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GAO-02-56R GSA Areawide Utility Contracts

United States General Accounting Office

Washington, DC 20548

December 17, 2001

Mr. David A. Drabkin

Deputy Associate Administrator

U.S. General Services Administration

Office of Acquisition Policy

1800 F Street, N.W.

Washington, DC 20405

Subject: GSA’s Guidance and Oversight Concerning Areawide Utility Contracts

Dear Mr. Drabkin:

In September 2001, we issued a report on the District of Columbia school system’s

use of a General Services Administration (GSA) areawide utility contract with the

Washington Gas Light Company.1

 The school system has used this contract for

$43 million worth of general facility improvements and maintenance—work that was

outside the scope of the contract. In the report, we raised concerns about GSA’s

guidance on the use of areawide utility contracts.

The guidance does not adequately indicate that, when the utility is not the only

available source, services ordered under areawide contracts must be provided by the

utility acting in its capacity as a public utility (i.e., subject to regulatory authority).

Otherwise, the government’s competitive contracting requirements apply. In addition,

we found that GSA lacked oversight of the school system’s use of the contract and

was unaware of the scope of work ordered under it, largely because neither the

school system nor Washington Gas complied with GSA’s reporting requirements.

This letter discusses these findings in greater detail and recommends actions that

GSA can take to improve its oversight of areawide contracts and its guidance on their

use.

Background

GSA is authorized by statute to prescribe policies and methods governing the

acquisition and supply of utility services for federal agencies.2

 Competition to

 1

 See District of Columbia: D.C. Public Schools Inappropriately Used Gas Utility Contract for

Renovations (GAO-01-963, Sept. 28, 2001).

2

 See section 201 of the Federal Property and Administrative Services Act of 1949, as amended

(40 U.S.C. sec. 481).
2 GAO-02-56R GSA Areawide Utility Contracts

provide such services is often unavailable within the market established by a utility’s

regulators. In such cases, GSA and utility service providers enter into areawide

contracts to cover the service needs of federal agencies within the utility’s franchise

territory. The franchise territory is a geographical area that a utility has a right to

serve on the basis of a franchise or other legal means. Areawide contracts provide a

preestablished contractual vehicle for ordering utility services such as electricity and

natural gas.

According to the Federal Acquisition Regulation, areawide contracts generally

provide for ordering utility services at rates approved and/or established by a

regulatory body (such as a public utility commission) and published in a tariff or rate

schedule.3 Any federal agency having a requirement for utility services within an area

covered by an areawide contract is required to acquire the services under that

contract unless service is available from more than one supplier. If service is

available from more than one supplier, the Federal Acquisition Regulation requires

that the service be acquired using competitive acquisition procedures.4

The District of Columbia government is authorized by GSA to use available areawide

contracts for utility services. The District of Columbia school system started using

the GSA areawide contract with Washington Gas in late 1997. To date, the school

system has ordered about $43 million worth of general facility improvements and

maintenance from Washington Gas as “energy management services” under the

contract’s ordering procedures. For example, the school system used the GSA

contract for a variety of renovation services, including painting, carpeting, plumbing,

and electrical work; boiler, air conditioning, and heating repairs; playground

upgrades; bathroom renovations; and the refurbishing of flagpoles.

Guidance on Use of

Areawide Contracts Is Misleading

GSA’s Energy Center of Expertise has published two sets of guidance to familiarize

agencies with the use of its areawide utility contracts: the Utility Areawide Guide

and Procuring Energy Management Services with the Utility Areawide Contract.

However, this guidance is misleading.

GSA’s guidance does not explain that, when the utility is not the only available

source, services ordered under areawide contracts must be provided by the utility

acting in its capacity as a public utility (i.e. subject to a regulatory authority such as a

public utility commission). Instead, the guidance states only that areawide contracts

allow agencies to procure from utilities a variety of energy management services—

 3 See 48 C.F.R. sec. 41.204.

4

 Id.
3 GAO-02-56R GSA Areawide Utility Contracts

including energy audits, feasibility studies, and installation of energy conservation

projects—and that agencies can define their own energy management projects under

the contract.

GSA’s use of areawide contracts for energy-efficiency services is based on the

National Energy Conservation Policy Act, as amended by the Energy Policy Act of

1992. This law encourages investment in energy efficiency by electric and gas

utilities, establishes energy management requirements for federal agencies, and

authorizes federal agencies to participate in utility incentive programs. (Appendix II

contains more detail on the authorization for agencies to participate in utility

incentive programs). Furthermore, Executive Order 13123, Greening the

Government Through Efficient Energy Management, issued on June 3, 1999 and

based on the Energy Policy Act, requires agencies to reduce energy usage and cost

through the use of alternative financing and contracting mechanisms.

Areawide contracts may be appropriate vehicles for carrying out the federal energy

management goals of the Energy Policy Act and the Executive Order. However,

under these authorities, use of these contracts is limited to only those services that

are subject to public utility regulatory authority and offered by a utility in its capacity

as a public utility.

The Energy Policy Act authorizes agencies to participate in a utility company’s

energy-efficiency programs that are generally available to the utility’s customers.

Such utility services are subject to public utility regulatory authority not only because

of the regulated nature of the utility industry in general, but also because of the

Energy Policy Act’s specific requirement that investment by electric and gas utilities

in energy efficiency be subject to state regulatory authority.5

 Congress, in requiring

under the Energy Policy Act that utilities and public utility commissions consider

energy-efficiency programs to reduce energy demand, intended that state laws and

regulatory commissions would continue to determine whether utilities actually

engage in such activities.6 Further, Executive Order 13123 defines “utility” as

meaning public agencies and privately-owned companies that market, generate,

and/or distribute energy or water as commodities for public use and that provide the

service under federal, state, or local regulated authority for all authorized customers. 7

 5 Sections 111 and 115 of the Energy Policy Act amended the Public Utilities Regulatory Policies Act of

1978 (16 U.S.C. sec. 2621; 15 U.S.C. sec. 3203) to encourage investments in conservation and energy

efficiency by electric and gas utilities under state regulatory authority.

6

 H.R. Conf. Rep. No. 102-1018, at 381-82, 383-83, reprinted in 1992 U.S.C.C.A.N. 2472-73, 2474-75.

7

The principal determinative characteristic of a public utility is that of service to, or readiness to

serve, an indefinite public that has a legal right to demand and receive its services or commodities.

64 Am Jur 2d Public Utilities sec. 2 (2001). A public utility holds itself out to the public generally and

may not refuse any legitimate demand for service, while a private business independently determines

whom it will serve. Id.
4 GAO-02-56R GSA Areawide Utility Contracts

Accordingly, the energy-efficiency programs available to federal agencies under the

Energy Policy Act—and generally available to the utilities’ customers—are subject to

public utility regulatory authority. To the extent that the Executive Order authorizes

the use by federal agencies of GSA areawide contracts for the procurement of energyefficiency services from utilities, such services may be provided only in the utility’s

capacity as a public utility (i.e. subject to regulatory authority). Otherwise, such

services would not be properly available to federal agencies through areawide

contracts, which are typically entered into by GSA with utilities on a sole-source

basis precisely because of utilities’ status as public utilities with exclusive franchises.

GSA’s guidance on the use of areawide contracts fails to make this clear.

Finally, GSA’s guidance does not list alternatives to areawide contracts for use in

situations where these contracts are inappropriate. For example, the guidance could

refer agencies to procedures for using energy savings performance contracts (which

are awarded using competitive procedures) or to the Federal Acquisition Regulation

procedures for acquiring utility services where more than one source is available.

Appendix III contains more detail on energy savings performance contracts.

Preexisting government sources, such as GSA’s federal supply schedules, may be

another option for fulfilling agencies’ needs for certain energy management services.

Guidance Does Not Emphasize

Competitive Contracting Requirements

In responding to our September 2001 report, GSA takes the position that the

acquisition of utilities’ energy-efficiency services without competition, through an

areawide contract, is an authorized exception to the government’s competitive

contracting requirements. According to GSA, the Energy Policy Act’s authorization

for federal agencies’ participation in utility incentive programs provides authorization

to procure the services from a specified source (the utility), which is one of the

statutory exemptions from competition in the Competition in Contracting Act of

1984.8

 However, even if the Energy Policy Act provides such authorization, the

exemption from competition is limited to the acquisition of utility services subject to

regulatory authority. GSA’s guidance does not make clear that, when the utility is not

the only available source for the services, the acquisition of the services is otherwise

subject to the government’s competitive contracting requirements.

GSA enters into areawide contracts without competition due to the regulated nature

of utility services, which, because of the legal right granted to a utility to service an

exclusive area, typically precludes competition. A service is authorized under a

utility incentive program—and thus under an available areawide contract—when it is

 8 41 U.S.C. sec. 253(c)(5).
5 GAO-02-56R GSA Areawide Utility Contracts

subject to public utility regulatory authority.9 Federal agencies would then be

authorized to participate in the program by the Energy Policy Act, notwithstanding

the availability of other sources for specific energy-conservation projects. The use of

an areawide contract to procure energy-efficiency services that are not subject to

regulatory authority is inconsistent with the government’s competitive procurement

requirements. In a June 20, 1974, bid protest decision, we held that in procuring

utility service, GSA is obligated to obtain competition to the extent that it is available

(RCA Alaska Communications, Inc., B-178442). We held that GSA’s authority to

procure utility services under the Federal Property and Administrative Services Act

does not justify noncompetitive procurements where competition is available. We

recognized that where public utilities are involved, the number of potential sources

may be severely limited, or, for that matter, only one source may be available.

However, we stated that, in our opinion, “the duty to obtain maximum competition is

paramount.” We concluded that GSA must assess the availability of competition and

act accordingly before entering into public utilities contracts.

Unless utilities provide energy-efficiency services in their capacity as public utilities,

we believe the services cannot be procured through a GSA areawide contract without

violating the Competition in Contracting Act of 1984. This Act establishes an even

higher competition standard—“full and open”—than was applicable in the 1974 GAO

bid protest decision. If GSA allows federal agencies to use areawide contracts to

procure energy efficiency services that are not subject to public utility regulatory

authority, GSA is not providing for full and open competition for potential sources of

these services, as required.

The GSA guidance lists a variety of potential energy-efficiency projects, none of

which involve work that only a utility could provide. Most of them—general facility

improvements and heating, ventilation, and air conditioning equipment upgrades—

could be performed by other sources such as a general contractor, licensed plumber

or electrician, or heating and air conditioning equipment company. Nonetheless, the

guidance states that most types of energy and energy management services are

 9 For example, a July 29, 1994, GSA Office of General Counsel memorandum approved the use of an

existing areawide contract for the acquisition of energy management services. The utility company’s

proposed energy conservation measures were a tariffed service offered under a program authorized by

the state public utilities commission, and participation in the program was generally available to

customers of the utility. The public utility would provide GSA a subsidy offsetting the total cost of

certain energy conservation measures (including the installation of energy-saving equipment) which

would be paid for through a monthly service charge on the agency’s electric bill over 14 years.

Payment for the services rendered by the utility would be determined in accordance with an

equipment services tariff approved by the public utilities commission.
6 GAO-02-56R GSA Areawide Utility Contracts

available through areawide utility contracts, and that these contracts have the

flexibility to cover “nearly every type of energy, water, and demand-side management

project possible.” According to the guidance, “if your local utility services provider

offers it, your Agency can procure it quickly and easily using the GSA Areawide

Contract.” However, GSA’s guidance does not inform agencies that the procurement

of any of the numerous potential energy conservation projects it lists is subject to the

availability of those services through regulatory authority over public utilities and

thus may not actually be available in each case. The guidance also fails to state that,

when the utility is not the only available source, services ordered under areawide

contracts are limited to those provided by the utility in its capacity as a public utility.

GSA Lacked Oversight Over School

System’s Use of Washington Gas Contract

Neither Washington Gas nor the District of Columbia public school system complied

with requirements to inform GSA of all orders executed under the areawide contract

with Washington Gas. In fact, the GSA contracting officer responsible for the

contract was unaware that the school system had improperly used the contract until

we informed her in April 2001.

GSA’s contract with Washington Gas requires a copy of each order executed under

the contract to be transmitted by the ordering agency (in this case, the District of

Columbia Public Schools) to GSA. This instruction is also printed on the front of the

contract’s ordering form. In addition, the contractor is required to provide GSA with

an annual report listing all federal customers requiring service under the contract,

including the nature, dollar value, and quantity of service. Furthermore, the Federal

Acquisition Regulation requires agencies using GSA areawide contracts to provide

GSA with a copy of each order issued to the contractor within 30 days after

execution.12

The contracting officer stated that many ordering agencies and contractors do not

comply with the requirement to report on their use of areawide contracts. In this

case, neither Washington Gas nor the school system filed copies of any of the orders

executed under the contract. The official said GSA administers about 160 areawide

contracts nationwide and lacks the resources to adequately monitor contract usage.

As a result, GSA relies on ordering agencies to raise questions or concerns. In the

case of the school system’s use of the Washington Gas contract, however, the school

system’s contracting officer did not raise questions about the scope of work allowed

under the contract. Thus, GSA was unaware that the contract was being improperly

used.

 12 48 C.F.R. sec. 41.204(e).
7 GAO-02-56R GSA Areawide Utility Contracts

Once we notified GSA that the school system was using the Washington Gas contract

for work outside the scope of the contract, the GSA contracting officer took prompt

action. In May 2001, GSA sent a letter to the schools’ contracting officer stating that

• GSA’s contract with Washington Gas is not intended to provide general facility

improvements and maintenance that are not energy-related and

• the continued use of the contract for services outside its scope and intent would

jeopardize the school system’s ability to continue using the contract.

The schools’ contracting officer responded that the school system would adhere to

the intended use of the contract when ordering future services and would follow GSA

guidance to ensure that only proper services are ordered. However, we remain

concerned that, by following the GSA guidance, the school system may continue to

procure services not covered under the areawide contract.

As the scope of our review was limited to the school system’s use of the Washington

Gas contract, we did not determine whether other GSA areawide utility contracts are

being improperly used or whether other contractors and ordering agencies are failing

to comply with the requirement to notify GSA of orders executed under the contracts.

Conclusion

Unless GSA’s guidance on areawide contracts is revised, the potential for misuse

exists. Following current guidance, ordering agencies could inappropriately define

an energy-efficiency project to be anything a utility—or its subsidiaries—is willing

and able to perform as a private business rather than in its capacity as a public utility.

The guidance could be interpreted as permitting agencies to order such energyefficiency projects on a sole-source basis under an areawide contract, even if the

projects are not subject to regulatory authority as required by law. We believe the

guidance fails to clearly advise agencies that unless the ordered services are subject

to regulatory authority, agencies are required to use competitive acquisition

procedures to obtain the services when more than one source exists.

The District of Columbia public school system’s misuse of the GSA areawide utility

contract with Washington Gas may be a solitary occurrence among the many

agencies that use these types of contracts. However, we believe that a contracting

agency such as GSA should be responsible for knowing how its contracts are used

and that ordering agencies and contractors are responsible for complying with GSA’s

reporting requirements. Better contract management and oversight by GSA would

help ensure that contracts are not used for more than their intended purpose and that

contractors provide no services beyond the scope of the contract.
8 GAO-02-56R GSA Areawide Utility Contracts

Recommendations for Executive Action

We recommend that you take the following actions:

• Direct a revision of GSA’s guidance on areawide utility contracts to emphasize

that ordering agencies must use competitive acquisition procedures to procure

utility services that are (1) not subject to regulatory authority and (2) available

from more than one supplier.

• Conduct an assessment—or request the GSA Inspector General to conduct an

assessment—of the extent to which (1) ordering agencies and contractors are

reporting the use of the contracts as required and (2) GSA is adequately

monitoring the contracts’ use. If appropriate monitoring is not taking place, GSA

should develop cost-effective controls to ensure that agencies are complying

with reporting requirements and properly using the contracts.

Please provide us with a response within 30 days of planned actions to be taken on

our recommendations.

Agency Comments

In written comments on a draft of this report, GSA concurred with our

recommendations. GSA’s agreement with our first recommendation was contingent

on an understanding that our interpretation of GSA’s authority under the Energy

Policy Act is consistent with GSA’s. GSA’s interpretation of its authority to provide

energy management services through areawide contracts is consistent with our

position. Specifically, GSA acknowledges in its comments that its authority to

negotiate utility contracts is limited to services that are subject to state regulatory

authority and to public utilities acting in their capacity as public utilities. GSA agrees

with our position that areawide contracts are limited to those utility services subject

to public utility regulatory authority or provided under such authority (which is what

we mean by the term "regulated"). We have clarified this language in the report.

GSA plans to implement a number of actions to address our recommendations. As

part of its efforts to revise its guidance on areawide contracts, GSA will survey state

regulatory commissions on the scope of their authorities and request public utilities

to certify that their energy management services offered to federal agencies are in

compliance with state rules and regulations. Further, because state standards may

vary, GSA plans to adopt a revised definition of, and additional guidance on, what

constitutes a demand-side energy management service. Once an agency has

determined that a project meets the definition, GSA will require the agency to follow

the required justification and approval process for using other than full and open

competition.

To increase oversight and monitoring of areawide contracts, GSA plans to clarify the

language in areawide contracts regarding the energy management services authorized

to be ordered; conduct periodic sampling and reviews of contract actions placed
9 GAO-02-56R GSA Areawide Utility Contracts

against areawide contracts; encourage agencies to compete energy management

requirements; and provide clearer guidance to both agencies and utilities on the use

of areawide contracts for energy management services. If improper use of the

contracts is discovered, GSA will take steps to advise agencies or, if warranted,

terminate the portion of the areawide contract pertaining to demand-side energy

management services.

GSA also states that it will (1) require utility companies to provide GSA with a copy

of any future authorization for energy management services and (2) remind ordering

agencies of their responsibilities to inform GSA when they order services under

areawide contracts.

GSA’s comments appear in appendix I.

We conducted our review from July to October 2001 in accordance with generally

accepted government auditing standards. In conducting our review, we met with

officials at GSA, the District of Columbia Public Schools, and Washington Gas. We

analyzed GSA’s areawide contract with Washington Gas and GSA’s guidance provided

to ordering agencies.

- - - - -

We are sending copies of this letter to the Honorable Stephen A. Perry, Administrator,

GSA; Dr. Paul Vance, Superintendent, District of Columbia Public Schools;

Subcommittee on the District of Columbia, House Committee on Appropriations; and

other interested congressional committees. This letter will also be available on

GAO’s home page at http://www.gao.gov. Please contact me at (202) 512-4841 or

Sheila Ratzenberger at (202) 512-8244 if you or your staff have any questions. Other

major contributors to this report were Adam Vodraska, Michele Mackin, and Charles

D. Groves.

Sincerely yours,

David E. Cooper, Director

Acquisition and Sourcing Management

Sheila K. Ratzenberger

Associate General Counsel
10 GAO-02-56R GSA Areawide Utility Contracts

Appendix I

Comments From the General Services Administration
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Appendix I
12 GAO-02-56R GSA Areawide Utility Contracts

Appendix I
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Appendix I
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Appendix I
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Appendix I
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Appendix I
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Appendix I
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Appendix I
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Appendix I
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Appendix I
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Appendix II

Utility Incentive Programs

Section 152(f) of the Energy Policy Act of 1992 (P.L. 102-486) amended the National

Energy Conservation Policy Act (42 U.S.C. sec. 8256(c)) to provide that

• federal agencies are authorized and encouraged to participate in programs to

increase energy efficiency and water conservation or the management of

electricity demand conducted by gas, water, or electric utilities and generally

available to the customers of such utilities;

• each agency may accept any financial incentive, goods, or services generally

available from any such utility to increase energy efficiency or to conserve water

or manage electricity demand;

• each agency is encouraged to enter into negotiations with electric, water, and gas

utilities to design cost-effective demand management and conservation incentive

programs to address the unique needs of facilities utilized by such agency; and

• agencies may not be denied the collection of rebates or other incentives if an

agency satisfies the criteria that generally apply to other customers of a utility

incentive program.
22 GAO-02-56R GSA Areawide Utility Contracts

Appendix III

Energy Savings Performance Contracts

Energy savings performance contracts are authorized by section 155 of the Energy

Policy Act of 1992 (P.L. 102-486), 42 U.S.C. sec. 8287. Performance contracting is a

tool for implementing energy conservation measures. Under performance

contracting, a federal agency enters into a multiyear contract with a qualified energy

service company, which then installs improvements in the agency’s buildings. The

company assumes all the up-front capital costs and, in return, receives a portion of

the annual savings attributable to the improvements for the duration of the contract.

The company’s portion of the energy savings is paid by the agency from funds that

the agency would otherwise have used to pay its utility costs. Performance

contracting allows the government to reduce its energy costs without appropriating

funds and without incurring capital costs for energy-efficient improvements. Unlike

areawide utility contracts, an energy savings performance contract is awarded

through competitive procedures and is not limited to regulated public utilities. For a

more detailed description of energy savings performance contracting, see our report

Energy Conservation: Energy Savings Performance Contracting in Federal

Civilian Agencies (GAO/RCED-96-215, Sept. 16, 1996).

(120096)
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