Profile and analysis of a start-up manufacturer of waste oil and trash converters.
Keith Burnett says his machines offer a safe, affordable way for small businesses to dispose of waste oil and trash by converting them to usable -- and salable -- electricity. How can he miss?* * *
Keith Burnett isn't just starting a company, he'll tell you. He's creating a new industry. The 40-year-old mechanical engineer envisions his invention becoming as ubiquitous and essential as the personal computer and the fax machine. He calls it the Goldfire, representing as it does a kind of technological alchemy.
Burnett aims to create wealth and value from the lowliest of ingredients -- used motor oil and common trash. By converting waste to electricity in small machines, he hopes to build a business that will benefit the environment and, in the bargain, save his customers serious money.
The idea came to Burnett five years ago, while he was working for the Defense Department. He kept hearing about the landfill crisis, millions of tons of trash going to a fast-shrinking number of dumps. Then there was the controversy over waste motor oil. Some 1.35 billion gallons of it are produced each year by service stations, quick-lube centers, and private-vehicle owners, 52% of whom change their own oil.
Most of the commercially obtained oil, from quick-lube and service stations, is recycled. But each year 193 million gallons -- close to 20 times the amount spilled by the Exxon Valdez -- are wantonly dumped by do-it-yourselfers. They stick it in the trash, pour it down drains, or dump it on the ground, where it eventually contaminates wells and aquifers. It has posed such a problem that some states have sought to classify used oil as a hazardous waste.
"All this stuff has energy value," Burnett remembers thinking. "There has to be a way to build a small machine to turn it into electricity." The concept seemed so obvious that, at first, Burnett was sure that such a thing must already exist. Cogeneration itself was not new -- public utilities, for instance, had huge incinerators that burned trash for power. In scouring the files at the U.S. Patent and Trademark Office, however, Burnett found nothing that resembled a Goldfire.
Later, while working on jet-fighter programs at McDonnell Douglas Corp., he kept tinkering with the idea, building models in his home engineering lab at night. "I just sat down," he says, "and pretended that somebody had assigned me the task of designing a machine that turned the Btu [British thermal unit] content of waste into energy." He had no doubts that the machine could be built. There was nothing magical about it, after all. This was basic mechanical engineering.
As Burnett contemplated the market for his device, he thought of a quick-lube franchise as a typical customer. The average quick lube uses about $500 worth of electricity a month. It also ends up with some 1,500 gallons of used oil each month. By his calculations that was enough to generate $1,500 worth of electricity, from a machine that would cost about $17,000, installed.
That was more power than a quick lube could use, but a market existed for the surplus. The Public Utility Regulatory Policies Act of 1978 requires electric utilities to allow cogenerators to connect to the electric grid so they'll have a market for excess power. It further requires that utilities pay a fair rate for that power. Not only would a quick lube with a Goldfire be electrically self-sufficient; it would actually get paid each month by the utility for the surfeit.
"I had people all over the country chuckling at the thought of making the power company send them a check," Burnett says.
The more Burnett studied his potential market, the bigger it looked. Operations like Pennzoil Co.'s Jiffy Lube International Inc. were proliferating, with Texaco, Exxon, Quaker State, and others entering the quick-oil-change industry with chains of their own. And the Goldfire, Burnett knew, could make electricity not only from oil but from any combustible fluid. Those included paint thinners, mineral spirits, and other liquid wastes commonly generated by auto-paint and -body shops, municipal garages, and car and truck dealerships.
Turning waste into a profit center, however, was only one advantage. Just as important to many automotive people was that, by disposing of liquid waste on-site, they could escape environmental risk. "I had a Chevrolet dealer tell me that when the waste-oil truck drives away, he feels as though he should get down on his knees and pray," Burnett says. "If the truck gets into an accident and oil spills, the legal bills and everything could put him out of business. The liability issue is big."
Solid waste represented a second market segment. Through pyrolysis, the chemical decomposition of a substance (such as trash) by heat, Burnett knew he could make natural hydrocarbon gases from ordinary garbage. The gas would be stored in a tank resembling a large version of a camp-stove propane canister. The same Goldfire that ran on oil vapors also could run on natural gas, by virtue of a special carburetor. The potential here was enormous. He envisioned the units serving every shopping mall, office building, and supermarket in the country.
Then there was agricultural waste. By Burnett's reckoning, a farmer who grows corn, for instance, sacrifices $200 worth of power per acre when he plows stalks under the soil -- those stalks have energy value. His research showed there were at least 80,000 small farmers and 25,000 corporate farms in the country.
All told, Burnett counted nearly 600,000 potential customers, from Burger Kings to industrial laundries. He would need to build five different models, he figured, each capable of paying for itself within three years. A $7,500, 5-kilowatt version would handle small-business needs. For larger companies, he'd provide a 100-kilowatt number retailing for $49,500. The add-on solid-fuel device, the Gas-fire, comes in four sizes ranging from $7,000 to $18,000.
Burnett projected sales of $46 million in the first year, rising to $161 million in the second and $394 million in the third. He saw a total market approaching $22 billion in the United States alone, with much more overseas.
That was just on the commercial side. He also envisioned residential versions, no bigger than central-air-conditioning units and running on engines something like those used in lawn mowers. For about $2,000, a homeowner could put one out back and create electricity from yard waste, paper, food scraps, and the like. Refuse that would not turn to gas -- cans, glass, plastic -- would collect on a grate, to be scooped out. A home model might not meet a household's entire electricity needs, but it could help out while also alleviating the landfill crunch.
All the machines would be interconnected to the local utility's power lines. Installation could be handled easily by electricians for $500 or so. With routine maintenance, Burnett believed, the machines would last 20 years. By arranging the various components in a specific way and adding some proprietary features and design work, Burnett filed for a number of patents, which are pending.* * *
The opportunity was there all right -- Burnett was sure of that. As for starting a company, well, he'd faced bigger risks before. As a Navy SEAL team commander in Vietnam, for instance, he had taken part in commando raids to rescue POWs. Never doubting that Goldfire would perform, he and his wife, Mary, moved in spring 1990 to Bradenton, Fla., where they had honeymooned. "We could build this company anywhere," Burnett says. "Why not do it someplace we liked?"
All he needed was capital. Having spent $40,000 on designing the machine, and lacking funds to go further, he went to work for an engineering concern while he looked for seed money. A few venture capital firms seemed interested but nothing materialized. The fund-raising task ultimately fell to a man named Sunny Decker.
Decker, a local industrial-equipment salesman, quickly grasped Goldfire's promise. "Every business has two fixed-overhead items each month -- the electric bill and the trash bill," he says. "With a device that could eliminate both, you had a gold mine. So I volunteered to raise the money Keith said he needed."
At age 60, Decker has a huge number of contacts. Between October and January he raised $140,000, selling limited partnership shares at $4,000 each and taking a small equity stake himself. By the end of the year the Burnetts had moved into a 3,500-square-foot space in an industrial park, with part-time mechanic Decker supplying hand tools to build the units. Thus was born Waste Energy Inc.
Burnett knew he was undercapitalized, but he'd planned for that. His own operation is 25% fabrication and 75% assembly of parts from the likes of Westinghouse and Honeywell, supplied on a just-in-time basis. The steel cabinets for the Goldfire are built by a local metalworking shop. "By outsourcing, we cut our initial capital requirements by better than half," Burnett says. He got the company up and running for about $25,000.
Not that there weren't snags, like the time he lit up the first test unit and filled his little factory with smoke. "You couldn't see the back door from 50 feet away," he says. "It was a minor miscalculation, and we got it fixed." By last February Burnett and his tiny but talented crew were ready to unveil the first full-size Goldfire prototype. The local media and potential buyers were invited to take a look.
Iley Conley, president of a Bradenton Buick dealership, was so intrigued by the machine that he ordered a $41,500, 50-kilowatt model. "The concept is terrific for small companies like ours," Conley says. "Our trash bill is more than $1,000 a month, and we pay dearly to get rid of used oil and other things. I particularly want to avoid any liability for the waste we generate -- one of those Superfund sites has cost us thousands of dollars. If the machine can burn this stuff and create electricity to help run the business, it's a win-win deal for us."
The reaction was much the same in March, when Burnett hauled the machine to a Las Vegas trade show for owners of quick-change lubrication centers. He came home with contracts and commitments totaling $5.1 million, including some machines for a California man who wanted to help market them in Asia.
That wasn't too shabby for a company still doing research and development. Burnett had to move quickly into production mode, and to manage his accelerating operations he brought in Ed Hargaden, who had been general manager of Donzi Yachts by Roscioli International Inc.'s luxury sport-fishing line, also in Bradenton. But just as the company was scaling up to meet demand, the machine developed serious trouble -- hot spots in the combustion chamber. Burnett had to fall back on Plan B.
That was both good and bad. The Plan A machine was fairly sophisticated -- a combustion chamber hooked up to a turbocharger, which drove a generator through a transmission. The Plan B machine is much simpler; its heart is a Ford industrial internal-combustion engine (not unlike an auto engine) which turns a General Electric generator. The exhaust heat from the engine itself, reaching 1,150 degrees Fahrenheit, boils oil in a pressurized tank to produce the vapor that runs the engine. It is economically viable only if the fuel is pretty much worthless, which it is. A study done for the Environmental Protection Agency found that the salvage value of used oil had fallen from 20¢ a gallon in 1983 to minus 20¢ in 1988, as haulers in certain parts of the country charged to take it away.
The disadvantage of Plan B is that it takes 15% more vapor than Plan A to produce a given amount of electricity. On the up side, however, the Plan B machine is much easier to assemble. "We haven't abandoned Plan A," Hargaden says, "but it's way down in priority with me right now because we have something that works and will be much more reliable."* * *
Hargaden's biggest challenge, he admits, will be controlling materials costs to achieve the goal of a 25% pretax operating profit. "So far we've had good luck with our vendors," he says. "We're getting original-equipment pricing from just about everybody, and we're getting good credit. But once we start cranking out more machines, I'll have to work on refining our costs."
The company can produce three Goldfires a day from the Bradenton site, and perhaps 20 a day from a much larger, nearby facility it's considering. As business builds, Burnett foresees a network of 10 satellite plants, together turning out 200 machines a day.
"We'll put them wherever it makes sense based on sales patterns," he explains. "It would take a total investment of less than $1 million, because I can open a plant for $50,000. All we need are some benches, some hand tools, a loading dock, and a few desks. And there's not a lot of work-force training to do. We can grow our people as we proceed, and pick the best of them to run these new locations."
Executive vice-president Mary Burnett, a former executive-search consultant, runs the marketing side. Already she is contemplating private-label Goldfires, to be distributed through companies like Deere & Co., for the agricultural market. She's written a job description for a national account manager, someone who "could walk into corporate McDonald's, corporate Sears, and corporate WalMart" for mass orders. Product ads in such trade publications as Environment Today and The National Oil and Lube News should produce some leads.
But the backbone of the marketing effort, as she plans it, will consist of a nationwide direct-sales force of 600, working strictly on commission. Sunny Decker, now the Southeast regional sales manager, predicts he'll have no trouble attracting quality people -- his classified ad for sales reps in an Atlanta paper netted 87 inquiries.
Paul Lathrop, the sales manager for Florida, had previously sold automotive-service equipment. He joined Waste Energy because he sees such tremendous potential for Goldfire. "I know the problems car dealers have with waste oil, because I've sold them equipment to handle it," he says. "Everybody who generates waste oil knows the situation is going to get worse before it gets better. Right now they give the oil away, at best. When I say I can make a gallon of that oil worth $1.35 in electrical savings, I get serious interest."
In fact, once Lathrop explains the machine's benefits, most prospects say they could hardly afford not to have it. "They don't want to be hassled with getting permits or with the installation," he says. "So I tell them we are going to do this turnkey for them, and that's what they want to hear."* * *
The issue of getting permits, however, may not be so cavalierly solved. Woody Mason, a jack-of-all-trades at Waste Energy, spends several days a week trying to decipher a bewildering morass of state environmental codes. His biggest problem is that the Goldfire falls into a gray area of technology.
"Not many people know how to classify this machine," he says. "It's not a burner or an incinerator or a boiler, so it doesn't fit into the normal categories. What we really have is a mini oil refinery. It filters and refines the oil to remove contaminants -- the emissions are probably no worse than what comes out of a car. And the natural gas from the solid waste is as clean a fuel as you can get."
All that will have to be demonstrated, and in the meantime just figuring out who needs what proof is a vexing challenge for Mason. Some states, he explains, grant exemption from air-quality regulations to any machine that produces less than 1 million Btus per hour -- that would exempt even the largest Goldfires. Other states want a permit for everything in sight.
"In California," he says, "you've got a real can of worms, because there are 33 separate air-quality-management districts, each with the authority to implement emissions standards stricter than the minimum required by the state. In Texas air-quality standards are first handled by the water bureau, and it passes its decision on to the air people. If water quality finds a unit exempt, then air quality has to pass judgment on it."
Dealing with the public utilities, another of Mason's roles, is no piece of cake, either. There are some 7,200 power companies in the country. Despite the federal law requiring them to purchase cogenerated power, they are hardly champing at the bit to get it. They regard systems like Goldfire as a threat to the well-ordered status quo, Mason says. Their electrical engineers are used to dealing with megawatts and gigawatts of power from huge cogenerators. "We're just a pain for them to fool with. We're like a gnat -- swat, and we'll go away."
"Most utilities are playing it straight with us, but others have a knee-jerk reaction that they need to protect their revenue base," says Burnett. "So they do whatever they can to slow us down. We had one utility tell us that it would need a design review before approving an interconnect. They said it would cost $25,000 and would take two years."
But Burnett seems largely unfazed by such obstacles. Eighty percent of Goldfire users won't generate more power than they themselves can consume, anyway. And Burnett knew all along that a company like his would need a strong customer service department to handle bureaucratic resistance. There are no problems, he says, that can't be solved.
Such are the pangs of launching a new industry. "I knew we'd run into some real hard walls, and we have," says Mary Burnett. "We're just going to have to break them down or crawl over them. But it's hard. I'd rather have another baby than go through this again."
Waste Energy Inc., Bradenton, Fla.
Concept: Manufacture and sell small machines enabling companies to convert their trash and waste oil to electricity to run their businesses. Excess electrical capacity could be sold back to local power companies. Eventual expansion into residential market* * *
Projections: Sales of $46 million in the first year, $161 million in the second, and $394 million in the third. Total U.S. commercial market seen to be $22 billion. Aiming for pretax operating profit of 25%* * *
Hurdles: Obtaining U.S. and foreign patent rights; controlling materials costs as production gets under way; winning permits, where required, from state environmental regulators; maneuvering through bureaucratic intricacies of the country's 7,200 public utilities* * *
Keith G. Burnett
Family: Divorced; remarried; three children by first wife
Personal funds invested: $40,000
Equity held: 72.5%, together with spouse, Mary Burnett
Workweek: 60 hours
Education: Baylor University, physics
Other companies started: Burnett Design, Amarillo, Tex.; designed underground houses
Last job held: Consulting engineer* * *
Waste Energy Inc. Projected Operating Statement
($ in thousands) Year 1 Year 2 Year 3
Sales $45,829 $161,323 $393,861
Cost of sales $15,288 $53,868 $131,967
Gross Profit $30,541 $107,455 $261,894
Marketing costs $7,802 $27,427 $66,957
Salaries and general $3,181 $10,893 $26,588
and administrative costs
Pretax Income $19,558 $69,135 $168,349
WHAT THE EXPERTS SAY
WALTER A. ZITLAU
Former president and chief executive of San Diego Gas & Electric Co.; now a consultant for independent power producers
Burnett's customers apparently will qualify as small power producers under the Public Utility Regulatory Policies Act (PURPA). Before they can sell any energy back to the power companies, they will have to get "qualified facility" numbers from the Federal Energy Regulatory Commission. That's not terribly difficult to do. But after that, either they or Waste Energy will have to negotiate contracts with the particular utilities they wish to tie into. That can get tricky because the utility's legal department always gets involved.
Some utilities are quite friendly to cogeneration. Others are more standoffish, but under PURPA they have to negotiate -- you are entitled to be paid the utility's "avoided cost" for any power you sell back to it. Avoided cost is not fuel alone; it includes fixed costs as well. So avoided-cost calculations are complicated.
The small power producer has an advantage in that, presumably, it will be selling power back during its hours of operation, say, 6 a.m. to 9 p.m., Monday through Friday. That coincides with the utility's peak-load period. But to get a good contract, a company must show the utility that it is going to be operated intelligently and on a continuing basis.
General partner, Edison Venture Fund, Lawrenceville, N.J., a $100-million venture capital firm with a half dozen investments in environmental companies
Overall, this thing has a certain appeal. However, I see three potentially overwhelming negatives. First and most important, how reasonable is it to ask these small operators to tackle the complex task of securing environmental permits for this kind of facility, as well as to monitor and comply with the ever-changing body of regulations? If Waste Energy wants to assist in the permit process and offer it as a customer service, it will have to become expert in air-quality and other regulations of all 50 states.
It is also quite possible that mandated air-emissions controls will make these units uneconomical. In that case, you'd have to wonder if centralized off-site alternatives for disposal of waste oil and other trash would have the advantage of significant economies of scale.
Finally, there is the question of what the residuals from these units will be. In the worst case, you could be turning nonhazardous waste into hazardous waste by converting waste oil and solid waste into small quantities of ash or other residuals that are considered hazardous.
Owner of a $250,000-a-year Texaco Express Lube in New Haven, Conn.
I have ordered a $16,500 Goldfire, which is a big investment for someone like me. I haven't paid for it yet, because first I want to see one that's working under stress conditions to see how it holds up. Its reliability is my biggest concern.
We generate around 1,000 gallons of waste oil a month, and we spend about $500 a month on electricity. I get 10¢ a gallon for the used oil -- $140 a month, tops. This unit would wipe out our power bill and provide enough electricity to sell maybe $150 or $200 a month back to the power company. My only bill would be a bank note of $400 a month, for five years, on the loan to buy the machine.
I figure I'd roughly break even for about five years, even if I don't get paid anything from the electric company, because I could depreciate the machine. Once it is paid off, the savings will go right to the bottom line. And if you can avoid the liability you face when waste oil leaves your site, that alone is probably reason enough to buy one.
Chemical engineer and former chief financial officer of International Power Technology Inc., a cogeneration concern; now a consultant on cogeneration
There's a tendency for customers to underestimate the auxiliary costs of using a product like this. Look at the example of the farmer with $200 worth of energy in cornstalks. Maybe that's true, but who is going to go out to pick up all that stuff and feed it into the machine? Those kinds of costs are real.
The customers here don't understand power generation and don't want to think about it. So it's natural for the supplier to offer turnkey installation, permitting, performance guarantees, and maybe warranties. Those are all reasonable for the customer to ask for, but they are expensive to provide. If you are not really careful, your business costs can get out of hand. This is remarkably complicated stuff -- dealing with air-quality people, negotiating with utilities -- and takes considerable resources and energy. You might win, but it could be a Pyrrhic victory.
But assuming all those things go well, the barriers to entry are still relatively low. Burnett talks about opening a plant for $50,000. I was in charge of intellectual property at my old job, and it is very difficult to come up with a patent that would preclude competitors from offering something very similar. He can't get a patent on burning waste oil to make power. What he can do is get a bunch of operating units in the field and get experience on them. Then he has a leg up on everybody else. You can't buy operating experience.