Meeting Date: July 19, 2006

Subject: Procurement Authorization Amendment - Option To Purchase 220 40-Foot Low Floor Diesel-Electric Hybrid Orion VII Buses 

Recommendation

It is recommended that the Commission:

1) Authorize staff to exercise the contract option with Orion Bus Industries of Mississauga (Orion) in an amount of $169,472,711.92 including all taxes, bonding, manuals and training for the purchase of 220 40-foot low floor diesel-electric hybrid Orion VII buses for delivery in 2007, subject to approval by Council of the City of Toronto, and

2) Forward a copy of this report to the Council of the City of Toronto for approval to proceed with the award of this contract option for the purchase of 220 40-foot low floor diesel-electric hybrid Orion VII buses for delivery in 2007, and

3) Note that this procurement is based on the approved bus fleet plan as shown in “APPENDIX 1” attached, and the 2006-2010 Capital budget program approved by the Council of the City of Toronto on December 12, 2005, and

4) Authorize staff to negotiate a price with Orion Bus Industries for the option to purchase up to 100 additional buses with the intent of making an award no later than March 31, 2007 for delivery in the first quarter of 2008.  The request for Budget approval for this purchase will be included in the 2007 to 2011 Capital Budget submission under Capital Project 4.11 – Purchase of Buses.

5) Authorize staff to dispose of those buses retired as a result of the purchase of the 220 new buses in the best interest of the Commission.

Funding

Sufficient funds for the purchase of 220 40-foot low floor diesel-electric hybrid buses in 2007 were included in Capital Project 4.11 – Purchase of Buses, under Purchase of Low Floor Diesel Buses (2007) as set out on pages 967 to 987 in the category of State of Good Repair/Safety, in the TTC 2006-2010 Capital Program as approved by City Council on December 12, 2005. Sufficient project cost commitment was granted by City Council in its approval of the budget, however it requested (Recommendation No. 212) that TTC report back to Budget Advisory Committee prior to making any commitments on 220 bus purchases in 2007.

Funding for the proposed additional of up to 100 buses, to be delivered in the first quarter of 2008, will be identified in the 2007 to 2011 Capital Budget submission.

At the time of Council’s approval of the TTC’s 2006-2010 Capital Program it was identified that there would be an estimated $77 million funding shortfall for TTC capital expenditures in 2007 (and a total shortfall of up to $319 million for the five years 2006-2010). It was anticipated that the $77 million shortfall in 2007 would be more than accommodated through: (1) a 5 to 10% under spending based on historical experience (resulting in under expenditures up to $40 million) and (2) utilization of the unspent portion of the City’s debt targets for the TTC in 2005 ($122 million) and 2006 ($47 million).
 
Recent Provincial announcements with regard to the elimination of the Ontario Transit Vehicle Program (for all vehicles) and the creation of a new Vehicle Funding Program (for bus replacements only) have resulted in an additional estimated funding deficiency of approximately $43 million in 2007 (and up to $392 million over the five years 2006-2010) including loss of the hybrid incentive premium.
 
Discussions are ongoing with the Province to clarify available funding to the TTC for all vehicle refurbishments, replacements and fleet expansion.

Background

In early 2005, a contract for the supply of 330 buses, made up of 150 diesel-electric hybrid and 180 clean diesel buses, was awarded to Orion. In addition to the base order of 330 buses, the contract also includes an option of supplying up to 220 low floor clean diesel and/or hybrid buses, in any combination thereof, for delivery in 2007. The option for the additional buses will remain open for acceptance by the Commission until September 30, 2006, to ensure delivery in 2007.

The option bus pricing offered as part of the original contract incorporates a 6% price increase over that of the base order buses, but did not include an anticipated cost increase due to the impact of more stringent engine exhaust regulations to be introduced in 2007. This extra cost was planned to be addressed in subsequent negotiations if the option was anticipated to be exercised.

As part of these negotiations, staff have elected to address the overall bus option pricing in view of the strengthening of the Canadian dollar over the last year. These negotiations have resulted in a substantial decrease of the option bus price being offered by Orion to a point where it now represents a 1% increase over the current base order which includes any additional costs associated with the aforementioned 2007 exhaust regulations. This pricing in itself is considered to be competitive.  However, in view of the fluctuating Canadian dollar, Orion are also offering, notwithstanding the foregoing, to share with the TTC 50% of the savings resulting from each $0.01 change in the Canadian/US exchange rate above $0.85CDN with the rates to be determined at time of delivery, with no cost exposure to the TTC if rates should fall below $0.85CDN. Essentially, in a scenario where the $US/CDN exchange rate remains above $0.87CDN for any month during the delivery period, the final pricing for the option buses delivered during that month will be lower than that of the  current order of base buses.  
Contract details are as follows:

Contract C32PY04839

Original Contract Amount  /  $208,086,892.35
Previously Approved Amendments / 1,560,284.31
Amount of this Amendment /  169,472,711.92

Revised Contract Amount /  $379,119,888.58

Discussion

The Capital Budget for the period of 2006-2010 approved by the Commission on November 28, 2005 and by the Council of the City of Toronto on December 12, 2005 included the current Bus Fleet Plan as part of the supporting documents. The plan indicated the purchase of a total of 330 buses (230 buses in 2006 and 100 Ridership Growth buses in 2007). During the contract negotiations with Orion for the supply of the 330 buses, agreement was reached to include an option in the contract for the purchase of up to an additional 220 buses to be delivered in 2007. The price agreement reached with Orion for the purchase of the initial 330 Orion VII’s was deemed to be very reasonable, therefore staff believed it prudent to include an option for an additional 220 buses.

Increasing the number of Orion VII’s in TTC’s bus fleet will lead to commonality of parts, maintenance practices and vehicle configuration, bringing improved efficiencies to the bus operation.  

The Commission is in desperate need of new buses to replace the older vehicles in our ageing fleet. It is essential that new buses to replace those scheduled for retirement in 2007 are procured at the earliest possible date. Since the option pricing is deemed to be fair and reasonable, and since all 220 buses can be delivered in 2007, staff recommend that the Commission exercise the option in the contract with Orion so the program can be entered into their production schedule to prevent any delay in delivery.

In addition to the regular fleet requirements discussed above, the need for additional buses in the fleet to accommodate those out of service for warranty repairs on the new Orion VII fleet, which are much more complex than those purchased in the past, has a direct impact on fleet availability for service.  Further, the need for buses to accommodate the major Capital Track Replacement programs in work throughout the City places an additional burden on the regular fleet.  As both of these needs will be on-going for a number of years, the requirement for additional buses has been identified as set out in Recommendation #4.

Justification

The Commission’s fleet is an average of 8.8 years old primarily as a result of the significant volume of bus replacements since 2003. This compares to 8 to 10 years at most other Ontario transit properties.  The purchase of replacement buses was deferred from the later 1990’s when an acceptable low floor bus design was not available.  Of the remainder of the fleet, approximately 18% are buses that will be older than 18 years by the end of 2006. It is essential that replacement buses be ordered immediately to ensure delivery of new buses in 2007.  Additionally, the direct replacement of buses scheduled for retirement after 18 - 25 years of service is reflected in the Bus Fleet plan wherein allocation of buses within the fleet has resulted in the planned retirement of 213 buses before the end of 2007.  (See “Appendix 1”).

The purchase of diesel-electric hybrid buses is recommended over the purchase of clean diesel buses due to the reduction in engine exhaust emissions and the forecast fuel savings of 30% to 40% compared to clean diesel buses.

The negotiated price of diesel-electric hybrid Orion VII buses will be a maximum of 1% higher, and potentially lower than those purchased in 2005 and 2006, depending upon the variation in the exchange rate during delivery. The new pricing is very reasonable and it is recommended that the option in the current contract with Orion be exercised to take advantage of the favourable price and the related benefits of a common model in the TTC fleet.  Further price negotiations for the option to purchase up to 100 more buses for delivery in 2008 will be predicated on the preferred pricing as established in this current procurement recommendation of 220 buses.

Further, as a requirement of funding under the CSIF contribution agreement (CA), the purchase of alternate fuel vehicles must amount to at least 66% of bus purchases in the years 2006-2008. The purchase of 324 hybrid buses is included as a project component under the final draft of Schedule B of the CA for both Federal (47%) and Provincial (33.3%) funding.  While it was anticipated that an additional one-third incentive funding would be available from the Province on the premium cost of the hybrid, recent announcements by the Province have removed this funding opportunity.  The impacts on TTC funding of recent changes to Provincial vehicle funding programs for 2007 and beyond must still be determined.
July 19, 2006

5-92-91

Attachment: “Appendix 1” – Bus Fleet Tables