September 7th, 2011 Can the energy strategy of the Department of Defense potentially reduce costs and stabilize fuel access and security? Hear what our energy specialists General Charles F. Wald and KC Healy have to say. Guests:General Charles F. Wald, Director and Leader of Deloitte’s Department of Defense Practice, Federal Government Services, Deloitte Services LP KC Healy, Director, Federal Energy Management/Sustainability, Deloitte Consulting LLP
Show Highlights: • The correlation of energy security and national security and America’s best defense • How the DoD tackles securing its energy supply • Energy related regulatory and legislative initiatives • Cost effective ways to ensure energy security and environmental sustainability in the DoD • Success factors of alternative energy sources The following is a full transcript of FedCentral’s interview with General Charles F. Wald, Director and Leader of Deloitte’s Department of Defense practice, Deloitte and KC Healy, Director of the Federal Energy Management and Sustainability practice, Deloitte Consulting, LLC conducted by Jane Norris on September 7, 2011. Jane Norris Welcome to FedCentral, brought to you by Deloitte, a program where executives and federal government leaders talk about the issues and initiatives that are making a real impact on the business of government today, to help government help America. We welcome General Chuck Wald, Director and Leader of Deloitte’s Department of Defense practice to the show today, and also KC Healy. He is a Director in Deloitte Consulting and Federal Energy Management and Sustainability practice. We thank you both for joining us today. We’re going to be talking about energy and sustainability, so it’s a natural that you would both be here with us today. Also want to just give a little background on both of you so people know who they’re listening to. General Wald is responsible for providing senior leadership and strategy in relationships with the Department of Defense practice. He is a subject matter specialist in weapons procurement and deployment, counter-terrorism, national energy, and international security policy. He is a specialist on energy security and General Wald retired from the US Air Force as a four-star general after serving over 35 years in the US military as a command pilot with more than 3600 flying hours and 430 combat hours. Also, KC Healy. He is, of course, in our Energy Management and Sustainability practice at Deloitte. He has 25 years of experience in the energy sector including 15 years consulting at Deloitte and 10 years in industry. During this time, KC has served clients in the areas of alternative energy, business and IT strategy development, business process engineering, talent and resource management, and stakeholder engagement and portfolio planning and management. Thank you both for joining us today. KC Healy It’s good to be here. General Wald Thank you. Jane Norris Today gentlemen, we’re talking about energy strategies for the Department of Defense. General Wald, give us an overview of where the energy strategy stands today. General Wald Sure. I think the big thing is the Department of Defense uses a lot of energy. On the other hand, it’s only a fraction of what the United States uses on a daily basis. So there’s a real understanding of what that really means to the Department of Defense. Maybe it’s on perspective, but the Department of Defense uses about 1.7% of all the energy in the United States on a daily basis, which seems like a small number. On the other hand, in 2008 when we had the spike in oil prices that went up to around, somewhere just shy of $150 a barrel, the Department of Defense spent an additional $11 billion that year on energy costs, which was un-programmed. So just from a cost standpoint, it’s hugely important. Number two is obvious, we can’t do much in the military without energy or fuel, if you will, and it’s a security issue as well, thirdly much of our energy comes from places in the world that aren’t necessarily in agreement with us. Ninety percent of all the fuel in the world is nationally owned and many of those countries don’t really agree with our foreign policy, so there’s a national security imperative there for the Department, as well. It’s a very complex issue. It’s not easy to resolve, but I think there are some solutions we can talk about later. Jane Norris KC, we do have an energy policy now the Department of Defense has announced they plan to operationalize? Talk to us a little about that plan. KC Healy Right, so the OSD has published energy strategies. Each of the services have their own energy strategies, and they all sort of agree on the same thing—that energy is a critical asset. It needs to be actively managed. It needs to be protected, and it needs to be conserved, and I think that we’re starting to see these policies and strategies starting to converge, even though their publishing separate strategies, they’re all very much on the same themes and the same sheet of music. Jane Norris General Wald, how do we then implement a plan that really gets to the heart of alternative energies being used, in forward operating bases or bases here in the United States, perhaps even in an aircraft? General Wald Well, KC kind of alluded to this, but it’s a confluence of different situations or issues that are coming together at one particular time. One is our national debt has made us focus more on how much money we do spend. The Department of Defense’s budget is going to be under pressure to decrease how much we spend. There’s also the imperative of human life in Afghanistan and Iraq, but many of our casualties are incurred in convoys, many of those convoys are carrying liquid, either water or fuel, to the battlefield, and that fuel becomes not only expensive from the standpoint of dollars but human life, and then three is there’s an executive order out today that says agencies and the government need to start looking at their carbon footprint. So you add those three imperatives together and it starts I guess demanding a policy. On the good side, the Department has appointed a director of operational energy who plans the policy. That’s Sharon Burke, and she will be, in a broad sense, developing a strategy for the Department. The services also have very active energy programs that are lead by senior officials in those services. So I think the attention is there now. It’s just a matter of putting that policy into effect. KC Healy Right, and you mentioned the OSD policy for operational energy, and it’s based on three major themes. One is more fight with less fuel. So the focus there is to reduce the overall demand, since that’s one good way of improving energy security. It’s just simply to use less of it. The other [pillar] it’s built upon is the idea of options. More options create fewer risks. If I’m not tied to one source, if I’m not tied to one location where I have to find it, then I have better versatility in terms of, how I want to employ my energy. If somebody shuts off my supply here, I can go there. That’s a great way of improving your security, and then they’re also focusing on building capability to lower the overall costs. Nobody wants to simply dictate that we’ll use less fuel. A better approach is to build it into the acquisition process so we design and acquire equipment that has the same capabilities but is built to use less fuel. I think that’s a very far-reaching, long-term vision that they’re putting into place. General Wald I’d just add to that I think it’s important to note that from a diversity standpoint, as KC pointed out, we can internally diversify from the United States standpoint. We now have a large discovery of shale gas, if you will, or at least the technology to get to that shale gas. There’s certain issues they have to work to get there, but as well as our own crude oil that we have in our continental shelf and in other places in the United States, and there’s an issue of safe drilling, and then you add alternatives. You know, renewable energies of wind or solar, things that can displace some of the petroleum we’re using now. The problem with sustainables like wind or solar is that today in the United States, that only makes up around 1-2% of all the energy we use. There’s a long way to go there, but I think the appealing thing to me about having more of a domestic ability to develop our own energy capability is that it gives us a little bit more security from the standpoint of disruptions and it lets us control our destiny a little bit more from a security standpoint. Jane Norris Are there legislative and policy roadblocks to making this happen? Where does that stand? Does Congress have a role in all this? General Wald I don’t think I can emphasize enough that it’s all about leadership and will. We have the technology. We have the natural resources if we do it right. Now it’s a matter of implementing policy and leadership, I’m kind of a half full glass kind of guy, so I think because of the situation we’re in today from a national debt standpoint, from a geopolitical standpoint globally, and the other imperatives about the understanding of how much energy we do use in both combat and peace time. That confluence of activity is going to come together now and I think we’ll have the right leadership to start addressing it, but again, it’s going take national leadership to make this happen. KC Healy Right, and an example of national leadership that’s already been put into place is the Energy Independence Security Act of 2007, which stipulates energy savings, conservation, improving implementation or the uptake of biofuels. It directs that the federal government be more sustainable in terms of their energy use. There’s a whole series of provisions that direct both the federal government to be sort of energy sustainable with respect to energy but also starts to establish goals, targets, and visions for the country, as a whole, starts to bring together some leadership direction, and I think the President’s recent endorsement of biofuels as a new form of transportation fuel for this source of transportation for the US is another example of somebody getting out front and setting the pace. Jane Norris That’s something that relates to cost, but there’s also a security issue involved in all of this. Why don’t you talk a little about that? General Wald Well, I think if you look at one of the major sources of our energy, which is the Middle East, you could argue why we are present there. There are different reasons people could argue, but one of them has to do with the fact that much of our energy or resources come from the Middle East, and so the assurance that we can have that energy is part of our national security strategy. If you look at the Rand study that came out in 2010 that looked at how much money United States government spends on military presence in the Middle East, and this is minus the Iraq Conflict that we’re in now or Afghanistan, it was somewhere between $65-85 billion a year. That money is actually translated directly to the taxpayer and some ways is directly translated in how much we spend at the pump and, you could look at that number and you could say in the United States, we’re paying about $9 a gallon for gasoline. Well, that’s an imperative on its own. From a military perspective, again, the assurance that we can actually operate our military forces, that those forces will have an adequate and appropriate amount of fuel available wherever we go worldwide is, I think, imperative enough, and lastly, I think the fact that the rest of the world, whether we like it or not, is moving toward a carbon based economy. Europe, in 2012, is going to start charging for carbon and transportation. When we operate there, we’re going to have to pay for that, so we’re being driven down this road of alternative fuels and more efficiency and more economy. KC Healy Just to pick up on the point you made about the transaction costs of buying fuel from overseas sources. We tend to focus on that $300 billion a year number, but there’ve been studies that show the impact on the US economy’s probably three times that. If you look at the transfer costs of the money that’s being sent overseas and the lost economic opportunity here in the US of what that $300 billion might have done, then really, you’re starting to talk about our overseas dependency might cost us a trillion dollars a year. That’s a pretty significant number, and when you think about it from the perspective of national security or national energy policy, that trillion dollar number creates some pretty advantageous business cases when you start to explore alternatives. Jane Norris So gentlemen, we talked a little about the lay of the land for the Department of Defense and their energy strategy, what are some solutions? Talk about what the Department of Defense is implementing and what your view or vision for their sustainability and energy management might be. General Wald I think the DoD puts it in three categories, at least the way I look at it. One is their fixed installations—their permanent bases. Two is their forward operating locations. That’s Afghanistan, Iraq, other places around the world, Djibouti, let’s say, and lastly what I refer to as muscle movers – big ships that don’t have nuclear power plants or tanks, let’s say for example, that wouldn’t lend itself to solar panel or jet engines, that are very sophisticated and probably aren’t going to change much in the near future until we have a breakthrough technology, which could be quite a while. So from that perspective, the fixed installation solution- I think the technology’s there. The wherewithal is there. It’s just a matter of starting to translate that into how we either modify or build new capability in our bases— that’s somewhat of a will issue. It’s a policy directive issue, but it’s not necessarily technology-limited. The forward operating bases where our troops are fighting on a daily basis and still putting their lives on the line is a little different, and that’s something that needs to be resolved immediately. So there are some commercial off-the-shelf technologies that are being used and some other existing technologies. For example, in Afghanistan, the Marines have started using, solar panels that have decreased the amount of fuel they actually need to use for their generators by a significant amount. So that’s a near term ingenuity on the United State’s part. The last one that interests me the most, is the replacement of an alternative for diesel fuel for our fighters, tanks and big ships, let’s say that can be done. The technology’s there. We know that the Navy’s flown airplanes with algae fuel and the Air Force has flown airplanes with different types of biofuels. Now the Navy has a plan. Their leadership is visionary for 2020. They’re going to be 50% alternative fuel in their fleets by that time. It’s called 50/50 by 2020, the Green Fleet. The issue is how do we actually get industry to start scaling up some of that capability. Because of the historical ups and downs of alternative fuels in the United States where private equity has invested in some of these alternatives and because of cheap oil, let’s say, that that investment hasn’t become lucrative. There’s been a tendency to be very, very careful in investing, and I think KC and I have worked on a project for the DoD with private industry to help send a signal to investors that the biomass demand is there. We can talk more about that in detail, but to send a signal to equity, I’ve been told that – some are between $1 1/2 and 2 trillion worth of equity waiting on the sidelines to invest that private equity and would invest in potential alternative drop-in fuels for the DoD. Jane Norris KC, there’s a MOU that was circulated fairly recently by the energy secretary. It involved the Department of the Navy, and I think USDA, is that part of what General Wald is talking about? KC Healy Yes, it is, and the General’s referring to, a number of different initiatives on the part of DoD to reach out and start to engage the private sector to increase the availability of these fuels, and it started with the memorandum of understanding between DLA Energy and the ATA to start investigating the infrastructure issues, the supply issues, and the financial issues related to getting these fuels into the supply base. Then we see the Navy engaging through their Defense Production Act Title III avenue with a readiness to invest hard money and the supply base to make and increase availability of these fuels, and now the Air Force is showing a request for information to gather more information about the supply base and what is out there in terms of fuel so that they can better leverage that knowledge to think about future purchases. They’re starting to engage in a very constructive, proactive way. If they go with the long term, the challenge will be to start to sort out what is the best deal. When is the right time to pay for these fuels, at a premium over the conventional fuels, and how long will that premium have to be paid? So as you get through the technology and the supply issues, then you get into the business issues that are very important to DoD over the long term. Jane Norris So General Wald, how do they overcome that cost chasm—how do you get there? General Wald Well, a lot of times, the crisis drives change, right, and I would prefer, as a military guy, not to wait for crisis to make a change, though, if we get into a serious crisis where our fuel goes up somewhere above 250, let’s say $200 a barrel, that will make an imperative. It was interesting in 2008, I think, when the fuel spiked at 145 or 148 or so a barrel. It happened rather quickly, and I think most of us recall that was a fairly significant event for most of us. Gasoline at the pump was somewhere around $4 plus a gallon, and there was a cry and hew in America about the cost of fuel. Interestingly enough, today we’re almost at the same number, but it was a slow boil the frog. It didn’t happen as quick. So the crisis part made a difference earlier. I suspect, if you really sat down and thought about it, we probably would say the crisis is pending. So I think the debt crisis may be a motivator. I think leadership, some of the things that KC alluded to, are going to start moving us down the path, but ultimately it will be visionary leadership that says we have to do this before we get into a fix, and I think we’re there. Jane Norris So this MOU that they’re talking about and we just discussed – it’s something that Deloitte has been working on—I mean, something similar, so talk about that. KC Healy Well, similar ideas. This is – it – and the idea is simply that you have to engage in a proactive way with a supply base. You can’t simply sit back, sort out the field of dreams approach to this and wait for things to happen. You have to get out there and engage, so we’ve explored some different approaches of bringing people together to pool their demand and share risk. It’s similar but not the same as what the Navy is doing with the Defense Production Act, and then this $510 million that they’re getting ready to invest. So we’re moving along similar paths, and I think that sort of reinforces the concept that it does take a partnership. It does take proactive engagement because it’s just not going to happen by itself. General Wald Yeah, let me add to that a little bit too, that’s a great point. I think you need to sit there, if you looked at all the facts, you’d have to say why isn’t this happening? You said that a minute ago, Jane, and it’s just the nature of the business. The DoD is not a business. The DoD is a government agency, and they have restrictions and processes they have to go through. Obviously a business is a business. They’re not going to put money in something that doesn’t get a return on investment, and KC and I believe there’s a role for Deloitte in this case to play an arbiter, if you will, or a stimulator for the fact that you bring the government and industry together in a public-private partnership way to agree that they’ll bring the best of both worlds together. So in the government case, long-term investment in commodities is not necessarily legal, so we’d have to have some legislative relief there. From a private standpoint, unless there’s some assurance that the fuel will be available or if private industry necessarily like a let’s say a FedEx, for example, that uses a tremendous amount of fuel every day. They’re one of the largest users of fuel in the world is not necessarily going to put their money into something that would be an investment in technology. In this case, that would benefit not necessarily themselves but the rest of the United States. So how do they join forces together, these two major demand signals, and come up with a solution, and I think we’ve got an answer to that. Jane Norris So, the answer is, KC? KC Healy Oh, boy, how much time do we have? I think you know, we alluded to the idea of the alliances and the partnerships to bring people together to share risk and share the costs. That’s certainly one way. Then there’s some very business-like approaches to this because the one thing that impresses me about the DoD is there’s a significant number of activities going on, and they’re going on across all services. They’re going on at DLA, they’re going on at DARPA and OSD, so out of this huge amount of activity, the right solutions that are appropriate will emerge. So the question is how do I accelerate that? How do I get things that work the best and share them across the whole DoD? One of the things that you start to do is you start to define common strategic goals. So how would I define, as the Department of Defense, what energy security is? These goals are already out there. They’re being formed. They’re being defined, but at some point, if you’re going to start rationalizing all this activity, you have to start rationalizing what the goals are, what the measurements are. So you begin with that definition process; here are my goals, here’s how they’re prioritized, this is how I define success, and then begin to drive it into the metrics of how am I going to measure that success, and then have that be common so that if I’m in the Marines or if I’m in the Army, if I’m a seaman or an airman, that essentially, barring the – accounting for the differences between services and missions, everybody’s talking in the same vernacular, the same language, the same metrics. That’s part of it. Jane Norris How far down the path has the Department of Defense gotten in terms of length of time or investment given the tight budget restrictions that all government is facing—what do you think? General Wald Let me start out with a negative, and then I’ll get to the positive. So the negative is in 1980, President Carter, in his State of the Union address, outlined the Carter Doctrine, and that’s that we would not allow the energy in the Middle East to be disrupted by any force. We need military power to ensure that. I think if I’m not mistaken, that’s 31 years ago, and we’ve gone through cycles. We went through the disruption from energy throughout the years. Then we spike back where energy, in some cases, oil, it was $10 a barrel, and now it’s 100 or so again, and so from a negative standpoint, we’ve had this warning for a long time, and on the good side, though, in cases outlying some of that, the services have picked this up as a major issue, mainly from a budgetary standpoint but also from an assurance of energy standpoint. So the DoD, based on guidance from Congress, has appointed a director for this strategy. I think my feeling is we probably have insight into what we can do right now, and it’s just going to be a matter of compelling leadership and probably going to have to get the Secretary of Defense to do this or the President. Jane Norris KC? KC Healy Yeah, I think it’s definitely important for the Department of Defense to sort of stay the course. I think I’ve had the pleasure of meeting many people who were influential in the energy space at DoD, and I’m impressed with the fact that they are thinking long-term. They know that there are no immediate solutions, and it will be a journey as opposed to just a sprint, and they think that way. Now how do I overcome the short-term issues of I’ve got a budget, has to be done every year, and we anticipate there’ll be budget challenges, so you have to watch the costs, be very mindful of where your benefits are. So you have to be very comprehensive in looking for the advantages that you gain through these different programs, and those advantages will be anywhere from cost to energy security, and by carefully defining the benefits, you can keep your portfolio going year in, year out, especially if you tie them to those long-term goals. Jane Norris Gentlemen, it’s been a fascinating conversation. I know you have a lot more to say. I’m sure we’ll revisit this topic again. I want to thank you both for joining us today, and we’ll talk about energy security again in the future. You’ve been listening to FedCentral on Federal News Radio 1500 AM. Our guests, General Chuck Wald, Director and Leader of Deloitte’s Department of Defense practice, and KC Healy, Director in Deloitte Consulting in the Federal Energy Management and Sustainability practice. Thank you all for joining us. I’m Jane Norris on Federal News Radio 1500 AM.