Opinion
Supreme Court No. S-11714.
June 21, 2006.
Appeal from the Superior Court of the State of Alaska, Fourth Judicial District, Fairbanks, Mark I. Wood, Judge. Superior Court No. 4FA-03-00362 CI.
John J. Burns, Borgeson Burns, P.C., Fairbanks, for Appellant.
Stephen C. Slotnick, Assistant Attorney General, and David W. Márquez, Attorney General, Juneau, for Appellee.
Before: Bryner, Chief Justice, Matthews, Fabe, and Carpeneti, Justices. [Eastaugh, Justice, not participating.
MEMORANDUM OPINION AND JUDGMENT
Entered pursuant to Appellate Rule 214.
I. INTRODUCTION
This appeal arises from a dispute over the validity of a state-issued request for proposals (RFP) soliciting offers to lease office space in Fairbanks for the Department of Natural Resources. Two prospective offerors, Bachner Company, Inc., and Bowers Investment Company, challenged the RFP, arguing that its provisions for granting preferences for bids by Alaska businesses and businesses employing disabled workers violated Alaska law; they also argued that the RFP unfairly discriminated against offerors who proposed to lease existing instead of newly built space. After the Commissioner of Administration rejected their challenge, Bachner and Bowers appealed to the superior court.
In a decision that explained the relevant facts of the case, carefully addressed all arguments raised, and thoroughly discussed the applicable law, Superior Court Judge Mark I. Wood concluded that the RFP complied with Alaska law governing the use of preferences in RFPs and that it treated all offers equally, regardless of whether they proposed to lease remodeled or newly built space. Bachner and Bowers then filed this appeal, renewing their challenge.
Because we believe that Judge Wood's decision correctly resolves the claims that Bachner and Bowers now raise here, we adopt that decision and set out its full text in Appendix A. But we first briefly address three points that deserve further comment in light of the current briefing.
II. ADDITIONAL POINTS
A. Mootness
The state argues as a threshold matter that this appeal should be dismissed on the ground of mootness as to Bachner because Bachner was ultimately awarded the Fairbanks lease. But we are not persuaded that the case is moot as to Bachner. The dispute raised by Bachner remains alive as to Bowers despite the award to Bachner. And as a regular participant in the state procurement process, Bachner retains sufficient ongoing interest in the disputed issues to claim interest-injury standing. Under these circumstances, AS 44.62.300 authorizes Bachner's continued participation in the appeal for purposes of obtaining declaratory relief: "An interested person may get a judicial declaration on the validity of a regulation by bringing an action for declaratory relief in the superior court."
B. Bachner's and Bowers's Preference Claims
Despite the superior court's thorough discussion of the point, Bachner and Bowers insist that the Department of Administration, Division of General Services (DGS) misinterpreted and misapplied 2 AAC 12.260(d) and (e) — the regulatory provisions specifying how to apply preferences in evaluating competitive sealed proposals. They contend that the state's interpretation of these provisions conflicts with the requirements of AS 36.30.170, the procurement code's provision that adopts the disputed preferences and describes how they apply. But this argument mistakenly assumes that AS 36.30.170 directly governs the evaluation of RFPs. It does not.
Alaska's procurement code establishes and authorizes two distinct kinds of competitive procurement processes: competitive sealed bidding and competitive sealed proposals. The sealed bidding process focuses on the price of the bid, awarding the contract to the lowest bidder. By contrast, the competitive sealed proposals process uses price as one factor but also evaluates other factors set out in the request for proposals, typically allocating a specified maximum number of points to each evaluation factor and awarding the contract to the offeror with the highest total points.
The Alaska Procurement Code is codified as title 36, chapter 30 of the Alaska Statutes.
AS 36.30.100-.190.
AS 36.30.200-.270.
AS 36.30.170.
AS 36.30.250.
The statutory preferences that Bachner and Bowers rely on here are located in AS 36.30.170, one of the procurement code's sealed-bid provisions. Specifically, section .170 describes the method for evaluating and awarding sealed bids. As part of this evaluation process, it adopts several preferences — including preferences for Alaskan businesses and businesses that employ disabled workers — that give qualified bidders an economic advantage by reducing the price of their bids. But by its own clear terms, section .170 applies only to bids solicited in a competitive sealed bidding process; nothing in section .170 purports to extend its preference requirements to procurement contracts using the competitive sealed proposals process.
See AS 36.30.170(b)-(f).
See, e.g., AS 36.30.170(a) and (b), which states in relevant part:
(a) Except as provided in (b)-(h) of this section, the procurement officer shall award a contract based on the solicited bids with reasonable promptness by written notice to the lowest responsible and responsive bidder whose bid conforms in all material respects to the requirements and criteria set out in the invitation to bid.
(b) The procurement officer shall award a contract based on solicited bids to the lowest responsive and responsible bidder after an Alaska bidder preference of five percent, an Alaska products preference as described in AS 36.30.322- 36.30.338, and a recycled products preference under AS 36.30.337 have been applied.
(Emphasis added.)
As the superior court correctly recognized in its decision, AS 36.30.250, not AS 36.30.170, directly controls how preferences are used in evaluating competitive sealed proposals — RFPs. Although section .250 requires the evaluation process for an RFP "to consider" the preferences used for sealed bids, it gives the Commissioner of Administration broad latitude to specify the precise manner in which those preferences should be considered:
(a) The procurement officer shall award a contract under competitive sealed proposals to the responsible and responsive offeror whose proposal is determined in writing to be the most advantageous to the state taking into consideration price and the evaluation factors set out in the request for proposals. Other factors and criteria may not be used in the evaluation. The contract file must contain the basis on which the award is made.
(b) In determining whether a proposal is advantageous to the state, the procurement officer shall take into account, in accordance with regulations of the commissioner, whether the offeror qualifies as an Alaska bidder under AS 36.30.170(b), is offering the service of an employment program, or qualifies for a preference under AS 36.30.170(e) or (f).
AS 36.30.250(a) and (b) (emphasis added).
Acting on this broad grant of authority, the commissioner adopted the regulation that Bachner and Bowers directly challenge here, 2 AAC 12.260. Subsections (d) and (e) of the regulation deal with preferences:
(d) For the purposes of evaluating price, the proposed price of an offeror who qualifies as an Alaska bidder under AS 36.30.170(b) shall be reduced by five percent. All other applicable preferences must be applied.
(e) If a numerical rating system is used, an Alaska offeror's preference of at least 10 percent of the total possible value of the rating system must be assigned to a proposal of an offeror who qualifies as an Alaska bidder under AS 36.30.170(b).
2 Alaska Administrative Code (AAC) 12.260(d), (e).
Bachner and Bowers contend that, if interpreted as the commissioner and the superior court did here, these provisions would conflict with the preference requirements spelled out in AS 36.30.170. But this contention misses the point that the regulation cannot directly conflict with AS 36.30.170, because that statute only applies to sealed bids; it does not extend to the subject addressed by the regulation — competitive sealed proposals. As discussed above, 2 AAC 12.260, the disputed regulation, is governed by AS 36.30.250. Because section .250 incorporates section .170's preferences to a limited extent, the regulation might conflict with section .170 indirectly, but only if it ignored section .250's provisions incorporating section .170.
Bachner and Bowers fail to identify any conflict between the challenged regulation and section .250. And we see no apparent conflict. As we have seen, AS 36.30.250 leaves the commissioner broad discretion to adopt a regulation specifying how AS 36.30.170's sealed-bid preferences should be "take[n] into account" by procurement officers in evaluating responses to RFPs. Because the regulation does exactly what section .250 authorizes the commissioner to do, it cannot be said to exceed the authority granted by section .250.
Of course the regulation might be invalid if the manner in which it required the disputed preferences to be taken into account conflicted with the basic purpose of AS 36.30.250, lacked any rational basis, or appeared to be arbitrary and capricious — in other words, if the regulation's provisions failed to provide assurances that the commissioner "ha[d] taken a hard look at the salient problems and ha[d] genuinely engaged in reasoned decision making." But in our view, the challenged regulation easily passes muster under this deferential standard.
Chalovich v. State, Dep't of Natural Res., 104 P.3d 125, 128 (Alaska 2004).
Grunert v. State, 109 P.3d 924, 929 (Alaska 2005).
In the competitive sealed bidding process, which awards contracts on the sole basis of price, a statutory preference reflects the legislature's determination that a qualified bidder deserves to be given an economic advantage in the process of evaluating the price of the bid. The regulation disputed here, 2 AAC 12.260, attempts to address essentially the same goal, but does so in the context of a different process, the competitive sealed proposals process. As already mentioned, the competitive sealed proposals process evaluates proposals and makes awards not just by determining lowest price, but also by considering relevant non-economic evaluation factors and awarding the contract to the "offeror whose proposal is determined . . . to be the most advantageous to the state taking into consideration price and the evaluation factors[.]"
AS 36.30.250(a).
Subsection (d) of the disputed regulation applies the statutory preferences specified under section .170 for purposes of evaluating the price component of the RFP. By so doing, it gives all offerors who qualify for preferences essentially the same economic advantage as to the price component of an RFP that their section .170 preferences would give them in the evaluation of the bid price in a sealed-bid procurement. As the superior court correctly recognized, because subsection (d) reduces the bid price of a qualifying offeror's proposal by the same amount that the price would have been reduced in a sealed-bid procurement, "there is a reasonable basis for application of the disability preference only to the price component during the evaluation of proposals."
Superior Court Decision, Appendix A at 10.
Subsection (e) of the challenged regulation goes beyond subsection (d): it gives the Alaska business preference extra weight in the RFP's non-price component by making that preference — and that preference alone — an evaluation factor worth "at least 10 percent of the total possible value of the rating system." By giving Alaska businesses this extra advantage with respect to the RFP's non-price component, subsection (e) effectively recognizes that having an Alaska business as a landlord for a long-term lease can offer the state, as a tenant, unique advantages unrelated to price that other statutory preferences would not offer. Given the broader nature of the factors used in evaluating an offer submitted in response to an RFP, as well as the broader, "most advantageous," standard for determining the winning offer, we see nothing arbitrary or irrational in the department's decision to take potential non-economic benefits of this kind into account.
Because 2 AAC 12.260's treatment of the Alaska business preference does not lack a reasonable basis and is neither arbitrary nor capricious, we conclude that the regulation is consistent with the basic purposes of its enabling statute, AS 36.30.250.
C. Discrimination Claims
Bachner and Bowers further allege that the RFP's definitions of "leasehold improvement costs" and "lease costs" discriminate against offerors proposing to lease remodeled, existing office space rather than newly built facilities. Relatedly, they challenge two features of the RFP: its use of the consumer price index in evaluating leasehold improvements and its use of a Present Value Analysis formula. They allege that these features enhance the discriminatory effects of the disputed definitions.
Yet these arguments all hinge on the mistaken premise that the RFP's definitions of "leasehold improvement costs" and "lease costs" impose different requirements on offerors proposing to lease existing space than they impose on offerors proposing to lease new space. As the state correctly observes in its briefing, the RFP's definition of leasehold improvements treats new and remodeled facilities identically. The RFP's definition of "leasehold improvements" begins with a general explanation of the term that informs all offerors that they will need to separately list leasehold improvement costs from ordinary lease costs:
When pricing offers, Offerors should separate the cost of leasehold improvements from normal monthly rent. The leasehold improvement portion of construction is distinct from the primary structure in that it is limited to the construction needs specific to the requirements of the State of Alaska solicitation and does not include the basic structure of the building or construction in common areas.
The definition then separately explains how this listing requirement would apply to new buildings ("build to suit") and existing facilities:
Build to Suit: The complete new construction of a facility is not considered leasehold improvements for purposes of this solicitation. Only a percentage as deemed directly connected with the State Agency's need are identified as leasehold improvements, i.e., partitions walls, electrical and data outlets required to meet specific requirements of the State.
Existing Facility: All elements of construction related directly to the Agency's needs as specified in the solicitation are identified as leasehold improvements.
As can be seen, these paragraphs are tailored to a specific category of offeror, but describe the core definition of "leasehold improvements" in nearly identical terms:
• "Build to Suit" offerors are told that leasehold improvements must be "directly connected with the State Agency's need[s] . . . required to meet specific requirements of the State."
• "Existing Facility" offerors are told that leasehold improvements must be "related directly to the Agency's needs as specified in the solicitation."
The RFP's definition of "leasehold improvements" ends with a disclaimer that the state reserves the right to request further information or clarification regarding an offeror's listing of leasehold improvement costs:
In the event . . . an Offeror's response is deemed inappropriate or needs clarification the State reserves the right to request such information from the Offeror. If the information is not provided and/or is not justified the Offeror may be found to be non-responsive and the offer may be rejected.
Nothing in this disclaimer, or in the definition as a whole, suggests discriminatory treatment; if anything, its language leaves the impression that, barring exceptional circumstances, both "build to suit" offerors and "existing facility" offerors will be allowed considerable discretion in drawing the line between a required leasehold improvement and an ordinary lease cost. Here, as the superior court recognized, this impression was expressly confirmed by the contracting officer, who assured Bachner and Bowers — before the due date for their proposals — that "building owners have reasonable discretion when determining which improvements they will include in their computation of Leasehold Improvement Costs." Given these circumstances we find no basis for Bachner's and Bowers's claims of discriminatory treatment.
Pointing to language from the RFP's price page that precludes leasehold improvement costs from being listed as ordinary lease costs and states that "ALL required leasehold improvements" must be listed as leasehold improvement costs, Bachner and Bowers dispute the suggestion that the RFP left them any discretion to classify costs as either leasehold improvements or ordinary lease costs. But while this language certainly makes it clear that all required leasehold improvement costs must be listed as such, this hardly suggests that offerors would have no discretion to decide what improvement costs are required costs: to say that all required costs must be listed does not equate to saying that all costs are required costs.
III. CONCLUSION
For the reasons set out in the superior court's decision and the additional reasons set out here, we AFFIRM the superior court's decision upholding the commissioner's ruling denying relief to Bachner and Bowers.
Appendix A IN THE SUPERIOR COURT FOR THE STATE OF ALASKA FOURTH JUDICIAL DISTRICT OF FAIRBANKS
Bachner Company, Inc., and ) Bowers Investment Company, ) ) Appellant, ) ) vs. ) ) State of Alaska, Department of ) Administration, and Mike Miller, in ) his official capacity as Commissioner, ) ) Appellee. )
Case No. 4FA-03-362 Civil
MEMORANDUM DECISION AND ORDER I. INTRODUCTION
This Memorandum Decision and Order has been edited to comply with the technical rules of the Alaska Supreme Court. Internal citations have been omitted.
Appellants Bachner Company and Bowers Investment Company appeal decisions made by the State of Alaska, Department of Administration, concerning competitive proposals for leased office space. Bachner and Bowers protested (1) the manner in which the State applied disability preferences and (2) the division of cost into two categories for the determination of the price of lease proposals. Appellants contend that the method for bifurcation of costs unfairly favored new building construction over existing buildings. The court rejects Bachner and Bowers' arguments on appeal.
II. BACKGROUND
Because the Alaska Department of Administration, Division of General Services ("DGS"), handles the leasing of facilities for state agencies, DGS conducted the procurement process for specialized leased office space in Fairbanks needed by the Geological Geophysical Survey Division of the Alaska Department of Natural Resources. DGS issued a Request for Proposals ("RFP") soliciting sealed proposals for the lease. The RFP required certain specialized facilities in the building, including specific rooms and connections for telecommunications and computer equipment, a "rock saw/polisher/sieving room," a large open "flat file/hanging file map storage room and common work area with light tables," and a "microscope/zoom transfer scope room." The initial term of the lease was to be ten years. The State had the unilateral option to renew the lease for ten additional one-year periods at the same terms and conditions as the initial lease. Future adjustments in the lease rate would be based on the Consumer Price Index (CPI) as applied to 35 percent of the monthly base lease rate. The RFP explained that the State would treat this 35 percent of the base lease rate as the lessor's "operational cost other than debt service and profit." A standard provision in the RFP encouraged offerors to carefully review the solicitation and to submit comments about defects in writing at least ten days before the closing date for submission of proposals.
The RFP explained evaluation factors and the relative weighting of these factors. A maximum of 60 out of a total of 100 points were assigned to price. Statutory preferences for Alaskan businesses and employers of disabled persons would be applied in accordance with state regulations. The deadline was changed to January 31, 2003.
DGS issued RFP amendments that explained how the preferences would be calculated and how the price component would be converted to points in a numerical evaluation system.
First Protest: In protests submitted in October 2002 by Bowers Investment Company and Bachner Company, they objected to the manner in which statutory preferences were applied. After Leasing and Facilities Manager Tanci Mintz issued an adverse decision, Bachner and Bowers appealed to the Commissioner of the Alaska Department of Administration. As required by AS 36.30.605, DGS Contracting Officer Michael Szewc supplied a protest report. Bachner and Bowers submitted a response to Mr. Szewc's report and attached material from a protest about a previous RFP. On January 15, 2003, Acting Commissioner of the Department of Administration issued a final agency decision denying the appeal regarding preferences.
Second Protest: On January 20, 2003, Bachner and Bowers filed another protest of the solicitation, alleging that the portion of the RFP addressing the division of costs between lease costs and leasehold improvement costs discriminated against owners of existing buildings. The RFP called for a distinction between (1) base "lease costs" that could continue for the maximum term of twenty years (the firm ten-year term plus an additional ten years at the state's option), such as operational costs ("Category A"); and (2) "leasehold improvement" costs that were to be allocated to the firm ten-year term ("Category B"). Bachner and Bowers interpreted the RFP to require that all improvements to existing buildings be included in the ten-year leasehold improvement costs, while allowing "build-to-suit" offers to designate most costs to the twenty-year lease costs. They viewed Consumer Price Index (CPI) adjustments permitted for lease costs, but not for leasehold improvement costs, to compound the discriminatory effect.
On January 23, 2003, the contracting officer, Mr. Szewc responded on behalf of DGS. He explained that building owners were free to determine what building improvements were specific to the State's occupancy and what types of improvements the owner may have pursued eventually for any tenant. He also explained that the CPI was applied only to 35% of the Base Lease Cost, because it was intended only to account for inflation in operating costs for the building in the future. The Leasehold Improvement Costs would be incurred before the state moved into the building.
Bachner and Bowers appealed Mr. Szewc's decision to the commissioner on January 31, 2003. Much of their argument was based on an unrelated protest and appeal concerning a RFP for a lease with the Department of Transportation and Public Facilities (DOT). The protest report written by Mr. Szewc explained that DGS expected offerors to include a sufficient amount in the base lease rate to adequately cover operational costs for the building, and only then determine the amount to charge the State for leasehold improvements. Bachner and Bowers responded in a letter asserting their view that the protest report was in direct conflict with the language in the RFP defining the distinction between Lease Costs and Leasehold Improvement Costs. On May 4, 2003, the Assistant Commissioner for DGS, Kevin Jardell, issued a final agency decision, disagreeing with Appellants' interpretation and denying their protest.
DGS issued notice of final award of the contract for leased office space to Bachner, who offered the proposal receiving the highest score. Bachner and Bowers appealed from DGS's decisions and the superior court consolidated the appeals. Oral argument on the consolidated appeals was held on April 16, 2004. Two primary issues are before the superior court: (1) preferences for employers of disabled persons; and (2) distinction between lease costs and leasehold improvement costs.
III. STANDARD
When an agency decides a question of statutory interpretation that involves agency expertise or determination of fundamental agency policies a reviewing court applies a "rational basis" test. When reviewing administrative regulations, the court determines whether the regulation is consistent with governing statutes and whether the regulation is reasonable and not arbitrary. The court examines an agency's application of statutes and regulations to particular factual circumstances with respect to whether it was arbitrary and an abuse of discretion. The appropriate standard for reviewing a decision of a state procurement officer is the "reasonable basis" standard. Under this standard, a reviewing court determines whether the agency's decision is supported by the facts, has a reasonable basis in law, and is not arbitrary even if the court does not agree with the agency's ultimate determination.
Gunderson v. University of Alaska, 922 P.2d 229, 233 (Alaska 1996).
State, Dep't of Revenue v. Cosio, 858 P.2d 621, 624-25 (Alaska 1993).
Rose v. Commercial Fisheries Entry Comm'n, 647 P.2d 154, 161 (Alaska 1982).
Gunderson, 922 P.2d at 233.
Gunderson, 922 P.2d at 233 (quoting Tesoro Alaska Petroleum v. Kenai Pipe Line, 746 P.2d 896, 903 (Alaska 1987)).
IV. DISCUSSION
A. Application of Disability Preference and Alaska Bidder Preference
Bowers, Bachner, and McKinley all eventually qualified for the same two statutory preferences: an Alaska bidder preference and a disability preference. Appellants argue that the state misapplied the preferences. They contend that 2 AAC 12.260, which governs the Department of Administration's evaluation of competitive sealed proposals, is inconsistent with AS 36.30.170 and AS 36.30.250. When a party challenges an administrative regulation, the court must determine: (1) whether the regulation is consistent with the statutory purpose; and (2) whether the regulation is reasonable and not arbitrary.
Although Bowers was initially denied Alaska bidder status, Bowers successfully protested on that issue. Notably, AS 36.30.170 specifies that it does not give a bidder, who would otherwise qualify for a disability preference under AS 36.30.170(e) or (f), a preference over another bidder who would otherwise qualify for a disability preference under the same provisions. Therefore, none of the offerors were entitled to a disability preference over another offeror in this particular case. Nonetheless, the court will discuss the issues because they may arise in future cases.
Cosio, 858 P.2d at 624.
1. Is 2 AAC 12.260 consistent with the statutory purpose of disability preferences?
This case involves proposals, not sealed bids. In competitive sealed bidding, the contract is awarded to the lowest responsive bid on price after preferences are applied. Under AS 36.30.170(b), a bidder who qualifies as an "Alaska bidder" obtains a five percent reduction in price for purposes of comparing the bids of Alaska and non-Alaska bidders. An Alaska bidder may qualify for an additional preference under AS 36.30.170, if the business is owned by persons with disabilities or if the business employs persons with disabilities. When an Alaska bidder qualifies for a disability preference, and the bid is not more than 10 percent higher than the lowest bid, the procurement officer is required to award the contract to that bidder, unless the lowest bidder also qualifies for [a] disability preference. Since only Alaska bidders can qualify for disability preferences, any bidder who qualifies for a disability preference also obtains the benefit of whatever Alaska bidder preferences are applied.
Proposals are governed by AS 36.30.200-.270. Sealed bidding is governed by AS 36.30.100-.190.
AS 36.30.170.
See AS 36.30.170(b).
AS 36.30.170(c), (e)-(f).
AS 36.30.170(e)-(f).
AS 36.30.170(c), (e), (f).
The statutory language is different regarding preferences when requests for proposals (RFP) are involved. The only variable in sealed bids is price, but proposals require consideration of several factors in addition to price. Under AS 36.30.250, the procurement officer must award a contract to the offeror of the proposal which is determined to be "the most advantageous to the state, taking into consideration price and the evaluation factors set out in the request for proposals." The statute further requires:
AS 36.30.250(a).
(b) In determining whether a proposal is advantageous to the state, the procurement officer shall take into account, in accordance with regulations of the [department], whether the offeror qualifies as an Alaska bidder under AS 36.30.170(b), . . ., or qualifies for a disability preference under AS 36.30.170(e) or (f).
AS 36.30.250(b).
The procurement officer need only "take into account" whether the offeror qualifies for a disability preferences. The language in AS 36.30.250(b) is consistent with the greater discretion necessitated by the consideration of more factors under an RFP.
Id.
The disability preferences were added to AS 36.30.170 and AS 36.30.250 in 1992. The legislative intent behind the disability preferences was to encourage the employment of disabled persons in Alaska and to increase business opportunities for disabled persons in Alaska. Because accommodations for disabled employees may create additional expense for an employer, the disability preferences helped such employers to compete for state contracts with businesses that did not have the potential expense of a significant number of disabled employees.
Ch. 114, SLA 1992.
See Alaska Leg. Comm. Min., House State Affairs Comm., Rep. Johnny Ellis, sponsor of HB 324, Feb. 12, 1992; Senate State Affairs Comm., Rep. Johnny Ellis, April 8, 1992; Ch. 114, SLA 1992.
See id.
Since AS 36.30.170(e)-(f) and AS 36.30.250(b) were passed by the legislature in the same 1992 bill, the legislature could easily have specified in AS 36.30.250(b) an intent to apply disability preferences to numeric scoring of proposals in the same way as price in seal bidding under AS 36.30.170(e)-(f). But AS 36.30.250(b) is written so that, although an offeror's qualification for a preference is determined by criteria in AS 36.30.170, the weight to be given the preference during proposal evaluations is left to the discretion of the agency and the agency's review process for adopting regulations.
See AS 36.30.250(b).
Under AS 36.30.250(b) the procurement officer must take into account, in accordance with regulations, whether an offeror qualifies for a preference under AS 36.30.170. Appellants argue that 2 AAC 12.260, which applies to the evaluation of proposals, is contrary to AS 36.30.170 and AS 36.30.250. The regulation contains two subsections that address preferences for offerors who qualify as Alaska bidders:
(d) For the purposes of evaluating price, the proposed price of an offeror who qualifies as an Alaska bidder under AS 36.30.170(b) shall be reduced by five percent. All other applicable preferences must be applied.
(e) If a numerical rating system is used, an Alaska offeror's preference of at least 10 percent of the total possible value of the rating system must be assigned to a proposal of an offeror who qualifies as an Alaska bidder under AS 36.30.170(b).
2 AAC 12.260(d), (e) (emphasis added).
Disability preferences are among the other preferences referenced in subsection (d). Subsection (d) begins with the phrase" [f]or purposes of evaluating price," indicating that all preferences applied under subsection (d) must be applied to the price component. Accordingly, DGS applied disability preferences to the price component.
Subsection (e) provides an additional preference for proposals offered by Alaska offerors when a numerical evaluation system is used. Appellants argue that the extra ten-percent preference granted to Alaska offerors in 2 AAC 12.260(e) is contrary to the five percent preference in AS 36.30.170(b) for Alaska offerors as compared to the ten percent preference for an employer of disabled persons in AS 36.30.170(f). But in AS 36.30.250(b) the legislature only mandated that whether the offeror qualified for a preference be considered. The statute delegated to agency regulations how those preferences would be considered. Alaska Statute 36.30.250 does not specify the weight to be given preferences when evaluating the multiple factors in an RFP.
AS 36.30.250(b).
Furthermore, an offeror must qualify as an Alaska offeror in order [to] qualify for a disability preference. All of the offerors qualified for the ten-point Alaska bidder preference, including Bowers after its protest. Thus, the appellants did not suffer any disadvantage from the award of ten extra points for Alaska bidder status. Their scores were raised by both Alaska bidder preferences and the disability preference applied to the price component. Bachner's proposal received the maximum points for price.
See AS 36.30.170(e), (f).
2. Is 2 AAC 12.260 reasonable and not arbitrary?
Where an agency interprets its own regulation, a deferential standard of review recognizes that the agency is best able to discern its intent in promulgating the regulation at issue. The court determines whether there is a reasonable basis for the regulation and the agency's interpretation.
Rose v. Commercial Fisheries Entry Comm'n, 647 P.2d 154, 161 (Alaska 1982).
See id.
Since sealed bids are evaluated only on the basis of price, the products or services offered are equivalent. Alaska Statute 36.30.170 establishes the manner in which preferences are calculated on the basis of price. Proposals, on the other hand, are evaluated using several factors, of which only one is price. Proposals are not necessarily equivalent in non-price categories, and the relative extent to which competing proposals meet the agency's needs with respect to factors other than price must be considered. Regulation 2 AAC 12.260(d) applies preferences to the price component of a proposal in the same way as applied to price in sealed bidding. In this case, price constituted 60 percent of the numerical score. The other 40 percent was composed of categories like function, appearance, location, and public convenience. Alaska Statute 36.30.170 reflects the legislature's willingness to pay more for contracts if necessary to create more opportunities for Alaska businesses, especially those with disabled employees. But AS 36.30.250 does not indicate any intention by the state to reduce the importance of non-price factors that might affect the extent to which a proposal meets the State's needs. It is reasonable for the State to pay more money for an equivalent product if necessary to encourage employment of disabled Alaskans. Similarly, it is reasonable for the State to pay more if necessary to lease office space from a business which employs disabled Alaskans, while at the same time assigning the highest scores for other factors to proposals offering those factors to the greatest extent. If two proposals are roughly equivalent in scoring on non-price factors, then the State will pay a higher amount if necessary to aid in the employment of a disabled Alaskan. Thus, there is a reasonable basis for application of the disability preference only to the price component during the evaluation of proposals.
Under AS 36.30.250(a), the procurement officer awards the contract to the offeror whose proposal is the "most advantageous" to the State. Alaska Statute 36.30.250(b) merely requires that, when determining whether a proposal is "advantageous to the state," the procurement officer must "take into account" preferences for Alaska bidder status and disabilities along with the other factors stated in the RFP.
AS 36.30.250(b).
Therefore, the court concludes that 2 AAC 12.260 is reasonable and not arbitrary regarding evaluation of proposals and application of disability preferences.
3. Is Bachner entitled to some benefit from the disability preference where Bachner is awarded the contract even without the preference?
During oral argument, Bachner complained that because it offered the lowest price and submitted the highest scoring proposal even without application of a preference, Bachner did not get any benefit from the preference. There is no merit in this argument. Bachner chose the price to offer, not the State.
Preferences merely apply during the process of choosing the offeror who will be awarded the contract. Nothing in the statutes suggests that preferences were intended to act as direct subsidies for employers of disabled persons. The disability preferences were intended to help employers of disabled persons requiring special accommodations for their disabilities to compete with businesses not faced with this extra cost.
See Alaska Leg. Comm. Min., House State Affairs Comm., Rep. Johnny Ellis, sponsor of HB 324, Feb. 12, 1992; Senate State Affairs Comm., Rep. Johnny Ellis, April 8, 1992; Ch. 114, SLA 1992.
Moreover, under AS 36.30.170(e), (f), a disability preference does not give an offeror, who would otherwise qualify for a disability preference under AS 36.30.170(e) or (f), a preference over another offeror who also qualifies for a disability preference. In this case Bachner, Bowers, and McKinley all qualified for a ten percent disability preference. Thus, the preference could not be applied to give any of them an advantage over another. Since all three offerors qualified for the same preferences, the choice of any of the three offerors accomplished the legislature's intent behind the preferences. The whole dispute over application of preferences has no effect upon which party would be awarded the contract in this case.
AS 36.30.170(e), (f).
Therefore, the court rejects Bachner's complaint about receiving no benefit from the disability preference.
Bachner also complained during oral argument that it was unfair for the State to require the company to continue to employ disabled workers when it did not obtain any benefit. In order to retain a disability preference for competing for future State contracts, however, Bachner must remain on the division of vocational rehabilitation's list of qualified employers of disabled persons. AS 36.30.170(g).
B. Lease costs distinguished from leasehold improvement costs: Did the RFP's definition of leasehold improvement discriminate against owners of existing buildings and give "build-to-suit" offerors an unfair advantage?
Appellants argue that the State discriminated against offerors who proposed existing buildings by allegedly preventing their recovery of operational costs and inflation adjustments, while permitting the recovery of these costs and adjustments by offerors who proposed new buildings. Appellants also argue that the State discriminated against offerors of existing buildings by applying a "Present Value Analysis" (PVA) in a manner favoring new buildings.
1. Did the State have a rational basis for the distinction between "leasehold improvement" costs and "lease costs" in the RFP?
Bachner and Bowers insist that the RFP requires offerors of existing buildings to assign all construction costs to "leasehold improvement costs" and allows most construction costs for a new building to be allocated to "lease costs." The State, on the other hand, insists that owners of existing buildings had the same discretion in assigning costs to the two categories comprising price as offerors proposing a new building.
The RFP defines "leasehold improvements" as follows:
When pricing offers, Offerors should separate the cost of leasehold improvements from normal monthly rent. The leasehold improvement portion of construction is distinct from the primary structure in that it is limited to the construction needs specific to the requirements of the State of Alaska solicitation and does not include the basic structure of the building or construction in common areas.
Build to Suit: The complete new construction of a facility is not considered leasehold improvements for purposes of this solicitation. Only a percentage as deemed directly connected with the State Agency's need are identified as leasehold improvements, i.e., partitions walls, electrical and data outlets required to meet specific requirements of the State.
Existing Facility: All elements of construction related directly to the Agency's needs as specified in the solicitation are identified as leasehold improvements.
In the event of [sic] an Offeror's response is deemed inappropriate or needs clarification the State reserves the right to request such information from the Offeror. If the information is not provided and/or is not justified the Offeror may be found to be non-responsive and the offer may be rejected.
"Leasehold improvements" are defined as features directly related to the Geological and Geophysical Survey Division's specific needs. Such features would likely be of no value to another tenant. Because the State may decline to renew the lease after the first ten years, the offeror could be assured of recovering such costs only during the firm ten-year term. The last paragraph of the definition merely allows the State to request an explanation from the offeror before making a determination of responsiveness. This is consistent with the greater discretion necessary to evaluate proposals.
On the other hand, the "Price Offer Page" in the RFP states: "ALL required leasehold improvements to provide this lease, must be included in [Category B]." When viewed alone, this statement might be interpreted, as Appellants did, to require an offeror to include all improvements to an existing building within Category B, regardless of the utility of those improvements for future tenants. If the improvements are likely to be useful to future tenants, however, such improvements are not "directly" related to the needs of the Geological and Geophysical Survey. These improvements could be included within lease costs.
In the agency's final decision, Assistant Commissioner Kevin Jardell noted that the contracting officer's written protest decision clarified the State's interpretation of the RFP before Bachner and Bowers submitted their proposals. Mr. Jardell rejected Appellants' argument that their own interpretation of the RFP should apply despite the contracting officer's decision unless the State formally amended the RFP. He concluded that Bachner and Bowers ignored the written decision "at their own risk."
It was reasonable for DGS to expect offerors to state a commercially feasible base lease rate to cover operational and financing costs and make adjustments in the leasehold improvement costs to the extent necessary to make the proposal competitive. DGS asserted in the protest report that lessors often pay for some improvements as an enticement for a particular lessee.
The "Price Offer Page" and the definition of "leasehold improvements" must be read together. The language in the RFP as a whole does not warrant Appellants' interpretation. The State had a rational basis for the definition of "leasehold improvements" used in the RFP and the distinction between "leasehold improvement costs" (Category B) and "lease costs" or the base lease rate (Category A). It was reasonable for the State to expect offerors to include all of their operational costs in the base lease rate that would continue after the first ten-year term ended. Moreover, even if the RFP language could be viewed as ambiguous, the contracting officer's decision clarified that DGS intended all offerors to have some discretion when allocating costs to the two categories.
Therefore, the court concludes that the State had a rational basis for requiring offerors to distinguish between base "lease costs" and "leasehold improvement" costs. The distinction did not discriminate against owners of existing buildings.
2. Was DGS arbitrary and capricious in providing for inflation adjustments based on the Consumer Price Index (CPI) for a percentage of only the basic lease costs and not leasehold improvement costs?
Appellants contend that the State should have permitted inflation adjustments for leasehold improvements, and not just for a percentage of the basic lease costs. The State points out that because the leasehold improvements would be incurred before the State moved into the building and related financing costs would be predictable, inflation adjustments were unwarranted for the cost of those improvements. Inflation adjustments based on the CPI were intended to account for inflationary rises in maintenance and utility costs. Appellants' argument on this issue is based on their misconception that offerors who proposed existing buildings were required to include all construction costs in the leasehold improvement category. The State's decision to allow CPI adjustments for 35 percent of lease costs was reasonable and not arbitrary.
3. Did the PVA formula used to evaluate proposals discriminate against offerors with existing building?
Appellants argue that application of the Present Value Analysis (PVA) formula gives offerors of new buildings an unfair advantage by making new buildings appear less expensive. The State contends that future payment streams must be discounted to present value in order to compare them.
Money in the future is worth less than the same amount of money in the present. It is generally impossible to compare payment streams, which pay different amounts at different rates, unless the payments are reduced to present value. Bachner's proposal contained a much lower base lease cost of $6,019 per month compared to the proposals of Bowers ($16,336) and McKinley ($24,357). The monthly base lease cost would be the same for twenty years if the State renewed the lease for the maximum possible terms. The monthly leasehold improvement cost, which the State would pay for only ten years, varied from $17,913 offered by Bachner, and $5,895 offered by Bowers, to $663 offered by McKinley. Such widely varying payment streams could be rationally compared only by reducing the amounts to present value.
See Hartland v. Hartland, 777 P.2d 636, 641 n. 4 (Alaska 1989); Vockner v. Erickson, 712 P.2d 379, 382-83 n. 7 (Alaska 1986).
See Foster v. Foster, 883 P.2d 397, 400 (Alaska 1994).
The RFP explains the application of a PVA formula during the evaluation process. Appellants' argument regarding application of a PVA formula rests partly on their assumption that offerors of existing buildings were required to include all construction costs as leasehold improvement costs. Furthermore, a chart in the record shows DGS's calculations of present value and reveals that both Bowers and Bachner received more points for price, which constituted sixty percent of the total score, for their existing buildings than McKinley received for its new building. When properly applied, the preferences would have no impact on the choice between offerors. Present value of the cost to the state for Bachner's proposal is $2,601,259, compared to $2,891,335 for Bowers, and $3,736,268 for McKinley.
Bachner's proposal received the maximum 60 points for the price component.
The court concludes that the State had a rational basis for discounting the proposed costs to present value in order to compare the proposals.
V. CONCLUSION AND ORDER
Disability preferences were intended to help employers of disabled persons to compete with businesses not incurring any added expense to accommodate disabled persons. Preferences are applied only during the selection process. Since all three Alaska offerors qualified for the ten percent disability preference, they were not entitled to have a disability preference applied against another offeror in this case. Bachner submitted the highest-scoring proposal and was awarded the lease. Furthermore, application of disability preferences to the price component in this RFP context had a reasonable basis and did not violate applicable statutes. DGS's denial of the appeal on disability preferences was reasonable and not arbitrary.
The State had a rational basis for bifurcating the total lease price into base "lease cost" and "leasehold improvement" cost. Although the RFP could have more clearly defined these terms and the purpose of the categories, the RFP as a whole sufficiently explained the categories, especially in combination with the explanation provided in the contract officer's protest decision. Neither the record nor the outcome of the RFP demonstrate any discrimination against existing buildings. The State's evaluation of price component of the proposals was reasonable and not arbitrary.
Therefore, the court affirms DGS's decisions denying both appeals.
With respect to Bachner, the appeals also could be considered moot, since the State awarded Bachner the contract.
IT IS SO ORDERED. DATED at Fairbanks, Alaska, this 27th day of September, 2004.
/s/ Mark Wood ______________________________ Mark Wood Superior Court Judge