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FUPWG Meeting Proceedings - Washington, DC

October 23-24, 2003
Holiday Inn on the Hill
Washington, DC

Introduction

The Federal Utility Partnership Working Group (FUPWG) held its Fall 2003 meeting in Washington, DC, on October 23-24. A total of 119 individuals attended the meeting, including 30 new members. Organizations represented included 20 utility officials, 17 Federal Energy Management Program (FEMP) representatives, 38 Federal agency representatives, 13 national laboratory representatives, and 31 representatives from energy-related organizations (see meeting participant list). The working group is a joint effort between FEMP and the utility industry to stimulate the exchange of information among participants and foster energy efficiency projects in federal facilities nationwide.

The agenda included the following presentations:

  • Washington Update
  • Critical Update: UESC Project Update
  • Agency Update I. - Department of Veterans' Affairs Update
  • Agency Update II. - Defense Energy Support Center Update and General Services Administration Update
  • Privatization Update
  • PANEL: Discussion of Financing/Refinancing
  • Case Study: GSA-National Capital Region Utility Financed Project
  • PANEL: Emerging Technologies - Agency Program Update
  • Natural Gas Supply and Pricing

All presentations are available on the FEMP website.

DAY 1 - OCTOBER 23, 2003


Welcoming Remarks

Paul Lynch, General Services Administration (GSA)

GSA distributed to each of its 11 operating regions a National Business Strategy that contains the agency's energy reduction goal for 2005 and suggestions on how each region can help achieve the goal. These suggestions include buying greenpower, engaging in Utility Energy Service Contracts (UESC), and improving building operations.

Tom Hattery, Federal Energy Management Program (FEMP) Philadelphia Regional Office Representative

The Department of Energy (DOE) maintains Alternative Financing Representatives (AFR) in each of the agency's Regional Offices to provide all Federal agencies with training, technical guidance, and direct project assistance to develop UESCs. Alternative financing through utility contracting enables agencies to fund energy and water efficiency projects with no initial capital investment. DOE's Office of Federal Energy Management Program (FEMP) is working with GSA to complete projects and leverage private sector partners. Federal facilities should keep AFRs informed about potential UESC projects in each region.

Washington Update

Beth Shearer, FEMP, Department of Energy (DOE)

Ms. Shearer congratulated Linda Collins of GSA and Ed Anderson of Florida Power and Light for winning the 2003 Lou Harris Award. The Lou Harris Award is presented annually to Federal Utility Partnership Working Group Members who have made a significant contribution to achieving Federal Energy Management goals.

Ms. Shearer informed the group that for FY 2004, FEMP anticipates receiving an appropriation of budget of $19.962 million; in FY 2003, the budget was $23.425 million.

Ms. Shearer stated that the 2001 - 2002 California energy crisis and the August 2003 Midwest power blackout created sustained vulnerability with respect to domestic energy security. She confirmed FEMP's present and future support for the development of combined heat and power (CHP) applications and distributed energy resources (DER). The CHP application at the Twenty Nine Palms military base is a successful example of how renewable power can be used to attain fuel diversity and energy security. A 7 MW dual-fueled cogeneration system was installed at the base to reduce reliance on the electric grid. Additionally, a 1 MW photovoltaic system was installed using California public benefits funds. Ms. Shearer urged utilities to promote the development of distributed power technologies by reconsidering the imposition of exit fees and other such impediments to onsite distribution.

Ms. Shearer presented highlights of pending comprehensive energy legislation, H.R. 6 - Energy Policy Act of 2003 (at the time of this meeting, the bill was being negotiated by a House - Senate Conference Committee. H.R. 6 provisions of interest include the following:

  • Directs Federal agencies to reduce energy consumption in Federal buildings (including industrial or laboratory facilities) between 2004 and 2013 at a rate of 2 percent per year, based on 2001 energy consumption levels.
  • Requires that by October 1, 2010, Federal buildings meeting established criteria shall be metered or submetered, using advanced metering devices that provide at least daily data and measure consumption of electricity at least hourly.
  • Requires agencies to procure Energy Star® or FEMP-designated products; provision provides exceptions based on cost-effectiveness or availability.
  • Authorizes the Department of Defense and other Federal agencies to enter into up to 10 pilot projects for Energy Savings Performance Contracts (ESPC) for non-building applications (e.g. replacing engines on airplanes)
  • Authorizes and encourages agencies to participate in UESCs conducted by gas, water, and electric utilities and generally available to utility customers.
  • DOE shall establish revised Federal building energy efficiency performance standards that are designed to achieve energy consumption levels at least 30 percent below most recent version of IECC.
  • Requires that DOE and the Environmental Protection Agency (EPA) establish a voluntary program to identify and promote energy-efficient products and buildings in order to reduce energy use, improve energy security, and reduce pollution through voluntary labeling of or other forms of communication about products and buildings meeting highest energy efficiency standards.
  • Establishes renewable energy goals such that the Federal Government consumes not less than 3 percent renewable energy in FY 2005-FY 2007, not less than 5 percent in FY 2008-FY 2010, and not less than 7.5 percent in FY 2011 and each fiscal year thereafter.

For more information on this and other legislative initiatives of interest, refer to the FEMP website.

Washington Update: Legislation, Measurement & Verification (M&V) Project Validation, and Combined Heat and Power/Energy Security

Brad Gustafson, Federal Energy Management Program (FEMP), Department of Energy (DOE)

FEMP provides the Federal contracting community with technical assistance to complete UESC and ESPC projects. Various informational avenues to accomplish this include the following:

  • AFV and Federal Acquisition conferences held in June 2003
  • Energy 2003 Acquisition Track
  • Federal Acquisition Council presentations
  • National Contract Management Association
  • Contract Management Magazine
  • News briefs from the Office of Federal Procurement Policy

FEMP is currently revising guidance for UESC project validation to incorporate various legal and statutory requirements and Office of Management and Budget (OMB) and General Accounting Office (GAO) recommendations into one comprehensive package. Once the document is complete, interested parties will be notified for submittal of comments. The next step will involve a January 2004 review by the DOE Interagency Energy Management Task Force. Mr. Gustafson anticipates that a final document will be available by early Spring 2004; this document will become the fifth in a series of Alternative Financed Guidance Memoranda. The purpose of the project validation initiative is to require that each UESC project include specifications on the project's background, the party responsible for performance, purpose of a performance monitoring plan, project benefits, outline of plan requirements, and statement of the levels of savings verification and guarantees, if applicable.

Mr. Gustafson encouraged members to utilize the FUPWG bulletin board and ask questions or share project information. The bulletin board also displays weekly legislative updates and can be found on the FEMP website.

Critical Update: UESC Project Update

Kate McMordie Stoughton, Pacific Northwest National Laboratory (PNNL)

Since January 1993, the Pacific Northwest National Laboratory, on behalf of FEMP, has collected data on over 1,000 UESC projects. Data is collected on a voluntary basis from participating utilities and Federal agencies. To date, over $1.25 billion dollars in total capital investment has been awarded as a result of UESCs. In FY 2003, UESC project activity totaled $132 million dollars. The highest rate of utility investment occurred during 2000-2001.

The estimated annual savings for reported UESC projects is 27 million MBtu; 62 percent of this savings is stipulated, and 38 percent is verified through M&V.

Questions and Answers:

Q: Do you see any pattern in the types of projects that undergo stipulated savings versus those that utilize M&V?
A: Smaller projects use stipulated savings, whereas larger projects usually measure savings through M&V.

Q: What is the percentage of investor owned utilities versus municipal utilities that report data?
A: The data reveals that 90 percent of the information has been collected from investor-owned utilities.

Agency Update I. - Department of Veterans' Affairs Update

Judith Sterne, Department of Veterans' Affairs (VA)

Energy Conservation Program Overview: In June 2003, the VA created an agency-wide energy conservation program establishing energy goals and requirements, consistent commodity acquisition and energy investment strategies, a systematic means of measuring and verifying savings in energy projects, and a method for reporting best practices in energy programs.

To fulfill these objectives and to reduce energy commodity expenditures that for some facilities in California have reached 21 cents per kWh, the VA sought the expertise of a commodity consultant. The consultant was charged with developing an energy policy and best practices guide and investigating financing options, which include appropriated funds, DOE ESPCs, UESCS, enhanced-use leasing, and GSA's Federal Supply Schedule. In each of the agency's regions, known as VISNs, the VA also launched a pilot program in which independent energy assessments are completed and the energy investment process is competitively bid. The five-phased pilot program could result in an energy investment of over $1.0 billion. The five phases include the following:

Phase I - Commodity acquisition assessment/energy baseline establishment
Phase II - Energy assessment for energy conservation measures
Phase III - Competitive design/build solicitation
Phase IV & V - Project installation oversight and post-installation measurement and verification

Enhanced-Use Leasing: VA's enhanced-use lease authority (EUL), enacted in August 1991, is an asset management technique that is unique to the agency. Under this authority, VA property is leased to a public or private sector entity to provide services to non-VA users in return for financial benefits to the agency. VA uses proceeds from EULs to construct co-generation energy centers to generate energy; the power is sold to VA and third party users. An assessment of EUL utilities conducted by VA identified the following energy savings opportunities:

  • ESPC: 21 facilities identified as having high potential for new ESPC contracts ($7M - $10M each)
  • Cogeneration: 48 facilities identified as having a high potential for the installation of a cogeneration plant ($5M - $20M each)
  • Cool Storage: 31 facilities with high potential for the installation of cool storage facilities ($1M - $2M each)
  • Demand-side Management: 60 facilities identifies as having high potential for demand-side management upgrades ($500K - $750K per upgrade)

Questions and Answers:

Q: Does the VA policy include the Leadership in Energy and Environmental Design (LEED) standard for new construction?
A: Yes. Facility managers are responsible for incorporating LEED standards in new construction.

Agency Update II. - Defense Energy Support Center (DESC) Update

Jake Moser, DESC

DESC provides the Department of Defense and other government agencies with comprehensive energy procurement strategies for coal, natural gas, and electricity. DESC does not purchase electricity, but acts as an agent for power purchases. The center also provides strategies for managing price volatility and limiting price risk for the purchase of these commodities. Through a solicitation process described as "quick and efficient," DESC awarded $45,000 to 3 Phases Energy services for 10 million kWh of wind energy, which qualifies as renewable energy credits and $46,600 to Sterling Planet for 19,829,787 kWh of renewable energy credits for electricity derived from landfill gas.

In addition in FY 2003, DESC accomplished the following:

  • Assisted in the implementation of several renewable purchase initiatives.
  • Helped establish electricity contracts with Locational Marginal Pricing (tool used to develop a wholesale energy price for each location or "node" on the electric grid) and Pennsylvania-New Jersey-Maryland Curtailment Service Provider agreements.
  • Honored several small businesses for the procurement of renewable energy.
  • Supported the EPA Green Tag procurement program.

Agency Update II. (Continued) - General Services Administration Program Update

Mark Ewing, Energy Center of Expertise, General Services Administration (GSA)

Mr. Ewing described the GSA areawide contract (AWC) as a viable mechanism for financing UESC projects. He stated that the AWC has independent authority. H.R. 6 - Energy Policy Act of 2003, which is currently being addressed by a House-Senate conference committee, includes language encouraging the use of utility energy service contracts; this is the first full acknowledgement of UESC in a law. H.R. 6 also includes provisions requiring that all government buildings be metered and that each building be outfitted with advanced metering technologies. Mr. Ewing discussed the possibility of using the AWC for installing metering technologies, but said that is not certain that more advanced technologies would fall under the AWC.

The Department of Agriculture's Rural Utility Service has requested that GSA provide financial assistance to rural utilities for an animal litter gasification plant program to generate electric power. The cost to produce the power would be subsidized by a renewables credit. GSA supports the program because it represents a viable source of green power, an environmental commitment to recycling animal waste, and a way to help sustain the poultry industry.

Contracting officers and energy managers at all Federal facilities are encouraged to visit GSA's improved website, which contains electronic versions of areawide contracts that may be used as a contract model.

GSA is also investing in a number of Combined Heat and Power (CHP) plants, including a $64 million plant fueled by natural gas that produces chilled water for cooling and electricity to eight Smithsonian Institution facilities. Excess power from the system is sold to the local utility. GSA discourages utility assessment of standby power charges to customers connecting their distributed energy to the electric grid because these charges make CHP economically less viable.

Questions and Answers:

Q: What is GSA's definition of cogeneration?
A: Cogeneration is defined as producing energy and using the waste heat for another purpose. Excess generation can be sold back to the electric company.

Q: How do we not charge standby fees when there are costs imposed on the utility by the government for connecting distributed energy generation to the grid? Also, there is no standard approach used by every state Public Utility Commission—each state has its own rules governing this issue.
A: DOE should address this issue and find a way to resolve it.

Privatization Update

Captain Rick Marrs, CEC, U.S. Navy

Utility management and ownership is not a core function of Department of Defense (DOD); privatization is the preferred tool. Investor owned utilities should be aware that the Federal Government is a good customer because of its good credit, timeliness in making contract payments, and cost-effective contract opportunities. Privatization is becoming an easier, more economical process because DOD is reconciling military and industry standards and contracting officers are improving their communication, flexibility, and expertise.

An evaluation of a privatization project at the Army National Training Center in Fort Irwin, California, revealed that the installation of an automatic inventory program and automatic power shutoff in emergency situations lowered the cost and improved operations and maintenance and power reliability. Private financing also helped achieve upgrades that were previously unaffordable.

Obstacles to overcome in the privatization of utilities on military bases include waiving cost accounting standards, addressing deviations to FAR Part 31 and identifying "allowable" versus "unallowable" costs, identifying how a utility can recapture the cost of making principal payments on its own, and right-of-way issues.

The Army and Air Force have standard privatization templates; many of these new contracts will begin to use services offered by the DESC. DESC provides monthly feedback to enable contract managers to track the status of a proposal. DOD expects to privatize 1,300 additional systems over the next two years. To review privatization solicitations, visit www.fedbizopps.gov.

Questions and Answers:

Q: Is privatization contingent on whether or not a base is subject to BRAC (Base Realignment and Closure)?
A: DOD does not "prejudge" which bases may be scheduled for BRAC. Often, bases are used by a new non-military tenant that would equally benefit from utility privatization.

Q: Do you recommend privatizing housing and utilities separately?
A: DOD advocates that contracting officers "do what makes sense," based on individual circumstances. In some cases, it is more efficient to privatize housing and utilities together; in other cases, it is more efficient to privatize housing and utilities separately.

PANEL: Discussion of Financing/Refinancing

Panelists discussed financier and Federal customer perspectives in financing UESC and ESPC contracts.

Open Discussion

Moderator - Jim Snook, Air Force
Financier Perspective - John Christmas, Hannon Armstrong L.L.C. and Bruce Gross, G.E. Capital
Federal Perspective - Ed Thibodo, U.S. Naval Facilities Engineering Command (NAVFAC)

Q: What is the primary driver that affects interest rate?
Mr. Christmas: There are several drivers affecting the interest rate, including the size and tenure of the project, whether it is an eight or ten-year Treasury Index, and whether or not the contract includes a risk of default or prepayment option. Ten years is the average term for project financing.

Q: Although engaging in a UESC is low risk, why is interest rate risk so high compared to home loans?
Mr. Christmas: The home mortgage market is well established, which means that it is generally less risky than a new market such as the UESC financing "market." Neither the utility nor the financier wants to take on interest rate risk while deliberating a contract. Performance risk is also a factor. Options to reduce the interest rate include prepaying or establishing an early buydown or fixed rate schedule.

Q: Does NAVFAC compete financing?
Mr. Thibodo: Yes, NAVFAC solicits proposals from many financiers and follows a protocol for financing that incorporates M&V into a contract with no guaranteed savings. Some contracting officers fear that including guaranteed savings clauses in a contract would increase the risk involved, and therefore increase the interest rate.

Q: Who works with NAVFAC to specify verification?
Mr. Thibodo: NAVFAC does this at the equipment level using an energy baseline to compare current energy performance of new equipment to replaced equipment to verify that it is meeting the performance standard.

Q: What is a financier's usual term for contracts since there are different agency financing schedules?
Mr. Christmas: The contract term varies, although a general rule is that the longer the contract, the higher the rate. Investment banks are now more comfortable with financing government ESPC projects.

Q: At what point do rates start to increase after a ten-year contract term?
Mr. Christmas: A contract that is financed for 15 years or longer, will incur higher interest rates.

Q: In a UESC, what is the difference in spread between a contract that incorporates guaranteed savings and one that does not?
Mr. Gross: Approximately 50 basis points. UESC and ESPC contracts with guaranteed savings should have a similar spread.

Q: Why are smaller projects usually financed using a UESC and larger projects usually financed using an ESPC?
Mr. Thibodo: It is the nature of the vehicle; contracting officers assess project conditions and use whichever vehicle is easiest to implement. Often, ESCOs solicit larger projects.

Q: If NAVFAC competitively searches for companies, why does it appear that NAVFAC uses the same financier with each contract?
Mr. Thibodo: All banks use the same Treasury rate and have the same risk spreads. NAVFAC often uses the same bank because the contracting officer has developed a relationship with the bank. Another financier would be chosen if the contracting officer found a better deal elsewhere.

Q: Why can't the government's "good credit" allow Federal agencies to get a better interest rate to finance their energy projects?
Mr. Christmas: The interest rate is largely based on the good credit of the government, but a utility's involvement adds risk. For example, a utility can stop billing or alter contract provisions.

DAY 2 - OCTOBER 24, 2003


Case Study: GSA - National Capital Region Utility Financed Project

Mark Ewing, General Services Administration (GSA)

GSA's National Capital Region implemented a UESC using an areawide contract (AWC). The AWC is a viable alternative to implementing an ESPC. GSA included guaranteed savings provisions in the AWC to comply with scoring regulations. The National Courts Building chiller project included the installation of three non-CFC centrifugal chillers, a condenser, chilled water pumps, and water efficiency measures, including low-flush toilets and low-flow sensor faucets for a 250,000 square foot floor space. Measurement and verification provisions were also included in the contract, as required by all GSA sites that are using the AWC for UESCs. The initial feasibility study was authorized in June 1999. The project was completed in January 2002 and financing payments were first issued in March 2002. The contractor's initial investment was $1.86 million. The contract resulted in guaranteed annual savings of $193,400 with a payback of 9.63 years. The guaranteed savings to the government over the 20-year financing term is $3.93 million.

PANEL: Emerging Technologies - Agency Program Update

Panelists discussed new, emerging technologies and their application in the Federal sector.
Moderator - Brad Gustafson, FEMP
Building Technologies - Jim Rannels, DOE Building Technologies Program

The goal of DOE's Buildings Technology program is to create technologies that, by 2025, will enable the construction of net zero energy buildings at a low incremental cost—meaning, on-site generation supplies enough energy to power all required operations of the building. An important aspect of a net zero energy building is the low energy requirement. The Emerging Technologies program partners with industry to develop and market technologies that help meet this challenge and include:

  • Solid state lighting
  • High performance windows and building envelope
  • Building controls
  • Advanced refrigeration and space conditioning

Some specific examples of technologies currently in the research and development stage include super insulating windows with multiple glazing and insulated frames, and advanced daylighting strategies.

Since 1973, energy efficiency technologies in residential windows have improved by 30-65 percent. In 2002, the T-8 lamp produced 75 source efficacy (lumens/watt); in 2020, solid state lighting will incur 220 source efficacy—which means that very little energy will be required to achieve the same lumen output of the lamp. Windows will soon be designed to produce energy. Technologies in building envelope materials include paints that are infrared-resistant. The Buildings Technologies program introduces high efficiency appliances to the market through technology demonstrations, facilitating technology procurements, sponsoring design competitions, and releasing competitive solicitations for energy efficient rooftop air conditioners, variable speed integrated intelligent blower, downsized rooftop cooling system, among other technologies.

Construction Engineering Research Laboratory (CERL) Technology Program Update - Dr. Alexander Zhivov, CERL

Energy efficiency is best achieved by increasing building systems efficiency in addition to installing high efficiency technologies. Energy managers should reevaluate established, but underutilized building systems technologies in the areas of optimizing building envelope, reducing internal loads, and increasing HVAC systems efficiency. To reduce heat gain and loss across the building envelope, facility energy managers should install caulking, weather stripping, air curtains, insulated glass (tinted and reflective), awnings, and overhangs. Strategies for internal load reduction include the installation of motion sensors, Energy Star® appliances, and process optimization and controls. Hydronic radiant heating and cooling systems are able to supply the same comfort levels with reduced energy requirements. Radiant heating provides more uniform heating and cooling, are silent, and do not create drafts. Indirect/direct evaporative cooling, in certain climates, is an inexpensive means of reducing load on the chilled water system. Equipment efficiency solutions include high-efficiency motors, chillers, waste heat recovery, and duct design optimization.

The Energy Concept Advisor tool is a database that allows the user to input systems operating inefficiencies; the database will provide solutions to increase efficiency and reduce energy use. The tool can be found on the International Energy Association website at www.iea.org.

Questions and Answers:

Q: How do you get the word out about the activities of the Buildings program?
A: The Buildings Technology Program is not an outreach group; it depends on other programs, such as FEMP, to market their programs.

Q: How do you deal with unknowns?
A: The Buildings Technology Program attempts to address "unknowns" during the initial rollout of a product. The program showcases new technologies and supports the deployment of proven technologies. The program has developed a database of projects where the technology has already been used.

Natural Gas Supply and Pricing

Chris McGill, American Gas Association (AGA)

Recent demand fluctuations in the natural gas market have caused prices to increase and fluctuate with great volatility; in 2000-2001, prices increased to $9 per thousand cubic feet (KCF), and one year later the price fell to $2-3 KCF. Volatility creates investor uncertainty and distrust in the energy market. It is predicted that natural gas markets will be at least or more volatile in the future.

Natural gas consumption rose in the early 1990's, but without incentives to find new capacity to support the demand, the gap between production and productive capacity narrowed. We are now "living on the margin," even a small change in demand or supply can dramatically alter the price of natural gas. Currently mined areas, such as the Gulf of Mexico, are exhibiting basin exhaustion. And while new natural gas deposits have been found on public lands in the U.S., Prudo Bay in Alaska, Sable Island in eastern Canada, and on the east coast of the U.S., eventually the new supply will experience diminishing returns. To expand production in these areas, new technologies or techniques for extraction must be employed. For example, miners could begin deepwater production farther out in the Gulf, or increase imports of liquefied natural gas (LNG). LNG is not a new concept; the U.S. has been importing it for many years. Vast, stranded resources of natural gas exist around the world that can be converted to LNG and shipped anywhere. The largest LNG supplier to the U.S. is Trinidad, and the Atlantic Basin is a feasible source for more LNG imports. Proposals to build new LNG terminals have been solicited for the areas of coastal Texas, Florida, and California.

Questions and Answers:

Q: What provisions in the energy bill would close the gap between supply and demand?
A: Provisions include a tax on the production side and a decrease in the depreciation period for building new pipelines and infrastructure.