Are Your Assets Protected?

A Multi-Pronged Approach to Asset Preservation

Sewer collection systems, water systems, and the operational plants that treat water and sewer flow are comprised of billions of dollars in above and underground assets. These assets are often times publicly owned and privately operated. One of the goals in that public/private relationship is for the assets to be returned to the owner in good condition, so that the owner can continue to provide reasonably priced and efficient services without significant overhaul or immediate replacements at the end of the relationship (or at the beginning of the next relationship). Whether publicly or privately operated, one method for preservation of above and underground public sewer and water system assets includes a multi-pronged approach, as discussed in this article.

Long-term operation, maintenance, repair and replacement agreements between the owner and operator are a means to establish such a multi-pronged approach, and achieve that goal of returning assets in good condition (“O&M Agreements”). O&M Agreements can ensure that the operator will spend money on asset preservation over the course of the relationship (oftentimes, 20+ years), and that all required maintenance, repairs and replacements are appropriately performed and monitored.

Sewer and water system assets must be regularly maintained, repaired and replaced in order to preserve their long-term reliability, durability and efficiency. If a long-term agreement is appropriately performed, monitored and administered, those maintenance, repairs and replacements will be kept up-to-date and, ideally, the owner will not have to pay the next operator to complete the work that it has already paid the incumbent operator to do.

One prong to asset preservation that can be included in an O&M Agreement is a repair and replacement budget that may be modified throughout the term, as necessary. The O&M Agreement can require the operator to report to the owner on the budget monthly, which allows for real-time monitoring of required maintenance, repair, and replacement obligations. If money is not being spent, the owner can spot it early and determine why. Unspent money from the budget can roll forward each year of the agreement and the operator can be required to spend it only for repair and replacement expenses, and not to offset the operator’s operation and maintenance responsibilities. The owner may also reserve the right to use such unexpended funds for capital expenditure(s) or other purposes as it sees fit and within its discretion.

In addition to the budget, another prong of the multi-pronged approach to asset preservation is a maintenance, repair and replacement plan. The maintenance, repair and replacement plan can establish the minimum standards for ongoing maintenance, repair, and replacement obligations. The plan can assure that no deferred or substandard maintenance, repair, and replacement occurs on material items. The plan can also help to establish clarity among the owner and the operator with regard to what is expected. In a public O&M Agreement, the plan is oftentimes presented by the operator as part of its proposal during the procurement process, and is further developed as any new assets come on line, and monitored throughout the term.

In addition to adhering to the maintenance, repair and replacement plan, the O&M Agreement will include requirements that the operator perform its obligations in compliance with applicable law, prudent industry practice, and specific agreed upon performance standards, all additional prongs in the multi-pronged approach to asset preservation.

Reporting and auditing are also crucial to asset preservation. Not only is timely and complete reporting from the operator to the owner crucial, but the owner’s review and analysis of the reports are equally crucial. The O&M Agreement will likely require the operator to provide monthly and annual operations and maintenance reports that include a comprehensive performance evaluation of the assets. These reports allow the owner to evaluate the administrative, operational, and maintenance practices employed by the operator. In addition to monthly and annual operations and maintenance reports, full-scale reviews to audit and inspect the state of repair, working condition, and performance capability of the assets, every full third contract year or so, in long-term contracts, are also important to asset preservation.

Another prong in the multi-pronged approach to asset preservation might include an objective measurement intended to objectively test whether the operator is performing its obligations and properly preserving the assets. The O&M Agreement can establish the process for implementation and review of the objective measurement. First, the owner must evaluate the condition of the assets at commencement of the O&M Agreement to establish a baseline. Then, as discussed above, the owner will periodically check on that condition throughout the term (i.e., monthly and annual reports, as well as periodic full reviews). Finally, the owner will evaluate the condition of the assets upon termination of the O&M Agreement and compare the condition from the baseline to the current condition.

For example, to evaluate the condition at the beginning and end of the term, the owner, operator (or a third-party consultant) can calculate and utilize the weighted average rebuild/ replacement useful life of the assets. A formula may be used to indicate that the actual weighted average rebuild/replacement useful life of the assets at the end of the term must be equal to or greater than some percentage (e.g., 92.5%) of the projected weighted average rebuild/replacement useful life at the beginning of the term. While this can allow for an objective assessment, such formulas can also be complicated and therefore must be clear to both parties, and including example calculations where necessary for clarification can be helpful. Also, many operators have their own, or license, software for this purpose that can be used to understand and analyze where an asset is in its lifecycle and to help owners and operators to know specifically where to invest funds on assets that are in poor condition at the end of their lifecycle.

A final prong in the multi-pronged approach to asset preservation is that the O&M Agreement should require that the assets and structures meet certain standards upon termination of the Agreement. For example, the O&M Agreement might require that assets must be returned to the owner at the end of the term in a condition which does not require the owner to undertake a significant overhaul or make immediate replacements in order to continue to provide reasonably priced and efficient services. If so, the operator may be required to assume some of the responsibility of returning the assets to such a condition. Ideally, if the multi-pronged approach is followed throughout the term, such overhaul or replacements will not be necessary.

In sum, best practices in asset preservation for sewer collection systems, water systems, and the operational plants that treat water and sewer flow may consist of utilizing a long-term operation, maintenance, repair and replacement agreement to establish a multi-pronged approach that includes a repair and replacement budget; an operation, maintenance, repair and replacement plan; reporting, monitoring and auditing; and a formula for establishing a baseline and objectively measuring the condition of assets. This multi-pronged approach can help owners ensure that not only is money spent on preserving their assets, but that the owner does not pay for the same repairs more than once.

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