Frederick County Ignores Major Flaws in Financial Plan for Incinerator

wteb&wgraphicThere are a number of major problems with the Waste-to-Energy, or incinerator, plan developed by the Northeast Maryland Waste Disposal Authority (the Authority) and still supported by the Frederick County Board of County Commissioners. The plan does not make good sense or good policy because it will increase the cost of trash disposal and will deplete Frederick County’s Reich’s Ford landfill faster. And Frederick County taxpayers will see their system benefit charges increase, perhaps significantly, to cover the increased cost.

In a letter dated June 28, 2012, Carroll County Board of Commissioners signaled their intent to withdraw from the partnership with Frederick County. Therefore, absent a replacement County, the entire financial burden will fall to Frederick County taxpayers.

Background

The Northeast Maryland Waste Disposal Authority, which wrote all the contracts governing this project, is a self-supporting public corporation of the State of Maryland and does not receive appropriations. By design, the Authority must fund their operations by charging fees for their services. Under the current plan and contract, if the regional Waste-to-Energy incinerator is built in Frederick County, the Authority will receive approximately $20 million in fees over the expected 30 year life of the service contract. In addition, the Authority charges counties an annual membership fee. Last year Frederick County’s fee was $125,000.00, and that is scheduled to increase by $50,000 per year for the next several years.

If the incinerator is constructed, the Northeast Maryland Waste Disposal Authority will own it.

Construction of the facility will be financed by revenue bonds issued by the Authority. Then Frederick County will be contractually required to pay off the debt over thirty years.

The mass burn incinerator will have a capacity of 1,500 tons per day or 547,500 tons per year. The guaranteed throughput is 503,700 tons per year. Under the current two-county agreement, Frederick County would be responsible for 60% of that capacity, or more than 300,000 tons per year. Currently, however, Frederick County generates only about 165,000 tons of trash per year, with 15,000 tons buried in Reichs Ford Landfill and 150,000 tons hauled to an out-of-county landfill.

The Authority is working under contracts on behalf of Frederick and Carroll County and is the contracting officer for the incinerator project. And when the facility begins operation, the Authority intends to import about 350,000 tons of trash per year into Frederick County for burning at this facility. The source of this trash has not yet been determined.

wtecolorsgraphicWheelabrator Technologies, Inc. was the successful bidder on the contract to build the facility, and to operate it for at least the first 20 years, with two 5-year options under the existing Service Contract with the Authority.

Wheelabrator will bill the Authority for its expenses. The Authority pays Wheelabrator and bills the counties.

System Benefit Charges, which are included as part of all county property tax bills, are a significant source of the revenue for the facility.

The Authority’s financial plan consists of several pages of spreadsheets showing estimated revenue and cost projections. The financial plan is identified as Conservative Electric Full Plant. Most of the cost is fixed by contract. Revenue can vary substantially based on the market prices for electricity and recovered metals.

There are several other contracts between the Authority and the counties, including the Energy Recovery Agreements; the Memorandum of Understanding; and the Project Site Lease Agreement (with Frederick County only).

Executive Summary

The most significant issues regarding this project are financing, the disposal of incinerator ash, projected savings, and premature plant obsolescence.

Bonds

NEA plans to issue $462 million worth of bonds to finance construction. NEA estimated debt service at $28 million per year over 30 years for a total of $840 million in principal and interest.

Frederick County claims it is not their debt. Technically, the debt belongs to the Authority because they issued the bonds. However, the County is required by Section 4.1 of the Energy Recovery Agreement to make debt service payments to the Authority for 30 years. Therefore, in effect, the debt does belong to the County.

Ash Disposal

Frederick County officials assert that outside jurisdictions bringing trash to the incinerator will backhaul their own ash. Their assertion is contradicted by existing contracts. The contracts signed by a previous Board of County Commissioners commit the county to disposing of ash, including ash from imported trash, in the Reichs Ford Landfill at County expense.

Premature Obsolescence

As of June 2013, the Northeast Maryland Waste Disposal Authority and Wheelabrator Technologies, Inc have not yet obtained the required permits. And yet, according to Frederick County, the Maryland Department of the Environment (MDE) has already required additional air quality control equipment, above and beyond Wheelabrator’s original proposal, that will add $25 million to the cost of the facility. History strongly suggests that more stringent regulatory requirements in the future will necessitate additional expenditures for pollution control equipment over the life of the contract. Some of these could be very substantial.

Projected Savings

A significant part of the justification for building an incinerator is the Authority’s projected cost savings over the current practice of hauling trash out of county, over the next thirty years. The Authority has claimed that Carroll County would save $229 million by using the incinerator. That assertion is false. A better – and more honest – estimate reveals that it will likely cost Carroll County at least $100 million more to use the incinerator. The projected savings are false because the Authority has inflated the projected revenues from the sale of electricity for the incinerator, while also overstated the cost of continuing to haul waste out of the county.

In 2012, Frederick County paid less that $8 million to long haul its trash out of state. For some additional perspective, in Fiscal Year 2012 alone, Montgomery County paid the Authority $41.4 million to cover the cost of operating the incinerator in Dickerson. Frederick County can expect to see similarly high payments to the Authority if the incinerator is built.

Details

Details – Bonds & Financing

Section 6.3 of the Service Contract requires the company to cover all costs above the projected design-build cost. Wheelabrator proposed to charge the Authority a design-build price of $332 million and provide a construction commitment in the amount of $73 million.

In February 2013, during a special meeting held in Brunswick, Maryland, I pointed out that the Authority intended to borrow $401.8 million for construction or $70 million more than the design-build price. By inflating the amount of bonds issued for construction, the Authority dramatically decreased the possibility – or risk – that Wheelabrator would actually have to spend very much for cost overruns.

In March 2013, Frederick County issued revised Northeast Maryland Waste Disposal Authority bond estimates, showing a new design-build price of $378 million, including a general contingency of $22 million to be financed by Northeast Maryland Waste Disposal Authority revenue bonds. Section 9.1 (C) of the Service Contract identifies ten adjustments to the design-build price. Funds for general contingency, however, are not on the list. The $22 million identified for contingency should not be added to the design-build price or included in the Authority’s bond issuance. If cost overruns actually amount to $22 million, they should be paid by Wheelabrator, not the taxpayers of Frederick County.

The Authority has also included a contingency for nitrogen oxide and nitric oxide (NOx) offsets in the design-build price. According to section 15.3 (13) of the Service Contract, NOx offsets are defined as pass through costs and should not be added to the design-build price. Pass through costs will be billed to the county by the Authority.

The $73 million construction commitment is not financing. It is to be used in event of a default by Wheelabrator. At various times, the Authority has represented the construction commitment as: 1) a capital contribution; 2) financing which is not a loan; 3) a contingency fund for cost overruns; and 4) a fixed base operating fee.

wtestacksskyimage250wTo understand what the construction commitment really is one has to review the Service Contract and find a fifth definition for Wheelabrator’s construction commitment: Insurance to guarantee completion in the event of a default by Wheelabrator. Section 6.3 (B) of the Service Contract identifies the $73 million construction commitment as project security to be used in event of a default by Wheelabrator. Section 6.3 (C) states the Authority shall not make any drawings upon the $73 million until it has paid the company the full design-build price. Drawing on those funds are permitted if the company defaults during construction.

It is very important that the design-build price be developed in accordance with the contract. If the design build price is inflated, it increases debt service payments from Frederick County and reduces financing from Wheelabrator for any cost overruns, at the expense of county taxpayers.

The Authority has explained Operating Charge # 2 on their spreadsheets as repayment of Wheelabrator’s Construction Commitment over a 20 year period. Section 15.3 of the Service Contract identifies a Fixed Escalation component of the Base Operation Fee which the Authority represents as contractual support for Operating Charge #2. Operating fees have been increasing at about 3% per year since the BAFO (Best And Final Offer) date of December 4, 2008, in accordance with section 15.3 of the Service Contract. Wheelabrator has not expended any of its construction commitment funds and may not be required to spend any of these funds unless the company defaults during construction. According to Section 6.3 of the Service Contract, the Authority can release or return any unused portion of the company’s construction commitment. Nevertheless, the Counties are required to reimburse the Authority $111.8 million over 20 years, as if the entire amount had been spent.

Details – Ash Disposal

Contrary to assertions made by Frederick County, the county will become a dumping ground for incinerator ash created by burning waste from outside jurisdictions or they will be required to pay to haul and dispose of the ash if it is sent to another landfill.

Under any scenario, the counties will rely heavily on waste from other counties for most of the expected life of the facility. While officials claim that participating counties bringing trash to the facility will be responsible for disposing of their own portion of the ash, according to Section 3.7 of the Frederick Energy Recovery Agreement and the definition of “Participating County” on pg. A-7 of the Energy Recovery Agreement, there are only two participating counties – Frederick and Carroll. The Memorandum of Understanding assigns responsibility for ash disposal to Frederick and Carroll based on plant capacity including marketed capacity. The Authority’s spreadsheets clearly show Frederick County paying for and transporting 90,666 tons of ash, or 60% of the total ash. Carroll is assigned 60,444 tons, or 40% of the total ash. Those totals include ash generated by burning out of county trash. Nothing on any spreadsheets reflect other jurisdictions hauling their own ash back home.

According to Frederick County’s solid waste tonnage report for calendar year 2011, Reichs Ford landfill had 2.1 million tons of capacity remaining and is projected to reach capacity in 2045. If the incinerator is built, Reichs Ford Landfill capacity will be depleted faster because waste which is currently shipped out-of-state is not depleting Reichs Ford Landfill capacity. That waste will be burned along with waste imported from other jurisdictions and create ash which will be buried in the County landfill.

In addition, the county officials claim that incineration will reduce the waste to 10% of its original volume. However, beyond that fact that 10% is an overly optimistic reduction, the county has completely omitted the fact that it will be responsible for disposing of 90,666 tons of incinerator ash in Reichs Ford landfill, as opposed to zero tons of that trash hauled out of county. In addition, if Frederick moves forward with a 1,500 tons per day incinerator without Carroll County (or a replacement partner), it would be responsible for disposing of all of the resulting 151,110 tons of incinerator ash because it would be the ONLY participating county.

The County views the long haul and disposal of trash to out of state landfills as an interim measure, but it is not clear why. The current practice is far less costly than building an incinerator. The current cost for Frederick County to transport and dispose of one ton of trash is about $51. By comparison, the all in cost at the comparable incinerator in Montgomery County is more than twice that, at $110 per ton.

Premature Obsolescence

The Maryland Department of the Environment (MDE) has already identified an additional $25 million beyond Wheelabrator’s original proposal for the cost of new air quality control equipment. The permits have not been been issued yet, and some changes in emissions requirements have already resulted in a large increase in the cost of the project. It is almost certain there will be many more cost increases, as either the Maryland Department of the Environment or the Environmental Protection Agency promulgate more stringent standards over the next three decades.

Projected Savings

The Authority created the illusion of savings by substantially inflating projected revenues from the sale of electricity, while also inflating the costs associated with continuing to haul waste out of the county.

The Authority estimated $33.2 million in electricity revenue in 2015 with increases every year for thirty years. For perspective, in Fiscal Year 2012 the actual energy revenue from the comparable incinerator in Montgomery County amounted to only $18.6 million. It’s also notable that these energy revenues have decreased three years in a row.

In a number of ways, the Authority‘s cost comparison between incineration and long hauling of trash is severely flawed. For just one example, the Authority assigned remaining landfill capacity to the incinerator at no cost, but did not provide the same benefit to the long haul option. Consequently, the Authority has overstated the cost of long haul by hundreds of millions of dollars.

The Authority also projected that Carroll County would save $229 million by utilizing the incinerator. However, when more realistic estimates are used, they show that Carroll County would spend at least $100 million more to use the incinerator.

In fiscal year 2012, Frederick County paid less that $8 million to haul its trash out of county. By comparison, Montgomery County paid the Authority $41.4 million to cover the cost of operating the incinerator in Dickerson. Frederick County should expect to see similar payments to the Authority if the proposed incinerator is built. And, of course, if it is built, there is no backing out of the deal…or the debt. At that point, the county is stuck.

It’s also worth noting that the Authority has informed the Maryland Department of the Environment that they anticipate the incinerator would require 64,700 trucks per year to bring in trash, tires and sludge, and to remove residual incinerator ash. There was no cost shown to account for the impact on county roads.

The information above constitues a relatively brief look at just a portion of the severe flaws in the economic model upon which this entire plan is based. But even just considering the issues I’ve raised here, its clear the incinerator is a very expensive commitment. And it will be the taxpayers of the county who pay for it.

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