From Regulator To Player

Jim Warner

Sometimes there is a silver lining in what appears to be a dark cloud. That saying holds true for the Lancaster County, Pa., Solid Waste Management Authority (LCSWMA). Despite having no taxing powers, no governmental backing of its debt, numerous competitive publicly and privately operated landfills and waste-to-energy plants within its region, and all waste in the county being collected by private haulers, the Authority transformed itself from a flow control-dependent operation to a business that is thriving in the post-Carbone era.

Organizational Structure A corporate and political body organized under the Municipal Authorities Act of 1945 of the Commonwealth of Pennsylvania, the Authority handles financing, design, construction and operation of the county's integrated municipal solid waste system.

Lancaster County commissioners appoint the nine-member LCSWMA board. Five senior managers oversee the Authority's operations, finance, technical services, administration and resource recovery facility (RRF) contract administration, as well as 70 full-time employees.

In addition, the authority owns and operates a 1,200 ton per day (tpd) RRF; the Frey Farm Landfill (FFL), permitted at 2,000 tpd; a transfer station, permitted at 1,500 tpd; and a permanent household hazardous waste (HHW) facility. These facilities process and dispose of municipal solid waste (MSW), construction and demolition (C&D) waste and residual/industrial waste.

The Pre-Carbone Era Prior to the 1994 Carbone decision, LCSWMA relied solely on municipal and county waste flow control ordinances to guarantee Lancaster county MSW would go to its facilities. Based only on its ability to control the waste flow, the Authority issued more than $180 million in municipal revenue bonds in the late 1980s to construct a waste-to-energy facility and landfill to manage its waste over the next 40 years. The Authority then set its tipping fees to meet its operating expenses and fulfill its debt obligation.

While the Carbone case was pending, the Authority began assessing how it could maintain its fiscal integrity if flow control could not be relied on, and it began planning to anticipate an adverse decision by the United States Supreme Court.

Now, six years after Carbone, the Authority is much stronger financially and operationally. Its business also is much more diverse, revenue sources have been expanded, tonnage is at record levels, operational efficiencies have been numerous and its business costs have been reduced. Most importantly, during these changes, environmental performance, facility reliability and safety were never compromised, and customer service improved.

How did the Authority change? Its goal in response to Carbone was to become less governmental and more business-like. The Authority would, in certain areas, become a market participant rather than a market regulator. This transformation sometimes required taking calculated risks, an aggressive management style, using existing assets effectively and allowing management flexibility to make quick decisions.

The Necessity to Act After Carbone, the Lancaster Solid Waste Management Authority had to be aggressive in addressing its situation to:

* Maintain Fiscal Integrity: The Authority had a significant amount of debt based on the ability to control waste flow. Protecting its bondholders' investment was a priority.

* Operate During Legislative Uncertainty: Shortly after the Carbone decision, Congress made an effort to "grandfather" flow control in certain situations, such as in Lancaster, where debt was incurred prior to the decision. Rather than wait and assume legislation would be passed, the LCSWMA began planning immediately. In hindsight, the Authority benefited from its early decisions, as the legislation was not adopted.

* Position Itself for Debt Refunding: The first chance to refinance the Authority's debt was in 1998. Because debt payments accounted for approximately 50 percent of all expenses, refunding was critical to the Authority's long-term financial strength.

* To successfully refinance, the Authority had to post financially successful numbers for 1996 and 1997. The Authority also had to secure its waste streams with mechanisms in addition to the flow control ordinances. And, the LCSWMA had to develop a larger and more diversified revenue base and become a more efficient organization.

The Authority had to achieve these goals to show the financial community that it was economically viable without flow control. Ultimately, without an investment grade rating, the Authority would have a difficult time refunding its debt.

Post-Carbone Strategy To help the organization move into a business type operation, LCSWMA had to retain its historical waste tonnage, increase other revenues using its assets, and decrease operating and non-operating costs.

In 1994, the Authority was charging a $69 per ton tipping fee for MSW, with all MSW deliveries depending on flow control ordinance enforcement. This tipping fee averaged approximately $20 per ton more than the prevailing market rates at private landfills in counties contiguous to Lancaster County. In the absence of flow control, the Authority's goal was to make sure that haulers continued to deliver MSW collected in the county to its facilities.

Because losing 1 ton of waste meant losing 100 percent of the tipping fee, and because it always is difficult to get lost waste back, the Authority devised a strategy, using Waste Delivery Contracts, that would retain all the MSW.

Waste Delivery Contracts were offered, providing the haulers with an initial reduction of $10 per ton, plus a tonnage rebate of $6 per ton, paid semi-annually, if the hauler delivered all MSW collected in the county to Authority facilities. Thus, the "net" rate to haulers dropped from $69 per ton to $53 per ton. All haulers cooperated and chose to enter into the agreements through the end of 1997. With "internal waste" secured, the Authority could focus on securing "external waste."

In the fall of 1997, the Authority renewed its agreements with all the haulers for a new 5-year term through Dec. 31, 2002. These agreements were made because the Authority hoped to refund its debt in early 1998 and needed to show this waste was under contract.

The new agreements provided a 15 percent rebate of the tipping fee to be paid quarterly, with the tipping fee capped at $68 per ton. Therefore, the net rate was capped at $57.80 for 5 years. Additionally, the Authority included C&D waste in its agreements with a maximum gross tipping fee of $44 per ton, paying a 15 percent rebate. This provided a capped net rate of $37.40 through 2002.

In this second round, 99 percent of the eligible waste was secured under contracts. With attractive rebates, the Lancaster county haulers cooperated to stabilize prices long-term, which continued to level the playing field in the county.

And because MSW has been secured through 2002 and the Authority posted surpluses in 1996 and 1997, the debt refunding was completed in March 1998. This helped the LCSWMA save more than $25 million in net present value on its debt and improved its long-term financial stability.

Increase Revenues Using Assets However, the Authority also had to increase revenues to cover tipping fees shortfalls (from original expectations) from the fee reductions in the hauler contracts.

After reviewing its options, the Authority identified four areas - industrial waste, electric revenue, transportation services and transfer fees - where it could use its assets to generate additional revenues, while keeping in mind its philosophy to act more as a market participant rather than a market regulator.

* Industrial Waste Program: More than any other, this program has given the Authority its largest revenue boost, as it generates additional tipping fees from waste not subject to flow control. Industrial waste is not part of any Pennsylvania county planning requirements and is subject to an open, competitive market. Pricing for this waste varies by customer and can be based on almost any factor.

Annually, the Authority's hundreds of contracted industrial waste customers generate about 230,000 tons per year. Last year, industrial waste accounted for $9.6 million in revenue or 30 percent of all tipping fees; $5.2 million of this originated from outside Lancaster county with less than 10 percent coming from out-of-state. Approximately 50 percent of this waste is processed at the RRF where it produces electric revenue in addition to the tipping fees. Tipping fees ranged from approximately $35 per ton to $250 per ton in 1999, averaging approximately $56 per ton.

The Authority also accepts other types of industrial wastes at its landfill, including contaminated soils, foundry sands, inorganic sludge and other non-combustible industrial waste. During 1999, the Authority landfilled approximately 112,000 tons of industrial waste, which generated approximately $3.92 million.

The Authority also formed agreements in 1995 with Lancaster Enviroservices Corp. (LESCO), an independent entity created by the Authority, to market the its industrial waste program to businesses outside of the county.

In addition to sales and marketing services, LESCO provides administrative and technical services related to the industrial wastes that the Authority accepts.

The revenues from increasing the industrial waste program have been a major contributor to the Authority's surpluses and have helped stabilize its MSW tipping fee.

* Electric Revenues: The Authority has maximized electric revenue by importing enough industrial waste to use all available capacity at the RRF each year. Under a 25-year Power Purchase Agreement, the Authority sells electricity, produced by waste combustion, to GPU Energy Services Inc., Reading, Pa.

In 1999, the Authority generated a record $15.3 million from energy sales, or 26 percent of the Authority's total revenue of $51.1 million in 1999. The average electric revenue produced in 1999 equaled $39.62 per ton processed. Industrial waste electricity revenues have risen from $1.4 million in 1994 to $4.3 million in 1999.

* Transportation Services: As part of its industrial waste program expansion, the Authority began to offer certain industrial waste customers, both inside and outside the county, transportation services using existing equipment. The Authority provides these services primarily to pharmaceutical companies located within Pennsylvania.

The Authority began transporting this waste to maintain tighter control of this business. Also, these companies often tend to prefer avoiding third-party transporters because of the high security level needed to ship their waste to the RRF.

The Authority's transportation services have helped retain customers by providing flexibility, full service, and adaptability to changing needs. The Authority also has a new revenue source - increasing from $0 in 1994 to $570,000 in 1999.

* Transfer Fees: In 1996, the Authority added a separate fee to waste delivered to the transfer station by haulers. This fee of $2 per ton for MSW and $8 per ton for C&D waste is added to the tipping fee and can be avoided if haulers deliver directly to the RRF or landfill. The transfer fees generated approximately $678,000 in 1999.

While the Authority aggressively increased revenues, it also aggressively reduced costs. Cost control measures were applied to:

* Labor Efficiencies - Payroll in 1999 was $235,000 less than in 1994, a 15 percent reduction;

* Leachate Treatment - A $100,000 yearly reduction; and

* Ash Stabilization - A $350,000 yearly reduction.

Non-operating costs consisted primarily of debt payments. In 1998, the Authority completed a favorable debt refunding by securing the waste delivery contracts, achieving revenue growth in the industrial waste program and achieving favorable interests rates in the bond market.

The debt savings lowered debt costs from $43.32 per ton in 1994 to $25.75 in 1999. Clearly being in a position to refund the old debt in 1998 was instrumental to establishing its strong current financial position.

The Authority provides a good example where public policy goals that include operating a fully integrated system can coincide with financial stability without subsidies, tax levies, etc. To achieve financial success, the organization had to throw out its old rules and reshape itself with its existing assets and market conditions.

Senior management now spends up to 50 percent of its time on issues related to customer service, revenue retention, revenue growth and other areas of financial management.

Through cooperation, mutual respect and understanding from private haulers, the LCWSMA has earned financial stability.

After a short series of steps, one Pennsylvania solid waste organization found that it could add money to its program by accepting its local businesses liquid industrial waste.

The Lancaster County (Pa.) Solid Waste Management Authority (LCSWMA) began operating a leachate treatment plant (LTP) in 1989 at its Frey Farm Landfill (FFL). By 1997, however, the Authority arranged for the leachate to be sent to the Lancaster Area Sewer Authority's (LASA) wastewater plant in exchange for allowing the LASA to dispose some of its sludge at the landfill. The Authority completed a three-mile pipeline to move the leachate to LASA in 1999.

During 1998, the Authority realized that the leachate treatment plant could process and treat certain liquid industrial waste, which would help broaden its services to industrial waste clients, while expanding and diversifying its revenue base. The Authority was issued a permit to process this type of waste by the Pennsylvania Department of Environmental Protection (PADEP) in late 1998.

By the end of 1999, the LTP processed 4.3 million gallons of industrial waste, generating $201,000 in revenue. Only approximately 30 percent of the plant's capacity was used. Revenues are projected to increase to $350,000 in fiscal year 2000.

First, the waste generator submits information to the Authority to ensure that the liquids can be managed according to the regulations. Once a stream has been accepted, the Authority inspects the inbound waste prior to off-loading to ensure that it meets the requirements. The inspection program includes examining the waste's physical and chemical characteristics.

The LTP uses both biological and chemical treatment. The processing treatment method varies depending on the waste's chemical and biological nature. In addition to aerobic digestion, the plant is equipped to adjust pH, strip ammonia, and remove solids and heavy metals.

After being treated at the plant, all remaining wastewater is sent to LASA's wastewater treatment plant. No wastewater is discharged directly from the LTP into the environment.

The solid fraction or sludge that remains after processing is disposed of at the landfill or transported to the Authority's resource recovery facility and incinerated. The ash residue from incineration is disposed at the landfill.

Types of industrial liquid waste treated during 1999 included: waste activated sludge, oily water, wash water from tank and equipment cleaning, cutting oils, coolants, paper coating wastewater, leather coloring wastewater, latex containing wastewater, dairy waste and several others.