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House of Representatives,
Subcommittee on Oversight and Investigations,
Committee on Veterans' Affairs,
Washington, DC.
    The subcommittee met, pursuant to call, at 2 p.m., in room 334, Cannon House Office Building, Hon. Terry Everett (chairman of the subcommittee) presiding.
    Present: Representatives Everett and Clyburn.
    Also Present: Representative Evans.
    Mr. EVERETT. I'm going to go ahead and start the hearing. Unfortunately, I think we've had three national security hearings today. This is the third Veterans' Committee hearing. I know there's been two Agriculture Committee hearings. I know Budget is meeting, and a group of others—Commerce—so Mr. Evans and I may be the only two here, but it is an important hearing.
    This hearing today by the Veterans' Affairs Subcommittee on Oversight and Investigations is intended to provide an in-depth look at the Department of Veterans Affairs' commitment and participation in the Federal Energy Management Program.
    The Energy Policy Act of 1992 authorizes agencies to utilize energy savings contracting to leverage private sector capital to fund energy retrofits and upgrades. Today we will examine how the VA has exercised good fiscal management and how effectively they have utilized these energy savings initiatives.
    Under this program, the Department of Energy in 1997 estimates the VA facilities to reduce energy consumption by more than $60 million annually. These savings could begin as soon as projects are implemented.
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    Every week the VA does not achieve its 30-percent energy savings goal can cost $1.2 million in lost opportunity—each and every week, $1.2 million. This conservative estimate is based on an annual utility cost of $212 million to operate some 4700 buildings and approximately 122.5 million square feet.
    Public and private sector energy utility companies have expressed interest in providing investment capital for VA energy conservation projects. The VA has been a reluctant participant in the past, but now appears to be moving ahead. We will hear more from the private sector on how successful these partnerships can be.
    We will also hear from an early proponent of Energy Saving Performance contracting, the Department of Army. I understand that the Army has been very successful with ESP contracts.
    I hope the VA's testimony will tell us how they plan to take greater advantage of this innovative type of contracting. Alternative financing for energy efficiency improvements should replace additional federal appropriations where feasible.
    Currently, each VA hospital exercises contracting authority. The VA should explore negotiations in energy conservation contracting in larger service areas such as the 22 Veterans Integrated Service Networks.
    I look forward to hearing from our witnesses today. At this time, I would like for any comments from my good friend, Mr. Clyburn, our Ranking Member.

    Mr. CLYBURN. Thank you very much, Mr. Chairman. As Ranking Democratic Member of this Subcommittee, I am pleased that you have called this important hearing that goes to the very heart of good government.
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    If we took a poll, most Americans would probably have no idea what the Federal Energy Management Program is. That is not to say, however, that it is not an important initiative.
    Congress voiced its strong support for this program when it enacted the Energy Policy Act of 1992. The program is designed to encourage reduced energy consumption and more efficient use of scarce resources by our Federal agencies, including the VA.
    For reasons that I'm sure VA will explain in some detail this afternoon, it has taken a while for them to begin achieving the efficiencies called for under the Act. No doubt there is a lot of work yet to be done on the part of the VA and other Federal agencies.
    I am hopeful this hearing will help sensitize the VA to the importance this Committee places on the program, and to the wise and efficient use of its appropriated dollars.
    Thank you, again, Mr. Chairman, for putting together this hearing this afternoon. I look forward to the testimony.
    [The prepared statement of Congressman Clyburn appears on p. 25.]

    Mr. EVERETT. Thank you very much. Mr. Evans.

    Mr. EVANS. Thank you, Mr. Chairman. I, like you, am a member of the National Security Committee and am in between hearings and won't be able to stay long. But I did want to commend you and Jim for your interest in today's hearings.
    Energy efficiency and cost savings may not make headlines in the papers, but they are the kinds of priorities the VA and other Federal agencies cannot afford to ignore as we make our plans for the 21st century.
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    So, I want to thank you again, Mr. Chairman, for recognizing me, and I look forward to some of the testimony before I have to report, as ordered, over to the National Security Committee.
    [The prepared statement of Congressman Evans appears on p. 28.]

    Mr. EVERETT. Thank you very much, Lane, I appreciate it.
    Mr. EVERETT. We're going to have a vote probably in about 7 or 8 minutes. I'm trying to find out if it's to be one or two votes—does anybody know? I'm going to ask the witnesses to limit their oral testimony to 5 minutes. Complete written statements will be, of course, entered into the official hearing record. And I will ask that we hold our questions until each entire panel has testified.
    Now I would like to recognize Panel 1 and welcome Mr. John Archibald, Acting Director, Federal Energy Management Program, Department of Energy. If you would, please be seated with your panel.

    Mr. ARCHIBALD. Thank you, Mr. Chairman, and I appreciate being able to introduce my written testimony for the record. I just have a few summary remarks.
    It is in the interest of all agencies to manage their energy wisely. In my capacity as the Acting Director of the Federal Energy Management Program, we work with all agencies who are ultimately responsible for their own energy use, but we try to coordinate their activities and streamline the activities of the Federal Government as a whole.
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    As we all know, budgets are tight even for cost-saving projects such as energy projects, and for several years agencies would complete the best projects they had identified, but there was never enough money to cover all of the projects that they could line up.
    In the mid 1980s, Congress passed and the President signed into law this unique authority at that time called ''Shared Energy Savings'' and currently called ''Energy Savings Performance Contracts''.
    This authority gives agencies an opportunity to use private sector funds and private sector human resources to stop the waste of energy that agencies could not stop with their own limited resources.
    The current Energy Savings Performance contracting authority is greatly improved, and contracting actions by DOE and the Army are accelerating the use through a mechanism that we have called ''Super ESPCs'', Super Energy Savings Performance Contracts.
    The VA, through one of the members that will testify here today, Bob Palazzi, was in the forefront of using these authorities to save taxpayers money at a VA Hospital in Connecticut. And I'm pleased at the level of activity that we are seeing in regions across the country where we are issuing—where DOE is issuing its Super ESPC contracts.
    The contracting task is now much simpler as a result of these Super ESPCs, and the agency workload at the facility level is much easier than it had been just recently.
    For FEMP and Headquarters agencies, there is a similar easing for each contract that we put in place of that workload. However, the demand that we are seeing in the field to use those contracts is actually increasing FEMP's workload, so that while we are busier at what we do, we are doing much more than we had been able to do in the past.
    FEMP and the Department of Energy are ready to help the VA and others as we help them implement these activities to help cut energy savings at their facilities, and we are expecting very significant energy savings to result. That's the conclusion of my opening remarks, Mr. Chairman.
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    [The prepared statement of Mr. Archibald appears on p. 29.]

    Mr. EVERETT. Thank you very much. I have just two brief questions. What are the major constraints for the VA to participate in DOE or Army Super ESPC?
    Mr. ARCHIBALD. The activities that are called for in these contracts right now require that the contractors provide a proposal to the facility and that the facility then be able to evaluate the proposal and to negotiate with the contractor on the best terms and conditions. So, there may be some energy-savings measures such as a lighting retrofit that would need to be incorporated or need to be expanded, and the agency needs to be able to manage that activity at the local facility level.
    Now, FEMP, through a mechanism that has just begun in Fiscal Year 1998 is authorized to assist the agencies at the local level, at the facility level, and to be reimbursed by the agency when those energy savings accrue in the outyears.
    So, that is probably the biggest activity for each agency such as the VA to undertake, is that negotiation with the Energy Savings Performance contractors at the local level, around the specific work that is involved at that site.
    Mr. EVERETT. How many VA Energy Savings Projects would you estimate could be initiated this year?
    Mr. ARCHIBALD. I know within the Department of Energy's contracts that we're putting in place, we've had discussions with four different VA VISNs, the Integrated Service Networks. Some of those are in places where we already have our contracts in place, and I would anticipate that we would see at least one of those signed this fiscal year to cover a VISN. The others are in areas where we are still working to put our contracts in place. For example, in the northeast, our contract there will be in place in the summertime. And so I don't know that the VA portion of the work will be added by this fiscal year, but I would expect that it might be added by the end of the calendar year.
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    Mr. EVERETT. How about in 2 years?
    Mr. ARCHIBALD. In 2 years, I would anticipate all four of those VISNs to have closed contract with the Energy Service contractors, and I would anticipate that others probably, if I might make a guess, I would say another four VISNs would have signed on just from places where we've had very preliminary discussions, but not the discussions that would actually bring us to close those contracts. That's for the DOE contracts alone.
    I will let the General speak for the Army's activities, but I do know that the Army and the VA are working together on a handful of additional VISNs that would be signed up under contracts under the Army's contracting mechanism.
    Mr. EVERETT. Thank you very much. Mr. Clyburn.
    Mr. CLYBURN. I have one question. The VA has indicated that it was precluded from entering into Energy Savings Performance contracts until regulations were put into place providing guidance on such contracts.
    Does your agency share a similar view regard the need for regulations prior to entering into such contracts?
    Mr. ARCHIBALD. Mr. Clyburn, we did not. In fact, we communicated to the VA that we felt that the authorities that were provided in the Energy Policy Act were clear, and that the statements that we had put in place, or the rulemaking process that we had gone through at DOE, as we were required to do in the Energy Policy Act, provided a clear mechanism to allow all agencies to use the Energy Savings Performance contracting authority.
    We did communicate that to the VA and, in a series of discussions over time, we and the VA came to the same conclusion that, in fact, we were authorized to use the ESPC authority.
    Mr. CLYBURN. So it was just a concern as to whether you were authorized to do it, or they were authorized to do it, or whether or not they didn't have proper guidance?
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    Mr. ARCHIBALD. Well, I would—I guess I would say initially counsel for both agencies disagreed. The counsel for DOE rendered an opinion that said yes, we were authorized to use the ESPC authority. Counsel within the VA had identified that they were not allowed to use it, that the authority was not granted. And what we ended up doing was negotiating over a period of time through a series of discussions at different levels within the agency, and ultimately both agencies agreed that the authority was, in fact, granted and that all agencies were authorized to enter into ESPCs.
    Mr. CLYBURN. Thank you, Mr. Chairman.
    Mr. EVERETT. Thank you. For the record, Department of Energy is the lead agency in this, right?
    Mr. ARCHIBALD. Yes, that's correct. In the Energy Policy Act, the Department of Energy was directed to issue the rulemaking on how to use the Energy Savings Performance contracts that were granted.
    Mr. EVERETT. And there is no disagreement between Department of Army and the Department of Energy on how to proceed on this?
    Mr. ARCHIBALD. I don't believe so, sir.
    Mr. EVERETT. There is a disagreement between counsel for VA and your counsel?
    Mr. ARCHIBALD. There was disagreement in the early days. I believe all that disagreement is now ironed out.
    Mr. EVERETT. Okay. We're going to recess this hearing. First of all, let me dismiss this panel. Jim, do you have any more questions?
    Mr. CLYBURN. No, sir.
    Mr. EVERETT. Let me dismiss this panel, and thank you for your participation. We may have additional questions for the record, and we're going to recess the hearing until we can take this vote. We should be back in about 10 minutes. Thank you.
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    Mr. EVERETT. I'd like to start the hearing again and call the second panel. Mr. Keith, Senior Vice President and General Counsel for CES Way, International, Inc. Mr. Keith is representing the National Association of Energy Service Companies.
    Mr. Keith, if you will just begin your testimony, and please hold it to 5 minutes.

    Mr. KEITH. Good afternoon, Mr. Chairman, Members of this Subcommittee. As I sated, I am Erbin Keith, Senior Vice President and General Counsel of CES Way International. CES Way International is an Energy Service Company, or commonly called an ESCO. I'm here to give testimony on behalf of National Association of Energy Service Companies, NAESCO, and I have submitted a written statement for the record.
    In the brief time I have today, I will emphasize NAESCO's recommendations regarding the Department of Veterans Administration's Energy Management Program.
    A year ago, if I was giving this testimony, it would be quite different. Frankly, after the DVA issued ESPC guidelines in September of 1996, very little happened. That has changed somewhat over the last year. The DVA has shown some movement on the ESPC by entering into some ESPC contracts, primarily under the Corps of Engineers Huntsville ESPC, and has also issued some Requests for Proposals for ESPC contracts around the country. Some of these projects are mentioned in Major General Hunter's written testimony.
    The DVA should be congratulated on taking these steps, but they need to be encouraged to take further steps and implement more projects. Indeed, that is the real challenge, not just entering to an ESPC, but actually implementing the project. Expediting that process is critical because, as the Chairman noted, truly time is money here, and the most inefficient solution is to delay or not do anything.
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    In light of this, NAESCO has four recommendations for the DVA. First, the DVA should rely on congressionally authorized ESPC for the procurement of energy efficiency measures. ESPCs offer many advantages over procurement options such as sole-source utility company area-wide agreements. For example, the Corps of Engineers Huntsville and DOE have put in place, or are putting in place nationwide, Indefinite Delivery/Indefinite Quantity ESPCs that the VA can, and has at least three instances, ordered off these contracts, particularly the Corps of Engineers Huntsville.
    These ID/IQ ESPCs were put in place by the Government agencies most experienced in ESPC, namely, the Department of Energy and the Corps of Engineers Huntsville. The contracts are well written. They are based on their experience and their lessons learned. The ESCOs selected under these contracts are among the most experienced in the country. In short, the contracts are in place. There is nothing preventing the VA from ordering off the contracts, and they have done so. The Corps of Engineers and Department of Energy have essentially ''greased the procurement skids'', and this process should be followed.
    Other options, such as sole-source utility company areawide agreements are inappropriate for VA Hospital energy conservation projects. VA Centers have special challenges for energy conservation projects. For example, VAs operate 24-hours-a-day, seven-days-a-week. They are very energy-intensive. The construction projects at VA Centers tend to be more expensive because it's a complex hospital environment. VA Hospitals have typically environmental issues that need to be addressed. They have complex system and equipment, and they have a significant amount of deferred maintenance costs that need to be addressed in an energy conservation project. An ESPC is much better suited to meet these challenges.
    The ESPCs are based on competitive procurement versus sole-source. That means the Government is likely to get a better price for the project. The ESPCs provide longer contract terms and, thus, more comprehensive projects, an important issue because some of our NAESCO members have found where utility companies have come in and done projects under an areawide agreement that tend to be what we consider ''cream-skimming'' projects. That isn't a service to the VA.
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    Often, other O&M savings can be considered in an ESPC contract, where they can't under a utility areawide agreement. The contract under an ESPC is performance-based and guaranteed. Not so under utility areawide agreement. And the ESCOs may bring significant hospital experience to the table, an experience that you may not see in a utility company.
    Our second recommendation is that the VA should consider implementation of ESPCs, where possible, on a VISN basis rather than a facility basis. This offers two advantages. One, by pooling the resources at a VISN level you're likely to have individuals who have different levels of expertise on different types of projects, and by pooling it at the VISN level, they can all work to implement the project.
    Two, by implementing on a VISN level, you may be able to take particular facilities that do not have significant energy savings and use other facilities with greater amount of savings to help implement the project at the smaller facility.
    Our third recommendation is that DVA support and train the local contracting officers. ESPCs are fairly new in some aspects, and are foreign to Government procurement. To take advantage of these ESPCs, the Government should provide training to the local contracting officers. The DOE and Corps of Engineers Huntsville are a good source for this training.
    Four, the ESPC program should be supported from the top down, from the DVA to the VISN level, and finally to the facility level. I don't need to elaborate on this point, but it's only obvious that you should be applying it at all levels of the DVA to make these projects work.
    On behalf of NAESCO, thanks for giving me the opportunity to give this testimony, and I'm prepared to answer any questions.
    [The prepared statement of Mr. Keith appears on p. 33.]

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    Mr. EVERETT. Thank you very much. As Acting Secretary West was at the Army when they used this program, I think we're going to have top-down.
    Mr. KEITH. That's encouraging.
    Mr. EVERETT. I'm not trying to put words in his mouth, but I think he's seen the benefit of the program. If you would, just a thing or two about training contracting officers. Could you go into a little bit more detail about that?
    Mr. KEITH. Well, the contracting officers, particularly at the facility level, may not have any experience in ESPCs. Again, they are fairly new, and some of the contracting procedures are foreign to traditional Government contracting procedures.
    It's important that the contracting officers at all levels have a good understanding of not only the contract terms of an ESPC, but how they are implemented. There are excellent sources for this training, particularly at the DOE and Corps of Engineers Huntsville. I've sat through their training. It's an excellent way to get these contracting officers to understand how an ESPC is implemented.
    Mr. EVERETT. How comprehensive are the VA's energy conservation initiatives, can you elaborate on that?
    Mr. KEITH. Ideally, they would be very comprehensive. NAESCO supports comprehensive energy conservation projects, and I want to explain what I mean by comprehensive.
    It's very easy to go in almost any facility of a certain age and come up with energy conservation measures related to lighting, for example, There are typically quick paybacks. And you can install a lighting system and it will pay from its savings in 3, 4, 5 years.
    The idea to do a comprehensive project is to use those quick payback items to pay for energy conservation measures that don't have quick paybacks. So, by blending all the items together, you come up with a project that pays in a reasonable amount of time.
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    The advantage to doing a comprehensive project is that you take care of a lot of the capital renewal needs of the facility. If you do a lighting only project, at that point you've wasted the opportunity. Now there has to be appropriations to go back and accomplish the other energy conservation measures that would need to take place at the facility, or environmental measures that need to take place.     Chiller replacement to comply with CSC requirements, for example. Once you've wasted the opportunity by doing a lighting only project or a quick payback project, you've lost that opportunity. That's the other advantage of an ESPC, is that under a utility areawide agreement, you're limited to a 10-year contract term. That limits the comprehensiveness of the project, and we have seen examples of that in industry.
    By going to an ESPC, you can go up to 25 years. And I think the DVA can give proper guidance to the VISN level and facility level as to when it's appropriate to go from, say, a 10-year project to a 15 to a 20 to a 25. My company, for example, has projects ranging from 15 years to 25 years with the Federal Government.
    Mr. EVERETT. I mentioned earlier that we have a lot of scheduling conflicts going on which seem to get worse and worse nowadays, and we don't have any Members of the Minority present, but we will allow counsel for the Minority to ask some questions. Thank you.
    Mr. SACHS. Thank you, Mr. Chairman, I'll be brief. Following up on what Chairman Everett was asking with regard to the status of the VA's energy savings efforts, can you give us a sense for how comprehensive those efforts are, and can you quantify the potential cost-savings out there within the VA?
    Mr. KEITH. Okay. Perhaps it's too early to answer your question, but the contracts that the VA has entered into are fairly recent, over the last year. An ESPC contract has various stages you must go through.
    First stage is to actually contract. Then audits have to be done, feasibility studies, approval to move on to a more well defined study, and then finally approval to move on with implementation of the project.
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    I'm not aware of any VA Hospital projects that have been awarded, for example, under the Corps of Engineers Huntsville's contract that have gotten past maybe the audit stage.
    My company, for example—actually, Major General Hunter I think is going to address some of these particular projects in his testimony—but, for example, in our projects, we are proposing very comprehensive project involving lighting, chiller change-out, co-generation options, humidity control, particularly long-term items to the VA.
    As of this point, we have been nothing but encouraged by the VA in our VISN that we're working, in response to our preliminary proposals.
    Mr. SACHS. How about a sense for potential cost-savings out there. Are you in a position at this point to give us an idea, based on how many facilities there are within the VA system, about what kind of cost-savings could be generated?
    Mr. KEITH. Yes. We have a rule-of-thumb that we use at these facilities. Typically, you can take the utility bill at a particular facility and, for a 10-year project, the 1-year utility bill is about the size of the project you can do.
    So, for example, if a VA has a $2 million utility bill, we feel we can do at least a $2 million project at that facility, sometimes much greater depending on the availability of DS money and other incentive monies.
    So, for example, in the VISN that we're working in right now, which is Florida and Puerto Rico, we are going to propose, and have submitted preliminary proposal, to do about $6 million of work at those seven hospitals, and this year alone we are expecting seven hospitals could have an ultimate construction value of between $20 and $30 million.
    Mr. SACHS. Thank you, Mr. Chairman.
    Mr. EVERETT. I want to make sure the record is clear. Do you currently have any Federal contracts?
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    Mr. KEITH. CES Way has Federal contracts under the Corps of Engineers Huntsville ESPC as well as the DOE's Southeast. Our affiliate company, Energy Pacific, has contracts under the DOE's Super ESPC in the West. CES Way has probably completed more Federal ESPCs than any ESCO. So there's quite a few contracts that are still ongoing but have been implemented.
    Mr. EVERETT. Thank you very much, Mr. Keith. We will have additional questions for the record, and we will appreciate your response to them. At this time, we will call Panel 3.
    Major General Milton Hunter, Director of Military Programs for the Army Corps of Engineers, for the Department of Army. General Hunter, we welcome you very much, and if you will introduce who is with you on your panel, and then at that point you may proceed, please.

    MGen. HUNTER. Thank you, Mr. Chairman. Mr. Chairman and Members of the Subcommittee, I am Major General Milton Hunter, Director of Military Programs in the Headquarters of the United States Army Corps of Engineers. Accompanying me today is Mr. Joe McCarty. He is from our Engineering and Construction Division in the Military Programs Directorate. He is my Mechanical Engineering Team Leader and supervisor at the ESPC program.
    In your letter of invitation, you asked for testimony on the Army's experience in ESPC. With your permission, I would like to give a brief overview of the Army experience with the program, and submit a more complete version for the record. And then I'll close by briefly discussing the Corps' effort and support of the Veterans' Administration ESPC Program.
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    Currently, the program has turned an Army investment of $792,000 since 1988 into 11 projects with a private sector investment of $36 million for the replacement of lighting, motors, cooling systems, ground source heat pumps, and air propane plants. The result is a total estimated cost avoidance of over $53 million over the life of the contracts. This is a great investment with over $11 million to be retained by the Government, a ten-fold return on the Government's investment.
    The Corps' involvement in Shared Energy Savings, which is the same as ESPC, began in 1986 with a chiller replacement project in Corpus Christi, TX. The Corps now has over 13 regional Super ESPC contracts to cover all 50 States, District of Columbia, and Puerto Rico. These 13 regional ID/IQ contracts have an ordering capacity for about $2 billion worth of energy saving measures. These contracts administered by our support center in Huntsville, AL, which was mentioned by the earlier witnesses, are available to any Government agency. Our customers include the Army, the Air Force, the Coast Guard, Defense Logistics Agency, the National Guard Bureau, and the Veterans' Administration.
    In February, the Office of the Secretary of Defense provided the Corps with $4 million to ''jump start'' the ESPC program for all DOD services. This money is being used to support a wide variety of initiatives including assisting customers in the award of task orders against the existing areawide contracts; development of new contracts to support ESPC activities at DOD facilities in Europe and Korea; expansion and award of additional contracts for CONUS; training in the ESPC process; and promotion of the ESPC program as well as technical support to the Air Force and the Navy in implementing ESPC programs.
    The Veterans' Administration uses a multi-faceted approach, as you heard earlier for energy savings performance contracting. They use the DOE regional contracts, they develop their own contracts, and they use the Corps' contracts.
    Currently, three of the 22 Veterans Integrated Service Networks have chosen to take part in the Corps' ESPC program., and signed Memorandums of Agreement with our Huntsville Support Center in the Fall of 1997.
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    The VA Omaha Medical Center in Omaha, Nebraska has also chosen to participate. An ESPC contractor has been selected for each. Training sessions for both Government and contractor personnel have been provided. The training provides information of the ESPC process, and the responsibilities of all involved parties.
    The ESPC contractors have performed site visits and are currently proposing projects such as lighting upgrades and controls, chiller upgrades and replacement, boiler upgrades, utility monitoring and control systems, domestic water heating, electric peak shaving, variable speed drives, geothermal heat pumps, cooling tower replacement, and motor replacements. This represents a total estimated private investment of about $15 million with a potential energy cost avoidance of about $30 million. Construction activity is expected to begin in the Fall of 1998.
    The DOD strategy to increase the efficiency of facilities and reduce energy demand and consumption was based on the fact that in Fiscal Year 1997 DOD spent over $2 billion for energy for buildings and facilities alone, as a part of their total usage of over $5 billion.
    Sir, that concludes my testimony subject to your questions.
    [The prepared statement of General Hunter appears on p. 40.]

    Mr. EVERETT. General, thank you very much for being here today. Can you again give me a sum total of how much the Army saved in energy and money by ESPC contracting?
    MGen. HUNTER. Yes, sir. The earlier figure I mentioned was $792,000 on 11 contracts. The projected savings is $53 million. To date, we estimate we have avoided $11 million.
    Mr. EVERETT. That's a dollar-for-dollar savings on appropriated funds.
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    MGen. HUNTER. Yes, sir.
    Mr. EVERETT. If you will, please elaborate on the Super ESPC. I understand that the VA is considering participating in this one.
    MGen. HUNTER. Sir, they are, in fact, participating in the ESPC contracts that we have awarded. I mentioned earlier that we had three Veterans Integrated Service Networks that have participated in ESPC contracts. We have also gotten the VA Omaha Medical Center to come on-line to participate in this process. So we have four from VA right now.
    Mr. EVERETT. Does the VA lose its bargaining power by contracting as single medical centers rather by regional VISNs?
    MGen. HUNTER. Sir, I'm not sure of that. I would have to research that and get you an answer for the record.
    (The information follows:)
Facility Versus Regional Contracts
    Question. Does the VA lose its bargaining power by contracting as single medical centers rather by regional VISNs?
    Answer. Regional VISN contracting is ideal. ESPC can be effectively used on essentially any facility or group of facilities. However, the more facilities in the grouping, up to a point, the greater the number and variety of energy conservation opportunities available. This increases the potential for combining a variety of energy conservation measures into ESPC projects that are acceptable for funding by the private contractor and provides the Government with the optimum benefits in terms of energy savings and cost avoidance.

    Mr. EVERETT. Thank you. Let me ask you, even with your contractor training program, do you think a local medical center contracting officer has the expertise to exercise these ESPC contracts?
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    MGen. HUNTER. I think with appropriate training they could exercise these contracts. Right now, we have a center of expertise as well as DOE, and if trained to use this instrument, I think they could be very successful in using it locally.
    Mr. EVERETT. But they would need the training.
    MGen. HUNTER. Yes, sir.
    Mr. EVERETT. Does the Army Corps of Engineers favor single facility contracts or regional systemwide contracts?
    MGen. HUNTER. Sir, we feel we can gain more advantage with a regional contract simply because you can issue multiple task orders against that contract and not have to issue single contracts with every energy savings effort.
    Mr. EVERETT. General, that's all the questions I have. We're going to let counsel for the Minority ask some questions. By the way, we may have additional questions for the record.
    MGen. HUNTER. Yes, sir.
    Mr. SACHS. General, your testimony indicates that three of the 22 VISNs within VA are presently working with you on energy savings performance programs. Can you give us a more detailed look at those three VISNs? Do you know whether contracts have actually been signed on those projects?
    MGen. HUNTER. Sir, I think the Memorandums of Agreement have been signed, but I don't think the contracts have been finalized yet.
    Mr. SACHS. Okay. Can you give us a thumbnail sketch what kind of energy saving activities are envisioned at those particular VISNs, and also a sense for the degree to which those kind of energy saving practices can be applied across-the-board within the VA hospital system?
    MGen. HUNTER. I'll defer that to my expert here in terms of what VA has done so far, since they have not been finalized. Maybe he can give you a sense of what they are doing in terms of the scope of work.
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    Mr. MCCARTY. Some of the things they are looking at would, of course, be lighting that was previously mentioned, which is usually a very high payback item. My understanding is they are also looking at high efficiency motors. They also looking at and seriously considering replacing some chillers with more energy efficient chillers. This also gets away from the ozone depleting chemicals in older chillers.
    I understand that there may be some cases where they are actually looking at geothermal heat pumps which may have application in the smaller units. These are some of the items that are being looked at. Of course, it is very site-specific. Most of those items that I've mentioned would have application in a large number of facilities, both VA facilities and military facilities.
    Mr. SACHS. So it is your sense that many of these cost-savings projects can be applied on a much larger scale within the VA hospital system?
    Mr. MCCARTY. Yes, sir. Many of the energy conservation measures have wide applicability.
    Mr. SACHS. General, if you could just—and this is the last question I have—if you could give us a sense for the degree which you have conducted any outreach, or the Corps has done outreach, to increase VA's awareness of the cost-saving possibilities?
    MGen. HUNTER. Sir, we have been promoting the program, as I alluded to earlier, within the Department of Defense. It was not widely used. It was used in parts of the Army and parts of the Air Force. What we did, in my briefing to the Deputy Secretary of Defense, was to get it imbedded DOD-wide. And the $4 million that was provided after that briefing was to give it a jump start to get all of the services to use it within DOD. So, that's sort of been the first effort.
    Mr. SACHS. So there has not been any stepped-up effort to spread the word at the VA, it's been kind of a focus at this point within DOD, is that correct?
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    MGen. HUNTER. Yes, sir.
    Mr. SACHS. Thank you, Mr. Chairman.
    Mr. EVERETT. General, let me extend my thanks to you for being here today. We certainly appreciate your testimony. At this time, as I said, we may have additional questions that we would appreciate your prompt response to for the record.
    Thank you very much, General.
    Mr. EVERETT. We will now call the next panel, Panel 4. Mr. Kenneth Clark, Chief Network Officer for the Veterans Health Administration, for the Department of Veterans Affairs, and Mr. Robert Palazzi, Chief, Design and Development, of the VA Connecticut Healthcare System. Gentlemen, if you will please be seated along with the rest of your panel.


    Mr. CLARK. Thank you, Mr. Chairman. Let me introduce the members of the panel. To my left is Mr. Robert Palazzi, who is the Chief of Design and Development Section of the West Have, Connecticut, VA Medical Center. To my right is Mr. Bill Graham, who is the Director of the Network Program Support office here in Headquarters. Next to Mr. Graham is Mr. Raj Garg, who is the Chief of Energy Management Division located here in Headquarters. And to Mr. Garg's right is Mr. Len Malamud, who is with the Office of the General Counsel, also here at Headquarters.
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    Mr. EVERETT. If you will proceed with your testimony, and I ask you again to hold it to 5 minutes, and we will submit your complete testimony for the record.
    Mr. CLARK. I have just a few opening comments to make, and Mr. Palazzi does as well, and we will be, obviously, available for questions.
    Mr. Chairman, I appreciate the opportunity to discuss VHA's Energy Management Program with you this afternoon. Since initial energy conservation measures were begun in 1975, the VA has consistently met, or exceed, all energy reduction goals set by Executive Orders.
    During those years, we've applied a variety of technologies consistent with legislative authority to help us meet our goals, and those will need to be even more rigorously managed as agency budgets continue to be held to responsible levels.
    The Energy Reduction Act of 1992 made Energy Savings Performance contracting possible for Federal agencies. Following issuance of contractual guidelines by the Department of Energy in final regulations published in the Federal Register in 1995, unique specific ESPC contract criteria were then developed by each Federal agency.

    In VA, these efforts involve General Counsel, procurement, field energy, and energy staff members. Criteria were issued to all VA Medical Facilities in October 1996.

    In response to field feedback, clarification guidance was subsequently distributed to all facilities last year. Since that time, training of field staff has been performed, familiarization both with procurement and technical staff at each facility and in the VISN with specific contract requirements of the ESPCs has been accomplished.
    In addition, simplification of the process has recently been made for the use of recently established regional Super ESPCs in each of the six DOD regions.
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    VHA sees tremendous field use of the ESPC and Super ESPC options for energy conservation. We have included several examples of specific applications in my written testimony, and we have a member of the panel, as I mentioned, from the VA Medical Center, West Haven, CT, who has personally dealt with the ESPC process.
    I'd like to ask Mr. Palazzi, from the West Haven VA, to make his opening statement, and then our panel will be available to answer any questions you have.
    [The prepared statement of Mr. Clark appears on p. 43.]


    Mr. PALAZZI. Good afternoon, Mr. Chairman. I have submitted my testimony in writing for the record, and I will just synopsize the program that was accomplished at VA Connecticut Healthcare Systems.
    Basically, we awarded an ESPC contract. At the time, it was called SES, Shared Energy Savings, based on the authority granted in the mid–1985 ruling, the same ruling that Department of Defense was working on as well as Army Corps.
    The contract was awarded November 11, 1992, and was substantially complete by April of 1993. Our Medical Center enjoyed the benefit of working with a very astute ESCO, which is an Energy Service provider. We developed a project which has replaced our chiller plant, and retrofitted and/or replaced approximately over 8,000 light fixtures at West Haven.
    The project completely pays for itself. There were no additional funds added to this project. There's no additional taxpayer dollars expended other than what we would have normally expended in our utility budget if we had done nothing.
    I feel our project was a success, and I really don't have anything bad to say about ESPC, nothing but applause because it worked well for us.
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    [The prepared statement of Mr. Palazzi appears on p. 48.]

    Mr. EVERETT. Thank you very much. I'm going to ask some direct questions—and, Mr. Clark, I'll start with you—you can respond in perhaps as few words as possible, but if you feel additional information should be furnished to the Committee, please feel free to do so in written form.
    Briefly state what the Department has done to move the ESPC program forward.
    Mr. CLARK. We have done a number of things, Mr. Chairman. We have, first and foremost, as I mentioned in my testimony, trained Medical Center staff to understand the ESPC contract process.
    We have now trained virtually all of our procurement staff in that area, all of our technical staff in that area, as well as the VISN staff, over the last couple of years. Obviously, with turnover in staff, we need to renew and continue those efforts, and will do that, but training has been a major thrust of our plans.
    Also, the staff here in Washington, through a series of conference calls, guidance, policy guidance, we have apprised the field of these opportunities and, perhaps more importantly, instructed them in how to go about the mechanics of entering into these contracts, and I think generally raised the level of sensitivity, interest and knowledge about the ESPC contracting process.
    Mr. EVERETT. And I'm sure that's right, but the average GS–10 contracting officer trained by you in these very complex multi-faceted contracts and the business aspects of ESPC, are they capable of exercising these contracts?
    Mr. CLARK. They are capable of exercising those contracts. Obviously, that's going to vary from facility-to-facility. And what we have tried to do is ensure that there is a knowledge so that those contracts can be expeditiously put in place. But, obviously, there's a lot of people involved. These are very complex contracts, and there are strengths and weaknesses in that area throughout the system.
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    Mr. EVERETT. Have any of the medical facility folks actually done one of these contracts?
    Mr. CLARK. I'm not sure what individual facilities have done them. We do have contracts now in three of the networks, which have been put in place only within the last 6 months, that involve 20 facilities.
    Mr. EVERETT. The medical center contracting officers, did they actually execute these ESPC contracts at those facilities you just mentioned?
    Mr. GRAHAM. Yes. They are involved in it, and most of the networks utilize the contracting officers at some of their servicing facilities, and key facilities, to actually exerts this and coordinate others that for all the network facilities.
    Also, we had five facilities that entered into contracts themselves—Dallas, Lake City, Florida; Richmond, Virginia; Portland, Oregon, and West Haven—on their own initially, plus, as you heard, Omaha is pursuing it on their own.
    One of the benefits of the DOE and the DOD contracts is that a lot of the more complex issues have already been addressed for the facility staffs, and it makes it much easier for them to get involved in this process.
    Mr. EVERETT. Do you have kind of a boilerplate guide for them to go by?
    Mr. GRAHAM. Yes, we sure do. It took a while to put it together, and we had to try to make sure that we were minimizing the risk factors. There are a lot of issues with liabilities and so on, and we address that in a general sense with a fairly lengthy guide, and then we tailored that as we got some feedback from the field about specific issues that they felt also needed to be clarified. So, we kind of had two tiers of information we've provided the field.
    Mr. EVERETT. Mr. Clark, of the 170 medical centers, how many of them have had ESPC contracts signed and working?
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    Mr. CLARK. The contracts that we just mentioned, which I think were five or six, are actually contracts and, as I said, we've got three networks now that have VISN-wide contracts in place. I will point out that all 22 networks, are in various stages of evaluating contracts or determining what their contract strategy will be, so this is at least an activity that's ongoing in all 22, and probably half of those are in stages of contracting where we hope that they would consummate a contract in the upcoming months.
    Mr. CLARK. The large numbers are going to really come forward with the VISN-wide concept. Of the three network VISN contracts that are being dealt with right now, there are 20 facilities in those three networks. So, that's where you start to really get into the larger number of facility involvement.
    Mr. EVERETT. Could part of the $20 million for the Tampa Spinal Cord Injury Unit and Energy Center project have been contracted under the ESPC?
    Mr. CLARK. I'm sorry, the question was, could it have been contracted under ESPC?
    Mr. EVERETT. Yes, could it have been contracted under ESPC and, if it could have, why wasn't it?
    Mr. CLARK. I'm afraid I don't know the answer to that.
    Mr. GRAHAM. I think primarily it was an Energy Management Center which had to do with the monitoring of some of the equipment. To be sure, some of the chillers were updated and upgraded for the spinal cord unit, but it was an oversight project that pulled in not only the equipment, but also the Energy Management Center, which is a computerized monitoring program for all of the aspects of energy at the facility. That was conceived, and we've done those traditionally, as a separate portion of a major construction project.
    Mr. EVERETT. Out of curiosity, how many medical centers have highly efficient light fixtures installed as a result of ESPC contracts?
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    Mr. CLARK. If we don't have an answer right at the table, we can certainly provide that to you. We don't know the answer to that, but we can provide that for the record.
    Mr. EVERETT. In the Department's 1997 annual report to the President and Congress, as required by the Energy Policy Act of 1992, the VA claims to have achieved a 15.1 percent reduction overall in energy consumption.
    If I lay your 1996 and 1997 annual reports side-by-side, it looks like the VA increased its fuel consumption in almost every single category. Can you explain how that can happen?
    Mr. GRAHAM. I can explain some of that, Mr. Chairman. I think, in part, what we've realized is that many of our facilities have become retrofitted for air conditioning, particularly facilities that were not, when they were built, air conditioned. As the facilities are retrofitted, or refurbished, generally we will include as part of that project, an air conditioning component. And so we will consume much more energy through air conditioning, in part.
    Another reason or another factor, certainly, is the increased sophistication of equipment and technology, particularly computers. Much of that has contributed to the increase in consumption.
    Mr. EVERETT. As I look down here, it's not just electricity, but fuel oil, natural gas, LPG and propane gas, coal, they are all up. Could you give me—I would ask you to make a detailed analysis of this—surely somebody has done that somewhere—and make it available to this Committee?
    Mr. CLARK. Certainly we can do that.
    (The information follows:)

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SHOOT NEW pp. 18 to 20 insert here

    Mr. EVERETT. Mr. Palazzi, how much money has your project actually saved to date, total figure?
    Mr. PALAZZI. Total for the contract of the 15-year term will be over $9 million. We save approximately $600,000 a year. Of that, the ESCO ends up getting about 90 percent of that. After we pay off the capital improvement, the net return to the VA is about $24,000 to $30,000 actually savings in our pocket.
    Mr. EVERETT. Counsel for the Minority has some questions, and then I'll have a closing remark or two.
    Mr. SACHS. Thank you, Mr. Chairman. Mr. Clark, your testimony indicates, on the last page actually, that the VA is currently evaluating its participation in Super ESPC contracts. Can you elaborate on this? It appears this might somehow suggest you might have second thoughts about participation. Can you clear that up for the record?
    Mr. CLARK. No, there are no second thoughts. That's merely a reference to the fact that involvement in the various networks are at different stages. Some are much more advanced than others, but there is no suggestion on our part that we are having second thoughts. I think we see this as a good thing, and more than just a good thing, it's an essential thing. We need to realize the energy savings.
    Mr. SACHS. Is this something that's being put out to the VISNs? I mean, is there an understanding out there that there is a vehicle in place that would smooth the way to this sort of energy savings?
    Mr. CLARK. Yes. We have shared this information or tried to share this information through a variety of directives, guidance, training, and whatnot. In all candor, we have learned as we have grown with this process, how to do it, how to do it best.
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    We will this year be putting together a national strategy or national plan to maximize our efforts in this area. We've not done that yet, but we are in the process of doing that, and I think that will include a strategy for making sure that everybody is informed about these opportunities and how to maximize that potential.
    Mr. SACHS. Thank you, Mr. Clark.
    Mr. Palazzi, if you can just quickly give us a sketch as to what gave you the impetus to undertake your project, and how you found out about the program, and the degree to which the VA Central Office was supportive of your efforts.
    Mr. PALAZZI. My case is kind of unique. Again, I was a little bit ahead of the curve. My motivation was to improve my facility and take heart that VA West Haven or VA Connecticut is my home, and I look out for it and try to improve it any way I can.
    In conversations with my peers in the private sector as well as intercommunication to other agencies such as GSA, around 1990 I became aware of the opportunity to do something like this.
    Through interacting with private sector, especially my utility companies of which I have two, they gave me the guidelines and/or the opportunities that were within my facility that could pay back within a reasonable period of time. So that helped me in the decision screening process, and everybody that does an ESPC needs to do this decision screening process to see which are going to pay back and be reasonable and that you want to invest into. Unlike some ESCOs, you want to do everything in your facility economically. It may not work for all sites.
    We ultimately did secure a sample contract from GSA, modified it, had L&T review accomplished, advertised it, went through the RFP process—which ESPC is a standard RFP format. Everybody seems to think it's something special, it's an RFP. And we ultimately awarded. I can tell you, this particular kind of contract is different in the fact that it is true performance. Traditional contracting that every Government agency does is usually spec and then bid out to a contractor to provide what the Government tells them to give you, exactly down to what color the device must look like. ESPC contracting is true performance contracting, where you establish a line that the contractor must meet.
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    In my case, I evaluated our existing equipment. Our chillers were almost 30 years old. And based on assumptions and calculations, I knew what the performance of my chillers were. I looked at technology at that time, what was the most efficient, and I selected the most efficient technology for the contractor to meet.
    What that did is establish the quality of equipment to be inserted into our facility. Standard specifications can be met by many different manufacturers. Performance can only be met by a few.
    Ultimately, we received a product that was superior to what I could get through a traditional.
    Mr. SACHS. And did you have the support of Central Office with regard to your efforts, or were they plugged into this?
    Mr. PALAZZI. Yes, I did. As a matter of fact, I did work with Raj Garg, who is at the table today, assisted us in developing our schedules so that we could get the legal approval.
    Mr. SACHS. Thank you, Mr. Chairman.
    Mr. EVERETT. Thank you. I want to thank the panel, all the panels, for appearing here today. It's pretty obvious there we can significantly reduce the VA's energy costs and provide private sector funds to invest in efficient equipment that uses the latest technology, as you just referred to, Mr. Palazzi. And I am encouraging the VA to move forward with ESPC contracting.
    I want to note again that we are talking about a potential savings here of $60 million a year, annually, out of the $220 million energy bill that the VA has. And I would like to point out to you that this Subcommittee is extremely interested in this matter, as well as the full Committee Chairman, Mr. Stump.
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    I am therefore requesting that we ask the VA to furnish me a quarterly report on its activities, and that should be a very comprehensive report of what projects are planned, which projects are underway, what progress has been made, and a possible completion date on these projects.
    As I said, money is pretty hard for us to come by around here nowadays, and we're talking about a direct dollar-for-dollar savings of appropriated funds.
    I appreciate your being here today, Mr. Clark. I assume that this report will come directly from your office, is that correct?
    Mr. CLARK. Yes.
    Mr. EVERETT. And we look forward to seeing the first one in about 3 months. Thank you very much for appearing here today. This adjourns this meeting.
    [Whereupon, at 3:27 p.m., the subcommittee was adjourned.]