Audit faults the DWP, contractor on Owens project

The Los Angeles Department of Water and Power and a contractor it hired to reduce dust on a dry lake bed in Owens Valley both have mismanaged the project’s finances, resulting in as much as $4.5 million in unnecessary costs, according to a confidential audit obtained Tuesday.

The report, ordered by the DWP Board of Commissioners, found that the utility did not seek competitive bids for some of the work and failed to exercise adequate control over two contracts with the engineering firm CH2M Hill.

At the same time, the audit accused the company of excessively marking up costs, charging for unauthorized work and double billing expenses in some instances.

DWP commissioners seized on the report as evidence of CH2M Hill’s trying to pump up profits at the expense of the city.

Commission President David Nahai said he believed the company owes the DWP at least $3.3 million, and possibly an additional $1.2 million, out of more than $106 million it has been awarded since 1998 to control dangerous dust on the dry bed of Owens Lake, about 200 miles northeast of Los Angeles.

“There is no doubt there were lapses in the administration of this contract on both sides,” Nahai said. “Although the department could have been a great deal more cautious and exacting, I think that CH2M Hill is at fault for not better policing its practices. I hope and expect that [it] will do the honorable thing, step up to the plate and write a check to the city for the amount the audit is disclosing.”

A CH2M Hill spokesman disputed the audit’s findings, saying the company consulted the DWP on its scope of work and costs for a project that presents huge, complex and unpredictable challenges.

“We respectfully disagree,” said John Corsi, director of corporate affairs in the company’s headquarters in Englewood, Colo. “At all times, we were in consultation with DWP about how this project and its contracts should be managed. This audit represents a series of opinions dressed up by facts and the facts are incorrect.”

CH2M Hill originally was given a $550,000 contract in 1998 to provide the city attorney’s office with expert witness services as it wrangled with regulatory agencies to limit the DWP’s liability for reducing dust on Owens Lake.

The lake had been dry since the late 1920s, the result of Los Angeles’ diverting the Owens River south to supply the city’s growing water needs.

The CH2M Hill contract was increased to nearly $13 million without seeking new bids, allowing the company to manage the dust-prevention project as part of an agreement with air quality officials in the Owens Valley area. The DWP has steadily increased the amount of money devoted to the firm.

The rising bill and questions about management and oversight, however, attracted the attention of DWP Commissioner Nick Patsaouras, who asked for the audit, by GCAP Services Inc. of Irvine.

The audit found, among other things, that the DWP awarded CH2M Hill one of its contracts without competitive bidding, a step the utility could not explain or justify to auditors.

The report also determined that the DWP did not check to see that CH2M Hill’s labor costs were fair and reasonable, and it cited the utility’s lax billing controls. The DWP, for example, was charged $330,000 at one point for work performed outside time frames spelled out in work agreements.

“It’s not only that CH2M Hill took advantage,” Patsaouras said. “We had no controls for an [overall project] that by the end of the day will be three-quarters of a billion dollars.”

Patsaouras also criticized CH2M Hill for its billing practices.

The audit, for example, recommended that the DWP “consider disallowing $398,107 in questioned subcontractor billings.” And the firm effectively double-dipped, the report found, earning about $2 million by marking up subcontractor costs as allowed in one of its agreements, while also charging an additional $477,740 for the same purposes.

Corsi, the CH2M Hill spokesman, said the company had passed two independent audits during the last nine years, adding that it earned no more money on subcontractor markups than that allowed by its contracts.

“We believe that in all cases, the DWP was invoiced in accordance with the terms of the contract,” he said. “What was our responsibility? To make sure the department was being billed fair market rates and that work was being delivered in a quality manner.”

Still, DWP commissioners said they would try to recover as much money as possible from CH2M Hill. If unsuccessful, they said they would ask the city attorney’s office to pursue a legal remedy.

Nahai and others predicted that the attention cast on the Owens Valley contracts would send a message to other DWP contractors.

And commissioners also said they were taking steps to prevent further waste, partly by auditing other contracts related to construction, materials and equipment.

“I think the word is out on the street that DWP is not going to tolerate inappropriate practices,” Nahai said. “We’re going to crack down and seek to recover money that belongs to the city of Los Angeles.”

duke.helfand@latimes.com