University of Iowa sued by corporate partner in billion-dollar utility deal
Just three years into a 50-year, billion-dollar partnership with a utility company, the University of Iowa is being sued over an alleged failure to abide by the terms of the deal.
The University of Iowa Energy Collaborative is suing the public university in the U.S. District Court for the Southern District of Iowa. The UIEC claims the school agreed in 2020 to accept $1.1 billion for a utility-system concession that serves the Iowa City campus. The UIEC now claims the school is refusing to make the required annual payments for utility services while demanding millions from UIEC for “unplanned” utility outages.
The university has yet to file a response to the claims, but said in a written statement that the school and its partner “have a disagreement regarding some of the terms and conditions” of their agreement. The statement added that while the university is “disappointed” UIEC felt the need to file a lawsuit, it is “eager for the court to provide us with a clear definition of the contract for both parties to adhere to.”
The lawsuit stems from a controversial deal in which the university, with the support of Gov. Kim Reynolds, sought to establish a new, public-private partnership for the operation of its on-campus utility system. The school contemplated a private utility operator taking over the operation and maintenance of the utility system. In return, the school would collect a sizable, upfront payout from the private operator that the university could use to pay down debt and plan for the future. It would then pay the operator an annual fee for the utility services the school once managed.
When the university announced its plans to pursue such a deal, it stated publicly that the upfront money it collected would be placed into an endowment, and that the annual proceeds generated by the endowment would be invested in the school’s core missions of teaching and research.
Three companies — Meridiam Infrastructure North America Corp. of New York, ENGIE North America Inc. of Texas, and Hannon Armstrong Sustainable Infrastructure Capital Inc. of Maryland – then formed the UIEC to pursue the concession.
In December 2019, after competitive bidding, the university selected UIEC to act as the concessionaire for its utility system. The deal closed a few months later, with UIEC making a $1.165 billion payment to the university in exchange for the utility concession over the next 50 years.
The school used $153 million of the proceeds to pay off its existing utility system bonds, $13 million to pay consulting fees, and set aside the remaining $999 million for its endowment.
At the time, the provisions of the deal were negotiated and drafted in such detail that the university’s then-president, Bruce Harreld, likened the process to writing the U.S. Constitution.
“We never know how it’s going to play out, but we tried to put in place — a little bit at times I was referring to it like writing the U.S. Constitution — which you have to create some values and principles you stand on and try to make those inviolate, and then try to add enough flexibility into it — a structure that can support those values but enough flexibility as the world evolves,” Harreld said at the time.
Under the terms of the deal, UIEC is responsible for operating and maintaining the utility system and the university pays an annual utility fee designed to cover UIEC’s capital and operating costs.
That payment encompasses several smaller fees, such as an annual fixed fee of $35 million, which increases by 1.5% per year beginning in 2025; a component that allows UIEC to recover the cost of capital improvements; plus a sum that’s essentially a rolling three-year average of operating and maintenance costs. The deal also contemplates the university’s approval for the capital improvements it would help fund.
The contract also gives UIEC with the right to propose, and schedule in consultation with the university, planned utility outages for system maintenance.
UIEC: School wants operator to work ‘for free’
Issues began to surface when the parties were calculating the utility fee the school would pay to UIEC in fiscal year 2021. UIEC alleges the university “began searching for ways to reduce its payment obligations to UIEC and chip away at UIEC’s contractual rights.”
Specifically, the school allegedly refused to pay certain categories of costs included in the operations and maintenance component of the utility fee. As a result, UIEC says, it now owes $1.5 million to the entity that actually operates the utility on a day-to-day basis: ENGIE North America, one of UIEC’s primary partners.
UIEC claims the payments it makes to ENGIE were negotiated at arm’s length and are in line with market standards. It also says the school knew about ENGIE’s role in serving as the utility operator in exchange for $1.5 million annually as compensation for the “day-to-day operation and maintenance” of the utility.
According to the lawsuit, the school has “made the baseless claim” that this operator fee is not an allowable expense for which it should be billed. “The university apparently believes the operator should perform its work with no margin, i.e., for free,” the lawsuit claims. “This position is untenable and contradicted by common sense.”
Another point of disagreement: UIEC says the compensation packages of its chief operating officer and chief financial officer, totaling $600,000 in 2020 and escalating annually, are part of the operating costs and should be factored into the utility fee paid by the school. According to the lawsuit, the university disagrees and has refused to factor those expenses into the utility fee.
The school also is alleged to have balked at paying for UIEC’s administrative expenses, such as office supplies and corporate overhead – which totaled $275,000 in the first year – as part of the utility fee. “In the face of these clear contractual payment obligations, supported by ample evidence, the university refuses to pay,” the lawsuit claims.
UIEC also says that in the summer of 2020, ENGIE identified two components of the utility that needed immediate repair. The university at first agreed to the repairs and to finance them, the lawsuit alleges, but when the components broke before the repairs could be completed, the school reneged on its promise.
One of the repairs involved spending $2.5 million on a turbine that “was in bad repair as a result of the university’s inadequate maintenance” in years past, the lawsuit claims. When the turbine sustained damage requiring significantly more cash to fix than was first estimated, the school allegedly refused to approve change orders for the required work.
As for the power outages, UIEC claims the university asserts that it is entitled to $5 million for an “unplanned” outage in 2021. UIEC says a “chilled-water outage” occurred in March and April of 2021, and was a planned outage and had been discussed with the school repeatedly before it happened, beginning as far back as December 2020.
In court papers, UIEC says that before it filed suit against the university, the parties participated in dispute resolution outlined in their agreement and were unable to resolve any of the issues.
The lawsuit seeks a judgment in UIEC’s favor on each of the issues that are in dispute, as well as a ruling requiring the university to file an insurance claim for damages sustained by the utility in the August 2020 derecho.