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Will county residents and a Seattle utility keep on paying?

A funny thing happens when Spokane’s trash incinerator is shut down for repairs: the City of Spokane saves money. This, explains Damon Taam, director of the Spokane Regional Solid Waste System, is because it’s cheaper to haul all the city’s trash straight to Rabanco’s Roosevelt Regional Landfill 219 miles away in Klickitat County.

When the incinerator is operating, the city first pays Wheelabrator to run its garbage through the burner, then it pays Rabanco to haul off the remaining 30 percent of the weight as ash. Moreover, on some days the burn isn’t even all that successful. "You can still read newsprint and cardboard packages in the ash pile," says one source close to the incinerator:

This burning and partial burning distills the ash into a far more toxic state than the raw trash from which it came. In other words, incineration not only doesn’t eliminate landfilling, it also creates the need for more technical landfill.

But if the incinerator has turned out to be more expensive than alternatives, why couldn’t Spokane’s citizens just get out of it? It has to do with the harsh reality of "involuntary resource providers." That’s legal lingo for Spokane taxpayers.

When city officials sold $50 million of anticipatory municipal bond notes in 1984, citizens’ earnings became collateral for the largest public works project in Spokane history, a project so painfully debated that former state representative Art Sprenkle called it "Spokane’s Vietnam."

To rid itself of its garbage, Spokane now spends $97.03 per ton. This is called the "tipping fee." Of the total tipping fee, $59.03 goes to pay for the incinerator, according to Solid Waste System Accountant Eric Larson. The balance covers other expenses, like the cost of closing old landfills ($13.67 per ton) and recycling (59¢ per ton).

On days when the incinerator is shut down, Rabanco takes all the city’s trash for $45 per ton (compared with the $59 incinerator charge), saving the community $14 a ton - a price break of roughly 24 percent.

Critics of the incinerator in the 1980s argued that the new generation of landfills then being developed was a cheaper and safer option than burning. What if Spokane had managed its trash that way? How much would it cost to have Rabanco landfill all of its refuse? Dennis McLaughlin, manager of Rabanco’s Regional Disposal Company, says the figure "would likely be in the upper $30 per ton range."

For back-of-the-envelope calculation purposes, put Rabanco’s charge at $39 a ton. That means Spokane is currently paying about 50 percent above the market rate. That’s the best deal Spokanites are likely to get from their incinerator. Two distinctly possible legal challenges could make things even uglier.

First, about half of the roughly 855 tons per day of garbage passing through the incinerator comes from outside the city limits, Taam says. But the fine print on the municipal bonds that financed the plant says city, not county, residents must pay for the incinerator; in a pinch, a recent U.S. Supreme Court ruling suggests, county residents might get off the hook.

Second, in 2001 the city gets hit with balloon payments. That year, debt service on the system’s bonds jumps from $12.6 million to $18.5 million annually. There the installments remain until December 1, 2010, when, after principal and interest payments totaling an estimated $320 million, the system’s bonds are paid off.

But the only way those payments can be made from incinerator revenue is if Puget Sound Energy honors its contract to buy electricity from the plant at substantially above-market rates. Should Puget’s ratepayers revolt, and if the courts let them break their contract with Spokane, involuntary resource providers (IRPs, as they’re called) of the Lilac City could face considerably more fiscal pain. The bonds financing the incinerator are supposed to be paid off by the facility’s revenues. If those revenues fall short, the taxpayers of the City of Spokane have to pay off the bonds anyway.

These risks have materialized because two of the developments incinerator critics most worried about in the 1980s came to pass.

The economic cornerstone of waste-to-energy incinerators is a contract provision known as GAT, for guaranteed annual tonnage. GATs were backed by "flow control ordinances," which forced communities to send their garbage through incinerators even if less expensive, more desirable disposal options became available. In 1994, as many legal observers predicted, the U.S. Supreme Court declared flow control unconstitutional.

In the case of C&A Carbone, Inc. v. Town of Clarkston, New York, the high court said that flow control violates the commerce clause of the Constitution. Especially on the East Coast, this has plunged many incinerator projects into financial crisis as communities began sending their trash to new, lined, monitored, permitted landfills at a fraction of the cost of burning.

Spokane officials are well aware that, because of the Supreme Court’s verdict, a menacing legal threat now lurks in the incinerator’s shadow. In its 1996 Comprehensive Annual Financial Report, the city noted that, while it knew of no pending, Carbone-type action against it, "a successful challenge to the enforceability of the Flow Control Ordinance could reduce the amount of solid waste being disposed of at the Solid Waste System."

The result? A deep slash in the incinerator’s earnings, money needed to pay off the plant. If that happened, somebody would have to make up the difference. That should be the citizens of Spokane County, reasoned the city in the same report.

But in light of the Supreme Court’s ruling, that conclusion might be wishful thinking. If county residents used a class action lawsuit to free themselves from the flow control ordinance, they would save millions on their garbage bills.

Also, the city wasn’t quite accurate in saying it was unaware of any litigation in the making based on the Carbone flow control decision. In 1997, Spokane settled a half-million-dollar lawsuit with operators of the Marshall Landfill that was rooted in precisely this legal theory. The city may have settled, speculates Marshall attorney Dennis Clayton, to prevent the action from growing into a successful attack by county residents on the unconstitutional ordinance.

The deal requiring the purchase of the plant’s electricity could also be fragile. Puget Sound Power and Light (the company’s name changed to Puget Sound Energy last year) contracted with Spokane in January, 1988, to buy all of the incinerator’s electricity because it was forced to, contends Wayman Robinette, the company’s director of energy trading. Robinette says he never wanted the incinerator’s electricity, but that Spokane’s negotiators threatened to sue him if he didn’t take it.

The 1978 Public Utilities Regulatory Policies Act forced Puget into this shotgun wedding. A brainchild of the Carter Administration, PURPA was intended to make America more energy self-sufficient by requiring utilities to buy electricity from facilities like the incinerator. The caveat: such electricity was supposed to be economically competitive. That’s the part that always bothered Robinette. He never believed the incinerator’s electricity would be a good value.

Given the historic volatility of electricity prices, Puget didn’t want to lock itself into a 20-year contract for power. Second, Puget was prevented by law from reviewing all the financial data behind the incinerator and couldn’t reassure itself of the project’s general soundness and reliability.

Today, just as Robinette originally feared, Puget finds the incinerator’s power far too expensive.

Puget’s contract calls for the utility to buy juice from the trash burner for 3.5¢ per kilowatt hour until 2000, then for up to 9.5¢ per kilowatt hour and above beginning in 2001, continuing until the incinerator is paid off. But in 2001, Puget’s forecasts show that plenty of electricity will be available for 2¢ to 2.5¢ per kilowatt hour. That means the company’s ratepayers and stockholders will be providing a large subsidy to Spokane’s trash disposal.

For 10 years, Puget’s contract with Spokane has "caused me personally a great deal of stress," says Robinette. Even so, the soft-spoken electrical engineer goes to great lengths to make it clear that neither he nor anyone else at Puget bears any animosity toward Spokane.

"I would absolutely love to find a win/win situation for Spokane and Puget Sound Energy. It would be just the highlight of my career," he adds.

Will Puget honor the electricity contract as it presently stands, given that Spokane’s ability to pay off the incinerator is predicated on the utility’s generous subsidy?

Probably, says the city’s Damon Taam. "We’re small potatoes, a mom and pop operation to [Puget]. They tell us we’re not even on their scope."

But Robinette says a discussion of how to adjust Puget’s contracts like the one with Spokane is already underway inside his company. Because he was involved in negotiating for the incinerator’s power in the beginning, and because he oversees Puget’s electrical contracts today, Robinette’s perspective on the waste-to-energy plant’s past and future is more historic than most.

"When that contract was..." he pauses, searching for the right phrase, "put into existence, it was done under a bunch of rules, laws, that forced my company to do that... I know exactly the pressures, the legal pressures that were apparent... How the benefit, or harm, gets shared between the people of our communities [today] is really up to the state and the feds."

While Robinette was the spokesman Puget Sound Energy’s public information office referred us to, he stressed that he was speaking from his perspective as a staffer and was not making formal pronouncements for his company.

There is one discussion that seems likely to take place before the regulators get involved, however. It concerns the formal notification served on the state Department of Ecology last summer that the Spokane County Air Pollution Control Authority was "unable to certify" that the incinerator was obeying the law - a situation only remedied this week (see "A win for Skelton," page 10).

Robinette was unaware of that notification, which apparently violates Spokane’s contract with Puget. "These facilities need to comply with the law. Absolutely, one hundred percent," said Robinette.

He received no word from either Spokane or the state of any disputes over the plant’s permits. "Spokane has an obligation to my company to provide me with information regarding their compliance... If there have been [permit] disputes or complaints and I haven’t heard about them, then that is a violation of the agreement.

"To me it means they have breached their faith with my company and my ratepayers," says Robinette. "They’ve broken the law."

The bottom line is that by the time Spokane’s incinerator is paid off it will have enjoyed a subsidy from the people of Spokane and Puget Sound into the hundreds of millions of dollars above market value. This is typical of incinerator projects across the U.S. So far, in fact, Spokane is getting a relatively good deal.

By 1993, as cheap modern landfills opened, the average incinerator in America cost 100 percent too much - twice the market rate for trash disposal, according to a report in Solid Waste Price Digest. That same year, the Wheelabrator incinerator in Claremont, N.H., was costing its participant district municipalities up to three times the market rate, according to John Tuthill, former district representative from Acworth, N.H.

By all indications, the economic deterioration of waste-to-energy is intensifying. For instance, the 23 towns using Wheelabrator’s waste-to-energy incinerator outside Boston in North Andover, Mass., currently pay a $95 per ton tipping fee, twice the state disposal average. But that cost is expected to double - quadrupling the market rate - over the next eight years as the facility is retrofitted with expensive pollution control technology to meet new federal Clean Air Act regulations. The project "has clearly gone awry," says North Andover Town Manager Robert Halpin.

Participating communities at both facilities have tried to break their contracts with Wheelabrator, but to no avail.

Waste-to-energy plants won’t survive the deregulation about to transform America’s electric utility industry, predicts Patrick Smith, managing editor of the Defaulted Bond Newsletter and an authority in the field. The real problem with making electricity from garbage, Smith explains, is, well, garbage. It’s an inefficient, dirty fuel, driving an inferior generating technology. No one trying to make money from electricity sales would build a waste-to-energy plant, he insists.

"I wouldn’t touch an incineration project as an investment," says Smith. "These pork barrel projects won’t make it. This is not a rocket science type of thing. Everybody knows how to produce electricity. If you’re an economic, viable entity and can stand on your own two feet, there’s no problem."

Otherwise? Big problem, warns Smith. When a city wastes money, it risks damaging its credit rating. In extreme cases, this can even force a municipality into bankruptcy.

The Bond Peddlers - Who speaks for the public?

Among the nation’s 73 similarly sized waste-to-energy plants, Spokane’s financial losses are not unusual. The reason was neatly summed up in an August 11, 1993 front page Wall Street Journal story, "Up in Smoke"

"Municipal officials made the plunge into trash burning with the best advice money could buy, hiring engineering consultants, Wall Street investment bankers and bond lawyers, all of whom have profited handsomely from fees connected to bond underwritings to finance incinerators... In hindsight, the public sector got most of the risks and the private sector most of the rewards in building waste-to-energy facilities."

That, in a nutshell, is the scenario that brought Spokane its incinerator, contends Spokane attorney Dennis Clayton.

"The problem at the core of this monstrosity is the cast of characters behind it," said Clayton. "Every adviser the city looked to for guidance about building the incinerator stood to gain personally if the incinerator were built, but not otherwise. There wasn’t a single financial, engineering or city staff consultant who didn’t benefit professionally from construction of the plant."

The money advisers all took percentages from the sale of the bonds, the engineers all got work directly associated with the project, prominent city staffers enjoyed advancements to manage the facility, he says.

Commissions paid so far to the incinerator’s bond salesmen, fees to the bond lawyers and premiums paid to the insurance underwriters have added up to $11.4 million, according to Dick Cook of the city’s finance department. That figure includes $3.2 million in fees for refinancing the bonds next October. Like a taxi meter, these charges will keep accruing until the incinerator is paid off. That’s because the city periodically refinances the project, a strategy similar to refinancing a home mortgage to take advantage of lower interest rates. Next October’s refinancing will mark the third such episode, and every time it’s done the bond salesmen and lawyers and insurance underwriters will take their cut.

Attorney Clayton’s verdict: "It shows a lack of common sense to take advice on a financial matter only from those with a vested interest in your decision."

Clayton’s lawsuit against the city on behalf of Marshall Landfill allowed him to review all the records surrounding the incinerator’s construction. He asserts there is no evidence the city ever studied alternatives to burning.

How could a community where fiscal conservatism is next to godliness get saddled with a public works project that squanders hundreds of millions of dollars, threatens the city’s solvency, and haunts the region with unanswered public health questions? The question requires a look at the character of municipal finance itself.

When a corporation sells stock the underwriting falls under the hawk-like scrutiny of the Securities Exchange Commission. Every prospectus describing stock offerings contains a section known as "management discussion and analysis." The SEC requires this to provide full disclosure about the risks associated with the investment.

But such disclosure requirements do not exist in the world of municipal bonds, leaving a large and important sector of the American economy - municipal finance, the mechanism for keeping the nation’s public services vital - inadequately protected against abuse. In fact, the last time there was a serious move to require substantive municipal finance disclosure, Congress blocked the effort.

As Fortune reported in its August 7, 1995, article, "The Big Sleaze In Muni Bonds," the result is an industry infamous for bribes, illegal campaign donations, overpricing and questionable speculation with tax exempt public funds.

The problem with municipal bonds is that no one represents the taxpayers.

"In fact," the magazine quoted Bryn Mawr, Penn., lawyer and bond expert Mark Schwartz, "everyone at the negotiating table during a bond deal has a strong financial incentive to say yes. The one party not at the table is the one providing the subsidy that makes the deal work, the federal taxpayer."

So sluggish has government been in curbing these abuses, The New York Times editorialized on April 21, 1997, that the municipal bond industry has become "one of the most corrupt in the United States." The Times urged the SEC to crack down.

No one alleges illegality in the sale of Spokane’s incinerator bonds. But criticism of the project’s financing - that it represented a sanctioned denial of the public’s will and interest - of that there is no shortage. When the state supreme court narrowly upheld the city’s right to build the facility, ignoring a voter initiative to put the issue on the ballot, Justice J. Durham wrote in dissent: "[The court] closes its eyes to the clear intent of the citizens of Spokane, thereby casting a pall over the entire initiative process. This intrusion into one of our most sacred democratic processes cannot go unchallenged, and I must dissent." F

The Company We Keep

Waste management "conscously and deliberately engaged in fraud and misrepresentation."U.S District Court Judge Odell Horton, 1996

In 1988, Waste Management, the world’s largest garbage company, bought into Wheelabrator, the company Spokane was negotiating with to operate the incinerator. Waste Management’s long history of legal violations was well documented in the media. Because of that, local incinerator critics wondered why the city’s leaders would invite it to take part in the largest public works project in Spokane’s history. They wanted this openly discussed. It never was. Not here, anyway. But Waste Management’s performance continued to be a hot topic nationwide.

In 1992, a year after Spokane’s incinerator went on line and after Waste Management had acquired a majority interest in Wheelabrator, San Diego District Attorney Ed Miller issued a 260-page report about the company. Miller had been instructed to investigate the company when it proposed a new landfill in the area.

Waste Management’s history, wrote Miller, "requires extreme caution by the San Diego County Board of Supervisors or any other governmental entity contemplating any contractual or business relationship with Waste Management."

Among the report’s conclusions:

"Waste Management, Inc.’s methods of doing business and history of civil and criminal violations has established a predictable pattern which has been fairly consistent over a significant number of years...

"These practices suggest an unseemly effort by Waste Management to manipulate local government for its own business ends. If unchecked, these practices, like other more direct forms of improper attempts to gain influence, may have a corrupting impact on local government and lead to decisions unsuitable to the best interests of the public..."

In summarizing his report, Miller noted that his office was unable to determine "whether Waste Management’s history, as reflected by this report, has been due to a failure of proper management, or has been the result of deliberate corporate policy."

Reports from other parts of the country lend support for concluding the latter:

item In ordering a $91.5 million fine against the company in December, 1996, U.S. District Court Judge Odell Horton of Tennessee found that Waste Management, "through its top corporate officers, consciously and deliberately engaged in fraud and misrepresentation." Wrote Horton in his opinion: "What is troubling about this case is that fraud, misrepresentation and dishonesty apparently became part of the operating culture of the Defendant corporation."

item The predominantly African-American, low-income neighborhoods of Winton Hills and Winton Place in Cincinnati owned the distinction of being Ohio’s most polluted communities. Residents suffered a host of illnesses - respiratory problems, rashes, headaches - they suspected were exacerbated by toxic gas releases from an adjacent Waste Management landfill. When residents sued Waste Management, they discovered company documents proving that toxic gases and other pollutants from the facility were migrating offsite, potentially contaminating their homes. Because of that evidence, on January 22, 1997, Ohio’s EPA ordered Waste Management to stop the emissions from the site and close it.

Waste Management argued that the internal company documents proving its guilt were "privileged" under a controversial new state environmental secrecy law the company itself had stumped for. Waste Management demanded the citizens return the evidence. Responded the Rev. Solomon Lundy, a community leader: "We local people have a right to get this information. To say we shouldn’t have it, or should give it back to [Waste Management], is like saying we should lay down and die." Ohio EPA rejected Waste Management’s demand.

item In March, 1997, San Bernadino County (Calif.) Sheriff’s investigators arrested Joseph Lauricella and a Waste Management landfill project manager, Glenn Odell, on charges of conspiracy, wiretapping and illegally using and copying another company’s computer data. In a plea bargain, Lauricella agreed to tell his story - that he had been hired by Waste Management to create a phony citizens’ group in support of the company’s proposed landfill. In the deposition, Lauricella alleges that company officials drafted bogus public hearings testimony and brought in a Clinton speechwriter to help bring off a multimillion dollar subterfuge.

Meanwhile, in a legal motion against the Waste Management subsidiary accused of the crimes, Cadiz Land Co. writes that it seeks to prove precisely the kind of wrongdoing San Diego’s DA warned of. Namely, that Waste Management’s subsidiary had "corrupted the political process and illegally usurped the county’s independent decision-making duties." The accused company denies those charges.

item On June 13, 1997, the Indiana Dept. of Environmental Management rejected the application of a Waste Management subsidiary for a hazardous landfill permit because of its troubling history. In supporting that decision, Carl Miller, an associate attorney for the city of New Haven, Ind., said the state "would have to grant a permit to Satan before they could grant a permit to this outfit." F

The San Diego DA’s Final Report on Waste Management, Inc. is available for $32.50 from the Clerk of the Board of Supervisors, Room 402, County Administration Center, San Diego, CA 92101-2471; phone: 619-531-5430.

The full text of the Lauricella deposition, the claims of which Waste Management has publicly denied, can be read on the web page http://www.healthy-again.net/wmx1.htm.

To Burn, Or Not To Burn - A path not chosen

Seven years after Spokane’s municipal solid waste incinerator went on line, this report begs a simple question: so what? The city is locked into a contract to burn its trash. The trash has to go somewhere.

This dilemma confronts Spokane - and every other consumer community in the world - with a short-term management and a long-term industrial design problem. One of the most eloquent voices to address the latter is that of William McDonough, dean of the School of Architecture at the University of Virginia.

These days McDonough is in global demand for his trailblazing industrial redesign program. At a 1993 centennial celebration in New York, he summed up his concept this way:

"If we understand that design leads to the manifestation of human intention, and if what we make with our hand is to be sacred and honor the earth that gives us life, then the things we make must not only rise from the ground but return to it, soil to soil, water to water, so everything that is received from the earth can be freely given back without causing harm to any living system. This is ecology. This is good design." He concluded with a stern warning: "We must face the fact that what we are seeing across the world today is war, a war against life itself. Our present systems of design have created a world that grows far beyond the capacity of the environment to sustain life into the future... If we destroy more forests, burn more garbage, drift-net more fish, burn more coal, bleach more paper, destroy more topsoil, poison more insects, build over more habitats, dam more rivers, produce more toxic and radioactive wastes, we are creating a vast industrial machine, not for living in, but for dying in... We must come to peace with and accept our place in the natural world."

How exactly a city like Spokane carries that off while disposing of yesterday’s, today’s and tomorrow’s trash is the question to which Dr. Neil N. Seldman has devoted his career. Recognized as one of America’s leading authorities on sustainable solid waste management, Seldman says that because waste-to-energy has proven to be an economic disaster and environmental worry everywhere, Spokane’s reasons to question its incinerator grow stronger every year. He says the city should phase out the facility and do something else with its trash.

"Let’s assume that the city, who issued the bonds, cannot get out of [the Wheelabrator contract]. I can say with confidence, based on my 25 years experience in the field, that if the city were to pay off the bonds and be done with it, and the facility phased out, it will be cheaper to implement comprehensive recycling, source reduction and composting than to continue paying the operating costs of that facility."

As it does so, Seldman says the city should temporarily landfill its refuse, because it’s cheaper and safer than burning.

In the recycling section of the Encyclopedia of Energy Technology and the Environment (John Wiley & Sons, 1995), which Seldman authored, he crunched the numbers behind his recommendation. At its heart is a new kind of economic development, a strategy for an economy that he says is not only possible but that is steadily coming into existence.

By the year 2000, Seldman wrote, America’s garbage bill is projected to be $75 billion. Instead of that staggering expense - a sea of red ink caused by the most wasteful society in history - he said the nation’s trash should be transformed into a new Gold Rush. Some communities are already harvesting the surprising wealth buried in trash. In 1990, for instance, scrap-based manufacturing in New Jersey was generating almost $1 billion in annual sales, $743 million in Massachusetts. In Maine, recycling employed more people than boat building.

In a spreadsheet published in the Encyclopedia, Seldman showed how this new industry can be systematically developed. The result? The average city in America with a population of one million, instead of spending money to throw its trash away, can earn nearly $800 million a year from its reuse, creating thousands of new local jobs and dozens of new locally owned companies.

If Spokane’s Solid Waste System serves a population of, say, half a million, it is reasonable to expect earnings of $400 million a year by shifting the region’s management strategy, contends Seldman.

Following Seldman’s recommendations, the City of Austin, Texas, wrote off a $20 million investment in a waste-to-energy project, implemented sustainable solid waste management, and is saving $120 million over what would have been the 20-year life of the plant. Last year, on the advice of Seldman and colleagues, Mercer County, N. J., abandoned a waste-to-energy project. In contrast, the five remaining New Jersey counties where waste-to-energy incinerators operate informed the governor that without a state bailout of $1.64 billion, the facilities would soon bankrupt them.

Seldman, who holds a Ph.D. in international relations and is president and director of waste utilization at the Institute for Local Self Reliance in Washington, D.C., is currently consulting on a project with The Center for Watershed and Community Health in Portland to recruit environmentally sound companies to Oregon, Washington, Idaho and Northern California.

Are ideas like Seldman’s and McDonough’s pie in the sky? The people of Canberra, Australia, don’t seem to think so. Australia’s capital city of Canberra (pop. 311,000) has recently finalized plans to eliminate waste altogether through means similar to those advocated by Seldman. Based on a strategy "developed through an extensive community consultation process," the city passed a law that bans waste in the community by 2010. That’s one year before Spokane will have paid off its incinerator.

A review of Canberra’s program is available at www.dpa.act.gov.au/nowaste.

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