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Ohio State plans to privatize energy with largest investment in university history

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Ohio State has proposed a plan to receive its largest investment in the university’s history by selling its energy to the highest bidder.

In accepting the unprecedented proposal, OSU will move forward in a public-private partnership with ENGIE, a French global energy producer and operator, who would control the energy used on campus for the next 50 years.

The agreement, which is the first of its stature, includes the largest upfront payment — to the tune of $1.015 billion — between an American university and a global energy partner, OSU officials said.

The final bidders for privatization were evaluated on the basis of a set of criteria which included academic collaboration, technical aspects, human resources and financing.  The decision to partner with ENGIE-Axium was made after it proposed a plan that included its academic collaboration proposal while also accelerating in a technical category, university officials said.

ENGIE-Axium also offered the largest upfront payment compared to other bidders.

This continues the trend of OSU privatizing its resources, which began with its CampusParc deal in 2012. The 50-year, $483 million deal was also the largest of its kind.

The University of Oklahoma is the only other public university who has an outside company run the operation of its utilities, albeit for a fraction of the price. In 2010, Oklahoma leased the control of its utilities for 50 years, worth $118 million.

ENGIE formed a partnership with Axium, an investment management firm that specializes in generating long-term returns through buy-and-hold investments. Axium was brought on to take the reigns of the business model and contractual details proposed to OSU during the bidding process.

The proposal will be voted on during a Board of Trustees meeting on April 7. If approved, the university will agree to a 50-year lease and receive the $1.015 billion upfront payment immediately.

As part of the payment, ENGIE-Axium has agreed to a $150 million commitment investing in OSU academics in areas requested by students and faculty during the bidding process.

These areas include: student financial aid, compensatory enhancements for faculty and staff and money to be distributed to classrooms, research labs and performance and arts spaces. However, the details of how much money will be devoted to each area was not disclosed.

The university will pay ENGIE-Axium a fixed fee of $45 million each year, with a 1.5 percent increase to cover inflation; an operating fee starting around $9.2 million to cover the cost of maintenance; and a variable fee tied to unknown capital investments.

OSU has been looking to privatize its energy since the project was announced in 2014. Last month, OSU had narrowed its choices down to three proposals, all with foreign ties.

If approved by the Board of Trustees, the energy company could begin working on campus by August, OSU officials said.

The new deal could impact the jobs of up to 52 current utility system employees working for OSU.

ENGIE-Axium will offer direct employment to all eligible current OSU utility workers, but for those who would instead prefer to remain university employees, OSU will offer them similar jobs at the same pay.

They will also hire on 15 new full-time employees to the utility system staff.

ENGIE-Axium plans to bring with it a $50 million, 60,000 square foot energy advancement and research center, which would be their first center in America. However, the location on campus is not known.

OSU officials said the construction of the center would fall under the Framework 2.0 plans approved by the Board of Trustees in January.

The research center would potentially be home to various faculty members, facility workers, researchers and perhaps students in internship-like positions, said OSU officials.

“In total these enhancements would position Ohio State to take immediate and substantial steps forward in faculty excellence, quality of our physical spaces and as a hub of research energy and sustainability,” said Provost and Executive Vice President Bruce McPheron.

Energy and services provided by ENGIE to Columbus campus will also be given to branch campuses. The branch campuses could then be reviewed by the energy company and given new proposed energy plans to increase efficiency.

“This partnership would position us as an international leader in energy and sustainability and further strengthen Ohio State as a national flagship public research university,” said University President Michael Drake in a press release.

If ENGIE-Axium begins to invest in various capital projects, they will be responsible for funding the projects with a 50/50 split of debt and equity. Meaning, 50 percent of the investment could be borrowed from banks and bonds.

ENGIE-Axium would have three main tasks in the partnership focusing on operations, sustainability and supply.

ENGIE-Axium is responsible for operating heating and cooling systems while simultaneously meeting or exceeding the university’s current energy standards. Also, ENGIE-Axium must propose and provide capital funding for undefined and unknown energy conservation measures improving OSU’s sustainability.

Additionally, the consortium must continue to buy electricity, natural gas and other energy sources directly from providers, which could include AEP Energy and Direct Energy, the two providers currently used on campus.

Correction, 3/31: A previous version of this article misstated the criteria that led to ENGIE-Axium’s selection as OSU’s private partner.

9 comments

  1. Why is this good for the university? They companies must be making money or they wouldn’t have made the proposal. Where is the money coming from? Is it from lower wages for the employees?

    The people behind this initiative in the university seem to want fast cash: “University officials said they ultimately chose the proposal from ENGIE-Axium because it offered the largest upfront payment of the three competitors.” So are we getting cash up front for less money 30 years from now? If not, why would the companies involve ever agree to the plan? I want to hear the benefit from the companies side, not just talk from the university about how they’re excited to spend their upfront payment.

  2. Skeptical Student

    This seems like every University President’s dream. Selling OSU’s financial future for a quick buck so that they can build some fancy high rises and say, “look what I did when I was President!” If you just do some simple math, 40,000 undergrad students paying $10,000 a year in tuition, that’s $400 million. A $1 billion payment isn’t exactly a lot of money when you’re looking at OSU as a whole.

  3. These 50 year deals seem stupid, especially without testing it out first.

  4. Former Infrastructure Investor

    TL;DR: It’s because OSU can invest and earn more interest than they’ll pay.

    Simple Example: ENGIE is willing to accept 4% annual returns because OSU is low-risk but the Endowment can earn 6.5% annual – that would net OSU an additional $25M every single year of additional money.

    This is a great use of OSU’s balance sheet. OSU is rated Aa1 and people will accept very low returns for that type of investment grade credit for 50 years. The Endowment has a long(er)-term investment strategy and can make investments with higher returns and more risk than Aa1.

  5. I hope the Provost and President Drake hear from EVERY staff and faculty member when the “compensatory enhancements for faculty and staff” result in another measly salary pool averaging 2% this year.

  6. If I could vote, I vote no or wait.
    45 million dollar fee per year x 50 years = 2250 million dollars minimum required.
    1 billion = 1000 million.
    Is there a buyout clause? Is the contract going to be posted first for public review?
    50 years is too long.
    I want to know can this company charge extra per measurable unit of energy and is it unregulated or supervised by regulations or laws?
    Note: that in Ohio under deregulation of utilities there currently are condominium and rental unit privately owned electric meter companies that charge as much as 40 percent above market rate according to a article I read.
    Thank you.

    • Good comment Frank, and with the 1.5% annual increases the running total actually gets up to $3,315 million ($3.3 Billion!)that OSU will pay the company. (45 + 45.7 + 46.4 etc…)

      This deal is concerning.

  7. Disenchanted Retiree

    ENGIE-Axiom will recoup its investment on the backs of university colleges and departments that will now be required to take full financial responsibility for the utilities they use. That lab on campus that creates lightening? Ba-bam goes the utility bill they will receive. This is not a gift, folks.

  8. How do you dismantle post WWII USA’s greatest achievement (the public higher education system)? Piece by piece. It’s another corporate give-away. Drake is a gutless patsy–why should he care? He’ll be back in SoCal in a few years. OSU’s CFO (who nearly left for an outfit that does these type of deals) gets another feather in his privatization cap.

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