Lawsuit against Siemens alleges corruption

By ANTHONY WARREN,

From pass-through companies to faulty meters, a $90 million contract to overhaul Jackson’s water system was fraught with corruption from day one, so alleges a lawsuit filed recently by the city.

In June, the Lumumba administration filed suit against Siemens Industry and its subcontractors, alleging the international company perpetrated “a massive fraud” on the capital city severely damaging its finances, destroying its creditworthiness and ruining its reputation among residents.

The city has brought eight counts against the companies involved and is seeking $225 million in damages.

Parties include Siemens Industry and its affiliates and parent company, U.S. Consolidated Inc., M.A.C. & Associates LLC, Invision It Consultants LLC, Garrett Enterprises Consolidated, individual Chris McNeil, and John Does 1-10.

According to the suit, Siemens guaranteed $120 million in savings as a result of the work, which included installing new meters, building and implementing a new billing system, and making some repairs at the city’s water treatment plants and sewer lines.

The city, though, states that the work has yet to live up to the promises. Jackson also states that the contract was overpriced by millions, in part, because of the use of “sham” minority contractors as pass-through for millions of dollars.

On top of that, the city alleges that the contract did not meet the state standards required for “energy performance contracts,” and that projected savings were based on assumptions, not hard numbers.

All energy performance contracts have to be signed off on by the state. The Siemens contract was approved by the Mississippi Development Authority prior to work getting under way.

Jackson brought on the firm in 2012, under former Mayor Harvey Johnson. Johnson sold what was then a $91 million contract as being “revenue-neutral,” meaning that it would pay for itself over time with increased revenues and savings.

Work included installing some 60,000 residential and 5,000 commercial water meters, implementing a new billing system and creating a network that would allow meters to better communicate with that billing system.

Jackson would no longer have to have meter readers, a move that would save hundreds of thousands of dollars a year. The new meters would also provide more accurate billings, a move that was expected to increase water revenues, while at the same time help residents curb water usage by providing real-time data.

The majority of the work was completed in 2015. Less than three years later, though, the city announced that the water system was about to go bankrupt, largely because thousands of customers were not receiving bills. Today, the system is generating just enough revenue to cover monthly operating expenses. However, revenues are still far short of Siemens’ projected savings, and the city will likely have to dip into its general fund to cover the $7 million Siemens bond payment.

According to court documents, Jackson loses “$2 million in revenue each month and has lost more than $20 million in revenue over the last year alone” as a result of the new meter and billing system.

False Promises

Siemens officials said the city would “realize savings and increased revenue as soon as the Siemens project began.”

In year one, for instance, Jackson was expected to save $3.3 million, an amount that was expected to increase to more than $7.2 million in year two and to more than $8 million by year 11.

Jackson entered into discussions with Siemens in late 2011, after the firm responded to the city’s request for qualifications.

In May 2012, Siemens conducted an audit of the city’s water system, and determined that its meters “were ... 86 to 94 percent accurate.” The firm estimated that meter accuracy would “decrease to 79 to 87 percent over a 15-year period.”

Chris McNeil, a Siemens associate, said “new water meters installed by Siemens, by comparison, would have a 98.5 percent accuracy rate.”

According to court records, McNeil said the city would save money on the staffing side (more than $500,000 in year one alone), because meters could be read remotely, meaning meter readers would no longer be needed.

Based on those projections, the city council approved entering into an “energy performance contract” with the firm in October 2012.

Complications ensue

Problems with the work occurred early on.

Not only were the savings nowhere to be found, but water bills skyrocketed. Some customers began receiving bills for thousands of dollars a month. Thousands of other customers did not receive bills at all.

In some cases, Siemens and its subcontractors had installed the wrong meters.

In February 2015, the city issued a temporary stop work order after officials discovered “Siemens had installed at least seven meters that were not configured to properly measure water usage.” 

A review determined Siemens had installed meters that measured usage in gallons, rather than hundred cubic feet.

The city charges $3.21 per hundred cubic feet, or 750 gallons used.

Fast forward to October 2018, and additional meter problems were discovered. West Monroe Partners, a private consultant brought on to review the Siemens work, determined that more than 35,500 faulty meters had been installed as part of the contract.

According to the report, the meters were installed, despite battery issues.

At the time of the court filings, approximately 10,000 meters were not working.

A pass-through problem

Equipment aside, Jackson alleges that the overall contract was inflated, in part, by using minority contractors as pass-through companies.

Jackson adopted a minority business ordinance in 1999, which sets bench marks the city must reach in awarding contracts. Under provisions, 12.41 percent of all construction contracts are required to go to African-American firms.

“As part of its pitch to secure a contract with the city, Siemens represented that it would utilize minority-owned businesses to carry out 58 percent” of the work.

“However, Siemens never intended to hire qualified EBO (minority-owned) subcontractors to actually perform the work. Instead, Siemens conspired with its co-defendants and used a pass-through scheme in which it hired sham contractors and middlemen to inflate its … numbers and deceive city residents,” court documents state.

Those minority subcontractors included Jackson-based U.S. Consolidated Industrial Inc., M.A.C. & Associates, Garrett Enterprises and Invision IT Consultants.

“Siemens carried out its scheme by having U.S. Consolidated buy the water meters from the manufacturer (Mueller Systems) … and then sell the meters to Siemens at a marked-up price for installation by yet another contractor.

“For its part, U.S. Consolidated received nearly $20 million for doing nothing more than serving as a middleman.”

The city alleges that Jackson-based M.A.C. & Associates also was a pass-through company and was paid “$19 million … for water plant and sewer line repairs and installation of the new water meters. In reality, Hemphill Construction, Inc. (and Pedal Valve, Inc.) performed most of the … repairs.”

M.A.C. President and CEO Marcus Wallace has long refuted these allegations. In fact, in 2016, he brought a suit against Siemens for breach of contract.

According to records from that case, after Siemens was hired, it bypassed M.A.C. and gave a portion of the work to another firm.

Another minority firm, Invision IT was paid $11 million to implement the new Oracle billing system. “However, another company ended up performing most of that work,” court records show.

As for Garrett, Jackson alleges the firm “was paid $4.6 million to perform construction management and quality control services. However, it was unclear what services, if any, Garrett actually performed.”

“Siemens selection of unqualified EBO subcontractors resulted in shoddy work that contributed to problems with the current water system and deprived other qualified EBO businesses the opportunity to perform the work,” the city states.

A system doomed to fail

The Siemens work included setting up an intricate network designed to make water billing more accurate.

In addition to the meters, the contract included installing a series of “collectors” and “repeaters,” which transmit meter data to the billing office.

Public Works Director Robert Miller previously explained how the system was supposed to work: “The meter … registers consumption, accumulates data (and) transfers that data to the collectors. The collectors go to the repeaters, which carry the data to the system.”

In some cases, though, meters have not been recognized by the billing system. In other cases, the system will not accept meter data that shows significant changes in water usage.

Repeaters and collectors are also in constant danger of being taken out by lighting strikes. Once that happens, data for hundreds of customers is not transmitted.

When those malfunctions occur, the billing system issues estimated bills based on previous months’ usage. After three estimated bills, the system stops sending out statements.

Those accounts, in turn, become “stranded.”

In spring 2018, some 23,000 accounts had been stranded for various reasons. Earlier this year, Miller reported that as many as 2,000 accounts were still being “stranded” each month.

Jackson is seeking $225 million in damages. Of that, $150 million would cover the contract costs, while $75 million would be to make up for “lost revenue and for damage to the city’s creditworthiness and reputation.” 

Judge Frank Vollor has been appointed by the Mississippi Supreme Court to preside over the case. Jackson is seeking a jury trial.

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