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Seattle port's clean-fuel incentive program under scrutiny from state auditor

Dec 14, 2012 07:25 PM

Audit: Port exceeded its authority with At-Berth Clean Fuels funds

The following is a portion of an announcement from the Washington State Auditor's Office regarding an audit of the Port of Seattle:

The Port exceeded its authority when it funded an incentive program.


In July 2009, the Port entered into an agreement with the Puget Sound Clean Air Agency to administer a program designed to reduce diesel emissions from maritime industry activity in the Puget Sound Region. The agreement provided $2.2 million through June 2012 for the At-Berth Clean Fuels (ABC Fuels) Incentive Program. The ABC Fuels program reimbursed shipping lines to use low-sulfur fuel while berthed at the Port. Reimbursements ranged from $1,200 to $2,850 for each berth, depending on the amount of low-sulfur fuel used.
Our audit identified the following concerns related to the Port’s agreement:
Exceeding authority


Prior to the July 2009 agreement with the Agency, the Port performed a legal analysis to determine whether it had the authority to administer air-pollution reduction programs. The Port concluded that certain aspects of air-pollution reduction programs were outside of its authority and entered into an agreement with the Agency to operate the ABC Fuels program. The Port may not pay another party to perform the activities it is not authorized to do.
Oversight of contracted services


The agreement with the Agency lacked a specific description of the services to be provided by the Agency. It did not provide the Port with a right to refuse payment or other remedy should the Agency spend the money for purposes beyond the Port’s authority. Additionally, the Port did not pre-approve Agency expenditures of port funds to ensure they were for allowable purposes.

Gift of public funds


The Port, through the Agency, used public funds to pay for fuel for shipping lines. The Port believes these payments assisted it in promoting itself and in attracting shipping lines. However, under the state Constitution, use of public funds to promote trade is considered a gift of public funds unless the Legislature has expressly authorized the type of payment. The Legislature did not authorize this type of payment. Moreover, the Port did not have agreements with these ship operators, and it could not demonstrate what it received in return for purchasing the fuel.
Because the ABC Fuels program is outside of the Port’s authority and because the Port did not receive legally sufficient consideration, all of the program’s costs are considered unallowable use of Port funds.


We recommend the Port ensure its activities, including contracted services, are within its statutory authority.

We further recommend the Port establish internal controls to ensure:


 Contracts with third parties sufficiently describe the work to be performed and monitoring is performed to ensure the work is completed before payment is made.


 Public funds are only spent on allowable activities and are not considered a gift of public funds.


When performing our audit we considered the following requirements:


RCW 53.08.040, Improvement of lands for industrial and commercial purposes – Providing sewer and water utilities – Providing pollution control facilities.


State of Washington Constitution:


Article VIII, Section 7


No county, city, town, or other municipal corporation shall hereafter give any money, or property, or loan its money, or credit to or in aid of any individual, association, company or corporation, except for the necessary support of the poor and infirm, or become directly or indirectly the owner of any stock in or bonds of any-association, company or corporation.


Article VIII, Section 8

The use of public funds by port districts in such manner as may be prescribed by the legislature for industrial development or trade promotion and promotional hosting shall be deemed a public use for a public purpose, and shall not be deemed a gift within the provisions of section 7 of this Article.


The Port provides the following information related to the findings of this audit:


This response addresses all three findings made by the SAO regarding the ABC Fuels Program.


The Port entered into an agreement with the Puget Sound Clean Air Agency (“PSCAA”), a state government agency that has the authority to monitor and maintain air quality in this region. The agreement was narrowly focused on finding ways to reduce air pollution from maritime activities originating in Elliott Bay, especially diesel pollution. The largest share of this diesel pollution (78%) is generated by ocean-going vessels (“OGV”), most of which call at the Port’s container terminals. The Port partnered with PSCAA by entering into an agreement whereby PSCAA would pursue and implement measures that would address maritime pollution. The agreement did not specify the kinds of programs that had to be implemented, but did require that the programs be directed towards reducing maritime pollution. The At-Berth Clean Fuels (“ABC Fuels”) Program arose out of this contract.

The ABC Fuels Program, as funded by the PSCAA, has been lauded by the maritime business community as being friendly to industry without being heavy-handed. The program is designed to encourage and provide an incentive to OGVs to burn cleaner diesel fuel while moored in Seattle. Because cleaner diesel fuel is more expensive, the PSCAA, with the Port’s assistance, designed the ABC Fuels Program to make up the cost differential between regular and cleaner diesel. The program has been very effective as demonstrated by the fact that in the short time since the program began, diesel particulate emissions from OGVs while at berth have gone down by 34%. This kind of pollution reduction incentive program is present in other ports in the United States, including those that are competing with the Port of Seattle for this same shipping business. The ABC Fuels Program is touted by the Port when it meets with OGV companies and it is part of the list of incentives that make Seattle a desirable destination for cargo ships.


The Port understands the SAO’s position and recognizes that it is not unreasonable to take the view that the contract exceeds the Port’s authority. The Port believes, however, that it is equally reasonable to view the contract as one for the purchase of general services designed to reduce maritime pollution from Port facilities. The specific service (the ABC Fuels Program) was not specified, identified, or mandated in any way under the agreement and the PSCAA could have spent the money on other programs, so long as that spending was within the general scope of reducing maritime pollution. Because the money was spent at the discretion of the PSCAA and not directed by the Port or required by the contract, the Port believes the Port’s payments to the PSCAA were within the Port’s powers.

The SAO contends that the PSCAA agreement did not allow the Port to refuse payment or provide a remedy if the Agency spent the money for purposes beyond the Port’s authority. In response, the Port would like to highlight two issues. The first is that the Port did not believe the contract exceeded the Port’s authority (see discussion above). The second is that the Port did have remedies available. If the PSCAA had spent money beyond the specified scope, the Port could have brought a legal action for damages and specific performance. The Port also had the ability to terminate the contract for any reason after giving proper notice to PSCAA.


The SAO’s determination that the Port made a gift of public funds through this program is based on the assertion that the contract exceeded the Port’s authority. As discussed above, while that is not an unreasonable interpretation, it does not preclude the Port’s interpretation regarding the validity of the contract. The SAO has correctly cited case law authority that public funds cannot be used for trade promotion. The Port suggests, however, that more recent case law from the state Supreme Court has recognized that governments’ proprietary powers are broad and these cases may supersede the limitations described in the 1965 case cited by the SAO as authority.


The Port will review the ABC Program in light of the SAO’s findings and will work with the SAO to reconstruct the program so that it meets the SAO’s concerns. Auditor’s Remarks
The Port is responsible for how public funds are used. It is the Port’s responsibility to ensure that all its public funds are used for an allowable purpose. In addition, the Port must function within its statutory authority. We reaffirm our finding.

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