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Eric S. Petersen, Law Partner Hawkins Delafield

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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 – PowerPoint PPT presentation

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Title: Eric S. Petersen, Law Partner Hawkins Delafield


1
United States Conference of MayorsUrban Water
Council2005 Urban Water SummitSeptember 30,
2005Albuquerque, New Mexico
Hawkins
Delafield Wood LLP
DESALINATION DESIGN-BUILDTHE SAN JUAN CAPISTRANO PROJECT
  • Eric S. Petersen, Law PartnerHawkins Delafield
    Wood LLPNew York, NY

2
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

3
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

4
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

5
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

6
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

7
DBO PROCUREMENT
  • CA Government Code 5956
  • RFQ/RFP Process
  • Concurrent Price, Non-Price Review
  • Best Value
  • Staff Selection
  • Council Contract Approval

8
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

9
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

10
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

11
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)

12
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

13
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

14
FOCUS ON PERMITTING RISKS
  • DHS Domestic water supply permit
  • Pilot testing
  • Terms and conditions
  • Delay
  • Non-issuance
  • Payment for permitting design costs

15
RISKS NOT TRANSFERRED (1)
  • Uncontrollable Circumstances
  • Pre-existing environmental conditions
  • Specified site conditions
  • Buried infrastructure repair costs
  • Changes in law
  • Force majeure

16
RISKS NOT TRANSFERRED (2)
  • Raw water quality exceedencers
  • General electricity rates (Indexed)
  • General price inflation (Indexed)
  • General interest rates

17
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

18
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

19
FINANCING PLAN
  • No SRF funding
  • City revenue debt
  • Enterprise fund
  • Tax-exempt (IRS Rev. Proc. 97-13)
  • Ambac Bond Insurance
  • Feasibility study

20
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

21
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)

22
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

23
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
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