Public Contract Law Journal

Using Energy Savings Performance Contracts to Improve Utility Security and Resilience at Department of Defense Installations that Experience Frequent Utility Disruptions

by Taylor Haga

Taylor Haga (thaga@law.gwu.edu) is a J.D. candidate at The George Washington University Law School and a member of the Public Contract Law Journal. She would like to recognize the professors and editors who diligently curate this publication while working alongside authors to ensure its quality and relevance. She would especially like to thank the professors and editors with whom she worked directly and received valuable guidance from throughout her writing process. Finally, she would like to extend her sincere gratitude to her parents, sister, family, and friends, without whom she would not be where she is today.


I. Introduction

In 2015, an official at Joint Base McGuire-Dix-Lakehurst (Trenton, New Jersey) disclosed to the Government Accountability Office (GAO) that the base recently experienced a disruption in its electrical power system.1 A power line had exploded, effectively shutting down the base’s power supply for an entire week.2 In describing the reason for the explosion, he explained that the power line was first installed in 1945 and was “past its expected service life.”3 The explosion — in addition to shutting down a “major Army facility” for a full week — forced the base to rely on generators for the next three weeks.4

This sort of disruption to utility systems is not uncommon at major military bases and defense installations.5 On the contrary, utility disruptions at four of the U.S. Navy’s major shipyards led to significant delays in its efforts to repair and maintain Naval ships, amounting to “approximately $58 million in lost productivity.”6 The U.S. Navy determined that these utility disruptions “were mostly caused by the equipment failure of Navy-owned utility equipment.”7 In July 2017, the Office of the Assistant Secretary of Defense for Energy, Installations, and Environment reported8 to Congress that during Fiscal Year 2016, “approximately 701 utility outages that lasted eight hours or longer” were reported by the Department of Defense (DoD) components and of those that were reported, the cost to the DoD — on average — was $500,000 per day.9

DoD10 installations and bases operate worldwide.11 They provide the “training, deployment, redeployment, and support for the military forces.”12 They are the platforms from which all military operations originate and develop. The DoD has specifically provided that “national security depends on [the DoD’s] defense installations and facilities being in the right place, at the right time, with the right qualities and capacities to protect our national resources.”13 Utility disruptions14 at DoD defense installations threaten those exact qualities and capacities necessary for our national security’s preservation.15

Furthermore, the financial and operational impacts of these disruptions can be broad.16 The financial costs can manifest in the actual cost of repair, lost productivity, and costs associated with disrupting the complex and interconnected activity of the military and the DoD.17 In addition, the operational impacts can result in delays or even cancellations due to the lack of necessary resources, creating vast downstream consequences on the DoD’s future operations and on the United States’ international position.18

Because financial and operational impacts from utility disruptions at these installations hampers the continuity of DoD operations and the effective execution of its missions, taking steps to prevent and/ or mitigate utility disruptions — i.e., improving utility security19 and resilience20 — at DoD installations is crucial.21 While some external causes and other exacerbating factors of utility disruptions, such as natural events and intentional behavior (cyber-attacks and planned disruptions), cannot readily be prevented or avoided, equipment failure, the most frequent cause of utility disruptions at DoD installations and an exacerbating factor for utility disruptions in general, can be mitigated.22 Based on the number of utility disruptions due to equipment failure at DoD installations, among other things, it is evident that the DoD has been unable to properly operate and maintain its utility systems.23 As such, this Note concentrates on the prevention and/ or mitigation of utility disruptions caused or influenced by equipment failure in the utility systems infrastructure owned and/ or operated and maintained by the DoD24 and servicing DoD installations and facilities.

Specifically, this Note proposes, as a solution to the lack of proper operation and maintenance, that the DoD use Energy Savings Performance Contracts (ESPC) to procure the proper operation and maintenance of utility systems at DoD installations. Under ESPCs, financial and operational issues will be significantly mitigated by placing the responsibility of maintaining and operating utility equipment in the hands of contractors paid on a contingent basis.

The second section of this Note will describe ESPCs, their statutory basis, how they operate, and the role they currently play as a vehicle for government procurement.25 This section will also discuss the basic elements that distinguish this method of government procurement from other more traditional government procurement methods. The third section will describe in detail the issues caused by equipment failure at DoD installations, including the financial and operational consequences of these utility disruptions and the factors contributing to the occurrence of these issues. The fourth section will describe how this application of ESPCs can help significantly to mitigate utility disruptions at DoD installations. It will describe how ESPCs address the specific obstacles the DoD faces in trying to mitigate disruptions and how ESPCs incentivizes contractors to bid on these projects. Finally, this Note will conclude with a summary of the main arguments for this application of ESPCs to mitigate the problem of utility disruptions at DoD installations.

II. How Energy Savings Performance Contracts Work and the Role Energy Savings Performance Contracts Currently Play in Government Procurement

ESPCs are government procurement contracts that are limited to procuring “energy savings and benefits ancillary to that purpose.”26 Government agencies use ESPCs to implement “energy savings measures,”27 also known as energy conservation measures, which allow a federal building to realize energy savings that were unrealized previously.28 Notably, an ESPC allows the government to acquire energy conservation measures with no up-front appropriations from Congress because the contractor assumes virtually all of the risk.29 The unique operation of ESPCs will be discussed in further detail below, followed by a discussion of its distinguishing features from the defining characteristics of more traditional methods of government procurement.

A. ESPCs Do Not Require Upfront Appropriations from Congress and Allocate the Risk of Performance on the Contractor

Federal agencies are authorized to enter ESPCs under 42 U.S.C. § 8287, which provides:

The head of a [f]ederal agency may enter into contracts under this subchapter solely for the purposes of achieving energy savings and benefits ancillary to that purpose. Each such contract may, notwithstanding any other provision of law, be for a period not to exceed 25 years. Such contract shall provide that the contractor shall incur costs of implementing energy savings measures, including at least the costs (if any) incurred in making energy audits, acquiring and installing equipment, and training personnel, in exchange for a share of any energy savings directly resulting from implementation of such measures during the term of the contract … Contracts under this subchapter shall be energy savings performance contracts ….30

ESPCs are used specifically for the procurement of energy savings.31 Since 1998, federal agencies have used ESPCs as a means of procuring energy savings and reducing operating costs “with no up-front capital costs or special appropriations from Congress.”32 Moreover, ESPCs form “a partnership between an agency and an energy service company (ESCO).”33 The ESPC compensates the ESCO — the contractor — with a share of the financial savings resulting from the energy savings obtained directly as a result of the measures implemented.34 The ESCO does not receive payment when “[a]ggregate annual payments by an agency to both utilities and energy savings performance contractors, under an energy savings performance contract … exceed the amount that the agency would have paid for utilities without an energy savings performance contract … during contract years.”35 Thus, the resulting energy savings — the desired ends of an ESPC — serves as the measure of performance under the contract, and the contractor is not paid where those ends are not obtained.36

The following is a simplified example of how a federal agency would use an ESPC to procure energy savings. A federal agency seeks to procure X amount of energy savings for the agency’s building.37 The ESCO knows it can get X amount of energy savings based on the federal building’s current inefficient or nonexistent energy conservation measures.38 Against this backdrop, the private contractor and the agency come to an agreement on the means by which the energy savings will be procured, the total cost of the contract to be paid to the contractor over the contract term, and the amount of energy and cost savings that the contractor will guarantee each year.39 Because the cost of the contract must be paid only from the guaranteed cost savings,40 the total monetary value of the cost savings guaranteed by the contractor must cover the total cost of the contract.41 There are no appropriations from Congress.42

The ESCO begins performance by implementing the energy savings measure at the DoD facility, incurring all of the contract’s upfront costs.43 If the ESCO meets the guaranteed energy and cost savings at the end of the first milestone period, the contractor will be paid the period’s contract price from the funds allocated for facility upkeep during that period.44 If the energy savings and subsequent cost savings exceed the amount owed to the ESCO, the agency keeps the surplus.45 Should the guaranteed savings continue to be realized according to the payment schedule, the contractor will continue to receive payment out of those savings until the end of the contract term.46 If the ESCO does not meet the guaranteed energy savings, the contractor will not receive payment.47 Thus, the contractor bears majority of the contract’s risk. Conceptually, ESPCs work where the government maintains an inefficient energy infrastructure and incurs preventable liabilities.48

The following is a current example of an ESPC in actual practice. In 2017, the Federal Communications Commission (FCC) awarded an ESPC to Honeywell International (HI) to implement lighting improvements, building envelope modifications, and HVAC measures.49 The contract’s term is twenty years.50 HI guarantees energy savings that would result in total financial savings of $15,614,511 to the FCC over the life of the contract.51 The total contract price to be paid to HI by the end of the contract, upon successful performance, is $15,614,490.52 HI will be paid the full price of the contract only if it achieves guaranteed cost savings of $15,614,511 because the price of the contract can only be paid from the cost savings.53 Because the FCC’s aggregate payments to the utilities and HI statutorily cannot exceed the amount the FCC would have paid to the utilities in the absence of the ESPC,54 the cost savings must cover at least the price of the contract in order to abide by that mandate.55

Broken down by year, if the energy conservation measure resulted in cost savings for the FCC of at least $780,725.55 per year (guaranteed cost savings/ contract term), then HI will be paid $780,724.50 (contract price/ contract term) for that year.56 At the end of the twenty-year term, provided energy savings resulted in cost savings of at least $780,725.55 per year, HI will be fully paid from those cost savings the price of the contract — $15,614,490.57 Any savings beyond $15,614,490 would be kept by the FCC.58

B. ESPCs Carry Distinct Advantages Over More Traditional Methods of Government Procurement such as Performance-Based Contracts, Design-Build Contracts, and Public- Private Partnerships

Traditional methods of government procurement include performancebased contracts, the design-build method, and public-private partnerships.59 ESPCs reflect more traditional methods of government procurement — incorporating certain distinguishing aspects of each to function as a government procurement vehicle.60 From the perspective of the problem of utility disruptions due to equipment failure, the ESPCs most significantly deviate from the traditional methods of government procurement by not involving upfront appropriations from Congress, even in the absence of private equity investments.61 Comparisons between ESPCs and other traditional methods of government procurement highlight the ESPC’s suitability for the specific situations — procurement of energy savings — for which the more traditional forms of government procurement have proven ill-suited and ineffective.62

While ESPCs are specific to the procurement of energy savings, performance-based contracts, design-build method, and public-private partnerships apply generally to government procurement.63 The ESPC reflects certain mechanisms employed in each approach, specifically, the structure of a public-private partnership, the delivery method of a design-build contract, and the payment method of a performance-based contract.64

Performance-based contracts are used in procurements where the focus of the transaction is the end results, rather than the means to those ends.65 Contractors are compensated based on whether they obtained the intended results.66 Thus, the results, rather than the means utilized by the contractor, determine whether the contractor successfully completed performance of the contract.67 Similarly, ESPCs focus on the end result — rather than the process — to determine the success of a contract; however, performance-based contracts usually require appropriations from Congress, while ESPCs do not.68

Design-build contracts are used to procure engineering services and construction.69 The defining feature of the design-build method of government procurement is that it “combin[es] [the] design and construction [of a project] in a single contract with one contractor,” as opposed to “the traditional delivery method where design and construction are sequential and contracted for separately with two contracts and two contractors.”70 In the design-build method, the contractor produces the design documents and assumes the risk of the design documents containing any error.71 ESPCs are similar to the design-build method because the ESCO designs and constructs the project; however, the design-build method generally requires appropriations from Congress, whereas ESPCs do not.72

Public-private partnerships are another approach to government procurement, typically used for public services.73 The distinguishing characteristic of a public-private partnership is that the private-sector partner “generally invests its own capital” for the project and “shares in income resulting from the partnership.”74 Public-private partnerships are used to continue or enhance public services while limiting costs.75 ESPCs resemble public-private partnerships in that, like many public-private partnerships, the contractor incurs upfront costs of implementing the contract; however, unlike most public-private partnerships, ESPCs do not provide the contractor with any ownership rights or income streaming from ownership.76

Given the aforementioned characteristics derived from more traditional vehicles of government procurement, an ESPC as a vehicle for the procurement of energy savings can be conceptualized as follows: a public-private partnership utilizing a design-build method of delivery and a performance-based method of payment — without the use of up-front appropriations from Congress or a private equity investment.77 Through this combination of characteristics, the ESPC takes a unique and effective approach to government savings on financial and operational costs related to the government’s energy use.78

III. The DOD Absorbs Large Financial and Operational Costs from Frequent Utility Disruptions due to Equipment Failure at its Installations because of a Lack of Proper Operation and Maintenance of Utility Systems Infrastructure

National security “depends on [the DoD’s] defense installations and facilities being in the right place, at the right time, with the right qualities and capacities to protect our national resources.”79 Even small disruptions in the utility systems powering DoD installations can have large impacts on the DoD and the nation.80 Utility system disruptions delay or cancel missions, cease security measure operations, and severely hamper communications; in many instances, practically all activity — likely time-sensitive and the consequence of complex and strategic planning — comes to a halt.81 Currently, the DoD absorbs large operational and financial costs from frequent utility disruptions due to equipment failure of DoD owned and/ or operated and maintained utility systems.82

In November 2016, the GAO conducted a study regarding utility disruptions at DoD owned and/ or operated and maintained utility systems due to equipment failure and submitted a report to the Committee on Armed services of the U.S. Senate.83 The study found that out of 364 DoD owned utility systems surveyed, “143 reported a total of 4,393 utility disruptions caused by equipment failure for fiscal years 2009 through 2015.”84 Further, “151 out of the 364 survey respondents reported that they did not have information on utility disruptions for any fiscal year from 2009 through 2015.”85 Because almost half of the respondents lacked information on utility disruptions, including those that only had information on utility disruptions for some of the years surveyed, the total utility disruptions due to equipment failure for the 364 DoD owned and/ or operated and maintained utility systems is likely much higher than 4,393.86

A. The Financial and Operational Consequences of Utility Disruptions at DoD Installations Have Been Substantial

As stated before, disruptions of utility systems at DoD installations can have large operational and financial impacts.87 These impacts can exponentially increase depending on the length of the disruption, the size of the area affected by the disruption, and the particular missions being undertaken at the time of the disruption.88 According to the GAO study referenced above, the 4,393 utility disruptions due to equipment failure resulted in a financial impact89 of over $29 million to repair and mitigate the disruptions.90

This number is almost certainly many times lower than the total financial impact of the utility disruptions caused by equipment failure because: (1) this number did not include the costs due to loss of productivity or other costs emanating from the disruption’s effects; (2) more utility disruptions likely would have been found had the utility systems kept information on disruptions, and thus, more financial costs were likely absorbed without being reported; and (3) only 100 utility systems out of the 143 that reported utility disruptions due to equipment failure reported the financial impacts of those disruptions.91 Notable reasons stated for failing to report the financial impact of the utility disruptions were the inability to estimate the financial impact of the utility disruptions, the undue difficulty and time-commitment of manually searching through records to calculate all of the costs, and the inaccuracy of estimated costs associated with disruptions because of calculation difficulties.92

In addition to the financial impacts of utility disruptions are the operational impacts, which have likewise been substantial.93 Utility disruptions result in delays or even cancellations due to the incapacity of installations and their resources.94 For example, between 2010 and 2013, electrical disruptions at Vandenberg Air Force Base due to equipment failure resulted in the delay of multiple satellite launches.95 Those delays and cancellations can create significant downstream consequences due to the complexity of DoD operations.96

B. Utility Disruptions at DoD Installations Due to Equipment Failure Have Been Caused by a Failure to Properly Operate or Maintain the Utility System

Utility systems have a complex physical infrastructure made up of many components; the proper operation and maintenance of the utility system’s infrastructure is critical to its continued and reliable functioning.97 Failure to properly operate or maintain a utility system’s infrastructure can cause equipment failure, which, in turn, causes utility disruptions.98 This is evident from the factors indicated by the DoD for past equipment failures that lead to utility disruptions, which include the equipment “operating beyond its intended life,”99 “[being] in poor condition,”100 “not [having] been properly maintained,”101 or “handling service volumes beyond its intended capacity.”102 Each of these risks can be mitigated through proper operation and maintenance of utility systems.103

For example, in 2015, utility systems at Joint Base Lewis-McChord, Washington, experienced disruptions due to equipment failure because they had “not been properly maintained [due to a] lack of expertise to perform maintenance.”104 Specifically, the installation’s well failed due to improper repairs “performed by personnel without specialized training, and tools [having] been mistakenly left inside the well.”105 In addition, a disruption due to equipment failure of a water utility system at a naval station in Great Lakes, Illinois, occurred because the utility system was in poor condition and thirty to forty years passed its intended life.106 Both of the above situations could have been prevented through the proper operation and maintenance of utility system infrastructures, which would have avoided the equipment failure and ensuing utility disruptions.107

The DoD is responsible for the proper operation and maintenance of all utility systems that it owns and/ or operates and maintains.108 Per DoD Instruction No. 4170.11:

DoD Components shall ensure primary power and emergency energy generation systems, infrastructure, equipment, and fuel that support their critical energy requirements receive the necessary maintenance. At a minimum, DoD Components shall maintain primary power and emergency generation systems according to their technical specifications and ensure that there is a trained operator assigned to maintain the emergency generation system, infrastructure, equipment and fuel.109

As of January 1, 2015, of the 2,524 utility systems serving DoD installations, private entities owned 570 and the DoD owned and/or operated and maintained 1,954.110 This leaves the DoD responsible for the proper operation and maintenance of 1,954 utility systems’ infrastructures.111 As illustrated above, the DoD has not been able to properly operate and/or maintain these utility systems on numerous occasions — resulting in utility disruptions due to equipment failure.112

A study commissioned by the Office of the Assistant Secretary of Defense for Energy, Installations, and Environment to “investigate business case analysis approaches for energy resilience” found further evidence of the DoD’s failure to properly operate and maintain its utility systems.113 In the study, Lincoln Laboratory at the Massachusetts Institute of Technology conducted site visits at four DoD installations to “understand existing resilience solutions and procedures” of the DoD in order to assess possible approaches to increasing utility resilience.114 The study found that:

[W]hile an on-base centralized energy solution can provide more resilience, military installations should first consider improving the reliability of their exiting electrical distribution system. Currently, a primary cause of outages on some military installations is the lack of reliability of the existing base electrical distribution system. This is problematic for any existing or future energy resilience solution. Critical missions will continue to experience outages if the reliability associated with the base’s electrical distribution system is not addressed. In some cases, a base receives a high level of reliability from the commercial electric system, only to see it degrade as the power makes its way onto the base[.]115

The study specifically found that: (1) groups that operate and maintain the backup power generators at DoD installations are “often understaffed, leading to uneven testing and maintenance of the equipment despite their best efforts[;]” (2) “[t]he reliability of [the] generators is typically below industry standards;” and (3) “the maintenance and failure rates of generators during startup and operation is not always recorded.”116 These findings indicate a lack of proper operation and maintenance.117 Essentially, the investigation concluded that while certain technological improvements could help to increase utility resilience, the current conditions under which the utility systems operate and are maintained render them vulnerable and unreliable.118 Any possible improvements in utility resilience achieved through new technology would likely be vitiated by the unreliability of the existing utility system, which would continue to cause utility disruptions if left unaddressed.119 In order to address the unreliability of the DoD’s utility systems, the reasons for the absence of proper operation and maintenance of the utility systems — evident from the numerous examples of the DoD’s failure to properly operate and/ or maintain its utility systems leading to utility disruptions due to equipment failure — need to be looked at closely.120

Obstacles cited by the DoD for the number of utility disruptions due to equipment failure include:121 inadequate funding;122 the difficulty of efficiently allocating limited repair funds between DoD installations due to the failure to keep accurate, uniform record of utility conditions123 and disruptions at each installation;124 “competing installation management priorities” and the inability of maintenance and repair projects to compete effectively with other types of projects during the allocation of limited funds because of lack of information and guidance;125 and the limited number of trained personnel to keep records of utility system conditions and disruptions and to operate and maintain the utility system infrastructure.126

These obstacles to proper operation, maintenance, and repair can be boiled down to: (1) inadequate funding;127 (2) the fact that the DoD does not know the actual condition of its facilities because of a lack of guidance on accurately assessing and recording the condition and vulnerabilities of each utility system128 and the lack of importance129 placed on such information; and (3) the lack of available and sufficiently trained personnel who can be held accountable for assessing and recording the condition and vulnerabilities of each utility system and for ensuring the proper operation and maintenance of each utility system.130 This Note proposes a new application of ESPCs to overcome these obstacles.

The current use of ESPCs does not address the obstacles mentioned above.131 While ESPCs are presently used to implement energy conservation measures and new technology, they are not used to operate and maintain utility system infrastructures.132 Even with conservation measures implemented through an ESPC, the ESCO can leave the operation and maintenance of the conservation measure to the agency, depending on the contract terms.133 Furthermore, even if the contract tasks the ESCO with the operation and maintenance of the conservation measure, contractors usually avoid responsibility for equipment that they did not install — even if the equipment is essential for operations.134 Thus, the current use of ESPCs to implement energy conservation measures does not address the lack of proper operation and maintenance of utility systems.135 This Note proposes a new application of ESPCs to solve this problem.

IV. Use of Energy Savings Performance Contracts with Successful Performance Based on the Absence of Utility Disruptions due to Equipment Failure to Procure the Proper Operation and Maintenance of Utility Systems Can Mitigate the Problem of Utility Disruptions

Eliminating or greatly reducing equipment failure in utility infrastructures owned and/ or operated and maintained by the DoD could reduce the operational and financial impact felt by the DoD for primarily two reasons.136 First, the large majority of utility systems that facilitate DoD installations are owned and/ or operated by the DoD.137 Second, equipment failure in DoD owned utility infrastructures accounts for forty-five percent of utility disruptions in DoD owned utility systems.138 Reductions can be obtained by using ESPCs to procure proper operation, maintenance, and repair of the utility infrastructures owned and/ or operated and maintained by the DoD and by making successful performance contingent on the absence of utility disruptions occurring from equipment failure.

A. Use of ESPCs to Procure Proper Operation and Maintenance of Utility Systems with Successful Performance Contingent on the Absence of Utility Disruptions Addresses Obstacles Faced by the DoD in Preventing Utility Disruptions Caused by Equipment Failure

ESPCs have the capacity and characteristics to address each of the previously mentioned issues and make possible the reduction of utility disruptions due to equipment failure at DoD installations.139 First, ESPCs address inadequate funding, and specifically the difficulty in allocating limited funds to specific installations and projects, by providing third-party funding through the ESCO.140 This eliminates the need for the allocation of appropriated funds to any utility system that is the subject of an ESPC.

Second, ESPCs address the DoD’s lack of knowledge about the conditions and vulnerabilities of its utility systems by having ESCO personnel — who can be contractually obligated to have specialized training — accurately assess and record the condition and vulnerabilities of the utility systems.141 This in turn addresses the lack of guidance, information, and perceived importance that prevent utility reliability projects from competing effectively with and being reasonably prioritized over other types of projects.

Third, ESPCs can address the lack sufficiently trained personnel to be fairly held accountable by having ESCO personnel make the assessments, keep records, and ensure proper maintenance under a contract where successful performance is contingent upon no utility disruptions due to equipment failure.142 Under this dynamic, the ESCO has an immediate and tangible incentive to make sure the job is completed properly.143 The DoD’s track record seemingly shows a lack of such incentives and related initiatives.144 Thus, ESPCs — used in this way — address each of the obstacles the DoD faces in securing the proper operation and maintenance of its utility system.

B. The Proposed Application of ESPCs Provide ESCOs Sufficient Incentive to Enter These Contracts

ESPCs offer incentives for ESCOs to take on the performance risk allocated by an ESPC once the ESCO can determine guaranteed savings — thus payment can be guaranteed.145 ESPCs only work if savings can be estimated and guaranteed, such that a contractor is willing to condition the payment upon that amount of savings being achieved.146 In the context of procuring energy savings through energy conservation measures, savings can be estimated and guaranteed because ESCOs know how much energy was being used prior to the contract and how much a particular energy conservation measure will decrease the amount of energy used post-implementation.147 The cost savings on the saved energy can be guaranteed by the ESCO and incentivize the ESCO to enter into the contract.148

In a similar vein, savings can be estimated and guaranteed in the context of procuring cost savings from the prevention or mitigation of utility disruptions due to equipment failure.149 Where utility disruptions due to equipment failure consistently have occurred at a particular utility system and where the ESCOs know they can properly operate and maintain the utility system to prevent such utility disruptions from occurring post-contract, the ESCO can guarantee the costs saved from those utility disruptions not occurring.150 The calculation of savings that could be guaranteed would be the difference between the costs incurred from disruptions caused by equipment failure in the previous year (or previous five years) and the costs incurred from disruptions caused by equipment failure in the first year of the contract (or the next five years, including the first year of the contract) — the latter would be zero if the contract was successfully performed.151 In other words, guaranteed savings would be the amount of the costs previously incurred from utility disruptions due to equipment failure that would not be incurred during the contract.152

For example, if it is assumed that a single utility disruption due to equipment failure lasting one day costs $500,000153 and that two such utility disruptions occurred annually at a single utility system for the last five years, a contractor — that could guarantee disruptions due to equipment failure would not happen at that utility system — could guarantee cost savings of $5,000,000.154 As long as the contractor’s services sought under the contract cost $5,000,000 or less, the contractor has an incentive to enter into the ESPC.155

From the DoD’s perspective, even if the government incurs the same financial impact from the ESPC as it had previously from mitigating utility disruptions, the DoD would still avoid the operational impacts of those disruptions — which would likely have occurred without the contract.156 Significantly, the contract’s price does not have to — and in practice will not157 — be equal to the total amount of cost savings the contractor can guarantee; by statute, the price of the contract only has to be less than or equal to that amount.158 As long as that is satisfied, the price of the contract is dependent only on how much the services actually cost.159

In regard to the previous example, if the services cost less than $1,000,000 per year, the price of the contract would be less than the total amount of cost savings — $5,000,000 — that the government would receive under the contract.160 Accordingly, depending on the cost of the services sought, the government’s total cost savings has the potential to be significantly higher than the contract price.161 This is especially true in the procurement of operation and maintenance services for utility systems because such services are approximately twenty times cheaper than retrofits or the implementation of new technology for utility systems, according to guidance issued by the Office of the Assistant Secretary of Defense for Energy, Installations, and Environment.162

Moreover, the government can be confident that those savings are met conceptually the same way as when it uses an ESPC to procure energy savings. In the case of energy savings, the government determines whether the contract’s cost combined with the utility bill’s cost would exceed the cost of what the utility bill would likely have been without the contract.163 Here, the government would simply need to determine that the contract’s cost plus the potential costs incurred from disruptions caused by equipment failure during the contract term would not exceed the costs incurred from disruptions caused by preventable equipment failure prior to the contract.164

It is important to note that, in either context, the amount of savings actually being met depends on many factors and thus, may not exactly match the estimated savings. However, that does not outweigh the likelihood of savings when a known solution is employed to fix an understood and common problem.165 The probability of successfully eliminating or greatly reducing the number of preventable utility disruptions occurring with utility systems — utility systems that regularly suffer preventable utility disruptions — is as likely as successfully reducing energy use through the implementation of energy-efficient appliances in buildings, which also involves numerous factors.166

Concerns of contractors lacking the incentive to take on the risk of performance with the proposed application of ESPCs — due to the uncertainty of achieving savings — is slight because federal agencies and ESCOs have not been deterred by this factor in the past, as shown in the continued usage of ESPCs in their current context.167 It is apparent that there is and must be a tolerated amount of inaccuracy and deviation between the predicted savings and the actual savings realized.168 This indefiniteness has not eliminated the use of ESPCs in the procurement of energy savings, and it should not thwart the use of ESPCs in the procurement of proper operation and maintenance of utility systems.169

V. Conclusion

ESPCs lend themselves to a situation where a federal agency seeks to reduce the utility disruptions that interrupt its vital operations and a contractor knows it can prevent those utility disruptions from occurring.170 The main challenges the DoD currently faces in reducing utility disruptions due to equipment failure include the DoD’s lack of funding, its incomprehensive collecting and reporting on utility conditions and disruptions, and its lack of personnel with the requisite expertise or accountability.171

ESPCs have the capacity to address these challenges and provide a vehicle for the procurement of more reliable utility systems servicing DoD installations by making possible the procurement of the proper operation, maintenance, and repair of the utility systems.172 Specifically, ESPCs would allow guaranteed savings to fund the procurement of the proper operation, maintenance, and repair of utility systems through third-party financing.173 Further, ESPCs avoid the problem of having to divert limited funds away from other necessary projects without guidance or knowledge on the conditions of each utility system by providing trained personnel to accurately access and record such information.174 Finally, ESPCs facilitate a solution to the DoD’s lack of accountable personnel because the risk of performance — i.e., preventing utility disruptions due to equipment failure — lies with the contractor, an ESCO with specialized expertise, and not the agency.175 Because of its unique operation, the ESPC is a suitable vehicle for the government to directly procure proper operation, maintenance, and repair of its utility systems and to indirectly procure a more effective DoD through more reliable utility systems servicing its installations.176

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  1. See U.S. Gov’t Accountability Office, GAO-17-27, Defense Infrastructure: Actions Needed to Strengthen Utility Resilience Planning 20 (2016) [hereinafter GAO- 7-27].
  2. Id.
  3. Id.
  4. Id.
  5. Id. at 6, 19–20. Utilities are provided through “utility systems.” Id. The Department of Defense’s installations utilize electric, natural gas, water, and wastewater utility systems to generate and distribute electricity, distribute natural gas, treat and distribute water, and collect and treat wastewater, respectively. Id. at 6.
  6. Id. at 19.
  7. Id.
  8. OFFICE OF THE ASSISTANT SEC’Y OF DEF. FOR ENERGY, INSTALLATIONS & ENV’T, DEPARTMENT OF DEFENSE ANNUAL ENERGY MANAGEMENT AND RESILIENCE (AEMR) REPORT FISCAL YEAR 2016 at 39–40 (2017) [hereinafter AEMR 2016].
  9. It is important to note that both the frequency and financial impact of these utility disruptions reported in the AEMR 2016 are likely greatly understated for the following reasons: (1) the practice of reporting disruptions has not been uniformly or accurately followed by DoD installations; (2) the number of disruptions reported does not include those lasting less than eight hours (which are frequent and can clearly be consequential, depending on the circumstances); and (3) the financial impact does not include the financial cost of lost productivity. See GAO-17-27, supra note 1, at 25; see also U.S. Gov’t Accountability Office, GAO-15-749, Defense Infrastructure: Improvements in DoD Reporting and Cybersecurity Implementation Needed to Enhance Utility Resilience Planning 26 (2015) [hereinafter GAO-15-749]; AEMR 2016, supra note 8, at 39–40.
  10. DoD is meant to refer to all DoD components, including the military services.
  11. See DoD 101: Overview of the Department of Defense, U.S. DEP’T DEF., http://www.defense.gov/About-DoD/DoD-101 [https://perma.cc/QLF6-59HH] (last visited Apr. 10, 2017).
  12. GAO-15-749, supra note 9, at 7.
  13. Id.
  14. A “utility disruption” refers to instances where a utility system ceases to perform its function. See GAO-17-27, supra note 1, at 1. That is, it ceases to generate and distribute electricity, distribute natural gas, treat and distribute water, or collect and treat wastewater, depending on what function it exists to perform. See id.
  15. See id. at 19–20.
  16. See id. at 19.
  17. See id.
  18. See id. at 20.
  19. “Utility security” refers to a utility system’s ability to remain continuously operable. See U.S. Gov’t Accountability Office, GAO-16-164, Defense Infrastructure: Improvement Needed in Energy Reporting and Security Funding at Installations with Limited Connectivity 7 (2016) [hereinafter GAO-16-164].
  20. “Utility resilience” refers to a utility system’s ability to regain operation after being disrupted. See id.
  21. See GAO-17-27, supra note 1, at 19.
  22. See id. at 1, 11 n.25, 20 (reporting 4,393 utility disruptions between FY 2009–2015 due to equipment failure among 143 utility systems that reported one or more utility disruptions that responded to GAO survey); see also AEMR 2016, supra note 8, at 40 (reporting that in FY 2016, of the utility disruptions reported by DoD components, approximately forty-five percent were caused by equipment failure, forty-two percent were planned, and the remainder were caused by acts of nature).
  23. See GAO-17-27, supra note 1, at 13–16; see also LINCOLN LAB., MASS. INST. OF TECH., TECHNICAL REP. 1216, APPLICATION OF A RESILIENCE FRAMEWORK TO MILITARY INSTALLATIONS: AMETHODOLOGY FOR ENERGY RESILIENCE BUSINESS CASE DECISIONS iii, v (2016) [hereinafter APPLICATION OF A RESILIENCE].
  24. The utility systems that serve DoD installations are owned, and thus directly or indirectly operated and maintained, by private companies or the DoD. See GAO-17-27, supra note 1, at 7. Moreover, some privately owned utility systems serving DoD installations have the majority of their operation and maintenance paid for by the DoD. See id. at 3 n.9. As this Note seeks to employ the use of ESPCs, a government procurement vehicle, it will focus only on those utility systems owned and/or operated and maintained by the DoD or one of the military services and not those that have been privatized.
  25. See generally 42 U.S.C. § 8287 (2012).
  26. See id. § 8287(a)(1).
  27. Id.
  28. Such measures include “lighting upgrades” or “plumbing fixtures” that are more energy efficient, “roof-mounted solar [photovoltaics] array[s],” “biomass steam turbine” generators, and other technological advances. See AEMR 2016, supra note 8, at 20, 24, 38.
  29. See Energy Savings Performance Contracts for Federal Agencies, OFF. ENERGY EFFICIENCY & RENEWABLE ENERGY, https://www.energy.gov/eere/femp/energy-savings-performance-contracts-federal-agencies [https://perma.cc/X7JR-4MQK] (last visited Apr. 10, 2017); see infra Part II.A.
  30. 42 U.S.C. § 8287(a).
  31. Id.
  32. Energy Savings Performance Contracts for Federal Agencies, supra note 29.
  33. Id.
  34. 42 U.S.C. § 8287(a)(1).
  35. Id. § 8287(a)(2)(B).
  36. See id. § 8287(a)(1).
  37. See id. § 8287(a)(2)(B).
  38. See id. § 8287(a)(1).
  39. See id. § 8287(a)(2)(B).
  40. See id.
  41. See id.
  42. See id. 8287.
  43. See id. § 8287(a)(1).
  44. The contract must set forth a payment schedule based upon the guarantee of savings. See id.
  45. See id.
  46. See id.
  47. See id. § 8287(a)(2)(B).
  48. See id. § 8287(a)(1).
  49. HVAC refers to heating, ventilation, and air-conditioning. Off. of Energy Efficiency & Renewable Energy, DOE IDIQ Energy Savings Performance Contract Awarded Projects Spreadsheet (Nov. 2017), https://energy.gov/eere/femp/downloads/doe-idiq-energy-savings-performance-contract-awarded-projects [https://perma.cc/X4ZZ-RGJ5] [hereinafter Awarded Projects Spreadsheet].
  50. Id.
  51. Id.
  52. Id.
  53. See id.; see also 42 U.S.C. § 8287(a)(1) (2012).
  54. See id. § 8287(a)(2)(B).
  55. See 42 U.S.C. § 8287.
  56. See Awarded Projects Spreadsheet, supra note 49; see also 42 U.S.C. § 8287(a)(2)(B).
  57. See 42 U.S.C. § 8287(a)(2)(B).
  58. See id.; see also id. § 8287(a)(1).
  59. See ACQUISITION ADVISORY PANEL, REPORT OF THE ACQUISITION ADVISORY PANEL TO THE OFFICE OF FEDERAL PROCUREMENT POLICY AND THE UNITED STATES CONGRESS 171 (2007) [hereinafter REPORT OF THE ACQUISITION ADVISORY PANEL]; see also FAR 36.102; see also U.S. GEN. ACCOUNTING OFFICE, GAO/GGD-99-71, PUBLIC-PRIVATE PARTNERSHIPS: TERMS RELATED TO BUILDING AND FACILITY PARTNERSHIPS 13–14 (1999) [hereinafter GAO/GGD-99-71].
  60. Compare REPORT OF THE ACQUISITION ADVISORY PANEL, supra note 59, at 171, FAR 36.102, and GAO/GGD-99-71, supra note 59, at 13–14, with 42 U.S.C. § 8287 (a) 1).
  61. See FAR 36.102; see also GAO/GGD-99-71, supra note 59, at 13–14. Compare 42 U.S.C. § 8287, with REPORT OF THE ACQUISITION ADVISORY PANEL, supra note 59, at 171.
  62. See FAR 36.102; see also GAO/GGD-99-71, supra note 59, at 13–14. Compare 42 U.S.C. § 8287, with REPORT OF THE ACQUISITION ADVISORY PANEL, supra note 59, at 171.
  63. See FAR 36.102; see also GAO/GGD-99-71, supra note 59, at 13–14. Compare 42 U.S.C. § 8287, with REPORT OF THE ACQUISITION ADVISORY PANEL, supra note 59, at 171.
  64. See FAR 36.102; see also GAO/GGD-99-71, supra note 59, at 13–14. Compare 42 U.S.C. § 8287, with REPORT OF THE ACQUISITION ADVISORY PANEL, supra note 59, at 171.
  65. REPORT OF THE ACQUISITION ADVISORY PANEL, supra note 59, at 171.
  66. Id.
  67. Id.
  68. See REPORT OF THE ACQUISITION ADVISORY PANEL, supra note 59, at 171; see also 42 U.S.C. § 8287(a)(1) (2012).
  69. FAR 36.102.
  70. See id. This traditional method of procurement is referred to as design-bid-build. Id.
  71. See FED. HIGHWAY ADMIN, U.S. DEP’T OF TRANSP., DESIGN-BUILD EFFECTIVENESS STUDY (2006), https://www.fhwa.dot.gov/reports/designbuild/designbuild2.htm [https://perma.cc/HET5-GVW6] [hereinafter DESIGN-BUILD EFFECTIVENESS STUDY].
  72. Compare 42 U.S.C. § 8287 (a)(1), with FAR 36.102; see also DESIGN-BUILD EFFECTIVENESS STUDY, supra note 71.
  73. GAO/GGD-99-71, supra note 59, at 13–14.
  74. Id.
  75. Id.
  76. Compare 42 U.S.C. § 8287 (a)(1), with GAO/GGD-99-71, supra note 59, at 13–14.
  77. See FAR 36.102; see also GAO/GGD-99-71, supra note 59, at 13–14. Compare 42 U.S.C. § 8287 (a)(1), with REPORT OF THE ACQUISITION ADVISORY PANEL, supra note 59, at 171.
  78. 42 U.S.C. § 8287 (a)(1).
  79. DoD 101: Overview of the Department of Defense, supra note 11.
  80. See GAO-17-27, supra note 1, at 1.
  81. See id.
  82. Id. at 11.
  83. Id.
  84. Disruption was defined as “being caused by the failure of DoD-owned equipment or by the under-performance of utility infrastructure based on operating environment standards and based on lasting more than 5 minutes.” Id. at 11 n.25. Further, the survey “clarified that [it] did not want survey respondents to report disruptions to the system that were caused by the failure of a commercial or privatized utility system; natural events such as a storm, earthquake, or fire; intentional or planned disruptions; or disruptions lasting less than 5 minutes.” Id.
  85. The GAO followed up with these respondents who reported not having information on disruptions to confirm their responses and to determine why such information was not available:

     

    [The GAO] confirmed that 53 respondents did not have information, 52 stated that they did have information, several of whom said that they misread the question and their answer should have been that they had information but experienced no disruptions, and 38 did not respond to [the GAO’s] follow-up. In addition, [the GAO] did not follow up with 8 respondents, 6 of whom said that they were unfamiliar with the system or whom did not believe they had the information necessary to complete the survey, and 2 of whom submitted survey responses after we began our follow up efforts.

     

    Id. at 25 (One reason cited for lack of information was that “the maintenance history is not always available due to personnel turnover.”).
  86. See id.
  87. See id. at 18.
  88. See id. at 19.
  89. See id. at 18 n.29 (Fiscal impact was defined “as the money spent repairing the disruption and mitigating its effect. For example, the costs of the replacement part and the cost of the personnel needed to complete the repair would be considered in the fiscal impact.”).
  90. Id. at 18.
  91. See id. at 18, 19 n.30, 25.
  92. Id. at 19.
  93. See id. at 20.
  94. See id.at 1.
  95. Id. (citing GAO-15-749, supra note 9).
  96. See id. at 22.
  97. OFFICE OF THE ASSISTANT SEC’Y OF DEF. FOR ENERGY, INSTALLATIONS, & ENV’T, ENERGY RESILIENCE: OPERATIONS, MAINTENANCE, & TESTING (OM&T) STRATEGY AND IMPLEMENTATION Guidance 5 (2017) [hereinafter OM&T] (“The safety and reliability of a power system largely depends on its OM&amop;T strategy.”).
  98. ID. at 6.
  99. See GAO-17-27, supra note 1, at 14.
  100. See id. at 16.
  101. See id.
  102. Id. at 14; see also id. at 16 (reporting that a Naval Station in Mayport, Florida, reported some of the utility disruptions were caused by poor condition of electrical equipment, stating “that the existing distribution system serving the installation’s on-base housing is unreliable, not in compliance with code, poorly designed, and past its expected useful lifespan of 50 years”).
  103. OM&T, supra note 97, at 6 (“OM&T processes allow for the proactive management of vulnerabilities and risks to energy resilient systems and infrastructures [such as,] equipment failure”).
  104. GAO-17-27, supra note 1, at 16.
  105. Id.
  106. See id. at 14.
  107. OM&T, supra note 97, at 6.
  108. Id. at 12.
  109. Id. (footnote omitted).
  110. GAO-17-27, supra note 1, at 7 (citing records maintained by the Assistant Secretary of Defense for Energy, Installations, and Environment on the ownership status of utility systems serving DoD installations).
  111. OM&T, supra, note 97, at 12.
  112. See GAO-17-27, supra note 1, at 14–16.
  113. AEMR 2016, supra note 8, at 43.
  114. APPLICATION OF A RESILIENCE, supra note 23, at iii.
  115. Id. at v.
  116. Id. at iii.
  117. See id. at iii, v.
  118. See id.
  119. See id. at v.
  120. See id. at iii, v.
  121. GAO-17-27, supra note 1, at 7 (“According to DoD, since 1997 the department has been attempting to privatize its utility systems because military installations have been unable to maintain reliable utility systems due to inadequate funding and competing installation management priorities.”).
  122. Id.
  123. See id. at 30 (The GAO “estimate[s] that utility managers consider knowledge about the condition of the system to have a somewhat or very positive effect on the ability to avoid or prevent equipment failure . . . ; to manage risk associated with equipment failure . . . ; to identify funding needs . . . ; and to extend the utility system’s usable service life[.]”).
  124. See id. at 1 (“[B]ecause DoD had not specifically identified and logged instances of disruptions caused by the failure of DoD-owned utility infrastructure, the department did not have comprehensive information about utility disruptions.”); id. at 26 (“An overarching reason we found for disruption information not being available is that the services vary in the extent to which each has issued guidance to collect and retain utility disruption information at the installation level.”).
  125. Id. at 7, 26, 28.
  126. Id. at 55.
  127. Absent third-party financing, utility systems owned by the DoD and utility systems for which the DoD finances the majority of operation and maintenance both require appropriation from Congress and the diversion of limited funds from other necessary projects to operate, maintain, and repair the utility infrastructure. See id. at 17.
  128. The current and past data indexes used to assess the condition of the DoD’s facilities have been found to lack credibility/accuracy as a measure of DoD facility condition:

     

    DoD’s standardized assessment process for utility systems is currently in development, and the initial version has limited capabilities to assess the condition of the utility infrastructure. Further, the military services are allowed to customize certain settings within the process which could result in differences in the FCI across the services. . . . Prior to 2013 the guidance issued by [the Office of the Secretary of Defense (OSD)] did not require a standardized condition assessment process, and the respective services used different methodologies to assess the condition of their facilities, including utility systems. As a result of the services’ nonstandardized approach, OSD determined that the [Facility Condition Index] data lacked credibility as a measure of DoD facility quality.

     

    Id. at 29.
  129. See id. at 2 n.4 (in response to the GAO’s recommendation that the DoD “revise its reporting guidance to collect and report on . . . the failure of DoD-owned utility infrastructure, . . . [t]he department did not concur . . . stating that reporting on these disruptions provides a ‘low value proposition;’ that the data collected by the department for the Energy Reports are not being used to guide its strategic decisions; and that collecting the data would be ‘onerous.’”).
  130. See id. at 55 (proper operation, maintenance, and repair of utility systems requires personnel to seek and initiate such proper operation, maintenance, and repair).
  131. See U.S. Gov’t Accountability Office, GAO-15-432, Energy Savings Performance Contracts: Additional Actions Needed to Improve Federal Oversight 57–62 (2015) [hereinafter GAO-15-432].
  132. See Awarded Projects Spreadsheet, supra note 49.
  133. See U.S. GAO-15-432, supra note 131, at 8 (“[c]ontractor and/or agency operates and maintains equipment”); see also id. at 60 (showing examples of ESPCs where the agency was responsible for the operation and maintenance of the energy conservation measure; agency was responsible for operation of a biomass boiler energy conservation measure; agency was responsible for preventative maintenance of heat recovery devices); Federal ESPC Process Phase 5: Post-Acceptance Performance, OFF. ENERGY EFFICIENCY & RENEWABLE ENERGY, https://energy.gov/eere/femp/federal-espc-process-phase-5-post-acceptance-performance [https://perma.cc/2KSU-7XRL] (last visited Feb. 12, 2018) (Performance of operations and maintenance tasks for the energy conservation measure “may be assigned to ESCO, to the agency, or shared.”).
  134. See GAO-15-432, supra note 131, at 57–62.
  135. See id.
  136. See GAO-17-27, supra note 1, at 11.
  137. Id. at 7.
  138. See AEMR 2016, supra note 8, at 40.
  139. See 42 U.S.C. § 8287(a)(1) (2012).
  140. See id.
  141. See id.
  142. See 42 U.S.C. § 8287(a)(2)(B).
  143. See id.
  144. See supra Part III.
  145. See 42 U.S.C. § 8287(a).
  146. See id. § 8287(a)(1).
  147. See id.
  148. See id.
  149. See id.
  150. See id.
  151. See id.
  152. See id.
  153. See AEMR 2016, supra note 8, at 39–40 (DoD’s average reported financial cost per day of reported utility disruptions in Fiscal Year 2016 was $500,000).
  154. See 42 U.S.C. § 8287(a)(1).
  155. See id.
  156. See GAO-17-27, supra note 1, at 20.
  157. In practice, the amount of cost savings the contractor guarantees (and the price of the contract) are always less than the total amount of cost savings possible in order to leave room for slight fluctuations and because the contractor need guarantee only enough to cover the cost of its services. Awarded Projects Spreadsheet, supra note 49.
  158. See 42 U.S.C. § 8287(a)(1).
  159. See id.
  160. See id.
  161. See id.
  162. OM&T, supra note 97, at 5.
  163. See 42 U.S.C. § 8287(a)(2)(B).
  164. See id.
  165. See GAO-15-432, supra note 131, at 12.
  166. Id. (explaining that change in agency operations may affect actual savings realized, but contractor not responsible for agency action which affects energy savings).
  167. See Energy Savings Performance Contracts for Federal Agencies, supra note 29.
  168. See GAO-15-432, supra note 131, at 12.
  169. See Energy Savings Performance Contracts for Federal Agencies, supra note 29; see also GAO-15-432, supra note 131, at 12.
  170. See 42 U.S.C. § 8287(a)(1) (2012).
  171. See GAO-17-27, supra note 1, at 2 n.4, 17, 29, 55.
  172. See 42 U.S.C. § 8287(a)(1); see also OM&T, supra note 97, at 6.
  173. See 42 U.S.C. § 8287(a)(1).
  174. See id.
  175. See id.
  176. See id.