Power Plant Developments in the City of Victorville

Recommendations 4

• R1

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  The monthly costs of services based on hourly rates. The rates, as defined in the agreement were $150 per hour for “Consultant” staff and $250 per hour for “Senior Consultant” staff. The contract notes that the City would not be billed for the services of Mr. Buck Johns, the President of Inland Energy. Harvey M. Rose Associates, LLC 3-7 Section 3: Power Plant Developments
• R2

  Page 85
  Reimbursement costs for “reasonable and necessary travel” (excluding travel to or from meetings in Victorville with City officials and staff).
• R3

  Page 85
  Reimbursement for other “out-of-pocket” expenses incurred by Inland Energy in performing the services, including subcontracted services. Although the contract excludes legal services from reimbursement, a preliminary budget provided by Inland Energy estimates that $725,000 will be needed for legal services.
• R4

  Page 85
  A 10% premium on all reimbursable costs. This fee is presumably to compensate Inland Energy for time spent on (1) administrative matters, including negotiating and administering contracts of subcontractors; (2) billing or reviewing the invoices of subcontractors; and, (3) administering accountancy requirements associated with subcontractor matters.3 Project Operating Profit In addition to the conventional compensation structure established by the monthly management fee clause, the development agreement contains an “Additional Compensation” clause that provides Inland Energy with the “right to receive five percent (5%) of ‘Project Operating Profit.’” The contract states that Inland Energy is entitled to this portion of the profit from the plant in “recognition of the unique value of the experience and expertise which Inland [Energy] commits to the performance of [development] services.” The additional compensation clause in the development agreement provides a much larger and more sustained form of compensation to Inland Energy than the monthly management fee and yet is only loosely tied to the consultant services provided by the company. In fact, the company’s 2008 projections for the operational expenses of the 500 megawatt plant, includes this compensation, which was estimated to be $4.5 million per year by Grand Jury sources. Further, the development agreement contains no clauses to limit this compensation to a defined period of time (e.g. two years) or a capped amount (e.g. $10 million). Assuming that the plant was built and then operated for 30 years, Inland Energy would be entitled to compensation of approximately $135 million over the life of the plant (without adjusting for inflation). Under this scenario, Inland Energy would be compensated with an additional $135 million over 30 years for what was estimated in the agreement as 24 months of design, development, and permitting work. Little Precedent to Support Project Operating Profit Clause There is little precedent to support the five percent (5%) of Project Operating Profit included in the development agreement. No other City or SCLAA contract includes such a clause. Further, at the time the contract was considered, City officials knew of no other similar public contract that provided five percent of operating profit for development and permitting work. We have assumed that the 10 percent fee would cover these administrative costs, since the contract specifically states that the 10% fee may be charged provided that the labor covered by the hourly fees does not include administrative tasks. Harvey M. Rose Associates, LLC 3-8 Section 3: Power Plant Developments Although City management has asserted that previous management based the profit clause on a 1999 agreement between Inland Energy and other private entities for the High Desert Power Plant Project, there is little evidence to support the relevance of this “template” agreement as a basis or justification for the fee. Under the “template” agreement, Inland Energy was providing similar services to two commercial entities4 that it had previously been sharing membership interest with in the High Desert Power Project. Conversely, Inland Energy never had an ownership interest in Victorville 2; it was simply providing development services to the City. Further, under the “template” agreement Inland Energy’s only form of compensation for such services was this percentage of operating profits and it was only 2.5 percent or half of what is provided for in the development agreement with the City. Conversely, the City agreed to pay Inland Energy a management fee based on hourly billings and five percent of operating profit for the life of the plant. City Did Not Perform Sufficient Due Diligence of Project Operating Clause Prior to Adoption of Agreement with Inland Energy As previously mentioned, the City did not conduct adequate research and due diligence in 2005 to determine if the agreement was consistent with other municipal power plant development agreements and in the best interests of SCLAA. Specifically, City management relied on two memoranda, both of which provide vague and cursory justification for the five percent project operating profit to be paid in perpetuity. First Memorandum Written by a Firm at the Request of Inland Energy Executives The first of these two memoranda was written by an attorney at the request of Inland Energy executives, not by City staff or by agents purported to represent the City’s interests. This memorandum made a broad assumption that the hourly management fees would not cover the costs and expenses of Inland Energy. The memorandum does not provide further analysis or