1. UTILITY PARTNERSHIP CITY OF STOCKTON & OMI / THAMES WATER SERVICE CONTRACT

2. Why Outsource?  The Adoption of new General Plan in 1990 was the impetus for a variety of issues facing the City of Stockton’s Municipal Utility Department (MUD) –Revised Master Plan for Wastewater estimates $250 million in plant upgrades needed  Includes capacity increase from 38 to 60 MGD  $90 million in upgrades authorized over the next 5 years

3. Why Outsource? –Funding for $90 million in upgrades:  Certificates of Participation issued for $45 million  Monthly residential rates increased from $12 to $18  Remainder from Fund Balance & Public Facility Fees –Additional $160 million in upgrades still needed

4. Why Outsource? – Concerns  Rate increases needed to fund additional projects  Public-interest groups concerned about rate increases  Change orders, contract overruns & pending claims for many existing projects

5. Why Outsource?  Municipal Utilities Department Response –Development of in-house Business Plan  Guide for future MUD Operations –Staffing reductions/cross training –Optimize chemical dosages –Energy conservation / new cogeneration facility  Disadvantages of Business Plan –Could not prevent filing of claims after construction projects –Inability to hold MUD financially accountable –Project overruns still occurred –Project completion schedule still not met

6. Selection Process  2001 Council directs staff to seek potential private partnership contractor  2002 Council directs staff to prepare Request For Proposal (RFP) to solicit proposals for a partnership to design, build and operate MUD facilities –Three private proposals received  OMI/Thames Water Stockton Inc  US Filter  Stockton Water Services LLC –Proposals compared to baseline study

7. Selection Process  MUD staff involved in selection & transition processes –Assisted in development of Baseline Study  Projected costs to continue existing operations –MUD staff involved in RFP & contract scopes –Council heard employee concerns  Financial counseling  Retirement counseling

8. Selection Process  OMI Thames Stockton, Inc. selection –Lowest cost –Experience worldwide –Innovative Wetlands project –Plant upgrade plan

9. Contract  Contract awarded to OMI / Thames Water Stockton Inc – February 2003 –Includes outsourced operations & maintenance of water, wastewater and stormwater utilities –Includes $57 million of capital improvements to meet growth needs and permit requirements

10. Contract  Transition Period – February - August 2003 –Employee counseling sessions –Meetings & bridging agreements with unions –Preparatory work for OMI takeover of City’s Managed Assets  Implementation of Contract, August 2003 –Transfer of employees and operation & maintenance of Managed Assets

11. Contract Goals  Fixed price for operation & maintenance responsibilities –Costs transferred to contractor (employees, gasoline, chemicals, natural gas)  Risk Transfer –Contractor liable for permit violations –Contractor Services must meet regulatory requirements

12. Contract Goals  Performance Standards –Performance-Based, 20-Year Contract  MUD could not be held to performance-based standards  Contractor provides securities to guarantee that performance standards are met –Financial penalty when failing to meet performance standards  Process concerns now the contractor’s responsibility  Required maintenance inspections –Annual & unscheduled reviews by City staff –Independent Triennial Review

13. Contract Guarantees  Plant discharge (NPDES) guarantee  Finished drinking water guarantee  Periodic Managed Asset evaluation –Ensures repair & replacement of Managed Assets per industry standards –Evaluation of Managed Assets conducted by independent consultant –Return Managed Assets at 95% of original value  City convenience termination –City to pay Contract convenience termination fee of $1 million with 30 day notice at its sole discretion

14. Current Contract Status  Fixed fee budgeting  Risk transferred to OMI  Lawsuit pending with concerned-citizen group  Improved utility tracking  Dealing with costs not specifically addressed in the contract –Reimbursement for infrastructure growth –Changes in laws  City added position to manage contract

15. City Responsibilities  Utility Financial Management  Utility Planning & Development Review  Capital Improvement Planning & Implementation  OMI-Thames Service Contract Management  Stormwater Management  Water Resources Planning & Management  Regulatory Compliance & Enforcement

16. Financial Summary  Contractor capital improvement cost ($57 million) vs City’s estimate ($120 million) –Different treatment methods were proposed (enhanced wetlands vs activated sludge)  Future estimated cost savings for operations & maintenance: $1 million

17. Contract Highlights  San Joaquin Council of Governments Regional Gold Award –Stockton Constructed Wetlands Treatment System  Sanitary Sewer Overflow Program –SSO reduction