Selling Off Miles of the Erie Canal

September 29, 2003

ALBANY, Sept. 28 - The Erie Canal took more than 9,000
workers and eight years to build, at a cost of $8.3
million. More than a thousand laborers died while building
it. But when it was completed, in 1825, it transformed the
nation by linking the Eastern Seaboard to the American

In 2002, a developer from Buffalo bought the exclusive
access rights to this unique piece of Americana by
answering an advertisement in an obscure government
publication and becoming the sole bidder. For $30,000, the
developer, Richard A. Hutchens, got the right to cut
private canals into the 524-mile state canal system,
allowing him to build housing developments with access to
the canal on any land he purchases along a maximum of 9
percent of the canal's length, about 45 miles of shoreline.

Just how one man quietly purchased the right to tap into a
piece of New York history for what seems to be a small sum
will be the subject of a public hearing scheduled for
Friday by Democrats in the State Assembly. The state
comptroller, Alan G. Hevesi, is also looking into the
bidding and sale.

Some critics have alleged that the sale may have been a
sweetheart deal, but canal officials dispute that. They say
the contract received a proper review and was approved by
the comptroller's office, though they acknowledge that they
could have done a better job of publicizing the sale to
attract more bidders.

"Upon reviewing the facts, it's clear that there was a
process that was in the public domain, that was approved by
the state comptroller, the attorney general and the Canal
Recreationway Commission," said Michael Fleischer,
executive director of the New York State Thruway Authority
and the Canal Corporation, a subsidiary of the Thruway
Authority that oversees the canal system.

Mr. Fleischer refused to say whether that process secured
the best possible deal for the rights the state sold, and
said that the chairman of the Thruway Authority, John L.
Buono, had asked that a more public process, including
wider advertisement and greater public outreach, be used in
future projects.

Officials at the Canal Corporation note that the deal with
Mr. Hutchens was made before Mr. Buono became head of the
Thruway Authority in 2002 and before Mr. Fleischer became
executive director this year. The details of Mr. Hutchens'
deal with the state were made public this month in an
article in The Post-Standard of Syracuse.

What is already known about how Mr. Hutchens bought the
rights to build along the canal paints what some critics
describe as a troubling picture of how New York State
authorities, the huge quasi-public corporations that do
everything from running the highway and subway systems to
building dormitories and bridges, do business.

"This state is selling used trucks for more than it quietly
sold the rights to the entire Erie Canal corridor," said
Assemblyman Richard L. Brodsky, a Westchester County
Democrat who is the chairman of a committee that oversees
authorities and will hold the hearings in Albany. "This is

Mr. Hutchens, who has given money to Gov. George E.
Pataki's campaigns and other state Republican funds, has
had business ventures that include construction of
low-income housing developments and frozen food
distribution. He could stand to make millions should he be
able to buy up land along the canal and build developments
with water links. His business partner, Thomas Bystryk,
said that it was a risky venture and that they had paid a
fair price.

"We have invested in excess of a half million dollars, and
not a dime came back yet," Mr. Bystryk said.

Indeed, the modern-day lure of the canal is largely
untested. But for much of the 19th century, it was the
engine that drove New York's economy, making the state a
manufacturing and shipping powerhouse.

While the system is a treasure in history's eyes, its
actual value now is difficult to state. Railroads
superseded canals as the transportation method of choice.
By 1959, when the Saint Lawrence Seaway was completed, the
canal was all but abandoned. Today, mostly recreational and
cruise boats ply the canal.

Meanwhile, the system costs the state $70 million a year to
operate, but it brings in only $2 million in fees and
development rights. The Thruway Authority pays the

In 1992, the system was put under the Canal Corporation.
Given its near mythic place in history, the canal has
something of a cult following, with a platoon of boosters,
people who are bullish on prospects for redevelopment to
attract tourists and upscale housing.

One of those boosters was Howard E. Steinberg. As chairman
of the Thruway Authority in 1996, Mr. Steinberg wrote to
200 companies he thought might be interested in submitting
proposals to redevelop land along the canal. Thirty-three
responded, with proposals from theme park builders, cruise
ship companies, a bank and real estate developers.

Officials at the Canal Corporation said most of the
responses were perfunctory and did not hold much promise.
They contacted several of the companies and began
negotiations with one that proposed to build a marina and
rent houseboats to vacationers, but the plan fell through,
canal officials said.

In a letter to a canal official in 1998, Mr. Hutchens
expressed an interest in building houses on small canals
that would be cut from private land into the main canal
system. Each house would have its own private waterway
leading to the system, like a water driveway where
homeowners could park their pleasure boats next to their
garages or in a shared marina.

In April 1999, an advertisement appeared in the Contract
Reporter, a state-run newsletter available only by
subscription. The newsletter is a vehicle for agencies and
authorities like the Canal Corporation to advertise items
for bid.

The advertisement described a proposal similar to the one
that had been outlined by Mr. Hutchens. Mr. Hutchens sent
in the only written reply to the advertisement, and the
authority negotiated a deal with him, ultimately agreeing
to the $30,000 price for his exclusive right to cut into
the canal.

Canal officials said the price was approved after a study
by the accounting firm KPMG. The study concluded that while
canal side development might turn out to be lucrative, the
risk shouldered by the first developer and the capital
outlay required to build would be so great that a low price
made sense to jump-start development, canal officials said.

The officials said they did not know whether the 32 other
companies that had expressed interest in the canal were
contacted after the Canal Corporation received only one bid
in response to the advertisement.

Mr. Hutchens hired a law firm run by H. Douglas Barclay, a
former state senator and prominent Republican who was
recently appointed as ambassador to El Salvador by
President Bush. The contract was approved in May 2002.

Under its terms, which expire in 2007, Mr. Hutchens will
make further payments of $15,000 for every cut into the
canal once he begins building, and cuts for developments
larger than 100 units would cost more. Also, each residence
in the developments would be assessed a $300 annual fee for
use of the canal; that fee would rise after five years.

Mr. Hutchens would have to buy private land near the canal
to use the rights he purchased. He has yet to identify any
sites, canal officials said. The agreement gives Mr.
Hutchens right of first refusal on sites identified by
other developers, but it does not preclude other deals that
might be struck to develop land along the canal.

At least one other developer, Michael Bragman, a Democratic
state assemblyman for two decades before resigning in 2002,
is interested in building a similar project to the one Mr.
Hutchens has proposed. Mr. Bragman, a Syracuse-based
developer, plans to build a $95 million complex of luxury
houses along the Oneida River, part of the canal system,
that could sell for more than half a million dollars in
Clay, north of Syracuse, using the right to cut into the
canal Mr. Hutchens owns.

Mr. Hutchens reached an agreement with Mr. Bragman on using
his rights. The amount of the deal has not been disclosed.
The Canal Corporation said last week that under the
contract, Mr. Hutchens did not have the right to make such
an arrangement without its approval.

Mr. Bragman did not return more than half a dozen phone
calls to his office requesting comment on the canal
development deal.

Canal officials said the sale of access rights was reviewed
and approved by the state comptroller's office and the
state attorney general's office and an independent
accounting firm reviewed the contract.

Marc Violette, a spokesman for Attorney General Eliot
Spitzer, said such reviews addressed only the legality of
the contract, not its merits. "It is not a seal of approval
on the substance of the deal," he said.

The comptroller's office submitted questions about the
canal deal to officials at the Canal Corporation, including
a request for information about what happened to the 32
other companies that had expressed interest in the canal in
1996, canal officials said. The corporation produced the
information and the comptroller's office approved the deal,
canal officials said. But Dan Weiller, a spokesman for the
comptroller, said the office was now looking into the deal.

Last week, the Canal Corporation hired a real estate firm
to do another assessment of the value of the rights that
Mr. Hutchens purchased.

Joseph Conway, a spokesman for Governor Pataki, said that
"we believe the canal is a tremendous asset, and we have
confidence in Chairman Buono and in the steps he's taken to
review this process."

Critics wonder whether the rights to something as legendary
as the Erie Canal should have been sold so quietly and for
so little money. Assemblyman Brodsky said he wanted to
know, among other things, why the 32 other companies that
wrote to Mr. Steinberg in response to his letter in 1996
were not contacted about the rights being put up for bid in
the Contract Reporter in 1999.

"First, you don't know the value of something until you
test it in a competitive environment," he said. "In this
case, they had only one bidder, so it was not competitive.
The second thing is, if the market won't yield sufficient
value for a resource, maybe it is better to take it off the
market and rethink how it should be used."

Blair Horner, executive director of the New York Public
Interest Research Group, which advocates open government,
said that while the sale of the canal rights appeared on
the surface to comply with state rules, it also exposed how
closed the world of state government was, particularly
state authorities, which, by design, have little public
oversight. "The secret and unaccountable nature of New York
State public authorities has been a historical fact," he
said. "It really is a very closed system that only the well
connected can penetrate. Too often, secret government is
bad government, where the public pays more and gets less."