SPECIAL REPORT * Community college district awarded $10.7-million construction contract designed to save money on utility bills. But as lack of competitive bidding is criticized . . . : Questions Cloud Project

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.

FEMA regulators say they are awaiting the results of the independent reviews being done by the state and the district before deciding whether to take further action.

At issue, said Paul Jacks, deputy director of the disaster assistance division at the emergency services office, is FEMA’s general directive “to ensure that maximum competition has occurred” in awarding contracts for construction work.

Procurement laws aim to ensure fair and open competition for government contracts and to make sure government is getting the best price.

The district did arrange for FEMA jobs and a portion of the state-funded work to be done at City College to be put out to bid.

But in an unusual arrangement, the district allowed the bidding to be done by Viron itself, not district officials. And the cost of the work to be done was agreed upon beforehand--included in a lump sum to be paid to Viron. The cost was the maximum amount of available FEMA and state grants for the included projects, paid to Viron as a flat fee under the contract.

In essence, Viron’s role, though unstated, was that of a general contractor, subcontracting out to other companies--a fact acknowledged by Greg Coxsom, Viron’s professional engineer on the project.

Legally, consultants, and even construction managers paid with consulting fees, can be selected through less rigorous competitive processes. But general contractors are a different matter.

General contractors control entire project costs, and must be selected through competitive bidding, said Strough of the emergency services office. Last year, Strough’s agency issued a letter allowing use of energy conservation projects, but the agency also said such work must be competitively bid.

The Viron deal is a relatively large undertaking for the community colleges, containing $7.2 million in FEMA and state funds in addition to $3.4 million in borrowings to be paid back through energy savings.

Miscalculation of Savings Estimate

Moreover, the calculations of projected energy savings over 15 years don’t take into account what financiers call “net present value”--the term used to describe the reality that a dollar today is worth more than the promise of a dollar several years in the future.

Because the calculations do not account for the present value of money, the estimate of savings the project is supposed to generate is larger than it would otherwise be.

Moreover, the contract projects energy savings of about 40% from what the district is currently paying on utility bills, even though air-conditioning is being added to about nine buildings, Coxsom said.

That is a relatively large, though not unknown, savings rate: “If I see someone saving 40%, I get nervous,” said one Northern California-based energy consultant who asked not to be identified.

“Forty percent is a lot, and all our projects don’t save that much,” said Coxsom. But he said the City College project is exceptional because the college had been using such highly inefficient equipment, including outdated air conditioners, and a high-pressure steam system that provides heat.

City College officials praised Viron’s work despite the controversy. The college had a critical need for air conditioning, which Viron has made possible, said President Mary Spangler.

Spangler added that she was under the impression that a sole-source contract was warranted because Viron was the only company that could do the type of work involved.

In fact, Viron is just one company in the highly competitive field of energy-services performance contracting.

One potential competitor, Siemens Building Technologies Inc., is sufficiently piqued by Viron’s arrangement with the district that it sent its representatives to a trustees meeting recently, asking to be allowed to compete for future projects.

For the moment, Drummond has put a halt to any expansion of Viron’s role with the district. An apparent addition of $6.7 million worth of work to Viron’s City College contract without bidding was pulled from a board of trustees agenda in November.

And while Viron has made presentations to other community college district campuses to do similar work, Drummond said he favors screening competitors before any new contracts are awarded.