When I first began drafting this article in August 2008, the original working title was "Energy Savings Performance Contracting: The Increasing Need in This Day of Skyrocketing Energy Costs." At that time, the cost of oil was around $145 per barrel, and there were predictions that it would exceed $200 per barrel by the year's end. As I began to revise the piece closer to the scheduled publication date in early 2009, however, the price of a barrel of crude oil had declined, as of November 21, 2008, by almost two-thirds.1 I had originally written "[i]t is news to no one that energy prices are increasing at an alarming rate." The original thesis of the article, naturally, was that the need for energy savings performance contracting (ESPC) would inevitably grow with the escalating price of energy.
The question now becomes, though, whether the catastrophic economic developments that began to take shape in early autumn 2008,2 particularly as they have resulted in a downward spiral of energy prices, will reduce the need for ESPC. Although the opinions of some formerly well-respected economic forecasters no longer appear to hold sway,3 the just-published report of the National Intelligence Council (NIC) predicts an ever-increasing need and competition for scarce coal, oil, and gas commodities. The need for ESPC could well become more critical as a result of these recent events and the likely increase in demand for diminishing energy commodities.4 With full awareness of the recent global economic crisis, the NIC warns:
The international system will be challenged by growing resource constraints, and at the same time that it is coping with the impact of new players [Brazil, China, India, Russia], access to relatively secure and clean energy sources and management of chronic food and water shortages will assume increasing importance for a growing number of countries during the next 15-20 years. Adding well over a billion people to the world's population by 2025 will itself put pressure on these vital resources.5
The NIC report goes on:
However, all current technologies are inadequate for replacing the traditional energy architecture on the scale needed, and new energy technologies probably will not be commercially viable and widespread by 2025. The pace of technological innovation will be key. Even with a favorable policy and funding environment for biofuels, clean coal, or hydrogen, the transition to new fuels will be slow. Major technologies historically have had an "adoption lag." In the energy sector, a recent study found that it takes an average of 25 years for a new production technology to become widely adopted.6
It is likely that ESPC will continue to be a popular contracting vehicle for federal agencies to achieve anticipated fuel efficiencies in an environment of budgetary shortages.7 This is a compelling reason why there will be a continuing and unabated need for the government to both upgrade and make more efficient its energy systems.
The federal government has recognized the need to take extraordinary measures to reduce its use of energy. Moreover, as noted above, despite the recent and precipitous decline in oil prices, no one can seriously disagree that the availability of oil, gas, and coal is finite, or that the United States faces increasing competition for these resources. ESPC is one of the tools that the government has used, and will likely continue to use, to accomplish these ends.
I will discuss briefly the potential impact of the so-called "subprime lending crisis" and the "credit crunch," and their effects on available credit to finance ESPC agreements.8 I will discuss this and the basics of ESPC contracting and some of the legal issues that have and may arise in connection with the utilization of this contract modality.
Some commentators have expressed the view that when ESPC agreements "are being used more frequently for larger and more lucrative government projects, challenges and disputes from the implementation and negotiation of these contracts will become an issue in the near future."9 In fact, there are few directly relevant, reported cases interpreting statutes that implement or impact ESPC, or the regulations relating thereto.
One recent case decided by the U.S. Court of Federal Claims, Enron Federal Solutions, Inc. v. United States10 (hereinafter "EFSI") may offer some useful insights. I will discuss this case in detail. Although it did not involve an ESPC agreement per se but rather a "utility privatization" contract—the purpose of which was clearly to engender energy savings at an Army facility—EFSI raises interesting questions about what happens when problems arise in an ESPC scenario due to a default termination.
Executive, Legislative, and Statutory Background
ESPC is a relatively recent development. Although federal agencies have had the authority to enter into performance-based contracts since 1985, it was not until 1995 that Congress authorized "shared energy savings agreements" with the passage of the Consolidated Omnibus Budget Reconciliation Act, Public Law No. 99-272.11 Within only two years of the enactment of that statute, agencies had utilized the ESPC device to draw more than $1 billion in private sector investment for the purpose of improving the energy efficiency of a great variety of federal facilities.12 Since that time, that dollar value has increased steadily.13 Ironically, this seemingly salutary legislation had to overcome a "sunset" provision a few years ago, but that provision was subsequently repealed with follow-on legislation extending the agencies' authority to utilize ESPC until September 30, 2016.14 Given the current national energy and economic circumstances, ESPC in the federal government appears to be here to stay.
Interestingly, as the authors of a comprehensive study evaluating ESPC noted as recently as 2003:
Despite the Congressional and Presidential directives to use ESPCs, some agencies have been reluctant to do so. Decision makers in these agencies see no reason to enter into long-term obligation to pay interest on borrowed money out of their own operating budgets if instead Congress will grant them appropriations to pay for the improvements up front.15
The landscape has changed dramatically since these comments were made. The United States is experiencing a current period of extremely high deficits that will only be exacerbated by the $700 billion "bailout/rescue." Even with a change of presidential administrations, there will be continued financial demands to support the conflicts in Iraq and Afghanistan. These factors, coupled with the temporarily abated, but inevitable, rise in energy costs and probable lower tax revenues in a stalled economy, make it highly unlikely that Congress will appropriate sufficient funds simply to upgrade existing, functioning—albeit inefficient—heating, cooling, and lighting systems. As such, congressional funding may not be a particularly realistic way of meeting the congressionally-mandated goal of the federal government's reducing its energy usage by 35 percent from the 1985 baseline level of energy consumption by 2010.16
Industry Views on Effects of Recent Events on ESPCs
ESPC industry representatives who are knowledgeable about financing and bonding of such contracts have told me that the growth of ESPC utilization by federal agencies has continued steadily. They report, however, that companies providing financing for these projects are becoming more stringent in their analysis of their potential profitability. Moreover, these insiders note that the larger capitalized energy saving contractors (ESCOs) will enjoy a competitive advantage in terms of availability of financing.17
These industry representatives report that availability of financing has not necessarily diminished but, rather, finance companies are requiring more information and stringent qualifications from their ESCOs. Additionally, the "spreads" between competing companies, in terms of differences in basis points of interest, have become wider. Similarly, whereas before the "credit crunch" companies had been willing to hold their rates of interest for relatively long periods of time while federal agencies and the ESCOs negotiated the final terms of their agreements, these companies are now no longer willing (or able) to do so. This puts a premium on the parties' reaching agreement in shorter periods of time if the ESPCs are to remain economically viable.
ESPC Definition and Basic Facts
A document entitled "Defense Energy Program Policy Memorandum" provides the following concise definition of energy savings performance contracting, which, though written 15 years ago, is as accurate today as it was then:
Energy Savings Performance Contracting is a contracting procedure in which a private contractor evaluates, designs, finances, acquires, installs and maintains energy savings equipment for a client, and receives compensation based on the performance of that equipment. The conditions of the contract determine the level of compensation to the contractor, with the reminder of the savings retained by the client.18
Selection of the ESCO
Essentially, ESPCs work as follows: Selection of an energy savings contractor in the federal area can occur in a number of ways: (1) an ESCO responds to a specific request for proposal (RFP) issued by a particular federal entity; or (2) an ESCO can approach a federal facility and discuss conducting an audit of the facility's energy consumption with the idea of developing a proposal for energy savings; or (3) an ESCO can be prequalified by either the Department of Energy (DOE) for eligibility in its so-called "Super ESPC" program, or under the auspices of the Department of Defense (DOD). Where prequalified, the ESCO, in the case of DOD, can be recommended, along with a few others, to a DOD facility, or, under the Super ESPC program, may be awarded an indefinite delivery/indefinite quantity (IDIQ) contract, and receive particular task orders under that IDIQ contract.19
While the first two selection methods are self-explanatory, perhaps the most common way that ESPC services are procured is through a federal prequalification program such as that of the DOD (by far the largest federal user of ESPC services)20 and the DOE. The benefit to various federal entities under the prequalification programs is that the process of selection becomes less costly to the agencies because the selection process is streamlined, dramatically reducing the time it takes to select an ESPC and begin the process of energy savings. DOE asserts that under its Super ESPC program, in addition to providing substantial oversight for the various agencies, this service can reduce procurement time from two to three years to as little as four months to one year.21
Under the DOD program, the Army, as lead agency for DOD on ESPC contracting, initiates a notice in the Commerce Business Daily soliciting firms that wish to be considered for prequalification for future ESPC projects. Once selected via a review of their statement of qualifications by a qualifications review board (QLB), the firms are qualified for a year. From the list of prequalified firms, a "technical board" will select no less than three but no more than five firms deemed capable of performing a particular project. These firms will be solicited to provide abbreviated price and technical proposals. Thereafter, the technical board will rank the offerors, making a recommendation to the contracting officer (CO) and providing a rationale for selection. If the CO approves, he or she will enter into negotiations in accordance with standard acquisition procedures. This does not, however, preclude the CO from making multiple awards. The awardee(s) will be required to provide all of the management, labor, material, equipment, and operations and maintenance services during the term of the agreed contract. The DOE prequalification process works similarly to DOD's, and both agencies utilize IDIQ "master" contracts, issuing task orders up to a defined limit.22
The factors on which ESCOs are selected for prequalification are straightforward, and include: (1) previous experience and demonstrated technical ability, with proven success in energy savings as a major factor; (2) financial viability and resources to perform; (3) the capacity to develop energy baselines via energy audits that are technically acceptable; and (4) having qualified staff, including subcontractors, for performance of all that is necessary for a completed project.23
Energy Savings-the Key to ESPC Success
Obviously, the key to the success of any ESPC agreement is the savings of energy over the term of the contract, from which (a) all capital expenditures are paid, and (b) the ESCO secures its profit. A critical first step is the establishment of a "baseline" during the audit of energy usage before the implementation of capital changes. This audit, known as a detailed energy survey (DES) is described as follows:
The DES is the ESCO's investment-grade audit of facilities and energy systems at the project site. The DES augments, refines, and updates the preliminary site survey data and provides the information needed to establish the energy and O&M [Operation and Maintenance] baselines and update the feasibility analyses of the ECMs [energy conservation measures] under consideration. Such information is also used to verify or adjust the estimated annual cost savings and confirm the contractor's ability to structure a project with an acceptable term, with guaranteed annual cost savings that cover the firm-fixed-price contractor payments. The DES is the basis for the revised technical and price proposals.24
Development of Detailed Energy Survey
It should be noted that a prospective ESCO undertakes a DES at no risk to the agency, but these costs are recoverable by the ESCO if the agency decides to go forward on the recommendation of the ESCO. As the DOE points out in its guidance:
The Super ESPCs were structured to allocate the greater share of the business risk to the ESCO. An ESCO may spend more than $1 million on developing initial and final proposals for a $3 million project, at no obligation to the agency until the delivery order award is signed. The ESCO can recover project development costs in the implementation price only if the project is ultimately awarded.25
Development of Revised and Final Proposal
Once the DES is completed and the baseline established, the parties will negotiate the package of energy conservation measures (ECMs) to be included in the scope of work, and develop and agree to a revised and final proposal as follows:
The ESCO integrates findings from the DES and the results of the financing acquisition with the requirements stated in the IDIQ and DO [delivery order] RFP to produce the final proposal. Findings of the DES are usually submitted as part of the final proposal. The proposal addresses ECMs considered, their feasibility, energy savings calculations, rationale for ECM selection, costs to implement each ECM with detailed backup information, and annual cost savings of each ECM with detailed supporting data.26
These energy savings are guaranteed by the ESCO, and the annual delta of savings obtained over the baseline is the source from which the ESCO recovers its capital expenditures for the installed and constructed improvements to the project's energy systems as well as its potential profit. If there are savings beyond an ESCO's costs and profit, these may be recovered by the federal agency. On the other hand, if the ESCO does not meet its guaranteed savings, through no fault of the particular agency, such losses are absorbed by the ESCO.
Financing, and Operation and Maintenance
A principal benefit to a federal agency in entering into an ESPC agreement is the avoidance of any initial outlay of funds for the purchase of material and permanent improvements to the facility from which savings are derived. As is well known in this field, the simple expedient of replacing all of the light bulbs and their fixtures with more energy efficient materials may result in a major portion of the energy savings. Under an ESPC agreement, the contractor normally finances all of these out-of-pocket costs.
These costs, and the interest costs are factored into the ESCO's projected costs as well as its profits over the life of the contract. The ESCO's obtaining of financing must be at arm's length. As the DOE states in its guidance:
Modifications made to the Super ESPC prime contracts in December 2004 require the ESCO to solicit competitive financing offers for the project in the commercial markets. The intent of this requirement is to ensure that the Government will receive the best possible overall value. The financing of a Super ESPC project is a contract between the ESCO and the financier, and it is the responsibility of the ESCO to obtain competitive offers, evaluate the offers, and make a selection based on their criteria for best value. The ESCO is required to document the process for the government.27
Development of Acceptable Measurement and Verification of Energy Savings
As important as determining the baseline of annual energy consumption is the development and agreement between agency and ESCO of an acceptable measurement and verification (M&V) program so that, as objectively as possible, energy savings can be calculated annually in a transparent and logical way. The DOE points out in its April 2005 guidelines:
Careful consideration should be given to the final M&V plan, because it specifies how savings will be determined. The final M&V plan should specify the following for the entire contract term:
- M&V methods to be employed
- Measurements, calculations, and stipulations
- Required content of the annual M&V report
- Recurring M&V deliverables, e.g., reports required with each monthly invoice, if continuous measurements are performed
- One-time M&V deliverables, e.g., the post-installation report
- Responsibility for M&V activities, preparation of analyses, and documentation
- O&M report requirements for each ECM (if required)28
Length of Contracts
Although by statute, agencies are permitted to enter into contracts with ESCOs for upwards of 25 years so as allow for amortization of costs,29 the repayment by an agency out of energy savings will be such that an ESCO will recover its costs of the improvements within the first 10 years after completion. During the performance phase of the contract, the ESCO agrees to maintain and operate the ECMs, which further reduces the agency's costs but, almost as importantly, also better ensures the ESCOs that these upgraded energy systems are properly performing so as to protect their investment in achieving the guaranteed energy savings over the life of the contract.30
Potential Problems and Pitfalls in ESPC
There have been relatively few reported decisions relating to disputes arising out of ESPC agreements, and some of those have been issued in connection with non-federal energy savings contracts. This may be due to the relative newness of these programs, as well as the fact that in the federal programs, there is a strong emphasis on the notion that an ESPC agreement is a "partnership" between the agency and the ESCO, and alternative dispute resolution is strongly encouraged. Moreover, almost by definition, the projects are either turnkey or design-build, where the ESCO has control over both design and construction.
If an ESPC agreement is terminated early, for convenience or for default, what obligation does the agency have to pay for improvements? As noted above, the obvious reason for the length of ESPC agreements is to create a stream of savings sufficient to pay for substantial improvements via reasonably level payments. What if an agency were to shut down a portion of a facility, make major modifications or, more drastically, close a facility well within the term of the contract? Typically ESPC agreements contain schedules that will dictate payments to be made to the ESCO in the event of terminations for convenience before the full period of the contract. As one commentator notes:
By agreeing to enter into a federal government contract that contains a termination clause, a contractor relinquishes the common law formula [regarding the right to future lost profits] and acquiesces in the substitution of a formula under which profit is allowed only on the work actually performed to date. Other federal contracts, however, such as federal energy savings contracts entered into under the Energy Policy Act of 1992, often include termination schedules that provide for termination payment of specified amounts that the government is required to pay if it exercises a termination for convenience. Such amounts are usually sufficient to repay the entire remaining amount of the financing together with a set premium to compensate the lender for the early prepayment.31
This is not as automatic as it sounds, and there can be variables. Clearly, in order for an ESCO to generate the energy savings needed to both cover its costs and make its profit, it needs all of its ECMs to continue to be operational for the entire period of operation and maintenance. As a recent analysis of an ongoing ESPC contract points out, demolition of facilities, modification, and closure are not uncommon, particularly at military facilities. An author of a recent study of an ESPC agreement notes:
The ESPC concept makes an assumption that is not accurate-that facilities remain static for the term of the contract. With mission requirements constantly changing, requiring facilities to remain unchanged for 25 years is just not a tenable proposition. The following are the issues that have arisen affecting the ESPC program, and the implemented solutions that keep the program flexible and viable:
* * *
Demolition of facilities. . . . appropriate contractual adjustments must be made, as the installed equipment still belongs to the ESCO. Since the demolition is not the fault of the ESCO, the ESCO is allowed to continue to claim credit for the energy savings its work produced in the facility. The ESCO also turns over ownership of any equipment installed under the task order in the facility to the government at the time of the buyout, and the government can salvage or discard at its preference.
Government changes to facilities. The requirement to modify a facility is far more common than demolition. When facilities are changed and the changes impact what the ESCO has to maintain, there must be some adjustment. Since the government wants to maintain a single maintenance contractor for the facility, it makes the most sense to have the ESCO be responsible. . . . The first solution to this problem was to add funding to the contract to cover the change in maintenance costs. The contracting office made the determination that this was not an acceptable solution and that KAFB [the facility] could not add non-energy-related funds to ESPC. The KAFB's final solution was to award a small service contract to the ESCO on a sole source basis for maintenance of changed requirements. These contracts, which are called Companion Service Contracts (CSC), have certain specific features that make them unique. First, they are tied to ESPC. The ESCO cannot use non-performance on the CSC as an excuse for not meeting energy savings requirements on ESPC. . . . The CSC allows KAFB to use the ESCO as an installer for HVAC equipment as well, which gives incentive to the ESCO to ensure the installation is done in the best possible manner to minimize maintenance problems.
When changes are made that only add equipment, all the new equipment falls under the CSC. When equipment that was covered under ESPC is removed, the government and the ESCO negotiate what can be covered of the new equipment under ESPC to maintain the same service level for which the ESCO is being paid. The remainder is covered by the CSC. This is advantageous to both the government and the ESCO. The government maximizes the advantage of the flat-rate service ESPC provides, and the ESCO gets newer equipment to maintain.32
Bonding the ESPC
Virtually all federal procurement contracts involving construction require that the contractor provide both performance and payment bonds.33 When a surety provides such bonds, it traditionally looks to its "principal" to sign a general agreement of indemnity (GIA)34 that includes a right to look to any contract balance remaining in the contract for repayment of any costs incurred in completion of the project, in the case of default, or to pay the surety for any payment bond claims it is required to honor in the event the principal fails to pay its subcontractors or suppliers. In the case of an ESPC contract, however, there is no "contract balance" to offset the losses of the surety.
Additionally, the usual "obligee" under a performance bond is the government agency that has entered into the contract with the ESCO. The entity paying the ESCO for services, materials, and equipment, however, is the financing company that provides the funds for the construction. In the event of default, how does the finance company protect itself by ensuring that there is a surety to complete the work, and thereby complete the project so that the finance company will be repaid out of energy savings?
Although there is apparently no statute, regulation, or case law dealing directly and specifically with these issues, based on my discussions with representatives of the financing, surety, and ESCO communities, it is common practice for financing companies to have themselves named as "dual obligees" on the federal agencies' Miller Act performance and payment bonds. It also appears that neither the sureties nor the agencies have objected to this practice of protecting finance companies as additional obligees in the event of an ESCO default.
Correspondingly, sureties will require the financing companies to create escrow arrangements that will enable them to tap into the balance of funding necessary for completion of projects, and to reimburse them for payment bond claims paid out. This also ensures that there is appropriate coordination of the repayment to the financing company of the funds advanced as well as repayment to the sureties of any sums that they have expended on behalf of defaulted ESCOs. There do not appear to be any reported cases, however, that deal with instances of ESCO defaults, or litigation of disputes between the financers of such projects and the sureties.
In the more traditional setting, disputes often occur with regard to who is entitled to the balance of contract funds.35 Both sureties and financers of ESPC agreements should have a familiarity with the Federal Assignment of Claims Act36 and Anti-Assignment Act37 because those statutes impose severe restrictions on the assignment of the proceeds of government contracts.38
My discussions with representatives of ESCOs also reveal that performance and payment bonds cover only the construction aspects of the ESPC and, in most instances, specifically exclude the O&M aspects of performance. Some states and other owners may require what is know as "guaranteed energy savings bonds," (GESBs), which may be put in place from year to year, may be in force for as long as four years, and are expensive and difficult to obtain. Moreover, there is no insurance or bonding product currently available to guarantee energy savings for any lengthy period, such as for 10 year or more. These GSEBs typically make up the difference between the energy savings that have been guaranteed in a given year and any shortfall in actual savings. Generally, the federal agencies do not require GESBs, but they may require corporate guarantees of a subsidiary's performance or standby letters of credit.
Sparse Litigation Involving ESPC Contracts
As noted above, there are few reported cases involving ESPC agreements, and research reveals that those few cases are only marginally relevant.39 This is most likely due to federal agencies and ESCOs working out disputes during the course of long performance periods. Whether this situation will continue remains to be seen, especially in the context of the current "credit crunch," the weakening U.S. economy, and expected increase in the use of ESPC.40
The most interesting decision from the United States Court of Federal Claims (COFC), Enron Federal Solutions, Inc. v. United States,41 does not actually involve an ESPC agreement but rather is a "privatization" case. EFSI nevertheless offers some interesting insights.
The Enron Federal Solutions Case
In February 2008, the COFC granted the government's motion for summary judgment, holding that EFSI, a subsidiary of Enron Corporation, essentially forfeited its right to recover some $11.6 million it had expended in capital improvements at an Army base in Brooklyn after it was default-terminated by the Army in the wake of Enron's bankruptcy.42 The court determined that the inability of EFSI, due to that bankruptcy, to continue to perform the remaining eight years of maintenance and operation of the upgraded systems supplying electricity, natural gas, potable water, and wastewater services to the Army's Fort Hamilton facility in the Borough of Brooklyn in New York City, constituted a material breach, depriving EFSI of any rights to recover for any of the expenses it had incurred prior to the default.
In 1999, EFSI entered into a "privatization" contract with the Army Corps of Engineers in which it agreed to take title to Fort Hamilton's utility distribution systems and to maintain and operate those systems for 10 years. EFSI had the responsibility to "front" all of the expenses involved in upgrading the systems, including financing charges as well as paying for any necessary capital improvements over the course of the contract term, all for a fixed price of approximately $25.4 million.43 In return, the contract required the Army to make fixed monthly payments to EFSI that amortized the contemplated expenses of the upgrades and the anticipated costs of operating and maintaining the systems.
The Fort Hamilton contract with EFSI was a DOD initiative to privatize the utility systems of the various services under Defense Reform Initiative Directive No. 9, called "Privatizing Utility Systems," issued on December 10, 1997.44 The parties agreed that EFSI had substantially completed the estimated $11.6 million worth of upgrades to the fort's utility systems, and that the Army had paid more than $4.2 million to EFSI by the date of Enron's bankruptcy filing.45 They also agreed that shortly after the bankruptcy filing, EFSI ceased operations and renounced the contract in bankruptcy court. EFSI was default-terminated on February 26, 2002, and its surety, Liberty Mutual, completed the project.46
Denial of EFSI's Certified Claim
The COFC denied EFSI's certified claim for approximately $10.5 million for three principal reasons: (1) that FAR § 52.241-10 ("Termination Liability" for utilities contracts) had no legal force or effect on the contract between the parties; (2) that EFSI was not entitled to recovery under the contract's "Termination for Default" clause; and (3) that EFSI was not entitled to recover its capital improvement costs under common law breach of contract or restitution theories.
COFC Grants Government's Summary Judgment Motion
After EFSI brought its action in the COFC, the court granted the government's motion for summary judgment. The court rejected EFSI's contention that the government was required to pay for the improvements regardless of the basis for termination because it had contractually agreed to pay for them, holding that the "Christian Doctrine" did not operate to incorporate certain clauses, including FAR § 52.241-10, into the parties' agreement.47
For the court, the fundamental consideration in its analysis of EFSI's claims was that they were based on a privatization contract in which the Army was not merely purchasing the various components of the contracts, such as new boilers, but was also buying the materials and labor involved in the upgrade of the utilities systems, as well as 10 years of utility services. The court took the position that the contract was "not a construction contract or a contract for the sale of goods."48 According to the court, the intent of the contract was to "shift the risk of capital improvements onto the contractor,"49 and the court found that, despite the parties' agreement that EFSI has "substantially completed" the capital improvements portion of the contract, EFSI's failure to complete the 10-year operation and maintenance portion was a material breach that precluded recovery for the value of the improvements, which reverted to the Army.50
Relevance of ESPC Contract to Privatization Contract
Because EFSI is not strictly an ESPC case, but rather deals with a privatization contract, it is hard to assess its precedential or persuasive authority. Nevertheless, there are many similarities, including especially the fact that both types of agreements require significant private capital outlays coupled with an extensive period of operation and maintenance. In the instance of default terminations during the post-construction performance period, parties will naturally draw comparisons to the EFSI case.
Bid Protest: Johnson Controls
In 1999, Johnson Controls, Inc., protested the award of six ESPC DOE contracts at the National Gallery of Art in Washington, D.C., and National Agricultural Library to other prequalified ESCOs in response to an RFP under a fixed-price, IDIQ procurement.51 Johnson complained that it was not selected for an award because the agency unreasonably downgraded its technical proposal in the evaluation of the ECM descriptions and its projected energy savings. The RFP provided that "technical factors were considered more important than price factors." After discussions and submission of best and final offers (BAFOs), Johnson's proposal was deemed technically inferior because the contractor had initially failed to submit certain important data and then after discussions produced data that was unreadable, among numerous other deficiencies. As the General Accounting Office (now the Government Accountability Office) (GAO) noted:
Our Office will question an agency's evaluation of proposals only if it lacks a reasonable basis or is inconsistent with the RFP's stated evaluation criteria. DAE Corp., Ltd., B-257185, Sept. 6, 1994, 94-2 CPD ¶ 95 at 4. Agencies are not obligated to afford all-encompassing discussions, but are only required to lead offerors into the areas of their proposals that are considered deficient. Stone & Webster Eng'g Corp., B-255286.2, Apr. 12, 1994, 94-1 CPD ¶ 306 at 11. We conclude that DOE's discussions with Johnson Controls were meaningful and that its evaluation was reasonable.52
The GAO determined that:
The RFP stated that technical factors were more important than price, and Siebe's proposal received a higher technical rating and its total price was lower than Johnson Controls'. Since, as discussed above, both the technical evaluation of Johnson Controls' proposal and the price analysis of all BAFOs were reasonable and consistent with the stated evaluation scheme, we conclude that the award decisions were reasonable.53
Leaving aside the particular analysis of the technical proposals, the criteria of the RFP and how the evaluators and source selection authority arrived at the decision not to award to Johnson Controls, this is not a remarkable decision, aside from the fact that it involved an ESPC contract. Yet one commentator states that "an ESPC award is more likely to be challenged on the basis of technical [evaluation] as compared to more standard commercial procurements."54
This is a fairly self-evident proposition. One of the essential elements of ESPC contracts is their "design-build" aspect. Of necessity, evaluation of responses to ESPC RFPs is going to involve an assessment of the "technical" aspects of such proposals. One of the advantages that federal agencies derive from ESPC contracts, beyond the fact that the ESCOs provide the up-front financing, is that the agencies do not have to determine how savings can be accomplished—that is the role of the ESCO. As such, competing parties are more likely to challenge awards on the basis of technical evaluations. Such challenges should be no more problematic than protests involving any other best-value procurement, however, and the agencies' decisions as to which proposals best meet their technical (cost savings) needs will continue to be afforded great deference by GAO. Moreover, while it makes sense to say that "as more ESPC contracts are awarded, more protests are likely to be based on alleged misevaluation of technical proposals," it does not naturally follow that this is a hallmark of ESPC procurements as opposed to other "best value" acquisitions in which technical criteria may outweigh costs. Indeed, what is truly remarkable is the apparent low number of protests of ESPC procurements to date.
Miscellaneous Other Cases Involving ESPC
As noted earlier, although this does not purport to be an exhaustive exposition of every reported case involving ESPC or similar type contracts (either federal, state, or private), what appears remarkable is the paucity of published decisions that involve any analysis of the statutes or regulations.
EUA Cogenex Corp. v. North Rockland Central School District
EUA Cogenex Corp. v. North Rockland Central School District55 relates to a New York State energy services lease agreement (ESLA), wherein the contractor agreed to install and maintain certain energy savings equipment and share in the ultimate cost savings. When the contractor's guaranteed savings did not pan out, the school district sued for breach of contract and other causes of action. There was a significant amendment to the contract and the district court was asked to decide whether the individual who signed the amendment on behalf of the school district was authorized to do so, or, alternatively, whether the school district ratified the actions of its agent. Thus, the case is not really an analysis of a performance-based energy savings contract, but merely involves such a contract and issues not germane to how energy savings type contracts are to be interpreted.
Rondout Valley Central School District v. Conoco Corp.
Rondout Valley Central School District v. Conoco Corp.56 involved a guaranteed savings energy management agreement ("GSEMA") between a school district and Conoco Corporation, which had been a wholly-owned subsidiary of the Boston Edison Company. When Conoco went into bankruptcy, the school district sought to pierce Boston Edison's corporate veil to recover damages for breaches of contract and warranty involving failed cogeneration units and abandonment of operation and maintenance obligations, and for other damages. The opinion specifically deals with whether the school district's economic expert should be permitted to testify regarding his opinion on damages. The case offers little by way of analysis of the interrelationship of owners, savings performance contractors, financers or sureties.
Barrett v. Johnson Controls, Inc.
Barrett v. Johnson Controls, Inc.57 is a case that involves an ESPC agreement, but, like the other decisions cited above, does not provide much analysis of the workings of such contracts or the interrelations of the parties. Rather, it is a suit by a pro se plaintiff, who was claiming to be a qui tam relator under federal false claims statutes, against various qualified ESCOs. The decision involves little analysis of the ESPC statutes.
Despite the economic upheaval of the last six months, ESPC is likely to remain an attractive way for federal agencies to ensure capital improvements to their energy-consuming infrastructure systems. Given what we know of the Obama administration's position regarding energy savings, it appears highly unlikely that the agencies will be relieved of their legal requirements to reduce energy consumption. Moreover, the "bailout/rescue" commitments of the Bush administration, coupled with the likely additional commitments that the Obama administration may have to make, will leave most federal agency budgets short of the necessary funds to dedicate to energy savings. This is likely to make ESPCs even more attractive to those agencies.
Although the cost of energy, particularly oil, has dramatically declined over the last few months, this does not appear to be a trend that will reverse anticipated increased worldwide competition for these increasingly scarce commodities in the long term. As a result, it does not appear that there will be any significant diminution of the pressure on federal agencies to do what they can to reduce energy consumption.
Additionally, although credit markets have tightened, the apparent overall success of ESPC contracting, as reflected by the paucity of substantial litigation between the federal agencies and ESCOs, should continue to make these agreements attractive. The agencies' familiarity with these contracts, coupled especially with their greater ability to measure actual cost savings, may, however, subject the ESCOs to increased scrutiny and, as a result, may make performance requirements harder to meet. This could lead to more legal disputes and impact the attractiveness of this method of procurement. Only time will tell.