Comments on H.R. 2480, The Uranium Enrichment Reorganization Act

Published by the Government Accountability Office on 1990-10-11.

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


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I* I                         United Slates General Accounting   Office    42        +4&G

       For Delivery    on    Com m ents on H.R.2480,      The Uranium      Enrichm ent
       October 11,    1990   Reorganization    Act ,I*

                             Statem ent   for the Record of
                             Victor    S. Rezendes
                             Director,    Energy Issues
                             Resources,     Com m unity, and Econom ic
                                Developm ent   Division
                             Before the
                             Com m ittee on Science,  Space,        and
                             House of Representatives


       GAO/T-RCED-91-3                                                           GAO Form 160 (12/87)
Mr.     Chairman           and Members of the Committee:

          We are pleased                 to submit            this      statement         for    the     record        to the
Committee          as it       considers              legislation             that     would     restructure                the
Department              of Energy's              (DOE) uranium               enrichment         program.             This
statement          presents             our views            on the         future     of DOE's uranium
enrichment              program         and focuses             on the        Uranium         Enrichment
Reorganization               Act        (H.R.2480).

        H.R.2480            would        restructure             DOE's enrichment                program        as a
government              corporation          subject            to theaGovernment                Corporation
Control         Acti'       In doing            so,    it     would,         among other         things,        allow         the
corporation              to set         prices        to maximize             long-term         returns;        establish
a fund         to meet future               decontamination,                    decommissioning,               and
remedial         action       costs         associated               with     past     uranium         enrichment
activitiesl;              and require             the government                 to pay its            share    of the
costs      to clean          up mining            wastes         generated            under     past     government

          In summary,           we have long                  supported          restructuring             the program
as a government               corporation                   and establishing              a decommissioning
fund.          We believe          H.R.2480            goes a long             way toward         establishing
clear     objectives              for     the     enrichment                program     and allowing            it     to
operate         in a more businesslike                         manner         in a competitive             market.                We

lAt fhe end of their  useful    lives,    radioactively   contaminated
facilities must be decontaminated        and decommissioned    to ensure                                                      that
they do not cause environmental        damage.
.   \

        are      also       pleased          that       the bill              would         direct         the government                    to meet
        its      financial            obligation              to clean               up mill          tailings              (mining          waste)
        sites.            However,           we have several                       concerns           with         the     proposed
        legislation               that       we would             like        to highlight                 at this           time.

                     --   We believe             H.R.2480            should           include             a specific              goal       to
                          recover         past       government                costs             associated          with         DOE's uranium
                          enrichment             program.                At the end of                    fiscal          year     1989,           we
                          estimate           that     DOE had not                    recovered             about          $9.9     billion              in
                          past       costs       from       its      customers.                    H.R.2480          would         limit           the
                          government's               cost         recovery            to unspecified                      dividends           on
                          stock       issued         by the new corporation                                to      the     Treasury           and
                          proceeds           from     the         sale        of     that         stock      to the public,                   if        and
                          when the           corporation                 is    privatized.                   Unless          problems
                          related         to licensing                   uncertainties,                    increased              competition,
                          and billions               of dollars                in     liabilities                  are     adequately
                          resolved,           we doubt             whether            the corporation                      will      ever          be
                          sold.          Therefore,               we believe                that      the Congress                 should           set       a
                          definite           cost     recovery                goal      rather            than      rely      on unspecified
                          dividend           receipts             and uncertain                    stock        sales.

                     -- We support               the establishment                          of     a decommissioning                       fund         to
                          pay current               and future                cleanup            costs       with         annual      matching
                          contributions               from         DOE and the                    corporation.                Past
                          production           from         DOE's enrichment                        plants          for     defense           and
                          commercial           customers                 has been about                    equal.           Therefore,                  we

             believe           that     cleanup           costs          for     facilities             transferred               under
             the     proposed           legislation                should          be equally               shared,         but     the
             cost      for      cleaning             up any new facilities                           should         rest     with
             the     new corporation.                      H.R.2480,               while       providing             for     annual
             matched           funding,          requires            that        cleanup            costs     be allocated
             between           the     government             and corporation                       on the basis             of     the
             time     period           during         which        the         contamination                occurred.             This
             is     an attempt               to separate             past        commercial             and defense
             activities.                Unfortunately,                    cleanup          costs        are     largely
             undefined,               and DOE does not have adequate                                    information               to
             allocate           these         costs      between            past      commercial              and defense
             activities.                We believe                that         by requiring            matching             payments
             the     fund       adequately              assigns           cleanup          responsibility                   on the
             basis      of      past         production,            and further                attempts             to allocate
             costs      will          lead     to confusion                    and disputes             between            the new
             corporation               and DOE.

        Before       I discuss               these      issues           in detail,            I will         briefly
describe      DOE's enrichment                       activities             and the           proposed          legislation.


        The federal             government              has enriched                uranium           for     defense
purposes      and commercial                   nuclear         power plants                   for     over      30 years            at
three      gaseous      diffusion              plants        located             in Oak Ridge,                Tennessee;
Portsmouth,          Ohio;       and Paducah,                Kentucky.                Throughout              the     197Os,           the
anticipated                 growth         of nuclear           power        led   DOE to expand                the enriched
uranium             production             capacity          at its       three        gaseous      diffusion               plants
and begin              construction              of a new enrichment                      plant       using      a different
production                 technology--gas                centrifuge--at                 Portsmouth.             However,                   the
anticipated                 demand for           enriched           uranium        did     not materialize,                       and
foreign             enrichment             suppliers          cut     into      DOE's domestic                and foreign
markets.               In 1985,            DOE halted           construction              of the gas centrifuge
plant             and shut      down the            Oak Ridge          plant.

             By 1986,         the         program      was beset             by many problems                 that         left        it
facing             a bleak      financial             future,         including           potential           multibillion
dollar            payments          for     electricity             not      used under           long-term           "take            or
pay"      contracts             initiated             with      the    Tennessee           Valley       Authority                 in        the
mid-1970s,                 when demand was expected                          to increase           rapidly.                Although
some problems                 have been resolved,                      DOE today           faces       multibillion
dollar            environmental              and decommissioning                       costs      and increasing
foreign             competition.               In addition,               DOE's responsibility                       for      past
unrecovered                 costs     has not          yet      been defined.


         H.R.2480             proposes,             among other              things,       to do the           following:

             --     Restructure             DOE's enrichment                  program          as a government

         *         corporation              subject          to the       Government            Corporation            Control
    --   Allow       the corporation            to set        prices     to maximize           long-term

    --   Require       the corporation                to issue      capital        stock      initially
         valued       at     $3 billion        to the      United       States.

    --   Require       the     corporation            to pay dividends            on this        stock
         unless       there      is an “overriding”               need to retain             earnings          for
         corporate         functions,         such as research                and development.

    --   Require       the     corporation            to report        to the     President          within          5
         years      on the       possible       sale     of    the corporation              to the
         private       sector.

    --   Authorize         the    corporation           to borrow        up to $2.5          billion          from
         the     private       sector       by issuing         bonds that         would      not     be
         guaranteed           by the government.

    -- Assign        responsibility             for     deploying        the next          generation          of
         uranium       enrichment           technology--the             atomic      vapor      laser
         isotope       separation           (AVLIS)      process--to           the corporation.

    --   Establish         a fund       to meet decontamination,                    decommissioning,
         and remedial            action      costs      at enrichment            plants.

                   --     Require        th e corporatio n                  to seek licenses                 from       th e Nuclear
                          R e g u l a tory     C o m m ission             ( N R C ) for        th e existing          p l a n ts        and any
                          new enrichment                   facilities.

        G A O 'S V IE W S O N T H E
        P R O P O S E DL E G IS L A T IO N

                  W e w o u l d like           to discuss                o u r views           o n several          key issues
        e m b o d i e d in H .R.2480:                     th e appropriate                organizatio n a l             structure             of
        th e p r o g r a m ;      past       unrecovered                 costs;       th e feasibility                of
        privatization;                fu tu r e         d e c o n ta m inatio n ,         decommissioning                  and
        e n v i r o n m e n tal     cleanup             costs;        a n d th e clean             u p o f m ill        tailing

        F u tu r e S tructure o f th e
        Enrichment P rogram

                  D O E believes             th a t       th e e n r i c h m e n t    p r o g r a m should            be
        restructured              as a g o v e r n m e n t            corporatio n .               O ver th e last              several
        years,          w e h a v e also          r e c o m m e n d e d th a t       th e e n r i c h m e n t       program be
        restructured              as a g o v e r n m e n t corporatio n .                          W e believe         th a t       a
        g o v e r n m e n t corporatio n                  could       establish           m o r e flexible           prices             to
        stim u late         d e m a n d a m o n g u tilities,                  p a r ticularly           th o s e    th a t        have not
        r e n e w e d their         c o n tracts               with   D O E b e c a u s e th e y        a r e waitin g             to s e e
        w h e r e th e p r o g r a m is h e a d e d .                    P resently            D O E is h a m p e r e d by
        government            processes               th a t     d o n o t allow          it      to act quickly                in a
competitive            market.            Further,       DOE's ability                  to set         flexible             prices
is     limited       by current            law.

Past      Unrecovered           Costs

         Total       uranium         enrichment          program             costs
                                                          have not been recovered
through          revenues.   Although the Atomic Energy Ac$'requires        the
recovery          of all government costs,   we recognize     that the existing
program          cannot      expect        to generate            revenues             sufficient              to repay         past
unrecovered           costs        that     we calculate                to    total       about        $9.9       billion           at
the     end of      fiscal         year      1989.       We note             that      this         amount       is   not      too
different          from      Smith        Barney's       calculation                 of total          past       costs.2
However,          Smith      Barney        assumed that             DOE could             reduce         total        costs         by
making       various         write-offs           and policy             decisions             and concluded                 that
DOE's customers               had overpaid              the government                  by about              $1.2 billion.
However,          DOE does not             have the         statutory               authority          to make these
write-offs          and policy             decisions;            only        the     Congress          can do so.

         Because          annual      imputed        interest            expense          on past         unrecovered
costs       is approaching                $1 billion,            we recognize                 that     full       cost
recovery          through       revenues          is not         feasible.              Therefore,              we have
encouraged          the Congress              to allow           DOE to write                 off     costs       associated
with     unproductive              program        assets,         such as the                 abandoned           gas

21n January 1990,               DOE entered     into a contract                           with Smith Barney,
Harris     Upham and           Co. Incorporated,      to assess                          the feasibility  of
restructuring     the           enrichment    program.    Smith                          Barney delivered  the
report     to DOE on           May 15, 1990.
centrifuge           facilities.               This       action,        although         requiring               a change        in
existing          legislation,              follows         generally           accepted           accounting
principles           and would             provide        a practical            approach             to help       resolve
the      problem       of unrecovered                 costs.          DOE wrote          off       unproductive
assets       in     1984 and 1985              (without            statutory          authority),              which      left
unrecovered            costs        at that        time       of     about      $3.4 billion.                  Since      that
time,      DOE has repaid                  about      $400 million             to the          Treasury           and is     now
pricing       its      uranium          enrichment            services          to recover             about       $3 billion
over      the next          12 years.

          H.R.2480          would       authorize           the write-off              of unproductive                 assets
but     does not        set      a specific            cost        recovery       goal.            DOE projects            that
the corporation                would        generate          over     $3 billion              in net         income      by the
year      2000 and over              $8 billion             by 2008.           Although            these       projections
do not       include         any investment                 in AVLIS           (perhaps          $1 billion          or more)
or any estimate                of    the     amount of dividends                      to be paid             on the
government           corporation's              stock,         they      illustrate             the     considerable
earning       power remaining                 in     the current             production             facilities.

          Therefore,           we believe            that      the Congress             should          set     a specific
repayment           amount consistent                 with         DOE's projections                  of the
corporation's               expected         earnings          over      the next         10 to 15 years,
rather      than      rely       on the       receipt          of unspecified              dividends              and/or
uncertain           stock      sales.         On the basis              of DOE's projections,                        we
believe       the     repayment            amount       should        be about          $3 billion.                We would
also*suggest            that        the Congress             provide         certain           flexibility           to the

corporation             in meeting                a specific             cost         recovery          goal,     such as
suspending            interest           payments.                 Such measures                 may be needed                to keep
the corporation                 competitive                if      substantial                investments           are needed
in new technology                      or environmental                       costs     increase          more than

Feasibility             of     Privatization

           We have several                    concerns          about          the prospects              for
privatization,                which           DOE believes               would         result       in the        federal
government            receiving               the market            value         of    its      past     investment.                Let
me just         mention         just          a few:

           --   Licensing:               Before           the enrichment                 corporation              could         be
                privatized,              it      would      have         to obtain              a license         for     each of
                its     operating              plants       from         NRC.          Because       current            law
                exempts         DOE from             obtaining            an NRC license                  for     its
                enrichment             plants,            no enrichment                 facility          has ever            been
                licensed          in     this        country.             Therefore,               unforeseen            licensing
                problems         may exist                since         the     two existing              production
                facilities             are       30 to 40 years                  old.

       --       Environmental                  and decommissioning                       costs:           These are largely
                undefined          but         could       total         billions             of dollars.               These costs
                would        inhibit           future       private             investment,              unless         the
                government's                  liability            is clearly            established.                   Smith

     Barney        reported          that       DOE's estimates                          for     decommissioning
     the      Oak Ridge           plant       alone          could         be as much as $8 billion,
     depending            on the         cleanup            required.               If         we assume similar
     costs        for     the     three       existing              plants,              these         costs      could
     total        $24 billion.                Further,              DOE has not                  completely
     identified            or characterized                     enrichment                     plant     waste          sites,
     and past           experience            indicates              that          such costs              increase               as
     more information                 becomes               available.                   In addition,                  inflation
     could        significantly               increase              these        costs.

--   Increasing            competition:                  An oversupply                         of enrichment
     capacity           exists      worldwide,                which         will          make the             lucrative
     U.S.     market        a "battleground"                        for     international                      suppliers
     as existing            DOE contracts                    expire         in      the mid-1990s.                          In
     particular,            DOE estimates                    that         the    Soviet            Union        has excess
     capacity           of up to 9 million                      separative                 work units                  (a
     measure        of the effort                 required                to enrich              uranium).                  The
     Soviet        Union         has recently                dominated             the          enrichment              market
     by selling            its     product         for        about         50 percent                  less      than           DOE's
     price.         This         excess      capacity,               coupled              with         domestic
     utilities'            need to purchase                     enriched             uranium             at the             lowest
     cost,        leads     DOE to expect                    that         the    Soviet            Union        will         become
     more active            in     the     U.S.        market.              Also,          DOE reports                  that
     China        is becoming             much more aggressive                             in      the    U.S.
     enrichment           marketplace.                   Finally,               a for-profit                   consortium
     of    three        domestic          utilities;                URENCO (a European                          producer);

                and Fluor-Daniel,                 Incorporated                  (a U.S.        firm)        has announced
                plans       to build          an enrichment               plant        in Louisiana,                using         the
                more cost-efficient                     gas centrifuge                 technology.

Decommissioning    and
Environmental   Cleanup                   Costs

            We have long          said        the decommissioning                      costs        should         be paid         by
the beneficiaries                 of     the    services             provided,          in this         case DOE's
commercial            and government             customers.                  H.R.2480          would        require         the
corporation             to establish            a fund         for      the      eventual           decontamination
and decommissioning                    of all          enrichment            plants.           It    would         also
require         the corporation                and DOE (as provided                       by appropriations)                       to
annually          make matching            payments            to      the    fund,       reflecting               the     fact
that        production          over    the     life      of     the      existing            plants        for     both
government            and commercial              customers             has been about                 equal.             The new
corporation             would     be responsible                 for      the     cleanup           costs         at any new

            However,       H.R.2480,           in an attempt                 to separate             past     commercial
and defense             activities,            would      also         require         that     cleanup           costs       be
allocated            between      the government                 and the corporation                        on the        basis
of     the    time      period        in which          the    activity           causing           the contamination
occurred.             Unfortunately,             cleanup            costs       at     the enrichment                 sites
are     largely         undefined,         and available                  information               does not         exist         to
accurately            allocate         these     costs.             We believe           that        requiring            equal
contributions              to the       fund     adequately               reflects            DOE's and the
 corporation's                 responsibilities,                   and further             attempts           to allocate
such costs              will      only     lead         to confusion              and disputes             between           DOE and
the corporation.

U.S.      Uranium          Industry

          H.R.2480             would     establish              a program           to help         pay for          cleaning          up
uranium         process          waste          (mill     tailings)              sites     resulting           from      past
government          contracts.                   The proposed             bill       would       require         the
Secretary          of      Energy        to reimburse                 responsible            parties          up to a
certain         dollar          limit      for      cleanup           costs       associated           with      uranium         sold
to the      government.                  Since          1979,      we have said              that      the government
should      pay its             share      of     the cleanup             costs          associated           with     the
production          of uranium              under         these        contracts.5

          In summary,              we believe             that        H.R.2480           takes      needed steps               toward
establishing              clear         objectives           for       the enrichment                program          and would
allow     the new corporation                           to better         operate          as a business               entity.
H.R.2480         would         also      help       resolve         several          long-term          issues         that,      in
our     view,     seriously              challenge           the       program's           future,         including            the
need to pay billions                      of dollars               in environmental                  and

3Clea%ing         Up Commingled Uranium Mill    Tailings:  Is Federal
Assistance         Necessary?  (EMD-'/g-29, Feb. 5, 1979).
decommissioning            costs        at a time         when competition                    is     expected         to

          We have pointed              out     several        specific         concerns            about      the
proposed       legislation.                  In particular,            we believe             the     proposed         bill
would       be strengthened             by including             a specific            cost        recovery
provision.           Because       DOE projects               that     the corporation's                     future
earnings       could     be substantial,                 we suggest            that     the Congress
require       the    repayment          of     $3 billion,            rather      than        rely     solely         on
unspecified          dividends          and/or       uncertain           future        stock         sales     that        may
not materialize           unless         problems         related         to licensing                uncertainties,
increased       competition,             and billions                of dollars         in     liabilities             are
adequately          resolved.

        We appreciate            the     opportunity            to submit             our views         on H.R.2480
for   the     record     and are willing                 to address            follow-on             questions         that
the Committee          may have.