OSU weighing controversial energy contract

Credit: DaytonDailyNews

OSU considers big energy changes

Credit: DaytonDailyNews

Privatization deal would be largest for a public institution in U.S.

At a glance

Ohio State University is considering hiring an outside vendor to operate and maintain the main campus utility system, sell energy to the university and make conservation upgrades across campus.

Here is what may be covered in the 50-year deal:

  • 450 buildings, including dorms, labs, sports arenas and a medical complex;
  • an electric distribution center with high-voltage and medium-voltage substations;
  • three centralized chilled water operating facilities for cooling;
  • five steam boilers for heating;
  • four working geothermal systems with a network of hundreds of water wells, and;
  • 16.5 miles of natural gas pipelines.

Timeline

Feb. 2015: Requests for Qualifications were issued to potenial vendors

June 2015: 44 responses to the RFQs were received

Oct 2015: 40 firms were invited to respond to a Request for Information, 10 multi-firm groups responded

Nov 2015: OSU trustees adopt sustainability goals for the university.

Current: OSU doing due diligence on the 10 groups and preparing a Request for Proposals.

Fall 2016: Six groups may be invited to submit formal proposals.

Ohio State’s campus in Columbus is the third-largest in the United States and easily the largest in Ohio. Our reporters closely watch the state’s flagship university for stories that impact Ohioans.

Four years after a controversial deal to lease its parking spaces to an outside vendor, Ohio State University is once again looking to the private sector for a cash infusion in exchange for control over critical assets: the utility system that heats, cools and powers more than 400 buildings on the main campus.

If the plan is implemented, Ohio State would be the largest public institution in the United States to privatize its utility system on such a broad scale.

The deal is not without risks, however.

In exchange for an undetermined amount of upfront cash, Ohio State would turn over control of its heating, cooling and electricity assets and agree to buy energy from the vendor for 50 years.

It would be like selling your house, pocketing the cash and then paying rent to stay while the landlord is responsible for upkeep.

“My fear is this shifts risk off to the future generations, which is not something you do if you’re pursuing sustainability,” said Robert Burns, a retired research specialist who did an analysis of the project for the union representing OSU utility workers. “And the future generations here are future faculty, students and staff.”

Ohio State officials say the deal would have safeguards to make certain the vendor maintains the assets and meets the school’s standards for customer service and energy efficiency.

The in-house utility team hits the university’s 99.96 percent reliability target most years, said OSU spokesman Rob Messinger.

While no decision on the plan has been made, Messinger said it illustrates the type of forward thinking for which OSU is known.

“The university is a place to be on the leading edge and looking at ways you can do things better and smarter,” he said.

A small city

The university started down the path more than five years ago but ramped up efforts in the past 18 months by inviting big players in the energy and finance sectors to submit qualifications and ideas.

Ohio State Chief Financial Officer Geoff Chatas, the driving force behind the parking contract, is one of three top OSU administrators in charge of the utility project.

This fall, Ohio State is expected to invite six of the 10 semi-finalists to submit detailed proposals. Competing vendors must have extensive experience and pockets deep enough to provide the hundreds of thousands of dollars that would be expected as an upfront payment.

The university is not disclosing which firms are in the running.

A finalist could be picked as early as late 2016, but Messinger cautioned: “No one has come to any decision about whether in the end this will make sense for us.”

The scope of what is being discussed is huge. Ohio State is like a small city: 88,000 workers, visitors and residents, 450 buildings, 22 million square feet of floor space, major sports operations and a complex medical center.

The utility infrastructure serving the 1,904-acre campus includes an electric distribution center with high-voltage and medium-voltage substations, three centralized chilled water operating facilities for cooling, five steam boilers and a network of tunnels for heating, four working geothermal systems with a network of hundreds of water wells, and 16.5 miles of natural gas pipelines.

As one of the state’s largest electricity customers, OSU spends about $110 million a year on energy — and demand is projected to grow as new dormitories, athletics facilities and more are brought online. Since 2004, the university has poured more than $300 million into utility system upgrades.

The winning vendor would assume some long-term risk, but would also inherit a well-maintained system that could deliver the potential for a steady cash flow over the next 50 years. OSU promises the vendor will “earn an attractive return.”

‘Risky experiment’

Despite the pile of cash, Burns said the deal could be bad news for Ohio State.

In his analysis for the union, Burns said the 50-year lease with a single vendor “makes this a unique and risky experiment where the consequences of small errors in risk management can and will multiply over time.”

The energy needs for the massive campus are much more complicated than keeping classrooms or student dorm rooms at a comfortable temperature, said Burns, who formerly worked at the Ohio State Center for Energy, Sustainability, and the Environment. The medical center, science labs, computer equipment and other instruments and research projects all have very narrow temperature tolerances, he said.

“The point is that energy management services are the lifeblood of the university,” Burns said.

State Rep. Mike Duffey, R-Worthington, who chairs the House Higher Education Subcommittee, said Ohio State will have to dig into the substance of the deal before pulling the trigger.

“You’re losing control and you’re also hedging against what you think the enterprise will make or lose in the future,” he said. “You definitely would need terms in the contract to protect you on every contingency that would matter for you, such as pricing and reliability.”

Other institutions, including the University of Oklahoma in Norman, have experimented with privatization. Oklahoma hired Corix Utilities in 2010 to run its heating, cooling, electricity, natural gas, water and sewer operations through 2060.

“It’s a great partnership with the university and we’re really, really happy with how it’s been working on all sides,” said Corix Executive Vice President Dietz Kellmann. He said he couldn’t comment on whether Corix will compete for the OSU deal, other than to say Corix is always looking for opportunities.

The University of Oklahoma is about half the size of Ohio State, which has 59,000 students on its Columbus campus.

Details kept secret

Ohio State’s energy plan appears to be more ambitious than the deal struck in June 2012 to lease for 50 years the school’s 35,000 on-campus parking spaces in exchange for $483 million in cash upfront.

But much about the deal is being kept secret.

The university is not disclosing the names of the 10 semi-finalists or the information that will be shared with the six finalists that may be invited to compete in the next stage.

Messinger said the university isn’t releasing documents at this point because it is an active bidding process. Besides, he said, the less the competitors know about one another the better it is for Ohio State.

The university would require the private vendor to make investments that will lead to the campus using 25 percent less energy within a decade, officials say.

If the energy plan goes forward, other state universities will look to privatize their energy grids, said Communications Workers of America District 4 Staff Representative Bill Bain, who represents workers at six universities in the Midwest.

That would likely mean higher costs to the public, said Bain, who said prices went up after parking contract took effect.

“We would expect potential energy hikes would be passed along to departments and ultimately that gets passed on to the students,” he said.

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