Joe Nelson, Staff Writer
Posted: 07/03/2012 07:11:14 PM PDT
Document: Read the Grand Jury report
Victorville officials responded this week to the San Bernardino County Grand Jury’s assertions that it recklessly embarked on high-risk power plant projects solely on the word of contractors with an interest in the projects.
The projects cost the city roughly $90 million in total losses.
“In hindsight there should have been a more independent review of the projects,” City Manager Doug Robertson said in an email Monday.
The Grand Jury zeroed in on two costly projects in its annual report released Friday: a co-generation power plant at the Foxborough Industrial Park that the city embarked on in June 2004 and the 500-megawatt Victorville II, or VV2, power plant at Southern California Logistics Airport (SCLA) initiated by the city in September 2005.
At the time, the city relied very heavily on consultants for analysis as there was no one on city staff with experience in that field, Robertson said.
City Councilman Mike Rothschild disputed the Grand Jury’s claims, saying the city contracted with investment bank Goldman Sachs to handle its VV2 account. Before the economy crashed in 2007, the city had seven companies that were interested in purchasing the power plant but they pulled out after the economy tanked, he said.
VV2 was never completed and ultimately cost SCLA more than $50 million in losses. The city did not conduct proper due diligence and entered into an “onerous and open-ended agreement” with Newport Beach-based Inland Energy, Inc. and a high-risk $182 million agreement to purchase power generation equipment from General Electric, according to the Grand Jury.
The city may have also violated the Brown Act when it adopted its agreement with General Electric in a closed-session meeting, according to the Grand Jury. Rothschild disputed the claim, saying the agreement was approved in open session.
“This is one of many statements preceded by a qualifier, such as “possible violation,” Robertson said. “It leads the reader to conclude the Brown Act was violated but doesn’t actually provide a legal argument.”
He said the city will address that allegation in its official written response to the Grand Jury findings, which it will submit by the Sept. 29 deadline.
Fifteen months prior to the VV2 debacle, the city entered into a contract with the engineering firm Carter & Burgess to design and construct a co-generation power plant at the Foxborough Industrial Park with the intent of powering tenants at the industrial park. Like VV2, the project was undertaken without a proper risk assessment, formal business plan or budget, according to the Grand Jury.
A combination of design errors and a change in state law mandating that 20 percent of all energy produced be renewable caused the project cost to soar from $22 million to $95 million. The project was scrapped, costing the city tens of millions of dollars.
The city sued Carter & Burgess over the botched project, winning a $52 million judgement, which is now under appeal. But even if the appellate court upholds the trial court ruling and the city is paid the money, it would still be out roughly $40 million, the Grand Jury noted.
Robertson said the city relied on Carter & Burgess to perform the risk assessment, as the city had no one on staff qualified to do so.
“Ultimately that risk assessment was flawed as was their project management,” Robertson said. “It was the subject of the litigation that found Carter & Burgess at fault in five causes of action.”
As to the $40 million lost in the deal, Robertson said the city, in an effort to salvage the project, spent a significant amount of money.
“It was known the project would be upside down operationally until the plant was completed so some of the losses were not recoverable,” Robertson said.
Inland Energy, Inc. also served as a consultant on the Foxborough project, monitoring its progress as its budget soared.
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