U.S. Department of Energy 

Office of Inspector General 

Office of Audit Services 

Audit Report 

Management of Energy Savings 

Performance Contract Delivery 

Orders at the Department of Energy

DOE/IG-0822 September 2009 
Department of Energy 

Washington, DC 20585 

September 10, 2009 

MEMORANDUM FOR THE SECRETARY 

FROM: Gregory H. Friedman 

 Inspector General 

SUBJECT: INFORMATION: Audit Report on the "Management of Energy 

 Savings Performance Contract Delivery Orders at the 

 Department of Energy" 

BACKGROUND

The American Recovery and Reinvestment Act established a series of energy-related 

goals, one of which was to make Federal facilities more energy efficient. The use of the 

Energy Savings Performance Contract (ESPC) concept, a mechanism for financing large 

scale energy improvements in Federal facilities, is likely to be an integral part of this 

effort. Under this arrangement, a private-sector energy services company (ESCO) 

develops and installs energy improvements in exchange for a share of future savings. 

Typical improvements include: energy efficient lighting; building management control 

systems; and, heating, ventilating, and air-conditioning system improvements. The 

Federal agency repays the ESCO for its capital investment over a period of years from 

the savings generated. Payments over the life of the ESPC, some extending for as long as 

25 years, are based on projected energy use and estimated energy savings agreed to by 

the Government. 

The Department of Energy's Golden Field Office is responsible for awarding and 

administering umbrella contracts called "Super ESPCs" that can be used by all Federal 

agencies for facilities worldwide. In December 2008, the Department issued 16 new 

Super ESPCs, with a combined ceiling of $80 billion. The Department also oversees its 

own ESPC delivery orders (orders) which are site-level contracts that incorporate the 

terms of the Government-wide Super ESPCs. As of April 2009, the Department had 16 

active ESPC orders with a combined value of $473 million. 

In a 2001 report on the Audit of the Department of Energy's Super Energy Savings 

Performance Contracts (DOE/IG-0499), we found that the Department had not 

maximized the use of its cost-recovery authority to enhance the Super ESPC program. 

Because of the results of our prior work and the national goal of making Federal facilities 

more energy efficient under the Recovery Act, we initiated this audit to evaluate the 

Department’s use of ESPCs. 

RESULTS OF AUDIT

Our detailed review of four of the Department's largest ESPC orders, valued at $256 

million, determined that the Department (i) had not always effectively used ESPC orders 

to achieve energy savings; and, (ii) had not ensured that the Government's interests were 
2 

adequately protected in this process. As such, the Department may risk spending up to 

$17.3 million more than it will realize in energy savings. For the four contracts tested in 

detail, we noted that the Department had not: 

• Ceased payments to the ESCO after projects had stopped generating savings. 

In one case, the Department continued to pay for energy savings even after the 

four buildings containing ESPC improvements had been demolished. The 

Department also continued to pay for an ESPC project that had not functioned 

for six years. Prompt action by Federal officials to modify the contracts when 

circumstances changed would have permitted the Department to save 

$1.4 million; 

• Verified that ESPC orders had generated the contractually required energy 

savings. At one site, the Department paid the ESCO $3.4 million despite 

having never verified that the savings were actually being achieved; 

• Ensured that equipment installed as part of the ESPC order was appropriately 

operated and maintained to achieve anticipated energy savings. For example, 

at one site, the ESCO indicated in two consecutive annual reports that the 

nighttime setback temperature in one building was incorrectly set at least 15 

degrees higher than recommended. The temperature variance in this case may 

have caused the heating, ventilation and air conditioning units to operate 

unnecessarily during the evenings; and, 

• Taken actions to include all costs necessary to implement the energy savings 

initiative when evaluating whether the project was likely to be cost-effective. 

Specifically, the Department may have understated costs by $12.5 million by 

not including all costs related to the implementation of the ESPC orders that 

were incurred by facility contractors. 

Our review established that weaknesses in the Department's contract management 

strategy for ESPCs, combined with a lack of guidance for evaluating contract proposals 

and subsequent performance, directly contributed to each of the above deficiencies. In 

particular, we noted that the Department had not adequately managed, monitored, and 

controlled the individual orders. In two noteworthy examples, we observed that the 

Department had not taken the basic step of ensuring that Contracting Officers were 

assigned to the ESPC orders. Our testing also revealed that the majority of those Federal 

and facility contractor officials charged with management of ESPC orders had either 

received no training or received training that was not sufficiently detailed to permit them 

to fully understand or perform all required duties. Additionally, we noted that problems 

with guidance may have contributed to issues with the failure to include all 

implementation costs in the ESPC order savings calculations and utility rate projections. 

As a result of the issues cited in this report, the Department risks spending up to $17.3 

million more than it will realize in energy savings from the four ESPC orders that we 

reviewed. The Department may also not achieve one of the purposes of the National 

Energy Conservation Policy Act, the legislation which is the basis for the ESPC program, 

since it risks not having sufficient funds available from energy cost savings in any given 
3 

year to pay the ESCOs. The Department is in the process of awarding 16 new orders at 

its facilities, with contract prices totaling $1.4 billion, making these findings highly 

relevant and timely. 

Department officials informed us that our audit has brought a tremendous amount of 

attention to ESPCs and that, at the macro-level, will undoubtedly improve the ESPC 

process within the Department. After being advised of the preliminary results, the 

Department initiated certain corrective actions in response to our audit. For example, the 

Office of Energy Efficiency and Renewable Energy requested that the Office of the Chief 

Financial Officer initiate a review of all Department ESPC orders to identify and address 

ESPC management deficiencies. As of July 2009, management officials told us that their 

review had identified problems similar to those cited in this report. As a result, the 

Department initiated corrective actions to address contract management, measurement 

and verification, and risks associated with energy cost fluctuations. In addition, the 

National Nuclear Security Administration had taken action to address many of the issues 

identified in this report. Specifically, a central Contracting Officer assumed 

administration of both orders identified as not having a Contracting Officer and 

discussions have commenced with the ESCO regarding the facility that was no longer 

operational. 

While we consider these actions to be productive and useful, more remains to be done if 

the Department is to ensure that ESPCs realize their promise of improving efficiency and 

reducing energy consumption and costs across the complex. Prompt and effective 

corrective actions are necessary, as well, to strengthen the Department's energy 

conservation leadership role and to provide an example for other Federal organizations to 

emulate when awarding and managing ESPC orders. As such, we made several 

recommendations designed to improve the Department's management of ESPCs. 

MANAGEMENT REACTION

While there were several notable disagreements, we consider management's comments to 

be generally responsive to the intent of our recommendations. 

Management generally concurred and pledged to take or continue previously prescribed 

corrective actions to address the weaknesses identified in our report. Management, 

however, disagreed with our estimate of savings at risk and the need to include all 

directly-associated costs when evaluating the cost-effectiveness of ESPC delivery orders. 

While management acknowledged that a policy review is needed to determine the 

implementation costs that should be considered in determining the cost-effectiveness of 

ESPC delivery orders, it believed that those costs would be significantly less than the 

$12.5 million incurred by facility contractors and as detailed in this report. In separate 

comments, the National Nuclear Security Administration (NNSA) concurred with four of 

seven of our specific recommendations. The NNSA expressed its belief that in spite of 

our findings, current Federal training, experience, and certification requirements for 

Contracting Officers and technical personnel provide the necessary credentials to 

successfully administer ESPC delivery orders. 
4 

Management asserted that it had taken action to improve the ESPC program prior to our 

audit. However, we found that whatever actions had been taken prior to our audit were 

not always effective in preventing or resolving problems identified in this report. 

Further, we do not concur with its assertions regarding savings estimates, associated 

costs, and the qualification and training of staff assigned to administer ESPC delivery 

orders. While we believe that corrective actions instituted by management are laudable, 

we note that actions to review the delivery orders were not initiated until we brought 

weaknesses outlined in our report to management's attention. 

Management's comments and our responses are discussed in more detail in the body of 

the report. 

Attachment 

cc: Deputy Secretary 

 Under Secretary of Energy 

 Under Secretary for Science 

 Administrator, National Nuclear Security Administration 

 Assistant Secretary for Energy Efficiency and Renewable Energy 

 Chief Financial Officer 

 Chief of Staff 

 Director, Office of Science 

 Program Manager, Federal Energy Management Program 
REPORT ON THE MANAGEMENT OF ENERGY SAVINGS 

PERFORMANCE CONTRACT DELIVERY ORDERS AT THE 

DEPARTMENT OF ENERGY 

TABLE OF 

CONTENTS 

Management of ESPC Delivery Orders

Details of Finding 1 

Recommendations 8 

Management and Auditor Comments 9 

Appendices

1. Objective, Scope, and Methodology 13 

2. Summary Table of Delivery Orders Reviewed 15 

3. Related Audit Reports 16 

4. Management Comments 17 
MANAGEMENT OF ESPC DELIVERY ORDERS ___

Development and The Department of Energy (Department) had not always 

Administration of ESPC effectively used Energy Savings Performance Contracts (ESPCs) 

Delivery Orders to achieve energy savings. Specifically, in the four ESPC delivery 

orders (orders) with energy services companies (ESCOs) that we 

reviewed, the Department had not: 

• Minimized costs by exercising its option under the orders to 

buy-out projects that failed to generate savings; 

• Verified the accuracy of claimed savings; 

• Ensured equipment installed as part of the ESPC order was 

appropriately operated and maintained to achieve anticipated 

energy savings; 

• Included all cost necessary to implement the ESPC order when 

evaluating whether the project was likely to be cost-effective; 

and, 

• Taken action to ensure that savings would exceed the cost of 

implementing the ESPC order in any given year. 

Payments for Projects that Were Not Operational

The Department had allowed ESCOs to claim energy savings from 

upgrades in facilities that were no longer operational. Specifically, we 

identified two examples where the Department continued to pay the 

ESCO for energy efficiency improvements that were not generating 

any energy savings. Exercising options to buy-out projects when the 

saving features cease to operate should save the Government money. 

The Department had the authority to modify the contracts in response 

to material changes. Specifically, in situations where projects fail to 

perform, or are no longer necessary, the Department can pay the 

ESCO for costs incurred thereby avoiding future interest payments and 

operational costs. 

In one instance, the Department continued to pay for energy 

improvements in four buildings at the Y-12 National Security 

Complex (Y-12) that had been demolished. At the time the order was 

awarded, the Department planned to continue using the buildings 

throughout the term of the ESPC order. However, due to unexpected 

mission changes after contract award, the buildings were demolished 

over a three-year period beginning in 2005. At that time, site technical 

personnel believed that Y-12 did not have the funds to buy out the 

contract. However, funding was not requested for this purpose. Had 

the Department modified the order to remove the buildings from the

Page 1 Details of Finding 
 

contract scope, it could have saved approximately $850,000. After 

we informed the current Contracting Officer of the demolished 

buildings, discussions with the ESCO were initiated to buy out this 

portion of the order. 

At the Pantex Plant (Pantex), the Department continued to pay for 

a laundry facility that stopped working in May 2003, after only one 

year in operation. Although the unit had not been in service for 

approximately six years, the Department continued to pay the 

ESCO for the facility's energy improvements. The Department 

could have saved at least $565,000 had it modified the delivery 

order when the laundry facility stopped working. In 2006, the 

Internal Audit Department at Pantex reported that the laundry 

facility was not operational and recommended that the equipment 

should either be returned to operation or removed from the order. 

At that time, no action was taken to rectify the issue. However, as 

a result of our audit, the current Contracting Officer had initiated a 

process to determine the ESCO's liability for this facility and 

modify the order. 

Verification of Actual Energy Savings

The Department had not always verified that actual energy savings 

claims were accurate and sufficient to cover payments to the 

ESCO. According to the contract and applicable procedures, the 

ESCO was responsible for calculating the annual savings generated 

by the ESPC orders, and the Department was responsible for 

verifying the savings and paying the ESCO accordingly. We 

evaluated savings calculations for two orders and determined that 

the Department had not verified that the ESCOs' reported savings 

were accurate and greater than the associated payments. In both of 

the following examples, the Department was unaware of the 

inconsistencies until we presented the results of our review. In 

response, the Department has entered into discussions with the 

ESCOs to enhance future verification activities. 

At Pantex, the Department had not ensured that savings claims 

were calculated in accordance with order requirements. For six 

years, the ESCO used estimates to calculate savings even though 

the order required actual measurements for seven of the nine 

energy improvements. The order required use of actual operating 

hours, utility meter data, and actual readings from the energy 

management control system. The ESCO based the use of estimates 

on a proposed order change that was never approved by the 

Department. Instead of requiring the ESCO to comply with the 

terms of the order, the Department continued to pay the ESCO's 

Page 2 Details of Finding 
 

invoices, including costs to perform the measurements, without 

questioning the change. The Department paid the ESCO 

$3.4 million for energy improvements without proper verification, 

including $160,000 for measurement activities that were not 

performed in accordance with the order. In addition, since the 

required measurements were not performed, it is uncertain whether 

enough savings were generated to cover the payments to the 

ESCO. 

At Y-12, we found that the Department had not required the ESCO 

to calculate annual savings in accordance with the order and had 

not verified that savings were sufficient to cover the associated 

payments. While the ESCO had measured the annual operating 

hours as required by the order, the measurements had not been 

used in the energy savings calculations. Site personnel, however, 

stated that the order required that actual measurements be used in 

the calculations of annual reported savings and that such 

measurements had been used. We noted, however, that the ESCO 

reported the exact same amount of savings for five consecutive 

years of the order. Further, the reported annual energy savings 

were less than the annual payments. Yet, the Department had not 

reduced the amount paid to the ESCO or questioned the savings 

reported. ESCO officials acknowledged that they were required by 

the order to take measurements of actual energy usage, but 

inexplicably claimed that they were not required to use the actual 

usage to calculate energy savings. 

Operation and Maintenance of Energy Improvements

The Department had not operated and maintained the equipment 

installed by the ESCO as required to achieve the projected energy 

savings. At Y-12, the ESCO indicated in two consecutive annual 

reports that the nighttime setback temperature in one building was 

incorrectly set at least 15 degrees higher than recommended. The 

temperature variance in this case may have caused the heating, 

ventilation and air conditioning units to operate unnecessarily 

during the evenings. After we notified site officials of the 

problem, they took action to properly adjust the thermostat 

settings. However, as noted in our report entitled The Department 

of Energy's Opportunity for Energy Savings Through the Use of 

Setbacks in its Facilities (DOE/IG-0817, July 2009), this problem 

had occurred at a number of other Department sites. 

In addition, some of the equipment had not been maintained by the 

Department to ensure proper performance. One chiller plant 

pump, for example, had been reported "out of service" by the 

Page 3 Details of Finding 
 

ESCO, but the problem was not addressed for three years. 

Management noted that only three of the six primary pumps were 

necessary for optimum performance and therefore, energy savings 

were not impacted by not repairing the pump. In 2008, the ESCO 

reported maintenance problems with three of the six pumps. We 

concluded that optimum performance of the project and future 

savings were at risk in the event of further equipment deterioration. 

According to management, the inoperable pump was repaired in 

January 2009. 

Implementation Costs 

The Department had not included all implementation costs in 

determining the amount of savings to be realized from ESPC 

orders. Specifically, the Department used other contractors to 

support the ESCO's implementation of the ESPC order during the 

construction period, but did not consider these additional costs 

when evaluating whether the ESPC order would be cost-effective. 

For example, the Department's contractor responsible for 

managing and operating Pantex spent $5.7 million for items such 

as security escorts and project management to support the 

implementation of the ESPC order. According to site personnel, 

these costs would not have been incurred except for the need to 

support the installation of energy efficiency improvements. Other 

Department officials stated that these costs would be incurred as 

part of any energy efficiency improvement project. These officials 

also expressed the view that requiring all implementation costs to 

be recovered through energy savings could put the ESPC at a 

disadvantage as a source of alternative financing for mandated 

energy conservation measures. 

At the Oak Ridge National Laboratory (ORNL), the Department's 

management and operating contractor expended $767,000 to 

support the implementation of the ESPC order during the first six 

months of construction, including $115,000 for an engineering 

support subcontract. In response to our inquiries, ORNL estimated 

that it will incur $6.5 million of costs to support the construction of 

ESPC projects. Since these costs were not included in the ESPC 

economic analysis, they could put the Department in a position 

where the total implementation costs exceed the savings generated 

by the ESPC order. 

Annual Payments

The National Energy Conservation Policy Act (NECPA) requires 

that in any given year, annual payments cannot exceed the annual 

Page 4 Details of Finding 
 

utility savings under the ESPC, according to an Office of the 

General Counsel interpretation and our review of the NECPA. 

Specifically, the NECPA requires that all payments for an ESPC 

be made only from funds appropriated or otherwise made available 

for utilities or related energy costs. To help ensure that projected 

or planned savings are realizable and that funds will be available to 

pay ESCOs, the Department's implementing guidance published in 

the Code of Federal Regulations provides a benchmark for utility 

rate escalation that Federal organizations may use when 

establishing the cost-effectiveness of a project. These rates are 

developed based on laws, policies, energy prices, production, and 

consumption by the Energy Information Administration (EIA) and 

published by the National Institute of Standards and Technology. 

Our audit revealed, however, that actions taken by the Department 

put it at increased risk of not having sufficient annual utility 

savings from the ESPC orders to make annual payments to the 

ESCOs, as required by the NECPA. Specifically, the Department 

allowed the ESCOs to calculate estimated annual energy cost 

savings by using utility rates higher than the EIA rate projections 

in two of the four orders we reviewed. As a result, the estimated 

annual energy cost savings to the Government increased, as well as 

the annual payments to be made to the ESCOs. If the EIA 

benchmark rates prove to be a more accurate projection of energy 

costs than the ESCOs' estimated rates, then the annual cost savings 

will not be sufficient to pay the ESCOs in any given year and the 

Government will have to pay the ESCOs from programmatic 

funds; a practice contrary to the intent of the NECPA. 

At ORNL, for example, instead of using benchmark utility rates 

escalated in accordance with EIA benchmark rates, the ESCO 

averaged the utility rate increases and applied this average increase 

to each year of the order. Further, the ESCO included 30 years of 

utility rate increases in the averaged rate even though the order was 

only for 18 years. Our analysis indicates that beginning in 2012, 

annual savings using the EIA rates are projected to be less than the 

contractually required payments to the ESCO. The projected 

difference in the second year could amount to $195,000, increasing 

to $355,000 in the third year of the order, culminating in $1.8 

million difference between actual savings and payment in the final 

year of the order, 2028. Thus, the Department is at increased risk 

of making payments that exceed projected savings which could, 

over the life of the order, amount to $21.5 million. 

The Office of the General Counsel told us that while EIA rates 

must be used in determining whether a project meets the regulatory 

Page 5 Details of Finding 
 

definition of an ESPC, it is unclear whether implementing 

regulations require agencies to use EIA rates when negotiating 

ESPC orders. We acknowledge that in the case of ORNL, the use 

of the locally-developed rates accelerated the payback period to the 

ESCO, thereby reducing interest payments and the total cost of the 

order. However, use of locally-developed rates also increased the 

risk that savings may not be sufficient in any given year to make 

the contractually required payment to the ESCO, as required by the 

NECPA. 

Contract Our review established that weaknesses in the Department's 

Management contract management strategy for ESPCs, combined with a lack of 

guidance for evaluating ESPC order proposals and subsequent 

performance, directly contributed to each of the deficiencies 

outlined in this report. Because of the technical complexities and 

unique features of ESPCs, the Department has established a tiered 

structure to manage ESPCs. Under this structure, the Federal 

Energy Management Program (FEMP) is responsible for 

establishing guidance for ESPCs; Contracting Officers from the 

Golden Field Office manage the Super ESPC contracts used across 

the Government; and, Department site offices are responsible for 

managing individual ESPC orders at the site-level. We found that: 

• Site offices had not ensured that adequate management 

existed for the individual orders; 

• The Department had not implemented an effective training 

program for contract and technical support personnel; and, 

• FEMP had not developed specific guidance regarding 

estimates of the costs of energy improvements. 

Site offices had not ensured that the ESPC orders were adequately 

managed, monitored, and controlled by Contracting Officers. Two 

of the ESPC orders we reviewed did not have active Contracting 

Officers at the beginning of our audit. In both situations, the 

Contracting Officers had left the organization and no replacement 

had been assigned. As a result, when we initially requested to 

review the contracts, the site offices could not locate the official 

contract file. Although the Y-12 contract file was located within a 

week, the Pantex contract file was not found for almost two 

months. After the Department was notified about our concerns, it 

took action to appoint a new Contracting Officer to each of these 

orders. 

Page 6 Details of Finding 
 

We also found that the Department had not adequately trained the 

personnel responsible for contract and technical oversight of the 

ESPC orders. We provided a questionnaire to contracting 

personnel, Contracting Officer Representatives, and technical 

representatives for each of the four orders we reviewed. Of the 15 

responses received, 10 individuals indicated that they had received 

no training or that the training they received was not sufficiently 

detailed to permit them to properly administer an ESPC order. 

Department officials stated that training opportunities are available 

for staff managing ESPCs. After our field work was completed, 

Department officials informed us that they were initiating actions 

to improve the awareness of training opportunities and to enhance 

the content of the training courses. According to management, 

both Pantex and Y-12 have recently received specific training on 

measurement and verification responsibilities. 

Further, the contract oversight teams had not been kept abreast of 

changes to the ESPC control structure as new guidance was 

developed. For example, in February 2007, FEMP developed a 

framework for implementing uniform and consistent reviews of 

annual measurement and verification reports. However, while this 

guidance was published on the FEMP website, it was only 

distributed to sites implementing new ESPC orders; sites with 

existing ESPC orders did not receive the updated guidance. 

Because the guidance directed reviewers to determine whether the 

report followed contractual requirements, use of this guidance 

could have alerted site personnel when all of the savings were 

based on estimates and when the contractual measurement method 

was not being followed. 

Finally, while the NECPA required that all costs be accounted for, 

FEMP had not developed specific procedures to identify, control, 

and ensure the recovery of the additional implementation costs 

incurred by the Department's management and operating 

contractors. Also, as previously noted, although the Code of 

Federal Regulations established utility rate benchmarks, it is not 

clear whether the use of these benchmarks was required when 

determining the energy cost savings in the order. FEMP, however, 

had not provided sufficiently-detailed procedures to assist site 

personnel in determining when to use the utility rate benchmarks. 

By addressing these two issues, the Department can gain greater 

assurance that savings will be consistently estimated and sufficient 

to cover the costs of ESPC orders. 

Risk and Costs As a result of the deficiencies related to pre-award evaluations and 

of ESPCs contract management cited in this report, the Department is at risk 

Page 7 Details of Finding 
 

of spending up to $17.3 million more than it will realize in energy 

savings from the four ESPC orders that we reviewed. Specifically, 

the Department: risked paying the ESCOs $12.5 million more than 

it will realize from savings because it did not consider all 

implementation costs in estimating future savings; paid the ESCOs 

$3.4 million without verifying that the savings were actually 

achieved; and, did not take advantage of an estimated $1.4 million 

in savings by promptly modifying orders when ESPC projects 

ceased to operate. As a result of not using utility rate benchmarks, 

the Department is at risk of not satisfying the objectives of the 

NECPA since it may not have sufficient funds from energy cost 

savings to make annual payments to the ESCOs. 

RECOMMENDATIONS To help prevent the deficiencies outlined in our report and improve 

the overall usefulness of ESPCs, we recommend that the 

Administrator, National Nuclear Security Administration (NNSA), 

and the Director, Office of Science, in conjunction with the 

Program Manager, Federal Energy Management Program, where 

appropriate: 

1. Develop procedures to identify, control, and ensure the 

inclusion of implementation costs; 

2. Develop a certification program to ensure that Contracting 

Officers and technical support staff are adequately trained 

prior to being assigned to an ESPC; 

3. Require continuing education to ensure that new or updated 

procedures are put into effect for existing delivery orders 

under Super ESPCs; 

4. Develop a process to ensure that all active delivery orders 

under Super ESPCs are continuously staffed with trained 

Contracting Officers and technical support staff; and, 

5. Clarify guidance for projecting the utility rates to be used 

when negotiating future ESPC orders. 

We recommend that the Administrator, NNSA, through the Senior 

Procurement Executive, direct the Contracting Officer to: 

6. Promptly make a determination on the need for an 

equitable adjustment on the Y-12 and Pantex ESPC orders 

for projects that no longer generate savings; and,

Page 8 Recommendations 
 

7. Determine the allowability of costs incurred for the laundry 

facility and measurement and verification services at 

Pantex. 

MANAGEMENT AND Management concurred with the report's recommendations but 

AUDITOR COMMENTS disagreed with several fundamental concepts regarding our 

estimation of savings at risk and the estimated costs of ESPC 

delivery orders. Management indicated that it planned to 

implement all of our recommendations. In separate comments, the 

NNSA concurred with four of seven of our specific 

recommendations. Additionally, the Department and NNSA 

indicated that improved controls over ESPCs were implemented 

before and during the audit. 

We noted that the Department took immediate action to review 

ESPC orders after we presented preliminary results of our audit 

and, after completion of that review, initiated corrective actions. 

However, the controls in place at the time of the audit failed to 

prevent or detect the problems that we identified in this report. We 

have addressed management's comments below and included 

additional information in the report, as appropriate. Management's 

comments are included in Appendix 4. 

Management Comment

Management disagreed that all of the $12.5 million in project 

oversight and management costs associated with efficiency 

upgrades should have been included in determining the amount of 

savings to be realized from the ESPC delivery orders. Specifically, 

management stated that such costs would have been incurred 

regardless of whether an ESPC was used to achieve energy 

efficiency goals. Management, however, agreed that a thorough 

understanding of all direct and indirect costs is an essential part of 

analyzing any energy efficiency project. 

During the exit conference to discuss management's comments, 

officials stated that a policy review is needed to determine what 

implementation costs should be included in determining the 

amount of savings to be realized from an ESPC delivery order. 

While management acknowledged that some portion of 

implementation costs should have been considered in determining 

the amount of savings, officials believed that the amount of such 

costs would have been significantly less than the $12.5 million 

cited in this report. Management also opined that no other Federal 

agency interprets the ESPC legislation as requiring that all costs 

should be considered in determining savings. 

Page 9 Management and Auditor Comments 
 

Auditor Response

The Department's argument that these costs would have been 

incurred to implement additional energy-improvement measures 

regardless of funding source is not consistent, in our view, with the 

intent of the NECPA, which is to ensure that all costs paid to 

implement the ESPC order are paid out of savings accrued during 

the contract. In addition, the Department had not provided us with 

any analysis to support its assertion that costs would be 

comparable for an alternative project. Further, the $12.5 million of 

implementation costs cited in the report only includes direct costs 

that were specifically identified by Departmental sites as being 

performed for the ESPC orders. 

We agree with management that a policy review is needed to 

determine which implementation costs should be included in 

determining the amount of savings to be realized from ESPC 

orders. Such a review is an important step towards implementing 

our first recommendation. Management asserted that because 

other Federal agencies do not utilize management and operating 

contractors to support ESPCs, they do not account for all 

implementation costs in ESPC delivery orders. However, 

management could not elaborate on how other Federal agencies 

accounted for costs such as security escort costs in high-security 

areas that were experienced by the Department during the 

implementation of ESPCs discussed in this report. 

Management Comment

Management disagreed that the entire $3.4 million in payments 

without verification of savings should be considered at risk and 

noted that the entire amount would only be at risk if the energy 

improvements were not operational. 

Auditor Response

Although we agree that payments for actual savings are warranted, 

the Department was not able to provide the specific amount of 

savings actually generated. The exact amount of savings will be 

determined by the Contracting Officer when our recommendations 

are addressed. 

Management Comment

Management also expressed concern about the use of rates 

developed by the EIA as a benchmark for utility rate escalation. 

Page 10 Management and Auditor Comments 
 

Specifically, officials noted that the use of EIA rates is not 

expressly required by the Code of Federal Regulations and that the 

EIA rates significantly under-predict utility rate escalation. 

Management further commented that comparing ESPC utility rates 

with actual local utility rates would be a better measure of how 

accurately the Department balanced its risks. 

Auditor Response

Although the Code of Federal Regulations does not specifically 

require the use of EIA rates in the delivery order, it does require 

that EIA rates be used to determine whether a specific project 

meets the definition of an ESPC. Further, the rates established by 

EIA are the Government's estimation of how rates will escalate in 

the future. Additionally, we noted that the rates in all four of the 

delivery orders we reviewed used different methodologies for 

escalating utility rates, even though two of the delivery orders were 

at the same site. Given that the Department repudiated EIA 

projections as not being a reasonable source for utility rate 

escalation, we recommended that the Department establish 

guidance for projecting the utility rates to be used when 

negotiating future delivery orders. 

Management Comment

In separate comments, the NNSA disagreed with our 

recommendations to develop an ESPC certification program, 

require additional continuing education, and to develop a process 

to ensure orders are continuously staffed with trained personnel. 

NNSA stated that current Federal training, experience, and 

certification requirements for Contracting Officers and technical 

personnel provide the necessary credentials to very successfully 

administer ESPCs. 

Auditor Response

During the audit, various contracting personnel expressed 

frustration and concern that the administration of ESPC orders 

includes a steep learning curve because ESPC orders are very 

different from other contracts. Technical personnel also explained 

that the training they received was insufficient to perform their 

required duties. Additionally, current Contracting Officer and 

technical staff training does not ensure that delivery orders are 

continuously staffed or that new or updated procedures are put into 

effect. 

Page 11 Management and Auditor Comments 
 

Management Comment

The NNSA disagreed that maintenance problems associated with 

three chiller pumps increased the risk to optimum performance and 

energy savings. Specifically, the NNSA noted that while 

maintenance problems were reported on three of the primary 

pumps, two of them were not completely out of service and were 

available for operation. 

Auditor Response

In our opinion, optimum performance and energy savings were at 

risk if the pumps were not properly maintained and further 

deterioration occurred in the pumps. Additionally, the ESPC order 

requires the Department to maintain this equipment. 

Page 12 Management and Auditor Comments 
Appendix 1 

OBJECTIVE Our objective of this audit was to determine whether the 

Department of Energy (Department) had effectively used Energy 

Savings Performance Contracts (ESPCs) to increase energy 

efficiency. 

SCOPE This audit was performed between December 2008 and July 2009. 

Audit work was conducted at the Department of Energy 

Headquarters in Washington, D.C.; the Golden Field Office in 

Golden, Colorado; the Y-12 National Security Complex, Oak 

Ridge National Laboratory, and Oak Ridge Office in Oak Ridge, 

Tennessee; and the Pantex Plant in Amarillo, Texas. 

METHODOLOGY To accomplish the audit objective, we: 

• Selected a judgmental sample of four ESPC delivery orders 

(orders) at the Department of Energy (See Appendix 2); 

• Reviewed essential documentation for the ESPCs, 

including contracts, proposals, and payment records; 

• Analyzed the implementation costs of ESPC orders; 

• Compared contractual projected utility savings to savings 

calculated using rates published by the National Institute of 

Standards and Technology; 

• Toured facilities housing energy efficiency improvements; 

• Reviewed methods for modifying ESPC orders to reflect 

energy efficiency equipment that is no longer operational; 

• Reviewed annual measurement and verification reports for 

accuracy and compared savings calculations to order 

requirements; 

• Obtained and reviewed laws, regulations, policies, and 

procedures related to ESPCs; and, 

• Held discussions with personnel from the Federal Energy 

Management Program, Golden Field Office, Oak Ridge 

Office, Oak Ridge National Laboratory, Y-12 National 

Security Complex, Pantex Plant, National Nuclear Security 

Administration Albuquerque Service Center, and energy 

service companies. 

Page 13 Objective, Scope, and Methodology 
Appendix 1 

We conducted this performance audit in accordance with generally 

accepted Government auditing standards. Those standards require 

that we plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objective. We believe that the 

evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objective. The audit included tests 

of controls and compliance with laws and regulations related to the 

ESPC program. Because our review was limited, it would not 

necessarily have disclosed all internal control deficiencies that may 

have existed at the time of our audit. Also, we examined the 

establishment of performance measures in accordance with the 

Government Performance and Results Act of 1993, as it related to 

the audit objective. Although we did not identify performance 

measures specific to ESPCs, we were able to document measures 

for cost effective energy efficiency and renewable energy projects 

to enhance energy security, environmental stewardship, and cost 

reduction within the Federal Government. Finally, we relied on a 

limited amount of computer processed data to accomplish our audit 

objective and found the data reliable. Specifically, we relied on 

computer processed data used to calculate the additional 

implementation costs incurred by the management and operating 

contractor at the Pantex Plant. To determine the data's reliability, 

we relied on an independent auditor's assessment of information 

technology application controls which included tests of the specific 

systems used to create the computer processed data we used. 

We held an exit conference with Department officials on 

September 8, 2009. 

Page 14 Objective, Scope, and Methodology 
Appendix 2 

SUMMARY TABLE OF DELIVERY ORDERS REVIEWED

The table below summarizes the Department of Energy (Department) Energy Savings 

Performance Contract (ESPC) delivery orders (orders) reviewed during our audit. We selected a 

judgmental sample of 4 orders from the 13 ESPC delivery orders, which were active as of 

September 2008. These orders represented $256 million of the total $429 million in ESPCs. 

When determining our sample, we considered each order's stage of development, contract price, 

and location. The sample included two ESPCs in the construction phase and two ESPCs in the 

performance period. During the construction phase, the energy services company (ESCO) 

installs the energy improvements at a Department facility. The performance period begins after 

the ESCO has installed all the energy improvements and the Department has approved the 

installation. At this point, the Department begins repaying the ESCO from the savings generated 

by the energy improvements. 

Location Award 

Date 

Contract 

Period 

(Years) 

Contract 

Phase 

Contract 

Period 

Payments 

Energy 

Improvements 

Pantex Plant 06/01/2000 19 Performance 

Period $10,806,198 

Building Automation, 

Lighting, Ozone Laundry, 

Water and Steam 

Distribution, 

Solar Water Heater 

Y-12 

National 

Security 

Complex 

03/26/2001 18 Performance 

Period $6,269,735 

Chiller Plant, Lighting, 

Building Automation, Water 

and Steam Distribution 

Pantex Plant 12/23/2005 19 Construction 

Phase $33,063,817 

Lighting, 

Water and Steam 

Distribution 

Oak Ridge 

National 

Laboratory 

07/30/2008 18 Construction 

Phase $206,038,773 

Building Automation, 

Advanced Metering, 

Lighting, Biomass Steam 

Plant, Water Conservation 

Totals $256,178,523 

Page 15 Summary Table of Delivery Orders Reviewed 
Appendix 3 

RELATED AUDIT REPORTS 

• Audit of the Department of Energy's Super Energy Savings Performance Contracts 

(DOE/IG-0499, April 2001). The audit reported that the Department of Energy (Department) 

had not maximized the use of its cost-recovery authority to enhance the Super Energy 

Savings Performance Contract (ESPC) program. In fact, the Department did not: (1) fully 

recover the cost of providing services to other Federal agencies; and, (2) use recovered funds 

to achieve greater energy efficiency. This occurred because the Department did not develop 

an appropriate pricing strategy for recovering costs and did not formulate a plan for spending 

the funds it recovered. As a result, the Department, as well as other Federal agencies, may 

not meet their long-term energy-savings goals because they will miss opportunities to use 

private financing mechanisms, such as Super ESPCs, to fund energy-savings projects. To 

address these conditions, actions were recommended to ensure that the Department's costs for 

providing services to other agencies are fully recovered and that the costs are used to enhance 

the Super ESPCs program. 

• Energy Savings: Performance Contracts Offer Benefits, but Vigilance is Needed to Protect 

Government Interests (GAO-05-340, June 2005). The Government Accountability Office 

(GAO) could not verify that financial savings cover costs. GAO work and agency audits 

disclosed ESPCs in which unfavorable contract terms, missing documentation, and other 

problems caused GAO to question how consistently savings cover costs. Furthermore, 

differing interpretations of the law establishing ESPCs about what components of costs must 

be paid for from the savings generated by the project or may be paid for using other funding 

sources have contributed to uncertainties about whether savings are appropriately covering 

costs. GAO recommended that the Congress consider clarifying the costs of ESPCs that 

must be covered by savings. GAO also recommended steps for agencies to better ensure that 

savings cover the costs of ESPCs, including using expertise, information, and competition 

more effectively. GAO further recommended that the Department do more to facilitate 

oversight of ESPCs. 

• Capital Financing: Partnerships and Energy Savings Performance Contracts Raise 

Budgeting and Monitoring Concerns (GAO-05-55, December 2004). GAO found that a 

number of factors may cause third-party financing, including ESPCs, to be more expensive 

than timely, full, and up-front appropriations. However, spreading costs over time enabled 

agencies to acquire capital that might not have been obtainable if full, up-front appropriations 

were required. GAO recommended that the Office of Management and Budget require, and 

suggests Congress consider requiring, agencies that use ESPCs to present an annual analysis 

comparing the total contract cycle costs of ESPCs entered into during the fiscal year with 

estimated up-front funding costs for the same energy improvements. 

.

Page 16 Related Audit Reports 
Appendix 4 

Page 17 Management Comments 
Appendix 4 (continued) 

Page 18 Management Comments 
Appendix 3 (continued) 

Page 19 Management Comments 
Appendix 3 (continued) 

Page 20 Management Comments 
IG Report No. DOE/IG-0822

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