B-159559, JUN. 19, 1967

B-159559: Jun 19, 1967

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THAT THE APPROPRIATIONS OF THE ARMED SERVICES FOR OPERATION AND MAINTENANCE WERE NOT AVAILABLE TO AMORTIZE THE COST OF A POWER PLANT NEEDED TO MEET THE ANTICIPATED INCREASED POWER REQUIREMENTS OF THE LOCAL RYUKYUAN ECONOMY AND THE ARMED SERVICES. IN OTHER WORDS WE HELD THAT THE ARMED SERVICES' FISCAL YEAR APPROPRIATIONS FOR OPERATION AND MAINTENANCE WERE NOT AVAILABLE FOR UTILITY SERVICES BEYOND THE NEEDS OF THE ARMED SERVICES. IT IS ANTICIPATED THAT REPC WILL CONTRIBUTE TO THE PROJECT FROM ITS PRESENT RESOURCES THE NECESSARY REAL ESTATE. COMMUNICATIONS WITH ENTREPRENEURS INDICATE THAT THOSE WHO ARE INTERESTED IN THE PROJECT AT ALL WOULD INSIST ON RECOVERING THEIR COST THROUGH INSTALLMENT PAYMENTS OVER NOT MORE THAN TEN YEARS.

B-159559, JUN. 19, 1967

TO THE SECRETARY OF THE ARMY:

LETTER DATED MAY 29, 1967, AND ENCLOSURES, FROM THE UNDER SECRETARY OF THE ARMY, REFERS TO OUR DECISION OF JULY 29, 1966, B-159559, TO YOU, CONCERNING THE CONTEMPLATED INCREASE OF ELECTRIC POWER GENERATING CAPACITY ON OKINAWA.

IN OUR DECISION OF JULY 29, WE HELD, IN EFFECT, THAT THE APPROPRIATIONS OF THE ARMED SERVICES FOR OPERATION AND MAINTENANCE WERE NOT AVAILABLE TO AMORTIZE THE COST OF A POWER PLANT NEEDED TO MEET THE ANTICIPATED INCREASED POWER REQUIREMENTS OF THE LOCAL RYUKYUAN ECONOMY AND THE ARMED SERVICES. IN OTHER WORDS WE HELD THAT THE ARMED SERVICES' FISCAL YEAR APPROPRIATIONS FOR OPERATION AND MAINTENANCE WERE NOT AVAILABLE FOR UTILITY SERVICES BEYOND THE NEEDS OF THE ARMED SERVICES.

ON THE BASIS OF THE PRINCIPLES ENUNCIATED IN OUR OPINION OF JULY 29, 1966, THE DEPARTMENT OF THE ARMY PLANS TO SUGGEST THAT THE RYUKYU ELECTRIC POWER CORPORATION (REPC) CONTRACT WITH A PRIVATE ENTREPRENEUR FOR THE CONSTRUCTION OF A STEAM TURBINE PLANT WITH A CAPACITY OF 160 MEGAWATTS (MW), TO BE PLACED IN SERVICE IN 1970-71. IT IS ANTICIPATED THAT REPC WILL CONTRIBUTE TO THE PROJECT FROM ITS PRESENT RESOURCES THE NECESSARY REAL ESTATE, ENGINEERING DESIGNS, CONSTRUCTION OF TRANSMISSION LINES, AND A CASH DOWN PAYMENT TO THE PRIVATE ENTREPRENEUR. THE REMAINDER OF THE COST OF THE PLANT WOULD BE PAID BY REPC TO THE ENTREPRENEUR ON AN INSTALLMENT BASIS.

COMMUNICATIONS WITH ENTREPRENEURS INDICATE THAT THOSE WHO ARE INTERESTED IN THE PROJECT AT ALL WOULD INSIST ON RECOVERING THEIR COST THROUGH INSTALLMENT PAYMENTS OVER NOT MORE THAN TEN YEARS. THERE ARE ALSO INDICATIONS THAT SOME OF THE ENTREPRENEURS WOULD REQUIRE FURTHER SECURITY IN THE FORM OF POWER PURCHASE CONTRACT BETWEEN REPC AND THE ARMED SERVICES, PERHAPS CONTAINING A CLAUSE THE EFFECT OF WHICH WOULD BE TO CREATE A CONTINGENT LIABILITY IN THE ARMED SERVICES FOR AT LEAST PART OF THE FUNDS NECESSARY TO MEET REPC INSTALLMENT OBLIGATIONS ON THE NEW PLANT.

IN CONNECTION WITH THIS PROPOSED POWER PURCHASE CONTRACT BETWEEN REPC AND THE ARMED SERVICES, ON THE BASIS OF OUR OPINION OF JULY 29, 1966, IT IS YOUR DEPARTMENT'S UNDERSTANDING THAT THE FOLLOWING FEATURES WOULD BE LEGALLY PERMISSIBLE.

"A. THE CONTRACT MAY BE FOR REQUIREMENTS OVER A TEN YEAR PERIOD.

"B. THE RATES UNDER THE CONTRACT MAY REFLECT THE FACT THAT REPC WILL DISCHARGE ITS DEBT INCURRED IN CONNECTION WITH THE NEW PLANT OVER NOT MORE THAN TEN YEARS, PROVIDED THAT MILITARY CONSUMERS ARE AT NO TIME REQUIRED TO PAY HIGHER RATES THAN THOSE CHARGED COMPARABLE CLASSES OF CIVILIAN CONSUMERS.

"C. THE CONTRACT MAY GRANT TO THE ARMED SERVICES AN OPTION TO RENEW THE CONTRACT FOR AN ADDITIONAL TERM NOT TO EXCEED TEN YEARS FROM THE DATE OF RENEWAL. THE CONTRACT MAY NOT, HOWEVER, CONTAIN A PROVISION REQUIRING EXTENSION BEYOND THE ORIGINAL TEN-YEAR TERM.

"D. THE CONTRACT MAY CONTAIN A PROVISION (IN THE FORM OF EITHER A MINIMUM PURCHASE CLAUSE OR A CONTINGENCY CANCELLATION CLAUSE) WHEREBY THE ARMED SERVICES GUARANTEE TO PAY TO REPC STATED ANNUAL AMOUNTS, THE TOTAL OF WHICH WILL NOT EXCEED THAT PROPORTION OF THE COST OF THE NEW FACILITIES WHICH IS ALLOCABLE TO THE PREDICATED NEEDS OF THE ARMED SERVICES.

"E. FOR PURPOSES OF DETERMINING THE MAXIMUM ALLOWABLE GUARANTEE, THE COST OF THE NEW FACILITIES INCLUDES BOTH THE ORIGINAL CONTRIBUTION BY REPC AND THE TOTAL OF ITS INSTALLMENT OBLIGATIONS.

"F. FOR PURPOSES OF DETERMINING THE MAXIMUM ALLOWABLE GUARANTEE, THE PROPORTION OF THE NEW FACILITIES ALLOCABLE TO THE NEEDS OF THE ARMED SERVICES MAY BE CONSIDERED TO BE THE PROPORTION OF THE TOTAL ANTICIPATED POWER DEMAND ON THE INTEGRATED REPC SYSTEM THAT IS EXPECTED (AT THE TIME OF EXECUTING THE CONTRACT) TO BE GENERATED BY THE REQUIREMENTS OF THE ARMED SERVICES. IT IS PRESENTLY ESTIMATED THAT FOR THE CONTRACT PERIOD THIS PROPORTION WOULD BE IN THE AREA OF 65 PERCENT.

"G. IN THE EVENT A GUARANTEE PROVISION IS INCLUDED IN THE PROPOSED POWER CONTRACT BETWEEN THE ARMED SERVICES AND REPC, THE DEPARTMENT OF THE ARMY WILL ASSURE THAT, IN THE EVENT THAT THE ARMED SERVICES' POWER CONSUMPTION IN ANY YEAR RISES TO AN AMOUNT GREATER THAN THE AMOUNT PROJECTED AT THE TIME THE CONTRACT IS NEGOTIATED, WITH THE EFFECT OF INCREASING REPC'S NET INCOME TO A LEVEL IN EXCESS OF THAT ANTICIPATED AT THE TIME THE CONTRACT IS NEGOTIATED, A FAIR PROPORTION OF THAT EXCESS NET INCOME WILL BE APPLIED TO REDUCE THE ARMED SERVICES' GUARANTEE OBLIGATION, IF ANY, FOR SUCCEEDING YEARS OF THE CONTRACT.'

IF YOUR DEPARTMENT'S UNDERSTANDING IS CORRECT THAT THE FOREGOING WOULD BE LEGALLY PERMISSIBLE ELEMENTS IN A CONTRACTUAL ARRANGEMENT BETWEEN THE ARMED SERVICES AND REPC, OUR CONFIRMATION TO THAT EFFECT IS REQUESTED.

SECTION 201 OF THE FEDERAL PROPERTY ACT OF 1949, AS AMENDED, 40 U.S.C. 481, PROVIDES IN SUBSECTION (A) (3) " THAT CONTRACTS FOR PUBLIC UTILITY SERVICES MAY BE MADE FOR PERIODS NOT EXCEEDING TEN YEARS * * *.' UNDERSTAND THAT BY DELEGATIONS OF AUTHORITY THE SERVICE SECRETARIES MAY AVAIL THEMSELVES OF THE STATUTORY POWER GRANTED WITH RESPECT TO PUBLIC UTILITY SERVICE CONTRACTS. WE ALSO UNDERSTAND THAT PURSUANT TO THE FOREGOING AUTHORITY THE DEPARTMENT OF THE ARMY HAS BEEN ENTERING INTO FIRM TERM CONTRACTS NOT EXCEEDING TEN YEARS WHERE--- AS FAR AS PERTINENT HERE-- - THE UTILITY REFUSES TO RENDER THE DESIRED SERVICE EXCEPT UNDER A CONTRACT THE FIRM TERM OF WHICH EXTENDS BEYOND A CURRENT FISCAL YEAR.

IN 37 COMP. GEN. 155, WE STATED THAT (PAGES 159-160):

"THE SITUATION NOT INFREQUENTLY ARISES IN THE CASE OF REQUIREMENTS FOR WATER, GAS, ELECTRICITY, OR OTHER UTILITIES THAT THERE IS ONLY ONE REASONABLE SOURCE OF SUPPLY AND THE FURNISHING OF THE SERVICE NEEDED REQUIRES THE CONSTRUCTION OF A NEW LINE TO THE GOVERNMENT PROJECT. THIS APPEARS TO HAVE BEEN THE SITUATION INVOLVED IN THE CASE OF THE EAST TENNESSEE NATURAL GAS COMPANY CONTRACT MENTIONED IN YOUR LETTER. UNDER SUCH CIRCUMSTANCES, AND WHERE THE CONTRACTOR IS UNWILLING TO BUILD THE REQUIRED NEW LINE AT ITS OWN EXPENSE WITHOUT ASSURANCES THAT IT WILL BE ABLE TO RECOVER THE CAPITAL COST INVOLVED, WE HAVE APPROVED ARRANGEMENTS SIMILAR TO THOSE IN THE CONTRACT PROPOSED IN THE PRESENT CASE. SEE, FOR EXAMPLE, 8 COMP. GEN. 655. IN SUCH CASES, THE ALTERNATIVES OPEN TO THE GOVERNMENT ASIDE FROM CONSTRUCTION AND OWNERSHIP OF THE NEW FACILITY BY THE GOVERNMENT OFTEN ARE (1) PAYMENT TO THE CONTRACTOR OF THE COST THEREOF AT THE BEGINNING OF THE CONTRACT, WITH OR WITHOUT REBATES FROM SUBSEQUENT BILLS FOR SERVICES, OR (2) CONTRACT PROVISIONS FOR CANCELLATION CHARGES CONTINGENT UPON FAILURE TO RENEW THE CONTRACT FROM YEAR TO YEAR. WHERE ONLY THESE ALTERNATIVES ARE AVAILABLE TO THE GOVERNMENT, THE COURSE MOST ADVANTAGEOUS TO THE GOVERNMENT ORDINARILY SHOULD BE CHOSEN, * * *.' SEE ALSO 16 COMP. GEN. 136, AND 17 COMP. GEN. 126.

IN VIEW OF THE AUTHORITY CONTAINED IN SECTION 201 OF THE FEDERAL PROPERTY AND ADMINISTRATIVE SERVICES ACT OF 1949, AS AMENDED, AND THE DECISIONS OF OUR OFFICE CITED ABOVE, THERE WOULD BE NO LEGAL OBJECTION TO THE FEATURES (ITEMS "A" THROUGH "G") PROPOSED BY THE UNDER SECRETARY IN HIS LETTER AND SET FORTH ABOVE. WITH RESPECT TO ITEM "G," HOWEVER, WE ASSUME THAT THERE WILL BE NO CHANGES IN EITHER RETIREMENTS OR ADDITIONS TO THE PLANTS (OTHER THAN THE PROPOSED NEW PLANT) WHICH WOULD AFFECT NET INCOME.

WHILE AS HERETOFORE INDICATED, THE FEATURES OR ELEMENTS SET FORTH ABOVE, WOULD BE LEGALLY PERMISSIBLE IN A CONTRACTUAL ARRANGEMENT BETWEEN THE ARMED SERVICES AND REPC, WE EXPRESS NO OPINION AS TO THE MERITS OF THE PROPOSED METHOD OF OBTAINING THE POWER NECESSARY TO MEET THE NEEDS OF THE ARMED SERVICES IN THE RYUKYU ISLANDS. IN OTHER WORDS WE HAVE NOT ATTEMPTED TO EVALUATE THE RELATIVE MERITS, FROM EITHER A MANAGEMENT OR COST STANDPOINT, OF THE INSTANT PROPOSAL AS OPPOSED TO SOME OTHER METHOD OF FINANCING.