	Background

Federal agency use of ESPCs was authorized by the Congress to provide an  alternative to direct appropriations for funding energy-efficiency  improvements in federal facilities. Twenty Agencies Used ESPCs

During fiscal years 1999 through 2003, 20 agencies undertook 254 ESPC  projects to finance investments in energy-efficiency improvements. The  ESPCs commit the federal government to annual payments totaling about  $2.5 billion over the terms of these contracts, conditional on either the  savings guaranteed in the contracts being verified or as stipulated in the  contracts. Agencies receive other  benefits through ESPCs as well, such as environmental improvements and  better mission capability resulting from replacing aging infrastructure with  more reliable equipment. ESPC-Financed Projects Have Reduced Energy Use and Agencies Expect to Achieve Energy Savings Worth At Least $2.5 Billion

Over the life of the ESPC financed projects included in our review, agencies  expect to achieve energy savings worth at least $2.5 billion and amounting  to over 9 million MMBTUs, as shown in table 2. Agencies may also benefit from substantial energy and financial savings  once the contracts are paid for. Upfront Funds Could Provide These Benefits But Are Often Not Available on a Timely Basis

Although the benefits from ESPC financed projects discussed above could  be achieved using upfront funding, agencies have found that sufficient  amounts of such funding were generally not available—making it necessary  for the agencies to use ESPCs to supplement the upfront funding they  receive in order to obtain these benefits. Agencies Believe Financial Savings Cover Costs, but Whether Savings Actually Do So Is Uncertain

Agencies generally believe that ESPCs’ financial savings cover the costs  because they design their contracts to cover costs and because they must  obtain verification reports from the energy services companies that  confirm this point or take steps to correct shortfalls in savings. Poor documentation adds to the problem of ensuring that savings cover  costs. Agencies’ Differing Interpretations of the Components of Costs That Must Be Covered by Savings under the ESPC Legislation Add to Uncertainty That Savings Cover Costs

The statute governing ESPCs provides that “aggregate annual payments”  under an ESPC may not exceed the amount the agency would have paid for  energy without such a contract. Agencies Are Concerned About Officials’ Lack of Necessary Expertise and Information and About Competitiveness of the Super ESPCs

Agencies expressed concerns about the expertise and information needs of  the agencies and insufficient competition among financiers and energy  services companies, all of which can affect agencies’ ability to protect the  government’s financial interests in using ESPCs. Agencies Expressed Concerns About Competition Among Finance Companies and Energy Services Companies

Some agency officials we spoke with expressed concerns that there may  not be enough competition among finance companies and that this could  lead to higher than necessary financing costs for ESPCs. Our  recommendations focus on the areas of information, expertise, and audits:  Collect and use ESPC-related data more effectively by (1) compiling  information on key contract terms—such as interest rates and markups  for energy-efficiency equipment—for each ESPC and as a key part of  best practices make information accessible to agency officials in  negotiating subsequent ESPCs and (2) tracking actual costs, verified  savings, and any changes to ESPC projects that may affect these costs  and savings. Objectives, Scope and Methodology

	Objectives

We were asked to determine (1) the extent to which federal agencies used  ESPCs; (2) what energy savings, financial savings, and other benefits  agencies expect to achieve; (3) the extent to which actual financial savings  from ESPCs cover costs; and (4) what areas, if any, require steps to protect  the government’s financial interests in using ESPCs.
Why GAO Did This Study

The federal government is the nation's largest energy consumer, spending, by latest accounting, $3.7 billion on energy for its 500,000 facilities. Upfront funding for energy-efficiency improvements has been difficult to obtain because of budget constraints and competing agency missions. The Congress in 1986 authorized agencies to use Energy Savings Performance Contracts (ESPCs) to privately finance these improvements. The law requires that annual payments for ESPCs not exceed the annual savings generated by the improvements. GAO was asked to identify (1) the extent to which agencies used ESPCs; (2) what energy savings, financial savings, and other benefits agencies expect to achieve; (3) the extent to which actual financial savings cover costs; and (4) what areas, if any, require steps to protect the government's financial interests in using ESPCs.

What GAO Found

Although comprehensive data on federal agencies' use of ESPCs are not available, in fiscal years 1999 through 2003, we found that 20 federal agencies undertook 254 ESPCs to finance investments in energy-saving improvements for 5 to 25 years. Through the ESPCs, federal agencies plan to make annual payments amounting to at least $2.5 billion spread over the lifetime of the contracts. Agencies expect to achieve benefits that include energy savings worth at least $2.5 billion over the life of the contracts, as well as other benefits that cannot be easily quantified, such as improved reliability of the newer equipment over the aging equipment it replaced, environmental improvements, and additional energy and financial savings once the contracts have been paid for. While these benefits could be achieved using upfront funds and with lower financing costs, agencies stated that they generally have not received sufficient funds upfront for doing so and see ESPCs as a necessary supplement to upfront funding in order to achieve the benefits cited. Agencies believe that ESPCs also provide unique benefits such as a partial shift of risk from agencies to private energy services companies and a more integrated approach to providing efficiency measures. Agencies structure ESPCs so that financial savings cover costs and they reported that many do. However, GAO could not verify that conclusion using the data on ESPCs, and GAO work and agency audits disclosed ESPCs in which unfavorable contract terms, missing documentation, and other problems caused GAO to question how consistently savings cover costs. Furthermore, differing interpretations of the law establishing ESPCs about what components of costs must be paid for from the savings generated by the project or may be paid for using other funding sources have contributed to uncertainties about whether savings are appropriately covering costs. GAO identified concerns in the areas of expertise and related information and competition that are fundamental to ensuring that savings cover costs and to protecting the government's financial interests in using ESPCs. According to agency officials, they often lacked the technical and contracting expertise and information (such as interest rates and markups) to negotiate ESPCs and to monitor contract performance in the long term. The officials also think there may be insufficient competition among finance and energy services companies and that this could lead to higher costs for ESPCs.