The Energy Policy Act of 1992 and Executive Order 12902 require federal agencies to reduce their consumption of energy in federal buildings. The act set a goal for the agencies of lowering their consumption (measured in British thermal units per square foot) by 20 percent below fiscal year 1985 levels by fiscal year 2000. The executive order, issued in March 1994, increased this goal to 30 percent by the year 2005. Because performance contracting enables federal agencies to implement energy efficiencies at no capital cost to the government, the act directed the agencies to use this approach and required DOE to establish methods and procedures for the agencies to use in performance contracting. DOE’s performance contracting procurement regulations went into effect on April 10, 1995. Performance contracting presents an alternative to appropriations as a means of financing energy-saving capital improvements for federal facilities. Under this approach, a federal agency may enter into a multiyear contract with an energy service company, which pays all of the up-front costs of implementing the improvements. These costs may include identifying a federal building’s energy requirements and acquiring, installing, operating, and maintaining energy-efficient equipment. In addition, the contractor is responsible for training government personnel in operating and maintaining the energy conservation equipment and measuring the energy savings. In exchange, after the contracting federal agency accepts the newly installed equipment, the contractor receives a share of the savings—in both utility and related operations and maintenance costs—resulting from the improvements until the contract expires. After that time, the federal government retains all of the savings and equipment. Figure 1 shows how performance contracting pays for energy-saving improvements and lowers federal agencies’ energy costs. Under DOE’s performance contracting procurement regulations, the contracting federal agency is to prepare a solicitation for prospective offerors using a model developed by DOE. Although the solicitation can be sent to any firm, under the Energy Policy Act of 1992, the contracting federal agency can negotiate only with firms designated as qualified by DOE or determined to be qualified by the contracting agency using the same selection methods and procedures as DOE. At DOE, a qualification review board evaluates a firm’s application package to determine whether the firm is qualified. At the time DOE developed its performance contracting procurement regulations for federal civilian agencies, the Department of Defense (DOD) had already developed a similar policy for the military services based, in part, on its own legislative authority. In addition, DOD had already developed its own list of qualified firms. Consequently, DOE decided to accept as qualified any firm approved by DOD. If a firm has been approved by DOD, DOE does not evaluate the firm’s qualifications but instead requests a copy of the application package that the firm sent to DOD and checks to ensure that the firm is, in fact, on DOD’s list of qualified firms. DOE’s performance contracting procurement regulations direct federal agencies to consider using DOE’s model solicitation to the maximum extent practicable. The model solicitation establishes criteria for evaluation and selection, including not only the cost of the proposed work but also the firm’s contracting experience and technical expertise. Using the model solicitation, the contracting federal agency rates proposals against the various criteria for firms responding to the solicitation and selects the firm whose overall rating reflects the best value for the government. According to FEMP, the benefits of performance contracting for the federal government generally include (1) reducing energy costs, (2) improving energy efficiency and helping agencies meet their energy savings requirements, (3) eliminating the costs of maintaining and repairing aging or obsolete energy-consuming equipment, (4) making contractors rather than the government responsible for operating and maintaining energy-saving equipment, and (5) creating an incentive for contractors to develop highly efficient improvements by linking their compensation to the savings achieved through their work. As of April 10, 1996, two civilian agencies, the National Park Service and the Federal Bureau of Prisons, had each awarded a performance contract using DOE’s April 10, 1995, performance contracting procurement regulations. The Park Service was the first federal civilian agency to award a performance contract under DOE’s performance contracting procurement regulations. This contract, for about $2.3 million in energy conservation measures at the Statue of Liberty National Monument and Ellis Island, was awarded on July 25, 1995. The contractor is to reduce energy consumption at both Ellis and Liberty islands by installing energy-efficient interior and exterior lighting, highly efficient motors for the air handling and pumping systems, and an energy management control system. The contractor is to provide, finance, install, and maintain the equipment for 15 years in exchange for a portion of the energy savings realized each year. After the Park Service accepts the equipment, the contractor will, for the duration of the contract, receive compensation from the Park Service from funds in its budget that would otherwise have gone to pay its utility bill. According to the contract, the contractor will be reimbursed for its costs, which include capital and financing costs and a profit, in accordance with a multiyear schedule contained in the contract. The contractor is also to receive a rebate of about $1.1 million from the local utility—Public Service Electric and Gas Company—in New Jersey after the equipment included in the rebate program has been installed and its performance has been verified. This rebate made the project “economically attractive” for the contractor, according to the Park Service’s contracting officer. The Park Service, meanwhile, is guaranteed at least $1 annually and, at the end of the 15-year contract period, will acquire energy-saving equipment valued in 1995 at about $1.2 million, thereby eliminating the need to obtain appropriations for this capital equipment. All savings in excess of $1 will also go to the agency. For example, the total savings to the agency during the first year are expected to be about $27,000, according to an official at DOE’s National Renewable Energy Laboratory (NREL). The Park Service began the performance contracting process by preparing a solicitation for prospective offerors. In this solicitation, it identified the terms of the contract and included the criteria for evaluating proposals and the measures that the Park Service believed would increase the facilities’ energy efficiency. The Park Service sent the solicitation to about 160 prospective firms and received proposals from 3 of them. Two of the three were on DOE’s list of qualified firms when they submitted their proposals; one was not. The Park Service reviewed but did not select the proposal from the firm that was not on the list. Had the Park Service wanted to select that proposal, it could not have done so until the firm had been approved for DOE’s list. For 11 months after receiving the proposals, the Park Service discussed them with the offerors, exchanged information, and amended the solicitation to reflect the results of mutual decisions or of decisions made by the Park Service to add some items or delete others that had proved infeasible. The offerors modified their proposals in response to the amended solicitation, and an evaluation team, consisting of staff from the Park Service and advisers from DOE’s Lawrence Berkeley National Laboratory (LBNL) and NREL, reviewed the final proposals using technical and cost criteria. The Park Service assigned the highest technical score to the proposal offered by CES/Way International, Inc., of Houston, Texas, determining that it was the “best value” and “most advantageous to the government.” According to Park Service staff, the Park Service’s performance contract is unique not only because it was the first awarded under DOE’s April 1995 final regulations but also because it involved work on nationally significant structures that warranted special consideration. For example, the buildings’ historic or aesthetic qualities had to be preserved, and the work had to be scheduled so as not to interfere with the museums’ normal operations. We discussed the practicality of the contract provision that guarantees that the government will receive $1 in energy savings and all energy savings exceeding the guaranteed amount during our visit to Ellis Island. Some of the on-site Park Service staff and the on-site CES/Way representative we interviewed said that the arrangement did not provide a strong incentive to the contractor to maximize the potential savings available at the facility. The NREL staff person who helped DOE develop the model solicitation said that FEMP and NREL staff had discussed the feasibility of including language in the solicitation that would have created such an incentive, giving the contractor a share in any savings exceeding the guaranteed amount. They did not include the language, the NREL staff person explained, because they were unable to develop criteria specifically for evaluating proposals containing an incentive option. FEMP and NREL staff agreed to reconsider an incentive option and acknowledged that such an option, where and when applicable, could bring further benefits to both the government and the contractors. On February 13, 1996, the Bureau awarded a 20-year performance contract for about $700,000 for a solar hot water system at a federal prison in Phoenix, Arizona. In part because the project would demonstrate the viability of solar technology to reduce the use of conventional energy and would therefore support both FEMP’s mission to assist agencies in reducing their use of conventional energy and NREL’s mission to promote renewable energy technologies, a cooperative research and development agreement was used to develop the proposal, according to an NREL official who assisted with the project. Since the specific solar technology to be installed under this performance contract was available from only one source, the NREL official said, only one firm was considered for the award. The contract was awarded to the Industrial Solar Technology Corporation of Golden, Colorado. Construction for the project is not scheduled to begin until the fall of 1996, according to an official in the Bureau’s Facilities Management Branch. For 1995, DOE received 97 applications from 88 applicants for inclusion on a list of qualified firms, which the Energy Policy Act of 1992 directed DOE to prepare. In total, 58 firms were found to be qualified, including 20 that DOD had previously approved.