Water & Drought

Sewer district awards $415 million contract despite legal questions

Director of operations, Ruben Robles, on top of one of the many secondary treatment tanks at the wastewater treatment plant for the Sacramento Regional County Sanitation District near Elk Grove, Calif., on Friday, May 16, 2014. The plant is going through a billion-dollar upgrade to limit the pollutants it discharges while at the same time trying to figure out how to sell more recycled water to large users.
Director of operations, Ruben Robles, on top of one of the many secondary treatment tanks at the wastewater treatment plant for the Sacramento Regional County Sanitation District near Elk Grove, Calif., on Friday, May 16, 2014. The plant is going through a billion-dollar upgrade to limit the pollutants it discharges while at the same time trying to figure out how to sell more recycled water to large users. mcrisostomo@sacbee.com

Sacramento’s regional sewer district awarded a $415 million contract Wednesday to a Seattle-based company accused of violating bidding rules.

The Sacramento Regional County Sanitation District hired Dragados USA to build a biological nutrient removal station, part of a larger $1.5 billion to $2 billion effort to meet stricter state standards on wastewater pollutants discharged into the Sacramento-San Joaquin Delta.

Losing bidder Balfour Beatty Infrastructure argued that the sewer board should have rejected Dragados because it was one of two firms owned by the same Spanish parent company, ACS, that bid on the project. Balfour said that two affiliated companies cannot compete for a contract under bidding guidelines because of the possibility for collusion.

Board members said that although they were concerned by the potential impropriety of those bids, they were more worried by the alternatives. They said awarding the deal to Balfour Beatty would cost an additional $28 million, while the sewer district would face costly state penalties if it had to rebid the project and could not complete work under the state timetable.

Board members said they were also persuaded by Dragados’ promise to use 20 percent local labor on the project.

The board, made up of elected officials from the region, voted 16-0 in favor of the contract for Dragados. Elk Grove Councilman Pat Hume abstained, saying he was divided on the issue. He said he could not vote for a contract he thinks violates the law, but neither could he vote against it with all of the additional costs that would entail.

Sacramento City Councilwoman Angelique Ashby said she thinks Balfour Beatty will challenge the decision in court. Other board members and district staff also indicated they were concerned about a legal challenge, which is one reason the board met in closed session for nearly an hour before the vote.

Stan Van Vleck, an attorney representing Balfour Beatty, said afterward that the company is considering its options.

Deputy county counsel Lisa Travis said Dragados and Flatiron West, another ACS subsidiary, never had a realistic opportunity to collude on the contract because their large conglomerate ACS owns almost 800 companies.

Hume said that too much of the county counsel’s argument was focused on whether Dragados and Flatiron colluded. He said the law requires only that they had the opportunity to collude.

Travis’ opinion was based in part on research conducted by the Sacramento law office Orrick, Herrington and Sutcliffe, which her office hired. Travis initially planned to keep the firm’s memo confidential, but the board, acting on a request from The Sacramento Bee, voted in closed session to release the report to the public.

The analysis concluded that ACS has an ownership interest in both companies “through multiple layers of subsidiaries,” but neither Dragados nor Flatiron had an interest in each other’s outcome, so no law was broken.

The district’s specifications for the project say only “one bid from any individual, firm, corporation, or association, under the same or different names, will be accepted.”

An accounting firm hired by Balfour Beatty concluded that Dragados violated that requirement. An accountant with the Rancho Cordova office of Moss-Adams found that “because ACS is exposed to the variable returns of Dragados and Flatiron and has the ability to impact the operating and capital decisions of each entity, I conclude that Dragados and Flatiron have an interest in the other’s bid.”

Van Vleck pointed to audited financial statements from ACS stating that it exercises control over its subsidiaries.

Several companies that did not bid on the sewer project submitted letters in support of Balfour Beatty’s complaint, saying the district would set a bad precedent by allowing two companies with the same owner to bid on a project. Similar objections have come up in other jurisdictions, and agencies have reached different conclusions about whether to allow more than one company owned by ACS to bid on a single project.

Tom Krider, an attorney representing Dragados, said ACS was never involved in the separate bid proposals by the two companies.

Companies have filed protests against three other contract awards since the district started its massive EchoWater project. In total, unsuccessful bidders have challenged almost $600 million in contracts. Only one of the four protests resolved so far has been upheld by the district’s board, but board members have expressed growing frustration with the staff’s handling of contracts. Last year, one losing bidder went to court to challenge a contract, though it ultimately lost.

On Wednesday, board chairman and county Supervisor Phil Serna named five board members to a subcommittee that will review contract requirements with the goal of reducing future conflicts. The subcommittee will examine how to handle contractors owned by the same conglomerate, among other issues.

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