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Uncle Sam Looks to Privatize Its Energy Infrastructure

Uncle Sam Looks to Privatize Its Energy Infrastructure

By Congressional mandate, Uncle Sam is supposed to get out of the utility business in the first few years of the new century. How the government can accomplish the feat at hundreds of military installations around the globe will become a little clearer by the end of this year when a current round of "requests for interest" (RFI) should be submitted by various private sector companies. No one has an overall price tag on the facilities worldwide, but it probably will be in the billions of dollars. There are thousands of miles of gas piping, water conduits and electrical lines to be sold.

"For now, I think the jury is still out," said Navigant Consulting's Don Harker, who is working with a number of Western military bases on initial evaluation of their electricity, gas and water systems. "But I think there are a lot of people interested in getting out there in these markets, so I think eventually [the Department of Defense] will be successful."

A number of major barriers await the effort, including: (1) old infrastructure in ill-repair, (2) legal questions about the rights of public utilities serving areas surrounding the military bases, (3) the level of interest among private sector companies if the commodity services and infrastructure ownership/operation are kept separate in the bidding as they are now, and (4) finally, streamlining the government bidding/contracting process, which is expected to be completed in less than four years.

The drive behind the privatization move is a desire by Congressional and military leaders to focus the U.S. military on its core competencies that include assuring the defense of the U.S. and its installations and people abroad. That means that unless there are security or economic reasons not to do it, every military installation is expected to find private sector companies or local utilities to own and operate its housing stock and utility infrastructure.

In the West, the military concentrations in Southern California and the Puget Sound region of the state of Washington are receiving considerable attention, according to Doug Powell, San Diego-based Naval Contracting Officer, a civilian position responsible for 75 sites, involving 215 separate energy and water systems in Washington, Oregon, Nevada, Arizona and California. Many of these bases, such as the Twenty-Nine Palms marine base in the high desert north of Palm Springs, have infrastructures and public works departments resembling small cities.

"We have a wide range of age and condition for these systems," Powell said. "The ones in really poor condition will need a capital infusion to bring them up to industry standards. So, that is part of the divesting process, but most private companies are not going to want to purchase and operate anything that wasn't up to industry standard."

Powell said the initial RFIs should give the military ideas for grouping some of the bases and facilities for the formal request-for-proposal (RFP) phase that runs through September 2001. Contracts are then supposed to be worked out by the end of September 2003 and the transition to private ownership by the end of September 2005.

"The whole idea is not to limit competition," Powell said. "We want to get as much competition as possible. We've been getting interest statements from private utilities, local municipal utilities, and unregulated firms, such as Enron or NewEnergy. There's been a pretty broad interest level."

NewEnergy, the Los Angeles-based energy services firm now part of AES Corp., the international energy facility developer/operator, confirmed that it is looking nationwide at potential military installations for which it may bid.

"The defense department is trying to do something that has never been done before, and in government that is always very difficult," said Phill Consiglio, NewEnergy's national director for government markets. "The good news is that we have commitments of many high-level officials and commitments by people with outstanding contracting knowledge like Doug Powell. With champions like that, I think they'll work through the hurdles.

"We look forward to working with people on this project. There are opportunities for everybody, and we can save the taxpayers money, too."

In addition to the existing infrastructure, several potential bidders are floating the idea that merchant power plant development and commodity energy buying may be business offshoots of an infrastructure purchase. Thus, a successful bidder on a base's gas and electric systems, may eventually develop a gas-fired power plant to sell excess power to the grid, along with brokering the gas supply contract for the base.

"We may or may not be buying the commodity from the new system owner," Powell said. "We're moving more into a competitive environment for purchasing the commodity and we want to maintain the flexibility for buying it. We don't want to tie our hands for a long period, so one of our goals is to maintain flexibility in that area."

Richard Nemec, Los Angeles

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