YOUNGSTOWN, Ohio – A law firm under consideration by the city to assess the viability of SOBE Thermal Energy Systems LLC’s operations would perform a “deep dive” into the financially troubled district steam utility and make recommendations on how to move forward, Mayor Derrick McDowell said Monday.
“They have a relationship with the same folks who solved the steam issue in Cleveland as well as Akron’s energy issue,” McDowell told members of City Council’s Public Utilities Committee.
Legislation was introduced last month seeking City Council’s approval of $130,000 to hire Roetzel & Andress Associates, an Akron law firm, to “assess Sobe’s functionality and identify financially sustainable long-term solutions.” Council tabled the matter and referred it to the utilities committee, which recommended it be introduced as late legislation in time for Wednesday’s City Council meeting.
McDowell said that the firm would do more than simply assess the company’s viability. “We need the experts, the technical evaluations that go beyond just telling us what we already know about the functionality of the system,” he said. “We need to really be discussing options.”
Time is of the essence, however, as SOBE reported last week that it would be incapable of funding its operations past October if it did not secure new funding through an emergency tariff increase or other assistance.
McDowell said he met last week with representatives of the Public Utilities Commission of Ohio, the court-appointed receiver managing SOBE’s assets, John Collins, and the company’s employees.
Among the concerns raised during the meeting was the PUCO’s desire to move forward with an emergency tariff increase that would impact 23 downtown customers currently receiving steam heat services from SOBE. He noted that the receiver explained that the rate hike was needed to offset a substantial shortfall of incoming revenue.
“They have an operational budget of about $220,000 monthly, and they’re currently taking in half of that, around $110,000,” McDowell said. “Doing the basic math, the tariff increase would more than double the rates these users are now experiencing,” he said.
Adding to the challenge is that four customers on the system do not have meters to determine steam usage, and many of those that do own meters that often provide inaccurate readouts, he said.
McDowell said he’s concerned about how a rate hike would impact those users and others on the system. “We are concerned about the death spiral that could occur if users remove themselves from the system because of this more than doubling of these tariffs,” he said.
Other concerns include a $2 million outstanding debt the company owes Enbridge Gas Co. in unpaid bills.
Cost to Rebuild the Plant
Last week, SOBE’s Collins filed his first receiver’s report with the Mahoning County Common Pleas Court, warning that it would be forced to cease operations by September or October if it did not secure funding.
Collins added in his report that one of the greatest challenges facing the business is that the steam plant and its older boilers were razed by SOBE’s previous owner, David Ferro. Initially, Ferro had plans to replace the boilers with a system that uses synthetic gas produced from recycled tire waste. That project, however, never materialized. Since then, the operation has leased mobile boilers to provide heat.
“What is absolutely required in order to give SOBE Thermal an opportunity to become a viable business entity is a complete reconstruction of the steam plant,” the report said.
A cost estimate of rebuilding the plant was completed in March, and a request for emergency funding to reconstruct the plant was submitted to Gov. Mike DeWine, the report said.
McDowell on Monday told the committee that it would cost approximately $13 million to rebuild the steam plant and another $17 million to upgrade the infrastructure serving the downtown district, totaling approximately $30 million.
That leaves few viable options for the system, McDowell acknowledged. “We only have so many courses of action,” he said.
Two of these options – the creation of a customer co-op or a municipal-owned system – are not feasible at the moment, McDowell said.
Another option is a sale, the mayor said. Entities that had connections with SOBE when it operated as Youngstown Thermal have expressed interest in acquiring the system. However, Ferro, the current owner of SOBE, has indicated that he wants to retain control of the company, McDowell said.
“We’re still petitioning the state through the governor’s office,” he said. “We’re waiting to hear back.”
The district heating company was placed into receivership in late September after the PUCO determined that it could no longer deliver mandated services to its customers.
An 800-horsepower mobile boiler was disconnected and repossessed by its owners Sept. 30 after SOBE management failed to make payments on its lease obligations, leaving customers without heat or hot water.
The court appointed Reg Martin as SOBE’s receiver Sept. 26. A 650-horsepower boiler was secured to serve customers on the district heating line during the first week of October. Martin, however, acknowledged that the boiler’s capacity was inadequate to serve customers during the winter months. In December, a second 200-horsepower boiler was added, as the team worked to acquire another 800-horsepower boiler for the system.
Meanwhile, customers and officials pressed the PUCO to intervene and replace Martin as receiver, questioning his management of the company.
Martin resigned as receiver in February, and the court appointed Collins, an Akron attorney, to replace him.
Martin’s removal came after customers – including City Hall – lost steam heat service to their buildings during one of the most severe winter cold blasts in recent memory. Temperatures plunged to 17 degrees below zero at points, as SOBE struggled to maintain adequate heating for downtown buildings and their tenants. A ruptured water line led to the complete shutdown of the company’s two mobile boilers. A third, an 800-horsepower boiler, was secured during the first week of February.
However, that boiler experienced a system failure Feb. 8, while the 650-horsepower unit at the site also shut down. That left a single boiler with just 200-horsepower capacity in operation, which was inadequate to supply steam heat to customers.
The debacle forced several organizations and businesses to temporarily close.
Expertise Is Needed
McDowell said hiring consultants such as Roetzel & Andress that have had experience in turning systems such as these around is vital in this case. Akron’s operation, he said, transitioned from a system that cost the city $8 million a year to an operation with a $4 million profit.
“We cannot do this in-house; we cannot go at this alone; we cannot even present options on where we should go from here without having this expert evaluation,” he said. “We are bearing the burden that doesn’t belong to us.”
Just what options are available right now is anyone’s guess, the mayor added, cautioning that the city – which is also a customer of SOBE – cannot promise a fix to this problem.
“The users are initiating things that SOBE should have been doing. The city itself is initiating things on behalf of the utility that we should not be doing,” McDowell said. “But if we do not do this, we are going to see a collapse of a system that impacts 23 of our buildings.”
Mike Ray, 4th Ward councilman and committee chairman, expressed frustration with the lack of action from the PUCO and the mismanagement of SOBE from the very beginning.
“We’re fixing the problem that was dumped on us because the PUCO lost sight of it,” he said. He also vented his agitation at the company. “We knew this wasn’t a good idea – burning tires never made sense, and they were full of it. So at the end of the day, we have to spend more money because of these creeps.”