oversight

Financial Management: Factors to Consider in Estimating Environmental Liabilities for Removing Hazardous Materials in Nuclear Submarines and Ships

Published by the Government Accountability Office on 1997-08-07.

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

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    A0
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         United States
         General Accounting  Office
         Washington, D.C. 20548

         Accounting and Information
         Management Division


         B-273004


         August 7, 1997

         Ms. Alice C. Maroni
         Acting Under Secretary of Defense (Comptroller)

         The Honorable Deborah P. Christie
         The Navy Assistant Secretary for Financial
           Management and Comptroller

         Subject:    Financial Management: Factors to Consider in Estimating
                     Environmental Liabilities for Removing Hazardous Materials in
                     Nuclear Submarines and Shitx

         Recent laws have enhanced the legislative requirements to provide policymakers
         and agency program managers with more reliable financial information to
         formulate budgets, manage government programs, and make difficult policy
         choices.’ As a result, because the difsculty of making informed decisions is
         increased when complete and reliable information on the cost and
         consequences of government programs and activities is unavtiable, these laws
         have made implementation of new accounting standards and audited federal
         financial statements a priority. New federal accounting standards have been
         adopted to enhance federal financial statements by requiring that government
         agencies show the financial results of their entire operations and provide
         relevant information on-agencies’ true Iinancial status-information that has
         never before been required in this form. This report discusses one such
         requirement for valuable information related to the costs of removal and




         ‘The Chief Financial Officers Act (CFO) of 1990, the Government Management
         Reform Act (GMRA) of 1994, and the Federal Financial Management Improvement
         Act of 1996.

                              GAO/AlMD-97-135R Environmental Liability for Nuclear Vessels
B-273004

disposal of hazardous materials2 from federal agencies’property, plant, and
equipment such as submarines and ships. The Congress also addressed the
concern about the significance of such costs in the National Defense
Authorization Act for Fiscal Year 1995, which requires the Secretary of Defense
to issue guidance on how to analyze, as early in the acquisition process as
feasible, the life-cycle environmental costs for major defense acquisition
programs, including the materials to be used and methods of disposal. The life-
cycle cost estimates would be required before proceeding toward production of
the major acquisition.

In October 1990, the Federal Accounting Standards Advisory Board (FASAB)
was established by the Secretary of the Treasury, the Director of the Office of
Management and Budget (OMB), and the Comptroller General of the United
States to consider and recommend accounting standards to address the
financial and budgetary information needs of the Congress, executive agencies,
and other users of federal financial information. Using a due process and
consensus building approach, the nine-member Board, which includes a member
from the Department of Defense (DOD), recommends accounting standards for
the federal government. Once FASAB recommends accounting standards, the
Secretary of the Treasury, the Director of OMB, and the Comptroller General
decide whether to adopt the recommended standards. If they are adopted, the
standards are published as Statements of Federal Financial Accounting
Standards (SFFAS) by OMB and GAO. In addition, the Federal Financial
Management Improvement Act of 1996, as well as the Federal Managers’
 Financial Integrity Act, require federal agencies to implement and maintain
financial management systems that substantially comply with these accounting
 standards.

Beginning with fiscal year 1998, these federal accounting standards require that
financial statements contain information about the extent of an agency’s
environmental liabilities for the cleanup3 of hazardous materials related to


“See enclosure III for a listing of hazardous materials in submarines and ships. The
removal of hazardous materials in nuclear submarines and ships during the
inactivation and disposal process may give rise to the creation of hazardous waste.
Hazardous waste disposal is governed by the disposal requirements of the Resource
Conservation and Recovery Act and the implementing regulations.
3SFFAS 6, Accountinsl for Prone&v. Plant, and Eauiument, defines cleanup as the
removal, containment, and/or disposal of (1) hazardous waste from property or (2)
material and/or property that consists of hazardous waste at permanent or
temporary closure or shutdown of associated property, plant, and equipment.

 2               GAO/AIMD-97-135R Environmental Liability for Nuclear Vessels
                                                                .

B-273004

federal agencies’property, plant, and equipment. For DOD, mission assets”
such as submarines, ships, aircraft, and combat vehicles are a major category of
property, plant, and equipment. Zn fiscal year 1996, DOD reported over $586
billion in this category. Because most of DOD’s mission assets contain
hazardous materials, DOD has an undisclosed liability for the cleanup of those
materials. To address this requirement, DOD officials have told us that they
have begun work to set a policy to guide the Departments of the Army, Navy,
and Air Force in reporting on environmental liabilities related to mission assets.
Navy officials have stated that they are waiting for DOD’s policy on what is to
be included as environmental costs before they develop implementing
regulations of their own.

We undertook this review to assist DOD in its efforts to meet the new SF’FXS6
reporting requirement and because of our responsibility to audit the federal
government’s consolidated financial statements beginning with fiscal year 1997.
Our objectives were to (1) determine whether an estimate of the mminmm
environmental liability could be made and (2) identify key factors DOD should
consider as it develops its policy. Enclosure I contains further details on our
scope and methodology.

Because the removal and disposal processes for the hazardous materials and/or
waste differ widely for each type of mission asset (for example, submarines,
ships, aircraft, combat vehicles, and missiles), the approach taken to estimate
these costs might also differ significantly. This review of nuclear submarines
and ships is one in a series of reviews we are conducting to address DOD
environmental liabilities associated with various types of mission assets.

ENVIRONMENTAL LIABILITIES RELATED TO NUCLEAR
SUBMARINES AND SHIPS CAN BE ESTIMATED

All nuclear submarines and ships contain hazardous materials and waste that
must be removed and disposed of when they are inactivated.” The Department




4SFF’AS6 defines federal mission property, plant, and equipment as possessing
certain characteristics related to (1) its use, such as having no expected
nongovernmental uses, and (2) its useful life, such as a very high risk of being
destroyed in use or premature obsolescence.
‘Inactivation processes are tailored to each spectic submarine and ship and include
equipment, inventory, and supplies reutilization; preservation; long-term storage;

3               GAO/AIMD-97-135R Environmental Liability for Nuclear Vessels
    -----                                                              -.




B-2 73004
of the Navy’s management information systems contain data that can be used to
estimate an environmental liability as a portion of the costs to inactivate and
dispose of nuclear submarines and ships. For example, these systems include
cost information on nuclear submarines and ships currently undergoing
inactivation or disposal activities. As discussed in enclosure II, the estimated
environmental costs associated with the shipyards’ inactivation and disposal6
activities related to a nuclear submarine could range, at a minimum, from $18.7
million to $61.0 million. This range in environmental costs should narrow as
DOD establishes its policy on what constitutes an environmental cost and the
Navy determines which shipyards will perform the inactivation procedures.

Although the Navy has not yet completed the inactivation and disposal of a
nuclear surface ship, Navy officials have estimated the environmental costs to
be significantly more than those for a nuclear submarine due to the size and
structure of the ships, the increased number of nuclear reactors per ship, and
the type of reactor compartments. For example, the Navy provided us the costs
for four nuclear cruisers that were undergoing inactivation and disposal, which
ranged from $146 million to $239 million. In 1996, Navy officials provided a
cost estimate that ranged from $807 million to $942 million7 for the inactivation
and disposal of the first Nimitz-class nuclear carrier if the work was begun in
fiscal year 1998. Subsequently, they stated that as the Navy gains experience in
defuehng during the refueling cycles of Nimitz-class carriers, they expect the
cost estimate for inactivating and disposing of Nimitz class carriers could be
reduced to about $500 million for the tenth Nimitz class carrier. The Navy has
not provided a basis for us to assess the reasonableness of the $500 million
 estimate, although as the Navy gains experience in the inactivation and disposal
 of aircraft carriers, cost efficiencies could occur. Ultimately, whatever the
 actual cost experience is, the estimate will need to be adjusted to reflect actual
 experience.


safe storage; safety precautions; reactor and missile compartment disposal; towing;
and hull disposal or recycling.
‘For the purpo ses of this letter, the term “disposal” excludes the temporary storage
and final disposition of spent nuclear fuel. As discussed in the next section, this is
a factor that must be addressed in DOD’s policy.
7Navy provided the estimated cost for the Nimitz-class carrier in 1996 dollars, and
the range for the four nuclear cruisers in 1995 dollars. For comparison purposes,
we adjusted the cruiser estimates to 1996 dollars using the Department of Defense
Deflator Table 5-6 contained in the National Defense Budget Estimates for Fiscal
Year 1997.

4                GAO/AIh%D-97-135R Environmental Liability for Nuclear Vessels
B-273904

Navy officials stated that they have not developed environmental cost estimates
because they are waiting for DOD to set policy on what is to be considered
environmental costs. As is the case with submarines, any environmental
liability estimated for nuclear ships will be affected by how DOD defies what
should be included as environmental costs and addresses the various factors
discussed in the following section.

FACTORS TO BE CONSIDERED IN ESTIMATl-NG
ENVIRONMENTAL LIABILITIES

Accounting standards state that if it is probable that the environmental liability
will fall within a range of potential costs, the lowest amount in the range should
be recorded as the liability, unless an amount within the range is the most likely
estimate to occur8 In estimating an environmental liability for all of the Navy’s
submarines and ships, various factors need to be addressed as DOD develops its
policy and chooses the appropriate methodology. Specifically, DOD must
(1) clarify that nuclear waste is a type of hazardous material as contemplated
by the accounting standard and (2) provide guidance on what specific activities
and costs should be considered environmentally related.

The federal accounting standards require federal agencies, including DOD, to
report in their fiscal year 1998 financial statements a liability associated with
the cleanup of hazardous materials related to federal agencies’property, plant,
and equipment. Navy shipyard officials responsible for inactivation activities
held divergent opinions on what should be considered hazardous material,
including whether radioactive material should be included. Although the federal
accounting standard makes no distinction between hazardous material and
radioactive material, these officials, referring to definitions in other, unrelated
regulations that appear to distinguish hazardous waste from radioactive waste,
question whether the accounting standards apply to radioactive waste.g If DOD
and Navy officials apply this distinction in interpreting the federal accounting
standard requirement to record a liability related to the cleanup of hazardous


8SFFAS 5, Accounting for Liabilities of the FederA Government, establishes the
criteria for recognizing liabilities, including environmental liabilities, that are
required for plant, property, and equipment, including mission assets.
‘The Nuclear Regulatory Commission regulations define radioactive material and
waste in 10 C.F.R., Part 20, for licensing purposes. In 40 C.F.R., Part 261, the
Environmental Protection Agency (ERA) deties hazardous waste for re,titory
purposes. These Navy officials argue that EPA’s de%ition of hazardous waste does
not include radioactive material.

5                GAO/AIMD-97-135R Environmental Liability for Nuclear Vessels
B-273004
materials, the most significant environmental-related liability, the disposal of
radioactive material, may be inappropriately excluded.

In addition, Navy officials had differing views on the specific inactivation
activities that should be included in the environmental cost. For example,
except for defueling” activities, some shipyard officials excluded supervision
and other indirect costs related to nuclear activities in their estimates of
environmental cost. Furthermore, DOD policy needs to address the extent to
which costs such as towing and escort ships, crew and other military personnel,
subsequent storage, reimbursable work, and offsets for reutilized material
should be included. Finally, the different classes and types of submarines and
surface ships and their relationship to current inactivation experience should be
considered. More detailed information on each of these factors and the effect
on the environmental liability is included in enclosure II.

The estimated liability is also to be adjusted annually based on changes to the
factors used to calculate the liability. Factors that could change the estimated
environmental liability and which should be addressed in the policy and
procedures adopted by DOD are (1) changes to environmental laws and
regulations that impact the level of effort or activity required to dispose of the
nuclear and hazardous materials and waste, (2) submarines or ships lost in
training or armed conflicts, or sold to foreign governments, (3) increases in
inventory levels as additional nuclear submarines and ships are added, (4)
changes in the nuclear and hazardous materials contained in the additional
vessels, (5) changes in technology, and (6) refinements to DOD’s methodology.
Regardless of the approach DOD chooses, the estimates will gain greater
accuracy over time through improvements to methodology, data reliability, and
financial management systems.ll


‘ODefueling includes the removal and handling of nuclear fuel. Final storage and
disposal of the spent nuclear fuel is not included in defueling.
“It should be noted that we and the Naval Audit Service have reported problems in
the reliability of information in the Navy’s accounting and logistical systems. While
there are limitations in the data, the Navy is working to improve the systems, which
should, over time, increase the accuracy of the information and improve the
environmental liability estimates. See GAO reports entitled CFO Act Financial
Audits    Increased Attention Must Be Given to Preuaring Naw’s Financial Reuorts
(GAO/AWID-967, March 27, 1996) and DOD Accounting Svstems: Efforts to
Imnrove Svstem for Naw Need Overall Structure (GAO/AIMD-96-99, September 30,
 1996), and the Naval Audit Service’s report entitled Denartment of the Naw Annual
Financial Renort. Fiscal Year 1996.

 6                GAO/AIMD-97-135R Environmental Liability for Nuclear Vessels
B-273004
TOTAL DISPOSAL COSTS AND BREAKDOWN
BY TIME PERIOD MAY BE USEFUL

Navy officials suggested that the total cost to inactivate and dispose of nuclear
submarines and ships, and not just the environmental costs, may provide useful
information and is more consistent with their existing information systems and
operational and budget requirements. Total cost information would be
consistent with the life-cycle information the Congress already requires for
major defense acquisition programs.

The new accounting standards would not preclude accounting for and reporting
as a liability the total cost of inactivation and disposal of nuclear submarines
and ships. Navy shipyard personnel agreed that the majority of the costs were
environmentally related but had differing views on what percentage of
inactivation and disposal costs were driven by environmental costs. Such
estimated percentages ranged from 72 percent to 100 percent per submarine.
Depending upon DOD’s definition of environmental costs, the total costs may
not differ significantly from the environmental portion of inactivation and
disposal costs and could be used for satisfying the new federal accounting
standards.

Regardless of whether the reported environmental liability is based on solely
the environmental costs associated with the cleanup and disposal of submarines
and ships or total disposal costs, the result will be a large liability-much of
which would not require outlays in the current year. A breakdown of the
liability could be provided in a footnote to the financial statements based on the
approximate time periods when the inactivations are expected to occur. Such
information could provide important context for congressional and other budget
decisionmakers on the annual impact of inactivations that have occurred or are
expected to occur during various budget periods, including those outside the
F’uture Years Defense Program.

HAZARDOUS MATERIALS ALSO
PRESENT IN NON-NUCLEAR SHIPS

This review focused on nuclear submarines and ships, which will have a
si,anifica.nt impact on DOD’s and the Navy’s estimated environmental liability.
However, hazardous materials are also present in the Navy’s non-nuclear
powered ships. As of September 30, 1996, the Naval Vessel Register reported a
total of 580 non-nuclear powered ships, including 209 active and 107 that were




7               GAO/AI&ID-97-135R Environmental Liability for Nuclear Vessels
B-273004
in various stages of dispo~al.~~ Examples of the types of hazardous materials
and waste in these ships are included in enclosure III. Determining the
inactivation and disposal costs related to the removal and disposal of hazardous
material and waste on these ships is also highly dependent on the resolution of
the factors discussed previously. Navy officials have indicated that once DOD
management provides guidance on which costs are considered to be
environmental, the Navy’s management information systems can be programmed
to capture the environmental data.

CONCLUSIONS

As discussed in this letter and accompanying enclosures, the Navy’s
management information systems contain sufficient data to develop a minimum
estimate of the environmental liability for the inactivation and disposal of
nuclear submarines and ships. As DOD and the Navy develop their policies, the
factors identified in this letter should help in choosing an appropriate
methodology for estimating this environmental liability related to nuclear
submarines and ships. The factors identified are also critical for determining
the environmental liability associated with the large inventory of non-nuclear
powered ships.

AGENCY COMMENTS AND OUR EVALUATION

The Department of Defense generally agreed with the contents of this letter. In
its written statement (see enclosure IV), DOD stated that to ensure that the
Department complies with the reporting requirements beginning in fiscal year
1998, an environmental liabilities working group was recently established to
address environmental liability issues and financial statement reporting
requirements. The group is comprised of representatives from the functional,
financial management, and audit communities.



We are sending copies of this letter to the Chairmen and Ranking Minority
Members of the Senate Committee on Armed Services, the House Committee on
National Security, the Senate Committee on Governmental Affairs, the House
Committee on Government Reform and Oversight, and to the Director of the


?I’he remaining ships were in several categories, such as Military Sealift Command,
Reserve Forces, Inactive Category B-Repair and Overhaul, and National Defense
R.eserve.

8                GAO/AIMD-97-135R Environmental Liability for Nuclear Vessels
                    __.-   .-                                                    -




B-273004

Office of Management and Budget. We are also sending copies to the Secretary
of Defense; the Under Secretary of Defense for Acquisition and Technology; the
Deputy Under Secretary of Defense for Environmental Security; the Assistant
Secretary for Financial Management and Comptroller, Air Force; the Assistant
Secretary for Financial Management and Comptroller, Army; and the Acting
Director, Defense Finance and Accounting Service. Copies will be made
available to others upon request.

Please contact me at (202) 5X-9095 if you have any questions concerning this
letter. Major contibutors to this letter are listed in enclosure V.




Lisa G. Jacobson
Director, Defense Audits




                GAO/AIMD-97-135R Environmental Liability for Nuclear Vessels
                       CONTENTS

                                                                Page


LETTER                                                           1


ENCLOSURES

      I      Scope and Methodology                               11

      II     Environmental Liability for Nuclear                 13
             Submarines and Ships Can Be Estimated

      m      Nuclear and Hazardous Material and Waste in         25
             Nuclear Submarines and Ships and Non-Nuclear
             Powered Ships

      Iv     Comments From the Department of Defense             26

      V      Major Contributors to This Report                   27




 10          GAO/AIMD-97-135R Environmental Liability for Nuclear Vessels
ENCLOSURE I.                                                               ENCLOSURE I
                              SCOPE AND METHODOLOGY

To gain an understanding of the procedures and the financial and logistical
management information systems that are used to account for and report the
inactivation and disposal of nuclear submarines and ships, we interviewed DOD and
Navy officials to discuss inactivation and disposal management and reporting. We also
reviewed applicable DOD and Navy instructions and regulations.

All nuclear submarines and ships are owned by the Department of the Navy, except
for one nuclear freighter that is owned by the Maritime Administration. Therefore, we
focused our work at the Naval Sea Systems Command and its directorates, shipyards,
and facilities that execute the inactivation and disposal program and operations.

To determine if an environmental liability could be estimated, we reviewed the
Statement of Federal Financial Accounting Standards 5 and 6 for criteria. We
interviewed Navy officials that were responsible to command, direct, and execute the
inactivation and disposal program for nuclear submarines and ships. Specifically, we

     reviewed the Naval Vessel Retister to determine the submarine and ship inventory;

     reviewed Jane’s Fighting Ships, a reference book that described each of the Navy’s
     submarines and ships;

     visited the Naval Sea Systems Command Directorates at Arlington, Virgin@ the
     Navy Inactive Fleet Detachment at Portsmouth, Virginia; three of the four Naval
     Inactive Ship Maintenance Facilities; and all four Naval shipyards;

     analyzed financial and logistical reports, called the “Ship Departure Reports,” which
     showed whether it was an attack or ballistic submarine, hull numbers, budgetary
     amounts, expenditures, and costs to inactivate and dispose of nuclear submarines;

     obtained nuclear ship cost estimates for reactor compartment disposals and hull
     recycling;

     held discussions with Navy officials to determine if the financial and logistical
     reports coming from their management information systems (specfically, the Ship
     Departure Reports) could be used to estimate an environmental liability; and

     held meetings with Navy officials and analyzed their Ship Departure Reports for
     nuclear submarines that had undergone inactivation and disposal at Naval
     shipyards to determine the environmental cost as a percentage to the actual


11                          GAO/AIMD-97-135R Environmental Liability for Nuclear Vessels
ENCLOSURE I                                                                  ENCLOSURE I

         shipyard cost reported in the departure reports. We did not audit the data in the
         financial and logistical management information system reports.

In addition, Navy officials provided us with the following reports related to nuclear
material and waste:

-        U.S. Naval Nuclear Powered Submarine Inactivation. Disposal and Recvcling.

-        Environmental Monitoring and Disposal of Radioactive Wastes From U.S. Naval
         Nuclear Powered Ships and Their Suuport Facilities.

-        Occunational Safetv. Health and Occupational Medicine Report.

During our review, we contacted personnel and/or conducted work at DOD
Headquarters; the Naval Sea Systems Command; the Navy Inactive Fleet Detachment,
Portsmouth, Virginia; the Naval Inactive Ship Maintenance Facilities at Bremerton,
Washington, Pearl Harbor, Hawaii, and Portsmouth, Virgin& the Naval shipyards at
Norfolk, Virginia, Pearl Harbor, Hawaii, Portsmouth, New Hampshire, and Puget
Sound, Bremerton, Washington; the Defense Reutilization and Marketing Service,
Battle Creek, Michigan; and other locations as needed.

We conducted our review between July 1996 and June 1997 in accordance with
generally accepted government auditing standards. We requested and received written
comments, which are discussed in the “Agency Comments and Our Evaluation” section
and reprinted in enclosure IV.




    12                          GAO/AIMD-97-135R Environmental Liability for Nuclear Vessels‘
ENCLOSURE lJ                                                           ENCLOSURE II


                    ENVIRONMENTAL LIABILITY FOR NUCLEAR
                   SUBMARINES AND SHIPS CAN BE ESTIMATED

The Navy has information available to estimate the environmental costs associated
with the inactivation and disposal of nuclear submarines and ships. The Navy
produces financial and logistical reports that can be used to calculate an estimated
environmental liability as a portion of the cost to inactivate and dispose of nuclear
submarines and ships. The four Naval shipyards use tiancial and logistical automated
systems to track the inactivation and disposal costs of nuclear submarines and ships.
Each shipyard uses the Standard Shipyard Management Information System (SSMIS),
an automated cost accounting system, and the Baseline Advanced Industrial
Management System (BAIMS), an automated logistical and project management
system. SSMIS uses the logistical data from BAIMS to produce the Ship Departure
Report, which provides costs for the inactivation and disposal of nuclear submarines
and ships. The key elements needed to prepare an estimated environmental liability
are (1) the types and quantities of nuclear submarines and ships in the inventory, (2)
the kinds of hazardous material and waste found in them, and (3) the cost
information.

INVENTORY OF NUCLEAR SUBMARINES AND SHIPS

The Navy has responsibility for all nuclear submarines and ships and maintains an
inventory of them in the Naval Vessel Register. Table II.1 shows the total per type of
nuclear submarines and ships in two categories-active and awaiting, or in the process
of, disposal.




13                        GAO/AIMD-97-135R Environmental Liability for Nuclear Vessels
ENCLOSU&EII                                                                 ENCLOSURE II

Table II.1: Nuclear Submarines and Shius From the Naval Vessel Register as of
            Seutember 30. 1996

                                                           Await&g or
                                                          in process of
      Tspe                                Active fleet         disposal           Total
      Submarines
         Ballistic                                   17                 9             26
         Attack                                      79               31             110
        Subtotal submarines                         96                40            136
      Surface ships
         Cruiser                                      3                 6                 9
         Aircraft carrier”                            8                 0                 8
         Subtotal surface ships                     11                  6             17
      Total                                        107                46            153

      “Consists of seven Nimitz class carriers (two reactors per carrier) and the carrier
      Enterprise, which has eight reactors.


IDENTIFICATIONOFNUCLEARAND
HAZARDOUSMA~RIALSANDWASTE
Navy officials provided us with lists and charts of nuclear and hazardous material and
waste that must be disposed of during the inactivation and disposal of nuclear
submarines and ships. For example, figure II.1 shows some of the different hazardous
materials and their possible locations within a nuclear submarine hull. See enclosure
III for a list of nuclear and hazardous material and waste in nuclear submarines and
ships and non-nuclear ships.




 14                           GAO/AIMD-97-135R Environmental Liability for Nuclear Vessels
                                                                    -.

ENCLOSUREII                                                              ENCLOSURE II


Figure II.1: Hazardous Materials Within a Submarine Hull




FRIABLE ASBESTOS LAGGING       AND1                              ASBESTOS MASTIC
INSULATION ON PIPE                     I                         UNDER INSULATION


     FIXED PcBS IN PLASTIC
     FOAM INSULATION




                                                      PC6 FELT UNDER
                 -       PCE HABITABILIN              SEPTUM PLATE
                         PAINT




Source: Department of the Navy.

Navy officials stated that they use the definitions for radioactive (nuclear) and
hazardous materials and waste that are contained in 10 C.F.R. (Energy) and 40 C.F.R.
(Protection of Environment). In addition, the Chief of Naval Operations (OPNAV)
provides instructions for the inactivation and disposal programs, such as OPNAVINST
5090.1B, Environmental and Natural Resources Program Manual; the Naval Ships
Command Technical Manual, Chapter 050, “Inactivation and Maintenance of Ships and

15                           GAO/AIMD-97-135R Environmental Liability for Nuclear Vessels
ENCLOSURE II                                                            ENCLOSURE II


Craft,” OPNAVINST 4770.5F, Manual for the Inactivation, Maintenance. and Disposal of
Ships and Service Craft, including nuclear submarines and ships; and U.S. Naval
Nuclear Powered Submarine Inactivation. Disposal, and Recvclinq.

ESTIMATED ENVIRONMENTAL COST
CALCULATION FOR NUCLEAR SUEWARINES

The inactivation and disposal of attack and ballistic nuclear submarines is done in
three phases: (1) inactivation, including defueling and storage of the nuclear material,
(2) reactor compartment removzil.and disposal, and (3) recycling of the submarine
huh. The four Naval shipyards perform the first phase. Only one shipyard, Puget
Sound, completes phases 2 and 3 for all nuclear submarines and ships. Consequently,
all nuclear submarines and ships inactivated at the other three shipyards must be
towed to Puget Sound for reactor compartment removal and disposal. While we did
not analyze the differences in inactivation costs among the four shipyards, our 1992
report included this type of analysis.13




13Nuclear Submarines: Navv Efforts to Reduce Inactivation Costs (GAO/NSIAD-92-134,
July 21, 1992). In that report, .the Navy estimated that it would cost about $2.7 billion to
inactivate 100 nuclear submarines and dispose of about 85 of them by the year 2000.

 16                        GAO/AtMD-97-135R Environmental Liability for Nuclear Vessels
ENCLOSURE II                                                                                 ENCLOSURE II


Table lI.2: Estimated Environmental Cost as an Integral Part of Inactivation and
            Disposal Per Attack Submarine Hull

 Dollars in millions)
                                                                         Shipyard

                                                                                     Pearl         Puget
                                              Portsmouth       Norfolk              Harbor         Sound

  Inactivation costs per shipyard                     $45.8         $36.7               $27.6         $ 8.1
  Environmental percentage of inactivation            100%               99%                 57%       43%
  cost
 Estimated environmental
 portion of inactivation costs                        $45.8         $36.3               $15.8          $3.5
  Average reactor compartment disposal
  and huIl recycling cost a                           $15.2         $15.2               $15.2         $15.2
  Estimated environmental cost per hull               $61.0         $51.5               $31.0         $18.7
  Percentage of environmental cost
  compared to total shipyard inactivation             100%               99%                 72%       80%
  and disposal cost per hull

“AU nuclear submarines that have undergone inactivation at Portsmouth, NorfoIk, and Pearl Harbor must be
towed to Puget Sound Naval Shipyard for reactor compartment disposal and hull recycling.

Source: Based on cost data reported by the shipyards in their Shio Denarture Reuorts for nine nuclear
submarines and other data provided by Navy offkials. We did not audit these data


Table II.2 shows the inactivation costs and estimated environmental portion of those
costs per attack submarine hull. This information is provided to demonstrate that cost
data are available. An analysis of the reasonableness of the cost data was not made and
the data should not be used to compare inactivations done at Merent shipyards. Navy
officials stated that these costs varied among shipyards because of differences in what is
included as inactivation costs and the size and complexity of the submarines being
inactivated. The inactivation costs, which are based on the costs reported by the
shipyards for nine nuclear submarines,‘4 varied considerably from shipyard to shipyard-
ranging from $8.1 million to $45.8 million. The estimated environmental portion ranged

‘%ese include the five most recent submarines for which Puget Sound removed the
reactor compartments and the four most recently inactivated submarines at the other
three shipyards.

17                               GAO/AIMD-97-135R Environmental Liability for Nuclear Vessels
ENCLOSURE II                                                            ENCLOSURE II


from $3.5 million to $45.8 million. Puget Sound is the least expensive location for
inactivating and disposing of nuclear attack submarines.l”

The inactivation work performed at the other shipyards is more expensive primarily
because (1) the nuclear submarines must be prepared for waterborne storage, which
includes establishing a watertight hull integrity that will support a minimum of 15 years of
wet storage at Puget Sound, (2) the nuclear submarines must be modified to be towed
thousands of miles, including installing special towing equipment and modifying some
ship systems for use during the tow to Fuget Sound for reactor compartment removal and
disposal and hull recycling, and (3) the type of submarine and the scope of work to be
accomplished. These preparations and modifications increase the scope of work and
labor at the other shipyards, resulting in inactivation cost variances between the
shipyards.

The range in the environmental portion of inactivation costs resulted primarily from the
differences in shipyard officials’ estimates of the environmental cost as a percentage of
shipyard inactivation costs. The range of estimates-from 43 percent to 100 percent-
reflected the absence of an official definition of an environmental cost, and is an
indication that opinions about what should be included differed considerably. More detail
about these differences is found in table H-3. However, the overall environmental cost
percentage for both inactivation and disposal ranged from ‘72 percent to 100 percent.
Thus, shipyard officials were in agreement that the majority of the actual costs were
environmental.

The estimated environmental cost per hull, as shown in table II.2, included (1) the
estimated environmental portion of inactivation costs and (2) the reactor compartment
disposal and hull recycling average cost of $15.2 million. The average reactor
compartment disposal and hull recycling cost included the costs related to (1) sending
reactor compartments to the Department of Energy’s Hanford, Washington, nuclear
disposal site and (2) cutting submarine hulls into pieces and sending them to a specific
smelter that melts the pieces at a high temperature that virtually eliminates its impact on
the environment. It excludes storage and disposal of spent nuclear fuel.




“In our previously mentioned 1992 report, we stated that it would be cheaper for the
Navy to do all nuclear submarine inactivation and disposal at the Roget Sound Naval
Shipyard. However, Navy officials stated that for strategic purposes, they wanted to
maintain the nuclear defueling and fueling capability at other shipyards.

                           GAO/AIMD-97-135R Environmental Liability for Nuclear Vessels
                                                                                             -




ENCLOSURE II                                                            ENCLOSURE II


Table II.3 shows the shipyard officials’ views on what constitute environmental costs
associated with the three categories withm the inactivation phase. Examples of activities
performed in each of the three categories include the following.

-    Defuelinq includes the removal and handling of nuclear fuel.

-    Nuclear includes conducting surveys, shutting off the nuclear plant, and draining and
     sealing related tanks and systems.

-    Non-nuclear includes engineering; planning and project management; testing, removal,
     and disposal of materials, fluids, and fuels; removal of equipment; installation of
     temporary ship systems; utilities and other dock services; and preparation for tow.




19                         GAO/AIMD-97-135R Environmental Liability for Nuclear Vessels
                                             --




ENCLOSURE II                                                                         ENCLOSURE II


Table II.3:      Shimard Officials’ Views on Environmental Costs for the Inactivation Phase

  Inactivation
  category              Portsmouth          Norfolk             Pearl Harbor         Puget   Sound

  DEFUEIJNG:            All costs           All costs           All costs            All costs
  Direct and indirect
  zests
  NUCLEAR:              All costs           All costs           Most costs-          Minimal costs
  Direct cost                                                   excludes a few       excludes all
  includes                                                      indirect costs as    indirect costs
  production and                                                noted.               as noted.
  hazardous material
  handling
  equipment;
  indirect costs
  include
  admikstration,
  planning, or
  supervision.
  NON-NUCLEAR:          All costs           Most costs-         Minimal costs-       Minimal cost
  Direct cost                               excludes a few      excludes all         excludes all
  includes handling                         indirect costs as   indirect costs as    indirect costs
  hazardous                                 noted.              noted.               as noted.
  materials and
  specific planning,
  engineerhrg, and
  project
  management and
  safety activities;
  indirect cost
  includes
  administration,
  planning, or
  supervision.

     LEGEND
     Minimal Costs=Activities and associated costs of these activities are 50 percent or less environmental.
     Most Costs=Activities and associated costs of these activities are more than 50 percent but less than
     100 percent environmental.
     AU Costs=Activities and associated costs of these activities are 100 percent environmental.

Source: Department of Navy officials and documentation provided.




20                                  GAO/AJMD-97-135R Environmental Liability for Nuclear Vessels
ENCLOSURE II                                                              ENCLOSURE II


As shown in table II.3, some officials believed that certain inactivation costs were not
environmentally related, while others felt that most or all of the inactivation work was an
environmental cost. For example, the main differences were associated with direct and
indirect costs. Examples of direct costs include direct production and hazardous material
handling equipment. Examples of indirect costs are administration and supervision. All
shipyard officials agreed that the direct costs for handling and storage or disposing of
nuclear and hazardous material and waste should be an environmental cost. However,
they generally disagreed on what indirect costs should be considered environmental. The
shipyard officials agreed that all indirect costs involved in defueling should be an
environmental cost.

As noted previously in table II.2, the estimated environmental cost per hull, based on nine
attack nuclear submarines reviewed, ranged from $18.7 million to $61.0 million. The
ultimate liability that would result from this range of costs could dramaticaUy change
depending on where the inactivation and disposal activities actually take place. Thus,
DOD must determine or make appropriate assumptions as to where such activities will
occur. Also, DOD needs to determine whether the following inactivation costs should be
included in the definition of an environmental cost:

-    salaries of the submarine crews and other military personnel;

-    towing and escort ships, including their crews and military personnel;16

-    reimbursable costs, such as removing antennas and other equipment;

-    subsequent storage costs, such as hull storage at Puget Sound and reactor
     compartment disposal at the Department of Energy’s Hanford, Washington, site and
     storage and ultimate disposal of the spent nuclear fuel; and

-    offsets for reutilized material.

Even though ballistic submarines are larger and more complex,” they undergo the same
three phases for inactivation and disposal as attack nuclear submarines. The inactivation


‘% our 1992 report, we estimated that based on fiscal year 1991 costs, the tow and escort
ships consumed between $40,000 and $270,000 in fuel per tow.
lTOhio class ballistic ,missile submarines are almost three tunes the size of attack
submarines, and the structure of the missile compartment requires more work because it
affects all three decks and the hull and there is a lot of metal to be disposed of. In
addition, the inactivation has to be done in line with the strategic arms limitation treaties.

21                            GAO/AI&ID-97-135R Environmental Liability for Nuclear Vessels
ENCLOSURE. II                                                           ENCLOSURE II


phase could be performed by alI four shipyards. Puget Sound recently performed all
three phases for two of the last three Benjamin Franklin/James Madison class nuclear
ballistic missile submarines. These two are a little less than half the size of an Ohio class
submarine, but are about 20 percent larger than a Los Angeles class attack submarine.
Puget Sound reported that the average cost for the two ballistic missile submarine
inactivations and disposals was $31.0 million per submarine, which reflects about $7.8
million (or 34 percent) more for the ballistic submarine inactivation and disposal than
attack submarines. As noted in table II.2, the inactivation cost for attack submarines
varied among shipyards. It would seem reasonable to assume that if ballistic submarine
inactivations were performed at the other three shipyards, the inactivation costs would
vary but would be greater than those incurred for attack submarines.

At a minimum, the environmental cost for each of the 136 attack and ballistic nuclear
submarines would be the $18.7 million to $61.0 million cost associated with disposal of a
nuclear attack submarine, the least costly to dispose of. However, this estimate is limited
because it (1) is based on the estimated environmental cost per attack submarine only,
(2) does not include the increased costs associated with the structural differences
between the attack and ballistic inactivations and disposal, (3) does not include missile
compartment disposal costs, and (4) is only the shipyard’s cost.

The Navy can use the Ship Departure Reports and its knowledge about the differences
between the two nuclear submarines to refine the estimate that is shown here. In
addition, Navy officials stated that once DOD provides an environmental liability policy
with official definitions for environmental costs, they would be able to program their
financial and logistical systems to provide the detailed information needed to calculate
the estimated environmental liability.

ESTIMATED ENVIRONMENTAL COST
CALCULATION FOR NUCLEAR SURFACE SHIPS

To date, the Navy has not completed inactivations and disposals for any nuclear surface
ships-cruisers and aircraft carriers. However, Navy officials stated that the nuclear ships
will follow the same inactivation and disposal processes as the nuclear submarines. The
scope of work for each of the inactivation and disposal processes will increase due to
ship size and structure, the amount of nuclear and hazardous materials and waste, and
the number and type of reactors in each of the nuclear ships. For example, all of the
nuclear cruisers and aircraft carriers have two reactors, except for one aircraft carrier
that has eight reactors that must be disposed of. Also, the type of the reactors on the
cruisers and aircraft carriers are different.




 22                         GAO/AIMD-97-135R Environmental Liability for Nuclear Vessels
ENCLOSURE II                                                           ENCLOSURE I?


The increased scope of work will significantly increase the costs for the inactivation and
disposal of nuclear ships. Although the Navy has not yet completed the inactivation and
disposal of a nuclear surface ship, Navy officials estimated the environmental costs to be
significantly more than those for a nuclear submarine due to the size and structure of the
ships, the increased number of nuclear reactors per ship, and type of reactor
compartments. For example, the Navy provided us the costs for four nuclear cruisers
that are currently undergoing inactivation and disposal that ranged from $146 million to
$239 million. In 1996, N avy officials provided a cost estimate that ranged from
$807 million to $942 million’* for the inactivation and disposal of the first Nimitz-class
nuclear carrier if the work was begun in fiscal year 1998. Subsequently, they stated that
as the Navy gains experience in defueling during the refueling cycles of Nimitz-class
carriers, they expect the cost estirnate for inactivating and disposing of Nimitz class
carriers could be reduced to about $500 million for the tenth Nimitz class carrier.
Although the Navy has not provided a basis for us to assess the reasonableness of the
$500 million estimate, we aclmowledge that as the Navy gains experience in the
inactivation and disposal of aircraft carriers, cost efficiencies could occur. Ultimately,
whatever the actual cost experience is, the estimate will need to be adjusted to reflect
actual experience.

Navy officials stated that they have not developed environmental cost estimates because
they are waiting for DOD to set policy on what is to be considered environmental costs.
As with submarines, any environmental liability estimated for nuclear ships will be
affected by how DOD (1) defines what should be included as envi.ronmenta.l cost and
(2) addresses the previously discussed factors.

REPORTING ENVIRONMENTAL COSTS BY FUTURE
TIME PERIODS WOULD BE USEFUL

Regardless of whether the reported environmental liability is based solely on the
environmental costs associated with the cleanup and disposal of submarines and ships or,
as discussed previously, on total disposal costs, Navy officials have pointed out that the
result will be a large liability-much of which would not require outlays in the current
year. One way to make this reported liability more meaningful to decisionmakers would
be to provide a breakdown of the environmental liability in a footnote to the financial
statements based on the approximate time periods when the inactivations are expected to


‘*The Navy provided the estimated cost for the Nimitz-class cartier in 1996 dollars and the
range for the four nuclear cruisers in 1995 dollars. For comparison purposes, we adjusted
the cruiser estimates to 1996 dollars using the Department of Defense Deflator Table 5-6
contained in the National Defense Budget Estimates for Fiscal Year 1997.

23                        GAOIAIMD-97-135R Environmental Liability for Nuclear Vessels
ENCLOSURE -n:                                                         ENCLOSURE II


occur. Such information could provide important context for congressional and other
budget decisionmakers on the total liability by showing the annual impact of inactivations
that have already occurred or are expected to occur during various budget periods,
including those beyond the Future Years Defense Program. Furthermore, if the time
periods used to present these data were consistent with budget justification documents,
such as DOD’s Future Years Defense Program, this type of disclosure would provide a
link between budgetary and accounting information, one of the key objectives of the CFO
Act.




24                         GAO/AIMD-97-135R Environmental Liability for Nuclear Vessels
ENCLOSURE III                                                             ENCLOSURE III
              NUCLEAR AND HAZARDOUS MIATERLALAND WASTE IN
       NUCLEAR SUBMARINES AND SHIPS AND NON-NUCLEAR POWERED SHIPS

Examples of hazardous material and waste in nuclear submarines and ships and non-
nuclear powered ships follows.

-    ammunition

-    anti-freeze

-    asbestos

-    bilge water

-    carbon/zinc batteries

-    chromium
-    lead

-    paint with lead, cadmium, or chrome constituents

-    petroleum sludge

-    polychlorinated biphenyls (PCBs)

-    polysulfides

In addition, nuclear submarines and ships have low level and mixed radioactive waste and
spent fuel from the reactor compartment that have to be cleaned and disposed of.




25                           GAO/A.&ID-97-135R Environmental Liability for Nuclear Vessels
                                                                                                                                              z.,




E N C L O S U R EJ V                                                                                                    E N C L O S U R EIV


                          C O M M E N T SF R O M T H E D E P A R T M E N T O F D E F E N S E




                                             UNDER       SECRETARY             OF DEFENSE
                                                     1100 DEFENSE   PENTAGON
                                                   WASHINGTON.    DC 20301-l 100




         COMPTROLLER
                                                                                                , ,-. 2:

               M I. G e n eL. D o d a r o
               AssistantC o m p trollerG e n e r a l
               Accountinga n d InformationM a n a g e m e nDivision
                                                           t
               U. S . G e n e r a Accounting
                                  l         O ffice
               washington,D C 2 0 5 4 8

               D e a r Mr. D o d a r o :

                        This is the Departmentof Defense( D o D ) r e s p o n s eto the G e n e r a lAccountingO ffice ( G A O )
               draft report“F I N A N C L A L M A N A G E M E N T Factorsto Considerin EstimatingEnvironmental
               Liabilities for R e m o v i n gH a z a r d o u sM a terialsin NuclearS u b m a r i n e as n d Ships,”d a t e dJuly 9.
               1 9 9 7( G A O C o d e9 l S S W O S D C a s e1408).

                         T h e Departmentgenerallyconcurswith the contentof the draft repoti In o u r efforts to
               e n s u r ethat m e Departmentcomplieswith the reportingrequirementb e g i n n i n gin F Y 1 9 9 8 ,a
               working g r o u p recentlyw a s establishedthat will addressenvironmentalliability issuesa n d financial
               statementreportmgrequire-ments.         ‘Thisg r o u pis comprisedof representatives
                                                                                                  from the functional.
               financialm a n a g e m e natn d audit communities.




                                                                            Alice C. M a r o n i
                                                                            PrincipalD e p u r yU n d e r
                                                                              Secretaryof Defense(Comptroller)




 26                                        G A O /A IM D - 9 7 - 1 3 5 RE n v i r o n m e n tal Liability for Nuclear Vessels
ENCLOSURE V                                                              ENCLOSURE V


                        MAJOR CONTRIBUTORS TO THIS REPORT

ACCOUNTING AND INFORMATION MANAGEMENT
DIVISION, WASHINGTON, D.C.

William D. Grindstaff, Assistant Director
Jacob W. Sprouse, Jr., Audit Manager
Linda J. Brigham Auditor

KANSAS CITY OFFICE

Dieter M. Kiefer, Assistant Director

SEATTLE OFFICE

Pat L. Seaton, Auditor-m-Charge
William E. Hanson, Senior Evaluator
Catherine W. Arnold, Evaluator
Elizabeth M. Naftchi, Auditor

OFFICE OF GENERAL COUNSEL

Amy M. Shimamura, Senior Attorney




(918885)

27                         GAO/AJIMD-97-135R Environmental Liability for Nuclear Vessels
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