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Utility Privatization At Military Facilities: GAO Approves Bundled Procurements And Participation By Entities Not Pre-Approved By State And Local Utility Regulators

August 28, 2000

Co-Authors: Raymond F. Monroe and Thomas P. Humphrey.

The General Accounting Office (GAO) has issued a ruling that is significant for all utilities that may participate in procurements to privatize utility systems at military installations. In Virginia Electric and Power Company; Baltimore Gas & Electric, B-285209, 285209.2 (Aug. 2, 2000), the GAO ruled:

  1. that competition for privatization of military utility facilities is not limited to entities that are pre-approved by state and local utility regulators; and
  2. that the military can require that offerors agree to privatize more than one type of utility system, or even all utility systems on a particular base, in a single procurement.


By September 30, 2003, most of the over two thousand utility systems owned and operated by the Military Departments are to be privatized. See DoD Reform Initiative Directive #49. Utility systems include systems: (1) for the generation and supply of electric power; (2) for the supply of natural gas; (3) for the transmission of telecommunications; (4) for the treatment or supply of water; (5) for the collection or treatment of wastewater; and (6) for the generation or supply of steam, hot water, and chilled water.

These privatization projects are not restricted to utilities. They can be awarded to a "municipal, private, regional, district, or cooperative utility company or other entity." 10 U.S.C. § 2688(a) (emphasis added). In addition, if more than one concern notifies the DoD of an interest in the procurement, competitive procedures must be used. 10 U.S.C. § 2688(b).

The GAO Approves Broad Competition

In protests filed at the GAO by Virginia Electric and Power Company and Baltimore Gas & Electric Company these utilities argued that only "other entities" that were approved by state and local utility regulators could compete for and perform the contracts. The GAO said no.

According to the GAO, pursuant to 10 U.S.C. § 2688, the government is free to open privatization procurements to all comers, without pre-approval by state and local regulators. The GAO explained:

an agency is entitled to view 10 U.S.C. § 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.

In addition, the GAO stated that, absent incorporation by the agency of particular state or local laws in the solicitation, "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."

In the procurement at issue in Virginia Power, the solicitation did require that the contractor (and any subcontractors) had to comply with all "relevant and appropriate" (1) local, state/district, and federal codes, regulations, or laws relating to the design, installation, operation, maintenance, and repair of the utility systems and (2) ordinances, rates, standards, operating policies or standard operating procedures. Nevertheless, even under these circumstances, the GAO held that advance approval of a contractor by state or local regulators was not required.

The GAO Leaves Constitutional Issues For The Courts

The Virginia Power decision was based in part on an opinion by the DoD General Counsel. In that opinion the General Counsel concluded that, absent an unequivocal and unambiguous waiver of sovereign immunity, constitutional principles prohibit states from regulating the federal government. In the General Counsel's opinion, nothing in

  • 10 U.S.C. § 2688,
  • federal statutes and regulations prohibiting the purchase of electricity in a manner inconsistent with state law or
  • any other federal law or regulation

evidences such a waiver. Opinion of DoD's General Counsel, The Role of State Laws and Regulations in Utility Privatization, (Feb. 24, 2000).

The GAO acknowledged that the apparent conflict between the federal statute and state and local regulation of utilities "raises constitutional questions." But, the GAO declined to address these issues. The GAO "leaves to the courts the resolution of constitutional questions." Similarly, the GAO held that its function is to foster competition, not "to protect any interest a protester may have in more restrictive specifications."

The message is clear. If utilities are going to pursue these constitutional issues, or seek to protect any other interests requiring more restrictive provisions in these privatization procurements, they must go to the federal courts. Currently, both the United States Court of Federal Claims and the federal district courts have jurisdiction over such protests. After December 31, 2000, however, district court protest jurisdiction is scheduled to be eliminated.

The GAO Approves "Bundling" Of More Than One Type Of Utility System

In addition, in Virginia Power, the GAO held that in appropriate circumstances more than one utility system can be "bundled" in a single privatization procurement. This means, for example, if an electric utility elects to compete for a bundled privatization project, it will be required to compete, not just for the electric utility system, but for one or more additional types of utility systems at a military facility.

Bundling, however, is not always allowed. The test is whether the bundling is necessary to satisfy the agency's needs. In Virginia Power, the GAO determined that the following circumstances justified bundling at the military bases involved in that procurement:

  • the agency anticipated significant savings from bundling and
  • because some utility systems, like electric, were more attractive than others, the agency anticipated that bundling would ensure receipt of acceptable offers for all systems and thus complete privatization.

In our view, this issue is far from resolved. Bundling may drive up the costs to the Government to unacceptable levels because utilities are forced to bid to provide services they are not familiar with, and are therefore, at risk. Increased risk typically results in higher prices. Alternatively, there may be no offerors for the bundled contract. Virginia Power raised some of these kinds of arguments but, according to the GAO, did not satisfy its burden of proof. The facts, however, will be different in each procurement, and thus, this argument may yet prevail.

What Is To Come?

There will undoubtedly be other challenges to the terms of these privatization solicitations and those challenges to the "rules of the competition" must generally be raised promptly after the solicitation is issued and before the proposals are submitted. Also, there likely will be post-award protests challenging the government's decision to award a contract to one or more offerors.

Bottom line, after Virginia Power, in privatization procurements, broad competition and the potential for protests exist whether or not deregulation has come to a utility's service area.

Thomas P. Humphrey
Senior Counsel – Washington, D.C.
Phone: +1.202.624.2633