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United States Conference of Mayors Urban Water Council 2005 Urban Water Summit September 30, 2005 Albuquerque, New Mexico. Hawkins. Delafield & Wood LLP. Eric S. Petersen, Law Partner Hawkins Delafield & Wood LLP New York, NY. PROJECT ELEMENTS.

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eric s petersen law partner hawkins delafield wood llp new york ny

United States Conference of MayorsUrban Water Council2005 Urban Water SummitSeptember 30, 2005Albuquerque, New Mexico

Hawkins

Delafield & WoodLLP

Eric S. Petersen, Law PartnerHawkins Delafield & Wood LLPNew York, NY

project elements
PROJECT ELEMENTS
  • 4 MGD reverse osmosis treatment plant with pretreatment
  • 8 groundwater extraction wells
  • 5,000 acre feet annual production
  • Raw and finished water pump stations and transmission lines
  • Brine disposal line
challenges
CHALLENGES
  • Limited staff availability
  • Limited expertise in groundwater treatment technologies
  • Aggressive schedule to meet deadlines for $250 per acre foot subsidy from Metropolitan Water District
project goals
PROJECT GOALS
  • Assure adequate water supply through local sources
  • Avoid constructing large water reservoir
  • Accelerated schedule
  • Improved technology
  • Single source responsibility
  • Performance – based contract
  • Private sector financing risk
slide5

PROCUREMENT GOALS (1): EARLY PRICE CERTAINTY

DBB

  • City design costs 6 -10% of construction cost
  • Bidder's price may exceed designer's estimates
  • Project may be delayed or re-designed

DBO

  • City design costs 1-3% of construction cost
  • Proposers design to level necessary to guarantee price
  • City obtains price and performance guarantees for low cost
procurement goals 2 change orders minimized
PROCUREMENT GOALS (2):CHANGE ORDERS MINIMIZED

DBB

  • Bid protests can be common
  • Construction monitoring is 6-8% of construction cost
  • Change orders can be prevalent
  • Litigation often accompanies contract awards and change order disputes

DBO

  • Proposals protests are uncommon
  • Construction monitoring is 1-2% of construction cost
  • Change orders are rare
  • Procurement Litigation is rare
dbo procurement
DBO PROCUREMENT
  • CA Government Code 5956
  • RFQ/RFP Process
  • Concurrent Price, Non-Price Review
  • “Best Value”
  • Staff Selection
  • Council Contract Approval
timeframe
TIMEFRAME
  • 1993 – 2000 planning
  • 2000 – RFQ Process (Eco Resources, Earth Tech, Ionics)
  • 2001 – RFP Process
  • 2002 – Contract Execution and Financing
  • 2003 - 2004 – Permitting Construction and Commissioning
  • 2005 – Operations
participants
PARTICIPANTS
  • City of San Juan Capistrano (CVWD)
  • Advisors – Pirnie and Hawkins
  • Contractor Team – Eco Resources, Boyle Engineering, and ARB, Inc.
  • Guarantor – Southwest Water
  • Financing – Lehman Brothers and AMBAC bond insurance
city retained rights and responsibilities
CITY RETAINED RIGHTS AND RESPONSIBILITIES
  • Ownership of assets
  • Ownership of system revenues
  • Setting user rates
  • Capital planning
  • Bond financing (tax-exempt)
  • Securing sites and rights-of-way
  • Obtaining water rights (San Juan Basin)
  • Obtaining MWD Subsidy
pricing and performance guarantees
PRICING AND PERFORMANCE GUARANTEES
  • Fixed Design-Build Price ($25 million)
  • Fixed Annual Service Fee ($1.1 million); Electricity ($1.0 million)
  • Water Treatment (7 enhanced standards)
  • Water Delivery (5,280 acre feet/year)
  • Production Efficiency (80%)
  • Hydraulic Transients
  • Electricity Usage (Guaranteed Maximum Utilization of 9,092,300 KWH/year and Guaranteed Max Demand of 1,275 KWH)
risks transferred 1
RISKS TRANSFERRED (1)
  • Internal disputes among designer, builder, operator, and equipment supplier
  • Design, permitting, construction and operating cost overruns
  • Scheduled Acceptance Date (2 years: permitting, design, construction, commissioning, acceptance testing)
  • Extension Period
risks transferred 2
RISKS TRANSFERRED (2)
  • Subsurface geotechnical risk
  • Regulatory compliance (fines, penalties)
  • Capital maintenance risk (major maintenance, repair and replacement)
  • Energy consumption excesses
  • Loss of MWD subsidy due to Company non-performance
focus on permitting risks
FOCUS ON PERMITTING RISKS
  • DHS Domestic water supply permit
  • Pilot testing
  • Terms and conditions
  • Delay
  • Non-issuance
  • Payment for permitting design costs
risks not transferred 1
RISKS NOT TRANSFERRED (1)
  • “Uncontrollable Circumstances”
  • Pre-existing environmental conditions
  • Specified site conditions
  • Buried infrastructure repair costs
  • Changes in law
  • Force majeure
risks not transferred 2
RISKS NOT TRANSFERRED (2)
  • Raw water quality exceedencers
  • General electricity rates (Indexed)
  • General price inflation (Indexed)
  • General interest rates
security for performance
SECURITY FOR PERFORMANCE
  • Southwest Water

(Parent Guaranty)

  • Performance and bonds
  • Letter of credit (1.5 years debt service – for AMBAC)
  • No stated monetary limit on liability
dbo savings
DBO SAVINGS
  • Source of savings
    • Core competency
    • Competition as to design; operator-driven
    • Competition as to operation
    • Cooperative relationship between designer, builder and operator
    • Smaller contingency allowances
    • Bulk consumables buying power
    • Broader technology access
  • Preventive v. breakdown maintenance
  • Optimized balance between capital and operating costs
  • Excessive redundancy eliminated
financing plan
FINANCING PLAN
  • No SRF funding
  • City revenue debt
  • Enterprise fund
  • Tax-exempt (IRS Rev. Proc. 97-13)
  • Ambac Bond Insurance
  • Feasibility study
contractor financing support
CONTRACTOR FINANCING SUPPORT
  • City debt cancelled if Company defaults
  • Directly transfers “completion” and “performance” risks to Company
  • Southwest repays Ambac up to $6.0 million
  • Ambac has “cure rights”
municipal control
MUNICIPAL CONTROL
  • Comprehensive asset development and management
  • Minimum design requirements and quality standards
  • Performance guarantees (repairs, fines, damages)
  • Costs guaranteed
  • Management by “full-service” contract
  • Vigorous, broader competition and cooperation
  • Convenience termination rights (10 years)
lessons learned
LESSONS LEARNED
  • Allow full vendor comment on proposed transaction – and listen
  • Private financing and siting complicates the transaction
  • Minimum design requirements are key
  • Early pilot testing is advisable
  • Attempted transfer of excessive risk is counter productive
ingredients for success
INGREDIENTS FOR SUCCESS
  • Initial strategic planning
  • Thoughtful, well developed RFQ/RFP
  • Creative and responsive proposals
  • Clear, comprehensive contract
  • Full proposer due diligence opportunity
  • Fair and balanced risk allocation
  • Outstanding leadership