Special study, energy-savings devices and services budgeted for by school districts

              SPECIAL STUDY
Report to the Arizona Legislature
By the Auditor General
August 1994
ENERGY- SAVING DEVICES AND
SERVICES BUDGETED FOR
BY SCHOOL DISTRICTS
DOUGLAS R. NORTON, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
DEBRA K. DAVENPORT, CPA
DEPUTIAUDITOeGEllElAL
August 1, 1994
Members of the Joint Legislative Committee
on Energy- Saving Devices and Services
Members of the Joint Legislative Audit Committee
Transmitted herewith is a report of the Auditor General, A Special Study of Energy- Saving
Devices and Services Budgeted for by School Districts. This study was conducted in response
to a request by the Joint Legislative Audit Committee pursuant to Laws 1994, Chapter 254.
The recommendations contained in this report were made notwithstanding the recent Arizona
Supreme Court ruling which declared the State's school capital funding method unconstitutional
and ordered the Legislature to devise a new method of funding schools.
We found districts that budgeted for energy- saving devices and services under the provisions of
Arizona Revised Statute 8 15- 9 10 most likely did not realize budgeted savings. Further, budgeted
amounts contained various errors and were not always adequately supported. Consequently,
these errors resulted in overstatements of districts' general budget limits. We also examined
district procurement practices for obtaining energy- saving devices and services and found that
control over these practices needs to be strengthened.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on August 8, 1994.
Sincerely,
DOURM. N orton
Auditor General
Enclosure
2910 NORTH 44TH STREET . SUITE 410 I PHOENIX, ARIZONA 85018 l ( 6 0 2 ) 553- 0333 FAX ( 602) 553- 0051
SUMMARY
The Office of the Auditor General has conducted a special study of energy- saving devices and
services budgeted for by school districts, pursuant to Laws 1994, Chapter 254.
Arizona Revised Statute ( A. R. S.) 815- 910 governed school district ( district) budgeting for
energy- saving devices and services for the period we reviewed. The statute provided districts
with additional expenditure authority to procure energy- saving devices and services that promote
energy conservation and reduce utility costs. Effective April 24, 1994, Laws 1994, Chapter 254,
$ 2 governs these budgeting practices.
Our study revealed districts most likely did not achieve budgeted savings as noted in Finding I,
page 6; however, we found at least one district that realized significant savings under the
provisions of A. R. S. 8 15- 9 10. Furthermore, this district realistically evaluated their " reduction
in utility expenditures" ( RUE) based on historical data and achievable projections. Energy
savings can be accomplished when districts:
Select the most efficient energy- saving devices and services from a full range of energy-saving
options;
Exercise more accountability, project ownership, and governing board involvement; and
Develop realistic RUE projections.
In addition to the above, an improved procurement process and a thorough understanding of the
budgeting provisions of Laws 1994, Chapter 254, $ 2 by the districts will better serve the
taxpayers and more closely meet the intent of the law. This cannot be accomplished without the
changes in the law recommended in our report.
Districts Most Likely Did Not
Realize Budgeted Savings
( see pages 6 through 12)
Districts that budgeted for energy- saving devices and services under the provisions of A. R. S.
$ 15- 910 most likely did not realize budgeted savings because of their reliance on aggressive
contractor savings projections. In addition, we found that the size and cost of a project did not
necessarily make a difference in how much energy is ultimately saved. Laws 1994, Chapter 254,
82 should be amended to make RUE dependent on actual utility reductions. Further, districts
should independently calculate and monitor RUE, and consider a full range of energy- saving
options.
District Budgeting Practices Overstate
General Budget Limits
( see pages 13 through 14)
District budgeting practices for energy- saving devices and services are overstating general budget
limits, which could increase districts' tax levies. For the districts we tested, budgeted amounts
for energy- saving devices were calculated incorrectly and were not always adequately supported
by detailed schedules and worksheets. Districts utilizing the budgeting provisions of Laws 1994,
Chapter 254, 52 must attain a thorough understanding of the law's requirements and exercise due
care when calculating the budget add- ons for energy- saving devices and services. This will help
to reduce budgeting errors and the overstatement of districts' general budget limits.
Contractor Practices and Lack of District
Oversight Undermine Effectiveness of
Procurement Process
( see pages 15 through 19)
District procurement decisions for purchasing energy- saving devices and services are heavily
influenced by contractor marketing strategies. These strategies include the representation that
projects will pay for themselves, the presentation of proposals containing all- inclusive cost
estimates ( i. e., bundling), and the promotion of costly service contracts. Further, districts have
generally not been using competitive sealed bidding practices. Effective fiscal year 1994- 95,
Laws 1994, Chapter 254, $ 2 requires the use of competitive sealed bids in purchasing energy-saving
devices budgeted for under the provisions of this law. However, competitive sealed bids
will not be sufficient to guarantee greater effectiveness until districts request itemized savings
estimates by component, consider a full range of service contracts, and maintain project
ownership and accountability.
TABLE OF CONTENTS
INTRODUCTION AND BACKGROUND
FINDING I: DISTRICTS MOST LIKELY DID NOT
REALIZE BUDGETED SAVINGS
RUE Did Not Meet or Exceed Budgeted Amounts
Districts Relied on Contractors'
Aggressive Projections
Project Size, Scope, or Expense Had
Little Impact on RUE
Recommendations
FINDING 11: DISTRICT BUDGETING PRACTICES
OVERSTATE GENERAL BUDGET LIMITS
Amounts Budgeted for Add- ons Were Incorrectly
Calculated and Were Not Always Supported
Recommendation
Paee
1
FINDING 111: CONTRACTOR PRACTICES AND LACK
OF DISTRICT OVERSIGHT UNDERMINE
EFFECTIVENESS OF PROCUREMENT PROCESS 15
Districts Acquire Energy- Saving Devices and
Services Using Various Procurement Methods
Contractors Represent That Projects Will
Pay for Themselves
" Bundling" Limits Districts' Abilities to
Determine Cost or Savings
Service Contracts Costly, Unjustified 17
Greater Oversight of Projects Needed 18
Recommendations 19
TABLE OF CONTENTS ( Concl'd)
OTHER PERTINENT INFORMATION
APPENDIX: METHODOLOGY
FIGURES AND TABLES
Figure 1 School District Budgeting
Figure 2 Amounts Budgeted for Energy- Saving Devices Add- ons,
Fiscal Years 199 1- 92 through 1993- 94
Figure 3 Three- District Comparison of Pre- Project Energy Usage
with Post- Project Energy Usage
Figure 4 Comparison of Large- Scale and Small- Scale
Utility Expenditure Reduction Projects
Table 1 Shortfall of District Budgeted Reductions
in Utility Expenditures,
Fiscal Year 1993- 94
Page
20
A- 1
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a special study of school district energy- saving
devices and services budgeted for by school districts ( districts), pursuant to Laws 1994, Chapter
254, as directed by the Joint Legislative Audit Committee.
Arizona Revised Statute ( A. R. S.) 5 15- 910 governed district budgeting for energy- saving devices
and services for the period we reviewed. The statute provided districts with additional
expenditure authority to procure energy- saving devices and services that promote energy
conservation and reduce utility costs. The statutory budgeting provisions became effective for
devices in fiscal year 1988- 89, when the Legislature amended A. R. S. $ 15- 910 to provide that
a district governing board may budget for energy- saving devices. The Legislature amended
A. R. S. 5 15- 910 again, to provide that the cost of energy- saving services may also be budgeted,
effective during fiscal year 1992- 93. Effective April 24, 1994, Laws 1994, Chapter 254, $ 2
governs these budgeting practices.
The amounts budgeted for energy- saving devices and services under A. R. S. $ 15- 910 increased
a district's general budget limit and were termed " add- ons." An increase in the general budget
limit provides a district with additional expenditure authority, which could increase the district's
tax levy. For fiscal year 1993- 94, A. R. S. 5 15- 910 provided that a district may increase its
general budget limit for the cost of energy- saving devices and services by the lesser of two
amounts, either project savings or cost. The add- ons for energy- saving devices and services
represented only 2 of the 19 possible add- ons available to districts for fiscal year 1993- 94. See
Figure 1, page 2, for district budgeting practices.
Typical energy- saving devices and services purchased by districts include the following.
High- efficiency heating, ventilation, and air conditioning units ( HVAC)
Energy- efficient heating systems
Lighting system retrofits
Energy management systems ( EMS)
Detection sensors for lighting and temperature controls
Light fixtures cleaning and relamps
Replacement and lowering of ceilings
Maintenance and service contracts for equipment
Monitoring services
Energy audits
Increasing Purchases of Energy- Saving
Devices and Services
From fiscal years 199 1- 92 through 1993- 94, the number of districts that budgeted for energy-saving
devices increased from 2 to 17. After final budget revisions for fiscal year 1993- 94, the
total amount budgeted for energy- saving devices in these 17 districts totaled $ 1,424,153 ( see
Figure 2, page 3), with total project costs of approximately $ 19 million.
FIGURE 1
SCHOOL DISTRICT BUDGETING
( BUDGET LIMITS
Control Limit
Revenue
ADD- ONS
1. Desegregation Expenditures
2. Tuition Out Debt Services
3. Budget Balance Carry Forward
4. Drop Out Prevention
5. Excess Utilities
a. Statutorily calculated excess utilities
b. Energy- saving services
6. Excess Property and Casualty Insurance
7. Registered Warrants or Tax Anticipation
Notes Interest Expense
8. Registered Warrant Expense
9. Energy- Saving Devices
10. Joint VocKech Center Operations
11. Override Authorization
12. Small School Adjustment
13. Tuition Revenue
a. Local
b. State
14. State Assistance
15. Add- On for Handicapped and Indian Students
16. Administrative Costs
17. Increase for Accommodation Schools
BUDGETED I
ADD- ONS
1. Federal Impact Capital Levy
Adjustment
2. FN 1993- 94 State Board Approval to
Budget and Accumulate Cash
Balance for Construction
Capital Levy
Budget Limit
( CLBL)
EXPENDITURES
Maintenance A school district's maintenance and operations and capital
outlay expenditure budgets can not exceed a school district's
Operations general budget limit and capital outlay levy limit combined.
Budget ( M80)
Capital Outlay
Budget ( CO) n
SOURCE: Oftice of the Auditor General
2
While there were only 17 districts that actually budgeted for energy- saving devices using the
provisions of A. R. S. $ 15- 910, there were an additional 12 districts that entered into contracts,
had contracts in progress, or had completed projects for energy- saving devices and services
during fiscal year 1993- 94, with total project costs of approximately $ 1 1 million. The districts
not utilizing this statutory provision were funding the projects through bond proceeds, capital
outlay, maintenance and operation funds, or a combination of these methods.
The 17 districts that budgeted for energy- saving devices in fiscal year 1993- 94 awarded the
contracts to 7 different contractors, with 3 contractors receiving 95 percent of the total contract
dollars. Also, 3 districts performed projects with in- house resources. Of the districts that used
outside contractors, 7 districts used the request for proposal ( RFP) process, 6 districts used a
regional purchasing cooperative, and 1 district used competitive sealed bidding procedures. See
Finding 111, page 15, for a description of the different procurement methods.
Scope and Methodology
The purpose of our study was directed as follows by Laws 1994, Chapter 254.
Select a sample of districts that have budgeted for the costs of energy- saving
devices under the provisions of A. R. S. $ 15- 9 10.
Determine whether energy- saving devices or services budgeted for by districts
resulted in documented reductions in utility expenditures.
Review district budgeting practices for energy- saving devices and services.
Make any related recommendations.
Subsequent to passage of the legislation, the Joint Legislative Audit Committee directed the
Auditor General's Office to select three districts for detailed analysis. The three districts were
selected because they had budgeted for energy- saving devices in fiscal year 1993- 94 under the
provisions of A. R. S. $ 15- 910 and had projects that were operational for at least six months.
Also, the districts had projects that varied in scope and expense and represented diverse
geographic areas and climates around the state. Further, each district used a different contractor.
The following summarizes the average daily membership ( ADM), project description, and project
cost for each district selected along with an identification of the county where the district resides.
Fiscal Year
1993- 94 Project
District Countv ADM Proiect Description Cost
A Maricopa 9,943 New HVAC's, EMS, and $ 4,423,560
service contract
B Gila 2,008 New heating and cooling 523,098
systems, retrofit lighting,
EMS, clean and replace
lamps, and service contract
C Y avapai 169 Change from electric to 213,332
evaporative coolers and
radiant gas heaters, and
retrofit lighting
We identified problems related to the procurement of energy- saving devices and services during
the course of our study and, therefore, we included corresponding recommendations in the report.
The report also presents other pertinent information as follows.
• Increased public use of facilities
• Lack of budgetary relief for new construction
• District financing of energy- saving devices with long- term lease agreements
To analyze whether projects had a reduction in utility expenditures, we collected information on
types and costs of devices and services acquired and the dates the projects were completed and
operational. We then compared pre- and post- project utility billings to determine the realized
savings. To analyze budgeting practices, we interviewed district personnel and reviewed budget
documentation. In addition, from all the districts that budgeted for energy- saving devices during
fiscal years 1991- 92 through 1993- 94, we collected the following information by phone surveys
with district personnel.
Types and costs of devices and services acquired
Associated contractors
Scope of the projects
Dates that the projects were completed and operational
Parties responsible for the calculation of cost savings and budget amounts
Parties responsible for monitoring
Sources of project funding
Methods of acquisition ( i. e., lump sum purchase or long- term lease agreement)
Bid processes used
FINDING I
DISTRICTS MOST LIKELY DID NOT REALIZE BUDGETED SAVINGS
A. R. S. 8 15- 910 permitted districts to budget as add- ons the lesser of cost or savings (" reduction
in utility expenditures" - RUE) associated with the purchase of energy- saving devices and
services. Districts that budgeted under these provisions most likely did not realize budgeted
savings. This was primarily due to the districts' reliance on contractors' aggressive savings
projections when budgeting RUE. For the purposes of our analysis, we defined RUE to mean
the reduction in actual utility usage from periods prior to the installation of energy- saving
devices and services. Further, we noted that smaller projects appeared to have as much an
impact on RUE as larger, more expensive projects.
RUE Did Not Meet or Exceed
Budgeted Amounts
We analyzed RUE by examining utility bills ( electric and gas) by meter for the three districts
tested for the last five fiscal years ( for a full discussion of the methodology, see Appendix). In
Figure 3, page 7, we report the results of our comparison for the three districts. Figure 3 reveals
that only one district achieved any notable reduction ( District C) while the other two districts
achieved only modest savings. Although District C experienced an increase in gas usage, this
was more than offset by a reduction in electricity usage that resulted in a RUE of approximately
$ 27,000.
Moreover, as demonstrated by Table 1, page 8, we found the modest savings achieved will not
meet or exceed the amount of budgeted RUE for the projects as was required by A. R. S. 8 15- 910.
Based on Auditor General analysis and calculations, District A and District B will experience
significant budget shortfalls. Only District C is likely to achieve sufficient RUE to match its
budgeted amount. Overall, District A and District B will likely realize only 12 and 22 percent,
respectively, of budgeted savings. Consequently, these districts are not meeting the statutory
requirement that RUE meet the budgeted savings.
Districts Relied on Contractors'
Aggressive Projections
Our study showed that districts frequently rely entirely on contractor projections of savings for
budgeting. Contractor projections of savings are often based on hypothetical baselines and other
questionable practices. Because these projected savings are not associated with actual reductions
in utility usage, districts are unable to achieve budgeted savings.
Figure 3
Three- District Comparison of Pre- Project Energy Usage
with Post- Project Energy Usage
Electric
District A Gas
01 I
Oct Nov Dec Jan Feb Mar Apr May Oct Nov Dec Jan Feb Mar Apr May
Month Month
District B
0 0
Sep Oct Nov Dec Jan Feb Mar Apr May
Month
i n ,
0 ' I
Sep Oct Nov Dec Jan Feb Mar Apr May
Month
District C
100 7
Jut Aug Sep Oct Nov Dec Jan Feb Mar Apr May
Month
I---- PRE NPOST /
I
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
Month
Source: Auditor General analysis and District utility bills.
7
Slzortfall of District Budgeted Reductions in Utility Expenditures
Annual Contractor- District-
Auditor General
5 School Total"
Source: Total Annual Project Cost and Contractor- Projected RUE - Contractor proposals, lease agreements, and Auditor General analysis;
District- Budgeted RUE - District expenditure budgets and Auditor General analysis;
Auditor General Range of RUE - District utility bills and Auditor General analysis.
a. Total Annual Project Cost includes the annual lease payment, principal and interest, and service contract costs.
b. Auditor General Range of RUE is presented in a range because the price per unit varies with usage. See Appendix for further explanation of range
amounts.
c. Amounts for Total Annual Project Cost, Contractor- Projected RUE, and District- Budgeted RUE were projected based on the total number and size
of HVAC units installed at these schools. See Appendix for further detail on these projections.
d. Auditor General Range of RUE was projected to all the District's schools based on actual data gathered at the five schools. See Appendix for further
detail of projection amounts.
Contractors often use hvvothetical baselines - We found that contractors often develop baselines
fiom hypothetical situations, especially when a district is replacing one type of system with
another. For example, one district that replaced evaporative coolers with high- efficiency
heating, ventilation, and air conditioning units ( HVAC) budgeted $ 246,000 during fiscal year
1993- 94 for RUE. The district had relied on the contractor's projection of savings when
budgeting this amount. The contractor's baseline used for determining the projection was
calculated by assuming that the district had 15- year- old air conditioning units which ran 24 hours
per day. When we asked the business manager how upgrading fiom evaporative coolers to air
conditioning would actually reduce the district's utility bills, he responded, " the lights and water,"
indicating that the retrofitted lights and reduced water usage would offset the cost of the
upgrades. No real savings resulted from this change, although the district showed energy savings
of $ 246,000.
Other questionable practices - In addition to the hypothetical baselines described above,
contractors use a variety of methods to project savings. Other practices noted in our study
included the following.
Projecting an entire year's worth of savings fiom one month of data
Developing a baseline founded on budgeted amounts instead of actual expenditures from
a prior year or prior years
RUE should be associated with actual utility usage - In order to achieve a consistent and
meaningful measurement of savings, the phrase in Laws 1994, Chapter 254, $ 2, " reduction in
utility expenditures," should be restricted to make RUE dependent on actual utility usage
reductions, rather than the methods currently used to project savings. Further, districts should
independently calculate RUE using their own baselines fiom at least one full year's utility bills,
and not rely solely on the contractor's projections. In cases where there are no comparable prior-year
utility bills, or in an upgrade fiom evaporative coolers to HVAC, the district should estimate
savings as the difference between a more efficient HVAC to a less efficient HVAC using
comparable run times. In addition, districts should independently track and monitor RUE from
monthly utility bills.
Project Size, Scope, or Expense
Had Little Impact on RUE
The size, scope, or expense of a project did not appear to be a factor in the amount of RUE
achieved by the districts. On the other hand, designing projects based on straightforward energy-conservation
principles can result in significant energy savings.
Size, sco- p e, or expense of a - p ro- j ect is not a factor in the amount of RUE - We analyzed RUE
on a project basis for the three districts tested plus an additional three districts. We found that
districts that made extensive changes and purchased expensive new devices did not realize more
savings than districts where only minor, less expensive changes were made. Figure 4, page 11
compares average monthly pre- installation kilowatt- hour ( KWH) usage with actual post-installation
KWH usage, project by project. Projects that fell above the 45- degree line
demonstrated decreased KWH usage, while projects below the 45- degree line showed increased
KWH usage. Projects that are exactly on the 45- degree line had no change in KWH usage.
Most projects fall within a relatively narrow margin of gain or loss ( approximately 20,000 KWH
above the 45- degree line and 20,000 KWH below the 45- degree line). Whether the district was
at the low end of the scale in terms of total KWH consumed or the high end, the savings margin
remains relatively constant. Consumers of large amounts of KWH should not expect to achieve
greater savings than consumers using less might achieve, as shown in Figure 4. Districts
considering large- scale projects should question the overall benefit of investing large sums of
money when less expensive actions may save just as much energy.
Straiphtforward ener- p- v- savin- g techniq- ues - Energy savings were achieved by districts when
projects were based on sound judgment and common sense. Some of the best examples of
energy savings we found are enumerated as follows.
Restricting air conditioning run time
Restricting temperature to a limited range
Changing from electric heat to gas
Retrofitting with energy- efficient lights
Installing run time and thermostat controllers
Installing lighting control sensors
Consolidating summer classes into one building
Maintaining equipment in good condition
Training employees in energy- saving practices
Consider a- full range of options - Districts should consider a full range of energy- saving options
such as those described above, prior to selecting large, expensive projects that may not
necessarily produce greater savings.
Figure 4
Comparison of Large- Scale and Small- Scale
Utility Expenditure Reduction Projects
- No Change
Small Scale
A Large Scale
20,000 KWH - $ 2200
Decreased KWH usage
Increased KWH usage
- - - - - - - - - - - - .
0 20 40 60 80 1 00
KWH ( thousands)
Post- Installation Usage
Source: Auditor General analysis and District utility bills.
11
I Recommendations
1. The Legislature should consider revising Laws 1994, Chapter 254, 52 to better define
" reduction in utility expenditures" ( RUE). In particular, the definition of RUE should
be associated with actual utility usage reductions, rather than projected savings.
2. Districts should independently calculate RUE using their own baselines from at least
one full year's utility bills, and not rely solely on the contractor's projections. In cases
where there are no comparable prior- year utility bills, or in an upgrade from
evaporative coolers to high- efficiency heating, ventilation, and air conditioning units
( HVAC), the district should estimate savings as the difference between a more
efficient HVAC to a less efficient HVAC using comparable run times. In addition,
districts should independently track and monitor RUE from monthly utility bills.
3. Districts should consider a full range of energy- saving options prior to selecting a
large, expensive project.
FINDING I1
DISTRICT BUDGETING PRACTICES OVERSTATE
GENERAL BUDGET LIMITS
For the districts we tested, budgeted amounts for energy- saving devices and services add- ons
were calculated incorrectly and were not always supported by detailed schedules and worksheets.
Although it did not appear that these errors were intentional, they resulted in overstatements of
the add- ons and corresponding overstatements in the general budget limits, which could
ultimately increase the districts' tax levies. For an overview of district budgeting practices, see
Figure 1, page 2.
Amounts Budgeted for Add- ons
Were Incorrectly Calculated and
Were Not Always Supported
For the districts tested, we found the following problems in the calculation of amounts budgeted
for energy- saving devices and services add- ons:
Budgeted savings attributable to energy- saving devices and services were not prorated,
when appropriate;
Budgeted savings for energy- saving devices and services were not adequately
supported by detailed schedules and worksheets; and
Budgeted savings for energy- saving devices and services were budgeted twice.
Savinrrs not prorated - For two of the districts, we found that their energy- saving projects
became operational two to three months into the fiscal year. However, budgeted savings for the
energy- saving devices add- on were not prorated, but instead represented an entire year's worth
of anticipated savings. By not prorating annualized savings, these districts overstated their
energy- saving devices add- ons by $ 66,000 and $ 8,000. Districts should prorate annual savings
when appropriate.
Budgeted add- ons not supported and savings budgeted twice - For one district, the amount of
budgeted savings for the energy- saving devices add- on was not supported by detailed schedules
and worksheets. The amount was based upon a preliminary project proposal, which was $ 18,000
higher than the final proposal and resulted in an overstatement of this add- on by that amount.
Also, this district budgeted the savings twice for the same project by budgeting savings
attributable to energy- saving devices again for the energy- saving services add- on. This resulted
in an overstatement of the energy- saving services add- on of $ 263,000. A. R. S. € 1j 5- 910 required
that savings attributable to energy- saving devices and energy- saving services be budgeted for
separately under each respective add- on. Districts must maintain adequate documentation to
support budgeted amounts, including detailed schedules and worksheets.
Recommendation
Districts utilizing the budgeting provisions of Laws 1994, Chapter 254, 52 must attain a thorough
understanding of the law's requirements and exercise due care when calculating the budget add-ons
for energy- saving devices and services, including:
a. Prorating annualized savings amounts, when applicable;
b. Maintaining adequate documentation to support budgeted amounts, including
detailed schedules and worksheets; and
c. Budgeting savings from energy- saving devices and savings fiom energy- saving
services separately for each add- on.
FINDING I11
CONTRACTOR PRACTICES AND LACK OF DISTRICT OVERSIGHT
UNDERMINE EFFECTIVENESS OF PROCUREMENT PROCESS
Districts acquire energy- saving devices and services using various procurement methods.
Procurement decisions for purchasing energy- saving devices and services are heavily influenced
by contractors' marketing strategies, such as contractors' representations that projects pay for
themselves. Contractors also market the energy- saving devices and services as a single " bundle,"
thus precluding an itemized accounting of the cost and the related energy savings. Furthermore,
contractors recommend excessive service contracts, adding to the project's cost. By retaining
appropriate oversight of the project, districts can make the procurement of energy- saving devices
and services more effective and efficient.
Districts Acquire Energy- Saving Devices and
Services Using Various Procurement Methods
We found that districts used three methods to acquire energy- saving devices and services:
competitive sealed bids, competitive sealed proposals ( usually referred to as request for proposals
- RFP), and a regional purchasing cooperative. The following descriptions summarize the three
procurement methods.
A competitive sealed bid must be used for all construction projects and for goods and
services exceeding $ 10,000. Competitive sealed bids must contain detailed purchase
descriptions, specifications, delivery and performance schedules, and inspection and
performance requirements. The contract must be awarded to the lowest responsible
and responsive bidder.
A RFP is used when competitive sealed bidding is not practical or advantageous to the
district, except it may not be used for construction. A RFP requests project proposals
based upon a general description of the goods and services required and the work
involved. A RFP bid evaluation is based upon price and other evaluation factors
contained in the proposal.
When using a regional purchasing cooperative, districts select a vendor from the
approved cooperative vendor listing. The vendor listing is comprised of contractors
who have responded to a RFP issued by the cooperative. RFPs and competitive sealed
bids for specific projects are not obtained by the district.
Most districts that acquired energy- saving devices or services interpreted the procurement code
to mean that they were not required to use competitive sealed bids. Generally, they used a
regional purchasing cooperative or RFP process. Laws 1994, Chapter 254, 52 requires that
districts budgeting for energy- saving devices use competitive sealed bids in the procurement
process. However, there is still some question as to whether districts that do not utilize the
provisions of Laws 1994, Chapter 254, $ 2 may continue to use a regional purchasing cooperative
or RFP instead of competitive sealed bids.
Contractors Represent That Projects
Will Pay for Themselves
Contractors profess the energy- saving projects will pay for themselves through energy savings
and other paper savings. Districts evaluate proposals based on the total cost of the project less
the contractor- developed savings. As contractor- projected energy savings may not be realistic
and paper savings may never be realized, districts may not be accepting proposals with the actual
lowest cost.
Contractor- projected enerm savings and " paper" savings - As discussed in Finding I, page 9,
we found that contractors projected energy savings using hypothetical baselines. Also,
contractors adjusted baselines to represent that districts will achieve even greater savings with
greater use. However, this assumption does not consider that any potential savings will be offset
by increased utility usage.
Paper savings include bond interest avoidance, reduced maintenance cost and replacement parts,
and personnel reductions. For example, paper savings created by personnel reductions may be
nullified by new service contracts and new employees hired to manage the energy management
system ( EMS). In addition, districts are hesitant to utilize the installation of a new EMS as a
reason to downsize the district staff or terminate employees, since these employees often perform
a variety of tasks other than maintenance of operating equipment.
Paper savings are usually presented in contractor proposals and marketed as a benefit in addition
to energy savings. During our study, we noted that the paper savings were correctly excluded
from the amounts budgeted for energy- saving devices and services add- ons.
Bidproposal evaluation - When evaluating proposals, districts consider the total project cost less
projected energy and paper savings. However, the cost of the project calculated in this manner
may be unrealistic, as energy savings developed from hypothetical baselines and paper savings
projections artificially reduce such costs. These unrealistically low " net" costs make it difficult,
if not impossible, for the districts to accurately evaluate the project proposals.
" Bundling" Limits Districts' Abilities
to Determine Cost or Savings
Currently, most contractors provide a single project estimate that does not itemize cost or
savings. This practice of " bundling" precludes districts fiom selecting the changes that will have
the greatest impact on savings and fiom knowing if they are paying excessive amounts for
individual items or making unnecessary purchases. Also, some contractors will not guarantee
savings unless the entire bundle is purchased.
Itemized cost and savings components - Procurement through a competitive sealed bid process
should limit the practice of bundling and force contractors to itemize key components to the
EMS. However, the competitive sealed bid process can only be effective if districts request
itemized cost estimates by component and by school, as well as itemized estimates of the impact
each component will have on savings at each school. The RFP process could be just as effective
as competitive sealed bidding if districts were required to develop detailed bid specifications and
to request itemized cost and savings estimates.
Guaranteed savings - Some contractors will not guarantee their projected savings unless the
entire bundle is purchased intact. However, we found that guarantees matter little in determining
savings and that ultimately the district ends up realizing no more savings than non- guaranteed
districts. Moreover, guarantees do not protect the districts if they choose to override the EMS,
increase run time, utilize schools in summer, add portable classrooms, etc.
Service Contracts Costly,
Unjustified
Contractors promote service contracts as a method of protecting a district's investment in energy-saving
devices. However, contractors do not itemize the cost of potential repairs nor do they
identify service needs for the energy- saving devices. Consequently, districts should identify and
specify service needs separately.
Contractors often promote the need for a service contract - Service contracts are promoted
under the premise of " protecting" the district's initial investment. In some instances, contractors
will not guarantee savings without a service contract. We found that districts routinely sign
service contracts that vary fiom relatively minor oversight of equipment to full- time, on- site
supervision. For one project we examined, the service contract accounted for approximately 55
percent of the project's total cost.
Service requirements not itemized - In the three districts we analyzed, no contractor itemized
the cost of potential repairs nor did they itemize service needs ( maintenance and repairs). For
example, contractors did not offer districts information on how many times the equipment would
be likely to fail each year, what the most likely repairs would be, or what equipment would be
covered under the manufacturer's warranty. In addition, even though most equipment is covered
under manufacturers' warranties for one to five years and the cost of defective parts is fully
refundable, this information is not routinely offered to districts when they are making a service
agreement purchase decision. In one case, the manufacturer filly refunded the replacement and
paid $ 10 to the contractor for the replacement of the defective part. Districts not purchasing
service contracts accept some risk should the equipment fail. However, absorbing the costs of
equipment failure may be less expensive than paying for the service contracts, especially
considering manufacturers' warranties.
Districts should identifv and specifit service needs - When districts are provided with accurate,
comprehensive information on equipment failures, warranties, etc., they can make informed
choices regarding service contracts, which can provide useful insurance against breakdowns.
Districts should also consider a full range of service contracts, including ones where they accept
more risk for equipment failure. Further, districts should identify specific service needs and bid
the service contract component separately from the rest of the project.
Greater Oversight of
Projects Needed
District accountability, project ownership, and governing board involvement in the decision-making
process may be more important than a contractor's projected savings, a service contract,
or a " guarantee." When a district is willing to invest the time, energy, and financial resources
necessary to achieve energy savings, positive results are more likely. Most districts abdicate
their responsibility for management oversight to the contractor. However, we found one district
that retained its oversight responsibilities. This district hired an independent engineering firm;
developed their own specifications for the project; bid the specifications through competitive
sealed bidding; requested cost and savings impact information on each component of the project;
developed detailed service contract specifications; and bid the service contract separately from
the EMS. As a result, the district not only obtained the best price, but set a standard for
contractor performance.
Recommendations
Districts should consider the following whether they use the competitive sealed bid process or
RFP.
1. Request unbundled component cost and savings estimates by component and by school
fiom contractors.
2. Request detailed information on manufacturers' warranties and equipment failures and
cost- of- service details.
3. Consider a full range of service contracts when implementing energy- saving devices
and evaluate the relative risk versus cost.
4. Bid service contracts separately from the other project components, when applicable.
5. Develop service specifications independent of the contractor and monitor the
contractor's service of the equipment, when applicable.
6. Maintain project ownership and accountability, with or without a contractor's
guarantee.
OTHER PERTINENT INFORMATION
During our study, we obtained other pertinent information relating to energy- saving devices and
services.
Increased Public Use of Facilities
We noted that districts expected an increase in the use of school facilities by the public. This
is primarily due to upgrading the usability of the school facilities. As a result, districts should
ensure that the amount charged to the public for such use is sufficient to recover utility costs.
Lack of Budgetary Relief for New Construction
We identified instances where districts were planning to upgrade the efficiency of the heating,
ventilation, and air conditioning ( HVAC) systems for schools that were only two or three years
old. Since Laws 1994, Chapter 254, 52 does not apply to new construction, districts have little
incentive to install energy- saving equipment when a facility is first constructed. Thus, not
allowing budgetary relief for installing energy- saving devices during new construction may be
conducive to waste. The Legislature should consider expanding the provisions of Laws 1994,
Chapter 254, 52 to include new construction. Although this budgetary relief could increase the
cost of new construction, it would ultimately result in more savings than a subsequent upgrade
of equipment after the facility is constructed.
District Financing of Energy- Saving Devices
with Long- Term Lease Agreements
We found that all of the districts tested were financing the cost of energy- saving devices through
long- term lease agreements. The lease terms ranged from five to ten years. A. R. S. 515- 910
provided that a district may budget the lesser of two amounts for the energy- saving devices add-on,
cost or savings. One district used the total cost of the devices in the calculation of the add-on
and the other two districts used the amount of the annual lease payment, including principal
and interest. This resulted in an inconsistent calculation of the energy- saving devices add- on
among these districts. Consequently, the Legislature should consider clarifying the phrase " cost
of energy- saving devices" to be the districts' annual cost of energy- saving devices, which could
include the principal and interest components of the annual lease payments.
APPENDIX
METHODOLOGY
The Joint Legislative Audit Committee requested that we select three school districts ( districts)
that had budgeted for the cost of energy- saving devices for detailed analysis. Our population
consisted of the 20 districts that had budgeted for the cost of energy- saving devices in any one
of the fiscal years from 1991- 92 through 1993- 94. The three districts we selected represent
diverse geographic areas and climates around the state. They include a variety of contractors and
reflect projects that were small in scope and relatively inexpensive, as well as projects that were
large in scope and expensive to complete. The districts we chose had operational projects a
minimum of six months by June 1994 and the average was nine months.
For the three districts, we collected monthly utility bills from fiscal year 1989- 90 through May
1994, except for one district, where data were only available back to fiscal year 1990- 91. At the
time of the audit, utility bills were only available through May 1994. One district selected,
District A, had 18 schools that had undergone energy- saving renovations; we selected 5 schools
in the district for detailed analysis.
In order to assess reduction in utility expenditures ( RUE), we first determined the project
completion date for each district. We then compared the utility bills from the period before the
project was completed to utility bills after its completion. For consistency, we compared only
equivalent months so that we were not comparing summer to winter. For example, if a district
installed devices by November 1, 1993, we compared the period after the project was completed
( November 1993 to May 1994) with the period before the devices were installed ( November
1989 to May 1990; November 1990 to May 1991; November 1991 to May 1992; November
1992 to May 1993). We relied on kilowatt- hours ( KWH) and therms instead of monthly cost
to control for rate variations among the districts and utility rate changes over time.
The data reported in Figure 3, page 7 represent a four- year average of the KWH and therms used
in the period prior to project completion as compared with the single year of KWH and them
data after project completion. The averaging of the utility bills controls for weather variations
and utility rate changes that have occurred over the period.
To develop the Auditor General Range of RUE presented in Table 1, page 8, we estimated RUE
separately for electric and gas in each district by multiplying the KWH ( therms) by a range of
electric ( gas) rates. The range of rates was developed by analyzing the past five years of rate
data. For electric, the range extended from 8 to 15 cents per KWH. For gas, the range extended
from 55 to 90 cents per them. Instead of reporting an average RUE, we present a range to give
the reader a sense of the high and low ends of potential savings.
Because the budgeted amounts for a project change over the life of the lease, we present only
the first- year cost figures in Table 1, page 8. Auditor General Range of RUE are annualized
estimates derived for each district by estimating savings school by school fiom existing data.
In most cases, we were missing only two or three months of data. Most missing data were for
June, July, or August, months when school is either not in session at all or is in session for only
part of the month. To calculate Auditor General Range of RUE we estimated KWH by
calculating the percentage change fiom an average of the four prior years' usage to the current
year's usage, month by month. For those months with missing data, such as July, we calculated
the amount by averaging the prior four years' KWH and them usage to create the data.
For District A, Total Annual Project Cost, Contractor- Projected RUE, and District- Budgeted RUE
were only available for the district in total. In order to develop the five school estimates for
these amounts, we first determined the heating, ventilation, and air conditioning ( HVAC) tonnage
for each of the 18 schools. We then allocated cost based on total tonnage. Since tonnage is not
the total cost of the project, we then distributed the remainder of the cost evenly over all the
schools in the district. We added HVAC tonnage- related cost plus the five- school portion of the
remaining cost to determine the Total Annual Project Cost for the five schools selected. Auditor
General Range of RUE was projected to the district based on the average savings of the five
schools.
The Shortfall Between Auditor General Range of RUE and District- Budgeted RUE was obtained
by subtracting District- Budgeted RUE from Auditor General Range of RUE.