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Nuclear Fuel Assurance Act: GAO Report (2)
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The original documents are located in Box 19, folder "Nuclear Fuel Assurance Act:
GAO Report (2)" of the Loen and Leppert 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States of America his copyrights in all of his unpublished writings in National Archives collections.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.
Digitized from Box 19 of the Loen & Leppert Files at the Gerald R. Ford Presidential Library
THE WHITE HOUSE
WASHINGTON
November 29, 1975
MEMORANDUM FOR:
AL ALM
DAVE ELLIOTT
BOB FRI
JOHN HILL
MYRON KRATZER
HUGH LOWETH
JIM MITCHELL
JERRY PARSKY
DICK ROBERTS
SAM TUTHILL
BILL VOIGT
FROM:
GLENN SCHLEEDE
SUBJECT:
DRAFT RESPONSE TO CONGRESSMAN
ANDERSON ON GAO'S REPORT ON
URANIUM ENRICHMENT
Attached for your review, comment and correction is a
draft of a consolidated response to Congressman Anderson's
letter to the President requesting an the Administration's
evaluation of GAO's final report.
May I have your comments as soon as possible, but no later
than noon, Monday, December 1, so that we can be sure that
we have available by Monday night, if needed, a complete
and correct evaluation.
I can be reached over the weekend via the White House
operator.
Thanks for your help.
CC: Mr. Cavanaugh
Dr. Connor
Mr. Leppert
Mr. O'Donnell
DRAFT November 29, 1975
Congressman John Anderson:
This letter and its attachment are in response to your
request for Administration comments on the recently issued
report by the General Accounting Office entitled, "Evaluation
of the Administration's Proposal for Government Assistance
to Private Uranium Enrichment Groups".
While, as described below, we have major substantive
comments and disagreements on the report and its
conclusions, there are a number of areas in which the
GAO conclusions have made an important contribution to
the portions of the report which:
Highlight the need for an early commitment to expand
uranium enrichment capacity in the U.S.
Recognize the need for the U.S. to be an aggressive
supplier of uranium enrichment services, to achieve
the Nation's energy, economic and non-proliferation
objectives.
Explain that there is little difference between privately
and Government-owned capacity in the ability to safe-
guard nuclear materials and protect classified technology.
Stress the desirability of encouraging private industrial
participation in financing and owning enrichment plants.
Support enactment of legislation, similar to that
proposed by the President, to provide Government assurances
and guarantees to interested private firms.
There are a number of other areas, summarized below
and detailed in the attachment to this letter, where we
disagree with the GAO report, generally because it is too
narrow in its perspective, incomplete in the factors
considered, and incorrect in its analyses and conclusions:
1. There are several important aspects of the Federal budget
impact that are not considered when Federal financing
and ownership of an Add-on plant is recommended.
2. The report incorrectly concludes that there is greater
certainty in getting a Government-owned add-on plant
on line when needed in the 1980's than a privately-
financed diffusion plant; and that a Government plant
provides more flexibility in sizing and scheduling.
-2-
3.
The GAO report considers only construction costs
when conclusing that a Government add-on plant would be
cheaper. When operating costs are considered there
would be little or no difference in cost of enrichment
services from an add-on plant and the proposed free
standing diffusion plant.
4. The final GAO report reaches several of its conclusions
on the basis of a proposal from UEA which is still
subject to ERDA-UEA negotiations, and the report seems
to misunderstand (a) the sequence of steps necessary
and (b) the approvals now being sought from the Congress.
5. The GAO report continues to reflect a misunderstanding
of the status of gaseous diffusion and centrifuge
technology and the relationship of technologies to the
need for Government cooperation and temporary assurances
to permit private firms to finance and own uranium enrich-
ment plants.
6. GAO concludes that the approach proposed in the Nuclear
Fuel Assurance Act is acceptable for centrifuge and
other "advance" technologies, but then concludes also
that private centrifuge ventures should accept more
risk -- a conclusion that is not justified.
7. Contrary to the conclusions of the GAO report, a
successful private venture utilizing diffusion technology
would have a direct relationship to the success of
private centrifuge ventures.
8. GAO does not take into account a number of disadvantages
of its recommendation that a Government Corporation be
created to take over existing enrichment facilities and
an add-on facility -- as a means of avoiding the budget
and appropriations process; nor does it justify its
assertion that such a Corporation would be more effective
than current arrangements.
9. The GAO assertions that the UEA proposal contemplates an
"essentially riskless" environment and that it would
help little in creating a "viable competitive private
market" are incorrect. Also, the report's analysis of
risk is highly theoretical.
-3-
10. The GAO does not consider some important factors before
reaching its conclusion that the UEA project (still under
negotiation) is "not acceptable" on the basis of
inadequate assumption of risks and "shifting" of risks
to the Government.
11. The GAO report seems to reflect a strong bias against
the proposal from the Uranium Enrichment Associates
(UEA), perhaps because (a) it is the only proposal
received by the Government that may provide the basis
for financing and owning the next increment of capacity
by private industry, and (b) for nuclear reasons, it
uses diffusion technology.
12. The GAO report does not seem to recognize that following
its recommendations would substantially delay and
may prevent ever achieving a private competitive
uranium enrichment industry in the U.S.
Thank you for the opportunity to provide you with the
Administration's evaluation of the GAO report. We consider
this a very important matter warranting the earliest
possible action by the Congress. We also consider it
important that complete information be made available to
the Congress so that all aspects of the President's
proposal can be evaluated by the Joint Committee on
Atomic Energy and by the full Congress.
If I can provide additional information, please let me
know.
Sincerely,
DRAFT
11/28/75
COMMENTS ON GAO'S REPORT, "EVALUATION OF THE ADMINISTRATION'S
PROPOSAL FOR GOVERNMENT ASSISTANCE TO PRIVATE URANIUM
ENRICHMENT GROUPS
Areas of Agreement
There are a number of areas where the report reflects useful
information and conclusions; for example the report:
Highlights the need for an early commitment to expand
uranium enrichment capacity in the U.S.
Recognizes the need for the U.S. to be an aggresive
supplier of uranium enrichment services, to achieve
the Nation's energy, economic and non-proliferation objectives.
Explains that there is little difference between privately
and Government-owned capacity in the ability to safeguard
nuclear materials and protect classified technology.
Stresses the desireability of encouraging private industrial
participation in financing and owning enrichment plants.
Supports enactment of legislation, similar to that proposed
by the President, to provide Government assurances and
guarantees to interested private firms.
Areas of Disagreement
There are a number of other areas, detailed below, where the
report is too narrow in perspective, incomplete in the factors
considered, incorrect in its analysis and conclusions:
1. There are several important aspects of the Federal budget
impact that are not considered when Federal financing and
ownership of an Add-on plant is recommended.
Overall budget constraints, particularly over the next
few years, raise serious doubts as to whether the
Federal government can commit more than $2 billion for
an add-on government enrichment plant and provide
continued or expanded funding for other stages in the
nuclear fuel cycle, particularly for reactor R&D and
assistance at the"back-end" of the fuel cycle. For
example:
- $429 million is being spent in 1976 on the LMFBR
program and this must grow in future years.
- $15 million in 1976 for uranium resource assessment
must expand in future years.
- Funding at the "back-end" for reprocessing R&D and
waste management has been small and large increases
are desired.
2
At the uranium enrichment stage, the negative cash
flow will be about $300 million in 1976 and will
grow substantially with improvement and upgrading of
existing plants. Negative cash flow will continue
until the early 1980's without an add-on plant and
would continue into the 1990's with an add-on plant.
Apply a discount rate equivalent to that paid by the
Government would mean that taxpayer investments in
past and current enrichment facilities and operations
would not be recovered until the 21st century.
Even without building an add-on plant, Government funding
for nuclear energy will continue to grow greater than
that for all other energy sources. These growing funding
requirements must compete with other national requirements.
2.
The report incorrectly concludes that there is greater
certainty in getting a Government-owned add-on plant on
line when needed in the 1980's than a privately-financed
diffusion plant; and that a Government plant provides
more flexibility. in sizing and scheduling.
There may be some slippages in the schedule for a
diffusion plant now estimated by UEA, but ERDA indicates
that it could not have a Government plant on line sooner.
ERDA has concluded that a full-size add-on plant (approx-
imately 8.8 million SWU capacity) would have to be
built--rather than a "half-size plant contemplated
earlier.
There are uncertainties associated with a Government
add-on that now appear greater than for a stand-alone
plant proposed by UEA. UEA contemplates using two
nuclear plants that are already partially designed as
the source of electrical power. Such nuclear plants
apparently are not available for an add-on plant,
making it necessary to build two 1200 megawatt fossil
fuel plants -- which normally would be expected to take
less time to plan and construct than nuclear plants.
ERDA believes such plants could be built but that (a)
the government may have to guarantee securities for
the plants, and (b) plants would have to meet clean
air requirements--which add uncertainty--including:
- Prohibitions against significant deterioriation in
air quality, with restrictions not yet known.
- Federal "new source performance standards" which
require use of "scrubbers" or low sulfur fuel.
- Air pollutant emission limitations imposed by
states in which the plants would be located.
- National primary and secondary ambient air quality
standards.
1. Perhaps new standards now being contemplated by
EPA (e.g., for sulfates) but not yet established.
Restrictions on strip mining of coal may constrain
the availability of low sulfur coal that would
certainly be needed if the plants did not use
scrubbers.
3.
The GAO report considers only construction costs when
concluding that a Government add-on plant would be
cheaper. When operating costs are considered there
would be little or no difference in cost of enrichment
services from an add-on plant and the proposed free
standing diffusion plant.
GAO compares a $2.7 billion estimate for a UEA
stand-alone plant with a $2.1 billion estimate for
an add-on plant. More recent estimates indicate
a cost of $2.92 billion for construction of the
proposed UEA plant and $2.46 billion in comparable
costs for an equivalent sized add-on at Portsmouth.
The implication by GAO that the add-on plant would
provide cheaper enrichment services is incorrect
because operating costs -- principally for electric
power are not considered. Electric power makes
up about 43% of the costs per SWU and capital costs
about 38%. UEA plans to use nuclear power which
is estimated to be 20% cheaper than power from coal-
fired plants, which ERDA expects as the source of
power for a Portsmouth add-on. The end result would
be essentially no difference in cost per SWU from
an add-on or the proposed stand-alone plant.
GAO's cost comparison also fails to take into account
(a) the substantial advantages of moving toward a
private competitive industry, and (b) the greater
potential of drawing on foreign sources of financing
(but with US control) if private industry is involved.
4.
The final GAO report reaches several of its conclusions
on the basis of a proposal from UEA which is still
subject to ERDA-UEA negotiations, and the report seems to
misunderstand (a) the sequence of steps necessary and (b)
the approvals now being sought from the Congress.
The proposal from UEA which contemplates construction
of a diffusion plant has provided a basis for negoti-
ations leading toward a possible cooperative agreement;
and the three proposal from firms wishing to construct
centrifuge plants are also expected to provide the basis
for negotiations.
Negotiations with UEA are still underway but there are
4
unresolved issues. ERDA is not yet satisfied that
an agreement has been negotiated which fully protects
the public interest, and the basis for agreement would
not be recommended until ERDA is satisfied.
The proposed Nuclear Fuel Assurance Act would make clear
ERDA's authority to negotiate and enter into cooperative
agreements with firms such as the four that have submitted
proposals, but no such agreement could be effective
until a 45 day period had been allowed for review by
the Congress through the JCAE (a well-established
procedure under the Atomic Energy Act, as amended).
The proposed Act would also authorize design and
construction planning for an add-on Government-owned
plant, should it not be possible to achieve acceptable
agreements with private firms.
Congressional approval is sought now only for the
legislation to authorize agreements. Such approval would
not commit the JCAE to accept now the basis for any
cooperative agreement with UEA or any other firm that
might later be submitted for the JCAE's review.
5. The GAO report continues to reflect a misunderstanding
of the status of gaseous diffusion and centrifuge technology
and the relationship of technologies to the need for
Government cooperation and temporary assurances to permit
private firms to finance and own uranium enrichment plants.
GAO incorrectly assumes that the type of technology
selected (diffusion, in the case of UEA) should be the
basis for determining whether or not Government assurances
are needed. Government assurances will be needed by
several firms during the transition to a private,
competitive industry whether those firms select diffusion
or centrifuge technology.
There is virtually no disagreement that gaseous diffusion
technology must be used in at least the next increment
of capacity (of approximately 9 million SWU). Labelling
gaseous diffusion technology as "technologically
obsolescent" has no real relevance to the discussion
even if subsequent plant use centrifuge echnology, as
is now expected.
There is no clear basis for the GAO conclusion that
diffusion technology should be incligible for use in
a private venture, particular when the product from
both technologies are the same and when the firm
proposing to use diffusion technology (UEA) is already
facing competition for customers from centrifuge
ventures and foreign suppliers.
V
5
6. GAO concludes that the approach proposed in the Nuclear
Fuel Assurance Act is acceptable for centrifuge and
other "advance" technologies, but then concludes also
that private centrifuge ventures should accept more
risk --- a conclusion that is not justified.
While the U.S. is well ahead of other nations in
advanced centrifuge technology, we do not yet know the
economics and reliability, for example, of mass
production of the required large number of centrifuge
units, or the operating, maintenance and replacement
costs of such mass produced units.
Gas centrifuge technology, being less fully developed,
is inherently riskier than diffusion and there is
no reasonable expectation that less support (risk
sharing) by the Government would be required than is
necessary for diffusion technology.
Laser technology, the other "advanced" technology
referred to by GAO, is still in early stages of
development.
7. Contrary to the conclusions of the GAO report, a successful
private venture utilizing diffusion technology would have
a direct relationship to the success of private centrifuge
ventures. A successful diffusion venture could demonstrate:
That business and financial problems common to the
enrichment business -- regardless of technology used --
can be resolved; e. g., that private industry can
raise capital for enrichment plants and establish
satisfactory relationships with customers, both domestic
and foreign.
That private industry financing and ownership is possible
while maintaining all necessary controls and safeguards.
The end of uncertainty as to whether the Government
has the resolve to end its monopoly and take the steps
necessary for a transition to a private competitive
industry.
6
8.
GAO does not take into account a number of disadvantages
of its recommendation that a Government Corporation be
created to take over existing enrichment facilities and
an add-on facility -- as a means of avoiding the
budget and appropriations process; nor does it justify
its assertion that such a Corporation would be more
effective than current arrangements.
Creating a new Government corporation to take over
existing plants and for "just one more" Government-
owned plant would perpetuate the period of uncertainty
with respect to Government intentions toward ending
its monopoly and moving toward a private industry.
The GAO report does not consider the disruption of
ongoing ERDA and contractor resources that would be
entailed in such a major reorganization, the time that
would inevitably be involved in getting a new Corporation
started, and the high probability that ERDA resources
would be diverted from the management of (a) the program
to move toward a private industry, and (b) the main-
tainence of a viable "hedge" plan.
The assertion that management of Government facilities
by a new Government corporation would be "more effective"
is not justified in the report -- other than than
freedom from the budget and appropriations process, which
may be undesireable.
The proposal to create a Government corporation so
that costs of constructing a new Government owned plant
would not show up in the Federal Budget is somewhat
misleading. Also, whether borrowing is from the Federal
Treasury or the money market, net outlays would never-
theless add to the Federal Budget deficit--as in the
case of TVA. Borrowing from the Treasury would add to
the total national debt.
The report does not cite other diadvantages of the
proposal to create a Government Corporation and extend
the period of the Government's monopoly:
- Uranium enrichment is not an activity that can be
performed well only by the Federal Government. It
is essentially a commercial/industrial activity.
- Uranium enrichment service capacity must expand
rapidly over the next few years and that expansion
could occur in the private sector -- rather than
swell the Federal sector.
- As the Nation's reliance on nuclear power grows,
maintaining a Federal monopoly would expand Federal
control over the Nation's electrical energy supply.
- An entrenched Government corporation would make
efforts to end that monopoly even more difficult.
- The Nation would forego the advantages of private
competition which can provide incentives over the
long run for lower costs, improved efficiences and
technological advancement -- as well as a more diverse
base for utilities to obtain their fuel.
9. The GAO assertionsthat the UEA proposal contemplates
an "essentially riskless" environment and that it
would help little in creating a "viable competitive
private market" are incorrect. Also, the report's
analysis of risk is highly theoretical.
The project carries risk with respect to loss of all
(although remote) or part (not remote) of equity
and/or loss of return on equity, intangible costs
such as delayed payout, loss of alternative business
opportunities, loss of services of key personnel, etc.
The report does take adequately into account the
risks that private firms would have in dealing with multi-
billion dolalr projects involving classified technology
which as not yet been proven in a commercial setting.
Without exception, potential entrants in the enriching
industry and others who have studied this matter (with
the possible exception of GAO) have concluded that
uranium enrichment presents abnormal business risks.
The report fails to note that, in the absence of private
industry involvement, the Federal Government would bear
all risks for the entire life of the plant -- rather
than limited risk during the periods of construction
and initial commercial operation.
The report calls for "more risk" by centrifuge proposers,
but gives no indication of what risks might be acceptable
or how they should be obtained.
8
With respect to the contribution of diffusion of a
viable competitive market, it should be noted that:
- The diffusion process may well be competitive for
still future increments of capacity; its availability
in the market place would represent a positive force as
it relates to competition.
- Competition is already at work and UEA and the centrifuge
projects are both seeking customers.
10. The GAO does not consider some important factors before
reaching its conclusion that the UEA project (still under
negotiation) is "not acceptable" on the basis of
inadequate assumption of risks and "shifting" of risks
to the Government.
It is appropriate for the Government to warrant Govern-
ment-developed technology since the Government would
be paid a royalty for it. If the warranties were
inappropriate for diffusion, the same logic would
suggest they were inappropriate for centrifuge.
The chances of failure of a diffusion plant to
work are very remote. There is no real financial
risk to the Government inasmuch as Government costs,
if any, would be recovered from private projects.
Project owners do assume substantial risks.
The result of the undertaking (together with
centrifuge projects, which is essentially riskless
to the Government, would be the end of Government
involvement in new plants and a successful transition
to a competitive private uranium enrichment industry.
11.
The GAO report seems to reflect a strong bias against
the proposal from the Uranium Enrichment Associates (UEA) per-
haps because (a) it is the only proposal received by
the Government that may provide the basis for financing
and owning the next increment of capacity by private
industry, and (b) for unclear reasons, it uses diffusion
technology.
It should be recalled that UEA is responding to an
invitation for private industry participation issued
openly to all who were interested and qualified over
two years ago -- under a program established to
comply with the Atomic Energy Act which requires
that "The development, use and control of atomic
energy shall be directed so as to
strengthen
free competition in private enterprise.
12. The GAO report does not seem to recognize that following
its recommendations would substantially delay and may
prevent ever achieving a private competitive uranium
enrichment industry in the U.S.
The report supports legislation similar to the
Nuclear Fuel Assurance Act for "advance" technology
but undercuts the effort to move toward a private
competitive industry by recommending (a) summarily
rejecting the UEA proposal -- even before negotiations
on it are completed, (b) building more Government-owned
capacity, and (c) creating a Government Corporation.
Ending a Government monopoly is extremely difficult
but following the GAO recommendations would increase
the difficulty. The progress and momentum of the
last three years would be diminished or destroyed, and
uncertainty over the Government's real intensions
would emerge once again -- undercutting extensive
efforts that have been undertaken by private industry.
Building more Government-owned capacity (after a
period of many years without constructing new plants)
could not help but cast doubts -- among potential
private participants and customers, foreign and
domestic -- about current or future assertions
that the Government is serious in its efforts to
involve industry and end its monopoly.
Contrary to implications in th- report, there is
no strong reason to suggest that it would be easier or
more effective to gegin the transition to a competitive
industry with centrifuge technology.
November 10, 1975
Dear John:
The President has asked me to thank you for
your November 7 letter concerning the final
draft of the GAO report on the Nuclear Fuel
Assurance Act, and to assure you that the
points you raised are under review, You
will hoar further as soon as possible.
With kindent regards,
Sincerely,
Vernon C, Loon
Deputy Assistant
to the President
The Honorable John B. Anderson
House of Representatives
Washington, D.C. 20515
bee: w/incoming to Glenn Schleede for further action.
beer w/Incoming to Charles Lopport for coordination of reply
with Glenn Schleede
VCL:VO:vo
FORD is QERALD LIBRARY
11-10 10
JOHN ANDERSON
DISTRICT OFFICE:
16TH DISTRICT, ILLINOIS
Rock RIVER SAVINGS BUILDING
401 W. STATE STREET
CHAIRMAN, REPUBLICAN CONFERENCE
ROCKFORD, ILLINOIS 61101
MEMBER:
Congress of the United States
(815) 962-8807
JOINT COMMITTEE ON
WASHINGTON OFFICE:
ATOMIC ENERGY
house of Representatives
1101 LONGWORTH BUILDING
WASHINGTON, D.C. 20515
COMMITTEE ON RULES
(202) 225-5676
Clashington, D.C. 20515
MICHAEL J. MASTERSON
DON WOLFENSBERGER
ADMINISTRATIVE ASSISTANT
LEGISLATIVE ASSISTANT
November 7, 1975
The Honorable Gerald R. Ford
The White House
Washington, D.C. 20500
Dear Mr. President:
The final draft of the General Accounting Office report on the
Nuclear Fuel Assurance Act has been received by the Joint Committee on
Atomic Energy and has been forwarded to the members. In the report I
note that the Administration raised objections to the draft report and
those objections were addressed by GAO in the final draft.
It is not clear to me that the air has yet been completely cleared
on several important points. To aid in my developing a precise under-
standing of these issues, I would appreciate receiving Administration
comments on the final draft of this report as well as their responses to
your critique of the draft report.
With best personal regards, I am
Very truly yours,
fly B
JOHN B. ANDERSON
Member of Congress
JBA:ds
THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS
THE WHITE HOUSE
WASHINGTON
Jim Cannon to your substantive
response
cc to Illen Schleade
Vo has original X ack. +
give back tome
FORD : LIBRARY 079838
JOHN B. ANDERSON
DISTRICT OFFICE:
16TH DISTRICT, ILLINOIS
Rock RIVER SAVINGS BUILDING
401 W. STATE STREET
CHAIRMAN, REPUBLICAN CONFERENCE
ROCKFORD, ILLINOIS 61101
(815) 962-8807
MEMBER:
Congress of the United States
JOINT COMMITTEE ON
WASHINGTON OFFICE:
ATOMIC ENERGY
house of Representatives
1101 LONGWORTH BUILDING
WASHINGTON, D.C. 20515
COMMITTEE ON RULES
(202) 225-5676
Mashington, D.C. 20515
MICHAEL J. MASTERSON
DON. WOLFENSBERGER
ADMINISTRATIVE ASSISTANT
LEGISLATIVE ASSISTANT
November 7, 1975
The Honorable Gerald R. Ford
The White House
Washington, D.C. 20500
Dear Mr. President:
The final draft of the General Accounting Office report on the
Nuclear Fuel Assurance Act has been received by the Joint Committee on
Atomic Energy and has been forwarded to the members. In the report I
note that the Administration raised objections to the draft report and
those objections were addressed by GAO in the final draft.
It is not clear to me that the air has yet been completely cleared
on several important points. To aid in my developing a precise under-
standing of these issues, I would appreciate receiving Administration
comments on the final draft of this report as well as their responses to
your critique of the draft report.
With best personal regards, I am
Very truly yours,
that Aniterson
JOHN B. ANDERSON
Member of Congress
JBA:ds
FORD is OERALD LIBRARY
THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS
THE WHITE HOUSE
WASHINGTON
December 18, 1975
TO:
CHARLIE LEPPERT
FROM:
Glenn Glenny Schleede
For your information.
Attachment
FORD is LIBRARY 03RALD
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503
December 11, 1975
Honorable John B. Anderson
House of Representatives
Washington, D.C. 20515
Dear John:
In response to your recent letter to the President, I
am enclosing a copy of the Administration's comments
on the report issued by the General Accounting Office
on October 31, 1975, entitled "Evaluation of the
Administration's Proposal for Government Assistance
to Private Uranium Enrichment Groups."
Sincerely yours,
James T. Lynn
Director
Enclosure
December 9, 1975
ADMINISTRATION COMMENTS ON GAO'S REPORT, "EVALUATION OF
THE ADMINISTRATION'S PROPOSAL FOR GOVERNMENT ASSISTANCE
TO PRIVATE URANIUM ENRICHMENT GROUPS"
Contents
Page
Summary
1
Areas of Agreement with Report
1
Areas of Disagreement with Report
2
1. Inadequate picture of background and status of
proposals and steps contemplated in Adminis-
tration's proposal -- including Congressional
review.
2
2. Rejection of UEA proposal before negotiations
are completed.
3
3. Importance of commercializing both diffusion
and centrifuge technologies.
4
4. Government add-on plant not more "flexible".
5
5. Government add-on plant will not be on line
sooner.
5
6. Add-on plant is not less costly.
6
7. Private diffusion plant is important to
create a competitive industry.
7
8. Business risk to private ventures are
understated.
8
9. Under assesses Federal budget implications.
9
10. Ignores disadvantages of creating a Government
corporation.
10
11. Discourages achievement of a private
competitive uranium enrichment industry.
11
COMMENTS ON GAO'S REPORT, "EVALUATION OF THE ADMINISTRATION'S
PROPOSAL FOR GOVERNMENT ASSISTANCE TO PRIVATE URANIUM
ENRICHMENT GROUPS
SUMMARY
GAO concludes that (a) the proposal submitted by the private
consortium (UEA) that wishes to finance, build, own and
operate a gaseous diffusion plant should not be accepted,
(b) ERDA should be authorized to build an add-on diffusion
plant instead, (c) a Government corporation should be
established to manage Government uranium enrichment facili-
ties, and (d) legislation similar to. that proposed by the
Administration should be considered but that it should be
limited to agreements with firms proposing to use "advanced"
uranium enrichment technologies.
The Administration disagrees with these conclusions, including
the one that legislation should permit cooperation and tem-
porary assurances only for firms using centrifuge or other
advanced technologies.
The Administration believes the GAO report is deficient in
that it does not consider all relevant factors in its analysis
and some of the findings on which the overall conclusions are
based are incorrect.
These deficiencies are discussed in the pages that follow.
If a more complete analysis had been done, substantially
different overall conclusions could have resulted.
AREAS OF AGREEMENT
While disagreeing with the overall conclusions, there are a
number of areas where we do agree. For example, the report:
Highlights the need for an early commitment to
expand uranium enrichment capacity in the U.S.
Recognizes the desirability for the U.S. to be an
aggressive supplier of uranium enrichment services, to
achieve the nation's energy, economic and non-proliferation
objectives.
Explains that there is essentially no difference between
privately and Government-owned capacity in the ability
to safeguard nuclear materials and protect classified
technology.
2
Recognizes that the goal of private entry in uranium
enrichment is desirable.
Recognizes that provisions for Government cooperation
and temporary assurances similar to those proposed
in the Nuclear Fuel Assurances Act will be necessary
to overcome obstacles to private industry involvement.
AREAS OF DISAGREEMENT
1. The GAO Report does not give an adequate picture of
(a) the background leading to the four proposals now
before ERDA from private firms wishing to enter the
uranium enrichment industry, (b) the current status
of those proposals, and (c) the steps contemplated in
the Administration's proposal -- including Congressional
review -- which are designed to protect the public
interest.
The policy announced in 1971 of encouraging private
industrial involvement in uranium enrichment, the
enrichment technology access program begun by AEC
in 1972, and the requests for proposals from private
industry are fully consistent with Atomic Energy Act
which requires that "The development, use and control
of atomic energy shall be directed so as to
strengthen free competition in private enterprise.
Two different proposals have been received from
one venture, Uranium Enrichment Associates (UEA)
- One was received in December 1974 and this was
refined in ERDA-UEA discussions during February
and March 1975 which sought to clarify all the
forms of assistance that might be required rather
than to arrive at the minimum forms and levels of
assurances that might be required. The result was
reviewed by several agencies and several concluded
that the total package of possible forms of assistance
was unacceptable.
- A second proposal was submitted by UEA in May 1975
following intensive discussions which revealed
that substantially less in Government cooperation
and assurances was necessary than had been suggested
by the February-March discussions.
3
ERDA now has before it:
- One proposal from Uranium Enrichment Associates
(UEA), which firm proposes to build a full scale
diffusion (9 million separative work unit - SWU)
plant near Dothan, Alabama.
- Three proposals have been received -- from Exxon
Nuclear, Centar, and Garrett Corporation -- which
firms propose to build demonstration scale centrifuge
plants, which would later be expanded (to 3 million
SWU capacity). These proposals are being evaluated
and, if found acceptable, could provide the basis
for beginning negotiations toward cooperative agree-
ments, in January 1976.
An agreement could not be signed by ERDA with any of
the four firms until:
- The NFAA is enacted.
- An appropriations bill providing contract authority
to cover contingent liability is enacted (even though
no outlays are expected).
- ERDA is satisfied that cooperative agreements are
fully protective of the public interest.
- The Joint Committee on Atomic Energy would have a
45-day period during which it could act to disapprove
the agreement if it were not found satisfactory.
ERDA would keep the JCAE currently informed of the
status of prospective agreements during negotiations
and well before the 45-day period begins.
Thus far, the Congress has been asked to approve
only the NFAA. However, approval of the NFAA or of
an appropriations act would not constitute Congressional
approval of any potential cooperative agreement with
a prospective uranium enrichment firm.
2. The GAO report, in recommending that the UEA proposal
not be accepted, fails to take into account that it is
a proposal on which negotiations are still being held --
rather than a final agreement ready for Congressional
review.
4
Negotiations are still underway between ERDA and
UEA. There are unresolved issues on which ERDA is
not yet satisfied.
There will be a full opportunity for Congressional
review before an agreement with UEA (or any other
private venture) could be signed.
3. The GAO report does not recognize that commercialization
of both diffusion and centrifuge technologies is important
in the development of a competitive private uranium
enrichment industry and is in the National interest.
The economics of the diffusion process are well
established and the technology is highly developed
in the United States. Nevertheless, additional
improvements are possible. The diffusion process
represents the economic standard against which other
enrichment processes must compete and prove competitive
for subsequent increments of capacity.
The economics of the centrifuge process, though
projected to be attractive, have not yet been demon-
strated. There is universal agreement that centrifuge
plants should be constructed as rapidly as possible
to establish their economic potential, but it is
premature to rely solely on centrifuge technology and
regard gaseous diffusion as inappropriate for commercial
use.
The availability of more than one technology in a
commercial atmosphere would contribute to competition
and could benefit utilities and consumers of electricity.
When the product from both technologies is the same,
i.e., uranium enrichment, there is no basis for
excluding arbitrarily the use of one technology in
a private venture.
The firm proposing to use diffusion technology (UEA)
is already facing competition for customers from
centrifuge ventures and foreign suppliers.
5
4.
The GAO report contends that a Government add-on plant
would have more flexibility "to deal with problems of
changing demand or poor projections" and thus minimize
the amount of needed additional diffusion capacity, but
(a) it does not recognize that this is largely a moot
point since both alternatives require construction of a
full scale project and (b) "flexibility" would be enhanced
by commercialization of diffusion technology.
Several months ago, ERDA believed a half-size add-on
plant might be adequate to bridge the gap between
the expected capacity of existing plants and the time
when centrifuge plants would be available.
ERDA now believes a full-sized plant is required
because of the greater demand for uranium enrichment
capacity due to (a) higher prices for natural uranium
and (b) delays in the recycling of uranium and
plutonium.
The availability of both diffusion and centrifuge
technologies in a commercial framework provides more
flexibility with respect to meeting market requirements
than would a single technology.
The greatest flexibility would result from acceptable
cooperative agreements with all four of the firms now
having proposals before ERDA -- resulting in early
starts on four plants.
5. The GAO Report is incorrect in its conclusion that a
Government-owned add-on plant could be on line sooner
than a privately-owned free standing diffusion plant.
According to current schedules, the add-on plant
would not be on line sooner than the UEA plant.
Both of these schedules are subject to some
uncertainty and it is not now possible to conclude
that one could be available earlier than the other.
There are some uncertainties, particularly with
respect to electrical power supply, which now appear
greater for a Government add-on plant than for the
UEA's proposed plant:
FORD & LIBRARY 038870
6
- UEA plans to use electrical power from new nuclear
plants which -- because design, long lead-time procurement
and certain steps toward licensing are underway -
could be completed more quickly than usual for nuclear
plants.
- Such nuclear plants apparently are not available for
an add-on Government plant within the desired time
frame, making it necessary to build one or two new
1200 to 1300 megawatt coal-fired electrical plants.
ERDA believes such coal-fired plants could be built;
however, (a) the government may have to guarantee
securities for the plants and transmission lines,
and (b) plants would have to meet clean air require-
ments -- which add uncertainty --- including:
Prohibitions against significant deterioriation
in air quality, which requirements are now being
considered by Congress.
New Source Performance Standards and National
Ambient Air Quality Standards set by the U.S.
Environmental Protection Agency (EPA), and
perhaps new standards (e.g., for sulfates) which
have not yet been set.
Air pollutant emission limitations in air quality
implementation plans set by the state in which
plants are located.
Generally, requirements now applicable can be met
with the installation of scrubbers or the use of low
sulfur coal. One potential power supplier has in-
formed ERDA that scrubbers would not be used. If
low sulfur coal is needed, restrictions on strip
mining and other constraints on coal production and
transportation would also have to be met.
6. The GAO report is not correct in concluding that a
Government add-on plant is less costly than a private
stand-alone plant because (a) GAO considered only the
construction costs, and (b) when operating costs are
considered it appears that there would be little or no
difference in the costs of enrichment services from an
add-on plant and the proposed free standing plant.
:
FORD
GERALD
LIBRARY
7
GAO compares a $2.7 billion construction estimate
for a UEA stand-alone plant with a $2.1 billion estimate
for an add-on plant at Portsmouth, Ohio. Capital costs
account for about 40% of the price per SWU from a
diffusion plant.
Electrical power accounts for roughly the same percentage
of costs per SWU but the actual percentage will depend
on whether it comes from coal or nuclear sources. UEA
plans to use nuclear plants which provide electrical
power at rates below those of new coal fired plants.
A higher power cost differential of only 5 mills per
kilowatt hour could mean more than $11 per SWU in higher
operating costs at the add-on plant or more than $100
million per year when coal is used. The end result
is likely to be as high or higher cost per SWU.
GAO's cost comparison also fails to take into account
broader factors such as (a) the long term competitive
advantages of moving toward a private industry, and
(b) the greater potential of drawing on foreign sources
of financing (but without sacrificing U.S. control) if
private industry is involved.
7. The GAO report is incorrect in its conclusion that a
private diffusion plant would not contribute to the
creation of a private competitive industry.
At the present time the four esisting private ventures
(one diffusion and three centrifuge) are at the pro-
posal stage, but already there is competition among
them for customers, both domestic and foreign.
A successful diffusion venture would demonstrate:
- That business and financial problems common to the
uranium enrichment business -- regardless of the
technology used -- can be resolved; e.g., that
private industry can raise capital for enrichment
plants and establish satisfactory relationships
with customers, both domestic and foreign.
- That private financing and ownership is possible
while maintaining all necessary controls and
safeguards.
8
- The end of uncertainty as to whether the Government
has the resolve to end its monopoly and take the
steps necessary for a transition to a private,
competitive industry.
8. The GAO report's analysis of risk (a) understates the
risk to UEA, (b) overestimates the risk to the Federal
Government, and (c) concludes that private firms using
centrifuge technology should assume more risk, but
doesn't say what level is acceptable or how it should be
obtained.
As indicated earlier, the UEA proposal is still under
negotiation and thus no final conclusion about the
risk can be stated. However, it is clear from the
proposal that substantial risks are involved. For
example:
- At a minimum, domestic equity investors
will be putting up more than $200 million.
All or part of that equity could be lost.
The chances of losing at least part of the equity
is not remote.
- Return on equity is also at risk. In addition,
there would be less tangible costs such as delayed
payout on investments, loss of alternative business
opportunities, services of key managerial and
technical personnel, etc.
- Once commercial operability of a plant has been
established, the obligations of the Government
would terminate and the private sector would carry
essentially full risk for the expected 25 or more
years of plant operation.
The report does not take adequately into account the
risks that private firms would have in dealing with
multi-billion dollar projects involving classified
technology which has not been proven in a commercial
setting.
In its assessment of Government risk-sharing, the
report fails to consider adequately that:
- even under the most severe consequences (need for
a Government take-over of a project) -- let alone
LIBRARY GERALD R. FORD
9
the more likely circumstances, Government funds
would not be at risk. Government funds would all
be recovered, normally from the private project
but, in any case, from the sale of uranium enrich-
ment services.
- under the GAO alternative where the Government
finances and owns an add-on plant, the Government
bears all the risks for the entire life of the
plant.
As indicated earlier, advanced technologies have more
uncertainties and are likely to require more Government
sharing of risk. In any case, the report is very vague
as to what level or type of risk that would be considered
acceptable by GAO.
As extensive hearings before the Joint Committee on
Atomic Energy have indicated, all who have studied
the issue have concluded that uranium enrichment
presents abnormal business risks.
9. The GAO report does not give adequate attention to the
budget impact of its recommendation for an add-on plant
in light of (a) overall budgetary constraints, (b) probable
need for more Federal assistance in other nuclear energy
research, development and demonstration, (c) competition
for funds from other programs, including non-nuclear energy
R&D, or (d) the long period of time before taxpayers are
repaid for past and current investment in Government
enrichment facilities -- let alone a new add-on plant.
The need to get Federal spending under control, as
reflected in efforts in the Administration and the
Congress, raises serious doubts as to the wisdom of
committing more than $2.8 billion for construction
and initial operation of an add-on Government plant.
Large sums are already being devoted to nuclear programs
(e.g., over $400 million for the breeder; over $200
million in net outlays for uranium enrichment) in
FY 1976. These programs and other nuclear R&D will
require even more in future years. For example,
pressures are increasing for the Government to do
more on reprocessing and long term waste management.
10
A commitment of Federal funds for enrichment --
where technology is available and industry willing
to provide financing -- could preclude additional
funding for other nuclear areas, as may be appropriate.
If more money has to be spent on uranium enrichment,
it probably will become increasingly difficult to
explain the relative funding levels for nuclear
and non-nuclear programs -- or the relationship to
other competing demands for Federal funds.
With the commitments already made to uranium
enrichment in Federal plants, there will not be
a cumulative positive cash flow until the 1980's.
Building a Government add-on plant would incur
costs which would not be recouped until after 1990.
10. The GAO report does not identify many disadvantages
associated with the creation of a Government corporation
to run present Government plants and an add-on plant or
justify its conclusion that a Government corporation would
be more effective than the current arrangements for managing
enrichment plants.
The proposal to create a Government corporation so that
costs of constructing a new Government owned plant would
not show up in the Federal Budget is misleading. Whether
borrowing is from the Federal Treasury or the money
market, net outlays would nevertheless add to the Federal
Budget deficit -- as in the case of TVA. Borrowing
from the Treasury would add to the total national debt.
Creating a new Government corporation to take over
existing plants and for "just one more" Government-
owned plant would create a new bureaucracy that would
tend to perpetuate the period of uncertainty with
respect to Government intentions toward ending its
monopoly and moving toward a private industry.
The assertion that management of Government facilities
by a new Government corporation would be "more effective"
is not justified in the report -- other than freedom
from the budget and appropriations process, which may
be undesirable.
11
The GAO report does not consider the disruption of
ongoing ERDA and contractor resources that would be
entailed in such a major reorganization; the time that
would inevitably be involved in getting a new corpora-
tion started; and the high probability that ERDA
resources would be diverted from the management of (a)
the program to move toward a private industry, and (b)
the maintenance of a viable contingency plan to build
a Government plant in the unlikely event private ventures
did not succeed.
The report does not cite other disadvantages of the
proposal to create a Government corporation and extend
the period of the Government's monopoly:
- Uranium enrichment is not an activity that should
be performed by the Federal Government. It is
a commercial/industrial activity.
- Uranium enrichment service capacity must expand
rapidly over the next few years and that expansion
could occur in the private sector -- rather than
enlarge the Federal sector.
- The Nation would forego the advantages of private
competition which would provide incentives over the
long run for lower costs, improved efficiences, and
technological advancement -- as well as a more diverse
base for utilities to obtain their fuel -- and which
will more aggressively pursue foreign markets for
uranium enrichment.
11. The GAO report does not seem to recognize that following
its recommendations would substantially delay and may
prevent ever achieving a private competitive uranium
enrichment industry in the U.S.
Ending a Government monopoly is extremely difficult
and following the GAO recommendations would increase
the difficulty. The progress and momentum of private
industry over the last three years would be diminished
or destroyed, and uncertainty over the Government's
real intentions would emerge once again -- undercutting
the extensive efforts that have been undertaken by
private industry. Building more Government-owned
12
capacity (after a period of about 20 years without
constructing new plants) could not help but cast
doubts -- among potential private participants and
customers, foreign and domestic -- about current or
future assertions that the Government is serious in its
efforts to involve industry and end its monopoly.
Contrary to implications in the report, there is no
reason to suggest that it would be easier or more
effective to begin the transition to a competitive
industry with centrifuge technology when diffusion
technology is at hand.