You asked a series of questions about the fuel cell project at the Connecticut Juvenile Training School (CJTS). Specifically, you asked when and why the decision to use fuel cells as the power source was made, how the contractor was selected, how much the project cost, and how much the state currently pays for fuel and to whom.

SUMMARY

The CJTS fuel cell project provides the electricity and water needed to power, heat, and cool the facility. The decision to use fuel cells and the ultimate selection of the contractor for the project appears to have been made by Judge Nicholas Cioffi, the special project manager the governor selected to oversee CJTS’ design and construction. Cioffi worked under a personal service agreement with the Department of Children and Families (DCF). He appears to have reported to both the DCF commissioner and the Governor’s Office.

In its March 2000 request for proposals (RFP) for the CJTS energy project, the Department of Public Works (DPW) asked vendors to submit a “base” and an “alternate” proposal. The base proposal sought a power system that covered CJTS and the adjacent Riverview and Connecticut Valley hospitals. The alternate proposal, included at Cioffi’s request, covered only CJTS and sought proposals for fuel cell power plants manufactured by International Fuel Cells, LLC, a United Technologies Corporation subsidiary. DPW specified this manufacturer, its staff state, in compliance with the intentions of Cioffi and Peter Ellef, the governor’s chief of staff.

Four applicants submitted base and alternate proposals. In June 2000, a DPW selection team recommended Keyspan Energy, the lowest cost vendor, but during the final negotiations Cioffi awarded the contract to Select Energy, a Northeast Utilities subsidiary that was the second lowest vendor. Select Energy later assigned the contract to HEC, Inc. , another Northeast Utilities subsidiary.

The fuel cell project cost $ 17,666,552 to build. The state sold $ 19,165,000 in 30-year certificates of participation to finance it. Debt service on those certificates will total $ 17,735,664, for a total cost to the state of $ 36,900,664.

The state, acting through DCF, pays Select Energy (which has since subsumed HEC, Inc. ) to operate and maintain the fuel cell project and provide the natural gas on which the fuel cells run. At present, DCF pays $ 200,000 a month--$ 130,000 for operating and maintaining the power facility and $ 70,000 for natural gas.

PROJECT SCOPE

The fuel cell or energy center project provides all the electricity and water needed to power, heat, and cool CJTS. It sits on an approximately one-acre parcel on the grounds of Connecticut Valley Hospital (CVH) next to CJTS. It consists of (1) a 13,200 square foot building housing three chillers, two boilers, two natural gas standby generator assemblies, and switchgear and (2) a fuel cell power island containing six fuel cell power plants and pad-mounted transformers located next to this building.

CONTRACTING PROCESS

The CJTS construction project evolved during 1999, after the General Assembly in May authorized $ 27 million in bonds to build the entire facility and placed it on a “fast-track” construction schedule (PA 99-26). The project’s original planning, which Cioffi managed, apparently incorporated a traditional power supply. In November, after the facility was initially designed and construction begun, DPW energy staff were brought into the process. As of this date, DPW staff report, no final agreement had been reached about how to heat and cool the buildings.

DPW initially planned to ask vendors to consider the new facility’s power needs in the context of its relationship to two nearby state facilities—CVH and Riverview Hospital, each of which had (and continue to have) its own energy source. To DPW staff it seemed to be “common sense. . . to think in terms of potential economies of scale and shared resources for energy supply to serve three facilities that are literally a ‘stone’s throw’ away from one another. . . . ” Based on this belief, DPW developed a “base proposal” RFP asking vendors to address heating, cooling, electricity, and standby power needs at all three sites.

Decision to Use Fuel Cells

At Cioffi’s request, DPW asked vendors also to submit an “alternate proposal” that applied just to CJTS. The RFP for the alternate proposal was limited to fuel cells manufactured by International Fuel Cells, LLC (aka ONSI Corp. and UTC Fuel Cells), a United Technologies Corporation subsidiary. DPW reports that it specified this manufacturer in compliance “with the intentions of Mr. Cioffi and Mr. Peter Ellef of the Governor’s Office, to the extent we understood them. ” The RFP for both base and alternate proposals was issued in March 2000.

DPW staff says it was not unusual for the agency to consider alternative energy solutions at CJTS. State law requires all design proposals for major capital projects to include at least two differing energy systems for space heating, cooling, and hot water (CGS § 16a-38(d)). Second, adding to existing air pollution levels in the Middletown area was clearly a concern for DCF and DPW. According to DPW, a 1999 Department of Environmental Protection “consent order” essentially allowed only natural gas to be used at the facility. Finally, the CJTS site was located above an aquifer, another cause for concern.

Vendor Selection

Four applicants submitted base and alternate proposals (but one vendor’s proposals were incomplete and were not considered). The overall price of each alternate proposal was lower than the overall price for any base proposal. Of course, the base proposal had to serve three facilities while the alternate proposal served just CJTS. But, the unit cost per mmBTUs (million British thermal units, a standard measure of energy) for each vendor’s base proposal was lower than its alternate proposal price due to economies of scale available in a larger plant.

During June 2000, a selection team that included DPW staff and a DCF representative (Jeanne Millstein, Cioffi’s deputy, who left her position in June before the contractor selection was made) evaluated the three complete proposals. After a review that included DPW’s energy staff and its financial consultant (Blum Shapiro), the team picked Keyspan Energy, a New York energy services company with a small branch office in Connecticut. It was the lowest cost vendor for both the base and alternate proposals. The team recommended the firm to DPW Commissioner Ted Anson for contract negotiation, and Anson accepted the recommendation.

Once Anson accepted the recommendation, it was turned over to Cioffi for final contract negotiations. In late June or early July 2000, Cioffi, DPW staff report, asked Keyspan and Select Energy, a Northeast Utilities subsidiary that was the second lowest vendor, to submit last, best offers. “Cioffi,” DPW states, “was not satisfied with Keyspan’s ‘last, best offer. ’ ” It is not clear whether Cioffi asked for these proposals simultaneously or asked Select Energy only after negotiations with Keyspan reached an impasse. Cioffi and DCF, according to DPW, made the decision to award the contract to Select Energy based on its last best offer on its alternate (CJTS fuel cell) proposal.

Turning contract negotiations over to Cioffi apparently was not standard DPW practice in “quality-based selections,” that is design-build and other projects where RFPs rather than competitive bids are solicited. In these cases, DPW staff report, and particularly in projects like CJTS that are governed by special legislation, DPW negotiates the final contract on behalf of the agency for which the project is being developed. When it negotiates contracts, DPW will sometimes turn to and award a contract to a vendor other than the one the DPW commissioner selected. This will occur when negotiations with the selected vendor break down, and in most cases DPW will, like Cioffi, look to the runner-up vendor.

Neither DPW nor current DCF staff was involved in the negotiations or final decision-making. DPW staff understands that the decision to select the fuel cell option was based on project costs, air emissions, and, possibly delivery schedule. But DPW energy staff was “not privy to the criteria, other than cost,” that Cioffi used to make the final decision.

Select Energy subsequently assigned the contract, with DPW’s approval, to HEC, Inc. , a Massachusetts-based, unregulated, indirect subsidiary of Northeast Utilities. HEC has since become part of Select Energy.

PROJECT COSTS AND STRUCTURE

Construction and Debt Service Costs

Construction of the CJTS energy center was done under a fixed-price, design-build contract valued at $ 17,666,552. The state issued 30-year certificates of participation to pay for construction. The Treasurer’s Office pays the debt service on the certificates (which it treats much as it does bonds). The total due over the certificate’s term is $ 36,900,664 ($ 19,165,000 in principal and $ 17,735,664 in interest).

Operation and Management Agreement

Beginning in February 2001 the state, acting through DCF, entered into a 20-year operation and management (O & M) agreement (with a 10-year renewal option) with HEC, Inc, now Select Energy. The agreement calls for the state to pay $ 1. 34 million a year (adjusted annually for inflation). The current monthly O & M payment is $ 130,000 or $ 1. 56 million a year.

The agreement requires Select Energy to supply all of CJTS’ electrical, heating, and cooling requirements. The state agrees not to purchase or produce electricity or thermal energy from any other source. The developer must operate, maintain, and repair the facility and is responsible for all of its costs.

Fuel Costs

The O & M agreement also calls for the state to pay $ 575,000 a year for the natural gas to run the fuel cells (again adjusted for inflation). Select Energy supplies this fuel. The agreement establishes the base price, but DCF staff report that it for the first two years it allowed Select Energy to charge either a debit or credit on the unit cost of the gas, based on the market price. For example, if the base price is $ 1 per unit and the gas actually cost $ 2 per unit, DCF would pay the $ 2. But if the market price is 75 cents per unit, DCF would receive a 25-cent credit. DCF received estimated bills using the base cost, and the account was reconciled each February.

In the agreement’s third year (which began February 2004), DCF asked the Office of Policy and Management (OPM) to negotiate Select Energy’s natural gas purchase based on the futures market, as is the state’s practice in other facilities. OPM went into this market when prices

were very high, according to DCF staff. Current monthly fuel costs total $ 70,000, according to DCF staff, of which $ 47,000 is the base price and $ 23,000 the adjustment based on the futures market price.

The monthly fuel cost is not affected by use, so the additional costs are based only on additional unit costs, not increased fuel use.

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