The fun begins, even though no one is "officially" to AssetCo or Service Co 
as of yet.
---------------------- Forwarded by John Ale/HOU/AZURIX on 06/30/2000 09:59 
AM ---------------------------


"Keith Harris" <keith.harris@wessexwater.co.uk> on 06/30/2000 09:42:02 AM
Please respond to "Keith Harris" <keith.harris@wessexwater.co.uk>
To: Libby Gawith/BTH/AZURIX@AZURIX
cc: "john coppack" <jb.coppack@wessexwater.co.uk>, 
kevin.gibbs@wessexwater.co.uk, Gareth Jones/BTH/AZURIX@AZURIX, Keith 
Willett/BTH/AZURIX@AZURIX, "legal" <legal@wessexwater.co.uk>, "'Chris Perry'" 
<chris.perry@wessexwater.co.uk>, "Nigel Reed" <nigel.reed@wessexwater.co.uk>, 
Jim.Wheaton@CliffordChance.com, John Ale/HOU/AZURIX@AZURIX, 
Chris.Bright@CliffordChance.com, colin.skellett@wessexwater.co.uk, 
sam.allen@wessexwater.co.uk 

Subject: Re: contracts



Libby

The error correction mechanism was put in at your request.

The whole point is that it protects both sides.  It protects assetCo & EngCo 
from being ripped off by either side as gain / pain after a given point is 
shared.  It also protects EngCo from AssetCo getting a bad regulatory deal or 
mis-specifying a project - your point about Bath tunnel.

The down side is that it blunts incentives if the trigger point for error 
correction is too close to the target cost.

Note also that packages of work are to be let.  This diversifies the risk of 
rip-off / poor estimation.

Keith
    -----Original Message-----
    From: libby_gawith@azurix.com <libby_gawith@azurix.com>
    To: Keith Harris <keith.harris@wessexwater.co.uk>
    Cc: john coppack <jb.coppack@wessexwater.co.uk>; 
kevin.gibbs@wessexwater.co.uk <kevin.gibbs@wessexwater.co.uk>; 
gareth_jones@azurix.com <gareth_jones@azurix.com>; kwillet@azurix.com 
<kwillet@azurix.com>; legal <legal@wessexwater.co.uk>; 'Chris Perry' 
<chris.perry@wessexwater.co.uk>; Nigel Reed <nigel.reed@wessexwater.co.uk>; 
Jim.Wheaton@CliffordChance.com <Jim.Wheaton@CliffordChance.com>; 
jale@azurix.com <jale@azurix.com>; Chris.Bright@CliffordChance.com 
<Chris.Bright@CliffordChance.com>; colin.skellett@wessexwater.co.uk 
<colin.skellett@wessexwater.co.uk>; sam.allen@wessexwater.co.uk 
<sam.allen@wessexwater.co.uk>
    Date: 30 June 2000 14:07
    Subject: Re: contracts




    Keith,

    Looking again at the payment terms included below -- the terms for 
Contracting
    at Risk for the Engco are different from what was agreed at GMT & what  
is the
    norm in the industry.  Was your proposal something you've seen elsewhere 
-- if
    so, please can you let us see the contract.?

    In the latest proposal  Engco take all the pain/gain for X % around the 
target,
    and  the pain/gain sharing happens above/below  X % of the target.   This 
is at
    odds with  what normally happens -- usually the client  would work up a 
target
    cost with the contractor, & then there would be a pain/gain share split 
from
    that target onwards. Sometimes there is a cap to the risk carried by one 
of the
    parties.

    The problem with the proposal below is that AssetCo is setting the cost , 
and I
    assume the scope  & programme.   And then asking Engco to take the risk 
that
    AssetCo's estimate is realistic.   We would end up with endless arguments
    between the parties as to the details of the scope -- because that is 
the  way
    that Engco  would make its money.    How would AssetCo be incentivised to 
be
    accurate in the estimating  , if errors to X % are picked up by Engco.

    I am assuming of course that you would be setting the estimates at the 13%
    saving assumed in the Internal Business Plan, which we all acknowledge is 
going
    to be hard to achieve.

    I think we need quite a bit of work on this area --  I suggest we set up a
    sub-group to work through the details of how the Engco payment terms 
would work,
    for the Contracting Risk option.  Are you OK with this suggestion?

    Libby






    "Keith Harris" <keith.harris@wessexwater.co.uk> on 29/06/2000 12:36:39

    Please respond to "Keith Harris" <keith.harris@wessexwater.co.uk>

    To:   "john coppack" <jb.coppack@wessexwater.co.uk>,
          kevin.gibbs@wessexwater.co.uk, Gareth Jones/BTH/AZURIX@AZURIX, Keith
          Willett/BTH/AZURIX@AZURIX, "legal" <legal@wessexwater.co.uk>, 
"'Chris
          Perry'" <chris.perry@wessexwater.co.uk>, "Nigel Reed"
          <nigel.reed@wessexwater.co.uk>, Jim.Wheaton@CliffordChance.com
    cc:   John Ale/HOU/AZURIX@AZURIX, Chris.Bright@CliffordChance.com,
          colin.skellett@wessexwater.co.uk, sam.allen@wessexwater.co.uk, Libby
          Gawith/BTH/AZURIX@AZURIX

    Subject:  contracts



    All

    Attached are the payment terms for 3 contract types agreed at Management 
Team on
    Tuesday

    1    O&M for existing standards & asset condition
    2    Meeting new pre-determined standards
    3    Meeting new discretionary standards and growth

    The note is designed to be the parameters within which the contracts will 
be
    structured

    The objective is to move this note to Heads of Terms by the end on July

    Please contact me if you have any problems.

    In case Gareth has not told you the Clifford Chance team will be with us 
at 9.30
    on Friday in Bristol to begin work on this.

    Gareth - Where are you planning to meet

    Keith


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