Eric S. Petersen, Law PartnerHawkins Delafield & Wood LLP

New York, NY

United States Conference of MayorsUrban Water Council

2005 Urban Water SummitSeptember 30, 2005

Albuquerque, New Mexico

DESALINATION DESIGN-BUILD:THE SAN JUAN CAPISTRANO

PROJECT

Hawkins

Delafield & Wood LLP

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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

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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

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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

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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

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PROCUREMENT GOALS (2):CHANGE ORDERS MINIMIZEDDBB

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 disputesDBO

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

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

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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

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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

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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

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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)

• 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

• 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)

• 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

– 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

• 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

• 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