Energy, Utility Projects Create Potential Liability following BRAC, GAO Finds

The Defense Department expects to incur more than $24 million in costs at two installations shuttered during the 2005 round of base closures to unwind renewable energy and privatized utility projects affected by the closures, according to a new Government Accountability Office (GAO) study.

At Fort Monmouth, N.J., the Army paid about $24.3 million to terminate a renewable energy contract involving ground source heat pumps and to install several boilers to replace the heat pumps. The Army also terminated a privatized electrical utility contract at Fort Monroe, Va., but has not yet reached a settlement with the utility over the termination, the report states. The contractor asked for either $9.9 million or $30.0 million, depending upon the remaining work to be completed by the company.

At a third BRAC 2005 closure, the Navy paid about $148,800 to install electric and water meters in privatized housing at Naval Air Station Brunswick, Maine, to ensure it would not be charged for utilities consumed by residents of units it no longer used.

GAO’s findings came as part of a review of the impact of the growing number of privatization projects located at military installations on a future BRAC round. As of Sept. 30, 2011, DOD had more than 550 public-private projects on more than 240 installations, a 125 percent increase since the 2005 round was conducted.

Sixty-four percent of those projects represent categories — privatized utilities and renewable energy — for which the Pentagon likely would incur liability in the event one of those projects is located on an installation designated for closure.

Liabilities likely will exist following a BRAC round for renewable energy and privatized utility projects because those types of projects commit the government to making future payments. That exposure may be limited, however, by termination-for-convenience clauses, or similar provisions, in those agreements, according to the congressional watchdog agency.

For four renewable energy projects GAO examined in detail — including power purchase agreements, energy savings performance contracts and utility energy service contracts — the agency learned that the military services likely would terminate them in the event of base closure even though officials said they expected a liability in each case. In one Army project, for example, officials said that terminating the project could result in a liability of up to $5.3 million, depending on the date of termination.

In contrast, privatized housing, Army lodging and enhanced use leasing projects in most cases would not be expected to create a financial liability because the leases or agreements that govern those projects likely would continue following a base closure. According to DOD officials, 15 out of 17 such projects that GAO examined would not result in liability in the event of a closure.

The reason for the divergent outcomes for public-private projects is that privatized housing, Army lodging and enhanced use leasing projects typically represent an investment of federal capital or leasing of a government asset, as opposed to a contractual obligation requiring future government expenditures, the report states.

An interesting appendix in the report includes a list of all public-private projects located at U.S. military installations.

Dan Cohen
Dan Cohen
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