Comments on Smith Barney's Uranium Enrichment Analysis

Published by the Government Accountability Office on 1990-07-31.

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

                     United States General   Accounting   Offlce


                     Comments on Smith Barney's            Uranium
For Release          Enrichment Analysis
on Delivery
Expected at
1O:OO a.m. EDT
July 31, 1990

                     Statement   of
                     Victor   S. Rezendes, Director,   Energy        Issues
                     Resources,   Community,  and Economic
                        Development  Division
                      Before    the
                      Subcommittee  on Energy and the Environment
                      Committee on Interior    and Insular Affairs
                      House of Representatives
                      and the
                      Subcommittee  on Energy and Power
                      Committee on Energy and Commerce
                      House of Representatives

                                                                     GAO   Form160(l-2/87)
                                    SUMMARY STATEMENT
       We have pointed        out in reports      and testimonies      over the last
several    years that the Congress needs to reevaluate                 the Department
of Energy's      (DOE) uranium enrichment          program in light       of its
current    business     environment.        Smith Barney reached this same
conclusion     and recommended that the program be restructured                  as a
government     corporation       before a private      company is formed.        We too
have supported      the formation        of a government     corporation     subject   to
the Government Corporation             Control   Act.
       However, we differ         with Smith Barney on the (1) extent to
which past costs to modernize                old plants     and build      additional
capacity     and future      costs to clean up environmental                contamination
and decommission       existing      facilities       should be borne by the new
corporation       and (2) feasibility           of privatization       in light       of the
changing market caused by increased                  competition.        In particular,
Smith Barney assumed a number of write-offs                      and adjustments        and
concluded      that DOE's customers            have overpaid      about $1.2 billion         in
past costs.        In reality,     total       costs have not been recovered
through     revenues but reduced by certain                adjustments      and policy
decisions,       which we believe        should only be made by the Congress.
        On the other hand, we do not want to see the program,
regardless      of its structure,         burdened by past costs to the point of
being noncompetitive.            Clearly,     as we have reported,          the program
cannot recover        $9.6 billion      and remain competitive.             Consequently,
we have supported         the write-off       of about $4.1 billion           in past costs
resulting     from the gas centrifuge            plant and gaseous diffusion
plant upgrades.          However, DOE estimates          that the corporation         could
earn about $3 billion           by the year 2000 and over $8 billion                by 2008.
Therefore,      the Congress should consider             a specific     provision     in any
restructuring       legislation      to ensure repayment of the $3 billion
that DOE has been pricing            to recover,      rather   than rely solely         on
the receipt       of unspecified       dividends     and/or uncertain         stock sales,
which may not materialize            because of licensing          uncertainties,
increased     competition,       and billions       of dollars     in liabilities.
        We also encourage the Congress to require                   the program to begin
setting     aside funds to decommission           the three existing            plants.
Smith Barney implies          that the corporation          at most would be
responsible      for environmental        compliance       and decommissioning           costs
after    its formation       and that the government           assume all prior
costs.      Smith Barney did not identify            total     costs and did not
specify     the method that should be used to allocate                    the costs
between the government           and the corporation.            Since DOE estimates
that government        purchasers    are responsible          for 50 percent          of
decommissioning        costs,    we believe    that restructuring            legislation
should require       the government       to match the corporationts                fund
contributions.         This requirement      should continue           until    the existing
plants     have been decommissioned.