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)

                 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
United States
General Accounting  Office
Washington, D.C. 20648

Resources, Community,   and
Economic Development    Division


October 23, 1990

The Honorable Richard G. Austin
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

                        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

                        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

                        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

                         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

                  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

                   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
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

               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

Appendix I
Objectives, Scope, and
Appendix II
Major Contributors to
This Report
Table                    Table 1: Actual and Potential Natural Gas Savings
                             Through Competitive Procurement


                         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

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

                  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

                  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

                       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

                                            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),

                                            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

             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