Despite warnings from staff and ignoring input from lawyers, Puerto Rico’s bankrupt utility signed a massive $300 million contract on October 17 with a tiny, inexperienced Montana company to rebuild its damaged electric grid in the aftermath of the Hurricane Maria disaster.
It was a horrible deal for Puerto Rico — and for US taxpayers expected to foot the bill, as emails, invoices, and reports exchanged between Whitefish Energy and Puerto Rico’s public utility company, PREPA, released late Monday by the House Committee on Natural Resources show.
As part of the contract, Whitefish Energy ended up charging Puerto Rico more than double the regular wages for utility crew line workers and higher-than-normal daily meal rates. The energy company also struggled to get equipment to the island, leading the Puerto Rican government to hire expensive charter flights, according to the newly publicized details of the botched deal.
The congressional committee launched an investigation after the Washington Post reported in October that PREPA had awarded a major emergency contract to Whitefish, an inexperienced Montana company with only two employees. The FBI launched one too.
The contract drew scrutiny almost immediately because it was so unusual. Typically, in the wake of a major blackout, local governments invoke a mutual-aid agreement with experienced public US utility companies, which can send crews at minimal cost to restore power. Instead, Whitefish Energy subcontracted with these public utility crews and overcharged PREPA for their labor, the records submitted to congressional investigators reveal.
The investigators’ conclusions were harsh. They described PREPA as “inept” and “dysfunctional.”
“Given the substantial amounts of taxpayer dollars that will be invested in Puerto Rico for rebuilding after Hurricane Maria, these findings raise grave concerns about PREPA’s ability to competently negotiate, manage, and implement critical infrastructure projects without significant independent oversight,” they wrote in a memo Monday to committee chair Rep. Rob Bishop (R-UT). Puerto Rican Gov. Ricardo Rosselló and Ricardo Ramos, the executive director of PREPA, also went before the Senate Energy and Natural Resources Committee Tuesday, where they were grilled by legislators about the contract.
What’s more, though Rosselló canceled the contract on October 29, it contained a clause requiring 30-days’ notice before termination. That means the government will continue to pay Whitefish to do work on transmission lines until the end of the month.
The whole ordeal is forcing lawmakers to look deeper into the Whitefish fiasco, and with 3.4 million Americans in desperate need of aid and a recovery effort that may top $95 billion, some want to change how the United States responds to disasters altogether to prevent similar situations.
“We don’t want this to happen again,” said Sen. Maria Cantwell (D-WA) at the Senate committee hearing. “We don’t want to see price gouging.”
PREPA and Whitefish were in way over their heads
A day or so before Hurricane Maria hit, PREPA’s contracting officer, Ramón Caldas, reached out to Whitefish CEO Andy Techmanski via LinkedIn, according to emails submitted to investigators. He wanted to know the company’s rates and how soon they could mobilize crews to the island.
The inquiry triggered a series of email exchanges between Techmanski and Caldas. The Whitefish executive assured Caldas that he had more than 100 crew members who could deploy within a week. During the exchange, Techmanski also offered Caldas a personal favor.
“Do you or your families need anything (generators, water, food, etc) for us to bring to help them?” Techmanski asked via email four days after the hurricane hit, two days before they signed the initial contract.
None of the emails released by investigators mention if Caldas accepted or rejected the offer, but a subsequent email from Techmanski suggests that he did.
“Ramón, we will get you the generator and other items, no problem,” Techmanski wrote.
Caldas and Techmanski hammered out the details of the contract, which included a $3.2 million down payment to mobilize workers and equipment. PREPA, which was going through bankruptcy proceedings before the storm hit, was counting on FEMA to reimburse the utility for the contract costs through its emergency assistance grants. But records show that the contract fell far below federal standards.
Among the other alarming discoveries from the investigation:
- The contract was not vetted internally at PREPA. An employee from PREPA’s risk management office told Caldas that his office didn’t get a chance to evaluate the contract and didn’t get the proof of insurance required from the contractor. “We are conscious of the urgency of the work to be done, however, there are high risks associated with the scope of this work,” the employee wrote in an email.
- PREPA and Whitefish encountered major shipping problems because neither was aware of the obstacles of transporting the materials by sea. The delays forced PREPA to approve charter jet flights at a much higher cost to transport a lot of the cargo.
- The last version of the contract increased hourly labor charges for utility line workers by 50 percent, to $319 per hour, for no apparent reason. (That’s far more than the $63 dollars an hour the workers were actually getting paid, according to the New York Times.) The contract also billed PREPA under the assumption that crews were working 16 hours a day, seven days a week. Investigators say this allowed contractors and subcontractors to charge PREPA for tons of overtime hours with little justification.
- The original contract did not meet FEMA standards, according to emails exchanged between PREPA’s attorneys and FEMA’s attorneys. They told Caldas that the contract was missing more than a dozen required provisions, including clauses related to labor standards, environmental regulations and anti-lobbying efforts.
- PREPA ignored its outside attorney’s advice to change parts of the contract before signing it, which would have given PREPA more flexibility to terminate the contract at no cost and would have required Whitefish to pay all applicable taxes. Instead, PREPA had to continue paying Whitefish to work for another 30 days after cancelling the contract. Rosselló announced on October 29 that he would cancel the Whitefish contract, but didn’t say when that 30-day notice was given. Just one week of labor and equipment cost PREPA about $110,000, based on an October 7 invoice from Whitefish. Nearly every one of the lawyer’s recommendations were ignored in the final contract.
No-bid contracts are risky
On Tuesday, the head of PREPA, Ricardo Ramos, defended his decision to sign a contract with Whitefish at a hearing before the House committee. He told members of Congress that he got price quotes from more than a dozen US companies, but that Whitefish said it would get workers to the island faster, with less money required up front.
“In retrospect, there are some steps in our contracting process with Whitefish that we could have done better,” Ramos said in prepared testimony. “I chose to contract with Whitefish because my priority was securing the immediate assistance that we needed to begin restoring power as quickly as possible to our most critical customers.”
One of the key reasons Puerto Rico ended up with such a bad deal involved the process it went through to award the contract. At the Senate hearing, Rosselló explained that because the Puerto Rican government is broke and owes $70 billion to creditors, it has little leverage in negotiating more favorable terms. Whitefish was the only contractor that didn’t demand a down payment and would only bill after work was done.
PREPA also did not follow the open bidding process, which is normally required for federal reimbursement.
Open bidding is considered the highest standard in government contracting, ensuring that the government gets the best deal and giving as many businesses as possible a chance to compete. These contracts generally require more levels of scrutiny and oversight, too. The downside of open bidding is that it can take a lot longer, which is why federal agencies often try to avoid it when they can, particularly during an emergency.
Federal agencies can skirt the open bidding process in certain emergency contracts if they can show that it would severely hinder their work. In those cases, they just need to get a few price quotes and pick the best deal.
That’s what PREPA tried to do. The utility company planned to get reimbursed through FEMA’s emergency assistance grants, so it didn’t go through the open bidding process.
At the Senate hearing Ramos also said that PREPA opted not to invoke mutual aid agreements with other utilities because officials were uncertain of whether they could manage the logistics of transporting and housing more utility workers.
“I needed people that were self-contained,” Ramos said. “There were no hotel rooms in Puerto Rico. You’d have to come military-style, with your own lodging, with your own diesel.”
But even the no-bid contract it ended up signing didn’t meet basic FEMA standards. And ignoring the lawyers’ advice meant that it was harder for PREPA to terminate the contract with Whitefish when the governor decided cancel it.
So PREPA is still paying Whitefish millions of dollars a week for work that the federal government won’t repay — money that PREPA doesn’t have because it’s bankrupt. Meanwhile, many Puerto Ricans will be waiting in the dark as the utility company searches for a better deal.
The Stafford Act needs an update
Who ends up on the hook for the reconstruction bill and how that money is spent is another major point of contention.
The Stafford Act, which authorizes FEMA to respond to a disaster, limits federal disaster relief money to rebuilding infrastructure as it was before the storm.
For Puerto Rico, that would mean rebuilding the grid back to the same decrepit state that led to the power outages in the first place, and neither Puerto Ricans nor lawmakers want that.
And the risk of extreme storms rises and populations increase in vulnerable areas, the potential harm and damages from hurricanes will increase. “We need to build a resilient grid because these are going to be happening again,” said Sen. Al Franken (D-MN). “As the climate continues to warm, they are only going to get more powerful.”
Rosselló said that Puerto Rico would benefit from more flexibility under the Stafford Act to rebuild with resilience in mind.
“If you have a state that has a modern system already and it comes down, then the Stafford act makes sense,” Rosselló said. “But if you are investing a lot of money in something that’s going to come down again, that’s just not the best use of that money.”
However, since Puerto Rico is broke, paying for upgrades would require Congress to authorize more funds — an already fraught process — and lawmakers are worried about disaster relief money going toward paying back creditors rather than actually rebuilding Puerto Rico.