# Executive Summary

A. Introduction

The maintenance and upgrade of infrastructure assets at the Department
of Energy's (DOE) ten Office of Science (SC) laboratories continues to
challenge SC and its management and operating (M&O) contractors. The
DOE, as a whole, as well as other federal agencies, is looking for
alternative ways to accomplish construction of needed facilities in
addition to maintaining existing site infrastructure. As funding through
traditional mechanisms is not readily available, alternative funding,
*i.e.,* financing with other than appropriated funds, has been viewed as
a viable option. [^1] The use of alternative financing has had varying
degrees of success at other federal agencies as well as some DOE sites.
There are certain aspects that must be present in order to achieve a
successful project. They are:

-   A strong partnership commitment on the part of the State, local
    government entities or the M&O contractor to fund projects

    -   Potential for future and private use

    -   A market other than the proposed federal use

    -   Be attractive to private investors, *i.e*., adequate return on
        investment, the ability to raise money for the development, and
        stability

    -   Capability of meeting Federal rules, regulations and criteria

    -   Demonstration that the alternative financed project is a good
        business deal

Not being able to meet any one of the above criteria can make it
difficult to successfully accomplish an alternatively financed project.

This report provides an overview of the principle issues and unique site
conditions that may lead to successful, or unsuccessful, alternative
financing initiatives. Each SC laboratory site office prepared a
site-specific white paper outlining their experience with alternative
financing.[^2] Observations derived from the site-specific reports are
presented in this paper. Recommendations based upon the observations are
also provided and include:

-   Establish an identifiable DOE process and position regarding
    alternative financing efforts, especially non-energy contracting
    efforts. Individual roles, responsibilities, authorities, and
    accountabilities must be delineated. The SC sites can no longer be
    left to "re-create" a position and process with each project.

-   Conduct a DOE Headquarters review of the current DOE FEMP policies
    and processes, with input from the site offices, as well as an
    increased commitment to reduce FEMP review time.

-   Conduct a DOE Headquarters review of the DOE policy decision to
    apply OMB Circular A-11 to DOE M&O contractors.

-   Explore the possibility of specific statutory language for
    alternative financing efforts with the appropriate Congressional
    committees.

B. Observations

The SC laboratories have a broad base of experiences, both current and
past, with various methods of alternative financing. The greatest amount
of experience seemed to be in energy related Energy Savings Performance
Contracting (ESPC) and Utility Energy Service Contracting (UESC) efforts
under DOE's Federal Energy Management Program (FEMP). There is also a
separate and distinct approach to alternative financing involving
non-energy or utility third party investment that has resulted in the
construction of buildings and other facilities.[^3] The depth of
experience in managing alternative financing issues varied from site to
site, as well as the degree of success with each of these methods of
alternative financing. It must be recognized that each SC site and
laboratory is unique. What worked at one site, might not work at another
-- one size does not fit all. Sharing of information/lessons learned and
increased training are necessary.[^4]

Many of the SC laboratories have met with general success in the past
with upgrading facility utility and energy savings equipment and systems
using the ESPC/UESC/FEMP approach to alternative financing. Under the
ESPC approach, a DOE-approved energy savings performance-company acts as
a third party to fund and implement an energy savings project at a site.
The UESC approach is similar to ESPC, however, under the UESC, a utility
company funds the project. DOE Order 430.2A (April 14, 2002) requires
these actions to have FEMP review and concurrence. While these types of
alternative financing have resulted in some notable successes, a few of
the SC sites expressed concerns that this form of alternative financing
was experiencing some difficulties, discussed further below, that could
endanger the viability of ESPCs and UESCs.

The other general method of alternative financing, used primarily to
build new laboratory and administrative type buildings, typically
involves state government or private party (individual or corporate)
assistance.[^5] In some of these situations, a state government has
provided funding through a state grant or construction at an SC
laboratory. Contributions and donations by private individuals or by
universities, corporations, and/or the DOE M&O contractor at some sites
have also provided various forms of financial assistance for building at
SC laboratory sites. Other, more creative approaches have required a
series of leases and/or quit claim deed activities in order to attract
financing for a building, with a long-term payback (typically through a
lease) of the upfront investment by a private entity. In addition to
being able to attract a qualified investor or developer, these types of
actions are greatly influenced by ownership of the land where the
facility is to be built and the terms of the lease or leases involved in
the transaction(s). Without specific statutory authority addressing this
type of non-utility alternative financing approach, any type of activity
beyond a standard facility lease of a building on non-DOE property
becomes problematic.

In reviewing the ESPC/UESC/FEMP alternative financing approaches taken
by the SC laboratories, there were issues of concern identified by the
site offices. Some of the site offices expressed a concern that they
have incurred long delays (*e.g.* FNAL -- 18 months and ANL -- 12
months) in getting FEMP review of some projects, a review process that
could kill the project being reviewed or preclude others from even being
initiated. Additionally, some sites believed that DOE FEMP
actions/requirements had become overly restrictive and could jeopardize
this means of alternative financing. One site specifically noted an
interim draft FEMP UESC policy statement, issued earlier this year[^6],
as endangering this method of alternative financing by shifting
significant risk to the third party involved. In fairness to FEMP, it
should be noted that FEMP was not contacted nor given the opportunity to
respond to these comments by the SC sites. Irrespective of whether or
not they are valid criticisms, they do represent a perception shared by
some of the SC sites that must be addressed.

The other non-utility approaches to alternative financing also had some
significant issues affecting their viability. The general economic
downturn was cited as a significant negative impact to the future of
state, private, and corporate ability to fund DOE alternative financing
activities. These tight economic times have also appeared to dampen the
willingness of our M&O contractors to act as a "middle man," provide
financial guarantees, or take financial risks in the alternative
financing arena. Further, recent DOE decisions to compete major
laboratory M&O prime contracts may have a chilling effect on the
contractors' willingness to participate in alternative financing.

In addition to the economic downturn, these types of non-utility
alternative financing activities are also greatly impacted by the
current statutory and regulatory framework. Without special legislative
authority for these alternative financing activities, DOE must operate
within its existing statutory authorities regarding land transfer and
acquisition, as well as funding and the use of funds received.
Anti-Deficiency Act issues and simple questions of authority to take an
action always lurk in the background and must be addressed on a project
by project basis.

Additionally, the simple location and ownership of the land, the type
and ultimate ownership of the facility envisioned, and the nature of the
lease also weigh heavily in the success or failure of one of these
ventures. These factors are particularly important to determining the
nature of the proposed lease under the Office of Management and Budget's
(OMB) Circular A-11. OMB Circular A-11, made applicable to DOE
management and operating contractors by a DOE Comptroller's policy
decision in 1992, provides a scoring mechanism to determine the nature
of lease involved \-- operating, capitol lease, or lease-purchase.[^7]
Determining the lease type, in turn, determines the amount of funding
that must be set aside upfront by the agency to cover those lease costs.
For example, if a lease is characterized as a lease-purchase, the agency
must set aside sufficient funds upfront to cover the entire present
value of the lease payments over the entire life of the lease (options
included). This type of a scoring outcome in lean fiscal times can
easily kill a deal of this nature.[^8] To avoid this type of OMB
Circular A-11 outcome, some "creative" land transfer and leasing
scenarios have been used and are being considered by various SC sites.
These scenarios might not be the best way for the government to get
where it wants to go, but it may be the only way to meet OMB Circular
A-11 requirements. In addition to the "creativity" used to address OMB
Circular A-11 issues, there also appeared to be a degree of inconsistent
application/interpretation of OMB Circular A-11.

This self-imposed OMB Circular A-11 policy restriction and lack of any
DOE special statutory authority renders each of these non-utility
arrangements unique and often opens them to criticism. Rumors of some
OMB criticism and skepticism of DOE alternative financing activities,
especially ORNL's recent office buildings project, were heard from
various sources. The Congressional Budget Office, in a February 2003
report of alternative financing efforts by the Department of Defense,
Department of Veterans Affairs, and DOE, registered its criticisms of
alternative financing. [^9] The Congressional Budget Office claimed
alternative financing hides the true costs of a project, is generally
more expensive than line item appropriated projects, and encourages bad
decisions by government managers (short term fix versus the long term
view/accountability).

It must be noted that alternatively financed initiatives can also have
unintended consequences. There can be access and security issues, as
well as issues regarding DOE/M&O loss of control for a portion of the
site, particularly for projects that involve a commercial element. There
can be issues during construction related to work and safety rules, and
union versus non-union workforce issues related to Davis-Bacon wages and
jurisdiction. There can be differences between the lessor and lessee
regarding the level of maintenance to be provided and potential
personnel impacts if laboratory labor is not used to perform the
maintenance. The laboratory's overhead rate can increase, and additional
burden placed on the general plant projects (GPP) account due to the
need to provide utilities to the new facility. The DOE, as the
landowner, may be viewed as a "deep pocket" source in the case of
liability issues. The fact that the lease may run for 20 -- 30 years
places significant emphasis on planning for the unexpected. Issues such
as these require detailed planning and risk assessment prior to the
initiation of an alternatively financed project.

C. Recommendations

In order to address these issues, as well as provide a more focused
approach to alternative financing efforts, several actions are
recommended. They are as follows:

-   An identifiable DOE process and position regarding alternative
    financing efforts, especially non-energy contracting efforts, is
    lacking and needs to be established. Individual roles,
    responsibilities, authorities, and accountabilities must be
    delineated. The SC sites can no longer be left to "re-create" a
    position and process with each project.

-   A DOE Headquarters review of the current DOE FEMP policies and
    processes, with input from the site offices, as well as an increased
    commitment to reduce FEMP review time.

-   A DOE Headquarters review of the DOE policy decision to apply OMB
    Circular A-11 to DOE M&O contractors.

-   DOE needs to explore the possibility of specific statutory language,
    for its alternative financing efforts, with the appropriate
    Congressional committees.

Finally, and perhaps most important, an identifiable conductor of
sufficient stature is going to be required to bring the many individual
pieces of this orchestra into harmony.

In order to carry out these Headquarters-level recommendations, a
Headquarters champion for alterative financing efforts is needed,
especially with respect to non-utility efforts. This can either be an
individual or a Headquarters-level working group of individuals
representing the various DOE offices involved in this process (*i.e.*
SC, GC, CFO, etc.). Since a review of current alternative financing
policies or activities will require significant coordination at the
Headquarters level, a champion at that level is an absolute requirement.

With SC budgets becoming tighter, we must continue to explore all lawful
alternatives to better our SC laboratory system and put dollars into
scientific work. A coordinated and committed DOE effort, at all levels,
will be necessary to fully realize alternative financing possibilities
and limitations.

[^1]: While many view alternative financing as an attractive means to
    help solve SC infrastructure issues, it became clear that not all
    individuals and offices share that view. While the upper levels of
    DOE and the Office of Management and Budget seem to share an
    enthusiasm for alternative financing and increased involvement and
    investment by the private sector in the SC infrastructure, there
    also seems to be a resistance to this concept one or two levels down
    in each organization -- a resistance to change, as well as a sense
    that these infrastructure projects should be completed the way DOE
    has done it in the past, with line item appropriations. Ironically,
    DOE has been getting indications from the Hill that Congress
    supports this novel approach to resolving infrastructure problems.
    One needs only to look at special legislation given to the
    Department of Defense and the Department of Veterans Affairs to
    recognize Congressional willingness to experiment in this area.

[^2]: Points of Contact at the various SC sites can be found as
    Attachment A.

[^3]: Another means of alternative financing, privatization of existing
    DOE assets, was not included in this review. As envisioned under
    this approach, a DOE asset is transferred to a private entity to own
    and operate. For example, a chilled water facility or electrical
    generating plant would be transferred to a private utility to own
    and operate. The DOE site would in turn buy the service from the
    utility provider. In theory, the utility would modernize the
    facility and the services bought by DOE would, in the long run, be
    cheaper for DOE than modernizing and operating the facility itself.
    Since privatization was not included in this review, DOE
    privatization history, methods and authorities for it were not
    examined.

[^4]: NNSA held an alternative financing workshop, at ORNL, on April 1
    -- 2, 2003. FEMP is planning a major workshop for August 17 -- 20,
    2003 at Lake Buena Vista, Florida. Other training opportunities are
    offered by FEMP and can be found on its website.

[^5]: Various examples of this type of assistance can be found in the
    "Table Summary of Successes and Challenges" in Section II of this
    report.

[^6]: See Attachment B for a copy of this draft document. A somewhat
    controversial FEMP Legal Opinion of October 3, 2002, believed to
    have influenced the draft interim policy statement, is also included
    as Attachment C.

[^7]: A copy of the relevant portion of OMB Circular A-11 is attached,
    Attachment D.

[^8]: On the other hand, an operating lease only requires the estimated
    total payments expected to arise under the full term of the lease,
    or, if a cancellation clause is included, an amount sufficient to
    cover lease payments for the first year plus an amount sufficient to
    cover the costs associated with cancellation.

[^9]: A copy of this Congressional Budget Office report can be found on
    the Internet at [http://www.cbo.gov](http://www.cbo.gov/). The
    February 2003 report is listed under "Recent Publications."