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A pervasive lack of oversight at Honolulu’s waste-to-energy facility in West Oahu has cost taxpayers hundreds of thousands of dollars — if not millions — in improper and questionable expenses, according to released this week.

The city has responded with its own sharp criticism — of the audit.

The municipal , which burns trash and converts it to electricity, opened in 1990 and is now operated as part of a public-private partnership, between the city and , that doesn’t expire until 2032.

The original contracts for construction and 20 years of operations, signed in 1985, totaled $313.7 million. But since then the Honolulu Department of Environmental Services, which oversees H-POWER, has issued 79 contract change orders, amendments and other modifications to increase that total to more than $993.3 million, as of fiscal year 2013.

The city auditor found that over the years Covanta and other consultants have taken advantage of the Department of Environmental Services by dictating contract terms and conditions that did not follow state or city procurement policies.

“H-POWER was their first attempt to do a public-private partnership of this sort. They walked into a marshland that they were not prepared or trained to do.” — Honolulu City Auditor Edwin Young

For instance, the city did not go out to bid when deciding to extend Covanta’s contract by 20 years to operate the H-POWER facility. The city auditor said that was a mistake, and could have resulted in the city not getting the best price. Other jurisdictions typically go out to bid every five to 10 years.

There are also questions about whether city officials unwittingly approved that 20-year extension, as it was buried inside a 2009 contract modification, and the auditor was unable to find any documentation of a discussion of the merits of keeping Covanta on the job for another two decades.

But the problems run much deeper, according to the audit. The auditor found that the city relied on Covanta and other consultants, including HDR Engineering and Mele Associates, to help write “one-sided” contract provisions that favored the company and that put the city in danger of severe financial loss.

For instance, the H-POWER contract included an “unusual” provision that the city would issue general obligation bonds to pay Covanta should other funds not be available. According to the auditor, typical contract language states that payments are subject to the availability of funds.

While H-POWER generates a significant amount of revenue from selling electricity to Hawaiian Electric Co. — about $65 million a year — the facility experienced a net loss of $543,500 in 2015. The audit states that if that trend continues, the city might be required to cover the losses.

“The Department of Environmental Services needs to do a better job of administering its contract,” City Auditor Edwin Young told Civil Beat. “H-POWER was their first attempt to do a public-private partnership of this sort. They walked into a marshland that they were not prepared or trained to do.”

According to the audit, Covanta’s contract limited the city’s access to company records, placed restrictions on auditing and included provisions that allowed Covanta to get paid without having to provide detailed receipts, invoices and time sheets to fully justify its expenses.

The audit cited several examples of shoddy city contracting practices and poor oversight from the Department of Environmental Services leading to dubious and unnecessary costs, including:

• A $585,000 reimbursement to Covanta for legal fees the company incurred during its contract negotiations with the city;
• Spending $52,800 for first-class and business class airline tickets and other travel expenses for Covanta and its sub-consultants;
• $471,400 in payments to a California-based subcontractor that was over-billing for hours worked and had a conflict of interest because the company was owned by a former Covanta executive;
• Hiring undergraduate engineering interns at a rate ranging from $40 to $59 an hour, which is higher than the entry-level pay for city engineers, which the audit said is $19 to $29 an hour;
• Shelling out more money than necessary — about $37,500 — to consultants for hourly wage rates that were higher than what was actually spelled out in city contracts.

The audit also raised concerns about the city’s contracts with HDR Engineering and Mele Associates, two companies that were hired to help the Department of Environmental Services keep track of the Covanta contract.

Both companies, like Covanta, saw their contract amounts increased through a series of modifications and change orders without competitive bidding. According to the audit, one of HDR’s contracts increased from $50,000 to $650,000 in this manner. The amount paid to Mele Associates increased from $2 million to $3.6 million.

HDR is a major contractor on the city’s troubled $6.6 billion rail project and has received millions of dollars worth of contracts to oversee compliance with wastewater system improvements ordered by the Environmental Protection Agency.

“Despite the shortcomings, (Department of Environmental Services) and (Budget & Fiscal Services) managers claim the Covanta contract is a good contract and is in the best interests of the city. We respectfully disagree.” — Office of the City Auditor

The audit found that, again similar to the agreement with Covanta, the consultants’ contracts did not require them to submit detailed invoices to the city to get paid. The audit states the consultant contracts also did not give the city the right to audit the companies.

“The existing H-POWER contracts limit the city’s ability to detect and prevent fraud, waste, and abuse,” the audit states.

“Despite the shortcomings, (Department of Environmental Services) and (Budget & Fiscal Services) managers claim the Covanta contract is a good contract and is in the best interests of the city. We respectfully disagree.”

Mayor Kirk Caldwell’sl administration dismissed much of the city auditor’s report and its findings in an 18-page letter from Managing Director Roy Amemiya, dated Dec. 1.

In the letter, Amemiya defends the city’s contract with Covanta and the Department of Environmental Service’s procurement practices, saying, among other things, that the city was not required to perform competitive bidding and that the plan had always been to have a long-term operator of the H-POWER facility.

Amemiya also denied the auditor’s assertion that the city does not have access to records or that the contract limits the city’s right to audit. He also said that there was no requirement in the contract that the city issue general obligation bonds, stating that it “gives the City flexibility as to funding sources.”

Officials from the Department of Environmental Services declined to be interviewed about the audit. But department spokesman Markus Owens did provide another letter from Amemiya to Young — this one dated Nov. 30 — that took a more aggressive tone.

Amemiya told Young that the audit contains “numerous erroneous or misleading conclusions based upon facts that are inaccurate, ignored or simply misunderstood.”

He said the Auditor’s Office is unfamiliar with waste-to-energy facilities such as H-POWER, and does not have “expertise” in procurement law. As a result, “many of the report’s findings and conclusions should be re-evaluated or outright dismissed.”

For example, Amemiya says that pointing out H-POWER’s $543,500 loss in 2015 paints an unfair portrait of the facility since it experienced 24 years of profit before then. According to his letter, the plant has generated more than $201 million in revenues for the city,  which has more than covered the costs of operation.

The managing director also criticized the audit for not pointing out the success the city had in reining in Covanta’s requests for payment. He cited an example in which the company asked for $5 million in damages, and the city negotiated the figure down to $1 million.

UPDATE: A city spokesman said Amemiya’s Nov. 30 letter was a “staff draft” that was not supposed to be released. He said the Dec. 1 letter — which is included in the audit report (linked to above)  — should have been given out.

Despite Amemiya’s letters, Young’s office stuck to the findings in its report and found there were still significant concerns in contract management that need to be addressed, particularly with staffing.

“We continue to stand by our overall finding that the complex H-POWER contracts require the assignment of adequate staff, resources, skills, and expertise to properly administer the contracts,” the audit report states.

“In our opinion, the assignment of a part-time contract administrator is insufficient to prevent fraud, waste, and abuse. We wish the city and (Department of Environmental Services) well in their contract administration responsibilities and procurement practices.”

The city Auditor’s Office plans to issue additional audits on other contracts the Department of Environmental Services has for sewer repairs in Waikiki and improvements to the Sand Island Wastewater Treatment Plant.