Hugh McDonald Touts Arkansas Reforms for Job Growth & Capital Investment

Secretary of Commerce Hugh McDonald: “The [economic] momentum has been really, really strong.” (Steve Lewis)

Hugh McDonald spent a career in the utility industry before becoming Arkansas’ secretary of commerce.

The recent legislative session tapped his expertise in both energy and economic development as he championed laws he believes will boost business in Arkansas. Some are already bearing fruit.

McDonald was CEO of the state’s largest electric company, Entergy Arkansas, from 2000 to 2016. He joined Gov. Sarah Huckabee Sanders’ cabinet in 2023.

Arkansas Business sat down with him in a teleconference interview late last month to get the highlights, including a law that will let utilities bill customers for big projects like power plants as they’re being built.

“The [economic] momentum has been really, really strong,” McDonald said, “but you’re always pushing. You always want to do better. We think this was a pretty comprehensive package that’s going to … help us keep our foot on the gas and keep the economy moving.”

One way to fuel growth is attracting companies looking to build big data centers and artificial intelligence projects. But the first question those big electricity consumers ask is if Arkansas can supply the power they need, McDonald said.

That’s the goal of the utility law, which supporters named the Generating Arkansas Jobs Act. It creates a quicker regulatory timeline for big infrastructure projects and lets ratepayers bear some costs while they’re being built.

‘We Need More Power’

“I just got off a call just a half-hour ago where the major issue was power,” McDonald said. “We need more power and the technology to provide bridge power is gas turbines. Data centers can’t be served by 100% solar and wind. They’ve got to have 24/7, 99.9% load factor power day and night. So this is another tool in the regulatory toolbox to accelerate capital investments sooner, and do it, frankly, at lower cost at the end of the day for consumers.”

Less than a week after the interview, the Little Rock Board of Directors approved plans for a $1 billion, 300,000-SF data center described as the largest single capital investment in the city’s history of economic development.

The law creates a rate increase “rider,” in industry parlance, that will let public utilities finance projects during construction as long as the rate is less than 10% below the national average.

The Arkansas Public Service Commission, which oversees utilities, could waive that limit if it considers the utility’s “strategic investment” to be in the public’s interest. The bill, led in the state Senate by Jonathan Dismang, R-Searcy, will allow the PSC six months to approve or reject project plans.

McDonald disagreed with former PSC Chair John Pickett’s criticism that the bill amounted to “a full-blown effort to undo and destabilize rate regulation” in Arkansas.

“Allowing the utilities to recover their costs before the plants go in service actually keeps rates lower than the old model,” McDonald said, adding that utilities building infrastructure will have to review cost details with the PSC every year of construction. “There’s plenty of safeguards built into the regulatory mechanism.”

A History Lesson

McDonald noted that Entergy and other investor-owned utilities joined electric cooperatives to build coal-fired plants in Arkansas in the 1970s and ’80s. “A lot of those plants were under construction when the 1970s recession hit. They were forecasting high load growth, and that didn’t happen. So in Arkansas, we ended up with a lot of capacity with coal. And for 30 or 40 years we’ve served economic development prospects with that excess capacity. That excess capacity is now gone.”

The electricity crunch will only get worse in coming years, unless utilities get busy building plants, because major coal generators in Newark and Redfield face retirement in the next five years. “That just exacerbates the problem,” McDonald said.

“Never before has the industry seen the amount of electricity growth potential that we’re seeing today through data centers, reshoring and manufacturing,” he said. “That lack of excess capacity is driving the need for new generation plants.”

The new plants will burn natural gas to turn turbines and create power because gas is plentiful and gas plants are economical.

“You’re not going to meet the need with wind,” McDonald said. “You’re not going to meet those reliability requirements with solar. They contribute, but what we need now is controllable power generation. The two choices are nuclear and natural gas. The technology is available today for natural gas, and the technology is not available today for small nuclear reactors.”

Arkansas’ electricity rates have long been among the lowest in the nation, and McDonald said utilities have a disincentive to raise rates drastically. “The utilities want to make sure their rates are competitive …. if they make rates too high, that’s not a good recipe for long-term growth for their utility or for the state.”

Other Priorities

Though McDonald spoke at length on utilities, he noted 10 other laws that he believes will promote business growth in Arkansas, including incentives for data centers, business modernization and automation, and the lithium production industry.

Other acts privatize the Arkansas Development Finance Authority, making it independent of Commerce; allow for creating industrial development authorities away from navigable waterways; decrease the base rate that employers contribute to the unemployment insurance system; and seek to spur economic development. (See list)

McDonald said he was particularly proud of the ADFA change.

“ADFA was created as a corporate instrumentality of the state, but over the years it really became a full-blown state agency,” McDonald said. “The bill [House Bill 1797] says the public mission does not change, but you’re no longer a, quote, state agency that has to follow all the procurement rules and pay plan rules. You can operate more like a private entity.”

ADFA President Mark Conine is already getting calls about taking advantage of the change, McDonald said. “The law hasn’t gone into effect yet, but Mark has already had three or four capital financial institutions reach out to him, saying let’s talk now. It’ll mean more capital, more small-business lending, more venture capital opportunities, and more financing of additional housing developments. So it’s already doing exactly what we wanted it to do, which is exciting.”

McDonald said the lithium incentive sends a message that the state “is very supportive” of helping the industry take off.

“We’re fortunate that we have the Smackover Formation in southwest Arkansas, but that formation also goes into Texas, into Louisiana,” he said. “The producers are going to extract the brine from the formation in Arkansas. That’s certain.”

But the state wanted to incentivize “not just pulling it out of the ground, but further refining it into lithium carbonate and lithium hydroxide, battery-grade lithium materials,” McDonald said. “So there’s sales tax incentives for further development and further use. You’ll get an incentive to do that in Arkansas.”

McDonald said the legislative package will help the state allocate resources to benefit the state’s economy.

“With leadership from the governor and the Legislature, we believe we’ve got a good foundation to build off of and enable us to compete more with the Georgias, the Alabamas, the Texases and the Tennessees. We compete with them every day in terms of creating more jobs, higher paying jobs, and more investment in the state.”