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This file contains materials relating to proposals for the production of enriched uranium by a private company versus the expansion of the government-owned plant in Portsmouth, Ohio.
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Uranium Enrichment (2)
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Uranium Enrichment (2)
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This file contains materials relating to proposals for the production of enriched uranium by a private company versus the expansion of the government-owned plant in Portsmouth, Ohio.
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James M. Cannon Files (Ford Administration)
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The original documents are located in Box 36, folder "Uranium Enrichment (2)" of the
James M. Cannon Files at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
THE WHITE HOUSE -
[Many 1975]
1) Negative w/ UEA
en Rul Need
2) Compuny avenut
a drium in formally
Last Atonie LT Comths in
FORD is LIBRARY GERALD
Digitized from Box 36 of the James M. Cannon Files at the Gerald R. Ford Presidential Library
[Many 1975]
The following is a brief description of how uranium is
processed for use by utilities in their reactors.
Uranium "rocks" are mined by companies such as Anaconda
Copper and processed into "yellow cake" which is a powder-
like substance. This is purchased (for around $10-15) by
the utilities and sent to a chemical company where it is
converted into uranium hexaflouride. This gaseous substance
is then sent to an ERDA enrichment plant.
The enriched uranium, which has now doubled in value, is sent
from the government plant to a fuel fabrication firm, such
as General Electric or Exxon, where the gas is converted
back into a solid (oxide) form. Here it is made into
"fuel elements" and packaged for use in the reactors. The
uranium then goes directly from the fuel fabrication firm
to the utility for use in the reactors. After its use as
a reactor fuel, it is sent to a chemical processor for
recycling or to be prepared for disposal.
FORD in LIBRARY 976830
[Many 1975]
Why did UEA decide that diffusion is the right technology?
1. Proven technology, now used in 3 ERDA-owned plants.
No question as to its workability. Centrifuge has yet
to be demonstrated on commercial scale. Diffusion is
known to be reliable. Manufacturers of centrifuge unable
to guarantee units.
2. Demonstrated technology and reliability is necessary
to get financial backing and customers (utilities).
3. Capital costs roughly a standoff between diffusion
and centrifuge.
4. Electricity requirements (about 15% of diffusion) for
centrifuge is a benefit but this is offset by:
Replacement and maintenance costs which are unknown
for centrifuge but well known for diffusion.
Higher labor costs.
Higher equity required for centrifuge because it
is unproven technology. High debt-low equity planned
for diffusion is a benefit to utility customers--
because they can write off interest on debt. Result is
to hold down price per separative work unit (SWU).
Fally, Ala
count
They
over
plant,
to muld
are
FORD is LIBRARY GERALD
1
project
K
for guaranteed what
ADDITIONAL
URANIUM
ENRICHMENT
CAPACITY
GERALD
Lann
FOR THE
1980's AND
BEYOND
May 2, 1975
BACKGROUND
USG now sole supplier in U. S.
USG capacity fully committed
Foreign competition increasing
Long construction lead times (8-10 yrs.)
$3-4 billion per full-size plant
History of indecision
DEMAND PICTURE
Total estimated market
1985 - 9 M
(100
1987 - 19 M
1990 - 38 M
Domestic market diminished
Foreign market data uncertain
Indicates need for flexibility in adding
incremental capacity
ALTERNATIVE TECHNOLOGIES
Gaseous Diffusion
-- 30 years old, but proven
Gas Centrifuge
-- new, untried at commercial size
-- less power to operate
-- smaller economic size
-- greater opportunity for future efficiencies
Basic Options
UEA Plan -- 9 M SWU GD plant - 1983
ERDA Plan --
Commit now to a 5 M SWU
USG "add-on" plant - 1984
Encourage maximum private
entry in centrifuge
- Garrett, EXXON, CENTAR
- 3-5 M SWU - 1986
Determine final size of add-on
GDP in one year
UEA - CENTAR COMPARISON
UEA
CENTAR
Capitalization
60% foreign
100% domestic
Equity
15%
25%
Loan guarantees
life
refinance
Commercial delivery
early 1980's
from start
Equity bailout
"fair
walk away
compensation"
Minimum Starting
75%
30%
Capacity
Defaulting Utility
Yes - NTE
Not requested
Oblig.
half of
domestic
sign-up
Completion/
Yes
Yes
Performance
guarantees
Comparative Analysis --- UEA VS. ERDA Plans
-- Meeting demand
UEA -- virtually certain
ERDA -- could fail to exceed 5 M SWUs
-- Decisive action
UEA -- sole source, hard to sell
-- 8-12 mos negot. leadtime
ERDA -- Gov't. "add-on" GDP should sell
-- private entry less controversial
than UEA
--- Encourage private entry
UEA --- results in single supplier only
ERDA -- results in competitive centrifuge
industry
-- Flexibility of Capacity increments
UEA --- No
ERDA -- Yes
-- Net budget impact
UEA -- None
ERDA -- probably less than $100 M net
-- less guarantee exposure, slightly
higher risk
-- no demonstration cost
RECOMMENDATION
Adopt ERDA approach
-- UEA as a sole source hard to justify
-- more decisive, less controversial than UEA
-- buys a better result -- competitive private
entry
-- Disadvantages acceptable
minimal net impact on budget
technical risk commercially acceptable
Next Steps
Obtain authorization for add-on GDP
Release centrifuge RFPs for early response
Legislation to establish commercial price
Announce open season
1) Glen Schlerer
May 15, 1975
MEMORANDUM
2) Camon- - File
TO:
Vice President Nelson Rockefeller
FROM: Edward Teller
E.T.
LIBRARY GERALD ? FORD
SUBJECT: Rapid Development of In Situ Technologies
INTRODUCTION
The exploitation of fossil fuels which are not close to the surface
may be carried out by in situ processes. These have the advantages of
possible early availability, moderate ultimate cost, ample resources and
limited interference with the environment. Once developed, these tech-
nologies can provide gas and liquid fuels to meet the nation's need for
more than a century.
In a financial sense, the government has a large stake in the syn-
thetic fuel industry. Especially in the case of shale, the most poten-
tially profitable sites are on land owned by the government. The govern-
ment has an obligation to the public to determine the true worth of that
land before leasing starts and to obtain a just return on the value of
that land.
To develop these technologies will require a large program of research
and development. At the present time, very little is being done and there
is a good reason why not. Private industry is great at research that has
a payoff within three years; government research is successful when the
industrial payoff is in twenty years. In between is no-man's land, not
well suited to either.
Presently, industry sees little incentive to pursue the technology
since the risks are considered high and alternative investments (e.g.,
-2-
in oil) seem attractive. Therefore, I propose that the government take
steps simultaneously to stimulate efforts by industry and also by govern-
ment to pursue the needed research itself, perhaps through the Energy
Research and Development Administration (ERDA). In government laboratorie:
research for a longer period may be planned. For industry, research-work
of shorter duration seems appropriate.
In the following, we will outline a possible approach that would
result in understanding the technology in five to seven years, and pro-
duction of a million barrels per day five years later. Equivalent amounts
of energy can be available from in situ coal gasification on the same time
scale. But to achieve these levels of production on this time scale, sig-
nificant efforts must be initiated now.
There are three different in situ processes to be considered: ex-
traction of oil from oil shale, production of high Btu gas from coal
occurring in thick seams, and the production of low BTU gas from coal
occurring in thin seams. The first two topics have many points of similar
and will be treated conjointly in the following. In all cases, some re-
search has to precede large scale production. This research can be carrie
out in government laboratories or by private enterprise at government ex-
pense. It will be recommended that both paths be pursued in order to
ensure early and relevant results. It may be preferable to concentrate
on one or the other approach. In any case, research by government and
private enterprise should be started at the earliest possible date and
any delay of one should not cause delay in the other
GERALD
LIBRARY
-3-
Phase I - R&D
Initial efforts will focus on fundamental research in the laboratory
coupled with testing in the field. The goal is to understand and to
learn how to control the process. During this phase, demonstration plants
capable of producing at least 5 thousand barrels per day (or equivalent
gas from coal) will be developed.
The research program for oil shale and for high Btu gasification
could be effected either by the government alone, or with the partici-
pation of industry. I recommend that we initiate a program in two parts,
exploiting the maximum contribution from both sources. One part would be
an effort by the government labs funded though ERDA. A parallel program
would involve industries which may be funded by an appropriate finance
corporation. This dual effort would reap benefits both from cooperal FOR
and from competition between the several participants.
GERALD
The specifics of the proposal for work on oil shale and for work on
high Btu gas are as follows:
- Provide $100 million for oil shale and $100 million for high Btu
gas to perform the research through the national laboratories.
This part of the program would take five to seven years to com-
plete and would carry the research through the commercial-size
5,000 to 50,000 barrels per day operation.
- Provide $150 million for oil shale and the same amount for high
Btu gas that might be divided among three companies (about $50
million each). This money would be spent over a three year period
to perform the research independently of each other. Following
-4-
the first three years, additional funding would be available at a level
of up to $25 million per company per year to be matched by an equal amount
of that company's funds. The matching funds would be required at this
stage since much of the risk would have been overcome in the preceeding
years. Full deployment could begin after two to four years of this jointly
funded research. In this phase altogether two to four companies would
be involved. It would not necessrily be the case that the same company
would be involved through all the R&D phase. Conceivably, one company
could develop the technology and another could build and expand the pilot
plant. Yet a third company could take over in Phase II (to be described
below), where the commercial operation will take place.
Making industry a part of the R&D effort would provide the oppor-
tunity to exploit several processes in several types of locations and
would provide for healthy competition between different techniques.
Work by government laboratories is essential to ensure the technical depth
required to establish the technology in a minimum amount of time and to
provide continuity throughout the entire research phase. There should
be cooperative interaction between the government and industrial research
programs to resolve any different findings that may occur. This plan
provides the opportunity to transfer laboratory technology to industry
and the government labs can certainly help in solving some problems that
will be encountered by the industries.
-5-
Phase II - Expansion to 1 Million Barrels Per Day
Following the research and development phase the technology
will have been established. The next step is for companies to create
a new industry based upon that technology. At the same time, means
to making capital available to the companies may be needed. Although
the process will be known to the industries involved, it will still be
unproven to the traditional lending agencies. A government financing
corporation could meet this need.
To deploy these technologies, several different types of financing
are possible:
1. The companies could construct the plants with government funds,
then after the operation is established the companies could buy
the plants. The synthetic rubber industry was financed in this
way during WW II.
2. Companies could simply borrow money from a finance corporation
at some low interest rate such as 4%. This would certainly pro-
vide an incentive.
3. Companies could lease the land at a low price as an inducement
for them to enter the industry. They would then pay a rather
high fixed rent on that land as an inducement to maximize the
rate of production at an early time. This kind of approach
would stimulate risk-taking by the companies.
The above three approaches are, of course, not mutually exclusive.
Low BTU gasification using less thick coal seams is a special case.
-6-
The process has already been partially established, by research
in the USSR and to some extent in the United States. The gas would
be of poorer quality and can be transported economically only a short
distance. Needed additional R&D effort can be of shorter duration and
would require less funding. A specific proposal would be to:
- Allocate $5 million per year to government laboratories,
possibly three of them, including the U.S. Geological Survey
and one or more state agencies. The research should be planned
for three years.
- Make available $5 million to each of three companies for a one-
year period to establish pilot facilities. This would be fol-
lowed by $10 million to one or two companies for two additional
years, to be supplemented by matching company funds. Expansion
beyond this point would be the same as for oil shale and high
Btu gasification.
Industrial participation in all three cases (oil shale, high Btu
gas, and low Btu gas) would come primarily from oil, gas, and coal companie:
but need not be limited to these.
Further Comments
Oil Shale: The process consists in rubblizing the shale in place
and using the earth in a manner similar to that of man-made retorts.
Industry participation in the research should be encouraged. This
is essential for the early acceptance of the technical results by industry.
The stack gas scrubber technology development is a prime example of the
-7-
delays that are likely to occur when one group develops a technology
in isolation from those who will have to use it. How to use the results
and the cost of the process can only be understood when the user has
considerable experience with the process.
Another step involves paving the way for final acceptance of the
large scale development of oil shale. Although the environmental impact
of in situ extraction is much less than for surface plants, there will
still be some effects. A program should be undertaken, probably not in
ERDA but rather in EPA, to determine how to handle that impact in an
acceptable manner. This work, too, would have to be performed in close
cooperation with the government research program, with participating
companies, and with the communities that would subsequently be affected.
Most, if not all, of the suitable oil shale land is owned by the
federal government. Suitable sites will have to be made available free
of charge for each of the research programs.
Coal Gasification and Liquefaction: The goal for high Btu gas is to
provide energy at a cost less than $1.00 per million Btu.
For low Btu gas, the goal is to provide the energy at a cost between
$1.00 and $1.50 per million Btu. The low Btu gas will be used near the
location of its source and there will be no large transportation costs
involved. The two alternatives for in situ coal gasification are the
following:
- To obtain high Btu gas one would exploit the deep thick Western
deposits of coal. Because of the long distance to major markets
-8-
and the cost of pipelines there is a premium on a high Btu gas for
distant users. The coal would be rubblized and then gasified
by burning in oxygen and in the presence of high pressure steam.
The product can be turned into pipeline quality gas by simple
processes carried out on the surface.
- To obtain low Btu gas one would utilize more widely distributed
coal deposits which occur in less thick seams. These occur par-
ticularly in the industrialized east and mid-west. There, the
premium on high Btu gas is not as great because gasification can
be done close enough to points of consumption so that the pipe-
line costs are not significant.
Whereas there are currently no efforts to produce high Btu gas in situ
by industry, there are already a number of industrial and government low
Btu gasification projects. Therefore, the more modest expenditures pro-
posed above may suffice.
FORD LIBRARY &
PROPOSED GOVERNMENT RESEARCH EXPENDITURES
CQST
PROGRAM
(Million $)
REMARKS
Oil Shale
Government Labs
100
Spent over 5-7 years
Industry
150
Approximately $50 million
(First 3 years)
to each of three companies
Industry
100-200
One or two companies at $25
(following period
years/company matched by COI
not exceeding 4 years)
pany funds.
Coal Gasification
(High BTU)
Government Labs
100
Spent over 5-7 years
Industry
150
Approximately $50 million t.
(First 3 years)
each of three companies
Industry
100-200
One or two companies at $25
(Following period not
year/company matched by com
exceeding 4 years)
pany funds
Coal Gasification
(Low BTU)
Government Labs
45
$5 million/year at each of
three labs for three years
Industry
15
Three companies at $5 milli
(First year)
year
Industry
20-40
One or two companies at $10
(Following 2 years)
year/company
TOTAL COST
780-1000
Present estimates of the capital required to expand these industries to
production level of a million barrels per day or its equivalent in gas are:
Oil Shale
$ 6 billion
High BTU Gas
7 11
Low BTU Gas
5 "
TOTAL
$ 18 billion
THE WHITE HOUSE
WASHINGTON
May 20, 1975
MEMORANDUM FOR:
JIM CANNON
FROM:
GLENN SCHLEEDE
SUBJECT:
RESPONSES TO YOUR QUESTIONS
RELATING TO URANIUM ENRICHMENT
This is in response to your questions concerning ownership
of UEA and heavy water as it relates to Dr. Teller's
comments:
1. Uranium Enrichment Associates (UEA) was initially formed
in about 1972 as a consortium for the purpose of doing
a study to see whether private industry involvement in
enriching uranium was a good idea. Three firms each
contributed $1 million: Bechtel, Westinghouse and
Union Carbide. Carbide operates 2 enrichment plants now.
The Japanese Government approached UEA and asked to
participate in the venture. The partners agreed, with
AEC's approval. The Japanese contribution was $3 million.
None of the partners was committed to anything more than
the study phase. Westinghouse and Carbide decided to drop
out at the end of the study. The Japanese received those
portions of the study that could be released (i.e., minus
certain classified portions) and the arrangement was
completed.
Bechtel has now been joined in UEA by Goodyear (which
company operates the third ERDA-owned diffusion plant).
About $2.5 million has been spent since completion of the
UEA study, most of it from Bechtel's funds. If the venture
proceeds, Bechtel expects to add 3 to 5 more partners
from U.S. industry. The expectation is that UEA partners
will then put up 40% of the equity (financing for the
venture is planned as 15% equity and 85% debt), and control
55% of the voting stock. UEA expects to get 60% of the
equity from foreign partners who will control only 45%
of the voting stock.
Foreign partners are expected to consist of customers
and/or equity holders. For example, Iran has offerred
to buy 20% of the product of the plant and take 20% of
equity and 20% of the debt. Other potential foreign
customers include Japan, Germany, France, Spain, Taiwan.
Venezuela may participate in financing but not product.
- 2 -
2. Dr. Teller and Heavy Water
This is a puzzle. I can understand why Dr. Teller would
be pushing the new enrichment concept of laser isotope
separation (LIS) which is under development at Livermore
and Los Alamos -- but can't understand why he would be
pushing heavy water.
Heavy Water refers to the moderating fluid used in
a particular kind of nuclear reactor. The heavy
water concept was explored by several industrial
nations, including the U.S., and was rejected by all
except Canada. The heavy water reactor uses natural
uranium (i.e., .7% U-235) rather than enriched
uranium which is used in all other reactors. For
example, the light water reactors which now dominate
U.S. markets require enriched uranium with 3% U-235.
Canada selected the heavy water reactor (marketed as
CANDU) largely because Canada has large quantities of
uranium. Other countries decided it was too inefficient.
Canada has succeeded in selling some CANDU's to India
but has not had great success elsewhere in the world
market.
Livermore and Los Alamos have been working on the use
of lasers to separate out the U-235 atoms from natural
uranium. The process is still in the development stage.
If it works it will be much, much cheaper than either
the centrifuge process or the existing diffusion process.
Right now there are at least as many people betting it
won't work as those betting for it. In any case, LIS
is not likely to be ready in time for the next 3 or 4
plants.
I hope the above helps. If not, I'll be pleased to try for
more.
CC: Mike Duval
GERALD
RECEIVED & DEVELOPMENT
UNITED STATES
ENERGY RESEARCH AND DEVELOPMENT ADMINISTRATION
WASHINGTON, D.C. 20545
USA
OFFICE OF THE ADMINISTRATOR
May 21, 1975
NOTE FOR: James Cannon, Director
Domestic Council
Jim:
Attached is ERDA's Summary Report on
UEA's Request for Government Assistance.
It was part of our memorandum to
Jim Lynn on April 1.
The budgetary impact of UEA is outlined
on page 7, section III.
I'll be glad to discuss this with you
further.
Bob Bob Fri
212 CA SI WI Deputy Administrator
Attachment
SUMMARY REPORT
UEA REQUEST FOR GOVERNMENT ASSISTANCE
FORD & LIBRARY GERALD
J. Introduction
Uranium Enrichment Associates (UEA) for nearly two years has actively
sought to establish a project for a large gaseous diffusion uranium
enrichment plant. It has made substantial progress in establishing the
technical basis for the project and has conducted extensive marketing
activities with prospective domestic and foreign customers. A project
financing structure (Figure 1) has been developed conceptually and
employed as a basis for the UEA marketing efforts. It has been deter-
mined by UEA and its financial advisors (Salomon Brothers) that, due to
the unique nature of the project (secret process, no commercial history,
very large capital requirements), it cannot be financed and operated
commercially without certain forms of Government assistance and assurance.
The Project Board - Private Uranium Enrichment, through extensive dis-
cussions with UEA and others, has evaluated the types of assistance
requested and the likely (and maximum theoretical) obligation that could
result to the Government. It is accepted by UEA that costs incurred by
the Government in providing the requested assistance would be repaid by
UEA, except in one case in which the Government might acquire a salable
asset. This brief summary provides highlights of the Board's evaluation
of each requested area of assistance. UEA has stated that there may be
alternative ways in which the objective of commercial project financing
can be achieved and that its positions, as expressed to the Board, are
open to further discussion. The Board, however, has been obliged to
evaluate UEA's expressed positions as to the Government assistance
required to insure project viability.
In addition to evaluation of the assistance requested from the Government,
the Board considered other key aspects of the project including: prospects
for domestic equity partners, anti-trust review considerations, other
regulatory considerations, market prospects both domestic and foreign,
project financial structure and the conceptual financing plan which is
based upon the assumed type of Government assistance, alternative ways
of resolving some of the problems which are raised, project power supply,
project completion schedule and time schedule for obtaining the necessary
legislative authority. Board review and discussion of these items is
contained in its final draft report.
LIBRARY
FIGURE 1
FORD
&
GERALD
CONCEPTUAL FINANCIAL STRUCTURE
(ASSUMES $5 BILLION PROJECT COST)
DOMESTIC 40 PERCENT
FOREIGN 60 PERCENT
TOTAL SHARE - $2 BILLION
TOTAL SHARE - - $3 BILLION
15 PERCENT EQUITY - $0.3 BILLION
85 PERCENT DEBT, 15 PERCENT EQUITY
4-8 U.S. COMPANIES
THREE OR MORE FOREIGN PARTICIPANTS
SWU PRICE STIPULATES MINIMUM
INDIVIDUAL CAPITAL PROVIDED:
15 PERCENT NET RETURN
I
FROM FOREIGN SOURCES
2
85 PERCENT DEBT - - $1.7 BILLION
PROPORTIONAL TO OFFTAKE
DEBT SECURITY
0
THROUGH IRREVOCABLE "LETTER OF
0
LONG-TERM CONTRACTS
CREDIT" HELD IN U.S.
GOVERNMENT ASSISTANCE PACKAGE
SWU PRICE REFLECTS INDIVIDUAL SERVICING
OF CAPITAL
SWU PRICE REFLECTS COST OF DEBT,
EQUITY AND GOVERNMENT ASSISTANCE
TOTAL FOREIGN VOTING RIGHTS
LIMITED TO 45 PERCENT
BALANCE OF EQUITY - - "PREFERRED STOCK"
- 3 -
II. Requested Government Assistance
A. Performance Assurance
UEA seeks an adequate supply of specialized materials and com-
ponents (e.g., barrier) now manufactured by ERDA plus Government
technical expertise and assistance to assure that the technical
basis of the project is sound and that obstacles can be overcome
most effectively in order that the project will perform technically.
Recognizing that this approach would, in effect, make the Government
a technical partner in the undertaking, UEA is willing to accept
whatever Government overview, including "veto power", is necessary
to protect the Government's interest during design, construction and
startup. The Board's best judgment of the cost of needed Government
functions is $150-$200 million; this includes costs of a 100-man
Government review team. It is assumed that Government costs would
be reimbursed on a current basis during construction.
Problems of risks involve potential early authorization of additional
Government barrier production capacity, ERDA scarce manpower alloca-
tions between CIP/CUP and the UEA project, Government liabilities
under warranties for its products and the practical problems which
could be created by dual project controls (increases in cost,
schedule delays).
B. Completion Guarantee
BERALD R.FORD LIBRARY
1. Contingent Government Loan Guarantee
UEA seeks an arrangement which will assure its ability to
borrow funds for the project. According to its concept, the
chief condition to invoking the contingent loan guarantee
would be an inability of UEA to market securities at an
interest rate equivalent to an "A" bond rating or above. At
that point the Government would back subsequent UEA securities
through a loan guarantee during the construction period to assure
their marketability. This would apply only to the domestic debt
portion (85% of 40%) up to a project cost limit. This limit
would be based upon a joint UEA/ERDA estimate of ultimate pro-
ject cost, escalated in an agreed manner and with application of
a contingency factor appropriate to the quality of the estimate,
plus an additional overrun allowance. The loan guarantee would
not apply to purely commercial debt already secured and all debts
would be of equal stature. According to UEA, this feature is
necessary to the financability of the project since it will assure
UEA's ability to obtain sufficient funds to complete the plant
(and thereby assure customers, PUC's and lenders of an operable
plant). In concept it would also minimize the amount or duration
of Government involvement in project financing. While there would
be no direct cost to the Government (except in the event of default),
- 4 -
the loan guarantee feature may increase Government debt and
might possibly impact the Federal debt ceiling.
Problems or risks involve the following:
- The plan is preliminary and has not been reviewed by
Salomon Brothers marketing staff or tested in the
marketplace.
- The contingent loan guarantee may adversely influence
(Treasury initial reaction) or imporve (Salomon Brothers
view) the availability of purely commercial debt. If the
former, the Government runs the risk of guaranteeing most,
if not all, domestic debt.
- Domestic utility rejection of UEA contracts, especially
"hell or high water" provision, would erode basis for
securing and servicing long-term debt. This could lead
to Government guarantee of all domestic debt for the
full 25 year term, if the project proceeded at all. (There
is evidence that some may accept, others may reject, this
provision.)
- The uncertainty of foreign participation up to the 60 percent
target, and the potential inability of UEA to compensate with
increased domestic capital, raises the potential Government
FORD
liability, if the project proceeds.
2. Overrun Funding
GERALD
LIBRARY
UEA requests assurance of funding overruns, in the event the
project cost limit is exceeded, by further Government guaranteed
loans, or direct loans to be repaid by UEA, possibly after pay-
ment of private debt. UEA would undertake to match such funding
with 15 percent equity funds on a "best efforts" basis. According
to UEA, the overrun feature would assure its ability to obtain
the large amounts of debt and equity capital required for the
project which otherwise would be impossible since it will be neces-
sary to employ a project cost estimate based only upon conceptual
design. The costs of such assurance are probably zero if, as is
likely, Government guaranteed loans would be involved, since in
the absence of a condition of "economic frustration" (see below),
one can safely assume that successful completion of the project is
technically feasible. However, there is a potential budgetary
impact of up to $2 billion which represents a 40 percent overrun.
With respect to problems or risks, there is great doubt that open
ended assumption of funding overruns by the Government probably
would be approved by Congress. Even if overrun funding were tied
to a limit, it would tend to reduce credibility of project estimate
- 5 -
limit to the Congress and endanger approval. UEA's lack
of firm commitment to provide additional equity in the
event of overruns to maintain 85 percent debt/15 percent
equity ratio may be unacceptable to Congress and it eliminates
a risk incentive to UEA for efficient management and control
of costs. There is some verbal evidence that UEA may be willing
to make a stronger commitment in this area than it has so far
made to the Board.
3. Economic Frustration
UEA requests Government assurance against risk of "economic
frustration" of the project, i.e., unacceptable postponement of
return on, or recovery of, equity due to (1) completion of
plant delayed beyond some agreed relatively late date, (2)
prohibition or indefinite suspension of consturction or
operation by judicial or administrative action or (3) other
causes which effectively prevent economic realization of the
project, such as inability to obtain power. In such event,
the Government would assume U.S. debt and provide "fair
compensation" to U.S. equity investors and would assume
control of the project in order to bring it to a successful
conclusion. According to UEA, they might not be able to obtain
necessary debt-equity capital in the face of such risk without
this assurance. The costs to the Government could range up to
all domestic capital, i.e., 40 percent of the project costs.
With respect to problems or risks, in the event of "economic
frustration" due only to unacceptable delay in completion of the
project, U.S. could then become an equity partner with other
foreign equity partners, thereby possibly presenting political
problems in the administration of the project. There exists a
potential Government liability for all domestic capital with a
risk of not having an operable plant, although with Government's
participation in key phases of the project such risk appears
remote. The concept may present difficulty in negotiation of
mutually acceptable criteria for "economic frustration" and "fair
compensation". Non-assumption by equity capital of the risk of
economic frustration would imperil Congressional approval, remove
a risk incentive to UEA for efficient management and create a
significant precedent regarding Government assistance.
C. Stockpile Backup and Load Leveling
UEA requests access to the Government SWU stockpile, on a lease or
purchase basis, for up to two million SWU's over the first four
years after startup, and nine million SWU's at the outset and decreas-
ing to zero five years after the plant achieves "successful" operation.
- 6 -
Additionally, ERDA is requested to agree to purchase up to a
total of six million SWU's (UEA estimates four million most
likely) during the first five-year operational phase of the
plant. The amount would be agreed five years in advance of the
proposed first delivery. Prior to firm-up, UEA would attempt to
sell the excess to others. These features will permit UEA
customer contract needs to be met in the event of startup delays
or interruptions and will levelize the commitments on the plant
due to irregular early customer demand prior to achieving a steady-
state operation. If the ERDA purchase obligation were four million
SWU's, and on a time schedule presently viewed as most likely, cost
to the Government could be $300-$500 million. In a time frame that
would require Government feed purchases, this could rise to $600-
$1400 million. This asset should, however, be resalable.
Problems and risks in this area concern the expected adequacy of
the Government SWU stockpile in relation to all anticipated needs
and the probable need, in the late 1970's, to seek appropriations
for purchase of SWU's and any needed feed. On the other hand, use
of surplus Government feed in the UEA plant, if possible timewise,
represents an opportunity to nearly double the amount of enriched
uranium produced.
D. Termination of ERDA Contracts
UEA requests that ERDA terminate a sufficient number of its long-
term enrichment services contracts with utilities to assure that
the UEA plant would be effectively sold out - on the assumption that
terminated customers would then sign with UEA. The Government has
already agreed that it would honor voluntary requests for termination.
Involuntary termination requires that certain criteria be met. However,
on the assumption that the criteria to allow the necessary terminations
would be met, there would be no cost to the Government since operating
conditions in Government plants would be adjusted to compensate.
Problems and risks relate to domestic requests for voluntary termina-
tion being tied to the imposition of an ERDA commercial SWU price, to
doubts as to whether involuntarily terminated customers would sign
with UEA, and to possible need to make a formal "reasonableness" finding
concerning UEA contract terms and conditions. Further, termination of
ERDA contracts beyond a certain point would result in uneconomic costs
to remaining ERDA customers.
E. Defaulting Utility Protection
UEA requests that, in the event of a default by a domestic utility
and inability of UEA to sell the services to others, the Government
assume the obligations of the defaulting utility up to a limit of
50 percent of the domestic utility share of plant output. LADA's
- 7 -
obligation would terminate when a substitute customer is found
or their long-term debt retired, whichever is earlier. Any amounts
recovered from defaulted utilities would accrue to ERDA. UEA's
objective is to protect the debt and equity investors by assuring
revenues to cover operating costs, debt requirements, and a 15 per-
cent net return on equity. Assumption of obligations by ERDA over-
comes the utilities' refusal, because of legal and financial reasons,
to accept increases in costs caused by a utility defaulting its
obligations (cross-guarantee of another utility). The potential cost
to ERDA (assuming $100/SWU plus feed) for each large reactor of a
defaulting utility could be in the order of $20 million a year
or $500 million over the maximum 25-year period. Maximum exposure
for 50 percent of the domestic utility share of the project would be
about $360 million a year or $ 9 billion over the 25-year period.
Also, ERDA would be required to maintain a contingency stockpile of
feed material as insurance even if no utilities default.
With respect to problems and risks, it is not apparent that a
"cross-guarantee" by ERDA is necessary because the potential risk,
although large, is not likely to materialize as (1) the utility
industry is not apt to crumble, (2) the reactor would likely still
need fuel (even if the utility were bankrupt), and (3) there is a
growing demand for power which would suggest that enriching services
could be marketed elsewhere. It would appear that assumption of the
obligations of defaulting utilities places risks on ERDA which could
and should be assumed by the UEA equity investors and/or UEA
customers, especially in view of the low probability of there being
a problem in this area.
III. Government Assistance Budget Impact
The summary shown in Figure 2 is the Board's collective judgment regarding
the likely impact of those elements of Government assistance which UEA
feels are necessary to insure project viability.
FIGURE 2
GOVERNMENT ASSISTANCE BUDGET IMPACT
($ Millions)
Potential
Most Likely
Maximum
A. Performance
150-200
150-400
Reimbursable, generally
Assurance
current basis
B. Completion
0
0-2000
Probably recoverable, economic
Guarantee
frustration remote
C. Stockpile Backup -
300-500
600-1400
Purchased SWU's represent
Load Leveling
(no feed)
a resalable asset
D. Termination of
0
0
Operating conditions adjusted
ERDA Contracts
E: Defaulting Utility
0-40
0-9000
Potential maximum obligation
Protection
(1 contract
if 3/2 of all domestic customers
for 2 years)
default for full 25-year period
MARKET ASSESSMENT
DOMESTIC
- Demand is consistent with the 40 percent of plant output target
assumed by UEA.
- Four "Letters of Intent to contract" have been received from domestic
utilities; three-four more expected shortly, with all "intent" letters
expected to total about 1.2 million SWU's/year.
- Remaining utility commitments probably dependant upon utility views of
UEA contract (presently not positive).
- However, if Government support to the project is given, domestic
customers are likely to follow.
FOREIGN
- Iran - Commitment likely for up to 30 percent of plant output or
FORD LIBRARY is
such less percent as U.S. Government policy may allow.
- Japan - Commitment of 22 percent of plant output probable if there
is strong U.S. utility or Government support to the project.
- France - Commitment of 11 percent spoken of, but may well be contingent
upon technology sharing and reciporcal ownership arrangement
with EURODIF, thus highly questionable.
-- West
Germany-
Commitment of 10 percent spoken of, but no solid information
to assess probability.
- Others - Taiwan, Spain, Brazil, Australia possible; capital financing
or other problems may be impediment.
- Conclu-
sion - Given uncertainty of U.S. policy on allowable foreign partici-
pation, other foreign conditions, the timely firm achievement
of the 60 percent target is doubtful thus jeopardizing timely
achievement of "Go" decision (requires commitment to 75 percent
of plant output).
- O'Neill
hasa copy.
875/21
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503
May 21, 1975
NOTE TO THE DIRECTOR - Per your Request
Attached is an outline of a possible statement on uranium enrichment
by Secretary Kissinger at the May 27 IEA governing board meeting.
We understand Jim Cannon is personally completely reworking the
Domestic Council cover memo to the President which is now virtually
a decision memo on the basic issue of private entry.
We are supplying information to Cannon via Glenn Schleede to assist
in his rewrite.
We understand Cannon is particularly concerned about the position
Kissinger should take at the IEA and will mention this in the
Presidential memo. Cannon is apparently trying-- in his rewrite--
to accommodate to NSC/State needs for early U.S. ability to accept
foreign orders as well as pump for private entry (which may be hard
to do).
Cannon plans personally to run his rewrite by you and Scowcroft by
today (Wednesday) or early tomorrow.
Hugh Kul Loweth
Attachment
GERALD R. LIBRARY FORD
THE VICE PRESIDENT
WASHINGTON
4 0
May 23, 1975
Dear Mr. President:
I have discussed fully the proposals
relating to enriched uranium with Jim Cannon.
While there are strong feelings on both
the private and the public sides of this issue,
in my judgment there should not be any conflict
between them. It is terribly important that
we pursue both approaches.
Our leadership in this field requires
that both the government and the private sectors
work together in the national interest on this
important issue.
If the ultimate decision should be to
create something like the energy financing group,
it would provide the vehicle for either the
government approach or the private approach,
or both -- without having to go back to the
Congress for funds. Indeed, in my judgment
I don't see how the capital can be raised for
either approach unless there is a vehicle such
as the proposed financing group.
Sincerely,
The President
The White House
NAR/JC/kb
UNITED STATES
DEVELOPMENT INDIAN ADMINISTR
ENERGY RESEARCH AND DEVELOPMENT ADMINISTRATION
WASHINGTON, D.C. 20545
5mc
USA
May 23, 1975
Honorable James T. Lynn, Director
Office of Management and Budget
Dear Jim:
As agreed at our meeting of April 15, 1975, on the UEA proposal
and alternative approaches to providing new enrichment capacity,
I am supplying additional information in response to your
specific questions and those of your staff.
We have continued to examine several aspects of this matter and
have determined that the centrifuge approach to commercial
enrichment is potentially more attractive than I had earlier
believed.
in the past several weeks, ERDA staff met
with eight organizations interested in private
centrifuge enriching and/or manufacturing.
The consensus is that the present Government
centrifuge program (DCEF) is overly modest and
that pilot plants -- expandable to large-scale
modules -- are necessary for successful
commercialization;
several asserted that centrifuge technology is
at a stage worthy of capital investment and
equity risk;
the Centar and EXXON centrifuge enriching proposals,
which I have reviewed personally, are more attractive
in many ways than UEA's diffusion proposal.
After further consideration, I have concluded that it is unlikely that
the Government will need to build the first large centrifuge plant, or
even pay for it; that at least three centrifuge proposers offer real
competition to the UEA proposal; and that it is conceivable that 9 million
SWUs centrifuge capacity can he on line in the 1984-86 time frame, provided
chiefly by three competitive private enrichers.
GERALD R. LIBRARY FORD
-2-
At the same time, I conclude that the Government must commit to
building an "add-on" plant.
re-opens the "order book" sooner and thus
clears up domestic uncertainty over future
capacity while moving to retain our share of
the expanding foreign market;
affords flexibility in gauging the size and
timing of the centrifuge plants; an increasingly
valuable asset given the uncertain demand picture;
maximizes the opportunity for hand-off of
Government contracts to centrifuge enrichers; this
is not possible under the UEA proposal alone;
offers a good hedge against the uncertainties
in feed availability and plutonium recycle which
could increase needed SW capacity by several
million units.
It has also become more apparent that the size needed for the proposed
Government "add-on" diffusion plant, if any is built, is less
certain now than earlier.
the growing evidence of centrifuge commercia-
lization potential, alluded to above, will
affect the size and timing of any diffusion
plant;
the demand picture in general is changing
substantially and we are proposing an open
season to reassess the demand situation for
the 1980's.
Government stockpile buildup and uncertainties
of the War Reserve will also affect the rate
of growth of needed capacity.
Uncertainties surrounding plutonium recycle have
cast doubt on ERDA's ability to meet commitments
of contracts contingent on recycling;
-3-
In light of these considerations, I now believe that ERDA's alterna-
tive plan should be accelerated by dropping the previously proposed
Government demonstration centrifuge plant and moving instead
directly into assistance for establishment of a competitive centrifuge
industry.
In summary form, therefore, ERDA's recommendation is:
-- Rejection of the UEA plan;
-- Initiation of private enriching capacity
on a competitive basis using centrifuge
rather than gaseous diffusion separation
methods. This advanced technology has
much greater energy efficiency; and is
more flexible in terms of meeting shifting
demand.
-- Commitment to take orders, both foreign and
domestic, as soon as Congress permits; commit-
ment to construct and operate a government
add-on facility to serve such orders while
the centrifuge industry gets underway; adjust
the size of the add-on plant to the minimum
needed to give private industry time to get
established.
I believe that this approach constitutes better policy and is a more
defensible proposal particularly because it applies government guarantees
more appropriately in support of the establishment of a competitive enrich-
ment industry rather than a single, sole-source supplier, such as UEA, and
thus buys a better result.
On the basis of current estimates, our proposed add-on plant is expected
to have a net budget impact of not more than $100 million total before
the higher enrichment charges already planned will begin to off-set new
plant costs in 1978 with breakeven occurring in 1980.
The UEA approach is not the best alternative available to the
government.
-- As it now stands, the UEA plan represents
both a sole source procurement and such a high
Federal liability and low private risk that it
-4-
would set an undesirable precedent for future
commercial ventures. For this reason, Congres-
sional support will be most difficult to achieve
and, even if such authorization is achieved,
9-12 months will have passed without an assured
program for meeting demand for enriched uranium.
--- Negotiations with UEA would require a number of
months and -- even if their position proved
more acceptable -- would still not of itself
speed the re-opening of the "order book" nor
establish enrichment on a competitive basis.
Altogether I believe these measures will provide additional capacity when
needed in the 1980's, and do so by a judicious and politically salable
mixture of Government and private programs, retain a large share of the
expanding foreign market, and give birth to a private centrifuge industry
-- all with acceptable risk to the Government, reasonable implications for
Federal outlays, and a good precedent for future commercialization ventures
of this type.
The answers to your specific questions are contained in the enclosure. My
staff and I would be glad to discuss these responses in more detail.
Sincerely,
B.b
Robert C. Seamans, Jr.
Administrator
Enclosure:
As stated
Additional Uranium Enrichment Capacity
Note: The following information is provided in response to
specific questions from OMB. Occasional redundancy is
necessary for completeness in responding to each question.
Also, for the sake of clarity, question No. 3 has been
addressed prior to question No. 2.
QUESTION NO. 1
How much time is needed for, and available for, the following:
a. negotiation of ERDA contract with UEA?
b. drafting of enabling legislation?
C. UEA negotiations with other potential equity partners?
d. UEA negotiations with foreign and domestic customers for
75% of plant capacity?
To what extent could these actions be accomplished concurrently?
Please provide a graphic display -- critical path analysis.
A graphic display and accompanying information is attached in
Tab A. Briefly, however,
a. 2-3 months are needed to agree on the features of
the UEA - ERDA contract and an additional 2-3
months to agree on the detailed terms;
b. 2-3 months are required for drafting the legislation;
C. 2-3 months are necessary to locate UEA's foreign equity
partners; followed by 4-6 months of contract negotiations.
d. 3-4 months needed for locating foreign and domestic
customers, 6-12 more to complete negotiations and
reach 75% commitment.
Enclosure
-2-
Altogether, 8-12 months would be required to complete the steps
leading to the UEA project's startup. This time frame
assumes concurrent action on all key steps
and necessarily runs the risk of serious delay
if setbacks occur in one or more of the steps;
assumes that Congress approves whatever is
negotiated and does so "on time." Congressional
action and timing may be problematical given the
uncertainties of the UEA proposal and the emergence
of the centrifuge alternatives, such as Centar,
EXXON, Garrett et al that will also seek Congres-
sional attention. It should be noted that Congres-
sional action on LMFBR took 18 months --- a proposal
that enjoyed the vigorous support of several key
members of the JCAE. UEA's plan has thus far drawn
fire from the Chairman of the House Appropriations
Subcommittee on Public works (Evins) and the
Chairman of the JCAE Subcommittee on Agreements for
Cooperation (Montoya), among others;
assumes that negotiations with UEA go well and also
that UEA will accept what Congress passes;
assumes no antitrust or regulatory problems including
high foreign participation.
As to the time available for securing passage of the UEA proposal,
the situation seems to be worsening. While the decision with
respect to size and timing of new capacity can wait for several
months, the decision with respect to the basic approach for providing
new capacity must be made in a matter of weeks.
The absence of a credible decision is creating
uncertainty among domestic utilities, thus
casting doubt on the future of nuclear power
expansion in this country;
Our large lead in centrifuge technology is
diminishing due to our continuing indecision;
the Germans and Japanese, particularly, are
catching up;
-3-
The recent NRC decision on exporting procedures
has complicated foreign access to U. S. nuclear
materials; a credible source of capacity will
encourage them to keep looking to the U.S. as
a supplier and thus permit us to retain a healthy
share of the expanding foreign market.
The UEA negotiation route is less credible now
than a month ago because the NRC action on exports
of nuclear materials will complicate UEA's bid for
foreign customers; and because the very existence
of several centrifuge proposals raise questions as
to desirability of commercializing a diffusion
plant.
QUESTION NO. 3
What are the pros and cons (or the risks and benefits) of going
to Congress with an enabling legislative package for UEA versus
enabling legislation for assistance programs for private entry
in the future.
UEA Approach
A. Benefits from our standpoint of going to Congress
with UEA include:
1. probability of being able to send legislative
package to Congress faster than any approach
except direct Government construction; and
2. Could be seen by Congress as less complex since
only UEA is involved whereas the alternative
approach is a mixed Government-private package
with several corporate entitites involved.
B. Risks from our standpoint include:
1. Loss of more time since the UEA proposal is fraught
with uncertainties that will invite close Congres-
sional scrutiny. Some members of Congress have
already expressed hostility to the UEA plan
(lack of sufficient UEA equity risk, lack of
identity of equity partners, lack of firm con-
tractual arrangements for domestic and foreign
customers, etc.);
-4-
2. Loss of control over the nature of the legislation
which, if a strong push cannot be mounted or main-
tained, could be completely rewritten into an
undesirable but mandatory course of action, e.g.,
a semi-independent Government corporation for
enrichment; and
3. Discouragement of future commercialization efforts
if the first proposal fails for whatever reason.
The first proposal, must be good
enough to withstand strong Congressional cross-
currents.
Alternative Approach
A. Benefits from standpoint of going to Congress with
the Alternative Plan include:
1. Greater Congressional receptivity since the plan
could be presented as "transitional" to commercial
enrichment. It contains both a Government plant
and several private pilot plants, as well as the
other advantages. In short, more salable; and
2. Political base would be broader and more supportive
since several corporations from several states
would be involved (the President should capitalize
on this before Congress does).
B. Risks include:
1. As with the UEA approach, possible outright rejection
of the commercialization concept and rewriting of
the bill in an undesirable manner; however, this is
believed to be less risky than the UEA route since
the Alternative Plan appears more defensible.
2. Present Congressional antipathy toward the big oil
companies may have some negative effect on the
centrifuge proposal inasmuch as EXXON and Atlantic-
Richfield are involved.
QUESTION NO. 2
Comparison of advantages to the Government of going UEA VS.
alternative route(s).
-5-
A brief comparative analysis follows based on certain key criteria
such as relative cost, impact on eventual centrifuge commercialization,
flexibility, etc. Tab B contains a summary comparison of the UEA
Centar, EXXON and Garrett plans.
A. Cost - UEA would avoid substantial Federal outlays -- assuming
Government guarantees are not involved. Liabilities
amount to as much as $3.8 billion.
- ERDA's Alternative Plan means initial net outlays, however,
our preliminary projections indicate that, with pricing
changes in separative work now being recommended, net
outlays can be held to less than $100 million before
total annual outlays can be offset by revenues beginning
in 1978. Cumulative outlay breakeven would occur in
1980 followed by rapidly mounting net revenues thereafter.
And, if the demonstration centrifuge is not Government-financed,
the picture will be even brighter. This projection is based
on the $75-80 per SWU range and is calculated based on full
costs to the Government. At $75.21, maximum enrichment
drain would be $636 cumulative million in 1977, but most of
that includes CIP/CUP; net new plant drawdown in 1978 is
about $85 million with breakeven in 1980.
B. Centrifuge Commercialization
- UEA route, if successful, could conceivably give some
momentum to later centrifuge commercialization; but if
the UEA concept were rejected, it almost certainly
would discourage future commercialization ventures.
- UEA also offers greater assured capacity than do the
centrifuge plants, but the relative inflexibility
of GDP capacity is a drawback.
- The ERDA Alternative Plan offers the following advantages
from the standpoint of centrifuge commercialization:
1. less power to operate (about 1/10th of that needed for
diffusion; or 300 MWe as opposed to 3,000 MWe);
2. inherently greater "add-on" flexibility, a valuable factor
given the current uncertainty of demand; UEA's total plant
size must be committed early while the centrifuge process
can be incrementally expanded as demand develops.
3. with the add-on plant, less capital to construct (about
$1 billion less than a comparable 9 million SWU diffusion
plant); eases drain on hard-pressed capitalization market;
-6-
4. less of an antitrust problem since several suppliers
would be involved; and
5. establishes a whole competitive industry, including
competitive procurement, using a new, more efficient
technology, rather than simply a single additional
supplier utilizing an aging technology that offers
virtually no future economic or technological
advantages.
C. Construction of an add-on gaseous diffusion plant
UEA agrees that a privately constructed and operated add-on
plant is not a realistic option. ERDA's Government add-on plant:
- removes all doubt that additional capacity will be
available in mid-1980's, thus encouraging continued
expansion of nuclear light water reactor power plants;
- takes advantage of potential available power at Portsmouth;
- small enough to avoid large-scale Government outlays;
- believed to be more salable to the Congress than the
UEA plan; and
- hedges the risk that centrifuge technology may possibly
encounter some unforeseen engineering obstacle that
would delay bringing capacity on line when needed.
D. Decisive Action
- UEA is less credible as a decisive action than ERDA's
Alternative Plan which contains the add-on feature
combined with a strong centrifuge commercialization
push.
E. Flexibility
- UEA proposes a 9 million SWU plant the demand for which
is less certain now than earlier.
- The Alternative Plan affords greater flexibility by
providing some assured capacity via the add-on GDP
leaving more time to adjust the size and scheduling
of the private centrifuge to market conditions as they
clarify.
-7-
F. Competition
- UEA is a sole source supplier and thus runs counter to
Government interface policies with the private sector.
- The Alternative Plan provides healthy competition result-
ing in the establishment of an industry.
QUESTION NO. 4
What is specifically unacceptable about the UEA proposal? What
kind of package could ERDA recommend?
Our recommendations are not predicated on specific problems with the
UEA plan although they do constitute an important consideration.
Rather, we are mainly concerned with the broader implications of
going the UEA route -- namely the undesirable policy precedent that would
be set by providing assistance on a sole source basis to establish
a single supplier; the difficulty in defending such a proposal before
the Congress in a timely manner; and, even if successful, the establish-
ment of a single last-of-its-kind diffusion plant, rather than a
competitive future-oriented centrifuge enrichment industry. Therefore,
even if the UEA package could be made "acceptable," the desirability
of proceeding the UEA route remains highly questionable.
With specific regard to the UEA plan, a basic weakness is its in-
completeness as a proposal. Important gaps exist in such areas as
specific equity partners, corporate base, and source of power for the
GDP. It is difficult to comment on the acceptability of elements of a
proposal that have been only vaguely developed or omitted altogether.
Much of the UEA plan has emerged only after intensive probing on
ERDA's part.
Another problem is that several features of the proposal are un-
conventional to say the least. For example, the lack of risk to UEA,
the "hell or high water" provisions in UEA-customer contracts, and the
open-ended cost overrun concept. Such features are controversial and
difficult to judge with any assurance.
We also believe that as a matter of desirable and defensible policy,
Government assistance for any commercialization venture should be com-
mensurate with the amount of risk involved on the part of the private
sector. Since diffusion technology is fully developed on commercial
-8-
scale, we therefore think that the amount of risk to UEA should be higher
than the risk assumed by a prospective centrifuge plant operator. Of
course, the degree of Government assistance for centrifuge will be honed
by competition.
Taking the foregoing into account, we cannot say precisely what UEA plan
would be "acceptable". But it would appear that adjustments to the exist-
ing UEA plan would have to be made in the following areas:
1. Require greater UEA equity (probably more than 25%).
2. Require greater UEA risk such as defaulting utilities.
3. Eliminate open-ended project cost overrun concept.
4. Assure strong U.S. participation in decision role if ERDA is
to provide a performance guarantee.
5. Except for major licensing changes by NRC, UEA should be committed to
completion of the facility.
6. Develop and enforce firm time schedule for UEA commitment/mile-
stones.
7. Limit terms of Government obligation to purchase SWUs from
UEA.
Also, in the area of UEA-customer contracts, we would like to see
the removal of pricing concepts which may be discriminatory or
inequitable (e.g., payment over contract period regardless of need;
and "hell or high water" provisions).
As to what kind of package ERDA would recommend, the following
summarizes our total proposed plan of action for development of
additional enrichment capacity in the mid-1980's.
1. Draft and transmit legislation ASAP designed to authorize ERDA
construction of a 4-5 million SWU gaseous diffusion add-on
plant at Portsmouth; also seek authorization for entering
into government-assistance contracts with 3-5 private
corporations to construct and operate several 200-300
thousand SWU centrifuge pilot plants, expandable to 1-3
million SWUs by 1985; and concurrently issue Requests For
Proposals on centrifuge enrichment.
-9-
2. Firm up estimates of demand for enriching services by announcing
an open season for fixed commitment customers; and also open
the "order book" for enrichment services from the new add-on
diffusion plant as soon as permitted by Congress. Based on
the firmed up estimates, decide within one year on the size and
timing of the capacity to be met via add-on plant and the private
centrifuge route. Assuming passage on the legislation in the meantime,
complete arrangements and let contracts.
3. Place the Government's enriching operation on a paying basis
to relieve pressure on the Federal budget. This would be done
as follows:
a. Raise the price of SWUs closer to a commercial level
based on Government costs, risks, and subsidies;
b. Attract foreign investment to the add-on diffusion
plant as well as to the centrifuge plants; and
C. Organize ERDA's enrichment operation into a more
self-contained, accountable unit. This could also
help de-fuse interest in establishing a Government
enrichment corporation.
TAB A
FIGURE 1
UEA-RELATED ACTIVITIES THAT
MUST PRECEDE PROJECT START
(Estimated months in parenthesis)
Congressional
Draft & Submit Legis.
Enact Permissive Legislation
0
Approve UEA/ERDA Contract
Action
(2-3)
(2-6)
(2-3)
UEA/Dom. Util.
Prelim. Discussions
Contract Negotiations
(3-4)
(3-4)
UEA/ERDA
Agree on Features
Detailed Terms
(2-3)
(2-3)
Proje
Star
(8-12
UEA/Foreign
Determine Who,
%
<
Detailed Negotiations
Tota
Partners
(2-3)
(4-6)
NRC/DOJ Review
Final NRC/DOJ Review
(2-3)
UEA/Dom. Equity
Prelim. Discussions
Contract Negotiations
Partners
(2-3)
(1-5)
UEA/Foreign Customers
Contract Negotiations
(6-12)
Time Requirements for UEA - Related Negotiations
The generalized analysis shown in Figure 1 is an attempt to depict
graphically the activities that must precede final UEA project authorization.
The diagram does not purport to show a critical path analysis, per se,
since it is essentially impossible to estimate the exact time required
for complex, parallel, interrelated negotiations with any validity. It
does describe, in broad terms, the features of UEA-other party negotiations,
interrelations among them, and rough estimates of the time required to
complete the various negotiations. Follow-on sections describe in somewhat
more detail the type of activities to be conducted during each of the
negotiations. A key point is that, in our view, the schedule represents
the most optimistic that can reasonably be assumed. It further assumes
that an Executive Branch negotiating position on several key issues has
been established. These include:
- acceptability, in principle, or with limitations, of
various aspects of Government assistance proposed by
UEA, or acceptability of alternatives which may achieve
the same result.
- acceptability of UEA's proposed utility contract terms
as they may influence Government support to the project.
- character and degree of risk that should be assumed by
equity.
a. UEA-ERDA Contract - 4 to 6 months from Executive Branch decision
to enter into negotiations
Negotiations must resolve these, among other, issues:
- Degree of ERDA involvement in details of design
and construction in order to provide assurance
of plant performance
- Nature and extent of government loan guarantees
(contingent or otherwise)
- method of providing
- defining project cost limits
- defining domestic share being guaranteed - depends on
UEA success in attracting foreign participants
- 3 -
- Method of covering any overruns
- degree, if any, of UEA domestic equity contribution
- foreign participant's commitments to overruns -
requires feed-back from those negotiations
- necessity of provision, or determination of alternatives
- Determining mutually acceptable groundrules for "economic
frustration" of project
- degree, if any, of domestic equity protection
- foreign participants acceptance
- conditions for invoking - present concept too broad
- Establishing precise details of SW involved in stockpile
access and load leveling
- amounts, time
- method of payment
- Conditions, if any under which ERDA would cover defaulting
utility obligations
- defining other actions UEA must take prior to
ERDA coverage
- limits to ERDA exposure
- equity risk prior to ERDA coverage
It is estimated that this process would require 4-6 months, including:
- 2-3 months to reach agreement with UEA (including respective
management approvals) on basic features of package, and crank
in feed-back from UEA-utility negotiations (which will
influence the degree of government (vs customer) risk
- 2-3 months to negotiate final detailed contract, including
respective management approvals
- 4 -
The first part of this process (establishing basic features) could
be shortened considerably if the Government were to simply agree to
whatever features UEA felt it needed (e.g. no appreciable equity
risk, overrun protection from outset, near-term market assurance
by ERDA, defaulting customers). However, the time then required
to get Congressional approval of such a contract, in light of
concerns verbalized by Representatives Evins and McCormack and
Senator Montoya over such features of the UEA proposal, plus
anticipated utility industry opposition, is very likely to be
much longer than if the Government were to drive a harder bargin
with UEA at the outset. Conclusion - time required from start of
negotiation to final congressional action of package is likely to
be about the same either way, however, simply accepting the UEA
approach would introduce a higher risk of Congressional non-
acceptance.
b. Congressional Action - 4-9 months
- Enabling Legislation
- Permissive legislation could be drafted,
coordinated within the Executive Branch and
submitted in 2-3 months
- Enactment of permissive legislation could
require 2-6 months, depending on:
- breadth and character of the legislative
package, and direction UEA-ERDA negotiations
are taking
- utility lobbying efforts
- degree to which Representatives Evins and
McCormack's and Senator Montoya's publically
stated concern is shared in Congress
- structure of UEA participant organization
as it unfolds
- Approval of final package would depend upon
- degree of UEA/Government risk-sharing
- DOJ and NRC views on domestic and foreign participation
- acceptability to utility customers
1/ Hearings before House Subcommittee on Public Works, April 18, 1975
and before the JCAE Subcommittee on Legislation, March 6, 1975
(Reiterated in letters from Evins to Seamans of March 20 and
April 18, 1975).
- 5 -
C. UEA-Potential Equity Partners - 3-8 months
- Probably no substantive action until the UEA/ERDA
negotiations have proceeded sufficiently to clearly
scope the Government's role (and equity risk) in the
project
- If UEA/ERDA contract minimizes domestic equity risk,
likelihood of obtaining domestic partners on a timely
basis increases
- If UEA/ERDA contract increases equity risk, it will
be more difficult to obtain domestic partners on a
timely basis
- Before potential domestic partners become fully
committed (and start contributing moneys), acceptability
by DOJ and regulatory considerations by NRC (including
economic controls) will need resolution
Conclusion: If ERDA basically agrees to all UEA requests on
UEA terms, domestic equity parnters could be on board (assuming
no DOJ problem) in 3-6 months. If ERDA negotiates for a package
with more equity risk, etc., a longer time will be required to
attract potential domestic partners and may possibly re-open
or extend negotiations. In that case, negotiations would likely
not be completed for at least 6-8 months.
d. UEA-Foreign Participants - 6-9 months
- Basic structure, contingent upon U.S. Congressional
approval of foreign participation (countries and
proposed % off take) should be known within 2-3
months after Executive Branch decision to enter into
negotiations with UEA
- Detailed negotiations with each foreign participant
by UEA will require
- agreement to terms, including
- nature of irrevocable letter of credit
- methods of cash draw-down during construction
- limitations of letter of credit
- vehicle for open-ended commitment to cover
pro-rata share of all cost overruns
GERALD
- 6 -
- Obtaining target participation of 60% foreign capital
- to the extent UEA fails to obtain the degree and
kind of foreign participation anticipated, it
will impact upon the degree of US Government
exposure
These detailed international negotiations will inevitably take
time, as they will involve several segments of foreign governments
and, perhaps, foreign utilities, and will influence (and be
influenced by) the UEA/ERDA negotiation. At least 4-6 months
will be required after the basic structure of the foreign
participation is known.
Conclusion: 6-8 months after UEA/ERDA negotiations begin.
e. UEA-Domestic Customers - 6-8 months
UEA presently has 5 letters of intent, subject to a satisfactory
Government assistance package begin adopted, and mutually acceptable
UEA/customer contract terms and conditions being adopted. Utility
negotiating positions will be strongly influenced by:
- Nature of Government Assistance
- performance, loan guarantees, overrun protection
- extent of UEA equity risk and any attendant incentives
to reduce costs
- conditions in UEA/ERDA contract that afford customer
protection
- degree of defaulting customer protection
- reduction or elimination of likelihood the
"Hell or High Water" provision would be
required
- Government posture that UEA is "only game in town"
- utilities likely to stall supply contract negotiations
while trying to encourage Congressional opposition,
hoping for a policy change. Utilities concerns
motivated by proposed UEA contract provisions
including:
- cost flow-through with no incentive on
UEA to reduce costs
- 7 -
- "Hell or High Water" provisions
requiring customer to pay, even if
UEA cannot deliver
- Uniform duration contract payment
obligation in which customers must begin
payments when plant becomes operational,
even if utility deliveries do not begin
for several years
- If this does not succeed (3-4 months), substantive
negotiations will begin when terms of UEA/ERDA
contract are known
UEA will need 15-20 domestic reactors under contract to reach the
domestic share of 75% commitment. This will likely involve
contracts with 10-15 domestic utilities, and would probably
consume 3-4 more months, once utilities decide to negotiate in
earnest, obtain management and probably state PSC approvals.
Conclusion: Total time 6-8 months
f. UEA-Foreign Customers - 6-12 months
Most foreign commitments will be made with the foreign participants.
However, it is likely that some foreign utilities who are not
involved in equity participation would seek contracts with UEA.
Terms and conditions would probably be similar to that offered
domestic customers. Negotiating these contracts should not be
a pacing item, unless required for UEA to obtain 75% capacity
commitment.
g. DOJ/NRC Acceptance - 8-12 months
After domestic and foreign participants are known (6-9 months)
antitrust and regulatory reviews must be made. Even with
expeditious handling, the reviews would take 2-3 months. It
is expected that Congressional and DOJ/NRC views would be
interchanged during the course of the review. The DOJ/NRC
position would become an input to final congressional action
on the UEA/ERDA contract.
While no two projects are the same, an indication of the time consumed
in complex contract negotiations is evidenced by recent experience with
the LMFBR Demonstration Program. Significant milestones associated with
Government/industry contract negotiations/approvals were:
- 8 -
January 1972
AEC accepts CE/TVA proposal as basis for
negotiation
August 1972
Memo of Understanding signed
September 1972
JCAE Hearings on Memo of Understanding
January 1973
Memo of Understanding Amended
July 1973
Principal Project Agreements (ERDA/PMC/TVA/CE,
ERDA/BRC and PMC/BRC contracts) signed
November 1973
W-PMC contract signed
January 1974
B&R-PMC contract signed
In this case, two years time was consumed in finalizing contractual
arrangements.
TAB B
CORIPARIDON UF POTENTIAL
ENRICHER'S GOVERNMENT ASSISTANCE CONCEPTS
Item
UEA
CENTAR
EXXON
GARRETT
Project Description
- 9 million SWU GDP by '83
- 270,000 SWU centrifuge plant
- Minimum 1 million SWU centrifuge
- 300;000 SWU centrifuge
- 60/40% foreign/domestic
by '81 expanding to 3 million
plant, plus supporting machine
plant by '81, expanding
- 85/15% debt - equity
SWU by '86
mfg. capability
to 2.7 million SWU by
- minimal equity risk
- $25 million at full risk
- Amount of equity risk unknown
late '84
initially, assuming Gov't.
(Gov't. control until project is
- 90/10% debt/equity
support
commercially viable)
- 25% equity in expansion
Process Guarantees
- Warrantees on ERDA-suppled
- guarantee technology and
- process guarantee for
equipment
performance thereof for 9-10
several years
- ERDA technical expertise
years
- Gov't owned and controlled en-
- ERDA involvement kept as
- Design&construction overview
- supply or cause the supply of
richment project until such
minimal as possible,
- Extends 1 year beyond full
machine at reasonable cost
time as project has proven its
consistent with degree
power
economic viability (defined at
of Gov't. support
outset), when private operation
provided
takes out Gov't, interest with
Completion Guarantees
- contingent Gov't. loan
- Gov't. loan guarantees for all
commercial financing of unde-
- Gov't. loan guarantees
guarantees if commercial debt
debt through 3 years operation
termined debt/equity structure.
for all debt through
becomes unavailable for
of expanded plant (~1989)
expansion phase until
domestic share
- Guaranteed debt eventually
sufficient operating
- Gov't. funding of domestic
rolled over by commercial debt
experience is obtained
share of overrun
secured by take-or-pay supply
to satisfy commercial
- Gov't. take over in event
contracts
of "Economic Frustration"
GREATO
lenders
- If project fails, Gov't. takes
- "Fair Compensation" for
plant, equity forfeited
equity
SW-Price Support
- Continues until differential
- Determined by amount Gov't.
- Continues through ex-
with ERDA charge is eliminated
receives
for its interest
pansion phase until
- Loan of 1 to "several million"
in plants at time of private
economies of scale
ERDA SW over first 5 years
takeover.
reduce SW costs to
to reduce average sale price
acceptable level
(probably ERDA charge)
Backup SW
- Lease-purchase arrangement
- Loan of ERDA SWU (see above)
- None after private operator
- Purchase SW from ERDA
for up to 11 million SW
resolves this problem
assumes control However not
as needed
over 4-5 years
directly addressed
- Not yet quantified
ERDA SW Purchase,
- Purchase up to 6 million over
Assurance of Market
- ERDA should provide indu cement
5 years; termination of ERDA
- Gov't. contracts with utilities
- Sell Excess SW to ERDA
for voluntary termination of
contracts
ERDA contracts
- To be fulfilled by plant output
- Not yet quantified
- Transferred to private operator
- "Commercial Charge"
when plants sold
Defaulting Utility
- Assume obligations of
Obligation
defaulting utility, up to
Not Addressed
50% of domestic share
Not Applicable
Not Addressed
Centar, Exxon, and Garrett concepts of Government assisting are very vague and preliminary, compared to UEA, As they develop their concepts in
more detail, it is likely that their concepts of such assistance will change.
Government assistance such as described herein might prove sufficient to cause Goodyear to propose an enrichment project,