Defense Infrastructure: Management Issue Requiring Attention in Utility Privatization

GAO-05-433 Published: May 12, 2005. Publicly Released: May 12, 2005.
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Highlights

Department of Defense (DOD) installations have about 2,600 electric, water, wastewater, and natural gas utility systems valued at about $50 billion. In 1997, DOD decided that utility privatization was the preferred method for improving utility systems and services and the Congress approved legislative authority for privatizing utility systems at military installations with Public Law No. 105-85. Because of the costs and long-term implications of DOD's utility privatization program, GAO reviewed the program to determine (1) the program's status, (2) whether the services' estimates of long-term savings from utility privatization projects are reliable, (3) how DOD implements the fair market value requirement for conveyed utility systems, and (4) whether other issues impact the effectiveness of DOD's execution of the program.

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Recommendations

Matter for Congressional Consideration

Matter Status Comments
On the basis of DOD's comments on our recommendations, Congress may wish to consider requiring DOD to address the issues and recommendations discussed in this report before proceeding with further utility privatization efforts.
Closed – Implemented
In response to our May 2005 report, Defense Infrastructure: Management Issues Requiring Attention in Utility Privatization (GAO-05-433), the Congress modified DOD's utility system conveyance authority and added a reporting requirement on the use of section 2688 of title 10, United States Code, to convey all or part of a utility system. The National Defense Authorization Act for Fiscal Year 2006 requires the Secretary of Defense to submit to congressional defense committees an analysis that demonstrates the economic benefit to the government before entering into a contract for the conveyance of all or part of a utility system. In addition, the act changes the requirement for the Secretary to receive fair market value for each utility system conveyance, limits the contract term to convey utility systems to 10 years unless the Secretary demonstrates that a longer term to be cost effective, and limits the number of systems to be conveyed in fiscal years 2006 and 2007. The act also requires the Secretary issue a report to congressional defense committees on the department's use of the utility system conveyance authority provided in section 2688, title 10. Specifically, the act requires the report to contain a (1) discussion of the methodology used to conduct the economic analyses of proposed utility system conveyances, (2) list of the steps taken to ensure the reliability of the economic analyses, (3) review of the costs and savings resulting from utility system conveyances, (4) discussion of the feasibility of obtaining fair market value, (5) discussion of the effects that permanent conveyance may have on the renegotiate of contracts for utility services, (6) comparison of the value of contracts to permanently convey a utility system versus contracts that include reversion of the system back to government ownership, (7) discussion of the efforts and direction within DOD to oversee implementation and use of the utility system conveyance authority, and (8) discussion of the effect of utility system conveyances on the operating budgets of affected military installations.

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Defense As long as savings are expected to be a key factor in utility privatization decision making, the Secretary of Defense should direct the Deputy Under Secretary of Defense (Installations and Environment) to revise the guidance for preparing economic analyses so that the analyses compare the cost of a proposed privatization contract with the cost of continued government ownership on the basis of the actual planned expenditures and the timing of these expenditures.
Closed – Not Implemented
In comments on the final report, DOD partially concurred with this recommendation. DOD commented that it is developing the modeling tools needed to more accurately predict long-term program requirements. According to DOD, because these tools will allow DOD to more closely align planned expenditures with requirements, this recommendation will be realized. However, according to DOD, until the tools are mature its estimate of the "should cost" to provide utility services at the appropriate standard is the most accurate measure of the projected long-term requirement for a particular system to be retained by the government. DOD stated that it plans to continue to (1) use the appropriate industry standard in determining the long-term costs to the United States for utility services provided by the utility system concerned, and (2) develop tools for better predicting the requirements for providing adequate utilities services. However, DOD did not change its method for preparing the economic analyses and considers this recommendation closed.
Department of Defense The Secretary of Defense should direct the Deputy Under Secretary of Defense (Installations and Environment) to require an independent review, perhaps by DOD headquarters or the services' audit agencies, of the economic analyses supporting proposed privatization projects.
Closed – Implemented
On November 2, 2005, DOD issued supplemental guidance for its utilities privatization program to address the issues raised in our report. Specifically, the supplemental guidance requires DOD components to ensure that independent reviews are conducted of all economic analyses supporting proposed utility privatization projects. At the minimum, the reviews are to verify that all relevant guidance has been met and that the privatization option is in the best interest of the government. The guidance further specifies that for the reviews to be considered independent they are to be performed by personnel with the appropriate analytical expertise and who are independent from the team that conducted the original economic analysis for the source selection authority.
Department of Defense The Secretary of Defense should direct the Deputy Under Secretary of Defense (Installations and Environment) to provide general program guidance emphasizing the need to consider increased utility costs under privatization as the military services prepare their operation and maintenance budget requests.
Closed – Implemented
On November 2, 2005, DOD issued supplemental guidance for its utilities privatization program to address the issues raised in our report. Specifically, the supplemental guidance requires DOD components to consider and plan for increased costs for utility services contracts resulting from potential privatization projects and system conveyance and to prepare operation and maintenance budgets based upon the expected costs under utilities privatization.
Department of Defense The Secretary of Defense should direct the Deputy Under Secretary of Defense (Installations and Environment) to place greater scrutiny on the implementation of the fair market value requirement in proposed contracts to minimize cases where contractors recover more than the amounts they paid for system conveyances.
Closed – Implemented
On November 2, 2005, DOD issued supplemental guidance requiring each procurement contracting agency to publish standard operating procedures that incorporate the military department's guidance for establishing fair market value of utility systems being considered for privatization.
Department of Defense The Secretary of Defense should direct the Deputy Under Secretary of Defense (Installations and Environment) to issue program guidance, specific to utility privatization, emphasizing the importance of contract oversight.
Closed – Implemented
On November 2, 2005, DOD issued supplemental guidance for its utilities privatization program to address the issues raised in our report. Specifically, the supplemental guidance requires the Defense Energy Support Center--the DOD contracting center of expertise for utility privatization--to develop specific pre-award and post-award procurement procedures for the effective management of utilities services contracts resulting from utilities privatization. In addition, the guidance requires the Center, in coordination with the Defense Acquisition University, to develop a training program for all contracting officers and DOD components involved in utilities privatization.
Department of Defense The Secretary of Defense should direct the Deputy Under Secretary of Defense (Installations and Environment) to reassess whether permanent conveyance of utility systems should be DOD's preferred approach to obtaining improved utility services.
Closed – Implemented
DOD concurred with this recommendation and stated that it had reassessed this issue since our prior report on utilities privatization. Consequently, most utility services contracts resulting from a utility conveyance includes a contract clause that provides an option for the government to purchase the system at the end of the contract period. According to DOD officials, where conveyance with a full title transfer is uneconomical, the DOD components have been encouraged to consider conveyance of a lesser estate if it will reduce long-term costs to the government.
Department of Defense The Secretary of Defense should direct the Secretaries of the military departments to ensure that installation operations and maintenance budgets are adjusted as necessary to reflect increased costs from utility privatization projects.
Closed – Implemented
On November 2, 2005, DOD issued supplemental guidance directing DOD components to prepare operation and maintenance budgets based upon the expected costs under utilities privatization. If significant shortfalls are anticipated that will impact utilities privatization, the components are required to notify the Deputy Under Secretary of Defense (Installations and Environment) during the annual program review or earlier, as appropriate.
Department of Defense The Secretary of Defense should direct the Secretaries of the military departments to issue specific utility privatization contract administration guidance including the clear assignment of responsibilities and ensure that resources are provided to perform adequate contract oversight.
Closed – Implemented
On November 2, 2005, DOD issued supplemental guidance for its utilities privatization program to address the issues raised in our report. Specifically, the supplemental guidance requires the Defense Energy Support Center to develop specific pre-award and post-award procurement procedures for the effective management of utilities services contracts resulting from privatization. DOD's supplemental guidance also requires that the procedures for transferring contract administration from the Procuring Contract Office to a Contracting Administration Office follow the Federal Acquisition Regulations and be coordinated with the DOD component soon after the source selection authority decision. The guidance also directs the Contracting Administration Office to coordinate with the Procurement Contracting Officer and the DOD component to ensure that contract administration efforts are adequately resourced.

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