Urban Politics #173: Technical Difficulties


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By City Councilmember Nick Licata.

Urban Politics (UP) blends my insights and information on current public policy developments and personal experiences with the intent of helping citizens shape Seattle’s future.

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CONTENTS:

  • Technical Difficulties
  • Avoiding A Battle Of Slogans
  • How Much Money Are We Talking About?
  • What Is At Stake?
  • Committee Meeting On Nucor
  • Role Of Mayor And Council

 

Technical Difficulties

Unfortunately there has been two errors made in the last two UP’s sent out.

This one UP173 was sent out with a blank subject line, so recipients may not have opened it.

The former UP 172 discussing NUCOR for the first time had a system problem so that I did not receive any replies except those that were specifically addressed to my Council email address: nick.licata@seattle.gov. The problem has been fixed so if you wish to resend a reply that had bounced back I will now receive it.

Avoiding A Battle Of Slogans

There is a tendency for politicians, including myself, to rely on a slogan to describe a solution to a complex problem, rather than to provide something less flashy and less concise. The current situation with Mayor’s proposed City Light contract with the NUCOR steel plant is a good illustration. The Mayor’s press release was headlined with the caption: “Mayor saves high wage jobs”. I could have used the caption “Stop Corporate Welfare” in my previous UP on NUCOR. Both statements touch upon truths and also engage in exaggeration. In this issue of UP I’d like to explain the proposed NUCOR contract with some deeper context than a sound bite.

In my last UP #172 I explained why NUCOR was highly unlikely to close down their Seattle steel plant. In sum they have said that they would like to have two plants operating on the west coast. They own two others, so they were implying that one of them could be decommissioned. In fairness to NUCOR, they have not explicitly stated that they intend to shut down the Seattle plant if they don’t get a cost break, although that seems to be their implied position. And the Mayor’s claim to have saved these 285 jobs pretty much rests on that assumption.

To recap the current situation, NUCOR owns a plant in Utah and another in Arizona. The Arizona plant is not currently operating and when it did it never reached capacity and furthermore it never seemed to operate profitably. NUCOR bought it last year for less than a quarter of its construction costs. They currently do not have a power contract and even if they were to get one, it is most likely in need of a major structural overhaul to become fully functional. See UP #172 for more details.

When I met with representatives from NUCOR, they suggested that their Utah plant might take Seattle’s business. But they also admitted that the Utah plant is operating near capacity and their “bottleneck” is their “melt shop”. That is, without a new furnace they couldn’t do much more. That essentially knocks out the Utah plant as an immediate threat. Since two-thirds of the cost of a new steel plant is in the furnace, NUCOR would have to make an investment of at least $100 million to transfer Seattle’s work there.

I’m suggesting that NUCOR pay at most an additional $3.3 million over what they are currently offering. The details were presented in the last UP, but essentially it amounts to an additional $1 million in cash and an annual electrical rate payment that is $2.3 million higher than what they are currently paying ($50 per megawatt hour rather than their past rate of $42 per megawatt hour). Other industries meanwhile will be paying $55 per megawatt hour.

The executives at NUCOR have to decide whether it makes business sense to close the Seattle mill because of the additional $3 million and instead invest at least $100 million in Utah to build a new furnace, which would not come on line for at least a couple of years. The bottom line favors the City.

In response, NUCOR has suggested that overseas competitors are the ones that could take the business if the Seattle plant were not competitive. That argument does not hold water for two reasons. First the Seattle plant is one of the top five efficient mills in the U.S. It is most likely that foreign competitors will go after other mills first. Second, right now and in the foreseeable future, this year and next year, American mills are producing cheaper metal than foreign mills.

The threat, if there is one, of shutting down the plant and moving the work elsewhere is one that comes with costs to NUCOR, costs that are higher than agreeing to accept a reasonable offer from the City. So the Mayor’s claim to have saved jobs is a bit of stretch and is not based on crunching the numbers. It substitutes a hard analysis with a plea of “saving jobs” to justify the agreement.

How Much Money Are We Talking About

Let’s look at the amount of money involved in the three proposals on the table (Existing SCL Contact, Mayor/NUCOR, Licata/Council):

Existing – NUCOR pays the city $11.5 million in cash & pays a 2004 electrical rate of $55/KMh

NUCOR pays a 2004 electrical rate of almost $63/MWhMWh – the standard industrial rate of $55/MWh plus an additional $7+/MWh to offset the lower rate received in 2002 and 2003. The additional $7+/Mwh stays in place until Nucor has effectively paid back a total of about $13.5 million. This should take about five years. Given inflation and interest costs, an immediate cash payment of about $11.5 million would be roughly equivalent to the $13.5 million Nucor should otherwise pay.

Mayor’s & NUCOR’s Agreement-

NUCOR pays the city $9 million in cash & pays a 2004 electrical rate of $42/MWh, final rates to be decided in 2005 but NUCOR’S rate is capped at no more than $49/MWh for 2004.

The total savings from the existing contract to NUCOR ranges between $4.5 million ($2.5 in cash and $2million in rates) and $7.0 million ($2.5 in cash and $4.5 million in rates).

Licata’s Council Proposal -

NUCOR pays $10 million in cash & pays a 2004 electrical rate of $50/MWh, with 2005 rates to be decided through normal City Light process.

The total savings from the existing contract to NUCOR is almost $3.5 million ($1.5 million in cash and just under $2 million in rates).

What Is At Stake?

Given that City Light’s combined budget is over $800 million and NUCOR is the most profitable steel company in America, what is the big deal about the relatively small amount of money were negotiating about? The answer has to do with setting a precedent: that Seattle City Light will be subsidizing electrical rates for a particular company now and into the unlimited future.

Seattle City Light has always operated on a cost of service basis rather than on an ability to pay, with the exception of course for the poor and infirmed. If SCL starts subsidizing one customer, even if it is SCL’s largest customer, other industrial clients could start requesting the same type of rate discounts.

The total amount of money will still be collected; it will just be shifted to those commercial accounts not receiving the discounts. For example if NUCOR paid only $45/MWh in 2004 instead of the $55+/MWh as all other industrial do, and SCL were then to extend this discount its 6 other large industrial users, it is estimated that all other commercial rates would have to increase by 2% to pay for the subsidy.

The principle of not directly subsidizing an industrial or commercial customer would be broken and SCL would then be subject to intense lobbying for making future exemptions for whatever industry was threatening to leave unless they got a subsidy.

And once this door is open it could lead to serious unintended consequences. For example, such subsidies would inevitably lead to increased rates for City Light’s remaining customers. In turn, these increased rates would push up costs for other local employers and could actually cost jobs in other key sectors. If original goal is to save jobs this would certainly be an ironic and painful outcome.

Committee Meeting On Nucor

The Energy & Environmental Policy Committee will meet on Wednesday, February 25, 2004 to discuss and possibly vote on the NUCOR legislation.

Role Of Mayor And Council

That there is even a debate about the proposed NUCOR electrical contract is because the Council is doing its job. As the legislative branch, we have the responsibility to review and approve all proposed legislation. We cannot do our job when the Mayor expects the Council to act without a serious review of his proposals.

For example, in this instance NUCOR has been negotiating with the Mayor’s staff for 6 months to come up with a proposal. It is fine if the Mayor wishes to take that long. But he should not expect nor mislead NUCOR into thinking that the Council will take less than a month to reach a decision.

Mayor’s office should set an overall agenda of issues that the various departments will work on during the year. The Council, at most can be expected to try to offer some general policy areas that they would like to see emphasized in the budget. But their charter responsibility is not to administer the departments.

Consequently the Council is at a disadvantage in trying to set an issues agenda for the various departments. In addition, the majority of the nine Council Members shifts from issue to issue, making it difficult to set an annual issues agenda that all CM’s can agree upon in advance. Identifying issues is not the purpose of the Council as a whole; rather it is more often the result of individual or groupings of CM’s.

However the Council does have an agenda, and that is to publicly review, discuss and debate the merits of legislation brought before us. We fail to do our expected tasks if we succumb to the Mayor’s intensive lobbying or prickly press releases. I believe the Council will garner the public’ s respect if we act thoughtfully and without malice, and at a pace that respects the important decisions that are placed before us.

Keep in touch…

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