By Rich Anderson
October 17, 2005

Information on recent Public-Private Partnerships was presented to mayors attending the Urban Water Summit held in Albuquerque (NM) on September 30 through October 1. Project experience in three cities, Rialto (CA), Rio Rancho (NM), and San Juan Capistrano (CA) indicates that short- and long-term partnerships yield considerable public benefits while local government maintains strategic control over water infrastructure assets, water and sewer rates, and quality of services. These three city projects illustrate what cities can negotiate and what private service providers will guarantee.

Rio Rancho Mayor Jim Owen described the pressing water needs of the city. Incorporated in 1981, Rio Rancho had a population of 10,131. The rapidly growing suburb of Albuquerque has a current population of 70,000, and is projected to reach 125,000 by 2020. The municipal jurisdiction covers 103 square miles and Owen estimates that another 200 square miles will be incorporated over the next few decades. The city not only faced rapid growth that required expansion of the wastewater system, it also experienced a difficult treatment issue involving arsenic in the water supply.

Owen stated that the city acquired the water and wastewater utilities in 1995 and turned to the private sector to operate them. He emphasized that the local government was dealing with all of the complexities of urban growth and building a local economy and that operating water and sewer systems was not one of their core capabilities. The city turned to private operators to take advantage of value services, cost-savings and efficiencies, and environmental compliance. The city retains ownership of all the infrastructure assets and sets water and sewer rates. They entered into a short-term contract operations partnership with OMI, a leading provider of water and wastewater services in the United States.

Rock Raiford, OMI Regional Operations Director, described the scope of services in the Partnership agreement. OMI is responsible for operating 350 miles of water distribution and sewer lines; four wastewater treatment plants; a 22 MGD groundwater production system including 21 wells; maintaining 13 water reservoirs; and 23 lift stations. OMI is involved in every phase of water treatment and distribution; meter installation; wastewater treatment and collection; managing the industrial pretreatment program and other water programs.

Raiford identified a number of accomplishments that were valuable to the city. OMI has been responsible for both water quality and environmental compliance. OMI improved procurement practices and saved the city $40,000 per year. The company began a program using bioxide as an alternative chemical to ferric chloride in the sewer collection system to reduce odor problems being experienced by neighbors surrounding the lift stations. They also implemented an operations and maintenance program that resulted in stabilized unit cost control for water production and treatment.

Jim Good, Vice President of Veolia Water of North America, described the reasons why Rialto entered into a partnership arrangement between the company and the city of Rialto. The city has a population just under 98,000, and was experiencing explosive growth. Municipal leaders searched for a partner to effectively operate and manage wastewater facilities to allow them to focus on other community priorities. The city articulated three clear goals that they were seeking to achieve: (1) eliminate continued facility operational and fiscal accountability issues; (2) recruit and retain employees for key management positions; (3) partner with a ‘corporate citizen’ that would invest in the community and support economic development.

Good focused on the partnership approach that has been successful with Rialto. He stated that the foundation of a successful partnership relies on four pillars: a good transition plan from public to private operation; a reliable operations and maintenance plan (O&M); a maintenance management program to identify and replace equipment and systems in a timely and cost-efficient manner; and, a good communications and community relations plan.

Veolia is involved with a number of capital improvements underway at the Rialto wastewater treatment plant. The gaseous disinfection system will be replaced. Improvements will be made to the aeration systems. A new circular clarifier will be installed and improvements will be made to the anaerobic digester system.

Rialto will maintain ownership of the wastewater treatment plant assets. The city will also continue to control sewer rates.

Eric Petersen, Partner, Hawkins Delafield & Wood, presented information on a Design-Build-Operate (DBO) project that his law firm served as advisor. He commented on some of the motivating factors that influenced the municipal leaders to consider a DBO Partnership approach. The city wanted to augment its water supply through local sources such as seawater, and not be totally dependent on regional supply sources. They also wanted to avoid constructing a large water reservoir for the new supply. The city was moving aggressively on developing its own supply in order to meet deadlines for a $250 per acre foot subsidy from Metropolitan Water District. The city had limited staff availability and limited expertise in groundwater treatment technologies. Turning to the private sector was a viable option in this situation.

Further refinement of the DBO approach led to an RFP process involving the following project design elements: a four MGD reverse osmosis treatment plant with pretreatment; eight groundwater extraction wells; 5,000 acre-feet annual production; raw and finished water pump stations and transmission lines; and a brine disposal line.

Petersen described some of the cost-comparison considerations the city made between a DBO approach and a traditional Design-Bid-Build (DBB) approach. These comparisons were important for ensuring project price certainty. City design costs could be six to ten percent of construction costs under a DBB, but only one to three percent under a DBO. A bidder’s price may exceed a designer’s estimates in a DBB, but in a DBO the proposers design to a level necessary to guarantee price. A DBB approach often encounters delays and possible re-designs, whereas in the DBO approach, the city obtains price and performance guarantees for low cost.

The city also made other comparisons to more fully understand the level of certainty they could expect for the project effort. Bid protests can be common in a DBB approach, while proposal protests under a DBO are uncommon. Litigation often accompanies contract awards and change order disputes in a DBB approach, while procurement litigation is rare in a DBO approach. Change orders are prevalent with DBBs, but rare in a DBO. Construction monitoring is six to eight percent of construction cost in a DBB, but only one to two percent in a DBO.

The city wanted to take responsibility for some important issues and maintain the rights for other items. They wanted to keep ownership of assets; ownership of system revenues; set user rates; control capital planning; obtain tax-exempt bond financing; secure sites and rights-of-way; obtain water rights to the San Juan Basin; and, obtain the $250 per acre foot MWD subsidy.

The results from San Juan Capistrano’s water planning comparison approach and procurement process was the awarding of a contract in 2001-2002, permitting in 2003-2004, and planned operation start in 2005. The final fixed Design-Build Price was $25 million. The Fixed Annual Service Fee was set at $1.1 million. Electricity costs were capped at $1.0 million per year. Water treatment standards were set at federal and state levels with seven enhanced standards that are contractually guaranteed. Water delivery specifies a guarantee for 5,280 acre feet per year. The company also guarantees a production efficiency of 80 percent.