Number: 99-04
Date: February 22, 1999
The Power Struggle: Army plugs into utility privatization savings//
By Linda James
As the competition heats up for a piece of the ever-shrinking budget pie, as Army personnel numbers continue to decline, as aging infrastructure puts increased demand on dwindling operations and maintenance dollars, the Army must find a better way, a cheaper way, to meet its mission without sacrificing support to the soldier. One Army answer is to put its limited resources into the business of fighting and winning wars and turn over much of the day-to-day business of operating and maintaining installations to the private sector.
Utility Privatization
Among the many initiatives the Army has sought to turn over to the private sector is utility privatization.
Under privatization, the Army becomes a customer who buys utilities services from a regional or municipal utility or a qualified investor-owned company. The utilities are electric, water, natural gas and sewer; however, according, to Carey Klug, a key player in the Army’s privatization initiative, there is often some confusion about what is actually being privatized.
"What we’re talking about is the distribution system – the buildings, the pipes, the wires – not the energy commodity itself," clarified Klug. Klug heads up the Privatization Team at the U.S. Army Engineering and Support Center, Huntsville, Ala. This Corps of Engineers organization has led the way helping Army installations implement the Defense Reform Initiative Directive to privatize utilities.
The initial directive, dated November 1997, established a deadline of Jan. 1, 2000, for the privatization of all utilities. But, Klug said, that recently changed when the directive was expanded to include all overseas installations as well as all stateside active Army, Reserve and Guard sites. The number of installations went from 500 to 2,000. Defense Reform Initiative #49, Dec. 23, 1998, established a new timeline extending the original deadlines by more than 3 and 1/2 years. The new directive moves the deadline for awarding privatization contracts from Jan. 1, 2000, to Sept. 30, 2003, and adds two interim milestones. By Sept. 30, 2000, the services must determine for which systems they will pursue privatization, and by Sept. 30, 2001, they must have released all solicitations for those systems.
Klug said the extension is necessary for lots of reasons. For instance, current Federal Acquisition Regulations limit the length of a utility service contract to ten years. "Ten years just isn’t long enough for most companies to make cost effective proposals," explained Klug. "And, if it’s not cost effective, the Army won’t privatize." Not cost effective for the Army is one of only two reasons to exempt a site from privatization. The other is for certain security considerations. The government, said Klug, is in the process of seeking, and expects to receive, relief from the ten-year rule. In fact, Department of the Army announced at the Worldwide Energy Conference held in January that legislation is going forward to provide for a 50-year contract term.
FORSCOM leading the way
U.S. Army Forces Command, one of the Army's largest "land owners," has led the way in the Army on utility privatization at its numerous installations. According to Adrian Gillespie, FORSCOM energy manager, several systems were already privately owned as a result of command actions taken in the 1980's; however, the scope of the effort to privatize the remaining systems would still be significant. "We are very pleased with progress to date," said Gillespie. "Utility privatization is a complex transaction with many implications, both immediate and long term. We feel it's most important to take the time necessary to develop any privatization solicitations so that the Army's interests are fully protected."
Since the original directive came out in 1997, FORSCOM enlisted the help of Klug's agency, Huntsville Center, to initiate a process to privatize utilities at FORSCOM installations.
Huntsville Center's innovative contracting experience and technical expertise in engineering, energy, and utilities provided a solid foundation for developing a process to support installations. According to Klug, the Privatization Team was breaking new ground, and during the last two years, the process has evolved into four phases.
Phase 1 - Initial Interest.
The first phase determines if a business or local organization is interested in operating and maintaining the installation's utility distribution system. This is done in a variety of ways ranging from simply talking with potentially interested utility service providers to placing a notice in Commerce Business Daily asking potential providers to express interest. But before a Request for Proposal is issued, significant work must be done, including an environmental baseline study, development of real estate documents for easements, and technical and cost data collection. Klug said, a life cycle cost analysis and cost of service study is completed to provide the information necessary to determine if privatizing the utility is cost effective.
If there is at least one interested provider and the subsequent studies indicate that privatization should be pursued, the solicitation phase begins.
Phase 2 - Solicitation.
If more than one interested provider is identified in Phase 1, the Federal Acquisition Regulation requires the Army to conduct a full and open competition. Normal competitive utility service contract procedures are used during the solicitation phase. That is, a Request for Proposal is placed in Commerce Business Daily, and the proposals are reviewed and evaluated by a source selection board using technical capability, past performance and cost/price as the evaluation criteria. Then, negotiations are conducted with potential utility providers before a recommendation is made to the installation or garrison commander. The command's higher headquarters must review all privatization packages, and the Secretary of the Army must approve any request for award or for an exemption. If it is a contract award, Congress must also receive a 21-day notification of the action. "Huntsville Center's recommendation will either be for a provider who can give the best technical support to the installation at a cost equal to or below the independent government estimate; or, if no provider can meet the requirements identified in the Defense Reform Initiative Directive, that is, the proposal can't be greater than 110 percent of the government estimate, then the recommendation will be to request an exemption based on the condition that it is uneconomical at this time," explained Klug. The installation would receive a five-year waiver and then must re-evaluate privatization at the end of that time.
The last step to this phase is the award of the contract. According to Klug, if Huntsville Center is supporting the installation through this process, the Center will award the contract and then transfer it to the installation's director of contracting.
Phase 3 - Transfer utility.
At this point, the installation transfers ownership to the utility provider who begins to operate, maintain, upgrade and improve the utility distribution system to industry standards for the installation. But, the Army's responsibility doesn't end here.
Phase 4 - Monitor contract.
Because utilities are critical to the operation and readiness of Army installations, the installation will remain a critical part of the success of this program by monitoring the performance of the contractor, said Klug.
Challenges
While the program has tremendous merit for the Army in light of the savings both in terms of people resources and the drain on limited operations and maintenance dollars, Klug said the program has its challenges. "Legislative relief for some of the contractual issues will help; however, developing a utility service contract that 'fits' this entirely new process has given Huntsville Center an edge," she explained. Huntsville Center's Privatization Team discovered that the typical utility service contracts being used by the Army -- Firm Fixed Price or Cost of Service -- both had benefits and disadvantages, but no one contract did it all. Klug credits the expertise of the Privatization Team members with developing an alternative to this contracting challenge. "Plyler McManus and Marc Allen of Huntsville Center had the experience and the technical expertise to pair the best of both contracts into a new contracting vehicle well-suited for this program," said Klug. The Firm Fixed Price with Cost Adjustments, also called Added Facilities, approach combines the benefits without the pitfalls, she explained.
Klug said this is just one of many lessons learned by Huntsville Center in the few years they have invested in utility privatization, but she maintains they have only just begun. By the year 2000, the Huntsville Center team is on tap to complete the privatization process for 18 different utility systems at Fort Stewart/Hunter Army Airfield, Ga.; Fort Campbell, Ky.; Fort Bragg, N.C; and Fort Carson, Colo. But that's just the tip of the iceberg considering several hundred Army installations worldwide must complete the privatization process by 2003. According to Klug, the key to making that deadline will be sharing information. "Many installations will tackle this effort on their own; others will seek out help from the few who are doing this type of work. However, the field is so new, the best thing we can do for the Army is talk to each other," she said. "Huntsville Center is just a phone call away."
Huntsville Center will be even more involved in the utility privatization process when the Corps of Engineers Center for Public Works completes a reorganization this year and moves the Army Power Procurement Office to Huntsville. Currently, the Center for Public Works is involved in the beginning and the end of the process providing general policy guidance, contracted study support, legal advice, and approval of final privatization decisions. Huntsville Center and some Corps geographic Districts are in the middle of the process providing the technical support, solicitations, and real estate documentation. Once the Center of Public Works reorganizes, Huntsville Center's new Installation Support Center of Expertise will be involved from beginning to end along with support from Corps geographic Districts. "It will truly be a one-door-to-the-Corps concept," said Klug.
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