Defense Acquisitions
Additional Analysis Needed to Capture Cost Differences Between Conventional and Nuclear Propulsion for Navy's Future Cruiser
Gao ID: GAO-09-886R August 7, 2009
The National Defense Authorization Act for Fiscal Year 2008 requires that any budget request for construction of a new class of major combatant vessels will be for one with an integrated nuclear power system, unless the Secretary of Defense submits notification to Congress that it is not in the national interest to do so. The Navy's Next Generation Cruiser--CG(X)--is subject to this legislation. In response to a congressional request, GAO reviewed the Navy's analysis of options for CG(X), including cost estimates related to building nuclear and conventional cruisers. GAO examined (1) the design concepts included in the CG(X) Analysis of Alternatives, (2) how each ship design concept addresses threats that cause capability gaps for maritime air and missile defense, and (3) how the Navy's methodology and assumptions affect its estimates of the relative costs for conventional and nuclear cruisers. To accomplish this, GAO analyzed CG(X) program documents, interviewed Navy and Department of Defense officials, and assessed the effect of alternative methodologies and assumptions on cost estimates. This letter is an unclassified summary of the classified report.
In the CG(X) Analysis of Alternatives, the Navy identified six ship design concepts. These concepts include developing new designs as well as making modifications to previous hulls. The sensitivity of the radar on each ship design drives the ability of that ship to address threats that cause capability gaps for joint forces. The Navy developed a minimum performance standard that each alternative would need to meet to address the gap. As the radar sensitivity level increases, the capability gaps against these threats diminish because the radar's ability to meet the performance standards improves. The Navy estimated the life-cycle costs for 19 nuclear cruisers and 19 conventional cruisers using the 2007 price of crude oil. Then, in the break-even analysis, the Navy calculated the price of crude oil at which the cost of 19 nuclear cruisers equals the cost of 19 conventional cruisers. Using this analysis, the Navy determined that if oil prices behaved similarly to the past 35 years, the nuclear cruisers would be cheaper than the conventional cruisers. The Navy's analysis does not include: (1) present value analysis to adequately account for the decreasing time value of money, (2) alternative scenarios for the future price of oil, and (3) an examination of how a less efficient conventional propulsion system would affect its cost estimates.
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GAO-09-886R, Defense Acquisitions: Additional Analysis Needed to Capture Cost Differences Between Conventional and Nuclear Propulsion for Navy's Future Cruiser
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Cost Differences Between Conventional and Nuclear Propulsion for Navy's
Future Cruiser' which was released on August 7, 2009.
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GAO-09-886R:
United States Government Accountability Office:
Washington, DC 20548:
August 7, 2009:
The Honorable Edward M. Kennedy:
Chairman:
The Honorable Mel Martinez:
Ranking Member:
Subcommittee on Seapower:
Committee on Armed Services:
United States Senate:
Subject: Defense Acquisitions: Additional Analysis Needed to Capture
Cost Differences Between Conventional and Nuclear Propulsion for Navy's
Future Cruiser:
The National Defense Authorization Act for Fiscal Year 2008 requires
that any budget request for construction of a new class of major
combatant vessels will be for one with an integrated nuclear power
system, unless the Secretary of Defense submits notification to
Congress that it is not in the national interest to do so. The Navy's
Next Generation Cruiser--CG(X)--is subject to this legislation. In
response to a congressional request, GAO reviewed the Navy's analysis
of options for CG(X), including cost estimates related to building
nuclear and conventional cruisers. GAO examined (1) the design concepts
included in the CG(X) Analysis of Alternatives, (2) how each ship
design concept addresses threats that cause capability gaps for
maritime air and missile defense, and (3) how the Navy's methodology
and assumptions affect its estimates of the relative costs for
conventional and nuclear cruisers. To accomplish this, GAO analyzed
CG(X) program documents, interviewed Navy and Department of Defense
officials, and assessed the effect of alternative methodologies and
assumptions on cost estimates. This letter is an unclassified summary
of the classified report.
In the CG(X) Analysis of Alternatives, the Navy identified six ship
design concepts. These concepts include developing new designs as well
as making modifications to previous hulls. For example, two concepts
are based upon making modifications to the DDG 1000 Zumwalt-class
destroyer and another concept is based upon making modifications to the
DDG 51 Arleigh Burke-class destroyer. The ship design concepts vary in
both capability, including the sensitivity of the radar and number of
missile cells, and propulsion system. The variability is based on
whether the concept uses a previous hull or is a new design. The Navy
analyzed two new cruiser design concepts, one with a conventional
propulsion system and one with a nuclear propulsion system. Both
included the most sensitive radar and highest number of missile cells
of all the concepts.
The sensitivity of the radar on each ship design drives the ability of
that ship to address threats that cause capability gaps for joint
forces. The Navy developed a minimum performance standard that each
alternative would need to meet to address the gap. As the radar
sensitivity level increases, the capability gaps against these threats
diminish because the radar's ability to meet the performance standards
improves.
The draft cost analysis--which has not yet been approved within the
Navy--includes a life-cycle cost estimate and a break-even analysis.
The Navy estimated the life-cycle costs for 19 nuclear cruisers and 19
conventional cruisers using the 2007 price of crude oil. Then, in the
break-even analysis, the Navy calculated the price of crude oil at
which the cost of 19 nuclear cruisers equals the cost of 19
conventional cruisers. Using this analysis, the Navy determined that if
oil prices behaved similarly to the past 35 years, the nuclear cruisers
would be cheaper than the conventional cruisers. The Navy's analysis
does not include: (1) present value analysis to adequately account for
the decreasing time value of money, (2) alternative scenarios for the
future price of oil, and (3) an examination of how a less efficient
conventional propulsion system would affect its cost estimates. By
incorporating present value analysis, as required by Department of
Defense guidance, and future oil projections from the Department of
Energy's Energy Information Administration, we found that the life-
cycle cost of the conventional cruisers would be less than the nuclear
cruisers. This demonstrates the sensitivity of the cost estimates to
different assumptions, underscoring the need for more rigorous analysis
before reaching conclusions about the alternatives.
Recommendations for Executive Action:
We recommend that the Secretary of Defense require that the Navy (1)
before finalizing Phase 2 of the Maritime Air and Missile Defense of
Joint Forces Analysis of Alternatives, include present value analysis,
alternative fuel scenarios, and analysis on the effect that a less
efficient conventional propulsion system has on the cost estimates and
(2) include present value analysis and alternative fuel scenarios in
any future analyses of the trade-off between conventional and nuclear
propulsion.
Agency Comments:
The Department of Defense provided us with restricted comments on our
report. In its comments, the department agreed with the recommended
actions. However, it disagreed with several of GAO's underlying
analyses.
If you or your staff have any questions about this report, please
contact me at (202) 512-4841.
Signed by:
Paul L. Francis:
Managing Director Acquisition and Sourcing Management:
[End of section]
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