Fuel Tax Makes Landfill Gas Run

Can a municipally-owned landfill take advantage of nonconventional fuel tax credits in order to make a landfill gas project viable? One Pacific Northwest landfill has, using a relatively unconventional method.

When the Northside Landfill in Spokane, Wash., was slated as a Superfund site in 1984 and was scheduled to close, city officials be-gan a campaign to capture and reuse the landfill gas (LFG) emanating from the 350-acre site. In 1988, the city prepared a methane management plan and by 1991, the landfill closed.

Because Spokane felt that a substantial amount of LFG could be re-used, and that it wasn't economically feasible to develop this project on its own, it began to consider its options.

In order to qualify for the tax credits, the city entered into two separate lease agreements and an operations and maintenance contract for the gas field. The first lease allows a private contractor to collect and sell the LFG from the entire Northside Landfill excluding one acre where the facility would be constructed and the gas turned into electricity.

The second lease is a "site lease," forming a separate company to operate the facility that converts the LFG to electricity.

These leases allow the city to take advantage of the tax credits. The other contract establishes an operations and maintenance agreement between the gas lessee and Spokane, for the city to operate the gas field.

The nonconventional fuel tax credits come into effect when LFG (based upon the BTU content) is sold by one party to an "unrelated" party. Under Internal Revenue Service Code, parties are "unrelated" if they don't ex-ceed 50 percent common ownership.

After both leases were signed, the development company assigned the LFG lease and the collection system operation and maintenance agreement to one of the newly-developed companies. Then, it assigned the site lease to a separate limited liability company owned equally by the gas lease company and a separate LFG engine dealer.

Thus, Spokane collects the LFG (as a contractor to the gas lease company) who, in turn, sells it to the site lease company for generating electri-city. Since both companies are technically "unrelated" to each other, the gas lease company can receive nonconventional fuel tax credits during each year of LFG sales for 10 years.

Consequently, the city doesn't have capital investment costs and receives royalties from energy sales.

Timing was critical when contracts were being considered. To qualify for the nonconventional fuel tax credits, the gas lease company had to sign a construction agreement to install a facility by December 31, 1995. (This deadline now has a proposed extension date of January 1, 1998.) And even though contracts were secured before the deadlines, the project still may not be completed because of its marginal economic aspect.

Spokane's story is not unique; all current LFG projects' economic viability will depend on nonconventional fuel tax credits coupled with private developers' ability to use them.