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Selling Energy to the Federal Government

Fortnightly Magazine - February 1 1998

from how utilities obtain a contract to post-contract performance obligations. In general, they promise more rights for the federal government (em and for utilities, added obligations.

What to Expect After Deregulation

Utilities, once worry-free about obtaining or retaining their government contracts, will soon find reason to worry about both.

To obtain a government contract, utilities will submit proposals, conduct negotiations and compete with others (em all subject to statutes, regulations and solicitation rules both complex and confusing. The better the competition and the more complex the procurement, the more the utility will lose.

And even if the utility wins the contract, the battle doesn't end there. A competing contractor may protest the award. Protests in a large-dollar competitive environment are frequent. If the protest is successful (usually because of some error by the government) the utility may be forced to compete again or the competitor may be given the contract. If the utility is successful and the protest is denied, the utility in most cases is still out the costs of defending itself in what is usually fast-paced, high-cost litigation. %n5%n

In general, the new rules that apply will vary, depending on the nature of the services provided and the degree of competition. Normally, the highest risks arise when there is no adequate price competition.

INADEQUATE COMPETITION. In this higher-risk environment, the utility may face onerous accounting, disclosure and audit obligations.

When prices are not set by tariffs, rates, rules or regulations, the utility will probably need an accounting system that segregates allowable versus unallowable costs as determined by government regulations and that have a look, feel and complexity akin to the federal tax laws. The utility in some instances may have to disclose "cost or pricing data" and certify that it is current, accurate and complete as of the date of agreement on price. %n6%n The definition of "cost or pricing data" is extremely broad, and the utility will need rigorous internal procedures to ensure that it satisfies this disclosure requirement.

The government, however, will not just take the utility's word for it. It will enjoy far-reaching rights to audit the utility's books. What the auditors find can and will be held against the utility. For example, if the government finds less than full disclosure of cost or pricing data, it can unilaterally reduce the price of the contract to what the government believes the price would have been if the data had been disclosed. If the utility disagrees with this reduction, it must proceed under the standard disputes clause in the contract, which often means litigation before a Board of Contract Appeals or the Court of Federal Claims.

ADEQUATE COMPETITION. Even if competition is deemed adequate, the utility will still operate in an unfamiliar contracting environment in which the government may impose changes in the contract.

Under the typical "changes" clause, the government has a unilateral right to direct changes within the general scope of the contract. The utility must do what the government says. The price will be resolved later by negotiation or, if the parties cannot agree, the