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."