oversight

Nuclear Waste: Changes Needed in DOE User-Fee Assessments to Avoid Funding Shortfall

Published by the Government Accountability Office on 1990-06-07.

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

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

  Comptroller   General
  of the United States

  B-202377.15

  June 7,199O

  To the President of the Senate and the
  Speaker of the House of Representatives

  This report presents the results of our fifth annual audit of the Department of Energy’s
  efforts to implement the Nuclear Waste Policy Act of 1982 (42 U.S.C. lOlOl>, as amended by
  Title V of the Omnibus Budget Reconciliation Act of Fiscal Year 1987 (P.L. 100-203). The act
  requires us to report to the Congress the results of an a-al    audit
                                                                     .- of the Department’s
  Office of Civilian Radioactive Waste Management.

  We are sending copies of this report to congressional committees with oversight of the
  Department’s activities, the Secretary of Energy, and other interested parties.

  This work was performed under the direction of Victor S. Rezendes, Director of Energy
  Issues, Resources, Community, and Economic Development Division. Other major
  contributors are listed in appendix III.




  Charles A. Bowsher
  Comptroller General
  of the United States
Executive Sumrnm


Purpose            oactive waste from civilian nuclear power plants and its defense-related
                   nuclear facilities could eventually cost $32 billion (in constant 1988 dol-
                   lars). To pay these costs, DOE must collect sufficient fees from utilities on
                   electricity generated by nuclear power plants and make payments from
                   its defense appropriation. In this fifth annual report, required by the
                   Nuclear Waste Policy Act of 1982, GAO discusses the reasonableness of
                   the methods and assumptions M)E uses in periodically estimating waste
                   program costs and revenues and deciding if fees should be adjusted.


                   The 1982 act directed DOE to develop one repository for permanent dis-
Background         posal of wastes produced by civilian nuclear power plants. DOE will also
                   dispose of its high-level wastes in the repository. In December 1987 the
                   Congress amended the act and directed WE to stop investigating all
                   potential first-repository sites except Yucca Mountain, Nevada; termi-
                   nate the search for a second repository; and report on the need for a
                   second repository in about 20 years.

                   The waste program is financed through annual appropriations from the
                   Nuclear Waste Fund. Each quarter, utilities pay a fee of 0.1 cent per
                   kilowatt-hour of nuclear-generated electricity into the Fund. In return,
                   utilities are relieved of further financial obligation for waste disposal.
                   DOE is also required to pay its fair share of program costs.

                   Each year DOE is required to determine if the civilian-waste fee is ade-
                   quate to recover all applicable program costs. DOE did not, however,
                   make the 1988-89 determinations. In assessing fee adequacy, DOE esti-
                   mates program costs, fee collections, interest earnings, and Fund bal-
                   ances through the program’s end. DOE does this using a variety of
                   assumptions, such as the number and locations of repositories and the
                   amount of electricity (and waste) to be generated. DOE has not proposed
                   a change in the fee since the program began.


                   Unless careful attention is given to its financial condition, the nuclear
Results in Brief   waste program is susceptible to future budget shortfalls, Without a fee
                   increase the civilian-waste part of the program may already be
                   underfunded by at least $2.4 billion (in discounted 1988 dollars). Also,
                   DOE has not paid its share-about       $480 million-of costs, nor has it dis-
                   closed this liability in its financial records.




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                      Executive Summary




                      Sound fiscal management requires reliable cost and revenue estimates
                      that recognize inherent program uncertainties. Although DOE has
                      improved its cost estimates, the estimates do not adequately recognize
                      program uncertainties. Indexing the civilian fee to the inflation rate
                      would address one major cost uncertainty. DOE intends to do this at an
                      appropriate time; however, it does not use a realistic rate of inflation as
                      its most probable scenario in assessing whether that time has arrived.
                      Also, legislation would be required to implement an inflation indexing
                      system.



GAO’s Analysis

Potential Funding     The nuclear waste program is susceptible to future budget problems.
                      The fee paid by utilities must provide sufficient revenues to cover total
Shortfall             program costs because DOE cannot adjust the fee retroactively. Thus, if
                      costs eventually exceed revenues, the shortfall will have to be financed
                      by either (1) charging those utilities still operating nuclear plants dis-
                      proportionately high disposal fees, (2) federal appropriations, or (3) a
                      combination of the two.

                      When DOE expects to begin operating a repository at Yucca Mountain in
                      2010, many nuclear plants will be approaching the end of their 40-year
                      lives. Unless new plants are built or the lives of existing plants are
                      extended, the number of nuclear plants will begin to decline and fee col-
                      lections will decrease. Under present law, the utilities operating the
                      remaining plants would have to pay higher fees if, at the time, DOE
                      found that program costs would exceed revenues. If adequate funding is
                      not provided, the Congress might have to authorize the use of general
                      tax revenues to fund a part of the program’s cost.


Reliability of Cost   Considering the program’s unique nature and early stage, DOE’S cost esti-
Estimates             mates are becoming more complete and reliable, in part because program
                      requirements are better defined. For example, DOE’s plan for investigat-
                      ing Yucca Mountain recently became available for use in estimating
                      costs. Also, DOE recently included some ma,ior cost elements omitted
                      from earlier estimates.

                      Improved estimates and changes in scope resulted in a real increase in
                      the program’s estimated cost of about $8 billion. The estimates still do


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                              Executive Summary




                              not, however, fully recognize future program uncertainties. For exam-
                              ple, program development and evaluation costs, one of the largest single
                              cost categories, does not contain a contingency allowance. But the pro-
                              gram’s cost-growth history and the uncertainties that must be consid-
                              ered in estimating costs over the program’s life, argue for a liberal,
                              system-wide contingency allowance in the estimates, In addition to infla-
                              tion, major uncertainties include schedule delays and the number of
                              repositories needed.


Insufficient   Weight Given   DOE'S analyses of fee adequacy show that various rates of inflation   over
to Inflation                  the program’s life would have wide-ranging effects on projected final
                              Fund balances. This occurs because inflation directly affects program
                              costs-it has already added about $4.5 billion to the program’s esti-
                              mated cost. However, the disposal fee that utilities pay is not adjusted
                              for inflation.

                              DOE estimates costs in constant dollars and then applies various inflation
                              rates to the estimates in analyzing fee adequacy. Its objective is to deter-
                              mine when an inflation indexing system should be implemented. DOE’S
                              1987 assessment and a February 1989 independent internal assessment
                              show that the current fee is inadequate unless little or no inflation
                              occurs over the program’s life, an unlikely event. The independent esti-
                              mate shows that without a fee increase the Fund may already be
                              underfunded by $2.4 billion to $4.1 billion (in discounted 1988 dollars).

                              In view of the program’s length and uncertainty in both real and infla-
                              tion-related costs, indexing the fee to the rate of inflation is a way of
                              protecting the Fund from the effects of inflation. However, DOE did not
                              select an inflation rate representing the most probable future scenario as
                              a base case in determining when indexing should begin. Thus, the basis
                              for its conclusion was not clear. The use of a realistic, base-case inflation
                              rate would help put the varying inflation rate scenarios analyzed into
                              better perspective, thereby making DOE'S fee-adequacy determination
                              clearer. Although DOE officials said the 1990 fee-adequacy report will
                              more clearly explain their assessment methodology, they do not intend
                              to use a base-case inflation-rate estimate.


DOE Not Paying Its Share      DOE has not begun paying its share of program costs, estimated at $3.6
                              billion to $6.4 billion depending on the number of repositories devel-
                              oped. The amount owed the Fund through September 30, 1989, is esti-
                              mated at $483 million, including interest, but DOEhas not recognized this


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                     Executive Summary




                     liability in its financial records and reports. DOE is considering paying its
                     share of costs each year and paying off prior year costs (plus interest)
                     over a lo-year period.

                     In reaching funding decisions, the administration and the Congress must
                     consider competing demands for funds, including those needed to clean
                     up DOE’Snuclear weapons complex. Of critical importance to future
                     defense-waste fee-payment decisions is formal reporting of DOE’Scost
                     share so that administration and congressional decision makers under-
                     stand the implications of alternative fee-payment decisions,


                     GAOrecommends that the Congress amend the Nuclear Waste Policy Act
Recommendation to    to authorize the Secretary of Energy to automatically adjust the civilian
the Congress         nuclear waste disposal fee on the basis of an inflation index.


                     GAO  makes several recommendations to the Secretary of Energy aimed
Recommendations to   at further improving DOE’Smethods for estimating program costs and
the Secretary of     determining the adequacy of civilian-waste disposal fees. (See chs. 2 and
Energy               3.) GAO is also recommending that the Secretary include statements of
                     DOE’Sactual and contingent liabilities for its share of program costs in its
                     financial and budget documents. (See ch. 3.)


                     DOE;agreed with the facts presented in GAO’S report and with all but one
Agency Comments      of its recommendations. GAOis concerned, however, that DOE’S planned
                     corrective actions may not adequately insure against a future funding
                     shortfall. For example, DOEagreed to study-not    implement-GAO’s rec-
                     ommendation that it provide adequate contingencies in all major cost
                     categories. GAOwill not be able to evaluate DOE’sactions until DOEissues
                     its next fee-adequacy report.




                     Page 5                                      GAO/EtCEB90-66 User-Fee Assessments
contents


Executive Summary                                                                                     2

Chapter 1                                                                                          8
                        Establishment of Program                                                   8
Introduction            Program Financing                                                          9
                        Fee Assessment Process                                                    10
                        Objectives, Scope, and Methodology                                        13
                        Agency Comments and GAO Evaluation                                        16

Chapter 2                                                                                         17
Reliability of Cost     Effects of Inflation on DOE’s Cost Estimates                              18
                        Changes Helped Hold Down Cost Estimate Increases                          19
Estimates Improving,    Better Identification of Program Tasks                                    22
but Major Cost          Large Uncertainties in Program Costs Remain                               30
                                                                                                  34
Uncertainties Remain    Conclusions
                        Recommendations to the Secretary of Energy                                35
                        Agency Comments and GAO Evaluation                                        35

Chapter 3                                                                                         37
Fee Adequacy            Treatment of Inflation Crucial to Fee Adequacy                            38
                        Current Fee Will Not Recover All Program Costs With                       39
Decision-Making             Inflation
Process Could Be        Fee Adjustment Mechanism Important to Ensure                              43
Improved                    Equitable Cost Recovery
                        Uncertainty About Real Costs and Collection of One-Time                   45
                            Fees
                        Uncertainty About DOE Payments for Disposal of                            45
                            Defense Waste
                        Conclusions                                                               52
                        Recommendation to the Congress                                            53
                        Recommendations to the Secretary of Energy                                53
                        Agency Comments and GAO Evaluation                                        54

Appendixes              Appendix I: Criteria Basic to an Effective Cost-Estimating                56
                            Process
                        Appendix II: Department of Energy Comments                                59
                        Appendix III: Major Contributors to This Report                           63
                   --
Tables                  Table 1.1: Status of the Nuclear Waste Fund as of                             9
                            December 3 1, 1989


                        Page 6                                    GAO/RCED-!W65User-Fee Assessments
Contents




                                                                     -_
Table 1.2: Annual Benefits Payable to Host State                          12
Table 2.1: Comparison of Unadjusted Total System Life-                    18
    Cycle Cost Estimates
Table 2.2: Comparison of Total System Life-Cycle Cost
    Estimates Adjusted for Inflation
Table 2.3: 1989 Total System Life-Cycle Cost Estimates
Table 2.4: Development and Evaluation Cost Estimate
Table 2.5: Comparison of ICE Staff’s Estimates With
    OCRWM’s Preliminary Estimates
Table 3.1: Projected End-Of-Program Fund Balances With
    Waste Fee of 1 Mill Per KWH
Table 3.2: Fee Needed to Recover Program Costs
Table 3.3: Analysis Used to Determine When to Begin
     Indexing l-Mill Waste Disposal Fee to Inflation
Table 3.4: Atomic Energy Defense Activities Budget for
    Fiscal Years 1988 Through 1990




Abbreviations

CEKI       Congressional Budget Office
DOE        Department of Energy
EIA        Energy Information Administration
GAO        General Accounting Office
GXP        gross national product
ICE        independent cost estimating
IG         Inspector General
KWH        kilowatt hour
MRS        monitored retrievable storage
MTU        metric tons of uranium
XRC        Nuclear Regulatory Commission
NWPA       Nuclear Waste Policy Act of 1982
OCRWM      Office of Civilian Radioactive Waste Management
RCED       Resources, Community, and Economic Development Division
TSLCC      total system life-cycle costs


Page 7                                  GAO/RCED-90-65 User-Fee Assessments
Chapter 1

Introduction


                   The Department of Energy (DOE) is responsible for developing and
                   administering a comprehensive national program directed toward the
                   safe and permanent disposal of spent nuclear fuel and other high-level
                   radioactive wastes.’ The Nuclear Waste Policy Act of 1982 (NWPA) (PI>.
                   97-425) requires that the owners and generators of the nuclear wastes
                   pay the program’s costs and establishes a fee-setting mechanism under
                   which DOE must annually assess the adequacy of the disposal fee. NWPA
                   also requires that we make an annual audit of DOE’S Office of Civilian
                   Radioactive Waste Management (OCRWM) which administers the pro-
                   gram. In this report on our fifth annual audit, we discuss CKXWM’S
                   assessment process, including the development of program cost esti-
                   mates and the process followed in deciding on whether the fee is
                   adequate.


                   KWPA    established the process and schedule to be followed by DOE in sit-
Establishment of   ing, constructing, and operating one or more deep underground reposito-
Program            ries in which nuclear wastes are to be disposed. The act required
                   constructing one repository and selecting a site for a second repository.
                   In late 1987 DOE was preparing to characterize (investigate) three poten-
                   tial sites for the nation’s first repository.’ However, in response to
                   mounting program opposition and costs, the Congress redirected the
                   program through the Nuclear Waste Policy Amendments Act of 1987
                   (Amendments Act) enacted on December 22, 1987.‘) Most importantly,
                   the Amendments Act designated one site (Yucca Mountain, Nevada) for
                   characterization and required the termination of work on all other sites,
                   including the search for candidate sites for the second repository. The
                   Amendments Act also authorized DOE to site, construct, and operate a
                   monitored retrievable storage (MRS) facility wherein the waste would be
                   stored temporarily; however, certain conditions must be met,

                   NWPA  gave the President an option as to whether or not DOE should dis-
                   pose of its highly radioactive waste from national defense activities in
                   the same repositories as commercial nuclear waste. In April 1985 the


                   ‘Spent nuclear fuel is the uranium fuel that has been removed from a nuclear rezactorafter it has
                   been used to the extent that it is no longer useful in producing electricity.
                   %e characterization refers to activities undertaken in either the laboratory or the field to study the
                   geologic condition of a potential repository site. Such activities include boring, surface excavations,
                   exploratory underground shafts, and testing at repository depth to evaluate the suitability of a site.
                   “The Amendments Act is contained m Title V of the Omnibus Budget Heconcrhation Act of 1987 (P-1,.
                   100-203).



                   Page 8                                                      GAO/WED-90-66 User-Fee Assessments
                                         Chapter 1
                                         Introduction




                                         President decided in favor of disposing of defense wastes with the com-
                                         mercial waste. In accordance with the act, the government must pay its
                                         fair share of the nuclear waste disposal program.


Program Financing                        costs be fully recovered from the generators and owners of nuclear
                                         waste. The act also directed DOE to enter into contracts with utilities to
                                         begin accepting nuclear waste by January 3 1, 1998, and established the
                                         Nuclear Waste Fund-a separate fund in the Treasury-to          finance the
                                         program. Utilities, through contracts with DOE, must pay annually into
                                         the Fund a user fee of 1 mill (one-tenth of a cent) per kilowatt hour
                                         (KWH) of electricity generated from their nuclear power plants since
                                         April 7, 1983. As applicable, they must also pay a one-time user fee for
                                         disposal of spent nuclear fuel they generated before that date. Payment
                                         of fees in accordance with ~0~‘s fee collection arrangements relieves a
                                         utility of any further financial obligation for disposal of the related
                                         waste.

                                         Regardless of the Fund balance, DOE can only obligate moneys from the
                                         Fund that have been appropriated by the Congress. Amounts that DOE
                                         determines are excess to current program needs are invested in U.S.
                                         obligations. If necessary, DOE is authorized to borrow from the U.S. Trea-
                                         sury. Table 1.1 shows the total fees collected, interest earned, and dis-
                                         bursements from the Fund through the end of December 1989.

Table 1.1: Status of the Nuclear Waste
Fund as of December 31,1989              Dollars in bullions       ~~       ___-_   -.                                 .--____
                                         Activity
                                         -.-____               ~                           ___.   ___-                           Amount-
                                         Collections-___~~   ~__~~~ ---.                             _~~____            _____
                                           One-time fees
                                         __-____..                ..-    _~___           __.                                ___- $1.452
                                           Ongoing fees                                                                           2.728
                                           interest
                                                 ____~     -                                                                        .a77
                                                                                                   __..
                                         Total                                                                                    $5.057
                                         Disbursements              ..--.                                                        $(2.708)
                                                                                                          -_.
                                         Balance                                                                                 $2.349
                                         Source. DOE.

                                         In a May 1989 report publicly released on September 25, 1989, DOE esti-
                                         mated that the program will cost between $23.8 billion and $32.7 billion
                                         (in constant 1988 dollars) depending on whether one or two repositories




                                         Page 9                                                   GAO/RCED-90-65 User-Fee Assessments
                 Chapter 1
                 Introduction




                 will be built and on other assumptions.” The estimated cost of the pro-
                 gram has been rising over the years at the same time that projections of
                 the quantity of nuclear-generated electricity and thus, spent fuel, have
                  been declining. DOE estimates that its fair share of the program’s pro-
                 jected cost is $3.6 billion to $6.4 billion, depending on whether one or
                 two repositories are eventually developed. This estimate is based on a
                  formula established by DOE in August 1987 for allocating the cost of the
                  nuclear waste program between civilian waste generators and DOE.DOE,
                 however, has not paid any moneys into the Nuclear Waste Fund. On the
                 basis of the formula, DOE estimates that it owed the fund about $483
                 million, including accrued interest, as of September 30, 1989.


                 The act requires that the Secretary of Energy annually review the
Fee Assessment   amount of the fee established to determine whether revenues generated
Process          from the fee will be sufficient to offset the program’s cost and, if not, to
                 propose a fee adjustment to the Congress. As a part of its annual fee
                 assessment, DOE estimates the costs of the waste management system
                 over its complete life cycle. In addition to program cost estimates, DOE
                 must project fee collections and interest earnings and/or expenses over
                 the program life of about 100 years.

                 The act requires that if a revision to the fee is deemed necessary, DOE
                 must immediately transmit its proposal to the Congress. Further, the
                 proposed fee is to become effective after a period of 90 days unless
                 either House of Congress disapproves it.5 In the 6 years since the NWPA
                 was enacted, DOE has not proposed a change in the fee.

                 In addition to preparing its cost analysis, DOE issues a report to the Con-
                 gress summarizing its assessment of the fee and prepares a supplemen-
                 tal report providing a more detailed discussion of the assessment. DOE
                 did not make the required annual assessment in 1988 or 1989. According
                 to an OCRWMofficial, the assessment was not made because DOEwas
                 restructuring the program on the basis of the changes called for by the
                 December 1987 amendments. Also, no assessment was issued in 1989



                 “Analysis of the Total System Life Cycle Cost for the Radioactive Waste Management Program (JIOE/
                 RW-0236, May 1989).

                 ‘The Supreme Court found unconstitutional other legislation providing for a legislative veto. In that
                 instance, the Court ruled the legislative veto provision unconstitutional but left the remaining part of
                 the act in tact. See Immigration and Naturalization Service v. Chadha, 462 [J.S. 919 (1983).



                 Page 10                                                     GAO/RCED-90-66 User-Fee Assessments
                            Chapter 1
                            Introduction




                            because DOE needs to revise the 1989 cost estimate to reflect revisions to
                            the program schedule announced on November 30, 1989.”


Program Cost Estimate       DOE’S waste program cost estimates are comprised of five major cost
                            categories:

                        l   Development and evaluation.
                        l   Transportation.
                        l   Repository.
                        l   MRS.
                        l   Benefit payments to states and Indian tribes.

                            The development and evaluation category includes past, present, and
                            future costs for siting, design development, testing, and regulatory and
                            institutional activities associated with the repositories and the transpor-
                            tation system. This category also includes the total costs of administer-
                            ing the program and monitoring the waste and repositories through
                            closure.

                            The transportation category includes the costs of purchasing, servicing,
                            and maintaining shipping casks and of transporting the waste to DOE
                            facilities.

                            The repository category includes costs for engineering, construction,
                            operation, and closure and decommissioning of both surface and under-
                            ground facilities. Within this category are costs for surface support
                            facilities for security, fire protection, food service, administration, main-
                            tenance, and laboratories; waste-handling buildings; and underground
                            shafts and ramps. Also included are costs for staffing, supplies, and util-
                            ities over the waste preparation and emplacement phase, the caretaker
                            phase, and any subsequent period through the decommissioning phase.
                            The latter phase involves permanently sealing the shafts and tunnels,
                            decontaminating surface facilities, and returning the site to its natural
                            state.

                            The cost of an MISS facility fully integrated into the system was first
                            included in DOE’s cost estimates in 1986. The types of costs included in
                            the MRS category are generally similar to those described above for the


                            “Report to Congress on Reassessmentof the Civilian Radioactive Waste Management Program (DOE/
                            RW-0247, Nov. 1989).



                            Page 11                                               GAO/RCElMOSS User-Fee Assessments
                                        Chapter 1
                                        Introduction




                                        repository except that the MRS does not include costs for underground
                                        facilities.

                                        The Amendments Act also authorized DOE to enter into a benefits agree-
                                        ment with the state of Nevada concerning a repository at Yucca Moun-
                                        tain and with a state or Indian tribe concerning an MRS facility within
                                        the state or Indian tribe borders. To be eligible to receive the benefits,
                                        however, the state or Indian tribe must agree to waive its rights to veto
                                        the President’s selection of a repository or MRS facility site and to waive
                                        any rights to impact assistance authorized by the NWPA. Benefit pay-
                                        ments must be made in accordance with the schedule shown in table 1.2.

Table 1.2: Annual Benefits Payable to
Host State                              Dollars in millions                                                                       ._~~~~~~
                                                                                                                   Benefit amount
                                        Pay schedule                                                               MRS__--..- Repository
                                        Annual payments prior to receipt of first spent fuel                   -     $5               $10
                                        Upon first receipt of spent fuel     -I. ._.-                                10                20
                                        Annual payments after receipt of first spent fuel until closure
                                          of the facilitv                                                            10                20




Projection of Revenues                  DOE'S Energy Information    Administration (EIA) projects the quantity of
                                        nuclear-generated electricity upon which the estimate of fee collections
                                        and nuclear waste quantities are based. Through the 1987 assessment,
                                        the EIA projection DOE used as its principal case, referred to as the upper-
                                        reference case, was derived from long-range forecasts of economic
                                        growth, energy demand (including electricity), and the projected nuclear
                                        power share of electrical generating capacity. This case assumed that
                                        utilities would begin constructing and operating new nuclear power
                                        plants by the turn of the century.

                                        In an August 1987 report, we recommended that DOE base its program
                                        plans on projections of nuclear-generated electricity from plants licensed
                                        to operate and those plants that were under construction and expected
                                        to become operational.’ DOE adopted our recommendation in making its
                                        cost estimate for 1989 and intends to follow the recommendation in its
                                        1990 fee-adequacy assessment.



                                        ‘Nuclear Waste: A Look at Current Use of Funds and Cost Estimates for the Future (GAO/
                                        RCED-87-121, Aug. 31, 1987).



                                        Page 12                                                 GAO/RCED-90-65 User-Fee Assessments
                             Chapter 1
                             IucroductioIl




                             Once fee collections are projected they can be used, along with estimated
                             costs, to project annual interest earnings and expenses and end-of-year
                             fund balances for each year through the end of the program’s life. These
                             projections are made for a number of different scenarios using various
                             assumptions about key program elements. The disposal fee should pro-
                             duce a zero or near-zero balance in the Nuclear Waste Fund at the pro-
                             gram’s end.


                             Our principal objective was to determine the reasonableness of the
Objectives, Scope, and       methods and assumptions used by DOE in making its annual assessments
Methodology                  of the adequacy of the fees that commercial generators of nuclear waste
                             pay into the Nuclear Waste Fund. We also reviewed issues related to
                             payment of fees for disposal of defense waste. To address our principal
                             objective we looked at the four major functions that DOE and its contrac-
                             tors perform in carrying out the assessment:

                         0 Projecting nuclear generated electricity, with resultant projections used
                           as a basis for estimating the amount of fees to be collected and the quan-
                           tity of waste to be produced and disposed of in one or more repositories.
                         9 Estimating total system life-cycle costs.
                         + Projecting interest revenues and end-of-year fund balances throughout
                           the life of the program, based on various assumptions and scenarios.
                         l Assessing whether or not a fee revision should be proposed to the
                           Congress.

                             The work performed in reviewing each of these four functions and in
                             reviewing defense-waste fee issues is summarized in the following
                             sections.


Projections of Nuclear       EIA  uses some sophisticated models in projecting electric generation
Electricity Generation       needs; however, the models used in projecting electricity generation
                             under the no-new orders case are fairly basic. We focused our review on
                             the methodology followed in projecting electricity generation under the
                             no-new orders case because this is the case DOEnow uses for program
                             planning purposes. [Jnder this case, EIA projects the amounts of electric-
                             ity that operating plants and plants expected to become operational will
                             produce over their lifetimes. We reviewed the reasonableness of the
                             methodology and assumptions used in arriving at projections under the
                             no-new orders case by looking at such matters as estimated plant lives
                             and the proportion of plant capacities used. Also, we met with officials



                             Page 13                                    GAO/RCEMO-66 User-Fee Assessments
                          Chapter 1
                          Illtroduction




                          of ELA and OCRWM to discuss such matters as EIA assumptions, methodol-
                          ogy, and input data.


Estimating Total System   In reviewing the adequacy of DOE'S cost-estimating methodology, we
                          used the following nine criteria which we identified in earlier work on
Life-Cycle Costs          major government acquisitions as basic to an effective cost-estimating
                          process:

                          Clear identification of task.
                          Broad participation in preparing estimates.
                          Availability of valid data.
                          Standardized structure for estimates.
                          Provision for program uncertainties (risks).
                          Recognition of inflation.
                          Recognition of excluded costs.
                          Independent review of estimates,
                          Revision of estimates when significant program changes occur.

                          These criteria are explained in appendix I.

                          In performing this review segment, we met with officials of DOE head-
                          quarters and field offices and the DOE contractor (Roy F, Weston, Inc.),
                          which is responsible, under DOE direction and guidance, for preparing
                          the annual total system life-cycle cost (TSLCC) estimates. We reviewed
                          and compared the six annual TSLCC estimates to determine the major rea-
                          sons why the estimates increased from less than $20 billion in 1983 to
                          over $30 billion in 1989. We discussed changes in the estimates with DOE
                          and contractor officials to determine the bases for the changes, evaluat-
                          ing particularly if and how the changes related to the nine criteria. We
                          also compared the architectural engineer’s initial repository cost esti-
                          mates with OCRWM'S final estimates.

                          We reviewed the work of DOE’SIndependent Cost Estimating (ICE) staff,
                          which prepares annual TSLCC estimates and fee-adequacy assessments
                          independent of those prepared by OCRWM.Among other things, we com-
                          pared the estimates prepared by ICE and OCRWMto identify the reasons
                          for any major differences to determine how such differences are
                          resolved.

                          We also reviewed the work of DOE'S Budget Validation Group. This group
                          is responsible for, among other things, validating the accuracy of



                          Page 14                                   GAO/RCED-90-66 User-Fee Assessments
                         Chapter 1
                         Introduction




                         OCRWM'S annual budget estimates relating to capital expenditures to con-
                         struct the exploratory shafts and related facilities to be built in conjunc-
                         tion with site characterization activities.


Projecting Interest      Battelle ‘Memorial Institute, a DOE contractor, makes the detailed reviews
                         WE uses in assessing fee adequacy. Battelle, among other things, uses
Revenues and Fund        HA'S electric generation and nuclear waste projections and the TSLCC
Balances                 estimates to determine whether the fee will produce sufficient revenues
                         to cover program costs. This determination is made for a number of sce-
                         narios using different program assumptions about such matters as sys-
                         tem configuration. As a part of its review, Battelle projects annual
                         interest revenues and/or expenses and program fund balances through
                         the program’s end. Battelle’s 1987 fee adequacy analysis was primarily
                         based on a real interest rate of 3 percent; however, it also examined the
                         effects of real interest rates of 0, 1, and 5 percent.

                         In performing this review segment, we reviewed and evaluated Bat-
                         telle’s annual reports, which it began issuing in 1984, and other Battelle
                         studies and documents relating to DOE'S assessments. We discussed Bat-
                         telle’s annual report, including study assumptions and methodology,
                         with officials of Battelle and OCRWM.We reviewed Battelle’s Fee Ade-
                         quacy Model, including available model documentation and the major
                         assumptions implicit in the model’s input data. We also diagrammed the
                         logic of all the model’s programs, We did not, however, validate this
                         model.


Assessing Fee Adequacy   We reviewed and evaluated DOE's annual fee-assessment reports for
                         1983-87. These reports set forth DOE'S recommendations to the Congress
                         as to the need for an adjustment to the fee, and the support and ratio-
                         nale for its recommendation. The 1987 assessment report was the latest
                         reviewed because a report for 1988 was not issued and the 1989 report
                         had not been issued at the time of our review. We did review the TSLCC
                         analysis, which was publicly released in September 1989, and an ICE
                         staff assessment report issued in February 1989.

                         We met with DOE officials to discuss the decision-making process DOE fol-
                         lows in judging whether the fee is adequate or needs to be adjusted. As
                         part of this review, we issued a report to the Secretary of Energy in July




                         Page 16                                     GAO/RCED-90-65 User-Fee Assessments
                           Chapter 1
                           Iutroduction




                           1988 that addresses        DOE’S   treatment of inflation in its decision-making
                           process.*


Defense Waste Fee Issues   In reviewing WE’S proposed approach to pay for disposal of defense
                           wastes, we analyzed the effects that the approach would have on the
                           Nuclear Waste Fund from the standpoints of balances in the Fund and
                           fairness to civilian ratepayers. We also assessed the effects on DOE’S
                           defense waste budget and the cost to the government on a consolidated
                           basis a


                           In addition, we reviewed available DOE and contractor documents setting
                           forth policies, procedures, and guidance. We also (1) reviewed applicable
                           GAO and DOE Inspector General (IG) reports and various studies such as
                           an August 1984 special study by the Congressional Budget Office enti-
                           tled Nuclear Waste Disposal: Achieving Adequate Financing and (2) con-
                           tacted officials of the Edison Electric Institute, a trade organization, and
                           the National Association of Regulatory Utility Commissioners.

                           Our review was made from January 1988 through September 1989 and
                           covered DOE activities carried out from 1982 through 1989. Our audit
                           work was performed in accordance with generally accepted government
                           auditing standards.


                           We obtained written DOE comments on a draft of this report, which are
Agency Comments and        contained in appendix II. DOE agreed with the facts presented in our
GAO Evaluation             report and with all but one of our recommendations. Nevertheless, we
                           are concerned that DOE’S planned corrective actions may not adequately
                           insure against a future funding shortfall in the Nuclear Waste Fund that
                           might have to be borne by taxpayers. For example, DOE agreed to study--
                           not implement- our recommendation that it provide adequate contin-
                           gencies in all major cost categories. We will be better able to judge the
                           adequacy of DOE’S actions after it issues its next fee-adequacy report
                           and cost estimate, now scheduled for late spring of this year.




                           ‘Nuclear Waste: DOE Should Base Disposal Fee Assessment on Realistic Inflation Rate (GAO/
                           RCEb88-129, July 22, 1988).



                           Page 16                                                 GAO/RCED-90-66 User-Fee Assessments
Chapter 2

Reliability of Cost Estimates Improving, but
Major Cost Uncertainties Remah

                The estimated cost of the nuclear waste management program has
                increased by 60 percent since WE issued its first cost estimate in 1983.
                At that time, DOE estimated that it would cost under $20 billion (1982
                dollars) to dispose of civilian nuclear waste in two repositories. Its most
                recent estimate is about $32 billion (1988 dollars). DOE also estimates
                that the program will cost about $25 billion with only one repository.

                Of the more than $12 billion increase in estimated costs, about $4.5 bil-
                lion is due to inflation over the first 6 years of the program. The remain-
                ing increase of about $8 billion represents real growth in estimated
                costs. This cost growth occurred as DOE more clearly identified the pro-
                gram system, assumptions, and performance requirements. Had it not
                been for changes in basic requirements that generally reduced the scope
                of the program, such as eliminating characterization of three candidate
                repository sites, DOE'S most recent cost estimate would be billions of dol-
                lars higher.

                Considering the unique nature of the nuclear waste program, DOE'S
                recent cost estimates are more reliable than estimates made early in the
                program’s life. DOE'S cost estimates are now more complete because they
                include the costs of certain activities that were not included in earlier
                estimates and are based on a better understanding of required tasks.
                Further, M)E is developing standardized cost accounts to help estimate
                and control costs, is obtaining broad participation by its contractors in
                developing cost-related information, and is using better and more up-to-
                date data. DOE also obtains an independent internal review of each
                annual cost estimate. Finally, although DOE does not address the effects
                of inflation on future program costs in preparing its cost estimates, it
                does address this factor in making its annual assessments of fee ade-
                quacy (see ch. 3).

                Nevertheless, considering how cost estimates have increased over the
                last 6 years and the uncertainties that must be considered in estimating
                costs over nearly a loo-year period, it is reasonable and prudent to
                assume that the actual cost of the nuclear waste program will be much
                higher than currently estimated by WE. Major uncertainties include
                inflation, schedule delays, and the number and location of repositories
                to be built Despite such major uncertainties, DOE does not include a lib-
                eral, system-wide contingency allowance in its cost estimates.




                Page 17                                    GAO/RCED-SO-66 UserFee Assessmimts
                                                         Chapter 2
                                                         Reliability of Cost Estimates Improving, but
                                                         Major Cost Uncertainties Remain




                                                         DOE expresses each of its cost estimates in terms of the purchasing
Effects of Inflation on                                  power of the dollar for the most recent full year. For example, its first
DOE’s Cost Estimates                                     cost estimate, issued in 1983, expressed all costs in constant 1982 dol-
                                                         lars regardless of the years in which various activities would be per-
                                                         formed and their associated costs incurred. Each of DOE’S annual cost
                                                         estimates is shown in table 2.1.


Table 2.1: Comparison of Unadjusted Total System Life-Cycle Cost Estimates
Dollars   in billions                                                          -..^_.                                       ~_.           ~___--
                                 .~-..
                                                                                         Year of fee-adequacy report’
Major cost cateaor@                                      1983                     1984_..---______   1985        ~~
                                                                                                                      1986                                 1987          198gc
Development        and evaluation                           $4.7         ---                                                                       $14.6-14.7            $13.1
_______                      ~_._~          .~_____~ ~~__                   -~.. $7.6       .._~_____..   $7.8        _____,- 59 2- 9.5
                                                                                                                                    --
                                                                                                      3.3- 5.1                 17-23                    2.0. 2.2                23
Transportation          I_~          “~~-                    3.9       -___ 2 5 3.9.-              -_____.,_.~.
                                                   10.7-11               10.5-12.9                 12.5-16.9               11.9-19.7                 12.6-18.7             13.4
Repository
__.~~____~,.                                           ____._ 2                                                                   .___
MRS
___..~.---.                                                        d                    d                         d            2.8- 2 9                      2.7            23
Benefit   payments                                                 e                    e                                                                          e        0.9
Total’                                           $19.3-19.8            $20.9-24.4--              $23.8-29.7’             $%.2-34.0e                $32.1-38.2            $32.0
                                                         aA fee-adequacy report and a cost estrmate for 1988 were not issued. Although a fee-adequacy                  report
                                                         was not issued in 1989, a cost estimate was.

                                                         bThe estrmates shown are in prror-year dollars. For example, the 1989 estimates reflects the purchasrng
                                                         power of the 1988 dollar
                                                         ‘The 1989 TSLCC analysrs, for comparability purposes, used the one scenarro with the no-new orders
                                                         electrrc generation projection, two repositories, and an MRS capable of consolidating fuel rod
                                                         assemblies.

                                                         dA TSLCC estimate that Included an Integral MRS system was not made until 1986.

                                                         ‘Benefit payments were authorrzed by the Amendments Act of 1987

                                                         ‘The range in total costs may not equal the sum of mintmum/maximum costs for each category because
                                                         (1) the ranges for each category may not be based on the same case and (2) independent rounding of
                                                         the costs for each category was made.
                                                         Source: Analysis of the Total System Lrfe Cycle Cost for the Civilian Radioactive Waste Management
                                                         Program 989.
                                                                   (May 1


                                                        To determine how inflation has affected DOE’s cost estimates over the
                                                        years, and then to show how estimated real costs have changed, it is
                                                        necessary to eliminate the effects of inflation by putting each annual
                                                        estimate on the same basis as DOE'S 1989 cost estimate. Inflation
                                                        adjusted figures are generally more meaningful for analysis and deci-
                                                        sion-making purposes because they put the estimates on an equal foot-
                                                        ing in terms of the dollar’s purchasing power. Because the 1989 estimate
                                                        is expressed in constant 1988 dollars, each earlier cost estimate was also
                                                        converted to constant 1988 dollars using the gross national product
                                                        (GNP) deflator. Table 2.2 shows the results of this exercise.




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                                            Chapter 2
                                            Reliability of Cost Estimates Improving, but
                                            Major Cost Uncertainties Remain




                                            The annual average inflation rate, as measured by the GNP deflator, has
                                            been relatively low during the past 6 years (it ranged from 2.6 percent
                                            to 4.6 percent). It has, however, had a significant effect on the estimated
                                            cost of the program. For example, as shown in table 2.2, adjusting DOE’S
                                            1983 TSLCCestimates to 1988 dollars increases the estimates from $19.3-
                                            $19.8 billion to $23,7-$24.3 billion. This increases the 1983 estimate by
                                            about $4.5 billion, or about 23 percent. Thus, adjusted for inflation the
                                            total program cost estimate increased by $7.7-$8.3 billion from 1983 to
                                             1989 whereas unadjusted for inflation the estimate increased by $12.2-
                                            $12.7 billion.


Table 2.2: Comparison of Total System Life-Cycle Cost Estimates Adjusted for Inflation
tiollars in billions           -.
                                                                           Year of fee-adequacy repoti
Major cost category                         1983               1984                    1985            1988                   1987           198gb
                               -.
npr,hnmnnt   anrl p\Iahlatint3               !w
                                             --.- R             9;9
                                                                -- n-                  !&I.9       $10.1-10.4          $16.1-15.8            $13.1
Transportation                                 4.0           3.0- 4.6               3.8- 5.8            1.9-   2.5          2 f- 2.4           2.3
         -                -.                                   .--...-..         ~~
Repository                             13.1-13.7          12 4-15.2              14.2-19.2          13.1-21 7            13.5-20.1
                                                                                                                         -                      13.4
MRS
  .-                                               c                   c                       c       3.1- 3.2                 2.9              2.3
---                                                             ~~
Benefit Pavments                                   d                   d                       d                 -d                 ‘d          $0.9
~__--
Total’                               $23.7-24.3         $24.7-28.8             $27.1-33.8          $28.9-37.4         $34.5-41.0              $32.0
                                            Note, Estimates were converted to 1988 dollars using GNP deflator
                                            aA fee-adequacy  report and a cost estimate for 1988 were not Issued. Although a fee-adequacy   report
                                            was not issued in 1989, a cosl estimate was

                                            bThe 1989 TSLCC analysis, for comparability purposes, used the one scenario with the no-new orders
                                            electric generation projection, two repositories, and an MRS capable of consolidating fuel rod
                                            assemblies

                                            ‘A TSLCC estimate that Included an Integral MRS system was not made until 1986.

                                            di3enefit payments were authorized by the Amendments Act of 1987

                                            eThe range In total costs may not equal the sum of minimum/maximum costs for each category because
                                            (1) the ranges for each category may not be based on the same case and (2) Independent roundtng of
                                            the costs for each category was made
                                            Source. Analysis of the Total System Life Cycle Cost for the CivIlIan Radioactive Waste Management
                                            Program (May 1989, DOE/RW-0236).



                                            A number of basic program changes have taken place since DOE made its
Changes Helped Hold                         first comprehensive cost estimate in 1984. Some of these changes, par-
Down Cost Estimate                          ticularly the elimination of costs to characterize three sites and the
Increases                                   reduction in the projected quantity of waste to be disposed of, have
                                            helped hold down the increases in the program cost estimates.




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    Chapter 2
    Reliability of Cost Estimates Improving, but
    Major Cost Uncertainties Remain




    DOE’s  1983 cost estimate was primarily based on a DOE-contractor study
    completed in December 1982, shortly before NWPA was enacted.’ The
    first comprehensive cost estimate DOE prepared on the basis of the act
    was issued in 1984. That estimate was based on

. characterization of three candidate sites for the first repository and two
  more candidate sites for the second repository;
s construction and operation of two repositories;
. shipment of 134,000 metric tons of uranium (MTU) of civilian waste
  directly from nuclear power plants to the two repositories for disposal;
  and
l an end to the program’s life, for cost-estimating purposes, in 2040.

    At the time of the 1984 estimate, DOE was considering four types of
    rock-domed salt, bedded salt, tuff, and basalt-for       the first repository
    and granite as an additional rock-type for the second repository. Also, it
    had already identified nine potential sites from which to choose the
    three sites to be characterized for the first repository. On the basis of
    this program configuration, DOE'S estimate of total program costs was
    between $24.7 billion and $28.8 billion (adjusted to constant 1988 dol-
    lars), as shown in table 2.2.

    Since DOE prepared its 1984 cost estimate, several basic program
    changes have occurred. Specifically, for the 1989 cost estimate,

l   DOEassumed that it will characterize only the Yucca Mountain site for
  the first repository and one other site if a second repository is eventu-
  ally developed;
l the projected quantity of wastes to be disposed of, including DOE'S
  defense waste, dropped to about 96,000 MTU;
l the life of the program was extended through 2089; and
q DOE included an MRS facility and benefit payments to host states or
  Indian tribes in its cost estimates.

    Because of the Amendments Act provisions (1) limiting site characteri-
    zation to Yucca Mountain, (2) deferring second-repository activities, and
    (3) authorizing an MRS facility, OCRWM reduced the number of scenarios
    for which it made cost estimates from 15 in 1984 to 5 in 1989. DOE’S
    1989 TSLCC analysis est.imates the costs of a waste management system
    with one- and two-repository configurations. In either case, the first

    ‘Projected Costs for Mined Geologic Repositories for Disposal of Commercial Nuclear Wastes (ONI-3,
    Dec. 1982).



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                                                  Chapter 2
                                                  Reliability of Cost Estimates Improving, but
                                                  Major Cost Uncertainties Remain




                                                   repository is assumed to be located at Yucca Mountain. The second
                                                   repository, if developed, would be located at a site that is central to
                                                   most civilian nuclear power plants-in essence, in the eastern part of
                                                   the country.

                                                   For both system configurations one estimate is made with an MRS facility
                                                   that would consolidate the fuel into a more compact arrangement before
                                                   shipping it to a repository and one with an MRS facility that would ship
                                                   the fuel intacL2 These scenarios assume that DOE would only be required
                                                   to dispose of wastes produced by existing nuclear plants and DOE’S
                                                   defense wastes. A fifth scenario using EIA’S more optimistic forecast of
                                                   electric generation, which assumes that utilities will construct many
                                                   new nuclear plants, is for a two-repository system and an MRS facility
                                                   that would consolidate fuel before shipment. DOE’S estimates of the cost
                                                   of these alternative waste systems is shown in table 2.3.


Table 2.3: 1989 Total System Life-Cycle Cost Estimatesa
Dollars in billlons                        -.-
                                                                                                                      Upper reference
                                                                     No-new orders scenario                          ~   scenario
                                                     Two repositories                       One repository            Two repositories
                                                     MRS fuel                             MRS fuel                            MRS fuel
Major cost category                              consolidation      Basic MRSb       consolidation        Basic MRSb     consolidation
Development      and evaluation        _~~.. _.
                                                           $13.1             -   $13.1
                                                                                            ~~___
                                                                                                        $9.7                $9.7                  $13.1
Transportation                                               2.3                    2.3                 2.6                  2.6                      2.4
First repository        -.         -..--                     6.7                    70                  8.7                  9.1                      6.6
Second repository
               _-_                                           68                     66                  0.0                  0.0                      7.4
MRS facility                                                23                      14                   3.1                 18                       2.3
Benefit ~-
         payments            -         -                     09 --__                09                  0.7                  0.7                      0.9
Total                                                     $32.0                  $31.2                $24.8               $23.8                   $32.7
                                                   aC~~t~ are in constant 1988 dollars

                                                   bin this scenario, the spent fuel is disposed of wtthout being consolidated
                                                   Source, Analysis of the Total System Life Cycle Cost for the CUllan Radioactive Waste Management
                                                   Program (May 1989, DOE/RW-0236)


                                                   Development and evaluation cost estimates, adjusted for inflation,
                                                   increased from $9.0 billion in 1984 to $13.1 billion in 1989, an increase
                                                   of $4.1 billion. This increase would have been several billion dollars
                                                   higher had it not been for the elimination of costs for characterizing
                                                   three sites following enactment of the 1987 Amendments Act. In its May

                                                  %el consolidation involves rearranging spent-fuel rod assemblies into a denser array, thereby reduc-
                                                  ing the number of containers requiring disposal.



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                             Chapter 2
                             Reliability of Cost Estimates Improving, but
                             Major Cost Uncertainties Remain




                             1989 cost estimate, DOEstated that, in the absence of the amendments,
                             estimated costs for development and evaluation would have risen to
                             about $18.7 billion (1988 dollars), air increase of about $5.6 billion over
                             the $13.1 billion estimate.

                             Also, DOE'S 1989 cost estimate for a single-repository system is about
                             $24.8 billion, or about $7.2 billion less than the cost estimate for two
                             repositories (see table 2.3). The lower cost for a single-repository system
                             results from the elimination of about $6.8 billion to construct the second
                             repository, a decrease of about $3.4 billion in development and evalua-
                             tion costs, and a decrease in benefit payments of about $0.2 billion.
                             These decreases were partially offset by increases of about $2.1 billion
                             to expand the first repository to hold all of the waste, about $0.7 billion
                             for the MRS facility, and about $0.3 billion for transportation.

                             Another factor helping to hold down program cost estimates is the
                             decrease in the projected quantity of waste. The current estimate of
                             about 96,000 MTU (compared with 134,000 MTU in 1984) includes the
                             86,800 MTU of civilian waste that EIA expects existing civilian nuclear
                             power plants to produce through the end of a 40-year operating life for
                             each plant. The figure also includes the equivalent of 8,875 MTU of
                             defense wastes that DOE projects it will produce through 2030 and 640
                             MTU of waste from a closed civilian spent fuel reprocessing plant, located
                             at West Valley, New York, that DOE is decommissioning.

                             The reduction in projected waste quantity helps reduce the estimates of
                             the transportation and repository cost categories. For example, DOEwill
                             need fewer transportation casks and will make fewer waste shipments.
                             Also, less waste means lower repository-related costs such as waste han-
                             dling, mining, and waste package fabrication. Therefore, as shown in
                             table 2.2, after adjusting DOE'S earlier cost estimates for inflation, esti-
                             mated transportation and repository costs have generally decreased
                             between 1984 and 1989. Not all of the repository cost reductions, how-
                             ever, are due to reduced waste quantities. For example, some of the
                             reductions are related to eliminating potentially high-cost repository
                             sites from consideration in the nuclear waste program.


                             Adjusted for inflation, the estimated real cost of the nuclear waste pro-
Better Identification   of   gram has increased by about $8 billion (1988 dollars). This increase is
Program Tasks                due in large part to cost items being added as the program became better
                             defined. In addition to making the estimates more complete, and thus
                             more reliable, DOE has made and is making other changes to improve the


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                   Reliability of Cost Estimates Improving, but
                   Major Cost Uncertainties Remain




                   estimates. For example, an across-the-board contingency factor of 20
                   percent is now included in the transportation cost category.

                   Clear identification of tasks is critical to preparing reliable and complete
                   cost estimates. As discussed earlier, DOE’s initial cost estimate was based
                   on a study issued before NWPA was enacted. Because the estimate was
                   based on conceptual designs that were not fully applicable to or consis-
                   tent with the program established by the act, it cautioned that the cost
                   estimate “should be considered as ‘expected values’ with a large uncer-
                   tainty margin.”

                   The 1984 cost estimate was the first comprehensive DOE estimate reflect-
                   ing its strategy for carrying out the waste program mandated by NWPA.”
                   Although comprehensive, the estimate was considered to be preliminary
                   and subject to the usual sources of error in any preliminary engineering
                   cost estimate as well as other factors peculiar to the program. These
                   other factors included the lack of definition in both the development and
                   evaluation and the repository cost categories. For example, the reposi-
                   tory costs were based on designs that DOE considered to be “preconcep-
                   tual,” at best. On the basis of the above, the cost-estimate analysis
                   stated that the cost estimate for the total system was even more uncer-
                   tain than typical preliminary engineering estimates.


Development and    Development and evaluation cost estimates are based on DOE’S annual
                   budgets. Unlike the other major cost categories, budgets must be pre-
Evaluation Costs   pared for development and evaluation costs because it is the only cate-
                   gory for which expenditures are currently made. DOE’S 5-year budget
                   estimate, added to the actual program expenses already incurred, and
                   projected costs through the end of the program, make up the total devel-
                   opment and evaluation cost estimate.

                   Development and evaluation costs are broken out into the seven major
                   subcategories shown in table 2.4 and are further subdivided through use
                   of a detailed work breakdown structure used in DOE'S financial informa-
                   tion system. While the methodology for each of the seven categories var-
                   ies somewhat, the basic approach is to determine the work that must be
                   done to complete the milestones set forth in the program schedule. The
                   budget cost estimates are used as a basis for projecting future costs.


                   “PreliminaryAnalysis of the Total System Life Cycle Cost of the Commercial High-Level Radioactive
                   Waste Disposal Program (April 27,1984).



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                                        Reliability of Cost Estimates Improving, but
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                                        A somewhat different method is used to estimate the cost of government
                                        administration, This cost is estimated based on the proportion of actual
                                        government administration costs to all development and evaluation
                                        costs incurred; however, WE establishes minimum annual cost estimates.
                                        In the 1989 estimates, these minimums were $25 million per year
                                        through the end of waste disposal operations in 2044 and $15 million
                                        per year through the remaining life of the program.

Table 2.4: Development and Evaluation
Cost Estimate                           Dollars in billions
                                        Cost category                                                                  Amount
                                        -..
                                        First repository                                                                    $5.2
                                        Second repository                                                                    3.1
                                        MkS facility -                                 -                                     0.3
                                        Transportation                                                                       1 .o
                                        Systems integration                                            ~~_.        -         02
                                        NRC fees                                                                       _...- 0.7
                                        Government admirktration                           .~.-                            2.6
                                        Total                                                                            $13.1


                                        In January 1988 DOEissued a draft of its site characterization plan for
                                        the Yucca Mountain site (DOE issued the final plan in December 1988).
                                        The plan, which is a nine-volume document of over 6,000 pages,
                                        describes in detail all the activities to be done in determining if the
                                        Yucca Mountain site is suitable for a repository. The increased scope of
                                        work called for by the plan resulted in significant increases in site char-
                                        acterization costs.

                                        Another factor that has increased the estimated development and evalu-
                                        ation costs is the extension of the expected life of the program by 49
                                        years between the 1984 and 1989 cost estimates-primarily        because of
                                        changing assumptions concerning waste retrievability requirements. The
                                        longer program life has significantly increased DOE’S estimate of govern-
                                        ment administration costs.

                                        Nuclear Regulatory Commission (NRC) regulations governing the con-
                                        struction and operation of DOE’S high-level waste repositories require
                                        that repositories be designed so that the waste can be retrieved during a
                                        50-year period to confirm (monitor) repository performance. In prior
                                        estimates, DOEhad assumed that it would backfill repository shafts and
                                        tunnels with rock during this 50-year period; however, in the 1985 esti-
                                        mate, DOE assumed that backfilling would not begin until the end of the



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                   Reliability of Cost Estimates Improving, but
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                   period.4 This change resulted in the need to incur costs to administer the
                   program through 2068, an additional 28 years, The cost of this addi-
                   tional program activity was offset, however, by a reduction in the esti-
                   mated minimum annual cost of government administration from $20
                   million to $10 million.

                   DOE’S  1986 cost estimate extended the program’s expected life another
                   21 years until 2089. This extension was due primarily to a change in
                   assumptions relating to backfilling the second repository. In its 1985
                   cost estimate, DOE had assumed that the second repository would be
                   backfilled in 8 years, but in its 1986 estimate DOE assumed that this
                   activity would require 27 years. The original assumption was based on
                   data related to the Yucca Mountain site, and the new assumption was
                   based on data obtained from the basalt rock site at Hanford, Washing-
                   ton. This change was made to ensure a more conservative cost estimate
                   for the second repository. DOE also increased the estimated minimum
                   annual cost of government administration from $10 million to $15
                   million.

                   The extension of the program’s expected life until 2089 and a $5 million
                   increase in the estimated minimum annual administrative costs, resulted
                   in the 1986 estimate of government administration costs increasing by
                   about $800 million over the 1985 estimate.


Repository Costs   Through the years, repository system designs have become more
                   defined. Initially, estimates for the several sites being considered were
                   all based on system designs for two salt sites under consideration for a
                   repository early in the program. The first time a site-specific design for
                   the Yucca Mountain site was used for cost-estimating purposes was in
                    1985. Site-specific designs are an important ingredient in preparing
                   accurate cost estimates because they allow the consideration of such
                   factors as depth and size of the particular repository. WE’S 1989 esti-
                   mate for first-repository costs is primarily based on a December 1988
                   report on costs, schedules, and operations at a repository located at
                   Yucca Mountain. Additional design and cost data used in preparing the
                   estimate were taken from the January 1988 draft site characterization
                   plan and a December 1988 DOE-contractor study of a waste-management
                   system with an MRS facility and a repository at Yucca Mountain.


                   ‘Although it is obviously easier to ret,rieve wastes before backfilling   occurs,   an OCRWM official said
                   that the waste ran be retrieved after a repository is backfilled.



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Major Cost Uncertainties Remain




First-repository cost estimates are initially developed by the applicable
architectural and engineering firm in accordance with guidance pro-
vided by Roy Weston, Inc., the DOE support contractor responsible for
the annual cost analyses. Because neither the location nor the type of
rock for the second repository is known, its estimated cost is based on
average mining and operating conditions using design information for
the two first-repository candidate sites eliminated by the 1987 Amend-
ments Act. Applicable headquarters and field office personnel also par-
ticipate in the development and review of the repository cost estimates.

Although a work breakdown structure is not currently used to estimate
repository costs, Weston has developed a cost account structure to
standardize the development of repository cost estimates for both repos-
itories. According to a Weston official, the cost account structure will
evolve into a work breakdown structure sometime in the future. Wes-
ton’s estimating guidance, which provides a definition of each cost
account, breaks out the account structure into the following seven major
categories: management and integration, site preparation, surface facili-
ties, shafts/ramps-underground,   subsurface excavations, underground
service systems, and waste package fabrication. As applicable, estimates
for individual items under each of the seven major categories were made
for engineering, construction, waste emplacement and caretaker, opera-
tions, closure, and decommissioning.

While the cost-estimating methodology can vary, according to Weston’s
guidance, a typical methodology would independently estimate the costs
of the construction and operation phases. The estimated costs of con-
struction and operation would consider local labor rates and material
and equipment costs, to which are added such items as sales taxes and
contingency factors. The estimate for other phases (i.e., engineering, clo-
sure, and decommissioning) would be based on a percentage of the con-
struction cost estimates minus the add-on items such as sales taxes and
contingency factors. The portion of the estimate that is attributable to
contingency is not disclosed in the cost-estimate analysis.

The 1989 cost-estimate analysis compared the 1987 estimate of $5.5 bil-
lion (constant 1986 dollars) for the first repository with the 1989 esti-
mate of $6.7 billion. According to the analysis, most of the increase was
due to increases in the unit costs of the waste packages and the number
of containers needed ($800 million), changes in underground service sys-
tems and excavation ($300 million), and the addition of the license-




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                         Chapter 2
                                   of Cost Estimates Improving, but
                         Reliability
                         Major Cost Unrrrtainties Remain




                         application design costs that were previously included in the develop-
                         ment and evaluation cost category ($262 million).”


Transportation   Costs   Transportation costs are broken out into (1) the costs of shipping and
                         security, (2) the costs of purchasing and maintaining the casks in which
                         the waste is packaged for shipping, and (3) other costs. Shipping and
                         security costs are first developed on a per-unit basis, that is, the cost of
                         a single shipment divided by the quantity of waste shipped. The unit
                         costs are then applied to the quantity of waste shipped between various
                         points and the resultant costs are totaled by year. The number of casks
                         to be purchased is based on expected usage. The “other” category
                         includes the cost of constructing, operating, and decommissioning a
                         cask-servicing facility. DOE adds a contingency factor of 20 percent of all
                         estimated transportation costs to help cover cost uncertainties.


Most Cost Items Now      As discussed above, the scope of program tasks and activities is becom-
Included in Estimate     ing better defined as DOE learns more about what needs to be done to
                         carry out program objectives and how long these efforts are likely to
                         take. In earlier years, however, there were a few program-related facili-
                         ties and activities that DOE should have either included within its cost
                         estimates or explained why the items were not included. DOE has
                         included most of these items in its 1989 cost estimate but, according to
                         its Independent Cost Estimating staff, not all of them. The ICE staff,
                         which is within the Office of Administration and Human Resource Man-
                         agement, reviews each of DOE’S waste program cost estimates. According
                         to this staff, there are at least two items still not included in that cost
                         estimate,

                         One activity that DOE did not include in its cost estimates until 1989 is
                         reimbursement of NRC for its program-related costs. According to the
                         1989 cost estimate, this activity is expected to cost over $700 million for
                         the two-repository system. The inclusion of NRC'S costs within the scope
                         of waste program activities has been an issue since the early days of the
                         program. For example, as long ago as 1983 the Office of Management
                         and Budget proposed that moneys be transferred from the h’uclear
                         Waste Fund to NRC to cover the latter agency’s program-related costs.
                         This was not done at that time because of the need to resolve related

                         ‘According to the analysis, the number of waste containers increased because of a new calculating
                         method used that considers the heat rate of each spent-fuel assembly rather than the average heat
                         rate used in the past.



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legal issues. Until DOE issued its 1989 cost estimate, it neither included
estimated NRC costs nor disclosed the potential for eventually adding
these costs into future program cost estimates.

An additional item related to NRC activities also included in the 1989 cost
estimate for the first time is an electronic information management sys-
tem called the Licensing Support System. Although the system is being
designed by a DOE contractor, NRC will administer it. The system will cost
an estimated $195 million over a IO-year period. As in the case of cost
estimates for NRC waste program activities, earlier DOEcost estimates did
not disclose the potential for adding this item to the program’s estimated
cost.

In its 1987 cost estimate, DOE added the cost of constructing a facility to
provide routine maintenance of transportation casks and to allow
annual recertification of the casks by NRC-$66    million in constant 1986
dollars. The operating costs of the facility, however, were assumed to be
covered by the annual cask maintenance charge. DOE recast these
charges in the 1989 cost estimate to include the cost of constructing,
operating, and decommissioning the facility, and as a result, the total
cask service and maintenance estimate increased from $310 million in
1987 (1986 dollars) to $1 billion in 1989 (1988 dollars).

An OCRWM official who works on transportation matters stated that
OCRWMrecognized the need for a facility to service and recertify casks
prior to 1987 but no estimate of its associated costs was made until the
1987 estimate. According to the official, OCRWMhad neither the time nor
the resources to develop a cost estimate for the facility.

According to the ICE staff, the transportation portion of DOE'S 1989 cost
estimate is still incomplete because it does not include the cost, esti-
mated at $157 million, of constructing, operating, and decommissioning
a facility to service the transportation fleet. Further, the estimate does
not include the cost to decommission the transportation casks, which the
estimating staff said would amount to about $45 million, The omission
of these costs was brought to OCRWM'S attention in a February 1989
report prepared by the ICE staff.”

The ICE staff cited the above items as reasons why its estimates of trans-
portation costs were about $200 million (constant 1988 dollars), or 8 to

“Independent Cost Estimate for the Total System Life Cycle Costs and FeeAdequacy of the Civilian
Radioactive Waste Management Program (Feb. 1989).



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                                       Chapter 2
                                       Reliability of Cost Estimates Improving, but
                                       Major Cost Uncertainties Remain




                                       9 percent, higher than preliminary estimates shown in an August 1988
                                       draft of what became DOE'S 1989 cost estimate. oCRWM officials told us
                                       that while the need to include these costs in future estimates is under
                                       consideration, in the past they had assumed that the disposal costs
                                       would be offset by the salvage value of the casks.


Independent Review of                  Each year, DOE’S ICE staff independently reviews DOE'S cost estimates for
                                       the nuclear waste program. For example, in February 1989 the ICE staff
Cost Estimates                         completed a review of OCRWM'SAugust 1988 preliminary cost estimate.
                                       The ICE staff’s review showed program costs ranging from $26.6 billion
                                       for a one-repository system to $36 billion for a two-repository system.
                                       The ICE staff prepared estimates for the same three scenarios OCRWM
                                       used in its preliminary cost analysis. In that analysis, OCRWMhad esti-
                                       mated costs for a system with two repositories, with the first repository
                                       built at Yucca Mountain and the second at an unspecified location. The
                                       preliminary cost analysis also estimated the cost of a single repository
                                       constructed at Yucca Mountain. All three scenarios included an MRS
                                       facility that would be capable of consolidating spent-fuel rod assemblies.

                                       The ICE staff’s cost estimates were 9 percent to 12 percent higher than
                                       OCRWM'Spreliminary estimates (see table 2.5). OCRWM'Spreliminary esti-
                                       mates ranged from $400 million more to $1.1 billion less than its final
                                       estimates for three similar scenarios (1988 dollars).

Table 2.5: Comparison of ICE Staff’s
Estimates With OCRWM’s Preliminary     Dollars   in billions
Estimates                                                                                Cost estimates                Difference
                                       Scenario                                             ICE OCRWM                Amount       Percent
                                       Two repositories,        no new orders              $35.3         $32.3          $3.0            9
                                       bne repository,         no new orders      -         26.6          23.7           2.9           12
                                       Two repositories,        upper reference             36.0          33.1           2.9            9
                                       Note: The ICE staff escalated OCRWM’s prelimrnary estimates to 1988 dollars by applying a 3.9.percent
                                       lnflatron factor

                                       Source: Independent Cost Estimate for the Total System Life Cycle Costs and Fee Adequacy of the
                                       CivIlIan Radioactive Waste Management Program (February 1989)


                                       The ICE staff’s estimate of repository costs was substantially above
                                       OCRWM’Spreliminary estimate made in August 1988-$15.5         billion com-
                                       pared with $13 billion for a two-repository system. The ICE staff said




                                       Page 29                                                     GAO/RCED-90-66User-Fee Assessments
                         Chapter 2
                         Reliability of C&t Estimates Improving, but
                         Major Cost Uncertainties Remain




                         that its estimate was higher principally because ICE (1) included a sec-
                         ond waste handling building as set forth in the June 1988 draft amend-
                         ment to ~3~'s mission plan, whereas OCRWMassumed one building,7 (2)
                         assumed tighter quality assurance in mining and waste packages, and
                         (3) used higher stainless steel prices for the waste packages. An OCRWM
                         official said that the next mission plan amendment will use a specific
                         waste handling building. Also, DOE’S 1989 cost estimate was based on
                         updated stainless steel prices. Thus, two of the three reasons for the
                         differences between the two estimates appear to have been resolved. An
                         ICE official told us, however, that the potential for higher costs resulting
                         from more stringent quality assurance requirements remains a major
                         concern of the ICE staff.


                         Despite the improvements in DOE’Scost estimates over the years, several
Large Uncertainties in   major uncertainties in the program could have a material effect on
Program Costs Remain     actual program costs in future years. Two of the uncertainties are
                         whether a second repository and an MRS facility will be developed.
                         Another is the suitability of the Yucca Mountain site for the first reposi-
                         tory. In addition, the long-term schedule for completing major program
                         tasks is uncertain. And finally, the unique and long-term nature of the
                         program make estimates of its eventual cost relatively uncertain both
                         because of potential inflationary and real cost increases. In preparing its
                         annual cost estimates, DOE has addressed the uncertainty over the num-
                         ber of repositories. There are other steps that it could take to address,
                         disclose, and account for the other uncertainties.


Number of Repositories   The Amendments Act directs DOE to characterize only the Yucca Moun-
                         tain site as a potential first repository. The act also requires DOE to
                         report to the President and the Congress between January 1,2007, and
                         January 1,2010, on the need for a second repository. The amendments
                         do not, however, alter the requirement contained in the 1982 waste act
                         that NRC, in authorizing DOEto construct and operate the first repository,
                         prohibit emplacement of more than 70,000 metric tons of waste in the
                         repository until a second one is operational. According to the legislative
                         history of the NWPA, the temporary capacity limit was intended to
                         ensure that two repositories, regionally dispersed, would be developed
                         so that no state would have to bear the entire burden of waste disposal.


                         71naccordance with the provisions of Section 301 of NWPA, DOE issued its plans for implementing
                         the waste management program in June 1985.



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                        Major Cost Uncertainties Remain




                        Even if the limit is lifted, a second repository might be needed if the
                        Yucca Mountain site cannot accommodate a repository large enough to
                        hold all the civilian and defense wastes expected to be produced-cur-
                        rently projected at 96,300 MTU.~ DOE has addressed this uncertainty in its
                        May 1989 cost estimate by estimating the cost of the program with both
                        one and two repositories.


Monitored Retrievable   NWPA required DOE to study the need for and feasibility of an MRS facility
                        capable of providing long-term storage, continuous monitoring, manage-
Storage Facility        ment, and maintenance of the wastes and ready retrievability for fur-
                        ther processing or disposal. On March 31, 1987, DOE submitted a
                        proposal to the Congress to build and operate an MRS facility in Oak
                        Ridge, Tennessee.

                        The Amendments Act authorizes DOE to construct and operate an MRS
                         facility but voids DOE’S selection of Oak Ridge as the MRS site, Instead, a
                        three-member MRS Review Commission was established to evaluate the
                        need for an MR~ facility as a part of a national nuclear waste manage-
                        ment system that will achieve the purposes of the NWPA, as amended. As
                        required, the Commission reported the results of its evaluation, includ-
                        ing its recommendations, to the Congress on November 1, 1989.!’ The
                        Commission concluded that an MRS facility cannot be justified under the
                        act’s conditions, which link the facility’s capacity and schedule of opera-
                        tion to that of the permanent repository. The Commission recommended
                        that the Congress authorize construction of an emergency storage facil-
                        ity limited to 2,000 MTU of waste and of a user-funded interim storage
                        facility limited to 5,000 MTU of waste. The Commission also recom-
                        mended that the Congress reconsider the subject of interim storage by
                        the year 2000.

                        As required by the amendments, DOE must conduct a new site selection
                        survey if it determines that an MRS facility is needed. DOE could not begin
                        a new survey and evaluation of potential MRS facility sites, however,
                        until the Commission submitted its report to the Congress. Further, DOE
                        may not select an MRS facility site until after it recommends a repository
                        site to the President and cannot begin construction of the MRS facility
                        until NRC has issued a construction authorization for a repository.


                        ‘For a more detailed discussion of this matter, see our report entitled Nuclear Waste Fourth Annual
                        Report on DOE’s Nuclear Waste Program (GAO/RCED-88-131, Sept. 28,198S).
                        “Nuclear Waste: Is There a Need for Federal Interim Storage? (Nov. 1, 1989).



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                           Reliability of Cost Estimates Improving, but
                           Major Cost Uncertainties Remain




                           Of particular concern to the future of an MRS facility will be the success
                           in selecting a site from a political standpoint. For example, in its report,
                           the MRS Review Commission was not optimistic that either DOE or the
                           Nuclear Waste Negotiator-a        position within the Executive Office of the
                           President empowered to negotiate potential agreements for nuclear
                           waste facilities-would    be successful in obtaining a state’s agreement to
                           host such a facility. DOE could address uncertainty over the MRS facility
                           by including in its annual cost estimates an estimate of the cost of the
                           waste program without such a facility.


Suitability of Yucca       If WE eventually determines that the Yucca Mountain site is suitable for
                           a repository, it must recommend its selection to the President. If the site
Mountain                   is unsuitable, DOE is not authorized to select another candidate site.
                           Instead, it must terminate all site-specific activities, report to the Con-
                           gress and the state that the site is unsuitable, and, within 6 months, pro-
                           vide the Congress with recommendations for further action to ensure
                           the safe, permanent disposal of nuclear waste.

                           Before DOE can determine the suitability of the site, it must investigate
                           the geologic conditions at the site. As discussed below, DOE now expects
                           this site characterization process to take until 2001. Although a determi-
                           nation that the site is unsuitable could be made at any time after site
                           characterization begins, a decision that the site is a suitable one will not
                           be made for at least 11 years. DOE could address this uncertainty by
                           including in its annual cost estimates an estimate of the cost of stopping
                           work at Yucca Mountain, selecting and characterizing another site, and
                           developing the first repository at the other site.


Schedule                   Another program uncertainty that is critical to DOE'S cost estimate is the
                           waste program’s schedule. Some key milestone dates assumed in the
                           1989 analysis include

                       l submitting a license application to NRC in 1995,
                       . receiving NRC construction authorization and beginning repository con-
                         struction in 1998,
                       l beginning waste receipt in first repository in 2003 and in second reposi-
                         tory in 2032, and
                       l completing waste receipt in first repository in 2027 and in second repos-
                         itory in 2042.




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                 Major Cost Uncertainties Remain




                 Establishing realistic program milestones is difficult, particularly for the
                 matters outside of WE'S direct control. For example, one reason for pro-
                 gram delays is the difficulty DOE has had in obtaining Nevada’s approval
                 of applications for environmental permits needed to begin characterizing
                 the site. Nevada recently returned DOE’S applications unapproved and is
                 suing DOE to block further work on Yucca Mountain. Moreover, there is a
                 potential for delays in obtaining an NRC license. While DOE'S current
                 schedule calls for it to obtain NRC approval of its license application
                 within a 3-year period, a nuclear industry coalition, with extensive
                 experience in licensing nuclear power plants, estimates that the licensing
                 process will require from 5 to 7 years.

                 DOE revised its program schedule in November 1989, in part due to the
                 environmental permit issue. The new schedule shows significant slip-
                 page in program milestones from those used in the 1989 cost estimate.
                 For example, the expected start of repository operations slipped from
                 2003 to 2010. However, 1x1~ points out that, because a licensed reposi-
                 tory is a first-of-a-kind undertaking, the later schedule dates should be
                 viewed only as reasonable targets. DOE could address the cost uncertain-
                 ties posed by potential schedule delays by including in its annual cost
                 estimates the estimated cost of program delays at key points, such as
                 completing site characterization, obtaining authorization to construct a
                 repository, and beginning repository operations.


Cost Estimates   DOE'S nuclear waste program is a large and unique century-long under-
                 taking. Although the major work effort in the early years-site charac-
                 terization -has become much more clearly defined and costly over time,
                 there is still considerable uncertainty about the time and effort that will
                 be required to complete this effort. Also, the actual costs of government
                 administration over the life of the program are uncertain. Despite these
                 uncertainties, however, there is no contingency provision in DOE'S cost
                 estimates to cover cost uncertainties in the development and evaluation
                 category.

                 Repository cost estimates do contain allowances for contingencies. These
                 allowances, however, are explicitly recognized only in the detailed cost
                 accounts. The overall amount of the contingency allowance for the
                 repository cost category is not disclosed in DOE'S cost estimates. In con-
                 trast, DOE'S estimate of transportation costs contains a contingency
                 allowance of 20 percent of all estimated transportation costs.




                 Page 33                                        GAO/RCED-!MMiSUser-Fee
                                                                                     Assessments
              Chapter   2
              Reliability of Cost Estimates Lmproving,
                                                    but
              Major Cost Uncertainties Remain




              Despite a number of factors working to hold down program costs, such
Conclusions   as less waste to dispose of and fewer sites to characterize, the estimated
              cost of the program has increased from under $20 billion in 1983 to $32
              billion in 1989. A major reason for this increase is related to the most
              important of the criteria we believe are basic to an effective cost-esti-
              mating process-a clear identification of the task. As the program
              became better defined and more complete, major cost items were added.
              Another major reason for the increase is inflation, which accounts for
              about $4.5 billion of the approximate $12 billion increase.

              The 1989 estimate could be understated by over $2 billion. First, the
               1989 TSLCC analysis does not include costs for a transportation fleet ser-
              vicing facility and transportation cask decommissioning that DOE'S ICE
              staff estimates would cost $200 million nor does it explain why such
              costs were excluded. Second, the TSLCC estimate does not include any
              provision to cover cost uncertainties for program development and eval-
              uation. Applying the 20 percent allowance provided for the transporta-
              tion cost category to the development and evaluation cost category
              would increase the 1989 estimate by about $2.6 billion for a two-reposi-
              tory system. Further, while provisions are made for cost uncertainties
              associated with the individual elements making up the estimated cost of
              the repository category, the cost-estimating analysis could be more
              informative if it disclosed the amount of the repository cost-category
              estimate allowed for contingencies.

              Although correcting the above problems would further improve the reli-
              ability of the estimates, their accuracy would still be questionable
              because of the difficulty in successfully predicting events and costs for
              this long and unique program. Accordingly, we believe that the esti-
              mated cost of the program will continue to increase as DOE proceeds with
              its research and development effort, system design refinements, and
              complex licensing procedures. Program delays, which have already
              pushed back the scheduled repository operating date by 12 years, will
              continue to create cost uncertainties. Another uncertainty is whether
              Yucca Mountain will prove to be suitable for a repository. If not, signifi-
              cant additional costs would be incurred for such things as the search for
              a new site, environmental impact studies, and site characterization.

              It could be useful to the Congress, DOE officials, and others interested in
              assessing the adequacy of the waste fee if estimates were made for sce-
              narios covering major program uncertainties. For example, considering
              the potential for future program delays, it could be beneficial in judging



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                      Reliability of Cost Estimates Improving, but
                      Major    Cost Uncertainties Remain




                      fee adequacy to know what effect further delays could have on esti-
                      mated costs. Also, it could be important to know what the effect on pro-
                      gram costs would be if Yucca Mountain is determined to be unsuitable
                      for a nuclear waste repository.

                      The recognition of inflation is also basic to an effective cost-estimating
                      process. Although DOE;does not recognize inflation in developing its esti-
                      mate, it does consider inflation in its fee-assessment analysis. Thus, our
                      concerns about DOE'S treatment of inflation are discussed in chapter 3,


                      To make the annual cost estimates of the nuclear waste management
Recommendations to    program more reliable and useful, we recommend that the Secretary of
the Secretary of      Energy (1) ensure that the estimates include the costs of all major facili-
Energy                ties, tasks, and activities or, if excluded, explain the rationale for such
                      exclusion, (2) have estimates made for additional scenarios, such as pro-
                      gram delays and a finding that Yucca Mountain would not be suitable
                      for a repository, and (3) ensure that all major categories of the estimates
                      include adequate provision for contingencies and that the total portion
                      of the estimates devoted to contingencies be disclosed.


                      DOE concurred with our first recommendation on including all cost ele-
Agency Comments and   ments in the estimates. DOE said that its estimates have included the
GAO Evaluation        costs of all system elements when such cost information was available,
                      but that in the future it will also discuss the rationale for not including
                      the cost of any known system components.

                      DOE did not concur with our second recommendation to make estimates
                      for additional scenarios. DOE does not believe that analyses of further
                      program delays and a potential finding of the unsuitability of Yucca
                      Mountain for a repository should be used at this time to analyze the
                      adequacy of the current fee. Nevertheless, WE said that it performs
                      analyses that arc similar to those we recommend but that the results of
                      these analyses are not published. It said that its analyses are performed
                      for the purposes of “system optimization” and contingency planning. In
                      regard to program delays, DOE noted its recent reevaluation of the pro-
                      gram schedule and that, on the basis thereof, the planned target date for
                      beginning repository operations was revised from 2003 to 2010.

                      The fact that DOE is already doing the types of analyses we are recom-
                      mending shows t,hat DOF:believes that the information generated by the



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analyses is useful. Regarding the question of whether or not the infor-
mation should be published, we believe that the impact such events
could have on program costs, and thus fees, would be of interest to the
Congress and others having an interest in the fee, and therefore should
be published. To help ensure that the results of its analyses, if pub-
lished, are properly interpreted by the readers of its reports in assessing
the adequacy of the waste fee, DOE could make sure that the analyses
are accompanied by the proper explanations and caveats.

In regard to the program schedule, we would point out that, like earlier
target extensions, the revised dates are only targets and that a whole
host of things could happen to delay the program further. Accordingly,
we believe that estimating what the program’s costs will be if there are
further delays could be useful.

Regarding our recommendations dealing with the provision for contin-
gencies in its cost estimates, DOE said that it makes allowances for uncer-
tainties in projecting development and evaluation costs, but that
without cost estimating guidelines such as those used for estimating the
costs of structures, the uncertainty is difficult to define explicitly. Nev-
ertheless, DOE said that it will reevaluate the feasibility of developing an
explicit contingency. Also, DOE said that in the future it will discuss, in
the TSLCC report itself, the contingency provisions used in developing the
program cost estimates,




Page 36                                        GAO/RCED-90-66 User-Fee Assessments
Chapter 3

Fee Adequacy Decision-Making ProcessCould
Be Improved

              A study by M)E'S ICE staff shows that, if inflation averages 4 percent a
              year over the program’s life and there is no fee increase, the Nuclear
              Waste Fund is underfunded by $2.4 billion for a one-repository system
              and $4.1 billion for a two-repository system (in discounted 1988 dol-
              lars). Although OCRWM'S most recent fee-adequacy assessment produced
              similar results, it did not propose a fee increase because of the assess-
              ment method it uses. The method is directed at determining if, and
              when, DOE should begin automatically adjusting the current fee to
              account for inflation. Indexing the fee to the rate of inflation would help
              ensure that adequate revenues are collected to cover program cost
              increases due to inflation. It would also equitably distribute program
              costs among present and future payers of fees as the purchasing power
              of the dollar changes over time. However, NWPA, as amended, does not
              authorize such a system.

              Also, OCRWMdoes not select an inflation rate estimate for use as its prin-
              cipal basis or most probable scenario for determining when indexing
              should begin. There is a critical need to do this in the assessment process
              considering that the cost estimates OCRWMprepares do not provide for
              cost increases due to inflation. OCRWMbases its analysis on several dif-
              ferent program cost and revenue scenarios coupled with different infla-
              tion and interest rates. These scenarios, however, produced results
              showing both that indexing should have begun several years ago and
              that indexing is not needed. Since no scenario was designated as the
              most probable to occur, it is difficult to put the results of OCRWM'S analy-
              ses of the various scenarios into perspective. Moreover, it is unclear how
              OCKWM made the decision that no fee increase was needed.

              Further, DOE'S fee assessments do not take into account the uncertainties
              in revenue collections from deferred utility payments of one-time fees
              for disposal of waste generated before April 7, 1983. If program cost
              estimates are understated and/or revenues are overstated, then either
              future payers of disposal fees will have to be charged much higher fees,
              the funding shortfall will have to be financed from general tax reve-
              nues, or a combination of both.

              Finally, DOE has not made any payments covering the cost of defense-
              waste disposal. With interest accumulating on the unpaid balance, DOE'S
              cost-share had climbed to $483 million by the end of September 1989. Its
              total share of costs is expected to be $3.6 billion to $6.4 billion, depend-
              ing on whether one or two repositories are eventually developed. DOE is
              considering starting to pay its fair share in fiscal year 1991, including
              paying off the amount it already owes over the next 10 years. This


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                         Fee Adequacy Decision-Making Process Could
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                         approach is sound. What is also needed in this deficit conscious environ-
                         ment is that DOE formally account for and disclose its cost share so that
                         congressional and administration decision makers can assess the impli-
                         cations of making or deferring defense waste payments while consider-
                         ing competing demands for funds.


                         The proper treatment of inflation is critical to arriving at sound conclu-
Treatment of Inflation   sions about fee adequacy. Much of the analysis presented in OCRWM'S
Crucial to Fee           most recent fee-adequacy report of June 1987, however, was based on a
Adequacy                 O-percent inflation rate coupled with a 3-percent real interest rate.’
                         These analyses indicated that factors affecting interest earned on such
                         investments play a critical role in determining assessment results. For
                         example, for the high-cost waste program scenarios, projections of total
                         interest earnings fluctuated greatly, ranging from about $11 billion to
                         $102 billion in the annual assessments that OCRWM made during the
                         1984-87 period. By comparison, OCRWM'S projections of fee collections
                         and program costs for the same period were relatively stable, ranging
                         from about $30 billion to $35 billion and from $24 billion to $32 billion,
                         respectively.

                         Moreover, while the projections of fee collections decreased by about 14
                         percent from 1984 to 1987 and program cost estimates increased by
                         about 30 percent, projections of interest earnings increased by more
                         than 450 percent. Interest earnings and end-of-program fund balances
                         are substantially increased when inflation is not taken into considera-
                         tion. With inflation considered, however, program expenditures can out-
                         strip revenues early on, creating a need to borrow funds and incur
                         interest expenses. For example, the ICE staff’s analysis shows that for
                         the one-repository system, with a 3-percent real interest rate (i.e., the
                         difference between the nominal interest rate and the inflation rate) and
                         no inflation, the estimated end-of-program fund balance is $29 billion;
                         however, with a 3-percent real interest rate and a 4-percent inflation
                         rate, the ending balance is a $44 billion deficit (in constant 1988 dol-
                         lars). [See table 3.1.)




                         'See Nuclear Waste Fund Fee Adequacy: An Assessment (DOE/HW-0020, June 1987).



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Table 3.1: Projected End-Of-Program
Fund Balances With Waste Fee 01 1 Mill   Dollars in billions (deficits   shown   in parentheses)
                                         -......-
Per KWH                                                                                  Balance for each scenario
                                                              Interest Two repositories,        One repository,   Two repositories,
                                         Inflation rate            rate     no new orders        no new orders     upper reference
                                         0                            0                 wi                   WI                  S(3)
                                         0                            3           _".__  (4)                  29                  52
                                         1                            4                 (28)    ..-- -"--       6                 Ii
                                         2 ._-~--.                    5                 (47)                 (14)                ('4)
                                         3              " .._ _-..- 6..-. ~~            (64)                 (30)                (38)
                                         4                            7                 (77)                 (44)                (57)
                                         Note Amounts shown are In constant 1988 dollars The ICE staff derived these amounts by deflating the
                                         projectlons contained in its report to account for inflation but not for the time value of money. This
                                         approach IS consistent wtth OCRWM’s methodology. ff the time value of money was accounted for,
                                         ICE’s projectIons of the amount by which the program would be underfunded for the 4 percent inflation
                                         and 7 percent interest rate scenano would range from $2.4 billion to $4 1 billlon.

                                         Source ICE staff adjustments     to amounts shown In Independent Cost Estimates for the Total System
                                         Life Cycle CC                                                                                (Feb. 1989)
                                         reflecting 1988 dollars



                                         In its February 1989 report, the ICE staff concluded that the l-mill fee
Current Fee Will Not                     will not cover program costs unless there is little or no inflation over the
Recover All Program                      life of the nuclear waste program. The ICE staff estimated that if the
Costs With Inflation                     inflation rate averages 4 percent and the interest rate 7 percent, retain-
                                         ing the l-mill fee would result in end-of-program fund deficits ranging
                                         from $44 billion to $77 billion (in constant 1988 dollars). The 4-percent
                                         infiation rate was the highest tested by ICE; however, as discussed later,
                                         it is below both the historic and projected rates for 25-year periods.
                                         Without an inflation indexing system, the ICE staff projected, the l-mill
                                         fee may have to be increased immediately by up to 50 percent to recover
                                         long-term program costs.

                                         In assessing the adequacy of the l-mill fee, the ICE staff compared, using
                                         varying rates of inflation and interest, the “stream” of projected annual
                                         expenditures and revenues and calcuIated the interest earned or
                                         incurred each year on the fund balance or deficit. Based on its analysis,
                                         the ICE staff concluded that the l-mill fee would not cover estimated
                                         program costs except in those cases where it is assumed that inflation
                                         averages less than 2 percent-an event the staff said is not likely to
                                         occur. (See table 3.2.)




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Table 3.2: Fee Needed to Recover
Program Costs                      Fee in mulls
                                     --
                                                                                     Balance for each scenario
                                                         Interest Two repositories,         One repository,   Two repositories,
                                   Inflation rate             rate       no new orders       no new orders     upper reference
                                   0                          -~
                                                                 0 __~-_
                                                                                   1.50          -.
                                                                                                        1.13             -_ 111
                                   0                            3
                                                               ~~-     .-.~
                                                                                      1.02                      0 88                 --   0.82
                                   1                         - 4                     1.14-‘-----          I___~ 0.98                      0.94
                                   ~---~~~            ~-
                                   2                     ~~-    5---    -__.          1.26                      1.08                      1.08
                                   3                            6                     138                       1.18           -7%
                                                                                                                         --_
                                   4                             7                    1.50                      1.29                      1.33

                                   Source. Independent Cost Estimates for the Total System Life Cycle Costs and Fee Adequacy of the
                                   CIvIlran RadIoactive Waste Management Program (Feb. 1989)


                                   Although the ICE staff said that its analysis showed a need to adjust the
                                   fee to ensure full cost-recovery in accordance with the provisions of
                                   NWPA, the staff also said that it learned after completing its analysis that
                                   OCRWM'S assessment of fee adequacy is based on determining when
                                   OCRWM should begin indexing the fee to inflation. Accordingly, the ICE
                                   staff said that in the future its analysis will be directed at determining
                                   when indexing should begin.

                                   OCRWM'S   most recent assessment of June 1987 had produced results that
                                   are similar to the February 1989 ICE report. Projections of end-of-pro-
                                   gram fund balances by OCRWM showed that with 4-percent inflation and
                                   7-percent interest rates, the current fee would result in deficits ranging
                                   from $21 billion to $76 billion (in constant 1986 dollars) for the then-
                                   authorized waste management system.’ Despite this finding, however,
                                   OCIZWM recommended that the l-mill fee not be changed. The decision not
                                   to recommend a fee increase was based on OCRWM'S assessment that it
                                   would not be necessary to immediately implement a system it plans to
                                   use to automatically revise the fee based on an inflation index,

                                   OCRWM  officials told us that they arrived at their decision after analyzing
                                   an “envelope of cases” of different scenarios-numbers       of nuclear
                                   plants, quantities of waste, and waste-system configuration-and     dif-
                                   ferent interest and inflation rates. For example, OCRWM officials said
                                   that for the 1987 assessment they analyzed inflation rates of 2,3, and 4
                                   percent coupled with real interest rates of 1 and 3 percent to determine
                                   when it would be necessary to begin indexing the fee to inflation (see

                                   ‘Although these figures acconnt for inflation, they dw not account for the time value of money. If the
                                   time value of money was xwunt,ed for, as measured by a real interest rate of 3 percent, OCRWM's
                                   1987 underfunding estimates would range from $1.1 billion to $4 billion in 1986 dollars.



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                                        table 3.3). According to these officials, OCRWM did not use a base (proba-
                                        ble) case in arriving at a decision about whether it will be necessary to
                                        implement an indexing system during the assessment year.

Table 3.3: Analysis Used to Determine
When to Begin indexing l-Mill Waste                                                  cost        Year to begin with various inflation rates
Disposal Fee to Inflation               Scenario                                     category      2 percent       3 percent       4 percent
                                                                                           I~~~_         ~~
                                        3 percent real interest rate
                                          cases                                                                     ~. -~-
                                        Upper reference case                                                                      _~.__
                                          Authorized system                         Low                                 a                     a              2004
                                                                                    High                         2003               1996’.--                 1993
                                           Improved performance                     LOW
                                             svstem                                                                     a          2003                      1998
                                                                                     Hlah                        1995
                                                                                                                  ~~...---.      1992-                       1990
                                        No new o&k    case ..-- ..--
                                          Authorized system                         LOW                                 a            2003                    1997
                                                                                    High                         1989             -‘~-1988                   1988
                                                                                                                              ~~-.
                                           Improved performance                     Low
                                             system                                                              1999               1994                     1992
                                                                                    High                                b                     h                     b
                                                                                                                                   .-~            ~-________--~
                                        1 perceni real interest rate
                                           cases
                                        ~.._~             ~~                       ~         --                                               .~~.-
                                        UDDer reference case                                             ~.~.”
                                          Authorized system                         Low                      2007
                                                                                                               .--.I               ___________-
                                                                                                                                    1998         1995
                                                                                    High                     1990 .-                1989         1988
                                                                                                          ~~~~                              _______ -~
                                           Improved performance                     Low
                                             system
                                             ~      .-.--..              ~~~                        .-           1999               1994                     1992
                                                                                    High                                b                     h                     b
                                                                                                                                         .~           .-..
                                        No new orders case                                                     ~~~~.-.
                                          Authorized system                    _.---. Low                     1992 .-
                                                                                                             ~~                     1990                     1989
                                                                                      High                              b                     b                     b

                                           Improved    performance                  Low
                                             system                                                                     b                     b                     b



                                        %flation   Indexing not needed

                                        bThe l-m111fee will not recover costs, even with no Inflation; thus, a fee increase and an inflation indexing
                                        system are needed Immediately.
                                        Source: Nuclear Wasie Fund Fee Adequacy An Assessment (DOE/RW-0020, June 1987).


                                        We discussed this OCRWM treatment of inflation assessment in a July
                                        1988 report.” We said that the highest inflation rate OCRWM used in its
                                        June 1987 analysis-4 percent-is below both the actual average for

                                        “GAO/RCED-88-129.



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the past 25 years (5.3 percent) and the rate forecasted for the next 25
years by two major economic forecasting firms4 We recommended that
OCRWMuse a realistic, base-case inflation rate estimate in determining
the fee required to recover program costs. We added that the sensitivity
of OCRWM’S projections could be tested by using inflation rates both
above and below the base case. Also, we said that, although OCRWM could
index the fee to inflation, the fee could not be changed automatically
each year because NWPA precludes a fee change without a go-day con-
gressional review process. We expressed our opinion that the Congress
would have to amend NWPA before OCKWM could implement an indexing
system.

OCRWM   officials told us that the next assessment report, currently sched-
uled to be issued in late spring of 1990, will correct many of the con-
cerns we raised on their 1987 report. They told us that the upcoming
report will do a better job of describing the process and methodology
OCRWM uses to assess fee adequacy and the bases for its decision about
whether or not to propose changing the current fee. Also, they said a
wider range of inflation rates would be used in the assessment; however,
they are not using a base-case inflation rate estimate in their assessment
as we had recommended.

DOEaddressed its reasons for opposing the use of a base-case inflation
rate in an October 5, 1988, letter written pursuant to 31 U.S.C. 720.” DOE
said that it believes that the use of a single base case is inappropriate
because of the significant uncertainties affecting this long-term pro-
gram. Specifically, DOE cited uncertainties about such factors as system
configuration, nuclear electric generation, interest rates, and inflation
rates. DOE said that. the use of an envelope of cases in assessing fee ade-
quacy is more appropriate than a single base case because alternative
assumptions about these factors can have offsetting effects on fee ade-
quacy. Lastly, DOE said that before it recommends an indexing system, it
will consider our views on the need to amend NWPA.

ME’S arguments are not persuasive. Inflation, like the other factors DOE
cited, must be recognized and realistically provided for in determining
what the disposal fee should be set at to produce the revenues needed to

JWe reported that Wharton Econometrics estimated that the annual inflation rate would average
between 4.3 and 5.1 percent for the %-year period from 1986 to 2011, and Data Resources, Inc.,
estimated that the rate would average between 4.1 and 6.8 percent for the 25year period from 1987
to 2012.

‘This law (31 USC. 720) requires the heads of a federal agency to submit     a written   statement   on
actions taken on our recommendations to selected congressional committees.



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                      cover program costs. We recognize that it is appropriate for OCRWMto
                      test the sensitivity of cost, revenue, and fee-adequacy analyses to alter-
                      native assumptions. Making a convincing analysis of what costs and rev-
                      enues are most likely to be, however, ultimately requires selecting
                      values for key factors that OCRWMcan defend as the most likely to occur.
                      OCRWM does not recognize the factor of inflation in preparing its program
                      cost estimates. If it did, however, one would presume that it would
                      select an inflation rate that it could defend on the basis of either histori-
                      cal rates of inflation or projections by recognized economic forecasting
                      firms. Such an approach would produce virtually the same result as
                      using a realistic, base-case estimate of the inflation rate in its fee-ade-
                      quacy analysis as we recommended in our July 1988 report. Thus, we
                      continue to believe that our recommendation is valid.


                      Section 302(a) of the NWPA requires that DOE propose a fee adjustment to
Fee Adjustment        the Congress if, based on its annual review, DOEdetermines that the fee
Mechanism Important   is either too high or too low. Thus, it is clear that in enacting NWPA the
to Ensure Equitable   Congress was not only concerned with ensuring that all program costs
                      be recovered from the generators and owners of the waste but that
Cost Recovery         those who pay disposal fees not be overcharged.

                      In an August 1984 study of the waste disposal fee, the Congressional
                      Budget Office (CBO)said that an “optimal fee” is one that collects neither
                      too much nor too little money from ratepayers.” It said that in establish-
                      ing such a fee there are two components: (1) assigning the correct fee
                      based on current estimates of program costs and waste generation and
                      (2) providing a mechanism for adjusting the fee. One fee adjusting mech-
                      anism CBO discussed is an inflation indexing system that would adjust
                      the fee automatically to account for the effects of inflation on program
                      costs and revenues.

                      We agree with CBO that to ensure full cost recovery the fee must be
                      adjusted to recognize both real changes in the annual estimates of costs
                      and revenues and changes due to inflation. As discussed in chapter 2,
                      estimating the real cost of this unique, long-term program at this early
                      stage is fraught with uncertainty. However, uncertainty over the long-
                      term effects of inflation could be addressed by implementing an infla-
                      tion indexing system that would provide for automatic fee adjustments
                      each year. OCRWMofficials told us that they favor such a system because


                      “Nuclear Waste Disposal: Achieving Adequate Financing, Congressional Budget Office (Aug. 1984).



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it would help to ensure adequate revenues and to distribute costs equita-
bly among present and future ratepayers by recognizing changes in the
purchasing power of the dollar. It should be noted, however, that the
current l-mill fee constitutes only a small portion-l.34   percent-of the
national average residential electricity price for 1988. Even with the
maximum 1.5-mill fee that the ICE staff’s analysis showed could be
needed, the fee would still be only 2 percent of the national average
price.

In our July 1988 report, we discussed the concern of utilities and others
that the $2 billion surplus that the Nuclear Waste Fund had at the time
indicated that the l-mill fee was too high. We said that large surpluses
in the Fund are to be expected in the early years of the program, when
expenditures are relatively small, as contrasted with later years, during
construction and operation of the repository or repositories. Early Fund
surpluses should not influence decisions about, fee adequacy because, as
explained below, utilities operating nuclear plants during the first 50 or
more years of the program’s life must pay fees that will produce suffi-
cient revenues to cover expenditures over the entire loo-year life of the
program.

The 1989 cost-estimate analysis shows that expenditures will decrease
substantially after the repository construction and operation phases
have been completed. The completion date assumed in that analysis was
2042 for a two-repository system. The cost-estimate analysis shows
annual expenditures peaking at $748 million in 2020, declining to $215
million in 2042 and dropping further to $74 million in 2043. From 2044
until the program’s end in 2087, annual costs average about $66 million
a year. Although expenditures would be made through 2087 under that
program schedule, collection of annual fees would occur only through
2037, when the last of the current generation of nuclear plants is
retired.7 Therefore, DOE must ensure that the fees collected through 2037
produce sufficient revenues to pay all costs through that year plus all
expenditures for the remaining 50 years of the program.




7Under EIA’s no-new orders forecast, it is assumed that no new nuclear plants will be built beyond
those currently operating and under construction. Thus, once the last of these plants ceases opera-
tions, no additional waste fees will be collected.



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Uncertainty About        quacy of the current fee due to the long-term effects of inflation, as dis-
Real Costs and           cussed in chapter 2, there is still significant uncertainty about what the
Collection of One-Time   real cost of the program will be. As previously discussed, the real cost of
                         the program is likely to be higher than DOE currently estimates. The cor-
Fees                     rect way to address this probability for the purpose of fee adequacy is,
                         as we recommended in chapter 2, to make appropriate allowances in
                         developing waste program cost estimates. There is also some uncer-
                         tainty about whether utilities will be able to pay all of the one-time fees
                         owed to the Nuclear Waste Fund for the nuclear waste that they gener-
                         ated prior to April 7, 1983.

                         The OCRWM and the ICE staff’s fee adequacy assessments discussed ear-
                         lier both assumed that DOE will collect all projected fees in a timely man-
                         ner. However, DOE’SInspector General reported in 1986 and again in
                          1990 that collection of some of the one-time fees is doubtful.R According
                         to the IG’S latest report, OCRWM'Scollection of about $2 billion of the $3
                         billion in one-time fees and interest payments due by January 1998 is at
                         risk. This is because of the uncertain financial position of 11 of the 17
                         utilities that chose to defer the payments until that time.” In commenting
                         on the report, the Secretary of Energy stated that he had directed OCRWM
                         to resolve this issue through one of the mechanisms that the IG recom-
                         mended. The amount of the underfunding estimates shown in the UCRWM
                         and ICE staff fee-adequacy analyses could be even greater if DOE does not
                         fully collect the deferred payments of the one-time fees owed by
                         utilities.


                         NWPA requires DOE to pay its fair share of waste program costs into the
Uncertainty About        Nuclear Waste Fund but does not specify when payments should be
DOE Payments for         made. To date, noE--specifically its Office of the Assistant Secretary for
Disposal of Defense      Defense Programs-has not paid into the Fund. Regular payment of
                         DOE’S share of program costs depends on the willingness of the adminis-
Waste                    tration and the Congress to provide the necessary funds at a time when
                         there are competing demands for funds to clean up and modernize DOE’S
                         defense complex.


                         *Accuracy of Fees Paid by the Civilian Power Industry to the Nuclear Waste Fund (WE/IG-0231,
                         Oct. 27, 1986) and Followup Review of Fees Paid by the Civilian Power Industry to the Nuclear Waste
                         Fund (DOE/IG-0280, Mar. 26, 1990).

                         ‘In accordance with their waste disposal contracts with DOE, utilities could pay the one-time fee (1)
                         in quarterly payments, with interest (2) in a future lump-sum payment, with interest, or (3) in full by
                         June 30, 1985, with no interest,.



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                           DOE  stated in its August 1989 C-year plan for environmental restoration
                           and waste management that it may begin paying its annual fair share
                           into the Fund in fiscal year 1991 and also pay off its cost share from
                           earlier years, plus interest, over a lo-year period. DOE'S congressional
                           budget request for fiscal year 1991, however, did not request such
                           funds, apparently because their inclusion was not approved by the
                           Office of Management and Budget Nevertheless, we evaluated DOE's
                           proposed payment approach from the standpoints of (1) fairness, or
                           equity, to utilities paying fees for disposal of civilian nuclear wastes, (2)
                           the cost to the federal government on a consolidated basis, (3) the effect
                           on DOE'S appropriation for atomic energy defense programs, and (4) the
                           effect on the Nuclear Waste Fund. We found that the approach is fair,
                           does not affect the government’s overall waste-disposal cost, and does
                           not severely affect the availability of funds from the Nuclear Waste
                           Fund. The major impact over the next 10 years would be that funds paid
                           into the Nuclear Waste Fund would not be available for use in cleaning
                           up or modernizing DOE'S defense complex. However, if DOE does not begin
                           paying its share of waste program costs, the unpaid balance-and inter-
                           est on that balance-will     rapidly increase.

                           To assist congressional decision makers in establishing budget priorities,
                           DOE:needs to allocate waste program costs between utilities and DOE each
                           year as well as fully disclose DOE'S estimated total share of costs and the
                           amount, including interest, that it already owes. These actions require
                           accounting and reporting procedures for allocating costs between civil-
                           ian- and defense-waste generators to provide for proper allocation and
                           recording of program costs.


NWPA Provides Discretion   NWPA requires DOE to allocate waste program costs between civilian- and
on Payments of Defense     defense-waste generators. It also prohibits any federal department from
                           disposing of nuclear waste generated or owned by the government into
Waste Fees                 civilian repositories unless the department transfers to DOE, for deposit
                           into the Nuclear Waste Fund, amounts “equivalent to” civilian waste
                           disposal fees. Following the President’s decision on defense waste dispo-
                           sal, section 8(b)(2) of NWPArequired the Secretary of Energy to proceed
                           promptly with arrangements, including cost allocation, for use of one or
                           more of the civilian repositories for disposal of defense waste. In August
                           1987, DOE established a method for allocating the costs of the waste pro-
                           gram between its civilian and DOE components. In an earlier report, we
                           concluded that DOE'S method complies with all NWPA requirements and is




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                          consistent with the accepted accounting concept of allocating costs to
                          parties that either caused them to be incurred or benefitted from them.“”

                          Beyond the requirement for allocating costs and paying equivalent fees,
                          the NWPA and its legislative history are silent on when the government
                          should begin paying for disposal of defense waste. DOE has, however,
                          outlined three basic policy positions that will affect whatever future
                          payment procedure WE adopts. First, DOE intends to allocate program
                          costs between commercial and defense waste owners and generators
                          beginning with the effective date of NWPA (Jan. 7, 1983), rather than the
                          date of the President’s decision to commingle the waste (Apr. 30, 1985).

                          Second, DOE intends that the time value of money will be included in
                          calculating budget requests for defense waste payments beyond the time
                          when OCRWM incurs related costs for disposal of defense wastes. In this
                          regard, DOE has recognized that OCRWM has already made substantial
                          outlays for development and evaluation activities for which its defense
                          program has a proportional obligation.

                          Third, DOE intends to consider the adequacy of the civilian-and defense-
                          waste fees independently so that the delay in defense waste disposal
                          payments will not affect the civilian fees. In this regard, DOE intends to
                          apply interest earned on investments of temporarily excess revenue
                          from civilian fee collections to the allocated cost of disposing of civilian
                          waste.


Equity to Utilities Not   Through December 31, 1989, utilities had paid about $4.2 billion into the
                          Nuclear Waste Fund, Upon payment of fees in accordance with their
Affected                  contracts with DOE, utilities are absolved from any further financial obli-
                          gation for disposal of the related wastes. The fees become federal funds
                          to be used, subject to congressional appropriation and direction, for
                          waste disposal activities. In return for payment of fees, the govern-
                          ment’s responsibilities are to develop, construct, operate, and decommis-
                          sion a repository and any other waste facilities needed to implement the
                          program, and to take title to and possession of the waste on which the
                          utilities have paid disposal fees. NWPA required that DOE’swaste disposal
                          contracts with utilities stipulate that, beginning not later than January
                          31, 1998, DOE will dispose of the waste. All contracts include such a
                          provision.

                          “‘Nuclear Waste: DOE’s Method for Assigning Defense Waste Disposal Costs Complies With NWPA
                          (GAO/RCED-89.2,Feb.2, 1989).



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                         In contrast to utilities, DOE'S defense programs office has not made any
                         fee payments into the Nuclear Waste Fund. Although DOE has not, as
                         discussed in more detail later, formally allocated waste program costs to
                         its defense programs, OCKWM estimates that the defense-waste share of
                         costs through September 30, 1989, amounted to $483 million. This
                         includes interest on the deferred payment of its estimated annual share
                         of costs.

                         In its fee-adequacy assessments, OCRWMaccounts for the effects of
                         defense-waste disposal costs and fees on the adequacy of civilian-waste
                         fees by assuming that each year its defense programs office pays into
                         the Nuclear Waste Fund an amount equal to the estimated annual
                         defense-waste disposal cost for that year. OCRWM'Sannual fee-adequacy
                         determination, therefore, is designed to ensure full recovery of all civil-
                         ian-waste disposal costs over the life of the waste program.

                         Because DOE has not paid its cost share into the Nuclear Waste Fund,
                         revenues in the Fund derived from fees paid by utilities and interest
                         earned on funds invested have been used to pay DOE'S share of program
                         costs. As a result, these revenues were not available for investment and,
                         therefore, were not earning interest for use in offsetting future civilian-
                         waste disposal costs.

                         However, with proper allocation of program costs between commercial
                         and defense-waste generators, including credit for interest earned on
                         investment of excess funds and interest charges on deferred payment of
                         allocated costs, DOE’Sproposed payment option would not be inequitable.
                         In this regard, the key to equitable treatment is for DOE to ensure that it
                         maintains the civilian fee at a level that is only high enough to recover
                         program costs related to disposal of civilian wastes.


Cost to the Government   The cost of defense-waste disposal on a consolidated government basis
Not Affected             is not affected by the absence of DOE payments to date into the Nuclear
                         Waste Fund. Had DOE been making payments into the Fund, the govern-
                         ment would have been borrowing funds by selling marketable obliga-
                         tions of the United States, As discussed above, however, deferring
                         payments to later years results in interest charges to Defense Programs.
                         The interest rates associated with the obligations are essentially the
                         same rates that are used to compute interest earned by the Nuclear
                         Waste Fund on investments in government obligations-and        to be




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                                          charged to DOE'S defense programs office on deferred payments. Specifi-
                                          cally, NWPA states that interest rates on Nuclear Waste Fund investments
                                          are to bear interest at rates

                                          . . . determined to be appropriate by the Secretary of the Treasury, taking into con-
                                          sideration the current average market yield on outstanding marketable obligations
                                          of the United States with remaining periods to maturity comparable to the maturi-
                                          ties of such investments, except that the interest rate on such investments shall not
                                          exceed the average interest rate applicable to existing borrowings.



No Major Effect on                        As of December 31, 1989, DOE had spent about $2.7 billion on the nuclear
                                          waste program, and the Nuclear Waste Fund had about $2.3 billion in
Nuclear Waste Fund                        amounts in excess of current needs invested in U.S. Treasury securities.
                                          Further, payments of civilian-waste fees into the Fund are expected to
                                          exceed program costs for many years. For this reason, DOE's proposed
                                          option of paying its waste program costs from prior years over the next
                                          10 years should not materially affect the av;lilability of money in the
                                          Nuclear Waste Fund.


Effect on Budget for                      Funds for defense-waste disposal will be paid from DOE'S “atomic energy
Defense Programs                          defense activities” appropriation, Table 3.4 summarizes DOE'S budget for
                                          this appropriation for the current and 2 most recent fiscal years. DOE'S
                                          budget requests through fiscal year 1990 have not included funds for
                                          disposal of defense waste in a repository developed under NWPA.

Table 3.4: Atomic Energy Defense
Activities Budget for Fiscal Years 1988   nolIars In millions
Through 1990                                                                                            Fiscal year
                                          Activities
                                          ~.~.                                                 1988a           1989’       1990b
                                          Weapons activities                                  $4.lkl          $4.234      $4.479
                                                                         ~~~
                                          Nuclear materials
                                                          ~-~ production                       1,799           1,926       2,169
                                          Defense waste
                                                      .~.. and environmental restoration         885             975       1,145
                                          Verification and control technology
                                                                        .-”                      15.8           155          150
                                          Nuclear safeguards and security                         78             80           a7
                                          Security
                                           -__.      investigations         ~~~-                  32             40           41
                                          New production.~ reactors                               20             60          304
                                          Naval reactors development
                                                                  ~~        ~                    6Oj            630          652
                                          TotaP                                               $7,749         $8,100       $9,027
                                          aAppropriatlon

                                          bBudget request
                                          Source, DOE budget request for flscal year 1990




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                           As shown in the table, DOE’S budget request for defense waste and envi-
                           ronmental restoration exceeded $1 billion in fiscal year 1990, or about
                           13 percent of the total defense activities budget. According to OCRWM’S
                           May 1989 waste program cost estimate, DOE’S annual share of program
                           costs is, with the exception of a few years, expected to be between $50
                           million and $100 million through 2011 (in constant 1988 dollars). The
                           actual amounts in year-of-expenditure dollars will vary. Also, through
                           fiscal year 2000, LIOEwould be paying about $50 million each year to
                           pay off its share of waste program costs through fiscal year 1990. Thus,
                           defense-waste fee payments as proposed by DOE would amount to
                           between $100 million to $150 million per year. The annual fee payment
                           would require adding to DOE’S defense appropriation, reducing other
                           defense activities, or some combination of both of these actions.

                           Paying the defense-waste fees WE is considering may be a formidable
                           task in view of the competition for atomic energy defense funds. Specifi-
                           cally, DOE is in the early stages of a long-term program to address major
                           safety and environmental problem areas in its aging nuclear defense
                           complex. On the basis of our analysis of available cost data in 1988, the
                           defense complex cleanup and modernization program will cost from
                           about $100 billion to over $130 billion.11

                           On the other hand, waiting until some future year to begin making fee
                           payments would result in much higher fees at that time due to the
                           accumulation of costs from prior years and interest charges on the
                           unpaid balance. For example, using DOE’S lowest cost case (one reposi-
                           tory, with intact storage of wastes, and no new utility orders of nuclear
                           plants), we calculated the cumulative defense-waste cost through 2000
                           assuming that DOE did not make any fee payments until after that year.
                           Because DOE’S cost estimate is expressed in constant 1988 dollars, we
                           escalated the annual costs to year-of-expenditure dollars using a nomi-
                           nal interest rate of 7 percent. By the end of the period studied, the
                           cumulative estimated defense-waste share of total program costs is
                           about $2.3 billion, including $1.1 billion in interest charges.


Importance of Accounting   In making its periodic estimates of the total cost of the civilian nuclear
and Disclosure             waste program, OCRWM separates out estimated civilian- and defense-
                           waste costs. In addition, in its June 1987 fee-adequacy assessment,
                           OCRWM evaluated the adequacy of civilian fees by assuming that defense-


                           ’ ’ Nuclear Health and Safety: Dealing With Problems in the Nuclear Defense Complex Expected to
                           Cost Over $100 Billion (GAO/RCED-88.197BR, July 6,198s).



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waste fees were paid as related costs were incurred. The latter step per-
mitted OCRWM to assume that all civilian fees paid into the Nuclear
Waste Fund were either used to pay civilian-waste program expenses or
were invested to produce income for such use in the future. As yet, how-
ever, OCRWMhas not recognized the amount of defense-waste costs
already incurred-determined    in accordance with its August 1987 cost
allocation method-in its Nuclear Waste Fund financial statements.

In its financial statements for fiscal years 1986 and 1985, OCRWM did
include a note to the statements recognizing that DOE must pay fees for
disposal of defense wastes that are equivalent to civilian disposal fees,
It also stated that an agreement specifying the amount of such fees had
not been completed. A similar note to DOE’S financial statements for fis-
cal years 1988 and 1987 stated that in August 1987 DOE had published a
“proposed” method for allocating costs between generators of commer-
ciaI and defense wastes but that an agreement specifying payment
schedules had not been completed.12 This note did not, however, identify
the estimated defense-waste share of costs as of the end of fiscal year
1988 even though (1) a share of waste program costs incurred since Jan-
uary 1983 are allocatable to DOE, (2) DOE is legally obligated to pay its
share of program costs before disposing of its wastes, and (3) the cost
allocation method had been in effect for a year.

DOE has also not discussed in its budget submissions the requirement
that it pay defense-waste fees into the Nuclear Waste Fund. Thus, DOE’S
current share of nuclear waste program costs as determined by using its
cost allocation method, as well as the government’s obligation to pay
these costs go unrecognized except in OCRWM’S periodic estimates of the
total cost of the nuclear waste program.

To ensure equitable treatment of civilian- and defense-waste generators,
it is essential that OCRWM allocate costs to each class according to its cost
allocation method. Moreover, budgetary disclosure of DOE'S cost share is
needed by the Congress to determine appropriate levels of revenues and
expenditures and to establish national budget priorities. Future budget-
ary control is weakened by the absence of full budgetary disclosure
because deferred nuclear waste disposal costs will affect future budget
resource allocation.


‘2Although WE referred to the cost allocation method as a proposed method, the method that it
published in august 1987 was DOE’s selected method. In December 1986 DOE had published a pre-
ferred and two alternative cost allocation methods for public comment.



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              Analyses made by the ICE staff and OCRWMshow that the l-mill fee will
Conclusions   not produce sufficient revenues to cover program costs when it is
              assumed that inflation will average 4 percent over the life of the pro-
              gram. ICE'S assessment, which considers the effects of the 1987 Amend-
              ments Act, shows that without a fee increase the Nuclear Waste Fund is
              underfunded by $2.4 billion to $4.1 billion, depending on whether DOE
              eventually develops one or two repositories. This assessment, however,
              assumes that WE will collect all deferred payments of the one-time fees
              and related interest, which DOE'S IG said is in doubt. It also assumes that
              DOE will pay its fair share of program costs,

              Although DOE has not assessed the adequacy of the waste fee in over 2-
               1/2 years, its last assessment showed that the l-mill fee could result in
              end-of-program deficits of billions of dollars. DOE'S basis for not propos-
              ing a fee increase was not clearly stated in the report. OCRWMofficials
              said that it was arrived at based on their analysis of a number of scena-
              rios to determine when, and if, an inflation indexing system should be
              implemented. The scenarios in the report produced such a wide range of
              results, however, the way in which DOE arrived at its decision is still not
              clear.

              An inflation indexing system could help ensure that sufficient revenues
              are collected to cover increases in cost estimates that are caused by
              price inflation, We agree with DOE'S position that an inflation indexing
              system has the advantage of helping to ensure that the cost burden of
              the program, in real terms, is shared fairly among current and future
              users of nuclear-generated electricity. As we pointed out in our July
              1988 report, however, an amendment to NWPA would be needed to imple-
              ment a system that would automatically adjust the waste fee based on
              an inflation index. If the Congress provides such authority to DOE, the
              agency needs to give increased emphasis to anticipated inflation in
              determining when the indexing system should be implemented by using
              a realistic base-case inflation-rate estimate.

              IME believes that relying on a single base ease is inappropriate because
              of the significant uncertainties affecting this long-term program. How-
              ever, the greatest uncertainty involving inflation centers around the
              rate at which it will occur and not whether it will occur. Uncertainty
              about the rate of inflation can be dealt with through annual adjustments
              to prqjected inflation rates as conditions warrant.

              Also, the use of a base-case inflation rate does not mean that the assess-
              ment should be limited to a single scenario. Obviously, there must be a


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                     number of different scenarios analyzed based on differing assumptions
                     about such matters as system design and configuration. Thus, with dif-
                     ferent scenarios, there will not be a single base case prescribing the
                     exact amount at which the fee should be set. Judgments will have to
                     continue to be made about when and if the fee should be changed and/or
                     an indexing system should be implemented. However, the use of a base-
                     case inflation rate will provide the most probable case for the future and
                     will help put into perspective the analysis of the sensitivity of fee ade-
                     quacy to higher and lower rates of inflation This would provide the
                     Congress and other interested parties with a better understanding of the
                     rationale DOE uses in arriving at its annual fee-adequacy determination.

                     Finally, now that the President has decided that DOE will dispose of its
                     defense waste in one or more civilian repositories and DOE has selected a
                     cost-allocation method, DOE is legally required to pay the cost of dispos-
                     ing of its nuclear wastes before such disposal occurs. In addition, the
                     amounts of DOE'S share of program costs incurred since NWPA was
                     enacted and its share of future program costs can be estimated using
                     DOE'S cost allocation method. Therefore, DOE needs to disclose its current
                     share of program costs in its defense programs budget submissions and
                     annual financial statements on the Nuclear Waste Fund. Budgetary dis-
                     closure is needed by the administration and the Congress to determine
                     appropriate levels of revenues and expenditures and to establish
                     national budget priorities, particularly in view of the requirement for
                     funds to operate, modernize, and clean up DOE'S nuclear weapons com-
                     plex. Also, recognizing the amount of the defense-waste share of costs,
                     rather than just DOE'S obligation to pay this share, provides a mechanism
                     for formally applying and disclosing the results of OCRWM'Scost alloca-
                     tion methodology.


                     We recommend that the Congress amend the Nuclear Waste Policy Act
Recommendation to    of 1982 to authorize the Secretary of Energy to automatically adjust the
the Congress         nuclear waste disposal fee that utilities pay into the Nuclear Waste Fund
                     on the basis of the annual rate of inflation.


                     If the Congress authorizes the Secretary of Energy to implement a sys-
Recommendations to   tem to automatically adjust the civilian waste disposal fee each year
the Secretary of     based on an appropriate inflation index, we recommend that the Secre-
Energy               tary use a realistic base-case inflation-rate estimate to determine when
                     the system should be implemented.



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                      We also recommend that the Secretary of Energy record DOE's liability
                      for its share of waste program costs in DOE'S financial records and
                      reports, and recognize the amount owed by DOE in the annual financial
                      statements of the Nuclear Waste Fund. Finally, the Secretary should
                      include the government’s contingent liability for future defense waste
                      disposal costs in DOE'S financial records and reports,


                      In concurring with our recommendation to the Congress on the need to
Agency Comments and   authorize a fee-setting mechanism that would automatically adjust the
GAO Evaluation        fee based on an inflation indexing system, DOE said that automatic
                      indexing would provide (1) more equality in the treatment of current
                      and future ratepayers and (2) the utilities with a predictable method of
                      planning for future fee increases. Nevertheless, it said that it has not yet
                      reached a conclusion about whether such an adjustment is necessary.
                      Moreover, DOE said that while it also concurs with our recommendation
                      to use a base-case inflation rate to determine when the inflation index-
                      ing system should be implemented, its approach to identifying the base
                      case differs from what we recommended. DOE considers it more useful to
                      use a probable range of inflation rates, rather than a single rate, as its
                      base case. This, it said, is because the inflation rate projections must be
                      made for 85 years. Finally, DOE said that it will clearly identify the
                      ranges it uses in its future fee-adequacy assessment reports,

                      We consider the proper treatment of inflation to be one of the most criti-
                      cal elements in ensuring that the waste fee is adequate to cover program
                      costs. To help avoid a funding shortfall in the Nuclear Waste Fund, we
                      are recommending that a single inflation rate be used as a base case. We
                      recognize, however, that the sensitivity of DOE’S projections would have
                      to be tested by using inflation rates both above and below the base case
                      rate. As we point out in our report, DOE management will need to con-
                      tinue exercising judgment in determining when and if the fee should be
                      changed and/or an indexing system should be implemented.

                      DOE has chosen to treat inflation as a part of its overall fee assessment
                      process rather than including inflation as a part of its cost estimate.
                      This treatment of inflation is satisfactory, but it should be remembered
                      that if inflation were considered in estimating costs, a single rate would
                      be applied. In fact, if an indexing system is implemented, the analysis of
                      fee adequacy can be performed in real terms because the fee is effec-
                      tively stated in constant dollars. On the assumption that real interest
                      rates remain approximately constant, this real-term analysis entirely
                      eliminates the general inflation rate as an issue in fee adequacy, leaving


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only the real (constant dollar) costs of the program as the basis for dis-
cretionary adjustment of the fee. Finally, DOE’Sconcern about the need
to make an %-year projection of the inflation rate is not a significant
problem because, as we point out in the report, the projected rate could
be adjusted if warranted during the annual assessments.

Until DOE issues its fee assessment report, which it expects to do late
this spring, we will not be able to determine whether DOE'S approach will
produce similar or significantly different results than the approach we
are recommending. Although there may be questions about what the
future holds in terms of the rate of inflation, there is little question that
inflation will occur. Accordingly, if and when the Congress authorizes
an inflation indexing system, we believe that DOEwill have to take
prompt action to begin to cover this cost element. If the Congress does
not authorize such a system, an alternative means of covering the rising
costs of inflation will have to be found.

DOE said that it concurs in principle with our recommendations on
recording DOE'S actual and contingent liability for its share of waste pro-
gram costs in its financial records and reports. DOE said, however, that
the appropriate recording and reporting treatment for large, long-term,
unfunded Iiabilities is a government-wide issue that must be resolved
before DOE takes action on our recommendations.

DOE owed the Nuclear Waste Fund $483 million for its share of program
costs as of September 30, 1989. There is no question that this amount is
a liability and should be recorded and reported as such. In regard to
DOE'S long-term contingent liability, we believe that our recommenda-
tions are valid and that, in the interest of full disclosure, DOE should
implement them.




Page 56                                      GAO/RCED-90-66 User-Fee Assessments
Appendix I

Criteria Basic to an Effective Cost-
Estimating Process

                               These criteria were first published in our report entitled Theory and
                               Practice of Cost Estimating for Major Acquisitions (July 24, 1972, B-
                               163058).


Clear Identification   of      To prepare a cost estimate, the estimator must be provided with the sys-
                               tern description, ground rules and assumptions, and technical and per-
Task                           formance characteristics of the system. A well-defined system
                               description that specifies conditions and constraints of the estimate is
                               essential in clearly identifying the scope of the estimate and docu-
                               menting how it was prepared.


Broad Participation in         The acquisition of a major system1 involves many agency and contractor
                               organizations in deciding mission need and requirements and defining
Preparing Estimates            performance parameters, force structures, and other system character-
                               istics for a given project. The cost estimate should ensure that all organi-
                               zations that have an input into the system design have participated in
                               preparing the project cost estimate. Each organization should have had
                               its data independently verified for accuracy and completeness and have
                               cost controls in place to ensure the reliability of its data.


Availability   of Valid Data   Numerous sources of data are available to the cost estimator. These data
                               sources vary in reliability. Historical data bases from which cost estima-
                               tors project costs of new systems from previously similar or comparable
                               systems are useful data sources. The estimator should use care in deter-
                               mining whether such data are suitable for the purposes identified. The
                               data should reflect current cost trends and be directly related to the sys-
                               tem’s performance characteristics and specifications.


Standardized Structure for     There should be a standard method, called a work breakdown structure,
Estimates                      for dividing the acquisition effort into specific work packages peculiar
                               to the type of system. The identification of these work packages
                               becomes more detailed as the system progresses through the acquisition
                               cycle.

                               The work breakdown structure ensures that

                               ‘A major system is defined as a combination of elements that will function together to produce the
                               capabilities required to fulfill a mission need. The elements may include, for example, equipment,
                               construction,  real property, hardware, or improvements.




                               Page   56                                                 GAO/RCED-90-66 User-Fee      Assessments
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                           Criteria Basic to an Effective Cost-
                           Estimating Process




                           (a) estimates can be related to the total program,

                           (b) relevant cost categories are not omitted,

                           (c) the estimate can be refined as the system design becomes more
                           defined, and

                           (d) estimates for similar types of systems can be compared by estima-
                           tors and decision makers.

                           An estimate derived from the work breakdown structure assists man-
                           agement in monitoring and directing diverse project activities being con-
                           tracted by the agencies and the contractors.


Provision for Program      One of the most difficult and often criticized aspects of cost estimating
                           concerns is identifying uncertainties and developing a realistic allow-
Uncertainties              ance for their cost impact. Work objectives should be divided into
                           knowns and unknowns and provisions made for their resolution.


Recognition of Inflation   Economic changes over the period of a system’s development and acqui-
                           sition can have a significant effect on the cost to develop, produce, and
                           operate major systems. It is important that inflation be recognized and
                           realistically provided for if estimates for total program costs are to be
                           valid.


Recognition of Excluded    Major system cost estimates should contain provisions for all costs asso-
costs                      ciated with the system. If major costs have been excluded for an esti-
                           mate or included under another category, it is important that the
                           estimator disclose this information and include its rationale.


Independent Review of      An independent review of a cost estimate is crucial to the establishment
Estimates                  of confidence in the estimate. The independent estimator must examine
                           the original estimate and verify, modify, and correct it as necessary to
                           ensure completeness, consistency, and accuracy of the information con-
                           tained in the cost estimate.




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                            Appendix I
                            Criteria Basic to an Effective Cost-
                            Estimating Process




Revision of Estimates       It is important that cost estimates be updated to reflect changes because
                            changes in the system’s design requirements drive the cost. Large
When Significant Program    changes in the cost of an acquisition significantly influence decisions to
Changes Occur               continue, modify, or terminate a program.




                           Page 58                                    GAO/RCED-9045 User-Fee Assessments
Appendix II

Department of Ehergy Comments




                                                  Department of Energy
                                                       Washington. DC 20585


                                                       March    26,   1990



              Mr. Victor   S. Rezendes
              Director,   Energy Issues
              Resources,   Community,    and
                 Economic Development     Division
              U.S. General   Accounting    Office
              Washington,   D.C.    20548

              Dear     Mr.    Rezendes:

              The Department      of Energy appreciates      the opportunity      to review     the General
              Accounting   Office's    (GAO) draft    report    entitled    "Changes Needed in DOE
              User-Fee   Assessments     to Avoid Funding      Shortfall"     (GAO/RCED-90-65).

              The Department    agrees with the facts     presented    in the draft        report,    but
              disagrees   with  one of GAO's recommendations.         Specifically,        the Department
              does not concur    in the recommendation     to develop    cost estimates           for additional
              scenarios,   such as program delays      and the contingency          that the Yucca Mountain
              site   may be found unsuitable.

              In addition,        the Department          agrees      in principle    with    the two recommendations
              regarding      the recording          of liability        for its share of the current          and contin-
              gent waste disposal          program costs            in its financial       reports   and statements.
              However,     the appropriate            recording       and reporting     treatment    for large,
              long-term,       unfunded    liabilities           is a Government-wide         issue that must be
              resolved     prior     to the Department             complying     with these recommendations.

              Detailed        comments on the individual          recommendations are provided    in the
              enclosure        to this   letter.     I hope    that these comments will    be useful   in
              preparing        the final     report.




                                                                       John C. Tuck
                                                                       Under Secretary

              Enclosure




                     Page69                                                       GAO/RCED90-65 User-Fee Assessments
             Appendix Il
             Department of Energy Comments




                        DOE COMMENTS ON GAO DRAFT REPORT:
       "CHANGES NEEDED ON DOE USER-FEE ASSESSMENTS TO AVOID FUNDING SHORTFALL"
                                     GAO/RCED-90-65


The Department     has reviewed    the draft report   and has the following     comments.                                          On
page 52 of the report,       GAO recommends that,   to make the annual cost estimates                                              of
the nuclear    waste management program more reliable        and useful,    the Secretary                                        of
Energy:

           (1)   "ensure     that the estimates                include   the      costs    of     all   major facilities,
                  tasks,     and activities    or,             if excluded,        explain        the   rationale     for      such
                  exclusion;

           (2)   "have estimates     made for additional                    scenarios,        such as program delays
                  and a finding    that  Yucca Mountain                    would not        be suitable  for a
                  repository;    and

          (3)    "ensure     that    all major categories      of the estimates       include    adequate
                   provision      for contingencies      and that   the total    portion      of the
                  estimates       devoted   to contingencies      be disclosed."

The Department            concurs        in the first            recommendation.               Indeed,      the Department       has
 included        such costs          in all previous             total        system life-cycle           cost (TSLCC)
 estimates        to the extent            that    the necessary               information        was available.          It must
be recognized,            however,         that    the waste management program                        is evolving;
 information         and requirements              for the design                of the waste management system are
still     being developed.                 The TSLCC estimates                   represent       snapshots      in time.      For
each analysis,           a cutoff          date is defined               so that programmatic               assumptions     are
frozen      to permit          calculation         of the TSLCC estimates.                       For example,         the need for
a transportation               fleet     servicing        facility           had not been determined                at the time
the assumptions              for the May 1989 TSLCC analysis                           were finalized.            The need for
this    facility        will       be discussed         in the next TSLCC report                     although       it is unlikely
that    sufficient           conceptual         design      data will            be available        at that time to allow
us to include           a cost estimate              for this          facility.           In the future,         the Department
will    discuss       the rationale             for not including                  cost estimates         for any known system
components.

The Department          does not concur           in the second recommendation.                  Although      the
Department has previously                 performed      and will       continue     to perform       analyses      of
various     scenarios,        including        analyses      similar      to those     suggested      in the GAD
report,     these analyses           are performed         for the purpose         of systems optimization             or
contingency       Planning        and are not published              in the TSLCC report.             The Department
disagrees      that     analyses      of further        schedule       delays    or of the potential           finding
of unsuitability           of the Yucca Mountain               site    should    be used at this        time to
analyze     the adequacy          of the current         fee.       The Department       has recently        conducted
an extensive        review      of the program          schedule       and has revised       the planned         date for
beginning      repository         operations        from 2003 to 2010.

In performing      the        TSLCC analyses,           the Department   endeavors   to bound the cost
estimates     over a        reasonable range            of scenarios.     It does not, nor does it
believe    it should,           include      cost    estimates    for the universe   of possible
scenarios.




           Page 60                                                                    GAO/RCED-90-65 User-Fee Assessments
                 Appendix II
                 Department of Energy Comments




                                                                                                                           2

     The Department           concurs        in the third         recommendation        that appropriate
     contingencies           be included           in the cost estimates.            As the GAO report           indicates,
     the Department           has included           contingencies        in the repository,          Monitored
     Retrievable        Storage       facility,         and transportation          cost estimates.          An explicit
     contingency         is not identified              for the development          and evaluation         (D&E) cost
     estimates.         The D&E cost estimates                  for the near term are based on the
     Department's          budget submission.                Budget ceilings       will     not be exceeded;
     therefore,        contingencies            on these estimates           would not be appropriate.                For the
     years       after  the budget period,                cost projections        are based upon the best estimate
     of program plans             and schedules           without     the benefit       of established       cost
     estimating        guidelines        such as exist            for estimating        the costs     of structures.           In
     making this        projection,            allowances       are made for uncertainty,             but without
     established        cost estimating              guidelines       the uncertainty        is difficult       to define
     explicitly.           In the future,            the Department         will  reevaluate       the feasibility          of a
     more explicit           contingency           in the D&E cost category.

     The Department's      practice has been to discuss                      contingencies         in the backup
     documents     to the TSLCC report.     In the future                    the Department          will discuss
     contingencies      in the TSLCC report   itself.

     Pages 75 and 76 of            the    GAO report      contain      the   following       additional
     recommendations:

              (4)    I'.. .that  the Congress     amend the Nuclear      Waste Policy  Act of 1982 to
                       authorize    the Secretary    of Energy to automatically       adjust   the nuclear
                       waste disposal     fee that utilities     pay into the Nuclear       Waste Fund on
                       the basis    of the annual    rate of inflation."

              (5)    II*. .that    the    Secretary      use a realistic          base-case    inflation     rate
                       estimate      to   determine      when the system          should    be implemented."

              (6)    I'.. -that  the Secretary  of Energy record     DOE's liability       for its share
                       of waste program costs     in DOE's financial    records      and reports,     and
                       recognize    the amount owed by DOE in the annual        financial     statements
                       of the Nuclear    Waste Fund."

              (7)    II.. .the Secretary     should  include  the government's                     contingent        liability
                       for future    defense   waste disposal    costs  in DOE's                   financial       records
                       and reports."

     The Department        concurs      in the fourth        recommendation         in the sense that         if and
     when an adjustment          is found to be necessary,                automatic     adjustments       appear to be
     the appropriate        mechanism.         The Department          has not yet reached          a conclusion       as
     to whether      such an adjustment           is necessary.           The Department       has indicated         in its
     annual    fee adequacy        reports     that    indexing      the fee to inflation,           rather     than
     proposing     larger,     less frequent         fee adjustments,          is the preferred         method when
     fee adjustments        are needed.        Legislation        authorizing       automatic     indexing      would
     provide     more equality        in the treatment          of current       and future     ratepayers        and
     would also provide          the utilities         with a predictable           method of planning          for
     future    fee increases.




I-

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          Appendix II
          Department of Energy Comments




                                                                                                                3’
The Department        concurs     in the fifth     recommendation       that a base-case         inflation
rate should       be used in arriving         at a decision      on the need to adjust          the fee.
However,     the Department's        approach    to identifying       the base case differs              from
that recommended.          The Department       considers     it more useful      to utilize         a
basecase (probable)           range of inflation       rates rather       than a single      rate since
the projections         are for 85 years.         In past reports       the Department       has not
clearly    identified       the ranges that      it considers      probable    for decision
purposes,      but will    do so in future       reports.

The Department        concurs      in principle           with the sixth          and seventh
recommendations.           However,       the appropriate            recording       and reporting       treatment
for large,      long-term,       unfunded       liabilities          is a Government-wide            issue that
must be resolved         prior     to the Department              complying       with these recommendations.
Section    E(b)(Z)      authorizes        the Department           to make payments           to the Nuclear
Waste Fund.        in the total         system life          cycle     cost report        ("Analysis     of the
Total    System Life       Cycle Cost for the Civilian                    Radioactive        Waste Management
Program,"     dated May 1989) and the fee adequacy                         report      ("Nuclear     Waste Fund Fee
Adequacy:       An Assessment,"          dated June 1987) the program has provided                           its
estimate     of the defense          high-level          waste cost share of total               system costs.

The Department        appreciates  the perspective      of          the GAO on these matters
and hopes that        these comments will    be helpful             in preparation  of the
final  report.




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Appendix III

Major Contributors to This Report


                        Judy England-Joseph, Associate Director
Resources,              Dwayne E. Weigel, Assistant Director
Community, and          Richard A. Renzi, Senior Evaluator
                        Sharon E. Dyer, Staff Evaluator
Economic                Hubert M. King, Jr., Staff Evaluator
Development Division,   Sarah E. Veale, Staff Evaluator
Washington, D.C.        Jay R. Cherlow, Economist
                        Judy K. Pagano, Operations Research AnaIyst




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