September 19, 2007
RESOURCE RECOVERY FACILITIES
By: Kevin E. McCarthy, Principal Analyst
You asked how other states finance resource recovery facilities. You were also interested in whether other states have statutes setting the rates charged for the electricity these facilities produce and wanted to know how these rates affect tip fees charged by the agencies or authorities.
Resource recovery facilities are generally financed by revenue bonds issued by the facility owner. The owner is usually a city, county, or quasi-public authority. The bonds are usually backed by the sales of electricity produced by the facility, tip fees for disposing waste at the facility, or both. In some cases there are additional revenue sources such as sales of steam produced by the facility or pledges made by municipalities that use the facility.
The rates paid for the electricity produced by resource recovery facilities were initially based on federal rather than state law in most cases. The federal law required electric companies to pay resource recovery facilities the company's “avoided costs” for the electricity the facility produced. A number of states, including Alabama, California, Florida, Maine, Minnesota, New Hampshire, New York, Oregon, Utah, and West Virginia, have or had parallel state laws. It appears that Connecticut is unusual, if not unique, in having a law that requires electric companies to buy the power produced by resources recovery facilities at a rate that exceeds the electric companies' avoided costs. More recently, the electric rates charged by some resources recovery facilities have been based on wholesale electric market rates rather than avoided costs.
The relationship between the electric rates and tip fees varies by jurisdiction and in some cases by facility. Among the factors affecting this relationship is the share of the facility's revenues coming from these sources, what these revenue streams are used for (e.g., paying off bonds vs. covering operating costs), whether there are additional revenue streams (e.g., sales of steam), and how the tip fees and electric rates are set.
According to Ted Michaels, president of the Integrated Waste Services Association, there are several dozen resources recovery authorities and public agencies that own Waste To Energy (WTE) facilities. Most of the facilities went into operation in the late 1980s and early 1990s. In many cases, the facilities are operated by a third party, such as Wheelbrator or Covanta. Most of the authorities or agencies serve a metropolitan area or county. The Delaware Solid Waste Authority serves the entire state. But while it sells methane (natural gas) recovered from its landfills, it does not generate electricity.
As a rule, the WTE facilities were financed through the issuance of revenue bonds backed by sales of electricity produced by the facilities, tip fees charged for waste disposal, or both. Dade County, Florida's facilities were also financed in part by a flat fee imposed on users of the solid waste disposal system. The bonds issued by York County, Pennsylvania, were additionally backed by the county. York County is expanding the size of its facility by approximately 50%. It will defease the approximately $15 million in outstanding bonds from the initial issuance when it issues the new bonds, which will not be backed by the county. The municipalities that own the Ecomaine facility in southern Maine have pledged their revenues to pay off the facility's bonds to the extent that tip fee revenue falls below a specified level.
The Greater Detroit Resources Recovery Authority is unusual in that approximately two-thirds of its energy revenues come from sales of steam, rather than electricity. Similarly, the Northeast Maryland Waste Disposal Authority facility in Hartford County, Maryland produces only steam.
RATES FOR ELECTRICITY PRODUCED BY WTE FACILITIES
In most cases, the rates set for the electricity sold by resources recovery facilities were initially based on a federal law, the Public Utilities Regulatory Policies Act of 1978 (PURPA). This act requires electric companies to enter contracts to buy the electricity produced by “qualifying facilities.” PURPA required the electric companies to pay the costs the company avoids by buying the electricity produced by the facility and the facility's generating capacity, rather than generating the power itself, or buying the power and capacity on the wholesale electric market. In addition to resources recovery facilities, “qualifying facilities” include solar, geothermal, hydropower, biomass, and cogeneration projects that satisfy maximum size, fuel use, ownership, location, and efficiency criteria specified by PURPA. Often, the prices were fixed for the first 10 years or so of the contract, and then allowed to float with wholesale market prices. To further help these generators raise the money they needed to build their facilities, some contracts were front-loaded, meaning that the electric company paid a particularly high price for power during the early years of the power sales agreement and later paid a lower price.
A number of states, including Alabama, California, Connecticut, Florida, Maine, Minnesota, New Hampshire, New York, Oregon, Utah, and West Virginia, have or had parallel “mini-PURPA” laws. At one point, New York's law required electric companies to pay at least 6 cents per kilowatt-hour (kwh) for power produced by qualifying facilities under its mini-PURPA law. It appears that Connecticut is unusual, if not unique, in having a law that requires electric companies to buy the power produced by resources recovery facilities at a rate that exceeds the electric companies' avoided costs.
Often the term of the contract with the electric company under the federal and state PURPA laws was tied to the term of the bonds used to finance the facilities. For example, the contract between York County, Pennsylvania, and its local electric company runs until 2015 (two years after its construction bonds will be paid off) and currently is about 7.5 cents per kilowatt-hour (kwh) for the county's resources recovery facility.
The Energy Policy Act of 2005 ends the federal requirement that an electric utility enter into a new contract to purchase electric energy from qualifying cogeneration facilities if the Federal Energy Regulatory Commission finds that the facility has nondiscriminatory access to one of three categories of markets, but these changes do not affect existing contracts under PURPA or obligations under state law.
Recently, several facilities have entered into electricity sales contracts in which the price of electricity is based, in whole or part, on wholesale electric market rates rather than avoided costs. For example, the Onondaga County (Syracuse, New York) Resources Recovery Authority currently sells electricity to the local electric company at a rate that is the greater of 6 cents per kwh or the wholesale market rate. This contract expires in 2009, when the rate will be set by the wholesale market. Currently, the authority receives 90% of the electricity sales revenue, and Covanta, Inc., the facility's operator, receives 10%. Covanta will receive all of the revenue starting in 2015, when the bonds that initially financed the facility are paid off. The Montgomery County facility of the Northeast Maryland Waste Disposal Authority has a market-based contract with a non-utility electric supplier. The rate charged under this contract is adjusted every three years and is currently 8 cents per kwh. Under the contract between Ecomaine, which serves southern Maine, and Constellation New Energy, the rate paid varies by the time of day and season in which it is produced. Dade County, Florida, originally had a PURPA avoided costs contract with its local electric utility (Progress Energy). It subsequently negotiated a three-tiered contract, in which it receives a base rate so long as the WTE facility operates at 83% capacity, and higher rates based on the utility's avoided costs and market rates if the facility operates at a higher capacity.
RELATIONSHIP BETWEEN ELECTRIC RATES AND TIP FEES
The relationship between the rates charged for electricity produced by WTE facilities and the tip fees these facilities charge varies by jurisdiction and in some cases by facility. One factor affecting this relationship is the relative shares of the owner's revenues that come from electric sales and tip fees. For example, Ecomaine derives nearly three times as much revenue from tip fees as it does from electric sales. In contrast, the greater Detroit authority gets the bulk of its revenues from energy sales.
These revenue streams can be used for different purposes. For example, in Dade County, Florida, the tip fees go to repay the facility's bonds while the electric revenues go to repay its operating costs. Some jurisdictions have additional revenue streams. As noted above, several facilities derive substantial revenues from selling steam. In addition, the 21 towns that own the Ecomaine facility have pledged to make payments from their general funds if the tip fees derived from their residents fall short of the towns' contractual obligations with Ecomaine. Last year, these town subsidies accounted for approximately $4 million of Ecomaine's total budget of $26 million.
Some jurisdictions have multiple tip fees. For example, in Broward County, Florida, the fee ranges from $30 per ton for construction and demolition waste to $110 per ton for tires. In some cases, tip fees are effectively set by the market. In Hartford County, Maryland, all residents contract with private haulers, who are not required to dispose of the waste at the county resource recovery facility. As a result, the county board sets tip fees to be competitive with other disposal options. Tip fees are also set by the county commissioners in Dade County, Florida. As a result, there is political pressure to keep these fees low, according to staff at the county's Department of Solid Waste Management.