U.S. Enrichment Corporation Privatization: USEC's Delays in Providing Data Hinder DOE's Oversight of the Uranium Decontamination Agreement
Released: 2006-06-16T00:00:00

Letter

Background

Uranium undergoes a number of processing steps in the production of nuclear fuel. To ensure its efficiency and ability to be used safely in nuclear reactors, nuclear fuel must meet rigorous technical specifications. For example, if certain contaminants are present in the material, they must be at or below specified levels so as not to harm workers or the environment or contaminate equipment.

Technetium, a radioactive metal that is produced as a by-product of fission in a nuclear reactor, is considered a contaminant by commercial specifications for nuclear fuel. Its presence in the nuclear fuel production process can contaminate equipment, lead to increased worker radiation doses, and raise environmental concerns. Therefore, specifications require that uranium that is to be enriched should contain no more technetium than one part per billion. USEC first discovered that some of the uranium DOE previously transferred to the corporation may have been contaminated with technetium in March 2000, when DOE requested that USEC sample uranium storage cylinders for technetium content. DOE believed that, during the 1970s, technetium-contaminated recycled uranium that it processed through certain production lines at the Paducah plant inadvertently left residual amounts of technetium in certain equipment. Subsequent processing of uranium using that equipment contaminated the material. USEC was able to determine that up to 9,550 metric tons of the 45,000 metric tons of uranium that DOE had transferred to the corporation prior to privatization had been processed through the contaminated production lines at Paducah and therefore was contaminated with technetium. USEC’s initial sampling indicated technetium contamination levels ranging from 11 to 148 parts per billion, all in excess of the commercial specification of one part per billion. In addition, DOE was able to determine that about 5,500 metric tons of uranium in its inventory had also been processed through the contaminated production lines at the Paducah plant and was also likely to be contaminated with technetium.

USEC conducts uranium decontamination work using equipment at the Portsmouth plant. Figure 1 illustrates the decontamination process.

USEC Reported About 10 Percent of the Contaminated Uranium DOE Transferred to the Corporation before Privatization Remains to Be Decontaminated

Through the end of February 2006, USEC reported that about 960 metric tons, or 10 percent, of the 9,550 metric tons of technetium-contaminated uranium transferred to it by DOE prior to privatization remains to be decontaminated. DOE estimates USEC will finish decontaminating this uranium by the end of December 2006. In total, USEC has decontaminated about 6,500 metric tons of its contaminated uranium. Specifically: USEC decontaminated nearly 3,600 metric tons of its inventory between June 2002 and December 2003 under the terms of the June 2002 agreement between USEC and DOE. Under this agreement, DOE compensated USEC for its decontamination costs by taking title to some of USEC’s depleted uranium, reducing USEC’s costs for eventually disposing of the material.

About 2,050 metric tons of USEC’s uranium were decontaminated between December 2003 and December 2004 under the terms of the April 2004 agreement between USEC and DOE. DOE compensated USEC for its decontamination costs using appropriated funds.

USEC decontaminated approximately 842 metric tons of its uranium between December 2004 and February 2006 under the December 2004 agreement, which provided that USEC cover its decontamination costs using proceeds from the commercial sale of clean uranium transferred from DOE’s inventory to USEC for sale.

The June 2002 agreement between DOE and USEC also provided for DOE to replace some of USEC’s contaminated uranium with clean uranium from DOE’s inventory. In October 2004, DOE exchanged 2,116 metric tons of USEC’s contaminated uranium with an equal amount of clean uranium from its inventory.

In addition to USEC’s inventory, since October 2004 USEC has been decontaminating about 7,600 metric tons of contaminated uranium in DOE’s inventory: 2,116 metric tons exchanged with USEC in October 2004 and 5,517 metric tons of contaminated uranium that were already in DOE’s inventory. As of February 28, 2006, USEC had decontaminated 2,065 of the 2,116 metric tons it transferred to DOE in October 2004 and 248 of the 5,517 metric tons that was already in DOE’s inventory. DOE estimates USEC will finish decontaminating the 5,327 metric tons of contaminated uranium that remain in DOE’s inventory by the end of October 2008. Figures 2 and 3 illustrate the amount of technetium-contaminated uranium in USEC’s and DOE’s inventories.

From June 2002 through the end of February 2006, USEC had invoiced DOE for decontamination costs totaling about $152 million. Of this amount, about $67 million was spent for direct costs, such as labor and decontamination equipment and supplies, and about $85 million was spent for indirect costs. These indirect costs included utilities and other plant overhead costs and administrative costs. Table 1 details USEC’s decontamination costs.

DOE has compensated USEC for its decontamination services in three ways. First, DOE has paid USEC about $62 million in appropriated funds. Second, DOE officials told us that the department has taken title to about 30,000 metric tons of USEC’s depleted uranium, which DOE estimated in 2004 would cost the department about $27 million to convert to a more stable form. Third, DOE compensated USEC for its remaining decontamination services using the proceeds from the commercial sale of clean uranium transferred from DOE to USEC pursuant to the December 2004 agreement between USEC and DOE.

In total, DOE has transferred about 1,100 metric tons of clean uranium to USEC for commercial sale under the December 2004 agreement. DOE transferred about 900 metric tons of clean uranium to USEC in December 2004, which USEC sold to four different buyers, resulting in total proceeds of $62 million. DOE officials told us that increases in market prices for uranium resulted in more money than DOE originally estimated. These additional proceeds allowed USEC to decontaminate about 280 metric tons more uranium than DOE originally believed the sale would fund. By February 2006, however, USEC had completely spent the proceeds generated from the sale of the 900 metric tons of clean uranium. Therefore, DOE transferred an additional 200 metric tons of clean uranium to generate additional funds for decontamination. USEC sold this uranium in February 2006, resulting in total proceeds of $22.4 million, which USEC expects will fund its decontamination services through June 2006. In addition, instead of transferring clean uranium to USEC and having USEC conduct additional uranium sales, DOE sold 200 metric tons of clean uranium in April 2006 to obtain money to compensate USEC for its decontamination services. These sales resulted in total proceeds of $23.4 million, which USEC expects will fund its decontamination services from July 2006 through November 2006. According to DOE officials, the department itself will likely conduct additional uranium sales to fund USEC’s decontamination services, rather than transferring additional uranium to USEC.

DOE’s Oversight of USEC’s Uranium Decontamination Activities Has Been Hindered by Delays in Obtaining Key Information from USEC

DOE takes several steps to oversee USEC’s uranium decontamination activities, including reviewing monthly reports submitted by USEC detailing decontamination progress and costs and tracking the proceeds USEC generates from selling clean uranium that DOE has transferred to the corporation under the December 2004 agreement. DOE has also contracted with DCAA to audit USEC’s decontamination costs. However, DOE and DCAA have been unable to complete some of their oversight steps because they have been unable to obtain some financial and other data from USEC in a timely manner. As a result, DOE has some concerns about whether USEC consistently conducts decontamination work in a cost-effective manner and is currently uncertain whether the compensation the department provided the corporation matches USEC’s actual decontamination costs.

DOE Oversees USEC’s Activities by Reviewing Monthly Reports and DCAA Audits and Conducting On-Site Verification

DOE takes several steps to oversee USEC’s uranium decontamination activities. For example, DOE reviews a number of monthly reports that USEC submits to the department. These monthly reports contain detailed information on USEC’s uranium decontamination activities. Specifically, these reports include the following: Information on the amount of uranium decontaminated each month, USEC’s estimate of the remaining contaminated uranium in USEC’s and DOE’s inventories, and data on the level of technetium contamination for uranium storage cylinders before and after processing. These data verify whether the uranium in each cylinder meets commercial specification after it has been through the decontamination process.

Summary data on USEC’s monthly decontamination costs as well as USEC’s estimate of the project’s total cost when the decontamination is completed. USEC also submits a breakdown of its costs into specific categories, such as, among other things, labor, employee benefits, materials, site security, and electricity.

Information on waste generated from the decontamination process.

DOE officials told us that they perform detailed analyses of these reports to verify that USEC is consistently conducting decontamination work in a cost-effective and efficient manner. If these officials identify inconsistencies or trends in the data that generate concerns or questions, they follow up with USEC each month through written inquiries to resolve uncertainties and obtain adequate justification for costs such as overtime and training. DOE officials at the Portsmouth and Paducah plants also conduct on-site inspections of the uranium cylinders in order to verify that USEC’s and DOE’s actual uranium inventories match what appear in USEC’s monthly reports.

DOE also tracks the proceeds from USEC’s sale of clean uranium transferred to the corporation under the December 2004 agreement. DOE obtains copies of all sales contracts between USEC and the buyers of this uranium. These contracts provide detailed information on the buyer, the quantity sold, its sale price, and the date of the sale. In addition, USEC provides DOE with a copy of the wire transfer between the buyer and USEC to verify the receipt of funds. DOE requires that USEC segregate the proceeds of the uranium sales into an account separate from USEC’s other funds. USEC maintains these funds in a separate brokerage account that invests in tax-exempt short-term securities. Each month, USEC submits a cost invoice to DOE for the decontamination work it performed during the preceding month. DOE then reviews and approves USEC’s invoice and USEC withdraws money from the brokerage account equivalent to its invoiced costs. DOE monitors the withdrawal rate to estimate when more uranium will need to be sold to obtain additional funding for the account.

Finally, DOE has also contracted with DCAA to audit the annual costs submitted by USEC, which DOE uses to verify that USEC’s decontamination costs match what DOE paid the corporation. To receive compensation for its indirect costs under the agreement, USEC provides estimates of its costs to DOE annually. These estimates, called “provisional billing rates,” are the basis of DOE’s compensation to USEC for its costs for that year. USEC submits monthly invoices to DOE using the provisional billing rates. DOE then compensates the corporation for its invoiced costs. Following the end of each calendar year, USEC is to submit financial data to DCAA that details the corporation’s actual incurred indirect costs. DCAA uses these data in its audits to verify that USEC’s incurred costs are reasonable. Any differences between USEC’s provisional billing rates and USEC’s incurred decontamination costs would mean either that DOE owes USEC additional money or that USEC owes DOE for any compensation in excess of incurred costs.

USEC’s Delays in Responding to Inquiries and Providing Financial Data Have Affected DOE’s Oversight

DOE officials told us that they have had difficulties receiving complete and timely responses to their inquiries on USEC’s monthly reports. Following their detailed analyses of USEC’s monthly reports to verify that USEC is conducting decontamination work in a cost-effective and efficient manner, DOE often submits written inquiries to USEC to resolve inconsistencies or other concerns. For example, DOE officials have submitted numerous inquiries to USEC questioning the amount of overtime hours USEC has billed to the project, which these officials think are unusually high. DOE officials have also questioned the large amounts of worker training that USEC has billed to the project. In addition, DOE officials have also inquired about certain materials USEC has purchased. According to DOE officials, DOE submits about five concerns per month to USEC. However, in its comments on a draft version of this report, USEC told us that DOE submits about 15 inquiries per month.

DOE officials told us that USEC sometimes takes up to 6 months before responding to DOE’s inquiries and then often only selectively respond to certain questions. In comments on a draft version of this report, USEC disagreed with DOE and stated that it has responded completely to DOE’s inquiries in an average of about 3 months. While USEC officials told us they attempt to provide timely responses to DOE’s inquiries, they also stated that the inquiries often request very specific data that are difficult to provide quickly. In addition, USEC officials told us that delays sometimes occurred when personnel from both DOE and DCAA were asking similar questions. USEC officials stated that they were sometimes confused about whether they should respond to DOE, DCAA, or both. Moreover, USEC indicated that DOE’s inquiries were often poorly communicated and not delivered to the appropriate personnel in a timely fashion. DOE officials indicated that they believed that the inquiries were adequately communicated and delivered to the appropriate USEC personnel in a timely fashion. Further, DOE officials stated that although some of the inquiries were more detailed, this would not justify the delays in USEC’s responses to the department. USEC officials also told us that despite their belief that DOE’s inquiries are often unnecessary and redundant, USEC is working to improve the timeliness and completeness of their responses. According to USEC officials, they met with DOE in March 2005 to try to reduce the size and redundancy of these inquiries. However, DOE officials stated that the reason for the apparent redundancy was USEC’s inability to respond to the original inquiries in a timely manner.

DOE’s inquiries have resulted in some benefits to the government. For example, USEC officials told us that, in response to DOE’s inquiries, USEC has adjusted some monthly invoices to remove some charges USEC incorrectly billed to the project because of administrative errors. According to DOE officials, these errors were only discovered after DOE submitted written inquiries to USEC after it had analyzed USEC’s monthly reports.

DCAA has also experienced delays in obtaining the financial data from USEC that are necessary to complete its annual audits of USEC’s decontamination costs. At the end of each fiscal year, USEC has 6 months to submit financial data to DCAA detailing the corporation’s indirect costs for that year. DCAA then completes an audit of these costs, which allows DOE to verify that USEC’s actual incurred costs for the year match what DOE paid the corporation. However, USEC has not submitted incurred cost data to DOE or DCAA for decontamination conducted during any time period from July 2002 to the present. DCAA has not completed any of its full annual audits of USEC’s incurred decontamination costs. DCAA has completed five limited-scope audits of USEC’s incurred costs for the individual months of December 2004 and January, March, May, and November 2005 to verify that USEC’s incurred costs are in accordance with applicable laws, regulations, and the provisions of the December 2004 agreement. According to DCAA officials, these limited audits of USEC’s monthly incurred costs have not found significant problems. In addition, DCAA has conducted other audits to examine, among other things, USEC’s internal controls and accounting systems. According to USEC, these other audits have not found significant deficiencies.

According to USEC officials, the delays in providing incurred cost data to DCAA are caused by several factors including limited internal accounting resources that are familiar with Federal Acquisition Regulations and government cost accounting standards protracted contract negotiations with DOE over how employee pension and post-retirement benefits should be treated in USEC’s accounting systems.

DOE officials with whom we spoke disagreed that these reasons should cause such a significant delay in providing incurred cost data to DCAA. USEC has submitted a revised schedule to DOE that estimates when it will provide incurred cost data to DCAA. (See table 2.)

In the absence of DCAA audits of USEC’s annual decontamination costs, DOE has taken steps to protect the government’s interests by limiting the amount of compensation paid to USEC. For example, USEC has stated that its actual decontamination costs in calendar year 2004 exceeded DOE’s compensation for that year. However, because DCAA was unable to complete its audit of USEC’s costs for that year, DOE refused to pay this difference. In addition, provisional billing rates were not revised in 2005, and USEC was compensated using 2004 provisional billing rates. USEC officials told us that the failure to revise the provisional billing rates has only increased the difference between USEC’s actual decontamination costs and the amount the corporation is being compensated. According to USEC officials, the difference between the corporation’s actual decontamination costs and the amount it has been compensated is about $3 million and will continue to grow until new billing rates are approved by DOE. DOE officials told us that they plan to approve new billing rates in June 2006. Furthermore, DOE officials said that the department will pay USEC any difference between the corporation’s actual decontamination costs and the amount already compensated once USEC submits its actual incurred costs and DCAA has been able to complete its audits.

Conclusions

Almost 8 years after USEC’s privatization, USEC and DOE are still dealing with the cleanup of technetium-contaminated uranium. According to DOE officials, the department decided to compensate USEC for decontaminating uranium to resolve potential legal liabilities and to help achieve other policy goals, such as the continuation of a reliable domestic source of uranium enrichment today and in the future. In our view, however, DOE has left the Congress and the public largely uninformed about these policy goals, as well as about the amount of progress USEC has made decontaminating uranium and the costs incurred in doing so. DOE deserves credit for attempting to protect the public interest by limiting the amount of compensation paid to USEC until the corporation provides the key financial data that are necessary for DOE’s oversight of USEC’s activities. However, because of the complexity of the issues, including the need to achieve multiple policy goals and the importance of maintaining a reliable, domestic source of uranium enrichment, it is important for DOE to provide the Congress with the information necessary for congressional oversight of the department’s activities.

Recommendations for Executive Action

We are recommending that the Secretary of Energy clarify with USEC (1) the specific oversight steps that DOE and DCAA conduct and (2) procedures that USEC should follow in responding to the department’s and DCAA’s questions on the corporation’s performance.

In addition, to assist the Congress in its continuing oversight of the department, we further recommend that the Secretary of Energy report the following information in DOE’s annual budget request to the Congress until USEC has completed uranium decontamination: the remaining quantities of uranium in USEC’s and DOE’s inventories that need to be decontaminated, the estimated costs of completing this decontamination work, the source of funds necessary to compensate USEC, and the progress DCAA has made completing the annual audits of USEC’s decontamination costs.

Agency Comments and Our Evaluation

We provided a draft copy of this report to DOE and USEC for their review and comment. DOE’s letter is presented as appendix II, and USEC’s letter is presented as appendix III.

In its written comments, DOE agreed with our recommendations, but requested that any report to the Congress be done on an annual basis, as part of the annual budget process. We agree with DOE and have modified our recommendation to provide for DOE reporting uranium decontamination performance and cost information in its annual budget requests rather than semiannually.

Both DOE and USEC commented that the report would be more accurate if it acknowledged the value and the successful performance of the program. DOE’s comments stated that the overall value of the program is not stated clearly and is somewhat overshadowed by detailed issues related to USEC’s cost reports. USEC believes that the report would be more precise if it acknowledged the successful technical and financial performance of the program. The objectives of our review were to provide factual information on USEC’s progress in decontaminating uranium and on DOE’s oversight of USEC’s uranium decontamination activities. Contrary to DOE’s and USEC’s assertions, our draft report clearly described what DOE and USEC officials told us were the benefits of the uranium decontamination agreements, including the amounts of uranium in USEC’s and DOE’s inventories that have been decontaminated, the technology developed to decontaminate the uranium, the continued employment of workers at the Portsmouth plant, and the maintenance of a reliable, domestic source of uranium enrichment. However, it is also important to note that these benefits did not come without significant cost. Specifically, DOE has provided over $150 million in various forms of compensation to USEC. To provide detailed information concerning the overall value of the program was beyond the scope of this review.

USEC generally agreed with the draft report’s findings and supported our recommendations to DOE. However, USEC commented that the report contained shortcomings in the presentation of its supporting analysis. Specifically, USEC said that the draft report does not acknowledge that USEC provided detailed invoice data to DOE that conformed to DOE’s rules on invoice review. On the contrary, our draft report contained detailed information on the types of information provided to DOE including reports on the amounts of uranium decontaminated each month, the amounts of waste generated, and the decontamination costs incurred. USEC states that DOE’s rules contain no requirements for incurred cost submissions. However, as our draft report stated, the contract clause in Federal Acquisition Regulation §52.216-7, which is specifically incorporated in DOE’s agreements with USEC, requires contractors to submit their final indirect cost rates, based on actual costs, to the cognizant federal agency within 6 months of the end of the contractor’s fiscal year. USEC has not complied with this requirement. In addition, USEC stated in its comments that the draft report’s discussion of USEC’s delays in responding to DOE’s follow-up questions is incomplete and inaccurate. In response, we have modified our report to note USEC’s disagreement with DOE officials’ statements regarding the number of DOE inquiries each month and USEC’s responsiveness.

USEC also stated that the draft report’s title overstates the report’s findings and implies a materiality to USEC’s delays that is not supported in the body of the report. We disagree that the draft report’s title makes this implication. USEC recommends that the title be changed to better reflect the report’s recommendation that clarification of procedures would improve DOE’s oversight of the uranium decontamination agreement. The purpose of the recommendation is not for DOE to change its oversight of USEC’s activities, as is implied by USEC’s suggested title. Rather, the recommendation is intended to encourage DOE to better communicate its existing oversight steps to USEC and instruct the corporation how to properly respond to the department’s inquiries.

DOE and USEC also provided technical comments that we incorporated into the report as appropriate.

We will send copies of this report to interested congressional committees, the Secretary of Energy, and USEC, Inc. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-3841 or aloisee@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 IV.

Appendix I: Objectives, Scope, and Methodology

At the request of the Chairman, Committee on Energy and Natural Resources, United States Senate, we examined (1) the United States Enrichment Corporation’s (USEC) progress in decontaminating technetium-contaminated uranium transferred to it by the Department of Energy (DOE) prior to its privatization and (2) DOE’s oversight of USEC’s decontamination activities.

To accomplish these objectives, we reviewed the preprivatization agreements between DOE and USEC that transferred uranium inventories to the corporation; memorandums of agreement and memorandums of understanding between DOE and USEC on the decontamination of technetium-contaminated uranium, signed in June 2002, April 2004, October 2004, and December 2004; DOE and USEC legal memorandums detailing DOE’s potential liability to replace uranium or compensate USEC; Federal Acquisition Regulations; and appropriate statutes, including the Energy Policy Act of 1992 and the USEC Privatization Act of 1996. We also interviewed officials from DOE’s Portsmouth and Paducah Project Office; Oak Ridge Operations Office; Environmental Management Consolidated Business Center; Office of Environmental Management; Office of Nuclear Energy; Office of General Counsel; and Office of the Under Secretary for Energy, Science, and Environment. In addition, we interviewed USEC officials at the corporation’s headquarters in Bethesda, Maryland, and at the Portsmouth Gaseous Diffusion Plant in Piketon, Ohio. We also interviewed officials with the Defense Contract Audit Agency (DCAA), which conducts audits of USEC’s decontamination costs.

To determine USEC’s progress in decontaminating uranium, we reviewed USEC’s monthly reports detailing its monthly decontamination progress as well as remaining uranium inventories to be decontaminated. We also reviewed USEC data on uranium storage cylinders processed each month and the specific amount of uranium in each cylinder. We also obtained USEC’s monthly cost statements submitted to DOE, which detail USEC’s monthly costs under a variety of categories, such as labor, plant overhead, and materials. We examined the reliability of uranium decontamination and cost data by obtaining responses from DOE to a series of data reliability questions covering issues such as data entry access, internal control procedures, and the accuracy and completeness of the data. We asked follow-up questions whenever necessary. We determined that these data were sufficiently reliable for the purposes of this report. Furthermore, we reviewed USEC’s marketing strategy for selling clean uranium transferred to the corporation by DOE under the December 2004 agreement and reviewed USEC’s sales reports submitted to DOE detailing the amount of uranium USEC sold to each buyer, the contract price of the uranium, its delivery date, and the date of payment. In addition, we reviewed the sales contracts between USEC and buyers of the clean uranium as well as invoices confirming receipt of funds from each uranium sale. We also visited the Portsmouth Gaseous Diffusion Plant site to inspect uranium decontamination facilities and to interview DOE and USEC officials.

To assess DOE’s oversight of USEC’s uranium decontamination activities, we interviewed DOE officials that conduct oversight of USEC’s decontamination work at the Portsmouth and Paducah Project Office, Oak Ridge Operations Office, and the Environmental Management Consolidated Business Center. We discussed DOE’s processes for conducting analyses of USEC’s monthly reports on decontamination progress and costs and the steps DOE takes to oversee USEC’s sales of clean uranium transferred by DOE under the December 2004 agreement. We also discussed DOE’s oversight with USEC officials. In addition, we obtained copies of five audits conducted by DCAA of USEC’s monthly decontamination costs and interviewed DCAA auditors to discuss the objectives, scope, and methodology of DCAA’s audit work.

We conducted our work between August 2005 and May 2006 in accordance with generally accepted government auditing standards.

Appendix II: Comments from the Department of Energy

Appendix III: Comments from USEC, Inc.

Appendix III: Comments from USEC, Inc.

Appendix IV: GAO Contact and Staff Acknowledgments

Staff Acknowledgments

In addition to the contact named above, Diane B. Raynes (Assistant Director), Ryan T. Coles, Jessica A. Evans, Doreen S. Feldman, Christopher E. Ferencik, Neill W. Martin-Rolsky, Mehrzad Nadji, Omari A. Norman, Susan A. Poling, Katherine M. Raheb, Keith A. Rhodes, Susan D. Sawtelle, and Rebecca Shea made key contributions to this report.