B-151628, SEP. 16, 1963

B-151628, SEP. 16, 1963

TO FLORIDA POWER CORPORATION:

REFERENCE IS MADE TO YOUR LETTER OF MAY 21, 1963, AND ENCLOSURES, PROTESTING AGAINST THE PROPOSED AWARD OF A CONTRACT TO THE CITY OF GAINESVILLE, FLORIDA, FOR THE FURNISHING OF ELECTRIC POWER TO THE VETERANS ADMINISTRATION HOSPITAL LOCATED IN GAINESVILLE.

YOU STATE THAT DURING THE COURSE OF YOUR COMPANY'S SUBMISSION OF BIDS FOR THIS PROJECT, YOU WERE TOLD BY THE VETERANS ADMINISTRATION THAT IN EVALUATING THE BIDS OF YOUR COMPANY AND THE CITY OF GAINESVILLE FOR AN AWARD OF THE CONTRACT, THE OVER-ALL GOVERNMENT POLICY IS NOT TO CONSIDER INCOME TAX PAYMENTS IN EVALUATING PROCUREMENT COSTS. YOUR LETTER GOES ON TO STATE THAT:

"WE WISH TO POINT OUT TO YOU IN PARTICULAR THE FACT THAT, IN THE VETERANS ADMINISTRATION EVALUATION, THEY GIVE CREDIT AND ALLOWANCE TO THE CITY OF GAINESVILLE FOR FURNISHING SEWER, WATER, FIRE ALARM CONNECTIONS AND PARKING LIGHTS. THIS TYPE OF SERVICE THE CITY, OF COURSE, UNDER LAW, MUST EXTEND TO ALL CITIZENS AND ENTITIES WITHIN THE CITY AND, THEREFORE, AS A MATTER OF FACT, IT IS NO "ADDITIONAL" BENEFIT TO THE FEDERAL GOVERNMENT BUT WHAT THE FEDERAL GOVERNMENT WOULD RECEIVE IF THE CONTRACT WERE AWARDED TO OUR COMPANY.

"THEN PLEASE NOTE THAT, AT THE END OF THEIR EVALUATION, THEY GIVE NO CONSIDERATION TO THE FEDERAL INCOME TAXES WHICH WOULD BE PAID BY OUR COMPANY UPON THE REVENUE TO BE RECEIVED FROM THE HOSPITAL.

"OUR COMPANY'S FEDERAL INCOME TAX HAS AVERAGED 17.19 PERCENT ON GROSS REVENUE DURING THE PAST FIVE YEARS. THIS PERCENTAGE APPLIED TO THE COMPUTED ANNUAL ELECTRIC SERVICE BILL OF $182,673.37 * * * RESULTS IN A FIGURE OF $31,383.28. THE NET ANNUAL COST OF SERVICE FROM OUR COMPANY WOULD THEREFORE BE $151,290.09 AS AGAINST A COST OF $170,350.72 FROM THE CITY OF GAINESVILLE.

"IT IS OUR FIRM BELIEF THAT, IN FACT AND UPON BASIC MORAL PRINCIPLES, THERE SHOULD AND COULD BE NO SUCH GOVERNMENT POLICY OF NOT GIVING CONSIDERATION TO INCOME TAX PAYMENTS IN EVALUATING PROCUREMENT COSTS. IS UPON THIS BASIS THAT WE ARE BRINGING THIS MATTER TO YOUR ATTENTION AND BY THIS LETTER REQUESTING YOU TO MAKE AN APPROPRIATE INVESTIGATION INTO THIS MATTER.'

THE RECORD BEFORE OUR OFFICE INDICATES THAT NEGOTIATIONS FOR THE SUBJECT CONTRACT WITH BOTH THE CITY AND YOUR COMPANY FIRST BEGAN IN NOVEMBER 1961. SINCE THAT TIME NUMEROUS PROPOSALS HAVE BEEN SUBMITTED ON VARIOUS BASES BY BOTH YOUR COMPANY AND THE CITY BUT FOR OUR PURPOSES WE NEED NOT DETAIL HERE THE LONG HISTORY OF THESE NEGOTIATIONS. THE VETERANS ADMINISTRATION (VA) REPORTS THAT ITS OBJECTIVE WAS TO OBTAIN POWER FOR THE PROJECT ON A BASIS WHICH WOULD BE MOST ADVANTAGEOUS TO THE GOVERNMENT BUT EACH TIME IT ATTEMPTED TO CLOSE NEGOTIATIONS, A NEW PROPOSAL WAS SUBMITTED BY THE OTHER SUPPLIER. THIS RESULTED IN THE MATTER BEING KEPT OPEN LONG BEYOND THE DATE WHEN IT SHOULD HAVE BEEN CLOSED. IT IS FURTHER REPORTED THAT ON APRIL 26, 1963, IN ORDER TO RESOLVE THE PROBLEM EXPEDITIOUSLY AND IN FAIRNESS TO ALL, THE VA REQUESTED SEALED PROPOSALS FROM THE CITY AND YOUR COMPANY. THESE PROPOSALS WERE RECEIVED ON MAY 14, 1963.

THE FOLLOWING PROVISIONS, AMONG OTHERS, WERE SET FORTH IN THE REQUEST FOR PROPOSALS:

"YOUR PROPOSAL MAY BE ON THE BASIS OF SUPPLYING POWER AT EITHER PRIMARY OR SECONDARY VOLTAGE. IF YOU ELECT TO SUPPLY PRIMARY POWER, YOUR PROPOSAL SHOULD INDICATE THE VOLTAGE YOU INTEND TO FURNISH. IF YOU ELECT TO SUPPLY SECONDARY POWER, IT SHOULD BE DELIVERED AT A UTILIZATION VOLTAGE OF 266/460 VOLTS. YOU SHOULD ALSO PROVIDE VOLTAGE REGULATION AS FOLLOWS: FLUCTUATION OF SECONDARY VOLTAGE NOT TO EXCEED THREE (3) PERCENT PLUS OR MINUS; AND FLUCTUATION OF PRIMARY VOLTAGE NOT TO EXCEED TEN (10) PERCENT PLUS OR MINUS.

"PROVIDED THE PROPOSAL MADE HEREIN IS ACCEPTED AND A CONTRACT AWARDED THEREFOR, THE FOLLOWING EQUIPMENT AND/OR SERVICES WILL BE PROVIDED AT NO COST TO THE GOVERNMENT:

"/ITEMIZE ALL SERVICES AND ALL MAJOR EQUIPMENT, AND INDICATE LOCATION OF EQUIPMENT. INCLUDE A SKETCH, BY A ONE-LINE DIAGRAM, SHOWING COMPLETE ELECTRICAL SCHEME FOR SERVICING THE HOSPITAL.)

"YOUR PROPOSAL SHOULD BE COMPLETE IN ALL RESPECTS, INCLUDING A STATEMENT OF ANY SPECIAL SERVICES, EQUIPMENT, FACILITIES, AND/OR CONDITIONS WHICH SHOULD BE GIVEN CONSIDERATION IN ITS EVALUATION. * * *"

IN A LETTER TO OUR OFFICE DATED JUNE 12, 1963, THE VA REPORTS THAT THE CITY OF GAINESVILLE OFFERED TO FURNISH WITHOUT CHARGE TO THE GOVERNMENT, THE NECESSARY SEWER, WATER AND FIRE ALARM CONNECTIONS; TO FURNISH, INSTALL AND MAINTAIN STREET LIGHTING ON ARCHER ROAD ALONG THE FRONT OF ITS PROPERTY; AND TO INSTALL A TRAFFIC SIGNAL AT THE MAIN ENTRANCE. THE VA STATES THAT SINCE THEY WOULD NORMALLY EXPECT TO REIMBURSE THE CITY FOR THE SEWER, WATER AND FIRE ALARM CONNECTIONS, THE ESTIMATED COST OF THESE ($116,900) WAS INCLUDED IN EVALUATION OF THE CITY'S PROPOSAL BUT THE COST OF THE OTHER ITEMS WHICH WERE OFF THE GOVERNMENT'S PROPERTY WERE NOT INCLUDED. IT IS ALSO STATED THAT THE CITY OFFERED TO PROVIDE APPROXIMATELY $25,000 WORTH OF ELECTRICAL EQUIPMENT.

WITH REGARD TO YOUR PROPOSAL THE VA REPORTS THAT YOU OFFERED TO FURNISH AND MAINTAIN A COMPLETE TRANSFORMER STATION AND TO INSTALL DUCTS WHICH THE GOVERNMENT WOULD OTHERWISE HAVE TO PROVIDE, ALL AT NO EXPENSE TO THE GOVERNMENT. THE VA ESTIMATES THE COST OF THESE ITEMS AS $147,500. YOU ALSO OFFERED TO METER THE POWER ON THE SECONDARY SIDE AND TO ABSORB THE TRANSFORMER LOSSES WHICH WOULD AMOUNT TO OVER $4,000 A YEAR.

IT IS FURTHER REPORTED THAT THE CITY OF GAINESVILLE OFFERED A FLAT 10 PERCENT DISCOUNT ON THE CHARGES GIVEN IN ITS "LARGE POWER ELECTRIC RATE SCHEDULE RATE H" WHEREAS YOUR PROPOSAL WOULD ADD A SMALL "BILLING ADJUSTMENT" BASED ON FUEL COSTS. THE REPORT THEN STATES THAT:

"AFTER TAKING ALL OF THESE VARIOUS CAPITAL EXPENSES AND RECURRING COSTS INTO ACCOUNT, IT WAS THE OPINION OF OUR ENGINEERS THAT THE ANNUAL SAVING TO THE GOVERNMENT BY PURCHASING POWER FROM THE CITY OF GAINESVILLE WOULD BE IN EXCESS OF $12,000 A YEAR.'

THE VA DID NOT CONSIDER INCOME TAX PAYMENTS THAT WOULD BE MADE BY YOUR COMPANY IF YOU RECEIVED THE CONTRACT IN EVALUATING THE PROPOSALS.

SUBSEQUENT TO THE SUBMISSION OF THE ABOVE REPORT, WE REQUESTED ADDITIONAL INFORMATION FROM THE VA WITH RESPECT TO THE FORMULA USED IN THE EVALUATION OF PROPOSALS. AT THE TIME OF OUR REQUEST FOR THE ADDITIONAL INFORMATION WE RAISED CERTAIN QUESTIONS CONCERNING THE PROPRIETY OF INCLUDING IN THE EVALUATION PROCESS, THE ESTIMATED COST OF SEWER, WATER AND FIRE ALARM CONNECTIONS. BY LETTER DATED AUGUST 21, 1963, THE VA FURNISHED US THE FOLLOWING INFORMATION:

"IN REVIEWING THE PROPOSALS RECEIVED FROM THE CITY OF GAINESVILLE AND THE FLORIDA POWER CORPORATION, WE FEEL THAT THE AWARD TO THE CITY OF GAINESVILLE CAN BE JUSTIFIED WITHOUT REGARD TO THE PAYMENT OF FEDERAL INCOME TAXES, OR THE FURNISHING OF UNRELATED SERVICES BY THE CITY, SUCH AS SEWER, WATER, AND FIRE ALARM CONNECTIONS.

"THE BASIS FOR THIS CONTENTION IS AS FOLLOWS:

TABLE "ESTIMATED ANNUAL COSTS

CITY OF GAINESVILLE:

ANNUAL CHARGES---------------------------------- $163,184.52

MAINTENANCE OF VA TRANSFORMERS, ETC.------------ 2,560.00

TRANSFORMER LOSSES------------------------------4,382.20

TOTAL---------------------- $170,126.72

FLORIDA POWER CORPORATION:

TOTAL ANNUAL CHARGES---------------------------- $182,673.37 "ANNUAL COST TO VA

FLORIDA POWER CORPORATION---------------------------- $182,673.37

CITY OF GAINESVILLE---------------------------------- 170,126.72

DIFFERENCE----------------- $ 12,546.65

"THEREFORE, THE ESTIMATED GROSS ANNUAL SAVING BY PURCHASING ELECTRIC POWER FROM THE CITY OF GAINESVILLE WOULD BE $12,546.65.

INITIAL VA CONSTRUCTION (REPLACEMENT COST)

"IN ORDER TO TAKE ADVANTAGE OF THE CITY'S PROPOSAL, IT WOULD BE NECESSARY FOR THE GOVERNMENT TO INSTALL TRANSFORMERS, SWITCH GEAR, OUTSIDE DUCTS AND CABLE, AND OTHER RELATED EQUIPMENT WHICH WOULD NOT BE NECESSARY IF POWER WERE PURCHASED FROM THE FLORIDA POWER CORPORATION. THE ESTIMATED COST OF THIS CONSTRUCTION AND EQUIPMENT IS $135,500. (ESTIMATED TOTAL COST OF $147,500 FOR EQUIPMENT LESS $12,000, THE VALUE OF ONE TRANSFORMER WHICH WOULD BE PROVIDED BY THE CITY.)

"BASED ON THE QUALITY OF MATERIAL AND WORKMANSHIP REQUIRED FOR THIS INSTALLATION, WE BELIEVE IT REASONABLE TO EXPECT THIS EQUIPMENT TO HAVE A LIFE EXPECTANCY OF AT LEAST 30 YEARS, UNDER ORDINARY OPERATING CONDITIONS AND WITH PROPER MAINTENANCE. THEREFORE, DEPRECIATION, OR THE REPLACEMENT COST OF ALL THE REQUIRED EQUIPMENT, INCLUDING THE TRANSFORMER FURNISHED BY THE CITY, WOULD BE AT THE RATE OF ABOUT $4,920 PER YEAR.

"NET ANNUAL COSTS (CONSIDERING ANNUAL REPLACEMENT COST)

TABLE

FLORIDA POWER CORPORATION--------------------------- $182,673.37

CITY OF GAINESVILLE:

TOTAL COST----------------------- $170,126.72

REPLACEMENT COST----------------- 4,920.00 175,046.72

DIFFERENCE---------------- $ 7,626.65

"AS INDICATED ABOVE, THE ESTIMATED NET ANNUAL COST OF ELECTRIC POWER, IF PURCHASED FROM THE CITY OF GAINESVILLE, WOULD BE APPROXIMATELY $7,625.00 PER YEAR LESS THAN IF PURCHASED FROM THE FLORIDA POWER CORPORATION.

"YOU WILL NOTE THAT THE ABOVE CALCULATIONS, BASED ON RATES ESTABLISHED BY THE CITY OF GAINESVILLE AND THE FLORIDA POWER CORPORATION, DO NOT TAKE INTO CONSIDERATION INCOME TAXES PAID BY THE FLORIDA POWER CORPORATION; THE NON-RELATED SERVICE CONNECTIONS OR ELECTRIC LIGHT STANDARDS TO BE PROVIDED BY THE CITY OF GAINESVILLE; NOR INTEREST PAID BY THE GOVERNMENT ON THE COST OF INITIAL CONSTRUCTION AND EQUIPMENT WHICH IT WOULD HAVE TO PROVIDE. THIS IS BASED ON OUR INTERPRETATION OF YOUR RECENT RULING IN B- 150886, JULY 15, 1963.'

IN OUR DECISION OF JULY 15, 1963 (B-150886), COPY ENCLOSED, WE HELD THAT INCOME TAX BENEFITS ACCRUING TO THE GOVERNMENT SHOULD NOT BE CONSIDERED IN EVALUATING PROPOSALS FOR AWARD OF GOVERNMENT CONTRACTS. FOR THE REASONS STATED IN THAT DECISION WE FEEL THE VA'S ACTION IN THIS RESPECT WAS PROPER. MOREOVER, ON THE BASIS OF THE EVALUATION AS SET FORTH IN ITS LETTER OF AUGUST 21, AS QUOTED ABOVE, WE THINK THAT THAT AN AWARD OF THE PROPOSED CONTRACT TO THE CITY OF GAINESVILLE COULD NOT BE QUESTIONED BY OUR OFFICE SINCE IT APPEARS THAT THE CITY HAS SUBMITTED THE MOST ADVANTAGEOUS PROPOSAL TO THE GOVERNMENT EVEN DISREGARDING THE BENEFIT OF THE ESTIMATED COST OF THE NONRELATED SERVICE CONNECTIONS WHICH WE UNDERSTAND WOULD BE ASSESSED BY THE CITY IF NOT OFFERED FREE OF CHARGE TO THE GOVERNMENT.

ACCORDINGLY, YOUR PROTEST AGAINST THE PROPOSED AWARD OF A CONTRACT TO THE CITY OF GAINESVILLE IS DENIED.