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Public-private partnerships have been used to make trans-formative changes in urban areas by building parking garages and refreshing roadways, among others. Since the 2008 recession, a growing number of public entities have been turning to partnerships to bridge the gap between strained public funding and the increasing need for services and improvements.
Ohio’s former U.S. Senator George Voinovich was a support-er of these partnerships ever since he was mayor of Cleveland in the 1980s. The then-mayor was one of the first in the nation to implement the P3 model for a variety of public services including water, sanitation, energy, transport, telecommunications, healthcare, and education.
Voinovich outlined four vital factors to successful P3 re-lationships: asking for help, securing resources, establishing trust, and communicating effectively. When Ohio voters sub-sequently elected Voinovich governor in the 1990s, he ampli-fied the P3 model throughout the state.
As the P3 model became more popular over the follow-ing decade, the state legislature established energy efficien-cy portfolio standards for the electric utilities in Ohio. This confluence of policy-based events sparked a P3 opportunity, unlike any other.
When the board began exploring P3 opportunities in 2014, the concept was not foreign to them. In 2013 the board approved a $483 million P3 deal to let QIC Global Infrastructure manage their parking facilities in exchange for an upfront investment.
With the successful launch of that P3 and approval from state legislation for an energy P3 deal, the board decided to move forward with an RFP.
In early 2017 several companies came to the table and sub-mitted proposals. The winning proposal was ENGIE North America and Axium Infrastructure. Shortly after the pro-ject was awarded, The Ohio State Energy Partners, LLC was formed. This group is comprised of representatives from EN-GIE and Axium that own, manage, and execute the agree-ment. Ohio State set the precedent, and many often refer to a higher education P3 utility management model as “The Ohio State Model”.
Potter: Probably the biggest (milestone) for 2020, which may be the biggest for the entire concession agreement, pend-ing regulatory approval, is we expect to start construc-tion on our new combined heat and power plant. This is something that Ohio State has been considering for more than a dozen years, but it was not until we had the P3 deal that we found a way to manage that upfront cost.
It is a very large project that was approved by the board for construction last summer. The total project, which is two projects put together, is more than $270 million. That construction is expected to start late spring, early summer. Starting construction will be a significant milestone.
Within the last two years, we have achieved several of the energy conservation measures that were a part of the agreement. We wanted the company to help get our cam-pus to our new efficiency goals, but those projects took a year to complete. This will be the first year since the concession was executed that we have a full year to look at the meter and say, “Look, we changed these 100,000 lights, and we upgraded these 14 buildings, and here’s a year's worth of meter data to prove the benefit.”
Potter:I think the biggest challenge has been and continues to be integrating a public mentality with a private mentality. Two of the P’s (of a P3) are very different. To get the partnership—the third P—to work, you have to figure out how to coordinate the public entity with the private entity. The private entity is accustomed to doing things at the speed of business. A public entity, like Ohio State, is a shared governance body that does things much slow-er and more methodically.
The shortest-term plan that Ohio State looks at is a five-year plan. A single capital project may be three or four years in development before it ever gets approval to go forward for design. Both sides have had to learn how to integrate two mentalities and take the best of both sides without undermining the mission and integrity of either. We are a public institution, so we have to do things publicly, but I think we are managing it well.
Potter: Definitely. Fortunately, we expected there would be, even though we spent years on the project and the con-tract is 2,600 pages long, we knew we would miss some-thing. The current contract is the third amended con-tract, and we are very pleased with it.
There has not been anything major, but one example is, we realized early on that we did not build in a mecha-nism for the company to charge us—or for us to charge them—for something that was previously unthought of. We built in this beautiful mechanism for the regular fees and capital investments, but we did not think about the one-off unknowns. In one of the amendments, we put in a mechanism that said we could mutually agree to a pay-ment structure for non-utility items, such as certification and application filing fees.
Potter: If you look at our KPIs, we did a few things. One, we limited them. The KPIs are only on the most important measures. When we first started the process and looked at performance standards, our first draft list was over 250 performance standards. Ultimately when the contract was done, we boiled that down to 13 KPIs. It was really for the things that would affect the operations, mission, and the continuity of the university.
We also built-in the notion of forgiveness. Everybody misses the mark by a little at some point. So, if there is a minor unplanned outage today, and it is the only one that happens this year on chilled water, it is going to get checked in their box as having an unplanned outage. But there is no penalty. However, if a particular event be-comes repetitive or is catastrophic, the penalties esca-late quickly. We tried to build in a reasonable scale of forgiveness but make ‘the hammer’ on the back end big enough that the company will take it very seriously. We can tell you, to date, the company is positively hypersen-sitive about their KPIs.
Potter: Definitely. It was not the one we thought it would be. We all thought it would be the availability of electrical power, but it turned out to be the availability of chilled water. We have learned you can make the chilled water plant very reliable, but if somebody in a building—who is not tied to the KPI—turns on a giant cold water spigot and leaves it on, it has the potential to momentarily draw down the pressure of the distribution system. This trig-gers an alarm and causes an outage.
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we will be able to achieve our efficiency goals better, cheaper, and faster. "
Potter: Many universities will shy away from considering something like this because of its complexity. But with-in the complexity is the opportunity. If you go slow and methodically, you can do it. Something the company has taught me is that your first answer to any disagreement or question cannot be, “Let’s go to the contract.” I think the university picked its partner well. In hind-sight, I think the partnership aspect of the deal is even more important than we really understood at the time. The company has helped us understand that the con-tract is there to support the partnership, not the other way around. Both their CEO and my team try never to say, “Well the contract tells you we get ‘XYZ’.” Let us talk about the issue first, and if we need to fall back to the contract, we can.
Partner with the appropriate outside consultants, get the right legal and financial consultants. It is important, from my perspective, that they be from outside because only those kinds of entities can keep you from comfort blindness, and they can help you see.
Ohio State Energy Partners was able to attract a $1.165 billion investment through their P3 with ENGIE/Axium. No matter how big your project, the goal should be to lean on the experts to provide solutions to your energy needs.
As Ohio State’s Potter said, “We had to admit that we were not experts at utility operations. We are experts in education and research. By finding the expert in utility operations, we have strong confidence that we will be able to achieve our efficiency goals better, cheaper, and faster.”
More information can be found in Ohio State’s 2019 Comprehensive Energy Management Annual Report, available March 2020. The report details the first two years of the partnership, with data from 2018 and 2019.
Scott has more than 28 years of public and private sector utility experience. Prior to joining Ohio State, Scott was the director of utilities at the Public Utilities Commission of Ohio. Scott is a graduate of The Ohio State University and the University of Southern California. He currently serves as the President and Trustee for the Ohio Energy Project, a non-profit organization dedicated to energy and leadership education for Ohio’s K-12 students and teachers.