Much of Camden's water supply is neither used nor billed, even as the private water company that runs the system collects millions in unapproved tax dollars and fails to protect the water from contamination, a state audit has found.

The loss of 45 percent of the water provided by Camden's biggest water company - due to leakage, overflow, meter inaccuracies and billing errors - mirrors faulty water systems in developing nations, according to the audit by the New Jersey comptroller. It exceeds the 10 percent allowed in the 1999 contract with the city, and amounts to a loss in revenue of $1.7 million annually.

Camden residents have long complained of poor water quality and brown water from their faucets, and inspections by state environmental officials found the potential for contamination in the water system is grave, according to the audit by the New Jersey Office of the State Comptroller.

The company, Bergen County-based United Water, could not provide paperwork proving that it had done mandated inspections, and it failed to maintain vents that prevent insects and small animals from entering the water supply, the audit found. The city, meanwhile, did not enforce contract provisions.

In response to findings in the audit, Camden is seeking $29 million in refunds from United Water, according to the comptroller's office.

Meanwhile, water rates have risen dramatically this year in Camden.

The comptroller's audit was initially prompted by a request from the state Department of Treasury, which has had extensive fiscal oversight in state-controlled Camden. The audit was released today.

Camden is halfway through a 20-year contract with United Water, one of the nation's largest water companies and a major contributor to New Jersey politicians of both parties. It is a subsidiary of an international corporation, Suez Environnement, based in Paris.

In a letter responding to a draft of the audit and included in the comptroller's final findings, United Water said it has made significant system improvements and reduced customer complaints by 90 percent while being a good corporate citizen - donating tickets for Camden children to go to the city's aquarium and giving the city a Christmas tree in 2008.

It disputed, point by point, several of the allegations, saying auditors misinterpreted the contract or did not consider recent changes it made to the water supply process. It said the water system was properly inspected and improvements - which the contract says the city must fund - were recommended.

The health and safety of Camden residents was never at risk, the company said.

But the state comptroller argued that contract mismanagement is simply rampant. Specifically, the audit alleged:

-Most Camden customers have uncollected balances at least 90 days old, but the company's account records are missing names and addresses, making collection impossible.

-The city paid $2.2 million in connection with an amendment to the United Water contract, even though that amendment was never legally approved by elected officials.

-A review of 64 "add-on" charges worth $8.3 million found problems with all 64 - including payments made without proper authorization.

-State auditors couldn't locate 15 of 17 city assets that were supposed to be maintained by United Water. The two that it did find, including a water treatment plant with nine vehicles, was virtually abandoned and "left to rot," according to the comptroller.

-United Water's record-keeping is so poor that when Camden relied on the company's list of properties with unpaid water bills to sell tax liens in 2003, it had to repurchase liens that should not have been sold. That cost the city nearly $72,000.

-Twenty percent of the city's fire hydrants need to be replaced, despite a contractual provision that all are operable.

-The company charged the city "administrative fees" not specified in the contract of 12.5 percent, even though the work was subcontracted to other companies.

-Water meters were not calibrated as mandated, causing inaccuracies and forcing the city to lose $1 million in charges to public entities like the Camden County Jail and the Riverfront State Prison.

-United Water failed to refund $550,000 owed to city customers.

Camden has been under state control since 2002, and most of its budget is subsidized by the state, so any wasted funds actually come from taxpayers throughout New Jersey.

This is the third state audit in the last several weeks showing various levels of mismanagement of city government. State politicians had said they planned to reform the city's governance before the new governor comes into office next month, but no bills have yet been proposed.

"If a municipality decides to outsource a basic service such as providing water, it needs to understand that its responsibilities do not end with the awarding of the contract," Comptroller Matthew Boxer said in a statement. "The city of Camden had an obligation to safeguard the public's tax dollars and it failed to do so."

Contact staff writer Matt Katz at 856-779-3919 or mkatz@phillynews.com.