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SPIN CONTROL: Duluth blasts Johnson Controls Inc., JCI blasts back

A look inside Duluth's Steam Utility District No. 1. Matthew R. Perrine/Budgeteer News file photo

Early Tuesday Duluth city leaders expressed their disappointment with Johnson Controls Inc. and its handling of the steam plant in Canal Park. After a press conference, the city sent out a press release ("Exhibit A"). JCI, subsequently, sent out its own release ("Exhibit B"). They are presented back-to-back for your reading pleasure below; they have been edited only for style and grammar.

EXHIBIT A

JCI failing to keep its promise to Duluth taxpayers

In 2006, Johnson Controls Inc. presented a proposal to the city that "guaranteed" $6.2 million in cost savings and emissions reduction as a result of proposed improvements to the steam plant in Canal Park. JCI promised that the improvements would be made "at no cost" to the city or the rate payers of the Steam Co-op. Now, three years into the agreement, the project is proving to be a failure and the guarantees made are not being honored.

"JCI made a guarantee to the residents of Duluth, and I expect them to live up to their promises," Mayor Don Ness said. "I'm tired of their corporate lawyers, their delay tactics and a seeming unwillingness to acknowledge the failure of this project. Their performance has been so inadequate that the only honorable step would be to immediately reconcile with the taxpayers of Duluth and the Steam Co-op by making payments for the embarrassing shortfalls in projected cost and emissions reductions."

The city had been attempting to work with JCI to settle these matters but has been rebuffed after numerous delays and legal wrangling. The city has spent two years in litigation with JCI and tens of thousands of dollars on legal fees and engineering consultants. The next scheduled arbitration is not until April 2011.

"Every day that we spend in litigation is an additional expense to the taxpayers who were promised that this project would be 'at no cost' to the city and the rate payers of the Steam Co-op," said David Montgomery, the city's chief administrative officer. "We have made good-faith settlement proposals to JCI that show the city's willingness to make meaningful accommodations to resolve this dispute. JCI has refused to budge and continues the same delay tactics at a significant cost to taxpayers."

Source: City of Duluth

EXHIBIT B

City of Duluth rejects Steam Cooperative recommendation on energy-savings resolution, arbitration with Johnson Controls set for April 2011

This afternoon's announcement by Mayor Don Ness regarding the city of Duluth's contract with Johnson Controls Inc. (JCI) left out a few important facts, which are covered below:

Negotiations between JCI and the city of Duluth have broken down regarding the amount JCI should pay for energy-savings shortfalls on its work at the Duluth Steam Cooperative, forcing a lengthy and expensive arbitration process to determine the appropriate payment. These negotiations have ended despite the recommendation from the Steam Cooperative's board of directors that the proposed resolution is appropriate.

JCI was hired by the city of Duluth in 2006 to make numerous upgrades to the steam plant and more than a mile of underground piping under a "performance contract," in which JCI guarantees a certain level of annual savings. If such savings were not reached, JCI agreed as part of the contract to pay the full difference between the realized savings and the actual amount. This is still JCI's intent: to ensure Duluth taxpayers get exactly what was promised in the contract.

"We always stand by our commitment to guarantee savings, and we intend to make all additional investments and payments that are required in our contract for our Duluth steam plant work," said Arif Quraishi, JCI's director of local government solutions (Americas division). "We were having productive negotiations with the city and the Steam Co-op, and thought we had reached a settlement, but at the 11th hour the city rejected all proposals for resolution.

"We know the agreement on the table is fair, and we believe the Steam Cooperative's board of directors also supports it, but it's difficult to come to agreement with two other parties when those two parties can't come to an agreement among themselves.

"Unfortunately, the city's decision to ignore the steam plant management's input leaves us no choice but to let an arbitrator rule on the matter. In the meantime, Johnson Controls has asked the city to allow us access to the plant to investigate and cure the alleged deficiencies with the original improvements."

Quraishi added that the city had also dragged its feet in 2009 regarding a disagreement on the methodology to calculate savings generated by steam plant efficiency improvements, so JCI filed to have an arbitrator resolve the issue. But the two sides then reached agreement on those calculations without arbitration, and those calculations were included as part of the most recent negotiations.

JCI has entered into hundreds of performance contracts throughout the United States, including more than 20 in the Duluth area -- several of which have saved taxpayers significant dollars. This will be the first time JCI, which has had an office in Duluth since 1956, has ever needed to issue a shortfall payment for any of its Duluth-area projects.

Among JCI's other recent work for the city of Duluth was the successful citywide implementation of an automated meter reading program, which included the conversion of more than 53,000 water and gas meters. JCI also successfully completed a 10-year performance contract with the Duluth Airport Authority, recently assisted Spirit Mountain with development of its master plan and is now completing installation of climate control and environmental monitoring systems in the DECC's new Amsoil Arena.

In September 2007, JCI assisted the Steam Cooperative by obtaining more than $1 million in funding from the Oregon Climate Trust, which awarded the funds because of emission reductions achieved from the energy savings. Prior to hiring JCI, the plant had been identified as the leading contributor of carbon dioxide emissions in the city. A primary objective of the project was reducing those CO2 emissions.

In a June 3 letter to Mayor Ness, Steam Cooperative Board President Anthony Mancuso wrote: "The co-op board supports the proposed settlement memorandum prepared by our joint counsel. Under the settlement agreement, JCI acknowledges shortfalls exist and agrees it has the responsibility to cure [them] through additional improvements that result in operational savings or a combination of improvements and cash payments over the life of the contract."

Later in that letter, Mancuso expressed dismay that the city would exclude the Steam Cooperative from the resolution of the matter, writing: "The JCI contract was signed by both the city of Duluth and the Duluth Steam Cooperative, therefore, co-op involvement, input and recommendations should be considered. We are also a party to this agreement."

An arbitration hearing has been set for April 2011.

Source: Greenfield Communications

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