DOD Invigorates Utilities Privatization Effort

February 28, 2003

Piechart showing DOD Utilities Privatization with Active Solicitations of 33%; Exempt 7%; Privitized 14%; Owned by Others 29%; and Pending Solicitations 17%

For several years the senior leadership of the Department of Defense (DOD) has sought to modernize DOD's $50 billion utilities infrastructure by taking advantage of private sector innovations, efficiencies, practices, and financing. In a recent memorandum, Deputy Secretary of Defense Dr. Paul Wolfowitz reaffirmed DOD's commitment to privatize military utility systems. The memorandum initiated a concerted effort to strengthen and revitalize the privatization efforts of each Military Service.

Each Service has evaluated the business case for privatization of utility systems' a complicated process. During the last decade, much progress was made and many lessons learned. DOD is now poised to incorporate numerous improvements into its utilities privatization program.

In issuing the new guidance, the Deputy Secretary of Defense emphasized that "to achieve innovative results, privatization must proceed in a deliberate manner that promotes industry interest and competition to the maximum extent practical." A utility privatization evaluation is being conducted on each electric, gas, water, and wastewater system at every Active, Reserve, and National Guard installation.

Solicitations for privatization are out for nearly 860 military utility systems with approximately one-half of those solicitations pending the receipt of proposals (see pie chart). Each Service maintains a web site detailing the status of those acquisitions, which can be accessed through the DOD's Office of the Secretary of Defense (OSD) web site. The OSD web site also includes the DOD's utility privatization guidance and other pertinent information on the DOD's utilities program. Solicitations on 450 additional utility systems will be released over the next 18 months, with all utility privatization evaluations completed by September 2005.

In the fall of 2001, Dr. Get W. Moy assumed the leadership of the Utilities and Energy Use Directorate. He said "Privatization is my number one priority. I want to be sure we obtain safe, technologically-current, and environmentally-sound utility systems, at a relatively lower cost than continued government ownership." Dr. Moy regularly meets with the Services and industry representatives to share information about best practices and address challenges.

All long-term utility privatization costs and benefits to the Federal government are required in an economic analyses of the systems, and evaluated over the life of the utility service contract, which could last 50 years. Specifically, the analyses address Federal taxes, insurance costs, effects on the price of the commodity, and other financial impacts of privatization. To facilitate the economic analysis and determine the life-cycle costs and benefits of each proposal, OSD developed the Utilities Privatization Economic Analysis Tool (UPEAST). This analytical tool has simplified the utility privatization evaluation process. The Services continue to establish partnerships with the utility industry and improve the accuracy of government estimates of utility service costs. After privatizing 375 systems, OSD expects to realize even greater benefits as the remaining utility systems are evaluated for privatization. Dr. Moy's message to industry is: "We are moving forward as rapidly as possible to privatize utility systems, and to do it right."

For more information, please contact Captain Rick Marrs of the Department of the Navy at 703-697-6195.