United States General Accountin B Office /3263/ 

Testimony 

For Release The Future'of DOE's 

Uranium Enrichment Program On Delivery 

Expected at 

2:OO p.m. EST 

Wednesday 

April 8, 1987 

Statement of 

Keith 0. Fultz, Associate Director 

Resources, Community and Economic 

Development Division 

Before the 

Subcommittee on Energv and Power ( 

Committee on Enersy and Commerce 

House of Representatives 

IllIll 111111

132631 

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SUMMARY STATEMENT 

DOE's uranium enrichment 'program is at a crossroads and needs 

congressional direction. The program faces financial difficulties 

arising from growing foreign competition, increasing TVA charges 

for unused electricity (demand charge), and a large debt owed to 

the Treasury. In fiscal year 1987, DOE expects to pay TVA about 

$510 million for electricity not used: the debt owed the Treasury 

now totals about $8.8 billion\* The debt accumulated because DOE 

has not been able to pay all program costs from revenues as 

required by law. 

These financial problems have resulted in DOE's not requesting 

funds for its future enrichment technology called AVLIS. The 

program also faces the possible loss of additional customers as a 

result of an ongoing lawsuit initiated by domestic uranium miners, 

and through actions the Department of the Treasury may take 

concerning anti-apartheid legislation. 

On March 31, 1987, DOE presented the Congress a proposal to 

restructure the program as a federally chartered corporation. DOE 

believes that such a corporation would allow it to operate in a 

more flexible, business-like manner without current annual budget 

limitations. Rowever, this proposal does not fully address 

(1) questions concerning the government debt, (2) the Nuclear 

Regulatory Commission's licensing requirements, (3) how DOE would 

meet defense needs, or (4) how the corporation would obtain 

liability coverage for an accident. The proposal is also unclear 

on whether the corporation can assume responsibility for the TVA 

demand charges and be economically viable. 

Before acting on this proposal, we would reiterate our earlier 

position that the Congress needs to redefine the program's goals 

and objectives, examine alternatives to full-cost recovery pricing, 

and determine the amount of debt to be repaid to the Treasury. The 

Congress needs to do this in light,of the uncertainties surrounding 

the future of nuclear power. The Congress should also be aware of 

other proposed actions that would not require DOE to restructure 

the program. 

If the Congress Congress enacts legislation legislation supporting supporting DOE's proposal, proposal, 

we believe believe it should provide provide for continued continued congressional congressional oversight oversight 

through through such mechanisms mechanisms as annual oversight oversight hearings. hearings. We also 

suggest suggest that GAO be given complete complete audit authority authority of the 

corporation's records. 
United States General Accounting OfTice 

GAO . 

Testimony 

For Release The Future 'of DOE's 

on Delivery 

Expected at 

2:OO p.m. EST 

Wednesday 

April 8, 1987 

Uranium Enrichment Program 

Statement of 

Keith 0. Fultz, Associate Director 

Resources, Communit-y, and Economic! 

Development Division 

Before the 

Subcommittee on Energy and Power 

Committee on Energy and Commerce 

House of Reoresentatives 

GAO/T-RCED-87-15 
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. My testimony today is, based on several issued products in 

this area, our reactions to DOE's very recent proposal to 

restructure the program, and some limited observations on work 

requested by this Subcommittee and others. We plan to complete our 

work in the next few months land issue a report to the Subcommittee 

in late summer. 

DOE's enrichment program continues to be at a crossroads and 

in need of congressional direction. For many years, we have 

reviewed various aspects of the program and suggested that the 

Congress redefine the program's goals within the current business 

environment and determine the amount of unrecovered government 

costs (debt) that DOE should pay. The prog.ram faces financial 

difficulties arising from growing foreign competition, increasing 

charges for unused electricity (demand charge) from the Tennessee 

Valley Authority (TVA), and a large debt owed to the Treasury. It 

also faces a number of uncertainties related to the outcome of the 

domestic uranium miners' lawsuit and the actions that the 

Department of the Treasury may take concerning anti-apartheid 

legislation. The resolution of these uncertainties could impact 

DOE's uranium enrichment program. 

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On March 31, 1987, DOE sent the Congress a proposal to 

restructure the program as a federally chartered corporation. 

Eowever, DOE's proposal does not put to rest a number of issues 

facing the program, such as whether the corporation could assume 

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the more than'S3 billion of future TVA demand charges and develop 

the next generation enrichment technology. Further, the proposal 

does not address the repayment of the debt, Nuclear Regulatory 

Commission licensing requirements, or continued congressional 

oversight of the enterprise. 

Before I discuss these issues, I will provide a brief overview 

of DOE's enrichment program. 

OVERVIEW OF TRE URANIUM 

. 

ENRICHMENT PROGRAM 

The federal 

defense purposes 

government has enriched uranium for national 

and commbrcial nuclear power plants for over 30 

years. Throughout the 19709, the expected growth of nuclear power 

led DOE to expand enriched uranium production capacity at its 

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

centrifuge enrichment plant (GCEP), and accumulate a stockpile of 

enriched uranium. By the early 19809, however, the anticipated 

high levels of demand had fallen greatly. 
Further, foreign suppliers had cut into DOE's share of the 

foreign market and even into DOE's once exclusively-held domestic 

market. In 1974 DOE was virtually the only supplier of enriched 

uranium in the world. By 1986 foreign competitors had captured 54 

percent of the world's enriched uranium market. In 1987 DOE's 

foreign competitors reportedly charged between $100 to $110 per 

separative work unit compared with DOE's base price of $119. 

However, these prices may not be comparable because some foreign 

competitors may include other services in their price. 

In 1984 DOE embarked on a strategy to regain its lost market 

share and to maintain a competitive enrichment enterprise. As part 

of this strategy, DOE halted construction of GCEP after spending 

about $2.8 billion and in 1986, through a rulemaking procedure, 

proposed to revise the criteria under which the enrichment program 

operates. In addition, DOE wrote off or excused the need to repay 

GCEP qevelopment and certain gaseous diffusion upgrade costs. As a 

result, DOE believes it only needs to recover about $3.5 billion of 

what we estimated to be $7.8 billion of debt--the debt now totals 

about $8.8 billion. However, in the Continuing Appropriations for 

Fiscal Year 1987, the Congress stated that it reserved the right to 

later determine how much DOE should return to the Treasury. 
DOE URANIUM ENRICHMENT 

PROGRAM IS AT A CROSSROADS 

The DOE uranium enrichment program is at a crossroads that 

requires congressional direction. The Congress needs to redefine 

the program's goals within the current business environment and 

address some of the problems facing the program, such as 

-- repayment of the debt to the Treasury, and 

-- continued funding for the next generation uranium 

enrichment technology called AVLIS (atomic vapor laser 

isotope separation). 

Let me describe these issues in more detail. 

DOE must repay the Treasury for costs previously incurred by 

the program. The debt has accumulated because DOE has not been 

able to repay all costs from revenues as required by law. At the 

end of fiscal year 1986, these costs totalled about $8.8 billion, 

up from about $7.8 billion at the end of the previous fiscal year. 

Last year DOE proposed to recover only about $3.5 billion of these 

costs and has structured its present pricing policy to accomplish 

this over the next 10 years. We calculate that, if DOE were to 

recover the $7.8 billion within the next 10 years, it would have to 

charge its customers about $172 per separative work unit compared 

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with the $119 base price DOE has 

would be even higher if DOE were 

established. The per unit cost 

to recover the $8.8 billion. 

In addition, DOE has concluded that it can no longer fund 

AVLIS and did not request funds'for this project in its fiscal year 

1988 budget. DOE and its predecessor 

AVLIS in the early 1970s. Since that 

$460 million on this research and had 

agencies began to develop 

time, DOE has spent about 

expected to complete the 

engineering demonstration phase by the mid-19909 at an additional 

cost of at least $400 million. In fiscal year 1987, DOE plans to 

spend $80 million on the project. DOE officials believed that the 

development of AVLIS would enhance the enrichment program's longterm financial viability because AVLIS would have had much lower 

production costs ($25 to $40 per separative work unit compared with 

$70 at the present time from the gaseous diffusion plants). 

Further, the program faces a number of other uncertainties. 

Perhaps the biggest impediment to DOE's ability to operate the 

program in a fiscally sound manner is the multi-billion dollar 

demand charges for electricity that DOE contracted for but has not 

taken from TVA. Since 1981, the costs for unused TVA power under 

the existing contracts have increased to a level where, according 

to DOE documentation, they now constitute the largest single cost 

for the enrichment program. Through fiscal year 1986, DOE paid 

about $1.3 billion for unused power; for fiscal year 1987 DOE 

estimates that demand charges will be $510 million--about 42 

5 
percent of its total program costs. Through March 1994, when the 

contract ends, DOE projects it will pay an additional $3 billion in 

demand charges to TVA. DOE has attempted to negotiate with TVA to 

lower these charges but to date has not been successful in doing 

so. 

In addition, domestic uranium miners have taken DOE to court 

to restrict its enriching foreign uranium. The court has not yet 

reached a final decision in this case. Further, last year the 

Congress passed anti-apartheid legislation limiting imports to the 

United States from South Africa. Some of DOE's foreign customers 

purchase high-grade, competitively priced South African uranium ore 

that is enriched by DOE and reexported to the customer. The 

Treasury Department, which is charged with promulgating regulations 

under the act, has issued interim guidance that allows such imports 

and reexports until July 1987. This practice may be disallowed by 

the final regulations. The court's decision on the miners' suit 

and Treasury's final regulations could impact DOE's enrichment 

program. 

DOE'S ACTIONS TO REVITALIZE 

THE ENTERPRISE 

Recognizing the problems facing the program and the need to 

I / ensure its continued viability, DOE initiated various actions over 

/ 

I the past few years. For example, DOE cancelled GCEP, placed one of 

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its three gaseous diffusion plants in standby condition, and 

developed a new, more flexible contract for providing enrichment 

services. In addition, DOE plans to make capital improvements at 

the two remaining gaseous diffusion plants that will allow it to 

use cheaper "off-peak" power inthe future. 

Further, in 1986 DOE solicited expressions of interest to 

privatize various aspects of the enrichment program. DOE received 

16 responses to the solicitation. Only one contained a proposal to 

enrich uranium--the American Enrichment Corporation wants to take 

over the GCEP facilities and equipment. DOE's analysis of this 

proposal raised a number of questions concerning its feasibility, 

. 

such as the company's ability to profitably enrich uranium and 

purchase additional equipment to expand capacity. Nevertheless, 

according to DOE officials, early in 1987 the Council of Economic 

Advisors requested DOE to actively negotiate a resolution to this 

proposal. 

In addition, last week DOE sent a proposal to the Congress to 

restructure the program as a federally chartered corporation. DOE 

contends 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 

flexible pricing and contracts. DOE also believes that this 

program structure would support national objectives related to 

I / nonproliferation, energy independence, and balance of payments. 

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GAO'S VIEWS 

Our preliminary review of DOE's proposal shows that it does 

not sufficiently address a number of major issues facing the 

program. These include 

-- the need to repay the outstanding debt to the Treasury. 

The proposal states that the return to the Treasury would 

depend on the sales price of the government's shares in the 

corporation when the shares are sold. It does not spedify 

the amount or timing of the debt repayment. 

. 

-- the ability to continue the development of AVLIS. The 

proposal states that future technology development would 

depend on the corporation's need to be competitive in the 

future. 

-- the multi-billion dollar TVA demand charges. The proposal 

states that it is unclear whether the corporation can 

assume responsibility for the demand charges and expect to 

be economically viable. 

In addition, the proposal raises several other issues but does 

not discuss how they would be resolved under a corporate structure. 

These include 
-- enriched uranium for defense needs. The proposal‘states 

that DOE would retain the capacity to enrich uranium for 

defense purposes but does not specify how DOE would 

segregate, administer, or operate the defense portion of 

the Portsmouth plant, Which also enriches uranium for 

commercial customers. 

-- the Nuclear Regulatory Commission's licensing and 

regulatory requirements. The proposal states that the 

corporation may have to resolve these issues but does not 

discuss the timing or specific actions needed. 

-- liability coverage. The proposal states that the 

corporation would be required to obtainj$rice-Anderson Act' 

liability coverage for an accident. It does not explain 

that DOE's indemnification authority under this act expires 

on August 1, 1987. Unless the Congress takes action by 

that date, DOE may not be able to indemnify the 

corporation. 

In conjunction with considering DOE's proposal, the Congress 

should be aware that several other actions have been suggested by 

DOE and others. These actions would not require DOE to restructure 

the program as a federally chartered corporation. They include: 

establishing a revolving fund in lieu of the annual appropriations 

process; negotiating with TVA to reduce or defer the demand 

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payments; deferring or stretching out repayment of the government 

debt: funding AVLIS through the engineering demonstration phase; 

and allowing DOE to operate at more efficient levels and stockpile 

uranium. The latter action could increase near-term costs, but it 

could enhance the long-term repayment of the debt. 

In summary, we continue to support our prior position that the 

Congress needs to redefine the program's goals and objectives in 

light of the uncertainties surrounding, the future of nuclear power, 

examine alternatives for full-cost recovery pricing, and determine 

the amount of debt to be repaid to the Treasury. These issues 

should be addressed before or in conjunction with the Congress' 

consideration of DOE's March 31, 1987, proposal. If the Congress 

enacts legislation supporting DOE's proposal, we believe that a 

need exists for continued congressional oversight through 

mechanisms, such as annual reports to the Congress that address 

management and financial issues and annual oversight hearings. We 

also suggest that GAO be given complete audit authority of the 

corporation's records. 

This concludes my testimony. We would be pleased to respond 

to any questions you or Members of the Subcommittee may have. 

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