Suit Focuses on L.A Port’s Use of Funds

To improve harbor safety, the Port of Los Angeles launched an ambitious plan to relocate cargo terminals for crude oil, petroleum products and other hazardous shipments to a man-made island away from populated areas.

The Army Corps of Engineers prepared detailed studies for the “energy island” project. The port sought special state legislation, and Congress authorized $108.6 million to help build the island by dredging deepwater channels so giant oil tankers could call at the terminal complex.

After nearly two decades of planning, construction commenced. Then port officials changed their minds. They decided to turn the island into a massive cargo terminal for Maersk Inc., the world’s largest shipping line.

Completed with much fanfare in 2004, Pier 400 made Los Angeles the nation’s premier container port, eclipsing neighboring Long Beach. But the project has since plunged the city’s Harbor Department into a sea of controversy -- and federal court.

Community activist Stanley D. Mosler has filed a false claims lawsuit against the port, Maersk and former harbor Executive Director Larry Keller. Keller resigned in 2004 amid concerns about his leadership and investigations into harbor contracting practices.

At issue is whether the port violated federal agreements to build the energy island and misappropriated its federal money and almost $1.1 billion in harbor revenue to construct the Maersk terminal.

What port officials did “amounted to a classic bait-and-switch maneuver,” said Mosler, who lives in Rancho Palos Verdes. “This is like leasing a stolen car. The port stole energy island and gave it to Maersk.”

U.S. District Judge S. James Otero is considering motions by both sides that could decide the case.

Attorneys for the port declined to comment. But Keller and Maersk contend that Mosler has no evidence of impropriety.

In court papers, port officials argue that they did not misappropriate funds because the port was under no legal obligation to commit a large portion of the 590-acre island for hazardous shipments.

They also pointed out that 15 acres of the island are still available for crude oil, petroleum products and chemical terminals, although initial plans called for up to 265 acres for such facilities.

In a recent court declaration, Vernon E. Hall, the port’s former development director, who worked on the energy island project for 17 years before retiring in late 1997, said that 15 acres does not satisfy the port’s federal agreement.

In addition, government and court records indicate that so little of the port’s original plan remains that some, if not all, of the channels and turning basins dredged for large oil tankers may no longer be needed. The port spent about $400 million to deepen the harbor and build the island.

Though enormous, Maersk’s containerships don’t require the same deep-water channels.

Upset about the port’s decision to forgo its original plans, neighboring Wilmington and San Pedro homeowner groups and activists said that no hazardous cargo terminals have been relocated in 25 years despite repeated promises.

“We need to move these terminals as far away as possible from populated areas,” said Jesse N. Marquez, executive director of the Coalition for a Safe Environment in Wilmington. “The port needs to make up for this, but it doesn’t have any plans to deal with our concerns.”

Marquez and other activists insist that the danger is real despite port assurances that safety has improved. In July, a tanker loaded with a fuel additive experienced problems with its safety system while at berth, forcing the temporary shutdown of a nearby container terminal.

Earlier this year, the State Lands Commission, which oversees coastal areas, issued a report stating that the more than 80-year-old Valero and Exxon Mobil terminals were in poor condition and at high risk of a major oil spill during an earthquake.

Port officials said there are ways other than relocation to improve the safety of the harbor’s nine cargo terminals that handle crude oil, petroleum products and chemicals.

Some terminal facilities have moved or closed over time, and other measures have been taken to reduce the risk of explosion, fire and toxic releases.

“Historically, we had a problem, but we have worked with customers and changed the types of shipments they handle to eliminate hazardous footprints over the community,” said Geraldine Knatz, the port’s executive director.

Harbor officials said they also have discussed reviving plans for relocating and consolidating hazardous cargo facilities, this time on Terminal Island.

The goal of moving chemical and oil terminals to an island facility dates to 1980, when port officials added it to the harbor master plan.

Four years earlier, nine people were killed and 58 injured when the tanker Sansinena exploded at the Union Oil Terminal. In 1972, a fire at the heavily contaminated GATX Annex Terminal destroyed 17 chemical storage tanks.

In the early 1980s, eight of 16 hazardous cargo terminals were deemed good candidates for relocation, including four to the proposed Pier 400. Planners hoped to eventually move all hazardous terminals to the island.

Over the next 17 years, port officials planned a 500- to 600-acre facility south of Terminal Island. A container terminal, a rail facility and a transportation causeway would be built on the remainder of the landfill.

To construct the island, the port was required to compensate for the loss of marine habitat. It obtained state legislation allowing it to contribute almost $55 million to restore Batiquitos Lagoon in north San Diego County, with lawmakers citing the safety benefits of relocating hazardous terminals.

In March 1997, the port and federal government entered into an agreement to dredge the harbor and build the island from landfill, consistent with plans described in the project’s feasibility study.

Widely supported by the community, the energy island would have had the latest pipelines, pumps, storage tanks and emergency measures to handle some of the port’s most toxic, flammable and explosive cargo.

Heavily loaded tankers could be safely and easily accommodated, the old terminal sites cleaned up and the capacity for chemical and petroleum shipments expanded.

But all that changed in 1998 as construction proceeded. That summer harbor officials lined up Maersk as a potential tenant.

Keller, a former Maersk executive, helped recruit the company. At the time, his home in the upscale Naples section of Long Beach had been financed with a $300,000 loan from Maersk.

Keller, who denied any conflict of interest, recused himself from lease negotiations and refinanced his home.

Maersk later entered into a 25-year lease with options to extend its agreement to 40 years and expand its 484-acre facility.

Port officials predicted the terminal would create 58,000 jobs and pump $3.4 billion into the regional economy, including $2 billion in harbor revenue.

In his lawsuit, Mosler argues that if port officials wanted to shelve the original energy island plan, they needed to go through the formal review process again and receive a new authorization from Congress.

Among Mosler’s evidence is a Sept. 10, 1998, port memo that states that shifting plans to construct the Maersk terminal would compromise federal funding.

In his court declaration, Hall, the former port director, interpreted the memo as a warning: If the Maersk terminal was built, it would violate agreements under which federal funds were obtained.

The author of the memo, Stacy Jones, a former program manager for Pier 400, contested Hall’s view in a separate declaration. To her, the change in plans meant that it would reduce the federal contribution, increasing the port’s share of the costs.

In court papers, port officials stated that they needed to change the energy island plan to a giant container terminal because there was no market for oil and petroleum terminals. Tenants resisted the idea as too costly, the papers state, and volumes of crude oil, petroleum and chemical products were declining.

From 1996 to 1999, the volume of liquid bulk cargo dropped from 17.3 million tons to 10.2 million tons, harbor statistics show.

But that trend has since reversed. Liquid bulk shipments have steadily increased since 1999 to 12.8 million tons last year. A 2005 report by the California Energy Commission predicted that more petroleum terminals will be needed in the future. And building such facilities in the Los Angeles area will be difficult, the study concluded, because land is scarce.

In their defense, port attorneys argue that the harbor’s agreement with the federal government does not specify how the island’s uses were to be divided up.

The port also contends that the government was informed of project changes and never objected.

But Mosler said that there is no documentation showing that the Army Corps of Engineers, responsible for oversight, ever approved the Maersk terminal.

In addition, he alleges that the corps never certified the completion of Pier 400 to ensure that federal funds were used as authorized.

Port officials said they have no certification records. Although the corps is still researching its records, it said in a prepared statement that the agency generally certifies federal expenditures as they are made.

In their statement, corps officials sided with the port and did not consider building a giant container terminal to be a substantial change to the original energy island plan:

“Pier 400 remains identified for container and liquid bulk facility use, and the only change that has occurred is an increase in acreage devoted to containers.”