Can Utility Deregulation Subsidize Clean Air Retrofits at WTE Facilities in Your State? It Has in Massachusetts, but Not Without Problems

By John Merritt

Electric-utility restructuring has a variety of important implications for waste-to-energy (WTE) facilities and, therefore, for the municipalities that contract with or operate these facilities. Among them are impacts on existing power purchase contracts, emerging new markets for sale of generated power, and whether or not WTE will be considered a "renewable energy" source with respect to mandated fractions of state or federal portfolios of energy production. In Massachusetts, there is an additional interesting and creative outcome of the state's statute restructuring the electric utilities. That new element is the creation of a trust fund by establishing a mandatory surcharge on most power sold in the state, a portion of which is being used to assist municipalities facing escalating tipping fees as a result of retrofits required under the Clean Air Act. This fund has been titled the Massachusetts Renewable Energy Trust Fund (RETF).

The RETF experience in Massachusetts is worth reviewing from two key perspectives. First, to determine if a similar program might make sense in other jurisdictions currently developing utility-restructuring legislation. Second, to review actual issues that arose during the creation and implementation of the RETF in Massachusetts in order to avoid similar problems in new programs. To this end, this article will provide a brief history of the Massachusetts fund creation, delineate key provisions that apply to WTE facilities, discuss actual issues that arose during program implementation, describe the financial benefits to municipalities, characterize the current status of the fund, and make recommendations for others who would seek to establish a similar program elsewhere.

Brief History of the Massachusetts RETF

During the mid-'90s, representatives of a regional consortium of Massachusetts communities, facing stiff Clean Air Act retrofit costs at their WTE disposal facility, joined with other interested parties to lobby the legislature to establish a fund to offset some of those costs as part of the restructuring of the electric-power industry in the state.

Prior to passage of Massachusetts's restructuring statute in 1997, taxpayers in many communities using WTE as their primary means of disposal were already facing the high costs of retrofits typical of facilities across the country, many of which were constructed in the '80s. They viewed the coming restructuring bill as an opportunity to find some funding relief. The tack was to make a strong case for WTE as renewable and worthy of support. Retrofit costs were characterized as a burden that could threaten the viability of some facilities and hence remove one or more renewable sources of energy.

The proponents of the fund were successful, and the bill included Section 68: "There is hereby established and set up … a separate trust fund to be known as the Massachusetts renewable energy trust fund … for the public purpose of generating the maximum economic and environmental benefits over time from renewable energy to the ratepayers of the commonwealth…." And thus the RETF was established. The revenue to fund the trust is derived from a "renewables charge" currently itemized on every consumer's electric bill, except customers of municipal power companies. The language establishing the authority for collecting the money to implement this fund is found in Section 20: Beginning on March 1, 1998, the department is hereby authorized and directed to require a mandatory charge per kilowatt-hour for all electricity consumers of the commonwealth, except those consumers served by a municipal lighting plant which does not supply generation service outside its own service territory or does not open its service territory to competition at the retail level, to support the development and promotion of renewable energy projects in accordance with the provisions of section 4E of chapter 40J. Said charge shall be the following amounts: three-quarters of one mill ($0.00075) per kilowatt-hour in calendar year 1998; one mill ($0.001) per kilowatt-hour in calendar year 1999; one and one-quarter mill ($0.00125) per kilowatt-hour in calendar year 2000; one mill ($0.001) per kilowatt-hour in calendar year 2001; three-quarters of one mill ($0.00075) per kilowatt-hour in calendar year 2002; and one-half of one mill ($0.0005) per kilowatt-hour in each calendar year thereafter.

In spring 2000, the process of implementing the Massachusetts RETF began, with the goal of distributing approximately $50 million to eligible municipalities in accordance with the provisions of the new statute. The process ultimately involved the Massachusetts Technology Collaborative (MTC), the responsible state agency charged with administering the RETF, state legislators, and more than 125 municipalities and their organizations and representatives. After more than six months and an elaborate dispute resolution process, a distribution formula was finally agreed upon. Grant funds will begin flowing to eligible communities during 2001.

Key Provisions

The following paragraph provides the basis for WTE ratepayer assistance for retrofits:

In calendar year 1998 through calendar year 2002, the revenues derived from one-quarter of one mill ($0.00025) of the charge assessed pursuant to the preceding paragraph in each such year shall be set aside and expended pursuant to implementing the provisions of paragraph (2) of subsection (i) of section 4E of chapter 40J.

The cited "paragraph (2)," which carves out retrofit funds, follows:

(2) The board shall make available from monies in the fund in accordance with subsection (a) grants to municipalities and other governmental bodies to provide debt service assistance in conjunction with alleviating payment obligations incurred by said municipalities and other governmental bodies through an existing contractual agreement pursuant to the installation of pollution control technology and the implementation of other operational improvements to existing renewable energy projects and facilities in the commonwealth utilizing waste-to-energy technology as a component of municipal solid waste plant technology in commercial use, or the closure of any such existing facilities.

The section delineates a fairly long list of activities eligible for the balance of the funds provided. However, WTE receives the only specific earmarking of a set fraction of the funding. The other activities eligible for support are delineated as follows:

For the purposes of expenditures from the fund, renewable energy technologies eligible for assistance shall include the following: solar photovoltaic and solar thermal electric energy; wind energy; ocean thermal, wave, or tidal energy; fuel cells; landfill gas; waste-to-energy which is a component of conventional municipal solid waste plant technology in commercial use; naturally flowing water and hydroelectric; low emission, advanced biomass power conversion technologies, such as gasification using such biomass fuels as wood, agricultural, or food wastes, energy crops, biogas, biodiesel, or organic refuse-derived fuel; and storage and conversion technologies connected to qualifying generation projects; provided, however, that expenditures related to waste-to-energy projects or facilities shall be limited to funds segregated pursuant to paragraph (2). Such funds may also be used for appropriate joint energy efficiency and renewable projects, as well as for investment by distribution companies in renewables and distributed generation opportunities, if consistent with the provisions of this section. The following technologies or fuels shall not be considered renewable energy supplies: coal, oil, natural gas except when used in fuel cells, and nuclear power.

So it is fair to say that this provision, coupled with WTE's likely inclusion in the mandated Renewable Portfolio Standard currently in the final stages of being established, represents a pretty good recognition of these facilities as an integral part of not only Massachusetts's waste management infrastructure, but also its valued renewable-energy generation.

Language That Led to Difficulties in Implementation

As mentioned in the introduction, certain aspects of the language adopted by the legislature led to problems during implementation of the grant fund. The key language to review is found above as "paragraph (2)."

This language includes two key ambiguous phrases, which ultimately required a difficult and confrontational process to determine exactly what formula for fund distribution would be not only consistent with this troublesome language, but also fair to all communities impacted by air-pollution-control retrofit expenses. Those phrases are "debt service assistance" and "an existing contractual agreement pursuant to the installation of pollution control technology and the implementation of other operational improvements."

The parties that lobbied for the legislation did not consult widely with potentially impacted stakeholders at other facilities in the state before moving forward. As a result, this ultimately very troubled language was drafted because it seemed to fit what they believed would be the specific profile of their impacted facilities when implemented by the MTC. However, when all eligible stakeholders began to review the circumstances at their facilities, it became immediately apparent that more care should have been given to drafting the language establishing eligibility.

Initial Stakeholder Meetings

An effort to start the process of identifying an appropriate grant fund eligibility process began with only certain parties included. Representatives of facilities that initially sought this legislative relief invited representatives of some, but not all, municipalities with contractual relationships with WTE facilities in the state to initiate a "stake-holder process." This process was independent of, but included some consultation with, the MTC, which has ultimate responsibility for establishing and implementing the RETF. The meetings were an attempt to provide a distribution formula and a speedy basis on which MTC could move forward.

Because of ambiguity in the previously cited language, early in that process, however, these meetings led to substantial disagreement among representatives of several facilities. In addition, parties representing certain of those communities that sought the legislation in the first place made claims in these public meetings that they were "entitled" to up to half of all available grant funds simply because of their role in seeking the legislation. Given that the fund was built on contributions from virtually everyone that paid an electric bill in virtually every community in the state, however, claims such as that were met with extremely negative reactions from the stakeholders who would have been left to split up the remains. It became clear fairly early that this series of meetings would not reach an amicable resolution of key fund-distribution issues.

Final Stakeholder Process

As a result of the severe breakdown in this early, independent stakeholder process, most parties to the discussion felt a more balanced approach would be necessary. Therefore requests were made to the legislators of several communities unhappy with the direction these talks were taking to intervene and ensure that a fair process evolved. Several legislators did formally request that MTC ensure that a fair and balanced approach to grant fund distribution be established. Based upon the unfortunate result of the early and limited stakeholder meetings and the requests from legislators, MTC moved aggressively to establish a new stakeholder process early in 2000. Elements of their comprehensive approach included employing the services of a professional dispute resolution firm and legal, accounting, and technical firms. From this point forward, MTC and its team took firm control of the implementation process.

There were several key objectives to be addressed. First, eligibility requirements consistent with the statutory language would need to be determined. Once a fair basis for eligibility was established, claims by all facilities needed to be measured in light of the established eligibility criteria. Second, a specific mechanism for stakeholders had to be established to formally apply for and be granted funds from the trust.

Once the new process was initiated, MTC made very substantial outreach efforts to ensure that every municipality that might be included in these discussions would have a place at the table. Without making this important effort, not undertaken in the abortive early stakeholder process, potentially eligible parties left out of the process could have challenged any negotiated agreement. By the end of the process, contract communities at all six currently existing WTEs and one that closed were represented and took part in extensive discussions and negotiations resulting in a comprehensive agreement. It was clear early in the process that the universe of possibly eligible retrofit expenditures was far larger than the total funds that would likely be generated into the trust, based on the legislative formula in the restructuring bill. Therefore, identifying the totality of eligible calls on the fund, so an appropriate distribution formula could be established for each eligible community, became the primary focus of all stakeholders participating in the process.

Specific Issues Addressed

As mentioned above, the issues of what constitutes "debt service assistance" or "an existing contractual agreement pursuant to the installation of pollution control technology and the implementation of other operational improvements" provided the basis for some of the most difficult discussions regarding "legislative intent" and how it should be translated into eligibility.

The initial petitioners that sought the legislation argued that their intention was to only provide funds for retrofits that would be required by the latest clean-air requirements. However, representatives of facilities that had already paid for pollution-control equipment at earlier points in their facility's history argued that it would be unfair for them not to receive some of the financial benefits promised by the RETF simply because they had already been good citizens and paid for improvements.

It is somewhat unclear why the term "debt service assistance" was included in the statute's language. However, its presence required a very interesting legal and financial analysis of all the projects before an approach that was acceptable to all stakeholders was identified. In short, it was determined that any community that had a contract at any time to pay tip fees to any facility that used any debt to install pollution control equipment could be eligible for grant funds.

Once that milestone was achieved and agreed upon, the task remained to establish an equitable formula for division of the available grant funds, which were not sufficient to meet 100% of the aggregate pollution-control equipment installation expenses identified at all facilities. The solution that was finally agreed upon totaled all such expenses and determined a proration for each facility, based upon the funds actually available. A mechanism was also included to give credit for other steps taken at all facilities, such as battery separation programs mandated by the Massachusetts Department of Environmental Protection. Finally, further distribution formulae were established should more funds become available through the program. Toward that end, the stakeholders are reviewing the possibility of asking the legislature for amendments to the program that might expand the amount of funds available to stakeholder communities.

An essential element of the negotiated stakeholder agreement on all of these issues was the fact that all claims would be subject to independent technical and financial review by the specialists hired by MTC for this purpose. This vetting has to take place for every claim before any funds are granted to communities.

With these key elements agreed upon, MTC has established a grant application process that should result in funds being received by some communities during 2001. A key requirement for any grant is that the retrofit or other eligible activity be fully implemented or completed, so the technical and financial review can be final.

Financial Impacts on Communities

The total amount currently estimated to be collected and earmarked for WTE retrofit funding is approximately $50 million. The share of the fund for which the author's community is eligible to receive grant reimbursement will be approximately $400,000 when all facility retrofit construction is completed. This is a fairly typical outcome for the 100-plus communities that have eligible claims under this program.

Conclusions

Once a process was established for a fair and balanced application of this statute, there is no question that substantial, actual relief for taxpayers bearing the burden of retrofit expenses at their WTE facility has been achieved. The approach can be seen as justified because of the renewable energy source that WTE represents, as well as the fact that the clean-air retrofits benefit all that breathe the air in Massachusetts.

With respect to improving the process that unfolded with the Massachusetts RETF, the key conclusion to be drawn is how important it is to carefully consider the language that will determine eligibility for expense relief for any identified pollution-control construction or other activities. Efforts must be focused on what method(s) might be employed to identify not only all eligible types of pollution-control improvements, but also how to unambiguously identify which communities or stakeholders are eligible to receive reimbursement.

A far better approach for others to follow might be to include all potential stakeholders at the earliest possible point and include them in all discussions from the earliest efforts to draft and lobby for passage of relief language. The failure to proceed in this fashion will almost inevitably result in the sorts of disputes that arose when the availability of millions of dollars in grant funds became generally known. This effort would obviate at least some of the stakeholder problems that arose during the Massachusetts experience as well as provide the widest possible base of community and legislator support for such relief during the lobbying period.

For current details on the implementation of this program in Massachusetts, the MTC Web site provides a great deal of public information at www.mtpc.org/massrenew/wastetoenergy.htm. For further information or referrals to key participants in the Massachusetts process, contact the author by e-mail at jam@merrittcom.com or by phone at 508/655-4951.

John Merritt is principal with Merritt Communications in Natick, MA.