On Friday, November 23, the federal government published a final rule that will significantly impact manufacturers and suppliers that produce or sell energy-consuming products and equipment used by federal agencies. 72 Fed. Reg. 65868 (Nov. 24, 2007). The new rule, which becomes effective on December 24, 2007, requires federal agencies to purchase only those energy-consuming products that are designated as meeting ENERGY STAR® or Federal Energy Management Program (FEMP) specifications for energy consumption. The rule does not apply, however, to product types that are not yet listed in the ENERGY STAR® or FEMP programs or if the procuring agency determines that (i) no ENERGY STAR® or FEMP-designated product is reasonably available that meets the agency’s functional requirements, or (ii) no ENERGY STAR® or FEMP-designated product is cost effective over the life of the product taking energy cost savings into account. Federal agencies will implement the new rule through a standard contract clause that places the burden of delivering compliant products on the supplier (including service providers that deliver energy-consuming products).

The rule is expected to preclude many energy-consuming products from the federal government market and will pose significant compliance risks for suppliers that deliver energy-consuming products and systems to the government.

Requirement to “Ensure” Delivery of Energy-Efficient Products

Section 104 of the Energy Policy Act of 2005 requires that when procuring an energy-consuming product, federal agencies “shall procure” an ENERGY STAR® or FEMP-designated product. Pub. L. No. 109-58, 119 Stat. 593, 609 (2005). The new rule implements this statutory provision by requiring federal agencies to use a new standard contract clause (FAR 52.223-15, Energy Efficiency in Energy-Consuming Products) that places the burden of compliance on the supplier when energy-consuming products “listed” in the ENERGY STAR® and FEMP programs will be delivered or furnished under the contract. 72 Fed. Reg. 65868 (FAR 23.206, Contract clause). Specifically, when included in a contract, this new clause will require the supplier to deliver products that satisfy the elevated standards of energy-efficiency under the ENERGY STAR® and FEMP programs, thereby making compliance with those standards a term and condition of the contract. The government’s approach marks a significant departure from prior regulations, which placed the onus on the procuring agency to select energy-efficient products. See FAR Subpart 23.7.

Several aspects of the ENERGY STAR® and FEMP programs and the way the government often buys energy-consuming products will make it difficult for suppliers to ensure delivery of compliant products. The following highlights some of the potential impacts and compliance implications of the new clause.

The ENERGY STAR® and FEMP Programs Capture Only the Top 25 Percent of Products in Terms of Energy Efficiency.

The relatively limited number of products that receive ENERGY STAR® or FEMP designations underscores the point that the new rule will have a significant impact. The designation processes under both the Environmental Protection Agency’s (EPA’s) ENERGY STAR® and the Department of Energy’s (DOE’s) FEMP programs are designed to capture only the top 25 percent of the market in terms of energy efficiency for each covered product category. For each category, the ENERGY STAR® and FEMP programs provide unique specifications that describe the energy-efficiency requirements that a product must meet to qualify for designation. The EPA and DOE periodically update the specifications with the intent that only the 25 percent most energy-efficient products will qualify. Consequently, a majority of energy-consuming products—potentially as many as 75 percent—will not be eligible for designation when a new specification is introduced. Accordingly, the new clause in some cases will limit the universe of energy-consuming products eligible for government purchase by as much as 75 percent.

Recent updates to ENERGY STAR® specifications for several product categories help illustrate this point. Under the new specifications for personal computers (PCs), “Version 4.0,” Tier I of which went into effect on July 20, 2007, the number of ENERGY STAR® compliant PCs has been significantly reduced. Under the prior ENERGY STAR® standards, “Version 3.0,” approximately 98 percent of desktop PCs procured by the government met the ENERGY STAR® minimum qualifications. According to the EPA, however, only eight models of desktop PCs and two integrated PCs are currently included on the list of ENERGY STAR® compliant products under Version 4.0. See EPA Network News Press Release, “ENERGY STAR® Program Tightens Requirements for Computers” (July 25, 2007). The specification revision effectively whittled the universe of ENERGY STAR®-designated desktop PCs that a contractor could deliver to the government from 98 percent of the market down to less than 25 percent.

ENERGY STAR® and FEMP Designation Do Not Extend for the Life of a Product Line.

Designation under the ENERGY STAR® and FEMP programs is not automatically granted for the life of the product model. Instead, all products must meet the specifications in effect on the manufacture date to bear the ENERGY STAR® label. If a product model that met the ENERGY STAR® specifications upon development does not meet later ENERGY STAR® standards, then the manufacturer may no longer designate the product.

The authors of the new regulation recognized that the ENERGY STAR® and FEMP standards are constantly changing, which would make ensuring deliveries of compliant products over the course of a long-term contract difficult. Consequently, the new rule provides somewhat of a safe harbor in that a product which meets the criteria for designation under the ENERGY STAR® or FEMP programs at the time of contract award will be deemed to satisfy the requirement for the life of the contract. 72 Fed. Reg. at 65869. As a practical matter, however, if changes to ENERGY STAR® or FEMP specifications after contract award, but prior to delivery, render the supplier’s product no longer compliant under those programs, a government agency might threaten to terminate the contract for its “convenience” or attempt to negotiate a contract modification for the delivery of a compliant product.

The Energy-Efficiency Characteristics of Products Delivered to the Government Often Are Determined by the Government’s Requirements.

The manner in which the government purchases energy-consuming products also makes it difficult for suppliers to ensure delivery of compliant products. In particular, the government often does not purchase “out of the box” solutions. Instead, the government often picks and chooses or otherwise demands certain features or functionality to meet government-specific requirements, forcing the contractor to modify its standard commercial offering prior to delivery. Similarly, a contractor, such as a systems integrator, frequently will be required to implement various products into a single “system.” Under both scenarios, the new rule seems to place the burden on the supplier (or service provider) to ensure that the modified product or the integrated products comply with the ENERGY STAR® or FEMP specifications applicable upon award. Under these situations, however, the supplier is often not in a position (at least not readily) to determine whether the product or products (including multiple products integrated into a system) meet the applicable ENERGY STAR® or FEMP specifications.

Although this issue was raised in comments to the proposed rule, the final rule failed to provide a solution. Instead, the preamble to the rule merely states that agencies should not order products that are modified in such a way that the products no longer meet ENERGY STAR® requirements. The government’s response provides little or no assistance for suppliers faced with an order for a modified product in a situation where the supplier has no realistic means to test whether a modification affects the energy-consuming characteristics of the product. It also fails to clarify whether a system integrator will be held responsible for ensuring that products integrated into a delivered system maintain their ENERGY STAR® or FEMP-designated qualifications.

Application of Life-Cycle-Cost Exception

Given the potential implications of the new clause, the prescribing language that determines when the contracting officer is required to include the clause in the solicitation/contract takes on increased importance. 71 Fed. Reg. at 70939 (FAR 23.205). Section 104 of the Energy Policy Act generally requires that agencies procure ENERGY STAR® or FEMP-designated products, but the law allows the head of the agency to waive the requirement if he or she determines either: (1) no designated product meets the agency’s needs, or (2) no designated product is cost effective over the life of the product even taking into account costs savings associated with reduced energy consumption. Considering that the specifications that form the bases of the ENERGY STAR® and FEMP programs are designed to capture only the top 25 percent of the market upon adoption, for some product categories it often may be the case that a designated product will not be cost effective even when taking into account cost savings associated with reduced energy consumption. The final rule implements the two exceptions consistent with the statutory language. Many suppliers that provide non-designated products undoubtedly will develop approaches to persuade government customers to invoke one of these exceptions. Notably, the authors of the rule removed proposed language that would have discouraged use of the statutory exceptions.

Conclusion

The new rule will significantly impact those manufacturers and suppliers that produce or sell energy consuming products used by the government that are not compliant with the specifications promulgated under the ENERGY STAR® and FEMP programs. Delivery of non-compliant products, notwithstanding mandatory contract language requiring compliance, may have serious consequences for a supplier or service provider, including termination of its contract for default and allegations of fraud under the False Claims Act. Manufacturers and suppliers are encouraged to assess the current status of compliance and implement and maintain compliance mechanisms to ensure the delivery of only ENERGY STAR® and FEMP-compliant products to government customers when required under the new rule.