Turning Up The Heat

February 8, 2008
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GRAND RAPIDS — Kent County is on the verge of selling its District Heating and Cooling Operation, which serves about 125 customers in the city’s downtown district.

Kent County Public Works Department Waste-to-Energy Director Bill Allen said Public Works board members and county commissioners would like to approve the system’s sale to The Trigen Companies by late March or early April to give Trigen enough time to upgrade the system before the next heating season rolls around.

Allen also said a sale is contingent on two factors, and only one involves the county.

“One, we have to come to an agreement on a sales agreement, with all the due diligence. We think we’re pretty well into that process, but you never know until you complete it,” he said.

“The second is the franchise agreement Trigen will seek with the city of Grand Rapids, because they will be a regulated company. And it’s their preference to be regulated locally through a franchise than through Lansing and the Public Service Commission.”

Rates for heating and cooling will be set by the franchise agreement the city ultimately signs with Trigen. If a local pact can’t be reached, Trigen can try to negotiate one with the PSC. But Deputy City Manager Eric DeLong said the city hired the law firm of Clark Hill to negotiate on its behalf. Talks are under way, and Delong said he hoped to have a completed agreement within the next three months.

“I think it’s better for our customers, and for all concerned, that regulation is done locally,” said DeLong.

“I think the county has found a good and viable partner in Trigen that will be good for the community,” he added.

Trigen has more than 1,200 customers in 11 U.S. cities and is part of Thermal North America Inc., a Boston-based firm with the largest portfolio of district heating- and-cooling networks in the nation. Denham Capital Management LP, a private equity firm, owned Thermal NA until December when Veolia Energy bought Thermal.

Veolia Energy is the leading provider of energy services to municipalities and businesses in Europe and has its home office in Paris. The company was founded 150 years ago and has a North American division that oversees its operations in Cambridge, Mass., and Montreal, Canada. Veolia Energy estimated Thermal NA would have revenue of $425 million for 2007.

“Turning the DHCO over to a company who specializes in operating these unique facilities efficiently is a ‘win’ for the customers and also a ‘win’ for the county,” said Art Tanis, county commissioner and chairman of the Public Works board, in a release.

“The county Public Works board and staff determined that continuing to own and manage this facility would not be in the best interest of our customers or Kent County residents,” he added.

During the process to create its 2006 strategic plan, the Public Works department came to the conclusion that the DHOC’s contribution to the overall Waste-to-Energy effort was limited, and had been that way for more than a decade. Its future seemed brighter when the natural gas industry was deregulated and the price for the energy source plummeted. But the cost of natural gas has risen mightily since then, and so has the county’s cost to maintain and provide the service.

Also in the 1990s, the county was able to generate an unlimited capacity of electricity from the Waste-to-Energy facility through the DHOC’s steam production, which was allowed under an agreement it had with Consumers Energy. But then Consumers Energy told the county it had to lock-in on a set capacity, which put a limit on the electricity the county could produce and the revenue the system could create. So in late 1992, the county had to change its focus from producing electricity to generating steam.

“The decision that produced the most net revenue for the operation was going with the higher level of electricity and the lower level of steam export. When we did that, that meant we had a minimum-per-kilowatt hour under our electric sales agreement. That also precluded how much steam we can send downtown from the Waste-to-Energy facility, and we had no real prospect of that changing,” said Allen.

Other matters also played a role in the county’s decision to search for a buyer.

“We had some issues that needed to be addressed as far as looking at modernization and some recapitalization. But the primary thing is, it was getting away from our core business, if you will, which is providing solid waste services for the citizens of Kent County.”

Kent County bought the DHCO from Consumers Energy in 1986 and then established Covanta Kent Inc. three years later to operate and maintain the system. The facility, located at 156 W. Fulton St., began commercial steam operation in February of 1990.

The DHOC combines a low-pressure system built in the 1920s with a high-pressure one that was built around 1970 to send heat and cooling to customers along two pipelines that run for a combined seven miles in the downtown district. The low-pressure line extends for two miles, while the high-pressure line stretches for five miles.

The system has four industrial boilers that have an output capacity of 450,000 pounds per hour, more than the 260,000 pounds per hour needed to meet the peak winter demand. The boilers can burn either natural gas or low-sulfur fuel oil and are backed by another 150,000 pounds per hour that is generated by the county’s Waste-to-Energy facility through a 1.5 mile pipeline that runs between the two buildings.

The county said Saint Mary’s Health Care is the system’s single largest customer. But the city has the most buildings being serviced by it at 15, and obviously has a financial interest in the franchise agreement the city staff is putting together with Trigen.

“Sometimes you just have to take a hard look at what you’re doing and say, ‘Maybe there is someone else who can do this better.’ Philosophically, I don’t think anyone has a problem in turning this back over to the private sector. We got this from Consumers Energy when it probably would not have continued. We upgraded it and took it to another level, but we think we’ve done all that we can,” said Allen.

“We think the system itself has been a very positive factor for downtown the last 20 years and we want that to continue. It’s a cliché, but it’s a win-win situation here if we can get everything knotted up and all the issues addressed.”

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