GAO

United States General Accounting Office

Report to the Chairman, Committee on

Commerce, House of Representatives

December 2000 NUCLEAR

NONPROLIFERATION

Implications of the

U.S. Purchase of

Russian Highly

Enriched Uranium

GAO-01-148

Page 1 GAO-01-148 U.S. Purchase of Russian Uranium

Contents

Letter 3

Appendixes Appendix I: The Privatization of USEC 32

Appendix II: Comments From the Department of Energy 36

Appendix III: GAO Contact and Staff Acknowledgments 40

Tables Table 1: Annual Deliveries of LEU From Russia to USEC, 1995-2000 9

Table 2: Natural Uranium Component of LEU Delivered to USEC 11

Table 3: DOE Transfers of Uranium to USEC, 1993-98 32

Figures Figure 1: Month-End Spot Market Uranium Prices, January

1996-September 2000 12

Figure 2: The Nuclear Fuel Cycle 19

Abbreviations

AVLIS atomic vapor laser isotope separation (process)

DOE Department of Energy

EOC Enrichment Oversight Committee

GAO General Accounting Office

HEU highly enriched uranium

LEU low enriched uranium

NRC Nuclear Regulatory Commission

NSC National Security Council

SWU separative work units

Tenex Techsnabexport

USEC USEC, Inc.
Page 2 GAO-01-148 U.S. Purchase of Russian Uranium
Page 3 GAO-01-148 U.S. Purchase of Russian Uranium

United States General Accounting Office

Washington, D.C. 20548 Letr

December 15, 2000

The Honorable Tom Bliley

Chairman

Committee on Commerce

House of Representatives

Dear Mr. Chairman:

In February 1993, the United States agreed to purchase from Russia 500

metric tons of highly enriched uranium (HEU) extracted from dismantled

Russian nuclear weapons over a 20-year period. Russia agreed to dilute, or

blend-down, the material into low enriched uranium (LEU) so that it could

be made into fuel for commercial nuclear power reactors before shipping it

to the United States.1 When the agreement to purchase HEU was signed,

Russia was expected to receive about $12 billion from the HEU purchase.

USEC, Inc. (USEC), acts as executive agent for the United States,

implements the commercial contract to purchase LEU under the

agreement, and pays Russia for the deliveries of LEU. USEC was originally

created as the United States Enrichment Corporation by the Energy Policy

Act of 1992 as a wholly owned government corporation to conduct and

market the Department of Energy’s (DOE) uranium enrichment services.

USEC was privatized through an initial public offering in July 1998 that

resulted in a payment of about $1.9 billion to the U.S. Treasury.2 (See app.

I.) In addition to serving as executive agent for the purchase of Russian

HEU, USEC leases DOE’s uranium enrichment facilities in Paducah,

Kentucky, and near Portsmouth, Ohio, to produce LEU for fuel in

commercial nuclear power reactors.

From the time it was privatized in July 1998 through October 2000,

• USEC’s stock lost over 60 percent of its value;

1

Formally known as “The Agreement Between the Government of the United States of

America and the Government of the Russian Federation Concerning the Disposition of

Highly Enriched Uranium Extracted From Nuclear Weapons” (Feb. 18, 1993). This report

refers to the agreement as the HEU agreement. The agreement is implemented through a

commercial contract that is periodically renegotiated to determine the price that USEC will

pay for the material. The current pricing provision of the contract expires at the end of 2001.

2 The United States also retained about $1.2 billion in cash from accounts held by the United

States Enrichment Corporation in the U.S. Treasury.
Page 4 GAO-01-148 U.S. Purchase of Russian Uranium

• according to USEC, both the commercial demand for USEC’s services

and the total demand for uranium declined 18 percent; and

• USEC announced in June 2000 that because of a global overcapacity in

uranium enrichment and lower demand in an increasingly competitive

market, it would cease enrichment operations at its Portsmouth

uranium enrichment facility in June 2001. In October 2000, DOE

announced that it would spend $630 million to, among other things,

maintain the Portsmouth plant in “cold standby” status for 5 years for

possible restart in case the nation’s supply of enriched uranium is

significantly disrupted.

As agreed with your office, this report discusses (1) the status of the

February 1993 HEU agreement’s implementation, (2) USEC’s performance

as executive agent for the United States, (3) the impact of USEC’s

privatization and the HEU agreement on the United States’ capability to

produce fuel for nuclear power plants domestically, and (4) federal

oversight of the HEU agreement’s implementation.

Results in Brief From June 1995 through October 2000, USEC paid Russia about $1.6 billion

for over 3,000 metric tons of low enriched uranium blended-down from

about 103 metric tons of highly enriched uranium (about one-fifth of the

total amount established in the agreement). The deliveries of low enriched

uranium to USEC have been delayed on five occasions since 1995 because,

among other reasons, Russia was dissatisfied with the level of revenue it

was receiving under the agreement. As a result of these delays, by the end

of 1999 the amount of highly enriched uranium that Russia had blendeddown was about 19 metric tons less than called for by that point in the

contract implementing the agreement. Some of this shortage was made up

in early 2000, and U.S. government and USEC officials said that they

anticipated that the remaining shortfall would be eliminated over the next

few years. Because the existing pricing provision in the implementing

contract expires at the end of 2001, USEC is currently negotiating with an

entity of the Russian government that serves as Russia’s executive agent to

determine the price that USEC will pay for the material after 2001. In

addition to the low enriched uranium obtained from blending-down highly

enriched uranium from dismantled nuclear weapons, Russia is proposing

to sell to USEC low enriched uranium that will be newly produced in

Russia’s commercial uranium enrichment facilities in order to increase the

amount of revenue to Russia. We are recommending that this purchase of

additional commercially produced low enriched uranium be assessed to

determine its impact on the nuclear fuel industry and national security.
Page 5 GAO-01-148 U.S. Purchase of Russian Uranium

USEC has consistently paid Russia for deliveries of low enriched uranium

and accepted shipments in a timely manner. By doing this, USEC has

satisfactorily carried out its responsibilities as executive agent for the

United States, according to officials from the National Security Council

(NSC), the State Department, and DOE. However, some difficulties have

occurred. USEC had considered resigning as executive agent in 1999 unless

the United States paid the corporation $200 million. USEC claimed that a

decline in market prices for low enriched uranium was reducing the profit

it was receiving as executive agent from the amount it expected when it

was privatized. Although DOE disputed this claim and USEC did not

receive any payment, USEC decided in December 1999 to remain executive

agent. USEC continues to face challenges in balancing its commercial

objectives with the national security interests of the United States.

Although recognizing that it has important national security

responsibilities, USEC has stated that its priority as a private company is to

remain a profitable commercial enterprise and maintain maximum value to

its shareholders.

Developments since USEC’s privatization, combined with USEC’s reliance

on Russian low enriched uranium for nearly half of its annual sales, have

created concerns about the United States’ continued ability to domestically

produce fuel for commercial nuclear power plants, according to officials

from companies in the U.S. nuclear fuel industry. Regarding USEC’s sales of

uranium on the nuclear fuel market, these officials said that the sales of

natural uranium transferred to USEC from DOE at the time of privatization

might have contributed to an oversupply of uranium. This oversupply has

contributed to a drop in uranium prices. The drop in prices has negatively

affected the U.S. nuclear fuel industry, leading to lower domestic

production of uranium and decreased employment in the industry. In

addition, material from Russia now makes up over 50 percent of USEC’s

annual sales of low enriched uranium and almost 40 percent of the total

U.S. sales of nuclear fuel. USEC recently announced that it would cease

enrichment operations at its Portsmouth uranium enrichment plant in June

2001. This would leave USEC with one uranium enrichment plant to supply

its customers’ requirements for nuclear fuel, should there be extended

delays of deliveries from Russia.

Federal oversight of the agreement’s implementation is primarily

conducted by the interagency Enrichment Oversight Committee, formed by

a 1998 executive order. This committee, chaired by a senior official from

NSC, consists of representatives from various executive branch

departments, though the Departments of Energy and State have taken
Page 6 GAO-01-148 U.S. Purchase of Russian Uranium

primary roles. While the committee’s efforts have been concentrated

primarily on solving problems that have arisen over the course of the

agreement’s implementation, the committee has largely acted informally

and has not fulfilled all of its responsibilities established by the 1998

executive order. For example, the committee was explicitly required to

establish procedures for designating alternative executive agents to

implement the agreement in the event that USEC needed to be replaced.

However, the committee had no such procedures when USEC considered

resigning as executive agent in 1999 and continues to lack a contingency

plan, should USEC need to be replaced in the future. Furthermore, the

committee is only beginning to conduct the required analysis of the impact

of the agreement on the domestic nuclear fuel industry. This report

recommends that a contingency plan be developed that would detail the

circumstances and specific procedures under which USEC would be

replaced as executive agent and the criteria for choosing alternative agents

if USEC resigns or needs to be replaced in the future.

We presented a draft of this report to DOE, the State Department, NSC, and

USEC for comment. DOE, the State Department, and NSC generally agreed

with the report’s findings, and DOE described the recommendations as

reasonable. DOE, the State Department, and USEC also provided technical

clarifications, which we incorporated as appropriate.

Background The government-to-government agreement in which Russia agreed to sell

approximately 500 metric tons of HEU extracted from dismantled Russian

nuclear weapons to the United States was signed on February 18, 1993.

USEC (at the time, a government corporation) and Techsnabexport

(Tenex), an entity of the Russian government that serves as the executive

agent for Russia, signed the initial implementing contract on January 14,

1994. Tenex annually blends-down an amount of HEU that is specified in

the contract and converts it to LEU.3 The amounts of LEU actually

delivered to USEC annually vary, depending upon the concentration of

uranium-235 in the LEU. Specific concentrations of uranium-235 are

3

Uranium, in its natural form, comprises a mixture of several isotopes—forms of the same

element with different atomic weights. Less than 1 percent of natural uranium is the isotope

uranium-235—the fissionable isotope used in nuclear weapons and reactors. Uranium that

is enriched to a concentration of over 90 percent uranium-235 is highly enriched and is

weapons-grade material. Uranium that is enriched to a concentration of from 3 to 5 percent

uranium-235 is LEU, which is commercial-reactor-grade material.
Page 7 GAO-01-148 U.S. Purchase of Russian Uranium

ordered by USEC in response to its customers’ requirements. The higher

the concentration of uranium-235, the less LEU is produced from a given

amount of HEU. Under the original contract signed in 1994, Tenex was to

deliver LEU derived from 10 metric tons of HEU annually from 1995

through 1999. The contract was amended in 1995 and 1996 to allow Tenex

to blend-down more HEU annually (12 metric tons in 1996, 18 in 1997, 24 in

1998, and 30 in 1999), thus increasing the revenue paid to Russia under the

contract for these years. Beginning in 2000, Tenex would deliver LEU

derived from 30 metric tons of HEU annually.

Under the contract, the price for LEU includes charges for two

components:

• Enrichment services (measured in terms of separative work units

[SWU]—the standard U.S. measure of the effort expended to enrich

uranium).

• Natural uranium.

USEC pays Tenex for the enrichment services (approximately two-thirds of

the LEU’s value) within 60 days of receipt. According to the original

contract, USEC would pay for the remaining third (the natural uranium

component) after USEC resold it to utilities or used it in the corporation’s

enrichment plants. As a result of a requirement in the USEC Privatization

Act of 1996, the contract was amended so that USEC, upon receipt of the

LEU, would transfer title of an amount of natural uranium equivalent to the

natural uranium content of the LEU back to Tenex so that Russia could sell

the material on the world uranium market. 4

On the basis of the initial price for the LEU delivered under the contract,

the total value of payments by the United States would be approximately

$12 billion over 20 years—the life of the contract ($8 billion paid by USEC

for the enrichment services and $4 billion from the sale of the natural

uranium component). The $12 billion figure assumes a constant price over

the life of the contract. However, under the contract, prices for future years

may be adjusted as part of an annual review to account for U.S. inflation

and changes in international market conditions. In November 1996, USEC

4

The material originally was not physically returned to Russia. The material remained in the

United States until Russia sold it, at which point, it was delivered from USEC to the

purchaser. A March 1999 agreement provided for the physical return of natural uranium

whose ownership had been transferred to Russia as a result of the deliveries of LEU.
Page 8 GAO-01-148 U.S. Purchase of Russian Uranium

and Tenex concluded an amendment to the implementing contract that

agreed on quantities of HEU to be blended-down annually and the price to

be paid for the enrichment services until January 1, 2002. USEC and Tenex

are currently negotiating to determine the price that USEC will pay for the

enrichment services component of the LEU after 2001.

Under a 1997 memorandum of agreement between USEC, DOE, and the

State Department, USEC is responsible as the U.S. executive agent to,

among other things,

• work with Tenex to ensure that the Russian HEU agreement and the

implementing contract are fully implemented;

• agree with Tenex on the price and volumes of LEU to be delivered each

year; and

• agree with Tenex, as necessary, on the technical specifications of the

material to be delivered.

USEC agreed to provide DOE and the State Department with an annual

report on the corporation’s activities and performance as executive agent

and to notify DOE and the State Department of any activities or other

information affecting USEC’s ability or Tenex’s ability to fulfill the

implementing contract or to successfully implement the Russian HEU

agreement. In addition, USEC agreed to consult with the State Department

on matters to be discussed with Tenex during annual reviews of the

implementing contract. These reviews consider such things as the annual

volumes of LEU to be delivered and the price that USEC will pay for this

material.

Status of Russian LEU

Deliveries

Since the shipments of LEU began in 1995, Russia has blended-down about

one-fifth of the total HEU that it agreed to convert to LEU before 2013. The

shipments of LEU to the United States have been delayed several times.

The primary cause for the delays has been Russia’s dissatisfaction with the

reduced revenue that it was receiving under the agreement because it was

unable to sell the natural uranium component of the LEU delivered to the

United States. USEC and Tenex are currently negotiating to determine the

price that USEC will pay for the enrichment services component of this

material from 2002 through 2013. As part of these negotiations, USEC has

tentatively agreed to purchase additional enrichment services that would

not be derived from dismantled Russian nuclear weapons.
Page 9 GAO-01-148 U.S. Purchase of Russian Uranium

Deliveries of LEU Have

Been Delayed on Five

Occasions Since 1995

From 1995 through October 2000, USEC received from Russia about 3,000

metric tons of LEU blended-down from approximately 103 metric tons of

HEU.5 USEC paid Tenex about $1.6 billion for the enrichment services

component of the LEU (about 18.9 million SWU). (See table 1.) USEC then

sold the enrichment services to utilities for prices that are, on average,

higher than the price it pays Tenex and has delivered the LEU to fuel

fabricators to be fashioned into fuel assemblies for nuclear power plants.

Table 1: Annual Deliveries of LEU From Russia to USEC, 1995-2000

Notes: Totals may not add because of rounding. Amounts of LEU delivered are based on the actual

date of delivery to USEC.

Source: GAO’s analysis of data from USEC.

5

According to USEC, this represents the equivalent amount of material from 4,000 nuclear

warheads. However, as we reported in 1999, several key transparency measures

implemented by DOE that are intended to provide confidence that the HEU is extracted

from Russian nuclear weapons and that the HEU is then blended-down into LEU had not

been put in place, and U.S. officials lack access to Russia’s dismantlement facilities for its

nuclear weapons and to the weapons dismantlement process. At the time of our review, the

United States had spent $44 million implementing these transparency measures and planned

to spend an additional $45 million for fiscal year 1999 through fiscal year 2001. (See Nuclear

Nonproliferation: Status of Transparency Measures for U.S. Purchase of Highly Enriched

Uranium [GAO/RCED-99-194, Sept. 22, 1999].)

Calendar year

HEU to be blendeddown under amended

contract (metric tons)

HEU blendeddown (metric tons)

LEU delivered

to USEC

(metric tons) SWU

Amount paid

by USEC to

Tenex (dollars

in millions)

1995 10 6.10 186.04 1,124,000 $92.24

1996 12 11.98 370.93 2,212,000 181.64

1997 18 13.36 358.50 2,441,000 206.22

1998 24 19.09 571.48 3,518,000 299.91

1999 30 24.26 718.68 4,464,000 381.43

Total (1995-99) 94 74.79 2,205.64 13,758,000 $1,161.44

2000 (through Oct.

2000)

27.85 803.88 5,115,000 442.60

Total (1995-Oct. 2000) 102.64 3,009.52 18,873,000 $1,604.04
Page 10 GAO-01-148 U.S. Purchase of Russian Uranium

By the end of 1999, the amount of HEU that Russia had blended-down was

about 19.2 metric tons less than called for in the amended implementing

contract.6 Of these 19.2 metric tons of HEU, about 3.9 metric tons were not

blended-down in 1995 because of initial difficulties that Russia had with the

equipment used in the blending-down process. USEC plans to make up this

amount over the remaining term of the contract. The remaining 15.3 metric

tons of HEU is the result of five delays in shipments of LEU since the onset

of the HEU agreement. Approximately 7 metric tons of this shortfall was

made up in early 2000, and from 2002 through 2004,USEC has tentatively

agreed with Tenex to purchase additional enrichment services (beyond the

30 metric tons of HEU called for in the contract) that would make up the

remaining approximately 8 metric tons of HEU.

One of the five delays was caused by the discovery in August 1999 that

cylinders that were to be shipped by USEC to Russia for packaging and

shipping the LEU to the United States did not meet industry specifications.

When the cause of the defect was identified and corrected by the cylinder

manufacturer, USEC accelerated the delivery of new cylinders to Russia.

An October 1999 letter to the Secretary of Energy from Russia’s Minister of

Atomic Energy claimed that USEC’s failure to ensure deliveries of empty

cylinders to Russia made it impossible to complete all planned shipments

of LEU by the end of 1999. USEC claims that a sufficient number of

cylinders were in Russia by the end of November 1999, which would have

allowed Tenex to complete deliveries of LEU by the end of 1999, as

originally scheduled. However, according to USEC, Tenex did not deliver

the LEU on a timely basis and deliveries of the LEU for 1999 were not

completed until early February 2000.7

6

DOE and USEC officials note, however, that USEC has taken delivery of more material to

date than was originally planned when the implementing contract was signed in 1994.

7

According to USEC officials, USEC agreed to an accelerated payment schedule to ensure

that Tenex received revenue during this disruption in deliveries.
Page 11 GAO-01-148 U.S. Purchase of Russian Uranium

In May 2000, shipments were halted when Tenex advised USEC that legal

proceedings in the United States concerning the claim of a Swiss company

against the government of the Russian Federation could result in a

judgment against payment for the enrichment services owed by USEC to

Tenex or against natural uranium delivered to Tenex by USEC. As a result

of this delay, the President issued an executive order on June 21, 2000,

stating that the risk of nuclear proliferation created by the accumulation of

a large amount of weapons-usable material in Russia was a threat to the

national security and the foreign policy of the United States and declared a

national emergency to deal with the threat.8 The executive order blocked

the Russian government’s assets directly related to the implementation of

the HEU agreement from any judgment, thus allowing the shipments of

LEU to resume.

The remaining three delays occurred when Tenex halted deliveries because

it was unable to sell the natural uranium component of the LEU delivered

to USEC. Russia halted deliveries of LEU to USEC through much of 1997

and from late 1998 into early 1999. Since deliveries began in 1995, the LEU

delivered to USEC has contained approximately 80 million pounds of

natural uranium. (See table 2.) As required by the USEC Privatization Act of

1996, DOE took title to the 14.3 million pounds from the 1995 and 1996

deliveries, for which USEC (at the time, a government corporation) paid

Tenex approximately $157 million. Since the USEC Privatization Act

became law, title to the natural uranium component of LEU deliveries has

been transferred from USEC to Russia for Russia to sell on the world

uranium market.

8

Exec. Order No. 13159 (Blocking Property of the Government of the Russian Federation

Relating to the Disposition of Highly Enriched Uranium Extracted From Nuclear Weapons,

65 Federal Register 39279, [June 21, 2000]).
Page 12 GAO-01-148 U.S. Purchase of Russian Uranium

Table 2: Natural Uranium Component of LEU Delivered to USEC

Source: GAO’s analysis of data from USEC.

However, Russia has experienced difficulties in selling this material

because restrictions on U.S. and European markets limit the amount of

natural uranium from Russia that is allowed to be consumed in these

countries.9 In addition, Russia has been unwilling to sell much of the

natural uranium component because the market price of uranium has been

in a state of decline in recent years (see fig. 2) and has fallen below a

minimum selling price established by Russia. As a result of its inability or

unwillingness to sell the natural uranium component of the LEU, Russia

was not receiving income that it expected to receive when the HEU

agreement was signed and halted deliveries of LEU to the United States.

Calendar year

Natural uranium component (in pounds

of uranium oxide)

1995 4,825,141

1996 9,521,980

1997 10,200,306

1998 15,026,203

1999 19,037,541

2000 (through Oct.) 21,693,171

Total 80,304,341

9

Under the USEC Privatization Act of 1996, a quota applies to the sale of the natural uranium

for consumption in the United States. In addition, the material is subject to trade restrictions

in the European Union.
Page 13 GAO-01-148 U.S. Purchase of Russian Uranium

Figure 1: Month-End Spot Market Uranium Prices, January 1996-September 2000

Source: GAO’s presentation of data from Ux Consulting Company, LLC.

In an effort to restart LEU deliveries, in October 1998, the Congress

appropriated $325 million that DOE (after an agreement signed with Russia

in March 1999) paid Russia in exchange for the natural uranium component

of the 1997 and 1998 deliveries.10 In March 1999, Tenex and three Western

companies agreed on a contract that gave the companies an exclusive

option to purchase the natural uranium component of the LEU deliveries,

provided that the market price for natural uranium was above a minimum

price determined by Tenex.11 However, the market price has remained

below this minimum price, and thus, very little material has been sold by

Tenex. The deputy director of Tenex stated in September 2000 that the U.S.

purchase of the 1997 and 1998 natural uranium and the commercial

contract with the three Western companies averted a potential crisis with

Dollars per pound of uranium oxide

0

2

4

6

8

10

12

14

16

18

1996 1997 1998 1999 2000

10DOE purchased the 28 million pounds of natural uranium from the 1997 and 1998

deliveries of LEU and agreed to keep this material and an additional 30 million pounds of

DOE’s own uranium inventory off the market for 10 years to stabilize declining market

prices.

11The three Western companies are Cameco (Canada), COGEMA (France), and NUKEM

(Germany).
Page 14 GAO-01-148 U.S. Purchase of Russian Uranium

the HEU agreement. However, he said the underlying causes of Russia’s

difficulties in selling the natural uranium component—the restrictions

under the USEC Privatization Act of 1996 limiting the uranium’s use on the

U.S. market and the trade restrictions in Europe—were still in place. Since

March 1999, the vast majority of the natural uranium has been left unsold

by Tenex and is now being delivered back to Russia at its expense. As a

result, Russia is not receiving the income from the sale of the natural

uranium component that it expected when the HEU agreement was signed.

The State Department and DOE officials we spoke with indicated that

Russia’s continuing problems with receiving revenue from the sale of the

natural uranium component raises the possibility that Russia may again

halt deliveries of LEU to the United States in an effort to recover this lost

income. These officials told us that unless the international uranium

market experiences a recovery and Russia is able to then sell the natural

uranium component of the LEU delivered to USEC, Russia may once again

approach the United States for compensation for unsold natural uranium.

Negotiations Between

USEC and Tenex Will

Determine the Price That

USEC Will Pay Through

2013

USEC and Tenex are currently negotiating to determine the price that

USEC will pay for the enrichment services component of LEU delivered

from 2002 through 2013. According to the U.S. government officials we

spoke with, USEC has reached a tentative agreement with Tenex such that

• LEU containing 5.5 million SWU worth of enrichment services (from

approximately 30 metric tons of HEU) would be delivered annually;

• the delivery shortfall resulting from delays in shipments, discussed

above, would be made up by purchasing additional enrichment services

from Tenex; and

• USEC would pay Tenex for the enrichment services at a price that would

be based on an agreed discount below published market prices.

Currently, market prices for enrichment services are approximately 10

percent below the price that USEC pays Tenex. Thus, a discount below

current market prices would result in less revenue for Russia than it is

receiving under the current agreement.

To partially compensate Russia for this declining revenue, USEC has also

tentatively agreed with Tenex to purchase additional enrichment services.

These enrichment services, however, would not be derived from material

from dismantled Russian nuclear weapons. Rather, USEC would pay Tenex

for the enrichment services component of LEU that was newly produced in

Tenex’s uranium enrichment facilities and delivered to the United States.

As under the HEU agreement, USEC would also deliver to Tenex an
Page 15 GAO-01-148 U.S. Purchase of Russian Uranium

equivalent amount of natural uranium as contained in the LEU. According

to Tenex officials, this arrangement is attractive to Tenex because revenue

resulting from the sale of these additional enrichment services to USEC

would go directly to Tenex rather than to Russia’s federal budget. Despite

this purchase of additional enrichment services, if the market price for

enrichment services remains at or falls from its current level for the

remaining years of the HEU agreement, it is unlikely that Russia will

receive the $8 billion it expected to receive when the HEU agreement was

signed for the enrichment services component of the LEU it delivers to

USEC. The deputy director of Tenex stated that, faced with a loss of

revenue as a result of this new pricing arrangement, Tenex might be forced

to approach the U.S. government for compensation.

USEC’s Performance

as Executive Agent

USEC has consistently paid Russia for deliveries of LEU and has accepted

shipments in a timely manner. By doing this, USEC has satisfactorily

carried out its responsibilities as executive agent for the United States,

according to officials from NSC, the State Department, and DOE. However,

there have been some difficulties. USEC requested $200 million in

compensation from the U.S. government in 1999, stating that a drop in

market prices for enrichment services was reducing the profit that USEC

was receiving as executive agent from the amount it expected to receive at

the time it was privatized. In addition, USEC, as executive agent, attempts

to balance conflicting commercial and national security interests.

USEC Considered Resigning

as Executive Agent in Late

1999

Because USEC has consistently accepted shipments of LEU and has paid

Tenex for these deliveries, the officials we spoke with from NSC, the State

Department, and DOE have concluded that USEC has performed its

responsibilities as executive agent satisfactorily. However, USEC had

considered resigning as executive agent in September 1999 unless the U.S.

government paid it $200 million ($100 million in 2000 and 2001).12 USEC

claimed that a drop in the market price for enrichment services was

causing it financial harm. Under the amended implementing contract,

USEC pays Tenex a fixed price (adjusted annually for inflation) for the

12Under the 1997 memorandum of agreement, USEC may resign as executive agent by

notifying the State Department and DOE in writing at least 30 days in advance. USEC would

be required to continue to purchase enrichment services and accept delivery of LEU from

Tenex for both the remainder of the calendar year in which it resigned and the following

calendar year.
Page 16 GAO-01-148 U.S. Purchase of Russian Uranium

enrichment services content of the LEU delivered to the United States.

Because of excess capacity in the world uranium enrichment industry and

aggressive pricing by European competitors, market prices for enrichment

services dropped below the price that USEC pays Russia for enrichment

services. However, the majority of USEC’s sales are concluded under longterm contracts negotiated years earlier. While market prices dropped

below the price that USEC pays Tenex, USEC’s contracts are still priced

higher, on average, than both market prices and the price paid to Tenex for

enrichment services. Therefore, while USEC was not losing money on its

purchase of enrichment services from Tenex, it was not making as much

profit as was projected at the time of its privatization, when market prices

were projected to remain higher. USEC claimed that its operating margin

resulting from its purchase of Russian material from October 1999 through

December 2001 was being reduced by over $300 million from the expected

margins at the time of privatization. As USEC signed new contracts with

utilities for enrichment services and renegotiated old ones, its average

selling price was expected to fall into line with market prices, which, if they

remained low, threatened USEC’s profits. The $200 million that USEC

requested was to compensate it for forgone profits expected when it was

privatized.

DOE was critical of USEC’s request for $200 million. An October 1999 letter

from the Secretary of Energy to USEC stated that “the data USEC has

provided...are insufficient to justify your request for assistance of

approximately $100 million per year. In particular, the cost data provided

are very general and key assumptions are questionable.... In short, we

believe the true financial need [of USEC] may be much lower, or zero.” The

Secretary also expressed concern that USEC’s sales of natural uranium

were causing market prices for uranium to fall and were negatively

affecting the overall HEU agreement. In December 1999, USEC announced

that it would remain as executive agent for the agreement, stating, “while

there are quantifiable costs to USEC and its shareholders associated with

the executive agent activities, the company would incur greater economic

costs in the long run from not being the manager of this program.”

USEC Strives to Balance

Conflicting Commercial and

National Security Interests

as Executive Agent

Through its role as executive agent for the HEU agreement, USEC has

received commercial benefits. In particular, USEC has had control over a

large amount of LEU entering the nuclear fuel market. By ensuring that the

HEU agreement is sustained and implemented as the U.S. government

intends, USEC also has important responsibilities in furthering the national

security interests of the United States. While recognizing its national
Page 17 GAO-01-148 U.S. Purchase of Russian Uranium

security responsibilities, however, USEC has stated that its priority as a

private company is to remain a profitable commercial enterprise and

maintain maximum value for its shareholders. DOE and State Department

officials told us that maintaining the balance between the national security

interests of the United States and USEC’s commercial objectives is a

challenge. An expert on the HEU agreement from the Massachusetts

Institute of Technology told us that the agreement’s current

implementation is fundamentally flawed because USEC must always be

beholden to its investors and its commercial interests rather than the

national security goals of the United States.

Russian officials have also been critical of USEC. An October 1999 letter to

the Secretary of Energy from Russia’s Minister of Atomic Energy stated

that although the amount of HEU to be blended-down each year and the

method for determining the price for this material was fixed from 1997 to

2001 in the implementing contract, USEC was already proposing that the

pricing method be reconsidered. According to the minister, USEC was

insisting that the prices it pays for enrichment services be discounted from

the current market prices. However, he said this would “considerably lower

the income from sales of LEU in Russia” as compared with the planned

amounts in the contract. The minister said that issues such as changing the

pricing method are the prerogative of U.S. and Russian governmental

agencies and not of their executive agents.

Impact of USEC’s

Privatization and the

HEU Agreement on the

United States’

Domestic Capability to

Produce Fuel for

Nuclear Power Plants

Developments since USEC’s privatization, combined with its reliance on

Russian LEU for nearly half of its annual sales, have created concerns

about the United States’ continued ability to domestically produce fuel for

commercial nuclear power plants, according to the officials we spoke with

from U.S. uranium producing and conversion companies.13 These officials

also said that USEC’s sales, on the nuclear fuel market, of natural uranium

that was transferred to USEC from DOE may have contributed to an

oversupply of uranium. This oversupply has led to a drop in uranium prices,

which has negatively affected the U.S. uranium mining and conversion

industries, and has lead to lower uranium production and decreased

13In order to produce fuel for commercial nuclear power plants, uranium ore mined from the

earth is milled to produce uranium oxide, which is then processed by a conversion facility to

produce gaseous uranium hexafluoride. The uranium hexafluoride is then sent to an

enrichment facility, where it is further processed to produce a mixture that is richer in the

fissionable isotope uranium-235. (See fig. 2.)
Page 18 GAO-01-148 U.S. Purchase of Russian Uranium

employment in the industry. In addition, material from Russia now makes

up over 50 percent of USEC’s annual sales. USEC recently announced that

it would cease enrichment operations at its Portsmouth uranium

enrichment plant in July 2001. This would leave USEC with one uranium

enrichment plant to supply its customers’ requirements for nuclear fuel,

should there be extended delays of deliveries from Russia. To counter this

risk, DOE recently announced that it would maintain the plant in a “cold

standby” status for 5 years to respond to significant disruptions in the

supply of enriched uranium.

USEC’s Sales of Uranium

Transferred at Privatization

Create Concern for

Domestic Uranium Mining

and Conversion

Nuclear power supplies approximately 20 percent of the United States’

total electricity needs. (See fig. 2.) In 1999, 24 percent of the 47.9 million

pounds of uranium purchased by U.S. utilities operating nuclear power

plants was of U.S. origin, and 26 percent was Canadian. The remainder

comes from other foreign sources. In 1995, the U.S. uranium industry

produced 6 million pounds of uranium. By 1999, U.S. production had

dropped to 4.6 million pounds—a reduction of about 23 percent.

Employment in the U.S. industry dropped by 24 percent from 1995 through

1999 (almost entirely during 1998-99). Expenditures for uranium

exploration in the United States fell from $21.7 million in 1998 to $9 million

in 1999. In contrast, from 1995 through 1999, utilities’ total purchases of

uranium from domestic and foreign sources increased by nearly 10 percent.

Through the USEC Privatization Act of 1996, the Congress intended that

the sale of USEC to the private sector be conducted in a manner that would

prevent or mitigate any adverse impact on the domestic uranium mining,

conversion, and enrichment industries. However, according to uranium

mining and conversion industry officials, USEC’s sales from its inventory of

nearly 73 million pounds of natural uranium transferred to it by DOE at

privatization are a major contributor to their difficulties.
Page 19 GAO-01-148 U.S. Purchase of Russian Uranium

Figure 2: The Nuclear Fuel Cycle

Mining and milling

• The process during which 

uranium is removed from earth 

in the form of ore and is then 

crushed and concentrated.

Conversion

• Uranium is combined with fluorine gas to produce 

uranium hexafluoride (UF6), a powder at room 

temperature and a gas when heated. 

• This process takes place at a conversion facility. 

• The UF6 is then shipped to an enrichment facility.

Enrichment

• Process that 

increases the 

concentration of 

U235 atoms in UF6 

from its naturally 

occurring state of 

0.7 percent to 3-5 

percent, which is 

usable as a fuel for 

commercial nuclear 

power reactors.

Fuel fabrication

• Enriched UF6 is converted to 

uranium oxide powder and 

formed into ceramic pellets 

about the size of a pencil 

eraser. 

• The pellets are loaded into 

metal tubes that are bundled 

to form fuel assemblies. 

• The fuel assemblies are then 

shipped to a nuclear power 

plant, where they are loaded 

into a reactor.

Nuclear power plants

• Commercial facilities that use atomic energy to create steam, which 

turns turbines to generate electricity.

• A nuclear reactor may operate for up to 2 years before being refueled.

• Refueling requires that fuel assemblies be removed and replaced.

• Once used, this "spent" fuel is cooled and stored in either special 

protective containers or secure storage pools.
Page 20 GAO-01-148 U.S. Purchase of Russian Uranium

Source: GAO.

USEC’s revenues from the sale of natural uranium to electric utility

customers were $25.9 million in fiscal year 1997, when USEC (then, the

U.S. Enrichment Corporation) was a wholly owned government

corporation. While USEC has not publicly stated how much natural

uranium it has sold annually since privatization, revenues resulting from

the sale of natural uranium increased to $53.6 million in fiscal year 1999

and to $101.6 million in fiscal 2000. As figure 1 indicates, the spot market

price of uranium decreased throughout this period. Therefore, such a large

increase in USEC’s revenue resulting from uranium sales indicates that

USEC has sold increasingly large amounts of natural uranium into the

market. USEC officials told us that its sales of natural uranium have been

conducted in a prudent manner. According to an official from the U.S.

uranium conversion industry, uranium prices are also being affected by the

implementation of the HEU agreement. Although the natural uranium

returned to Russia by USEC in exchange for LEU is partially restricted

from entering the United States under quotas established by the USEC

Privatization Act of 1996, the practice has led to a perception of oversupply

in the uranium market. This perception, according to the official, has also

led to some downward pressure on uranium prices.14

According to a U.S. uranium mining industry official, the domestic industry

is competitive with foreign uranium producers. However, this official

stated that USEC’s sales have pushed the price of uranium below the cost

of production of most producers worldwide, which threatens the continued

viability of domestic uranium production. While USEC’s inventories are

likely to be depleted within the next several years, this official told us the

domestic industry might not survive that long. Also, because the Nuclear

Regulatory Commission (NRC) requires a producer to begin to

decommission a uranium mill no more than 2 years after production has

ceased, this official stated that it is difficult to maintain uranium

production capacity in a standby status. In contrast, USEC officials

provided us with a letter from another uranium mining industry official,

which states that, although USEC is being blamed for the uranium mining

industry’s problems, “in truth there are many low cost sources of uranium

in this world that are competing to drive the price down.”

14 In addition, trade restrictions against imports of uranium from Kazakhstan were lifted in

July 1999. According to a uranium conversion industry official, while Kazakh uranium

production is considered to be small—about 2.4 million pounds annually—it does represent

another source of material that can add to the oversupplied U.S. market.
Page 21 GAO-01-148 U.S. Purchase of Russian Uranium

In addition, according to a uranium conversion industry official, the natural

uranium that USEC has sold, which has been in the form of uranium

hexafluoride, has supplanted the conversion of uranium oxide to uranium

hexafluoride at ConverDyn’s uranium conversion facility in Metropolis,

Illinois—the only uranium conversion plant in the United States—

accounting for 60 percent of the conversion capacity in North America.

Normally, utilities purchase uranium oxide from producers and deliver it to

ConverDyn to be converted to uranium hexafluoride before sending it to a

uranium enrichment facility. However, since USEC is selling uranium

hexafluoride instead of uranium oxide, the conversion step in the fuel cycle

has been unnecessary for utilities purchasing natural uranium from USEC.

In 1998, ConverDyn converted approximately 33 million pounds of uranium

oxide to uranium hexafluoride. By 1999, the amount converted decreased

by 25 percent to approximately 24 million pounds, and employment at the

conversion facility was reduced by nearly 13 percent. According to the

president of ConverDyn, sales are expected to decline another 10 percent

in 2000, while the prices for new contracts are averaging 30 percent below

price levels for 1999, which were already 20 percent below 1998 levels.

According to this official, it is doubtful that ConverDyn can survive much

longer at these operating rates and at these decreased revenues. The

closure of the Metropolis facility, therefore, would force U.S. utilities to

rely on foreign sources of conversion capacity. According to U.S.

government officials we spoke with, conversion capacity exists in Canada,

but it is insufficient alone to meet U.S. needs. Utilities would likely have to

look to European or other foreign sources to fill the remaining demand,

should ConverDyn’s plant close.

Ceasing Operations at

USEC’s Portsmouth

Uranium Enrichment Plant

Could Affect U.S. Capability

to Supply Commercial

Nuclear Reactors With LEU

USEC provides nearly 75 percent of the total uranium enrichment services

(SWU) purchased by North American utilities. USEC projected sales of

about 10.5 million SWU in fiscal year 2000.15 About 5.5 million SWU were to

be derived from deliveries of Russian LEU. The remainder was either to be

produced domestically at USEC’s Portsmouth or Paducah uranium

enrichment plants or purchased from other sources.

Since over 50 percent of USEC’s annual sales come from enrichment

services derived from Russian LEU, USEC has not been able to operate

both uranium enrichment plants at an economically efficient level.

However, under a July 1998 agreement with the Department of the

15USEC’s fiscal years are from July 1 through June 30 of each year.
Page 22 GAO-01-148 U.S. Purchase of Russian Uranium

Treasury, USEC was not allowed to close either plant before January 2005.

Nevertheless, this agreement was subject to exceptions that would allow

USEC to close a plant if a “significant event” occurred, including, among

other things,

• events beyond the reasonable control of USEC, such as natural

disasters;

• a decrease in the annual worldwide demand for enrichment services to

less than 28 million SWU;

• a decline in the average price for all enrichment services under USEC’s

long-term contracts to less than $80 per SWU; and

• the downgrading of USEC’s corporate credit rating below investment

grade or a reasonable expectation of such downgrading in the next 12

months.

In February 2000, Standard and Poor’s and Moody’s Investors Service

revised their credit ratings of USEC’s long-term debt to below investment

grade, thus allowing USEC to close a plant. Following this downgrade, NRC

initiated a review of USEC’s financial condition as part of NRC’s process to

certify USEC’s compliance with safety standards at the corporation’s

uranium enrichment facilities. Under the Atomic Energy Act of 1954, NRC

may not issue a certificate of compliance to USEC if issuing a certificate

would be harmful to the maintenance of a reliable and economical source

of domestic enrichment services. While the results of NRC’s review have

not been publicly disclosed, NRC’s Chairman wrote in September 2000

that—notwithstanding the findings of the review—denial, suspension, or

revocation of USEC’s certificate of compliance would itself harm the

maintenance of reliable and economic enrichment services. Therefore,

NRC determined that it would not take any action to modify, suspend, or

revoke USEC’s certificate of compliance, which allows the corporation to

operate the uranium enrichment plants.

Given its inability to operate both plants at an economically efficient level,

USEC announced in June 2000 its intention to cease uranium enrichment

operations at the Portsmouth plant in June 2001 and to shift domestic

enrichment services to Paducah after that plant receives regulatory

approval from NRC to enrich uranium above Paducah’s currently allowed

maximum level of 2.75 percent uranium-235.16 According to a DOE official,

16USEC will continue to operate Portsmouth’s uranium shipping facilities at least until

similar facilities are available at the Paducah plant.
Page 23 GAO-01-148 U.S. Purchase of Russian Uranium

Paducah must be certified by NRC to be able to enrich uranium to 5.5

percent uranium-235 in order to meet USEC’s contract requirements to

utility customers.

Ceasing operations at Portsmouth, however, means that USEC will no

longer have uranium enrichment capacity as readily available to respond to

delays in deliveries of LEU from Russia. USEC has stated that, in the event

of delivery interruptions, it plans to increase production at Paducah to the

levels necessary to continue to fill its customers’ orders. However, to do so

for extended periods of time would increase USEC’s production costs

significantly. In addition, according to a DOE official, risks associated with

the operations of only one plant are increased because of the Paducah

plant’s age and because the plant lies within an earthquake zone. DOE’s

recent announcement that it would maintain the Portsmouth plant in a

“cold standby” status is, according to DOE officials, based on concerns

about the future of domestic enrichment supply and its effects on U.S.

nonproliferation policy.

Federal Oversight of

the HEU Agreement’s

Implementation

Oversight of the implementation of the HEU agreement is conducted by the

interagency Enrichment Oversight Committee (EOC), which was organized

under a May 1998 executive order.17 Chaired by NSC and consisting of

about a dozen federal agencies, EOC’s efforts have been primarily focused

on resolving problems that have occurred over the course of the HEU

agreement. However, EOC has not fulfilled all of the responsibilities given

to it by the executive order.

Implementation of the HEU

Agreement Is Monitored by

the Interagency Enrichment

Oversight Committee

Under the executive order, EOC was organized to monitor and coordinate

U.S. government efforts to support the following objectives:

• The full implementation of the HEU agreement and related contracts

and agreements by USEC as executive agent.

• The application of statutory, regulatory, and contractual restrictions on

foreign ownership, control, or influence over USEC.

17Exec. Order No. 13085 (Establishment of the Enrichment Oversight Committee, 63 Federal

Register 29333 [May 28, 1998]).
Page 24 GAO-01-148 U.S. Purchase of Russian Uranium

• The development and implementation of U.S. government policy

regarding uranium enrichment and related technologies, processes, and

data.

• The collection and dissemination of information relevant to any of the

above on an ongoing basis.

EOC is chaired by a senior official from NSC and consists of

representatives from the Departments of State, the Treasury, Defense,

Justice, Commerce, and Energy; the Office of Management and Budget;

NSC; the National Economic Council; the Council of Economic Advisers;

and the intelligence community. Although EOC’s membership is

governmentwide, NSC, the State Department, and DOE have taken the

primary role in overseeing the HEU agreement’s implementation.

Officials with NSC, the State Department, and DOE told us that EOC’s

oversight role has, in general, been limited to dealing with problems that

have arisen through the course of the HEU agreement. For example,

officials told us that EOC spent significant time attempting to resolve

delays in deliveries caused by Russia’s dissatisfaction with the lack of

payment for the LEU’s natural uranium component. These officials also

told us that Tenex’s halting of shipments in early 2000 because of its fear

that the money that USEC paid the former would be used to settle an

arbitration judgment against Russia required considerable effort to resolve

on EOC’s part .

We asked officials from NSC, the State Department, and DOE for records of

EOC’s periodic meetings or documentation of the decisions made.

However, these officials told us that EOC has primarily acted in an informal

manner, meeting only as required and involving only those agencies that

have an interest in the topic under discussion, and that there are no

available records or minutes from these meetings. For example, Treasury

and Commerce officials have not been as involved in the national security

deliberations of EOC because, according to these officials, their primary

interest does not involve national security issues. Similarly, Department of

Defense officials are not involved in EOC’s deliberations regarding the

privatization of USEC, except as they relate to the national security

implications of the privatization.
Page 25 GAO-01-148 U.S. Purchase of Russian Uranium

EOC Has Not Fulfilled All of

Its Responsibilities Under

the May 1998 Executive

Order

EOC has not fulfilled all of its responsibilities as laid out in the executive

order that established the committee. Specifically, the order required EOC

to establish procedures for designating alternative executive agents to

implement the HEU agreement. However, EOC lacked such procedures

when USEC considered resigning as executive agent in 1999. While EOC

interviewed several companies that would be willing to take over as

executive agent if USEC were to resign, EOC did not provide us with any

analyses of the companies’ relative advantages and disadvantages, nor of

the impact of a change of executive agent on the implementation of the

HEU agreement. NSC, State Department, and DOE officials told us that

they weighed the merits of replacing USEC with several other companies.

According to DOE officials, USEC, while not unique, has several

advantages relative to potential replacements. For example, USEC has a

large customer base and can more readily incorporate the Russian material

into its existing enrichment contracts. In addition, USEC possesses an

existing inventory of natural uranium that it can transfer to Russia upon the

delivery of LEU.

EOC continues to lack a contingency plan, should USEC resign in the

future or should the U.S. government choose to take over USEC’s

responsibilities or replace USEC as executive agent with another company.

According to an NSC official, such a plan is unnecessary because USEC is

unlikely to resign and there is no need for such a formal plan. USEC, NSC,

State Department, and DOE officials told us that the corporation plans to

continue as executive agent for the foreseeable future.

EOC was also required to collect and analyze information related to the

maintenance of the domestic uranium mining, conversion, and enrichment

industries. Under the USEC Privatization Act of 1996, the President is to

report to the Congress annually on the impact that the HEU Agreement is

having on these industries. Under the May 1998 executive order, EOC was

given responsibility to prepare these reports. The 1998 and 1999 reports

stated that the domestic mining, conversion, and enrichment industries did

not experience material adverse impacts as a result of the HEU agreement.

However, from our discussions with the DOE officials who were

responsible for preparing these reports, the information used to prepare

the analyses supporting these assertions was unclear to us. In the August

2000 report to the Congress, EOC concluded that there had been an

adverse impact on these industries. EOC’s conclusion was made after

market prices for uranium had been falling for several years as a result of

the large quantities of uranium anticipated from the HEU agreement and

the marketing of USEC’s natural uranium inventory. In July 2000, we raised
Page 26 GAO-01-148 U.S. Purchase of Russian Uranium

the difficulties faced by the domestic uranium mining and conversion

industries with an NSC official. This official acknowledged that EOC had

not done sufficient analysis on the uranium mining and conversion aspects

of the nuclear fuel cycle, concentrating primarily on enrichment instead.

EOC has produced a draft study on the maintenance of a viable domestic

uranium enrichment industry and is now beginning to analyze the domestic

uranium mining and conversion industries, which are also essential steps in

the nuclear fuel cycle. EOC now expects to issue a report on U.S. energy

security needs—including issues involving uranium mining, conversion,

and enrichment—in December 2000.

According to a DOE official, EOC’s oversight of USEC has been hampered

by a lack of access to information from USEC so that EOC can analyze the

HEU agreement’s implementation. This official told us that when USEC

requested $200 million in compensation for its role as executive agent from

the U.S. government, DOE lacked sufficient information to analyze USEC’s

claims about the impact of its role as executive agent on its profitability.

DOE depended upon USEC to provide information and analysis regarding,

among other things, the difference between USEC’s costs of producing

LEU domestically and the price being paid to Tenex for LEU. The Secretary

of Energy said the data that USEC provided were insufficient to justify the

request. USEC officials disputed this claim and told us that all information

required to be reported or that was requested by EOC has been provided by

USEC.

Conclusions The HEU agreement’s implementation has had a beneficial impact on the

national security of the United States, namely, the removal of over 100

metric tons of weapons-grade material from Russia. Achieving this benefit,

however, has not been without cost. Not only has the U.S. government

spent $325 million in purchasing natural uranium from Russia, but the

United States also faces a growing dependence on Russian-origin material

for nuclear fuel, which now makes up almost 40 percent of annual U.S.

sales. The Congress intended that the federal government ensure that

neither the privatization of USEC nor the implementation of the HEU

agreement would be harmful to the domestic uranium industry. However,

factors subsequent to USEC’s privatization and the implementation of the

HEU agreement have affected U.S. nuclear fuel production. EOC, which is

responsible for coordinating federal policy, has been largely passive in its

responsibilities to monitor the impact of privatization and the HEU

agreement on the industry. Nevertheless, we are encouraged that EOC is

now examining the most effective ways to maintain the U.S. domestic
Page 27 GAO-01-148 U.S. Purchase of Russian Uranium

uranium mining, conversion, and enrichment industries. EOC needs to

prevent or mitigate the negative effects of the HEU agreement through

careful monitoring, analysis, and reporting of the impact of USEC’s

activities on the entire domestic uranium industry to key decisionmakers to

aid in charting the optimal path to the industry’s continuation, as the

Congress intended. Specifically, regarding USEC’s current negotiations

with Tenex on the price that USEC will pay for enrichment services from

2002 through 2013, EOC needs to make clear what the benefits would be of

importing newly produced LEU rather than additional LEU derived from

dismantled Russian nuclear weapons and what impact this would have on

the domestic uranium production and conversion industries and on U.S.

national security objectives.

We recognize the challenges posed by having a private company implement

an agreement with important nuclear nonproliferation objectives and the

difficulties posed by federal oversight of the actions of that private

company. While successful implementation of the HEU agreement requires

some balancing of commercial interests with national security objectives,

in the end, the national security interests of the United States must take

priority. Therefore, careful and thorough oversight of the government’s

executive agent is needed to ensure that its actions are compatible with

national security interests. If the actions of any private company in

performing its role as executive agent are contrary to these interests, the

U.S. government should be prepared to either replace it or to take on the

responsibilities itself. A contingency plan that would detail the

circumstances under which USEC would be replaced is needed along with

clear criteria for choosing the replacement. Such a plan was envisioned by

the executive order that formed EOC and would, we believe, amplify to

USEC and its successors as executive agent, if any, that the overriding

priority of the U.S. government in the implementation of the HEU

agreement is the removal from Russia and delivery to the United States of

nuclear material from dismantled nuclear weapons.

Recommendations for

Executive Action

We recommend that the Assistant to the President for National Security

Affairs direct the chair of the Enrichment Oversight Committee to

• study and report to the Congress on the benefits and the national

security implications to the United States, in addition to the impact on

the domestic nuclear fuel industry, of importing newly produced LEU

from Russia (rather than additional weapons-origin material) as is being

proposed in USEC’s current negotiations with Tenex on the price of the
Page 28 GAO-01-148 U.S. Purchase of Russian Uranium

enrichment services component of LEU to be delivered to the United

States through 2013, and

• prepare and transmit to the Congress a contingency plan that would

detail the circumstances under which a replacement for USEC would be

needed, the criteria for choosing the entity or entities (including U.S.

government agencies) that would serve as the replacement, and the

specific procedures to be followed in the event that USEC withdraws or

is replaced as executive agent for the HEU agreement.

Agency Comments and

Our Evaluation

We provided DOE, the State Department, NSC, and USEC with a draft of

this report for their review and comment.

We received written comments from DOE and we spoke with officials from

the State Department, including the Senior Adviser to the Under Secretary

for Arms Control and International Security; NSC, including the Special

Assistant to the President and Senior Director, Nonproliferation and

Export Controls; and USEC, including its Senior Vice President; to obtain

their comments. In general, DOE, the State Department, and NSC agreed

with the draft report’s findings and DOE described the recommendations as

reasonable. DOE, the State Department, and USEC provided us with

technical clarifications, which we incorporated as appropriate.

In its written comments, DOE said that the report was useful and

integrated information from a wide variety of sources in the United States,

Russia, and the nuclear industry, illustrating the complexity of the HEU

agreement. However, DOE said that the report understates the sustained

record of successful government action and focuses too narrowly on

procedural provisions, such as the requirement in the executive order to

develop procedures to replace the executive agent. Our report notes that

EOC has spent significant time resolving problems that have arisen through

the course of the HEU agreement. We continue to believe, however, that

the requirements laid out in the executive order need to be fully

implemented and that a contingency plan would serve more than just a

procedural purpose. It would also serve as a means to emphasize to USEC

and any successor executive agents that the priority of the United States in

the implementation of the HEU agreement is the removal of weapons-grade

material from Russia. DOE states that if USEC had resigned in December

1999, EOC would have had over a year to choose a replacement. A

contingency plan, however, would provide a mechanism that could be

rapidly implemented not only if USEC were to resign, but also if it were no

longer capable of fulfilling its duties as executive agent. We agree with DOE
Page 29 GAO-01-148 U.S. Purchase of Russian Uranium

that market conditions would affect EOC’s selection of alternative

executive agents. Therefore, when developing criteria for choosing

alternative agents as we recommend, EOC should examine how prevailing

market conditions would affect these criteria. DOE also said that the report

understates the steps EOC has taken to address domestic market and fuel

cycle interests. Specifically, DOE notes EOC’s efforts to withhold uranium

from the market in an effort to support prices and the proposal to maintain

the Portsmouth uranium enrichment plant in a standby status. Our report

notes both of these efforts, and, as we point out, we are encouraged that

EOC is now examining the most effective ways of maintaining the domestic

uranium mining, conversion, and enrichment industries. However, EOC’s

analyses are still being developed and it remains to be seen what impact the

actions resulting from these analyses will have on the domestic nuclear fuel

industry. Furthermore, we continue to believe that the proposal to import

commercially produced LEU from Russia needs to be evaluated to

determine its impact not only on the nuclear fuel industry, but also on U.S.

national security. DOE’s comments are reprinted in appendix II.

Scope and

Methodology

To obtain information for this report, we reviewed and analyzed the 1993

HEU agreement, the 1994 implementing contract and subsequent

amendments, executive orders, memorandums of agreement,

congressional testimony, and applicable U.S. laws. We reviewed annual

reports to the Congress on the impact of the HEU agreement on the

domestic uranium mining, conversion, and enrichment industries

submitted by DOE in accordance with the USEC Privatization Act of 1996.

In addition, we reviewed an April 2000 draft study prepared by EOC on the

maintenance of a viable domestic uranium enrichment industry. We also

examined an August 2000 financial review of USEC conducted by NRC in

response to the February 2000 downgrade of USEC’s corporate credit

rating. We reviewed and analyzed documentation that USEC provided us

with, including data on LEU deliveries, USEC’s annual reports, reports and

correspondence to EOC, and USEC’s annual and quarterly filings with the

U.S. Securities and Exchange Commission. We compared USEC’s data on

LEU deliveries with similar data from DOE to determine the consistency of

the data. We interviewed cognizant officials from the Departments of

Commerce, Defense, Energy, State, and the Treasury. We also interviewed

an official from NSC and officials from NRC. In addition, we spoke with

representatives of USEC, Inc.; Urenco, Inc.; NUKEM, Inc.; New York

Nuclear Corporation; Global Nuclear Services and Supply, Ltd.; the Nuclear

Energy Institute; ConverDyn; General Atomics; Energy Resources

International, Inc.; Commodore Nuclear; the Paper, Allied Chemical, and
Page 30 GAO-01-148 U.S. Purchase of Russian Uranium

Energy Workers Union; and the Uranium Producers of America. We also

spoke with Dr. Thomas Neff from the Center for International Studies at

the Massachusetts Institute of Technology. Dr. Neff has advised both the

United States and Russian governments on the implementation of the HEU

agreement. Additionally, we visited Moscow, Russia, in September 2000 to

meet with officials from Techsnabexport, the executive agent for the

Russian Federation. We performed our work from March to November

2000 in accordance with generally accepted government auditing

standards.

As agreed with your office, unless you publicly announce its contents

earlier, we plan no further distribution of this report until 14 days after the

date of this letter. At that time, we will send copies of this report to the

appropriate congressional committees; the Honorable Samuel R. Berger,

Assistant to the President for National Security Affairs, the Honorable Bill

Richardson, Secretary of Energy; the Honorable Madeleine K. Albright,

Secretary of State; the Honorable William S. Cohen, Secretary of Defense;

the Honorable Lawrence H. Summers, Secretary of the Treasury; the

Honorable Norman Y. Mineta, Secretary of Commerce; the Honorable

Richard A. Meserve, Chairman of the Nuclear Regulatory Commission; the

Honorable Jacob J. Lew, Director of the Office of Management and Budget;

William H. Timbers, President and Chief Executive Officer of USEC, Inc.;

and other interested parties.

If you have any questions about this report, please call me on (202) 512-

3841. Key contributors to this report are listed in appendix III.

Sincerely yours,

(Ms.) Gary L. Jones

Director

Natural Resources and Environment
Page 31 GAO-01-148 U.S. Purchase of Russian Uranium
Page 32 GAO-01-148 U.S. Purchase of Russian Uranium

Appendix I

The Privatization of USEC ApApenednxidexiIs

The United States Enrichment Corporation (USEC) was created by the

Energy Policy Act of 1992 as a wholly owned government corporation to

assume responsibility for conducting and marketing the Department of

Energy’s (DOE) uranium enrichment services. The USEC Privatization Act

of 1996 authorized the corporation’s sale to the private sector in a manner

that provided for the corporation’s long-term viability; the continuing

operation of DOE’s uranium enrichment plants; the protection of the public

interest in maintaining a reliable and economical domestic source of

uranium mining, conversion, and enrichment services; and to the extent

not inconsistent with these purposes, secured the maximum proceeds to

the United States.

The corporation was privatized through an initial public offering on July 28,

1998, resulting in proceeds to the U.S. government of nearly $1.9 billion,

consisting of

• nearly $1.4 billion from the sale of USEC stock, and

• $500 million borrowed by USEC and paid to the government.

In addition, the United States retained about $1.2 billion in cash from

accounts held by the corporation in the U.S. Treasury.
Appendix I

The Privatization of USEC

Page 33 GAO-01-148 U.S. Purchase of Russian Uranium

According to USEC’s privatization prospectus, as of March 31, 1998 (4

months prior to privatization), USEC had over $3.1 billion in assets and

accounts receivable (primarily, cash held at the U.S. Treasury and about 73

million pounds of uranium transferred to USEC by DOE) and liabilities of

over $1 billion. In addition, USEC had the exclusive commercial rights to

the atomic vapor laser isotope separation (AVLIS) process that, at

privatization, was expected to significantly reduce USEC’s production

costs. AVLIS is a new uranium enrichment technology that uses lasers to

enrich uranium. DOE spent more than $1.7 billion developing the

technology and transferred it to USEC in an April 1995 memorandum of

agreement. USEC announced in June 1999 that it was suspending further

development of the AVLIS process, on which it had spent over $100 million

since privatization. The suspension left USEC without a complete plan to

replace its existing gaseous diffusion enrichment technology, which is

nearly 50 years old and very costly when compared with its competitors’

centrifuge enrichment technology.1 USEC is currently evaluating both

centrifuge technology and another laser-based technology called SILEX as

a replacement for its gaseous diffusion technology.

Pursuant to the Energy Policy Act of 1992, the USEC Privatization Act of

1996, and memorandums of agreement between USEC and DOE, DOE

made seven transfers of approximately 73 million pounds of uranium to

USEC from 1993 through 1998. (See table 3.)

1 The gaseous diffusion process involves the passage of uranium hexafluoride in a gaseous

form through a series of filters. Because uranium-235 is lighter, it passes through the filters

more readily than uranium-238, resulting in gaseous uranium that is enriched in uranium235—the fissionable isotope. The other enrichment process—gas centrifuge—employs

rapidly spinning cylinders containing uranium hexafluoride to separate the fissionable

uranium-235 from the nonfissionable uranium-238. The centrifuge process is significantly

less power intensive than the gaseous diffusion process.
Appendix I

The Privatization of USEC

Page 34 GAO-01-148 U.S. Purchase of Russian Uranium

Table 3: DOE Transfers of Uranium to USEC, 1993-98

Note: 42.3 million pounds was subject to various restrictions that limited the amount of uranium that

USEC was allowed to sell over a specified period of time.

Source: DOE.

USEC was also the beneficiary of several other favorable arrangements

with the U.S. government, including

• an advantageous lease providing for nominal rent payments for the use

of the two enrichment plants with an open-ended renewal option,

• low-cost power purchase arrangements whereby USEC purchases

electricity (which represents nearly 60 percent of USEC’s production

costs) from DOE at an average cost of less than 2 cents per kilowatt

hour, and

• the U.S. government’s retention of substantially all liabilities arising

from the operation of the enrichment plants prior to privatization,

including nearly all environmental clean-up and decommissioning

liabilities.

USEC also received from DOE contracts with 64 nuclear utility customers

operating 273 nuclear reactors in 14 countries. As of March 31, 1998, these

contracts were worth $3.2 billion through fiscal year 2000 and $7.4 billion

through fiscal 2009.

At the time of privatization, USEC estimated that it held a 75-percent

market share in North America and 40 percent worldwide in the highly

competitive uranium enrichment industry. However, in 1999, USEC

reported some decrease in its worldwide market share because of, among

Transfer date

Amount transferred (in millions of

pounds of uranium)

July 1993 22.9

December 1994 6.2

November 1995 0.9

April 1998 13.0

April 1998 18.2

May 1998 11.1

May 1998 0.5

Total 72.8
Appendix I

The Privatization of USEC

Page 35 GAO-01-148 U.S. Purchase of Russian Uranium

other things, the adverse impact of a strengthened U.S. dollar and

increased competition among uranium enrichment suppliers.

USEC’s total revenue decreased from about $1.6 billion in fiscal year 1995

to about $1.5 billion in fiscal 2000, and its cost of sales (the cost of the

enrichment services that USEC sold to its customers, which depends upon

both production costs at the two uranium enrichment plants and the costs

of LEU delivered from Russia) has increased from $1.1 billion to $1.2 billion

in the same period. The increase in costs occurred largely since

privatization, increasing by about $174 million from fiscal year 1998

through fiscal year 2000 alone. As a result of decreasing revenue and

increasing costs, USEC’s gross profit has declined from $522.6 million in

fiscal year 1995 to $233.6 million in fiscal year 2000, a reduction of 58

percent. After being offered in July 1998 at $14.25 per share, USEC’s stock

dropped to $3.50 per share in March 2000 before recovering somewhat to

$5.19 per share in October 2000.
Page 36 GAO-01-148 U.S. Purchase of Russian Uranium

Appendix II

Comments From the Department of Energy ApendxiI
Appendix II

Comments From the Department of Energy

Page 37 GAO-01-148 U.S. Purchase of Russian Uranium
Appendix II

Comments From the Department of Energy

Page 38 GAO-01-148 U.S. Purchase of Russian Uranium
Appendix II

Comments From the Department of Energy

Page 39 GAO-01-148 U.S. Purchase of Russian Uranium
Page 40 GAO-01-148 U.S. Purchase of Russian Uranium

Appendix III

GAO Contact and Staff Acknowledgments ApendxiI

GAO Contact Gene Aloise (202) 512-3841

Acknowledgments In addition, Margaret Armen, Jay Cherlow, Ryan T. Coles, Doreen S.

Feldman, John C. Fretwell, Glen Levis, Mehrzad Nadjii, and Barbara R.

Timmerman made key contributions to this report.

(141445) Letr
Ordering Information The first copy of each GAO report is free. Additional copies of

reports are $2 each. A check or money order should be made out to

the Superintendent of Documents. VISA and MasterCard credit

cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address are

discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

Orders by visiting:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders by phone:

(202) 512-6000

fax: (202) 512-6061

TDD (202) 512-2537

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any list

from the past 30 days, please call (202) 512-6000 using a touchtone

phone. A recorded menu will provide information on how to obtain

these lists.

Orders by Internet:

For information on how to access GAO reports on the Internet,

send an e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web home page at:

http://www.gao.gov

To Report Fraud,

Waste, or Abuse in

Federal Programs

Contact one:

• Web site: http://www.gao.gov/fraudnet/fraudnet.htm

• e-mail: fraudnet@gao.gov

• 1-800-424-5454 (automated answering system)

United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. GI00