An Inexpensive Experiment

Henrico industrial property anyone?

Henrico industrial property anyone?

by James A. Bacon

Henrico County, my home county, is conducting an inexpensive public policy experiment. If it pans out, the county could improve its competitive posture as a manufacturing location. If it doesn’t, the county hasn’t lost much and can always revert to the previous status quo.

County Manager John A. Vithoulkas has included a 70% cut to the county’s machine & tools tax in next year’s annual budget from $1 per $100 in value to $0.30, a measure that will cost the county an estimated $1.5 million a year in revenue. The cut appears poised to pass, reports Ted Strong with the Richmond Times-Dispatch. It received no opposition in last week’s legislative budget hearings.

“In the long term, this should lead to more manufacturing jobs, which will add more revenue to the county’s coffers,” Vithoulkas said. “We are competing for jobs in the world market now. And we aim to not just compete, but to win.”

The move will help the county capitalize on increased activity in the manufacturing sector, especially “on-shoring” or the repatriation of manufacturing jobs to the United States from abroad, said Gary McLaren, executive director of the Henrico County Economic Development Authority. “We’re serious about attracting manufacturing jobs to Henrico County, and I think this is proof of that.”

Brett Vassey, president of the Virginia Manufacturers Association, described the tax as one of the biggest impediments to manufacturing expansion in Virginia. The tax discourages companies from spending on new equipment that will make them more competitive. “Capital is like water. It flows to the lowest point,” he said.

I’m not totally convinced that the tax cut will make a difference, and it will be hard to determine if is a decisive factor even if Henrico does attract new manufacturing investment. But I think it’s worth a try. On-shoring is a major trend, and Virginia localities should try to exploit it. As labor costs rise in China, many companies are thinking about pulling some of their manufacturing operations back to the U.S. The trend is especially strong in energy-intensive industries that can take advantage of super-low natural gas prices.

But I have two questions. First, will the surging value of the U.S. dollar hurt Virginia (and the rest of the nation) as a manufacturing platform? The economic commentary is almost unanimous that manufacturing will be one one of the hardest-hit sectors. As long as Europe and Japan persist in competitive devaluations of their currencies as a tool to stimulate their economies through their own versions of Quantitative Easing, U.S. manufacturing will suffer.

Second, will Virginia be in a position to exploit natural gas prices? Virginia produces very little of its own natural gas; it relies upon pipelines to bring in gas from the Gulf Coast or (in the future) the Marcellus Shale gas-producing areas of the country. Virginia is bumping up against the ceiling of its gas capacity.

During a February cold snap, Virginia Natural Gas, the AGL Resources subsidiary that distributes gas to the Hampton Roads area, was hard pressed to keep the gas flowing. “Every valve was open,” Ken Yagelski, managing director of gas supply, told me in a recent interview. “We were utilizing all the capacity resources we had to serve our customers.” The company curtailed service to all 108 of its customers who had contracted to have their gas supply interrupted in exchange for a discount in rates. Those customers were prepared for the interruption, so no harm was done, but Yagelski says the incident could be a prelude to the future.

Demand for natural gas in in VNG’s service area is growing one or two percent yearly. VNG is looking to the proposed 550-mile Atlantic Coast Pipeline, a venture in which it is a partner, to supply the gas for the next generation of growth. But the routing of that pipeline has proved to be incredibly controversial, and there is no guarantee at this point that it will be built. If it isn’t,  supply curtailments likely will become more frequent and, at some point, VNG would have to stop taking new customers.

VNG serves Hampton Roads, but would-be industrial customers in the Richmond region would be just as concerned about the reliability of gas supplies.

Bacon’s bottom line: Attracting new manufacturing investment through lower machine & tool taxes is no slam-dunk, and it would be unwise to create expectations that it will lead to sudden success. But if the spike in the value of the dollar proves to be temporary and the Atlantic Coast Pipeline does get built, Henrico’s bet should be one well worth taking. At the very least, a broad-based tax cut that benefits incumbent businesses as well as newcomers is vastly preferable to doling out subsidies and tax incentives to bribe one specific company to invest here.

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28 responses to “An Inexpensive Experiment

  1. Confusing. Natural gas price future are typically set at the Henry Hub connection in Louisiana. Are you talking about transportation costs? Are you trying to raise the specter of some kind of natural gas shortage? That’s strange.

    • Yes, I am raising the spectre of a natural gas shortage if more pipeline capacity isn’t built. The February cold snap was an outlier — temperature far below normal. We don’t face shortages in the near-term. However, industrial customers who invest with 20- or 30-year time horizons are looking out 10 years or more.

      • You discern this because someone who has a clear conflict of interest tells you that is the case? No need for actual verification/data/outside 3rd party non-affiliated data to support this I suppose.

        The guy who makes money by selling and distributing gas and has direct business interests in streamlining an important environmental process to get a pipeline quickly so they can expand, and of course wants it done quickly so that the legal defense documents that protect the public are as poorly crafted as possible… is telling you (shocker!) that he needs a pipeline.

        Seems like you were headed down a good line, then you veered off course to make a partisan case for what has become the new evangelism of the republican party; the church of combustibles. If natural gas were a massive deficiency in a corridor, you’ll start seeing more freight moving natural gas in that corridor and businesses saying there is a shortage of natural gas… got any evidence in interviews of this happening?

        • No, there’s no shortage of natural gas now. Of course, that’s not what I said. What I said is this: VNG pushed up against the upper limits of its capacity in February. Everything worked out fine. But if demand increases at one or two percent per year, there could be a problem in a decade.

          If you wait until people have shortages to decide to build a pipeline, you’ll encounter a delay of two, three, four, five years before the pipeline can be built.

          • Tysons Engineer

            And in the meantime fuels can move by all sorts of other means if that were the case. The point being, if VNG wants to build a pipeline, they shouldn’t create this crisis scenario. The reason they frame the question like that is so they can skirt requirements for permits and get assistance on land negotiations.

            You can’t be this naive Jim. Perhaps you need to work with a few big industrial companies in their permitting process to see how shady this stuff really is.

            The pipeline does not have to get built tomorrow. There is no crisis. No businesses have been denied fuel to date, and if there was a shortage they could receive it through other means. If VNG wants additional pipeline, do like every other damn company who wants to build something in this state, stop depending on corporate welfare and special rules, and go through the process of explaining their case, getting the land, and getting the permits to build.

            End of story. No more special rules for energy companies.

  2. Gee, you are taking on limited example from a relatively small natural gas pipeline network in the Tidewater area and trying to extrapolate that into a pipeline crisis because of extreme and temporary winter weather.

    I would think that the number of companies using natural gas in Tidewater served by the Georgia firm would have to expand dramatically to create a true shortage.

    Of course, what COULD create shortages is if greedy utilities take gas intended for domestic customers including corporate ones and export it.

    Dow Chemical complains greatly that domestic gas prices will go up considerably if we suddenly start exporting gas. Dow needs cheap as feedstock for plastics and other products.

    Oddly, you seem to be trying to create a phony shortage — at least until the exports start — and are missing the point.

    • Peter, your logic is mystifying.

      AGL, Dominion and other investors in the proposed Atlantic Coast Pipeline are willing to pony up serious money to meet projected long-term demand for natural gas. I expect that they are as aware as you are of the factors, such as the push to export natural gas, that affect gas prices and demand for gas. Come to think of it, given the fact that Dominion is one of the companies that wants to export natural gas, maybe they’re even *more* up to date on that trend than you.

      If these “greedy” companies are willing to invest their money in new gas pipelines — if they’re willing to put their own capital on the line — then it’s a pretty good bet that they think demand for gas will continue to rise slowly but steadily in the years ahead. It does not strike me that “greedy” gas companies want to make this investment out of the goodness of their hearts.

      • And there is something called the tragedy of the commons. If they are truly serious about this, then should also be willing to put in the time and effort it takes to resolve the concerns of the public whose land/livelihoods/health could be put at risk if this is a shoddily agreed upon approval. Not to mention, most of these pipelines involve land takings, much of what the companies want “assistance” on. So you are asking the government to prefer corporations who want to grease the skids over the concerns of a person who owns the land and would be exposed to ALL of the risk of the actions of the corporation without any benefit from it.

        That is the dictionary definition of fascism, but I’m sure you’ll mislabeled it as utilitarianism. I guess it all comes down to your perception of public benefit.

        • T.E., so eminent domain = fascism.

          I guess you’ll be voting for Rand Paul this next election.

          • Tysons Engineer

            Eminent domain when applied for the purpose of circumventing requirements and other obligations by a private FOR PROFIT corporation is absolutely fascism. It’s darn near the dictionary definition of fascism.

            I won’t be voting for Rand Paul because he’s a lip service phony who has backwards views on 90% of his ideas and ideology and happens to just get 10% of it right by luck. He’s also a complete novice in pragmatism… something I think most people would agree should be one of the highest criteria for a president considering the herd of cats located up on the hill.

            He wants government out of your life… unless he’s talking to social conservatives, then he wants the government to slut shame.

            Mostly he just wants the government out of the corporations life, yawn.

          • eminent domain IS fascism if the govt is being used to take property rights away from some to enrich others without a real public need.

            there’s a process for this. It requires the company to demonstrate a real public need and benefit instead of trying to evade the process by crying “crisis”.

            I’m befuddled as to why you latch on to bogus excuses in the first place. I can only presume that you’re actually opposed to the govt requirements in the first place.

            you can’t have it both ways. If this is purely a private business, free market venture than they are free to negotiate for what they want – just like any other company that wants something.

            when you, at the same time, question the role of the govt and want the govt to be used to take land – then – yes – you are essentially advocating an authoritarian role that decides who has rights and who does not or who has rights superior to others.

  3. But there’s plenty of gas — especially post-fracking. Are you talking about supply of product or infrastructure? I haven’t seen a massive manufacturing expansion just yet.

    So, is it export? If it is aha! Part of the problem with the pipeline controversy is that Dominion and utilities like it are insisting that they have the right to stomp on private property rights because providing energy is for the public good and they have a legal and moral requirement to supply energy. That is, the public good of the U.S. It is not for the public good of Japanese, or Indians or Europeans who face gas prices two to three times U.S. domestic prices.

    So what is Mister Libertarian Jim Bacon arguing here? It is OK to trod upon private property rights — such as allowing uninvited surveying– if it is for the sake of letting a big utility make more profits EXPORTING an American commodity?

    I don’t think your argument is very clear here. How many industries that Virginia might recruit or develop actually need raw natural gas? Some maybe. But not all.

    What kind of Third World country do you think we are living in?

    • Wow, Peter, your leaps in logic are just breath-taking.

      There are two entirely separate sets of issues here. First, will the demand for natural gas increase in Virginia’s major metropolitan areas, and how much faith can we put in utility projections given changes in the market such as the construction of a gas-export capability? In other words, is there a demonstrable *need* for a pipeline?

      The second set of issues surrounds the use of eminent domain in various ways to build a new pipeline. Do property owners have sufficient rights, or is the Atlantic Coast Pipeline (of which Dominion is the managing partner) trampling those rights?

      I am suggesting that demand for natural gas in Virginia likely will increase, even if gas is exported overseas (although I reserve the right to change my mind if I delve deeper into the topic). I have made no pronouncement *ever* regarding the rights of property owners or the desirability of the proposed route for the Atlantic Coast Pipeline. I have not studied those issues, which I suspect involves complex and nuanced tradeoffs between individual rights and public good, and I cannot at this point make an intelligent judgment.

      By contrast, you seem unable to disentangle the two sets of issues. At the root, I suspect, is a gut dislike and distrust of Dominion and other “greedy” utilities.

  4. Here;s something else:

    http://www.forbes.com/sites/christopherhelman/2014/02/08/how-can-a-nation-awash-in-natural-gas-have-shortages-and-what-to-do-about-it/2/

    But guess what? It is so, like, last year. If you spend enough time covering energy, you don’t take talk of “shortages” all that seriously when they come after a cold winter or a hot summer.

    Natural gas prices are like coal– very volatile.

    • I made it totally clear that the February cold snap was an isolated incident, but argued that it could be prelude to *future* shortages if demand for natural gas grows as Virginia Natural Gas projects. The issue is what does the picture look like 10 years from now?

      It’s easy for you to laugh off the idea of shortages — you’re not the one who is statutorily required to ensure system reliability. You have no skin in the game. If you’re wrong in ten years, you’re long gone. VNG will live with the fallout.

  5. Virginia Natural Gas?? All caps? Is this a new marketing idea?

  6. FYI, the City of Virginia Beach took the bold step to (virtually) eliminate it’s machinery & tool tax several years ago, a move that has worked out very well for the city. Virginia Beach Council embraced the opportunity to be a leader in the Commonwealth on this front, and has seen strong manufacturing growth (domestic and international) as a result.

    • Scott, it’s refreshing to hear from someone who’s not obsessed by the Atlantic Coast Pipeline controversy. Yes, the Times-Dispatch article made note of Virginia Beach’s success with the M&T tax cut. I’d like to know more about what kind of success it has enjoyed.

      • The M&T tax is an anachronism that should go away, I agree. Companies do not eat taxes – they incorporate them into the price of their products and customers pay higher prices and at the same time it hurts companies operating margins. If everyone did M&T – it would be essentially a way for a county to capture taxes from people who bought products beyond the borders of the county. That might have made sense a long time ago but all it does today is encourage companies to go somewhere else.

        but, the basic issue for the pipeline – for ALL private sector actions involving acquiring private property that does not belong to them is a very different issue that somehow Conservatives don’t seem to “get”.

        Conservatives talk a big game about property rights – but then they just assume that businesses have superior property rights over private like it’s okay because they are a “business” who must have the “right” to do business even if it means polluting others and even taking their land.

        regulations to protect other folks property right – like the use of eminent domain is characterized as “job-killing” govt regulation even as they want
        the govt to essentially condemn private property owners land rights.

        there is a concept called Common Carrier that requires any taking of property to be justified – not just for the economic interests of the taker but demonstrates an actual need and benefit to the public beyond the profits of the company wanting the govt to essentially take others property.

        it goes right over the heads of pipeline proponents. They don’t see it in terms of the pipeline serving a legitimate public need verses private business for-profit actions.

        The govt has a legitimate role in laying out railroad and public road corridors that truly serves a public purpose.

        People forget with the Atlantic Coast proposal that it is but one of three proposals.

        so there is competition… but Dominion and the pro-pipeline folks seem to ignore this.

        what is the process that should be followed in determining which of the 3 proposals best serve the public interest?

        • Before you assume the Atlantic Coast Pipeline serves no public purpose, why don’t you check out what the Federal Energy Regulatory Commission has to say on the subject.

          • Oh I’m NOT assuming. I’m saying the supporters are ASSUMING that if it’s a pipeline it’s automatically a public purpose without actually making that determination.

            The fact that there ARE – THREE proposals – at the minimum should require all 3 to demonstrate their public purpose – compare and contrast.

            A pipeline company that only makes money on transporting gas – and moves gas owned by others – has a stronger case than a company building their own for their own purposes – in my view.

            why shouldn’t a pipeline-only company build a pipeline that Dominion would then pay access it rather than DOminion building their own and then engaging in the sale of gas – and trying to use eminent domain to do it?

            If Dominion was ONLY going to use the pipeline as infrastructure to generate electricity – and nothing else, no re-sale or export – then obviously they are serving a public purpose.

            but if they are going to play games with what they do with the gas and it might be re-sold or exported for profit – then I think not.

          • If Dominion says they will use the pipeline to power their plants and excess capacity will be sold to whoever needs it – at market rates – and they will not themselves engage in re-sale or export – then they have a case.

            but as far as I can tell – they’re threatening to use ED without disclosing their specific intentions.

            like I said – supporters are assuming they are justified in what they are doing that requires ED – and I have yet to see anything that justifies the use of ED.

            Why does Dominion have the right to go on people’s property when they have not even been through the FERC approval process?

            isn’t this just more of Dominion’s arrogance in Virginia?

            my understanding is that the opponents are not gad fly’s – they have some serious legal and financial horsepower and are demanding that pipelines follow existing rights-of-ways public and private or prove that it’s not feasible.

            If it turns out that Dominion is perceived to be using ED to save money for a private purpose – it could go badly for them. The opponents are not rolling over.

          • “As far as I can tell – they’re threatening to use ED without disclosing their specific intentions.”

            How do you deduce that, Larry? Because you haven’t read anything in the press to indicate otherwise? I make no assumptions one way or the other at this point. One thing I can tell you is that there is a tremendous void in public knowledge on the subject. There is a huge amount of information in the public domain that Virginia media have neither the resources nor inclination to gather and report upon. In a way, I can’t blame them. It’s reallllly complicated. It’s eyes-glaze-over stuff that very few people are inclined to read.

            I am trying to educate myself on the issues. Hopefully, I’ll have more answers next week.

          • Perhaps you should read more…

            ” Senator Creigh Deeds (D-Bath) called legislation passed in Virginia in 2004 allowing natural gas companies the right to enter private property to conduct surveys without landowners approval “unconstitutional”. He is the co-patron of Senate Bill 1338 which would repeal that legislation and could have big implications for Dominion Resource’s proposed Atlantic Coast Pipeline.

            “It would be akin to giving an individual, me, the right to go in your backyard and poke around,” Deeds said.

            Dominion is using that statute to sue nearly 50 landowners in Nelson County who have refused to allow surveyors on their land for the natural gas pipeline. Deeds said he is more concerned about property rights than the pipeline.”

            “There are still private property rights,” Deeds said. “If we let one person’s private property rights be quashed, we are in danger of all of our rights being quashed.”

            got a response? what say you now?

            how about a blog post on property rights?

            and this is a question from a liberal to a conservative.

            gawd!

          • Perhaps you should *think* more. Establishing a public need for a pipeline is one issue. Allowing Dominion (or any other utility) to transgress personal property rights is an entirely separate issue.

            It is logically possible to say (1) there is a public need for a pipeline and (2) Dominion is not justified in surveying peoples’ land without their permission. As I said to T.E. earlier in this thread, I have made no comment whatsoever on the eminent domain issue. My comments have been directed to the public need part.

            But you seem to take the view that if Dominion is not justified in transgressing peoples’ property rights, that somehow means there is no public need. Aristotle is rolling in his grave at the utter illogic of your statements.

          • nope. not true. and I think you’re wrong. They ARE linked.

            I’m saying there is a PROCESS where Dominion does NOT threaten people with court orders BEFORE they have demonstrated a public need.

            they have no right to even talk about going on people’s property without first demonstrating there is a public need.

            cart before the horse.

  7. speaking of Dominion and the Atlantic Coast pipeline and the James River crossing, – it looks like some pieces of the puzzle are starting to fall into place:

    “Dominion plans to build natural gas power plant in Southside”

    “Dominion Resources Inc. announced today that it plans to build a 1,600-megawatt natural gas-fired power plant in Southside Virginia.
    The plant — which would be the state’s largest fueled by natural gas — would be built on a 1,143-acre property that straddles the Greensville-Brunswick county line, with most of the land in Greensville.

    The company said the plant would cost about $1 billion and that it could power 400,000 homes when operating at peak capacity.
    It will draw fuel from a Transco pipeline that is being extended to the site, and it would eventually be supplied by the proposed Atlantic Coast Pipeline.
    The plant, which would need to be approved by the State Corporation Commission, would open in 2019.
    …….
    To fuel these new power plants, Dominion and other utilities need to get more gas into Southside from the Marcellus shale fields in West Virginia and Pennsylvania. But the proposed 550-mile Atlantic Coast Pipeline has drawn fierce opposition, especially from property owners in Nelson and Augusta counties, where the 42-inch pipe would cross the Blue Ridge Mountains.
    The proposed pipeline “will be critical to providing reliability, infrastructure, fuel supply diversity and helping to keep fuel costs low not only for this plant but the entire generation fleet,” Dominion said.

    …………..
    Dominion warned the General Assembly this winter that the EPA’s proposed Clean Power Plan could force it to close coal-fired plants in coming years. Dominion sought — and received — permission to freeze customers’ base rates until late 2022.
    That means customers won’t get refunds if the company earns more than it should, but it also means the company cannot raise its base rates in the next seven years. The company can still raise its charges for fuel, however, and can ask state regulators to increase customers’ bills to pay for new power stations.”

    http://www.richmond.com/business/local/article_9a4f9f8b-2dc2-5e47-bd2d-dc8d206ee327.html

    so Dominion DOES have plans to SHIFT the Surry Nuke to power Hampton and to build replacement capacity with natural gas brought by pipeline.

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