B-150886, JULY 15, 1963, 43 COMP. GEN. 60

B-150886: Jul 15, 1963

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AGRICULTURE DEPARTMENT - RURAL ELECTRIFICATION ADMINISTRATION - LOANS TO COOPERATIVES - CENTRAL SERVICE LIMITATION INCOME TAX BENEFITS AND INTEREST COSTS WHICH WOULD ACCRUE TO THE GOVERNMENT IF AN AWARD OF AN ELECTRIC POWER CONTRACT WERE MADE TO AN INVESTOR-OWNED PRIVATE UTILITY COMPANY RATHER THAN TO A TAX EXEMPT RURAL ELECTRIC COOPERATIVE WHICH HAD TO OBTAIN A LONG-TERM LOW INTEREST RATE LOAN FROM THE RURAL ELECTRIFICATION ADMINISTRATION TO ENABLE IT TO FURNISH THE REQUIRED SERVICE ARE INDIRECT BENEFITS WHICH ARE TOO UNCERTAIN AND SPECULATIVE TO BE CONSIDERED IN THE EVALUATION PROCESS AND. IS PROPER. THE GOVERNMENT PROCUREMENT PROCEDURE WHICH REQUIRES ESTABLISHMENT IN ADVANCE OF DEFINITE FACTORS FOR BID EVALUATION IS NOT THE PROPER VEHICLE TO EQUALIZE THE UNEQUAL COMPETITIVE SITUATION CREATED BY LEGISLATION UNRELATED TO PROCUREMENT AND.

B-150886, JULY 15, 1963, 43 COMP. GEN. 60

BIDS - EVALUATION - NEGOTIATION - FACTORS OTHER THAN PRICE. BIDS - EVALUATION - TAX BENEFITS - LOAN ASSISTANCE FROM GOVERNMENT. AGRICULTURE DEPARTMENT - RURAL ELECTRIFICATION ADMINISTRATION - LOANS TO COOPERATIVES - CENTRAL SERVICE LIMITATION INCOME TAX BENEFITS AND INTEREST COSTS WHICH WOULD ACCRUE TO THE GOVERNMENT IF AN AWARD OF AN ELECTRIC POWER CONTRACT WERE MADE TO AN INVESTOR-OWNED PRIVATE UTILITY COMPANY RATHER THAN TO A TAX EXEMPT RURAL ELECTRIC COOPERATIVE WHICH HAD TO OBTAIN A LONG-TERM LOW INTEREST RATE LOAN FROM THE RURAL ELECTRIFICATION ADMINISTRATION TO ENABLE IT TO FURNISH THE REQUIRED SERVICE ARE INDIRECT BENEFITS WHICH ARE TOO UNCERTAIN AND SPECULATIVE TO BE CONSIDERED IN THE EVALUATION PROCESS AND, THEREFORE, AWARD OF A NEGOTIATED CONTRACT TO THE COOPERATIVE ON THE BASIS OF A COMPARISON OF THE RATE SCHEDULES BASED ON ESTIMATED CONSUMPTION, PLUS A DETERMINATION OF THE BIDDER'S CAPABILITY TO MEET THE SERVICE REQUIREMENTS, IS PROPER. WHILE FINANCIAL ADVANTAGES SUCH AS TAX AND LOAN ASSISTANCE TO RURAL ELECTRIC COOPERATIVE BORROWING FROM THE RURAL ELECTRIFICATION ADMINISTRATION CREATE AN UNEQUAL COMPETITIVE SITUATION WHEN THE COOPERATIVE COMPETES WITH PRIVATE REGULATED POWER COMPANIES FOR GOVERNMENT BUSINESS, THE GOVERNMENT PROCUREMENT PROCEDURE WHICH REQUIRES ESTABLISHMENT IN ADVANCE OF DEFINITE FACTORS FOR BID EVALUATION IS NOT THE PROPER VEHICLE TO EQUALIZE THE UNEQUAL COMPETITIVE SITUATION CREATED BY LEGISLATION UNRELATED TO PROCUREMENT AND, THEREFORE, IN THE ABSENCE OF LEGISLATION REQUIRING CONSIDERATION OF INDIRECT BENEFITS TO THE GOVERNMENT IN THE EVALUATION PROCESS SUCH FACTORS ARE NOT FOR CONSIDERATION. A LOAN OBTAINED BY A RURAL ELECTRIC COOPERATIVE UNDER SECTION 4 OF THE RURAL ELECTRIFICATION ACT OF 1936, 7 U.S.C. 904, WHICH PRECLUDES LOANS TO AREA RECEIVING "CENTRAL STATION SERVICE" SO THAT THE COOPERATIVE COULD FURNISH POWER TO A MILITARY RADAR SITE WHICH WAS NOT SERVED BY ANY EXISTING ELECTRIC DISTRIBUTION FACILITIES AND WHICH WAS LOCATED 4 MILES FROM THE NEAREST FACILITIES THAT WERE OWNED BY THE COOPERATIVE IS A LOAN TO AN AREA NOT RECEIVING CENTRAL STATION SERVICE AND, THEREFORE, DOES NOT VIOLATE THE LIMITATION IN SECTION 4 OF THE ACT.

TO BEGGS, LANE, DANIEL, MIDDLEBROOKS AND GAINES, JULY 15, 1963:

WE REFER TO YOUR LETTER DATED MAY 14, 1963, AND TO THAT OF YOUR CLIENT, GULF POWER COMPANY, DATED FEBRUARY 19, 1963, CONCERNING YOUR CLIENT'S PROTEST AGAINST THE AWARD OF A CONTRACT BY THE DEPARTMENT OF THE AIR FORCE TO CHOCTAWHATCHEE ELECTRIC COOPERATIVE, INC. (CHELCO), FOR ELECTRIC POWER REQUIREMENTS FOR THE SPADAT RADAR SITE AT EGLIN AIR FORCE BASE, FLORIDA, UNDER REQUEST FOR PROPOSALS--- ELECTRIC POWER SERVICE, PROJECT 496LY1.

THE DEPARTMENT OF THE AIR FORCE REPORTS THAT THE SPADAT RADAR SITE LOCATION IS SUCH THAT GULF POWER AND CHELCO ARE BOTH GEOGRAPHICALLY LOCATED TO SERVE THE SITE AND THAT BOTH FIRMS ARE CURRENTLY SERVING CERTAIN AREAS ON THE EGLIN AIR FORCE BASE RESERVATION. PRIOR TO ISSUING A REQUEST FOR PROPOSALS, THE FLORIDA STATE RAILROAD PUBLIC UTILITIES COMMISSION, TALLAHASSEE, FLORIDA, WAS CONTACTED BY THE AIR FORCE TO DETERMINE IF SERVICE TO THE RADAR SITE AREA WOULD BE LIMITED TO A SPECIFIC FIRM BY FRANCHISE. IT WAS LEARNED THAT TERRITORIAL FRANCHISE DID NOT EXIST AND THE CHOICE FOR THE SOURCE OF POWER WOULD BE THAT OF THE CUSTOMER.

DUE TO ADVANCE PUBLICITY ON THE CONSTRUCTION OF THE RADAR FACILITIES, CHELCO AND GULF POWER BOTH EXPRESSED THEIR DESIRE TO FURNISH THE POWER REQUIREMENTS FOR THE SITE. THE AIR FORCE REPORTS THAT THERE EXISTED NO BASIS FOR SELECTION OF EITHER FIRM FOR NEGOTIATION OF A CONTRACT ON A SINGLE SOURCE BASIS AND, THEREFORE, A DETERMINATION WAS MADE TO REQUEST TECHNICAL AND COST PROPOSALS FROM BOTH FIRMS.

TECHNICAL AND COST PROPOSALS WERE RECEIVED FROM CHELCO AND GULF POWER ON NOVEMBER 14, 1962, AND SUBMITTED TO THE AIR FORCE CIVIL ENGINEERS FOR REVIEW AND ANALYSIS. DUE TO THE REQUIREMENT FOR A HIGH DEGREE OF RELIABILITY IN POWER SUPPLY FOR SPADAT, TECHNICAL REVIEW OF PROPOSALS WAS NOT COMPLETED UNTIL CONTINUED NEGOTIATION WITH BOTH FIRMS PRODUCED ALL POSSIBLE INFORMATION ON CAPABILITY OF EACH FIRM, AS WELL AS THE MOST REASONABLE RATE SCHEDULE EACH FIRM COULD OFFER. THE AIR FORCE REPORTS THAT A REVIEW OF THE PROPOSALS BY AIR FORCE ENGINEERING PERSONNEL ESTABLISHED THAT EITHER FIRM HAD THE CAPABILITY TO MEET THE REQUIREMENTS OF THE AIR FORCE. IT WAS CONCLUDED THAT FROM THE STANDPOINT OF OVERALL COSTS TO THE AIR FORCE, CHELCO OFFERED THE MOST ADVANTAGEOUS RATE SCHEDULE. AWARD OF THE CONTRACT WAS THEREFORE MADE TO CHELCO ON FEBRUARY 18, 1963.

GULF POWER'S LETTER OF FEBRUARY 19, 1963, CONTENDS THAT THE CONTRACT IS CONTRARY TO THE BEST INTERESTS OF THE UNITED STATES. GULF POWER POINTS OUT THAT IT IS AN INVESTOR-OWNED ELECTRIC UTILITY SERVING CUSTOMERS IN THE 10 WESTERNMOST COUNTIES IN NORTHWEST FLORIDA UNDER THE JURISDICTION OF, AND SUBJECT TO APPROVAL OF, THE FLORIDA RAILROAD AND PUBLIC UTILITIES COMMISSION, THE FEDERAL POWER COMMISSION AND THE SECURITIES AND EXCHANGE COMMISSION. ON THE OTHER HAND, CHELCO IS A RURAL ELECTRIC COOPERATIVE ORGANIZED UNDER THE LAWS OF THE STATE OF FLORIDA SOLELY "FOR THE PURPOSE OF SUPPLYING ELECTRIC ENERGY AND PROMOTING AND EXTENDING THE USE THEREOF IN RURAL AREAS," AND WHOSE RATES AND CHARGES ARE NOT REGULATED.

GULF POWER STATES THAT IT HAS ASSUMED THE RESPONSIBILITY TO SUPPLY, AND HAS SUPPLIED, THE ELECTRIC POWER REQUIREMENTS OF THE EGLIN AIR FORCE BASE COMPLEX SINCE ITS INCEPTION IN 1941. THE SPADAT PROJECT REQUIRES SERVICE AT 115 KV. AND GULF POWER HAS OPERATED A 115 KV. TRANSMISSION SYSTEM SINCE 1926 AND THE EGLIN COMPLEX IS PRESENTLY SUPPLIED BY THREE SUCH 115 KV. GULF POWER COMPANY LINES. IT IS POINTED OUT THAT SINCE CHELCO DOES NOT NOW HAVE ANY 115 KV. FACILITIES IN NORTHWEST FLORIDA, MAJOR ADDITIONS TO THE COOPERATIVE SYSTEM WOULD BE REQUIRED FOR THEM TO SERVE THE 4000 KV.-A. LOAD OF THE SPADAT PROJECT; THAT THE NEAREST 115 KV. SOURCE AVAILABLE TO CHELCO IS THE ALABAMA ELECTRIC COOPERATIVE IN THE VICINITY OF OPP, ALABAMA; AND THAT THE EXTENSION OF 115 KV. LINES FROM OPP TO THE PROJECT SITE PLUS THE INSTALLATION OF DIESEL OR OTHER TYPE GENERATING EQUIPMENT OF 4000 KV. A. RATING NEARBY, TOGETHER WITH A CONNECTING 115 KV. LINE, ARE CONSERVATIVELY ESTIMATED TO REQUIRE FUNDS IN THE AMOUNT OF APPROXIMATELY $1,150,000. IN THIS CONNECTION, YOUR LETTER OF MAY 14 ENCLOSED A NEWS RELEASE BY THE DEPARTMENT OF AGRICULTURE DATED APRIL 30, 1963, WHICH STATES THAT THE RURAL ELECTRIFICATION ADMINISTRATION HAS APPROVED A LOAN OF $2,225,000 TO CHELCO TO ENABLE THE COOPERATIVE TO SERVE THE SPADAT LOAD AT EGLIN AIR FORCE BASE. YOU STATE THAT THIS LOAN WILL MATURE IN 35 YEARS AND WILL CARRY A 2 PERCENT INTEREST CHARGE WHEREAS THE GOVERNMENT'S COST FOR THESE FUNDS WILL BE 4 PERCENT. YOU ALSO ENCLOSE A COMPUTATION SHEET SHOWING THAT CHELCO WILL PAY THE UNITED STATES $868,149 AS INTEREST ON THIS LOAN OVER A 35 YEAR PERIOD AND CONTEND THAT THE GOVERNMENT WILL PAY ITS BONDHOLDERS FOR USE OF THIS MONEY APPROXIMATELY TWICE THIS SUM SO THAT THE CERTAIN NET LOSS TO THE GOVERNMENT OVER THE PERIOD OF THE LOAN IS ALMOST $900,000. YOU STATE THAT THE DIFFERENCE ANNUALLY BETWEEN WHAT THE AIR FORCE WOULD PAY GULF POWER FOR ENERGY AND WHAT IT HAS AGREED TO PAY CHELCO IS $39,000 AND THAT THE "COST OF MONEY" LOSS TO THE GOVERNMENT IN EACH OF THE FIRST 5 YEARS OF THE ELECTRIC SERVICE CONTRACT IS $44,500.

GULF POWER'S LETTER FURTHER STATES THAT ALTHOUGH THE TAX COMPONENT OF MATERIALS AND SUPPLIES ORDINARILY PURCHASED BY THE GOVERNMENT WOULD BE DIFFICULT, IF NOT IMPOSSIBLE, TO DETERMINE, SUCH IS NOT THE CASE IN THE PURCHASE OF ELECTRIC SERVICE FROM A REGULATED UTILITY. IT IS ALLEGED THAT THE INCOME TAX COMPONENT OF PAYMENTS TO A REGULATED UTILITY FOR ELECTRIC SERVICE CAN BE READILY AND DEFINITELY DETERMINED. ON THE OTHER HAND, IT IS NOTED THAT NO INCOME TAX PAYMENTS ACCRUE TO THE GOVERNMENT FROM A RURAL ELECTRIC COOPERATIVE. GULF POWER CONTENDS THAT IF IT WERE AWARDED THE CONTRACT THE INCREMENTAL TAX PAYMENT RETURNED TO THE GOVERNMENT IS CONSERVATIVELY CALCULATED TO BE $43,500 PER YEAR.

IN VIEW OF THE ABOVE CONSIDERATIONS, YOU CONTEND THAT BECAUSE THE AIR FORCE DID NOT TAKE INTO ACCOUNT INTEREST AND INCOME TAXES IN EVALUATING THE PROPOSALS, THE AWARD OF THE CONTRACT TO CHELCO DID NOT RESULT "TO THE BEST ADVANTAGE OF THE GOVERNMENT, PRICE AND OTHER FACTORS CONSIDERED" AS PROVIDED IN PARAGRAPH 3-101 OF THE ARMED SERVICES PROCUREMENT REGULATION (ASPR).

IN ADDITION TO THE ABOVE, YOU ALSO CONTEND THAT THE AWARD TO CHELCO IS IMPROPER BECAUSE THE RURAL ELECTRIFICATION ADMINISTRATION ACTED BEYOND THE AUTHORITY GRANTED THAT AGENCY UNDER SECTION 904, TITLE 7, UNITED STATES CODE, IN MAKING THE LOAN, PREVIOUSLY NOTED, TO CHELCO.

IN SUPPORT OF YOUR CONTENTION THAT THE INCOME TAX BENEFITS ACCRUING TO THE GOVERNMENT SHOULD HAVE BEEN CONSIDERED IN EVALUATING THE PROPOSALS, YOU NOTE THAT PARAGRAPH 2-407.5, ASPR, WHICH DEALS WITH THE FORMAL ADVERTISING ENUMERATES CERTAIN "OTHER FACTORS TO BE CONSIDERED" IN EVALUATING BIDS AND AMONG THEM ARE ITEMS OF FEDERAL, STATE, AND LOCAL TAXES. WHILE NONE OF THE PROVISIONS OF SECTION III OF ASPR ENUMERATES TAXES AS A FACTOR TO BE CONSIDERED IN EVALUATING QUOTATIONS OR PROPOSALS IN PROCUREMENTS BY NEGOTIATION, YOU SAY THAT IT IS REASONABLE TO CONCLUDE THAT TAXES ARE JUST AS APPROPRIATE A FACTOR TO CONSIDER IN NEGOTIATION AS IN PROCUREMENT BY FORMAL ADVERTISING SINCE THE EFFECT OF TAXES PAID BY THE PROSPECTIVE CONTRACTOR TO THE GOVERNMENT IS THE SAME IN EITHER CASE. YOUR LETTER GOES ON TO STATE THAT:

IT CAN BE ARGUED CONVINCINGLY THAT WHEN A LARGE LOAD IS ADDED TO AN ALREADY GOING AND EFFICIENTLY OPERATED ELECTRIC UTILITY COMPANY'S SYSTEM, APPROXIMATELY 52 PERCENT OF THE REVENUE FROM THAT LOAD GOES TO FEDERAL INCOME TAXES--- THAT THE RESULT IS MUCH THE SAME AS WHEN TEN ADDITIONAL PASSENGERS BOARD AN ALREADY PROFIT-MAKING BUS. HOWEVER, FOR THE PURPOSE OF THIS SHOWING WE HAVE ELECTED TO PURSUE A MUCH MORE CONSERVATIVE APPROACH.

THE FEDERAL POWER COMMISSION CONSISTENTLY RULES THAT A REGULATED ELECTRIC UTILITY COMPANY IS ENTITLED TO A 6 PERCENT RATE OF RETURN (THERE HAVE BEEN INSTANCES RECENTLY WHERE THE FEDERAL POWER COMMISSION HAS ORDERED INVESTOR -OWNED PRIVATE UTILITY COMPANIES TO INCREASE THEIR RATES WHEN NEGOTIATING NEW CONTRACTS WITH ELECTRIC COOPERATIVES SO THAT THE UTILITY COMPANY WOULD BE GUARANTEED A 6 PERCENT RATE OF RETURN). WHEN RATE OF RETURN DROPS BELOW 6 PERCENT, THE UTILITY COMPANY IS ENTITLED TO ADJUST RATES OVER ITS ENTIRE SYSTEM TO PRODUCE SUCH A RATE OF RETURN FROM THE SYSTEM AS A WHOLE. RATE OF RETURN IS RELATED TO INVESTMENT IN PLANT AND FACILITIES. THEREFORE, WHEN THIS SPADAT LOAD IS ADDED TO GULF POWER COMPANY'S SYSTEM, IT IS INESCAPABLE THAT ADDITIONAL INCOME TAXES RESULT. THE INCOME TAX COMPONENT OF PAYMENTS TO A REGULATED UTILITY FOR ELECTRIC SERVICE CAN BE READILY AND DEFINITELY DETERMINED.

IN ITS REPORT TO US THE AIR FORCE NOTES THAT NO PROVISION IS MADE IN ANY STATUTE REGULATION FOR ELIMINATING THE COMPETITIVE ADVANTAGES THAT COOPERATIVES BORROWING FROM THE RURAL ELECTRIFICATION ADMINISTRATION ARE GIVEN BY STATUTE, NOR ARE THERE ANY PROVISIONS FOR ELIMINATING A TAX ADVANTAGE ONE OFFEROR MAY HAVE OVER ANOTHER. THE AIR FORCE BELIEVES THAT IT WOULD BE IMPRACTICAL TO TRY TO ELIMINATE SUCH ADVANTAGES. IN THIS REGARD THE AIR FORCE STATES THAT TAXES PAID BY PRIVATE COMPANIES ARE DEPENDENT UPON PROFITS AND MAY VARY FROM TIME TO TIME BECAUSE OF NUMEROUS FACTORS. INTEREST PAID BY THE GOVERNMENT ALSO VARIES FROM TIME TO TIME, AND IS DEPENDENT ON THE TYPE OF BORROWING INVOLVED. TO TRY TO ISOLATE THESE FACTORS AND GIVE THEM A NUMERICAL VALUE WOULD BE QUITE DIFFICULT AND WOULD INVOLVE CONSIDERABLE SPECULATION. IN THIS CONNECTION, THE RECORD DISCLOSES THAT AT THE TIME PROPOSALS WERE SUBMITTED GULF POWER SPECIFICALLY POINTED OUT THE INCOME TAX BENEFITS THAT WOULD ACCRUE TO THE GOVERNMENT IF AWARDED THE CONTRACT, WHEREAS CHELCO SPECIFICALLY CALLED ATTENTION TO THE FACT THAT UNDER ITS CAPITAL CREDITS SYSTEM OF OPERATION, RECEIPTS IN EXCESS OF EXPENDITURES ARE RETURNED TO THE CONSUMERS. IT IS STATED THAT CASH RETURNED TO EGLIN AIR FORCE BASE ON EXISTING CHELCO SERVICE CONTRACTS HAS BEEN IN EXCESS OF 12 PERCENT OF THE AMOUNT BILLED. HOWEVER, THE CONTRACTING OFFICER CONCLUDED THAT GULF POWER'S CLAIM WITH RESPECT TO INTEREST AND TAXES, AS WELL AS CHELCO'S POSITION ON RETURNS THROUGH ITS CAPITAL CREDITS SYSTEM, REPRESENTED INTANGIBLE FACTORS NOT SUBJECT TO PROPER EVALUATION. EVALUATION WAS THEREFORE LIMITED TO COMPARISON OF RATE SCHEDULES BASED ON ESTIMATED CONSUMPTION, PLUS A DETERMINATION OF CAPABILITY TO MEET THE REQUIREMENT FOR SERVICE.

WE BELIEVE THAT THE CONTRACTING OFFICER'S EVALUATION OF PROPOSALS WAS PROPER AND THAT THE AWARD TO CHELCO WAS TO THE BEST ADVANTAGE OF THE GOVERNMENT,"PRICE AND OTHER FACTORS CONSIDERED" WITHIN THE MEANING OF SECTION 2305 (C), TITLE 10, UNITED STATES CODE.

PARAGRAPH 2-407.5 (E), ASPR, WHICH DEALS WITH FORMAL ADVERTISING, PROVIDES AS FOLLOWS:

2-407.5 OTHER FACTORS TO BE CONSIDERED. THE FACTORS SET FORTH IN (A) THROUGH (F) BELOW, AMONG OTHERS, MAY BE CONSIDERED IN EVALUATING BIDS.

(E) FEDERAL, STATE, AND LOCAL TAXES (SEE SECTION XI)

SECTION XI DEALS WITH EXCISE TAXES AND THE PROVISIONS CONTAINED THEREIN ARE DESIGNED TO TAKE CARE OF CONTINGENCIES AS TO THE APPLICABILITY OF SUCH TAXES. EXCISE TAXES, AS DISTINGUISHED FROM INCOME TAXES, ARE GENERALLY MEASURED IN TERMS OF A SPECIFIED PERCENTAGE OF THE SALE PRICE OF THE GOODS OR SERVICES SOLD AND ALSO, UNLIKE INCOME TAXES, THEY ARE GENERALLY TAKEN DIRECTLY INTO ACCOUNT BY BIDDERS WHEN CALCULATING THEIR BIDS SO THAT THE PRICE BID WILL USUALLY INCLUDE AN AMOUNT EQUAL TO THE TAX IMPOSED. THE CONSTITUTIONAL UNCERTAINTY OF A GREAT VARIETY OF STATE AND LOCAL TAXING STATUTES AS APPLIED TO GOVERNMENT CONTRACTORS OBVIOUSLY POSES THE LIKELIHOOD OF LARGE CONTINGENCY FACTORS IN THE PRICING OF FIXED-PRICE TYPE CONTRACTS. UNCERTAINTY OF INCREASES IN TAX RATES IN THOSE PROCUREMENTS INVOLVING A LONG PERFORMANCE PERIOD AND UNCERTAINTY AS TO THE IMPOSITION OF NEW TAXES ALSO INCREASES THE TAX-CONTINGENCY FACTOR IN PRICES OFFERED ON GOVERNMENT CONTRACTS. SECTION XI OF ASPR PROVIDES PROCEDURES AND CONTRACT CLAUSES TO BE INCLUDED IN INVITATIONS FOR BIDS AND REQUESTS FOR PROPOSALS WHICH ARE DESIGNED TO MAKE CERTAIN, BY WAY OF PRICE ADJUSTMENTS AND ESCALATION, THAT THE GOVERNMENT WILL NOT BE CHARGED WITH EXCESSIVE TAX CONTINGENCIES AND WILL NOT BE REQUIRED TO ASSUME THE BURDEN OF INAPPLICABLE TAXES. FROM THESE CONSIDERATIONS, IT IS APPARENT THAT THE FEDERAL, STATE AND LOCAL TAXES ENUMERATED IN ASPR 2-407.5 AS "OTHER FACTORS TO BE CONSIDERED" WERE NOT MEANT TO EMBRACE INCOME TAXES WHICH ARE NOT USUALLY TAKEN DIRECTLY INTO ACCOUNT BY BIDDERS AS A PRICE COMPONENT IN COMPUTING THEIR BIDS.

WHILE WE RECOGNIZE, AS DOES THE DEPARTMENT OF THE AIR FORCE, THE COMPETITIVE PROBLEM THAT GULF POWER HAS WITH RESPECT TO COMPETITION WITH COOPERATIVES LIKE CHELCO, WE MUST ALSO RECOGNIZE THAT THE COMPETITIVE ADVANTAGES ENJOYED BY SUCH COOPERATIVES ARE THE RESULT OF TAX AND LOAN ASSISTANCE LEGISLATION ENACTED BY THE CONGRESS. WE ARE AWARE OF NO STATUTE OR REGULATION WHICH PROVIDES FOR CONSIDERATION OF POSSIBLE INCOME TAX BENEFITS OR INTEREST COSTS TO THE GOVERNMENT AS FACTORS IN SELECTING A CONTRACTOR FOR AWARD. IF SUCH FACTORS WERE TO BE INTRODUCED INTO THE EVALUATION PROCESS, IT WOULD RESULT, IN THE VAST MAJORITY OF CASES, IN CONFUSION AND UNCERTAINTY AND WOULD PLACE AN UNBEARABLE, IF NOT IMPOSSIBLE, ADMINISTRATIVE BURDEN ON PROCUREMENT OFFICIALS. IN THAT CONNECTION, WE EXPRESSLY HELD IN B-137093, MAY 8, 1959, INVOLVING A NEGOTIATED CONTRACT, THAT INCOME TAXES TO BE PAID BY A DOMESTIC FIRM IF AWARDED A CONTRACT FOR CONSTRUCTION OF A DAM IN TAIWAN COULD NOT PROPERLY BE TAKEN INTO ACCOUNT IN EVALUATION OF PROPOSALS. (THE SUCCESSFUL CONTRACTOR WAS A PANAMANIAN FIRM NOT SUBJECT TO UNITED STATES INCOME TAXES.) WE NOTED THAT SINCE TAXES PAID TO THE GOVERNMENT MUST BE BASED ON THE TOTAL OF THE FIRM'S OPERATIONS FOR THE YEAR (AND IN SOME CASES FOR A LONGER PERIOD), IT WAS DIFFICULT TO SEE HOW SUCH A FACTOR COULD BE REDUCED TO A SUFFICIENTLY DEFINITE FORM AT THE TIME OF AWARD TO PERMIT ITS CONSIDERATION IN EVALUATING BIDS OR CONTRACT PROPOSALS. SEE ALSO 35 COMP. GEN. 282 WHERE THE SAME RESULT WAS REACHED WITH RESPECT TO INTEREST CHARGES INCIDENT TO PROGRESS PAYMENTS. THE PROTESTING BIDDER CONTENDED THAT PROGRESS PAYMENTS ELECTED TO BE RECEIVED BY THE SUCCESSFUL BIDDER WOULD CAUSE MORE ADMINISTRATIVE WORK THAN ONE FINAL PAYMENT UPON COMPLETION AND THAT UNDER A PROGRESS-PAYMENT PROVISION THE GOVERNMENT WOULD INCUR ADDITIONAL COST BY WAY OF INTEREST AS A RESULT OF BEING REQUIRED TO PAY A SUM OF MONEY SOONER THAN IT WOULD OTHERWISE BE REQUIRED TO PAY. THE PROTESTANT FURTHER CONTENDED THAT THE ADDITIONAL INTEREST WAS CAPABLE OF COMPUTATION, SINCE IT COULD BE DETERMINED WITH REASONABLE CERTAINTY THE TIME WHEN THE GOVERNMENT WOULD BE REQUIRED TO MAKE THE PROGRESS PAYMENTS; THAT THE INTEREST ON SUCH PAYMENTS, AT THE RATE OF INTEREST THAT THE GOVERNMENT PAYS ON BORROWED MONEY, WOULD FAR EXCEED THE DIFFERENCE BETWEEN ITS BID AND THE SUCCESSFUL BID; AND THAT THE GOVERNMENT WAS REQUIRED--- AS YOU CONTEND IN THE CASE BEFORE US--- TO TAKE SUCH COST INTO CONSIDERATION EVALUATING BIDS UNDER THE PHRASE "OTHER FACTORS" CONTAINED IN THE INVITATION. IN REJECTING THESE CONTENTIONS WE STATED:

IT IS OUR OPINION THAT, IN THE ABSENCE OF EXPRESS PROVISIONS AND SPECIFIC CRITERIA SET FORTH IN THE APPLICABLE INVITATION OR REGULATIONS, THE COST OF ADDITIONAL ADMINISTRATIVE EXPENSE AND INTEREST WHICH MIGHT BE INVOLVED IN MAKING PROGRESS PAYMENTS AS AGAINST A LUMP-SUM PAYMENT UPON FINAL DELIVERY, IS TOO INDEFINITE AND SPECULATIVE TO BE MADE AN EVALUATION FACTOR AND THAT FOR THE ADMINISTRATIVE OFFICE, IN THIS INSTANCE, TO HAVE EVALUATED THE BIDS ON THE BASIS OF THE BIDDER'S ELECTION TO TAKE PROGRESS PAYMENTS WOULD NOT HAVE BEEN JUSTIFIED. AS WE HELD IN 33 COMP. GEN. 108 WITH REGARD TO THE ELEMENT OF PROSPECTIVE DEPRECIATION ON AUTOMOTIVE EQUIPMENT, TO INTRODUCE SUCH INDEFINITE AND SPECULATIVE FACTORS INTO BID EVALUATIONS "WOULD EVENTUALLY LEAD TO ALL KINDS OF CONFUSION AND UNCERTAINTIES IN THE ADMINISTRATION OF THE ADVERTISING FOR BIDS STATUTES AND IS NOT CONTEMPLATED OR AUTHORIZED UNDER THE LAW.'

WHILE WE REALIZE THAT 35 COMP. GEN. 282 INVOLVED A PROCUREMENT ACCOMPLISHED BY THE FORMAL ADVERTISING PROCEDURES, WE PERCEIVE NO REASON WHY THE RATIONALE THERE SET FORTH IS NOT EQUALLY APPLICABLE TO PROCUREMENT BY NEGOTIATION, SINCE THE NEED FOR DEFINITENESS AND CERTAINTY IN THE EVALUATION PROCESS IS JUST AS GREAT IN THE LATTER TYPE OF PROCUREMENT AS IN THE FORMER.

MOREOVER, EVEN IF WE WERE TO ASSUME, FOR THE SAKE OF ARGUMENT, THAT INCOME TAX BENEFITS AND INTEREST COSTS TO THE GOVERNMENT CAN BE ASCERTAINED IN ADVANCE OF AWARD WITH THE PRECISION AND CERTAINTY REQUIRED BY THE EVALUATION PROCESS, WHICH YOU CONTEND CAN BE DONE AND THE AIR FORCE DENIES, WE DO NOT THINK THAT GOVERNMENT PROCUREMENT PROCEDURE IS THE PROPER VEHICLE BY WHICH TO EQUALIZE A COMPETITIVE SITUATION CREATED BY LEGISLATION UNRELATED TO PROCUREMENT LAW. THERE IS NO LEGAL BASIS EITHER FOR DENYING AN AWARD TO A COOPERATIVE LIKE CHELCO, OR FOR TAKING INTO CONSIDERATION IN THE EVALUATION OF OFFERS FACTORS NOT NORMALLY CONSIDERED, SIMPLY BECAUSE OF FINANCIAL ADVANTAGES GRANTED TO A PARTICULAR TYPE OF BUSINESS ENTITY BY THE CONGRESS. THERE ARE MANY EXISTING UNEQUAL COMPETITIVE SITUATIONS OF WHICH THE PROCUREMENT LAWS TAKE NO NOTICE. FOR EXAMPLE, PROCUREMENT PROCEDURES DO NOT ATTEMPT TO EQUALIZE THE NATURAL COMPETITIVE ADVANTAGE ENJOYED BY A CONCERN WITH RESPECT TO LOWER TRANSPORTATION COSTS RESULTING FROM CLOSE PROXIMITY OF A PLANT TO THE REQUIRED DELIVERY POINT OF THE GOODS BEING PURCHASED BY THE GOVERNMENT. NOR DO THESE PROCEDURES ATTEMPT TO EQUALIZE POSSIBLE FINANCIAL DISADVANTAGES WITH RESPECT TO INCOME TAX RATES AND TAX TREATMENT UNDERWHICH PRIVATE INDIVIDUALS DOING BUSINESS WITH THE GOVERNMENT MUST OPERATE AS OPPOSED TO THE RATES AND TREATMENT UNDER WHICH CORPORATIONS OPERATE. SUCH EXAMPLES MAY BE MULTIPLIED. IF THESE FACTORS, AND FACTORS OF LIKE NATURE, WERE TO BE GIVEN WEIGHT IN THE BID EVALUATION PROCESS SO AS TO EQUALIZE THE COMPETITIVE POSITION OF BIDDERS, THAT PROCESS WOULD BE FRAUGHT WITH SPECULATION, CONFUSION AND SUSPICION. WE BELIEVE THAT IF INDIRECT BENEFITS TO THE GOVERNMENT, WHICH IN MOST CASES ARE INCAPABLE OF ADVANCE AND ACCURATE MEASUREMENT, ARE TO BE INTRODUCED INTO THE EVALUATION PROCESS THAT RESULT SHOULD BE ACCOMPLISHED BY LEGISLATION.

AS TO WHETHER THE RURAL ELECTRIFICATION ADMINISTRATION (REA) IN MAKING A LOAN TO CHELCO, ACTED BEYOND THE AUTHORITY GRANTED IT BY SECTION 4 OF THE RURAL ELECTRIFICATION ACT OF 1936, AS AMENDED (RE ACT), 7 U.S.C. 904, THIS SECTION PROVIDES, IN PERTINENT PART, AS FOLLOWS:

THE ADMINISTRATOR IS AUTHORIZED AND EMPOWERED, FROM THE SUMS HEREINBEFORE AUTHORIZED, TO MAKE LOANS FOR RURAL ELECTRIFICATION TO PERSONS, CORPORATIONS, STATES, TERRITORIES, AND SUBDIVISIONS AND AGENCIES THEREOF, MUNICIPALITIES, PEOPLES' UTILITY DISTRICTS AND COOPERATIVE, NONPROFIT, OR LIMITED-DIVIDEND ASSOCIATIONS, ORGANIZED UNDER THE LAWS OF ANY STATE OR TERRITORY OF THE UNITED STATES, FOR THE PURPOSE OF FINANCING THE CONSTRUCTION AND OPERATION OF GENERATING PLANTS, ELECTRIC TRANSMISSION AND DISTRIBUTION LINES OR SYSTEMS FOR THE FURNISHING OF ELECTRIC ENERGY TO PERSONS IN RURAL AREAS WHO ARE NOT RECEIVING CENTRAL STATION SERVICE. * *

YOU CONTEND IN EFFECT, THAT THE LOAN IN QUESTION IS IN VIOLATION OF THE "CENTRAL STATION SERVICE" LIMITATION IN SECTION 4 BECAUSE (1) EGLIN AIR FORCE BASE IS RECEIVING "CENTRAL STATION SERVICE" FROM GULF POWER AND (2) THE LOAN IS TO FINANCE FACILITIES WHICH WILL BE IN COMPETITION WITH, OR DUPLICATE THE FACILITIES, OF GULF POWER. YOUR LETTER CONTAINS A NUMBER OF EXCERPTS FROM THE LEGISLATIVE HISTORY OF THE RE ACT IN SUPPORT OF THE PROPOSITION THAT THE "CENTRAL STATION SERVICE" LIMITATION IS DESIGNED TO PREVENT DUPLICATION OF FACILITIES AND COMPETITION WITH PRIVATE UTILITY COMPANIES.

THE RECORD DISCLOSES THAT THE SPADAT RADAR SITE IN QUESTION IS TO BE LOCATED ON RANGE 63, EGLIN AIR FORCE BASE; THAT RANGE 63 HAS NO ELECTRIC DISTRIBUTION FACILITIES AND IS APPROXIMATELY 4 MILES FROM THE RESERVATION 12 KV. DISTRIBUTION SYSTEM; AND THAT DURING THE YEARS 1957 61 CHELCO SERVED FACILITIES ON THIS RANGE BUT UPON DEACTIVATION OF THE RANGE AND CONTRACT TERMINATION DISTRIBUTION FACILITIES WERE REMOVED. THE RECORD FURTHER DISCLOSES THAT CHELCO HAS SERVED THE EASTERN PART OF EGLIN AIR FORCE BASE (THE SPADAT AREA) FOR 20 YEARS AND THAT THE NEAREST 115 KV. GULF POWER LINES ARE ABOUT 15 MILES FROM THE SPADAT AREA. THE RECORD ALSO DISCLOSES THAT CHELCO'S EXISTING 44 KV. SUBTRANSMISSION SYSTEM IS INCAPABLE OF HANDLING THE ADDITIONAL 7,500 KV-A. CAPACITY REQUIRED BY THE AIR FORCE FOR THE SPADAT SITE; AND THAT GULF POWER REFUSED TO NEGOTIATE OR FURNISH CHELCO AN ADDITIONAL SUPPLY OF POWER TO SERVE THE SPADAT LOAD.

IT IS CLEAR FROM THE FOREGOING THAT ALTHOUGH BOTH CHELCO AND GULF POWER SERVE CERTAIN AREAS OF EGLIN AIR FORCE BASE, NEITHER IS NOW SERVING THE AREA KNOWN AS RANGE 63, THE SPADAT RADAR SITE, THAT SUCH SITE HAS NO ELECTRIC DISTRIBUTION FACILITIES AND APPARENTLY IS APPROXIMATELY 4 MILES FROM THE NEAREST DISTRIBUTION FACILITIES AND THAT THESE FACILITIES ARE OWNED BY CHELCO. IT IS ALSO CLEAR FROM THE FACTS SET FORTH ABOVE THAT GULF POWER WOULD HAVE TO EXTEND ITS LINE APPROXIMATELY 15 MILES TO SERVE THE SPADAT RADAR SITE. THEREFORE, IT WOULD NOT BE UNREASONABLE TO CONCLUDE THAT RANGE 63 OF EGLIN AIR FORCE BASE IS NOT RECEIVING CENTRAL STATION SERVICE.

IN VIEW OF THE FOREGOING, WE WOULD NOT HOLD THAT THE USE OF REA LOAN FUNDS FOR THE PURPOSE OF SERVING THE SPADAT RADAR SITE ON RANGE 63, EGLIN AIR FORCE BASE, WOULD VIOLATE THE "CENTRAL STATION SERVICE" LIMITATION PROVISIONS OF THE RURAL ELECTRIFICATION ACT OF 1936, AS AMENDED.