1 Operation & Maintenance Savings M&V Summit Kansas City, MO 6 November 2002

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Operation & Maintenance Savings

M&V Summit

Kansas City, MO

6 November 2002

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Agenda

• What is meant by O&M savings?

• What FEMP Legislation says.

• What FEMP Legislation DOESN'T say.

• Relationship between O&M and R&R.

• M&V of O&M.

• Case Study: Military District of Washington.

• Discussion of O&M Issues.

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What Are O&M Savings?

Consider:

• IDIQ

• Delivery Order Guidelines

• Practical Guide to Savings

• FEMP 2.2, Chapter 33

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IDIQ: B.2 REQUIRED SERVICES

The contractor shall provide ...all labor, material, and equipment necessary to... provide energy cost savings and related operation and maintenance cost savings.... Contracted delivery order services may also include operations and maintenance services...

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IDIQ: C.1 GENERAL REQUIREMENTS

This contract is to acquire...energy conservation services...to reduce energy... costs, and energy-related operations and maintenance costs... .

The Contractor shall...provide operations and maintenance as specified in each delivery order. The cost of an ECM project must be covered by the reduced energy and related operation and maintenance cost savings...

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IDIQ Definitions

Energy Conservation Measure. Measures that are applied...that improve...energy efficiency...and...operation and maintenance efficiencies.... ECM is interpreted to include measures that result in energy and/or energy-related cost savings that may not necessarily improve energy efficiency.

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IDIQ Definitions

Energy Cost Savings. A reduction in the cost of energy and related operation and maintenance expenses from a base cost... as a result of... improvements, altered operations and maintenance, or technical services.

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IDIQ Definitions

Energy-Related Cost Savings. Energy-related cost savings are reductions in expenses (other than energy costs) related to energy-consuming equipment, generally affecting operations, maintenance, renewal [replace? refurbish?], or repair expenses of equipment.

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IDIQ Definitions

Recurring Energy-Related Cost Savings. Recurring energy-related cost savings are... reductions in energy-related expenses that are budgeted and allocated annually, i.e., lowered costs for ongoing maintenance, operations and repair. These must be “real” savings, i.e., there must be an associated reduction in money that the Government was currently spending or planning to spend.

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continued

Operations, maintenance, and repair costs for tasks currently being performed by the government or by a contractor hired by the Government are energy-related cost savings if the ESPC contractor assumes the task, reduces the task, or eliminates the task.

The Government will determine whether an ESPC contractor-proposed task assumption, reduction, or elimination will be considered recurring energy-related cost savings.

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DO Guidelines

2.3.3 Capital Improvements Without Capital Appropriations

Appropriations from Congress for operating and maintenance expenses may be used for ESCO payments...if the money is appropriated for and comes from the agency funds budgeted and allocated for energy and energy-related O&M expenses.

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DO Guidelines

2.4.1 Allowable Cost SavingsThe money to pay the contractor...must be paid from funds appropriated for energy expenses and related O&M expenses, and must all be from cost savings... Two main categories of savings are referred to in ESPC delivery orders: (1) energy cost savings and (2) energy-related O&M cost savings. There is no basis in the ESPC statute or regulations for requiring that energy savings constitute 50% or any other arbitrary proportion of total savings.

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DO Guidelines

2.4.3 Real SavingsOnly "real savings" may be applied to contractor payments; that is, the savings must show as reduced expenses in the agency's accounts for energy or energy-related O&M. Payments must come from money that the government was either already spending or planning to spend [and appropriated]... Only real savings, by definition, will make money available for contractor payments.

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DO Guidelines

When Real Is Not Ideal: Maintenance and Operations SpendingTight budgets in many cases force agencies to stretch energy dollars by operating their facilities using substandard procedures or equipment.... However...the energy-related savings must be figured on the basis of actual budgeting and spending patterns rather than on the level of spending that would have been necessary for optimal O&M of the system.

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DO Guidelines

2.4.6 DOE FEMP Programmatic Guidance on Savings and PaymentsDOE FEMP guidance stresses the directive that agencies should “exercise due diligence” to document for the project all of the energy-related O&M cost savings in the delivery order, which may include (1) for recurring energy-related O&M cost savings, the estimated avoided operation, maintenance, renewal, repair, or other costs; ...

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DO Guidelines

2.4.7 Checklist of Guiding Principles and Directives on Savings and Payments•Only real savings...that show as reduced costs for...energy-related O&M expenses.•O&M savings may be claimed only for the amount that was actually budgeted or being spent...•The basis for determining all savings must be documented and agreed upon by the contractor and the customer in the delivery order.•Agencies are advised to carefully document cost savings of every kind.

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FEMP M&V Guidelines 2.2

• Chapter 33 discusses how to verify O&M savings, but does not provide direction.

• Section 33.2.2 does not specify baseline costs and implies that O&M baseline costs may be based on standard practices instead of actual costs.

• Section 33.3.3 says that “All payments...must come from demonstrable savings to the agency's budget.” but then later implies that O&M baseline costs may be based on other practices instead of actual costs.

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What FEMP Says

• You can’t save what you’re not spending.

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What FEMP Doesn’t Say

DO Guidelines: 2.4.1 Allowable Cost SavingsThere is no basis in the ESPC statute or regulations for requiring that energy savings constitute 50% or any other arbitrary proportion of total savings.

• Therefore, acceptable levels of O&M savings are decided by mutual agreement between agency and ESCO.

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Relationship between O & M and R & R

• For the baseline case, the IDIQ and the DO Guidelines indicate that existing ‘repair and replace’ budgets are part of the operations and maintenance budget.

• Therefore, existing R&R budgets can be used to help establish baseline O&M costs.

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Relationship between O & M and R & R

• For the post-retrofit case, R&R of equipment is defined in the DO but generally the ESCO assumes responsibility.

• Replacement due to failure is to be covered under warranty for a specified period; scheduled equipment replacement (e.g, lights) is to be budgeted in the payment stream.

• Responsibility Matrix mentions R&R.

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M&V of O&M Savings

Definitions*

• Gross O&M Savings: Real O&M expenses that will be reduced or eliminated due to installation of equipment or provision of services.

* Mark’s

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M&V of O&M Savings

• Net O&M Savings: Gross O&M savings less O&M service costs paid to ESCO

O&MSavings,NET = O&MSavings,GROSS - O&MPayments

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M&V of O&M Savings

O&M expenses include:

• Normal operating labor

• Preventative maintenance labor

• Consumable parts (lamps, filters...)

• Scheduled replacement parts & labor

• Emergency repair parts & labor

• End of life equipment replacement

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Case Study: MDW

• Military District of Washington comprises five Army bases in Washington, D.C. area.

• Used ESPC via competitive solicitation in 1998 to select ESCO.

• Three ESCOs responded to RFP.

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Case Study: MDW

• Savings from all proposers had significant O&M component: 20% to 50% of the total savings.

CapitalInvestment

Term EnergySavings

Net O&MSavings

O&MSavings as %

of Total

Evantage $ 66 Million 18 $ 5.4 Million $ 5.4 Million 50%

Noresco $ 58 Million 25 $ 5.3 Million $ 1.4 Million 21%

Viron $ 65 Million 15 $ 5.6 Million $ 1.7 Million 23%

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Case Study: MDW

• Net O&M Savings not the whole story- need to look at baseline O&M expenses.

Claimed Baseline O&M(Gross O&M Savings)

ProposedService Phase

Services

Net O&MSavings

Evantage $11.7 Million $ 6.3 Million $ 5.4 Million

Noresco $ 2.7 Million $ 1.3 Million $ 1.4 Million

Viron $ 8.1 Million $ 6.4 Million $ 1.7 Million

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Case Study: MDW

Baseline O&M costs vary greatly due to:

• equipment included or excluded from analysis,

• whether repair & replace costs were included,

• assumed labor costs,

• assumed labor times.

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Case Study: MDW

• Contract awarded to Viron/Pepco in 1999.

• $224 Million over 18 years, ~$14 MM/yr.

• O&M savings and services were significant components of the contract. – 14% of savings are from Net O&M– 40% of payments are for O&M services

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Case Study: MDW

• Problem: Neither V/P nor MDW had a clear idea of what the ‘true’ O&M costs were.

• MDW was unable to document their O&M costs in a useful manner.

• V/P responded by developing O&M costs based on labor rates, typical practices, expected lifetimes and repair & replacement practices.

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Case Study: MDW

• Problem: Methodology used to develop O&M costs was not properly reviewed and contains some questionable assumptions and methodology. MDW agreed to the methods, thus agreeing to these stipulated conditions.

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Case Study: MDW

Baseline O&M practices and costs based on:

• R.S. Means Maintenance Cost Data

• ASHRAE Handbooks

• Other government facilities

• NASA, NAVFAC, ACE, GSA, DOE, DOS

• Equipment manufacturers

• Consultant’s experience

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Case Study: MDW

Estimated baseline and ESCO O&M costs were a function of:

• Preventative Maintenance

• Reactive Maintenance

• Replacement Factor

• Residual Value

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Case Study: MDW

• Situation: Change orders significantly affect O&M savings and therefore payment stream. MDW and V/P disagree over value of O&M savings. Validating claimed O&M baseline expenses is difficult- claimed methodology seems to be inconsistent and not repeatable.

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Case Study: MDW

• Solution: None, since O&M baseline is part of the contract. MDW had the opportunity to provide O&M data but couldn’t.

• Lesson: Agreeing to an O&M baseline without sufficient diligence sets up a situation for disagreements later.

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Case Study: MDW

• Conclusion: Lack of direction (in 1998/1999) resulted in accepting a project with large reliance on O&M for savings, savings whose development appears questionable. Working relationship between parties suffers.

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O&M Working Group

• To be headed by Ab Ream, DOE.

• Will address O&M savings in alternatively-financed projects.

• Proposes meeting week of 18 November.

• DOE headquarters, Washington, D.C.

• 202-586-7230, ab.ream@ee.doe.gov

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Discussion Points

Discussion of O&M Issues– What guidance should FEMP/DOD provide?– How much O&M savings is too much?– Defining the baseline & what to include– Treatment of ambiguous baselines– Defining post-retrofit costs– Budgetary considerations– Staffing considerations

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Discussion Points

– Evaluation of indirect benefits (labor redirection)

– Repair & Replacement: O&M or separate issue?

– Persistence of revised O&M practices– Relationship between energy savings and O&M

practices