Glendale still seeks a revenue lift from landfill gas.

City contractor unable to find private-sector investors

The City of Glendale's quest to turn trash into cash has come up short. The company hired by Glendale to tap methane gas from the city's Scholl Canyon landfill has had little luck in finding investors willing to cough up the $8.5 million to make the project fly, Glendale officials said.

In April the Glendale City Council awarded the trash-gas contract to Palmer Capital, a Boston-based company involved in the conversion of waste into energy for the last decade. Under the contract, Palmer would take all the risks in developing and operating the project, and keep a portion of the profits, while paying a fee to the city.

Companies like Palmer have found a lucrative niche turning landfill gas to energy, said industry observers.

Landfill gas, discovered as a viable energy source in the early 1980s, is a natural by-product of decomposing garbage. Its chemical composition is not that different from that of natural gas, said landfill experts. Natural gas is about 95 percent methane and landfill gas is about 40 percent methane. Carbon dioxide, the other main component of landfill gas, is not used for energy.

Although methane is considered an energy source, the South Coast Air Quality Management District considers it a "green-house gas" that contributes to the depletion of the earth's protective ozone layer. As such, the AQMD requires landfill operators to burn off the methane through a process called "flaring."

By contracting with private-sector operators, like Palmer, cities can not only avoid the expense of "flaring," but they can actually realize profits from the landfill gas.

Despite Palmer's inability to find investors thus far, company officials plan to proceed, said David Marquez, Palmer's vice president. "We haven't given up on it," he said. "Believe me, it's too valuable to us."

Kerry Morford, assistant director of public works for the City of Glendale, said "Palmer is throwing a wider net in California and Massachusetts" to find investors.

Although there are about 175 landfill gas-to-energy projects across the country with proven track records, Marquez said finding investors is difficult because the price of natural gas has decreased and there is not much of a market for the accompanying tax credits.

The federal government offers tax credits to companies and investors involved in producing alternative fuels. Investors attracted to such a deal are usually those who have to pay more than the alternative minimum tax -- a tax imposed on wealthy corporations and individuals that side step all other tax liability through various shelters and deductions. Such investors are looking for an investment to lower their tax liability, as well as make a return, explained Marquez.

Marquez said likely investors in the project would be corporations that understand the technology, such as gas holding companies or utility subsidiaries. Financial services companies or companies that have investment-oriented subsidiaries would also be likely candidates, he said.

"In this poor economic environment, it's hard to find companies paying above the AMT (alternative minimum tax) because companies just aren't doing that well," he said.

The alternative minimum tax is a federal tax that came about with the sweeping Tax Reform Act of 1986. The tax is aimed at making sure that people pay at least some income tax.

Through a variety of tax shelters and donations, wealthy individuals and corporations could previously avoid all tax liability. With an AMT, the government calculates a company's income without all the deductions.

To John Cosulich, supervising engineer in charge of landfill gas energy facilities at the Los Angeles County Sanitation District, landfill-gas projects are a "win, win, win" situation.

The sanitation districts operates three landfill gas-to-energy projects -- one in an inactive landfill in Rolling Hills Estates, one in Pomona and one in Whittier.

"It's win because they generate over $50 million in revenue a year," said Cosulich. Over the long term, he said, landfill energy lowers the cost of refuse disposal, reduces the dependence on foreign fuel and has cleaner emissions.

He said the Puente Hills landfill project, one of the largest in the country, generates 50 megawatts of power and provides fuel for 100,000 homes. He said the initial costs of the project were paid off in five years. The landfill-gas project generated $35 million to $40 million in net income last year by selling the gas to Southern California Edison.

Besides selling the landfill gas to power companies, the sanitation district also compresses the gas, takes out the moisture and pumps the gas into Rio Hondo Community College for less than half the cost of natural gas, said Cosulich.

The City of Burbank also has a landfill-to-energy project. Developed by Palmer Capital in 1988, then sold to J.W. Operating Co. of Wray, Colo., in 1990, Burbank's landfill generates about 0.8 megawatts of power, said Marquez.

Joy Hamilton, administrative officer for the City of Burbank, said the city is quite pleased with the project. Burbank collects about $80,000 a year in royalties, and J.W. Operating takes care of the city's requirement to comply with AQMD methane-emission standards, she said.

Not meeting AQMD requirements for treating methane, in fact, was what set back Glendale's first landfill gas-to-energy project in 1982, said public works assistant director Morford. He said Glendale tried to build its own on-site generator to convert the fuel, but it was shut down because it did not meet AQMD requirements.

By hiring a private company, the city does not have anything to lose, explained Morford. Under the 20-year agreement the city signed with Palmer, Palmer would pay Glendale $20 million over a three-year period. That money would be net income to the city, Morford pointed out.

Glendale actually gets revenues three different ways, said Palmer's Marquez. First, the city doesn't have to pay for burning methane. Second, the city gets paid a 15 percent royalty on the gross revenue of gas sold. And third, Palmer would sell the gas to the Glendale Public Service at a 12.5-percent discount.

Marquez wouldn't say how much Palmer expects to make off the deal, but he said the company would indeed make a profit.

Morford estimated the discount would provide $300,000 in savings a year. Glendale's landfill, about three times smaller than the Puente Hills site, is expected to generate between 12 and 14 megawatts of power and provide fuel for 30,000 homes, said Marquez.

Unlike the Puente Hills site, which has its own generator on site, Glendale's Scholl Canyon project would pump the gas through five miles of pipe directly to the city-owned utility. The utility would then blend that gas with natural gas.

Morford said the utility must make $1 million in modifications to burn the landfill gas, but it should recoup its $1 million capital investment and realize savings within three and a half years.

Glendale City Councilman Larry Zarian said Palmer Capital still has between 30 and 60 days to drum up investors to meet its contractual obligation.

But that methane-gas project is not Glendale's only attempt at turning trash into cash.

Scholl Canyon, which currently contains 20 million tons of trash, is scheduled for closure by the year 2019, said Zarian.

He is hoping a plant will be built that creates energy from burning that near-full landfill's trash. He said talks with city officials are currently ongoing. He estimated the cost for such a plant would be between $300 million and $400 million.