In re Choctawhatchee Electric Cooperative, Inc. (agency decision, June 14, 2019)

Plain-English summary

Choctawhatchee Electric Cooperative received a 50-year contract to buy, operate, maintain, and upgrade the electrical system at Eglin Air Force Base. It argued that Davis-Bacon did not apply because the cooperative would own the infrastructure and the government was not directly hiring construction contractors. The Board found that the contract called for substantial, separable construction and that federal payments would heavily, if not fully, fund more than $150 million in upgrades over time. The system served a federal military base, and government title was not required for a publicly funded work serving the public interest. The Board affirmed application of Davis-Bacon prevailing-wage and labor standards to the construction work.

Decision snapshot

• Cited authorities: 40 U.S.C. § 3142; 29 C.F.R. §§ 5.2, 5.13, and 7.1
• Outcome: Wage and Hour Administrator's Davis-Bacon coverage determination affirmed.
• Key point: A privatized military utility remains a Davis-Bacon public work when the contract calls for substantial construction funded by the government to serve the base.

Full text (DOL official public release)

U.S. Department of Labor Administrative Review Board
200 Constitution Avenue, N.W.
Washington, D.C. 20210

  In the Matter of:

  CHOCTAWHATCHEE ELECTRIC                          ARB CASE NO.   2017-0032
  COOPERATIVE, INC. (“CHELCO”)

  With respect to the applicability of     DATE: June 14, 2019
  the Davis-Bacon Act, 40 U.S.C. §§ 3141-
  3148, to the U.S. Government’s
  Solicitation, acting through the Defense
  Logistics Agency to privatize
  the electrical distribution system
  at Eglin Air Force Base



  Appearances:

  For the Petitioner Choctawhatchee Electric Cooperative, Inc.:
        Benjamin L. Willey, Esq.; Law Offices of Benjamin L. Willey;
        Salisbury, Maryland

  For the Administrator, Wage and Hour Division:
        Nicholas C. Geale, Esq., Jennifer S. Brand, Esq., Jonathan T.
        Rees, Esq., Sarah Kay Marcus, Esq.; United States Department
        of Labor, Washington, District of Columbia

  Before: William T. Barto, Chief Administrative Appeals Judge; James A.
  Haynes and Daniel T. Gresh, Administrative Appeals Judges.

                          FINAL DECISION AND ORDER

         PER CURIAM. This case arises under the provisions of the Davis-Bacon Act
  (DBA), 40 U.S.C. § 3141 et seq. (2006), and the applicable implementing regulations
  at 29 C.F.R. Parts 1, 3, 5, and 7 (2016).



         On January 18, 2017, the Administrator of the U.S. Department of Labor’s
  Wage and Hour Division (the Administrator) determined that the DBA’s prevailing
  wage and labor standards apply to the construction component of Eglin Air Force
  Base (Eglin AFB)’s electrical system privatization contract. The Choctawhatchee
  Electric Cooperative, Inc. (CHELCO) petitioned the Administrative Review Board
  (ARB or Board) to review the Administrator’s final ruling pursuant to 29 C.F.R.
  Parts 5, 7. For the reasons that follow, we affirm the Administrator’s final ruling
  that the DBA’s prevailing wage and labor standards apply to Eglin AFB’s electrical
  utility privatization contract.



                                      BACKGROUND

     A. Eglin AFB’s Privatization Solicitation and Contract Award

         On September 28, 2012, the Defense Logistics Agency (DLA) issued a
  solicitation for the privatization of Eglin AFB’s utility systems including its
  electrical system. At the time of the solicitation, Eglin AFB owned most of its
  electrical distribution and transmission infrastructure, but four private utilities,
  one of which was CHELCO, generated the electricity.

         DLA’s solicitation for privatization asked bidders to identify the capital
  improvements necessary to bring the electrical system on the base up to industry
  standards. Administrator’s Decision (Admin. Dec.) at 1-2. Proposed upgrades
  included both Initial System Deficiency Corrections (ISDC) and annual System
  Deficiency Corrections (SDC).

         The privatization solicitation consisted of two parts: a bill of sale for the
  infrastructure and a utility services contract extending over a fifty-year period.
  Under the terms of the solicitation, the successful awardee would have the
  responsibility to own, operate, and maintain the electrical utility and its
  infrastructure. Eglin AFB would retain access to the utility infrastructure conveyed
  to the private awardee and ownership of the land beneath it. The McNamara-
  O’Hara Service Contract Act (SCA), 41 U.S.C. § 6701 et seq. (2011), governs the
  services contract for the operation and maintenance of the system. On August 29,
  2014, DLA amended the solicitation to include DBA requirements for the capital





  upgrades involving construction, alteration, or repair of buildings. As amended, the
  DBA applies to ISDCs, SDCs, and other capital upgrades. Admin. Dec. at 2.

         CHELCO submitted its bid on March 5, 2013, and on September 14, 2016, it
  was awarded the contract to privatize electricity service at Eglin AFB. The
  privatization contract provided that CHELCO is purchasing the utility from the
  government using a billing credit in excess of $30 million to be recouped from
  government fees. The government agreed to pay CHELCO a utility services charge
  including “operations and maintenance,” “renewals and replacements,” and
  “purchase price recovery charge” fees. Admin. Dec. at 2-3. The contract requires $18
  million for ISDC projects and capital upgrades, including the construction of a $10
  million underground line. Most of the capital improvements fall in the “renewal and
  replacement” category. Admin. Dec. at 3. Over the fifty-year period, the renewal and
  replacement fees were estimated to reach $165 million.

        On April 22, 2016, CHELCO requested a ruling from the Administrator on
  the applicability of the DBA in light of the D.C. Circuit’s ruling in District of
  Columbia v. Dept. of Labor, 819 F.3d 444 (D.C. Cir. 2016) (hereinafter
  CityCenterDC). Citing CityCenterDC, CHELCO argued that the privatization of
  Eglin AFB’s utility was not a “contract for construction of a public work” under the
  DBA. Instead, CHELCO contended that because the contractor will own the facility
  and the government will not finance the construction, the contract does not fall
  within the provisions of the DBA. Even if the contract did involve public funding,
  CHELCO argued that the lack of government ownership precludes the contract
  from being a “public work” subject to the DBA.

     B. Administrator’s Decision

         On January 18, 2017, the Administrator determined, contrary to CHELCO’s
  arguments, that the Eglin AFB electric privatization contract was a contract for
  construction of a public work subject to the DBA. Admin. Dec. at 4. The
  Administrator identified substantial construction in support of the conclusion that
  there was more than an incidental amount of construction involved in the
  performance of the privatization. The Administrator also pointed to extensive
  government funding, including nonrecurring costs, lump sums, and amortized costs
  and referenced over $150 million in capital expenditures to be paid over the course
  of several years. Admin. Dec. at 5. CHELCO now appeals the Administrator’s
  decision to the ARB.



                       JURISDICTION AND STANDARD OF REVIEW

         Contracting agencies “ha[ve] the initial responsibility for determining
  whether a particular contract is subject to the Davis-Bacon Act,” but disputes about
  such coverage are subject to administrative review by the Department of Labor
  (DOL). Univ. Research Ass’n, Inc. v. Coutu, 450 U.S. 754, 760 (1981); see 29 C.F.R. §
  5.5(a); North Georgia Bldg. Const. Trades Council v. Goldschmidt, 621 F.2d 697 (5th
  Cir. 1980). The DOL’s review is conducted initially by the DOL’s Wage and Hour
  Administrator, 29 C.F.R. § 5.13, but a decision by the Administrator may be
  appealed to the ARB, which then renders the final agency decision on the matter.
  Secretary’s Order 01-2019 (Delegation of Authority and Assignment of
  Responsibility to the Administrative Review Board), 84 Fed. Reg. 13072 (Apr. 3,
  2019); 29 C.F.R. §§ 7.1, 7.9; CityCenterDC Project, ARB Nos. 11-074, -078, -082, slip
  op. at 8 (ARB Apr. 30, 2013).

         The ARB’s review of the Administrator’s final ruling is in the nature of an
  appellate proceeding and the Board “will not hear [factual] matters de novo except
  upon a showing of extraordinary circumstances.” 29 C.F.R. § 7.1(e). The ARB will
  assess the Administrator’s rulings to determine whether they are consistent with
  the DBA and its implementing regulations, and are a reasonable exercise of the
  discretion delegated to the Administrator to implement and enforce the DBA.
  William J. Lang Land Clearing, Inc., ARB Nos. 01-072, -079; ALJ Nos. 1998-DBA-
  001, -006 (ARB Sept. 28, 2004)). “In considering the matters within the scope of its
  jurisdiction,” the Board acts “as fully and finally as might the Secretary of Labor.”
  29 C.F.R. § 7.1(d); see Griffin v. Reich, 956 F. Supp. 98, 104 (D.R.I. 1997).



                                       DISCUSSION

         A. Davis-Bacon Act’s Statutory and Regulatory Framework

         The DBA was enacted in 1931 to insure that federal construction projects did
  not undercut local wages and benefits. As amended, the DBA sets forth the criteria
  for contract coverage as follows:





         (a)   Application – The advertised specifications for every contract in
         excess of $2,000, to which the Federal Government or the District of
         Columbia is a party, for construction, alteration, or repair, including
         painting and decorating, of public buildings and public works of the
         Government or the District of Columbia that are located in a State or in
         the District of Columbia and which requires or involves the employment
         of mechanics or laborers shall contain a provision stating the minimum
         wages to be paid various classes of laborers and mechanics.

         (b)    Based on prevailing wage – The minimum wages shall be
         based on the wages the Secretary of Labor determines to be prevailing
         for the corresponding classes of laborers and mechanics employed on
         projects of a character similar to the contract work in the civil division
         of the State in which the work is to be performed, or in the District of
         Columbia if the work is to be performed there.

  40 U.S.C. §§ 3142(a), (b). Accordingly, a covered contract must be in excess of $2,000
  and for “construction, alteration, or repair, including painting and decorating, of
  public buildings and public works.” 40 U.S.C. § 3142(a). The purpose of the DBA’s
  prevailing wage provisions is “not . . . to benefit contractors, but rather to protect
  their employees from substandard earnings by fixing a floor under wages on
  Government projects.” United States v. Binghamton Const. Co., 347 U.S. 171, 177
  (1954).

         Under the DBA’s implementing regulations, the term “contract” means “any
  prime contract which is subject wholly or in part to the labor standards provisions .
  . . and any subcontract of any tier thereunder, let under the prime contract.” 29
  C.F.R. § 5.2(h). The term “building or work” includes construction activity that
  encompasses “without limitation” buildings, structures, and improvements of all
  types. 29 C.F.R. § 5.2(j). The terms “construction, prosecution, completion, or
  repair,” mean “[a]ll types of work done . . . on a particular building or work.” Id.
  Under this definition, work includes “altering, remodeling, installation (where
  appropriate) on the site of the work of items fabricated off-site,” “painting and
  decorating,” and transporting materials and supplies to or from the building. . . . 29
  C.F.R. § 5.2(j)(1). The terms “public building” or “public work” include any “building
  or work, the construction, prosecution, completion, or repair of which . . . is carried
  on directly by authority of or with funds of a Federal agency to serve the interest of
  the general public regardless of whether title thereof is in a Federal agency.” 29
  C.F.R. § 5.2(k). Under these regulatory definitions, the DBA covers a work when it





  is demonstrated that: (1) there is a “contract,” (2) the contract is “for construction,”
  and (3) the construction is for a public building or public work.

         B. The Privatization Contract Agreement between Eglin AFB and
            CHELCO Constitutes a “Contract” “for Construction” within the
            Meaning of the DBA

         It is effectively undisputed that Eglin AFB’s privatization contract involves
  substantial construction upgrades. The privatization agreement includes large
  payments for “more than an incidental amount of” alteration and construction in
  ISDCs, SDCs, and renewal and replacement. Admin. Dec. at 6; see In re Crown
  Point, Ind. Outpatient Clinic, WAB No. 86-33, slip op. at 3 (June 26, 1987), aff’d sub
  nom., Bldg. and Constr. Trades Dep’t, AFL-CIO v. Turnage, 705 F. Supp. 5 (D.D.C.
  1988); In re Military Housing, Fort Drum, N.Y., WAB No. 85-16 (Aug. 23, 1985)..
  But this does not end our analysis. When a federal agency enters directly into a
  contract with a construction firm to construct a public building or public work that
  the federal government will own, the application of the DBA ordinarily is clear.
  However, when agencies use other financing or contractual methods for acquiring
  spaces or structures that will be used for public purposes (e.g., leases), the question
  of DBA coverage becomes more complicated.

         In a 1994 U.S. Department of Justice, Office of Legal Counsel (OLC) Opinion,
  the OLC considered the question of whether a lease-construction contract, providing
  for the federal government to lease a property from a private developer who then
  contracts for construction under the federal government’s direction, was covered
  under the DBA. The OLC concluded that “contracts . . . for construction” for
  purposes of DBA coverage are not limited to contracts entered into directly with a
  construction contractor; it is sufficient if the federal contract or lease under which
  the work is done “call[s] for the construction of a public work.” 18 U.S. Op. Off.
  Legal Counsel 109, 113, 1994 WL 810699, at 4. Opining for analysis on a case-by-
  case basis, the OLC suggested several factors to assist in determining whether a
  lease-construction contract requires Davis-Bacon wages. The factors include the
  length of lease, the degree of federal control over design and construction, the public
  use of the final project, the extent to which the government’s lease payments fully
  pay for the construction, and the absence of a bad-faith purpose to avoid Davis-
  Bacon requirements. 1994 WL 810699 at n.10. The OLC opinion also noted that the
  typical lease-construction contract resembled a public building’s “contract . . . for
  construction” because the federal government required construction designed to its



  specifications even though it was not identified as a party to the construction
  contract itself. The DOL adopted the factors cited in the 1994 OLC Opinion in All-
  Agency Memorandum 176 (June 22, 1994) (AAM 176).

         Analyzing prior cases and the 1994 OLC Opinion, the ARB has affirmed the
  Administrator’s decision that a fifteen-year lease specifying the development and
  construction of a privately owned building for the U.S. Department of the Interior to
  use was a “contract . . . for construction” and therefore covered under the DBA. In re
  Phx Field Office, Bureau of Land Mgmt., ARB No. 01-010, slip op. at 8-9 (ARB June
  29, 2001). The ARB considered the public use of the building during the fifteen-year
  lease significant and discounted the significance of the potential private use of the
  building after the expiration of the lease. Id. at 10. Applying AAM 176’s factors, the
  ARB recognized that the lease payments would pay the full cost of the construction
  during the first ten years of the building’s projected forty-year life span, which the
  Board identified as a fact which “strongly supports” the Administrator’s conclusion
  that the Department of Interior’s lease was a “contract . . . for construction” under
  the DBA. Id. at 11.

        In CityCenterDC, the ARB rejected an argument that the District of
  Columbia had not entered into a “contract” “for construction” because the District’s
  contracts were with a developer rather than directly with a construction contractor.
  Quoting the Administrator, the ARB made the following comment:

         These are precisely the types of arguments that the Board has rejected
         in decisions such as Phoenix Field Office, Fort Drum, and Crown Point,
         all of which make clear that a government lease agreement that
         ‘contemplates construction activity’ qualifies as a contract for
         construction under the DBA even when a government agency is not a
         party to the contract with the construction contractor.

  CityCenterDC Project, ARB Nos. 11-074, -078, -082, slip op. at 11-12 (citations
  omitted).

        The developers and the District appealed the ARB’s decision to the United
  States District Court for the District of Columbia. The district court set aside the
  ARB’s decision, finding that the contract was not a public work. District of
  Columbia v. Dep’t of Labor, 34 F. Supp.3d 172 (D.D.C. 2014). The government
  appealed the district court’s decision to the United States Court of Appeals for the
  D.C. Circuit. Affirming the district court, the D.C. Circuit sharply challenged the



  DOL’s approach to interpreting the DBA’s “contract . . . for construction” language,
  but reserved a final determination on DOL’s lease-construction contract because it
  concluded that CityCenter was not comparable to a lease-construction contract in
  several respects. CityCenterDC, 819 F.3d 444 (D.C. Cir. 2016).

         Following the D.C. Circuit’s CityCenterDC opinion, the DOL issued All-
  Agency Memorandum 222 (January 11, 2017) (AAM 222). AAM 222 announces that
  the WHD will continue to apply the DBA to military privatization projects when
  those projects call for construction, even though the federal government is not
  directly a party to the construction contract:

         As another example, DOD is permitted to privatize utility systems (such
         as systems that generate and supply electric power or treat or supply
         water), by conveying such systems to a private entity.[1] Such
         arrangements may include both the government's receipt of the utility
         system's services, see id. § 2688(c)(l)(B), (c)(2), and "a contribution
         toward the cost of construction, repair, or replacement of the utility
         system by the entity to which the utility system is being conveyed," id.
         § 2688(h). If an arrangement conveying a utility system does indeed
         contemplate construction and involve public funding for the
         construction (whether the payments are made directly in exchange for
         construction or indirectly through, for example, payments for utility
         services that exceed the cost of the services unrelated to construction),
         the requirements for DBA coverage will be met.

  Id. at 11. The ARB recognizes that the Administrator may issue legislative and
  interpretive rules to implement the statutes within the Administrator’s
  responsibility, and the Board has held that AAMs are interpretative rules. In re U.
  S. Army, All-Agency Memorandum No. 157, ARB No. 96-133 (ARB July 17, 1997).
  The Board relies upon or affirms AAMs if they are a reasonable interpretation of
  the DBA. Id. at 7, citing Patton-Tully Transp. Co., WAB Case No. 93-13 (May 6,
  1994); see also In re Cent. Energy Plant, ARB No. 01-057 (ARB Sept. 30, 2003). AAM
  222 applies the factors and reasoning articulated in the 1994 OLC letter, and we
  conclude that the AAM is a reasonable interpretation of the DBA’s coverage
  position.



  1      The 1998 National Defense Authorization Act permits “conveyances” of utility
  infrastructure on military bases to distribute the construction costs through privatization
  and reimbursement. P.L. No. 105-85, § 2812 (1997); 10 U.S.C. § 2888(h).



         The issue in the privatization contract in this matter resembles the issue
  argued in CityCenterDC in that Eglin AFB will not be a party to the actual
  construction contracts to upgrade and improve upon the electrical infrastructure.
  However, the controversial facts present in CityCenterDC are not at issue in Eglin
  AFB’s privatization. In CityCenterDC, the District of Columbia leased to the private
  developers and the lease payments went to the District of Columbia. Moreover, the
  factors identified in the 1994 OLC Opinion were not present in CityCenterDC, and
  several factors distinguish the contract under review here: the federal government
  is heavily if not fully funding the construction upgrades and improvements; Eglin
  AFB’s privatization calls for a fifty-year contract after which time the federal
  government may reacquire ownership; and the primary use of the privatization
  contract is for CHELCO to supply electricity to Eglin AFB, a military reservation
  administered by the federal government. For these reasons, we affirm the
  Administrator’s decision that CHELCO’s privatization contract calls for significant
  and segregable construction and constitutes a “contract . . . for construction” for
  purposes of requiring DBA wages and benefits.


         C. The Eglin AFB Privatization Project Constitutes a “Public Work”
            within the Meaning of the DBA

         As CHELCO’s construction upgrades and improvements to Eglin AFB’s
  electrical utility infrastructure do not involve a public building, 2 the issue here is
  whether CHELCO’s construction constitutes a “public work” for purposes of the
  DBA requirements.

         The term . . . public work includes building or work, the construction,
         prosecution, completion, or repair of which, as defined above, is carried
         on directly by authority of or with funds of a Federal agency to serve the
         interest of the general public regardless of whether title thereof is in a
         Federal agency.

  29 C.F.R. § 5.2(k). The terms “building or work” include works such as bridges,
  dams, plants, highways, sewers, railways, airports, excavating, and landscaping. Id.
  § 5.2(i).


  2   Ownership of the buildings and equipment will have shifted almost entirely to
  CHELCO, a private entity, under the privatization contract.



         In CityCenterDC, the ARB determined that CityCenter was a “public work”
  notwithstanding that it was privately funded, privately constructed, privately
  owned, and privately used. The ARB reasoned that a work can be a public work for
  DBA purposes if it serves the public interest, even though the construction was not
  publicly funded and the government does not own, operate, occupy, or use the final
  project. The ARB relied upon factors such as the District of Columbia’s enabling
  legislation, the long-term lease (from the District of Columbia to the developers),
  and the District’s control over CityCenter’s design, construction, and maintenance.
  The ARB concluded that the DBA’s regulations do not require that a public work
  “primarily” serve the public in order to be considered a public work to which the
  DBA applies as long as the public is served in some manner. CityCenterDC Project,
  ARB Nos. 11-074, -078, -082, slip op. at 13-14 (footnotes omitted).

         As previously noted, the district court set aside the ARB’s decision. Affirming
  the district court, the D.C. Circuit ruled that a “public work” must contain at least
  one of two characteristics, determining that the CityCenter project possessed
  neither: (i) public funding for the construction or (ii) government ownership or
  operation of the completed facility. CityCenterDC, 819 F.3d at 446 n.2, 452-53. The
  CityCenterDC opinion reserved determining whether both characteristics were
  necessary.

        Addressing the gap left by the D.C. Circuit’s CityCenterDC decision,
  CHELCO argues that both “public funding” and “government ownership” are
  required for “public works.” It thereby urges the Board to resolve a question the
  D.C. Circuit did not reach.

                  i.   Public Funding of the Construction Upgrades

        Like the District of Columbia in CityCenterDC, Eglin AFB owns the land
  beneath the property that is being conveyed. But unlike the District of Columbia in
  CityCenterDC, Eglin AFB is paying for the construction in lump sums under the
  contract, through utility-charge fees, and through various other payments to
  CHELCO. The privatization contract provides for financing from Eglin AFB
  including over $150 million in “replacement and renewables” and large ISDCs and
  SDCs. Furthermore, the privatization contract specifies that Eglin AFB will
  reimburse CHELCO’s initial billing credit through “purchase price offset” fees
  which the government will pay to CHELCO.



          This case is readily distinguishable from CityCenterDC because of the value,
  the duration, and the variety of federal funding of the work CHELCO has
  contracted to perform. Therefore, the Administrator’s determination that Eglin
  AFB’s contract for privatization included substantial public funding for construction
  is affirmed.

                  ii.   Government Ownership or Operation of the Completed Facility

         CHELCO also urges the Board to conclude that “public work” requires
  government use or ownership and emphasizes that, by the terms of the contract,
  CHELCO owns the utility infrastructure and is responsible for its use and
  maintenance. The Administrator counters that government ownership is not a
  statutory requirement to be considered a “public work.” AAM 222, issued in
  response to the D.C. Circuit’s CityCenterDC, advises that the WHD will not treat
  government ownership as a prerequisite to be considered a “public work” because
  the “interest of [the] general public” may be met without government “title.” AAM
  222, at 8, citing 29 C.F.R. § 5.2(k). We note that the factors which can establish
  government ownership under the DBA extend beyond evidence of title and deed, but
  can include ownership, occupancy, and use of the final project even in the absence of
  the federal government being listed as an owner on the relevant legal documents.
  AAM 222 at 9-10; CityCenterDC, 819 F.3d at 452-53. As we stated above, we
  conclude that AAM 222 is a reasonable interpretation of the DBA’s requirements
  and find no grounds to disturb the Administrator’s interpretation of “public work.” 3




  3       The Administrator contends in the alternative that even if federal government
  ownership is considered a requirement for DBA coverage of a “public work,” there are
  several indicia of federal government ownership present in CHELCO’s privatization of the
  Eglin AFB electrical utility. Although not necessary for the resolution of this matter, we
  agree. The public entanglement between CHELCO and Eglin AFB under the instant facts
  is extensive. The utility sits on a closed military base. Eglin AFB retains control through a
  “web of servitudes and contractual obligations” including control of access to the base,
  shared access to the base’s infrastructure, the federal government’s permission to provide
  utilities to others outside the base, and the federal government’s possible reacquisition of
  the infrastructure after the expiration of the contract. More importantly, the “government
  use” component of public-work status is met by the fact that the utility’s electricity output
  provides electrical service to Eglin AFB.





                                     CONCLUSION

         For the foregoing reasons, the Administrator’s determination that that
  construction and improvements at Eglin AFB under the contract at issue are
  subject to the Davis-Bacon Act’s prevailing wage and labor standards provisions is
  correct in fact and law and is hereby AFFIRMED.

         SO ORDERED.