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Energy-savings project leaves Army in the cold

It projects millions of dollars in losses from a private-contract job to upgrade a steam power plant in Alaska. The case highlights flaws in the government's energy contracts program.

October 30, 2009|Ralph Vartabedian

FT. RICHARDSON, ALASKA — Under a federal program to transform government facilities into models of energy efficiency, Honeywell International Inc. came calling on Army commanders here with a deal to replace the base's decades-old steam power plant.

The company proposed installing millions of dollars in new heating equipment and hooking the base to the local power grid -- all free in exchange for the company getting the bulk of future energy savings.

It was precisely the kind of deal that politicians and bureaucrats in Washington were pushing at facilities across the country -- modernizing aging machinery without the government spending any money of its own.

But today, the Ft. Richardson deal, one of the largest among hundreds of similar contracts, has sunk into a morass of accounting disputes and allegations of misconduct.

Army officials say they are stuck with a system that consumes more energy than before. Over the 25-year life of the project, the Army could lose more than $100 million, according to internal Army documents.

"There were no savings at all," said Army auditor Nayer Mahmoud, former chief of internal review at Ft. Richardson.

The problems at Ft. Richardson point to the significant flaws in the once-heralded program, known as Energy Saving Performance Contracts. Critics say that the energy savings promised by private contractors are often illusory and that the contracts have exposed the government to enormous risk.

Despite the program's troubled history, the government is forging ahead with it across the country.

In the last year alone, the Energy Department has issued 16 new "super" energy-saving performance contracts with a combined maximum potential value of $80 billion, according to the department's inspector general.

The Government Accountability Office, the investigative arm of Congress, issued a report in 2005 that questioned whether the contracts were saving any money.

The Army Audit Agency has issued numerous reports that found private contractors had grossly inflated projected cost savings. In one report on the Ft. Richardson project, outside auditors found that Honeywell was counting energy savings from nearly two dozen buildings that had been demolished.

Honeywell has been accused of fraud in a sealed federal False Claims Act lawsuit, according to congressional sources.

Even the Energy Department has been accused of mismanaging its own programs, losing a potential $17 million on four contracts, according to a probe last month by the department's inspector general.

"Skeptics said this looks too good to be true," said Charles Tiefer, University of Baltimore professor of government contract law who has testified before Congress on the program. "And they were right."

Good on paper

The energy-saving program was created by law in 1992 and promoted by Presidents Clinton and George W. Bush, and now President Obama.

There is an undeniable allure to the idea. Costly energy upgrades are financed by a private contractor, which borrows money, installs the equipment and recoups its investment over many years.

But the projects have turned out to be enormously complex, both technically and legally. Government managers have been hard-pressed to protect against errors and deliberate fraud, Tiefer said.

A key issue has been measuring how much energy has been used in the past and estimating how much will be used in the future to determine whether a project will save money, a difficult calculation that often proves faulty.

"This program took the government on a disastrous diversion from real energy conservation," Tiefer said. "Strained bookkeeping took the place of sound energy practices."

The Ft. Richardson project has become one of the most prominent examples of what could go wrong.

Honeywell was awarded the contract without competition just months after its initial sales call in November 1999. The project was overseen by the Army Corps of Engineers out of Huntsville, Ala.

The project aimed to mothball Ft. Richardson's power plant, which used high-pressure steam to generate electricity and then piped the residual steam to heat buildings, including three elementary schools, a nearby hospital and a state fish hatchery.

Honeywell's plan was to put in miles of natural gas pipes and install about 300 boilers to heat individual buildings. Savings were expected from reducing the loss of heat in underground pipes. For electricity, the base would draw from the Anchorage power grid, allowing a reduction in labor costs at the central power plant.

Some Army officers never liked the idea of depending on private contractors for something as important as heat and light in the subarctic.

"It is tough to put your faith in somebody else's hands," said Anthony Coroalles, former garrison commander and now city manager of Calabasas. "If the power ever fails there in the winter, you would have to evacuate the base. In the military culture, you don't take a risk on the defense of the country."

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