Utility uses PCO to retain control of its facilities

When a city issues RFPs, it is not unusual to find a number of private contractors responding with ideas on improving efficiency and cutting costs. But when Charlotte, N.C., issued RFPs for the operation and maintenance of its Vest water treatment and Irwin Creek wastewater facilities, the winning bids were an inside job, submitted by the city’s utility department.

Faced with having to compete for the operation and maintenance of two of its seven treatment facilities, the Charlotte-Mecklenburg Utility Department (CMUD) was forced to do what most private companies consider standard practice — reinvent itself to enhance its competitiveness and efficiencies.

CMUD created a team of utility employees and consultants charged with looking at personnel, management and operations and maintenance costs before submitting a bid to the city council.

In April 1996, CMUD submitted bids to operate these plants under the terms and conditions stated in the RFP. The city also received bids from six private companies and/or joint ventures to operate these facilities. An analysis of price proposals contained in the bids, by a team of independent bid evaluation firms, indicated that the CMUD-combined bid was the lowest cost bid, with proposed total fees over five years that were around $1.6 million lower than those of the nearest competitor.

The CMUD administers, operates and maintains a unified water and wastewater system for a service area that includes Charlotte and Mecklenburg County, as well as several smaller municipalities and other areas in the region. The water system has a plant processing capacity of approximately 125 mad while the wastewater system has capacity totaling approximately 92 mgd.

In 1995, a private contract operations firm made an unsolicited offer to the city council to purchase and operate the McAlpine plant (CMUD’s largest wastewater treatment plant). Charlotte rejected the unsolicited proposal, but privatization advocates encouraged CMUD to accelerate a plan that envisioned contract operations of some of its facilities. In addition, the city had recently contracted one-fourth of its refuse collection to a private firm.

In January 1996, Charlotte issued its RFPs for the Vest and Irwin Creek plants. Submitted proposals were not evaluated on cost alone. The bids also had to include plans for boosting efficiency and cutting costs, according to George Raftelis, a consultant with locally based Raftelis Environmental, hired by the city to evaluate the proposals.

CMUD proposed reducing operations and maintenance costs at both facilities by nearly $1 million by cutting personnel and enhancing automation. Cost and performance guarantees — a staple of private service agreements — were also included in its proposal.

During preparation and submittal of the winning bid, a new approach — called “Public Contract Operations” (PCO) — emerged. CMUD’s engineering consultant has a new PCO division that helped guide the utility through this process.

PCO involves the delivery of services by a public agency to a city or county government through the development and execution of a public “contract” — actually a Memorandum of Understanding (MOW) between the local government and the governmental agency. The MOU contains all the terms and conditions that the local government would include in a service contract with a private company. In the CMUD case, it will be similar to the draft services contract included by the city in the RFPs.

To respond to the RFPs and provide the requested services, CMUD formed a separate operating and accounting structure called “CMUD Contract Operations” (CM-ConOp). The key elements of the CM-ConOp bid are:

* Provision of Cost and Performance Guarantees. CM-ConOp agreed to provide the same level of performance as the city required of private contractors. The costs to the city for delivery of these services will be fixed for the three-year contract term, as per the terms and conditions required in the RFP and included in the MOU. A portion of any savings achieved by CM-ConOp in operating the plants at a cost that is lower than the annual fee will be set aside to “guarantee” the coverage of cost overruns in the remaining years of the contract;

* Reliance on Plant Automation. Similar to private contract operators, CM-ConOp chose to minimize staffing by increasing the use of automation at the plants. This increased automation, as well as other plant improvements, will be paid for through the contract fee, not the capital improvement plan;

* Development of New Job Classifications and Responsibilities. To operate the plants under contract, CM-ConOp chose to develop a new classification of plant operator, namely a public contract operator. All operators will be fully cross-trained and will perform maintenance as well as operational responsibilities. As a result of the bid, public contract operators are now empowered to make process changes at the plant and motivated to optimize processes to save costs. In addition to operating the plant, the PCO operator will be crosstrained to perform tasks previously performed by the chemist, water quality technician and building maintenance staff;

* Performance Incentives. CM-ConOp operators will receive a direct share of any savings that result from actual plant operating costs being less than the annual fee;

* Plant Reinvestment. A portion of the CM-ConOp fee will be used to pay for plant capital efficiency improvements. These improvements will be made outside of the capital improvement plan process traditionally used by CMUD. Investments totaling $86,000 will be made at the Irwin Creek plant, paid for out of the guaranteed annual fee;

* Private Sector Performance Incentives and Automation Investments. The CM-ConOp staff will have many of the same performance incentives as plant operators employed by a private company.

The CM-ConOp operators will directly share in plant cost savings to be allocated on a monthly basis. The operators will also be crosstrained to perform all tasks related to plant operation and maintenance and will be empowered to make on’ the-spot decisions in order to enhance plant performance and minimize operational costs.

Operators will be provided with state-of-the-art automation systems to enable remote monitoring and/or control of pumps, valves, blowers and similar equipment, paid for out of the plant annual contract fee; and

* Public-Sector Policies and Service Objectives. PCO, unlike its private counterpart, allows public policies and service objectives to continue to guide the overall operation of plants. The plants and their employees continue as public sector employees, and public goals and policies are not superseded by incentives to maximize short-term profits. Plant cost savings are fully reinvested in the local community.

Implementation of the public contract operations will benefit the employee, the agency, the city or county manager, local elected officials, and ultimately, the ratepayer.

Most local government employees have few performance incentives to reduce costs. The PCO approach empowers the plant employees to directly participate in the benefits and risks associated with efficient plant operations. Operators are encouraged to achieve the highest levels of certification possible.

Under the new approach, the plant manager is given the authority and responsibility to operate the plant as a profit center. The manager knows, in advance, what the annual budget will be and is secure that it cannot be changed.

The manager also has, in writing, performance parameters such as average flows that are expected. The manager has the authority to use a portion of plant cost savings to reinvest in the plant for the sake of efficiency improvements.

The utility is no longer at the mercy of arbitrary budget cuts made by newly elected officials. The utility can point to an MOU that defines not only the level of plant service agreed to by the PCO, but also commits the government to providing an annual fee for the operation of the plant.

Ratepayers perhaps stand to benefit most from the approach, since they receive the benefits of service from a long-standing public agency versus a private company with short-term profit motives. At the same time, ratepayers will benefit from the significant cost reductions achievable by rates that are stabilized, or even reduced, in the future.

Elected officials are under substantial pressure to privatize operations, and PCO provides an alternative that circumvents the “public sector versus private sector” argument. Elected officials now have the option of supporting public sector control while, at the same time, achieving the benefits offered by traditional privatization firms.

Municipal agencies, while not convinced of the necessity for full privatization, are looking for options to change the ways that local government services are currently provided. With PCO, these agencies can stay ahead of the competition by developing unsolicited bids and submitting them during the budget development process.

This article was written by Jeremy O’Brien, project manager for HDR Engineering, Charlorte, N.C.