ABSTRACT 
 
 
 
 
Title of Document: UTILITIES PRIVATIZATION IN THE 
UNITED STATES AIR FORCE   
  
 David R. Scott, M.S., 2007 
Directed By: Professor John Cable, R.A.; PMP 
 
 
The Department of Defense (DOD) has roughly 2,600 electric, water, wastewater, 
and natural gas utility systems valued at an estimated $50 billion.  In 1997, DOD 
decided that privatization was the preferred method for attaining industry standards 
for utility systems.  The Air Force has ownership of 502 of these utility systems.  This 
thesis will provide a background of DOD policy, the Air Force?s Utilities 
Privatization Program and Guidance, findings made by the Government 
Accountability Office (GAO) and actions taken to remedy those findings, and discuss 
several issues that personnel involved in utilities privatization should understand and 
remain vigilant of during the privatization process and throughout the life of the 
contracts. 
 
  
 
 
 
 
 
 
 
 
 
 
 
UTILITIES PRIVATIZATION IN THE UNITED STATES AIR FORCE    
 
 
 
By 
 
 
David R. Scott 
 
 
 
 
 
Thesis submitted to the Faculty of the Graduate School of the  
University of Maryland, College Park, in partial fulfillment 
of the requirements for the degree of 
Master of Science 
2007 
 
 
 
 
 
 
 
 
 
 
Advisory Committee: 
Professor John H. Cable, Chair 
Professor Miroslaw J. Skibniewski 
Professor Gregory B. Baecher 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
? Copyright by 
David R. Scott 
2007 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 i 
 
Preface 
This author approached the subject of Utilities Privatization with many 
preconceptions.  The divestiture by the DOD of such a vast number of utility systems 
creates many fears for Civil Engineers.  The repair, upgrade, and operation and 
maintenance (O&M) of utility systems has been a major part of the Civil Engineer 
career field since its inception.  Privatizing any portion of a military career field?s 
duties creates many fears among its personnel:  the loss of control in the event of a 
utility disruption, the loss of manpower associated with a utility system, the loss of 
some funding associated with the utility system, and the underlying fear that the 
contract may sour, burdening taxpayers with excessive utility service costs. 
 
Through research, evaluation, and interviews, this author became aware of a robust 
Air Force Utilities Privatization program.  The intent of this thesis is to provide any 
Air Force personnel involved in the privatization of utilities, with a single document 
to reference for details concerning DOD policy, Air Force Utilities Privatization 
Program and Guidance, issues raised by the GAO, a discussion related to some of 
these key concerns, as well as issues to keep in mind during project preparation and 
after award. 
 
 
 
 
 
 ii 
 
Foreword 
 
Chapter 1 is intended to provide a brief overview of DOD guidance.  For any reader 
that is already familiar with the policy pertaining to utilities privatization, chapter 1 
may be skipped and/or only referenced when necessary. 
 
Chapter 2 is intended to describe the Air Force?s Program and Guidance concerning 
utilities privatization.  The guidance has been reordered and abridged from the 
official document, however the verbiage was left largely unchanged and items were 
only abridged and reordered when the author felt necessary in order to aid any reader, 
not just Air Force or DOD personnel, in becoming familiar with the guidance of this 
Service.  Some of the information contained in the guidance, such as key roles and 
responsibilities, was removed from this thesis.  The interested reader may obtain more 
thorough details by referring to the original document.  
 
Chapter 3 condenses and summarizes two reports performed by the GAO, one in May 
of 2005 and one in September of 2006.  The reports highlight concerns raised by the 
GAO and actions either taken, or not taken, by DOD to concerning these issues. 
 
Chapter 4 provides discussion concerning key utilities privatization issues that this 
author believes personnel involved in Utilities Privatization should understand 
concerning the program. 
 
 iii 
 
Chapter 5 is intended to provide a quick-reference timeline with key milestones in the 
utilities privatization process to date. 
 
Many of the reference materials used for this thesis used different acronyms (e.g. 
DOD or DoD as the short form for Department of Defense).  The author standardized 
the use of acronyms throughout this document in order to aid its readability. 
 
 
 iv 
 
Acknowledgements 
Mr. Dick Woodworth     HQ AFCESA/CENU 
Mr. Brent S. Smeltzer     HQ AFCESA/CENU 
Mrs. Vicki Benassutti     305 CES/CEOEE 
Mr. Joseph Bogdan     305 CES/CEOE 
 
 
 v 
 
Table of Contents 
 
 
Preface............................................................................................................................ i 
Foreword....................................................................................................................... ii 
Acknowledgements...................................................................................................... iv 
Table of Contents.......................................................................................................... v 
List of Tables .............................................................................................................. vii 
List of Figures............................................................................................................viii 
1. Department of Defense (DOD) Policy.............................................................. 1 
1.3. Conveyance Authority .............................................................................. 2 
1.4. Definitions and Scope as per DRI Number 49.......................................... 2 
1.5. Exemptions from privatization as per DRI Number 49............................ 3 
1.6. Competitive Procedures as per DRI Number 49....................................... 4 
1.7. Congressional Notification Requirements ................................................ 7 
1.8. Financial Management.............................................................................. 9 
Chapter 2: United States Air Force Policy and Guidance 
5
........................................ 11 
2. Overview......................................................................................................... 11 
2.2. Preliminary Screening Followed by a Three-Phase Process....................... 12 
2.2.1. The Preliminary Screening Process .................................................... 12 
2.2.2. The Project Plan and Feasibility Analysis Phase................................ 12 
2.2.3. The Comprehensive Analysis Phase................................................... 12 
2.2.4. The Final Feasibility, Approval, and Implementation Phase.............. 13 
2.3. Goals ........................................................................................................... 13 
2.4. Divestiture Strategy .................................................................................... 14 
2.4.2. Full and Open Competition................................................................. 14 
2.4.3. Sole Source ......................................................................................... 16 
2.4.4. Total Privatization versus Partial Privatization................................... 16 
2.4.5. Ownership:.......................................................................................... 17 
2.4.6. Housing Privatization Conflict ........................................................... 17 
2.4.7. Exemptions ......................................................................................... 18 
2.5. Utilities Privatization Process..................................................................... 19 
2.6. Preliminary Screening of Programmed Utility Systems............................. 20 
Figure 1 Preliminary Screening of Programmed Utility Systems................. 21 
2.7. Phase 1: Project Plan and Feasibility Analysis........................................... 21 
Figure 2 Phase I of the Utilities Privatization Process .................................. 32 
2.8. Phase II: Comprehensive Analysis ............................................................. 32 
Figure 3 Phase II of the Utilities Privatization Process................................. 46 
2.9. Phase III: Final Feasibility, Approval, and Implementation....................... 46 
Figure 4 Phase III of the Utilities Privatization Process ............................... 72 
Chapter 3: Government Accountability Office Findings and Recommendations 
2, 4
. 73 
3. Government Accountability Office Reports ................................................... 73 
3.2. May 2005 Report 
4
.................................................................................. 73 
3.2.3. Timeliness........................................................................................... 74 
3.2.4. Impact on O&M Funding.................................................................... 75 
 
 vi 
 
3.2.5. Use of ?Should Cost?.......................................................................... 75 
3.2.6. Independent Review............................................................................ 77 
3.2.7. Fair Market Value............................................................................... 78 
Table 1 Percent of Systems with Privatization or Exemption Decisions..... 80 
3.3. GAO May 2005 Report Conclusion ....................................................... 81 
3.4. GAO May 2005 Report Recommendations............................................ 81 
3.5. September 2006 GAO Report 
2
............................................................... 82 
3.5.4. Timeliness........................................................................................... 85 
3.5.7. Program Legislative Authority ........................................................... 89 
Table 2 Utility Privatization Program Status as of March 31, 2006............ 91 
3.5.9. Additional Privatization Possibilities.................................................. 91 
3.5.10. Management and Oversight Improvements since May 2005 Report.. 92 
3.5.11. Economic Analyses............................................................................. 94 
3.5.12. Funding Concerns ............................................................................... 96 
3.5.13. Cost Growth........................................................................................ 98 
3.5.14. Use of Should Cost ........................................................................... 101 
3.5.15. Fair Market Value............................................................................. 106 
3.5.16. Recommendations by the GAO and DOD response......................... 107 
Chapter 4: Discussion and Analysis ......................................................................... 115 
4. Discussion..................................................................................................... 115 
4.1. Understanding the Project Environment............................................... 115 
Figure 5 O&M Costs for Fiscal Years 1995 through 2005 ......................... 116 
Figure 6 Percentage Change in DOD Costs by Major Budget Category from 
FY 1995 to 2000 ............................................................................................... 117 
Figure 7 Percentage Change in DOD Costs by Major Budget Category from 
FY 2000 to 2005 ............................................................................................... 117 
4.2. O&M Funding....................................................................................... 118 
Table 4 Changes in Service Contract Costs in Selected Categories .......... 122 
Table 5 A-76 Public/Private Competition Decisions for FY 1995-2005... 125 
4.3. Fair Market Value and Use of Should Cost.......................................... 125 
Figure 8 Capital Recovery Diagram (Fair Market Value) .......................... 126 
Figure 9 Capital Recovery Diagram (Use of Should Cost #1).................... 128 
Figure 10 Capital Recovery Diagram (Use of Should Cost #2).................... 129 
4.4. Possibility of errors in Air Force Should Cost...................................... 132 
4.5. Cost Growth.......................................................................................... 135 
4.6. Government Retained Ownership......................................................... 139 
4.7. Additional Legal Issues......................................................................... 140 
4.8. Conclusion ............................................................................................ 141 
Chapter 5:  Utility Privatization Timeline in Review ............................................... 143 
5. Key milestones.............................................................................................. 143 
Glossary .................................................................................................................... 146 
Bibliography / References......................................................................................... 149 
 
vii 
List of Tables 
 
Table 1 Percent of Systems with Privatization or Exemption Decisions as of 
May 2005 GAO report.   Sources: DOD & GAO. 
 
Table 2 Status of the Utility Privatization Program as of March 31, 2006.  
Sources: DOD & GAO September 2006 report. 
 
Table 3 DOD?s Estimated Cost Avoidance from Utility Privatization 
  Sources: DOD via GAO September 2006 report. 
 
Table 4 Changes in Service Contract Costs in Selected Categories  
 
Table 5 A-76 Public/Private Competition Decisions for FY 1995-2005 
 
 viii 
 
List of Figures 
Figure 1 Preliminary Screening of Programmed Utility Systems 
Figure 2 Phase I of the Utilities Privatization Process 
Figure 3 Phase II of the Utilities Privatization Process 
Figure 4 Phase III of the Utilities Privatization Process 
Figure 5 O&M Costs for Fiscal Years 1995 through 2005 
 
Figure 6 Percentage Change in DOD Costs by Major Budget Category from FY 
1995 to 2000 
 
Figure 7 Percentage Change in DOD Costs by Major Budget Category from FY 
2000 to 2005 
 
Figure 8 Capital Recovery Diagram (Fair Market Value) 
 
Figure 9 Capital Recover Diagram (Use of Should Cost #1) 
 
 
 
 1 
 
Chapter 1: Utilities Privatization Background and Policy 
1. Department of Defense (DOD) Policy 
 
1.1. On 10 December 1997, the Deputy Secretary of Defense issued Department 
of Defense Reform Initiative (DRI) Number 9, directing the Military 
Departments to develop a plan for privatizing all utility systems (electric, 
water, waste water and natural gas) by January 1, 2000.  The memorandum 
provided for two exceptions: any utility system which should not be 
privatized due to unique security reasons or when privatization is 
uneconomical.  The Under Secretary of Defense for Acquisition & 
Technology was directed ?to develop uniform criteria for the Military 
Departments to apply in determining whether a facility is exempt from 
privatization due to economic or security considerations.?
 1
 
 
1.2. One year later, on 23 December 1998, the Deputy Secretary of Defense 
issued DRI Number 49 to ?establish program management and oversight 
responsibilities and provide guidance for performing economic analyses for 
proposed projects, exempting systems from the program, and using 
competitive procedures to conduct the program.  The memorandum also 
stated that the objective was for DOD to get out of the business of owning, 
managing, and operating utility systems by privatizing them and that 
exceptions from privatization should be rare.?
2
   Additionally, though the 
previous DRI did not specifically direct the privatization of steam, hot and 
 
 2 
 
chilled water, and telecommunications, DRI Number 49 stated that it did not 
prohibit such privatization. 
1.3. Conveyance Authority 
1.3.1. Section 2688 of Title 10, United States Code (10 U.S.C. ? 2688) states 
?The Secretary of a military department my convey a utility system, or 
part of a utility system, under the jurisdiction of the Secretary to a 
municipal, private, regional, district, or cooperative utility company or 
other entity.  The conveyance may consist of all right, title, and interest 
of the United States in the utility system or such lesser estate as the 
Secretary considers appropriate to serve the interests of the United 
States." 
1.4. Definitions and Scope as per DRI Number 49 
1.4.1. A ?Utility system? means any system for the generation and supply of 
electric power, for the treatment or supply of water, for the collection or 
treatment of wastewater, and for the supply of natural gas.  For the 
purpose of this definition, supply shall include distribution.  A utility 
system includes equipment, fixtures, structures, and other improvements 
utilized in connection with the systems described above, as well as the 
easements of rights-of-way associated with those systems.  A utility 
system does not include any projects constructed or operated by the 
Army Corps of Engineers under its civil works authorities nor does it 
 
 3 
 
include an interest in real property other than easement of right-of-way 
associated with the utility system. 
1.4.2. The Military Departments are authorized to convey a utility system to 
any municipal, private, regional, district, or cooperative utility company 
or to any other entity under this authority in accordance with applicable 
state and local laws.  In the case of overseas utility systems, privatization 
will comply with appropriate agreements and applicable host nation 
laws. 
1.4.3. The privatization of utilities and utility systems is to be conducted at 
all installations, both in the United States and overseas, that have utility 
systems available to convey.  All Active Duty, Reserve, and Guard 
installations, both major and minor, not currently designated for closure 
under the Base Realignment and Closure (BRAC) Act will be considered 
candidates for utility system privatization.  BRAC closure constitutes 
privatization of the entire installation to include utility systems.  All 
BRAC designated installation closures will be transferred/privatized in 
accordance with appropriate closure laws and agreements. 
1.5. Exemptions from privatization as per DRI Number 49 
1.5.1. A utility system is exempt when either the Secretary concerned or the 
Principal Staff Assistant for a Defense Agency certifies to the Under 
Secretary of Defense Acquisitions and Technology (USD (A&T)) that 
unique security reasons require that the United States own the system or 
it is deemed uneconomical.   
 
 4 
 
1.5.2. ?Unique security reasons? are situations in which: 
1.5.2.1.Ownership of the utility system by a private utility or 
other entity would substantially impair the mission of the 
Department concerned; or 
1.5.2.2.Ownership of the utility system by a private utility or 
other entity would compromise classified operations or 
property. 
1.5.3. Privatization may be considered ?uneconomical? only when:  
1.5.3.1.There is a demonstrated lack of market interest, as 
indicated by a lack of response from any utility company 
or other responsive and responsible entity to an 
announcement of the intention to privatize; or 
1.5.3.2.The long-term cost to the Department as a result of 
privatization would be greater than the long-term benefits; 
or 
1.5.3.3.The long-term cost to the Department for utility services 
provided by the utility system concerned will not be 
reduced. 
1.6. Competitive Procedures as per DRI Number 49 
1.6.1. Competitive procedures will be used in conducting the privatization of 
utility systems.  In advance of issuance of the solicitation, the Military 
Departments must determine whether there is market interest in 
acquiring the utility system.  The Departments should synopsize in the 
 
 5 
 
Federal Business Opportunities (FedBizOpps) and other available media.  
The synopsis shall indicate the Department is considering privatizing its 
utilities, state the type and location of those utilities, and request that 
interested parties communicate their intent to a specified point of contact 
(POC) within the Department concerned.  The synopses? results will 
form the basis of the competition analysis necessary for the Department 
to determine the proper competition strategy.   
1.6.2. If the installation resided in an area served by a franchised and 
regulated utility, that franchise holder shall not be considered the 
presumptive conveyee, nor shall another responsible and responsive 
utility or entity that expresses interest be excluded from competition.  
State law and regulatory policy should be considered when determining 
the form of competition for franchised and regulated utilities.  Where 
state law and regulatory policy specifically prohibits competition, a sole-
source negotiation may be pursued after evaluation of the response to the 
synopses.  The Military Department, however, may not rely on the 
assertions of the franchised or regulated utility in this regard.  Rather, it 
must make an independent legal finding that the franchised or regulated 
utility is the only entity authorized to own and operate the utility system 
to be privatized. 
1.6.3. The competitive procedures must ensure that the utility services 
resulting from privatization are sufficient to support installation missions 
in a reliable and resource efficient manner. 
 
 6 
 
1.6.4. Military Departments should consider how different regulatory 
environments might affect the determination of rate structures for any 
utility service contracts entered into beyond the end of the initial utility 
service contract.  Special consideration should be given when contracting 
with a utility or other entity that is not subject to price regulation or that 
is price self-regulated.  The non- or self-regulated environment may 
present considerable barriers to ensuring the strength of the 
Department?s negotiation position for the follow-on service contact.  The 
Department shall contract in a manner that will mitigate the risk it bears 
in subsequent contracts.  Some risk mitigation methods to consider 
include: contractually establishing a regulatory scheme in the initial 
conveyance/service contract, retaining actual land ownership, and 
conveying a lesser estate as considered appropriate by the Secretary and 
as authorized by Section 2688. 
1.6.5. The solicitation shall require that if the utility system under 
consideration for privatization will continue in operation after 
conveyance, the recipient shall take all actions necessary to ensure that 
the system complies with all applicable legal and regulatory 
requirements.  If the utility system under consideration for privatization 
will instead be replaced, the new system must also comply with the 
above requirements. 
1.6.6. The solicitation shall contain a provision plainly stating that the 
Department cannot guarantee that it will enter into a contract at the end 
 
 7 
 
of the solicitation process.  The provision must express that the success 
of the solicitation is contingent upon the ability to certify to Congress 
that the long-term economic benefit of the conveyance exceeds the long-
term economic costs, and that the conveyance will reduce the long-term 
costs to the Department concerned for utility services provided. 
1.6.7. The Military Departments shall conduct all utility privatizations 
consistent with all other applicable legal and regulatory requirements, 
including any environmental analysis requirements. 
1.6.8. After determining that privatization is uneconomical or is precluded by 
security considerations, efforts should be made to award an Energy 
Savings Performance Contract (ESPC), to competitively source the 
operation of those systems, or pursue other cost savings measures. 
1.7. Congressional Notification Requirements 
1.7.1. Section 2688 of Title 10 requires that the Secretary concerned submit 
to the Defense Committees of Congress an analysis that demonstrates 
that the long-term economic benefit of the conveyance exceeds the long-
term economic cost, and that the conveyance will reduce the long-term 
costs to the Department concerned for utility services provide by the 
subject utility system.  The Secretary concerned shall not proceed with 
conveyance of the utility system until 21 days have elapsed after the 
committees receive the economic analysis. 
1.7.1.1.The economic analysis must take into account the costs 
for operation, maintenance, and system improvements that 
 
 8 
 
would be incurred by the Department if the systems were 
operated and maintained in accordance with accepted 
industry practice and all applicable legal and regulatory 
requirements.  The direct proceeds (if any) from a 
conveyance and the future cost of utility services to be 
obtained if the conveyance is made must also be 
considered. 
1.7.1.2.Methodological Assumptions and Parameters: 
1.7.1.3. The basic parameters involved in the economic analysis, 
such as economic life and period of analysis, are those 
specified in DOD Instruction 7041.3.  Other parameters 
shall also be included in the analysis, if necessary.  All 
parameters should be clearly explained and justified. 
1.7.1.4. For the purpose of the economic analysis, ?long-term? 
refers to the economic life of the utility system under 
consideration for privatization.  (Note: Economic life of 
the utility system under consideration for conveyance 
need not be the same as the life of the contract for utility 
service.) 
1.7.1.5.  Life-cycle cost analysis shall be treated / conducted as 
specified in OMB Circular A-94.  Should a general 
inflation assumption be necessary, the inflation rate 
specified in section 7 of Circular A-94 is recommended.  
 
 9 
 
This shall be the rate used in converting costs and benefits 
from real to nominal values, and vice versa.  The discount 
factor utilized in the economic analysis shall be as 
described in section 8 of Circular A-94 and as specified in 
Appendix C of the circular.  While the real discount rate is 
usually preferable, if future benefits and costs are given in 
nominal terms, then the nominal rate shall be sued.  Real 
and nominal values may not be combined in the same 
analysis. 
1.7.1.6. Since the actual costs that the Department concerned 
incurs in operating and maintaining its utility systems may 
reflect inadequate maintenance and conditions, the 
economic analysis must include the costs that should be 
incurred if the systems were operated and maintained in 
accordance with all applicable legal and regulatory 
requirements.  The object of this approach is to bring a 
degree of parity to the costs reflected in the proposals and 
the economic baseline survey developed by the 
Department. 
1.8. Financial Management 
1.8.1. Section 2688 of Title 10 requires the recipient utility or entity to pay 
fair market value, as determined by the Secretary concerned, for the 
utility system.  This consideration for the conveyance may be accepted in 
 
 10 
 
the form of a lump sum payment of a reduction in charges for utility 
services provided by the utility being conveyed to the military 
installation at which the system is located.  The treatment of a lump sum 
payment received in consideration for the sale of a utility system should 
be handled in accordance with procedures described in the Financial 
Management Regulations (FMR). 
1.8.2. If the Secretary concerned elects to receive consideration through a 
reduction in charge for utility services provide to the military 
installation, the time period for reduction in charges for services 
provided by the privatized utility shall not be longer than the life of the 
contact for utility services. 
1.8.3. When structuring an arrangement for privatization of a utility system, 
the Secretary concerned may require additional terms and considerations 
as part of the sale of the utility system as he or she considers appropriate 
to protect the interest of the United States. 
 
 11 
 
Chapter 2: United States Air Force Policy and Guidance 
5
 
2. Overview 
 
2.1. The Air Force Utilities Privatization Policy and Guidance, July 2005 revision 
familiarizes the reader with a brief overview of privatization.  It states, 
privatization is the process by which the Air Force will transfer to a qualified 
entity, which may include companies that are not considered typical utility 
companies, ownership of the utility system, while at the same time 
contracting for the provision of quality utility services to all installation 
facilities.  Once the Air Staff identifies utility systems eligible for 
privatization, the Installation / Wing Commander is responsible for executing 
appropriate privatization projects.  The Major Command (MAJCOM) will 
assist and facilitate the privatization process and interact with the Air Force 
Energy Management Branch, Asset Management and Operations Division 
(AF/A7CAE) on policy issues and the Deputy General Counsel for 
Installations and Environment (SAF/GCN) on legal issues.  Headquarters, Air 
Force Civil Engineer Support Agency (HQ AFCESA) will provide technical 
and contract support for performing the required analysis. 
 
 12 
 
2.2. Preliminary Screening Followed by a Three-Phase Process 
2.2.1. The Preliminary Screening Process  
2.2.1.1.This process is performed for all programmed utility 
systems to determine which systems are exempt from 
privatization for readiness or unique security reasons.  The 
Secretary of the Air Force (SECAF) makes exemption 
decisions. 
2.2.2. The Project Plan and Feasibility Analysis Phase  
2.2.2.1.This phase results in the Project Plan and Feasibility 
Analysis Report.  This Feasibility Analysis Report 
includes a Preliminary Economic Analysis (EA) and 
determines whether responsive proposals for the purchase 
of the system are likely to be received. 
2.2.3. The Comprehensive Analysis Phase 
2.2.3.1.This phase results in a Draft Comprehensive Analysis 
Report and Draft Request for Proposal (RFP).  The 
Comprehensive Analysis Report includes analyses on real 
estate, environmental, transition, and planning issues 
affecting privatization.  This phase also determines 
appropriate terms and conditions to be factored into 
preparing the Draft RFP. 
 
 13 
 
2.2.4. The Final Feasibility, Approval, and Implementation Phase 
2.2.4.1.This phase results in either a Privatization Approval 
Package or Privatization Non-Economic Package 
submitted for SECAF approval.  The Privatization 
Approval Package is composed of various Comprehensive 
Analysis Report elements.  The entire Comprehensive 
Analysis Report with the supporting analysis will not be 
submitted but must be available as back up and as the 
departure point for follow-on analyses if the 
recommended course of action is not approved or is 
modified during the review.  Systems not selected for 
privatization because of lack of market interest or where 
costs exceed benefits will be documented in a 
Privatization Non-Economic Package. 
2.3. Goals 
2.3.1. The objective is to reduce long-term financial requirements to support 
utility systems, thereby making scarce funds available for mission-
critical requirements, such as force modernization, and to permit Air 
Force leadership to focus on core competencies and the global mission to 
achieve air, space, and cyberspace superiority. 
2.3.2. Several Air Force goals must be achieved and maintained throughout 
the privatization process.  The Air Force?s basic goal it so transfer 
ownership of utility systems to obtain better economies.  The transfer of 
 
 14 
 
utility system ownership and the responsibility to provide utility services 
must make good business sense and result in the Air Force purchase of 
utility services at a lower long-term cost.  The privatized utility service 
must also be as reliable as the current Air Force system.  The Air Force 
will not privatize under 10 U.S.C. ? 2688 utilities systems that, in the 
view of the SECAF, are required for mission readiness. 
2.3.3. The Air Force Utilities Privatization Policy and Guidance Manual does 
not address leasing or concessions, competitive sourcing (contracting out 
system operations and maintenance, or energy savings performance 
contracts (ESPCs) (projects executed under 42 U.S.C. ? 8287, Shared 
Energy Savings, involving private sector capital for energy savings 
projects). 
2.4. Divestiture Strategy 
2.4.1. The utilities privatization process may result in different acquisition 
strategies.  Approval of the divestiture strategy ultimately resides with 
the Source Selection Authority (SSA). 
2.4.2. Full and Open Competition: 10 U.S.C. ? 2688 provides that if 
more than one utility or entity expresses interest in a conveyance, the 
conveyance of the system shall be carried out through the use of 
competitive procedures.  The sale of a utility system under 10 U.S.C. ? 
2688 is a disposal of personal property since normally, only the 
equipment making up the utility system is being disposed of.  In specific 
instances where one is required, a right-of-way for the owner to gain 
 
 15 
 
access to the system may accompany the bill of sale.  It is not a sale of 
real estate.  The Air Force will have to contract with the new owner to 
distribute the utility commodity.  The resulting contract may address 
supplying the wholesale commodity itself, although this is not 
necessarily a requirement in every sale.  It may be beneficial and 
necessary to combine the supplying of the commodity with the 
distribution service as in the case of water and wastewater systems.  It 
may be beneficial to separate the two, as in the case of electric and gas 
systems, in order to take advantage of future deregulated markets.  In 
either situation, there will be a sale of the utility system under 10 U.S.C. 
? 2688--a property disposal--and an acquisition of utility services under 
the Federal Acquisition Regulation (FAR).  These are two distinct 
actions, but they are necessarily connected since they must be done at the 
same time and, presumably, in the same direction.  Title 10 U.S.C. ? 
2302 and 2304 provides the rules governing when and how competitive 
procedures are to be used.  If disposal action and acquisition are handled 
as a single transaction, the FAR applies and the solicitation will contain 
FAR terms and conditions governing the entire process and the resulting 
services contract, but not the resulting disposal.  In other words, use FAR 
provisions to conduct the entire action, but only apply the substantive 
FAR provisions to the resulting services contract, not to the resulting 
sale.  If the divestiture portion of the transaction is reflected in a different 
 
 16 
 
document than the utility contract, that portion is not regulated to have 
FAR terms and conditions, although they can be included. 
2.4.3. Sole Source: If an installation resided in an area served by a 
franchised and regulated utility, that franchised holder shall not be 
considered the presumptive conveyee, nor shall another responsible and 
responsive utility or entity that expresses interest be excluded from 
competition.  Installations may not rely on the assertions of franchised or 
regulated utilities in this regard.  Rather, an independent legal finding, 
based on State law and regulatory policy, must be made by the 
installation legal office determining that the franchised or regulated 
utility is the only entity authorized to own and operate the utility system 
to be privatized.  In most cases, only when a franchise is exclusive, 
(meaning both a franchise is required and that only one entity may hold 
the franchise at any one time), will sole source be an alternative.  In 
either case, DRID #49 requires an independent finding to determine that 
the franchised or regulated utility is the only entity authorized to own 
and operate the utility system being privatized.  Mere convenience is not 
sufficient reason to find a sole-source situation. 
2.4.4. Total Privatization versus Partial Privatization: Privatizing a 
portion of a specific system, (i.e., only the plant), does not fit the OSD 
definition of privatization/total divestiture of that specific system.  
Systems shall not be partially privatized.  The entire system must be 
conveyed in order to be defined ?privatized.? 
 
 17 
 
2.4.5. Ownership: Government-owned utility systems may be identified by 
reviewing appropriate DD Forms 1354, Transfer and Acceptance of 
Military Real Property.  Additionally, if a system is on the AF real 
property records, then the AF is the likely owner.  Systems with 
uncertain ownership must be identified and ownership resolved at the 
earliest opportunity.  Government ownership of the land over, on, or in 
which the systems are placed must be decisively determined.  For 
example, is the system being considered owned by others but the land is 
owned by the Air Force or is the system owned by the Air Force on land 
owned by others, or is any part of the land containing a system an 
addition to the original base property and owned by whom or does a 
lease exist that would prohibit a right of access. 
2.4.6. Housing Privatization Conflict: Many initiatives are underway to 
privatize housing at Air Force installations.  On-going housing 
privatization efforts differ in their conceptual approaches with regards to 
utility systems.  Consult your MAJCOM housing privatization staff for 
information regarding the disposition of utility systems for these on-
going initiatives.  Future housing privatization efforts which seek to 
convey units and underlying real estate should include the underlying 
utilities.  Future housing privatization efforts which seek to convey units, 
but lease the underlying real estate, should not include the underlying 
utilities.  Rather, under the utilities privatization program, transition of 
 
 18 
 
these utility systems should occur at the meter, meter socket, weather-
head, main panel shut off, shut-off valve or clean-outs. 
2.4.6.1.For installations with privatized military family housing 
(MFH) or where an announced MFH privatization 
initiative is underway, modifications to the points of 
demarcation, and billing/metering strategies may have to 
be made.  In these cases, de-confliction of the housing 
privatization Statement of Need (SON), and the utilities 
privatization Statement of Work (SOW) scopes will be 
necessary.  The identification of costs associated with the 
systems is spelled out in the RFP.  The costs identified are 
to be paid, as stated in the RFP. 
2.4.6.2.Where there is both MFH and Utilities Privatization, the 
base and MAJCOM Integrated Process Team (IPT) need 
to coordinate with AFCEE for MFH Privatization issues 
and AFCESA for Utilities Privatization issues.  The Point 
of Contact (POC) for the program initiated first shall 
contact the other program POC to ensure the language in 
both RFP?s is consistent, compatible, and contribute to 
achieving favorable economics for both programs. 
2.4.7. Exemptions: When applying the exemption for unique security 
concerns, consider the following: If privatization is found to impact the 
unique security of an installation as determined by un-mitigatable 
 
 19 
 
findings in and operational risk management assessment, such as 
adversely impacting the readiness core and thereby jeopardizing the 
Prime BEEF mission for the installation, then the exemption should be 
applied to the specific utility system.  Decreased opportunity for training 
of Prime BEEF team members is not a reason for exemption as this is a 
mitigatable circumstance.  Insufficient manpower to fulfill the wartime 
requirement is reason for exempting a utility system.  All efforts to 
provide sufficient manpower, through reassessing the Military/Civilian 
mixture and/or offering positions with Air Force Specialty Codes 
(AFSC) which are excess to the wartime requirement at an installation, 
should be exhausted prior to seeking this exemption. 
2.5. Utilities Privatization Process 
 
2.5.1. In its overview, the Air Force Utilizes Privatization Policy and 
Guidance Manual stresses the importance of communication.  
Communicating and coordinating with other federal agencies, state, 
tribal, and local governments, regulators, and local community, 
installation officials, unions, affected employees, HQ USAF, the 
MAJCOM staff, HQ AFCESA, and HQ AFCEE.  Because many 
resources are required to privatize a utility system, it is of utmost 
importance to establish a dedicated team of installation experts with 
command support. 
2.5.2. Communication should be established early and maintained 
throughout the process.  Contact should be maintained on-installation 
 
 20 
 
within the project team and with affected unions and installation 
employees; off-installation communication should also be maintained 
with HQ USAF, the MAJCOM, HQ AFCESA, HQ AFCEE, and with the 
local community.  The success of the initiative depends on active 
leadership and strong support at all levels. 
2.6. Preliminary Screening of Programmed Utility Systems 
 
2.6.1. The privatization process begins with a preliminary screening of 
programmed utility systems to identify privatization candidates.  This 
preliminary screening includes the following: 
2.6.1.1.Revalidating that no adverse effects on mission readiness 
would exempt a utility system from privatization.  HQ 
USAF performs this evaluation which includes verifying 
that privatizing the utility system will have no adverse 
effect on staffing for contingency operations. 
2.6.1.2.Revalidating that no unique security requirements would 
exempt a utility system from privatization.  HQ USAF 
also performs this evaluation, which ensures that 
ownership of the utility system by a private entity would 
not impair the installation?s mission or ownership of the 
utility system by a private entity would not compromise 
classified operations or property. 
 
 21 
 
 
Figure 1 Preliminary Screening of Programmed Utility Systems 
 
2.7. Phase 1: Project Plan and Feasibility Analysis 
2.7.1. Once candidate utility systems are revalidated, the first phase of the 
privatization process begins.  This phase is typically executed at the 
installation level by the Installation Civil Engineer under the guidance of 
the Installation/Wing Commander.  Phase I validates the project and 
includes the following: 
2.7.1.1.Developing a project plan 
 
 22 
 
2.7.1.1.1. This describes the following: project scope, installation 
utilities privatization team members and responsibilities, 
communication plan with a list of points of contact, project 
schedule, and additional resources. 
2.7.1.1.2. As part of the project planning, it is essential to establish 
360-degree communications.  The installation privatization 
team is comprised of representatives from real estate, cost and 
finance, community planning, legal, environmental, 
engineering, contracting, public affairs, and manpower.  
Contacts at the MAJCOM, AF/ILEXO, HQ AFCESA, and HQ 
AFCEE are also established to coordinate project development 
and gain technical and resource assistance. 
2.7.1.2.Conducting a Utility Requirements Assessment 
2.7.1.2.1. The basis for the utilities privatization requirement is the 
installation?s existing utility requirement.  Requirements are 
also assessed by quantifying the impact of planned 
construction and mission changes and adjusting the utility 
requirement appropriately.  Once the utility requirement is 
known, it is used to determine whether adequate system 
capacity exists (including room for marginal growth and 
contingencies), excess capacity that may have value to the 
competitors, or whether portions of the system can be 
abandoned. 
 
 23 
 
2.7.1.3.Conducting an Operational Impact and Risk Management 
Analysis 
2.7.1.3.1. The Air Force Council Privatization IPT specifies the 
operational risk management procedures to conduct a tabletop 
utilities privatization vulnerability assessment.  The IPT 
focuses on five major vulnerability categories: readiness, 
security, quality and availability, installation population, and 
government liability. 
2.7.1.3.2. Integrating the proper risk assessment during the planning 
stages allows for potential hazards to be identified, the risk 
assessed, and control measures analyzed.  Decision makers at 
the appropriate level choose the appropriate controls based on 
the analysis of overall costs and benefits.  When the costs 
outweigh the benefits, some risk may be accepted.  Ultimately, 
the control measures implemented in the real estate 
instruments and utility service contract will be reflected in the 
contract costs and the determination of the privatization 
project?s economic viability. 
2.7.1.4.Determining the impact of any applicable state and local 
regulations on the process, potential owner, and transfer 
2.7.1.4.1. The review determines whether the state?s Public Utility 
Commission (PUC), State Corporation Commission, or similar 
regulatory body has jurisdiction over operating the utility 
 
 24 
 
system to be privatized.  The DOD has determined that, as a 
matter of law, there are few if any circumstances where the 
state will have regulatory authority over the selection of a 
utility system owner or service provider.  If the installation 
believes it has such a unique situation, it should contact 
SAF/GCN, through AFA7CAE, to discuss the matter. 
2.7.2.  Conducting an Industry Market Analysis 
2.7.2.1.1. To determine whether privatizing a particular utility system 
is feasible, it is necessary to determine if there are potential 
purchasers in the marketplace.  The Industry Market Analysis 
determines whether there is likely to be competition for the 
purchase of the utility system.  The Industry Market Analysis 
proceeds as follows: 
2.7.2.1.1.1.Contact all local utilities in writing, describing the 
privatization project and asking for a letter response 
expressing whether they have any interest in proposing. 
2.7.2.1.1.2.Contact other nationally known companies actively 
engaged in the provision of the utility commodity, 
describing the privatization project and asking for a letter 
response expressing whether they had any interest in 
proposing. 
2.7.2.1.1.3.Publish a description of the project and formal Request 
for Interest (RFI) in the FedBizOpps Synopsis.  It should 
 
 25 
 
be noted that FedBizOpps stands for Federal Business 
Opportunities.  FedBizOpps.gov is the single government 
point-of-entry for Federal Government Procurement 
opportunities over $25,000.  Government buyers are able 
to publicize their business opportunities by posting 
information directly to FedBizOpps via the Internet.  
Commercial vendors seeking Federal markets for their 
products and services can search, monitor and retrieve 
opportunities solicited by the entire Federal contracting 
community.
10
 
2.7.2.1.1.4.Letters of interest alone do not constitute competition.  
Requests for non-binding business concept proposals 
from entities demonstrating interest are warranted if they 
are deemed to be beneficial.  Informational requests in 
the non-binding proposal should include the proposed 
purchase price, proposed service rates, suggested 
approaches to renovating the system if required, the 
estimated cost of the renovation, and the cost to operate, 
maintain, and renew the existing or renovated system 
over time. 
2.7.2.2.Conducting a detailed inventory of the systems 
2.7.2.2.1. The inventory establishes a list of system assets and 
determines the cost to replace each asset.  If a different 
 
 26 
 
configuration or technology is to be used in the replacement, 
its cost, rather than that for exact replacement of existing 
facilities, is estimated.  The cost of replacing assets is 
determined by using Historical Air Force Construction Cost 
Handbook supplemented by RS Means? cost-estimating 
publications.  Life expectancy is taken from manufacturers? 
literature or other life-cycle cost publications. 
2.7.2.3.Conducting a Preliminary EA 
2.7.2.3.1. The preliminary EA compared government should cost of 
owning and operating the system versus the privatization 
alternative.  This requires developing cash-flow projections 
for government should cost and privatization and performing a 
life-cycle cost analysis on both alternatives.  The components 
of the government should cost cash flow are as follows: 
2.7.2.3.2. Establishing 50-year government should cost cash flow 
2.7.2.3.2.1.Renewal and replacement costs.  This is accomplished 
by performing the following: 
2.7.2.3.2.1.1. Establish an inventory of the system as 
described above 
2.7.2.3.2.1.2. Perform a facility condition assessment on the 
inventoried system to include a physical inventory 
review and spot check to confirm the system and its 
condition and maintenance and repair backlog.  
 
 27 
 
Information is developed so that a facility condition 
index can be ascribed to each system 
2.7.2.3.2.1.3. Establish renewal and replacement costs based 
on the assessment making sure deficiency 
corrections are not double counted.  Government 
Should Cost Renewal and Replacement costs are to 
be shown in the year required. 
2.7.2.3.2.2.New construction costs.  Based on the results of the 
Utility Requirements Assessment and the regulator 
review, the system?s functional deficiencies that require 
expansion for future loads or process enhancements to 
meet expected changes in regulatory permitting 
requirements were identified.  New construction costs to 
meet these requirements are estimated based on the cost 
of similar construction, to include debt service or loan 
interest charges, and factored into the cash flow when the 
requirements have to be in place.  Only construction or 
demolition projects that are currently funded are included 
in the analysis. 
2.7.2.3.2.3.Training cost due to privatization 
2.7.2.3.2.4.Adjusted operating costs.  Operating costs include 
operations, maintenance, and general and administrative 
costs.  In order to obtain this data, a detailed review of 
 
 28 
 
financial records is performed.  Additionally, key 
personnel are interviewed to verify costs data and to be 
sure that all costs are included in the overall estimated 
cost of service.  Government costs are then adjusted to 
account for under-funded or inadequate O&M 
procedures. 
2.7.2.3.3. Establishing 50-year privatization cash flow 
2.7.2.3.3.1.Estimated purchase price.  Ultimately the fair market 
value of the utility system will be determined by the 
SECAF during Phase III.  However, to perform the 
Preliminary EA, an estimated value of the utility system 
is established and assumed to be the purchase price of the 
system.  Using a similar methodology as that used for 
developing the renewal and replacement costs provides 
an estimated purchase price.  This similar method uses 
the replacement cost new (RCN) for the inventoried 
components and applies a factor for depreciation based 
on the age of each component.  This method, commonly 
referred to as replacement cost new less depreciation 
(RCNLD), provides a basis for an estimated purchase 
price. 
2.7.2.3.3.2.Estimated utility service rates.  Information collected 
via the state and local regulatory reviews and the 
 
 29 
 
Industry Market Analysis is used to help develop 
estimated service rates.  These estimated service rates are 
used to project a cash-flow for the privatization 
alternative.  The estimated service rate includes only the 
costs associated with operating and maintaining the 
utility systems and not the utility commodity itself. 
2.7.2.3.4. Performing a life-cycle cost analysis 
2.7.2.3.4.1.Net Present Value (NPV) analysis on 50-year cash 
flows.  The life-cycle cost analysis compares projected 
50-year cash flows for the government should cost and 
privatization alternatives using the following steps: 
2.7.2.3.4.1.1. Establish a cash-flow projection for maintaining 
the government should cost alterative.  This cash-
flow projection incorporates costs associated with 
current operations, adjusted for under-funded or 
inadequate O&M, and renewal and replacement 
costs. 
2.7.2.3.4.1.2. Establish a cash-flow projection for the assumed 
privatization alternative.  This cash-flow projection 
incorporates costs associated with the sale of the 
utility system (estimated purchase price) and the 
purchase of utility service from the new owner 
(estimated service rates).  
 
 30 
 
2.7.2.3.4.1.3. Conducting NPV analysis of the government 
should cost and privatization alternatives to 
determine the lease cost alternative.  
2.7.2.4.The preliminary EA is considered to have at lease an 80 
percent confidence rate as it uses best available industry 
information and engineering judgment.  However, it 
cannot reflect the strategic business value of these 
systems.  That can only be determined through the 
solicitation of binding proposals.  Unless the preliminary 
EA indicates that estimated privatization costs are greater 
than the government should cost by 20 percent or more, 
MAJCOMs proceed on to Phase II obtaining binding 
proposals fro industry for development of a certified EA.  
The ?20% rule? applies only to the preliminary economic 
analysis?actual privatization costs indicated by the 
proposal can not exceed the government should cost to be 
determined economically feasible. 
2.7.2.5.Preparing a Feasibility Analysis Report, which contains 
the analyses performed under Phase I and justifies 
continuing on to Phase II or eliminating the utility from 
further consideration. 
2.7.2.6.Once all Phase I analyses and the Preliminary EA are 
complete, the Feasibility Analysis Report is assembled 
 
 31 
 
and submitted to the MAJCOM and HQ USAF.  This 
report includes all analyses performed to demonstrate the 
economic viability of the project and recommends 
continuing on with Phase II of the project or eliminating 
the utility from further privatization considerations. 
2.7.2.7.Conducting reviews and implementing a ?go/no-go? 
decision.  The final decision point in Phase I is whether to 
commit additional resources to further define the project 
and develop the RFP.  In order to proceed to Phase II, 
MAJCOM review of the project is obtained, and a ?go/no-
go? decision is made by the appropriate base authority.  
Following the decision, HQ USAF is notified that the 
project is proceeding to Phase II or that privatization is not 
feasible. 
 
 32 
 
 
Figure 2 Phase I of the Utilities Privatization Process 
 
2.8. Phase II: Comprehensive Analysis 
2.8.1. Once Phase I is approved by the MAJCOM, Phase II is initiated.  
Phase II includes the steps necessary to perform the Comprehensive 
Analysis, which defines the terms and conditions of the proposed 
privatization.  Phase II also includes developing the Draft RFP.  This 
phase includes the following: 
 
 33 
 
2.8.1.1.Reviewing the Project Plan and Feasibility Analysis 
Report from Phase I.  Based on the findings during the 
Feasibility Analysis, the Project Plan should be reviewed 
to ensure budget, schedule, personnel, and points of 
contact are updated and appropriate. 
2.8.1.2.Complying with the Environmental Impact Analysis 
Process (EIAP).  Environmental analysis is required to 
comply with the National Environmental Policy Act 
(NEPA) and is performed in accordance with AFI-32-
7061.  Privatizing utility systems should generally qualify 
for a categorical exclusion (CATEX).  There will also be 
instances where a CATEX will not apply, in which case 
an environmental assessment or environmental impact 
statement (EIS) may be necessary. 
2.8.1.3.Determining if an Environmental Baseline Survey will be 
required 
2.8.1.4.Developing draft real estate instruments, using templates 
provided by HQ USAF.  There will typically be two and 
sometimes three documents that define the relationship 
with the new utility provider: 
2.8.1.4.1. Utility service contract resulting from solicitation 
2.8.1.4.2. A Bill of Sale describing the property being conveyed, 
including an inventory of the equipment and structures 
 
 34 
 
2.8.1.4.3. Access to systems on government property is normally 
gained through terms and conditions of the service contract.  
However, in certain instances where required, a Right-of-Way 
detailing the new owner?s rights relating to access to its utility 
system and describing the extent of the lands covered by the 
access rights may be executed.  In these instances, the Right-
of-Way is an attachment to the RFP.  The provisions of the 
Bill of Sale and the Right-of-Way, if there is one, supersede 
the provisions of the contract if there is a conflict.  This is to 
help mitigate risk by ensuring that access to the installation, 
and the operational security it protects, are not inadvertently 
lost during routine changes in the contract.  Additionally, the 
Bill of Sale is permanent and the term of the Right-of-Way 
will always be at least as long as the contract and may be 
longer (and is subject to renewal). 
2.8.1.5.Developing draft transition plans.  The following are 
three key transition plans that should be developed during 
Phase II: 
2.8.1.5.1. Employee Transition Plan.  Planning to mitigate the impact 
of privatization on the lives of Air Force employees is Air 
Force policy, and it will significantly increase the prospects 
for project success.  The manpower representative on the 
project team should determine the potential impact on 
 
 35 
 
employees and provide detailed guidance on reduction-in-
force procedures if necessary.  This information will provide 
the basis for an Employee Transition Plan.  The plan should 
include the following: 
2.8.1.5.1.1.Coordinating with the unions representing affected 
employees as soon as any significant prospect of 
privatization is identified 
2.8.1.5.1.2.Communicating the schedule and conditions for the 
potential transfer and transition assistance available to 
affected employees as early as possible in the process 
and continuously thereafter 
2.8.1.5.1.3.Submitting requests for separation incentive and early 
retirement authorizations 
2.8.1.5.1.4.Setting up out-placement and job transition assistance 
2.8.1.5.1.5.Explaining the OBM Circular A-76 does not apply to 
utilities privatization 
2.8.1.5.1.6.Addressing employee rights with regard to employment 
with the new owner 
2.8.1.5.2. Operational Transition Plan.  Once the Air Force has 
determined which elements are essential, the RFP should 
require a contractor-developed Operational Transition Plan 
that addresses each element of operational transfer as part of 
the technical proposal.  It is important that a cooperative spirit 
 
 36 
 
be demonstrated between the system?s current and future 
owners and operators.  A plan with well-communicated 
procedures and expectations will help ensure a smooth 
operational transition.  The Operational Transition Plan should 
include the following activities: 
2.8.1.5.2.1.Scheduling transfer of system O&M, including a period 
of joint operation or on-site training for new employees 
and supervisors 
2.8.1.5.2.2.Scheduling construction or installation of any 
connection requirements, such as meters, pipelines, 
feeders, switch gear, and transformers, and any 
associated outages 
2.8.1.5.2.3.Transferring or modifying environmental permits, if 
appropriate 
2.8.1.5.2.4.Conducting joint inventories of personal property to be 
transferred, such as special tools, equipment, and spare 
parts 
2.8.1.5.2.5.Providing operations manuals and maintenance records 
2.8.1.5.2.6.Recording initial meter reading for billing purposes 
2.8.1.5.3. Post-Award Project Management Plan.  Most of this work 
will fall under the authority of the Contracting Officer as part 
of the acquisition strategy, but it should include establishing a 
 
 37 
 
Post-Award Project Management Team, which will be 
responsible for the following: 
2.8.1.5.3.1.Providing quality assurance/quality control (QA/QC) 
2.8.1.5.3.2.Serving as a customer relations liaison 
2.8.1.5.3.3.Assessing contractor performance annually or more 
frequently if required by the contract 
2.8.1.5.3.4.Verifying services received 
2.8.1.5.3.5.Processing payments 
2.8.1.5.3.6.Determining when the contract requirements are met 
for the purpose of financial close-out 
2.8.1.6.Preparing an Acquisition Plan.  Using the uniform 
template provided by HQ USAF, the Installation 
Contracting Officer is responsible for completing 
development of the contract vehicle, which will procure 
utility services after privatization, and establish the long-
term relationship of the utility provider so that potential 
privatization concerns are mitigated. 
2.8.1.7.The privatization acquisition strategy should be a best-
value source selection made in accordance with Air Force 
Federal Acquisition Regulation Supplement (AFFARS), 
Part 15, from proposals that first demonstrate economic 
cost avoidance to the Air Force should cost in their 
respective proposals.  This meets the requirements of 10 
 
 38 
 
U.S.C. ? 2688 for lower long-tem costs.  Since 10 U.S.C. 
? 2688 requires the privatization be economical in 
accordance with the terms of the statute, no award may be 
made that will not meet the requirements of the EA 
required to be sent to Congress.  Once the SSET identifies 
those offerors that appear to meet that economic test, an 
award may then be based on best value.  There is no 
requirement to award to the best price.  The Contracting 
Officer must prepare an Acquisition Plan that describes 
the acquisition strategy. 
2.8.1.8.The Acquisition Plan should be developed in accordance 
with FAR Part 7.105, Acquisition Planning.  Considering 
all aspects of the planning and acquisition process, the 
Acquisition Plan should address the following (not all 
inclusive): 
2.8.1.8.1. Statement of Need.  Present a statement of need that 
summarizes the purpose for the acquisition and feasible 
alternatives to the acquisition. 
2.8.1.8.2. Applicable Conditions.  State the requirements for 
compatibility with existing and future programs, including the 
Housing Privatization Program, discuss method of conveyance 
of property, and discuss applicable installation specific 
 
 39 
 
requirements that should be reflected in the property transfer 
instrument. 
2.8.1.8.3. Cost.  State the cost goals of the acquisition, discuss how 
life-cycle cost will be considered, and discuss how should-cost 
figures into the acquisition. 
2.8.1.8.4. Performance.  State the performance objectives of the 
acquisition, and discuss how privatization will affect utility 
service performance to the end users. 
2.8.1.8.5. Contract Type.  State the contracting type and method that 
will be used and how goals and objectives of privatization will 
be achieved. 
2.8.1.8.6. Risks.  Discuss technical, cost, and schedule risks that are 
involved with privatization, and describe what efforts will 
mitigate the risk. 
2.8.1.8.7. Competition.  Discuss how competition will be sought, 
promoted, and sustained throughout the acquisition process, 
and discuss incentives and disincentives that should be 
considered for the RFP. 
2.8.1.8.8. Logistics Considerations.  Discuss the reliability, 
maintainability, and QA issues that will be required by the 
RFP.  A Post-Award Management Plan should be required to 
address these issues as part of the RFP. 
 
 40 
 
2.8.1.8.9. Milestones.  Present the acquisition strategy and steps to 
achieving contract award.  Special considerations should be 
given to providing offerors sufficient time to develop quality 
offers even if that means longer than usual proposal periods.  
Because of the length of the contract period and the extreme 
complexity of the action, it is highly desirable to receive the 
best offers we can, even if that requires more investment of 
time at the start. 
2.8.1.9.The Final Acquisition Plan will be a comprehensive plan 
that fulfills the Air Force needs in a timely and cost-
effective manner and contains the overall strategy for 
managing the acquisition process.  The overall strategy 
presented in the Acquisition Plan will precipitate the 
individual requirements in the RFP.  If an issue is 
important, identify it in the Acquisition Plan and RFP and 
require that it be specifically addressed in the technical 
proposal prepared by the Offeror. 
2.8.1.10. Preparing a Source Selection Plan (SSP) and 
establishing the Source Selection Evaluation Team 
(SSET).  A SSP is required.  The SSP, a key document is 
conducting source selection, should be jointly developed 
by contracting personnel and personnel responsible for the 
requirement.  For privatization projects, the Divestiture 
 
 41 
 
Authority has been delegated to SAF/IEI, but the SSA for 
the utility services contract has been delegated in 
accordance with FAR contract value standards.  Because 
of this, the Divestiture Authority and the SSA will almost 
certainly not be the same person.  Since the acquisition of 
the utility services contract cannot take place without the 
sale of the system, the decision by the SSA to award or 
not must be supported by the Divestiture Authority?s 
decision to sign the real estate documents.  Nevertheless, 
the SSA should proceed as though this is a typical 
acquisition with the understanding that contract award 
cannot occur without concurrence by SAF/IEI.  The SSP 
should contain the following: 
2.8.1.10.1.1.  Introduction.  This briefly describes what is 
being acquired and the goals and objectives of the 
acquisition. 
2.8.1.10.1.2. Source Selection Organization.  This section 
describes the SSA and SSET organizations (including 
Government and non-Government advisors).  Key 
members must be identified by name, organization, and 
position title.  Use of non-Government advisors shall 
conform to AFFARS 5315.303-90 (g). 
 
 42 
 
2.8.1.10.1.3. Proposed Pre-Solicitation Activities.  This 
section describes the Utilities Market Survey and how it 
was used to develop competition.  It describes the steps 
that will be used to qualify offerors. 
2.8.1.10.1.4. Evaluation Procedures.  This section describes 
the process that will be used by the SSET to evaluate 
offerors proposals.  This discussion should center on 
developing government should costs and the EA process. 
2.8.1.10.1.5. Evaluation Criteria.  This section should 
describe the cost criterion and specific criteria, including 
factors and, when appropriate, sub-factors, and elements.  
This information should be exactly duplicated in (section 
M of) the RFP.  This section should also describe the 
assessment criteria and how they apply to the evaluation.  
The evaluation will be based upon four factors: Cost or 
price, Past Performance, Mission Capability, and 
Proposal Risk.  The RFP shall describe the evaluation 
factors and their relative order of importance.  Of 
paramount importance is the financial capability of the 
Offeror.  Evaluation should be of the Offeror itself, not 
of affiliated companies that cannot be held legally 
responsible for the Offeror?s obligations.  Be particularly 
cautious of an Offeror that has created a ?shell? company 
 
 43 
 
to make its offer in order to avoid liability to the parent 
entity.  Any assurances from an Offeror that its parent of 
affiliated company will financially support the Offeror 
should be carefully examined to ensure there is an 
unbreakable legal commitment that the Air Force can 
enforce should the Offeror fail to perform.  The 
unsupported and unanalyzed assurances of the Offeror 
should never be accepted without independent 
confirmation.  Finally, this section describes general 
considerations and how they relate to the evaluation of 
the Offeror?s proposal. 
2.8.1.10.1.6. Acquisition Strategy.  The SSP summarizes the 
Acquisition Plan, including the contract type proposed, 
incentives, disincentives, special contract clauses, and 
other elements reflective of the Acquisition Plan. 
2.8.1.10.1.7. Schedule of events.  This schedule identifies and 
establishes the schedule for significant source selection 
activities in sufficient detail to allow the reviewing 
authorities to assess the practicality of the schedule.  The 
AFFARS Part 5315 provides guidance on source 
selection events.  The Phase III schedule will be used to 
develop the source selection schedule.  The source 
selection schedule will support the OSD milestone dates. 
 
 44 
 
2.8.1.10.2. Draft Request for Proposal.  USAF is using a standard 
template for utilities privatization.  Use the appropriate 
standard RFP template with its attachments provided by HQ 
USAF.  HQ USAF has prepared two standard templates: 
competitive and sole source.  For Reserve Components located 
on leased property, there are special provisions provided, 
particularly in the property transfer instruments, dealing with 
circumstances peculiar to them.  For standard template 
changes, the installation must request a deviation from HQ 
USAF.  Request for deviations are forwarded through the 
MAJCOM to HQ AFCESA/CENU.  AFCESA will forward 
request to AF/A7CAE who will serve as the focal point for Air 
Staff coordination.  Each deviation request must include a 
detailed statement of the deviation requested and an 
explanation of the need for the deviation. 
2.8.1.10.2.1. Where the DESC is providing contracting 
support, the DESC version of the Air Force templates 
will be used.  Preparing the Draft RFP is the 
responsibility of the Contracting Officer. 
2.8.1.11. Preparing the Draft RFP, using the templates provided 
by HQ USAF 
2.8.1.12. Preparing a Draft Comprehensive Analysis Report.  At 
this point, the Draft Comprehensive Analysis Report 
 
 45 
 
should be prepared.  The Draft Comprehensive Analysis 
Report should contain all data and analyses performed 
during the Phase II process and summarized the Phase I 
process.  
2.8.1.13. Conducting reviews and gaining approvals.  The Draft 
RFP and Draft Comprehensive Analysis Report are 
approved by the installation.  The SSA will approve the 
RFP before it can be issued. 
 
 
 46 
 
 
Figure 3 Phase II of the Utilities Privatization Process 
 
2.9. Phase III: Final Feasibility, Approval, and Implementation 
2.9.1. The last phase is focused on completing the acquisition, assessing the 
value of the contractor proposals, gaining HQ USAF approval, notifying 
Congress, awarding the project, and implementing the transition. 
 
 47 
 
2.9.2. Following review and approval of Phase II plans, Phase III of the 
utilities privatization process completes the process.  This final phase 
includes the following: 
2.9.2.1.Reviewing the Project Plan, Feasibility Analysis, and 
Comprehensive Analysis.  Based on the findings of the 
Comprehensive Analysis, a cursory review of the Project 
Plan should be conducted to ensure budget, schedule, 
personnel, and points of contact are updated and 
appropriate. 
2.9.2.2.For systems of little or no market value due to age and/or 
physical condition, and are ready for near future 
replacement and are partially owned by the utility 
provider, the CO may consider other contracting methods 
to divest the utility such as the use of the GSA Area-wide 
contract or sole source. 
2.9.2.3.Finalizing the RFP.  After the Draft RFP is prepared, 
approved changes are incorporated into the appropriate 
sections of the RFP, and all sections to be included in the 
Final RFP are completed. 
2.9.2.3.1. It will be beneficial to provide site tours and open a 
technical library related to the utility system so that available 
information is provided to all interested parties as early in the 
privatization process as possible.  If a technical library is not 
 
 48 
 
established before the RFP is issued, it should be immediately 
afterward.  This will allow Offerors the maximum time 
possible to develop their proposals.  Sufficient time should be 
permitted in the RFP for the Offerors to conduct the level of 
due diligence both parties would want before entering into a 
permanent relationship.  Advanced RFIs in the privatization 
process along with access to technical information in a central 
library can help accelerate the time from RFP to proposal. 
2.9.2.3.2. The Air Force Contracting Officer is responsible for the 
final assembly of the RFP, which will include all sections of 
the RFP. 
2.9.2.4.Preparing and issuing the FedBizOpps Synopsis for the 
project.  A principle goal of this activity is generating the 
maximum competition among qualified entities.  This is 
accomplished by announcing the solicitation in the 
FedBizOpps Synopsis, national newspapers, and trade 
journals to get as broad a dissemination as possible.  The 
FedBizOpps Synopsis should describe the project and 
qualification process that will be implemented.  The 
Synopsis should provide logistic information regarding 
when, where, and how to request the RFP. 
2.9.2.5.Updating government should cost developed during 
Phase I 
 
 49 
 
2.9.2.6.Issuing the RFP and conducting the site tour.  The SOW 
will include A-E deliverables of the updated ?Cost 
Analysis? using the AF CEA Model, Government Should 
Cost Estimate (GSCE) Model, and GSCE supporting data 
template.  The initial delivery will occur prior to RFP 
release.  The entire RFP is issued to all entities responding 
to the FedBizOpps Synopsis.  Additional RFPs will also be 
issued subsequent to the initial issuance upon request to 
the CO.  Approximately two weeks after issuing the RFP, 
the CO should conduct a site tour beginning with a pre-
proposal conference for potential offerors.  This site tour 
is a critical step in preparing the Offerors? proposals.  The 
site tour should provide insight into the physical 
conditions of the system, O&M practices, and overall 
effectiveness of the system to provide quality service to 
the Air Force.  The Installation Civil Engineer should 
attend the site tour to provide technical information about 
the system and answer questions related to its operation 
and condition.  Following the site tour, a timeframe is 
established in which prospective offerors are allowed to 
submit questions in writing.  Air Force responses to the 
questions must be provided to all participants involved in 
the procurement.  If warranted, the CO will prepare and 
 
 50 
 
issue responses as amendments to the RFP.  The process 
of responding to Offeror questions cannot be used to 
circumvent the requirement to obtain HQ USAF approval 
for deviations to the RFP and its attachments.  The CO 
should be extremely cautious in answering questions from 
Offerors in order not to create conflicts with provisions in 
the uniform Air Force RFP and the property transfer 
instruments.  If uncertain, seek assistance from experts at 
HQ USAF.      
2.9.2.7.Requesting technical and cost proposals from qualified 
firms 
2.9.2.8.Conducting a Technical Evaluation Process.  The 
Technical Evaluation Process begins with a request for, 
and acceptance of, separate technical and cost proposals 
from qualified offerors.  The Government will accept 
proposals up to the stipulated time and date, evaluating the 
technical proposals, hold discussions with offerors, secure 
final revised proposals, and select the proposal that meets 
the economic criteria for 10 U.S.C. ? 2688 and offers the 
best value to the Air Force. 
2.9.2.8.1. Due diligence visits are funded and conducted by the 
MAJCOM.  The visits should be conducted following 
 
 51 
 
negotiations with the offerors and during preparation of their 
final offers. 
2.9.2.8.2. The Integrated Data System (IDS) automated source 
selection tool is available as an option for use in the source 
selection process.  IDS training to the SSET should occur prior 
to receipt of the proposals. 
2.9.2.8.3. Receiving and evaluating technical and cost proposals.  
Proposals will only be accepted up to the time indicated by the 
instructions to offerors or subsequent change through an 
amendment issued by the CO.  Once the CO receives the 
proposals and has determined they meet the submission 
requirements, the SSET is provided the technical and cost 
portions of the proposals to evaluate against the evaluation 
criteria. 
2.9.2.8.4. The SSET evaluates the proposals to qualify the offerors in 
terms of providing quality service to the Air Force.  This 
evaluation must be objective and solely based on the 
evaluation criteria.  Subjective evaluation could lead to protest 
following the award of the project.  AFFARS, Part 15 
provides guidance on performing technical evaluations of 
proposals and determining the competitive range.  The SSET 
will use the life-cycle cost analysis model provided by HQ 
AFCESA for each proposal.  Life-cycle cost analysis will be 
 
 52 
 
based on the offerors? proposal and updated government 
should costs discussed below.  This model analysis will 
identify proposals offering cost avoidance and support holding 
discussions with offerors. 
2.9.2.8.5. Holding discussions with offerors.  Once the SSET had 
determined, based on evaluation criteria, a list of qualified 
offerors in the competitive range, the CO will initiate 
discussion with those entities in accordance with AFFARS, 
Part 15 to resolve any questions or deficiencies.  These 
discussions should lead to preparing and submitting final 
revised proposals.  MAJCOMs will provide guidance to the 
Base and ensure that offerors are allowed access to those 
utility systems for which they are preparing revised proposals.   
2.9.2.8.6. Preparing final revised proposals by offerors 
2.9.2.8.7. Reviewing final revised proposals.  After receiving the 
final revised proposals by the offerors, the SSET evaluates the 
proposals to determine which proposals offer the ?best value? 
(quality and cost trade-off). 
2.9.2.8.8. The terms of these final revised proposals will be input into 
the economic model used in the EA to compare the Air 
Force?s should costs.  This information will be used in the 
overall source selection process to select a provider.  
 
 53 
 
AFFARS, Part 15 describes the process for documenting the 
evaluation process of the final revised proposals. 
2.9.2.9.Updating Government Should Costs (Including Major 
ANG Installations).  The government should cost shall be 
updated based on the following process: 
2.9.2.9.1. All cost will be escalated to a common Fiscal Year using 
the Gross Domestic Product (GDP) deflator (Chained Price 
Index) available from 
http://www.gpoaccess.gov/usbudget/index.html.  Go to the 
?FY XXXX budget? then ?Historical Tables?, then ?Section 
10?.  The GDP deflator for years beyond those already 
calculated shall be assumed to increase at the same rate as the 
last year in the table. 
2.9.2.9.2. The costs of privatization do not start until the final source 
selection has been made and the service contract is signed.  
All costs before that date are sunk costs and not part of the 
analysis. 
2.9.2.9.3. Gather updated data from the base on the current inventory 
and adjustments to the government should costs. 
2.9.2.9.4. Perform a facility condition assessment on the inventoried 
system to include a physical inventory review and spot check 
to confirm the system and its condition and maintenance and 
 
 54 
 
repair backlog; information should be developed so that a 
facility condition index can be ascribed to each system 
2.9.2.9.5. Replacement Cost New.  Determine RCN based on the 
updated inventory using the HQ AFCESA component cost 
database, Area Cost Factors, and government markups (5% for 
contingencies; 5.7% Continental US and 6.5% everywhere 
else for SIOH; and 10% for Design).  Replacement Cost New 
will be estimated based on what it would cost to install the 
component today using current materials (e.g. polyethylene 
pipe versus black steel pipe) assuming a green field site (no 
roads, sidewalks, etc.). 
2.9.2.9.6. Replacement Cost New Less Depreciation.  Determine 
RCNLD based on remaining useful life.  Useful life based on 
HQ AFCESA component life database on HQ AFCESA 
component life database adjusted by the facility condition 
assessment. 
2.9.2.9.7. Book Value.  Determine Original Cost New Less 
Depreciation (OCNLD) or Book Value (BV) by deescalating 
RCN back to the installation date of each component using 
current GDP deflator and depreciating the components based 
on remaining useful life.  Useful life will be based on HQ 
AFCESA component life database adjusted by the facility 
condition assessment. 
 
 55 
 
2.9.2.9.8. Deficiencies.  Identify and cost Physical and Functional 
deficiencies. 
2.9.2.9.8.1.Physical Deficiencies.  The facility condition 
assessment will identify the system?s current physical 
deficiencies that must be corrected to bring the utility 
system to industry standards or correct physical 
deterioration.  The timeline for amortizing the deficiency 
corrections which will be determined for each specific 
utility, deficiency, and funding constrains could range 
from two to seven years or more   Overdue renewals and 
replacements will be covered under Renewal and 
Replacement costs and not as deficiencies.  Specific 
Industry standards not met or physical deterioration 
being corrected will be cited in the documentation for 
each deficiency.  Area Cost Factors, and government 
markups (10% for contingencies; 5.7% Continental US 
and 6.5% everywhere else for SIOH; and 10% for 
Design) apply. 
2.9.2.9.8.2.Functional Deficiencies.  The system?s functional 
deficiencies that will require expansion for future loads 
or process enhancements to meet expected changes in 
regulatory permitting requirements will be identified.  
New construction costs to meet these requirements 
 
 56 
 
should be estimated based on the HQ AFCESA 
component cost database and factored into the cash flow 
when the requirement must be in place.  Specific 
justification for each functional deficiency will be cited 
in the documentation.  Future load requirements will only 
cover funded projects.  Area Cost Factors and 
government markups apply. 
2.9.2.9.9. Renewal and Replacements (R&R).  Identify and cost 
R&R.  If a different configuration or technology would be 
used in the replacement, its cost, rather than that for exact 
replacement of existing facilities, should be estimated.  
Additionally, R&R shall include costs for cuts and patches to 
other facilities (roads, sidewalks, etc.) and costs for 
connections to components not being replaced that may be 
required to replace the components.  Use the HQ AFCESA 
component cost and life expectancy database along with the 
facility condition assessment to determine costs and 
replacement cycles.  Coordinate R&R projects with 
deficiencies so not to double count replacements.  Area Cost 
Factors and government markups apply. 
2.9.2.9.10. Government should costs.  Determine the Government 
should O&M costs.  The government insurance portion of the 
Government Should Costs is calculated as shown below. 
 
 57 
 
2.9.2.9.11. Government Insurance Costs.  The Government insurance 
cost will be calculated using the procedures in OMB Circular 
A-76 Revised Supplemental Handbook, Part II, Chapter 2, 
paragraph D.7.  The Net Book Value of the utility system, 
vehicles, equipment, and facilities is calculated by taking 50% 
of the Replacement Cost New.  Add the average monthly 
value of materials and supplies to the net book value of the 
system, vehicles, equipment, and facilities and then multiply 
this total by 0.5% to determine the casualty portion of 
insurance.  The liability portion of insurance will be calculated 
by multiplying the labor costs times 0.7%.  Insurance is 
calculated for both the Unadjusted Government Costs as well 
as for the Adjustments to the Government Costs. 
2.9.2.9.12. Determine Government Privatized Costs.  Government 
Privatized Costs include Contract Administration, Price Re-
determination Negotiations, Transition costs, Training Costs, 
Reduction in Bids for Taxes, and any other costs incurred by 
the Government due to the privatization effort after the 
contract is signed. 
2.9.2.9.13. Contract Administration.  5% of the privatized total cost up 
to $100,000 is the total installation costs for contract 
administration including all G&A cost.  Since contract 
oversight includes oversight of the R&R and Capital Upgrade 
 
 58 
 
work in addition to the O&M work, the Air Force calculates 
contract oversight as 5% of the total privatized contract 
amount up to $100,000.  The Air Force applies the percentage 
to the privatized contract amount rather than the government 
should cost O&M cost because the contract oversight is work 
performed on the privatized contract and the privatized cost is 
a better measure of the amount of work required. 
2.9.2.9.14. Price Re-determination Negotiations.  For systems with a 
Privatized O&M cost of less than $100,000 per year, add 
$2500 (FY2004 dollars) every three years.  For systems with a 
Privatized O&M cost greater than $100,000 per year, add 
5.4% of the Privatized O&M every three years. 
2.9.2.9.15. Transition Costs consist of Operations Transfer and 
Personnel Costs.  Operational Transfer and Personnel 
Displacement costs shall be calculated as 10% of the 
Government Should O&M cost without G&A up to $50,000.  
The current OSD guidance calculation of 10% of the 
Unadjusted Status Quo Labor cost does not adequately cover 
the transition cost for contract operated bases with no in-house 
labor nor does it adequately cover other transition costs from 
vehicles, materials, etc. 
2.9.2.9.16. Training Costs.  Include any additional costs for training 
required because of privatization such as the construction of 
 
 59 
 
training mock-ups.  Personnel manpower costs are not part of 
this cost because they are excluded from the Government 
Should Costs.  Only extra costs such as TDY cost to a 
different location to get training will be included.  
Privatization contractor costs will be included in their bids. 
2.9.2.9.17. Taxes.  If the bidder pays Federal Taxes, including 
Contribution in Aid of Construction, they will be subtracted 
from the Privatized cost in the economic analysis.  The 
Federal Taxes paid are calculated by multiplying the annual 
privatized cost times the applicable utility rate from OMB 
Circular No. A-76, Revised Supplemental handbook, 
Performance of Commercial Activities, Appendix 4, or AFI 
38-203, Commercial Activities Program, Attachment 9.  All 
Federal taxes (including Contribution in Aid of Construction) 
contained in an offer are credited back to the Offeror by 
entering them as a negative value in the analysis on the 
privatized side.  In cases where the Offeror has identified the 
Federal Taxes included in their costs, these may be used in 
lieu of the method above if they have shown how the taxes 
were calculated and they appear correct. 
2.9.2.9.18. Other Government Costs.  Document and certify any other 
costs of privatization not included in the above categories.  
The updated Government Should Costs will be prepared using 
 
 60 
 
the AF CEA Model, GSCE Model, and GSCE Supporting 
Data Template. 
2.9.2.10. Cost Analysis for SSET Information. 
2.9.2.10.1. Quantify and Forecast the Full Cost of Service for the 
Government Should Cost Alternative. 
2.9.2.10.1.1. The updated government should cost, 
established earlier in Phase III, are used to develop a 
cash-flow projection for keeping the service in-house.  
This government should cost cash-flow projection should 
account for all O&M costs (adjusted as appropriate), 
R&R costs, known deficiency construction required for 
increased utility requirements, and known deficiency 
upgrades required to maintain compliance with state 
and/or local regulations.  The cash-flow projection 
should be developed using the AF CEA Model.  Interim 
A-E analyses deliverables to support the SSA decision 
and award will also be identified. 
2.9.2.10.2. Quality and Cost of Service from Received Proposals for 
the Privatization Alternative. 
2.9.2.10.2.1. Proposals will be evaluated in terms of purchase 
price and service fees.  Projected cash flows will be 
prepared based on the proposed acquisition price and 
service fees.  Cash-flow projection for the privatization 
 
 61 
 
alternative is determined from data contained in Section 
B and Section L Schedules of the Offeror?s proposal.  
This data is entered in the AF CEA model in order to 
determine if the proposal is lower than the government 
should cost.  Best and Final proposals that do not meet 
the requirement to be lower than the government should 
cost will not be considered. 
2.9.2.10.2.2. The cost analysis will consist of cash flow equal 
to the number of years in the service contract of both the 
government should cost and privatization alternative and 
comparison of the present value of each.  Government 
should costs will include capital costs and annual 
operating costs such as O&M, G&A, and insurance costs.  
Capital costs cover deficiency corrections costs and 
R&R.  Privatized costs will include the rate charged to 
the Air Force for utility service by the new owner plus 
the Air Force?s own management costs (contract 
administration) to oversee the new owner?s operation.  
2.9.2.11. Selecting the successful Offeror 
2.9.2.12. Preparing a Draft EA 
2.9.2.12.1. Once the SSET has recommended a decision, a Draft EA 
must be prepared to: 
 
 62 
 
2.9.2.12.1.1. Assure that the privatization alternative does or 
does not meet title 10 U.S.C. ? 2688 and DOD guidance. 
2.9.2.12.1.2. Conform to guidance specified in OBM Circular 
A-94. 
2.9.2.12.1.3. Conform to guidelines specified by DOD 
Guidance. 
2.9.2.12.1.4. Document the life-cycle cost and the benefits 
associated with the government should cost and with 
privatization.  A qualitative analysis of benefits should be 
documented by the SSET. 
2.9.2.12.1.5. Show estimates of the OCNLD and the RCNLD 
of the utility system as well as the Fair Market Value of 
the proposal(s). 
2.9.2.12.1.6. If there is a recommendation to award to a 
proposal that meets all requirements, then the economic 
analysis should be limited to comparison of the 
recommended proposal with the government should 
costs.  If the SSET is not making a recommendation for 
award, but one or more proposals are economic and 
technically qualified, then an economic analysis will be 
prepared for all economic and technically qualified 
proposals.  If no proposal meets the economic criteria, 
then an economic analysis will be made for each 
 
 63 
 
proposal not meeting the economic criteria but are 
technically acceptable. 
2.9.2.12.1.7. An economic analysis is not required for 
proposals that are not technically acceptable. 
2.9.2.12.1.8. The projected cash flows should be prepared 
according to the following: 
2.9.2.12.1.8.1. Quantify and forecast the full cost of service for 
the government should cost. 
2.9.2.12.1.8.2. Quantify the cost of service from the 
recommended proposal or all uneconomic proposals 
if none are recommended.  
2.9.2.12.1.8.3. Conduct life-cycle cost analysis using the AF 
CEA Model. 
2.9.2.12.1.8.4. The Draft EA(s) must be reviewed following the 
DOD Guidance for certification and coordination by 
base and MAJCOM civil engineer, FM, and HQ 
AFCESA personnel.  Certification by comptroller 
personnel means that an EA has been prepared 
according to DOD and AF guidance.  Certification 
does not mean that the comptroller organization 
endorses the recommendation contained in the EA.  
Only responsible functional officials can judge 
whether the recommendation is appropriate.  
 
 64 
 
Certification by comptroller personnel attests to the 
proper use of economic principles in the analysis 
and to the adequacy of documentation such that the 
EA is a stand-alone document.  Certification by 
functional personnel indicates that the assumptions, 
reasoning and cost-benefit assessments in the EA 
are consistent with their area of technical expertise.  
Functional managers and reviewers at each stage of 
the review process must sign the Certificate of 
Satisfactory Economic Analysis.  EAs forwarded to 
Air Staff or Secretariat must give evidence of 
MAJCOM certification. 
2.9.2.12.1.8.5. HQ AFCESA sends the Draft EA(s) to Air 
Force Audit Agency (AFAA) for review.  The 
AFAA review will be included as an appendix to 
the EA. 
2.9.2.12.1.8.6. The Base Civil Engineer signature is required 
on the CEA. Therefore, the BCE should be involved 
in the early development of the Draft EA. 
2.9.2.12.2. Quantify and Forecast the Full Cost of Services for the 
Government Should Cost Alternative 
2.9.2.12.2.1. The updated government should cost, 
established earlier in Phase III, is used to develop a cash-
 
 65 
 
flow projection for keeping the service in-house to the 
Air Force.  This government should cost cash-flow 
projection should account for all O&M costs (adjusted as 
appropriate to meet industry standards), R&R costs, 
known MILCON construction required for increased 
utility requirements, known upgrades required to 
maintain compliance with state and/or local regulations, 
and all work required to bring and keep the system at 
industry standards. 
2.9.2.12.3. Quantify the Cost of Service from Received Proposals for 
the Privatization Alternative 
2.9.2.12.3.1. Proposals will be evaluated in terms of 
purchased price and service fees.  Those proposals that 
contain terms that are obviously not competitive will be 
eliminated from further consideration.  For those 
proposals that remain, projected cash flows will be 
prepared based on the proposed acquisition price and 
service fees.  This projection should be based on the 
utility requirements identified in Phase I and refined in 
Phase II. 
2.9.2.12.3.2. Cash-flow projection for the privatization 
alternative is determined from data contained in Section 
B of the Offerors? proposal. 
 
 66 
 
2.9.2.12.4. SAF/IEI Establish Fair Market Value.  The fair market 
value of the utility system will be recommended by the SSA 
and approved by SAF/IEI.  
2.9.2.12.5. Conduct Life-Cycle Cost Analysis.   
2.9.2.12.5.1. Life cycle cot analysis associated with the 
government should cost and privatization alternatives for 
which detailed cash flows were developed must be 
performed in a manner consistent with DOD guidelines. 
2.9.2.12.5.2. As described above, the Draft EA should be 
prepared according to DOD guidelines.  This report will 
document the life-cycle cost and the benefits associated 
with the government should cost and with privatization. 
2.9.2.12.5.3. The draft(s) will be submitted to the base FM 
and the MAJCOM for review.  They should also be 
submitted to the SSA tasked with contractor selection 
and contract negotiations. 
2.9.2.13. Preparing the Certified Economic Analysis 
2.9.2.13.1. Review comments on the Draft EA(s) should be provided 
within three weeks once the draft is submitted.  The Final 
EA(s) will be prepared based on the review comments and the 
final terms and conditions in the contract.  The Life Cycle cost 
analysis comparing the final alternatives will be prepared 
 
 67 
 
using the AF CEA Model.  The Final EA(s) shall be certified 
according to DOD Guidance before the final SSA decision. 
2.9.2.13.2. Organization responsibilities including the following: 
Utilities privatization study contractors will prepare the final 
EA(s) consistent with guidance.  Bases will certify the final 
EA(s) and MAJCOM, HQ AFCESA will review and 
coordinate on the final EA(s), and the AFAA will review the 
EA(s) which then becomes the CEA(s). 
2.9.2.14. SAF/IEI Establish Fair Market Value.  The fair market 
value of the utility system will be recommended by the 
SSA selection of the best value proposal that meets 
appropriate DOD directives and legislative requirements.  
The CEA will report on the OCNLD and RCNLD 
benchmark values and will report on the SSA?s 
recommended fair market value of the system.  Final 
determination of the Fair Market Value will be by 
SECAF. 
2.9.2.15. Finalizing transition plans.  Based on the final revised 
proposals, the transition plans can be updated to reflect the 
selected offerors approach to transition.  The final 
transition plans will be the tool used to control and guide 
the transition of operations smoothly. 
 
 68 
 
2.9.2.16. Finalizing draft real estate instrument(s).  There will be 
a separate Bill of Sale and possibly a Right-of-Way 
instrument, for each utility system without regard to 
whether the systems have been ?bundled?.  This will 
prevent confusion later by avoiding the need to separate 
real property interests contained in a single document 
should the owner transfer a system to another entity.  
Additionally, it will prevent potential confusion in the 
inventories attached to the Bills of Sale and the property 
descriptions attached to the Rights-of-Way by ensuring 
that each instrument has only one inventory or property 
description, as the case may be.  Property transfer 
instruments will be finalized by filling in the appropriate 
spaces and attaching the appropriate attachments.  The 
real estate documents are signed by the contractor and 
submitted with the bid proposal. 
2.9.2.17. Preparing the Final Comprehensive Analysis Report.  
Once the selection is made, real estate documents signed, 
and the contract is awarded, the Final Comprehensive 
Analysis Report (FCAR) will be prepared and submitted.  
The FCAR should summarize the Feasibility Analysis 
Report from Phase I with updates from Phase II and Phase 
III. 
 
 69 
 
2.9.2.18. Preparing and submitting the project Approval Package 
for SAF/IEI approval and Congressional notification 
2.9.2.18.1. The Comprehensive Analysis Report will be summarized in 
a Project Summary Report to be included in an Approval 
Package.  The Project Summary Report and CEA are included 
in an Approval Package for formal submission to SAF/IEI.  
The Approval Package will also contain the basic contract and 
property transfer instruments signed by the contractor. 
2.9.2.18.2. Proper procedures will be followed when submitting source 
selection sensitive information to the Air Staff. 
2.9.2.18.3. To avoid the Source Selection Sensitivity issue, address the 
approval package memorandum as follows: 
MEMORANDUM TO HQ USAF/A7CAE 
2.9.2.18.4. The requirements for the congressional notification 
package are Staff Summary Sheet (SSS) and four tabs and 
indicate the progress that packages go through from receipt at 
Air Staff to signed memo back to the SSA / MAJCOM / Base 
for award of contract.  The tabs are: 1) The congressional 
authorizers notification of intended award, 2) the 
congressional notification of intended award, 3) the CEA for 
each system involved, and 4) a copy of title 10 U.S.C. ?2688. 
2.9.2.19. Awarding the contract and implementing transition.  
Following SAF/IEI approval of the project, SAF/IEI will 
 
 70 
 
coordinate Congressional notification.  The service 
contract and the property transfer instruments (the Bill of 
Sale and the Right-of-Way, if required) are signed at the 
same time, although the property transfer instruments do 
not actually take effect until the contract start date.  
Signature authority of the property transfer instruments 
may or may not be delegated at the discretion of SAF/IEI. 
2.9.2.20. Implementing Transaction.  Having planned the 
operational transfer of the system and the transition of the 
affected civil service employees, and having included 
these requirements in the contract, close coordination with 
the new owner will be necessary for the project to be 
successfully implemented.  The Post-Award Project 
Management Team and QA/QC organizations will be put 
in place to evaluate performance, confirm compliance 
with property transfer conditions, and assure that services 
are delivered in accordance with the contract.  When 
transition is complete, the installation will be left with a 
long-term utility service contract to administer.  This 
contract, which is the vehicle for obtaining quality service, 
will be monitored by the Post-Award Contract 
Management Team, just as utility contracts are 
administered around the Air Force today. 
 
 71 
 
2.9.2.21. Conducting an EBS, if determined necessary in Phase II 
or III, to assess the condition of the property.  An EBS 
may be necessary in the case of some utility system sales.  
The level of analysis will be determined on a case-by-case 
basis depending on the specific circumstances of the 
privatization action.  Generally, a privatization action that 
only results in the sale of the system (i.e., no land is sold) 
will not require an EBS.  Nevertheless, in some 
circumstances it may still be desirable to conduct an EBS 
to establish the condition of the land surrounding the 
utility system, especially if the right-of-way instrument is 
executed.  This is most likely to occur in the case of the 
sale of a wastewater system that includes a treatment 
plant.  If the Grantor (AF) determines that an EBS is 
required, the Grantee (owner) will prepare the EBS in 
accordance with the Grantor?s standards and requirements.  
Costs for this EBS will be born by the Grantor.  The EBS 
will be performed with the successful Offeror after the 
award.  If such an EBS is required and prepared, upon 
expiration, termination, or abandonment of the Right-of-
Way, Grantee will prepare another EBS, in accordance 
with Grantor?s standards and requirements, which will 
document the environmental condition of the property at 
 
 72 
 
the end of Grantee?s use of the premises.  The Parties will 
share equally the cost of the EBS. 
 
Figure 4 Phase III of the Utilities Privatization Process 
 
 
 73 
 
Chapter 3: Government Accountability Office Findings and 
Recommendations 
2, 4
 
3. Government Accountability Office Reports 
 
3.1. Overview.  The Government Accountability Office (GAO) performed two 
evaluations of DOD?s Utilities Privatization Program.  The first report titled 
Defense Infrastructure; Management Issues Requiring Attention in Utility 
Privatization was issued in May of 2005.  A follow-up report titled Defense 
Infrastructure; Actions Taken to Improve the Management of Utility 
Privatization, but Some Concerns Remain was published in September of 
2006.  Highlights and recommendations of the reports are presented below. 
3.2. May 2005 Report 
4
 
3.2.1. GAO reviewed the program to determine: 
3.2.1.1.The program?s status 
3.2.1.2.Whether the services? estimate of long-term savings from 
utility privatization projects are reliable 
3.2.1.3.How DOD implements the fair market value requirement 
for conveyed utility systems, and 
3.2.1.4.Whether other issues impact the effectiveness of DOD?s 
execution of the program 
3.2.2. In its letter to the Ranking Member, Subcommittee on Readiness, 
Committee on Armed Services, House of Representatives, the GAO 
summarized ?DOD decided in 1997 that utility privatization was the 
 
 74 
 
preferred method for improving utility systems and services because 
privatization would allow installations to benefit from private sector 
financing and efficiencies.  With private sector financing, installations 
could immediately obtain major upgrades to their utility systems and pay 
for these improvements over time.  Thus, utility improvements could be 
achieved without going through the traditional military construction 
budget justification and funding process.? 
3.2.3. Timeliness 
3.2.3.1.The report noted that after spending about $248 million 
on program implementation, the services had privatized 
only 94 systems and exempted 311 systems of the 1,499 
utility systems determined to be available for privatization 
as of December 31, 2004. 
3.2.3.2.Primary causes for slow implementation were because the 
privatization evaluation, solicitation, and contracting 
processes were more complex and time consuming than 
originally expected. 
3.2.3.3.Additionally, in October of 2004, the US Navy inquired 
as to whether the services were required at the time of 
contract signing to obligate sufficient funds to pay a 
privatization contractor for costs that had not been 
recovered under a contract to date in the event of a future 
contract termination.  The DOD Office of General 
 
 75 
 
Counsel evaluated the issue and concluded in February 
2005 that the services were not required to obligate 
sufficient funds to cover contract termination liability 
under the utility privatization program.  The GAO agreed 
with this determination, but nevertheless, all contracts had 
been placed on hold from October 2004 until February 
2005. 
3.2.4. Impact on O&M Funding 
3.2.4.1.Air Force officials estimated that the Air Force?s costs 
alone could increase between $100 million and $200 
million annually for the first 5 to 10 years of privatization 
3.2.4.2.Various service officials expressed concern that unless 
funding for O&M accounts are adjusted to reflect this 
increase, other support functions on military bases could 
suffer as funds are shifted to cover ?must pay? privatized 
utility costs 
3.2.5. Use of ?Should Cost? 
3.2.5.1.Each service followed DOD guidance and compared the 
long-term estimated costs of the contract with the 
estimated long-term ?should costs? of continued 
government ownership assuming that the services would 
 
 76 
 
upgrade, operate, and maintain the system in accordance 
with accepted industry standards 
3.2.5.2.The GAO stated that this estimating method would be 
appropriate if, in the event the system is not privatized, the 
service proceeded to upgrade, operate, and maintain the 
system as called for in the estimate.  However, this 
generally is not the case.  According to DOD and service 
officials, if a system is not privatized, then the anticipated 
system improvements would probably be delayed because 
of DOD?s budget allocation decisions, which have limited 
funds for utility systems not privatized. 
3.2.5.3.The GAO report also recognized that delays in system 
improvements could increase government costs due to 
increased maintenance and possible changes in system 
reliability in the long term.  Thus, if reduced costs to the 
government are expected to be a key factor in utility 
privatization decision making, then it would appear more 
appropriate for the services to compare the cost of a 
proposed privatization contract with the cost of continued 
government ownership on the basis of the actual planned 
expenditures and timing of these expenditures, with 
appropriate consideration to the impact of delayed 
improvements. 
 
 77 
 
3.2.5.4.The report also highlighted DOD?s lack of requirement 
for the services? economic analyses to be subject to an 
independent review. 
3.2.6. Independent Review 
3.2.6.1.DOD initially did not require the services? economic 
analyses be subjected to an independent review for 
accuracy and compliance with guidance. 
3.2.6.2.GAO stated that the reliability of the analyses is not 
reviewed by DOD headquarters officials by an 
independent party, such as the services? audit agencies. 
3.2.6.3.GAO compared the Utilities Privatization process with 
the services? housing privatization process and noted: 
under the housing privation process, the service that 
proposes a project must provide the responsible DOD 
headquarters officials with a detailed briefing that 
describes the project, its justification, and whether it meets 
specific financial criteria.  These top-level review steps 
provide additional assurance that supporting analyses are 
reliable and that each project is adequately justified before 
approval 
 
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3.2.7. Fair Market Value 
3.2.7.1.The report stated that in some instances, the requirement 
for the services to receive fair market value for systems 
conveyed resulted in higher contract costs 
3.2.7.2.Army guidance at the time, stated that fair market value 
could range from zero to full replacement cost of the 
system, however guidance and practices for determining 
fair market value varied among the services 
3.2.7.3.The report noted that although it is a reasonable concept 
that the government should receive consideration if an 
asset is conveyed to a contractor, the receipt of 
consideration for conveyances in the utility privatization 
program does not typically result in a net financial 
payment to the government.  To recover their costs, 
privatization contractors normally include the full amount 
they paid for conveyances in the associated utility services 
contracts and, therefore, the government will pay back the 
amounts received for the conveyances in the utility service 
bills over time.  In some cases, contactors include 
additional amounts in the utility services bills to cover the 
contractor?s costs associated with the fair market value 
payments.  GAO concluded that implementing the fair 
market value requirement in such cases will result in 
 
 79 
 
increased costs because the government will pay back 
more than it will receive for the conveyances 
3.2.7.3.1. An example of the above scenario occurred for the 
electrical distribution privatization at Dobbins Air Reserve 
Base.  The contractor will pay $741,000 as the fair market 
value and recover this cost, plus associated costs, by charging 
the Air Force $1,322,000 in the utility services over time.  
Thus, implementing the fair market value requirement will 
result in the Air Force paying $581,000, or 78 percent, more 
than it will receive for the conveyance. 
3.2.7.3.2. An additional example provided by GAO was for 
privatizing Fort Lee?s electric distribution system.  The 
contractor was to pay $9.7 million for the conveyance ($6.6 
million as a cash down payment and the remaining balance 
financed over 27 years).  The contract was then to recover its 
costs, including added amounts for taxes and other associated 
costs, through annual charges added to the installation?s utility 
service bills over the first 28 years of the contract.  This 
resulted in the Army being charged $16.7 million in FY 2005 
dollars, resulting in the Army paying about $7 million, or 72 
percent, more than it received for the conveyance. 
3.2.7.4.GAO identified two other area of concern in its May 
2005 report: 
 
 80 
 
3.2.7.4.1. First, the adequacy of privatization contract oversight.  
GAO stated that although they intended to do so, the services 
have not issued specific contract administration guidance for 
the program. 
3.2.7.4.2. Second, DOD?s approach to utility privatization differs 
from typical private sector practices in that private sector 
companies may outsource system O&M but normally retain 
system ownership.  As a result, this permanent conveyance 
may give the contractor an advantage when negotiating 
service contract charges or renewals. 
3.2.7.5.  Table 1 below depicts the privatization or exemption 
decisions as of September 30, 2004.  
 
Table 1 Percent of Systems with Privatization or Exemption Decisions  
(Sources: DOD via GAO May 2005 report) 
 
3.2.7.6.As of the May 2005 report, the GAO noted that of the 
services, only the Air Force met the September 30, 2004, 
goal by making a privatization or exemption decision on 
at least 65 percent of its utility systems available for 
privatization. 
 
 81 
 
3.3. GAO May 2005 Report Conclusion 
3.3.1. GAO stated that utility privatization has helped installations achieve 
major system improvements that according to DOD would not have been 
otherwise possible given competing appropriations priorities.  
Nevertheless, the utility privatization program generally increases 
military utility costs well above historical levels because the program 
leverages private sector capital to achieve utility system improvements.  
To pay for these improvements over time, DOD?s funding obligations 
will likely increase, not decrease, by hundreds of millions of dollars and 
O&M budgets will need to be adjusted, as necessary. 
3.4. GAO May 2005 Report Recommendations  
3.4.1. As long as savings are expected to be a key factor in utility 
privatization decision making, revise the guidance for preparing 
economic analyses so that the analyses compare the cost of a proposed 
privatization contract with the cost of continued government ownership 
on the basis of the actual planned expenditures and the timing of these 
expenditures. 
3.4.2. Require an independent review, perhaps by DOD headquarters or the 
services? audit agencies, of the economic analyses supporting proposed 
privatization projects 
3.4.3. Provide general program guidance emphasizing the need to consider 
increased utility costs under privatization as the military services prepare 
their O&M budget requests 
 
 82 
 
3.4.4. Place greater scrutiny on the implementation of the fair market value 
requirement in proposed contracts to minimize cases where contractors 
recover more than the amounts they paid for system conveyances 
3.4.5. Issue program guidance, specific to utility privatization, emphasizing 
the importance of contract oversight 
3.4.6. Reassess whether permanent conveyance of utility systems should be 
DOD?s preferred approach to obtaining improved utility services 
3.4.7. Ensure that installation O&M budgets are adjusted as necessary to 
reflect increased costs from utility privatization projects 
3.4.8. Issue specific utility privatization contract administration guidance 
including the clear assignment of responsibilities and ensure that 
resources are provided to perform adequate contract oversight 
3.5. September 2006 GAO Report 
2
 
3.5.1. The GAO began its second report with a brief update stating: Since 
GAO?s May 2005 report, DOD has issued new guidance and required 
changes in procedures.  If fully implemented, these changes should result 
in more reliable economic analyses, improved budgetary consideration 
of increased utility costs, enhanced oversight of privatization contracts, 
and reduced instances where contractors recover more than the fair 
market value paid for system conveyances.  However, a number of 
concerns remain: 
3.5.1.1.Although DOD made changes to improve the reliability 
of project economic analyses by requiring independent 
 
 83 
 
reviews, GAO reviewed 10 economic analyses and found 
reliability issues that had not been identified during the 
independent reviews 
3.5.1.2.DOD directed the services to adequately consider in their 
budgets the increased costs resulting from utility 
privatization.  However, questions remain over the 
availability of the funds needed to complete the program 
because the services estimate that they will need $453 
million more than is currently programmed to pay costs 
associated with remaining utility systems that might be 
privatized 
3.5.1.3.Although DOD made changes to improve contract 
administration and oversight, it may take some time to 
fully implement the changes as new privatization contracts 
are awarded.  GAO?s review of the five projects awarded 
prior to DOD?s changes found continuing questions about 
the adequacy of resources provided to perform oversight 
and the lack of required plans for overseeing contractor 
performance 
3.5.1.4.It is too early in the program?s implementation to know to 
what extend DOD?s efforts will be successful in ensuring 
equitable periodic contract price adjustments and limiting 
long-term cost growth in the utility privatization program.  
 
 84 
 
However, GOA found indications that cost growth may 
become a challenge 
3.5.1.5.DOD did not change its guidance to require that project 
economic analyses depict the actual expected costs of 
continued government ownership if the systems are not 
privatized.  Therefore, DOD?s reported $650 million in 
long-term cost reductions is unrealistic 
3.5.2. Since the May 2005 report, GAO summarized: Although DOD 
initially disagreed with the report?s findings and recommendations, after 
further review the department subsequently reported to Congress that it 
generally agreed with the findings and recommendations and decided to 
issue new guidance on November 2, 2005.  The new guidance, among 
other things, required the services to complete remaining evaluations of 
utility system potential for privatization in a timely and efficient manner, 
perform an independent review of the economic analyses supporting 
proposed projects, consider and plan for increased costs for utility 
services resulting from potential privatization projects, and take steps 
designed to improve the administration and oversight of awarded 
privatization projects.  The GAO also noted that even before DOD had 
issued the new guidance, the services had implemented several program 
improvements including the requirement for independent reviews of 
project economic analyses. 
 
 85 
 
3.5.3. GAO noted that the National Defense Authorization Act for FY 2006 
made several modifications to the legislative authority for the utility 
privatization program, restricted the number of utility systems that DOD 
could privatize during FY 2006 and 2007, and required the Secretary of 
Defense to submit a report to congressional defense committees by April 
1, 2006, addressing the program issues and any of the concerns noted in 
GAO?s May 2005 report. 
3.5.4. Timeliness 
3.5.4.1.GAO again reiterated the fact that implementation of the 
utility privatization program has been slower than 
expected.  The report stated that the estimated program 
completion date slipped from September 2005 to 
September 2011. 
3.5.4.2.As before DOD officials attributed the delays to 
privatization evaluation, solicitation, and contracting 
processes that were more complex and time-consuming 
than originally anticipated.  Additionally, the program was 
suspended from October 2005 to March 2006 in order to 
allow DOD and the services time to review concerns 
noted in GAO?s previous report, develop and issue 
supplemental guidance for the program, and implement 
program changes necessitated by modifications in the 
program?s legislative authority. 
 
 86 
 
3.5.5. Implementation Costs and Program Delays 
3.5.5.1.With program delays, the services? total estimated 
program implementation costs through fiscal year 2006 
had increased from $268 million to $285 million and 
additional amounts will be required before the program is 
projected to be completed by 2011 
3.5.5.2.Program delays also caused the Defense Energy Support 
Center (DESC) to cancel solicitation to privatize 42 Army 
utility systems in May 2006.  These had been closed from 
1 to 4 years and there were concerns that conditions, such 
as the accuracy of the inventory and needed 
improvements, had changed or might change prior to 
award 
3.5.6. The GAO highlighted concerns remaining from the previous report 
3.5.6.1.Although DOD made changes to improve the reliability 
of project economic analyses by implementing 
independent reviews, as stated previously GAO found 
issues with the implementation of the change.  
Specifically, GAO reviewed the economic analyses 
supporting 10 privatization projects that had been 
subjected to independent reviews and found reliability 
issues that had not been identified during the independent 
review 
 
 87 
 
3.5.6.2.Although DOD directed the services to adequately 
consider in their budgets the increased costs resulting from 
utility privatization, questions remain over the availability 
of the funds needed to complete the program.  The 
services have estimated they will need $453 million more 
than is currently programmed for continuing government 
utility operations to pay implementation and contract costs 
associated with the remaining number of utility systems 
that might be privatized through 2010 for the Air Force 
and the Navy and Marine Corps and through 2011 for the 
Army.  DOD had not made any decisions on the funding 
availability issue at the time of GAO?s review 
3.5.6.3.It may take some time to fully implement DOD changes 
to improve utility privatization contract administration and 
oversight as new privatization contracts are awarded.  
GAO?s review of five projects awarded prior to DOD?s 
changes found continued oversight concerns, including 
questions about the adequacy of resources provided to 
perform oversight and lack of required plans for 
overseeing contractor performance 
3.5.6.4.DOD reported to Congress in March 2006 that, although 
privatization may limit the government?s options during 
contract negotiations, the department continues to prefer 
 
 88 
 
privatization with permanent conveyance and believes that 
safeguards are in place to adequately protect the 
government?s interests.  It is too early in the program?s 
implementation to know to what extent DOD?s efforts will 
be successful in ensuring equitable periodic contract price 
adjustments and limiting long-term cost growth in the 
utility privatization program.  However, GAO found cost 
growth in three of six privatization projects it reviewed.  
In one case, the government?s annual costs for utility 
service were expected to increase by 92 percent as a result 
of the contract?s first periodic price adjustment 
3.5.6.5.DOD did not change its guidance to require that project 
economic analyses depict the actual expected costs of 
continued government ownership in the event that the 
systems are not privatized.  Therefore, although DOD 
reported to Congress that the 81 contracts awarded under 
the utility privatization authority will result in about $650 
million in long-term cost reductions to the government, 
the amount is unrealistic because it was not calculated 
based on the actual expected cost differences between 
continued government ownership and privatization, and 
because privatization generally results in increased, not 
decreased, utility service costs to the government 
 
 89 
 
3.5.7. Program Legislative Authority 
3.5.7.1. The National Defense Authorization Act of FY 2006, 
made several modifications to the legislative authority for 
the utilities privatization program.  The act did the 
following: 
3.5.7.1.1. Reinstated a requirement that the Secretary of Defense 
must submit to congressional defense committees an economic 
analysis and wait 21 days after the analysis is received by 
congressional defense committees, or 14 days in electronic 
form, before conveying a utility system.  The economic 
analysis must demonstrate among other things that the 
conveyance will reduce the long-term costs to the United 
States of utility services provided by the utility system.  The 
report and wait requirement has been replaced with a 
requirement for a quarterly report of conveyances by the 
National Defense Authorization Act for FY 2004 
3.5.7.1.2. Added a requirement that the economic analyses 
incorporate margins of error in the estimates, based upon 
guidance approved by the Secretary of Defense, that minimize 
any underestimation of the costs resulting from privatization 
or any overestimation of the costs resulting from continued 
government ownership 
 
 90 
 
3.5.7.1.3. Eliminated the requirement that DOD must receive as 
consideration for a conveyance an amount equal to the 
system?s fair market value 
3.5.7.1.4. Limited contract terms to 10 years, unless the Secretary 
concerned determines that a longer term contract, not to 
exceed 50 years, will be cost-effective and provides an 
explanation of the need for the longer term contract along with 
a comparison of costs between a 10-year contract and the 
longer term contract 
3.5.7.1.5. Placed a temporary limitation on conveyance authority 
stating that during each of fiscal years 2006 and 2007, the 
number of utility systems for which conveyance contracts may 
be entered into under this authority shall not exceed 25 percent 
of the total number of utility systems determined to be eligible 
for privatization under this authority as of January 6, 2006 
3.5.7.1.6. Required DOD to submit, not later than April 1, 2006, to 
congressional defense committees a report describing the use 
of section 2688 of title 10, United States Code, to convey 
utility systems.  The report was to address several specified 
aspects of the utility privatization program. 
3.5.8. Status of Utility Privatization Contracts  
 
 91 
 
Table 2 Utility Privatization Program Status as of March 31, 2006.   
(Sources: DOD via GAO September 2006 report) 
 
3.5.8.1.The GAO noted that of the 1,496 utility systems available 
for privatization, only 81 have been awarded under title 10 
U.S.C 2688,  36 systems have been privatized under other 
programs such as DOD?s housing privatization program, 
and 147 additional systems have been exempted, bringing 
to total exempted systems to 458.  Between May 31, 2005 
and September 30, 2005, the services privatized 14 utility 
systems, however the services have awarded no projects 
under title 10 authority since DOD issued supplemental 
program guidance in November 2005. 
3.5.9. Additional Privatization Possibilities 
3.5.9.1.The Army estimated that 41 additional systems might be 
privatized with the associated contract costs totaling about 
$212 million; the Navy and the Marine Corps estimated 
that 40 additional systems might be privatized with 
associated contract costs totaling about $139 million; and 
 
 92 
 
the Air Force estimated that 210 additional systems might 
be privatized with the associated contract costs totaling 
about $602 million.  Air Force officials stated that its 
estimated 210 additional systems was a ?worst case? 
estimate used to determine the maximum funding needed 
for possible additional privatization contracts. 
3.5.10. Management and Oversight Improvements since May 2005 Report 
3.5.10.1. The GAO noted that DOD now requires economic 
analyses to undergo an independent review to assess the 
inputs and assumptions, ensure that cost estimates for the 
government-owned and privatization options are treated in 
a consistent manner, and verify that all relevant guidance 
has been met.  Also, in supplemental program guidance in 
November 2005, DOD reminded the services to consider 
and plan for increased costs for utility services contracts 
resulting from potential privatization projects and prepare 
O&M budgets based on the expected costs. 
3.5.10.2. The guidance also emphasized the importance of 
contract oversight and directed a number of actions 
designed to ensure adequate contract administration and 
oversight.  Among other things, the guidance directed the 
Defense Energy Support Center to develop specific pre-
award and post-award procurement procedures for the 
 
 93 
 
effective management of utilities services contracts, 
directed contract agencies to adequately train and prepare 
personnel involved in the utility privatization contracts, 
noted that DOD components are responsible for ensuring 
that the acquisition plan adequately addresses cost growth 
control, and stated that DOD components are responsible 
for ensuring that resources required to properly administer 
the contracts have been identified and provided. 
3.5.10.3. GAO also noted remaining concerns.  GAO stated that 
changes to address some issues have not been effectively 
implemented, some changes were not sufficient to totally 
eliminate the concerns, and DOD did not make changes to 
address some concerns causing continued questions about 
the reliability of the economic analyses, the availability of 
funds to pay for the remaining projects that might be 
privatized, the adequacy of contract oversight in projects 
that might be privatized, the adequacy of contract 
oversight in projects awarded prior to DOD?s changes, 
and the control of long-term cost growth in utility 
privatization contracts.  GAO also reiterated the concern 
that the program may continue to provide an unrealistic 
sense of savings and decision makers may have 
 
 94 
 
incomplete information on the financial effect of 
privatization decision. 
3.5.11. Economic Analyses 
3.5.11.1. Even before DOD issued the November 2005 guidance 
requiring independent reviews, Army and Air Force 
officials stated that they had implemented such reviews to 
help ensure reliability of their project analyses.  The 
official stated that independent reviews were performed 
on the analyses supporting 12 utility privatization projects 
that were awarded in September 2005, after GAO?s 
previous report, but before DOD?s issuance of the 
guidance requiring independent reviews. 
3.5.11.2. As an additional step to help ensure reliable economic 
analyses, DOD?s March 2006 report to Congress stated 
that the services must conduct post-conveyance reviews 
that compare actual project costs with the estimated costs 
included in the projects? economic analyses.  DOD stated 
that the post-conveyance reviews are conducted 2 to 3 
years after contract award, and that the results of these 
reviews will be compiled until such time as the analysis of 
all conveyance is complete.  DOD stated that the reviews 
are to include an analysis of the system?s inventory, 
changes in requirements and contract costs, and a 
 
 95 
 
comparison of actual contract costs with estimates from 
the economic analyses. 
3.5.11.3. GAO stated that although DOD?s changes are steps in 
the right direction, they found issues with the 
implementation of the changes.  First, GAO reviewed the 
analyses associated with 10 Army and Air Force projects 
awarded in September 2005 
3.5.11.3.1. As one of three examples provided by GAO:  the economic 
analyses for the water and wastewater privatization projects at 
Andrews Air Force base were based on the systems? inventory 
(i.e. the wells, pumps, water treatment equipment, valves, fire 
hydrants, water distribution mains, meters, storage tanks, 
reservoirs, and other components that constitute the systems) 
and conditions 2 years prior to contract award.  The Air Force 
stated that adjustments to the contract could be made after 
contract award, if needed, to reflect changes in the inventory.  
However, because the analyses were not updated to reflect 
inventory changes before contract award, the reliability of the 
analyses is less certain.  This issue was not noted in the 
independent review. 
3.5.11.4. Second, although DOD noted in its March 2006 report 
to Congress the importance of post-conveyance reviews as 
an additional measure to help ensure reliable economic 
 
 96 
 
analyses, DOD has not issued guidance that requires the 
services to perform the reviews.  Service officials stated 
that they had performed only a limited number of post-
conveyance reviews and do not have plans to perform the 
reviews in the manner or frequency described in DOD?s 
report to Congress. 
3.5.12. Funding Concerns 
3.5.12.1. GAO reported that the services estimate that they 
potentially will need $453 million more than is currently 
programmed for continuing government utility operations 
to pay implementation and contract costs associated with 
the remaining number of utility systems that might be 
privatized through 2010 for the Air Force, the Navy, and 
Marine Corps, and through 2011 for the Army. 
3.5.12.2. Similar to the May 2005 report, the GAO again stated 
that utility costs increase with privatization.  Essentially, 
under the privatization program, the services leverage 
private sector capital to achieve utility system 
improvements that otherwise would not be feasible in the 
short term because of limited funding caused by the 
competition for funds and budget allocation decisions.  
The services pay for the improvements over time through 
the utility services contracts, which are ?must pay? bills.  
 
 97 
 
As a result , if the installation?s funds were not increased 
sufficiently, then funds provided for other installation 
functions where there was more discretion in spending 
might be used to pay the higher utility bills.  This, in turn, 
could negatively affect those other functions, such as the 
maintenance of installation facilities.  The GAO 
recommended that DOD provide guidance emphasizing 
the need to consider increased utility costs under 
privatization when the military services prepare their 
O&M budget requests.  In November 2005, DOD issued 
supplemental program guidance that reminded DOD 
components to consider the increase in utility costs from 
privatization. 
3.5.12.3. The November 2005 guidance also directed DOD 
components to advise the Deputy Under Secretary of 
Defense (Installations and Environmental) if significant 
shortfalls are anticipated that will affect utilities 
privatization efforts.  In response to that direction, each 
service estimated the remaining number of utility systems 
that might be privatized, calculated the associated 
implementation and contract costs, compared these costs 
with the funds already programmed for continued 
government operations of the systems that might be 
 
 98 
 
privatized, and determined whether any potential funding 
shortfalls existed. 
3.5.13. Cost Growth 
3.5.13.1. GAO noted that because contractors own installation 
utility systems after privatization and, therefore, may have 
an advantage when negotiating contract changes and 
renewals, containing utility privatization contract cost 
growth may become a challenge as contracts go through 
periodic price adjustments and installations negotiate 
prices for additional needed capital improvement projects 
and other changes. 
3.5.13.2. DOD has recognized that privatization may limit the 
government options during contract renegotiations and has 
taken steps to help control cost growth. 
3.5.13.2.1. DOD stated the March 2006 report to Congress that a 
contractor also may have limited options under privatization 
because the contractor typically cannot use the installation?s 
utility system to service other customers.  This creates a one-
to-one relationship between the installation and the contractor.  
In this relationship, DOD stated that both parties must work 
together to execute fair and equitable contract changes, both 
parties have significant vested interests in successful 
 
 99 
 
negotiations, and both parties retain substantial negotiation 
leverage.  
3.5.13.2.2. DOD also noted that service contracts awarded as part of a 
privatization transaction are contracts subject to the FAR and 
applicable statutes.  DOD stated that all contracts will include 
appropriate provisions to protect the government?s interest 
while allowing the contractor reasonable compensation for the 
services provided.  DOD?s report further stated that fixed price 
contracts with prospective price adjustment provisions have 
been determined to be the most appropriate contract in most 
situations and that this type of contract will mitigate cost risk 
and hopefully result in a satisfactory long-term relationship for 
both the contractor and the government. 
3.5.13.2.3. DOD noted that utility services contracts may include a 
contract clause that provides an option for the government to 
purchase the system at the end of the contract period.  
According to Defense Energy Support Center officials, the 
center has developed language for future Army and Air Force 
contracts that would provide an option for the government to 
buy back a system at the end of the contract period.  Navy 
officials stated that the Navy does not plan to include a buy 
back clause in its future contracts because a system could be 
taken back, if necessary, through condemnation procedures. 
 
 100 
 
3.5.13.2.4. DOD also emphasized in its November 2005 report the 
importance of controlling contract cost growth.  Specifically, 
the guidance noted that prior to awarding a services contract 
resulting from a utility conveyance; DOD components are 
responsible for ensuring that the acquisition addresses cost 
growth control, which includes specifying the appropriate 
price adjustment methodology and post-award contract 
administration. 
3.5.13.3. According to DOD, most utility privatization contracts 
include provisions for periodic price adjustments.  The 
price adjustment process allows contract price changes 
based on changes in market prices, generally to cover 
inflation, and changes to the service requirement from 
system additions or modifications resulting from capital 
upgrades.  Under this process, the contractor is required to 
submit sufficient data to support the accuracy and 
reliability of the basis for service charge adjustments.  If 
the contractor?s data is determined to be fair and 
reasonable, the CO negotiates a service charge adjustment.  
Utility privatization contracts normally provide for price 
adjustments after an initial 2-year period and every 3 years 
thereafter.  In addition to cost increases from service 
charge adjustments, contract costs can also increase as a 
 
 101 
 
result of contract modifications to pay for additional 
capital improvement projects not included in the initial 
contract. 
3.5.13.4. GAO reported that according to the services, utility 
privatization contract for 22 systems are currently 
undergoing, or will be subject to, their first periodic price 
adjustment before the end of calendar year 2007.  The 
GAO also noted that according to Air Force officials, four 
additional utility privatization contracts were previously 
eligible for periodic price adjustment but no adjustment 
was made because neither the contractor nor the 
government requested an adjustment. 
3.5.14. Use of Should Cost 
3.5.14.1. As in its previous report, the GAO again noted that 
DOD?s guidance directs the services to compare the 
estimated long-term costs of the contract with the 
estimated long-term ?should costs? of continued 
government ownership assuming that the service would 
upgrade, operate, and maintain the system in accordance 
with accepted industry standards as called for in the 
proposed contract. 
3.5.14.2. The GAO continues to believe that this method would 
be appropriate, if in the event the system is not privatized, 
 
 102 
 
the services proceeded to upgrade, operate, and maintain 
the system as called for in the estimate.  However, this is 
generally not the case due to DOD?s budget allocation 
decisions, which have limited funds for utility 
improvements. 
3.5.14.3. According to GAO, DOD?s report to Congress in 
March 2006 illustrates their concern.  DOD?s report stated 
that the department?s total cost avoidance from utility 
conveyances is expected to exceed $1 billion in today?s 
dollars and, as shown in table 3, the report included 
information showing that the 81 contracts awarded under 
10 U.S.C. ? 2688 will result in about $650 million in 
reduced costs to the government in today?s dollars 
compared to DOD?s ?should cost? estimate. 
Table 3 DOD?s Estimated Cost Avoidance from Utility Privatization 
(Sources: DOD via GAO September 2006 report) 
 
 
 103 
 
3.5.14.4. The GAO report stated that DOD?s reported cost 
avoidance amounts provide an unrealistic sense of savings 
for several reasons: 
3.5.14.4.1. The estimated costs under government ownership are not 
based on the actual expected costs if the system is not 
privatized but rather on a higher ?should cost? amount.  As a 
result, estimated costs under government ownership are 
overstated and, therefore, DOD?s estimated cost avoidance is 
overstated, at least in the short term. 
3.5.14.4.2. The government?s costs for utility services increase with 
privatization.  Army officials estimated that average annual 
cost increase for each privatized Army system was $1.3 
million more than is currently programmed for continuing 
government ownership to pay for the contract and other costs 
associated with the remaining number of utility systems that 
might be privatized through 2010 for the Air Force and the 
Navy and Marine Corps, and through 2011 for the Army. 
3.5.14.4.3. DOD?s reported cost avoidance does not consider the 
program?s one-time implementation costs.  Through fiscal 
year 2005, about $268 million was spent to implement the 
program. 
3.5.14.4.4. The economic analyses used to estimate the cost avoidance 
between the government-owned and privatization options for 
 
 104 
 
several of the 81 projects included in DOD?s report to 
Congress are unreliable.  GAO had noted in its previous 
report, that the cost estimates generally favored the 
privatization option by understating long-term privatization 
costs or overstating long-term government ownership costs.  
When GAO made adjustments to address the issues in the 
analyses, the estimated cost avoidance with privatization was 
reduced or eliminated. 
3.5.14.4.5. Cost growth in privatization contracts might reduce or 
eliminate the amount of the estimated cost avoidance from 
privatization.  GAO reviewed the analyses supporting the 
Navy?s one privatization project under 10 U.S.C. ? 2688, 
awarded in 1999, and compared actual contract costs to the 
estimated contract costs included in the analysis.  The analysis 
showed that if contract costs continue to increase at the same 
rate experienced since the contract was awarded, then the 
project?s estimated cost avoidance would be reduced from 
about $92.7 million to about $18 million.  This analysis also 
did not include consideration of privatization contract 
oversight costs.  Consideration of these costs would further 
reduce the estimated cost avoidance to about $4 million. 
3.5.14.5. The National Defense Authorization Act for Fiscal 
Year 2006 modified the program?s legislative authority by 
 
 105 
 
requiring that project economic analyses incorporate 
margins of error in the estimates that minimize any 
underestimation of the costs resulting from privatization 
of the utility system or any overestimation of the costs 
resulting from continued government ownership and 
management of the utility system.  The GAO states that 
this step could help improve the reliability of the cost 
differences between the government-owned and 
privatization options.  The modified authority stated that 
incorporating margins of error in the estimates was to be 
based upon guidance approved by the Secretary of 
Defense.  However, as of June 2006, DOD had only 
issued general guidance in this area with no details on how 
the services were to comply with the new requirement.  
Specifically, on March 20, 2006, DOD issued guidance 
directing the services to include in the economic analyses 
an explanation as to how margin of error considerations 
were addressed in developing the independent government 
cost estimate and carried forward in the price analysis 
report and cost realism report.  At the time of GAO?s 
review in June 2006, Army and Navy officials stated that 
they were evaluating how to include margins of error into 
future economic analyses.  Air Force officials stated that 
 
 106 
 
their economic analyses already included margins of error 
calculations but that no formal rules existed on how to use 
the results of the calculations. 
3.5.15. Fair Market Value 
3.5.15.1. In the May 2005 report, the GAO recommended that 
DOD place greater scrutiny on the implementation of the 
fair market value requirement in proposed contracts to 
minimize cases where contractors recover more than the 
amounts they paid for system conveyances.  Subsequent to 
the report, in January 2006, the National Defense 
Authorization Act for FY 2006 was enacted.  The act 
changed the legislative language from stating that fair 
market value from a conveyance must be received to 
stating that fair market value from a conveyance may be 
received. 
3.5.15.2. The GAO then stated that in March 2006, DOD issued 
guidance to implement modifications in the legislative 
authority made by the act.  DOD?s guidance noted that 
military departments are no longer required to obtain fair 
market value exclusively through cash payments or rate 
credits.  The departments now have the flexibility to seek 
consideration in a manner other than a payment of the fair 
 
 107 
 
market value when the economic analysis demonstrates it 
is in the best interest of the government. 
3.5.15.3. GAO?s review of 10 economic analyses for projects 
awarded after their May 2005 report showed that the fair 
market value paid by the contractor and the amount 
recovered were the same.  Thus, according to these 
analyses, the receipt of the fair market value for the 
conveyances in these cases did not result in any increased 
costs to the government. 
3.5.16. Recommendations by the GAO and DOD response 
3.5.16.1. Require  independent reviewers to report to decision 
makers on the thoroughness of each economic analysis 
and any significant anomalies in the assumptions used and 
estimated costs for each ownership option 
3.5.16.1.1. DOD concurred with this recommendation stating: the 
guidance issued on 2 November 2005 requires and 
independent review for all analyses supporting a proposed 
conveyance.  While there are clearly some areas of concern in 
the independent reviews that were studied, the report also 
states that these reviews were conducted prior to the 
Department issuing guidance requiring them.  Additionally, 
these reviews were the first ones conducted and were learning 
experiences for all involved.  Since these reviews, lessons 
 
 108 
 
learned have been shared through the Utilities Privatization 
Working Group (UPWG) to improve the quality of later 
reviews.  DOD?s plan of action included: 
3.5.16.1.1.1. Continuing independent reviews as per current 
guidance and,  
3.5.16.1.1.2. Through the UPWG, emphasize the scope of the 
reviews and continue to share lessons learned to improve 
the quality of future reviews  
3.5.16.2.  Issue guidance requiring the services to perform the 
post-conveyance reviews as noted in DOD?s March 2006 
report to Congress 
3.5.16.2.1. DOD concurred with this recommendation stating: as noted 
in the March 2006 report to Congress, the Department 
recognizes the value of post conveyance reviews.  The report 
expresses concern over the limited number and scope of the 
reviews that have been conducted.  While the Department 
agrees that the scope of the reviews may be less than adequate, 
it is important to note that conducting these reviews at a time 
before the contractor has reached steady state operations is not 
conducive to reliable and realistic results.  DOD?s plan of 
action is to: 
 
 109 
 
3.5.16.2.1.1. Issue guidance requiring Service officials to 
perform post conveyance reviews in a manner and time 
frame consistent with the March 2006 report to Congress 
3.5.16.3. Address the utility privatization program potential 
funding shortfall in view of all DOD and service funding 
and priority needs 
3.5.16.3.1. DOD partially concurred with this recommendation, 
stating: the guidance issued on 2 November 2005 directs 
Components to consider and plan for all costs associated with 
utility privatization before and after conveyance.  GAO reports 
that without identifying additional resources for utility 
privatization costs, funding for these contracts must come 
from other base operating support funds.  In reality, it has been 
the utility sustainment funds that have been used in the past 
for other base support operations that has led to the need and 
desire privatize.  Components must continue to prioritize 
competing interests within the constraints provided by budgets 
and guidance.  DOD?s plan of action was to: 
3.5.16.3.1.1. Reiterate guidance through the UPWG, and  
3.5.16.3.1.2. Monitor and respond to program reviews and 
waiver requests. 
3.5.16.4. Ensure that utility privatization contracts awarded prior 
to the November 2005 supplemental guidance have 
 
 110 
 
adequate resources and contractor performance 
surveillance plans 
3.5.16.4.1. DOD concurred with this recommendation, stating: the 
GAO report states that written performance evaluation plans 
as required by Federal Acquisition Regulations were not in 
place at two installations.  Additionally, the report points to 
concerns that adequate personnel resources have not always 
been identified.  It is the responsibility of the requiring activity 
and the contracting officer to ensure that both of these items 
are adequately addressed prior to award.  In those cases where 
that were not done prior to award, it is imperative that the 
problem be corrected.  There is sometimes a difference of 
opinion in the level of detailed oversight that is necessary and 
in the adequacy of the workforce to handle the workload in a 
particular office.  These issues should be resolved under the 
purview of the Service and not at the DOD level.  The DESC, 
in cooperation with Defense Acquisition University, recently 
provided a new online course for Utility Privatization Contract 
Administration.  This module will be used in a continuing 
environment to help ensure adequate training for personnel 
involved with privatized utility contracts.  The DOD?s plan of 
action was to: 
 
 111 
 
3.5.16.4.1.1. Reiterate through the UPWG that Federal 
Acquisition Regulations require a written performance 
evaluation plan and these plans are valuable and essential 
components of government oversight, and 
3.5.16.4.1.2. Advertise availability of the new Utilities 
Privatization Contract Administration module through 
Defense Acquisition University 
3.5.16.5. Place additional emphasis on monitoring contract cost 
growth as utility privatization contracts undergo periodic 
price adjustments and other changes are negotiated 
3.5.16.5.1. DOD partially concurred with this recommendation stating: 
the GAO report identifies cost growth in several contracts, 
some of which appear to be excessive at first look, but the 
report does not classify the growth as warranted or 
unwarranted.  Cost growth my occur in utility service 
contracts due to many factors, including but not limited to, 
increased labor costs, increased energy costs, and the addition 
of infrastructure that needs to be covered by the contract.  
Much of the cost growth discussed in the report occurred in 
the fifth year of a contract due to inventory adjustments that 
were made after contract award.  GAO only looked at the 
contract cost and did not review the impact to the government 
estimate.  In most cases, while there is cost growth, it would 
 
 112 
 
have affected both estimates and as such, the savings delta 
remains valid.  The Component?s necessity to prioritize budget 
constraints is an inherent driver toward emphasizing and 
controlling unwarranted cost growth.  As such, the 
Department does not consider that there is anything to gain by 
issuing guidance on this topic.  The DOD?s plan of action was 
to: 
3.5.16.5.1.1. Continue to emphasize the requirement to 
implement procedures to control cost growth in 
privatized utility contracts. 
3.5.16.6. Require, in addition to the ?should cost? estimate, that 
each project economic analysis include the system?s 
current annual costs and the actual expected annual costs 
if the system is not privatized 
3.5.16.6.1. The DOD did not concur with this recommendation, but 
stated: The Department can include the current annual costs in 
the economic analysis but cannot provide the expected annual 
cost if the system is not privatized.  It went on to state, the 
current annual cost, alone, would be of limited use because it 
could only be compared to the ?should cost?, which is what 
we should be spending, as opposed to what we are or will be 
spending to maintain the system.  At most, only a handful of 
systems currently being considered for privatization would 
 
 113 
 
have reasonably projected recapitalization projects that could 
be included to formulate the future annual costs if not 
privatized.  Without inclusion of such recapitalization costs, 
the projected annual costs would be essentially the same as 
current annual costs.  The projection, therefore, would be of 
no real value except in those very few cases with pending 
projects, and then only if the project was essentially a 
complete recapitalization of the entire system, in order to be 
comparable to the cost of privatization.  DOD?s plan of action 
stated: 
3.5.16.6.1.1. Considering the intent to provide reliable utility 
services support, continue to use the appropriate industry 
standard in determining the long-term costs of the United 
States for utility services provided by the utility system 
concerned 
3.5.16.7. Issue detailed guidance explaining how the services 
should incorporate margins of error in the economic 
analyses 
3.5.16.7.1. DOD concurred with this recommendation stating: 
although the March 2006 guidance directs Components to 
include an explanation as to how margin of error 
considerations were addressed, there is no clear guidance on 
 
 114 
 
how margin of error should be addressed.  DOD?s plan of 
action was: 
3.5.16.7.1.1. The Department will work with the Components 
to identify the best method for considering margin of 
error and will issue guidance directing that method be 
used in future analyses. 
 
 
 115 
 
Chapter 4: Discussion and Analysis 
 
4. Discussion 
4.1. Understanding the Project Environment 
4.1.1. According to the Project Management Institute (PMI), via A Guide to 
the Project Management Body of Knowledge (PMBOK Guide), 
understanding the project environment is one of the areas of expertise 
required for effective project management 
4.1.2. The keen reader may have noted that in both reports, the GAO 
commented on the slower than expected progress of utility privatization 
program implementation.  In fact, both reports literally begin with the 
following statements:  ?DOD?s progress in implementing the utility 
privatization program has been slower than expected??  This is a true 
and valid point.  However, in this section we will explore in greater 
detail, the external environment affecting utility privatization in DOD. 
4.1.3. In a separate report titled Defense Budget; Trends in Operations and 
Maintenance Costs and Support Services Contracting issued by the 
GAO in May 2007, the following graph was obtained: 
 
 116 
 
Figure 5 O&M Costs for Fiscal Years 1995 through 2005 
 
4.1.4. The GAO noted that the costs shown in the figure are actual total 
obligation authority, which includes regular O&M appropriations, any 
supplemental O&M appropriations, and any funding from other 
appropriation accounts transferred or reprogrammed into the O&M 
account during budget execution. 
4.1.5. The GAO stated that although DOD?s O&M costs increased 
significantly between fiscal years 1995 and 2005, there was a distinct 
difference in the rate of growth between the early and latter years of this 
10-year period.  Specifically, as shown in the figure, DOD?s annual costs 
were practically constant until 2001, when the costs began to increase. 
 
 117 
 
 
Figure 6 Percentage Change in DOD Costs by Major Budget Category 
from FY 1995 to 2000 
 
Figure 7 Percentage Change in DOD Costs by Major Budget Category 
from FY 2000 to 2005 
 
 118 
 
4.2. O&M Funding 
4.2.1. As the GAO noted, O&M appropriations are a major component of 
DOD?s funding for readiness, O&M, training, supply, and equipment 
maintenance of military units as well as the administrative and facilities 
infrastructure of military bases.  The funds provide for a diverse range of 
programs and activities that include the salaries and benefits of most 
DOD civilian employees; depot maintenance activities; fuel purchases; 
flying hours; base operations; consumable supplies; health care for active 
duty service personnel and other eligible beneficiaries; reserve 
component operations; and DOD-wide support functions including 
several combat support agencies, four intelligence agencies, and other 
agencies that provide common information services, contract 
administration, contract audit, logistics, and administrative support to the 
military departments. 
4.2.2. Figure 6 on the previous page, can be examined to yield the following 
observation as made by the GAO:  during the first half of the 10-year 
period from FY 1995 to 2000, DOD?s O&M costs increased by about 1 
percent.  More specifically, O&M costs increased by 2 percent for the 
Army and declined about 1 percent in the Navy and Marine Corps and 
declined by 2 percent in the Air Force.  In comparison, costs in DOD?s 
other major budget categories during this period changed as follows: 
military personnel costs declined by about 13 percent; procurement costs 
increased by about 21 percent; research and development costs increased 
 
 119 
 
by about 4 percent; and other costs increased by about 1 percent.  DOD?s 
total costs were almost constant between FY 1995 and FY 2000. 
4.2.3. Figure 7 shows that a significant change in cost growth occurred 
during the subsequent 5-year period from FY 2000 to FY 2005, when 
DOD?s O&M costs increased by about 57 percent.  In other major 
categories during this period, GAO reported that military personnel costs 
increased about 36 percent, procurement costs increased by about 62 
percent, research and development increased by about 62 percent, and 
other costs increased by about 13 percent.  DOD total costs increased 
about 51 percent between FY 2000 and FY 2005.  The GAO went on to 
report that during the period, the Army?s O&M costs increased by about 
137 percent, while the Navy and Marine Corps? and the Air Force?s 
O&M costs increased by about 30 percent and 29 percent respectively. 
4.2.4. By now, based on the timeline of the utilities privatization program, 
hopefully the reader has developed a suspicion of what happened which 
was the primary cause in the uptrend in O&M costs: the unfortunate 
events of September 11, 2001. 
4.2.4.1.The GAO stated: according to DOD and service officials, 
the primary cause for increased O&M costs since FY 2001 
is the increase in military operations associated with the 
Global War on Terrorism (GWOT) and other 
contingencies, including hurricane relief.  However, the 
officials also stated that other factors have contributed to 
 
 120 
 
the growth in O&M costs, such as the aging of military 
infrastructure and equipment; increased costs for 
installation security, antiterrorism force protection, 
communications, information technology, transportation, 
and utilities; and certain changes in acquisition 
approaches. 
4.2.4.2.GAO went on to state the fight against terrorism has 
resulted in operations and deployments around the globe 
that are in addition to the usual peacetime operations.  
According to DOD, the related costs have included not 
only the personnel costs associated with mobilizing 
National Guard and reserve forces but also the costs of 
supporting these forces and the increased pace of 
operations.  O&M-funded costs include a wide range of 
activities and services supporting operations including 
costs related to: 
4.2.4.2.1. Pre-deployment and forward-deployed training of units and 
personnel 
4.2.4.2.2. Personnel support costs including travel, subsistence, 
reserve component personnel activation and deactivation 
costs, and unit-level morale, welfare, and recreation 
4.2.4.2.3. Establishment, maintenance, and operation of housing and 
dining facilities and camps in the theaters of operation 
 
 121 
 
4.2.4.2.4. Petroleum, oils, lubricants, spare parts, consumable end 
items, and other items necessary to support the deployment of 
air, ground, and naval units 
4.2.4.2.5. Establishment, maintenance, and operation of facilities 
including funds for roads, water, supply, fire protection, 
hazardous waste disposal, force protection bunkers and 
barricades 
4.2.4.2.6. Command, control, communications, computers, and 
intelligence within the contingency areas of operations 
4.2.4.2.7. Organizational-level maintenance including repairs to 
equipment and vehicles 
4.2.4.2.8. Intermediate- and depot-level maintenance of weapons and 
weapons system platforms requiring service after the wear and 
tear of combat operations; and 
4.2.4.2.9. Contracts for services for logistics and infrastructure 
support to deployed forces. 
4.2.5. Congress provides O&M appropriations to 11 service-oriented O&M 
accounts: the Army, Navy, Marine Corps, Air Force, Army Reserve, 
Navy Reserve, Marine Corps Reserve, Air Force Reserve, Army 
National Guard, Air National Guard, and defense-wide (and to defense 
accounts, such as the defense health program).  In addition to regular 
O&M appropriations, the Congress can make supplemental 
 
 122 
 
appropriations to finance the incremental costs above the peacetime 
budget that are associated with contingencies, such as the GWOT. 
4.2.6. To meet military requirements during a period of increased operations 
without an increase in active duty and civilian personnel, DOD has relied 
not only on reserve personnel activations but also on increased use of 
contractor support in areas such as management and administrative 
services, information technology services, medical services, weapons 
systems, and base operations support.  Between FY 2000 and FY 2005, 
DOD?s service contract costs in O&M-related areas increased over $40 
billion, or 73 percent. 
 
Table 4 Changes in Service Contract Costs in Selected Categories  
(Sources:  DOD via GAO Sept 2007 Defense Budget Report)  
4.2.7. DOD officials noted several factors that have contributed to DOD?s 
increased use of contractor support: 
 
 123 
 
4.2.7.1.First, GWOT and other contingencies have significantly 
increased O&M requirements and DOD has met these 
without an increase in active duty and civilian personnel.  
To do this, DOD relied not only on reserve personnel 
activations, but also on increased use of contractor support 
4.2.7.2.Second, Office of Management and Budget Circular A-76 
notes that the long-standing policy of the federal 
government has been to rely on the private sector for 
needed commercial services and that commercial activities 
should be subjected to the forces of competition to ensure 
that the American people receive maximum value for their 
tax dollars.
9
 
4.2.7.3.Third, DOD initiatives that have required that 
consideration be given to outsourcing certain work 
performed by uniformed and DOD civilian personnel have 
resulted in outsourcing decisions.  For example, between 
FYs 1995 and 2005, DOD?s competitive sourcing, or A-
76 public/private competition, program resulted in 570 
decisions to contract out work that had been performed by 
over 39,000 uniformed and DOD civilian personnel.  In 
another section of the report, GAO noted that the number 
of A-76 public/private competition contracts is small in 
comparison to overall O&M expenditure, with the total 
 
 124 
 
contract values between FY 1995 and 2005 being $1.2 
billion.  Additionally, GAO sited utility privatization as 
another example of outsourcing. 
4.2.7.4.Fourth, Service officials noted that in some instances 
certain personnel issues tend to favor the use of contractor 
support. 
 
 
 
 125 
 
 
 
Table 5 A-76 Public/Private Competition Decisions for FY 1995-2005 
(Sources:  DOD via GAO Sept 2007 Defense Budget Report)  
 
4.2.8. For the decade ending with FY 2005, GAO noted that the military 
services decided to outsource 51 percent of the cases.  The report also 
stated that its analysis of the military services? reported information from 
the A-76 program, and case studies it performed at three contracted out 
installations, showed that outsourcing decisions generally resulted in 
reducing the government?s costs for the work. 
4.3. Fair Market Value and Use of Should Cost 
 
4.3.1. The GAO questioned the validity behind the requirement for the 
services to obtain Fair Market Value for the conveyance of utility 
systems.  
4.3.2. The following capital recovery formula and diagram were created in 
order to aid the reader in a brief understanding of why the Fair Market 
Value requirement does not help the government to obtain the lowest 
prices for utility services: 
 
 126 
 
 
Figure 8 Capital Recovery Diagram (Fair Market Value) 
 
4.3.3. Assuming that the utility service provider will pay $10 million as the 
Fair Market Value of the system, and the contractor must pay a modest 6 
percent interest rate for a $10 million loan, what must the contractor 
change the government in order to break-even at the end of the ten year 
period? 
4.3.3.1.The formula A = P [ i ( 1+ i )
n
 ] / [(1+i)
n
 ? 1] is used, with 
i equaling the interest rate of six percent, n equaling the 
number of periods (in this case ten years), P equaling the 
initial investment of $10 million,  and A being the yearly 
cost to the government the service provider must be 
charged in order to break-even at the end of the ten year 
period.  In this situation, A equals $1,358,680.  This 
would mean that the government would inevitably 
0         1       2       3       4       5       6       7       8       9       10  (year) 
$10 million system purchase 
 
 127 
 
payback $13,586,800 to the contractor, for a system which 
the government initially owned.  And it should be noted, 
that this simplified example did not include any profit for 
the contractor nor did it include taxes owed by the 
contractor.  This model is merely meant to show that 
economically, even in a simplistic ten-year model with a 
modest interest rate, it is not economically wise to require 
a Fair Market Value for a system.  This requirement, as 
the GAO correctly noted, does not aid to any of the goals 
of utilities privatization: to leverage private sector 
financing for the upgrade, operations, and maintenance of 
utility systems.  It is this author?s opinion, that Congress, 
through the National Defense Authorization Act of FY 
2006, made the correct decision to eliminate the 
requirement that DOD receive Fair Market Value for the 
conveyance of any utility system. 
4.3.4. In both reports, the GAO disagreed with DOD?s use of should cost in 
lieu of actual projected costs.  This author disagrees with the opinion of 
the GAO concerning this topic, and it is hoped that the following 
examples, in combination with the discussion will help to show why the 
use of should cost is more appropriate. 
 
 128 
 
 
Figure 9 Capital Recovery Diagram (Use of Should Cost #1) 
 
4.3.5. In an example very similar to that provided to refute the Fair Market 
Value requirement, this hypothetical scenario will assume that the 
system is conveyed to the contractor for $0, the contractor wishes to earn 
a 10 percent profit, and there is only one capital investment of $20 
million required to bring the system to industry standards.  The capital 
improvement project will be completed in the first year of the contract. 
4.3.5.1.This example, would mean A = $20,000,000 
[.1(1.1)
10
]/[(1.1
10
-1] = $3,254,908.  In other words, the 
utility service provider, in order to earn a ten percent 
profit on the infrastructure upgrade it provided to the 
government, would recoup over $32 million over the ten 
year period. 
0         1       2       3       4       5       6       7       8       9       10  (year) 
$20 million capital upgrade 
 
 129 
 
4.3.5.2.It should be noted, that for the sake of simplicity, this 
example, as well as the following example, does not 
include the contract costs for O&M of the system.   
 
 
Figure 10 Capital Recovery Diagram (Use of Should Cost #2) 
 
4.3.5.3.In this example, we will assume that the government had 
a planned capital upgrade two years from contract 
initiation.  A reader familiar with cash-flow, will realize 
that this example will be less expensive than the previous 
example, but to be thorough, the solution requires the 
capital upgrade expenditure be first brought back to the 
current year, then solve for the yearly costs to the 
government.  Again, assuming a ten percent interest rate: 
4.3.5.4.P = F (1+i)
-n
 = $20,000,000 (1.1)
-2
 = $16,528,925 
4.3.5.5.A = P [ i ( 1+ i )
n
 ] / [(1+i)
n
 ? 1] = $2,690,006 
0         1       2       3       4       5       6       7       8       9       10  (year) 
$20 million capital upgrade (year 2) 
 
 130 
 
4.3.5.6.This would mean that over ten years, the government 
would pay the contractor $26,900,060 in lieu of $32, 
549,080.  At first glance, according to cash-flow the GAO 
appears to be correct.  However, there is a much larger 
topic which this author believes is being essentially 
ignored or overlooked by the GAO. 
4.3.5.7.First and foremost, one of the major purposes of DOD 
privatizing utilities is to ?get out of the business of 
owning, managing, and operating utility systems? and 
more importantly, ?Utilities privatization is the preferred 
method for improving utility systems and services by 
allowing military installations to benefit from private 
sector financing and efficiencies.?  For the GAO to 
recommend the government use actual costs in lieu of 
should costs, overlooks the necessity to upgrade many of 
these utility systems now.  Economically, the GAO is 
correct; it would be much less expensive to contract for 
delayed utility system improvements.  At the present time, 
the government, more specifically the DOD, does not have 
enough capital programmed for the level of utility system 
improvements which are presently required.  If the DOD 
were to currently fund this level of capital improvements, 
 
 131 
 
it would more than likely have substantial impacts on 
higher priority military requirements.   
4.3.5.8.Second, if the government deemed it necessary, it has the 
right to modify the contract and postpone utility upgrades.  
This would lead to a reduction in costs to the government, 
as shown by the most recent analysis.  As long as the CO 
can successfully implement the modification, the 
government will not lose money.  Therefore, if the United 
States were ever to enter a budget crisis, the Congress or 
DOD would have the capability of reducing its present 
cost, by modifying these projects to delay some of the 
infrastructure improvements.    
4.3.5.9.Third, one of the key benefits of privatizing utilities is the 
fact that the government does not need to have large lump-
sums of funding at the present time in order to obtain the 
needed capital upgrades.  Utilities privatization enables 
the government to spread the costs of capital upgrades out 
over time, and those capital upgrades are less expensive, 
due to the competitive nature of privatization contract. 
4.3.5.10. Fourth, another monetary advantage utilities 
privatization provides to the government is stable-planned 
expenditure.  Upon contract negotiation and award, 
installation will have a set-rate of expenditure which will 
 
 132 
 
be used by the base FM for planning purposes, with little 
or no price flux.  This of course, is barring any 
modifications by the base to the contract and excludes the 
periodic contract price adjustments. 
4.3.6. Additionally, it should be noted, that during the Preliminary Economic 
Analysis (ref section 2.7.1.7), the Air Force specifies very carefully how 
to properly develop a 50-year government should cost.  The Facilities 
energy Center (CEN) of HQ AFCESA also maintains its website to 
provide Air Force personnel involved in Utilities Privatization with 
Contract Transfer Briefings, Policy and Guidance, RFP and EA 
Templates, Questions and Answers, Lessons Learned, Related Public 
Utility Privatization Links, and Utility Privatization Archived 
Information.  Concerning the Certified Economic Analysis, AFCESA 
provides a standard model for all Air Force Installations to use, as well 
as a user manual.  HQ AFCESA and MAJCOM personnel provide 
support and oversight to installations throughout the program, and help 
to ensure that EAs are conducted and finalized according to standards.  
So now lets consider how likely it would be for an Air Force 
Installation?s Utility Privatization erroneous should costs, be filed by the 
CO for an RFP release or an RFP that is ?on-the-street.? 
4.4. Possibility of errors in Air Force Should Cost 
 
4.4.1. As noted, the Air Force should costs are first performed during the 
Preliminary EA phase.  This phase has an 80% confidence rate, meaning 
 
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that unless the estimated privatization costs are greater than the 
government should cost by 20 percent or more, MAJCOMS proceed on 
to Phase II obtaining binding proposals from industry to develop a CEA.  
This ?20% rule? applies only to the Preliminary EA conducted during 
Phase I. 
4.4.2. Once Phase I is approved by the MAJCOM, Phase II is initiated.  As 
part of Phase II, among other things described in Section 2.8, the 
Acquisition Plan is prepared with updated costs.  It states the cost goals 
of the acquisition, discusses how life-cycle cost will be considered, and 
discusses how should cost figures into the acquisition.  The acquisition 
strategy must demonstrate cost avoidance to the Air Force should cost in 
order to meet the requirements of 10 U.S.C. ? 2688.  Once the Draft RFP 
and Draft Comprehensive Analysis Report are prepared, they are 
approved at the installation.  The SSA will approve the RFP before it can 
be issued. 
4.4.3. Phase III is focused on completing the acquisition, accessing the value 
of the contractor proposals, gaining HQ USAF approval, notifying 
Congress, awarding the project, and implementing the transition.  During 
this phase, government should costs are once again updated (ref section 
2.9.2.9 for greater detail).  The Draft EAs must be reviewed following 
DOD guidance for certification and coordination by the base and 
MAJCOM Civil Engineer, FM, and HQ AFCESA personnel.  Functional 
managers and reviewers at each stage of the review process must sign the 
 
 134 
 
Certificate of Satisfactory Economic Analysis.  EAs forwarded to Air 
Staff must give evidence of MAJCOM certification.  HQ AFCESA sends 
the Draft EA to the AFAA for review.  The Base Civil Engineer (BCE; 
this is the Commander of the Civil Engineer Squadron) signature is 
required on the CEA.  
4.4.4. So to return to the topic of this section, what is the likelihood that 
erroneous government should costs remain in the RFP?  The fact that the 
documents are prepared and reviewed by the SSET means that there will 
be many ?eyes? on the documents throughout the process.  Additionally, 
these projects receive ?high-visibility? by Squadron, Group, and 
Installation Commanders involved.  This author cannot speak for every 
Civil Engineer in the Air Force, but thus far has never experienced a 
Commander who would willingly allow government should costs to be 
overestimated.  Personnel in the Civil Engineer career field are 
instinctively the most apprehensive about Utilities Privatization.  After 
all, these personnel have been operating and maintaining these systems 
for their entire career.  The livelihood of these personnel, both Military 
and Civilian, may be affected by this process.  The likelihood that these 
personnel would attempt to push a higher government should cost 
estimate up the chain of command, is slim.  If anything, Civil Engineers 
would err on the side of safety, and estimate their costs more 
conservatively, thus reducing the government should cost.  At the 
installation level, the BCE and Contracting Squadron Commander would 
 
 135 
 
be the two key players in any Utility Privatization contract.  They will of 
course, delegate many of the action items of this process to subordinates 
for action, but prior to the any review at the Group or Installation level, 
these two individuals will be very thorough and critical of the final 
product.  Once approved at the Squadron level, the Project Approval 
Package would then progress up the chain of command to the Group, and 
then to the Installation Commander.  Following Installation approval, the 
MAJCOM, HQ AFCESA, AFAA, and Air Staff will review the package, 
and finally, Congress will be notified. 
4.4.5. Given the many concerns and lessons learned regarding Utilities 
Privatization, hopefully by now the reader has a sense of how thoroughly 
these approval packages are reviewed.  Although no process will ever 
yield a 100% guarantee, it can be assumed that the likelihood of a poor 
government should cost estimate supporting a UP RFP, is extremely 
small. 
4.5. Cost Growth 
 
4.5.1. This author agrees with the GAO, cost growth should be monitored 
extremely carefully throughout the lives of these contracts.  Given the 
above argument, it is highly unlikely that a contract will be awarded that 
would be more expensive than government continued control.  However, 
if a contract is awarded for less than estimated government should costs, 
then cost growth of the contract may eventually lead to privatized 
 
 136 
 
utilities which are no longer less expensive than had the government 
retained control. 
4.5.2. That being said, according to AFCESA officials, the only true 
justification for contract growth is inflation.  For instance, following 
Hurricane Katrina, the price of copper increased significantly, and thus 
some contracts required additional funding.  But inflation is a national 
issue and does not simply affect Utility Privatization projects.  Inflation 
would also impact the cost of these utility upgrades if the services 
continued to manage and accomplish them via MILCON appropriations.  
So theoretically, it is a ?wash,? meaning that the contractor is entitled to 
additional funding due to inflation, and the government would have bore 
these costs inevitably if it were to maintain control over the utility 
systems. 
4.5.3. One last point which the GAO also commented on was cost growth 
due to inventory errors.  According to AFCESA officials, 
overwhelmingly, inventories are underestimated by the services.  This is 
due to the nature of any military installation.  Similar to any city, 
maintaining accurate records of all underground utilities is extremely 
challenging.  Over the course of time, Mylar drawings, blue-prints, 
AutoCAD drawings, and currently GIS have been used to identify 
underground utilities as accurately as possible.  However, as most Civil 
Engineers or personnel in the construction industry are aware, there is 
always some risk of finding underground utilities which are different 
 
 137 
 
from what was recorded.  That is an unfortunate fact of life for many 
townships and cities world-wide.  Air Force Installations, and all military 
installations for that matter, are not immune to this.  The Air Force has 
made vast improvements in implementing GIS over the past decade, but 
there is always some risk of unidentified utilities, due to the fact that 
many of the records are over 50-years old, may not have been accurate to 
begin with, changes during construction were not identified on the as-
built drawings, a utility outage created a situation where an emergency 
repair was performed, etc.  There are countless reasons why some of the 
inventory may be slightly in error, but the cost of digging up every utility 
in order to verify its status 100%, is simply too great, and any reasonable 
person would not suggest going to that level in a city or military 
installation simply to reduce all risk.  The cost would excessively out-
weight the benefit.  Instead, Utilities Privatization contracts are written 
with inventories which are known.  In some cases, during the joint 
inspection between the contractor and the government, additional 
quantities are identified.  Furthermore, during the course of the contract, 
additional utilities may be found.  But the costs to maintain and upgrade 
(if applicable) would have been part of the RFP had the government 
known about them, and would have therefore been included in the base-
bid.  The identification of additional inventory represents some risk, but 
not much.  If anything, since the government is typically in the position 
of underestimating the inventory, it would potentially be saving money 
 
 138 
 
until that additional inventory is found.  At that point, the contract can 
and should be adjusted, to properly compensate the contractor.  Similar 
to the issue of inflation, the government would have been responsible for 
these costs if it had retained control of the system and therefore the 
contractor is entitled to a price adjustment. 
4.5.4. It should also be noted, that without allowing periodic price 
adjustments in the contract, the government would be paying 
significantly higher contract amounts due to risk.  A contractor would be 
responsible for agreeing to a 50-year contract and be expected to make 
accurate cost estimates concerning inflation, taxes, the price of labor, 
material prices, the cost of fuel, etc.  Any reputable contractor would 
realize that the risk associated with trying to estimate unknowns for that 
length of time would simply be too high.  That would lead to one of three 
situations: 
4.5.4.1.Only un-reputable companies would bid on the contract, 
and more than likely the government would face future 
terminations for default if inflation and/or the previously 
mentioned costs escalate. 
4.5.4.2.Reputable companies would bid, but price this risk into 
their bids.  This would boost the bids to such a high level 
that no awards would be made, since the government 
should cost would always be less than the bids.  Therefore 
the utilities would not be privatized. 
 
 139 
 
4.5.4.3.The government may get lucky by having a reputable 
contractor bid, by assuming a great deal of risk at a low-
price.  The future of that contract would be based on 
inflation and costs.  If inflation stays at or below current 
levels, as do costs, the contract may work out.  But if 
inflation or costs were to escalate, the company may be 
forced out of business, or may make the business decision 
to stop work, and accept a termination for default. 
4.5.4.4.None of these options sound very good to this author.  
Allowing for contract price adjustments after two years 
and then after every three years, helps reduce risk for the 
contractor, and inevitably helps the government obtain 
reputable companies with the potential to fulfill this long-
term contract. 
4.6. Government Retained Ownership 
 
4.6.1. This author initially shared the concern of the GAO that DOD is going 
about privatization in a way that is not typical to industry.  DOD is 
permanently conveying these utility systems, which is a cause for 
concern for the GAO, at the end of the contract or in the event of a 
contract termination. 
4.6.2. However, in response to lessons learned early in the utilities 
privatization program, the Air Force revised its RFP to include a 
Repurchase Clause.  The clause requires the contractor to maintain 
 
 140 
 
repurchase price data for the end of every year in the contract.  In the 
event of a Termination for Convenience, Termination for Default or at 
the end of the contract life, the Air Force now has a pre-negotiated price 
(performed prior to bid) for the utility system. 
4.6.3. This added level of protection for the Air Force helps to reduce its risk.  
Pre-determined prices are now available for future negotiations.  As with 
any contract, if negotiations could not be reached, the government 
always has the ability to settle the matter in a court of law.  With the pre-
determined repurchase price, the Air Force is now in a much better 
negotiating position. 
4.7. Additional Legal Issues 
 
4.7.1. It should be noted that the Air Force has three separate RFPs.  One is 
for the sole-source selection of a regulated utility company; one is for the 
sole-source selection of non-regulated utility company; and the most 
frequently used, is the competitive RFP. 
4.7.2. Military installations reside in many states, and some states have a 
Public Utilities Commission (PUC) or a Utility Regulatory Commission 
(URC) that regulates the rates and services of a utility or several utilities.  
Though Congress, through 10 .U.S.C. ? 2688 does not require DOD to 
sole-source to regulated utility companies, it did not strictly prohibit it.  
In some cases it is beneficial for the Air Force to receive the benefit of 
PUC or URC oversight.  These issues vary from state-to-state, but 
personnel involved in Utilities Privatization should be cognizant of the 
 
 141 
 
different RFPs available for use, and consult their installation Judge 
Advocate, MAJCOM and AFCESA concerning which RFP is best suited 
for that particular state and situation. 
4.8. Conclusion 
4.8.1. It is hoped that this document has provided the reader with the history 
of Utilities Privatization, an understanding of the Air Force?s Program 
and Guidance Manual, issues raised by the GAO during the past couple 
of years, and actions taken by both the DOD and more specifically the 
Air Force to address many of the concerns.  As it has been shown, based 
on its own lessons learned, in many cases the Air Force actually 
implemented changes prior to the DOD policy revisions.  In some 
instances, such as the use of should cost, disagreement remains between 
the DOD and the GAO.  Hopefully the reader has a better understanding 
of why this author agrees with the DOD?s approach, that the use of 
should costs is more appropriate then the use of actual projected costs.  
That being said, the personnel at the GAO whom performed many of 
these analyses and reports deserve a lot of respect for their research into 
this program and many of the recommendations they provided.  In the 
end, this author believes the GAO?s exploration into this program has 
done nothing less than strengthen it.  Above all others, the DOD 
personnel involved in Utilities Privatization deserve a tremendous 
amount of respect from this nation.  Over the past decade, these 
personnel have taken this vast initiative, organized it, developed detailed 
 
 142 
 
Program and Guidance, continually looked for and applied lessons 
learned to the RFPs (as well as the Utilities Privatization process as a 
whole), and created what this author considers to be an impeccable 
program.  The service these individuals have performed on behalf of the 
taxpayers is remarkable.  As with any program of this magnitude, there 
will continue to be challenges but it can be seen with the current history 
of this program, these challenges become smaller every step of the way.  
So long as the DOD personnel involved maintain their current mindset of 
correcting these issues and continually apply lessons learned to the 
greater program, this author believes this already strong program will 
only become more robust.  As a final note, the following chapter 
provides the reader with a brief timeline of the Utilities Privatization 
Program.  It is intended to serve as a quick-reference for key milestones 
in the Utilities Privatization program. 
 
 143 
 
Chapter 5:  Utility Privatization Timeline in Review 
5. Key milestones 
5.1. December 1997, DOD issued DRI Directive Number 9 
5.1.1. Instructed the military departments to develop a plan that would result 
privatizing all installation electric, natural gas, water, and wastewater 
systems by January 1, 2000 unless exempted for unique security reasons 
or would be uneconomical 
5.2. December 1998, DOD issued DRI Directive Number 49 
5.2.1. Established program management and oversight responsibilities and 
provided guidance for performing economic analyses for proposed 
projects, exempting systems from the program, and using competitive 
procedures to conduct the program.  The implementation goal was reset 
to September 30, 2003 
5.3. October 2002, DOD issued revised program guidance stating that owning, 
operating, and maintaining utility systems was not a core DOD function and 
utility privatization was the preferred method for improving utility systems.  
The goals were again reset for the military departments to reach a 
privatization or exemption decision on at least 65 percent of systems by 
September 30, 2004 and on all systems by September 30, 2005 
5.4. October 2004, inquiry by US Navy to OSD concerning whether it was 
required to obligate funds to cover potential contract termination expenses 
should the contract be terminated prior to the contractor recovering its 
 
 144 
 
acquisition and system improvement costs.  All services shared the Navy?s 
concerns.  Utilities privatization contracts were placed on hold 
5.5. February 2005, DOD Office of General Counsel issued guidance to the 
service, resolving the contract termination inquiry and releasing the contract 
hold 
5.6. July 2004 ? March 2005, GAO conducted its review in preparation for its 
May 2005 report 
5.7. May 2005, GAO issued Defense Infrastructure; Management Issues 
Requiring Attention in Utility Privatization 
5.8. October 2005 ? March 2006, the services suspended the utilities privatization 
program in order to reassess the management of the program.  According to 
service officials, the suspension allowed DOD and the services time to 
review concerns noted in GAO?s May 2005 report, develop and issue 
supplemental guidance for the program, and implement program changes 
necessitated by modifications in the program?s legislative authority
 2
 
5.9. November 2005, DOD issued new guidance, partially in response to the May 
2005 GAO report, requiring the services to complete remaining evaluations 
of utility system potential for privatization in a timely and efficient manner, 
perform an independent review of the economic analyses supporting 
proposed projects, consider and plan for increased costs for utility services 
resulting from potential privatization projects, and take steps designed to 
improve the administration and oversight of awarded privatization projects
 2
 
 
 145 
 
5.10. January 2006, the National Defense Authorization Act for Fiscal Year 2006 
made several modifications to the legislative authority  for the utilities 
privatization program, restricted the number of utility systems that DOD 
could privatize (not to exceed 25 percent of the total number of utility 
systems eligible for privatization) during FY 2006 and 2007, and required the 
Secretary of Defense to submit a report to congressional defense committees 
by April 1, 2006, addressing the program issues and many of the concerns 
noted in GAO?s May 2005 report 
2
 
5.11. March 2006 ? July 2006, GAO conducted its review in preparation of its 
upcoming report to be issued in September 2006 
5.12. September 2006, GAO issued Defense Infrastructure; Actions Taken to 
Improve the Management of Utility Privatization, but Some Concerns 
Remain 
 
 
 146 
 
Glossary 
 
A-E   Architect-Engineer 
AFCEE  Short form for HQ AFCEE 
AF/A7CAE Air Force Energy Management Asset Management and 
Operations Division 
AFAA   Air Force Audit Agency 
AFSC   Air Force Specialty Code 
ANG   Air National Guard 
BRAC   Base Realignment and Closure 
BV   Book Value 
CATEX  Categorical Exclusion 
CEA   Certified Economic Analysis 
CO   Contracting Officer 
DOD   Department of Defense 
DRI   Defense Reform Initiative 
DRID   Defense Reform Initiative Directive 
EA   Economic Analysis 
EBS   Environmental Baseline Survey 
EIAP   Environmental Impact Analysis Process 
EIS   Environmental Impact Statement 
ESPC   Energy Savings Performance Contract 
FAR   Federal Acquisition Regulation 
 
 147 
 
FCAR   Final Comprehensive Analysis Report 
FM   Financial Management or Financial Manager 
FY   Fiscal Year 
G&A   General and Administrative 
GAO   United States Government Accountability Office 
GDP   Gross Domestic Product 
GSCE   Government Should Cost Estimate 
GWOT  Global War on Terrorism 
HQ AFCEE Headquarters, Air Force Center for Engineering and the 
Environment (formerly Air Force Center for Environmental 
Excellence); occasionally written as AFCEE in short form 
HQ AFCESA Headquarters, Air Force Civil Engineer Support Agency 
HQ USAF  Headquarters, United States Air Force 
IPT   Integrated Process Team 
MAJCOM  Major Command 
MFH   Military Family Housing 
MILCON  Military Construction 
NEPA   National Environmental Policy Act 
NPV   Net Present Value 
O&M   Operations and Maintenance 
OCNLD  Original Cost New Less Depreciation 
PMI   Project Management Institute 
PMBOK  Project Management Body of Knowledge 
 
 148 
 
Prime BEEF  Prime Base Engineer Emergency Force 
QA/QC  Quality Assurance/Quality Control 
R&R   Renewal and Replacements 
RCN   Replacement Cost New 
RCNLD  Replacement Cost New Less Depreciation 
RIF   Request for Interest 
RFP   Request for Proposal 
SAF or SECAF Secretary of the Air Force 
SAF/GCN  Deputy General Counsel for Installations and Environment 
SAF/IEI  Deputy Assistant Secretary of the Air Force, Installations 
SIOH   Supervision, Inspection, and Over-Head 
SON   Statement of Need 
SOW   Statement of Work 
SSA   Source Selection Authority 
SSP   Source Selection Plan 
SSS   Staff Summary Sheet 
SSET   Source Selection Evaluation Team 
USD (A&T)  Under Secretary of Defense (Acquisitions and Technology) 
 
 
 
 
 149 
 
Bibliography / References 
 
1. DOD, Deputy Secretary of Defense, Memorandum for Secretaries of the 
Military Departments and others, Subject: Department of Defense Reform 
Initiative Directive #9-Privatizing Utility Systems (Washington, D.C.: Dec. 10, 
1997). 
 
2. GAO, Defense Infrastructure: Actions Taken to Improve the Management of 
Utility Privatization, but Some Concerns Remain, GAO-06-914 (Washington, 
D.C.: September 2, 2006). 
 
3. DOD, Deputy Secretary of Defense, Memorandum for Secretaries of the 
Military Departments and others, Subject: Department of Defense Reform 
Initiative Directive #49-Privatizing Utility Systems (Washington, D.C.: Dec. 23, 
1998). 
 
4. GAO, Defense Infrastructure: Management Issues Requiring Attention in 
Utility Privatization, GAO-05-433 (Washington, D.C.: May 12, 2005). 
 
5. USAF, Air Force Utilities Privatization Policy and Guidance Manual, 
(Washington, D.C.: October 2002), July 2005 Revision. 
 
6. National Defense Authorization Act for Fiscal Year 2006, Pub. L. No. 109-
163, ? 2823 (2006) (codified as amended at 10 U.S.C. ? 2688). 
 
7. A Guide to the Project Management Body of Knowledge, PMBOK? Guide, 
?2004, Third Edition, Project Management Institute, ISBN 1- 930699-45-X 
 
8. GAO, Defense Budget: Trends in Operation and Maintenance Costs and 
Support Services Contracting, GAO-07-631 (Washington, D.C.: May 2007). 
 
9. Office of Management and Budget, Circular No. A-76 (Revised), Subject: 
Performance of Commercial Activities (Washington, D.C.: May 29, 2003). 
 
10. Federal Business Opportunities; http://www.fedbizopps.gov