Transcript Hawkins Delafield & Wood LLP United States Conference of Mayors Urban Water Council 2005 Urban Water Summit September 30, 2005 Albuquerque, New Mexico DESALINATION DESIGN-BUILD: THE SAN JUAN.

Hawkins
Delafield & Wood LLP
United States Conference of Mayors
Urban Water Council
2005 Urban Water Summit
September 30, 2005
Albuquerque, New Mexico
DESALINATION DESIGN-BUILD:
THE SAN JUAN CAPISTRANO
PROJECT
Eric S. Petersen, Law Partner
Hawkins Delafield & Wood LLP
New York, NY
PROJECT ELEMENTS
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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
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CHALLENGES
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Limited staff availability
Limited expertise in groundwater
treatment technologies
Aggressive schedule to meet
deadlines for $250 per acre foot
subsidy from Metropolitan Water
District
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PROJECT GOALS
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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
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PROCUREMENT GOALS (1):
EARLY PRICE CERTAINTY
DBB
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City design costs 6 -10% of construction cost
Bidder's price may exceed designer's
estimates
Project may be delayed or re-designed
DBO
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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
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PROCUREMENT GOALS (2):
CHANGE ORDERS MINIMIZED
DBB
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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
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Proposals protests are uncommon
Construction monitoring is 1-2% of
construction cost
Change orders are rare
Procurement Litigation is rare
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DBO PROCUREMENT
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CA Government Code 5956
RFQ/RFP Process
Concurrent Price, Non-Price Review
“Best Value”
Staff Selection
Council Contract Approval
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TIMEFRAME
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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
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PARTICIPANTS
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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
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CITY RETAINED RIGHTS AND
RESPONSIBILITIES
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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
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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)
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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
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RISKS TRANSFERRED (2)
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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
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FOCUS ON PERMITTING RISKS
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DHS Domestic water supply permit
Pilot testing
Terms and conditions
Delay
Non-issuance
Payment for permitting design costs
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RISKS NOT TRANSFERRED (1)
• “Uncontrollable Circumstances”
• Pre-existing environmental
conditions
• Specified site conditions
• Buried infrastructure repair costs
• Changes in law
• Force majeure
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RISKS NOT TRANSFERRED (2)
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Raw water quality exceedencers
General electricity rates (Indexed)
General price inflation (Indexed)
General interest rates
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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
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DBO SAVINGS
• Source of savings
– Core competency
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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
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FINANCING PLAN
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No SRF funding
City revenue debt
Enterprise fund
Tax-exempt (IRS Rev. Proc. 97-13)
Ambac Bond Insurance
Feasibility study
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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”
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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)
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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
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INGREDIENTS FOR SUCCESS
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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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