Category Archives: Economic development

Dominion Explores Pumped Storage in SW Virginia

Graphic credit: Dominion Energy

Much to my astonishment, Dominion Energy is taking a serious look at building a pumped-storage hydro-electric power plant in Virginia’s coalfields. I wrote about the idea back in February but it struck me as a long shot. So much for my superficial impression. It now transpires that Dominion is identifying potential sites in far Southwest Virginia and hopes to narrow the list later this year.

If Dominion decides to proceed, it will notify potentially affected landowners and set up meetings to gain public support, according to Dominion spokesman Greg Edwards. Though still in the early exploratory phase, Dominion describes the prospects as “very exciting.”

The potential impact is enormous. The pumped-storage power station would have a capacity of 1,000 megawatts, making it even bigger than Dominion’s coal- and wood-burning Virginia City Hybrid Energy Center, which cost $1.8 billion to build and generates $6 million a year in tax revenue for Wise County. “We’re talking about revenues way in excess of what Virginia City generates,” Edwards told the Coalfield Progress.

The idea behind pumped storage is to move water between reservoirs at different elevations. Dominion would let the gravity-fed water run turbines, as shown in the company-supplied graphic above, during periods of peak power demand when the cost of electricity is expensive, and then pump the water back to the upper basin when electricity is cheap. The concept is the same as Dominion’s pumped-storage dam in Bath County, the world’s largest.

Pumped storage will be increasingly attractive as eastern utilities increasingly rely upon wind and solar power, which are intermittent sources of electricity. A pumped storage facility could help even out fluctuations in electric production due to variations in wind and sunshine, or even shift power production from periods of peak solar output during the mid-day to peak demand in the late afternoon/early evening. The massive scale contemplated for the project — 1,000 megawatts, roughly equivalent to the capacity of a state-of-the-art gas-fired facility — suggests that Dominion could be considering the plant for load-shifting purposes. And that could be a game-changer.

Source: Dominion 2017 Integrated Resource Plan. Click for legible image.

Dominion’s Integrated Resource Plan foresees the need for a new nuclear power plant by 2030 (under the strictest CO2 regulatory regime), up to five new gas combustion turbines by 2032, and more than 5,000 megawatts of solar power by 2040. I am entering the realm of speculation here — none of this comes from Dominion — but the addition of a giant pumped-storage facility to Dominion’s generating fleet might enable the company to shift more aggressively to solar power and still maintain grid reliability. Potentially, depending upon transmission line limitations, pumped-storage could eliminate the projected need for four 240-megawatt combustion turbines. (How such a shift would impact the demand for natural gas supplied by the proposed Atlantic Coast Pipeline is a big unanswered question.)

The idea originated with coalfield legislators, not Dominion. Del. Terry Kilgore, R-Gate City, Del. Todd E. Pillion, R-Abingdon, and Sen. Ben Chafin-Lebanon, amended the state code to add pumped-storage hydroelectricity generation and storage to the list of projects which, if built in the Virginia coalfield counties, would be deemed “in the public interest.”

Learning of the proposal during the General Assembly session, Dominion quickly began exploring the idea. Early media reports emphasized the idea of using underground mines as a holding tank for the water, but Edwards told the Coalfield Progress, “We’re not wedded to underground.”

So far, Dominion’s investigations into potential sites have involved working with maps and satellite imagery. The company has looked at “literally hundreds” of possible locations. Even if Dominion finds a suitable site, however, it could take seven to ten years until a pumped-storage facility became operational.

Ferguson Deal Will Help Transform Newport News

City Center in Newport News. Photo credit: Daily Press.

A couple of weeks ago, the City of Newport News announced an economic development coup: Ferguson Enterprises, the nation’s largest distributor of plumbing supplies and one of the city’s largest home-grown companies, will locate an $82.8 million office project in City Center at Oyster Point.

The new campus will house 1,400 information-technology and administrative jobs, of which 1,000 will be relocated from local offices and 434 will be new hires. Salaries will start at $45,000 before benefits. The company, a $14 billion subsidiary of U.K.-based Wolseley plc, had considered sites in California, South Dakota, Nevada and Washington.

Snagging the investment took $15.6 million in state and local incentives. These include the donation of land valued at $3 million, $4.8 million in property tax rebates over the next decade, $2 million from the Commonwealth’s Opportunity Fund, a $2 million city match, $1 million to build a “skybridge” connection to a parking deck, and $700,000 in road improvements. It’s not clear from press reports where the rest of the local incentives are coming from, although they may be associated with construction of the parking deck.

Clearly, fear of losing jobs was a big motivator in granting the incentives. “A city like Newport News to lose 1,000 jobs would have been devastating,” said Governor Terry McAuliffe at the announcement. “I mean, I know the numbers — this was very competitive.”

Of course, those numbers are confidential, so there is no way the public can gauge the necessity of the incentives. As always, my concern is that a private company mau-maued the state and local government into giving subsidies by threatening to make its investment in another state.

Sometimes cost and labor considerations do make it a sound business decision to locate a major operations center elsewhere. But sometimes it doesn’t –sometimes there are advantages to locating important operational activities in proximity to the corporate headquarters — and the company is just using its leverage to extract tax concessions. Neither the governor’s press release nor the news reports give any indication of which was the case.

Ferguson CEO Frank Roach certainly didn’t sound like raw self interest came into play in the deal. “Ferguson is deeply rooted in the Commonwealth and we have been proud to call Virginia home for more than 60 years,” he said. “We are excited to further invest in the City of Newport News.”

Bacon’s bottom line: Yeah, right. Ferguson is so proud of its Virginia roots that it took $15 million in incentives to keep it here. As a subsidiary of a British company that doesn’t give two hoots about Newport News, such sentimental ties don’t carry much weight. Such rhetoric doesn’t sit well with me. Either it is insincere, or Ferguson wanted to stay in Newport News all along, which calls into question the need for subsidies.

Still, all things considered, the deal could have been worse. Yes, the city will be rebating $4.8 million in property tax rebates over ten years, but that’s only half the tax revenue generated by the property, so it still will gain from the deal to the tune of $480,000 per year.  That will be almost enough to pay off its $2 million state match and $1 million for the skybridge within six years. The city also will build a parking deck, but that was part of the planned development of City Center anyway. As for the $700,000 in road improvements, they can be construed as routine public works.

What I like most about the project was barely alluded to in the official pronouncements: Ferguson will become an anchor tenant in City Center, a nucleus for re-developing a city comprised mainly of a run-down downtown adjoining a sea of suburban sprawl-style development. City Center, a project of the Norfolk-based Harvey Lindsay Commercial Real Estate, constitutes an effort to create walkable, mixed-use urbanism.

That’s exactly what Newport News needs to recruit young workers and retain the businesses that hire them. The city badly needs transformation. While the benefits of creating sustainable land use patterns may be hard to quantify, they are real. 

(Hat tip: Paul Yoon.)

Coping Gracefully with Depopulation

Map credit: Virginia Department of Mines, Minerals and Energy

A Roanoke Times editorial asks a provocative question: “Should we just let Appalachia go?” Instead of trying to rebuild a new economy in far Southwest Virginia, should the commonwealth just allow the region to depopulate?

As the editorial points out, the Appalachian mountains and hollers were sparsely populated through the 18th and 19th centuries. Then, in the late 1800s there arose an industrial economy that ran on coal. “Coal happened. Railroads happened. People — many of them immigrants — poured into Appalachia. Roanoke was not the only boom town to spring up then. So did lots of other communities deeper in coal country.”

After an efflorescence during the last 70s/early 80s, coal went into decline. Mechanization eliminated jobs. Thicker, efficient-to-mine coal seams played out. Environmental regulations drove up the cost of mining and combusting coal. And natural gas began displacing coal in the utility market. As long as high-quality metallurgical coal used in steel making can be mined in Appalachia, mining will never totally disappear. But coal will be a shadow of the industry it once was.

Virginia’s coalfields have tried to diversity their economies, but they suffer enormous competitive disadvantages. They are geographically remote, far from large urban centers and interstate highways. They have a paucity of flat land suitable for industrial development. The workforce is poorly educated, substance abuse is widespread, and most ambitious young people who earn college degrees leave for better employment prospects elsewhere. And the quality of amenities and public services is low so that everyone who made significant wealth in coal mining moved out of the region. There is no moneyed business class to spark an entrepreneurial revitalization.

Some coal counties refuse to die. Wise County has been especially creative in trying to reinvent its economy around broadband, data centers and solar energy. Recent state legislation that would favor pumped storage as a complement to solar farms has Dominion Energy giving a serious look at the region. The economic impact of such a facility, if ever built, would exceed that of Dominion’s $1.8-billion Virginia City Hybrid Energy Center, which burns coal and biomass. But the economics of these dreams remain unproven.

“It’s hard to see what industries exist in which Appalachia has a comparative advantage as vast as it had in coal,” the Roanoke Times quotes economist Lyman Stone as writing. “I’m not saying none do or could ever exist; I’m just saying that if they can or do, they don’t seem extremely clear right now.”

In Stone’s estimation, without coal mining to prop up the economy, Appalachia’s population has a long way to fall. He writes: “We can’t let hopes blind us to realities. On some level, population must be associated with economic activity to support it. Coal mining is still declining, and when it’s completely gone, it’s not clear how much economic activity will remain, and therefore how much population can be sustained.”

Bacon’s bottom line: As much as I hate to acknowledge it, Stone’s prognosis is correct. The 21st century economy belongs primarily to populous urban areas. I wouldn’t discourage coalfield residents from trying to salvage their communities — indeed, I very much hope they succeed. But even if creative-thinking localities such as Wise succeed in diversifying their economies, data centers, solar farms and pumped-storage facilities employ very few workers beyond the construction phase. Such projects would bolster the local tax base, enabling counties to maintain basic services, so they are worth pursuing. But they won’t reverse the depopulation of the region.

The coalfield counties, like other remote, rural counties in Virginia, need to think how to decline gracefully. Hard-hit cities and towns in the Midwestern rust belt are learning how to cope with shrinking populations, and perhaps it’s possible to learn lessons from them. What rural counties do not need to do is invest scarce resources in desperate, long-shot bids to turn around their economies. The circumstances are dismal, but living in denial of economic reality will only make things worse.

Thinking on a Higher Plane about Higher Education

Stephen Moret, CEO of the Virginia Economic Development Partnership (VEDP), brought a wealth of experience in corporate recruitment and workforce training when he moved to Virginia from Louisiana. But there’s another aspect of Virginia’s economic development chief that has gained little notice here in the Old Dominion. Last year he earned a doctorate in higher education management from the University of Pennsylvania.

The Ed.D. dissertation that Moret completed last year, “Attainment, Alignment, and Economic Opportunity in America: Linkages Between Higher Education and the Labor Market,” examines the connection between higher education and economic development in the United States, often challenging the conventional wisdom in the process. His findings are worth considering here in Virginia.

Two propositions are widely and uncritically accepted in the Old Dominion: (1) a highly educated workforce is good for economic development, and (2) therefore, we should invest more in higher education. Accordingly, the Virginia Plan for Higher Education sets the goal of making Virginia the best educated state in the U.S. by 2030. The plan articulates the rationale:

An educated population and well-trained workforce increase economic competitiveness, improve the lives of individuals and support greater community engagement. The best-educated state means that Virginia supports higher education at all levels. This spectrum includes workforce credentials such as industry certifications, state licensures, apprenticeships and certificates, as well as traditional degrees.

Moret does not contest the link between an educated workforce and economic development. But the relationship is a complicated one, he says. His dissertation suggests that it is possible to invest too much in higher ed, or invest in the wrong places. Among other issues, Moret discusses the problem of “malemployment,” a form of underemployment in which four-year degree holders work in jobs requiring less education. He worries that many college graduates lack the critical thinking skills needed to succeed in the workplace. And he notes that the benefits from investing in higher education are highly uneven among the states.

Malemployment. Malemployment is a widespread problem in the U.S. Approximately one-quarter to one-third of all college graduates and roughly 45% of recent college graduates are working in jobs that do not require college-level skills. Altogether, about 10 million FTFY (full-year, full-time) employees with a bachelor’s degree are malemployed nationally, working as retail sales clerks, truck drivers, food service managers, cashiers and other occupations.

“Proponents of higher college degree attainment often emphasize the higher earnings and lower unemployment rates enjoyed by college graduates in comparison to those of individuals whose formal education ended with a high school diploma,” writes Moret. “The reality is that significant numbers of college graduates do not secure employment in occupations that require and/or make meaningful use of college-level skills. They often experience much lower earnings premiums as well as lower job satisfaction than their peers.”

The phenomenon varies widely by type of degree. Science and engineering degrees tend to have the lowest rate of malemployment, arts & humanities among the highest rates.

“The sheer size of the malemployed population as well as the nature of the occupations that many malemployed individuals hold suggest this is a widespread and serious issue in the U.S.,” says Moret, calling into question the simplistic idea that a college education is a sure pathway to well-compensated employment.

Critical thinking. Most full-time faculty members at colleges and universities consider development of critical thinking skills (99%) and effective writing skills (93%) to be essential or very important goals of an undergraduate education. Employers say they are looking for the same skills. All too often, degree earners are not gaining mastery of them. At a few institutions, students lose proficiency at college.

Quoting from an academic source, Moret says:

Many seniors graduate without being able to write well enough to satisfy their employers. Many cannot reason clearly or perform competently in analyzing complex, nontechnical problems, even though faculties rank critical thinking as the primary goal of a college education. Few undergraduates receiving a degree are able to speak or read a foreign language. Most have never taken a course in quantitative reasoning.

Many studies of the connection between education and economic growth have focused on years of schooling or educational attainment as the key predictor, says Moret. But recent research has shown that the real predictor is cognitive skills, which may or may not be obtained in college. (I would bet that there is a large overlap between these cognitive under-achievers and college grads experiencing malemployment.)

Migration and educational attainment. Highly educated, recent college graduates are the most likely of any demographic group to move from one state to another. Individuals with a bachelor’s degree are twice as likely to complete an interstate move as those with a high school degree; Ph.D.s are three times as likely. Likewise, people in their 20s and early 30s are more likely to move than any other age group.

Some states export college-level talent to other states, in effect losing the fiscal investment they made in their students, while other states are talent importers, reaping the benefit of others’ investments. The Great Lakes states are the biggest exporters, followed by the Mid-Atlantic, New England and the Plains states. For every 100 bachelor’s degrees conferred in Michigan, the state has lost 22.

Says Moret:

When college degree production substantially exceeds demand in a state, college graduates tend to complete interstate moves in order to secure better employment outcomes. Collectively, these findings suggest that the economic payoff of a college degree is much greater in some states than others, and state leaders must be careful to ensure that their college degree attainment initiatives are not misaligned with the labor market demands of their economies.

Traditionally, Virginia has been a talent “importing” state, which has contributed to the Washington metropolitan area, including Northern Virginia, having the best educated workforce of any metro in the country. The Old Dominion has benefited from other states’ investment in higher education. However, in recent years, coinciding with sequestration and Virginia’s economic slowdown, Virginia has shifted to a talent-exporting state (although the number of people leaving the state is relatively small). Despite this transition, the state forges ahead with a strategic higher-ed plan calling for awarding more degrees, certifications and apprenticeships. Will supply exceed demand? Will we end up exporting talent? Are we investing excessively in higher ed — or perhaps in the wrong places, producing too many B.A. degrees and too few certifications for skills that are demonstrably in demand?

Virginia’s public policy leaders are not asking such questions — or, if they are, their deliberations are not reflected in the news media. But the issues Moret raises in his dissertation are profoundly important. With an economy in the doldrums and a state budget facing chronic stress, Virginians must question all of their hoary assumptions in order to make better use of the state’s limited resources.

As a member of the State Council for Higher Education in Virginia, Moret is in a position to ask the questions that no one else in authority is asking. Let us hope he makes the most of the opportunity.

Exploring the Dark Side of the Creative Class

Richard Florida, who gained renown 15 years ago with his book, “The Rise of the Creative Class,” is a progenitor of big ideas exploring the nexus of urbanism, innovation and prosperity, and he’s back with another book and another big idea. Having documented in previous works that a handful of “superstar cities” are sucking up the lion’s share of artistic, scientific, and entrepreneurial talent and creating a wildly disproportionate share of global wealth, he delves into the dark side of urban prosperity. The title of the new book lays out his thesis succinctly: “The New Urban Crisis: How Our Cities Are Increasing Inequality, Deepening Segregation, and Failing the Middle Class—and What We Can do About It.”

The “clustering” effect – capital, corporations and talent migrating to large metro regions with deep labor markets – creates a huge economic advantage for the world’s biggest metros, and an economic advantage for dense urban centers within those metros. As the creative class grows in wealth and power, there ensues a competition for prime urban space. Prosperous inhabitants bid up the price of housing, while NIMBYs inhibit the development of new units. Soaring housing prices drive out the working and middle classes, and push the poor into enclaves segregated by income, race, and education.

The result is “winner-take-all urbanism,” says Florida. “The talented and advantaged cluster and colonize a small, select group of superstar cities, leaving everybody and everywhere else behind.” This baleful trend, he describes as the “New Urban Crisis.”

As with all of Florida’s books, “The New Urban Crisis” has much to recommend it. Florida is very good at descriptive analysis – showing what is going on. It is impossible to finish this book without agreeing with his conclusion that a handful of highly innovative supercities are more prosperous than others, that the combination of increasing demand and constricted supply are increasing the cost of housing, and that housing soaring prices in these metros are displacing the poor and middle class. Florida will convince you that prosperous cities are becoming more unequal, not less, and that the pervasive pattern of the past half century – prosperous suburbs and decaying urban cores – is being replaced by a patchwork pattern of highly affluent neighborhoods intermixed with neighborhoods of concentrated poor in both urban cores and suburbs.

Florida is far less persuasive with his prescriptive analysis. As a political liberal, he agonizes over the growing inequality within metro areas, particularly the impact on poor African-Americans. Despite the promise of the book sub-title, he devotes little attention to how metros fail the middle class. Hispanics are strangely absent from the discussion. As for whites in rural/small town America, he evinces no concern whatsoever.

As a liberal, Florida remains sublimely confident that government is the solution to what ails the U.S. He is realistic enough to acknowledge that the New Deal/Great Society paradigm is getting long in the tooth, and that America needs to realign resources to reflect 21st-century realities. He also regards the thicket of NIMBY-empowering zoning regulations and building codes as a prime cause of rising housing prices and income segregation, and argues that they need to be scaled back. But whether he’s writing about the minimum wage, mass transit and inter-city rail, and the scourge of poverty, his confidence in the beneficent power of government never flags.

In previous books, Florida attributed the success of large metropolitan areas in large part to three factors – talent, technology and tolerance. By tolerance, he means acceptance of cultural and ethnic diversity: gays, bohemians, and racial, religious and cultural minorities. In a North American context, he is undoubtedly right: Open societies do foster creativity and innovation. (I’m not sure how well his paradigm applies to Singapore, Seoul, Tokyo or cities in ethnically homogeneous countries like Sweden and Finland, but that’s an issue for another time.)

He views Republicans as retrogrades, and regards the election of Donald Trump as an unmitigated disaster. “Summoning up the political will to face up to the New Urban Crisis will be no easy thing,” he says. “And it will be ever more difficult with Donald Trump as president and the Republicans in control of both houses of Congress.”

Yet he is strangely incurious about one of his own findings: The more politically liberal the city, the greater the inequality. At least he acknowledges the phenomenon, even if he explains it away:

Our most liberal cities number among the most unequal. …. Across the United States, inequality is not just a little higher, but substantially higher, in liberal areas than in more conservative ones. … My own analysis of all 350-plus US metros found wage inequality to be positively correlated with political liberalism and negatively associated with political conservatism.

Florida never entertains the possibility that liberalism causes poverty and inequality. “Of course, inequality is not a direct product of liberal political views,” he says. “Rather, liberalism and inequality are simply both attributes of large, dense, knowledge-based metros.”

An alternative narrative would suggest that inequality arises from the juxtaposition of massive wealth creation of new industries with tragi-comic ineptitude of big-city administrations, mostly Democratic and mostly liberal. “Blue” cities are more prone to over-spending and fiscal crises. (The situation in blue-state Illinois has deteriorated to the point, we read in the news today, that the PowerBall and MegaMillion lotteries are dropping the state as a client!) Blue cities have larger under-funded pension liabilities, their taxes are more punitive, their inner-city schools are worse, their murder rates are higher, and unemployment is more chronic – all of this despite the immense advantages conferred by the presence of greater wealth to tax.

A core argument of “The New Urban Crisis” is that high housing prices are driving inequality and income segregation. Florida alludes to the work of so-called market urbanists who argue that eliminating restrictive zoning and building codes will allow developers to build as needed. “They make an important point: zoning and building codes do need to be liberalized and modernized,” he concedes. “We can no longer allow NIMBYs and New Urban Luddites to stand in the way of the dense, clustered development our cities and our economy need.”

While deregulation will help by building more housing and increasing density, he adds, the high cost of land combined with the high cost of high-rise construction will limit new construction to expensive office towers and will not create affordable housing. As evidence, he points to Houston, one of the few large metros in the U.S. where developers “can build what and where they want.” While Houston housing is more affordable than New York’s, L.A.’s or San Francisco’s, he says, it is “rather expensive” compared to that of most other metros, and the metro ranks high in his inequality and segregation indices.

I’ve never found persuasive the argument persuasive the argument that building luxury towers instead of workforce housing leads to higher housing prices for the poor. If the super-rich occupy the luxury towers, they relinquish the slightly less luxurious/preferable accommodations where they once dwelled. The merely rich move in, in turn creating vacancies in their less opulent quarters, which in turn creates openings for the merely affluent, and so on down the line. Unless Latin industrialists and Russian oligarchs are buying up all the luxury tower units as a hedge, new luxury housing eventually exerts downward pressure on housing prices down the line.

Edward Banfield described the economic logic in his classic, “The Unheavenly City.” Writing in 1968 at the height of white flight and the original urban crisis, the urban sociologist foretold the trends that Florida describes in “The New Urban Crisis.”

If present trends continue, thee will not only be more people in the cities in the next two or three decades, but a higher proportion of them will be well-off. … In this very affluent society, housing probably will be discarded at an ever faster rate than now, and the demand for living space will probably be greater. In the future, then, the process of turnover is likely to give more and better housing bargains to the not well-off, encouraging them to move even farther outward and thus eventually emptying the central city and bringing “blight” to the suburbs that were new a decade or two ago.

Eventually land in the suburbs would be worth more than land in the central city, Banfield predicted. “When this time comes, the direction of metropolitan growth will reverse itself: the well-off will move from the suburbs to the cities, probably causing editorial writers to deplore the ‘flight to the central city’ and politicians to call for government programs to check it by redevelopment the suburbs.”

Lo and behold, 40 years later, Florida describes a “suburban crisis” of flight from cheap-to-build but expensive-to-maintain suburban sprawl back into the city. At least he avoids the trap of calling for government programs to redevelop the suburbs.

Banfield didn’t foresee everything – he did not predict the growing preference for walkable, mixed-use communities in denser settings. But he understood basic economics: As the wealthy migrate to the most luxurious housing, the poor migrate to the least desirable and cheapest housing. At this stage in urban evolution, that means the poor are moving into the aging, 50s- and 60s-era ranch-style tract houses of the inner suburbs that no one else wants. That’s the affordable housing that Florida yearns for, but he does not see it for what it is.

There’s nothing that liberals love more than a good social crisis – it gives them meaning in life. As much as I appreciate Florida’s previous work, I can’t get as exercised as he does about the New Urban Crisis.

Fairfax Snags AWS Corporate Center, 1,500 Jobs

AWS data center in Ashburn. Photo credit: Atlantic

Governor Terry McAuliffe announced a major economic-development coup yesterday: Amazon Web Services (AWS) will locate its new East Coast corporate campus in Fairfax County, creating up to 1,500 jobs. AWS, which already operates several data centers in Northern Virginia and distribution centers downstate, will provide cloud computing services from the new campus.

“When one of the world’s most successful companies chooses to expand its footprint across Virginia, it is a testament to our talented workforce and business climate,” McAuliffe said in a press release. “Because it was a priority to win this transformational project, we partnered with Virginia’s Major Employment and Investment Project Approval Commission to ensure that AWS chose the Commonwealth. We have a longstanding relationship with Amazon and are proud that the company will continue to play a key role in building the new Virginia economy.”

Virginia competed successfully against Texas and Washington for the project.

Amazon employs nearly 7,000 Virginians. Between the AWS corporate center and a new distribution center in Frederick County, the Seattle-based technology giant will add more than 2,000 jobs over the next several years, said Secretary of Commerce and Trade Todd Haymore.

“The actual infrastructure at the heart of AWS’ infrastructure-as-a-service isn’t the thing that makes it important to developers; it’s the services and APIs built on top of that infrastructure,” wrote Ingrid Burrington in a 2016 Atlantic magazine article about AWS’s Northern Virginia operations.

AWS cloud services provide web hosting, application hosting, storage and backup, content delivery, and scalable database solutions, according to the press release. “AWS offers over 90 fully featured services for compute, storage, networking, database, analytics, application services, deployment, management, developer, mobile, Internet of Things (IoT), Artificial Intelligence (AI), security, hybrid, and enterprise applications.”

Bacon’s bottom line: AWS’s decision to locate in Fairfax County is good news. I take it for granted that the 1,500 technology jobs will pay well. As a bonus, these jobs represent a significant step toward the diversification of Northern Virginia’s economy away from direct federal employment, adding luster to the region’s status as the nation’s leading location for data centers. While the federal government will be a major customer, the corporate center will serve private and nonprofit clients, too.

A criticism of data centers is that they support few jobs. Well, the AWS campus will support a lot of jobs. This announcement is very good news, and none of what follows should diminish the accomplishment.

However….. I do have questions. AWS will be eligible to receive $7,000 in state incentives per net new job created, up to 1,500 jobs. That represents a state subsidy of up to $11,250,000 for the company with the fourth largest market capitalization in the world ($423 billion as of March 31, 2017).

The state “custom performance grant” will be triggered by Amazon hiring 600 employees. The Virginia Economic Development Partnership (VEDP) worked with the Major Employment and Investment Project Approval Commission to secure the project. McAuliffe approved the grant, which also must be approved by the General Assembly. Although the press release did no say so, Virginians can be reassured that the grant is contingent upon AWS creating the jobs it says it will.

But why is any subsidy necessary? The press release says that Virginia competed with Texas and Washington state for the project. Really? Virginia competed with Texas and Washington for an East Coast corporate center? The press release says that AWS will be providing services to businesses, government, and educational organizations.” The biggest government customer of all happens to be the federal government, the center of which is within spitting distance of Fairfax County. If you want to provide cloud services to Uncle Sam, you need a location in the Washington metropolitan area, not halfway across the country.

One of AWS’s services is GovCloud, designed to host sensitive data and regulated workloads. States the GovCloud website: “AWS GovCloud (US) is operated solely by employees who are vetted U.S. Citizens on U.S. soil, and root account holders of AWS accounts must confirm they are U.S. Persons before being granted access credentials to the region.”

The website does not mention GovCloud employees requiring security clearance, although I would find it difficult to imagine that they wouldn’t. Lending credence to my conjecture, AWS works closely with Corporate Office Properties Trust (COPT), a real estate investment trust that specializes in national security tenants.

“Amazon’s relationship with COPT may help reassure federal and local government agencies that the Amazon US East facilities meet their requirements,” wrote Rich Miller in Data Center Frontier in September 2016.

“Security is in COPT’s DNA,” the company says, noting its historic focus on security. That includes Anti-Terrorism/Force Protection (ATFP) compliance, with a controlled perimeter greater than 150 feet from the building, biometric access controls, man traps, video surveillance zones, and extensive experience building SCIF (Sensitive Compartmented Information Facility) space for government clients.

Given the emphasis on security for data-center infrastructure, it would seem likely that similar considerations would prevail at the Fairfax County corporate center where employees provide value-added services. Surely it would be easier for AWS to recruit employees with security clearances in Northern Virginia than either Washington, where GovCloud is currently located, or Texas.

I welcome Amazon as a corporate citizen of the Commonwealth. But I have a tough time swallowing a $11 million subsidy for a cloud-services project that logic dictates should be located (1) near federal agencies in Washington, D.C., and (2) in a mid-Atlantic location easily accessible to the entire east coast to serve other clients. (Perhaps there is a third advantage — physical proximity to the company’s Northern Virginia data centers, but that’s pure conjecture on my part.)

VEDP and the MEI commission undoubtedly had good reasons for providing the grant. But we’ll never know how well the commission conducted its due diligence. Economic-development deals are always treated as highly confidential, and the public never gets to know the justification for why public funds are expended. I hate the lack of transparency.

Building on Virginia’s Data-Center Boom

Data centers are the hottest trend in Virginia economic development these days. But the state is only beginning to think through the implications.

Loudoun County, home to 75 facilities, has developed the largest cluster of data centers in the country (and perhaps the world), and next-door-neighbor Prince William County is rising fast. Rural Mecklenburg County has attracted nearly $2 billion in investment as the location of Microsoft’s East Coast hub for online services. QTS has retrofitted an old microchip factory in Henrico County to open a data center, while DP Facilities, Inc., opened a $65 project center in Wise County. Soon, Virginia Beach will enter the data-center sweepstakes when construction is complete on a 4,000-mile transatlantic cable connecting Virginia to Europe.

According to Paula Squires writing in Virginia Business magazine, Virginia boasts more than 650 data processing, hosting and related establishments that employ more than 13,900 people. Since 2006, the industry has announced more than $11.8 million in new investment and 6,600 jobs. The jobs, while relatively few in number, pay well (more than $100,000 a year in Northern Virginia), and generate a gusher of local taxes.

Billions of dollars are flowing into the sector as the global economy embraces cloud computing to handle the massive surge in data collection and storage. A Markets and Markets research report estimates that the cloud storage market will grow from $23.76 billion in 2016 to $74.94 billion by 2021 — a compounded annual growth rate of 25.8%.

Loudoun County was one of the first localities anywhere to see the economic development potential. The county had a built-in advantage — a massive network of fiber-optic cable built by AOL and WorldCom during the heyday of the 1990s Internet bubble. WorldCom went bust and AOL has a much-diminished presence, but the cable infrastructure remained — and high-capacity connectivity is an essential prerequisite for a data center. Loudoun claims that 70% of the world’s Internet traffic passes through the county. The concentration of data centers is so pronounced that economic developers refers to a six-mile radius around Waxpool Road and Loudoun County Parkway as “data center alley.”

The county has built on its infrastructure advantage by learning how to expedite zoning, permitting and construction. CyrusOne completed construction of a 220,000-square-foot data center in Sterling in 180 days — reputedly the shortest construction time fever for a center that size, reports Squires.

To incentivize investment, the state exempts computer equipment bought or leased for a data center from the retail sales and use tax. Henrico County has dropped its business property tax rate on computers and related equipment from $3.50 to $.40 per $100 of assessed value.

Also, Dominion Energy has emerged as a significant partner. The endless racks of servers inside data centers consume electricity and generate heat, which must be cooled by massive HVAC systems. Dominion charges 5.2 cents per kilowatt hour for large facilities, and a slightly higher rate for small ones. “We’re very competitive,” says Stan Blackwell, director of customer service and strategic partnerships for Dominion. “We have some of the lowest data-center rates in the nation.”

Bacon’s bottom line: The rise of the data-center industry raises two pointed sets of public policy questions.

First, how can Virginia optimize this opportunity? What are the critical drivers? Obviously, the existence of high-capacity fiber networks is one consideration. It appears from the map atop this post that Virginia has one of the densest clusters of long-haul fiber capacity in the country. How crucial is that advantage? Does Virginia’s proximity to a relatively fiber-poor Southeastern U.S. give data centers serving that market an edge? Is the competitive advantage bequeathed by fiber-optic infrastructure such that Virginia should consider encouraging investment in more? Conversely, does it do any good for Virginia to invest in its own fiber infrastructure if connections to neighboring states are lacking? Many, many questions.

Electricity is one of the largest costs associated with operating a data center, accounting for roughly 10% of the total cost of ownership — and it is one of the largest costs that vary by location. Dominion’s electric rates confer a significant competitive edge for locations within its service territory.

Graph credit: Dominion Energy

One of the biggest challenges for Dominion — and the further expansion of the data-center industry — is delivering electricity to these data centers. In one particularly controversial case, the utility wants to build a 230 kV transmission line and substation from Gainesville to Haymarket to serve an Amazon data center. Locals have organized in opposition, claiming that the 100-foot-tall towers will disrupt views and harm property values to benefit a single industrial customer. They insist that Dominion bury the line at considerable expense. If Virginia wants to develop the data-center industry more fully, it may need to find ways to resolve the inevitable utility-landowner disputes fairly expeditiously. No company wants to wait years to find out whether a project will get the electric power it needs.

A second big public policy question centers on the implications of the data-center boom for electricity demand in Virginia. According to Virginia Business, data centers represent Dominion’s fastest-growing customer segment: About 7% of the company’s retail portfolio consists of data centers.

This feeds into the debate over Dominion’s future electric generating mix. Dominion’s 2017 Integrated Resource Plan (IRP) assumes that electric load will increase at a compounded rate of 1.5% over the next 15 years — considerably higher than PJM Interconnection’s forecast for the Dominion service territory. Dominion argues that PJM has not taken into account the phenomenal growth of demand by Virginia-based data centers. These projections matter because they influence how much new generating capacity — including nuclear, as I will explore in a forthcoming post — Dominion adds in the years ahead, with tremendous implications for rate payer and the environment.

The data center surge could prove to be an economic development boon for Virginia. But the industry’s growth impacts local zoning and land-use practices, tax policy, fiber-optic infrastructure development, and energy policy. The McAuliffe administration would be well advised to pull together a conclave to determine how to sort through these issues.

Four Goals to Revitalize Southwest Virginia


by Steve Haner

Dear Southwest Virginia:

I read with interest Wade Gilley’s recent Roanoke Times column on steps Southwest Virginia should take to brighten its economic future. Sure, appoint another commission, but here are some more concrete thoughts: Stop expecting Richmond or Washington or anybody else to provide the capital or the leadership.

I spent twenty years living in Roanoke, ten of them with the Roanoke Times & World-News, but we left Roanoke more than 30 years ago to move to Richmond. My emotional attachment to the region is just as deep as ever, and on my mother’s side the family ties go back to the Revolution. That talented and highly-educated family is largely gone: north, east, west and south. My parents and their siblings all grew up in Bluefield. Of the fourteen people in my generation, one lives in the region now. Of their twenty-plus offspring, one lives there now.

So, goal one is to stop exporting your talent. You have the educational institutions – Virginia Tech, in my opinion, provides the best value for the dollar in Virginia, and the smaller schools and community colleges in the region are all excellent. I shocked a young lady recently by saying: “Of course I’ve heard of Emory and Henry! My grandfather went there!” But you need to figure out how to provide the jobs, low cost of living and amenities that make Tech and Radford and E&H grads stay in the region.

Goal two is to regionalize, regionalize, regionalize. I’ve been out of Roanoke for three decades, but it doesn’t look like the various Roanoke Valley governments are working much closer together than they were. Hampton Roads cities and counties consolidated decades ago but the localities in your region remain fractured, and deep down may still think like competitors. Look again at consolidation in the Roanoke Valley. Every southwest locality should be in conversation with its neighbors about what services they can share and whether two governments should become one, even if that means fewer jobs for politicians to hold and pass out.

Goal three is to restructure your business taxes to make it impossible for businesses not to include you on the short list for locations. Get rid of your machinery and tools taxes entirely. If not that (but it would be a dynamite step) find some other bold tactic that puts the region on the map. It will be the combination of the workforce and economic incentives that works.

Goal four is to embrace and celebrate growth. Watching the battle over the pipelines is not sending warm and fuzzy signals to anybody who might bring in another proposal requiring major permits and land disturbance, or who needs gas for operations. My experience in Roanoke decades ago was that a major proposal always brought out the whiners afraid of growth and enamored of the sleepy status quo. The jobs usually went elsewhere.

Covering the state Capitol for that paper, I was always amused by the focus on small, ill-advised grant programs to support this or that local activity. Explore Park. Center in the Square. Advocates always touted them as essential to economic development, but they were small stuff. The politicians complied and got a bullet point for their brochure. Thousands flock to Explore now, right? Today the screaming is about loss of federal handouts. Dependency as a state of mind is just as destructive to an economy as it is to an individual.

Stephen D. Haner, principal of Black Walnut Strategies, lives in Richmond.

Liberty U Acquires Research Park, Advances Research Ambitions

Center for Advanced Engineering and Research in Bedford County. Photo credit: Virginia Hamrick Photography

Expanding its role as the economic dynamo of the Lynchburg metropolitan region, Liberty University has finalized a $4.3 million purchase of the Center for Advanced Engineering and Research (CAER) in Bedford County.

Reports “Work It, Lynchburg“:

For Liberty, the purchase of the CAER facility is an opportunity to build a new research campus on the surrounding 28-acre lot at the New London Business and Technology Center park. The space will serve as the new home for the Liberty School of Engineering and Computational Science.

“This is an exciting step for Liberty University as we expand our presence as a research university and do so at a new location in Bedford County,” Liberty President Jerry Falwell said in a news release from the university. “Our investment in this facility and our commitment to relocate our School of Engineering and Computational Sciences to this site demonstrates our goal to expand our partnerships with business and industry and offer exciting new opportunities for our students.”

Liberty plans to grow its engineering program to 800-plus students and 30-plus faculty and add new undergraduate and graduate degrees along with a new doctorate focused on energy, according to remarks made by Bob Bailey, the executive director of CAER and a member of the LU engineering department advisory board, at a January meeting of the Tobacco Region Revitalization Commission.

Evan Feinman, executive director of the tobacco commission, had described the project as in “financial distress.” An initiative of the Region 2000 economic development group, CAER was originally conceived of as “an industry-focused regional research and development center that drives the development of innovative products and processes by providing local access to university and federal research and inventions.”

Bacon’s bottom line: LU President Jerry Falwell Jr. has set his sights on transforming Liberty University into a religious-oriented, higher-ed powerhouse akin to Notre Dame University or Brigham Young University. From that perspective, acquiring the research center, relocating the school’s engineering and computational sciences program there, and reinforcing ties with regional industries makes total sense. With LU’s resources behind it, the research center could grow into an innovation ecosystem that could spawn new businesses and drive economic growth in the Lynchburg region.

That’s great news for economic development in the Lynchburg region, and it’s a positive sign for the continuing evolution of LU from its origins as a bible college to liberal arts college to online learning pioneer and, now, research university. LU’s business model is highly profitable, and it is investing its non-profit “surplus” into growth.

My main reservation is that Liberty could choose to make its education more affordable by lowering tuition instead — it could perfect a business model of low-cost higher ed that serves as an example to the entire country, thus addressing one of the nation’s major socio-economic crises. Instead, Falwell seems driven to implement a high-prestige, high-cost model of higher ed that is part of the national problem. What a shame. What an opportunity lost. But LU is a private institution, and Falwell is answerable to no one but his own board. Creating a new research university out of fallow fields is a tremendous accomplishment and a not-insignificant consolation prize.

New Energy in Downtown Norfolk

Hilton Norfolk the Main. The Bacon family stayed here during my dad’s funeral. We had other priorities at the time than hitting the rooftop bar. But we may be back!

Hampton Roads may be stuck in the economic doldrums, lagging the state and national economic growth rate over the past decade, but considerable change — positive change — has been taking place under the surface. Spurred by booming residential development, the city of Norfolk’s downtown is looking more vibrant than any time I remember seeing it.

My impression of downtown Norfolk was shaped in the summer in 1973 when I interned with the Virginian-Pilot as a college student. I would venture across Brambleton Ave. to buy lunch at a sandwich shop whose name I can no longer recall — great Italian hoagies, though — and would stroll down Granby Street, fascinated by the gin joints and titty bars catering to sailors and merchant seamen. The words that come to mind are sleazy and dilapidated. Norfolk was still an important regional finance center, so people were willing to work downtown, but no one, other than homeless people, would dream of living there.

Over the succeeding decades, city authorities pumped millions of dollars into urban revitalization projects of varying merit. The Waterside retail development. Hotels and conference centers. Nauticus. MacArthur Mall. The cruise ship terminal. And probably a lot more that I can’t recall offhand. It was an uphill battle as downtown retail collapsed, the local banking industry was absorbed by out-of-state giants, and, other than the location of the Norfolk Southern headquarters, the private sector showed few signs of vitality.

But something happened the past few years while I wasn’t paying close attention. Downtown residential is hot. Drive down Boush Street, and you’ll see wall-to-wall townhouses and apartment buildings for blocks on end. A major bank tower is being converted from commercial to residential. And Hilton’s Norfolk the Main hotel has just opened an amazing new facility. I’m sure there’s a lot more going on that I’m not aware of. But downtown appears to be developing a great restaurant scene, and I expect it is experiencing a revival of small-scale retail and service businesses catering to the growing residential population.

Downtown Norfolk has several assets. It has inherited a grid street system, a wealth of pre-20th century architecture and a mix of office, retail and residential development. It has cultural amenities such as the MacArthur Museum and the Chrysler Museum (just outside of downtown). And it has a fantastic working waterfront.

Before my dad passed a month ago, he and my stepmom lived in a high-rise senior living facility on the waterfront just a few blocks from downtown. From the 12th floor, they enjoyed a panoramic view of the Elizabeth River with its port cranes, shipbuilding docks and all manner of vessels chugging up and down the waterway.  My dad would stand out on the balcony with his telescope and inspect every inch of the landscape. The view isn’t anything you would call beautiful, but it is mesmerizing — there is so much going on. It never gets dull.

I haven’t spent enough time in Norfolk to get a keen sense of what is happening downtown. Who is moving into all these apartments and condos — Millennials or old guys? Are there a lot of start-ups forming? Is an ecosystem of innovation taking root? Is the changing look of downtown an impressive but economically sterile trend, or does it portend a wave of entrepreneurial energy? I can’t say. What I can tell you is that Norfolk is not stagnating. It is changing. It is reinventing itself. And I can’t help but think that’s a good thing.