TITLE: B-295952.4, LENS, JV--Costs, December 12, 2005
BNUMBER: B-295952.4
DATE: December 12, 2005
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B-295952.4, LENS, JV--Costs, December 12, 2005

   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

   Matter of: LENS, JV--Costs

   File: B-295952.4

   Date: December 12, 2005

   Albert B. Krachman, Esq., David A. Lieb, Esq., and Brian S. Gocial, Esq.,
   Blank Rome LLP, for the protester.

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

   Guy R. Pietrovito, Esq., and James A. Spangenberg, Esq., Office of the
   General Counsel, GAO, participated in the preparation of the decision.

   DIGEST

   Request for recommendation for reimbursement of costs for filing and
   pursuing protest is denied, even though the agency decided to take
   corrective action in response to the protest, where the record does not
   establish that protest was clearly meritorious.

   DECISION

   LENS, JV requests that our Office recommend that the firm be reimbursed
   the costs of filing and pursuing its protest of the non-selection of
   firm's proposal under request for proposals (RFP) No. N62742-03-R-1112,
   issued by the Department of the Navy for an electric utility privatization
   initiative at the Marine Corps Base Hawaii (MCBH) Kaneohe Bay. In that
   protest, LENS argued that the agency's "should cost" methodology for
   operation and maintenance of the electric utility system was flawed and
   inconsistent with the solicitation and was based upon information not
   provided to the offeror.

   We deny the request.

   The RFP was issued pursuant to the Department of Defense's (DOD) program
   to consider privatization of utility systems at military installations.
   See DOD Revised Guidance for the Utilities Privatization Program, Oct. 9,
   2002. Authority for that program is provided by 10 U.S.C. sect. 2688
   (2000), which provides that the secretary of a military department may
   convey a utility system to a municipal, private, regional, district, or
   cooperative utility company or other entity so long as it is in the
   long-term economic interest of the government.

   Here, the RFP invited proposals for the privatization of the electric
   distribution system at the MCBH Kaneohe Bay. Potential offerors were
   informed

     The New Owner shall own, operate, repair and maintain the Primary (12KV)
     Electrical Distribution Systems (EDS) at MCBH Kaneohe Bay, providing
     continuous electric utility service 24 hours per day, 7 days per week.
     The New Owner shall employ sound utility practices to ensure continuous,
     dependable, and reliable utility service is provided to [MCBH Kaneohe
     Bay] and to minimize the scope and length of any service disruption.

   RFP, attach. J.3, MCBH Kaneohe Bay Electrical Distribution System
   Specification, at 1. The RFP also described the major customers, such as
   family housing, and major facilities to be supported under the
   solicitation. Id. at 3. In addition, the RFP provided a detailed technical
   data package that, among other things, described the historical electric
   usage, electric assets (and for each asset its service life and remaining
   life), planned capital projects, and "pending/potential energy saving
   performance contract projects," and included an assessment of the
   condition of various electric system assets. Id., attach. 15, Technical
   Data Package. Minimum service requirements and performance standards were
   also provided. Among other things, offerors were informed that the
   electric system was required to be "up 99 % of the time," that "[e]ach
   system or major piece of equipment is operational in that there are no
   significant impacts to customers or the Base," and that emergency service
   work be performed, 95 percent of the time, within 15 minutes during normal
   working hours and within 2 hours outside of normal working hours. Id.,
   attach J.3, MCBH Kaneohe Bay Electrical Distribution System Specification,
   at 4.

   Offerors were required to provide separate technical and price proposals.
   With respect to the price proposals, offerors were informed that they must
   submit fixed prices for three items: an upfront payment for purchase of
   the utility system; a monthly purchase credit for the utility system in
   lieu of, or in addition to, the upfront monthly payment; and a monthly
   operation and maintenance (O&M) charge. RFP at 77. The solicitation also
   required that offerors provide a Capital Renewals and Replacement Schedule
   identifying all capital upgrades, renewals or replacements, "taking into
   consideration the condition and future replacement needs of all system
   capital assets." This schedule requested that offerors provide an
   amortized monthly price that "when combined over the life of the system
   results in complete recovery of investments for continuously renewing and
   replacing system assets as they fail or reach the end of their useful
   life." RFP at 78.

   The RFP was a performance-based solicitation. Since the ultimate awardee
   was to assume ownership of the electric utility system, the RFP did not
   require capital improvements, upgrades, renewals, or replacements for the
   electric system infrastructure. Rather, the solicitation essentially
   catalogued the scope and condition of the infrastructure maintained by the
   government and required offerors to propose their plans for addressing the
   needs of the system over the 50-year life of the contract.

   The RFP provided that, for the purpose of entering into exclusive
   negotiations with the agency for privatization and operation of the
   electric utility system, the agency would select a single offeror on the
   basis of a "best value" determination considering the price and technical
   factors identified in the solicitation. The RFP provided that the selected
   best-value offeror would enter into negotiations with the agency
   concerning the purchase of the utility system and a contract for providing
   the utility service. Offerors were informed that the agency would not
   enter into a contract with the offeror unless the offeror's proposal
   provided fair market value for the utility assets and that entering into a
   contract with the offeror was in the government's long-term economic
   interest. RFP at 83.

   In December 2004, the Navy received only the offer from LENS to purchase
   the electric utility and provide utility services. Although the Navy
   initially rejected LENS's proposal as unacceptable, in response to a
   protest to our Office the Navy took corrective action and included LENS's
   proposal in the competitive range and conducted discussions with the firm.
   Ultimately, the Navy determined that LENS's final proposal revision was
   marginal and that LENS's proposed prices for the utility assets and for
   provision of utility services were not in the government's long-term
   economic interest. Specifically, the Navy found that LENS's proposed price
   for the utility assets was $9 million less than the government's estimate
   and that LENS's proposed net present value (NPV) for O&M of the system for
   the life of the contract was nearly $96 million higher (nearly 20 times
   more) than the government's should-cost estimate. The Navy also found that
   LENS's proposed NPV for capital renewals and replacements was more than
   $16 million higher than (more than double) the government's should-cost
   estimate. See Agency Report (AR), exh. C, Price Evaluation Board Report,
   at 3. Based upon these significant price differences and discrepancies,
   the source selection authority rejected LENS's proposal for the electric
   utility privatization.

   Following a debriefing, LENS protested to our Office, arguing that the
   agency's should-cost methodology for operation and maintenance of the
   electric utility at the MCBH was flawed and inconsistent with the
   solicitation and was based upon information not provided to the offerors.
   In particular, the protester complained that the agency's should-cost O&M
   estimate was based upon significantly lower staffing than what LENS had
   proposed and that this lower staffing was "premised upon a patchwork use
   of part-time personnel and contractors" that would not satisfy the
   solicitation requirement to provide reliable, dependable service "24 hours
   each and every day." Protest at 12-13. LENS requested that our Office
   recommend that the agency make award to LENS, "as the [agency's] cost
   comparison should be viewed as a nullity." Id. at 14.

   The Navy filed a responsive report to the protest, in which the agency
   denied that the agency's should-cost estimate was deficient. In
   particular, the agency argued that its estimate for the agency's
   performance of electric utility O&M was carefully determined from a review
   of the MCBH's actual operations and costs, considering the electric
   utility assets and their condition. Moreover, the agency argued that
   LENS's proposed price for electric utility system O&M was inflated and
   reflected the firm's misreading of the solicitation. The agency contended
   that LENS misunderstood the solicitation requirement for electric service
   24 hours per day, every day, as requiring that the firm provide staffing
   24 hours per day, every day, and that this misunderstanding resulted in
   LEN'S inflated proposed staffing.

   Subsequent to filing its report, the agency decided to take corrective
   action. Specifically, the Navy informed us that it would reinstate LENS's
   proposal in the competitive range and amend the RFP to, among other
   things, clarify the condition of electric utility assets and emphasize
   that "the performance-based requirements in the Statement of Work do not
   dictate staffing and operation and maintenance resources or a specific
   maintenance schedule, which are to be determined by the offeror, based on
   fulfillment of system and response performance requirements." Agency
   Corrective Action Letter, Oct. 5, 2005, at 2. The agency also stated that
   it would validate the agency's should-cost estimate "independently of the
   should cost-preparing activity." Id. at 3.

   We dismissed LENS's protest because the agency's corrective action
   rendered the protester's protest academic. Thereafter, LENS requested that
   we recommend that the Navy pay the protester the reasonable costs of
   filing and pursuing the protest.

   Where, as here, a procuring agency takes corrective action in response to
   a protest, our Office may recommend that the agency reimburse the
   protester its protest costs where, based on the circumstances of the case,
   we determine that the agency unduly delayed taking corrective action in
   the face of a clearly meritorious protest, thereby causing a protester to
   expend unnecessary time and resources to make further use of the protest
   process in order to obtain relief. 4 C.F.R. sect. 21.8(e) (2005); Pemco
   Aeroplex, Inc.--Recon. and Costs, B-275587.5, B-275587.6, Oct. 14, 1997,
   97-2 CPD para.102 at 5. A protest is clearly meritorious when a reasonable
   agency inquiry into the protest allegations would show facts disclosing
   the absence of a defensible legal position. AVIATE L.L.C., B-275058.6,
   B-275058.7, Apr. 14, 1997, 97-1 CPD para. 162 at 16. For a protest to be
   clearly meritorious, the issue involved must not be a close question. J.F.
   Taylor, Inc.--Entitlement to Costs, B-266039.3, July 5, 1996, 96-2 CPD
   para. 5 at 3. Rather, the record must establish that the agency
   prejudicially violated a procurement statute or regulation. Georgia Power
   Co.; Savannah Elec. and Power Co.--Costs, B-289211.5, B-289211.6, May 2,
   2002, 2002 CPD para. 81 at 5. The mere fact that an agency decides to take
   corrective action does not establish that a statute or regulation clearly
   has been violated. East Penn Mfg. Co., Inc.--Costs, B-291503.4, Apr. 10,
   2003, 2003 CPD para. 83 at 3.

   Here, the record does not establish that LENS's protest was clearly
   meritorious. Even were we to accept all of the protester's arguments
   concerning the agency's should-cost estimate and the adequacy of the
   solicitation, the record does not show a reasonable possibility that LENS
   was prejudiced, given the significant difference between the agency's
   should-cost estimate for government operation and maintenance of the
   electric utility and LENS's proposed price.[1] See First Fed.
   Corp.--Costs, B-293373.2, Apr. 21, 2004, 2004 CPD para. 94 at 3 (protest
   not clearly meritorious where there was no competitive prejudice to the
   protester, even where agency took corrective action in response to
   protest). Here, as our Office repeatedly informed the parties during the
   protest, the record does not show the cost impact on either the agency's
   should-cost estimate or the protester's proposed price; in fact, this was
   one of the reasons our Office informed the parties during the protest that
   a hearing might be necessary to resolve this protest. See Spar Applied
   Sys.--Declaration of Entitlement, B-276030.2, Sept. 12, 1997, 97-2 CPD
   para. 70 at 5 (a protest was not clearly meritorious where resolution of
   the protest required substantial further record development such as
   conducting a hearing to complete and clarify the record). Without further
   record development in this case, we are unable to determine that there is
   any reasonable possibility that LENS was prejudiced, even assuming,
   arguendo, that the agency's conduct of the acquisition was deficient.

   The request for a recommendation that costs be reimbursed is denied.

   Anthony H. Gamboa

   General Counsel

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

   [1] Prejudice is an element of every viable protest, and we will not
   sustain a protest unless the protester demonstrates a reasonable
   possibility of prejudice. Lithos Restoration, Ltd., B-247003.2, Apr. 22,
   1992, 92-1 CPD para. 379 at 5.