Editor’s note: This op-ed is by Jack Harding, the chairman of Vermont Tiger, a political blog.
The barn is on fire, the creek is rising and Candidate Shumlin attacks Candidate Dubie for….saying IBM will leave if the Vermont Yankee closes.
Is this the debate we want to have in the last weeks before the election? What about the $120M budget deficit? What about exploding K-12 costs? Unfunded pension liabilities? How about a vision for Vermont’s future?
Campaigns have a way of jumping the tracks. Candidates use disagreements over small details to avoid talking about the big issues. We are asked, by the Shumlin campaign, to believe that Brian Dubie made it up about IBM because its PR office claims that the company has no such plans. The PR office? Please.
Let’s be grownups here and avoid this emotional trap. Let’s look at Mr. Dubie’s claim from a business person’s perspective and determine if he was right to spread concern over the pressures on IBM.
But, before we do, please recall; Vermont Yankee employs some 600 people so if Mr. Dubie is right, that is the guaranteed hole from which we will get to crawl. Now…
Bottom line: My “back of the envelope” analysis is…
Industry Fact:
The Essex Junction facility has been on the auction block for two years.
In other words, the love affair between the capital intensive, low profitability semiconductor group and IBM HQ is long gone. It wouldn’t take much for the strategy wonks in Armonk to pull the trigger.
Direct economic impact of doubling electric power costs:
The city of Essex Junction lists the IBM fab as 76,000 square meters. It takes ~2kWh per square meter to operate a fab. The fab runs 24 hours a day and 365 days a year with some exceptions. If we assume IBM pays an average of $.03 per kWh, we can estimate the electricity tab to be, as follows:
Annual energy costs = 76,000 x 2 x 24 x 365 x $.03 = $39,945,600/ year.
Calculated another way, in 2001 IBM received the Governor’s Award for Environmental Excellence by reducing its annual power consumption by 123,000 Megawatt hours. If we assume that represented a generous 10 % savings, the annual power bill would be;
Annual energy costs=1,230,000 annual mWh x 1000 kW/mW x $.03 = $36,900,000/year. Pretty close.
Now, let’s assume IBM VT has revenues of about $400 M. Overall IBM Microelectronics is estimated to be about $2.5B. There are some bright spots of profitability, including Essex Junction, but otherwise, it’s believed to have been pretty bleak and, in any case, a general drag on the Big Blue bottom line and capital expense budget.
So, what happens to the IBM VT profitability if Vermont Yankee closes and the kW hour rate doubles to $.06? If we presume a very generous, after tax, net profit of 12.5% (of $400M), or $50M, we can see the impact of a doubling of electrical power cost from approximately $40M to $80M reduces the profit to $10M ($50M -$40M); frightfully close to breakeven and probably worse. (Further, since VT is its most profitable site, this loss of profit may mean more across all of IBM Micro.)
This is bad but it may not be terminal for the entire facility.
Indirect economic costs:
But wait. On June 30, 2010, IBM announced in its 2009 Corporate Responsibility Report that company-wide it had save $26.8M in energy costs. This is not in VT. This is worldwide. In other words, the IBM global, corporate effort to save energy costs would be completely wiped out if IBM VT were subjected to even a $.02/kWh increase in energy costs. This is unlikely to please anyone in an already unimpressed IBM HQ and, coupled with a disproportionately high consumption of capital investment, it obviously increases the likelihood that any cost slashing suitor for the facility or the decision to leave Vermont has a much lower barrier.
Direct impact on potential layoffs:
In any case, Vermont Yankee leaving VT is not a good thing for the 5000 Essex Junction employees. Here’s why…
If we assume that the average, fully burdened IBM VT employee costs $100,000, IBM would have to lay off approximately 400 folks to recover the profit lost ($40M) to a 2X increase in energy cost.
Conclusion:
Brian Dubie may not be literally accurate in his prediction, but he is not wrong to be publicly concerned. The likely energy cost increase, if Vermont Yankee is closed, will;
a) Nearly eliminate the Essex Junction net, after tax profit (if there really is any),
b) Increase the likelihood of a disposition of the Essex Junction facility,
c) Lead logically to the dismissal of 400 employees; and
d) Easily wipe out the global energy costs savings of IBM.
Coupled with the 600 lost Yankee jobs, and the likely indirect loss of another 200 related jobs, Vermont stands to lose approximately 1200 jobs under Mr. Shumlin’s agenda.
I think Mr. Dubie was wise to sound the alarm…. and in the meantime, the barn has burned down and the creek flooded the basement.
Oh, and Mr. Shumlin, between this and the German solar power gaff, you’re 0-2. You may want to steer away from an energy debate
