: United States General Accounting Office t GAO Report to the Administrator, Services Administration General ., October 1990 NATUIZAL GAS Opportunities for Federal Cost Savings Through Competitive Purchases United States General Accounting Office Washington, D.C. 20648 Resources, Community, and Economic Development Division B-240575 October 23, 1990 The Honorable Richard G. Austin Administrator General Services Administration Dear Mr. Austin: Changes in federal regulations affecting the sale, purchase, and trans- portation of natural gas in the late 1970s and early 1980s have provided the federal government with greater opportunities to purchase natural gas from sources other than a single public utility serving a local area. By purchasing natural gas from a variety of sources, such as at the well- head where natural gas is produced, users are afforded opportunities to shop for the most competitive prices and reduce their natural gas costs. Because of the large dollar amount that federal agencies spend for nat- ural gas-over $500 million annually-and the potential opportunity to reduce costs, we initiated this review of natural gas purchases by mili- tary and civilian facilities to determine (1) the extent to which competi- tive procurements are used by federal facilities, (2) actual and potential cost savings of selected facilities that have been or could be buying com- petitively, and (3) why competitive procurement may not be more widely practiced. The number of federal facilities purchasing natural gas competitively appears to be small. Within the Department of Defense (DOD), the Defense Fuel Supply Center (DEX) has the responsibility for centrally coordinating natural gas purchases among the military services. Offi- cials there told us that about 63 out of approximately 600 DOD facilities were competitively purchasing natural gas in 1989. Although we did not obtain data for all federal civilian agencies, information we obtained from the federal civilian agencies who are the largest users of natural gas indicates that federal civilian competitive purchases are limited. We reviewed the savings reported by three federal facilities-one DOD and two Department of Veterans Affairs (VA) facilities-in three states and found that significant savings were realized through competitive procurement of natural gas. We verified that these facilities saved 10 percent to 30 percent on their natural gas purchases through competi- tive procurement practices. We also estimated that four other facilities in these three states could have reduced their natural gas costs by 11 percent to 22 percent if t,hey had used competitive procurement. These Page 1 GAO/RCEDSl-36 Competitive Purchases of Natural Gas R-240675 the traditional practice of purchasing natural gas from the local utility. Before changes in the regulation of the natural gas industry, users con- tracted with their local utilities for their natural gas needs. The utilities arranged for the purchase of natural gas from the wellhead supplier, which transported it by major pipelines to them. The utilities then dis- tributed natural gas to their customers. Significant amounts of natural gas are being purchased by federal agen- Extent of Competitive ties each year. The extent to which federal agencies are procuring nat- Purchasing Unknown ural gas competitively is unknown. However, information we obtained but Appears Limited from federal civilian and military agencies that are among the largest users of natural gas indicates that competitive procurement appears to be limited. The military services spend over $345 million annually on natural gas. While some of the larger DOD facilities have been purchasing gas com- petitively since 1987, the practice is not widespread. Of almost 600 mili- tary installations nationwide, 63 were buying natural gas competitively at the end of 1989, according to DOD officials. Federal civilian agencies spend over $160 million annually for natural gas, but agencies that, we contacted have little information on how indi- vidual facilities purchase natural gas. According to Energy Information Administration data, GSA and the Departments of Justice, Energy, and Veterans Affairs are among the largest federal civilian users of natural gas, accounting for 60 percent of the natural gas expenditures in the civilian sector. We were unable to determine the extent of competitive purchasing by these federal agencies because the data either were not collected or were not current. From the information that we were able to obtain, however, it appears that the number of federal facilities purchasing natural gas competi- tively is limited. For example, VA provided data showing that 8 of 172 VA medical centers were buying natural gas supplies competitively. GSA has assisted seven federal civilian agencies’ facilities in obtaining competi- tive contracts for natural gas over a Zl-month period through 1989. During this time frame 42 facilities requested assistance from GSA in purchasing natural gas competitively. To the best of GSA'S knowledge, however, the remaining 35 facilities had not awarded a competitive pro- curement contract for natural gas. Page 3 GAO/RCEB91-36 C!ompet.itlve Purchases of Natural Gas B240676 We found that all four could have saved money by changing to competi- tive procurements. At VA medical centers in Atlanta and Augusta, Georgia, we estimated savings of $48,000 (19 percent) and $66,000 (11 percent), respectively. For a VA medical center in Chicago, we calculated savings of $101,000, or 22 percent. Similarly, we estimated that the U.S. Penitentiary in Leavenworth, could have saved $99,000, or 20 percent, if it purchased natural gas from the wellhead. Other federal agency evaluations of facilities currently buying natural gas noncompetitively from utilities also indicate significant potential savings. These estimates could change because market rates for natural gas can vary from one region to another and over a period of time. For the 42 sites that requested assistance from GSA on competitive purchasing over a 21-month period through 1989, GSA’S analysis showed combined savings could total over $5 million annually (24 percent) for these facilities if they purchased natural gas competitively. Likewise, DFSC’s evaluation of facility gas purchases in one of its regions projected total annual savings for the 13 sites reviewed at $3.5 million (16 per- cent). Annual savings were calculated to be over $2 million for one facility, $100,000 to $260,000 for five facilities, and $7,000 to $100,000 for the remaining seven facilities. Another DOD study estimated that sav- ings for DOD nationwide could total between $25 million and $38 million annually, or from 7 percent to 11 percent of DOD’S total natural gas expenditures. Further potential savings are detailed in a April 1990 report issued by the Department of Energy’s (DOE) Inspector General.* The Inspector Gen- eral’s office reviewed the contracting practices of its Albuquerque Oper- ations Office for purchasing natural gas at four DOE facilities. The audit concluded that by awarding competitively priced natural gas contracts, the Albuquerque Operations Office could save about $3.6 million annu- ally (39 percent). Since agencies have historically bought natural gas from a local utility, Reasons Vary for Lack they have been unaware of or slow to recognize the impact of deregu- of Competitive lated prices and increased pipeline access on natural gas purchasing Procurement practices. Of the 30 facilities we contacted during our review, 19 were not purchasing natural gas competitively. Reasons cited by agency offi- cials for not buying natural gas competitively included (1) a lack of ‘Purchase of Natural Gas By the Albuquerque Operations Office (IJ.S Department of Energy Office of Inspector General, DOE/IG-0282, Apr. 1990). Page 6 GAO/RCEB9136 Competitive Purchases of Natural Gas E-240676 of 42 federal civilian agencies’ facilities that requested assistance in obtaining competitive natural gas contracts. GSA officials told us that when agencies request GSA’s assistance in procuring natural gas competi- tively, GSA will review and assess annual gas expenditures, existing utili- ties gas contracts, potential wellhead purchases, and alternative fuel capability for federal civilian facilities. GSA will develop a competitive savings estimate based on its assessment, as well as market rates for natural gas and transportation costs. If projected savings are at least 10 percent, GSA recommends competitive procurement. GSA will then pro- vide instructions on the procedures to follow, as well as a sample solici- tation package for competitive bidding. After the facility awards a competitive contract, GSA will, if requested, negotiate a contract with the local utility to transport the natural gas from the utility to the facility. established a program in January I990 to increase natural gas com- DOD’s Program for DOD petitive purchasing for all the services by centralizing and expanding Purchasing Natural wellhead purchases. DISC was given responsibility for administering the Ga+sCompetitively program because of its expertise in competitive purchasing of other petroleum products. To assess the potential savings using competitive purchasing, DFSC divided the country into seven geographic areas to ana- lyze large military users of natural gas. In March of 1990, it completed an evaluation of one of its seven geographical areas by comparing utility costs with competitive procurement costs. (Evaluation results were dis- cussed previously.) K-X officials told us that they are continuing this assessment in the remaining six areas, and they estimate that the evalu- ation of all large facilities will be completed by early 1991. In addition to this assessment, DFX officials said that they will determine gas purchasing strategies for these facilities and solicit and award the con- tracts. Individual facilities will arrange transportation for the gas from their local utility to 1he facility. has recognized that the potential exists for additional savings associ- GSA Plans to Assess GSA ated with competitive natural gas purchases among federal civilian Agencies’ Potential to facilities and that, like DOD, GSA could provide greater guidance and Purchase Natural Gas assistance to these facilities within its existing authority. In commenting on a draft of this report, GSA officials told us that, as a result of our Competitively review, they plan to initiate a program to assess federal civilian agen- cies’ potential to procure natural gas competitively. This effort includes identifying the 20 largest facilities within GSA in order to evaluate their gas purchasing practices. They also plan to contact other federal civilian agencies that use natural gas to determine potential savings through Page7 GAO/RCED-9136CompetitivePuchasesofNaturalGas R-240676 We provided a draft of this report to the Administrator, GSA, to obtain Agency Comments formal agency comments. GSA officials told us that they generally agreed with the facts presented and with our recommendations. GSA officials agreed that federal civilian facilities could achieve additional savings through competitive procurement, although savings may vary depending on natural gas prices and transportation costs. They also agreed that increased leadership could facilitate additional savings and said they are developing a number of initiatives to address our recom- mendations, including evaluating potential savings of federal civilian facilities that could purchase natural gas competitively. We also discussed information contained in this report with DOD, DOE, VA, and Department of Justice officials who generally agreed with the fac- tual information in this report, and we have incorporated their com- ments where appropriate. The head of a federal agency is required by 31 USC. 720 to submit a written statement on actions taken on our recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Operations not later than 60 days after the date of this letter and to the House and Senate Committees on Appropriations with the agency’s first request for appropriations made more than 60 days after the date of this letter. We would appreciate being apprised of actions you intend to take regarding our recommendations. We wish to express our appreciation for the assistance and cooperation of GSA personnel during our review. The objectives, scope. and methodology of our review are discussed in appendix I. We are sending copies of this report to the Departments of Defense, Vet- erans Affairs, Energy, and Justice; the Office of Management and Budget; other federal agencies; and selected Committees and Subcommittees. page9 GAO/RCED91-36 Competitive F'urchasesofNahmxlGas Page 11 GAO/WED-91-36 Competitive Purchases of Natural Gas Page 13 GAO/RCLD91-36 Competitive Purchases of Natural Gas Appendix II Mqjor Contributors to This Report Judy A. England-Joseph, Associate Director Resources, James A. Fowler, Assistant Director Community, and Francis J. Kovalak, Assignment Manager Economic Development Division, Washington, D.C. Robert F. Stephens, Evaluator-in-Charge Detroit Regiona1 Office Barbra A. Chiapella, Evaluator Allen R. Walter, Evaluator Page 16 GAO/RCED9136 CompetItlve Purchasea of Natural Gas Appendix I Objectives, Scope,and Methodology Our work focused on both military and federal civilian facilities at judg- mentally selected sites in diverse geographic regions across the country to determine how they were procuring natural gas. Our first objective was to determine the extent of natural gas competitive buying at federal facilities. We initially obtained information from agency officials on large users of natural gas and potential savings through competitive procurement within their agencies, including the Departments of Energy, Defense, Justice, and Veterans Affairs, as well as GSA. We did not verify the accuracy of the information provided us by the agencies. Our second objective was to verify annual savings at federal facilities purchasing natural gas competitively and determine the potential for savings at facilities continuing to buy natural gas from local utilities. Using information supplied by agency officials, we judgmentally selected seven states where large consumers buying natural gas both competitively and noncompetitively were clustered. Within the seven areas, we contacted 30 facilities to identify those that had claimed sav- ings through competitive procurement, as well as those that had the potential for savings. In order to meet this objective, we selected three facilities buying nat- ural gas competitively and four buying natural gas from the local utility in three of the seven areas-Georgia, Illinois, and Kansas. We verified savings at the three facilities by reviewing gas supplier and local utility contracts and comparing each facility’s costs using competitive purchasing with what it would have paid to the local utility. We esti- mated potential savings at the four facilities not purchasing competi- tively by applying competitive gas prices and transportation rates from suppliers and local utilities in the area to the facility’s gas consumption figures. Our third objective was to identify reasons why competitive procure- ment may not be more widely practiced. We interviewed officials at the Office of Federal Procurement Policy, GSA, and DOD to better understand roles and responsibilities for procurement policy. We contacted officials at the 30 facilities to acquire information on their gas purchasing methods and reasons why they used a particular method. We conducted our work from January 1990 to June 1990 in accordance with generally accepted government auditing standards. Page 14 GAO/RCJDBl-96 Competitive purchases of Natural Gas Contents Letter Appendix I Objectives, Scope, and Methodology Appendix II Major Contributors to This Report Table Table 1: Actual and Potential Natural Gas Savings Through Competitive Procurement Abbreviations DFSC Defense Fuel Supply Center DOD Department of Defense DOE Department of Energy GAO General Accounting Office GSA General Services Administration VA Veterans Affairs Page 12 GAO/RCED-9136 Cmnpetitive Purchases of Natural Gas B-240676 The work was performed under the direction of Victor S. Rezendes, Director of Energy Issues, who may be reached at (202) 275-1441. Other major contributors to this report are listed in appendix II. Sincerely yours, Assistant Comptroller General Page 10 GAO/RCED91-96 Competitive Purchases of Natural Gas E-240676 competitive procurement and to work with DFSC officials on centralizing solicitation and contract awards. In May 1990, GSA had contacted DFSC officials and provided natural gas pipeline and gas usage information to DFSC on two civilian facilities so that these facilities could be included in DFSC’s solicitation for procuring natural gas competitively in one of its regions. Although regulatory changes in the natural gas industry have afforded Conclusions federal agencies the opportunity to procure natural gas competitively directly from a variety of sources, such as at the wellhead, our review and other analyses indicate that agencies have not taken full advantage of this option, which could reduce their natural gas expenditures. We believe that DOD is moving in the right direction by instituting an agencywide program to determine at which facilities competitive procurements are practicable. We also believe that GSA’s recent initia- tives to assess the potential for competitive natural gas procurement in the federal civilian agency sector are good first steps. GSA’S initiatives, however, are in the formative stage and have yet to be implemented throughout the federal civilian agency sector. We believe that the GSA Administrator should monitor these efforts to ensure that opportunities to reduce federal natural gas expenditures are fully realized. We recommend that the Administrator, GSA, as a principal negotiator for Recommendations federal utility and supply contracts, institute a program to work with federal civilian agencies in conducting procurement cost comparisons for all large federal civilian agency users of natural gas. We also recom- mend that on the basis of the comparative analysis, GSA should recom- mend a gas-purchasing strategy to agency users, actively assist in its achievement, and maintain data showing results of the analysis. We also suggest that GSA may wish to consult and work with DOD officials to take advantage of their regional analysis, as well as their centralized solicita- tion and contract award procedures. In addition, we recommend that the Administrator monitor GSA initia- tives to assess the potential for competitive natural gas procurement in the federal civilian agency sector to ensure that opportunities to reduce federal natural gas expenditures are fully realized. Page 9 GAO/RCED-9136 Competitive Purchases of Natural Gas 5240676 awareness of this purchasing option and (2) a lack of time, staff resources, and technical expertise for evaluating the various options available and for managing the competitive bid process itself. In one case, the reason cited for not procuring competitively was that the local utility would not transport the natural gas bought by the consumer at the wellhead to the consumer’s facility. In other instances we were told that utilities had offered some facilities lower natural gas rates in order to avoid losing them as customers. We also identified other factors that should be considered if a federal facility is going to pursue competitive procurement of natural gas. Pri- marily, a facility needs to consume a large volume of gas to make com- petitive procurement economically worthwhile and may need to have the capability,to use an alternative fuel as a backup in case of gas trans- portation interruptions by the pipeline. Some factors may result in addi- tional costs, such as the costs associated with staff training and/or additional resources that may be needed to pursue competitive procure- ment. Also, suppliers may assess a facility a penalty for under- or over- ordering amounts of gas needed. In addition, VA and DOD officials told us that because savings obtained from competitive procurement are not available to the facilities for other activities-the savings result in cuts from their budgets-there is no incentive to devote the time and resources to pursue cost-saving initiatives. The Federal Property Administrative Services Act of 1949, as amended, GSA’s Natural Gas provides GSA with statutory authority to negotiate and review federal Purchasing Practices agencies’ contracts for utility services, including natural gas. GSA has delegated some of this contracting authority to the Departments of Defense and Energy. Historically, GSA negotiated long-term contracts with area utilities to provide gas services for individual facilities. Where a utility could provide service to more than one facility in the same geo- graphic area, GSA could arrange areawide contracts to include all appro- priate facilities. At the same time, however, federal facilities are allowed to enter into contracts with utilities for natural gas on their own. If a federal facility purchases natural gas through a public utility, Federal Acquisition Regulations require the facility to submit a utility contract above $150,000 to GSA for review prior to award. According to GSA, any agency requiring technical or consulting assis- tance in acquiring utility services, including assistance in negotiating with a potential wellhead supplier, may contact GSA and GSA will, upon this request, furnish assistance. As discussed earlier, GSA has assisted 7 Page6 GAO/WED-91.36CompetitivePurchasesofNatudGas BZ40676 Considering that over $500 million is spent annually on gas purchases Actual and Potential by federal agencies, increasing competitive procurement could result in Savings Through the significant further savings. We verified actual savings of $393,000, ranging from 10 percent to 30 percent, at three facilities that competi- Competitive tively purchased gas. In addition, we estimated that a total of $314,000, Procurement Process or 11 percent to 22 percent, could have been saved over a 12.month Can Be Significant period if four other facilities in areas nearby the above three facilities had purchased natural gas competitively. Table 1 shows the actual and potential savings for the facilities in three geographic locations. Table 1: Actual and Potential Natural Gas Savings Through Competitive Locations with savings Locations with potential savings Procurement Actual Potential Facility savings Facility savings Warner-Roblns VA Medical Centers Air Force Base, Atlanta, GA $48,000 (19) Warner-Robins, GA $104,000 (11) Augusta, GA 66,000 (11) ~~~~~ ~~ Chlcago, II 101,000 (22) VA MedIcal Centers Hines, IL 144,000 (10) --~~~~~U S Penltentlary Topeka, KS 145,000 (30) Leavenworth, KS 99,000 (20) Total $393,000 Total $314,000 Note Numbers m parentheses represent percentage of actual or potential natural gas savcngs As shown in table 1, Warner-Robins Air Force Base buys natural gas competitively. We verified savings of $104,000, or 11 percent, in 1989. We also visited VAmedical centers that purchase gas competitively in Hines, Illinois, and Topeka, Kansas, and verified savings over a 12- month period of $144,000 (10 percent) and $145,000 (30 percent), respectively. We identified four federal facilities buying natural gas from their local utilities also located in Georgia, Illinois, and Kansas. We calculated the costs of competitive procurements for these four facilities and compared them to current utility purchases to see if they could realize any savings by changing their procurement practices. Our calculations were based on (1) current annual natural gas consumption at the facilities, (2) the rates that the utilities charged for natural gas used, and (3) wellhead rates negotiated from competitive sources used by the above three facilities, plus costs for transporting the gas to the facilities. Page 4 GAO/RCEDSl-36 Competitive Purchases of Nahud Gas B-240576 savings estimates apply to the facilities we reviewed and cannot be applied to the universe of all federal facilities. However, other analyses of natural gas purchases done by federal agencies indicate that signifi- cant savings are possible through competitive procurement. Various factors have inhibited agencies from pursuing competitive purchasing. Reasons why this has not been pursued include lack of knowledge by agency personnel about natural gas purchasing options and the time, staff resources, and incentives necessary to explore this option. Other factors might also affect facilities’ use of competitive pro- curement for purchasing natural gas. For example, facilities should con- sume a large enough volume of natural gas to make it economically worthwhile to pursue competitive procurement. DOD, which is the largest federal user of natural gas and therefore could potentially benefit the most from competitive purchases, accounts for about 70 percent of total federal expenditures for natural gas. DFSC offi- cials told us that because of the limited number of military installations taking advantage of potential competitive savings, DOD authorized DISC to evaluate and consolidate competitive procurement among all the ser- vices, which it began in January 1990. In contrast, similar central coor- dination does not exist for federal civilian agencies wishing to buy gas competitively. On the basis of our work, the General Services Adminis- tration (GSA) has recently begun to evaluate federal civilian agencies’ potential to procure natural gas competitively. During the late 1960s relatively low regulated natural gas prices led to Background an increased demand for natural gas. At the same time, the low price ceilings, together with a number of other factors, led to a reduction in gas exploration and development and decreased gas discoveries. As a result, supplies were not being replaced at the same rate they were being consumed. Decreased gas discoveries, service curtailments, and the inability of pipelines to acquire gas supplies led to the Natural Gas Policy Act of 1978, which provided for the eventual phase-out of con- trols of natural gas prices for certain categories of gas. The Natural Gas Wellhead Decontrol Act of 1989 established 1993 as the deadline for complete price decontrol. As a result of regulatory changes that increased access to pipelines and the decontrol of natural gas prices, a user can now buy gas directly from a variety of suppliers at competitive prices, arrange its transportation through major pipelines to its facility, and realize potential savings over Page 2 GAO/RCED9135 Competitive Purchases of Natural Gas
Natural Gas: Opportunities for Federal Cost Savings Through Competitive Purchases
Published by the Government Accountability Office on 1990-10-23.
Below is a raw (and likely hideous) rendition of the original report. (PDF)