TITLE:  American States Utilities Services, Inc., B-291307.3, June 30, 2004
BNUMBER:  B-291307.3
DATE:  June 30, 2004
**********************************************************************
   DOCUMENT FOR PUBLIC RELEASE                                                
                                                                              
The decision issued on the date below was subject to a GAO Protective      
Order.  This redacted version has been approved for public release.        

   Decision

   A 

   Matter of:   American States Utilities Services, Inc.

   A 

   File:            B-291307.3

   A 

   Date:              June 30, 2004

   A 

   Stephen M. Sorett, Esq., and John A. Burkholder, Esq., McKenna Long &
Aldridge, forA the protester.

   Kenneth A. Martin, Esq., Martin & Associates, for U.S. Filter Operation
Systems, Inc.

   Robert E. Little, Jr., Esq., Department of the Navy, for the agency.

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

   DIGEST

   A 

   1.  Protest that agency evaluated protester*s proposal, under request for
proposals for utilities privatization, against undisclosed criteria for
pricing structure, operations and maintenance savings, and subcontractor
experience is denied, where evaluation was consistent with the
solicitation*s evaluation criteria and agency*s conclusions are reasonably
supported by the record.

   A 

   2.  Protest that agency held inadequate and misleading discussions with
protester concerning subcontractor capability is denied, where agency
informed protester of its concerns during discussions and protester*s
response did not alleviate those concerns; agency did not mislead
protester by failing to reiterate the concerns that were not alleviated
after reviewing protester*s response to the initial discussions.

   DECISION

   A 

   American States Utilities Services, Inc. (ASUS) protests the Department of
the Navy*s award of a contract to U.S. Filter Operation Systems, Inc.
(USFOS), under request for proposals (RFP) No.A N62470-00-R-3602, for
utilities privatization. ASUS asserts that its proposal was unfairly
evaluated against unstated criteria, and that the discussions held with
the firm were inadequate and misleading.

   A 

   We deny the protest.

   A 

   BACKGROUND

   A 

   The Navy seeks to privatize 58 different utility systems for wastewater
and potable water collection, distribution and treatment located
throughout Virginia, West Virginia, and North Carolina.  As set forth in
the RFP, the agency*s objective for privatizing these systems is to
*transfer ownership responsibility and risks to a highly qualified private
party, utilize private capital for System investments, and secure and
maintain high quality, reliable service that is more economical.*  RFP
SA 5.2.1; see RFPA SS 1, 3.  The authority to convey these utility systems
is provided by 10A U.S.C. SA 2688 (2000), which authorizes agencies to
privatize, or convey, a utility system so long as it is in the long-term
economic interest of the government. 

   A 

   The RFP was a performance-based solicitation with the stated intent of
providing offerors with the *maximum flexibility in developing
privatization solutions.*  RFPA SA 5.1.  Offerors were encouraged to
*utilize their creativity, skills, and expertise in proposing an offer
that is most advantageous* to the agency, RFP SS 3, 7; thus, according to
the solicitation, *the majority of terms and conditions for privatization
have been left to the development* of the offerors.  RFP S 5.1.

    

   Under the solicitation, award was to be made to the offeror whose proposal
represented the best value to the government based on two evaluation
factors: (1)A technical, including equally weighted subfactors for service
requirements, experience/past performance, financial capability, and
support for small businesses; and (2)A economic/price, including equally
weighted subfactors for economic/price and long term cost.  In addition,
the RFP provided for a risk assessment to be performed with respect to
each pricing element of a proposal.  The RFP stated that the technical and
economic/price subfactors were equally important.

   A 

   Both ASUS and USFOS submitted proposals in response to the RFP that were
found to be in the competitive range.  The Navy then held several
comprehensive rounds of discussions with the offerors concerning the
economics, weaknesses and deficiencies in their proposals, the goals and
objectives of utilities privatization, the Navy*s preferences regarding
pricing structure, and the requirements for asset conveyance.  The agency
also conducted site visits and interviews with existing customers and
employees of the offerors to further evaluate the firms* operating,
maintenance, and administration practices.  At the conclusion of these
discussions, the agency requested submission of final proposal revisions
(FPR).

   A 

   USFOS submitted an FPR for 34 different water and wastewater facilities,
while ASUS submitted an FPR for 19 water systems and 18 wastewater
systems.  USFOS*s proposal received an overall proposal rating of good,
while ASUS*s was rated as only acceptable.  The evaluation board evaluated
offerors* proposals as follows:

   A 

   +------------------------------------------------------------------------+
|A                                         |ASUS         |USFOS          |
|------------------------------------------+-------------+---------------|
|Overall Price Rating                      |Acceptable   |Good           |
|------------------------------------------+-------------+---------------|
|A          |Economic/Price                |Good         |Good           |
|           |------------------------------+-------------+---------------|
|           |Long Term Cost                |Acceptable   |Good           |
|------------------------------------------+-------------+---------------|
|Overall Technical Rating                  |Acceptable   |Acceptable     |
|------------------------------------------+-------------+---------------|
|A          |Service Requirements          |Good         |Good           |
|           |------------------------------+-------------+---------------|
|           |Experience/                   |Acceptable   |Good           |
|           |                              |             |               |
|           |Past Performance              |             |               |
|           |------------------------------+-------------+---------------|
|           |Financial Capability          |Acceptable   |Acceptable     |
|           |------------------------------+-------------+---------------|
|           |Small Business Support        |Acceptable   |Acceptable     |
|------------------------------------------+-------------+---------------|
|Overall Proposal Rating                   |Acceptable   |Good           |
+------------------------------------------------------------------------+

   A 

   A 

   The Navy specifically found USFOS*s pricing structure to be more favorable
to the government and less risky than ASUS*s.  USFOS offered a 50-year
service contract with a 25-year fixed price (with economic price
adjustment), which the agency considered to be its preferred method of
pricing because it provided the most predictability and long-term
stability in price.  In addition, USFOS proposed to [REDACTED]; the agency
viewed this approach as a strength because it provided for recompetition
as a means of price redetermination.  In contrast, while ASUS proposed to
assume full responsibility for the operation, maintenance, and
recapitalization of the potable water and wastewater systems for a period
of 50 years, ASUS*s FPR provided for a price redetermination after 2
years, and every 5A years thereafter, which the Navy viewed as posing an
increased price risk to the government.  

   A 

   In addition, the Navy determined that the overall life-cycle cost of
USFOS*s proposal was [REDACTED]A percent lower than under government
ownership, including [REDACTED]A percent savings in operations and
maintenance (O&M) costs and [REDACTED] percent savings in capital
expenditures.  In contrast, the overall life-cycle cost of ASUS*s proposal
was only [REDACTED] percent lower than under government ownership,
including [REDACTED] percent savings in O&M costs and [REDACTED] percent
savings in capital expenditures.  Further, the Navy found advantageous
USFOS*s higher O&M savings, on the basis that offerors generally have more
control over their O&M charges and, as a result, the projections of O&M
savings were likely to be more reliable.

   A 

   While the Navy found both offers to be overall technically acceptable, it
determined that USFOS*s offer was more advantageous.  For example, while
USFOS proposed that it would perform as the prime contractor for the
service contract, ASUS proposed to have a subcontractor provide the O&M
support for the Navy systems and perform most of the wastewater portion of
the proposal.  The Navy found that ASUS*s reliance on the subcontractor
posed a risk to performance because of the subcontractor*s apparent lack
of experience operating wastewater collection systems similar in size and
complexity to the Navy systems, and because award of this contract could
require a 148-percent growth in the subcontractor*s business. 

   A 

   The Navy concluded that, based on its more advantageous technical
approach, more favorable pricing structure, and lower risk, USFOS*s
proposal represented the best value to the government, and that the due
diligence process therefore should commence with that firm.  Upon being
notified that it was no longer being considered for award, ASUS first
protested to the agency and then, when that protest was denied, filed this
protest with our Office.

   A 

   EVALUATION

   A 

   ASUS challenges the Navy*s evaluation of its proposal.  The protester
asserts that the Navy applied unstated evaluation criteria in three
areas:  the evaluation of its proposal pricing structure, O&M savings, and
subcontractor experience.

   A 

   We review challenges to an agency*s evaluation only to determine whether
the agency acted reasonably and in accord with the solicitation*s
evaluation criteria and applicable procurement statutes and regulations. 
PharmChem, Inc., Ba**291725.3 etA al., July 22, 2003, 2003 CPD P 148 at
3.  Based on our review of the record, we find the agency*s selection of
USFOS to be reasonable.

   A 

   Pricing Structure

   A 

   ASUS asserts that the agency evaluated its proposal against an undisclosed
*4a**tier* pricing preference in which a *design-build-operate*(DBO)
contract structure was the preferred approach.  According to ASUS, it was
told *for the first time at the debriefing* that the Navy*s order of
pricing preference (ranging from most favorable to least favorable) was as
follows: (1) a firm-fixed-price approach along the lines of a DBO for a 25
year time period and possible use of a *trust*; (2) cost of service
approach; (3) price redetermination based on agreed upon events as a
*trigger*; and (4) price redetermination to occur every 5 years.  Protest
at 6. 

   A 

   ASUS*s argument is without merit.  As an initial matter, the Navy denies
that it preferred a DBO approach; according to the agency, a DBO approach
was never considered to be a viable one in a federal privatization
program, and the concept was mentioned in the debriefing only as a lead-in
to explaining the concept of third-party ownership arrangements in the
context of utilities privatization.  Agency Report at 5.  Based upon our
review of the record, we find nothing to indicate that consideration of a
DBO approach played any role in the evaluation.

   A 

   Instead, our review of the record indicates that the Navy emphasized, both
in the evaluation and in its communications with ASUS, the agency*s desire
for long-term price predictability and a reduction in the cost risk to the
government.  For example, ASUS was told that the *Navy is looking for the
least risky, flexible contract, with cost predictability.*  Minutes from
May 6, 2003 Discussion Session, at 2.  The Navy explained that it
*requires price predictability* and advised ASUS that *[y]our
redetermination is risky.  The more a price can be fixed over time, the
better.*  Id. atA 3.  Indeed, ASUS admits in its response to discussion
questions that:

   A 

   [t]here have been three (3) differing pricing structures discussed in
meetings with the Government.  These are, in order of Government
preference:  1) Long term fixed[-]price with recompetition/
redetermination at year 25, 2) Cost of Service, and 3) Price
Redetermination.

   ASUS Response to Discussion Questions, Aug. 11, 2003, at 6. 
Notwithstanding the Navy*s advice to the contrary, however, ASUS informed
the Navy that it would *not be able to have a fixed price with escalator
for a 25-year period,* id., and ASUS instead proposed a price
redetermination after 2 years, and every 5A years thereafter.  We find
that the agency reasonably viewed ASUS*s approach as posing an increased
price risk to the government.

    

   O&M Savings Versus Capital Savings

   A 

   ASUS complains that its proposal was considered less favorably than
USFOS*s and *downgraded* under the economic/price subfactor based on an
undisclosed preference for O&M savings as opposed to capital savings. 
This argument is without merit.

   A 

   The record indicates that the Navy did not *downgrade* ASUS*s proposal in
the evaluation on account of its mix of O&M and capital savings, but
instead rated it *good* under this price subfactor, and assessed it a
*strength* for the firm*s proposed O&M and capital savings.  Evaluation
Board Report at 14.  The record confirms that the Navy merely considered
offerors* proposed O&M and capital savings as a discriminator between
proposals in terms of price risk.  Id. atA 4.  Such a comparison was
consistent with the stated evaluation approach, which provided that the
agency would evaluate, under the economic/price subfactor, the *purchase
price . . . with [a] breakout of capitalization component,* and that each
price element would be evaluated for risk.  RFP S 6.  To the extent that
ASUS complains it was not informed that a higher O&M and lower capital
savings approach (like that proposed by USFOS) would be considered more
favorably, such disclosure was not necessary; where, as here, the
solicitation allows for alternative approaches to meeting the agency*s
requirements, the agency is not required to advise a technically
acceptable offeror that it considers another approach to be superior to
that proposed by the protester.  Cerner Corp., Ba**293093, Ba**293093.2,
Feb. 2, 2004, 2004 CPD P 34 at 8.[1] 

   Subcontractor Experience

   A 

   ASUS challenges the determination by the Navy, and the consequent
assignment of a weakness to its proposal on the basis, that its proposed
subcontractor lacked pipe experience comparable to the required effort. 
In this regard, the Navy expressed concern because the subcontractor that
ASUS proposed as the prime contractor for the wastewater portion of the
required effort possessed less than 85 miles of collection pipe
experience, whereas there was a total of 229 miles of collection pipe to
be operated and maintained.

   A 

   As an initial matter, ASUS argues that consideration of this type of pipe
experience is not included within the stated evaluation criteria.  We
disagree.  The RFP expressly required that, with respect to the
experience/past performance evaluation factor, each offeror *shall
demonstrate* in its proposal:

   A 

   experience (including subcontractors) in . . . operation and maintenance
of utility systems over the last 10 years.  The experience should be of
similar or greater size and complexity as the utility(s) covered by the
Offeror*s proposal.

   RFP S 7.  Further, the RFP also specifically required offerors, in
describing their experience/past performance, to discuss the number of
miles of collection pipe they have operated and maintained.  Id.

   A 

   ASUS also asserts that the agency held inadequate and misleading
discussions concerning its subcontractor*s capability and potential for
growth.  Specifically, it contends that it was not given an opportunity to
respond to the agency*s concern that with the addition of the Navy
wastewater systems, the subcontractor could experience a 148 percent
growth in annual revenues, which could increase the risk of poor
performance.  Evaluation Board Report at 18. 

   A 

   Although discussions must address at least deficiencies and significant
weaknesses identified in proposals, the precise content of discussions is
largely a matter of the contracting officer*s judgment.  We review the
adequacy of discussions to ensure that agencies point out weaknesses that,
unless corrected, would prevent an offeror from having a reasonable chance
for award.  Northrop Grumman Info. Tech., Inc., Ba**290080 et al., June
10, 2002, 2002 CPD P 136 at 6.  For discussions to be meaningful, they
must lead offerors into the areas of their proposals requiring
amplification or revision, but this requirement does not obligate an
agency to *spoon-feed* an offeror, ITT Fed. Sys. Int*l Corp., B-285176.4,
B-285176.5, Jan.A 9, 2001, 2001 CPD P 45 at 7, nor does it create an
obligation for agencies to conduct successive rounds of discussions until
all proposal defects have been corrected.  OMV Med., Inc., B-281490, Feb.
16, 1999, 99-1 CPD P 38 at 7.  However, in conducting discussions, an
agency may not prejudicially mislead offerors.  American Sys. Corp.,
B-292755, B-292755.2, Dec. 3, 2003, 2003 CPD PA 225 atA 7.

   A 

   Here, ASUS admits that, *[d]uring discussions .  .  . the Navy expressed
concerns about [the subcontractor*s] size and its capability to perform
the subcontracted work if it were to experience rapid growth as a result
of this project.*  ASUS Comments atA 7.  However, ASUS notes that, in
response to these expressed concerns, it provided financial records
regarding the subcontractor*s viability, a corporate guarantee from ASUS*s
parent company, and an explanation of the subcontractor*s plans to hire
the workers from the existing government workforce necessary to operate
the wastewater systems.  ASUS argues that the agency*s apparent
*acceptance* of the information and *failure to point out any continuing
perceived weaknesses* was misleading and denied ASUS the opportunity to
revise it proposal.  Id. at 8.  We disagree. 

   A 

   Nothing in the record suggests that the agency misled ASUS regarding its
concerns.  ASUS has pointed to no affirmative statements by the Navy
indicating that the agency viewed the concerns it had raised regarding the
proposed subcontractor as having been resolved.  Further, since the agency
was not required to reiterate concerns that were not alleviated after
reviewing the protester*s response to the initial discussions, OMV Med.,
Inc., supra, the mere fact that the Navy remained silent after the
protester*s response could not reasonably be understood here as an
indication that the agency found ASUS*s response to be satisfactory.

   A 

   ASUS questions the assigned weakness with respect to the experience of its
subcontractor, asserting that pipe operation and maintenance is the least
difficult and most routine of all the work contemplated by the contract. 
However, the Navy explains that since the wastewater systems to be
privatized consist almost entirely of piping and pumping stations,
maintenance and repair of wastewater piping is a significant part of the
required effort.  Agency Report at 6.  ASUS has not shown the agency
position in this regard to be unreasonable.  See Entz Aerodyne, Inc.,
Ba**293531, Mar. 9, 2004, 2004 CPD PA 70 at 3 (mere disagreement with the
agency*s conclusions is insufficient to render those conclusions
unreasonable).

   A 

   The protest is denied. 

   A 

   Anthony H. Gamboa

   General Counsel

   A 

   ------------------------

   [1] While ASUS suggests that the agency*s more favorable evaluation of
USFOS*s higher O&M and lower capital savings approach was based on
appropriations process considerations, the contemporaneous evaluation
record supports the agency*s position that the Navy*s evaluation instead
was based on the view that because offerors generally have more control
over their O&M charges, the projections of O&M savings were likely to be
more reliable.  Evaluation Board Report at 4.  We find nothing improper or
otherwise unreasonable in the evaluation in this regard.