Energy Savings Performance Contracts:

Additional Actions Needed to Improve Federal Oversight

GAO-15-432: Published: Jun 17, 2015. Publicly Released: Jun 17, 2015.

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What GAO Found

The seven selected agencies in GAO's review awarded approximately $12.1 billion in energy savings performance contracts (ESPC) in fiscal years 1995 through 2014 and plan to continue using them to help meet federal energy directives and initiatives. Under ESPCs, private contractors finance the up-front costs of energy improvements. Agencies then repay contractors from the savings, such as those resulting from lower utility bills. The seven agencies GAO reviewed have used more than 500 ESPCs for projects, such as installing energy-efficient lighting or power generation projects. Agencies' plans to use ESPCs vary, particularly for data center consolidation projects, which could reduce a significant amount of energy.

Cost and energy savings that contractors reported to agencies for most ESPCs met or exceeded expectations, but some of these savings may be overstated. GAO's review of a nongeneralizable sample of 20 projects found that contractors' reports overstated cost and energy savings for 14 projects. Contractors calculate and report savings annually in accordance with plans agreed to in their contracts with agencies. These plans include assumptions about agencies' use of equipment, which may change over the life of the contract. If changes reduce project savings, such as when an agency does not operate or maintain the equipment as agreed, contractors are not required to reduce the amount of savings they report or measure the changes' effects. GAO evaluated the extent to which changes in agency operations or other factors within agencies' control may have reduced energy savings for a nongeneralizable sample of projects. Estimates agencies provided to GAO of savings that were reported but not achieved ranged from negligible to nearly half of a project's reported annual savings. For example, one agency removed equipment for a sewer system upgrade, which resulted in over $104,000 in annual savings that were reported but not achieved, or about 40 percent of the project's reported savings. Federal guidance states that when reviewing contractor reports, agencies should understand changes in project performance and savings levels, and what actions should be taken to address deficiencies. However, agencies were not always aware of how much savings were not achieved due to agency actions because contractors were not required to report this information. Without clearer reporting of savings that are not achieved, agencies may be unable to determine what, if any, corrective actions should be taken.

The seven agencies in GAO's review have conducted limited oversight and evaluation of their ESPC projects. In GAO's sample of 20 projects, agency representatives did not perform some oversight activities included in guidance because they were unaware of these duties or how to perform them, among other reasons. Without ensuring that training provides officials with the information needed to understand how to perform their oversight responsibilities, agencies may continue to inconsistently perform oversight. Moreover, most of the agencies in GAO's review have not systematically evaluated their ESPC portfolios to determine the effects of changing circumstances—such as facility use—on project performance because they do not have processes to do so. Without such oversight and evaluation, agency officials cannot make fully informed decisions about how best to strategically manage their ESPCs.

Why GAO Did This Study

Constrained budgets and increasing energy efficiency goals have led federal agencies to explore innovative ways to fund energy improvements, including ESPCs. An expected increase in the use of ESPCs has raised questions about agencies' ability to ensure that the government's interests are protected. ESPCs can span up to 25 years and be valued at millions of dollars each.

GAO was asked to review federal use of ESPCs since 2005. This report examines the extent to which (1) agencies have used ESPCs and plan to use them; (2) projects have achieved their expected cost and energy savings; and (3) agencies have overseen and evaluated such projects. GAO compiled data on awarded ESPCs; reviewed agency guidance and files for a nongeneralizable sample of 20 ESPC projects that reflected a range of contract award dates, contract values, and other characteristics; and interviewed officials from the seven agencies with the highest energy usage and greatest facility square footage—the Air Force, Army, and Navy within the Department of Defense; the Departments of Energy, Justice, and Veterans Affairs; and the General Services Administration.

What GAO Recommends

GAO is making recommendations to improve oversight of ESPC projects through clearer reporting of savings, improved training, and systematic evaluations of portfolios, among other things. In general, the agencies partially concurred with GAO's recommendations. GAO has modified the report, as appropriate, to address the agencies' comments.

For more information, contact Frank Rusco at (202) 512-3841 or ruscof@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In response to our recommendation, DOE implemented changes to its existing "Life of Contract" program that DOE uses to monitor Energy Savings Performance Contract (ESPC) projects that were awarded using the DOE vehicle. Specifically, DOE implemented procedural improvements to monitor agency witnessing of contractor measurement and verification (M&V) activities and the agency review of M&V reports. Among other things, the Federal Energy Management Program (FEMP) collects information from agencies on whether they witnessed M&V activities and reviewed M&V reports for each ESPC project. FEMP provides the results of its data collection to the agency leads quarterly.

    Recommendation: To help agencies more consistently perform their oversight responsibilities and oversee contractors' measurement and verification activities, the Secretary of Energy should direct FEMP to monitor agencies' oversight of ESPC projects that agencies have awarded using the DOE contract vehicle, including whether agencies witnessed the contractors' measurement and verification activities and reviewed and certified acceptance of the measurement and verification report.

    Agency Affected: Department of Energy

  2. Status: Closed - Implemented

    Comments: DOD concurred with the recommendation. In July 2018, DOD established a process to evaluate the performance of their ESPC projects. Specifically, DOD established a process to collect information quarterly on the performance of ESPC projects from each of the components. DOD will analyze the data quarterly to determine if there are issues that should be addressed. The results of the analysis will be shared with the components at quarterly DOD Energy Performance Working Group meetings, and the information may be used by the components to assist with decisions about future contract actions, such as modifications or terminations.

    Recommendation: To help ensure that agencies have sufficient information on the effects of changing circumstances on the performance of their ESPC portfolios, the Secretaries of Defense, Energy, and Veterans Affairs; the Attorney General; and the Administrator of the General Services Administration should establish a process to systematically evaluate their ESPC projects--including baseline assumptions about facilities' energy use, utility prices, and interest rates--to determine how their ESPC portfolios are performing and the extent to which they are achieving expected savings. Agencies could consider conducting such evaluations either after a certain number of years, or in response to events, such as changes in utility prices or market interest rates, or appropriations becoming available that could be used for modifications or terminations.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: In March 2018, DOE's Sustainability Performance Office issued a final policy that includes a process for ESPC portfolio reviews. The process includes an internal review of a sample of ESPC projects each year to assess whether projects are meeting expected savings and a review of the effect of changing utility prices and building uses, among other things. DOE plans to complete its first review using this process in December 2018.

    Recommendation: To help ensure that agencies have sufficient information on the effects of changing circumstances on the performance of their ESPC portfolios, the Secretaries of Defense, Energy, and Veterans Affairs; the Attorney General; and the Administrator of the General Services Administration should establish a process to systematically evaluate their ESPC projects--including baseline assumptions about facilities' energy use, utility prices, and interest rates--to determine how their ESPC portfolios are performing and the extent to which they are achieving expected savings. Agencies could consider conducting such evaluations either after a certain number of years, or in response to events, such as changes in utility prices or market interest rates, or appropriations becoming available that could be used for modifications or terminations.

    Agency Affected: Department of Energy

  4. Status: Open

    Comments: In July 2019, Bureau of Prisons officials reported that they were in the process of revising their Standard Operating Procedure (SOP) for ESPCs. The revised SOP is expected to include language that addresses a process to systematically evaluate ESPC projects in the future. Officials anticipate that the SOP will be updated by January 1, 2020.

    Recommendation: To help ensure that agencies have sufficient information on the effects of changing circumstances on the performance of their ESPC portfolios, the Secretaries of Defense, Energy, and Veterans Affairs; the Attorney General; and the Administrator of the General Services Administration should establish a process to systematically evaluate their ESPC projects--including baseline assumptions about facilities' energy use, utility prices, and interest rates--to determine how their ESPC portfolios are performing and the extent to which they are achieving expected savings. Agencies could consider conducting such evaluations either after a certain number of years, or in response to events, such as changes in utility prices or market interest rates, or appropriations becoming available that could be used for modifications or terminations.

    Agency Affected: Department of Justice

  5. Status: Closed - Implemented

    Comments: In 2017, VA established a portfolio review process to evaluate the performance of its ESPC portfolio on a recurring basis; the process is scheduled to begin in 2018. .

    Recommendation: To help ensure that agencies have sufficient information on the effects of changing circumstances on the performance of their ESPC portfolios, the Secretaries of Defense, Energy, and Veterans Affairs; the Attorney General; and the Administrator of the General Services Administration should establish a process to systematically evaluate their ESPC projects--including baseline assumptions about facilities' energy use, utility prices, and interest rates--to determine how their ESPC portfolios are performing and the extent to which they are achieving expected savings. Agencies could consider conducting such evaluations either after a certain number of years, or in response to events, such as changes in utility prices or market interest rates, or appropriations becoming available that could be used for modifications or terminations.

    Agency Affected: Department of Veterans Affairs

  6. Status: Closed - Implemented

    Comments: GSA agreed with the recommendation. In response to this recommendation, GSA developed a review plan to use DOE-provided data to determine how its ESPC portfolio is performing with regard to dollar savings and energy savings, among others. The DOE-provided data, along with supplemental data, will be used to compile a "watch list" to track performance of specific projects or project elements. GSA plans to update its watch list at least annually. At least every 5 years, GSA will complete a comprehensive portfolio review, which will result in a Portfolio Review Findings Report. Specific trigger points, such as changes to external market conditions, may lead to a portfolio review for certain elements.

    Recommendation: To help ensure that agencies have sufficient information on the effects of changing circumstances on the performance of their ESPC portfolios, the Secretaries of Defense, Energy, and Veterans Affairs; the Attorney General; and the Administrator of the General Services Administration should establish a process to systematically evaluate their ESPC projects--including baseline assumptions about facilities' energy use, utility prices, and interest rates--to determine how their ESPC portfolios are performing and the extent to which they are achieving expected savings. Agencies could consider conducting such evaluations either after a certain number of years, or in response to events, such as changes in utility prices or market interest rates, or appropriations becoming available that could be used for modifications or terminations.

    Agency Affected: General Services Administration

  7. Status: Open

    Comments: In August 2019, GAO requested information on the status of the recommendation. We will update the recommendation's status when information is received from OMB.

    Recommendation: To help agencies decide whether to use ESPCs to consolidate federal data centers, the Director of the Office of Management and Budget should document, for the purposes of scoring ESPCs, (1) what qualifies as energy-related savings and (2) the allowable proportion of energy and energy-related cost savings.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  8. Status: Closed - Implemented

    Comments: FEMP examined its available training and resources and determined that no additional training or resources are required. FEMP officials believe that there is training in place to address agency responsibilities during the performance period, including a review of FEMP's guidance on measurement and verification (M&V) witnessing, guidance on annual M&V report review and certification, guidance on agency responsibility for operation and maintenance of energy conservation measures, and an overview of FEMP's annual Life of Contract services. In addition, FEMP has other resources available related to measurement and verification activities, including the "Guide to Government Witnessing and Review of Measurement and Verification Activities" and "Reviewing Post-Installation and Annual Reports For Federal ESPC Projects."

    Recommendation: To help agencies more consistently perform their oversight responsibilities and oversee contractors' measurement and verification activities, the Secretary of Energy should direct DOE's Federal Energy Management Program (FEMP) to evaluate existing training and determine whether additional training is needed on observing contractors' measurement and verification activities and reviewing and certifying measurement and verification reports.

    Agency Affected: Department of Energy

  9. Status: Closed - Implemented

    Comments: The Army Corps of Engineers ESPC contract vehicle requires contractors to use DOE's M&V plans, guidelines, and report outline. Therefore, when DOE updated its M&V guidance in November 2015, contractors were required to include estimates of cost and energy savings not achieved due to agency actions. Further, the contract vehicle includes a requirement that contractors report actual savings achieved for the project.

    Recommendation: To help ensure that agencies have sufficient information on ESPC performance to oversee whether future and current contracts are achieving their expected savings, the Secretaries of Defense and Energy should specify in the scheduled revisions to their ESPC contract vehicles or in guidance to agencies that measurement and verification reports for future projects are to include estimates of cost and energy savings that were not achieved because of agency actions. Additionally, the Department of Energy (DOE) may wish to consider periodically analyzing data on other factors that may affect savings, such as utility prices, to provide information on how savings achieved by ESPCs awarded through its contract vehicle have been affected by changing utility prices since its prior study in 2007.

    Agency Affected: Department of Defense

  10. Status: Closed - Implemented

    Comments: In November 2016, DOE sent letters to companies that hold the ESPC contract requesting that companies report information on cost and energy savings that were not achieved due to agency actions as part of their annual measurement and verification reports. For contracts awarded before the revised requirements were included, DOE requested that companies provide the information, but use a simplified approach so that they do not incur additional costs for measurement and verification. Further, in 2015, DOE funded a study by Lawrence Berkeley National Laboratory that assessed escalation rates for ESPCs and recommended the use of the National Institute for Standards and Technology's energy escalation rates calculator as a reliable third-party estimate of escalation rates.

    Recommendation: To help ensure that agencies have sufficient information on ESPC performance to oversee whether future and current contracts are achieving their expected savings, the Secretaries of Defense and Energy should specify in the scheduled revisions to their ESPC contract vehicles or in guidance to agencies that measurement and verification reports for future projects are to include estimates of cost and energy savings that were not achieved because of agency actions. Additionally, the Department of Energy (DOE) may wish to consider periodically analyzing data on other factors that may affect savings, such as utility prices, to provide information on how savings achieved by ESPCs awarded through its contract vehicle have been affected by changing utility prices since its prior study in 2007.

    Agency Affected: Department of Energy

  11. Status: Closed - Implemented

    Comments: DOD's current ESPC projects are implemented through DOE's Indefinite Delivery/Indefinite Quantity (IDIQ) contract or the Army Corps of Engineers' Multiple Award Task Order Contract (MATOC). In November 2016, DOE sent letters to companies that hold the IDIQ contract requesting that companies report information on cost and energy savings that were not achieved due to agency actions as part of their annual measurement and verification reports. For contracts awarded before the revised requirements were included, DOE requested that companies provide the information, but use a simplified approach so that they do not incur additional costs for measurement and verification. In April 2017, the Army Corps of Engineers sent letters to companies that hold the MATOC contract to request the same information.

    Recommendation: To help ensure that agencies have sufficient information on ESPC performance to oversee whether future and current contracts are achieving their expected savings, the Secretaries of Defense, Energy, and Veterans Affairs; the Attorney General; and the Administrator of the General Services Administration should work with contractors to determine the best way to obtain estimates of cost and energy savings that are not achieved because of agency actions in order to include these estimates in future measurement and verification reports for existing contracts, in accordance with DOE guidance, and where economically feasible.

    Agency Affected: Department of Defense

  12. Status: Closed - Implemented

    Comments: In November 2015, DOE published updated M&V guidelines that require contractors to report estimates of cost and energy savings that were not achieved because of agency actions. The current IDIQ contract requires contracts to use the updated M&V guidelines for developing their M&V reports for all projects under the IDIQ.

    Recommendation: To help ensure that agencies have sufficient information on ESPC performance to oversee whether future and current contracts are achieving their expected savings, the Secretaries of Defense, Energy, and Veterans Affairs; the Attorney General; and the Administrator of the General Services Administration should work with contractors to determine the best way to obtain estimates of cost and energy savings that are not achieved because of agency actions in order to include these estimates in future measurement and verification reports for existing contracts, in accordance with DOE guidance, and where economically feasible.

    Agency Affected: Department of Energy

  13. Status: Closed - Implemented

    Comments: In September 2019, Bureau of Prisons updated their Standard Operating Procedure (SOP) to address this recommendation. For example, the SOP now requires the local contracting officer to be made aware of any potential contract issues that may affect guaranteed savings throughout the entire performance period. It also requires the Regional Energy Conservation Coordinator to be on-site during all measurement and verification (M&V) activities and that facilities managers review the completed M&V report before it is sent to the National Energy Program Manager for review. Finally, the SOP now calls for each institution to review the projects between annual M&V visits to identify any potential performance deficiencies.

    Recommendation: To help ensure that agencies have sufficient information on ESPC performance to oversee whether future and current contracts are achieving their expected savings, the Secretaries of Defense, Energy, and Veterans Affairs; the Attorney General; and the Administrator of the General Services Administration should work with contractors to determine the best way to obtain estimates of cost and energy savings that are not achieved because of agency actions in order to include these estimates in future measurement and verification reports for existing contracts, in accordance with DOE guidance, and where economically feasible.

    Agency Affected: Department of Justice

  14. Status: Closed - Implemented

    Comments: In 2016, VA mandated the use of the Federal Energy Management Program's (FEMP) Measurement and Verification (M&V) Guidelines version 4.0 for its ESPCs, which calls for reporting all savings lost due to agency actions in annual measurement and verification reports.

    Recommendation: To help ensure that agencies have sufficient information on ESPC performance to oversee whether future and current contracts are achieving their expected savings, the Secretaries of Defense, Energy, and Veterans Affairs; the Attorney General; and the Administrator of the General Services Administration should work with contractors to determine the best way to obtain estimates of cost and energy savings that are not achieved because of agency actions in order to include these estimates in future measurement and verification reports for existing contracts, in accordance with DOE guidance, and where economically feasible.

    Agency Affected: Department of Veterans Affairs

  15. Status: Closed - Implemented

    Comments: GSA updated the language for its ESPC task orders to require contractors to track performance of the installed equipment or systems to ensure that they are achieving expected savings, regardless of contractor liability. Additionally, the revised language requires contractors to include in their annual measurement and verification reports not only the contractual energy savings or shortfall, but also an explanation of the actual energy savings or shortfall factoring in variables such as utility price changes, and baseline adjustments.

    Recommendation: To help ensure that agencies have sufficient information on ESPC performance to oversee whether future and current contracts are achieving their expected savings, the Secretaries of Defense, Energy, and Veterans Affairs; the Attorney General; and the Administrator of the General Services Administration should work with contractors to determine the best way to obtain estimates of cost and energy savings that are not achieved because of agency actions in order to include these estimates in future measurement and verification reports for existing contracts, in accordance with DOE guidance, and where economically feasible.

    Agency Affected: General Services Administration

 

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