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Energy-Saving Contracting for Schools Argued

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A widely used method of financing school energy improvements has come under fire from some state officials, who say it leaves schools vulnerable to being cheated.

Lawmakers in Arizona and Minnesota last week debated whether to place new restrictions on the method, known as energy-saving performance contracting.

Under performance contracts, firms agree to do work to make schools more energy efficient--for example, installing blowers or computer-controlled thermostats--for free. Schools for several years continue to pay out their previous level of energy spending, and the firms recoup their investment from the difference between that amount and the new, lower costs. Once the contracts are over, the schools benefit over the long term from reduced energy costs.

Critics of the practice contend that some districts are paying far more than they should, frequently by entering into performance contracts that stretch out too long and enable the vendor to profit from energy savings long after earning back its investment. Moreover, they say, school officials in some cases are signing the contracts without appropriate outside review or competitive bidding.

"There didn't seem to be enough care given to entering into these contracts, given how much they are for,'' said State Rep. Mindy G. Greiling of Minnesota, the sponsor of legislation calling for third-party scrutiny of performance-contract agreements.

Proponents of the contracts--who include officials of state school boards' associations and national groups of state energy officials and school-facilities planners--describe them as a no-lose proposition yielding significant savings for schools. The flurry of legislative activity, proponents suggest, is being driven by companies that fear competition from performance contractors.

"It has really been a battle between two business communities,'' said Thomas W. Pickrell, a lawyer for the Arizona School Boards Association, who accused "a small section of the school-construction industry'' of trying to block district access to performance contracts.

"There is ample protection in the contracts if people use a little common sense,'' said Shirley J. Hansen, the president of a facility-management consulting firm.

More than 20 states have enacted legislation in the past decade to enable school systems and other public entities to enter into performance contracts. Legislation frequently is needed because the contracts tend to last longer than is normally allowed, and often are not awarded through the competitive-bidding process required by many states.

'A Great Deal' for Taxpayers

Frank Bishop, the executive director of the National Association of State Energy Officials, said he has advocated performance contracting as a means for cash-strapped school systems to fund badly needed improvements in heating, cooling, and lighting.

"What performance contracting did was come forward with a great deal for the institution and taxpayer,'' asserted Richard J. Cathcart, the vice president and general manager of the building-control division of Honeywell Inc., a major provider of performance contracts.

Honeywell--which boasts of its role in getting many of the state laws passed--frequently cites a 1992 study by the American Association of School Administrators that found that the nation's public schools waste nearly $2 billion in energy costs each year. (See Education Week, March 18, 1992.)

Performance contracts not only cut down on waste, Ms. Hansen said, but "guarantee that the savings will be there to pay for the equipment and services.''

"There is no obligation on the school district to spend any money other than what is already going to the utility,'' she added.

Once the contracts expire--generally after periods of from seven to 15 years--districts are free to keep their energy savings, advocates of the contracts note. Traditional low-bid contracts, they point out, require up-front payments and do not provide the assurances of results that a performance contractor does.

Higher Costs Seen

But critics counter that performance contractors frequently stress the ease of financing their work to divert attention from the contracts' long-term costs.

Michael F. Harris, a Phoenix energy contractor, recently told Arizona lawmakers that districts are spending 25 percent to 35 percent more on performance contracts than they would for the same work awarded through competitive bids.

In Arizona, performance contractors also have been accused of promoting the contracts as a way for districts to get around state bidding requirements and spending caps for new construction.

Much of the work districts are terming "retrofitting'' or "maintenance''--and thus financing through performance contracts solicited without competitive bids--actually amounts to new construction that should be funded through bonds and awarded to the low bidder, said James L. Wilson, an administrative-services officer for the Arizona education department.

The Arizona legislation calls for the state auditor general and a joint legislative committee to investigate alleged abuses of a 1992 performance-contracting law.

Both the Arizona and Minnesota bills, which by last week had been passed by each state's House, also seek to limit the types of cost savings that contractors can take into consideration in determining how much they should be repaid.

In both states, critics have claimed that performance contracts are vaguely written, biased in favor of the vendor when it comes to measuring performance, and pitched to school officials with little expertise. The critics also allege that vendors pad the savings they guarantee with estimates of "soft'' operational savings, such as the cost of maintaining old equipment.

"There are such nebulous promises up front that you cannot hold anyone's feet to the fire,'' argued Richard C. Lambert, a Roseville, Minn., energy contractor who is pushing for revisions in that state's 1988 performance-contracting law.

Dorothy M. Suomala, the superintendent of the Tri-County School District in northwestern Minnesota, said she views the cost breakdown on a contract approved before her tenure as "excessive'' and "vague,'' and is asking the company for disclosure of costs before signing off on work completed last year.

A few states, such as Ohio, now require districts to submit performance contracts to a state agency for review.

Beyond 'A Salesman's Boasts'

Jack D. Hunter, who reviews contracts as the supervisor of school facilities for the Ohio education department, said such oversight is necessary to insure the contracts are worded fairly and reasonably and to force vendors to offer "engineering calculations rather than a salesman's boasts.''

But Richard J. Anderson, the executive director of the Minnesota School Boards Association, said requiring reviews only increases a school system's costs.

The National Association of Energy Service Companies has been promoting standards for measuring energy savings that will help resolve misunderstandings between contractors and districts.

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