Energy Savings
Performance Contracts Offer Benefits, but Vigilance Is Needed to Protect Government Interests Gao ID: GAO-05-340 June 22, 2005The federal government is the nation's largest energy consumer, spending, by latest accounting, $3.7 billion on energy for its 500,000 facilities. Upfront funding for energy-efficiency improvements has been difficult to obtain because of budget constraints and competing agency missions. The Congress in 1986 authorized agencies to use Energy Savings Performance Contracts (ESPCs) to privately finance these improvements. The law requires that annual payments for ESPCs not exceed the annual savings generated by the improvements. GAO was asked to identify (1) the extent to which agencies used ESPCs; (2) what energy savings, financial savings, and other benefits agencies expect to achieve; (3) the extent to which actual financial savings cover costs; and (4) what areas, if any, require steps to protect the government's financial interests in using ESPCs.
Although comprehensive data on federal agencies' use of ESPCs are not available, in fiscal years 1999 through 2003, we found that 20 federal agencies undertook 254 ESPCs to finance investments in energy-saving improvements for 5 to 25 years. Through the ESPCs, federal agencies plan to make annual payments amounting to at least $2.5 billion spread over the lifetime of the contracts. Agencies expect to achieve benefits that include energy savings worth at least $2.5 billion over the life of the contracts, as well as other benefits that cannot be easily quantified, such as improved reliability of the newer equipment over the aging equipment it replaced, environmental improvements, and additional energy and financial savings once the contracts have been paid for. While these benefits could be achieved using upfront funds and with lower financing costs, agencies stated that they generally have not received sufficient funds upfront for doing so and see ESPCs as a necessary supplement to upfront funding in order to achieve the benefits cited. Agencies believe that ESPCs also provide unique benefits such as a partial shift of risk from agencies to private energy services companies and a more integrated approach to providing efficiency measures. Agencies structure ESPCs so that financial savings cover costs and they reported that many do. However, GAO could not verify that conclusion using the data on ESPCs, and GAO work and agency audits disclosed ESPCs in which unfavorable contract terms, missing documentation, and other problems caused GAO to question how consistently savings cover costs. Furthermore, differing interpretations of the law establishing ESPCs about what components of costs must be paid for from the savings generated by the project or may be paid for using other funding sources have contributed to uncertainties about whether savings are appropriately covering costs. GAO identified concerns in the areas of expertise and related information and competition that are fundamental to ensuring that savings cover costs and to protecting the government's financial interests in using ESPCs. According to agency officials, they often lacked the technical and contracting expertise and information (such as interest rates and markups) to negotiate ESPCs and to monitor contract performance in the long term. The officials also think there may be insufficient competition among finance and energy services companies and that this could lead to higher costs for ESPCs.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-05-340, Energy Savings: Performance Contracts Offer Benefits, but Vigilance Is Needed to Protect Government Interests
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Report to Congressional Requesters:
June 2005:
Energy Savings:
Performance Contracts Offer Benefits, but Vigilance Is Needed to
Protect Government Interests:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-340]:
GAO Highlights:
Highlights of GAO-05-340, a report to congressional requesters:
Why GAO Did This Study:
The federal government is the nation‘s largest energy consumer,
spending, by latest accounting, $3.7 billion on energy for its 500,000
facilities. Upfront funding for energy-efficiency improvements has been
difficult to obtain because of budget constraints and competing agency
missions. The Congress in 1986 authorized agencies to use Energy
Savings Performance Contracts (ESPCs) to privately finance these
improvements. The law requires that annual payments for ESPCs not
exceed the annual savings generated by the improvements.
GAO was asked to identify (1) the extent to which agencies used ESPCs;
(2) what energy savings, financial savings, and other benefits agencies
expect to achieve; (3) the extent to which actual financial savings
cover costs; and (4) what areas, if any, require steps to protect the
government‘s financial interests in using ESPCs.
What GAO Found:
Although comprehensive data on federal agencies‘ use of ESPCs are not
available, in fiscal years 1999 through 2003, we found that 20 federal
agencies undertook 254 ESPCs to finance investments in energy-saving
improvements for 5 to 25 years. Through the ESPCs, federal agencies
plan to make annual payments amounting to at least $2.5 billion spread
over the lifetime of the contracts.
Agencies expect to achieve benefits that include energy savings worth
at least $2.5 billion over the life of the contracts, as well as other
benefits that cannot be easily quantified, such as improved reliability
of the newer equipment over the aging equipment it replaced,
environmental improvements, and additional energy and financial savings
once the contracts have been paid for. While these benefits could be
achieved using upfront funds and with lower financing costs, agencies
stated that they generally have not received sufficient funds upfront
for doing so and see ESPCs as a necessary supplement to upfront funding
in order to achieve the benefits cited. Agencies believe that ESPCs
also provide unique benefits such as a partial shift of risk from
agencies to private energy services companies and a more integrated
approach to providing efficiency measures.
Agencies structure ESPCs so that financial savings cover costs and they
reported that many do. However, GAO could not verify that conclusion
using the data on ESPCs, and GAO work and agency audits disclosed ESPCs
in which unfavorable contract terms, missing documentation, and other
problems caused GAO to question how consistently savings cover costs.
Furthermore, differing interpretations of the law establishing ESPCs
about what components of costs must be paid for from the savings
generated by the project or may be paid for using other funding sources
have contributed to uncertainties about whether savings are
appropriately covering costs.
GAO identified concerns in the areas of expertise and related
information and competition that are fundamental to ensuring that
savings cover costs and to protecting the government‘s financial
interests in using ESPCs. According to agency officials, they often
lacked the technical and contracting expertise and information (such as
interest rates and markups) to negotiate ESPCs and to monitor contract
performance in the long term. The officials also think there may be
insufficient competition among finance and energy services companies
and that this could lead to higher costs for ESPCs.
What GAO Recommends:
GAO recommends that the Congress consider clarifying the costs of ESPCs
that must be covered by savings. GAO also recommends steps for agencies
to better ensure that savings cover the costs of ESPCs, including using
expertise, information, and competition more effectively. GAO further
recommends that DOE do more to facilitate oversight of ESPCs. DOD, DOE,
GSA, DOJ, and VA concurred with the report.
www.gao.gov/cgi-bin/getrpt?GAO-05-340.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Jim Wells, 202-512-3841,
wellsj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Many Agencies Used ESPCs, Although the Extent of Use Varied:
Agencies Expect ESPC-Financed Projects to Result in Energy Savings As
Well As Other Benefits:
Agencies Believe Financial Savings Cover Costs, but Whether Savings
Actually Do So Is Uncertain:
Agencies Are Concerned About Officials' Lack of Necessary Expertise and
Information and About Competitiveness of the Super ESPCs:
Conclusions:
Matter for Congressional Consideration:
Recommendations for Executive Action:
Agency Comments:
Appendixes:
Appendix I: Objectives, Scope and Methodology:
Appendix II: Comments from the Department of Defense:
Appendix III: Comments from the Department of Energy:
Appendix IV: Comments from the Department of Veterans Affairs:
Appendix V: Comments from the General Services Administration:
Appendix VI: GAO Contact and Staff Acknowledgments:
Tables Tables:
Table 1: Number and Cost of ESPC Projects Undertaken in Fiscal Years
1999 through 2003:
Table 2: Energy and Financial Savings for ESPC Projects Undertaken in
Fiscal Years 1999 through 2003:
Table 3: Steps Contracting Centers Are Taking to Address Concerns About
Expertise, Information, and Competitiveness:
Figures:
Figure 1: Percentage of ESPC Financed Projects, by Contract Value,
Undertaken in Fiscal Years 1999 through 2003:
Figure 2: Agencies' Use of Contracting Centers for ESPCs Undertaken in
Fiscal Years 1999 through 2003:
Abbreviations:
DOD: Department of Defense:
DOE: Department of Energy:
DOJ: Department of Justice:
ESPC: Energy Savings Performance Contracts:
FEMP: Federal Energy Management Program:
GSA: General Services Administration:
MMBTU: million British thermal units:
VA: Department of Veterans Affairs:
Letter June 21, 2005:
The Honorable Tom Davis:
Chairman:
The Honorable Henry A. Waxman:
Ranking Minority Member:
Committee on Government Reform:
House of Representatives:
The federal government is the single largest energy consumer in the
nation, spending about $3.7 billion in fiscal year 2002[Footnote 1]on
energy for its approximately 500,000 facilities in the United States.
The Energy Policy Act of 1992 and several subsequent executive orders
require federal agencies to reduce their consumption of energy in
federal facilities. Most notably, Executive Order 13123, issued in
1999, requires agencies, by 2010, to reduce energy consumption by 35
percent from a 1985 baseline. Additional provisions in the act and
various executive orders have added other goals, such as conserving
water and using renewable fuels.
Whether to pay for energy-efficiency improvements that reduce energy
consumption through up-front appropriations or through private
financing is a matter of concern to many. Agencies and members of the
Congress have long recognized that upfront funding for energy-
efficiency improvements has often been difficult to obtain because of
budget constraints and competing agency mission priorities. In 1986,
the Congress provided agencies with an alternative mechanism for
obtaining energy-efficiency improvements when it authorized agencies to
use Energy Savings Performance Contracts (ESPCs), a type of share-in-
savings contract, to privately finance the improvements. This step
reflected the trend in the federal government toward increased reliance
on performance-based contracting to improve the services agencies
receive from contractors. In performance-based contracting, the agency
specifies the result it desires and leaves it to the contractor to
decide how best to achieve the desired result. Through share-in-savings
contracting, one performance-based technique, the agency compensates a
contractor from the financial benefits derived as a result of contract
performance. Under an ESPC, agencies enter into a long-term contract
(up to 25 years) with a private energy services company in which the
company installs energy-efficiency improvements financed from private
funds. The agency then repays the company until the improvements have
been paid for. The law requires that annual payments for the ESPCs not
exceed the value of the annual utility savings generated by the
installed energy-efficiency improvements. As part of an ESPC, the
agency and the energy services company estimate the annual energy and
financial savings and develop a plan to monitor and verify that the
expected savings actually occur. ESPCs are designed to shift
performance risk associated with energy-efficiency improvements from
the agency to the company. This shift is to be made by conditioning
annual payments to the company on verification that the expected
financial savings have been realized. These savings are to be
calculated as the difference between the baseline cost for energy
consumption that would have been incurred without the ESPC and the cost
of the energy consumption with the ESPC's energy-efficiency
improvements in place.
Agencies tended to use ESPCs sparingly during the late 1980s and early
1990s, largely because negotiating an ESPC can be a highly technical
and time-consuming process. Agencies began using ESPCs more during the
late 1990s. Agencies' energy reduction goals became more ambitious as a
result of Executive Order 13123, and the new goals required agencies to
allocate additional funds to install energy-efficiency improvements. To
help simplify and shorten the ESPC negotiation process, the Department
of Energy's (DOE) Federal Energy Management Program (FEMP) negotiated
"super" ESPCs with energy services companies that FEMP prequalified,
via a competitive process, to provide services under the contracts.
FEMP's super ESPCs are umbrella contracts that federal agencies may use
to purchase energy equipment and services. The Department of the Air
Force and the U.S. Army Corps of Engineers negotiated similar "super"
ESPCs. Agencies have the option to use the super ESPCs to take
advantage of some prenegotiated terms and conditions. In this regard,
agencies can implement delivery orders more quickly using the super
ESPCs because the competitive selection process has already been
completed and key terms of the contract negotiated. Alternatively, the
agencies may still enter into "stand-alone" ESPCs with energy services
companies using a separate competitive selection process.
The use of ESPCs in recent years has raised questions about how these
contracts should be reflected in the federal budget. At present, they
are not reflected--"scored"--upfront in the budget when the contract is
signed, and budget agencies disagree about whether they should
be.[Footnote 2] The Congressional Budget Office believes that the
obligation to make payments for the energy-efficiency improvements and
the financing costs is incurred when the government signs the ESPC and
that scoring the full cost is consistent with governmentwide accounting
principles that the budget reflect this commitment as a new obligation
at the time of signing. The Office of Management and Budget, on the
other hand, includes the costs of ESPCs in the budget on an annual
basis as they are incurred. The scoring treatment is based on the
contingent nature of the contract--payments are contingent on achieving
expected financial savings and, therefore, the government is not fully
committed to the entire long-term cost of the ESPC at the time it is
signed. Agencies have statutory authority to enter into a multiyear
contract even if funds are available only to pay for the first year of
the contract. Although authorization for ESPCs lapsed on October 1,
2003, it was renewed on October 28, 2004, through fiscal year 2006, and
retroactive authorization was provided for any ESPCs signed between the
time the authority expired and was reinstated.
In this context, you asked us to determine, for contracts agencies
undertook in fiscal years 1999 through 2003, (1) the extent to which
agencies used ESPCs; (2) what energy savings, financial savings, and
other benefits agencies expect to achieve; (3) the extent to which
actual financial savings from ESPCs cover costs; and (4) what areas, if
any, require steps to protect the government's financial interests in
using ESPCs.
To answer these questions, we first obtained basic contract data from
the databases of the four federal contracting centers that assist
agencies with ESPCs--the Air Force Civil Engineer Support Agency, the
U.S. Army Corps of Engineers' Huntsville Center, FEMP, and the Naval
Facilities Engineering Service Center, which reflect the majority of
all federal ESPCs undertaken during fiscal years 1999 through 2003. We
did not completely assess these data for reliability; however, we
reviewed the steps each agency took to ensure the data were reliable
and determined that these steps were sufficient for our reporting
purposes. We also obtained more detailed contract data for the same
period from the seven federal agencies having the most facility floor
space and highest energy use and, therefore, the most potential to use
ESPCs. These agencies were DOE; the Departments of the Air Force, the
Army, the Navy (including the Marine Corps), Justice, and Veterans
Affairs; and the General Services Administration. We did not perform
formal benefit/cost analyses of individual ESPC projects or of ESPCs as
a whole because of data limitations. Consequently, to assess the costs
and benefits of ESPCs, we supplemented the limited data analysis we
were able to conduct with agencies' assessments of their own ESPCs and
the additional information we obtained from agency files and through
more than 60 interviews with officials from the agencies, energy
services companies, and financiers. We also reviewed relevant
regulations, policies, and agency procedures. For more information
regarding the scope and method we followed, see appendix I. We
conducted our work from January 2004 through May 2005 in accordance
with generally accepted government auditing standards.
Results in Brief:
In fiscal years 1999 through 2003, 20 federal agencies undertook a
total of 254 ESPCs to finance investments in energy-efficiency
improvements for up to 25 years. However, we could not determine the
full extent of ESPC use because there is no comprehensive database on
federal agencies' use of ESPCs. Although DOE is required to report to
the Congress some governmentwide annual data on the new ESPCs that
agencies undertake each year, DOE's data are not comprehensive or
cumulative. The 20 agencies for which we do have data have committed
the federal government to annual payments totaling about $2.5 billion
over the terms of these contracts, conditional on either the savings
guaranteed in the contracts being verified or as stipulated in the
contracts.[Footnote 3] The energy-efficiency improvements have been or
are in the process of being installed at locations across the nation
and cover many types of equipment including lighting, boilers,
geothermal heat pumps, and energy management systems. The extent of
ESPC use has varied across agencies. For example, the Department of
Defense (DOD) agencies undertook about 153 ESPCs to finance about $1.8
billion in costs at about 100 military installations, while the
Department of Justice undertook only 2 ESPCs to finance about $43
million in energy-efficiency improvements. Department of Defense
officials told us they relied on ESPCs to augment the upfront funding
they receive to purchase such improvements and achieve their energy
efficiency goals. Justice officials told us they undertook two projects
to help meet similar goals.
Agencies expect to achieve energy savings worth at least $2.5 billion
over the life of their ESPCs, as well other benefits that we could not
attach a dollar value to, including improved ability to accomplish
their missions by replacing aging infrastructure and environmental
benefits from using newer and cleaner technologies. Agencies also
generally expect benefits to continue after the contracts end because
the improvements financed by the ESPCs should operate and continue to
save energy beyond the point at which they have been paid for. While
these benefits could be achieved using upfront funding with associated
financial cost savings to the government, agencies told us they
generally have not received appropriations for these types of
investments in sufficient amounts to achieve their energy savings goals
and maintain their energy infrastructure in a timely manner. Therefore,
they stated that meeting their energy savings and other goals often
depends on using ESPCs to supplement the upfront funding. In addition,
agencies and industry experts told us that ESPCs provide benefits that
are not typically obtained when agencies use upfront funding to
purchase the investments. For example, ESPCs shift some of the risk
from the government to the energy services companies by making payments
conditional on verification of expected performance, which in turn
yields energy savings. Such performance clauses are not generally
included when agencies purchase improvements using upfront funds,
though it might be possible to do so. Agency officials also said using
ESPCs enabled them to develop an integrated approach to energy
management in their buildings by ensuring, for example, that new and
existing equipment work together efficiently. In contrast, they said
that obtaining up-front funding is uncertain and episodic, making it
difficult to ensure that improvements work effectively together and
with existing equipment.
Agencies believe that ESPCs' financial savings generally cover the
costs, and they provided examples of when this has occurred; however,
the available data are not conclusive and our work, agency audits of
ESPCs, and agencies' different interpretations about the components of
costs that must be covered by savings under the ESPC legislation raise
questions about how consistently savings actually cover costs. The ESPC
legislation requires agencies to design their ESPCs so that the upfront
estimates of savings exceed the costs. In addition, payments on the
contracts are conditioned on the savings guaranteed in the contracts
being verified. Although the agencies in our review told us about
projects for which savings covered costs and provided data on verified
savings for most of their projects, the data were not sufficient for us
to conclude whether project savings have covered costs. Furthermore, we
found instances that caused us to question whether savings consistently
cover costs. For example, a 2002 Army audit of a 1999 project covering
five locations found that the project's guaranteed savings were based
on faulty assumptions, potentially leading to payments of about $96
million that may not be covered by savings if corrections are not made
and if the contract is not renegotiated. Finally, the agencies have
adopted different interpretations of which costs must be covered by
savings under the ESPC authorizing legislation. In practice, it remains
uncertain whether contract payments may be made only from utility
savings resulting from the ESPC or from funds already earmarked for
equipment replacement and other sources to reduce the length of the
contract and finance charges. As a result, agencies expressed the need
for legislative clarification in this area.
During our review, the expertise and information needs of the agencies
and competitiveness issues related to the contracts emerged as concerns
for the protection of the government's financial interests in using
ESPCs. First, according to a number of the agency officials we
interviewed, they often lacked the necessary technical and contracting
expertise and related information to effectively develop and negotiate
the terms of ESPCs and to monitor contract performance once the energy-
efficiency improvements were operating. Even when the officials
obtained assistance from the Department of Defense's and FEMP's
contracting centers, which the officials generally believed to be
helpful, they told us they sometimes could have benefited from
additional help with some aspects of developing the contracts, such as
evaluating the proposed financing, and monitoring savings during the
term of the contract. However, for various reasons, such as resource
constraints, they did not always get that assistance. As a result, they
sometimes relied on the energy services companies for help in these
areas, thereby calling into question whether they negotiated the best
contracts and ensured that the savings guaranteed by the contracts were
realized. The officials lacked necessary expertise largely because they
were inexperienced with ESPCs. They lacked necessary information
because information on ESPCs negotiated in the past is generally
neither collected and disseminated above the individual project level;
nor is it required to be. In addition to their concerns about expertise
and information, agency officials believe they may be paying too much
for financing and other terms in the contracts, in part, because there
may not be enough competition among the companies that finance ESPCs
and among the energy services companies. One reason for lack of
competition among financiers may be the limited number of companies
involved in financing ESPCs. Another reason may be the risk associated
with financing ESPCs because of the performance requirements--risk that
tends to limit the number of financiers interested in participating.
Regarding insufficient competition among energy services companies,
most officials believe that the super ESPCs, including their lists of
prequalified companies, are outdated and the contracts should be put
out for recompetition more frequently. The individual agencies and the
contracting centers have taken a number of steps to address concerns
about expertise, information, and competition. For example, in 2000,
DOE began requiring that each of its departmental projects be approved
by a team of experts in headquarters, and each of the contracting
centers has developed guidance for verifying actual savings. In
addition, the agencies have begun to address some of these concerns
more collectively through an interagency steering committee. We did not
attempt to assess the effectiveness of the agencies' efforts.
To strengthen the ESPC process, we are recommending that the Congress
consider clarifying the components of costs that must be covered by
savings in the statute relevant to ESPCs. We are also making
recommendations concerning the use of data, expertise, audits, and
competition to the heads of the agencies that use ESPCs; to the
Secretaries of Defense and Energy because the contracting centers
answer to them; and to the Secretary of Energy because of that agency's
ESPC oversight and reporting responsibilities.
In commenting on a draft of this report, the Departments of Defense
(for the Departments of the Air Force, the Army, and the Navy), Energy,
Justice, and Veterans Affairs, and the General Services Administration,
all stated their concurrence with our findings, conclusions, and
recommendations and provided technical and clarifying comments, which
we have incorporated, as appropriate.
Background:
Federal agency use of ESPCs was authorized by the Congress to provide
an alternative to direct appropriations for funding energy-efficiency
improvements in federal facilities.[Footnote 4] Many agencies were hard-
pressed to pay for planned maintenance and repairs in their facilities,
let alone make more significant building improvements. As a result of
this situation, many federal facilities were in a state of
deterioration with agencies estimating restoration and repair needs in
the tens of billions of dollars. Although energy-efficiency
improvements were likely to save money over the life of the investments
and replace aging infrastructure, budgetary constraints prevented
agencies many times from receiving appropriations for such investments.
Under the ESPC legislation, agencies could take advantage of private-
sector expertise, often lacking at the agencies, with little or no
upfront cost to the government. Under these contracts, private-sector
firms are supposed to bear the risk of equipment performance in return
for a share of the savings. This arrangement permitted agencies to meet
mission requirements and upgrade their energy efficiency to reduce
energy usage at the same time, while recognizing only the first year's
cost upfront in the budget. The Congress authorized agencies to retain
some or all of any annual savings available after required contractual
payments to the energy services companies have been made.[Footnote 5]
ESPC Process:
To begin an ESPC project, agency officials work on their own or with
the assistance of one of the federal contracting centers at the U.S.
Air Force, the U.S. Army Corps of Engineers' Huntsville Center, the
Navy, or FEMP, to choose an energy services company for the project and
to identify the energy-efficiency improvements the company will finance
for the agency.[Footnote 6] Usually, multiple companies submit initial
proposals that include information on their qualifications and
preliminary cost and savings projections for the project. During this
phase, all costs are borne by the companies.
To continue developing the project, the agency chooses one company and
agrees to pay for a detailed energy survey. According to contracting
center officials, this survey typically takes up to 1 year and includes
such items as an assessment of baseline energy use and cost,
projections of energy use and savings once the improvements have been
put in place, maintenance schedules, and prices. Improvements must be
"life-cycle cost effective," that is, the benefits must meet or exceed
total costs over the contract. Determining life-cycle cost
effectiveness is an agency responsibility, but the agency can request
this service from the company, generally for a separate fee. A final
proposal that includes the detailed survey becomes the basis for
comment and negotiation between the agency and/or contracting center
and the company. Included in these negotiations are such contract terms
as the "markups" added to the direct cost of each improvement to cover
the energy services company's indirect costs and profit associated with
its implementation,[Footnote 7] operations and maintenance
arrangements, guaranteed savings amounts, financing, and methods to
verify that savings are achieved.
Once the agency and energy services company have reached final
agreement on contract terms, the company designs and installs the
energy-efficiency improvements and tests the improvements' operating
performance. Agency officials review test results and have the company
make any necessary corrections. To install, test, and accept the
improvements typically takes up to 2 years to complete. Upon accepting
the project, the agency starts payments to the company, which must be
supported by regular measurement and verification reviews.
Although agencies may develop an ESPC themselves, doing so can be a
complicated process; consequently, most agencies seek assistance from
one of the contracting centers at DOD or FEMP. To streamline the
procurement process, three of these contracting centers--Air Force,
U.S. Army Corps of Engineers' Huntsville Center, and FEMP--have awarded
super ESPCs, from which multiple projects can be developed, to
prequalified energy services companies in different regions of the
country.[Footnote 8] The super ESPC awards to selected energy services
companies complied with Federal Acquisition Regulation rules and
requirements for competition. With these multiple-award contracts in
place, agencies can implement ESPCs in a fraction of the time it would
take to undertake an ESPC alone because the competitive process to
select qualified companies has been completed and key terms of the
contract broadly negotiated, such as setting maximum markups the
companies may charge. In addition to managing the super ESPCs, the
contracting centers support agencies in negotiating aspects of specific
projects for a separate fee. For example, FEMP provides facilitation
services, where a third party assists the agency and energy services
company in agreeing on terms such as markup rates, financing options,
and the appropriateness of plans to measure and verify savings for
proposed improvements. In addition, FEMP issues guidelines, offers
training, and provides other support to agencies using the FEMP super
ESPC.
ESPC Savings Are Intended to Cover Contract Costs:
Under an ESPC, company-incurred costs are paid from savings resulting
from improvements during the life of the contract. These savings
include such things as reductions in energy costs, operation and
maintenance costs, and repair and replacement costs directly related to
the new efficiency improvements. In addition to direct costs for the
improvements, other costs that savings should cover include financing
charges, monitoring services, and company-provided maintenance. Savings
to an agency must exceed payments to the energy services company. By
law, aggregate annual payments by an agency to both utilities and
energy services companies under an ESPC may not exceed the amount that
the agency would have paid for utilities without the ESPC. To ensure
that energy savings cover the contract costs, companies are required to
guarantee the performance of the new equipment and assume the risk for
its operation and maintenance during the contract, even though the
agency may perform the maintenance. Agencies still assume some risks,
for example, for changes in utility rates and in hours of operation,
over which the energy services company has no control.
To measure and verify that the guaranteed savings are achieved, an
agency compares baseline energy usage and costs prior to the ESPC with
consumption and costs after the improvements have been installed.
Typically, the company develops a baseline during its detailed survey,
while the agency is responsible for ensuring that the baseline has been
properly defined. The company then estimates the energy that will be
saved by installing the improvements and calculates the financial
savings expected in the future. At least annually, and sometimes more
often, the company provides measurement and verification inspections
and reports to the agency to substantiate the expected savings.
Several measurement and verification protocols are available to
determine energy savings. For example, under FEMP guidelines, four
options are discussed that range in complexity and costs. The simplest,
and perhaps least expensive, option is to measure the capacity or
efficiency of the new equipment and "stipulate" hours of operation,
expected energy consumption, and other factors rather than specifically
measure them. Such stipulation is often used for simpler improvements,
such as lighting. A more costly option might include constant
monitoring of energy usage through metering or computer simulation
models of whole building energy consumption. These methods may involve
metering performance and operating factors before and after the
installation of the improvements. When choosing among the alternatives,
agencies balance the need for accuracy of their estimates with the
costs of verifying those estimates. As part of its guidance, FEMP
includes a matrix that describes a number of factors and associated
risks involving financial, operational, and performance issues. When
guaranteed savings are not achieved directly due to the performance of
the equipment, the agency may withhold payment from the energy services
company until the conditions are corrected.[Footnote 9]
Prior GAO Work Compared the Financing Costs of ESPCs with Upfront
Funding:
As we reported in December 2004, while ESPCs provide an alternative
financing mechanism for agencies' energy-efficiency improvements, for
the cases we examined, such funding was more expensive than using
timely upfront appropriations. This is because the federal government
is able to obtain capital at a lower financing rate than private
companies can. In this regard, our earlier work examining six projects
found that financing these projects with ESPCs cost 8 to 56 percent
more than had the projects been funded at the same time with upfront
funds.[Footnote 10] The report noted that other factors, such as
required measurement and verification of savings, may also affect the
cost of projects financed with ESPCs. Agency officials commenting on
this work agreed that timely upfront appropriations would be less
costly than privately financing energy-efficiency improvements, if such
appropriations were available, but stated that any delays in funding
would result in a subsequent loss of energy and cost savings and these
losses over time could offset the lower financing costs of the upfront
funding. We did not analyze the likelihood nor the costs of such
delays.
Many Agencies Used ESPCs, Although the Extent of Use Varied:
During fiscal years 1999 through 2003, numerous agencies undertook
ESPCs to finance energy-efficiency improvements, committing the federal
government to annual payments totaling about $2.5 billion over the
terms of these contracts. The use of ESPCs has been geographically
widespread, with many types of equipment installed, and the extent of
use has varied across the agencies.
During our review, we found that there is no source of comprehensive
data on federal agencies' use of ESPCs, either in DOE, the contracting
centers, or the agencies. DOE is required to collect data on the
numbers, costs, and expected energy and financial savings for the new
ESPCs that agencies undertake each year and report these data annually
to the Congress. The data in DOE's reports, however, were not adequate
for our review for several reasons: they did not include some critical
elements, such as actual energy savings; they were not cumulative from
year to year; and they did not include ESPCs begun in fiscal year 2003
because DOE has not yet issued the report for that year. Similarly, the
DOD and FEMP contracting centers' data were not comprehensive enough
for our purposes. The centers' data were limited to those contracts for
which they provided assistance; like DOE's reports, they did not
include certain critical elements; and, with the exception of Navy's,
did not incorporate information on modifications or progress on the
contracts past the point at which the centers' assistance to the agency
was completed--usually only up to 1 year after the contract was signed.
Furthermore, most agencies do not have a comprehensive, centralized
electronic or paper system for tracking their ESPCs and keep some
contract data only in project files at the facilities where the
contracts are being implemented.
Consequently, to examine ESPC use across the federal government, we
obtained data from the four contracting centers and from the seven
agencies included in our review. We combined the data from all the
agencies into a consistent format, deleted duplicate records, and
performed basic tests to ascertain the reliability of the data.
Although the data for some projects were incomplete, the overall
results of our analyses appear to be consistent with information
published from other sources. The results of our analyses follow.
Twenty Agencies Used ESPCs:
During fiscal years 1999 through 2003, 20 agencies undertook 254 ESPC
projects to finance investments in energy-efficiency improvements. The
ESPCs commit the federal government to annual payments totaling about
$2.5 billion over the terms of these contracts, conditional on either
the savings guaranteed in the contracts being verified or as stipulated
in the contracts. Because energy services companies are accountable for
guaranteeing the performance of the equipment installed, if savings are
reduced due to equipment performance, the company must correct any
related problems. In some instances, the contract may stipulate an
amount of savings that will be achieved. In the event that this
stipulation overstates actual savings, the agency must still make
payments based on the amount of savings stipulated. However, if
stipulation understates savings, the agency obtains the additional
savings at no additional cost. Table 1 shows the numbers and costs of
ESPCs the 20 agencies undertook, as well as the percentage of total
ESPCs attributable to each agency.
Table 1: Number and Cost of ESPC Projects Undertaken in Fiscal Years
1999 through 2003:
Agency: Department of Defense: Air Force;
Number of projects: 63;
Percentage of total number of projects: 24.8%;
Number of projects with cost data: 63;
Cost to be paid over contract term: $760,012,668;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 30.8%.
Agency: Department of Defense: Army;
Number of projects: 47;
Percentage of total number of projects: 18.5%;
Number of projects with cost data: 46;
Cost to be paid over contract term: $324,374,960;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 13.2%.
Agency: Department of Defense: Navy, including Marine Corps;
Number of projects: 40;
Percentage of total number of projects: 15.7%;
Number of projects with cost data: 35;
Cost to be paid over contract term: $653,376,185;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 26.5%.
Agency: Department of Defense: Other DOD agencies;
Number of projects: 3;
Percentage of total number of projects: 1.2%;
Number of projects with cost data: 3;
Cost to be paid over contract term: $21,040,420;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 0.9%.
Subtotal for Defense agencies;
Number of projects: 153;
Percentage of total number of projects: 60.2%;
Number of projects with cost data: 147;
Cost to be paid over contract term: $1,758,804,233;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 71.3%.
Agency: General Services Administration;
Number of projects: 30;
Percentage of total number of projects: 11.8%;
Number of projects with cost data: 30;
Cost to be paid over contract term: $222,500,840;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 9.0%.
Agency: Department of Veterans Affairs;
Number of projects: 24;
Percentage of total number of projects: 9.4%;
Number of projects with cost data: 17;
Cost to be paid over contract term: $146,818,918;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 6.0%.
Agency: Department of Energy;
Number of projects: 10;
Percentage of total number of projects: 3.9%;
Number of projects with cost data: 10;
Cost to be paid over contract term: $38,076,458;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 1.5%.
Agency: Department of Transportation;
Number of projects: 8;
Percentage of total number of projects: 3.1%;
Number of projects with cost data: 8;
Cost to be paid over contract term: $56,516,373;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 2.3%.
Agency: Department of Interior;
Number of projects: 5;
Percentage of total number of projects: 2.0%;
Number of projects with cost data: 5;
Cost to be paid over contract term: $26,787,215;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 1.1%.
Agency: Department of Labor;
Number of projects: 4;
Percentage of total number of projects: 1.6%;
Number of projects with cost data: 4;
Cost to be paid over contract term: $11,543,796;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 0.5%.
Agency: National Aeronautics and Space Administration;
Number of projects: 4;
Percentage of total number of projects: 1.6%;
Number of projects with cost data: 4;
Cost to be paid over contract term: $54,300,894;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 2.2%.
Agency: Department of Health and Human Services;
Number of projects: 3;
Percentage of total number of projects: 1.2%;
Number of projects with cost data: 3;
Cost to be paid over contract term: $20,004,872;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 0.8%.
Agency: National Archives and Records Administration;
Number of projects: 3;
Percentage of total number of projects: 1.2%;
Number of projects with cost data: 3;
Cost to be paid over contract term: $14,762,964;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 0.6%.
Agency: Department of Agriculture;
Number of projects: 3;
Percentage of total number of projects: 1.2%;
Number of projects with cost data: 3;
Cost to be paid over contract term: $37,046,526;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 1.5%.
Agency: Department of Justice;
Number of projects: 2;
Percentage of total number of projects: 0.8%;
Number of projects with cost data: 2;
Cost to be paid over contract term: $42,984,767;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 1.7%.
Agency: Department of Commerce;
Number of projects: 1;
Percentage of total number of projects: 0.4%;
Number of projects with cost data: 1;
Cost to be paid over contract term: $8,689,639;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 0.4%.
Agency: Environmental Protection Agency;
Number of projects: 1;
Percentage of total number of projects: 0.4%;
Number of projects with cost data: 1;
Cost to be paid over contract term: $8,687,513;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 0.4%.
Agency: Kennedy Center for the Performing Arts;
Number of projects: 1;
Percentage of total number of projects: 0.4%;
Number of projects with cost data: 0;
Cost to be paid over contract term: NA[A];
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: --.
Agency: National Gallery of Art;
Number of projects: 1;
Percentage of total number of projects: 0.4%;
Number of projects with cost data: 1;
Cost to be paid over contract term: $5,108,785;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 0.2%.
Agency: Department of State;
Number of projects: 1;
Percentage of total number of projects: 0.4%;
Number of projects with cost data: 1;
Cost to be paid over contract term: $12,847,527;
Agency's percentage of $2.5 billion in total cost to be paid over
contract term: 0.5%.
Total;
Number of projects: 254;
Number of projects with cost data: 240[A];
Cost to be paid over contract term: $2,465,481,320.
Source: GAO's analysis of ESPC data reported by the four ESPC
contracting centers and seven individual agencies included in GAO's
review.
[A] Of the 254 projects agencies reported undertaking, the agencies
reported cost data for 240. We did not receive cost data for 1 Army
project, 5 Marine Corps projects, 7 Veterans Affairs projects, or the
Kennedy Center's project. Furthermore, the agencies reported estimated
savings for only 237 of the 240 with cost data. To allow a fair
comparison of costs (shown in table 1) to savings (shown in table 2),
we calculated total cost for only the 237 projects with both cost and
savings data. As a consequence, we have understated total cost by the
costs of the 3 projects for which we did not receive savings data and
by the costs of the additional 14 projects for which we received
neither cost nor savings data.
[End of table]
The size of ESPC projects varied greatly over the 5-year period,
ranging from $241,943 to $137,515,074. About 72 percent of the projects
in this time period are valued at $10 million or less, as shown in
figure 1. The contract length of all ESPC projects ranges from 5 to 25
years, with an average of 15.8 years.
Figure 1: Percentage of ESPC Financed Projects, by Contract Value,
Undertaken in Fiscal Years 1999 through 2003:
[See PDF for image]
[End of figure]
Using the ESPCs, agencies financed energy-efficiency improvements that
have been or are in the process of being installed at locations in 49
states and on U.S. military installations in Guam, Cuba, Italy,
Germany, and Korea. Numerous types of energy-efficiency improvements
were financed, including replacement of boiler and chiller plants for
heating and cooling, energy management control systems, geothermal heat
pumps, and lighting. In the largest ESPC project during the 5-year
period, the Marine Corps committed to spend almost $138 million at a
facility in California to install a cogeneration plant, solar hot water
and photovoltaic systems, heating, ventilating, and air conditioning at
various sites, and waste water pump upgrades. This ESPC project,
awarded in July 2002, has a contract term of 18 years.
Extent of ESPC Use Varied Across Agencies:
The extent to which agencies have used ESPC financed projects has
varied, as shown in table 1. DOD agencies have used the contracts the
most, undertaking about 153 ESPCs to finance about $1.8 billion in
costs at about 100 military installations during the 5-year period. DOD
officials told us they relied heavily on ESPCs to achieve energy
infrastructure improvements, in part because of difficulties they
encountered in obtaining adequate upfront funding for energy projects
that were not categorized as being mission-critical. They noted that
these improvements also helped the agencies meet other national energy
goals as well.
After DOD, the General Services Administration (GSA) and Veterans
Affairs (VA) used ESPCs the most during the 5-year period, undertaking
30 and 24 projects, respectively. Together these agencies account for
about 21 percent of projects. Both GSA and VA officials told us that
adequate upfront funding for their energy projects has been difficult
to obtain in recent years. At the same time, they have faced increasing
backlogs of these projects in their capital management plans.
Consequently, the agencies have moved toward using more ESPCs to meet
mandated energy reduction goals and to make badly needed upgrades to
aging and inefficient equipment.
DOE's departmental ESPC projects represent about 4 percent of the total
projects undertaken over the period, valued at about $38 million. DOE
officials told us that the agency has mainly used ESPCs since 1999 to
supplement limitations in upfront funding for energy-efficiency
projects. After GSA and VA, among civilian agencies, DOE has a high
percentage of federal facility square footage; however, the agency has
not been among the largest users of ESPCs for two reasons. First, the
agency has found it relatively easy to meet its mandated energy
reduction goals because it has in recent years closed a number of its
facilities, such as those producing nuclear weapons, that were no
longer needed. Furthermore, many DOE facilities have negotiated low
utility rates or are in regions of the country where utility rates are
relatively low. This makes developing an ESPC for which savings will
cover costs difficult, because the low utility rates hold down the
amounts that can be saved with the energy-efficiency improvements. As a
result, DOE's major goal in using ESPCs, we were told, has been for
energy infrastructure improvement.
Of the seven agencies in our review, the Department of Justice
(Justice) used ESPCs the least, undertaking only two ESPCs totaling
about $43 million in costs. According to Justice officials, because
many of their facilities are prisons, security concerns can make
undertaking energy-efficiency projects on existing buildings difficult.
Nonetheless, the agency undertook two ESPC projects in 2003, one each
under the Bureau of Prisons and the Federal Bureau of Investigation.
According to the officials, the agency undertook the ESPCs because it
was concerned about meeting the mandated energy reductions, and upfront
funding for energy-efficiency projects was decreasing. In addition, for
one of the projects, the agency saw a chance to use an ESPC to
accomplish environmental goals established by Executive Order 13123,
such as making more use of renewable energy. In that case, the agency
undertook a project at a California prison site. After the California
energy crises in 2000 and 2001, the agency sought to decrease its
dependence on the electricity grid, so the project included
installation of renewable energy sources, including a wind turbine and
photovoltaic panel, which furthered the agency's energy security
interests as well as helping it meet its energy reduction and
environmental goals.
Finally, five agencies--the Departments of Commerce and State, the
Environmental Protection Agency, the John F. Kennedy Center for the
Performing Arts, and the National Gallery of Art--that we did not
contact for additional information for our review each undertook one
project during the 5-year period. We did not receive cost data for the
Kennedy Center. The other four totaled about $35 million in costs.
Agencies Increasingly Used FEMP's Services:
Figure 2 shows agency use of the contracting centers at the Air Force,
the U.S. Army Corps of Engineers' Huntsville Center, the Navy, and FEMP
for fiscal years 1999 through 2003. With the exception of 2002, the
data show that, over the period, agencies increasingly used FEMP's
contracting center more relative to the other agencies' centers.
Although there was an average of 51 ESPC financed projects undertaken
each year, there was a 54 percent increase in projects awarded from
2002 (37 projects) to 2003 (57 projects). According to agency
officials, this increase was largely because agencies put significant
effort into awarding ESPC financed projects, anticipating the sunset of
the legislation on October 1, 2003. This was particularly true for
ESPCs done through FEMP's contracting center. As discussed previously,
on October 28, 2004, ESPC authority was renewed through fiscal year
2006.
Figure 2: Agencies' Use of Contracting Centers for ESPCs Undertaken in
Fiscal Years 1999 through 2003:
[See PDF for image]
[End of figure]
Agencies Expect ESPC-Financed Projects to Result in Energy Savings As
Well As Other Benefits:
ESPCs awarded by federal agencies to finance energy-efficiency
improvements are expected to achieve energy savings worth at least $2.5
billion during the life of their contracts. Agencies estimate that they
are annually reducing energy use by at least 9 million MMBTUs.[Footnote
11] Some savings are also expected to continue after the ESPCs end.
Agencies receive other benefits through ESPCs as well, such as
environmental improvements and better mission capability resulting from
replacing aging infrastructure with more reliable equipment. Although
these benefits could be achieved through up-front appropriations at a
lower cost, this funding has often not been available on a timely
basis. Furthermore, ESPCs provide additional benefits not typically
associated with investments purchased through upfront appropriations,
such as shifting some of the performance risk of the equipment to the
energy services companies and allowing agencies to more easily combine
multiple energy-efficiency improvements into an integrated package.
ESPC-Financed Projects Have Reduced Energy Use and Agencies Expect to
Achieve Energy Savings Worth At Least $2.5 Billion:
Over the life of the ESPC financed projects included in our review,
agencies expect to achieve energy savings worth at least $2.5 billion
and amounting to over 9 million MMBTUs, as shown in table 2. These
estimated savings are likely to be understated because the agencies did
not report financial savings for 17 projects and energy savings for 45
projects. The military services account for about 64 percent of the
financial savings and about 71 percent of energy savings for the ESPCs
awarded during the 5 years. Savings at some specific locations are
expected to be substantial. For example, reported data show that total
estimated savings at each of three military installations will exceed
$100 million, ranging from $117 to $138 million for a total of $378
million. The ESPC at Elmendorf Air Force Base in Alaska is expected to
reduce the base's energy consumption by more than 1 million MMBTUs per
year, which are valued at $123 million for the 22-year contract term.
According to the base energy manager, this is the largest ESPC ever
awarded by the Air Force.
Table 2: Energy and Financial Savings for ESPC Projects Undertaken in
Fiscal Years 1999 through 2003:
Agency: Department of Defense: Air Force;
Number of projects with financial savings data: 63;
Estimated cumulative financial savings over life of contract:
$750,533,703;
Percentage of financial savings for all contracts: 30.0%;
Number of projects with estimated energy savings data: 60;
Estimated annual energy savings in MMBTUs: $3,448,867;
Percentage of estimated energy savings for all contracts: 37.9%.
Agency: Department of Defense: Army;
Number of projects with financial savings data: 44;
Estimated cumulative financial savings over life of contract:
$334,403,496;
Percentage of financial savings for all contracts: 26.7%;
Number of projects with estimated energy savings data: 34;
Estimated annual energy savings in MMBTUs: $383,674;
Percentage of estimated energy savings for all contracts: 20.5%.
Agency: Department of Defense: Navy;
Number of projects with financial savings data: 35;
Estimated cumulative financial savings over life of contract:
$667,164,060;
Percentage of financial savings for all contracts: 13.4%;
Number of projects with estimated energy savings data: 38;
Estimated annual energy savings in MMBTUs: $1,866,509;
Percentage of estimated energy savings for all contracts: 4.2%.
Agency: Department of Defense: Other DOD agencies;
Number of projects with financial savings data: 3;
Estimated cumulative financial savings over life of contract:
$21,089,559;
Percentage of financial savings for all contracts: 0.8%;
Number of projects with estimated energy savings data: 3;
Estimated annual energy savings in MMBTUs: $89,065;
Percentage of estimated energy savings for all contracts: 1.0%.
Subtotal for Defense agencies;
Number of projects with financial savings data: 145;
Estimated cumulative financial savings over life of contract:
$1,773,190,818;
Percentage of financial savings for all contracts: 70.9%;
Number of projects with estimated energy savings data: 135;
Estimated annual energy savings in MMBTUs: $5,788,115;
Percentage of estimated energy savings for all contracts: 63.7%.
Agency: General Services Administration;
Number of projects with financial savings data: 30;
Estimated cumulative financial savings over life of contract:
$233,000,518;
Percentage of financial savings for all contracts: 9.3%;
Number of projects with estimated energy savings data: 30;
Estimated annual energy savings in MMBTUs: $697,413;
Percentage of estimated energy savings for all contracts: 7.7%.
Agency: Department of Veterans Affairs;
Number of projects with financial savings data: 16;
Estimated cumulative financial savings over life of contract:
$154,879,631;
Percentage of financial savings for all contracts: 6.2%;
Number of projects with estimated energy savings data: 13;
Estimated annual energy savings in MMBTUs: $1,887,625;
Percentage of estimated energy savings for all contracts: 20.8%.
Agency: Department of Energy;
Number of projects with financial savings data: 10;
Estimated cumulative financial savings over life of contract:
$38,099,795;
Percentage of financial savings for all contracts: 1.5%;
Number of projects with estimated energy savings data: 10;
Estimated annual energy savings in MMBTUs: $271,403;
Percentage of estimated energy savings for all contracts: 3.0%.
Agency: Department of Transportation;
Number of projects with financial savings data: 8;
Estimated cumulative financial savings over life of contract:
$57,161,461;
Percentage of financial savings for all contracts: 2.3%;
Number of projects with estimated energy savings data: 3;
Estimated annual energy savings in MMBTUs: $49,233;
Percentage of estimated energy savings for all contracts: 0.5%.
Agency: Department of Interior;
Number of projects with financial savings data: 5;
Estimated cumulative financial savings over life of contract:
$26,572,468;
Percentage of financial savings for all contracts: 1.1%;
Number of projects with estimated energy savings data: 5;
Estimated annual energy savings in MMBTUs: $75,292;
Percentage of estimated energy savings for all contracts: 0.8%.
Agency: Department of Labor;
Number of projects with financial savings data: 4;
Estimated cumulative financial savings over life of contract:
$11,602,330;
Percentage of financial savings for all contracts: 0.5%;
Number of projects with estimated energy savings data: 2;
Estimated annual energy savings in MMBTUs: $20,489;
Percentage of estimated energy savings for all contracts: 0.2%.
Agency: National Aeronautics and Space Administration;
Number of projects with financial savings data: 4;
Estimated cumulative financial savings over life of contract:
$54,567,011;
Percentage of financial savings for all contracts: 2.2%;
Number of projects with estimated energy savings data: 3;
Estimated annual energy savings in MMBTUs: $167,833;
Percentage of estimated energy savings for all contracts: 1.8%.
Agency: Department of Health and Human Services;
Number of projects with financial savings data: 3;
Estimated cumulative financial savings over life of contract:
$20,033,135;
Percentage of financial savings for all contracts: 0.8%;
Number of projects with estimated energy savings data: 1;
Estimated annual energy savings in MMBTUs: $20,144;
Percentage of estimated energy savings for all contracts: 0.2%.
Agency: National Archives and Records Administration;
Number of projects with financial savings data: 3;
Estimated cumulative financial savings over life of contract:
$13,636,305;
Percentage of financial savings for all contracts: 0.5%;
Number of projects with estimated energy savings data: 1;
Estimated annual energy savings in MMBTUs: $4,962;
Percentage of estimated energy savings for all contracts: 0.1%.
Agency: Department of Agriculture;
Number of projects with financial savings data: 3;
Estimated cumulative financial savings over life of contract:
$39,267,423;
Percentage of financial savings for all contracts: 1.6%;
Number of projects with estimated energy savings data: 2;
Estimated annual energy savings in MMBTUs: $32,329;
Percentage of estimated energy savings for all contracts: 0.4%.
Agency: Department of Justice;
Number of projects with financial savings data: 2;
Estimated cumulative financial savings over life of contract:
$43,008,699;
Percentage of financial savings for all contracts: 1.7%;
Number of projects with estimated energy savings data: 2;
Estimated annual energy savings in MMBTUs: $26,994;
Percentage of estimated energy savings for all contracts: 0.3%.
Agency: Department of Commerce;
Number of projects with financial savings data: 1;
Estimated cumulative financial savings over life of contract:
$8,689,649;
Percentage of financial savings for all contracts: 0.3%;
Number of projects with estimated energy savings data: 0[A];
Estimated annual energy savings in MMBTUs: NA[A];
Percentage of estimated energy savings for all contracts: --.
Agency: Environmental Protection Agency;
Number of projects with financial savings data: 1;
Estimated cumulative financial savings over life of contract:
$8,966,682;
Percentage of financial savings for all contracts: 0.4%;
Number of projects with estimated energy savings data: 1;
Estimated annual energy savings in MMBTUs: $24,900;
Percentage of estimated energy savings for all contracts: 0.3%.
Agency: Kennedy Center for the Performing Arts;
Number of projects with financial savings data: 0[A];
Estimated cumulative financial savings over life of contract: NA[A];
Percentage of financial savings for all contracts: --;
Number of projects with estimated energy savings data: 0[A];
Estimated annual energy savings in MMBTUs: NA[A];
Percentage of estimated energy savings for all contracts: --.
Agency: National Gallery of Art;
Number of projects with financial savings data: 1;
Estimated cumulative financial savings over life of contract:
$5,184,179;
Percentage of financial savings for all contracts: 0.2%;
Number of projects with estimated energy savings data: 1;
Estimated annual energy savings in MMBTUs: $22,796;
Percentage of estimated energy savings for all contracts: 0.3%.
Agency: Department of State;
Number of projects with financial savings data: 1;
Estimated cumulative financial savings over life of contract:
$12,847,609;
Percentage of financial savings for all contracts: 0.5%;
Number of projects with estimated energy savings data: 0[A];
Estimated annual energy savings in MMBTUs: NA[A];
Percentage of estimated energy savings for all contracts: --.
Agency: Total;
Number of projects with financial savings data: 237;
Estimated cumulative financial savings over life of contract:
$2,500,707,713[B];
Number of projects with estimated energy savings data: 209;
Estimated annual energy savings in MMBTUs: $9,089,527[C].
Source: GAO's analysis of ESPC data reported by the four ESPC
contracting centers and seven individual agencies included in GAO's
review.
[A] We did not receive financial savings data for the Kennedy Center's
project. We did not receive energy savings data for the projects of the
Departments of Commerce or State, or for the Kennedy Center's project.
[B] Agencies reported financial savings data for 237 of the 254
projects;
consequently, the total financial savings reported here understates
total savings by the unknown amount of the savings of the 17 projects
for which we did not receive savings data.
[C] Agencies reported estimated energy savings to date for only 209 of
the 254 projects, understating estimated savings achieved to date.
[End of table]
The installation of energy efficient equipment has already resulted in
some energy savings and is expected to result in further savings, lower
utility bills, and reduced operations and maintenance expenses. Over
the 5-year period, the agencies estimate they reduced their energy use
by at least 9 million MMBTUs annually.[Footnote 12] According to agency
officials, these reductions have assisted, and will continue to assist,
agencies in meeting their mandated goals for reducing BTUs of energy
used. For example, agencies reported that they exceeded by 4 percent
their goal for fiscal year 2000--a 20 percent reduction in BTUs of
energy consumed relative to their fiscal year 1985 usage. Agencies
report their progress in meeting the goals by each agency as a whole
and do not indicate the portion that could be attributed to the
agency's ESPCs. However, officials we interviewed representing most of
the agencies believe they would not have met the 2000 goal without the
contracts. Furthermore, they expect their ability to meet the remaining
goals--30 percent reduction by fiscal year 2005 and 35 percent by
fiscal year 2010--depends largely on being able to use ESPCs to finance
energy efficiency improvements. DOD officials told us that in recent
years ESPCs have accounted for over half of DOD agencies' annual energy
savings. Furthermore, they believe that DOD will have significant
difficulty in achieving the 2005 energy reduction goal because a number
of ESPC projects planned for fiscal years 2004 and early 2005 were not
undertaken because authority for ESPCs was suspended during that time.
DOE is an exception--according to DOE officials, the agency has already
met its goals for 2005 and 2010, largely because it has closed
facilities that produced nuclear weapons, thereby significantly
reducing the energy consumed by the agency.
Agencies may also benefit from substantial energy and financial savings
once the contracts are paid for. Energy and related financial savings
should continue beyond a project's payback period through annual energy
saving, as well as through reduced operations and maintenance costs.
Currently, financial savings retained by agencies are small because
most agencies use their savings to pay off their contracts with the
energy services companies as quickly as possible, thereby reducing debt
more rapidly and saving interest costs to the government. For example,
GSA, which currently pays energy services companies 98 percent of the
agency's annual financial savings from ESPCs, estimates that it will
save about $16 million annually from its 30 projects after it has
repaid the companies. Similarly, data provided by the Air Force and the
Navy show expected annual financial savings for those agencies of
almost $45 and $40 million, respectively, once the contracts are paid
for, and Army and Marine Corps projects also expect to garner financial
savings past the contract terms. In another instance, officials at Fort
Bragg told us that they would continue to obtain lower utility rates,
which were negotiated as part of the ESPC by the energy services
company, even after the contract period.
ESPC Financed Projects Offer Additional Benefits:
In addition to energy savings and lower overall utility costs, ESPC-
financed projects, like projects funded with upfront appropriations,
can provide agencies with environmental benefits through installation
of newer, cleaner technologies. The ESPC financed projects in our
review, we were told, are assisting the agencies in eliminating
environmental hazards, reducing outdoor air pollution, and improving
indoor air quality. The project at Elmendorf Air Force Base allowed the
Air Force to replace old steam plants insulated with asbestos, a known
environmental hazard. In another instance, in the ESPC at Portsmouth
Naval Shipyard, in Maine, the Navy installed a cogeneration unit for
generating power. As a result, the shipyard eliminated its reliance on
bunker fuel oil and is producing significantly fewer greenhouse gas
emissions.
ESPC-financed projects also allow agencies to replace aging
infrastructure without having to obtain upfront appropriations.
Officials at six of the seven agencies in our review noted the
importance of using ESPCs to replace aging infrastructure. The
upgrades, the officials told us, improved the agencies' abilities to
carry out their primary missions and provide a more comfortable work
environment for employees. At Elmendorf Air Force Base, for example,
the energy manager told us the base was able to replace a 50-year-old
cogeneration power plant with a new, much more efficient decentralized
natural gas system. Navy officials told us they faced a similar
situation with a power plant built in 1945, which was failing at their
Portsmouth facility. The backlog of maintenance work on the power plant
was continuing to increase. Due to the geographic location in Maine,
with severe winter weather and the continual repairs needed on the old
power plant, an upgrade was essential to support the nuclear submarines
at the shipyard. The officials noted each day's loss of power cost the
shipyard $1.5 million. By using an ESPC to replace the power plant, the
base was able to eliminate eight full-time staff positions (saving
about $448,000 annually) because the new power plant is easier to
operate and does not require frequent emergency maintenance, as the old
one did.
Upfront Funds Could Provide These Benefits But Are Often Not Available
on a Timely Basis:
Although the benefits from ESPC financed projects discussed above could
be achieved using upfront funding, agencies have found that sufficient
amounts of such funding were generally not available--making it
necessary for the agencies to use ESPCs to supplement the upfront
funding they receive in order to obtain these benefits. A study by Oak
Ridge National Laboratory that compared ESPCs with upfront funded
projects concluded that when sufficient upfront funds are not
available, the most expensive choice may be to do nothing, allowing
inefficient equipment to remain in service and wasting funds on
unnecessary energy use and emergency repairs and replacement. Officials
at six of the seven agencies we reviewed--the Air Force, the Army, GSA,
Justice, the Navy, and VA--told us that, in spite of attempts to obtain
upfront appropriations for energy projects, adequate amounts of such
funds were generally not available.[Footnote 13] For example:
* GSA officials said the agency received no funds for any energy-
efficiency work included in their capital management plans for fiscal
years 2002 and 2003, although they requested $32 million and $8
million, respectively. As a result, they used other financing options,
such as ESPCs.
* Army officials at Aberdeen Proving Ground noted that failing heating
and air conditioning systems in the base's family housing had become a
fire hazard and were too expensive to maintain. These officials said
they repeatedly attempted to obtain upfront appropriations for the
upgrades but, being unsuccessful, negotiated an ESPC.
* Navy officials told us their planned investments for energy-
efficiency projects range from $100 million to $150 million annually in
order to meet their BTU reduction goals. However, because the Congress
will only provide $50 million for all of DOD, and the Navy only gets
about $15 million of that amount--or none, as in fiscal year 2000--the
Navy questions the usefulness of requesting the funds while foregoing
making energy-efficiency improvements.
Furthermore, officials at both the VA and the Navy told us that even
when they can obtain upfront funds, the project typically takes 4 to 5
years to obtain approval and be completed, compared with about 2 years
for an ESPC. Navy officials pointed out that up-front-funded projects
take longer because projects must be submitted 2 years in advance of
the budget year; in addition, they said that most projects are not
fully funded and have to be resubmitted in subsequent years. According
to these and other agency officials, their agencies were achieving
savings through lower utility bills and reduced operation and
maintenance costs during the extra years that equipment installed under
ESPCs was operational. DOE's Oak Ridge National Laboratory reported in
March 2003 that, on average, upfront funded projects that were approved
took 63 months to award, design, and construct, compared with 27 months
for ESPCs.
In a recent report, GAO performed a case study analysis of six ESPC
projects and compared the actual costs of financing the energy-
efficiency improvements incurred in the ESPCs with an estimate of what
the financial costs would have been had the improvements been paid for
through timely upfront appropriations.[Footnote 14] We found that the
financial cost to the government of private financing was significantly
higher than the financial costs of upfront appropriations and also that
monitoring and verification costs--included with ESPCs but typically
not included in projects paid for with up-front appropriations--also
added to the cost difference between private versus upfront financing.
Specifically, our case studies found that ESPC financed projects
increased the government's cost of acquiring the energy-efficiency
improvements by 8 to 56 percent compared to timely, full, upfront
appropriations. Our analysis assumed that the energy savings and other
benefits associated with the energy-efficiency improvements were
independent of how they were financed.
While our earlier work found higher financing costs associated with the
use of ESPCs, a recent study of ESPCs, undertaken by the Lawrence
Berkeley National Laboratory, analyzed both the costs and government
benefits of 109 ESPCs and compared the net benefits of these projects
with the net benefits under several alternative scenarios involving
direct, upfront appropriations.[Footnote 15] The study assumed that the
performance of the equipment installed was dependent to varying degrees
on which financing method was used. Specifically, they evaluated
scenarios in which energy savings from equipment installed using
upfront appropriations decay over time (1 or 2 percent per year)
because projects funded up-front typically do not include the same
level of monitoring and verification to ensure sustained performance of
the equipment. The study concluded that "delays of more than one year
in obtaining congressional appropriations result in reduced net
benefits relative to ESPC-financed projects." Although we did not
independently verify all of the study's assumptions, data, and results,
we did review several studies of energy audits that the Lawrence
Berkeley authors used to support their assumption regarding savings
decay to verify their assumption that energy systems' savings decay in
the absence of proper monitoring and verification. In discussions with
experts on the performance of energy equipment, we were told that many
of the energy-efficiency improvements require careful monitoring and
verification to ensure that they perform up to their specifications and
that, without such monitoring and verification, energy savings would
indeed decay over time, in some cases very quickly; however, we found
that agencies often lack sufficient expertise in monitoring and
verifying performance of energy equipment on their own. Thus, although
we could not conclude on the actual extent of savings decay for upfront-
funded projects, there is evidence that savings decay occurs. While it
is likely that agencies could purchase monitoring and verification
services from the private sector in the case of equipment paid for with
up-front appropriations, they have typically not done so in the past
and the additional cost of doing so is unknown. We cannot conclude
definitively the extent to which decreased savings decay and other
benefits from ESPC-financed projects may offset the significant savings
achieved from using upfront funding that we found previously in six
case studies.
Some ESPC Benefits Not Readily Available With Up-front Funding:
ESPCs also provide two benefits not typically associated with
investments purchased through upfront appropriations: (1) some
performance risk is shifted from the government to the energy services
companies and (2) agencies find it easier to combine multiple energy-
efficiency improvements into an integrated package. First, as noted by
agency officials and industry experts, because ESPCs require energy
services companies to guarantee equipment performance over the lifetime
of the contract, which in turn yields energy savings, agencies benefit
as these risks are shifted from the agencies to the companies. As part
of these guarantees, energy services companies are ultimately
responsible for insuring that adequate operations and maintenance are
conducted and for any repairing and replacing equipment if it fails.
These requirements reduce the risks from possible faulty engineering,
poor equipment installation, or equipment failure. For projects funded
with upfront appropriations, energy services companies are generally
only responsible for equipment risks during the warranty period, which
typically is shorter than an ESPC's contract guarantee. While it may be
possible to supplement upfront-funded projects with additional warranty
or performance coverage, agency officials told us that this would add
costs and typically is not done. According to FEMP ESPC program
managers, ESPCs create an incentive for energy services companies to
develop highly efficient improvements and maintain the equipment so
that it is in peak operating condition. This incentive occurs because
the companies' compensation is directly linked to the savings achieved
through their work. Officials from both the Navy and the Army told us
that because the value of energy savings must cover the annual payments
to the energy services company, the company bears the risk when it
encounters problems. For any problems related to the performance of the
equipment that are defined as company risks and that were not
explicitly determined to be an agency risk, the agency can withhold
future payments from the energy services company until the problem has
been corrected. Officials at Fort Bragg told us that they withheld
payment from a contractor for a short period until an equipment problem
was fixed on their ESPC. In many cases, the agency, rather than the
energy services company, performs the operations and maintenance. An
official from the DOE departmental energy management program, however,
noted that it is not altogether clear when a piece of equipment fails,
whether payment to the energy services company can be stopped directly
or whether a review of maintenance records, for example must be
performed to determine if the agency or the company is responsible for
the failure. Typically, when problems occur for equipment purchased
with up-front funds, if the warranty period is over, the agency is
responsible for fixing or replacing the equipment at its own expense.
Second, with ESPC-financed projects agencies find it easier to bundle a
number of energy-efficiency improvements so they can function as an
integrated system. In this way, one energy services company is
responsible for the guaranteed performance of all the equipment. Agency
officials told us that, due to tight budgets, upfront funding is
limited even when it is available and the agency can typically install
only a few of the necessary energy-efficiency improvements. They said
it may be years before the agency receives authority to fund additional
projects and, due to the competition requirements of federal
procurement practices, it is quite possible a different energy services
company would be selected to install them. Besides potential problems
of integrating the controls for system components installed by two
different companies, some savings that would have been obtained if all
energy-efficiency improvements had been installed without delay at one
time are lost. Energy savings can be achieved more quickly through an
integrated approach than implementing efficiency improvements on a
piecemeal basis. The lack of a performance guarantee over the life of
the equipment purchased with up-front funding and the uncertain,
episodic nature of upfront funding can make those projects more risky
and less capable of generating an integrated approach to energy
management for new and existing equipment.
Agencies Believe Financial Savings Cover Costs, but Whether Savings
Actually Do So Is Uncertain:
Agencies generally believe that ESPCs' financial savings cover the
costs because they design their contracts to cover costs and because
they must obtain verification reports from the energy services
companies that confirm this point or take steps to correct shortfalls
in savings. They cited examples of projects that realized savings in
excess of costs and provided data on verified savings for most of their
projects. However, the data provided were insufficient to conclude
whether savings covered costs of the projects in our review.
Furthermore, our work, agency audits of ESPCs, and agencies' differing
interpretations about the components of costs that must be covered by
savings caused us to question whether savings consistently cover costs.
FEMP officials recognize the difficulty in ensuring that actual savings
cover costs and have formed a special working group to address
uncertainties regarding savings.
Agencies Generally Believe That Savings Cover Costs Because They Are
Designed to Do So and Because Companies Must Verify Savings, but
Uncertainties Arise from Limitations of Available Data:
In response to statutory requirements, agencies design ESPCs so that
savings are sufficient to cover costs. In addition, the agencies
refrain from committing themselves to ESPCs when they determine
beforehand that savings will be inadequate or when the payback will
exceed their preferred time frames for the contracts. For example, a
DOE official cited several departmental projects that advanced to the
final proposal stage but that the agency dropped because the economics
for the projects were either poor or the agency did not agree with the
savings projections. For one project, the low utility rate (which
reduced the amount of savings that could be accrued) and the high cost
of performing the work in an area with access controlled for security
reasons forced the project's abandonment. In another case, the agency
did not agree with the company's projected savings and believed that
very little savings would be achieved. FEMP officials noted a
requirement for performing a life-cycle cost analysis of individual
energy-efficiency improvements, which are then bundled to ensure that
the project's overall savings cover costs.
Another reason for agencies' general confidence regarding savings is
that energy services companies are required to submit annual
measurement and verification reports confirming the savings and, in
case of a shortfall, take corrective steps to recoup the savings. These
annual reports provide the specific figures on which agencies base
their payments to the energy services companies. In some cases, the
reports are updated quarterly to give the officials monitoring the
project more current data on the performance of equipment, enabling
them to spot shortfalls in savings and have the energy services company
correct them quickly. In addition, agency officials cited projects that
realized savings in excess of costs. For example, the ESPC at Fairchild
Air Force Base in Washington State has garnered about $180,000 more per
year than it cost. The extra savings have resulted from the equipment
operating more efficiently than estimated and actual utility costs that
were higher than estimated in the contract.
We asked the seven agencies in our review to provide data on verified
savings for each of their projects. In many cases, the projects have
not entered their performance periods, so verified savings data are not
yet available. To approximate the number of projects that should have
verified savings available, we looked at the 111 projects (about 44
percent of the projects) that had been under way for 3 years or more
and could reasonably be expected to have at least 1 year of verified
savings to report.[Footnote 16] In this regard, the seven agencies
reported verified savings for most of the 111 projects, but they did
not provide cost data that could be compared with the annual verified
savings. We did not take steps to obtain the data, which are contained
in files at projects located across the country. Thus, we could not
conclude from the data provided to us that verified savings were, in
fact, covering the costs of these projects. Furthermore, while federal
officials are expected to accompany energy services company officials
when the data are being gathered for the reports to provide an extra
level of confidence in the data's validity, FEMP officials cautioned
that this added check may not be happening as often as it should.
An additional limitation of the data is that the measurement and
verification process relies not only on actual measurements but on
estimates as well. As will be discussed more fully later, estimates may
be used extensively in this process, introducing the possibility of
incorrect assumptions and errors in the calculations. Moreover, the
process evaluates not only the performance of the equipment, but
additional factors such as the cost of energy that affect actual
savings.
Agency Officials and Audits Cite Projects for Which Savings May Not
Cover Costs:
Agencies cited specific projects in which the savings have not covered
costs. According to a DOE departmental official, savings for 4 of its
10 projects have fallen short of costs because of unexpected problems.
DOE's analysis has shown that, in three of the four instances where
savings are inadequate, the shortfall has resulted from unpredictable
mission changes in the use of the facilities. For example, in one of
these cases, the discovery of beryllium contamination forced the
closure of some of the buildings involved in the contract. Reductions
in electricity consumption accounted for the fourth case. In this
instance, in 7 out of 12 months each year, DOE is not meeting the
minimum required demand cost that was projected and has to pay for the
electrical demand it does not use. As a result, for 7 months of the
year, the new equipment associated with the project is not providing
any electrical demand savings, so the overall cost savings of the
equipment is less than expected. In general, according to the DOE
official, it is extremely difficult to accurately predict all the
variables that affect energy savings over the 10 to 15 year ESPC
contract term, so agencies have to bear some of the risk of inaccurate
assumptions at the outset.
While most agencies have not audited their ESPCs, the Army and Air
Force audits of ESPCs have found several instances in which savings may
not have covered costs. For example, a 2002 Army audit of a 1999
project covering five locations found the Army could pay about $96
million that may not be covered by savings over the 18-year life of the
project because savings that the Army agreed to were overestimated.
First, the report found the baselines were incorrect because the
contractor inflated labor costs for the operation and maintenance
baseline by $66 million over the life of the project. Second, it found
the contractor also overstated the baselines for electrical consumption
and water conservation by more than $30 million over the life of the
project. This inflation of both baselines occurred, according to the
report, because the agency relied heavily on the contractor to prepare
them. Other major contributing factors, the report stated, appeared to
be insufficient time to review contract proposals and a desire to award
the contract and pay the contractor prematurely. As a consequence, the
report concluded, the agency could pay for nonexistent savings over the
term of the contract. As another example of questionable estimates, the
contractor for an Air Force ESPC increased the original consumption
baseline by over 11,000 kilowatts with no indication that Air Force
officials questioned this adjustment.
Poor documentation adds to the problem of ensuring that savings cover
costs. For example, energy services companies at 8 locations reviewed
in a 2003 Air Force audit reported savings of $6.7 million associated
with $78 million in ESPC investments, but civil engineering officials
could not provide support that they reviewed or validated these
numbers. The auditors projected the results for the sample of 8
locations to the 36 included in their review and concluded that the
lack of documentation made it impossible to assess the savings that the
agency will receive for about $600 million in costs for energy
efficient equipment. As noted in the report, this condition occurred
because Air Force guidelines did not specifically require maintenance
of baseline supporting documentation, a methodology for savings
computation, or validation of cost savings. In response to
recommendations in the report, Air Force officials stated that they
were taking steps to correct these problems. However, we could not
determine the status of the payments for either the Army or the Air
Force projects in these audits because the audit documentation did not
indicate whether payments were made despite the potential savings
shortfalls.
Difficulties in Calculating Savings, Ensuring Adequate Equipment
Maintenance, and Verifying Savings Also Contribute to Uncertainty About
Savings Covering Costs:
Accurately calculating financial savings is fundamentally difficult for
agency officials to do. Major components of financial savings--baseline
energy consumption, the consumption once the energy efficiency
improvements have been installed, and the cost of energy associated
with both the baseline and the later consumption--are partly
stipulated, or estimated, rather than actually measured. In this
regard, striking the "right" balance between stipulation (which is less
costly but also less accurate) and measurement (which is more costly
but also more accurate) is a challenge for agencies. To the extent that
stipulation is used in lieu of actual measurement, according to DOE
officials, savings calculations may be based on inadequate data or
incorrect assumptions, which contribute to uncertainties about the
actual savings.
Agency officials commented on how difficult it is to identify the
consumption and cost of energy, which forms the basic equation
(consumption times cost) that establishes the energy-related baseline
and the future financial savings. For example, contractual arrangements
with regard to consumption can affect the savings. In the case of "take-
or-pay" contracts, agencies may have to pay for a certain amount of
projected minimum demand even if they do not actually use it. As noted
earlier, this situation has occurred in one of DOE's ESPCs and has
reduced its savings to the point where savings will not cover payments
under the contract. The cost of energy, as shown in utility rates, can
also be difficult to determine. Given their potential complexity, it is
easy for energy services companies or federal officials to provide
incorrect utility rates, which in turn will have important consequences
for the level of savings. Rates need not only to be determined
accurately to establish the baseline but also projected as accurately
as possible into the future to determine eventual savings. These rates
are projected 10 years into the future in ESPC contracts, according to
agency officials, but the actual rates can change at any point during
the contract period. Anomalies due to weather, fluctuations in energy
prices, or other influences can affect the rates. In general, if
utility rates go down or increase more slowly than projected, then the
actual savings will not materialize. In essence, these rates are
stipulated, and the agency bears the risk.
Ensuring that the equipment installed under ESPCs has been adequately
operated and maintained is essential for agencies and can affect
whether savings cover costs. According to an expert who has worked on
Army and Air Force ESPCs, calculations of guaranteed savings assume a
high level of operation and maintenance activities, but rapid loss of
energy efficiency if equipment output is not maintained can jeopardize
savings. He said that typically a 10 to 20 percent degradation in
savings occurs annually on a given ESPC in the event of improper
operation and maintenance. He cited the virtual ruin of a chiller (for
air conditioning) in only 3 years as a result of improper maintenance.
Similarly, measurement and verification are critical in the longer term
for achieving guaranteed savings. In determining these savings,
however, energy services companies blend the use of measurement with
stipulations in their reporting process. The expert who has worked on
Army and Air Force ESPCs noted that, despite the importance of using
measurement in addition to stipulation, there are numerous barriers to
performing actual measurements. These barriers include a lack of
appropriate metered equipment and reluctance by energy services
companies to perform measurement and verification because it might work
against their interests. An Air Force official observed that in his
experience energy services companies prefer stipulation and have
limited the number of actual measurement for projects as much as
possible. A report for FEMP examining seven ESPCs noted the reliance on
stipulation in the projects' measurement and verification plans. The
primary reason for using this method was its low cost; however, the
report concluded that the large use of stipulated savings left the
agencies at risk of unrealized savings. To help agencies use
stipulation correctly, in 2000, FEMP issued supplemental guidance on
measurement and verification that specifies that some stipulation may
be used in lieu of measurement when there is a reasonable degree of
certainty about the stipulated values, their contribution to overall
uncertainty is small, and they are based on reliable and documented
sources of information.
A Special Working Group Has Been Formed to Address These Uncertainties:
DOD and FEMP recently established a special working group to address
the uncertainties about actual savings. The Energy Savings Discrepancy
Resolution Working Group, formed in late 2004, is developing approaches
to compare projected and actual savings and to explain any deviations.
Because it has just commenced these studies, the group has obtained
preliminary results regarding only one project. The group found that
the projected savings for this project were diminished by
consolidations of agency missions, expanded construction, and new
demands for energy that had nothing to do with the ESPC. Officials said
they chose this project because it came with a well-developed baseline,
which is often not available for careful evaluations of this sort.
Agencies' Differing Interpretations of the Components of Costs That
Must Be Covered by Savings under the ESPC Legislation Add to
Uncertainty That Savings Cover Costs:
The statute governing ESPCs provides that "aggregate annual payments"
under an ESPC may not exceed the amount the agency would have paid for
energy without such a contract.[Footnote 17] However, agencies differ
in their interpretation of this statute. In practice, it remains
uncertain whether contract payments may be made only from utility
savings resulting from the ESPC or from funds already earmarked for
equipment replacement and other sources to reduce the length of the
contract and finance charges. Within DOE, for example, disagreement
about the interpretation of the statute is shown by a FEMP guide on the
one hand and an opinion provided by DOE's Office of General Counsel on
the other.
According to a DOE departmental official, the main source of guidance
for agencies regarding lump-sum payments is FEMP's "Practical Guide to
Savings and Payments in Super ESPC Delivery Orders," issued in January
2003. Section 3.6 explains that agencies may use existing funds that
would otherwise be used for operation and maintenance and repair and
replacement projects (1) to increase ESPC project investment and
include a more comprehensive set of energy-efficiency improvements than
would be possible otherwise, or (2) to lower the financed amount and
shorten the term, thereby reducing interest costs over the term. The
section adds that one-time energy-related cost savings are often
applied as a preperformance-period payment to the energy services
company. However, such payments may also be scheduled as payments
during the contract performance period.
Similarly, section 4.4.1 of the FEMP guide states that if appropriated
funds are available for general maintenance, operation, repair, and
replacement of energy-consuming systems (as opposed to being earmarked
for a specific project via a capital line item), they may be used for
payments to the energy services company. Adding that one-time savings
and payments from general operation and maintenance and repair and
replacement accounts merit further clarification, the discussion notes
that the intent of the ESPC statute is to permit the use of funds
available in general operation and maintenance and repair and
replacement accounts that could be used for energy-related purposes for
preperformance-period ESPC payments. It also notes that one-time
payments scheduled during the performance period may not exceed the
amount planned and budgeted in the general operation and maintenance
and repair and replacement accounts for the avoided project.
Despite the FEMP guide's attempt to clarify allowable sources of
funding for ESPC projects, some uncertainties remain. Even within DOE,
for example, the General Counsel's office expressed an opinion at
variance with the FEMP guide. A memo from the General Counsel's office
to the assistant secretary for Energy Efficiency and Renewable Energy
in August 2000 stated that, in the case of buyouts and buydowns in
super ESPC projects, energy cost savings must exceed payments in each
of the contract years. The memo added that, because ESPCs are
performance contracts, payment is conditional upon the realization of
energy cost savings. The memo stated that buy downs are in effect
prepayments which, in any contract year, may not exceed guaranteed and
verified energy costs savings for that year. The memo concluded that
prepayments have the effect of paying a contractor before the savings
have occurred and under this analysis such prepayments are
prohibited.[Footnote 18]
GSA's policy regarding buydowns is drawn primarily from the FEMP guide.
In GSA, the motivation for using the funds allowed by this guide is the
low utility rates in some of its regions. These low utility rates
reduce the savings accrued by a proposed project, necessitating a
longer contract term so that sufficient savings can be generated for
covering costs. According to GSA officials, the agency has used upfront
buydowns frequently, which has enabled GSA to reduce the cost and
length of its contracts. They noted that even a small buy down has a
large impact over the typical length of such contracts.
GSA officials told us that the lack of clarity regarding financial
terms in earlier FEMP guidance led to GSA being unable to buy down
ESPCs in some cases. One of GSA's main complaints in this regard
stemmed from inconsistencies across its regions about what funding
sources could be applied to buy downs. Following comments to FEMP and
FEMP's revision of the guidance, GSA officials noted that there have
been no complaints since October 2002. Asked if there are any remaining
improvements needed for the sake of clarity, GSA officials told us that
there is still some uncertainty about how much can be financed and how
much can be bought down on any given ESPC project.
The Navy has no written policy on the use of buydowns and defers to
contracting officers to determine when additional payments can be made.
Because of the lack of clarity in this area, the Energy Programs
division director at the Naval Facilities Engineering Service Center
has asked for written guidance from the Navy but has not received it.
The director told us that contracting officers evaluate the legislation
and the terms of the contract and apply them to individual contracts
and situations. He said that there have been three different situations
in which the Navy has used buydowns. First, before or during
construction, the Navy has identified avoided costs for equipment whose
purchase is already included in the budget but that will not be needed
as a result of an ESPC. Funds associated with these avoided costs can
be used to reduce the amount of money owed in the contract because the
Navy views these avoided costs as resulting directly from the ESPC.
Second, during the actual performance period of the contract, the Navy
has used other utilities budget monies from its working capital fund
and mission funding to reduce the amount of money owed. However, it has
stopped this practice because GAO raised concerns about the money not
being linked with savings from the ESPC. Third, in cases of terminating
specific energy efficiency improvements or terminating a number of
years from a contract, the Navy has used funds from its utilities
budget. The division director stated that greater clarity regarding the
use of funds to make additional performance period payments from the
utilities budget, but not directly associated with the ESPC, would be
helpful because these payments can reduce long-term financing costs and
save money for the government.
Agencies Are Concerned About Officials' Lack of Necessary Expertise and
Information and About Competitiveness of the Super ESPCs:
Agencies expressed concerns about the expertise and information needs
of the agencies and insufficient competition among financiers and
energy services companies, all of which can affect agencies' ability to
protect the government's financial interests in using ESPCs. Regarding
expertise and information, agency officials many times lacked technical
and contracting expertise and information on past contracts needed to
effectively evaluate the ESPC proposals and monitor the contracts for
savings. As a result, they often relied on the energy services
companies, calling into question the quality of the deals the officials
struck and their certainty that guaranteed savings were realized.
Expertise was lacking mainly because of inexperience with ESPCs, and
information was lacking mainly because agencies are not required to
collect and disseminate it. Regarding insufficient competition,
agencies believe there may not be enough competition among finance
companies and energy services companies. As a result, agencies may be
paying too much for financing and other terms of the contracts and may
be getting poor services after the contracts have been signed. In
recognition of these shortcomings, the agencies are taking a number of
corrective steps on an ad hoc basis and have developed an interagency
steering committee to address some of them collectively. We did not
assess the effectiveness of the agencies' efforts.
Agencies Often Lacked the Expertise and Information Needed to
Effectively Develop and Monitor ESPCs:
Those project officials we interviewed who were able to marshal the
expertise and information they needed believe that having adequate
expertise and information are critical to the success of the ESPC. For
example, officials at the Portsmouth Naval Shipyard, which undertook a
$43 million ESPC in 1999 to upgrade its power plant system, relied on
the U.S. Army Corps of Engineers' Huntsville Center and the Navy
contracting centers for technical and contracting support and on a
consultant for engineering support and analysis of utilities
forecasting. According to the Navy official who developed and oversees
the Portsmouth project, the expertise provided by the three sources was
essential to the success of the project. In particular, the
consultant's analysis of electricity rate projections, made possible
because of the consultant's knowledge of utility markets in New
England, allowed the Portsmouth officials to question the energy
services company's rate projections and negotiate more favorable rates
for the ESPC.
As previously discussed, developing and monitoring an ESPC are
difficult, requiring both technical and contracting expertise. In
particular, for the development phase of ESPCs, we learned that
agencies frequently had difficulty with technical responsibilities such
as accurately calculating energy-use baselines and forecasting utility
rates. For example, the Air Force and Army audits of ESPCs noted a
number of instances in which baselines were incorrectly established,
and numerous officials told us how difficult it is to accurately
establish these baselines. Along those lines, the manager of DOE's
departmental energy management program told us that officials at the
project level do not always have the necessary expertise to forecast
utility rates and, given the complexity of forecasting these rates,
particularly over the long terms typical of ESPCs, it is easy for the
officials to agree to incorrect estimates. ESPC experts at DOE's Oak
Ridge National Laboratory agreed, saying it may be unrealistic to
expect a government contracting officer to be able to effectively
negotiate some contract terms such as utility rates because they are
technically difficult to understand and forecast.
Regarding monitoring ESPCs once the energy-efficiency improvements are
in place and operating, the measurement and verification reports the
energy services companies submit to substantiate savings pose a
challenge for agencies because of their technical nature. A number of
the officials we interviewed told us that the level of expertise at the
project level is often inadequate to perform a thorough evaluation of
the measurement and verification reports. The manager of DOE's
departmental energy management program noted that, in the past, DOE has
not reviewed measurement and verification reports. The challenge of
effectively reviewing these reports, however, has led DOE to consider
requiring that DOE headquarters become involved in measurement and
verification evaluations. In addition, according to an expert in
measurement and verification for the Air Force, lack of technical
knowledge is the primary cause for agencies' failure to conduct
appropriate measurement and verification oversight. In this regard, a
lack of basic adherence to measurement and verification plans has also
been observed. The project manager of the Air Force audit noted that,
among the eight bases included in his review, only one had properly
followed its plan.
Another area requiring technical expertise involves a careful balance
between stipulation and measurement and striking this balance has been
difficult for agencies. According to DOE officials, key guidelines for
measurement and verification do not define the best method for each
energy-efficiency improvement that balances the trade-offs between cost
and accuracy. Consequently, the "right" amount of measurement and
verification for many improvements remains uncertain and requires
expertise to determine in each case. Agency officials have generally
agreed that measurement and verification, at least in the first years
of using the super-ESPC contracts, tended to rely more heavily on
stipulation than on actual measurements for determining long-term
savings. An Air Force official told us that, in his view, the heavy
reliance on stipulation during the earlier years of the program worked
to his agency's disadvantage with regard to savings. In more recent
contracts, however, he believes that a better balance between
stipulation and measurement has been reached because there has been a
greater reliance on expertise in this area.
In some cases, we were told, the officials may have the technical, but
not contracting, expertise they need. Managers of the VA's ESPC program
are confident that the agency's project-level officials have enough
engineering know-how to understand the technology and construction
process involved with ESPCs; however, the Managers are concerned that
project level officials do not understand the financing, markups, or
other aspects of the business end of ESPCs well enough, giving the
energy services companies an advantage over the agency officials, who,
in turn, may not be able to make the best business decisions for
government. For example, according to the Manager of DOE's departmental
energy management program, in his experience, markups and financing
rates often go unchallenged by project-level staff, even though they
are negotiable, because the project officials do not have the expertise
to challenge them. Furthermore, officials who oversee GSA's energy
program told us that GSA energy managers have had to negotiate with
energy services companies on markups and financing terms, even though
they were not adequately trained in that contracting technique.
Related to expertise, ESPC project-level officials also may not have
the information at their disposal that would help them develop the best
possible contracts and effectively oversee contract implementation. A
number of officials we interviewed said they had neither benchmarking
data on prices and other contract terms agreed to for other ESPCs, nor
knowledge of "lessons learned" on other contracts, making it difficult
for the officials to evaluate project proposals and to negotiate
effectively. Of the seven agencies included in our review, DOE, GSA,
and the Navy compile and maintain some data on their ESPCs in one
location. Although individual project files contain some data that
could be used for benchmarking prices and terms, agencies are not
required to compile and disseminate such information across their
ESPCs, and the other four agencies told us they do not. Similarly, as
discussed previously, although agencies are required to monitor the
performance of energy services companies on individual projects to
determine whether expected savings are being realized, they are not
required to keep track of that information at the agency level. As a
result, the agencies may not have historical information on contract
performance to use in choosing energy services companies and developing
terms of the contracts, such as the measurement and verification plans.
Officials responsible for ESPCs do not always have the expertise and
related information they need for a number of reasons. Many of the
project-level officials are inexperienced with ESPCs. In that regard,
several of the military project officials we interviewed said that
their current experience is their first encounter with an ESPC, and the
limited training they received did not adequately prepare them.
Furthermore, DOD officials told us that because military staff are
frequently reassigned after a few years, it is not likely that one
person will be on site throughout the entire ESPC contract, and the
officials expect their replacements to be similarly inexperienced with
the contracts. Further exacerbating the problem, we were told that many
of the military and civilian officials charged with developing and
overseeing ESPCs only work on the contracts part-time so the efforts
they can devote to the process are limited.
Most agencies do not require their officials to use the contracting
centers in DOD and FEMP when developing ESPC projects; nonetheless,
most of them do. In the case of interviews with officials from 27
projects in which the officials discussed their use of contracting
centers or other sources of expertise in detail, officials from 26 of
these projects said they found the expertise helpful. However, for 13
of the 26 projects that got assistance, officials cited areas of the
ESPC development process in particular for which they could have used
more expertise. For example, GSA and VA officials told us that their
FEMP project facilitators, which cost the agency $30,000 for each
project, did not perform some functions that the agencies thought would
have been beneficial, such as preparing estimates of project costs or
advocating for the agencies during contract negotiations. Some project
officials that used the contracting centers found the centers to be
inadequately funded. For example, one Air Force project official told
us that the Air Force's center provided the project with excellent
support, but could not visit the project site due to resource
constraints. Similarly, another official told us he did not consider
using the U.S. Army Corps of Engineers' Huntsville Center because he
thought, based on his previous experience with the center, that it was
understaffed and would not be able to devote enough effort to the
project.
As a result, we were told that agencies often rely on the energy
services companies to provide much of the needed expertise to develop
and monitor the ESPC projects, potentially raising a conflict of
interest.[Footnote 19] One company representative told us that agency
officials are typically not familiar with the energy savings potential
of the new equipment being proposed for installation, for example, and
another representative said that agencies need more ESPC expertise. A
number of agency officials agreed that they rely on the energy services
companies because they lack certain expertise themselves. For example,
an Air Force official told us that project officials on remote air
bases tend to have less-experienced staff and rely on the energy
services companies for essential ESPC activities such as performing
life-cycle cost analyses.
Agencies Expressed Concerns About Competition Among Finance Companies
and Energy Services Companies:
Some agency officials we spoke with expressed concerns that there may
not be enough competition among finance companies and that this could
lead to higher than necessary financing costs for ESPCs. Some agency
officials told us they believe the financing rates for ESPCs are high
compared with rates to finance energy-efficiency improvements by other
means. For example, according to VA ESPC program managers, the rates VA
has negotiated to purchase energy-related equipment via another
financing mechanism--enhanced-use leases--are generally lower than its
ESPC rates.[Footnote 20] For the 241 ESPC delivery orders for which we
received financing data, financing rates ranged from 5 to 13 percent,
with an average across all projects of almost 8 percent. According to
an ESPC expert at DOE's Oak Ridge National Laboratory, improving the
financing of ESPC projects is one of the most important ways to achieve
a better deal for the government.
Agency officials stated that there may be too few companies available
to finance ESPCs. For example, the head of the Navy's ESPC program told
us that there have been difficulties in finding investors for its ESPCs
and needs more investors in the program. VA officials responsible for
overseeing the agency's ESPCs echoed this concern. They believe there
are only three or four "boutique" companies that specialize in
financing ESPCs, and that the absence of more financing companies
drives up the financing rates. They cited findings by a consultant the
agency hired to review ESPCs that reported that the lack of competition
among energy financiers creates higher rates, and the officials believe
that injecting more competition into the process may result in better
rates. The head of FEMP's Super ESPC Program estimates that there are
eight financiers that have provided bids for financing ESPCs.
Agency officials also said they have seen little evidence that the
energy services companies are seeking out the most favorable financing
rates. Historically, energy services companies were not required to
provide documentation of having sought favorable rates. According to a
contracting officer who reviews the Army ESPCs, the agency has
sometimes obtained better rates when it required at least three quotes
from financiers. According to the Air Force and Navy officials
responsible for reviewing ESPC proposals, some proposals did not
contain sufficient information to adequately determine if the financing
costs were reasonable. The Deputy Manager of DOE's departmental energy
management program told us that including documentation of competition
among financiers in the ESPC proposals is needed to provide better
assurances that the government is getting the best financing rates. In
his experience, an energy services company often wants to use a single
financier for all of its ESPCs, so he believes little or no competition
for financing exists for those contracts. The energy services company
representatives rebut this contention, saying they consistently seek
the most favorable financing for ESPCs. They told us that lower
financing costs allow more of the project's savings to be spent on
energy-efficiency improvements, from which the companies profit, rather
than on finance costs.
Other agency officials and representatives of finance companies and an
energy services company have offered other explanations for why finance
rates for ESPCs are as high as they are. For example, according to FEMP
and GSA ESPC program managers, as well as representatives of the three
financing companies in our review, agency officials generally do not
understand that certain characteristics of ESPCs increase the risk of
financing those contracts and may drive the rates up. Chronic late
payments by agencies are one such characteristic. Others include the
possibility that the agency will withhold its payments if the savings
guaranteed in the contract are not realized, the additional uncertainty
about contract performance due to the long contract terms typical of an
ESPC, and the possibility that the agency will make unscheduled
payments that will reduce the financier's return on the contract.
According to GSA's ESPC Program Manager, these risk factors limit the
number of companies willing to finance ESPCs, and the complexity of the
contracts drives financing rates higher.
We were unable in the scope of this work to determine the extent, if
any, to which a lack of competition, rather than other factors, has
caused finance rates for ESPCs to be higher than for other methods of
financing energy-efficiency improvements. However, due to the large
number of questions raised by agencies, we believe this question should
be explored in more depth.
Some agency officials also expressed concern that there may not be
enough competition among energy services companies. In general, they
told us there may be too few companies on the lists and those companies
may be charging prices that are too high and providing inadequate
services. Regarding the number of companies available, some officials
told us that often only the large companies on the lists are willing to
undertake ESPCs, effectively limiting agencies to three or four
companies to choose from. FEMP ESPC program managers affirmed that it
may be only the largest companies that can afford the extended
negotiation and contract implementation periods of ESPCs before getting
paid for their services. Further, GSA ESPC managers told us they have
received complaints from energy services companies that would like to
take on smaller ESPCs, but believe they are disadvantaged in obtaining
that business because they are not on the lists and have not been given
a sufficient chance to compete for that status. In that regard,
officials from some agencies told us that the companies approved for
the lists often will not bid on projects unless they are worth at least
$1 to $2 million. As a result, the agencies must forego undertaking the
smaller projects or combine multiple locations into a project to meet
the threshold. According to DOE and GSA officials, it is more difficult
to manage projects with multiple locations. In addition, according to
the head of FEMP's Super ESPC program, multiple energy services
companies that did not compete in the original super ESPC competitions
have communicated their desire to participate in a recompetition and to
be added to lists of prequalified energy services companies.
Some agency officials linked a perceived lack of competition among
energy services companies with high markups and prices for other
components of ESPCs and poor services--especially after the contract is
signed. Regarding markups, energy services companies charge a
percentage of the cost of each energy-efficiency improvement to cover
company costs for, among other things, overhead, sales, markup on
subcontractor-supplied materials and labor, and profit. Both the Army
and FEMP super ESPCs contain pre-negotiated markup maximums that are
intended to cap the amount of markup that the energy services company
can add to the basic price of each energy-efficiency improvement
covered by the contracts. FEMP's markup maximums typically range from
26 to 31 percent--but may be as low as 5 percent and as high as 100
percent--depending on the energy-efficiency improvement on which they
are based and the region of the country the improvement is implemented.
The markup maximums the U.S. Army Corps of Engineers' Huntsville Center
provided to us range from 15 to 30 percent. A number of agency
officials told us that, as a practical matter, the energy services
companies resist agencies' efforts to negotiate markups that are lower
than the caps. According to an Air Force contracting center official,
the Air Force super ESPCs do not contain prenegotiated markup maximums
for energy-efficiency improvements and the negotiators that use the Air
Force super ESPCs typically obtain more favorable markups than those
who use the Army Corps of Engineers' Huntsville Center's or FEMP's
super ESPCs. To test this assertion, we examined data on markups in
ongoing ESPCs that agencies reported to us. The reported markups ranged
from 10 to 40 percent for projects under FEMP's super ESPC, from 13 to
32 percent for the U.S. Army Corps of Engineers' Huntsville Center's,
and from 9 to 29 percent for the Air Force's. However, because the
agencies did not report markups for all of the projects in our review
and because data did not tie markups to individual energy-efficiency
improvements, we could not determine whether the projects using the Air
Force super ESPC actually resulted in more favorable markups.
With regard to prices of some components of ESPCs, a number of agency
officials we interviewed expressed concern about their ability to
negotiate reasonable prices in their ESPCs. DOD agencies are required
to give all energy services companies prequalified for a super ESPC an
opportunity to participate in a limited competition at the initial
proposal stage of a project. The competition is limited because,
ostensibly, the companies have already passed government scrutiny in
order to be included on the super contract. Although civilian agencies
do not have the same requirement, they may choose to conduct a limited
competition, and most did for the projects in our review. For the
limited competition, the agencies provide the companies with such
information as current utility rates and the types of improvements the
agency is considering that the companies can use to develop their
initial proposals. The initial proposals contain preliminary cost
estimates and other information the agencies use to narrow the field to
the single company it will do business with on the project. Prices are
not discussed with any specificity until after the selected company has
prepared its formal project proposal, even though the formal proposal
can take more than 6 months to complete and review. By that time, we
were told, the agency may feel pressure to continue with the company,
possibly accepting prices that are too high because it is too costly to
start over with another company. Lacking the ability to force the
energy companies to compete more rigorously on prices, ESPCs may cost
more than they should.
Finally, some officials complained about the unsatisfactory services
provided by the energy services companies. For example, one Air Force
energy manager told us that the quality of work by the energy services
company declined substantially after the delivery order was awarded.
According to this official, the energy services company lacked the
internal capability to properly do the work yet resisted hiring
additional staff. In addition, the company did not use the
subcontractor identified in the project proposal; as a result, the
agency could not determine if the costs claimed by the company were
valid. Some other problems cited by officials included inflated costs
and over-billing for equipment and labor, insufficient and/or redundant
design work, substitution of cheaper materials, untimely responses, and
disruptive staffing changes.
None of the companies on the super ESPC lists have had to re-compete
for their positions on the lists since they won them 6 to 9 years ago,
and the re-competitions planned for them will not occur for another 1
to 2 years. The companies on those lists have not changed unless they
merged with others, went out of business, or chose to be taken off the
list. While there are no requirements for how frequently the super
ESPCs must be put out for competition, GSA's practice regarding its
contracts for the Federal Supply Schedule, which are multiyear
contracts similar to the super ESPCs, is to renegotiate the contracts
every 5 years to help ensure the contracts remain competitive.
According to the head of FEMP's Super ESPC Program, DOE policy calls
for re-competing contracts such as the super ESPCs every 5 years.
Our own analysis of agency data on ESPC use indicates that ESPC
contracts appear to be highly concentrated among a relative few
companies in some regions. We calculated the Herfindahl-Hirschman Index
(HHI)--an index used by the Federal Trade Commission and the Department
of Justice to evaluate mergers--for each of the six regions defined by
the FEMP super ESPCs. In four of the six FEMP regions, the HHI was
above the level at which industries are typically considered to be
moderately to severely concentrated. While such measures do not by
themselves indicate a lack of competition, they do suggest that a more
complete evaluation of the competitiveness of the ESPC contracts is
warranted.
Individual Agencies and the Contracting Centers Are Taking Steps to
Address Concerns about Expertise, Information, and Competition:
Individual agencies have taken steps to address concerns about
expertise and related information and competition. Among other steps,
to bring expertise and information from previous ESPCs to bear on new
ones being undertaken by their agencies, DOE and the Navy each require
ESPC proposals be reviewed by experts either in-house or at FEMP and do
not allow the projects to proceed into implementation without approval
of these experts. DOE and GSA compiled lists of lessons learned and
have shared them among project officials within their agencies. In
addition, the Air Force, the Army, the Navy, DOE, GSA, and VA each have
begun requesting evidence of competition for financing rates before
they will agree to an ESPC for their agencies. Furthermore, rather than
relying exclusively on the super ESPC contracts, officials from VA are
pursuing alternatives to introduce price competition into the process.
The contracting centers have also taken steps to bolster the expertise
and information available to their officials and to address the
competitiveness problems with the super ESPCs. Most notably, all the
centers have, among other things, issued guidance to help agencies with
developing and monitoring their ESPCs and begun requiring that project
proposals contain documentation of multiple financing bids.
Furthermore, the centers are working to have newly competed super ESPCs
available to agencies between fiscal years 2007 and 2008. The U.S. Army
Corps of Engineers' Huntsville Center plans to have its new super ESPCs
in place by the beginning of fiscal year 2008 and has begun that
process. According to a U.S. Army Corps of Engineers' Huntsville Center
contracting office official, the center has not recompeted its super
ESPCs because the current contracts do not expire until the end of 2007
and developing the revisions to the contracts has proven to be a slow
process that requires coordinated input from multiple ESPC experts and
contracting centers. FEMP also plans to recompete its super ESPCs. It
plans to begin the process in 2006 and have the new contracts in place
sometime in 2007. According to the FEMP Super ESPC Program manager,
FEMP has not recompeted its super ESPCs to date primarily because FEMP
has focused its efforts on helping agencies undertake successful ESPCs
and developing guidance for the agencies to use. The Air Force does not
presently plan to recompete its contracts but will reconsider that
decision over the next 2 years. According to managers of Air Force's
contracting center, Air Force ESPC projects are increasingly using
FEMP's super ESPCs because doing so provides the project-level
officials with more contract and energy services company options.
Consequently, rather than re-competing the Air Force super ESPCs, the
managers may begin to phase out their agency's use of the Air Force
super ESPCs as they increasingly use FEMP's with Air Force-specific
clauses added.
Although most of the steps agencies and contracting centers have taken
to address expertise, information, and competition needs have been ad
hoc, they have recently begun to address them more collectively via an
interagency steering committee and its working groups. The purposes of
the steering committee include sharing experiences and lessons learned
among the federal agencies that use ESPCs the most, identifying process
and procedural improvements, and developing best practices. The
steering committee plans to develop performance metrics by which its
efforts can be evaluated by June 2005. In addition, the steering
committee and its working groups have accomplished some of their
objectives to date. For example, the working group on measurement and
verification issued a template standardizing the measurement and
verification process. Each of the contracting centers used some of the
group's recommendations when it developed new measurement and
verification guidance. See table 3 for a more complete list of steps
the contracting centers have taken.
We believe that many of the steps the individual agencies and
contracting centers have taken to address expertise, information, and
competition issues promise to help improve those areas. However,
because of their ad-hoc nature and because many are relatively new and
untested, we did not attempt to assess their effectiveness.
Table 3: Steps Contracting Centers Are Taking to Address Concerns About
Expertise, Information, and Competitiveness:
Contracting centers: FEMP;
Expertise and data: Expertise: (1) Developed ESPC delivery order
guidelines in October 1999 and updated in February 2004, (2) Developed
guidance on measurement and verification in September 2000, (3)
Developed a guide regarding ESPC savings and payments in January 2003,
(4) Developed ESPC-specific training on process, tools, and best
practices in 2004, (5) Facilitates ongoing working groups involved in
ESPC issues including measurement and verification, performance period
administration, and energy savings discrepancy resolution, (6) Offers
Project Facilitators;
Competition: Financing: (1) Facilitates the financing working group of
the ESPC Steering Committee, (2) Implementing financing reforms in
super ESPC modification as of late 2004, (3) Educating agencies and
fiance companies more on ESPC financing;
Competition: Contract terms: (1) Issued modifications to super ESPC
language and terms in late-2004 with changes effective in 2005; (2)
Plans to update markup maximums during re-competition of super ESPCs by
2007; (3) Will begin the super ESPC re-competition in late 2006 to be
completed by 2007; (4) Plans to recompete every 5 yrs.
Contracting centers: FEMP;
Expertise and data: Data: Collects data on basic contract terms at time
of signing but does not collect data on contract modifications past the
first year or monitoring data showing energy savings;
Competition: Pricing competition: Facilitates the Price Reasonableness
working group of the ESPC Steering Committee - tasked to provide tools
and guidance in negotiating competitive pricing.
Contracting centers: Navy;
Expertise and data: Expertise: (1) Provides centralized engineering and
contracting expertise, (2) Developed process and contract guidance in
October 2003, (3) Developed a price reasonableness guide, (4) Shares
lessons learned throughout agency, (5) Requires in-house or FEMP
approval of new ESPCs;
Competition: Contract Terms: (1) Helping sites implement additional
contract language to better protect the agency's interests;
Contracting centers: Navy;
Expertise and data: Data: Maintains a central ESPC database;
Competition: Financing: Requesting documentation of multiple financier
bids.
Contracting centers: Air Force;
Expertise and data: Expertise: (1) Developed M&V templates for each
technology and other guidance beginning in 2001, (2) Provides expertise
and support to project officials (3) Created a Resource Efficiency
Manager position to address expertise needs;
Competition: Financing: Requesting documentation of multiple financier
bids;
Contracting centers: Air Force;
Expertise and data: Data: Centrally collects basic contract data and
modification information, but does not collect monitoring or savings
data;
Competition: Contract terms: (1) Modifying M&V language in the super
ESPCs, (2) Contract agency helping implement additional contract
language to other super ESPC templates; (3) 2005-2006 evaluating either
re-competing Air Force's super ESPCs or using FEMP's with Air Force-
specific clauses added.
Contracting centers: Army Corps of Engineers' Huntsville Center;
Expertise and data: Expertise: (1) Developed ESPC training document,
(2) Participates in FEMP working group, (3) Uses a template to assist
agency officials negotiating with contractors;
Contracting centers: Army Corps of Engineers' Huntsville Center;
Expertise and data: Data: Collects data on some contract terms, and may
not have all modifications on record;
Competition: Contract terms: (1) Currently revising proposal
requirements and other language via bi-lateral negotiations with energy
services companies; (2) revising additional language and terms by 3rd
quarter FY2005, to be included in planned recompetition for FY2007.
Source: GAO analysis of contracting center information.
[End of table]
Conclusions:
ESPCs provide a valuable and practical tool that federal agencies use
to meet energy reduction, environmental, infrastructure, and other
goals. Clearly, agencies that have used ESPCs to install more
efficient, energy-saving equipment have reduced their energy
consumption and associated environmental impacts. Further, by using
private financing, agencies have also been able to more quickly and
consistently replace an aging and energy-wasting infrastructure--an
infrastructure that the agencies have identified in their capital
management plans as being in need of billons of dollars of repair and
restoration.
While using ESPC-financed projects has permitted agencies to reduce
energy consumption and achieve other goals, the extent to which savings
cover costs as required by legislation remains uncertain. The
complexity of ESPCs accounts for much of this uncertainty. ESPCs are
complicated because of the wide array of technical, financial, legal,
and energy-related issues that must be resolved both in the short and
long-term. Because of this complexity and the cost of more extensive
reliance on actual measurements, agencies have tended in the past to
defer to the expertise of energy services companies and the use of
stipulation in lieu of measurements. In doing so, they may have paid
contractors for energy savings that did not occur or may have
negotiated contracts that are more expensive than necessary. Limited
agency audits and our interviews have disclosed indications of these
problems in dozens of projects. Since most agencies have not audited
their use of ESPCs and broad performance information and documentation
are unavailable, we could not determine how widespread these problems
are. Without comprehensive information on actual performance of the
contracts once they have begun to unfold, however, the agencies' task
of overseeing the contracts becomes difficult. In turn, the lack of
comprehensive information on ESPC performance makes it more difficult
for the Congress to determine the level of support it should lend to
agency use of the financing mechanism. Finally, because DOE reports to
the Congress about agencies' progress toward achieving energy goals,
the lack of comprehensive data on the results of ESPCs also reduces
congressional awareness in this area. In a more general context,
additional information would be useful in comparing the costs and
benefits of ESPCs relative to alternative financing mechanisms. This
information could include, among other things, the effects of
deterioration of energy efficiency savings in the absence of
measurement and verification and delays in obtaining up-front
appropriations relative to obtaining funds through ESPCs.
In response to these problems, agencies have begun to recognize the
importance of developing and using their own expertise more
effectively, but this has occurred only recently and, at this point,
they have not ensured that it is brought to bear during negotiations
and in the longer term. The ability to correct these problems requires
the availability of high-quality information and the expertise to use
it effectively during negotiations and throughout the life of these
long-term contracts. In developing and using appropriate expertise and
information, agencies can also begin to assemble better information
about governmentwide experiences with ESPCs, including ways of
improving such areas as measurement and verification. They can also
draw conclusions regarding the effectiveness of agencies' working
relationships with individual energy services companies, which could
provide another valuable tool for agencies to consider. Finally, as
ESPC use continues, sharing best practices or lessons learned in all of
these areas would go a long way toward making ESPCs as cost effective
as possible while also helping to ensure that the federal government's
financial interests are protected. Absent further efforts to rely on
appropriate expertise and improve the quality of information, agencies
will continue to be at a disadvantage in negotiating effective ESPCs
and less likely to achieve long-term energy and financial savings.
Agencies have expressed concerns about the adequacy of competition
among financiers and energy services companies in developing ESPCs and
consequently their ability protect their interests. Agency officials
and others expressed concerns that financing costs may be too high
because there may be too few companies that finance ESPCs and energy
services companies may not seek the most favorable financing. Other
problems such as the length of time between competitions for the
approved list of energy services companies and the lack of price
competition inherent in using the super ESPCs also reinforce these
concerns. Agency officials have taken some steps to address these
concerns, but the question of sufficient competition points toward the
need for further measures such as requiring greater competition among
financial service companies to potentially reduce interest rates and
putting the super ESPCs out for competition more frequently.
Differing agency interpretations of the law establishing ESPCs have
contributed to agency uncertainties about the use of funding sources
other than savings for reducing investments in ESPCs through upfront
payments. Within DOE, inconsistencies and uncertainties about
interpretation of the statute are apparent. In practice, some agencies
believe that contract payments may be made only from utility savings
resulting from the ESPC while other agencies make a lump-sum payment on
the contract--from funds already earmarked for equipment replacement or
from other sources--to reduce the length of the contract and finance
charges. In our view, these inconsistencies reflect a lack of clarity
about the use of down payments in general and what does--or does not--
constitute a legitimate source of funds for such down payments if they
are allowed.
Matter for Congressional Consideration:
To ensure that agencies use ESPCs as the Congress intends, we recommend
that the Congress consider revising the relevant statute to more
clearly define the components of costs that must be covered by savings.
In particular, the Congress could clarify whether agencies may make
lump sum payments using funds other than their current year utility
savings.
Recommendations for Executive Action:
To better ensure that federal agencies undertake only those ESPCs
having the greatest likelihood that savings will cover costs and that
the agencies negotiate the best possible contract terms and monitor the
contracts properly, we are making recommendations to the heads of those
agencies included in our review, namely the Secretaries of Defense,
Energy, Justice, and Veterans Affairs, and the Administrator of the
General Services Administration. Our recommendations focus on the areas
of information, expertise, and audits:
* Collect and use ESPC-related data more effectively by (1) compiling
information on key contract terms--such as interest rates and markups
for energy-efficiency equipment--for each ESPC and as a key part of
best practices make information accessible to agency officials in
negotiating subsequent ESPCs and (2) tracking actual costs, verified
savings, and any changes to ESPC projects that may affect these costs
and savings.
* Ensure that the agency officials responsible for ESPC decision-making
use appropriate expertise when they undertake an ESPC. If the officials
do not have sufficient expertise themselves, they should be required to
obtain it from such independent sources as a centralized pool within
the agency;
the contracting centers of the Air Force, the U.S. Army Corps of
Engineers, the Navy, and FEMP; or from private parties. The costs of
acquiring this expertise should be considered in deciding whether to
use an ESPC.
* Require, as appropriate and in line with available resources, that
inspectors general or other audit offices conduct audits of ESPC
projects to ensure the projects are achieving their expected results.
Because the contracting centers can play an important role in helping
the agencies develop and monitor their ESPCs, we recommend that the
secretaries of Defense and Energy require the contracting centers to:
* work with the agencies that use them to ensure that the contracting
centers have the information and expertise needed to effectively
develop and monitor their ESPCs; and:
* continue and expand their ongoing efforts regarding competition,
including taking steps such as re-competing the super ESPCs as soon as
possible and then more regularly.
Finally, to strengthen the information available to the Congress for
assessing the progress and effectiveness of ESPCs, we recommend that
the Secretary of Energy collect more extensive information on agencies'
ESPCs, including such critical elements as cumulative verified savings
and costs, and include that information in its annual report to the
Congress. As a part of this effort, we also recommend that the
Secretary compare projects funded by ESPCs with projects funded by
upfront appropriations to determine their relative costs and benefits.
Specifically, the Secretary should determine, among other things, the
effects of deterioration of energy efficiency savings in the absence of
measurement and verification and delays in obtaining upfront
appropriations relative to obtaining funds through ESPCs.
Agency Comments:
We provided the Departments of Defense, Energy, Justice, and Veterans
Affairs, and the General Services Administration, with a draft of this
report for their review and comment. DOD, DOE, VA, and GSA provided
written comments, which are presented in appendixes II through V. The
Department of Justice responded by email on June 2, 2005. All of the
agencies generally concurred with the findings, conclusions, and
recommendations and stated their intention of implementing the
recommendations. The agencies also submitted technical and clarifying
comments, which we have incorporated as appropriate.
In addition, DOE expressed concerns in two areas. First, regarding our
discussion about confusion over the allowable sources of funding for
ESPCs, DOE expressed the view that its General Counsel's office's
opinion regarding prepayments was not at variance with FEMP guidance as
we reported. Nevertheless, the agency noted that it will take steps to
ensure that FEMP guidance is consistent on this point to avoid future
confusion. Furthermore, DOE supports our recommendation that the
Congress more clearly define the components of ESPC costs that must be
covered by savings and the agency stated that it will address the issue
in a report to the Congress on ESPCs that is currently in the review
and approval process within the agency. We have added language to the
report noting DOE's disagreement with our discussion of this issue.
Second, DOE expressed concern that FEMP does not have authority to do
more to facilitate oversight of ESPCs, as we recommended. While we
recognize DOE's concern with taking on additional oversight
responsibilities, we note that, in commenting on our draft report, all
of the agencies stated their intention to work cooperatively with DOE
and the other agencies to implement our recommendations. In
recommending that DOE facilitate oversight of ESPCs, we intended that
the agency take such actions as collecting data on verified savings and
costs and reporting such information to the Congress, as well as to the
agencies themselves, to aid the Congress and the agencies in their ESPC
oversight actions. We believe that it is appropriate at this point for
DOE and the other agencies to continue to use a cooperative approach,
such as through the Federal ESPC Steering Committee, to develop and
implement consistent and best practices for ESPCs.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the date of this letter. At that time, we will send copies of this
report to the appropriate congressional committees; the Secretaries of
Defense, Energy, and Veterans Affairs; the Attorney General; the
Administrator, GSA; and other interested parties. We will also make
copies available to others upon request. In addition, the report will
be available at no charge on the GAO Web site at [Hyperlink,
http://www.gao.gov].
If you or your staff have any questions, please call me at (202) 512-
3841. Contact points for our Offices of Congressional Relations and
Public Affairs may be found on the last page of this report. GAO staff
who made key contributors to this report are listed in appendix VI.
Signed by:
Jim Wells:
Director, Natural Resources and Environment:
[End of section]
Appendixes:
Appendix I: Objectives, Scope and Methodology:
Objectives:
We were asked to determine (1) the extent to which federal agencies
used ESPCs; (2) what energy savings, financial savings, and other
benefits agencies expect to achieve; (3) the extent to which actual
financial savings from ESPCs cover costs; and (4) what areas, if any,
require steps to protect the government's financial interests in using
ESPCs.
Scope and Methodology:
To satisfy these objectives, we included in our review any ESPCs that
agencies undertook in fiscal years 1999 through 2003. We did not
perform formal cost benefit analyses of individual ESPC projects or of
ESPCs as a whole because of data limitations.
To address the data analysis component of these objectives, we first
obtained basic contract data from the four federal contracting centers
that assist agencies with ESPCs-the Air Force Civil Engineer Support
Agency, the U.S. Army Corps of Engineers' Huntsville Center, the Naval
Facilities Engineering Service Center, and (FEMP), which reflect the
majority of all ESPCs undertaken during fiscal years 1999 through 2003.
We did not completely assess these data for reliability; however, we
reviewed the steps that the contracting centers take to ensure data
reliability and determined that these steps were sufficient for our
reporting purposes. We obtained more detailed contract data for the
same period from the seven federal agencies in our review having the
most facility floor space and the highest energy use and therefore the
highest potential to use ESPCs. These agencies were the Departments of
the Air Force, the Army, the Navy (including the Marine Corps), Energy,
Justice, Veterans Affairs, and the General Services Administration.
Before analyzing the contract data, we combined the data from the
contracting centers and the agencies into a single data set. Because
some agency contract data could also be included in the contracting
center data, we identified the projects that appeared to have duplicate
records. We asked each agency to confirm those records that were
duplicates and, using our best judgment, retained those records with
the most complete information.
To address the objectives overall, we interviewed and obtained
documentation from a wide range of stakeholders. From the seven
agencies and four contracting centers, we talked with officials at
headquarters, in regions, and at specific project sites. We also
discussed the issues with officials from the Congressional Research
Service; Oak Ridge National Laboratory; Lawrence Berkeley National
Laboratory; the Defense Energy Support Service Center; and the states
of Maryland and Louisiana, both of which use ESPCs extensively. In
addition, we talked with officials from the energy services and
financial services sectors and an academic expert knowledgeable about
ESPCs. We also reviewed relevant legislation, regulations, policies,
and agency procedures.
We also reviewed studies by the Oak Ridge National Laboratory and the
Lawrence Berkeley National Laboratory that analyzed the costs and
benefits of ESPCs and compared net benefits of using ESPCs to finance
energy savings improvements with the net benefits of using direct
appropriations. To evaluate these studies, we interviewed some of the
authors and reviewed other studies and reports that the authors had
referred to and which supported some of the assumptions they used to
model the net benefits. In particular, we asked the authors of the
Lawrence Berkeley National Laboratory study about their support for the
assumption that energy savings decay over time in the absence of
monitoring and verification. They referred us to a body of literature
on energy commissioning--essentially energy audits of buildings--in
which there is evidence of energy savings decay. We reviewed several
studies from this literature and concluded that there was sufficient
evidence for savings decay to warrant inclusion of the Lawrence
Berkeley National Laboratory study results, with the proper caveat that
we could not definitively conclude on the extent of savings decay or on
the extent to which decreased savings decay and other benefits from
ESPC-funded projects may offset the significant savings achieved from
using upfront funding that we found previously in six case studies.
To better understand specific benefits, problems and suggested
improvements for ESPCs as well as evaluate whether savings were
covering costs, we interviewed and obtained appropriate documentation
from officials who either negotiated and/or currently manage specific
ESPC projects at 15 geographically dispersed locations. We judgmentally
selected these officials from lists of knowledgeable officials provided
to us by the ESPC program managers of each agency. We also discussed
these issues in general for an additional 10 projects with the
officials who manage DOE's departmental ESPCs. Furthermore, we reviewed
13 audit reports conducted by the Army Audit Agency or Air Force Audit
Agency and discussed the results with auditors involved in the reviews;
reviewed a report by a consultant hired by VA to assess that agency's
use of ESPCs; reviewed relevant GAO reports and consulted with subject
matter experts at GAO; and reviewed other reports and information on
ESPCs identified by searching the literature.
We conducted our work from January 2004 through May 2005 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the Department of Defense:
OFFICE OF THE UNDER SECRETARY OF DEFENSE:
3000 DEFENSE PENTAGON:
ACQUISITION, TECHNOLOGY AND LOGISTICS:
WASHINGTON, DC 20301-3000:
JUN 02 2005:
Mr. Jim Wells:
Director, Natural Resources and Environment:
U.S. Government Accountability Office:
441 G Street NW:
Washington, D.C. 20548:
This is the Department of Defense (DoD) response to the GAO Draft
Report GAO-05-340, 'ENERGY SAVINGS: Performance Contracts Offer
Benefits, but Vigilance Is Needed to Protect Government Interests,'
(GAO Code 360425), dated 4 May 2005.
The Department commends the effort your team expended to conduct a
comprehensive review of the Energy Savings Performance Contract (ESPC)
program. We particularly appreciate the constant communication with our
staff throughout the entire effort. The findings and recommendations of
this draft final report are a reflection of a very good understanding
and thorough analysis of all facets of the ESPC program.
We concur with your assessment that this program offers value beyond
simple energy savings. We also agree with your recommendations for
improvement and are grateful that your report articulated many of the
actions currently underway. Based on input from my staff, I have
concluded that this report is fair and balanced. As your team pointed
out, while these complicated contracts are structured to ensure that
savings will exceed costs, we recognize that our measurement and
verification procedures must be improved to confirm estimates with
actual data.
We recognize the importance of proper and consistent execution of these
complicated contracts throughout the entire Federal government. It is
our intention to implement immediately the recommendations offered, in
coordination with the other Federal agencies, through the Federal ESPC
Steering Committee, chaired by the Department of Energy (DoE), Federal
Energy Management Program (FEMP). We are confident that FEMP's
leadership in this area will continue to build upon lessons learned and
allow us to implement additional improvements to this essential
contract vehicle that accounts for over half of our Department's energy
reductions.
Our comments are attached.
Philip W. Grone:
Deputy Under Secretary of Defense:
(Installations and Environment):
Enclosures:
GAO DRAFT REPORT DATED MAY 4, 2005 GAO-05-340 (GAO CODE 360425):
"ENGERY SAVINGS: Performance Contracts Offer Benefits, but Vigilance Is
Needed to Protect Government Interests"
DEPARTMENT OF DEFENSE COMMENTS TO THE GAO RECOMMENDATIONS:
RECOMMENDATION 1: The GAO recommended that the Secretary of Defense
compile information on key contract term-such as interest rates and
mark-ups for energy-efficiency equipment-for each ESPC and as a key
part of best practices make information accessible to agency officials
in negotiating subsequent ESPCs. (p. 55/GAO Draft Report):
DOD RESPONSE: DoD concurs and plans to implement immediately this
recommendation, in coordination with the other Federal agencies,
through the Federal ESPC Steering Committee, chaired by the Department
of Energy (DoE), Federal Energy Management Program (FEMP).
RECOMMENDATION 2: The GAO recommended that the Secretary of Defense
track actual costs, verified savings, and any changes to ESPC projects
that may affect these cost and savings. (p. 55/GAO Draft Report):
DOD RESPONSE: DoD concurs and plans to implement immediately this
recommendation, in coordination with the other Federal agencies,
through the Federal ESPC Steering Committee, chaired by the Department
of Energy (DoE), Federal Energy Management Program (FEMP).
RECOMMENDATION 3: The GAO recommended that the Secretary of Defense
ensure that the agency officials responsible for ESPC decision-making
use appropriate expertise when they undertake an ESPC. If the officials
do not have sufficient expertise themselves, they should be required to
obtain it from such independent sources as a centralized pool within
the agency; the contracting centers of Air Force, Army Corps Energy,
and Navy; or private parties. The cost in acquiring this expertise
should be considered in deciding whether to use ESPC. (p. 55/GAO Draft
Report):
DOD RESPONSE: DoD concurs and plans to implement immediately this
recommendation, in coordination with the other Federal agencies,
through the Federal ESPC Steering Committee, chaired by the Department
of Energy (DoE), Federal Energy Management Program (FEMP).
RECOMMENDATION 4: The GAO recommended that the Secretary of Defense
require inspectors general or other audit offices conduct audits of
ESPC projects to ensure the projects are achieving their expected
results. (p. 56/GAO Draft Report):
DOD RESPONSE: DoD concurs and plans to implement immediately this
recommendation, in coordination with the other Federal agencies,
through the Federal ESPC Steering Committee, chaired by the Department
of Energy (DoE), Federal Energy Management Program (FEMP).
RECOMMENDATION 5: The GAO recommended that the Secretary of Defense
require contracting centers to work with the agencies that use them to
ensure that the contracting centers have the information and expertise
needed to effectively develop and monitor their ESPCs. (p. 56/GAO Draft
Report):
DOD RESPONSE: DoD concurs and plans to implement immediately this
recommendation, in coordination with the other Federal agencies,
through the Federal ESPC Steering Committee, chaired by the Department
of Energy (DoE), Federal Energy Management Program (FEMP).
RECOMMENDATION 6: The GAO recommended that the Secretary of Defense to
require contracting centers to continue and expand their ongoing
efforts regarding competition, including taking steps such as re-
competing the super ESPCs as soon as possible and then more regularly.
(p. 56/GAO Draft Report):
DOD RESPONSE: DoD concurs and plans to implement immediately this
recommendation, in coordination with the other Federal agencies,
through the Federal ESPC Steering Committee, chaired by the Department
of Energy (DoE), Federal Energy Management Program (FEMP).
[End of section]
Appendix III: Comments from the Department of Energy:
Department of Energy:
Washington, DC 20585:
June 3, 2005:
Mr. Jim Wells:
Director, Natural Resources and Environment:
U.S. Government Accountability Office:
Washington, DC 20548:
RE: The Department of Energy's (DOE) Comments on the Draft Report
entitled Energy Savings: Performance Contracts Offer Benefits, but
Vigilance Is Needed to Protect Government Interests (GAO-05-340):
Dear Mr. Wells:
Enclosed are DOE's comments on the Draft Report entitled Energy
Savings: Performance Contracts Offer Benefits, but Vigilance Is Needed
to Protect Government Interests (GAO-05-340). The Department
appreciates the thoroughness of GAO's review of the Energy Savings
Performance Contracting (ESPC) matters addressed in the Draft Report.
Moreover, the Department intends to ensure that future DOE ESPC program
improvements reflect GAO recommendations whenever possible.
Please contact Ms. Dreda Perry of my staff regarding any questions you
may have. Ms. Perry can be reached at 202-586-0561 or
dreda.perry@ee.doe.gov.
Sincerely,
Signed by:
David K. Garman:
Assistant Secretary:
Energy Efficiency and Renewable Energy:
Enclosure:
DEPARTMENT OF ENERGY COMMENTS ON DRAFT GAO REPORT, ENERGY SAVINGS:
PERFORMANCE CONTRACTS OFFER BENEFITS, BUT VIGILANCE IS NEEDED TO
PROTECT GOVERNMENT INTERESTS (GAO-05-340, MAY 2005):
The Department of Energy (DOE) commends the Government Accountability
Office (GAO) for its balanced and thoughtful review of the Energy
Savings Performance Contracting (ESPC) Program. DOE is pleased that GAO
has revised certain positions expressed in its previous report
concerning ESPCs (GAO-05-55), and generally concurs with the
recommendations of the May 2005 draft GAO report (GAO-05-340), as
follows:
MATTER FOR CONGRESSIONAL CONSIDERATION Recommendation that Congress
consider revising the relevant statute to more clearly define the
components of costs that must be covered by savings.
DOE anticipates that its "Report to Congress on Energy Savings
Performance Contracts," required by section 1090 of the Ronald W.
Reagan National Defense Authorization Act for Fiscal Year 2005, which
is currently in Departmental concurrences, will support GAO's first
recommendation for clarification of agency authority to make lump sum
payments using funds other than current year utility savings. Express
legislative authority allowing avoided-project cost savings to be
applied as pre-performance-period payments would permit agencies to
implement more comprehensive, higher-value ESPCs and enhance facility
energy security.
RECOMMENDATIONS FOR EXECUTIVE ACTION:
DOE generally agrees with all of GAO's recommendations suggesting
Executive action as described in the body of the report (pp. 55-56),
but the portrayal on the "Highlights" page that "GAO further recommends
that DOE do more to facilitate oversight of ESPCs" provides an
excellent segue to our major comments regarding these recommendations.
We are concerned that DOE's Federal Energy Management Program (FEMP)
cannot "mind the ESPC store" throughout the Federal Government without
having clear authority for oversight of agency contracting. Full agency
participation in the DOE-chaired Federal ESPC Steering Committee and
implementing all executive actions approved by that body would provide
greater ESPC oversight ability to DOE.
RECOMMENDATIONS FOR PROGRAMMATIC ACTIONS:
1. Collect and use ESPC-related data more effectively:
DOE concurs with GAO's recommendation regarding the collection and use
of ESPC-related data so that procurement history and experience can
improve the agency negotiating position in subsequent ESPCs. FEMP has
already developed such tools for pricing and financing reasonableness
reviews, and recommends that all ESPC contracting centers and agencies
share their data and ensure that Government tools are as robust as they
can be. FEMP similarly recommends the collection and sharing of
performance-period data to enable Government-wide verification of
guaranteed energy cost savings through the tracking of ESPC contractor
payments and various categories of cost savings.
2. Ensure that agency officials responsible for ESPC decision making
use appropriate expertise when undertaking an ESPC.
DOE concurs with the recommendation that agencies be required to use
appropriate expertise when developing and implementing an ESPC. FEMP
has, in fact, already mandated that all projects ordered under the DOE
Super ESPC contracts be supported by experienced ESPC project
facilitators, and FEMP will only delegate ordering authority to ESPC
centers of expertise committed to maintaining a staff of qualified
contracting officers. Because of the unique contracting structure of
these procurements, the success of the ESPC program requires a few
experienced contracting officers dedicated to the administration of
ESPCs, rather than expecting all contracting officers who are immersed
in traditional Federal procurement to competently handle an occasional
ESPC award. For the same reason, any available agency facility engineer
is not an acceptable substitute for an experienced ESPC project
facilitator. The Federal ESPC Steering Committee is establishing a
requirement that experienced ESPC project facilitators and qualified
ESPC contracting officers be assigned to every ESPC project.
3. Require, as appropriate and in line with available resources, that
inspectors general or other audit offices conduct audits of ESPC
projects.
DOE concurs with GAO's recommendation that the Secretaries of Defense,
Energy, and Veterans Affairs, the Attorney General, and the
Administrator of the General Services Administration require
appropriate audits to ensure that their agencies' ESPC projects achieve
their expected results.
4. Require contracting centers to work with agencies to (a) ensure the
contracting centers have the information and expertise needed to
effectively develop and monitor their ESPCs, and (b) continue and
expand their ongoing efforts regarding competition.
DOE concurs with GAO's recommendation that the ESPC contracting centers
be required to work with customer agencies to ensure that they have the
assistance and expertise needed to appropriately address ESPC
development, monitoring, and competitiveness issues. DOE believes that
all agencies should make full use of the experienced ESPC project
facilitators and contracting officers who are dedicated to the ESPC
program and provided by the contracting centers.
5. Recommend that the Secretary of Energy collect more extensive
information on agencies' ESPCs.
DOE concurs with GAO's recommendation for Government-wide ESPC data
collection to strengthen the annual report to Congress. DOE also
concurs with the recommendation to compare projects funded by ESPCs
with projects funded up front, and in fact has done so in the past with
limited samples.
Although DOE generally concurs with the recommendations of this draft
GAO report, the following additional comments are provided.
ADDITIONAL COMMENTS:
1. "Even within DOE, for example, the General Counsel's office
expressed an opinion at variance with the FEMP Guide." (pp. 35-36):
GAO suggests that a DOE General Counsel opinion from August 2000
conflicts with FEMP guidelines and practices regarding ESPC pre-
performance-period payments ("P4s"), buyouts, or buydowns. GAO's
statement is not accurate.
DOE General Counsel's opinion of August 18, 2000, requires that any
prepayment such as a buyout, buydown, or P4 can only be applied to an
ESPC if that payment does not exceed the amount of energy cost savings
obtained in the same contract year. Nothing in FEMP's "Practical Guide
to Savings and Payments in Super ESPC Delivery Orders" dated January
2003 ("the FEMP Guide") is inconsistent with the General Counsel's
legal opinion. The FEMP Guide specifically emphasizes that any payment
(including prepayments) made to an ESPC contractor must not exceed the
amount of energy cost savings realized during the contract year. [NOTE
1]
We recognize that the FEMP Guide also indicates that such payments "may
not exceed the. amount planned and budgeted for the avoided project"
(FEMP Guide, p. 8). GAO, however, has taken this reference out of
context. This latter provision is in addition to the requirement that
the payment not exceed the energy cost savings. In order to avoid
future confusion, we will review the FEMP Guide to ensure that this
point is consistent throughout.
2. Competition-related comments primarily related to the small number
of relatively large energy services contractors (ESCOs) that are active
in the program. (pp. 45-46):
As directed by the Energy Policy Act's 1992 amendment to the ESPC
statute, DOE FEMP developed ESPC implementing regulations (10 CFR 436
Subpart B) that were adopted in 1995. As an initial step in providing
competitive contractors for ESPC projects, the regulations established
a list of qualified ESCOs who currently number more than 100.
Originally DOE FEMP developed a model ESPC solicitation for agency
sites to use in competitively selecting an ESCO from the qualified list
and implementing their ESPCs. Agencies did not use this process to
develop ESPC projects, however, because the site-specific method was
too labor-and time-intensive.
In large part because of the unworkable nature of site-specific ESCO
solicitations, ESPC authority went essentially unused until FY 1998,
when DOE FEMP applied the indefinite-delivery, indefinite-quantity
(IDIQ) contract form to ESPCs. The IDIQ method streamlined the process
by competitively selecting ESCOs and awarding them umbrella contracts
for geographic areas. Agencies could then "order" projects from these
preselected, qualified ESCOs. The Army and Air Force did the same, as
did the Navy/Marines for various overseas regions. Since they became
available, 90 percent of the ESPC business has been done under these
umbrella contracts, and in recent years nearly all of it has been.
Although DOE's policy is to re-compete IDIQ contracts every five years,
this could not be done for the DOE Super ESPCs in FY 2003 because the
program's Congressional authority lapsed at the end of the year. Re-
competing the IDIQs will likely not be a prudent use of Government or
private-sector resources until ESPC is permanently reauthorized.
Private-sector firms spend hundreds of thousands of dollars responding
to RFPs of this type, and cannot be expected to participate in a
competitive solicitation so long as the authority is uncertain.
Likewise, significant resources are expended by the Federal Government
to implement a solicitation the size of a Super ESPC.
In anticipation of permanent reauthorization, the DOE Super ESPCs will
be re-competed in 2007, which will open the field to the participation
of additional qualified service providers. Small-business
subcontracting plans and goals in the new IDIQs will be considered by
DOE. DOE will explore opportunities for small businesses in its
multiple awards under the Super ESPC including teaming and pre-
qualification of subcontractors.
3. "Some agency officials linked a perceived lack of competition among
energy service companies with high markups and prices for other
components of ESPCs and poor services-especially after the contract is
signed." (p. 46):
ESPCs who leverage their services from existing regional offices (large
ESPCs) tend to put relatively more of their costs into markup and less
into direct implementation cost than ESPCs who establish and dissolve
project offices as needed (small ESPCs). Government ESPC price
reasonableness reviews have evolved through experience to focus more on
the ail-in price (including markup) for ECMs and services, using
procurement history from both ESPC and directly funded projects as the
comparative basis. Markups are an artifact of the particular ESCO's
business model, being essentially an intermediate accounting
convention. Agencies wanting to use competition to verify price
reasonableness can require their ESPCs to compete ECMs to multiple
construction subcontractors.
4. "We were unable in the scope of this work to determine the extent,
if any, to which a lack of competition, rather than other factors, has
caused finance rates for ESPCs to be higher than for other methods of
financing energy-efficiency improvements. However; due to the large
number of questions raised about this by agencies, we believe this
question should be explored in more depth." (p. 45):
As the GAO draft report recognizes, DOE has already implemented
modifications to its Super ESPC prime contracts that require ESPCs to
source their financing through a competitive process that is
transparent to the Government.
Because improved financing is the most important single action that can
be taken to make ESPCs a better financial deal for the Government,
however, DOE agrees that additional actions to reduce financing costs
should be considered. Under existing law, it is the ESCO's
responsibility to obtain the needed financing. The Government has no
privity of contract with the financing entities. In order for the
Government to be more engaged in the financing transactions, additional
authority is needed. For example, since the Federal Government is able
to access lower-cost sources of capital than a private-sector ESCO,
ESPC authority could be revised to allow the issuance of separate
contracts for (1) ESCO services and energy conservation measures and
the attendant performance guarantees, and (2) project financing.
Essentially all State and local-Government ESPCs are implemented with
separate agreements for the energy services and financing in order to
achieve better financing rates. This structural issue is likely to be
addressed in DOE's upcoming report to Congress mentioned on page 1,
which was required by the legislation providing for the program's
reauthorization.
5. "GAO further recommends that DOE do more to facilitate oversight of
ESPCs." (Highlights page):
DOE's modifications to the Super ESPCs made effective in December 2004
address many of the issues identified in the GAO report. Notable
changes to the contracts include the following:
* Reducing financing costs:
- ESCOs are required to solicit multiple competitive financing offers
from the commercial markets.
- ESCOs are required to use the Government-prescribed Investor Deal
Summary to solicit financing offers.
- All financing offers must be submitted in the form of the Government-
prescribed Standard Financing Offer. The selected offer must be
included in the final proposal.
- ESCOs are required to certify to the Government that their
acquisition of financing was undertaken in accord with best business
practice.
* Price reasonableness determination:
- ESCOs are required to place pricing information in final proposals in
accordance with the Government's pricing placement guidance.
* Measurement and Verification (M&V):
- M&V plans, post-installation reports, and annual reports must conform
to Government-specified outlines.
- Refinements were made to operations and maintenance, repair and
replacement, and commissioning provisions.
For the past two years under the auspices of the Federal ESPC Steering
Committee, FEMP has established and directed multi-disciplinary
technical working groups in areas such as M&V standardization, price
reasonableness review, financing cost reduction, standardization of
commissioning within ESPC to apply the lessons learned, and best
practices as part of its ongoing ESPC quality assurance and improvement
activity. Many of the points raised by GAO have already been identified
and activities to address them completed, underway, or recognized as
needing deeper improvements. FEW intends to ensure that the DOE Super
ESPC program improvements implemented going forward consider and
reflect GAO's recommendations.
NOTE:
[1] A highlighted box on page 9 of the FEMP Guide emphasizes that
contractor payments may not exceed annual energy cost savings:
Payments to ESPC contractors must satisfy these criteria:
* Cost savings must exceed payments. Guaranteed cost savings to the
Federal customer must exceed payments to the contractor in every year
of the delivery order term.
[End of section]
Appendix IV: Comments from the Department of Veterans Affairs:
THE DEPUTY SECRETARY OF VETERANS AFFAIRS:
WASHINGTON:
June 6, 2005:
Mr. Jim Wells:
Director:
Natural Resources and Environment:
U. S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Wells:
The Department of Veterans Affairs (VA) has reviewed your draft report
ENERGY SAVINGS: Performance Contracts Offer Benefits, but Vigilance Is
Needed to Protect Government Interests, (GAO-05-340) and concurs with
your conclusions and recommendations. The enclosure provides general
comments as well as comments to your recommendations. VA appreciates
the opportunity to review your draft report.
Sincerely yours,
Signed by:
Gordon H. Mansfield:
Enclosure:
Enclosure:
The Department of Veterans Affairs (VA) Comments on the Government
Accountability Office's (GAO) Draft Report: "ENERGY SAVINGS:
Performance Contracts Offer Benefits, but Vigilance Is Needed to
Protect Government Interests" (GAO-05-340):
General Comments - GAO conducted a comprehensive analysis of energy
savings performance contracts (ESPC) into which agencies, including
Department of Defense, Department of Energy, General Services
Administration, and Veterans Affairs (VA) have entered over the past
few years. GAO's assessment, based on costs and benefits, appears to be
fair. Many of GAO's findings reflect conclusions about ESPCs that VA
had arrived at previously. For example, VA had determined that due to
lack of competition, using the ESPC as currently structured was not in
the Department's best interest. As a participant on the Federal ESPC
Steering Committee, VA brought the ESPC shortcomings to the steering
committee's attention. The steering committee's various working groups
are addressing many of the issues raised in GAO's report.
To better ensure that federal agencies undertake only those ESPCs
having the greatest likelihood that savings will cover costs and that
the agencies negotiate the best possible contract terms and monitor the
contracts properly, we are making recommendations to the heads of these
agencies included in our review, namely the Secretaries of Defense,
Energy, Justice, and Veterans Affairs, and the Administrator of the
General Services Administration. The recommendations focus on the areas
of information, expertise, and audits,
* Collect and use ESPC-related data more effectively by (1) compiling
information on key contract terms - such as interest rates and mark-ups
for energy-efficiency equipment - for each ESPC and as a key part of
best practices make information accessible to agency officials in
negotiating subsequent ESPCs, and (2) tracking actual costs, verified
savings, and any changes to ESPC projects that may affect these costs
and savings.
Concur - VA recently implemented a national energy conservation program
which addresses ESPC data needs as follows:
1) VA will more effectively track the items and conditions under which
it has entered into ESPCs; and:
2) VA will more effectively collect and track ESPC energy use and cost
information in order to develop practices that will yield the best
agreements and results in future projects for the agency.
Enclosure:
The Department of Veterans Affairs (VA) Comments on the Government
Accountability Office's (GAO) Draft Report: ENERGY SAVINGS: Performance
Contracts Offer Benefits, but Vigilance Is Needed to Protect Government
Interests (GAO-05-340):
* Ensure that the agency officials responsible for the ESPC decision-
making use appropriate expertise when they undertake an ESPC. If the
officials do not have sufficient expertise themselves, they should be
required to obtain it from such independent sources as a centralized
pool within the agency; the contracting centers of Air force, Army
corps, Energy, and Navy; or from private parties. The costs of
acquiring this expertise should be considered in deciding whether to
use an ESPC.
Concur - This is consistent with VA's contracting officers' general
responsibilities. When these officials select vendors, negotiate
agreements and sign contracts, they must thoroughly understand the
implications to which they are committing VA.
Require, as appropriate and in line with available resources, that
inspectors general or other audit offices conduct audits of ESPC
projects to ensure the projects are achieving their expected results.
Concur - VA's Office of Inspector General should audit VA's energy
savings performance initiatives and contracts within its routine audit
process.
[End of section]
Appendix V: Comments from the General Services Administration:
GSA:
GSA Administrator:
June 10, 2005:
Mr. Jim Wells:
Director, Natural Resources and Environment:
U.S. Government Accountability Office:
441 G Street NW:
Washington, DC 20548:
Dear Mr. Wells:
The General Services Administration (GSA) appreciates this opportunity
to submit agency comments on the Government Accountability Office (GAO)
"Draft Report to Congressional Requesters, ENERGY SAVINGS: "Performance
Contracts Offer Benefits, but Vigilance Is Needed to Protect Government
Interests," GAO-05-340 (Draft Report). The findings and recommendations
of this draft report reflect the thoroughness of the audit and high
level of communication between GSA specialists and GAO auditors.
We concur with your assessment that this program offers benefits beyond
simple energy savings. While the report did not identify any specific
GSA Energy Savings Performance Contract (ESPC) projects not having
sufficient savings to cover costs, we realize that this was only a
result of a high level of due diligence by agency regional operations
staff, which must be maintained and can always be improved upon. In
this regard, GSA can and will improve its centralized oversight of all
ESPCs awarded within the agency.
We recognize that ESPCs represent an alternative funding source, which
carries with it a responsibility to execute these contracts using
proper and consistent methods pursuant to Department of Energy (DoE)
guidance. Therefore, it is our intention to implement the
recommendations offered, in coordination with the other Federal
agencies, through the Federal ESPC Steering Committee, chaired by DoE's
Federal Energy Management Program (FEMP). Our comments are enclosed.
Thank you for the opportunity to comment on the draft report. Should
you have any questions, please contact me. Staff inquiries may be
directed to Mr. Sam Hunter, Public Buildings Service, at (202) 501-
0353.
Sincerely,
Signed by:
Stephen A. Perry:
Administrator:
Enclosure:
GAO DRAFT REPORT DATED MAY 4, 2005 GAO-05-340 (GAO CODE 360425):
"ENERGY SAVINGS: Performance Contracts Offer Benefits, but Vigilance Is
Needed to Protect Government Interests"
GENERAL SERVICES ADMINISTRATION COMMENTS TO THE GAO RECOMMENDATIONS:
RECOMMENDATION 1: GAO recommended that GSA compile information on key
contract terms-such as interest rates and mark-ups for energy-
efficiency equipment-for each ESPC and as a key part of best practices,
make information accessible to agency officials in negotiating
subsequent ESPCs. (p. 55/GAO Draft Report):
GSA RESPONSE: GSA concurs and plans to implement this recommendation
consistent with its internal agency action plan:
RECOMMENDATION 2: GAO recommended that GSA ensure that the agency
officials responsible for ESPC decision-making use appropriate
expertise when they undertake an ESPC. If the officials do not have
sufficient expertise themselves, they should be required to obtain it
from such independent sources as: (a) a centralized pool within the
agency; (b) the contracting centers of Air Force, Army Corps, Energy
and Navy; or (c) private parties. The cost in acquiring this expertise
should be considered in deciding whether to use an ESPC. (p. 55/GAO
Draft Report):
GSA RESPONSE GSA concurs and plans to implement this recommendation
consistent with its internal agency action plan.
RECOMMENDATION 3: GAO recommended that GSA require inspectors general
or other audit offices to conduct audits of ESPC projects to ensure the
projects are achieving their expected results. (p. 56/GAO Draft Report):
GSA RESPONSE: GSA's Office of the Inspector General (OIG) has conducted
audits of GSA's use of ESPCs in the past. GSA concurs and plans to
continue this practice consistent with its internal agency OIG audit
schedule.
[End of section]
Appendix VI: GAO Contact and Staff Acknowledgments:
GAO Contact:
Jim Wells, (202) 512-3841:
Staff Acknowledgments:
In addition to the individual named above, Dan Haas, Dennis Carroll,
Randy Jones, Hugh Paquette, Frank Rusco, Karla Springer, Barbara
Timmerman, and Jena Whitley made key contributions to this report.
Chris Bonham, Carol Henn, Cynthia Norris, and Jena Sinkfield also
contributed.
(360425):
FOOTNOTES
[1] Fiscal year 2002 is the latest year for which the Department of
Energy has reported data on federal energy use, see U.S. Department of
Energy, Annual Report to Congress on Federal Energy Management and
Conservation Programs Fiscal Year 2002 (Washington, D.C.: Sept. 29,
2004).
[2] GAO, Capital Financing: Partnerships and Energy Savings Performance
Contracts Raise Budgeting and Monitoring Concerns, GAO-05-55
(Washington, D.C.: Dec. 16, 2004).
[3] By law, payment to an energy services company must reflect the
savings guarantee. Because energy services companies are accountable
for guaranteeing the performance of the equipment installed, if savings
are reduced due to equipment performance, the company must correct any
related problems. In some instances the contract may stipulate an
amount of savings that will be achieved. In the event that this
stipulation overstates actual savings, the agency must still make
payments based on the amount of savings stipulated. However, if
stipulation understates savings, the agency obtains the additional
savings at no additional cost.
[4] ESPCs were first introduced under the Comprehensive Omnibus Budget
Reconciliation Act of 1985, Pub. L. 99-272, which amended the National
Energy Conservation Policy Act. Agencies' authority to use ESPCs was
further extended under the Energy Policy Act of 1992, Pub. L. No. 102-
486, to authorize agencies to use energy savings performance contracts
as a tool for implementing energy-efficiency improvements. Prior to the
Energy Policy Act, the Federal Energy Management Improvement Act of
1988 mandated a 10 percent reduction in energy used per square foot in
federal buildings between 1985 and 1995. Executive Order 12759 issued
April 17, 1991, extended these reduction requirements to the year 2000,
requiring a 20 percent reduction from 1985 levels. These requirements
were incorporated into the Energy Policy Act of 1992 (42 U.S.C. § 8253
(a) (1)). Executive Order 12902 issued March 8, 1994, increased the
reduction to 30 percent per gross square foot by 2005 compared to 1985
to the extent that the improvements are cost effective, and Executive
Order 13123, issued June 3, 1999, extended this further to 35 percent
by 2010.
[5] Currently DOD and GSA may retain and use 100 percent of all savings
without further appropriation. Other agencies can retain 50 percent of
savings and must return the other 50 percent to the Treasury.
[6] ESPC contracting assistance from FEMP and the U.S. Army Corps of
Engineers is available to all agencies, although the contracting
assistance from the Air Force is available only to Air Force
installations or military tenants located there. Currently, the Navy
and Marine Corps use the FEMP super ESPCs for their ESPC projects, and
because the Navy has centralized technical and contracting support
staff who are familiar with ESPCs, the Navy and Marine Corps use the
Navy technical and contracting staff to provide most of the support for
Navy and Marine Corps ESPCs.
[7] Markups are expressed as a percentage of the cost of a particular
energy-efficiency improvement.
[8] DOE has certified as prequalified energy services companies in six
regions of the country; the Air Force has prequalified companies in six
regions; and the U.S. Army Corps of Engineers has two major contracts:
a 46-state and a 4-state contract.
[9] By law, payment to an energy services company must reflect the
savings guarantee. Since energy services companies are accountable for
guaranteeing the performance of the equipment installed, if savings are
reduced due to equipment performance, the company must correct any
related problems.
[10] GAO-05-55.
[11] MMBTU stands for million British thermal units and is a standard
unit used to measure energy usage. The estimated 9.1 million MMBTUs in
energy savings from ESPCs is equal to the annual energy needed for
about 98,000 households, at an average of about 92 MMBTUs per household
per year.
[12] The agencies reported estimated, rather than actual, BTUs saved.
[13] Attempts to obtain appropriations included requesting funds in the
President's budget, from the Office of Management and Budget, or
internally within the agency.
[14] GAO, Capital Financing: Partnerships and Energy Savings
Performance Contracts Raise Budgeting and Monitoring Concerns, GAO-05-
55 (Washington, D.C.: Dec. 16, 2004).
[15] Ernest Orlando Lawrence Berkeley National Laboratory, Public and
Institutional Markets for ESCO Services: Comparing Programs, Practices
and Performance, LBNL-55002 (University of Calif. Berkeley, California;
March 2005).
[16] We were told that, on average, project construction/installation
takes up to 2 years to complete and be accepted by the agency, after
which the performance period begins.
[17] 42 U.S.C. § 8287 (a)(2)(B).
[18] In commenting on a draft of this report, DOE disagreed with our
assessment that the opinion of the General Counsel's office and FEMP
guidance are at variance. Nevertheless, DOE plans to address this point
through guidance and in an upcoming report on ESPCs to the Congress.
Consequently, we did not change the report text.
[19] As we pointed out in our earlier report, once agencies decide to
use an ESPC and select an energy services company to work with, they
must ensure that the government's interests are protected from the
potential conflicts that may arise.
[20] Enhanced-use leases allow authorized agencies to enter into long-
term real property leases. Like ESPCs, they allow agencies to use
private funds to finance improvements to real property, including
energy-efficiency improvements.
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