Background

The Lynn Water and Sewer Commission (Commission) provides water and wastewater collection, treatment, and disposal services for residents and businesses in the city of Lynn, Massachusetts and several surrounding communities. Pursuant to a consent decree negotiated with the United States Environmental Protection Agency (EPA), the Commission constructed a 25.8 million gallon per day primary wastewater treatment plant in 1985 and secondary wastewater treatment facilities in 1990. The wastewater treatment plant has been operated by U.S. Filter under a series of contracts since the plant came on line in 1985.

Lynn's wastewater collection system was constructed between 1884 and 1928. Prior to 1990, the collection system had many combined sewers that carried both sanitary flows and stormwater. The combined sewer system lacked the capacity needed to handle the combined flows and would overflow during periods of heavy rain, discharging untreated wastewater into river or ocean waters. The inadequate capacity of the combined sewer system also produced flooding of streets and basements in Lynn.

In 1987, the Commission negotiated an amended consent decree with the EPA requiring the Commission to develop a plan to address the combined sewer overflows (CSOs). The engineering firm of Camp Dresser & McKee Inc. (CDM) developed a CSO control plan that included separating combined sewers in some areas of Lynn and constructing a tunnel/pumpback facility to store excess water during periods of heavy rain. CDM's 1998 cost estimate for the tunnel/pumpback facility was $62 million.

Beginning in 1991, the Commission began a sewer separation program as required by the consent decree. Between 1991 and 2000, the Commission awarded eight construction contracts for sewer separation work in various Lynn neighborhoods. These contracts were awarded on the basis of bids solicited under the state's public construction bidding law.

Planning for Long-Term DBO Contracting

In 1997, CDM conducted an efficiency study for the Commission to identify potential management or operating changes that would produce cost savings. In the 1997 efficiency study, CDM noted that the operation and maintenance contract required U.S. Filter to employ a minimum of 49 employees at the wastewater treatment plant. CDM recommended the award of a contract to design and build improvements to and operate the wastewater treatment plant for a 20-year term. CDM determined that a 20-year design-build-operate (DBO) contract could produce cost savings if the contractor were allowed to reduce the number of employees. The CDM study recommended against the DBO contract approach for the design and construction of CSO abatement facilities, but the Commission did not follow this recommendation.

In 1997, the Commission entered into privatization services contracts with CDM and with the New York law firm of Hawkins, Delafield & Wood (HDW) to assist with the procurement of long-term DBO contracts for the wastewater treatment plant and for CSO abatement work, referred to as the East Lynn CSO Project. In 1998, the Commission shifted the privatization services work from CDM to Malcolm Pirnie, another engineering firm, through a no-bid amendment to a small engineering services contract. The Commission's expenditures for these two privatization consultants would mount to more than $3 million over the following three years.

The Commission obtained special legislative authorization in 1998 to exempt the DBO contracts from the state's public construction bidding law. In February 1999, the Commission issued requests for proposals (RFPs) for both contracts; proposers could respond to one or both RFPs.

The East Lynn CSO Project

The Commission chose an open-ended design approach for the East Lynn CSO Project. The RFP invited proposers to develop a design based on any technology that would accomplish the project objectives of reducing or eliminating CSOs and flooding problems. This approach was intended to promote competition among firms to develop the most cost-effective design. The Commission expected to place responsibility on the contractor for meeting the project objectives.

However, the Commission's expectations for the East Lynn CSO Project procurement approach proved to be unrealistic. The open-ended design competition required proposers to invest substantial resources to investigate the causes of the CSO problem and to develop design solutions; thus, the high cost of proposal preparation discouraged rather than promoted competition. The Commission received only two proposals: one from U.S. Filter and one from another design-build team. U.S. Filter had been acquired by Vivendi, a $45 billion corporation, prior to the proposal due date; the design firm responsible for preparing the second proposal was also owned and controlled by Vivendi. Thus, it does not appear that the Commission generated genuine competition for the project.

Neither of the two proposals included the tunnel/pumpback facility that CDM had recommended in 1990. Instead, both proposals were for sewer separation projects. U.S. Filter proposed to install a new, small-diameter, sanitary-only sewer but refused to accept responsibility for the risk of sewer overflows, sewage backup, and flooding that could result from this approach. The second proposal contained a completely different scope of work, calling for the construction of a new, large-diameter stormwater sewer. Because the scopes of work involved in each approach were so different, the proposal prices were not comparable.

After 15 months of proposal evaluation and contract negotiation, the Commission awarded a $48 million sewer separation contract to U.S. Filter. However, the contract did not produce the benefits that the Commission had hoped to achieve through the DBO process. The U.S. Filter approach poses risks of sewer overflows and flooding resulting from inadequate sewer capacity. Under the one-sided contract negotiated with U.S. Filter, the Commission bears the risk for ensuring that the sewer system design has adequate capacity to prevent these problems. The contract also makes the Commission responsible for other construction work that will be required to meet the project objectives. The findings in this report show that this work is likely to bring the Commission's cost for the project to more than $86 million. Even more troubling, the Office's cost estimate for the sewer separation work proposed by U.S. Filter shows that the $47 million design-build price is $22 million higher than the cost of comparable work procured by the Commission under the state's public construction bidding law for other sewer separation projects.

The Commission's Chairman and the Mayor of Lynn have publicly claimed that the U.S. Filter contract stands to produce $400 million in cost savings when compared with a 1990 plan for a totally different technical approach involving a tunnel/pumpback facility. This cost-savings claim was not supported by the engineering cost estimates prepared by the Commission's own consultants. But more importantly, the comparison of the cost of the U.S. Filter contract with the cost of the tunnel/pumpback plan is a red herring. U.S. Filter's $47 million design-build price is nearly double the cost for similar construction work procured through competitive bidding, making the East Lynn CSO Project a bad deal for ratepayers.

The 20-Year DBO Wastewater Treatment Plant Contract

The Commission's 25.8 million gallon per day wastewater treatment plant has been operated by U.S. Filter since the plant came on line in 1985. The Commission awarded a five-year contract to U.S. Filter through a competitive process in 1991 and subsequently amended that contract to allow U.S. Filter to pass through increased operating costs. The Commission again solicited proposals for a new five-year contract in 1996 and received competitive proposals from U.S. Filter and another firm. The price proposed by U.S. Filter in 1996 would have resulted in approximately $500,000 in cost savings per year in comparison with the 1991 contract. However, the Commission did not award a new contract in 1996 but instead continued to rely on U.S. Filter to operate the plant for another four years under month-to-month extensions of its 1991 contract pending the procurement of a 20-year DBO contract.

The RFP for a 20-year DBO contract issued by the Commission in February 1999 generated only two proposals. As was the case with the East Lynn CSO Project, the two proposals were submitted by U.S. Filter and by another firm; both firms were owned and controlled by Vivendi. Thus, the RFP process did not generate meaningful competition.

The Commission relied on Malcolm Pirnie to perform an analysis comparing the costs of the two proposals and to determine whether a 20-year DBO contract resulting from one of the proposals would result in lower costs than a traditional, five-year operating and maintenance contract. Malcolm Pirnie's flawed analysis overstated the Commission's actual operating cost in projecting that the 20-year DBO contract would cost $28.6 million less over the 20-year term than the Commission's then-current five-year contract. When the Office corrected the costs to reflect the Commission's actual data, the projected savings were reduced from $28.6 million to $7.7 million. Moreover, cost adjustment factors in the 20-year DBO contract will increase the Commission's costs, further eroding any potential cost savings.

The Office used Malcolm Pirnie's mathematical model to compare the cost of U.S. Filter's 1996 competitive proposal with the 20-year DBO contract. This comparison shows that the competitive price for a five-year contract, extrapolated to 20 years, would produce lower costs than the 20-year DBO contract with U.S. Filter. U.S. Filter may realize operating cost savings resulting from its CSO work and its planned staff reductions, but the findings in this report show that the savings will translate to increased profits for U.S. Filter rather than lower rates for the ratepayers. Moreover, the Commission will have little leverage in future cost-adjustment negotiations with U.S. Filter under the complex, 20-year DBO contract, which effectively insulates U.S. Filter from the threat of future competition.

The Commission's Privatization Consultant Contracts

The findings in this report also show that the Commission failed to exercise control over its expenditures for privatization consultants, which mounted to more than $3 million over three years. The Commission initially awarded a competitively priced $56,168 general engineering services contract to Malcolm Pirnie. The Commission later amended that contract to allow Malcolm Pirnie to increase its hourly rates by as much as 73 percent and to bill more than $1.6 million in privatization consultant services.

The Commission also awarded a sole-source contract for privatization legal services to the New York firm of Hawkins, Delafield & Wood (HDW) that grew to more than $1.5 million over the first three years. This open-ended contract did not require HDW to itemize or document the $92,564 in travel and meal expenses billed to and reimbursed by the Commission. After the Office requested documentation, HDW acknowledged that $3,295 of those expenses had been erroneously billed to the Commission and that HDW had no documentation to support another $4,695 in travel and meal expenses.

The RFPs for both of the DBO contracts required the winning firm to reimburse the Commission for the cost of the privatization consultants. This imprudent method of financing its consultant costs created pressure for the Commission to award the contracts to recover the $3 million it had spent, regardless of whether the contracts offered good deals for ratepayers.