Environmental
Financial Advisory Board
EFAB
Robert Lenna
Chair
John Wise
Executive Director
Members
Hon. Pete Domenici
George Butcher
PeteButkus
Michael Curley
Michael Deane
Linda Descano
Peter Emerson
Deeohn Ferris
Shockley Gardner
Evan Henry
Anne Pendergrass Hill
Stephen Mahfood
Langdon Mush
John McCarthy
George Raftelis
Arthur Ray
Heather Ruth
Sonia Toledo
JimTozzi
Mary Ellen Whitworth
Robin Wiessmann
Joseph Young
Elizabeth Ytell
Cost-Effective Environmental Management
Case Studies
REPORT
This report has not been reviewed for approval by the U.S. Environmental Protection
Agency, and hence, the views and opinions expressed in the report do not necessarily
represent those of the Agency or any other agencies in the Federal Government
January 1998
Printed on Recycled Paper
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ENVIRONMENTAL FINANCIAL ADVISORY BOARD
JAN 12 1996
Honorable Carol M. Browner
Administrator
U.S. Environmental Protection Agency
401 M Street, SW
Washington, D.C. 20460
Dear Ms. Browner:
We are very pleased to transmit to you the latest report of your Environmental Financial
Advisory Board (Board), Cost-Effective Environmental Management Case Studies. This report
presents a group often case studies showcasing cutting edge, real-world examples of how
communities have successfully implemented public-private partnerships and internal optimization
(improvement) models. These case studies provide important information on benefits and
drawbacks, lessons learned, and how other communities might benefit from the experiences.
While it makes no formal recommendations, the report characterizes some of the most
exciting approaches communities are taking to address the financing challenges they face in
providing environmental services. It focuses on financing approaches that not only reduce the
costs of delivering environmental services, but also improve the delivery of those services. We
hope the report will be the first in a series examining successful partnership, competitivization,
and internal optimization models. We strongly believe that communities nationwide can use this
type of information to help them better meet their environmental responsibilities.
We want to take this opportunity to thank the members of the Board's Cost-Effective
Environmental Management Workgroup and its chair, George Raftelis, for their efforts in
developing this report. Finally, on behalf of the entire Board, we would like to express to you our
deepest appreciation for the opportunity to continue to assist EPA in addressing the financing
issues critical to meeting the nation's environmental mandates.
Sincerely,
Robert O. Lenna, Chair £y*ohn C. Wise, Executive Director
U.S. EPA Environmental U.S. EPA Environmental
Financial Advisory Board Financial Advisory Board *
cc: Fred Hansen (1102)
Sallyanne Harper (2710)
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Cost-Effective Environmental Management Case Studies
Table of Contents
FORWARD
CHAPTER I: INTRODUCTION 1
EFAB Description 1
Relationship of this Document to Previous EFAB Reports and Activities 1
Introduction to Cost-Effective Management Models 2
Case Study Setting 7
Institutional Setting , 10
Discussion of Compendium as a "Living" Document 11
CHAPTERII: CASESTUDIES 12
Contract Operations
of the Irwin Creek Wastewater Treatment Plant
and the Vest Water Treatment Plant
Charlotte, North Carolina 12
Overview of Public-Private Partnership 12
Community Demographics 12
Facility(s) Description (Treatment, Collection, & Disposal) 13
Overview of Procurement/Competition and Implementation Process 13
Labor Issues , 16
Public Policy Issues and How They Were Addressed 16
Economics of Case Study for the Community and Privatizer 17
Noneconomic Benefits to Community , 18
Drawbacks 18
Lessons Learned ..... v 18
Community/Privatizer Contact for Additional Information 20
Contract Operations
of the Belmont and Southport
' Advanced Wastewater Treatment Facilities
Indianapolis, Indiana 21
Overview of Public-Private Partnership .. 21
Community Demographics 21
Facility(s) Description (Treatment, Collection, & Disposal) 22
Overview of Procurement/Competition and Implementation Process 22
Labor Issues 24
Public Policy Issues ; 24
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Table of Contents (cont)
Economics of Case Study for the Community and Privatizer 25
Noneconomic Benefits to Community ,26
Potential Drawbacks 26
Lessons Learned 27
Community/Privatizer Contacts for Additional Information 28
Contract Operations
of City Water Department
Jersey City, New Jersey 29
Overview of Public-Private Partnership 29
Community Demographics 29
Overview of Procurement/Competition and Implementation Process 30
Labor Issues , 32
Public Policy Issues 32
Economics of Case Study for the Community and Privatizer 33
Noneconomic Benefits to Community 33
Drawbacks , 33
Lessons Learned .,'.... 33
Community/Privatizer Contacts for Additional Information 34
Sale of Wastewater Treatment Plant
. Under Executive Order 12803
The Miami Conservancy District
Municipalities of Carlisle, Franklin, and Germantown, Ohio ........... 35
Overview of Public-Private Partnership .35
Community Demographics 35
Facility Description 36
Overview of Procurement/CompetitknTand Implementation Process ....-.,... 36
Labor Issues 38
Public Policy Issues 39
Economics of Case Study for the Community and Privatizer 39
Noneconomic Benefits 40
Lessons Learned ; 40
Community/Privatizer Contacts for Additional Information 40
Concession Operations ,
of Water and Sewer Facilities
Township of North Brunswick, New Jersey 41
Overview of Privatization 41
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Table of Contents (cont)
Community Demographics 41
Facility(s) Description (Treatment, Collection, & Disposal) 42
Overview of Procurement/Competition and Implementation Process 42
Labor Issues 44
Public Policy Issues 44
Economics of Case Study for the Community and Privatizer 45
Noneconomic Benefits to Community 45
Lessons Learned , 45
Community/Privatizer Contacts for Additional Information 46
Contract Operations
of the East Bank Sewage Treatment Plant
and the West Bank Secondary Treatment Plant
Sewerage and Water Board of New Orleans, LA 47
Overview of Public-Private Partnership 47
Community Demographics 47
Facility(s) Description (Treatment, Collection, & Disposal) 48
Overview of Procurement/Competition and Implementation Process 48
Labor Issues 49
Public Policy Issues 50
Economics of Case Study for the Community and Privatizer 50
Noneconomic Benefits to Community 50
Drawbacks -. 51
Lessons Learned 51
Community/Privatizer Contacts for Additional Information 51
Contract Operations
of the North Canadian, Chisholm Creek, and
Deer Creek Wastewater Treatment Plants;
the Witcher Pumping Complex! and
Related Sludge Disposal Services
Oklahoma City Water Utilities Trust 52
Overview of Public-Private Partnership 52
Community Demographics 52
Facility(s) Description (Treatment, Collection, & Disposal) 53
Overview of Procurement/Competition and Implementation Process ......... 53
Labor Issues 54
Public Policy Issues 55
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Table of Contents (cont.)
Economics of Case Study for the Community and Privatizer 55
Noneconomic Benefits to Community 56
Lessons Learned , , 56
Community/Privatizer Contacts for Additional Information 56
Contract Operations
of the Biosolids Recycling Center
Philadelphia, Pennsylvania , 57
Overview of Public-Private Partnership 57
Community Demographics : 57
Facility(s) Description (Treatment, Collection, & Disposal) ....... 58
Overview of Procurement/Competition and Implementation Process 58
Labor Issues , 59
Economics of Case Study for the Community 59
Noneconomic Benefits to Community 60
Lessons Learned , 60
Community/Privatizer Contacts for Additional Information 61
Contract Operations
of West New York Municipal Utility Authority
Water Pollution Control Facility
West New York, NJ 62
Overview of Public-Private Partnership 62
Community Demographics 63
Facility^) Description (Treatment, Collection, & Disposal) 63
Overview of Procurement/Competition and Implementation Process......... 63
Labor Issues ', 64
Lessons Learned 64
Community/Privatizer Contacts for Additional Information 64
Full Privatization
of the Wilmington Wastewater Treatment Plant
Wilmington Delaware 65
Overview of Public-Private Partnership 65
Community Demographics 66
Facility(s) Description (Treatment, Collection, & Disposal) ., 66
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Table of Contents (cont.)
Overview of Procurement/Competition and Implementation Process 67
Labor Issues , 69
Economics of Case Study for the Community and Privatizer 70
Noneconomic Benefits to Community 71
Drawbacks 72
Lessons Learned 72
Community/Privatizer Contacts for Additional Information 73
CHAPTER HI: INFORMATION SOURCES/REFERENCES 74
General References 74
Specific References , '. 75
Indianapolis, IN Case Study -... 75
North Brunswick, NJ Case Study 76
New Orleans, LA Case Study .76
Oklahoma City, OK Case Study 77
Philadelphia, PA Case Study 77
West New York Municipal Authority, NJ Case Study 77
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FORWARD
Since its inception in 1989, the Environmental Financial Advisory Board (EFAB) has advised
the U.S. Environmental Protection Agency (EPA) on a wide range of environmental financing issues
to assist EPA in carrying out its environmental mandates. In this effort, EFAB has worked closely
with Agency programs in seeking approaches that lower environmental costs, increase public and
private investment in environmental facilities and services, and build state and local capacities to carry
out environmental programs and activities.
One area in which EFAB has placed particular emphasis has been the effective delivery of
environmental services, In developing hs 1997 Strategic Action Agenda, the Board formed a Cost-
Effective Environmental Management Workgroup to examine financing models that communities can
use to improve environmental services. In its deliberations, EFAB determined that it would produce
two products:
* " Case Studies" showcasing cutting edge examples of how communities have implemented
successful public-private partnerships and internal optimization models. These case studies
would include a discussion of the lessons learned from these case studies and how this
information might be used in helping other communities design their own approaches.
* A "How To Handbook" providing guidance to local officials and managers when evaluating
the feasibility of various public-private partnership arrangements and internal models. The
handbook would also discuss ways various models might be implemented.
This EFAB report delivers on the first of these two planned products. It identifies and
presents real-world models that communities are actually using to deliver more cost-effective
environmental operations and services. In some cases the models are public-private partnerships,
while in others, communities are looking internally to optimization, competitivization, or other
re-engineering approaches.
The introductory materials and case studies on the following pages attempt to capture the
essence of what EFAB hopes will be the first in a series of exciting partnership, competitivization,
and internal optimization case studies. The case studies can provide concrete examples to all local
officials how successful partnerships and other models can be used by communities to meet their
environmental service needs more efficiently. They also demonstrate how public-private partnerships
can be used as one way to provide substantial benefits to both the public and private sectors, creating
the classic "win-win" situation.
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CHAPTER!: INTRODUCTION
EFAB Description
The Environmental Financial Advisory Board (EFAB), a federal chartered advisory committee
which operates in accordance with the provisions of the Federal Advisory Committee Act, was
established in August 1989 to advise the U.S. Environmental Protection Agency (EPA) on
environmental finance issues to assist EPA in carrying out its environmental mandates. EFAB
consists of independent experts drawn from: all levels of government, including elected officials; the
finance, banking, and legal communities; business and industry; and national organizations.
Since its inception, EFAB has examined numerous policy and program options across a broad
spectrum incentives and revenues; environmental costing; institutional efficiencies; outreach and
coordination; and rural, urban, and international issues - that seek to lower costs of environmental
protection, increase public and private investment in facilities and services, and build state and local
financial capacity to carry out environmental -programs. It has worked closely with various Agency
programs to better address difficult environmental finance problems, including: the Office of Solid
Waste and Emergency Response (Brownfields and Superfund); the Office of International Activities
(international/NAFTA issues); the Office of Water (Safe Drinking Water Act guidance); the Office
of Air and Radiation and the Clean Air Act Advisory Committee (Clean Air Act issues); the Science
Advisory Board (environmental risk and finance); and the Common Sense Initiative (small business
access to capital).
EFAB also works in partnership with EPA's Environmental Finance Centers (EFCs), a
network of six university-based regional programs that develop and provide financial training and
educational and analytical services to states, localities, and small businesses. EFAB members serve
as advisors to the EFCs and participate on expert finance panels of the EFCs designed to help
governments and small businesses.
Relationship of this Document to Previous EFAB Reports and Activities
EFAB has been a strong advocate of promoting the effective delivery of environmental
services. When EFAB was established in 1989, workgroups were formed to examine specific finance
areas, including private participation in the provision of environmental services. EFAB's Private
Sector Incentives workgroup sought ways private participation could increase resources available for
environmental investment by reducing the costs of construction and operations.
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In November 1991, the Board released its report, "Private Sector Participation in the
Provision of Environmental Services: Barriers and Incentives." The Board concluded that the
development of public-private partnerships was inhibited by a number of factors that limit the
operational flexibility of public environmental facilities or that reduce incentives for private partners.
EFAB outlined strategies designed to increase private sector involvement in service delivery,
including: develop federal policies and programs to encourage the establishment of public-private
partnerships for environmental services; evaluate the public policy implications of increasing flexibility
in applying federal grant policies and regulations to stimulate private investment; encourage states
and localities to modify laws that act as disincentives to private investment or operation of facilities;
promote strategies that encourage communities to develop user-fee systems that cover the full cost
of providing services; and reduce risks associated with private investment or operation of public
facilities.
The Board has continued to place a major emphasis on the effective delivery of environmental
services. When EFAB met in August 1996 for the purpose of developing its 1997 Strategic Action
Agenda, it formed several workgroups, one being the Cost-Effective Environmental Management
workgroup. The workgroup expanded its scope beyond just considering public-private partnerships
as desirable cost-effective models. Specifically, the workgroup added to its evaluation, models that
focus on internally optimizing environmental services. To achieve its objectives, this workgroup
outlined two major work products: a compendium of case studies on effective service delivery, and
a "how-to" handbook for local officials interested in looking at next steps in terms of pursuing
implementation. The result of the first work product (the compendium) is the EFAB report now
being released, "Cost-Effective Environmental Management Case Studies" (July 1997).
Introduction to Cost-Effective Management Models
Communities with governmental utilities can consider both an internal and external focus in
pursuing more cost-effective environmental service. Focused internally, government utilities first
evaluate those areas where there are opportunities for improvement, and then determine their ability
to address these opportunities. Externally, government utilities have looked to private sector models
to achieve more cost-effective management.
Internal improvement has been defined in recent times by many terms such as "optimization,"
"competitivization,"and "re-engineering." The process of internal improvement begins with
identifying those areas where improvement can take place. Opportunities for improvement can be
in the technical, financial, and organizational areas. Examples of areas for improvement are
summarized in the following table.
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Opportunities for Improvement
Technical
Process Improvements
Automation
Maintenance Systems
Excess Capacity"
Technology Applications
Compliance Risks
Energy Conservation
Management Systems
Financial
Utility Rate Schedules (power,
gas, sewer, telephone, etc.)
Bulk Purchasing/Procurement
Inventory Control
Improved Cost Accounting
and Management Reporting
Capital Investments
Organizational
Organizational Structure
Staffing
Staff Productivity
Union Agreements
Training
Shift & Operating Schedules
Overtime
Management Practices
After opportunities for improvement are identified, the government utility must then evaluate
its ability to implement the changes necessary to achieve potential improvements. Factors influencing
the community's ability to execute change include:
Supportive management by governing body (political leadership);
Perception of utility by public/customers;
Perception of utility by private sector providers;
Relationship of utility with regulatory agencies;
Relationship between management and unions;
Management and supervisory leadership; and
Employee attitudes.
Should the community lack the wherewithal or the ability to implement change, private sector cost-
effective models should be considered.
As a result, elected officials throughout the country are looking to public-private partnerships
as they strive to provide environmental infrastructure and services to communities. The options
available to them are as broad as their needs. The power of public-private partnerships is the
flexibility to match the particular capabilities of a private partner to the unique needs of a community.
Should a community select a private sector management model, it should establish clearly
defined and achievable objectives to determine the type of partnership that best meets its needs. This
nexus of objectives and needs can include the following:
capital improvements for upgrades, expansions, or renovations;
* access to private capital;
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* access to advanced technology;
* construction or implementation time constraints;
* increased efficiency or dependability of operations; and
» stability of user rate charges.
Community leaders must consider their needs and objectives with a thorough understanding of the
legal, technical, financial, and political framework within which they will make decisions. This
complexity leads to the uniqueness of each partnership. Fortunately, the range of public-private
alternatives available also is very broad. In addition, after evaluating their circumstances, some
communities choose to seek internal optimization or reengineering of their environmental services
to meet their objectives rather than pursuing a partnership.
Environmental public-private partnerships.generally involve a contractual relationship between
a public authority and a private company to mutually provide a service or facility. Partnerships can
involve a variety of activities and degrees of private participation ranging from design, construction,
operation, maintenance, management, financing, and/or ownership.
The following overview presents the principal types of public-private partnerships created
by communities for environmental services. It does not discuss in great detail the advantages and
disadvantages, relative strengths and weaknesses, and benefits and burdens of each. For this
information, the EPA publication, "A Guidebook of Financial Tools," by the Environmental Financial
Advisory Board and the Environmental Finance Center Network provides a comprehensive review
of many specific types of public-private partnerships.
Most public-private partnerships fit into one of several categories. They are listed below in
order of the degree of private participation, from the most private participation to the least.
* merchant facility;
full privatization;
« concession;
« leasing;
design-build-operate;
* contract operations, maintenance, and management; and .
* contract services.
Merchant Facility
A merchant facility is unique among partnerships because the private sector makes a
business decision to provide the service or facility to a community's residents. In other forms of
partnerships, the public authority determines the need for the service or facility and then works with
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the private sector to provide it. In this case, once the company decides to provide the service, it
builds, owns, and operates the system and takes, foil responsibility for the service and risk for its
performance.
This type of partnership is more common for solid waste facilities than for water and
wastewater services. The capital costs and regulatory issues related to building distribution or
collection systems for water services usually make it infeasible for a company to develop a merchant
water supply or wastewater treatment system. Waste disposal sites, recycling facilities, incinerators,
and other solid waste infrastructure are not constrained by in-the-ground pipes for their source
material and have greater freedom to attract inflows on a business basis.
Full Privtttizotion
The term "privatization" is commonly used interchangeably with "public-private partnership."
However, true privatization is a particular form of partnership in which the private sector assumes
a great deal of responsibility for the service under the general direction of the public entity. For new
facilities, once government officials decide to undertake a project, they would retain the private
partner to design, finance, build, own, operate, and maintain the infrastructure and administration
necessary to provide the service. For existing facilities, the company typically would acquire, through
purchase, the municipal assets and affiliated programs. It then would assume full responsibility for
future capital improvements.
Although the private sector owns the facilities under full privatization, the public sector
remains an important partner. The two parties typically enter into a long-term contract of 20-30 years
that defines roles and responsibilities of each. The municipality often retains the role of setting rates
and collecting user charges. It then pays the company a fee for providing the service to the
community. Because environmental infrastructure is closely related to land use and planning, local
officials often wish to retain some degree of control over system expansion. The private provider,
however, is responsible for financing, building, and operating and any capital improvements during
the contract period.
Concession
Under concession arrangements, a company typically pays a "concession fee" to a public
authority for the "right" to provide an environmental service to the residents of a specific area. This
is very similar to the public sector granting a "franchise" to a company. Concessions generally are
granted for a term of at least 15 years. The municipality sets overall performance criteria that the
private provider must meet, but the concessionaire has extensive responsibility and control over the
operations and management of its facilities.
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Concessions can involve existing systems or the construction of new facilities. The public
authority often retains ownership of any assets necessary to provide the service and is responsible for
financing major capital improvements or new facilities. However, the concessionaire may be required
to lease the assets from the public sector. In addition, it is responsible for investments necessary to
maintain the system. While the public v sector, through the local government or an oversight
regulatory agency such as a public utility commission, usually has authority to set .user rates, the
private concessionaire often bills users and collects revenues.
Leasing
The distinction between concession and leasing can be difficult to make. As noted above, a
concession grants a right to a company to provide an environmental service. Leasing entails more
direct public participation. A public authority essentially hires a company to provide the service; the
company in turn leases from the government the assets necessary to provide the service. The
company makes annual lease payments or an up-front "lump-sum" payment to the public partner
the lessee. The term of the lease can be of any duration, but typically is longer than many operations
contracts (see below). The public and private partners establish a service contract concurrent with
the lease. The contract sets responsibilities and performance criteria for both sides. The municipality
sets and collects user charges and pays a service fee to the private lessor.
The decision to upgrade or expand facilities remains with the public sector, which may design,
finance, and build the capital improvements itself or incorporate them into the lease, making the
company responsible for providing them based on procurement criteria and performance standards.
Design-Build-Operate
Design-build-operate (DBO) also is known as 'turnkey" procurement. Its key element is that
one private entity is responsible for designing and building as well as operating and maintaining a
facility. The objective is to coordinate all these steps to create innovations, synergies, and efficiencies
and to establish firm overall responsibility for performance. This approach obviously works only for
new facilities or those needing extensive renovation or reconstruction.
The public sector finances DBO projects, owns the facilities, and generally retains
responsibility for capital expenditures during the term of the contract, which can run from 5 to 20
years. The public entity pays the company for design and construction and then an annual service fee.
The essence of this arrangement is that the public owner assumes financial responsibility and
risk and its private partner assumes technological and performance risk.
DBO has evolved into many self-explanatory variations. Some of the most common include
EOT (build-own-transfer), BOO (build-own-operate), and BOOT (build-own-operate-transfer).
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Contract Operations. Maintenance, and Management
Under this common arrangement the public sector contracts with a private firm to operate a
public facility such as a wastewater treatment plant or to provide a service such as trash collection.
The physical assets remain in public ownership and control and the municipality retains responsibility
for financing and constructing improvements. However, with the trend toward longer term contracts,
from the current 3-5 years to up to 15-25 years, the private sector is increasingly taking responsibility
for some capital improvements.
Local officials normally set rates, collect fees, and pay the private operator a service fee based
upon usage. The operator, in return, has to meet specified service and performance criteria. As part
of comprehensive contract management of a system, the private firm may read meters (or other use
measurements), bill customers, and collect revenues on behalf of the government authority.
Contract operations, maintenance, and management often entails more than simply
procurement of contract employees by the public sector. A key element of this type of partnership
can be access to new or innovative technologies and management systems. Municipalities often find
they can establish improved financial management because they pay a known, set service fee to the
private operator rather than face annual fluctuations in operating costs.
Contract Services
While "privatization" is often thought to be new, municipalities historically have contracted
out many particular aspects of their environmental services. Most public authorities hire engineers
to design infrastructure facilities and contractors to build them. They then contract with consultants
to assist in start-up and initial operations. Other common "outsourced" services are laboratory
analysis, payroll, janitorial, grounds maintenance, and vehicle maintenance.
Municipalities pay contractors a fee for these services and closely supervise contractor
performance. These traditional arrangements fit this discussion of public-private partnerships since
they help public officials to provide environmental services as efficiently as possible.
Case Study Setting
In preparing this compendium of case studies, every attempt was made to provide an unbiased
summary of the information, issues, and processes involved. As much background information as
possible was reviewed in the preparation of the case studies. The case studies chosen represent a
broad cross-section of privatization alternatives and procurement processes. These case studies range
from contract operation of a single plant to contract operations of entire water and wastewater
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systems, and from competitivization of public utility operations to full privatization through the sale
of utility assets to a private operator. The specific circumstances surrounding each case study, as
related to the objectives of the communities, authorities, or utilities (the utility providers), and the
procurement process vary significantly. The lessons learned from these experiences, however, are
applicable to almost any privatization evaluation and procurement.
Some general lessons to be learned from the case studies include:
Develop a well-defined set of objectives for evaluating the effectiveness of privatization
alternatives and the benefits of an individual proposal.
Visit communities or operations that have been successfully privatized to clarify the benefits
of specific privatization alternatives, as well as the risks and issues that need to be addressed.
Potential cost savings should not be the sole criterion for evaluating privatization or
competitivization alternatives or specific proposals. Short-term economics may be impacted
for the sake of more favorable long-term cost savings.
Procurement is an important part of the evaluation and selection of a privatizer.
* It is critical to provide a "level playing field" for all participants in the privatization selection
process. This is particularly important if an in-house bid is to be compared to privatizer bids.
* Objective, measurable criteria for the evaluation and ranking of qualification submittals and
proposals will enhance the integrity of the evaluation process.
* It is important to exclude all utility employees whose jobs will be directly impacted by
privatization from the evaluation and selection process.
* All affected stakeholders should be involved in the process early.
Defining how risks are allocated is important in structuring a service contract between the
private contractor and the governmental agency.
Clear definitions of preventive, corrective, and predictive maintenance responsibilities to be
assumed by the privatizer, with specific cut-offs for maintenance activities verses capital
expenditure pass-throughs to the city or utility, should be included in contract agreements.
* Service contracts should identify specific reporting and record keeping requirements related
to facility operations and maintenance.
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If the utility sells assets, it may want to retain ownership of the land the facilities sit on and
establish a lease arrangement with the privatizer.
In the event of full privatization, the purchase agreement should include a repurchase option
at fair market value.
An important aspect of the privatization is indemnification of the utility from compliance
violations under private operations.
Current employees may be asked to be retained by the privatizer for at least a minimum time
period. It is possible in some cases for employees to be better off under private contractors
due to increased training, benefits, and career opportunities.
Potential adjustments to the service fee in the contract agreement should be clearly defined.
An appropriate time frame and venue for completing the negotiation process should be
provided. The negotiation process may be streamlined by including a draft service agreement
in the RFP. Another possibility is employing simultaneous negotiations with more than one
vendor to maintain competition until contract execution.
Contract oversight and administration may require a significant commitment of utility
personnel.
Labor should be brought into the process early whether optimization or privatization models
are pursued.
The community should define its utility objectives as it evaluates whether privatization or
optimization best achieves these objectives.
A preliminary analysis should be conducted by the community to determine whether a public
option, private option, or a combination of both should be pursued.
In a managed competition, the public sector competitors should be empowered by the
community to "look outside of the box" and compete on an equivalent basis as its private
sector counterpart.
When a public sector competitor wins a managed competition, a Memorandum of
Understanding (MOU), similar to a service contract with a private contractor, should be
prepared. The MOU defines the responsibilities and requirements of the public operator.
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Institutional Setting
The section above pointed out some general lessons learned from the examination of the case
studies. It is also important to examine institutional factors that may impact the choice of and use of
a particular privatization/competitivization model. Some of these factors include the following.
* IRS regulations currently allow management contracts to extend to 20 years under certain
circumstances without jeopardizing the tax-exempt status of any facilities that the
management contract may relate to.
* Presidential Executive Orders 12803 and 12893 address full privatization involving the sale
or lease of utility assets to a private contractor. This type of privatization requires
consideration of special issues, such as the repayment of federal grants, if these funds were
used to build the facilities. Also, such cases involving the sale or lease of grant-funded assets
require federal approval.
* Specific local guidelines for procurement processes must be carefully reviewed and rigorously
followed to minimize the risk of any potential legal challenge.
* Labor unions are a significant consideration in the process of privatizing. In some cases,
union concessions were gained through serious consideration of the privatizing option.
However, utilities are cautioned against trying to negotiate changes in union agreements as
a trade-off to privatization. In some states, it is illegal to use the threat of privatization to
gain union concessions. It is advisable to bring labor unions and civil service into the process
as early as possible. Union requirements can place significant restrictions on the procurement
process and should be evaluated and addressed as early as possible.
For full privatization projects, State Revolving Fund (SRF) moneys are not available. As an
alternative, Private Activity Bonds (PABs) may be available and may provide funds at a cost
comparable to tax-free revenue bonds available to a public utility. The availability of PABs
varies from state to state and can change over time.
* Some states may require state regulatory agency approval for a private contractor to provide
a utility service. However, privatization agreements should be structured, if possible, to avoid
regulation by the Public Utility Commission, or similar agency.
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Discussion of Compendium as "Living" Document
This compendium presents several examples of various types of privatizations across the
country; Over time, new examples will emerge of cutting edge privatization approaches, while some
of the existing case studies will become obsolete. Therefore, to continue to keep this resource as
valuable as possible, it will be periodically updated with new case studies and other case studies will
be removed. The frequency of document updates is expected to be every 12 to 18 months.
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CHAPTER //.- CASE STUDIES
Cost-Effective Environmental Management Case Study
Contract Operations
of the Irwin Creek Wastewater Treatment Plant
and the Vest Water Treatment Plant
Charlotte, North Carolina
Overview of Public-Private Partnership
The City of Charlotte (City) has established a policy to actively pursue opportunities such as
competition and outsourcing to reduce the costs of providing public services. Water and wastewater
services are provided for Charlotte and Mecklenburg County by the Charlotte-Mecklenburg Utility
Department (CMUD) which operates all three water treatment plants and five wastewater treatment
plants serving the area. As a project to explore cost savings opportunities via privatization, CMUD
decided to offer one water treatment plant and one wastewater treatment plant for contract
operations; the Vest Water Treatment Plant (Vest) and the Irwin Creek Wastewater Plant (Irwin).
The procurement process included a qualifications phase to develop a short list of qualified proposers
and a technical proposal to evaluate operational capabilities and potential cost savings available using
privatization. CMUD also developed its own proposal to compete with the Privatizer' proposals.
Elaborate measures were .taken to ensure a "level playing field" for all proposers, particularly related
to the allocation of indirect department and City overhead costs to CMUD's internal proposal.
Community Demographics . .
Sim. The service area includes all of Mecklenburg County (approximately 500*000 people). Utility
service is provided by three water treatment plants and five wastewater treatment plants.
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Location. Both plants are located within the city limits of Charlotte, North Caroline,
Economy. Charlotte and Mecklenburg County have a very strong economy and have experienced
significant growth over the past several years. This trend is expected to continue for several more
years, since Charlotte's economy is based on a large financial services sector (e.g. banking and
insurance) and light industry.
Nature of customer constituency. CMUD provides retail water and sewer service to residential,
commercial, and industrial customers. In addition, CMUD has-signed contracts to provide future
wholesale wastewater treatment services for portions of two adjacent counties, Union and Cabarrus.
Faciiity(s) Description (Treatment, Collection, & Disposal)
Size/age. The Vest plant currently treats 16 to 24 MGD with an average yearly production of 20
MGD. Hydraulic capacity is about 30 MGD. However, the actual range of delivery of finished water
can range from 6 to 46 MGD and is determined by CMUD operations at the Franklin Water
Treatment Plant
The Irwin plant treats an average of 12 MGD of mostly domestic wastewater, with a design capacity
of IS MGD. The plant was upgraded and expanded to its present configuration in 1953, with
additional upgrades and expansions in 1971, 1979, and 1987. Recently completed (1996) plant
upgrades include the addition of a single media effluent filter to provide tertiary treatment. Secondary
treatment is based on a modified Bio-Filter activated sludge process.
Regulatory history. CMUD has not experienced any recent compliance problems.
Specific type and extent of privatization. The type of privatization opportunity offered by
CMUD involved a five-year contract (a three-year contract with two one-year options for renewal,
in accordance with IRS guidelines) for operation and maintenance of the plant facilities only. Each
plant was treated as a separate competition opportunity with a separate procurement process,
although firms were allowed to submit a combined proposal, in addition to the individual proposals,
if there was a cost benefit to the City of awarding both contracts to a single firm.
Overview of Procurement/Competition and Implementation Process
Motivating issues. The City has adopted a policy of actively pursuing opportunities to reduce costs
for providing public services to its customers. The City has recently undertaken a major "right sizing"
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program for certain services and has strongly encouraged the use of outside competition. The Vest
and Irwin privatization projects were intended to serve as pilot projects to determine the potential
economic and service quality benefits available from private operators for the delivery of water and
sewer services, as compared to continued operation by CMUD.
Procurement Process. The City chose to use a two-stage procurement process. The first stage was
to issue a request for qualifications (RFQ) for firms interested in proposing on one or both of the
projects. Separate statements of qualifications (SOQs) were required for each project. The City
received nine SOQs for the Vest project and eight SOQs for the Irwin project. The objective of this
stage of the process was to develop a short-list of highly qualified firms to submit technical/cost
proposals. SOQs were evaluated using an evaluation matrix that included the following criteria:
Management Arrangements;
Relevant Experience of Company;
Experience and Qualifications of Key Staff;
Technical Resources of Company;
Financial Resources of Company;
Performance History; and
Project Understanding / Contracting Suggestions.
A number of subcriteria were developed for each of these criteria. Emphasis was placed on
developing specific subcriteria that were as objective and quantitative as possible to provide an
unbiased ranking of SOQs. In the final analysis, due to the high quality of SOQs received, only one
firm did not make the short-list. As a result, including the City's in-house proposal (the City was pre-
qualified), seven proposals were submitted for Vest and six for Irwin.
The primary criterion for evaluating proposals was cost. Proposals were compared based upon a net
present value calculation of the proposed annual fees for each of the five years of the operations
contract. Technical aspects of proposals were also evaluated, including quality and reliability of
proposed operations and maintenance services, the level and skills of maintenance and management
staff, the transition plan, and specific areas of risk associated with each proposal.
Community participants/advisory committees/utility advisors. Because CMUD was also
proposing on both projects, a number of steps were taken to ensure all proposals were evaluated on
a level playing field. First, two separate and independent teams were established within CMUD. One
team prepared the City's in-house competitive proposal and was required to follow the same
guidelines and requirements for submitting proposals as the private firms. A second team was formed
to assist with the overall competition/procurement process. These two teams were prohibited from
exchanging information or communicating about the procurement process or the proposal documents.
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The second step was to form a-six member evaluation team responsible for providing a fair and
unbiased evaluation of all proposals. This team consisted of two citizen members of City advisory
committees, two non-CMUD City staff members, and two CMUD management staff members. The
CMUD staff members were not directly involved in the operation of either plant and were not allowed
to interact with any of the staff responsible for developing the in-house proposal.
The third step involved hiring an independent consulting team to manage the procurement process
and to assist in the evaluation of qualifications submittals and technical/cost proposals. The
engineering firm of Camp Dresser & McKee (CDM) was retained as the consultant to manage the
overall procurement process, with assistance from Raftelis Environmental Consulting Group (RECG).
RECG was also retained as a subconsultant to assist with evaluating financial qualifications and
analyzing cost proposals, including a detailed review of the methodology used to allocate an
appropriate share of indirect costs to the in-house proposal prepared by CMUD staff.
Proposal selected and why. The price proposed by CMUD's in-house team was substantially lower
than the lowest privatizer proposal, representing annual cost savings of about 30% over its prior
year's budget. Other technical aspects of the City's in-house proposal were comparable to the
Privatizer' proposals, and the City was selected to operate both plants. The City's in-house proposal
included several approaches for reducing operating costs including staff reductions, increased
automation, and improved process control equipment. A separate cost center and special cost
reporting requirements were set up to track the performance of the City in meeting cost savings goals
specified in the proposal for the operation of the plants. Failure to meet the cost savings would mean
that the City's contract could be terminated and operation of the plants would again be offered for
privatization. Performance incentives were developed making employee bonuses contingent on cost
savings generated above that specified in the proposal. Since the contract start date was July 1, 1996,
performance results are not yet available to evaluate the staffs ability to meet its cost savings goals.
Time frame. The procurement process began in late spring 199S with the formation of the in-house
proposal team and the evaluation committee. Utility advisors were engaged in the summer of 1995;
RFQs were issued in August 1995; and RFPs were issued in January 1996. The proposal evaluation
process was completed by May. Since the City won the contract, which was consummated with a
Memorandum of Understanding between the City and the group formed to prepare the in-house
proposal, the implementation process was shortened as it was not necessary to negotiate a service
agreement or implement a transition to private operations.
Cost to the community for procurement process. The cost to the community was approximately
$500,000, including cost for utility advisors and consultants assisting with the procurement process,
and consultants hired by CMUD staff to assist in preparing proposal documents for the in-house
proposal. This cost does not include the extensive time commitment of CMUD staff and other City
staff in managing the process and preparing the in-house proposal.
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How consensus in the community was achieved. Consensus toward increased competition as a
means of reducing costs has been building over time as a result of prior experience with competition
and privatization for other government functions in Charlotte,
Labor Issues i
Nature and extent of labor union involvement. Charlotte utility services are not unionized.
Employee issues addressed in service contract. For this procurement, neither the City nor the
privatizer was required to offer employment to all existing employees at the two plants. The
successful proposer was required only to maintain staffing at adequate levels to meet all requirements
of the service contract, including proper certifications and any training costs associated with
maintaining necessary certifications. The winning proposal made by the City included both a
reduction in the operating staff at the two plants and a reorganization of staff schedules in order to
reduce costs and maintain compliance with relevant operating requirements.
Out placement services and displacement process. Proposers were not required to provide plans
for Out placement services or assistance for displaced employees. However, the City anticipated
placing displaced employees in existing unfilled job openings in the utility department or elsewhere
in City operations.
Public Policy Issues and How They Were Addressed
The most significant public policy issue addressed by this competition/procurement process was how
to ensure an objective, fair, and transparent evaluation of proposals among all proposers, particularly
the in-house proposal prepared by CMUD staff. The City recognized that in order to attract qualified
vendors and encourage competition, it was necessary to provide a "level playing field" for evaluating
public and private proposals. Experience with similar procurement processes in Charlotte, as well
as the experience of other communities, resulted in significant concern over potential legal challenges
to the procurement process if there were any evidence that the evaluation process was not as fair and
objective as possible or that the in-house proposal received preferential treatment.
Careful planning of the procurement process was very important, particularly related to the structure
of the CMUD proposing team and the requirement that the proposing team and the evaluation team
maintain complete independence. Another issue of particular concern was the evaluation of costs
included in the in-house proposal. In preparing the in-house proposal, CMUD staff was required to
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identify all direct costs related to the operation of each plant which were part of the scope of
operations identified in the RFP. In addition, other direct costs which were not part of the proposed
operations contract or were considered to be "pass through" costs to the City, were also identified.
These costs were identified at a level of detail sufficient to document the potential cost savings
offered by the in-house proposal and sufficient to provide a basis for tracking and monitoring the
future success in achieving these proposed savings.
Indirect costs were also subjected to an extra level of scrutiny. All indirect costs related to City,
CMUD department, and operating division overhead were reviewed by RECG and categorized as
variable, semi-variable, or fixed costs. Additional analysis of variable costs was conducted to
determine which costs may be eliminated under privatization compared with continued CMUD
operation, and whether or not these costs should be included in the in-house proposal. In order to
provide a level playing field, expected costs for contract administration and oversight were reviewed
to determine if these costs represent additional, incremental costs to the City, or if these costs could
be absorbed by excess capacity available to CMUD management staff as a result of privatization. Any
additional costs related to contract administration were added to the Privatizer' proposals.
Concern over the perception of an objective process led to extra efforts to keep all parties informed
about all aspects of the procurement/competition process. In particular, private companies were
given several opportunities to comment on the procurement process, A bidders' conference was held
where the procurement and evaluation process was explained, including the procedures required of
CMUD staff in preparing the in-house proposal. A draft RFP was submitted to all qualified
Privatizers for their review and comments. The draft RFP included a draft service agreement as well
as specific instructions on how private and in-house proposals were to be prepared and submitted.
The issue of maintenance costs and the proposer's responsibility for these costs was addressed by
clearly defining the requirements of corrective, preventive, and predictive maintenance and the cut-
offs or limits on maintenance costs that the proposers were expected to include in cost proposals.
Economics of Case Study for the Community and Privatizer
Short-term economic impacts. Based on the City's in-house proposal, cost savings of
approximately 30% are expected in the first year of the contract, as compared to.the previous year's
budget.
Rate impacts. Since the operation of these two plants represents only a small portion of the total
CMUD budget, the impact on rates will not be significant over a five-year time frame. However, the
implication for achieving similar savings throughout CMUD operations may have a significant impact
on long-term costs and future rate increases.
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Noneconomic Benefits to Community
Quality of service Improved quality of service was not a significant goal of privatization, except
in the area of improved maintenance procedures and reporting. By carefully defining the specific
types of maintenance to be performed, including computerization and record keeping requirements,
and by identifying limits on maintenance costs assumed by the privatizer, the City expected to benefit
from improved maintenance and ensure that the value of the City's assets would be preserved.
Drawbacks . ; ____
Increase in cost of capital. Cost of capital was not an issue, since regardless of the outcome of
the competition process, the City would retain responsibility for capital expenditure at both plants.
No significant capital expenditure was expected at either plant over the five-year life of the contract.
Perceived loss of control. The City's previous experience with privatization has been favorable, and
perceived loss of control was not a significant issue. Adequate control would be maintained through
the provisions of the service contract and by retaining ownership of the land and assets.
Lessons Learned
Although the City did not decide to privatize the operation of the two plants, the
procurement/competition process was extremely successful and should serve as an effective model
for other communities. This project demonstrates the importance of a number of valuable lessons.
* Open communications between the City and potential Privatizer can help foster an atmosphere
of cooperation and fair competition, even when the City is competing directly with the
Privatizer. Benefits can include higher quality proposals and improved opportunities for cost
savings.
An objective evaluation process that provides a level playing field for all proposers, public and
private, is essential to attract qualified Privatizers and minimize risks of legal challenges. An
objective and quantified process may provide more straightforward differentiation among
qualification submittals.
* A two-step procurement process, with a separate RFQ and RFP, can be.an effective way to
streamline the overall process, particularly if a large number of proposals are anticipated.
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Qualifications submittals are easier and less expensive for firms to prepare and submit, while
still providing an effective way for the utility to screen out undesirable candidates and
potentially develop a "short list" of highly-qualified proposers. Generally a short list of three
to five firms is preferable. Short-listed firms are encouraged to put maximum effort into
preparing technical and cost proposals since there is a higher probability of being selected.
If a short list of firms is developed, the time required by the evaluation team and consultants
to evaluate proposals is reduced, which can also reduce the cost of the procurement process.
The RFP document should include a draft service agreement to further define the proposed
scope of services and responsibilities to be assumed by the privatizer. This draft service
agreement should be as comprehensive and explicit as possible.. This information will allow
the proposers to develop specific recommendations for operating and maintaining the facility,
and can provide a more consistent basis for comparing proposals. It can also lead to fewer
problems in negotiating the final service agreement.
The evaluation of indirect costs for preparing a base-line budget or for analyzing an in-house
proposal, can be complicated and time-consuming. It is better to set up workable guidelines
and procedures for evaluating these costs and for evaluating and comparing public and private
cost proposals, rather than trying to analyze these costs completely. It is possible to provide
a level playing field by focusing on the process without becoming mired in the details.
However, it is also important to consider contract administration and implementation costs
as potential additions to private sector proposals.
Careful definitions of maintenance requirements and costs assumed by the contract operator
and the City provide an important foundation for high-quality proposals. It is important that
both sides understand the maintenance risks to be assumed by the contract operator, so cost-
effective proposals can be prepared and potential cost savings to the City can be evaluated.
If a public entity is given the opportunity to propose with the same operational flexibility as
the private sector, then significant cost savings can be achieved with an in-house proposal.
The proposal process can provide an enormous incentive for the public sector to respond.
However, it is important to recognize that certain institutional constraints may be unavoidable
and may provide an advantage to the private sector. Similarly, other factors may favor the
public sector. The greatest total benefit to the City and to the customer occurs when both
sides have an equal opportunity to develop creative and cost-effective proposals.
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Community/Privatizer Contact for Additional Information
Doug Bean
Director
Charlotte-Mecklenburg Utility Department
5100 Brookshire Boulevard
Charlotte, NC 28216
(704)391-5073
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Cost-Effective Environmental Management Case Study
Contract Operations
of the Belmont and Southport
Advanced Wastewater Treatment Facilities
Indianapolis, Indiana
Overview of Public-Private Partnership
This public-private partnership involved the contract management, maintenance and operations of two
Advanced Wastewater Treatment (AWT) facilities by a private operator. The City of Indianapolis
(City) built these AWT facilities to meet an unusual challenge. The 1972 Clean Water Act, along
with subsequent state and federal regulations, set rigorous standards for all US cities. For
Indianapolis, the standards require removal of at least 97% Biochemical Oxygen Demand and 80%
of ammonia nitrogen to further reduce wastewater oxygen demand. The Indianapolis Department
of Public Works (DPW) must process up to 245 MOD at the plants, and must discharge the effluent
into the White River, a very small/low flow body of water. The DPW built the facilities (Belmont and
Southport) within seven (7) miles of each other. The total program cost was about $250 million and
involved numerous technological innovations and state-of-the-art technologies. About 75% of the-
funds were made available via grant program of the U.S. Environmental Protection Agency and 10%
by the Indiana State Board of Health. Contract operations of the two facilities is projected to save
the City about $60 million over five years.
Community Demographics
Size and Location. The two AWT facilities serve approximately 850,000 to 900,000 people
(400,000 accounts) in the greater Indianapolis area, which includes all of Marion County. The
facilities are also within close proximity to the Indianapolis International Airport.
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Economy. The Indianapolis area has a very stable and diversified economy, with average growth
of approximately 1.5% annually.
Facility(s) Description (Treatment, Collection, & Disposal)
Size/age. Total average treatment capacity of the two AWT plants is 300 million gallons per day
(ISO each). The plants had been operating for 11 years, as of July 15,1993, the date of the RFP for
contract operations.
Facility overview. Prior to privatization, both facilities were sophisticated, state-of-the-art facilities
operated at a high level of efficiency. These facilities include preliminary treatment, primary
clarification, biological treatment via bio-roughing and oxygen nitrification, followed by secondary
clarification, effluent filtration, and ozone disinfection prior to effluent discharge into the White River.
Also included in the operations contract are the associated sludge handling facilities, laboratories, and
pre-treatment programs. Excluded from contract operations were sewer collection, billing and
collection, and customer service functions.
Overview of Procurement/Competition and Implementation Process
Motivating issues. The City wanted additional efficiencies in the management, operation and
maintenance, of the facilities and cost savings for the City and ratepayers. A consulting report
prepared by Ernst & Young stated the City wanted to "determine the value and alternatives for
leveraging the assets to generate new sources of revenue for wastewater capital improvements."
Ernst & Young was hired to study six options for the City, including selling the City's assets. One
option was a public-private partnership; operation of the system by a private contractor with
ownership remaining with the City. The analysis also determined the value of the system, to explore
the option of a possible sale to private investors. The consultant recommended against private
ownership primarily because significant rate increases would be needed to offset the loss of a 35%
property tax subsidy provided under public ownership. Also, since the facilities were built with
federal grant money, sale of the plants would occasion the payment of almost half of the cash inflow
from the sale back to the federal government. Ernst & Young recommended that the City
competitively propose the operation and maintenance of the facilities. In selecting this option, the
City retained tax advantages and gained with substantial savings via operational efficiencies.
Community participants/advisory committees. A task force including various members of the
City Council and representatives of the stakeholders was formed to evaluate the proposals.
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Stakeholders included all members of the community affected by the outcome of the decision -
City-County Council members, utility management and staff, regulatory officials (concerned with
effluent limits), and general citizens. The inclusion of this large, diverse group of people early in the
decision-making process greatly facilitated the privatization process in the later stages.
Privatizer selected and why. White River Environmental Partners (WREP), a consortium of
private firms, was selected for the operations, maintenance, and management (OM&M) of the two
facilities. The selection was based primarily on economics and the professional capabilities of the
contractor. WREP's proposal guaranteed 38% savings over the previous year's budget, and the
professional capabilities of the companies within the consortium were considered superior to the other
proposals, WREP consists of several large national and international companies: LAH White River
Corporation, JMM White River Corporation, Indianapolis Water Company (IWC) Services, IWC
Resources Corporation, GWC Operational Services, JMM Operational Services, Lyonnaise American
Holdings, Lyonnaise des Eaux-Rumey, GWC Corporation, and Montgomery Watson Americas.
The two closest proposals were AmericanAnglian and the internal proposal submitted by the existing
employees. Although WREP and AmericanAnglian were close in terms of economics, the City
believed it would benefit from the extensive professional capabilities of WREP. The economics of
both WREP and AmericanAnglian surpassed the economics of the internal proposal.
Regulatory involvement Since the City of Indianapolis has maintained ownership of its wastewater
system, the Indiana Department of Environmental Management (IDEM), the state environmental
regulatory agency, does not have jurisdiction over the facilities' operation or wastewater service
rates. However, federal tax regulations do restrict the length of a contract between government
private entities, although renewal of a contract is not constrained.
Time frame. The entire process, including the preparation time for procurement, took 8 to 10
months. The City signed an operational contract with the consortium on December 23,1993, and
operations were transferred to the consortium on January 30, 1994.
Cost to the community for procurement process. The investment was estimated to be
approximately $200,000 to $300,000 for advisors, consultants and engineers. This amount was paid
back to the City within a few weeks, since the annual operating budget was immediately decreased
from $30 million a year to $17 million a year.
How consensus in the community was achieved. The inclusion of representatives from such a
large group of stakeholders in the task force evaluation committee assisted the privatization process
by taking all interests into consideration early in the evaluation process.
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Labor Issues
Nature and extent of labor union involvement. This .privatization was one of the City's first and
relations with the union, the American Federation of State, County, and Municipal Employees were
contentious. The union sued the City and released media ads denouncing privatization. After
working through numerous privatizations together, the City and union have much improved relations,
such that the City and union recently won a joint award from the Ford Foundation.
Number of union employees. AFSCME is a rank-and-file union. Workers paid weekly by the hour
were union members. Engineers and other management positions paid biweekly were not.
The consortium agreed to honor the existing
Acceptance of privatization by labor union. The consortium agreed
agreement between AFSCME and the City when the privatization occurred.
Employee issues addressed in service contract. All employees were guaranteed an interview by
the consortium. If not hired by them, they were guaranteed an equivalent job with the City. The
agreement guaranteed employees jobs, offered better advancement opportunities, additional training,
and in some cases, more pay with the consortium. Over the two-year period of contract operations,
WREP workers earned an average of 3% more than under City operations.
Out placement services and displacement process. The consortium hired about half of the existing
employees. The remainder were placed using a "holding pool" concept. It was expected to take at
least nine months to find jobs for these employees; however, as a result of the strong economy in
Indianapolis all employees were placed in about two months.
Public Policy Issues [ /
Issue How It Was Addressed
How was the consortium to be held First, it had to meet NPDES requirements, and
accountable for compliance with was responsible for any penalties as a result of
environmental regulations, customer violations. It was also required to maintain the
service levels, and other relevant same effluent level or better than under City
requirements? operations (chief tool for measuring the success
of private operations). Lastly, it was subject to
selective audit by an overseeing board to
ensure contract compliance and keep the City
apprised of the status of private operations.
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How was the community assured that All major capital improvements remain the
the facility would be expanded to meet responsibility of the City, The consortium has
future needs? been required to inform the Gity of the need to
upgrade or expand, but the final decision to
make improvements has remained the City's to
make in conjunction with its engineers.
Economics of Case Study for the Community and Privatizer
Expected benefits of privatization. The City believed that equipment life could be prolonged,
training of employees could be improved, and additional benefits could be reaped from having the
AWT facilities operated and maintained over a number of years by a private contractor having
experience with a variety of similar systems. The private operation and maintenance of the AWT
facilities was viewed by the City as a long-term project.
The City-run AWT facilities had won numerous awards for their operations and safety. The City did
not fully realize the inefficiency of its operations until significant cost savings occurred after
privatization. The private operators implemented new process controls and computer operations as
a result of their access to more sophisticated technology which was unavailable to the City operators.
Short-term economic impacts. After two years, WREP operations has saved the City $22.6 million
in operations and maintenance costs. WREP operations has been projected to save approximately
$60 million over five years. Between 1993 and 1994, the AWT facilities' O&M budget was reduced
from $30 million to $17 million and the number of public employees was reduced from 328 to 196.
By June 1996,168 WREP employees staffed the AWT facilities.
The City also received $57,010 in energy rebates from the Indianapolis Power and Light Company
in recognition of energy efficient motors, which were designed and installed by WREP personnel.
Rate impacts. Although rate increases have been recommended and anticipated, the City has been
able to hold rates constant due to cost savings associated with the privatization arrangement.
However, rates are expected to grow slowly over time because of numerous factors, including
inflation. Instead of lowering rates, the City of Indianapolis deposits all savings associated with
privatization into a Sewer Sanitary Fund. This fund is used to enhance the City's economic
competitiveness by improving the City's system. For example, funds have been used to dry out
interceptors and collector systems and to provide sewer service to new areas.
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Noneconomic Benefits to Community
Compliance history. Since privatization, effluent violations have been reduced from seven under
City operations to only one. According to an official with the City of Indianapolis, rains have been
heavier than usual since the consortium began operations. Nevertheless, WREP operates at about
one-fifth to one-seventh the exceedence rate (the rate at which violations of IDEM and EPA
regulations occur) of that of City operations under stressful conditions, which provides additional
evidence of the success of consortium operations.
The White River is a low flow river which receives outflows from various local industries and unitary
systems, in addition to flows from the City's combined sewer and stormwater system. A fishkill
recently occurred in the White River, and industrial run-off from the local industries has been
suggested as a potential cause for the kill. Another suggestion has been that the kill was simply a
natural phenomenon which occurred due to the extreme low water being experienced at the time.'
Li spite of these possibilities, the IDEM has recommended fines to the City and WREP for the fishkill,
but the appeals process is not over and no fines have been paid.
Safety. The accident rate at the AWT facilities decreased 70% in the first year of WREP operations,
and decreased 42% again in the second year. This demonstrates an overall 80% reduction in the
number of accidents per year. The Indiana Water Pollution Control Association (IWPCA) presented
its annual safety award to WREP in 1995.
Technology changes. New process controls and computerization have been added to the facilities
since the consortium began operations. The private operators have greater access to the newest
technologies through their European parent companies.
Employee relations. Employee grievances were reduced from 38 under City operations to only one
under WREP operations in 1994, and none in 1995.
Potential Drawbacks
Reimbursement of federal grant and/or state SRF funds. Since contract operations was chosen,
and the City has retained ownership of the facilities, the reimbursement of federal grant and/or state
SRF funds was not necessary, and the City benefits from tax advantages.
Negative aspects of long-term contracts. The contract is only for five years. At the end of the
contract term, the contract will have to be renegotiated. Any changes desired by the City at that time
can be incorporated into a new contract, or the City will need to re-propose the operations.
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Labor skepticism. The consortium entered into the same agreement with the union as the union
previously had with the City. Since privatization, employee grievances have decreased from 38 in
1993 to 1 in 1994, and none in 1995.
Lessons Learned
The City of Indianapolis has introduced competition into a variety of services originally performed
by the government. Although the City approaches each competition individually, it has developed
a set of general principles which guide all of its competition/privatization efforts. So far, the City's
privatization efforts have resulted in total savings nearing $200 million. Below is the City's list of
general principles for competition, taken from its "General Overview of Competition & Privatization
Initiatives at the City of Indianapolis/Marion County Indiana" dated June 11, 1996:
» "The key to positive results is competition. Privatization is just one of the
several possible outcomes.
Invitations to competition should be public. Specifically, competition must
be open to all qualified contestants to elicit everyone's most aggressive
response. The Request for Proposals ("RFP") process is used by the City
because under Indiana law, the RFP process (unlike formal proposals) permits
negotiations to continue after a leader or leaders are selected. In the City's
experience, these final negotiations nearly always enhance deals.
» Evaluations of competitive responses need to be inclusive. The City usually
accomplishes this by forming ad hoc, cross-functional evaluation teams,
representing all the major stakeholders and line organizations.
* To the extent practical, existing employees should be encouraged to enter
competitions for their functions. In practice here, this increasingly translates
into involvement of the union membership and leadership in competitions.
City line management, and consultants hired at City expense, are often
involved in development of these "intrepreneurial" responses. The creativity
of the union leadership in these competitions was recognized in 1995 by an
American Government Award from, the Ford Foundation, presented jointly to
the union and the City.
« A key technical resource for development of effective "intrepreneurial"
proposals is accurate cost accounting. Activity Based Costing (ABC) is
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the City's preferred methodology.
Although the City often seeks estimates and advice from consultants and
"experts", when in doubt it lets the marketplace speak. For example, the
study conducted for the privatization of the two AWT facilities estimated
possible savings between 5-10%. Later RFPs eventually led to a deal saving
a minimum of about 40%, or more than $60 million over five years.
Deal documents need to explicitly address performance standards, and provide
economic incentives for vendors to attain and maintain performance goals.
Such provisions must be implemented with effective contract oversight and
management on the City's part."
Community/Privatizer Contacts for Additional Information
Tom Olsen
Director of Enterprise Development
City of Indianapolis
City-County Building, Suite 2460
200 East Washington Street
Indianapolis, IN 46204
Phone (317) 327-4794
Fax (317) 327-4954
Mark Maxwell
Manager of Contract Compliance
City of Indianapolis
Phone (317) 327-5654
Charles Bardonner
Administrator / Quality Services
Department of Public Works
2700 S. Behnont Avenue
Engineering Building
Indianapolis, IN 46221
Phone: (317)-327-2516, (317) 327-2244
Fax: (317) 327-2334
Steve Fantausso, President, or
Linda Ard
AFSCME, Indiana #62
1427 N. Pennsylvania Ave.
Indianapolis, IN 46202
Phone: (317) 632-1432
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Cost-Effective Environmental Management Case Study
Contract Operations of City Water Department
Jersey City, New Jersey
Overview of Public-Private Partnership
In the summer of 1995, the City of Jersey City (City) sought to privatize the operations of the City
Water Department through the efforts of the newly-elected administration. The new Mayor, the
Honorable Bret Schundler, was elected based on a pro-business and privatization platform. The new
City government recognized the "institutional gridlock" causing inefficiency in the operations of its
water system. After issuing a comprehensive RFP and carefully evaluating the proposals, the City
entered into a three-year operating contract (with two optional one-year renewals) with United Water
Resources (UWR). The contract provided for a $2.5 million up-front concession payment to the City
and is projected to save the City $38.5 million over the five-year term.
Community Demographics
Size and location. The Jersey City Water Department provides water service to approximately
32,000 retail customers located in the New Jersey metropolitan area across the Hudson River from
New York City, Jersey City is in Hudson County, bounded on the north by Hoboken, New Jersey
and on the south by Bayonne, New Jersey. The Boonton Water Treatment Plant is located adjacent
to one of the City's water sources, the Boonton Reservoir, approximately 23 miles northwest of the
City. Potable water is pumped via aqueduct to the Jersey City area, where it is distributed to retail
customers. Wholesale customers are served along the aqueduct.
Economics. The City has a favorable cost of living and tax environment for attracting business.
Wages are relatively low as are taxes and other city charges for utility services. Many New York City
companies have offices in Jersey City due to the relatively low cost of doing business. In recent years
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the City has had economic problems, and as a result, the Mayor has focused on the City's economic
development and financial challenges. He has been instrumental in the promotion of privatization and
desires the most cost-effective method for providing water services to the City's customers,
Customer constituency. The City provides both retail and wholesale water service, and
approximately 29,000 of the City's 32,000 retail customers have meters with a diameter of one inch
or less. The City provides wholesale water service through individual contracts with UWR of
Hackensack, New Jersey and the municipalities of Hoboken, Lyndhurst, and West Caldwell.
Facility Overview. The City's water system consists of a City-owned watershed, two reservoirs,
a treatment facility, and an extensive transmission and distribution system. The City owns and
maintains two reservoirs, the Split Rock and the Boonton, and about 5,700 acres of watershed
around the reservoirs. The reservoirs have capacities of 3.3 and 8.0 billion gallons a day, respectively.
The 80 MGD Boonton treatment facility receives average daily flows of about 55 MOD.
Regulatory history. The government agency which regulates government-owned water and
wastewater utilities is the New Jersey Department of Environmental Protection. The City has had
compliance problems with state and federal regulations in the past. In particular, the City had been
stockpiling sludge from the water treatment plant and was forced to dispose of this stockpile, and
further sludge generated, into a regulation disposal site.
Specific type and extent of privatization. The City entered into a three-year operating contract
(with two optional renewals for one-year periods) with UWR. The contract provided for the
privatization of all water services including source of supply, treatment, distribution, meter reading,
billing and collection, and laboratory services. The only functions remaining with the City were rate
setting and policy-making. A creative cost-sharing arrangement was negotiated to encourage a
decrease in uncollectables, to promote marketing of additional water services to wholesale customers,
and to reduce the amount of unaccounted-for water. The service contract provides a formula for
calculating these incentives to UWR.
Overview of Procurement/Competition and Implementation Process
Motivating issues. The City considered privatization as a result of the new City administration's
focus on business and recognition that "institutional gridlock" in the City had substantially constrained
the performance of the water utility department. The new Mayor had been elected on a platform
which included a focus on privatization. In addition, as a result of uncollectables and unaccounted-for
water, only 68% of the water produced was ultimately being billed and collected. In comparison, a
well-operated system should have less than 15% non-revenue water and less than 1% uncollectables.
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Community participants/advisory committees. A steering committee was formed, consisting of
members of the City Council and key staff personnel involved in providing water services. No formal
external advisory committee was established, although the labor unions were active in providing input
during the process. Utility staff who were involved in the process included the Director of Water
Operations, the Deputy Director, the Chief Engineer, and the Manager of Water Operations, In
addition, the City's Business Manager played an important role in the process.
Utility advisors. Raftelis Environmental Consulting Group (RECG) managed the privatization
feasibility and procurement process. RECG was assisted by W.R. Lazard on relevant financial issues,
Privatizer selected and why. A comprehensive RFP was prepared which included in-depth
evaluation criteria, and UWR was selected as the privatizer. The proposals were evaluated based on
the following criteria:
technical merit of the proposal;
* proposer's management, operations and maintenance approach;
experience and responsiveness of the proposer;
* capability of the proposer to complete the obligations of the agreement; and
» price of the proposal,
Regulatory involvement. The state of New Jersey had recently passed a new privatization
procurement act for water utilities, the New Jersey Water Supply Public-Private Contracting Act, and
Jersey City was one of the first communities to follow this act. The privatization required approval
from several agencies within the state, including the Public Utilities Board, the Department of
Environmental Protection, and the Division of Local Government Services in the Department of
Community Affairs. Also, a New Jersey municipal procurement act, used for processing government
services, was deemed irrelevant to Jersey City's case since the procurement was a privatization.
Time frame. The procurement process took approximately one year, including the issuance of an
RFQ and an RFP, and implementation. The final agreement was signed on April 1,1996.,
Cost to the community. External cost to the community for the process was approximately
$300,000 to $350,000.
How consensus in the community was achieved. Given the large cost savings associated with
privatization and the increased revenue from the marketing of services to wholesale customers, it
became apparent that it would be advantageous for the City to pursue privatization. Thus gaining
the consensus of the City Council was relatively straightforward. There was substantial focus on
union issues so as to promote agreement among labor representatives as well.
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Labor Issues
Nature and extent of labor union involvement. Labor unions were brought into the procurement
process early and were heavily involved in negotiating the service contract: An innovative concept
of leasing employees became the basis for the agreement. Under such an arrangement, the employees.
remained Jersey City employees but were leased by the privatizer. All benefits and salaries were paid
by the privatizer, but the municipal benefits accrued in the pension plan program were retained by the
City. There is still some question as to whether recent state law has allowed the employees to retain
all the privileges of municipal employment in the state retirement system.
Outplacement services and displacement process. The service contract required that the privatizer
utilize all employees for at least one year. Afterward, the privatizer could release these employees
back to the City, A special fund was set up to cover the cost of displacement after the one-year
period.
Public Policy Issues
Issue
How would the possible displacement of
City employees be handled?
How would UWR be held accountable for
compliance with state and federal
environmental regulations and for
maintaining an adequate customer service
level?
How It Was Addressed
Frank negotiations with the labor unions from
the beginning of the privatization process
facilitated the transition to private operations.
The decision to require UWR to use City
employees for at least one year resulted from
negotiations with all parties.
In the service contract, UWR assumed
responsibility for potable water quality and
liability for any fines issued due to regulatory
violations. In addition, a comprehensive and
continuous reporting system from UWR to
the City aided the City's oversight of private
operations. A detailed description of UWR's
customer service responsibilities was
incorporated into the contract as well.
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Labor negotiations play a major role in the privatization process, and should not be downplayed.
"It cannot be overly emphasized that a project of this nature and magnitude could not be
accomplished without the administration and governing body working in conceit along with the
selected consultant and the appointed contract selection committee to achieve clearly defined
objectives. As stated in your case study, a comprehensive and clearly written RFP is essential... Also
the Jersey City RFP contained a Draft Service Agreement which gave insight to the proposers of what
would be contractually required of them. This feature was invaluable at the time of actual contract
negotiations as all parties were on the same page. A substantial time and cost savings was realized
by everyone due to these features." - Joe Macula, City Finance Director
Community/Privatizer Contact for Additional Information
Daniel F. Mahony, Jr.
City of Jersey City
325 Palisades Avenue
Jersey City, NJ 07307
Phone (201) 547-5157
Fax (201) 547-6586
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Cost-Effective Environmental Management Case Study
Sale of Wastewater Treatment Plant
Under Executive Order 12803
The Miami Conservancy District
Municipalities of Carlisle, Franklin, and Germantown, Ohio
Overview of Public-Private Partnership
This public-private partnership involved the sale of the 4.5 MOD wastewatef treatment facility by the
Miami Conservancy District (MCD) to Wheelabrator Environmental Operational Services
(Wheelabrator EOS) of Hampton, New Hampshire. The transaction represented the first sale of a
grant-funded environmental facility to the private sector under Executive Order 12S03 as signed by
President Bush in April 1992. MCD is a flood control government agency serving the counties
abutting the greater Miami River around the Dayton, Ohio area; and the Franklin area wastewater
treatment plant serves the municipalities of Carlisle, Franklin, and Germantown, as well as
Montgomery and Warren counties. The 4.5 MOD plant was completed in 1972 at a cost of $3.2
million, including a $1.75 million federal grant. Since the municipalities and counties had existing
service agreements with MCD, it was necessary for them to approve the sale of the facility.
Community Demographics __
Size. The Franklin area wastewater treatment plant (Franklin WWTP) serves a population of
approximately 40,000 in the three municipalities of Carlisle, Franklin, and Germantown, and
incorporated areas of Montgomery and Warren counties. Growth has been moderate but steady over
the past several years, and area governments have been very focused on economic development.
Location. The Franklin WWTP is located approximately 30 miles southwest of Dayton, Ohio.
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Economy. The economy of the area serviced by the Franklin WWTP is driven primarily by the
manufacturing industry. Additionally, several process wastewater industries in the area provide jobs
for residents. All communities are aggressively recruiting new industry into the area, and having
adequate sewer capacity for economic development is a major concern.
Nature of Customer Constituency. The plant serves about 8,000 households and several major
industries including pulp and paper mills, pharmaceutical manufacturers, and industrial launderers.
These industries represent 33% of the plant's total effluent flow and over 75% of plant loadings.
Facility Description
Facility Overview. The 4.5 MGD plant was completed in 1972 at a cost of $3,2 million, including
a federal grant of $1.75 million. Plant upgrades and expansions totaling $7.5 million were completed
in 1984,1989, and 1991. The facility was designed to treat a combination of industrial and domestic
waste. Current flows average slightly greater than 2.0 MGD.
Regulatory History. The wastewater treatment plant is regulated by the Ohio EPA. The transfer
of the Domestic Sewage Exclusion (DSE) from MCD to the private and public partners
(Wheelabrator EOS and the three municipalities of Carlisle, Franklin, and Germantown) was a key
issue in the sale of the facility. In addition, the Ohio Water Development Authority (OWDA) had
loaned approximately $5.0 million to MCD for upgrades and expansions, and OWDA had to approve
the transfer. A key element of the transfer was the assurance that the OWDA tax-exempt status of
the current outstanding bonds would be preserved. Given the fact that the municipalities maintained
sewer collection, rate setting, and customer service responsibilities for their retail customers, the
transaction did not fall under the jurisdiction of the Ohio Public Service Commission.
Overview of Procurement/Competition and Implementation Process
Motivating Issues. Since its construction in the early 1970s, flood control has been the major
mission of MCD. As a result of a strategic planning exercise in the late 1980s, MCD recognized the
need to divest itself of its wastewater treatment facility and concentrate on its major focus - flood
control. Therefore, MCD moved to contract operations of the Franklin WWTP in July 1987.
However, MCD maintained its NPDES permit, the responsibility for rate setting over its bulk
customers (three municipalities and two counties), and the management of the municipal industrial
pretreatment program. Over the next several years, MCD considered full privatization, and there was
significant controversy as to who would be a suitable owner of the facility. As a result of Executive
Order 12803, th§ full privatization of MCD's Franklin WWTP became an EPA pilot project for
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transferring a wastewater treatment facility to a private owner. After significant economic analysis,
policy evaluation, and other relevant considerations, MCD, the bulk municipal customers, and
Wheelabrator EOS agreed to the sale of the facility to Wheelabrator EOS.
Major Community Participants
Individual
James L. Rozelle
Samuel L. Coxson
James Mears
Matthew Coppler
Patrick Long
Edward L. Schwaberow
Theodore Landis
Organization
MCD
City of Franklin
City of Franklin
Municipality of Carlisle
Municipality of Carlisle
Village of Germantown
Village of Germantown
Title
General Manager and Chief Engineer
City Manager
Mayor
Municipality Manager
Mayor
Village Manager
Mayor
Community Advisors
Individual
Frank Leone
Michael Deane
Organization
Raftelis Environmental
Consulting Group, Inc.
U.S. EPA
Title
Environmental Consultant.
Public-Private Partnership
Coordinator
Privatizer Selected and Why. The communities and MCD negotiated with Wheelabrator EOS to
own and operate the Franklin WWTP. Wheelabrator EOS had been the successful contract operator
for over six years and had been an effective leader in dealing with EPA regulations, structuring
financing of similar projects, and consummating relevant sales issues. Further, Wheelabrator EOS
had a long history of dealing with similar transactions in the waste energy business, and Ohio law
allowed MCD to conduct competitive negotiations directly with Wheelabrator EOS without going
through a procurement process.
i
Regulatory Involvement. The Ohio EPA, EPA Region V Headquarters in Chicago, the US EPA,
and the US Office of Management and Budget were all key in approving the wastewater facility sale.
In addition, the Ohio Water Development Agency had to approve the transfer to ensure the continued
tax-exempt status for outstanding bonds issued on behalf of MCD.
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Time Frame
April 30,1992 Executive Order 12803 signed by President Bush.
December 1992 EPA Administrator Riley approved the sale of the Franklin WWTP as an
EPA pilot project for Executive Order 12803.
August 1993 Consultant hired to evaluate privatization feasibility and to assist in
implementing the transaction.
June 1994 ' Municipalities approved service sales contract with Wheelabrator EOS.
July 11,1995 EPA Administrator Carol Browner approved the sale of the Franklin
WWTP to Wheelabrator EOS.
Cost to the Community for Procurement Process. The feasibility analysis project cost
approximately $35,000. In addition, professional fees for contract negotiation, preparation of the
service agreement, and relevant supporting activities were approximately $150,000. Much of the
legal fees were absorbed by Wheelabrator EOS and would have translated into additional expenses
of more than $100,000.
How Consensus in the Community was Achieved. Community consensus was achieved by
committed involvement from the municipal managers, MCD Director, community advisors, and
Wheelabrator EOS. The municipal managers kept the councils well informed, and effective
presentations were developed to educate their councils and gain support. Economic and non-
economic benefits, as well as drawbacks, were discussed openly with the councils. The positive
benefits of the sale and frank discussions with the communities were the main ingredients of the
successful transfer. Montgomery and Warren counties were similarly brought on board at a later date
to support the project.
Labor Issues
There were no labor issues that arose since the plant was already under private operations.
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Public Policy Issues
Issue Haw It Was Addressed
Land ownership The municipalities believed it in their interest to
own the land and lease it to the new owner.
Under this approach, they maintain certain
control over the sale arrangement. A prepaid
land lease was structured to provide them with
payment for use of the land,
Assurance to the communities of expansion The service contract required Wheelabrator EOS
for future needs, to expand the facility at certain threshold points.
Formulas were provided in the service agreement
allowing for the recovery of expansion costs.
Maintenance of municipal industrial The three municipalities and Wheelabrator EOS
pretreatment programs and compliance with are co-permitees. They must work together to
environmental regulations. ensure proper influent is discharged in the facility
and appropriate treatment levels are maintained.
Economics of Case Study for the Community and Privatizer
Since the procurement was sole-sourced, Wheelabrator EOS agreed to let the communities' advisors
review the economics under a confidentiality agreement.. The advisors* analysis showed that over the
20-year contract period, the cost of continued MCD operation versus Wheelabrator EOS operation
was basically the same. The advisors were convinced that Wheelabrator EOS would make only
reasonable returns, similar to that allowed under regulation by the Ohio Public Utility Commission.
Wheelabrator EOS's cost in the early years of the agreement would be substantially lower than
MCD's, but as existing bonds are paid off, MCD costs become lower. The sale of the plant was in
effect a "refinancing of the mortgage" of the plant over the contract life. The sewage treatment rate
was reduced from the existing MCD rate of $1.69 per 1,000 gallons to the Wheelabrator EOS rate
of $1.45 per 1,000 gallons, a 14% reduction. It was agreed that the Wheelabrator EOS cost would
increase by the CPI each year.
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Noneconomic Benefits
The communities were able to assign certain ownership risks to the private partner via the service
contract, and can repurchase the facilities at the end of the 20-year term if so desired. The
arrangement also allows for responsive expansion of the facility as economic growth materializes, and
the communities have available to them the technical resources of a major environmental corporation.
Lessons Learned
A major lesson learned was to have all affected political jurisdictions on board early; however, by
not including Montgomery and Warren counties in the early stages, the consensus process took
longer as all relevant agreements were executed.
Another lesson learned was not to be misguided about the amount of time it takes to navigate through
the approval process, particularly when federal approvals are required for the sale of grant-financed
assets. Gaining approval for a sale is complex and requires appropriate internal and external input
and commitment. Although the time frame today may be less than the 30-month period experienced
by MCD, the amount of time required to receive all approvals may still be substantial.
In addition, negotiation with a private contractor is a careful and important process. It is imperative
to negotiate with the proper resources, time frame, and venue in mind. Instrumental in the process
is appropriate economic, legal, and engineering input.
Community/Privatizer Contacts for Additional Information
Jim Rozelle
General Manager
Miami Conservancy District
38 East Monument
Dayton, OH 45402
Phone (513) 223-1271
Fax (513) 223-4730
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Cost-Effective Environmental Management Case Study
Concession Operations
of Water and Sewer Facilities
Township of North Brunswick, New Jersey
Overview of Privatization
The first US publicly-procured, long-term concession contract for the operation of a water and sewer
system was signed in February 1996 by the Township of North Brunswick (the "Township") and US
Water Inc. The Township's Water Treatment Plant had been operated by US Water under contract
operations for ten years prior to the concession agreement. This contract was the first application
of two recent Jersey state laws: the New Jersey Wastewater Treatment Public-Private Contracting
Act and the New Jersey Water Supply Public-Private Contracting Act. Under the terms of the
concession contract, US Water operates, maintains, and manages both the water and wastewater
systems for 20 years, including the distribution and collection systems, billing and collection, and
customer service. In addition, US Water will install new water meters system-wide. The Township
still retains ownership of the facilities and its rate-setting ability, but does not participate hi any of the
day-to-day operations. As a result of the concession, $23 million of Township debt was defeased by
US Water, an initial concession payment of $6 million was made to the Township, and royalties of
$22.9 million will be paid to the Township over the 20-year life of the contract. The township
estimates the concession contract will result in a total savings of $46 million over the 20-year period.
Community Demographics
Size. The facilities serve the entire Township of North Brunswick having a population of
approximately 35,000, and an additional 200 surrounding residences. The number of customers
served is about 12,000, consisting of approximately 70% residential, 15% commercial, and 15%
industrial.
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Location. The Township of North Brunswick is located in Middlesex County, New Jersey.
Economics. The economic base of the region includes manufacturing and some pharmaceutical
companies. The area has steady population growth of about 1/2% per year (US Water estimate).
A major residential complex of 2,000 units has just been approved to be built in the Township which
may create increased growth in the area.
Nature of customer constituency. The facilities serve the Township of North Brunswick, which
is a mixture of industrial (20%) and residential customers (80%).
Specifics on bulk/wholesale customers. The Township serves Franklin Township on a wholesale
basis for up to 1.0 MOD
Facility(s) Description (Treatment, Collection, & Disposal) -
Size/age The Water Treatment Plant is only four years old, recently built because the original plant
burned. Some of the pumping stations and lines are 50 to 60 years old.
Regulatory history. The Township has experienced only minor violations of New Jersey Water
Supply Authority regulations and New Jersey Department of Environmental Protection regulations.
Facility overview. The Water Treatment Plant has a capacity of 10.0 MGD. Average current flows
are 4.0 to S.O MGD. The Township has a contract with the New Jersey Water Supply Authority to
draw 8.0 MGD.
Overview of Procurement/Competition and Implementation Process
Motivating issues. In the fall of 1994, a blue ribbon panel was organized to study the options
available to the Township. Ernst & Young conducted a feasibility study and projected the cost of
current operations over 20 years and calculated the necessary rate increases. The Township wanted
to find a less expensive way to operate the facility, and additionally wanted to relieve itself of billing
and collection, customer service, and other responsibilities related to the operation of the facility, but
still retain ownership of the facility and its rate-setting ability. The Township also wanted to improve
its balance sheet by defeasing some of its outstanding debt.
Community participants / advisory committees. The blue ribbon panel consisted of various
members of the Township Council and the mayor.
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Privatizer selected and why. US Water was selected primarily for economic reasons. The US
Water proposal provided an estimated $46 million cost savings over a 20-year period, and the amount
and timing of the additional payments were the most amenable to the Township. All of the bidders
were required to defease $23 million of Township debt in their proposals, but the type and timing of
other payments were left up to the proposal. US Water proposed to defease the $23 million in debt,
to make an up-front concession payment of $6 million to the Township, and to pay royalties of $22.9
million over the 20-year contract period, with varying payments per year.
Regulatory involvement. In New Jersey, the contract must be reviewed by state agencies, and
afterwards there is no further review. Water supply service contracts require approval of the Division
of Local Government Services in the Department of Community Affairs, the Board of Public Utilities,
and the New Jersey Department of Environmental Protection. Wastewater treatment service
contracts require approval of the Division of Local Government Services in the Department of
Community Affairs and the New Jersey Department of Environmental Protection.
This new legislation in New Jersey is quite innovative in the manner in which it allows payment of
concession fees to the municipality. These fees may be paid either up-front, annually, or however the
municipality desires. The concession fee must be used to reduce or offset property taxes, service
rates, nonrecurring expenses, or capital asset expenditures. The laws permit a wide range of
contractual agreements in order to best meet the requirements of the local,municipality. However,
the utility may be disadvantaged by the comprehensive contract reviews by the above-mentioned
regulatory bodies. Furthermore, competitive procurement is required, and asset sales are prohibited.
Time frame. The Township began exploring its options in the fall of 1994 with the organization of
the blue ribbon panel and the feasibility study by Ernst & Young. The combined RFQ/RFP was
issued in February 1995 and proposals were due May 4,1995. The procurement process was delayed
for a while during the summer while the Township waited for the New Jersey Water Supply Public-
Private Contracting Act (which had been passed by the New Jersey Legislature) to be signed by the
Governor. The Township also had to wait on both the passing and the signing of the New Jersey
Wastewater Treatment Public-Private Contracting Act in order to privatize the sewer collection
services, even though the Wastewater Treatment Facility remained the responsibility of the Middlesex
County Municipal Utilities Authority (MUA). When both acts were finally passed, the Township
issued an amended RFP, providing bidders with the opportunity to re-propose based on the passage
of these two new state laws. The Township began negotiations with US Water in September of 1995.
Thus, the entire process took one year.
Cost to the community for procurement process. The Township invested approximately $400,000
in the privatization process.
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How consensus in the community was achieved. The decision to privatize was not an issue since
the Water Treatment facility was already being operated under a contract with US Water.
Additionally, Mayor Paul Matacera of the Township wrote in an article, "This contract is a win-win-
win public-private partnership for the taxpayers and utility users, the employees and the private firm."
Labor Issues
Outplacement services and displacement process. Township employees are represented by the
local chapter of the Communications Workers of America. Since the facilities were already operating
under contract operations with US Water, only six employees were affected by the concession
agreement. US Water agreed to hire all current employees for at least two years. After two years,
employees would either be offered a permanent job with US Water or with the Township.
Public Policy Issues
Issue
How was the privatizer held accountable
for compliance with environmental
regulations, customer service levels, and
other relevant requirements?
Haw It Was Addressed
US Water must comply with state water
quality standards and pay fines assessed
for violations. There were a number of
requirements for repairs and maintenance
in the contract, and the Township was
given annual inspection rights. An
Operations Committee of Township
officials and US Water employees would
oversee day-to-day facility operations and
resolve disputes, For customer service,
numerical standards in the contract set
maximum response times to customer
problems. For example, two days was
established as the response time for a
customer complaint, and a specified
number of hours was established as the
response time for a sewer blockage.
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How was the community assured that the facility The Township is responsible for all
would be expanded to meet future needs? capital improvements, but can petition
US Water to make improvements if they
are able to do so at a lesser cost than the
Township's engineers. No improvements
are an absolute requirement for US
Water.
Economics of Case Study for the Community and Privatizer
Short-term economic impacts. The contract spans 20 years, and short-term benefits were not
considered in the decision to privatize.
Long-term economic impacts. The fair market value of the 20-year transaction was the primary
criterion by which the proposals were judged. The Township estimates total savings of $46 million
over the 20-year period.
Rate impacts. The US Water proposal estimated rates for the next 20 years based on their annual
fee, with the first year's rates increasing 5.75% over the previous year's rates, and eventually
increasing only 3.0% in the latter years of the contract. The cost of operations by US Water was
significantly less expensive than Township operations.
Noneconomic Benefits to Community
The system-wide replacement of all water meters was included hi the contract as part of US Water's
responsibilities.
Lessons Learned
The main questions to ask are "What is the objective of the municipality?" and "Can this objective
be achieved through private operations?" In the case of North Brunswick, the Township wanted to
be relieved of all utility requirements, to improve its balance sheet, and to have some budget relief.
Because of these goals, the Township had to take a longer-term view.
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Community/Privatizer Contacts for Additional Information
David Mackenzie
US Water
1 148 Washington Street
Cape May, NJ 08204
Phone (609) 884-6119
Fax (609) 884-4349
David Milkowski
Ernst & Young
Phone (908) 906-3225
Paul Keller
Business Administrator
North Brunswick Township
Phone (908) 247-0922 ext,435
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Cost-Effective Environmental Management Case Study
Contract Operations
of the East Bank Sewage Treatment Plant
and the West Bank Secondary Treatment Plant
Sewerage and Water Board of New Orleans, LA
Overview of Public-Private Partnership
The Sewerage and Water Board of New Orleans (S&WB), a statutory body of the Louisiana state
constitution, owned and operated two wastewater treatment plants which provided secondary
treatment of wastewater flows originating in the greater New Orleans area with effluent discharging
into the Mississippi River, The S&WB was having difficulty meeting permitted levels for total
suspended solids (TSS), operating costs were increasing, and the plant's maintenance program could
not keep pace with the repair requirements for the aging East Bank facility. In 1991, the S&WB
authorized and funded a $1,7 million capital improvements program (CEP) to rehabilitate major
equipment at the East Bank Plant and decided to switch to private operations, maintenance, and
management (OM&M). As a result, the S&WB contracted with Professional Services Group (PSG)
in 1991 to operate, maintain, and manage the East Bank and West Bank Sewage Treatment Plants
for a five-year term. PSG operations have saved the S&WB an average of $1.1 million annually.
Community Demographics
Size. The two plants serve approximately 165,000 customers (a population of 480,000).
Location. The plants serve the greater New Orleans area.
Economy. In addition to the City's year-round tourism industry, the City of New Orleans is a major
shipping port, especially for grain and petrochemicals.
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Nature of customer constituency. The customer base consists of only retail customers, principally
residential and only 1% industrial.
Facility(s) Description (Treatment, Collection, & Disposal)
Size. The East Bank treatment facility, constructed in 1962 and expanded in 1980, is a 122 MOD
pure oxygen activated sludge plant. The smaller West Bank secondary treatment facility, constructed
in 1973, is a 10 MGD trickling filter plant which is now being expanded such that its capacity will be
doubled.
Regulatory history. The S&WB has had difficulty meeting NPDES .permit requirements which has
resulted in several violations. These violations, prior to privatization, continue to be the subject of
litigation between the city and US EPA and the US Department of Justice (DOJ). The facilities have
been regulated by the US Environmental Protection Agency (EPA) and the Louisiana Department
of Environmental Quality.
Facility overview. The East Bank plant processes more than 90% of the wastewater from the City
of New Orleans (City). Having a service area below sea level, high annual rainfall and a large
population base places significant demands on the facility. Although the facility is currently rated at
122 MGD with short-term peak treatment capacity of 239 MGD, extended wet weather flows of as
high as 2SO MGD are not uncommon.
Overview of Procurement/Competition and Implementation Process
Motivating issues. In addition to achieving permit compliance, annual operating savings of
$750,000 were projected under privatization due to improved worker productivity. Another major
reason for the privatization arrangement was to circumvent Civil Service Commission limitations on
employment and job changes. Civil service salary caps did not allow the S&WB to hire the most
technically qualified personnel to operate the plant.
Community participants/advisory committees. All of the privatization research was performed
in-house. A group headed by the S&WB Sewer & Water Committee Chair, Katherine Moraldo,
studied contract operations around the country through a process of gathering and reviewing RFQs,
RFPs, and service contracts. Joseph Sullivan, the S&WB Superintendent, led a group in visiting 13
different privatized facilities and interviewing the appropriate staff and city management associated
with each facility.
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Privatizer selected and why. PSG was selected from a group of three short-listed firms based on
cost, operating experience, technical resources, employee training and development programs, safety
programs, computerized process controls, and procedures for the transition from public to private
operations. This contract represents one of the largest OM&M wastewater operations contracts in
the entire United States,
Regulatory involvement. The City is not under the jurisdiction of the Louisiana Department of
Environmental Quality since the S&WB is essentially its own state agency. No regulatory review was
involved in the privatization process.
Time frame. Beginning in early 1991, the S&WB conducted a nine- to ten-month study of contract
operations, which included tours of other privately-operated facilities. PSG assumed OM&M of the
facilities on January 10,1992.
Cost to the community for procurement process. Although not quantified by the City, the process
probably cost less than $100,000, since outside advisors were not used.
How consensus in the community was achieved. The main opponent of the privatization process
was the City Civil Service System (CCSS), represented by the City Civil Service Commission
(CCSC). The CCSC is a rigidly structured group of appointed citizens who make the decisions for
the operation of the CCSS in representing City employees. Agreement was achieved through PSG's
offer to employ all S&WB employees.
Labor Issues
Nature and extent of labor union involvement The employees of the S&WB are not represented
by a union. One attempt at unionization was made in the past, but failed due to the overwhelming
power of the CCSS. Additionally, the CCSS opposed the privatization, until an agreement was
reached with the S&WB, PSG, and the CCSC.
Outplacement services and displacement process. PSG offered employment to the plant's 52
employees with better pay and benefits and guaranteed the jobs for two years. Furthermore, the
employees were given the choice to remain with the S&WB.
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Public Policy Issues
Issue
How would the privatizer be held
accountable for compliance with
environmental regulations, customer
service levels, and other relevant
requirements?
How It Was Addressed
PSG established regular reporting mechanisms
to provide S&WB management with current
information on plant operations. Also, the
service contract has been structured so that
responsibility for all capital improvements and
maintenance of items costing greater than
$5,000 (or having a service life of over three
years) rests with the S&WB. PSG is
responsible for routine maintenance and
repair. The contractor's operations remain
under the scrutiny of the same regulatory
bodies as the S&WB's operations. The
S&WB retains the NPDES contract with the
EPA. Fines resulting from violations which
occur under contract operations will be the
liability of PSG,
Economics of Case Study for the Community and Privatizer
Short-term economic impacts. Operational savings have been achieved and are expected to grow
in future years. PSG operations have saved an average of $1.1 million annually since 1991.
Rate impacts. Rates have not been increased since 1987, remaining flat despite the cost savings
achieved by privatization. ,
Noneconomic Benefits to Community
>
Quality of service. PSG established a preventive maintenance program and a comprehensive odor
control plan and conducted a Comprehensive Maintenance Evaluation (CME) of the plants upon
assuming operational control. The CME uses advanced analytical techniques and predictive
maintenance methods to anticipate equipment problems.
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Compliance history. PSG directed the complete rehabilitation of a 70 tpd cryogenic plant which
had been inoperable for years and also restored inoperable 40 tpd and 20 tpd incinerators, whose
failure had resulted in numerous compliance violations. In addition, plant discharge quality has been
improved. Increased incinerator capacity has cut solids inventory throughout the facility to
approximately 200 tons, and fecal coliform in the effluent has been reduced to an average of 12
colonies per 100 ml/d because of the rehabilitation of the chlorination system.
Employee relations. Private operations have provided improved wages and productivity incentives
for employees, as well as extensive employee training programs.
Drawbacks
The S&WB believes it was a mistake to sign a five-year contract, renewable for one-year periods.
It is now the fifth year of the contract, and the S&WB would have liked to be renewing the contract
with PSG for another five years, instead of only one year. The S&WB believes that making the
contractor a longer-term provider gives the contractor more financial exposure in the operations of
the facility, and thus the municipality can expect greater efforts and efficiencies by the provider.
Lessons Learned
The key to a.successful privatization is having a well-defined contract with a reputable firm.
The contracting government should make sure that the term "maintenance" is well-defined in the
contract, as well as who will pay for each type of maintenance. This will prevent any "arm-wrestling
matches" during the contract period. Although the S&WB and PSG have excellent relations,
disagreement may still occur over who should bear certain costs.
Community/Privatizer Contacts for Additional Information
Don Crowder Joseph Sullivan
S&WB Liaison S&WB General Superintendent
Sewerage and Water Board of Hew Orleans Sewerage and Water Board of New Orleans
625 St. Joseph Street 625 St. Joseph Street
New Orleans, LA 70165 New Orleans, LA 70165
Phone (504) 585-2271 or 585-2272 Phone (504) 585-2365
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Cost-Effective Environmental Management Case Study
Contract Operations
of the North Canadian, Chisholm Creek,
and Deer Creek Wastewater Treatment Plants;
the Witcher Pumping Complex;
and Related Sludge Disposal Services
Oklahoma City Water Utilities Trust
Overview of Public-Private Partnership
In 1988, the Oklahoma City Water Utilities Trust (OCWUT), a business entity created by state law,
contracted out the operations, maintenance, and management of three wastewater treatment facilities,
a pumping station, and all sludge disposal services. Professional Services Group (PSG) was awarded
the contract to operate the North Canadian, Chisholm Creek, and Deer Creek Treatment Plants, the
Witcher Pumping Complex, and the related sludge disposal services. Prior to entering into the
agreement with PSG, operations and maintenance duties at the North Canadian and Deer Creek
plants had been performed by two separate companies, while operations at the Chisholm Creek plant
had been carried out by City employees. Sludge disposal for each facility had been performed by an
additional company under three separate contracts. This independent structure of operations,
maintenance, and sludge removal activities had created an unnecessary and expensive duplication of
operations, equipment, and personnel. The incorporation of all these facilities into contract
operations by PSG has created savings of approximately 11% annually for OCWUT.
Community Demographics
"^^"^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^""*
Size and location. The three wastewater. treatment facilities receive predominantly domestic waste
from approximately 600,000 residents, as well as process waste from light industries in the service
area. The plants serve an approximately 530 square mile area in and around Oklahoma City.
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Nature of customer constituency. The City has special "wholesale" contracts with surrounding
municipalities, the local Air Force base, and General Motors in addition to its retail, residential,
commercial, institutional, and industrial customers.
Facility(s) Description (Treatment, Collection, & Disposal)
Size. The North Canadian plant has an average design capacity of 80 MGD, and the Deer Creek and
Chisholm Creek plants have average design capacities of 10 MGD and 5 MGD, respectively.
Collectively, the three plants generate an annual average of 23,500 tons of sludge.
Facility overview. The North Canadian plant processes consist of grit/screening removal followed
by primary clarification, activated sludge treatment, secondary clarification, chlorine contact, and
various odor control devices such as chemical scrubbers and a hydrogen peroxide injection system.
The Witcher Pumping Complex consists of two large lift stations and three aeration wastewater
storage lagoons. The Deer Creek plant is a rotating biological contractor plant for secondary
treatment followed by nitrification and chlorination. Finally, the Chisholm Creek plant has primary
and secondary treatment using the activated sludge process, followed by advanced treatment of
nitrification, phosphorous removal, and filtration with chlorination prior to discharge to the receiving
system.
Overview of Procurement/Competition and Implementation Process
Motivating issues. The City considered privatization in an effort to lower costs to taxpayers. In
1987, the operating cost to the City for the treatment of 80 MGD was approximately $12 million.
Comparisons with other wastewater facilities revealed that Oklahoma City was paying about twice
what other municipalities were paying for wastewater treatment on a per unit basis.
Utility staff and officials. The Treatment Division of the Water and Wastewater Utilities
Department of Oklahoma City conducted the entire procurement process. No outside engineering
or financial consultant was hired by the City.
Privatizer selected and why. The RFP directed prospective firms to identify operational changes
and/or capital improvements to ensure maximum efficiency and to lower costs. This provision
opened the door to innovative techniques in sludge processing and disposal. PSG was chosen for
having the lowest cost proposal as a result of the capital improvements and operational changes
proposed in their proposal.
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This contract was especially progressive for its time, since most contract operations agreements for
wastewater treatment plants were for operation of the plant "as is," This agreement permits
operational changes and capital improvements to ensure the most efficient and cost-effective
operation of the facilities.
Regulatory involvement. No regulatory approval was needed for the contract between PSG and
OCWUT,
Time frame. In 1987, the City put sludge management, disposal services and operations of all the
facilities up for competitive proposal. The entire process took approximately one year, and the
contract was signed in 1988.
Cost to the community for procurement process. Although not quantified by the City, the process
probably cost less than $100,000.
How consensus in the community was achieved. All but one of the facilities were already privately
operated, so gaining consensus was not a major issue. The assistant city manager had an engineering
background and could easily explain the privatization process and projected results to City Council.
Labor Issues
Out placement services and displacement process. The employment of all existing employees was
a condition of the RFP. Although the employees were members of the American Federation of State,
City, and Municipal Employees (AFSCME), there was no union involvement in the privatization
process. At the start of contract operations, PSG offered employment with equal salary and benefits
to all City plant employees. During the first year of the contract, the firm conducted intensive hands-
on and classroom training, and a continuous training program was established. In addition to in-
house training, many employees utilized the Department of Environmental Science at nearby Rose
State College to help prepare them for certification, with tuition fully reimbursed by the company.
Employees who did not choose to work for PSG could also remain employed with the City.
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Public Policy Issues
Issue
How would the privatizer be held
accountable for compliance with
environmental regulations, customer
service levels, and other relevant
requirements?
How It Was Addressed
Under the agreement, the City still owns the
facilities, but PSG has assumed responsibility
for operation of the three plants, their effluent
quality, and any fines that the municipality may
be required to pay for compliance violations.
The Treatment Division of the City's Water
and Wastewater Utilities Department employs
three people whose jobs are to oversee the
private operations by looking after the plant
and making routine inspections. The
operations are also subject to regulations and
checks by the EPA, the State Department of
Environmental Health, and the City-County
Health Department.
Economics of Case Study for the Community and Privatizer
Short-term economic impacts. In the first year of the contract, the City saved about $4.5 million.
The City has been saving about 11% per year over original budget projections as a result of the
capital improvements and operational changes from privatization. In the initial year of operations,
there were certain scope changes because of the addition of new technologies that led to additional
costs. After three years, the contract was renewed for an additional five years, and will be eligible
for renewal next year. PSG's annual fee is currently $10.3 million, which remains lower than the
1987 cost of OCWUT operations.
Rate impacts. Wastewater rates have not been increased since October 1983. From 1989 to 1993,
a 4% annual decrease in wastewater rates occurred as a result of the savings achieved under private
operations. Since the last decrease, the City has used the cost savings from privatization to make
improvements within the system instead of lowering rates. The City is contemplating rate increases
of 3% per yeir for three years beginning in October 1996.
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Noneconomic Benefits to Community
Technology changes. The post-dewatered lime stabilization process, approved by the state in 1988,
has greatly reduced energy consumption for sludge processing and has also dropped polymer
conditioning aids by 50%.
The largest cost reduction by far has been the decrease in transportation costs. Previously, 6,500-
gallon tankers carried 60 to 65 loads of liquid sludge per day, seven days a week, from the North
Canadian plant to the application sites. Now that the sludge has a much higher solids content,
truckloads have decreased to 18 to 20 per day, five days a week. Under the land application
program, cake sludge is transported from the plant and applied to agricultural farmlands and other
lands for recycling of nutrients.
At the Witcher Pumping Complex, PSG has implemented extensive operational and mechanical
improvements, including the installation of a computer-based telemetry system, an upgrade of the
control system, and the implementation of a more efficient staffing plan.
Lessons Learned ; ;
The City did not anticipate how large a role it would need to play in supervising the contract
operations. The City now has three employees dedicated to the oversight of the facilities.
Community/Privatizer Contacts for Additional Information
James Couch Edward Tacha
Director of Utilities Sludge Manager/Agronomist for the municipal
Oklahoma City Water Utilities Trust program
Phone (405) 232-6238
BretWeingart
Dennis Merrill Acting Director of Utilities
Regional Manager for PSG Oklahoma City Water Utilities Trust
Phone (405) 297-3809
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Cost-Effective Environmental Management Case Study
Contract Operations
of the Biosolids Recycling Center
Philadelphia, Pennsylvania
Overview of Public-Private Partnership
The Philadelphia Water Department (PWD) owns and operates one of the largest centralized
biosolids processing facilities in the United States, the Biosolids Recycling Center (BRC).
Specifically, BRC is a division of the Philadelphia Water Department and reports to the same
management. In the late 1980's, the BRC was experiencing high operations costs, low productivity,
community distrust, extremely high overtime expenditures, labor unrest, and improper equipment.
Most importantly, a consent decree was imposed on the BRC by the Pennsylvania Department of
Environmental Resources for removal of stockpiled products from unpermitted areas. Also, the BRC
was the target of unfavorable union action and media attention during protracted municipal union
negotiations in the summer of 1992. After a new city administration settled the union contract, the
administration set a goal for itself to reduce operating costs at the BRC by $5 million (approximately
one-fifth of operating costs at that time), and retained the engineering firm of Camp, Dresser &
McKee (CDM) to evaluate the BRC and estimate the cost of operations under private management.
Contract operations was generally presumed the only viable option available to the city to accomplish
the cost savings goal set by the administration. While no specific assurance was given by the
administration, the managers of the BRC believed that a challenge had been presented to them to
accomplish a successful turn-around, concurrent with the CDM study, which might thereby dissuade
officials from proceeding with contract operations.
Community Demographics
Size The BRC provides the dewatering and composting processes for two regional wastewater
plants, the PWD's Northeast Water Pollution Control Plant and the Southwest Pollution Control
Plant, which serve approximately 487,000 accounts (2.3 million people). The PWD formerly had an
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agreement with the Camden County Municipal Utilities Authority (CCMU.A) in which its BRC
provided sludge treatment services for this county's wastewater facility; however, the contract
expired in June 1995 and has not been renewed.
Location, The PWD provides sludge disposal services through the BRC to the City of Philadelphia
and ten counties, townships, and/or authorities in the surrounding area, including: the Township of
Abington, Bensalem Township Authority, Bucks County Water and Sewer Authority, the Township
of Cheltenham, the Delaware County Regional Water Quality Control Authority, the Township of
Lower Merion, the Township of Lower Moreland and Lower Moreland Township Authority, Lower
Southampton Municipal Authority, the Township of Springfield in Montgomery County, and the
Upper Darby Township.
Nature of customer constituency. The BRC processes liquid sludge from the two regional
wastewater treatment facilities and distributes the processed biosolids product to contractors for
ultimate disposal. Under the Total Quality Management (TQM) philosophy adopted by the BRC
management, bom the regional wastewater treatment plants and the contractors receiving the
biosolids product are considered customers of the BRC.
Facility(s) Description (Treatment, Collection, & Disposal)
Size. The BRC consists of a centralized biosolids dewatering station and a 72 acre biosolids
composting plant. At the time the RFQ was issued, October 1993, the BRC handled approximately
15.5 million gallons per week of digested and thickened sludge.
Regulatory history. A consent decree was imposed on the PWD by the Pennsylvania Department
of Environmental Resources for the removal of stockpiled products from unpermitted areas.
Specific type and extent of privatization. The City issued an RFQ in October 1993 to begin the
privatization process. Meanwhile, the managers of the BRC implemented vigorous changes at the
facility, focusing on addressing the financial challenge of meeting self-imposed "expense goals". The
PWD management succeeded in meeting the challenge, and the City halted the privatization process.
Overview of Procurement/Competition and Implementation Process
Motivating issues. In the late 1980's, the BRC faced numerous problems, including: high operations
costs, low productivity, community distrust, extremely high overtime expenditures, labor unrest,
improper equipment, and most importantly, a consent decree imposed by the Pennsylvania
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Department of Environmental Resources for the removal of stockpiled products from unpermitted
areas, In addition, the BRC was the target of unfavorable union action and media attention during
protracted municipal union negotiations in the summer of 1992. The combination of these factors
made the BRC a prime candidate for privatization.
Utility advisors. The City retained Camp, Dresser & McKee (CDM) to evaluate the facilities and
estimate the cost to operate the plants under private management. The study estimated that contract
operations of the BRC would yield annual savings of $6 million to $8 million over current city
operations.
Labor Issues
Nature and extent of labor union involvement The union, District Council 33 of the American
Federation of State, County, and Municipal Employees (AFSCME), negotiated with the PWD
management to ensure that no layoffs would occur. In turn, the PWD management worked closely
with AFSCME to develop the best strategy for moving employees within the PWD. Although some
employees may have been placed in lesser positions, no one was unemployed as a result of the
changes implemented by the PWD management.
Economics of Case Study for the Community
Table 1 Biosolids Management Unit Budget and Expenditures, FY 1993 to FY 1995
Budget Categories 1993 Budget
Porsonnol Services
Purchase of Services
Materials and Supplies
Equipment
TOTAL
S 7,368.517
17,088,000
6,025,000
100.000
$ 30,561,517
1993 Actual 1994 Budget 1994 Actual 1995 Budget 1995 Actual
$ 7,009,975
14,564,581
4,279.906
123.486
$ 26,877,948
$ '7,648,000 $
10,396,000
5,693,000
190.00Q
$ 23,927,000 $
5,929,115
8,170,801
4,171,463
141.535
18,412,914
$ 5,000,000 $ 4,967,081
6,950,000 6,560,069
3,500,000 3.320,188
230.000 38690
$ 15,680,000 $14,886,028
Source: Table 4 of "PrivatizatiorTA Challenge to Change in the 1990's," Philadelphia Water Department
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Rate impacts. The BRC rates are set by the PWD for the entire department and are fixed for long
periods of time. Rates have not been reduced as a result of cost savings; however, they are not
expected to be increased until after the turn of the century.
Noneconomic Benefits to Community
Quality of service To basic inefficiencies, the BRC management implemented the use of Total
Quality Management (TQM) principles which incorporate four key components, the first of which
is "customer orientation". Employees at the BRC became mindful that their customers, both the
wastewater facilities supplying liquid sludge and the contractors receiving processed biosolids
products, mattered. The employees focused on improving operations which affected their customers.
Technology changes. Management modernized the dewatering equipment by replacing eddy current
backdrives and installing automatic torque control which removed the need for "hands-on" operation
and improved the consistency of equipment performance. Vehicular equipment was reassigned to
upgrade the BRC's capacity for materials handling, and production of screened compost was reduced
from two shifts to one shift of operation as a result of a better coordinated screening system.
Lessons Learned
The lessons .listed below are taken from the article, "PrivatizationA Challenge to Change in the
1990's" written by the PWD for a Water Environment Federation publication.
* Municipal operations, even those with a tradition of union activism and strong work rules,
present an opportunity for positive change.
* Sound data and clear operational objectives can set the stage for positive change in municipal
operations.
* Very large financial benefits can be realized in changing a municipal operation, and potential
savings can be of a size meeting or exceeding projected financial benefits of privatization.
* The Total Quality Management technique is one tool for municipal managers (proven at
Philadelphia's BRC) which can help accomplish the same goals of decreasing cost and
increased efficiency.
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Community/Privatizer Contacts for Additional Information ____
t
Guru P. Bose Howard Neukrug
Manager, Wastewater Operations Manager, Planning and Technical Services
City of Philadelphia Water Department City of Philadelphia Water Department
ARA Tower ARA Tower
1101 Market Street 1101 Market Street
Philadelphia, PA 19107 Philadelphia, PA 19107
Phone (215) 685-6250 Phone (215) 685-6319
Pete Matthews
AFSCME Business Agent for PWD
Phone (215) 895-3323
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Cost-Effective Environmental Management Case Study
Contract Operations
of West New York Municipal Utility Authority
Water Pollution Control Facility
West New York, NJ
Overview of Public-Private Partnership
In the fall of 1994, the West New York Municipal Utility Authority (MUA) issued an RFQ for the
purchase or lease of its 10 MOD wastewater treatment facility. In early 1995, the MUA issued an
RFP, and three proposals from private contractors were received by June of 1995. Concurrent with
the receipt of the proposals, a new mayor and city administration were elected, creating the need to
familiarize the new administration with privatization.
In addition to the political changes occurring at the time, a nearby wastewater authority, the Tri-Cities
Authority, expressed an interest in buying the assets of the MUA soon after the private proposals had
been received. This interest created a new dynamic in MUA's decision to privatize, since the issues
involved in a sale to another public entity differ from those involved in a sale to a private contractor.
This opportunity has created new possibilities for the MUA which had not been contemplated earlier
and has delayed the procurement process for over a year.
The Town of West New York (Town) is still in the process of deciding the preliminary issue of
whether or not to sell to a public authority or to a private contractor, The decision of which
privatizer to choose will obviously have to come after this first decision is made. The Town wants
to put the privatization process officially on hold, so that if the decision is made to sell to the private
sector, no backtracking will be necessary. As of July 1996, US Water, Inc. and AmericanAnglian
Environmental Technologies, Inc. are the only two contractors that remain in the competition.
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Community Demographics
Size. The MUA serves a population of 60,000 and has 4,900 customer accounts.
Location. West New York, NJ is located only a few miles from Bergen County.
Economy. The area's economy is composed of service-oriented companies.
Nature of customer constituency. The MUA serves primarily retail customers of West New York,
but also serves portions of Union City and Weehawken as wholesale customers.
Facility(s) Description (Treatment, Collection, & Disposal)
Size. The MUA operates a 10 MGD wastewater treatment facility.
Specific type and extent of privatization. The MUA received three proposals from private
contractors in June 1995 to purchase the facility (full privatization), and as of July 1996, these
proposals were still being considered. The potential still exists for the procurement process to be
formally put on hold so that the MUA can consider another option, specifically the possibility of
merging with or selling its assets to another public authority.
If the MUA decides on full privatization, it will retain some control over its facility by way of a
service agreement with the privatizer. If the MUA decides to sell to the Tri-Cities Authority,
however, the MUA will not be responsible for any aspects of the wastewater treatment facility, nor
will it have any control over its operations or rates.
Overview of Procurement/Competition and Implementation Process
Motivating issues. The MUA is having trouble managing the debt service generated from capital
investment.
Community participants / advisory committees. The City Council and the MUA Board are
involved in the privatization process.
Utility advisors. CME Associates of Parlon, New Jersey are the consulting engineers; Natwest is
the financial advisor; and DeCotiss, Fitzpatrick & Gluck are legal counsel for the MUA.
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Privatizer selected and why. No privatizer has yet been selected.
Time frame. The MUA has been considering privatization for about two years as of June 1996.
Labor Issues
Nature and extent of labor union inyolvement The MUA Director stated that employee issues
have not hindered the privatization process.
Lessons Learned
Economic and political factors which may affect the privatization process are really very case specific.
The election of a new mayor and the purchase offer from a public authority have hindered the
privatization process in West New York.
Community/Privatizer Contacts for Additional Information
Arnold Mitnaul, Executive Director David Mackenzie
Municipal Utility Authority US Water
Phone (201) 295-5240 1148 Washington Street
Cape May, NJ 08204
Phone (609) 884-6119
Fax (609) 884-4349
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Cost-Effective Environmental Management Case Study
Full Privatization
of the Wilmington Wastewater Treatment Plant
Wilmington Delaware
Overview of Public-Private Partnership
In the fell of 1994, the Department of Public Works (DPW) for the City of Wilmington (City) began
investigating the economic benefits of privatizing the operation of the Wilmington Wastewater
Treatment Plant (WWTP). Two privatization options were evaluated initially: (1) leasing the WWTP
to a.private operator and (2) the sale of the WWTP assets to a private owner/operator with a 20-year
operations contract. Under the guidelines set by Presidential Executive Orders 12803 and 12893, the
City was seeking to receive a substantial up-front payment by the privatizer to be amortized over the
life of a 20-year operations contract. After completing an elaborate procurement process to select
a preferred privatizer, the project was delayed due to concerns raised by New Castle County
(County). The County generates 70% of the flows to the WWTP, and wanted to ensure that the
interests of its customers/residents were not being neglected to the benefit of the City. It further
wanted to share in the financial benefits offered by the sale of assets.
As a result, a number of alternative privatization scenarios were evaluated in an effort to reach an
agreement acceptable to all parties. These included variations of both a 20-year long-term operation
and maintenance contract and a five-year contract. Overall, the economic analysis indicated that an
operations and maintenance contract agreement offered the greatest cost savings since this alternative
would not involve repayment of the front-end purchase costs. The County wanted to purchase the
plant in order to have increased control over plant operations and input into future decisions about
plant expansions. As another alternative, the County offered to become a co-owner of the facility.
As of this point, the City has chosen to change the privatization approach to a 4- to 20-year
operations and maintenance contract with a service agreement between the City and the privatizer.
However, no final agreement had been reached, and negotiations were still underway to determine
the type of privatization approach that best meets the needs of all parties.
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Community Demographics
Size. The WWTP serves an approximate population of 460,000 in the City of Wilmington, most of
New Castle County, and a small part of Pennsylvania. The City represents approximately 16% of the
total population of the County and generates approximately 30% of total flows to the plant. Almost
all of the growth is occurring in the County.
Location. The plant is located within the City limits of Wilmington, Delaware adjacent to the
Delaware River.
Economics. The economic base for Wilmington and the surrounding area includes a large
professional group and a large industrial presence, particularly the petrochemical industry, including
DuPont.
Nature of customer constituency. In the City, the facility serves residential, commercial, and
industrial retail customers. It also provides service on a wholesale basis to the County, which in turn
provides retail service to a mixture of residential, commercial, and industrial customers. The City also
provides wholesale service to the City of Newark and South Delaware County.
Specifics on bulk/wholesale customers. The relationship between the City and the County for
wastewater treatment services (the County being a wholesale customer of the City) is governed by
an interjurisdictional service agreement. The agreement sets the methodology used to allocate costs
to be recovered from the County for wastewater treatment. The County sets its retail rates to recover
cost for wastewater treatment plus cost for operation and maintenance of its collection system.
Facility(s) Description (Treatment, Collection, & Disposal)
Size/age. The plant has a rated capacity to treat 90 MGD and is operating at capacity. During wet
weather months, the WWTP often exceeds its permitted average flow capacity, since stormwater is
treated at the plant along with domestic and industrial wastewater. The City is in the final stage of
completing a $20 million expansion in secondary treatment capacity, and has already implemented
improvements of $18 million in primary treatment and digestion capacity. As a result, the City will
be seeking an increase in its Delaware River waste load allocation and an increase in the rated flow
capacity from the Delaware Department of Natural Resources and Environmental Control (DNREC).
Regulatory history. The WWTP has maintained general compliance with DNREC regulations, with
the exception of some problems related to high flows to the plant during wet periods.
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Facility overview. The facility provides tertiary treatment of wastewater in order to meet stringent
requirements for water quality before treated water can be released into the Delaware River.
Specific type and extent of privatization. The full privatization was to include purchase of most
of the assets at the WWTP with the exception of the specific assets recently added to the facility and
financed with State Revolving Fund (SRF) Loans. Assets related to the collection system, including
sewer pump stations, were not included as part of the assets to be purchased. The price to be paid
to the City for the WWTP assets was fixed in the RFP, based upon the Net Book Value of the assets
specifically identified (approximately $52 million). After a re-evaluation of listed assets, this price
was subsequently adjusted downward to $41.9 million. Contract operations of the facility would
include management, operation and maintenance for all of the assets at the WWTP, including SRF
funded assets, plus the main sewer pump stations located outside the plant. The only exceptions were
the sludge dewatering and processing facilities located at the WWTP, which were already operated
by an existing contract operator (Wheelabrator EOS), and the solids removal operations, which were
contracted out to a second contract operator (VFL). It is anticipated that both of these operations
will be consolidated under the operation of the new privatizer once the existing contracts expire.
Overview of Procurement/Competition and Implementation Process
Motivating issues. The City expressed three main objectives in seeking to privatize the WWTP: (1)
controlling operating costs, (2) ensuring short- and long-term cost and rate stability, and (3)
generating cash to the City to meet other financial needs. The full privatization option, including the
sale of the WWTP assets with a 20-year operations contract, provided the most effective method of
achieving these goals. Further objectives included achieving acceptable rate impacts to all customers,
preserving the City's capital investment to assure long-term reliability and performance of the
WWTP, and gaining assistance from the privatizer in meeting future capital expenditure objectives.
Community participants/advisory committees. A privatization review committee was formed to
manage the overall procurement process; including development of RFP documents, review and
evaluation of proposals, negotiations with, the preferred vendor, and implementation of an appropriate
service agreement. The review committee was made up of City staff from several departments,
including legal, personnel, finance, and public works (wastewater treatment division), and also
included a representative from the mayor's office. There was no representation from New Castle
County since the City owned the WWTP assets, and the expectation was that any privatization
agreement would be entered into between the City and the privatizer only. Services provided to the
County would continue to be defined and regulated by an interjurisdictional service agreement
between the City and the County.
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Utility staff and officials Since the City had announced its clear intention to privatize the facility,
including the sale of assets to the most qualified firm, there was little concern about possible conflicts
of interest resulting from DPW staff participation on the procurement and evaluation process.
However, with the exception of the Water Division Director, operations staff were not involved in
the evaluation and ranking of technical proposals from privatizers.
Utility advisors. The City hired Raftelis Environmental Consulting Group (RECG) to provide
assistance with the initial feasibility analysis of privatization options and with the entire procurement
process, from the development of the RFP document through contract negotiations. Other advisors
included P.G. Corbin Co. who provided financial advice in assessing the impacts of the transaction
on the financial posture of the City; Saul Ewing, bond counsel, who investigated potential changes
in the tax status of bonds; and the firm of Richards, Layton & Singer who participated in negotiating
many of the legal aspects of various privatization scenarios.
Privatizer selected and why. Wheelabrator EOS was the preferred vendor based on an evaluation
of firm qualifications and technical proposals. The review committee and utility advisors conducted
the evaluation based upon an evaluation matrix that included the following general criteria:
corporate profile;
corporate experience and expertise;
regulatory experience;
key management and operational personnel;
financial strength;
employee considerations;
references and reputation;
utilization of Disadvantaged Business Enterprises and EEO compliance; and
completeness and responsiveness of the proposal.
Cost proposals were submitted separately from the technical proposals, as required by City
procurement policies, and were not used in the evaluation and ranking of submittals. Each proposer
was scored and ranked solely on the basis of its technical proposal. The cost proposals were to be
used for developing a.cost basis for negotiating a Service Contract and Service Fee with the preferred
vendor. Ultimately, the most qualified privatizer was selected at the least cost as a result of the
negotiations. The procurement process was challenged in court, but the City's process prevailed.
Regulatory Involvement As owner of the treatment plant assets, the privatizer would be expected
to maintain all necessary local, state, regional, and federal permits. However, since the privatizer
would not have direct interface with customers, it was not anticipated that the transfer of ownership,
or the operation and maintenance of the plant, would fall under the jurisdiction of, or be regulated
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by, the Delaware Public Service Commission. However, if foil privatization included the purchase
of WWTP assets and the subsequent repayment of federal grants, it was anticipated that approvals
would be required from DNREC, Region III of the U.S. Environmental Protection Agency (EPA),.
the US EPA, and the federal Office of Management and Budget (OMB). The need for approvals at
the regional and federal level under a long-term lease privatization scenario is still being investigated.
Time frame. The feasibility study to determine the economic benefits of privatization and the
preferred privatization option began in the fall of 1994. The decision to move ahead with
privatization came in January 1995, and work began on the RFP document in March 1995. The RFP
was issued in early May, with technical proposals due by the end of June, and cost proposals due by
July 21,1995. The proposal evaluation process, including requests for clarification and interviews,
took approximately six weeks, with the notice of rankings issued at the end of August. Contract
negotiations with the preferred privatizer began shortly thereafter and were to have been completed
by the end of 1995, with a scheduled project start date of January 1,1996. However, negotiations
are still underway between the City, County, and Wheelabrator EOS to develop an acceptable
privatization scenario that meets the objectives of all parties, which will likely be a service contract
with a term of 4 to 20 years.
Cost to the community for procurement process". The cost for project feasibility studies,
procurement services, negotiation, and implementation (including consultant and legal fees) is in the
range of $300,000 to $400,000.
How consensus in the community was achieved. Consensus within the total service area, including
New Castle County, was not cultivated from the outset. As a result, the County did not approve of
the project and voiced significant concerns that the City was going to receive a substantial financial
windfall that County customers would ultimately pay for in the form of higher rates. Even after it was
demonstrated that privatization would result in significant long-term rate savings for all customers,
the County believed that it had an "equity position" in the assets and should share in the benefits
derived from privatization. Disagreement over this central issue is the primary reason that the full
privatization initiative failed.
Labor Issues
Nature and extent of labor union involvement. At the time the RFP was issued, 24 of 41 plant
employees were members of the American Federation of State, County, and Municipal Employees
(AFSCME) Local. 320, and 15 were members of AFSCME Local 1102. Privatizers were required
per the RFP to offer employment to all existing employees who passed a basic physical and drug
screening, with comparable salary and benefits as offered by the existing union contract. Privatizers
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were also required to honor the terms of the existing collective bargaining agreements with the
unions. Union approval and cooperation was sought reasonably early in the procurement process,
as proposals were being evaluated. Because of the RFP requirements previously listed, employee and
labor union concerns did not become a major issue in the process.
Outplacement services and displacement process., Privatizers were required not to terminate
employees except for cause for a minimum period of two years. Reductions in staffing levels to
achieve more efficient operations and costs savings were anticipated to be obtained through normal
attrition. The use of a 20-year service agreement under full privatization provided a sufficiently long
time frame to allow for staff reductions through attrition, as compared to a five-year service
agreement.
Economics of Case Study for the Community and Privatizer
Since full privatization did not occur, and contract operations is still being negotiated, it is not
possible to assess the economic benefits gained through privatization. However, based upon the
economic feasibility study conducted in the fall of 1994, the expectation of full privatization was
neutral short-term economic impacts and positive long-term economic benefits, both to the City in
terms of cost of operation and availability of funds to meet capital growth needs, and to ratepayers.
Rate benefits, in terms of lower expected rates from year five through 20 over the 20-year time frame,
would be reflected in both inside-City retail rates and wholesale rates charged to the County. These
benefits are substantial given that the City was to receive a substantial cash infusion from the sale of
the assets that would be recovered by the privatizer over the 20-year operations contract. Cost
savings from improved operating efficiencies under private management were expected to more than
offset the cost of amortizing the purchase price.
Once the County demonstrated that it intended to block full privatization unless it was allowed to
participate in the economic benefits derived from the sale of assets, several additional feasibility
analyses were conducted. These analyses evaluated alternative scenarios for accomplishing the
objectives of the City. One alternative was to have the privatizer make a front-end payment to the
City, in the form of a loan or contribution, that would be recovered through the service fee. Several
front-end payment amounts were considered, ranging from $4 million to $28 million. A significant
portion of this payment was assumed to be used to retire existing debt, which left insufficient funds
available for other financial needs of the City unless this payment was at the high end of the range.
The analysis indicated that the economic impacts, particularly rate impacts, were less favorable with
a shorter five-year operations and maintenance contract. An analysis assuming four consecutive five-
year contracts demonstrated more favorable economics, but was unacceptable to the privatizer
because of the risk that the renewal options were not guaranteed. In addition, the County was
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unwilling to participate since it would be paying 70 % of the cost of the front-end payment without
receiving any benefits. As a result, the City agreed that in the event that a front-end payment was
received, all costs associated with repaying this amount would be recovered exclusively from the
City's retail rates and would not be passed through to County customers.
Another alternative was for the County to purchase part of the WWTP assets to become joint owner
with the City. This would provide the cash infusion needed by the City to retire debt and meet other
financial needs. However, this alternative raised concerns about the political impact of co-ownership
and the ability of the City to control future service delivery and capital expenditure for plant
expansions. In addition, the City currently bills the County for its proportional share of depreciation
expense, which effectively turns a non-cash expense into a cash benefit for the City. This arrangement
would have had to be modified if the County became a co-owner.
A third alternative was to have the privatizer lease the WWTP assets. The lease was structured to
include payments in lieu of taxes as an alternative cash inflow for the City. Under the original full
privatization scenario, the City would have received annual property taxes from the privatizer to meet
other financial needs. By structuring a lease arrangement that included annual payments in lieu of
taxes, the City could generate cash available for other needs. The extra cost would be offset by
savings in operating costs to keep rate impacts acceptable. However, the County again refused to
participate since they would receive no benefit and would be paying 70% of the cost through their
rates. In general, the County's position was that any cost related to up-front payments, or any other
payments to the City that did not relate directly to operation of the WWTP, should be recovered
exclusively through the rates charged to the City's retail customers, which would result in
substantially greater rate impacts on retail customers in the City.
Noneconomic Benefits to Community
Quality of service. The private contractor was expected to provide equal or improved performance
over existing operations in terms of treatment processes, effluent quality, maintenance and
preservation of equipment and capital resources, and other parameters for measuring operational
quality and efficiency.
Compliance history. The privatizer was expected to assist with efforts to control CSO problems,
including recommendations for improvements in process controls or changes to plant operations
and/or capital improvements that may be required.
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Technology changes. With a 20-year service agreement, access to more advanced and efficient
treatment technology would be enhanced, both because the privatizer is expected to have better
access to the latest technology, and because cost savings achieved through technological
enhancements were to be shared by the privatizer and the City.
Drawbacks
Increase in cost of capital. Access to capital from the privatizer, as well as access to tax-exempt
Private Activity Bonds, was expected to keep the cost of capital from increasing significantly as
compared to revenue bonds and SRF financing.
Reimbursement of federal grant and/or state SRF funds. Although full privatization would
involve additional regulatory approvals because of the need to repay federal grants, this process was
not expected to add significant cost or time to the process. However, experience with this process
was a criterion used to evaluate proposals, and the privatizer was required to assume a large share
of the responsibility for moving this process forward. SRF-funded assets were not included in the
assets to be sold, so reimbursement of these funds was not an issue.
Perceived loss of control. The guidelines established in the draft Service Agreement (included as
part of the RFP document), including performance measures and reporting requirements, coupled
with a performance bond, were sufficient to alleviate most concerns over loss of control.
Negative aspects of long-term contracts. The longer-term contract included as part of the full
privatization option was viewed as a positive aspect, since it provided an opportunity for the
privatizer to recover its initial investment to purchase the WWTP assets over a longer time frame.
As a result, short-term rate impacts were acceptable, and it allowed sufficient time to implement cost-
saving operational changes, in terms of technology and labor, to keep long-term operating costs and
rate impacts at an acceptable level
Lessons Learned
The failure of the full privatization initiative, in spite of the expected short- and long-term benefits
to all ratepayers, was precipitated by the failure to achieve consensus early in the process among all
affected parties or stakeholders. Even though the County did not share in the ownership of the
WWTP assets, its position as the largest customer, producing approximately 70 % of flows to the
WWTP, provided sufficient leverage to block the privatization initiative. The County argued that
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they should also participate in the economic benefits derived from the sale of the assets since County
ratepayers had contributed significantly toward the capital costs associated with those assets. By
withholding its cooperation and refusing to enter into a new interjurisdictional agreement that would
provide a long-term commitment to provide the flows needed to keep the plant operating at or near
capacity, the deal was effectively blocked. Sharing the cash payment with the County did not work
for the City because after reimbursing federal grants, the remaining funds would be insufficient to
meet other financial needs of the City, which was the main justification for, and benefit of, selling the
WWTP assets. As a result, the City has decided to retain ownership of the assets and possibly forgo
the benefits of an up-front cast payment, in favor of a standard contract operations approach to
reduce operating costs. The lesson to be learned from this process is that all major users or
stakeholders should be included in the privatization process from the very beginning.
Other lessons to be learned include:
* Care should be taken to exclude from the evaluation and selection process any existing personnel
whose position or job would be significantly or directly impacted by privatization. In particular,
any personnel directly involved in the operation of the facilities to be privatized should be
excluded from the evaluation process.
* It is essential to review, understand, and seek clarifications where necessary, on any procurement
laws, regulations, -or guidelines that may affect the procurement, evaluation, selection, or
negotiation process. Rigorous compliance with all relevant rules and guidelines is essential to
avoid possible legal challenges to the procurement process.
* It is important to keep relevant state environmental agencies informed throughout the
privatization process. Depending on the specific type of privatization, more extensive
coordination and involvement may be required. .
Community/Privatizer Contacts for Additional Information
Mr. Kash Srinivasan ' Carolyn Schlecker
Water Division Director City Solicitor
City of Wilmington City of Wilmington
Louis L. Redding Building Louis L. Redding Building
800 French Street 800 French Street
Wilmington, DE 19801-3537 Wilmington, DE 19801-3537
(302) 573-5777 (302) 571-4200
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CHAPTER III: RELATED INFORMATION/SOURCES/REFERENCES
General References
Beecher, Janice A., Ph.D., G. Richard Dreese, Ph.D., and John D. Stanford, J.D, "Regulatory
Implications of Water and Wastewater Utility Privatization," National Regulatory Research Institute,
July 1995.
Couch, James and Dennis Merrill. "Plant Expansion Cut Costs," Water Environment & Technology,
Vol. 5, No. 10, October 1993.
Couch, James and Dennis Merrill. "Contract Operations - One Year Later," Public Works,
September 1989.
Couch, James and Edward Tacha. "Cutting Costs for Sludge Management," Biocycle,
May 1989.
Couch, James and Dennis Merrill. "Contract Ops and Capital Improvements Boost Pump Station
Efficiency," Water Engineering and Management, April 1989.
Hawkins, Russell, and Leah Benedict."Making Environmental Partnerships Work," ICMA MIS
Report, Vol.22, No. 9, September 1990.
Hefiron, Jenny. "Privatization Provides Government Services," Small Flows, Vol. 6, No. 1, January
1992.
Heilman, John G., and Gerald W. Johnson. "The Politics and Economics of Privatization: The Case
of Wastewater Treatment" The University of Alabama Press, 1992.
Lisk, Ian. "Capital Improvements, Contract O&M Combined to Solve Problems,." Water
Engineering and Management. Scranton Gillette Communications, Inc., February 1993.
Ollis, Robert W. Jr., "Tax-Exempt Financing of Municipal Recycling Facilities: Public-Private
Partnerships," CIFA Monograph No, 4,1991.
Urban Water Council, U.S. Conference of Mayors, "Public/Private Partnerships in Municipal Water
and Wastewater Systems; Case Studies of Selected Cities," September 1997.
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U.S. Conference of Mayors, "A Status Report on Public/Private Partnerships in Municipal Water and
Wastewater Systems," September 1997.
U.S. Congress, Joint Economic Committee StaffReport, "The $7.7 Billion Mistake: Federal Barriers
to State and Local Privatization," February 1996.
U.S. Department of Energy, "Harnessing the Opportunities and Challenges of Privatization," January
1997.
US EPA Environmental Financial Advisory Board."Private Sector Participation in the Provision of
Environmental Services: Barriers and Incentives," November 1991.
US EPA Environmental Financial Advisory Board and Environmental Finance Center Network.
"Paying for Sustainable Environmental Systems: A Guide Book of Financial Tools," June 1997
Revision.
U.S. Environmental Protection Agency, "Public-Private Partnerships for Environmental Facilities: A
Self-Help Guide for Local Governments," July 1991, Pub. #EPA 20-M-2003.
U.S. Environmental Protection Agency, "Public-Private Partnerships Case Studies: Profiles of
Success in Providing Environmental Services," September 1991, Pub. #EPA 20-M-2005.
U.S. Environmental Protection Agency, "Solid Waste Contracting: Questions and Answers," May
1992, Pub. «EPA 220-B-92005.
U.S. Environmental Protection Agency, "Response to Congress on Privatization of Wastewater
Facilities," July 1997, Pub. #EPA 832-R-97-001a.
"Water, Wastewater Privatization Case Studies." Public Works Financing. Special Section.
March 1996.
Specific References
Indianapolis. M Case Study
"City of Indianapolis Request for Qualifications," Department of Public Works of the City .of
Indianapolis, June 1993.
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General Overview of Competition and Privatization Initiatives at the City of Indianapolis/Marion
County Indiana," Office of Enterprise Development, June 1996,
"Indianapolis AWT Facilities Second Year Summary Results," Public Works Financing Special
Water Issue, June 1996.
"Request for Proposals for the City of Indianapolis, Indiana Advanced Wastewater Treatment
Facilities," Department of Public Works of the City of Indianapolis, July 1993.
Telephone Interviews with Tom Olsen, Director, Office of Enterprise Development.
Telephone Interviews with Patrick E. Gallagher, Vice President, Camp, Dresser & McKee, Inc.
North Brunswick. NJ Case Study
Matacera, Paul. "A National First: North Brunswick's 20-year Public-Private Water Partnership,"
New Jersey Municipalities, June 1996.
Telephone Interviews with David Mackenzie, U.S. Water.
Telephone Interview with Paul Keller, Business Administrator for the Township of North Brunswick
New Orleans. LA Case Study
"Agreement for Operations and Maintenance Services Between the Sewerage and Water Board of
New Orleans and Professional Services Group," December 1991.
Berry, Bobby. "Clarifier Changes Minimize I&I Effects," Water Environment and Technology, Vol.
6, No. 8, August 1994.
"Case Study: New Orleans, Louisiana." Professional Services Group.
"New Orleans Contracts Wastewater Treatment." PSG Report, Vol. 6, No. 2, March/April 1992.
"Request for Proposal for Full Service, Operation and Maintenance of the Wastewater Treatment
Plants for the Sewerage and Water Board of New Orleans," Sewerage and Water Board of New
Orleans, August 1991.
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Simpson, Catherine A. "Wastewater Plant Restores Incinerator Performance," Pollution
Engineering. Cahners Publishing Company: April 1994.
Telephone Interviews with Don Crowder, S&WB Liaison, Sewerage and Water Board of New
Orleans.
Oklahoma Citv. OK Case Study
"Case Study: Oklahoma City, Oklahoma," Professional Services Group.
"Oklahoma City Benefits from Contract Operations," PSG Report, Vol. 9, No. 1,
January/February 1995
Telephone Interview with Tom Carpenter, Superintendent of Water and Wastewater Utilities
Division, Oklahoma City Water Utilities Trust.
Telephone Interview with Bret Weingart, Acting Director of Utilities, Oklahoma City Water Utilities
Trust.
Philadelphia. PA Case Study
"Privatization - A Challenge to Change in the 1990's,11 Philadelphia Water Department, 1995.
"Request for Qualifications to Provide Sludge Management Services for the Sludge Processing and
Distribution Center," Philadelphia Water Department, September 1993.
Telephone Interviews with Guru P. Bose, Manager, Wastewater Operations, Philadelphia Water
Department.
Telephone Interview with Dean Kaplan, Finance Director, City of Philadelphia, Pennsylvania.
West New York Municipal Utility Authority. NJ Case Study
Telephone Interview with Arnold Mitnaul, Executive Director of the West New York Municipal
Utilities Authority.
Telephone Interview with David Mackenzie of US Water.
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