‘Minority’ Firms : Utility Pacts Undercut by ‘Fronts’
Hard pressed last year to register a sudden, dramatic increase in its dealings with companies owned by women and minorities, GTE California latched on to some curious business partners.
Take, for example, Wesely-Thomas Enterprises, a Thousand Oaks construction company.
One day last April, Carl Wesely, the company’s founder, turned over majority ownership and the presidency of the firm to his wife, Nancy, who had been working in the accounting office at La Reina High School.
“I came here, actually, overnight,” Nancy Wesely recalled.
‘Does Open Doors’
Not much else changed at Wesely-Thomas. Carl Wesely still ran things--bringing in the business, handling the bids, overseeing the jobs--while his wife was in charge of the office. But now, GTE’s real estate department, Wesely-Thomas’ biggest customer, could count its $2.1 million in contracts with the firm toward its minority contracting goals.
Having a woman president “does open doors,” Nancy Wesely said.
Over and over again, in amounts that run to the tens of millions of dollars, programs at California’s biggest utilities designed to reach out to businesses owned by women and minorities instead have given contracts to companies, such as Wesely-Thomas, that may actually be owned or controlled by white men.
In public testimony, executives at some of the utilities have acknowledged that at least 50% of the suppliers they counted as woman- or minority-owned in fact were controlled by white males. Auditors hired by the utilities say the number of “fronts” actually may be as high as 65%.
Though contractors resist being labeled as fronts--Nancy Wesely, for instance, said it was inaccurate to describe her firm as one--they long have poisoned contracting programs designed to counter decades of discrimination against non-white, non-male businesses. Highway construction projects and government affirmative action efforts in a score of cities and states have been subjected to investigation.
Little Oversight Cited
But in private industry, there are few places where so much money has been spent with so little oversight as in the minority contracting programs of California’s large gas, electric and telecommunications utilities, experts say.
Under steady pressure over the last decade from legislators and minority groups, the seven largest utilities in the state--Pacific Bell, Pacific Gas & Electric, Southern California Edison, GTE, Southern California Gas, AT&T; and San Diego Gas & Electric--have increased their spending with companies that claim to be owned by women or minorities.
In 1987, the last year for which complete figures were reported to the California Public Utilities Commission, the seven utilities together spent $428.6 million with such firms. More than half that amount, $218.2 million, went to firms that claimed to be owned by white women--the category that independent analysts and the utilities agree is most prone to invasion by fronts.
“Half or more of the dollar amounts are shams, if not half or more of the (woman-owned) contractors,” said Robert Gnaizda, an attorney with Public Advocates in San Francisco, the law firm that has represented civil rights groups in legislative and PUC challenges to the utilities’ performance.
Experts say that claims of Latino and American Indian ownership often fail to withstand scrutiny as well and that the U.S. subsidiaries of Asian firms sometimes are wrongly counted as being owned by Asian-Americans.
‘Thousands’ Falsely Listed
Kevin B. Williams, a contract compliance officer for the San Francisco Human Rights Commission who has testified as an expert witness on fronts, said “literally thousands of businesses” are falsely listed as minority firms with the PUC.
“You’re talking about big bucks and the ways people put together phony businesses to get those bucks,” he said.
Critics say the utilities can hardly afford for their minority contracting dollars to be diluted. The $428.6 million spent in 1987 amounted to just 7.7% of the big utilities’ total contract spending of $5.55 billion.
Black-owned firms got less than 1% of the utilities’ money, while Asians and Latinos got barely more than 1%--this in a state where minorities own 18% of all businesses. Woman-owned businesses, one-third of all California firms, got less than 4% of the utilities’ dollars.
“The numbers are woefully, woefully not up to par,” said Lynne Choy Uyeda, president of the Asian Business Assn. in Los Angeles.
Faced with a threat that their top executives’ pay might be frozen if that performance did not improve, the seven utilities pledged a year ago to do 20% of their business--$1.2 billion or more annually--with woman- and minority-owned firms by 1993.
The firms are supposed to get no preference in the awarding of contracts, which are still to go to the low bidder. That provision, state officials and business leaders say, may shield the affirmative action program from any challenge in the wake of last month’s U.S. Supreme Court decision putting strict limits on government programs that give bidding advantages to women and minority vendors.
Under a 1986 law authored by Assemblywoman Gwen Moore (D-Los Angeles), the utilities are required to undertake outreach programs to identify potential minority- and woman-owned vendors. A PUC order requires the utilities to train buyers in the importance of affirmative action, encourage prime contractors to utilize minority subcontractors and provide technical assistance to potential vendors.
Central Clearinghouse
To keep fronts from draining the growing pot of contract dollars, the big utilities, joined by 10 smaller utilities, are establishing a central clearinghouse to verify the status and act as a shared data bank of vendors claiming to be owned by women or minorities. Eighteen organizations submitted bids late last month to operate the clearinghouse; the utilities hope to have it in operation by summer.
“Your program has no validity if you’re not (verifying),” said Arthur Jimenez, the PUC’s point man on the clearinghouse project. “You couldn’t with any confidence report on your results and be confident they’re accurate and truthful.”
But until just more than two years ago, none of the companies had ever questioned their contractors’ claims to minority status. To date, only GTE, Pacific Bell, Pacific Gas & Electric and Southern California Gas have subjected any of those claims to independent verification, and none of their reviews has been exhaustive.
The results of the firms’ audits, however, suggest the extent of the front problem:
- GTE’s auditors challenged the minority status of firms that did $18.8 million in business with the company last year--nearly 20% of the $102 million in minority and woman contracting the phone company’s divisions reported for 1988.
In the company’s real estate development department, which controls major construction projects, $8.6 million in contracts has been called into question--60% of the department’s total. Wesely-Thomas Enterprises is one of the contractors whose status is under review.
- In 1986, Pacific Gas & Electric disqualified 12% of its minority vendors and 28% of its woman vendors after a field survey of their qualifications. And that was while the utility, which serves customers from San Luis Obispo to the Oregon border, still considered 50% ownership sufficient for a company to retain special status. Now 51% ownership--the threshold for virtually all government affirmative action programs--is the PUC’s standard for the state’s utilities as well.
- Also in 1986, a review prompted Southern California Gas to disqualify 10 of its biggest women vendors, slicing about $1 million from the $14 million in contracts with woman-owned businesses it would have reported to the PUC. Virginia C. Allen, the gas company’s minority and small business manager, estimates that 30% to 50% of the companies now on the utility’s minority and woman contractor lists may be fronts.
- Late in 1985, Pacific Bell stipulated in a PUC proceeding that at least half of its minority and women vendors were fronts. The company will not disclose the results of audits it has conducted since 1987, but leaders of minority organizations say Pacific Bell officials have acknowledged that 65% of the companies reviewed were disqualified.
Utility spokesmen say many of the companies that are disqualified as woman- or minority-owned did not intend to misrepresent themselves. Confusion about the requirements, mistakes in filling out certification forms and frequent changes in company makeup explain many of the circumstances that skeptics would label as “fronts,” they say.
A Close Call
Even investigators for review agencies considered harsh in their assessment of fronts concede that it sometimes can be a close call whether a company is genuinely minority- or woman-owned. The criterion is not just 51% ownership, said Jimenez, but also day-to-day direction of the company.
“You have to be part of the business--managing, controlling and operating the business,” he said.
Often, a woman will be a construction company’s office manager, president and largest shareholder, for instance. But if the firm’s construction and marketing expertise lie with her husband or sons, the company’s woman-owned status may be suspect, experts say.
GTE and its auditors are reviewing the woman-owned status of several firms that may have such a management structure.
One is Mountjoy Construction Co. in Monrovia, which performed $452,000 in general construction work for GTE last year. Mountjoy’s president and 80% stockholder is Earline Mountjoy, wife of the firm’s founder, Assemblyman Richard L. Mountjoy (R-Monrovia).
Earline Mountjoy said she was always active in the 33-year-old business, going to government offices to get permits, delivering bids and the like. But when her husband’s legislative duties became more time-consuming five or six years ago, she said, she assumed control of the firm.
‘Oversee Everything’
“I just basically oversee everything,” she said. “I can hire. I can fire. I sign the checks. I’m in on all the bidding. I decide what jobs we bid on.”
But the firm continues to operate under Assemblyman Mountjoy’s contractor’s license, and he is listed as its “responsible managing officer” at the Contractors’ State License Board. The legislator has reported income of more than $10,000 from both GTE and Southern California Edison on his financial disclosure forms for the last three years.
Some of those familiar with the firm, meanwhile, say it appears that the Mountjoys’ sons, Dennis and Michael, are in charge.
“The boys are who I deal with,” said Arthur O. Stephens, the West Los Angeles architect who designed a GTE facility in Mar Vista that Mountjoy Construction is remodeling.
In any event, GTE did not reach out to the disadvantaged business community when it listed Mountjoy as a woman-owned business last year. GTE “was always our biggest customer,” Earline Mountjoy said. The phone company did $11.6 million in business with Mountjoy from 1984 to 1987, prior to its designation as woman-owned.
One of Southern California Edison’s biggest woman-owned vendors is Electrical Systems Testing Inc., a Garden Grove firm that did $1.9 million in work last year for the utility. But it, too, may not meet the PUC’s standards for woman ownership.
A former Edison employee, Jimmy E. Roberson, is the company’s president and “responsible managing officer.” Internal Edison records list him as the utility’s contact at the firm. Edison officials say stock ownership records submitted by Electrical Systems in 1986 state that Roberson’s ex-wife, Donna, owns 55% of the company’s stock. But records of the Robersons’ divorce last year say they split the company 50-50.
Raised No Eyebrows
The firm’s sudden claim of woman-owned status after years as an Edison contractor raised no eyebrows at the utility, which does not investigate vendors’ claims of woman or minority ownership. Not even Roberson’s new wife--Diana Roberson, the manager of Edison’s woman and minority business program--questioned Electrical Systems’ qualifications.
“They have complied with the same requirements as we have requested our other suppliers to comply with,” said Michael J. Blower, manager of procurement for the utility in Rosemead. Diana Roberson, added Edison spokesman David M. Barron, “has conducted herself appropriately.”
Experts on fronts say the utilities--along with other businesses and governments under pressure to increase their minority contracting--may encourage their existing white-male-owned vendors to take steps to qualify as woman- or minority-owned.
“We have heard and experienced that . . . more than once,” said Quentin P. Smith Jr., president of the Denver Group, a Los Angeles management consulting firm that helps companies develop minority contracting programs.
Nancy Wesely said it was encouragement from GTE that prompted Wesely-Thomas Enterprises to reconstitute itself as a woman-owned company last spring.
“I think we talked to people at GTE, and they said there were some possibilities available” for woman-owned firms, she said.
GTE officials deny that the company has urged any of its established contractors to rearrange their businesses to qualify as woman- or minority-owned.
“We’ve openly let our vendors know we’re going to be shifting a lot of our dollars to woman- and minority-owned businesses,” said Larry Cox, a GTE spokesman. “I don’t think in any case I know of we’ve encouraged a business to misrepresent itself.”
Even if GTE did not urge its contractors to set up fronts, it was clear to the industry that the utility was urging its existing vendors, whenever possible, to gain listing as minority- or woman-owned contractors, according to a former employee of the firm’s real estate development department who now does construction work for GTE.
“I probably would suspicion that some people, yes, were suggested that if they could qualify they should qualify themselves as minorities,” said the ex-employee, Leon Faynsod, co-owner of Larry Brown Construction Co. in Covina. His firm’s status as Latino-owned has been challenged by GTE’s auditors, but the Mexican-born Faynsod said he can prove he purchased a majority share in the firm from Brown, the company’s founder.
Contracting Improved
Even without the $18.8 million in questioned contracts, GTE dramatically improved its contracting with woman- and minority-owned companies last year. In 1987, it spent $37.1 million with such firms. In 1988, the figure more than doubled to $83.2 million--all of which, the company says, was with firms whose status had been independently verified.
“We’re very determined, and I think our record this year shows the kind of commitment we have,” Cox said.
It is not yet clear, though, what--if anything--the consequences will be for companies identified as fronts by utility auditors or the new clearinghouse.
Although Assemblywoman Moore’s 1986 law made posing as a woman- or minority-owned firm a felony, punishable by a fine of up to $5,000 and as much as five years in prison, state officials and minority group leaders say they know of no cases in which any of the utilities have informed law enforcement authorities of a possible violation.
Some minority leaders worry that the criminal provision will never be effective. “Anybody would risk $5,000 for a $5-million contract,” said Selwyn Whitehead, president of the Coalition of Bay-Area Woman-Owned Businesses in Oakland. “And what district attorney is going to pursue that problem?”
Michael J. Delaney, chief of the consumer protection division of the Los Angeles County district attorney’s office, said he was not aware of the law until he was asked about it by a reporter. But Delaney said he would welcome the chance to review possible violations.
“It’s the kind of thing we’re interested in,” he said. “We prosecute unfair competition.”
PUTTING UTILITIES’ CONTRACTING IN PERSPECTIVE Contracting by the state’s largest utilities with companies owned by women and minorities is far less than those groups’ shares of business ownership in California or their representation in the state’s population.
In percent:
Contractors for the state’s seven largest utilities, 1987: White-male: 92.3 White-female: 3.9 Latino: 1.6 Black: .7 Asian and other minorities: 1.5 Business ownership in California, 1982: White-male: 49.0 White-female: 33.0* Latino: 6.2 Black: 3.7 Asian and other minorities: 7.9 California population, 1987 estimate: White-male: 29.5 White-female: 30.7 Latino: 23.0 Black: 8.0 Asian and other minorities: 9.0 *Includes businesses owned by minority females.
Sources: Pacific Bell, Pacific Gas & Electric Co., Southern California Edison Co., GTE California, Southern California Gas Co., AT&T;, San Diego Gas & Electric Co.; U.S. Census Bureau; California Dept. of Finance.
HOW THE STATE’S SEVEN BIGGEST UTILITIES STACK UP
The dollar figures, which are in thousands, reflect the amounts the utilities spend with firms owned by white males, white females and minorities. The percentages are the share of all money spent by the utilities with each of the three groups.
Minorities White-females White-males 4.9 4.3 90.8 2.9 4.9 92.2 3.7 3.6 92.7 1.9 2.5 95.6 5.5 3.7 90.8 2.7 4.4 92.9 4.4 1.8 93.8
Minorities 4.9 Pacific Bell ($1,953,169) 2.9 Pacific Gas & Electric ($1,167,761) 3.7 Southern California Edison ($986,131) 1.9 GTE California ($844,302) 5.5 Southern California Gas ($326,556) 2.7 AT&T; ($143,410) 4.4 San Diego Gas & Electric ($124,464)
Source: Reports filed by the utilities with the California Public Utilities Commission.
