P3s Can Make CNG Projects a Reality

Oct. 12, 2014
Public-private partnerships offer transit agencies the ability to benefit from a CNG program promptly, even when immediate funding to pay the up-front costs of the CNG infrastructure may be unavailable.

Compressed natural gas (CNG) is an economically and environmentally sustainable alternative fuel for transit agencies across the nation. Its long-term savings potential and clean fuel properties that reduce tailpipe emissions of CO2 and other pollutants have led many transit agencies to implement or expand their CNG bus programs. In an era of tight government budgets, one of the most difficult challenges for agencies is to obtain funding to pay for the up-front costs to build the infrastructure needed to fuel and maintain buses. This makes CNG projects suitable candidates for the increasingly used public-private partnership procurement method. Under this method a transit agency may obtain financing from a private natural-gas-for-transportation solutions company, with the private party paying the upfront costs of the project while supplying the critical expertise necessary to complete these projects on schedule and in a cost-effective manner.

 The Rise of CNG 

For a long time now, transit agencies have predominantly used diesel fuel as the primary energy source for their fleets. As of 2013, sixty percent of the buses operated by transit agencies were fueled with conventional diesel. However, this is rapidly changing as transit agencies are switching to alternative fuels in an effort to reduce both their operational costs and emissions. As a result, as much as 40 percent of U.S. buses now run on alternative fuels, half of which are CNG buses. This process has been rapidly occurring: the number of buses than run on CNG and other alternative fuels has doubled in the last eight years. Bus manufacturers and transit managers expect the number of vehicles running on CNG and other alternative fuels to continue to increase. 

Rolling stock fuel choice decisions have significant, long-term impacts on transit agency budgets. Fuel typically accounts for 15 to 25 percent of bus system operating costs. In 2013, without including wages and employment benefits, fuel represented an average 21 percent of U.S. transit agencies’ operational costs for directly operated buses. Moreover, the Federal Transit Administration’s (FTA) minimum useful life requirement for large, heavy-duty buses is 12 years or at least 500,000 miles logged before the bus is eligible for federal funding to be replaced. Transit buses average about 34,000 miles per year. High mileage requirements make fuel efficiency a priority for transit agencies as it heavily impacts local and regional budgets and global emissions. Because of this, today’s fuel purchasing decisions determine an agency’s long-term cost structure and environmental footprint.

Transit agencies traditionally deployed CNG buses to reduce emissions. However, the discovery of large domestic natural gas reserves has significantly lowered CNG prices compared to diesel prices over the past few years. When measured on a gallon equivalent basis, the average cost of purchasing CNG as a transportation fuel is up to 40 percent lower than the cost of purchasing diesel. The resulting cost savings makes CNG an even more attractive fuel alternative. Moreover, the domestic supply of natural gas is projected to last more than 100 years. Therefore, natural gas prices are projected to remain significantly lower and less volatile than diesel prices in the foreseeable future. As a result, transit agencies can switch to CNG and substantially reduce their long-term operational costs, gain additional control over their budget and contribute to a cleaner, less carbon intensive environment. CNG’s economic and environmental advantages have made it the preferred alternative to diesel for U.S. transit agencies.

The Unique Challenges of Implementing a CNG Program

Many transit agencies use the lowest cost, technically acceptable model to procure services and products. Under this model, the agency sets minimum technical specifications and invites firms to submit bids based on those specifications. The contract is then awarded to the lowest bidder who meets the minimum specifications of the agency. This model usually works best for purchasing routine services and materials.

CNG fueling and maintenance infrastructure, however, is more complex, requiring particular expertise to determine the best approach to build a fueling and maintenance infrastructure in a cost-efficient and reliable manner. Bill Zobel, vice president for market development and strategy at Trillium CNG, which builds and operates CNG bus infrastructure for some of the nation’s largest transit agencies, suggests procurement officials consider a best value CNG implementation plan. A best value approach allows a balanced consideration of key factors that will ensure the agency meets its performance requirements, management plans and quality control strategies. These factors include the up-front costs of purchasing and installing the necessary technology, selecting the necessary equipment and control technology, the company’s history of successful project delivery, as well as options for the future expansion of the CNG fleet. CNG fueling and maintenance facilities are a long-term investment for transit agencies. Therefore, failure to consider these factors can undermine or sub-optimize the long-term value that the agency derives from the CNG program.

P3s: An Opportunity for Transit Agencies to Begin Benefiting from CNG 

Public-Private Partnerships (P3s) are contractual agreements formed between public entities and private enterprises that allow for greater private sector participation in the design, delivery, financing, operation and maintenance of public buildings and public infrastructure projects. These agreements allow public entities to leverage private funds, permitting faster, more cost effective project delivery. P3s have long been used in Europe and Canada and, over the past few years, this procurement method has rapidly gained popularity in the United States.

By partnering with private companies, transit agencies can shift the financial and operational risks and obligations of a CNG bus deployment program to companies that have the necessary expertise and wherewithal. The benefits of entering into a P3 for major transit infrastructure projects are not only reduced costs and risk to the agency, but also streamlined design, permitting and construction periods.

The P3 model typically uses the best value procurement approach to select a company. Under this approach, the transit agency sets the performance goals of the CNG program and allows companies to propose the design, engineering and technical methods to meet those goals. Unlike the lowest cost approach, the best value approach allows agencies to consider factors other than price which are necessary to determine the best practices that will allow the CNG infrastructure to be more efficient and reliable over time.

When managing CNG infrastructure facilities in-house, transit agencies are responsible for the full cost of facility operations and maintenance. Major risks include disruptions, inefficiencies and unexpected costs arising from incompatible technologies.

Design, build, operate and maintain (DBOM) turnkey contracting allows for efficiencies derived from seamless engineering and uniform operations that follow a consistent set of management principles and best practices. Contracting with a DBOM firm allows the firm to spread fueling and maintenance costs throughout its network, which can significantly lower the transit agency’s cost. DBOM firms routinely train their employees on the most up-to-date best practices. By contracting with a DBOM for a turnkey solution transit agencies can mitigate the costs of training its own personnel. Finally, the up-front capital costs of building the CNG infrastructure may require a transit agency to issue bonds. A turnkey firm, on the other hand, can spread infrastructure development costs across a multi-year term, allowing these costs to be amortized without the agency needing to incur debt on its balance sheet.

Successful DBOM Projects to Implement Turnkey CNG Programs

Transit agencies at the forefront of implementing CNG-run fleets have successfully entered into DBOM contracts with private firms for CNG fueling and maintenance stations. An example is California’s Orange County Transportation Authority (OCTA), with 95 percent of its buses being fueled by CNG. OCTA has efficaciously selected the DBOM model for its CNG Anaheim, Garden Grove and Santa Ana stations. Each station was procured following a best value, performance-based scope of work approach to secure a single, qualified vendor to design, construct and maintain the new CNG fueling station. All projects were completed between 2006 and 2008 on-time and on-budget.

As P3s gain popularity, the turnkey solutions have expanded to include infrastructure financing and leasing options, as well as rolling stock acquisition and financing within a single procurement solicitation. Most recently, on June 13, 2014, Miami-Dade, Transit (MDT) issued a request for proposals for the design, financing, construction, maintenance and operation of a CNG bus conversion program, including the buses. MDT plans to convert its 817-bus fleet from diesel to CNG over a five to seven year period. CNG fueling and maintenance infrastructure will be installed at three of the transit agency’s four garages. MDT is interested in providing a public access fueling component to generate revenue, which together with the savings derived from using CNG fuel, is expected to help offset the costs of building the infrastructure and purchasing the buses.

Many agencies have opted to convert to CNG-fueled bus fleets. Not only is CNG a low emissions fuel, but it is also a fuel that is priced much less than diesel on a gallon equivalent basis. Moreover, CNG is projected to have much lower price volatility than diesel in coming years. This will allow transit agencies to both save money and better anticipate their future costs. Nevertheless, equally important to a decision to convert a bus fleet to CNG is the decision on what procurement method to use. In an era of tight government and agency budgets, P3s offer transit agencies the ability to benefit from a CNG program promptly, even when immediate funding to pay the up-front costs of the CNG infrastructure may be unavailable. Finally, a partnership allows transit agencies to focus on their operations while relying on the expertise of the private company who is best positioned to design, build, maintain and operate a reliable and efficient CNG program.

Alexander P. Heckler and Diana C. Mendez, of Llorente & Heckler, P.A., are Miami-based attorneys specializing in procurement and P3s.

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Trillium CNG

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