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.
WC 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.
In the cleanup arena, one form of contracting with which DOE has achieved significant success is the use of cost-plus-incentive-fee contracts. DOE used that form at sites such as Rocky Flats and Fernald, and most recently with the successes achieved at the Idaho Cleanup Project. And yet the Department seems to be all but abandoning that approach as it goes forward with new procurements. You have contracting officers who are familiar with the cost-plus-incentive-fee approach and the successes it has generated, so can you utilize them more to replicate those previous successes?
While we have announced our interest in fixed-priced contracting and we’re very committed to moving in that overall direction, A, there are areas that don’t lend themselves to it, and B, we would be the last people to walk away from contractual experiences that have worked well for the taxpayer and produced the right kind of results. So I think to the extent that we’ve had a model and to the extent that that model has worked, we’re not going to just turn a cold shoulder but I think the important point is you’re going to have different projects in which it will be clear which of these models is the most applicable.
It is never going to be a one-size-fits-all strategy. As I said, the nature of our business does not allow for all fixed-price contracts, so in those cases where it doesn’t make sense, this model could still be used to the extent that it’s provided good performance in the past
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.
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.
Concerning DOE’s cleanup efforts, the Department’s relationship with states that host major Office of Environmental Management sites seems to have hit, I would say in the last year, a new low. In Washington state, officials are raising the specter again of a potential lawsuit over delays in completing work at Hanford. In South Carolina, state regulators are threatening millions of dollars in fines against DOE for delays in work at the Savannah River Site. State officials in Nevada have questioned DOE’s communications and similarly so have those in New Mexico concerning cleanup at Los Alamos and the recent incidents that have shut down WIPP.
So from your perspective, why have things gotten to this point? How can DOE make improvements?
The work that remains by definition is the hardest work that we have had in the whole portfolio. You know how much our EM footprint we have reduced. You mentioned Mound, Fernald, Rocky Flats. It is not that they were easy but we worked them through, they came to a good outcome. And so the problems that we still have, they’re tough ones. So to a certain degree it’s inevitable that, because they are frustrating problems, you’re going to encounter frustration in the states.
That having been said, Secretary Moniz, from the onset made clear that we need to step up our game with project management in the EM portfolio, which is why he included EM in the portfolio of the newly-created Under Secretary for Management and Performance in his major organizational reform of the Department. He also made it clear from the outset that we need to step up our game with states and localities. So even though we have had challenging times, there is no way one can deny that we are working closely with states. We have, I think, as wide a bandwidth of communications with all of the states you mentioned and more besides, again, than I have seen, and it’s constructive.
Even at times when regulatory authorities are taking enforcement actions, we still keep a very active dialogue and a constructive one trying to come up with solutions that are good for the states because what the states actually realize, if you have to choose between putting $10 into fines or $10 into cleanup, obviously you’re going to do better over time by putting the money into cleanup. So it’s really not in anybody’s interest to get into a mere confrontational posture. I think everybody shares this at the broadest level, the commitment to do what is both our legal obligation and our moral responsibility, which is to return these sites to the communities that hosted them, that kept the nation safe by building a deterrent that helped the Nation prevail in the Cold War. And we’re going to get it done.
And it’s like a family–you’re going to have arguments, you’re going to have problems, but at the end of the day we’re all part of the same family and we’re going to get the job done and we’re going to have to get it done in a way that satisfies our own specs and our own regulations and standards, but also the states and localities. I don’t think you’re ever going to see a kind of a magic wand waved and all be sweetness and light, but I think we’ll get there in the end.
With that message of money paid in fines takes away funding for cleanup, how seriously then does the Department take the threat of fines from state regulators?
Very seriously, because it’s a zero-sum game. Every dollar that goes into a fine comes out of mission performance. And so we work like the dickens to avoid having them happen. And the problem is, just like a bedspread that doesn’t cover all the siblings in a bed, there isn’t enough budget to cover all the things we need to do across the complex.
So, the challenge that is faced by our CFO types and our budgetary experts who try to make the dollars in EM cover this huge set of responsibilities is a very daunting task. And that’s why it’s really important when we have opportunities to finish one job before we start another, to do that. A lot of times, there is understandable pressure to start new projects before we finish existing projects. And one sure way to increase the total lifetime cost of everything is by starting a bunch of projects and doing them all in parallel as opposed to starting a project, getting the hotel load up and then doing the work and then getting the hotel load off, because it’s the overhead that kills you over time. And unfortunately, from kind of a long-term budgetary standpoint, there is what we call the peanut butter temptation, just to spread budgets around. That’s not always the optimal way to dedicate the dollars to get the job done optimally from a budget and schedule standpoint.
Obviously this year EM has been dominated so far by what has happened at WIPP and the investigation into the cause of the radiological release there. While that investigation is ongoing, other investigations have found significant problems into how the contractor at WIPP managed the site, how the DOE field office managed the contractor and how DOE headquarters managed the field. How is DOE looking at the WIPP incidents in terms of accountability?
Well, we have to let the facts take us to any conclusion regarding accountability. All of us believe, and certainly Secretary Moniz has been very clear about this, A, that we need an honest analytical assessment of what happened. And, B, that there obviously has to be accountability based on that assessment. I don’t know what it’s going to mean ultimately because the facts will dictate. But I can tell you, again at the level of principle, everyone is keenly aware both of the direct importance of getting this right in terms of what happened and why, but also taking full account of what that tells us about our governance.
I’ve worked on the governance issues in one form or another since the day I walked in here. And again, we’ve made progress, but it’s never going to be a job that’s "done", precisely because governance is a process. That’s why I actually think it’s important to have our management principle to commit to continuous improvement, because if you don’t instill a sense that continuous improvement is not just accepted but required, then you are always going to run a risk of either, A, complacency, or B, a reluctance to admit room to improve. And that could be fatal. If you are thinking about things like enhancing our safety culture and our security culture, complacency is going to be your biggest enemy.
Is there room for termination when it comes to accountability?
Clearly, yes, and we have taken those acts where that’s been indicated.
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.
