utility privatization in the military services: issues, problems, and
potential solutions

Major Jeffrey a. Renshaw[^1]

**I. Introduction**

The Department of Defense (DoD) issued Defense Reform Initiative
Directive No. 9 ("DRID No. 9"), "Privatizing Utility Systems," on 10
December 1997, thus launching the DoD's Utility Privatization
initiative. It directed the military departments "to develop a plan for
privatizing all of their utility systems (electric, water, waste water
and natural gas) by January 1, 2000, except those needed for unique
security reasons, or when privatization is uneconomical."[^2] Defense
Reform Initiative Directive No. 49, "Privatizing Utility Systems" ("DRID
No. 49"), came along a year later, fleshing out the DRID No. 9 mandate
and extending the date for the military services to award utility
privatization contracts for all eligible utility distribution systems to
no later than 30 September 2003.[^3] Defense Reform Initiative Directive
Nos. 9 and 49 were issued pursuant to authority granted by Congress in
10 U.S.C. § 2688,[^4] which allowed, but did not require, federal
agencies, including the military services, to privatize their utility
systems.

Implementation of the directives has proved troublesome. Defense Reform
Initiative Directive No. 49 set out an interim milestone -- that utility
privatization solicitations for all eligible-to-be-privatized systems be
released "on the street" no later than 30 September 2001.[^5] None of
the services met this milestone. The fact that this milestone was not
met by any of the services is indicative of the problems facing utility
privatization implementers. This article will explore four[^6] of the
more difficult legal issues challenging both policy-makers in the
military services and utility privatization implementers at the
installation-level, where "the rubber meets the road."[^7]

The first "issue" is an overarching one that is more of a policy
discussion than a legal issue. Considering that the military services
have not met the DRID No. 49 interim milestone to have all utility
privatization solicitations released by 30 September 2001, what is the
likelihood they will meet the 30 September 2003 deadline to have all
eligible utility systems privatized? Further, is the 30 September 2003
deadline wise; is it in the best interest of the services? The
Department of Defense very recently answered "no" to this question, and
apparently the deadlines will be pushed further back.[^8]

The second issue is what effect, if any, state law has upon the utility
privatization contractor selection process and upon the subsequent
contractual relationship between military installations and the selected
utility privatization contractors. The article will also address whether
installations should desire, and enthusiastically accept, state
regulation of their relationship with the utility privatization
contractor, irrespective of whether Federal law preempts state law in
these areas.

The third issue addressed is a very practical one. What happens if the
utility privatization contractor fails to perform satisfactorily during
the life of the utility service contract? Further, what happens at the
end of the fifty-year service contract and what type of bargaining
position will the installation be in, considering that the contractor
owns the utility system and is in effect "the only game in town?"
Remedies available to the government in the event of contractor default,
and in the event the government and contractor are unable to
successfully negotiate a follow-on to the initial fifty-year service
contract, will be explored.

The fourth and final issue concerns use of the Federal Acquisition
Regulation (FAR) contract clauses and compares the "Negotiated Rates"
clause[^9] against the "Regulated Rates" clause[^10] in utility service
contracts with municipal utility privatization contractors. Part 241 of
the Defense Federal Acquisition Regulations (DFARS)[^11] requires that
utility service rates between federal agencies and municipal utility
companies be negotiated. Many municipal utility companies hold a
different view, believing they are entitled to use of the Regulated
Rates clause. This dispute caused the breakdown of utility privatization
negotiations between an Air Force base and a municipal utility company,
and is a thorny issue that may also adversely affect future negotiations
between military installations and municipal utility companies.

**II. Background**

A. What is Utility Privatization, and Why Does DoD Want To Do It?

Utility Privatization is the sale of government-owned on-base utility
distribution systems to a private entity that will then operate the
systems and provide utility services to the base's buildings and
activities.[^12] It is important to distinguish "privatization" from
"contracting out" and "outsourcing." Unfortunately, many times these
terms are used interchangeably, causing confusion. Basically, in utility
privatization, the government is selling its on-base utility
distribution systems -- electric, natural gas, water, and wastewater
systems -- to private entities. The contractor buying these systems will
then own them and will be responsible for their operation and
maintenance. The government is *not* retaining ownership of the systems
and contracting-out their operation and maintenance to a private entity.
It is selling the systems outright.[^13]

The DRID No. 49 objective is "to get DoD out of the business of owning,
managing, and operating utility systems by privatizing them."[^14] The
DoD has issued draft utility privatization guidance, which is expected
to be released in final format in the near future. The draft guidance
states in part:

> \[T\]he purpose of privatization is to allow the Defense Components to
> focus on core defense missions and functions by relieving them of
> those installation management activities that can be done more
> efficiently and effectively by others. Historically, military
> installations have been unable to fully upgrade and maintain utility
> systems due to inadequate funding and competing installation
> management priorities. Utilities privatization will allow military
> installations the opportunity to benefit from private sector financing
> and efficiencies to obtain improved utility systems and services.[^15]

One commentator suggests another rationale for DoD utility
privatization, stating "\[i\]n the government budget process, it is much
easier for the services to ask for and receive 'utility operating
dollars' (which is the classification of the privatization payments made
to a utility) than capital dollars to rebuild the systems."[^16] If
indeed this is DoD's logic, it is questionable. This logic assumes that
although military installations cannot convince Congress to properly
fund upgrades to military-owned utility systems, Congress will view
utility bills as "must pay" items. Therefore, needed upgrades to
military utility infrastructure will be obtained by selling the systems
to private entities, who will then upgrade the systems and incorporate
the cost of upgrades in their utility bills to the installations \-- a
convoluted, but apparently necessary means of obtaining properly
functioning utility systems.

B. What Exactly is Being Privatized?

Although 10 U.S.C. §2688 authorized military services to convey steam,
hot and chilled water, and telecommunications systems to private
entities, DRID No. 9 focused on the so-called "Big 4" utility systems --
electric, water, wastewater, and natural gas.[^17] The term "utility
systems" refers to an installation's electric, water, wastewater, and
natural gas utility distribution systems. It refers to utility
infrastructure -- wires, pipes, mains, switching stations, and
transformers. Basically, it involves the utility infrastructure that
connects the base to the off-base commodity supplier and connects the
various buildings on the installation. It does not include wiring and
piping found inside buildings.[^18]

> **C. What "Service" Will the Utility Privatization Contractor
> Provide?**

When an installation privatizes its on-base electric distribution
system, for example, the entity buying the system (the "utility
privatization contractor") will own the system, and will operate and
maintain the system. The "service" provided by the utilities
privatization contractor thereafter is the operation and maintenance of
the distribution system, presumably ensuring the flow of electricity to
those installation buildings requiring it. The actual electricity, the
electrons being distributed over the now contractor-owned system,
typically will not be generated or provided by the utility privatization
contractor. In fact, both the Army and Air Force utility privatization
Request for Proposal (RFP) templates specifically state the "commodity"
is not included in the utility service contract and will not be provided
by the utility privatization contractor.[^19]

In a utility privatization scenario, you could have Electric Utility
Company A delivering the commodity (electricity) to the installation
substation, formerly owned and operated by the installation but now
owned by Utility Privatization Contractor B, to then be distributed to
all the installation's buildings and facilities requiring a supply of
electricity, over a distribution system formerly owned by the
installation, but now owned by Utility Privatization Contractor B.
Alternatively, it is possible that Electric Utility Company A could be
selected as the Utility Privatization Contractor, in which case, it
would be providing both the commodity (the electricity, the electrons)
to the base, as well as distribution services over the on-base electric
distribution system it just purchased. However, in that scenario,
Electric Utility Company A will continue to provide the electricity
commodity, the electrons, to the installation pursuant to a different
contract, and not pursuant to the utility privatization service
contract.[^20]

Military installations located in states that have not deregulated their
electric industries typically buy their electricity from a
state-regulated entity colloquially known as the "local utility."
Section 8093 of the Fiscal Year 1988 DoD Appropriations Act[^21]
requires Federal agencies to purchase electricity in a manner consistent
with state law. Section 8093 is implemented in Federal procurement
policy.[^22] In those states that have *not* deregulated, state utility
regulatory commissions have generally granted the exclusive right to
provide electric service within certain designated territories to
regulated utility companies. A military installation falling within one
of those state commission-designated territories is required therefore
to purchase its electricity from the utility company holding the service
territory franchise. In those states that *have* deregulated their
electric industries, the military installations, along with other
electric customers, are given the right to purchase their electricity on
the open market, from electric generation power-producing companies, and
not just from the "local utility." States are deregulating their
electric industries on a piecemeal basis and this process, although
occurring at the same time as utility privatization, is not related to
it.

D. How Will Privatization be Accomplished?

In the typical scenario, a military installation will conduct a
competitive solicitation for its utility privatization project. Once the
successful offeror is selected, the installation will enter into three
separate agreements with the contractor. First, the installation will
award a utility service contract to that contractor for a term of up to
fifty years.[^23] Second, the installation will sell the particular
utility system to the contractor via a bill of sale, concurrent with the
signing of the utility service contract. The privatization statute
requires that the installation receive fair market value on the sale of
the system from the contractor. Third, the installation will grant a
right of way to the contractor to allow it to enter the base to operate
and maintain its utility system concurrent with the contract action and
bill of sale.

Typically, the sale will involve only the utility infrastructure, and
not the land surrounding the infrastructure, i.e., the land over, above,
under, around the infrastructure.[^24] When one says that Base A is
"privatizing" its electric utility distribution system, for example, to
Utility Company B, that means Base A has agreed to sell its electric
system to Company B. Base A has also agreed to enter into a utility
service contract with Company B, and to grant a right of way to Company
B to allow it to enter the base and operate and maintain its (Company
B's) utility system. The three actions are inextricably entwined and
interdependent; an installation would not sell its utility system to a
private entity without first reaching an acceptable agreement with that
entity to operate and maintain the system for the installation's
benefit. Likewise, a utility company would not purchase a utility system
and enter into a contract to provide service without having a right of
way to come onto the installation to operate and maintain its utility
system.[^25]

The terms "regulated utility" and "unregulated utility" are used
throughout this article. A "regulated utility company" refers to an
entity that is regulated by a state regulatory commission, typically
called "public utility commissions" or "public service commissions."
Military installations typically buy their electric power, for example,
from an entity that is authorized by the state commission to sell
electricity in a defined service territory that encompasses the
installation. An "unregulated utility company" refers to an entity that
is not presently regulated by a state regulatory commission. Unregulated
as well as regulated entities compete for award of installation utility
privatization contracts. Generally speaking, a regulated utility is
concerned with whether its purchase, operation and maintenance of an
on-base utility system is permitted by the state body that regulates it,
and to what extent its operation of the system must be consistent with
state laws and regulations. Unregulated entities do not share these
concerns; however, representatives of the regulated utility industry
argue that after an unregulated entity purchases an installation's
utility system, that entity must thereafter become subject to state
regulation.[^26]

III\. The DRID No. 49 Deadline to Privatize by 30 September 2003 is Not
Realistic and will be Extended

A. Milestone No. 2 of DRID No. 49 Not Met

The DoD set an interim goal in DRID No. 49, milestone No. 2, to have all
utility privatization solicitations released by 30 September 2001. That
is, for all DoD utility systems eligible to be privatized (systems not
previously exempted from privatization due to security or economic
concerns), the military services were directed to have all solicitations
"on the street" by 30 September 2001. None of the services met this
goal. As of 12 November 2001, the Army had released only 125 Requests
for Proposals (RFPs) out of 294 utility systems available to privatize;
the Navy, including the Marine Corps, had released only 397 RFPs out of
722 utility systems available to privatize; and the Air Force had
released only 180 RFPs out of 434 utility systems available to
privatize.[^27] Each service reported higher numbers of solicitation
releases in their January 2002 Quarterly Reports, but each still falls
well short of the DRID No. 49 goal.[^28]

B. What is The Problem?

According to a July 2000 General Accounting Office (GAO) report:

> Significant problems are being encountered in privatizing utility
> systems and the Department is unlikely to meet its goals. As of
> December 31, 1999, DOD has privatized only 13 of the approximately
> 1,700 systems it is considering for privatization.... According to DOD
> officials, privatization efforts are very complex, time consuming, and
> costly. For example, privatization includes describing the current
> condition of about 1,700 utility systems, analyzing myriad state and
> local laws governing utilities, and determining the best value offer
> received from interested utility companies.[^29]

In May 2001, Randall Yim, the DoD Deputy Undersecretary For
Installations, reportedly considered "extending a 2003 deadline for
privatizing 1,600 utility systems at bases across the country amid
industry complaints that the deadline is unrealistic,"[^30] but the
deadline remained unchanged. Draft utility privatization guidance that
DoD has been readying to issue in the near future re-affirmed the 30
September 2003 deadline to privatize all eligible military utility
systems,[^31] however, most recent indications from DoD are that the
deadline will be pushed back a "year or two."[^32] As of 12 November
2001, the Army had awarded twenty utility privatization contracts, the
Navy three, and the Air Force none. Therefore, at that time only 14.15%
of eligible, available utility systems had been privatized.[^33] The
number of systems privatized increased slightly by January 2002, as the
Army reported twenty-four systems awarded, the Navy still three, and the
Air Force, two.[^34] The DoD has no doubt taken these figures to heart
and it appears will extend the DRID No. 49 deadline of 30 September 2003
to a later date.

Rumblings and uncertainty concerning the wisdom of the 30 September 2003
deadline were evident in the Fall of 2001, specifically, at a 6
September 2001 DoD Installations Policy Board (IPB) meeting.[^35] The
January 2002 Army and Air Force utility privatization Quarterly Reports
reference this meeting; the Army understanding of the IPB meeting
outcome is that the DRID No. 49 interim milestones have been "deleted,"
leaving two options open. Those two options are to either: (1) retain
utility system ownership and fund the upgrades necessary to bring them
up to standards, or (2) privatize utilities systems to entities better
able to upgrade and maintain them."[^36] The January 2002 Air Force
Quarterly Report states, "The OSD Installations Policy Board (IPB)
meeting held on 6 Sep 01 instructed the services to prepare a utilities
revitalization plan without regard to the Defense Reform Initiative
Directive (DRID) #49 milestones."[^37] The most recent Navy Quarterly
Report does not mention the 6 September 2001 IPB meeting, but discusses
a "master plan" representing "the DON's revised acquisition timeline to
show the issuance of RFPs and evaluation of proposals in a phased and
balanced approach through 2005."[^38]

In addition to issuing new rules that push back the 2003 deadline by a
year or two, the DoD should also either clearly affirm, or deny, the
Army's understanding that privatization is no longer mandatory, but is
now one of two "options." The DoD policy has been to privatize *all*
utility systems eligible to be privatized. A system is "eligible to
privatize" if not exempted from privatization for security reasons or
because it is uneconomical to privatize.[^39] However, as a result of
the September 2001 DoD IPB meeting, the Army believes that there is now
an option to fund the upgrades necessary to bring military utility
systems up to standards, *in lieu of privatization.* This is a "third
exemption" to utility privatization that has heretofore not existed. Is
this the result DoD wants? It should clearly state so, one way or the
other.

C. Military Services' Perspectives

An Army forum was conducted on 9 August 2001 with the underlying
premise, "\[t\]he Army's Utility Privatization Program is broken and
needs to be fixed."[^40] That forum concluded that "a. The Program is
alive and well; b. The hardest part is generally over and, c. We'll make
the Sep 03 goal."[^41] Following the September 2001 IPB meeting,
however, the Army now understands utility privatization to be optional
and not mandatory for all eligible systems, but views privatization as
the "preferred course of action" and will continue to push towards
privatization of all eligible utility systems by 30 September 2003.[^42]

In its July 2001 Quarterly Report, the Navy stated "as of 30 June 2001,
RFPs have been issued for 398 systems. This represents a 55% completion
of Milestone #2."[^43] The DoD statistics discussed above confirm,
however, that the Navy did not meet the 30 September 2001 milestone as
directed by DRID No. 49.[^44] In the "Outstanding Issues" section of its
Report, the Navy noted industry concerns as to the reasonableness of the
DRID deadlines and recommended (1) that DoD "issue policy that puts a
hiatus on requiring the Services to issue further RFPs in order to meet
the 30 September 2001 milestone; and (2) develop a joint-service
interdisciplinary working group under the Installations Policy Board to
make recommendations for program changes."[^45] The January 2002 Navy
Quarterly Report stated the Navy had developed a "master detailed plan"
which in effect would extend the DRID No. 49 deadline to 2005.[^46]

In the summer of 2000, the Air Force instituted what it called the
"Utility Privatization Pathfinder Program." Those bases named as
"Pathfinders" would, in effect, serve as the guinea pigs in ferreting
out lessons to be learned in how best to privatize utilities in the Air
Force. The remaining "Non-Pathfinder" bases have been put on hold, and
their solicitations will not be released until an undetermined future
date. Out of 434 eligible-to-privatize utility systems, the Air Force
has only named 79 as "Pathfinders." That means 355 Air Force utility
systems are eligible to be privatized, but are presently classified as
"Non-Pathfinders" and are not on the fast track to privatization.[^47]
The January 2002 Air Force Quarterly Report discusses the Air Force's
understanding that the 6 September 2001 DoD IPB meeting would ultimately
result in new DRID No. 49 milestone dates.[^48]

D. Congressional Perspective

The U.S. Senate Committee on Armed Services Report accompanying its
proposed amendment[^49] to 10 U.S.C. § 2688 stated in part:

> \[S\]pecifically, the committee believes that the Department may not
> be giving potential offerors enough time to respond to its requests
> for proposals. This particularly affects the utilities required to
> obtain permission from their regulators in order to form teams or
> partnerships to respond to the Department's requirements. Providing
> insufficient time for regulated entities, therefore, has the effect of
> limiting competition. The Department should examine and adjust its
> existing timetables to ensure that potential competitors have adequate
> time to respond.[^50]

**E. Where Are We?**

The Senate Committee on Armed Services Report excerpt above shows that
some members of the Senate, at least, are not pushing any sort of
timetable upon DoD within which to accomplish utility privatization.
There certainly is no legal authority mandating that utility
privatization in the military be accomplished by a certain date, and in
fact, there is a sense from Congress to slow down and make sure the
timetables give potential offerors the opportunity to properly respond.

The Air Force's Pathfinder Program is based upon the premise that
utility privatization will be done the right way. The Air Force will
take the time to form lessons learned, and then apply those lessons to
Non-Pathfinder solicitations. However, it seems unlikely that taking
such a measured, common-sense approach will lead the Air Force to
meeting a 30 September 2003 deadline to privatize all eligible systems.
In fact, the 30 September 2003 DoD deadline will likely not be met by
any of the services. The deadline should be extended to allow the
release of well-crafted RFPs, and to allow potential offerors enough
time to submit worthwhile proposals. The sense of the Senate[^51] is
correct, and there is no reason to impose unreasonable artificial
deadlines. This is a message apparently "received" at DoD and the
deadline is expected to be extended.[^52]

Further, DoD needs to clarify the outcome of the 6 September 2001 IPB
meeting. The Army understands that privatization of all eligible systems
is no longer required, and that a new option to fund system upgrades and
retain ownership now exists. Is the Army correct? Is the current DoD
policy that installations do not have to privatize their eligible
utility systems, but if they do privatize, they have to do so within the
DRID No. 49 timeline or within extended deadlines? If so, this is a
major and welcome shift in policy.

IV\. The Role of State Laws and Regulations in Utility Privatization

One area meriting careful DoD evaluation is state law interaction with
utility privatization implementation. Generally speaking, it appears
that state law has neither authority over the utility privatization
solicitation process, nor over the contractors selected in the
solicitation process. However, state regulation has benefits that DoD
may want to take advantage of, and indeed, the current Army and Air
Force solicitation templates give state regulatory bodies significant
authority over the installations' relationship with the utility
privatization contractor.

**A. The Issues**

Two main issues exist regarding the interface between state law and
utility privatization. The first issue concerns whether state laws and
regulations apply to the conveyance of an on-base utility system to a
private entity under 10 U.S.C. § 2688. In other words, does state law
have any effect on either the solicitation process or on a military
installation's selection of a utility privatization contractor?
Regulated utility companies (companies regulated by state public utility
commissions)[^53] have argued that because state commission-set service
territories encompass the privatizing military installation, state law
therefore mandates that the installation award its utility privatization
project to the regulated utility on a sole source basis. This position
has been rejected by DoD and has not been supported by either the GAO or
the Maryland Federal District Court that reviewed the issue.[^54]

The second issue concerns state regulation of utility privatization
contractors. Does state law have any impact on the relationship between
a military installation and the utility privatization contractor that
the installation selects to own, operate and maintain the on-base
utility distribution system? Do state public utility commissions have
any jurisdiction over the utility privatization contractor, especially
if the contractor selected is a "regulated utility?"

A third, and much more interesting issue is whether, regardless of what
the law strictly requires, DoD should nevertheless *desire* state
regulation of its relationships with its utility privatization
contractors. Indeed, and in seeming contravention of a DoD General
Counsel (DoD/GC) opinion,[^55] the current Army and Air Force utility
privatization solicitation templates include provisions that would
require military installations to pay utility rates set by a state
regulatory commission, perhaps the strongest form of state regulation.

B. DoD Position

*1. DoD/GC 24 February 2000 Opinion*

The General Counsel of the Department of Defense (DoD/GC) issued an
opinion on "The Role of State Laws and Regulations in Utility
Privatization" on 24 February 2000.[^56] This "opinion" has no
precedential value but one assumes the military services are expected to
follow it. The opinion concludes that state law is not applicable to the
conveyance of on-base utility systems under 10 U.S.C. § 2688. Federal
installations are to conduct utility privatization solicitations
competitively, as required by Section 2688, regardless of whether state
law application might result in a sole-source award to a specified
utility company.[^57] Further, the opinion reads, "\[t\]he state may not
regulate the Federal Government's acquisition of utility services
related to the on-base utility system. Federal procurement laws and
regulations are supreme in this area."[^58]

The practical effect of DoD/GC's opinion is that military installations
pursuing utility privatization projects must conduct their solicitations
competitively in accordance with 10 U.S.C. § 2688, without regard to any
conflicting state law that might prohibit competitive solicitations.
Further, once the utility privatization contractor is competitively
selected, that contractor's relationship with the installation will not
be regulated by the state.

*2. Caveats to DoD/GC Opinion*

*a. Limited State Regulation Permitted*

The DoD/GC opinion leaves room for some level of state regulation of a
utility privatization contractor. Pervasive state regulation, especially
that which would overturn an installation's competitive selection of a
contractor, is not permitted. However, certain state regulations and
laws regarding the contractor's operation of the on-base system may have
to be complied with, if they do not impose a significant burden on the
federal government.[^59]

The DoD/GC opinion explains that in some instances, state regulators
have used what could be called a back-door approach to regulating
contractors on federal installations. The result is often a conflict
between Federal regulations affecting Federal purchases and state
regulation of providers of goods and services in its territory.
Typically, states will require a provider of a particular service or
item of supply to be licensed while Federal contracting rules do not
require the vendor to obtain a state license.[^60]

One can envision a utility privatization scenario in which a state
utility regulatory commission would not aggressively insert itself into,
or actively oppose, the competitive solicitation process. The state
commission in this scenario would not necessarily maintain that it had
the authority to tell a military installation how to conduct its utility
privatization solicitation and would not pointedly direct the
sole-source selection of a particular utility company as the utility
privatization contractor. However, if the state commission required the
utility privatization contractor to possess a state license issued by
the commission, then the state regulatory licensing procedure would
interfere with the federal contractor selection process. Additionally,
if the state commission would only give a license to the utility company
granted the particular state commission-set service territory
encompassing the military installation, then of course the state
regulator would be indirectly and improperly interfering with the
federal selection process.

The DoD/GC opinion resolves the conflict between state and federal law
through a Constitutional Supremacy Clause analysis."[^61] The opinion
cites *California Fed. Savings & Loan Ass'n v. Guerra* for the
proposition that "\[C\]ongressional intent to pre-empt state law in a
particular area may be inferred where the scheme of federal regulation
is sufficiently comprehensive to make reasonable the inference that
Congress 'left no room' for supplementary state regulation."[^62]

In DoD/GC's view, while these Constitutional principles prevent a state
from requiring a military installation's utility privatization
contractor to obtain a state license, they do not shut out all forms of
state regulation. The opinion recognizes that, by and large, on-base
utility distribution systems are interconnected with larger off-base
systems. The well-being of the entire system, in essence, depends in
part upon the proper operation of the on-base portion of the system.
Therefore, DoD/GC recognizes that installations should follow some
state-imposed safety and health regulations that affect the entire
utility system.[^63]

The DoD/GC, therefore, envisions some level of permissible state
regulation of the utility privatization contractor. The issue that will
be discussed later[^64] is whether the DoD/GC opinion's "permissible
level of state regulation" would include a federal installation's
payment of state commission-set utility rates to a utility privatization
contractor that is regulated by the state.

*b. "Section 8093"*

Section 8093 of Fiscal Year 1988 DoD Appropriations Act requires federal
agencies to purchase electricity in a manner consistent with state law,
including compliance with state utility commission rulings and electric
utility franchises or service territories established pursuant to state
law.[^65] However, the 24 February 2000 DoD/GC opinion narrowly
construed this statute such that only the electricity commodity must be
purchased in accordance with state law.[^66] Utility privatization does
not include the purchase of the electricity commodity, but rather,
involves the conveyance of on-base electric distribution systems to
private entities that will then own, operate and maintain the electric
systems. The installation will continue to purchase its electricity from
the local provider, in accordance with state law (in those states that
have not deregulated their electric industry).

C. GAO and Maryland Federal District Court Decisions Support DoD/GC
Position

In *Virginia Electric and Power Company (VEPCO); Baltimore Gas &
Electric Company (BG&E),*[^67] two regulated utility companies protested
the competitive solicitation issued by the Army Corp of Engineers for
the privatization of utilities at five installations in the National
Capital Region under the Military District of Washington (MDW).[^68] The
VEPCO and BG&E contended the solicitation was improper because it failed
"to recognize that the privatization of the utilities is subject to
state and local utility law and regulation."[^69]

The GAO denied the protest, deciding that 10 U.S.C. § 2688 preempted
state law.[^70] The GAO noted that "the effect of the protesters'
argument would be that the contracts for electric and gas distribution
would be awarded on a sole-source basis to the company holding the local
utility franchise at each installation,"[^71] an impermissible effect in
the GAO's view.[^72] The GAO rejected the protester's argument that
Section 8093 required compliance with state law dictating the utility
privatization contractor selection process, instead following the DoD/GC
opinion's narrow construction of Section 8093.[^73]

The BG&E disagreed with GAO's decision and filed suit in Maryland
Federal District Court.[^74] The District Court concurred with the GAO
opinion, holding that 10 U.S.C. § 2688 clearly required the use of
competitive procedures in selecting utility privatization contractors,
even if this procedure conflicted with state law and regulations.[^75]
In the court proceedings, BG&E's focus shifted somewhat from attacking
the solicitation procedure to attacking the post-award status of the
successful offeror. The BG&E argued to the federal court that DoD's
solicitation was illegal because it did "not specify that the PSC will
have jurisdiction over the successful bidder that becomes the new owner
of the Fort Meade utility distribution system,"[^76] and also because
the "\[s\]olicitation does not require that a bidder hold franchise
rights and a utility license issued by the PSC."[^77]

In the federal court case, BG&E argued again that Section 8093 required
federal agencies, including military installations, to adhere to state
commission-service territories when awarding utility privatization
contracts. The court, however, agreed with the GAO's observation that
the effect of accepting BG&E's argument "would be that the contracts for
electric and natural gas distribution would be awarded on a sole-source
basis to the company holding the local utility franchise,"[^78] an
effect neither the GAO nor the Maryland Federal District Court was
willing to adopt. The Court found that "in the October 2000 amendments
to Section 2688, Congress expressly prohibited the application of state
public utility law to curtail competitive bidding for any of the Army's
privatization contracts."[^79] The Court held that 10 U.S.C. § 2688
preempted any state public utility laws that precluded competition.[^80]

D. Even if the Federal Government is Not Legally Required to Accept
State Jurisdiction Over the Utility Privatization Contractor, Should It
Nevertheless Desire State Jurisdiction? Moreover, Do the Army and Air
Force RFP Templates Actually Promote State Jurisdiction?

Although both GAO and the Maryland court upheld DoD's position on state
regulatory authority, some, particularly those representing national
associations of regulated utility companies, argue DoD is foolish to not
desire the many benefits that state regulation has to offer. In effect,
they argue, why should DoD pay to police and monitor the utility
privatization contractor with government personnel, when DoD can receive
the benefits of state regulation for free?

*1. Arguments in Favor of State Regulation/Jurisdiction*

The regulated utility industry lobbied Congress heavily in 2000 to enact
an amendment proposed in the U.S. House of Representatives that would
have required DoD installations to comply with state law in their
implementation of utility privatization projects.[^81] They believed the
House amendment would likely result in utility privatization sole-source
awards to regulated local utility providers because most states have
delineated service territories. In fact, the Court in the *BG&E* case
noted that had the House amendment passed, the result in the case would
have been different, and a decision in favor of BG&E would have been
required.[^82] The House amendment did not pass; instead, Congress
passed an amendment that reaffirmed the competitive solicitation process
but also contained language requiring the utility privatization process
to be conducted in a manner consistent with state laws to the extent
necessary to ensure all interested regulated and unregulated utility
companies and other interested entities receive a fair opportunity to
compete for awards.[^83]

Arguments made by the American Public Power Association (APPA) to
Congress in 2000 were typical of those made by the regulated utility
industry in favor of the proposed House amendment to Section 2688 to
mandate adherence to state law.[^84] The APPA identified three
potentially problematic and costly aspects of selling the utility
systems and awarding long-term utility service contracts to unregulated
entities. The APPA argued that unregulated entities were more likely to
default on utility privatization service contracts than regulated
entities, creating a future estimated \$2 to \$3 billion liability on
the part of DoD.[^85] The second problem they identified dealt with the
"bargaining leverage" that an unregulated entity would hold at the end
of the initial fifty-year utility privatization service contract.[^86]
The APPA reasoned to Congress that at the end of the fifty-year service
contract, an installation would have no choice but to accept contract
terms and prices, unreasonable or otherwise, proposed by the unregulated
owner of the utility system since the installation was in effect the
"captive customer" of the contractor.[^87] The installation would be
unable to select a different contractor, because the system owner would
not be required to let another entity operate and maintain its property.
The third argument made by the APPA pointed to the high cost DoD would
incur in monitoring the contract performance of unregulated contractors.
The regulated utility industry argued that it could provide effective,
efficient regulatory oversight of regulated utilities selected as
privatization contractors.[^88]

In July 2000, Colorado Springs Utilities (CSU) joined in the
Congressional lobbying effort, arguing for passage of the proposed House
amendment to 10 U.S.C. § 2688. Their lawyers provided a case study of
the Air Force's effort to privatize the natural gas distribution system
at Mather AFB, California, and the difficulties encountered due to the
unregulated status of the utility privatization contractor. The CSU's
letter to Congress stated in part, "This 'real world' experience with a
defaulting utility privatization company underscores why Congress needs
to extend State utility law to utility privatization companies that
ultimately will own and operate the retail utility distribution systems
on DoD installations."[^89] The CSU letter to Congress criticized DoD's
policy of contractual enforcement of state utility system standards and
practices. They argued that not only was DoD foolishly failing to rely
upon the expertise and experience of state regulators, but also that DoD
possessed "no effective enforcement mechanism."[^90]

The regulated industry message to DoD and to Congress seemed to be, do
not ask for freedom from state regulation, because you might get it.
They argued that DoD was being shortsighted by not taking advantage of
state regulatory oversight already in place. They further argued that a
regulated utility serving an installation in the capacity of a utility
privatization contractor would, by virtue of its regulated status, have
an obligation to serve the base, independent of and in addition to its
contractual obligations.

Interestingly, language from the 2000 Senate Armed Services Committee
Report accompanying its proposed amendment to Section 2688[^91] supports
the regulated industry's arguments:

> While the committee supports the Department's competitive
> privatization efforts, it believes that the Department must be mindful
> of the impacts of these efforts upon public safety and the public
> interest in assuming a safe and effective network of utility systems
> among multiple users. The Department should take steps, either through
> reliance upon existing public utility regulatory mechanisms or through
> careful contract provisions and service oversight of privatization
> contracts, to protect public interests both within and without base
> installation boundaries.[^92]

The Senate expressly stated that taking advantage of "existing public
utility regulatory mechanisms" might be a good idea. This view would
seem to support the conclusion that if an installation selects a
regulated utility as its privatization contractor, then the installation
could accept jurisdiction of the state utility regulatory body.
Conversely, if an unregulated entity were selected, the installation
would have to rely upon "careful contract provisions and service
oversight of privatization contracts."[^93]

Further, DRID No. 49 justified the utility privatization initiative as
primarily an effort to get DoD out of the utility business and focus on
core competencies.[^94] Accepting state utility commission jurisdiction
over the utility privatization contractor seems more in line with this
sentiment, rather than policing and heavy monitoring of the contractor
solely with federal government personnel, which does not lend itself to
"getting out of the utility business."

Both the current Army and Air Force utility privatization RFP templates
include, as a contract clause, Change in Rates or Terms and Conditions
of Service for Regulated Services.[^95] The section below will discuss
what the effect of this clause is, and whether its inclusion in the RFP
is consistent with the current DoD utility privatization policy stated
in the 24 February 2000 DoD/GC opinion.

*2. The "Regulated Rates" Clause*

The Regulated Rates clause, FAR 52.241-7,[^96] requires the government
to automatically pay utility rate increases approved by statewide
utility regulatory bodies and to incorporate the rate increases via
utility service contract modifications. A military installation affected
by a rate increase may object to the increase, but, like any other
utility customer, it accepts the jurisdiction of the state public
utility commission to rule on its objection. This clause reflects DoD
policy to "comply with the current regulations, practices and decisions
of independent regulatory bodies which are subject to judicial
appeal.... Rates established by an independent regulatory body are
considered 'prices set by law or regulation' and do not require
submission of cost or

pricing data...."[^97] In a typical scenario, Base A purchases its
electric power from Utility Company B, the "local provider" authorized
by the state public utility commission to provide service in the
territorial area encompassing Base A. If Utility Company B's rates,
terms, and conditions of service are set and regulated by an independent
statewide regulatory body, then DoD procurement policy is to accept, as
a matter of comity, the decisions of that regulatory body relative to
rate increases, for example, reserving the right to object to a rate
increase, but ultimately accepting the jurisdiction of the state
commission to decide the case.

The DoD procurement policy set out in DFARS 241.201 and the Regulated
Rates clause pre-date the DoD utility privatization initiative.[^98] In
fact, it is not likely that utility privatization was envisioned when
these provisions were drafted. The distinction is important. In a
pre-privatization scenario, a utility company provided service (gas,
electric) to the base boundary. The utility company transported the
commodity to the base. Using electric distribution as an example, the
commodity (the electricity) was transferred from the utility company
system to the base distribution system, and then distributed throughout
the base, over a base-owned electric distribution system. In this
pre-privatization scenario, where the installation still owns and
operates the on-base utility distribution system, the present effect of
the FAR Regulated Rates clause is that the installation agrees to pay
rates set by the state utility regulatory body for the commodity that is
delivered to them and for utility company charges ancillary to delivery
of the commodity to the base gates. The base agrees to abide by terms of
service set by the state regulatory body.

Presently, however, in a pre-privatization scenario, the state
regulatory body is only exercising jurisdiction over off-base
activities. The rates that state utility commissions set, that must be
paid by military installations, reflect the cost of delivering the
particular commodity involved to the "base gates." This transportation
of commodity occurs off the installation. The state regulatory bodies,
the public utility commissions, do not presently have any jurisdiction
over military installations' operation of their on-base utility
distribution systems, nor have they ever. Will that change once an
installation privatizes its system to a private entity? In the event a
base privatizes to an unregulated entity, then that scenario will not
change. But what happens if the base sells its electric system to a
utility company regulated by the state public utility commission? As
will be discussed below, the DoD response to this question is mixed and
inconsistent.

3\. What Exactly is the DoD Policy on Pervasive State Regulation of the
Utility Privatization Contractor?

The Army successfully argued in the *BG&E* case[^99] that the Maryland
Public Service Commission (PSC) would not have jurisdiction over the
utility privatization contractor it selected; that the Army had, as a
matter of comity, agreed to require the private contractor to be bound
by state and local health, safety and environmental laws, including
utilities laws and regulations; that the PSC would not have regulatory
jurisdiction over the private entity that obtained the contract or
otherwise have authority to enforce those state and local standards;
that the Army would enforce those standards, having extensive provisions
in the solicitation requiring the contractor to enable that enforcement.

In favorably ruling on these arguments, the *BG&E* Court held that the

> the federal government has absorbed state law, including utilities
> law, to supply the regulatory standards necessary and appropriate for
> the operation and maintenance of the electricity and natural gas
> distribution systems at Fort Meade; however, it has not agreed to the
> PSC's exercise of jurisdiction for the enforcement of those standards.
> Instead, the federal government will continue to enforce those
> standards even after the systems are transferred to private
> hands.[^100]

This is exactly the modus operandi that Colorado Springs Utilities
questioned in its letter to Congress, supporting the proposed House
amendment to Section 2688.[^101] Why should DoD "adopt" state
regulations and standards if DoD is going to inexpertly "enforce" them
itself, rather than take advantage of the in-place, built-in regulatory
oversight provided by the state commissions to provide enforcement?

A review of both the Army and Air Force utility privatization templates
reveals that the regulated utilities may have their wish after all. In
seeming contravention of the Army's position in the *BG&E* case[^102]
and the DoD/GC opinion,[^103] both RFP templates contain FAR 52.241-7,
the Regulated Rates clause.[^104] Inclusion of this clause in a utility
service contract between an installation and a utility privatization
contractor will give state public utility commissions the authority to
set the utility rate to be paid by the installation, as well as other
terms and conditions of service.

The DoD/GC opinion did allow for some degree of state regulation of the
utility privatization contractor, generally in the area of health and
safety concerns. This concession of some state regulatory authority,
however, does not appear broad enough to permit state regulation over
the rate to be paid by the installation to the contractor or to terms
and conditions of service other than those safety and health-related.

There is obviously a disconnect in DoD policy in this area. On the one
hand are the principles set out in the 24 February 2000 DoD/GC opinion,
which were consistent with the position taken by the Army in the *BG&E*
case. The position taken by DoD was that, with a few caveats, state law
and regulations had no effect in the relationship between an
installation and its utility privatization contractor. However, the Army
and Air Force RFP templates permit a great deal of state regulatory
control over the relationship between the installation and the
contractor. What can be more pervasive in terms of regulatory oversight
than the setting of the rate the installation will pay to the
contractor? Yet that is precisely what the Army and Air Force RFP
templates allow by inclusion of the Regulated Rates clause, FAR
52.241-7.

A potential offeror in the Texas Regional Demonstration (TRD) noted this
very incongruity in a Question and Answer session, asking if the
government had determined whether the privatized electric or natural gas
service would be subject to state regulatory jurisdiction.[^105] The
government responded that federal law governed the privatization
actions.[^106] The potential offeror also asked if the federal
government believed state jurisdiction was not applicable to "reconcile
this determination with the Clause I.5 which provides for regulated
utility FAR provisions."[^107] Clause I.5 of the TRD solicitation, as
well as the Army and Air Force utility privatization RFP templates,
incorporates the Regulated Rates clause into the contract. The potential
offeror asked a very good question. If the government is saying that
privatized electric and natural gas service is not subject to the
jurisdiction of the state regulatory commission, why is the Regulated
Rates clause contained in the RFP?

It would seem that the regulated utility companies have won a limited
victory from their perspective. It is true that these companies were
unsuccessful in their efforts to lobby Congress to pass the proposed
House amendment to 10 U.S.C. § 2688.[^108] This amendment would have
required compliance with state law, and virtually assured award of
utility privatization projects to the regulated "local utility" on a
sole-source basis. However, should a regulated utility win a utility
privatization competitive solicitation, then the service contract it
will sign with the awarding installation will include the FAR Regulated
Rates clause which provides for the state regulatory commission to set
the rate, terms and conditions of service.

Inclusion of the Regulated Rates clause in the service contract between
installation and contractor makes sense, for many of the reasons cited
by the regulated utility industry. However, use of the clause appears to
be inconsistent with DoD policy, as stated in the DoD/GC
memorandum.[^109] That memorandum permitted limited state regulation of
the utility privatization contractor, generally in the areas of utility
system reliability and safety. Use of the Regulated Rates clause in
privatization service contracts will permit state regulatory bodies to
set the rates paid by federal installations to regulated utility
privatization contractors.

The utility rates paid by military installations to their privatization
contractors will be for the *on-base* operation and maintenance of the
utility system involved. It is true that federal procurement policy
presently requires, as a matter of comity, federal agencies to pay state
commission-set utility rates. But that is for off-base service. State
commissions have never regulated on-base utility systems. Therefore, use
of the Regulated Rates clause in utility privatization service contracts
should not be taken for granted. It is breaking new ground. But, if the
federal government is willing to accept state commission jurisdiction in
its relationship with its off-base utility providers, it should be no
less willing to accept state commission jurisdiction over its
relationship with its on-base regulated utility privatization
contractor. The presence of the Regulated Rates clause in DoD utility
privatization solicitations indicates that DoD is willing to accept
state commission jurisdiction over its on-base regulated utility
privatization contractor. But DoD policy as currently stated does not
permit it.

The DoD should resolve the present policy disconnect by expressly
revising the policy to allow use of the Regulated Rates clause in
utility privatization service contracts. One may logically assume that
the DoD/GC memorandum only says that states do not possess jurisdiction
over utility privatization contractors as *a matter of right,* but it is
permissible to *contractually accede* to state jurisdiction. But the
memorandum does not expressly state this.

4\. What Should DoD Policy Be?

It makes sense to use the Regulated Rates clause in the Military
Services' utility privatization RFP template; however, several concerns
about the use of the Regulated Rates clause can and should be addressed
by modification of the RFP.

*a. State Regulatory Jurisdiction Must be Assured*

If an unregulated entity is selected as an installation's utility
privatization contractor, a state regulatory commission will not
regulate it. The Army and Air Force RFPs state that in the event an
unregulated entity is selected, the Negotiated Rates clause will be
inserted into the utility service contract.[^110] If an installation
selects a regulated utility as its privatization contractor, then
presumably the installation intends to rely upon state regulatory
oversight of the contractor, including the setting of the tariff rate to
be paid. That regulatory oversight should not be assumed, but should be
confirmed in the solicitation process.

In the *BG&E* case, BG&E obtained a formal opinion from the Maryland
Public Service Commission's (PSC) General Counsel, stating that "it
would have authority over any non-federal entity awarded the Army
contract to own, operate and maintain the electric system at Fort
Meade."[^111] In that case, the Army successfully argued that the PSC
would not have jurisdiction. However, if the Army is going to include
FAR 52.241-7 in a utility service contract with a state-regulated
utility company, it behooves the Army to ensure that the state
commission will exercise jurisdiction. It seems that one of the major
benefits of selecting a regulated utility company as the privatization
contractor would be to obtain the oversight of the state regulatory
commission. In the *BG&E* case, the Maryland commission affirmatively
stated it would exercise jurisdiction. However, in other cases, state
regulatory agencies have stated they would not exercise jurisdiction
over a utility privatization contractor. For example, the Colorado
Public Utilities Commission (PUC) decided that it would not have any
jurisdiction over the utility privatization contractor selected by Fort
Carson, Colorado:

> Relevant congressional action and executive agency regulation confirm
> that Commission regulation of the solicitation winner is precluded
> with respect to activities on the federal enclave portion of Fort
> Carson. This Commission does not have jurisdiction to mandate the
> identity of or to regulate the solicitation winner vis-à-vis the
> utility distribution facilities located within the federal enclave
> portion of Fort Carson.[^112]

The Colorado PUC also stated that it would have no jurisdiction over the
proprietorial interest portions of Fort Carson either, unless the
"Federal contracting officer" decided to accept PUC authority.[^113] It
is true that the petition heard by the Colorado PUC was filed by Enron,
an unregulated entity. However, the language used by the PUC in its
decision is broad enough to include regulated utility companies as well.
That is, it is fair to conclude that the PUC decision stands for the
proposition that if a state PUC-regulated utility company was selected
as the Fort Carson utility privatization contractor, the PUC would not
exercise jurisdiction over it. The one caveat to that statement is that
the Colorado PUC apparently would be able to exercise jurisdiction over
the proprietorial areas of military installations, if agreed to by the
government.

When a state-regulated utility company submits a proposal on a utility
privatization solicitation containing the Regulated Rates clause, it
should be required to submit a written statement from that state's PUC,
affirmatively stating that the PUC will exercise jurisdiction over the
regulated utility company. If the regulated utility company cannot
obtain such a statement from the state PUC, then the RFP should clearly
state that the Regulated Rates clause will not be in effect, and rates
will be negotiated between the installation and the utility company. The
source selection authority should not give any weight to the benefits of
state regulatory oversight if the regulated utility offeror cannot prove
that the state regulatory body will exercise jurisdiction.

Will other state public utility commissions accept jurisdiction over the
relationship between a federal military installation and its utility
privatization contractor? State commissions would be treading where they
have never tread before -- regulating the operation of utility systems
located on a federal installation. Some state commissions may decide, as
the Colorado commission did, that they do not possess jurisdiction over
federal enclave portions of installations. Other commissions may decide
that they *could* exercise jurisdiction, but may nevertheless *decline*
to exercise jurisdiction. They could very well point to the fact that
the federal government in the DoD/GC opinion[^114] took the position
that state law had no effect on the utility privatization contractor
selection/solicitation process. Now, they might ask with irony, "The
federal government is inviting our jurisdiction over its contractual
relationship with the privatization contractor process?" The state PUCs
could in essence feel they were earlier snubbed by the federal
government and they will not now be so quick to assist it. For this
reason, it is recommended that the installation ascertain early on
whether the state public utility commission will in fact exercise
jurisdiction over a regulated utility acting as the installation's
utility privatization contractor. The burden should be put on regulated
utility offerors to *prove* that their state regulatory commission would
exercise jurisdiction over them.

b\. State Regulatory Body Cannot be Given Jurisdiction Over Installation
Security-Related Issues

The Air Force has raised a legitimate concern regarding installation
security that is not presently addressed in DoD utility privatization
RFP templates that needs to be resolved.[^115] The problem is that if
state public utility commissions are given jurisdiction over on-base
utility privatization contractors, they could compel an installation to
allow on-base access of utility company employees that the installation
might otherwise deem security threats.[^116]

Of course, had the House amendment to Section 2688 passed, state
regulation of the utility privatization contractor would have been
mandated. The amendment did not pass, but current DoD utility
privatization RFPs would grant state commission jurisdiction over
regulated utility privatization contractors pursuant to the Regulated
Rates clause. Because DoD is granting state jurisdiction as a matter of
comity -- as a contractual right -- DoD can surely tailor the contract
to meet its needs and concerns. The utility privatization RFP should be
revised to expressly state that while the contract includes the
Regulated Rates clause, and therefore the installation will accept, as a
matter of comity, rates set by the state commission, as well as certain
terms and conditions of service, the installation commander remains the
final authority on matters that he/she decides affect installation
security. This would effectively deny the state commission the authority
to determine which utility company employees could enter the
installation. This must be clearly spelled-out in the RFP.

Some protections are already in place in the interest of installation
security. The Air Force right of way template makes clear that access to
installations is subject to the control of the installation's commanding
officer. To solidify this, the same language should be included in the
DoD utility privatization RFPs.[^117]

Additionally, the Regulated Rates clause does state, "The Government
shall not be bound to accept any new regulation inconsistent with
Federal laws or regulations."[^118] However, a state public utility
commission could already have a regulation in place, concerning utility
company employees' access to places of work, that might conflict with
federal law. The state commission could take the position that the
regulation was not "new" and therefore was applicable to a military
installation. To avoid this possibility, the DoD utility privatization
RFPs should clearly state that operation of the Regulated Rates clause
is expressly subject to the right of way's reservation of security
issues to the installation commander.

**E. In sum -- What Exactly is the *Status Quo*, and What We Should Do
About It?**

In its amendment to 10 U.S.C. § 2688 in 2000, Congress made clear it
favors a competitive utility privatization contractor selection process.
In its report discussing the amendment, the Senate Armed Services
Committee also stated that DoD would be wise to allow state regulatory
oversight of its relationship with a regulated utility privatization
contractor. It makes sense to include the Regulated Rates clause in
contracts with regulated utilities that are selected as utilities
privatization contractors. The DoD should clarify its policy to so
state. However, it should be pointed out to the contractors that both
the right of way document, and the Regulated Rates clause itself,
declare federal law supreme in the area of installation security.
Further, in light of the fact that regulated utilities and state
commissions have been told that state law and regulations can play no
part in the contractor selection process, is it likely the state
commissions will come back into the fold and agree to exercise
jurisdiction over a regulated entity selected to be a utility
privatization contractor? In Colorado, the answer appears to be "no."
Before an installation selects a regulated utility company as its
privatization contractor, presumably relying upon the benefits of state
regulatory oversight, that installation should assure itself that the
state commission will indeed exercise that jurisdiction.

V. The Military Services' Policy Does Not Favor the Use of Reversionary
Clauses in Utility Privatization Contracts -- So, What Happens if the
Utility Privatization Contractor Defaults?

Current DoD policy disfavors use of reversionary clauses in utility
privatization contracts. Black's Law Dictionary defines "reversion" as
"a future interest in land arising by operation of law whenever an
estate owner grants to another a particular estate, such as a life
estate or a term of years, but does not dispose of the entire
interest."[^119] 10 U.S.C. § 2688(a) states that a utility system
conveyance "may consist of all right, title, and interest of the United
States in the utility system or such lesser estate as the Secretary
considers appropriate to serve the interests of the United
States."[^120] The statute does not prohibit a "reversionary clause" in
which the government reserves the right to buy back the system from the
contractor in the event of a termination for default of the service
contract.

There is no clear procedure for how military installations will regain
ownership of their privatized utility systems should that ever become
necessary. The regulated utility industry's lobbying efforts on behalf
of the proposed House amendment to Section 2688 failed, but a point
raised by them remains troubling: what if the utility privatization
contractor defaults in contract performance, and the government must
regain ownership of the on-base utility system?

A. The Potential Problems

When an installation successfully privatizes a utility system, it will
transfer ownership of that system to a private entity, the "utility
privatization contractor." It will most likely enter into a fifty-year
utility service contract with the utility privatization contractor to
operate and maintain that system and provide utility service to the
base, excluding the commodity. There are two potential troubling
scenarios: first, the contractor defaults during the fifty-year contract
performance period, becoming incapable of contract performance; or
second, at the end of the fifty-year service contract, the contractor
attempts to gouge the base on its price because it can. The contractor
owns the system, after all, and the base will have no other available
option to provide service. Do the services' utility privatization RFPs,
which will blossom into utility service contracts between installations
and contractors, adequately address these concerns and protect the
government? The short answer is no.

The specific concern addressed here is a situation where an installation
feels compelled to terminate a utility privatization service contract
for default because the contractor is not properly operating and
maintaining its system, and the installation is not receiving the level
of utility service that it requires. A termination for convenience is
not a big concern because presumably in that scenario, the base would no
longer likely require utility service, due, perhaps, to a base closure.

*1. Default During the Life of the Contract*

In April 2000 the American Public Power Association (APPA) identified to
Congress its concerns of allowing unregulated entities to compete for,
and win, utility privatization awards. The APPA argued that in awarding
utility privatization contracts to unregulated entities, the government
ran the risk of future contract defaults, with adverse budgetary
consequences for the government. The APPA argued that unregulated
entities were much more likely to default on utility privatization
contracts than regulated entities, due to "thin capitalization margins,
higher costs of capital, an absence of any obligation to serve the
public, and a lack of regulated cost of service recovery through
tariffed service rates."[^121]

In a 1998 article in E-Source, Steve Allenby noted:

> Termination risks arise when it is unclear what happens when either
> party terminates the privatization agreement. Third-party financiers
> will assume most, if not all, of the termination liability of the
> utility, but only if clear language (including the use of termination
> schedules) outlines what costs the military base will pay at
> termination. What the base pays at termination is a critical question,
> because it is highly probable the utility will have made investments
> that will not be fully amortized at termination.[^122]

This article will not address in great depth the issue of termination
payments, i.e., what the government might owe to the contractor in the
event of termination, or conversely, what the contractor might owe to
the government. Rather, the focus is on the more basic issue of *how*
the government would go about regaining ownership of the utility system
in the event the contractor defaults on contract performance. If the
contractor is not performing its contractual requirements, what
procedure does the government use to regain possession of the utility
system? The bill of sale transfers ownership of the utility system from
the government to the contractor. The utility service contract contains
standard FAR clauses that deal with terminating the contract for
convenience or default. What document potentially affects the
government's rights vis-à-vis the system itself, if the contractor
defaults on contract performance? The right of way provides some limited
rights, as will be discussed further in section V.C. below.

2\. Contractor Bargaining Advantage at Contract Term's End

The first area of concern is how the government would go about
re-gaining ownership of an on-base utility system owned by an entity
that defaults on the service contract. The second area of concern is how
the government would go about re-gaining ownership of an on-base utility
system owned by an entity that will not negotiate in good faith with the
Government at the conclusion of the fifty-year contract performance
period.

The APPA described the bargaining leverage held by a such an entity,
calling the installations "captive customers" at the conclusion of the
fifty-year contract term. The contractor owns the on-base utility
distribution system, but has no obligation to serve the installation.
The APPA argued that no such problem would occur if a regulated entity
were the privatization contractor because the regulated company would
have an obligation to serve the installation independent of the
contract.[^123] Presumably, an unregulated entity will be motivated to
negotiate in good faith for a new service contract at the end of the
initial fifty-year contract term. If the contractor does not reach an
agreement with the installation, the contractor's stream of income ends.
Nevertheless, the contractor will no doubt hold bargaining leverage.

The focus here is how to deal with these two potential problems. What
options, if any, would be available to the government to regain
ownership of the utility system at the end of the fifty-year service
contract if the contractor proposes unreasonable contract terms? What
options, if any, would be available to the government to regain
ownership of the utility system during the life of the fifty-year
service contract, if the contractor defaults?

B. Current Services' Practice

Section B.2.3, of the Air Force competitive RFP template reads in part,
"\[T\]he United States will retain no reversionary interests in the
utility system sold, other than the Right of Way upon its expiration or
termination."[^124] The Army RFP template, developed by the Defense
Energy Service Center (DESC), does not contain specific language
regarding reversionary clauses or the lack thereof, but the utility
privatization RFP released by Fort Lewis in 1999 contained similar
language to that found in the Air Force RFP template; no reversionary
interest will be retained by the Army.[^125]

This is a very hazy area in utility privatization implementation and one
that concerns installation commanders, who are interested in the
reliability and continuity of their installation's utility service. To
date, the question of what happens if the privatization contractor
defaults remains unanswered.[^126] The official Air Force utility
privatization website[^127] contains the following responses to
frequently asked RFP questions: (1) "Question: What becomes of the
utility system after termination of the service contract? Answer: That
question is not resolved by the contract."[^128] (2) "Question: How will
the Government obtain utility service after termination of the service
contract, if only one potential source owns the system? By sole source
award? Answer: This question is beyond the scope of the RFP."[^129]

A potential bidder on the Maxwell/Gunter AFB utility privatization
solicitation noted that the government retained no reversionary interest
in the privatized utility systems. This bidder asked what would be the
consequences if, after a system was sold, a state regulatory authority
determined that the system owner cannot own the system and/or provide
service in accordance with the contract terms?[^130] Although not
specifically asked by the bidder, a related question is what would the
consequences be if the utility privatization contractor became unable to
provide service in accordance with the contract terms? The Air Force
response referred to DESC responses given to potential bidders on the
Texas Regional Demonstration solicitation. The DESC response was that
the RFP and resulting contracts are governed by federal law; therefore
the government would "not speculate on the potential consequences if
other parties take a different position."[^131]

The DESC response only answers the question posed by the potential
bidder, as it should have. The response implied that the government
believed that a state regulatory commission would be unable to affect a
utility privatization contractor's ability to perform a contract.
However, what would the consequences be if the utility privatization
contractor defaults on the contract for some other reason, for example,
taking a financial turn for the worse? A related issue is what would be
the effect if the installation and the utility privatization contractor
are unable to successfully negotiate a follow-on service contract at the
end of the initial fifty-year term?

The January 2002 Navy utilities privatization Quarterly Report stated
that it was "imperative" to add reversionary rights to utility
privatization contracts.[^132] A utility privatization working group
comprised of representatives of all the services and of several
disciplines is presently reviewing the use of reversionary clauses. It
is possible that future guidance "might direct that such clauses are
optional and at the discretion of the Services."[^133]

C. The Right Of Way

The third piece of the utility privatization trinity is the right of
way. The bill of sale transfers ownership of the utility system. The
utility service contract obligates the contractor to operate and
maintain the system and to provide reliable utility service to the base.
The right of way is the document that allows the contractor access on
the base to maintain its utility system. It contains some provisions
that impact upon the two termination scenarios discussed herein.

The right of way used by the Air Force is for a term of seventy-five
years.[^134] The government has the sole discretion to renew the right
of way at the end of the seventy-five year term.[^135] Paragraph twelve
of the right of way states that the government may terminate it for the
contractor's failure to comply with its provisions, after giving the
contractor a ten day cure period and an additional seven days to respond
to a written notice of termination.[^136] Paragraph twenty-seven of the
right of way gives the government the right to terminate it if the
contractor abandons its utility system.[^137]

Obviously, the right of way is important to the utility service
contractor because, without it, the contractor cannot enter the base to
operate and maintain its utility system. If the contractor abandons the
system for a year, then the government can terminate the right of way,
effectively terminating the contractor's status as the installation's
utility privatization contractor. The contractor nevertheless owns the
system. Further, what happens during that one year period when the
contractor is not providing service because he has abandoned the system?
The Army and Air Force RFP templates do contain clauses giving the
government the right "to perform or supplement performance of contract
functions with government personnel during periods of disaster, war
emergencies, police actions, or acts of God affecting the
installation."[^138] Arguably, a contractor's abandonment of its utility
system and its failure to provide needed service may well result in a
disaster on the installation that the installation could remedy by
performing the work necessary to keep the particular utility running.
However, the issue remains of how the government would regain ownership
of a system that has been abandoned or is not being properly operated
and maintained by the contractor, resulting in termination by default of
the utility service contract, and/or termination of the right of way.

D. Options Available to the Government to Regain Utility System
Ownership, if Necessary

*1. Eminent Domain Proceeding*

The Fifth Amendment to the United States Constitution does not forbid
governmental taking of private property; it mandates, however, that that
the property owner be justly compensated.[^139] In the event a utility
privatization contractor failed to perform its contractual duty to
operate and maintain its utility system, thereby failing to deliver the
needed utility service to the installation, the installation would be
able to assume ownership of the system via eminent domain. Of course,
the contractor would have to be compensated for his property.[^140]

Courts have often upheld the government's eminent domain rights. In
*United States v. Brooklyn Union Gas Co.,* for example, the United
States, wanting to expand the Brooklyn Navy Yard in 1941, took the
facilities of two public utility companies, one supplying gas, the other
electricity.[^141] In *United States v. Jones,*[^142] the United States
took back lands and works of improvement -- locks, dams, canals, and
other structures -- that it had previously ceded to the State of
Wisconsin, and were now owned by a private entity named "the Green Bay
and Mississippi Canal Company." In those cases, it was undisputed the
United States had the inherent authority to take the private property of
the companies. The issue in those cases was the amount of just
compensation to be paid to the companies. Courts use complex methods to
determine "just compensation" for government-taken property.[^143]

If the government does not provide for some "hard and fast" termination
procedures in the utility service contract, the government's termination
liability will be determined by vague "just compensation" standards, in
the event it is forced to re-take ownership of a utility system.[^144]
Instead, the government should know what its termination liability, if
any, would be were it to regain ownership of a utility system. The only
way to do that is include termination liability in the utility service
contract.

*2. Reversionary Clause in the Utility Service Contract*

The military services' present policy is to not include reversionary
clauses in utility privatization service contracts, despite the fact
that 10 U.S.C. § 2688 would permit it. The present Army and Air Force
RFP templates do contain the standard FAR clauses on Termination for
Convenience[^145] and Termination for Default.[^146] However, these
clauses are not well-suited to deal with a privatized situation. In the
typical termination scenario envisioned by these clauses, the government
is terminating a service-providing contractor. In a privatization
scenario, however, the government is terminating not only a service
provider, but also the owner of the service-delivery system. In essence,
the government is terminating the services of *the only entity legally
authorized to perform the services* -- the utility service contractor.
So, while the government is authorized by both the service contract and
the right of way to terminate the services of the utility services
contractor, how does the government go about "terminating" the
contractor's status as utility system owner? Before the government can
either operate the utility system, or contract out its operation to
another entity, it must regain ownership of the utility system.
Certainly, the government may be able to step in and run the system on a
temporary basis, but would not be able to operate and maintain the
terminated utility privatization contractor's system on the longer term
without re-acquiring ownership of the system. Nothing contained in
either the present Army or Air Force RFP template, or Air Force right of
way, gives the government the right to re-take a utility system, and
nothing gives the installation the right to operate and maintain the
utility privatization contractor's system, other than Section H.6 which
would allow government personnel to perform contract functions in the
event of a disaster or act of God.[^147]

Steven Allenby's article discusses the question of what happens to the
installation distribution system if the utility does not renew the
service contract at the end of its term.[^148] A related question is
what happens to the installation distribution system if for some reason
the utility service contract is terminated before the end of its term?
In that situation, an entity owns the system but is not contractually
authorized to operate and maintain it.

Mr. Allenby describes a model Army utility privatization service
contract he reviewed which stated "the utility must give three years'
notice if it does not intend to renew the contract. It also says the
installation will pay the present value of any unamortized capital
investments when the contract ends, and it says the installation has the
right to buy back its distribution system for \$0."[^149] Neither the
present Army or Air Force RFP template contain such a provision.
However, such a provision would cover a situation where the contractor
is not willing to renew the service contract. It could also be drafted
to cover a situation where the government was unable to secure what it
believed to be favorable terms/price for the new service contract, and
also a situation where the government felt compelled to terminate the
service contract for default.

This "buy back provision" is the type of reversionary clause needed in
the utility privatization service contract. The provision should state
that in the event the contractor defaults on its contractual service
obligations, or in the event that the contractor and the government are
unable to reach agreement on a new service contract at the end of the
fifty-year service contract term, the government will be allowed to buy
back the system at no cost. This may seem patently unfair to the
contractor/system owner at first glance, but consider that if the
government is forced to terminate the contractor for default, then the
contractor would not have been doing the job it agreed to perform.
Therefore, the contractor should not be paid anything, other than the
cost of any system infrastructure improvements that may have been made,
for which it has not been fully compensated. Further, it is assumed that
by the end of the fifty-year service contract, the contractor will have
been fully compensated for all system improvements, but if that is not
the case, the contractor should receive compensation for any unamortized
improvements.

A standard FAR contract clause, 52.241-10, Termination Liability, exists
that could be tailored for use in a utility privatization service
contract.[^150] This clause is typically used in situations where a
utility company has constructed facilities on base, and also provides
utility service to the base. The utility is not paid a lump sum for the
construction, but rather the cost is billed out over several years. It
is basically incorporated into the company's monthly utility bill to the
base. The clause is activated in situations where the service contract
is terminated for whatever reason, typically due to base closure, but in
any event, prior to the company receiving full compensation for the
construction. This clause could also be adapted for use in utility
privatization service contracts, and provide an agreed-upon means of
compensation to a utility privatization contractor whose service
contract is terminated. Even though terminated for default, the
contractor may still be due compensation for any facilities he has built
and has not fully been paid for. Use of this clause, along with a
reversionary clause, is preferable to regaining ownership of a utility
system via eminent domain and the uncertainty of how a court will arrive
at just compensation for the contractor.

**VI. Municipal Utility Companies: Negotiated Rates Clause Versus
Regulated Rates Clause**

The Regulated Rates clause is for use in contracts with regulated
utilities. The Negotiated Rates clause is for use in contracts with
unregulated utilities.[^151] Municipal utility companies generally want
to be treated as regulated utilities, but federal procurement policy
considers them unregulated. This divergence of opinion has already
scuttled utility privatization negotiations between a military
installation and a municipal utility company and likely renders future
such negotiations at other installations troublesome.

A. The Issue

Municipal utility companies are one of the entities mentioned in 10
U.S.C. § 2688 as potential utility privatization contractors. Municipal
utility companies are owned and operated by municipalities and usually
are not regulated by their statewide public utility commission.[^152]
Municipal utilities sometimes take the position that they are
"regulated," and therefore should be able to unilaterally set utility
rates for military installations should they be selected as the utility
privatization contractor.[^153] The government position is that defense
acquisition regulations require the use of a negotiated rates procedure
when dealing with municipal utility companies.[^154] This difference of
opinion resulted in the breakdown of utility privatization negotiations
between an Air Force Base and a municipal utility company, for the
base's electric distribution system.[^155] The municipal utility argued
that FAR 52.241-7, "Change in Rates or Terms and Conditions of Service
for Regulated Services,"[^156] should be used in the utility service
contract, while the Air Force wanted to use the clause found at FAR
52-241-8, "Change in Rates or Terms and Conditions of Service for
Unregulated Services."[^157] In essence, municipal utility companies
want to be treated the same way as those utility companies regulated by
state public utility commissions. For example, the municipals want DoD
to unilaterally accept rates established by their City Council, as is
permitted by the Regulated Rates clause. The same issue will likely
jeopardize future utility privatization negotiations between
installations and municipal utility companies.

B. Why the Difference in Opinion Between DoD and Municipal Utility
Companies? What Are The Applicable Regulations?

The DFARS defines a "regulated utility supplier" as a "utility supplier
regulated by an independent regulatory body."[^158] It defines
"independent regulatory body" as "the Federal Energy Regulatory
Commission, a state-wide agency, or an agency with less than statewide
jurisdiction when operating pursuant to state authority."[^159] It
defines a "nonindependent regulatory body" as "a body that regulates a
utility supplier which is owned or operated by the same entity that
created the regulatory body, e.g., a municipal utility."[^160] The DFARS
241.201, "Policy," states:

> Except as provided in FAR 41.201, DoD, as a matter of comity, will
> comply with the current regulations, practices and decisions of
> independent regulatory bodies which are subject to judicial appeal.
> This policy does not extend to regulatory bodies whose decisions are
> not subject to appeal nor does it extend to nonindependent regulatory
> bodies.[^161]

Municipal utilities are by definition, at least in defense acquisition
regulatory parlance, not "regulated." Typically, the municipal utility's
rates and terms and conditions of service are established by that
municipality's legislative body, not by an independent statewide
commission.

The argument in favor of allowing municipal utility companies to use the
Regulated Rates clause points to FAR 41.501, which directs contracting
officers to insert the Regulated Rates clause in contracts "when the
utility services are subject to a regulatory body."[^162] This contract
clause itself states that it is applicable to the extent that services
furnished under the contract are "subject to regulation by a regulatory
body."[^163] The argument is that the FAR requires use of the Regulated
Rates clause when the services are furnished subject to regulation by a
regulatory body, with no further definition of "regulatory body" like
that found in DFARS Part 241. The municipal utility companies say that
they are indeed regulated, and that even if regulated by their own city
council, this fits within the FAR definition providing that the
Regulated Rates clause should be used.

The DFARS should be read in conjunction with the FAR. The FAR does not
specifically define "regulatory body," but the DFARS does. The DFARS
definition generally excludes municipal utilities from the definition of
"regulated utility."[^164] The DFARS language is not inconsistent with
the FAR provisions; it merely supplements the FAR. The DFARS policy does
not explain the rationale for the differentiation between municipal
utilities and state-regulated utilities, but it seems rather obvious.
The federal government does not want its utility providers to have
authority to set their own rates, without any "independent" review. In
the case of municipals, the utility provider and the rate-setting body
are one and the same -- the municipality.[^165] In the case of
state-regulated utilities, the "independent" state commission reviews,
and approves, proposed rates. The next section will discuss a case that
specifically upheld the use of a Negotiated Rates clause in a utility
service contract between the City of Tacoma, Washington, and McChord
AFB, Washington.

C. Caselaw

The dispute in the *City of Tacoma v. United States* involved a 1972
contract between the City and McChord AFB, Washington, in which the City
agreed to provide electrical services to the base.[^166] The City of
Tacoma was acting in its capacity as a municipal utility company. The
contract contained a negotiated change of rates clause that the parties
used to successfully negotiate nine rate changes between 1973 to
1977.[^167] The City of Tacoma, however, later challenged the negotiated
rates clause as being illusory, arguing that the clause was merely an
"agreement to agree" permitting the government to refuse to accept new
rates, without consequence.[^168] The Court rejected this argument,
finding that the government clearly had a contractual obligation to
negotiate in good faith.[^169]

The City of Tacoma did not advance the argument that some advocate now,
that the FAR and DFARS are somehow in conflict because the FAR does not
specifically exclude self-regulated municipal utility companies from the
definition of "regulated utilities." In fact, the Court found that the
Negotiated Rates clause was totally appropriate between a government
agency and a municipal utility company.

D. Solution?

The government apparently intends to use FAR 52.241-7, the Regulated
Rates clause, in utility service contracts between itself and utility
companies regulated by independent statewide commissions.[^170] The
DFARS provisions discussed above clearly state that municipal utility
companies not regulated by statewide commissions are not to be accorded
the status of "regulated utility." Therefore, rates and terms and
conditions of service between municipal utility companies and the
government must be subject to FAR 52.241-8, the Negotiated Rates
clause.[^171] Current DoD procurement policy does not allow the use of
the Regulated Rates clause[^172] in contracts between installations and
municipal utility companies, nor should it. Municipal utility companies
desiring to compete for utility privatization awards will have to accept
the use of the Negotiated Rates clause[^173] in their contracts, or
forego competing for privatization awards.

VII\. Conclusion

The military services appear to be doing the smart thing in taking the
time to benefit from lessons learned in utility privatization
implementation. The DoD should encourage the services to continue
thinking and acting smart and should not stringently enforce artificial,
unreasonable time standards for completion of privatization projects.
The DoD should ensure that its policies are clearly stated and
understood by all the services. If privatization of military utility
systems is no longer mandatory, but is now an option, this should be
clearly stated. The DoD should also be generous in extending
privatization timelines, if privatization implementers -- those situated
where "the rubber meets the road" -- believe they need the extra time.
Recent indications from DoD to the effect that the deadlines will be
extended "a year or two" are encouraging.[^174]

The DoD should further clarify its policy on the role of state law and
regulation as it pertains to the relationship between installations and
their utility privatization contractors. It should confirm that use of
the Regulated Rates clause[^175] is expressly permitted by DoD policy.
Use of this clause will not grant state jurisdiction over utility
privatization contractors by right, but rather by contract. In instances
where regulated utility companies win utility privatization contracts,
installations should take advantage of the regulatory oversight provided
by state public utility commissions, after assuring themselves that the
commission will in fact exercise jurisdiction. In no instance, however,
can installations agree to state control over installation security
issues, such as installation access.

While DoD is smart to use the Regulated Rates clause[^176] in contracts
between its installations and state commission-regulated utilities, it
must insist on use of the Negotiated Rates clause[^177] in contracts
between installations and self-regulated municipal utilities.

The DoD also appears to be moving in the right direction on use of a
reversionary clause in privatization contracts. Some type of
reversionary clause is needed to clearly spell out how an installation
will regain ownership over a utility system if that need arises as well
as the parties' financial obligations in the event of utility service
contract termination.

Policy needs to be practical, realistic, and helpful to utility
privatization implementers. There is no substitute for common sense in
this process, and the services' current measured approaches indicate
that common sense and application of lessons learned will govern their
stewardship of DoD's Utility Privatization Program.

[^1]: ^\*^ *Major JeffreyA. Renshaw (B.A., Louisiana State University;
    J.D., Loyola University of the South; LL.M., The Judge Advocate
    General School of the Army) is a United States Air Force Judge
    Advocate currently assigned as a contract appeals trial attorney at
    Headquarters, Air Force Material Command, Wright-Patterson Air Force
    Base, Ohio. He is a member of the Louisiana State Bar.*

[^2]: U.S. [Dep't of Defense, Office of The Deputy Secretary of Defense,
    Defense Reform Initiative Directive No. 9]{.smallcaps} (Dec. 1997)
    \[hereinafter "[Defense Reform Initiative Directive No.
    9"\].]{.smallcaps}

[^3]: U.S. [Dep't of Defense, Office of The Deputy Secretary of Defense,
    Defense Reform Initiative Directive No. 49]{.smallcaps} (Dec. 1998)
    \[hereinafter "[Defense Reform Initiative Directive No.
    49"\].]{.smallcaps}

[^4]: As provided by 10 U.S.C. § 2688(a) (1997):

    > CONVEYANCE AUTHORITY. -- The Secretary of a military department
    > may convey a utility system, or part of a utility system, under
    > the jurisdiction of the Secretary to a municipal, private,
    > regional, district, or cooperative utility company or other
    > entity. The conveyance may consist of all right, title, and
    > interest of the United States in the utility system or such lesser
    > estate as the Secretary considers appropriate to serve the
    > interests of the United States.

[^5]: [Defense Reform Initiative Directive No. 49,]{.smallcaps} *supra*
    note 2.

[^6]: This article as originally drafted discussed a fifth issue -- The
    contract cost principle (FAR 31.205-20, Interest and other financial
    costs) prohibits contractors from collecting interest expense on
    their borrowings. This provision did not allow utility privatization
    contractors to merely collect the expense entailed by borrowing
    money, and negated one of the basic premises justifying utility
    privatization. That premise is that DoD does not have the funds
    necessary to upgrade and maintain its utility systems, but will
    obtain these needed upgrades via the utility privatization
    contractors who will obtain the funding necessary for the upgrades.
    However, if the utility privatization contractors were not permitted
    to collect their interest expense, this would probably make their
    borrowing too expensive and therefore untenable. Congress enacted
    legislation in Fall 2001, S. 1438, 107^th^ Congress, 1^st^ session.
    S. 1438 (2001), requiring the Secretary of Defense to determine
    whether FAR 31.205-20 should be modified to allow utility
    privatization contractors to collect their interest expense on
    borrowings. On 15 April 2002, Deidre A. Lee, the Director of DoD
    Procurement, authorized a class deviation from FAR 31.205-20's cost
    principles. "Pursuant to this deviation, the utilities privatization
    contractor will be permitted to recover its interest costs
    associated only with capital expenditures to acquire, renovate,
    replace, upgrade, and/or expand utility systems..." The DoD solved
    the problem therefore by modifying the FAR provision, and a more
    detailed discussion of the issue was removed from this article.
    *See* FAR 31.205-20.

[^7]: By no means will this article attempt to address the myriad of
    legal issues and problems involved in utility privatization
    implementation in the military services. Issues such as the
    legality/propriety of the economic analysis model, i.e., inclusion
    of "should costs" in comparing status quo Government ownership of
    utility systems versus privatized ownership; conflicts of interest
    presented by utility privatization A-E consultants bidding on
    solicitations; the so-called "POM disconnect" (privatized versus
    Government ownership of utility systems will cost more, but this
    additional expense has not been budgeted); leasing as an alternative
    to privatization; and combining privatization with other DoD energy
    programs such as energy conservation, will not be addressed. These
    issues are mentioned so that the reader will understand there are
    other challenging issues that he/she may have to confront in the
    utility privatization arena, in addition to those discussed in this
    article.

[^8]: George Cahlink, *"Pentagon retools plans to privatize utilities at
    military bases,"* GovExec.com (April 16, 2002)
    \<http//www.govexec.com/dailyfed/0402/041602g1.htm\> ("By June, the
    Defense Department will issue new rules for utility privatization
    that push back the 2003 deadline by a year or two...").

[^9]: [Federal Acquisition Reg (FAR)]{.smallcaps} 52.241-8, Change in
    Rates or Terms and Conditions of Service for Unregulated Services
    (Feb. 1995).

[^10]: FAR 52.241-7, Change in Rates or Terms and Conditions for
    Regulated Services (Feb. 1995).

[^11]: [U.S. Dep't of Defense, Defense Federal Acquisition Reg. Supp.
    (DFARS) Part 241]{.smallcaps} (Jan. 13, 2000).

[^12]: 10 U.S.C. § 2688. *See generally* Lt Colonel Bill C. Wells,
    Through the Looking Glass (quickly) -- A Brief Introduction to
    Utilities Privatization With a Special Focus on Environmental
    Concerns (1999) (on file with author) ("Today most all Air Force
    bases are no longer islands off by themselves, but are heavily
    integrated with the utility systems of their surrounding
    communities. What privatization is going to do is move the point of
    connection to the outside systems from the base boundary to the
    individual building."). Lt Colonel Wells is presently the Chief of
    the Air Force Utility Litigation Team, Air Force Legal Services
    Agency, Tyndall AFB, Florida.

[^13]: *See generally* Wells, *supra* note 11.

    > Privatization differs from contracting out (e.g. A-76) in that in
    > a contracting out situation the contractor is hired to run a
    > utility system for a period of time, but the government continues
    > to own the system and remains responsible for planning and paying
    > for maintenance, improvements and upgrades. Another way that
    > privatization differs from mere contracting out is that it is well
    > neigh \[sic\] irreversible. Once a privatization deal is complete
    > the government no longer holds title to the utility system -- and
    > the rules do not even allow you to have a reversionary interest,
    > though you can, and probably should arrange to have a right of
    > first refusal if the new owner ever decides to sell your system.

    *Id*.

[^14]: [Defense Reform Initiative Directive No. 49,]{.smallcaps} *supra*
    note 2.

[^15]: Draft Policy Guidance, Office of the Deputy Undersecretary of
    Defense (Installations & Environment), subject: Privatizing Defense
    Utility Systems (undated) (on file with author) \[hereinafter "Draft
    Policy Guidance."\].

[^16]: Steven J. Allenby, *Military Utility Privatization: A Good Tactic
    for Distribution Companies?,*[E-Source(]{.smallcaps}Oct. 1998)
    \<http://www.esource.com/members/e_cd/pdfs/er9808.pdf\> ("The U.S.
    Military is part of a worldwide trend toward privatization. The
    trend is fueled by an organization's desire to focus on its core
    competencies and to farm out other elements of its operations to
    experts that can accomplish them more cost-effectively. In the
    military's case, there is an additional motivation for
    privatization: as an opportunity to rebuild a neglected utility
    infrastructure.").

[^17]: [Defense Reform Initiative Directive No. 9,]{.smallcaps} *supra*
    note 1.

[^18]: [Defense Reform Initiative Directive No. 49,]{.smallcaps} *supra*
    note 2. A "utility system" is defined as

    > any system for the generation and supply of electric power, for
    > the treatment or supply of water, for the collection or treatment
    > of wastewater, and for the supply of natural gas. For the purpose
    > of this definition, supply shall include distribution. A utility
    > system includes equipment, fixtures, structures, and other
    > improvements utilized in connection with the systems described
    > above, as well as the easements or rights-of-way associated with
    > those systems. A utility system does not include any projects
    > constructed or operated by the Army Corps of Engineers under its
    > civil works authorities nor does it include any interest in real
    > property other than an easement or right-of-way associated with
    > the utility system.

    *Id*.

[^19]: [Air Force Civil Engineer Support Agency, Template for
    Competitive Solicitations, Request for Proposal (RFP)
    (1]{.smallcaps} June 2000)
    \<http://www.afcesa.af.mil/Directorate/CEO/Contracts/UtilPrivatization/Uppage.htm#Templates\>
    \[hereinafter "[Air Force RFP Template"]{.smallcaps}\]; [Defense
    Energy Support Center/U.S. Army, Privatization Solicitation
    Template, (1]{.smallcaps} Oct. 2001)
    \<<http://www.hqda.mil/acsimweb/fd/policy/utilitiespricur.htm>\>
    \[hereinafter "[Army RFP Template"]{.smallcaps}\]. The website
    states the Army Assistant Chief of Staff for Installation Management
    (ACSIM) encourages the widespread use of the RFP template by Army
    installations.

[^20]: *See generally* [Dep't of Defense, Procurement of Electricity
    from Most Economical Source -- Report to Congress 8
    (]{.smallcaps}Mar. 26, 1996), *cited in* Christopher J. Aluotto,
    *Privatizing and Combining Electricity and Energy Conservation
    Requirements on Military Installations, 30* [Pub. Cont. L.J. 723,
    725 (]{.smallcaps}Summer 2001).

    > A military installation is similar to a small town in size and
    > structure and includes many of the attributes of any town, such as
    > housing areas, grocery stores, hospitals, churches, and shopping
    > centers. Each facility is connected to a complex network of
    > utility infrastructure consisting of electric, natural gas,
    > water/wastewater, and telecommunications systems. ... Most
    > installations do not generate electricity but instead buy it from
    > an electric utility company. The utility company delivers
    > electricity at high voltage to an electric substation normally
    > located just inside the installation boundary where the voltage is
    > reduced so it can be safely distributed to buildings and
    > facilities. Ownership of the electricity transfers from the
    > utility to the military installation at the substation. Once
    > delivered to the substation, the installation becomes responsible
    > for distributing the electricity to end users.

    *Id*.

[^21]: Continuing Appropriations Act of Fiscal Year 1988, Pub.L. No.
    100-202, § 8093, 101 Stat. 1329, 1329-79 (1987).

[^22]: FAR 41.201 (d) and (e).

[^23]: 10 U.S.C. § 2688(c)(3) (1997); FAR 41.103(b) allows Federal
    agencies to enter into utility service contracts not exceeding ten
    years. However, in the National Defense Authorization Act of Fiscal
    Year 2000, Pub. L. No. 106-65, § 2812, 113 Stat. 774, 851 (2000)
    \[hereinafter "2000 Congressional Amendment"\], Congress added para.
    (3) to subsec. (c) of § 2688, to specifically allow fifty-year
    utility service contracts for use in privatization actions.

[^24]: *But see* 10 U.S.C. § 2688(h)(2)(B), added by the 2000
    Congressional Amendment, that allows the sale of land, in addition
    to utility infrastructure, in utility privatization actions.

[^25]: *See generally* Wells, *supra* note 11.

    > There will be at least three separate documents required to close
    > the transaction -- a bill of sale (for the conveyance of the
    > system as personal property), a real estate document to allow the
    > new owner of the utility system to leave it on or under the
    > government's real estate ... a service contract to operate the
    > system, and one to supply the product that the utility system will
    > distribute. Note that the supplier and the owner of the
    > distribution system might be the same entity, but also might not
    > be, and even if they are, the transactions will probably be
    > separate.

    *Id*.

[^26]: *See, e.g.,* Baltimore Gas and Elec. Co. v. United States, 133 F.
    Supp. 2d 721 (D. Md. 2001). See discussion *infra* IV.C.

[^27]: Office of the Secretary of Defense, Energy and Utility Home Page
    of the Dep't of Defense Energy and Engineering Directorate (Nov. 12,
    2001) \<http://www.acq.osd.mil/

    installation/utilities/milservice/status.htm\>.

[^28]: [Dep't of The Army, Defense Reform Initiative Directive #49,
    Privatizing Utility Systems, Quarterly Progress Report
    (]{.smallcaps}Jan[. 15, 2002) (]{.smallcaps}on file with the author)
    \[hereinafter, "[Dep't of The Army Quarterly Report"]{.smallcaps}\];
    [Dep't of The Navy, Utilities Privatization Quarterly Report
    (]{.smallcaps}Jan. 2002) \<<https://privatization.nfesc.navy.mil/>\>
    \[hereinafter, "[Dep't of The Navy Quarterly Report"]{.smallcaps}\];
    [Dep't of The Air Force, Utilities Privatization Program, FY 02/1
    Quarterly Report (]{.smallcaps}Jan. 15, 2002) (on file with the
    author). \[hereinafter, "[Dep't of The Air Force Quarterly
    Report"]{.smallcaps}\]. In the January 2002 Quarterly Reports, the
    Army reports that 157 RFPs have been released out of 320
    now-available-to-privatize systems. The Navy reports that 444 RFPs
    have been released out of a now available to privatize 730 systems,
    and the Air Force reports that 242 RFPs have been released out of a
    now available to privatize 513 systems.

[^29]: [Gen. Acct. Off.]{.smallcaps}, [Rep. No.
    GAO/]{.smallcaps}NSIAD-00-72, [Actions Needed to]{.smallcaps}
    [Sustain Reform]{.smallcaps} [Initiatives and Achieve Greater
    Results]{.smallcaps} (July 2000), at 62.

[^30]: Tichakorn Hill, *Protests May Delay DoD Utility Privatization,*
    Federal Times.Com (May 21, 2001) (on file with author).

[^31]: Draft Policy Guidance, *supra* note 14.

[^32]: Cahlink, *supra* note 7.

[^33]: Office of the Secretary of Defense, Energy and Utility Home Page
    of the Dep't of Defense Energy and Engineering Directorate, *supra*
    note 26.

[^34]: [Dep't of The Army Quarterly Report, Dep't of The Navy Quarterly
    Report, Dep't of The Air Force Quarterly Report,]{.smallcaps}
    *supra* note 27.

[^35]: The DoD Installations Policy Board is a multi-service working
    group under The Office of the Secretary of Defense, Installations
    and Environment. It formulates DoD policy on, among other things,
    utility privatization.

[^36]: [Dep't of The Army Quarterly Report,]{.smallcaps} *supra* note
    27.

    > OSD deleted the interim milestones of DRID #49 and provided for
    > two options -- fund the upgrades necessary to bring utility
    > systems up to C2 standards, or privatize utilities systems to
    > entities better able to improve their condition. The Army will
    > continue to pursue the privatization of utility systems as the
    > preferred course of action and retains the goal to privatize all
    > utility systems by 30 September 2003. Towards that end we have
    > established a goal of 70 privatized systems in this FY and will
    > continue to work to achieve that target." It is assumed "C2"
    > stands for "Command and Control.

    *Id*.

[^37]: [Dep't of The Air Force Quarterly Report,]{.smallcaps} *supra*
    note 27.

[^38]: [Dep't of The Navy Quarterly Report,]{.smallcaps} *supra* note
    27.

[^39]: [Defense Reform Initiative Directive No. 9,]{.smallcaps} *supra*
    note 1.

[^40]: Army Facilities and Housing Directorate Home Page (Aug 9, 2001)
    \<http://www.hqda.army.mil/acsimweb/fd/policy/IPRminutes.htm\>.

[^41]: *Id.*

[^42]: [Dep't of The Army Quarterly Report,]{.smallcaps} *supra* note
    27.

[^43]: [Dep't of The Navy, Utilities Privatization Quarterly
    Report]{.smallcaps} (July 2001)
    \<<https://privatization.nfesc.navy.mil/>\> \[hereinafter, "[Dep't
    of The Navy Quarterly Report,]{.smallcaps} July 2001"\].

[^44]: Office of the Secretary of Defense, Energy and Utility Home Page
    of the Dep't of Defense Energy and Engineering Directorate, *supra*
    note 26.

[^45]: [Dep't of the Navy Quarterly Report]{.smallcaps} (July 2001),
    *supra* note 42.

[^46]: [Dep't of The Navy Quarterly Report,]{.smallcaps} *supra* note
    27.

[^47]: Air Force Civil Engineer Support Agency Home Page (visited Feb.
    12, 2002)
    <http://www.afcesa.af.mil/Directorate/CEO/Contracts/UtilPrivatization/default.htm>.

    > Air Force leadership is committed to ensuring that funds are
    > available prior to the release of any RFPs and funding issues will
    > continue to be addressed corporately as we gather lessons from the
    > Pathfinders. Seventy-nine systems ... have been approved as
    > Pathfinders. The Pathfinder concept is a sensible and responsible
    > way of proceeding, which allows us to continue to pursue the
    > systems with RFPs on the street and to obtain lessons learned to
    > be used for the rest of the program. Pathfinder projects proving
    > to be economically sound will be awarded while remaining
    > Non-Pathfinder projects can be positioned for release when we have
    > a better understanding of associated privatization costs.

    *Id*.

[^48]: [Dep't of The Air Force Quarterly Report,]{.smallcaps} *supra*
    note 27. ("The OSD Installations Policy Board (IPB) meeting held on
    6 Sep 01 instructed the Services to prepare a utilities
    revitalization plan without regard to the Defense Reform Initiative
    Directive (DRID) #49 milestones. The Air Force is preparing its
    initial plan for submittal to OSD on or about 30 Jan 02. Once
    approved, new milestone dates will be updated. Until such time, all
    discussions in this and subsequent Air Force Utilities Privatization
    (UP) quarterly reports referring to DRID #49 and its milestones are
    for reference only.").

[^49]: H.R. 4205, 106^th^ Cong. (2000). Congress considered two
    amendments to 10 U.S.C. §2688 in 2000; the proposed House amendment
    would have made utility privatization conveyances and awards subject
    to state law, and would also have subjected the contractor selected
    to state laws and regulations. The proposed Senate amendment,
    S.2551, 106^th^ Cong. (2000), did not contain such broad concessions
    to state law applicability, but rather said that non-competitive
    procurement procedures could be used in accordance with 10 U.S.C. §
    2304 (c) through (f). The 2000 Amendment passed by Congress was most
    similar to the Senate's proposed amendment.

[^50]: [S. Rep. No.]{.smallcaps} 106-292, to accompany S. 2549, 106^th^
    Cong. (2000).

[^51]: *Id.*

[^52]: Cahlink, *supra* note 7.

[^53]: *See* discussion *supra* section IV.D regarding "regulated
    utility companies" and "unregulated utility companies."

[^54]: *See infra* notes 66, 73.

[^55]: *See infra* note 55.

[^56]: Memorandum, The General Counsel of the Dep't of Defense, to the
    General Counsel of the Army, the General Counsel of the Navy, and
    the General Counsel of the Air Force, subject: The Role of State
    Laws and Regulations in Utility Privatization (24 Feb. 2000)
    \<<http://www.acq.osd.mil/installation/utilities/policies/policies.htm>\>.

[^57]:
    > Because Congress has not waived the sovereign immunity of the
    > United States with respect to the conveyance of an on-base utility
    > system under section 2688 of title 10, United States Code, state
    > law is not applicable to the conveyance of an on-base utility
    > system under Section 2688; rather, Section 2688 governs the
    > conveyance. Accordingly, '\[i\]f more than one utility or entity
    > ... notifies the Secretary concerned of an interest in a
    > conveyance ..., the Secretary shall carry out the conveyance
    > through the use of competitive procedures', not on a sole source
    > basis to a utility that state law indicates has an exclusive right
    > to provide utility service in the relevant geographic area.

    *Id.* at 4.

[^58]: *Id.* at 8, 9.

[^59]:
    > \[w\]hile the entity to whom the Department conveyed the on-base
    > system is not required to submit to state licensing or similar
    > requirements that undermine the Federal competitive selection of
    > that entity, to the extent the state has regulations regarding the
    > conduct of operation and ownership of utility systems, the entity
    > may have to comply with those requirements if those state
    > requirements do not impose a significant burden on the Federal
    > Government, conflict with a Federal system of regulation, or
    > undermine the Federal policy being implemented. This will require
    > a careful analysis of particular state requirements in relation to
    > the Federal action.

    *Id.* at 9.

[^60]: *Id.* at 6.

[^61]: [U.S. Const.,]{.smallcaps} art. VI, cl. 2, *cited in* Memorandum,
    The General Counsel of the Dep't of Defense, *supra* note 55. (The
    Supremacy Clause states, "This Constitution, and the Laws of the
    United States which shall be made in Pursuance thereof ... shall be
    the supreme Law of the Land; and the Judges in every state shall be
    bound thereby, any Thing in the Constitution or Laws of any state to
    the Contrary notwithstanding.").

[^62]: California Fed. Savings & Loan Ass'n v. Guerra, 479 U.S. 272, 284
    (1987), *cited in* Memorandum, The General Counsel of the Dep't of
    Defense, *supra* note 55.

[^63]:
    > States may justify regulation of a utility contractor on other
    > grounds e.g. safety and health considerations affecting the
    > broader utility distribution framework. This requires a different
    > Supremacy Clause analysis since it is not the case that Congress
    > has 'left no room' for state regulation to ensure safe and
    > economical operation of intrastate utility distribution
    > systems.... Given potentially inconsistent Federal and state
    > regulations each addressing legitimate concerns, a balancing test
    > is required.... In applying a balancing test, the Courts would be
    > required to balance Federal policies favoring maximum possible
    > competition in government contracting against whatever safety or
    > other regulatory concerns the states could articulate. It would
    > seem clear from the case law that the state could not impose a
    > license requirement because that could operate to overturn the
    > Federal selection of a contractor using competitive procedures....
    > However, the state may well regulate the operation of that
    > contractor in a non-discriminatory way to protect the health and
    > safety of all its citizens as long as that regulation does not
    > impose a significant burden on the Federal government or conflict
    > with a Federal system of regulation.... North Dakota v. United
    > States, 495 U.S. 423 (1990). Some degree of state regulation of
    > the contractor operating a utility system on the installation may
    > be permissible, to ensure, for example, that the operation of the
    > on-base system does not threaten the safety and reliability of any
    > utility system to which the on-base system connects.

    Memorandum, The General Counsel of the Dep't of Defense, *supra*
    note 55, at 7, 8.

[^64]: *See* discussion *infra* section IV.D.3.

[^65]: Continuing Appropriations Act of Fiscal Year 1988, Pub.L.
    100-202, § 8093, 101 Stat. 1329 (1987).

    > None of the funds appropriated or made available by this or any
    > other Act with respect to any fiscal year may be used by any
    > Department, agency, or instrumentality of the United States to
    > purchase electricity in a manner inconsistent with State law
    > governing the provision of electric utility service, including
    > State utility commission rulings and electric utility franchises
    > or service territories established pursuant to State statute,
    > State regulation, or State-approved territorial agreements.

    *Id*. Section 8093 only applies to the electricity commodity, and
    does not apply to any other utility commodities.

[^66]: Memorandum, The General Counsel of the Dep't of Defense, *supra*
    note 55, at 5.

    > A plain reading of Section 8093's operative statutory language ...
    > necessarily leads to the conclusion that the waiver of sovereign
    > immunity in that section is limited to purchase of the electric
    > commodity (electric power) excluding distribution or transmission
    > services. There is nothing in this section to indicate that
    > 'purchase electricity' should be read in any way other than its
    > plain language. Consequently, electricity does not include the
    > provision of utility services other than the commodity itself.

    *Id*.

[^67]: Virginia Elec. and Power Co.; Baltimore Gas & Elec. Co., Comp.
    Gen. B-285209, B-285209.2, Aug. 2, 2000, 2000 CPD ¶134.

[^68]: *Id.*

[^69]:
    > BG&E asserts that it is the only entity authorized by Maryland law
    > and the Public Service Commission of Maryland (PSC) to own,
    > operate and maintain electric and natural gas distribution systems
    > in the Fort Meade area. According to BG&E, before any other entity
    > can perform the utility privatization requirements for electric
    > and natural gas distribution services at Fort Meade, that entity
    > must first obtain an electric franchise and right to operate from
    > the Maryland state legislature, as well as revision by the PSC of
    > its order designating BG&E as the sole entity responsible for
    > electric service in the Fort Meade area, and obtain a gas
    > franchise from Anne Arundel County, Maryland, and the consent of
    > local authorities and the PSC to exercise the gas franchise.

    *Id* at 8 - 9*.*

[^70]: *Id.*

[^71]: *Id.*

[^72]: *Id.*

[^73]: *Id.*

[^74]: Baltimore Gas and Elec. Co. v. United States, 133 F. Supp. 2d 721
    (D. Md. 2001).

[^75]: *Id.* at 739.

[^76]: *Id.* at 724. "PSC" stands for "Public Service Commission."

[^77]: *Id.* at 724.

[^78]: *Id.* at 734.

[^79]: *Id.* at 739.

[^80]: *Id.* at 745.

[^81]: [H.R. 4205, 106]{.smallcaps}^th^ Cong. (2000).

[^82]: *Baltimore Gas & Elec. Co.*, 133 F. Supp. 2d at 739.

[^83]: 10 U.S.C. § 2688 (1997). As the statute itself says,

    > With respect to the solicitation process used in connection with
    > the conveyance of a utility system (or part of a utility system)
    > under subsection (a), the Secretary concerned shall ensure that
    > the process is conducted in a manner consistent with the laws and
    > regulations of the State in which the utility system is located to
    > the extent necessary to ensure that all interested regulated and
    > unregulated utility companies and other interested entities
    > receive an opportunity to acquire and operate the utility system
    > to be conveyed.

    *Id.* Subsection (f)(2) states, "The Secretary concerned shall
    require in any contract for the conveyance of a utility system (or
    part of a utility system) under subsection (a) that the conveyee
    manage and operate the utility system in a manner consistent with
    applicable Federal and State regulations pertaining to health,
    safety, fire, and environmental requirements."

[^84]: Memorandum from the American Public Power Association, prepared
    by Talisman Partners, Ltd., to Congress (April 26, 2000) (on file
    with author) \[hereinafter "APPA memorandum"\].

[^85]: *Id.* ("DoD costs of recovering a utility distribution system
    upon the default, abandonment, or early contract termination by an
    unregulated owner are expected to be in the range of \$2.2 to \$3.3
    billion during the initial expected 50-year term of DoD utility
    privatization contracts.").

[^86]:
    > DoD costs associated with the bargaining leverage held by the
    > unregulated utility owner at the end of the initial contract when
    > negotiating a new contract for continued service could total \$34
    > to \$147 billion over the 50-year period following the initial
    > contract period.... This bargaining leverage directly results from
    > the DoD installation becoming a captive customer of the
    > unregulated entity, and the unregulated entity having no legal or
    > practical restrictions on the pricing of services in the follow-on
    > contract. This circumstance is exclusively attributable to the
    > lack of regulation or public oversight. *Id.*

[^87]: *Id.*

[^88]:
    > DoD costs of providing needed oversight that would typically be
    > provided by a regulatory body could total \$2.1 to \$2.4 billion
    > during the 50-year contract period. These costs represent the
    > added DoD expense related to assuring periodic price
    > re-determinations are at fair and reasonable levels, and
    > enforcement of safety requirements, industry standards, as well as
    > other matters for the common good. These regulatory oversight
    > functions must be provided for by the DoD or ignored for services
    > rendered by a provider that is not subject to utility commission
    > regulation or other public oversight and control.

    *Id.*

[^89]: Letter from Timothy B. Mills, Counsel for Colorado Springs
    Utilities, to George W. Lauffer, Professional Staff Member, Senate
    Armed Services Committee (July 18, 2000) (on file with author).

[^90]:
    > The natural gas utilities privatization company defaulted on its
    > contractual obligations to the Air Force and its legal obligations
    > owed under California State utility law and the rulings and
    > regulations of the California Public Utilities Commission
    > (California PUC) to maintain and operate a safe and reliable
    > distribution system.... Even though the Air Force's contractual
    > agreement with the utilities privatization company obligated the
    > private company to operate the Mather Field natural gas
    > distribution system in accordance with the requirements of State
    > utility law, including, but not limited to, safety and
    > environmental requirements -- as is the case with DoD's proposed
    > utility privatization contracts -- the Air Force possessed no
    > effective enforcement mechanism. ... DoD claims that it intends to
    > make the requirements of State utility laws, regulations,
    > standards and practices applicable to utilities privatization
    > companies by including these requirements as material terms and
    > conditions of the DoD utilities privatization contracts. Thus, DoD
    > inexplicably and unnecessarily places itself in the incongruous
    > position of (a) on the one hand, imposing State utility laws,
    > regulations, standards and practices on the privatization company
    > as contract requirements, while (b) on the other hand, insisting
    > at the same time that exclusive federal legislative jurisdiction
    > and 'sovereign immunity' should be maintained so that the State
    > utility law regulators most expert in such laws, regulations,
    > standards and practices, should have no power or authority to
    > enforce these requirements, even if requested by DoD.

    *Id.*

[^91]: S. 2551, 106^th^ Cong. (2000).

[^92]: [S. Rep. No. 106-292,]{.smallcaps} *supra* note 49.

[^93]: *Id.*

[^94]: [Defense Reform Initiative Directive No. 49,]{.smallcaps} *supra*
    note 2.

[^95]: FAR 52.241-7.

[^96]:
    > Change in Rates or Terms and Conditions of Service for Regulated
    > Services (Feb. 1995). (a) This clause applies to the extent
    > services furnished under this contract are subject to regulation
    > by a regulatory body. The contractor agrees to give \*
    > \_\_\_\_\_\_\_\_\_\_ written notice of (1) the filing of an
    > application for change in rates or terms and conditions of service
    > concurrently with the filing of the application and (2) any
    > changes pending with the regulatory body as of the date of
    > contract award. Such notice shall fully describe the proposed
    > change. If, during the term of this contract, the regulatory body
    > having jurisdiction approves any changes, the Contractor shall
    > forward to the Contracting Officer a copy of such changes within
    > 15 days after the effective date thereof. The Contractor agrees to
    > continue furnishing service under this Contract in accordance with
    > the amended tariff, and the Government agrees to pay for such
    > service at the higher or lower rates as of the date when such
    > rates are made effective. (b) The Contractor agrees that
    > throughout the life of this contract the applicable published and
    > unpublished rate schedule(s) shall not be in excess of the lowest
    > cost published and unpublished rate schedule(s) available to any
    > other customers of the same class under similar conditions of use
    > and service. (c) In the event that the regulatory body promulgates
    > any regulation concerning matters other than rates which affects
    > this contract, the Contractor shall immediately provide a copy to
    > the Contracting Officer. The Government shall not be bound to
    > accept any new regulation inconsistent with Federal laws or
    > regulations. (d) Any changes to rates or terms and conditions of
    > service shall be made a part of this contract by the issuance of a
    > contract modification unless otherwise specified in the contract.
    > The effective date of the change shall be the effective date by
    > the regulatory body. Any factors not governed by the regulatory
    > body will have an effective date as agreed to by the parties.

    FAR 52.241-7.

[^97]:
    > Except as provided in FAR 41.201, DoD, as a matter of comity, will
    > comply with the current regulations, practices, and decisions of
    > independent regulatory bodies which are subject to judicial
    > appeal. This policy does not extend to regulatory bodies whose
    > decisions are not subject to appeal nor does it extend to
    > nonindependent regulatory bodies. (2) Purchases of utility
    > services outside of the United States may use -- (i) Formats and
    > technical provisions consistent with local practice; and (ii) Dual
    > language forms and contracts. (3) Rates established by an
    > independent regulatory body are considered 'prices set by law or
    > regulation' and do not require submission of cost or pricing data
    > (see FAR Subpart 15.4).

    DFARS 241.201.

[^98]: D[efense Reform Initiative Directive No.]{.smallcaps} 9 announced
    the DoD utility privatization initiative in December 1997. The most
    recent version of the Regulated Rates clause, FAR 52-241-7, is dated
    February 1995. DFARS 241.201 was most recently revised in January
    2000, but its language is substantially the same as it was prior to
    1997.

[^99]: *Baltimore Gas & Elec. Co.*, 133 F. Supp. 2d at 739.

[^100]: *Id.* at 738.

[^101]: Letter from Timothy B. Mills to George W. Lauffer, *supra* note
    88.

[^102]: *Baltimore Gas & Elec. Co.*, 133 F. Supp. 2d at 721.

[^103]: Memorandum, The General Counsel of the Dep't of Defense, *supra*
    note 55.

[^104]: [Air Force RFP Template; Army RFP Template,]{.smallcaps} *supra*
    note 18.

[^105]: [Defense Energy Support Center, Texas Regional Demonstration
    Solicitation, Amendment 3, Question 78c (]{.smallcaps}March 13,
    2000) \<<http://www.desc.dla.mil/PublicPages/a/priv/TRD/Amd3.pdf>\>
    The potential offeror asked, "Has the DESC made a determination that
    privatized electric or natural gas service is subject to the
    jurisdiction of any of the regulatory bodies: the Public Utility
    Commission of Texas (PUCT), the Texas Railroad Commission (TRRC), or
    the City Counsel of the City of San Antonio in the case of Lackland
    AFB and Randolph AFB?" The "Texas Regional Demonstration" is a
    solicitation released by the Defense Energy Support Center (DESC)
    for the privatization of the natural gas, electrical, water and
    wastewater utility infrastructure at nine military installations
    located throughout the State of Texas.

[^106]: *Id.*

[^107]: *Id.*

[^108]: H.R. 4205, 106^th^ Cong. (2000).

[^109]: Memorandum, The General Counsel of the Dep't of Defense, *supra*
    note 55.

[^110]: ^?^ [Air Force RFP Template, Army RFP Template,]{.smallcaps}
    *supra* note 18, at Section I.5. The Negotiated Rates clause, FAR
    52.241-8, provides for negotiated utility rates between
    installations and unregulated utility providers, as opposed to a
    state commission-set tariff rate for regulated utilities.

[^111]: *Baltimore Gas & Elec. Co.*, 133 F. Supp. 2d at 732.

[^112]: Enron Fed. Solutions, Inc., Docket No. 99D-242EG, Decision No.
    C00-807, Public Utilities Comm'n of the State of Colorado (July 19,
    2000) (on file with author), at 12.

[^113]: *Id.* at 19, 20.

[^114]: Memorandum, The General Counsel of the Dep't of Defense, *supra*
    note 55.

[^115]: Position Paper, AF/ILEIO point paper, subject: Mather Natural
    Gas Privatization as a Case Study in Support of Legislative
    Proposals (19 July 2000) \<www.il/hq.af.mil/ile/ilei.htm. (AF/ILEIO,
    the Air Force Civil Engineer's utility privatization division, has
    been "stood down," and utilities privatization is now under AF/ILEX,
    The Civil Engineer's Readiness and Installation Support Division,
    per the AF/ILE website.)

[^116]: *Id*. The AF/ILEIO point paper was written to dissuade Congress
    from passing the proposed 2000 Amendment to 10 USC § 2688. Had that
    amendment passed, state regulation of the utility privatization
    contractor would have been expressly recognized. The same sentiments
    however are still applicable in the context of a state regulatory
    body exercising jurisdiction over a regulated utility privatization
    contractor pursuant to the Regulated Rates clause. The point paper
    states in part,

    > Because the Air Force would have to comply with any 'State laws,
    > regulations, rulings and policies,' a legislature, the state
    > public utilities commission, or its staff would have authority to
    > define access requirements to our property. For instance, the PUC
    > or its staff could determine, as a matter of 'policy,' that a
    > certain form of easement would be used, even though that easement
    > would surrender the authority of the installation commander to
    > exercise control over access. Some states have much more expansive
    > civil rights laws than the federal government. To the extent we
    > would have to comply with them regarding access by utility company
    > employees, we would be compelled to allow access by persons who
    > could pose a security threat, simply because the state laws do not
    > recognize our concerns in that area.

[^117]: [Secretary of the Air Force, Office of General Counsel
    (SAF/GCN), Right of Way for Utility Systems, Draft Version 5,
    section 4.1 (]{.smallcaps}Dec. 2000) (on file with author)
    \[hereinafter "[Right of Way"]{.smallcaps}\].

    > In accepting the privileges and obligations established hereunder,
    > Grantee recognizes that the Installation serves the national
    > defense and that Grantor will not permit the operation,
    > construction, installation, repair and maintenance of a utility
    > system and the provision of utility services to interfere with the
    > Installation's military mission. This Installation is a closed
    > military installation and is subject to the provisions of the
    > Internal Security Act of 1950, 50 U.S.C. §797. Access to the
    > Installation is subject to the control of its commanding officer
    > and is governed by such regulations and orders as have been
    > lawfully promulgated or approved by the Secretary of Defense or by
    > any designated military commander. Any access granted to Grantee,
    > its employees, and its agents is subject to such regulations and
    > orders.

    *Id*.

[^118]: FAR 52.241-7(c).

[^119]: [Black's Law Dictionary 1320 (]{.smallcaps}7^th^ ed. 1999).

[^120]: 10 U.S.C. § 2688(a) (1997).

[^121]:
    > There is risk to the Government that, for a variety of reasons,
    > sometime during the 50 year life of the utility privatization
    > contract, the utility provider will default, abandon the utility
    > system, or initiate early termination of the contract.... Compared
    > to regulated entities, unregulated entities providing utility
    > services are likely to have thin capitalization margins, higher
    > costs of capital, an absence of any obligation to serve the
    > public, and a lack of regulated cost of service recovery through
    > tariffed service rates. It can be reasonably expected that the
    > defaults, bankruptcies, system abandonments and early contract
    > terminations for unregulated providers of distribution services
    > would be as high as the rate of defaults for 'investment' grade
    > entities. Historical data for defaults of investment grade
    > entities indicates that over 250 systems will revert to the DoD at
    > least one time during the initial 50-year privatization period. In
    > addition, there may be instances in which DoD must reacquire
    > problematic utility systems multiple times during the initial
    > privatization term. The costs associated with utility system
    > default, abandonment, or non-performance were estimated by
    > identifying the costs related to three main activities required by
    > the Government when a utility provider no longer is willing or
    > able to provide the services required under the contract. These
    > three activities and appropriated fund requirements are: initial
    > physical assessment and recovery; ongoing utility system operation
    > and maintenance; legal recovery of the system through repurchase
    > and re-privatization.

    [Appa Memorandum,]{.smallcaps} *supra* note 83.

[^122]: Allenby, *supra* note 15, at 15.

[^123]:
    > Bargaining leverage, as used in this study, is defined as the
    > power held by a company due to its control of a particular market.
    > At the expiration of a DoD contract an unregulated entity will be
    > in a position of having complete control over the market for
    > utility distribution services at a DoD installation because an
    > installation essentially becomes a captive customer. Once the
    > contract has expired, the utility service provider will own the
    > distribution equipment but will have no obligation to serve the
    > installation. Given that an installation will opt to renegotiate
    > the service contract after 50 years, the unregulated entity will
    > be able to charge a premium for service from then on. It is noted
    > that a regulated utility will continue to provide service under
    > its obligation to serve mandate. In the absence of a negotiated
    > contract, the regulated utility will provide service at a tariff
    > rate schedule.

    [Appa Memorandum,]{.smallcaps} *supra* note 83, at iv.

[^124]: [Air Force RFP Template]{.smallcaps}, *supra* note 18, at
    Section B.2.3.

[^125]: [Directorate of contracting, fort lewis, washington, Amendment
    of Solicitation/Modification of Contract]{.smallcaps} (22 Aug. 2001)
    \<http://www.lewis.army.mil/doc/solicitations/00r2/amend3/Amendment%2000003%20%2022%20Aug%2001.doc.

[^126]: For example, the following comments are found in an Army Judge
    Advocate General School outline on "Competitive Sourcing and
    Privatization," -- "Reversionary clauses. The contractual agreement
    must protect the government's interests in the event of a default
    termination. The use of reversionary clauses, which revoke the
    conveyance of the utility system, are but one option. Presently, the
    Army General Counsel's office does not favor the use of reversionary
    clauses as the means to accomplish this end." [U.S. Army Judge
    Advocate General's school, Contract & Fiscal Law Dep't, Competitive
    Sourcing and Privatization Outline (]{.smallcaps}Jan. 2001) (on file
    with author). The outline does not discuss what "other options" are
    available, because none have been formally identified.

[^127]: <http://www.afcesa.af.mil/Directorate/CEO/Contracts/UtilPrivatization/default.htm>
    ([Air Force Civil Engineer Support Agency (AFCESA/CEOC), Air Force
    Utilities Privatization Frequently Asked RFP Questions]{.smallcaps}
    (26 Sep. 2000) (also on file with author)).

[^128]: *Id.*

[^129]: *Id.*

[^130]: *Id.*

[^131]: [Defense Energy Support Center, Texas Regional Demonstration
    solicitation, Answer to Question 80,]{.smallcaps} *supra* note 104.

[^132]: [Dep't of The Navy Quarterly Report,]{.smallcaps} *supra* note
    27.

[^133]: [Utilities Privatization Working Group, Dep't of Defense,
    Meeting Minutes (]{.smallcaps}Feb. 28, 2002) (on file with author)
    \[hereinafter "Utilities Privatization Working Group"\].

[^134]: [Right of Way,]{.smallcaps} *supra* note 116, at 4.

[^135]: *Id.* at 4.

[^136]: *Id.* at 9 - 10.

[^137]: *Id.* at 17 ("Abandonment shall consist of Grantee failing to
    utilize the Premises, or any part of them, to provide services to
    customers for a period of one year.").

[^138]: [Air Force RFP Template,]{.smallcaps} *supra* note 18, at
    [Section H.6, "]{.smallcaps}Rights of the Government to Perform
    Function with Its Own Personnel."

[^139]: [U.S. Const., amend V.]{.smallcaps}

[^140]:
    > The power to take private property for public uses, generally
    > termed the right of eminent domain, belongs to every independent
    > government. It is an incident of sovereignty, and, as said in
    > [Boom v. Patterson]{.underline}, 98 U.S. 106, requires no
    > constitutional recognition. The provision found in the Fifth
    > Amendment to the federal Constitution, and in the Constitutions of
    > the several States, for just compensation for the property taken,
    > is merely a limitation upon the use of the power. It is no part of
    > the power itself, but a condition upon which the power may be
    > exercised.

    United States v. Jones, 109 U.S. 513 (1883).

[^141]: United States v. Brooklyn Union Gas Co., 168 F.2d 391 (2d Cir.
    1948).

[^142]: United States v. Jones, 109 U.S. 513 (1883).

[^143]: *See e.g.,* Onondaga County Water Auth. v. New York Water
    Service Corp., 139 N.Y.S. 755 (N.Y. App. Div. 1955).

    > The valuation of utility properties in eminent domain proceedings
    > presents unique problems. The absence of sales of similar property
    > is one difficulty. For another thing, the taking includes not just
    > the property, but also the business, and the two are practically
    > inseparable. The standard of compensation in utility condemnations
    > is an extremely vague one, and although many tests are considered,
    > none seems to be controlling. No rigid measures can be prescribed
    > for the determination of 'just compensation' under all
    > circumstances and in all cases. No hard and fast rule can be laid
    > down that will cover every case or fix in advance the limit of the
    > matters which may be taken into consideration by the commissioners
    > in any particular case. Various tests have been applied, alone and
    > in combination. The usual method of fixing the value of property
    > for taking is by ascertaining market value. But there is hardly a
    > market, in the usual sense, for a public utility, particularly a
    > regulated utility. Resort must therefore be made to other tests of
    > value, and what is used is largely a matter of judgment and
    > circumstance.

    *Id*. *See also* L.S. Tellier, Annotation, *Compensation or Damages
    for Condemning a Public Utility Plant,* 68 A.L.R.2d 392 (2001).

[^144]: *Onondaga*, 139 N.Y.S. 755 (1955).

[^145]: FAR 52.249-2

[^146]: FAR 52.249-8

[^147]: [Air Force RFP Template; Army RFP Template,]{.smallcaps} *supra*
    note 18, at Section H.6.

[^148]: Allenby, *supra* note 15, at 15.

[^149]: *Id.* at 15.

[^150]: FAR 52.241-10.

[^151]: *See* discussion *supra* sections I, II D, and IV D. 2 regarding
    regulated and unregulated utility companies vis-a-vis the Regulated
    Rates clause and the Negotiated Rates clause.

[^152]: *See generally* [Air Force Logistics Management Agency, Utility
    Contracting Reference Guide (]{.smallcaps}Sept. 1996) (on file with
    author), at 6 \[hereinafter "[Air Force Logistics Management Agency
    Guide"]{.smallcaps}\] ("Municipals are unique in operation,
    financing, and the way they are regulated. The vast majority of
    municipal utilities are self-regulated. State Public Service
    Commissions have little or no regulatory authority for operations,
    services, and rates imposed by the Municipals. Many Municipals
    pattern accounting and service standards along state and federal
    regulatory standards, but for the most part they are independent of
    state regulatory oversight.").

[^153]: As a Trial and Negotiation Attorney assigned to the Air Force
    Utility Litigation Team, Air Force Legal Services Agency, Tyndall
    AFB, Florida, from 1999-2001, the author was personally involved in
    negotiations with several municipal utility companies that took the
    position they were "regulated" and therefore their contracts with
    the Federal Government should include the Regulated Rates clause.

[^154]: DFARS 241.201; FAR 41.402. The latter reads, "If the utility
    supplier is not regulated and the rates, terms, and conditions of
    service are subject to negotiation pursuant to the clause at
    52.241-8, Change in Rates or Terms and Conditions of Service for
    Unregulated Services, any rate change shall be made a part of the
    contract by contract modification."

[^155]: The author participated in these negotiations as an advisor to
    the particular Air Force installation and Major Command involved.
    The parties' identities will not be revealed so as not to jeopardize
    and compromise potential future negotiations between the parties.

[^156]: FAR 52.241-7.

[^157]: FAR 52.241-8.

[^158]: DFARS 241.101.

[^159]: *Id.*

[^160]: *Id.*

[^161]: DFARS 241.201.

[^162]: FAR 41.501.

[^163]: FAR 52.241-7.

[^164]: DFARS 241.101.

[^165]: [Air Force Logistics Management Agency Guide,]{.smallcaps}
    *supra* note 150.

[^166]: City of Tacoma v. United States, 31 F.3d 1130 (Fed. Cir. 1994).

[^167]: *Id*. at 1131.

[^168]: *Id.* at 1132.

[^169]: *Id*.

[^170]: *See* discussion *infra* section IV.D.3. regarding use of FAR
    52.241-7 in DoD utility privatization solicitation templates.

[^171]: FAR 52.241-8.

[^172]: DFARS 241.201.

[^173]: FAR 52.241-8.

[^174]: Cahlink, *supra* note 7.

[^175]: FAR 52.241-7.

[^176]: *Id.*

[^177]: FAR 52.241-8.