MY COLUMN: The year that changed Nevada -- the untold details of how the Tesla deal was done

When Steve Hill, the state's economic development czar, picked up the phone a year ago, Ryan Mulvenon, an energy policy staffer for Senate Majority Leader Harry Reid was on the line.

“Diarmuid O'Connell (vice president of business development) is going to be calling you because Tesla is interested in putting a manufacturing plant in the Western United States, and they’re considering Nevada,” Mulvenon told Hill, as the latter recalled it recently. (Reid's office confirmed the conversation, and the senator later wrote encouraging letters, too.)

Interesting, Hill thought. A short time later that day in October 2013, O’Connell was on the line. Tesla, especially CEO Elon Musk, had a long relationship with Reid’s office, and O’Connell had secured Hill’s number from the majority leader’s staff.

Hill recalled: “He said, “Hey we’re going to build this manufacturing plant, about 5 million square feet, 6,500 jobs.  I want to talk to you about that.’”

More interesting, Hill thought.

Later that week, Hill ran into Gov. Brian Sandoval at a ribbon-cutting and told him about the phone call. “He was excited about the possibility,” Hill said. “But, you know, there’s lots of possibilities that come up. Certainly at the time you think, you know, probably not Nevada."


One year later, it was indeed Nevada. But, despite some post-mortem analysis and conclusions, the state was not always the first choice and the deal with Nevada fell apart, or appeared to, several times. That’s according to in-depth interviews with Hill and O’Connell, the men who eventually negotiated the package that will bring that gigafactory to Storey County and potentially reshape Northern Nevada’s – and Nevada’s – future.

What happened after that phone call is a fascinating story of high-level bargaining and brinkmanship that resulted in that Sept. 3 announcement on the Capitol steps in Carson City, a celebration that neither party was quite sure would happen until it did and one that has been since met with a mixture of exuberance and criticism. I have already laid out the contours  of how the deal was done But now, thanks to more interviews, I have a raft of new detail, including the cursory consideration of Las Vegas sites, the ebb and flow of the negotiations and the climactic, Labor Day weekend conversation between Sandoval and Musk.

“It was a combination of proximity, speed and certainty of execution and a meaningful, if not the best incentive package that could help us get the thing going,” O’Connell said, summing up why Nevada won with its billion-dollar incentive package. “The bottom line is you had two informed parties, each with their own leverage, trying to figure out something that works.”

Before he made that phone call to Hill and about the time Reid wrote letters to Musk and Sandoval about the proposed gigafactory, O’Connell said, he had no idea where the project would go. He scoffed at the notion that because of Nevada’s proximity to the Fremont, CA, Tesla plant that Nevada always was the first choice.

“It was not the first choice, he said flatly. “It’s not true.”

O’Connell said there were sites in California that “were good and much closer, served our purposes…ideally, if we could have had this (there), it would have been much better. So it’s absolutely not the case that Reno was preferred.”

Indeed, O’Connell added, “The only thing Nevada had going for it was proximity. (Reno) didn’t have a good site. (Reno) didn’t have good situation economically.  We were concerned with the size of the work force. We were concerned with the size of Reno. We were concerned about the utility of the incentives at the time as well as the cost of energy.”

Other than all of that, Nevada was perfect.

Much also has been made of Nevada’s lithium mine being critical because of the Tesla battery comments. But, as Hill and O'Connell told me, that wasn’t as big a factor as you might think. It wouldn’t cost that much to ship in lithium, which, Hill said, "is actually not one of the largest components of the batteries from a sheer weight and raw material supply.”

Or as O’Connell put it, “It would be really nice if there were a nickel mine there.”


After Tesla served notice to a handful of states last October about the proposed gigafactory, the company had each one fill out what amounted to a request for information (RFI). In Nevada, Hill’s team at the Governor’s Office of Economic Development informed the Las Vegas Global Economic Alliance and the Economic Development Authority of Western Nevada. But it soon became clear that the project, if it were built in Nevada, would go North.

“They needed a minimum of 300 acres at the time – they wanted 500, and they wanted room to expand if possible,” Hill said. “And, those types of sites are relatively abundant in Northern Nevada, not nearly so much in Southern Nevada.”

But when they responded to Tesla’s RFI, Nevada listed five sites, two in the South and three in the North. The pair in the South were at Apex and at Mountain View while Reno possibilities included the Reno Technology Park, the Reno-Stead Airport and the Tahoe-Reno Industrial Park. Later, Fernley was added as a possible site for the gigafactory.

Hill’s team also began talking about financing plans with Reid’s office, including advanced technology vehicle manufacturing loans, which Tesla had previously garnered. (Those eventually did not pan out.)

When Nevada submitted its RFI last November, the standard abatement package also was included, a munchkin version of what ultimately was approved. Other unusual plans were considered, including building a power plant on one of the sites (seems to conflict with the Tesla ethos) and a private equity fund evinced interest.

In December, a Tesla delegation flew into Las Vegas to meet with Hill and others at the Innevation Center, which houses Switch Communications and the Las Vegas Global Economic Alliance. They toured the southern sites that day and flew to Northern Nevada the next day to see those prospective locations. But the South was never really in the running.

“We did look at some properties down there, but the logistics piece didn’t work that well,” O’Connell said. “Given where we are in California, if you are going to be in Nevada, because of proximity, it’s the North.”

The lead negotiator for Tesla at that time was Daniel Witt, then a senior development and policy associate. And so Hill’s team was, for quite some time, calling the potential gigafactory Project Daniel. Tesla’s infrastructure specialist, who is now in charge of building the gigafactory, Kevin Kassekert, also was in on the early meetings.

About a month later came the bad news: Nevada was fourth in line for the plant with its RFI, about $650 million short on the abatements and $900 million short overall. Hill said he believed that Texas and New Mexico were the main competition. But O’Connell said it was never that simple, that the process was multilayered and not linear.

“It’s a dynamic process, it’s an iterative process and it’s taking place at at least two levels,” he explained. “At one level, we had teams literally looking at dirt…the viability of a physical location. At another level, the conversation was between ourselves and the economic development folks about what kinds of financial programs can be used.”

O’Connell acknowledged that at the beginning of the year, there “was a big gap. The conclusion was, and I remember the conversation with great clarity, is that we can’t just take the off-the-shelf incentive package from the Nevada office of economic development.”


And in this high-stakes poker game, whether it was a bluff or not, the Tesla folks also told Nevada that the state’s logistics advantage was not enough. “They didn’t feel that we had much of an advantage, that to, you know, bringing it into Texas, or bringing it in to California, or Arizona, or Oregon, they’re potentially and probably are in some cases closer to ports, better rail service, the cost of rail service, all of those things matter," Hill said.

So Hill and his team decided to make Tesla understand that Nevada’s logistics advantage was decisive. The state commissioned rail and trucking studies. The GOED folks actually deconstructed a lithium-ion battery to find out where you could buy the components and how much it would cost to bring them to Northern Nevada.

“We put that model together, and really felt by the time we got done that we had, depending on which state (you compared it to), roughly a $300 million advantage over 20 years,” Hill said.

So $300 million down; about twice that much to fill the gap.

Tesla was listening, and Nevada made the list of finalists announced at the end of February. So the state hired Applied Economics, a Phoenix-based firm, to do an impact study.

In March, Tesla told the state that it had to find a way to close the cash gap if it wanted to be selected. “At that point, we started looking at an expanded abatement offer, which was, is a significant step because you go from this is what we had to typically had to offer that’s in the law right now to if we’re going to offer more, it is going to take a special session in order to be able to make that happen,” Hill recalled. “And, you know, the governor was obviously willing to do that.  So we started looking at what we would be willing to offer.  And it’s, you know, at about this point where we, you know, the conversation starts to get relatively serious and have a higher level of intensity both internally and probably externally as well.”

As they began to ponder how much they were willing to give away, Hill and Sandoval decided they needed to set boundaries, embedded in principles they pledged to follow.

Said Hill: “We didn’t want to harm the general fund, we wanted anything we did to be performance based, we wanted to make sure that there was accountability and clawbacks and everything, and this one’s a little more vague, but we wanted it to feel that this was clearly the best interest of the state. And at the point we started to, if we got to the point where we started to question that, or really if the Governor started questioning that, that was the part where we were probably going too far.”

Hill said they also set up two other rules:

Don’t fall in love with the deal: “Be willing to lose if that’s really the right choice,” Hill said. “It’s pretty easy to get incrementalized, and you do it to yourself…..  Pretty soon you look you look up and you’re, you can be pretty far away from what your initial boundaries were because it just seems like it’s so important to get the deal done.  So you just need to know going in that there’s a point at which you should not get this.  And, I’ll tell you a few times where we enforced that. It wasn’t me, but really the governor.”

Earn the last look: “Earning the last look really meant delivering the best service and quality, really paying attention to our customers - working to get to the point that customers wanted to buy from us as long as our price was competitive enough. From the state's standpoint, that means having the right business environment and being responsive to the needs of companies - that we will work to overcome obstacles, respond quickly, not put up roadblocks.  That's what I heard at the press conference when Elon said we are the 'make it happen state' and that is what we saw through the negotiations. If you haven't gotten to the point a customer wants to buy from you, or in this case, a company wants to be in Nevada, offering better and better incentives is probably just raising the cost to another state.”


What followed was a series of offers followed by rejections followed by fears the deal would never happen.

How about 75 percent tax abatements and a longer time frame? No, thank you, but here’s our counter: 100 percent abatements for 20 years, free land, reduced power costs and a $21 million grant from the state Catalyst Fund.

Hill & Co. thought they could do that, but only NV Energy could negotiate a power deal. Tesla is going to be a huge power user in the state, but the governor refused to even consider some sort of incentive program for the company that would have a substantial impact on rates for Northern Nevadans.

So by May, it seemed Nevada was close to landing Tesla but would ultimately not do so because of the power problem. "That was the first time where we felt like we had a pretty good shot at this and we’re going to say no to this particular issue and that’s probably going to kill it,” Hill said.

(In the end, after lengthy negotiations with NV Energy and state officials, an agreement was reached to dramatically expand a rate rider program for Tesla. “ It made perfect sense given the breadth of the Tesla commitment and will benefit Nevada and our customers for years to come,” said Paul Caudill, the president and CEO of NV Energy. “We have long been an advocate for and realize how important it is to attract these new and exciting businesses to Nevada and Tesla meets that criteria on several levels.”)

But it wasn’t over yet. After a few weeks of radio silence, Tesla asked for an abatement on the remainder of sales taxes they had not yet solicited. And the state was ready to agree to build that $43 million road for Tesla to link the site to a highway to California.

But could Hill and his folks persuade Lance Gilman, who runs the industrial park, to give Tesla the land for free? The answer was yes.

“(Gilman) was pretty rock solid through this whole process," Hill said. "It’s obviously a big opportunity for him and for the site, just like it is for the state and the region, but he handled the whole process very professionally.  You know, he could have been – you know you can see how someone could easily get to the point where they were leaning on us pretty hard…”

With the money from the Catalyst Fund, which would have had an impact on the general fund, turned into transferable tax credits, and with Tesla agreeing to exchange money for K-12 for the extended abatement package (a good deal for the car company) the next major sticking point was water. The plant needed a lot of it, and there was some on the land. But not nearly enough.

The eventual solution was quite creative. The treatment plants in Washoe, now discharging into the Truckee River, So they will now plumb and pipe that water to the Storey/Washoe County line and provide the water – the portion that they’re currently putting in the Truckee River. Then – and who remains unclear – someone will pump it the rest of the way to the site, which is not far from the county line.

At that point, in June, it appeared the deal was just about consummated. Hill briefed Cabinet directors and the new chief of staff, Mike Willden, who had just been promoted. At that time, two other key players in making the deal happen and then eventually ensuring it passed through the Legislature got involved: Gubernatorial General Counsel Michon Martin and Deputy Chief of Staff Jackie Bryant.

By now, Tesla seemed to be excited about the site, even wanted to expand the size to 1,000 acres and broke ground. But, O’Connell told me, that did not mean Nevada had been chosen yet, even though much speculation occurred when the earth-moving was finally discovered.

“No, not at all,” he said last week. “The problem was the site in northern Nevada was not nearly as flat as others. We had to make that site viable. We needed to do some work up there (during the negotiations.).”

Hill was surprised no one picked up on the grading right away. “That stayed much more quiet than I thought for a long period,” he said. “It’s remote. You’re not going to drive by it accidentally.  You’ve got to drive to it.  And it’s basically at a dead end at the end of the road, so it’s, it’s not something that you’re necessarily are going to notice. But, having been in the construction industry for 30 years, I couldn’t keep a secret for an hour.  If a construction worker knows something, typically everybody knows something.  They had 125 pieces of heavy equipment working around the clock for three or four weeks.  And it finally, obviously, started to percolate out.  But, it was quiet for a lot longer than I would have thought.”

On July 3, Hill was pretty sure the deal was done and briefed legislative leadership. The plan was for a special session on July 21st.

But Tesla could not yet give what Hill called a “rock-solid commitment” to move forward, with July 30 earnings calls coming for itself and Panasonic, another publicly traded partner. Sandoval got involved, called Musk and tried to push the deal to conclusion, but it did not happen.

Not only did it not happen, Musk suddenly wanted the deal restructured.

“They wanted the 10 percent of the cost of the factory kind of upfront,” Hill said, and that would have been $500 million from a state whose yearly general fund is only six times that. “ I mean that, I don’t think, I don’t know if they were necessarily looking for it, you know, a check on day one, but in the first couple of years, they wanted that 10 percent number.”

The Tesla folks wanted to mirror the structure of a deal Volkswagen made with Tennessee a few years ago, but Sandoval told Musk it was unworkable. And even for a lesser amount, he would not take cash out of the general fund. It seemed to be over.

“That was the second big time that we felt like, well that ended this again," Hill remembered, "which, in this particular situation was doubly disappointing, as we felt, you know you get close to thinking you’re done and then think, ‘Wow, this is not going to happen.’”    

Hill described what occurred next as a “pretty tense period. Tesla was certainly not happy with that answer, so we had a pretty tense week leading up to the earnings call (on July 30).” The core group huddled in Sandoval’s office and listened, fearing the worst.

Musk repeated his call for the winning state to provide the 10 percent up-front money, which sparked some speculation in the media that Nevada already had been disqualified based on larger states being able to afford it. But Hill had not given up, and O’Connell still was considering Nevada. So Hill went to Palo Alto and spent a couple of days with O’Connell in early August, trying to find a way to make Nevada viable.

Hill’s economic analysis changed when O’Connell made it clear that the jobs were not the $19 an hour variety that Volkswagen had provided in Tennessee, but significantly higher: $25 an hour to $27 an hour.

And then O’Connell had another idea, so Hill thought. Just as in Tennessee, Nevada would use, he believed, industrial revenue bonds, which the state has at its disposal, to help bridge the financial gap. By then, Tesla had lowered the $500 million ask so long as the state would, as Hill described it, “put the state’s credit on the line.”

That was a non-starter. So there was a miscommunication about exactly what type of bonds to use – and that almost scuttled the deal, again. Said Hill: That was really the last time we said, ‘No we can’t do those.’  And we thought, ‘Well we’re back to this not really working again.’”

And, Hill recalled, Tesla’s message was clear if Nevada was going to win out over other states with larger incentive packages: “We’ve got to close this gap somehow.  It just has to happen or we’re not going to be able to do this.”


And that’s when the state cobbled together the boosted package: Hill’s team dramatically increased the transferable tax credit component (by almost 10 times the original $21 million); the gutting of the film tax credit, which state officials said was not meeting metrics; and the ending of the home insurance office tax credit, which lawmakers, including Speaker Marilyn Kirkpatrick, had questioned the efficacy of for years.

On Aug. 28, a final conversation took place below the CEO level – that is without Musk and Sandoval – between Hill, O’Connell, Tesla CFO Deepak Ahuja and others on a conference call. All that remained was for Musk and Sandoval to seal the deal.

Hill, who was sitting in his kitchen as that call ended, tried to reach the governor to give him the good news. But Sandoval was on a train trip through the rurals to celebrate Nevada’s sesquicentennial, so he was unreachable for a little while. But Musk and Sandoval finally talked on Sept. 1, Labor Day, to finalize the company coming to Nevada.

“We met with legislative leadership the next day in Carson City with Tesla,” Hill said. “We were going to walk through the deal.  Legislative leadership, and I think primarily led by the speaker, asked to include the 50 percent hiring of Nevadans component in the legislation.”

Before making the announcement official – it already had leaked because of the legislative briefings – Hill and Sandoval decided on one aspect they would not try to spin, and that was the size of the tax break.

“We decided going into the announcement and going into the session that we would own the $1 billion number, it might be a $1 billion, it might not," Hill said. But even though they would include a lower range, they knew the media would focus on the 10 figures. 

Two days later, Sandoval and Musk stood on the the Capitol steps, flanked by lawmakers and with hundreds in the courtyard, to announce the deal.

The special session, as I have reported, went relatively smoothly, and was done within 48 hours of commencement. History had been made.


Not surprisingly, both Hill and O’Connell chafe at post-announcement criticism that the state gave too much, that Tesla had its way with Nevada, that Sandoval went too far to make the deal.

Here’s how Hill sees it: “We actually feel like, the way that the agreement ended was a better deal for the state, and Tesla feels like it’s a better deal for them, and it’s largely because of the way the, and then this was, this was, part of what came out of the conversation at Palo Alto, how the state and Tesla look at the present value of dollars.  To Tesla, money in the first couple of years is way more important from a financial standpoint than money eight, 10, 12, 15 years from now.  So the discount rate that use for that analysis is substantially steeper than for the state, which provides an opportunity to set up a win-win situation, which is what we think we did when the deal changed in July.”

And while he wouldn’t name names, Hill said the Tesla/Nevada branding already is sparking interest, including from a company a few weeks ago:

“We had a company call up and say, you know, we’re a Panasonic supplier, but we need to be there, we’re looking for you know, this much acreage, this kind of building, 200 or 300 manufacturing jobs.  We don’t want to be right next to the plant because we want an expanded labor pool to draw from so we’ll be out in a month and we’re going to take a look and figure this out.  I mean that’s happening.  I’ve had a couple of calls from companies.... saying, 'So explain how that legislation worked.'  So  there’s potential major project possibilities.  I’ve had two of those.”

He couldn’t document it, but O’Connell said he had heard real estate values in Reno have jumped 10 percent since the announcement, although this could be evanescent. But it also could be a sign of things to come.

O’Connell said the national and local media criticism of giveaways arises out of a history of bad abatement deals, especially with stadiums. O’Connell said, and many stories have not included this and I’d guess many reporters have not read the actual law, that the incentives are all performance-based – there has to be a $3.5 billion investment, for instance, before they kick in.

“There will be indirect effects on the local economy,” O’Connell said. “The state was willing to concede a couple of things because the general economic lift will make the incentives pale by comparison. In business and in all sorts of things, you have to spend money to make money.”

And then O’Connell went a little ideolgoical about some of the critics, which include the thoughtful Washington Examiner columnist Tim Carney.

“This is an outgrowth of libertarian or tea party dialectic,” he averred. “That’s just not how the world works. This was a business deal between two informed parties who were looking at mutual benefits. That’s simply what it was."

Perhaps. But what started almost exactly a year ago to what culminated last month was anything but simple.