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October 31, 2007

Subject: Comments on WyomingCountyIDA Application for Financial Assistance” for

the High Sheldon “Wind Farm”

Unfortunately, it’s not possible to learn much from this “Application for Financial Assistance.”

The Application simply does not contain enough information for the WyomingCountyIDA or anyone else to make reasoned judgments. Perhaps there is more information publicly available. I have not had time to try to obtain data from the WC IDA or the local government, or to review other documents such as the EIS. However, even with those it’s likely that critically important information is missing. Later in this memo I will offer some generic comments that likely apply to the High Sheldon Wind Farm but are based on documents associated with other projects.

This memo provides comments on:

  • The High Sheldon Application to the WyomingCountyIDA, and
  • The apparent lack of facts and objective analysis of economic impacts of “wind farms” by local and state government officials in New York.

Critical Information Missing from the Application for Financial Assistance

The following information that would be required to understand local economic implications of the project is missing from the Application:

  1. Economic Feasibility. No financial data are presented that would justify the developer’s claim (Paragraph II. 6, page 3) that the requested WC IDA benefits are “necessary to making this project economically feasible.” Any such claim cannot reasonably be accepted without a detailed financial justification for it. This claim should receive no weight.
  1. Projected Employment. The data on “Employment at project location” (Paragraph III. 1., page 4, may or may not be true. Often, “wind farm” owners bring workers from other locations to perform maintenance and other functions. The developer should be required to identify (a) the specific positions that would be filled by the project 9 full-time and 6 part-time employees, (b) the qualifications for filling those positions, (c) whether local workers would qualify, and (d) whether the workers would actually have their official residence in the immediate area. There would be little local economic benefit from employees who reside elsewhere.
    As explained later in this memo, experience from other projects and with information on claims made by “wind farm” developers and other advocates (including government entities) demonstrates that economic and job benefits are greatly overestimated in claims made when permits and tax breaks are being sought. For example:
  1. Few of the jobs during construction are filled by local workers. Instead most are imported and maintain their residences (and pay their taxes) elsewhere.
  2. Few of the permanent jobs will be filled by local workers and often they are filled by people brought in temporarily (e.g., for turbine maintenance).
  1. Project Costs. The application provides virtually no detail on the cost of the project (Paragraph IV. 1, page 4) and undermines the value of the little information presented by indicating that the two items of information provided are estimated and subject to change. Similarly, the application provides no information on project financing (paragraph IV. 2, page 4).
  1. The “Cost Benefit Analysis” (Paragraph V, page 5) is of little or no value for several reasons:
  1. Project viability with local tax breaks. No financial data are presented that would justify the developer’s claim (Paragraph V. page 5) that “the project would not be economically viable if subject to property taxes at the fully assessed rate.” Any such claim cannot reasonably be accepted without a detailed financial justification for it. This claim should receive no weight.
  1. Potential local payments. No details are provided that would support the developer’s estimates of “$900,000 annual PILOT and Host Community Agreement Payments,” “$130,000 in annual Fire Department Taxes,” or “$1,000,000 in annual Royalty payments to landowners and wages to local employees.” If those are serious numbers, the developer should be willing to provide details on how the estimates were made.

Citizens in communities affected should be very careful in accepting any such estimates without (a) details of how the estimates were calculated, (b) which factors determining the amounts paid could change in future years, (c) how payments will be made, and (d) guarantees that payments will be made over the claimed life of the “wind farm.” Such information is necessary, for example, for the following reasons:

  1. Citizens (as well as local and county officials) should know whether the payment calculations are guaranteed fixed amounts each year for the life of the “wind farm” or are dependent on variables such as (i) revenue, (ii) electricity produced, (iii) net profits, or something else. The risks for citizens in host communities are serious ones. For example:

1)If payments are affected by revenue:

(i)The revenue received may or may not include the huge impact of tax breaks and subsidies which are received by the “wind farm” owner and make up a large share of the owner’s reason for building the “wind farm.”

(ii)The revenue received will depend on the market for the electricity that is generated. There is no assurance that market conditions will be favorable for those dependent on the revenue because (a) electricity market conditions can changes, (b) the value of electricity from wind turbines is inherently of low value because the electricity is intermittent, volatile and most likely to be produced at night and in colder months rather than on hot summer late afternoons when demand is high and electricity has its highest market value. (This latter factor is likely to be recognized increasingly as time passes and government and utility officials recognize the limitations of electricity from wind and the costs of integrating it into electricity grids.)

2)If payments are based on electricity produced:

i)The electricity produced will depend on wind conditions at the site and “wind farm” developers are notorious for overestimating electricity production (often by overestimating “capacity factors”).

ii)Also, electricity produced will depend on how well the turbines and blades are maintained. Recognize that the owner’s incentive for keeping and maintaining production may decline substantially once the owner has captured all the tax benefits (6 tax years for accelerated depreciation; 10 years for Production Tax Credits) and subsidies (10 years for the payments from NYSERDA).

3)If payments are based on net profit (probably unlikely, accepting promises would be extremely risky because local or county government officials and citizens would have no control over actions that the “wind farm” owner could take that would affect net profits. Also, they may have no access to the owner’s financial records.

  1. Citizens face still another risk. Most “wind farms” are legally owned by single asset Limited Liability Companies (LLCs). Their only “assets” are the facilities and, perhaps, a power purchase contract for the sale of the electricity. In the event of bankruptcy, local or county governments entities (and the citizens) may have no recourse to the payments they have been promised.

Furthermore, experience shows that the ownership of “wind farms” changes frequently. Local or county government officials may find that those who made the initial promises are no longer involved and they are dealing with some new entity.

  1. Local Government Evaluations. For the above reasons, local or county government officials would be remiss if they did not obtain iron-clad assurances that payments promised at the time permits are approved and tax breaks are granted will be paid for the life of the project. Such guarantees might be in the form of legally binding parentcorporation guarantees, bonds with premiums paid in advance for the life of the project, or escrow deposits held by independent third parties. (Legal advice from attorneys loyal to citizens’ interests is needed on this aspect of any deal with “wind farm” owners.)

Unfortunately, local or county government officials may not be a good position to protect citizens’ interests when dealing with “wind farm” proposals for several reasons, including: (a) limited experience in dealing with “wind farm” issues, (b) tendency to focus on potential near-term benefits (and next election) rather than the long term implications, (c) complexity of the economic issues, (d) tendency to be overwhelmed by aggressive “wind farm” developers and their consultants, and (e) excessive reliance on data, information, and documents presented by the developer and its consultants – rather than from independent, objective sources.

  1. Claims about local spending; implied local benefits. No details are provided to support the claims that “over $5,000,000 in materials from local suppliers and over $8,000,000 in wages paid to temporary construction workers.” Even if the numbers are accurate, it should NOT be assumed that these expenditures would have great local or regional economic benefit.

Claims such as these are common from “wind farm” developers and are a major cause of the overestimation of local economic benefits. Overestimation of local economic benefits occurs for such reasons as the following:

  1. Purchases from local suppliers. Even if $5,000,000 was spent on materials and supplies from local sources, this does not mean thatthere will $5 million in local economic benefit simply because the $5 million would represent the total price of the purchases, NOT the value added locally. If a local supplier provided some steel products, electric equipment or supplies, or fuel for the project, most of the money paid would actually go to wholesalers or producers local outside the local area. Only that portion of the total price that reflects value added locally might have a favorable local economic impact.
    This can be illustrated by the purchase locally of a gallon of gasoline for, say, $2.75. The overwhelming share of that $2.75 goes to the producer of the crude oil, the refiner, the transporters, and to state and federal taxes. Only a small part, such as the wages of a service station employee or profit to the station owner (if local) might have a local economic benefit.
    If the material purchased was gravel for use in mixing concrete, much of the economic benefit might accrue locally – but perhaps not if the gravel pit is owned by a distant company. The cement that would be used in making the concrete as well as the rebar used in turbine foundations would almost certainly come from sources outside the local area.
  1. Wages paid to Construction workers. It is now a well known fact that an overwhelming share of the workers employed during construction of a “wind farm” come from outside the local area. Many of the workers are skilled in assembling turbine, towers, blades, and associated equipment and travel from one project to another.

Furthermore, a very small share of the wages of imported workers would be spent locally. Instead, most would flow to the locations of their permanent homes and their families for all normal expenses such as mortgage, automobile or credit card payments, and expenditures for maintaining their homes and families. There is a good chance that any income taxes they pay will be in the state where they maintain their permanent residence.

  1. Lease and Rental Payments to Landowners that host wind turbines. “Wind Farm” developers often cite these payments as providing local economic benefits. In fact, such payments might provide local economic benefit ONLY if they were spent or invested locally. There is no reason to expect local economic benefit from these payments if:
  2. The land is owned byan absentee landowner, or
  3. The money is spent or invested outside the local area.
  1. Local impact of Capital Costs of the Project. While not referred to in the section of the Application that is labeled “Cost Benefit Analysis,” other parts of the Application seem to imply that the capital costs of the project (over $200,000,000) would have significant local economic impact. Claims about local impact of capital expenditures are another common source of overestimation of local and regional economic benefits

In fact, the overwhelming share of the capital costs of a “wind farm” will be spent outside the local area, region and, most likely, the state and perhaps even the US. That fact is simply because the overwhelming share of capital costs is accounted for by the turbines, blades, towers, electronic controls, computers, substation equipment, and other components.

Generic Problems with Claims about Favorable Economic Impact of “wind farms.”

In New YorkState, claims of significant favorable economic impact have been made by the Governor, NYS PSC, NYSERDA, and local and county government officials and economic development authorities – as well as by wind farm developers and owners, various advocacy groups, and even some electric utilities.

Unfortunately, most of the claims of favorable economic impact of “wind farms” are overstated and do not stand up under reasonable scrutiny. Many are based on faulty assumptions and/or faulty economic analysis. Some of these claims are made without any publicly available justification and detail.

Examples of faulty assumptions and analyses can be found in draft and final environmental impact statements, in consultant reports provided by developers and/or those used by local government officials and county economic development authorities.

  1. Examples of faulty assumptions cited above. The previous sections of this paper provide examples of faulty assumptions that lead to overestimations of local economic benefit, These include:
  1. Assuming that a large share of the capital cost of a “wind farm” is spent locally when most is spend elsewhere.
  2. Failure to recognize that most workers employed during construction are imported and that an overwhelming share of their wages are likely to be spent elsewhere, and that they probably pay taxes elsewhere.
  3. Overestimation of the number of permanent employees and the share of the positions that will be filled with local people and with people who maintain their residence in the local area.
  4. Assuming that the full cost of local purchases – rather than only the local value added portion -- has favorable local economic impact.
  5. Assuming that payments to landowners will be spent or invested locally.
  1. Compounding the errors with faulty assumptions about indirect and induced effects. Most “economic analyses” of “wind farm” economic benefits compound the overestimates listed above in their calculations of indirect or induced effects. For example, developers may claim correctly that some local expenditures by temporary workers – e.g., for local lodging, meals and incidental spending – may lead to additional, local temporary jobs such as in restaurants, motels and hotels, and some stores. Also, they may claim that local purchases of some materials and supplies for the “wind farm” will result in more temporary local jobs.

The “wind farm” developers or their advocates often make all the errors listed in A., above, before beginning their calculations of indirect and induced economic impacts – resulting in severe overestimation of favorable impacts. Further, those making the estimates often rely on “input output” analyses and formulae that are questionable in their underlying assumptions.

  1. Ignoring costs associated with the “wind farm.” Economic analyses seem not to take into account locally imposed costs that result from a “wind farm” during construction and thereafter; including such costs as public safety costs, road repair and maintenance that are paid for by local citizens through their taxes.
  1. Impact of higher electricity prices. There is no serious question but that the full, true costs of electricity from wind energy are higher per kilowatt-hour than electricity from most other sources – while the true value of the electricity is lower because it is intermittent, volatile, unreliable and not likely to be available when most needed to meet peak electricity demands.
    These higher costs are passed along to electric customers and/or taxpayers and reflected in their monthly electric bills or their tax bills. Additions to electric and tax bills mean that citizens have less money available to spend for other purposes; e.g., food, clothing, shelter, medical costs, education, recreation and other necessities and discretionary spending. There will be less money to spend in local stores, dry cleaners, and other establishments.
    The added costs may be relatively small for an individual (but perhaps devastating for those with limited income) but they can be very significant for groups of citizens, areas or regions.

In fact, the money that is diverted to higher taxes payments and higher electric bills means fewer local jobs. However, these negative effects are seldom mentioned by “wind farm” developers, advocacy groups and government officials.

  1. Impact of shifting tax burden to citizens who do not benefit from tax exemptions and abatements. Tax breaks granted to certain special interests are seldom matched by cuts in spending by the taxing authorities. Therefore, the tax burden escaped by the favored is shifted to remaining taxpayers.

Conclusion