United States General Accounting Office 1 

Testimony 

Fo- Release 

on Eelivery 

Expected at 

9:45 a.m. EST 

Tuesday 

June 28, 1988 

The Future of DOE's Uranium Enrichment 

Program 

Statement of 

Keith 0. Fultz, Senior Associate Director 

Resources, Community, and Economic 

Development Division 

Before the 

Subcommittee on Energy and the Environment 

Committee on Interior and Insular Affairs 

House of Representatives 

136190 

GAO/T-RCED-88-SC 
Mr. Chairman and Members of the Subcommittee: 

We appreciate the opportunity to present our views on the 

future of the Department of Energy's (DOE) uranium enrichment 

program, which was established to promote national energy security 

goals while recovering government costs. My testimony today will 

focus on the Uranium Revitalization, Tailings Reclamation and 

Enrichment Act of 1988 (H.R.4489) and an administration proposal 

that may accompany the United States-Canada Free Trade Agreement. 

Both would restructure the enrichment program as a government 

corporation while providing different means of financial support to 

the domestic uranium mining industry. 

In summary, we have pointed out in reports and testimonies 

over the last several years that the Congress needs to reevaluate 

the enrichment program in light of its current business 

environment, establish clear objectives for it, and address its 

many problems. H.R.4489 and the administrationfs proposal would 

restructure the enrichment program as a government corporation 

subject to the Government Corporation Control Act. In general, we 

see merit to these proposals because they would enable the 

corporation to operate in a business-like manner with clear 

objectives. 

However, we do have some concerns with both H.R.4489 and the 

administration's proposal. As you know, Mr. Chairman, the Atomic 

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Energy Act requires that the government's costs associated with 

producing enriched uranium be recovered over a reasonable period of 

time. At the end of fiscal year 1987, DOE had not recovered about 

$9 billion. Both H.R.4489 and the administration's proposal would 

limit the recovery of past costs to the repayment of $364 million 

and the receipt of stock issued by the corporation. Most of the 

amount repaid would be channeled into a fund that would be used to 

clean up uranium mill tailings and, in the case of the 

administration's proposal, purchase domestic uranium ore. DOE 

officials told us in 1986 that they could operate competitively and 

price their services to recover about $3.4 billion. We believe 

that setting a low repayment amount ignores DOE's pricing strategy 

and the productive capability of the existing enrichment 

facilities. Therefore, we oppose setting the amount at only $364 

million. 

Also, both proposals would establish a fund to decontaminate 

and decommission the corporation's property. We should point out, 

however, that the proposals do not address the costs--estimated to 

be about $1 billion-- to decommission DOE's Oak Ridge plant. 

Although we have not analyzed the impact of the proposals on 

the domestic uranium market, we have some observations on both. 

Both H.R.4489 and the administration's proposal would establish a 

fund to clean up mine sites. In addition, H.R.4489 would impose 

fees on utilities based on the amount of foreign ore used in their 

2 
nuclear power plants, and the administration's proposal would 

provide for the purchase of at least $750 million of uranium ore 

from domestic producers. However, DOE already has a substantial 

stockpile of ore that it does not expect to deplete for at least 10 

years. 4 

Before we offer some observations on H.R.4489 and the 

administration's proposal, I will briefly describe DOE's enrichment 

activities. 

OVERVIEK OF THE URANIUM ENRICHMENT PROGRAM 

The federal government has enriched uranium for national 

defense purposes and commercial nuclear power plants for over 30 

years. Throughout the 197Os, the expected growth of nuclear power 

led IXE to expand enriched uranium production capacity at its three 

gaseous diffusion plants, begin construction of a large-scale gas 

centrifuge enrichment plant, and accumulate a stockpile of 

enriched uranium. 

However, the anticipated demand for U.S. enrichment services 

did not materialize, and foreign suppliers cut into DOE's domestic 

and foreign markets. By 1986 the program was beset by many 

problems that left it facing a bleak financial future. The 

problems included (1) multibillion dollar payments for electricity 

not used under long-term contracts with the Tennessee Valley 

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Authority (TVA), (2) market uncertainties due to ongoing litigation 

with domestic uranium miners over possible restrictions on DOE's 

enrichment of foreign uranium ore, (3) potentially large 

decommissioning and environmental costs for the aging plants, and 

(4) billions of dollars in unrecovered costs. 

Some of these problems have been resolved. For example, on 

December 31, 1987, TVA and DOE agreed to set the costs for unused 

power at about $1.8 billion through 1994 when the contracts expire. 

In addition, earlier this month, the U.S. Supreme Court rendered a 

decision on the domestic uranium miners lawsuit. In effect, the 

ruling provides that DOE has to restrict the enrichment of foreign 

uranium ore only if the restriction would make the domestic uranium 

industry viable. 

PRINCIPAL FEATURES OF THE 

PROPOSED LEGISLATION 

Today we will discuss some of the principal features of 

H.R.4489 and the administration's proposal. Both are similar to 

S.2097, the Uranium Revitalization, Tailings Reclamation and 

4 
Enrichment Act of 1987, passed by the Senate on March 30, 1988. 

H .R.4489 proposes, among other things, to: 

-- Restructure DOE's enrichment program as a government 

corporation subject to most provisions of the Government 

Corporation Control Act. 

-- Require the corporation to issue capital stock to the 

United States based on the 1987 book value of the 

program's assets. The United States cannot sell, transfer, 

or convey the stock until authorized by law. 

-- Require the corporation to repay $364 million within 20 

years. The $364 million, called the initial debt, and the 

stock issued by the corporation would represent the 

recovery of all past costs. 

-- Authorize the corporation to borrow up to $2.5 billion from 

the private sector by issuing bonds that would not be 

government obligations or explicitly guaranteed by the 

government. 

-- Establish a decontamination and decommissioning fund for 

the corporation's property. 
-- Exempt the corporation from licensing by the Nuclear 

Regulatory Commission. 

H.R.4489 would also establish a uranium mill tailings fund to 

clean up specified sites. The fund would be administered by the 

Secretary of Energy. Contributions to the fund would be made by 

states, mine owners, and utilities with licensed nuclear power 

plants. In addition, the federal government would contribute $300 

million, primarily funded by the corporation's repayment of the 

initial debt. H.R.4489 would also impose fees on domestic 

utilities based on the amount of foreign uranium ore used in their 

nuclear power plants. 

While the administration's proposals has many similarities to 

H.R.4489, it also contains a number of differences. It would 

establish a uranium revitalization fund made up of contributions 

from states, mine owners, fees from utilities to total $1 billion, 

and $450 million from the new corporation ($250 million from the 

repayment of the initial debt and $200 million from sales). The 

fund would be used to clean up mining sites and purchase at least 

$750 million of domestic ore through 1994. The proposal would also 

require the Nuclear Regulatory Commisssion to issue the corporation 

an operating license no later than 5 years from the date of 

enactment. However, the proposal would not impose a fee on 

utilities that use foreign ore. 

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GAO'S VIE= ON THE 

PROPOSED LEGISLATION 

We believe that the Congress must answer three key questions 

in deciding the future of the enrichment program. 

1. What is the appropriate organizational structure for the 

program? 

2. What amount of past costs should be recovered? 

3. What should DOE (or the new corporation) do for the 

domestic uranium mining industry? 

Let me briefly discuss our views on H.R.4489 and the 

administration's proposal as they relate to these three questions 

and suggest some modifications for your consideration. 

Future Structure of the Enrichment Proaram 

Both the administration and DOE believe that the enrichment 

program should be restructured as a government corporation. Both 

contend that this structure would allow the enterprise to operate 

in a competitive, business-like manner with clearer objectives, 

free it from government budgetary and other limitations, and permit 

more flexible relations with its customers. 

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Because of government budgetary restrictions, DOE has taken 

cost-cutting actions that may threaten its ability to be 

competitive in the future. For example, DOE cut fiscal year 1987 

production costs by meeting demand from enriched uranium 

inventories. After the inventory is depleted, DOE may be forced to 

produce at uneconomic levels to meet demand by operating at higher 

production levels that use large amounts of electricity. If this 

occurs, DOE estimates that costs could increase by about $80 

million over the next 4 to 5 years. In another attempt to cut 

costs, DOE did not request fiscal year 1988 funds for research on 

an energy-efficient laser technology, although research and 

development is 3 to 5 years ahead of foreign competitors and offers 

the best long-term hope for the enrichment program to be 

compe t i ti ve. The Congress, however, restored funds for this 

program. 

Although we generally oppose new government corporations, we 

recognize that under certain conditions they are justified. The 

enrichment program meets many of the criteria generally believed to 

be conducive to corporate management, such as performance of a 

business function requiring many transactions with the private 

sector. However, if a uranium enrichment corporation is formed, we 

believe it should be subject to the Government Corporation Control 

Act. The act requires the corporation's finances to be part of the 

federal budget and sets forth, in part, audit and budget oversight 

provisions that may not apply to other federally chartered 

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corporations. H.R.4489 and the administration's proposal would 

establish a government corporation. 

In addition, both proposals would require an independent 

accounting firm to audit the financial statements of the 

corporation in those years that GAO does not conduct a financial 

audit. The proposals would also require GAO to review each of the 

accounting firms' audits. Although we strongly support the use of 

independent audits, we would prefer to review them at our 

discretion rather than being required to do so. 

Past Unrecovered Costs 

Although present legislation requires the recovery of all 

government costs, we recognize that the existing program cannot 

expect to generate revenues sufficient to pay past costs that 

totaled about $9 billion at the end of fiscal year 1987. Accordir 

to DOE, no price for its enrichment services would generate sales 

over the next 10 years sufficient to recover this amount, unless 

domestic utilities were required to purchase from DOE. 

Because we recognize that full cost recovery is not feasible, 

we recommended in our October 1987 report, Uranium Enrichment: 

Congressional Action Needed to Revitalize the Program (GAO/RCED-88- 

181, that the Congress allow DOE to write off the costs associated 

with unproductive program assets. This action, although requiring 

9 
a change in existing legislation, would follow generally accepted 

accounting principles and would provide a practical approach for 

helping to resolve the problem of unrecovered costs. DOE wrote off 

unproductive assets in 1984 and 1985 (without legal authority), 

which left unrecovered costs at that time of about $3.4 billion. 

DOE officials told us that the write-off allows the program to 

operate competitively and generate revenues to recover the $3.4 

billion. By setting a much lower repayment amount, H.R.4489 and 

the administration's proposal ignore DOE's pricing strategy and the 

productive capability of the existing enrichment facilities. 

Therefore, we oppose setting the repayment amount at only $364 

million. We also note that substantial portions of the $364 

million--$300 million under H.R.4489 and $250 million under the 

administration's proposal --would be directed to the clean up of 

mine sites and/or the purchase of domestic ore. 

We would like to make one other point concerning program 

costs. We believe that DOE needs to act now on its responsibility 

to decontaminate and decommission the enrichment plants. We have 

long supported the concept that decommissioning costs should be 

paid by the current beneficiaries of the service received. 

How eve r , DOE has not collected even $1 to decommission its three 

diffusion plants, although the Oak Ridge plant is shut down. In 

our 1987 report, we recommended that the Congress require DOE to 

recover decommissioning costs. Both proposals would require the 

corporation to establish a fund for future decommissioning 

10 
activities. However, the proposals would not transfer the Oak 

Ridge plant to the new corporation. Its decommissioning costs-- 

estimated to be over $1 billion (1987 dollars)--will remain DQE*s 

responsibility. 

Uranium Miners 

Section 161(v) of the Atomic Energy Act requires DOE to 

restrict the enrichment of foreign uranium to the extent necessary 

to ensure a viable U.S. uranium mining industry. Since 1984, DOE 

has concluded that the industry is not viable but has not taken any 

action to revive it, such as restricting the enrichment of foreign 

uranium ore. DOE has stated that such action would not be 

sufficient to revive the industry and could cause its customers to 

turn to foreign enrichment suppliers. The uranium miners argue 

that DOE's concerns are not valid because foreign enrichment 

suppliers do not have excess capacity to meet the needs of DOE's 

customers and would not add new capacity because of their concerns 

that the Congress might limit the importation of foreign enriched 

uranium. 

In December 1984, several uranium producers filed suit asking 

the U.S. District Court in Colorado to order DOE to, among other 

things, limit imports of foreign uranium to ensure the U.S. uranium 

industry's viability. The court ruled in favor of the miners, but 

on June 15, 1988, the U.S. Supreme Court ruled in effect that DOE 

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has to restrict the enrichment of foreign uranium ore only if such 

restrictions would make the domestic uranium industry viable. 

Both H.R.4489 and the administration's proposal, while 

repealing section 161(v), would provide support to the U.S. 

uranic-m mining industry. H.R.4489 would impose a fee on utilities 

based on the amount of foreign uranium ore used in their nuclear 

power plants through the year 2000. The administration's proposal, 

in order to engender support for the U.S.-Canada Free Trade 

Agreement, would require the new corporation to purchase at least 

$750 million of domestic ore through a competitive bid process. We 

understand that the Free Trade Agreement would remove all 

restrictions on Canadian ore imports beginning in 1989. U.S. 

utilities plan to purchase about 10,500 metric tons of uranium ore 

in 1988; about 35 percent of the ore comes from foreign producers. 

Over ninety percent of the foreign ore comes from Canada. 

We have not assessed the impact of H.R.4489 or the 

administration's proposal on the uranium market. However, we would 

like to point out that DOE already has a uranium ore inventory that 

it uses to meet defense production needs and optimize production 

costs. DOE expects to use some of the inventory--from about 1,500 

to 5,000 metric tons per year-- to reduce production costs. As of 

December 1987, DOE's inventory totaled about 53,000 metric tons. 

Thus, the administration's proposal will substantially increase an 

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already sizable inventory that will not be depleted for at least 

10 years. 

In summary, we believe that H.R.4489 and the administration's 

proposal provide a mechanism to establish clear objectives for the 

enrichment program and address some of its problems. However, we 

strongly suggest, Mr. Chairman, that you and the Subcommittee 

establish a higher cost repayment goal. In addition, we are 

concerned that the potentially high cost to decommission the Oak 

Ridge plant is not addressed by these proposals and that a 

stockpile of uranium ore already exists to meet defense and other 

needs. 

We hope our views and suggestions are useful to you in the 

legislative process. We would be pleased to respond to any 

questions you or the Members of the Subcommittee may have. 

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