The 2007 explosion of an 83-year-old steam pipe near Grand Central Terminal sent City Journal editors and other New Yorkers fleeing.
Peter Foley/epa/CorbisThe 2007 explosion of an 83-year-old steam pipe near Grand Central Terminal sent City Journal editors and other New Yorkers fleeing.

In 1926, an upstate New York entrepreneur named Max Katzman invented the world’s first electric vaporizer. Over the next eight decades, the company that he founded—Kaz, Incorporated—became an international powerhouse, churning out not only vaporizers but also humidifiers, bug zappers, air purifiers, thermometers, fans, and heaters for brands like Vicks, Braun, and Honeywell. Despite its global ambitions and Boston headquarters, Kaz maintained an upstate presence, including a manufacturing facility in Hudson, New York, a town on the eastern bank of the great river. In 2008, the plant employed 350 people.

No longer. Last autumn, CEO Richard Katzman (grandson of Max) announced that Kaz would close the New York facility, throwing 300 of its Hudson employees out of work. Only the clerical and customer-service jobs would remain. Kaz, which boasts $500 million in total yearly revenues, would henceforth outsource its manufacturing to a Washington State–based company (which, in turn, moved operations to Mexico). The reason for closing the plant wasn’t so much the global economic meltdown, though that didn’t help; it was the astronomical cost of doing business in the Empire State.

The loss of another upstate manufacturing icon dealt a crushing blow to Hudson, a nineteenth-century whaling capital that reinvented itself in the late twentieth century as a community that manufactured the products that American consumers wanted. Coming on the heels of LB Furniture Industries’ early 2008 announcement of plans to close its own Hudson facility, leaving 150 people unemployed, the Kaz news led the town’s mayor to lament the end of the manufacturing era in Hudson. But it’s not just Hudson: there’s reason to wonder if manufacturing has any future at all in New York State. Between 2000 and 2008, the state bled more than 200,000—or 30 percent—of its manufacturing jobs. Few statistics reveal more about the fundamental weakness of New York’s economy.

How did things get so lousy? New York is a famously high-cost state, of course—many people are aware of the heavy tax load that New Yorkers bear (though Wall Street’s boom long masked its full economic harm), and housing prices in the state are among the nation’s highest. But two other critical factors help explain New York’s woeful economic situation: the sky-high prices that residents and businesses pay for energy; and a decrepit energy infrastructure totally unsuited for a twenty-first-century economy. “High costs—especially including our energy costs—meant we weren’t making money,” says a Kaz official. “It didn’t make any sense to continue there.” Adds state assemblyman Marcus Molinaro: “Kaz fell victim to New York’s high cost of doing business, driven up in part by high energy costs and our state’s failure to develop and adopt a comprehensive strategic energy plan.”

New York State was once at energy’s cutting edge. From Pearl Street to Niagara Falls, pioneers like Edison, Tesla, Westinghouse, and Insull contributed to our knowledge of electricity in ways that still serve Americans. Corporate titans created America’s vast petroleum industry from offices at 26 Broadway. The Robert Moses Niagara Power Plant advanced our understanding of the practicality of large-scale pumped-storage hydroelectricity.

Today, however, New York’s energy reputation is chiefly for pummeling consumers with some of the highest power prices in the United States. According to the U.S. Energy Information Administration, the average retail price of electricity across all sectors of the New York economy is nearly 16¢ per kilowatt-hour, more than 60 percent higher than the national average. New Yorkers pay more for electricity than residents of any state except Hawaii, Connecticut, and Massachusetts. Broken down by sector, New Yorkers pay the fourth-highest commercial, fourth-highest residential, and seventh-highest industrial electricity prices. They must also cope with some of the highest retail gasoline prices in the nation. Only Washington State and California residents pay more at the pump.

New York’s electricity prices are stratospheric for political, not economic, reasons. State, county, and municipal policymakers tend to view ratepayers not as customers deserving of consideration but as a deep-pocketed resource to exploit. The typical utility bill is larded up with a battery of state and local taxes and fees: direct assessments on ratepayers, taxes that apply to generators and transmission companies and get passed on to consumers, and expensive regulations to combat pollution or global warming. The New York Post recently estimated that 22 percent of a typical New York City resident’s Con Ed electric bill goes to taxes. Each of the taxes, fees, or regulations may be defensible individually, but considered as a whole, they add up to a crushing burden that helps explain why New York’s non–financial services economy has been in a decade-long slump.

Not only does Albany seem unconcerned about the effect of high energy prices on New York’s economy; state officials are trying to see how much more they can take from ratepayers. Exhibit A is the System Benefits Charge (SBC), an obscure line item on ratepayers’ bills. This de facto tax supports energy-efficiency initiatives, which are supposed to reduce energy costs but thus far haven’t. On the contrary: the rates have risen numerous times since the SBC was first instituted in 1998. Last October, the Public Service Commission, which regulates electricity, water, and telecommunications rates and services in the state, again jacked up the fee, from 0.18¢ per kilowatt-hour to 0.30¢. Governor David Paterson anticipates that the increase will pour $350 million into state coffers this year.

But that’s small potatoes compared with the money grab in the recently passed state budget. In a bid to help erase a scary multibillion-dollar deficit, the budget levies more than 50 tax hikes and fee increases across all parts of New York’s economy; those targeting energy and the environment will ensure that power prices keep climbing. Among the most onerous new taxes is an increase in the so-called Section 18a assessment from 0.33 percent of a utility’s revenues to 2 percent. (These monies help fund the Public Service Commission.) As with any corporate tax, the cost will get passed on to customers. After five years, the new rate will supposedly ratchet down to 1 percent—but that’s still a 200 percent increase. Paterson hopes that the hike will pull in $651 million in the first year.

The budget also raises the fee on nuclear-plant operators from $550,000 to a cool $1 million for each of the state’s six commercial reactors. And it hikes fees for discharging emissions of regulated contaminate from state power plants. Large-scale power-plant operators will see the tax soar from $45 per ton of emissions to $65 per ton—a 42 percent increase, designed to cull $2.5 million. Other new environmental fees aim to bring in millions more. Ratepayers again will bear the costs.

The contempt that New York’s political class shows for ratepayers extends to the state’s drivers. New Yorkers pay the highest combined state and local gasoline taxes in the nation: 42.5¢ per gallon (cpg). The national average is 27.2 cpg. State and local taxes on diesel fuel come to 42.6 cpg, more than 16 cpg higher than the national average. (New York State’s 8-cpg excise tax on gasoline is actually the lowest in the country, but for every gallon of gasoline or diesel they buy, New Yorkers also pay a Petroleum Business Tax, a volume-weighted average sales tax, a spill tax, a petroleum-testing fee, and county sales taxes.)

If there’s a silver lining for drivers, it’s that one of the more onerous policies forced on consumers by Albany died a quiet death last year. That was the Motor Fuel Marketing Practices Act, a law signed by Governor George Pataki in 2003 that instituted a minimum price for gasoline and forbade retailers from charging below 95 percent of their cost. This price floor, a gift to independent gasoline retailers, had served to undercut chain retail outlets like Wal-Mart, Sam’s Club, and WaWa, which might use the efficiencies of their large operations to deliver lower gas prices. The Federal Trade Commission warned in 2003 that the law would harm consumers. It likely would have been extended had it not come up for renewal last summer, when consumers were still reeling from the shock of $150-per-barrel oil prices.

New York policymakers are so fixated on taxing energy production and use that they seem ignorant of looming energy-supply problems that desperately need addressing. The state’s energy infrastructure is completely outdated, particularly downstate. The 2006 blackout, which left more than 170,000 Queens residents without power for nearly two weeks, resulted partly from overreliance on strained electricity feeder cables, one of them six decades old. A 2007 explosion outside Grand Central Terminal that blasted a geyser of steam and muddy debris 40 stories into the air was caused by the failure of a steam pipe laid in 1924.

New York’s inadequate energy infrastructure hurts consumers even when disaster doesn’t strike. Insufficient transmission capacity leads to congestion charges that drive up the price of power. The U.S. Department of Energy estimates that congestion charges in 2008 cost customers on the eastern grid $8 billion—about $40 per person, and much more in New York City. But that number is piddling compared with the full-blown economic losses of a serious blackout. The 2003 blackout of most of the northeastern United States and parts of Canada accounted for between $7 billion and $10 billion in damage, according to ICF Consulting.

Pointing to estimates of increased electricity demand, the New York Independent System Operator (NYISO), which oversees the state’s electricity grid, says that blackouts will be inevitable a decade from now unless New York adds new generating capacity. Should Attorney General Andrew Cuomo and environmental activist Robert F. Kennedy, Jr. succeed in blocking the relicensing of one of Indian Point’s two nuclear reactors, NYISO warns, we would see “an immediate violation of reliability standards.” Translated into English: blackouts would be likelier—now.

Are Governor Paterson and the legislature listening? It doesn’t look as though they are. Paterson initially signaled that he was serious about energy: his second executive order was to create a comprehensive state energy plan, and he didn’t endorse the anti–Indian Point crusade of his predecessor, Eliot Spitzer. But since then, Paterson has adopted a fantasyland approach to energy that relies on unachievable gains in efficiency to forestall the building of new power plants and a faddish devotion to creating a green energy economy in New York. The legislature has been just as obtuse. Meanwhile, businesses like Kaz and LB Furniture keep closing their doors and laying off employees.

Albany’s unseriousness about the state’s energy deficiencies was on full display in May. To great fanfare, Governor Paterson and General Electric CEO Jeff Immelt announced that the company would build a $100 million manufacturing facility in upstate New York to produce advanced batteries for GE’s hybrid locomotive, among other things. Sponsors hailed the project, which will employ 350 workers, as a triumph for New York’s economic-development efforts as well as a major step forward in positioning the state as a leader in new energy technologies. But GE had agreed to locate the facility in New York not because of the state’s investment climate but despite it, demanding $15 million in state funding as well as an unspecified amount of money from the federal stimulus package. Instead of throwing confetti, Albany policymakers should be asking why the only way to entice a reputable manufacturer to invest in New York is to bribe it with taxpayer money.

Graph by Robert Pizzo.

So what should Albany do to turn the power on? State policymakers should start with a moratorium on energy tax and fee increases and new environmental regulations that make energy ever more expensive. But a moratorium isn’t enough. Paterson and legislative leaders should conduct a comprehensive audit and cost-benefit analysis of energy fees, taxes, and regulations in order to weigh their cumulative economic impact. With a clear picture of the total burden placed on New York ratepayers, Albany should then reevaluate and revisit every tax and major environmental regulation that affects energy prices, with the ultimate goal of getting New York’s electricity and gasoline prices in line with national averages.

Getting a handle on energy prices, though vital, is still only part of the solution. With electricity demand likely to grow in the coming decades, New York needs more power plants—roughly the equivalent of three more 1,000-megawatt reactors added to the grid over the next ten years alone to ensure smooth operations. The legislature should thus reauthorize the successful siting law for large power plants (known as Article X) that it foolishly allowed to expire in 2003. The law offered a one-stop process for applying for a permit to build a new plant, simplified the byzantine matter of considering local objections to proposed plants, and slashed the time needed for projects to win approval.

Working with city officials downstate as well as with the state’s utilities, leaders in Albany should also formulate a strategy for replacing and upgrading pipes, wires, transformers, substations, and other critical pieces of New York’s energy production and delivery apparatus, so that the state has an energy infrastructure capable of serving the needs of a twenty-first-century economy. Ultimately, though, what policymakers must come to terms with is that energy is the life force of any economy—and that policies driving its price up and its reliability down have been choking the life out of New York’s.


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