IIAR

How Local Regulations, State Operating Environments, and U.S. Geography are Shaping Building Decisions

The cost of real estate, an available workforce and proximity to transportation dictate where businesses build industrial refrigeration facilities, and those factors are more important than ever in recent years. As rising demand spurs cold chain growth, clear winner (and loser) locations are emerging from the patchwork of regional U.S. regulatory and business environments. Increasingly, those environments are taking center stage in decisions to build a facility or what refrigerant to use.

Some states, such as California and New Jersey, can take a hit on the issue of the cost of envionmental compliance, said Peter Jordan, senior principal engineer at MBD Risk Management Services Inc., which is based in Langhorne, Pennsylvania. “Facilities and large corporate companies know which states are more difficult from an environmental compliance standpoint than others and they absolutely take that into account,” he said.

Chuck Taylor, president of CRT Design which is based in Jacksonville, Florida, said it is very difficult to install an ammonia system in New Jersey. And, “no matter what you do in California, it is tough,” he added.

However, Eric Smith, vice president and technical director for IIAR, said there is no single formula businesses can use. “The best place is often not so easily quantifiable.” he said. “The best place depends largely on what you’re doing.”

REGULATORY RESTRICTIONS

Federal regulatory requirements include the Occupational Safety and Health Administration’s Process Safety Management standard and the Environmental Protection Agency’s Risk Management Program, but some states, including California and New Jersey, administer requirements at the state level. “They comply with the federal program, but they have other more restrictive covenants as part of their state mandate,” said Michael Lynch, vice president of engineering for U.S. Cold Storage, which operates 38 facilities across 13 states.

Those within the industry know New Jersey is particularly onerous when it comes to refrigeration facilities.

New Jersey has regulations in place to protect the environment that are particularly stringent. “New Jersey developed the Toxic Catastrophe Prevention Act as a precursor to PSM/RMP,” Smith said, adding that enforcement can be quite strict. “Given those two factors, we know that some companies have moved out of New Jersey and others have chosen to just build smaller facilities with Freon-based systems or they just rely on neighboring states.”

Lynch said many companies avoid New Jersey by locating facilities in Delaware or Pennsylvania or they avoid using ammonia within the Garden State. “That is a problem because they tend to use a chlorofluorocarbon or hydrochlorofluorocarbons or some type of refrigerant, which is probably on someone’s watch list,” Lynch said.

“New Jersey isn’t against ammonia. But there are additional burdens,” Jordan said.

As a result, Taylor said that the location could dictate the type of refrigeration it might use.

Jordan noted that there are more ammonia and ammonia refrigeration companies in Pennsylvania’s Lehigh County than in the entire state of New Jersey. Lehigh County has a population of 350,000 whereas New Jersey has a population of 8.9 million, he noted.

Lynch said United States Cold Storage has located warehouses just inside the Pennsylvania border, which allows the company to service the Northeast without having to operate in the confines of New Jersey. “We’re not the only company that has done that. Unfortunately it puts the state of New Jersey at a disadvantage,” he said.

Several years ago, Ocean Spray closed its facility in Bordentown, N.J., which it had operated for more than 70 years, and relocated to Upper Macungie, Pa. When announcing the decision to move, Ocean Spray cited lower utility and transportation costs.

Industry experts said there are also disadvantages to locating in California. Bing Cheng, senior manager of utilities, environmental and sustainability programs for Campbell Soup Company, said it is difficult to maintain a profitable business model in the Golden State due to local regulations, such as AB-32 — the California Global Warming Solutions Act of 2006 — and utility costs. In California, the cost of electric power is higher than in the other locations. “It costs seven to eight cents per kilowatt hour in the Midwest but 12 to 13 cents in California,” Lynch said. “That is the cost of doing business in the state.”

California’s environmental policies can be restrictive, Lynch said. “There are a lot of permitting fees and airquality fees,” he explained. “You’re complying with the federal program, but then there are additional state layers of regulations that must be considered.”

Lynch added that permitting a site in California could cost $1 million to $2 million per location. In other states, such as Texas, it is much cheaper, with permitting running about $100,000 to $200,000. “They are more supportive of industry in Texas compared to what we’ve experienced in other parts of the country,” Lynch said.

U.S. Cold Storage has several operations in Texas and said the state is pro-business. “The regulatory laws there are fairly benign and the costs are low,” he said. “Our power costs in Texas are some of the lowest in the country.”

Cheng said Texas has additional attractive elements, including having no state income tax, good incentives, less intrusive local regulations, low labor wages and a central location.

However, Cheng said that while a state’s regulatory environment comes into play, the few greenfield sites that Campbell’s has initiated over the past decade haven’t been selected based on favorable industrial refrigeration regulations.

“I would say this would be lower on the criteria checklist,” Cheng said. Campbell’s has its world headquarters and one bakery site in New Jersey. “We are actually looking at CO2 as an alternative for the bakery, which utilizes some R22-based refrigerant equipment. In partnership with Taylor’s CRT Design, we recently commissioned a new CO2 refrigeration package for our world headquarters pilot plant centralized storage cooler and freezer.”

Taylor said the ammonia market in California is strong and always will be, mainly because the state has large fresh produce output.

Smith agreed. “With California, its climate is such that a large percentage of our country’s fruits and vegetables come from this area of the country. Many facilities are located not more than a mile or two from the place where the food is grown, and there is no other choice to this,” he said.

Campbell’s has two tomato plants in California that do not use any refrigeration. The company’s other California site, which is in Bakersfield, is well over the 10,000-pound ammonia threshold, which makes the facility subject to Federal PSM/RMP rules, due to the size and refrigeration load the facility requires.

California is leading the states initiative is to phase out HFCs and encouraging natural refrigerants,” Taylor said. “The whole movement towards lowcharge ammonia systems is going to open up ammonia to be used in many other locations around the country. Ammonia is also being considered in many new applications that were historically commercial Freon systems and are now being approached with natural refrigerants.”

Cheng said several states follow California’s emission standards: Connecticut, Delaware, Michigan, Maryland, Massachusetts, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Vermont, Washington and the District of Columbia.

STATE-SPECIFIC NUANCES

Some states have state-specific design requirements. “These design elements may be onerous, but they’re done for a reason,” Smith said.

For example, California also has a progressive energy code, and warehouses have to be built to a high level of efficiency, which requires efficient, evaporative condensers and refrigeration controls, Lynch said. There is also a high seismic classification, which adds expense.

Due to the risk of earthquakes, California requires pipes and vessels to be engineered to seismically withstand a quake. “You have to basically constrain the pipe to the building, and it just makes the design much more complex,” Taylor said.

Also in California, based on old codes, many localities require engine room exhaust scrubbing, Smith said. “It is not a state requirement but based on old state codes that have not been updated. Some municipalities require them because they’re familiar with them and they have not considered the new safety standards and technology available today.”

Smith said that in Illinois, the state boiler inspection division had a misunderstanding of the nature of ammonia refrigeration vessels and at one point asked companies to inspect the interior of the vessels for corrosion. “We have convinced them that it is not a phenomenon that occurs. They’ve reconsidered their enforcement policy, but haven’t taken an official position,” Smith said.

In very northern climates, it is common to block off sections of a condenser in the wintertime when it is so cold outside that the capacity for the condenser isn’t required. “A historical problem is that operators had a tendency to isolate a section and then forget to open it back up when the warm weather came along, creating a hydrostatic pressure problem,” Smith said.

Therefore some states instigated a code requirement to have relief valves installed on evaporative condensers.

Some fire departments are more stringent than others. “A lot depends on the official in charge and their beliefs,” Smith said, adding that the fire department in Phoenix, Arizona, is a proponent of using diffusion tanks to capture releases from relief systems. “That is because of one official who was convinced of their necessity based on old codes and his understanding. Our position is that they are a good idea if a refrigeration system is located in a highly dense population zone like a downtown or next to a nursing home or a hospital, but otherwise, this design may often create other operational and safety issues.”

Even the frequency of OSHA or EPA inspections can vary by state. “In some of the more rigorously enforced states, like California and Ohio, you may see them every three years. In New Jersey, even the smallest plants know they’ll most likely have an inspection by the New Jersey Department of Environmental Protection every year that lasts two to five days. That is the on-site time. It doesn’t include the preparation time,” Jordan said.

THE ROLE OF LOGISTICS

When selecting a location, Lynch said that location, particularly proximity to Interstate highways, is critical. “You don’t want trucks required to travel far off the highway and through side streets,” he said.

Smith said companies don’t want to be transporting raw materials very far from where the food products are grown. “Then you spend a lot of money trucking things around, and it is beginning to spoil at the same time,” he said. “Once food is processed and the initial heat is taken out, the processor can immediately begin to transport its products to distribution centers and cold storage facilities.”

Jordan agreed that the location of raw materials makes a difference. “If you’re packaging raw tomatoes, you want a facility where those are close,” he said, adding that at the opposite end of the spectrum is where customers are located. “A big soup market is in the Northeast United States. It would make sense to have your production facilities close to a ready market.”

Specific products have nuances that can also be influenced by geography. “You can’t really ship bulk ice cream through the Rockies because of the air in the ice cream. That is why many ice cream facilities have a high-altitude plant,” Jordan said.

Cheng said that supply chain management costs have been a key driver in Campbell’s recent distribution center initiatives. He added that the company has opened new product distribution centers in Findley, Ohio, and Fort Worth, Texas.

“We are also building a new distribution center in Fayetteville, North Carolina,” Cheng said, noting that Campbell’s strategy over the past decade has been to expand or upgrade existing manufacturing sites. “These centers are strategically located near our major manufacturing sites.”

Another factor is the availability of utilities, such as water, sewer and power. “You typically have all of those utilities readily available, but when you’re in unincorporated areas, water may not be nearby or in the quantities you need,” Lynch said.

THE IMPORTANCE OF A WORKFORCE

All facilities need labor, and Lynch said it is a top priority to be in areas with a competent workforce.

The cost of labor is a high priority for companies, Jordan said. “End users have to look at the availability of labor and subdivide that into an educated workforce versus key technical support.” He explained that in some operations technical support may be more important while others may seek out more unskilled labor.

Large facilities in New Jersey, such as a warehouse, require licensed operators on staff, which run about $100,000 a year, Lynch said. “You need one for each shift, but they can’t be away from the engine room for any period of time, so you’d have to have two,” he said, adding that with multiple shifts, costs could exceed $500,000 annually.

Jordan testified before the New Jersey Senate Environmental and Energy Committee in an attempt to convince lawmakers that they were stacking the deck against companies wanting to move into or stay in New Jersey. Additional refrigeration engineer costs and regulatory costs in New Jersey mean a mediumsize plant pays between $25,000 to $100,000 more in initial upfront costs compared to what it would pay in other states. Annual maintenance costs run between $40,000 and $100,000 higher in New Jersey as well, Jordan said.

“As for licensing requirements like those that exist in New Jersey, to my knowledge there are no other states which have refrigeration licensing requirements,” Jordan said. “But there are licensing requirements in some individual cities in the U.S. For example within the boundaries of New York City, the person supervising the operation of an ammonia refrigeration system needs to obtain a Certificate of Qualification for ‘Refrigeration Operating Engineer’.”

Smith said technology has changed, but the requirements for certified operators have not. “We’ve tried to get things changed in New Jersey, but it is very difficult,” Smith said.

New Jersey has a more restrictive labor environment than some states in other regions of the country. “If you were a company that didn’t have a union, you’d be pressured into an organized-labor environment, which may or may not be something a company wants to do,” Lynch said.

According to the U.S. Labor Department’s Bureau of Labor Statistics, unions represent 16.9 percent of the workforce in California, versus just 5.8 percent in Texas. New Jersey’s rate of workforce union representation is 17.1 percent, while Pennsylvania is 13.0 percent.