oversight

Price Increase and Change in Criteria for Uranium Enrichment Services

Published by the Government Accountability Office on 1971-02-09.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

              ’ COMPTROLLER     GENERAL     OF      -WE       UNITED   STATES
                              WASHINGTON.    D.C.         20548




B-159687




Dear    Mr.   Chairman:

         The General        Accounting       Office     has made   a review      of
the price     increase      and change       in criteria    for uranium      enrich-
ment    services,      Atomic      Energy      Commission,       The review       was
made    in accordance          with a request        dated December       21, 1970,
by the Chairman,          Joint    Committee        on Atomic    Energy,

        A copy of this report       is being     sent to the Vice Chairman
of your Committee,          As agreed     to by your Committee,        copies
of the report     are being    made    available     to the Atomic   Energy
Commission,         Comments      of the Commission         have been incor-
porated     in the report,

       We plan to make          no further     distribution      of this report
unless   copies     are specifically       requested,       and then we shall
make   distribution       only after your agreement             has been ob-
tained  or public      announcement        has been made by you concern-
ing the contents       of the report,

                                                      Sincerely          yours      p




                                                 ” ‘Comptroller                 General
                                                    of the United               States

The Honorable      John 0, Pastore,         Chairman
Joint  Committee      on Atomic      Energy
Congress     of the United    States
                                                           4
                                                           5
                                                           6
                                                           8

2       EFFECTS OF JU?IEND~N' TO SUBSECTION %QEv
        QF THE ATOMIC ENERGY ACT OF 1954                   9

3       CQ~E~~S CQNCEWING PRQPOSED $32 PRICE
        FOR        %UH ENWICmEW SERVICES                  I.2
            Experience      under $26 price               12
            Factors ?cesuZtfng in need for price
                increase                                  14
            Effects      of variances    in assumptions
                on p3coposed price                        18
                   Dennand for cz?nsichent sewices        18
                   Plutonium     recycle                  2-l
                   Cascade improvmat         an
                      power uprating     progr            22
                   Cost of money to the Government        23
            Al..%owance for contingencies                 25
            ConcZusions                                   25

4       SCOPE OF REVa:                                    27



    1   Letter   dated December 21, 1970, from the
           Chaimm,     Joint Committee on Atomic
           Energgr, to the ComptroSPer Generah            31




                                                          32
                                                                  ,


APPENDIX                                                              Page
  III          Letter   dated January 11, 1971, from the
                  Chairman,   Atomic Energy Commission, to
                  the General Accounting    Office                     36

      IV        Excerpt from ARC's Original             Uranium En-
                  richment  Services Criteria            with AEC's
                  proposed changes                                     39

                                    ABBREVIATIONS

AEC        Atomic     Energy   Commission

CIP        Cascade Improvement            Program

CUP        Cascade Power Uprating             Program

GAO        General     Accounting        Office

MWe        megawatt     of electricity
                     ’   I




COMPTROLLER  GENER~L~SREPORTTO
T.l%'JOINT COMMITTEEON ATOMIC ENERGY
CONGRESSOF THE UNITED STATES



DIGEST
------

WHYTi4E REVIEW WASMADE
    On December 21, 1978, the Joint Committee on Atomic Energy requested
    the General Accounting Office      (GAO) to review the Atomic Energy Commis-
    sim"s (AK's)     proposed revisl"43-1 to the Uranium Enrichment Services
    Criteria  and the proposed increase in the price for enrichment ser-
    vices 0

    The revision  was proposed as a result of an amendment (contained   in
    Public Law 91-560 applied     December 19, IWO) to the Atomic Energy Act
    of 1954, which provided   that the prices for eParichment services "shall
    be cm a basis of recovery of the Governmen%"s costs over a reasonable
    period of time."
    Prior to the amendment, the act,        in subsection 16lv, provided    that
    prices be established  on a basis       providing   reasonable compensation     to
    the Government.

    In August 1970, WE6 amended its original      Uranium Enrichment Services
    Criteria to change the basis fovl computing the price from a cost-
    recovery basis to a ~~mmer~ia~-~~~erp~ise      basis.  Because these corn-
    mercial criteria   are not consl"sten% with the amendment to subsection
    1861~~ WE6 has proposed a further    revision  to the criteria.

    AEC has proposed also an increase in the price for enrichment       services
    to $32 a unit of separative      work.  This is an increase of $6 over the
    $26 price currently    in effect   and $3.30 over the price of $28,70 sched-
    uled to become effective     February 22, 1979 0 (See ppm 4 to 8.)


FINDINGS AND CONCLUSIONS
     The proposed revised criteria     are Identical      to the original     criteria
     except f0r certain    language modi$ications     made to confown to the word-
     ing of the amendment to subsection        161~. GAO believes       that the provi-
     sions of the criteria     having an effect    on pricing   provide     an adequate
     basis for recovering,     over a reasonable    period of time, appropriate
     Government costs of flarnishirq     enrichment services.        (See p0 9.)

     The doir,% Committee has requested      GAO to examine into AEC's legal basis
     for implementing   the $a%.70 price     which was established en the basis
of commercial     criteria.       In GAO’s opinion,for        the $28.70     price       to be
valid,   it must be justifiable         on the basis     of the original         criteria.
AEC stated,     in response     to a question    from GAO, that        the $28.70          price
could  have been justified         under the original       criteria     at the time the
price  was established.         GAO has no reason      to question       AEC's statement
and sees no legal         basis to question   AK's     decision      to implement          the
$28.70   price.     (See pp. 9 to 11.)

Production      of separative     work has been substantially               lower than antici-
pated at the time the $26 price              was established.,      but there       has not been
a comparable       reduction    in operating     costs.        This situation       is attribut-
able primarily        to an overestimate       of the production         efficiency      of the
diffusion     plants      at low power levels.        (See pp. 12 and 13.)

AEC's estimated        costs for each unit        of separative                work have increased
substantially       since   the $26 price      was established;                 a major part of
this    increase    has occurred    since     development      of           the $28.70  price.
Increases       have occurred    in estimates       of

   --power      costs,       _

   --other      operating        costs,

   --cascade       improvement            and power    uprating   program      costs,

   --interest       costs.        (See      pp*   14 to   77.)

The proposed    price     is based on many assumptions       as to events     expected
to take place     over extended     periods    of time.   The uncertainties         in-
volved   in several     of these   assumptions    and the effects     of variations
are discussed     beginning     on page 18.

AEC's projected        costs from fiscal          year 1971 through          fiscal      year 1980--
the campaign      period      on which the $32 price           is based--are          stated     in
current-year      dollars.       The   $32   price,     however,    includes        a   15-percent
contingency     factor--or       $4.15 a unit.          GAO believes       that     the provision
of a contingency         factor   represents        a reasonable      method      of providing
for variances      between projected           and actual      unit   costs of production.
(See pa 25.)

GAObelieves   that           the proposed           $32 price  is consistent     with the pricing
provisions  of the           revised       criteria     and the provisions      of subsection
161~ of the Atomic             Energy      Act of 1954, as amended.          (See p. 25.)

The Joint Committee      has suggested                  that AEC reassess      the enrichment
services  price   at fixed intervals.                      AEC has taken    steps toward pre-
paration  of financial      statements                showing   the results      of operations
    of the enrichment           activity    and has advised      GAO that      it intends     to use
    such statements        in    its periodic    reassessment      of the      price.     (See ppe 25
    and 26.)


RECOMMENDATIONSOR SUGGESTIOUS


    pare be published          annually.          GAO suggested         also that AEC periodically
    prepare      information        showing    current      projections       of costs   and revenues
    over a period          of several      years.       Such information         would provide     AEC
    and the Joint          Committee     with an indication             of the extent    to which the
    established        price   is meeting         the objective         of recovering    the Govern-
    ment's      costs over a reasonable              period    of time.       (See p. 26.)




    AEC agreed     to   accept     GAO's   suggestions.
                                    CHAPTER 1

                                 INTRODUCTION

       The General Accounting           Office   has reviewed   the Atomic
Energy Commission's         proposed revision        to the Uranium Enrich-
ment Services     Criteria       and the proposed increase        in the
price for enrichment          services.       The review was made in re-
sponse to a request dated December 21, 1970, by the Chair-
man, Joint     Committee on Atomic Energy, Congress of the
United States,       A copy of the Joint          Committee's   request  is
included     as appendix      I.    The scope of our review is de-
scribed    in chapter      4.

      The criteria      set forth     the terms and conditions                under
which AEC offers,       subject   to available        capability,          to pro-
vide uranium enrichment         services. 1 The proposed revision,
announced by ARC in a letter            to the Joint      Committee dated
December 21, 1970, (see app-            II)   was  made   as a result           of an
amendment to subsection         161~ of the Atomic Energy Act of
1954, as amended.        The amendment was contained                in Public
Law 91-560 approved December 19, 1970,                 This amendment pro-
vides that the prices        for enrichment        services       "shall      be on
a basis of recovery       of the Government's          costs over a rea-
sonable period of time."          Prior      to the amendment, subsection
161~ provided      that such prices be established                on a basis
which would provide       reasonable        compensation      to the Govern-
ment.
      On December 21, 1970, AEC announced that the price for
each unit of separative         work based on the revised                criteria
would be $32--an increase         of $6 from the existing                price of
$26 and an increase       of $3,30 from the $28.70 price which is
scheduled   to become effme               on February     22, 1971.
         Since this report     discusses      three different    sets of
criteria,      we have labeled     the criteria     as (1) the original
criteria,       (2) the commercial     criteria,    and (3) the revised
criteria      to avoid confusion      as to the criteria      being

1The work devoted to separating           a quantity   of uranium (feed
 material)     into two fractions     --one a product      fraction   con-
 taining     a higher   concentration     of the isotope U-235 than
 the feed and the other a tails           fraction   containing     a lower
 concentration       of U-235.
                                          4
discussed    at any particular           point     in the report,            The re-
vised criteria       and the proposed          $32 price      for each unit          of
separative     work are the primary            subjects     of this        report;
however 2 to facihitate         the understanding           of the reasoning
behind,    and the necessity         for         e revised      criteria,        a dis-
cussion    of the original        and c        elrcial   ca-itercia       as wekk as
the revised     criteria    follows,

ORIGIN.iJd.4 CRITERIA

         The original       Uran-ium      Enrichment       Services    Criteria       rep-
resented       an implementation           of the Private         Ownership      of Spe-
cial Nudear         Materials        Act (Pub, L, 88-489) which provided
for (1) the termination               05 mandatory         Government     ownership
of special        nuclear     materials        and (2 the eventual            private
ownership        cd power reactor          fueEs,        rivate     ownership      avoids
the necessity         for a major buildup             of the Government's           in-
vestment       in nuclear       fuel    inventories        for commercial        power
-srE?aCtOrS,      AEC   estimated       that,    if   mandatory      Government       own-
ership       of n1~1ea-r fu.eE had continued,                the Government's         in-
vestment       in nuclear       fue%s in the possession              of private       firms
for civilian        power appLieations              could possibly       have reached
 $3 billion       to $4 billion         by 1980,

         Subsection      161~ of the Atomic Energy Act lof 1954, which
was added by Public          Law 8 -489, requires          AE@ ta establish
criteria      in writing,              ng forth   the terms and conditions
under which AEC will           provide    uranium    enrichm      t services                    1
for domestic        and foreign      customers,      Before       C establishes                  \,,
such criteria,         it must submit       the proposed     criteria     ta the                  g
Joint     Committee      on Atomic Energy for a CL=day period               unless                 '1
tht?   JQint   CQlTEl'LittEt'Z    Wtd.VeS   il2   Writing,      the    ConditioXi   of,   0-C
all    or any portion            Of)   such a. 45-day        period,

       On July 1, 1966, AK submitted                  the original       criteria
to the JQint      Committee,         At the Joint        CommitteePs      request,
we reviewed     the criteria         and the proposed          contracts      for ura-
nium enriclment        ser'GFices*     In our report         to the Chairman
 &L-159687 0 August l9 1966), we stated                  that the provisions
having    an effect     on pricing       afforded       a reasonable      basis    for
recovering,     over    a  long    term    of   operation,      the   GovernmentPs
cost of furnishing          enrichment       services      and that the pro-
posed ceiling       cha-rge ($30 a unit          of separative        work, subject
 to upwax-d escalation         for the cost of electric              power and labor)
wou%d be adequate         to permit      recovery       of appropriate
                                                  5
Government costs projected   over a number of years.1    The
original  criteria became effective   on December 23, 1966, and
have been the basis upon which AEC has offered    to provide
uranium enrichment  services   to its customers,

         On September 21, 1967, AEC announced that the actual
charge for uranium enrichment               services    would be $26 a unit
of separative          work.   At the   Joint     Committee's  request,    we
reviewed      the basis used by ABC in establishing              the amount
to be charged,          and, in a report      to the Chairman (B-159687,
September 25, 1967), we stated that the charge was adequate
to permit recovery           of appropriate       Government costs pro-
jected     over a number of years and was consistent                with the
original      criteria,

COMMERCIAL CRITERIA

         On June 10, 1970, AEC proposed an amendment to the
original      criteria       which changed the basis for computing                   the
charge for enrichment             services     from a cost-recovery          basis
to a basis related            to the price a commercial          firm would
charge assuming operation               in new uranium enrichment            facili-
ties.      Also,     AEC    announced     that   the price  for     each  unit       of
separative        work based on these commercial            criteria      would
be $28,70--an          increase    of $2.70 from the existing            price of
$26,
        At the request of the Joint     Committee on Atomic Energyp
we made a review and issued a report         on the proposed re-
visions    to the criteria    and price  (B-159687,  July 17, 1970)
in which we discussed      the need for and applicability    of the
commercial    basis,

        In our report,          we stated that,    on the basis of our in-
terpretation        of the      legislative  history;    the language of
subsection      161~ of       the Atomic Energy Act of 1954, as amended;
and statements         from     the 1966 hearings     on Uranium Enrichment
Services     Criteria,        it did not appear to be consistent       with


1As of July 1, 1970, the ceiling  price was $32,91,  AEC's
 current  estimates show that the ceiling price is expected
 to be about $36,50 by July 1, 1971.


                                           6
the intent  of the Congress to conclude        that the term "Tea-
sonable compensation"      as used in subsection        l.6l.v permitted
induding   a profit   over a period of time,         We expressed          the
view that there was doubt that the commercial               criteria,under
which more than ful.1 costs might be recovered              over a period
of time, was authorized       under subsection    Idlv,         we stated
that we did not believe       that the commercial       criteria        should
be adopted without    further     action by the Congress,

      With respect    to the proposed price increase,      we con-
cluded that,   because of cost escalation      and operating    Levels
lower than originally      anticipated, a price increase     might
be warranted,

         After     the issuance of our report,             AEC requested         the
views of the Department               of Justice     with respect        to the legal
validity        of .AEC9s proposed amendment to the original                     crite-
ria,      On h.gust         5, 1970,    the   Department    of   Justice      con-
curred in .&X's contention                 that there was nothing           in the
legislative          history    which would preclude          the possibility           of
setting        prices higlxr       than the Government's          full     costs if
this appeared to be in the national                   interest      in the develop-
ment and utilization             of nuclear      power,

        After expiration    of the required        45-day period,      .KEC,
on August 25, 1970, by publication             in the Federal Register,
established    the commercial       criteria     and established     the
$X3,70 price to become effective             180 days after      such prtbl.i-
cation pursuant       to the criteria,

        After publication      of the above notices,        the Joint     Com-
mittee     on Atomic Energy reported       out a bil% which. among
other things,      proposed an amendment to subsection             b6'Lv to
clarify      the congressiona%    intent   at the time this subsec-
tion was enacted into law.           The clarified      provision     states
that the prices for enrichment           services     PPshall be on a ba-
sis sf recovery       of the Government's        costs over a reasonable
period Qf timeoUD This amendment was contained                  in PubLic
Law 9k-560 approved on December 19, 1970.
      JUX has taken the position    that all legal recyir-ents
associated  with an increase    in price to $2~~70 will    have
been met on February   22, 31971, and that this price will      go
into effect  on that date,
REVISED CRITERIA

        AEC submitted    its proposed revised     criteria    to the
Joint    Committee    on December 21, 1970, to establish        criteria
in compliance      with the amendment to subsection        161~ dis-
cussed above.       AEC also announced that the price for en-
richment   services     on the basis of the proposed criteria
would be set at $32 for each unit of separative             work, or
 $3,30 higher    than the price of $28,70 a unit which is
scheduled    to go into effect     on February    22, 1971.     This in-
crease in price is considered        necessary    because of increases
in the projected       costs of separative    work, principally        the
cost of electrical       power.
       Prior to emactmene Qf Public Law 91-5QQ, a
cember 19, 1970, subsectioa            E61v of the atomic
of      54, as amended, provided         in part that prices for em-
ric    ent services      be established        on a basis which would
provide     reasonable     compensation      to tRe @overmment a Public
I.43~ 91-560 clarified        this provision      to require  that pA.ces
f0r   enricfLHlent   services     be established     on a basis 0% recov-
ery of the Govermmentes costs over a reasonable                 period of
time @
        As a result     of this amendment ta subsection          l.Qlv, AEC /
        rogosed a revision        to the Uranium Enric
                                                                              \
                Qur review of the proposed revise                             ',,ii
showed that they were identical              to the origina%    criteria
except for certain         language modifications        made to conform           I/#
to the wording of the amendment to subsection                161~.       (See
appo TV.)                                                                          ,//'

      In our opinion,    izhe grovisions      of the criteria            having
an effect   on pricing   afford      an adequate basis for            recwer-
ing, uver a reasonable      period     of time, appropriate            Govern-
ment costs 05 furnishing        enrichment    services.
        In announcing          the proposed revision      to the criteria,
    C stated that the previously             announced imcrease in the
enridmemt         price from $26 to $28.70 a unit of separative
work wauld go imto effect               on February   22, 1971--180     dtsys
after     that price had been published             in the Federal Register,
TRe $28.70 price was established                under the commercial       cri-
teria    discussed        in our July 17, 1970, report         to tke Joint
comittee       o We expressed         the view that there was doubt that
             ercial     criteria,     under which more than full        costs
migRt be recovered             over a period of time, was authorized            by
subsection        EQIv.

      TRe Joint  Co ittee  has requested   us to examine                  into
   C"s legal basis for implementing    the $28.70 price.
          In the     report  of the Joint Committee,   which accom-
panied      the     proposed legislation  subsequently   enacted as
Public      Law     91-560 (S. Rept. 1247, H. Rept* 1470, 91st
Gong.),       the    Committee stated:

      "Under the clarified        version    of subsection       16lv.,
      it is intended     that the criteria       in effect       since
      1966 will   continue     to be in effect      unless and un-
      til   the Commission proposes revisions            thereto
      that conform to the requirements           of the statute
      and submits them to the Committee for the 45-day
      review period,     -Eck*lI (Underscoring     supplied.)

        From this statement,     it seems clear that the intent             of
the Congress in enacting       the amendment to subsection             161~
was to continue     in effect    the cost-recovery     criteria        es-
tablished    in 1966.. Consequently,       and in view of our report
of July 17, 1970, concerning        this matter,    it is our opinion
that,    in order for the $28.70 price to be valid,             such price
must be justifiable      on the basis of the original           criteria
established     in 1966.

         By letter     of December 30, 1970, we requested        the Chair-
man, ARC, to advise us regarding          the basis for MC's view
that the price of $28.70 predicated           upon a commercial-
enterprise        type of operation  properly   may be made for en-
richment      services    effective February 22, 1971.        Also we
asked to be advised whether such price of $28.70 could be
justified       on the basis of the original      cost-recovery     cri-
teria     established     in 1966.

         By letter   of January 11, 1971, the Chairman, ARC, ad-
vised us that an opinion           of July 2, 1970, by AZ's          General
Counsel and a separate          opinion      dated August 5, 1970, by the
Acting     Assistant   Attorney     General,      Department   of Justice,
held that the proposed revision               to the criteria    and the
proposed price of $28.70 to be established                  in accordance
therewith      would be legally        valid    under subsection    161~.
Those opinions       constitute      the basis for ARC's view that the
price of $28.70, as established,               may properly    be made ef-
fective     February   22, 1971.        The Chairman also stated that
the price of $28,70 could have been justified                  under the
criteria      of 1966 at the time the price was established


                                      10
pears nt to the criteria transmitted         to the Joint     Committee
by %etter of June PO, 1970.

      Concerning   the proposed $2.70 increase    in the exist-
ing   rice from $26 to $2 JO, W@ stated at          es 35 and 36
Qf our report    sf July B-7, awe, refer-red   to above, that:

      Tde believe  that, because costs for the IO-year
      period ending ia %97 are estimated         to exceed
      revenues by aboPmt $160 million,      a  rice   increase
      is needed to ensure recovery     of appropriate       Govern-
      ment costs over the orfgind      period.

                       rice increase      of $2.70 a unit would
                     0 result   in additional     revenues total-
      ing about $0 to 85 percent of the zanmu.nt projected
      as a loss under the $26 price through          1975.     For
                   %WO-80, the $28.70 price is estimated
      to result  in sufficient    revenues to provide        for
      recovering   Ckwerment    costs inc%uding      an estimated
      amount for contingencies.P"

We ha.ve no reason,therefore,   to believe    that the $28.70
price cou%d not have been justified      under the 1966 criteria.

      Bra view   of   statement
                      the           that the price of $28.70
eouEd have been established      pursuant     to the 1966 criteria,
we see no Pegall basis to further       question    the validity    of
such price to be effective      February    22, PWH.
                                 CHAPTER 3

             COMMENTS CONCERNING PROPOSED$32 PRICE

                   FOR URANIUM ENRICHMENT SERVICES

       The following    sections  discuss AEC's experience  under
the price of $26 a unit of separative       work and the factors
considered     and assumptions   made by AEC in determining   the
amount by which the price should be increased,

        There are many technical          judgments    relating  to opti-
mizing plant     operations      that have an obvious impact on the
operating    cost estimates        which form the basis for the price
charged for enrichment          services.       Also, on the basis of the
operating    experience     which AEC has gained since the $26
price was established         in 1967, certain        of the estimates    of
cost and operating       performance        have been refined.

       Because of the complexity      of the technical      judgments
involved     and because of the need for timely        completion      of
our examination     to enable early review by the Joint Commit-
tee of the proposed price increase,         we directed    our exami-
nation    primarily   toward an analysis    of the factors      result-
ing in the need for the price increase         and the effects         of
variances     in the assumptions   used in developing      the pro-
posed price.

EXPERIENCE UNDER $26 PRICE

        AK's    price of $26 a unit of separative   work was es-
tablished     in 1967 on a basis that was intended     to ensure
recovery     of appropriate  Government costs projected    over a
number of years.

       The following       table,   which was prepared      from     AEC's re-
cords, compares AEC's original            forecasts    used as     the basis
for establishing        the $26 price with AEC's actual            cost of
production,     including       its computation     of imputed     interest
on preproduction.          Data for fiscal      years 1966 are       not in-
cluded because they are classified.




                                     12
                                       ~iscel         year   1968                        Fiscal         year   1569                       Fiscal         year   1970
                                                                Increase                                          1ncresse                                          IlXX.38Sl?
                           Origin.31                                         Original                                   or     Original
                          forecast              Actual       d&f&)           forecast             Actual       decrease(-)     forecast            Actual       decrek--)

Total      cost   of
   production
    (in millions)           $227                s&t                  $2        $194               $29
                                                                                                   _                $2           $2                S2S
                                                                                                                                                    -                 $23
                                                                                                                                                                       -
unit    case    of
   produceion               $23.76
                             __
                             --                 52588                sl&       Sm
                                                                                --
                                                                                                  S&Z               sl.oz        SW?
                                                                                                                                  --               s31.5p             5>8$
                                                                                                                                                                       _1_

Production           of
   separative work
   units (in thou-
                                                                                                                                  6,933              6.les
   sands)                     B
                              --                  8,912               -651
                                                                       --       -7,846             $z
                                                                                                   -                 -849
                                                                                                                      =z=x=.                         __                -748
FACTORS FZXLTING            IN NEED FOR PRICE INCREASE

         As previously      discussed,    the $28.70 price scheduled       to
go into effect         in February     1971 was based on commercial
criteria     and therefore       the components of this charge were
not based on estimated           Government costs,     The following     ta-
ble compares the components of the original               $26 price,
which was based on estimated             Government costqwith      those of
the proposed $32 price.             The cost components are stated       in
current-year       dollars,
                                         Existing         Proposed       Differences
                                            unit             unit           between
                                            price            price        components
                                          of $26           of $32         of $26 and
       Cost components                   (note a)         (note b)        $32 price

Power                                     $10.91           S-3*70              $2.79
Other operating                             2.50             3*50               1.00
Depreciation                                3,65              3.30              -.35
Added factor      (note c>                  3*79             3.75               -,04
Cascade improvement         and
   power uprating      programs                   .50         1.85              1,35
Interest     on preproduction                   1.15          1*75                .60

     Total     identified     costs            22,50        27085               5.35

Contingency                                     3.50          4015               065

     Unit     price                       $26.00           $32.00              $6.00


al3ased on a campaign         period     of fiscal        years     1966-75.
b
  Based on a campaign         period     of fiscal        years     1971-80.

'Includes   interest,        administration,            and research      and devel-
   opment costs.
       The above table shows that AEC's estimated       costs                      for
each unit of separative     work have increased    substantially
since the $26 price was established.        A major part of                       this
increase   has occurred  since announcement of the $28.70                           price
in June 1970.    The increases   in the cost components of                          the

                                           14
wit   &-mrges    for (1) pwer,    (2) other operating      costs,
(3) the Cascade Improvement       Program (CIP) and the Cascade
Power Up-rating Program (CUP) (see p. 229, and (4) interest
on preproduction     resulted  from the f0hXowing     factorS.
     PQWf2-rcosts -=-The $26 and $3 prices were
age c0astzugat power costs of 4 an 5,2 miJlEs p
        espective%y.                 s represente
        f power at the               iA2es were de
l@X c3-mmmCed the    $28,70 price it   was experiencing                a power
a3St of about 4,X miE9s per BeiZowatt-hour,

       Since electric      power represents   about 75 percent    of
the out-of-pocket       costs of operating    the gaseous diffusion
  %ants at full     capacity,   the increased    cost of power was a
   jar factor     in the decision    to raise the prfc@ for enrich-
m@nt services,

                                --The     $32 price     is    based    on esti-
                                 s which are Sk a unit. higher     than
                               e $26 price was based,       These @OS-tS
include    (1) costs of operating      and maintaining    the gaseous
diffusion     p%ants (excluive      of power) $# cl> pl      test costs,
 (3) equipment     and general   plant project    e20sts, and (4) mis-
cellaneous     costs,

      Estimated   operation     and maintenance    costs f0r a h%%y
powered plant have increased        from $24 million      annually   at
the time the $26 price was established          to $38 mi%%ion annu-
ally * AEC attributes       this increase    of $14 million      to:


      --A $4 mill.ion   understatement        in the    $24 miflion        esti-
         mate m

      --An $8 million    increase       as the result        of cost    escala-
         tion,

                 rice
                    was based on estimated    g%ant test costs
                       ear over the original.   c    sign period;
                        a~~~~~~a~~s an increas         funding
Ieve% for such costs because of @If and C $ from $8.3 mil-
lion in fiseaE year 19'91 to S12,fi mil.%ion in fiscal     year
1974.   Beginning         in fiscal  year 1978, these              costs    are ex-
pected to return          to the $5.5 million   annual             level    origi-
nally  estimated.

        Equipment and general     plant project     costs were inad-
vertently     omitted  in computing    the $26 price,     and current
estimates     show that approximately     $10 million     annually    is
needed for these items.

     Estimated         miscellaneous        costs are about         the    same as
those on which         the $26 price        was based.

        CIP and CUP--The $26 price was based on an estimated
cost of $289 million        for CTP with amortization      charges be-
ginning    in fiscal    year 1972.    Approximately    $59 million  of
this amount was to be amortized         between fiscal    year 1972
and fiscal    year 1975.       There was no provision    for CUP in
the original     estimate.

      As a result   of AECBs research and development    efforts
and additional    work on the scope of CIP, the $32 price pro-
vides for amortization      charges on the basis of an estimated
cost for CIP of $525 million--or      $236 million more than the
prior  estimate.    Also the $32 price anticipates    an invest-
ment of $225 million     for CUP.

         In arriving     at the $32 price,    AEC projected     that costs
totaling     about $318 million      would be amortized      between fis-
cal year 1975 and fiscal         year 1980 for CIP and CUP. There-
fore additional         costs of $259 million    ($318 million      minus
$59 million)        are provided  for by the $32 price that were
not provided        for by the $26 price.,

        Interest      on preproduction--The               unit price of $32 in-
cludes $1.75 for imputed interest                      on the GovernmentIs       in-
vestment       in preproduced         inventories,         or an increase      of 60
cents from the amount included                   in the $26 price.          AEC  esti-
mates that a greater             preproduced         inventory     will   be in ex-
istence      for a longer period            of time partially           due to the
fact that inventory            levels     have increased         because AEC has
experienced        and is anticipating             reductions      in near-term      re-
quirements       from those originally               projected.       Also the shift
in campaign periods            adds the years 1976-80 when the average
preproduced        inventories        are expected to be higher             than the

                                           16
leveE.5 of the first.      5 years   of the    earlier      campaign     period
on which   the   $26 price      was based,


       FoP'Sowing is a comparison     by year of           AEC*s original
unit cost estimates      (which were projected             through     fiscal
year 1975) with (11 estimates        prepared    in        the latter       past
of fised      year 1970, wh(en lax detemined             that there was a
need tCb increase    the unit price,     and (2)         .14ECD s current     unit
f2os-L estimates,    These estimates     inckude         imputed     interest      on

                      Original             RR3ViS@.d        CuTxrent
                      estimates           eSti~teS         estimates
                        $23,765            $24,%4a           S24J34"
                         24,56              28,58a            28,58"
                         25,73              30094             31,5ga
                         23,04              29,32             33002
                         22,93              27042             32,70
                         21,38              26,7'%            31,33
                         20,70              26,87             31019
                         20,22              26,05             29,80
                                            24068             28,31
                                            22.54             26.65
                                            21011             25071
                                            19.953            24,68
                                            I"%,59            24,21
                   inc‘luding     AEcps    CQmputa~~ion     of imputed      in-
EFFECTS OF VARIANCES IN
ASSUMPTIONS ON PROPOSEDPRICE

      Following is a discussion    of various  assumptions              on
which AEC based its computation     of the proposed price               of
$32 a unit of separative     work and of the effects    that            changes
in these assumptions    would have on the price.

Demand for    enrichment     services

        The gaseous diffusion       plants were built       for national
defense purposes;         however, the enriched      uranium requirements
for defense purposes have greatly            decreased and the plants
are now available         to produce fuel for civilian         nuclear     power
reactors    and to meet other requirements,             At full    capacity
the diffusion       plants consume about 6,000 megawatts of elec-
tricity    @We) and produce about 17 million             units of separa-
tive work annually.          During fiscal    year 1970, however,          the
diffusion     plants were operated        at about one third       of full
capacity    and produced only about 6.2 million             units   of sepa-
rative    work.

        In the last several     years there has been a significant
growth in the size and the number of nuclear            plants    being
constructed      and operated   for the production     of electrical
power and continued       growth is expected.      This development
has resulted      in a corresponding    growth in the need for en-
riched    uranium which is produced in the gaseous diffusion
plants.

      AEC estimates   that the demand for enrichment               services
from its gaseous diffusion       plants will      require     plant capac-
ity prior  to 1980 substantially         in excess of current          capac-
ity and that thesdemand will        continue    to increase        for a num-
ber of years thereafter.       Through 1980 this demand is ex-
pected to be met by the use of preproduced              inventories.

       AK's    projections      of the demand for future       enrichment
services     and its studies       and plans for meeting the demand
are based in large part on judgment as to technological                   and
economic developments          expected to occur in the nuclear         field
and therefore      are subject      to a great deal of uncertainty.
We found, however,         that projections    of nuclear    growth by in-
dustry   fell   within     the range of ARC planning      estimates.
Domestic   plants                 130,000      170,000      150,000
           'kmts    Qncate al      70,000      E00,000       89,000

    TOtd                          200,000      2-70,ooo     239,000




.!iEC uses the medium as its       rimalry basis for estimating    the
total     recpi-~cements for separative    work from the U.S. gaseous
diffusion       plaits 0 The chart below i%lustra&es    the protected
gromh sf nudear          power,
        During fiscal      year 1970 the foreign        demand for enrich:
ment services        was about 1.1 million      units of separative
work.     The need for enrichment        services     to provide   fuel for
foreign     reactors    (excluding  the United Kingdom) is expected
by AEC to increase         to about 4.8 million       units of separative
work in 1975 and to about 11.6 million               units by 1980.

        Considerable      interest      has developed       in some countries
in obtaining       an enrichment        capability     which would enable
those countries        to achieve at least           some independence       in
 supplying    their    enriched      uranium requirements.           AFX has
taken this situation           into consideration         in preparing     its
long-range      forecasts      of foreign       demand,     These forecasts
are based on the assumption              that there will        be some reduc-
tion in foreign        demand beginning           in 1975, at which time it
 is assumed that the United States will                  be providing    95 per-
cent of the above foreign              demand.      AEC assumes that in 1980
the United      States will        be providing      about 9.8 million       units
of separative       work, or 85 percent of the above foreign                   de-
mand.

        AEC estimates   do not show any reduction       in foreign    de-
mand which may result        because of the proposed increased
price of $32 a unit.         According    to AEC there was no need to
adjust    its estimates    because the technology      of plants   built
abroad is unlikely      to be sufficiently      advanced for many
years to constitute       strong economic competition       for United
States'     plants,

        To show the effects             of a reduction        in demand (either
foreign      or domestic)         on unit production         costs, we requested
AEC to develop a case study showing the effect                           on the pro-
posed $32 price of an assumed additional                        reduction      in total
annual demand of 10 percent                 in the 1976-80 period because
of the price increase               or delays in the development               of the
nuclear      industry.        The study showed that the price for each
unit of separative            work was not very sensitive                to relatively
small reductions           in future       demand and that,         assuming a
lo-percent        reduction       in total    demand and no change in pro-
duction,       the cost of production            would be increased            by about
20 cents a unit.             This    increase    is  attributable          to  the addi-
tional     interest       costs on the higher preproduced                  inventories.



                                           20
                .




Plu%onim     recyclle

       PEutonium recycle      is %he process whereby replacement
fuel loaded into reactors        will    contain plutonium     recovered
from spent fuel discharged        from such reactors       and %hereby
reduce the need for enariched uranium.           In computing       the
proposed $32 price,      .AEC assumed %ha% plutonium        recycling
would begin in 1974 and would reduce the separative                 work
repmiremeazes by 8.5 million         uni%s %hrough 1980.       A% our rem
ques% AEC recomputed the es%ima%ed costs of produc%ion                   for
%he period B971-80 assuming %ha% plu%onium recycling                  capa-
bili%y    was no% de-veloped,     AECps computation       showed that
estimated    production    costs would decrease by abou% IO cents
a unit if such an assumption          were made.
Cascade improvement   and cascade
power upratinp  programs

        As part of its program to meet the projected                   rapid
growth in enrichment         service     requirements,     AEX plans to in-
crease the capacity        of the gaseous diffusion            plants      through
implementation     of (1) CIP, which would incorporate                   the lat-
est technology     available       into the existing       plant equipment
and (2) CUP, which would permit effective                 use of larger
amounts of electric        power by the existing          and improved equip-
ment.     AEC estimated      that the total       capital    investment        in
CIP and CUP would amount to about $750 million                    and that full
implementation     of these programs could increase                 the existing
plants'    annual separative         work capacity,     at full    power by
about 50 percent.

        Prior    to March 1969, AEC contemplated        installing    CIP in
fiscal     years 1973-78 and CUP in fiscal        years 1977-78.        At
the time the $32 price was calculated,            AEC's estimates        showed
that these improvements          were expected   to be installed      in
fiscal     years 1974-79.       This delay resulted     because AEC's
fiscal     year 1970 budget did not include         funds to begin CIP.
In fiscal      year 1971, the Congress appropriated            $21.1 million
to start      CIP; however,     as of January 1971 AEC had been ap-
portioned      only $5 million.

        AEC's studies        show that implementation        of CIP and CUP
will    substantially        increase   the efficiency     of the existing
plants    and result       in a reduction     in the unit cost of separa-
tive work.        Thus any delay in implementing           these programs
could be expected          to increase     the average unit cost of sep-
arative    work over the lo-year           campaign period.         In making
its current       projections,       AEC has assumed that appropriated
funds totaling         about $750 million       will   be available     in
fiscal    years 1971-79 for the installation              of CIP and CUP.

      The initial     increased     capacity    attributable        to CIP and
CUP will   be available      beginning     in fiscal      years 1975 and
1978, respectively.         AEC therefore      based the proposed $32
price on amortization        of the capital       improvement       costs nec-
essary to implement CIP and CUP beginning                 in fiscal      years
1975 and 1978, respectively,           and continuing        over the remain-
ing useful    life  of the existing        gaseous diffusion          plants


                                        22
which is &rrentEy     projected    to end in fiscal    year 1988,
Any delay in implementing       CIP and CUP would resu%t in amor-
tizing  the capital   costs over a shorter     period    of time and
thus increase    the unit cost ok: separative    work.

       AEC advised us that,    assuming a l-year  delay in imple-
menting CIP and CUP and no change in other factors,         the es-
timated   costs of production    would increase  by about 50 cents
a unit   (excluding contingency)     over the campaign period.

Cost of money to the Government

      AEC"s computation   of the proposed $32 price was based
on the assumption    that the average cost of money to the
Government would be 5 percent      a yea-r.  In computing   the ae-
tual. cost of money to the Government,      AEC uses the index for
total   marketable public   issues that is published     on the
final   workday of each month in the P'Daily Statement      of the
Treasury.bP

     The graph on the following   page shows the actual cost
of money to the Government from July I.965 through December
1970 on the basis of the Treasury   statements,

         To il_lustncate    the effect     that a change in the interest
rate has on the unit price of separative                  work, we requested
,&XC to calculate        the effect     on production      costs of rates
differing       from the rates used in its cost projections.               AEC
advised us that an increase              in the projected      rate from 5 to
6 percent would increase            estimated    production      costs by $1.05
a unit (excluding          contingency)      and that a decrease to 4 per-
cent would similarly           cause a $1.05 reduction.
                                                                      I           ,




         TREASURY   INTEREST     RATES ON TOTAL MARKETABLE                PiJ5LlC     iSSUES




                                                                     AT DECEMBE       31, 1970 (5.8%:

  6.0                                                                                                   6.0

                                                                                      \


                         PERCE   AGE(S.O%)USE        3Y AEC

  5.5                                                                                                   5.5

                                                                    /‘:

                     \
G
6 5.0                                                                                                   5.0
!x
ul
n                                                    -f




  4.5                                                LCTUAL AVER.   E RATE                              4.5



                    /‘ \
                                                     ‘HROUGH DEC    BER 1970 (4.89


                                 /


  4.0                                                                                                   4.0




   3.5                                                                                                  3.5




   3.0                                                                                                  3.0




         1966                         1968                1969

                                         FISCAL      YEARS



                                                24
ALLOWANCE FOR CONTINGENCIES

        In developing       the propcesed $32 pricep AEC included             a     (
contingency      factor     Qf a5 pe332ent, or $4.15 a unit,           to pro-
vide an allowance         for possible        future  changes in both annual
and emlative          requirements        for enrichment    services,    pro-       ',
jecte      lant operational           levels    and costs based thereon,        and
3.2-E p    acted level        of unit costs far labor,        power, and
0the-r cost elements.               e $26 price also included         a 15-          ',
percent    contingency        factor,

        En 0ur  opiwian,       and on the basis of      C"s past experf-
ewe, there is a need to provide             for unfo    seen events which
could have an effect           on the cost of enric     ent services,         We
believe    that the provision        of a eontiagemy      factor    represents
a reasonable      method of providing       for variances      between pro-
jected    and actual unit costs of production           that could result
from the factors         discussed   in this chapter,



        Although      many of the assumptions      made by AEC in arriv-
ing at the proposed $32 price for uranium enrichment                  ser-
vices are subject         to a great deal. of uncertainty,        our review
revealed       no basis for questioning     their    reasonableness.       We
believe      that the proposed $32 price is consistent            with the
pricing      provisions     of the revised  criteria     and the provi-
sions of subsection          161~ of the Atomic Energy Act of 1954,
as amended,

        h the Joint Committee's     arepo~t,      which accompanied the
proposed legislation    subsequently         enacted as Public Law
'X-560,   the Committee stated:

      "T%e Joint       Committee believes        it advisable      for the
      cQmmissiQn, within          the context      of the applicable
      criteria,      to reassess the enrichment           services
      charge at such fixed           intervaBs     and uti%izing      such
      averaging      periods     as* in. the opinion      of the Com-
      mission,      are reasonably        cakcu%ated to assure re-
      covery of appropriate            Government costs, with rel-
      ative     price stability,        and the contingency        factors
      necessary      to provide      for cost variationsOtt          (Under-
      sccxfng supplied.)
       AEC, consistent      with this statement,     has taken steps
directed    to the preparation       of financial   statements        showing
the results     of operations     of the enrichment      activity       and has
advised us that it intends         to use such statements          in its
periodic    reassessment     of the price for enriching           services,

        We suggested that AEC publish         such statements      annually
and that AEX periodically          prepare  information      showing its
current    projections      of costs and revenues over a period           of
several    years.      Such information    would provide      AEC and the
Joint    Committee with an indication         of the extent      to which
the established        price is meeting the objective         of recovering
Government costs over a reasanable            period    of time,

      AEC agreed     to accept    our suggestions.




                                      26
                                    CHAPTER 4



       Our review was performed        at AEC Headquarters        in German-
town, Maryland,     and was directed       toward (1) ascertaining
whether AECQs proposed revision          to the Uranium Enrichment
Semiees criteria       is in conformity       with the     Y.mv~si.ons of
Public Law 9l.-560,      (2) examining     into AECps egal basis for
imphementing     the $28,70 urani        enrichment    price on Febm-
ary 22, 1971, (3) evaluating            C's   proposed   increase      in the
uranium enrichment       price to $32, and (4) analyzing            the
specific   assumptions      upon which the $32 price is based,

        We reviewed    applicable       legislative      history,       .&EC's poli-
cies and pracedures,         and      C's records relating             to the en-
richment     activity.                tion,     we obtained       the views of
various       C representatives         knowledgeable       of, and respon-
sible for, the production            and sale of enriched            uranium.

       As part of our review,  we requested   AEC to make certain
studies   to determine  the sensitivity   of some of the assumg-
tions on which the proposed $32 price was based.

      In reviewin        the proposed $32 price,     we evaluated,    to
the extent     feasible     consistent  with the many technical     fac-
tors involved,       the reasonableness     of AEC"s assumptions    and
methods employed in developing          the price based on these as-
sumptions,       Because of time limitations,       we did not verify
aU of the many complex mathematicaP             computations   made by
AEC in arriving        at the proposed price.

     We also obtained  data from AEC showing production    costs
e erienced   under the present  $26 price.  We did  not verify
the accuracy of the data.
                                         ~AS-IINGTON,   D.C.     205to


                                         December        21,      1970




Honorable      Elmer    B, Staats
Comptroller       General   of the
      United    States
Washington,       D, C,

Dear   Mr,     StaLats:

      BY letter    dated December          21, 1970, the AEC submitted         to the Joint Commitiee
 on Atomic    Energy     in compliance         with the recent   amendment      to subsection       161va of
the atomic      Energy    Act of 1954, as amended,           a proposed    amendment       to the
Uranium     Enrichment       Services      Criteria,    The act requires      in general     that such an
amendment       lie before    the Joint Committee         for forty-five    days while     Congress      is
in session    before    becoming      effective,

     According       to the AEC letter,    it was further     determined,      with Commissioner
Ramey    non-concurring,        that the charge   for enriching      serti.ces    on the basis    of
the amended      Criteria   will be set at $32 per kilogram         unit of separative      work0

       In this connection       the Joint Committee      would   appreciate      it if the General
Accounting      Office   would     review  the proposed     amendment,       the increased     price,
the specific     assumptions        upon which  the new price is based,          and other related
matters)      and furnish     the Joint Committee       with a report     thereon     at your earliest
convenience.

      To assist     you in this matter,    I am enclosing    a copy of the letter           from   Dr,
Seaborg     dated December       21, 1970, with attachments.       Thank you for           your
cooperation      in this matter,




                                                               Chairman

Enclosure
APPENDIX II
     Page 1

                                        UNITEIJ STATES
                                ATOMIC   ENERGY   COMMISSION
                                   WASHINGTON,    D. C. 20545

                                             BEG       21    1970

    Honorable       Chet Holifield
    Chairman,        Joint Committee    on
      Atomic      Energy
    Congress       of the United States

    Dear    Mr.    Holifield:

    Revision    of the Uranium         Enrichr.Tent      Services     Criteria      is required     to establish
    Criteria   in compliance       with the race&          amendment        to Subsection       161~. of the
    Atomic    Energy    Act of 1954. as amended.               Attachment        “A” is the proposed
    amendment      to the Criteria       which h;zs been developed             to effect this change.
    This amendment        of the Criteria        is herewith      vubmittsd      to the Joint Committee
    on Atomic     Energy    for its review         pursuant    to Subsection        162~. of the Atomic
    Energy    Act of 1954, as amended.

    It has further   been       determined,       with Commissioner         Ramey non-concurring,
    that the charge    for      enriching     services     on the basir of the amended      Criteria
    will be set at ‘$32.00         per kilogram       unit of separati.‘e    T.Jork. Major  assumptions
    used as a basis for         this char&are          presented    in Attachment    “B”.   Commissioner
    Ramey’s     views are        presented     in Atrachment      “C”.

    The $32. 00 charge         is within the Limitation  of the ceili lg charge         which was
    $32.91 as of July 1. 1970, and is currently          estimated      to increase       to approxi-
    mately     $36.50     by July 1, 1971. An increase      in the recently      established      charge
    of ‘$28. 70 which will go into effect on February           22, 1971. is necessary           because
    of increases      in the projected    costs of separative     vrork, principally         the cost of
    electrical     power.

    Upon establishment         of the amended    Criteria,       the Commission     will announce
    this charge    by publication     in the Federal       Register.     The new charge      will go
    into effect 180 days after such publicntion,             in accor&nce      with paragraph
     5(j) of the Criteria.

    As Attachment      “D” we are enclosing      a copy of a publi:    announcement   which
    we plan to make on this action in the next day or SO.           ‘?‘e wocld be pleased   to
    provide   any further  informatioi    in this connection   as tl e Committee     may
    require.
                                                Cordially,

                                                 /s/    Glenn       T. Seaborg

                                                Chairman

    Attachments:
    A, B, C & D


    GAO note:          Attachment        D has been deleted.




                                                            32
                                                                                                              APPENDIX              II
                                                                                                                          Page 2



         REVISION         OF URANIUM             ENRICHMENT              SERVICES          CRITERIA
    SEGTIQN         5 -GENERAL              FEAI&URES           OF STANDARD              DOMESTJ&;          CONTRAGTS


Psra.     (cl - Cbaxge         %0x Enriching         Services

          Subpar.          (1) - The charge          80~ cmrichiaag       sctrvisea,       in accordanx%        Wifh alas Act,
will be eetabliahed                  cpn a nonadis~riminat~ry            basis and $3~ ZL basis 0% recovery                 4
the G~~emrnen%‘o                   coats OWQP a reasonable              period       of time.     Applicable        charge5
POP cmriehing                scrvisse       and re%ate.d services          will be those in a%%ect at %hs time a%
delivery          of’ enrichd           uranium     to the customer           a5  (i] pteblishsd     in tkt Federal         W@gierl&er
or (ii) i.n tlae abeeaase of Such publication,                         determiaaed         in accordaass        with the Gcam-
 mission’8           pricing       policy..      The charge       per unit of sspzkrativs           work for erarichhg
services          will be the same as ekmt employed                       ln the Gommi~siara’s             pnbli~8asd     schedu&
0% chaxgcs             for sala OK lease of enriched                 uranium.          Th2 AEC may impose               ap1 appm -
priate        surcharge           reprssen%ing        ttdditional     soert:ge i% any, to Qbe AEG fox providiriq
enriching           rexvices         on    short   no%iss.

        Subpr.           (29 - AEGOs         charge     for  enriching,      servicr:s    wi%P lx satablishad            on a
basis &a% wiEP. aOQur(E thaz recovery                       0% approprista         Gcsvernment        costs projscted
owex ?%reasonable                perispd 0% %im.e. The cost of ~epaxiitiwa                    work inaclrades &ecfrie
power       md      a.11 obhe~     costs,       direc% and Indirect,           of opera&lag      the gaseous        dif’ffuoion
plants;        appropriate        depreciation          0% soid plants;        and a %a~c&e~rto cover applicable
costs 0% procss8               devehpment,            AEC ~dminiatrsbthon             and d~thar Coveammapnt            ouppalert
functicrans,        and imputed           intereN      on investment         in plant and worki83g         carpital.       During
the early period              of grow%h of maclm3r power.                  there will be only n small civilim
demand          on the large AEC di%%usion plants.                      The?e plants were originally                construc&sd
for nationnal, oeeurity               purposes,        but will be utilized          ia masting      %ntu:upe civilian        re-
quirements.               h this ia%erim period              0% low phnk utiliz,ati.on,          the Commission             I~.F
determined             that, the torts        to be charged        to the :;eparativ%        work produced           ff~r
acivilian customers               will eneluds         those portions         0% the costs aattributable          to degree
ciation        and itierb8t        on p&u@. isrvestm6mt            which are properly           alllacable    &o plan* in
 standby and to exce~a capacity.

       Subpar.     (3) - Projections         of supply      and   demand over a reasonable                time period
will has used in astab%ishizlg           a phn %or di%%usion plant aperations.                     This plan will
be &he basis %or estztblislzing            arm average       charge      for aeparakive      work over the period
involved,      which charge         till  be kept a8 stable as posaibh               aa operating        ph~e are
periodically       updated.       Under e3uazh operating           platat3s, AEC wilE at times be prspnsdua:ingS
enriched      uraGam.       hteres%       QP Oh% Separative           work    costs   0% any    such   preproduced
irawsntorf@s     will be %sxztorced iiato th@ average               separative      work charges.




                                                                33
APPENDIX II
     Page 3

                                            ATTACHMENT                 “B”


           MAJOR   ASSUMPTIONS                   WSED AS BASIS FOR ENRICHMENT
            CHARGE    OF $32.00                PER KILOGRAM    UNIT OF SEPARATIVE
                                                    WORK



 1.   Campaign        Period       - LO year      6ampaign         period,      FY 1571-80.

 2.   Discount     Rate and Contingency             - The time value of expenditures                and
      revenues      ixsed          on an average       cost of money to the government                 of
      5% per year.          The total unit cost of separative               work is increased          by
      a contingency        factor     of 15% to provide        an allowance        for possible    future
      changes     in both annual and cumulative                 requirements         for enriching
      services,      projected        plant operational       levels and costs based thereon,
      and the projected           level of unit costs for labor,            power,      and other
      elements      of the cost of enriching            services.

 3.   Requirements         - Kequlrements              for enriched          uranium      are based on the
      AEC’s     2970 forecast         of installed        civilian       nuclear     power plants corres-
      ponding     by the end of 1980 tp 150,000                    Mwe of domer.tic           power       plants and
      89.000     Mwe of foreign          plant:      in the rest of the free, world                  using enriched
      uranium      {exclusive       of the United I<ingdom                 which has its own uranium
      enriching       capability)    e The estimate               for enriching         services        further
      assumes       the use of plutonium              recycle.        beginning       in 1974, to reduce
      requirements         for enriched          uranium         and that a port .OQ of the projected
      foreign    market        for enriching        services         varying      from 5% in 1975 to 15% in
      1980 will be supplied           from sources             other than the United States,
      Government         requirements           are included           to reflect      appropriate          needs for
      enriched      uranium       for Weapons I Military                 Non-Weapons            (including         the
      Navy program]            and Civilian        Uses for other than power                   reactors         (including
      research       and development            needs).

 4.   .-Costs - Costs are based OA projected               levels in FY I972 and extended
      thereafter   without    further     adjustment     for cost inflation.     The elements
      of cost included     are consistent        with those enumerazed        in Section   5 (c)
      (2) and (3) of the proposed          Uranium    Enrichment     Services     Criteria   as
      set forth in Attachment         “A”.




                                                                  34
                                                                             APPENDIW: II
                                                                                  Page 4


                                WNZTED     STATES
                        A.TOMIC  ENERGY    COMAAfSSZON
                         WASHmGToW,     D, c. m545




TO:         w. B. MCg;QQl,Sesra;tai-y
IFROM:      James T. Ram%y, CoKm!rlissicsner
SlJBJECT:   Posi%iom    cm Revised    Criteria   and hcrswed   Pris@   for
            Enriching     Ssrviwe    for Utarnium    Fuel
APPENDIX III
       Page        1

                                              UNITED        STATES                    r

                                  aTOM   IC ENERGY            COMM           lSSlON
                                         WASHINGTON.         D.C.    20545


                                                       .zLAN 11 1971



      Mr. F. H. Barclay,         Jr.
      Associate      General    Counsel
      General     Accounting     Office
      441 G Street,        H.W.
      Washington,       D. C.    20548

      Dear    Mr.      Barclay:

      This   is in response         to your      request      for    the basis      of our belief
      that   the charge     of $28.70         per kilogram         unit    of separative          work
      based on the revised            Uranium      Enrichment        Services      Criteria        pro-
      perly    may be made effective             February       22, 1971,      for     enrichment
      serv ices e You also          requested       our views        as to whether          such
      charge     could   be justified        on the basis          of the original           Criteria
      establ   ished   in 1966.

      We be1 ieve the $28.70 charge             properly    may be made for enrichment
      services    rendered    on and after         February   22, 1971, until         modified
      by the Commission       pursuant        to the proposed      revised   Criteria        sub-
      mitted   to the Joint      Committee       on Atomic    Energy     on December       21,
      1970. Our basis       for    this    view    is set forth      in the enclosed
      opinion   of our General         Counsel.

      With     regard      to your       latter       question,    a determination                made at
      this     time would        result         in a charge     of $32.00      as         indicated        by
      our recent         submission          to the Joint        Committee     of         proposed       revisions
      to the Criteria            established           on August    25, 1970,             which     would
      reinstate        the Criteria           of 1966 in compliance            with          P.L.    91-560.
      The $28.70         charge      could       also    have been justified                under    the
      Criteria       of 1966 at the time we established                      the          $28.70     pursuant
      to the Criteria            of 1970.




      Enclosure:
      Opinion



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