10-04-1979 HUCMSpecial Meeting
October 4, 1979
All Commissioners were present, also present were Mgr.
Alexander, Counsel Peterson, Counsel Zelle and Watson
of Robins, Davis and Lyons and John Nixon of Gas
Turbine Corporation.
President Quade called the meeting to order at 10:00 a.m.
The first order of business was the election of officers
for the coming year. A motion was made by Commissioner
Filk, seconded by Commissioner Tracy that present
Commission members'be ' re- elected in their present
positions. The motion carried unanimously.
Commissioner Filk, noting that the City Council had
voted a raise in their compensation, made a motion that
a letter be sent to the Council requesting a raise in
compensation for the Utility Commissioners. The motion
was seconded by Commissioner Tracy and after discussion
was carried unanimously.
Mgr. Alexander then presented some information and
photographs of the #9 Curtiss - Wright power turbine
as to the cracks and the welding being done to
correct the problem.
It was generally felt that welding was not the solution
and that a new casting of a more durable material would
be the proper way to repair the unit.
Counsel Zelle stated that as a fact the warranty on
unit #9 was out as of September 29, 1979, however
it remains that the unit has been down for repairs
for about 9 months. He also continued that with the
meeting at hand on October 5, 1979 with Curtiss - Wright
and Rolls Royce we should plan a proper presentation.
After discussion, Counsel Zelle suggested that the
plan should be in three segments: 1st - the Curtiss - Wright
power turbine, 2nd - the Rolls Royce engine and
3rd - the entire unit.
As a matter of information, Mgr. Alexander stated that
after November 1, 1979 United Power Association will no
longer make its agreed upon payments unless unit #9
is back in Hutchinson and able to produce according to
industry standards.
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John Nixon told that he had been in England in meetings
with Rolls Royce and that they had indicated they had
furnished all necessary parts to Curtiss - Wright to
repair the engine at no charge.
After a general discussion by all parties present,
Counsel Zelle summed up the options with the Commission
feeling that a soft approach should be made, followed
by whatever measures in order to get unit #9 operating
by November 1, 1979. Warranty should,also.be a prime.
consideration.
On a motion by Commissioner Filk, seconded, by Commissioner
Tracy the meeting was adjourned at 12 noon.
d/
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Clinton Tracy, Secretary
The following minutes taken by Robert Palmquist of
Associated Consultants:
Special Meeting
October 5, 1979
RE: Hutchinson, Minnesota
Curtiss - Wright, Turbine Installation
A meeting was held in the Commissioners' Room at the Hutchinson
Utilities Building on October 5, 1979 to discuss the referenced
installation. The following persons were in attendance:
Mr. Larry Zelle, Attorney, Robins, Davis & Lyons
Mr. John Nixon, President, Gas Turbine Corporation
Mr. Howard Quade, President, Hutchinson Utilities Commission
Mr. Herb Filk, Vice - President, Hutchinson Utilities Commission
Mr. Clint Tracy, Commissioner, Hutchinson Utilities Commission
Mr. Rufus Alexander, Manager of Utilities, Hutchinson, MN
Mr. Rich Peterson, Attorney, Hutchinson
Mr. Hugo Casatelli, Director of Program Management, Curtiss - Wright
Mr. Len Green, General Manager of Gas Turbine Operations, C -W
Mr. Dana Taylor, Attorney, Curtiss-Wright
Mr. Bob Palmquist, Mechanical Engineer, Associated Consultants
Mr. Peter Clay, Rolls Royce, N.Y.
Mr. Ken Crooks, Rolls Royce, U.K.
Mr. Mitchell Pines, Attorney, Rolls -Royce
Mr. Bob Wattson, Attorney, Robins, Davis & Lyons
1. LZ - Perhaps we should start with a brief resume of the
June 26, 1979 meeting. The IGV failures caused extensive
damage. There seems to be agreement between Hutchinson and
CW insofar as the mode of failure. In the opinion of Hutchinson,
failure resulted from defects in design and materials of IGV's.
Specifically, equipment as sold by CW was not capable of adequately
performing the specific function for which it was purchased.
Hutchinson believes there was a failure by CW and /or RR to properly
and adequately warn and caution the user with respect to hazards
which existed in cold weather operation, specifically with the IGV's.
Hutchinson believes that CW and RR were aware of this potential
problem at the time of sale and /or the time of commercial operation.
This was not disclosed, except by two sheets out of several
thousand, in the inspection manual. Hutchinson told CW that the
repairs should be covered by warranty, at their cost.
CW (Mr. Sharp) expressed, on April 6, 1979, in a letter to Mr.
Alexander, that CW felt the failures were due to Hutchinson failure
to make 250 or 500 hour inspections. Consequently, it is
Hutchinson's responsibilities to repair the IGV damages. CW
says that if the inspection had been made, the catastrophic
failures would not have occurred. CW did say they would assist,
at their cost, estimated to be $381,000.
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On July 16, 1978, CW forwarded an invoice in the amount of $381,000,
without a breakdown.
At the June 26, 1979 meeting, Hutchinson advised CW that Hutchinson
could not accept the CW offer. Hutchinson disagrees with the CW
position that non - inspection caused the failures. Hutchinson feels
CW position is ill - founded because the inspection was not preventative.
CW disagrees with Hutchinson's position. Hutchinson feels that if the
CW inspection procedures were followed, the turbine would have to be
down every 10 days. Hutchinson understands that RR had re- designed
the IGV's, and CW should have offered these to Hutchinson.
Hutchinson told CW that Hutchinson could not accept CW position that
CW is not responsible. CW feels Hutchinson must assume some
responsibility. Both parties feel litigation should be avoided, if
possible.
At the June 26 meeting, CW offered to absorb 25% of the cost. IGV's
might be $30,000. Labor might be 25% of total. Hutchinson countered
with. an offer to pay $100,000, based upon the following:
A. The $381,000 repair figure quoted by CW includes no profit
to CW, and no contributions from RR.... "
B. The overhead warranty would be an extension to the existing
warranty.
C. New stator housing.
D. Old stator housing will be repaired and make availah le to
Hutchinson.
E. One year warranty on new housing.
F. All terms completed within 30 days after agreement.
CW rejected the offer, and countered with a 50 -50 sharing with no
conditions attached. CW would expect a release regarding past failures
of GG. Future warranty would apply. 30 day time frame could be met.
2. LZ - Following the June 26 meeting, Hutchinson received a telex
from Cod saying that RR is contributing to CW, re: Hutchinson unit.
3. MP - RR is not assuming any liability by being at this meeting.
4. LZ -- If there was a defective product, Hutchinson can go to RR.
5. MP - RR does not agree with that statement.
6. LZ - Hutchinson does not want to be involved in a lawsuit. Hutchinson
does want to be treated fairly. Hutchinson wants the meeting to take a
business tone; and take the form of resolving things in a practical
manner.
7. KC - was unit under GW warranty on April 29, 1976?
8. LG - Yes.
9. KC - RR unit was not under warranty to CW.
10. LZ - Regarding warranty, the December 15, 1975 CW contract
was covered by a performance bond. Is this still in effect?
11. LG - I. don't know.
12. RP - The warranty was covered by a performance bond, and to
our knowledge was not cancelled.
13. LZ - In April CW letter, is $381,000 the correct number?
14. LG - The correct number is considerably higher. However, due
to the hassle we were in, we did not increase our price. None of
these numbers include profit.
15. LZ - All we have is the bald invoice. For instance, we have no
breakdown between materials and labor.
16. LG - Total cost, no profit, is $526,769.83. CW felt, and still
feels, that CW -RR offer to absorb all but $190,000 is a fair offer.
Both CW and RR have made a very substantial commitment. This is done
not to admit any liability, but to resolve the problem. If Hutchinson
accepts this offer, the acceptance would be contingent upon acceptance
of cost verification, by Hutchinson, via a trip to Woodridge. CW
would allow Hutchinson to examine their books. CW feels that
Hutchinson would agree $526,000 is a valid number.
17. LZ - Is verification contingent upon acceptance?
18. LG - No. Acceptance would be contingent upon verification.
19. LZ - How about just verification?
20. DT - Our books are not open for casual examination.
21. LZ - Would number be available for examination?
22. DT - Yes, but only to the extent of proving the price breakdown,
not to examining the books.
23. LZ - Are we talking about a new number CW claims we owe them,
in order to get the GG back? Does it have any practical meaning?
24. DT - For the purposes of this discussion, no. This figure is
for Hutchinson information only. CW is willing to dispose of the
situation for $381,000.
25. LZ - What is CW position, then?
26. DT - CW will settle on the basis of the June 26 meeting.
27. LZ - Hutchinson could have paid CW $381,000 then sued CW.
Has this changed?
28. 30 minute recess,
29. LG - A $190,000 payment by Hutchinson is still valid. Hutchinson
could make it contingent upon verification of costs. This would be a
full settlement in connection with failures to the engine.
B. CW will release engine, if Hutchinson chooses not to settle, at
$381,000, as partial payment towards $526,000. CW would reserve their
rights on the additional $145,000.
30. LZ - Settlement proposed is same as in June, with one exception.
CW has switched from 50 -50 sharing to $190,000 payable by Hutchinson.
31. LG - Offer still stands at $190,000.
32. MT - One additional factor is figures: can he reviewed.
33. LZ - Anytime an invoice is submitted, a party has the right to
examine the costs. If we agree to $190,000, and an audit is made,
will CW reduce the $190,000, dollar for dollar, by the amount the
audit is under $526,000?
34. DT - CW feels Hutchinson is adequately protected by this agreement.
35. LZ - What if the estimate is not verified?
36. DT - Then there would be no settlement.
37. LG - Where then is the engine?
38. DT - Right where it is row.
39. LG - Hutchinson can obtain the engine, if they accept our offer.
40. DT - Hutchinson could get engine by paying $381,000.
41. LZ - We realized this some time ago. What is Cw response to
proposal for reducing $190,000 if $526,000 is too high?
42. DT - CW will not accept this.
43. LZ - If $526,000 is a valid number, $190,000 can't be reduced.
44. LG - Hutchinson can't lose either.
45. LG - CW latest offer stands.
46. LZ - We will commit to $190,000 if CW will commit to reduction,
dollar for dollar.
47. IT - CW standard accounting practices are used. Since we can get
into arguments with. other people, we can get into an argument with you.
Parts are based upon. replacement costs, rather than costs at time of
original installation. This is one area where we could disagree. If
Hutchinson sees any serious defect. in CW accounting practices, then
Hutchinson will not be bound. to the settlement.
48. LZ - Hutchinson is not looking for ways to disprove CW
accounting practices. Where we are now is when we were in June,
translated into a flat amount of $190,000.
49. DT - CW will not "sweeten the pot."
50. LZ - Hutchinson was looking for some concessions.
51. LZ - To Hutchinson, the number is $190,000, to be paid by
Hutchinson, and $190,000 by CW. We would like to know what RR
contribution is. CW is more culpable than RR because we relied
on CW.
52. MP - CW and RR have been looking at $526,000 figure. The
burden on CW is their portion of $526,000, rather than $381,000.
53. LZ - Will RR talk to Hutchinson separate from CW?
54. MP - RR feels this is a problem between CW and Hutchinson.
RR is here as an accomodation to CW, without recognizing liability
by RR or CW.
55. LZ - DT made a comment that in the $526,000 figure, parts were
costed at replacement cost rather than original cost. Does this
relate to RR parts or CW parts?
56. DT - I believe they are RR parts.
57. LZ - Did parts come from inventory or RR? To the extent
that parts were taken out of CW inventory, were they replaced
by RR?
58. LG - No.
59. LZ - Portions of Hutchinson parts were from inventory and
part from RR?
60. LZ - Were all parts obtained from RR?
61. DT - We don't know.
62. LG - What is the point of that question?
63. LZ - The point is cost accounting. If parts were replaced, we
don't want to be charged for parts.
64. LG - Our agreement with RR has nothing to do with Hutchinson.
65. LZ - It does insofar as CW has stated that their offer is
"generous ".
66.
LZ
- Did CW pay
RR for
Hutchinson parts?
67.
LG
- We made an
offer
to allow Hutchinson to examine the costs.
68. LG - We should not be talking about accounting methods.
69. LZ - How can we talk about a settlement without talking
about this?
70. DT - Auditing should show that costing is consistent with what
we represent costs to be.
71. DT - CW would not have a problem with verification. I do not
know if inventory parts have been replaced.
72. LZ - I don't know if CW is entitled to replacement costs. We
want to know what actual cost was, and what replacement cost is. To
the extent that CW did not carry replacement parts, we want to know
actual costs, via an invoice. Three things: Inventory parts that
were replaced, inventory parts that were not replaced, and
noninventory parts.
73. LG - It boils down to whether Hutchinson accepts CW accounting
methods.
74. LZ - If numbers total $381,000 Hutchinson obligation should be
based on some portion of this. If other totals occur, Hutchinson
obligation is viewed differently. We don't know what Hutchinson
obligation should be until we know what CW costs are. Hutchinson
will provide full release to CW and RR, if CW will replace unit,
and provide standard overhaul warranty, at no charge.
75. LG - Hutchinson offer is rejected.
76. LZ - I think that CW exposure has increased. Prior to this,
it was whether or not to treat repair items as warranty items.
However, because CW upped the cost to $526,000, and refuses to
disclose RR involvement, CW expense becomes more than warranty
repairs. CW has not dealt with Hutchinson in good faith.
77. I don't think there is anything further to say.
78. KC - The tenure of the meeting is that Hutchinson should have no
obligation. There never before has been a major failure. However,
there never has been a case where an operator failed to take precautions.
79. LZ - Has there been cases with a converted B where orifice was
not changed?
80. KC - We have had damage to IGV's, with large orifice, but no
failures.
81. LZ - Can you say that failure connot occur in 250 hours?
82. KC - Yes. Failure usually occurs in 500 - 750 hours.
83. LZ - Hutchinson's position is we did not have adequate warning.
If it was such a major item, it should have been brought to our
attention. CW did not do the inspection when they were in the
plenum area.
84. LZ - On the basis of 250 hour inspections, we would be
shutting down every 10 days. On that basis, we would be replacing
blades, and spending $150,000 per year for blades. If RR or CW
knew, prior to 1979, about the blade problem, they, had a
legal or moral obligation to replace the blades. Tole recognize
we also may have some exposure. We do not believe it is
$190,000 worth.
85. MP - If it was established to Hutchinson that total costs
were one million dollars, Hutchinson would look at $190,000
differently.
86. LZ - That would be true if we did not have a previous
figure of $381,000. I don't believe Hutchinson obligation
should be based on a figure higher than that amount.
87. LZ - If CW is firm on $190,000 by Hutchinson, then there is
nothing further to talk about, and the matters will go to
litigation. Hutchinson does not want to go to court.
88. LG - CW does not want to go to litigation either. We will
explore the options over lunch, although we are not hopeful of
any change.
BREAK FOR LUNCH
89. With CW and RR not in attendance, the Commission rejected
the notion of audit of CW cost accounting.
LZ - I believe a fair settlement would be 60- 30-10 (cv RR-
Hutchinson). If $381,000 to $526,000 is the correct range,
then Hutchinson liability would be $38,100 to $52,600, max.
HQ - When CW gets back, we will see what they have to say, then
meet privately to discuss their proposal.
MEETING RE- CONVENES AFTER LUNCH
90. LG - CW makes Hutchinson the following offer: If Hutchinson
pays $190,000, CW agrees to a dollar for dollar reduction, if the
audited amount is under $526,000. General accounting practices
would be used. Disputes would be settled by CW auditors. The
prices for parts would be per parts list less discount, at the
time of need for the part.
91. DT - No information will be made available relating to
profits. Information shall remain confidential, and not made
available to consultants, other than lawyer and accounting firms.
92. LZ - Coopers - Lybrand, CW auditors, would have a vested
interest in saying their audit is in accordance with generally
accepted practices.
93. LG - CW might be agreeable to using different auditors, for
resolving disputes, if that is the only difference.
94. LZ - Let us caucus, to discuss CW offer.
CW AND RR LEAVE ROOM
95. JN - Would RR be willing to back up claims by CW for repairs?
96. LZ - No matter how many hours CW puts in for repairs, Hutchinson
should pay that amount.
97. JN - I think Hutchinson has a pretty good chance of getting a
reduction from $526,000.
98. LZ - Should we offer to pay 25% of $526,000?
99. HF - We have to make a decision which will get us the engine.
100. LZ - Legally, it would cost about $100,000 for litigation.
101. HQ - Shall we offer $75,000, cash settlement, or $381,000 and sue?
102. LZ - Reject CW offer, because Hutchinson cannot have a technical
consultant on board.
103. HQ - We should deal with exact figures that than percentages.
104. LZ - Hutchinson would be better off paying $75,000. However, to
get this thing to move, we should say 20% of audited amount.
105. HQ - We should offer $105,000 (20% of $526,000), as full
settlement, or $381,000, and sue.
106. LZ - Hutchinson should:
A. Turn down CW offer.
B. Offer $105,000
C. If unacceptable, Hutchinson pays $381,000, then sue.
107. HQ - Hutchinson will agree to last above.
CW RETURNS TO MEETING
108. LZ - Without a technical audit, Hutchinson could not determine
if CW charges are reasonable.
109. LG - If that were the only objection, would Hutchinson accept the
offer.
110. LZ - Yes.
111. LG - How would difference be resolved?
112. LZ - Some mutually acceptable means would have to be developed.
113. JN - Labor charges for GT repairs, by different shops,
are basically the same. Without technical recourse, the costs
could not be verifiable.
114. LG - In a normal situation that would be true. However,
here, where each piece is scrutinized, labor costs are higher.
115. JN - Engine went in for repairs.
116. LG - Engine does not come in normally, when in for repair.
How do we resolve difference?
117. PC - RR is surprised question is raised. RR has no problems
with technical competency of CW.
118. LZ - Engineering differences of opinion in regard to hours
of repair will not be raised, unless it is well out of line.
119. DT - Because this was a repair job, CW was interested in
keeping costs to a minimum.
120. JN - $381,000 invoice was a lump sum...
121. RA - We asked for a break -down, and it was not given.
122. LG - This cost data will be available to Hutchinson.
123.
LZ
- What is CW position on
technical consultant?
124.
CW
does not see how differences can be resolved.
125.
LZ
- These would have to be
mutually resolved.
126.
LZ
- Our counterproposal to
CW is one of the following:
A. 20% of $526,000 or
$105,200
B. $381,000, then sue
CW.
127. LG - The only problem with a technical audit is how to
resolve differences.
128. LG - CW has every part that was replaced. They would be
available to JN. Labor charges are not isolated by task, and
our records do not get into the detail required by JN.
129. LZ - How many hours should repairs take?
130. JN - No more than 3000 hours.
131. LG - We are within that.
132. LG - Let CW take the problems of technical audit back, and
see if this can be resolved.
133. LZ - Present consideration is $190,000 reduced dollar for
dollar by amount technical audit is below $526,000.
134. LZ - Hutchinson will pay $381,000. CW will tell us if
technical audit is OK. If not, then CW will be sued.
135 - DT - OK.
136. LZ - We will proceed on that basis. We urge CW to proceed on the
basis of percentage settlement.
137. LG - JN says anything over $75,000 for labor is excessive.
CW has spent less than this.
138. LG - CW will have to consider a technical audit.
139. MT - Payment of $381,000 will not preclude final settlement
without a lawsuit.
140. HF - How long will it take to get engine here?
141. HC - Depends on transportation.
142.. LZ - A. Let LZ know by Wednesday if technical audit is acceptable.
B. If acceptable Hutchinson might go to $190,000 settlement,
reduced, dollar for dollar, by amount technical audit
is under $526,000.
C. 20% settlement would include only arithmatic audit.
D. Engine would be shipped upon payment of $381,000 and
CW would have a reasonable time to respond to attempt
for final settlement outside litigation.
143. LZ - Reasonable time is coupled with option to settle rather
than sue. If settlement is made, difference between $381,000 and
settlement will be paid Hutchinson by CW. What about interest?
144. DT - Both parties should absorb interest.
145. LZ - OK, because Hutchinson would recover interest in a lawsuit.
146. LZ - In regard to power turbine stator, where are we in regard to
warranty? Within next 7 - 10 days, we would like to know CW position
on warranty.
147. LG - What is the problem with repair?
148. LZ - We are nervous about the welding repair.
149. LG - Why is warranty extension required?
150. LZ - We have been told repairs won't hold.
151. LG - I understand.
Robert Palmquist
Associated Consultants
On a motion by Commissioner Filk, seconded by Commissioner
Tracy that the motion made during the Special Meeting on
September 24, 1979, concerning a contribution to the City of
Hutchinson of approximately $200,000 be rescinded. The
motion carried.
A motion was made by Commissioner Filk, seconded by Commissioner
Tracy to contribute approximately $250,000 to the General Fund
of the City of Hutchinson for the year 1980, to be paid in
quarterly payments. The motion was unanimously carried.
The meeting was adjourned at 3:30 p.m.
AT
H. P. Quade, President
Clinton Tracy, Secreta
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