Excess Uranium Inventories: Clarifying DOE's Disposition Options Could Help Avoid Further Legal Violations
Published: 2011-09-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Uranium is a key component in the production of nuclear energy and nuclear weapons. The Department of Energy (DOE) manages the nation's surplus uranium, which is derived in part from former nuclear weapons production. In 2008, DOE published a uranium management plan that set a target for DOE uranium sales and transfers to avert harm to the domestic uranium industry. In 2009, DOE began using natural uranium to pay for cleanup work at a former uranium enrichment facility in Ohio, without having identified such transactions in its 2008 plan. As directed, GAO reviewed DOE's uranium management program. This report examines (1) DOE's uranium transactions and plans for future transactions, (2) the extent to which these transactions were consistent with DOE's uranium management plan, and (3) the extent to which these transactions were consistent with federal law. GAO reviewed transaction documents and contracts and interviewed knowledgeable DOE, contractor, and uranium industry officials and uranium market analysts.
section_title: What GAO Found
paragraphs: In a series of seven transactions from December 2009 through June 2011, DOE used 1,873 metric tons of natural uranium to pay for $256 million in cleanup services provided by two contractors at the Portsmouth, Ohio, enrichment facility, and additional transactions are planned. Six out of seven of these transactions involved the United States Enrichment Corporation (USEC), former operator of the Portsmouth facility. DOE released 1,473 metric tons of uranium, and USEC provided $194 million in cleanup services at the Portsmouth facility. Among other activities, USEC's services included removing chemical and hazardous materials from the plant. The seventh transaction involved a second contractor. In June 2011, DOE released 400 metric tons of uranium, and the contractor agreed to provide $62 million in decontamination and decommissioning services. DOE officials said the department expects to continue transferring natural uranium to this contractor for cleanup services through 2013. DOE's uranium transactions have been consistent with parts of its uranium management plan but not with others. The plan states that DOE would adhere to a target for uranium sales and transfers of no more than 10 percent of annual domestic fuel requirements for uranium. DOE's releases of uranium into the commercial market did not exceed the annual target specified in the plan, ranging from 5 percent of demand in 2008 to 6 percent in 2010--well below the 2008 plan's designated target. With regard to other provisions, however, DOE has departed somewhat from the plan. For example, the department has deviated from the schedule of uranium transfers articulated by the plan, allowing more uranium to enter the market sooner than cited. DOE's uranium transactions with USEC were sales authorized by the USEC Privatization Act, but they did not comply with federal fiscal law. The USEC Privatization Act requires that before a uranium sale, DOE must determine that the materials are surplus to national security needs; that the department is receiving fair market value; and that the sales will not adversely affect the domestic uranium mining, conversion, and enrichment industries. GAO found that DOE met these requirements. Nevertheless, by not depositing the value of the net proceeds from the sales of uranium into the Treasury, DOE violated the miscellaneous receipts statute. This statute requires an official or agent of the government receiving money from any source on the government's behalf to deposit the money in the Treasury. As GAO found when it reviewed a similar series of transactions in 2006, DOE provided the uranium to USEC for sale to a third party and allowed USEC to keep the proceeds of the sales. Even with no money changing hands, GAO concludes that an amount equivalent to the value that went to USEC should have gone to the Treasury. By not depositing an amount equal to the value of the uranium into the Treasury, DOE has inappropriately circumvented the power of the purse granted to Congress under the Constitution.
section_title: What GAO Recommends
paragraphs: GAO recommends that DOE update its uranium management plan and suggests that Congress consider authorizing DOE to, among other things, retain the proceeds of future uranium transactions. DOE agreed to update its uranium management plan but disagreed that its actions did not comply with federal fiscal law. GAO maintains, however, that DOE's comments do not undermine the conclusion that the department violated the miscellaneous receipts statute.

section_title: Letter
paragraphs: Uranium—a naturally occurring radioactive element—is used in nuclear  weapons as well as in fuel for nuclear power plants. In the United States,  20 percent of the nation’s electricity comes from nuclear power, and  growing energy demand and concerns about carbon dioxide emitted  when fossil fuels are burned have sparked interest in increasing the use  of nuclear power. A healthy and reliable domestic uranium industry is  considered essential to ensuring that nuclear power remains a viable  option for supplying the nation’s energy needs.
From the 1940s, the Department of Energy (DOE) and its predecessor  agencies have processed uranium as a source of nuclear material for  defense and commercial purposes. A key step in this process is the  enrichment of natural uranium, which raises its concentration of uranium- 235, the form, or isotope, that undergoes fission to release enormous  amounts of energy in nuclear reactors and weapons. The enrichment  process results in two principal products: (1) enriched uranium  hexafluoride, which can be further processed for specific uses, such as  nuclear weapons or fuel for power plants, and (2) leftover “tails” of  uranium hexafluoride, which are also called depleted uranium because  the material is depleted in uranium-235 compared with natural uranium.  Since 1993, uranium enrichment activities at DOE-owned uranium  enrichment plants have been performed by the United States Enrichment  Corporation (USEC), a former government-owned corporation that was  privatized in 1998.
DOE maintains inventories of natural, enriched, and depleted uranium in  excess of its needs. This inventory comes from a variety of sources,  including the dismantling of some of the nation’s nuclear weapons or  leftover material from before 1993. The department stores most of its  uranium at its Portsmouth Gaseous Diffusion Plant, a uranium enrichment  facility in Piketon, Ohio, that ceased operations in 2001, and at its  Paducah Gaseous Diffusion Plant, a similar facility currently operated by  USEC in Paducah, Kentucky.
In March 2008, we reported on DOE’s options for its inventory of depleted  uranium. We recommended that the department develop a  comprehensive uranium management assessment containing detailed  information on the types and quantities of depleted, natural, and enriched  uranium managed by DOE and a comprehensive assessment of the  department’s options for this material. In December 2008, with input from  the uranium industry, DOE published its “Excess Uranium Inventory  Management Plan” detailing the amount of uranium held by the  department and what plans it had at that time for selling or transferring  uranium to the commercial market. The purpose of DOE’s plan was to  provide the general public and interested stakeholders more specific  information and enhanced transparency with respect to DOE’s preliminary  plans for its excess uranium transactions. The plan detailed the amount  and type of uranium in the department’s possession and DOE’s  disposition strategy at the time. Among other details in the plan, DOE  committed to generally restricting its annual uranium sales and transfers  to 10 percent of domestic nuclear fuel requirements but also noted that it  may exceed 10 percent in any given year for certain special purposes.  Shortly thereafter, in July 2009, DOE announced its intent to use some of  its natural uranium to compensate USEC—in lieu of cash payment—for  accelerated environmental cleanup work the company was conducting at  the Portsmouth facility. This work was intended to prepare the facility for  decontamination and decommissioning. In August 2010, DOE entered  into a new contract with the firm Fluor-B&W Portsmouth to decontaminate  and decommission the Portsmouth facility. Subsequently, DOE  announced a second round of uranium transactions—this time with the  new contractor instead of USEC—to similarly compensate it for some of  its services at Portsmouth.
The conference report accompanying the fiscal year 2010 Energy and  Water Development and Related Agencies Appropriations Act directed us  to review DOE’s overall uranium management plan, including the  department’s oversight and implementation strategy, and to assess  certain uranium transactions for consistency with federal law.  Accordingly, this report examines (1) DOE’s transactions using its excess  uranium and its plans for such transactions in the future, (2) the extent to  which these transactions have been consistent with DOE’s excess  uranium management plan, and (3) the extent to which these transactions  are consistent with federal law.
To examine DOE’s uranium transactions for cleanup services, we  reviewed, among other things, DOE documents detailing the transactions  the department has engaged in involving its uranium, assessments of the  value of uranium in each transaction, and analyses of the impact of  DOE’s activities on the uranium market. To examine the extent to which  DOE’s activities have been consistent with its excess uranium  management plan, we analyzed the plan and compared the uranium  activities the plan projected against DOE’s actual uranium transactions.  To determine the extent to which DOE’s uranium transactions are  consistent with federal law, we reviewed statutes governing DOE’s  uranium activities, including the USEC Privatization Act, as well as  relevant fiscal laws, such as the miscellaneous receipts statute. For all of  our objectives, we interviewed officials at DOE’s headquarters in  Washington, D.C., and at the Portsmouth/Paducah Project Office in  Lexington, Kentucky. We interviewed uranium industry representatives at  selected mining, milling, conversion, enrichment, and fabrication firms  about DOE’s uranium management plan, the commercial uranium market,  and the impact of DOE’s activities on the uranium industry. We selected  firms in the uranium industry to obtain information from each stage of the  nuclear fuel cycle. We also interviewed nuclear industry trade  representatives, market analysts, uranium brokers, and utilities. Appendix  I describes our scope and methodology in more detail.
We conducted this performance audit from November 2010 through  September 2011, in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Before uranium can become nuclear fuel to produce energy or be used in  weapons, it must be mined from the earth. Mining firms in the United  States extract uranium by conventional means, such as open-pit and  underground mining, as well as by means of a liquid that leaches uranium  from the ground. The product from these techniques is a substance called  yellowcake. Yellowcake on its own cannot fuel nuclear reactors and  weapons. Rather, it is shipped to a conversion facility, where the  yellowcake is converted to uranium hexafluoride (a gas when heated) for  the enrichment process. Uranium comprises a mix of several isotopes, or  forms of the same element with different atomic weights. Less than  1 percent of natural uranium found in yellowcake is the isotope uranium- 235—the fissile isotope used in nuclear reactors and nuclear weapons.  After conversion, enrichment firms use one of several processes to  increase the amount of uranium-235 to concentrations suitable for  generating nuclear power or for nuclear weapons. To be suitable as fuel  for nuclear reactors, natural uranium must be enriched to a concentration  of from 3 to 5 percent uranium-235. This fuel is referred to as low- enriched uranium. Natural uranium enriched to a concentration of over  90 percent uranium-235 is highly enriched uranium, which is considered  weapons-grade material. For more detailed information about the nuclear  fuel cycle, see appendix II.
Initially, the federal government was the only entity providing domestic  enrichment services in the United States. More recently, however,  domestic uranium enrichment activities have been performed by private  industry. USEC is one of several firms that provide enrichment services to  utilities operating nuclear power plants. It has provided enrichment  services using DOE-owned facilities since 1993, when it began  functioning as a government-owned corporation. In 1998, USEC began  functioning as a private corporation, which today runs the Paducah  Gaseous Diffusion Plant in Kentucky. USEC ran the Portsmouth Gaseous  Diffusion Plant in Piketon, Ohio, until 2001, when DOE contracted the firm  to maintain the plant in cold-standby status for a number of years until the  department was ready to decontaminate and decommission it. USEC is  currently seeking funding to open a new enrichment facility, the American  Centrifuge Plant, at the Portsmouth site.
The market for uranium works somewhat differently from other commodity  markets. In one of two ways, uranium buyers, such as utilities, purchase  uranium and the services to convert it into nuclear fuel. First, buyers can  obtain uranium under long-term contracts with sellers in the “term”  market. Second, sellers can make their uranium available for immediate  sale in a forum called the “spot” market. Transaction details about sales  through both long-term contracts and the spot market are ordinarily  considered business proprietary information. Uranium typically changes  ownership through a process called a book transfer. Book transfers do  not usually involve the physical movement of uranium, generally occurring  at conversion and enrichment facilities, which tend to maintain large  quantities of yellowcake or uranium hexafluoride on site for their  customers. Uranium transactions are conducted directly between buyers  and sellers, but brokers also match buyers with sellers for a fee. In  addition, speculators may hold and sell uranium strategically to profit from  swings in the price of the material.
section_title: DOE Has Used Excess Uranium to Pay for Cleanup Services, and Additional Transactions Are Planned
paragraphs: Since 2008, DOE has engaged in transactions involving excess uranium  to pay two contractors for cleanup services at the Portsmouth Gaseous  Diffusion Plant. Most of the uranium went to USEC to prepare the  Portsmouth facility for decontamination and decommissioning. DOE plans  additional transactions involving excess uranium.
subsections: section_title: DOE Has Used Nearly 1,900 Metric Tons of Excess Uranium to Pay for More Than $250 Million in Cleanup Services
paragraphs: From December 2009 through June 2011, DOE used 1,873 metric tons of  its excess natural uranium to pay for $256 million in cleanup services at  its Portsmouth facility (see table 1). During this period, the department  completed seven transactions with two firms.
DOE’s first six transactions took place with USEC. In these transactions,  DOE released in total about 1,473 metric tons of uranium valued at about  $194.3 million. In return, USEC provided accelerated cleanup services to  prepare the Portsmouth facility for eventual decontamination and  decommissioning. For example, USEC removed and disposed of  chemical and hazardous materials, including electrical equipment  containing polychlorinated biphenyls, toxic chemicals that the  Environmental Protection Agency states have been demonstrated to  cause cancer. Other work USEC performed included relocating a cooling  water line and identifying excess equipment suitable for recycling.
One uranium transaction to date has also occurred between DOE and  Fluor-B&W Portsmouth. This firm began activities to decontaminate and  decommission the Portsmouth facility in March 2011, according to a DOE  official. In June 2011, DOE released 400 metric tons of uranium valued at  nearly $62 million to Fluor-B&W Portsmouth as payment for additional  cleanup services at the Portsmouth facility.
In these transactions, the value DOE received for each lot of natural  uranium was reduced by the transaction costs both USEC and Fluor- B&W Portsmouth expected to incur to carry out the seven transactions  (see table 2). These costs, which included charges for such things as  storage cylinder handling and inspections, record keeping, and sales  management, totaled almost $4 million. To account for these costs in the  first six transactions, USEC reduced the value of the uranium transactions  by 1 percent. Fluor-B&W Portsmouth reduced the value of its June 2011  transaction by substantially more—almost 2.8 percent—to account for  sales costs. Fluor-B&W Portsmouth expects to discount all future  transactions by a similar percentage as well, according to company  representatives. In addition, under its contract with the department, Fluor- B&W Portsmouth also sought cost reimbursement from DOE for  expenses associated with uranium handling and inspection and setting up  what the parties referred to as a “uranium transfer management  program.” According to Fluor-B&W Portsmouth representatives, Fluor- B&W Portsmouth was not a participant in the uranium market before it  entered into its contract with DOE, which required the company to  establish processes and procedures to manage 10 anticipated  transactions over two and a half years. DOE plans nine additional  transactions of natural uranium with Fluor-B&W Portsmouth through  2013, according to agency documents.
In addition to the natural uranium that DOE anticipates it will release to  Fluor-B&W Portsmouth for cleanup services through 2013, DOE also  maintains other inventories of natural uranium. In 2008, DOE stored  approximately 4,500 metric tons of uranium that does not currently meet  commercial specifications for manufacturing nuclear fuel. According to  DOE’s December 2008 uranium management plan, this uranium would  require considerable processing before it could meet commercial  standards. The plan states that some of this material would eventually be  processed and offered for use in the commercial market over a number of  years. According to DOE, however, some of the material is so  contaminated that it is no longer under consideration for processing, and  DOE is uncertain what its ultimate disposition will be.
In addition to natural uranium, DOE maintains inventories of enriched and  depleted uranium that are in excess of the department’s needs. For  example, at the end of fiscal year 2010, DOE had 89 metric tons of  excess highly enriched uranium in its inventories. To dispose of highly  enriched uranium, DOE’s National Nuclear Security Administration  (NNSA), a semiautonomous agency within DOE that is responsible for the  management of the nation’s nuclear weapons program, has reduced the  enrichment level of some of this uranium so it is potentially usable as  nuclear fuel in the Tennessee Valley Authority’s nuclear power reactors.  Some of the down-blended material has also gone to support DOE’s  American Assured Fuel Supply Program, which ensures, among other  things, access to nuclear fuel for civilian reactors in foreign countries that  have good nonproliferation credentials.
According to agency officials, DOE also has approximately  750,000 metric tons of depleted uranium tails that it stores in about  63,000 metal cylinders in storage yards at its Paducah and Portsmouth  enrichment plants. A product of the enrichment process, this depleted  uranium has historically been considered of limited use, but increases in  uranium prices have potentially made it profitable to re-enrich some of the  tails to further extract uranium-235. We reported in June 2011 that at May  2011 uranium prices and enrichment costs, DOE’s tails have a net value  of $4.2 billion. This estimate is very sensitive, however, to changing  uranium prices, which have been extremely volatile, as well as to the  availability of sufficient enrichment capacity.
USEC has publicly announced an interest in re-enriching some of DOE’s  tails beginning in 2012. USEC plans to shut down operations at DOE’s  Paducah facility, depending on market conditions, and also plans to  replace some of the Paducah facility’s production capacity with the new  centrifuge-based uranium enrichment plant it is constructing. USEC is  considering continued operation of the Paducah facility beyond May  2012. According to USEC, processing depleted uranium could contribute  toward maintaining operations at Paducah and retaining 1,200 employees  the company might otherwise have to lay off. DOE officials, however, said  that the department has no current plans to sell or re-enrich depleted  uranium tails.
section_title: DOE’s Transactions Did Not Exceed Targets Set by Its Uranium Management Plan, but DOE’s Activities Were Not Consistent with the Plan in Other Ways
paragraphs: DOE’ s excess uranium transactions have been consistent with parts of  its uranium management plan but not with others. Specifically, the  amount of uranium the department sold or transferred is less than the  target of 10 percent of annual domestic fuel requirements that DOE  established under the 2008 plan. With regard to other provisions,  however, DOE has departed somewhat from the plan. For example, DOE  has deviated from the schedule of uranium transfers articulated by the  plan, resulting in more uranium entering the market much sooner than  cited.
subsections: section_title: DOE’s Uranium Transactions Have Not Exceeded the Target of 10 Percent of Domestic Uranium Demand Specified by the Plan
paragraphs: The total amount of uranium that DOE sold or transferred from  January 2008 to June 2011 has stayed below the target specified in the  department’s December 2008 uranium management plan. The plan  stated that DOE would adhere to a target for uranium sales and transfers  of no more than 10 percent of the annual U.S. requirements for nuclear  fuel. The target was established in part to alleviate concerns raised by  uranium industry officials that sales of uranium by DOE could harm the  domestic uranium mining, conversion, and enrichment industries. Such  concerns included a fear that sudden marked increases in the supply of  uranium could depress prices. The targeted limit on uranium sales and  transfers reflects DOE and uranium industry officials’ concurrence that the  industry could withstand, without adverse material impact, the addition to  the market from DOE’s uranium inventory of up to 10 percent of the U.S.  demand for uranium in any year.
DOE’s December 2008 plan estimated that U.S. nuclear fuel  requirements would be about 19,250 metric tons of uranium annually from  2008 through 2010. According to industry analysts, requirements are  likely to increase gradually to about 20,000 metric tons by 2013. As  shown in table 3, the total uranium DOE released to the market  represented only about 5 percent of total U.S. demand in 2008 and  6 percent in 2009, significantly below the 10 percent target established by  the plan.
Consistent with its 2008 plan, DOE has successfully kept its sales or  transfers of uranium below the 10 percent target, but it has departed from  other key provisions in its 2008 plan. For example, the plan scheduled  uranium sales or transfers so that uranium would be released into the  market gradually from 2009 through 2013. As shown in figure 1, DOE  originally intended to increase the amount of uranium released year by  year, from about 600 metric tons of uranium in 2008 to nearly  2,000 metric tons by 2013. But as a result of the uranium transactions  with USEC and Fluor-B&W Portsmouth, which were announced after  DOE’s December 2008 plan, DOE is poised to release substantially more  uranium faster than the plan stated.
DOE’s plan also stated that the department may sell or re-enrich up to  7,000 metric tons of depleted uranium from 2008 to 2017. We learned  from DOE officials, however, that the department has no plans to release  any inventory of depleted uranium in the near term. According to DOE  officials, a key reason depleted uranium is not likely to be sold or re- enriched is concern that doing so would push total DOE uranium sales  and transfers over the December 2008 plan’s 10 percent target.
According to domestic uranium industry officials we interviewed, DOE’s  departure from its 2008 plan has created anxiety about how much further  DOE might deviate from its plan in the future. In particular, industry  officials were concerned that uncertainties about the quantities of uranium  DOE might suddenly decide to sell or transfer could cause a fall in future  uranium prices. Industry officials told us that this fear of declining prices  discouraged potential investment in the industry, particularly in newer  mining companies seeking to start production. Industry officials also said  they feared that uncertainties about DOE’s future plans would raise the  costs of borrowing and of insurance coverage.
In discussions, DOE officials stated that the December 2008 uranium  management plan was out of date soon after it was issued and that most  of the plan’s projected transfers from 2011 forward no longer reflected the  department’s present intentions. DOE officials told us that the department  has begun work on updating the uranium management plan, but officials  were unable to provide a date by which the update will be completed.
section_title: DOE’s Uranium Transactions with USEC Were Consistent with Federal Law Governing Uranium Transactions but Did Not Comply with Federal Fiscal Law
paragraphs: We found that DOE’s uranium transactions with USEC constituted sales  authorized under the USEC Privatization Act and that conditions the act  requires before a uranium sale can be made were met. We found,  however, that by not depositing an amount equivalent to the proceeds  from these transactions into the Treasury, DOE violated the  miscellaneous receipts statute.
subsections: section_title: DOE’s Uranium Transactions with USEC Constituted Sales through an Agent
paragraphs: The Atomic Energy Act of 1954, as amended, gives DOE general  authority under certain conditions to sell, lease, distribute, or otherwise  make available source material, including natural uranium. Congress,  however, limited this authority in 1996 when it passed the USEC  Privatization Act. This act prohibits the Secretary of Energy from  transferring or selling any uranium except as consistent with the act’s  specific terms and conditions. The specific provision governing the  material that DOE provided to USEC authorizes only sales of that  material.
We found that from December 2009 through March 2011, DOE sold  natural uranium into the market using USEC as its agent. DOE maintains  that these transactions constituted barters with USEC, rather than sales  by DOE using USEC as its agent, in that the transactions involved an  exchange of services (environmental cleanup work) for materials  (uranium). Our review of the substance of these transactions, however,  showed that they were sales. A sale typically involves an exchange of  goods or services for cash, and DOE in fact arranged for USEC to receive  cash from the sale of federal uranium assets as compensation for  services USEC provided to DOE. The transactions were thus sales  executed through an agent—USEC. (Appendix III contains a detailed  legal analysis of these issues.) Such sales are authorized by the USEC  Privatization Act. Because we found that the transactions were sales,  we did not consider and did not decide whether barters are also  authorized under the USEC Privatization Act.
Two key factors demonstrate that DOE’s transactions with USEC were  sales through an agent, rather than barters: first, DOE had control over  USEC’s sales of the uranium, which was the property of the federal  government, and second, and USEC sold the uranium for the benefit of  the government and assumed no financial risk in the transaction.
According to USEC officials, USEC finalized the sales of uranium to third  parties before it signed the contract modifications under which it agreed to  conduct cleanup in exchange for the uranium. That is, USEC arranged for  the sale of federal property; it did not sell its own property. DOE has  stated that it did not control the sale of the uranium under the terms of the  contract modifications with USEC, but because the uranium was  marketed and sold before those contract modifications were made final,  the terms of the contract modification did not govern the sale. Instead,  DOE and USEC officials told us that they had an earlier, oral agreement  for the valuation of the material under which USEC solicited buyers for  federal uranium assets. During the term of this agreement, which led  directly to sales of the uranium, DOE had the right to exercise control  over USEC’s actions as an agent. Moreover, USEC sold the uranium  primarily for DOE’s benefit. USEC stated in its 2010 annual report to the  U.S. Securities and Exchange Commission that it never considered  itself the owner of the uranium because the company assumed no risk in  its sale and did not stand to earn a profit. USEC also stated in the report  that the amount of work USEC was to provide under the cleanup contract  depended on the net value of the uranium (minus transaction costs). If  USEC had secured less value for the material, it would have done less  work for DOE; it therefore did not stand to gain or lose on the uranium  sales. The primary beneficiary of the transactions was DOE, which sought  to structure the transactions to avoid the receipt of cash it was not  authorized to retain and use to pay for cleanup at the Portsmouth facility.
That USEC acted as DOE’s agent is also indicated by the value DOE  received for the uranium (in terms of work to be performed by USEC),  which was reduced by an amount equal to the transaction costs that  USEC incurred in the sale of the uranium. In other words, DOE did not  receive the gross value, or price, that USEC realized from the sale of the  uranium but instead received value equal to the net proceeds of its sale.
USEC deducted from its valuation of the natural uranium transfer costs  for such things as materials handling and a commission covering its sales  management activities. For example, USEC deducted $825,000 in sales  management fees, plus other transaction and transfer costs, from the  value of the uranium involved in the transaction. A USEC official said that  the sales management fees were for the time and expertise to collect  offers, value the material, negotiate sales of the material, and execute  book transfers of the material. In other words, USEC charged a  commission against the value of the material. DOE officials stated that  such transactional fees or costs are routinely part of any commodity  transaction. We agree that such costs routinely figure into commodity  transactions, but where those costs are incurred by the recipient and  charged back to the seller, and where those costs include a commission,  the transactions are most accurately understood as ones involving an  agent. DOE has mischaracterized the transactions as barters, but it is not  this mischaracterization that makes the transactions illegal. The  transactions constituted sales, and sales—whether through an agent or  not—are authorized by the USEC Privatization Act. Rather, DOE’s legal  violation occurred when it failed to deposit the value of the net proceeds  into the Treasury as required by the miscellaneous receipts statute.
section_title: Conditions Required by the USEC Privatization Act Were Met, but Analysis of the Market Impact of the Uranium Transactions Was Inconclusive
paragraphs: For DOE to carry out sales under the USEC Privatization Act, three  conditions must first be met. First, the President must determine that the  uranium intended for sale is not needed for national security. The uranium  involved in DOE’s transactions with USEC has been in DOE’s inventory  for over a decade. According to DOE, in that time this uranium has never  been included in a nuclear weapons stockpile memorandum signed by  the President, which identifies inventories of uranium for national defense  needs. Because the uranium involved in DOE’s transactions was not  included in the most recent memorandum, the Nuclear Weapons  Council—a joint Department of Defense and DOE organization  established by Congress to manage the U.S. nuclear weapons  stockpile—approved the release of the material for other purposes. Thus,  the first condition was met.
Second, the USEC Privatization Act requires that the Secretary of Energy  receive no less than fair market value for uranium sold. To ensure that  this condition was met, DOE officials said they assessed USEC’s  proposed valuation of the uranium and considered the most recent  average spot market prices and USEC’s transfer costs. The department  then issued a determination that USEC’s valuation represented fair  market value for the material. Although we did not conduct our own  analysis as to whether the Secretary in fact received fair market value for  the uranium, we do not dispute the department’s determination that it met  this requirement of the USEC Privatization Act.
Third, the act requires the Secretary of Energy to determine that  proposed transactions will have no adverse material impact on the  domestic uranium mining, conversion, and enrichment industries. To  meet this requirement, DOE contracted with an energy research firm,  Energy Resources International, which issued a market impact analysis in  November 2009 that projected the potential market effects of planned  uranium sales and transfers from the last quarter of calendar year 2009  through 2013. The study took into consideration the five planned  transactions for environmental cleanup at Portsmouth, as well as other  planned transactions, including those between NNSA and the Tennessee  Valley Authority and the American Assured Fuel Supply Program, among  others. The authors of the study stated that DOE’s planned transactions  would have no adverse material impact on uranium producers, and DOE  issued the required determination on the basis of this study. Thus, the  third condition under the USEC Privatization Act was met.
Nevertheless, our review found the results of the market impact analysis  to be inconclusive. The economic model developed by Energy Resources  International analyzed market impact for the term market and included  assumptions about supply-and-demand characteristics that represent the  long-term, rather than the spot market, even though DOE, industry  experts, and Energy Resources International analysts themselves agreed  that DOE uranium transactions would have the potential to affect the spot  market most. Furthermore, the study stated that long-term prices are  more relevant to investment decisions by the industry. In fact, in a  subsequent study issued in December 2010 to account for additional  DOE transactions beginning in 2011, Energy Resources International  expanded its analysis to include the price impact of the transfers on the  spot market, which it had previously characterized as too difficult to  assess.
The new study included an econometric model to evaluate the price  impact in the spot market, but we found that it too was inconclusive. In  particular, the econometric model used historic data on price, quantity  supplied, and quantity demanded and did not identify and evaluate the  effects of other factors that could also affect the behavior of uranium spot  prices. These factors could include market participants’ expectations  about future uranium supply and demand, as well as their expectations of  future levels of uranium inventories. In addition, because the details about  uranium sales through both long-term contracts and the spot market are  typically considered business proprietary information, data about  expected future uranium supply and demand are usually not available  and thus difficult or impossible to adequately model. A change in the price  of competing energy resources, such as oil and coal, could also affect  uranium spot prices. Changes in the prices of related minerals found in  tandem with uranium, such as gold, copper, and vanadium, can also  affect uranium spot prices. Specifically, a high market price for gold,  copper, vanadium may encourage uranium exploration and production.  Furthermore, domestic and international political and economic events or  natural disasters—such as the March 2011 earthquake, tsunami, and  subsequent nuclear accident in Japan—can affect uranium spot prices.
Because the econometric model used was not able to evaluate any of  these factors, its estimate of the change in the spot market price of  uranium caused by an isolated event would be inconclusive. We agree,  as Energy Resources International noted in its study, that it is difficult to  predict a specific change in the spot market price due to one particular  future event, such as a DOE uranium transaction.
section_title: DOE Violated the Miscellaneous Receipts Statute by Not Depositing the Value of Net Proceeds from Uranium Transactions with USEC into the Treasury
paragraphs: DOE violated the miscellaneous receipts statute in handling the proceeds  of its sales of uranium through USEC. This statute requires that “an  official or agent of the Government receiving money for the Government  from any source shall deposit the money in the Treasury as soon as  practicable without deduction for any charge or claim.” Generally, a  federal agency may not operate beyond the level that it can finance with  its annual appropriation without specific congressional authorization. For  an agency to keep money that has not been appropriated is to undercut  Congress’s constitutional power of the purse.
In providing uranium to USEC for sale to a third party and allowing USEC  to keep the proceeds, DOE constructively received money for the  government and improperly extended its reach beyond the operating level  that it was otherwise authorized to achieve through its congressional  appropriation. DOE officials readily acknowledged that if the department  had sold the uranium directly into the market and received cash, it would  have had to deposit that cash into the Treasury. DOE officials also  acknowledged that it structured its transactions with USEC the way it did  so as to avoid having to deposit the proceeds of a sale into the Treasury.  DOE said that without this mechanism, it would not have been able to  fund the accelerated cleanup at Portsmouth. In DOE’s view, however,  because it received no cash in these transactions, it was not required to  deposit any proceeds into the Treasury.
We disagree with DOE’s conclusion—that, because it received no direct  cash for its uranium, it was not subject to the miscellaneous receipts  statute—for the same reasons that we found similar actions by DOE in  2006, also involving use of USEC as its sales agent, to violate this law.  It is a well-understood principle of law that what cannot be done directly  cannot be done indirectly. An agency that lacks authority to retain and  use amounts that it receives directly cannot circumvent its lack of  authority by engaging a contractor or, as here, a sales agent to indirectly  receive, retain, and use the funds. To the extent that Congress sees  merit in the additional cleanup work that DOE states is needed at its  facilities, it could provide DOE with explicit authority to barter uranium, as  well as authority to receive and retain funding from the department’s  barters, transfers, and sales of uranium.
section_title: Conclusions
paragraphs: One purpose of DOE’s December 2008 uranium management plan was  to reassure the domestic uranium industry that the department would  refrain from suddenly releasing unanticipated amounts of uranium into the  market. But by announcing, 8 months after issuing its plan, uranium  transactions that were not envisioned in the plan, DOE introduced  additional uncertainty into that market. Partly as a result of the  department’s actions, the domestic uranium producers we interviewed  fear the consequences of future transactions in which the department  may engage. Without an accurate, updated plan that clearly details  DOE’s future uranium activities and the circumstances under which  departmental plans could change, companies in the domestic uranium  industry cannot adequately anticipate the department’s actions and take  steps to mitigate the consequences of those actions.
Federal law authorizes DOE to dispose of its excess uranium by selling it  directly on the open market and depositing the proceeds in the Treasury.  According to DOE officials with whom we spoke, however, DOE has no  incentive to do so because the department would be unable to use the  proceeds for its own cleanup priorities without specific congressional  authorization. Nevertheless, our review indicates that DOE’s uranium  transactions with USEC constituted sales and that USEC served as the  department’s sales agent. Even though DOE did not directly receive cash  for its uranium, in our view the transactions constituted sales, and thus  the department was required to deposit an amount equal to the value of  the uranium into the Treasury. By not doing so, DOE has inappropriately  circumvented the power of the purse granted to Congress under the  Constitution and violated the miscellaneous receipts statute. We do not  question the need to decontaminate and decommission DOE’s uranium  enrichment facilities. If, however, the department cannot finance these  cleanup activities without additional funding, it is the prerogative of  Congress, not DOE, to make the necessary funding available.
section_title: Recommendation for Executive Action
paragraphs: To improve DOE’s management of its excess uranium inventories, we  recommend that the Secretary of Energy update the December 2008  “Excess Uranium Inventory Management Plan” to more accurately reflect  DOE’s plans for marketing its uranium.
section_title: Matter for Congressional Consideration
paragraphs: If Congress sees merit in using proceeds from the barter, transfer, or sale  of federal uranium assets to pay for environmental cleanup of uranium  enrichment facilities, it should consider:    providing DOE with explicit authority to barter excess uranium and to  retain the proceeds from barters, transfers, or sales or   directing DOE to sell federal uranium assets for cash and directing  that collected proceeds be made available for obligation only to the  extent and in the amount provided in advance in appropriations acts  for necessary expenses in decontaminating and decommissioning  uranium facilities and directing DOE to deposit into the Treasury any  excess over what is appropriated.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOE for comment. In its written  comments, reproduced in appendix IV, DOE agreed with our  recommendation to update its excess uranium management plan but  disagreed that the department violated federal fiscal law.
In general, DOE’s comments focused on our finding that DOE’s uranium  transactions constituted sales through an agent. Specifically, DOE  commented that its transfer of uranium to USEC was a barter,  exchanging uranium assets for environmental cleanup, and that USEC  was not a sales agent for the department. Therefore, according to DOE,  the department did not violate the miscellaneous receipt statute. DOE  stated that no authorized official signed a written agreement with USEC  under which the company would sell uranium for DOE, nor could the  department be bound by an oral agreement. DOE stated that the contract  modifications under which USEC agreed to conduct cleanup in exchange  for uranium did not include any language indicating USEC should obtain  offers for DOE uranium or otherwise serve as DOE’s sales agent. In  DOE’s view, we should not have considered any evidence other than the  written contract modifications between DOE and USEC. DOE also  disagreed with our statement that USEC faced no risk of loss in its sale of  the uranium and that DOE paid a commission to USEC for its sale of the  uranium. In addition, DOE disagreed that it entered into the transactions  with USEC specifically to avoid receiving cash, contrary to what USEC  and DOE officials explicitly told us. Instead, DOE stated the purpose of  the transactions was to achieve accelerated cleanup of the Portsmouth  site, which would help create or retain jobs at the site and save the  federal government money in long-term maintenance costs. DOE also  disagreed with our estimate of the value of the department’s depleted  uranium tails and provided updated data on the department’s actual and  planned uranium sales and transfers.
DOE’s comments do not undermine our conclusion that the department  violated the miscellaneous receipts statute. DOE arranged for USEC to  receive cash from the sales of federal uranium as compensation for  cleanup activities that DOE would otherwise have had to pay for out of its  appropriated funds. Rather than address this fact, DOE reasserts its  position that the transactions constituted barters, not sales through an  agent. DOE’s argument is misplaced, however. Whether the transactions  were barters or sales goes mainly to the question of whether DOE was  authorized to engage in the transactions at all under the USEC  Privatization Act, and we found that the transactions were authorized as  sales. As we noted in our report, that the transactions were sales and  not barters is also significant to the question of whether DOE complied  with the miscellaneous receipts statute, but only in that DOE did not  deposit the net proceeds from its sales into the Treasury. The department  does not refute, however, the central tenet behind our conclusion that it  violated the miscellaneous receipts statute. It asserts that because it did  not receive any actual cash in the transaction, it did not have to deposit  any money into the Treasury. As we noted in our draft report, GAO and  the courts have found in a number of instances that an entity does not  have to receive actual cash to trigger a responsibility to deposit money  into the Treasury.
DOE’s comments also do not refute our finding that its transactions with  USEC were sales through an agent. DOE focuses on the lack of a written  agreement between the department and USEC that establishes the  company as DOE’s agent. We agree that no written agreement exists  authorizing USEC to value DOE’s uranium assets. Nevertheless, DOE  has acknowledged the existence of an oral agreement, and whether DOE  could be bound to act under such an agreement is not relevant to the  present analysis. The fact remains that DOE requested USEC’s valuation  of the uranium, which it knew to be based on the solicitation of firm offers  for the material and which led directly to the uranium’s sale. Further, it  was necessary and appropriate to look to evidence other than the  contract modifications because the contract modifications do not cover  valuation of the uranium.
Our review, therefore, appropriately examined the process USEC and  DOE used to establish the uranium’s value before the contract  modifications were signed. Our review of this process also established  that USEC in fact faced no risk of loss in its sale of the uranium because  it sold the uranium before agreeing on how much work it would do in  exchange for the uranium. In addition, DOE did pay a commission to  USEC under the common definition of the term, that is, “a fee paid to an  agent or employee for transacting a piece of business or performing a  service.” DOE acknowledges that it paid a “sales management fee” to  USEC. We see no distinction between such a fee and a commission.  Further, we do not dispute DOE’s contention that the overall purpose of  accelerating the Portsmouth cleanup work may have been to save on  long-term site maintenance costs and protect local employment, but DOE  officials repeatedly told us that the department chose to pay for this  project in the manner it did specifically to avoid the receipt of cash. DOE  provided no other reason why it would seek to barter uranium rather than  sell it. We therefore conclude that DOE manipulated the disposition of  federal assets to avoid the payment of proceeds for those assets into the  federal Treasury. Doing so violated the miscellaneous receipts statute.
With regard to our estimate of the value of DOE’s depleted uranium tails,  DOE stated that the draft report did not include any source or backup  information for our $4.2 billion estimate of the tails’ value. DOE’s  statement is incorrect. The draft report cited our June 2011 report that  explained in detail how we developed our estimate. Specifically, our  estimate is based on a model we previously developed that uses  standard formulas to estimate how much enriched uranium and tails can  be produced from a given amount of uranium and enrichment services.  The model employs price data obtained from nuclear industry trade  publications. Such data are commonly used to estimate the market price  for uranium. We agree with DOE that our estimate of the tails’ value does  not include the additional costs that may be incurred processing tails  stored in deteriorating cylinders, addressing the poor quality of some  material, or packaging and transporting the material. Our estimate omits  these costs because they are unknown. DOE is mistaken, however, in  stating that our estimate does not include the costs of production. Our  model includes the cost of enrichment services in its estimate of the tails’  net value. Nevertheless, as our June 2011 report and the draft report  noted, our estimate is very sensitive to changing uranium prices, as well  as to the availability of sufficient enrichment capacity. Uranium prices are  volatile, and a sharp rise or fall can greatly affect the value of uranium  tails. Any estimates of the value of DOE’s tails are therefore subject to  great uncertainty.
Finally, after we received the department’s comments on our draft report,  DOE officials provided additional updated data on the department’s actual  and planned uranium sales and transfers. We revised the report  accordingly to reflect the most current data DOE provided to us.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of Energy, the Director of the Office of  Management and Budget, and other interested parties. In addition, the  report will be available at no charge on the GAO Web site at  http://www.gao.gov.
If you or your staff members have any questions regarding this report,  please contact Gene Aloise at (202) 512-3841 or aloisee@gao.gov. You  may also contact Susan D. Sawtelle at (202) 512-6417 or  sawtelles@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  GAO staff who made major contributions to this report are listed in  appendix V.
section_title: Appendix I: Scope and Methodology
paragraphs: To identify the Department of Energy’s (DOE) transactions involving  excess uranium used to pay for accelerated cleanup work at the  Portsmouth Gaseous Diffusion Plant, we obtained department summary  data drawn from the Nuclear Materials Management and Safeguard  System regarding all sales and transfers of uranium from January 1,  2008, through June 30, 2011. To identify specific transactions involving  natural uranium during this time frame, we also obtained and reviewed  individual nuclear materials transaction reports, which detailed the  change of uranium ownership from DOE to the United States Enrichment  Corporation (USEC) and to Fluor-B&W Portsmouth. We obtained  information on the value of these transactions and the services paid for by  these transactions by reviewing uranium valuation documents from USEC  and Fluor-B&W Portsmouth, as well as the relevant DOE contracts or  contract modifications related to the transactions. To further our  understanding of these transactions and to determine DOE’s future plans  to sell or transfer uranium, we interviewed DOE nuclear materials  management officials from the National Nuclear Security Administration  (NNSA), the Office of Nuclear Energy, and the Office of Environmental  Management. We also met with or interviewed by phone knowledgeable  USEC officials at the Paducah Gaseous Diffusion Plant in Kentucky and  Fluor-B&W Portsmouth officials at the Portsmouth Gaseous Diffusion  Plant in Ohio. We did not determine the accuracy of DOE’s uranium  inventory data or specifically verify the amount of uranium physically  transferred from DOE to other entities, including USEC and Fluor-B&W  Portsmouth. We instead reviewed extensive department guidance  regarding the Nuclear Materials Management and Safeguard System,  including the Nuclear Materials Control and Accountability System, which  tracks the character, location, and transfer of all federal inventories of  nuclear materials, including uranium. Associated documentation indicates  that an extensive program exists to ensure the accuracy of information on  the nuclear materials inventory, but we nevertheless reviewed recent  assessments of key databases that make up the nuclear materials  management system. No material weaknesses were reported. We  therefore determined that uranium inventory data drawn from these  systems were sufficiently reliable for purposes of this report.
To determine the extent to which DOE’s natural uranium transactions  were consistent with DOE’s “Excess Uranium Inventory Management  Plan” issued in 2008, we compared key provisions of the plan to DOE’s  specific activities to manage its uranium inventory. To develop an  understanding of DOE’s uranium management activities, we interviewed  DOE officials at the Portsmouth/Paducah Project Office in Lexington,  Kentucky, which has managed the recent uranium transactions, as well  as the DOE contracting officers responsible for negotiating and executing  federal contracts for cleanup services. To develop an understanding of  the impact that DOE’s uranium transactions might have on the market for  uranium products, we also interviewed a wide range of uranium industry  representatives. These representatives included officials from uranium  trade associations; startup and established mining companies;  ConverDyn’s conversion facility in Metropolis, Illinois; and USEC’s  gaseous diffusion enrichment plant in Paducah, Kentucky. We also  interviewed officials from selected utility companies operating commercial  nuclear power plants, commodities brokers and traders, and market  analysts. We visited two mining operations, a Cameco corporation “in  situ” uranium mine at Smith Ranch, Wyoming, and the Denison Mines  corporation underground mine and uranium milling facility near Blanding,  Utah.
Finally, to determine the extent to which DOE’s uranium transactions  were consistent with applicable federal law, we reviewed requirements of  the Atomic Energy Act, the USEC Privatization Act and the  miscellaneous receipts statute. We obtained and reviewed internal DOE  documentation authorizing uranium transactions and changing ownership  of cylinders containing natural uranium to USEC and to Fluor-B&W  Portsmouth. We reviewed market impact analyses prepared by Energy  Resources International, Inc., under contract with DOE; internal  documents certifying that DOE would receive fair market value for its  natural uranium; and secretarial determinations that uranium transactions  would have no adverse impact on the uranium market and that the  uranium was not needed for national security purposes. For information  on how the uranium transactions were documented for accounting  purposes, we also reviewed USEC’s annual 10-K report to the Securities  and Exchange Commission and interviewed USEC and Fluor-B&W  Portsmouth business and accounting officials.
We conducted this performance audit from November 2010 through  September 2011, in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
section_title: Appendix II: The Nuclear Fuel Cycle
paragraphs: 1. Finding uranium deposits Unlike coal, which forms continuous  seams in rock, uranium forms discrete,  concentrated deposits distributed like   the specks in blue cheese. Uranium  can be found by detecting the presence  of radioactivity from the air, from the  earth’s surface, or by excavation.
section_title: Appendix II: The Nuclear Fuel Cycle
paragraphs: 2. Uranium mining regulation and startup The uranium mining industry is  regulated by various federal and  state authorities. To bring a mine  into production takes 8 to 10 years  and costs many millions of dollars.
The cost to bring a conventional  open-pit or underground mine on  line can be up to $400 million, while  an “in situ” mine, which extracts  minerals from an underground  aquifer, costs about $100 million.
section_title: Appendix II: The Nuclear Fuel Cycle
paragraphs: Conventional open-pit mining gains  access to ore by using explosives  to remove surface material. If the  uranium is too far below the surface,  tunnels and shafts are dug to reach  and extract the ore. Broken ore is  then sent to a processing mill.
At the mill, the ore is crushed,  ground, and then fed to a leaching  system that uses resin and chemicals  to separate uranium from the ore.  The resulting yellow slurry—called  “yellowcake”     —is washed, dried,  and sold to utility customers.
Interactive features: Roll your mouse       over to see yellowcake.
section_title: Appendix II: The Nuclear Fuel Cycle
paragraphs: 4. Mining by in situ recovery In situ mineral recovery circulates  naturally occurring groundwater  through uranium deposits in porous  sandstone. At the surface, the  uranium is treated to separate it  from the water and then dried. The  resulting yellowcake is sold to utility  customers.
section_title: Appendix II: The Nuclear Fuel Cycle
paragraphs: The uranium in yellowcake  is heated and combined with  other gases to produce uranium  hexafluoride, a gas. Once cooled,  uranium hexafluoride crystallizes               and becomes a solid, which can  be easily shipped in cylinders to a  uranium enrichment plant.
section_title: Appendix II: The Nuclear Fuel Cycle
paragraphs: 6. Department of Energy inventory  of uranium hexafluoride The Department of Energy oversees  a substantial supply of uranium  hexafluoride cylinders left over from  prior nuclear weapons programs  or received under U.S. nuclear  nonproliferation agreements with the  Russian Federation.
The department has occasionally  sold or transferred this uranium, most  recently to accelerate cleanup of the  Portsmouth Gaseous Diffusion Plant  near Piketon, Ohio.
section_title: Appendix II: The Nuclear Fuel Cycle
paragraphs: Commercial nuclear reactors in the  United States require fuel consisting  of at least 3 percent concentration of  uranium-235. Uranium hexafluoride,  the gaseous form of natural uranium,  contains a concentration of only 0.71  percent uranium-235 and therefore  requires enrichment before it can be  used as fuel. In the United States,  enrichment is done primarily by  means of gaseous diffusion and gas  centrifuge.
section_title: Appendix II: The Nuclear Fuel Cycle
paragraphs: 8. Enrichment by gaseous diffusion Enriching uranium through gaseous  diffusion repeatedly forces uranium  hexafluoride under pressure through  porous membranes, separating the  isotope uranium-235 from uranium-238.  The gas must be processed through  as many as 1,400 stages to achieve a  concentration of 3 percent uranium-235.
Interactive features: Roll your  mouse over     to see the gaseous  diffusion stage.
section_title: Appendix II: The Nuclear Fuel Cycle
paragraphs: 9. Enrichment by gas centrifuge  Enriching uranium with a gas  centrifuge involves spinning uranium  hexafluoride gas at high speed in  a series of cylinders to separate  uranium-235 from uranium-238.  Centrifuge technology requires only  10 to 20 stages and a fraction of the  energy required for gaseous diffusion.
section_title: Appendix II: The Nuclear Fuel Cycle
paragraphs: To fabricate fuel, enriched uranium  hexafluoride gas is combined with  other elements to form a uranium  dioxide powder, which is compressed,  formed into pellets, and then sealed  into long metal tubes to form fuel rods.  These rods are bundled to create a  fuel assembly.
Depending on the reactor type, about  179 to 264 fuel rods are required  for each fuel assembly; a typical  reactor core holds 121 to 193 fuel  assemblies.
section_title: Appendix III: Legal Analysis of DOE’s Strategy to Finance USEC’s Cleanup Work at the Portsmouth Gaseous Diffusion Plant
subsections: section_title: Introduction and Summary of Conclusions
paragraphs: As part of GAO’s review of DOE’s overall uranium management plan, we  examined what DOE referred to as a series of “barter arrangements”  between DOE and USEC for accelerated cleanup services at the  Portsmouth Gaseous Diffusion Plant. Specifically, we examined the  consistency of these transactions with federal law governing uranium  transactions and the disposition of government assets.
We found that DOE’s transactions constituted sales of uranium, which  were authorized under the USEC Privatization Act but violated the  miscellaneous receipts statute because DOE failed to deposit the value of  the net proceeds into the Treasury. We came to the same conclusion in  2006 in analyzing a similar series of transactions between DOE and  USEC. In particular, although DOE has characterized its most recent  transactions with USEC as “barters,” they are more accurately  characterized as sales of uranium into the market, with USEC acting as  DOE’s sales agent. The miscellaneous receipts statute requires  government officials who receive money for the government to deposit  the money into the Treasury. Although DOE did not receive cash from the  sale of federal uranium assets, it allowed USEC to receive and keep cash  from the sales. Because DOE was not authorized to keep the sale  proceeds, the department also was not authorized to engage USEC to  receive them. The current transactions differ in some superficial respects  from the 2006 transactions, but the core substance is the same, and, as  DOE told us, in this case it intentionally structured the disposition of  federal assets to avoid payment of the proceeds for those assets into the  federal Treasury.
section_title: Analysis
subsections: section_title: DOE’s Uranium Transactions with USEC Were Sales Authorized by the USEC Privatization Act
paragraphs: Under the Atomic Energy Act of 1954, as amended, DOE has general  authority to sell, lease, distribute, or otherwise make available source  material, including natural uranium, under certain conditions to licensed  entities. Congress limited this general authority in 1996, however, in the  USEC Privatization Act. Section 3112(a) of this act explicitly prohibits  DOE from selling or transferring “any uranium” except as “consistent with”  section 3112. The remaining provisions of section 3112 then specify the  conditions under which DOE may sell or transfer various types of natural  and enriched uranium. Section 3112(b) covers uranium transferred to  DOE under the US-Russia Highly Enriched Uranium Purchase  Agreement in 1995 and 1996. Section 3112(c) covers natural and  enriched uranium transferred before 1998 to USEC without charge as  part of its privatization. Section 3112(e) covers transfers of enriched  uranium to federal, state, and local agencies; nonprofit, charitable, or  educational institutions; and others. Section 3112(d)(1) covers natural  and low-enriched uranium sold from DOE’s inventory that is not otherwise  covered under sections 3112(b), (c), or (e). According to DOE, the  uranium subject to the 2009-2011 transactions with USEC was natural  uranium from DOE’s inventory. It therefore does not fall into any of the  categories covered by sections 3112(b), (c), or (e) and is thus covered by  section 3112(d)(1). Because section 3112(d)(1) only authorizes sales,  DOE’s transactions with USEC must be sales or else be prohibited by the  USEC Privatization Act.
According to DOE, its transactions with USEC constituted barters—an  exchange of goods (natural uranium) for services (accelerated cleanup  services at the Portsmouth Gaseous Diffusion Plant) authorized by the  Atomic Energy Act—and are not “inconsistent with” the USEC  Privatization Act. DOE declined to explain to us whether and how barters  authorized under the Atomic Energy Act also constitute sales authorized  by the USEC Privatization Act. DOE instead stressed that because it  relies on its broad Atomic Energy Act authority to dispose of source  material, the distinction between barters and sales is not relevant.  Specifically, in DOE’s view, the USEC Privatization Act does not affect its  authority under the Atomic Energy Act to engage in transactions involving  uranium but simply establishes additional conditions that apply to the  exercise of its authority under this act. Because we found that the current  transactions in question were sales (through an agent) of uranium, and  because all such sales are governed by the USEC Privatization Act, we  need not and did not address whether barters are authorized under this  act.
In this report we found, as we did in analyzing similar transactions in  2006, that DOE’s transactions with USEC constituted sales authorized by  section 3112(d)(1) of the USEC Privatization Act—but through USEC as  agent, rather than to USEC as buyer. DOE and USEC had different  views about the nature of their relationship with respect to the most recent  transactions. DOE told us that it bartered federal uranium assets for  cleanup services with USEC and did not employ USEC as an agent to  sell the uranium to third parties. By contrast, a USEC official told us that  USEC did act as DOE’s sales agent and in its 2010 annual report to the  U.S. Securities and Exchange Commission stated that USEC never  owned the material because it did not stand to make a profit or loss from  the uranium sale. Labels that parties ascribe to their roles are not  controlling as to whether a principal-agent relationship exists, however.  That relationship is determined by considering four key characteristics  and looking to the substance of the transaction as a whole, with no single  characteristic being determinative. The four characteristics of a sales  agency arrangement are (1) one entity delivers goods to another; (2) the  other entity is to sell the goods not as his own property but as the  property of and for the benefit of another, with the first entity remaining  the owner of the goods; (3) the first entity has the right to control the sale,  fix the price and terms, and recall the goods; and (4) the first entity has  the right to demand and receive proceeds of the goods when sold, minus  the agent’s commission. The series of transactions between DOE and  USEC exhibited the last three of these four characteristics, and the first,  delivery of the goods, is not applicable to uranium. Thus, taken as a  whole, the DOE-USEC series of transactions indicates that the  relationship was functionally one of agency, with DOE as the principal  and USEC as the agent.
First, USEC sold uranium that was the property of the federal government  primarily for the benefit of the government. According to USEC officials,  USEC finalized the sales of the uranium to third parties before it signed  the contract modifications with DOE under which it agreed to conduct  cleanup in exchange for the uranium. USEC arranged for the sale of  federal property; it did not sell its own property. This point is underscored  by USEC’s 10-K report, in which it states that it did not consider itself to  be the owner of the material. USEC also sold the uranium primarily for  DOE’s benefit: USEC’s 10-K states that USEC assumed no risk in the  sale and did not stand to make any profit because the amount of work  USEC was to provide under the cleanup contract was dependent on the  net value of the uranium. USEC set the value of the uranium on the basis  of offers it received for the uranium, the highest of which it subsequently  accepted and translated into sales. If USEC had secured less value for  the material, it would have done less work for DOE. The only benefit of  the “barter” transaction accrued to DOE: as DOE officials told us, by  purportedly structuring the transactions as barters, DOE sought to avoid  receiving cash, which it would have had to deposit into the Treasury.  USEC kept the proceeds of the sale and used them for the cleanup  services it provided at the Portsmouth facility but became entitled to the  value of the uranium only after it signed the contract modifications to  furnish cleanup services in exchange for that value. Those proceeds,  therefore, cannot be said to be a benefit of the transaction that resulted in  the sale of the uranium. The contract modifications purported to transfer  title to the uranium to USEC, but at the time the contract modifications  were signed, the uranium had already been sold. To the extent that title  did actually pass through USEC, it could only have been to facilitate  further transfers to the ultimate buyers.
Second, DOE had the right to control the sale of the uranium. DOE stated  that it did not control the sale of the uranium under the terms of the  contract modifications with USEC but, rather, bartered federal uranium  assets to USEC in exchange for cleanup services. DOE also stated that  USEC was subsequently free to sell the uranium at any time it wished.  The uranium was marketed and sold before the contract modifications  were executed, however, so the terms of those contract modifications are  not relevant in evaluating the control that DOE did or did not exercise  over the sale. Instead, DOE and USEC officials told us that they had an  oral agreement for the valuation of the material before the contract  modifications were signed. DOE stated that it did not specifically  authorize, require, or request USEC to solicit offers for the uranium but  acknowledged that it requested USEC’s valuation of the uranium, which it  knew was to be based on the solicitation of firm offers for the material.  During the term of this agreement, which led directly to sale of the  uranium, DOE had the right to exercise control over USEC’s actions as  agent.
Moreover, although DOE officials stated that they did not know whether or  when USEC in fact sold the material, a USEC official told us that a DOE  official knew that USEC was seeking to finalize sales contracts with the  highest bidders for the uranium and in fact encouraged USEC to finalize  the sales quickly so that the contract modifications could be signed. In  addition, two of the letters that USEC sent to DOE to establish the value  of the uranium on the basis of offers received refer to the material as  already sold. These facts indicate that DOE was, or should have been,  aware that the material was being sold before finalization of its “barter”  agreement, while the material was still subject to DOE’s control, and that  DOE at least assented to, and may have explicitly authorized, the sales.
That DOE controlled the price obtained from the sales is also evinced by  the fact that the valuation process, over which DOE had approval, was  tied up with the sales process. USEC submitted its valuation of the  uranium to DOE for approval for two reasons: (1) to determine the  amount of work that USEC would be required to perform in exchange for  that value and (2) to enable DOE to determine that it would receive fair  market value for the material. Receipt of no less than fair market value is  a condition required by the USEC Privatization Act before the sale of  uranium. As USEC stated in a series of letters to DOE establishing the  value of the uranium, USEC felt that actual bids represented a more  realistic value than mere consultation of spot market prices at the time of  the sale. Soliciting firm offers for the material may have provided a  realistic valuation of the material, but the same process also constituted  USEC’s first step in selling federally owned uranium on DOE’s behalf.  Further, this step was taken with DOE’s knowledge and approval,  including its specific approval of the price to be attained.
Third, the value that DOE received for the uranium, in terms of work to be  performed by USEC, was reduced by an amount equal to the transaction  costs that USEC incurred in the sale of the uranium. In other words, DOE  did not receive the gross value, or price, that USEC realized from the sale  of the uranium but instead received value equal to the net proceeds of its  sale. USEC deducted its transaction costs from the value it attributed to  the uranium, and DOE approved that net value as the fair market value of  the material. The value USEC attributed to the uranium was also the price  received from its buyers, and the fact that costs were deducted from the  value means that the value DOE received equaled the net proceeds of  the sale to a third party from its agent, USEC, rather than the price of the  sale from USEC as buyer.
Furthermore, the value of the uranium was decreased to account for  USEC’s “sales management fee” in addition to USEC’s other transaction  costs. USEC clearly labeled these amounts as sales management fees in  its valuation letters for DOE approval, and DOE did in fact approve the  net valuations. A USEC official told us that the sales management fee  represented USEC’s fee for brokering the material, USEC’s fee for  negotiating the actual sales of the material, and USEC’s costs associated  with arranging book transfers of the material. In other words, USEC  charged a commission against the value of the material. DOE has stated  that such transactional fees or costs are routinely part of any commodity  transaction. We agree that such costs routinely figure into commodity  transactions, but where those costs are incurred by the recipient and  charged back to the seller, and where those costs include a commission,  they indicate a transaction involving an agent.
In sum, DOE’s uranium transactions with USEC, viewed as a whole,  constituted sales through an agent rather than barters. USEC arranged  for the sale of federal uranium assets while the uranium was still federal  property. The only party that benefited from the sale was DOE. USEC  deducted its transactions costs, as well as a commission, from the value  of the uranium. These are all characteristics of sales agency rather than  barter and resale. Even assuming some ambiguity in how these facts and  circumstances should be characterized—agency or sale—courts have  long found against the party whose mixed motives created the  ambiguity. In this case, any mixed motives are attributable to DOE.  DOE’s acknowledged objectives were to accomplish the cleanup work  and avoid using appropriated funds to do so. It was motivated to structure  the uranium transactions as purported barters so that it would not receive  cash that it would have to deposit into the Treasury. At the same time, it  was motivated to provide an arrangement acceptable to USEC so that the  cleanup work could be accomplished. USEC’s sole motivation was to  minimize the risks inherent in the transaction. USEC officials told us they  only accepted uranium as payment for cleanup services because they did  not believe that DOE could finance the cleanup work with cash (i.e.,  appropriated funds), and they wanted the cleanup work to proceed to  keep the skilled employees at Portsmouth working until USEC could open  its new gas centrifuge enrichment facility there. Thus, USEC accepted the  arrangement DOE offered, but only after it had found buyers for DOE’s  uranium, so the time USEC held the uranium and USEC’s exposure to  swings in the uranium market would be minimized. USEC was willing to  take DOE’s uranium only in a manner that made it DOE’s sales agent.  Although DOE did not specifically ask USEC to deal with the uranium in  this way, DOE knew what actions USEC was taking and approved of the  steps USEC took along the way. The true nature and effect of this  arrangement was that USEC served as DOE’s agent in selling federal  uranium assets into the market.
section_title: DOE Violated the Miscellaneous Receipts Statute by Not Depositing the Value of Net Proceeds from Uranium Transactions with USEC into the Treasury
paragraphs: Our present review found, as did our analysis of similar transactions in  2006, that DOE did not comply with the miscellaneous receipts statute  because it did not deposit the proceeds from sale of its uranium into the  Treasury. Under the miscellaneous receipts statute, “an official or agent  of the Government receiving money for the Government from any source  shall deposit the money in the Treasury as soon as practicable without  deduction for any charge or claim.” As a general proposition, a federal  agency may not augment its appropriations from Congress without  specific statutory authority. When Congress makes an annual  appropriation to an agency, it is also establishing an authorized program  level. In other words, Congress is telling the agency that it cannot operate  beyond the level it can finance under its appropriation. To permit an  agency to operate beyond this level, with funds derived from some other  source without specific congressional approval, would amount to a  usurpation of Congress’s constitutional prerogative to appropriate funds.  Restated, the objective of the rule against augmentation of appropriations  is to prevent a government agency from undercutting Congress’s  constitutional “power of the purse” by circuitously exceeding the amount  Congress has appropriated for that activity. For an agency to keep money  that has not been appropriated by Congress is to augment its  appropriation.
In providing uranium to USEC for sale to a third party and allowing USEC  to keep the proceeds, DOE constructively received money for the  government. DOE used the proceeds of the sale to fund activities that the  department would otherwise have had to pay for out of its appropriation.  By allowing USEC to retain the cash proceeds from the sale of federal  uranium, DOE improperly extended its reach beyond the operating level  that it was otherwise authorized to achieve through its congressional  appropriation. DOE readily acknowledged to us that if it had sold its  uranium directly into the market and received cash, it would have had to  deposit that cash into the Treasury. DOE officials also told us that they  structured the transactions with USEC as they did to avoid having to  deposit the proceeds of a sale into the Treasury. DOE stated that  because it received no cash in this transaction, it was not required to  deposit any proceeds into the Treasury. We disagree with DOE’s  conclusion. It is a fundamental principle of law that what cannot be done  directly cannot be done indirectly. An agency that lacks the authority to  retain and use amounts that it receives directly cannot circumvent its lack  of authority by engaging a contractor or, as here, a sales agent to  indirectly receive, retain, and use the funds. In similar circumstances,  the courts and we have recognized that a contractor constructively  receiving money for a federal agency is not free of the requirement of the  miscellaneous receipts statute: that funds received for the use of the  United States be deposited in the Treasury. We have also found that a  federal agency receives money under the miscellaneous receipts statute  if the receipts are to cover the expenses of the government or to pay  government obligations. Here, USEC received money for DOE. The  uranium belonged to DOE when USEC arranged for its sale, but instead  of passing the cash proceeds back to DOE, USEC was allowed to keep  the cash as compensation for work under its cleanup contract—work for  which it was DOE’s responsibility to pay.
Finally, we examined whether DOE’s set of transactions with USEC could  be characterized as a no-cost contract. In a no-cost contract, a contractor  provides a service to the government, but the government has no  financial liability to the contractor and the contractor has no expectation of  payment from the government. For example, in a case in which the  General Services Administration contracted for real estate brokerage  services and brokers were compensated not by the agency but through  commissions received from landlords, we found that these contracts were  no-cost contracts that did not violate the miscellaneous receipts statute.  The General Services Administration did not augment its appropriation by  accepting services without payment, however, because it had no financial  liability to the brokers; the common industry practice was for those  brokers to receive their compensation from third parties. But the  transactions between DOE and USEC were not comparable. In this case,  DOE incurred a cost: it paid a total of $194.3 million in federal uranium  assets for accelerated cleanup services. It allowed USEC to retain cash  from the sale of these assets as compensation for services USEC  provided to DOE, services for which DOE would otherwise have had to  pay out of its appropriated funds. Thus DOE, unlike the General Services  Administration, augmented its appropriation.
section_title: Conclusion
paragraphs: Transactions that DOE characterized as “barters” between itself and  USEC, whereby federal uranium assets were used to compensate USEC  for cleanup services at the Portsmouth Gaseous Diffusion Plant, are more  accurately characterized as sales of uranium into the market with USEC  acting as DOE’s sales agent. Such sales complied with the USEC  Privatization Act, but DOE violated the miscellaneous receipts statute  when it did not deposit the value of the net proceeds of these sales into  the Treasury. The fact that DOE did not receive any actual cash from the  sales is irrelevant. DOE arranged for USEC to receive cash from the  sales as compensation for cleanup activities that DOE would otherwise  have had to pay for out of its appropriated funds. DOE was not itself  authorized to keep the proceeds of the sale, nor was it authorized to allow  USEC to keep them. DOE may not manipulate the disposition of federal  assets to avoid the payment of proceeds for those assets into the federal  Treasury.
section_title: Appendix IV: Comments from the Department of Energy
section_title: Appendix V: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the individuals named above, Ryan T. Coles (Assistant  Director), Antoinette Capaccio, Ellen W. Chu, Cheron Green, Paul  Kazemersky, Karen Keegan, Mehrzad Nadji, Kathryn Pedalino, and  Ginny Vanderlinde made key contributions to this report.