Econ Focus

Commerce and Nature

Business Park Thrives Near Bay
KENT ISLAND, Md. — The Chesapeake Bay Business Park, located on Maryland's Eastern Shore, provides a scenic, yet functional, setting for business. Large amounts of modern office space can be hard to find in Queen Anne's County — 68 percent of the county's 239,000 acres is zoned for agricultural use.

Developed by Queen Anne's County Commissioner, the Business Park is the largest business complex in the county and attracts a variety of manufacturing and service companies to the 159-acre facility. The Park is located near Route 50 and can carry traffic from Maryland's Eastern Shore to the Washington, D.C., metropolitan area and Baltimore, less than an hour away.

The Park welcomed its first tenant, Sisk Mailing Service, in 1988. Currently, the park is home to more than 700 employees and more than 30 companies, including the world's third-largest producer of electric guitars and a search firm for the chemical industry. Three companies moved into the park during the first half of 2002. KRM Development has leased 288,000 square feet of space and plans to build a 377,000-square-foot facility to meet future demand.

The Chesapeake Bay is an inviting backdrop for business. "The business park's serene setting and natural amenities — are very attractive to companies that are seeking to expand or relocate," says Suzanne Eakle, business development manager of the Queen Anne's County Department of Business and Tourism.

Terrapin Beach Nature Park, located adjacent to the business park, has picnic pavilions, a nature trail, and a pond with observation blinds. In addition, a boardwalk leads to the Chesapeake Bay, North America's largest and most biologically diverse estuary.

While this picturesque setting provides a high quality of life, it is also ecologically sensitive. Residents on Kent Island have resisted residential and commercial development out of concern for potential environmental problems. Eakle says companies that relocate to the Chesapeake Bay Business Park or expand operations there cannot have a negative environmental impact. "No heavy industrial uses are permitted."

One new facility planned for the park is a child care center, scheduled for completion in 2003.

— Bridgette Craney

Mining Update

Regulations, Prices Seesaw in West Virginia's Coal Industry
Two years ago, the survival skills of West Virginia coal producers were being tested to their limits. Uncertainty in mining regulations and depressed coal prices forced many companies to scale back their operations. Since then, the industry has experienced as many twists and turns as a coal car winding through an underground mine.

In April 2001, a federal appeals court overturned a pivotal ruling that had delayed mountaintop mining projects in West Virginia for more than a year. Ruling in a lawsuit against state and federal regulators, U.S. District Court Judge Charles Haden determined in October 1999 that the West Virginia Department of Environmental Protection (WVDEP) couldn't permit the dumping of waste material from mountaintop mines into the streams of nearby valleys. He deemed such actions as violating the federal Clean Water Act. However, the appeals court said Haden didn't have the jurisdiction to make this decision because the state has primacy over regulating its mine permitting process.

Mining companies were happy to see the issue resolved. Ben Greene, former chairman of the West Virginia Coal Association, was quoted in The State Journal as saying, "We can get back to stability and normalcy in the practice of mining."

That normalcy didn't last long. In May 2002, Judge Haden ruled in a different lawsuit against the U.S. Army Corps of Engineers that the agency couldn't allow mountaintop mines to dump waste into valleys. Once again, West Virginia's regulatory environment was thrown into disarray. As of September 2002, 90 applications for a federal permit to deposit mine waste in waterways under the Surface Mining Control and Reclamation Act were pending. No mining operation in the Mountain State had received the four federal permits necessary to begin operations since Haden's ruling.

Meanwhile, coal companies are coughing up more tax money.

Before a mining project is approved, the company must post a bond that will cover land reclamation costs in case it goes bankrupt or walks away from the project. However, the national Office of Surface Mining repeatedly warned West Virginia that the bonds weren't enough to fund reclamation efforts. To head off a federal takeover of the state's bonding program, the WVDEP proposed in August 2001 to increase the coal tax from 3 cents to 14 cents per ton. The hike began July 1, 2002, and will remain at this level until April 2005, at which point the tax will fall to 7 cents per ton.

State regulators had wanted to increase the per-ton tax by 20 cents, but coal producers worked out a compromise. At the time, miners wanted to keep more of their revenue to sink back into new production.

President Bush's energy policy put coal back in the spotlight in 2001 by encouraging the development of the nation's power generation capacity and clean coal technology. Combined with rising natural gas prices, this helped push coal prices from $25 a ton to as much as $50 a ton on the spot market.

Producers responded by opening new mining operations, since much of their output was already committed under long-term contracts negotiated at lower prices. As a result, West Virginia coal producers boosted their work forces from 16,400 at the start of 2001 to 18,600 by the end of the year.

Unfortunately, prices for many producers slid in 2002, and so did employment, to an estimated 16,500 as of last September. Still, coal industry analyst Andy Roberts of RDI Consulting stated last March that prices should remain high enough to cover mining costs and produce a reasonable return on investment in the near future.

— Charles Gerena

Monsoon Season

Virginia Revenues Plummet
RICHMOND, Va. — Virginia's budget woes continue to mount as the state copes with a massive income shortage for the 2002-2004 biennial spending plan. As this issue went to press, the state may be as much as $2 billion in the hole, including about $216 million deferred from the 2002 revenue shortfall and another $1.3 million reduction in general fund forecasts because of weak economic growth.

Revenues dropped dramatically in 2002, prompting the state to use cash from surplus lottery profits, budget reductions, and other unspent funds to cover expenses. In the fiscal year ending June 30, 2002, Virginia's state general fund revenue growth was the weakest on record. Withholding collections fell $52 million under forecast because of lost jobs and weak salary and wage growth. Nonwithholding income, including income from capital gains, fell by 19.2 percent, or $94.9 million below estimates. The decline was three times the declines in 1991 and 1992, when nonwithholding income fell by 1.9 percent and 6.1 percent, respectively. Adding to the problem was a record number of tax refunds issued in 2002, a 40 percent increase over 2001. Sales and use tax, however, finished about $17 million over forecast, but corporate income tax fell $5.4 million below forecast.

Virginia's budget vulnerability stems partly from its dependence on income tax for a hefty share of general fund money, says John Knapp, economist and research director of the University of Virginia's Weldon Cooper Center for Public Service. Individual and corporate income taxes make up nearly 68 percent of Virginia's general fund.

"With the run-up in stock prices in the late 1990s, there was a lot of growth in realized capital gains, and realized capital gains don't necessarily track the flow measures in our economy," he says. "Traditionally, most of the indicators used to forecast revenue in Virginia were flow measures, the changes in employment and income, but when you get a stock market bubble like we had, it sort of took the forecasters by surprise."

Deep budget cuts are in store for state agencies as well as the loss of about 1,800 state jobs. The Department of Motor Vehicles (DMV), for example, will close 12 offices, and other offices will close one day a week to save money. DMV funding will drop by more than 7 percent in fiscal 2003 and 14 percent in fiscal 2004. Transportation funds, which pay for DMV, are considered separate from the general fund. Voters in November rejected a half-penny sales tax increase to pay for transportation infrastructure, partly because of worries over how the money would be used.

Layoffs announced last fall exclude employees in the state university system who may ultimately lose jobs, possibly 4,500 people. Virginia Gov. Mark Warner said he will reduce his salary by 20 percent and his office budget ($2.4 million) by 15 percent in 2003 and 19 percent in 2004. State agency budgets are being clipped as much as 15 percent, the maximum reductions a governor can make from budgeted expenditures without approval by the General Assembly.

One problem with slashing state agency budgets, Knapp says, is that eventually it will be payback time. "Many things done in a crisis like this, you have to pay back," he notes. "To defer maintenance implies even larger expenditures at the very end, after in the future."

Robert Holsworth, director of Virginia Commonwealth University's Center for Public Policy, says state budgets suffered under the late 1990s notion that "we could simultaneously reduce taxes significantly and raise spending on key matters such as education substantially without jeopardizing the long-term interests of the Commonwealth.

"Unfortunately, the recession demonstrated that this position couldn't be sustained. "

— Betty Joyce Nash

Electricity Markets

As Utilities Retreat From Trading, Bank Steps In
Mention the term "energy trading" and corporate scandals likely come to mind. In fact, buying and selling power has a legitimate business purpose — to efficiently manage the flow of electrons between the nation's utilities.

Power can't be inventoried for future use, yet demand for it fluctuates throughout the day. This can result in supply shortfalls during peak periods such as the early morning, or in excess power generated during slow periods such as the late evening.

In the past, such imbalances were usually resolved among utilities, says Mike Wilczek, an electricity markets specialist and senior market editor for Platts in Washington, D.C. One firm with a power surplus or shortfall on a particular day would contact other utilities until it found a trading partner. Then, the parties agreed upon a price for the transaction.

This process became more complicated in states that restructured their electricity markets. In states like Maryland, utilities have to purchase power in an open wholesale market. While they have gained access to multiple buyers and sellers, enabling them to shop around for better prices, the downside has been increased price volatility.

Energy marketers began offering electricity derivatives and other long-term financial agreements as a hedge against future price fluctuations. As utilities bought and sold more power in this manner, their traders seized opportunities to profit from their market knowledge.

Trading volumes skyrocketed and revenues soared, until the Enron debacle in 2001. Credit agencies downgraded the debt of many traders, making it difficult for them to do business without additional collateral. Worse, collateral became harder and more expensive to obtain as investors turned their backs on energy trading. Enron's collapse also increased the scrutiny of traders' business practices.

Some utilities like Dynegy Inc. and Aquila Inc. have closed their trading businesses, while American Electric Power and others have scaled back. This has dramatically reduced the number of counterparties available in the electricity market. "We are still looking to make trades that get value from the assets we have," says Daniel Donovan, manager of media relations at Dominion Resources Inc. in Richmond, Va. "But it has been difficult to pull them off because there are fewer partners."

Other Fifth District utilities continue to trade in the wholesale market, including Allegheny Energy Inc. in Hagerstown, Md., and Duke Energy Corp. in Charlotte, N.C. However, the trading operations of all three companies have seen a drop in volume. "A lot of competitors have laid off traders," including Duke, notes Deborah Witmer, vice president of public affairs for the company's merchant energy business.

While utilities are retrenching, Bank of America recently expanded its energy trading activities. Last October, the Federal Energy Regulatory Commission approved the company's request to "extend [its] existing cash-settled derivatives business to include physical settlement" of electricity trades, explains bank spokesman Jeff Hershberger. Buying and selling power is a service "that our clients have been requesting for some time."

But how will Bank of America make money from trading power when others aren't? Hershberger says the bank's experience in commodities trading, expertise in risk management, and ample capital give it an advantage.

The presence of Bank of America and other financial institutions like Morgan Stanley could help restore liquidity and trust in wholesale electricity markets, but only time will tell.

— Charles Gerena

Virginia History

Economic Impact of Preservation
RICHMOND, Va. — Efforts to preserve the Old Dominion's rich history have stepped up with the Preservation Alliance of Virginia's 2002 list of the state's 10 most endangered historical places. Will funding the renovation and preservation of these sites be worth the money for private investors and taxpayers? Many argue yes.

Preservation projects can be complicated, time-consuming, and expensive, but communities and developers still embark upon them for various reasons. Some renovators are motivated by a love of architecture, while others want to preserve their heritage. In addition to these cultural motivators, state and federal tax credits offer economic incentives.

Once a preservation project begins, it yields several benefits to local economies that aren't captured in its costs. For instance, a total of 29.8 temporary construction and permanent jobs are created for every $1 million spent on renovating a historic property, according to the National Trust for Historic Preservation. In contrast, new construction generates a total of 26.4 temporary and permanent jobs. The difference is due to the fact that modernizing, renovating, and preserving an existing structure is often more labor-intensive than building something new.

Also, historic preservation jobs pay more because they require highly skilled artisans. The result is that $779,800 in new income is generated for every $1 million spent on preservation, compared to $726,800 in income created by new construction.

Once private homes and commercial buildings find new life, entire communities can be revitalized. In nearly every case, property values rise following the completion of a preservation project. "Historic buildings — that are used and reused, almost by definition, are places that people rate high on quality-of-life scales," explains Donovan Rypkema, of the Washington, D.C., consultancy Place Economics. However, some economists point out a significant byproduct: Rising property values and maintenance costs can drive low-income residents from a neighborhood, contributing to socio-economic segregation.

Heritage tourism is another potential economic benefit. Colonial Williamsburg, for example, earns more than $575 million annually from heritage tourism. A study by economists David Listokin, Barbara Listokin, and Michael Lahr of Rutgers University estimated that $20 billion to $25 billion is spent yearly on heritage travel in the United States.

As more people begin to recognize the benefits of preservation, Virginia's most endangered historical sites may be saved after all. Of the 10 sites on the 2000 endangered list, seven have been renovated or are in the process of renovation.

— Amanda White