University of Iowa slapped with lawsuit from private partner in energy P3

A 50-year lease of the University of Iowa’s utility system has soured less than three years into the deal, as the consortium filed a lawsuit over the university’s alleged lack of payments and other contract violations.  

When first inked in December 2019, the public-private partnership between the university and a consortium of firms dubbed the University of Iowa Energy Collaborative LLC. was one of the first of its kind, following a high-profile deal from the Ohio State University in 2017.

Under the concession, UIEC, comprising ENGIE, Meridiam and Hannon Armstrong, paid the university $1.165 billion upfront to lease the university’s steam, cooling, water and electricity systems for 50 years.  The university agreed to make annual payments starting at $35 million, with annual 1.5% increases starting in 2025 that would boost the fee to $68 million after 50 years.

The contract’s terms were “so carefully negotiated and drafted that the university’s President likened the process to ‘writing the U.S. Constitution’,” according to UIEC’s federal lawsuit, filed on Jan. 26.

But problems began just months after the deal closed in March 2020, when the parties began to calculate the university’s fee for fiscal year 2021, the complaint says.

“The university — with its billion dollars now in hand — began searching for ways to reduce its payment obligations to UIEC and chip away at UIEC’s contractual rights,” the lawsuit says. “For nearly three years now, UIEC … has performed as promised and has discharged all of its legal obligations. The university, by contrast, has refused to recognize or perform its contractual obligations.”

The university has also rescinded approvals for promised repairs and threatened its own lawsuit for utility outages, according to the lawsuit, which says that UIEC “remains fully committed to helping the university meet its sustainability goals and bring its utility system into the 21st century.”

UIEC’s attorney, Mark Weinhardt, declined to comment.

In a statement, a university spokesperson said the university “been working with its utilities partner to resolve” differences over the contract’s terms and conditions.

“We are disappointed that our utilities partner has a different interpretation of the contract and felt the need to file a lawsuit against the university.  We are eager for the court to provide us with a clear definition of the contract for both parties to adhere to. We will continue to work with our P3 partners to ensure that the utility needs of our campus will be met today and for the next 47 years.”

The university was one of the first in the country to turn to the P3 model to upgrade and manage its utility system, following the Ohio State University’s $1 billion lease of its utility system to ENGIE and Axium Infrastructure in 2017.

Since then, higher education energy concessions have become one of the most active spaces in the P3 market, with deals coming from the universities at Maryland, Washington, Idaho, Virginia, as well as California State University, Iowa State University, Louisiana State University, Howard University, Georgetown and Syracuse and others.

Iowa’s deal was an effort to advance its goal of achieving a carbon-free utility by 2025 as well as generate money for its academic strategic plan. It deposited roughly $985 million of the upfront payment into an endowment. To cover the costs of the P3 and produce $15 million annually for its strategic plan, the deal must produce a total of $3 billion over the 50-year term.

Among the disagreements is what the annual utility fee is made up of, and whether the university is required to make an insurance claim for property damage events. The consortium is also seeking declaratory relief to stop the university’s own threats of litigation.

The lawsuit comes a month after Iowa Auditor Rob Sand released a report highlighting some of the P3’s risks.

If the investments fail to generate expected returns, “Iowa taxpayers may be responsible for making up any shortfall,” Sand warned. “This transaction has become the largest financial obligation ever held by Iowa taxpayers.”