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Weapons of Mass Destruction (WMD)

95111: Privatizing the United States Enrichment Corporation

Updated December 4, 1996

Marc Humphries
Environment and Natural Resources Policy Division

CONTENTS

SUMMARY

MOST RECENT DEVELOPMENTS

BACKGROUND AND ANALYSIS

The Energy Policy Act of 1992 (P.L. 102-486)
USEC: Structure and Operations
Enrichment Technologies
Market for Enrichment Services
Legislative Proposals and Policy Issues
How to Privatize
Russian HEU and the Impact on the Domestic Uranium Mining Industry
The HEU Deal
The Anti-Dumping Case
Liabilities of USEC and DOE
Exclusive Marketing Agent
Cost to the Taxpayer

LEGISLATION

CONGRESSIONAL HEARINGS, REPORTS, AND DOCUMENTS

FOR ADDITIONAL READING


SUMMARY

Legislative proposals to privatize the United States Enrichment Corporation (USEC) have been introduced in the House (H.R. 1216) and Senate (S. 755). The bills, as amended, were included in the budget reconciliation bill (H.R. 2491). It was cleared by the House and the Senate on November 17, but vetoed by the President on December 6. A substitute bill for S. 755 was introduced on January 26, 1996, by Senator Murkowski. The Murkowski substitute was included in H.R. 3019, the Balanced Budget Downpayment Act II. The conference report for H.R. 3019 was passed by the House and Senate on April 25, 1996, and was signed by President Clinton (P.L. 104-134) on April 26, 1996.

Under the Energy Policy Act of 1992 (EPACT -- P.L. 102-486), USEC replaced the Uranium Enrichment Enterprise (UEE) and became a wholly-owned government corporation and the exclusive marketing agent of enriched uranium for the government. UEE contracts and agreements related to low enriched uranium (LEU) were transferred to the corporation. The corporation was authorized to negotiate the purchase of LEU derived from highly enriched uranium (HEU) from the former Soviet Union's missile warheads. The law mandated USEC to privatize if possible. New legislation is unnecessary to privatize USEC; however, the pending bills are intended to make USEC more attractive to a potential private-sector buyer.

Congress has been faced with a number of policy issues: balancing the national security objectives of the HEU deal with Russia with its impact on the U.S. uranium industry; clarifying U.S. and USEC liabilities after privatization; USEC's role as the exclusive marketing agent for DOE materials; and potential costs to the taxpayer.Legislation has addressed these major issues.

As part of the HEU deal, the USEC will purchase LEU derived from 500 metric tons of HEU, which will be removed from nuclear warheads over a period of 20 years. The Russians would like to accelerate the delivery schedule to 10 or 15 years The HEU will be blended down to low enriched uranium (LEU) in Russia and then shipped to the United States. One concern was that the antidumping suspension agreement against Russian uranium exports restricts the amount of Russian uranium on the U.S. market.

Provisions in the law clarify the liabilities of the United States and the corporation. The purpose would be to keep the buyer of USEC free of government-created liabilities and make a "clean break" from the government corporation. A provision in the law requires DOE to treat, store, and dispose of low-level radioactive waste produced by the corporation at DOE facilities.

The USEC is pursuing privatization through an initial public offering (IPO), or a merger/acquisition (M&A). An IPO would create a publicly traded taxpaying entity. Through an M&A, USEC would be purchased at a competitive sale by a "strategic buyer." A provision would allow USEC to establish a state-chartered private profit corporation into which it could merge. This provision would then permit the stockholders to change USEC without federal legislation. One consortium is already established to purchase USEC and the possibility exists that another consortium will be set up for the same intention.


MOST RECENT DEVELOPMENTS

Both House and Senate versions of the USEC Privatization Act (H.R. 1216 and S. 755) were amended and made part of the budget reconciliation process (Balanced Budget Act of 1995, H.R. 2491). The conference agreement (H.Rept.104-347) was reported out November 15 and approved by the House and the Senate on November 17. President Clinton vetoed H.R. 2491 on December 6. An amended version of S. 755 (the Murkowski amendment) was introduced by Senators Murkowski, Johnston, Domenici and Ford on January 26, 1996. The Murkowski substitute was rolled into continuing resolution H.R. 3019 (the Balanced Budget Downpayment Act II) and was approved by the Senate on March 19, 1996, by a vote 79-21.

The conference report for H.R. 3019 (renamed the Omnibus Consolidated Rescissions and Appropriations Act of 1996) was passed by the House and the Senate on April 25, 1996, and was signed by the President (P.L. 104-134) on April 26, 1996.

The New York-based company Pleiades is putting together a consortium and the financing for the purchase of the USEC. Pleiades was formed for the purposes of acquiring the USEC. Pleiades intends to establish a vertically integrated company that would be financed through debt and equity. Another group of companies (AlliedSignal, Fluor Daniel, Lockheed Martin, General Atomics, and Babcock & Wilcox) signed a memorandum of understanding to look at the possibility of forming a consortium to privatize USEC.

On November 14, 1996, an agreement was reached to amend the U.S.- Russian HEU deal. Among other things, the amendment would increase the pace of deliveries of low enriched uranium (LEU) by 50% over 5 years (1997-2001). The amendment specifies delivery of 18 metric tons (mt) in 1997, 24 mt in 1998, and 30 mt in the years 1999 - 2001. The LEU under this amendment will be derived from about 132 mt of highly enriched uranium (HEU). Transparency issues remain a concern. The U.S. government and USEC want to ensure that the materials received were from dismantled nuclear weapons. Further, in compliance with the Energy Policy Act of 1992, the Nuclear Regulatory Commission issued certificates to the USEC to operate both uranium enrichment facilities.


BACKGROUND AND ANALYSIS

The U.S. enrichment program was created by the government in the 1940s to provide the U.S. military with enriched uranium for nuclear weapons. A 1964 amendment to the Atomic Energy Act of 1954 gave the Atomic Energy Commission authority to provide enrichment services to the nuclear power industry on a commercial basis. The law allowed the nuclear power industry to purchase uranium and have it enriched at government enrichment facilities. This practice began in 1969. The government was required to charge enrichment fees sufficient to cover all costs on the number of "separative work units" (SWUs) needed to increase the percentage of fissile U-235 to the desired level for nuclear fuel. The United States Uranium Enrichment Enterprise (UEE) was vested in the DOE upon DOE's creation in 1977.

During the uranium enrichment process, the percentage of the fissile isotope U-235 is increased by separating and removing a portion of the nonfissile isotope U-238. Natural uranium, unenriched, contains about 0.7% U-235. Most commercial nuclear power plants require uranium that has been enriched in U-235 to about 3%-5%, or low-enriched uranium (LEU). Uranium enriched to 20% or more U-235 is classified as highly enriched uranium (HEU); the concentrations of U-235 in weapons-grade HEU is about 95%.

The Energy Policy Act of 1992 (P.L. 102- 486)

Under the Energy Policy Act of 1992 (EPACT), the USEC replaced the UEE and became a wholly-owned government corporation and the exclusive marketing agent of enriched uranium for the government. USEC has a five-member board of directors, all appointed by the President and confirmed by the Senate. All previous UEE contracts and agreements related to uranium enrichment were transferred to the corporation. Some low-enriched uranium inventories to fulfill contracts were also transferred from DOE to USEC at no cost.

USEC leases from DOE two gaseous diffusion plants at Portsmouth, Ohio, and Paducah, Kentucky, for 6 years, after which the corporation has the exclusive rights to renew the leasing agreement under the same terms and conditions. The lease payments to the DOE cover the costs of administering the lease and related activities. The Treasury as USEC's sole stockholder was issued capital stock of $3 billion as its equity investment. (EPACT specified that the issue be either $3 billion or the net book of assets transferred from DOE, the higher of the two. The book value is $1.4 billion.) Dividend payments to the Treasury constitute the sole recovery to the federal government for any past unrecovered costs of the uranium enrichment program. USEC has the exclusive right to deploy atomic vapor laser isotope separation technology (AVLIS) and has the authority to implement a government-to- government contract for highly enriched uranium (HEU) with Russia.

As mandated by the 1992 Act, USEC delivered a privatization plan to the President and Congress in June 1995. Although the EPACT authorizes privatization without further legislation, a number of problems involved in the process could be eased by Congress. These problems, and legislative proposals to deal with them, are discussed later in this Issue Brief.

One of the problems presented by the agreement between Russia and the United States is the use of Russian highly enriched uranium (HEU) as a source of fuel for U.S. civilian nuclear power reactors. This procedure threatens to displace natural uranium produced by the financially "unviable" U.S. uranium mining industry, at a time when Russian uranium imports are already subject to a quota arising out of a U.S. anti-dumping action. (See "Russian HEU and the Impact on the Domestic Uranium Mining Industry," below.)

USEC: Structure and Operations

The corporation was established to compete in the international enrichment service market and provide a reliable source of domestic enrichment services. Flexibility in pricing, enrichment services, and marketing strategy are part of USEC's plan to stay competitive. Previously, DOE had to charge a single published price to all customers. The corporate objective to maximize shareholder value is particularly important over the next few years as existing contracts expire and competition for the uncommitted market becomes more fierce.

One EPACT mandate to USEC was to privatize if possible. Although legislation was not required, the USEC Privatization Act, passed by Congress as part of H.R. 3019, might enhance the value of the corporation. It has been estimated by J.P. Morgan Securities, Inc. that a public offering sale would generate about $1.5 billion in revenues to the Treasury. J.P. Morgan Securities Inc., as advisor to USEC, prepared a report on privatization and provided testimony to Congress on privatization options. It concluded that proceeding with both an initial public offering (IPO) and a merger/acquisition would provide the flexibility to respond to the conditions of the market. However, J.P. Morgan indicated that IPO appears to be the more likely method of privatization because of the more difficult prospect of finding a single buyer.

The corporation has a staff of 162 and manages 4,300 employees at the enrichment facilities, which are operated under contract by Lockheed Marietta Utility Services, a subsidiary of the newly formed Lockheed Martin. Martin Marietta managed and operated the facilities under DOE's UEE. USEC provides enrichment services for 64 utilities that own and operate nuclear power facilities in more than 14 countries including the United States. In 1994, USEC had revenues of $1.5 billion with assets of about $2.5 billion. It returned to the Treasury dividends of $30 million in 1993 and $55 million in 1994 and $120 million in 1995.

As mentioned, DOE leases two commercial gaseous diffusion plants to the corporation at cost. These two facilities represent over one-third of world enrichment capacity and production. The Paducah plant currently produces 6.8 million separative work units (SWU) of its 11.3 million annual SWU capacity. The Portsmouth plant produces 6.2 million SWU of it 7.7 million capacity. The GDPs are 40 years old; they have been overhauled, but according to USEC, additional expenditures would not be needed to extend the life of the GDPs another 15-20 years. Power represents 60% of all USEC's production costs.

The Nuclear Regulatory Commission (NRC) has the authority to establish safety standards and a certification process for the GDPs. USEC's earlier certification application to the NRC was rejected because of insufficient information. Major NRC concerns were nuclear safeguards and safety and the line of authority in the event of an emergency at one of the GDPs. In September 1995, the NRC accepted USEC's application for certification of the GDPs and in September 1996 NRC issued an initial certification decision. The NRC issued final certification on November 26, 1996. The NRC will take over regulatory authority from the DOE on March 3, 1997.

Enrichment Technologies

Gaseous diffusion, the most widely used technology for enriching uranium, is the technology used by USEC and its predecessor, the Uranium Enrichment Enterprise. Gaseous diffusion separates the U-235 and U-238 molecules after the uranium has been converted to uranium hexafluoride gas (UF-6). The UF-6 passes through a series of filters, becoming more concentrated in U-235 with each successive pass. Several thousand passes are needed for the material to reach the desired level of concentration. The process requires very large amounts of electricity to pump the UF-6 gas through the vast network of filters. USEC currently uses only the gaseous diffusion process at plants at Paducah and Portsmouth.

The development of atomic vapor laser isotope separation (AVLIS), another enrichment technology, has been underway for a number of years at DOE's Lawrence Livermore Laboratory in California. AVLIS would use laser light to remove electrons from U-235 molecules in vaporized uranium metal. Those molecules then acquire an electric charge and could be collected easily. It is expected to be a much more efficient process, reducing power use and production costs significantly. USEC has made a decision to commercially deploy the AVLIS technology. Current R&D spending for AVLIS operations is between $10 and $13 million per month; this comes from the corporation's cash flow. DOE recently began to transfer the rights and property associated with AVLIS to the corporation. If AVLIS is deployed commercially for uses other than uranium enrichment, then USEC or the privatized company would pay DOE royalties for the use of that technology. Although AVLIS technology could be used for the production of weapons-grade uranium, current deployment plans are for commercial use only.

Opponents to AVLIS development argue that with excess enrichment capacity there is no need to develop AVLIS and that the money currently being spent on its R&D could be used to repay the Treasury. Furthermore they say it is a high-risk technology whose full R&D burden should not fall on the federal government. Critics of AVLIS view this support as a major subsidy to a privatized USEC. Louisiana Energy Services (LES), a potential private competitor in the U.S enrichment service industry, has stated concern that this support could lead to entry barriers into the uranium enrichment service sector.

Advocates of AVLIS development argue that AVLIS could be ready to replace old and inefficient GDP capacity but a decision on deployment would be needed relatively soon because it would take about 10 years and $1 billion to construct new AVLIS capacity. AVLIS could be added without necessarily a net gain in total U.S. capacity, they say.

Market for Enrichment Services

The United States was at one time the sole market-economy provider of enrichment services. Its current share is over one-third of the world market (including the nonmarket economies) and about 80% of the U.S. market. Other major competitors include URENCO and Eurodif in Europe and TENEX in Russia. USEC also controls over one-third of world capacity. Over the next 10-15 years worldwide demand for enrichment services is expected to grow modestly or stay flat, while U.S. demand is expected to decline (see table 1 for high projection). Despite the expected decline in the U.S. enrichment market and the large amount of uncommitted demand after 1995, USEC must continue to be profitable if it is to privatize or to commercialize AVLIS.

***TABLE or GRAPHIC not shown here***

Legislative Proposals and Policy Issues

Although EPACT authorizes privatization, the 104th Congress is considering additional legislation that would resolve several privatization issues. Among the major concerns are the mechanism for privatization, cost recovery, the transfer of liability, the exclusive marketing role of USEC, ensuring full implementation of the Russian HEU agreement, and the impact on the domestic uranium mining industry. A House bill (H.R. 1216) was rolled into H.R. 1215, the omnibus tax bill, which passed the House in April 1995. The Senate bill (S. 755) was introduced by Senator Domenici on May 3, 1995. The Administration delivered its version of a privatization bill to Congress in June 1995. The House and Senate bills were amended and included in the Budget Reconciliation bill (H.R. 2491, S. 1357). Both bills were approved in October and reported out of conference November 15. The conference report (H.Rept. 104-347) was approved on November 17 in the House and Senate, but vetoed by President Clinton on December 6. A substitute bill (S. 755) was introduced by Murkowski, et al. on January 26, 1996, and was rolled into the omnibus continuing resolution H.R. 3019. HR. 3019 was approved in the Senate on March 19, 1996.

How to Privatize

USEC presented its privatization plan to the President and to Congress on June 30, 1995. An evaluation of the plan by the General Accounting Office (GAO), which is mandated by the EPACT, was presented to Congress in mid-September 1995 (GAO/RCED-95-245). Among its recommendations were: Congress require that the Secretary of the Treasury lead the privatization process, determine the sale price, investigate ways for USEC to receive fair value for its excess uranium inventory, and establish a mechanism to protect the government from an undervalued sale. The GAO report concludes that the total return to the U.S. Treasury from privatizing could be between $1.7 billion and $2.2 billion but the net present value under different assumptions (using a government discount rate among other things) could give the corporation a net present value of between $2.8 billion and $3.5 billion. Further, GAO contends that the net present value analysis conducted by J.P. Morgan, Inc. does not adequately reflect current market conditions, recent administrative decisions, or the excess inventory owned by the USEC.

What is the most effective way to privatize the corporation? The corporation has been working closely with the financial services firm J.P. Morgan Securities to identify and evaluate different methods for privatization. Two primary methods have been recommended and will be pursued simultaneously: an initial public offering (IPO) and a merger or acquisition (M&A) with another corporation or group of corporations. By pursuing both methods concurrently USEC expects to have the flexibility to respond to the market. Under either plan, USEC would likely remain viable according to J.P. Morgan's analysis.

According to J.P. Morgan, an IPO seems the more likely approach. An IPO would create a publicly traded taxpaying entity. The U.S. Treasury would sell all the shares of its USEC common stock in an IPO. Issuing and selling stock could expand ownership, optimize USEC's capital structure, and allow for more independence of the corporation. The IPO would be valued based on comparable market valuations of similar businesses, in this case possibly a public utility since there are no other publicly traded uranium enrichment corporations. Another advantage of an IPO is that there is prior experience with this approach. Previous privatizations, such as the sale of the government-owned Conrail corporation, were carried out by that means.

Through a merger or acquisition, USEC would be purchased at a competitive sale by a "strategic buyer." A merger could attract a higher return to the taxpayer and be part of a financially strong operation. However, because of USEC's unique role and cost, finding a company that would consider USEC a "strategic fit" could be problematic.

P.L. 104-134 permits the corporation to establish a private profit corporation into which it could merge. Otherwise, because USEC was created by federal legislation, any changes in its charter would require congressional action. By contrast, as a State-chartered corporation, the stockholders could change its charter. P.L. 104-134 provides that any resulting State-chartered private corporation not be an agency or instrumentality of the United States or a government-controlled corporation.

The Secretary of the Treasury must determine that the method of privatization will maximize the proceeds to the United States consistent with such criteria. If an IPO or a M&A did not appear to generate sufficient revenues, or was not consistent with the other statutory requirements for privatization, USEC would continue to operate as a government-owned corporation. This could be a problem for the United States and a potential loss to taxpayers. If concern develops over production costs or insufficient capacity to meet future needs, the corporation may be faced with a decision to commercialize AVLIS before privatization, because of the long lead time needed for deployment. The corporation also could decide to terminate AVLIS. If the corporation is not privatized within a reasonable period of time, a question that must be addressed is: how long would R&D funding for AVLIS continue before a decision on its future is made? The Administration, however, is moving forward with plans to privatize the USEC.

Russian HEU and the Impact on the Domestic Uranium Mining Industry

The HEU Deal. With the addition of HEU from U.S. and Russian dismantled nuclear weapons and increased Russian uranium sales, excess supply kept natural uranium prices were in the $10-$12 per pound range; more recently, uranium prices have fluctuated between $14 to $17 per lb. This is a major concern to the U.S. uranium industry. For the past several years the industry has been declared "nonviable" (as defined by the Atomic Energy Act) by the Secretary of Energy. Production has declined from 44 million pounds in 1980 (its highest point) to 3.1 million pounds in 1993. Production occurred at five in situ operations and as a byproduct at two phosphate mines. Employment has declined as well, falling from 20,000 in 1980 to 380 in 1993.

The HEU deal is important to national security . As part of the agreement, USEC will purchase low enriched uranium (LEU) derived from 500 metric tons of highly enriched uranium, which will be removed from nuclear warheads over a period of 20 years. The HEU will be blended down to LEU in Russia, then shipped to the United States. The agreement calls for 10 metric tons each year for the first 5 years, then 30 metric tons each year for the next 15 years. Ten metric tons of HEU is equivalent to about 8 million pounds of natural uranium, or roughly 5% of world demand and about 25% of U.S. net uranium imports. The contract between the United States and Russia provides that Russia receive only the SWU value of the LEU at the time of delivery. Payments for the natural uranium are not made until such material is resold or used, or at the end of the 20-year contract. The natural uranium component of the deal is valued at $4 billion.

As of December 21, 1995, about 186 metric tons of LEU (blended down from 6.1 metric tons of HEU) had arrived in the United States from Russia during 1995. LEU blended from 12 metric tons of HEU is expected from Russia in 1996. It is possible, however, that a more accelerated delivery schedule might occur and the USEC would receive LEU blended down from 18 metric tons of HEU in 1996. The Russians would like the delivery schedule advanced to include all 500 metric tons of blended down HEU delivered to the United States within 10 or 15 years instead of the maximum 20 years.

The Anti-Dumping Case. There is general concern about an anti-dumping action against Russian uranium exports. Anti-dumping petitions were filed against the Soviet Union in November 1991 by uranium producers and the Oil, Chemical and Atomic Workers Union against uranium producers in the Soviet Union. The primary complaint was that natural uranium exports to the United States, which increased from next to nothing in 1988 to around 7 million pounds in 1991, were causing material injury to U.S. uranium producers.

An agreement suspending the anti-dumping action was reached in 1992 and amended in 1994. The 1994 agreement suspended any further antidumping action by the Department of Commerce. It restricted supply from six republics of the former Soviet Union (FSU) and established quotas on imports based on the U.S. domestic market price for raw uranium. It established a floor price for uranium, under which no FSU uranium is permitted into the United States. The floor price was $13 per pound in the 1992 agreement, which was too high to allow any imports. It was dropped to $12 in 1994. The 1994 agreement also included a provision for matched sales of Russian-origin natural uranium with newly produced U.S. natural uranium.

The suspension agreement explicitly exempts the Russian HEU from the quota restrictions, but does not exempt the "embedded" natural uranium that would be supplied to USEC if it were actually enriching uranium rather than using diluted weapons HEU. This hypothetical uranium is labelled "Russian," and counts against the Russian export quota reached in the suspension agreement.

The rationale for this device is that without it, the natural uranium component of Russian LEU derived from HEU, would displace U.S.-mined natural uranium, threatening the domestic uranium mining industry. The EPACT requires that " ... the corporation shall seek ways to minimize the impact on the domestic mining industry and processing industries from the sale of blended down HEU." However, if USEC must pay the Russians $4 billion for natural uranium that is not allowed to be sold in the United States, the corporation's value to potential private purchasers would be reduced, possibly making privatization impossible. On the other hand, if that portion of the HEU deal was long delayed, the Russians might turn down the whole agreement, thereby frustrating purposes related to the dismantlement of Russian weapons.

The House-passed privatization bill originally did not address the issue of paying Russia any sooner for embedded uranium or allowing USEC to market that uranium any sooner than the current suspension agreement allows. The version included in the House reconciliation bill did.

P.L. 104-134 allows the embedded uranium from the Russian HEU to flow into the U.S. market in one of three ways. Initially, USEC will transfer to the DOE natural uranium embedded in the LEU derived from 18 tons of HEU delivered in 1995 and 1996, which could be sold over 7 years through overfeeding SWU facilities, sold outside the United States, sold in 1995 and 1996 to the Russian executive agent for use in matched sales under the suspension agreement, or restricted in annual sales of up to 3 million lbs. U3O8 equivalent in the United States for consumption beginning in 2002. USEC will pay the Russians for the uranium. The second approach allows the Russians' executive agent the option to take back Russian uranium delivered to USEC beginning in 1997 to be resold in the United States in a measured fashion beginning 1998. Finally, if the Russian executive agent were to reject the above two approaches, an independent entity would be selected by USEC to sell the Russian uranium in increments in the United States beginning in 1998.

A U.S.-Russian agreement of May 1995 represents a commitment from both parties to resolve the problems with the Russian HEU agreement.

Liabilities of USEC and DOE

Because there was no language in EPACT on U.S. liabilities for USEC operations before privatization, provisions were included in the privatization bills to clarify this. There are two major types of liability: corporate liability and that associated with handling low-level and mixed waste under the Resource and Conservation Recovery Act

P.L. 104-134 provides that all liabilities attributable to USEC from the transition date to the privatization date will remain with the U.S. government, except as otherwise provided. This will make a "clean break" from the government corporation and make privatization more attractive, according to J.P. Morgan Securities, Inc. After privatization, liabilities based on operations stay with the corporation. Critics contend that any transfer of liability from USEC to the DOE would in effect be a subsidy to the privatized corporation and could lead to unfair competition and the possibility of barriers to entry. If AVLIS were not deployed, and a decision were made to terminate the project, DOE would bear the termination costs.

P.L. 104-134 requires DOE to dispose of low-level radioactive waste produced by the corporation on a reimbursable basis. The DOE will also accept low-level nuclear waste on a reimbursable basis from anyone licensed under the NRC to operate a uranium enrichment facility. Terms for waste disposal would be no more favorable for USEC than for other NRC-licensed enrichment facilities. The provision also calls for USEC to compensate DOE a share of the capital costs for disposal of the waste at prices no greater than commercial, State, or interstate compact prices. The government, however, would remain liable for the decontamination and decommissioning of the two GDPs after privatization.

Exclusive Marketing Agent

Concern from most quarters over the role a private USEC would play as an exclusive marketing agent for DOE materials led to House, Senate and Administration proposals that would repeal USEC's role as DOE's exclusive marketing agent. Being the exclusive marketing agent would possibly give USEC a monopoly position over HEU and DOE materials for enrichment. P.L. 104-134 continues to prohibit DOE from marketing enriched uranium and related and related services and eliminates USEC's role as DOE's exclusive marketing agent.

Cost to the Taxpayer

According to EPACT, the sale of USEC to the private sector must return to the Treasury at least the net present value of the corporation. The initial value of $3 billion was set by EPACT, but USEC set the value of the corporation at around $1.4 billion to reflect the net book value of the assets transferred to the corporation when USEC was established. The difference of $1.6 billion is the excess over book value. The current value of the corporation has been estimated by the Congressional Budget Office between $1.3-$1.9 billion. The Administration's estimate of net revenue (considered to be the net present value) generated from the sale of the corporation is $1.5 - $1.8 billion, including $400-$600 million in retained cash. The net present value criterion has been considered a major safeguard to ensure that the taxpayer is compensated adequately if USEC is privatized.

In addition to recovering the net present value of USEC, the Treasury would receive an exit dividend of $600-$800 million, about half of USEC's cash value expected at the time of privatization, and DOE would continue to receive lease payments for the two gaseous diffusion plants, and could receive a royalty for the use of AVLIS if it is commercialized. The government is prohibited from spending any money on the construction of AVLIS, but over $1 billion has already been spent on R&D and the corporation is currently spending about $10 to $13 million per month in R&D. The GAO report maintains that the entire $1.2 billion cash balance at USEC "already belong to the Government" and the $400-$600 million transferred from the Treasury must be figured into the net value of the corporation. The GAO concluded that the U.S. Treasury can provide the impartiality needed in the sale of the USEC in order to protect the U.S. taxpayer.

USEC is required to issue dividends to the U.S. Treasury which are equal to the amount in excess of its operating expenses plus deposits in its Working Capital Account. A dividend of $30 million was paid to the U.S. Treasury in 1993, $55 million in 1994 and $120 million in 1995. Some critics of USEC have maintained that the dividend payment to the Treasury is too small and could be higher if funding for AVLIS predeployment activity were terminated.

The DOE proposes to transfer a small portion of its LEU and HEU to USEC. This proposal was part of the President's budget to pay for his proposed middle class tax cut. The value of the material is estimated by CBO at $100 million and estimated by the Administration at near $400 million. The CBO's estimate is lower than the Administration's because of what it views as technical and production cost problems associated with the material.

One intention of the legislation under consideration is to help make USEC more attractive to the private sector so that the federal Treasury will receive at least the net present value for the corporation.


LEGISLATION

S. 755 (Domenici)
Amends the Atomic Energy Act of 1954 for the purpose of privatizing USEC. The corporation would no longer be the exclusive marketing agent for the DOE. The DOE may use the corporation as its marketing agent through a competitive or noncompetitive process. The DOE would accept all low-level waste for disposal on a reimbursable basis from the corporation, if requested, after privatization. Before privatization the DOE shall transfer at no cost up to 50 metric tons of HEU and 7,000 metric tons of natural uranium. However, restrictions limiting the amount of LEU to 800,000 SWUs/year and UF-6 equivalent natural uranium to 4 million lbs./year or 10% of the amount transferred (whichever is less) from DOE to USEC would apply. After privatization the government may change its executive agent with regard to the disposition of Russian HEU under the current U.S.- Russian agreement. The executive agent is authorized to negotiate the purchase of all the HEU from any state of the FSU. The law allows USEC to establish a private corporation in any state. The embedded uranium from Russian HEU would flow into the U.S. market. USEC will transfer to the DOE natural uranium embedded in 18 tons of HEU, which could be sold over 7 years through overfeeding SWU facilities, sold outside the United States, restricted in sales of up to 3 million lbs U3O8 equivalent in the United States for consumption beginning in 2002. USEC will pay the Russians for the uranium. Beginning in 1997, the law allows the Russian executive agent to take back Russian uranium delivered to USEC and permits resale in the United States in measured quantities beginning in 1998. Otherwise an independent entity would be selected by USEC to sell the Russian uranium in increments in the United States beginning in 1998. A futures market for Russian natural uranium would be created to address the trade restrictions on U.S. imports of Russian uranium. Russian UF-6 equivalent material would enter the United States according to a schedule with the intent to minimize the impact on the domestic uranium mining industry. Also, the law gives the Secretary of the Treasury the authority to approve the sale of USEC to the private sector, requires that USEC pay a 3% royalty for nonenrichment uses of the AVLIS technology, and extends the period for NRC re-certification of USEC's gaseous diffusion plants from one to 5 years. Introduced May 3, 1995; referred to Committee on Energy and Natural Resources. S. 755 as amended, was approved by the Committee on Energy and Natural Resources on Sept. 21, 1995, and will be part of the budget reconciliation bill. S. 755 is presently pending on the Senate calendar.

The Murkowski amendment in the nature of a substitute to S.755 was introduced on January 26, 1996. The substitute adds back language in the section on low-level waste that was previously removed from the version included in the reconciliation bill. The Murkowski substitute was included in the omnibus continuing resolution known as the Balanced Budget Downpayment Act II, later renamed the Omnibus Consolidated Rescissions and Appropriations Act of 1996 (H.R. 3019). The House and Senate approved the conference report on April 25, 1996; the measure was signed by the President (P.L. 104-134) on April 26, 1996.


CONGRESSIONAL HEARINGS, REPORTS, AND DOCUMENTS

U.S. Congress. House. Committee on Commerce. USEC Privatization Act (H.R. 1216). 104th Congress, 1st session. H.Rept. 104-86

U.S. Congress. Senate. Committee on Energy and Natural Resources. USEC Privatization Act. Hearings, 104th Congress, 1st session, on S. 755. June 13, 1995. Washington, U.S. Govt. Print. Off., 1995. 115 p. S.Hrg. 104-105


FOR ADDITIONAL READING

Plan for the Privatization of the USEC, Submitted to the President and the Congress of the United States, June 1995, United States Enrichment Corporation.

Uranium Enrichment: Process to Privatize the U.S. Enrichment Corporation Needs to Be Strengthened, United States General Accounting Office, Report to Congressional Committees, September 1995, GAO/RCED-95-245.

USEC Annual Report, 1995, United States Enrichment Corporation, February 13, 1996.






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