oversight

Nuclear Waste: DOE's Estimates of Potential Savings From Privatizing Cleanup Projects

Published by the Government Accountability Office on 1997-01-31.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

      United States
GAO   General Accounting  Office
      Washington, D.C. 20548

      Resources, Community,   and
      Economic Development    Division


      B-275836 -.


      January 31, 1997


      The Honorable John Glenn
      Ranking Minority Member
      Committee on Governmental Affairs
      United States Senate

      Dear Senator Glenn:

      In fiscal year 1997, the Department of Energy’s (DOE) Environmental
      Management (EM) program is expected to spend about $5.6 billion to clean up
      radioactive and hazardous wastes-the legacy of the Cold War. This effort is
      being performed primarily under cost reimbursement contracts by contractors
      that manage and operate (M&O contractors) many of DOE’s facilities. DOE,
      however, has found that using the M&O approach is very expensive and slow.’
      To reduce cleanup costs and spur greater progress, DOE is pursuing a new
      contracting strategy, which it calls “privatization.” This approach does not
      involve the transfer (sale) of government-owned assets or functions to the
      private sector. Rather, it relies on the use of a competitively awarded fixed-
      price performance contract, through which DOE purchases waste cleanup
      services from a “private” contractor other than the M&O contractor.

      In its fiscal year 1997 budget request to the Congress, DOE requested $185
      million to support the privatization of efforts to clean up radioactive tank waste
      at its Hanford Site in Richland, Washington. The Hanford tank waste cleanup
      is a very complex task that is expected to cost $36 billion and take until nearly
      2030 to complete. In support of its Hanford funding request, DOE identified six
      projects that it considered “highly successful” examples of privatization. These
      include two laundries to clean radiologically contaminated clothing and four


      ‘We have previously reported the difficulties DOE has experienced in
      controlling the costs and activities of its M&O contractors. See Energv
      Management: Vulnerabilitv of DOE’s Contracting to Waste, Fraud. Abuse, and
      Mismanagement (GAO/RCED-92-101, Apr. 10, 1992).
                                             GAO/RCEJ%9749R,Nuclear Wastez DOE’s E&n&es of
                                               Polimtial Savings From Pxivaw Cleanup Projects
                                                                              1’



B-275836

projects to immobilize radioactive waste. DOE estimated that these projects
would cost about $1.545 billion if the M&O contractor did the work, but only
$462 million if the efforts were privatized, for -an estimated cost savings of
about $1.1 billion. Because of your concern about the prospects for
successfully privatizing the Hanford tank waste cleanup, you asked us to
determine the accuracy of the information provided in DOE’s fiscal year 1997
congressional budget request on the six projects.

RESULTS IN BRIEF

The overall estimate of $1.1 billion in savings from privatizing six projects that
DOE provided to the Congress in its fiscal year 1997 budget request was not
totally accurate. Specifically, we found some understated costs, incorrect cost
data, and cost comparisons of projects with different scopes that affected the
accuracy of several of the estimates. We did not find any evidence to suggest
that the estimates were intentionally overstated or understated. While DOE
could not supply data to produce more accurate estimates for all of the
projects, the available data for these projects indicate that the privatized
approach has the potential to save several hundred million dollars compared
with the current M&O contracting approach. However, only the two laundries
were operational when DOE claimed these savings in its budget request.
 Consequently, DOE’s characterization of the six projects as “highly successful”
 appears to be premature.

BACKGROUND

DOE’s production of nuclear weapons during the Cold War resulted in
thousands of tons of radioactive and hazardous waste, which must now be
cleaned up. The task of cleaning up this waste could stretch beyond the
middle of the next century and could cost between $189 billion and $265
billion.’

 DOE’s Office of Environmental Management (EM), which is responsible for the
 cleanup, is initiating a strategy that it believes will enable it to complete much
 of the cleanup in the next 10 years. As part of its IO-year strategy, EM is
 relying on a contracting approach that it calls “privatization” to help reduce the
 cost of radioactive waste cleanups. This strategy represents a break from
 DOE’s prior approach to such cleanups. In the past, DOE used a cost-plus-
 award-fee contract, told the M&O contractor how to perform waste-related



 ‘See DOE’s report, The 1996 Baseline Environmental Management Renort.

 2-                                    GAOLRCRD-97-49R DOE’s PrivatiMion   Savings Estimates
B-275836
cleanup activities, and paid the M&O contractor regardless of what was
accomplished. Under privatization, DOE would use a fixed-price, competitively
awarded contract; the private contractor(s) would finance, design, build, and
operate any required waste cleanup-facilities; and DOE would pay the
contractor(s) only for a successful cleanup. DOE believes that this fixed-price,
competitive strategy will reduce the overall costs of radioactive and hazardous
waste cleanups.

In its fiscal year 1997 budget request to the Congress, DOE listed six
privatization projects (see table 1) that it considered to be ‘highly successful.”
DOE identified these projects to support its request for $185 million in fiscal
year 1997 budget authority to privatize radioactive tank waste cleanup activities
at its Hanford Site. DOE estimated that these six projects, which are being
performed under fixed-price contracts, would cost almost $1.1 billion less than
if the M&O contractor were performing the work (see table 2). Five of the six
projects were started before DOE initiated its privatization strategy. In
addition, four of the six projects are fixed-price subcontracts initiated by the
M&O contractor. Furthermore, in presenting these projects, DOE stated that
no budget outlays would occur on them until they “are operational and
providing the service required.”




3-                                    GAO/RCED-97-49R   DOE’s Privatization   Savings E&mates
B-275836
Table 1: Six Privatization Projects Identified in DOE’s Fiscal Year 1997 Budaet
Request


IProject
IHanford Laundry         Clean radioactively                Contract awarded 8/92;
                         contaminated and regular           project operational 8/93.


 Idaho Laundry


 Savannah River M-
 Area Mixed Waste
 Tank Remediation
 Idaho Pit 9              Retrieve and remediate            Contract awarded 1 O/94;
 Remediation              110,000 cubic feet of buried      facilities under construction.
 Demonstration

 Hanford Low-Level
 Mixed Waste Thermal
 Treatment Facility
 Idaho Alpha Mixed
 Waste Treatment
 Facility


 aTransuranic wastes are man-made radioactive elements produced from uranium
 during a nuclear reactor’s operations. All transuranic wastes contain radioactive
 elements that have an atomic number greater than that of uranium.

 bAlpha low-level waste is radioactive waste containing alpha-emitting radioactive
 elements. Alpha elements are the least penetrating of the three common forms of
 radiation (alpha, beta, and gamma). Mixed waste includes both radioactive and
 hazardous waste.




 4-                                      GAO/RCED-97-49R   DOE’s Wvalidion   Savings Estimates
B-275836
Table 2: Savinas From Six Privatization Proiects Presented in DOE’s Fiscal Year
1997 Budaet Reauest

Dollars in millions



                                                   under privatization




  Remediation


  Mixed Waste Thermal

  Idaho Alpha Mixed




aEstimated cost of having an M&O contractor perform the work under a cost-plus
contracting arrangement.

bCost estimate assumes follow-on work.

‘Estimated savings based on assumed lo-year operation.

Source: DOE.




5 --                                     GACYRCED-9749R DOE’s I?rivahtion   t&wings EstimaW
B-275836

ESTIMATED SAVINGS ARE NOT TOTALLY
ACCURATE, AND CLAIMS OF SUCCESS
MAY BE PREMATURE

The overall estimate of $1.1 billion in savings is not a totally accurate indicator
of the potential savings associated with the six privatization projects.
Specifically, we found some understated costs, incorrect cost data, and cost
comparisons of projects with different scopes that affected the accuracy of
several of the estimates. We did not find any evidence to suggest that the
estimates were intentionally overstated or understated. While DOE could not
supply data to produce more accurate estimates for all of the projects, the
available data indicate that, for the six projects, privatization has the potential
to save several hundred million dollars compared with the current M&O
contracting approach. However, only two projects were operational at the time
DOE claimed these savings in its budget request. In addition, a 1993 DOE study
found that significant cost escalation has occurred in tied-price cleanup
contracts. Consequently, DOE’s characterization of the six projects as “highly
successful” appears to be premature.

Some Estimates Mav Be Overstated,
While Others Annear Understated

For two of the six privatization projects-Pit 9 and the Idaho Laundry-the
savings associated with privatization may be overstated because, for example,
DOE’s methodology understated the costs of privatization. For another project-
the Idaho Alpha Mixed Waste Treatment Facility-the savings estimated in the
budget request appear to be understated.

For the Idaho Pit 9 project, DOE estimated costs of $313 million if an M&O
contractor performed the work. DOE negotiated a privatized contract for $179
million-for an estimated savings of $134 million. However, the cost of the
privatized contract appears to be understated. Specifically, DOE assumed that
the contractor would obtain follow-on work once the Pit 9 contract was
completed. Therefore, DOE did not classify $21 million that the contractor
invested in Pit 9 equipment as a cost of the Pit 9 project because DOE assumed
that the equipment would likely be used in future DOE works. However, if the
contractor successfully completes the Pit 9 project but no future remediation
work is available, the government must still pay the contractor the $21 million
(raising the project’s total cost to $200 million). The Pit 9 project engineer
agreed that the $21 million should be included in comparisons of the project’s
cost.


 6 -                                   GAO/WED-9749R   DOE’s privatization   Savings Estimates
B-275836

For the Idaho Laundry project, DOE’s budget proposal shows a nonprivatized
cost of $6 million and a privatized cost of $1 million, for an estimated savings of
$5 million. However, DOE Idaho officials told us that both the $6 million and
$1 million cost figures were incorrect. They stid~ that no cost estimates had
been performed before they decided to contract out the laundry service.
However, in response to our questions, they estimated that privatizing the
laundry saved about $733,000 in the first year of operations and could save $3
million to $8 million over 10 years.

For the Idaho Alpha Mixed Waste Treatment Facility, DOE officials decided to
substantially change the project after submitting the budget information. DOE
officials believed that additional savings could be achieved by changing the
scope of the project to include transuranic wastes. In December 1994, these
officials estimated a nonprivatized cost of $470 million and a privatized cost of
$184 million, for an estimated savings of $286 million. However, these
estimates reflected the estimated cost of treating only the alpha mixed low-level
waste, which was the first phase of a larger Idaho Waste Processing Facility
project.3 In June 1995, DOE canceled the Idaho Alpha Mixed Waste Treatment
Facility project because it had decided in May 1995 to develop the Advanced
Mixed Waste Treatment Project, which would treat and dispose of 65,000 cubic
meters of both alpha and transuranic wastes.

Documents at DOE’s Idaho Operations Office indicate that the nonprivatized
cost for treating both types of wastes would be $1.6 billion and the privatized
cost about $820 million, for an estimated savings of $780 million. DOE officials
told us that they reported this estimate to congressional staff during bud et
briefings in April 1996. However, since awarding a $1.18 billion contract 4 for
this project in December 1996, DOE officials expect the life-cycle cost savings
for retrieving and treating the alpha and transuranic wastes to be less than $780
million. DOE Idaho officials hope to have a revised savings estimate before




3At the time, DOE’s Idaho operations office planned to privatize only the first
phase of the project-the treatment of alpha mixed waste. They did not plan to
privatize the second phase of the project-the treatment of transuranic waste.
‘This contract includes the retrieval and treatment of 65,000 cubic meters of
alpha low-level and transuranic waste currently stored at the site. It also
includes an option to treat up to an additional 120,000 cubic meters of waste
generated by future cleanup work at the site, as well as some waste generated
at other DOE sites.
7 .-                                  GAOLRCED-9749R   DOE’s Privathtion   Savings Estimates
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February 1997; however, they told us that the savings could be as much as $500
million.

Comparisons of Costs for Projects
That Differ in Scone Make Savings
Estimates Unreliable

For the Hanford Low-Level Mixed Waste Thermal Treatment Facility project,
DOE estimated the cost of having the M&O contractor perform the work at
$610 million and the cost of privatization at $40 million, for an estimated
savings of $570 million. However, the $610 million estimate was actually for a
much larger facility than the project that DOE has privatized. Specifically, this
estimate covered the costs to construct and operate for 10 years a facility that
would eventually treat about 39,000 cubic meters of both contact- and remote-
handled5 mixed low-level and mixed transuranic wastes. In contrast, the
estimate of $40 million is to treat no more than 5,120 cubic meters of contact-
handled mixed low-level waste at an off-site treatment facility. DOE
headquarters officials told us that after the budget proposal was submitted, they
determined that the savings estimated for this project were unreliable because
of incomplete data and, in April 1996, they dropped this project as an example
of successful privatization.

In response to our questions, DOE Richland officials provided a rough estimate
showing that having a private (non-M&O) contractor process the entire 39,000
cubic meters of waste would cost about $412 million less than having the M&O
perform the work. However, they could not estimate the cost of having the
M&O contractor process the smaller amount-5,120 cubic meters of contact-
handled mixed low-level waste-as called for in the existing privatization
contract, because the data for this estimate were not available. Thus, no
comparison of the costs before and after privatization could be made.
However, DOE believes that the privatized processing of the 5,120 cubic meters
will be less costly than on-site processing by the M&O contractor would have
been.

 The savings estimate for Savannah River M-Area Mixed Waste Tank
 Remediation also involves projects with different scopes. DOE stated in its
 fiscal year 1997 budget request to the Congress that having the M&O contractor



 5Contact-handled radioactive waste packages have low surface radiation dose
 rates. Remote-handled packages have high dose rates and workers’ exposure
 should be minimized.

 8 -                                   GAO/RCED-97-49R DOE’s Prisdzation   !3avhgs Estimates
B-275836

perform the project would cost $46 million, whereas having a private contractor
do the work would cost only $18 million-a claimed savings of $28 million.
However, the $46 million estimate was for the M&O contractor to build a
permanent facility that would use grout (a cementlike material) to immobilize
the existing waste in M-Area tanks plus additional waste that was expected to
be generated in support of continuing reactor operations over a lo-year period.
The need to support reactor operations ended with the winding down and
conclusion of the Cold War. Thus, in contrast, the $18 million estimate was for
a private contractor to build a temporary facility and vitrify (immobilize in
glass) only the existing waste in the M-Area tanks. The private contractor was
expected to take about 1 year to vitrify the tank waste.

DOE officials stated that they consider the comparison of the original M&O
project and the privatized project valid because they believe that each project
would process about the same amount of waste. However, the officials could
provide no cost estimate for a preprivatized project that, like the privatized
project, would have involved building and operating a temporary facility to
vitrify only the existing M-Area tank waste in 1 year. Thus, no one-for-one cost
comparison could be made of projects with like scopes to determine the savings
that could be realized from privatizing the project. EM’s team leader for
privatization informed us that DOE had lowered its estimate of the costs saved
by privatizing the M-Area project to a “more conservative” $19 million in
briefings to congressional staff after DOE submitted its budget request.

In one instance, while the scope did not differ, DOE did use different time
frames in estimating its savings. Specifically, for the Hanford Laundry project,
DOE’s budget request showed a nonprivatized cost estimate of $100 million and
a privatized cost estimate of $40 million, for an estimated savings of $60 million.
However, a detailed cost estimate prepared at the site when the decision was
made to p&at&e showed $82 million in savings. This estimate was based on 22
years of operations; however, for the fiscal year 1997 budget request, DOE
decided to assume a shorter lo-year operating period and made other
adjustments to the original analysis. According to DOE Richland officials, these
changes made the analysis more conservative and more consistent with the
approach used for other privatization projects.

Claims of Success Mav Be Premature

In its budget request, DOE stated that the six projects were highly successful
examples of privatization, which DOE expected to cost $1.1 billion less than if
the work were being performed by an M&O contractor. However, at the time


9                                     GAOMXD-97-49R   DOE’s Privatization   Savings Estimates
B-275836

DOE submitted its budget request to the Congress, only two of the projects
were operational.

Only the two least complex projects-privatizing the Hanford and the Idaho
laundry facilities-were operational at the time DOE submitted its budget
request and had, therefore, progressed far enough for savings to be realized.
Site officials believe that both of these projects have been cost-effective. For
example, the Idaho Laundry operation saved about $733,000 in its first year. Of
the four remaining projects, the Savannah River M-Area waste remediation
project became operational in October 1996, while the other three waste
immobilization projects are still several years away from being operational. In
addition, one of these three projects-the Pit 9 waste remediation project-has
encountered technical problems and is currently at least 15 months behind
schedule.

EM’s team leader for privatizing DOE’s waste cleanup projects told us that EM
considers a project successfully privatized when a fixed-price contract for the
project is signed. At the time DOE indicated in its budget request that all six
projects were SuccessfuI, only four of the six projects were under contract.
Moreover, having a signed contract, even for a fixed price, does not ensure that
the project will be successful and cost-effective. For example, a 1993 study of
EM’s contracting practices found that for a representative sample of EM’s
contracts, the actual cost of the fixed price contracts exceeded the estimated
cost by almost 75 percent. This cost growth occurred primarily because
projects were poorly defined, leading to contract change orders after the
contract was signed.6 A recent update to the study showed that overall cost
overruns in EM contracts still range from about 30 to 50 percent.’ However,
the update did not distinguish between cost growth in cost-reimbursement
contracts and cost growth in fixed-price contracts. Thus, the extent to which
these fixed-price projects succeed in producing savings may not be known until
 DOE has some operational experience.




 %he Department of Energv, Office of Environmental Restoration & Waste
 Management. Proiect Performance Studv, Independent Project Analysis, inc.
 (Reston, Va., Nov. 30, 1993).
 7The Denartment of Energv. Office of Environmental Restoration & Waste
 Management. Proiect Performance Studv Update, Independent Project Analysis,
 Inc. (Reston, Va, Apr. 1996).
 lo-                                  GAO/RCFCD-97-49R DOE’s PrivalircMion   Savings E&mates
B-275836

THE STATEMENT ABOUT BUDGET OUTLAYS
IN DOE’S BUDGET REQUEST WAS NOT ACCURATE

In its fiscal year 1997 budget request, DOE stated that no budget outlays would
occur on privatized projects until they “are operational and providing the
service required.” However, DOE made payments on two of the six privatized
projects identified in its request before they were operational and plans to make
payments on a third before it is providing the required services.

As of December 1996, DOE had paid the Idaho Pit 9 project contractor almost
$53 million, and the project was still at least 15 months from being operational.
Since the contract was signed, DOE made payments for design work and
construction activities. According to officials in DOE’s Idaho operations office,
the contract was structured with milestone and progress payments in order to
keep the negotiated contract price as low as possible.

DOE also made payments to the contractor before the Savannah River M-Area
tank waste remediation project was operational. These payments totaled about
$2 million and were mainly for preconstruction design activities, radiation
control and other project safety assurance activities, drums to store vitrified
waste, and the clean closure of one of M-Area’s waste storage tanks. Savannah
River officials told us that most of these payments were necessary to start up
the project and, in some cases, were for activities that represented changes or
additions to the contract’s original statement of work.

In addition, DOE plans to make payments to the contractor for the Idaho
Advanced Mixed Waste Treatment Project before the contractor provides waste
treatment services. Payments of about $16.3 million will be made for several
deliverables during the first phase of the project, including developing a plan for
public involvement and obtaining permits for the facility within 3 years of the
contract’s award. DOE agreed to make these payments because it considered
obtaining the permits from the state of Idaho within the project’s 3-year
schedule to be the greatest risk to meeting the project’s objectives. According
to DOE’s Deputy Project Manager for this project, if the contractor is unable to
obtain the required permits on schedule, DOE or the contractor has the option
to terminate the contract with no further obligations or liability.

EM’s team leader for privatization told us that when DOE stated in its budget
request that no government outlays would be made on privatized projects
before they were providing required services, it intended the statement to apply
only to projects privatized in fiscal year 1997 and beyond. He said that, in his
opinion, the statement should not have been made in the context of presenting

ll-                                    GAO/RCED-9749R   DOE’s Privatization   Savings Esiimates
     B-275836

      information on these six privatized projects. In commenting on our report,
      DOE officials told us that they have learned that it may be in the best interest
      of the government to pay for early deliverables, such as a permit, to balance
~~--~;+isk and&+ntaintain competition by encouraging a sufficient number of bidders.

     AGENCY COMMENTS

     We provided DOE with a draft of this report for its review and comment. DOE
     agreed that our report was factually accurate. However, DOE disagreed with
     several aspects of the report, including the tone, which it believed was
     imbalanced and could mislead the reader about the cost-effectiveness of the
     privatization program. In addition, DOE provided annotated comments on
     technical aspects of the draft, which we have incorporated where appropriate.
     (See enc. I for DOE’s comments.)

     DOE disagreed with our statement that its characterization of the six projects
     as “highly successful” appeared to be premature. DOE noted that success could
     be measured at several points, including when a contract was awarded, when a
     project became operational, and when a project was completed. DOE believed
     that we expected success to be measured only when a project was completed,
     which in some cases would not be until 2015. We do not believe that DOE
     needs to wait until all of its privatization efforts have been completed before it
     can gauge their success. However, given that only the two least complex
     projects were operational at the time of DOE’s fiscal year 1997 budget
     submission and that one of the biggest projects-Pit g-is currently experiencing
     problems, we continue to believe that characterizing the projects as highly
     successful was premature. We have consistently supported efforts by DOE to
     reform its contracting approaches to make them more cost-effective, and we
     believe that fixed-price contracts can be an important component of this
     endeavor. We also recognize in the report that privatization has the potential to
      save money. At the same time, the Department needs to ensure its credibility
     by providing sound evidence on the potential success of its contract reform
      initiatives.

      DOE also disagreed with our having cited a 1993 study performed by
      Independent Project Analysis, Inc., which showed cost growth in fixed-price
      contracts. DOE noted, among other things, that the study focused mostly on
      environmental restoration work, while most privatization projects are not for
      environmental restoration. Additionally, DOE pointed out that the study did not
      address the six projects identified in its fiscal year 1997 budget request as
      highly successful. We recognize that any study has its limitations; however, we
      believe the results of the 1993 study are valid, since the fixed-price contracts

      12                                    GAO/RCED-9749R   DOE’s hivatizatin   Savings Estimates
B-275836
discussed in the 1993 study were let by DOE’s M&O contractors, a feature
found in four of the six projects identified in DOE’s fiscal year 1997 budget
request. More importantly, we included the results of the 1993 study as only
one piece of evidence to support our view that DOE’s characterization of the
six projects as highly successful appeared to be premature.

DOE also noted that the six projects were prototypical and that the Department
would use them to prove the concept and apply the lessons learned to future
privatization work. DOE stated that we repeatedly criticized it for not adhering
to privatization principles articulated in 1995, such as not making progress
payments. Our objective was to determine the accuracy of the information
provided in DOE’s fiscal year 1997 budget request, not to determine whether the
projects adhered to the privatization principles. In that request, which was
submitted in March 1996, DOE stated that no budget outlays would occur until
the privatized projects were operational and were providing the service
required. In ex amining the evidence, we found that payments had been made
before service was provided, and we have reported this information as part of
our evaluation of the accuracy of DOE’s statements. We recognize that, as part
of its privatization effort, DOE may need to modify some of its principles to
ensure that privatization is successful.

Finally, DOE cited a discussion that appeared in the draft it reviewed about
whether the cost of capital for the Pit 9 project should have been included in
calculations of the cost of privatization. After discussing this issue with DOE,
we agreed that DOE treated the costs of capital appropriately and deleted this
paragraph from the report.

SCOPE AND METHODOLOGY

We conducted our review at DOE’s Richland, Idaho, and Savannah River
operations offices and at DOE headquarters in Washington, D.C., and
Germantown, Maryland. We reviewed relevant documents describing the six
privatized projects, including feasibility and cost studies for the projects. We
discussed the details of these documents and other information on the projects
with the DOE and contractor officials who are responsible for the projects. Our
work was performed from September through January 1997 in accordance with
generally accepted government auditing standards.



As arranged with your office, unless you publicly announce its contents earlier,
we plan no further distribution of this report until 10 days after the date of this

13                                     GAOLRCED-9749R DOE’s Privatization   Savings Estimatc?s
B-275836

letter. At that time, we will send a copy to the Secretary of Energy. We will
also make copies available to others upon request.


Jf you have any questions about this report, please contact me at (202) 5123841.
Major contributors to this report include Chris Abraham, James NoGl, Jack Paul,
Thomas Perry, William Swick, -and Charles Sylvis.

Sincerely yours,




 and Science Is&&

Enclosure




 14                                   GAOLRCED-9749R   DOE’s PrimWon   Savings Estimates
ENCLOSURE I                                                                                                         ENCLOSURE I


                                                      Department of Energy
                                                            Washington, DC 2p05
                                                               January 27, 1997



              Br. Victor    S. Resendee
              Director,   Energy,    Resources       and            Science      IS8Ue5
              Resources,    Community,     and
               Economic Development        Division
              U.S. General    Accounting      Office
              441 G Street,     N.W.
              Washington,    D.C.    20548

              Dear    Mt.    Rezendes:

              Thank you for the opportunity            to cosnnent on your draft      report                          dated January
              16, 1997, entitled        Nuclear  Waste: DOE's Estimates        of Potential                            Savinss    From
              Privatizina     Cleanuv Prolects       (GAO/RCBD-97-49R,    Code 302202).                               We appreciate
              your recognition      that privatization        has the potential     to save                           substantial
              money when compared with the current             management and operating                               (M&O)
              contracting     approach.

              The Department         of Energy         (DOE) generally              agrees that the data contained                       in the
              report     have been corrected             to be factually               accurate.            However,      the Department
              believes      that the tone of the report                     is imbalanced             and presents          a biased view
              which could mislead             the reader         regarding          the cost effectiveness                  of the
              Environmental        Management privatization                     program.          For example,          in Table 2, the
              GAO references         six privatization              projects         which DOE had previously                   presented
              as being 'highly          successful,'          resulting          in “estimated            cost    savings      of about
              61-l Billion."          Your report          stat&        that these estimates                   are "not totally
              accurate       and may be premature."                 The Department             agrees that we do not
              currently       have the data available                 for     the Hanford          Low Level Mixed Waste
              Thermal Treatment           Facility       project        to enable us to make a valid                        "apples-to-
              apples"     MM)-to-privatization               comparison           for like       scope.         Although      we continue
              to believe       that this        project      is leading           to substantial              cost saving we withdrew
              this    project     as an example of successful                       privatization             in subsequent        briefings
              to Congressional          staff      on the FY 1997 Budget Request.                             The removal       of this
              project      from Table 2 would result                  in five example projects                      with estimated
              savings      of $513 million.             The current           EM estimate           of cost       savinas      and cost
              avoidances       for these five           orolects         is annroximatelv               S700 million,          an increase
              of almost       40 oercent        over the 'inaccurate"                 estimate         criticized        in your report.

              We believe      that our estimates         of cost savings     and cost avoidances                are
              conservative       and follow    generally      accepted  industry        and government            estimating
              guidelines      and practices.        For example, the GAO report              criticizes         the
              Department      for not including        the cost of capital         incurred        by the Government           in.
              making payments       for deliverables         on the Idaho Pit 9 project.                 Generally,        under"
              the privatization        approach,     the cost of financing          the project          is incurred        by
              the contractor       and is included         in the coat estimates         for     privatization.
              However,     we have excluded       the Government's     coat of capital              incurred      under the
              traditional       M&O approach     and have therefore       significantly            understated        the
              estimated     cost savings     from privatization.



                                                           15      GAO/RCED-9749R            DOE’s Privatization        Savings E.&mates
ENCLOSURE I                                                                                                                ENCLOSURE I


                The estimation          of saving5         from privatization             has been an iterative          process
              _ m        continuous       improvements.            Privatization          estimates      used during     the budget
                formulation         process      are based upon the.best                .knowledge.available          at that tixqe.
                As a planned         privatization           project       matures,      scopes are often        further    refined;
                different       technical        approaches        may be evaluated           to ensure feasibility,
                efficiency        and cost effectiveness:                  and additional         new technologies       may become
                available.          As a result,         cost estimates           are revised       to incorporate       the most
                current      availsble        information.             Pinally,     the contract        award process      may
                produce      additional         changes in the proposed                scope,     contract    terms and
                conditions        in order       to obtain        the best overall           deal    for the Government.          For
                these reasons,           ~05% estimates           will     be updated or modified            as appropriate.

                Page two of your report          discusses    the Hanford   Tank Waste Remediation    System
                (TWRS) project     as well      as the six projects     which DOE considered    as "highly
                successful"    examples     of privatization.       Please be advised that technical        and
                programmatic     considerations,        in addition   to cost savings,   were major   factors
                in the decision      to privatise       the Hanford   TWRS project.

                The GAO report             makes three            references          to a 1993 study performed                  by Independent
                Project        Analyeis,        Inc.      (IPA) for DOE. The GAO alleges                           that this       study shows
                that DOE has experienced                      *significant            cost escalation            in fixed      price      contracts
                for waste cleanup'                (page 3) , that UDOE acknowledged                          that significant             cost
                escalation           has occurred           in fixed-price              contracts       for    waste clean-up"             (page 8),
                and that "for a representative                          sample of RR's fixed                price     contracts,         the
                actual       cost exceeded            the estimated             cost by almost            75 percent"         (page 15). The
                Department           believes       that the study results                     were unintentionally,               yet
                materially,            misrepresented             by GAO. The referenced                    IPA study measures cost
                growth from the start                   of remedial            design      to the completion             of remedial action.
                 It does not measure contractual                          cost arowth for fixed arice contracts.                                In
                 addition,          the study was done almost                     exclusively          on environmental             restoration
                work and the study itself                       states      that "the waste management [project]                            sample
                 is too small            for statistical             reliability"             (most DOE privatization                projects       are
                 not for environmental                  restoration            work).         DOE has not determined               the number of
                 fixed     price       projects       used in the IPA study,                    but it is thought             to be small and
                 is not thought             to be statistically                  reliable.         Also,      the IPA study does not
                 address         any of the six projects                   cited       by DOE as being 'highly                successful"
                 examples          of privatization.                According          to senior officials              from'IPA,        the GAO
                 did not contact              IPA to determine               if their         conclusions         from reading the report
                 were valid.             DOE does pg& acknowledge                      "that    significant          cost escalation            has
                 occurred          in fixed      price       contracts         for waste clean-up,#                and it is our belief
                 that the study ie &                    a 'representative                 sample of EM'5 fixed             price      contracts."
                 For example,            on the Savannah River                   M-Area Mixed Waste Tank Remediation                           project
                  (one of the six projects                     cited     by DOE), the contract                  award in November 1993
                 was for $13.9 million                  and the current                contract      price      as of October          1996
                  (almost        three years         later      when the facility                became operational)              is $14.2
                 million;          an increase         of only two percent                   due to contract           modification.

                 Further,     the GAO has repeatedly     criticized      the Department's     performance on
                 cost reimbursable      contracte.     (Reference    the August 1993 GAO Report,
                 Manaaement Problems       Reouire   a Lona-Term    Commitment to Chanae, which states
                 that    *DOE's [M&O] contractors     have little     incentive   to be cost-effective     when
                 the government     pays all expenses      and assumes nearly       all risk.")      The




                                                                  16       GAO/R--9749RDOE’s                   PrivatizationSavingsE&nabs
ENCLOSURE I                                                                                                             ENCLOSURE I



              - zpartment       believes  that             En will    be much more 5uccessful  in containing  cost
                growth      on our fixed  price             privatX5ation    contracts  than we have been under the
                traditional      M&O approach.

                It is noteworthy         that  all six 'highly        successfulw     examples of privatization
                projects     are now under contract          or have been completed.            These six projects
                are not scheduled          to be complete      until    2015.     By stating    that our claims    of
                success    are 'premature"        the implication        is that DOE should wait to report          cost
                savings    until    the projects      are complete,        18 years hence.        The Department   feels
                an obligation       to provide      more timely      status   reporting      to the public   and to the
                Congress.        We believe    that presenting        our estimates       of cost savings at the
                time of contract         award is both necessary and appropriate                and not "premature."
                We fully     intend    and indeed are required,            to provide     the Congress with regular
                status    updates     on these projects.

                The RM program has consistently                        cited     these six projects                 as being prototypical
                in that we would use them to prove the conce& and would apply the lessons-
                learned        to future       privatization           work.        Indeed,      the GAO report            correctly        states
                that five of these contract                       awards precede the initiation                      of the EH
                Privatization             Program.         Your report repeatedly                criticizes          the Department           for
                not adhering            to the RW privatization                 principles,          such as not making progress'
                payments,          yet the principles              were first         articulated         in the 1995 time frsme,
                well     after      most of the six contracts                   had been awarded.                 This represents           the
                creation         of an historical              anachronism       by the GAO. The application                        of the
                current       privatization             principles       to these historical                examples,        is
                inappropriate             and misleading.            Additionally,            the principle            of not making
                payments         before      waste is treated            is not intended             to be rigidly           applied.         The
                report      correctly         notes that for the AMWTF project,                         the Department            anticipates
                making approximately                  $16 million        in payments for deliverables                      if the
                contractor           successfully          obtain8     the required           permits.          As we have progressed,
                it has become clear                 that on large          projects        where there          is high risk          associated
                with the permitting                 and licensing          phase of projects,               the contractor            should be
                paid for permitting/licensing                       deliverables.             That phased contracting                   structure
                with payment for deliverables                       encourages         more companies             to bid.       After      Phase
                I, if the company cannot obtain                        needed permit5            after      a good faith         effort,       both
                parties        can agree to terminate                the contract           with no further             obligation.           These
                payments         represent        less than 2 percent               of the anticipated               contract       costs and
                should      not unduly         influence         the contractor's            incentive         to perform.           DOE
                believed         that making such a minor payment was in the Government's best
                interest.           For each privatization                 project,        EM intends         to carefully          evaluate
                the issue          of making          payments to contractors                 and will        develop      an appropriate
                sharing       of financial            risk    between the Government                 and the contractor.                DOW
                adheres       to the principle               of paying      only for product , and we believe                         that the
                criticism          exhibited        in the GAO report            is unwarranted.

                We do not believe        that the savings         estimate      for the Savannah River M-Area
                Mixed Waste Tank Remediation             project      involves     projects    with different         scopes.
                Thie example is very instructive               and demonstrates          a fundamental     benefit       of
                privatization.         The GAO asserts       that     since the W&O estimate          was for permanent
                facility       and the privatization        contractor       is building      a temporary     facility,
                the projects       have different      scopes.      From the DOE perspective,           the remediation
                project      scope is to treat       720,000 gallone         of radioactive       sludge - we do not




                                                               17      GAO/RCED-97-49R           DOE'sPrivatizatinSavingsEstimates
ENCLOSURE I                                                                                                      ENCLOSURE I

                                                                                                                                        4

               - c&     what typs of process          or facility    the contractor       tames, only that    they meet
                 the applicable        environmental     , safety,   and health     regulations     and they treat
                 the waste to the desired            waste form and acceptance         criteria.     In fact,    the
                 construction        of a permanent      facility   would lead to even higher          costs and
                 larger     relative    cost savings       since the facility    would have to be maintained
                 and would eventually          have to be decontaminated        and decommissioned.

                 As stated        in the April         1992, GAO Report Bnerav Wanaaement: Vulnerabzlltv, .                        of
                 DOE'5 Contractina           to Waste, Praud. Abuse. and Mismanagement,                        %orrecting        the
                 contract        management problems            that face DOE will          be difficult        and time-
                 consuming.       . . Poramost      smong the issues           that need to be addressed            is the old
                 corporate        culture      which includes        the contract       management approach.'                Our
                 privatization           and contract        reform    initiatives      represent        a strong     effort     to
                 address       the criticisms          stated     in this      1992 report.      Privatization         challenges
                 "the old corporate             culture'      which persisted        in DOE for more than a half
                 century.

                 This current    report    seems to be in conflict   with the conclusions   of your 1992
                 and 1993 reports.      More work remains    to be done: however the success of the EM
                 privatization     program   should be highlighted   in the current   GAO Report.

                 We thank you for the open eormrPunfcatione        throughout  the                      process    between your
                 representatives      and our staffs    at both the Headquarters                        and sites.      If you
                 have any guestions,      please   contact  me at (202) 586-7720                        or Thad Konopnicki      of
                 my staff     at (202) 566-6331.

                                                                Sincerely,


                                                                )-e--a*O~
                                                                James M. Owendoff
                                                                Acting    Principal  Deputy Assistant                Secretary
                                                                   for Environmental    Management




                                                                                                                                            I




    (302202)                                                  18     GAO/RCRD-97-49RDOE'sF?iva~tionSavingsRstimates
.-                         .-. .--        ^.

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