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Privatization of Water Services in the United States: An Assessment of Issues and Experience (2002)

Chapter: C Seattle Public Utilities Treatment Plant, Design-Build-Operate Project, Risk-Sharing Matrix

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Suggested Citation:"C Seattle Public Utilities Treatment Plant, Design-Build-Operate Project, Risk-Sharing Matrix." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
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Page 131
Suggested Citation:"C Seattle Public Utilities Treatment Plant, Design-Build-Operate Project, Risk-Sharing Matrix." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
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Page 132
Suggested Citation:"C Seattle Public Utilities Treatment Plant, Design-Build-Operate Project, Risk-Sharing Matrix." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
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Page 133
Suggested Citation:"C Seattle Public Utilities Treatment Plant, Design-Build-Operate Project, Risk-Sharing Matrix." National Research Council. 2002. Privatization of Water Services in the United States: An Assessment of Issues and Experience. Washington, DC: The National Academies Press. doi: 10.17226/10135.
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Page 134

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C Seattle Public Utilities Treatment Plant, Design-Build-Operate Project, Risk-Sharing Matrix Risk Allocation Remarks Design Technology Contractor City reviews designs through an established Selection review procedure in Service Agreement. Technology Contractor/ Contractor is responsible for selecting technology Obsolescence City that is proven, will be permitted by agencies, and will meet performance guarantees. Contractor is responsible for technology obsolescence, except for change in law, unforeseen circumstances, and unspecified conditions for raw water and water demand. Unforeseen City Risks for change in law, unforeseen circumstances, Preexisting and preexisting site conditions are the city’s Site Conditions risks. Construction/Commissioning Construction Contractor City monitors construction and tests to determine Period compliance with service agreement. Acceptance Test Contractor Service agreement specifies guaranteed construction period after fulfillment of conditions precedent. Notice to proceed given after conditions precedent satisfied. Payment City/ Facility not deemed suitable for commercial Contractor operation until test is passed. Retest principles outlined in service agreement. Construction payment based on drawdown and milestone schedule in service agreement. City is responsible for payment when milestones are met by contractor. 131

132 APPENDIX C Risk Allocation Remarks Operations and Maintenance Payment City City monitors performance via review of records and reports. City may conduct periodic inspections. Preventive Contractor Monthly service fee paid with a fixed and variable Maintenance component consistent with tax laws and forms of financing (i.e., pass-through costs, the only variable component). Monthly reports typically accompany invoices. Repairs and Contractor/ Standard-of-care provisions and contractual Replacements City obligations requiring proactive preventative maintenance program. Capital Contractor/ Contractor is responsible for all repairs and Improvements City replacements to meet performance requirements, except for certain major improvements where the city may be responsible for costs. Contractor is responsible for all capital improvements required to meet performance requirements, except for certain major improvements where the city may be responsible for costs. City is responsible for capital improvements as a result of changes to performance standards. Renegotiation principles are included in the service agreement. Supply of Raw Water Infrastructure City City is responsible for supplying water to facility (e.g., pipelines, site at interface point. Contractor assumes reservoirs, etc.) responsibility at the interface point. Quantity City/ Specified range of flows based on historical data is Contractor provided in the service agreement. Contractor assumes risk for flows within the specified range. City provides relief for flows outside of the range. Contractual provisions included for contractor to justify adjustments to service fees for flows outside of specified ranges. Quality City/ Specified ranges of quality based on historical Contractor data are provided in service agreement. Contractor assumes risk for quality within the specified range. City provides relief for raw water quality (additional payment or reduction in treatment rate) outside of range. Plant Performance Quality (without Contractor Contractor is responsible for supply of specified change in law) water quality. Contractual provisions for the need to shut down facility if raw water quality prohibits ability to meet standards.

APPENDIX C 133 Risk Allocation Remarks Quality (with City City is responsible for costs associated with change in law) upgrading and operating facility to meet new standards. Renegotiation principles are included in service agreement. Quantity and Contractor/ Contractor is responsible for flows within Flow City specified range. Contractual provisions for delivery of water quantities requested by city outside of specified range. Infrastructure for City City is responsible for installing and maintaining Transmission transmission and distribution systems for specified and requested flows. Environmental/Permitting Additional Contractor Contractor is responsible for complying with Environmental mitigation in existing final Environmental Review Impact Statement (EIS) and to prepare supplemental EIS/addenda if needed. Existing Contractor Contractor is responsible for reporting to regulatory agencies and the city. City monitors contractor’s performance. Change in Law City/ Typically allocated to the city. Limited risk can be Contractor allocated to contractor (i.e., dollar limit). Renegotiation principles are included in service agreement. Permitting Contractor/ Contractor secures most permits. City may be City co-permittee. Securing permits typically undertaken as part of conditions precedent in service agreement. Other Factors Financing City City responsible for financing project as part of conditions precedent. Escalation of Contractor/ Contractor holds price until a specified calendar Costs— City date. Thereafter, price escalates at a percentage Construction of a specified index (i.e., CPI, ENR, etc.) Escalation of City Service fee escalates annually at a percentage of a Costs— specified index (i.e., CPI). Certain pass-through Operation costs are allowed. Taxation Contractor All taxes (i.e., income tax) are contractor’s responsibility. Natural Contractor/ Insurance; renegotiation principles; force majeure Disaster City provisions. City has responsible risk for amounts above uninsured portions. Industrial Relations Prevailing Wage Contractor Contractor’s choice whether or not to pay Rates/Force prevailing wages. Contractor’s risk if initial Majeure choice not to pay such rates is incorrect.

134 APPENDIX C Strikes Contractor/ For local strikes against the facility, contractor City assumes risk. For national strikes, city assumes risk. SOURCE: Westerhoff, G. P., D. Gale, P. D. Reiter, S. A. Haskins, and J. B. Gilbert. 1998. The Changing Water Utility: Creative Approaches to Effectiveness and Efficiency. Denver, Colo.: American Water Works Association.

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In the quest to reduce costs and improve the efficiency of water and wastewater services, many communities in the United States are exploring the potential advantages of privatization of those services. Unlike other utility services, local governments have generally assumed responsibility for providing water services. Privatization of such services can include the outright sale of system assets, or various forms of public-private partnerships—from the simple provision of supplies and services, to private design construction and operation of treatment plants and distribution systems. Many factors are contributing to the growing interest in the privatization of water services. Higher operating costs, more stringent federal water quality and waste effluent standards, greater customer demands for quality and reliability, and an aging water delivery and wastewater collection and treatment infrastructure are all challenging municipalities that may be short of funds or technical capabilities. For municipalities with limited capacities to meet these challenges, privatization can be a viable alternative.

Privatization of Water Services evaluates the fiscal and policy implications of privatization, scenarios in which privatization works best, and the efficiencies that may be gained by contracting with private water utilities.

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