Problems for New Ethanol Facility
Who Pays for the New Infrastructure?
A city utility is being asked to pay for infrastructure improvements for a new Ethanol production facility.
A recent article in the Virginian Pilot looks at the question of who is paying for new Ethanol production facilities. In this case it is the water supply lines for the planned ethanol production facility that Bio Energy Virginia LLC is looking for the government to provide.
What are the costs?
The town of Chesapeake, VA is being asked to extend water lines to the new plant location at a projected cost of $20,000,000. The new Ethanol plant would then be the single largest user of water from the local utility, using up to 1.5 million gallons of water per day. State or Federal money may be available to defray part of the cost.
If Bio Energy Virginia were to pay for the new water line it would be a 4% increase in the cost of the project. This might be enough to change the economics of the facility, but the money would be a capital expenditure so it would have some tax benefits for the company.
If the local utility were to recoup the cost through additional water charges to the plant over the next 20 years they would have to charge an extra $0.67 per gallon of water used by the facility. If the payback costs were spread among all of the users of the water system, the cost of water might increase by anywhere from $0.10 to $0.30 per gallon, if the utility bore the cost by itself. State and Federal funds could decrease those payback costs significantly.
Is the government responsible for jobs?
This is an age old question about the responsibility of government to provide incentives to gain jobs for its citizens. Governments do have some responsibilities to provide for the common good. Increased availability of jobs in the city is certainly good for the citizens of that city. Thus, many people agree that some government subsidies to encourage jobs are necessary.
How much should the government pay for jobs?
For a businessman the question would be easy to answer, how much money comes back for the amount of money going out; a relatively easy calculation once you figure out what your assumptions are. A government could make the same calculation; look at the taxes that would be paid on the improved property and the new payroll, then see what the payback period is.
What other benefits would the city receive?
Governments, fortunately, are not about profit and loss. They also have to take into account what other businesses might follow the new development into the city. The new water lines could be used by other developers building in the area, reducing their costs by some amount, thus encouraging further development.
There is also something to be said for increasing energy independence and reducing the use of fossil fuels; increasingly of interest to many local governments. There are also a large number of E85 (85% Ethanol-15%Gasoline Fuels) equipped cars that have to run on just gasoline because of the lack of availability of locally produced Ethanol.
Conclusion
There are no hard and fast rules for this type of decision. The local government has to look at the local issues and costs. State and Federal subsidies will help, of course, but the political and economic decisions have to be made by local politicians that have to answer to local voters.
