•  

  •  

 

Utility Privatization—Success in Key West

Utility privatization offers military installations a long-term solution for sustaining important infrastructure systems and the services they provide to base personnel and operations.

 

By  Jeffrey S. Sorenson, P.E., CFM, DBIA, M.SAME, and Sondra Retzlaff, M.SAME  

   


 

Military infrastructure continues to age and need repair, but funding limitations present tough choices for installation commanders and service leadership.

Utility systems directly support the mission and contribute to the quality of life for assigned personnel and their families. However, all too often, the utility systems suffer by comparison to other necessary investments. Most accounts required to sustain and modernize utility infrastructure are underfunded, with needed upgrades treated secondary to necessary weapons systems. And because utilities systems are generally unseen, remaining funds are often used for base facilities due to the perception that visibility implies importance.

  

GAINING EFFICIENCIES

The Department of Defense (DOD) sought a solution that would offer the best value and efficiency to maintain a state of readiness while also allowing for upgrades and improvements to infrastructure. The National Defense Authorization Act of Fiscal Year 1998 authorized DOD to transfer ownership of utility systems and added the legislative authority under 10 U.S.C. 2688. This was followed by the Defense Reform Initiative Directive #9 in December 1997, which directed military departments to privatize electric, gas, water, and wastewater systems. If a system privatization was not economical or presented a security issue to the installation, it could be exempted. At the program’s outset, DOD owned 2,600 utility systems valued at $50 billion.

Privatizing on-base utility systems means they are sold to private or other public enti­ties. The purchasing entity assumes the responsibility to operate and maintain the systems. The military installation enters into a utility service contract that can be in effect for up to 50 years, generally under a rate structure that offers greater predict­ability of costs. Under the contract, the government remains the owner of the land surrounding the utility. Access is provided via some form of right-of-way.

The privatization procurement process was, and continues to be, complex. To prepare the request-for-proposal requires extensive collection of technical data and utility systems details. Entities can propose on some or all available systems in a request-for-proposal, and the evaluation process for the government to determine the best-value offeror for each is complicated. An initial goal of privatizing all DOD installation utility systems by Jan. 1, 2000, proved unre­alistic. Further attempts to meet revised goals have also proven unsuccessful. Today, the Office of the Deputy Undersecretary of Defense reports the military departments continue to move forward to privatize utili­ties—although no specific goals are in place for completing the program.

Despite the challenges, privatization is yielding successes, including efforts by the U.S. Army and U.S. Air Force through the Defense Logistics Agency Energy office. The Air Force reports that 167 out of about 660 utilities systems are privatized, which has avoided more than $500 million in costs. Another 122 systems are in active solicitations. Of its 660 systems, 160 were exempted as non-economic.

 

Public entities, such as the Florida Keys Aqueduct Authority, have the local presence and resources necessary to meet installation utility privatization requirements. IMAGE BY SARAH HOWELL, MEAD & HUNT

Public entities, such as the Florida Keys Aqueduct Authority, have the local presence and resources necessary to meet installation utility privatization requirements. IMAGE BY SARAH HOWELL, MEAD & HUNT


 

CHALLENGES AND BENEFITS

Utility privatization requires a substantial investment of time, effort and money for the entities interested in purchasing. Many local utilities have limited expo­sure to federal contract requirements. The complex request-for-proposal (up to 400 pages plus technical data) often leads to non-compliant submissions. On the government side, the contract­ing officer role has experienced high turn­over. This has led to a loss of knowledge of the privatization process and contract execution experience. The multiple layers of necessary approvals from government agencies also is burdensome.

Moreover, every privatization location is different and each system has its own unique challenges, including various system deficiencies requiring early investment, accuracy of technical data, and limitations on what is even available. While the challenges to privatization are real, so too are the benefits. The government is relieved of the responsibility for sustain­ing assets that support, but often are not critical to, the warfighting mission. Utility systems are improved to meet industry standards and their reliability, performance and compliance is enhanced. Even training for military members when utility opera­tions and maintenance skills are needed can be included in the utility service contract and provided by the new owner. Financially, previously unfunded requirements become a “must-pay” utility bill. Long-term costs to the installation are reduced.

A public utility often presents signifi­cant social and economic benefits. It has knowledge of local conditions and unique challenges of the area. Often, the utility already is providing the commodity (water or electricity) to the fence line of the instal­lation or already treating the wastewater. Additionally, because of its not-for-profit status, the public utility has access to low-cost financing. The purchase stimulates the local economy and reinforces the connec­tion between the community and the installation. Costs are shared for resources, including expensive equipment.

  


 Despite the challenges, privatization is yielding successes, including efforts by the U.S. Army and U.S. Air Force through the Defense Logistics Agency Energy office. The Air Force reports that 167 out of about 660 utilities systems are privatized, which has avoided more than $500 million in costs. Another 122 systems are in active solicitations. Of its 660 systems, 160 were exempted as non-economic.


  

A MODEL TO FOLLOW

The Florida Keys Aqueduct Authority (FKAA) is an ongoing utility privatization success. Established by state legislation in 1937, FKAA is the water utility throughout the Florida Keys service area. FKAA, which added wastewater services in 1998, pres­ently serves over 48,000 customers within Monroe County. As the sole provider of potable water for all Florida Keys residents, FKAA transports the water from its well field on the mainland of Florida through a 130-mi transmission pipeline with an additional 690-mi of distribution pipelines.

In December 2002, Naval Facilities Engineering Command Southern Division (which later was joined with other offices to become Naval Facilities Engineering Command Southeast) issued a water request-for-proposal as part of a three-state area in December 2002, with proposals due in June 2003. Among the multiple utili­ties to be privatized were the distribution systems for six different U.S. Navy proper­ties in Key West. FKAA opted to propose for these six properties. While the utility already had been providing supplying water to Naval Air Station Key West, FKAA maintenance and operations stopped where Navy property began. FKAA handled just the water distribution. The issuance of the water request-for-proposal was to transfer the ownership of the utilities so that FKAA would be entirely responsible for everything that goes along with water distribution to the base and also on the base.

Compared with the current Defense Logistics Agency model requiring a four-volume proposal (one each for Technical, Past Performance, Contract Documentation and Price), the Key West privatization at the time required a two-volume proposal: Technical and Price. The selection crite­ria were similar to what they are today: Technical Capability, Past Performance, Risk, Price and Socioeconomic (Small Business Commitment). FKAA sought assistance with its proposal and worked with Mead & Hunt, which provided support on the initial proposal, on the government-required revised proposals, and then through negotiations and start-up. FKAA was notified of its selection as best-value offeror in February 2005 and was awarded the contract in January 2008.

The ownership transfer has proven beneficial for both FKAA and the govern­ment. FKAA folded operations into its existing processes, saving on time and costs through part-time “as needed” staff on the installation, which meant only part-time equipment use as well. The utility invested immediately to improve system pressures and eliminate an old storage tank that posed a potential threat of collapse during hurricanes, and replaced more than $3 million in system components in the first five years. FKAA also has stepped in to operate the wastewater treatment plant in urgent situations. A rather significant finding through the Key West privatization is that the rate structure used (prospective price redetermination) is both cumbersome and time-consuming. Fortunately, the Defense Logistics Agency no longer uses that approach.

  

VALUABLE INVESTMENT

No matter what utility system is being considered for privatizing, the process requires time, effort and money.

The challenges can be daunting—but the benefits to the government are significant, and consultants are available to help utilities through the process. With the potential for costs savings, such as the $500 million avoided to date by the Air Force alone, finding a way to make privatization work is worth the investment.

  


 

Jeffrey S. Sorenson, P.E., CFM, DBIA, M.SAME, is Vice President, Federal Programs - Utility Privatization Practice Leader, and Sondra Retzlaff, M.SAME, is Technical Writer, Mead & Hunt Inc. They can be reached at 608-443-0583, or This email address is being protected from spambots. You need JavaScript enabled to view it.; and 608-443-0376, or This email address is being protected from spambots. You need JavaScript enabled to view it..