$73.5 million sole-source contract raises eyebrows

DANIEL CHACÓN Updated: December 21, 2012 at 12:00 am • Published: December 21, 2012

Colorado Springs Utilities officials are defending their decision to award a $73.5 million no-bid contract to a local company for a power plant emission control technology that they say shows major promise but was still in development.

The city-owned utility said the NeuStream scrubber system was not only cheaper and smaller compared with conventional technology, but Neumann Systems Group Inc. was the only company that could provide it.

Tim Leigh, a Utilities Board member who has been critical of the utility and questions why the contract wasn’t put out to bid, describes the sole-source justification as incredulous.

“CSU’s assertion that Neumann’s proprietary technology is the only solution is like saying, ‘McDonald’s is the only fast food franchise (that sells) hamburgers because they have a secret sauce in the Quarter Pounder,’” Leigh said this week in an open letter to ratepayers.

The sole-source contract is the latest in a series of questions about the utility’s decision to pass up conventional technology for one-of-a-kind scrubbers invented by local entrepreneur and physicist David Neumann.

“I don’t think it is NSG’s place to comment on the terms and conditions of our contract with the city,” Neumann said Friday in an email. “However, I hope that someone is fact-checking Councilmember Leigh’s statements about CSU, the contract and NSG. There are many indisputable factual errors in his statements of the last few weeks.”

Amid the debate over the scrubbers is a bigger discussion about the governance of Utilities, which the City Council oversees in its dual role as the Utilities Board. The future of the Martin Drake Power Plant, where the scrubbers were tested and now are being installed, is also center stage.

The board, faced with mounting political pressure, decided earlier this year to embark on a decommissioning study of Drake. But a board majority has rejected attempts to stop or delay installation of the scrubbers.

The utility, which bankrolled Neumann, including for research and development of his technology, needs to install scrubbers at its two coal-fired power plants to comply with federal air quality regulations that take effect in 2017.

For Utilities, which operates the largest municipal electric system in Colorado, the decision to contract with Neumann made sense, said Bruce McCormick, the utility’s chief energy services officer.

Utilities started looking at scrubbers for Drake in the early 2000s. Officials said they were eyeing conventional scrubbers, which a consultant said would cost about $158 million, when they met Neumann.

Initially, Neumann only wanted advice. When a government job fell through, Neumann said he started looking for applications for his technology and found it could be applied to power plants. Neumann turned to his local utility “to get a critique” and learn more about other utilities.

But after further discussions, Utilities and Neumann agreed in 2007 to test his technology on a small scale at Drake. More tests at larger scales followed, and each proved successful.

On Sept. 29, 2011, Utilities and Neumann signed a sole-source contract.

“At the point we felt like that technology was the right one for us, it became essentially a sole-source approach because we viewed it as lower cost and better performing technology,” McCormick said.

Utilities also stood to make a profit if Neumann found other buyers. Under the agreement, the utility makes 3 percent on the company’s gross sales of its scrubbers for 10 years.

In a sole source justification and approval form signed the same day as the contract, Utilities said the NeuStream scrubber was a “proprietary, patented process” only available from Neumann.

“While there are other technologies that scrub, we had gone through this due diligence and were clearly convinced Neumann was the only technology that could meet the performance expectations and the cost expectations that we have,” McCormick said. “At that point, you have a cost and technology justification of why it’s sole source.”

The contract with Neumann is for design and equipment procurement, and the amount is $66.8 million plus a 10 percent fixed fee, for a total of $73.5 million, McCormick said. The sole-source justification estimated $80 million to cover the contract cost, he said.

The total project cost to remove sulfur dioxide at Drake is $121 million. It includes Neumann’s capital costs, plus additional “internal and external costs,” such as electrical system upgrades, labor and site preparation, McCormick said.

The utility “certainly” took risk of a developmental technology into consideration before it decided to contract with Neumann, McCormick said.

“When you’re convinced that the cost is much lower and the performance is much better, those are the things that tell you, ‘Hey, it’s time to take that risk,’” he said, adding that NeuStream also had the potential of generating hundreds of local jobs and increasing tax revenues.

The sole-source contract was signed just days before City Attorney Chris Melcher, an appointee of Mayor Steve Bach, started his job. The utility has been under increased scrutiny since Bach took office.

Utilities said Jan Crosby, who used to work in the Utilities Division of the City Attorney’s Office, was involved in contract negotiations and developing the contract language. She was aided by an unnamed outside legal firm, Utilities said.

“The contract was approved as to form by Jan Crosby,” McCormick said in an email.

Crosby is no longer an attorney for the city. She accepted a non-attorney position with Utilities on Nov.1 “assisting with property management,” Melcher said in an email.

Melcher did not return a call for comment.

Leigh, who is facing an ethics complaint filed by Neumann, called for an investigation of the sole-source contract.

“The folks who approved and signed off on this document must be held accountable for this intentional, grievous and very expensive … mistake,” he said.

Utilities’ assertion that Neumann was the only provider of the technology “is just not true,” Leigh said.

“There were and are several vendors who would have liked to have had a chance to bid on the scrubber,” he said.

Former City Councilman Sean Paige, who has called for an open and transparent process for all matters involving Utilities and supported the technology as a member of the Utilities Board, said he credits Leigh for his service “as a utility board gadfly.” But he said he still hasn’t seen anything from Leigh to convince him that Utilities needs to change or reverse course with its scrubber technology.

“Voices of dissent should always be welcome because they can improve the decision-making process, but the personal tone this particular dispute has taken, sometimes from both sides, unfortunately has come to overshadow the substance of the debate,” Paige said.

Leigh said he’s trying to get the facts but has run into roadblocks with Utilities.

Leigh is even doing his own research. He said he contacted companies for estimates on their sulfur dioxide scrubbers, including Alstom, a global power generation equipment supplier.

Tim Brown, a spokesman for the company, said Alstom doesn’t publicly discuss its bids or estimates and that it only issues formal bids in response to specific proposals.

But Brown said Alstom would be willing to give Colorado Springs Utilities a quote.

“We would welcome the chance to provide a competitively-priced solution to meet the municipality’s needs,” he said.

In a statement, Bach said the city “is very careful not to use sole-source contracts unless there is no other provider with similar or comparable technology or service.

“Competitive bidding among similar providers almost always leads to a lower price and a better product/service for the city as it does for the private sector,” he said.

Contact Daniel Chacón: 476-1623
Twitter @danieljchacon
Facebook Daniel Chacon

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