Clear Air Force Station: Air Force Reviewed Costs and Benefits of Several Options before Deciding to Close the Power Plant
Published: 2014-05-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Clear Air Force Station, located in the interior of Alaska where temperatures can drop as low as -60 o Fahrenheit, currently generates its own heat and power from a coal-fired combined heat and power plant. The station performs a critical radar mission for the Department of Defense, for which it is vital to have reliable sources of heat and power. Air Force Space Command has determined that the existing 50-year-old plant is operating inefficiently, and the Air Force plans to close the existing plant, after first connecting to the local power grid for electricity and constructing a new heat system for the administrative and residential areas of the installation. GAO was asked to review the Air Force's feasibility study and analyses of alternatives before the Air Force closes the plant.
This report addresses (1) the extent to which the Air Force evaluated options regarding the Clear Air Force Station combined heat and power plant and (2) what other options, if any, the Air Force considered before deciding on the alternative power source it selected. GAO reviewed the feasibility study; Department of Defense and Air Force guidance; and other analyses, contract information, and documentation related to the power plant.
GAO also issued a restricted version of this report, which includes additional details on some estimated costs. In written comments on a draft of the restricted report, the Air Force concurred with GAO's observations.
section_title: What GAO Found
paragraphs: The Air Force's decision to close the existing power plant at Clear Air Force Station is based, in part, on a 2010 study examining the feasibility of implementing alternative power sources at the installation in order to reduce operating costs while ensuring reliable power for the installation's mission. This study, along with other associated studies and analyses, initially led the Air Force to pursue leasing the plant to a private-sector entity or public utility. When no lease proposals were submitted, the Air Force pursued the option to close the plant, finding that the estimated costs of closing it were significantly less than the estimated costs of continuing to operate and maintain it. GAO found that the Air Force generally followed its own guidance for preparing cost estimates and analyses of alternatives. However, in the plant-closure option considered in the feasibility study, some costs—such as labor costs for operating and maintaining the new heat system—were not fully developed. While it is unlikely that adding this information would have materially affected the final outcome, more fully developing those costs would have provided decision makers with more complete information and a better understanding when considering the proposed options. In addition to economic factors, several noneconomic goals significantly influenced the Air Force's decision concerning the power plant, including the goals of no longer operating and maintaining a power plant, reducing energy costs, and ensuring reliable power for current and future missions.
The Air Force considered and evaluated several options for the plant's future before selecting the option to close the plant after first connecting to the local power grid and building a separate heat system. Officials said that they obtained ideas from stakeholders for the options they considered and evaluated in detail some of the options that looked more promising. Still other options were considered but were not fully evaluated because they did not generate as much savings or the Air Force did not consider them to be economically feasible. For example, the Air Force looked in detail at options for leasing the plant but did not fully assess the costs of more incremental options, such as retaining ownership of the plant but downscaling its operations. For the options that the Air Force evaluated in detail, it found that some generated significantly more savings than others and that some were not feasible from the Air Force's perspective.

section_title: Letter
paragraphs: Clear Air Force Station, Alaska, is home to an early warning radar system  that tracks near-earth satellites and provides continual ground-based  missile warning to defend the United States and Canada. The installation  is also home to the 13th Space Warning Squadron, assigned to the 21st  Space Wing at Peterson Air Force Base, Colorado, which is part of Air  Force Space Command. Clear Air Force Station is located in the interior  of Alaska, where temperatures can drop to as low as -60 Fahrenheit, and  it currently generates its own heat and power from a coal-fired combined  heat and power plant that is over 50 years old. Given the extreme winter  temperatures and the criticality of the radar mission, it is vital that reliable  sources of heat and power be available both for the radar facility and for  the area where most of the administrative offices and living quarters are  located (called the “composite area”). While the existing plant remains  operational and continues to provide both power and heat for the  installation, Air Force Space Command has determined that the existing  plant is operating inefficiently. According to Air Force officials, the 21st  Space Wing had been looking at ways to improve efficiency and cut costs  for the Clear Air Force Station power plant as far back as the 1990s,  including efforts to upgrade the plant. However, due to mission  requirements for uninterrupted power and heat (24 hours a day, 7 days a  week), the command believed that it was unable to pursue major changes  until after emergency backup power for the installation’s mission was  ensured. Emergency power plant generators that would provide this  backup were programmed into the budget in 2004, funded in 2010, and  installed in 2012. In 2008, after the emergency power plant was  programmed into the budget but before it was funded, the 21st Space  Wing began to explore the process of leasing the plant to a private-sector  entity or public utility in response to a request from the Air Force’s civil  engineering community for candidates for this type of action.
The Air Force saw this as an opportunity to explore ways to resolve its  long-standing concern about energy inefficiency and, following the civil  engineering community’s request, in 2009, the Air Force initiated a study  that examined the feasibility of implementing alternative power options at  Clear Air Force Station in order to reduce operating costs while ensuring  sufficient reliability to support the installation’s mission. This study,  published in 2010, looked at several options for achieving these goals,  from which the Air Force narrowed the possibilities down to those that it  saw as having the greatest potential for overall savings. process, the Air Force further developed the requirements, including  costs, of implementing different options, with varying degrees of detail for  different options. Ultimately, after the feasibility study was completed and  the preferred option—leasing the plant—was dismissed due to a lack of  interest (i.e., no private-sector entity or public utility submitted a proposal  to lease the plant), the Air Force decided that it would take steps to close  the existing plant only after first connecting to the local power grid for  electricity and constructing a new heat system.
You asked us to review the Air Force’s feasibility study and analyses of  alternatives for Clear Air Force Station. This report discusses (1) the  extent to which the Air Force evaluated options regarding the Clear Air  Force Station combined heat and power plant and (2) what other options,  if any, the Air Force considered before deciding on the alternative power  source it selected. We also issued a restricted version of this report,  which includes the Air Force’s total estimated costs for its projects to  connect to the local power grid and construct a new heat system.
Air Force Real Property Agency, Clear Air Force Station Combined Heat and Power  Plant Feasibility Study (Nov. 29, 2010).
To determine the extent to which the Air Force has evaluated options for  the Clear Air Force Station combined heat and power plant, we reviewed  the documentation for the project, including the 2010 feasibility study,  contract documentation, Department of Defense (DOD) and Air Force  guidance, and the Air Force analyses used to document and support its  final determination for the plant, including the environmental assessment  and subsequent finding of no significant impact for the tie-in to the local  grid and construction of a new heat system. We assessed the Air Force’s  analyses against Air Force guidance on economic analyses and  business-case analyses and its enhanced-use lease playbook, which is  used to develop enhanced-use lease projects. We also discussed the  studies, analyses, contracts, and other documentation with appropriate  officials from Headquarters Air Force, Air Force Space Command, 21st  Space Wing, Clear Air Force Station, the Air Force Civil Engineer  Center, and the U.S. Army Corps of Engineers. Additionally, we  discussed the current coal supply contract for Clear Air Force Station with  officials from Usibelli Coal Mine, and the grid tie-in project with an official  from Golden Valley Electric Association. Further, we spoke with Defense  Logistics Agency–Energy officials about the existing coal contract as well  as current and potential future contracts for other fuel sources, such as  diesel. Finally, we interviewed Missile Defense Agency officials for  information on their roles in the current decision and the potential effect of  future radar upgrades on the installation’s energy needs.
To determine what other options, if any, the Air Force considered before  deciding on the alternative power source it selected, we reviewed the Air  Force’s analyses on the options it considered, including the concept  opportunity study, which first laid out some options for the plant, and the  feasibility study. We also reviewed documentation related to additional  analyses that were not included in those two studies. We spoke with  officials from Headquarters Air Force, Air Force Space Command, 21st  Space Wing, Clear Air Force Station, the Air Force Civil Engineer Center,  and the U.S. Army Corps of Engineers regarding how the options for the  plant were vetted and the factors that affected the Air Force’s decision.  Additionally, we spoke with representatives of Doyon Utilities, Golden  Valley Electric Association, and Aurora Energy and with plant employees  regarding their perspectives on the enhanced-use lease process.  Appendix I contains additional information about our scope and  methodology.
We conducted this performance audit from October 2013 through May  2014 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: History and Mission of Clear Air Force Station
paragraphs: Clear Air Force Station is the oldest missile warning site in North America.  The installation supports the 13th Space Warning Squadron and the  213th Space Warning Squadron, Alaska Air National Guard. The 13th  Space Warning Squadron is one of seven geographically separated units  of the 21st Space Wing, Peterson Air Force Base, Colorado. Its mission is  to provide combat capabilities through missile warning and missile  defense and through space surveillance for the North American  Aerospace Defense Command, U.S. Strategic Command, and the Missile  Defense Agency. The mission of the 213th Space Warning Squadron is to  operate and support the early warning radar. Since January 2001, these  missions have been accomplished through the use of a Solid State  Phased Array Radar System, which replaced the Ballistic Missile Early  Warning System that had been in place since the installation became  operational in 1961. The radar’s primary mission is to detect missile  launches to determine whether there are incoming intercontinental  ballistic missiles or sea-launched ballistic missiles threatening the United  States or its allies. Its secondary mission is to detect, track, identify, and  generate positional data for more than 9,500 manmade objects that are in  orbit in space. Approximately 300 active-duty service members, Air  National Guard personnel, DOD civilians, and contract employees  support the missions at Clear Air Force Station.
The developed portion of Clear Air Force Station can be separated into  four main areas: (1) the composite area, where most administrative,  recreational, and living quarters are located; (2) the camp area, where  civil engineering, maintenance shops, and security police offices are  located; (3) the radar site; and (4) the old technical site, where the old  radar and associated support buildings and the plant are located. Other  facilities associated with the plant include a coal yard, a cooling pond, and  a rail spur—owned and operated by the Air Force—along which coal is  delivered to the installation by Air Force-owned and Air Force-operated  locomotives. (See fig. 1 for a map of Clear Air Force Station.)
section_title: Combined Heat and Power Plant Overview
paragraphs: The existing combined heat and power plant at Clear Air Force Station is  owned by the Air Force and became operational in 1961. The plant burns  coal in three coal-fired boilers to produce steam, which generates power  through the use of steam turbine generators. As a byproduct of electricity  generation, the plant delivers steam to the installation for heating via  underground steam lines. The plant has three steam turbine generators,  each capable of producing 7.5 megawatts of power, for a total capacity of  22.5 megawatts. The boilers and turbines are interconnected so that any  boiler can be linked to any turbine generator (see fig. 2).
The Air Force’s standard operating procedure is to run two boilers and  two turbine generators at the plant concurrently in order to provide  backup in the event that one component fails and to better control the  power system’s operating frequency. According to Air Force officials,  having readily available backup steam in the winter is important because  the start-up time for a boiler is about 4 to 5 hours, which is enough time  for water pipes to freeze and cause damage to facilities in the meantime.  Each boiler and generator runs for 8 months each year, and the boilers  are rotated out of service for inspection and maintenance. In addition to  the redundancy provided by running two boilers and two generators, the  installation has a 300-kilowatt generator capable of providing electricity to  the composite area in the event of an outage. A separate emergency  power plant, which became operational in July 2012, would provide  electricity and electrical heat for the radar in the event of failure of the  central power plant. The Air Force currently does not have backup for  heat in the composite area, which hosts most administrative, recreational,  and housing facilities on the installation.
section_title: Clear Air Force Station Energy Demand and Consumption
paragraphs: The energy demand at Clear Air Force Station has decreased from when  the plant first became operational, due to the radar replacement in 2001.  The previous Ballistic Missile Early Warning System radar required 5  megawatts of power, while the new Solid State Phased Array Radar  System requires only 1.1 megawatts of power—approximately 80 percent  less. Currently, the total energy demand at the installation ranges from 3  megawatts in the summer to 6 megawatts in the winter, of which  approximately 1 megawatt is needed to run the plant itself. In recent  years, the plant has burned an average of about 53,900 tons of coal per  year. Due to the Air Force’s standard operating procedure of running two  boilers and two turbine generators concurrently to provide redundancy  and backup, the plant’s energy production typically exceeds the demand,   The excess power—that is, power  resulting in excess steam and power.that is not consumed—is delivered to a load bank, a device that converts  the power to heat and dissipates the heat into the air.
Air Force Space Command data show that, in 2012, the command led the  Air Force in facilities energy consumption, with the highest energy costs  and the greatest energy consumption per square foot—a metric used by  the Air Force to ascertain energy efficiency—among the major commands  (see fig. 3). Facilities in Air Force Space Command consume  approximately 98 percent of the command’s energy because its missions  are facility-centric. consumes over 16 percent of the command’s facilities energy and has a  facilities energy cost per square foot that is approximately twice the  command’s average. Further, the installation’s average energy use per  square foot is approximately seven times greater than the command’s  average (1.39 million vs. 0.20 million BTUs).
DOD defines facility energy to include energy needed to power fixed installations and  nontactical vehicles.
section_title: Air Force Plans and Funding Sources for Clear Air Force Station Projects
paragraphs: The Air Force has identified several projects that must be completed  before it can close the power plant. These include constructing a new  electric system connecting the installation to the local power grid, a heat  system that will replace the heat function currently provided by the plant  to the composite area, and a 1-megawatt backup generator to provide  power to the composite area in the event of an outage on the local power  grid. The portion of the power grid to which the installation will be  connected is operated by Golden Valley Electric Association and is part of  Alaska’s Railbelt transmission system, a single transmission line  spanning 600 miles. According to a 2010 Department of Energy study,  power exchanges among Alaska’s utilities are limited, and each public  utility operates independently of others in different areas of Alaska.
Golden Valley Electric Association is the only public utility located within  the Clear Air Force Station service area. Figure 4 is a map of the Alaska  Railbelt Transmission System near Clear Air Force Station that shows the  locations of the installation, the Golden Valley Electric Association  transmission line, and the proposed grid interconnection project.
By September 2013, the Air Force had refined its total cost estimate for  the transmission and heat-system projects.Air Force awarded a firm-fixed price order for an estimated $5.2 million  against an existing General Services Administration contract with Golden  Valley Electric Association, the local utility that provides power to the area  where the installation is located. (The Air Force issued a 120-day  suspension of work order for the contract in October 2013. The  suspension was extended in February 2014 for another 60 days.) As part   In late September 2013, the  of the Air Force contract, the utility will construct a switching substation at  the power line closest to the installation and a 3-mile-long transmission  line that will go from the switching substation to another substation that  will be located on Clear Air Force Station. The transmission line and the  switching substation will be owned and maintained by the utility. After  construction, the Air Force will obtain electricity from the utility.
Separately from the contract with Golden Valley Electric Association, but  as part of the electric system, the U.S. Army Corps of Engineers plans to  award a design-build contract for installation of the electrical intertie,  which would include a transformer, switchgear, and a distribution  substation, to distribute power from the new transmission line to facilities  on the installation. intertie, and this portion of the power system will be located on the  installation. The contract to be awarded by the U.S. Army Corps of  Engineers would also include a new heat system to replace the heat  function currently served by the plant and a 1-megawatt generator  capable of providing power to the composite area in the case of an  outage on the local power grid. Heat and backup power are already in  place for the radar site. The steam heating system would be owned and  managed by the Air Force.
The Air Force will own and manage the electrical  The Air Force has plans to carry out these projects primarily using fiscal  year 2013 funds from the Energy Conservation Investment Program,  which is overseen by the Office of the Secretary of Defense (OSD). To the extent that funds from that source do not fully cover the costs of the  projects, Air Force officials have said that they plan to make up the  difference by using savings from other fiscal year 2012 funds that were  previously provided by OSD. Air Force officials also said that costs may  change as the Air Force enters into negotiations with contractors to refine  the requirements of the components and design.
A design-build contract is a contract with a single entity to deliver both design and  construction of a project. The information provided in this report regarding cost is a subset  of the information provided in our earlier, restricted report.
section_title: Environmental Regulations
paragraphs: The Clear Air Force Station plant is required to meet state and federal  regulations related to air quality, among other environmental regulations.  The plant currently operates under an air quality control operating permit  issued by the Alaska Department of Environmental Conservation. This  permit limits each of the three boilers at the plant to producing a  maximum of 85,000 pounds of steam per hour. Further, under the  permit, the Air Force has chosen to limit its coal consumption to fewer  than 135,000 tons per year and has taken other steps to avoid being  classified as a major source of hazardous air pollutants. The permit and  the Air Force’s decision to limit its coal consumption effectively cap the  plant’s current operations at 25 to 30 percent of its 22.5-megawatt  capacity, or 5.6 to 7.0 megawatts. Figure 5 illustrates the different  capacities of the plant and the current operation.
Air Force officials told us that the plant has been operating at 5.7 to 7.0  megawatts for the past 10 years. If the Air Force should want to operate  the existing plant at full capacity, it would have to address issues  associated with regulations pertaining to air pollutants and air quality. For  example, officials indicated that a new air model would have to be  developed and reviewed by various environmental agencies to determine  whether there was any deterioration in air quality at Denali National Park  and Fairbanks, and the Air Force would potentially need to obtain a new  permit. In order to obtain a new air permit, if needed, the operator of the  plant may need to install or establish additional air quality controls and  monitoring requirements.
section_title: The Air Force Conducted Analyses of Various Options for Closing the Plant but Could Have Provided Additional Information
paragraphs: In assessing its options for power and heat generation at Clear Air Force  Station, the Air Force undertook a variety of analyses, including—but not  limited to—the feasibility study. The feasibility study estimated that the  costs to close the plant would be less than half the costs to operate and  maintain the plant as-is over the next 50 years. (The Air Force used a 50- year time frame because, according to the feasibility study, that is a  standard lease period for an enhanced-use lease.) However, the Air  Force could have included additional information in its feasibility study on  the option to close the plant (e.g., heat system costs), particularly since  this option was determined to be the most economical option for the Air  Force and was identified as the option to follow if an acceptable lease  offer was not received. Still, adding this information is unlikely to have  materially influenced the Air Force’s choice of this option over the other  options that remained after the enhanced-use lease and utilities  privatization alternatives had been ruled out, since the expected cost  savings differed so greatly between the closure option and the other  remaining options. Further, the Air Force had additional noneconomic  goals, such as reducing energy costs at the installation, which it included  in its assessment and decision-making process.
subsections: section_title: The Air Force Generally Followed Relevant Guidance in Preparing Its Analyses
paragraphs: We assessed the Air Force’s processes against Air Force guidance on  economic analyses and business-case analyses and its enhanced-use  lease playbook, which is used to develop enhanced-use lease projects,  and we found that the Air Force had generally followed its own guidance  for preparing cost estimates and analyses of alternatives. As the Air  Force narrowed the available options, it further refined its requirements  and revised its cost estimates. The feasibility study is one step in the Air  Force’s process for developing an enhanced-use lease project. The study  addresses the potential uses of the asset considered for the enhanced- use lease and determines the highest and best use for the property,  taking into account mission-related constraints. As a guide for preparing  project proposals, the Air Force uses an enhanced-use lease playbook  that was originally developed by its real-property agency. The feasibility  study also generally follows guidelines laid out in the Air Force instruction  for economic analyses and the Air Force manual for business-case  analyses, which provide guidance on developing analyses like those  included in the feasibility study. Further, since the Air Force submitted the  grid connection and heat plant project for funding under the fiscal year  2013 Energy Conservation Investment Program, the Air Force also used  specific guidance for that program, which requires developing a life-cycle  cost analysis for the project.
subsections: section_title: Enhanced-Use Lease Playbook
paragraphs: The Air Force’s Enhanced-Use Lease Playbook identifies five phases of  an enhanced-use lease project. The first phase, project identification,  includes identifying non-excess real property that presents a potential  lease opportunity. During the second phase, project definition,  stakeholders determine the feasibility of the proposed project by  evaluating potential risks and returns for the project. Key tasks from this  phase include conducting a site-orientation visit and preparing the  feasibility study. The third phase, project acquisition, analyzes the viability  of the project from operational, force-protection, environmental, and  financial standpoints and identifies the type of consideration that will be  sought from the lessee, which can be cash or in-kind. This phase includes  developing a statement of need, hosting an Industry Day, advertising a request for qualifications, receiving proposals, and selecting the highest  ranked offeror with which to conduct the lease negotiations. The final two  phases—lease negotiation and closing and postclosing management— are undertaken after the third phase ends with the selection of a  developer that will undertake the project. The Air Force took the following  steps while developing the enhanced-use lease project for the power  plant:
Conducted a visit to Clear Air Force Station in May 2010, during  which Air Force civil engineers performed a site survey of the  installation’s water, waste treatment, and combined heat and power  plant; conducted a site-orientation visit to the plant; and interviewed  the local public utility, Golden Valley Electric Association.
Prepared the feasibility study, which was finalized in November  2010. This study incorporated the status quo estimate that had been  prepared by a contractor to assess the costs of operating the plant  over the next 50 years in the same manner as in 2009 and replacing  items with like items, as needed.baseline against which five options for operating the plant were  compared.
The status quo estimate was the
Held an Industry Day on August 7, 2012, which was attended by  representatives from several Alaska utilities, developers, and energy  companies. During this event, the Air Force presented the enhanced- use lease opportunity, provided a tour of the power plant, and  accepted questions from participants. The questions and the Air  Force’s answers to those questions were subsequently posted on the  website of the consulting firm the Air Force contracted with to support  its execution of the enhanced-use lease project.
Prepared a statement of need just prior to Industry Day. The  playbook indicates that the statement of need is to be revised based  on feedback received during Industry Day or updates required from  answers provided as part of a question-and-answer document.
Posted a final request for qualifications on the Federal Business  Opportunities website.for qualifications is to be released within 3 weeks after Industry Day,  to maintain interest and momentum from the event. It further notes  that the response period is typically 6 weeks. The Air Force posted its  request for qualifications on October 12, 2012, over 9 weeks after  Industry Day. The deadline for proposals was December 7, 2012, or  approximately 8 weeks later. The guidance also suggests that  additional time may be given for more complicated projects, and Air  Force officials told us they wanted to give potential lessees additional  time to prepare their proposals.
The playbook indicates that the final request  The Air Force did not get beyond these steps in the enhanced-use lease  process because it did not receive any proposals.
section_title: Air Force Instruction and Manual
paragraphs: Air Force guidance on economic and business-case analyses provides  information on developing cost estimates for certain projects. Air Force  guidance for economic analyses identifies circumstances under which an  economic analysis is required, including new projects when total  investment costs equal or exceed $2 million (in fiscal year 2011 constant  dollars) and for any utilities privatization project. It further lays out  special instructions for energy projects, which are to be evaluated in  constant dollars and to use Department of Energy indices, which are  published annually, for energy prices. Further, in the case of lease- purchase decisions and private sector-financed leases or service  contracts involving energy projects, Energy Conservation Investment  Program projects are to have a simple payback of 10 years or fewer and  a minimum savings-to-investment ratio of 1.25 to meet DOD criteria.  The Air Force guidance for business-case analyses describes such an  analysis as a decision-support document that identifies alternatives and  presents convincing business, economic, risk, and technical arguments  for selection and implementation to achieve stated organization objectives  or imperatives. Among other things, the benefits and total costs to the  government should be developed over the full life cycle of the project for  each alternative, and they should address the status quo. The guidance  also notes that, for enhanced-use leases, these analyses focus on  identifying the highest and best use for the fair market value of the asset  and presenting the business, economic, and technical arguments in  support of the project.found that the Air Force generally followed this guidance. Specifically, we  found the following:   Reviewing the Air Force’s feasibility study, we
For each of the five options presented in the feasibility study, the Air  Force included estimated costs and a comparison of those costs  against each of the others and against the costs of continuing to  operate the plant. Table 1 summarizes the total estimated costs for each of the five options presented in the feasibility study and for the  status quo as well as the estimated cost savings to the Air Force for  each of the options compared to the status quo.
Estimated costs for each option were laid out in different broad  categories, including operation and maintenance and repair and  replacement of existing assets, among others. Further, these  categories varied based on the characteristics of the option being  described. For example, the first option involved replacing the current  plant, with its capacity of 22.5 megawatts, with a smaller, 8-megawatt  plant that would not be connected to the grid. Thus, the description of  this option did not include costs for the grid connection and included a  reduced estimate for operation and maintenance costs after the  smaller plant became operational. Appendix II contains additional  information on the estimated costs of the five options in comparison to  each other and to the status quo.
All costs were calculated over a 50-year period because the Air Force  considered 50 years to be the expected term of an enhanced-use  lease. Estimates were expressed in 2010 dollars to provide the  same present value across all options.
The feasibility study used a standard figure for the cost to purchase  power under the enhanced-use lease and utilities privatization options  and included a separate amount for the cost to purchase steam for heat.  However, the option to close the plant included only the costs for  purchasing power and did not clearly account for the costs of fuels to  operate the new heat systems. In general, the Air Force projected that  power costs would increase but that those increased costs would be  offset by decreased capital and labor costs.
section_title: Energy Conservation Investment Program Guidance
paragraphs: The Air Force submitted the grid connection and heat plant project to  OSD in January 2012, as a proposal for funding under the fiscal year  2013 Energy Conservation Investment Program. The Energy  Conservation Investment Program seeks to fund projects that will produce  improvements in energy consumption, cost, management, and security;  one of the program’s objectives is to dramatically change the energy  consumption at individual installations or joint bases. Funds for the  program are allocated across four categories of projects: renewable  energy, energy conservation, water conservation, and energy security.  Proposals are evaluated based on several metrics, including the savings- to-investment ratio and the payback period, among others, and all  proposals submitted to OSD must include a life-cycle cost analysis for the  proposed project.
The Air Force submitted the DD Form 1391, Military Construction Project  Data, and the building life-cycle cost report for its proposed project along  with a spreadsheet addressing the data elements requested in program  guidance. Air Force officials told us that the building life-cycle cost  estimate analysis is accepted by OSD and is the only tool the Air Force  uses for assessing energy options. We reviewed the original DD Form  1391 that was prepared in January 2012 for the Clear Air Force Station  project and submitted with the building life-cycle cost estimate as part of  the submission to the Energy Conservation Investment Program. This  estimate was subsequently revised in September 2013 as the Air Force  refined its cost estimates and prepared to work on the contracts with  Golden Valley Electric Association and the U.S. Army Corps of  Engineers.
Original Cost Estimate. The building life-cycle cost estimate in the  original DD Form 1391 determined that annual energy costs would  increase by $7.36 million, whereas annual recurring savings in  operation and maintenance costs would be approximately $8.87  million per year. The estimate also identified capital projects valued at  approximately $16.2 million in plant upgrades for the next 5 years,  which would be avoided if the plant was decommissioned. savings-to-investment ratio was 8.42, and the payback period was  7.59 years. A higher savings-to-investment ratio indicates greater  savings in comparison to the investment, and the OSD program  manager told us that the Energy Conservation Investment Program  funds many projects that have ratios between 1.4 and 2.0. The ratio  for this project was significantly greater than the program requirement  of 1.25. Also, the payback period was within the requirement of 10  years or fewer.
Although the costs of power and diesel fuel are shown to be greater than the costs of  coal in this projection, these costs are less than the anticipated savings in labor and  capital costs.
Revised Cost Estimate. In the revised DD Form 1391, annual cost  savings from reduced operation and maintenance expenditures were  estimated to result in a net first-year savings of $2.68 million. The  same capital costs would be avoided. The savings-to-investment ratio  was now 3.30 and the payback period was now about 6.62 years.  This was a marked drop from the earlier 8.42 savings-to-investment  ratio but was still greater than the 1.25 threshold. Additionally, the  payback period was well within the requirement of 10 years or less.
We talked to Air Force officials about the reasons for the decrease in  expected savings for the grid tie-in and heat plant project in the second  estimate. These officials told us that the original DD Form 1391 was  based on information that had been collected from the raw steam and  electrical output of the plant that is supplied to the composite area. They  said that, because the energy is measured at the production point, much  of the wasted energy in the generation process was captured in the  operation and maintenance costs. According to the officials, the revised  DD Form 1391 has more refined costs because an engineering heat  analysis that modeled the heat consumption of the composite area  buildings was performed in support of the design of the new heat plant.  The officials said that the modeled data provided a more accurate picture  based on seasonal and peak load conditions and enabled the Air Force to  identify more accurate maintenance costs compared to those in the  feasibility study.
Another change was in the estimated costs to purchase power from  Golden Valley Electric Association. The feasibility study estimated that  Clear Air Force Station could purchase electricity at a price of 11.5 cents  per kilowatt hour. As of April 2013, this price was estimated to be  approximately 13.23 cents per kilowatt hour under the GS-3 industrial  rate. Representatives from the union that represents plant personnel had  questioned the accuracy of the Golden Valley Electric Association rate  used by the Air Force, but Air Force officials told us that the Air Force had  confirmed with Golden Valley Electric Association that it would receive the  industrial rate, as opposed to the GS-2 commercial rate of almost 16  cents per kilowatt hour. The officials told us that this was because the Air  Force, not the public utility, would be responsible for maintenance of the  substation and switchgear that will be located on the installation.
section_title: For Options Considered in the Feasibility Study, Some Plant-Closure Costs Were Not Fully Developed, but Adding This Information Would Not Have Materially Affected the Outcome
paragraphs: In reviewing the cost estimates for the five options for the plant, we found  there were some items and associated costs that were not fully  developed in the feasibility study but were later more fully developed as  the Air Force took steps to carry out its plans. Air Force guidance on  economic analyses indicates that minor costs or costs common to all of  the alternatives being considered may be excluded when conducting a  preliminary economic analysis. However, although the feasibility study  presented the option to close the plant as the alternative the Air Force  would pursue if it did not receive any proposals for an enhanced-use  lease, the study did not fully document all of the expected costs for the  plant-closure option. While adding this information is unlikely to have  materially affected the Air Force’s decision to close the plant, fully  developing those costs in the feasibility study would have provided  decision makers with more complete information and a better  understanding of the proposed actions. Although some cost details were  not available at the time of the feasibility study, having a better description  of the sources of costs and what actions the Air Force would need to take  to provide a heat system for the composite area would have given  decision makers a fuller picture of what the Air Force would need to buy  or consider in assessing the costs of this option. In particular, it would  have been useful to present an estimate of other associated costs, such  as the labor or additional contract costs, over the same period. Two  instances where we saw that costs for the plant-closure option were not  fully developed were heat system costs and potential labor or contract  costs.
subsections: section_title: Heat System Costs Were Not Fully Developed in Plant- Closure Option
paragraphs: The analysis for the plant-closure option included a placeholder for a heat  system with estimated costs of almost $13 million (in 2010 dollars) for  boilers to heat the buildings. However, the feasibility study stated only  that the buildings could be converted to electric heat, or the Air Force  would buy and install package steam generators in 2015 to supply steam  to the buildings. The information in the study did not specify the types of  systems that the Air Force anticipated using, nor did it provide information  on the source of the $13 million estimated cost. Further, there are likely to  be other costs associated with the heat system, such as diesel storage  tanks, possible modifications to the existing buildings to accept a different  method of receiving heat, and a means of protecting existing water and  sewage pipes that are currently kept warm by their proximity to the steam  lines; these other costs were not presented in the study. Additionally,  boilers have a shorter life span than a power plant. The Air Force’s  revised building life-cycle cost estimate included a life cycle of  approximately 20 years, which is OSD’s estimated economic life cycle for  boilers. As a result, the Air Force would likely have to replace the boilers  at least twice during the 50-year period covered by the plant-closure  option. The Air Force’s estimated cost for the boilers in 2015 was $15  million. Applying this estimate to replacement boilers in years 26 and 46  would require an additional $7.6 million and $4.5 million, respectively, in  2010 dollars. We determined, and Air Force officials acknowledged, that  this would result in a total increase of $12.1 million for this option, which  would still be less costly than the status quo.
section_title: Plant-Closure Option Did Not Include Labor or Contract Costs
paragraphs: The plant-closure option assumed that the plant would be closed after  2015 and that starting in 2016 there would be no operation and  maintenance or general and administrative costs. However, there would  still be some remaining costs for continuing to provide heat to the base,  and they are not included in the estimate for the plant-closure option. The  plant-closure option accounts for savings in labor costs, since the existing  plant personnel would no longer be needed once the plant is  decommissioned. While these costs would no longer be associated with  operating and maintaining the plant, there would likely be some personnel  costs incurred for this option. The plant currently provides both power and  heat to the composite area, and connecting to the grid and purchasing  electricity from Golden Valley Electric Association addresses only the  provision of power. As described above, the Air Force will be installing  heat systems for the composite area, which will require personnel to  operate and maintain them. Air Force officials told us that operating the  heat boilers could require two to eight personnel, depending on the  number, type, and size of the heat system that is developed. If operations  and maintenance were provided by the current base operating support  contractor, then the contractor would likely require additional funding in  order to assure this coverage. The Air Force would incur these costs  either as labor costs or as increases in the base operating support  contract.
Air Force officials told us that they initially were considering a centralized  steam plant with a high-pressure system—which would have required two  operators at a time for 24 hours a day, 7 days a week—and that the Air  Force would have likely retained civilian plant employees for this work.  According to the officials, if the Air Force had pursued this higher- pressure option, which they said had been considered during the  evaluation of heat plant options, it would have required eight dedicated  plant personnel. The officials said that they would likely have retained  some Air Force civilian employees, but about 75 percent fewer  employees than the 34 positions identified in the feasibility study. The  status quo estimate calculates the labor costs, which are part of the  operation and maintenance costs, to be approximately $4.3 million per  year in 2010 dollars. If almost one-fourth of the labor costs are added  back into the model for 2016 and beyond, this will result in an increase of  almost $22.5 million in this estimate (in 2010 dollars). Since the initial  discussions, the Air Force has moved away from the high-pressure  system and is now considering a medium-pressure heat source. Air Force  officials told us that they now anticipate having the base operating  support contractor operate and maintain the boilers. They estimated that  funding this item will require approximately $257,000 per year above the  existing contract, which would include labor, equipment, and supply  components. We calculated that adding these contract costs to the  estimate each year would have added an additional $5.7 million in 2010  dollars over the 50-year period, which would still make it less costly than  the status quo.
section_title: Omissions Were Unlikely to Have Materially Affected the Air Force’s Decision
paragraphs: Despite these omissions, we found that the differences in the plant- closure cost estimate were unlikely to have materially affected the Air  Force’s decision to close the plant. Specifically, the costs of all of the  options where the plant remained open under Air Force operation were  significantly higher than the costs of the option where the plant would be  closed, even accounting for the omissions discussed above. There were  some items that could have been more fully documented and included in  the plant-closure option, particularly since this was the option the study  recommended be pursued if the enhanced-use lease proposal were  unsuccessful. However, while including those items that were omitted  could have been helpful for decision makers and for clearly documenting  differences between the options, the differences in those dollar amounts  were unlikely to have materially affected the determination of overall  savings compared to the status quo option. Regarding the heat boilers,  for example, the Air Force has since refined its cost estimates as part of  the building life-cycle cost estimates developed for the submission to the  Energy Conservation Investment Program. The latest cost estimate for  purchasing the boilers is now less than half of the amount estimated in  the feasibility study. Further, the labor costs for 8 personnel would still  be approximately 75 percent lower than the labor cost used in the  feasibility study, which was for 34 personnel. Instead, the Air Force could  face approximately $250,000 per year in labor and related costs. Even  the original boiler estimate falls far below the estimated status quo cost.  That is, the original boiler estimate—with two replacements over the  period covered by the feasibility study, plus eight civilian positions to run a  centralized heat plant—would have brought the estimated cost for the  plant-closure option to about $273 million (in 2010 dollars), versus  estimated status quo costs of almost $507 million over the same 50-year  period.
section_title: Several Noneconomic Goals Significantly Influenced the Air Force’s Decision Concerning the Power Plant
paragraphs: The Air Force identified goals other than cost savings in relation to the  power plant at Clear Air Force Station. Specifically, in addition to its  economic analyses of various power plant alternatives and the  subsequent elimination of some options, the Air Force also considered  other factors when making its decision regarding the future of the plant.  These included the
Air Force goal of no longer operating and maintaining the plant  because the Air Force does not consider power generation to be a  core competency,
Air Force goal of reducing energy costs at Clear Air Force Station,
Air Force need to ensure reliable power for current and future  mission-critical facilities and supporting facilities.
Taken together, these factors and the Air Force’s analyses formed the  basis for the Air Force’s decision to close the plant once the grid  connection, heat systems, and backup power sources are operational.  These factors and their effect on the Air Force’s decision are discussed  below.
subsections: section_title: Air Force Goal of No Longer Being Responsible for Operating and Maintaining the Plant
paragraphs: In the feasibility study, the Air Force indicated that one constraint for the  study was that both Air Force Space Command and Clear Air Force  Station stipulated that the Air Force did not wish to become a de facto  utility with the assumption of resultant roles, responsibilities, and risks. To  that end, the study stated that relieving the Air Force of the responsibility  for operating and maintaining the plant was a primary test for determining  an optimal alternative operating model for the plant. Of the five options  presented in the feasibility study, the Air Force concluded that options 3  (lease) and 4 (privatize the plant) met this test. Options 1 (smaller plant  with no grid connection) and 2 (smaller plant with grid connection), on the  other hand, did not meet this test, since the Air Force would continue to  operate and maintain a plant at Clear Air Force Station under those  scenarios, as well as under the status quo option. In option 5, the plant  would close so that no entity would be operating and maintaining a plant  on the installation. Air Force officials told us that power plant maintenance  and operations are not core competencies for the service, and the Air  Force is seeking to move away from operating power-production facilities  worldwide.
section_title: Air Force Goal of Reducing Energy Costs at Clear Air Force Station
paragraphs: The feasibility study highlighted that the Air Force was looking for ways to  reduce the energy costs at Clear Air Force Station. As described earlier,  the installation has an energy intensity, or energy consumption per  square foot of building space, that is approximately seven times the  average for Air Force Space Command installations, and its cost per  square foot is about double that of the average for the command. Officials  from Air Force Space Command and the Air Force Civil Engineer Center  told us that the Air Force has a service-wide goal of reducing its energy  intensity by 37.5 percent by 2020, and they explained how the plant at  Clear Air Force Station fits into those larger energy goals. Within Air  Force Space Command, the 21st Wing is seeking facilities energy  reductions for its seven installations that report on energy. The energy- reduction project at Clear Air Force Station is a command priority, and the  21st Wing determined that connecting the installation to the grid will  contribute greatly to the wing meeting its energy-efficiency goals. In Air  Force Space Command’s estimate, eliminating on-site energy generation  at Clear Air Force Station will reduce the installation’s annual energy  consumption by about 85 percent, from approximately 800 million BTUs  to 123 million BTUs.
section_title: Air Force Need to Ensure Reliable Power for Current Mission
paragraphs: According to the Air Force Space Command instruction regarding utility  reliability requirements in place at the time of the feasibility study, the  missile warning radar system for Clear Air Force Station, Alaska, required  0.9999 annual utility availability, or 99.99 percent. This translated to a  downtime of 53 minutes a year. The 2010 feasibility study stated that, in  2009, Golden Valley Electric Association’s system had a reliability of  99.99 percent, experiencing about 10 to 20 minutes of outages. The study  assessed that Golden Valley Electric Association’s minimal system  outages and the possibility that Clear Air Force Station could negotiate  uninterruptible service with the utility would mean that Golden Valley  Electric Association would likely serve as a reliable backup power  source. Officials stated that DOD’s reliability standards apply solely to  mission-critical facilities, and the radar is the only mission-critical facility at  Clear Air Force Station. Therefore, according to these officials, reliability  standards apply only to the radar and not to the composite area or the  rest of the installation. Air Force officials explained that the new  emergency power plant for the radar mission, which had been under  construction at the time of the feasibility study, had since been completed  and that it would provide the required backup power and heat for the  radar mission. With both the emergency power plant and a connection to  the grid, the radar could shift from the plant to the grid to acquire the  electricity needed to provide power and heat to the radar facility. In our  discussions with Air Force officials, we learned that the power plant had  experienced two outages a few months earlier—the first outages in more  than 16 years—highlighting the age and condition of the plant and the  importance of backup power for the radar mission. Air Force and Missile  Defense Agency officials also described upcoming projects to expand the  emergency power plant capabilities by installing a third generator.  Additional diesel storage tanks will also be constructed to ensure that  additional fuel resources are on-site near the radar facility and available  to support backup power generation.
Although it is not considered mission-critical, the composite area also  requires a reliable source of power and heat, due to the extreme  temperatures that could quickly damage facilities and utility systems in  the event of a power outage. Air Force officials told us that the planned  1-megawatt backup generator will provide the minimal power needed for  the heat plants and electricity for the composite area if the installation  loses grid power. They further stated that the tie-in to the electric grid will  be configured in such a way that power could be brought in from a  different direction should there be problems somewhere along the Golden  Valley Electric Association transmission line. For example, if there is a  power outage south of the installation that affects the Golden Valley  Electric Association transmission line, power could be brought in from the  north, and vice versa.
section_title: Air Force Need to Ensure Reliable Power for Future Missions
paragraphs: The Air Force and the Missile Defense Agency have planned radar  upgrades for Clear Air Force Station in the near future, but the Air Force  has determined that these upgrades are not likely to have significant  effects on Clear Air Force Station’s energy requirements. Since changes  to the radar in 2001 had resulted in the significant reduction in power  requirements for Clear Air Force Station, we discussed with appropriate  Air Force and Missile Defense Agency officials the potential impact of  these planned changes on the installation’s energy requirements and  what confidence the Air Force had that the planned capability at the  installation would be sufficient to support any adjusted energy  requirements. In the feasibility study, the Air Force addressed the  potential effects of the radar upgrades on Clear Air Force Station’s energy  demand, stating that the new radar system was expected to consume an  amount of power roughly equal to the power currently being shed to the  load bank, which would result in no appreciable increase in electricity  demand. As stated previously, energy demand at Clear Air Force Station  ranges from 3 to 6 megawatts, and the power delivered to the load bank  ranges from approximately 100 kilowatts in the winter to 1,000 kilowatts in  the summer.
Air Force Space Command officials summarized their assessment of the  effect of the radar upgrade on energy requirements. According to these  officials, there are two pending Missile Defense Agency projects that will  influence the energy load and cost calculations at Clear Air Force Station.  Of these projects, one was previously assessed as potentially requiring a  temporary load increase during implementation and simultaneous  operation but not a net increase in consumption once the transition is  complete. For the other project, the Air Force did not have load figures  but assessed that the project would not greatly increase the energy  demand at Clear Air Force Station. In addition, the officials addressed the  potential effects on energy demand of three other upcoming military  construction projects at Clear Air Force Station. They told us that the Air  Force had concluded that, overall, there would not be a net increase in  energy demand, due in part to more energy-efficient construction.
section_title: The Air Force Considered Several Alternatives to Closing the Power Plant but Did Not Find Them to Be Economical, and Some Options Were Not Fully Evaluated
paragraphs: The Air Force considered and evaluated several options before selecting  the option to close the plant after first connecting to the local grid and  building a separate heat system. Officials said that they obtained ideas for  the options they considered from stakeholders, including Clear Air Force  Station, 21st Space Wing, and power plant employees, and fully  evaluated some of the options that looked more promising. Still other  options were considered but were not fully evaluated in formal studies  because they did not generate as much savings or the Air Force did not  consider them to be economically feasible. For example, the Air Force did  not fully assess the costs of more incremental changes to current  operations of the existing plant, such as retaining ownership of the plant  but downscaling its operations, because extensive capital improvement  costs would remain (although the costs of coal would be reduced).  Among the options that it considered, the Air Force found that some  options did not generate as much savings as other options and that some  were not feasible from the Air Force’s perspective because the technical,  practical, and mission challenges were viewed as too difficult to  overcome. The Air Force pursued the option to solicit an outside entity to  assume the plant’s operations and maintenance through an enhanced- use lease, but no outside entity ultimately submitted a proposal in  response to the Air Force’s solicitation. Finally, as the U.S. Army Corps of  Engineers further developed studies on the designs of the heat systems,  various technical issues emerged, leading to changes in the design of the  heat system.
subsections: section_title: The Air Force Determined That Some Alternatives to Closing the Power Plant Were Not Economical
paragraphs: The Air Force began to consider what it should do with the power plant at  Clear Air Force Station after it had identified the plant as operating  inefficiently. As noted earlier, the 21st Space Wing had been looking at  ways to improve efficiency and cut costs for the Clear Air Force Station  power plant as far back as the 1990s, but Air Force Space Command  believed that it was unable to pursue major changes until after emergency  backup power for the installation’s mission was ensured. For this reason,  the 21st Space Wing did not formally program any requirements prior to  2008 that would have led them to seek funding for such projects. In  August 2009, the Air Force Real Property Agency prepared a briefing that  referenced a 2008 concept opportunity study that identified the plant as  underutilized and identified opportunities and challenges associated with  an enhanced-use lease for the plant. For example, the briefing identified  potential environmental review as a challenge that might undermine the  value of the plant for a potential lessee. The same briefing discussed the  establishment of a working group to conduct an opportunity analysis for  the plant. In the same month, officials from Air Force Space Command,  the 21st Civil Engineering Squadron, the Air Force Real Property Agency,  and the Air Force Civil Engineer Support Agency met to discuss  opportunities for utilities privatization or an enhanced-use lease of the  plant. The meeting attendees discussed potential interest from Golden  Valley Electric Association to acquire the plant’s excess energy and  agreed to conduct a prefeasibility study to compare available options in  order to determine the best approach for the power situation at Clear Air  Force Station. The Air Force then prepared a draft concept opportunity  study in June 2010, as a precursor to the feasibility study. The concept  opportunity study was a qualitative study that identified strengths,  weaknesses, opportunities, and threats for four options as they pertained  to energy reliability; environmental requirements; potential for revenues,  savings, or energy efficiency for the Air Force; and reductions in non- mission-critical resources and the time involved in plant functions. Three  of the options were also studied in the feasibility study, which provided a  quantitative comparison of the savings generated for the Air Force by  each of the five options when compared to the status quo. Both studies  considered the options for the enhanced-use lease, utilities privatization,  and selling excess power. The possibility of closing the plant was first  raised in the concept opportunity study and was studied further in the  feasibility study.
Air Force officials said that economic analyses drove the decision they  made regarding the power plant and determined that some options were  not economical because they did not generate as much savings for the  Air Force. The concept opportunity study stated that the Air Force  continuing to own and operate the plant would not be advantageous  because the plant would continue to produce energy in excess of  requirements, using old equipment. These officials said the feasibility  study indicated that it would be cost-prohibitive to update the existing  plant. The feasibility study estimated the costs for updating the existing  plant in the near term as about $21 million. Those costs include items  such as installing a new combustion-control system and replacing a boiler  tube. Additionally, plant employees told us that, due to the age of the  plant, replacement parts for plant equipment and controls have become  difficult to find. The feasibility study found that options for the Air Force to  operate a smaller replacement plant, with or without selling excess power  from this smaller plant, would not generate as much savings for the Air  Force as certain other options. The feasibility study also found that the  utilities privatization option would generate slightly greater savings than  an enhanced-use lease and that the option to close the plant would  generate the most savings for the Air Force compared to the status quo.The feasibility study concluded that the Air Force should pursue the  enhanced-use lease in order to obtain realistic valuations of the plant  from potential lessees, or, if the lease project were unsuccessful, close  the plant. Table 2 provides a summary of several of the options that the  Air Force considered. The details of the options considered in either the  concept opportunity study or the feasibility study are discussed below.  1.  Replace the current plant with a plant sized at 8 megawatts: This  option was not considered in the concept opportunity study but was  included in the feasibility study. Under this scenario, the current plant  would be replaced over a 5-year period with a plant sized for the  energy demand at the installation at 8 megawatts. This option was  shown to generate some savings compared to the status quo in the  feasibility study, but not to generate as much savings as the other  options. 2.  Connect to the power grid and sell excess power: In both the  concept opportunity study and the feasibility study, the Air Force  considered connecting a plant on the installation to the local power  grid in order to sell the excess power it would generate. The concept  opportunity study considered the option for the existing plant to  produce power in excess of mission requirements and sell the excess  power through the grid connection. The study concluded that, in order  for power sales to be economical, the plant would likely need to  operate at its full 22.5-megawatt capacity. Under this scenario in the  feasibility study, the Air Force would replace the existing plant with a  plant sized at 8 megawatts and sell any excess power to a utility or  another military base in Alaska. The feasibility study found that this  option generated lower savings than other options and that revenues  generated from the smaller plant would not cover the cost of the  connection to the grid, because there would not be as much power in  excess of the installation’s needs available for sale. Furthermore,  there were some complications associated with operating the plant at  its full 22.5-megawatt capacity:
As previously stated, the Air Force currently does not operate the  plant at full capacity in order to avoid having it classified as a  major source for hazardous air pollutants. According to Air Force  officials, increasing power production at the current plant would  also require them to install new combustion and emission  monitoring controls and to consider changes to the air quality  control operating permit. Officials additionally said that an  environmental analysis associated with obtaining a new permit  would also be required, and that permit would take 2 to 3 years to  obtain.
Air Force officials indicated that the Air Force would not be able to  sell power to private entities and that selling power to a public  utility or other government entities was not economically viable.They also said that, if the Air Force sold power to other  government entities, such as Army bases in Alaska, it would still  incur the costs of capital improvements to the plant but would not  be reimbursed for that investment. In addition, they said that they  had considered selling excess power to the Army but determined  that this option would not have been economical for the Army  because the Army could buy any additional power it might need at  a cheaper rate from the local public utility.  3.  Lease the plant to a private entity or public utility through an  enhanced-use lease: This option was considered in both the concept  opportunity study and the feasibility study. Under this scenario in the  concept opportunity study, the Air Force would negotiate with the  lessee to purchase power and steam. The concept opportunity study  recommended moving forward with a quantitative evaluation, or  business-case analysis, of the enhanced-use lease option. Under this  scenario in the feasibility study, the Air Force would pay for the  connection from the existing plant to the grid and would negotiate a  power and steam purchase agreement with the lessee. Additionally,  the lessee would sell power to the market over the grid. The feasibility  study makes the assumption that the lessee would replace the plant  at a capacity of 22.5 megawatts and that the Air Force would  reimburse the lessee for capital upgrades to the plant, while the  revenue that the lessee generated through power sales would be  deducted from the amount the Air Force would pay the lessee for the  capital upgrades. The feasibility study found the enhanced-use lease  to be the option that generated the third greatest savings among the  options that were evaluated, close to the savings generated for one of  the scenarios for utilities privatization. In February 2011, officials from  the Air Force Real Property Agency briefed the Privatization Executive  Steering Group and the Basing Requirement Review Panel, both of  which concurred with the recommendation to pursue an enhanced- use lease.  4.  Privatize the plant: This option was also considered in both the  concept opportunity study and the feasibility study. Under this option  in the concept opportunity study, the Air Force would sell the existing  plant to a third party and negotiate a power and steam purchase  agreement with the new owner. The Air Force evaluated two  scenarios under this option in the feasibility study. Under both  scenarios, the Air Force would pay for the connection from the plant to  the grid, and the new owner would replace the plant up front (by 2020)  at a capacity of 22.5 megawatts. As in the enhanced-use lease option,  the Air Force would reimburse the new owner for plant upgrades, and  the new owner would sell power to the Air Force and to the market  over the grid. Revenue generated by the plant owner would be  deducted from the amount the Air Force would reimburse the new  owner for capital upgrades. In one scenario, the Air Force would pay  its share of the owner’s capital investment; in the second scenario, the  Air Force would compensate the owner for all of the capital  investments. While the first scenario would generate some savings to  the Air Force, the second scenario would generate costs rather than  savings.
The concept opportunity study identified several advantages that an  enhanced-use lease would have over utilities privatization. For  example, under the enhanced-use lease, the Air Force would have  more flexibility to revert the equipment and operations back to Air  Force control and, if desired, to purchase power through a grid  interconnection in the future. According to this study, an enhanced- use lease could also better accommodate changes in mission  requirements, energy pricing, and utility and environmental  regulations. The feasibility study identified similar issues for  consideration for both the enhanced-use lease and utilities  privatization options, including that for either option to be attractive to  an outside entity, a major upgrade of equipment would likely be  required to enable the lessee or new owner to maximize the amount  of excess power it could sell on the grid.  5.  Close the plant: The concept opportunity study raised the possibility  of connecting to the local power grid as the installation’s sole source  of power, with backup diesel generators for power, and briefly  identified some issues to take into account were the Air Force to  consider this option. Under this option in the feasibility study, the Air  Force would build the connection to the grid, install power and steam  backup systems, purchase power from Golden Valley Electric  Association, and shut down the plant. The costs associated with this  option include approximately $22 million (in 2010 dollars) to  decommission the existing plant. The option to close the plant  generated the most savings for the Air Force compared to the other  options considered in the feasibility study.
section_title: The Air Force Did Not Fully Evaluate Some Options
paragraphs: Air Force officials said that other options were discussed but were not  formally evaluated and documented in studies. For example, officials told  us that they considered connecting to the local grid and then running the  plant seasonally or running the plant to failure, that is, performing  maintenance as needed but not making any major upgrades to extend the  life of the plant. Some plant employees said they believed that the most  efficient way to run the plant would be to run one boiler and one turbine  generator instead of two and investing in the plant to continue its  operation, for example by upgrading its combustion controls. In the  scenario envisioned by plant employees, the plant would provide primary  power and heat to the installation. But the installation could still establish  a connection to the local grid for sale of electricity and install a separate  heat system as backup power and heat for nonradar areas.employees believed that operating the plant would be less expensive  under this scenario. Air Force officials said that they had considered  running only one boiler and one turbine generator and had run the plant  this way in the summer of 2012 as part of a study on ways to cut utility  costs. They said that this option would reduce the costs of coal but would  still require the Air Force to invest in extensive capital improvements to  the plant and be responsible for the environmental liabilities of operating  the plant. The Air Force did not fully assess the costs of this option,  including its effects on labor and maintenance costs, for these reasons.
Plant  Since the Air Force began considering alternatives to its current operation  of the power plant, it has taken steps to improve the reliability of its  energy supplies. In particular, the availability of backup power generation  and heat for the radar and related facilities and for the composite area  means that the only service provided by the existing power plant that  does not have an independent backup supply is the heating for the  composite area. In the feasibility study, the Air Force did not formally  evaluate the feasibility or cost of installing boilers to provide heat to the  composite area as a backup to the existing plant because, as stated  earlier, this study focused on those options that the Air Force considered  to be economically feasible. Rather, boilers to provide heat for the  composite area were considered only under the option to close the plant.  However, as part of developing the enhanced-use lease project, the Air  Force has subsequently taken steps to acquire a backup heat system,  which is discussed later in this report. Table 2 provides a summary of  several of the options that the Air Force considered.
section_title: The Air Force Pursued an Enhanced-Use Lease but Did Not Receive Proposals
paragraphs: Although the results of the feasibility study showed that closing the plant  would generate greater cost savings for the Air Force than an enhanced- use lease, the study recommended that the Air Force first pursue the  enhanced-use lease. The study stated that the cost for a lessee to  implement capital investments in the plant could possibly be lower than  the estimates provided in the study and that the lessee might be able to  capture revenue and increase the market value of the plant. Air Force  officials said the Air Force pursued the enhanced-use lease in order to  leverage industry knowledge and resources and seek creative solutions  for keeping the plant open. One Air Force official said that proposals for  the enhanced-use lease could have varied by offeror and led the Air  Force in different directions than what was envisioned for the enhanced- use lease in the feasibility study. Additionally, negotiations with the  highest-ranked offeror would have determined the final terms and  conditions of the enhanced-use lease.
As noted earlier, the Air Force released a statement of need in August  2012 to notify interested parties of the enhanced-use lease opportunity,  and it held an Industry Day. The companies and public utility that  participated in the Industry Day had an opportunity to ask questions, and  officials from two of the entities we spoke with said that they had  requested and been provided a separate tour of the plant. In October  2012, the Air Force released its final request for qualifications, in which it  indicated that the lease would begin after the Air Force completed the  project to provide a new heat plant and connect the installation to the  power grid. Additionally, the document stated that the Air Force did not  plan to incur additional expenses to maintain the plant after the  completion of this project.
Between the conclusion of the feasibility study in 2010 and the release of  the statement of need in 2012, the Air Force’s plans for the enhanced-use  lease changed due to several factors:
At the conclusion of the feasibility study and as the Air Force began to  develop the enhanced-use lease option, the Air Force intended to  connect the plant’s electrical distribution system to the power grid and  enter into an agreement with a lessee to obtain both power and steam  for heat. Officials said that connecting the plant to the power grid  would make the plant economically viable to the lessee, which might  then be able to sell electricity to other customers through the power  grid. The Air Force also intended to discuss recouping the cost of the  connection from the lessee through the lease negotiation process.
When the enhanced-use lease project was approved within the Air  Force and sent to OSD for review, OSD determined that the project  did not meet the conditions for an enhanced-use lease because a  heat plant was not considered and the plant would still be needed for  “public use” until the connection to the power grid was made. As a  result of this review, the Air Force expanded the scope of its project to  include a heating system and a backup generator. Additionally, the  transmission line would now be connected to a substation on the  installation rather than to the power plant’s electrical distribution  system, as originally considered in the feasibility study. Officials said  that this change resulted in a delay of about a year for the enhanced- use lease solicitation process to begin.
The Air Force did not receive any responses to its request for  qualifications, and officials said the Air Force determined that receiving no  bids on the enhanced-use lease demonstrated that keeping the plant  running did not make business sense. We spoke with representatives  from two companies and a public utility that had attended Industry Day  and with Air Force officials about possible reasons for this lack of industry  interest in pursuing the enhanced-use lease. Among the things they cited  were the following:
Environmental standards: Air Force officials and a representative of  the public utility we spoke with cited the costs of upgrading the power  plant to meet environmental standards as a deterrent. One company’s  representative said that because the Air Force’s energy demand at  Clear Air Force Station is only a small percentage of the load capacity  of the plant, the lessee would likely have to sell excess power to other  customers. However, as discussed previously, if the plant operated at  increased capacity, it would potentially be reclassified as a major  source for hazardous air pollutants, which might necessitate additional  controls and monitoring requirements. The representative for the  public utility additionally cited concern with the level at which the plant  would be allowed to produce output if a new permit could not be  obtained and the length of time associated with obtaining a new  permit. A representative from another company also cited the lengthy  time associated with obtaining a new permit as a concern. The Air  Force believed that a new permit would take 2 to 3 years to obtain.
Need for upgrades: Air Force officials and company representatives  said that the plant required major upgrades. A representative from  one company we spoke with said that the Air Force would have  required the lessee to upgrade the plant to meet government  standards but that those standards were unclear in the information  that the Air Force provided to potential lessees. A representative from  the public utility said that in order for the plant to meet environmental  standards, it would need to upgrade the central plant control system.  The utility conducted its own assessment of needed plant upgrades  and found that additional repairs may be needed.
Uncertainty of the plant’s profitability: A representative from the  public utility told us that the utility conducted its own assessment of  the plant and found that even if the plant could be run at its full  capacity after obtaining the necessary environmental permits,  production would be more costly than that utility’s other power-  production alternatives. The utility’s assessment also found the  estimated cost per megawatt hour would be higher than the utility had  expected.
Transformer with greater transmission capacity needed: One  company’s representative with whom we spoke also cited the  transformer’s transmission capacity as a potential issue that would  affect the company’s ability to sell excess power. The transformer the  Air Force planned to buy and place on the installation to receive  power from Golden Valley Electric Association did not have the  capability to increase the transmission voltage in order to deliver  electricity back to the power grid for sale to outside customers.  Additionally, since the transmission line as described in the request  for qualifications for the enhanced-use lease would not be connected  to the power plant, an electrical connection would need to be made  between the power plant and the substation on the installation with a  transformer capable of increasing the voltage. Air Force officials  said that the Air Force did not want to incur the additional cost of  purchasing a transformer that could deliver electricity back to the grid,  because a larger capacity transformer would potentially not add value  for the Air Force.
Competition regarding rates: One Air Force official and a  representative from a company we spoke with said that Golden Valley  Electric Association, the local utility, was perceived to have  advantages over other companies in negotiating the enhanced-use  lease, because the Air Force was already planning to build the  transmission line connecting the installation to the power grid  operated by Golden Valley Electric Association. Air Force officials said  they did not want to commit during Industry Day to buying electricity or  steam for heat from any potential lessee but instead told participants  to include a power sale offer in their proposals. One company’s  representative said that he believed the Air Force would opt to buy  electricity at the least-cost rate by comparing the rate offered by  Golden Valley Electric Association to the rate offered by the lessee.  Therefore, any lessee other than Golden Valley Electric Association  would have had to compete with Golden Valley Electric Association’s  rate. This representative also believed that the Air Force would obtain  heat from the lessee, because that would be less expensive than  potentially using oil-fired generators to heat the composite area. Air  Force officials provided a similar assessment.
Disposal of coal ash: One company’s representative said that the  treatment of the ash produced from the burning of coal was a  concern. Due to an Air Force decision not to allow the potential lessee  to use the landfill located on the installation that is primarily used for  the disposal of the coal ash produced from burning coal, the lessee  would have to find a solution offsite. The representative said that,  based on the company’s operation of other coal plants, finding a  solution to the disposal of coal ash is a difficult issue for the company.  Air Force officials said that the Air Force’s decision was based on  concerns about long-term risks and environmental concerns for the  Air Force if it were to let the potential lessee use the landfill.
Available alternatives to Clear Air Force Station plant: Air Force  officials said that Golden Valley Electric Association had expressed  interest in the plant in the past. However, in the interim the utility had  proceeded to take the steps necessary to reopen a dormant power  plant that would have more than twice the capacity of the Clear Air  Force Station plant. The Golden Valley Electric Association  representative we spoke with said that the company will invest heavily  in capital improvements at that plant and did not know if the risk with  the Clear Air Force Station plant would be worthwhile.
section_title: Design of Heat Systems Evolved over Time
paragraphs: In the feasibility study, the option to close the plant was the only option  that included installing a new heat system. Under the other options  considered in the feasibility study, the Air Force made the assumption  that it would be able to obtain heat from a replacement plant or from the  lessee or new owner. As discussed above, in response to OSD’s review  of the enhanced-use lease, the Air Force revised its plans to include  construction of a new heat system for the installation. As the U.S. Army  Corps of Engineers conducted studies to further refine the design of the  heat system, various technical issues emerged, leading to changes in the  design.
The Air Force first considered building a central heat system for the  installation. Officials said that if the enhanced-use lease had succeeded,  the Air Force would have negotiated with the lessee to purchase the  steam from the plant and use it as the primary source of heat, using the  new central heat system only in circumstances where it could not obtain  heat from the lessee. The Air Force asked the U.S. Army Corps of  Engineers to begin designing a heat system in April 2012, before it  released its request for qualifications for the enhanced-use lease. Around  this time, the Air Force asked the U.S. Army Corps of Engineers to  conduct a study to evaluate the relative advantages of a central versus a  decentralized heat system.that a decentralized heat system would cost less than a centralized heat  system. Air Force officials said that the concern was about what type of  fuel would be used for the heat system. The design of the heat system  was put on hold for a month, in September 2012, while Air Force officials  reviewed the completed study and finalized consensus on the preferred  heating system. Some Air Force officials thought that whether the  enhanced-use lease succeeded would affect the design of the heat  system. Air Force officials decided to restart the design with a  decentralized heat system in October 2012, prior to the December 2012  due date for the responses to the request for qualifications for the  enhanced-use lease. Air Force officials said that they concluded from the  August study that a decentralized heat plant would be preferable whether  or not the enhanced-use lease succeeded. Air Force and Army officials  told us that, as the Army conducted further studies on the decentralized  heat system, several technical issues emerged with the design, including  concerns regarding how to keep the water pipelines from freezing.  Officials said that these technical issues, which were at times associated  with high costs, affected the direction of the design for the heat system. In  April 2013, the U.S. Army Corps of Engineers studied the costs of using  three to four low-pressure steam heat plants, which would resolve the  technical complication that had emerged. However, this revised design  raised new concerns, such as the logistics of refueling the heat plants  each day using small vehicles and the proximity of the heat plants to the  buildings where personnel are located. As of February 2014, the U.S.  Army Corps of Engineers had not completed the design of the heat  system, but the currently preferred design is two medium-sized buildings,  each containing three steam boilers. The third boiler in each building  would serve as backup for the other two. Additionally, if one of the  building’s boilers failed, Air Force officials said that the other building’s  boilers would be able to supply enough heat for the entire composite  area. Officials said that using this configuration would address the  concerns raised by previous designs of the heat system, including fueling  logistics and proximity to personnel.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of our restricted report, the Air Force  concurred with our observations. The Air Force noted that, overall, our  report documents the extensive studies and analyses that the Air Force  conducted. The Air Force noted that it was these studies and analyses  that led to the Air Force’s ultimate decision to tie to the electrical grid,  build supplemental heat plants, and eventually decommission the central  heat and power plant. The Air Force stated that it concurred with the draft  restricted report, with comments. These comments were technical in  nature and were incorporated as appropriate.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense, and the Secretary of the Air Force.  In addition, the report is available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-4523 or leporeb@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made key contributions to this report  are listed in appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine the extent to which the Air Force has evaluated options for  the Clear Air Force Station combined heat and power plant, we reviewed  the documentation for the project, including the 2010 feasibility study,  contract data, Department of Defense (DOD) and Air Force guidance, and  the Air Force analyses used to document and support the service’s final  determination for the plant, including the environmental assessment and  subsequent finding of no significant impact for the tie-in to the local grid  and construction of a new heat system. Specifically, we reviewed the Air  Force’s guidance on economic analyses and business-case analyses and  its enhanced-use lease playbook that is used to develop enhanced-use  lease projects. We reviewed the documentation the Air Force provided  us and talked with appropriate Air Force officials at Headquarters Air  Force, Air Force Space Command, 21st Space Wing, and the Air Force  Civil Engineer Center. We compared the Air Force’s documentation and  actions against the guidelines provided in the Air Force’s guidance. We  also reviewed the Air Force’s November 2010 feasibility study that  assessed the estimated costs of maintaining the status quo at the Clear  Air Force Station power plant against five options. We looked at the  economic analyses for each option and the status quo and reviewed the  calculations for the estimated costs provided. We assessed the study’s  assumptions against Air Force guidance on economic analyses and  business-case analyses. We discussed the studies, analyses, contracts,  and other documentation with appropriate officials from Headquarters Air  Force, Air Force Space Command, 21st Space Wing, Clear Air Force  Station, the Air Force Civil Engineer Center, and the U.S. Army Corps of  Engineers. We reviewed the Air Force’s analyses regarding its decision to  close the power plant; however, we did not analyze all of the underlying  data used to support those analyses. We also met with officials from  Usibelli Coal Mine and Golden Valley Electric Association. Further, we  spoke with Defense Logistics Agency–Energy officials about the existing  coal contract as well as current and potential future contracts for other  fuel sources, such as diesel. Finally, we interviewed Missile Defense  Agency officials for information on their roles in the current decision and  the potential effect of future radar upgrades on the installation’s energy  needs.
To determine what other options, if any, the Air Force considered before  deciding on the alternative power source it selected, we reviewed the Air  Force’s analyses on the options it considered, including the concept  opportunity study, which first laid out some options for the plant, and the  feasibility study. We also reviewed documentation related to additional  analyses that were not included in those two studies. We spoke with  appropriate officials from Headquarters Air Force, Air Force Space  Command, 21st Space Wing, Clear Air Force Station, the Air Force Civil  Engineer Center, and the U.S. Army Corps of Engineers regarding how  the options for the plant were vetted and the factors that the Air Force  took into account in its decision making. Additionally, we spoke with  representatives of Doyon Utilities, Golden Valley Electric Association, and  Aurora Energy and with plant employees regarding their perspectives on  the enhanced-use lease process.
Table 3 below identifies the organizations and offices that we contacted  during our review.
We conducted this performance audit from October 2013 through May  2014 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Development of Feasibility Study
paragraphs: In August 2009, Air Force Space Command requested the establishment  of a working group comprising personnel from Clear Air Force Station, the  21st Space Wing, the Air Force Civil Engineer Support Agency, the Air  Force Real Property Agency, and the major command to develop a  feasibility study for the plant. This team developed a set of five possible  options for the plant that represented the highest-ranked and best known  alternatives based on the experience and knowledge of the team. In May  of 2010, the Air Force Civil Engineer Support Agency and the Air Force  Real Property Agency conducted a joint visit to Clear Air Force Station in  which team members performed a site survey of the installation’s water,  waste treatment, and power plant; conducted a site-orientation visit of the  plant; and interviewed representatives from the local utility, Golden Valley  Electric Association. This site survey and site-orientation visit, along with  additional market and technical research, became the basis for the  feasibility study.
The working group also agreed to use the Government Should Cost  Estimate as the basis for developing cost models to analyze each of the  five proposed operating models in the feasibility study. The feasibility  study laid out five options, which were compared against the baseline  costs, or status quo, of operating the plant. The company CH2M Hill,  under contract to the Air Force, developed the status quo analysis, which  was termed the Government Should Cost Estimate and which assumed  that (1) the power plant would continue to be operated in the same  manner as in 2009 and (2) the equipment, buildings, and inventory would  be replaced with inventory similar to what is currently in place. The status  quo identified estimated costs over the 50-year period of the analysis,  including the following:
Annual operation and maintenance costs of $8.87 million per year.
These costs include the labor costs for Air Force civilian personnel to  operate the plant, fuel costs, the cost of contracted maintenance  services, and the cost associated with environmental permits. Power  plant employees operate and maintain the plant equipment, whereas  the base operating support contractor conducts basic maintenance of  the installation’s buildings, including lights and ventilation.
Annual general and administrative costs of $1.12 million per year.
Costs for repairing and replacing power plant components over the  50-year period (termed “R&R” costs), which totaled $392.55 million.
Costs for life-extension projects expected to occur in the initial 5 years  of the analysis period (2010 through 2014), which totaled $22.73  million. These initial system deficiency correction items were identified  by plant personnel as needing immediate attention and were  documented as part of the CH2M Hill site survey.
The repair and replacement and initial system deficiency corrections are  intended to increase the life of the current plant until 2030, at which point  the status quo estimate assumes that the Air Force will need to replace  the existing plant at a cost of $254.99 million. At this point the plant would  be 69 years old. The costs that make up the Government Should Cost  Estimate are summarized in table 4 below, which represents the  estimated costs of continuing to operate and maintain the existing plant  for the next 50 years. These estimates are presented as net present  value in 2010 funds.
According to the feasibility study, a cost model analysis was developed to  determine the Air Force’s capital investment requirements and the  average costs of power generation for each of the plant options. The Air  Force used the output from the cost models to conduct a comparative  analysis of the options to determine the optimum path forward for the  plant. In the comparative analysis, the economic metric used to evaluate  the five options was net present value—the sum of all future cash  outflows minus inflows discounted to 2010 dollars, calculated over a 50- year period. The Air Force used the 50-year time frame because it  considered a 50-year lease to be most likely to be signed. Each option is  evaluated over a 50-year period to be consistent with the status quo  estimate. We reviewed the broad cost estimates presented for the five  options and the status quo in the feasibility study and verified them  against the costs presented in the supporting tables for each option.  These costs from the Air Force’s summary table were presented in   table 1.
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Maria Storts (Assistant Director),  Karyn Angulo, Michael Armes, James Ashley, Heather Krause, Ron La  Due Lake, Joanne Landesman, Jon Ludwigson, Nadji Mehrzad, Anne  Rhodes-Kline, Michael Shaughnessy, Amie Steele Lesser, and Weifei  Zheng made key contributions to this report.