NDIA Education Seminar March 31, 2008 “Green” Procurement – New Regulations and the Impact on the IT Industry

1. NDIA Education Seminar March 31, 2008 “Green” Procurement – New Regulations and the Impact on the IT Industry Michael D. McGill Hogan & Hartson LLP

2. Background • Green policies and initiatives, including environmental stewardship and energy efficiency, have received increased attention during last five years. • “Green procurement” is not new, but we are seeing an increased focus and a trend in regulations that shifts compliance burden to contractors. • Three FAR rules and policy letter issued during last quarter of 2007 signal potential increased focus and shift in regulatory approach: • Final FAR Rule implementing Section 104 of Energy Policy Act of 2005 (72 Fed. Reg. 65868, Nov. 23, 2007) • Interim FAR Rule regarding use of EPEAT tool (72 Fed. Reg. 73215, Dec. 26, 2007) • Final FAR Rule regarding procurement of biobased products (72 Fed. Reg. 63040, Nov. 7, 2007) • Proposed OMB Policy Letter on acquisition of green products and services (72 Fed. Reg. 73904, Dec. 28, 2007)

3. FAR Rule re Energy Efficiency (72 Fed. Reg. 65868) • Implements Section 104 of the Energy Policy Act of 2005—which mandates that agencies shall procure only Energy Star or Federal Energy Management Program (FEMP) designated products when procuring energy-consuming products. • The restriction does not apply to products or systems designed or procured for combat or combat-related missions. • Allows head of agency to waive requirement with written determination that: • No designated product meets agency’s needs; or • No designated product is cost effective over the life of the product even taking into account cost savings associated with reduced energy consumption.

4. Overview of Energy Star and FEMP Programs Energy Star Program • Began in 1992 and jointly sponsored by EPA and DOE. • Originally focused on office equipment but expanded to other energy-consuming products categories, including lighting, commercial & industrial equipment, food service equipment, appliances, residential equipment, and construction materials. • Specifications are set for different product types and are intended to capture only the top 25 percent of the market. • Allows manufacturers of products that meet or exceed specified criteria to use the Energy Star logo on their products. Federal Energy Management Program • Originally started in 1993 to reduce energy consumption in federal buildings. • Designate products as being among the highest 25 percent of equivalent products in energy efficiency.

5. FAR Rule re Energy Efficiency (Cont’d) • FAR rule implements agency obligation to procurement Energy Star or FEMP designated products through a new FAR clause, 52.223-15, Energy Efficiency in Energy-Consuming Products. • Unless written determination is made by head of agency, CO must include 52.223-15 when products covered by Energy Star or FEMP will be delivered under contract. • When included in contract, 52.223-15 requires contractor to ensure that it will deliver and furnish only compliant products (i.e., Energy Star or FEMP-designated products). • On its face, this requirement is straightforward; however, in practice it may be difficult to ensure delivery of compliant products.

6. Implementation and Compliance Issues • Issue One: Limiting the universe of compliant products. • Energy Star and FEMP are “excellence” standards. • Energy Star and FEMP develop product-specific specifications that are intended to capture only the top 25 percent of products. • Majority of energy consuming products—as many as 75 percent—will be ineligible upon issuance of a new Energy Star or FEMP specification. • Thus, the FAR rule limits the universe of products the Government can accept and the contractor can deliver. • Encouraging innovation through rewarding only the most energy efficient products is a primary purpose of the Energy Star and FEMP programs, but tying contract requirements to the programs will have a significant impact on both Government and contractors.

7. Implementation and Compliance Issues (Cont’d) • EPA updated specifications for personal computers in 2007, adopting Energy Star Version 4.0, Tier I (effective July 20, 2007). • Intended to reward only the top 25% of efficient products within product groups (i.e., personal computers) with Energy Star label • First major update since 2000; 98% of personal computers met the Energy Star Version 3.0 requirements • Only 8 models of desktop computers and 2 integrated computers were included on the EPA list of 118 Energy Star compliant computer products under Version 4.0 • In light of FAR rule, the specification revision significantly whittled down the universe of products available to the Government customers.

8. Implementation and Compliance Issues (Cont’d) • Issue Two: Inconsistencies between green standards and procurement regulations and/or contract terms and conditions or specifications • Designation under Energy Star and FEMP is not automatically granted for life of product model under Version 4.0. All products must meet specifications in effect on manufacture date to qualify for Energy Star label. • FAR Councils provided “safe harbor” by stating that products must meet criteria for designation at the time of award. • However, if changes to Energy Star specifications occur after award but prior to delivery, contractor may be able to satisfy this safe harbor by meeting the earlier criteria but not be able to use the Energy Star label. • This could create risk that the Government personnel would reject the product. • Difficulties with conditioning compliance with contract on meeting standards of external “green” program that is not designed specifically for the government procurement context.

9. Implementation and Compliance Issues (Cont’d) • Issue Three: Inconsistencies between the Energy Star and FEMP programs and Government procurement practices. • Energy-efficiency characteristics of products delivered to the Government are often determined by Government’s unique requirements. • Government often does not buy “out of the box” solutions. • Government often requires contractor to serve as system integrator and implement various products into a single system. • FAR rule places burden on contractor to “ensure” that products delivered to the Government are compliant and remain compliant when product features and mods are ordered by Government customers. • However, in reality, contractor often is not in position where it can determine energy-consuming characteristics of products or systems upon delivery. Thus, clause may put unreasonable expectation on contractor to ensure compliance even where it is impossible to test for compliance. • Final Rule does not define or address "integrated systems,” but fair reading is that any product delivered or furnished to the Government—whether standing alone or sold as part of an integrated system—must be compliant. • System integrators need to confirm that each subcontract product delivered are Energy Star compliant; prime contractor should flow down requirements to subcontractors.

10. Implementation and Compliance Issues (Cont’d) • FAR rule also poses special challenges for supply agencies and contractors that provide goods and services under multiple award contracts. • GSA and DLA must identify and prominently display all Energy Star and FEMP designated products in any inventory or listing of products. • GSA and DLA only allowed to supply Energy Star and FEMP designated products. • Schedule Vendors have begun to remove non-compliant products.

11. Interim FAR Rule re EPEAT (72 Fed. Reg. 73215) • Effective 12/26/2007, an interim rule requires agencies to use the Electronic Product Environmental Assessment Tool, EPEAT, when acquiring personal computer products (i.e., desktops, notebooks, monitors, and certain peripherals) • EPEAT system evaluates covered products based on 51 environmental criteria; all EPEAT-registered products must meet 23 mandatory criteria; 28 other criteria are used to distinguish Bronze, Silver, and Gold recognition. EPEAT is ANSI approved and Standard 1680 of Institute of Electrical and Electronics Engineers (IEEE). EPEAT encompasses Energy Star. • FAR rule implements E.O. 13423, which directs agencies to procure EPEAT registered products to meet at least 95 of requirements for product categories covered. • Rule also adds another contract clause (FAR 52.223) that requires contractors to deliver or furnish covered products that are at least EPEAT Bronze registered or higher upon proposal submission. • Agencies may use ALT I clause that requires Silver or Gold registration or use Silver or Gold registration in proposal evaluation. • Clause applies to commercial items.

12. Final FAR Rule re Biobased Products (72 Fed. Reg. 63040) • Effective December 7, 2007, a final rule requires agencies to provide procurement preferences for certain biobased products. • “Biobased products” are “commercial or industrial products (other than food or feed) that are composed, in whole or in significant part, of biological products, including renewable domestic agricultural materials (including plant, animal, and marine materials) or forestry materials.” Ethanol is an example. • USDA issues regulations identifying biobased products that must be purchased or granted a procurement preference (e.g., diesel fuel additives, penetrating lubricants, sorbents, and greases). • FAR rule prescribes two contract clauses. Under FAR 52.223-1, offeror certifies by signing the offer that biobased products used or delivered will comply with applicable specifications and other contractual requirements. • Clause does not apply to (1) spacecraft system and launch support equipment, and (2) products or services designed or procured for combat or combat-related missions.

13. OMB Policy Letter (72 Fed. Reg. 73904) • Proposed OFPP policy letter calls on agencies to develop and implement “green purchasing policies and affirmative procurement programs.” • Requires agencies to identify opportunities and give preference to acquisition of green products and services, including: • Alternative fuels and alternative fuel vehicles and hybrids • Biobased products • Energy Star and FEMP-designated • Environmentally-preferable products and services • Electronics registered on the EPEAT • Low or no toxic or hazardous chemicals or materials or products • Non-ozone depleting substances • Recycled-content and/or remanufactured products • Renewable energy • Water-efficient products

14. OMB Policy Letter (Cont’d) • Develop and implement affirmative procurement program: • State preference for green products and services • “Flow down” green preferences to contractors and subcontractors • Compliance monitoring, annual compliance reporting, corrective action, and auditing • Use FedBizOpps to promote green products and services • Achieve best value based on life-cycle-cost assessments and cradle to grave manufacture, use, and disposition • Green and/or sustainable standards and performance indicators in SOWs, source selection factors, and performance-based acquisitions • Past performance evaluation of contractor’s adherence to green components/sustainable aspects of contracts

15. OMB Policy Letter (Cont’d) • Ensure representation of environmental and energy experts on procurement team and consider sustainable design practices and life cycle cost impacts • Develop and require training of workforce on acquisition of green products and services • DLA and GSA to adopt automatic substitution policies

16. Conclusion • Green compliance is going to become an increasingly important issue for government contractors. • Developments in this area, including regulations and new green standards, must be closely monitored. • For example, impact of FAR 52.223-15 is going to expand, as EPA is expected to release a data center Energy Star specification covering servers, cooling and infrastructure in January 2009 and Version 4.0 Tier 2 for personal computers. • Delivering or furnishing “green” may be a term and condition of government contracts. Failure to meet the requirement could result in termination for default or price adjustments. Contractors may need to flow down requirements. • “Green” considerations will take more prominent role in evaluation criteria, performance reviews, and past performance evaluations. • Implementing these regulations will put another responsibility on acquisition workforce. • Green regulations are positive development but not without “growing pains.”

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