U.S. GOVERNMENT PRINTING OFFICE

64–028CC WASHINGTON : 2000

PRIVATIZATION OF THE U.S. ENRICHMENT CORPORATION AND ITS IMPACT ON THE DOMESTIC URANIUM INDUSTRY

HEARING

BEFORE THE

SUBCOMMITTEE ON

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

APRIL 13, 2000

Serial No. 106–129

Printed for the use of the Committee on Commerce

(

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COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

JAMES E. DERDERIAN, Chief of Staff

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

FRED UPTON, Michigan, Chairman

JOE BARTON, Texas

CHRISTOPHER COX, California

RICHARD BURR, North Carolina

Vice Chairman

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

ROY BLUNT, Missouri

ED BRYANT, Tennessee

TOM BLILEY, Virginia,

(Ex Officio)

RON KLINK, Pennsylvania

HENRY A. WAXMAN, California

BART STUPAK, Michigan

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

3

C O N T E N T S

Page

Testimony of:

Brewer, Shelby, S. Brewer Enterprises, Inc ................................................... 264

Gensler, Gary, Under Secretary, U.S. Department of Treasury ................... 203

Graham, James J., President, Converdyn ...................................................... 233

Miller, Richard D., Policy Analyst, Pace International ................................. 273

Moniz, Ernest J., Under Secretary, U.S. Department of Energy ................. 211

Paperiello, Carl J., Deputy Executive Director for Materials, Research

and State Programs, U.S. Nuclear Regulatory Commission ..................... 218

Stiglitz, Joseph, World Bank ........................................................................... 269

Stout, Mark, Vice President, Land and Marketing, Uranium Producers

of America ...................................................................................................... 241

Timbers, William H., President and CEO, USEC, Inc .................................. 11

(III)

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PRIVATIZATION OF THE U.S. ENRICHMENT

CORPORATION AND ITS IMPACT ON THE

DOMESTIC URANIUM INDUSTRY

THURSDAY, APRIL 13, 2000

HOUSE OF REPRESENTATIVES,

COMMITTEE ON COMMERCE,

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS,

Washington, DC.

The subcommittee met, pursuant to notice, at 3 p.m., in room

2123, Rayburn House Office Building, Hon. Richard Burr (vice

chairman) presiding.

Members present: Representatives Barton, Burr, Bilbray,

Whitfield, Bryant, Stupak, Green, and Strickland.

Also present: Representative Wilson.

Staff present: Dwight Cates, majority investigator; Amy Davidge,

legislative clerk; and Edith Holleman, minority counsel.

Mr. BURR. At this time, the Chair would call to order the Subcommittee on Oversight and Investigations hearing, a review of the

U.S. Enrichment Corporation’s privatization and its impact on the

domestic uranium industry. At this time the Chair would recognize

himself for an opening statement. The Portsmouth and Paducah

gaseous diffusion plants were built by the Atomic Energy Commission in the 1950’s for the purposes of enriching uranium for defense

needs. In the 1960’s, the plants were no longer required for bomb

production and their mission shifted to meet fuel demands of the

nuclear power industry.

For decades, the government controlled this uranium production.

However, in the early 1990’s, it became increasingly clear to Congress that the government had no business controlling an enterprise which markets its services exclusively to the private sector.

In response to the 1992 Energy Policy Act, in 1993 the enrichment

enterprise was transferred from the Department of Energy to a

newly formed government-owned corporation called the United

States Enrichment Corporation. Pursuant to the USEC Privatization Act of 1996, the Clinton administration, led by the Treasury

Department, determined that the complete transfer of the government’s interest in USEC through an initial public offering of stock

met all the statutory criteria set out by Congress. The IPO stock

sale was completed in July, 1998.

The committee began its review of USEC’s privatization and the

impact it has had on the uranium industry 12 months ago. This

committee is interested in whether the Clinton administration followed the law when it privatized USEC and whether USEC has

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lived up to its ongoing agreement with the government, agreements

it freely entered into before privatization.

The committee has also focused on USEC’s activities as executive

agent to the Russian Highly Enriched Uranium Agreement, a critical nuclear non-proliferation agreement. The administration has

said as recently as today’s Wall Street Journal senior administration official was quoted, it only followed the directions of Congress

in privatizing USEC. I wish it were that simple. Congress most certainly did provide direction to the administration, but I question

whether the administration actually followed those directions.

I have a few things I am interested in and would like to hear

from our witnesses about. I have a number of concerns about the

role played by executive branch agencies in USEC’s privatization.

The Department of Energy transferred a large amount of natural

uranium to USEC a few weeks before privatization. According to

the Department, these transfers really didn’t amount to much but

according to the uranium industry, USEC’s subsequent sale of this

uranium has hurt their viability.

If this is true, then the Clinton administration clearly acted outside the terms of the USEC Privatization Act of 1996 which required that the manner of privatization chosen by the administration ensures the viability of the uranium mining and conversion

service industries. I would like to know what the Treasury knew

about the financial health of USEC and the enrichment industry

when it decided to privatize USEC through the stock sale. It appears that Treasury and its financial advisors relied primarily on

information provided by USEC.

I am concerned that USEC did not make it clear to Treasury or

to stock investors that the market price of uranium was trending

down and USEC’s production costs were trending up indicating future viability was not certain. There are many complicated and

wide ranging issues to discuss today. I look forward to the testimony of all of our witnesses.

At this time, I would recognize the ranking member, Mr. Stupak,

for an opening statement.

Mr. STUPAK. Thank you, Mr. Chairman. I want to thank you for

holding this hearing. It is long overdue. The legislation authorizing

a privatization of the U.S. Enrichment Corporation, USEC, came

from this committee. But when the actual agreement was proposed

and resulted in much skepticism from the press, this committee

had held no oversight. Nor do I believe that the administration did

an independent review it was tasked with before letting a public

offering occur.

Even today, the Treasury Department, which set up this deal

and is now faced with the reality of junk bond rating which in effect would allow USEC to shut down a plant, seems reluctant to

do the essential review. Oversight before privatization might have

avoided some of the problems we are facing today because they

were publicly identified at the time. It was well known that there

was an overcapacity of enrichment services and that prices were

dropping to below USEC’s cost of production and escalating price

of the Russian product. It was known that the power prices in the

United States were increasing, not dropping, and that an expectation of obtaining power costs lower than the government’s subVerDate 11-MAY-2000 15:11 Mar 15, 2001 Jkt 010199 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 E:\HEARINGS\64028 pfrm01 PsN: 64028
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sidized contract USEC probably were not realistic. Currently,

power costs make up 50 percent of the production costs.

There are many, many questions about the viability of the proposed next generation technology that should have been fully debated. But at the time, of all the agencies that were required to declare that USEC display economic viability as required by Congress, only Commerce had the foresight to state, ‘‘Commerce emphasized that any in-depth analysis on its part award privatization

of USEC through an IPO, initial public offering, meets the statutory criteria would require great speculation as to the future of the

suspension agreements as well as the future market and political

conditions.’’ The Nuclear Regulatory Commission which was tasked by Congress to determine if a reliable and economic domestic source of

uranium rich services would be provided was told by the USEC

board that an investment-grade credit rating was the only criteria

it should look at. Since USEC had received that rating, the NRC

washed its hands of any further responsibility. So much for independence. Oversight might have avoided the loss as sustained by

the uranium industry because of what it alleges were illegal transfers of uranium by the Department of Energy to USEC and the illegal sales of the uranium in a manner that has almost destroyed the

domestic industry. Oversight might well have helped avoid multimillion dollar losses suffered by the stock and bond holders because

they were not fully aware of the market and technology realities.

It might have avoided the privatization completely by forcing a

closer look at the long-term economics of the deal. It might have

avoided the overselling of and overreliance of an unproven technology that at best was still less economical than that of competing

producers and at worse was a bottomless pit from which little

would emerge. It might have forced USEC to have a credible backup plan if its technology choice failed, a plan that could have been

implemented immediately.

If that had been done, USEC would not be here today. Nine

months after pulling the plug on its failed technology with no clear

path to go forward, generating the majority of their cash-flow by

dumping cheap uranium on a market and selling its unused power

contracts at a profit that would both junk stocks and junk bonds.

If oversight had been done, the administration would not be here

today also with no clear path forward. The provision of nuclear fuel

to our defense and energy industry is essentially a government

function. The government and this body cannot wash its hands of

its responsibility. Nor can the U.S. Enrichment Corporation be allowed to run a company into the ground because of bad business

and financial judgments on the theory that the government must

bail it out because it plays such an important role in our nation’s

defense.

A recent report rating USEC’s $500 million in junk bond says

that they are a good buy because the government won’t let the corporation fail. We should not be in a position to be held hostage by

incompetent but highly paid management for their personal and

their stockholders’ benefit. I must say that in a real company, if a

chairman and board allowed their stock to lose two-thirds of its

value and their bonds to go below the investment rating and has

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no serious plan for recovery, that they would very likely have been

gone by now. The chairman of a serious company asking for government assistance will start by cutting their own salary much as

Lee Iacocca did many years ago.

This matter, Mr. Chairman, requires more than one hearing if

we are going to have any real impact. USEC is partly our creation

and it is our responsibility to make sure the legislation is carried

out. With that, Mr. Chairman, I yield back my time.

Mr. BURR. The gentleman’s time has expired. The Chair would

recognize the gentleman from Kentucky, Mr. Whitfield, for an

opening statement.

Mr. WHITFIELD. Mr. Chairman, thank you very much. We appreciate Chairman Bliley agreeing to this hearing which we consider

particularly important at this time. Events surrounding the two

plants, the one in Paducah in my district and the one in Piketon,

Ohio in Congressman Ted Strickland’s district have both been the

subject of extensive media coverage and numerous House and Senate hearings over the last year. Those hearings, including a previous hearing by this subcommittee, focused on revelations about

worker exposure to contaminated materials without their knowledge, the results of DOE investigations about warter safety and environmental damage at the plants and in the surrounding communities, proposed budgets affecting plan operations, and the need for

a newly established Federal program to compensate workers or

their surviving family members for illnesses they contracted while

exposed to hazardous materials and chemicals used in the enrichment process.

Although USEC is a private corporation, it is the only company

in the United States which enriches uranium to fuel nuclear power

plants and the only company designated as the U.S. agent in a nuclear disarmament arrangement with the Russians. Therefore,

USEC’s future is important both in terms of our national security

interests and because nuclear power supplies 20 percent of this Nation’s electricity. Congress has a responsibility to obtain the facts

surrounding USEC’s financial condition.

Rumors in the communities of Paducah and Portsmouth as well

as on Wall Street about possible plant closures and the financial

status of USEC and also concerns expressed by institutional investors and independent financial analysts make this hearing imperative. Some are saying the government should assume responsibility

for the operation of the two plants. Some are forecasting such serious financial problems in the long run for USEC that it may be

necessary to find a merger or acquisition partner even though the

law which privatized USEC prohibits any one entity from owning

more than 10 percent of the company.

Some say that USEC loses money serving as the government’s

executive agent of the Russian enrich uranium while others say the

company makes money off this arrangement. These are just a few

of the issues raised by interested parties directly impacted by

USEC’s ability to remain competitive. So our purpose today is to

obtain some facts. We already know some of them. USEC did announce the layoff of 850 workers at Paducah and Portsmouth.

Moody’s and Standard & Poor’s have downgraded the credit rating

of USEC below investment grade so the company’s corporate bonds

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are now considered junk bonds. Electricity accounts for between 50

to 55 percent of USEC’s production costs and the company is currently the beneficiary of power at an average cost of 2 cents per

kilowatt hour.

The Paducah and Portsmouth plants are currently operating at

25 to 35 percent capacity. SWU market share end prices are falling. USEC’s net income has fallen from $360 million approximately 5 years ago to a projected $35 million next year. As production decreases, costs per SWU increase. The NRC has launched its own

investigation into the economic viability of USEC. Dividend payouts to stockholders have been reduced by 50 percent. It appears

that the company may be using its free cash-flow to buy back outstanding shares of stock. All of this sounds quite ominous but is

it? We hope to find out today from our panel of witnesses what are

the real problems and are there some solutions.

Let me close by saying this hearing is not just about jobs. Regardless of what the future may hold for USEC, our government

cannot let this industry fail. We must have a domestic supply of

enriched uranium to meet our energy needs, and we must continue

to demilitarize the Russian nuclear arsenal. And, of course, we are

particularly interested in this hearing to determine the impact of

privatization and the Russian agreement on the uranium mining

and conversion service industries. Mr. Chairman, I look forward to

the testimony of the witnesses.

Mr. BURR. The gentleman’s time has expired. The Chair would

ask unanimous consent that all members of the subcommittee be

allowed to enter opening statements at any time in their entirety.

At this time, hearing no objection, so ordered. At this time, the

Chair would recognize the gentleman from Ohio, Mr. Strickland,

for the purposes of an opening statement.

Mr. STRICKLAND. Thank you, Mr. Chairman. I look forward to

this hearing. I hope it will spark a thorough and revealing debate

about the Federal Government’s role in the uranium enrichment

industry. Thorough because I do not think that all of the stakeholders in this debate are present today. Revealing because I think

we must ask some tough questions today in order to better understand the current financial condition of the United States Enrichment Corporation, how we got here, and how we move forward to

ensure a reliable and economic domestic uranium mining conversion and enrichment industry.

I opposed the privatization of USEC. I was gravely concerned

that designating a private USEC as the executive agent for the

Russian HEU Agreement was a recipe for disaster. It made no

sense to me to require an inherent governmental function to rest

in the hands of a corporation responsible to its shareholders and

its bottom line. I raised concerns that USEC as the executive agent

of the HEU Agreement could lead the corporation to undertake actions which conflict with the statutory criteria established by Congress and threaten the viability of the uranium enrichment industry.

As the representative of the uranium enrichment facility in

Piketon, Ohio, I have obviously followed USEC’s course with tremendous interest, and it seems to me the corporation’s priorities

are wrong. In less than 2 years after privatization, USEC has alVerDate 11-MAY-2000 15:11 Mar 15, 2001 Jkt 010199 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 E:\HEARINGS\64028 pfrm01 PsN: 64028
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ready publicly debated walking away from the Russian deal. In less

than 2 years, they have visited Capitol Hill offices asking for a

$200 million bailout and as this industry declines, management

profits.

According to the Associated Press, USEC’s CEO and president receives a total compensation package of $2.48 million and has negotiated a $3.6 million golden parachute should he resign or be replaced. That same individual’s salary under the public corporation was approximately $350. With these facts as a backdrop, I am

proud to admit that a major concern of mine throughout the privatization process has been the effect it has had on the workers and

the communities of southern Ohio.

This privatization process intertwines national security, energy

security, and Wall Street issues in a complicated manner but given

what we know about the personal enrichment of certain individuals, we must not forget the families in Piketon, Ohio, and Paducah, Kentucky, who fear a plant closure and brace themselves for

the impact such a closure would have on the local economies.

Southern Ohio and western Kentucky do not weather this transition alone. Other local communities such as Metropolis, Illinois,

also feel the negative effects of privatization.

We must remember that USEC provides 75 percent of the nuclear fuel for nearly 20 percent of our nation’s electricity producers.

We have 103 operating nuclear power plants in this country located

in 31 different States. It seems very clear to me that our Nation’s

energy supply depends a great deal on USEC’s viability. I understand that foreign competitors offer enrichment services and conversion services, but do we want to depend on other nations for our

nuclear fuel supply just like we depend on OPEC for our oil supply.

I think the answer is no. I think that many of my colleagues here

today will agree that the Federal Government has an obligation to

safeguard this industry but not necessarily this corporation and

that is why I think we should seriously look at the government

once again assuming ownership of this industry.

Mr. Chairman, what we know now about privatization is that it

was a classic case of massive insider enrichment. A handful of insiders got rich at the expense of national security, domestic energy

security, the well-being of workers, local economies, and taxpayers.

How did it happen? It happened because every time a legitimate

concern was raised, it was minimized and ignored. If personal gain

overshadowed national security issues, then it is time we understand what went wrong. Mr. Whitfield and I will see over 800

workers at our facilities lose their jobs this summer and that will

bring the total number of separations at the plants to nearly 1,500

workers, approximately one-third of the workforce.

If the IPO method of privatization was chosen in large part because it meant significantly fewer layoffs as I was told, then I ask

who did the math. Some of our witnesses here today first blew the

whistle on privatization pitfalls we are now experiencing. Still

other highly regarded individuals like Dr. Thomas Nef, the father

of the Russian HEU Agreement, and Senator Domenici sent shots

across the bow that this privatization was potentially lethal to our

national security. Too many people predicted USEC’s current situation, and I hope today is not the last hearing on this issue. I also

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hope it is not too late for government to step in and to do the right

thing. Mr. Chairman, I have a letter from Senator Mike DeWine.

He has asked if we could enter this into the record.

Mr. BURR. Without objection, so ordered.

Mr. STRICKLAND. Thank you, sir.

Mr. BURR. The gentleman’s time has expired. Does the gentlemen from California have an opening statement?

Mr. BILBRAY. I have no opening statement.

Mr. BURR. Does the gentleman from Tennessee have an opening

statement?

Mr. BRYANT. Thank you, Mr. Chairman. I too add my appreciation for your conducting this hearing. I appreciate the panel that

we have assembled today. We will be, in my case, going in and out

today because of conflicting other matters in our schedule; and I

apologize in advance for that. Out of a great deal of respect for our

Chairman and courtesy to the panels, I am going to take advantage

of your generous offer to submit my full statement into the record

and would yield back my time.

[The prepared statement of Hon. Ed Bryant follows:]

PREPARED STATEMENT OF HON. ED BRYANT, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF TENNESSEE

Thank you Mr. Chairman, Mr. Chairman, I appreciate your holding this timely

hearing today, and I want to welcome all of our distinguished witnesses. Because

of the importance of this issue, I am very anxious to hear from the panels you’ve

assembled today.

Mr. Chairman, the federal government has never been accused of being the most

efficient operation the world has ever seen. From the military’s thousand dollar toilet seats to the billions and billions of dollars lost every year in Medicare waste and

fraud, the government’s reputation as inefficient has been well earned.

Today, however, this subcommittee finds itself in the strange position of investigating the inefficiencies of a private company. As the Wall Street Journal points

out in today’s addition, the financially troubled United States Enrichment Corporation ‘‘may be about to close one of the nation’s two remaining uranium-enrichment

plants...’’ It also reports that USEC announced in February that it will reduce its

workforce by 850 people and cut its annual dividend in half all in an effort to reduce

costs.

Having been in the private sector before coming to Congress, I am very much

aware of the fact that becoming more competitive may mean the need for periodic

reductions in a company’s workforce. However, a 20% reduction is a large enough

cut to indicate that USEC is either burdened with a bloated workforce or that it

is in very serious financial trouble. In either case, because of the national security

implications of what USEC produces, the February announcement is extremely troubling.

If USEC can function more efficiently with 850 fewer employees, why, when the

Treasury Department was developing the USEC privatization plan, did it apparently set this company up for failure by mandating that it maintain so many employees. On the other hand, if USEC is simply trying to jettison everything but the

life boats in an attempt to remain solvent, then we need to ask what has happened

in the last two years to cause this crisis? Are we looking at gross mismanagement,

incompetence, or simply the harsh reality of market forces?

With a 70% drop in the price of its stock since USEC’s initial public offering, I

think the solvency of this company is in question. While the U.S. has not produced

uranium since the 60s, uranium production is still vital to the national security of

this country, and I think this subcommittee should spend its time today trying to

learn as much as possible about USEC’s current position so as to avoid some of the

worst case scenarios.

Again, I thank the chairman for holding this hearing, I look forward to questioning the members of the assembled panels and I yield back the balance of my

time.

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Mr. BURR. I appreciate that from the gentleman. Does the gentleman from Texas, Mr. Green, have an opening statement?

Mr. GREEN. Mr. Chairman, I have an opening statement but I

will submit it for the record.

[The prepared statement of Hon. Gene Green follows:]

PREPARED STATEMENT OF HON. GENE GREEN, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF TEXAS

Thank you, Mr. Chairman for scheduling today’s hearing. I look forward to the

opportunity to have the testimony of the witnesses on the record on the issues that

we will raise here today.

Almost two years ago, the Treasury Department, based on the recommendation

of the United States Enrichment Corporation board and the agreement of several

other federal agencies, approved the sale of the USEC through an initial public offering of stock (IPO). This IPO, combined with additional expenses, brought the

Treasury over $1.8 billion in revenue. The future seemed bright.

Now, however, the picture is muddled. Despite the seemingly rosy forecast that

existed at the time, current conditions, according to USEC, are dire. The stock price

has fallen from over $14 at the IPO to just under $5 as of last week. USEC’s credit

rating has been downgraded by Standard and Poor’s to junk-bond status. The company has announced plans to terminate 850 employees in June of this year, on top

of the 500 it has already let go since privatization. Additionally, USEC is said to

be considering closing one of the two gaseous diffusion plants (GDPs) prior to 2005,

which may or may not be a violation of the privatization agreement.

Further, the damage is not limited solely to USEC. When privatized, the Department of Energy (DOE) transferred stockpiles of unenriched uranium to the corporation. In an attempt to generate cash flow, USEC has since sold those stockpiles on

the open market, threatening the viability of the domestic uranium mining industry.

Finally, the troubles with USEC have threatened our national security. When

USEC was privatized, they willingly assumed the role as the executive agent for the

HEU Agreement, under which we purchase uranium from dismantled Russian nuclear warheads and reprocess it for use in the commercial market. This agreement

not only allowed USEC to control the flow of uranium out of Russia, one of the only

other world producers, but ensured that Russian weapons-grade uranium did not

make its way into the hands of undesirable nations or organizations.

Last November, USEC threatened to pull out of this agreement unless the U.S.

government paid it $200 million dollars over the next two years. After DOE examined and raised questions about that request, the corporation backed down and

agreed to continue with the agreement. The threat, however, combined with the financial straits faced by USEC, raise alarm and concern about the future of the HEU

Agreement.

Today, Mr. Chairman, I hope that we can start down the road to discovering

where we went wrong with the United States Enrichment Corporation. Did we

choose the wrong time for privatization? Could anyone have foreseen some of these

events, such as a drop in the price of enriched uranium on the world markets? Is

government intervention or a bailout of the corporation necessary? Maybe we should

buy back the corporation if it benefits taxpayers. Who, if anyone, is to blame for

the mess that we have before us today? I hope that we will find the answers to

these and other questions, if not today, then in the near future.

Again, I would like to thank the witnesses for appearing today and I look forward

to their testimony.

Mr. BURR. The Chair also appreciates Mr. Green’s request. The

Chair would ask unanimous consent that Mrs. Wilson be allowed

to provide an opening statement even though she is not a member

of the subcommittee but is a member of the full committee. Without objection, the Chair would recognize Mrs. Wilson for an opening statement.

Mrs. WILSON. Thank you, Mr. Chairman. I appreciate your forbearance in allowing me to participate in this hearing today. I

think this hearing is not only about the management of the U.S.

Enrichment Corporation but it is also about what can be done to

save the front end of the domestic nuclear fuel cycle.

9

My State of New Mexico has been the leading producer of uranium since the 1950’s. Today we are no longer producing uranium

to fuel almost one quarter of our electric needs in the nuclear

power industry. This is unacceptable energy policy. The domestic

uranium industry has been forced to compete with Russian and

U.S. uranium stockpiles available for commercial use since the end

of the cold war.

Our Nation’s non-proliferation policy calls for the Russian stocks

to be absorbed by the commercial market in competition with our

domestic producers. In 1996, these producers thought they had

worked with Congress to meter in the government uranium in a

way that would keep the price of uranium reasonable and, to the

extent possible, maximize the value of the government reserves.

However, Congress and the producers were surprised to learn

shortly before USEC’s privatization that the government corporation had amassed huge amounts of natural uranium and planned

to sell this material with its enriched product at a very aggressive

pace.

These sales of national uranium have resulted in a drop of ura- nium prices from over $15 in 1996 to almost $9 today. This policy

is driving our producers to the brink of extinction. This has all occurred even though Congress has twice directed DOE to only sell

its surplus uranium if it would not have an adverse impact on domestic producers. Mr. Chairman, I look forward to working with

you and others on this committee to fix this problem. It is extremely important to me and to our Nation, and I thank you for

allowing me to participate in this important hearing. I yield the

balance of my time.

Mr. BURR. The gentlelady’s time has expired. For what purpose

does the gentleman from California—— Mr. BILBRAY. To address the committee, Mr. Chairman. An opening statement I wasn’t going to make. I just want to point out to

all my colleagues here as we get our testimony about this issue, it

is such a habit for those of us on this side of the counter to be

pointing fingers and saying what is or isn’t being done or should

have been done. I just want to point out that this Congress, both

Republicans and Democrats in the past have not supported the export of technologies that might have helped to mitigate this problem.

Let me give you an example. Americans—American manufacturers have the capability of producing gas reactors, nuclear reactors

that would convert weapons-grade uranium into power generation

in the past Soviet Union in Russia. The capability of actually encouraging the past Soviet republics to use their weapons-grade material for their domestic energy generation is something that we basically walked away from and we did that starting in 1985—I mean

1995 and we sort of—the fact is it wasn’t popular to talk about nuclear technology either if you are Republican or Democrat.

And I only want to raise this because we have commodities out

there in the world market. And when we do not encourage our new

friends to utilize those commodities for their own domestic use,

they obviously are going to put that into the world market; and it

is going to have impacts on the available price of certain commodities. And I just brought that up, but there is an example where

10

those of us in Congress could have done more and helped mitigate

this to some degree. There would have been less Soviet material

out there to flood the market if I can use that term because the

ex-Soviet would have been using that to generate their own clean,

non-greenhouse gas creating power and also not sending this material into our market. I yield back, Mr. Chairman.

Mr. BURR. The gentleman’s time is expired. The gentleman

raises a very valid point.

[Additional statement submitted for the record follows:]

PREPARED STATEMENT OF HON. TOM BLILEY, CHAIRMAN, COMMITTEE ON COMMERCE

Today we will review the privatization of the United States Enrichment Corporation and the impact privatization has had on the domestic uranium industry. USEC

serves an important role in our domestic energy needs—it is the only domestic

source of enriched uranium. USEC provides 70% of the enriched uranium used in

our nuclear power reactors. A healthy USEC, and a healthy domestic uranium industry reduces our reliance on foreign countries for our energy needs. USEC also

acts as the government’s Executive Agent to the Russian HEU Agreement. As Executive Agent to this critical non-proliferation agreement, USEC purchases uranium

from dismantled warheads that were once aimed at our country and resells this uranium as nuclear fuel for a profit.

I supported legislation that called on the Clinton Administration to bring the efficiencies of the private sector to the government-owned uranium enrichment enterprise. In passing the USEC Privatization Act of 1996, Congress supported the concept of privatization but only if certain conditions were first met, namely that privatization would not adversely affect the uranium industry or national security. We

charged the Administration with making those determinations and relied on its

findings. The Treasury Department completed USEC privatization in July of 1998,

and everyone seemed happy with the big return we got from the sale of USEC stock.

Today, less than two years after privatization, USEC is in bad financial shape,

the outlook for the uranium industry is very bad, and the Russian HEU Agreement

is in jeopardy. We will never know if these troubling developments could have been

avoided had the Administration chosen to privatize USEC in an alternative manner.

But I do know that the path forward chosen by the Administration has had serious

adverse consequences for the uranium industry and our national security.

Considering the quick decline in USEC’s financial condition so soon after privatization, it is entirely appropriate for Congress to assess what information USEC

provided Treasury before privatization, and what decisions the Clinton Administration made in its efforts to privatize USEC. We must evaluate whether certain facts

and concerns were swept aside in the Administration’s rush to sell USEC stock. For

instance, before privatization USEC promised to replace its aging and inefficient enrichment plants with a low-cost alternative. But today, USEC’s long term viability

is in question because its plans for a new enrichment plant fell through, and it has

not come up with an alternative.

Additionally, we must evaluate the impact USEC has had on the uranium mining

and conversion service industries since privatization. We will hear testimony today

that USEC has engaged in aggressive marketing tactics that have undercut the viability of these industries. Additionally, because the Clinton Administration has

failed to adequately oversee USEC’s activities as Executive Agent to the Russia

deal, Congress must also step in to review the status of this critical non-proliferation agreement.

In the end, USEC’s problems must be solved by USEC. If the company is unable

to survive, there is little Congress can do to make it survive. However, a viable domestic uranium industry is essential for the country’s long term energy needs. The

nuclear energy community, particularly nuclear power companies, better start

thinking hard about whether USEC will survive. What would happen if the only domestic source of enriched uranium no longer existed? Similarly, the government

must decide what our future uranium needs are, and develop a plan which ensures

those needs are met. Unfortunately, the Clinton/Gore Administration has not

thought much about these issues, and is has no plan.

I expect today’s testimony to help the Committee understand whether the Clinton

Administration privatized this company in a manner that set USEC up for failure.

I also expect this hearing will help me understand whether USEC is committed to

long term survival, and whether the uranium industry can survive. After this hearing, I will continue to monitor USEC’s financial outlook, but I will focus on the naVerDate 11-MAY-2000 15:11 Mar 15, 2001 Jkt 010199 PO 00000 Frm 00014 Fmt 6633 Sfmt 6621 E:\HEARINGS\64028 pfrm01 PsN: 64028
11

tional security issues related to USEC privatization. I plan to schedule another

hearing later this year regarding national security issues. I will be working closely

with Representative Whitfield on these very important issues today, and in the future. Thank you, and I yield back.

Mr. BURR. At this time, the Chair would call up Mr. Timbers

who is our witness on the first panel. Mr. Timbers, you are aware

that this subcommittee is an investigative subcommittee and as

such it has had the practice of taking in testimony under oath. Do

you have any objection to taking testimony under oath?

Mr. TIMBERS. No.

Mr. BURR. The Chair then advises you that under the rules of

the House and the rules of the committee, you are entitled to be

advised by counsel. Do you desire to be advised by counsel?

Mr. TIMBERS. No.

Mr. BURR. I would ask you to rise with me and take the oath.

[Witness sworn.]

Mr. BURR. The Chair would recognize Mr. Timbers for 5 minutes

for purposes of his opening statement.

TESTIMONY OF WILLIAM H. TIMBERS, PRESIDENT AND CEO,

USEC, INC.

Mr. TIMBERS. Mr. Chairman, members of the committee, my

name is William Timbers; and I am the president and chief executive officer of USEC, Inc., and its subsidiary, the United States Enrichment Corporation. Thank you for the opportunity to participate

in this hearing concerning USEC which was privatized by the government nearly 2 years ago.

Privatization of the government’s uranium enrichment operation

was a congressional objective for some 30 years and 14 consecutive

congresses. A bipartisan member—group of members on this committee and in the Senate led these efforts. It also took the efforts

of the Nixon, Ford, carter, Reagan, Bush, and Clinton administrations to complete the job. As a demonstration of continuing bipartisanship and bicameral cooperation, this was truly a landmark accomplishment. The 1992 Energy Policy Act recognized that the government’s uranium enrichment enterprise was failing and that life

as a business in the private sector was the best hope for preserving

this important domestic energy resource.

The act created the United States Enrichment Corporation, a

government corporation and gave them a number of responsibilities. The act transferred all the uranium enrichment activities

from the Department of Energy to the new government corporation.

The act directed the new corporation to restructure the enrichment

enterprise, run it like a business, make a profit, commercially implement the Russian HEU Agreement and prepare the restructured

business for sale to the private sector.

The 1996 USEC Privatization Act provided the additional preparations needed for the privatization of the corporation. As directed

by Congress, the USEC Federal board of directors and the Secretary of Treasury consummated the sale of USEC in July 1998 in

a public offering of securities to investors. This sale became the

largest privatization of Federal assets since CONRAIL yielding a

total of over $3 billion to taxpayers.

12

On a number of occasions, I have appeared before congressional

committees to report on the government’s corporation’s progress

and prospects. Today I am here to represent USEC, Inc., a private

enterprise now entirely owned by approximately 40,000 investors.

As an investor-owned company, we have a fiduciary responsibility

to our owners with an obligation to create shareholder value. We

also continue to fulfill our national security obligation to Federal

Government serving as its executive agent to implement the megatons to megawatts program on a commercial basis. And we continue as well our commitments to ensure a long-term domestic enrichment capability and to protect the health and safety of our

workers.

During the 22 months since privatization, market conditions

have changed dramatically. There has been a 15 percent drop in

global market prices for enrichment, an 18 percent drop in global

demand for enrichment, a 12 percent drop in uranium prices, and

an 18 percent drop in global demand for uranium. At the same

time, our costs have increased dramatically. Our summer power

prices have tripled at Paducah and electricity is 55 percent of our

production costs. Our cost of purchasing the Russian material has

increased. Our purchase costs are now higher than our selling

price. And our obligations have forced us to substantially reduce

production levels resulting in higher unit costs. These and other

conditions have produced a triple whammy of fewer sales, reduced

revenues, and greatly increased costs.

Now, any business faced with this situation must take prompt

action to change that equation. That is what we are doing, taking

action; but we have had to act under a unique constraint. Let me

quote to you directly from our SEC form 10-Q disclosure document

dated December 31, 1999. ‘‘USEC has been constrained in responding to these market conditions by its privatization agreement with

the U.S. Treasury Department. This agreement restricts the actions that USEC could take to reduce operating costs.’’

I am sure you can appreciate that no other business has had to

contend with such changed market conditions limited by such constraints. Coming to grips with these changed market conditions

means making tough decisions. These decisions and their implementation are in all of our interests. They will help us to ensure

that USEC, Inc., remains a dependable, domestic supplier of enriched uranium services and retains this global leadership in a

fiercely competitive business.

The workforce reduction constraints in the Treasury agreement

expire this coming July. We have already announced a reduction

of up to 850 employees at the Paducah and Portsmouth enrichment

plants. We regret the necessity of having to lay off employees, but

we must take this action to reduce costs and to make us more competitive. The fact that we are taking a hard look at all of our

costs—the fact that we are taking a hard look at all of our costs

to seek reductions, everything is on the table for consideration. The

combined results of these factors have been a deterioration of our

market, our profitability and our share price. Share price is a barometer. In USEC’s case, the barometer has fallen 67 percent since

the initial public offering 2 years ago. This indicates recognition by

13

investors of changed market conditions and the other factors I have

previously mentioned.

As we stated in a public announcement last February, we expect

much lower earnings for fiscal year 2001. We have also cut our dividend to investors and both Standard & Poor’s and Moody’s have

dropped our credit rating to below investment grade. To be sure

the dot com phenomenon has made the stock markets chaotic. During the past year, more than 50 percent of companies in America

listed in the S&P 500 index have had their stock price decline and

many well-known, respected companies have ratings below investment grade. Neither of these facts is any comfort to us or to our

shareholders. The initiatives we are taking are aimed at improving

both situations.

Another contributing reason for the decline in our share price is

investor concern about the continuing legacy contamination issues

being revealed about the Paducah and Portsmouth DOE reservations. While USEC liability in these matters was limited by the

Privatization Act, some confusion exists because of the press reports. They do not clearly point out that these contamination issues

arise from operational practices before USEC, Inc. was created, and

they remain the responsibility of the U.S. Government.

From the day we began operations in 1993, USEC has set a high

standard of commitment to safety. As directed by the Energy Policy

Act, we earned certification of the plants by the U.S. Nuclear Regulatory Commission; and we are under their regulatory purview.

Last September, we participated in this committee’s hearings on

legacy contamination issues at Paducah and Portsmouth. We clearly stated that for the benefit of our workers and host communities,

we take the issues of worker protection and legacy contamination

issues very seriously. We are cooperating fully with DOE as they

address these historical issues. We have also taken initiatives to

reinsure that current work in our plant areas is conducted safely

and that we provide a strong safe working environment for our employees.

As you will recall, an NRC spokesperson also testified before

your committee that day stating that NRC had determined that

USEC operations were being conducted safely and our safety programs were in full compliance with their regulations. I would like

to now turn to the matter of preprivatization government transfers

of uranium to USEC.

Mr. BURR. Mr. Timbers, I really need to ask you to come to a

conclusion. And I think all the members have had an opportunity

to read your full testimony. And it certainly will be entered into the

record in its entirety, but we do need to allow members on this day

to try to make available your time for questions. So I would ask

you to summarize if you could.

Mr. TIMBERS. Okay. I think I would like to make two final points

to this. First on the Russian HEU Agreement that this has been

a deal that has been successful and working for the benefit of this

Nation. We are now in the sixth year of the commercial implementation of this program and that the equivalent of over 3,254 nuclear warheads have been converted to power plant fuel purchased

by Russia—purchased by USEC from Russia. We have paid the Russians over $1.3 billion. Over half of that has come from a priVerDate 11-MAY-2000 15:11 Mar 15, 2001 Jkt 010199 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 E:\HEARINGS\64028 pfrm01 PsN: 64028
14

vate company partly supported by the shareholders. And we are actually ahead of the 1993 schedule.

In addition, I think it is also clear to point out that this company

continues to provide a secure and dependable source of uranium

enrichment. We do remain the world leader in sales of uranium enrichment services. We have a strong business fundamentals that

include over $6 billion in backlog and a robust cash-flow from sales.

We are a well-run, service-oriented business focused on safety, customer service, identifying and seizing opportunities, solving problems and producing results. While we are a work in progress, we

have been making progress. To fulfill the promise of a privatized

USEC, all concerns have to realize that the cold war is over and

the war we are now fighting is global competition. Thank you, Mr.

Chairman. I will submit the rest of the testimony for the record.

[The prepared statement of William H. Timbers follows:]

PREPARED STATEMENT OF WILLIAM H. TIMBERS, PRESIDENT AND CEO, USEC INC.

Mr. Chairman and Members of the Committee. My name is William H. Timbers,

and I am President and Chief Executive Officer of USEC Inc. and its subsidiary,

the United States Enrichment Corporation.

Thank you for the opportunity to participate in this hearing concerning USEC,

which was privatized by the government nearly two years ago.

The privatization of the government’s uranium enrichment operations was a Congressional objective for some thirty years and fourteen consecutive Congresses. A bipartisan group of Members on this Committee and in the Senate led these efforts.

It also took the efforts of the Nixon, Ford, Carter, Reagan, Bush and Clinton Administrations to complete the job. As a demonstration of continuing bipartisan and bicameral cooperation, this was a truly a landmark accomplishment.

The 1992 Energy Policy Act recognized that the government’s uranium enrichment enterprise was failing and that life as a business in the private sector was

the best hope for preserving this important domestic energy resource. The Act created the United States Enrichment Corporation, a government corporation, and

gave it a number of responsibilities. The Act transferred all uranium enrichment activities from the Department of Energy to the new government corporation.

The Act directed the new corporation to restructure the enrichment enterprise,

run it like a business, make a profit, commercially implement the Russian HEU

agreement and prepare the restructured business for sale to the private sector.

The 1996 USEC Privatization Act provided the additional preparations needed for

the privatization of the corporation. As directed by the Congress, the USEC Federal

Board of Directors and the Secretary of the Treasury consummated the sale of

USEC in July 1998 by a public offering of securities to investors. This sale became

the largest privatization of a federal asset since Conrail, yielding a total of over $3

billion to taxpayers.

On a number of occasions, I have appeared before Congressional committees to

report on the government corporation’s progress and prospects. Today, I am here to

represent USEC Inc. as a private enterprise, now entirely owned by approximately

40,000 investors.

As an investor-owned company, we have a fiduciary responsibility to our owners

with an obligation to create shareholder value. We also continue to fulfill our national security obligation to the federal government, serving as its Executive Agent

to implement the Megatons to Megawatts program on a commercial basis. And we

continue, as well, our commitments to ensure a long-term domestic enrichment capability and to protect the health and safety of our workers.

USEC BUSINESS CHALLENGES

During the 22 months since privatization, market conditions have changed drastically. There have been:

• A 15 percent drop in global market prices for enrichment

• An 18 percent drop in global demand for enrichment

• A 12 percent drop in uranium prices

• An 18 percent drop in global demand for uranium

At the same time our costs have increased dramatically:

15

• Our summer power prices have tripled at Paducah—and electricity is 55 percent

of our production cost, • Our cost of purchasing the Russian material has increased—our purchase costs

are now higher than our selling price, and • Our obligations have forced us to substantially reduce production levels, resulting

in higher unit costs.

These and other conditions have produced a triple-whammy of fewer sales, reduced revenues and greatly increased costs. Any business faced with this situation

must take prompt action to change that equation. That’s what we are doing—taking

action. But we have had to act under a unique constraint.

Let me quote to you directly from our SEC form 10Q disclosure document dated

December 31, 1999. ‘‘USEC has been constrained in responding to these market conditions by its privatization agreement with the U.S. Treasury Department. This

agreement restricts the actions that USEC could take to reduce operating costs.’’ I

am sure you can appreciate that no other business has had to contend with such

changed market conditions while limited by such constraints.

Coming to grips with these changed market conditions means making tough decisions. These decisions and their implementation are in all of our interests. They will

help to ensure that USEC Inc. remains a dependable domestic supplier of enriched

uranium services and retains its global leadership in a fiercely competitive business.

The workforce reduction constraints in the Treasury agreement expire this coming

July. We have already announced a reduction of up to 850 employees at the Paducah and Portsmouth enrichment plants. We regret the necessity of having to lay off

employees. But we must take this action to reduce costs to make us more competitive. The fact is that we are taking a hard look at all of our costs to seek reductions.

Everything is on the table for consideration.

The combined results of these factors have been a deterioration of our market, our

profitability and our share price. Share price is a barometer. In USEC’s case, the

barometer has fallen 67 percent since the initial public offering two years ago. This

indicates recognition by investors of changed market conditions and the other factors I previously mentioned.

As we stated in our public announcement last February, we expect much lower

earnings for fiscal year 2001. We have also cut our dividend to investors, and both

Standard and Poor and Moody’s have dropped our credit rating to below investment

grade. To be sure, the dot com phenomenon has made the stock markets chaotic.

During the past year, more than 50 percent of the companies in America listed in

the S&P 500 index had stock price declines, and many well-known and respected

companies have ratings below investment grade. Neither of these facts is of any

comfort to us or to our shareholders. The initiatives we are taking are aimed at improving both situations.

Another contributing reason for the decline in our share price is investor concern

about the continuing legacy contamination issues being revealed about the Paducah

and Portsmouth DOE reservations. While USEC liability in these matters was limited by the Privatization Act, some confusion exists because press reports do not

clearly point out that these contamination issues arise from operational practices

years before USEC Inc. was created and they remain the responsibility of the U.

S. Government.

OUR COMMITMENT TO SAFETY

From the day we began operations in 1993, USEC has set a high standard of commitment to safety. As directed by the Energy Policy Act, we earned certification of

the plants by the U.S. Nuclear Regulatory Commission, and we are under their regulatory purview. Last September, we participated in this Committee’s hearings on

legacy contamination issues at Paducah and Portsmouth. We clearly stated that, for

the benefit of our workers and host communities, we take these issues of worker

protection and legacy contamination very seriously.

We are cooperating fully with DOE as they address these historical issues. We

have also taken initiatives to re-ensure that current work in our plant areas is conducted safely and that we provide a safe working environment for our employees.

As you will recall, an NRC spokesperson also testified before your Committee that

day, stating that NRC had determined that USEC operations were being conducted

safely and that our safety program was in full compliance with their regulations.

USEC URANIUM INVENTORIES

I would like to now turn to the matter of the pre-privatization government transfers of uranium to USEC and our sale of this material. Let me summarize the situation. Uranium was transferred to USEC by the government as directed by the EnVerDate 11-MAY-2000 15:11 Mar 15, 2001 Jkt 010199 PO 00000 Frm 00019 Fmt 6633 Sfmt 6621 E:\HEARINGS\64028 pfrm01 PsN: 64028
16

ergy Policy Act of 1992 and the USEC Privatization Act of 1996, and information

on the transfers was publicly reported.

I have made commitments to the U.S. government that USEC would limit its

sales of its uranium, and I also gave assurances that our sales would be made in

a market-sensitive manner. We have lived up to those commitments. I would also

point out that we have a fiduciary duty to our shareholders to maximize the value

of our uranium assets. Clearly, we do not want to sell our uranium in a marketdisruptive manner that might lower the value of our uranium assets.

MEGATONS TO MEGAWATTS PROGRESS

We are also meeting our obligation as Executive Agent of the government by implementing the Megatons to Megawatts national security program. We are now in

the sixth year of commercial implementation of the program. The equivalent of over

3,254 nuclear warheads has been converted to power plant fuel purchased by USEC

from Russia. We have paid Russia over $1.3 billion thus far, and over half of that

was paid by the privately owned USEC—not the taxpayer. And, we are actually

ahead of the 1993 U.S./Russian schedule for purchases and deliveries. The scoreboard clearly shows that we have been successful in meeting our commitments to

implement this national security program.

THE GOAL OF WORKER TRANSITION

Before concluding my remarks, I would like to return to the very important matter of workforce reductions this coming July. While these reductions will result in

considerable savings, they will also result in a substantial impact on those affected

employees, their families and their communities.

We have proposed that all concerned constituencies, including USEC, Congress,

the Administration, DOE, the unions and the communities, work together to mitigate these impacts. Worker transition to cleanup programs is the most logical and

feasible way to address this matter. We are prepared to cooperate with all constituencies to pursue a seamless worker transition. But to achieve this goal, we must

put aside differences and begin working together.

I would like to conclude by expressing my appreciation to the Committee for your

consideration. My five years of public service as USEC’s Transition Manager, President and CEO of the government corporation have afforded me an opportunity to

work with a wonderful group of employees and with many dedicated public servants

in the Congress and the Administration.

As President and CEO of the private-sector USEC, I am determined that we will

meet our commitments to our owners for creation of shareholder value and will fulfill our obligations and commitments to the government. I firmly believe that we can

and will achieve continued profitability for our shareholders. We will continue to

succeed in implementing the Megatons to Megawatts program. And we will continue

to provide a secure and dependable domestic source of uranium enrichment.

We remain the world leader in sales of uranium enrichment services. We have

strong business fundamentals that include over $6 billion in backlog and a robust

cash flow from sales. We are a well run, service-oriented business focused on safety,

customer service, identifying and seizing opportunities, solving problems and producing results.

While we are a work-in-progress, we have been making progress. To fulfill the

promise of a privatized USEC, all concerned have to realize that the Cold War is

over and the war we are now fighting is global competition.Thank you for your consideration. I welcome your questions.

Mr. BURR. Thank you, Mr. Timbers, for accommodating the committee, and I will assure you that we all take it with great interest,

your entire testimony.

The Chair at this time would ask unanimous consent that this

set of documents previously agreed to by the majority and the minority be entered into the record with the understanding that staff

will work with all interested parties after this hearing to make

whatever redactions that are deemed appropriate part of the documents insertion into the formal public record.

Without objection and hearing none, so ordered.

[The information referred to follows:]

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Mr. BURR. The Chair would recognize himself at this time for the

purposes of questions of Mr. Timbers.

Mr. Timbers, you said that there was a great effort to control

costs and that all things are on the table. Tell me, was Mr.

Strickland’s remarks relative to your compensation accurate?

Mr. TIMBERS. Mr. Chairman, which part of Mr. Strickland’s—— Mr. BURR. Let me rephrase the question. If you added up all the

salary, the bonus, the stock options or dividends, whatever is in

your package, what do you make on an annual basis?

Mr. TIMBERS. I make a salary of $600,000 a year, and the rest

of compensation is at risk. Last year, there was a bonus approximately of 600,000; and the balance was in stock.

Mr. BURR. That stock would have been valued at what?

Mr. TIMBERS. I would have to check what the value was at that

time. I am not sure right now.

Mr. BURR. Were those stock options you were referring to?

Mr. TIMBERS. Combination of stock options. Most of it was in

stock options, and there was restricted stock as well.

Mr. BURR. When can you exercise those options?

Mr. TIMBERS. There is a vesting period that is—I think it is prorated over a 5-year period so one-fifth is vested in the first year,

and then the second fifth is vested in the second year and so on

through 5 years.

Mr. BURR. Let me ask you, we are in the 21st or 22nd month of

the privatization. Was your salary bigger this year than last or less

this year than the prior year?

Mr. TIMBERS. According to the agreements with the Treasury at

the time of privatization, my compensation could not change for 6

months following privatization. After that 6-month period—we

privatized in July 1998. That 6-months period expired in February

1999.

Mr. BURR. Where is your salary in compensation today relative

to where it was for the first 6 months when it couldn’t be changed?

Mr. TIMBERS. The first 6 months I think as Mr. Strickland indicated I think was $325,000.

Mr. BURR. It has gone up significantly.

Mr. TIMBERS. It has gone up from the government sector salary

to a private sector salary.

Mr. BURR. Is your salary on the table as it relates to all things

on the table?

Mr. TIMBERS. My salary has not been discussed in that context.

Mr. BURR. Let me ask you if you were fired today, how much

would you walk away with with the agreements—I think he referred to a parachute.

Mr. TIMBERS. I would have to go back and check that. I can’t

quote you those numbers.

Mr. BURR. Can anybody behind you help you? Is it 3 years of

pay? Am I close?

Mr. TIMBERS. I think it is approximately 3 years of pay.

Mr. BURR. So if you were fired, you would get 3 years of pay. If

you quit, how much would you get?

Mr. TIMBERS. Zero.

Mr. BURR. Is that to the best of your knowledge? Do you need

any help from the people behind you?

192

Mr. TIMBERS. If I were to quit, it would be zero. There is not

compensation. I would point out, Mr. Chairman, that this compensation structure was evaluated by an outside independent company. It is structured so as to be comparable to like, similar size

companies in similar type businesses.

Mr. BURR. Mr. Timbers, I am sure whoever did those calculations

probably used something as a guide. I am not asking technical

questions about USEC because I think that we have some people

who are integrally interested, Mr. Strickland, Mr. Whitfield, but I

did come out of business and I know that when a company’s stock

devaluates 75 percent, there is a board of directors that usually

looks at the officer’s salary first and tries to make adjustments that

are reflective of that. The simple question I am asking you as president, as head of the board, has your board of directors come to you

and said we need to talk to you about your salaries or have you

talked to officers about the level of salaries?

Mr. TIMBERS. No, that discussion has not occurred.

Mr. BURR. So your salary and officers’ salary is off the table

when we talk about cost-cutting procedures as it relates to a company whose stock has depreciated 75 percent of its open value.

Mr. TIMBERS. Mr. Chairman, I said that discussion has not occurred.

Mr. BURR. Will it occur?

Mr. TIMBERS. There are not plans of that right now.

Mr. BURR. Did the changes in the market condition come as a

surprise to you?

Mr. TIMBERS. There were expectations that it was a challenging

environment in terms of the market. I think those expectations

were reflected in our disclosure statement, both in the offering

memorandum and subsequent 10-K and 10-Q statements.

Mr. BURR. If you had to close the facility today, which one would

it be of the two?

Mr. TIMBERS. We don’t have—we have not made any kind of determination of that sort.

Mr. BURR. Do you have any detailed plan on cost-cutting procedures?

Mr. TIMBERS. Pardon?

Mr. BURR. Do you have any detailed plan on cost-cutting procedures?

Mr. TIMBERS. Mr. Chairman, I still didn’t——

Mr. BURR. Do you have any written plan on cost-cutting procedures?

Mr. TIMBERS. We are looking at a number of different alternatives of how we may be able to save costs for the company in

terms of power, in terms of labor, in terms of plant operations and

a variety of different scenarios have been looked at. Do they constitute a plan? We do have an operating plan in place that has a

number of different scenarios being considered.

Mr. BURR. Your company recently purchased 10 million shares of

its own stock back for an average price of $10 a share. You have

already lost $55 million based upon my calculation of where the

stock price is today at roughly $4.50. Explain how this has been

an effective cost-cutting effort.

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Mr. TIMBERS. The stock buy-back program that you refer to was

initiated in July 1999; and at that time, there was a view in terms

of purchasing that stock that it was an effective use of the cash of

the corporation. Cash of the corporation belongs to the shareholder,

and we need to make a determination as stewards of that cash for

the shareholder as to how best to effectively deploy that cash. If a

determination was made that the stock of the company was under

valued at that time and that would be a good investment to make,

that amount was I think completed at approximately the price you

are talking about.

Mr. BURR. The Chair has really concluded the question it wanted

to ask but would take this opportunity to make a statement that

in fact the price of stock in the marketplace is indicative of what

individual investors are willing to pay, based upon their comfort

level of not only the business that the company is in but in the

leadership of the individuals that run the company; and I think

that, Mr. Timbers, for the trend that you suggest today, my No. 1

suggestion would be you need a written plan. Without a written

plan, it puts everything on the table, everything, including salaries

that don’t reflect the trend that is currently happening to your

company stock. I think with some certainty I would know what the

value would be a year from now.

At this time the Chair would recognize Mr. Stupak for purposes

of questions.

Mr. STUPAK. Thank you, Mr. Chairman. Mr. Timbers, in my

opening statement I said we all share some responsibility here, and

I stick with that statement. If we are going to share the responsibility, I guess I would pick up a little bit where Mr. Burr was.

I mentioned in my opening statement about Lee Iacocca coming

here before Congress, actually this committee and Jim Blanchard

was the Congressman from Michigan. And we helped out the

Chrysler company, but Mr. Iacocca’s salary was $1 and from what I have heard thus far today, it looks like your salary is about $1.2

million in cash not counting stock options where those values may

be. It could very well be over $2 million. So if we are going to share

this responsibility which I think we have to, if we are going to

come and ask the Congress for a $200 million bail-out request, we

have to all share in some of that responsibility.

When Congress privatized the USEC probably before any of us

sitting on this dias, it is fair to say before any of us on this dias

were in Congress, the purpose was to gain money for the Treasury;

is that correct?

Mr. TIMBERS. Yes.

Mr. STUPAK. And, in fact, in 1991 you proposed privatization of

USEC to the Bush administration; did you not?

Mr. TIMBERS. I am trying to think. In 1990, I worked for Smith

Barney.

Mr. STUPAK. 1991 I said.

Mr. TIMBERS. I am not sure what you are referring to in 1991.

There was proposals in another endeavor that I had.

Mr. STUPAK. Did you propose privatization of USEC to the Bush

administration, you personally?

Mr. TIMBERS. If there was a proposal being made at that time,

it was in the context of a report prepared under the company

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Smith Barney; and I was acting on behalf of Smith Barney so if

there was a proposal——

Mr. STUPAK. On behalf of the corporation, you recommended that

USEC should be privatized?

Mr. TIMBERS. We recommended that the existing business of the

uranium enrichment under the guise of operating within the full

government had a great deal of difficulty for its future success. We

recommended at that time that it would be——

Mr. STUPAK. Let’s fast forward. I think the answer is yes that

Smith Barney recommended it. You were part of that group. Let’s

go to 1998. In 1998 you supported, in the clearest terms, privatization of USEC through a public offering; did you not?

Mr. TIMBERS. I am sorry, did I——

Mr. STUPAK. In 1998 did you support privatization of USEC

through a public offering IPO in 1998?

Mr. TIMBERS. I was asked by the Federal board of directors to

give my views as to what was the best way to privatize and in responding to these views indicated that I thought the best plan was

to privatize it through an IPO in terms of getting—maximizing——

Mr. STUPAK. The answer is yes then.

Mr. TIMBERS. [continuing] maximizing the criteria set by Congress.

Mr. STUPAK. I am not trying to cut you off. I am down to 2 minutes so I am trying to get through some of these questions.

USEC agreed to all those constraints you talked about in your

statement in 1998, did they not?

Mr. TIMBERS. Yes.

Mr. STUPAK. In fact, if you had thought it was not workable, you

would have recommended that privatization was not feasible;

would you have not?

Mr. TIMBERS. That is correct.

Mr. STUPAK. But you didn’t do that. You thought it was feasible,

and you recommended in 1998 that they move forward?

Mr. TIMBERS. I did, yes.

Mr. STUPAK. According to the minutes of the board meetings in

June and July 1998, you knew the market price of the SWU in new

contracts was below your production costs and even below what

you are paying for the Russian SWU and the price of that SWU

would go up even if the market price went down. In fact, on page

44 of the minutes of July 22, 1998, the board is told that the average price of new contract is already below $90 an SWU, and there

was concern reported in the press that it would go as low as 80

which would be the low production cost and the cost of Russian

SWU. So you already knew that when you made these IPOs, right?

Mr. TIMBERS. I don’t believe those were my observations, but I

would like to go back and check the record.

Mr. STUPAK. June and July board minutes of 1998, I guess that

was also based upon something from J. P. Morgan; right?

Mr. TIMBERS. Mr. Stupak, I would have to check the record on

that.

Mr. STUPAK. In the book right there, I believe it is document

number 22.

Mr. TIMBERS. This is my book.

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Mr. STUPAK. Do we have document number 22 there we could

show the witness. The same white book, wrong contents.

Under document number 22 it is on page 44. I stand corrected.

Document 27, page 44 I am looking at—the second issue, on line

14, the second issue was the falling of new contracts below $80 per

SWU. The intent at the time it was agreed to was not the very next

contract you signed. This became a major issue because there was

some concern that as you all know, the prices have been falling and

the average price of new contracts has been heading below $90.

There was some concerns stated in the press that it would be as

low as 85, 84, and $80 would be breached within the next year.

So is that correct? That is what I am really trying to get at. And

that’s your board minutes.

Mr. TIMBERS. Mr. Stupak, I was not on the board of directors.

And as I look at this document, this is the July 22, 1998 meeting;

if I see the attendance, I was not present at that meeting.

Mr. STUPAK. So you were not at the meeting, but you were the

CEO of the company?

Mr. TIMBERS. The Federal board of USEC did not have the CEO

on the board. There are five Presidentially appointed, Senate confirmed members. That did not include the CEO.

Mr. STUPAK. Okay. But you knew the price of your contracts, did

you not?

Mr. TIMBERS. Do you know who was saying this? Because this is

somewhat out of context.

Mr. STUPAK. Mr. Goldman.

Mr. TIMBERS. Mr. Goldman is an attorney?

Mr. STUPAK. Right. You know the price of your contracts; right?

Yes or no? Did you know the price of your contracts?

Mr. TIMBERS. Yes, I knew the price of the contracts.

Mr. STUPAK. So that is correct? That is the prices that you

thought it would be?

Mr. TIMBERS. No, I believe that the contracts prior to privatiza- tion were approximately about $92 that were being added to the

book. It says here there is some concern in the press that things

would go lower. That is not necessarily what our view was at that

time.

Mr. STUPAK. You are saying that you thought the new contracts were $92?

Mr. TIMBERS. I believe they were $92, which is higher—if I can

refer to your statement, that is higher than the price we were paying to Russia.

Mr. STUPAK. Correct.

Mr. WHITFIELD [presiding]. Mr. Stupak, you have run over by

about 2 minutes. If you could make this your last question.

Mr. STUPAK. Would you provide us some evidence that you knew

it would be $92?

Mr. TIMBERS. In our disclosure documents, in terms of both the

prospectus and the offering memorandum that we provided to potential bidders, I believe the price on there was $92 per SWU, to

the best of my recollection. But I would be glad to go back and

check that for the record, Mr. Stupak.

Mr. STUPAK. And you projected out that they would be $92?

Would be your projected cost?

196

Mr. TIMBERS. We projected that the price would be stable at that

time.

Mr. STUPAK. Really, even though the newspaper and everyone

else said everything was going, if I can use the word, ‘‘to hell in

a hand basket’’ in a big hurry. You had excess production

capacity—— Mr. TIMBERS. I’m not exactly sure.

Mr. STUPAK. [continuing] of a uranium stock.

Mr. TIMBERS. Pardon me?

Mr. STUPAK. Everyone was saying that, look, excess production

capacity, yet falling prices and liquidation of uranium stocks. The

newspapers was saying it was going to be down in the low 80’s, but

still you projected out to the 90’s and $92 in the future?

Mr. TIMBERS. We believed at that time that the market would be

stable in terms of the pricing. The pricing that has dropped since

privatization, as I indicated, which is about 15 percent, is a level

that dropped the prices below a level that we were projecting at

that time.

Mr. STUPAK. Mr. Chairman, thank you for the extra time.

Mr. WHITFIELD. Okay, I will ask questions next. Mr. Timbers, in

the strategic plan that was developed in preparation for privatization in document 5 in the book you have a page with key assumptions on estimated new sales prices for SWU. In the year 1999, the

estimated new sales price for SWU is $95 per SWU. And it show

it’s going up to $110 per SWU in the year 2007.

Mr. TIMBERS. With escalation. That includes escalation.

Mr. WHITFIELD. Now, we’re talking about new sales; we are not

talking about old contracts.

Mr. TIMBERS. That’s correct.

Mr. WHITFIELD. And SWU never did reach any of these prices

during these years, did it? I mean, right now you are selling them

at about $80 a SWU.

Mr. TIMBERS. That’s correct.

Mr. WHITFIELD. So where did these numbers come from that

would show a projection of $95, $96, and $98 a SWU?

Mr. TIMBERS. The strategic plan in 1997. Obviously, market factors have changed since that time.

Mr. WHITFIELD. And what year did you prepare the strategic

plan? 1997?

Mr. TIMBERS. Yes.

Mr. WHITFIELD. So things dramatically changed. Instead of having SWU at $95 in 1999, it is down to around $80.

Mr. TIMBERS. Things have considerably changed. There has been

a fundamental change in terms of competitor pricing. There has

been a contraction of the marketplace. There has been aggressive

liquidation of inventories by customers here and abroad. And since

this time period, the market is fundamentally different, even within the short period from September 1997.

Mr. WHITFIELD. So for whatever reason, the strategic plan is

wrong on the SWU price.

Mr. TIMBERS. Well, anytime you develop a strategic plan, a strategic plan dynamic document, it is appropriate at that time——

Mr. WHITFIELD. Let me ask you another question. You have been

with USEC since 1993?

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Mr. TIMBERS. Yes.

Mr. WHITFIELD. And during that time that you have been associated with USEC, there has been a lot of discussion about AVLIS

technology. Now in the board meeting on June 3, 1998, there was

quite a bit of discussion about AVLIS technology in the context of

which offer, IPO, merger and acquisition, would be the best way to

go. And I know that Mrs. Green on page 253 made the comment:

If you don’t invest in AVLIS, there really is no future for enrichment. And on page 244, you said that every day that privatization

is delayed, we delay the deployment of AVLIS. And then you said

the No. 1 thing for the privatized company within the first 90 days

is to begin the siting process for AVLIS. Technology is not the

question, it is a siting delay.

And then in the prospectus, they talk about the competitive advantage of this company is the AVLIS technology. And it says that

USEC plans to complete the development and commence commercialization of the next generation of uranium enrichment technology, AVLIS, and that it will be deployed at full-scale facility by

2005.

Now that was in 1998. What changed that made you all drop the

AVLIS technology so completely after it had been sold as the technology that could make this industry succeed?

Mr. TIMBERS. AVLIS, prior to their privatization for a period of

about 18 months, had a significant string of successes of demonstration performance at the Lawrence Livermore lab, and that

gave us a considerable degree of confidence that the technology was

being proven to be successful and that we can move to the level of

deployment. And if you recall, subsequent to privatization, we

began a deployment process where we began to make inquiries

throughout the United States about possible sites, including Paducah and Portsmouth.

Now, what really has happened—what happened since that time

is the technology did work. AVLIS technology did work, did enrich

uranium. But what happened is that we could not get the further

development in terms of longevity of operations of the enrichment

process such that, as we tried at the Lawrence Livermore labs, the

rate of return that we could get out of the project could not exceed

the double digits.

Economically, we could not make this thing work from an investment standpoint. Technically, it worked. Technically, it reflected

the results that we had, but we could not improve it to the point

of making it economic.

Can I just explain how that works? In order to run AVLIS successfully, it had to run for a long period of time so that between

a refurbishment module and what happened during our testing,

subsequent to our good string of 18 months of tests, is that we

could not extend that period sufficiently enough to get a great—a

run rate of return on material that we were enriching.

Mr. WHITFIELD. So basically, the technology works but from a

commercial standpoint, the return is simply not there?

Mr. TIMBERS. It did not work well enough.

Mr. WHITFIELD. Now, let me ask you, your production costs are in the $90 range using gaseous diffusion. You are selling SWU at

$80. AVLIS technology does not work. So what’s the answer?

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Mr. TIMBERS. I’ve indicated in public disclosure and a number of

different forums that we’re looking at a two-pronged approach in

terms of looking at acquiring centrifuge technology and also the

R&D development of the Silex technology in Australia. Acquiring

centrifuge technology can be either directly in reinstituting the

DOE technology in Oak Ridge—and we are in discussions with

DOE about doing that—and No. 2, it could be acquiring centrifuge

technology from a European producer or from the Russians.

Mr. WHITFIELD. Now there are many independent analysts who

say that because of the downgrading of the credit rating of USEC

that it would be difficult for USEC to raise the money to pay for

installing centrifuge technology.

Mr. TIMBERS. If there is an appropriate technology that is economic, I believe the money can be raised for it.

Mr. WHITFIELD. Okay. I see my time has expired. Mr. Strickland.

Mr. STRICKLAND. Thank you, Mr. Chairman.

Mr. Timbers, do you recall a meeting in Senator DeWine’s office

where Senator Voinovich was present, I was present, as well as

members of our staff, when you said that it took a private corporation to be able to stop investing in AVLIS and that a government

corporation would never have been able to do that? Do you recall

that conversation?

Mr. TIMBERS. I recall the meeting, but I don’t recall that conversation.

Mr. STRICKLAND. I think our staffs recall it very clearly. And I

think I recall you saying in that meeting that when you first came

on board, or early when you came on board USEC, that you said

we ought to stop and take a look at this technology before we continue to invest in it.

The reason I think that is relevant is this: I assume the investors

who bought stock in this private corporation rightfully believed

that AVLIS was a viable technology that held out great promise to

this industry. And I am wondering if those who bought the stock

may feel just a little misled if, in fact, that was your feeling prior

to the time of privatization. If you do not recall that conversation,

then I’ll accept that response, but I recall it clearly. And I think

the two Senators do.

Mr. Timbers, do you remember requesting a waiver to allow you

to participate in the privatization process?

Mr. TIMBERS. There was a series of waivers that were requested

by the chairman of the board to waive government ethics issues.

Mr. STRICKLAND. You say they were requested by the chairman

of the board?

Mr. TIMBERS. Yes.

Mr. STRICKLAND. I have a letter here from the chairman of the

board to you, and it says: On September 25, 1995, you provided me

with a request for a waiver under section 208(b)1 to allow you to

participate in matters directed toward the implementation of the

plan of privatization of the United States Enrichment Corporation.

Your request—— Mr. WHITFIELD. Mr. Strickland, would you care to introduce

those into the record?

Mr. STRICKLAND. I would. This waiver letter, it is dated September 26, 1995, from Mr. Rainer.

199

He further says: Your request stated that such matters would include—and I won’t list all of them—but one of things that you requested was to be able to participate in the method that USEC

should utilize in privatizing; e.g., an IPO or an M&A transaction.

You also requested to be able to participate in the selection of individuals to be appointed to serve on the board of the privatized corporation. And I think that may be relevant to the discussion about

whether or not there had been a discussion of whether or not your

compensation was on the board—was on the table, since you had

great influence, apparently, in the selection of the board.

But the law says, and i quote from the law, under Title 18,

Crimes and Criminal Procedure of the United States Code section

208 A, ‘‘Whoever, being an officer or employee of the executive

branch of the U.S. Government or of any independent agency of the

government, participates personally and substantially as a government officer or employee through decision approval, disapproval,

recommendation, their rendering of advice, investigation, or otherwise in a contract claim controversy or other particular matter in

which he has a financial interest shall be subject to penalties set

forth.’’

But then Mr. Rainer says, given the scope—given these factors

and the scope of this waiver as delineated herein, I do not find your

disqualifying financial interest to be so substantial as to be deemed

likely to affect the integrity of your service to the government.

Now, we have heard here today that your salary went from

$350,000, approximately, to perhaps over $2 million. I don’t know

what you or Mr. Rainer would consider substantial. To me, that is

incredibly substantial. And so it seems as if you were intimately involved in these decisions regarding how to privatize, the selection

of the board members for the new corporation, and it troubles me

greatly that I think the—certainly the intent of the law, the intent

of the law was not carried out in this procedure.

And it calls into question whether or not all of the decisions that

were made between you and the board and the Department of

Treasury were decisions that were made in the best interest of this

country or if they were made to further the personal financial interests of those involved.

It is a troubling set of circumstances, and as we move forward

I think it is appropriate that we look at where we have been, because we need to know who and what it is, Mr. Chairman, that we

are dealing with as we look forward to the future of this industry.

And with that I yield back my time.

Mr. WHITFIELD. Mr. Bilbray.

Mr. TIMBERS. Mr. Chairman, if I could actually make one comment. I appreciate Mr. Strickland bringing parts of that letter to

my attention. I had forgotten the procedures about who requested

what waiver process, so that I stand corrected by Mr. Strickland

identifying those who requested. I just did not recall.

Mr. WHITFIELD. Mr. Strickland—Mr. Bilbray.

Mr. BILBRAY. Mr. Chairman, how many times have you been to

Mr. Strickland’s Ohio or Mr. Whitfield’s Kentucky facility?

Mr. TIMBERS. Dozens of times. I have had board meetings there

both in the private and in the government corporation.

200

Mr. BILBRAY. Have you been to the plants to see the operations

themselves?

Mr. TIMBERS. Dozens of times.

Mr. BILBRAY. How long ago was the last time you were there.

Mr. TIMBERS. About a year ago at both plants. I’ve had board

meetings—I took the private board to a board meeting at both of

the plants over the past year.

Mr. BILBRAY. But when you talk about—it has been a year since

you have actually seen the operation in the plants?

Mr. TIMBERS. The last visit was the board meeting that we had

which was in approximately—about a year ago.

Mr. BILBRAY. Now, the board meeting, I’m just trying to see as

the CEO of the corporation, what was the last time you were in

and actually witnessed the operation itself at those plants?

Mr. TIMBERS. I do not have the date, Mr. Bilbray, but the date

that board meeting was, we saw the operations of the plants. If you

have a board meeting there, you conduct business, but the primary

reason is to have the board view the plants, take a tour of the

plants, talk to management and talk to workers.

Mr. BILBRAY. So it has been a year since you have been at the

physical plants?

Mr. TIMBERS. Approximately that. Whenever date that board

meeting is.

Mr. BILBRAY. Thank you. I appreciate that. Mr. Chairman, I

yield back.

Mr. WHITFIELD. We have a vote on the floor. I want to ask one

other question. Mr. Strickland, do you have any additional questions for Mr. Timbers?

Mr. STRICKLAND. Mr. Chairman, could we submit questions to

have answered in writing?

Mr. WHITFIELD. Yes, without objection, so ordered.

Mr. STRICKLAND. Thank you, Mr. Chairman.

Mr. WHITFIELD. I have one other question. Mr. Timbers, in the

past several days, my office has been receiving a lot of fax letters

from employees at USEC. They are blaming the Nuclear Regulatory Commission, or at least stating that in the new criticality

safety standards which they say are delaying your efforts to certify

the Paducah plant for a high assay upgrade, that the NRC is using

different standards at Paducah than they are using at the Piketon

plant.

However, according to a letter we received from the NRC, they

say the reason why your announced plans to get the high assay upgrade approval by the end of the year won’t take place is because

USEC has failed to follow the proper documentation in a timely

manner. Do you have any comment about those letters?

Mr. TIMBERS. I’m not aware of those letters. If there is a difference in terms of the views about what is corporate criticality

safety, I will be glad to look into it, but I am not aware of what

those letters are referring to.

Mr. WHITFIELD. You are not aware of the letter from the NRC

saying that USEC has not filed its documentation in a timely manner and that the information that you have provided is incomplete

and not factual?

Mr. TIMBERS. I’d like to go take a look at that letter.

201

Mr. WHITFIELD. It is in document 18 of the book.

Mr. TIMBERS. It is in 18?

Mr. WHITFIELD. It is a letter addressed evidently to Steven

Toelle.

Mr. TIMBERS. This is about the financial review conducted by the

NRC? The letter I’m pointed to is March 29, 2000, regarding USEC

financial evaluation. Is that the letter?

Mr. WHITFIELD. Just a minute. I tell you what we’ll do, we will

get that to you in writing as well. And a copy of the letter.

Mr. TIMBERS. Be glad to answer that Mr. Chairman.

Mr. WHITFIELD. As soon as we get back from voting we will call

up the second panel. I understand we have a vote in about 5 minutes and then we are going to have another 5-minute vote and then

we will be right back.

But, Mr. Timbers, in concluding I would simply say that produc- tion costs are up in the $90 range and you are selling SWU around

$80. Your old contracts were around $110 a SWU. AVLIS is off the

table. We don’t know if centrifuge is going to work or not. Many

people are concerned that you are buying back stock and that the

long-term viability of USEC is in danger. And that’s one of our primary concerns and that’s why we are looking forward to additional

testimony today from other people who have analyzed it. But I

want to thank you for coming today. We appreciate your being

here. And there may be some additional questions that we would

like to submit to you in writing.

Mr. TIMBERS. That would be fine.

Mr. WHITFIELD. Thank you.

Mr. TIMBERS. Mr. Chairman?

Mr. WHITFIELD. Yes?

Mr. TIMBERS. There are two submissions—there were two points

I would like to make, just before we adjourn for a moment, in answering Mr. Stupak’s question about the trends toward lower pricing. And he was inquiring about what our views were at the time

of privatization. We would like to submit for the record page 13 of

our offering prospectus in 1998 that talks specifically about our disclosure on trends toward lower pricing. And the second point—if

that meets with your approval.

Mr. WHITFIELD. That’s fine.

Mr. TIMBERS. The second point is that, gee, my salaries were

mentioned a couple of times and Mr. Stupak has mentioned that

it is $1.2 million. My salary is $600,000, as I stated. The balance

of the compensation is at risk.

Mr. WHITFIELD. Page 13 is already in the record of your prospectus. So we’ve got it.

Mr. TIMBERS. Okay.

Mr. WHITFIELD. Thank you very much. As soon as we come back,

we are going to call up panel II——

Mr. STRICKLAND. Mr. Chairman, could I ask another question?

And I’ll be happy to miss the vote in order to ask this question.

Mr. WHITFIELD. Sure, go right ahead.

Mr. STRICKLAND. Thank you. Mr. Timbers, there has been speculation that in order to reach one of the significant events necessary

to enable USEC to close one of the two plants before their obligation ends in 2005, that there has been some manipulative behavior

202

on the part of USEC which would enable them to reach a significant event.

In fact, Morgan Stanley has written this: With aggressive stock

buy-backs, the debt could be downgraded to below investment

grade. That would be a formal condition allowing USEC to shut

down one of the unneeded production plants which would save

$100 million annually, according to management. But the physical—the physical capacity to do all needed production at one plant

may be a year or more away, and there will be heavy political pressure fighting any such shutdown.

Are you aware of Morgan Stanley’s suggestion?

Mr. TIMBERS. I think I do. My best recollection is I do recall a

statement like that.

Mr. STRICKLAND. And were you aware of this recommendation

prior to the decision to buy back the stock?

Mr. TIMBERS. I don’t know the date of that recommendation. The

decision to buy back the stock is independent. You know, you’re

making, I think, a connection between a significant event under

the Treasury agreement and the stock buy-back. In February we

announced three major actions by the corporation. One was the announcement that our earnings for fiscal year 2000, beginning in

July of this year, would be about 60 percent below this year’s earnings. No. 2, we announced a stock buy-back. And No. 3, we cut the

dividend by one-half.

What I would like to point out is that the amount of money that

the corporation saved by cutting the dividend by one-half is about

equivalent over this period of time to the amount of money that

would be used for a stock buy-back program if completed.

I would note very carefully that if there was an intention by anybody in regard to—by the rating agencies in regard to these three

announcements, the reduction of earnings by 60 percent was the

most dramatic element that the rating agencies would pay attention to.

Mr. WHITFIELD. Mr. Strickland, I am going to have to ask to you

finish up. I need to make this vote, even though you may not.

Mr. STRICKLAND. Your December 1999 quarterly report lists all

of the things that could occur that would enable one of the plants

to be closed.

Mr. TIMBERS. I think we have listed that in a number of different

quarters, not just that one quarter.

Mr. STRICKLAND. On February 4, 2000, Standard & Poors revised

its credit rating of USEC’s long-term debt to below investment

grade. It troubles me that there appears to be perhaps a manipulative behavior on the part of the corporation which would enable

them to violate an agreement which they have had, a legally binding contract with the Department of Treasury. And when we talk

to Mr. Gensler, I’m going to ask him if he is aware of any such behavior and what the action of the Department of Treasury will be

in response.

Mr. TIMBERS. Mr. Strickland, that view is not accurate. And it

is not accurate about the conduct of the company.

Mr. WHITFIELD. Thank you very much, Mr. Timbers. We will be

right back.

[Brief recess.]

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Mr. WHITFIELD. I will call the meeting back to order. We have

the gentlemen from panel II, the Honorable Gary Gensler, Under

Secretary, United States Department of Treasury, we appreciate

your being here very much. Mr. Ernest Moniz, Under Secretary,

Department of Energy, we appreciate your being here. And Mr.

Carl Paperiello, Deputy Executive Director for Materials Research

and State Programs the U.S. Nuclear Regulatory Commission.

Thank you for being here.

With that, Mr. Gensler, if you would like to proceed with your

opening statement. And, of course, the entire statement will be

submitted for the record.

TESTIMONY OF GARY GENSLER, UNDER SECRETARY, U.S. DEPARTMENT OF TREASURY; ERNEST J. MONIZ, UNDER SECRETARY, U.S. DEPARTMENT OF ENERGY; AND CARL J.

PAPERIELLO, DEPUTY EXECUTIVE DIRECTOR FOR MATERIALS, RESEARCH AND STATE PROGRAMS, U.S. NUCLEAR

REGULATORY COMMISSION

Mr. GENSLER. I thank you, Mr. Chairman, ranking member. I appreciate your calling this hearing. I know this is a very important

matter to the Congress and very important to you and your district

and Congressman Strickland’s district, and we take these matters

very seriously at Treasury and throughout the administration.

I’d like to just summarize my remarks and I appreciate submitting them for the record.

The statutory framework for the privatization of USEC was laid

out in two important acts by Congress in 1992 and in 1996, best

recollection. Throughout the privatization process we followed the

statutory framework provided by Congress closely, thoroughly, and

conscientiously. Between those two acts in 1992 and 1996, the U.S.

Government entered into a very important arrangement with the

Russian Federation as it related to the sale of the bomb grade material out of Russia, known as the HEU Agreement.

The President had submitted to him a privatization plan, the

same plan that Congress considered in 1996. That plan was submitted to the President and the President signed off to the privatization plan in 1997, which considered what was called a dual-path

process. And as you most likely recall, this is a process whereby

outside financial experts, working with the USEC board of directors, would look and explore the sale by merger and look and explore the sale by the initial public offering.

The most attractive third party proposal, if I could just highlight

this, and this is much more detailed in the public record and in my

prepared remarks, but the most attractive third party sale proposal

was a leveraged buyout. And just to pause for a moment, the USEC

searched with 50 companies to see if there was an interest in buying the company. What was found is that there was a limited interest in the purchase of the company by large commercial firms.

There was more of an interest by financial parties through what’s

called a leveraged buyout, and in fact those were the only two proposals received. This put a significant amount of leverage on the

company, approximately $1.5 billion of fixed rate securities, and

then had investors in the equity.

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The USEC board determined that both the proposed sale transaction, this leveraged buyout transaction, and the public stock offering satisfied the statutory criteria that Congress had laid out.

But they concluded that the offering was the best of the two alternatives.

Treasury’s role was then to take an extensive review of USEC’s

board decision, based upon all the available information at the

time. As part of this review it sought and obtained advice from over

a dozen Federal agencies with regard to the statutory criteria laid

out by Congress. And I would say that it was a very complex set

of circumstances. As many commercial firms are, USEC is also

complex, but the statute itself had many criteria that we sought to

review.

In coordinating that interagency process, all the essential decisions that were made on the privatization reflected a collective

judgment of the appropriate government agencies, whether it be

national security issues, the very important issues of labor and the

environment, very important issues of the continuation of the

plants.

Mr. WHITFIELD. May I interrupt you just a minute Mr. Gensler.

I have just been reminded, which I should have remembered at the

beginning, this is an oversight hearing. We would like to ask you,

unless you have some objection, to stand and be sworn that what

you are testifying to will be the whole truth and nothing but the

truth. All witnesses, if you would raise your right hand.

[Witnesses sworn.]

Mr. WHITFIELD. Thank you very much. Now we’re sworn in.

Mr. GENSLER. I appreciate that. I always assume, if I am in front

of Congress, that to be the case.

In consultation with the other agencies, Treasury determined

that both the public offering and the merger path met the statutory

criteria but determined the offering was best in meeting those statutory criteria. And while I detail it more in the testimony, this involved at least four areas: expected level of debt—the leveraged

buyout, as I said, had close to three times the amount of fixed rate

obligations, and two, the higher level, at least initially, of employment. The leveraged buyout was suggesting as many as 1,700 layoffs and the initial public offering, in the order of 500 layoffs. And

we were able to at least memorialize for 2 years in the Treasury

agreement higher expected proceeds and lower expected market

and financing fiscal risks.

Additionally, I would note in the terms of the level of debt and

long-term viability, the credit rating by independent credit rating

agencies came in at what’s called triple B plus, which was higher

than the level that would have been in the leveraged buyout of only

triple B rating, both of which were above the minimum rate that

the NRC, who I know probably will be commenting later, had initially laid out in their draft standard review plan.

To address many of the concerns raised by Congress, there were

numerous arrangements with USEC during the privatization and

post privatization. And just highlighting them briefly, on the national security side there were numerous arrangements with the

State Department, of course, the Enrichment Oversight Committee,

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the Department of Energy and the NRC, a very important issue as

we all know today.

There is the certification process with the NRC itself, and I

would of course defer to the NRC, but those standards in terms of

compliance with health and safety standards, compliance with very

important issues as laid out by Congress. Labor and environmental

issues. Very importantly, many agreements were entered into with

the Department of Energy and following up also in agreements

with the OMB.

Treasury did not have any explicit requirement in the statute beyond privatization, but we thought it was appropriate to enter into

a contractual arrangement to best forward the statutory criteria as

laid out by Congress. And that agreement I think is, as you know— had four specific arrangements for post privatization. One related

to the compensation levels of the private firm after privatization.

The second was the labor component with regard to the 2 years for

the 500 employees. Third, it related to the sale of assets. The statute actually said that this company could not sell more than 10

percent of its stock for 3 years, consistent with that we embodied

that about assets. And fourthly and very importantly with regard

to the plants, continued operation of the plants through January

2005, unless the actual viability of the company in some way was

in question through a significant event. A significant commercial

event was defined as either a significant decline in earnings, pricing, operating results or, as is somewhat focus in this hearing, loss

of the investment grade rating.

Treasury has vigorously enforced this agreement. Just as one example, subsequent to the privatization, USEC management attempted to renegotiate the restrictions on the layoffs. Treasury did

not allow this and thought very carefully but very clearly that we

should not deviate from those obligations. In addition, earlier this

year in January when we first heard that the board may be considering something with regard to the plants, we requested that the

company notify Treasury immediately if they were considering such

a closing. We asked for ample time to review and the legal justifications of any considerations the board may have in this regard.

I would note for the record that USEC has not notified us to this

day that they see that there has been such an event or that they

are taking such actions. While there is no statutory basis for ongoing Treasury oversight of USEC, we take our role with regard to

that contract very seriously. And despite our limited role, we also

feel that we must be and should be responsive to this Congress

with regard to these matters.

Mr. WHITFIELD. If you could summarize for us, Mr. Gensler.

Mr. GENSLER. I was actually done, so that was perfect timing.

[The prepared statement of Gary Gensler follows:]

PREPARED STATEMENT OF GARY GENSLER, TREASURY UNDER SECRETARY

Mr. Chairman and members of the Subcommittee, I appreciate the opportunity to

testify on the privatization of the United States Enrichment Corporation (‘‘USEC’’).

The privatization of USEC was the culmination of a process mandated by Congress

through the enactment of the Energy Policy Act of 1992 and the 1996 USEC Privatization Act. Throughout the entire privatization process, we followed the statutory

framework provided by Congress very closely, thoroughly, and conscientiously.

I will divide my remarks into five parts: first, a general discussion of the statutory

framework on which the privatization process was based; second, a discussion of the

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privatization decision of the USEC board of directors (the ‘‘USEC Board’’); third, a

summary of the governmental review of the USEC Board’s decision and reasons the

government agencies approved the public stock offering as the best means of achieving privatization; fourth, the measures taken by the federal government relating to

USEC’s conduct during and after the privatization; and fifth, Treasury’s involvement in USEC-related matters following privatization.

STATUTORY FRAMEWORK

The process that culminated in the privatization of USEC was begun by Congress

in 1992, when it enacted the Energy Policy Act. That legislation established USEC

as a government corporation and gave it a mandate to develop a strategic plan for

privatization. The 1992 Act set up a board of directors that was composed of members appointed by the President and confirmed by the Senate.

The 1992 Act authorized USEC to implement its privatization plan upon the occurrence of two events. First, the President had to approve the plan. Second, the

USEC Board had to determine, in consultation with appropriate agencies of the

United States, that privatization would satisfy four statutory criteria: a return to

the United States at least equal to the net present value of USEC as a government

corporation; protection against foreign ownership, control, or domination of USEC;

protection of public health and safety and common defense and security; and a reasonable assurance of adequate enrichment capacity to meet the demand of the domestic electric utility industry.

In 1996, before the President had approved USEC’s privatization plan, Congress

again passed legislation aimed at prompting the sale of USEC. The USEC Privatization Act established additional requirements for the certification and licensing of

USEC’s uranium enrichment activities by the Nuclear Regulatory Commission

(‘‘NRC’’) and contained provisions to clarify the allocation of assets and liabilities between the government and a privatized USEC, including a section that provided for

the transfer of substantial quantities of natural and enriched uranium from the Department of Energy (‘‘DOE’’) to USEC. The 1996 Act also enacted protections for

USEC’s workers, including a requirement that DOE provide benefits to certain

USEC workers in the event of a plant closing or mass layoff.

Finally, the 1996 Act directed USEC to privatize, with the approval of the Secretary of the Treasury, in a manner that satisfied the additional statutory criteria

of providing for: the long-term viability of USEC, the continued operation of the gaseous diffusion plants that USEC leases from DOE, and the maintenance of a reliable and economical domestic source of uranium mining, enrichment, and conversion; and, to the extent not inconsistent with these three criteria, obtaining the

maximum proceeds for the United States.

THE USEC BOARD’S DECISION

First Steps

In 1995, USEC submitted its plan for privatization to the President and Congress.

The plan accomplished the statutory requirement to evaluate alternative means of

privatization by establishing a ‘‘dual-path’’ process, in which USEC simultaneously

prepared for an initial public offering of stock and a negotiated sale to a third party.

The plan concluded that such a dual-path process would allow decision-makers to

select the best means of privatization on the basis of concrete information about the

relative merits of specific transaction alternatives. In July 1997, the President approved the privatization plan subject to the development of an adequate post-privatization oversight process.

Third-Party Sale

To initiate the negotiated third-party sale path of the dual-path process, USEC’s

transaction manager distributed over 50 preliminary information packages to industrial, utility and financial firms. USEC received expressions of interest from five

parties. The USEC Board reviewed these submissions and consulted with the appropriate federal agencies for national security clearance of the interested parties.

Based on its review, the USEC Board invited three of the parties to conduct due

diligence at USEC’s facilities. After extensive due diligence by the interested parties, USEC received two firm proposals for the acquisition of USEC through a negotiated third-party sale. Interested parties were directed to submit an extensive package of information, including a firm, all-cash proposal; a definitive mark-up of a

draft merger agreement; binding financial arrangements; strategic business plans

for the privatized corporation; comprehensive disclosure on their consortium arrangements, including charter documents and shareholder agreements; regulatory

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information; and information on how the interested party would satisfy the statutory criteria of the privatization legislation.

Public Stock Offering

Simultaneous with the third-party sale path, the USEC Board and USEC’s man- agement worked with their financial and legal advisors to prepare for a possible

public stock offering. The involvement of private sector financial and legal advisors

in transactions of this nature is necessary and standard, and we believe their involvement contributed greatly to the decision-making process. Once the USEC

Board procured the services of these advisors, USEC worked with them to prepare

the necessary Securities and Exchange Commission registration statement. The advisors also provided advice on the timing of a stock offering and valuation range,

and coordinated appropriate marketing efforts, including road shows.

In addition, USEC’s advisors each provided independent advice on the appropriate

levels of debt that USEC should incur to maximize value for the federal government. These financial advisors concluded that incurring a reasonable amount of debt

prior to an offering would increase the gross proceeds to the federal government,

reduce the aggregate amount of fees paid to financial advisors, and reduce the

amount of proceeds subject to market risk. The inclusion of debt in connection with

an initial public offering is a standard financing practice that is utilized in

privatizations around the world. Upon review of those analyses, Treasury and OMB

agreed that the USEC financing structure, in the event of a public stock offering,

should include net debt of $500 million. The financial advisors advised Treasury

that this net debt would not affect the long-term viability of the privatized corporation.

The Decision

The USEC Board considered third-party sale proposals from two potential buyers.

The most attractive proposal (the ‘‘Carlyle proposal’’) was a leveraged buy-out that offered $1.9 billion for the acquisition of USEC, subject to a number of conditions.

The second third-party sale proposal was also a leveraged buy-out, but it offered less

attractive terms than either the Carlyle proposal or the public stock offering proposal.

On June 11, 1998, the USEC Board determined that both the Carlyle proposal

and the public stock offering proposal satisfied the statutory requirements, but that

the offering provided the superior method of addressing the special areas of concern

identified in the two privatization statutes. The USEC Board unanimously approved

privatization through the public stock offering.

GOVERNMENTAL REVIEW OF THE USEC BOARD’S DECISION, AND REASONS FOR

APPROVING THE PUBLIC STOCK OFFERING

Governmental Review Process

During the entire privatization process, judgments were made collectively by the

appropriate agencies of the Administration. Treasury coordinated this inter-agency

process. To ensure that the views of the appropriate agencies were taken into account, during the entire dual-path process Treasury consulted extensively with such

agencies as the Council of Economic Advisors (‘‘CEA’’), the Central Intelligence

Agency (‘‘CIA’’), the Department of Commerce (‘‘DOC’’), the Department of Defense

(‘‘DOD’’), DOE, the Department of Justice (‘‘DOJ’’), the Department of State

(‘‘DOS’’), the National Economic Council (‘‘NEC’’), NRC, the National Security Council (‘‘NSC’’), and the Office of Management and Budget (‘‘OMB’’). All of the essential

decisions made during the privatization process reflected the collective judgment of

these government agencies.

As part of our review of the USEC Board’s decision to approve the public stock

offering as the method of privatizing the corporation, we sought and obtained advice

from federal agencies having expertise relevant to the statutory criteria specified by

Congress in the two privatization statutes. Specifically, we obtained advice in writing from: (1) DOE on the satisfaction of the statutory criteria related to long-term

viability, continued operation of the enrichment facilities, and a reliable and economical domestic source of uranium mining, enrichment and conversion services; (2)

DOC and NRC on the satisfaction of the statutory criterion related to reliable and

economical domestic source of uranium mining, enrichment and conversion services;

and (3) OMB on the satisfaction of the statutory criterion related to securing maximized proceeds to the United States. The consultative process included extensive

discussions with senior representatives from DOE and OMB.

In addition, Treasury asked the CIA, DOD, DOE, DOS, the Federal Bureau of Investigation, NRC, NSC, and OMB to provide any information about the members

of the parties (and their affiliates) that submitted final third-party sale proposals

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that might, in the view of these agencies, have a material effect on the government’s

review of the proposals. None of these agencies informed Treasury of any information on this subject. Finally, the NSC was fully involved throughout the privatization process and chaired a number of meetings on national security-related matters.

The NSC, in consultation with appropriate national security agencies, determined

that the privatization plan was consistent with the national security requirements

of the statutes.

In addition, staffs from Treasury and other agencies undertook an extensive review of the available information, including the following: (1) written materials and

oral presentations provided by USEC’s management on the Corporation, its strategic plans, and the uranium enrichment industry; (2) proposals received from the

parties interested in the acquisition of USEC through a negotiated third-party sale;

(3) written materials from, presentations by, and discussions with USEC’s financial

and legal advisors, including a formal written opinion from its financial advisor; (4)

four meetings of the USEC Board on the method and manner of sale (which included meetings with each of the parties interested in a negotiated third-party sale,

union representatives, and a Congressional representative); (5) discussions with the

leading candidate for a negotiated third-party sale regarding its proposal; (6) ‘‘bringdown’’ discussions and presentations by the financial advisors; and (7) discussions

with the Oil, Chemical, and Atomic Workers Union.

Reasons for Approving the Public Stock Offering

Treasury determined that both the public stock offering and the Carlyle proposal

met the statutory criteria for privatization, but that the offering was the superior

method of addressing the special concerns identified in the privatization legislation.

The primary reasons for our determination were a lower expected level of debt,

higher expected levels of employment, higher expected proceeds, unresolved contract

points with Carlyle, and lower expected market and financing risks.

Debt Levels/Credit Rating—The debt level under the Carlyle proposal would have

been $1.2 billion, as compared with $500 million under the stock offering. In addition, the Carlyle proposal included about $355 million in preferred stock, which

would have been a fixed-rate obligation. The actual credit rating under the public

stock offering proposal was BBB+. This was higher than the expected credit rating

under the Carlyle approach (BBB). The credit rating under the stock offering was

also higher than the minimum level deemed acceptable by the USEC Board (BBB)

for its statutory determinations. Also, as I will discuss later in this testimony, the

credit rating under the stock offering was higher than the credit rating suggested

by NRC as the minimum threshold for transfer of the certificate to the privatized

corporation without further review of USEC’s financial structure (BBB-). The reduced debt level and higher credit rating under the stock offering were key factors

supporting the determination that privatization provided for the long-term viability

of USEC.

Relative Impact on Employment—The Carlyle proposal included large, rapid reductions in employment at the two gaseous diffusion plants within the first two

years of over 1,700 jobs (gross figure). The reduction would have been partially offset by plant reconfiguration and other activities, but the net decrease in employment over two years would have been about 1,400 jobs. In contrast, the public stock

offering proposal included job reductions within the first two years of about 500,

plus normal attrition.

Expected Proceeds—

The mid-point of the expected range of the estimated net proceeds from the public

stock offering was approximately $40 million greater than the estimated net proceeds from the Carlyle proposal. Moreover, the estimated difference between the two

approaches might have been even greater because the Carlyle proposal included the

establishment of an escrow account of $100 million, which would be held aside for

up to six years to indemnify Carlyle against certain contingencies. The escrow proposal created uncertainty as to the ultimate amount of net proceeds that would result from the Carlyle proposal. Carlyle also conditioned its proposal upon the

issuance of a favorable determination from the Internal Revenue Service concerning

the tax treatment of the proposed transaction.

Relative Financing Risks—USEC’s transaction manager advised the government

that, although there would be market exposure for the public stock offering during

the marketing period of three to four weeks, the market risk was low. The Carlyle

proposal, on the other hand, involved certain financing risks, as the commitment letters were subject to material market changes, equity investments by members of the

Carlyle Consortium, due diligence, and other factors.

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MEAURES TAKEN BY THE FEDERAL GOVERNMENT RELATING TO USEC’S CONDUCT

Restrictions During Privatization Process

During the privatization process, Treasury required that USEC take certain actions to protect the integrity of the process. Treasury insisted that the pre-privatization members of the USEC Board not continue with the privatized corporation and

that the transaction manager be precluded from representing USEC for a period of

two years after privatization. Treasury also insisted that only one member of

USEC’s current management serve on the board of directors of the privatized corporation, and not initially as the chairman, and that the privatized corporation’s charter documents not contain ‘‘anti-takeover’’ provisions that might entrench management.

Agreements Governing USEC’s Post-Privatization Conduct

The federal government negotiated a number of contracts with USEC that would

govern the corporation’s conduct after privatization to address special areas of concern reflected in the privatization statutes.

National Security—Since 1993, USEC had served as the United States Government’s Executive Agent under the agreement between the United States and the

Russian Federation concerning the disposition of highly enriched uranium extracted

from nuclear weapons (the ‘‘Russian HEU Agreement’’). In anticipation of the possibility of USEC’s privatization, the President in 1998 established, by executive order,

a federal inter-agency Enrichment Oversight Committee. Among other functions,

this committee coordinates the government’s monitoring of the privatized corporation’s implementation of the Russian HEU Agreement.

Shortly before the privatization, USEC entered into an agreement with DOE

under which USEC agreed that the privatized corporation would supply periodic information reports to DOE to support the functions of the Enrichment Oversight

Committee. The privatized corporation has succeeded to USEC’s rights and responsibilities under the agreement among DOS, DOE, and USEC guiding USEC’s performance as the United States Government’s Executive Agent under the Russian

HEU Agreement. At DOS’s request, Treasury also obtained a written statement

from USEC indicating its intent to limit the amount of natural uranium that it

would sell into the marketplace.

The National Industrial Security Program, which is administered by DOE and

NRC, restricts foreign involvement in entities that require access to classified information. Because enrichment operations require access to classified information, the

privatized successor to USEC must meet the requirements of this program. The program requires annual re-certification that the privatized corporation is free from foreign ownership, control, or influence that may result in the compromise of classified

information. In addition, the privatized corporation has an ongoing responsibility

under the program to report any changes in the nature or extent of foreign ownership, control, or influence.

Nuclear Regulatory Commission Certification—In the USEC Privatization Act,

Congress gave the NRC ongoing authority to review USEC’s compliance with three

of the privatization criteria in connection with periodic NRC certification proceedings. Specifically, NRC must determine that (1) USEC is not subject to foreign

ownership, control, or domination, (2) the certification of USEC would not be inimical to the common defense and security, and (3) the certification of USEC would

not be inimical to the maintenance of a reliable and economical domestic source of

enrichment services. NRC certification also focuses on health, safety, and environmental concerns. Under the statute, USEC or any successor corporation must apply

for certification at least every five years.

To assist in implementing this provision, NRC staff prepared a standard review

plan that described information to be examined and factors that it would consider

in applying the three statutory criteria. For the criterion relating to a reliable and

economical domestic source of enrichment services, the review plan provides that

approval should be automatic if USEC or a successor corporation has an investment

grade credit rating. An investment grade rating is generally considered to mean at

least a BBB-rating. The NRC review plan also provides, however, that an applicant

with a lower credit rating, or no credit rating at all, may receive certification if

other factors support a favorable determination.

Labor and Environment—USEC entered into two agreements with DOE to ameliorate the effect of job reductions resulting from the privatization. USEC agreed

with DOE in the first agreement that the privatized corporation would provide certain worker transition assistance benefits using an agreed-upon amount of USEC’s

pre-privatization funds. Under the second agreement, USEC agreed to pay DOE a

certain amount of USEC’s pre-privatization funds for DOE to assume responsibility

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for a certain amount of depleted uranium produced by the privatized corporation,

and DOE agreed to apply these funds in ways aimed at creating new jobs or giving

hiring preferences to qualified laid-off workers.

With respect to environmental matters, USEC entered into an agreement with

OMB allocating costs between the privatized corporation and the federal government for certain environmental liabilities.

In addition to the agreements concerning post-privatization conduct, the

privatized corporation is subject to the Occupational Safety and Health Review

Commission’s worker health and safety regulations and the Environmental Protection Agency’s environmental regulations.

The Post-Closing Agreement—Treasury also entered into a separate agreement

with USEC a few days before privatization that limited the corporation’s conduct

after privatization. This agreement, entitled the Agreement Regarding Post-Closing

Conduct (the ‘‘Post-Closing Agreement’’), was not explicitly required by the statutes.

Treasury felt, however, that this agreement was the best way to address special

areas of concern identified in the privatization.

The Post-Closing Agreement imposed four main limitations on the corporation’s

conduct after privatization: first, restrictions on executive compensation; second, a

two-year restriction on layoffs; third, a three-year restriction on a sale of all or substantially all of USEC’s assets; and fourth, a restriction on plant closings until January 1, 2005.

On the subject of executive compensation, Treasury obtained USEC’s agreement

that the privatized corporation’s executive officers would not receive any increase in

salary for at least 180 days after the privatization and would not receive any stock

options unless the plans under which they were granted were approved by the new

shareholders. Treasury sought these agreements to protect the integrity of the privatization process.

On the subject of employment, Treasury obtained USEC’s agreement that layoffs

at the gaseous diffusion plants through the privatized corporation’s fiscal year 2000

would not exceed 500, and that they would be conducted in substantially equal parts

in fiscal years 1999 and 2000.

On the subject of asset sales, Treasury obtained USEC’s agreement that the

privatized corporation would not sell all or substantially all of its uranium enrichment assets or operations for a three-year period after the closing of the privatization. This provision in the Post-Closing Agreement was designed to complement a

provision in the 1996 Act, in which Congress restricted any person from acquiring

more than 10% of USEC’s stock during the three-year period after privatization. The

provision in the Post-Closing agreement was also designed to ensure that USEC’s

operations could not be sold off piecemeal by USEC during the period immediately

after privatization.

On the subject of continuous operation of the plants, Treasury obtained USEC’s

agreement that the privatized corporation would continue to operate the gaseous

diffusion plants until January 1, 2005, unless a ‘‘Significant Event’’ (as defined in

the Post-Closing Agreement) occurs that could threaten the corporation’s viability

or the maintenance of a reliable domestic enrichment industry.

TREASURY’S INVOLVEMENT SUBSEQUENT TO PRIVATIZATION

Treasury has vigorously enforced the restrictions contained in the Post-Closing

Agreement. For example, subsequent to privatization, USEC attempted to renegotiate the restriction on layoffs. Treasury, however, refused to allow USEC to deviate

from its obligations under the Post-Closing Agreement.

In addition, earlier this year, Treasury sent a letter to the Chairman of USEC

stating that we had been informed that the Board was about to consider the closure

of a plant. In that letter, we referred USEC to the plant closing restrictions in the

Post-Closing Agreement. We also stated that, as a party to the Post-Closing Agreement, Treasury has an interest in receiving information concerning proposed plant

closings. Accordingly, we said that we would like to review and comment on the

legal justification for any proposed plant closing prior to any meeting of USEC’s

Board of Directors which may consider such a closing.

Further, we requested that USEC notify Treasury immediately if it is considering

a closing based on the occurrence of one or more Significant Events and that USEC

provide the factual basis for concluding that a Significant Event has occurred or is

likely to occur in the near future. We explained that it is important that Treasury

has ample time to evaluate independently the merits of such a plan, so that we may

verify USEC’s adherence to the requirements of the Post-Closing Agreement.

Senior Treasury officials have met with members of Congress and their staffs to

discuss USEC. Treasury has also attended meetings of the Enrichment Oversight

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Committee since privatization. The meetings have focused on energy and national

security issues. As a result, our participation in the meetings has been limited.

There is no statutory basis for ongoing Treasury oversight of USEC—which is now

a private corporation—other than the Post-Closing Agreement. In addition, although

USEC’s operations involve important issues in the areas of national security, labor,

and energy, these topics are outside of Treasury’s area of expertise. Despite our limited role since privatization, however, we are committed to being as responsive as

possible to concerns raised by Congress and others.

CONCLUSION

Mr. Chairman, we went to great lengths to fulfill the statutory direction for privatization in a manner consistent with the special areas of concern identified by

Congress. Decisions at every juncture were the result of a careful, collective determination by the many federal agencies and organizations involved in the process.

In entering into the Post-Closing Agreement, we believe we even went beyond the

express requirements of the privatization statutes.

It’s been almost two years since the privatization occurred. During such a timeframe, markets can change dramatically. Global and domestic economic conditions

can shift considerably. Private sector firms must continually make business decisions in order to compete in a changing market environment.

At the time of the privatization, the appropriate federal agencies made the best

decisions possible given the information we had at our disposal. We believed the decisions were the most judicious ones possible at the time and the most likely means

of achieving the purposes of the statutes.

We believe that Congress provided a clear process for the government agencies

to follow in accomplishing the privatization. The legislation set up a deliberation

process that started with a Senate-confirmed board of directors outside of executive

departments. The legislation also developed a rigorous process through which national security, labor, environmental, and post-closing conduct issues were collectively addressed by appropriate federal agencies. We believe Treasury and the other

federal agencies involved in the process accomplished the objectives of the legislation in the most prudent manner possible at the time.

This concludes my written remarks. I will be happy to answer any questions you

may have.

Mr. WHITFIELD. Okay. Mr. Moniz.

TESTIMONY OF ERNEST J. MONIZ

Mr. MONIZ. Mr. Chairman, thank you for the opportunity to

present the Department of Energy’s views on the issues before us

today.

The Department has three core interests in the performance of

a privatized USEC: Nonproliferation, particularly implementation

of the HEU Agreement with Russia; security of supply, that is, the

capability to secure or produce the enrichment requirements for

meeting nuclear power industry and certain defense needs; and

third, public policy commitments, particularly helping the gaseous

diffusion plant work force and communities through a period of

transition.

The administration and Department have been active in promoting these equities and I will spend a few minutes summarizing

those actions. I will organize the remarks around two time periods

following privatization, the relatively near term say the first 5 to

7 years, and the longer term beyond.

Let me start with the near term. At the time of privatization, a

clear set of assets and responsibilities was transferred to USEC.

These assets and responsibilities included, first, a robust market

share of the domestic and international enrichment markets with

significant long-term contracts in place at favorable SWU prices; a

favorable lease arrangement for the Portsmouth and Paducah

plants; favorable power rates for SWU production, thereby addressVerDate 11-MAY-2000 15:11 Mar 15, 2001 Jkt 010199 PO 00000 Frm 00215 Fmt 6633 Sfmt 6602 E:\HEARINGS\64028 pfrm01 PsN: 64028
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ing the principal cost driver for the gaseous diffusion technology;

transfer of significant uranium inventories with restrictions on

entry into the U.S. market of approximately half of that inventory;

HEU Agreement executive agency with a predictable cost of Russian LEU purchase negotiated by USEC and well below the market

SWU price at the time of privatization; agreed restrictions designed

to assist the work force and communities through the near term,

including a cap on work force reductions and the requirement to

operate both GDPs until January 2005 barring significant defined

financial events; seventh, transfer advanced enrichment technology; and finally, virtually no liabilities from pre-privatization

operations.

The private sector clearly viewed this balanced set of assets and

opportunities and responsibilities favorably at the time of privatization, but the uranium-based markets have certainly proved to be

weaker than was viewed then.

I would like to briefly describe some actions that we have taken

in the last 20 months, but first let me emphasize that USEC has

performed satisfactorily to this point as executive agent for the

HEU Agreement. There has been much discussion over the last

half year over whether the HEU Agreement responsibilities were

an asset or liability for USEC. Perhaps the clearest indication of

the HEU Agreement as a net asset to USEC is that USEC made

the business decision on December 1, 1999, to continue as executive

agent. If USEC had elected not to continue in that role, we were

prepared—we had taken steps to identify alternative and/or additional agents interested in implementing the HEU Agreement from

2002 on.

A critical issue to the success of the HEU Agreement was resolution of the uranium feed issue about a year ago. I will just note

that the administration played an important role in facilitating a

solution to that problem. As part of it, of course, the Congress

helped with appropriations allowing us to purchase 2 years’ worth

of uranium. We also pulled 22,000 metric tons of natural uranium

off the market in the United States and, similarly, Russia is building up a comparable stockpile.

Currently, of course, a key issue is negotiation of the future pricing of the SWU component of the HEU contract between the U.S.

and Russian executive agents for 2002 and beyond. The long-term

market-based solution that we engineered for the feed component

provides something of a template. And indeed the Russian Minister

of Atomic Energy in meetings with the Secretary has explicitly acknowledged the need for a long-term agreement on market terms.

The administration is actively supporting the negotiations and believes that market-based prices can and will be attained.

USEC’s continuing strong order book and substantial cash-flow

will help them sustain domestic enrichment capability for this period. However, a privatized USEC has also announced that further

streamlining is required to maintain market competitiveness. The

Secretary is strongly committed to assisting the GDP work force

and communities through this period and will work closely with the

congressional delegations, the unions, and others that represent

these interests.

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In addition to our work on the HEU Agreement in this context,

several other actions have been taken. The administration has submitted a strong fiscal year 2001 budget request and an fiscal year

2000 supplemental request of $26 million designed to aid workers

in the transition. The Department is consulting with the workers,

the local community, and elected officials to determine the most appropriate means to minimize involuntary separations and the mix

of separation benefits given available funds. The Department has

provided about $14 million in local community assistance for developing employment opportunities. The Department is proceeding

with plans to build and operate the DUF6 conversion facilities and

plans to issue an RFP by October 2000 and award a contract in fiscal year 2001.

And finally, the administration is addressing significant environmental safety and health concerns at Paducah and Portsmouth.

Just yesterday the Secretary, accompanied by key Members of this

body, including Mr. Strickland, announced a major initiative to

compensate workers made ill by exposure to radiation and toxic

substances.

With the administration and congressional cooperation, we feel

we can continue to balance public equities during this transition

period.

But turning to the longer term, a key issue recognized very clearly prior to and at the time of privatization, is that a successor technology to gaseous diffusion—one that is less energy intensive and

available for deployment in this decade—was needed. The June

1999 USEC business decision to discontinue AVLIS has clouded

the path forward, at least temporarily.

USEC is actively addressing the alternatives, both centrifuge and

laser-based technologies. The government has a continuing interest

for both security of supply and workforce reasons. Steps taken include: a study on security of supply now ready for interagency review and requested by the Secretary immediately after the USEC

AVLIS decision; the United States worked with the Australian government to facilitate cooperation on SILEX technology; and USEC

has expressed an interest in evaluating centrifuge technology options and the Department, within appropriate bounds, is cooperating to provide technology access.

There is no doubt that heightened attention must be paid to

long-term domestic enrichment capability in the aftermath of

USEC’s AVLIS decision. At the same time, implementation of a

long-term market-based HEU Agreement will help provide stability

in both the SWU and feed areas and we will continue multipronged support of programs that aid the workforce and communities by addressing health, remediation, and job creation issues.

Privatization of USEC reflects a long-standing bipartisan commitment by successive administrations and Congresses, as does the

commitment to balancing the public interests of nonproliferation,

security of supply, and community responsibility. We hope to continue that bipartisan commitment through the sometimes difficult

period of transition. Thank you.

[The prepared statement of Ernest J. Moniz follows:]

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PREPARED STATEMENT OF HON. ERNEST J. MONIZ, UNDER SECRETARY OF ENERGY

INTRODUCTION

Mr. Chairman, thank you for the opportunity to appear before your committee

today and represent the Department of Energy in these deliberations concerning the

United States Enrichment Corporation (USEC), its privatization and the domestic

uranium industry.

I am Ernest Moniz. I have been Under Secretary at the Department of Energy

since the end of 1997. Prior to that, I was Head of the Department of Physics at

MIT and served as Associate Director for Science in the Office of Science and Technology Policy.

At the Department of Energy my areas of responsibility have been focused principally on the DOE’s science and national security programs. My oversight in the

latter area has included maintaining the nuclear stockpile and addressing nonproliferation challenges, particularly our cooperative programs to secure nuclear materials in Russia and to dispose of excess plutonium. As a result of the Department’s

work on a broad front with the Ministry of Atomic Energy of Russia, I have also

been directly engaged in working to implement the US-Russian HEU Purchase

Agreement. My work on integrating the DOE’s R&D programs has included the

issue of nuclear energy R&D for the future.

I will organize my brief remarks on USEC and the domestic uranium industry

around several national level goals that reflect a Department of Energy perspective:

• First, nonproliferation: carrying out and sustaining the 1993 US-Russian HEU

Purchase Agreement under which 500 metric tons of highly enriched uranium

(HEU) are extracted from nuclear weapons in Russia and blended down, never

to be used in weapons again.

• Second, energy policy: ensuring an adequate capability for securing or producing

the enrichment and nuclear industry requirements of the United States.

• Third, defense needs: ensuring that we can meet defense needs that require domestic enriched uranium.

• Fourth, public policy commitments: supporting the equities embodied in the

‘‘Treasury Agreement’’ to our workers at the gaseous diffusion plants (GDPs).

These are not the only priority issues. But any path forward should address them.

The Energy Policy Act of 1992 created USEC to privatize the enrichment operations. The USEC Privatization Act of 1996 clarified many details of privatization

and explicitly provided for the 1993 US-Russian HEU Purchase Agreement (‘‘HEU

Agreement’’) to supply uranium markets of the United States. Pursuant to such legislation, the President subsequently approved a privatization plan in 1997, and after

conclusion of many complex agreements defining the terms of privatization, USEC

became a private corporation in July 1998. Each step reflected a longstanding bipartisan commitment to privatization by successive Administrations and Congresses.

The government’s interests and role of USEC in various public policy issues and the

uranium market are touched on below.

1. Nonproliferation and National Security

First, on national security, I will discuss the HEU Agreement, USEC’s role in its

implementation, and various challenges faced and overcome.

The end of the Cold War and collapse of the Soviet Union inevitably affected the

world nuclear supply industry and uranium markets. Excess weapons material was

destined to be sold into the world market. Such material contains much enrichment

value (measured in separative work units, or SWUs) and uranium. The HEU Agreement provides an incentive for Russia to take material from nuclear warheads and

blend them into low enriched uranium (LEU), instead of simply enriching more in

their centrifuges and selling it on the world market, perhaps in a manner that lowers prices in the world market, as happened before the HEU Agreement.

The magnitude of the challenge in reversing the Cold War buildup of nuclear materials involves expenditures on the multi-billion-dollar scale. This inevitably leads

to an intersection of governmental interests and the private sector, where the market for uranium based fuel involves revenues on the scale of billions of dollars. The

HEU Agreement provides Russia incentives for continued dismantlement of weapons, and revenues that support Russia during a time of transition.

The HEU Agreement serves US national security interests, and is in Russia’s interest as well. It is designed to take 500 metric tons of HEU (equivalent to about

20,000 weapons) from Russian weapons and blend it down for use and sale as commercial reactor fuel over twenty years. To date, the material derived from over 80

metric tons of HEU has been purchased and sold, ridding the equivalent of more

than 3,000 nuclear weapons. The HEU Agreement is a government to government

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agreement that defines a framework that is implemented through commercial

means. USEC is the current US executive agent, having signed an implementing contract

with Russia’s executive agent in 1994, and begun payments to Russia in 1995 for

deliveries that have continued yearly since then. USEC has performed satisfactorily

under an agreement that defines USEC’s role as executive agent. The US can replace or add an additional agent, just as USEC can give notice that it no longer

desires to serve as such.

It should be noted that there are essentially two tracks in implementing the HEU

Agreement, as it has evolved. First, the portion USEC pays Russia for the SWUs,

which is about two thirds of the value of what Russia physically delivers to USEC.

USEC uses the Russian delivery to provide enriched uranium to its utility customers. Second, Russia, for every delivery to USEC, is by US law awarded title to

an amount of natural uranium that is contained in the enriched uranium purchased

by USEC. Russia then seeks to realize the remaining value of the HEU Agreement

through natural uranium sales, in the US under the schedule limits set out in the

Privatization Act of 1996, or internationally.

The natural uranium track (or ‘‘feed component’’, as it is sometimes called) complicated implementation of the entire HEU Agreement on several occasions starting

in early1997. Russia’s export guidelines in the past stopped deliveries to USEC, because of the lack of payment and a path forward on payment for its natural uranium. An agreement signed by Secretary of Energy Richardson with his Russian

counterpart early last year solved this problem. This ‘‘HEU Feed Transfer Agreement’’ (‘‘Transfer Agreement’’) used $325 million appropriated by the Congress for

DOE to purchase the 11,000 metric tons of unsold Russian natural uranium that

had accumulated in the United States, added it to an existing 11,000 metric ton

DOE stockpile, provided for holding this total off the market for 10 years, and defined a long term commercial path forward for the feed component for the duration

of the HEU Agreement.

The DOE through the Transfer Agreement, and in the interest of the market,

thus pulled 22,000 metric tons (nearly 60 million pounds) of natural uranium off the

market for a decade, uranium that was otherwise slated to be sold over this period

and the future proceeds for which will go to the Treasury. In addition, what Russia

does not sell to a western consortium of companies pursuant to the annual quotas

in the 1996 US law, will be returned to a Russian stockpile where, until it reaches

a 22,000 metric ton amount, can only be sold into long term contracts with the consortium, or used to blend down more HEU from Russian weapons. To date, because

of the current market, most of the Russian feed is slated for transport back to Russia’s stockpile, and thus will not soon come into the US market.

More recently, issues have arisen in implementing the HEU Agreement that directly involve USEC. One involves the question whether the SWU portion of the

HEU Agreement is a liability or an asset to USEC, and if so, what the government

should do. Another is the pricing of SWU from Russia for the balance of the HEU

Agreement.

Public statements by USEC prior to privatization suggested that USEC viewed

the Russian supply of SWU as a strategic asset, particularly after USEC negotiated

a pricing mechanism with Russia that went into effect in 1997 and extends through

2001 deliveries. Indeed, this pricing mechanism reflected a discount off the spot

market price at the time of the signing of the contract amendment, escalated by an

agreed inflation metric. The low enriched uranium (LEU) supplied by Russia under

the HEU Agreement and its pricing was therefore part of a known mosaic of assets

(e.g., favorable electricity rates for SWU production, sales contracts, transfers of

uranium inventories, Russian LEU at a price negotiated by USEC) and responsibilities that transferred to the privatized USEC. The US government did not rule out

in the latter part of 1999 examining what, if anything, might be appropriate under

changed conditions, particularly in the full context of other public equities to be discussed below. But based on our assessments, we are not persuaded that the HEU

Agreement was a net liability, compared to USEC’s ability to produce and replace

the enrichment services from Russia.

In certain respects, the issue was put to the test on December 1, 1999. USEC

made a business decision to continue as executive agent with certain legal obligations to perform through 2001. The US also took steps to identify other alternative

or additional agents interested in implementing the HEU Agreement.

The US endorses USEC’s efforts to reach agreement on commercial terms with

Russia’s executive agent on a pricing mechanism for SWU to succeed the current

mechanism that applies through 2001. Indeed, Russia acknowledges a continuing

need for market based contracts, as in the agreement on HEU feed. Both the Russian and US governments are monitoring these discussions, mindful of the interests

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of their agents, as well as broader equities. A stable commercial mechanism for the

SWU that complements the long-term commercial agreement for the feed component

is desirable.

2. Security of Supply and Enrichment

Second, I will discuss the impact of the HEU Agreement on the US, and related

issues on security of supply and enrichment of uranium for the United States, as

they have evolved since 1998.

The uranium imported into the US as a result of the HEU Agreement affects the

US market (as would the absence of such an agreement). This is more evident now

that the HEU Agreement has proceeded from an initial annual purchase of 6 metric

tons in 1995 to an annual 30 metric ton annual amount in 1999 and for the duration of the agreement to 2013. In addition, various nuclear plant closures over this

period have also impacted world demand. An annual report provided to the Congress reflects the impacts of implementing the HEU Agreement, in conjunction with

other developments.

The HEU Agreement is slated to provide from 1999 onward 5.5 million SWU per

year which represents somewhat less than half of USEC sales in recent years when

combined with their production at the gaseous diffusion plants in Ohio and Kentucky. DOE leases these plants to USEC. USEC may not close one of these plants

until January 2005 because of its obligation to continue operating the plants until

that time, absent a significant financial event.

The US government, therefore, for reasons of national security and energy policy

needs to ensure that the balance of interests is maintained in regard to security of

supply in the coming years. There are several noteworthy points in this regard:

• One, the HEU Agreement has over time become an important source of supply

for enrichment for the U.S. nuclear industry. Given the availability of nuclear

material for such purposes, the benefits of this commerce outweigh, in general

terms, the risks on the supply side.

• Two, USEC’s decision in June 1999 to discontinue the Atomic Vapor Laser Isotope

Separation (AVLIS) enrichment technology clouds the path forward for a replacement technology for the GDPs, particularly one that is less energy intensive and available in the desired time frame. Secretary Richardson asked for a

study of the consequences of this decision for US energy security immediately

after USEC’s decision. The Department has completed this study and, at the

direction of the Enrichment Oversight Committee, it is ready for review by

other agencies. USEC, meanwhile, is reviewing other possible enrichment technologies, such as centrifuges and laser-based approaches. The Department is, as

appropriate, aiding USEC’s evaluation of certain enrichment technologies.

• Three, the evaluation of USEC’s credit rating this year has raised concerns about

USEC plans for the GDP’s over the next several years as they evaluate long

term replacement technologies.

Until last year, on the basis of the combination of factors such as favorable power

contracts through 2005, low costs of leasing the GDPs from the Department, and

ongoing R&D on AVLIS, a path forward on future domestic enrichment capability

was clearer. In the aftermath of USEC’s decision in 1999 on AVLIS, however, the

Secretary immediately focused on what the long-term implications would be. USEC

is pursuing its R&D on the SILEX enrichment technology, and the US worked with

the Government of Australia to enable this cooperation funded by USEC to proceed.

Meanwhile, more recently, USEC has expressed interest in evaluating centrifuge

technology options, and the Department has cooperated to that end, within appropriate bounds. The study on security of supply initiated last year by the Secretary

is part of the heightened attention that must be paid to long-term domestic enrichment capability following the USEC cancellation of AVLIS development.

3. Defense Needs

Third, I will note briefly specialized but important defense needs that pertain to

domestic enrichment capacity and uranium inventory management, as well as some

potentially beneficial market consequences that may result.

In late 1998, the US decided to produce its future tritium needed for the stockpile

in Tennessee Valley Authority (TVA) light water reactors. To comply with various

nonproliferation commitments it is important to ensure that the uranium and enrichment are of US origin in the reactors producing tritium. The TVA and USEC

last year signed an enrichment services contract that some uranium analysts believe

may cover some 15-20 million pounds of natural uranium for the 10-year contract.

Thus, USEC planning for the TVA contract may address some concerns over the disposition of its uranium inventory in the market.

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In addition, the Department monitors the long-term enriched uranium needs of

its naval reactors program.

4. Public Policy Commitments

Fourth, I want to return to public policy commitments to workers at the GDPs

that I noted above in a different context of security of supply. Secretary Richardson

feels very strongly about these issues.

I noted earlier the Treasury Agreement that USEC signed shortly before privatization. The working premise of the agreement is that both enrichment plants,

leased by DOE, to USEC would be kept open through 2004 and work force reductions were capped until June 2000. For the Secretary’s part, any prospect of federal

support that had not been contemplated prior to privatization certainly should not

be considered now if it did not reinforce previous commitments made to the federal

government and to GDP workers. Indeed, any other approach would put the government in the position of appearing to benefit private sector parties while ignoring or

harming existing federal commitments.

I know you are aware of recent reports regarding significant environmental,

health and safety concerns at the gaseous diffusion plants. As part of our response

to these developments, the Department has developed initiatives for additional

funding in fiscal year 2001 to accelerate cleanup and protect health and safety at

the GDPs in Ohio and Kentucky. Such initiatives include remedial actions to dispose of low-level waste and clean up old landfills, oversight investigation of past and

current practices, reviewing uranium flows to assess potential worker exposures, establishing worker radiation exposure profiles, and expanding medical surveillance

for current and former workers.

The Administration has a proposed an initiative to compensate workers made ill

by exposure to radiation and toxic substances while working to build America’s nuclear defense. The levels of compensation for federal and contractor workers at the

three GDPs in Kentucky, Ohio and Tennessee formerly run by DOE, are similar to

those established in the initial compensation legislation proposal submitted to Congress in November 1999.

The Administration has also submitted a $26 million fiscal year 2000 Supplemental Budget Request to the Congress to address additional concerns, including

$10 million for Environmental, Safety and Health activities (health studies, oversight), and $16 million for environmental restoration. The Department urges the

Congress to act on these requests as soon as possible.

USEC earlier this year announced some 850 layoffs at the GDPs to occur this

summer that were long anticipated. The FY 2001 budget and the supplemental request for the Environmental Management program support the Secretary’s efforts

to aid workers in the transition.

The Department is consulting with workers, the local community, and elected officials to determine the most appropriate means to minimize involuntary separations

and the mix of separation benefits for workers who do not transition that can be

supported with available funds. The Department has provided $13.8 million in assistance to local communities for activities that can provide employment opportunities for displaced workers and additional community assistance requests are currently under review.

In addition, the Department is proceeding with plans for a project to build and

operate conversion facilities to chemically convert depleted uranium hexafloride inventories into a form better suited to both storage and ultimate disposition. This has

been paced principally by characterization of contamination in the depleted uranium

inventory, sampling analysis of which should enable an RFP to be issued by October

of this year, award of contract in fiscal year 2001, and the initiation of design.

Concluding Remarks

I have set out some of the basic governmental interests from DOE’s perspective

in:

• Performance on the HEU Agreement;

• Monitoring security of supply of enrichment, relative to private sector plans, market availability and national reserves;

• Meeting defense needs; and

• Fulfilling public policy equities to GDP workers.

I have noted, where appropriate, USEC’s role, or uranium market impacts of the

HEU Agreement or governmental actions.

In closing, I note that the end of the Cold War has posed novel challenges and

opportunities.

The impetus to create USEC came out of the 1980s and was to privatize enrichment in a bipolar world. It would have been hard to imagine in the mid-1980s durVerDate 11-MAY-2000 15:11 Mar 15, 2001 Jkt 010199 PO 00000 Frm 00221 Fmt 6633 Sfmt 6621 E:\HEARINGS\64028 pfrm01 PsN: 64028
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ing a build up of nuclear weapons that, little more than a decade latter, concerns

would be raised about the rate at which material from dismantled Russian nuclear

weapons comes into the US, or that questions would arise about sustaining US enrichment capability or what future options are best.

In the post Cold War context, it has always been understood that a private executive agent implementing the HEU Agreement with Russia could experience tensions

between its commercial interests and the government’s immediate preferences. This

is a perpetual tension to be managed. In the end, the government will have its interests served, or take corrective steps. However, the complex intersection of governmental and private interests is a fact of life driven by the large scale of resources

needed to reverse Cold War buildups (HEU, plutonium, weapons complex). Much

has been accomplished, and given the scale of the problems created over many

years, much remains to be done.

We need the support of the Congress on all these issues and look forward to working with you. I would be pleased to respond to any questions you may have. Thank

you.

Mr. WHITFIELD. Thank you.

Mr. Paperiello.

TESTIMONY OF CARL J. PAPERIELLO

Mr. PAPERIELLO. Mr. Chairman, it is my pleasure to appear before you today to discuss the U.S. NRC’s financial review of the

USEC. Under the USEC Privatization Act of 1996, the NRC is required to determine if the issuance of a certificate of compliance

would be inimicable to the maintenance of a reliable and economic

domestic source of enrichment services. In February of this year

the NRC initiated a review of USEC’s financial condition because

NRC’s basis for its previous determination had changed, when on

February 4, Standard & Poors downgraded USEC’s corporate credit

rating to below investment grade.

I’d like to clarify something that I heard today. The NRC used

the corporate credit rating for the initial public offering path. And

we had developed a standard review plan to deal with either path,

a sale of the company or an IPO. The decision to use the credit rating was based upon extensive conversations with both financial

managers in the private sector as well as Federal agencies, including the U.S. Treasury and the Securities and Exchange Commission.

When the NRC recertified USEC’s operation of the gaseous diffusion plants in January 1999, USEC had investment grade credit

ratings from both Moody’s investors service and Standard & Poors.

On February 3 of this year, USEC announced lower financial projections for fiscal 2001, a plan to lay off 850 employees, a dividend

rate cut to half its previous value, and a program to repurchase

stock. On the next day, Standard & Poors reacted to this announcement by downgrading USEC’s credit rating from BBB to BB+, a

below investment grade rating. And on February 23, Moody’s downgraded USEC from Baa1 to Ba1, also below investment grade rating.

As I note, recertification was based in part on USEC’s investment credit ratings. Consequently, we have reopened the financial

review of USEC to evaluate changed conditions. And this review of

the financial status is consistent with typical agency practice whenever the basis for issuing a license, in this case a certificate for operating the gaseous diffusion plants—when that changes we will

then turn around and reinvestigate the basis for our licensing decision.

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We are evaluating the projected financial condition of USEC anticipated for the next 5-year period consistent with the guidance

that we have published in our standard review plan for recertification of the gaseous diffusion plants. I should point out that when

we wrote the initial standard review plan for the initial certification, it was a public document. We shared it with everybody. The

uranium—the Enrichment Oversight Committee saw it, so it was

not something that we did in a vacuum.

And, of course, since they have dropped below investment grade,

additional analysis will have to be done. We will be using consultants. We don’t have that many people on our own staff who are

qualified to look into business plans, projected financial statements, and other financial information. We plan on providing our

analysis and recommendation to the Commission in early summer

of this year. And any Commission recommendations, as appropriate, would be forwarded to Congress and the Enrichment Oversight Committee.

I also have to note that the NRC staff’s major efforts at the gaseous diffusion plants remain the protection of the workers’ and

public’s health and safety, protection of the environment, and the

assurance of the common defense and security of the United States.

In conclusion, we have reopened our financial evaluation of

USEC following the recent corporate credit rating downgrades from

Moody’s and Standard & Poors, and based on a staff evaluation the

Commission will forward any appropriate recommendations to Congress and the Enrichment Oversight Committee for use in making

future decisions regarding domestic enrichment service.

This is concludes my oral statement.

[The prepared statement of Carl J. Paperiello follows:]

PREPARED STATEMENT CARL J. PAPERIELLO, DEPUTY EXECUTIVE DIRECTOR FOR MATERIALS, RESEARCH, AND STATE PROGRAMS, U.S. NUCLEAR REGULATORY COMMISSION

Mr. Chairman and Members of the Subcommittee: It is a pleasure to appear before you today to discuss the U.S. Nuclear Regulatory Commission’s (NRC’s) financial review of the U.S. Enrichment Corporation (USEC) and the status of several

important regulatory activities. Under the USEC Privatization Act of 1996 (P.L.

104-134), the NRC is required to determine if the issuance of a certificate would be

inimical to the maintenance of a reliable and economical domestic source of enrichment services. In February of this year, NRC initiated a review of USEC’s financial

condition because NRC’s basis for its previous determination had changed when, on

February 4, 2000, Standard & Poor’s (S&P) downgraded USEC’s corporate credit

rating to below investment grade.

When NRC recertified USEC’s operation of the gaseous diffusion plants in January 1999, USEC had investment-grade credit ratings from both Moody’s Investors

Service (Moody’s) and S&P. On February 3, 2000, USEC announced lower financial

projections for fiscal year 2001, a plan to lay off 850 employees, a dividend rate cut

to half of its previous value, and a program to repurchase stock. On February 4,

2000, S&P reacted to this announcement by downgrading USEC’s credit rating from

BBB to BB+, a speculative rating. On February 23, 2000, Moody’s downgraded

USEC from Baa1 to Ba1, also a speculative-grade rating.

NRC’s recertification of USEC in early 1999, in part, was based on USEC’s investment-grade credit ratings. Consequently, NRC re-opened the financial review of

USEC to evaluate the changed conditions in light of the changes that occurred in

the financial market in February. Reviewing the financial status is consistent with

typical agency practice if the basis for authorizing an activity, such as operating the

gaseous diffusion plants, changes anytime after the authorization. We believe this

is consistent with the authority Congress provided to the NRC in the USEC Privatization Act of 1996.

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NRC staff is evaluating the projected financial condition of USEC anticipated for

the next five-year period consistent with the NRC guidance developed specifically

for USEC. This review examines business plans, projected financial statements, and

other information applicable to the critical issues affecting USEC. On February 25,

2000, NRC requested USEC to provide the information to support this review by

the end of March. Last month, USEC requested some additional time to assemble

and submit the information.

To guide such certification reviews required in 10 CFR Part 76, NRC staff developed a ‘‘Standard Review Plan for Recertification of the Gaseous Diffusion Plants,’’ NUREG-1671 (SRP), last updated in February 1999. The section of the SRP describing the financial review was approved by the Commission in November 1997 to include the privatization effort. Chapter 16 of the SRP describes the procedures and

criteria for conducting these reviews to implement the requirement in 10 CFR

76.22(b)(2), which states ‘‘A certificate of compliance may not be issued to [USEC]

if the Commission determines that...the issuance of such a certificate of compliance

would be inimical to...the maintenance of a reliable and economical domestic

source of enrichment services.’’ The NRC established this requirement to implement

section 193(f) of the Atomic Energy Act, et. seq. (42 USC 2243). The SRP includes

an examination of the credit strength and financial condition based on credit ratings

from rating services such as Moody’s and S&P. During the transfer of the certificate

to the privatized corporation in July 1998, consistent with the SRP, NRC determined that USEC had a financial structure that included an investment-grade rating from Moody’s or S&P and, therefore, met the long-term economic viability requirements. Under the SRP, a speculative rating could also be acceptable, but additional criteria and an analysis would be required.

NRC staff plans to provide its analysis and recommendations to the Commission

in early Summer 2000. Any Commission recommendations, as appropriate, would be

forwarded to Congress and the Enrichment Oversight Committee, a group of representatives from several Executive Branch agencies including the Departments of

Treasury, Commerce, Energy, and Defense, the Office of Management and Budget,

and the National Security Council. Any recommendations could then be used by

Congress and the Executive Branch to determine the need for any future government actions.

The NRC staff is also working on several other important regulatory activities associated with the gaseous diffusion plants, including the Paducah seismic modification project, the Paducah enrichment upgrade project, a review of USEC’s safety

program, and continued oversight to ensure that layoffs at Paducah and Portsmouth

do not adversely impact safety and safeguards at either plant. DOE identified in

1995 the vulnerability to earthquakes of two of the process buildings at Paducah.

NRC incorporated requirements to strengthen building structures in the Compliance

Plan when the plant was certified in 1997. The Compliance Plan is an NRC-approved plan requiring USEC to achieve compliance with regulatory standards on a

set schedule. Since that time there have been several program delays in the seismic

upgrades due to the identification of several unreviewed safety questions, unexpected construction difficulties, and characterization by the DOE of its Material

Storage Areas, where some of the seismic construction work is taking place. DOE

and USEC reached agreement on an approach in early February 2000, which allows

characterization of the DMSAs by July 2000 and completion of the seismic upgrades

by September 2000. Since that time, USEC has continued to make progress on both

programs.

In 1999, USEC announced its intent to increase the enrichment level of uranium

processed at Paducah. The Paducah Higher Assay Upgrade Project would increase

the maximum product enrichment from 2.75 weight percent to 5.0 weight percent

uranium-235 (U-235). Because 5 weight percent enriched uranium cannot be used

for military applications, there are no national security issues from this upgrade.

The increase in enrichments must be authorized by USEC requesting and NRC

amending the certificate for Paducah. NRC approval of the enrichment amendment

request depends on a number of factors, including the technical adequacy of several

licensing submittals that USEC plans to submit between now and September. The

NRC expects to review the submittals during the remainder of this year and into

early 2001.

The third significant regulatory activity for both Paducah and Portsmouth involves confirmation of the adequacy of the safety programs to protect workers, the

public, and the environment. In response to public and Congressional concerns

about worker protection and historical exposures as a result of processing and handling reprocessed reactor fuel material from the 1950s to the mid-1970s at Paducah

and Portsmouth the NRC conducted special confirmatory inspections in September

and October of 1999 of USEC’s radiation safety programs. Following the inspections,

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the NRC held public exit meetings near the Paducah and Portsmouth sites. NRC’s

inspections concluded that USEC’s radiation protection programs at both sites were

adequate and met NRC requirements. The inspections also confirmed that the environmental releases of radioactive materials from USEC’s operations were well within NRC limits and that the environmental monitoring programs were adequate.

However, the inspections identified that some of the workers were not aware of certain radiological hazards or radiation protection requirements and that the radiation protection training did not include site-specific information regarding radiological hazards from transuranic radionuclides. In addition, at Paducah, the NRC

concluded that certain unsupported assumptions were being made in calculating internal doses because they did not adequately include a contribution from some

transuranic radionuclides. Although the inspection confirmed that the sites’ airborne

radioactivity levels and, thus, worker and public risks were low, the NRC concluded

that USEC’s assumption that there was no contribution from some transuranic

radionuclides was not supported by recent measurements. Since the inspections,

USEC has taken actions to strengthen its radiation protection programs. The NRC

staff continues to review USEC’s corrective actions as part of its ongoing inspections.

NRC has also been conducting similar licensing reviews to confirm the adequacy

of each site’s nuclear criticality safety program to protect against the risk of a nuclear criticality accident. USEC is required by regulation to demonstrate the adequacy of its nuclear criticality safety program in preventing a criticality accident in

plant areas where it judges that there is a potential for criticality accidents. The

staff has several review actions under way in an attempt to confirm the adequacy

of each criticality program and to require USEC to correct or mitigate any significant deficiencies.

The final activity that I would like to discuss briefly is NRC’s continuing review

of USEC’s performance in the transition phase leading up to and following any layoffs. There are regulatory requirements for minimum staffing levels and overtime

usage, and reduced staffing can affect critical functions such as plant operations and

maintenance. There are two resident inspectors at each gaseous diffusion plant, who

regularly observe daily plant operations and interface with the plant staff. The resident inspections are supplemented with specialist inspections in such areas as radiation protection, fire protection, nuclear criticality safety, chemical process safety,

and material control and accounting. To ensure that continued staffing changes do

not detract from the protection of public health and safety and safeguards at the

plants, NRC staff has increased its regulatory oversight during the transition phase.

In addition, NRC will conduct increased safety and safeguards inspections, conduct

meetings with USEC management, the public, and other stakeholders on the transition activities, and monitor performance trends such as backlogs, operational events,

overtime usage, and compliance with regulatory commitments.

In conclusion, we have re-opened our financial evaluation of USEC following the

recent corporate credit rating downgrades from Moody’s and S&P. Based on the

staff evaluation, the Commission will forward any appropriate recommendations to

Congress and the Enrichment Oversight Committee for use in making future decisions regarding domestic enrichment services. The NRC staff is also continuing to

monitor closely USEC’s performance at the plants to ensure protection of public

health and safety and safeguards.

Thank you, Mr. Chairman. I would be pleased to answer any questions that you

and Members of the Subcommittee may have.

Mr. WHITFIELD. Mr. Paperiello thank you very much and thank

all of you for your testimony.

Mr. Paperiello, let me ask you a couple of questions. Since USEC

has been privatized, how many times has the NRC fined USEC for

unsafe operations?

Mr. PAPERIELLO. In the past year, year and a half, I’m aware of

two occasions. There might have been some earlier. I just don’t

have the number—I could find it out, but I just don’t know.

Mr. WHITFIELD. Were there civil fines associated with that?

Mr. PAPERIELLO. Yes, in the past year, maybe 15 months, we

have issued a fine to Portsmouth as a consequence of a fire that

occurred in December 1998. And we recently issued a fine to Paducah for employment discrimination.

222

Mr. WHITFIELD. And do you know about what the dollar figure

was?

Mr. PAPERIELLO. The second one was, I believe, $88,000. I think

the one at Portsmouth was $50,000 in that range, but I know I’m

under oath. It is in that order.

Mr. WHITFIELD. The NRC is now considering an application of

USEC to enrich uranium up to 5 percent or 5.5 percent at the Paducah plant. And allegations have been made by certain employees

there, as well as others, that in the criticality safety area that NRC

is applying a different standard in this evaluation than they have

in the past. What is your comment about that?

Mr. PAPERIELLO. Yes, they have a program to upgrade the enrichment percentage at Paducah. It is a program—as explained to

us, will require them to submit, I think, as many as five license

or certificate amendments.

The first amendment came in, I think, at the end of last year and

somewhere in the February timeframe. We rejected that application. It was an application to change the limit on enrichment at

certain portions of the plant. We rejected it because they did not

provide an adequate technical basis. As you’re aware, criticality is

potentially a very serious problem at any fuel facility. We all know

what happened in Japan last year. And there was not an adequate

technical basis—that was the basis of our rejection. It had nothing

to do with change in policy, at least from our viewpoint, but it was

an increase in the enrichment over what the facility—at those stations that had been originally designed for without an adequate

technical basis.

Mr. WHITFIELD. And when do you expect a decision would be

made upon this application?

Mr. PAPERIELLO. We don’t have applications in front of us. They

laid out a timeframe to us for when they would be submitting information. You made reference to a letter that we sent them. I

don’t know if it is the letter I read, but the letter I read, we basically said we are not going to be able to do this by the end of this

calendar year if some of the information you’re going to submit to

us isn’t going to come in until November. That was the point.

Mr. WHITFIELD. Okay. And so you don’t have all the information

at this point.

Mr. PAPERIELLO. We do not have all the information. What we

were replying to was the timeframe that they were laying out to

us.

Mr. WHITFIELD. Mr. Moniz, at privatization, a large sum of uranium was transferred to USEC as a part of that privatization

agreement. Did you have any concern that their selling it on the

open market would possibly drive down the price of uranium?

Mr. MONIZ. First, I should note there was a large transfer of uranium consistent with the EPACT requirements and then a second

transfer——

Mr. WHITFIELD. Was the first transfer 30 million pounds?

Mr. MONIZ. No, that was approximately 120 million pounds, I believe. However, of that only 23 million pounds was DOE-owned

uranium.

Mr. WHITFIELD. And what was the second one?

223

Mr. MONIZ. I could get that for you later on. Quite a bit of the

first transfer, more than 90 million pounds was actually owned by

utilities. The second part—thank you, here it is. The total EPACT

transfers were about 140 million pounds, and the Privatization Act

transfers 31 million pounds.

Also I will note that we have taken, as I mentioned in my oral

statement, we have actually taken 58 million pounds of DOE uranium off the market for 10 years which compensates for part of

that. In the transfer, more than half of the uranium had restrictions on its entry into the market. We—the Secretary wrote to the

corporation, in fact, late last year, asking questions about this, and

the corporation has responded in terms of their plans to market at

the rate of 10 percent of worldwide market demand.

Mr. WHITFIELD. Mr. Mark Stout of the Uranium Producers of

America will be testifying later today and in his testimony he says

that USEC’s selling of this uranium on the market is decimating

their industry. Do you have any reaction to that?

Mr. MONIZ. Well, it’s clear the market is soft, prices have fallen

substantially. I think the USEC sales certainly contribute to it, although we believe they are not the only element. There have been

significant liquidations of supplies, for example, by various groups.

Mr. WHITFIELD. I have one more question and then we will proceed.

Mr. Gensler, Mr. Stiglitz was chairman of the President’s Council

of Economic Advisors and was serving in that capacity when discussions were being considered in the administration about whether or not USEC should be privatized. And he was very strong in

his view that it should not be privatized, and he enumerated certain reasons that have come to pass. In your involvement with the

discussions on the decision to privatize or not privatize, were there

other people in the administration that were as opposed to it as

Mr. Stiglitz, from your recollection?

Mr. GENSLER. Just for the record, I actually joined the administration after, I think, Mr. Stiglitz went on to his important duties

at the World Bank, so I don’t know in a comparative sense. But I

am aware of his points of view and that as we move forward, we

looked at this in a thorough way with regard to the statutory criteria. And having had that debate before the President—before the

1997 opinion to move forward, which actually was before I joined

the administration.

Mr. WHITFIELD. Mr. Stupak.

Mr. STUPAK. Thank you, Mr. Chairman. Mr. Moniz, I thought

you just said in your testimony that dumping on the market was

not driving down the price of the U.S. SWUs; correct?

Mr. MONIZ. The discussion we just had of natural uranium? And

I said certainly sales in fact by anyone, and certainly by USEC,

added to the current market condition. What I added was that

there were other sources as well of uranium that lowered the market price.

Mr. STUPAK. Okay. There was a document that was just handed

in front of you and it is part of the record. Right there by your

name plate there. If you could take a look at it. It goes—it states:

As a result, USEC has been selling natural uranium stocks reVerDate 11-MAY-2000 15:11 Mar 15, 2001 Jkt 010199 PO 00000 Frm 00227 Fmt 6633 Sfmt 6602 E:\HEARINGS\64028 pfrm01 PsN: 64028
224

ceived through privatization and conversion services to raise cash

to sustain itself.

This is about the third paragraph, last line.

Natural uranium prices have as a result fallen to new lows despite the March 1999 U.S.-Russian Transfer Agreement intended to

shore up the natural uranium tract of the HEU Agreement.

Is that an accurate statement?

Mr. MONIZ. Yes, again I would just add it is not the only driver

of the prices.

Mr. STUPAK. Let’s read on here a little bit. It says the Russians

feel like they don’t have to reduce their returns to benefit USEC

stockholders, so it wouldn’t give USEC a lower price on SWUs this

year. Is that also correct?

Mr. MONIZ. I cannot confirm the Russian attitude. This was an

analysis done.

Mr. STUPAK. That’s what it says in the next paragraph there;

right?

Mr. MONIZ. Yes, but this was one person’s analysis.

Mr. STUPAK. DOE analysis.

Mr. MONIZ. Correct. All I’m saying is I don’t know if it correctly

reflects the Russian view.

Mr. STUPAK. Or DOE is not correct?

Mr. MONIZ. It could be. This is an analysis.

Mr. STUPAK. Okay. Let’s get down to the bottom line of USEC’s

bailout proposal as DOE saw it. The USEC wanted $200 million or

USEC would withdraw as the executive agent under the HEU

plant and—quoting now—in addition, USEC might choose to close

the Portsmouth, Ohio, plant in the near term. This would save the

company approximately $113 million per year, but would cause unemployment for 1,500 people that were provided some assurances

or reassurance in a 1998 Treasury agreement that they would be

employed through 2004. So either USEC gets $200 million, or 1,500 people are out of

work and the government has no executive agent. That basically

was the proposal and that’s the way it was analyzed there; right?

Mr. MONIZ. That was one analysis presented. You are certainly

correct that at that time, people—— Mr. STUPAK. That is one analysis by DOE; right?

Mr. MONIZ. Correct.

Mr. STUPAK. That sounds a bit like blackmail, doesn’t it? Either

you give us $200 million or we close down this plant and 1,500 people are unemployed.

Mr. MONIZ. USEC made an argument in terms of statements

about spot market prices versus HEU Agreement prices and from

that calculated $200 million.

Mr. STUPAK. Or 1,500 people are laid off.

Mr. MONIZ. Sir, I am certainly not aware—I am personally not

aware of that statement ever having been made.

Mr. STUPAK. But you cannot close a plant before 2005 unless

there is a significant event; right? Is that the agreement?

Mr. MONIZ. Correct. That is part of the Treasury agreement; yes,

sir.

Mr. STUPAK. And now we get this proposal or analysis that was

made—and I guess it was made at the White House—dated NoVerDate 11-MAY-2000 15:11 Mar 15, 2001 Jkt 010199 PO 00000 Frm 00228 Fmt 6633 Sfmt 6602 E:\HEARINGS\64028 pfrm01 PsN: 64028
225

vember 12, 1999, stating that the bailout would protect, ‘‘continued

plant operations that otherwise would be in jeopardy in Ohio and

Kentucky.’’ What would be a significant event which would lead to

the closure if you have assurance it is going to be open until 2005?

Mr. MONIZ. Actually, Mr. Gensler may want to answer that.

There are a set of conditions spelled out in the Treasury agreement

as to what would constitute such a significant event. They are welldefined financial benchmarks.

Mr. STUPAK. Okay.

Mr. GENSLER. The concept was that which might go to the viability of the organization. And they were reductions of earnings to certain levels, reductions of SWU pricing to certain levels or operating

margins, and as we have talked about here—— Mr. STUPAK. Have any of these significant events occurred yet?

Mr. GENSLER. As I said in my prepared remarks, we informed

USEC in January that if they thought there was a significant

event, they should so notify us. They haven’t notified.

Mr. STUPAK. They have noticed you of any significant event?

Mr. GENSLER. They have not done so.

Mr. STUPAK. Is their credit rating below what it should be, the

investment credit?

Mr. WHITFIELD. Mr. Stupak, if you would finish up this question,

then we will move on to Mr. Strickland.

Mr. STUPAK. Oh, I’m sorry.

Mr. GENSLER. I think if the question is—let me just state factually as I understand it, that in early February, as noted earlier by

one of my administration colleagues, was downgraded by Moody’s

and S&P. Each of those downgrades, as was currently stated on the

record, are noninvestment great.

Mr. STUPAK. So in your agreement that is a significant event?

Mr. GENSLER. Again, we have not been notified as such by

USEC, and we think it is really, as we said in January, incumbent

upon them to come to us and tell us their thinking if they are so

considering such an action.

Mr. STUPAK. That is one of the events in that agreement. Right?

That’s one of the significant events in the agreement, yes or no?

Mr. GENSLER. The agreement does list noninvestment grade rating as you so suggest.

Mr. STUPAK. Thank you.

Mr. WHITFIELD. Mr. Strickland.

Mr. STRICKLAND. Mr. Gensler, is there anything in the Treasury

agreement that requires USEC to notify Treasury that a significant

event has occurred?

Mr. GENSLER. We believe that they do have that obligation. We

so put them on notice in January with regard to that.

Mr. STRICKLAND. If they have got that obligation and one of the

conditions had been met, then who has got the responsibility for

pursuing this? Under the terms of the agreement, who has an obligation to determine a significant event has occurred?

Mr. GENSLER. The terms of the agreement are that they have an

obligation to keep those plants, both plants open till—— Mr. STRICKLAND. How do they inform you of that?

Mr. GENSLER. I think there are many ways they can inform us.

They haven’t sought any of those ways——

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Mr. STRICKLAND. Then are we assuming that USEC——

Mr. GENSLER. [continuing] ways to inform us if they were so considering taking it to their board.

Mr. STRICKLAND. Then can we assume—and as the Treasury Department, I think you have an obligation here. Can we assume that

USEC is not meeting their obligation to inform you that a significant event has occurred if a significant event has occurred and we

all know it has? Come on, we can read.

Mr. GENSLER. I actually have to say there are two components

of it. Whether they are considering and taking to their board such

dramatic action that I know this committee, we are all very interested in, and the question of significant event. They have not informed us of either of those.

Mr. STRICKLAND. If they inform you that such an event has occurred, will you commit to us that you will investigate whether or

not Morgan Stanley’s recommendation was followed by USEC’s

management in manipulating circumstances so that such an event

would occur?

Mr. GENSLER. I would say that if such time comes that they inform us, that we will look at all relevant factors at that point in

time. To your earlier question, sir, as I recall from the earlier

panel, I would say that I think it would be quite a risky path for

any company to take, but particularly this company and quite an

unusual a path to take to try to——

Mr. STRICKLAND. Don’t you think it is interesting that Morgan

Stanley would put in writing such a recommendation? I assume

that would be unusual for a company like Morgan Stanley as well,

but they obviously have. I don’t think it would be unusual for us

to presume that USEC may have taken advice from Morgan Stanley since Morgan Stanley was intricately involved in advising over

the entire privatization process having received multiple, multiple,

multiple millions of dollars; and Morgan Stanley has been very

public in saying they think that USEC needs to close one of the two

plants. It seems to me there is a relationship, some relationship between USEC and Morgan Stanley.

I have a series of questions that I think you could answer yes

or no. Were you aware that administration officials, including Dr.

Stiglitz, opposed privatization based on national security concerns?

Just a yes or no answer if you would.

Mr. GENSLER. I was aware of that.

Mr. STRICKLAND. Were you aware of concerns raised by Senator

Domenici in this letter to Secretary Burger raising concerns about

national security matters regarding privatization?

Mr. GENSLER. I was aware, and I know that the national security

part of the administration did a thorough review of those matters.

Mr. STRICKLAND. Did it surprise you that USEC showed up last

fall asking for a $200 million bailout or threatening to possibly

walk away from the executive agent status?

Mr. GENSLER. I would say that I was very encouraged that on

December 1—they stayed with that status—that they tried to negotiate or bring to Congress their private sector concerns. I think we

are fortunate that they stayed with that agreement even though

Congress saw fit to move forward without giving them that money.

227

Mr. STRICKLAND. Were you responsible as a senior official of the

administration for advising the USEC board on national security

issues before privatization?

Mr. GENSLER. No, I was not.

Mr. STRICKLAND. I have a copy of a transcript here in which

Chairman Rainer—this was immediately before privatization—in

reaction to questions raised by Mr. Burton, who was one of the

board members, regarding being briefed by the NSC in regard to

the matters raised by Senator Domenici and others and I quote

from Mr. Rainer in response to Mr. Burton, ‘‘I gave you some information saying that I talked to Gensler and they are prepared to

move ahead. Can’t you derive answers from that? Don’t you have

the ability to derive answers from the fact that Gary Gensler said

senior people in the administration had been all over this thing for

days and days and days and we should take confidence in the fact

that they are expecting us to move ahead with privatization?’’

Was Mr. Rainer inaccurate in describing his conversation with

you regarding these national security matters?

Mr. GENSLER. With all respect, I am not sure what the context

of that conversation was in the meeting that you are referring to.

Mr. STRICKLAND. Well, Mr. Burton was raising questions and Mr.

Burton was asking that before privatization the board be briefed on

these national security matters, and his request for such a briefing

was denied. Does this seem improper to you that on a five-member

board before such a momentous decision to privatize this industry,

when one of the five board members asked for a national security

briefing before that final decision was made that that board member would be denied getting such a national security briefing? Does

that seem appropriate?

Mr. GENSLER. The role of Treasury was to review; and as I said,

we were very much in touch with the national security part of the

administration, the National Security Council, the NSC, the State

Department, CIA, Department of Energy on these matters. The

board deliberations as Congress had set up were separate from the

deliberations. We were not—I was not party to that board meeting

that you are referring to. And if board members requested that, it

was certainly amongst the board members. This would be the first

time I would be familiar with that.

Mr. STRICKLAND. I would hope you would feel disappointed to

know that Mr. Rainer was using a conversation that he had had

with you as a way of denying such a briefing.

One further question, if I could, Mr. Chairman. Mr. Gensler, I

think you say in your testimony that privatization occurred as a result of the unanimous vote of the board, and I think it is important

for us to understand that on that five-member board, three members voted to privatize, one member abstained, and one member

voted no. This was a decision that was made in a conflictual atmosphere, and it was an important national security decision; and it

seems to me that it was pushed forward, national security concerns

were put by the wayside and even a Senator, even a Senator writing a letter raising national security concerns was, for all practical

purposes, just ignored in order to get this privatization taken care

of as quickly as possible.

228

Mr. GENSLER. If I could just respond to help out a bit. If I in any

way left you with the wrong impression, I didn’t mean to. The vote

of the board in June 1998 on whether to move forward with the

privatization through the initial public offering or the leverage

buyout proposal was actually a unanimous vote. I think the vote

that you are referring to was on the pricing, on the day of the pricing when the road show had been completed after about a month,

at that point in time, which was the split vote.

Mr. STRICKLAND. Thank you.

Mr. WHITFIELD. Thank you. I have a couple of more questions,

and then Mr. Stupak and Mr. Strickland if you have a couple more,

and then we will dismiss this panel.

Mr. Moniz, October 27, 1999, Mike Telson, this is in document

17, has a memorandum to the Deputy Secretary. This is in conjunction with USEC’s request for a $200 million appropriation from the

government because of the money that they calculated they were

losing by implementing the agreement with the Russians. In this

document USEC calculates what it would cost them to enrich

5,500,000 SWU. And then the Department of Energy calculated

what they thought it would cost them to enrich 5,500,000 SWU. According to this document, DOE’s calculation was twice per SWU

what the USEC calculation was. Is it true that you used that document as one of the factors in deciding not to pursue the $200 million appropriation?

Mr. MONIZ. There were several inputs in the discussion at that

time period, including—this probably comes from the analysis that

the Department had performed. The analysis that was done, and

I must stress that was not a validated analysis. In fact they did

not have access to all of the data from either the corporation or

from the Department of Energy. This was a group that was familiar with the industry. We felt we could still learn something from

that. They clearly came out with results that were quite different

from some of the USEC analyses. I am not sure if those discrepancies have been fully resolved, but clearly one of them in the discussion involved power issues.

Mr. WHITFIELD. Would you agree that USEC is the beneficiary

of very low kilowatt hour costs?

Mr. MONIZ. We have the government contract which gives them

a significant amount of very low-cost power, although not all their

power is low cost and that becomes the issue at the margin. If it

then goes to much higher cost power, the implications are very,

very significant.

Mr. WHITFIELD. Implications are catastrophic, really.

Mr. MONIZ. One cent per kilowatt hour additional cost translates

into $25 additional per SWU, so it has a significant impact.

Mr. WHITFIELD. Which can be disastrous.

Mr. MONIZ. Right. In the end, the Secretary had some exchanges

by letter with Mr. Timbers. We performed analyses, had discussions with the corporation. In the end we clearly came to the conclusion that the HEU Agreement was an asset for USEC, and

again all I can say is that their decision, presumably a business decision in my view, supports the idea that it is a net asset.

229

Mr. WHITFIELD. Mr. Gensler, if USEC tomorrow made the announcement that they intended to close the Paducah plant or the

Portsmouth plant, what would Treasury do?

Mr. GENSLER. Well, I think under our arrangements, they need

to come to us before they make such announcements. We have put

them on notice of that, and I think they understand we have had

dialog with their lawyers on that matter as well. So I think the

time to talk with Treasury is before such announcement, and they

have indicated they understand that full well.

Mr. WHITFIELD. At this point they have had no discussions with

you about this.

Mr. GENSLER. That is right.

Mr. WHITFIELD. Mr. Stupak.

Mr. STUPAK. Thank you. Mr. Moniz, do you think the conversion

industry in the United States should be eliminated?

Mr. MONIZ. No, I don’t.

Mr. STUPAK. Then ConverDyn, should they just go out of business sooner rather than later then?

Mr. MONIZ. I have no basis to judge that. Certainly, I realize the

conversion prices have fallen by more than a factor of two.

Mr. STUPAK. I want to discuss a little bit about that because the

president of the Uranium Producers of America is going to testify

later today that DOE’s transfer of an equivalent of 11.6 million

pounds of uranium through USEC with no restriction on when it

could be sold, plus large amounts of uranium in USEC had accumulated by underfeeding, have destroyed the domestic uranium

market as uranium is being sold at less than the cost of producing

it. As you know, USEC has been actively selling its uranium inventory to generate short-term cash and earnings and the price has

fallen. Do you agree with this analysis?

Mr. MONIZ. Certainly, that USEC has sold substantial amounts

of uranium is a fact. As I said earlier, that has certainly been one

of the factors in driving down the prices and causing the soft market.

Mr. STUPAK. Do you think Congress intended the domestic uranium industry should pay for the privatization of USEC?

Mr. MONIZ. Well, as stated earlier, first of all, the transfers of

the Department’s uranium to USEC upon privatization, first 56

percent flowed directly from EPAct. The remainder is authorized in

the privatization act and counterbalancing that, the USEC Privatization Act was 31 million pounds of the total 73 million pounds

of DOE uranium. Countervailing that, is that DOE has taken—in

the context of the HEU Agreement 58 million pounds off the market.

Mr. STUPAK. But it hasn’t lifted the price that much, though.

Mr. MONIZ. It certainly has not.

Mr. STUPAK. Apparently DOE and no one else knew that USEC

had accumulated over 30 million pounds of uranium that it could

sell without restrictions prior to privatization and that those sales

would be pressed to markets. So why did DOE transfer uranium

without restrictions on the sale?

Mr. MONIZ. Roughly half of the uranium transferred had restrictions or its entry into market.

230

Mr. STUPAK. How about the other 30 million? No one knew about

it?

Mr. MONIZ. I don’t know that in detail. I could get back to you

for the record.

[The following was received for the record:]

From 1993 through 1998, the Department of Energy transferred about 172 million pounds of uranium in the form of natural uranium hexaflouride to USEC in

order to meet requirements under the Energy Policy Act of 1992 (EPACT) and the

USEC Privatization Act. Of the total 172 million pounds transferred, approximately

99 million pounds was customer-owned uranium. The remaining amount, of approximately 73 million pounds represents the Department’s transfers of its uranium to

USEC.

Forty-two million pounds or about 57 percent of the total DOE transfers of 73 million pounds was restricted by law or agreement in terms of the manner in which

it can be introduced into the uranium market. While the 31 million pound difference

was not market-restricted, the majority of it—about 22 million pounds—represented

the Department’s working inventory for non-government operations and became

USEC Inc’s initial working inventory. The transfer of the working inventory—a requirement under the EPACT—occurred in 1993 and was the subject of a 1994 review by the General Accounting Office that concluded that the initial transfers had

been completed consistent with the requirements of the EPACT. Another 0.9 million

pounds of DOE’s working inventory was transferred in 1995. The remaining 7 million pounds in uranium inventory transfers were accomplished over the next several

years to satisfy other requirements of the EPACT. A table showing the transfers of

uranium inventories follows:

Document Date MTU

Quantity of

Uranium

(Millions of

lbs. of U308,

equivalent)

EPACT TRANSFERS.

Determination Order (interim) ................................................................................ 7/1/93

—customer owned uranium ................................................................................... .................... 37,982 98.75

—government owned working inventory ................................................................ .................... 8,800 22.88

Subtotal, uranium initially transferred .............................................................. .................... 46,782 121.63

Memorandum of Agreement (MOA) ......................................................................... 12/15/94

—HEU (USEC receives blended down LEU) ........................................................... .................... 2,400 6.24

Determination Order (final) .................................................................................... 11/21/95

—adjustment for actuals in government owned working inventory ..................... .................... 340 .88

Amendment to MOA FY98-1 ................................................................................... 5/15/98

—Natural and low enriched uranium .................................................................... .................... 14,253 111.06

Amendment to MOA FY98-2 ................................................................................... 5/15/98

—correction in amount of HEU expected to be recovered by USEC ..................... .................... 208 .54

Total, uranium transferred to meet EPAct ............................................................. .................... 53,983 140.35

USEC PRIVATIZATION ACT TRANSFERS.

Memorandum of Agreement .................................................................................... 4/21/98

—50 Metric Tons of HEU (To be delivered 1999-2004) ....................................... .................... 25,000 212.97

—7,000 Metric Tons of Natural ............................................................................. .................... 27,000 218.20

Total, uranium transferred to meet USEC Priv. Act ............................................... .................... 12,000 31.17

Total, uranium transferred to USEC ..................................................................... .................... 65,983 171.52

Less: customer owned uranium (transferred 7/l/93) ............................................. .................... -37,982 -98.75

Net, uranium transfers from DOE to USEC .......................................................... .................... 28,001 72.77

1 The MOA restricts the introduction of the uranium into the market to not less than 4 years and no more than 35 percent in any one year.

A Secretarial Determination of No Material Adverse Impact covering this transfer was signed by Secretary Pen ̃ a on May 15, 1998. 2 The USEC Privatization Act and the MOA restricted the introduction of the uranium into the market such that no more than 10 percent of

the uranium could enter the market each year after 1997 or 4,000,000 pounds, whichever is less. The Act exempts this material from the

Secretarial Determination requirement.

Mr. STUPAK. That is the problem. No one knew about it before;

and it sounds like you know the answer, but you are not telling us.

231

Mr. MONIZ. No. I will tell you anything I know. I am afraid I

don’t know specifically about this 30 million pounds. Again, over

half of the uranium transferred had very clear restrictions on sale

into the U.S. market. The other issue, of course, is that within the

restriction on their uranium sales, one certainly anticipates they

would also make business decisions in terms of the overall market.

And also I should add some of those sales have come from overseas.

Mr. STUPAK. But they need cash so they are selling at less than

market value and really hurting the domestic industry because

they got it basically for free?

Mr. MONIZ. I would say that in the privatization, there was a

rather complex set of assets and responsibilities transferred. Part

of it was inventories. Part of it was the power contracts. There

were also responsibilities in terms of the restrictions on employment, the restrictions on the operation of the plant.

Mr. STUPAK. They basically got the uranium for free.

Mr. MONIZ. It was a transfer of assets and responsibilities that

was judged in the private sector.

Mr. STUPAK. Was there monetary paid to the U.S. Treasury for

that uranium end responsibility?

Mr. MONIZ. It was one of the assets in the privatization, and Treasury received $1.9 billion total when this private sector judged

the set of assets and responsibilities.

Mr. STUPAK. They dump it when they want, drive down the private industry and the private market, and that is what we are experiencing now; and that is what the next testimony will be.

Mr. MONIZ. Some unrestricted and some restricted uranium.

Mr. STUPAK. Thank you, Mr. Chairman.

Mr. WHITFIELD. Mr. Strickland.

Mr. STRICKLAND. Thank you. Mr. Gensler, just one more question. Is USEC legally obligated to inform you that a significant

event has occurred; and if USEC chooses to close a plant without

informing you, is there any legal reason why they should be required to inform you? Is there anything in the Treasury agreement

that legally binds USEC to inform Treasury that a significant

event has occurred?

Mr. GENSLER. Let me say again I am sorry because that was our

counsel. We think that it is most definitely implied in our contract.

We so informed them in our dialogs with them counsel to counsel.

They have understood that and as I said earlier haven’t come to

us at this point in time, but there has been no debate when we

have talked to them about that.

Mr. STRICKLAND. I guess my response would be this is an important transaction, and I would hope that there would have been

some with all due respect to your legal counsel someone associated

with Treasury that would know how to write a binding legal contract which would have made such an obligation very clear.

Dr. Moniz, one of my favorite people as a matter of fact.

Mr. MONIZ. Thank you.

Mr. STRICKLAND. This is my question. Under Public Law 104-

134, the USEC Privatization Act section 3108, which deals with the

effect of the transfer of contracts, isn’t it true that the Government

remains obligated to the parties—and by parties I mean customers

or consumers with whom USEC contracts—even if USEC breaches

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these contracts so that in effect the Government is the guarantor

who is on the hook for any of USEC’s actions?

Mr. MONIZ. As you know, I am not a lawyer; and I would like

to clarify this to make sure it is correct. I believe this is correct

that we have a liability there.

Mr. STRICKLAND. So these provisions basically relieve USEC of

any——

Mr. MONIZ. If I may add. Yes, sir, unless the contracts are

changed.

Mr. STRICKLAND. So these provisions relieve USEC of any ultimate accountability to those with whom they contract?

Mr. MONIZ. Well, presumably to run a viable business at least,

they would want to be honoring their contracts.

Mr. STRICKLAND. Well, other scenarios where they may for some

reason choose not to continue to operate a viable business.

Mr. MONIZ. It is not for me to speculate on that at the moment.

Again, I would just repeat that from our perspective, I think there

are three critical public equities for us to pay attention to and quite

frankly be concerned about: the operation issue, the security of supply issue, and the commitments to the communities and workforce

in Paducah and Portsmouth.

Mr. STRICKLAND. The reason I raise the question with you, because we say privatization was something that was widely supported and a good thing, but at the end of the day it is Uncle Sam,

it is the taxpayer that ultimately is still accountable for any decision that USEC makes; and that is one of the reasons I continually

find myself asking why privatization.

Mr. Paperiello, when you make your analysis, will the Russian

material be counted as supply in determining a reliable supply of

enrichment during your review of these matters?

Mr. PAPERIELLO. I don’t know. I mean, I am sure people on my

staff do. I just don’t know.

Mr. STRICKLAND. It seems to me that if the requirement is to

have a reliable domestic supply that we ought not to be able to

count as a part of that supply material coming in from a foreign

source subject to changes within the Russian Government or any

number of other circumstances. Will you investigate that question

and provide us with an answer?

Mr. PAPERIELLO. Yes, sir.

[The following was received for the record:]

In NRC’s financial review, we are looking at business plans, contracts, and other

related documents in order to conclude whether USEC will have the ability to continue operating and thus provide a ‘‘reliable and economical source of domestic enrichment services.’’ With respect to contractual commitments, uranium downblended

by Russia from the HEU Agreement once it has entered the U.S. market will be

considered as a non-domestic source for filling USEC contractual commitments. The

financial effects on USEC of the requirement for it to be the Executive Agent for

the Russian HEU Agreement will be reflected in USEC’s financial projections and

will be a part of our review.

Mr. WHITFIELD. Mr. Strickland, one more question. I would like

to remind Mr. Paperiello, emphasize that we very much would like

to have an answer to that question.

Mr. PAPERIELLO. Yes, sir.

Mr. STRICKLAND. One final question quickly. If after you do your

analysis, which I am sure will not be made available public, but

233

you will submit this analysis to the commission, if your findings

are such that you are unable to tell the commission that USEC in

your judgment as a result of your analysis is unable to continue to

be a reliable supplier of domestic product, what are the choices

that face the commission under the law?

Mr. PAPERIELLO. I think our major option is to inform the administration and the Congress. If you think of our authority, I can revoke or suspend the certificate. That would mean the plant couldn’t

operate. So, therefore, you wouldn’t have a domestic supply. As a

regulatory safety agency, we are sort of in a—this is an unusual

situation for us to be in.

Mr. STRICKLAND. That is why I think it is important for this committee and for this Congress to understand that if you reach such

a determination and you cannot legally license or certify these

plants for continued operation, the only reasonable thing to happen

in my judgment is for this government to once more assume ownership and control of this industry because we cannot allow these

plants simply to continue to cease functioning. And I just point

that out because I think that could be a very real possibility and

that as a government, as I said earlier, we cannot allow this industry to fail; but we can allow this corporation to fail.

Thank you, Mr. Chairman. I turn back my time.

Mr. WHITFIELD. I want to thank this panel for your statements

and answering our questions. We may have some additional questions that we will get to you and would hope that you would respond to those in writing. This panel is dismissed. Thank you very

much.

I will now call the third panel: Mr. James Graham, president of

ConverDyn; Dr. Shelby Brewer, president of S. Brewer Enterprises;

Mr. Richard Miller, policy analyst for PACE International; Mr.

Mark Stout, vice president, Uranium Producers of America; and

Dr. Joseph Stiglitz with the World Bank.

The Chair would advise each of you that under the rules of the

House and rules of the committee, you are entitled to be advised

by counsel. Do any of you desire to be advised by counsel during

your testimony here today? The anticipated response is no. In that

case, if you would please rise and raise your right hand, I will

swear you in.

[Witnesses sworn.]

Thank you all very much for being with us this afternoon. We

genuinely appreciate your coming to testify. All of you are well

versed on this issue, and we look forward to your testimony. Mr.

Graham, if you would like to start.

TESTIMONY OF JAMES J. GRAHAM, PRESIDENT, CONVERDYN;

MARK STOUT, VICE PRESIDENT, LAND AND MARKETING,

URANIUM PRODUCERS OF AMERICA; SHELBY T. BREWER, S.

BREWER ENTERPRISES, INC.; JOSEPH E. STIGLITZ, WORLD

BANK; AND RICHARD D. MILLER, POLICY ANALYST, PACE

INTERNATIONAL

Mr. GRAHAM. Mr. Chairman and members of the subcommittee,

my name is Jim Graham; and I am the president and CEO of

ConverDyn, and I would like to thank you for the opportunity to

participate on behalf of the U.S. domestic conversion industry. For

234

the sake of brevity, I have submitted my written testimony and

will speak along some key issues and points for our business and

really would state that the situation of the conversion industry

today is one of desperation. This should be a time of optimism because in 1999 the U.S. industry elevated their record output of

electricity from the nuclear industry to over 23 percent. But instead we may be witnessing a demise of the conversion industry

and of the nuclear fuel cycle here in the United States.

ConverDyn is the sole provider of conversion services in the

United States. Conversion is just a chemical process of converting

U308, an oxide and UF6, a gas. It is a small component, less than

4 percent of the nuclear fuel cycle cost; but it is a critical component in the fuel cycle. Our facility in Metropolis, Illinois, is the only

facility as I mentioned and represents 60 percent of the conversion

capacity in North America. We are one of five in the world. The future of the facility and the 350 remaining workers and more importantly a secure domestic supply of nuclear fuel for the U.S. industry today is in doubt. Primarily two actions by the U.S. Government has placed our industry in peril: first, the HEU Agreement

between the governments of the United States and Russia and, second, the privatization of the U.S. Enrichment Corporation.

The HEU Agreement was fully supported by ConverDyn and its

parent companies, and we continue to support that agreement

today. The second, privatization of U.S. Enrichment Corporation,

occurred almost simultaneously with the HEU Agreement. The key

point here, had, one, the HEU Agreement been signed and supported by all, the industry today would be okay in our opinion. But

simultaneously these two events and aggressive action of marketing the material transferred to U.S. Enrichment Corporation

has basically put our industry at peril. An example is the HEU

Agreement. Over the next 15 years, the annual amount of conversion services delivered into the United States is almost the same

output from our conversion facility in Metropolis, Illinois.

Unfortunately, the commercial fuel created by the HEU Agreement is sold primarily into the United States market. It has not

in Europe. Ias not in Asia. It is all in the United States. For 50

years the U.S. Government has been a good participant in the U.S.

nuclear industry but never as a competitor. With the privatization

of the U.S. Enrichment Corporation, a competitor to both the conversion industry and the uranium industry was created overnight.

This company at privatization had an inventory in excess of 28,000

metric tons of conversion services. This is the equivalent of almost

31⁄2 years of output from our facility. Their cost basis of this material was basically zero. There is no cost basis.

I have an interesting chart that I would like to show to illustrate

the points of our industry, if I may. This first chart shows the decline in price for the conversion services over the last 3 years. You

can see the decline in the last 2 years were very dramatic; and you

can see the events, privatization of the U.S. Enrichment Corporation and the HEU Agreement, both impacted.

The next chart shows the annual sales, forward sales for

ConverDyn; and you can see that two occurrences, primarily the

U.S. Enrichment Corporation, you can see the decline in our forward sales as an industry in the United States. The next chart

235

shows the same period of time that the sales from the U.S. Enrichment Corporation of their uranium and conversion into the marketplace. This information is obtained from their own annual reports,

10-Ks, 10-Qs, and public information. It is this decline in our own

business sector and a growth of the new competitor that is basically putting our industry in peril.

The continued loss of ConverDyn of sales from this aggressive

government-created competitor may make it uneconomical for us to

continue. We estimate at the current rate of sales by the U.S. Enrichment Corporation that their inventory may be exhausted in 3

to 4 years. The problem is ConverDyn and our facility in Metropolis, Illinois, may not survive that long. We are in this business to

make money and to survive. In the future if we are gone, the need

will be there for conversion but the Metropolis plant may not be.

So, Mr. Chairman, the combination of these two sources of conversion services, the Russian HEU and the transfers of material from

DOE, is a burden that the sole U.S. domestic supply of conversion

services cannot bear. Without relief, the demise of our industry is

very likely. Thank you.

[The prepared statement of James J. Graham follows:]

PREPARED STATEMENT OF JAMES J. GRAHAM, PRESIDENT AND CEO OF CONVERDYN

ON BEHALF OF THE DOMESTIC URANIUM CONVERSION INDUSTRY

Mr. Chairman, and Members of the Subcommittee, my name is Jim Graham and

I am the President and CEO of ConverDyn. I would like to thank you for the opportunity to speak before you today on behalf of the U.S. domestic uranium conversion

industry. The situation for the uranium conversion industry is one of desperation.

In 1999, nuclear power generated a record twenty three percent of the electricity

output for the United States. This should be a cause for optimism, but instead we

may be witnessing the end of the domestic nuclear fuel cycle industry.

ConverDyn is the sole manufacturer in the U.S. uranium conversion industry.

Conversion is the chemical process by which the form of uranium is changed from

U308 to UF6 and is a small (representing less than 4% of the fuel cycle cost) but

critical chemical step in the production of nuclear fuel for electric power production.

Our facility in Metropolis, Illinois is the only such production facility in the U.S.

and represents approximately 60% of the conversion capability that exists in North

America. The future of this facility, its 350 remaining workers, and more importantly a secure domestic supply of nuclear fuel for the U.S. industry are in doubt.

Unfortunately, there have been two actions by the U.S. government, which have

placed the future of this facility in peril. The first was the agreement between U.S.

and Russian governments (the HEU Agreement) to turn former Soviet nuclear

weapons into fuel for commercial reactors. ConverDyn and its affiliated parent companies supported and continue to support this effort. The second was the privatization of the United States Enrichment Corporation. These occurred almost simultaneously in the U.S. and placed undue burden on the domestic industry. One of these

events could have been dealt with in the normal commercial environment, but both

events together have forced the domestic uranium conversion industry out of balance and at great risk of being eliminated.

The HEU agreement will turn former Soviet nuclear weapons material into commercial nuclear fuel for the next 15 years. This creates an annual quantity of nuclear fuel in the U.S. nearly equal to the yearly output of the Metropolis facility.

U.S. & Russia HEU Agreement

Delivery Schedule vs ConverDyn Production

(MTU @ UF6)

Year gLRussian ConverDyn

1996 ............................................................................. 3,636 Actual ..................................................................... 11,600

1997 ............................................................................. 5,454 Actual ..................................................................... 11,500

1998 ............................................................................. 7,300 Actual ..................................................................... 11,600

1999 ............................................................................. 4,545 Actual ..................................................................... 9,300

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U.S. & Russia HEU Agreement—Continued

Delivery Schedule vs ConverDyn Production

(MTU @ UF6)

Year gLRussian ConverDyn

2000 ............................................................................. 9,100 Projected ................................................................. 9,300

2001 ............................................................................. 9,100 Projected ................................................................. 9,300

2002 ............................................................................. 9,100 Projected ................................................................. 9,300

2003 ............................................................................. 9,100 Projected ................................................................. 9,300

The reduction of nuclear weapons is a cause that should be supported economically by the entire country. Unfortunately, the commercial nuclear fuel created by

the HEU program is sold into the U.S. market to the detriment of the established

commercial processing facilities, such as the Metropolis facility.

However, the HEU agreement by itself would not have significantly impacted the

domestic industry. It was the subsequent privatization of the United States Enrichment Corporation (USEC) that has placed the domestic uranium conversion industry at risk.

For more than fifty years, the U.S. government has been a participant in the U.S.

nuclear industry, but never as a competitor. Almost overnight, the U.S. government

created a new competitor in the U.S. for uranium and conversion companies as a

result of this action. Specifically, the privatization of USEC created a private company whose primary liquid asset is the 28,000 plus metric tons equivalent of UF6

transferred at privatization by DOE. This is the product of ConverDyn and as such,

does not require conversion. USEC was privatized with enough former U.S. government inventory to replace almost three years of production from the Metropolis facility.

USEC Inventory At Privatization

(MTU @ UF6)

Year USEC ConverDyn

1998 ............................................................................... 28,000+ ......................................................................... 11,500

1999 ............................................................................... ? ............................................................................ 9,300

2000 ............................................................................... ? ............................................................................ 9,300

2001 ............................................................................... ? ............................................................................ 9,300

Public documents from USEC indicate that this former U.S. government inventory

is being sold aggressively to the commercial nuclear industry as direct competition

to the Metropolis facility contrary to what the government intended in the Privatization Act of 1996. (Attachment 1).

The USEC UF6 inventory has no cash cost and since privatization, USEC has

been aggressively selling their inventory and obtaining a significant portion of conversion market share and revenue from the industry. Continued loss of sales by

ConverDyn to this aggressive government created competitor may make it uneconomical to continue to maintain the Metropolis facility. We estimate that at the current rate of sale, this inventory will be exhausted in approximately 3 to 4 years.

At that time conversion services from a facility like Metropolis will again be needed

by the U.S. nuclear industry. However, unless some action is taken in the interim,

the ConverDyn facility is likely to be shut down. Attachment 2 of this statement

describes proposed remedies.

Mr. Chairman, the combination of these two sources of conversion services—Russian HEU imports and USEC transfers from DOE—is a burden that the sole U.S.

domestic provider of primary uranium conversion services cannot bear. Without relief, the demise of the only domestic conversion provider, ConverDyn, is likely!

BACKGROUND

What is uranium conversion and what is its role in nuclear power?

Uranium conversion is a process of chemical transformation by which natural uranium concentrates in the form of U3O8 are converted to natural uranium

hexafluoride (UF6). Uranium conversion is one of the four major steps in the production of nuclear fuel. These steps are components of the nuclear fuel cycle illustrated herewith.

237

1. Uranium Production—Uranium is a naturally occurring element in the

earth’s crust. When sufficiently concentrated by natural physical and chemical

forces, it may be economic to mine the ore by open-pit, underground methods. Uranium is typically recovered from the ores by alkaline or acid leaching. Uranium is

also produced by in-situ leaching and as a by-product of phosphate fertilizer, gold,

and copper. The final product of uranium mining and processing is usually a mixture of uranium oxides referred to as either natural uranium concentrates, U3O8,

or ‘‘yellowcake.’’ Natural uranium concentrates contain 0.711 percent 235U, the active isotope in the nuclear process. The remaining 99.3 percent is the inactive isotope 238U.

2. Uranium Conversion—Natural uranium concentrates in the form of U3O8 are

converted to natural uranium hexafluoride (UF6) in order to provide an appropriate

feed material for the next step in the nuclear fuel cycle: enrichment. The conversion

process includes feed preparation, reduction with hydrogen to UO2, hydrofluorination to UF4, fluorination to UF6, which is a gas at moderate temperatures and purification. Uranium in this form retains the natural isotopic concentration of 235U of

0.711 percent.

3. Uranium Enrichment—Enrichment is a process of concentrating the 235U isotope to higher levels of 3 to 5 percent in order to increase the efficiency of the fuel

for nuclear reactors. Concentration of the 235U isotope occurs by molecular weight

in the gaseous diffusion process used in the U.S. and Europe, as well as in the centrifuge process used in Russia and Europe.

4. Fuel Fabrication—Enriched uranium hexafluoride is converted by fabricating

companies to UO2, pelletized, and inserted into zirconium alloy tubes which are

then combined into bundles of nuclear fuel.

Each of these steps must be completed in order to produce a final product. Each

step in the production process has a different character, different participants, different regional distribution, and a different value. These characteristics are referred

to as the ‘‘Industry Value Chain.’’ It is notable that most of the world’s nuclear fuel

cycle participants are foreign-owned, yet the U.S. is the world’s largest user of nuclear fuel with over one hundred operating nuclear units.

Impact of HEU Agreement and USEC Privatization.

The sole manufacturer in the U.S. domestic uranium conversion industry is

ConverDyn. Today, ConverDyn is being threatened by two recent actions by the U.S.

Government:

1) The U.S.—Russian agreement on the conversion of highly-enriched uranium

(HEU) in Russian nuclear weapons to nuclear fuel; and

2) The Privatization of the United States Enrichment Corporation.

Impact of Russian HEU Agreement—Nuclear warheads contains the same

three components as nuclear fuel: 1) natural uranium concentrates, 2) conversion

services, and 3) enrichment services. When the U.S. government devised a plan in

1995 to subsidize the dismantlement of Soviet nuclear weapons, the enrichment

services component of those weapons received the bulk of the attention since it accounts for the bulk of the value.. Unfortunately, this plan failed to fully address the

disposition of either the natural uranium concentrates component or the conversion

components. As a government corporation, USEC was appointed as Executive Agent

for the implementation of this plan. Ultimately, in 1999, an agreement for disposition of uranium concentrates was reached between three western, but non-U.S.,

companies and the Russian government. This agreement provides a defined structure for the disposition of uranium, but, again, no format for the disposition of conversion addressed. As a result, conversion is available from a variety of uncontrolled

sources, which disrupt the stability of the industry.

The quantity of natural uranium concentrates and conversion services contained

in dismantled Russian nuclear warheads amounts to approximately 9.1 million kgU

as UF6 per year. Not all of this material can be sold in the U.S. each year due to

the existing quota provision, but it is imported physically and is seen by nuclear

utilities as a vast resource which will provide an abundant supply of uranium, conversion and enrichment far into the future. The U.S./Russian HEU agreement provides for the enrichment component to be used by USEC. The USEC Privatization

Act specified that natural uranium concentrates could enter the country only in

gradually increasing quantities. No limitations of any kind were applied to conversion services. ConverDyn attempted during the drafting of the Privatization Act to

obtain the same quota provisions provided to the natural uranium component but

was advised by the government that we were considered a monopoly. ConverDyn

protested unsuccessfully that the U.S. market was truly international and that all

primary conversion providers have access to the available U.S. market.

238

Impact of the USEC Privatization—When USEC was privatized, it received a

substantial endowment of both uranium concentrates and conversion services contained in excess of 28,000 metric tons of uranium hexafluoride. This endowment was

designed to provide USEC with a working inventory, to fund certain clean-up operations and to provide sufficient assets to ensure that the privatization process would

be well received by investors. Both in terms of the privatization process and certain

of the transfers of material to USEC, some strings were attached to prevent dumping of USEC products. These strings included limitations on the annual sales of the

natural uranium concentrates transferred to USEC. No restrictions, however, were

placed on sales of the conversion services contained in those transfers.

In its S-1 registration statement of June 29, 1998, USEC published its plans to

sell most of its inventory between 2000 and 2005. USEC’s CEO Mr. William Timbers later stated that these sales would amount to less than 10 percent of the world

requirements. USEC’s major sales arena, however, is the U.S. and 10 percent of

world requirements equates to approximately 40 percent of U.S. requirements. Even

worse, a large portion of U.S. requirements for that period have already been filled.

Hence, there is little or no room for additional sales by others, especially a newly

created competitor with significant cash needs. Since most of these sales are to be

in the form of UF6, the U.S. conversion industry is suffering a crippling blow.

USEC does not seem to understand the impact of sales of this magnitude on the

nuclear fuel components industries. In a July 27, 1998 letter to the State department, Mr. Timbers stated: ‘‘USEC will dispose of natural uranium in a gradual and

flexible manner so that the company, as well as all participants in the global uranium marketplace, can benefit from the maintenance of a healthy uranium market.’’

A few months later, Mr. Timbers further stated: ‘‘We will dispose of our uranium

inventory in a gradual market-sensitive manner.’’ Reality has proven this not to be

the case.

Prices Have Fallen—Conversion prices in the spot market fell from $6.00 per

kgU as UF6 in 1997 to $2.45 in early 2000. Primary supply has remained unchanged during this period while at the same time consumption has increased

slightly, but secondary supply from U.S. Government inventories transferred to

USEC pursuant to the privatization process and from converted Russian nuclear

weapons has entered the market in massive quantities. Historically, the uranium

conversion business as been supported by long term contracts. The volume of activity in the spot market remained less than ten percent until the early-nineties when

secondary supplies started to impact the market increasingly. Additionally, longterm prices were historically higher than spot prices and did not follow the spot

market activity until the last several years. The market dynamics created by an aggressive government-created competitor in the market place has forced the longterm market value down and forced the long-term prices to nearly track the spot

market.

Sales Have Dropped—The primary conversion sales volume has been cut to less

than half of the 1997 level. Aggressive sales at below market prices by USEC has

reduced the amount of material sold through the competitive bidding process as utilities obtain more and more material in ‘‘Off-market’’ transactions at discount prices.

Revenues Have Collapsed—As a consequence of reduced prices in combination

with reduced volume; revenue expectations for the domestic uranium conversion

company have been cut by a factor of four.

Unfair Competition—HEU and USEC inventories of conversion services have

no current cost basis. Uranium conversion services contained in the converted Russian HEU were produced by the Soviet Union in the distant past for military purposes. Conversion services currently being marketed by USEC were produced by the

U.S. government over the past half-century as strategic and working inventories.

Primary converters such as ConverDyn, which have current costs for labor, chemicals and electricity, cannot compete with this supply. These old inventories are valued at market price and there is no loss to be incurred or reported no matter how

low the price goes. At present market consumption rates, the USEC UF6 inventories

will significantly impact the market for another three to four years.

Importantly, the USEC Privatization Act itself makes it clear that the impact on

the domestic uranium conversion industry shall be monitored and that action is to

be taken ‘‘to prevent or mitigate any material adverse impact on such industries.’’

To date, it is clear that if any such monitoring has been done, it has missed the

indisputable and devastating impact that the privatization has had on the conversion industry. In fact, prior to and since privatization, the conversion industry has

not even been consulted. Further, and almost needless to say, no action has been

taken to mitigate the impact on our industry.

239

240

ATTACHMENT 2

POTENTIAL U.S. GOVERNMENT ACTIONS TO SAVE THE DOMESTIC NUCLEAR FUEL CYCLE

Proposed Remedies—Mitigation of the impact of USEC and/or the HEU UF6

sales may be easily accomplished by a combination of the following:

1. Amend the Privatization Act to eliminate unfair competition from conversion

services contained in converted Russian HEU. Such competition may be mitigated by including conversion services in the already established quota for the

contained uranium. Such a quota would not impact the implementation of the

HEU deal; rather it would ensure that resultant materials did not severely impact the U.S. market.

2. DOE could purchase the remaining uncommitted portion of the USEC UF6 inventory for a negotiated market value. This would provide DOE with an asset that

could be sold later at a greater value and at such time as a Secretarial determination could show that release of incremental portions would not have a

major impact on the marketplace.

3. Alternatively, DOE could borrow the uncommitted portion of the USEC UF6 inventory at a negotiated interest rate and return to USEC for sale (not delivery)

at such time as a Secretarial determination could show that release of incremental portions would not have a major impact on the marketplace. Such a

plan preserves the inventory as an asset for USEC, yet provides a means for

it to earn current revenue. Certainly, just withholding the material from the

market will increase the asset value and provide for even greater interest payments.

4. DOE could purchase an amount of conversion services for a four-year period of

time at a negotiated price to assure the viability of the sole domestic uranium

conversion facility. DOE would be able to sell the conversion at such time as

a Secretarial determination could show that release of incremental portions

would not have a major impact on the marketplace.

ATTACHMENT 3

CONVERDYN: HISTORY AND FACILITIES

In November 1992 affiliates of Honeywell and General Atomics formed

ConverDyn, a 50-50 partnership to more effectively market the uranium conversion

services provided by Honeywell’s Metropolis, Illinois plant. This facility has operated

since the late 1950’s. Both Honeywell and General Atomics are U.S. companies that

have been in existence for more than 50 years. Honeywell is a publicly held corporation listed on the New York stock exchange while General Atomics is a privately

held company.

ConverDyn’s major activity is the supply of UF6 conversion services to its nuclear

power utility customers worldwide. The major activity at the Metropolis facility is

the production of UF6 and related services.

Production Capacity—Annual production capacity is 12,700 mtU as UF6.

History of Production—Metropolis production has increased steadily over the

years commensurate with our customers’ demands. Production was curtailed to 8.2

million kgU as UF6 in 1999 from 12.7 million kgU due to deteriorating market conditions.

Property and Personnel—The Metropolis Works is located on 1,000 acres of

property with the actual operation occupying 50 acres with the balance in farms and

woodlands. Approximately 350 people are employed at the plant; total annual payroll exceeds $16 million. The Company place strong emphasis on excellence in performance especially in the areas of safety, environmental and regulatory matters.

Metropolis Works sets the standard for safety and environmental/regulatory performance in its industry. Its personal injury record is consistently better than the

chemical or nuclear industries as a whole, and it enjoys a good relationship with

all regulatory agencies, including Environmental Protection Agency, Occupational

Safety and Health Administration, and the Nuclear Regulatory Commission. The

UF6 operation is conducted under NRC License, SUB-526.

Product Quality and Performance—UF6 production quality is 99.99% and has

been consistently supplied to all Western enrichment facilities. The Metropolis facility was among the first plants to receive ISO-9000 certification at Honeywell. The

UF6 quality assurance program includes formal operating procedures and operator

training, as well as preventive maintenance for process equipment and assurance

programs for cylinders and laboratory equipment and instrumentation.

Mr. WHITFIELD. Mr. Graham, thank you.

241

Mr. Stout, if you would give your statement. We will try to keep

these to about 5 minutes.

TESTIMONY OF MARK STOUT

Mr. STOUT. Mr. Chairman, members of the committee, my name

is Mark Stout. I am vice president of marketing for Rio Algom Mining Corporation and president of the uranium Producers of America.

Mr. Chairman, Congress has repeatedly recognized the importance of maintaining a healthy domestic uranium industry. In the

1992 Energy Policy Act, Congress mandated that U.S. Government

stockpiles must not be introduced into the commercial marketplace

in a manner that would adversely impact the domestic uranium industry. That principle was reiterated again in 1996 in the USEC

Privatization Act. Nevertheless, domestic production has declined

by 50 percent, and the value of uranium assets worldwide have

plummeted in the 2 years since USEC was privatized. The principal cause is the Department of Energy has failed to meet their

congressional mandate to use U.S. Government stockpiles in a

manner not detrimental to domestic uranium industry.

Two government initiatives which greatly influenced the precarious position we find ourselves in today: first, through the Russian

HEU Agreement, our government has chosen to pay for its non-proliferation policies concerning former Soviet nuclear weaponry by requiring the commercial marketplace to absorb this material and

bear the burden—most of the burden of the cost. Second, in an effort to maximize the value of the corporation—of the enrichment

Corporation when it was privatized, huge government inventories

were assigned to USEC before the corporation went public. The

amount of U.S. Government uranium given to USEC is equivalent

to about 25 times the amount of current domestic production.

Together these two initiatives have severely depressed the price

of natural uranium. The depressed price threatens not only the viability of the domestic uranium industry, but ironically it also

threatens the Russian HEU Agreement. It was clearly foreseen in

1995 by sponsors of the USEC privatization that a balance needed

to be achieved in metering into the U.S. and western markets Russian HEU uranium and U.S. Government uranium transferred to

USEC.

During 1995 representatives of the domestic uranium industry

and USEC met congressional staff and DOE to work out a reasonable schedule for the sale of Russian HEU and USEC uranium.

The results of these discussions were incorporated into the 1996

USEC Privatization Act. The privatization act limited to approximately 31 million pounds the amount of uranium to be transferred

to USEC and restricted annual USEC uranium deliveries in the

U.S. to no more than 10 percent of the amount transferred or 4

million pounds, whichever was less.

In April 1996, President Clinton signed the privatization act.

Shortly thereafter, USEC began to market uranium far more aggressively and in much greater quantities than envisioned. The

USEC S1 registration statement filed with the SEC over 2 years

later revealed publicly for the first time that about two and a half

times the amount of uranium inventory allowed in the privatizaVerDate 11-MAY-2000 09:16 Mar 16, 2001 Jkt 010199 PO 00000 Frm 00245 Fmt 6633 Sfmt 6602 E:\HEARINGS\64028 pfrm01 PsN: 64028
242

tion act was to be transferred to USEC and that USEC’s projected

sales volume would far exceed the limitations set forth in the act.

After reviewing the surprised disclosures contained in the S1,

Senator Domenici expressed concern over the impact of the additional transfers on both the uranium market and on the Russian

HEU Agreement. He urged the National Security Council to review

the impact of these transfers prior to the administration’s decision

to approve the sale of the enrichment corporation. Shortly thereafter, Senator Domenici explicitly requested the administration not

to transfer the excessive uranium to USEC. Senator Domenici’s

recommendations were not taken. The results of the excessive government transfers have been production curtailments, mine closures, termination of development plans, departure of critical talent, layoffs, large asset write-downs and a total cessation of expiration by every uranium mining company in the U.S. and most overseas, for that matter.

When President Clinton signed the privatization act, the price of uranium was $16.15 per pound on the spot market. Since that time

it has now dropped to about $9.10 a pound. Domestic production

in 1996 totaled 6.3 million pounds. This year we will be lucky to

make 3 million pounds. Perhaps even a better measure of what the

USEC privatization has meant to our industry which is reflected

in the CAMECO which is the largest publicly traded uranium company in the world stock price which has declined from $72.90 in

April 1996 to 16.80 at last week’s close of the foreign exchange, a

loss of some 80 percent of its value. The domestic uranium industry

cannot survive for much longer the uncontrolled dumping of transferred U.S. Government stockpiles by USEC.

Mr. Chairman, we urge this committee to look into why the

quantities of uranium transferred from DOE to USEC increased so

dramatically from the time the initial privatization plans were

agreed to in 1995 and into the details of USEC’s sales activities

today, especially in light of a report issued earlier this week by the

bank of New York that cites USEC-estimated uranium sales totaling over 67 million pounds through fiscal year 2006, an amount

which would seriously limit the ability of Russian HEU uranium

and U.S. uranium to enter the market. We urge the committee to

consider legislation, to reaffirm the intent of the privatization act

with respect to USEC uranium transfers and sales and make it

clear that USEC does not have legal immunity from taking actions

contrary to the provisions of that act. Thank you.

[The prepared statement of Mark Stout follows:]

PREPARED STATEMENT OF MARK STOUT, PRESIDENT, URANIUM PRODUCERS OF

AMERICA

Mr. Chairman and distinguished members of the Committee, my name is Mark

Stout. I am Vice President, Land and Marketing, for Rio Algom Mining Corporation,

and I currently serve as President of the Uranium Producers of America (UPA), a

trade association of domestic uranium mining and milling companies. I am testifying today on behalf of the UPA.

Mr. Chairman, the domestic uranium producing industry has a remarkable and

unique relationship with the United States Congress dating back to the enactment

of the Atomic Energy Act in 1954. The uranium industry was created by the Federal

Government to serve national security needs in the early years of the Cold War. Private industry responded admirably to the government’s urgent need for uranium.

After satisfying the national security need to fuel the nation’s nuclear defense, the

domestic industry became a reliable source for the country’s nuclear power industry.

243

1See Exhibit 1 (showing EPACT and Priv. Act. impact provisions).

2The most notable energy trend in the U.S. today is the continued electrification of our economy. Approximately 23% of electricity produced in the U.S. comes from uranium-fueled nuclear

power reactors. At present, the majority of the natural uranium to be processed and fabricated

into fuel for these reactors is supplied from foreign sources. Title X, Subtitle B of the Energy

Policy Act of 1992 recognized the national need to avoid dependence on imports in this critical

energy sector. 3See Exhibit 2 (Estimated Uncovered Uranium Requirements, 2000-2018).

4With the advent of in situ leach technology, U.S. production centers’ productivity has compared favorably with foreign producers as shown on Exhibit 3.

The domestic industry has established and maintains today valuable strategic resources. These resources include skilled operators, coveted technology and competitive uranium operations and reserves.

Congress has repeatedly recognized the importance of maintaining a healthy domestic uranium industry. When Congress addressed energy policy in the 1992 Energy Policy Act, it mandated government stockpiled uranium must not be introduced

to the commercial marketplace in a manner that would adversely impact the domestic mining industry. That principal was reiterated again in 1996 in the United

States Enrichment Corporation Privatization Act.1

Mr. Chairman, despite repeated efforts by Congress, the domestic uranium industry is rapidly becoming an endangered species. The Department of Energy has continuously failed to meet its charge to use U. S. government uranium stockpiles in

a manner not to adversely impact the domestic uranium industry. As this committee

considers the impact of recent U.S. government owned uranium transfers to USEC,

we ask that a way be found to enforce and monitor existing uranium policy. Despite

DOE’s contention that its actions would have no adverse impact, the facts show the

contrary. The U.S. is rapidly becoming totally dependent on U.S. and Russian government stockpiles and production from foreign producers. In our view, this is shortsighted energy policy and dangerous economic policy. This is true for any valuable

natural resource commodity, especially one that fuels almost one-fourth of our nation’s electrical generation.2

Two government initiatives have greatly influenced the precarious position in

which the domestic producers find themselves today. First, our government has attempted to conduct its non-proliferation policies concerning former Soviet nuclear

weaponry by requiring the commercial marketplace to absorb this material and bear

the lion’s share of the cost of its implementation. Second, in an effort to maximize

the value of the Enrichment Corporation’s privatization, large government inventories were transferred to USEC before the Corporation went public.

Together, these two initiatives have severely depressed the price of natural uranium. The depressed price threatens not only the viability of the domestic uranium

industry, but ironically it also has negative implications on the U.S./Russian HEU

Agreement, which is an important part of our national nuclear non-proliferation program.

More specifically, the transfer of DOE inventories to the United States Enrichment Corporation (USEC) has created devastating material adverse impacts on domestic uranium production due to the ensuing aggressive selling of these transferred inventories by USEC. According to the government’s Energy Information Administration in 1998, USEC’s level of marketable inventory approached 60 million

pounds U3O8 equivalent. EIA stated this was enough to supply six-eight million

pounds per year to the market roughly over the next decade. As shown by the chart

attached as Exhibit 2, utility uncommitted demand cannot absorb these supplies, especially when Russian HEU uranium and conventional producers are interjected

into the mix.3

Despite U.S. mining technology that allows domestic producers to compete in productivity with foreign producers, USEC sales have pushed the price of uranium

below any valid cost of production.4 USEC uranium sales combined with sales resulting from the implementation of other U.S. government initiatives have in effect

‘‘taken’’ the good faith investments made by domestic uranium producers. The adverse impact on the price of uranium from these secondary sources has severely impacted the domestic producers. We believe that the substantial damage to the producing industry is in direct contravention of the congressional mandate concerning

the disposition of government uranium stockpiles expressed both in the Energy Policy Act of 1992 and the USEC Privatization Act.

Today we are faced with an extremely unusual economic situation in uranium.

World uranium production is only one-half the demand for nuclear power reactor

fuel. In 1999, uranium production was approximately 80 million pounds U3O8 com- pared to demand of 160 million pounds. This magnitude of a supply/demand imbalance is unprecedented in industrial commodity markets. Generally, in energy or

244

5 In the late 1980s, the Soviet Union began selling uranium in all forms into the Western

World market at sales prices significantly below the production costs of all western producers.

In response, in late 1991, a group of domestic uranium producers (the Ad Hoc Committee) joined

by the Oil Chemical and Atomic Workers (OCAW) union filed an anti-dumping suit against the

Soviet Union. About one month after the suit was filed, the Soviet Union dissolved and the case

proceeded against the individual republics of Kazakhstan, Krygystan, Uzbekistan, Tajikistan,

Ukraine, and Russia. The preliminary finding by the Department of Commerce ruled in favor

of the Ad Hoc Committee and OCAW and determined that a dumping duty of 115.82% was appropriate. This extremely large dumping duty would have effectively precluded any imports of

uranium from these republics. However, a provision of U.S. trade law allowed the U.S. government to settle these cases without domestic industry participation or agreement because these

republics were considered non-market economy countries. Therefore, rather than letting the

cases proceed to final dumping orders, in 1992 the U.S. Government entered into ‘‘Suspension

Agreements’’ with Russia, Uzbekistan, and Kazakhstan. The ‘‘Suspension Agreements’’ set up

CIS sales quotas legal in the U.S. as a function of market price, U.S. production, and other metering mechanisms. These republics were granted market quotas under the suspension agreements notwithstanding the prior determination that affirmed dumping. Since 1992, a total of

almost 30 million lbs. U3O8 has been imported into the U.S. duty free from these countries. 6Once again, the Administration recognized the need to not adversely impact the domestic

production industry in the U.S./Russian HEU Agreements. The Agreement provided that its implementation should be accomplished in a manner that minimizes impact upon the U.S. uranium industry. This position was ratified in a letter from the DOE Director of the Office of Nuclear Energy, Terry Lash, to Senator Craig Thomas in 1994. (See Exhibit 4.) 7See 42 U.S.C. 2297h-10

8 ‘‘Privatization legislation should enhance the long-term competitiveness of the nuclear fuel

markets. Long-term competitiveness means that the market includes multiple suppliers and

avoids concentration of market power.***The [nuclear utility] industry believes that U.S. HEU

transferred to USEC prior to privatization will provide some competitive advantage...The provisions which provide quantitative limits on the amount of material to be transferred and the

rate at which the material can enter the market provides a useful framework for metering the

introduction of the material to the market.’’ Testimony of Joe Colvin, Executive Vice President,

Nuclear Energy Institute, Before the Committee on Energy and Natural Resources, United

States Senate, June 13, 1995 (USEC Privatization Hearing).

metals markets an imbalance of only 1 or 2 percent will bring on substantial swings

in the commodity price, as we have witnessed most recently with crude oil. This

huge supply/demand imbalance in uranium, which has developed over the past ten

years, is primarily the result of massive sales of Russian and U.S. governmentowned inventories. In the early 1990’s several hundred million pounds of natural

uranium stockpiled in the Soviet bloc countries were dumped in Western markets.5

By 1995, a major portion of these inventories had been absorbed. However, as natural uranium imports from the former Soviet Union declined due to consumption

and as a result of ‘‘Suspension Agreements’’ limiting their entry into the U.S., Russian HEU (highly enriched uranium from dismantled nuclear weapons) began to be

imported. It appeared in 1995 that Western markets could accommodate the deliveries of uranium purchases specified by the U.S./Russian HEU Agreement. This

schedule called for natural uranium deliveries from HEU to be about eight million

pounds U3O8 in 1995 through 1999, increasing to about 24 million pounds U3O8 in

the year 2000 and beyond. As the HEU agreements were being finalized, 6 progressing along a somewhat independent path were plans to privatize the U.S. Enrichment Corporation. It was clearly foreseen in 1995 by sponsors of USEC privatization that a balance needed to be achieved in metering into U.S. and Western

markets HEU uranium and U.S. government uranium inventories to be transferred

to USEC.

During 1995, representatives of the domestic uranium producers and USEC met

congressional staff and DOE to work out a reasonable schedule for the sale of HEU

uranium and USEC’s sales of U.S. government inventories. The results of these discussions were incorporated into the 1996 Privatization Act.7 The Privatization Act

that resulted from these negotiations limited to approximately 30 million pounds

U3O8 the amount of uranium to be transferred from DOE to USEC and limited annual uranium sales by USEC to no more than four million pounds per year. The

Privatization Act also specified the rate at which HEU uranium feed could be sold

in the U.S. This schedule allowed two million pounds U3O8 of HEU uranium to be

sold in 1998, increasing by one or two million pounds each year to a level of 20 million pounds per year in 2009 and beyond. The purpose of this section of the Privatization Act was to prevent the suppression of the price of uranium. This would benefit uranium producers and enhance the value of government stockpiles. It also

served to promote long-term competitiveness.8

U.S. uranium producers supported USEC’s privatization and believed that the

limited transfers and schedules for uranium sales set forth in the Privatization Act

provided a reasonable transition period during which the uranium production indusVerDate 11-MAY-2000 09:16 Mar 16, 2001 Jkt 010199 PO 00000 Frm 00248 Fmt 6633 Sfmt 6621 E:\HEARINGS\64028 pfrm01 PsN: 64028
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9See 42 U.S.C. § 2997h-10(c). 10S. Rep. 104-173, November 17, 1995. 11See 42 U.S.C. § 2297h-10(c)(2)(B). 12See 42 U.S.C. § 2297h-10(d)(2). 13S. Rep. 104-173, dated November 17, 1995 at 28.

try and commercial markets could adjust to the implementation of the HEU Agreement and USEC privatization. Our support was misplaced.

In April 1996, President Clinton signed the Privatization Act. Shortly thereafter,

USEC apparently began to market uranium far more aggressively and in much

greater quantities than envisioned. The USEC S-1 registration statement filed with

the SEC over two years later (shortly before privatization in the summer of 1998)

revealed publicly for the first time that about two and one-half times the quantity

of uranium inventory allowed in the Privatization Act was to be transferred to

USEC and that USEC’s projected sales volume would far exceed the limitations set

forth in the Act.

THE USEC PRIVATIZATION ACT

In 1996, Congress passed the Privatization Act in order to authorize and facilitate

the privatization of the enrichment program. Congress again recognized that

USEC’s ties with DOE posed a threat to private uranium producers and therefore

built on the protections against the sale or transfers of U.S. government stockpiles

mandated by the provisions of the Energy Policy Act.

Congress carefully included in the Privatization Act constraints on DOE’s authority to transfer or sell uranium. Thus, § 2297h-10(a) of the Act first makes it clear

that the ‘‘Secretary shall not...transfer or sell any uranium (including natural uranium concentrate, natural uranium hexaflouride, or enriched uranium in any form)

to any person except as consistent with this section.’’ DOE was authorized in the

Act to transfer without charge up to 50 metric tons of HEU and 7,000 metric tons

of natural uranium to USEC.9 This transfer was the equivalent of approximately 30

million pounds of natural uranium. The legislative history indicates that this transfer was intended ‘‘as a means of enhancing the value of USEC in the marketplace

and reducing DOE’s costs of safeguarding surplus [highly enriched uranium].10 In

order to lessen the impact of USEC’s sales of this transferred material, USEC was

restricted in delivering the material for commercial end use in the United States

‘‘to no more than 10 percent of the uranium transferred under this subsection or

more than 4,000,000 pounds, whichever is less, in any calendar year after 1997.’’ 11

The Privatization Act went on to restrict commercial sales of DOE’s remaining

stockpiles. Such sales were limited to those determined by the Secretary that will

not have an adverse impact on the domestic uranium mining, conversion or enrichment industry. DOE was further required to take into account in its determination

sales of uranium under the Russian HEU Agreement and the Suspension Agreement. Finally, DOE could only sell the government stockpiled uranium at a price

that was not less than the fair market value of the material.12

The presence of the USEC transfer provisions in the Act described above establish

that Congress intended that the sales provisions of subsection (d) would apply principally to sales of uranium to parties other than USEC. In fact, the legislative history of the Act indicates that ‘‘[t]o enhance the competitiveness of the enrichment

market, it is the intent of Congress that the Secretary shall sell material directly

into the market in lots of a size that end users can bid on it.’’ 13 This establishes

that Congress envisioned sales directly to end users such as electric utilities rather

than sole-source sales to USEC. This was critical to domestic producers because

USEC has tied sales of uranium with sales of enrichment services. USEC is the only

domestic provider of uranium enrichment services and controls through prior U.S.

government contracts the majority of U.S. enrichment supply for several more years.

Thus, USEC already wields enormous power over consumers of enriched uranium.

USEC’s tying of sales of uranium with sales of enrichment services enhances its

ability to increase its presence in the uranium services market, and also allows it

to dominate the market for sales of uranium as they have apparently chosen to do.

While the domestic producers continue to support a strong domestic enrichment

industry, we do not believe that subsidizing enrichment sales with transferred U.S.

government owned inventories is fair or consistent with the principals in the privatization legislation.

USEC INVENTORY / DOE TRANSFERS TO USEC

In addition to the authorized DOE transfer of approximately 30 million pounds

mentioned above, USEC disclosed in its Prospectus that it held additional invenVerDate 11-MAY-2000 09:16 Mar 16, 2001 Jkt 010199 PO 00000 Frm 00249 Fmt 6633 Sfmt 6621 E:\HEARINGS\64028 pfrm01 PsN: 64028
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14The Secretarial Determination did provide some protections, stating: ‘‘In order to mitigate

potential adverse impacts on industry, the Department will restrict the United States Enrichment Corporation’s sale of the transferred uranium to a maximum of 35 percent of the total

in any single year, with the total quantity to be sold over a minimum of 4 years.’’ However,

these restrictions were over and above those established by the Privatization Act. Further,

USEC’s other uranium inventories were not subjected to these restrictions. Finally, DOE put

no enforcement provisions in place to monitor USEC inventory sales of any kind. 15See 42 USC § 2297 h-10(a). 16 Underfeeding refers to a process that uses more electricity and less uranium to attain the

desired enrichment, which results in a buildup of excess uranium inventory. When the electricity used during the enrichment is government funded, the net result is windfall of surplus

uranium to USEC. EPACT had urged the government enrichment corporation to overfeed, that

is, more uranium to boost the market. However, underfeeding proved to be USEC’s choice in

order to build up its uranium inventory. 17 June 19, 1995 memo from David Garmen and Sam Fowler to Members and Legislative Assistants, Committee on Energy and Natural Resources.

tories at March 31, 1998 totaling about 31.5 million pounds. The revelation of this

large inventory came as a complete surprise to the industry and was clearly not contemplated by the sponsors of the Privatization Act.

In addition to this 31.5 million pounds, on May 18, 1998 the Secretary of Energy

issued a Determination (Secretarial Determination) which authorized the transfer

from U.S. government stockpiles of 3,800 metric tons of natural uranium and 45

metric tons of low-enriched uranium to USEC.14 USEC also transferred .8 metric

tons of HEU at this time. The action of transferring the equivalent of 11.6 million

pounds of DOE uranium to USEC violated the restrictions contained in the Privatization Act on the amounts of uranium that could be transferred by DOE to USEC.15

To support this transfer, DOE prepared a Secretarial Determination. It is worth

noting that the Secretarial Determination and accompanying analysis of potential

market impacts characterized the transaction as a transfer of uranium rather than

a sale. Even if this transaction was a sale, the only discussion of whether DOE received any value for this transfer over and above the transfer set forth in the Act,

is a passing reference at page 2 of the DOE Analysis which stated that the transfer

is ‘‘to settle certain Departmental liabilities at the gaseous diffusion plants.’’ The

DOE Analysis offered no explanation of the nature and dollar amount of any such

liabilities and whether the settlement of them was intended to represent the fair

market value of the transferred uranium. The Secretarial Determination is devoid

of any finding that the price paid to the Secretary was the fair market value of the

government’s material.

More importantly, the Secretarial Determination and Analysis of impacts of the

transaction on the domestic uranium industry were fatally flawed. For example, in

the Analysis, DOE failed to consider the cumulative effect of the significant quantities of uranium that had previously been transferred to USEC, the effects of higher than expected recovery rates from HEU received under the Russian HEU Agreement, and large quantities of uranium that USEC amassed through underfeeding

in the enrichment process.16

DOE’s Analysis also compared the material transferred with total domestic utility

requirements instead of comparing the transaction material to the uncommitted demand of these utilities. DOE’s analysis greatly favored a low impact result as it ignored what utilities had already purchased for future deliveries. The volume transferred should have been compared to the uncommitted supply available for a fair

and meaningful analysis.

The domestic uranium industry, although the subject of this Determination, was

given no opportunity to comment and point out the flaws in the Determination. In

fact, the transaction took the industry and the privatization sponsors by surprise.

DOE’s failure to allow comments was somewhat surprising as the Senate Energy

Committee staff had stated in a memorandum, ‘‘After the date of privatization, S.

755 allows DOE to market enriched uranium by competitive bid after DOE certifies

(through a full rulemaking process with public comment) that the sale of the material will not have adverse impact on the domestic mining or enrichment facilities.’’ 17

DOE’s 1998 determination of no adverse impact caused by the entry of 11.6 million pounds is particularly puzzling due to the fact that in 1997 DOE reduced the

amount of uranium it was to sell pursuant to a 1997 Secretarial Determination from

3.2 million pounds to one million pounds in recognition of the producing industries

warnings of the adverse impacts the sale of 3.2 million pounds would cause. Further, DOE canceled future sales due to changing market conditions that magnified

the adverse impacts to the production industry. Certainly nothing changed to lessen

impacts of the sales of government transferred uranium between the time DOE canceled its 1997 and beyond sales and redirected their uranium to USEC.

247

18 At page 7 of USEC’s S-1, USEC championed its ability to complete sales from national uranium inventory. USEC announced it was ‘‘positioned to supplement its uranium enrichment revenues through new sales of natural uranium. USEC’s existing inventory contains a substantial

amount of natural uranium, which has been supplemented by the transfer of additional uranium

from the U.S. Government.’’ 19See Exhibit 5 (Domenici to Berger letter of June 26, 1998). 20Senator Domenici’s concerns were well placed as the U.S. government was forced to pay

$325 million in 1998 for the Russian natural uranium components made in 1997 and 1998 deliveries pursuant to the Russian HEU Agreement. See Exhibit 6 (Domenici letter to Frueth, et al.

of July 20, 1998). 21This compares to UX’s projection of $11 to $13 without the addition of USEC’s extra material. 22See Exhibit 7.

Again, the revelation that much larger uranium inventories would be transferred

to USEC first surfaced publicly in USEC’s S-1 Privatization Statement.18 After reviewing the initial surprise disclosures of USEC’s unexpected uranium inventory

largesse, Senator Domenici (a key privatization supporter) expressed strong concern

over the impacts on the additional transfers on the uranium market.19 Senator

Domenici also expressed grave reservations about the inventory impacts on the Russian HEU Agreement. Senator Domenici felt this was a national security concern

and implored the National Security Council to review the impact of the transfer

prior to the Administration’s decision to approving the sale of the Enrichment Corporation.20 The announcement of DOE’s additional transfers had an almost immediate adverse impact on the uranium market and the domestic industry.

An initial response to USEC’s revelation of its expanded inventory holdings and

its intent to bring these substantial inventories to the market was the prediction

of a major drop in prices by one of the leading industry consulting companies. The

Uranium Exchange Company’s (Ux) ‘‘Market Impact of USEC Inventory Sales’’ published in July 1998, predicted if, as advertised in the S-1, USEC sold 60 million

pounds of those inventories into the market by the end of 2005, the spot market

price of uranium would decline to $8 to $10 from 1999 to 2004.21 If USEC utilized ‘‘underfeeding’’ as they apparently have, the price according to Ux’s projection could drop to $6.00 to $9.00 from 1999 to 2004. Ux may have been a bit too pessimistic

with their price projection but it appears they did not project that Russian HEU

feed would be squeezed out of the market to the extent it has been.

In addition to the damage done to the domestic uranium industry as a result of

USEC’s uranium, the U.S. Treasury has also paid a big price. Only three months

after USEC’s privatization, Congress was required to bail out the Russian HEU

Agreement by purchasing the natural feed component of the Russian HEU material

delivered in 1997 and 1998. An appropriation of $325 million was required to make

this purchase. DOE, in recognition of the adverse impacts of its USEC transfers, put

this purchase material and its remaining uranium inventories on hold for a ten-year

period in an effort to bring some order to the commercial market. While it would

be difficult to perceive how the sale of additional DOE material could survive a Secretarial Determination, DOE’s action has not had an effect in correcting price imbal- ances. In fact, every U.S. uranium producer has curtailed its uranium production since

USEC’s privatization. Many producers have placed their operations on standby,

while others have cut back on production. New Mexico, the historic leader of domestic production, is producing no uranium for the first time since 1955. Many foreign

producers have also reduced production as production costs, in most if not all instances, exceed the market price of uranium.22 It has been devastating to our industry that quantities of uranium beyond those specified in the Privatization Act were

transferred and that the Act’s four million pounds U3O8 per year sales limit has

been ignored.

In retrospect, it was a serious mistake to have transferred any U.S. governmentowned inventories to USEC beyond a necessary in-process working inventory. The

success of the HEU Agreement and an entire industry are now at stake. The result

of the excessive government transfers has been production curtailments, mine closures, the termination of development plans, the departure of critical talent, and a

total cessation of exploration by every uranium mining company in the U.S. and

most overseas companies.

U.S. utilities generally contract two to five years in advance of their actual uranium delivery requirements, leaving some flexibility in their contracts for spot purchases if the spot market is attractive enough. Overseas utilities generally contract

even further into the future. Therefore, when USEC was privatized with a large

uranium inventory, in order to convert that inventory to cash, USEC was forced to

sell at deep discounts into a market already largely committed. This has suppressed

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23See Exhibit 8. 24See Exhibit 9 (Stout letter to Richardson dated November 24, 1999). 25See Exhibit 10 (Rate of Return on DOE Repurchase). 26See Exhibit 11 (Magwood letter to Stout dated February 16, 2000).

the price of natural uranium obtained by real producers and has devalued the uranium component of the Russian HEU material.

When President Clinton signed the Privatization Act in April 1996, the published uranium price was $16.15 per pound U3O8. Since that time, it has dropped to $9.10

per pound U3O8. Domestic production in 1996 totaled 6.3 million pounds. This year,

production will be approximately 3 million pounds. Perhaps even a better measure

of what the USEC Privatization has meant to our industry is reflected in the

CAMECO (the largest publicly traded uranium company) share price which has declined from $72.90 in April 1996 to $16.80 at last week’s close of the Toronto Exchange—a loss of approximately 80 percent of its value before the USEC privatization.23

If nothing is done to correct this situation, our nation will lose valuable mining

operations, ore resources and the skilled operators that can produce uranium at

very reasonable prices. Due in part to NRC bonding and decommissioning requirements, it is extremely difficult and costly to hold uranium mines in a standby mode.

In 1999, uranium provided about 23 percent of the electric power in the United

States. More capital is invested in nuclear generation facilities than all other generating plants combined. In the U.S., only coal fuels more electricity supply, and in

Europe and Japan, nuclear power ranks first in electricity production. Because of

its low fuel cost, reliability, air quality benefits and secure supply lines, uranium

has now become a fundamental energy source in the industrialized world. Yet, it

seems that in the United States, some policy makers have come to view the nuclear

power industry as a way to absorb surplus military stockpiles of uranium over the

short-run rather than as a key power source for the long-run.

The uranium industry can relinquish a substantial share of the commercial market to Russian uranium as provided by the HEU Agreements and the Privatization

Act and still maintain a reasonable level of production to maintain competitiveness.

However, it cannot survive the uncontrolled dumping of transferred U.S. government stockpiles by USEC.

Mr. Chairman, we urge this Committee to look into why the quantities of uranium to be transferred from DOE to USEC increased from the time the initial privatization plans were agreed to in 1995 and the actual public offering in 1998.

We urge the Committee to inquire as to whether DOE’s economic impact analysis

of the USEC privatization that determined ‘‘no adverse impact on the domestic uranium industry’’ presumed that the four million pounds U3O8 per year USEC sales

restriction would be adhered to.

We urge the Committee to consider legislation to clarify the intent of the Privatization Act with respect to uranium transfers and sales and also whether USEC

should continue to be granted legal immunity from taking action contrary to the

provisions of the Act.

We believe legislation should be adopted to make clear that further transfers of

uranium from DOE to USEC would only be authorized after a full hearing from all

affected parties and that U.S. government contracts intended to subsidize USEC operations such as low-cost power supply deals with TVA, be evaluated as to their impact on uranium markets and the HEU Agreements.

The domestic producers have met with DOE and other members of the front end

of the nuclear fuel cycle to discuss potential remedies to the current situation. In

November 1999, the uranium and conversion producers proposed that DOE repurchase the uranium transferred to USEC during the privatization process.24 This proposal allowed DOE to sell the repurchased uranium when uncommitted demand expanded. This would have allowed DOE to recapture its expenditure and recognize

a positive return in the future.25

While DOE recognized ‘‘that many issues intersect at the juncture of the domestic

uranium market—including the continued success of the U.S./Russian agreement on

highly enriched uranium,’’ DOE was unwilling to pursue this proposal.26 DOE did,

however, agree to work with industry and other stakeholders to resolve the complex

issues raised. We eagerly await any initiatives DOE might put forward. These initiatives may require U.S. taxpayer involvement in financing the Russian HEU

Agreement or possibly a tax credit for nuclear utilities purchasing new mined uranium, conversion and enrichment services. We believe a solution can be achieved

with Congress’ assistance.

Mr. Chairman, it is my fervent hope that we will look back at this hearing as

a milestone in refocusing the Congress and the Administration in correcting past

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missteps in the handling of issues affecting the front end of the nuclear fuel cycle.

We believe that nuclear power will play a vital role in producing clean, efficient electrical power for our nation, lessening our dependence on coal and foreign oil. The

domestic uranium industry, given a level playing field, can compete economically

with producers in the western world and assist in maintaining a secure source of

fuel for our nation’s nuclear power plants. We also need strong conversion and enrichment programs to complete the nuclear fuel cycle. It is of the utmost importance

that Congress takes the lead in correcting the errors of the past, and we look forward to working with you and others that recognize the need to do this.

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Mr. WHITFIELD. Thank you, Mr. Stout.

We have been called for our last vote of the day, but I would like

to go on with Dr. Brewer and get your opening statement.

TESTIMONY OF SHELBY T. BREWER

Mr. BREWER. Thank you, Mr. Chairman. I am pleased to be here

to give you whatever perspective I can on this situation. As you

know, I had—I have had less than 1 week to prepare. About 17

years ago, I was in the Reagan administration during the first

term; and I had responsibility for all of the nuclear activities in the

Department except weapons production. Uranium enrichment was

one of the responsibilities, and we had a very severe market crisis

during my tenure there. We took very acute and realistic actions

to turn that situation around and got the market back. We reduced

cost. We reformed the contract format. We made provisions to burn

out the secondary market which was being fed by overpricing and

take-or-pay contracts, et cetera; and I emerged from that neardeath experience with a conviction that we needed to run this business like a business.

Now 17 years later and 2 years after the celebrated IPO, the ox

is in the ditch and you know the statistics. They have been cited

several times today. The stock value has depressed 70 percent.

Market cap is down to $400 million. The company has lost its credit standing, credit rating. Market share is down. Costs are up.

Backlog is down and most important, the quality of the backlog,

the margin implicit in the backlog is not there. It is gone. And so— and reported earnings and projected earnings are down. Moreover,

USEC is selling their inventory, $1 billion worth of inventory

roughly that they inherited from the Department of Energy. They

are selling it rapidly to cover these operating deficits. You have just

heard that.

This raises a very crucial issue in my mind. What did USEC

management know in 1998 at the time of the IPO that is now

known? I should have said what did they not know then that is obvious now. It was obvious then. It was obvious 5 or 6 years ago

that there was an elephant in the living room, and it is just that

simple. Now you have them here on Capitol Hill with this pathetic

the ‘‘dog ate my lunch’’—or ‘‘dog ate my homework’’ excuse. It was

the market that did it. It was the Russian deal that trashed them.

And it is baloney; it really is. They negotiated the Russian deal.

Why would they negotiate something that places them at disadvantage?

So I would like to refer—and I will be very brief. As Henry the

IV said to his wives, I won’t keep you long—to the figure in my testimony and I will make these points very briefly. They are selling

below their total cost of production plus margin. And that can’t go

on indefinitely. Their proposal now is to renegotiate the Russian

contract. Well, they can add maybe—they can reduce their cost by

maybe $5 an SWU, not much to write home about.

There are—the other proposal that is being discussed is the shutdown of a GDP, either Portsmouth or Paducah. That too is only a

temporary Band-Aid because Avlis has been terminated. Avlis has

been terminated. If you look at my chart, Mr. Chairman, they are

back in the soup even with the termination of a GDP in the year

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2004. And that is because the negative backlog or the nonquality

backlog in their order books keeps growing on. It is a gift that

keeps on giving year after year after year. So I wish I could be

more responsive to your invitation for finding a magic bullet that

would fix all of this and in 1 week’s time I have not done that.

But I know that blaming the Russian deal is a red herring. That

is not it. The way they are contracting for SWU production now is

not it. The backlog that they inherited was $125 an SWU which

is—or the contracts I signed in the early 1980’s. And then of course

as has been discussed today and I won’t go into it, the IPO process

itself is suspect. With the borrowing of half a billion dollars in

order to trump the bid of a private company to acquire USEC,

where was the SEC and the Treasury during this oversight, during

this process? I will quit at that point. I think I am in enough trouble.

[The prepared statement of Shelby T. Brewer follows:]

PREPARED STATEMENT OF SHELBY T. BREWER, S. BREWER ENTERPRISES, INC.

Mr. Chairman and members of the Committee, I wish I could say that I am

pleased to present testimony on this subject. The Uranium Enrichment Enterprise

was one of my responsibilities when I was in the Reagan Administration in the

early 1980s. We faced a severe market crisis in those days, and were able to turn

it around and save the business from insolvency. We owe much of the credit to John

Longnecker who I appointed to head the enrichment enterprise. The business

emerged stronger because we took painful actions to reduce costs, became more customer attentive. We slimmed down, shaped the business, and became competitive.

John and I emerged from this ‘‘near death experience’’ with the conviction that the

Uranium Enrichment Enterprise urgently needed to be fundamentally restructured

and run like a business, market-driven, rather than an instrument of U.S. foreign

policy, a contractor feeding trough, and as a federal cash cow, an irresistible plaything for federal budget aficionados barnacling onto any available revenue stream.

John and I strongly supported the government corporation element of the 1992 Energy Policy Act.

The financial performance of the privatized entity, United States Enrichment Corporation (USEC), has been dismal, and it’s future looks grave. I cite the following

indicators:

1. The stock price has fallen by more than 70%, reducing USEC market capitalization from $1.6 Billion in 1998 to about $400 million in early year 2000.

2. Standard and Poors downgraded its credit rating at the end of August 1999, and

again in February 2000 to below investment grade, with a future outlook as

‘‘negative’’.

3. On February 23, 2000, Moody’s also downgraded USEC’s senior unsecured bank

credit and short-term debt ratings.

4. Merrill Lynch, one of the IPO underwriters, downgraded USEC’s stock in February 2000 based on concerns regarding future cost compositeness.

5. USEC slashed its dividend in February 2000 due to poor financial performance.

6. Fiscal year 1999 sales were less than promised, and fiscal year 2000 revenue estimates were lowered by about $100 million.

7. Despite aggressive sales of uranium inventories (transferred from the Department

of Energy to USEC), fiscal year 2001 earnings estimates have been lowered to

about $35 Million. USEC’s annual report for 1999 noted that net income has

fallen consistently. Selling this inventory is like living on principal rather than

earnings.

8. Gaseous Diffusion Plant (GDP) production costs increased and exceeded $95/

SWU, in contrast to USEC’s goal of achieving GDP production costs of $75/

SWU.

9. USEC market share both world and US has declined: the US market share has

declined from 90% to 75%, and the world market share has declined from 70%

to about 40%. The backlog has declined, and the quality of the backlog (margin)

has declined drastically as USEC began contracting SWU deliveries below cost.

What concerns me most is the trend toward an ultimate liquidity (cash flow) problem, a short step away from bankruptcy. I have no access to USEC internal data,

and properly so. I am using only data which is in the public domain, and have had

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less than one week since the invitation to testify, to data-gather and analyze. In recent trade press interviews, USEC’s senior management has discussed USEC’s declining revenue and increasing costs.

Using USEC’s method of comparison, my projection of USEC’s financial condition

(based on its SEC filing) is quite daunting as shown in the attached figure. Terminology in the figure is defined as follows:

USEC Breakeven Cost is the sum of direct GDP production cost, plus Sales, General

and Administrative Expenses (SG&A), plus Research Development, plus Dividends. This is the price that would recover all Production costs, overhead costs,

and return a profit margin.

GDP Cost is the sum of Power Purchase Cost, plus Depreciation, plus Maintenance

and Other Operating Costs.

Average Sales Price is the Revenue divided by SWU production.

The figure is intended to show fundamental concepts and trends. Data has been

taken from public domain sources, since I do not have access to USEC’s internal

books. One can argue about the absolute magnitudes and the dates in the figure,

but the point is to illustrate trends and prospects.

Several points can me made from the figure.

1. First, Average Sales Price in the immediate future drops below USEC Breakeven Cost, that is, the price the actual price is insufficient to cover costs and provide

a return to the stockholders.

2. This condition persists until about 2003, when USEC when USEC Breakeven

crosses under the Average Sales Price. 3. This assumes that (a) the Soviet deal is renegotiated to trim about $10/SWU off the Soviet price (a net savings to the enterprise of about $5/SWU); (b) one GDP

is closed (about 2002).

4. Beyond about 2004, Average Sales Price falls below USEC Breakeven again,

so that the Soviet renegotiation and the GDP shutdown are not permanent fixes as

long as USEC continues to contract product sales under cost. Recent sales prices

are just about $80/SWU, and impact of these sales roll out into the future.

Again, I do not want to imply that this chart is based on rocket-science analysis.

It is intended to define the crisis, show major trend lines, and to roughly measure

impacts of remedies which have been discussed.

From the analysis summarized in the figure, believe, I believe that USEC will continue to experience significant financial problems, namely losses from its core business that USEC-management will try to offset by selling inventories inherited from

DOE, a non-viable and non-substantive stratagem for the short or long term.

One (of the several) excuses that USEC management has made for its poor performance is the that the uranium purchase deal with the Russians, for National Security and diplomatic purposes, injures USEC’S bottom line. This is a red herring.

First of all, the Soviet Union deal was negotiated in by USEC itself as the executive

agent of the US Government. They negotiated a deal which they are now complaining about. Second, the classical ‘‘make or buy’’ mathematics was applicable in

the early 1990s when Soviet quantities were small and the marginal cost of U.S.

production was significantly lower than it is now. In that time frame, there was indeed a penalty for buying the Soviet material. Now, however, the quantities to be

purchased from the Soviets will account for almost half of the total USEC SWU deliveries, and the cost of producing this material internally at the US GDP’s is significantly above the Soviet price. This is because new, firm power, power purchase

agreements will have to be negotiated, probably significantly above the roughly 2

c/kwh price USEC now pays. The price for purchased power could be as high as 3

c/kwh. In short, the purchase of the Soviet material is a plus, not a negative, to

USEC’s bottom line. Third, the transfer of the DOE stockpile, valued at about $1

Billion, offset any disadvantage the Soviet deal imposed on USEC in early days of

implementing the deal. For USEC to come to Capital Hill with a tin cup, pleading

for a subsidy, is disingenuous. The Soviet deal cannot be used as a crutch to excuse

poor management.

USEC will argue that all of the maladies their business suffers were and are beyond their control. I disagree. Apparently not understanding that it was in an oversupplied, buyers-market, USEC did not adopt a competitive price ceiling once the

Atomic Energy Act Section 161v evaporated in 1992. Over the side went my and

John Longnecker’s pledges to reduce costs/prices further below the $125/SWU we

contracted for in the early 1980s. As a result of this gouging, USEC lost market

share, and actually sued its customers for terminating contracts and seeking other

supply options. When this strategy proved ineffective, USEC began selling SWUs

under its current cost. The customer population regards USEC as a very unstable

source of supply, and this perception results from the arrogance and ineptitude of

the company.

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Another critical question is the foundation of the Initial Public Offering (IPO)

process itself, and the representations made at the time. It is clear to me that the

enterprise was hugely overvalued in garnering in excess of $1.5 Billion in stock

placement. For one thing, the uranium stockpile inheritance (evaluated at about $1

Billion) was a gross overstatement, in that this is not immediately fungible. If one

tried to convert this to dollars rapidly, the market price would collapse. The correct

way to evaluate the stockpile is to compute the present value of a long Stream of

modest stockpile sales, using classical discounted cash flow methods. The selling

would stop when the inventory level reached that working inventory needed to run

the business efficiently Another issue with the EPO process is the curious loan of

$500 Million that USEC management obtained to trump the bid of a private company to acquire USEC. The industry knew of course that the last thing that USEC

management wanted was a simple straightforward acquisition of the business as a

method of privatizing. The transaction was sort of characterized as a hybrid LBO/

IPO transaction. Whatever, the debt service on the $500 Million loan is on the backs

of the USEC IPO stockholders. Where was Federal (Treasury and SEC) oversight

during this process?

The Treasury and the taxpayer cannot complain, because the money to trump the

private company offering was obtained and deposited in the Treasury. What makes

it public business now, however, is that USEC is seeking a federal subsidy, and because the future of U.S. uranium enrichment capacity is a national security issue.

Therefore, Mr. Chairman, your oversight is timely.

Subsidizing this failed business and its management is not a solution, but another

invitation to further industry cynicism, by rewarding sloppy and inept commercial

practice.

Since I received the invitation less than one week ago to be here I have thought

long and hard about an equitable solution for the U.S. Government, the USEC

stockholders, and an operational fix to the financial meltdown we see in USEC. I

am sorry that I cannot present to you a surgical failsafe recommendation at this

time, a set of silver bullets.

The first set of recommendations are peripheral, obvious, hard, and do not solve

the endemic problem.

(a) renegotiate the prices paid to the Soviets—this is the USEC proposition, and I

wish them well, although they negotiated the current Soviet scenario and have

little credibility. Also, from the Figure, the potential improvement on the USEC

bottom line (about $5/SWU), is not large.

(b) close one of the two GDPs, and try to make significant savings in operating and

maintenance expenses—this could significantly improve USEC’s bottom line,

but would not be a lasting solution, as USEC’s poor quality backlog will continue to flow through (prices below cost) the books.

(c) negotiate new power supply contracts—I doubt if this would reduce power price—

in all likelihood, the price would increase;

(d) advise USEC to enter new adjacent businesses, to diversify—However, USEC

has no cash or credit-worthiness to make acquisitions, and the management

team is not credible, so this approach is not viable.

None of the above nibbling-at-the edges approaches have a high success probability, enough to offset the financial disaster, nor could they arrive in time to save

the enterprise. Therefore, deep and major structural changes are in order. I am totally opposed to subsidizing USEC from the tax base. (If anything, USEC should pay

back a portion of the advantage it enjoys from the Soviet windfall.)

Therefore I believe major structural changes must be contemplated, and that will

involve legislation. These are my thoughts:

A) First, separate and delineate clearly and budget separately roles of national security/diplomacy from USEC.

B) Have the Departments of Defense or Energy reclaim beneficial control over one

GDP for national security purposes. The plant could be put in a hot standby

configuration if there is no near-term need for HEU production. If there is a

payment owed to USEC stockholders, make it.

C) Compute mathematically any loss of USEC stockholder value due to the Soviet

deal as it was implemented when marginal costs of production were less than

the Soviet price, less any gain from the Soviet deal more recently (when USEC’s

production costs have increased significantly).

D) Encourage USEC stockholders to examine creatively the prospect of a merger or

divestment with another enrichment supplier, or successful adjacent operator in

the nuclear fuel cycle.

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Mr. Chairman, I wish I could be more optimistic, and more helpful to the Committee. I wish I had more definitive recommendations as to a solution. Thank you

for the invitation to be here.

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Mr. WHITFIELD. We will recess for about 10 minutes; and then

we will come back, Dr. Stiglitz, and have your testimony and Mr.

Miller’s. I apologize for this delay, but it won’t be very long.

[Brief recess.]

Mr. WHITFIELD. I would like to reconvene the hearing and Dr.

Brewer had just finished his testimony. So, Dr. Stiglitz, if you

would give us your testimony.

TESTIMONY OF JOSEPH E. STIGLITZ

Mr. STIGLITZ. Thank you. It is a pleasure for me to appear before

you to testify on this subject of the privatization of the U.S. Enrichment Corporation. As I point out in my written testimony, from

1993 through 1997 I served as a member and chairman of the

President’s Council of Economic Advisors. In that capacity I participated in extensive discussions on the privatization issue. In my

years on the council, I faced a large number of complicated and

technical issues in which there was considerable uncertainty about

the merits of alternative courses of actions. Decisions had to be

made and these decisions entailed difficult judgment calls. The privatization of USEC was different. This was an issue where there

were serious large down-side risks and virtually no upside gains.

What I want to do is describe what I thought of as the central

down-side risks and what are the alleged benefits and why I

thought they were so minuscule.

The main basis of our opposition was really one that went to the

issue of nuclear nonproliferation. And as economists, the reason

that we were involved is that we had to assess what the incentives

of USEC as a privatized entity would be. There had been this important agreement that has been referred to a number of in—a

number of times where we were bringing in the HEU from Russia.

I think all of us believed very strongly this was a bipartisan BushClinton initiative, getting as much of that into the United States

as fast as possible. So we thought that was very important; and as

economists we then had to ask the question if it were privatized,

would there—what would their incentives be. We came to the very

strong conclusion that it was not—it would not be in their interest

as a privatized entity to maintain that flow of HEU and that they

would engage in one way or another a variety of ways of trying to

do everything they could to stop that flow coming in.

One way of putting it, we argued that there was an inevitable

conflict of interest between the interest of the privatized new monopoly in the U.S. and the national interest in seeing that as much

of the uranium be brought into the United States as possible. We

have seen—even while USEC remained under Timbers within the

U.S. Government, we have seen manifestations of the potential

conflict of interest and the dissembling to which it could give rise.

When Russia offered to increase its sales substantially, USEC

declined the offer and payment could only be interpreted as hush

money to keep the agreement secret. Even after the secret agreement was signed, representatives of USEC in a meeting at the old

executive office building denied that they would ever engage in activities that would slow down the flow of enriched uranium. They

would always put the national interests first and they said it with

seeming conviction. But to be sure when they made those strong

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denials, they were unaware that there were those at the meeting

who already new about the secret agreement that they had already

signed or that the council of economic advisors would manage to

learn of its contents within days. There were other examples, manifestations of conflicts of interest that I don’t have time here to talk

about and I didn’t in my testimony; but if you want a more extended discussion, I could do that.

At the council, we also addressed the issue of whether there were

mechanisms of regulatory oversight that would be able to address

effectively the issues of conflict of interest; and we came to the conclusion that that would be very difficult, and some of the discussion

earlier today has highlighted some of the difficulties, for instance,

oversight on the safety issue and the kind of bind that the government would get into if they failed to meet the regulatory requirements. So we, in fact, had anticipated that; and that had been a

source of our concern. Those on the other side said well, don’t

worry about these things. Regulation oversight will take care of it.

There were other problematic issues associated with privatization, one of them being competition policy. Those in the antitrust

division shared our view that this was not an industry that was

competitive; and, therefore, normal private market forces were not

at play.

The conclusion I just had time to touch on was that there were

clear down-side risks, and the question then is were there off-setting benefits. And our belief was strongly that there were not beliefs—there were not benefits to anyone who is not absolutely committed to privatization as an end in itself. Only if you took that as

your goal, would privatization be something that you would say is

valuable.

The economic benefits, the efficiency gains that had been hoped

from privatization, actually there have been enormous gains already in the preceding years through the process of

corporationization. So the benefits that one would hope to get from

privatization, we do not anticipate any significant further benefits.

Moreover, the standard argument for privatization which is derived from intense competition from private firms were not applicable in this case precisely because this is not a market in which

most of the other firms are private. In fact, all of the other firms

in the world have a very large public role. And there is actually a

high degree of market concentration.

One of the alleged benefits of privatization was that it would provide funding for the new AVLIS technology. We engaged in consultations on this matter and came to the view that the prospects

for the new technology were limited at best.

We also came to the view that this was not what you might call

a clean privatization. That is to say the government was assuming

a whole variety of liabilities not only environmental but the kind

that Representative Strickland talked about earlier; and so this is

not the kind of usual privatization that you think of where you

have a clean transfer of assets to the private sector of a steel mill

or something like this. This was an area where there was inherent

conflict, inherent important public role that could not be separated

from the privatization process.

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One of the driving forces for privatization was obtaining the

President’s commitment to a balanced budget, an issue which

seems particularly irrelevant given today’s budgetary situation.

Things turn around quickly in this world. But as an economist, this

argument was especially questionable since privatization revenue

shouldn’t even be included in the budget since they constitute a

sale of an asset. So our view was this was a whole bogus issue. But

even if you took it on its face, the fact of it is that if you look at

the privatization and how much revenue did the Government get

and a point that has already been made, $1.9 billion; but then you

ought to subtract out the fact that it was given all this uranium.

Anybody can sell uranium. You were talking about selling the corporation. At one time they actually also talked about putting cash

reserves. Selling cash is not very difficult either.

The interesting thing, of course, is that there is an incentive to

boost up the value of the total enterprise, the corporation including

the uranium, because, of course, the commissions that are given

are based on the total asset sale—the commission to the companies

that do the sale are usually based on asset value. So they include

the $1.9 billion, not the $900 million or whatever is the value of

the company. So they were getting very large commissions on the

sale of uranium, and I am sure anybody else selling uranium would

have enjoyed commissions at those levels.

As it turned out, many of the concerns that we raised in the

course of the privatization debate seemed unfortunately to have

been borne out. The AVLIS technology was abandoned. The revenues raised were not substantial and the budgetary situation clearly made the whole issue barely germane. According to newspaper

reports, the privatization at times has put at risk a broad range

of negotiations over nuclear proliferation issues.

And again USEC has expressed at times reluctance at continuing

the importation of material from Russia. The regulatory issues that

we were concerned about have again surfaced in an important way.

The national benefits from the privatization have yet to be demonstrated. The risks presented are already all too apparent. And let

me just conclude on one remark about the decisionmaking process

itself.

I regret that there was not a full, open discussion of the issues

prior to privatization. I cannot see how any issue of national security was served by the secrecy and lack of transparency that surrounded so much of the privatization process. Greater openness

would have subjected the decision to more intensive public scrutiny, and that scrutiny I believe may well have led to a different

outcome, one that I still believe would have been far more in accord

with our overall national interests. Thank you.

[The prepared statement of Joseph E. Stiglitz follows:]

PREPARED STATEMENT OF JOSEPH E. STIGLITZ, WORLD BANK

It is a pleasure for me to appear before you to testify on the subject of the privatization of the U.S. Enrichment Corporation (USEC). During the period 1993 through

1997 I served as a member, and then Chairman, of the President’s Council of Economic Advisers. In that capacity, I participated in extensive discussions on that

issue. In my years on the Council, I faced a large number of complicated and technical issues, in which there was considerable uncertainty about the merits of alternative courses of actions. Decisions have to be made, and these decisions entail hard

judgment calls.

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1 At a meeting of the Council of Foreign Relations in which the issue was discussed, not a

single individual could identify benefits of privatization which were at all commensurate with

the risks.

The privatization of USEC was different. This was an issue where there were serious, large downside risks, and virtually no upside gains. It was an easy judgment

call, one that I came to feel strongly about, and where my judgment was shared

by all those in the Council and its staff who looked at the issue. It was a view, by

the way, which was also shared by those in the academic community (mainly those

involved in national security issues), with whom I discussed the issue.1 While I was

Chairman, we succeeded in presenting the adverse case against privatization sufficiently effectively that it was delayed, but as you all know, shortly into the Administration’s second term, the privatization was finalized.

Central to the Council’s opposition to privatization was a concern about issues of

nuclear non-proliferation. We strongly agreed with the commitment of both the

Bush and Clinton Administrations that it was in everyone’s interest that as much

of the enriched uranium from the nuclear warheads be deenriched and transferred

to the United States as quickly as possible, and were highly supportive of the

swords-to-ploughshares agreement made with Russia that entailed the de-enriched

uranium being use for nuclear power plants. USEC had been assigned the role of

the exclusive agent for bringing the material into the United States and marketing

the LEU (low enriched uranium) to electric utilities. This made sense, given the

dominant market share that the USEC, at the time, a public entity, had, not only

in the United States, but around the world. But privatization would change all that.

Our analysis showed convincingly and beyond any shadow of a doubt that it would

not be in the interests of a privatized USEC to bring the material into the United

States; the costs of producing enriched uranium (especially at the low rates—arguably below market—at which USEC obtained electricity) were less than the fair

market price at which USEC would be required to purchase the material from Russia. There was an inevitable conflict of interest—between the interests of the

privatized near-monopoly in the U.S., and the national interests in seeing that as

much of the uranium be brought into the United States as possible.

We had seen manifestations of the potential conflict of interest—and the dissembling to which it could give rise—even while USEC remained within the public sector. When Russia offered to increase its sales substantially, USEC declined the offer

and paid what can only be interpreted as hush money to keep the agreement in secret. Even after the secret agreement was signed, representatives of USEC denied,

in a meeting at the Old Executive Office Building, that they would ever engage in

activities that would slow down the flow of enriched uranium; they would always

put the national interests first! To be sure, when they made those strong denials,

they were unaware that there were those at the meeting who know about the secret

agreement, or that the Council would manage to learn of its contents within days.

But this was not the only example of a manifestation of a conflict of interest which

I could relate before you today.

An issue that we debated extensively was whether there were forms of regulatory

oversight that could adequately address this and other conflicts of interest issues.

There was also a debate about whether the threat of terminating USEC’s exclusivity

in importing the enriched uranium sufficed to ensure ‘‘good behavior’’ on the part

of the USEC. Our conclusion was that it was not, nor did we have confidence that

an effective regulatory mechanism could be set into place.

There were other problematic issues associated with privatization. For instance,

the high level of market share raised concerns about the effectiveness of competition. Given that, had USEC been in the private sector, it is unlikely that an agreement to become the exclusive agent for importing the material from one of the few

competing sources would have passed anti-trust scrutiny. My concerns for the anticompetitive effects were shared by those in the anti-trust division of the Department

of Justice with whom I spoke.

There were thus clear down-side risks. Were there offsetting benefits? These were

not apparent to anyone not absolutely committed to privatization as an end in itself.

Major efficiency gains had already been achieved, and it was not apparent that

there were significant further efficiency gains to be had from privatization. Moreover, the standard arguments for privatization, derived from intense competition

from private firms, were not fully applicable in this case. USEC had a major share

of the world market, there were only a few other firms; all of the other firms had

substantially public sector ownership; and even if were later to become privatized,

governmental interests in maintaining a supply of enriched uranium implied that

there might not be the standard arms-length relationship to government. One of the

alleged benefits of privatization was that it would provide funding for the new

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AVLIS technology. We engaged in consultations on this matter, and came to the

view that the prospects for the new technology were limited at best.

One of the driving forces for privatization was attaining the President’s commitment to a balanced budget—an issue which seems particularly irrelevant given today’s budgetary situation. As an economist, this argument was especially questionable, since privatization revenues should not even included in the budget, since they

constitute just a sale of an asset. Indeed, while revenues in the year of the sale increase, revenues in subsequent years would decline. The long run impact on the

public debt accordingly was likely to be small at best. As it turned out, the net revenue attained from the sale of USEC (net of fees paid for privatization and net of

the sale of uranium which accompanied the sale of USEC) were sufficiently small—

especially when account is taken of the future lost revenues—to make it clear that

the benefit was not at all commensurate with the risks.

As it turned out, many of the concerns that we raised in the course of the privatization debate seem, unfortunately, to have been borne out. The AVLIS technology

was abandoned. The revenues raised were not substantial, and the budgetary situation clearly made that whole issue barely germane. According to newspaper reports,

the privatization, at least at times, has put at risk a broad range of negotiations

over nuclear proliferation issues. And, again, according to newspaper reports, USEC

has expressed at times reluctance at continuing the importation of the material

from Russia. The national benefits from the privatization have yet to have been

demonstrated. The risks presented are already all too apparent.

Let me conclude by a remark about the decision making process itself. I regret

that there was not a full, open discussion of this issue prior to privatization. I cannot see any issue of national security that was served by the secrecy and lack of

transparency that surrounded so much of the process of privatization. Greater openness would have subjected the decision to more intense public scrutiny, and that

scrutiny, I believe, might well have led to a different outcome, one that I still believe

would have been far more in accord with our overall national interests.

Mr. WHITFIELD. Thank you, Dr. Stiglitz.

Mr. Miller.

TESTIMONY OF RICHARD D. MILLER

Mr. MILLER. Thank you, Mr. Chairman. I am Richard Miller a

policy analyst for the Paper Allied Industrial Chemical and Energy

Workers Union, which, as you know, represents 2,000 worker at

Portsmouth and Paducah gaseous diffusion plants, and another 250

workers at the Honeywell-operated ConverDyn facility in Metropolis, Illinois. And with me are representatives of the local unions

and workers at the Paducah and Portsmouth plants.

USEC, it is important to understand, is more than a private company simply seeking to satisfy shareholders. In order to privatize

USEC, Congress mandated that USEC fulfill important public responsibilities. Privatization would never have been approved by

Congress had those important public responsibilities been abandoned. So for USEC today to come in and say these are shackles,

these are restrictions that were imposed upon us by the Government you have to understand fundamentally this never would have

happened if those obligations had been abandoned.

In fact, they were proposed by USEC in their privatization plan.

How in fact did we wind up in the predicament where we are

today? At least one point is that every red flag that was raised—

and there were numerous—whether it was the conflicts of incentives between shareholders and our national security; whether it

was whether you could mesh imports from Russia and maintain

and operate two gaseous diffusion plants; whether it was possible

to have a viable and economic domestic supply while the company

was relying on cash-flow from glutting the uranium and conversion

markets; whether it was even anyone did any due diligence to find

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out if AVLIS will work. As we know, the joke was you will see

Elvis before you see AVLIS. And I wish I had my Elvis mask today. Today, USEC is in deep financial trouble. Not only was $325 million required to bail out the Russian agreement just after privatization, largely as a result of the impact on the national uranium markets, USEC came back looking for another $200 million precisely

as one of the panelists here predicted. USEC is digging itself a

deeper hole. It has borrowed another $200 million to finance stock

buy-backs, it is paying out dividends in excess of its earnings, and,

in fact, it appears as though that stock buy-back was precisely designed to drive down the credit rating in order to escape the Treasury agreement so they could close one, if not both, of the gaseous

diffusion plants when the cost lines cross the revenue lines some

time at end of 2003.

The junk bond rating has clearly impaired their ability to finance

new technology. And selling general and administrative costs have

jumped 36 percent in the first 6 month of the current fiscal year,

reflecting higher senior management salaries and the addition of

blue-chip lobbyists who are plying the halls of government looking

for assistance and seeking relief, particularly from this congressional oversight hearing.

The central reason USEC was privatized through an IPO was

based on Mr. Timbers’ claim that the private corporation was going

to promptly deploy AVLIS. Transcripts, however, of the board of directors meetings reveal that the other two companies bidding for

USEC didn’t think AVLIS was going to work and several board

members were troubled that highly sophisticated firms were saying

that their basic business plan wasn’t going to work.

Well, the independent advisor, J.P. Morgan, upon whom both the

USEC board and the Department of Treasury relied for independent advice, said this about those who doubted AVLIS, quote,

Let’s don’t forget what you all heard yesterday was not an unbiased technical expertise advice. Every one of those guys are clearly

professional board spookers and they clearly had an agenda which

was to convince this board, meaning the Federal USEC board, that

what they were saying was right and what you all have done for

the past 4 years is wrong. But rather than seek an independent review, the Chairman of the board called on Mr. Timbers, one who

clearly had a self interest in the IPO outcome, to disparage his

competitor’s view of AVLIS. He said every day privatization is delayed is a day we delay the deployment of AVLIS. And yet less

than a year after privatization, AVLIS is gone. Now USEC is disclosing its considering closing one of the GDPs in contravention of

the privatization act. And I would add none of the significant

events that were testified to by Mr. Gensler can be found anywhere

in the privatization act or the EPAct of 1992. They got invented out

of thin air.

Wall Street is urging closure of a plant on the grounds they

would save $65 million a year. And yet experts, some of whom I

know have briefed this committee, including John Longanecker, are

of the view that USEC will likely have no uranium enrichment industry in this country sometime after 2003 or 2004. So it won’t be

a debate about which goes first, Portsmouth or Paducah. It will be

both.

275

In July 2001, the restrictions on stock ownership which restricts

shareholders from holding more than 10 percent of USEC’s stock

expire. And at that point if USEC is worth more dead than alive

as some suspect as they today, a liquidator will come in and will

break them up. Now the question is, what would Congress do in

that case? Would they be able to act at that point? Would the administration be able to act? Is there any reason to believe on the

other hand that another solution which has been touted, which is

a takeover by a bigger more financially solvent firm, might help?

They may be more financially solvent, but they have the same

shareholder incentives; and for that reason there will be no likelihood that both plants will be operated, there is no assurance the

Russian agreement will be implemented if it is not in their economic interest, and the $1 billion to deploy centrifuges will never

be coughed up, particularly if it is cheaper to liquidate than it is

to invest.

In fact, it is more likely than not that both gaseous diffusion

plants will be closed before any new enrichment technology is ever

deployed in this country.

I see my time is running down. I would like to point to one other

commitment Mr. Timbers made. Many of us doubted both gaseous

diffusion plants would last to 2005; and the reason we doubted it

was because of 5.5 million SWU a year coming into the country and

how was he going to manage both GDPs at the same time. There

were options proposed. Mr. Whitfield and Mr. Strickland here proposed legislation to create what we called at SWU bank a way for

the Government to play a role taking some of the Russian SWU off

the market and metering it in a responsible fashion, but that was

rejected.

Yet Mr. Timbers said in letters to us all operating plants considered by USEC require the running of both GDPs until the year

2004. He said I clearly stated no matter what scenario we looked

at we will have to keep both plants up and producing for the foreseeable future until at least 2004 just to meet customer demands.

And I would like to further clarify these matters in the hope that

there would be no further miscommunications by the union about

them.

Mr. Rainer reiterated those commitments just 2 months before

privatization, and yet here we find ourselves confronting USEC

manipulating its balance sheet in order to get out of Treasury

agreement by buying back stock and driving down its credit rating.

That was a Treasury agreement shot through with loopholes. Everybody knew it. We tried to call the Treasury on it. They would

not meet with us. They refused meetings. We tried to meet with

the USEC board and you know what USEC’s advisors said? The

union is complaining about nothing. They continue to complain

about nothing.

Mr. WHITFIELD. Mr. Miller, excuse me, if you could conclude.

Mr. MILLER. I apologize, Mr. Whitfield.

Mr. WHITFIELD. Your testimony is very good.

Mr. MILLER. I am sure you will have an opportunity to already

have read it. Let me just go to where we are. We have got two

choices. We can follow the administration’s asleep-at-the-switch approach, which is where we are. And you heard it in the testimony

276

before us. We can issue severance checks and seek appropriations

for cleanup work that might hire 150 people. But there is no administration policy with respect to the problems wrought by this

privatization. USEC’s signalling it’s triggered a significant event.

They have told me privately they have triggered a significant

event. It is pretty hard to imagine that anybody could believe they

haven’t.

Moreover, I expect fully that the administration, as Mr. Gensler

testified, will continue to sit there like a deer staring in the headlights, while they close the plants. We have heard nothing that

causes us to believe they will investigate the breach of contract into

which USEC has manipulated itself.

Finally, how do we get out of it? And I’m sure this panel will explore it. We’re not abashed to say that you are not going to save

the domestic uranium mining and conversion industry unless this

goes back in the Government, and the only question is how do we

get there.

[The prepared statement of Richard D. Miller follows:]

PREPARED STATEMENT OF RICHARD D. MILLER, POLICY ANALYST, PAPER, ALLIEDINDUSTRIAL, CHEMICAL & ENERGY WORKERS UNION

I am Richard Miller, a policy analyst for the Paper, Allied-Industrial, Chemical

& Energy Workers Union (‘‘PACE’’). PACE represents 2,000 hourly workers at the

Paducah, Kentucky and Portsmouth, Ohio gaseous diffusion plants, and 250 workers at the Honeywell uranium hexaflouride conversion plant in Metropolis, Illinois—

the only enrichment and conversion plants in the United States.

SUMMARY

Congress authorized the Administration to privatize the government-owned USEC

only on the condition that privatization: (1) would not be inimical to national security; (2) would provide for the continued operation of the Kentucky and Ohio uranium enrichment plants; (3) would provide for a reliable and economic domestic uranium mining, enrichment and conversion industry; (4) would provide for the long

term viability of the enterprise; and that (5) the buyer would not be foreign owned

or controlled. Subject to the fulfillment of Congressional mandates, Treasury was required to maximize the proceeds from privatization. On July 22, 1998, USEC’s

Board led, by its Chairman, William Rainer, voted 3-1 (with the fifth member abstaining) to approve privatization via an Initial Public Offering (‘‘IPO’’).

USEC, Inc. (hereafter, the private company will be referred to ‘‘USEC, Inc.’’) operates the Department of Energy’s (‘‘DOE’’) two uranium enrichments plants in Ohio

and Kentucky, the only domestic sources of enrichment capacity in the US. These

plants supply fuel generating plants that provide approximately 20% of the country’s electricity.

USEC was also vested with the responsibility for the uneconomic, but essential,

non-proliferation agreement on behalf of the US government: the U.S.-Russia Highly

Enriched Uranium (‘‘HEU’’) Agreement. USEC markets $475 million/year of blended-down highly enriched uranium derived from Russian warheads to nuclear utilities for use as reactor fuel.

Today, USEC is in financial trouble. It has sought $200 million in government aid

to cure the defects that were evident from the outset of privatization. Prior to privatization, the contradictions inherent in USEC’s fulfillment of its domestic, national security and shareholder obligations were brought to the attention of USEC’s

Board, the Treasury Department, the Energy Department and the White House.

These decisionmakers knew that implementation of the Russian agreement would

displace 47% of USEC’s production and drive up production costs at the enrichment

plants. These decisionmakers also knew USEC would become the high-cost producer

in an oversupplied world market with declining prices, making it difficult to survive

against its three other competitors—all government-controlled enterprises. But the

entire process was conducted in needless and unlawful secrecy. Smart people are

more likely to do stupid things when they close themselves off from outside criticism

and advice.

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1 BNY Capital Markets, Research Report, April 7, 2000, pp 11USEC will likely shutdown the

nation’s enrichment industry over the next 3 years. This will result in total dependence on foreign sources for nuclear power plant fuel. 1USEC, Inc’s. liquidation, or its gradual transformation into a uranium brokerage operation, both plausible outcomes, would eliminate all domestic production. Some believe that a takeover by a larger company will rescue USEC, Inc.

But there is no reason to believe that a takeover will keep two plants open, assure the Russian

agreement is implemented, or provide the $1+ billion needed to deploy lower-cost enrichment

technology. It is more likely than not that both gaseous diffusion plants will close before a new

technology can be designed, licensed and deployed—unless the government is running the enterprise.

The central reason USEC was privatized through an IPO was based Mr. Timbers’

claim that the private corporation would promptly deploy an AVLIS, a new technology that had the potential to make USEC the low-cost supplier worldwide. Transcripts of USEC’s secret Board Meetings reveal that the other two companies who

were bidding for USEC were dubious, at best, about commercializing AVLIS. One

Board member recalled industry joke: ‘‘You’ll see Elvis before you see AVLIS.’’ Rather than obtain an independent review of the commercial viability of AVLIS, the

Chairman called upon an admittedly ‘‘very biased’’ CEO Nick Timbers, to disparage

his competitors’ views of AVLIS. Less than a year after privatization, the same

managers pulled the plug on AVLIS.

USEC has disclosed that it is considering the closure of one gaseous diffusion

plant (‘‘GDP’’), in contravention of the Privatization Act and USEC’s pre-privatization commitments to run both plants through 2004. Wall Street is urging closure,

on the premise that USEC would save net $65 million/year 1. Meanwhile, USEC continues to spend heavily on dividends, stock buybacks, and high executive salaries.

Today our testimony will ask why was privatization was botched so badly, what

is the prognosis, and what steps should Congress take next? One feasible solution:

establish a government-owned corporation similar to the one establishing USEC in

EPAct of 1992, and have this enterprise develop a plan to take over the US Russia

HEU Agreement, the operations of the GDPs, and the competent management of

USEC’s inventories.

USEC, INC. HAS ALREADY JEOPARDIZED FOUR MANDATED PUBLIC RESPONSIBILITIES

THAT IT FREELY ASSUMED AS PREDICATE TO PRIVATIZATION

USEC Inc. was vested by statute and contract with important public responsibilities. USEC now portrays these responsibilities as shackles; in fact, they were proposed by USEC in the plan submitted to the Administration on behalf of privatization. Now, only 18 months after privatization, four of these responsibilities have

been or will soon be jeopardized, absent government intervention.

• implement a 20 year government-to-government agreement between the United

States and Russia to import 5.5 million SWU/year of Low Enriched Uranium

derived from nuclear warheads. EPAct of 1992 required that privatization ‘‘not

be inimical to the common defense and security.’’ (42 USC 2297d-1)

• continue operations of the Energy Department’s two gaseous diffusion plants in

Portsmouth, Ohio and Paducah, Kentucky (42 USC 2297h-2);

• provide for the protection of the public interest in maintaining a reliable and economical domestic source of uranium mining, enrichment and conversion services

(42 USC 2297h-2); and

• provide for the long-term viability of the corporation (i.e. deploy next generation

technology) (42 USC 2297h-2).

USEC’S FINANCIAL PLIGHT IMPAIRS ITS FULFILLMENT OF PUBLIC OBLIGATIONS

In the 18 months since privatization, the commitments that were made prior to

privatization—especially those to maintain a reliable and economic domestic uranium mining, enrichment and conversion industry—are dissolving amidst the force

of USEC’s financial difficulties. Objective indicators include:

• USEC, Inc. has announced layoffs/separation of 1450 workers—fully 1/3 of the

workforce. Honeywell, the sole domestic UF6 ‘‘conversion’’ plant, has laid off

20% of its workforce since privatization.

• USEC, Inc.’s credit ratings were downgraded 3 notches by Standard & Poors from

BBB+ (investment grade) to BB+ (below investment grade or ‘‘junk bond’’ status).

• The Nuclear Regulatory Commission has commenced a review to determine if the

credit downgrades will be inimical to the maintenance of a reliable and economic source of domestic enrichment services over a 5-year period.

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2SEC Form 10-Q for USEC, pp. 11, February 7, 2000

• USEC’s key to long-term viability—low cost AVLIS enrichment technology—was terminated as uneconomic less than a year after privatization. The non classified portion of the government’s $1.7 billion investment was auctioned off at an

abandoned K-Mart for less than $1 million. • USEC, Inc’s power costs are up 50% at Paducah since privatization. • USEC, Inc. projects a steep decline in earnings in the year beginning July 1 ($35-

$45 million). This is <10% of the earnings in 1995. The lion’s share of 2001

earnings will come from monetizing part of the Energy Department’s firm power

contracts at Portsmouth. • Merrill Lynch, one of USEC’s IPO underwriters, downgraded its recommendation

on USEC, Inc.’s stock to ‘‘neutral’’ and noted that USEC’s condition is ‘‘worse than we feared.’’ • USEC, Inc.’s stock price, which measures investors’ reaction to its plan for main- taining competitiveness, has dropped to $4.50 from the $14.25 IPO price.

USEC, Inc. is digging an even deeper hole for itself:

• Since privatization, USEC, Inc. borrowed another $200 million, largely to finance

the buyback of 30 million shares and pay dividends that exceed earnings. The

debt to equity ratio has increased from 33% to 40%. • Selling, general and administrative costs have jumped 36% in the first 6 months

of the current fiscal year 2. This reflects significantly higher senior management

salaries, an increase in headquarters staff, and the addition of blue chip lobbyists who are plying the halls of government looking for ‘‘assistance’’ and relief

from Congressional oversight. • The junk bond credit rating has impaired USEC, Inc’s ability to finance new technology. Even with possible technology sharing arrangements with the Energy

Department, USEC, Inc. may be bankrupt or liquidated by the time it is ready

to break ground on centrifuge technology—assuming it is an economic path forward. • USEC, Inc. is losing 785,000 lbs of R-114 freon coolant per year. At this rate,

USEC, Inc. will run out of its inventories of R-114 by September 2001. R-114

has been banned under the Montreal Protocol, costs about $12/lb and is very

scarce. Equipment modifications at Portsmouth are needed for alternative coolants, but these have not commenced. USEC, Inc. will have to close the Portsmouth plant if it does not upgrade for alternative coolant. Without replacement

coolant, even the government could not run these plants.

Privatization has jeopardized implementation of the U.S.-Russia HEU Agreement:

• Shipments under the U.S.-Russia HEU agreement were suspended shortly after

privatization because of privatization’s adverse impact on natural uranium mar- kets. A $325 million bailout was required to restore shipments in April 1999. • USEC, Inc. informed the Administration and Congress that it would terminate its

role as Executive Agent of the HEU Agreement on December 1, 1999, if it did

not receive $200 million in assistance. USEC, Inc. argued it deserved assistance

to compensate for low market prices. This assistance was denied, in part, because USEC, Inc. advised Wall Street that it was going to announce a stock repurchase plan, and keep paying dividends, and in part because it was unwilling

to keep its commitment to operate both GDPs through 2004.

THE ROOT OF USEC’S ECONOMIC PROBLEMS

USEC is a high-cost producer in an oversupplied market competing with government-controlled enterprises. Its production, brokerage, and technology development

activities are independently and collectively impaired.

A. Domestic uranium enrichment economics:

Today, USEC is writing new long-term contracts at $80-83/SWU, but its production costs at the GDP’s average $95+/SWU. The reason USEC is generating profits

at all is that the ‘‘order book’’ of customer contracts assumed by USEC upon privatization included contracts priced at $125/SWU, which has fortunately kept its average selling price at approximately $110/SWU this year. But this cash cow is going

to run dry, because the high-priced contracts will expire between 2001 and 2003.

At that point USEC will confront negative operating margins on its GDPs, absent

a major recovery in SWU prices or dramatically lower electricity costs.

USEC’s domestic production economics have been substantially impaired by

brokering 5.5 million SWU/year of Russian-origin Low Enriched Uranium (‘‘LEU)

derived from nuclear warheads. The HEU deal has displaced 47% of USEC’s domestic production. Prior to the Russian Agreement, USEC made 13.6 million SWU/year

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3 ‘‘Conversion’’ is the process of converting yellow cake to UF6. UF6 is the feedstock that goes

into the GDPs.

at the two plants. But USEC has had to cut production by nearly 50%. This raises

unit production costs, as there are fewer units of production over which to distribute

fixed costs. Thus, even as USEC cut payrolls by 500 in 1998-1999, its average production costs nonetheless jumped from $78.50/SWU in 1995 to $97 SWU in 2000.

The additional 850 layoffs slated for July 14, 2000 will cut production costs by approximately $5.50/SWU, but will not restore profitability to domestic production.

Pressured by the need for cash flow to pay out dividends that exceed its earnings,

and implementing a 30 million share buyback, USEC has raised cash by selling off

its inventory of natural uranium and UF6 conversion products. These aggressive

sales have driven down the market price for UF6 conversion services 3. Without

some improvement in the conversion market, major layoffs are inevitable. USEC’s

sales of government-provided inventory, in short, are eroding the viability of the

only domestic conversion plant in the US.

USEC’s production costs have also been driven up by summertime spikes in power

cost. The Paducah is plant is exceptionally vulnerable to price spikes because it is

almost exclusively reliant upon off peak power. However, the impact has been partially offset by sale of blocks of unused firm power at Portsmouth.

B. Brokering the Russian HEU Agreement Economics

USEC pays an average of $88/SWU (including shipping) for the 5.5 million/year

of SWU from Russia. These sales are economic when USEC, Inc. fills its order book

of contracts valued at as much as $125/SWU. It is not economic when, as now,

USEC enters in new contracts at a market price of $80-85/SWU.

USEC is trying to extend the Russian contract at a much lower price, estimated

to be 15% below market price ($68-70/SWU). The Russians are reportedly willing

to consider market realities, but the size of the price reduction sought by USEC is

unlikely to be accepted by the Russians. Moreover, USEC is unlikely to close a deal

anytime soon, as the Russians gain leverage the closer they get to the contract expiration date of December 31, 2001. Political developments in Russia also counsel

against swiftly concluding a deal for a 20% price reduction.

USEC’s marginal cost of production (outside of four summer months) is about $60/

SWU Based on the $88/SWU Russian cost, USEC points out this amounts to an opportunity cost of approximately $100 million per year to USEC shareholders (a cost

disclosed in USEC’s S-1 prospectus). This disincentive, as noted above, drove USEC

to threaten to terminate as the US Government’s Executive Agent due to the impact

to its shareholders.

C. USEC, Inc. Has No Advanced Technology and Cannot be Competitive with GDPs

Alone

Although the Energy Department and USEC invested $1.7 billion, AVLIS was determined by USEC, Inc. not to be commercially feasible. With 50 year old GDPs and

no proven advanced technology option, USEC, Inc. has no clear path to future competitiveness. With weakened financials USEC, Inc. would find it difficult, if not prohibitively costly, to raise funds to deploy replacement centrifuge enrichment technology that is used by Urenco, its primary European competitor.

THE DETERMINATION TO PRIVATIZE WAS MADE IN DISREGARD OF REPEATED AND

NUMEROUS ‘‘RED FLAGS’’ SHOWING THAT PUBLIC MANDATES COULD NOT BE HONORED

Pursuant to Court order, PACE obtained transcripts of the secret USEC Board

of Director’s meetings. The transcripts show the decision to privatize was made in

disregard of red flags that should have given pause regarding the viability of the

privatized corporation and its ability to meet national security and domestic mandates. Rather than investigate these warnings, those responsible for privatization

too eagerly deferred to the claims of (a) USEC management, who stood to retain

their jobs and attain major pay increases and (b) the ‘‘independent’’ financial advisors, who had $7.5 million in success fees tied to a ‘‘Yes’’ vote to privatize.

A. Prior to Privatization USEC Steadfastly Committed to Continued GDP Operation;

It Contrived an Escape from these Commitments Within 18 Months of Privatization

Prior to privatization, USEC management vigorously maintained it could implement the US Russia HEU agreement and continue operations of both uranium enVerDate 11-MAY-2000 09:40 Mar 16, 2001 Jkt 010199 PO 00000 Frm 00283 Fmt 6633 Sfmt 6621 E:\HEARINGS\64028 pfrm01 PsN: 64028
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4OCAW—the Oil, Chemical & Atomic Workers Union—is the predecessor to PACE. On January 5, 1999 OCAW merged with the United Paper Workers International Union to form PACE. 5These exceptions were not found anywhere in the USEC Privatization Act.

6Transcript, July 22, 1998, pp. 48

7 Remarks of William H. Timbers, USEC, Inc. Board of Directors Meeting, November 3, 1999

8Letter from Senators George Voinovich and Mike DeWine and Representative Ted Strickland

to William H. Timbers, January 26, 2000. 9 USU is the stock trading symbol for USEC.

10Stock analyst report by Kit Konolige, Morgan, Stanley, Dean Witter, Downgrade, Another

Miss, Catalysts Still Far off, February 4, 2000, pp. 4.

richment plants. On April 24, 1997, USEC’s CEO Mr. Timbers wrote to OCAW 4

President Robert Wages:

‘‘All operating plans considered by USEC require the running of both GDP’s

(gaseous diffusion plants) until the year 2004.’’

‘‘I clearly stated no matter what scenario we looked at, we will have to keep

both plants open and producing for the foreseeable future, at least until 2004,

in order to meet customer demands.’’

USEC refused to produce numbers to show how USEC could operate both GDP’s.

Mr. Timbers nonetheless scolded the union for doubting management’s credibility:

I would like to further clarify these matters in hopes that there would be no

further miscommunications by OCAW about them.

When, on May 1, 1998 OCAW questioned how the statutory requirement to operate both GDPs would be enforced post-privatization, Board Chairman William

Rainer wrote:

‘‘We would remind you that Nick Timber’s letter of April 24, 1997 to you advised OCAW of USEC’s policy position that both GDPs would operate at least

through 2004. This remains our position as we review the various privatization

options.’’

On June 29, 1998, the Treasury Department and USEC released an agreement

on Post Closing Conduct (‘‘Treasury Agreement’’). The agreement, incorporated in

the sales contract, requires USEC to maintain operations of both gaseous diffusion

plants through December 31, 2004. On review of the agreement, OCAW wrote to Assistant Secretary of Treasury Gary Gensler that the Agreement was ‘‘booby trapped’’

with loopholes, including the following ‘‘significant events’’ by which USEC can escape the statutory requirement: 5 1. events beyond the reasonable control of USEC,

such as natural disasters; 2. a decrease in annual worldwide demand to no less than

28 million SWU; 3. a decline in the average price for all SWU under USEC’s longterm firm contracts to no less than $80 per SWU (in 1998 dollars); 4. a decline in

operating margin below 10% in a consecutive 12 month period; 5. a decline in the

interest coverage ratio to below 2.5x in a consecutive 12 month period; or 6. if the

long term corporate credit rating of USEC is, or is reasonably expected in the next

12 months to be, downgraded below and investment grade rating.

OCAW also asked the USEC Board for the opportunity to appear before it to explain the problems with these loopholes. The request was denied and the Board

transcripts show USEC’s legal advisors ridiculed OCAW’s concerns. Les Goldman of

Skadden, Arps stated: ‘‘they [the union] continued to complain without giving reason.’’ 6

Within 18 months of privatization, USEC has engineered a ‘‘two-step’’ escape from

the Treasury Agreement.

Step One: Mr. Timbers advised shareholders of his desire to rationalize ‘‘global

over capacity.’’ 7 In January, 2000 Congressional staff were advised that ‘‘USEC anticipates plant closure at either Portsmouth or Paducah to occur sooner than 2004.

The January 25 USEC Board meeting discussed the possibility of plant closure.’’ 8

Morgan Stanley, the lead underwriter for USEC, Inc.’s Initial Public Offering,

publically outlined a plan it had privately urged USEC to take to escape the Treasury Agreement:

With aggressive stock buybacks, the debt could be downgraded to below investment grade. That would be a formal condition allowing USU 9 to shut down

one unneeded production plant, which would save $100 million/year annually,

according to management. But the physical capability to do all needed production at one plant may be year or more away. And there will be heavy political

pressure fighting any such shutdown.10

Step Two: USEC followed the script laid out by Morgan Stanley. On February 3,

USEC announced that, despite poor earnings prospects, it was repurchasing 20 million shares of stock. On February 4 Standard and Poors immediately downgraded

USEC’s credit two notches to ‘‘below investment grade’’. USEC verbally advised

PACE that a ‘‘significant event’’ had been triggered under the Treasury Agreement.

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On January 26, PACE wrote to USEC’s Board urging it to hold off on rumored

stock buybacks and dividend payments because this would compromise the Treasury

Agreement. We urged USEC, Inc.’s Board to evaluate whether the corporation could

be viable without substantial government assistance. USEC, Inc.’s Board never acknowledged our letter, leading us to question whether Mr. Timbers ever shared it

with his Board.

At the same time, Senators Voinovich, DeWine and Representative Strickland

wrote USEC’s Board: ‘‘We are forced to question whether USEC entered into the Agreement on Post

Closing Conduct in good faith. It appears to us because of USEC’s current consideration of plant closure, whether it is Portsmouth or Paducah, that USEC

entered into the agreement with fully considering the effects that market supply

[from Russia] would have on our country’s enrichment activities.’’ Minutes of USEC’s Board meetings from 1996, that had been unlawfully withheld

for a year under the Government in the Sunshine Act, reveal that as a governmentowned corporation USEC had, in fact, considered plans that included closing a plant

prior to privatization. The August 7, 1996 minutes state: ‘‘the supply mix assumed in the ‘Strategic Plan’ was not a vote to shut down

the plants, but represents a possibility.’’ This raises concerns about the veracity of USEC’s management’s representations.

The USEC Privatization Act of 1996 (PL 104-134) had already been signed into law

on April 26, 1996, with a requirement to continue operations of both gaseous diffusion plants as a pre-requisite for privatization.

On February 22, 2000, PACE verbally advised Treasury officials that USEC, Inc.

had triggered a ‘‘significant event’’ under the Treasury Agreement, and that USEC,

Inc. had taken steps which appeared to involve bad faith conduct. Treasury refuses

to investigate whether USEC, Inc. has subverted the Treasury Agreement in bad

faith. Treasury refuses to even acknowledge that a ‘‘significant event’’ has occurred,

even as USEC, Inc. announced that fact in February 7, 2000 Securities and Exchange Commission filing. We are at a loss to explain the calculated indifference

by the Administration.

The lessons are clear. USEC made promises before privatization, but they were

memorialized in loophole-ridden agreements. Protestations that the loopholes were

big enough to drive a truck through were summarily dismissed. With the Administration looking the other way, these promises are now being broken.

B. USEC and the Administration Ignored a Congressionally Proposed Solution to the

Conflict Between the Russian Agreement and Continued Operations of the GDPs

The twin goals of Implementing the US-Russia HEU Agreement and continuing

operations of the both gaseous diffusion plants were never meshed prior to privatization.

Seeking to pre-empt the conflict that has predictably emerged, Representatives

Ted Strickland and Ed Whitfield filed HR 3491, the Assisting Acquisition of Russian

Material Act, on May 21, 1998, two months prior to privatization. The ‘‘Findings and

Purposes’’ spelled out the problem and a possible solution to the problem USEC, Inc.

claims unfairly shackles it two years later:

‘‘The execution of the Russian HEU Agreement will significantly increase the

supply of LEU (Low enriched) fuel available in the United States marketplace;

and, as a result and in order to balance supply with demand, the privatized

United States Enrichment Corporation may have to take actions contrary to or

inconsistent with maintaining long-term viability, continued operation of the

gaseous diffusion plants, and a reliable and economical domestic source of uranium mining, enrichment, and conversion services, and other statutory requirements...’’

‘‘The principal responsibility for ensuring the faithful implementation of the

United States obligations under the Russian HEU Agreement, which is a government-to-government agreement, lies with the Department of Energy; and the

execution of those obligations is an inherently governmental function under the

foreign policy of the United States.’’

‘‘Therefore, the Department of Energy shall, subject to appropriations, acquire

directly or from the United States Executive Agent such amounts of the Russian

HEU converted to LEU under the Russian HEU Agreement, and withhold such

amounts from resale into the private market for such period of time, as may

be necessary to fully achieve the national security goals of the United States

under the Russian HEU Agreement and to allow a privatized United States Enrichment Corporation to meet the statutory requirements of the privatization.’’

At the time the bill was filed, USEC management, not wanting to concede the incompatibility of the privatization with operating two GDPs and keeping the Russian

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11Oped entitled, ‘‘This Privatization Proposal is Radioactive,’’ Wall Street Journal, Joseph E.

Stiglitz, June 2, 1998. 12The experts included Tom Neff, the MIT physicist who has been credited with conceiving

the HEU agreement; Richard Falkenrath, a national security scholar at Harvard; General

Burns, the now-retired officer who negotiated the HEU Agreement with Russia; and as mentioned above, Joseph Stiglitz.

HEU deal alive, rejected the concept offered by HR 3491. They said Congress would

never appropriate funds because the Russian Agreement had to be cost free for the

government. Ironically, USEC was back 18 months later looking for a way to have

the government carry the costs of the Russian HEU Agreement on behalf of their

shareholders.

C. The Secret Transcripts Confirm that the Decisionmakers Failed to Perform Due

Diligence on the National Security Impacts of Privatization

1. At the time they decided to privatize, the USEC Board and the Treasury Department were on the broadest notice that due diligence required renewed review of the

conflict between national security and shareholder interests.

In the weeks before the July 28, 1998 the Administration was put on the most

visible notice of the uniform concern of independent experts that privatization would

imperil national security. In a Wall Street Journal op-ed, Joseph Stiglitz, former

Chairman of the Council of Economic Advisors, wrote 11:

‘‘That privatization is generally desirable is a core belief of modern economists. Still many economists, including me, oppose the auction [of USEC] which

would be the most significant privatization effort in a decade.’’

‘‘As an economist I believe in the power of incentives. That’s why the auction

[of USEC] is so worrisome. The management of a privatized USEC would have

a responsibility to its shareholders to maximize market value. That goal is likely to conflict with national security. This potential conflict of interest could be

a major threat to national security because of the crucial role of USEC in our

nuclear non proliferation efforts.’’

At the time of the Board’s final deliberations, nationally recognized experts on the

Russian agreement expressed strong concern about the effect of privatization.12 On

June 26, 1998 Senator Pete Domenici—a prominent proponent of privatization—

wrote to National Security Advisor Sandy Berger: ‘‘In recent days I have become

concerned that aspects of the pending sale... may have a serious impact on implementation of the HEU Agreement and therefore national security.’’ He added, ‘‘I am

not certain that a privatized executive agent can still function in the ways necessary

to carry out the national security objectives of the HEU Agreement.’’

Days before the IPO was announced, Senator Domenici learned that USEC would

enter the private market with 30 million more pounds of government uranium than

was assumed when the 1996 USEC Privatization Act was adopted. Mr. Domenici

was concerned that the unanticipated sale of this inventory into the market would

lead to a reduction in uranium market price, thereby causing an unplanned reduction in the value received by the Russian government as part of the U.S.-Russia

HEU Agreement. These developments ‘‘could significantly reduce the Russian Federation’s incentive to continue the Agreement.’’

In fact, the Russian government stated its concern that privatizing USEC with

a 70 million pound inventory of natural uranium would significantly devalue a

major component of the US Russia HEU Agreement. In a July, 1998 letter to Senator Domenici, Russian Minister E.O. Adamov stated ‘‘the execution of the Agreement [US-Russia HEU Agreement] is rapidly deteriorating’’ as a result of privatization. (Letter attached).

On July 16, PACE asked to address USEC’s final board meeting to discuss whether a bailout of the Russian Agreement might be required. This request was denied.

Meanwhile 47 members of the House wrote the Administration asking them to stop

the privatization.

On July 20, Senator Domenici advised the Vice President’s National Security Advisor Leon Feurth, and others that the Administration would be wise not to proceed

with privatization, as conceived, because it ‘‘could imperil the HEU Agreement’’.

Senator Domenici wrote: ‘‘If this means that you would have to resticker the S-1

[Prospectus], so be it.’’

A July 20, New York Times editorial (‘‘Nuclear Security for Sale) , predicted that

privatization ‘‘promises rich underwriting fees for Wall Street. But this deal offers

little economic gain for the taxpayer and risks big losses for American nuclear security.’’

2. The Secret Transcripts Show that USEC Board Chairman William Rainer, and

USEC’s consultants, thwarted due diligence on national security.

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13 USEC Board Transcripts, July 22, 1998, pp. 53 14 USEC Board Transcripts, July 22, 1998, pp. 50 15 USEC Board Transcripts, July 22, 1998, pp.93 16 USEC Board Transcripts, June 2, 1998, pp. 177 17 USEC Board Transcripts, June 3, 1998, pp. 206 18 USEC Board Transcripts, June 3, 1998, pp. 198

On July 22, 1998 the USEC Board met to finalize its privatization decision. The

transcripts show that USEC Board Member William Burton’s multiple requests that

the USEC Board be briefed by Senator Domenici and National Security staff were

denied because ‘‘I was told that might inflame the market and so they wouldn’t be

invited.’’ 13 Indeed, Mr. Burton noted that Board had not even been provided with

the Senator’s June 20th letter.

In lieu of a briefing by official national security experts, Chairman Rainer asked

USEC’s private lawyer from Skadden, Arps to brief the Board on national security.14

Following the lawyer’s statements, Board Member Burton reiterated that the Board

was being kept in the dark:

I don’t think we have enough information in light of this issue that has risen

up. There has been a ton of press, a ton of meetings, everybody who’s been involved in it except this Board, and we can’t even get a briefing on them.15

Shortly following the July 28, 1998 privatization, Russia suspended shipments

under the HEU Agreement due to the adverse impacts of USEC privatization on

natural uranium markets. At the Administration’s request, Congress was asked to

appropriate $325 million to bail out the Agreement as part of a deal to offset the

harm to Russia from USEC privatization. Cynically, senior Administration officials

were planning to seek Congressional bailouts even before the Initial Public Offering

was concluded. But this information was conveniently kept away from those who

were asking questions on the USEC Board.

3. The Public Concerns Soon Proved Correct—In fact, in October and November

1999, USEC, Inc. threatened to terminate its role as the Executive Agent under the

US Russia HEU Agreement if it didn’t obtain substantial (up to $200 million) in

government assistance. Predictions made by Dr. Stiglitz were confirmed.

This threat induced the US government to seek out replacement executive agents.

The Administration quickly discovered that a replacement executive agent would require a subsidy to take on this uneconomic brokerage agreement, and that the conflicts built-in to the privatization, which the Administration it had dismissed were,

in fact, quite real. In response to USEC’s concerns, (a) the Administration was prepared to offer no more than it would have to expend to hire a replacement executive

agent, and, (b) to the credit of the Energy Secretary, only if USEC, Inc. lived up

to its previous commitments to keep both gaseous diffusion plants open through

2004. USEC refused to cement the commitment that it had made only 16 months

earlier, and further declared it was laying of 850 more workers regardless of government assistance.

D. The Secret Transcripts Reveal that While Serious Doubts Surfaced About Whether

AVLIS Could be Commercialized and USEC Could Ever Be Viable, Due Diligence Was Not Performed

The transcripts show that the primary private bidders—Lockheed/Carlyle and

General Atomics/Texas Pacific—told the USEC board that they planned to limit investment in or defer deployment of AVLIS. Board members quickly realized that the

doubt cast on AVLIS by technically sophisticated bidders called USEC management’s claims into question. USEC Board Member Christopher Coburn stated:

It seems to me that we have a problem, because we have a critical technology

which we have based our assumptions on for future performance throughout.

We have one source of information. Now finally, we have several independent,

if you count these bidders as being independent, sources seem to disagree with

us.16

Similarly, Board Member Margaret Greene stated:

we got pretty consistent input from our first opportunity to have external

sources give us input, that the AVLIS projections were not realistic.17

However, the transcripts show that USEC Board Chairman William Rainer was

determined not to secure the requisite independent review of USEC’s management

claims:

‘‘[i]t is not practical at this moment to bring in an independent knowledgeable,

up to date expert on some of the issues that we heard yesterday that were in

conflict with the business plan that management has put together and that this

Board has supported now for over four years.’’ 18

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19 USEC Board Transcripts, June 3, 1998, pp. 206-207 20 USEC Board Transcripts, June 2, 1998, pp. 177 21 USEC Board Transcripts, June 3, 1998, pp. 215 22 USEC Board Transcripts, June 3, 1998, pp.242 23 USEC Board Transcripts, June 3, 1998, pp.244 24 USEC Board Transcripts, June 3, 1998, pp. 299 25 USEC Board Transcripts, June 3, 1998, pp. 268 26 USEC Board Transcripts, June 3, 1998, pp. 211-212 27 ‘‘Advanced Technology Business Assessment,’’ United States Enrichment Corporation, Draft

February 21, 1994, pp.102. 28 USEC in-house Counsel Robert Moore is now Counsel to USEC, Inc. PACE understands

that Skadden, Arps, which received over $15 million for its services during privatization, remains as an outside law firm to USEC, Inc. Coincident with Skadden, Arps’ statement of its

view that AVLIS was essentially a statutory condition, Board Member Burton pointed out that

Skadden, Arps was likely not to be retained by Lockheed if Lockheed were chosen (USEC Board

Transcripts, June 3, 1998, pp. 224-229). 29 USEC Board Transcripts, June 3, 1998, pp. 223-224 30 USEC Board Transcripts, June 3, 1998, pp. 200-202 and pp. 204-206

Indeed, Chairman Rainer permitted J.P. Morgan—USEC’s ostensibly independent

financial advisor—to deprecate the technical analysis provided by management’s

competition. With regard to the Lockheed/Carlyle presentation of their $1.8 billion

bid, J.P. Morgan’s Jim Derryberry advised the Board of Directors:

Let’s don’t forget what you all heard yesterday was not an unbiased technical

expertise advice. Every one of those guys are clearly professional board-spookers

and they clearly had an agenda, which was to convince this Board that what

they were saying was right and what you all have done for the past four years

is wrong.19 (Emphasis added)

The Lockheed advice, Mr. Derryberry declared, ‘‘was very biased.’’

In lieu of independent review, Chairman Rainer invited USEC management to

critique its competition behind closed doors:

And at the risk of knowing that some of us may be tempted to dilute management’s argument about the IPO from the standpoint of potential conflict of interest, we know these people pretty well and each has a factor to divide it by.

I nonetheless would like to hear management’s view, A, of some of the things

that were raised yesterday that opposed to its and our current business plans;

because, if management cares to talk about the advantages of an IPO as opposed to an M&A.20

USEC’s CEO Nick Timbers proceeded to attack his competition:

We made the decision not to do, specifically not to do what [Lockheed]

Carlyle’s proposing. And we think that all the test results that we’ve had over

the last 18 months, that it has proven probably to be the right decision.21

Mr. Timbers further proclaimed:

• ‘‘[AVLIS] is going to be the method by which this company stays viable’’ 22

• ‘‘every day that privatization is delayed is delay of deployment of AVLIS.’’ 23

• ‘‘we feel confident . . . in the successes of the AVLIS development.’’ 24

Mr. Timbers assailed his competition in secret while proclaiming he was ‘‘very biased’’:

I’m very biased. I’m biased to our plan. I’m biased to the AVLIS plan that

we have and I’m biased to what I think is a good operating plan that we have.25

Mr. Timbers declared that AVLIS was uniformly supported by external studies: 26

First of all, there have been extensive external analysis of AVLIS... Since

1994 . . .there has been one, two, three, four, five, six, external independent

analyses . . . so that there is substantial documentation about whether this is the

correct approach, to check our theory.

PACE asked for the analyses referred to by Mr Timbers. When the documents

were provided a year after privatization, pursuant to PACE’s Freedom of Information of Act litigation, one of the reports stated that:

Negative cash flows resulting from the deployment of either an AVLIS plant

or a centrifuge plant are substantial. In none of the AVLIS cases does the cumulative cash flow turn positive in less than 12 years; the usual turning point

is 16-18 years.27

USEC in-house and outside counsel—who both had a self-interest in the choice

of the IPO 28—advised the USEC Board that the statutory criteria of ‘‘viability’’

would not be met absent commitment to AVLIS.29 When challenged, Counsel necessarily acknowledged that continuation of AVLIS did not itself appear as an express statutory requirement. 30 Similarly, USEC Board Members, Treasury and

OMB officials (the latter attended all meetings) relied, it appears, on an ‘‘independent financial advisor,’’ J.P. Morgan. The transcripts show J.P. Morgan heavily

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31 USEC Board Transcripts, June 3, 1998, pp. 131-132 32Prospectus for 100,000,000 shares of USEC Stock, June 29, 1998, pp. 6 33 42 USC 2297h-7(a)(4)

favored privatization through an IPO. Indeed, it was to be given an additional $7.5

million ‘‘success fee’’ if privatization went forward, above and beyond their basic fee

of $80,000 per month.

The secret transcripts show that in the end, with the support of the private consultants, Mr. Timbers’ advocacy was central to the Board’s choice of the IPO

Only three of five Board members (Rainer, Greene, and Youngblood) voted to privatize through the IPO. At least one of the three (Board Member Youngblood) made

plain that his decision was based on the premise—erroneous as it turned out to be—

that management’s proposal was distinguished by its commitment to AVLIS:

I will simply make the statement that I think both of them [Lockheed and

management] feel that they satisfy these [statutory] criteria. They just do it in

radically different ways, one [USEC management] with an investment in AVLIS

and the other an investment, a greater investment in the GDPs (existing gaseous diffusion plants).

It is my opinion that I would rather see the investment—having been here

since the beginning of this company—to have the proceeds of these billion-plus

dollars go toward the reinvestment in AVLIS and the success of the company

as [as claimed by USEC management] compared to paying down the debt [as

ostensibly proposed by Lockheed].31

Despite the substantial uncertainty with respect the feasibility of commercializing

AVLIS, and thus doubts about the viability of the corporation, USEC’s public prospectus failed to disclose the red flags regarding AVLIS:

USEC’s public prospectus (‘‘S-1’’) filed with the U.S. Securities and Exchange

Commission stated that the new corporation would:

Commercialize AVLIS Technology: USEC plans to complete the development

and commence commercialization of the next generation of uranium enrichment

technology, AVLIS, which uses lasers to enrich uranium, and which should permit USEC to remain one of the lowest cost suppliers of uranium enrichment

services and enhance its competitive position. Commercial deployment of AVLIS

is anticipated in 2005.32

The public prospectus failed to disclose to the investing public, for example, that:

(i) all knowledgeable private bidders had cast doubt on the viability of AVLIS; (ii)

independent expertise was not empaneled to review management’s self-interested

claims; and (iii) the Board relied on the admittedly biased management group to critique its competition.

In sum, the secret transcripts provide compelling testimony that USEC management, with the support of USEC private advisers, made commitments it knew would

not be fulfilled. If it conceded that critical statutory requirements could not be fulfilled, privatization—and their large pay and benefit increases—would have been

jeopardized.

THE TRANSCRIPTS PROVIDE STRONG EVIDENCE THAT THE PRIVATIZATION OCCURRED

BECAUSE OF SECRECY AND CONFLICT OF INTEREST

A. USEC and Other Officials Took a Broad Immunity from Lawsuit and Abused It

The 1996 Privatization act provided broad statutory immunity from suit for any

act arising our of privatization:

‘‘Any stated or implied consent for the United States, or any agent or officer

of the United States, to be sued by any person for any legal, equitable, or other

relief with respect to any claim arising any action taken by any agent or officer

of the United States in connection with the privatization of the Corporation is

hereby withdrawn.’’ 33

USEC managed to take this broad immunity and abuse it. USEC, under the

watchful eye of the Treasury Department and OMB, closed the entirety of essentially all USEC meetings in blatant violation of the Government in the Sunshine

Act. Then, when OCAW took USEC to court, the Department of Justice, on USEC’s

behalf, relied on this immunity from litigation to oppose opening the proceedings.

It was only in July 1999—following a court ordered deadline—that the Government

provided thousands of pages of secret transcripts of the USEC Board meetings.

USEC also withheld numerous documents in response to OCAW’s December, 1997

Freedom of Information Act request. These documents form the core of this testimony before your Committee.

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34 Unjust Enrichment, Nation, December 13, 1999, pp. 4-5

B. The Transcripts Show that the Decision to Privatize through an IPO was

Bedrocked on Conflict of Interest

Chairman Rainer’s solicitation of the admittedly ‘‘very biased’’ Mr. Timbers to secretly attack his competitors’ claims in lieu of the admittedly needed independent

review of Mr. Timbers claims, was not merely a conflict of interest, but a conflict

that, as Mr. Timbers’ subsequent cancellation of AVLIS shows, provides textbook

demonstration of the importance of Federal conflict of interest law.

How could this conflict have occurred? Chairman Rainer and Mr. Timbers sought

to paper the conflict over with a purported ‘‘waiver’’ of the governing criminal conflict of interest prohibitions.

18 U.S.C. Section 208 (‘‘Section 208’’)). permits a waiver only where the waiving

official finds that the disqualifying ‘‘interest is not so substantial as to be deemed

likely to effect the integrity of the services which the Government may expect from

such officer or employee.’’ Chairman Rainer’s waiver letter for CEO Timbers confirmed that Timbers’ financial interest in the privatization decision was substantial (because he stood to significantly benefit depending on the method of privatization, if any, that was chosen).

In fact, Timbers, the CEO and President of the new and old company, earned

$325,000 when USEC was in public hands. Last February (1999), the board of the

newly privatized USEC, Inc. set his base pay at $600,000 per years, gave him a

$617,625 bonus and awarded him stock shares currently worth $900,000. 34 In addition, he received a ‘‘golden parachute’’ with 3 years pay and benefits if he is terminated.

As noted above, the transcripts record that Mr. Timbers himself declared that he was ‘‘very biased’’. The letter sought to justify the waiver on grounds that Timbers’ services were needed (i.e., expediency), and that Mr. Timbers would be overseen by

the Board. There is nothing in the language of Section 208, or to PACE’s knowledge,

in judicial precedent, that permits a waiver in the presence of an admittedly substantial conflict.

Chairman Rainer’s letter declared that Mr. Timbers’ admitted bias would be kept

in check because the USEC Board would monitor Mr. Timbers’ conflict of interest.

However, far from keeping conflict in check, the transcripts show—as summarized

above—that Chairman Rainer solicited Mr. Timbers’ evaluation of USEC management’s competition behind closed doors. Mr. Timbers admittedly biased evaluation,

in turn, was critical to the Board’s split decision to award USEC to Mr. Timbers’ IPO team.

PACE requested an investigation by the Public Integrity Section of the Justice

Department. In an August 13, 1999 letter to PACE, Mr. Lee Radek, chief of the

Public Integrity Section, asserted that since there was a waiver letter, there could

be no violation of the conflict of interest law. PACE wrote the Attorney General

again asking whether conflicts of interests can simply be papered over with waiver

letter, no matter how egregious the conflict.

By letter of September 29, 1999, Mr. John C. Keeney, Deputy Assistant Attorney

General for the Criminal Division responded. Mr. Keeney did not take issue with

the facts presented by PACE or dispute that Mr. Rainer’s waiver was, on its face,

in flat out violation of Section 208. Mr. Keeney nonetheless declared:

Nevertheless, successful prosecution requires that the government prove beyond a reasonable doubt each and every element of an offense. Prosecution of

USEC’s president would inevitably fail because he sought and obtained a waiver of the conflict of interest.

Thus, according to Mr. Keeney (and Mr. Radek) the Department of Justice’s view

is that anyone who wants to violate Federal criminal conflict of interest law can do

so with absolute impunity by simply papering over the conflict—however raw and

even admitted—with a waiver. Conspicuously absent from both the Radek and

Keeney letters is any legal analysis, or statutory or court authority in support of

their view that the country’s bedrock conflict of interest prohibition can be so readily

evaded.

In letters of October 8, 1999 and February 5, 2000, PACE, requested the opportunity to meet with Attorney General and staff to discuss determine of the DOJ

really intends to modify the 150-year old conflict of interest precedent without any

evident basis. Despite repeated inquiries, we have not received a response.

USEC’S PROGNOSIS: WILL ITS PUBLIC RESPONSIBILITIES BE ABANDONED OR FULFILLED?

Fifteen months from now—on July 28, 2001—the statutory restriction on shareholder control of more than 10% of USEC’s stock will expire. USEC could be taken

287

over, and the new buyer will presumably assume responsibility for the HEU Agreement. But there is no reason to believe that a takeover will keep two plants open,

assure the Russian agreement is implemented, or provide the $1+ billion needed to

deploy lower-cost enrichment technology. It is more likely than not that both gaseous diffusion plants will close before a new technology can be designed, licensed

and deployed.

If USEC’s market value remains, as it is today, far below its breakup value, efficient markets will likely unlock its breakup value through liquidation. Investors

could sell off USEC’s inventories, receivables, the ‘‘order book’’ of any remaining

above market sales contracts, and the HEU Agreement with Russia (assuming it is

economic). Over time, the US government would be handed the keys to the Energy

Department’s uranium enrichment plants. Unfortunately, the US government, at

that point, would have watched as investors separated the order book from the

plants. Without customers, the plants are not viable.

One prominent analyst stated: ‘‘Our bottom line is that making and keeping

USEC profitable for the next 5-10 years would require the stringing together of a

number of near miracles. In fact, we believe that USEC is unlikely to exist in its

present form 2-3 years hence. With 50 year old GDPs and no proven advanced technology option, USEC has no clear path to future competitiveness.’’

Under the asleep-at-the-switch approach currently followed by the Administration

and the bail-me-out approach followed by USEC, the domestic mining, conversion

and enrichment industry, as we know it, will disappear this decade.

However, given the non-proliferation imperative inherent in the Russian HEU

Agreement, an Executive Agent for HEU deal is required to broker Russian SWU.

If USEC’s order book is not liquidated, perhaps a brokerage operation will fill these

orders with increased Russian imports or subcontract production to fill out the order

book.

THE PATH FORWARD: WHAT ARE THE GOVERNMENT’S OPTIONS?

The Administration and Congress have at least three choices with respect to

maintaining a reliable and economic domestic supply of mining, conversion and enrichment services, while managing the US Russia HEU Agreement.

A. The Administration’s Asleep-at-the-Switch Approach

Aside from issuing severance checks and seeking appropriations for cleanup work

that will generate 100-150 jobs, there is no administration policy with respect to the

problems wrought by USEC privatization. USEC is signaling that it triggered a significant event under the Treasury Agreement and will announce plant closure as

soon as feasible. The Administration is signaling that it has no obligations under

the USEC Privatization Act. A cash-hungry USEC that is paying out more in dividends than it is earning will maintain cash flow by liquidating its inventories of

uranium and SWU, to the detriment of the conversion and mining industries and

USEC’s own SWU market. If USEC negotiates a long term reduction in Russian

SWU prices to below market, it will be far more economic to broker than operate

the GDPs. If USEC goes bankrupt, the creditors will take control of the USEC’s

order book. The government will confront the nasty question of whether it has to

negotiate with creditors in front of a bankruptcy judge over who should control the

Russian HEU agreement.

B. USEC’s Current Approach to Government Assistance

USEC appears interested in Administration support for extending the Russian

HEU Agreement for 15 years at market-based pricing plus a brokerage premium.

USEC’s financials indicate that, absent dramatic reductions in electricity costs and/

or increases in SWU pricing, it will go negative on operating cash flow from the

GDPs and likely close both by the end of 2003. USEC appears interested in the government providing financial assistance to deploy new technology, through in-kind

DOE research, buildings and equipment, and loan guarantees.

Long term investments in new technology—if feasible—require that USEC is not

liquidated, nor bankrupt, before completing the construction project in the 2006-

2007 time period. Under the current pathway it is likely that both GDPs will be

closed before any new technology is deployed and operating successfully.

C. It is Time to Create a Government-Owned Corporation to Assure the Public Interest is Not Further Compromised

The Administration and Congress should develop a plan to create a new government-owned corporation modeled after the original United States Enrichment Corporation which was established under the Energy Policy Act of 1992.

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Initially, this new corporation would be charged with assuming the role as an Executive Agent for the U.S.-Russia HEU Agreement to guarantee performance of the

Russia HEU deal. USEC could purchase SWU from the Executive Agent up to the

5.5 million SWU that it needs to fill orders. The Corporation would be authorized

to request appropriations, as necessary, to assure the full implementation of the

U.S.-Russia HEU Agreement. However, the Executive Agent could stockpile SWU

if deemed necessary, to maintain security of supply, and sell it consistent with the

1996 USEC Privatization Act.

The government-controlled corporation, in cooperation with the Secretary of

Treasury and Energy, would evaluate and develop options for maintaining domestic

production enrichment capacity, if and when, USEC fails to do so. The governmentowned corporation could operate the gaseous diffusion plants, develop, test and deploy advanced technology, and utilize the DOE’s electricity contracts.

Mr. WHITFIELD. Thank you very much.

Mr. Stiglitz, I had referred earlier to a letter that you wrote to

the President and the Vice President—I’m sorry, Dr. Neff wrote the

letter expressing similar concerns to what you had. But in your testimony you talk about the fact that there was a lack of transparency and lack of open discussion. Did you have discussions with

Treasury officials about this prior to the decision being made to privatize?

Mr. STIGLITZ. Oh, within the administration, there were a large

number of discussions. And all the issues that I raised and more

we tried to bring forward.

The general stance was this is a done deal, why are you fighting

something that’s already a fait accompli. And we were just a little

bit more obstinate because we thought what was at issue was extremely important. But what I was referring to in lack of transparency there was very little public discussion. We found it very

difficult. And the ethics was that within the White House you don’t

discuss public issues unless there is a decision to make in public.

And so the view was that we could discuss it within ourselves, but

if there is any disagreements, or these issues, nobody else should

be brought into the decisionmaking process.

Mr. WHITFIELD. Were there other members of the National Security Council that had the same reservations that you did?

Mr. STIGLITZ. There were other people within the national security community, but not within the National Security Council. I

might add that after I left the administration, we had a meeting

at the Council of Foreign Relations in New York of a large number

of national security experts on the issue of nonproliferation, and

there was not a single one that could identify a positive argument

for privatization.

Mr. WHITFIELD. Right. Mr. Graham, in your testimony you

talked about how your industry is slowly being driven out of business. Someone, I can’t remember who, talked about how USEC is

using both its control of uranium and the only enrichment facility

in the country to obtain business and that they’re using that excessive power to drive other people out. Would you elaborate on that

a little bit.

Mr. GRAHAM. Mr. Chairman, I would think that the answer to

that question is that since USEC is the dominant player in the fuel

cycle representing over 50 percent of the value chain of nuclear

fuel, that they have the ability with their large inventory of uranium and conversion services, to couple these products together to

go to customers and sell them the final product, which in this case

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is the three components, uranium conversion and SWU, as EUP.

And the value of that EUP is such that if you lower it just a little

bit, you are able to put a great deal of pressure both on the uranium and conversion components and thus take a larger market

share.

Mr. WHITFIELD. And they did receive UF6 from the Government

as well. Correct?

Mr. GRAHAM. The bulk of the material that was transferred to

them that was in their inventory at the time of privatization was

in the form of UF6.

Mr. WHITFIELD. So that eliminates the need for your service?

Mr. GRAHAM. Exactly, sir.

Mr. WHITFIELD. Dr. Brewer, you had discussed how USEC is selling its uranium, and that’s one of the things that’s really keeping

them afloat right now, isn’t it?

Mr. BREWER. Yes, that’s correct. It’s like if you were running a

company, as I did for 10 years as CEO, and you had—you were relying on your current profitability from operations that existed in

the past their contingency reserves put on the balance sheet and

then when those are exhausted or when you are no longer obligated, you drop those into the P&L, it is like that. If you are not

profitable on current operations, you are in bad trouble. And this

did not happen to me, but I saw it happen to other business units

in combustion engineering.

Mr. WHITFIELD. But they are basically cannibalizing themselves.

Mr. BREWER. Yes, they are eating their seed corn, and it is like

living on principal rather than earnings.

Mr. WHITFIELD. And they are losing market share; is that correct?

Mr. BREWER. Yes, they are losing market share. They are losing

backlog, and most important is the quality of the backlog. In other

words the profit margin embedded in the backlog is south of costs.

And you can see from the figure that they’re negative now. The

only thing that’s—that’s hiding this or concealing it is the sale of

the uranium stockpile.

Mr. WHITFIELD. And Mr. Timbers talks a lot about the Russian

agreement, how harmful it has been to his company; but his production costs now are even greater than what he is buying it for,

isn’t it?

Mr. BREWER. That’s correct. In the early days of the Russian

agreement, there was—the marginal cost of production was less

than the price of the Russian uranium in dollars per SWU. The

marginal cost was about $50 an SWU and now it is $75.

But, moreover, most important is that you cannot go out and

purchase the power to produce that 5.5 million SWUs from the

Russians; you cannot replace that purchase because you have to go

out and contract for power probably at 3 or 4 cents a kilowatt hour.

They are paying about 2.1 cents per kilowatt hour now. I’m paying

in Virginia 9 cents a kilowatt hour. So you know—— Mr. WHITFIELD. I think Mr. Moniz and others talked about if

their electrical costs go up just a cent, it can make a gigantic difference to them.

Mr. BREWER. Yes, if you go out and try to contract to replace that

Russian import, the cost is going to be astronomical. So when you

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hear them tout and make this excuse, this ‘‘dog ate my homework’’

excuse, that it’s the Russian deal that’s the blame, it’s false.

Mr. WHITFIELD. Well, it’s obvious that they’re in a very serious

condition right now and all of us have a lot at stake here and we

are going to have to try to come up with some answers.

Mr. Stupak.

Mr. STUPAK. I’ve been sitting here some 5 hours, and we had to

prepare for this hearing, and I’m just looking at this whole thing.

What gain was there for the Government or the taxpayers in this

whole deal? I don’t see a silver lining here for anybody. You guys

are on the way out trying to keep your head above water. We have

extra uranium coming here and just sitting here, and here is this

contract that we entered into and there is supposed to be some

benefit for the Government, the taxpayers if you will of this country; and I don’t see any. Am I wrong? I mean, Wall Street made

a few bucks off of it, I guess. That’s about it.

Mr. Stout, when I looked at your letter that you received from

DOE in February of this year it seems to say that it can’t do anything about USEC’s dumping of uranium except to talk to them

about it. Is that your impression? I don’t mean to put words in your

mouth. That’s the impression I got.

Mr. STOUT. That could well be the case. I guess to this point no

specific concrete proposals have been forwarded by DOE.

Mr. STUPAK. Other than talk to them? You know, what do you

think—I will ask Mr. Miller on down, what do you think government should do here? What do you think we in Congress should

do? Let’s have an open discussion here a little bit about this. There

is no benefit to us. What do we do? Tear it up and start all over?

Mr. MILLER. Well, you have a tricky problem because the shareholders control; and if they go bankrupt, you will do business with

the creditors.

Mr. STUPAK. Well, if we don’t give them $200 million bailout,

there won’t be anything to——

Mr. MILLER. Well, they have uranium inventories they could liquidate to carry on so they at least continue to cover the interest

on their debt for some time. But I think one of the things that is

important to keep in mind, the Russian agreement—I would beg to

differ slightly with Dr. Brewer on the impact on USEC. A report

that was done—this was based on public sources by Energy Resources International, shows that when you cut your production by

47 percent, as has happened to USEC in order to accommodate

that important Russian agreement, you wind up raising your unit

costs. As a result, we have seen labor costs per SWU climb from

$15.70 in 1995 up to $27.70. I can assure you it isn’t like Mr. Timbers where we got a pay increase. Okay? It is because you are amortizing those costs over fewer SWU, and there is a certain point

where you cannot cut workers as much as you cut production and

maintain safety.

So as a result, I do think that government has a role here to ensure the security of supply under the Russian agreement and security of supply with respect to maintaining a domestic industry. It

is not economic for a private sector firm to do it whose first priority

is to take care of their shareholders, and that is why I think some

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kind of alternative structure has to be developed that takes this

out of the private sector.

If you don’t care, if Congress makes the conclusion that it doesn’t

matter whether we have a domestic industry and if the uranium

industry is not viewed as important, if the conversion industry is

not viewed as important and you don’t want a domestic source of

enrichment and you prepared to be dependent upon foreign suppliers, then put a fork in it. If you don’t come to that conclusion,

then I think government has a role here.

Mr. STUPAK. Anyone else? Dr. Brewer?

Mr. BREWER. I would suggest that, first of all, that you separate

the national security and diplomatic roles that USEC has been

given, which they sought and were given, from USEC as a standalone business. And let the CEO go run that business, if he can,

and bring the other functions back to the U.S. Government, the

functions of Russian importation et cetera.

Second thing that should be studied is for the Department of Defense and the Department of Energy to reclaim beneficial control

over one of the GDPs in the national interest, as a national security matter. If it’s not needed for production of LEU, then—which

it probably is not since we do not have the cold war anymore you

don’t need it for weapons and you need very little for Navy use, you

could run it in a hot stand-by condition. But take one GDP and

keep it in a hot stand-by condition under the control of either DOE

or DOD. I would prefer DOD, but—but at any rate, separate this

terrible conflict of interest you have got between the national security and running a business going through the head of one former

bond salesman.

Mr. STIGLITZ. Let me just—I think the two points that Dr. Brewer raised are the essential ones that the national security issue is

first priority, getting that taken back into the Government. It is a

little more complicated though because unless the government

wants simply to stockpile it, most—a lot of the contracts in the past

have been through USEC, and that’s one of the assets which they

have. So this would have to be a accompanied, I think, by this kind

of detailed security analysis of how important is it to the United

States to maintain a production, a conversion, a mining capacity in

each of these areas.

And I would suspect they would decide that it is important to

keep some level of capacity and the question is what level of capacity. And then ask, having decided that how do we go about—what

are the impediments to doing that? And almost surely the answer

will entail some restrictions on the sale of this huge stockpile. Any

industry, if all of a sudden we took our oil stockpile in a normal

circumstance and started selling it all of the sudden, it would have

a shock effect on the oil market. It wasn’t put there as a method

of bailing out a firm; it was put there for a whole set of national

strategic reasons to be sold over a longer period of time.

So it is probably the case that you have instruments of control

under the privatization; but you may not, in which case you will

have to have legislation that would address how do you control the

pace of sale of those stockpiles.

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Mr. STUPAK. I see my time has expired. My follow-up question

was going to be how much is it going to cost us, but I guess that

is for another day. Thank you, Mr. Chairman.

Mr. WHITFIELD. Mr. Strickland.

Mr. STRICKLAND. I want to thank this panel. I only wish that Mr.

Timbers and Mr. Gensler from Treasury were sitting in this room

listening to what you have to say. These are important matters,

and I hope to God that they at least read your statements.

You are very credible and believable people. I was especially

struck by your comments, Dr. Stiglitz, regarding the secrecy. Before privatization, I told the Vice President that it was impossible

for me to know if anything illegal or unethical was happening, but

that there was so much secrecy surrounding the process that it was

impossible to know for sure. And then he referred me to Mr.

Gensler, and others within the administration. And I asked for information, and it was refused me. Even that waiver letter that I

made reference to earlier in this hearing I received only after filing

a freedom of information request, a document that should have

been available to every American citizen. And that’s just one example of the secrecy that surrounded this process.

Now you are all credible people. Dr. Stiglitz, you are a person

that is well known in the economic world. I want to ask a question.

We’ve talked about what to do. If, in fact, a national security matter and an economic security matter is at risk here, and if privatization at least as it occurred was a bad idea and it was carried

out poorly, why not reverse that process? And I would like to ask

each of you if you would like to see this government resume responsibility and ownership and control of this industry. I’m not

asking you if we can or how we could do it, but I’m first of all asking you if that’s something you would like to see.

Mr. GRAHAM. Congressman, from the conversion industry, life before privatization was a level playing field. We could compete with

all the competitors on an international basis. In the current form,

we cannot compete and cannot survive; and we would vote for it

to be returned to the government.

Mr. STOUT. I think it is good energy policy to ensure that we always have a strong domestic uranium enrichment corporation. I

guess from what I’ve learned in the past and what I’ve heard

today, I have serious doubts about whether that’s going to be the

case much longer under the current situation.

Mr. BREWER. Mr. Strickland, I would take it back to a government-owned corporation. I would take it back that step. I would not

take it all the way back to the business I had to run as assistant

secretary because you have so much dysfunctionality in the annual

appropriations cycle and the section 161(B) and inability to compete.

But, yes, I would take it back to a government-owned corporation, something like a COMSAT.

Mr. STIGLITZ. I agree. I think the inherent conflicts of interest

between public and private purposes that are virtually impossible

to address through regulatory mechanisms make it very difficult

for it to be a conventional private enterprise, particularly given the

global market structure in which it is embedded.

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Mr. MILLER. Mr. Strickland, I guess I’ve already identified that

our preference would be a government-owned corporation as well.

This committee marked up and reported a bill, an EPAct of 1992,

that created a government-owned corporation. What the logistics

would be perhaps would be for another day, but we would strongly

support putting this back in the Government.

Mr. STRICKLAND. Thank you. I think at least from my perspective

what we have heard today casts serious doubt upon the credibility

of the management of USEC and their intentions. The word ‘‘cannibalization’’ has been used here. We are talking about selling off

assets in order just to stay alive perhaps for a short period of time.

We have talked about a management that has a golden parachute

in place. And so, Mr. Miller, I want to ask you a question that I

think gets to what may be a very large problem here. And it has

to do with concerns that may exist regarding an adequate supply

of coolants for the GDP plants.

How concerned are you about that matter? And the reason I ask

is it is because if there is a management that is serious about

maintaining these facilities, continuing to operate this industry,

then they’ve got to think ahead in terms of what is required of

them. And my understanding is that this is a serious problem; that

the freon issue is a serious problem; that they at this very moment

should be engaged in planning for how to deal with this problem.

And if they are not doing it, then it makes me wonder if they’re

serious about maintaining the viability of this industry or if they’re

just going to rape it for all of its assets and then walk away leaving

Uncle Sam and the taxpayer holding the bag. Would one of you answer that, please.

Mr. STIGLITZ. I have to run catch a plane, can I be excused?

Mr. WHITFIELD. Yes, sir. Thank you, Dr. Stiglitz, for being here.

We are sorry we detained you.

Mr. STRICKLAND. Thank you, Dr. Stiglitz.

Mr. MILLER. Well, Dr. Brewer, our assessment of this at least is

that unless we have missed something from USEC management,

their inventories of R114 run out. They have about 1.25 million

pounds in inventory. It is almost impossible to buy; it has been

banned under the Montreal Protocol, properly. The problem is they

run out in September 2000 at their current leak rate. Unless the

leak rate is dramatically slowed, they should be making mechanical upgrades to permit them to use replacement coolant. We have

seen no construction work which would cause us to believe that.

And if the keys were turned back over to the government to run

these plants, they couldn’t run them either because there is no

coolant.

Mr. BREWER. One of the reasons why the production costs for

GDPs has gone up from $50 an SWU up to $95 is because lack of

maintenance and lack of attention to detail and training and so

forth. And I won’t go all the way and say they’re treating it like

a cash cow or milking a cash cow, but it’s close.

Mr. WHITFIELD. Any further questions, Mr. Strickland?

Mr. STRICKLAND. No, thank you. Thank you, Mr. Whitfield, for

your patience.

Mr. WHITFIELD. Well, I want to thank the panel. We looked at

the management of USEC, and in one of their board meetings

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when they talked about going to an IPO they said their debt would

never exceed 25 percent of their market capitalization, and today

it’s about 110 percent. They said their market share was going to

increase; it’s decreased. They said the SWU prices were going up;

they’re going down. They said the production costs were going

down; they went up. They said that they were going to save the

enrichment business with AVLIS technology, and no sooner were

they privatized than they scrapped it.

We are damaging our uranium industry and our conversion industry of uranium. And we have a lot of individuals and their families who are suffering as a result of it. And we have placed this

Russian agreement in jeopardy in a way.

So I think we have a very serious problem here, and your testimony has been quite helpful as we explore some options and some

ways to try to deal with this. I want to thank you very much for

your time. It has taken about all afternoon. I apologize for that. We

thank you and we look forward to working with you as we try to

address this problem.

Thanks. The hearing is adjourned.

[Whereupon, at 7:01 p.m., the subcommittee was adjourned.]