Dec 1 - McClatchy-Tribune Regional News - Matt Hagengruber Billings Gazette, Mont.

The city of Billings stands to make at least $20 million over 40 years after signing a deal with Montana-Dakota Utilities to sell methane from the city landfill. With the deal, the city turns a liability into an asset.

But some are disappointed that the city gave away what could be millions of dollars in energy credits to MDU -- credits that may be worth more than the gas itself.

"It's as if you're selling a house without knowing the value of house, and you didn't know how many bedrooms the house had," said Jeff Griffin, a Billings environmental consultant who tried, beginning in April, to persuade the city to change the deal.

Griffin has worked for the United Nations and is certified as a carbon auditor for a company based in Germany. He runs a consulting business in Billings and is finding more work in energy credits.

But city officials and others in the waste business are quick to point out that the carbon market is speculative and untested, and few outside that business truly understand what's going on.

"It is a commodity market, and I simply don't have the staff to do that," City Administrator Tina Volek said. "We have a project that will bring us an estimated $500,000 a year. We're expecting revenue from that, and we're not investing anything."

Carbon credits and renewable energy credits, also called RECs, are a market-based method to combat global warming. Energy credit buyers are companies that are emitting greenhouse gases into the atmosphere. Credit sellers are those that are voluntarily doing things to prevent greenhouse gas emissions. The system works like any market in which buyers and sellers agree on price.

In the future, the thinking goes, the government may require companies to buy and spend energy credits if they emit greenhouse gases, so many companies are stockpiling credits before that happens. Landfills across the country are selling their energy credits now because they're preventing the emissions voluntarily. Once landfills and others are forced to stop emissions, their credits become worthless.

In early versions of the landfill contract, written by MDU more than a year ago, the utility company received 100 percent of any energy credits generated by the project. That worried Councilwoman Jani McCall, who asked in early August to meet with Volek and Public Works Director Dave Mumford. She brought Griffin to the meeting.

Griffin said he told Volek and Mumford that the energy credits could be worth at least $300,000 a year and that there was no reason to give all of them to MDU. Griffin now thinks that the credits could be worth closer to $800,000 a year and that they belong to the city because it owns the landfill and the methane. MDU is simply the company that has agreed to extract the methane from the landfill, Griffin said.

"City staff people were getting calls weekly from people who wanted to get these carbon credits," Griffin said. "There are companies out there that have lists of these old landfills, and they're calling every week. The city was just giving them to MDU."

A recent Wall Street Journal article cited several landfills across the country that were selling carbon credits, including one in New Jersey that sold credits for almost $430,000 in nine months. The credits can be sold every year because the methane keeps flowing.

In Fargo, N.D., solid-waste manager Terry Ludlum said his landfill earns credits by burning off some methane, piping some to a nearby sunflower seed plant and burning the rest for electricity generation. Ludlum said Fargo earlier this year was one of just seven cities considered full members of the Chicago Climate Exchange. Because of its work since 2001, the exchange awarded the landfill about 170,000 credits retroactively.

For several months, city officials in Fargo watched the price of carbon credits climb on the Chicago exchange before pulling the trigger on a sale. In March, they sold the credits for $712,000.

Now Ludlum said the landfill hopes to earn close to 100,000 credits a year. He said the city expects to make about $500,000 annually on the gas sales and at least another $500,000 on energy credits. The city also has an innovative wastewater project that brings in about $1 million a year.

"That was the difference between raising taxes or not in Fargo," he said. "The mayor recommended no mill levy increase due to the renewable energy projects."

But Ludlum said he understands Volek's concerns about jumping into the energy credit market. He said he had to spend about 20 hours a week for several years to figure out the process, and minor errors in capturing methane cost the landfill about half its credits last year.

"I basically did the work myself," Ludlum said. "It was about 18 months of my life I'll never get back, but it's worth it in the long run."

In Montana's Flathead County, Public Works Director Dave Prunty said his landfill had teamed up with a local electric cooperative to generate electricity using landfill methane. The county and the co-op agreed to split any energy credits evenly.

The amount of gas and credits to be generated in Flathead County is tiny compared with Billings. The Billings landfill is projected to give off 1,480 cubic feet of landfill gas per minute, compared with 250 to 450 cubic feet per minute in Flathead County. But Prunty said word got out quickly that his landfill would someday have credits it could sell.

"When our story got out, my phone started ringing, and my counterpart at the co-op, his phone started ringing," Prunty said. "It's amazing how quickly word travels. They jumped us like flies to the gut pile."

One carbon credit equals one metric ton of carbon dioxide that isn't released into the air. Because methane is about 20 times as potent a greenhouse gas as carbon dioxide, capturing 1 ton of methane generates 20 times as many credits as a ton of carbon dioxide.

The amount of credits to be generated by the Billings landfill is still unknown, but Griffin's calculations put the figure at about 118,000 credits per year.

Billings could sell its credits for about $7 each now, according to Jeff Liebert, co-founder of the Verdeo Group, a Washington, D.C.-based company that deals in carbon offsets. Liebert, who has worked with Griffin, said he expects prices to climb to about $15 over the next few years. At $7 a credit, Billings' credits are worth about $825,000 a year.

After the August meeting with McCall and Griffin, the city staff renegotiated with MDU to break the 40-year contract into four 10-year segments. MDU also agreed to give the city 15 percent of the energy credits, which means an annual windfall for the city of about $124,000. MDU's credits could be worth about $700,000 a year, if the company decided to sell them.

Mumford said that 15 percent of the credits is better than none and that the deal can be changed later.

"We get pure profit for doing nothing more than owning land," Mumford said. "MDU wanted all of the credits, but what we got is 15 percent, and all of that is renegotiated at the 10-year mark. They drove somewhat of a hard bargain on that because we don't have the resources to build this and go in there with all those people.

"We have a good arrangement. Was it one that swung all in our favor? Probably not, but I feel comfortable with it."

Liebert also said the deal wasn't too skewed, as MDU is making all the capital investment.

"I'm quite impressed that a utility is willing to put up the capital. That's pretty progressive," he said. "But 100,000 credits is a lot of credits to get your hands on in Montana. If a utility wants credits from a landfill, that means they're high-quality credits."

McCall said MDU would still have 100 percent of the credits had she and Griffin not intervened. She said MDU threatened to pull out of the deal if the negotiations became too bogged down.

"I think the city had gone so far down the path that they didn't want to have to back up," McCall said. "The only reason we got 15 percent is because I pushed the issue. My sense was that there wasn't a lot of knowledge of these credits and their value."

Others wondered why the city didn't seek proposals from other companies. Mumford said that working with MDU was the best arrangement, because it is the only gas supplier in the area and MDU would be buying 100 percent of the gas. Trying to work with another company didn't guarantee that all the gas could be sold, Mumford said.

"MDU is only one that sells natural gas by pipeline here. Anyone else would be a third party selling it to MDU," he said. "Our contract says that they're required to buy our gas if it's produced at the landfill."

Griffin said other companies would have jumped at the project given the chance, and they probably would have offered better terms to the city. Griffin said the problem lies with city staff members who don't understand energy credits.

"Even at that meeting, Mumford didn't understand that his own contract was giving all the carbon credits and RECs to MDU," Griffin said. "It wasn't a priority. Dave just wanted it off his desk. I can see that, but my point in the meeting with him was, 'Think of it as an asset, not a liability." "

Rick Reid, the regional head of MDU, dismissed Griffin's concerns and said energy credits don't mean as much now because the demand for them is purely speculative.

"We felt that 15 percent was fair and equitable," he said. "If, in 10 years, they are of more value than we think they're going to be, it can be renegotiated. It's easy to sit back and take pot shots at what somebody has done, but the entire City Council voted for it."

City officials may also have seen Griffin as angling for business. He admitted as much, telling Mumford that he would be willing to help out the city if it wanted to renegotiate the contract.

"For some reason, I got tagged as the greedy consultant," Griffin said.

McCall wishes that the city had received more energy credits.

"If these credits have no value, why were 100 percent of the credits going to go MDU?" McCall said.

When the contract came before the City Council on Aug. 25, McCall, while still thinking the city deserved more of the energy credits, voted for it along with all her colleagues. She hopes that the city will renegotiate for more energy credits in 10 years.

Others, like Councilman Ed Ulledalen, agreed with the city staff that a risk-free investment with such a large return was worth it for the cash-strapped city. A financial adviser, Ulledalen said the city's cut of 15 percent of the gas sales is similar to what a rancher might receive for selling the rights to underground natural gas.

"It was more favorable to get the cash flow," he said. "Should we take the risk and bid this out or take the $500,000 in revenue starting next year? If you get too creative, you might end up with nothing. It's like trying to catch a knife."

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