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August 24, 2006
Shifting jurisdicational advantage
Yesterday, I talked about the importance of creativity in jurisdictional advantage. Clearly, communities need to understand the factors and forced that make their location a desirable place for economic activity. Some of those forces are internal - the creativity and entrepreneurship resident in the community. Others are external. And like a company's competitive advantage, jurisdictional advantage can (and does) shift.
An example of that shift can be seen in two case studies - both of which focus on energy costs and regulation.
The first is about an aluminum plant in central Maryland -- just north of Washington DC - "The Power of Rising Energy Prices":
For 35 years, the aluminum plant surrounded by fields of soybeans and corn in Frederick County has provided high-paying, reliable jobs that lured workers from faraway states.
. . .
Years ago, when companies chose locations to build aluminum plants, they did it to be close to the country's lowest-cost power providers. Eastalco long relied on cheap power provided by the Allegheny generating facilities that are close to cheap coal.
But with deregulation and nation-wide marketing of electricity, the price is the national price - not based on nearby resources:
If the market were still regulated, the company said, the price it pays would be more closely related to the price of coal, the dominant fuel for Allegheny's plants. But the company said that the PJM market establishes prices that are more heavily pegged to the price of natural gas. The most expensive unit of electrical generation, the company said, is used to determine the market rate. And that price is typically for power generated with natural gas, whose costs have increased much more rapidly than coal's.
So, with the disappearance of cheap local electricity, the plant is in trouble.
The second is the opposite set of regulations - an area that thought it would thrive because of cheap local power but was forced to export that electricity: the Columbia River basin. Tech Firms Go Mining for Megawatts:
There is cheap electricity here and lots of it. That is because the Columbia, the premier hydroelectric river in North America, flows nearby. Three publicly owned, local utilities own five large dams on the river, and they produce much more electricity than the sparse local population can use. With power prices soaring, the three utilities have become the hydroelectric emirates of the Pacific Northwest.
Until now, they have been obligated under 50-year-old contracts to sell about two-thirds of their power -- without profit -- to major utilities serving millions of people in Seattle, Tacoma and Portland. The arrangement helped keep monthly electric bills in the Northwest far below the national average.
Those old contracts, though, are expiring -- a development that will help push up residential electricity rates across the region. And the mid-Columbia utilities are scurrying to sell their newly unleashed power to the corporate giants of the Internet -- if they are willing to plant "server farms" in two-stop-light towns such as Quincy.
They do seem uncommonly eager.
Out in the bean field, Microsoft is rushing to complete what it says will be the largest data center it has ever built. It is scheduled to go online in February. Downstream in The Dalles, Ore., Google is building a data center that will go online within the next year and is reported by local officials to be scouring the region looking for other sites. Upstream in Wenatchee, Wash., Yahoo is expected to go online with another data center in the fall and is in negotiations for still others.
This was the original promise. The promoter of the Grand Coulee dam (local newspaper publisher Rufus Woods
boasted noisily in the pages of his newspaper that electricity from the dams would lure major industry to Wenatchee and the Columbia Basin. But the federal government broke his heart by stringing wires across the Northwest and setting up rules requiring dams to sell most electricity at a postage stamp rate, meaning that power had to cost the same in Wenatchee as it did hundreds of miles away in Seattle, Tacoma or Portland.
Although farming in the Columbia Basin boomed, thanks to irrigation water diverted by Grand Coulee, major industry, for the most part, ignored Wenatchee and towns such as Quincy for most of the past seven decades.
Companies could get plenty of cheap power in Seattle and Portland without having to build in the boondocks -- until now.
In both cases, external forces are shifting the communities' advantages - one positive and one negative. Those external forces may not be under the communities' control, but the internal forces will determine how each community copes with the changes.
In his paper, Why the Garden Club Couldn't Save Youngstown, Sean Safford talks about the social and political infrastructure needed for a community to respond to an economic shift. In this case, why Allentown was able to successfully respond to the shift and Youngstown was not. Often referred to as "capacity building," this institutional infrastructure is just as important a jurisdictional advantage as cheap electricity or a skilled workforce.
It is also the most intangible of intangible assets – one that is often defined more by its absence and not considered until too late. Capacity building should be at the top of our economic development concerns. Unfortunately, it is not as sexy as luring the next plant or setting up a high-tech oriented partnership. But it is the foundation of all that other work – and we need to start treating it as such.
Posted by Ken Jarboe at August 24, 2006 9:15 AM
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