District of Columbia: D.C. Public Schools Inappropriately Used Gas Utility Contract for Renovations
Released: 2001-09-28T00:00:00

Letter

Background

In response to public concerns about safety and maintenance, the District of Columbia undertook a major effort to renovate and modernize its public schools in 1998. It has budgeted $1.3 billion for the renovations from fiscal year 1998 through 2007.

The school system began this effort by entering into a Memorandum of Agreement with the Army Corps of Engineers. The agreement was for engineering, procurement, and technical assistance to ensure that construction contracts were awarded and managed so that schools could open in the fall of that year. In the Fiscal Year 1999 District of Columbia Appropriations Act, Congress authorized the Corps of Engineers to provide the school system with engineering, construction, and related services.

Until fiscal year 2001, the District of Columbia’s Office of Contracting and Procurement was the central authority for procurements made by the various city agencies, including the school system. In October 2000, the school system obtained its own procurement authority. It assumed responsibility for about a third of the school renovation projects on the fiscal year 2001 capital projects list, while the Corps of Engineers was responsible for the remainder. To obtain renovation services for the repairs under its purview, the school system has almost exclusively used a GSA areawide public utility contract with Washington Gas for gas, gas transportation, and energy management services.

GSA entered into the contract with Washington Gas, a regulated public utility, without competition because the company has an exclusive franchise by law to provide certain utility services in its service area. The “energy management” services available from the contract could, if the contractor has these services on file with the Public Service Commission, include services intended to provide energy savings, efficiency improvements, energy audits, conservation measures such as lighting control and boiler control improvements, and water conservation device installation.

Contract Was Improperly Used and Precluded Competition

The school system improperly used the gas utility contract as a vehicle for obtaining a broad range of facility improvements and maintenance work. In doing so, it precluded competition by awarding all of the work on a sole-source basis to Washington Gas as the prime contractor. The types of services provided under the Washington Gas contract could have been performed by licensed plumbing, heating, electrical, or general contractor firms.

The GSA contract with Washington Gas is limited to the provision of regulated gas utility and energy management services. In contrast, our analysis of completed projects from August 2000 through March 2001 shows that the school system has paid Washington Gas $25 million for a range of projects, including painting, carpeting, and electrical work; boiler, air conditioning, heating, and structural repairs; bathroom, auditorium, and swimming pool renovations; and flag pole refurbishments. Figure 1 shows the major categories of services.

Based on our reading of the contract, the governing regulation, and discussions with GSA and the District of Columbia Public Service Commission, we do not believe these services were within the scope of the GSA contract because none of the work or services were regulated utility services or otherwise on file with the Public Service Commission. Appendix V contains details on our analysis.

The school system first started using the GSA areawide contract with Washington Gas in the last months of calendar year 1997 to provide emergency boiler repairs and temporary boiler rentals. These services were outside the scope of utility services described in the contract. In 2000 and 2001, the range of services expanded to include many other types of projects ordered by the school system, all of which were also outside the contract’s scope. Washington Gas marketed its project management services to the school system and performed these services without regard to the scope of its contract with GSA.

The school system’s chief contracting officer explained to us that the Washington Gas contract was used because it was an existing source of supply that could be quickly implemented to keep the schools open. In contrast, according to the contracting officer, the typical lengthy procurement process using solicited competitive bids would have prevented the timely acquisition of the needed work and services. The contracting officer considered the GSA contract to be available for use because the type of work was, in the contracting officer’s view, energy- related.

Other contracting options were available to the school system. For example, the school system could have used the Army Corps of Engineers to perform school renovations. The Corps carried out most of the renovation work for the school system from fiscal years 1999 through 2001. Further, the Corps had alternative contract vehicles for which it had well-defined statements of work, independent cost estimates, and negotiated contractor fees. The then-Chief Facilities Officer informed us that he was reluctant to give additional work to the Corps, however, because he believed the Corps processes and procedures were too slow given the crisis atmosphere and pressure from the community to carry out renovations quickly.

GSA Concerns With School System’s Use of the Contract

After we raised questions about the school system’s use of the Washington Gas contract, the GSA contracting officer responsible for the contract sent a May 2001 letter to the school system’s contracting officer stating that (1) the contract is not intended to provide general facility improvements and maintenance that are not energy-related and (2) continued use of the contract for services outside the scope and intent would jeopardize the school system’s ability to continue using the contract. The GSA contracting officer was unaware of the scope of services for which the school system was contracting with Washington Gas because neither the school system nor Washington Gas had reported use of the contract to GSA as required.

An Assistant General Counsel at the General Services Administration also told us that many of the construction services provided by Washington Gas to the school system clearly fell outside the scope of the areawide contract because these services dealt with general construction as opposed to gas, gas transportation, or energy management services. Further, the Counsel explained that energy management services must result in documented energy cost savings or a reduction in energy usage.

To ensure that the contract is properly used in the future, the GSA contracting officer referred the school system’s contracting officer to GSA guidance on areawide utility contracts. However, we believe this guidance in insufficient and unclear. For example, the guidance could be interpreted as allowing the school system to order any service Washington Gas, or more precisely, its subsidiaries and subcontractors, might have to offer. It also lists many energy management projects that are not regulated utility services that could be provided under areawide contracts, such as window and air conditioning replacements.

We are sending a separate letter to GSA detailing our concerns with its guidance and providing recommendations on improving oversight and guidance on areawide utility contracts.

Sound Practices Not Followed in Using the Washington Gas Contract

Our review also revealed serious breakdowns in internal controls and gross shortcomings in the way the work under the gas utility contract was ordered and handled. The school system failed to adhere to review and oversight requirements. School system personnel inappropriately chose a select group of subcontractors to perform the work. The school system did not take steps to obtain fair and reasonable prices and failed to perform adequate and effective contract administration. The absence of effective controls and oversight has put the $32.9 million already spent on the renovation work—as well as some $10.2 million in outstanding orders—at considerable risk of improper billing, poor quality work, and high prices.

Management and Oversight Practices Fundamental to Successful Contracting

Establishing and following strong management and oversight practices is critical to successful contracting efforts. To ensure that they get the best deal possible agencies should fully consider risks as well as alternative solutions. They generally should compete the work they want done. In noncompetitive contracting situations, particular care needs to be taken to ensure fair and reasonable prices.

Moreover, once a contract is awarded, agencies need to take steps to effectively oversee their contractors. For example, they should have effective plans for assuring the quality of the work performed by the contractor. When these controls are not in place, agencies assume undue risk and could end up paying more than they should.

The District of Columbia has controls in place to ensure that it obtains fair and reasonable prices and to provide contract oversight. For example, District agencies are required to perform procurement planning and conduct market surveys to promote and provide for competition for supplies and services. In addition, until fiscal year 2001, the District of Columbia’s Office of Contracting and Procurement was required to review contracting actions (including the school system’s) totaling $50,000 or more. Currently, the school system’s Office of General Counsel is required to review contract actions of $25,000 or more. Among other things, these reviews require evidence that independent cost estimates have been performed, work has been competed or justified as a sole-source procurement, and a legal review has been performed.

School System Did Not Adhere to Review and Oversight Requirements

The school system did not adhere to a number of oversight requirements in carrying out the renovation work. Such requirements are in place to ensure that the District obtains the best price and service, contracts are legally sound, payments to contractors are justified, and work has adequately been competed. Specifically: The school system did not obtain required reviews and approvals from the District of Columbia’s Office of Contracting and Procurement. When the school system began using the Washington Gas contract, it had not yet been granted it own contracting authority. As such, it was required to submit actions totaling $50,000 or more to the Office of Contracting and Procurement up until October 2000. This review considered such things as the cost of the work, whether the contract was legally sound, whether the work was competed, and whether sole-source procurements were adequately justified. However, only 2 of 20 actions that were subject to this review—representing $1.3 million of $14.9 million—were submitted.

The school system did not obtain required approvals from its General Counsel. When the school system obtained its contracting authority in October 2000, the school system’s guidance required contract actions totaling $25,000 or more to be submitted to the General Counsel for review and approval. However, the contracting officer ignored this requirement and did not submit $28.2 million of orders that met this review threshold. General Counsel officials told us that they were unaware of the extent to which the school system was using the Washington Gas contract.

The school system bypassed the City Council approval process. District of Columbia law requires City Council approval of any proposed District government contract (including orders under an existing contract) having a value of more than $1 million. The proposed contract is to be accompanied by a summary that includes a description of the selection process and a certification that the proposed contract is legally sufficient and has been reviewed by the District of Columbia Office of the Corporation Counsel. The school system bypassed this process by grouping about $43 million of renovation work into orders of $950,000 each—just under the $1 million threshold. Sometimes, the school system issued as many as three such orders in a single day. Table 1 details the value and dates of the specific orders.

Required approvals from the District of Columbia’s Financial Responsibility and Management Assistance Authority were not obtained. The authority, also known as the Control Board, was established in 1995 to repair the District’s failing financial conditions and to improve the effectiveness of its various entities. The Board is responsible for reviewing and approving certain contracts awarded by the District. One criterion triggering review by the Board is contracts awarded on a sole- source basis. Officials on the Board told us that they should have reviewed all of the orders placed under the Washington Gas contract because they consider the contract to be a sole source procurement. They told us that they had reviewed only one of the orders, for emergency boiler repairs in 1997. After that time, the school system did not forward any subsequent orders under the contract to the Board for review.

An additional oversight mechanism within the school system is the Office of Finance, which is concerned with the District’s financial health and approves funding for contract orders as well as payments to contractors. The school system’s Office of Finance questioned the use of the Washington Gas contract in July and August 2000 because of the large number of orders being made to Washington Gas. However, it approved orders after receiving assurances from the contracting officer that the orders were justified. We believe these assurances were insufficient because they did not show that the work was within the scope of the contract and they were not supported by justification for using a sole- source contract or pricing analyses. As figure 2 illustrates, the school system substantially increased the value of the orders once the Office of Finance continued approving orders based on the assurances of the contracting officer.

By not following oversight requirements, the school system put the renovation work at considerable risk of improper billing and high prices. In fact, we found that the school system was overcharged by about $1.9 million because of duplicate billings and billings for work not completed. We found 11 cases where Washington Gas had billed the school system twice for the same work. These duplicate billings totaled $243,174. For example, Washington Gas billed the school system twice for $18,250 for painting performed by a subcontractor at M.M. Washington Senior High School and for $62,000 for lighting work at Aiton Elementary School. In other cases, Washington Gas billed the school system for the full cost of the work before subcontractors had completed the work. These improper billings totaled about $1.7 million.

School System Inappropriately Selected Subcontractors to Perform Work

All of the work performed by subcontractors under the Washington Gas contract could have been awarded on a competitive basis. However, school system officials chose to rely for the most part on a select group of subcontractors to perform the work. Subcontractors were frequently preselected based on their area of expertise. For example, if carpeting was needed, a certain company usually received the work. Another company was usually called to do painting, a third for electrical repairs, and a fourth for general construction. Figure 3 shows the amount of work awarded to these four subcontractors from August 2000 through March 2001.

School System Did Not Take Steps to Ensure That Prices Were Fair and Reasonable

Reliable cost estimates and pricing analyses are central to determining whether the price of a product or service is fair and reasonable. As such, they are required as part of the District’s contract oversight requirements. Nevertheless, we found that independent cost estimates and pricing analyses were prepared for almost none of the orders under the Washington Gas contract. The school system relied on its facilities staff, not contracting officials, to conduct these reviews, but the staff did not do them.

Additionally, the school system did not determine that Washington Gas’ prices and fees for the renovation work were fair and reasonable, as required, or negotiate the fee charged by Washington Gas. The Washington Gas contract does not establish prices or fees for any of the work ordered by the school system. Rather, prices were to be negotiated between the contractor and the school system.

In 1999 and 2000, Washington Gas generally charged the school system a 20-percent fee on each project conducted under the contract. The fee included services such as project management, engineering design, inspection services, and administrative services, as well as overhead and profit. The fee was not negotiated. In fact, it applied to all renovations orders regardless of size or complexity of work and regardless of the extent of Washington Gas’ role in individual projects.

Washington Gas increased its fee at the beginning of fiscal year 2001 from 20 to 25 percent because the school system was requesting additional work and larger projects. This increase was also not negotiated, and the 25-percent fee was applied as a flat rate to all projects. The school system’s contracting officer was unaware that the fee had been raised until we notified her. The then-Chief Facilities Officer raised concern about the fee with Washington Gas and requested that it be lowered. However, no action was taken.

Lastly, for much of the boiler work, the school system paid a fee to a subsidiary of Washington Gas (American Combustion Industries, Inc.), in addition to the 25-percent fee charged by Washington Gas. In some cases, as a result of this situation the school system paid fees of up to 50 percent—with half going to Washington Gas and half to its subsidiary.

Because the school system failed to use competitive procedures, neglected to prepare reliable cost estimates and pricing analyses, and failed to negotiate fees, it had no way of knowing whether prices were fair and reasonable. In fact, the school system has paid Washington Gas a total of $6 million in fees for very limited program management services. For the most part, only 4 employees at Washington Gas worked on school renovation-related efforts. One employee served as a liaison with the school system; another prepared the listings of work to be completed and informed the subcontractor to begin work; a third inspected the work; and a fourth ensured that the subcontractors were paid.

Further, on many projects, Washington Gas did not provide all of the services that, according to Washington Gas officials, formed the basis for its fee. For example, Washington Gas collected $74,448 in fees for a $297,795 parking lot and playground renovation project at Hendley Elementary School. For its 25-percent fee, Washington Gas just prepared the listing of renovation work to be completed, told the subcontractor to begin work, inspected the work, and paid the subcontractor.

School System Did Not Adequately Administer the Contract

Facilities staff took on duties normally belonging to the prime contractor and contracting officer without any authority to do so. Specifically, school system facility staff who did not have contracting authority were intimately involved in selecting subcontractors, approving proposed prices, making changes to the work, assuring the quality of the work performed, and approving invoices for payment. For example: The prime contractor normally selects subcontractors, approves their prices, and defines their scopes of work. In this case, however, the school system facilities staff—not Washington Gas, the prime contractor— solicited and approved subcontractor proposals. At times, these proposals were vague and broad in scope, making it difficult to determine how prices were established and approved. For example, one proposal, for drain cleaning at “various D.C. public schools,” offers to snake and clean various drains for a not-to-exceed price of $100,000. The schools were not listed, nor was the extent of the work detailed. A $25,421 proposal to install carpet in five rooms at Shaw Junior High School did not indicate the area of carpet; therefore, a realistic evaluation of the price could not be made.

District contracting officers normally ensure that procurements of supplies, services, or construction conform to the quality and quantity requirements of the contract. In this case, however, the facilities staff performed quality assurance without any official delegation of responsibility to do so. Many times, the facilities official who had selected the subcontractor and approved the subcontractor’s work and price also inspected the work and authorized payment. Furthermore, many inspections were not well-documented, and for some projects, facilities staff approved completed work by simply signing the subcontractor’s invoices without indicating that the work had been inspected and deemed acceptable.

Facilities staff directed Washington Gas to adjust contracted work for 276 projects, totaling $7.4 million, between August 2000 and March 2001. These projects comprised about 29 percent of the $25.4 million paid to Washington Gas during that time period. (See fig. 4). Nevertheless, the contracting officer did not officially modify contracted work, as required, to reflect these changes. In fact, the contracting officer, who was responsible for making contract modifications, was unaware of the changes.

Contracting officials sometimes provide program staff with limited authority to perform such duties as monitoring technical performance and reporting any potential or actual problems to the contracting officer. In these cases, the contracting officer formally designates this authority, and in doing so, provides the program staff with detailed guidance on what these duties entail and do not entail. In particular, the guidance stresses that program staff are not empowered to authorize, agree to, or sign any modifications to the work. However, for work done under the Washington Gas contract, the school system’s contracting officer did not delegate this authority to the facilities staff or provide them with guidance about their roles and responsibilities.

Actions Being Taken by the School System to Address Problems

School system officials have recognized that the renovation work was not properly managed and informed us that they are aggressively pursing a number of corrective actions related to the Washington Gas contract: The school system has discontinued use of the Washington Gas contract for all projects that fall outside the school system’s legally-defined scope of the contract. Further, all outstanding invoices for completed work will be paid contingent on Washington Gas subcontractors submitting proper documentation.

For any remaining safety-related work directed to Washington Gas, the request for services will include a statement of work that the Washington Gas company will use to develop proposals and compete the work.

The school system will explore appropriate actions, including possible legal recourse against Washington Gas for overpayments under the contract.

The practice of bundling projects in groups of $950,000 will be discontinued.

School system officials also advised us that, in the longer term, they are taking a number of steps to strengthen contract review and administration in general: All contract orders are being assigned to competitively-selected contractors.

The school system has hired a team of contracting staff with expertise in construction. The team is responsible for assuring that well-defined proposals and independent cost estimates are prepared and for negotiating contractors’ fees.

Limited contract administrative functions will be provided to the facilities staff.

The school system’s General Counsel will review all construction and renovation contracts of $25,000 and above. The Office of General Counsel will determine whether available contracting alternatives have been considered, cost estimates are reasonable, work has been adequately completed, and contracts are legally sound.

All contract orders will be evaluated to ensure that they fall within the scope of the contract and that appropriate types of funding are used for each action. Participants in this review now include the Office of Contracts and Acquisitions, the Office of the General Counsel, the Office of Facilities Management, and the Office of the Chief Financial Officer.

The Office of Facilities Management now prepares government estimates and scopes of work for all construction work exceeding $5,000.

The school system has hired construction inspectors to ensure compliance with contract documents and quality requirements. Final inspection is required prior to making the final payment to the contractor. The school system is also establishing an Office of Compliance to monitor the overall facilities contracting process.

The Finance Office is reviewing the revised contract review procedures to see if improvements can be made.

The Board of Education will now review all contracts over $100,000.

Conclusion

The school system was facing a crisis situation when it undertook its school renovation effort in 1997, and it was under considerable pressure to quickly get the schools upgraded and in safe condition. Obtaining services under GSA’s contract with Washington Gas may have offered a quick and convenient way of fixing the school system’s immediate problem. However, this approach was inappropriate because it went well beyond the scope of the contract. It also undercut competition and was used without determining that prices were fair and reasonable. Therefore, we have serious doubts that the school system has received the best value for its money. Moreover, the contract was administered without regard to management and oversight controls that are in place to ensure that proper procurement practices were followed and that the work performed was of good quality.

Unless actions are taken to improve controls over the actions remaining under the Washington Gas contract and procurement planning for future school renovation contracts, the hundreds of millions of dollars being spent to fix the schools—including the $10.2 million in outstanding orders under the Washington Gas contract—will remain at risk to the same problems. The measures the school system is planning should help mitigate this risk. However, the school system will need to make a concerted effort to ensure that they are quickly and effectively implemented and sustained throughout future renovation contracts.

Recommendations

We recommend that the Superintendent of the District of Columbia School system ensure that the school system’s planned corrective actions are implemented in a timely manner.

In addition, we recommend that the Superintendent ensure that the contracting officer complies with District of Columbia procurement procedures in contracting for the remaining school renovation work, including procurement planning, use of competitive acquisition procedures, and ensuring that contractor prices and fees are fair and reasonable.

We also recommend that, specifically regarding the Washington Gas contract, the Superintendent direct the contracting officer to terminate, if cost-beneficial, outstanding orders that are beyond the scope of the contract and properly procure the replacement work through available government sources or competitive procedures.

Lastly, we recommend that the school system’s Chief Financial Officer take a more active role in the contract review process. Because this official is concerned with ensuring the District’s financial health, the official should notify appropriate authorities about irregular contracting activities that may be taking place.

Agency Comments and Our Evaluation

The District of Columbia Public Schools, Washington Gas, and GSA provided written comments on a draft of this report. The comments, along with our responses, appear in appendixes II, III, and IV, respectively.

The school system did not take exception to our findings or recommendations. It noted that many organizational and procedural changes have occurred over the past year to correct the problems identified in the report. We have incorporated references to these actions in the report where appropriate. In our future work on school renovation and modernization efforts, we will evaluate the actions taken by the school system.

The school system stated that it has discontinued use of Washington Gas for projects that fall outside the legally-defined scope of the contract. However, we remain concerned that the legal definition of the scope of work applied by the school system is not consistent with our interpretation of the Washington Gas contract. As discussed in our comments on GSA’s response to our report (appendix IV), as well as our analysis presented in appendix V, in our opinion none of the work Washington Gas has performed for the school system is within the scope of the contract.

In an e-mail follow-up to its written response, the school system stated that it has not canceled any of the outstanding orders for which purchase orders had been issued because the majority of the work was deemed necessary for life/health/safety requirements or was critical to the opening of schools in the fall of 2001. In addition, the school system stated that there was insufficient time to stop the work in progress without incurring substantial penalties and potential liability. Further GAO comments on the school system’s response appear in appendix II.

Washington Gas took exception to our findings dealing with the scope of services, its role as a prime contractor, the fee charged under the contract, and billing issues. For example, it stated that we were incorrect in our assertions that fees were not negotiated and that overcharges occurred.

There is no evidence in school system’s or Washington Gas’ files, or from discussions with any of the officials involved with this contract, that the fees were ever negotiated. On the issue of overcharges, in an August 13, 2001, letter to the school system’s superintendent, Washington Gas stated that it had verified that duplicate billings did occur. It intends to credit the school system for the overbillings in its June 2001 invoice; however, as of the time of this report, neither the invoice nor the credit had been submitted to the school system. In a document provided to us, Washington Gas indicated that duplicate billings totaled $482,915. Given these facts, we do not understand how Washington Gas can assert that overcharges did not occur. Further GAO comments in response to Washington Gas’ letter appear in appendix III.

GSA did not take issue with our findings that the school system improperly used the Washington Gas contract to accomplish general construction or to our findings with regard to internal contracting practices in the school system.

However, both GSA and Washington Gas disagreed with our position that none of the renovation work performed by Washington Gas was within the scope of the areawide utility contract. GSA pointed out that one of the exceptions to the Competition in Contracting Act provides that other than competitive procedures may be used when a statute expressly authorizes or requires that the procurement be made from a specified source. GSA stated that the Energy Policy Act provides such authorization. We stand by our position that work performed on a sole-source basis under areawide utility contracts must be regulated by a public regulatory authority, and that this was not the case for any of the work ordered by the school system from Washington Gas. We provide additional details on this issue in our response to GSA’s comments in appendix IV. We will soon issue a report to GSA addressing its guidance on areawide utility contracts and its oversight of the school system’s use of the Washington Gas contract.

We are sending copies of this report to other interested congressional committees; the Administrator, General Services Administration; the Mayor of the District of Columbia; the Chair of the City Council; the District of Columbia Board of Education; the Chief Financial Officer, District of Columbia Public Schools; the Superintendent of District of Columbia Public Schools; and the Vice President and General Counsel, Washington Gas Light Company.

If you have any questions regarding this report, please contact me on (202) 512-4181. An additional contact and staff acknowledgments are listed in appendix IV.

Appendix I: Scope and Methodology

To identify the review process for using the Washington Gas contract, we reviewed the District of Columbia Code; title 27 of the District of Columbia’s Municipal Regulations; and policies and procedures issued by the Office of Contracting and Procurement and DCPS. We held discussions with officials in the Office of the Chief Counsel, District of Columbia; the Control Board; the Office of Contracting and Procurement; and the school system’s General Counsel, Office of Finance, and Office of Contracts and Acquisitions.

To determine whether the work was within the scope of the GSA areawide contract, we reviewed the contract and applicable regulations. We analyzed billing records from Washington Gas to DCPS for about 600 projects from August 2000 through March 2001 and checked these records against subcontractor proposals and invoices to determine the types of services obtained. We also interviewed the contracting officer in GSA’s Public Utilities/Energy Center of Expertise and the GSA Assistant General Counsel; officials in the District of Columbia Public Service Commission; the Office of Contracting and Procurement; the school system’s General Counsel; the former Chief Facilities Officer; and the current Deputy Directors in the Facilities Division.

To assess the internal controls in place to administer the contract within the Facilities Division, we reviewed records maintained in the Division and the school system’s contracting and finance offices. We held discussions with officials in the District of Columbia Office of Contracting and Procurement; the former Chief Facilities Officer and the current Deputy Directors; the project managers in the Facilities Division; the school system’s contracting and finance offices; and the Washington Gas Light Company.

To evaluate the fee charged by Washington Gas for services provided under the contract, we analyzed Washington Gas’s billing records to the school system as well as subcontractor proposals and invoices. We interviewed and obtained information from officials at Washington Gas and the school system’s contracting, facilities, and finance offices.

To identify duplicate billings, we identified projects for which Washington Gas had billed the school system twice where the dollar amount, school, and service were identical. We considered double billings to have occurred when we could find only one proposal for the 2 billings. To identify cases where Washington Gas had billed the school system for work not completed, we reviewed the company’s official files to determine whether progress payments had been made or whether the subcontractor submitted invoices. In addition, we checked to see whether the subcontractor had been paid by Washington Gas. Washington Gas’ normal policy was to pay the subcontractors before billing the school system.

To determine whether contracted work was adjusted, we compared the listing of projects compiled by Washington Gas under each order under the contract with the listing of projects accompanying Washington Gas’ bill to the school system for each specific order. When projects were billed but not listed on the original order, we considered them to be contract adjustments.

We performed our work from March through August 2001 in accordance with generally accepted government auditing standards.

Appendix II: Comments from the District of Columbia Public Schools

The following are GAO’s comments on the District of Columbia Public Schools’ letter dated September 21, 2001.

GAO Comments

1. In an e-mail follow-up to its letter, the school system clarified that the contracting officer and the Office of Facilities Management are currently conducting an analysis of unauthorized work orders that were sent to Washington Gas to determine which, if any, have been executed and which have not. In addition, the school system responded to our third recommendation by stating that it did not cancel contracts for which purchase orders had been issued because the majority of the work was deemed necessary to fulfilling life/health/safety requirements or was critical to the opening of schools in the fall. The school system stated that there was insufficient time to stop the work in progress without running the risk of essential work being completed in time and the school system’s incurring substantial penalties and potential liability. 2. The statement is based on several discussions with the then-Chief Facilities Officer.

Appendix III: Comments from the Washington Gas Light Company

The following are GAO’s comments on the Washington Gas Light Company’s letter dated September 17, 2001.

GAO Comments

Washington Gas claims that some of the work performed for the school system under the areawide contract was within the contract’s scope and asserts that several of our statements, such as those concerning fees and overcharges, are incorrect. We disagree with Washington Gas on each point, as discussed below. 1. We disagree with Washington Gas on the issue of the scope of the areawide utility contract. We stand by our position that none of the services provided by Washington Gas to the school system fell within the contract’s scope. These were not regulated services, but rather work that could have been performed by heating, plumbing, or general contractors. We address this issue further in our response to GSA’s comments (app. IV). 2. Contrary to Washington Gas’ response, our report does not state that the fee was excessive. However, because the school system did not use competitive procedures, prepare cost estimates or pricing analyses, or negotiate the fee, it had no way of knowing whether Washington Gas’ prices were fair and reasonable. We rightly point out that Washington Gas charged the school system a flat fee for each project, despite the fact that the scope of work varied widely by project.

Further, we are correct in stating that fees were not negotiated, that fees were charged by Washington Gas and its affiliate, and that there were overcharges (see comments 4, 8, and 9 below). 3. We do not speculate that the Army Corps of Engineers would have provided better quality work at lower prices. Rather, we point out that existing Army Corps contracting mechanisms provided an option to using the sole-source Washington Gas contract. 4. The fees were not, in fact, negotiated. The school system inappropriately paid the fee without undergoing the normal negotiations with the contractor. Merely accepting the fee is not equivalent to negotiating it. 5. Washington Gas incorrectly states that its fees were fully disclosed as part of each proposal and invoice submitted to the school system.

Washington Gas indicated on its proposals and invoices the base cost and, in a separate column, the final price, which incorporated Washington Gas’ fee. However, the fee itself did not appear explicitly on the documents. The school system’s contracting officer was unaware that the fee had increased to 25 percent. Only by calculating the difference between the base cost and the final price would one realize that the fee had increased.

Further, the Control Board approved only one contract action, for emergency boiler work in 1997. As we note in the report, the school system failed to submit all subsequent orders to the Control Board for review, contrary to the Board’s requirements. Any implication that the Control Board was aware of—or approved—Washington Gas’ fee for any other than the initial contract action is misleading. 6. Our report outlines the elements included in Washington Gas’ mark-up, based on documents provided by Washington Gas. Further, we do not refer to the mark-up as a “profit,” but rather as a “fee.” 7. We recognize that the school system asked Washington Gas to provide a limited amount of services on certain projects. However, we point out that Washington Gas charged a flat 25-percent fee—and that the school system paid this fee—for every project, even though the needs of each project varied widely. 8. Contrary to Washington Gas’ statement, our report does not contend that the company improperly marked up sales by its affiliate, American Combustion Industries, Inc. We correctly point out that both Washington Gas and its affiliate charged a fee to the school system and that, in addition to paying Washington Gas’ 25-percent fee, the school system paid an additional fee to American Combustion Industries, Inc. 9. Washington Gas refers to “alleged” overbillings. In fact, overbillings did occur and Washington Gas has explicitly acknowledged them. After we identified $243,174 in duplicate billings from Washington Gas to the school system from August 2000 through March 2001, Washington Gas hired an independent audit firm to confirm our findings. The firm discovered that Washington Gas had double-billed the school system in the amount of $482,915. In an August 13, 2001, letter to the school system’s superintendent, Washington Gas stated that it would credit the school system for the duplicate billings. Given this situation, we fail to understand how Washington Gas can imply that overcharges did not occur. 10. During our audit, we provided Washington Gas a list of projects, totaling $1.7 million, where it appeared that Washington Gas had billed the school system before work had been completed. As of the time of this report, the accounting firm hired by Washington Gas had not completed its review of these projects to determine whether these improper billings had occurred and, if so, the extent of the errors.

Appendix IV: Comments from the General Services Administration

The following are GAO’s comments on the General Services Administration’s letter dated September 19, 2001.

GAO Comments

1. We agree with GSA that areawide contracts may be appropriate vehicles for carrying out the federal energy management goals of the Energy Policy Act. However, we continue to believe that any exception to the government’s competitive contracting requirements for agency participation in utility incentive programs is limited to regulated services or to services for which the utility is the only available source. None of the arguments or information GSA has provided in its comments is inconsistent with our position or convinces us otherwise.

As we will more fully discuss in our forthcoming letter to GSA, our view is further supported not only by the Energy Policy Act itself, but by the definition of “utility” in an Executive Order requiring agencies to reduce energy usage and cost through use of alternative financing and contracting mechanisms. Indeed, the language “generally available to customers” that GSA refers to itself appears to indicate that the utility incentive programs in which federal agencies are authorized to participate are subject to applicable public utility regulatory authority. Accordingly, we stand by our position that the government’s competitive contracting requirements limit the use of GSA areawide contracts to utility services, including energy efficiency services, subject to public utility regulatory authority or for which the utility is the only available source. 2. GSA misconstrues our position. The language to which GSA refers was not meant to signify that only the regulated utility could perform regulated services. We are not aware of any prohibition on a utility company’s subsidiaries or subcontractors performing such services if approved or authorized under regulatory authority. Instead, our point was that, in the case of the school system, the subsidiaries and subcontractors were providing unregulated services not authorized under the areawide contract rather than services that could be authorized under the contract if subject to public utility regulatory authority. Further, as we pointed out, Washington Gas was acting as a general contractor by performing a project management role over its unregulated subsidiaries and subcontractors, a role that was not authorized under the GSA contract. 3. GSA acknowledges that the areawide contract with Washington Gas is for regulated utility services, as we maintain. Because of deregulation in the utility industry, GSA states that it is now reviewing its areawide contracts for possible modification in light of “current industry practice.”

We also recognize that deregulation may limit the services that may be ordered under an areawide contract because certain services may no longer be subject to regulation (but are available from more than one source in the marketplace).

Since areawide contracts are entered into without competition due to the regulated nature of the utility industry, we reiterate our position that the contracts remain limited to regulated services or services for which the utility is the only available source. As we have indicated, we believe the government’s competitive procurement requirements are violated if an areawide contract is used for utility services, including energy efficiency services, that are not subject to public utility regulatory authority or for which the utility is not the only available source. To the extent utility services are available from more than one source, the acquisition of such services should be through competitive procedures, as already required under the Federal Acquisition Regulation. In modifying any areawide contracts to reflect “current industry practice,” GSA must ensure that it complies fully with the government’s competitive procurement requirements.

Appendix V: None of the School System’s Orders Fell Within Scope of the GSA Contract

In determining whether an order is beyond the scope of a contract, GAO looks to whether there is a material difference between the task order and the contract. Here, there is a material difference between GSA’s contract with the Washington Gas Light Company for gas utility and energy management services and the orders placed by the school system under the contract.

The GSA Contract

On April 17, 1996, GSA executed an areawide utility services contract with the Washington Gas Light Company for federal agencies to use in obtaining natural gas, gas transportation, and energy management services. The contract is the master contract for acquisitions of these utility services by all federal agencies from Washington Gas for a period of 10 years (through April 16, 2006). Washington Gas has an exclusive franchise from government regulatory bodies (including the District of Columbia Public Service Commission) to provide natural gas service to customers in Washington, D.C., and adjoining areas of Maryland and Virginia. Due to the regulated nature of this public utility company, GSA entered into the contract with Washington Gas without competition.

The GSA contract with Washington Gas authorizes agencies to order gas, gas transportation, and/or energy management services directly from the contractor. The contract defines “Energy Management Services” as: “any one or more of the services provided or to be provided by the Contractor pursuant to an Authorization in the form of EXHIBIT “C”, which services are within the knowledge and/or supervision of the Commission. Such services include any specific service intended to provide energy savings, efficiency improvements and/or demand reductions in Federal facilities, whether or not it involved financial incentives and/or rebates, specifically including (but not limited to): energy audits and energy conservation measures such as lighting control and boiler control improvements, cooling tower retrofits, solar air preheating systems, demand side management initiatives, fuel cell installation, and water conservation device installation.”

To obtain energy management services from the contractor, the ordering agency files an Exhibit “C” “Authorization for Energy Management Service” form with the contractor. The form, which is included in the contract, states that energy management service is required to be provided consistent with the “ontractor’s applicable tariffs, rates, rules, regulations, riders, practices, and/or terms and conditions of service, as modified, amended or supplemented by the Contractor and approved, to the extent required, by the Commission, and in the event that specific approval is not required by the Commission, service provided is required to be within the knowledge and/or supervision of the Commission.”

Exhibit “C” listed the following energy management services that could be ordered if approved by or within the knowledge and/or supervision of the Public Service Commission: “Preliminary Energy Audit”; “Energy Conservation Project (ECP) Installation”; “ECP Feasibility Study”; “ECP Engineering & Design Study”; “Demand-Side Management (DSM) Project”; “Special Facilities”; and “Other”. If the “Other” box was checked, the ordering agency was to describe the service(s) purchased in the “Remarks” section of the form.

School System’s Use of the GSA Contract

The school system issued more than $43 million worth of orders to Washington Gas under the GSA areawide contract, all on Exhibit “C,” ostensibly as “energy management services” and all under the “Other” category of services. The school system would then list the nature of services ordered in the “Remarks” section of each Exhibit “C.”

The school system first started issuing orders at the end of calendar year 1997 for emergency boiler repairs, rental of temporary boilers, purchase and installation of replacement boilers, and repair, replacement, and maintenance of heating, ventilation, and air conditioning (HVAC) equipment. Beginning in 1999, the nature of the work or services the school system ordered from Washington Gas began shifting to general maintenance, repair, construction, and to the procurement of other work related to building operations such as carpet installation and flooring repairs, painting and ceiling work, electrical and lighting upgrades, the purchase and installation of window air conditioning units, elevator renovations and upgrades, the purchase and installation of new public address and clock systems, generator replacement, replacement of security lights, installation of bathroom partitions, and plumbing work.

Contract Did Not Contemplate the Work Ordered

The GSA areawide contract with Washington Gas makes no reference whatsoever to any of these types of work or services or even to the general issue of boiler repair, rental, and replacement, or HVAC maintenance or repairs. This is not surprising, because the contract is specifically for the provision of regulated utility services, not the type of work that can otherwise be performed by a general contractor, maintenance firm, or licensed plumbing or heating contractor. We do not view the GSA contract as contemplating the type of boiler and HVAC repair and replacement, minor construction and building maintenance, and other work and services that could be provided competitively by many available sources. Indeed, Federal Acquisition Regulation (FAR) part 41, which establishes procedures for federal agencies to acquire utility services, states that its provisions, including those related to GSA areawide utility contracts, do not apply to construction and maintenance of government- owned facilities. To the extent that school system orders involved construction and maintenance, these orders are clearly contrary to the governing regulation.

The GSA contract also requires than an “Energy Management Service” provided by the contractor must be within the knowledge and/or supervision of the Public Service Commission having jurisdiction over the contractor’s service area. Specifically, the contract defines the term “Service” as: “any commodities, financial incentives, goods, and/or services generally available from the Contractor pursuant to its tariffs, rates, rules, regulations, riders, practices, or terms and conditions of service, as may be modified, amended, or supplemented by the Contractor and approved from time to time by the Commission, and the rules and regulations adopted by the Commission.”

As we read the GSA contract, if the contractor has not notified the Public Service Commission of its intention to provide the service (which then may be subject to Commission regulation/approval), the service cannot properly be provided under the GSA contract. Based on our reading of the contract and our discussion with representatives of the District of Columbia Public Service Commission, we believe that any energy management services provided by Washington Gas to the school system under the GSA areawide contract would have to have been “within the knowledge and/or supervision” of the Public Service Commission.

However, there is no indication that any of the work or specific services provided by Washington Gas to the school system were “within the knowledge and/or supervision” of the Public Service Commission, through a tariff filing or otherwise. Rather, the only services relevant here that could have been construed as related to “Energy Management Services” that the Public Service Commission had on file from Washington Gas were “non-residential full scale conservation programs” that included a municipal boiler/furnace installation assistance program for space and water heating. These programs were considered by the Commission to be a “least cost planning program,” the costs of which were included in the rate base passed on to ratepayers. Since these programs affected rates paid by Washington Gas customers, the programs were described in a tariff filed by Washington Gas with the Public Service Commission. The Commission provided us a copy of the relevant portion of the tariff.

Under the tariff, effective for service rendered after March 1994, the municipal boiler/furnace installation assistance program provided for cash incentives to the District Government for replacing boilers, furnaces, and hot water heaters with new gas-fired high efficiency equipment. The tariff did not indicate that Washington Gas itself was to provide the equipment replacement but merely that upon verification of the installation of the equipment, Washington Gas was to provide a cash incentive to the District for each eligible replacement of equipment. The tariff also authorized Washington Gas to conduct energy surveys of the buildings of customers participating in the programs at no cost to the customer. Because these services were provided in a tariff effective when the GSA areawide contract with Washington Gas was executed in 1996, these limited services could be the only ”Energy Management Services” contemplated by the contract as being within the knowledge or supervision of the Public Service Commission.

Beginning in 1999, even these limited “Energy Management Services” were no longer authorized by the Public Service Commission in Washington Gas’s capacity as a regulated public utility. In an order dated December 21, 1998, the Commission approved the elimination of least-cost planning costs from the utility rate base, thus terminating filing requirements related to least-cost planning, including the municipal boiler/furnace installation assistance program. The Commission does not have on file from Washington Gas any other energy management service programs applicable to the GSA contract. Accordingly, since December 1998, there have been no authorized energy management services “within the knowledge and/or supervision” of the Public Service Commission that Washington Gas can provide under the GSA contract. Thus, all the orders issued by the school system to Washington Gas for “energy management services” after that date were for work and services not “within the knowledge and/or supervision” of the Public Service Commission, and thus outside the scope of the GSA contract.

The orders issued by the school system to Washington Gas prior to December 21, 1998, also are outside the scope of the GSA contract. Based on the information provided to us, these orders were primarily for boiler (heating) repairs, temporary boiler rentals, new boilers, and chiller (air conditioning) repairs. None of these goods and services are authorized under the GSA contract because none of Washington Gas’s energy management services on file with the Public Service Commission included heating and air conditioning repair services, renting temporary boilers, and selling and installing new boilers. Because these services were not within the knowledge or supervision of the Public Service Commission, they could not be obtained under the GSA contract, and the school system’s orders for these services were beyond the scope of the GSA contract.

Orders Not Performed by Regulated Utility

Another indication that the work ordered by the school system fell outside the scope of the GSA contract was the fact that in no instance was any of the work ordered actually performed in the schools by Washington Gas Light Co. itself. For every order, Washington Gas Light Co. either had the work performed by a subsidiary (such as American Combustion Industries, Inc) or a subcontractor, usually at the behest of school system personnel (who specifically requested Washington Gas to subcontract with certain firms). These subcontractors included general contractors and heating and plumbing contractors.

The significance of the involvement of these subsidiaries and subcontractors is that the school system was not ordering from or having the worked performed by the regulated utility provider (Washington Gas Light Co.) but by unregulated subsidiaries or subcontractors. Because these subsidiaries or subcontractors were providing unregulated services rather than the energy management services authorized to be performed by the regulated utility (that is, by Washington Gas Light Co. itself) the services performed by the subsidiaries and subcontractor fell outside the scope of the GSA contract.

Further, Washington Gas representatives and school system officials with whom we spoke characterized the services provided by Washington Gas employees as “project management.” The project management role was more akin to the responsibilities of a general contractor over its subcontractors rather than to any provision of actual utility services. Indeed, Washington Gas representatives told us the school system officials had requested the company to play the role of project manager for the renovations to the schools. Such project management services primarily involved Washington Gas personnel aggregating work requested by the schools into orders for the school system’s contracting officer to issue and administrative oversight of the subsidiaries and subcontractors actually performing the ordered work at the schools. Nowhere in the GSA contract is “project management” listed or otherwise contemplated by the contract as an “energy management service.”

Areawide Contracts Limited to Regulated Utility Services

We believe our conclusion that only a very limited scope of services can be provided under the GSA contract with Washington Gas is warranted because of the unique nature of GSA areawide utility contracts in the context of the federal government’s competitive procurement requirements.

Under the Federal Acquisition Regulation, GSA’s areawide contracts are limited to regulated utility services, or at least to utility services for which there is no other source within the service area. This is because GSA enters into areawide utility contracts without competition due to the fact that competition for the utility services is not available within the geographic area (the “franchise territory”) covered by an areawide contract because provision of the services is based upon a franchise, a certificate of public convenience and necessity, or other legal means. Agencies needing utility services within an area covered by an areawide contract are required to use the contract to acquire those services unless service is available from more than one supplier. If service is available from more than one supplier, agencies are required to procure the service using competitive acquisition procedures.

In our opinion, allowing agencies to order services under an areawide contract for which the utility provider is not the only available source would run counter to the requirements of the Competition in Contracting Act of 1984, which requires federal agencies, including GSA, to conduct procurements using full and open competition. Competition requirements are evaded if areawide contractors, which are awarded their contracts by virtue of their status as regulated utilities, are allowed to provide unregulated services to ordering agencies that are available from other sources using competitive procedures. Further, utility providers could take advantage of their status by marketing these unregulated services (typically provided by subsidiaries) to agencies required or authorized to use an areawide contract. We view this as contrary to the basic competitive contracting rules applicable to the Federal and District of Columbia government.

Conclusion

We conclude that all the orders placed by the school system under the GSA areawide utility contract with Washington Gas improperly exceeded the contract’s scope. It appears that all of the work ordered by the school system is not of the type of that only Washington Gas Light Co. itself could have provided as a regulated utility. Rather, the work ordered is of the type that could be performed by competent general contractors, maintenance firms, or licensed plumbing, electrical or heating contractors. Where a task order is beyond the scope of the underlying contract, the work covered by the order would otherwise be subject to the statutory requirements for competition. Here, because all of the work ordered was beyond the scope of GSA’s contract with Washington Gas, more than $43 million worth of work was acquired by the school system without competition.

Appendix VI: GAO Contact and Staff Acknowledgments

GAO Contact

Acknowledgments

In addition to the name above, Cristina T. Chaplain; Robert Davis, Jr.; Charles D. Groves; John D. Heere; William Petrick, Jr.; Christopher Pothoven; and Adam Vodraska made key contributions to this report.