Auditors uncover no-bid contracts, preferential rates, and lack of oversight

Controller Chelsa Wagner today released an operational analysis of the County’s steam heat provider, Pittsburgh Allegheny County Thermal (PACT). For the period of June 1, 2010 through May 31, 2011, the County paid PACT .4 million to heat and cool six buildings. In addition to County buildings, PACT is a cooperative that provides steam heating and cooling to government buildings and businesses throughout the “golden triangle” region of downtown Pittsburgh through a series of tunnels. City and County government buildings account for 42% of steam usage.

With so many tax dollars invested, this cooperative is really a public good and should be a steward for taxpayers. However, Wagner’s analysis found serious operational, financial management, and transparency concerns. PACT has not maintained competitive rates, retained existing members, or expanded the member base. Wagner has called on PACT’s leadership and board to engage more rigorously in shoring up and expanding the system before it is too late.

“When the steam tunnels were constructed in 1915, planners had hoped the tunnels would serve 300 buildings, but as of last year PACT only provided steam to 56 buildings, nearly half of their membership 20 years ago,” Wagner said. “The value in a cooperative is its economies of scale: as more members join, prices should go down. In recent years, PACT has not responded to the needs and challenges of the Downtown business district and must immediately focus on lowering costs and increasing membership.”

A significant finding in Wagner’s investigation was the use of no-bid contracts and inadequate controls in contracting by PACT management. For example, Wagner found that PACT’s senior management entered a 0,000 marketing contract without the approval of its Board of Directors and that PACT has used the same external auditing firm for 20 years and at an hourly rate, which runs against best practices. Wagner also discovered that some preferential rates had been given to certain customers in order to keep them in the cooperative. In effect, the County and other public users have been paying a premium rate despite representing nearly half of the usage. Wagner called this revelation “absurd”.

“PACT must modernize its practices and ensure its number one priority is delivering the most inexpensive rate to its customers,” Wagner said, “There is great opportunity and value in this type of cooperative if it is managed well. But right now, PACT must take significant steps to ensure it is an effective and efficient option for all of its current and future customers.”

Another financial finding of Wagner’s extensive analysis found that PACT’s natural gas procurement process cost PACT’s members an extra ,187,372 over the most recent three year period (2010-2012). Wagner recommended that PACT consider using a hedging strategy for the purchase of forward natural gas contracts to help minimize exposure to unfavorable natural gas costs.

“With natural gas costs at a record low and existing infrastructure in place, PACT has great potential to provide an affordable, environmentally friendly heating and cooling option for Downtown Pittsburgh.” Wagner said, “To do this, PACT must improve their board structure and improve relations with current members, especially the City and County, who have a significant stake in this cooperative.”

Wagner also recommended that new construction in the golden triangle receiving public subsidies should be encouraged to use PACT as their heating and cooling provider. Wagner said this would provide additional benefit for taxpayers by adding more members to the cooperative. She called on County, City, and other civic leaders to take a more active position in expanding PACT’s membership to help lower the burden on taxpayers for PACT’s services.

“Our elected leaders must take a broader role in helping PACT become the viable energy resource that the original planners of our City imagined it could be.” Wagner said “PACT’s success depends on its ability to grow its membership base. Through advocacy, local leaders can play a key role in making this energy cooperative beneficial for members and taxpayers.”

The procedures performed in Wagner’s analysis identified a number of ways in which PACT can improve its operating efficiency and lower steam rates for its members. The Controller evaluated the fiscal prudence of PACT’s operational expenditures, maintenance of its infrastructure, measures taken to maintain and expand its member base, its overall governance practices, and other matters.  It additionally analyzed the County’s energy alternatives and evaluated the benefits and disadvantages associated with both remaining a member of PACT as well as leaving the PACT cooperative.  
Wagner indicated that she would like to work with PACT to both implement her recommendations and help the cooperative be more efficient, innovative, and transparent in the future.