A contract between the Prison Industry Enhancement Certification program and Direct Trailer & Equipment Company, of Kingwood, to build flatbed trailers contributed to the demise of Lufkin Industries' Trailer Division, which was already struggling to stay afloat in a stagnant market, according to Paul Perez, vice president and general counsel for Lufkin Industries. Lufkin Industry officials last year learned through word-of-mouth from its distributors that flatbed trailers, similar to those the company manufactures, were on the market. "We sell a lot of our trailers to distributors across the country," Perez said. "They alerted us that we had a direct competitor that was marketing a trailer similar to ours at a lower price." Company officials began trying to find out more information about DTEC, a company that has only been in business since 2005. "We started asking, 'Who are they and why are they able to sell so low?'" Perez said. That's when LI officials began hearing rumors that the trailers were being made by prisoners out of the Michael Unit in Tennessee Colony, near Palestine. "We starting hearing last year that it was prison labor, but were unable to get proof until this summer," Perez said. "It took weeks and weeks of persisting, but we finally got permission to visit the work site, and that was our proof." The contract with the state, which the company on its Web site calles "a unique partnership," enabled DTEC to undercut Lufkin Industries' prices by paying out less in overhead and salaries by using prison labor and facilities to assemble its trailers. A $3 million contract LI lost to DTEC last year was "just one example" of business lost, Perez said. John Nelson, president of DTEC, declined to comment for this story. The program The Prisoner Industry Enhancement program, or PIE, was created by Congress in 1979 to encourage states and local governments to find jobs for offenders that would give them experience in realistic working environments, pay them wages and allow them to acquire job skills they could use upon release. The prisoners-for-hire program, which has been in place at the Texas Department of Criminal Justice for 14 years, has saved Texas taxpayers millions since its inception, because the cost of housing the prisoners is deducted from the wages paid by the private business that employs them. The majority of the money earned by offenders goes back into the state's pocket as reimbursement for room and board. The rest is divided between dependent support, payroll taxes, supervision, restitution, the Crime Victim's Compensation Fund and offenders' savings. Since the program began, more than $14 million in room and board restitution has been deposited into the state's General Revenue Fund, according to the TDCJ Web site. However, terms of the program specifically say it cannot compete with private industry, according to state guidelines. Last year, the PIE Certification Program consisted of, on average, 253 offenders at the Lockhart Work Facility, employed by Chatleff Controls to make air conditioner parts; 31 offenders at the Lockhart Work Facility, employed by OnShore Resources to make computer components; 47 offenders at the Coffield Unit, employed by Atrium Company to make windows; 14 offenders at the Ellis Unit, employed by Texas International Hardwoods and Veneers, to make veneer products; and 53 offenders at the Michael Unit, employed by DTEC to make trailer beds. Unfair advantage In its brochure, Direct Trailer, a sister company of DTEC boasts, "utilizing the buying power of a major corporation like (China International Marine Containers), and assembling the trailers in the US at Tennessee Colony, TX, a state correctional facility, we are assured of having the lowest costs for materials and labor. We then pass this savings on to the customer!" Perez called the use of Chinese components, coupled with prison labor, "a double whammy" for Lufkin Industries. Although DTEC, like all businesses that contract with PIE, has to pay the prevailing wage to its prisoner employees, it does not have to pay retirement, health insurance and other benefits it would have to pay to "free world" employees. Lufkin Industries Trailer Division, on the other hand, in 2007 had a $7 million payroll for its 150 employees, Perez said. And, DTEC pays just $1 a year to TDCJ for use of the facility out of which it operates on prison grounds and $1,100 a month for the use of various equipment, according to the contract between DTEC and PIE. "They had some very favorable terms in addition to the labor," Perez said. "We have overhead, utilities, taxes, upkeep maintenance ... We shouldn't be competing against a state entity. That's when we contacted our legislators and told them we thought it was terribly unfair and that it made a bad situation even worse." Legislators get involved Calls from the CEO of Lufkin Industries to state legislators clued lawmakers in to the conflict of interest. State Sen. Robert Nichols and Agriculture Commissioner Todd Staples looked into the matter and determined the Texas Workforce Commission did not consider the negative impact to existing jobs in the Lufkin area when it approved the contract between PIE and DTEC. "We did our own investigating," Nichols said. "If the program requires verification, then how did this happen? We found out they don't validate. There is a clear intent to, but there is no process that I am aware of, to do so." State Rep. Jim McReynolds also responded to the call for help. McReynolds met with Lufkin Mayor Jack Gorden, City Manager Paul Parker and the city's economic development director, Jim Wehmeier, a few weeks ago. "I let them know who I would talk with," McReynolds said. All three legislators drafted letters or made phone calls to various state officials, as did Gorden. In a letter from Nichols, dated Dec. 21, 2007, to Brad Livingston, executive director of the Texas Department of Criminal Justice and Diane Rath, chair of the Texas Workforce Commission, he asked that the operations at the Michael Unit "cease and desist immediately and the appropriate agency personnel take the necessary steps to end the contract that is causing such havoc on existing private industry ..." Nichols' letter continues, urging a quick resolution. "Time is of the essence in this matter," the letter states. "While the PIE program concept does have a role, its implementation should never result in direct competition with existing businesses, particularly in the same market." In a second letter dated Jan. 9, 2008, to Livingston, Rath, and Kathy Flanagan, presiding officer of the private sector industries oversight authority, Nichols refers to the Texas Administrative Code for the prison authority which states, "... the industry project shall not result in displacement of free world workers or the loss of existing jobs of a specific type provided by the employer in this state." Nichols points out that while it is the responsibility of the Texas Workforce Commission to verify that existing jobs will not be lost by contracts with PIE, "the situation has occurred and jobs are being lost." Less than a week after the second letter was sent, LI announced it would shut down its trailer division, citing "a loss of sales in its commercial trailer market in 2007 and a forecast for more losses in 2008." The decision affects 150 employees at the plant between Lufkin and Huntington, although the company says it will try to move many of them to other jobs in the company. The aftermath Everyone involved agrees PIE is beneficial to the state, and to the prisoners who participate in the program. However, it should not come at a cost to private industry, they say. "I think it's a good program, but it should not be allowed to compete with the free market," Perez said. "The concept is a good concept," McReynolds said. "I don't think the taxpayers would be upset that the money the prisoners make goes to pay for the cost of their incarceration. But it's not a great concept when it competes with businesses." "The idea is very good," Nichols said. "You have prisoners who don't have a good opportunity to get a job on the outside. The hope is if they develop those skills in prison, they are likely to become good citizens... All that, we support." While it is too late for the Lufkin Industries trailer division to benefit from any resolution regarding the contract between PIE and DTEC, company officials want to make sure other industry does not suffer as a result of the lack of verification by the TWC and as a result of the broad language in the contract between PIE and DTEC. The wording in the contract between DTEC and PIE specifies the prisoners work would be in "welding and fabrication," something that leaves the door open a little too wide, all parties agree, giving room for DTEC to compete with other metal or fabrication businesses. "Who's to say they can't do anything?" said Gorden. "The next step (could) be something that Citation, out on Raguet, does." "What's to say what industry they're going to go and compete against next?" said Wehmeier. "It's bad for economic development." Perez, Smith and LI General Manager Rob Maharrey, along with Wehmeier, are planning to attend a Feb. 7 special hearing of the oversight committee - which was requested by Staples and Nichols - to discuss the situation and the impact it has had on their business. "What exaggerates the situation is, it's right here in East Texas, where we're trying to promote economic development," Perez said. "If a prison is putting a product into the market that competes with local industry, that's unfair. This is not just a Lufkin Industries issue." Nichols, McReynolds, and representatives from business and manufacturing associations will also be present at the hearing. Nichols said he also spoke with company officials of Bright Coop Inc., a Nacogdoches trailer manufacturer, who may also attend the hearing. The ideal outcome of the hearing, Nichols said, would be "for operations to cease and desist until (TWC) can develop a method of validating that they do not displace any jobs." Because the contract with DTEC is a state contract, it can be canceled with 30 days notice, Nichols noted. Jim Wilfore, president of Direct Trailer, DTEC's sister company, would not comment except to say that DTEC did not contribute to the fall of Lufkin Industries' trailer division. "We only sold a couple of hundred trailers," he said. "It wouldn't matter if it was just one," Nichols said. "We think this is a very important issue, not just for Lufkin Industries, but for other industry in the area." A new trailer sits in the parking lot of Lufkin Industries' Trailer Division on U.S. 69 south between Lufkin and Huntington. Andy Adams/The Lufkin Daily News Inmates at the Michael Unit in Tennessee Colony have been making flatbed trailers through a contract between Direct Trailer and Equipment Company, of Kingwood, and the Prison Industry Enhancement Certification program. The agreement contributed to the shutdown of the Lufkin Industries trailer division, said a company official. Photo by Christina Cutler/Palestine Herald-Press