Secrecy Surrounds Contract Cancellation

by John Perry 
Capistrano Taxpayers Association (CTA) 

Recently I requested information from the City about the 2008 cancellation of the Contract with ECO Systems (“ECO”), the company hired by the City to design, build, maintain and operate the Ground Water Recovery Plant (GWRP). I had no recollection of a council vote to terminate the Contract, so I obtained a copy of it and reviewed City Council Agendas to see what I could find.

According to City records, the Contract cancellation was never placed on the agenda, was never reported out of closed session and was never reported in the meeting minutes as required by law. There was no public disclosure and no opportunity for public input, as required by law.

It’s hard to believe since the ECO Contract states that the Contract could only be terminated if either the Company or the City defaulted the terms of the contract, or if either party declared bankruptcy.

I figured that neither of these events occurred, since the bonds used to finance the GWRP were insured and if ECO had defaulted, ECO and the insurers would be required pay off the bonds - not the ratepayers, and the project would then be terminated. But the City let ECO walk away from their contractual commitment without triggering the insurance clause.

Due to this action, the City ratepayers were forced to take over ECO and parent company Southland Water’s contractual obligations to:

· Make all necessary repairs resulting from design defects (in the millions thus far).

· Produce at least 5,231 acre feet of water at a fixed cost of $1.1 million per year (since the takeover, the estimated cost to the taxpayers for the lack of GWRP output is over $15 million because it has never produced this amount).

· Take over the operation, maintenance and the risk of the GWRP, using the newly formed Utilities Department staffed with 22 employees at a cost to ratepayers of more than $2 million per year.

· Assume the expense of repairing and maintaining the GWRP’s infrastructure including replacement of wells, booster pumps, pipelines and support equipment, which has cost millions and remains an on-going expense.

And the spending continues.

Despite its poor performance and design defects, the Council majority voted to expand the water plant using taxpayer money in the hopes that it will somehow reach the original Contract requirement of 5,231 area-feet of water. The Contract required ECO to meet this goal or be fined if it failed.

It’s obvious that the City Council created this mess both when it originally started the Project in 2002 without understanding the financial risks to the City of operating a $38 million water facility, and when they allowed ECO to walk away from its contractual obligations for the design-flawed water plant.

Now the taxpayers continue to pay the price for the City Council missteps, through increasingly higher water rates.

The CTA continues to monitor the GWRP and other City tax-related issues. For more information about the Capistrano Taxpayers Association, please visit our website at:

Editor’s note: We invited Councilman Sam Allevato to explain the council’s action in canceling ECO’s contract, as he is the only present council member who served on the council in 2008 when the contract was terminated. His response is on page three.


Anonymous said...

Mr. Perry thank you for continuing your research on behalf of the residents of SJC...just when you think the story of the GWRP cant get any worse, it does as evidenced by this article. I pray the CTA is successful in its lawsuit on our behalf.

Anonymous said...

No wonder our water bills are so high! Is there any thing we the citizens can do about this? Can we sue them over this?

Anonymous said...

What part was secret? It was an item of potential litigation on city agendas and they announced it.

So what is secret?

Editorial Board said...

Where in the Dispatch post does it say that it was an item of potential litigation on the City's agenda? The post you refer to is only an announcement after the deal was done.

Also, the reporting is sloppy at best. The reporter, Jonathan Volzke, apparently failed to research the ECO contract which states that neither party can terminate the contract unless one of the parties either defaults or files for bankruptcy. This is one of the points in John Perry's article.

Even if ECO had been allowed to walk away from the contract, Volzke also failed to research the true cost to the City for allowing them to walk away. The City contracted with ECO to run the plant for $1.1 million per year, but it is costing the City $7 million per year to run it.

For Volzke to accept Cindy Russell's suggestion that this action resulted in some type of "savings", allowing money to be "tucked away" for maintenance would be laughable if it wasn't so financially devastating to the ratepayers, who are forced to pick up the tab once again for the City's poor judgment and lack of fiduciary responsibility. The ratepayers have been stuck with on-going repairs for the flawed design of this plant. Had the City done its job, it would have triggered the insurance that covered design defects, and the ratepayers would be off the hook (another "oversight" by Volzke in his reporting).

Instead, water rates have risen to unaffordable levels, and ratepayers are promised year after year that if the City just spends more money, "this year the plant will produce - we promise". NONE of these promises have been kept.

Meanwhile the production levels are continually downgraded because the plant is unable to produce what it was designed to.

If Volzke had done his homework, he would know all of this. He would also know that the ground water in this area is poor, with high levels of unhealthy minerals, which causes tremendously expensive filters to fail and rupture. It's a vicious cycle and isn't easily remedied without an influx of tons of cash - which the City relies on the ratepayers to pony up.

Unfortunately for the ratepayers, it isn't likely to end soon - unless the water rate lawsuit is successful.

We at the CCS remain hopeful that the lawsuit is successful and the City is forced to do what they should have done long ago - purchase the water from a less expensive source.

Copyright © 2014, All Rights Reserved - LLC