Municipal Utility Saves Major Costs with Effective Risk Management

Close supervision of key milestones aided successful installation

By Larry Johnson, PE

When commissioning completed in August 2017, all those involved with the Ray D. Nixon Power Plant sulfur dioxide (SO2) scrubber and activated carbon injection system project were pleased with the results. The $57 million project was a success: No construction surprises had emerged; no old unforeseen utility corridors or foundations were unearthed and the system worked as designed, all at a significant cost savings.

Colorado Springs Utilities, responding in part to more stringent SO2 limits imposed by the Colorado Regional Haze State Implementation Plan and federal standards, is sending a positive message to its state and community by reducing emissions from the coal-fired plant south of Colorado Springs. By saving an estimated $10 million through a competitive selection process, the utility also showed responsible management to its ratepayers. The story of how the collective team pulled that off is one of careful planning, closely managing and distributing project risk.

“Our contract agreement established a foundation for managing risks and to assign risk to the party best suited to manage the risk,” said Steve Duling, program director for Springs Utilities. “When planning the project, we had discussions on how and when risks would transfer from one party to another.”

Tackling risk with Project Management Institute techniques

The Unit 1 Nixon scrubber project would retrofit its 225-MW coal-fired electric generating unit with a flue gas desulfurization system and a activated carbon injection (ACI) system to control mercury emissions. Along with needing to comply with Colorado’s haze control plan, the other emissions issue was the EPA’s sulfur compliance deadline of Dec. 31, 2017. The new equipment is designed to reduce emissions to less than 0.085 lbs/MMBtu for sulfur and less than 0.8 lbs/TBtu for mercury.

Springs Utilities hired Stanley Consultants to serve as their owner’s engineer providing construction and project oversight. The first task was to generate a performance specification to contract an engineering, procurement, construction and commissioning(EPCC) contractor. Stanley Consultants was also called on to design new transformers, an isophase bus duct, a new fire suppression system and to assist in procuring new ultra-low NOX burners.

The EPCC method of project delivery came with a guaranteed maximum price for the installation of the scrubber. While the EPCC format was followed in principle, the contract in effect could be described as more of a hybrid, where all parties shared various risks at different phases of the project. The owner wanted to place the appropriate execution risk on the EPCC contractor, cap the owner’s cost exposure and still allow the project team to identify and share cost savings while maintaining quality and meeting schedule.

Both Springs Utilities and its owner’s engineer had been trained in Project Management Institute practices and risk management techniques and put them into practice on the scrubber and ACI project. Because of its complexity, negotiating the contract took longer than anticipated, but it ultimately provided a good return on investment.

The owner agreed to bear some of the unforeseen existing conditions risks associated with early project work, such as identifying underground utility corridors, ductwork condition and old foundations.

“As the owner, we believed these were risks most appropriate for the owner to carry,” Duling said. “We carried the contingency until underground was completed. If we didn’t take that risk, the respondents to this RFP solicitation would have to put in the cost of contingency and if they didn’t encounter anything, they would have benefited. Our carrying that risk saved us and our ratepayers money.”

Springs Utilities worked with its owner’s engineer to build a matrix that identified risks associated with each phase of the project, assess the likelihood of a risk event, the potential monetary value of the event and documented mitigation steps for each risk. The risk matrix broke the analysis into the following categories: existing conditions, construction, performance, timing and quality. The risk management committee, comprised of Springs Utilities and the owner’s engineer, met monthly to update the risk matrix and draw down the contingency fund for risks that had passed.

At one point, Springs Utilities held $11 million in contingency money to pay for potential risk events. The team conducted regular risk review meetings. As key milestones passed during construction, the contingency was released as risks were passed or were mitigated. Prior to commissioning, the fund was down to less than $500,000.

“The process was to take the work breakdown structure and identify potential risks and assign values to them. The consortium had some risk; the owner had some,” Duling added.

For example, one Springs Utilities-held risk was obtaining approval of the site development plan from the county and a railroad crossing agreements. It was assigned a potential risk value of $200,000. The mitigation plan was to gather as much information as possible from the consortium team and make sure the applications were complete to prevent resubmittal. The team also stayed in close touch with the agencies having jurisdiction.

All team members played parts in risk management. Engineers directed geospatial surveys, inspected ductwork, fans, panels inside ash bins and decided what to reuse and replace. The inspections had to be carefully planned because of limited outages during which this information could be collected.

Savings shared between owner, contractor

Following the process laid out in the competitive solicitation, Springs Utilities utilized a shared savings agreement based on using value engineering methods. The agreement identified two contract phases, the initial guaranteed maximum price and the final guaranteed maximum price. The initial guaranteed price gave Springs Utilities 70 percent of savings and the contractor 30 percent. During the final maximum guaranteed price phase of project, Springs Utilities received 80 percent of project savings and the contractor 20 percent. Duling credits market conditions as a large factor in the favorable terms achieved through the competitive solicitation.

Overall, construction stayed on time and budget at a quality level that satisfied the owner’s expectations. Duling credits the contractor for its expertise and being willing to rethink their plans when changes were needed. For example, the initial lime recycle system vendor would not hold to its original quoted pricing and another vendor was hired. He said the contractor constantly looked for efficiencies in how they sequenced work. The scrubber and carbon injection system are scheduled to be online by this fall and the plant fully emissions compliant by December.

“We weren’t sure how it was going to play out. There’s so many ways risk was being managed, from us recognizing we didn’t have the resources internally to deliver the project and hiring an owner’s engineer,” Duling said.

“EPCC with an owner’s engineer is just another tool in the tool kit. If it’s the right project; if it’s new generation source or having to put SCRs on, it may warrant this type of approach. You need to plan and analyze where the market’s at and learn the internal drivers that influence your project.”

Larry R. Johnson, P.E., is vice president and senior project manager with Stanley Consultants. His 30 years of experience includes medium and large power generation projects, management of professionals, technicians and support personnel in all aspects of multidiscipline projects.