Financing Opens Tap To Sweet-Water Solution

By Paul Rosta

San Juan Capistrano is renowned for its 18th-century Spanish mission and celebrated in song as the place where the swallows return every March 19 on St Joseph's Day. When the little birds come back next year, this picturesque southern California coastal town will have a new claim to fame with water agencies and design-builders as well as romantics and birdwatchers.

An innovative water reclamation project is providing the answer to a question challenging many California water officials: where do you turn when the tap runs dry? By year's end, a design-build-operate team led by Southwest Water Co., Los Angeles, and its construction and operations arm, ECO Resources Inc., Pleasanton, Calif., will offer one solution by delivering a $25-million reverse osmosis plant and infrastructure that will clean up as much as 5.1 million gal of brackish water per day from underground sources for drinking water.

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In order to qualify for a crucial grant that makes the project feasible, the plant must be up and running at 95% capacity by December. There was only one way to get the job done. "I don't think we could have made that date at all if we had not had the design-build process," says independent consultant Cliff Swan, working for Los Angeles-based Psomas Associates, which is a consultant to the city. What's more, "I don't think this project would even have broken ground yet if it was a conventional project," says Joe Adelaars, project manager for Lake Forest, Calif.-based ARB Inc., the project's general contractor.

As subcontractors to ECO, ARB and Boyle Engineering Corp., Newport Beach, Calif., will share financially in any rewards stemming from their ideas. The strategy offers an incentive for the team members "to look at the best long-term return, as opposed to what's my best return as an individual," says Steve Richardson, ECO's western regional vice president.

City staff and the design-build team believe the key to success was the painstaking, sometimes contentious negotiations over the service contract, especially risk assignment. Those critical discussions made possible a functional service agreement and a facility that could prove to be a model for other water-strapped communities. "If this project is successful, I think we'll see a lot more," says Swan.

San Juan Capistrano embarked on the project because "we need to generate more sources of local water here," says Cindy Russell, director of administrative services and acting assistant city manager. Like many southern California communities, the city relies heavily on imported water, purchasing about 95% of its supply from the Metropolitan Water District of Southern California, the region's largest wholesaler.

Unlike many MWD communities, this city has an ace in the hole, "a huge, untapped local source of groundwater," Russell says. The catch is that this plentiful source is too brackish to use as it is, so the issue became how to capitalize on the water most effectively.

Building additional reservoirs would have required a 40% hike in water bills, much higher than the 15% increase needed for the reclamation project. Besides bigger bills, creating more storage would have required the city "to build a bunch of big round tanks where everyone can see them," Russell says.

Miles of piping and other infrastructure caused the city to take financing lead.

In contrast, a low-profile reverse osmosis plant will produce enough treated water to meet half the city's potable water needs in the summer and all of it during the winter. All told, the plant will reduce the city's dependence on imports from 95% to 50% on average, Russell says.

San Juan Capistrano likely would have relied on standard procurement, but the city was under the gun. "I think we were kind of forced to do it [design-build] because we had a grant that had a construction time limit," says Amy Amirani, the city's public works director. The city wanted to qualify for cash incentives offered by the MWD. The city will be eligible for $250 per acre-ft produced, about $1 million annually. Without the MWD contribution, "this project probably wouldn't have penciled out," says Tom Tekulve, vice president of finance and treasurer at Southwest Water.

MWD's deadlines-an early 2003 construction start and water production by December 2004-presented "a very narrow target we had to hit," says Eric Bauman, the city's water engineering manager. Unlike most treatment plants that phase in increased capacity, "we have to produce water at a certain high percentage of the plant's design capacity (about 95%) from day-one throughout the life of the contract," says ECO's Richardson.

"To get it designed and built was not something we could do in that time frame with our expertise," Bauman says. "We had not had experience with a project this large. We needed a mechanism that could transfer risk to someone who really knew what they were doing."

After surveying other water districts, the city decided on its design-build-operate-finance strategy and then retained Malcolm Pirnie Inc., White Plains, N.Y., to help develop a request for proposals. After the city selected the ECO-led team in 2001, several unexpected twists caused a last-minute shakeup.

Perhaps indulging in "a little bit of posturing at the last minute," the original contractor "got a little sideways on us" and began balking over the contract and their part of the service contract, says Chris J. Costello, Southwest's construction manager. When ECO and the contractor parted ways, "we went to a Plan B and did some estimating and negotiations with ARB," Costello says.

	Sand filters will help eliminate iron and manganese before treatment.

The new contractor proved to be a better fit than its predecessor in several respects. ARB could self-perform about 90% of the work, such as installation of 5 miles of pipeline, "where the other contractor would have to bring in a pipeline subcontractor," Costello says. But bringing in a new team member after the city had already selected ECO raised some eyebrows at City Hall. "They thought we were trying to pull a fast one," Costello says. A quick field trip to the contractor's headquarters reassured skeptics that the team's newest member was a well-established firm with formidable resources. And ARB proved invaluable. To avoid permitting delays associated with open-cut work, some pipeline installation involved directional borings crossing under Interstate 5, Trabuco Creek and a commuter rail line that required a 42-in.-dia casing containing three pipe lines placed under it.

Money Talks

The financing strategy also underwent a significant change. Like all cities, San Juan Capistrano is risk-averse and the RFP had called for the team to also provide financing, says Tekulve. Although Southwest Water has the resources to build a reverse osmosis plant, this project also called for 5 miles of pipeline, eight wells, a booster pump station, chemical and water storage tanks and a 2,400-sq-ft treatment plant containing two banks of filters. "This one was large enough that it didn't make sense for us to use our own balance sheet," Tekulve says. "We're not in the business of lending people money for 20 years."

A key breakthrough occurred when the city took the lead on financing and used its own credit rating and its status as a municipality to lower the cost of financing. "I think the real home run on this one was ultimately the savings," Tekulve says. "We realized we could save some more money on the bond side by getting tax-exempt municipal bonds."

For the city, the question then became, "How do we structure the debt issued by the city so the vendor is taking some of the risk?" Russell says. Southwest Water is sharing some of the risk through letters of credit. As a further hedge, the city had the bonds insured so that "if this plant didn't work, we weren't on the hook for $32 million" in bonds, Russell says.

Even more intensive than devising the financing was hammering out the technical and operational pieces of the service contract. The city and ECO "spent a lot more time negotiating than either of us had ever expected," Russell says. Bauman says the negotiations ran from mid-2001 to early 2003 and "was time very well spent."

"Because it was such a long-term contract, you really had to do as much thinking through the process as possible," Tekulve says.

Much of the discussion hinged on risk management, particularly for such issues as water quality, production and plant operation. Amirani, notes that the original RFP placed virtually the entire risk on the design-build team, a level of risk that was impractical.

"We can't have a 20-year contract and be at risk with the state or the feds imposing restrictions on the particulates required to be cleaned in the process," Tekulve says.

	Directional boring took piping under roads and rail.

The ingenious solution devised by Bauman and Boyle Engineering was to establish a threshold for particulate concentration. As long as the particulates in the brackish water remain below a certain level, treating the water is ECO's responsibility, Teklulve says. If the particulates exceed that limit, or if the law changes, the city foots any additional cost.

ECO will provide a predetermined amount of water-4,800 acre-ft annually-for a fixed price. "If it costs more to produce the water than it says in the contract, that's their risk," Russell says. "We know what we're paying, year in and year out" for 20 years. Areas of shared risk include fluctuation in power costs. The contract also stipulates a certain life expectancy for the equipment and requires that worn-out components be replaced. At the end of 20 years, the city can choose to take over the plant or renew Southwest Water's contract, which Russell says "gives us maximum flexibility."

"I think in the end...there was a fair allocation of the risks and rewards," Tekulve says. "Everyone wanted to make this thing successful on both sides."

Treated water will fill all of the city’s needs in winter.

"You need to go into it with a risk allocation that puts the risk where it's best able to be resolved," says Bauman. It is critical "to be objective and to remember that you need to look at each risk allocation that comes up," he adds.

Working with agencies accustomed to design-bid-build procurement also presented a challenge to both the team and the city. "The engineering and building department has been tremendously accommodating in working on the plans for each phase," says Bauman. But the biggest thing the city had to realize is that "they're not going to get a full set of drawings before they issued a permit," says Swan. As a result checking plans "was more like design-bid-build a lot of the time," says Eugene C. Spilker, Boyle Engineering's senior project manager.

Costello acknowledges that the team feels hamstrung at times. He says most of the federal, state and local regulatory agencies involved were cooperative, yet if he were to do it again, "within the first month...I would have wanted to have a meeting" with all agencies to get a comprehensive list of their requirements and typical review time frames.

As the project heads toward completion, city officials are enthusiastic about design-build. "It's a very good way to get complex, expensive projects done," Bauman concludes. Amirani believes the city has saved money by not having to pay separately for engineering costs, which might amount to 8% to 10% of the budget, or for construction management and inspection, which typically account for another 10%. Change orders valued at 10% to 20% of the project would not be uncommon, but, Amirani says, "We haven't had any change orders so far." She adds, "This was so successful that we might consider [design-build] for our future projects."

The author has provided communications services to the industry for more than 20 years, working with general contractors, subcontractors and trade groups.

Photo credit: Chris Costello

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