Iowa State investigating public-private utilities pact, like UI’s

Iowa State University - as it takes steps to go coal-free - also is investigating the possibility of entering a public-private partnership for operation of its utility system, following the lead of the University of Iowa, which in December entered into a $1.165 billion agreement with a French firm.

Pam Cain, Iowa State's interim senior vice president for operations and finance, made the announcement in a discussion with a subgroup of regents Thursday morning - as part of her campus' request to proceed with a $12 million to $14 million replacement of its two remaining coal-fired boilers with natural gas-fired boilers.

The work will end the use of coal on the Ames campus.

That project, which the regent subgroup said it would recommend to the board for full approval, would produce annual savings of $3.7 million, according to the proposal. It also is expected to cut ISU greenhouse gas emissions by 35 percent and 'significantly reduce other air emissions.”

Cain, in revealing her campus' inquiry into a possible public-private partnership - called a 'P3” - she did not offer any details, including how far the campus has gone in investigating a partnership and what process it might follow.

'Iowa State is researching evaluating P3 opportunities that might exist for university utilities operation to leverage innovation and capture efficiency for the benefit of the university,” she said. 'The (coal-replacement) project will run parallel with our P3 efforts and will enhance the value of our utility system to potential private utility partners.”

The University of Iowa began investigating a public-private partnership early in 2019 before hiring financial and energy consultants and issuing two rounds of requests for qualifications and then proposals.

UI officials - although they didn't share specifics of vendors - reported as many as 100 to 150 firms across the region, nation, and world responded to their calls for potential partners.

After whittling the larger pool of prospects to a handful, the university in December entered into a landmark 50-year deal with global energy provider Engie and infrastructure investment firm Meridiam.

The partnership benefited the UI by landing a massive upfront lump sum it could invest into an endowment and pull from annually to support its strategic plan and mission. The deal benefited Engie by affording the operator a steady stream of income for five decades and access to tax benefits not available to UI as a public entity.

Nuts and bolts of the deal involved Engie contributing half the upfront payment and Meridiam investing the other half - creating a new UI Energy Collaborative Holdings LLC. From the $1.165 million, UI took $153 million to pay off utility debt and another $13 million to pay consultants hired to investigate the process the deal.

The remaining $999 million went into the new endowment, which UI officials projected would increase in value at 4 percent a year - although that was before the economic downturn and COVID-19.

Per the original model, the university projected pulling $15 million annually for campus initiatives and utility expenses it couldn't cover via the standard campus billing process.

The gap exists because the UI has to pay its new partner a $35 million annual fixed fee, in addition to utility expenses and costs for employees, maintenance, upgrades, fuel, and other items. The fee is scheduled to increase annually after five years at a 1.5 percent rate.

Over the life of the deal, the university expects to pay its operator $2.4 billion in just the fixed fee - excluding spending on utilities, employees, facilities, fuel, and other costs. The campus expects to cover that through its standard billing process and some endowment proceeds.

For its strategic plan, the campus plans to pull $735 million from the endowment over the duration of the deal.

The university projects pulling more than $3 billion from the endowment over the contract's life both for strategic initiatives and utility costs. But a three-member board will decide exactly how much to pull annually and how to allocate it, according to the UI plan.

UI President Bruce Harreld, in announcing the deal in December, said the campus was conservative in projecting returns and stressed taxpayers would not be held responsible if the market turns south and the endowment flounders.

'Whenever we're talking about low risk or lower risk - there is risk; there's not no risk,” he said at the time.

'And, at the end of the day, if we go through a period of 2007, '08, and '09 where we had a credit lockup … we wouldn't spend the money,” he said. 'That capital can stay in the 501(c)3. And so actually we've been planning on $15 million a year on average to come to the university - that would go to zero during that period.”

UI leadership has not provided a public update on that endowment and how the recent market downturn has affected it.

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