TITLE:  Virginia Electric and Power Company; Baltimore Gas & Electric, B-285209; B-285209.2, August 2, 2000
BNUMBER:  B-285209; B-285209.2
DATE:  August 2, 2000
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Virginia Electric and Power Company; Baltimore Gas & Electric, B-285209;
B-285209.2, August 2, 2000

Decision

Matter of: Virginia Electric and Power Company; Baltimore Gas & Electric
Company

File: B-285209; B-285209.2

Date: August 2, 2000

Michael W. Clancy, Esq., and Thomas D. Leland, Esq., Holland & Knight, for
Virginia Electric and Power Company; and Kevin P. Mullen, Esq., Carl L.
Vacketta, Esq., Karen Gray, Esq., and David P. Handler, Esq., Piper,
Marbury, Rudnick & Wolfe, for Baltimore Gas & Electric Company, the
protesters.

Madeline L. Shay, Esq., Douglas W. Kornreich, Esq., and J.J. Cox, Esq., U.S.
Army Corps of Engineers, for the agency.

David A. Ashen, Esq., Office of General Counsel, GAO, participated in
preparation of the decision.

DIGEST

1. Protest that solicitation for privatization of utilities at military
installations is defective for failure to acknowledge a requirement for
state and local approval before selected contractor can commence performing
natural gas and electric distribution services at the installations is
denied, where 10 U.S.C. sect. 2688(b) requires that if more than one utility or
entity expresses an interest in a conveyance, the conveyance shall be
carried out using competitive procedures; section 2688 does not authorize
restricting competition by requiring state and local approval (which would
effectively eliminate all but one source for each utility), and while
agencies may impose restrictions necessary to meet their needs, they may
not, unless authorized by statute, impose restrictions not based on their
needs.

2. Protest against requirement, in solicitation for privatization of 13
utility systems (including electric, natural gas, water, and wastewater) at
five military installations, that offerors propose on all utility systems at
an installation (with no more than one, consolidated contract to be awarded
for each installation) is denied, where agency not only anticipated
realizing significant savings from consolidation, but also determined that
there was a significant risk that permitting offerors to propose on the
basis of 13 individual utility systems would result in not receiving an
acceptable offer for some or all of the water and wastewater systems; where
an agency reasonably does not anticipate that it will receive competition
for all of its requirements if it solicits separately for them, it properly
may combine them in a single procurement.

DECISION

Virginia Electric and Power Company (VEPCO) and Baltimore Gas & Electric
Company (BG&E) protest the terms of request for proposals (RFP)
No. DACA31-00-R-0026, a competitive solicitation issued by the U.S. Army
Corps of Engineers (Corps) for the privatization of utilities at five
installations in the National Capital Region under the Military District of
Washington (MDW). VEPCO and BG&E contend that the RFP is improper because it
fails to recognize that the privatization of the utilities is subject to
state and local utility law and regulation. In addition, VEPCO challenges
the solicitation provision for the award of one consolidated contract that
includes all of the (different types of) utility systems at each
installation.

We deny the protests.

The RFP was issued on March 28, 2000, as part of the overall Department of
Defense (DOD) program to privatize utility systems. That privatization
program is governed by section 2688 of Title 10, United States Code, enacted
in 1997, which provides that the "Secretary of a military department may
convey a utility system, or part of a utility system, under the jurisdiction
of the Secretary to a municipal, private, regional, district, or cooperative
utility company or other entity." 10 U.S.C. sect. 2688(a) (Supp. IV 1998).
Further, section 2688 provides that "[i]f more than one utility or entity .
. . notifies the Secretary concerned of an interest in a conveyance . . .
the Secretary shall carry out the conveyance through the use of competitive
procedures." 10 U.S.C. sect. 2688(b); see Government of Harford County,
Maryland, B-283259, B-283259.3, Oct. 28, 1999, 99-2 CPD para. 81 at 4 n.6.
Following enactment of section 2688, DOD first issued DOD Reform Initiative
Directive (DRID) No. 9, directing the military departments to develop plans
for privatizing electric, water, wastewater, and natural gas utility systems
by January 1, 2000, and then in 1998 issued DRID No. 49, directing the
military departments to develop plans providing for the award not later than
September 30, 2003 of privatization contracts for all utility systems except
those exempted in the attached guidance. DRID No. 9, Privatizing Utility
Systems, Dec. 10, 1997; DRID No. 49, Privatizing Utility Systems, Dec. 23,
1998. [1]

The RFP contemplates the award of one or more 50-year contracts for the
transfer of ownership (except for the natural gas systems), and the
operation by the new owner to provide services to the government, of the
following specified 13 utility distribution and collection (UDC) systems at
five installations in the National Capital Region: (1) electric and natural
gas systems at Fort Meade, Maryland; (2) electric, natural gas, water, and
wastewater at Fort McNair, District of Columbia; (3) electric, water, and
wastewater at Fort Myer, Virginia; (4) electric, water, and wastewater at
Fort Belvoir, Virginia; and (5) electric at Fort A.P. Hill, Virginia. (While
the contractors will not be required to assume ownership of the existing
natural gas UDC systems, they will be required to operate and maintain those
systems until they have completed new natural gas systems to be owned and
operated by the contractors. RFP sect. C.3.2.) Upon award, the selected
contractor for an installation is required to initiate action to bring the
UDC systems into compliance with local, state and federal codes, regulations
and laws pertaining to the design, installation, operation, maintenance and
repair of UDC systems. Capital improvements needed to bring the Fort Myer
natural gas distribution system into compliance must be completed not later
than 18 months after award; those required for the Fort Meade natural gas
distribution system must be completed within 30 months; and those required
for all other UDC systems must be completed within 60 months. RFP
sect.sect. C.5.1.1, C.8.1. Although the contractor will be responsible for funding
any required capital investments, the RFP provides for the cost of expansion
and upgrades to be recovered from the government over a period of time that
is consistent with the contractor's standard capital investment recovery
process or as required by a financing institution. RFP sect. H.1.1.

The RFP provides for only one award to be made per installation, and
offerors are required to propose on all utilities at a particular
installation. Offerors also are permitted, but are not required, to propose
on more than one installation; if an offeror proposes on more than one
installation, it may also submit a combination offer at a discounted price
covering the installations upon which it proposed. RFP sect.sect. B.3, B.5. The
contemplated term of the utility services contracts is 50 years, but the RFP
requires submission of total costs for each utility for each year, including
operation and maintenance costs and the estimated annual cost associated
with the offeror's initial capital improvement plan, for only the first 15
years; pricing thereafter will be determined under the price redetermination
provisions of Federal Acquisition Regulation (FAR) sect. 52.216-5. [2] RFP
sect. B.3.4.

STATE AND LOCAL UTILITY REGULATION

Position of the Parties

Both BG&E and VEPCO argue that the solicitation was defective for failure to
acknowledge that privatization of the UDC systems here is subject to state
law and regulation. BG&E specifically asserts that the solicitation is
defective because it fails to account for the fact that the states generally
have authority under the Federal Power Act of 1935, 16 U.S.C. sect. 824(b)(1)
(1994), and the Natural Gas Act of 1938, 15 U.S.C. sect. 717(c) (1994), over
intrastate transactions in electric energy and natural gas, and that this
authority is applicable to the privatization of the electric and natural gas
UDC systems at Fort Meade in Maryland. BG&E asserts that it is the only
entity authorized by Maryland law and the Public Service Commission of
Maryland (PSC) to own, operate and maintain electric and natural gas
distribution systems in the Fort Meade area. According to BG&E, before any
other entity can perform the utility privatization requirements for electric
and natural gas distribution services at Fort Meade, that entity must first
obtain an electric franchise and right to operate from the Maryland state
legislature, as well as revision by the PSC of its order designating BG&E as
the sole entity responsible for electric service in the Fort Meade area, and
obtain a gas franchise from Anne Arundel County, Maryland, and the consent
of local authorities and the PSC to exercise the gas franchise. BG&E Protest
at 13-14. [3]

In response, the Corps cites the written opinion of DOD's General Counsel,
dated February 24, 2000, that state laws and regulations do not apply to the
conveyance of an on-base utility system under section 2688. Opinion of DOD's
General Counsel, The Role of State Laws and Regulations in Utility
Privatization, Feb. 24, 2000 (DOD GC Opinion), at 4. DOD's General Counsel
based his conclusion on the constitutional principles that the states may
not regulate the federal government except to the extent that the
Constitution so provides or Congress consents, citing McCulloch v. Maryland,
17 U.S. 316 (1819), and that for Congress to consent to such regulation, it
must unequivocally and unambiguously waive the sovereign immunity of the
United States, citing United States Department of Energy v. Ohio, 503 U.S.
607, 615 (1992) and Hancock v. Train, 426 U.S. 167, 178-79 (1976). According
to DOD's General Counsel, the authority granted by section 2688 to convey an
on-base utility system is in furtherance of Congress' authority under
Article IV, section 3, of the Constitution "to dispose of and make all
needful Rules and Regulations respecting the Territory or other Property
belonging to the United States . . . ." DOD GC Opinion at 2. DOD's General
Counsel concluded that nothing in section 2688 or otherwise evidences the
explicit waiver of federal sovereignty required before a state can restrict
the disposal of federal property. Id. at 1-4, 8.

BG&E, however, argues that the DOD General Counsel's analysis fails to
account for the U. S. Supreme Court's decision in North Dakota v. United
States, 495 U.S. 423 (1990), where the Court stated that it "has more
recently adopted a functional approach to claims of governmental immunity,
accommodating of the full range of each sovereign's legislative authority
and respectful of the primary role of Congress in resolving conflicts
between National and State Governments." 495 U.S. at 435. Applying this
analysis, the Court in North Dakota upheld a state requirement, as applied
to alcoholic beverages sold at clubs and package stores on military bases
under concurrent federal and state jurisdiction, that importers of liquor
into the state must file a monthly report on the volume of liquor imported
and affix a label to each bottle of liquor sold to a federal enclave
indicating that the label is for domestic consumption within the enclave.
Id. at 426-44, 448-49. Likewise, according to BG&E, under the Supreme
Court's functional analysis in North Dakota, Maryland's recognized authority
over intrastate transactions in electric energy and natural gas, which does
not involve regulation of the federal government directly but instead
operates against all utility companies, without discrimination against the
federal government, does not violate the Supremacy Clause of the
Constitution when applied to the contractor selected to perform electric and
natural gas distribution services at Fort Meade.

Analysis

We conclude that the protesters have failed to demonstrate that the
solicitation was defective in this regard. First, we note that the RFP
already requires the successful contractor to "comply with all relevant and
appropriate local, state/district and federal codes, regulations or laws,
and changes thereto, as they pertain to the design, installation, operation,
maintenance and repair of the utility distribution/collection systems. The
Contractor shall comply with all relevant and appropriate ordinances, rates,
standards, operating policies or standard operating procedures, as well as
modifications thereto, as they are made and enacted." [4] RFP sect. C.8.1.

Second, we are not persuaded by the argument that the solicitation was
defective for failure to acknowledge a requirement for state and local
approval of the awardees. The effect of the protesters' argument would be
that the contracts for electric and gas distribution would be awarded on a
sole-source basis to the company holding the local utility franchise at each
installation.

The apparent conflict between the federal statutory mandate for competition
in 10 U.S.C. sect. 2688 and the state and local system of what are effectively
utility monopolies raises constitutional questions briefed at length by the
parties here. Our Office leaves to the courts the resolution of
constitutional questions; we look only to whether contracting agencies are
complying with clearly established judicial guidance in this area. See
Elrich Contracting Inc.; The George Byron Co., B-262015, B-265701, Aug. 17,
1995, 95-2 CPD para. 71 at 2.

In our view, unless a court rules otherwise, an agency is entitled to view
10 U.S.C. sect. 2688 as preempting any effort to limit competition for providing
utility distribution services at the military installations to the entities
currently approved by the respective states. Nothing in the protesters'
pleadings suggests clear federal judicial precedent requiring the federal
government to yield to state regulation over utility distribution services
at the federal installations. In particular, we note that the decision in
North Dakota, relied on by BG&E, specifically acknowledged as instructive a
line of Supreme Court cases on congressional preemption that invalidated
state regulations that prohibited what federal procurement statutes
required. The Court noted that, "for example, in Public Utilities Comm'n of
California v. United States, 355 U.S. 534 (1958), we put to one side
‘cases where, absent a conflicting federal regulation, a State seeks
to impose safety or other requirements on a contractor who does business for
the United States.' Id., at 543. We invalidated the state law because there
was a clear conflict between the state policy of regulation of negotiated
rates and the federal policy, expressed in statute and regulation, of
negotiated rates. Id. at 544." 495 U.S. at 435-36 n.7. The Court cited to
cases "in which we invalidated state regulations that prohibited what
federal law required. We stated in [Paul v. United States, 371 U.S. 245
(1963),] that there was a ‘collision . . . clear and acute,' between
the federal law which required competitive bidding among suppliers and the
state law which directly limited the extent to which suppliers could
compete. 371 U.S., at 253." 495 U.S. at 440. [5]

Here, there is a federal statute that mandates a particular procurement
approach. Section 2688 expressly directs and requires that "[i]f more than
one utility or entity . . . notifies the Secretary concerned of an interest
in a conveyance . . . the Secretary shall carry out the conveyance through
the use of competitive procedures." 10 U.S.C. sect. 2688(b).

It is undisputed that more than one utility or entity has expressed an
interest in the privatization of utilities at these installations. BG&E,
however, argues that the section 2688 requirement for use of competitive
procedures does not preclude imposing a requirement for state and local
approval before the selected contractor can commence performing natural gas
and electric distribution services. BG&E notes in this regard that, even
under the Competition in Contracting Act of 1984 (CICA), agencies need not
obtain full and open competition through the use of competitive procedures
"in the case of procurement procedures otherwise expressly authorized by
statute," 10 U.S.C. sect. 2304(a)(1) (1994), or where the product or services
"are available from only one responsible source or only from a limited
number of responsible sources and no other type of property or services will
satisfy the needs of the agency." 10 U.S.C. sect. 2304(c)(1).

We do not find BG&E's position persuasive. While agencies may impose
restrictions necessary to meet their needs, they may not, unless authorized
by statute, impose restrictions not based on their needs. See 10 U.S.C.
sect. 2305(a)(1)(B). Here, neither section 2688 nor another federal statute
authorizes the use of noncompetitive procedures or the restriction on
competition--a requirement for state and local approval--which BG&E seeks to
impose. To the extent that BG&E argues that, notwithstanding the absence of
a statutory requirement to restrict competition, the agency's needs require,
in effect, imposing a state and local licensing requirement, we note that
our Office will not consider contentions that specifications or other terms
and conditions should be made more restrictive, since our role in reviewing
bid protests is to ensure that the statutory requirements for full and open
competition are met, not to protect any interest a protester may have in
more restrictive specifications. ATA Defense Indus., Inc., B-282511.8, May
18, 2000, 2000 CPD para. ___ at 5; Simplix, B-274388, Dec. 6, 1996, 96-2 CPD para.
216 at 5-6. [6]

Section 8093

In support of its position, BG&E cites section 8093 of the Department of
Defense Appropriations Act, 1988, Pub. L. No. 100-202, sect. 8093, 101 Stat.
1329, 1329-79, and both BG&E and VEPCO cite its implementing regulation, FAR
sect.sect. 41.201(d), (e). Section 8093 generally provides, with some exceptions not
relevant here, as follows:

None of the funds appropriated or made available by this or any other Act
with respect to any fiscal year may be used by any Department, agency, or
instrumentality of the United States to purchase electricity in a manner
inconsistent with State law governing the provision of electric utility
service, including State utility commission rulings and electric utility
franchises or service territories established pursuant to State statute,
State regulation, or State-approved territorial agreements.

We do not consider section 8093, or its implementing regulations, to furnish
a basis for restricting competition in the selection of a conveyee for
on-base UDC systems. As an initial matter, we note that DOD's General
Counsel, in his February 24, 2000 opinion, takes the position that a plain
reading of section 8093's language, referring to the "purchase [of]
electricity in a manner inconsistent with State law governing the provision
of electric utility service," when considered in light of the constitutional
principle that waivers of sovereign immunity should be narrowly construed,
United States Department of Energy v. Ohio, 503 U.S. at 615, necessarily
indicates that the waiver of sovereign immunity in section 8093 is limited
to the purchase of the electric commodity (electric power) and does not
extend to acquisition of distribution or transmission services. DOD GC
Opinion at 5.

In support of his view that section 8093 does not apply to the conveyance of
a utility system, DOD's General Counsel cites the legislative history of
section 8093, which indicates that "[t]his provision is intended to protect
remaining customers of utility systems from the higher rates that inevitably
would result if a Federal customer were allowed to leave local utility
systems to obtain retail electric utility service from a nonlocal supplier."
S. Rep. No. 100-235, at 70 (1987); see H. R. Conf. Rep. No. 100-498, at 673
(1987). As suggested by DOD's General Counsel, the disposal of a
government-owned utility distribution system, not part of the local
utility's service base, and the subsequent acquisition of services from that
system, does not appear to be the harm which section 8093 seeks to avoid,
that is, utility abandonment by federal customers. See West River Elec.
Ass'n, Inc. v. Black Hills Power and Light Co., 918 F.2d 713, 717, 719 (8th
Cir. 1990) (given section 8093's purpose of avoiding utility abandonment by
federal customers, and since the federal enclave was not previously a
customer of the local utility, there was no indication that the section was
intended to apply so as to secure the local utility the exclusive right to
supply electricity). [7] Further, we note that the terms of the solicitation
here are consistent with this distinction between the procurement from the
local utility of electric power as a commodity and the acquisition of
distribution services from the conveyee, in that the RFP provides that
"[t]he services being procured by this solicitation do not include the
purchase of electricity, natural gas, or potable water or the treatment of
wastewater. . . . We do not anticipate that this procurement will interfere
with any franchises or authorities." RFP sect. B.2.

Accordingly, we do not believe that the provision in section 8093 regarding
the purchase of electricity conflicts with the mandate in section 2688 for
competitive procedures in the conveyance of utility systems. However, to the
extent that the protesters contend there is a conflict, the specific mandate
in the subsequently enacted section 2688 must prevail. [8]

DRID No. 49

BG&E and VEPCO also cite DRID No. 49 in support of its position. That
directive generally states that "[c]ompetitive procedures will be used in
conducting the privatization of utility systems," and that "[i]f the
installation resides in an area served by a franchised and regulated
utility, that franchise holder shall not be considered the presumptive
conveyee, nor shall another responsible and responsive utility or entity
that expresses interest be excluded from the competition." DRID No. 49 sect. IV.
However, DRID No. 49 also adds that "[s]tate law and regulatory policy
should be considered when determining the form of competition for franchised
and regulated utilities. Where state law and regulatory policy specifically
prohibits competition, a sole-source negotiation may be pursued after
evaluating response to the synopses." Id. (The directive cautions, however,
that the agency "may not rely on the assertions of the franchised or
regulated utility in this regard," but instead "must make an independent
legal finding that the franchised or regulated utility is the only entity
authorized to own and operate the utility system to be privatized." Id.)

As discussed above, we find reasonable the agency's position, as expressed
in the recent opinion of DOD's General Counsel and the agency's pleadings in
this case, that state and local law and regulation do not apply to the award
of a contract for conveyance of an on-base utility distribution system under
section 2688. Again, section 2688 specifically requires competition in the
conveyance of utility systems. To the extent that the protesters maintain
that the policy expressed in DRID No. 49 calls for another, noncompetitive
approach, in effect a sole source, on account of state and local regulation,
the specific statutory mandate in section 2688 for competition must prevail.

CONSOLIDATED CONTRACTING APPROACH

VEPCO challenges the solicitation requirement that offerors propose on all
utility systems at an installation and the provision for the award of no
more than one, consolidated contract at each installation. According to the
protester, this bundling of different types of utility systems precludes
competition by regulated utilities in Virginia, does not meet the
section 2688 requirement for the use of competitive procedures, and is not
necessary to meet the agency's actual needs. VEPCO contends that the agency
instead should permit offerors to propose on any of the 13 individual
utility systems being privatized here.

CICA generally requires that solicitations permit full and open competition
and contain restrictive provisions or conditions only to the extent
necessary to satisfy the needs of the agency. 10 U.S.C. sect.sect. 2305(a)(1)(A),
(B). Since bundled, consolidated, or total-package procurements combine
separate, multiple requirements into one contract, they have the potential
for restricting competition by excluding firms that can furnish only a
portion of the overall requirement. The Urban Group, Inc.; McSwain and
Assocs., Inc., B-281352, B-281353, Jan. 28, 1999, 99-1 CPD para. 25 at 9; Aalco
Forwarding, Inc., et al., B-277241.12, B-277241.13, Dec. 29, 1997, 97-2 CPD
para. 175 at 6. Where a protester challenges the bundling, we will review such
solicitations to determine whether the approach is necessary to satisfy the
agency's needs.

Based upon our review of the record, we find that the agency has reasonably
determined to consolidate all utilities at each installation into a single
contract rather than permit offerors to propose on individual utility
systems.

Agency Justification

In this regard, we note that the agency expects to achieve significant cost
savings from awarding no more than 5 contracts, that is, one for each
installation, rather than awarding as many as 13 contracts, that is, one for
each utility system. First, the agency expects that, as a result of
contractor efficiencies and economies of scale arising from having one
contractor responsible for all of the privatized utilities at an
installation, there will be significant contract savings accruing to the
government in the form of lower contract pricing and a lower cost to the
government for cost reimbursable capital improvements. The government
anticipates a more efficient, fuller utilization of personnel and equipment,
particularly specialists and specialized equipment, when personnel or
equipment can be switched between a number of systems at a particular
installation depending on demand and schedule. The government also
anticipates better coordination, mobilization and sequencing of work on
construction projects at an installation so as to mass similar work and
avoid conflicts and piecemeal efforts. For example, this could include
[DELETED]. Agency Post-Hearing Comments, July 11, 2000, at 7-9.

In support of its expectation of contract savings from these and similar
efficiencies, the agency offered at the hearing our Office conducted in this
matter testimony from the Deputy Chief of Staff for Support, Military
District of Washington, an experienced construction manager and engineer
(who also signed the determination and findings supporting the consolidation
of utility systems at each installation), Hearing Transcript (Tr.), July 6,
2000 (II), at 6-10,19-20, 36-37, 62-63, 65, 67, 72, as well as testimony
from an outside consultant. Tr., June 30, 2000 (I), at 183-84, 216, 239-42.
In addition, the agency pointed to indications it had received from offerors
or potential offerors that consolidation could result in significant
contract savings. For example, [DELETED]. Tr. II at 19-20, 36-37. Also, the
record includes the government analysis of an offer submitted by Evantage, a
unit of VEPCO, in response to MDW's solicitation for an energy savings
performance contract for energy-saving upgrades and maintenance for the
National Capital Region. The agency's analysis indicated that Evantage's
1999 proposal for the consolidated line item, which consolidated the
individual line items for Fort Meade, Fort Belvoir and Fort McNair/Fort
Myer, offered very significant financial advantages relative to the sum of
its individual line offers, including approximately an additional
$11.6 million (or approximately 21.3 percent) in investment, a decrease in
the overhead rate from 15.8-19.3 percent rates for the individual line items
to 5.9 percent, and a reduction in the interest rate from 7.9 percent to
6.31 percent. Review of Jan. 15,1999, Proposals, sect. 4, Analysis of Individual
Offers, at 7-8; Tr. II at 42-50. (The agency considers Evantage's proposed
reduction in overhead rates in the event of consolidation to be particularly
significant because it believes many of the economies of scale it expects to
realize from consolidation will be related to a decrease in managerial and
administrative costs. Agency Post-Hearing Comments, July 14, 2000, at 11;
see Tr. I at 241.)

In addition, the agency expects that as a result of consolidation, reducing
the number of contracts to no more than 5 from as many as 13, there will be
significant contract administration savings. In this regard, the Deputy
Chief of Staff for Support testified that, although the number of utility
systems would remain the same, increasing the number of contracts from 5 to
13 could increase contract administration costs by $[DELETED] million over
the life of the contract as a result of the need for additional contracting
officers, contract specialists, and construction field specialists needed to
supervise and coordinate the additional contractors. Tr. II at 21-26, 34-36,
94-104, 107-08. The Deputy Chief of Staff for Support noted in this regard
that, since MDW will probably eliminate [DELETED] positions in the next
2-3 years, in preparation for conducting Office of Management and Budget
Circular No. A-76 cost comparisons between in-house and contractor
performance, MDW would likely not have the workforce needed to administer
the contracts and, as a result, it would need to contract at a higher price
with another agency, such as the Corps, for contract administration
services. Tr. II at 27-28.

Further, the agency expects that having more contractors working at the same
installation would lengthen the construction period during the upgrade phase
of the contract because of coordination problems, thereby delaying the
repair of facilities (some of which are aging and need to be repaired as
soon as possible) and increasing the cost to the government (both directly
for contract administration and indirectly through reimbursement of a
contractor's capital improvement costs). Tr. II at 37-38. The agency also
expects that having more contractors at the installations--which have a
workforce of approximately [DELETED] and are busy and congested--would
increase the disruption to agency operations and the potential for
accidents. Tr. II at 38-41.

The agency also determined that requiring offerors to take on all of the
utilities at an installation was necessary so as to ensure that all of the
utility systems are in fact privatized. Specifically, the record indicates
that some utilities are of more interest to potential contractors than
others; electric distribution systems are most attractive, followed in order
of declining preference by natural gas distribution systems, and potable
water distribution/wastewater collection systems. Tr. I at 185-86; Tr. II at
13. Indeed, the agency concluded from the information available to it that
there was so little interest in water distribution and wastewater collection
systems lacking significant treatment facilities, as is the case here with
the three installations (Fort Belvoir, Fort Myer and Fort McNair) that have
water systems to be privatized under this solicitation, especially when they
are small systems (such as those at Fort Myer and Fort McNair) or in poor
condition (as is the case with Fort Myer's wastewater collection system and
Fort Belvoir's water distribution and wastewater collection systems), that
there was a significant risk that the agency would be unable to obtain any
offers for them if offerors were afforded the opportunity to propose on
individual utility systems. Tr. I at 21-22, 189, 193-94; Tr. II at 13-14,
128; Utility Privatization Study, Military District of Washington, C.H.
Guernsey & Co., Apr. 2000, sect.sect. 3.2.4, 5.2.4. The possibility that the agency
might be unable to privatize the water distribution and wastewater
collection systems (or other systems) was of particular concern to the
agency because the agency currently lacks the military construction funds
needed to finance needed capital improvements. The agency instead seeks to
acquire the needed upgrades and improvements by transferring ownership of
the systems to a private contractor and then reimbursing the contractor over
time (the "mortgage" concept) using operation and maintenance funds as the
contractor amortizes the cost of the capital improvements it makes. Tr. II
at 63-65, 68-72.

In this regard, the record indicates that in 1996-97, [DELETED] indicated
that it was not interested in assuming ownership of the wastewater
collection system at [DELETED], because it is in "very bad shape." Affidavit
of (Former) Chief, Installation Support Division, MDW, June 20, 2000.
Likewise, [DELETED] advised the Corps on November 19, 1999, that, because
the solicitation required assumption of the risk for the water and
wastewater systems at Fort McNair, Fort Myer and Fort Belvoir, but those
systems did not provide sufficient daily activity to share the overhead of
comprehensive utility systems, [DELETED] could not recruit team members and
would probably be unable to submit a proposal unless significant treatment
systems, such as that at Fort Meade (which was not included the
solicitation), were added. Letter from [DELETED] to the Corps at 1-2
(Nov. 19, 1999). According to [DELETED], "From our discussions with leading
representatives from the water/wastewater industry, without significant
treatment systems offered in the procurement, the opportunity is not of
sufficient capacity for their participation." Id. at 2. In addition,
consultants to the agency from C.H. Guernsey & Company, which is providing
utility privatization support to the government, reported on other instances
of little interest in distribution/collection systems--including, for
example, at [DELETED]--unless they were accompanied by at least an
opportunity to share in excess treatment capacity. Statement of Senior Vice
President, C.H. Guernsey & Company, June 28, 2000; Statement of Senior
Project Manager, Energy Division, C.H. Guernsey & Company, June 28, 2000.

VEPCO's Contentions

As an initial matter, VEPCO asserts that it (as well as any other regulated
Virginia utility) is unable, as a matter of utilities law and regulation, to
compete, either on its own or as part of a teaming arrangement, for a
requirement to provide services that are not incidental and related to its
regulated business, the provision of electric power. [9] VEPCO argues that,
because it excludes regulated utilities and effectively leaves a field of
only one firm, the agency's consolidated (i.e., bundled) procurement
approach necessarily fails to satisfy the section 2688 requirement for use
of competitive procedures when privatizing utilities. [10]

We disagree. Again, agencies are required to specify their needs in a manner
designed to promote full and open competition and thus may include
restrictive requirements only to the extent necessary to satisfy their
actual needs. 10 U.S.C. sect.sect. 2305(a)(1)(A), (B). However, all specifications
and other solicitation requirements are potentially restrictive of
competition to some extent, and the mere fact that a particular prospective
offeror is unable or unwilling to compete under a solicitation that reflects
the agency's needs does not establish that the solicitation is unduly
restrictive or that the agency is using other than competitive procedures.
See Micromass, Inc., B-278869, Mar. 24, 1998, 98-1 CPD para. 93 at 4.

VEPCO also questions the agency's expectation of significant savings from a
bundled approach. For example, the protester notes a number of
inconsistencies in the approach to calculating contract administration
savings between: (1) the estimate detailed in the testimony of the Deputy
Chief of Staff for Support, who testified to contract administration savings
of $[DELETED] million over the life of the contract from awarding only 5
contracts, rather than 13, Tr. II at 94; (2) an analysis submitted to our
Office in response to the protest, which estimated that contract
administration savings from awarding only 5, rather than 13, contracts would
total approximately $[DELETED] million, Corps Letter, June 29, 2000,
Contract Scenarios Attach., at 2-5; and (3) an earlier analysis prepared by
a subordinate of, and referenced in the determination and finding signed by,
the Deputy Chief of Staff for Support, which estimated contract
administration savings of up to $[DELETED] million from awarding only
1 contract rather than 13. Determination and Findings Regarding Appropriate
Level of Combinations of Utilities in MDW Utility Privatization (D&F),
Mar. 17, 2000, sect. 11. However, all of the analyses agree that there will be a
significant increase in contract administration costs as a result of
awarding the additional contracts, and VEPCO has not shown this expectation
to be unreasonable.

Nor has VEPCO shown the agency expectation of significant contract savings
from an installation-level consolidation of utility systems to be
unreasonable. [11] We recognize that VEPCO has raised a significant question
as to whether the expected savings from an installation-level consolidation
of utility systems might be offset to some extent by higher prices/costs in
the event that the consolidation eliminates from the field of competitors
regulated local utilities, which presumably should be in a position to offer
some economies of scale from integration of the installation systems into
the local utility's adjacent service area. Tr. II at 171-72, 203. However,
VEPCO failed to offer testimony at the hearing from experts in the
construction and utilities fields as to the extent and nature of these
savings, or to otherwise clearly demonstrate that any such savings are
likely to be greater than the savings reasonably expected from
consolidation. Cf. Pemco Aeroplex, Inc., B-280397, Sept. 25, 1998, 98-2 CPD
para. 79 at 15 (agency failed to submit persuasive evidence to support claimed
savings from bundling, or that any such savings are significant when
compared to the potential cost savings from increased competition if
workloads were unbundled). [12]

In any case, VEPCO has not shown that the agency was unreasonable in
determining that privatizing on a utility-by-utility basis could result in
the government being unable to privatize some of the less desirable utility
systems, systems for which it lacks the military construction funding to
make needed capital improvements. VEPCO asserts that the agency was aware
that there was water company interest in privatization of the water and
wastewater UDC systems if they were unbundled from the other types of
utility systems. In support of its assertion, VEPCO cites an April 2, 1998
letter in which [DELETED] expressed "a great interest in providing water and
wastewater ownership, operation and maintenance services to the US
Government," but noted that the "complexities of one utility may delay the
privatization of others"; [DELETED] suggested that "[a]n option to avoid
such delays may be to bundle like utilities of several bases
(water/wastewater utilities for the three bases referenced under this
request for information as an example)." Letter from [DELETED] to the Corps
at 1, 2 (Apr. 2, 1998). As noted by the agency, however, [DELETED] also
stated in its April 2 letter to the Corps that "[w]e suggest that the Army
consider retaining ownership of the facilities, and allow the private sector
company to enter into a lease arrangement to operate, maintain, and manage
the facilities," id. at 2; the agency viewed this as inconsistent with the
concept of privatization, which involves transferring ownership of, and
responsibility for, the utility systems (as distinguished from merely
contracting out their operation). Tr. I at 91.

VEPCO also cites an April 3, 1998 letter to the Corps in which [DELETED]
noted that at a recent industry-government forum, the Corps indicated that
it was "bundling all the utilities into one package because individually
they may not be economically viable for privatization." Letter from
[DELETED] to the Corps at 1 (Apr. 3, 1998). [DELETED] advised the Corps that
"[t]his concern may be true for single isolated installations, but in this
situation there are several installations in the same metropolitan area and
by considering them together in one proposal, the feasibility of separating
the utilities is very possible." Id.

The record indicates, however, that the agency understood [DELETED]'s
interest to be in treatment plants rather than merely
collection/distribution systems. Tr. I at 98. That this understanding was
not unreasonable is suggested by subsequent events. At an August 24, 1999
meeting, requested by VEPCO after [DELETED] declined to finalize a teaming
arrangement with VEPCO, and which was attended by representatives of VEPCO,
[DELETED], [DELETED], the Corps, and MDW, the government was advised that

the w/ww [water/wastewater] pipe systems at Fts. Myer, McNair and Belvoir
only offer at best an uncertain or low financial opportunity. Additionally,
the government was told that if the Ft. Meade w/ww treatment facilities and
pipes were included in the solicitation, there would be greater profit
incentives for potential contractors and additional savings for the
Government.

Affidavit of Program Manager for Utility Privatization, Baltimore District,
Corps, June 19, 2000, at 1; Aug. 24, 1999 Meeting Sign-In Sheet, and Agenda
at 7. Again, we note that after the meeting, [DELETED] advised the Corps
that "[f]rom our discussions with leading representatives from the
water/wastewater industry, without significant treatment systems offered in
the procurement, the opportunity is not of sufficient capacity for their
participation." Letter from [DELETED] to the Corps at 2 (Nov. 19, 1999). We
further note that VEPCO's director of government energy programs testified
that

the water company had always said, every water company, in fact, the ones
that wouldn't even come to talk to us said, well, without a water treatment
system it is not large enough, so most of the water companies indicated that
a larger bundling for them, where they had the water, including the Ft.
Meade system, would be of more interest to them.

Tr. I at 286-87; see id. at 294, 298-99; but cf. Tr. I at 325-26 ([DELETED],
unlike [DELETED], was willing to consider distribution systems only).

Based upon our review of the record, we conclude that given the totality of
the information available to the agency, the government could reasonably
determine that there was a significant risk that, if the solicitation were
structured as VEPCO protests it should have been, that is, on the basis of
soliciting offers on the basis of 13 individual utility systems, the agency
would not receive an acceptable offer for some or all of the
water/wastewater UDC systems, which lacked a treatment component. As we have
previously held, where an agency reasonably does not anticipate that it will
receive competition for all of its requirements if it solicits separately
for them, it properly may combine them in a single procurement.
Iowa-Illinois Cleaning Co., B-260463, June 13, 1995, 95-1 CPD para. 272 at 3;
cf. Pemco Aeroplex, Inc., supra, at 14 (while GAO recognizes that the agency
must have all of its workload performed, GAO finds that the agency has
failed to justify consolidation as necessary to obtain adequate competition
for all components of the workload).

Further, VEPCO has not shown that it was unreasonable for the agency to
conclude that, to the extent that it was able to privatize all of its
utility systems under separate contracts for each utility, the resulting
circumstance of multiple contractors undertaking capital improvements at the
same installation was likely to create coordination problems (and thus
extend the construction period and delay the needed repair or replacement of
utility systems) and increase the disruption to operations at the
installations.

In summary, while it may well turn out (as asserted by VEPCO) that the
agency's consolidated contracting approach will significantly restrict
competition, we find that the above justifications cited by the agency, when
considered together, provide a reasonable basis for the agency determination
to consolidate all utilities at each

installation into a single contract rather than permit offerors to propose
on individual utility systems. [13]

The protests are denied.

Robert P. Murphy

General Counsel

Notes

1. Section 2688 prohibits conveyance of a utility system until the Secretary
has submitted to Congress, and Congress has had 21 days to review, an
economic analysis demonstrating that the long-term economic benefit of the
conveyance to the United States exceeds its long-term economic cost and that
the conveyance will reduce the long-term costs of the United States for
utility services. 10 U.S.C. sect. 2688(e). DRID No. 49 exempts from
privatization utility systems that would be uneconomical to privatize or for
which there are unique security reasons not to privatize. DRID No. 49 sect.
III.A.

2. This RFP replaces RFP No. DACA31-99-R-0044, issued on July 20, 1999,
under which the Corps had previously sought to privatize utility systems at
National Capital Area installations. Among other differences, the earlier
solicitation required offerors to propose on all UDC systems at all
installations, rather than merely all UDC systems at any installation, and
it contemplated the award of a single 15-year contract. The earlier
solicitation was cancelled after VEPCO filed a protest with our Office
challenging the solicitation provision for the award of a single
consolidated contract and arguing (as did BG&E in an agency-level protest)
that the solicitation was improper because it failed to recognize that the
privatization of the utilities was subject to state utility law and
regulation. Virginia Elec. and Power Co., B-284597.

3. BG&E has submitted an opinion from the general counsel of the PSC stating
that the commission will have jurisdiction over any non-federal entity
awarded the contract to own, operate and maintain the natural gas and
electric distribution systems at Fort Meade. Letter from PSC General Counsel
to BG&E at 2 (Jan. 7, 2000), Opinion at 2-5, 13.

4. According to DOD's General Counsel:

while the entity to whom the Department conveyed the on-base utility system
is not required to submit to state licensing or similar requirements that
undermine the Federal competitive selection of that entity, to the extent
that the state has regulations regarding the conduct of operation and
ownership of utility systems, the entity may have to comply with those
requirements if those state requirements do not impose a significant burden
on the Federal Government, conflict with a Federal system of regulation, or
undermine the Federal policy being implemented.

DOD GC Opinion at 9.

5. See United States v. Commonwealth of Virginia, 139 F.3d 984 (4th Cir.
1998), where the Fourth Circuit invalidated a state licensing requirement as
applied to an investigator performing federal background checks. In reaching
its decision, the court specifically distinguished the decision in North
Dakota, noting that unlike the case before it, the liquor regulations
addressed in North Dakota "did not attempt to alter the criteria under which
the federal government made its decision. Nor did those regulations prevent
the federal government from selecting the bid it believed was most
competitive or otherwise enable the state to second-guess the federal
government's judgment as to who should supply the federal enclave." 139 F.3d
at 989 n.7; see Gartrell Constr. Inc. v. Aubry, 940 F.2d 437 (9th Cir. 1991)
(state may not require a construction contractor performing work for the
federal government at a military installation, and having been determined
responsible by the federal government, to obtain a state license, as that
would interfere with federal government functions and frustrate the policy
of selecting the lowest responsible bidder).

6. As noted by BG&E, section 2688 does envision compliance with state
regulation in one circumstance. Section sect. 2688(c) provides that the
Secretary of the military department concerned shall require consideration
for a conveyance in an amount equal to the fair market value of the right,
title, or interest of the United States conveyed, and states that this
consideration may take the form of a lump sum payment or a reduction in
charges for utility services provided by the utility or entity concerned to
the military installation at which the utility system is located. In the
latter event, "[i]f the utility services proposed to be provided as
consideration . . . are subject to regulation by a Federal or State agency,
any reduction in the rate charged for the utility services shall be subject
to establishment or approval by that agency." 10 U.S.C. sect. 2688(c)(2). This
provision, however, concerns the acceptability of only one form of
consideration that may be offered, that is, a reduction in the rate charged
for utility services that are subject to regulation by a federal or state
agency, and it in no way supports an intention to generally limit the
competition to entities that have, or can obtain before commencing
performance, state and local approval for furnishing natural gas and
electric distribution services. See generally H. R. Conf. Rep. No. 105-340,
at 858-59 (1997).

7. In both West River, 918 F.2d at 719, and City of Tacoma, Dep't of Public
Utilities v. United States, 28 Fed. Cl. 637, 646 (1993), the courts found
that section 8093 did not manifest the necessary clear and unambiguous
intent on the part of Congress to defer its exclusive jurisdiction over a
federal enclave and authorize state regulation.

8. Both BG&E and VEPCO also cite Defense Federal Acquisition Regulation
Supplement sect. 241.201(1), which provides that in acquiring utility services,
"[e]xcept as provided in FAR 41.201, DOD, as a matter of comity, will comply
with current regulations, practices and decisions of independent regulatory
bodies which are subject to judicial appeal." Again, to the extent that this
regulatory provision is inconsistent with section 2688, that section's
specific statutory mandate for competition in the conveyance of utility
systems must prevail.

9. It is not clear why, if VEPCO in fact is unable as a matter of law to
compete for a bundled requirement, it actively participated in the
pre-solicitation stages of this procurement, engaging in extensive
interaction with the agency for several years. In this regard, we note that
in a 1999 letter to the Corps, it explained its inability to compete in
terms of business considerations rather than legal restrictions. Thus, VEPCO
advised the agency that

[a]fter almost 4 years of effort and lengthy discussions with numerous
industry leaders, it appears that we will be unable to secure a dedicated
water/wastewater utility provider to join our team. On several occasions we
have had preliminary agreement with water/wastewater providers that
ultimately declined to participate after performing some due diligence of
the MDW opportunity. The risk profile is not attractive, particularly with
the limited information on which to base technical and financial
assessments.

Letter from VEPCO to the Corps at 1 (Nov. 29, 1999). (VEPCO proposed
amending the solicitation either to include all water/wastewater systems
(including Fort Meade's) or to remove all such systems. Id. at 2.)

10. VEPCO points out that in a prior utility privatization procurement at
Fort Hamilton, New York, the Corps received only one offer, and that was
from a nonregulated utility provider. The Corps, however, has explained that
there were significant differences between the Fort Hamilton procurement and
this one which made the Fort Hamilton requirement significantly less
attractive to offerors, including: (1) the fact that the Fort Hamilton
requirement was a very small one in an area with many, much larger and more
attractive opportunities; (2) the fact that the Fort Hamilton contract was
to be for 10 years while the current solicitation contemplates award of a
50-year contract, see Letter from [DELETED] to the Corps at 2 (Apr. 3, 1998)
(10-year contract inconsistent with standard amortization period in
industry); and (3) the fact that the Fort Hamilton solicitation required a
fixed-price offer for the capital improvements portion of the requirement,
while the current solicitation provides for cost reimbursement for capital
improvements, thereby reducing the risk to the contractor. Agency
Post-Hearing Comments, July 11, 2000, at 9. We note that the extent of the
actual competition received here is unknown since, although initial
proposals have been received, the Corps has declined to release information
about them on the basis that any release could jeopardize the integrity of
the ongoing procurement.

11. Indeed, a consultant retained by VEPCO testified that he believed that
consolidation of utilities could produce "synergies" that provide
"significant savings" to companies other than the local utilities. Tr. I at
365-66.

12. As noted by VEPCO, in his March 17 D&F, the Deputy Chief of Staff for
Support cited in support of his position that significant contract savings
could be expected from consolidation an estimate ($[DELETED] million in
savings) that derived from a chart prepared by a potential offeror. D&F sect.
12. The fact that this estimate originated with a potential offeror, and
appeared to reflect the estimated potential savings available from
consolidation of systems beyond those being privatized here, does not
undermine the reasonableness of the Deputy Chief of Staff for Support's
position that significant savings from consolidation are possible here, a
position that, as noted above, he explained in his testimony.
Tr. II at 6-10,19-20, 36-37, 62-63, 65, 67, 72.

13. VEPCO also objects to the fact that the agency allowed only 30 days to
submit proposals. As noted above, however, the protester argues that the
RFP's "bundled structure precludes [VEPCO] . . . from competing in the
procurement." VEPCO Post-Hearing Comments, July 11, 2000, at 5. Given our
conclusion above that the agency reasonably determined that the consolidated
contracting approach reflected its actual needs, and in view of the
protester's admitted inability to compete under that approach, it is
apparent that the failure to afford the protester a longer response time did
not result in competitive prejudice to the protester, and thus does not
provide a basis to sustain its protest. Infrared Techs. Corp., B-282912,
Sept. 2, 1999, 99-2 CPD para. 41 at 8 (competitive prejudice is a critical
element of any viable protest).