Capitol Power Plant: Architect of the Capitol Should Update Its Long-term Energy Plan before Committing to Major Energy Projects
Released: 2015-09-03T00:00:00

Letter

Background

AOC manages and operates CPP to support the agency’s strategic goals and objectives, including stewardship of Capitol facilities and conservation of resources. AOC must also comply with relevant laws and regulations, including environmental-protection and energy-reduction requirements. CPP consists of six main facilities: an administration building, a boiler plant, the West Refrigeration Plant, the West Refrigeration Plant Expansion, the East Refrigeration Plant, and a coal yard at a secondary site (see fig. 1).

CPP serves 25 buildings comprising about 17-million square feet, including the U.S. Capitol building, House and Senate office buildings, the Supreme Court, and five buildings not under AOC’s management, including Union Station and the Government Publishing Office. Figure 2 identifies the primary Capitol Complex facilities served by CPP.

CPP provides steam to 25 buildings and chilled water to 19 buildings. CPP bills non-AOC customers for its costs under arrangements in various statutes.

CPP is a district energy system that generates steam and chilled water for distribution through tunnels and direct buried piping to heat and cool nearby buildings (see fig. 3). Many district energy systems exist throughout the country, often at universities and office parks.

In the absence of the district energy system, AOC would likely have to install a more dispersed system, such as heating and cooling generation equipment in each building. Alternatively, AOC could potentially obtain steam and chilled water from another district energy provider, such as the General Services Administration (GSA), to serve some of the buildings in the complex, but could face challenges in doing so.

CPP has seven fossil-fuel fired boilers that primarily burn natural gas to generate steam. The boilers operate primarily on natural gas, but AOC can burn coal in two boilers when additional steam capacity is needed or fuel oil in five boilers if, for example, interruptions occurred in the supply of natural gas (see table 1).

As we previously reported, CPP increased its use of natural gas over coal and fuel oil beginning in 2008 as a result of the “Green the Capitol’ initiative,” which began at the direction of the House of Representatives. CPP has continued this practice for environmental and other reasons.

CPP currently has eight electricity-powered chillers to produce chilled water. AOC officials said CPP has experienced sporadic mechanical and electrical problems with its oldest chillers. AOC has a long-term plan to replace its older chillers, referred to as the Refrigeration Plant Revitalization (RPR) project, which calls for the replacement of several existing chillers and the addition of cooling towers over several phases by 2018. Table 2 provides information on CPP’s chillers in the West Refrigeration Plant and its West Refrigeration Plant Expansion.

AOC Has Implemented Many Measures to Manage Energy-Related Costs and Has Opportunities to Further Manage These Costs

Since 2008, AOC has implemented many measures to manage the energy-related costs of the buildings served by CPP. AOC’s efforts have reduced the energy needed to cool the buildings in the complex and the energy-related costs of operating CPP have fallen since fiscal year 2011. AOC has additional opportunities to further manage its energy costs.

AOC Has Implemented Many Measures to Manage Energy-Related Costs

Since 2008, AOC has implemented many measures to manage the energy-related costs of the complex.

Measures to Reduce Heating and Cooling Production Costs

To reduce the costs of producing steam, AOC replaced some steam- powered water treatment equipment at CPP with new equipment powered by electricity. Specifically, in fiscal year 2014, AOC replaced two of the pumps feeding the plant’s boilers, formerly powered by steam, with new electric pumps. An outside study prepared by a consultant to AOC found that this would reduce in-plant steam use and improve the overall efficiency of the system, resulting in an almost 7 percent decrease in annual fuel costs and a nearly 10 percent improvement in the plant’s steam output.

Additionally, AOC officials said they secured better terms in fiscal year 2014 for purchasing natural gas to operate the plant’s boilers. Starting in fiscal year 2014, AOC paid $8.36 per thousand cubic feet of natural gas as opposed to the $12.95 the agency paid in fiscal year 2013, a reduction of approximately 35 percent. The contract expires in 2017.

AOC also completed several projects to lower the costs of providing chilled water. AOC officials said that in fiscal year 2012 they began a practice known as “free cooling” at CPP to reduce electricity costs. During winter months, CPP uses outside air, the plant’s cooling towers, and heat exchangers to chill water rather than using its electric chillers. A 2013 study of the chilled water system shows that CPP should be able to meet the majority of chilled water demand in winter months using free cooling, thereby lowering its electricity costs. The study estimated that free cooling would achieve about $307,000 annually in savings through reduced electricity use.

Also, in fiscal year 2014, AOC installed new chillers at CPP. The 2013 chilled-water- system audit concluded CPP could produce chilled water more efficiently if it increased its use of two relatively new and efficient chillers located in the East Refrigeration Plant, where the chillers were underused due to the relatively poor condition of the cooling towers there. AOC initially planned to move the two chillers to the West Refrigeration Plant Expansion. Ultimately, AOC purchased and installed two new chillers of similar capacity and efficiency. Additionally, in fiscal year 2014 AOC started construction to add two new chillers and three cooling towers to the West Refrigeration Plant Expansion as part of the RPR project. AOC budget documents state the new chillers will operate 50 percent more efficiently than the older chillers.

Measures to Better Understand Energy Consumption and Identify Opportunities for Conservation

To better understand energy consumption, AOC installed energy meters at most of the buildings it serves and is installing sub-meters within selected buildings. Energy meters can provide information on the consumption of steam, chilled water, and electricity. According to AOC officials, metering allows the agency to identify changes in energy consumption that could indicate equipment problems, measure progress on energy conservation, assist in identifying future conservation measures, and evaluate energy losses during distribution. Within the last 6 years, AOC installed meters for most of the buildings served by CPP. AOC does not have meters for individual office spaces, but plans to install meters for some energy-intensive spaces, such as kitchens and data centers. According to AOC officials, the agency does not generally track energy use at the occupant level because of the cost and instead encourages energy conservation within offices through education and awareness activities.

Select operators of other district energy systems we interviewed specifically mentioned the installation of energy meters to minimize the costs of operating their systems. Some of these operators said they installed meters at individual buildings served by their systems and are considering installing or have already installed submeters where appropriate.

In addition, between 2008 and 2013, AOC commissioned energy audits of most of the buildings served by CPP. Energy audits involve examining a building’s physical features and utility history to identify conservation opportunities. AOC officials told us they engaged an engineering company to complete energy audits of the buildings operated by AOC, including the Supreme Court, and Thurgood Marshall buildings at a cost of $5 million. The audits produced estimates of the implementation cost, maximum energy and cost-savings potential, and pay-off period for energy conservation measures in all of the audited buildings.

For the 16 largest buildings in the complex administered by AOC, these audits recommended several hundred conservation measures that could result in substantial energy savings. Most of the potential savings could stem from upgrades to heating and cooling systems. Three buildings—the Capitol, Madison Building, and Rayburn House Office Building–account for 52 percent of the potential energy savings from measures recommended by the contractor. Over one-third of the potential energy savings from these recommended measures involve the Library of Congress buildings, with the Madison Building—home of one of the Library’s largest data centers—accounting for the greatest number of recommendations and the highest potential energy savings. For example, the audits estimated that fully replacing heating, ventilation, and air conditioning (HVAC) control systems in the Madison Building could reduce the building’s cooling needs by half, and this project accounted for 18 percent of all potential energy savings from the recommended measures. The contractor estimated that independently implementing all of its recommended measures could cost $115 million and that each measure would eventually result in dollar savings, with the payoff period varying for the different individual measures. As described below, AOC implemented some measures and intends to implement others as resources allow.

Measures to Reduce Energy Consumption

AOC officials subsequently evaluated the energy audits based on factors such as cost-effectiveness and execution difficulty and approved some measures for implementation. AOC staff and contractors have already implemented some of the measures. For example, AOC staff repaired and optimized some existing HVAC systems.

AOC also hired contractors to improve the energy efficiency of the Capitol and House and Senate office buildings through conservation measures. To finance these measures, AOC repays the contractors from avoided costs. Under Energy Savings Performance Contracts (ESPC), federal agencies enter into contracts—up to 25 years—with a private company in which the company incurs the costs of financing and installing energy efficiency improvements in exchange for a share of any savings resulting from the improvements. Table 3 describes the energy conservation measures installed under these contracts.

Air handling unit replacement

HVAC systems and controls upgrades

Lighting retrofit and controls

Steam trap maintenance

Energy efficient lighting upgrades

HVAC and controls upgrades

Steam trap replacement

Water conservation / fixture upgrades

HVAC systems and controls upgrades

HVAC testing, adjusting, and balancing

Insulation of steam system components

Lighting retrofit and controls

Transformer upgrades During the contract term, agencies typically continue to budget and request appropriations for energy-related operations and maintenance based on their baseline energy needs prior to implementation of the improvements. Agencies repay the company for the costs—such as initial construction and installation costs, and the company’s borrowing costs and profit—from appropriations using the savings generated by the improvements. The federal statute authorizing federal agencies to enter into ESPCs states that the aggregate annual payments may not exceed the amount the agency would have paid for utilities without an ESPC. At the end of the contract, payments to the company cease and the energy savings may allow agencies to reduce their energy-related expenses. Figure 4 illustrates the potential effect of an ESPC on an agency’s cash flows.

We reported in 2004 that although ESPCs provide an alternative funding mechanism for agencies’ energy-efficiency improvements, for the cases we examined at that time, such funding costs more than using upfront appropriations. This is because the federal government can obtain capital at a lower financing rate than private companies. We also reported in June 2005 that vigilance is needed to ensure agencies negotiate the best possible contract terms and that energy savings achieved will cover agencies’ costs.

To date, AOC’s contractors report that energy and cost savings have exceeded the guaranteed amounts. In fiscal year 2013, they reported total savings of over $9.8 million. AOC made nearly $8 million in payments to the contractors in 2013, resulting in a net savings of approximately $1.7 million. In September 2012, one of AOC’s contractors refinanced an ESPC project at a projected savings to the agency of $19.8 million over the term of the project.

For the entire complex, total steam and chilled-water consumption declined between 2010 and 2013, and adjusting the data to account for yearly changes in weather shows reductions in energy use, mostly from greater efficiency in producing chilled water. Because changes in weather affect the need for steam and chilled water, energy managers evaluate energy consumption against a measure of the average need for heating or cooling services. Cooling and heating degree days measure the number of days with outdoor temperatures above or below, respectively, 65 degrees Fahrenheit and the amount above or below that temperature. For example, a cooling degree day value of 10 indicates that the average temperature for the day was 75 degrees. AOC’s annual energy consumption of chilled water per cooling degree day fell between fiscal years 2010 and 2013, which shows that consumption of chilled water (i.e., cooling) decreased more than would be expected simply due to lower temperatures. AOC’s steam consumption per heating degree day during this period fluctuated. Figure 5 shows AOC’s annual steam and chilled- water consumption per heating and cooling degree days.

AOC incurs regularly occurring costs as well as capital costs to operate and maintain CPP. AOC’s regularly occurring costs to operate CPP, which include, among other things, the fuels and electricity to power the plant’s generating equipment and the personnel to operate and maintain them, rose from fiscal year 2009 to fiscal year 2011 and then fell between fiscal years 2012 and 2014. AOC’s costs (expressed as total obligations) to operate CPP were about $59 million in fiscal year 2009, rose to about $69 million in fiscal year 2011, and then fell to about $63 million by fiscal year 2014 (see table 4).

From fiscal year 2009 to fiscal year 2014, fuel and electricity accounted for about 46 percent of the costs to operate CPP (in 2015 dollars). AOC’s total obligations on fuel and electricity for CPP rose from about $32 million in fiscal year 2009 to a high of $33 million in fiscal year 2010, before declining in the subsequent years to about $24 million in fiscal year 2014. Changes in a variety of factors can affect CPP’s costs, including fuel and electricity costs, staffing levels, maintenance needs, efficiency in using fuels, and consumption patterns. As shown above, costs for individual line items have varied over time.

AOC Has Opportunities to Further Manage Energy- Related Costs

While AOC has implemented some conservation measures, AOC has additional opportunities to manage its energy-related costs. AOC’s past energy audits identified several hundred additional measures that could further reduce energy consumption in the complex and related costs and are expected to pay for themselves. Of these, AOC has selected some measures it intends to implement when resources become available (see table 5).

These include upgrades to building lighting, plumbing, and mechanical systems throughout the complex. For example, such upgrades could include (1) replacing inefficient light fixtures with modern, more-efficient fixtures with occupancy sensors, (2) replacing older inefficient plumbing fixtures with low-flow fixtures with automatic sensors, or (3) replacing pneumatic air-handling controls with more modern, digital controls. The measures AOC selected with the largest projected energy reductions include upgrades to the Library of Congress buildings. AOC officials said they are considering entering into an ESPC for these buildings that would include improvements to lighting and HVAC systems, and infrastructure upgrades to the data center in the Madison Building.

AOC Decided to Pursue a Cogeneration System Based on Partial Updates of Its 2009 Long-term Plan but Did Not Follow Key Leading Federal Capital-Planning Practices

Based on a 2009 long-term plan and subsequent partial updates, AOC decided that it should install a cogeneration system to replace aging boilers, meet future demand for steam, and produce electricity. AOC officials said that since upfront appropriations would not likely be available to procure the cogeneration system, they had decided to finance the project. AOC’s iterative planning did not follow key leading practices we identified for federal capital planning. AOC officials said they were unaware of the relevant guidance we cited on leading practices and did not provide documents to support their claims that the agency needed to move quickly to execute a contract for the proposed cogeneration system.

AOC Decided That a Cogeneration System Was Needed Based on a 2009 Long-term Plan and Subsequent Partial Updates

In 2009, AOC issued a long-term energy plan that concluded the agency should install a cogeneration system to replace aging boilers, meet future demand for steam, produce electricity, and serve other agency objectives. AOC continued to justify the need to pursue cogeneration in subsequent partial updates to the plan. Cogeneration, also known as combined heat and power, involves the simultaneous production of electricity and heat from a single fuel source, such as natural gas. AOC has proposed a cogeneration system that would use a natural gas combustion turbine to generate electricity and a recovery unit that would use excess heat from the turbine’s exhaust stream to heat water and create steam (see fig. 6).

AOC officials stated the cogeneration system, despite initial costs that are significantly higher than other alternatives, will provide needed steam and save money over time by producing electricity to power its chillers— thereby avoiding or decreasing the costs of purchasing electricity. In addition, cogeneration systems can produce excess electricity that can be sold to local utilities, thereby generating income that helps offset the cost of the system.

AOC’s 2009 long-term energy plan included a forecast showing that demand for steam would grow and exceed the plant’s capacity to generate steam by fiscal year 2016. To address this projected gap in capacity, the 2009 plan assessed nearly 30 capital alternatives for installing new steam-generating equipment, including natural-gas- powered boilers, a cogeneration system, or nuclear capabilities. The 2009 plan evaluated the capital alternatives using several criteria, including total life cycle costs, initial construction costs, air pollution emissions, energy efficiency, and security. AOC’s 2009 plan recommended that AOC continue to operate CPP as a district energy system to provide heating, and in that context, the best options based on life cycle costs and environmental impacts would involve a new cogeneration system or the use of synthetic coal. Ultimately, citing concerns about the cost and availability of synthetic coal as well as environmental concerns, the plan recommended that AOC procure a cogeneration system.

Specifically, the 2009 long-term plan recommended that AOC purchase a cogeneration system comprising one 7.5-megawatt cogeneration combustion turbine, which would represent the first of a three-phase plan. The 2009 plan also called for the installation (in two subsequent phases) of five natural gas boilers along with two other combustion turbines—another 7.5-megawatt turbine and a 15-megawatt turbine—and the equipment needed to distribute electricity throughout the complex.

The 2009 plan assumed the first combustion turbine would serve only CPP, but that the later installation of the additional turbines would enable AOC to distribute electricity throughout the complex and potentially allow for selling excess electricity to the local utility. The estimated construction cost for the project was $120 million over its three phases. AOC officials said that it estimated the construction costs in the 2009 plan through a benchmarking analysis and did not reflect an actual bid from a vendor.

AOC engaged the National Academies’ National Research Council (NRC) to review a draft of its 2009 long-term energy plan. In response to AOC’s request, the NRC organized an expert panel that identified several shortcomings in the draft plan, including that the energy demand projections were not supported by firm data and did not account for mandates to reduce energy consumption. In the final version of the 2009 plan, AOC states it addressed NRC’s concerns and accounted for both increased utility demand from building renovations and reductions in demand due to the energy reduction mandates.

AOC subsequently developed the design of the cogeneration project throughout 2012 and 2013. AOC formally proposed the project during its fiscal year 2012 appropriations hearings. In 2012, AOC also received two consultant-authored reports assessing the feasibility of the system. These reports included an analysis that concluded that the value of a cogeneration system, which AOC officials said represented the first two phases of the 2009 long-term plan, was highly dependent on the price at which AOC could sell the excess electricity generated by the system. Throughout 2013, AOC worked with a vendor to further develop the design of a cogeneration system representing the first two phases of the 2009 plan. In November 2013, AOC officials stated that the project’s initial construction-related costs would total roughly $67 million. The vendor ultimately provided a bid in late 2013 that resulted in a total project cost that was $100 million over AOC’s estimate. As a result, AOC initiated discussions with another vendor in January 2014.

On two occasions in 2014, during the course of the audit work for this report, AOC provided GAO with draft plans that concluded a cogeneration system was still the preferred means of meeting steam demand. In July 2014, AOC provided GAO with a draft version of a partial update of the 2009 plan prepared by a consultant, titled Strategic Long Term Energy Plan Update: Draft Final Report, that concluded new steam-generating capacity was needed to replace two aging boilers and meet projected increased future demand for steam. The draft July 2014 partial update included an updated long-term forecast of demand and, unlike the 2009 plan, did not project a gap in steam capacity occurring in 2016. Instead, the draft recommended that AOC replace the capacity of two aging boilers to decrease CPP’s reliance on coal. The draft July 2014 partial update did not, however, describe the expected life of these boilers. Unlike the 2009 document, the draft July 2014 partial update was not comprehensive and reviewed adding new natural gas boilers or eight different configurations of a cogeneration system (which involved combining new gas boilers with the systems). When presenting the draft partial update to GAO in July 2014, AOC officials said that the agency had not accepted the update as final from the consultant and would likely ask the consultant to add information and make changes before doing so. The draft July 2014 update recommended the option with the lowest life cycle costs: that AOC install a natural gas cogeneration system with two 5.7-megawatt turbines, as well as two natural gas boilers providing a total of 190,000 pounds of steam per hour.

The draft July 2014 partial update said the electricity generated by the cogeneration system would only be used within CPP and would not serve the rest of the complex or be sold to a utility; CPP does not have the infrastructure to provide electricity to the complex. Because of the low demand for electricity at CPP during winter months—due to relatively low chiller use—the plant would idle one of the two 5.7-megawatt units during peak winter conditions. In the draft July 2014 partial update, AOC’s consultant estimated the initial construction-related costs for the project at $56 million.

Later, in December 2014, AOC provided GAO with a draft plan, along with consultant-generated supporting documents, that assessed a choice between a cogeneration system and a single natural gas-boiler. Unlike the 2009 long-term plan and the consultant’s draft July 2014 partial update, the December 2014 draft plan did not include updated long-term forecasts of demand for steam. Instead, the draft plan used one year of demand—calendar year 2013—as the basis for all future years. The December 2014 draft plan stated CPP needed to replace the steam- generating capacity of two of its oldest boilers, citing their age and increasing operations and maintenance costs and recommended that AOC install a natural gas cogeneration system with a single 7.5- megawatt combustion turbine providing a maximum steam capacity of 100,000 pounds per hour. AOC officials stated this would fulfill the first phase of its 2009 long-term energy plan. The December 2014 draft plan stated the electricity generated by the cogeneration system would power CPP’s electric chillers and not serve the rest of the complex.

In contrast to the draft July 2014 update, the December 2014 draft plan stated that AOC would sell any excess electricity to the local utility. AOC officials said they expect to use up to 90 percent of the electricity generated by the proposed system to operate the plant’s chillers, thereby avoiding paying for the electricity from the local utility and justifying the system’s relatively large upfront investment (when compared to other alternatives). The agency plans to sell the excess 10 percent of electricity at rates to be determined by a future agreement with the local utility. AOC officials stated this could involve CPP’s becoming a facility qualified to sell electricity to the grid under the Public Utility Regulatory Policies Act (PURPA) of 1978. The officials said they used electricity rates for a qualified facility in the analysis supporting the December 2014 draft plan to use the most conservative approach. AOC officials said they are researching other arrangements for selling the excess electricity that could prove more economically favorable than as a qualified facility under PURPA.

Table 6 summarizes some of the key attributes of the recommended options in AOC’s planning since 2009 for meeting future energy needs.

AOC officials stated the cost estimates in the December 2014 draft plan reflected two independent cost estimates prepared by consultants and aligned with a bid received in November 2014 from the second vendor, a bid that was closer to the original project budget than the previous bid. AOC informed GAO in December 2014 that the agency desired to execute a contract with the vendor and proceed with construction of the cogeneration system—consisting of one 7.5 MW combustion turbine as described in its December 2014 draft plan. AOC officials said they continued to negotiate the scope of the project, a negotiation that resulted in, among other things, a reduction in the interest rate for financing the project. In March 2015, GAO received updated calculations from AOC reflecting these changes. As of March 2015, AOC had obligated about $16 million on design, preliminary site work, and management of the project.

AOC Officials Said Appropriations Would Not Likely Be Available and Intend to Finance the Cogeneration Project

AOC intends to procure the cogeneration system using a utility energy services contract (UESC)—an agreement, similar to ESPCs described previously, in which, in this case, a utility arranges financing to cover the upfront costs of an energy project that a federal agency then repays over the contract term from energy cost savings achieved by the project. Under the UESC, AOC would pay for financing costs, such as interest payments to the utility, in addition to repaying the initial capital costs of the cogeneration project (i.e., construction and other upfront costs) over the contract period (AOC used an analysis period of two years for construction and up to a 25-year contract period). According to our analysis of AOC’s updated data supporting its December 2014 draft plan, the agency would pay about $28 million more in nominal costs under the UESC than if the agency acquired the system using upfront appropriated funds: $16 million more in initial construction costs, due to additional UESC vendor overhead costs, and $12 million more in financing costs over the life of the contract. Under a typical UESC, repayments to the utility reflect the estimated cost savings from the project’s energy efficiency measures. However, under a UESC like AOC has proposed where the utility guarantees performance and not savings, the utility does not guarantee that the project will generate sufficient savings to pay for itself over time.

Acquiring the system using an upfront appropriation would cost less than using a third party to finance the project over the proposed 27-year analysis period. However, AOC officials said that since upfront appropriations would likely not be available to procure the cogeneration system, they had decided to pursue the project using a UESC. Because AOC planned to conduct the project without upfront appropriated funds, AOC officials stated they had not assessed the proposed cogeneration project using the agency’s capital-planning prioritization process, by which the agency ranks proposed capital projects and recommends those projects scoring the highest for funding through annual appropriations. As a result, AOC did not analyze the project and its merits relative to other projects using the agency’s pre-determined criteria for capital planning. AOC officials stated that the aforementioned ESPC projects did not go through the agency’s capital planning prioritization process for the same reason.

AOC intends to use a UESC under an arrangement established by the General Services Administration (GSA) that could help facilitate the transaction but narrows the number of entities AOC can engage to complete the project. Through its UESC arrangement, GSA has established basic contract terms with select utility companies, and agencies using this arrangement contract with one of these providers. GSA has contracts with two providers in the Washington, D.C., area.

While the selection of a UESC vendor is limited to two vendors, AOC officials said that this will not preclude competition as the selected UESC vendor will obtain competitive bids from subcontractors for the construction of the cogeneration system.

Based on independent estimates and in alignment with the bid received in November 2014, AOC’s latest data show that a cogeneration system consisting of a 7.5 MW combustion turbine and funded by a UESC would have a total project cost of about $85 million. This includes about $57 million in initial construction-related costs (including contingency funds), another $4 million in agency project management costs, and about $24 million in financing costs.

AOC’s data show the project’s life cycle costs as lower than other alternatives, such as a natural gas boiler procured using upfront appropriations. These data also show that the cogeneration system procured using a UESC, AOC’s intended course of action, would result in savings, when compared to a status quo option, of about $7.3 million over 27 years (in today’s dollars) due to the savings achieved by producing its own electricity for the plant. AOC’s data show that the project would repay the UESC vendor in full for the capital and financing costs in 21 years (after the completion of construction and once payments had begun). By comparison, AOC’s data show that a cogeneration system procured with upfront appropriations would achieve savings in today’s dollars of $21.4 million over the analysis period when compared to the status quo option. Further, AOC’s data show a natural gas boiler procured with upfront appropriations for $9.3 million would achieve savings of about $2.7 million over the analysis period when compared to the status quo option.

AOC’s calculations on life cycle costs did not reflect the nearly $16 million in funds already obligated for the project. AOC officials said they relied on the National Institute of Standards and Technology (NIST) handbook on life cycle costing for federal energy management programs. AOC officials noted the handbook instructs federal agencies to not include sunk costs when estimating a project’s life cycle costs. Our analysis of AOC’s data suggest that the agency could have procured a natural gas boiler providing the same amount of steam for less than the $16 million the agency has already obligated for the cogeneration project. AOC’s data show a cost of about $9.3 million for procuring such a boiler. AOC officials said they would have had to also obligate funds to prepare the plant for a new boiler, but they did not identify the amount of funds this would have required.

AOC Did Not Follow Key Leading Federal Capital- Planning Practices

Key leading capital-planning practices and other federal guidance we identified state that agencies should, among other things, (1) update their plans in response to changes in their operating environment; (2) fully assess their needs and identify performance gaps; (3) assess a wide range of potential approaches—including non-capital approaches—for meeting those needs; (4) conduct valid sensitivity and uncertainty analyses to identify and quantify the riskiest cost drivers of proposed projects; and (5) engage independent experts when tackling complex issues. However, AOC’s planning that led the agency to pursue a cogeneration system did not follow these key leading practices.

AOC Did Not Update Its Long- term Plan in Response to Changes in Key Assumptions

Leading organizations generally revise their decision-making process in response to a perception of changing needs or a changing environment. However, AOC did not update its 2009 long-term energy plan until late 2014, did so only partially, and has continued to use the 2009 plan to justify its decision to procure a cogeneration system. In the meantime, major changes have occurred in key assumptions affecting AOC’s plans, such as the price of natural gas and the complex’s demand for steam and chilled water. For example, in part due to increased supplies resulting from the boom in domestic shale gas extraction, prices for natural gas for commercial customers fell by about 20 percent between 2009 and 2012 (when AOC formally proposed the cogeneration project). Furthermore, since publishing its 2009 long-term plan, AOC completed energy audits of its buildings and implemented several energy conservation measures in the complex and reduced the complex’s demand for steam and chilled water.

Despite these changes, AOC officials stated they did not believe it was necessary to fully update its 2009 long-term plan to implement the cogeneration system, which they consider to be a single energy conservation measure that addresses a need to replace aging boilers. The officials stated they updated the factors that changed since 2009 that could affect the choice between cogeneration and a natural gas boiler. AOC officials also told us they recognized the importance of fully updating the agency’s long-term energy plan and stated they plan to do so later in fiscal year 2015 after they have made a decision on implementing the proposed cogeneration system. However, by not fully updating its 2009 long-term plan, AOC has continued to pursue a cogeneration system without up-to-date information on a variety of factors, such as the changes in the natural gas markets and the realized impacts of AOC’s demand reduction efforts, that could change the relative merits of the full range of alternatives available to AOC for meeting its long-term needs.

Select operators of other district energy system we spoke with stated they regularly conduct planning efforts to identify the needs of their systems, and alternatives to address them. For example, one operator said that although it prepares a strategic plan every 5 years, the operator also updates demand forecasts and conducts other planning as part of its annual budgeting process.

AOC Did Not Fully Assess Needs or Describe a Performance Gap It Intends to Address with Cogeneration

AOC did not fully assess its long-term steam needs or identify the performance gap the cogeneration project would address. Leading practices and federal guidance, including the Office of Management and Budget’s (OMB’s) Supplement to OMB Circular A-11 and GAO’s Leading Practices in Capital Decision-Making, state that agencies should comprehensively assess what they need to meet their goals and objectives, identify any gaps between current and needed capabilities (i.e., performance gaps), and explain how a capital project helps the agency address those gaps and meet its goals. However, AOC’s December 2014 draft plan—which the agency has used to justify the current cogeneration project—has not comprehensively assessed the agency’s needs or identified potential performance gaps. Without fully assessing its needs, the agency risks committing to a project that does not fully meet its long-term needs and thereby does not provide the agency with the most efficient use of its funds.

Specifically, AOC’s December 2014 draft plan did not forecast the future demand for CPP’s heating and cooling services and instead assumed 2013 levels of demand would continue over the 27-year contract for the cogeneration system. The agency’s 2009 long-term plan included long- term forecasts of steam and chilled water demand showing that future demand for steam would exceed current capabilities. However, the forecast for the 2009 long-term plan is outdated as it does not reflect the realized effects of AOC’s demand management efforts. AOC included long-term forecasts of steam and chilled water demand in its draft July 2014 partial update, but AOC did not finalize it. In addition, the demand forecasts in the 2009 long-term plan and its draft July 2014 partial update may have overstated future needs as they did not fully consider the impact of AOC’s completed and ongoing energy conservation measures and only included factors that would increase overall demand for steam.

AOC’s 2009 long-term plan and draft July 2014 partial update assumed demand for steam and chilled water would increase due to future building renovations that would either increase the amount of building space served by CPP or increase the amount of outside air it heats or cools and circulates through buildings. In the 2009 long-term plan, AOC assumed energy reduction efforts would offset these increases. As described above, AOC’s chilled water use has fallen since that time and its steam use has fluctuated. The draft July 2014 partial update specifically states that it did not consider reductions in energy use.

The absence of steam demand forecasts in the December 2014 draft plan (1) disregards prior forecasts that are either outdated or were not finalized, (2) ignores the possibility of future changes in demand, and (3) raises questions about the purpose and sizing of the proposed cogeneration system and how it will meet future needs. In explaining why it did not forecast long-term demand for the CPP’s services, AOC officials said new steam-generating capacity was needed—regardless of potential changes in the long-term demand for steam—to decrease the plant’s reliance on two of its older boilers at the end of their service life. AOC’s December 2014 draft plan stated that doing so would thereby allow AOC to avoid the increased maintenance costs associated with operating the boilers infrequently. AOC officials stated that the December 2014 draft plan was intended to compare installing one natural gas boiler with installing one cogeneration system and re-validate the 2009 long-term plan’s recommendation, rather than re‐evaluate all long‐term technical options for meeting steam demand—thereby making it inappropriate to include a long-term forecast of demand. Furthermore, the AOC officials stated that expected future demand that reflects reductions due to AOC’s conservation measures would not reduce demand to anywhere near the point where a boiler replacement is not needed. However, AOC’s December 2014 draft plan that it is using to justify the need and scope of the cogeneration project does not include any such forecasts to support these statements.

AOC officials stated the two coal boilers needing replacement are nearly 60 years old and are showing signs of wear. The officials stated the boilers still operate but are unreliable and suffer frequent breakdowns requiring emergency repairs. However, AOC has not provided documents that support these statements. AOC estimated that renovating the boilers, including the addition of currently lacking air-pollution controls, could cost up to $10 million per boiler. However, reports on the condition of the boilers provided by AOC, as well as the agency’s aforementioned planning documents, did not estimate the expected remaining life of the boilers—thereby not assessing whether a performance gap exists and making it unclear how the cogeneration system will meet any long-term needs.

Furthermore, AOC’s December 2014 draft plan did not make clear to what extent the proposed system would help AOC avoid the increased maintenance costs associated with continued operation and maintenance of the two older boilers which can operate on coal. AOC officials said in February 2015 that once it had installed the cogeneration system, CPP would keep at least one of the two boilers in reserve to meet peak steam demand. The officials added that the cogeneration system would allow CPP to operate these older boilers on natural gas instead of coal. However, later in its technical comments, AOC noted that CPP would maintain only one of the older boilers for occasional use (decommissioning the other once the cogeneration system is operational). Therefore, AOC will continue to incur maintenance costs associated with continued use of at least one of the two older boilers.

AOC’s December 2014 draft plan stated the proposed cogeneration system would enhance the agency’s ability to meet its environmental objectives but stated the system is not needed to meet current EPA emissions standards for hazardous air pollutants. The plan stated CPP can meet promulgated rules limiting emissions of hazardous air pollutants (HAP) from industrial, commercial, and institutional boilers without installing the cogeneration system.

Although the cogeneration system would likely increase emissions of certain air pollutants from CPP due to the increased use of natural gas, AOC’s draft plan estimated the system would result in lower regional emissions overall. The electricity generated by the cogeneration system using natural gas would result in relatively fewer emissions than the equivalent amount of electricity purchased from the local utility, which delivers electricity produced predominantly from coal. The December 2014 draft plan states a cogeneration system would result in 14 fewer metric tons of regional HAPs annually, or 18 percent less than a new natural gas boiler providing the same amount of steam. AOC’s draft plan estimates that the cogeneration system will result in lower regional greenhouse gas emissions, although federal regulations for limiting such emissions have not yet taken effect. AOC’s December 2014 draft plan stated a cogeneration system would result in about 15,000 fewer metric tons of regional carbon dioxide emissions per year—7 percent less than a new natural gas-powered boiler, an amount that AOC stated is the equivalent of removing nearly 3,200 vehicles from local roadways each year.

Furthermore, the December 2014 draft plan stated meeting the agency’s energy reduction goals did not depend on the cogeneration project. In the plan, AOC stated that “due in large part to the results achieved through the ESPCs and other energy reduction activities, AOC will not require cogeneration to meet the EISA or EPAct requirements at this time.” However, AOC officials said that if Congress renews EISA or EPAct and additional annual energy reduction goals are set for federal agencies, cogeneration may again become key in future AOC energy reduction efforts.

AOC Did Not Identify and Evaluate a Range of Alternatives for Meeting Heating Needs

AOC’s plans have only considered capital options for meeting its heating needs, and its December 2014 draft plan did not evaluate a range of alternatives. Federal leading planning practices state that capital plans should consider a wide range of alternatives for meeting agency needs, including non-capital alternatives, and evaluate them based on established criteria. GAO’s Executive Guide: Leading Practices in Capital Decision-Making states that managers and decision-makers in successful organizations consider alternatives to investing in new capital projects. Without considering a wide range of options, including non-capital options, AOC may choose a more expensive alternative for meeting its needs.

Specifically, AOC’s 2009 plan broadly considered capital alternatives for meeting long-term demand for steam, such as nuclear or geothermal power generation, but did not assess non-capital alternatives for meeting the agency’s objectives, such as implementing operational changes or conservation measures to decrease consumption in the buildings served by CPP. GAO’s capital decision-making guide calls for managers to consider non-capital approaches among the alternatives for meeting an agency need, but AOC’s plan did not explicitly examine such options. As a result, AOC may not have identified the most cost-effective means to heat and cool the complex.

As we noted earlier, AOC’s 2014 planning documents assessed a narrower range of capital alternatives—adding a cogeneration system or new natural-gas powered boilers—to meet the demand for steam. AOC’s 2014 plans also envision smaller cogeneration systems that represent a significantly reduced scope from the 2009 plan, which recommended the installation of three turbines in phases to provide power to the entire complex. For example, the December 2014 draft plan recommends a single turbine system that provides electricity to CPP and not the complex The 2014 plans also did not fully take into account AOC’s efforts to reduce the demand for steam through conservation measures in the buildings served by CPP–which may include operational changes or smaller capital investments–on future steam demand. As described above, AOC has installed some conservation measures in the Capitol and House and Senate office buildings and has identified many additional measures that it could implement in the future. The July 2014 plan ignores energy savings from these measures, while the December plan used demand data from 2013 without adjustments for measures implemented since then or in the future.

AOC officials stated its latest plan was not meant to fully update the 2009 plan and thereby assess a broad range of alternatives for meeting the agency’s needs. AOC officials stated that the 2014 plan was for replacing current equipment and is consistent with implementing the first phase of the 2009 plan. AOC officials stated they did not believe it was necessary to fully update the 2009 plan to implement a single energy conservation measure that replaces aging boilers—the cogeneration system. AOC officials added that they intend in fiscal year 2015 to fully update the 2009 long-term plan, after the agency has made a decision on implementing the proposed cogeneration project.

By only considering a narrow range of alternatives, not accounting for the agency’s ongoing efforts to reduce its steam demand, or fully updating the long-term plan before undertaking a costly and risky project, AOC may be selecting a capital alternative that is not scaled to meet the agency’s long-term needs and therefore could cost more than necessary.

AOC Did Not Perform Valid Sensitivity or Uncertainty Analyses

AOC did not perform valid sensitivity or uncertainty analyses when assessing the cogeneration system and available alternatives for meeting the agency’s long-term demand for steam. The GAO Cost Estimating Guide calls for agencies, when considering capital projects, to conduct both sensitivity and uncertainty analyses to identify and quantify the cost drivers that pose the most risk of increasing project costs beyond expectations. Sensitivity analysis shows how changes in a key assumption affect the expected cost of a program or project, while holding all other assumptions constant. Uncertainty analysis captures the cumulative effect of various risks on the expected cost of a project by changing many assumptions at the same time. Such information can inform managers about whether their preferred choice remains superior among a group of alternatives.

In the case of the proposed cogeneration project, the absence of valid sensitivity and uncertainty analyses makes it unclear whether the project will generate sufficient savings to cover its costs under a range of future conditions—raising questions on whether the project is more cost- effective than other alternatives. Furthermore, should AOC’s projections about the project’s expected savings prove inaccurate, Congress would likely need to appropriate more funds to cover a portion of AOC’s costs to own and operate the system—including the financing costs to be paid to the UESC vendor.

Specifically, in its December 2014 draft plan, AOC did not vary a key cost driver when it performed a sensitivity analysis on the expected life cycle costs of the alternatives it considered. When conducting sensitivity analyses, the Cost Estimating Guide calls for agencies to vary the key cost drivers of a project’s life cycle costs, particularly those that are most likely to change over time. The expected life cycle costs of operating either a cogeneration system or a natural gas boiler depends, in part, on the demand for heating and cooling over time. However, as noted above, AOC did not vary demand for heating and cooling in its December 2014 draft plan and instead assumed 2013 levels throughout the forecast period.

The Cost Estimating Guide also states that valid sensitivity analyses vary assumptions about key cost drivers in ways that are well-documented, traceable, and based on historical data or another valid basis. However, neither AOC nor a laboratory it engaged presented rationales for their variations of forecasted natural gas and electricity prices from the expected case. In its December 2014 draft plan, AOC varied its assumptions by applying a subjective 25 percent change over the 27-year forecast period. The plan provided no rationale for using 25 percent.

In a separate analysis accompanying the December 2014 draft plan, a Department of Energy (DOE) laboratory engaged by AOC presented results of a sensitivity analysis assessing the impact of varying natural gas and electricity prices that varied their initial values. The analysis varied the starting values of both natural gas and electricity prices in a range based on the author’s professional judgment rather than empirical evidence. Furthermore, the analysis did not assess the impact of varying natural gas and electricity prices on the alternatives AOC considered. The Cost Estimating Guide states sensitivity analyses should test the sensitivity of the ranking of considered alternatives to changes in key assumptions. However, the analysis did not assess the potential impact of varying natural gas and electricity prices on the other considered alternative in AOC’s analysis—a natural gas boiler. AOC officials stated the laboratory is an acknowledged expert charged with administration of the federal government’s energy management program.

Furthermore, in its December 2014 draft plan AOC relied on DOE forecasts of natural gas and electricity prices in its expected case, but AOC did not use DOE forecasts in its sensitivity analysis. Instead, the agency chose to vary the prices by 25 percent as discussed above. Using AOC’s 25 percent adjustment, instead of available DOE forecasts, to vary future natural gas and electricity prices raises questions about whether the project remains superior to other options under a range of possible outcomes.

Specifically, in the Energy Information Agency’s Annual Energy Outlook 2014, DOE created numerous forecasts of natural gas and electricity prices to represent a range of possible future scenarios. When using several of these DOE forecasts, we found the expected savings of the proposed cogeneration project, when compared to other alternatives, changed significantly. Specifically, in AOC’s expected case the project financed using a UESC saves about $4.6 million more over the 27-year period than a boiler acquired with upfront appropriations. Using a DOE scenario where natural gas is more plentiful and prices are lower than in the expected case, however, the cogeneration project becomes less advantageous—saving $1.9 million more than a boiler. Conversely, using a DOE forecast where natural gas is relatively less available and prices are higher over time, the savings of the cogeneration project increases slightly to $5.0 million more than a boiler.

In addition to a sensitivity analysis, the Cost Estimating Guide calls for agencies to perform an uncertainty analysis to capture the cumulative effect of various risks on the expected cost of a project. In an uncertainty analysis, project costs should involve a range of possible costs based on a specified probability, known as a confidence interval. Unlike sensitivity analysis, an uncertainty analysis looks at the effects of changing many assumptions at the same time. This involves, among other things, identifying key project cost drivers, modeling various types of uncertainty associated with the cost drivers, and using a simulation method, known as a Monte Carlo analysis.

AOC performed an uncertainty analysis on the expected initial construction cost of the project, but did not perform a similar analysis for the life cycle costs of the options it considered. AOC developed an uncertainty analysis on the cogeneration project’s initial construction cost using a Monte Carlo simulation, and agency officials stated this helped them assess the risks that could cause the initial cost of constructing the cogeneration system to exceed the expected level. AOC officials also stated the analysis allowed them to calculate a confidence interval around the expected initial construction cost and therefore budget an appropriate amount of contingency funds. However, AOC did not present its estimates of the project’s savings, derived from its life cycle cost analysis, as a range of possible costs based on a specified probability. Instead, AOC presented a point estimate of the project’s life cycle cost without a confidence interval quantifying the degree of uncertainty.

AOC officials said they did not believe an uncertainty analysis was required, based on their understanding of NIST’s handbook on life cycle costs that states uncertainty assessment is more complex and time consuming than sensitivity analysis and therefore the decision for doing so depends on an agency’s judgement of a variety factors, including the relative size of the project, availability of data, and availability of resources such as time, money, and expertise. However, the estimated life cycle cost of the project is determined, in part, on the forecasted prices for key inputs like natural gas and electricity that have historically been highly variable. Without a credible uncertainty analysis, AOC has not presented information on which cost drivers pose the most risk to the project’s life cycle cost.

AOC Did Not Use an Independent Panel to Review a Full Update of a Long-term Energy Plan

In addition to the capital planning guidance we cite above, our prior work recommends that federal agencies use independent panels of experts for conducting comprehensive, objective reviews of complex issues, such as those facing AOC. As mentioned above, AOC engaged the National Academies’ National Research Council (NRC) to review a draft of its 2009 long-term energy plan and the final version of the 2009 plan stated that it addressed NRC’s recommendations. However, unlike its 2009 plan, AOC has not engaged an independent panel like the NRC to review the subsequent iterations of its planning. AOC officials stated that they did not find it necessary to fully update its long-term plan before executing the contract for the cogeneration system, which the officials stated is a single energy conservation measure intended to replace aging boilers. However, the cogeneration system is relatively complex when compared to available alternatives such as boiler replacement and AOC has obligated about $16 million in design, preliminary site work, and management for the project—an amount that AOC’s data suggests could have procured a new natural gas boiler providing the same amount of steam. Using an independent panel to review AOC’s planning could have provided more assurance that AOC was positioning itself to cost-effectively meet its long-term energy needs.

AOC Was Unaware of Relevant Leading Practices and Did Not Support Claims on the Need to Quickly Execute Cogeneration Contract

Since issuing its long-term energy plan in 2009, AOC has pursued an iterative planning approach without fully updating the long-term plan or following key leading practices. AOC officials said they were generally unaware of the applicability of the leading practices we cited. AOC officials said they instead relied on other sources of federal guidance, such as NIST’s handbook on determining the life cycle costs of energy conservation projects or DOE’s guidance for using UESCs to finance such projects, an approach that led them to believe that it was unnecessary to fully update the long-term energy plan before executing a contract for the cogeneration project since its intent is to replace aging boilers. However, the guidance AOC cited generally applies after an agency has conducted a needs assessment and conducted a capital- planning process using GAO, OMB, and other relevant guidance cited above. Thus, the guidance AOC officials said they followed does not substitute for first completing an up-to-date capital plan. Without following key leading capital practices, AOC’s planning could commit the agency to a project that does not fully and cost-effectively meet its needs—thereby not providing taxpayers or Congress with the most efficient use of funds in a time when the federal government faces significant financial challenges.

In August 2014, we discussed with AOC shortcomings in its planning for the cogeneration project relative to leading practices and referred the agency to documents outlining these practices. AOC officials then provided the aforementioned set of planning documents in December 2014 that the agency stated were intended to address our concerns. AOC officials also provided several reasons why they needed to continue planning the project and quickly execute a contract. These included (1) that certain existing boilers were near the end of their useful life and that AOC might face challenges meeting demand for steam in the near future, and (2) that AOC needed to start construction soon or the Washington, D.C. government would retract the project’s construction and air quality permits.

Our review did not identify valid support for these claims. Reports on the condition of the boilers provided by AOC did not identify the remaining useful life of the two boilers in question. Additionally, AOC did not provide documents supporting its statement that the permits for the project were at risk; AOC officials told us they believed the planning steps the agency had taken would be sufficient to keep the permits in effect.

Conclusions

AOC has implemented many measures to manage the costs of heating and cooling the Capitol Complex and has achieved measurable results. The agency has additional opportunities to manage these costs through conservation. AOC and its contractors have identified hundreds of additional energy conservation measures, and the agency intends to act on some of them when resources become available.

Related to this, AOC’s planning to evaluate the relative merits of the currently proposed cogeneration project has not followed key leading practices identified in OMB, GAO, and other relevant capital-planning guidance. These include not (1) fully updating the agency’s 2009 long- term energy plan to reflect changes in energy costs and demand that occurred since the plan was issued; (2) fully assessing long-term energy needs or the performance gap the project would address in light of changes in key variables that could affect its relative merits; (3) identifying a full range of alternatives for meeting future needs, including non-capital or conservation measures; (4) conducting valid sensitivity or uncertainty analyses; or (5) engaging an independent panel of experts to review AOC’s updates of its long-term plan. AOC officials said they were unaware of some of these leading practices and therefore did not follow them. AOC’s planning was insufficient for us to discern whether the cogeneration project would generate enough savings to cover its costs or prove more cost-effective than other options for meeting the agency’s needs. Thus, without addressing the shortcomings listed above, AOC’s planning does not provide confidence that the proposed project will decrease the need for future energy-related appropriations.

Recommendations for Agency Action

GAO is making two recommendations to the Architect of the Capitol.

We recommend that the Architect of the Capitol, prior to undertaking future major capital projects related to its energy needs, fully update its long-term energy plan while following key leading capital-planning practices. As part of this effort, the agency should: fully assess the complex’s long-term needs and identify any performance gaps, while taking into account the effects of possible changes in demand—including the impacts of ongoing and planned energy conservation measures and other factors that could affect the demand for CPP’s services; identify and evaluate a range of alternatives for how to best meet the agency’s needs, including non-capital options and energy conservation measures that could reduce the demand for CPP’s services; and identify key assumptions and risks of the alternatives considered and perform valid sensitivity and uncertainty analyses to determine which alternatives could prove the most cost-effective under a range of potential future conditions.

As AOC updates its long-term energy plan, the Architect should seek a review of the plan by an independent panel of experts to ensure it follows key leading practices and provide the results of the review to Congress.

Agency Comments and Our Evaluation

We provided a draft of this report to the AOC for review and comment. In its written comments, included as appendix II, the Architect disagreed with our findings, conclusions, and recommendations. However, AOC also said that the agency has effectively implemented our recommendations in a “manner sufficient to move forward with the planned cogeneration project.” As we discuss below, AOC provided two new reports focusing on the need to replace its oldest boilers and potential risks and costs associated with the proposed cogeneration project. We did not review these reports because AOC did not provide them or make us aware of them until after we had completed our work. We plan to review these studies in the future and discuss them with Congress. While these reports may expand on the justification for the cogeneration project, we continue to believe that AOC should first update its overall long-term strategic energy plan and evaluate a full range of alternatives for best meeting its needs prior to undertaking major energy projects in the future. We also acknowledge that AOC may need to replace certain steam-generating equipment, in part or in whole, at some point in the future. AOC also provided technical comments, which we addressed as appropriate in the report.

In its written comments, AOC stated that contrary to our recommendations and assertions in the draft report, AOC adhered to key leading capital-planning practices based on its 2009 long-term energy plan, 2014 revalidation efforts, and additional documentation. AOC’s written comments contradict statements by AOC officials in April 2015 that they were not aware of the key leading capital-planning practices cited in our draft report. At that time, these officials said that AOC instead followed NIST guidance on performing life-cycle cost analyses for energy conservation projects and DOE guidance for financing energy projects using non-appropriated funds. Furthermore, the agency did not provide evidence that contradicted our finding about it not adhering to these practices during our review. We therefore maintain that we reached the correct conclusion about AOC’s adherence to key leading capital- planning practices.

As part of our first recommendation, we said that AOC should fully assess the complex’s long-term needs and identify any performance gaps. As part of its written comments, AOC provided additional documentation that the agency said fully explains how the agency has already assessed these needs through preparing a justification for replacing the complex’s aging boilers. The documentation expands on its efforts to support the proposed cogeneration project, including a report on the condition of two of its oldest boilers and an updated sensitivity analysis comparing the long-term benefits of installing new boilers or a cogeneration system. We did not assess the validity of these documents because AOC did not provide them or make us aware of them until after we had sent the draft report for comment. Moreover, AOC did not use this information as part of the basis for selecting the current planned cogeneration project. We maintain that AOC should conduct such an analysis prior to making a decision about energy projects, rather than as part of efforts to validate decisions made in 2009 and 2014.

Another part of our first recommendation said that AOC should identify and evaluate a range of alternatives for how to best meet the agency’s needs, and identify key assumptions and risks of the alternatives. Regarding identifying and evaluating a range of alternatives, including non-capital options and energy conservation measures, AOC said that it did so in 2009 and selected cogeneration to replace the aging boilers. AOC added that it updated key assumptions used in the 2009 plan in 2014 and further evaluated the two technically feasible options—natural gas boilers and cogeneration—in extensive detail, which AOC stated validated that cogeneration remained the best option. We agree that the 2009 long-term energy plan broadly considered a range of alternatives for meeting the agency’s long-term energy needs, but the analysis conducted in 2014 focused solely on two options. From 2009 to the present, many factors have changed that could potentially lead AOC to reach a different, more cost-effective solution to meet any future performance gaps. For example, the costs of fuels, electricity, and labor have changed since 2009. In addition, the demand for AOC’s services has changed as the agency has pursued conservation and other energy-saving efforts. We therefore continue to believe that AOC should fully update its long-term energy plan, taking into account changes in key variables and the full range of options for how best to meet the agency’s needs, including non- capital options and energy conservation measures.

The last part of our first recommendation said that AOC should identify key assumptions and risks and perform valid sensitivity and uncertainty analyses to identify cost-effective alternatives under a range of future scenarios. In its written comments, AOC said that it identified key assumptions and risks and subsequently performed valid sensitivity and uncertainty analyses. The Department of Energy’s National Renewable Energy Laboratory (NREL), as a third-party reviewer of the cogeneration validation effort, conducted a deterministic sensitivity analysis of the cogeneration project’s life-cycle cost, and AOC performed its own sensitivity analysis in its December 2014 draft plan. Our report identified shortcomings of these analyses, raising questions about their usefulness in identifying a cost-effective alternative. AOC also used a different third party to perform a probabilistic risk assessment of the project’s construction cost, which we acknowledged in our report. In addition, AOC said the agency also used another third party to complete an additional probabilistic risk assessment of the project’s life-cycle cost in May 2015. We did not assess the validity of this analysis because AOC did not provide it to us until after we had sent the draft report for comment. While AOC has conducted some sensitivity and uncertainty analyses, it did so to support a decision made in 2009, rather than to evaluate alternatives in the context of a full update of its long-term energy plan. We, therefore, continue to believe that AOC should fully update its long-term energy plan and follow leading practices for analyzing alternatives in that context.

Our second recommendation states that, as AOC updates its long-term energy plan, the Architect should seek an independent review of the plan by an expert panel to ensure it follows key leading practices and provide the results of the review to Congress. In its written comments, AOC stated that it had engaged an outside entity to review AOC’s 2014 effort to validate its choice to pursue a cogeneration project. However, a review of a partial update to a 2009 plan does not address our recommendation that AOC fully update its long-term energy plan and then seek outside review by an independent panel of experts, as it did in 2009.

AOC’s written comments included additional details about its disagreement with our findings, conclusions, and recommendations, which we address in appendix II.

We are sending copies of this report to the appropriate congressional committees, the Architect of the Capitol, and other interested parties. 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 Frank Rusco at (202) 512-3841 or ruscof@gao.gov or Lori Rectanus at (202) 512-2834 or rectanusl@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 contributors to this report are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

Our work for this report focused on the Architect of the Capitol’s (AOC) Capitol Power Plant (CPP) and actions taken by AOC to manage the costs of providing heating and cooling services to the complex. In particular, this report examines: (1) measures AOC implemented since GAO’s 2008 report to manage the energy-related costs of the buildings served by CPP and opportunities, if any, to further manage these costs, and (2) how AOC decided to procure a cogeneration system and the extent to which AOC followed leading capital-planning practices.

To identify measures AOC has implemented since 2008 to manage energy-related costs, we examined AOC and CPP appropriations, obligations, and expenditures data from 2009 to 2013 to identify the costs incurred by AOC related to production, distribution, and consumption of heating, cooling, and electricity by the complex. We assessed the reliability of these data—for example, by reviewing related documentation and interviewing knowledgeable AOC budget and finance officials—and found them sufficiently reliable for our reporting purposes. We also reviewed relevant AOC reports and documents, and interviewed AOC and CPP officials.

To identify measures AOC could potentially implement to further manage its energy-related costs, we reviewed AOC reports and other documents, such as energy audits of CPP’s steam and chilled water systems. We assessed the reliability of the data in these audits by reviewing related documentation and interviewing knowledgeable AOC officials and found these data sufficiently reliable for our reporting purposes. We also interviewed eight operators of other district energy systems to learn about measures they have implemented to manage costs, as well as the benefits and costs associated with those measures. We identified these operators based on, among other things, our preliminary research; interviews with CPP staff and managers of other district energy systems; we selected the operators based on similarities to the CPP, such as whether the operators were located in climates similar to Washington, D.C. We selected eight operators: five in the Washington, D.C., area and three in the Boston, Massachusetts, area. Four of the operators are public entities and the remaining four are private, two of which are private universities (see table 7). The information collected during these interviews cannot be generalized to all district heating or cooling systems.

To review AOC’s planning effort to further manage its energy-related costs, we reviewed AOC’s planning documents and recent updates, including (1) AOC’s 2009 Strategic Long-Term Energy Plan, (2) AOC’s draft Strategic Long-Term Energy Plan released in the summer of 2014, and (3) AOC’s draft Cogeneration at Capitol Power Plant Project Summary and accompanying consultant reports issued in December 2014. We identified four sources of federal guidance on capital planning and alternatives analysis and compared the guidance in those documents to AOC’s planning documents. We also interviewed AOC officials to discuss the agency’s planning documents and efforts.

We conducted our work from December 2013 to September 2015 in accordance with all sections of GAO’s Quality Assurance Framework that are relevant to our objectives. The framework requires that we plan and perform the engagement to obtain sufficient and appropriate evidence to meet our stated objectives and to discuss any limitations in our work. We believe the information and data obtained, and the analysis conducted, provide a reasonable basis for any findings and conclusions in this product.

Appendix II: Comments from the Architect of the Capitol

See comment 20

Comment 1: We agree that CPP has equipment that may need replacement, in part or in whole, at some point in the future. However, AOC has not provided information on the likelihood of any such failures. After we provided our draft report to AOC for comment, the agency provided a new report on justifying the replacement of some of its older boilers, dated July 17, 2015, that provides anecdotes on problems AOC has overcome in maintaining the boilers but did not provide information quantifying the operational or budget impacts of these problems or estimates of the likelihood of a sudden failure of the boilers in the near future. Furthermore, AOC has not provided us with information—other than condition reports we reviewed finding that the boilers were in good to fair condition for their ages—supporting AOC’s claims that the boilers are effectively “on life support.”

Comment 2: We agree that AOC should operate and maintain CPP with the goal of meeting peak steam demand. However, AOC has not quantified any negative effects that would occur if CPP had to meet peak steam demand while operating its boilers only on natural gas and experiencing a temporary boiler outage. Furthermore, as AOC has noted, the proposed cogeneration system would not provide enough steam to allow AOC to meet its peak steam demand without using one of the two older boilers it intends to replace. Therefore, AOC will continue to incur some of the increased costs associated with infrequent use of one of the two older boilers that the agency stated the cogeneration project was meant to address. Furthermore, it is not clear when the agency intends to fully replace the capacity of the two oldest boilers. We therefore continue to believe that AOC should fully update its long-term energy plan while following leading capital-planning practices to ensure the agency fully assesses its needs and finds the most cost-effective ways to meet them.

Comment 3: We agree that AOC’s 2009 long-term energy plan assessed a broad range of technical options for providing heating and cooling to the complex. However, given that many factors have changed that could potentially lead AOC to reach a different, more cost-effective solution to meet any future performance gaps, we continue to recommend that AOC fully update its long-term energy plan while following key leading capital-planning practices and seek an independent review of the plan and provide the results of this review to Congress. In its letter, AOC noted that the NRC committee that reviewed its 2009 plan stated that “electric generation (or Cogeneration) is the best long-term strategy for AOC to achieve its mission of reliable, cost-effective, efficient, and environmentally sound utility services.”

However, we did not find this statement in the NRC committee’s 2009 report; instead, it is an AOC statement included in its final 2009 long-term energy plan.

Comment 4: AOC sought to clarify the progression of its planning efforts, which we summarized in Table 6 in our report. However, it is unclear why AOC stated that we mischaracterized its July 2014 Strategic Long Term Energy Plan Update: Draft Final Report, which we described as a draft plan throughout our report. In August 2014, we discussed with AOC shortcomings in its planning for the cogeneration project relative to leading practices and referred the agency to documents outlining these practices. AOC officials later wrote that the agency addressed the presented shortcomings by completing the December 2014 draft plan and supporting documents, which called for a cogeneration system with a configuration that differed from the July 2014 draft plan.

Comment 5: AOC stated that its 2014 revalidation addressed the key leading capital-planning practices we cited, but this revalidation focused on two technical options and did not, as called for in leading practices, fully assess the complex’s long-term needs and identify and evaluate a full range of options for best meeting those needs. We continue to maintain that, prior to undertaking major energy projects, AOC should fully update its 2009 long-term energy plan as called for in leading capital-planning practices, given that key factors have changed that could have changed the plan’s conclusions.

Comment 6: AOC stated that it completed an evaluation and redeveloped its long- term steam demand forecasts to address the urgent need to replace its older coal- firing boilers. We did not assess the validity of this evaluation because AOC did not provide it, or make us aware of it, until after we had sent the draft report to the agency for its comments. This evaluation did not accompany the agency’s December 2014 draft plan, which AOC used to justify the need for and scope of the proposed cogeneration project.

Comment 7: We agree that AOC reviewed a broad range of options for meeting its long-term needs in its 2009 long-term energy plan. However, AOC did not examine non-capital options in the 2009 plan—such as operational changes or conservation measures—and it is unclear how or when AOC assessed some of the capital or financing options it cited in its written comments. Since 2009, AOC has assessed two capital options—a cogeneration system or a natural gas boiler. From 2009 to the present, many factors have changed that could potentially lead AOC to reach a different, more cost-effective solution to meet its needs. Therefore, we continue to believe that AOC should identify and assess a wide range of options for meeting its needs in a full update of its long-term energy plan.

Comment 8: We have not assessed AOC’s additional sensitivity analysis, as the agency provided it after we had completed our draft report. We do not know the basis for AOC's statement that the group of energy conservation measures it identified would reduce the complex’s steam demand by 20 percent or the basis for the statement that the cost of the measures—including some or all of the costs of the Cannon House Office Building Renewal project—would exceed $2 billion.

Comment 9: AOC disagreed with our statement that the agency did not update its 2009 long-term plan in response to changes in key assumptions, citing the analyses it performed in 2014 and 2015 on the life cycle costs of the proposed cogeneration system and an alternative of a natural gas boiler. However, AOC did not update the key assumptions in the context of a full update of its 2009 plan, which assessed a broad range of options for meeting the complex’s heating and cooling needs. AOC stated that it included updated assumptions in its spreadsheets on the life cycle costs of the proposed cogeneration project and a natural gas boiler alternative, and stated that we declined its offers to discuss these spreadsheets. However, we reviewed these spreadsheets containing AOC’s life cycle cost analyses and identified shortcomings that we describe in our report.

Comment 10: AOC stated that it completed a probabilistic risk assessment in May 2015 that was consistent with GAO’s Cost Estimating Guide, which identifies some key leading capital-planning practices. However, AOC did not make us aware of or provide this assessment until after we had completed our review and prepared our draft report.

Comment 11: AOC stated that the Department of Energy’s National Renewable Energy Laboratory (NREL) provided an independent review of its December 2014 draft plan, which compared the proposed cogeneration system to an alternative of a natural gas boiler. NREL’s review of a partial update to a 2009 plan, rather than a full update, does not address our recommendation. AOC needs to fully update its long- term energy plan and then seek outside review by an independent panel of experts, as it did in 2009.

Comment 12: We agree that cogeneration can offer benefits in certain settings. However, given the significantly higher upfront costs of cogeneration when compared to alternatives like a natural gas boiler, it is important that the planning involved in selecting the technology over viable alternatives exhibit the aspects of key leading capital-planning practices we cited—such as fully assessing needs, assessing a range of alternatives, and using valid sensitivity and uncertainty analyses to identify key risks and confirm the superiority of a chosen option over its alternatives. To ensure that AOC’s choices for meeting its long-term energy needs result from planning that exhibits these leading practices, we continue to believe that AOC should fully update its long-term energy plan while following the key leading practices we cited.

Comment 13: AOC stated that the construction permit for the proposed cogeneration project will expire in June 2016 and that fully implementing our recommendations would introduce a delay of approximately two years to either option for obtaining additional steam generating capacity. We maintain it is important for AOC to make the correct decisions about its capital and long-term energy needs through planning that follows key leading capital-planning practices, regardless of when any permits may expire for a particular project. Furthermore, AOC did not provide a basis for its claim that fully updating its long-term energy plan would cause a delay of an additional two years to either option for adding new steam generating capacity, and if AOC’s claim is accurate then the agency should start the update as expeditiously as possible. Therefore, we continue to recommend that AOC fully update its long-term energy plan while following leading capital-planning practices before undertaking future major capital projects related to its energy needs.

Comment 14: We agree that AOC faces limits on its continued use of coal at CPP and on its emission of air pollutants, and we believe AOC should factor in such constraints in a full update of its long-term energy plan.

Comment 15: AOC stated in its letter that our report suggested that capital-planning guidance is clear and leaves no room for misunderstanding or misinterpretation by agencies. During the course of our review, and after receiving a preview of our report’s findings, AOC officials said they were generally unaware of the applicability of the leading practices we cited. We identify in our report GAO’s prior work that recommends the use of independent panels by agencies when addressing complex issues such as those facing AOC, and as the agency itself used in 2009 to review its draft long-term energy plan. As part of fulfilling our recommendation that the agency fully update its long-term energy plan while following leading capital-planning practices, we continue to believe AOC should submit the plan for review by an independent panel of experts and submit the results to Congress.

Comment 16: AOC did not assess the proposed cogeneration project using its capital planning prioritization process for projects to be funded with upfront appropriations, stating that it is the agency’s strategy to use a UESC to finance the proposed cogeneration project—thereby allowing AOC to request appropriations to fund other critical infrastructure projects for which AOC stated such alternative funding sources are not available. As we stated in our report, by not assessing the proposed project using the agency’s capital planning prioritization, AOC did not analyze the project relative to other projects for which the AOC was seeking appropriated funding using the agency’s pre-determined criteria for capital planning.

Comment 17: We agree that, like the proposed cogeneration project, AOC would have incurred some pre-construction obligations for design and project management to replace the steam-generating capacity of one or both of its older coal-firing boilers with a natural gas boiler. AOC’s draft December 2014 plan shows that a natural gas boiler providing the same amount of steam as the proposed cogeneration system would cost approximately $9.3 million. It is not clear to what extent this estimate includes pre-construction obligations, which for the cogeneration project totaled about $16 million as of March 2015.

Comment 18: We agree that CPP may not be able maintain adequate capacity to meet peak demand should both older coal-firing boilers fail at the same time, but this does not change the need for AOC to fully assess its long-term energy needs and evaluate a range of alternatives for meeting them in the context of a full update of its long-term energy plan.

Comment 19: AOC officials stated appropriations would likely not be available for the cogeneration project and therefore selected a UESC to finance the project. Because the agency did not intend to use upfront appropriations to acquire the system, AOC did not assess the project using its capital planning prioritization process. As we reported, acquiring the system using a UESC results in more upfront costs and financing costs than if the agency used upfront appropriations. AOC stated that it discussed its funding challenges with GAO, but it is not GAO’s role to advise agencies as they seek funding for their proposed capital projects.

Comment 20: AOC stated that its selection of the proposed cogeneration project and its revalidation efforts have followed key leading practices. However, as we state in our report and our response, we remain unconvinced that AOC’s planning followed key leading capital-planning practices and therefore AOC has not demonstrated whether the proposed cogeneration project will prove more cost-effective than other alternatives for meeting the agency’s needs. We therefore continue to recommend that AOC, prior to undertaking major energy projects, fully update its 2009 long-term energy plan while following key leading capital-planning practices, including: fully assessing its energy needs, identifying and evaluating a range of alternatives for meeting its needs, and identifying key assumptions and risks and performing valid sensitivity and uncertainty analyses. We also continue to recommend, given the complexity of the issues it is facing, that AOC seek a review by an independent panel of experts as it fully updates its long-term energy plan and provide the results of this review to Congress.

Appendix III: GAO Contacts and Staff Acknowledgments

GAO Contacts

Staff Acknowledgments

In addition to the individuals names above, Michael Armes (Assistant Director); Michael Hix (Assistant Director); John Delicath; Philip Farah; Cindy Gilbert; Geoff Hamilton; Dan Paepke; Mick Ray; and Shep Ryen made key contributions to this report.