Federal agency use of ESPCs was authorized by the Congress to provide an alternative to direct appropriations for funding energy-efficiency improvements in federal facilities. Many agencies were hard-pressed to pay for planned maintenance and repairs in their facilities, let alone make more significant building improvements. As a result of this situation, many federal facilities were in a state of deterioration with agencies estimating restoration and repair needs in the tens of billions of dollars. Although energy-efficiency improvements were likely to save money over the life of the investments and replace aging infrastructure, budgetary constraints prevented agencies many times from receiving appropriations for such investments. Under the ESPC legislation, agencies could take advantage of private-sector expertise, often lacking at the agencies, with little or no upfront cost to the government. Under these contracts, private-sector firms are supposed to bear the risk of equipment performance in return for a share of the savings. This arrangement permitted agencies to meet mission requirements and upgrade their energy efficiency to reduce energy usage at the same time, while recognizing only the first year’s cost upfront in the budget. The Congress authorized agencies to retain some or all of any annual savings available after required contractual payments to the energy services companies have been made. To begin an ESPC project, agency officials work on their own or with the assistance of one of the federal contracting centers at the U.S. Air Force, the U.S. Army Corps of Engineers’ Huntsville Center, the Navy, or FEMP, to choose an energy services company for the project and to identify the energy-efficiency improvements the company will finance for the agency. Usually, multiple companies submit initial proposals that include information on their qualifications and preliminary cost and savings projections for the project. During this phase, all costs are borne by the companies. To continue developing the project, the agency chooses one company and agrees to pay for a detailed energy survey. According to contracting center officials, this survey typically takes up to 1 year and includes such items as an assessment of baseline energy use and cost, projections of energy use and savings once the improvements have been put in place, maintenance schedules, and prices. Improvements must be “life-cycle cost effective,” that is, the benefits must meet or exceed total costs over the contract. Determining life-cycle cost effectiveness is an agency responsibility, but the agency can request this service from the company, generally for a separate fee. A final proposal that includes the detailed survey becomes the basis for comment and negotiation between the agency and/or contracting center and the company. Included in these negotiations are such contract terms as the “markups” added to the direct cost of each improvement to cover the energy services company’s indirect costs and profit associated with its implementation, operations and maintenance arrangements, guaranteed savings amounts, financing, and methods to verify that savings are achieved. Once the agency and energy services company have reached final agreement on contract terms, the company designs and installs the energy- efficiency improvements and tests the improvements’ operating performance. Agency officials review test results and have the company make any necessary corrections. To install, test, and accept the improvements typically takes up to 2 years to complete. Upon accepting the project, the agency starts payments to the company, which must be supported by regular measurement and verification reviews. Although agencies may develop an ESPC themselves, doing so can be a complicated process; consequently, most agencies seek assistance from one of the contracting centers at DOD or FEMP. To streamline the procurement process, three of these contracting centers—Air Force, U.S. Army Corps of Engineers’ Huntsville Center, and FEMP—have awarded super ESPCs, from which multiple projects can be developed, to prequalified energy services companies in different regions of the country. The super ESPC awards to selected energy services companies complied with Federal Acquisition Regulation rules and requirements for competition. With these multiple-award contracts in place, agencies can implement ESPCs in a fraction of the time it would take to undertake an ESPC alone because the competitive process to select qualified companies has been completed and key terms of the contract broadly negotiated, such as setting maximum markups the companies may charge. In addition to managing the super ESPCs, the contracting centers support agencies in negotiating aspects of specific projects for a separate fee. For example, FEMP provides facilitation services, where a third party assists the agency and energy services company in agreeing on terms such as markup rates, financing options, and the appropriateness of plans to measure and verify savings for proposed improvements. In addition, FEMP issues guidelines, offers training, and provides other support to agencies using the FEMP super ESPC. Under an ESPC, company-incurred costs are paid from savings resulting from improvements during the life of the contract. These savings include such things as reductions in energy costs, operation and maintenance costs, and repair and replacement costs directly related to the new efficiency improvements. In addition to direct costs for the improvements, other costs that savings should cover include financing charges, monitoring services, and company-provided maintenance. Savings to an agency must exceed payments to the energy services company. By law, aggregate annual payments by an agency to both utilities and energy services companies under an ESPC may not exceed the amount that the agency would have paid for utilities without the ESPC. To ensure that energy savings cover the contract costs, companies are required to guarantee the performance of the new equipment and assume the risk for its operation and maintenance during the contract, even though the agency may perform the maintenance. Agencies still assume some risks, for example, for changes in utility rates and in hours of operation, over which the energy services company has no control. To measure and verify that the guaranteed savings are achieved, an agency compares baseline energy usage and costs prior to the ESPC with consumption and costs after the improvements have been installed. Typically, the company develops a baseline during its detailed survey, while the agency is responsible for ensuring that the baseline has been properly defined. The company then estimates the energy that will be saved by installing the improvements and calculates the financial savings expected in the future. At least annually, and sometimes more often, the company provides measurement and verification inspections and reports to the agency to substantiate the expected savings. Several measurement and verification protocols are available to determine energy savings. For example, under FEMP guidelines, four options are discussed that range in complexity and costs. The simplest, and perhaps least expensive, option is to measure the capacity or efficiency of the new equipment and “stipulate” hours of operation, expected energy consumption, and other factors rather than specifically measure them. Such stipulation is often used for simpler improvements, such as lighting. A more costly option might include constant monitoring of energy usage through metering or computer simulation models of whole building energy consumption. These methods may involve metering performance and operating factors before and after the installation of the improvements. When choosing among the alternatives, agencies balance the need for accuracy of their estimates with the costs of verifying those estimates. As part of its guidance, FEMP includes a matrix that describes a number of factors and associated risks involving financial, operational, and performance issues. When guaranteed savings are not achieved directly due to the performance of the equipment, the agency may withhold payment from the energy services company until the conditions are corrected. As we reported in December 2004, while ESPCs provide an alternative financing mechanism for agencies’ energy-efficiency improvements, for the cases we examined, such funding was more expensive than using timely upfront appropriations. This is because the federal government is able to obtain capital at a lower financing rate than private companies can. In this regard, our earlier work examining six projects found that financing these projects with ESPCs cost 8 to 56 percent more than had the projects been funded at the same time with upfront funds. The report noted that other factors, such as required measurement and verification of savings, may also affect the cost of projects financed with ESPCs. Agency officials commenting on this work agreed that timely upfront appropriations would be less costly than privately financing energy-efficiency improvements, if such appropriations were available, but stated that any delays in funding would result in a subsequent loss of energy and cost savings and these losses over time could offset the lower financing costs of the upfront funding. We did not analyze the likelihood nor the costs of such delays. During fiscal years 1999 through 2003, numerous agencies undertook ESPCs to finance energy-efficiency improvements, committing the federal government to annual payments totaling about $2.5 billion over the terms of these contracts. The use of ESPCs has been geographically widespread, with many types of equipment installed, and the extent of use has varied across the agencies. During our review, we found that there is no source of comprehensive data on federal agencies’ use of ESPCs, either in DOE, the contracting centers, or the agencies. DOE is required to collect data on the numbers, costs, and expected energy and financial savings for the new ESPCs that agencies undertake each year and report these data annually to the Congress. The data in DOE’s reports, however, were not adequate for our review for several reasons: they did not include some critical elements, such as actual energy savings; they were not cumulative from year to year; and they did not include ESPCs begun in fiscal year 2003 because DOE has not yet issued the report for that year. Similarly, the DOD and FEMP contracting centers’ data were not comprehensive enough for our purposes. The centers’ data were limited to those contracts for which they provided assistance; like DOE’s reports, they did not include certain critical elements; and, with the exception of Navy’s, did not incorporate information on modifications or progress on the contracts past the point at which the centers’ assistance to the agency was completed—usually only up to 1 year after the contract was signed.