Eric S. Petersen, Law Partner Hawkins Delafield

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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

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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 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

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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