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Business

What's up with that steam?

A lot more than you might realize (PLUS A WDET INTERVIEW WITH THE AUTHOR)

MT Photo: Bruce Giffin
Inside the bowels of Detroit Thermal's century-old plant at Beacon Street.
Detroit Thermal Manager Victor Koppang at a map showing the extensive underground system his company operates.
AUDIO

WDET interviews Curt Guyette about this story. (MP3)
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Published 11/5/2008

It is an iconic image, one that can convey the sense of the industry and grit and struggle that lies at the heart of Detroit: Plumes of gray steam billowing from openings in steel manhole covers placed along the city's streets and sidewalks, a sultry mist that conjures the possibility of a netherworld where mysterious machinations occur out of sight, in the dark below.

For those who live in the city, or come here to work every day, or venture into town in search of good times, those spewing plumes are a common sight. But how many of these people realize what's truly going on with that steam? Do they know where it comes from, or that the telltale wisps give only a hint of something far more potent at work?

Potent, indeed, because the steam coursing through miles of pipe buried far underground is part of an intense debate over Detroit's municipal trash incinerator. The eventual decision regarding its fate will have a lasting effect on the city's economic future.

Much about that incinerator is bizarre, starting with how, even though the city no longer owns the facility, it remains obligated to pay off the bonds that were issued to fund the burner's construction in the late 1980s and the installation of costly air-pollution control equipment that had to be added in the early 1990s soon after it was built. By the time those bonds are finally retired at the end of June 2009, Detroit taxpayers will have shelled out more than $1 billion in principal and interest for what is formally known as the Greater Detroit Resource Recovery Facility located at the juncture of interstates 94 and 75.

Even though the Detroit City Council voted earlier this year to discontinue using the incinerator — deciding instead to rely on landfills and an ambitious curbside recycling program that has yet to begin — the city, because of the way the original deal was formulated, might still be forced to continue burning its trash if the plant's owners can meet the best offer provided by landfills hoping to get the city's trash and cash.

Almost as convoluted as all that is the steam deal between the city, the Greater Detroit Resource Recovery Authority — a quasi-government entity that oversees incinerator operations, with a board made up of mayoral appointees — and Detroit Thermal, the corporation that operates a steam distribution system that serves an area roughly bounded on the east by I-75/375, on the west by the Lodge Freeway, on the north by Grand Boulevard, and on the south by the Detroit River. It's a massive chunk of central Detroit.

The steam system dates back to the early 1900s, when the newly formed Edison Illuminating Company decided to use exhaust from electricity-generating steam engines to heat buildings in the neighborhood around its Willis Avenue plant, according to a history of the system produced by the American Society of Mechanical Engineers (ASME).

Even then, such systems weren't new ideas. In 1877, the town of Lockport, N.Y., introduced the first district heating system, "showing how a single large steam plant could operate at a higher overall thermal efficiency than a series of small, isolated boilers, especially in the commercial districts of cities," according to the ASME history, produced in 1985 when it designated one of the buildings in the Detroit system a National Historic Mechanical Engineering Landmark.

Dozens of other cities across the map — from Boston and Baltimore to San Francisco and Seattle — also have what are known as "district energy" systems. New York City has two. Chicago and Minneapolis each have three.

In Detroit, the original system consisted of 3,000 feet of main lines serving just 12 customers. As time passed, competitors that sprang up were purchased and consolidated under the ownership of parent company Detroit Edison. New generating plants came and went over the years. One constant fixture, however, has been the Beacon Street facility (near what is now the site of Ford Field). Two other plants also remain operational.

Originally coal-fired, these plants began to be converted in the 1970s as more stringent pollution-control standards were implemented. The three remaining plants (the original Willis Avenue plant has long been shuttered) are all fired by natural gas now. However, since Detroit's municipal trash incinerator came online in the 1990s, burning garbage has generated 75 percent of steam used to heat and cool buildings connected to the system.


GARBAGE IN, STEAM OUT

Each year, 800,000 tons of garbage — supplied both by the city and private haulers — are trucked to the incinerator; most of it is burned, generating the intense heat used to create steam in a series of massive boilers. That steam is piped to the plant on Beacon Street — the one designated a historical landmark by the mechanical engineers — at the eastern edge of downtown. From there, the steam, after pressure is reduced to make it compatible with the equipment of end users, flows into what has been scaled back to 39 miles of pipe, heating and cooling buildings from the Renaissance Center on the riverfront to the Fisher Building in the New Center area, with buildings large and small in between.

But that steam takes a somewhat different route on paper, with the city and its taxpayers losing at every turn. It works like this:

• The city pays an exorbitant $170 a ton (compared to rates as low as $12 a ton paid by some private haulers) to dispose of its trash at the incinerator, where it is burned to generate electricity and steam.

• GDRRA sells the steam to former system owner Detroit Edison for $14.40 per 1,000 pounds (known as an M-pound).

• Detroit Edison, as part of the deal made when it sold off the system, sells the steam to Detroit Thermal for $6 an M-pound. It, however, is not involved with the actual transmission of any steam. Only its accountants are involved.

• Detroit Thermal, after receiving the steam directly from the GDRRA incinerator, reduces the pressure as part of an inexpensive process necessary to make it compatible with equipment used by building owners. The city pays a variable rate for that steam. In October it was $24.85 an M-pound; this month it is a bit over $20. But even at that rate, the city is paying a rate nearly 50 percent more than what GDDRA sold it for.

Asked why the city pays so much, Victor Koppang, Detroit Thermal's general manager, tells Metro Times, "That's just the way the deal is structured."

Cathy Square, appointed by former Mayor Kwame Kilpatrick to head the GDDRA board, has been retained under the new mayor, Ken Cockrel Jr.

"The thing people need to realize," she says, "is that GDDRA sells the steam wholesale, and the city, as a customer, is buying at retail."

In this case, though, the biggest markup goes to the middleman in the deal, Detroit Thermal.

But now, "wholesaler" GDDRA — which for all intents and purposes is really the city — is about to take a loss on the front end as well. Beginning Dec. 14, Detroit Edison will be removed from the steam picture (although it will still buy electricity that's also generated at the incinerator). Starting then, Detroit Thermal will begin paying GDDRA $9.25 an M-pound for the steam directly. Consequently, because GDRRA sells about 2.6 million M-pounds of steam a year, it's going to sustain a revenue drop of about $6.5 million over the next six months until a temporary agreement expires in June. A new price is to be negotiated by then.

"It's going to be a big hit, there's no doubt about that," Square says about the price drop GDDRA will experience beginning in mid-December.

According to a 2007 "Strategic Operating Alternatives Report" (SOAR) commissioned by the Greater Detroit Resource Recovery Authority to evaluate the incinerator's future, the arrangement makes for a tricky balancing act. If GDDRA — which takes 85 percent of the steam revenue, with the remaining 15 percent going to the private corporation that actually operates the plant — tries to increase its take by negotiating for higher prices, then the city (and the businesses it wants to see stay in Detroit) will end up paying more.

And, as Detroit Thermal's Koppang notes, GDDRA has to keep its price below what the company can produce its own steam for, otherwise it will lose its only customer.

While the city wrestles with a pending decision over the future of its trash — with the question being whether Detroit will continue trucking its garbage to the incinerator it once owned and could still repurchase, or begin turning to landfills and curbside recycling instead — owners of the steam system that's served Detroit for more than a century are fighting to rebuild a customer base that has been decimated since reaching a peak of about 1,600 buildings in the 1960s.


WSU: GRID LOSS

By 2003, when Detroit Thermal bought the system for $2.5 million, there were just 136 customers occupying 275 buildings. The price was so low because the aged system required massive upgrades, according to Michigan Public Service Commission files. Detroit Thermal says that it has spent $29 million in improvements since making the purchase, primarily upgrading the piping system and Beacon Street plant, where two new boilers have been added. "The focus," says Koppang, "has been on increasing safety and efficiencies."

Improvements to the piping system were sorely needed. According to one report, more than half the steam produced was being lost to leaks and other problems. Detroit Thermal tells Metro Times that, because of the recent upgrades, that's been reduced to about 41 percent.

That compares to an expected loss of between 20 percent and 30 percent for a new boiler installed to service a single building, says Koppang. His company, a subsidiary Ohio-based Thermal Ventures II, is scrambling to reverse a downward trend that has continued since the purchase; Detroit Thermal currently has just 104 customers in 146 buildings. Among those customers are the City of Detroit (including the Coleman A. Young Municipal Center and Cobo Hall), Wayne County, Detroit Medical Center, Henry Ford Hospital and the Detroit Board of Education.

A deteriorating customer base for Detroit Thermal causes long-term concern for the city on several fronts, according to the SOAR report.

The primary concern is how much all that steam — the city purchases more than 300,000 M-pounds annually — might cost in coming years. There are a lot of ifs involved in trying to calculate exactly what the future holds.

If the incinerator closes, Detroit Thermal has the capacity to generate enough steam on its own. But it would have to create it by burning natural gas, which can be more expensive than the steam produced by the incinerator.

But, even if the incinerator remains, Detroit Thermal will have to charge its customers considerably more if it continues losing business.

As explained in the SOAR report, if customers keep leaving the system as their long-term contracts expire, those who remain are generally forced to take on an increased share of the so-called "fixed costs" incurred by Detroit Thermal. And the higher the costs go, the greater the likelihood that even more customers will leave.

Also at issue is the ability of the city to retain businesses already here and to attract new business desperately needed to bring in more tax dollars as budget deficits mount.

As the report noted, Detroit Thermal's customers have three basic options: Continue as a customer "and accept the anticipated cost increases"; install their own heating and cooling systems; or abandon the affected buildings.

One high-profile customer has already decided it was more economical to install its own boilers rather than continue using Detroit Thermal: Wayne State University.

In 2005, the WSU Board of Governors decided to issue more than $46 million in bonds to finance building its own boiler plants, allowing it to sever nearly all connections with Detroit Thermal's steam loop. (A few small WSU facilities continue to buy steam from the company, Koppang says.)

At the time, about half the university's buildings were on the system; the other half was already independent. Even so, the university was Detroit Thermal's second-largest customer behind the Detroit Medical Center. According to a story in Crain's Detroit Business, the university estimated that it could cut steam costs in half during the first year its new boilers became operational, and it projected savings of $75 million over the 30-year life of the bonds.

The project was completed earlier this year, says John Davis, WSU's vice president of finance and facilities management. It is, he says, too early to know if the savings are going to be as dramatic as projected.

"We haven't gone through full cycle yet," says Davis. "We're anxious for that to happen so that we can analyze things after that. But, so far, so good. Everything worked out well in terms of installation and start-up."

Davis explains that part of the university's calculation was based on the fear that other big users were also contemplating leaving the system.

In the worst-case scenario, says the SOAR report, "the steam loop could have negative impacts on the city's economy if it were to result in the relocation of businesses out of the city and the loss of productivity in city agencies."

A spokesperson for the nonprofit Detroit Economic Growth Corp., which receives city funding and provides staff for the quasi-government Downtown Development Authority, tells Metro Times that steam prices don't come up as an issue when it's talking with businesspeople about staying downtown.

However, Sue Mosey, president of the nonprofit University Cultural Center Association — a consortium of more than 60 organizations formed to "enhance and promote development and use of Midtown" — says she hears much talk regarding the costs of staying on the steam loop.

"Of course, it's a big issue," says Mosey, who works with a board of directors that includes many of the city's most prominent business and cultural leaders. "It's huge. And as some started getting off the system, it became even more of an issue.

"I'm aware of several places that are making the decision to look at other options, looking for a way to be more efficient."

When Wayne State was first studying the issue, says Davis, concern about other big users leaving the system played a role in its decision-making process. Among those considering a move at that time, he says, was the Detroit Medical Center.

However, it appears now that Detroit Thermal could be retaining its largest customer. Asked whether the DMC was indeed contemplating a move similar to the one made by Wayne State, Medical Center spokeswoman Lori Mouton informed Metro Times that "the DMC is actively in discussions with Detroit Thermal on a long-term contract."

It's that kind of news that Victor Koppang wants more of.


SALES FORCE

"It's all about customer service," Detroit Thermal's general manager Koppang says.

After only 10 months on the job, he is still sorting out some of the nuts and bolts when it comes to the actual process of generating steam and maintaining a distribution system. But he knows more than enough to pitch his product.

And to clear up what might be a misperception.

That steam pouring from manhole covers — not all of it is actually escaping from faulty equipment. Sometimes, after heavy storms, it is rainwater hitting the hot steam pipes that creates the plumes. There are also water pipes running through the same tunnels, and when they leak and splatter on their hot neighbors, that also causes steam to waft from the manhole covers, Koppang says.

Before hiring on at Detroit Thermal, he owned a company that helped companies focus efforts on seeking out new markets. At one point in the 1990s, he was vice president of a Michigan pager company. He also worked for Xerox, in sales and management, during his first 12 years out of college. "This is a new industry for me," says Koppang, a tall and balding man who wears crisp white shirts and displays the comfortable familiarity all good salesmen have. "But I understand the importance of providing value to a customer and a positive work environment, and that's what we do."

Xerox, he points out, sold copiers at a premium price, but it was able to succeed because it peddled a quality product backed by superior customer service. "What Xerox did," he says, "was sell value."

He sees Detroit Thermal's strength similarly. For one thing, he says, Detroit Edison struggled with maintaining its steam business because that wasn't the company's primary focus.

"This wasn't DTE's core business, and I think that clouded their ability to grow," he says. "But for us, this is all we do. And we're not going away. We're investing in the system, and we're working hard to bring in new customers."

Taking a Metro Times reporter and photographer on a tour of the Beacon Street plant, he looks almost as out of place as we do, all of us wearing hardhats while navigating through a maze of serpentine pipes. But he's also, it seems, a quick learner, pointing out details of the facility, proudly ticking off the upgrades — especially the two massive new boilers.

What Detroit Thermal has to offer its customers, he says, is peace of mind: none of the capital expenses that are involved with installing your own boiler system, none of the costs that come with hiring the skilled operators needed to run and maintain them.

"What we do is take your headaches," he says.

As for the incinerator, despite the City Council's vote this summer, he expects the facility will somehow keep operating. "That's the inside information we're getting," he says.

And, should that information be wrong and the facility shuts down, then Detroit Thermal will simply crank up its own boilers and fill the void. That 75 percent of its steam currently comes from the incinerator won't be a problem.

"We aren't going away," he says. "We're going to continue providing services to the city of Detroit, we're going to invest in the system, and we're going to prosper."

Whether that occurs with steam coming from the incinerator remains an open question. The city has finalized negotiations with landfill operators, "but we're holding those numbers pretty close to our chest," GDDRA head Square says.

At this point, the only way the city is obligated to continue sending its trash to the facility is if the incinerator's private owners can meet the cost of the lowest landfill operator. But that doesn't necessarily mean the two current owners. Beginning in January, she says, there is a window of opportunity to sell the incinerator, and for a new owner to meet the best landfill price.

Square says there is also a possibility that, if there are no outside buyers, the city could end up becoming the owner at virtually no cost. But even if that does happen, she says, there are other complications that could well prevent the city from actually operating the facility.

However, a recent statement by Mayor Cockrel, who sided with the majority when still council president this summer and voted to stop sending trash to the incinerator, indicated he was considering keeping the plant open "for a year or two" to allow more time to get the whole mess sorted out.

"I think that when it comes to GDDRA, Mayor Cockrel's thinking has evolved," says Square. "And like other mayors before him, there are some things he has to let play out. But I can also tell you he's extremely green, and that he wants Detroit to be a greener place."

Which means what, exactly?

Only time will tell. But at this point, the future of the incinerator is a lot like that steam that floats from beneath Detroit. You know it's there, but there's nothing anyone can hold onto.

At least, not right now.

Curt Guyette is Metro Times news editor. Contact him at 313-202-8004 or cguyette@metrotimes.com.

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