The Military Services Have Used Alternative Financing for Hundreds of Energy Projects since 2005, but Have Not Collected and Provided Complete and Accurate Data to DOD

Since 2005, the military services have used alternative financing  arrangements for hundreds of energy projects to improve energy  efficiency, save money, and meet energy goals; however, the military  services have not collected and provided DOD complete and accurate  data to aid DOD and congressional oversight of alternatively financed  energy projects. However, we were unable to identify and the military services could not  provide complete data on the range of their alternatively financed  projects, to include data on total contract cost for 196 of 446 ESPC and  UESC projects. Furthermore, some of the data provided by the Army and Navy on their  alternatively financed energy projects did not include the level of accuracy  needed for better or improved planning and budgeting purposes. During the course of this review, military service and DOD officials stated  that one reason that the military departments and DOD headquarters  levels did not always have complete and accurate data is because the  military services have decentralized authority for entering into  alternatively financed projects and for maintaining associated data. Without more consistent verification of performance for all  alternatively financed projects, DOD cannot be certain that all projects are  achieving their estimated savings. In addition, DOD uses guidance issued by the Office of Management and  Budget. Additionally, DOD’s interpretation of this guidance has resulted in the  military departments developing varying approaches for verifying savings  of their UESC projects. The Military Services Identified Benefits and Disadvantages, as Well as Potential Other Costs, of Using Alternative Financing for Selected Energy Projects

		Officials Have Identified Benefits and Disadvantages of Using Alternative Financing Arrangements Instead of Up-front Appropriations for Energy Projects

Alternative financing arrangements provide the military services the  opportunity to partner with the private sector to finance energy projects;  however, there are benefits and disadvantages to these projects. However, we found some potential costs that  may add to the overall cost of a project or may not always be included in  total contract payments. In our review of the life-cycle cost analyses and  contract documentation for the selected ESPCs and UESCs in our  sample, we found that contracts varied in how they funded other potential  costs associated with the projects, such as operation and maintenance  and the repair and replacement of installed equipment, as well as some  other energy project costs that may or may not be included in the  payment to contractors. These  accounts are included in the total contract costs. Conclusions

DOD has taken various actions to meet its needs as the largest energy  consumer in the federal government, including diversifying power  sources, implementing conservation and other efficiency actions to  reduce demand, and relying on private-sector contracts through  alternative financing arrangements in lieu of using up-front appropriations  to fund energy projects. If DOD does not require the military services to provide DOD  with complete and accurate data on all alternatively financed energy  projects, decision makers within the department and Congress may not  have all information needed for effective oversight of these projects,  which represent long-term budgetary commitments for periods of up to 25  years. Without updated and clear guidance on  how the military departments should be taking steps to verify savings  associated with UESC projects to validate project performance, the  military services will likely continue to interpret DOD guidance differently  and are likely to take inconsistent approaches to assuring the  performance of UESC projects, which could limit DOD’s visibility over  projects that commit the departments to long-term payments. Recommendations for Executive Action

To assist DOD and Congress in their oversight of DOD’s alternatively  financed energy projects, we recommend that the Secretary of Defense  direct the military services to collect complete and accurate data on their  alternatively financed energy projects, including data on the services’  financial obligations and cost savings, and provide the data to DOD at  least annually to aid departmental oversight. In written comments, DOD concurred with our  first recommendation and nonconcurred with our second  recommendation. Rather,  we recommended that DOD clarify and update its guidance for verifying  savings for these projects to help the military services appropriately  budget for the projects over the contract’s life. To assess the extent to which the military services reported achieving  expected savings and verified the reported performance of selected  projects, we reviewed agency-level guidance on the different levels of  measurement and verification or performance assurance that are required  for alternatively financed energy projects, such as DOD’s instruction on  installation energy management and the Department of Energy’s most  recent guidelines for measurement and verification and performance  assurance, to determine requirements for measuring savings for the  different types of projects. GAO-13-337.
Why GAO Did This Study

DOD, the largest energy consumer in the federal government, has been addressing its power needs by diversifying its power resources, reducing demand, and implementing conservation projects. To address its goals for energy projects, DOD also has been using alternative financing from private-sector contracts rather than relying solely on annual federal appropriations to fund projects upfront.
The House and Senate reports accompanying their respective bills for the National Defense Authorization Act for 2017 included provisions that GAO review DOD's alternatively financed energy projects. This report (1) evaluates the military services' use of alternative financing arrangements since 2005 and data collected and provided to DOD on those projects; (2) assesses reported project savings and verification of reported performance, and (3) describes benefits and disadvantages and potential other costs of using alternative financing rather than up-front appropriations. GAO analyzed and reviewed DOD data, relevant guidance, and project documentation; interviewed cognizant officials; and reviewed a nongeneralizable sample of projects.

What GAO Found

The military services have used alternative financing arrangements—entering into about 38 private-sector contracts annually from 2005 through 2016—to improve energy efficiency, save money, and meet energy goals. However, the military services have not collected and provided the Department of Defense (DOD) complete and accurate data, such as total contract costs and savings. For example, GAO was unable to identify and the military services could not provide total contract costs for 196 of the 446 alternatively financed energy projects since 2005. Furthermore, some data provided on select projects did not include the level of accuracy needed for planning and budgeting purposes. According to officials, the military services did not always have complete and accurate data because authority for entering into these projects has been decentralized and data have not been consistently maintained. As such, neither the military departments, which include the military services, nor DOD have complete and accurate data on the universe of these projects. Without complete and accurate data on all alternatively financed energy projects, decision makers will not have the information needed for effective project oversight or insight into future budgetary implications of the projects, including impacts on utility budgets.
DOD's alternatively financed energy projects that GAO reviewed reported achieving expected savings. Specifically, GAO's review of 13 operational alternatively financed energy projects found that all 13 projects reported achieving their expected savings. However, the military services have varying approaches for verifying whether projected savings were achieved for all utility energy service contracts (UESC)—an arrangement in which a utility arranges financing to cover the project's costs, which are then repaid by the agency over the contract term. DOD guidance requires the military services to track estimated and verified savings and measurement and verification information for all energy projects, but DOD's guidance is inconsistent with more recent Office of Management and Budget guidance. This inconsistency and DOD's interpretation of Office of Management and Budget guidance have resulted in the military departments developing varying approaches for verifying savings of UESC projects. Without clear guidance from DOD on how the military services should be taking steps to verify savings associated with UESC projects, the military services will continue to interpret guidance differently and are likely to take inconsistent approaches to verifying the savings of UESC projects spanning potentially a 25-year duration.
DOD and military service officials identified benefits and disadvantages, as well as other potential costs, of using alternative arrangements to finance energy projects rather than using up-front appropriations. According to officials, benefits include the ability to fund projects that would not otherwise be funded due to budgetary constraints, to complete projects more quickly, and to have expert personnel available to implement and manage such projects. However, officials also identified disadvantages, including higher costs and the risks associated with long-term financial obligations. In addition, GAO found that some potential costs for these alternatively financed energy projects, such as costs associated with operation and maintenance and repair and replacement of equipment, add to overall project costs and may not be included in the total contract payments.

What GAO Recommends

GAO recommends that the military services collect and provide DOD complete and accurate data on all alternatively financed energy projects and that DOD update its guidance to clarify requirements for verifying UESC savings. DOD concurred with the first recommendation and nonconcurred with the second. GAO continues to believe its recommendation is valid, as discussed in this report.