A major dilemma most companies and institutions have struggled with in recent years is the desire to make capital improvements to reduce energy consumption and energy bills, but lacking financing to do so.

To solve these problems, energy service companies (ESCOs), an entire industry unheard of in the United States until a few years ago, have sprung up.

ESCOs invest what are often large sums of money to retrofit buildings, and then share the savings on energy bills with their customers. These programs, really energy conservation systems that includes capital improvements, maintenance, personnel training and emergency services, have operated in the private sector very successfully.

Now the first public sector project will occur here in Washington, when the District government signs an agreement to retrofit five public housing buildings. This project also will be the largest single shared savings contract in housing in the United States, according to Richard Esteves, who managed the conservation program for General Public Utilities Corp., a utility holding company, until recently.

The District government is currently accepting bids from various ESCOs for the project and plans to make final arrangements no later than November, according to Tom Wooden, a branch chief for the Department of Housing and Community Development.

The city anticipates savings of 20 to 40 percent in its energy bills in these buildings, Wooden said. These buildings are Sheridan Terrace, Spodder Terrace, Regency House, Montana Terrace and LeDroit Park.

"There's a massive potential for saving dollars from the energy budget of the city. Right now, there are 12,000 units in Washington with an energy bill of $22 million a year," said Norris McDonald, of the Environmental Policy Institute.

The institute, which is acting as a consultant for this project, researched ESCOs and helped convince the city to test this approach, he said.

"I was trying to discover a solution to the energy problem in multifamily housing" in the early 1980s as part of his job at the institute, McDonald said. "The energy service companies industry is the solution I came up with."

Constraints of cost, the complexity of retrofitting and the tenant-owner conflicts limited energy savings in low-cost, multifamily housing, McDonald said. "The owner has no incentive to put this equipment in the housing because he can pass on the (energy) costs to the tenants. The tenants have no incentive because it's not their property," McDonald said.

ESCOs cut through these problems by providing the financing and know-how, he said.

Savings from the reduced energy bills will be funneled back into these buildings for other improvements, Wooden said.

Both the Defense and Housing and Urban Development departments are investigating the energy service programs and are closely watching the District's project, McDonald said.

ESCOs market two basic kinds of programs, with minor variations: A savings guarantee and a shared savings plan. Although the program might differ, the procedure is fairly standard. After conducting an energy use analysis, the company will develop an estimate of the amount of consumption it can reduce for its customer.

Under a guaranteed savings program, an ESCO will promise, in writing, to lower the number of energy units used by a fixed percentage. Any savings beyond those guaranteed are the company's profits. If the guaranteed savings are not achieved, the ESCO makes up the difference to its customer.

In order to meet the reduction in energy consumption guaranteed, an ESCO must retrofit a facility, which could include replacing or tuning up boilers, adding temperature control gauges to heating and air conditioning units and lighting systems and installing microprocessors.

"The main benefit is, frankly, energy conservation pays well," Esteves said. But "the housing and building stock is so enormous (in the United States) that this approach is not even a blip yet."

Stewart STM and Warner Total Comfort Care Inc., two local companies, offer a guaranteed savings approach. Stewart STM, a partnership of Stewart Oil and Royal Dutch Shell, is one of the oldest ESCOs and has been in business since 1978.

Warner TCC places technicians in each facility to monitor energy consumption. The company sets target reduction levels and any savings beyond the targets are paid to the technician as a bonus, said Jim Betz, Warner TCC president.

The customer cannot lose, said Betz. Reductions in his energy costs are guaranteed in writing and he pays for no capital improvements. "We sell comfort. That's the real key," he said.

Carrollburg Condominiums in Washington, with 425 units, became a customer of Stewart STM in fall of 1980. Stewart has provided energy management services and provided fuel oil to the housing complex, said developer Guy Ciazzio.

While Stewart was managing the energy services for Carrollburg, the project decided to convert to gas fuel from oil and Stewart spent more than $50,000 on equipment, Ciazzio said.

"In the long run, it's saved us money and they have provided us with supplemental services that have benefitted the (condominiums). As an organization, they have been responsive to our needs," he said.

Since it signed its contract with Stewart, Carrollburg Condominiums has saved about $70,000 in energy costs, $60,000 in capital improvements and $55,000 in maintenance and service charges, Esteves said.

A by-product of this kind of arrangement is insurance for companies that guarantee savings. Enertrack Inc., an insurance company based in Richmond, was formed primarily to market energy warranty insurance, according to its owner, Tom Olchefske.

Enertrack has an exclusive arrangement with Markel Service, an insurance brokerage, Olchefske said. Although Markel has offered this insurance for three years, "the program was very slow to take off," and Markel decide to pay a company to market the product for it, he said.

The insurance is "primarily a selling tool" for ESCOs that guarantee savings, he said. If the reductions in energy costs are not achieved by the ESCO, the insurance company pays the difference.

Olchefske said that claims against this insurance have been "surprisingly low considering the pioneering nature of the coverage."

Under the shared savings approach, probably the fastest growing program, the ESCO splits the energy savings with its customers. Typical contracts range from five to 10 years, with a 50-50 split, Esteves said, although seven-to-10 year contracts with larger shares going to the ESCOs are becoming more common.

Houston-based Time Energy Management Inc., which maintains an office in Potomac, Md., is one of the largest shared savings ESCOs in operation; it started out as a producer of software for energy consumption systems, according to company president and founder David Brown.

After finding most companies could not or would not finance major capital improvements for energy conservation, Brown decided to offer financing as part of his company's service. Within the first month of offering this service, Time Energy had 100 clients, Brown said. Currently, it services about 700 clients, he said.

ESCOs employ engineers, former managers of corporate energy programs and computer experts to help operate their programs. And most of the larger companies are internally financed, Esteves said.

Most ESCOs look for clients whose energy bills are more than $100,000 annually, Esteves said. But this could include a total of a chain of stores or a shopping mall.

"Based upon what vendors have told me, between 3,000 and 7,000 facilties are under innovative financing" programs provided by ESCOs, Esteves said.

"We're on the threshold of the proliferation of these types of companies," said Betz. "It will really become the state-of-the-art in management."

When GPU began publishing a directory of ESCOs in June 1982, it listed about 20 companies. In its latest edition, published in March 1983, the list had grown to more than 100, Esteves said.

Spokesmen for both Virginia Electric and Power Co. and Potomac Electric and Power Co. said they encourage their customers to look into these energy service companies.

In an article about energy service companies that ran in the August 27 real estate section, Steuart STM was incorrectly spelled.