Utility privatization: A snapshot of “The Deal”

Posted in: Infrastructure, Military, Water

utility privatizationDefense Logistics Agency’s Utility Privatization Program involves bidding on a 50-year contract to own, operate and maintain the utility system(s) you win. The contracting involves a complex, lengthy process of preparing a proposal, bidding and negotiations, and a transition period to “take over” the system.

The privatization program systems include water, wastewater, gas and electric. New to this target group are thermal and power systems. You will find these utility systems across the United States.

These bids or proposals involve drafting a voluminous, several hundred-page document, typically developed over a three to four-month time period. The proposal is broken down into four volumes, each of varying length and complexity:

  • Volume I – Technical Proposal
  • Volume II – Past Performance Evaluation
  • Volume III – Contract Documents and Exceptions
  • Volume IV – Price Proposal

If your proposal meets the competitive criteria, then you will receive a series of “negotiation messages” in the year after the initial proposal submittal.

Your proposal will be ranked based five factors:

  • Factor 1 – Technical Capability (Vol 1)
  • Factor 2 – Past Performance (Vol 2)
  • Factor 3 – Risk (Vols 1 and 4)
  • Factor 4 – Socioeconomic Plan (Vol 3)
  • Factor 5 – Price (Vol 4)

Each factor is given a “weight” or comparative value. Factors 1, 2 and 3 are equal in weight and are all greater than Factor 4. The weight of Factors 1, 2, 3 and 4 added together outweigh Factor 5.

The contract is awarded to the successful offeror at the end of the negotiations. The process then moves into the “transition period”, which is typically about nine months. During this time, the transfer of ownership and/or operations begins. The transfer includes a joint inventory, opportunity for due diligence, obtaining resources and staff, and completion of the bill of sale.

Once the contract start date hits, the contractor assumes operations, and begins executing Initial System Deficiency Corrections, along with scheduling, managing and performing long term Renewals and Replacements for the 50-year contract.

Defense Logistics Agency has privatized more than 600 utilities’ systems for Army and Air Force, and has 600 more to go. The Navy has privatized several and is looking to re-engage in the process.

The program is extremely successful. Consider these statistics:

  • 27% government “should-cost” avoidance (i.e., what work should cost after the fat is squeezed out)
  • $10 million per year in cost avoidance on water systems, alone
  • 17% commodity cost savings (i.e., reducing lost water and gas lost from leaky pipes)
  • 26% less water use at 21 Upper Peninsual sites
  • 44% life-cycle cost benefits (i.e., new owners will run the system 44% more efficiently than the Army over the life of the infrastructure)

This is why the Defense Logistics Agency continues to push forward with the program.

Interested in learning more about privatization? Check out my blog “Utility privatization benefits, substantial for utilities.”

Shannon Saramaa, PE

About the Author

Shannon Saramaa, P.E., is a member of Mead & Hunt’s water and wastewater team. A true entrepreneur with innovation in her heart, Shannon founded a municipal water and wastewater consulting firm that continues to serve numerous Colorado utility districts, cities, institutions and other water and wastewater providers. Shannon now goes forward in the same spirit as a member of Mead & Hunt.

Read more posts by Shannon Saramaa, PE

2 responses on “Utility privatization: A snapshot of “The Deal”

  1. In your opinion, is bundling of utilities (electric, gas, water, wastewater) viewed favorably by the evaluators?

    1. Yes, generally they are, as cost benefits are realized when utilities are grouped. For example, building only one new onsite operations center to house their staff, versus having two separate facilities for two different contractors. FTEs can often be shared by the utilizes if they are crosstrained as well (e.g. water-wastewater). DLA also just has just one contract to manage over the 50-year term. These are just a few examples, of many. Thanks for your interest!

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