Audit Finds Waste in 'Green' Projects
Energy Dept. Acknowledges Problems With Outsourcing, Need for Oversight

By Robert O'Harrow Jr.
Washington Post Staff Writer
Monday, September 21, 2009

The four drafty buildings had been fixtures of the Energy Department complex in Oak Ridge, Tenn., for more than half a century. They burned energy like 1950s sedans.

The buildings seemed like perfect candidates for a federal conservation retrofit program that relies on private contractors that receive a percentage of the money they save. A deal was struck in 2001. The contractors reworked lighting and heating systems, among other things, and began collecting payments.

The project was counted among the department's "green" successes -- until auditors discovered that the buildings had been torn down several years ago, and the government had paid $850,000 for energy savings at facilities that no longer existed.

The audit findings show the potential for waste and abuse at a time when the department is poised to launch billions of dollars more in stimulus spending on an unprecedented welter of green projects across the country.

The initiatives are hallmarks of the $787 billion American Recovery and Reinvestment Act approved by Congress in February. The stimulus law directed almost $17 billion to the department's Office of Energy Efficiency and Renewable Energy, including $3.2 billion for energy-efficiency and conservation block grants and $3.1 billion for state energy programs.

The outsourcing arrangements such as those at Oak Ridge, known as "energy savings performance contracts," or ESPCs, will probably be an integral part of those efforts, according to government and industry officials.

In December, the department issued 16 deals called Super ESPCs that may be worth as much as $80 billion over the next quarter-century.

The explosion in green spending is occurring despite well-documented weaknesses at the core of the strategy: A chronic lack of government officials assigned and properly trained to oversee the financially and technically complex projects.

The problems are not exclusive to Oak Ridge. The auditors, from the department's inspector general's office, also determined that $565,000 had been paid over six years under the same arrangement to a contractor in Texas for a high-efficiency laundry that was no longer in use. The department also paid out $3.4 million on another project without checking whether the conservation measures worked -- and $160,000 for measurements that were never taken.

At the same time, the auditors found, some contractors appeared to use inflated energy cost estimates in their savings calculations, increasing their fees.

"Our review established that weaknesses in the Department's contract management strategy for ESPCs . . . directly contributed to each of the above deficiencies," the department's inspector general, Gregory H. Friedman, wrote in a memo accompanying the report.

The audit report follows other findings about the department's difficulties in curbing energy use.

In July, Friedman's office reported that the department spent $11.5 million more than necessary on its utility bills because government and contracting officials failed to use mechanical and software systems to automatically turn down the heat in buildings at night.

Energy Department officials acknowledged the problems with the outsourcing program. In a response to the audit, they said that the findings "brought a tremendous amount of attention" to the energy-saving contracting process.

In summer, after learning about the audit findings, Assistant Secretary Cathy Zoi launched "a major reform effort," a department spokeswoman said in a written statement.

"This effort will implement all of the IG's recommendations ahead of schedule and will go beyond these recommendations to establish a project oversight and audit mechanism," spokeswoman Jen Stutsman said.

Adopted in the 1990s, the outsourcing approach enables "agencies to accomplish energy savings projects without up-front capital costs and without special congressional appropriations," according to Energy Department literature.

The department says the arrangements have saved the federal government $1.4 billion through 460 projects involving 19 federal agencies. States have also adopted the approach.

Auditors have questioned the reported savings, saying in reports that the lack of oversight and clear accounting of all the projects' costs makes it difficult to know whether the government is reducing spending.

The newest IG audit, launched in anticipation of the stimulus spending, targeted four contracts worth $256 million. One of them involved Oak Ridge's massive Y-12 National Security Complex, where nuclear weapons are assembled.

A contractor, Honeywell, was hired in 2001 to upgrade a World War II-era office building, a laboratory from the 1950s, a library, and a structure that housed a cafeteria and records.

But not long after the work was completed, officials at Oak Ridge decided to tear down the buildings as part of an overhaul. The demolition began in 2005.

Honeywell notified the department that it could buy out the company's contract. But department officials did not take up the suggestion. Instead, the department continued to pay -- $850,000 more than necessary.

An Energy Department spokesman acknowledged the missteps in the program but said the department had saved taxpayers more than $4 million in operations and maintenance costs by tearing down the buildings as part of a project to renovate the complex.

"Our mistake was that we failed to recognize that the department had a process to terminate and buy out existing contracts that were no longer fully valid," said Steven Wyatt, the spokesman for the Y-12 facility at Oak Ridge.

"In retrospect, there is no question that Y-12 would not have considered establishing an energy saving initiative for any building scheduled to be demolished."

Honeywell declined to discuss details about the Y-12 project. In a statement, the company said it "has completed many energy savings performance contracting (ESPC) projects at federal sites -- work that is expected to deliver $1.6 billion in guaranteed savings and significantly cut carbon emissions." It added: "We look forward to additional work with DOE."

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