By PHIL FAIRBANKS and MICHAEL BEEBE

News Staff Reporters The power brokers 7/9/00

LEWISTON - The Niagara region's great treasure - the cheapest industrial electricity in the nation - is often touted as a savior of sorts, an essential ingredient in turning around a Rust Belt economy struggling to stay afloat. It's a myth.

The reality is that most of the hydropower set aside for industry, worth nearly $260 million a year, goes to a handful of older companies that provide few jobs for the power they get. And 10 percent of Niagara's power is shipped out of state.

There's little anyone can do about it.

Such giants as Occidental Chemical and Olin Corp. receive huge subsidies because of Niagara's inexpensive power, but they create or retain a small number of jobs when compared to other industrial customers.

What the region gets in return - jobs, investment, wealth - is just one of the questions being asked as the Niagara Power Project enters an important chapter in its history.

Over the next six years, as the Federal Energy Regulatory Commission oversees relicensing of the Niagara Project, politicians and community leaders will make two major decisions about the cheap hydropower - who should run Niagara, and can the region keep more of its cheap power here?

Wherever it goes, Niagara power, known as liquid gold to the industry and homeowners lucky enough to share it, will have huge effects on the economy.

The answers reached during the coming relicensing will go a long way toward deciding whether such companies as Occidental and Olin keep their lock on inexpensive power.

Occidental gets more power than any other single customer, a subsidy worth more than $30 million a year. In return, it employs 1,091 people, or about one employee for every 100 kilowatts of hydropower.

By comparison, Ingram Micro gets a relatively small amount of power, less than 2 percent of what Occidental gets, but the company employs 2,457 workers. That's 164 workers per 100 kilowatts of power.

A Buffalo News analysis of the companies that get cheap hydropower from the power plant in Lewiston reveals the following:

 More than two-thirds of all the hydropower set aside for industry goes to 10 companies that employ 16,324 workers. The balance of the hydropower set aside for industry, less than one-third, goes to 95 companies that employ 31,521 workers.

 Seven of Niagara's 10 biggest customers employ fewer than three workers for every 100 kilowatts of power. That compares with an average of 16 employees per 100 kilowatts for the rest of the companies.

 The biggest industrial customers, such companies as Occidental, save between $5 million and $30 million each year because of cheaper rates.

 The state Power Authority, which operates the Niagara Plant, is hamstrung by law, contracts and legal settlements from taking power away from many of its largest customers.

 Even when companies lose power, the process often takes years. Occidental will keep its full allotment of power until at least next year and maybe later, despite its proposed layoff of 340 employees this summer.

When Power Authority Chairman Robert Moses began work in 1957 on Niagara, a three-year, $737 million construction project that required a work force of 11,700, he promised a new era of wealth and prosperity for Niagara Falls.

Four decades later, people are still waiting.

"The idea was to grow jobs, but it never happened," said Mark Zito, a Niagara Falls School Board member and president of the Niagara Power Coalition, a group critical of the plant's job creation record.

The coalition is quick to note that, despite the presence of cheap hydropower in its backyard, the region has lost 48 percent of its manufacturing jobs since Niagara began operations in 1961.

State labor officials note that many of those jobs were lost to automation and outsourcing as local companies looked for ways to increase productivity and cut costs.

Niagara's value

Cheap electricity. Low-cost power. It's the juice that keeps dozens of manufacturers in Western New York.

Without it, many would leave or shut down. And with them would go dozens of other smaller companies that count on them for work.

At 2 cents a kilowatt, Niagara's power is a bargain. Keep in mind, the market rate for industrial customers is about 4 to 8 cents a kilowatt. That can vary depending on the time of day, the time of year and other conditions.

Is it any wonder that companies view Niagara's cheap hydropower as a key ingredient in their business, the very reason they're on the Niagara Frontier?

"We're very power-intensive," said Rich Hall, plant manager for Olin Corp. in Niagara Falls. "To us, power is a raw material, not a utility. Hydropower is the single most competitive advantage we have."

Hall is blunt when it comes to the company's reliance on cheap power. Energy accounts for at least 35 percent of Olin's operating costs, he says, and without Niagara's hydropower, the local plant would close and take good-paying jobs with it.

"That's why we're here," Hall said. "It's critical. It's fundamental."

But there's also a disparity in the number of jobs Olin produces compared to other hydropower customers.

Olin receives more power than all but one other customer, Occidental, but employs only 201 people. That translates into .3 jobs for every 100 kilowatts of power, well below the average for Niagara's users.

And Olin isn't alone.

Niagara's 10 biggest customers receive two-thirds of all the power set aside for industry in Western New York. Seven of those 10 businesses fall far short of the employment average for all companies.

High-performance customers

Not every customer is a low performer.

One of the most productive companies is Delphi Harrison Thermal Systems in Lockport, the region's largest manufacturer and one of Niagara's biggest customers. The company employs about 45 workers per 100 kilowatts of power, more than three times the average.

Delphi's cheap power has taken on even greater importance since its parent company last month ordered it to increase profits or be put on its "troubled plants" list.

"It's extremely important because of the challenges we face," said Delphi spokesman Douglas Hoyt. "We're always looking to cut costs, so hydropower is a big plus for our bottom line."

Even among smaller companies, cheap power is a sought-after resource.

Sorrento Cheese gets only 250 kilowatts of Niagara's Power but employs 250 people. Like Delphi, it views hydropower as a way to cut costs and reinvest in the company.

"It allows us to do other things like our recent expansion," said Robert Woeppel, Sorrento's vice president of human resources.

Who benefits?

For employers, the benefits are obvious. Cheap power means big savings, as much as $300,000 a year for each megawatt of cheap power. The savings, of course, vary from company to company depending on how efficiently each uses the energy.

In the case of Olin, Occidental and other big customers, Niagara's power saves them between $20 million and $30 million a year.

Those subsidies came under attack in 1992 when a local union, the former Oil, Chemical and Atomic Workers International Union, released the results of a five-year study of Niagara's customers.

The union, now known as PACE (Paper, Allied-Industrial, Chemical & Energy Workers), found that most of the cheap power set aside for business went to "dinosaur industries," companies in decline or barely holding their own.

In a few cases, the union discovered, the subsidy actually exceeded the customer's total payroll. The study pointed to Niachlor Corp., which later became Olin, and its annual savings, the equivalent of $125,147 per job.

The bottom line, according to the union, is that companies use their cheap power to boost profit margins, not create jobs or modernize plants.

"It's corporate welfare," said Gary Horab, a PACE representative. "We stand behind the carrot-and-stick approach. If you want cheap power, we want to see capital investment."

Plant managers are quick to defend their use of cheap power. They see it as an essential ingredient in offsetting an otherwise poor business environment in upstate New York.

Economic advantage

At a time when taxes and energy costs are driving away business, Niagara provides an important economic advantage.

"If it wasn't for hydropower, we wouldn't be operating here," said Tom Feeney, Occidental's plant manager.

To make his point, Feeney said his plant operates at only 80 percent capacity because the other 20 percent would require the use of higher-priced, market-rate electricity.

"It's not a subsidy," he said. "It's a question of whether you want an Occidental or DuPont to stay here."

Business leaders say it's unfair to judge Niagara's success solely on the number of jobs its customers generate. They claim a ripple effect, an impact on companies supporting the Olins and Occidentals.

"The spinoff factor is amazing," said Charles Steiner, president of the Niagara Falls Chamber of Commerce. "Many of our small and medium-sized companies depend on those older industries."

Steiner also questions the wisdom of taking power away from an existing company in the hope that a better one might take its place. He thinks it's wiser to stick with a sure thing.

"I don't think the return is guaranteed," he said. "I also don't think this community is ready to say "so long' to those big employers."

Obstacles to change

Even if the community wanted to, saying goodbye to Occidental or Olin would be almost impossible.

Even today, 40 years after Niagara went on line, its "vintage" customers maintain a strong legal and contractual hold on their power. Anything short of a plant closing is unlikely to take it away.

The reasons are old and complex.

Occidental and others owe their power to a 1957 federal law authorizing construction of Niagara. The law ensures that those companies that received power from the old Schoellkopf power plant - which collapsed in a 1956 rock slide - would continue to receive cheap power from Niagara.

Known as "replacement power" customers, they're assured of 445,000 kilowatts of power - about 20 percent of Niagara's total output - and over the years have successfully fought to keep it.

One of those legal battles resulted in those same companies extending their long-term contracts with the Power Authority to 2013. And only one thing can stop those extensions - a decision by the federal government to award Niagara's new license - the current one expires in 2007 - to someone other than the Power Authority.

Linking power to jobs

The same is true of Niagara's other industrial customers, companies receiving "expansion power." Some of them began receiving power in the 1960s, but it wasn't until 1988 that both expansion and replacement customers had their power linked to job commitments.

More and more, the authority views Niagara as a development engine. Periodically - 18 times over the past five years - it cracks down on customers by taking away part or all of their power.

In two instances, it was Occidental that lost power because it failed to meet its job commitment.

Despite those crackdowns, the authority's enforcement effort has come under criticism by state auditors.

In 1996, state Comptroller H. Carl McCall lambasted the authority for failing to rigorously enforce its contracts with industry. To make his point, McCall's auditors singled out four companies that fell below 70 percent of their job commitment for three consecutive years.

In each case, the authority saw fit to grant extensions.

The authority, now largely under the control of Gov. George E. Pataki, dismisses the audit as a political document, an out-of-date snapshot in time.

"These are things that always carry a political tone," said authority Chairman Clarence "Rapp" Rappleyea. "I'm satisfied with the way things are being done."

To hear Rappleyea talk, the authority is hamstrung from taking power away from its larger customers. Authority officials also claim that, when power has been available in the past, few companies have applied to get it.

"Given the parameters we have," he said, "I think we're doing pretty well."

http://www1.buffnews.com/editorial/20000709/1031080.asp

Copyright ) 1999 - 2000 The Buffal

-- Martin Thompson (mthom1927@aol.com), July 09, 2000

Answers

I never realized that the economics of the electrical power business was so upsde down daffy.

-- Uncle Fred (dogboy45@bigfoot.com), July 10, 2000.