Nuclear Nonproliferation: Implications of the U.S. Purchase of Russian Highly Enriched Uranium (Letter Report, 12/15/2000, GAO/GAO-01-148)
In 1993, the United States agreed to buy 500 metric tons of highly
enriched uranium from Russia. This uranium was extracted from dismantled
nuclear weapons over a 20-year period. USEC, Incorporated, (the company
that acts as an executive agent for the United States) paid Russia about
$1.6 billion for over 3,000 metric tons of low enriched uranium blended
from highly enriched uranium. Five of these deliveries to USEC have been
delayed because, among other reasons, Russia was dissatisfied with the
revenue it was getting from the sales. By the end of 1999, USEC had
received about 19 metric tons less than the agreement called for at that
point in the contract. The U.S. government and USEC expect that the
shortfall will be made up in the next few years. In addition to the
uranium obtained from dismantled nuclear weapons, Russia is also
proposing that the United States purchase newly produced uranium
processed in its commercial facilities. GAO is recommending that this
arrangement be assessed to determine its impact on the nuclear fuel
industry and national security.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GAO-01-148
TITLE: Nuclear Nonproliferation: Implications of the U.S.
Purchase of Russian Highly Enriched Uranium
DATE: 12/15/2000
SUBJECT: Uranium
International agreements
Arms control agreements
Nuclear facilities
Nuclear weapons
Nuclear proliferation
Foreign governments
IDENTIFIER: Russia
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GAO-01-148
Report to the Chairman, Committee on Commerce, House of Representatives
December 2000 NUCLEAR NONPROLIFERATION
Implications of the U. S. Purchase of Russian Highly Enriched Uranium
GAO- 01- 148
Letter 3 Appendixes Appendix I: The Privatization of USEC 32
Appendix II: Comments From the Department of Energy 36 Appendix III: GAO
Contact and Staff Acknowledgments 40
Tables Table 1: Annual Deliveries of LEU From Russia to USEC, 1995- 2000 9
Table 2: Natural Uranium Component of LEU Delivered to USEC 11
Table 3: DOE Transfers of Uranium to USEC, 1993- 98 32 Figures Figure 1:
Month- End Spot Market Uranium Prices, January
1996- September 2000 12 Figure 2: The Nuclear Fuel Cycle 19
Abbreviations
AVLIS atomic vapor laser isotope separation (process) DOE Department of
Energy EOC Enrichment Oversight Committee GAO General Accounting Office HEU
highly enriched uranium LEU low enriched uranium NRC Nuclear Regulatory
Commission NSC National Security Council SWU separative work units Tenex
Techsnabexport USEC USEC, Inc.
Lett er
December 15, 2000 The Honorable Tom Bliley Chairman Committee on Commerce
House of Representatives
Dear Mr. Chairman: In February 1993, the United States agreed to purchase
from Russia 500 metric tons of highly enriched uranium (HEU) extracted from
dismantled Russian nuclear weapons over a 20- year period. Russia agreed to
dilute, or blend- down, the material into low enriched uranium (LEU) so that
it could be made into fuel for commercial nuclear power reactors before
shipping it to the United States. 1 When the agreement to purchase HEU was
signed, Russia was expected to receive about $12 billion from the HEU
purchase.
USEC, Inc. (USEC), acts as executive agent for the United States, implements
the commercial contract to purchase LEU under the agreement, and pays Russia
for the deliveries of LEU. USEC was originally created as the United States
Enrichment Corporation by the Energy Policy Act of 1992 as a wholly owned
government corporation to conduct and market the Department of Energy's
(DOE) uranium enrichment services. USEC was privatized through an initial
public offering in July 1998 that resulted in a payment of about $1.9
billion to the U. S. Treasury. 2 (See app. I.) In addition to serving as
executive agent for the purchase of Russian HEU, USEC leases DOE's uranium
enrichment facilities in Paducah, Kentucky, and near Portsmouth, Ohio, to
produce LEU for fuel in commercial nuclear power reactors.
From the time it was privatized in July 1998 through October 2000, USEC's
stock lost over 60 percent of its value; 1 Formally known as “The
Agreement Between the Government of the United States of America and the
Government of the Russian Federation Concerning the Disposition of Highly
Enriched Uranium Extracted From Nuclear Weapons” (Feb. 18, 1993). This
report refers to the agreement as the HEU agreement. The agreement is
implemented through a commercial contract that is periodically renegotiated
to determine the price that USEC will pay for the material. The current
pricing provision of the contract expires at the end of 2001.
2 The United States also retained about $1. 2 billion in cash from accounts
held by the United States Enrichment Corporation in the U. S. Treasury.
according to USEC, both the commercial demand for USEC's services and the
total demand for uranium declined 18 percent; and USEC announced in June
2000 that because of a global overcapacity in
uranium enrichment and lower demand in an increasingly competitive market,
it would cease enrichment operations at its Portsmouth uranium enrichment
facility in June 2001. In October 2000, DOE announced that it would spend
$630 million to, among other things, maintain the Portsmouth plant in
“cold standby” status for 5 years for possible restart in case
the nation's supply of enriched uranium is significantly disrupted.
As agreed with your office, this report discusses (1) the status of the
February 1993 HEU agreement's implementation, (2) USEC's performance as
executive agent for the United States, (3) the impact of USEC's
privatization and the HEU agreement on the United States' capability to
produce fuel for nuclear power plants domestically, and (4) federal
oversight of the HEU agreement's implementation.
Results in Brief From June 1995 through October 2000, USEC paid Russia about
$1. 6 billion for over 3, 000 metric tons of low enriched uranium blended-
down from
about 103 metric tons of highly enriched uranium (about one- fifth of the
total amount established in the agreement). The deliveries of low enriched
uranium to USEC have been delayed on five occasions since 1995 because,
among other reasons, Russia was dissatisfied with the level of revenue it
was receiving under the agreement. As a result of these delays, by the end
of 1999 the amount of highly enriched uranium that Russia had blendeddown
was about 19 metric tons less than called for by that point in the contract
implementing the agreement. Some of this shortage was made up in early 2000,
and U. S. government and USEC officials said that they anticipated that the
remaining shortfall would be eliminated over the next few years. Because the
existing pricing provision in the implementing contract expires at the end
of 2001, USEC is currently negotiating with an entity of the Russian
government that serves as Russia's executive agent to determine the price
that USEC will pay for the material after 2001. In addition to the low
enriched uranium obtained from blending- down highly enriched uranium from
dismantled nuclear weapons, Russia is proposing to sell to USEC low enriched
uranium that will be newly produced in Russia's commercial uranium
enrichment facilities in order to increase the amount of revenue to Russia.
We are recommending that this purchase of additional commercially produced
low enriched uranium be assessed to determine its impact on the nuclear fuel
industry and national security.
USEC has consistently paid Russia for deliveries of low enriched uranium and
accepted shipments in a timely manner. By doing this, USEC has
satisfactorily carried out its responsibilities as executive agent for the
United States, according to officials from the National Security Council
(NSC), the State Department, and DOE. However, some difficulties have
occurred. USEC had considered resigning as executive agent in 1999 unless
the United States paid the corporation $200 million. USEC claimed that a
decline in market prices for low enriched uranium was reducing the profit it
was receiving as executive agent from the amount it expected when it was
privatized. Although DOE disputed this claim and USEC did not receive any
payment, USEC decided in December 1999 to remain executive agent. USEC
continues to face challenges in balancing its commercial objectives with the
national security interests of the United States. Although recognizing that
it has important national security responsibilities, USEC has stated that
its priority as a private company is to remain a profitable commercial
enterprise and maintain maximum value to its shareholders.
Developments since USEC's privatization, combined with USEC's reliance on
Russian low enriched uranium for nearly half of its annual sales, have
created concerns about the United States' continued ability to domestically
produce fuel for commercial nuclear power plants, according to officials
from companies in the U. S. nuclear fuel industry. Regarding USEC's sales of
uranium on the nuclear fuel market, these officials said that the sales of
natural uranium transferred to USEC from DOE at the time of privatization
might have contributed to an oversupply of uranium. This oversupply has
contributed to a drop in uranium prices. The drop in prices has negatively
affected the U. S. nuclear fuel industry, leading to lower domestic
production of uranium and decreased employment in the industry. In addition,
material from Russia now makes up over 50 percent of USEC's annual sales of
low enriched uranium and almost 40 percent of the total U. S. sales of
nuclear fuel. USEC recently announced that it would cease enrichment
operations at its Portsmouth uranium enrichment plant in June 2001. This
would leave USEC with one uranium enrichment plant to supply its customers'
requirements for nuclear fuel, should there be extended delays of deliveries
from Russia.
Federal oversight of the agreement's implementation is primarily conducted
by the interagency Enrichment Oversight Committee, formed by a 1998
executive order. This committee, chaired by a senior official from NSC,
consists of representatives from various executive branch departments,
though the Departments of Energy and State have taken
primary roles. While the committee's efforts have been concentrated
primarily on solving problems that have arisen over the course of the
agreement's implementation, the committee has largely acted informally and
has not fulfilled all of its responsibilities established by the 1998
executive order. For example, the committee was explicitly required to
establish procedures for designating alternative executive agents to
implement the agreement in the event that USEC needed to be replaced.
However, the committee had no such procedures when USEC considered resigning
as executive agent in 1999 and continues to lack a contingency plan, should
USEC need to be replaced in the future. Furthermore, the committee is only
beginning to conduct the required analysis of the impact of the agreement on
the domestic nuclear fuel industry. This report recommends that a
contingency plan be developed that would detail the circumstances and
specific procedures under which USEC would be replaced as executive agent
and the criteria for choosing alternative agents if USEC resigns or needs to
be replaced in the future.
We presented a draft of this report to DOE, the State Department, NSC, and
USEC for comment. DOE, the State Department, and NSC generally agreed with
the report's findings, and DOE described the recommendations as reasonable.
DOE, the State Department, and USEC also provided technical clarifications,
which we incorporated as appropriate.
Background The government- to- government agreement in which Russia agreed
to sell approximately 500 metric tons of HEU extracted from dismantled
Russian
nuclear weapons to the United States was signed on February 18, 1993. USEC
(at the time, a government corporation) and Techsnabexport (Tenex), an
entity of the Russian government that serves as the executive agent for
Russia, signed the initial implementing contract on January 14, 1994. Tenex
annually blends- down an amount of HEU that is specified in the contract and
converts it to LEU. 3 The amounts of LEU actually delivered to USEC annually
vary, depending upon the concentration of uranium- 235 in the LEU. Specific
concentrations of uranium- 235 are
3 Uranium, in its natural form, comprises a mixture of several isotopes-
forms of the same element with different atomic weights. Less than 1 percent
of natural uranium is the isotope uranium- 235- the fissionable isotope used
in nuclear weapons and reactors. Uranium that is enriched to a concentration
of over 90 percent uranium- 235 is highly enriched and is weapons- grade
material. Uranium that is enriched to a concentration of from 3 to 5 percent
uranium- 235 is LEU, which is commercial- reactor- grade material.
ordered by USEC in response to its customers' requirements. The higher the
concentration of uranium- 235, the less LEU is produced from a given amount
of HEU. Under the original contract signed in 1994, Tenex was to deliver LEU
derived from 10 metric tons of HEU annually from 1995 through 1999. The
contract was amended in 1995 and 1996 to allow Tenex to blend- down more HEU
annually (12 metric tons in 1996, 18 in 1997, 24 in 1998, and 30 in 1999),
thus increasing the revenue paid to Russia under the contract for these
years. Beginning in 2000, Tenex would deliver LEU derived from 30 metric
tons of HEU annually.
Under the contract, the price for LEU includes charges for two components:
Enrichment services (measured in terms of separative work units [SWU]- the
standard U. S. measure of the effort expended to enrich uranium). Natural
uranium.
USEC pays Tenex for the enrichment services (approximately two- thirds of
the LEU's value) within 60 days of receipt. According to the original
contract, USEC would pay for the remaining third (the natural uranium
component) after USEC resold it to utilities or used it in the corporation's
enrichment plants. As a result of a requirement in the USEC Privatization
Act of 1996, the contract was amended so that USEC, upon receipt of the LEU,
would transfer title of an amount of natural uranium equivalent to the
natural uranium content of the LEU back to Tenex so that Russia could sell
the material on the world uranium market. 4
On the basis of the initial price for the LEU delivered under the contract,
the total value of payments by the United States would be approximately $12
billion over 20 years- the life of the contract ($ 8 billion paid by USEC
for the enrichment services and $4 billion from the sale of the natural
uranium component). The $12 billion figure assumes a constant price over the
life of the contract. However, under the contract, prices for future years
may be adjusted as part of an annual review to account for U. S. inflation
and changes in international market conditions. In November 1996, USEC
4 The material originally was not physically returned to Russia. The
material remained in the United States until Russia sold it, at which point,
it was delivered from USEC to the purchaser. A March 1999 agreement provided
for the physical return of natural uranium whose ownership had been
transferred to Russia as a result of the deliveries of LEU.
and Tenex concluded an amendment to the implementing contract that agreed on
quantities of HEU to be blended- down annually and the price to be paid for
the enrichment services until January 1, 2002. USEC and Tenex are currently
negotiating to determine the price that USEC will pay for the enrichment
services component of the LEU after 2001.
Under a 1997 memorandum of agreement between USEC, DOE, and the State
Department, USEC is responsible as the U. S. executive agent to, among other
things,
work with Tenex to ensure that the Russian HEU agreement and the
implementing contract are fully implemented; agree with Tenex on the price
and volumes of LEU to be delivered each
year; and agree with Tenex, as necessary, on the technical specifications of
the
material to be delivered. USEC agreed to provide DOE and the State
Department with an annual report on the corporation's activities and
performance as executive agent and to notify DOE and the State Department of
any activities or other information affecting USEC's ability or Tenex's
ability to fulfill the implementing contract or to successfully implement
the Russian HEU agreement. In addition, USEC agreed to consult with the
State Department on matters to be discussed with Tenex during annual reviews
of the implementing contract. These reviews consider such things as the
annual volumes of LEU to be delivered and the price that USEC will pay for
this material.
Status of Russian LEU Since the shipments of LEU began in 1995, Russia has
blended- down about
Deliveries one- fifth of the total HEU that it agreed to convert to LEU
before 2013. The
shipments of LEU to the United States have been delayed several times. The
primary cause for the delays has been Russia's dissatisfaction with the
reduced revenue that it was receiving under the agreement because it was
unable to sell the natural uranium component of the LEU delivered to the
United States. USEC and Tenex are currently negotiating to determine the
price that USEC will pay for the enrichment services component of this
material from 2002 through 2013. As part of these negotiations, USEC has
tentatively agreed to purchase additional enrichment services that would not
be derived from dismantled Russian nuclear weapons.
Deliveries of LEU Have From 1995 through October 2000, USEC received from
Russia about 3,000
Been Delayed on Five metric tons of LEU blended- down from approximately 103
metric tons of
HEU. 5 USEC paid Tenex about $1. 6 billion for the enrichment services
Occasions Since 1995
component of the LEU (about 18.9 million SWU). (See table 1.) USEC then sold
the enrichment services to utilities for prices that are, on average, higher
than the price it pays Tenex and has delivered the LEU to fuel fabricators
to be fashioned into fuel assemblies for nuclear power plants.
Table 1: Annual Deliveries of LEU From Russia to USEC, 1995- 2000 Amount
paid HEU to be blendeddown LEU delivered
by USEC to under amended
HEU blendeddown to USEC
Tenex (dollars Calendar year
contract (metric tons) (metric tons) (metric tons) SWU
in millions)
1995 10 6.10 186.04 1, 124, 000 $92.24 1996 12 11.98 370.93 2, 212, 000
181.64 1997 18 13.36 358.50 2, 441, 000 206.22 1998 24 19.09 571.48 3, 518,
000 299.91 1999 30 24.26 718.68 4, 464, 000 381.43
Total (1995- 99) 94 74.79 2,205.64 13, 758, 000 $1, 161. 44
2000 (through Oct. 27.85 803.88 5, 115, 000 442.60 2000) Total (1995- Oct.
2000) 102.64 3,009.52 18, 873, 000 $1, 604. 04
Notes: Totals may not add because of rounding. Amounts of LEU delivered are
based on the actual date of delivery to USEC.
Source: GAO's analysis of data from USEC.
5 According to USEC, this represents the equivalent amount of material from
4, 000 nuclear warheads. However, as we reported in 1999, several key
transparency measures implemented by DOE that are intended to provide
confidence that the HEU is extracted from Russian nuclear weapons and that
the HEU is then blended- down into LEU had not been put in place, and U. S.
officials lack access to Russia's dismantlement facilities for its nuclear
weapons and to the weapons dismantlement process. At the time of our review,
the United States had spent $44 million implementing these transparency
measures and planned to spend an additional $45 million for fiscal year 1999
through fiscal year 2001. (See Nuclear Nonproliferation: Status of
Transparency Measures for U. S. Purchase of Highly Enriched Uranium[ GAO/
RCED- 99- 194, Sept. 22, 1999].)
By the end of 1999, the amount of HEU that Russia had blended- down was
about 19.2 metric tons less than called for in the amended implementing
contract. 6 Of these 19.2 metric tons of HEU, about 3.9 metric tons were not
blended- down in 1995 because of initial difficulties that Russia had with
the equipment used in the blending- down process. USEC plans to make up this
amount over the remaining term of the contract. The remaining 15.3 metric
tons of HEU is the result of five delays in shipments of LEU since the onset
of the HEU agreement. Approximately 7 metric tons of this shortfall was made
up in early 2000, and from 2002 through 2004, USEC has tentatively agreed
with Tenex to purchase additional enrichment services (beyond the 30 metric
tons of HEU called for in the contract) that would make up the remaining
approximately 8 metric tons of HEU.
One of the five delays was caused by the discovery in August 1999 that
cylinders that were to be shipped by USEC to Russia for packaging and
shipping the LEU to the United States did not meet industry specifications.
When the cause of the defect was identified and corrected by the cylinder
manufacturer, USEC accelerated the delivery of new cylinders to Russia. An
October 1999 letter to the Secretary of Energy from Russia's Minister of
Atomic Energy claimed that USEC's failure to ensure deliveries of empty
cylinders to Russia made it impossible to complete all planned shipments of
LEU by the end of 1999. USEC claims that a sufficient number of cylinders
were in Russia by the end of November 1999, which would have allowed Tenex
to complete deliveries of LEU by the end of 1999, as originally scheduled.
However, according to USEC, Tenex did not deliver the LEU on a timely basis
and deliveries of the LEU for 1999 were not completed until early February
2000. 7
6 DOE and USEC officials note, however, that USEC has taken delivery of more
material to date than was originally planned when the implementing contract
was signed in 1994. 7 According to USEC officials, USEC agreed to an
accelerated payment schedule to ensure that Tenex received revenue during
this disruption in deliveries.
In May 2000, shipments were halted when Tenex advised USEC that legal
proceedings in the United States concerning the claim of a Swiss company
against the government of the Russian Federation could result in a judgment
against payment for the enrichment services owed by USEC to Tenex or against
natural uranium delivered to Tenex by USEC. As a result of this delay, the
President issued an executive order on June 21, 2000, stating that the risk
of nuclear proliferation created by the accumulation of a large amount of
weapons- usable material in Russia was a threat to the national security and
the foreign policy of the United States and declared a national emergency to
deal with the threat. 8 The executive order blocked the Russian government's
assets directly related to the implementation of the HEU agreement from any
judgment, thus allowing the shipments of LEU to resume.
The remaining three delays occurred when Tenex halted deliveries because it
was unable to sell the natural uranium component of the LEU delivered to
USEC. Russia halted deliveries of LEU to USEC through much of 1997 and from
late 1998 into early 1999. Since deliveries began in 1995, the LEU delivered
to USEC has contained approximately 80 million pounds of natural uranium.
(See table 2.) As required by the USEC Privatization Act of 1996, DOE took
title to the 14. 3 million pounds from the 1995 and 1996 deliveries, for
which USEC (at the time, a government corporation) paid Tenex approximately
$157 million. Since the USEC Privatization Act became law, title to the
natural uranium component of LEU deliveries has been transferred from USEC
to Russia for Russia to sell on the world uranium market.
8 Exec. Order No. 13159 (Blocking Property of the Government of the Russian
Federation Relating to the Disposition of Highly Enriched Uranium Extracted
From Nuclear Weapons, 65 Federal Register39279, [June 21, 2000]).
Table 2: Natural Uranium Component of LEU Delivered to USEC Natural uranium
component (in pounds Calendar year of uranium oxide)
1995 4,825, 141 1996 9,521, 980 1997 10, 200, 306 1998 15, 026, 203 1999 19,
037, 541 2000 (through Oct.) 21,693, 171
Total 80, 304, 341
Source: GAO's analysis of data from USEC.
However, Russia has experienced difficulties in selling this material
because restrictions on U. S. and European markets limit the amount of
natural uranium from Russia that is allowed to be consumed in these
countries. 9 In addition, Russia has been unwilling to sell much of the
natural uranium component because the market price of uranium has been in a
state of decline in recent years (see fig. 2) and has fallen below a minimum
selling price established by Russia. As a result of its inability or
unwillingness to sell the natural uranium component of the LEU, Russia was
not receiving income that it expected to receive when the HEU agreement was
signed and halted deliveries of LEU to the United States.
9 Under the USEC Privatization Act of 1996, a quota applies to the sale of
the natural uranium for consumption in the United States. In addition, the
material is subject to trade restrictions in the European Union.
Figure 1: Month- End Spot Market Uranium Prices, January 1996- September
2000
Dollars per pound of uranium oxide 18
16 14 12 10
8 6 4 2 0
1996 1997 1998 1999 2000
Source: GAO's presentation of data from Ux Consulting Company, LLC.
In an effort to restart LEU deliveries, in October 1998, the Congress
appropriated $325 million that DOE (after an agreement signed with Russia in
March 1999) paid Russia in exchange for the natural uranium component of the
1997 and 1998 deliveries. 10 In March 1999, Tenex and three Western
companies agreed on a contract that gave the companies an exclusive option
to purchase the natural uranium component of the LEU deliveries, provided
that the market price for natural uranium was above a minimum price
determined by Tenex. 11 However, the market price has remained below this
minimum price, and thus, very little material has been sold by Tenex. The
deputy director of Tenex stated in September 2000 that the U. S. purchase of
the 1997 and 1998 natural uranium and the commercial contract with the three
Western companies averted a potential crisis with
10 DOE purchased the 28 million pounds of natural uranium from the 1997 and
1998 deliveries of LEU and agreed to keep this material and an additional 30
million pounds of DOE's own uranium inventory off the market for 10 years to
stabilize declining market prices.
11 The three Western companies are Cameco (Canada), COGEMA (France), and
NUKEM (Germany).
the HEU agreement. However, he said the underlying causes of Russia's
difficulties in selling the natural uranium component- the restrictions
under the USEC Privatization Act of 1996 limiting the uranium's use on the
U. S. market and the trade restrictions in Europe- were still in place.
Since March 1999, the vast majority of the natural uranium has been left
unsold by Tenex and is now being delivered back to Russia at its expense. As
a result, Russia is not receiving the income from the sale of the natural
uranium component that it expected when the HEU agreement was signed. The
State Department and DOE officials we spoke with indicated that Russia's
continuing problems with receiving revenue from the sale of the natural
uranium component raises the possibility that Russia may again halt
deliveries of LEU to the United States in an effort to recover this lost
income. These officials told us that unless the international uranium market
experiences a recovery and Russia is able to then sell the natural uranium
component of the LEU delivered to USEC, Russia may once again approach the
United States for compensation for unsold natural uranium.
Negotiations Between USEC and Tenex are currently negotiating to determine
the price that
USEC and Tenex Will USEC will pay for the enrichment services component of
LEU delivered
Determine the Price That from 2002 through 2013. According to the U. S.
government officials we
USEC Will Pay Through spoke with, USEC has reached a tentative agreement
with Tenex such that
2013 LEU containing 5.5 million SWU worth of enrichment services (from
approximately 30 metric tons of HEU) would be delivered annually; the
delivery shortfall resulting from delays in shipments, discussed
above, would be made up by purchasing additional enrichment services from
Tenex; and USEC would pay Tenex for the enrichment services at a price that
would
be based on an agreed discount below published market prices. Currently,
market prices for enrichment services are approximately 10 percent below the
price that USEC pays Tenex. Thus, a discount below current market prices
would result in less revenue for Russia than it is receiving under the
current agreement.
To partially compensate Russia for this declining revenue, USEC has also
tentatively agreed with Tenex to purchase additional enrichment services.
These enrichment services, however, would not be derived from material from
dismantled Russian nuclear weapons. Rather, USEC would pay Tenex for the
enrichment services component of LEU that was newly produced in Tenex's
uranium enrichment facilities and delivered to the United States. As under
the HEU agreement, USEC would also deliver to Tenex an
equivalent amount of natural uranium as contained in the LEU. According to
Tenex officials, this arrangement is attractive to Tenex because revenue
resulting from the sale of these additional enrichment services to USEC
would go directly to Tenex rather than to Russia's federal budget. Despite
this purchase of additional enrichment services, if the market price for
enrichment services remains at or falls from its current level for the
remaining years of the HEU agreement, it is unlikely that Russia will
receive the $8 billion it expected to receive when the HEU agreement was
signed for the enrichment services component of the LEU it delivers to USEC.
The deputy director of Tenex stated that, faced with a loss of revenue as a
result of this new pricing arrangement, Tenex might be forced to approach
the U. S. government for compensation.
USEC's Performance USEC has consistently paid Russia for deliveries of LEU
and has accepted
as Executive Agent shipments in a timely manner. By doing this, USEC has
satisfactorily
carried out its responsibilities as executive agent for the United States,
according to officials from NSC, the State Department, and DOE. However,
there have been some difficulties. USEC requested $200 million in
compensation from the U. S. government in 1999, stating that a drop in
market prices for enrichment services was reducing the profit that USEC was
receiving as executive agent from the amount it expected to receive at the
time it was privatized. In addition, USEC, as executive agent, attempts to
balance conflicting commercial and national security interests.
USEC Considered Resigning Because USEC has consistently accepted shipments
of LEU and has paid
as Executive Agent in Late Tenex for these deliveries, the officials we
spoke with from NSC, the State
1999 Department, and DOE have concluded that USEC has performed its
responsibilities as executive agent satisfactorily. However, USEC had
considered resigning as executive agent in September 1999 unless the U. S.
government paid it $200 million ($ 100 million in 2000 and 2001). 12 USEC
claimed that a drop in the market price for enrichment services was causing
it financial harm. Under the amended implementing contract, USEC pays Tenex
a fixed price (adjusted annually for inflation) for the
12 Under the 1997 memorandum of agreement, USEC may resign as executive
agent by notifying the State Department and DOE in writing at least 30 days
in advance. USEC would be required to continue to purchase enrichment
services and accept delivery of LEU from Tenex for both the remainder of the
calendar year in which it resigned and the following calendar year.
enrichment services content of the LEU delivered to the United States.
Because of excess capacity in the world uranium enrichment industry and
aggressive pricing by European competitors, market prices for enrichment
services dropped below the price that USEC pays Russia for enrichment
services. However, the majority of USEC's sales are concluded under longterm
contracts negotiated years earlier. While market prices dropped below the
price that USEC pays Tenex, USEC's contracts are still priced higher, on
average, than both market prices and the price paid to Tenex for enrichment
services. Therefore, while USEC was not losing money on its purchase of
enrichment services from Tenex, it was not making as much profit as was
projected at the time of its privatization, when market prices were
projected to remain higher. USEC claimed that its operating margin resulting
from its purchase of Russian material from October 1999 through December
2001 was being reduced by over $300 million from the expected margins at the
time of privatization. As USEC signed new contracts with utilities for
enrichment services and renegotiated old ones, its average selling price was
expected to fall into line with market prices, which, if they remained low,
threatened USEC's profits. The $200 million that USEC requested was to
compensate it for forgone profits expected when it was privatized.
DOE was critical of USEC's request for $200 million. An October 1999 letter
from the Secretary of Energy to USEC stated that “the data USEC has
provided¼are insufficient to justify your request for assistance of
approximately $100 million per year. In particular, the cost data provided
are very general and key assumptions are questionable¼. In short, we believe
the true financial need [of USEC] may be much lower, or zero.” The
Secretary also expressed concern that USEC's sales of natural uranium were
causing market prices for uranium to fall and were negatively affecting the
overall HEU agreement. In December 1999, USEC announced that it would remain
as executive agent for the agreement, stating, “while there are
quantifiable costs to USEC and its shareholders associated with the
executive agent activities, the company would incur greater economic costs
in the long run from not being the manager of this program.”
USEC Strives to Balance Through its role as executive agent for the HEU
agreement, USEC has
Conflicting Commercial and received commercial benefits. In particular, USEC
has had control over a
National Security Interests large amount of LEU entering the nuclear fuel
market. By ensuring that the
as Executive Agent HEU agreement is sustained and implemented as the U. S.
government
intends, USEC also has important responsibilities in furthering the national
security interests of the United States. While recognizing its national
security responsibilities, however, USEC has stated that its priority as a
private company is to remain a profitable commercial enterprise and maintain
maximum value for its shareholders. DOE and State Department officials told
us that maintaining the balance between the national security interests of
the United States and USEC's commercial objectives is a challenge. An expert
on the HEU agreement from the Massachusetts Institute of Technology told us
that the agreement's current implementation is fundamentally flawed because
USEC must always be beholden to its investors and its commercial interests
rather than the national security goals of the United States.
Russian officials have also been critical of USEC. An October 1999 letter to
the Secretary of Energy from Russia's Minister of Atomic Energy stated that
although the amount of HEU to be blended- down each year and the method for
determining the price for this material was fixed from 1997 to 2001 in the
implementing contract, USEC was already proposing that the pricing method be
reconsidered. According to the minister, USEC was insisting that the prices
it pays for enrichment services be discounted from the current market
prices. However, he said this would “considerably lower the income
from sales of LEU in Russia” as compared with the planned amounts in
the contract. The minister said that issues such as changing the pricing
method are the prerogative of U. S. and Russian governmental agencies and
not of their executive agents.
Impact of USEC's Developments since USEC's privatization, combined with its
reliance on
Privatization and the Russian LEU for nearly half of its annual sales, have
created concerns
about the United States' continued ability to domestically produce fuel for
HEU Agreement on the
commercial nuclear power plants, according to the officials we spoke with
United States'
from U. S. uranium producing and conversion companies. 13 These officials
Domestic Capability to
also said that USEC's sales, on the nuclear fuel market, of natural uranium
that was transferred to USEC from DOE may have contributed to an
Produce Fuel for oversupply of uranium. This oversupply has led to a drop in
uranium prices,
Nuclear Power Plants which has negatively affected the U. S. uranium mining
and conversion
industries, and has lead to lower uranium production and decreased 13 In
order to produce fuel for commercial nuclear power plants, uranium ore mined
from the earth is milled to produce uranium oxide, which is then processed
by a conversion facility to produce gaseous uranium hexafluoride. The
uranium hexafluoride is then sent to an enrichment facility, where it is
further processed to produce a mixture that is richer in the fissionable
isotope uranium- 235. (See fig. 2.)
employment in the industry. In addition, material from Russia now makes up
over 50 percent of USEC's annual sales. USEC recently announced that it
would cease enrichment operations at its Portsmouth uranium enrichment plant
in July 2001. This would leave USEC with one uranium enrichment plant to
supply its customers' requirements for nuclear fuel, should there be
extended delays of deliveries from Russia. To counter this risk, DOE
recently announced that it would maintain the plant in a “cold
standby” status for 5 years to respond to significant disruptions in
the supply of enriched uranium.
USEC's Sales of Uranium Nuclear power supplies approximately 20 percent of
the United States'
Transferred at Privatization total electricity needs. (See fig. 2.) In 1999,
24 percent of the 47.9 million
Create Concern for pounds of uranium purchased by U. S. utilities operating
nuclear power
Domestic Uranium Mining plants was of U. S. origin, and 26 percent was
Canadian. The remainder
comes from other foreign sources. In 1995, the U. S. uranium industry and
Conversion
produced 6 million pounds of uranium. By 1999, U. S. production had dropped
to 4. 6 million pounds- a reduction of about 23 percent. Employment in the
U. S. industry dropped by 24 percent from 1995 through 1999 (almost entirely
during 1998- 99). Expenditures for uranium exploration in the United States
fell from $21.7 million in 1998 to $9 million in 1999. In contrast, from
1995 through 1999, utilities' total purchases of uranium from domestic and
foreign sources increased by nearly 10 percent. Through the USEC
Privatization Act of 1996, the Congress intended that the sale of USEC to
the private sector be conducted in a manner that would prevent or mitigate
any adverse impact on the domestic uranium mining, conversion, and
enrichment industries. However, according to uranium mining and conversion
industry officials, USEC's sales from its inventory of nearly 73 million
pounds of natural uranium transferred to it by DOE at privatization are a
major contributor to their difficulties.
Figure 2: The Nuclear Fuel Cycle
Mining and milling
The process during which uranium is removed from earth in the form of ore
and is then
Nuclear power plants
crushed and concentrated. Commercial facilities that use atomic energy to
create steam, which
turns turbines to generate electricity. A nuclear reactor may operate for up
to 2 years before being refueled. Refueling requires that fuel assemblies be
removed and replaced. Once used, this "spent" fuel is cooled and stored in
either special
protective containers or secure storage pools.
Conversion
Uranium is combined with fluorine gas to produce uranium hexafluoride (UF6),
a powder at room temperature and a gas when heated. This process takes place
at a conversion facility. The UF6 is then shipped to an enrichment facility.
Enrichment Fuel fabrication
Process that Enriched UF6 is converted to increases the
uranium oxide powder and concentration of
formed into ceramic pellets U235 atoms in UF6
about the size of a pencil from its naturally
eraser. occurring state of The pellets are loaded into 0.7 percent to 3- 5
metal tubes that are bundled percent, which is
to form fuel assemblies. usable as a fuel for The fuel assemblies are then
commercial nuclear
shipped to a nuclear power power reactors.
plant, where they are loaded into a reactor.
Source: GAO.
USEC's revenues from the sale of natural uranium to electric utility
customers were $25. 9 million in fiscal year 1997, when USEC (then, the U.
S. Enrichment Corporation) was a wholly owned government corporation. While
USEC has not publicly stated how much natural uranium it has sold annually
since privatization, revenues resulting from the sale of natural uranium
increased to $53. 6 million in fiscal year 1999 and to $101.6 million in
fiscal 2000. As figure 1 indicates, the spot market price of uranium
decreased throughout this period. Therefore, such a large increase in USEC's
revenue resulting from uranium sales indicates that USEC has sold
increasingly large amounts of natural uranium into the market. USEC
officials told us that its sales of natural uranium have been conducted in a
prudent manner. According to an official from the U. S. uranium conversion
industry, uranium prices are also being affected by the implementation of
the HEU agreement. Although the natural uranium returned to Russia by USEC
in exchange for LEU is partially restricted from entering the United States
under quotas established by the USEC Privatization Act of 1996, the practice
has led to a perception of oversupply in the uranium market. This
perception, according to the official, has also led to some downward
pressure on uranium prices. 14
According to a U. S. uranium mining industry official, the domestic industry
is competitive with foreign uranium producers. However, this official stated
that USEC's sales have pushed the price of uranium below the cost of
production of most producers worldwide, which threatens the continued
viability of domestic uranium production. While USEC's inventories are
likely to be depleted within the next several years, this official told us
the domestic industry might not survive that long. Also, because the Nuclear
Regulatory Commission (NRC) requires a producer to begin to decommission a
uranium mill no more than 2 years after production has ceased, this official
stated that it is difficult to maintain uranium production capacity in a
standby status. In contrast, USEC officials provided us with a letter from
another uranium mining industry official, which states that, although USEC
is being blamed for the uranium mining industry's problems, “in truth
there are many low cost sources of uranium in this world that are competing
to drive the price down.”
14 In addition, trade restrictions against imports of uranium from
Kazakhstan were lifted in July 1999. According to a uranium conversion
industry official, while Kazakh uranium production is considered to be
small- about 2. 4 million pounds annually- it does represent another source
of material that can add to the oversupplied U. S. market.
In addition, according to a uranium conversion industry official, the
natural uranium that USEC has sold, which has been in the form of uranium
hexafluoride, has supplanted the conversion of uranium oxide to uranium
hexafluoride at ConverDyn's uranium conversion facility in Metropolis,
Illinois- the only uranium conversion plant in the United States- accounting
for 60 percent of the conversion capacity in North America. Normally,
utilities purchase uranium oxide from producers and deliver it to ConverDyn
to be converted to uranium hexafluoride before sending it to a uranium
enrichment facility. However, since USEC is selling uranium hexafluoride
instead of uranium oxide, the conversion step in the fuel cycle has been
unnecessary for utilities purchasing natural uranium from USEC. In 1998,
ConverDyn converted approximately 33 million pounds of uranium oxide to
uranium hexafluoride. By 1999, the amount converted decreased by 25 percent
to approximately 24 million pounds, and employment at the conversion
facility was reduced by nearly 13 percent. According to the president of
ConverDyn, sales are expected to decline another 10 percent in 2000, while
the prices for new contracts are averaging 30 percent below price levels for
1999, which were already 20 percent below 1998 levels. According to this
official, it is doubtful that ConverDyn can survive much longer at these
operating rates and at these decreased revenues. The closure of the
Metropolis facility, therefore, would force U. S. utilities to rely on
foreign sources of conversion capacity. According to U. S. government
officials we spoke with, conversion capacity exists in Canada, but it is
insufficient alone to meet U. S. needs. Utilities would likely have to look
to European or other foreign sources to fill the remaining demand, should
ConverDyn's plant close.
Ceasing Operations at USEC provides nearly 75 percent of the total uranium
enrichment services
USEC's Portsmouth (SWU) purchased by North American utilities. USEC
projected sales of
about 10.5 million SWU in fiscal year 2000. 15 About 5.5 million SWU were to
Uranium Enrichment Plant
be derived from deliveries of Russian LEU. The remainder was either to be
Could Affect U. S. Capability
produced domestically at USEC's Portsmouth or Paducah uranium to Supply
Commercial
enrichment plants or purchased from other sources. Nuclear Reactors With LEU
Since over 50 percent of USEC's annual sales come from enrichment services
derived from Russian LEU, USEC has not been able to operate both uranium
enrichment plants at an economically efficient level. However, under a July
1998 agreement with the Department of the
15 USEC's fiscal years are from July 1 through June 30 of each year.
Treasury, USEC was not allowed to close either plant before January 2005.
Nevertheless, this agreement was subject to exceptions that would allow USEC
to close a plant if a “significant event” occurred, including,
among other things,
events beyond the reasonable control of USEC, such as natural disasters; a
decrease in the annual worldwide demand for enrichment services to
less than 28 million SWU; a decline in the average price for all enrichment
services under USEC's
long- term contracts to less than $80 per SWU; and the downgrading of USEC's
corporate credit rating below investment
grade or a reasonable expectation of such downgrading in the next 12 months.
In February 2000, Standard and Poor's and Moody's Investors Service revised
their credit ratings of USEC's long- term debt to below investment grade,
thus allowing USEC to close a plant. Following this downgrade, NRC initiated
a review of USEC's financial condition as part of NRC's process to certify
USEC's compliance with safety standards at the corporation's uranium
enrichment facilities. Under the Atomic Energy Act of 1954, NRC may not
issue a certificate of compliance to USEC if issuing a certificate would be
harmful to the maintenance of a reliable and economical source of domestic
enrichment services. While the results of NRC's review have not been
publicly disclosed, NRC's Chairman wrote in September 2000 that-
notwithstanding the findings of the review- denial, suspension, or
revocation of USEC's certificate of compliance would itself harm the
maintenance of reliable and economic enrichment services. Therefore, NRC
determined that it would not take any action to modify, suspend, or revoke
USEC's certificate of compliance, which allows the corporation to operate
the uranium enrichment plants.
Given its inability to operate both plants at an economically efficient
level, USEC announced in June 2000 its intention to cease uranium enrichment
operations at the Portsmouth plant in June 2001 and to shift domestic
enrichment services to Paducah after that plant receives regulatory approval
from NRC to enrich uranium above Paducah's currently allowed maximum level
of 2. 75 percent uranium- 235. 16 According to a DOE official,
16 USEC will continue to operate Portsmouth's uranium shipping facilities at
least until similar facilities are available at the Paducah plant.
Paducah must be certified by NRC to be able to enrich uranium to 5. 5
percent uranium- 235 in order to meet USEC's contract requirements to
utility customers.
Ceasing operations at Portsmouth, however, means that USEC will no longer
have uranium enrichment capacity as readily available to respond to delays
in deliveries of LEU from Russia. USEC has stated that, in the event of
delivery interruptions, it plans to increase production at Paducah to the
levels necessary to continue to fill its customers' orders. However, to do
so for extended periods of time would increase USEC's production costs
significantly. In addition, according to a DOE official, risks associated
with the operations of only one plant are increased because of the Paducah
plant's age and because the plant lies within an earthquake zone. DOE's
recent announcement that it would maintain the Portsmouth plant in a
“cold standby” status is, according to DOE officials, based on
concerns about the future of domestic enrichment supply and its effects on
U. S. nonproliferation policy.
Federal Oversight of Oversight of the implementation of the HEU agreement is
conducted by the
interagency Enrichment Oversight Committee (EOC), which was organized the
HEU Agreement's
under a May 1998 executive order. 17 Chaired by NSC and consisting of
Implementation
about a dozen federal agencies, EOC's efforts have been primarily focused on
resolving problems that have occurred over the course of the HEU agreement.
However, EOC has not fulfilled all of the responsibilities given to it by
the executive order.
Implementation of the HEU Under the executive order, EOC was organized to
monitor and coordinate
Agreement Is Monitored by U. S. government efforts to support the following
objectives:
the Interagency Enrichment The full implementation of the HEU agreement and
related contracts
Oversight Committee and agreements by USEC as executive agent.
The application of statutory, regulatory, and contractual restrictions on
foreign ownership, control, or influence over USEC.
17 Exec. Order No. 13085 (Establishment of the Enrichment Oversight
Committee, 63 Federal Register29333 [May 28, 1998]).
The development and implementation of U. S. government policy regarding
uranium enrichment and related technologies, processes, and data. The
collection and dissemination of information relevant to any of the
above on an ongoing basis. EOC is chaired by a senior official from NSC and
consists of representatives from the Departments of State, the Treasury,
Defense, Justice, Commerce, and Energy; the Office of Management and Budget;
NSC; the National Economic Council; the Council of Economic Advisers; and
the intelligence community. Although EOC's membership is governmentwide,
NSC, the State Department, and DOE have taken the primary role in overseeing
the HEU agreement's implementation.
Officials with NSC, the State Department, and DOE told us that EOC's
oversight role has, in general, been limited to dealing with problems that
have arisen through the course of the HEU agreement. For example, officials
told us that EOC spent significant time attempting to resolve delays in
deliveries caused by Russia's dissatisfaction with the lack of payment for
the LEU's natural uranium component. These officials also told us that
Tenex's halting of shipments in early 2000 because of its fear that the
money that USEC paid the former would be used to settle an arbitration
judgment against Russia required considerable effort to resolve on EOC's
part .
We asked officials from NSC, the State Department, and DOE for records of
EOC's periodic meetings or documentation of the decisions made. However,
these officials told us that EOC has primarily acted in an informal manner,
meeting only as required and involving only those agencies that have an
interest in the topic under discussion, and that there are no available
records or minutes from these meetings. For example, Treasury and Commerce
officials have not been as involved in the national security deliberations
of EOC because, according to these officials, their primary interest does
not involve national security issues. Similarly, Department of Defense
officials are not involved in EOC's deliberations regarding the
privatization of USEC, except as they relate to the national security
implications of the privatization.
EOC Has Not Fulfilled All of EOC has not fulfilled all of its
responsibilities as laid out in the executive
Its Responsibilities Under order that established the committee.
Specifically, the order required EOC
the May 1998 Executive to establish procedures for designating alternative
executive agents to
Order implement the HEU agreement. However, EOC lacked such procedures
when USEC considered resigning as executive agent in 1999. While EOC
interviewed several companies that would be willing to take over as
executive agent if USEC were to resign, EOC did not provide us with any
analyses of the companies' relative advantages and disadvantages, nor of the
impact of a change of executive agent on the implementation of the HEU
agreement. NSC, State Department, and DOE officials told us that they
weighed the merits of replacing USEC with several other companies. According
to DOE officials, USEC, while not unique, has several advantages relative to
potential replacements. For example, USEC has a large customer base and can
more readily incorporate the Russian material into its existing enrichment
contracts. In addition, USEC possesses an existing inventory of natural
uranium that it can transfer to Russia upon the delivery of LEU.
EOC continues to lack a contingency plan, should USEC resign in the future
or should the U. S. government choose to take over USEC's responsibilities
or replace USEC as executive agent with another company. According to an NSC
official, such a plan is unnecessary because USEC is unlikely to resign and
there is no need for such a formal plan. USEC, NSC, State Department, and
DOE officials told us that the corporation plans to continue as executive
agent for the foreseeable future.
EOC was also required to collect and analyze information related to the
maintenance of the domestic uranium mining, conversion, and enrichment
industries. Under the USEC Privatization Act of 1996, the President is to
report to the Congress annually on the impact that the HEU Agreement is
having on these industries. Under the May 1998 executive order, EOC was
given responsibility to prepare these reports. The 1998 and 1999 reports
stated that the domestic mining, conversion, and enrichment industries did
not experience material adverse impacts as a result of the HEU agreement.
However, from our discussions with the DOE officials who were responsible
for preparing these reports, the information used to prepare the analyses
supporting these assertions was unclear to us. In the August 2000 report to
the Congress, EOC concluded that there had been an adverse impact on these
industries. EOC's conclusion was made after market prices for uranium had
been falling for several years as a result of the large quantities of
uranium anticipated from the HEU agreement and the marketing of USEC's
natural uranium inventory. In July 2000, we raised
the difficulties faced by the domestic uranium mining and conversion
industries with an NSC official. This official acknowledged that EOC had not
done sufficient analysis on the uranium mining and conversion aspects of the
nuclear fuel cycle, concentrating primarily on enrichment instead. EOC has
produced a draft study on the maintenance of a viable domestic uranium
enrichment industry and is now beginning to analyze the domestic uranium
mining and conversion industries, which are also essential steps in the
nuclear fuel cycle. EOC now expects to issue a report on U. S. energy
security needs- including issues involving uranium mining, conversion, and
enrichment- in December 2000.
According to a DOE official, EOC's oversight of USEC has been hampered by a
lack of access to information from USEC so that EOC can analyze the HEU
agreement's implementation. This official told us that when USEC requested
$200 million in compensation for its role as executive agent from the U. S.
government, DOE lacked sufficient information to analyze USEC's claims about
the impact of its role as executive agent on its profitability. DOE depended
upon USEC to provide information and analysis regarding, among other things,
the difference between USEC's costs of producing LEU domestically and the
price being paid to Tenex for LEU. The Secretary of Energy said the data
that USEC provided were insufficient to justify the request. USEC officials
disputed this claim and told us that all information required to be reported
or that was requested by EOC has been provided by USEC.
Conclusions The HEU agreement's implementation has had a beneficial impact
on the national security of the United States, namely, the removal of over
100
metric tons of weapons- grade material from Russia. Achieving this benefit,
however, has not been without cost. Not only has the U. S. government spent
$325 million in purchasing natural uranium from Russia, but the United
States also faces a growing dependence on Russian- origin material for
nuclear fuel, which now makes up almost 40 percent of annual U. S. sales.
The Congress intended that the federal government ensure that neither the
privatization of USEC nor the implementation of the HEU agreement would be
harmful to the domestic uranium industry. However, factors subsequent to
USEC's privatization and the implementation of the HEU agreement have
affected U. S. nuclear fuel production. EOC, which is responsible for
coordinating federal policy, has been largely passive in its
responsibilities to monitor the impact of privatization and the HEU
agreement on the industry. Nevertheless, we are encouraged that EOC is now
examining the most effective ways to maintain the U. S. domestic
uranium mining, conversion, and enrichment industries. EOC needs to prevent
or mitigate the negative effects of the HEU agreement through careful
monitoring, analysis, and reporting of the impact of USEC's activities on
the entire domestic uranium industry to key decisionmakers to aid in
charting the optimal path to the industry's continuation, as the Congress
intended. Specifically, regarding USEC's current negotiations with Tenex on
the price that USEC will pay for enrichment services from 2002 through 2013,
EOC needs to make clear what the benefits would be of importing newly
produced LEU rather than additional LEU derived from dismantled Russian
nuclear weapons and what impact this would have on the domestic uranium
production and conversion industries and on U. S. national security
objectives.
We recognize the challenges posed by having a private company implement an
agreement with important nuclear nonproliferation objectives and the
difficulties posed by federal oversight of the actions of that private
company. While successful implementation of the HEU agreement requires some
balancing of commercial interests with national security objectives, in the
end, the national security interests of the United States must take
priority. Therefore, careful and thorough oversight of the government's
executive agent is needed to ensure that its actions are compatible with
national security interests. If the actions of any private company in
performing its role as executive agent are contrary to these interests, the
U. S. government should be prepared to either replace it or to take on the
responsibilities itself. A contingency plan that would detail the
circumstances under which USEC would be replaced is needed along with clear
criteria for choosing the replacement. Such a plan was envisioned by the
executive order that formed EOC and would, we believe, amplify to USEC and
its successors as executive agent, if any, that the overriding priority of
the U. S. government in the implementation of the HEU agreement is the
removal from Russia and delivery to the United States of nuclear material
from dismantled nuclear weapons.
Recommendations for We recommend that the Assistant to the President for
National Security
Executive Action Affairs direct the chair of the Enrichment Oversight
Committee to
study and report to the Congress on the benefits and the national security
implications to the United States, in addition to the impact on the domestic
nuclear fuel industry, of importing newly produced LEU from Russia (rather
than additional weapons- origin material) as is being proposed in USEC's
current negotiations with Tenex on the price of the
enrichment services component of LEU to be delivered to the United States
through 2013, and prepare and transmit to the Congress a contingency plan
that would
detail the circumstances under which a replacement for USEC would be needed,
the criteria for choosing the entity or entities (including U. S. government
agencies) that would serve as the replacement, and the specific procedures
to be followed in the event that USEC withdraws or is replaced as executive
agent for the HEU agreement.
Agency Comments and We provided DOE, the State Department, NSC, and USEC
with a draft of
Our Evaluation this report for their review and comment.
We received written comments from DOE and we spoke with officials from the
State Department, including the Senior Adviser to the Under Secretary for
Arms Control and International Security; NSC, including the Special
Assistant to the President and Senior Director, Nonproliferation and Export
Controls; and USEC, including its Senior Vice President; to obtain their
comments. In general, DOE, the State Department, and NSC agreed with the
draft report's findings and DOE described the recommendations as reasonable.
DOE, the State Department, and USEC provided us with technical
clarifications, which we incorporated as appropriate.
In its written comments, DOE said that the report was useful and integrated
information from a wide variety of sources in the United States, Russia, and
the nuclear industry, illustrating the complexity of the HEU agreement.
However, DOE said that the report understates the sustained record of
successful government action and focuses too narrowly on procedural
provisions, such as the requirement in the executive order to develop
procedures to replace the executive agent. Our report notes that EOC has
spent significant time resolving problems that have arisen through the
course of the HEU agreement. We continue to believe, however, that the
requirements laid out in the executive order need to be fully implemented
and that a contingency plan would serve more than just a procedural purpose.
It would also serve as a means to emphasize to USEC and any successor
executive agents that the priority of the United States in the
implementation of the HEU agreement is the removal of weapons- grade
material from Russia. DOE states that if USEC had resigned in December 1999,
EOC would have had over a year to choose a replacement. A contingency plan,
however, would provide a mechanism that could be rapidly implemented not
only if USEC were to resign, but also if it were no longer capable of
fulfilling its duties as executive agent. We agree with DOE
that market conditions would affect EOC's selection of alternative executive
agents. Therefore, when developing criteria for choosing alternative agents
as we recommend, EOC should examine how prevailing market conditions would
affect these criteria. DOE also said that the report understates the steps
EOC has taken to address domestic market and fuel cycle interests.
Specifically, DOE notes EOC's efforts to withhold uranium from the market in
an effort to support prices and the proposal to maintain the Portsmouth
uranium enrichment plant in a standby status. Our report notes both of these
efforts, and, as we point out, we are encouraged that EOC is now examining
the most effective ways of maintaining the domestic uranium mining,
conversion, and enrichment industries. However, EOC's analyses are still
being developed and it remains to be seen what impact the actions resulting
from these analyses will have on the domestic nuclear fuel industry.
Furthermore, we continue to believe that the proposal to import commercially
produced LEU from Russia needs to be evaluated to determine its impact not
only on the nuclear fuel industry, but also on U. S. national security.
DOE's comments are reprinted in appendix II.
Scope and To obtain information for this report, we reviewed and analyzed
the 1993
Methodology HEU agreement, the 1994 implementing contract and subsequent
amendments, executive orders, memorandums of agreement, congressional
testimony, and applicable U. S. laws. We reviewed annual reports to the
Congress on the impact of the HEU agreement on the domestic uranium mining,
conversion, and enrichment industries submitted by DOE in accordance with
the USEC Privatization Act of 1996. In addition, we reviewed an April 2000
draft study prepared by EOC on the maintenance of a viable domestic uranium
enrichment industry. We also examined an August 2000 financial review of
USEC conducted by NRC in response to the February 2000 downgrade of USEC's
corporate credit rating. We reviewed and analyzed documentation that USEC
provided us with, including data on LEU deliveries, USEC's annual reports,
reports and correspondence to EOC, and USEC's annual and quarterly filings
with the U. S. Securities and Exchange Commission. We compared USEC's data
on LEU deliveries with similar data from DOE to determine the consistency of
the data. We interviewed cognizant officials from the Departments of
Commerce, Defense, Energy, State, and the Treasury. We also interviewed an
official from NSC and officials from NRC. In addition, we spoke with
representatives of USEC, Inc.; Urenco, Inc.; NUKEM, Inc.; New York Nuclear
Corporation; Global Nuclear Services and Supply, Ltd.; the Nuclear Energy
Institute; ConverDyn; General Atomics; Energy Resources International, Inc.;
Commodore Nuclear; the Paper, Allied Chemical, and
Energy Workers Union; and the Uranium Producers of America. We also spoke
with Dr. Thomas Neff from the Center for International Studies at the
Massachusetts Institute of Technology. Dr. Neff has advised both the United
States and Russian governments on the implementation of the HEU agreement.
Additionally, we visited Moscow, Russia, in September 2000 to meet with
officials from Techsnabexport, the executive agent for the Russian
Federation. We performed our work from March to November 2000 in accordance
with generally accepted government auditing standards.
As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 14 days after
the date of this letter. At that time, we will send copies of this report to
the appropriate congressional committees; the Honorable Samuel R. Berger,
Assistant to the President for National Security Affairs, the Honorable Bill
Richardson, Secretary of Energy; the Honorable Madeleine K. Albright,
Secretary of State; the Honorable William S. Cohen, Secretary of Defense;
the Honorable Lawrence H. Summers, Secretary of the Treasury; the Honorable
Norman Y. Mineta, Secretary of Commerce; the Honorable Richard A. Meserve,
Chairman of the Nuclear Regulatory Commission; the Honorable Jacob J. Lew,
Director of the Office of Management and Budget; William H. Timbers,
President and Chief Executive Officer of USEC, Inc.; and other interested
parties.
If you have any questions about this report, please call me on (202)
5123841. Key contributors to this report are listed in appendix III.
Sincerely yours, (Ms.) Gary L. Jones Director Natural Resources and
Environment
Appendi Appendi xes xI
The Privatization of USEC The United States Enrichment Corporation (USEC)
was created by the Energy Policy Act of 1992 as a wholly owned government
corporation to assume responsibility for conducting and marketing the
Department of Energy's (DOE) uranium enrichment services. The USEC
Privatization Act of 1996 authorized the corporation's sale to the private
sector in a manner that provided for the corporation's long- term viability;
the continuing operation of DOE's uranium enrichment plants; the protection
of the public interest in maintaining a reliable and economical domestic
source of uranium mining, conversion, and enrichment services; and to the
extent not inconsistent with these purposes, secured the maximum proceeds to
the United States.
The corporation was privatized through an initial public offering on July
28, 1998, resulting in proceeds to the U. S. government of nearly $1. 9
billion, consisting of
nearly $1. 4 billion from the sale of USEC stock, and $500 million borrowed
by USEC and paid to the government.
In addition, the United States retained about $1. 2 billion in cash from
accounts held by the corporation in the U. S. Treasury.
According to USEC's privatization prospectus, as of March 31, 1998 (4 months
prior to privatization), USEC had over $3.1 billion in assets and accounts
receivable (primarily, cash held at the U. S. Treasury and about 73 million
pounds of uranium transferred to USEC by DOE) and liabilities of over $1
billion. In addition, USEC had the exclusive commercial rights to the atomic
vapor laser isotope separation (AVLIS) process that, at privatization, was
expected to significantly reduce USEC's production costs. AVLIS is a new
uranium enrichment technology that uses lasers to enrich uranium. DOE spent
more than $1.7 billion developing the technology and transferred it to USEC
in an April 1995 memorandum of agreement. USEC announced in June 1999 that
it was suspending further development of the AVLIS process, on which it had
spent over $100 million since privatization. The suspension left USEC
without a complete plan to replace its existing gaseous diffusion enrichment
technology, which is nearly 50 years old and very costly when compared with
its competitors' centrifuge enrichment technology. 1 USEC is currently
evaluating both centrifuge technology and another laser- based technology
called SILEX as a replacement for its gaseous diffusion technology.
Pursuant to the Energy Policy Act of 1992, the USEC Privatization Act of
1996, and memorandums of agreement between USEC and DOE, DOE made seven
transfers of approximately 73 million pounds of uranium to USEC from 1993
through 1998. (See table 3.)
1 The gaseous diffusion process involves the passage of uranium hexafluoride
in a gaseous form through a series of filters. Because uranium- 235 is
lighter, it passes through the filters more readily than uranium- 238,
resulting in gaseous uranium that is enriched in uranium235- the fissionable
isotope. The other enrichment process- gas centrifuge- employs rapidly
spinning cylinders containing uranium hexafluoride to separate the
fissionable uranium- 235 from the nonfissionable uranium- 238. The
centrifuge process is significantly less power intensive than the gaseous
diffusion process.
Table 3: DOE Transfers of Uranium to USEC, 1993- 98 Amount transferred (in
millions of Transfer date pounds of uranium)
July 1993 22. 9 December 1994 6. 2 November 1995 0. 9 April 1998 13. 0 April
1998 18. 2 May 1998 11. 1 May 1998 0.5
Total 72. 8
Note: 42.3 million pounds was subject to various restrictions that limited
the amount of uranium that USEC was allowed to sell over a specified period
of time.
Source: DOE.
USEC was also the beneficiary of several other favorable arrangements with
the U. S. government, including
an advantageous lease providing for nominal rent payments for the use of the
two enrichment plants with an open- ended renewal option, low- cost power
purchase arrangements whereby USEC purchases
electricity (which represents nearly 60 percent of USEC's production costs)
from DOE at an average cost of less than 2 cents per kilowatt hour, and the
U. S. government's retention of substantially all liabilities arising
from the operation of the enrichment plants prior to privatization,
including nearly all environmental clean- up and decommissioning
liabilities.
USEC also received from DOE contracts with 64 nuclear utility customers
operating 273 nuclear reactors in 14 countries. As of March 31, 1998, these
contracts were worth $3.2 billion through fiscal year 2000 and $7.4 billion
through fiscal 2009.
At the time of privatization, USEC estimated that it held a 75- percent
market share in North America and 40 percent worldwide in the highly
competitive uranium enrichment industry. However, in 1999, USEC reported
some decrease in its worldwide market share because of, among
other things, the adverse impact of a strengthened U. S. dollar and
increased competition among uranium enrichment suppliers.
USEC's total revenue decreased from about $1.6 billion in fiscal year 1995
to about $1.5 billion in fiscal 2000, and its cost of sales (the cost of the
enrichment services that USEC sold to its customers, which depends upon both
production costs at the two uranium enrichment plants and the costs of LEU
delivered from Russia) has increased from $1. 1 billion to $1.2 billion in
the same period. The increase in costs occurred largely since privatization,
increasing by about $174 million from fiscal year 1998 through fiscal year
2000 alone. As a result of decreasing revenue and increasing costs, USEC's
gross profit has declined from $522.6 million in fiscal year 1995 to $233.6
million in fiscal year 2000, a reduction of 58 percent. After being offered
in July 1998 at $14.25 per share, USEC's stock dropped to $3. 50 per share
in March 2000 before recovering somewhat to $5. 19 per share in October
2000.
Appendi xII Comments From the Department of Energy
Appendi xI II
GAO Contact and Staff Acknowledgments GAO Contact Gene Aloise (202) 512-
3841 Acknowledgments In addition, Margaret Armen, Jay Cherlow, Ryan T.
Coles, Doreen S.
Feldman, John C. Fretwell, Glen Levis, Mehrzad Nadjii, and Barbara R.
Timmerman made key contributions to this report.
(141445) Lett er
GAO United States General Accounting Office
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Contents
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Appendix I
Appendix I The Privatization of USEC
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Appendix I The Privatization of USEC
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Appendix I The Privatization of USEC
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Appendix II
Appendix II Comments From the Department of Energy
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Appendix II Comments From the Department of Energy
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Appendix II Comments From the Department of Energy
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