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Performance Contracting: Should Virginia Do More?

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Note: *This story is a special contribution to Decision Virginia from former NBC12 Anchor/Reporter Andrea McDaniel

How Far are Taxpayers Willing to take the Revolution?   Looking at Alternative Ways of Doing Business
By Andrea McDaniel

Tea partiers, flush with their successful November 2 revolt, are anticipating the fruits of their success expecting to soon see less government and lower taxes. Budget battles though are only just beginning and they can be nasty as witnessed by the current legislative fight and loud protests which started in Wisconsin and are now spreading to other states.

With the still struggling economy, job losses and revenues way down, cutting the size of government and taxes are admittedly daunting challenges. Interest alone on Virginia’s debt has grown 50% in 3 years. Virginia’s $14 billion dollar a year budget was balanced only after lawmakers made $4 billion in painful cuts and more are recommended.

Virginia cities and counties are struggling too. Grayson County residents recently rallied to protest a 44% property tax increase. County officials say they had no choice given their economic realities and state funding cuts.

The Petersburg School System is facing a more than two million dollar budget shortfall for next fiscal year. Last year it was more than 8 million. Petersburg’s Superintendent said teachers can expect no raises for what would be the fourth straight year while none of Petersburg’s seven schools met the state’s 2010 “Adequate Yearly Progress” requirements. Petersburg’s newest school building is 34 years old.

Clearly taxpayers are in no mood to fork over more money and are ready to hold politicians feet to the fire. How do these newly-elected leaders turn campaign slogans into workable solutions?
Governor McDonnell said government can work smarter and cheaper by running the state more like a business and trim state bureaucracy by cutting down the current 24,000 pages of state regulations—ideas that will take years to fully implement.

Another of his campaign proposals that could reap potentially big savings is cutting the state’s power bill. Energy costs are becoming critical as oil prices skyrocket—an 8 percent jump Wednesday alone. Three succeeding governors have issued executive orders that state agencies take measures to reduce their energy bills. All three orders came with no money to pay for the new programs. This is where “performance contracting” could make a big difference. Basically it means that energy service companies, known as ESCO’s, upgrade a public building and taxpayers repay over the life of the contract, usually 15 years, using the energy savings realized from the renovations.

Trane is one of 15 ESCOs certified in Virginia. Local Trane representative Larry Cummings says current technology can save millions of dollars and that savings would allow government buildings to get long overdue energy renovations without hiking taxes or floating bonds.”

The Virginian charged with overseeing the state’s energy performance contracts agrees. “Performance contracting has been a boon to the Commonwealth,” Charlie Barksdale said. It uses existing dollars to upgrade aging, rundown state buildings instead of taking more money from taxpayers, he explained. The money has already been allocated, he said, but right now it is going to utility companies to pay heating bills. The renovations cut down on utility bills and that savings is then used to pay off the renovation loans.

Energy service companies (called ESCO’s) put their profits on the line instead of leaving taxpayers holding the bag. It’s gaining popularity at the state level and is just beginning to catch on locally.

Here’s how it works: agencies invite 4 ESCO’s to do preliminary audits of the agency’s energy use and then submit proposals on how much the agency could save with their recommended renovations.

Each company’s proposal is screened, negotiations are opened with the best two and then a finalist is chosen to provide a more comprehensive “technical audit” which contains hard numbers on how much the renovation will cost and how much energy savings will be realized. “It’s all itemized, Barksdale said. I make sure the technical audit has a fixed price make the contractors pull out even the contingencies (costs which turn out to be less or more than expected) as a line item.”

The technical audit is then used as the basis for requesting a bank loan which comes through an existing line of credit from the state Treasury. The loans are repaid from the money the agency saves on its heating and air conditioning bills and the contractor’s on the hook if the energy savings don’t pan out. The company has to pay the difference between the loan payment and the actual energy savings realized.

If it is such a good deal why hasn’t Governor McDonnell issued an Executive Order requiring state agencies to perform energy audits to get the process rolling as he promised during the campaign?

As Governor, Bob McDonnell will examine state agencies top to bottom and require state agencies to partner with Energy Savings Performance Contracting companies. ~~www.bobmcdonnell.com

Email and voicemail messages to the Governor’s office have so far not been returned.

Why aren’t more state and local buildings using performance contracts? “They are beginning to,” Barksdale said. The state currently has $200 million in performance contracts a jump of $160 million in the last five years, cutting the state’s energy usage by $20 million dollars a year–$20 million that is now going toward upgrading aging state buildings.

There could be more building involved but apparently inertia of long-time state bureaucrats has to be overcome along with state employees’ fear of losing their jobs. Barksdale believes it is a needless fear because state maintenance crews are already too lean and inadequate maintenance results in higher energy costs.

As Trane’s Cummings puts it, “it’s a bit of an education process. The federal government instigated performance contracting and has used it for the last 30 years but it has gained momentum here in the last 5 years or so. Trane has done two large projects (in Virginia).”

The first was a $40-plus million dollar renovation of the Damn Neck Naval Base which won a Presidential award. Geothermal was the best choice for Oceana Naval Base: “To save on energy and maintenance we put the equipment underground to protect it from the elements.” Geothermal uses water and earth to heat and cool the buildings.
Cummings says locally, schools stand to benefit the most. “They usually have about 80% of the buildings in a county, so they have the biggest potential savings,” he says. College dormitories are a good bet for renewable energy: “They use lots of water—there would be a good use of solar power to heat water” and save energy dollars, Cummings adds.
Talk of geothermal and solar begs the question: Is this just a way for ‘progressives’ to push their ‘green’ agenda by using incentives, a type of ‘crony capitalism’ and the savings are not real? The companies get contracts but the taxpayer gets hit paying for someone’s political agenda?

“No,” said Barksdale, “to me it is all about the numbers when assessing whether to use new green energy options like biomass or solar versus conventional heating sources. He said he believes options like biomass are appropriate “only under the right circumstances.”

Barksdale points out another plus for performance contracts is they generate lots of work and that means jobs. “It’s huge,” said Barksdale. The ESCO’s have to bring in crews to do the work, crews who have to stay in hotels, eat in our restaurants, etc.,” a boon to the local economy. You don’t have to go to taxpayers to get extra money for renovations because it is already budgeted—you are just changing who you pay that money to,” Barksdale stressed.

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Written by Ryan Nobles

February 25, 2011 at 7:36 pm

Posted in Uncategorized

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