The Los Angeles Community College District is under fire for awarding a $10.7-million construction and equipment contract without competitive bidding, under an arrangement that relies on projected savings on future utility bills to pay off the district's debt.
The move is part of a growing trend among public agencies to forgo conventional bidding procedures for projects that aim to save money on utility bills.
The practice of awarding certain energy contracts without bidding is allowed under a little-known state law designed to promote energy conservation.
But state and federal officials are investigating the district's contract with Viron Energy Services, which may have gone beyond energy-saving upgrades by wrapping in a host of federal and state projects at Los Angeles City College.
Under the contract, all the projects were combined under a sole-source arrangement that appears to sidestep laws requiring general contractors to compete for government work.
Bonnie James, a district vice chancellor who oversaw the Viron contract, defended the district's actions. The contract is legal, he said, because of exceptions allowed for energy conservation.
Moreover, Viron offered guarantees that the work would be completed on time and within budget, he said. The offer was a better deal, in his view, than conventionally bid projects, which tend to go over-budget because of change orders and delays.
But others have questioned the deal, including Marshall Drummond, the new chancellor of the community college district and James' boss.
Drummond, who was hired last summer--long after the Viron contract had already been approved--said he believes Viron did quality work in a timely manner, but he is concerned that the district may not have done enough to ensure fair competition.
"I don't have assurances that we did," he said. "I will be damn certain that we do if we do this again." Drummond has asked for an independent auditor and a legal firm to review the contract.
Officials with the state community college chancellor's office, meanwhile, have placed a hold on payment of further construction claims from the Viron project, pending review.
"They are serious allegations," said Patrick Lenz, executive vice chancellor of the state community colleges. "If nothing else, there is an appearance of impropriety, if not impropriety itself."
The Viron contract may merit scrutiny in part because the energy services management business overall has had a questionable track record.
Under energy services management contracts, large companies promise to do work for public agencies that will be paid for by future savings in utility bills.
As the practice has grown, it has generated controversy, with critics saying that officials at government agencies, who are often unfamiliar with private-sector accounting principles, frequently have committed themselves to projects that do not make financial sense.
In Arizona, for example, a 1994 state audit lambasted a handful of energy service companies--not including Viron--for making promises that failed to be realized, leaving taxpayers stuck with the bills.
The industry has been credited with cleaning up problems. Advocates now say energy services companies such as Viron--among the industry leaders--give agencies a way to save money over the long-term through energy conservation. Those savings are nearly impossible to achieve through traditional procurement practices, advocates of the management contracts say.
But officials who are experienced with such programs say that to make sure the contracts pay off, public agencies need to take steps to protect themselves.
"You have to be careful about it. You have to make sure your interests are being taken care of," said an engineer for a California utility who had researched the issue.
The Los Angeles Community College District asked a Los Angeles Department of Water and Power engineer to review the improvements proposed by Viron and report back in a letter. They also sought counsel from their in-house attorney.
Beyond that, they took none of the other commonly recommended steps to ensure the Viron contract represented the best deal they could get. Those recommended steps include use of modified competitions in awarding contracts, usually through a formal review of proposals or qualifications, use of model contracts or the hiring of third-party "customer representatives" to help negotiate contracts. Hiring independent firms to monitor savings is also an option.
The district's contract has raised several questions.
Especially at issue is more than $2.8 million in Federal Emergency Management Agency funds for earthquake retrofits that were wrapped into the contract.
"I know of no circumstances where FEMA or [the state] have approved a sole-source contract," for nonemergency retrofit work performed by a general contractor, said Barbara Strough, an associate management auditor with the Governor's Office of Emergency Services, the agency which acts as a watchdog over FEMA projects.