Written by Energy Services Media in collaboration with Johnson Controls & University of North Dakota
Eighty miles south of Canada, hugging the border of Minnesota and North Dakota, sits the city of Grand Forks. This welcoming city in North Dakota is known for its tight-knit and friendly community, home to 55,000 people. It is a hub for a variety of industries, including engineering, aerospace, energy, agriculture and healthcare. At the center of this thriving city is the University of North Dakota (UND).
Established in 1883, UND is the state’s oldest university. Its sprawling campus includes 240 buildings across 550 acres serving 13,000 students. As the first university in the country to offer a degree in unmanned aircraft systems, it is best known for the John D. Odegard School of Aerospace Sciences (UND Aerospace), which houses a majority of its fleet at the nearby Grand Forks International Airport. Powering the bustling and growing campus is a coal-burning steam plant, which dates back to 1909.
Over the past decade, UND has advanced in sustainable and energy-efficient infrastructure efforts. Activities have included retrofitting lights, installing heat recovery systems and managing technology for peak and off-peak use. For every step forward the university took, the root cause of inefficiencies became clear.
In 2016, the university calculated the steam plant’s Facility Condition Needs Index (FCNI), which compares the total facility deficiencies to the total replacement costs. The lower the score, the better the facility’s condition. Typically, a score over 0.10 classifies as a poor rating. The steam plant’s score was 0.55. It was a glaring issue that needed attention. Five of the seven boilers were past design life and the other two needed immediate repairs. In 2018, the plant’s FCNI score increased to 0.72, requiring nearly $50 million for repairs.
UND named Michael (Mike) Pieper, Associate Vice President for Facilities in November 2016.
Pieper grew up on a family-owned dairy farm in Minnesota. Having been raised by parents who worked as mathematicians, he had a high aptitude for the subject and a keen eye for solving problems. When faced with challenges on the farm, his approach to solving problems started at the root cause, developing long-term solutions to prevent problems from reoccurring. This same approach served him well throughout his entire career.
He received his bachelor’s degree in General Management and his master’s degree in School Business Management from the University of Wisconsin-Whitewater. From 2007 to 2014, he served as the Vice President of Finance and Operations for Western Technical College in La Crosse, Wisconsin, where he served as a member of the college’s senior leadership team.
In 2014, Pieper joined Winona State University’s Facility Services department as Assistant Vice President. At Winona, he championed the university’s master facility planning, reorganized the facility department, oversaw the installation of two federally funded sub-grade pedestrian railroad crossings and managed the relocation of the College of Education (Education Village).
When Mike stepped into his new role at UND, it was clear that the first problem that needed to be addressed was the steam plant.
SOLUTION: PUBLIC-PRIVATE PARTNERSHIP
As the steam plant’s FCNI score inched its way higher, UND’s facilities management team explored options for funding an entirely new plant. Through this exploration, the team realized the opportunity that laid in North Dakota’s state law allowing a private operator to build, operate and transfer a facility—a public-private partnership (P3).
Pieper, along with his peers, immediately began preparations for proposing a P3 to build a new natural-gas-powered steam plant. UND had two things working in its favor: data and knowledgeable people.
In 2018, UND announced its partnership with Johnson Controls. Energy Services Media (ESM) recently sat down with Pieper to gain an inside look into the unique P3 model.
ESM: After learning the state law allows a private operator agreement, what were the next steps?
Pieper: We needed to identify a source to accomplish the ultimate goal of building a new plant that wasn’t going to take away funding from our academic mission and existing projects.
The P3 model checked all of the boxes that met the president’s goals and timeline. The plant would no longer be a business continuity risk that we would have to manage, and after an in-depth review, we moved forward with procuring a provider.
One thing we had in our favor was a lot of due diligence over a five year period. We had very knowledgeable people on site. They knew what we needed to do, but not necessarily quite how to get it accomplished. We’re fortunate to be able to go back and look at the data that we’ve gathered over the past five years and say, “Is this possible?” We completed validation of information internally, which we then used to solicit a partner. Because we had the knowledge we were able to say, “This is what we know; this is what we have.”
Then we followed the standard procurement practices for a request for proposal (RFP), which was posted for three weeks. We moved pretty rapidly because it was a facility-driven decision. The pre-development phase followed. We then hit a due diligence period where we went to the partner and shared the information we had. We felt very comfortable that we could hit our goals and benchmarks. We encouraged them to take the time, on their dime, to evaluate the information and come back to us with a path forward. That took roughly two to three months.
We both agreed that the solution was there and we could hit our target. We created a pre-development agreement where we shared the cost to dig deeper. I call it audit grade research, meaning we want to come out of that pre-development agreement with all the information we need to populate a multi-year long-term agreement.
We anticipated that the pre-development stage would not take long. However, we had to consider the needs of the external university and government partners. That process took about six months.
From there, we were off and rolling and entered into a development agreement. We were proactive and started to pre-order materials.
The bid was awarded in October of 2018. Construction started in April of 2019 and Johnson Controls is now in the process of commissioning the plant. The contract states that the operation needs to change over at the end of the summer of 2020, but we think it will happen sooner.
We moved rather quickly. We are ahead of schedule and the budgets are holding well, so we are delighted with the outcome.
ESM: Who were the top candidates during the RFP process?
Pieper: Enwave, Burns & McDonnell and Johnson Controls.
When we created the RFP, we asked for a couple of specific things. We wanted a firm to be the lead for the project. Many people wanted to build it, some wanted to design it, but we wanted to hire somebody to take the lead.
We were very upfront when informing interested firms what we were looking for in a lead firm. We made it clear that this project only gets done if it is legal and receives political acceptance.
We needed to be politically sensitive and actively engage stakeholders.
ESM: What led to Johnson Controls winning the project?
Pieper: Johnson Controls really took being the lead to heart. They brought the communication and the political relations people to the table. In addition, they saw the value of bringing the legal expertise upfront in the interview process.
ESM: Why was a P3 the right fit for UND?
Pieper: One of our priorities was “certainty.” We understand the inputs, costs, and revenues we have to extract from the steam plant to keep it operational. We also know that, like any other capital project, investments are going to be required over time. We wanted to avoid the start- stop mentality of a traditional construction project, continually questioning if we had the budget or approval to fund the project.
We embedded over the full life of the project a requirement for maintenance and scheduled capital investments. This made us feel comfortable that we would be getting back a valuable asset at the end of the contract. This further allows us options at the end of the agreement to extend the contract or return the plant to university operations.
It was important to us that the asset was going to be in good shape for the long run. We wanted Johnson Controls to be able to take the risk of making sure it’s properly staffed and operates with maximum efficiency.
ESM: What is the cost structure?
Pieper: We issued debt to fund the project. Johnson Controls is committed to paying for that debt. Johnson Controls recoups the money to pay for the debt through selling steam to the university. We have a contracted rate in place. Inflationary factors were built into the agreement. But in general, that’s how the money’s going to flow.
The initial priority was the steam plant project. As the conversation unfolded, it became clear that substantial energy savings opportunities existed throughout campus.
Since we were anticipating entering into a 40-year contract, we saw this as an opportunity to look at the campus holistically. We wanted to capture savings where we could and reduce the amount of deferred maintenance. The length of the contract provides additional opportunities that we typically wouldn’t see under a traditional performance contract.
The energy savings projects throughout campus were included as part of the steam plant project, which provided cost-saving efficiencies to help improve the financial profile. A portion of the revenue generated by the sale of steam will offset the debt. These revenues will also pay for the operations, capital improvements and life cycle management of the plant.
ESM: Why did UND decide to opt-out of a large upfront concession payment?
Pieper: One of the attractive things about a P3 is that it provides a lot of capital upfront. Some institutions maybe a little bit more leveraged than others, even in terms of things like tuition rates.
UND is one of the best institutions in higher education in terms of being very under leveraged and our tuition is way below the market. Our quality of education far exceeds many in our regional market who are charging double.
It was not a necessity to raise a bunch of capital. We had little to no debt. Without debt being a key driver, I think the investment model just wasn’t attractive.
A key piece of operations to the new steam plant is N+1 redundancy. This is a resiliency measure, which allows the steam plant to support the campus even in the face of an outage or extreme weather conditions. Components (N) have at least one (+1) independent backup component. Two examples of UND’s steam plant N+1 redundancy components are the deaerators and boilers; each has an independent back up.
FUTURE P3S ON CAMPUS
The university is discussing the utilization of P3 model for other projects and initiatives on campus. They have seen benefit in utilizing a P3 model for the steam plant project and other projects completed on and off-campus. For colleges and universities with strong revenue projects a P3 model provides an opportunity to reduce operating costs and deferred maintenance costs.
As of February 2020, Johnson Controls is in the commissioning phase and is on track to be operational spring of 2020.
To learn more about Johnson Controls and the UND project contact:
Lyle Schumann, Director of Business Development // Lyle.C.Schumann@jci.com // 651-775-7548
THE COMPETITIVE ADVANTAGE: DRIVING LOCAL INVOLVEMENT
Johnson Controls involvement with the University of North Dakota (UND), as well as with stakeholders of the local and state levels, was a crucial element of its winning bid. When the university created the RFP, leaders made it clear that they wanted the final firm to take the lead on all aspects of the project. The challenge was to build a team with national and local expertise to deliver the project.
Local partnerships formed an integral part of Johnson Controls approach, and this continued into the construction phase. The company committed at an early stage to rely heavily on local contractors, and they followed through in exceptional fashion: 80 percent of the work was performed by companies in North Dakota, many of which were local to Grand Forks.
Johnson Controls built a team of local design professionals that had previously worked on projects both on and off-campus; Affiliated Engineers Inc (AEI), Fosdick & Hilmer, AE2S, JLG Architects, and Obermiller Nelson Engineering (ONE). Each firm had specific roles in design. Johnson Controls was the general contractor with PCL Construction and FM Sylvan as major subcontractors.
Odney, a communications and marketing firm that has been operating and expanding in North Dakota for more than thirty years, was a crucial partner. Odney helped foster critical partnerships with elected officials, from the governor and state legislature to the mayor and key leaders of Grand Forks.
Johnson Controls held a strategic approach from the very beginning. The initial stages focused on ensuring that vital stakeholders understood what could be accomplished through the steam plant project, and the project benefits for UND, the state government, and other higher education institutions in general.
The compelling mix of national P3 experience, commitment to local engagement, and a strong communication strategy led Johnson Controls to be the desired partner for the University of North Dakota’s P3 project.