ACQUISITION OF UTILITIES SERVICES: SOME LEGAL CONSIDERATIONS
Department of the Army
If asked why they buy electric power on a sole source basis, most people who buy power for the Department of Defense (DoD) would say that the reason is section 8093 of the 1988 Department of Defense Appropriations Act. But that provision became effective only in 1988. For many years before that law was enacted, agencies has been procuring electricity from their local utilities on a sole source basis.
DoD and other agencies have bought power on a sole source basis for a number of reasons. First, they often have been able to find no other supplier of power than the local franchised utilities. Arguably, because of the legal principle of federal supremacy, agencies could procure power from any source, regardless of state franchising laws. But there remained the problem of how to move the power the agency might purchase somewhere else to the necessary delivery point. So, wheeling is a problem separate and apart from the restrictions in section 8093.
Second, there is an institutional problem. Sole source procurement, on the basis of a published tariff, is simply easier, Even if it were not easier, federal agencies today lack the necessary resources and expertise to procure power competitively. If they were authorized to procure power competitively today, few agencies would be ready to do so. A change in the law authorizing federal agencies to procure power competitively would simply create a legal basis for potential offerors to sue the agencies if they failed to do so. Thus, it is not as simple as merely changing the law. Agencies must provide the resources necessary for the procurement activities to conduct a competitive acquisition of power.
The acquisition of local telecommunications services presents an example of this problem. The law has been changed to authorize the procurement of local telecommunications services on a competitive basis by all users. However, the military services are only beginning to address how they will move from a sole source to a competitive environment. Acquisition planning is just beginning.
How to Achieve a Competitive System
In dealing with these issues, it is instructive to review the analysis of the report DoD recently submitted to Congress, as it was required to do so by last year's DoD Authorization Act (''Procurement of Electricity from the Most Economical Source"). In that report DoD was asked to comment on the means necessary for moving to competitive procurement of electricity.
The report discussed two potential ways. First, Congress could repeal section 8093. However, DoD does not recommend that course of action alone, because it does not resolve the question of how to move the power purchased competitively to DoD installations. Second, Congress could repeal section 8093 and in addition provide that DoD activities are eligible customers for the purchase of wholesale power and, as such, subject to the jurisdiction of the Federal Energy Regulatory Commission. DoD agencies could compete in the FERC-regulated wholesale power market and move power to their installations under FERC rules on wheeling. It is this change that DoD recommended to Congress. However, authorization of this approach would not resolve the agency resource and expertise problems discussed above.
There are no easy answers. I would urge, however, that agencies begin preparing now for this new emerging competitive marketplace. It will happen; perhaps in California first, or perhaps in another state. It appears inevitable, and federal acquisition offices should be planning their response. They need to plan what they intend to buy, whether to buy from one company only or from multiple companies, the lengths of the optimum contract periods, the transmission and distribution services that they will need, what will likely be available, and so forth.
Will it be too difficult for federal agencies to make competitive power purchases with 50 different state public utility commissions setting the rules? Would it be better to receive wholesale eligible status under the
Federal Power Act and worry only about FERC's rules and regulations? Efficiency would seem to argue for eliminating the multitude of rules and regulations that apply and simplifying contracting through wholesale status.
Clearly, today there are opportunities for federal agencies in the evolving competitive marketplace. Utilities have shown increasingly that they are worried about retaining federal agencies as customers. At the political level, they have an interest in working with federal agencies (as in the ongoing meetings between DoD and the Edison Electric Institute), to help maintain Congressional support for keeping section 8093 in place.
Federal agencies can take advantage of this leverage. They should be seeking reduced rates, with the implied threat of the competitive marketplace. Utilities value highly the opportunity to secure large loads such as those of federal facilities. For example, recently the El Paso Electric Company (which is trying to emerge from bankruptcy) sued the Air Force for taking steps to procure electricity competitively in New Mexico. Ultimately the Air Force settled the case by signing up with El Paso Electric for a fixed-term contract at a reduced rate. El Paso Electric then presented the agreement as evidence of its ability to lock in an important, large customer. Federal agencies should all be aware of this leverage.
I would suggest that agencies not push the envelope of competition now. I don't think they have the institutional will to fight those battles in court. We do not have the resources to challenge the sole source issue at the moment. I would again offer the example of what the Air Force tried to do in New Mexico. While I think legally federal agencies have the authority to buy competitively, I question our will to defend this principle. (Notwithstanding the negative experience of the Air Force, El Paso electric did ultimately reduce its rates.) Also if the federal agencies are too aggressive in asserting their rights to competitive acquisition, they will become the lightning rod for lawsuits and possibly be a catalyst for a political solution to the issue.
Federal agencies need to start planning now, because acquisition planning takes time. We need to determine what we plan to do when
competition arrives, because it will arrive, and probably before we are prepared for it. In the meantime, agencies should use their increasing leverage with utilities to gain concessions on prices and services. But they should not attempt to push the envelope of competition now. The recent FERC decision attempts to clarify a number of important issues which may have cost implications for federal agencies. These issues will need to be examined thoroughly in the light of evolving legal and regulatory action.