As appeared in the April 2009 edition of "Nuclear News" magazine:
The Georgia Public Service Commission [PSC] approved Vogtle Units 3 and 4 on March 17. By a 4-1 vote, the Georgia PSC approved not only the construction of the two Westinghouse AP 1000 reactors planned for the site near Waynesboro, Ga., but also the recovery of some of the project's costs through electricity rates starting in 2011, before the reactors enter service. Southern Company requested the PSC's certification for its subsidiary Georgia Power Company. Another subsidiary, Southern Nuclear Operating Company, would build and operate the reactors. The PSC set Georgia Power's
"certified cost" at $6.446 billion. Because Georgia Power owns 45.7 percent of the plant, this would translate to a cost estimate for the entire plant of 14.1 billion, or about $6.13 per watt. Unlike the comparatively rapid, straightforward approvals for the new reactor projects by state agencies in Florida and South Carolina, the process set up in 2007 by the Georgia PSC required Southern to go through an extensive consideration of alternative power sources, sites, and overall approaches to planning (such as demand-side management). In the end, the PSC agreed with Southern that new nuclear power at Vogtle is the preferred option.
Dr. Kris Nielsen testified on the prudence of the management decisions and processes used by Georgia Power in the GA PSC hearings in support of the Georgia Power filing for Vogtle 3 and 4's certification, including the selection of Toshiba/Shaw and the Engineering Procurement and Construction contract. The same team of Pegasus-Global personnel who assisted Georgia Power Company on Vogtle Units 1
& 2 in the late 1980's was again retained to assist in the certification process and evaluation of prudence of Vogtle 3
& 4. The Pegasus-Global team that assisted Dr. Nielsen included: Dr. Patricia Galloway, John Owen, Howard Sobel, Gerald Tucker and Jack Dignum.
Iatan 1
Pegasus-Global was retained by Kansas City Power & Light to assist KCP&L in its rate case regarding Iatan Unit 1 Power Plant environmental upgrades and common facilities before the Missouri Public Service Commission. Iatan 1 environmental upgrades include emission reducing upgrades that use available technologies to reduce carbon and other emissions on a coal fired generating plant originally completed in the early 1980's. Dr. Kris Nielsen testified in the Missouri PSC regarding the proper prudence standards, KCP&L's management decision making under that standard, and the applicable in-service criteria. KCP&L reached a settlement with all parties to Missouri rate case that allows costs of the capital project to go into rate base. This rate case is the first docket to consider the prudence of electric power generating facility capital costs in Missouri since the Calloway Nuclear Plant went into service nearly 20 years ago. Dr. Nielsen also has filed testimony regarding Iatan 1 prudence in KCP&L's
rate case before the Kansas Corporation Commission. The Pegasus-Global's team that assisted Dr. Nielsen included Dr. Patricia Galloway, Gerald Tucker, John Owen, Howard Sobel and Jim Crumm.
Oil and Gas
Deutsche Bank
The Pegasus-Global Management Team of Dr. Patricia Galloway, Dr. Kris Nielsen, and Jack Dignum spent a full week in London on behalf of Deutsche Bank advising managers of 17 of the largest European investment fund managers on the current and future of the global spending in the Oil
& Gas industry and prospects for Engineering and Construction companies in the
near and medium term. Pegasus-Global's main themes regarding owners were the change in CAPEX spends in the upstream and downstream markets, the importance of demand side economics, and the need to heavily invest in alternatives markets. In the services sector (engineering, construction and related companies) the change in management philosophy towards meeting the changing owner CAPEX requirements, cash conservation and the difficulty that will be felt by concentrating on oil
& gas instead of diversification (for instance, the relationship between the infrastructure, power and oil
& gas sectors). Commenting on the Pegasus-Global perspective the investment fund managers were told in a follow up note:
Infrastructure
Kochi University
The infrastructure of world will be changing rapidly over the next few years as the public sector all around the globe invests in job-producing public works projects, Dr. Kris Nielsen told representatives of more than two dozen countries (primarily from Asia) at the International Conference of the Society for Social Management Systems (SSMS) held at Kochi University of Technology in Japan. With $35 Trillion dollars expected to be invested worldwide infrastructure engineering and construction in the next two decades, corruption and bribery will be high on the agenda of all governments. The nearly $13 Trillion committed in the US alone to date to combat economic recession is almost equal to the US gross domestic product (GDP) for 2008. When this amount of money is spent by the governments of the world, it increases concern exponentially regarding ethics, bribery and construction. As Dr. Nielsen further explained the use of management, performance and compliance audits by private corporations and governments will increase to assure transparency and accountability through good governance. The use of management and performance auditing, especially in infrastructure engineering and construction, as it is used as a means of recovery from global economic conditions is key. Pegasus-Global
has performed performance and prudence audits all around the globe. In addition,
Pegasus-Global's resources Bill Henry and Claudio Dall' Acqua are world leaders
in promoting ethics and combating bribery and corruption. Read Dr. Nielsen's
presentation A Management
System for Infrastructure Construction; Meeting the Needs of the Next Two
Decades.
Pegasus-Global Today
Two new members
We'd like to welcome two of our newest resource members, Jim Anspach and Peter Hughes to our roster of superb specialists.
Jim Anspach pretty much wrote the book on subsurface utilities and has over thirty years in the field. He is considered one of the foremost experts on risk management techniques for underground utilities as well as doing much research and development in the underground arena. His experience with all types of underground utilities offers considerable expertise as infrastructure, power and Oil and Gas expand.
Peter Hughes had considerable
experience both domestically and throughout the world in Pegasus-Global's key industry sectors. His experience includes executive positions with international engineering and construction firms in the oil, gas and infrastructure fields with several major firms. His experience in oil and gas, wastewater, clean fuels and transportation will be a huge asset to our already impressive bull pen.
Welcome aboard, Gentlemen!
Canadian Society of Civil Engineers
Engineering education reform is not a new issue or a new debate; however, engineering education reform is now a global crisis that is being brought into sharper focus as the world begins to confront such transnational issues as climate change, decaying infrastructure, infrastructure security, natural disasters, etc. While engineers remain strong in terms of their technological skills, they are generally weak in terms of their management and communication capabilities. They do not fully understand the concept of globalization; have a firm grasp of the issues confronting the 21st-century engineer; lack the competencies that would enable them to rise to leadership positions within government and industry; and are not developing curricula that would train engineers to anticipate and focus on the rapid changes by which the 21st century will be at least partially defined.
The need to educate the engineer of the 21st century more strategically is
essential to the endurance of the profession.
Developing a proposed education program through modifications of successful programs to meet the needs of the 21st-century engineer will enable engineers to acquire the skills necessary to succeed in the world economy and to grow within the domestic engineering and construction market in a more transparent manner. The 21st Century keynote address will provide us a better understanding of what a 21st-century engineer may be facing in his or her endeavors, of how we as a profession must elevate our public standing and increase the public's confidence in us, and of what skills may be necessary to add to one's individual tool box in order to succeed in the 21st-century global marketplace.
While Design Build/EPC contracting can potentially can save millions of dollars up front, as well as, dollars paid in change orders as construction proceeds, Design Build/EPC contracting may not be the silver bullet for construction that Design Build/EPC contractors perceive it to be. Owners often question whether the check and balances are in place and questions who really pays for alterations in design. Owners look toward the Design Build/EPC contractor to be the one stop shop and the last stop for all the costs to be incurred for a project
- from inception to project close out. Thus, change becomes an issue that may not be well defined in today's Design Build/EPC construction environment.
In a changing world, what does uncertainty mean for the Design Build/EPC industry? What does the current world economic conditions, as well as, the current US economic conditions mean to a Design Build/EPC contractor wanting to play in the construction industry today? Factors such as labor supply restrictions; loss of intellectual knowledge and fund availability for these infrastructure projects has shrunk considerably from previous years. Recent project experience and recent trends within the construction industry indicate executing projects is going to be more difficult and more risky in the future. Understanding these risks and their legal implications will be critical for both the Owners and the Design Build/EPC contractors to be successful.
Dr. Kris R. Nielsen (2006), in his presentation on risk management to the Deutsche Bank Global Oil
& Gas Conference in 2006, described the current stakeholder's perceptions of success. He quoted his remarks from the May 2004 Offshore Technology Conference (OTC) in Houston, Texas, as follows:
"Certainly, as an industry we can point to amazing technological successes. Every day we are pressing the technology envelope and moving the technology bar higher, even for mature developments or regions. Yet, our industry grumbles and rumples in the commercial reality behind many of these successes. A reality is that in the last decade we have concentrated the number of Owner
"Players" at all levels and sectors. A co reality today is that many of the key Contractor
"Players" of a decade ago no longer exist, are combined, or are no longer willing or capable of
"playing." There are many reasons, but query: has there been a significant change in the way we have handled these increasing risks as we execute today's
projects? The answer is partially ‘YES. But we must ask: are we achieving
success from the perspective of the both the project itself and its execution
stakeholders? Clearly, the answer is ‘NO.'
Today, the commercial risk in offshore and frontier regions is huge. Projects are often packaged as a single mega project requiring a long development period. Then as an industry, we try to control risk contractually, with non negotiable terms, and generally through lump sum pricing. These are exacerbated by contracting approaches that are driven by transparency requirements of national oil and gas companies or the financial community funding many of the projects. To further create commercial complexity, local content requirements have been handed down to the lowest tiers of the execution hierarchy, where there is the least capability. Deep water offshore regions and frontier regions have reduced the capability and capacity to successfully execute in these contract formats
- especially in the time driven environment required today.
Concurrently, as oil and gas prices gyrated in the last two decades, Owners have shed both research efforts and comprehensive in house engineering / project management capacity to rationalize costs. Conversely, Contractors too have shed research efforts, but have heavily promoted EPCI (Engineering, Procurement, Construction and Installation) contracting. Yet, most Contractors oversold in house capacity to do so and have not had the required management processes to manage lump sum EPCI contracts on this scale.
What then is the commercial reality we face now: Risk in project execution in all forms is not being effectively managed. Execution is delayed, costs of execution soar, and parties' must protect their commercial status. Owners must minimize CAPEX impacts. Contractors must recover real out of pocket costs and some profit. Risk shedding has become everyone's game. Owners are forced to reduce exposure through even transfer of even equity risk to entities whose business model is based on near term execution profits and slim capitalization. Needed return on investment requires maintenance of production timing and production cost requirements. In reality, Contractors can and should only accept risk that can be reasonably defined. The reality is that Owners are not achieving their risk management needs and Contractors have a fraction of shareholder value of a decade ago. Out of commercial necessity then, both Owners and Contractors are employing
"hardball" project management / contract administration that further breeds mistrust and further exacerbate the conditions and context that bred the mutual mistrust in the first place.
The observations of 2004 hold true today, especially for the oil & gas, power and transportation industries. It is not surprising that the amount of Design Build/EPC contracting is enormous. The surprise is the conditions under which the Design Build/EPC contractor has to execute the projects. In reviewing change in a changing world, the key factors facing a Design Build/EPC contractor today include:
Lump Sum / Fixed Price vs. Cost Reimbursable Contracting
The Prudence Requirement
Meeting a Standard of Care
Assuring Sustainability
In Design Build/EPC contracting there are shifting patterns of risk. All of the key factors noted above are interrelated and one cannot be truly discussed without knowledge of the other.
Prudence is taking an interesting twist in the new age of construction. In the US, Public Utility Commissions (PUC) or Public Service Commissions (PSC) is looking to approve construction costs in advance of the construction starting. In this case, the Design Build/EPC contractor must provide a means of estimating or providing a contract price and dividing out the fixed price portion from the variable portion and link those variables to something that will allow the utility and the Design Build/EPC contractor the protection yet can be approved by the PUC. In fact, the real action will not come from the nuclear regulatory area which drove the costs and delay in the previous nuclear area, but from Balance of Plant issues, which in turn will be governed by Standards of Care.
Even with non nuclear plant construction such as coal plants, the concept of prudence has taken hold in many of the PSC's. For example, Kansas City Power
& Light (KCP&L) recently filed a case on its Iatan I Coal Fired unit to defend the costs of environmental upgrades to Unit 1 (KCP&L-Missouri PSC- ER-2009-0089). The same is expected for the construction costs of its new
Iatan 2 unit. Design Build/EPC contractors will have to deal with providing convincing proof to a utility that they have the resource planning and means to assure the utility, or prove up the costs incurred that came from change
- and that the entire cost or schedule extensions were appropriately and reasonably incurred.
Design Build/EPC contractors will need to have the ability to prove and assure the utility and the regulator that the changes were consistent with standards of care and that the changes were not the result of Design Build/EPC contractor
"screw ups". Utilities will look to the Design Build/EPC contractor to "eat" any costs that cannot be proven to be a prudent expense or that resulted from contractor claims
- (that being from the Design Build/EPC contractor or subcontractors to the Design Build/EPC contractor). In effect, the utilities are now hyper about change and it is critical in the utilities mind as to whether or not they can recover costs that flow from change.
Who is in the best position to guard against change? It is the Design Build/EPC contractor. The Owners will look to the Design Build/EPC contractor to provide the expected Standard of Care in the execution of the projects undertaken and will hold them responsible for changes and cost overruns which they believe could have been avoided had the Design Build/EPC contractor utilized a Standard of Care that would be expected in the industry. Considerations must be given to the differences between fixed price contracts and cost reimbursable contracts. Design Build/EPC contractors need to recognize that contract administration issues and change management have mentality issues that are quite different than cost reimbursable contracts because an Owner will try and get as much as possible for the price. The Design Build/EPC contractor has to meet to what it has agreed and nothing more. They must have in place a rigorous program where all the actions can be reviewed at a detailed level and rolled up to why specific decisions were made.
The Design Build/EPC contractor also has to be aware of what is going on in sustainability. Sustainability in today's changing world is more than simply looking at life cycle costs or finding ways to make a project last longer. Sustainability includes looking towards the means in which construction is undertaken and how carbon emissions can be minimized. Sustainability includes looking towards the future and how the project will provide both economic and quality of life benefits for future generations as well as the planet.
This paper explores our changing Design Build/EPC industry in regards to contracting strategy, prudence concepts, standard of care and sustainability and what effects and legal implications these key factors have on changes that occur, including the Design Build/EPC contractor's responsibility.
