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Swirl over rising Covanta costs

The nearly 20% spike in the waste-to-energy plant expansion costs is causing county officials to chafe.

By BILL VARIAN
Published August 10, 2005

TAMPA - When Hillsborough commissioners gave the initial okay to one of their biggest contracts ever last year, they did so without seeking competitive bids.

Covanta Hillsborough Inc. was pledging what it billed as a rock-bottom $89.3-million price tag to expand the waste-to-energy plant it already operates for Hillsborough County. The company also would get to keep running the east Hillsborough plant for the next 20 years, giving the contract a value of nearly a half-billion dollars.

A little more than a year later, the cost of the expansion has climbed nearly 20 percent, to $106.8-million, raising questions for some about the wisdom of the original 7-0 commission vote.

"It makes no sense," said County Commissioner Brian Blair, who was not yet elected to the board when the plan was approved in June 2004. "If it was your business, and you were getting a new roof, wouldn't you want to get three estimates?"

The issue is scheduled to return to commissioners Aug. 17 for a final vote on the contract. The county administration is still analyzing what the increase will mean for rates paid by Hillsborough residents for garbage pickup.

In the meantime, county negotiators are working to exact some concessions from Covanta to offset the spike in construction costs.

Some of the cost increase can be blamed on delays in finalizing the deal's details. The contract was supposed to be finished in April. The original construction estimate is subject to an escalator clause that increases the price at a rate equal to the Consumer Price Index.

But Covanta spokeswoman Beth Leytham says most of the increase is because of sharp increases in the cost of construction material, particularly steel, due in part to the building boom in China. The company is pledging to forgo the normal 8.5 percent profit it tacks on to the portion of the costs it blames on rising prices for construction materials.

She said that while Covanta did not face competition from other companies, 95 percent of the construction work will be done by subcontractors who submitted competitive bids.

"There was a dramatic increase in steel prices, and the lion's share of the increase is in the increased cost of the steel," Leytham said. "We are not taking a profit in that increase."

However, those price increases had been well under way when commissioners signed off in the plan. The company submitted charts documenting the higher steel prices, from the U.S. Bureau of Labor Statistics, with a June letter it submitted to the county alerting officials of increased construction costs.

The spike in construction materials costs has been well documented in the media.

"I think it was about December of 2003 that we realized something was wrong," said Bob Clark, president of Tampa Steel Erecting, which buys bulk steel from wholesalers to make the frame of buildings. "Then in March of 2004 they started hitting us with surcharges."

Despite the increase, a consultant hired by the county to analyze its garbage-burning future said he still stands by the recommendation to do the project without seeking bids.

"Absolutely," said Daniel Strobridge, a vice president with Camp Dresser & McKee. "We still think that is the best possible price you can get in today's commodity market."

The county hired a company then known as Ogden Martin Systems of Hillsborough County Inc., which later became Covanta, to design, build and run the garbage incinerator on Falkenburg Road in 1984 after seeking competitive bids. Each day, the plant burns up to 1,200 tons of garbage that would otherwise end up in the south county landfill. The heat it generates is used to produce enough electricity to power about 15,000 homes. The plant was later updated with added pollution controls.

Covanta is a sister company to Covanta Tampa Construction, which was removed as the contractor of Tampa Bay Water's troubled desalination plant. Its parent is Covanta Energy Corp., which emerged from bankruptcy in March 2004.

Three months later, commissioners essentially voted to hire the company to add another 600 tons daily of capacity to the waste-to-energy plant and extend its contract to run it.

The logic was this: The county has generally been happy with how Covanta has run the plant until now. Because Covanta owns the rights to a main component of the furnace it uses to burn trash, any competitor would likely have to pay the company to expand the plant.

Commissioners and their staff used expressions like, "bird in the hand," and "if it ain't broke, don't fix it," in explaining the sole-source deal. Attorneys for the county said commissioners could forgo state bidding requirements because Covanta is uniquely qualified for the work.

Their unanimous vote contrasted with Pinellas County, where commissioners are seeking competitive bids for continued operation of a similar plant. That plant is run by Wheelabrator Technologies Inc., a subsidiary of Waste Management. Covanta, as one of the four main companies that do such work, has submitted paperwork to be considered for the project.

Likewise, Wheelabrator officials, and representatives of Montenay Power Corp., have expressed interest in running the Hillsborough plant, if not building it.

"We're still interested," said Frank Ferraro, vice president for public policy at Wheelabrator. "We'd love the opportunity to offer some alternatives should the situation arise."

County Administrator Pat Bean said she is still formulating her recommendation to commissioners. Her staff and county consultants are discussing options, such as adding a component to the project that would separate recyclables from the garbage stream, which could be sold for a profit to the county.

The county may also seek to keep a bigger chunk of any unspent money in a contingency fund being created for the project. Covanta would otherwise get to keep that money as an incentive to keep its prices low.

"I was surprised that they requested that increase," Bean said. "I contacted them and suggested that they needed to consider some alternatives that could make the proposal something reasonable for the county to consider."

[Last modified August 10, 2005, 00:36:13]