Miami-Dade Legislative Item
File Number: 121117
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File Number: 121117 File Type: Resolution Status: Adopted
Version: 0 Reference: R-639-12 Control: Board of County Commissioners
File Name: OPERATIONS AND MANAGEMENT AGREEMENT RE: COVANTA Introduced: 5/30/2012
Requester: Public Works & Waste Management Cost: Final Action: 7/17/2012
Agenda Date: 7/17/2012 Agenda Item Number: 8L1
Notes: TLL- 5/30/2012 Title: RESOLUTION AUTHORIZING EXECUTION OF THE FOURTH AMENDED AND RESTATED OPERATIONS AND MANAGEMENT AGREEMENT BY AND BETWEEN MIAMI-DADE COUNTY AND COVANTA DADE RENEWABLE ENERGY, LTD. FOR OPERATION OF THE COUNTY’S RESOURCES RECOVERY FACILITY
Indexes: NONE
Sponsors: Audrey M. Edmonson, Prime Sponsor
Sunset Provision: No Effective Date: Expiration Date:
Registered Lobbyist: None Listed


Legislative History

Acting Body Date Agenda Item Action Sent To Due Date Returned Pass/Fail

Board of County Commissioners 7/17/2012 8L1 Adopted P

Infrastructure and Land Use Committee 6/13/2012 3D Forwarded to BCC with a favorable recommendation P

County Attorney 5/30/2012 Assigned Thomas H. Robertson 5/31/2012

County Mayor 5/30/2012 Assigned County Attorney 7/17/2012
REPORT: PWWM (ASST. COUNTY ATTY: THOMAS ROBERTSON) (PENDING CMTE ASSIGNMENT) (Commissioner Edmonson is the SPONSOR)

County Mayor 5/30/2012 Assigned Alina Tejeda-Hudak 5/22/2012 5/30/2012

Legislative Text


TITLE
RESOLUTION AUTHORIZING EXECUTION OF THE FOURTH AMENDED AND RESTATED OPERATIONS AND MANAGEMENT AGREEMENT BY AND BETWEEN MIAMI-DADE COUNTY AND COVANTA DADE RENEWABLE ENERGY, LTD. FOR OPERATION OF THE COUNTY’S RESOURCES RECOVERY FACILITY

BODY
WHEREAS, this Board desires to accomplish the purposes outlined in the accompanying memorandum, a copy of which is incorporated herein by reference,

NOW, THEREFORE, BE IT RESOLVED BY THE BOARD OF COUNTY COMMISSIONERS OF MIAMI-DADE COUNTY, FLORIDA, that the Fourth Amended and Restated Operations and Management Agreement is approved and the Mayor or Mayor’s designee is authorized to execute the Agreement in substantially the form attached hereto after review and approval by the County Attorney. The County Mayor or County Mayor’s designee is authorized to exercise any and all powers and options within the Agreement including termination.

HEADER
Date:

To: Honorable Chairman Joe A. Martinez
and Members, Board of County Commissioners

From: Carlos A. Gimenez
Mayor

Subject: Fourth Amended and Restated Operations and Management Agreement by and between Miami-Dade County and Covanta Dade Renewable Energy, LTD. for operation of the County’s Resources Recovery Facility

STAFF RECOMMENDATION
RECOMMENDATION
It is recommended that the Board of County Commissioners approve the attached resolution authorizing execution of the Fourth Amended and Restated Operations and Management Agreement by and between Miami-Dade County and Covanta Dade Renewable Energy, LTD. (Covanta) for operation of the County’s Resources Recovery Facility (Agreement). The proposed Agreement incorporates two prior amendments from 2000 and 2004, a series of prior letter agreements and the 2010 Consent Agreement that transferred equity interests from the prior operator, Montenay-Dade, LTD., to the current operator Covanta Dade Renewable Energy, LTD., as well as other changes including the assumption by Covanta of responsibility for meeting federal reliability standards for the bulk power system due to a change-in-law.

SCOPE
The Resources Recovery Facility (RRF) is capable of processing over 1.3 million tons of waste per year and is the centerpiece of the County’s solid waste management system. This facility serves the residents of unincorporated Miami-Dade County and eight (8) municipalities where the County provides waste collection services, including: City of Aventura, City of Doral, City of Miami Gardens, City of Sunny Isles Beach, Town of Cutler Bay, Town of Miami Lakes, Village of Palmetto Bay and Village of Pinecrest.

The RRF also serves the residents of 18 Miami-Dade municipalities that have entered into long-term waste disposal interlocal agreements with the County, including: Bal Harbour Village, Town of Bay Harbor Islands, Village of Biscayne Park, City of Coral Gables, City of Hialeah, City of Homestead, City of Miami, City of Miami Beach, Village of Miami Shores, City of Miami Springs, City of North Bay Village, City of North Miami, City of North Miami Beach, City of Opa-Locka, City of South Miami, Town of Surfside, City of Sweetwater and City of West Miami. These municipalities comply with State concurrency requirements by means of their waste disposal interlocal agreements with the County.

In addition, RRF serves numerous private waste haulers that provide commercial waste collection services throughout Miami-Dade County.

FISCAL IMPACT
The FY2010-11 expenditure by the Public Works and Waste Management Department (PWWM) for RRF operations was approximately $61 million. Covanta is paid a decreasing four (4) tier fee for each ton of waste processed at RRF. The following waste processing fees (Tipping Fees) paid to Covanta are subject to annual adjustment based on increases or decreases in the Consumer Price Index (CPI):

1. The base Tipping Fee rate for FY2011-12 is $47.14 per ton for the first 732,000 tons processed;
2. The second tier Tipping Fee rate is $39.93 per ton from 732,000 tons to 966,000 tons;
3. The third tier Tipping Fee rate is $32.59 per ton for the first 76,000 tons of trash, after a total of 966,000 tons of waste have been delivered; and
4. The fourth tier Tipping Fee rate is $29.14 per ton for all garbage over 966,000 tons and all trash over the 76,000 tons in tier three.

The RRF produces energy from waste that is sold to Progress Energy, an investor owned utility (IOU). Total electrical revenue for FY2010-11 amounted to approximately $31.5 million (highest ever recorded), which is shared equally between Covanta and the PWWM. The proposed Agreement will not alter the core financial contractual elements discussed above; however, several recommended changes will have a financial impact on the PWWM, as follows:

* Foremost is Covanta’s assumption of responsibility for meeting federal reliability standards for the bulk power system resulting from a change-in-law. In exchange for taking on this responsibility and its risks for payment of fines for non-compliance, the four percent (4%) CPI reduction, scheduled to take effect in 2013, will be reduced to three percent (3%). This change translates into an annual cost to the PWWM of approximately $415,000 beginning in 2013, and continuing through the current term of the Agreement (until 2023 and up to 2043, predicated on the exercise of options to renew). It should be noted that the maximum penalty for non-compliance with federal reliability standards is $1,000,000 per day.

* Provided the quantity of tires received at the RRF does not fall below its current 5,700 tons per year level and recycling and/or alternative fuel markets for tires are robust, changes relating to the recovery of tires will provide a new revenue stream to the PWWM of approximately $50,000 annually. As well, a corresponding $365,000 annual reduction in transportation and landfill disposal charges for shredded tires is anticipated.

* The proposed Agreement changes Section 12.3, Cost Impact on Company, to allow for alternate means to compensate Covanta for cost increases related to change-in-law when the change involves significant cost variability over time. For instance, the PWWM recently shifted from the purchase of propane to natural gas for carbon monoxide (CO) control, which is change-in-law related. This change has significantly reduced the cost to the PWWM for CO control. Conservatively, the cost reduction from moving to natural gas should be greater than 50% in FY2011-12. The potential annual cost savings is in the range of $800,000 at current market rates.

TRACK RECORD/MONITOR
The PWWM employs an on-site Facility Engineer (Wieland Uchdorf, PhD) and associated staff to monitor Covanta’s operation of the RRF on a daily basis. PWWM administration receives a minimum of two (2) RRF status reports from the Facility Engineer each day. The Facility Engineer chairs a bi-weekly operations and management meeting with Covanta to discuss plant operations and resolve any deficiencies. Pursuant to its Bond Covenants, the PWWM also employs a Consulting Engineer to evaluate the condition of its facilities, including RRF. The Consulting Engineer prepares a monthly surveillance report summarizing overall RRF operations, as well as an annual RRF inspection report. RRF expenditures are also reviewed as part of the annual budget development process.

The RRF operations and management agreement is also periodically reviewed by the County’s Audit and Management Services Department (AMS). The most recent AMS review was completed on June 6, 2011.

MANAGER'S BACKGROUND
BACKGROUND
The County’s Resources Recovery Facility has been in existence since the early 1980’s. The processing capacity of the RRF was increased in the mid 1990’s to facilitate the production of biomass fuel for energy production elsewhere. A major air pollution control upgrade of the RRF to comply with the Federal Clean Air Act was completed in 1999. Many additional improvements have been made to the RRF over the years to improve its operational efficiency and otherwise enhance the Facility.

The previous Third Amended and Restated Operations and Management Agreement was approved by the Board in 1996 (R-917-96). The Third Amended and Restated Agreement has been amended twice since that time, as follows:

* In 2000 - to primarily address three (3) change-in-law fee adjustments related to the mercury control system, compliance with the 1994 changes in the South Florida Building Code and compliance with new OSHA worker safety rules; and, capital improvements related to County fire safety regulations, state and local waste water discharge standards and carbon monoxide (CO) and nitrous oxide (NOx) controls (R-875-00).

* In 2004 - to primarily address the disposition of Fines, a byproduct of Biomass Fuel production; an extension of the term from 2013 to 2023; allowing a 100,000 tons per year increase in the County’s waste delivery obligation; a two-part CPI reduction in tipping fees paid to the operator occurring in 2007 and 2013; and placing a limit on trash Non-processable items (R-899-04).

On January 15, 2010, the Board approved assignment of the Third Amended and Restated Agreement to Covanta Southeastern Florida Renewable Energy LLC, which included a Consent Agreement between the County, Montenay and Covanta (the Parties). The Consent Agreement contained nine (9) Business Terms the Parties had agreed to during pre-assignment negotiations. Of these Business Terms, only four (4) necessitated changes to the Agreement and are discussed below. The other five (5) Business Terms and their sub-elements have been satisfactorily completed. All changes contained in the proposed Agreement that relate to the Consent Agreement are retroactive to October 1, 2009.

In the process of preparing a “Third Amendment” to the Agreement to incorporate the terms of the Consent Agreement, Covanta and the PWWM mutually agreed to instead amend and restate the entire Agreement to bring together all previous amendments and letter agreements into a single document. While this process required a longer time frame to complete, it also provided an opportunity to streamline the Agreement by deleting obsolete sections and moving sections to more appropriate locations within the document. Further, other terms were negotiated and incorporated relating to Facility operations and change-in-law for inclusion in the Agreement. A description of each of the other changes to the Agreement follows discussion of the four (4) Business Terms from the Consent Agreement:

Business Terms from the Consent Agreement
1. Incorporation of three pre-existing letter agreements into the proposed Agreement

a) The Letter Agreement dated August 18, 2005, provided a process for calculating the cost of taking waste to other than the RRF in the event that Covanta failed to accept waste it had requested above the County’s normal waste delivery guarantee. In order to simplify the process to arrive at a per ton penalty amount and not further complicate the Agreement, an Unbudgeted Disposal Cost Fee of $3.45 per ton, subject to CPI, has been negotiated and included in the proposed Agreement. The negotiated amount is consistent with the most recent per ton penalty derived from the Letter Agreement calculation.

b) The Letter Agreement of September 27, 2006, provided for the reprocessing of Reject Overs, a subset of Recyclable Trash Rejects, as incoming garbage and exempting an amount of Reject Overs from counting toward the 17.6% Recyclable Trash Rejects Guarantee. This practice provides a transportation cost savings to the PWWM and increases electrical revenue. The proposed Agreement limits the amount of Reject Overs and Recyclable Trash Rejects that can be reprocessed as garbage to 10.9% of incoming Recyclable Trash. Covanta and the PWWM mutually agreed to waive the waste composition study related to this item as contemplated in the Consent Agreement.

c) The Letter Agreement dated January 9, 2007, provided a methodology for calculating the Capital Tipping Fee paid to Covanta by the County for debt service on the RRF Bonds. The proposed Agreement has been amended to incorporate this methodology.

2. Establishment of a Combined Residue Guarantee
The RRF produces three residue streams, one from garbage processing and two from trash processing, each with its own limit or guarantee (i.e. Residue – 30% of On-Site Waste; Fines – 34.9% of Recyclable Trash; and, Recyclable Trash Rejects – 17.6% of Recyclable Trash). The Consent Agreement contemplated combining these three separate guarantees into a single aggregate guarantee to simplify calculating the guarantee and assessing penalties for exceeding the guarantee. The proposed Agreement establishes a “Combined Residue/Fines/Rejects Guarantee” of 33.8% of all incoming waste. Again, Covanta and PWWM agreed that a waste composition study was not necessary to arrive at this negotiated amount. Any residue above the Combined Residue/Fines/Rejects Guarantee disposed of by the PWWM will be charged to Covanta at the County’s Contract Tipping Fee rate, currently $62.59 per ton.

3. Adjustment to Put-or-Pay Amounts for County Waste Deliveries to Covanta
The County is required to deliver a set amount of waste by type (garbage or trash) to the RRF each year or pay a penalty. The following changes in County’s waste delivery requirements contained in the Consent Agreement, which are designed to simplify the Agreement and better enable the County to meet its waste delivery obligations going forward, have been incorporated into the proposed Agreement:

* The Annual Recyclable Trash Guaranteed Tonnage has been decreased from 270,000 tons to 240,000 tons.
* The method for distinguishing between On-Site Waste and Recyclable Trash has been changed to state that the first 240,000 tons of trash delivered to the RRF counts toward Recyclable Trash and any amount over that counts as On-Site Waste.
* The Annual On-Site Waste Guaranteed Tonnage has been increased from 702,000 tons to 732,000 tons, which must consist of all garbage, such that the sum of the Annual On-Site Waste Guaranteed Tonnage and the Annual Recyclable Trash Guaranteed Tonnage shall not be less than 972,000 tons.
* The upper limit of the soft put-or-pay requirement (subject to waste availability) for the County’s On-Site Waste Guaranteed Tonnage has been increased from 936,000 tons to 966,000 tons.
* The tipping fees paid to Covanta by the PWWM have been aggregated into a single Solid Waste Tipping Fee with four (4) decreasing tiers based on waste type and volume (see Fiscal Impact section).
* In the event that the County delivers less than 400,000 tons of trash to the RRF, Covanta’s Annual On-Site Waste Processing Guarantee will be reduced by the shortfall up to a maximum reduction of 160,000 tons.

4. Mutual Waiver of Subrogation
Mutual waiver of subrogation in the County’s and Covanta’s insurance policies has been included as a requirement in the proposed Agreement. This will prevent the insurance providers from taking action against either the County or Covanta to recover their payments for claims.
Other Changes to the Agreement

* FRCC Compliance - In response to widespread electrical blackouts in the Midwest and Eastern portions of the United States in 2005 that were caused by a malfunction at a regulated utility operation in the Midwest, the Federal Power Act was amended. This amendment resulted in the Federal Energy Regulatory Commission (FERC) adopting new rules governing electrical power generation, transmission, distribution and sale, including power generated by a small power producer such as the RRF, which had previously been exempt from most of these regulations. The North American Electricity Reliability Corporation (NERC) and its eight subordinate regional agencies are responsible for enforcing these standards. Since June 18, 2007, the RRF has had to comply with the NERC standards. The Florida Reliability Coordinating Council (FRCC) is the regional administrator governing these activities in Miami-Dade County. FRCC manages compliance with its reliability standards through a series of mechanisms including: self reporting, spot check audits and on-site audits.

Miami-Dade County through the PWWM is the Generator Owner (GO) of the RRF in accordance with FRCC rules; Covanta is the Generator Operator (GOP). FRCC rules specify Facility reliability standards that must be met and ascribe them to the GO and GOP as they see fit. This poses a problem for the GO, in that the GOP operates the Facility and maintains all operating records, therefore the GO is highly dependent upon the GOP for its compliance with FRCC reliability standards. Recognizing this potential disadvantage for the GO, the FRCC changed its rules to permit a GOP to take full responsibility for compliance when the two entities come together as a Joint Registration Organization (JRO), if the GO and GOP agree in an official signed contract, such as the proposed Agreement.

To address this change-in-law, the proposed Agreement includes a new sub-section, 3.23, FERC/NERC Compliance Obligations, which transfers all responsibilities for meeting FRCC reliability standards to Covanta. To compensate Covanta for their increased costs and risk associated with potential penalties for non-compliance, the four percent (4%) CPI reduction that was part of the Second Amendment in 2004 and scheduled to take effect in 2013 will be reduced to three percent (3%). This change translates into an annual cost to the PWWM of approximately $415,000 beginning in 2013 and continuing through the current term of the Agreement (until 2023 and up to 2043, predicated on the exercise of options to renew). It should be noted that the maximum penalty for non-compliance with FRCC reliability standards is $1,000,000 per day.

* Tires as a Recovered Material – Typically, tires delivered to the facility have been shredded by Covanta and returned to the PWWM for landfill disposal. Recently, opportunities to recycle tires or use them as an alternative fuel in cement manufacturing have been presented to Covanta. When Covanta recovers tires for such uses, the PWWM realizes a cost savings in transportation and disposal of shredded tires. The proposed Agreement has been clarified to acknowledge that Covanta is not responsible to shred tires that constitute Recovered Materials, as defined in the Agreement. Further, the Tires Tipping Fee paid to Covanta has been adjusted to include a separate rate of $103.15 per ton for clean tires and $113.31 per ton for unclean tires that are not returned to the PWWM. These rates, which are below the current disposal charge of $114.18 per ton, will only increase if the disposal charge increases, thereby providing an additional $11 per ton revenue stream to the PWWM for recovered clean tires. Assuming 80% of the approximate 5,700 tons of tires received at RRF annually were recovered by Covanta for recycling or use as an alternative fuel, approximately $50,000 in additional revenue would accrue to the PWWM. In addition, the corresponding reduction in transportation costs and landfill disposal charges associated with shredded tires would amount to approximately $365,000. It is important to note that all tires delivered to the RRF count toward the County’s waste delivery obligation to Covanta. Further, as regulatory compliance efforts aimed at shutting down illegal tire export operations in Miami-Dade County begin to have their desired effect, the quantity of waste tires received at the Facility are anticipated to increase.

* Deleted/Moved Sections – Section IV, Construction Obligations of the Company, which relates to the Retrofit of the Facility to meet requirements of the Clean Air Act, Additional Improvements to the Facility and Recyclable Trash Improvements, which have all been completed, is obsolete and has been removed in its entirety. Section XVI, Processing of Recyclable Trash, has been moved to Section V.

* Sale of Namco Metals Processing to Covanta – The secondary metals shredder and associated equipment owned and operated by NAMCO and previously authorized by the County has been purchased by Covanta. This on-site facility reprocesses metal recovered in the refuse derived fuel production process to enhance its marketability. The proposed Agreement would allow Covanta to dispose of ash residue generated from processing of imported metals at the County’s applicable disposal charge. When the Agreement with Covanta is terminated, the County will have the right to purchase this facility for its fair market value.

* Change-in-Law Fee Adjustments – Section 12.3 of the Agreement, Cost Impact on Company, relates to compensation to Covanta, for operational cost increases brought about by a change-in-law. The only method provided in this section to compensate Covanta is an increase in Tipping Fees. Typically, the PWWM uses Section 7.1.5 of the Agreement, Other Payments to Company, to compensate Covanta for the purchase of commodities such as fuels and for services such as ash hauling that are highly dependent on fuel prices. For instance, the PWWM recently shifted from the purchase of propane to natural gas for carbon monoxide (CO) control, which is change-in-law related. This change has significantly reduced the cost to the PWWM for CO control. Conservatively, the cost reduction from moving to natural gas should be greater than 50% in FY2011-12. The potential annual cost savings is in the range of $800,000 at current market rates. Since the prices of certain types of commodities can vary widely based on global economic factors, paying a market price is often preferable to embedding the compensation rate for a change-in-law in the Tipping Fees. Therefore, the proposed Agreement changes Section 12.3 to allow for alternate means to compensate Covanta for cost increases related to change-in-law when the change involves significant cost variability over time.



_________________________
Alina T. Hudak
County Manager/Deputy Mayor



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