IRWINDALE — The organizers of a plan to construct a waste-to-energy plant in Irwindale are being sued for $11.5 million by a technical consultant who claims that the organizers never intended to build the plant but only wanted to profit from its financing.
The suit, filed in Los Angeles Superior Court, seeks $11.5 million from Pacific Waste Management Corp.; its parent company, Conversion Industries Inc., and Conversion's president, John P. McGrain, all with offices in Pasadena.
McGrain termed the allegations "absolute baloney," and said that Pacific Waste is committed to building the Irwindale plant and is continuing its efforts to obtain construction permits.
He said that the company has spent more than $7 million on the project. The company has refused to say how the money has been spent.
Expenses Paid by Bond Interest
Most of these expenses were paid by a $395-million bond issue sold by the Irwindale Resource Recovery Authority, an agency of the city of Irwindale.
Because the bonds were issued by a government agency and are tax-exempt, they carry a comparatively low interest rate. The proceeds were reinvested at a higher rate, generating an estimated $13 million in 18 months.
Pacific Waste was authorized to use the interest income to pay the project's development costs.
The lawsuit, filed in December by David P. Diggins and his consulting firm, Diggins Inc. of Laguna Beach, alleges that the defendants "set about to erect an elaborate charade whereby they misrepresented the capacity and profitability of the project in order to obtain the issuance of bonds."
"The sole interest of the defendants," the suit claims, "was to obtain the 'float' or 'arbitrage' between the interest paid on the bonds and the interest rate realized by investment of the proceeds from the sale of bonds."
Stephen J. Tully, attorney for Diggins, refused to elaborate on the charges or discuss evidence to support them.
Allegations Are Denied
Attorneys for McGrain, 40, a former securities broker, and the two companies have filed responses to the lawsuit that flatly deny the allegations.
The suit says that the defendants offered Diggins $1.5 million to serve as technical adviser to the Irwindale project about two years ago but repudiated the agreement a year later.
The suit seeks payment of the $1.5 million plus $10 million in punitive damages.
Diggins said in an interview that he put "quite a bit of work" into the project and that his efforts helped Pacific Waste obtain financing.
But, he said, he also developed figures that showed the project was economically infeasible. He said when he raised that point with McGrain, he was told that Pacific Waste did not intend to build the plant anyway.
McGrain insisted to The Times that the Irwindale project is feasible and denied that Diggins ever was hired for the project.
He said that Pacific Waste considered hiring Diggins to represent it in negotiations to buy equipment for the Irwindale plant because of his experience in that field, but did not because his fee was too high.
Proposed Power Plant
Pacific Waste has proposed construction of a plant that would burn 3,000 tons of trash a day to generate 80 megawatts of power, enough electricity to serve 40,000 homes.
The plant would earn money by selling the electricity to Southern California Edison Co. and by charging trash haulers for refuse disposal.
The company's contract with Edison sets rates for 10 years under which it could earn $736 million, plus additional bonus payments for reliability.
But if the plant is not operating by November, 1989, Edison has the option of terminating or renegotiating the contract.
Pacific Waste must obtain permits from both the state Energy Commission and the federal Environmental Protection Agency to build the plant.
Its state application was suspended April 1 and will not be reinstated until the company lines up waste-supply contracts and finds ways of offsetting air pollutants that would be emitted by the Irwindale plant.
The Irwindale Resource Recovery Authority sold $395 million worth of bonds for the project in December, 1984, under an agreement that promised the authority a share of the plant's income.
Initially the bonds were sold and the proceeds reinvested in six-month periods, with a spread between the interest rates on the bonds and those on the reinvestments ranging from 1.5% to 2.7%, yielding an estimated $13 million for the project's development fund.
Attorneys for Miller Brewing Co., which owns a brewery across the Foothill Freeway from the proposed site of the waste-to-energy plant and opposes the project, have asked the city of Irwindale for information about how interest from the bond issue has been spent.
Charles Martin, who is both city attorney and city manager for Irwindale, said he has written a letter to Manufacturers Hanover Trust Co. of New York, the bond trustee, asking for a report on expenditures.