The following interview with Deputy Energy Secretary Dan Poneman, who announced this week plans to leave DOE in the fall, was conducted by ExchangeMonitor Publications Editor-in-Chief Mike Nartker.
NS&D Monitor
6/20/2014
To start things off, I think one of the things you’ll be remembered for during your time at DOE is the Department’s efforts to improve its contract management practices and to, as officials have put it, better balance risks and rewards between DOE and its contractors. A significant part of this has been an increased emphasis on the use of fixed-price contracting. What future do you see for the continued emphasis on that approach based on results so far?
I think it’s got a good future. It depends a lot on two things—one is defining—intelligently the scope of the projects in such a way that you can hive off those which lend themselves to fixed price contracting and those which really don’t, but the second thing is that fixed-price contracting does permit a better alignment of interests on the one hand, but it also imposes a greater management burden. I’ll come back to both points.
On the first piece, the nature of many of the cleanup contracts at the DOE is that you’re dealing with, first of all, extraordinarily complex actinide chemistry. Second of all, you’re talking about first of a kind, one of a kind, nuclear class projects. And there are inherent uncertainties and risks in that. So in those areas will remain some core activities that will not lend themselves to fixed price contracting. Why? Because in a rational calculation of contracting price, factoring all those uncertainties would produce numbers that are just too high to be acceptable, and maybe in respect of risks that are not in fact realized, in which case you would not have done the right thing in terms of a financial management standpoint.
So once you get that right and you can take off parts of the scope of work that are discrete and don’t have that kind of unique risk profile, then you can use fixed-price contracting for the rest. But even there we have to have contracting officers, both in sufficient number given the responsibilities that they are undertaking, as well as with sufficient training and expertise to be accustomed to this kind of contracting. Because obviously people have been trained in a certain system and to make some adjustments like we’re talking about requires some amount of educational retraining. So you’ve got to have a workforce that’s capable to the task they’re being assigned.
Do you think the Department has those resources in terms of being able to, one, like you say, define the scope of work adequately in order to break out parts for fixed price contracting, and, two, to be able to manage in a firm fixed price environment?
This is always and always will be, I suppose, a work in progress. You start by changing the paradigm. And so by definition on the day that you changed the paradigm you’re not ready because it’s a different paradigm. Point one.
Point two. You know the Budget Control Act. You know the budget environment. We are struggling under the constraints of very, very tight budgets with a huge set of responsibilities. So there is no question that they’re stressed in that dimension. Where I find reason for encouragement is in my visits from time to time in the sessions that our Office of Management organization holds periodically on the federal side as well as with the contractors. And in the feedback I’m getting out of those meetings, I see a greater level of acceptance, and embracing of these kinds of ideas. So I think it’s not where it ideally could be, but I think we’re moving in the right direction.
I’m sure you’ve heard from the contracting industry concerns that, I think, can be summed up as while DOE is doing a good job of placing more risk on contractors, there doesn’t seem to be an increased reward. Is that the right message for the industry to take from the Department concerning the focus on balancing risk and reward, and are you afraid of a withdrawal from the market?
Well, that’s a great question. It’s not the right message to suggest that there is an unfair balance of risk and reward. I want to come back to that. And I do think that we would be better off overall to have an ample pool of interested contractors. That I believe will serve the taxpayers’ interest best.
To that end, I keep coming back to the core principles, which I’m sure you’ve heard me say many times. First, we must always seek to align contractor interest to the taxpayer interest. Second, we must structure contracts so that each party bears responsibility for its own actions. Every CEO with whom I’ve spoken to is fine with those core principles. And if we are able to actually apply those principles, I think we will end up with in fact, A, a motivated contractor base, and B, a better set of results for the taxpayer. And so, I’ll just give you an example of why I don’t think it’s a one-way street in the way that you described or that some people might infer. I encountered contracts in which there were missed milestone payments for failure to meet some interim target, but no opportunity to recover that missed payment. So I said, for example, if you have a set of interim milestones and you miss every one, if you give me a performing asset at CD-4, I will be willing to give you all those milestone payments back. On the other hand, if you’re getting interim milestone payments but then at CD-4 I don’t have an asset operating to spec, I’m going to want to claw those interim payments back.
I think that’s just fair. And I think an arm’s length, intelligent, capable contractor is, in my experience, very willing to do that. Another example would be a cleanup contract, where if we get an early application of some new technology that will allow us earlier closing of a tank or shutting down of a portion of the tank farm, that saves the taxpayer money. In that kind of situation there is more consideration to put on the table to benefit the contractor and thereby incentivize good performance.
On the concept of balancing contractor and taxpayer interest, one issue that has come up lately regarding the national laboratories is moving to a more ‘public interest’ model of management that would come with lowered fee. As you’re getting ready to leave Department, do you think contractors had been paid too much fee and especially too much fee for base performance—not for incentivizing or accelerating work but just doing what the Department hired them to do? Have contractors been paid too much and so should the Department look at an approach of reduced base fee, but if performance is greater, so is the fee, and vice versus with poor performance?
It’s hard to put out a rear-view mirror and say this one or that one was too much. I think, though, to the larger point, what I have found now talking in the M&O contractor space where a lot of this conversation has been occurring is that what drives performance actually is not fundamentally monetary at the level of the labs. If the people who are leading the labs and the scientists who are working at the labs were primarily motivated in that direction, they wouldn’t be at the labs. They go to the lab because they can work there on a critical national mission that they believe in. They go to the labs because they’ve got the coolest, most advanced equipment to use, that they’ve got the best cutting edge science for them to perform.
So to me, it’s about having the incentives line up right. And if large fees take it out of that mentality into more of a classic corporate mentality, we’re not addressing the critical elements that motivate what we’re looking for. And so in that respect I think to put more of the dollars onto mission and less onto that kind of an excessive fee is the right thing to do. And frankly, in conversations I’ve had with our people out there in the system, it seems to be extremely welcome. There is a risk of distortion any time you get this kind of mismatch of the fee structure and what you’re actually looking for in terms of performance out of the labs.
Of course you can’t talk about contract management in DOE without talking about project management. This week, House appropriators have again rapped the Department over project management in the report accompanying their version of the FY15 energy spending bill. What do you feel needs to be done in the Department to finally put project management concerns to bed and rebuild credibility with lawmakers so they feel DOE knows how to manage projects such as the Mixed Oxide Fuel Fabrication Facility, the Hanford Waste Treatment Plant or the Uranium Processing Facility?
We have been moving in the right direction. It takes some time, and it’s been a step-by-step process. So, for example, several years ago the GAO took us off of the high-risk list for all of the science projects. Then we applied a lot of the best practices that we developed in recent years—things like chunking contracts and that generation of reforms. We basically ended up performing much better on everything but the largest contracts, and then GAO took DOE off the high-risk list for all but the largest contracts.
So now we’re down to the really hard cases of the huge, first-of-a-kind, one-of-a-kind, nuclear class facilities. Even there we’ve been learning very important lessons. And now you’ve seen us go to the modular approach twice in terms of kind of the so-called chunking concept overall, when it came to CMRR and UPF, where you had these big-box approaches with the large capital assets that are sometimes very hard to manage, with the cost overruns and schedule delays that come with it. So now we have seen a much more intelligent, modern modular, approach to getting the mission done in a more efficient way.
So I think you’re going to still see that move to more modular approaches happen. But let’s be clear, it’s going to require both elements we talked about a little bit earlier in this conversation. Number one, we’re going to have to have adequate numbers of knowledgeable contracting officials because it puts a lot of burden on the federal oversight to be good enough to figure out how to design and supervise the contract. And then, two, it’s going to require a process of acculturation and training and learning by doing.
We’re going to keep applying some of the other basic principles about the alignment of taxpayer interest and making sure the benefits and burdens run with the responsible party. But I think you’re going to see that happening. And there is not one of these cases, as painful as a lot of these experiences are, from which we haven’t really taken away very important learning that we then apply to the next case. And, as I said, we’re down to some hard cases now. Fortunately, Secretary Moniz has been very, very focused on this. He has pulled together some of the smartest people we’ve got to work on this, including some of the fresh talent he’s brought into the Department since his arrival, to try to codify some of the lessons we’ve learned in recent years. And I think, in the next period here he’s going to be looking at a lot of the results of some of those internal reviews of best practices and trying to apply them.
In terms of hard cases, one that’s got a lot of attention lately is MOX. The Department has proposed putting that project into ‘cold standby’ and is looking at alternatives for plutonium disposition. I wanted to ask you, especially with your background in nonproliferation, should the MOX project be viewed as a traditional DOE project where cost and schedule concerns are important, or should MOX be seen as more of a policy objective and be managed in such a way that may place a different emphasis on cost-and-schedule given the benefits the project is intended to achieve?
It’s a good question. I think sometimes lack of clarity on the answer to that question can get us into trouble. So let me try to express it this way. The mission in terms of the purpose to be addressed by the MOX project obviously is rooted in our desire to reduce nuclear threats and is driven by the overall non-proliferation vision of not just this president but every president going back to President Clinton.
That having been said, we simply don’t have the luxury not to apply really hard-nosed contractual disciplines to all of our contracts. And so is it worth something to satisfy a nonproliferation objective in a manner that does not lend itself to easy quantification? Yes. But can you write a blank check? Obviously not. So clearly you need some kind of balance.
I don’t think we should ever walk away from our taxpayer stewardship responsibilities, because ultimately every dollar that you take away or that goes into this project is coming out of something else worthy to do, including in non-proliferation programs. So in a way, it’s a bit of a false dichotomy. In conclusion, you can’t lose sight of the fact that in addition to actually building an operating facility you’re also satisfying a larger national security imperative.
More broadly with the NNSA, the Congressionally created government panel recently came out with its interim report, and the finding that appears to have caught all of the headlines is the idea that the NNSA is a “failed experiment” when it comes to governance. What do you think of that statement?
I’m always more comfortable talking about what we’re doing and what we’re trying to do as opposed to grading myself. I’m proud of a lot of the things we do, but I don’t think there is any place for complacency or smugness, nor do I ever feel that there is no room for improvement. So I think a lot of good work has come out of that commission and I would say a lot of the things that have been identified in terms of the duplication of effort and sometimes the lack of clarity of mission and so forth are very good points to take in mind as we seek to correct the path forward with respect to NNSA.
Clearly the drivers that led to the creation of NNSA in the first place are not still present. And so, you know, a lot of the things that led to the structure of the separated functions are still germane. And frankly, there is a lot of duplication at a time where we don’t have the resources to spend doing the same thing twice. In short, I think there is a lot of room for improvement. We’re still obviously processing what we’ve read, and there is more to come. But I think we’re going to get a lot of very good, very operational advice from that group.
At the recent Energy Facility Contractors Group here at DOE headquarters, retired Admiral Richard Mies, the co-chair of the government panel, said many of the panel’s findings have been outlined in previous reports that examined NNSA. So now in the waning years of this Administration, the governance panel will come out with its final report, and a panel examining the national labs will come out with its final report. How can DOE prevent these reports from just being put on the shelf, so to speak, and instead ensure their recommendations are acted upon?
Again it’s an excellent question because that is the risk. But this time I think you have a good chance to make a difference. Why? First, because you have a highly-qualified panel working this issue. Second, in Secretary Moniz you have somebody who’s been around the block. Somebody who spent years here in the past when he was under secretary and all the years in between during which he watched the organization very closely, which is why he did the management reform that he did when he became secretary. So he is a leader who knows how to act on good advice.
In short, if you take the combination of kind of the quality of the product that we’re hoping to receive from that commission and then the very experienced but not hidebound attitude that Secretary Moniz brings to questions like this, regarding governance, it may well be that this is the ideal time because you’ve got the accumulated institutional wisdom of six years in office, plus a leader who is still fresh in his mandate, and open to useful suggestions just at the time when these reports are going to be coming in.
So it could work out to be a very good time to do things that will have a lasting effect, despite the risk that these reports will turn out like some others that you cite. But remember some of the past reports made a very positive difference.
With nuclear energy, where do you see the future of domestic U.S. uranium enrichment?
I’d make two points. Number one, the national security requirements for domestic enrichment I don’t see as changing. So it’s going to be important to the United States of America always to have a domestic source of enrichment.
Number two, as we look to a world that is, after an appropriate pause for reflection and taking into account the lessons of Fukushima, now continuing on a path of deploying nuclear energy, I think it’s in our long-term national interest from a national security perspective, from a non-proliferation perspective and, yes, from an economic perspective for the United States to play an important role not only in terms of meeting its own national security requirements in the narrow sense but also being a global player in non-proliferation and in nuclear energy. So I certainly hope that we are able to sustain that kind of domestic enrichment capability moving forward because I believe it’s strongly in our national interest.
To that end, the Department has spent a number of years, to heavy criticism, in effect propping up USEC. Now USEC has moved to file bankruptcy, and DOE is taking over the American Centrifuge Project. Were those years and that expenditure to try to keep USEC afloat basically worth it?
On this question, I can’t accept the premise. I think there is a common misperception that the U.S. was trying to prop up a specific company. That was never, as far as I knew, the U.S. objective. The U.S. objective has been to sustain a domestic capability. It happens to be that the indigenous technology that we had to pursue was the American Centrifuge Project and happens that USEC was the company that was pursuing that capability. But the objective from a U.S. strategic standpoint was in sustaining and developing that technology and that option. And apart from its role as the executive agent for the implementation of the government-to-government HEU deal, USEC is simply viewed as a company.
Has it been worth it to seek to develop an indigenous nuclear technology to allow domestic enrichment to continue to be a home-grown element of the American nuclear future? I think the answer to that is yes. Do I know now if this particular approach is going to work? I can’t answer that right now. We have a really smart team of people, including folks out at Oak Ridge, who are evaluating all the options including this one. But I think that the effort to stay in that market space of an indigenous technology for enrichment is strategically the right thing for the United States.
As we wrap things up, what’s the one thing you’re most proud of during your time at the Department?
It’s hard to single it out. I am proud of the progress that we have made in trying to strengthen our project management. I am proud of developing and standing up stronger emergency response capability, which we really utilized very heavily in Fukushima response but then evolved into something broader that could respond to climate change and enhance resilience in response to such events as Hurricane Sandy. I’m proud of strengthening our cyber security posture significantly. I am proud of the role that we played in helping to fulfill the president’s Prague vision both on the non-proliferation side and in developing an international framework for civil nuclear cooperation, as well as making sure we are making the prudent investments to sustain the safety, reliability and effectiveness of our deterrent.
I’m also proud of what we were able to do in terms of the Recovery Act, in facilitating the introduction at commercial scale of clean energy technologies that really help change our domestic energy marketplace. We didn’t have any grid-scale solar PV, any grid-scale concentrated solar plants. Through the loan guarantee program we have built a number of these units. We now have operating renewable power generation assets that have demonstrated the business proposition to such a degree that private capital is now coming in.
So that whole set of so-called 1705 loans, we’re proud of those. We’re proud of what we were able to do with advanced vehicle technologies and investing the $5.9 billion that went into the fleet of Ford Motors, making more efficient and less polluting vehicles in a substantial market share. But then a much smaller market share but one with a lot of promise was the investment we made in Tesla, an all-electric vehicle, where the borrower paid back the loan early. So that set of transformational investments that helped to drive our energy economy and our manufacturing initiatives into a new direction is not only going to lower carbon, it’s also going to produce jobs, prosperity, and really strong economic opportunities for the country.
What’s the one thing you wish could have gone differently?
You always wish that you could have done more. In terms of work in progress, even though it’s a source of some satisfaction, in project management, I’d like to do even better. And in terms of a very sustained effort at enhancing our safety and security culture and again, I think we’ve made a lot of progress, but that’s something that’s going to require continued and sustained attention.
Lastly, what’s next for you? Where do you go from here?
This has been a marathon. I’ve really, really enjoyed it. I’m looking forward to thinking about what comes next. For the first time in a long time I’ve got some writing ideas and I want to have some chance to do that. And I’m going to be spending some time back at Harvard, at my alma mater, in fact the research center I used to work at as an undergraduate, the Belfer Center for Science and International Affairs. It’s always great to get up there because you get people who are not part of this bureaucratic world but with deep expertise. So I’m looking forward to having a chance to sit down, brainstorm, write about issues I really care about, and then think what comes next.
