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City both regulates, profits from frac sand (12/02/2012)


CD Corp., lessee and operator of the Winona Port Authority commercial harbor, has requested an amendment to its permit to double the number of barges containing frac sand it could transport from the dock, from 24 to 48 each month. If CD Corp. is granted the expansion, the city’s Port Authority would also share in the profits, and would collect more than $160,000 in tonnage fees.

The recently completed $1.4 million Winona Port Authority dock is one of two properties the Port owns that are leased for frac sand operations, making a profit for the city agency.

The City of Winona is also responsible for regulating the frac sand industry, and has been studying a host of potential new regulations for months. A draft list of rules is expected to be the subject of upcoming public hearings to be held by the Winona Planning Commission and Winona City Council.

Could the present situation—the city both regulating and profiting from the frac sand industry—present a conflict of interest? No, according to City Manager Judy Bodway. "I don't see a conflict with that," she said.

The city imposed an emergency moratorium in March 2012 that prohibited the operation of new frac sand businesses, and constrained existing sand businesses from expansion. The moratorium, however, did not apply to CD Corp. or the city's commercial harbor. Since that time, CD Corp. has expanded its frac sand activities at the site from six barges transported during the 2011 season to about 50 barges this year, according to Dan Nisbit, CD Corp. owner.

City regulates

After six months of intensive study of the silica sand industry, the Winona City Planning Commission is ready to present its final regulatory recommendations. The draft rules would change the existing mining ordinance to more specifically address quality of life, road wear, water permitting, and air quality.

In early July, the Planning Commission voted to approve language requiring all silica sand mining operations conduct weekly moisture level tests, and to ensure that all stockpiles contain at least three percent moisture; the City Council adopted that change. However, Assistant City Planner Carlos Espinosa recently recommended a "more reasonable" moisture level of 1.5 percent, which is also the moisture level sought by Nisbit in his variance request for CD Corp.

“The three percent moisture content was a little bit too tough for the industry to work with,” Espinosa explained, after talking with the Minnesota Pollution Control Agency. “And, the 1.5 percent moisture content still achieves the goal of reducing hazardous dust.”

Nisbit explained that sand brought to the port is “sopping wet.” When sand first arrives from the washing facility, Nisbit said, it contains about 12 percent moisture. The sand holds the high moisture level for about four to eight hours, when the level drops to six percent moisture. Within two days, he added, it is down to three percent.

“[The change in the recommended moisture level] was really to better accommodate the industry as a whole,” Espinosa said.

CD Corp.’s current CUP language requires that the company submit a log of all moisture readings to the city on a monthly basis. Also, it requires that a city official be present at the dock to measure moisture levels each time a barge is loaded. However, while CD Corp. loaded 50 barges at the port during the 2012 season, only once did city officials check the moisture levels.

“Mayor Miller and Carlos [Espinosa] came to the site to see what the three percent moisture looked like and they could see the water flowing out of the sand,” Nisbit said. “Obviously, they saw no dust.” Espinosa said the city conducts weekly “drive-bys” of the site but does not supervise each barge that is loaded. He said CD Corp. self-monitors for proper moisture levels and inquiries about moisture level records should be directed to the business itself.

City prompts lawsuit talk

In early June 2012, the city council added stipulations to the CD Corp. CUP. The council restricted CD Corp. to shipping sand obtained from facilities operated by Robert Hemker or Steve Kohner in Winona, and no one else. They also added that

if any Wisconsin sand facilities wanted to deliver sand to CD Corp., they would also need a CUP. Councilmen Gerry Krage and Al Thurley voted against that CUP amendment.

The decision quickly prompted several council members, business leaders, and Nisbit to question not only the specifics of the language, but also the legality of the decision. Nisbit went on the record to say that a lawsuit could be in the works over the restrictions. "We haven't made any decisions yet," Nisbit said in July. "We are exploring our options and we just have to wait and see what happens."

Winona City Attorney Chris Hood addressed the council's decision, and said it was a reasonable condition that was made to protect the health, safety, and welfare of the public. However, Thomas Cotter, antitrust law professor at the University of Minnesota Law School, said Nisbit had a civil case that could be argued.

"I would tend to think the only recourse, assuming that all of the rules, whatever they are, for awarding contracts, have been properly followed, would be some sort of constitutional claim, that the city’s policy is arbitrary and capricious and, therefore, some sort of due process violation, or that the amendment of the CUP somehow constituted a taking, for which just compensation is due,” Cotter said.

City profits

CD Corp is a private business that leases the Winona Port Authority harbor for $110,000 a year. When it begins to use the new dock, it will also pay a fee of 28 cents per ton on commodities handled there. During the 2012 season, the business routed all of its frac sand through the old dock for transport. That dock is expected to be retired next season. Because the company used the old dock, it did not pay the Winona Port Authority a tonnage fee for the 50 sand barges that were loaded there, but will pay the 28-cent fee next season, when it is expected to use the new $1.4 million publicly-owned dock exclusively.

In preparation to move to the new, larger dock, Nisbit has filed the variance request seeking to amend his CUP to increase the number of barges his company can load.

“We’re looking to become more efficient as a business and the added barges may seem like more trucks on site, but it’s actually going to be more efficient than before,” Nisbit said. “The sand we are getting is coming from near Arcadia and there is a wash plant on that site so the smaller material will be taken care of there and trucked here. It sounds much worse than it really is. It will actually be much more efficient.”

The Winona Port Authority also leases land to Robert Hemker for a planned frac sand processing facility in the East End Industrial Park. The 4.42 acre site is currently leased with an option to buy for $192,535 -- or $1 per square foot. Hemker pays $20,000 annually to lease the land, as well as several smaller amounts for the option to purchase the property. The lease term is five years, with an option to renew for another five years.

Winona Port Authority: the city’s financial ‘arm’

The Winona Port Authority operates much like an Economic Development Association (EDA) might function in a city without a commercial harbor, pursuing a city's economic interests. It owns public land, which it can then sell. For instance, the Port sold the “industrial” land where Walmart was developed. It also borrowed the money necessary for the construction of the Pelzer Street railroad overpass.

One city council member sits on the Port Authority board. The Port Authority may levy taxes, but the property tax amount collected from city taxpayers must be approved by the Winona City Council.

“[The Port Authority] is the economic development arm for the city,” said Bodway.  


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