BNUMBER: B-260063
DATE: June 30, 1995
TITLE: Federal Aviation Administration Negotiations with
Pacific Gas and Electric Company to Provide Electric Utility
Service to a Remote Air Route Surveillance Radar Facility
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Matter of:Federal Aviation Administration Negotiations with Pacific
Gas and Electric Company to Provide Electric Utility Service
to a Remote Air Route Surveillance Radar Facility
File: B-260063
Date: June 30, 1995
DIGEST
1. The Federal Aviation Administration violated 31 U.S.C. 3324 by
making an advance payment to Pacific Gas and Electric Company for
connecting electrical utility service to a remote FAA facility. FAA
failed to obtain "adequate security" for making advance payments as
required by 41 U.S.C. 255 or to follow the other requirements of the
Federal Acquisition Regulations regarding advance payments.
2. The Federal Aviation Administration may pay a connection charge to
Pacific Gas and Electric Company to connect electrical utility service
to a remote FAA facility that includes an itemization of the increased
federal and state income taxes that PG&E will incur incident to the
transaction. The enumerated amounts would reimburse PG&E for taxes
imposed upon the utility and would not constitute impermissible taxes
on the federal government.
3. The Federal Aviation Administration should not accept as part of
its agreement with Pacific Gas and Electric Company to connect
electrical utility service to a remote FAA facility a clause offering
PG&E an open-ended, unrestricted indemnity from FAA. The indemnity
clause, through events that FAA cannot control, could produce a
liability in excess of FAA's available appropriations in violation of
the Antideficiency Act, 31 U.S.C. 1341 and 1517.
DECISION
The Assistant Chief Counsel, Western-Pacific Region, Federal Aviation
Administration (FAA), has requested a decision on several issues
raised during negotiations between the FAA and Pacific Gas & Electric
Company (PG&E). FAA and PG&E are negotiating the amount that PG&E
will be paid to connect electrical power to FAA's Rainbow Ridge Air
Route Surveillance Radar site in a remote location near Eureka,
California.
For the reasons discussed below, we conclude that: (1) the FAA
violated 31 U.S.C. 3324 by making an advance payment to PG&E for the
connection of the Rainbow Ridge radar site to PG&E's electrical power
lines; (2) FAA may pay a connection charge to PG&E that includes an
itemization of the increased federal and state income taxes that PG&E
will incur incident to its agreement to connect electrical power to
the Rainbow Ridge radar site; and (3) FAA should not accept as part
of its agreement with PG&E an open-ended, unrestricted indemnity
clause that would require FAA to assume liability for damages that
PG&E may incur in providing electrical service to the Rainbow Ridge
site.
Background
The FAA (together with the U.S. Air Force) is currently constructing
43 Air Route Surveillance Radar sites across the continental United
States to fulfill both civilian and military aviation radar needs.
One of these sites is located at Rainbow Ridge, California. The
Rainbow Ridge radar site is in a remote location, which has caused
some difficulty for the FAA in procuring the electrical power needed
to run the facility. In order to obtain power, the Rainbow Ridge
radar site must be connected to power lines owned by PG&E, the sole
provider of electrical power in the area.
In December 1985, PG&E and the General Services Administration entered
into a 10-year term areawide public utilities contract for PG&E to
provide utility services to federal government facilities. Under
Article 2(b) of the areawide contract, all federal agency procurements
of utility services from PG&E were to be made under the contract. The
areawide contract generally requires PG&E to provide utility services
at PG&E's general tariff rates as approved by the California Public
Utilities Commission (Commission). However, Article 2(b) of the
areawide contract allows PG&E to provide "services of a special
nature" to federal agencies at negotiated rates, provided that such
rates and services are allowed by the Commission.
FAA has been in negotiations with PG&E to connect the Rainbow Ridge
radar site to PG&E's power line 7 miles away and to thereafter provide
electrical service to the radar facility. The record reflects that
PG&E considers connecting electrical service to the Rainbow Ridge site
to be a service "of a special nature" under the areawide contract.
Specifically, PG&E projects that the revenue from the facilities
installed to make the 7-mile-long connection to the Rainbow Ridge
radar site will not be enough to support its investment in installing
the equipment. PG&E thus asserts that the line to the Rainbow Ridge
radar site would be an unfair economic burden on PG&E's remaining
customers.
Accordingly, as would be allowed under Article 2(b) of the areawide
contract, PG&E has offered to connect service to the Rainbow Ridge
radar site for a negotiated charge. The charge PG&E seeks includes
amounts that will reimburse PG&E for: the costs of constructing the
connecting facilities to the Rainbow Ridge radar site, the increased
federal and state income taxes that PG&E will be assessed as a result
of having those construction costs reimbursed, and PG&E's ownership
costs for the new facilities that will not be recovered by the
electrical service rates that FAA pays for electricity used at the
Rainbow Ridge radar site.
The record reflects that on March 30, 1992, PG&E offered, under the
terms of the areawide contract, to connect electrical service to the
Rainbow Ridge site for a connection charge of $440,438. On May 4,
1993, FAA accepted this offer and made a $440,438 payment to PG&E.
However, the PG&E offer stated that it was conditioned upon acceptance
of the agreement by the California State Public Utilities
Commission.[1] Since the agreement was never submitted to the
Commission for approval, both PG&E and FAA assert that it never took
effect.
On August 18, 1993, PG&E notified FAA that it could no longer connect
service to the Rainbow Ridge site for the connection charge offered in
March 1992. In the resulting negotiations for a new connection
charge, FAA became concerned about three aspects of PG&E's offers to
connect service to Rainbow Ridge. First, PG&E has asked that the full
amount of the connection charges be paid in advance of connecting
electrical service to the Rainbow Ridge site. Second, PG&E has stated
that the amount of the connection charge must include a reimbursement
for the increased federal and state corporate income taxes that PG&E
will incur because part of the connection charge will be taxable
income to PG&E as a contribution in aid of construction (CIAC).
Finally, PG&E's has requested that any agreement to connect and
provide service to the Rainbow Ridge site include an open-ended,
unrestricted indemnity clause requiring FAA to assume liability for
damages that PG&E may incur in providing electrical service to the
Rainbow Ridge site. FAA has sought our views on whether it may accept
these conditions of PG&E's offers.
Advance Payment
As stated above, in 1993, FAA paid $440,438 to PG&E in advance of the
installation of any connecting power lines to the Rainbow Ridge radar
site. FAA also states that throughout their negotiations with PG&E,
PG&E has insisted upon advance payment for the full amount of any
connection charge. Under 31 U.S.C. 3324, agencies may not make
advance payments on contracts unless the payments are specifically
authorized by law.[2] Under 41 U.S.C. 255, agencies are authorized
to make advance payments under contracts for property or services, but
they must determine that the advance payment will be in the public
interest and must obtain adequate security. Security may be in the
form of liens in favor of the federal government on the property being
acquired, on the balance of advance funds held by the contractor, or
on property acquired for the performance of the contract. 41
U.S.C. 255(d).
Part 32.4 of the Federal Acquisition Regulation (FAR) implements the
advance payment authority of section 255. The FAR states that advance
payments are the least preferred method of contract financing for the
federal government, and that advances should be made sparingly. 48
C.F.R. 32.402. The FAR also sets out the types of situations when
advance payments may be considered, such as contracts of a highly
classified nature where national security interests would make
assignment of claims undesirable, or contracts where reasonable
commercial financing is not available. 48 C.F.R. 32.403.
Our review of the record shows that FAA has not complied with the
requirements of either 41 U.S.C. 255 or FAR Part 32.4. FAA
apparently has made a $440,438 payment to PG&E without security or any
means of protecting the government's interest. In the course of its
continuing negotiations with PG&E, FAA has asserted that PG&E's rate
for connecting service to the Rainbow Ridge radar site should take
into account the interest earned on the advance payment.[3] We do not
view this as adequate compliance with the requirements of section 255.
Since FAA has not indicated to us any other authority for making an
advance payment to PG&E, and we are not aware of any, we conclude that
FAA violated the prohibition of 31 U.S.C. 3324 when it made the
$440,438 advance payment to PG&E.
CIAC Taxes
Although corporations are subject to federal income tax on their gross
income "from whatever source derived," contributions to capital of a
corporation are specifically excluded from gross income. 26 U.S.C.
61 and 118(a). However, the capital contributions made by customers
or potential customers, referred to as contributions in aid of
construction (CIACs), are not considered contributions to capital for
purposes of the exclusion. 26 U.S.C. 118(b). Thus, CIACs paid by
customers are taxable income to the corporations that receive them.
The Internal Revenue Service has determined that payments made by
customers to a public utility to obtain utility services will be
treated as CIACs, and thus will be taxable income to the utility. IRS
Notice 87-82, 87-2 C.B. 389. Thus, at least some part of the
connection charge that FAA would pay to PG&E to make an electrical
service connection to the Rainbow Ridge radar site will be income to
PG&E that is subject to federal corporate income tax. Further, PG&E's
California corporate taxable income is determined in accordance with
the federal Internal Revenue Code. Cal. Rev. & Tax. 17131 (Deering
Supp. 1995). Thus the amount of PG&E's CIAC income from the FAA that
will be subject to federal corporate income tax will also be subject
to California state corporate income tax.
As stated above, PG&E has expressed the view that, because the
facilities constructed to provide electrical power to the Rainbow
Ridge radar site would be an uneconomic investment by PG&E, FAA should
bear the full economic costs of constructing the facilities.
Consistent with this view, PG&E has sought to recover the increased
corporate income taxes, both federal and state, that it will incur
incident to an agreement to connect service to the Rainbow Ridge radar
site. FAA has objected to the "CIAC tax" amounts included in PG&E's
offered connection charges on the grounds that FAA's appropriations
are not available to pay such taxes.
We conclude that FAA's appropriations are available to pay that part
of a connection charge that PG&E has itemized as the increased income
taxes that PG&E would incur because of its transaction with the FAA.
In regard to the increase in California corporate income taxes, our
decisions focus in the issue of whether the legal incidence of the tax
falls on the federal agency or some other party. 61 Comp. Gen. 257
(1982). If the legal incidence of the tax falls on some other party
(often then referred to as a vendor tax), the fact that the economic
burden of the tax may fall on a federal agency does not make the tax
unconstitutional. Id. Thus, we have concluded that a "tax" included
as a separate item on a utility bill submitted to a federal agency
could be paid if it is merely a reimbursement of a vendor tax assessed
on the utility. 32 Comp. Gen. 577 (1953). In such situations, the
agency's appropriation is being used to acquire the utility services,
not to pay the "tax" itemized on the utility bill.
It is clear that the legal incidence of California portion of the
"CIAC tax" that PG&E itemized on its offers to connect service to the
Rainbow Ridge radar site falls on PG&E, not on the FAA. As discussed
above, the "tax" is really an increase in PG&E's corporate income
taxes. Accordingly, our cases would not prevent FAA from paying a
charge for connecting electrical service to the Rainbow Ridge radar
site that specifically itemizes the increased state corporate income
taxes that PG&E will pay incident to the transaction.
Further, we see no need for any different result regarding the
increased federal corporate income taxes itemized by PG&E. As with
the net increase in the California corporate income tax, FAA will not
bear the legal incidence of any net increase in PG&E's federal
corporate income tax. FAA's appropriations will be used for the
appropriate purpose of connecting electrical service for the Rainbow
Ridge radar site. The fact that the amount which FAA pays will
reimburse PG&E for its full costs, including the net increase to its
federal income taxes, does not change the nature of FAA's expenditure.
Finally, we note that PG&E's various offers to connect service to the
Rainbow Ridge radar site calculate the applicable "CIAC tax" amounts
as 34 percent of the costs of installing the connecting facilities
that will not otherwise be recovered by PG&E. However, the IRS has
stated that the amount that a utility must recover in order to ensure
that its ratepayers do not bear the burden of increased taxes incident
to a CIAC payment
"may be determined by reducing the amount of tax attributable to
the receipt of the CIAC by the present value of the tax benefits
to be obtained by depreciating the CIAC property in determining
the utility's Federal income tax liability."
1987-2 C.B. at 392. We urge the FAA to ensure that "CIAC tax" portion
of the Rainbow Ridge radar site connection charge paid to PG&E is
calculated consistent with the IRS description.
Indemnity Clause
As FAA points out, open-ended, unrestricted indemnity clauses in
government contracts may involve agencies in violations of the
Antideficiency Act, 31 U.S.C. 1341 and 1517. Sections 1341 and
1517 generally prohibit federal officials from incurring obligations
in excess of the amounts available. Open-ended, unrestricted
indemnity clauses may require the government to make a future payment
of an indefinite and uncertain amount, as determined by contingencies
that cannot be defined by the contract.
"There is no possible way to know at the time that the contract
is signed whether there are sufficient funds in the appropriation
to cover the liability if or when it arises because no one knows
in advance how much the liability may be."
62 Comp. Gen. 361, 366 (1983). Because those amounts are uncertain,
they may exceed the amounts available to the agency in violation of
the Antideficiency Act. Accordingly, in most circumstances such
open-ended, unrestricted indemnity clauses themselves constitute
violations of the Antideficiency Act. Id. at 367.
The clause proposed by PG&E states, in part, that
"[FAA] shall indemnify and hold harmless PG&E, its officers,
agents, and employees against all loss, damage, expense, and
liability, resulting from injury to or death of any person,
including but not limited to employees of PG&E, [FAA], or any
third party, or for loss, destruction, damage to property,
including but not limited to, property of PG&E, [FAA], or any
third party, arising out of or in any way connected with the
performance of this Agreement and any and all construction
activities, however caused, except to the extent caused by the
active negligence or wilful misconduct of PG&E, its officers,
agents and employees."
FAA has concluded, based on our cases, that it should not accept this
opened, unrestricted indemnity clause. We agree.[4]
Conclusion
In conclusion, we find that the FAA has violated 31 U.S.C. 3324 by
making an advance payment to PG&E for the connection of the Rainbow
Ridge radar site to PG&E's electrical power lines. FAA failed to
obtain "adequate security" as required by 41 U.S.C. 255 or to follow
the other requirements of the FAR regarding advance payments. We also
conclude that FAA may pay a connection charge to PG&E that includes an
itemization of the increased federal and state income taxes that PG&E
will incur incident to its agreement to connect electrical power to
the Rainbow Ridge radar site. The reimbursements would cover valid
taxes imposed upon PG&E and would not constitute impermissible taxes
on the federal government. Finally, FAA should not accept as part of
its agreement with PG&E a clause offering PG&E an open-ended,
unrestricted indemnity from FAA. The indemnity clause, through events
that FAA cannot control, could produce a liability in excess of FAA's
available appropriations in violation of the Antideficiency Act, 31
U.S.C. 1341 and 1517.
/s/James F. Hinchman
for Comptroller General
of the United States
1. This condition appears to be consistent with the language of
Article 2(b) of the areawide contract providing that agreements to
provide special services at negotiated rates be for services and rates
that are "allowed by the Commission."
2. Section 3324 itself authorizes certain advance payments, but none
of those authorizations applies in this matter.
3. In the alternative, FAA states that PG&E may return the advance
payment to the FAA, so that the funds may be deposited in an interest
bearing account until PG&E and FAA can agree on a charge for
connecting the Rainbow Ridge radar site. We are not aware of any
authority that would permit FAA to hold federal funds in an interest
bearing account pending final payment to a contractor. In general,
refunds of erroneous payments should be credited to the appropriation
account initially charged with the payment. See 30 Comp. Gen. 595
(1950).
4. While agencies may, under some circumstances, procure power under
tariffs containing indemnity clauses, 59 Comp. Gen. 705 (1980), in
this case PG&E is seeking an indemnity clause as part of the special,
individually negotiated rate to be paid by FAA for connecting service
to the Rainbow Ridge radar site, not in a generally applicable tariff.
The clause proposed by PG&E would specifically discriminate against
FAA. PG&E's areawide contract with the General Services
Administration provides:
"The government shall in no event be liable or responsible
for damage or injury to any person or property occasioned
through the use or operation of the Contractor's Utility
Facilities or actions of the Contractor, its employees, or
agents, in performing this Contract; provided however that
the Contractor shall not be responsible for the negligent
actions of the government, its employees, or agents."