U.S. Enrichment Corporation Privatization
USEC's Delays in Providing Data Hinder DOE's Oversight of the Uranium Decontamination Agreement Gao ID: GAO-06-723 June 16, 2006Prior to the 1998 privatization of the U.S. Enrichment Corporation (USEC), the Department of Energy (DOE) transferred about 45,000 metric tons of natural uranium to USEC to, among other things, be enriched to fulfill USEC's nuclear fuel contracts. About 9,550 metric tons were subsequently discovered to be contaminated with technetium, a radioactive metal, at levels exceeding the specification for nuclear fuel. Although DOE has not admitted liability, DOE and USEC have entered into agreements under which USEC is decontaminating the uranium. DOE has compensated USEC for its decontamination costs in several ways, including using proceeds from sales of government-owned clean uranium. GAO was asked to examine (1) USEC's progress in decontaminating uranium and (2) DOE's oversight of USEC's decontamination activities. A forthcoming GAO legal opinion will address DOE's legal authority to transfer clean uranium to USEC for sale and use the proceeds to compensate USEC for its decontamination services.
As of February 28, 2006, USEC reported that about 10 percent of the contaminated uranium that DOE transferred to the corporation prior to privatization remains to be decontaminated, or about 960 metric tons of the 9,550 contaminated metric tons transferred. DOE estimates USEC will finish decontaminating this uranium by the end of December 2006. Through the end of February 2006, USEC has invoiced DOE for a total of about $152 million in decontamination costs. DOE takes several steps to oversee USEC's uranium decontamination activities. DOE reviews monthly USEC reports that detail, among other things, the corporation's decontamination progress and costs. In addition, DOE, through the Defense Contract Audit Agency (DCAA), audits USEC to verify that USEC's actual costs match the amount DOE paid to the corporation and are in accordance with the provisions of the uranium decontamination agreement. However, DOE has had difficulties completing some of its oversight because of USEC's delays in providing financial data and other information. DOE officials told us that USEC sometimes takes up to 6 months before responding to its inquiries about the corporation's monthly reports. As a result, DOE has some concerns about whether USEC consistently conducts decontamination work in a cost-effective manner. DCAA has also experienced significant delays obtaining USEC financial data that it requires for its annual audit of USEC's costs. DOE uses these data to verify that USEC's actual decontamination costs match what DOE paid USEC. Until DCAA's audits are complete, DOE cannot be certain whether the compensation it provided to USEC matches USEC's actual decontamination costs. As a result, USEC may need to repay money to the government or DOE may owe additional money to USEC upon completion of these audits. In addition, the Congress has not received information to assist in the appropriations process on the progress and costs of decontamination.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-06-723, U.S. Enrichment Corporation Privatization: USEC's Delays in Providing Data Hinder DOE's Oversight of the Uranium Decontamination Agreement
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GAO Highlights:
Highlights of GAO-06-723, a report to the Chairman, Committee on Energy
and Natural Resources, U.S. Senate.
Why GAO Did This Study:
Prior to the 1998 privatization of the U.S. Enrichment Corporation
(USEC), the Department of Energy (DOE) transferred about 45,000 metric
tons of natural uranium to USEC to, among other things, be enriched to
fulfill USEC‘s nuclear fuel contracts. About 9,550 metric tons were
subsequently discovered to be contaminated with technetium, a
radioactive metal, at levels exceeding the specification for nuclear
fuel. Although DOE has not admitted liability, DOE and USEC have
entered into agreements under which USEC is decontaminating the
uranium. DOE has compensated USEC for its decontamination costs in
several ways, including using proceeds from sales of government-owned
clean uranium. GAO was asked to examine (1) USEC‘s progress in
decontaminating uranium and (2) DOE‘s oversight of USEC‘s
decontamination activities. A forthcoming GAO legal opinion will
address DOE‘s legal authority to transfer clean uranium to USEC for
sale and use the proceeds to compensate USEC for its decontamination
services.
What GAO Found:
As of February 28, 2006, USEC reported that about 10 percent of the
contaminated uranium that DOE transferred to the corporation prior to
privatization remains to be decontaminated, or about 960 metric tons of
the 9,550 contaminated metric tons transferred. DOE estimates USEC will
finish decontaminating this uranium by the end of December 2006.
Through the end of February 2006, USEC has invoiced DOE for a total of
about $152 million in decontamination costs. DOE takes several steps to
oversee USEC‘s uranium decontamination activities. DOE reviews monthly
USEC reports that detail, among other things, the corporation‘s
decontamination progress and costs. In addition, DOE, through the
Defense Contract Audit Agency (DCAA), audits USEC to verify that USEC‘s
actual costs match the amount DOE paid to the corporation and are in
accordance with the provisions of the uranium decontamination
agreement. However, DOE has had difficulties completing some of its
oversight because of USEC‘s delays in providing financial data and
other information. DOE officials told us that USEC sometimes takes up
to 6 months before responding to its inquiries about the corporation‘s
monthly reports. As a result, DOE has some concerns about whether USEC
consistently conducts decontamination work in a cost-effective manner.
DCAA has also experienced significant delays obtaining USEC financial
data that it requires for its annual audit of USEC‘s costs. DOE uses
these data to verify that USEC‘s actual decontamination costs match
what DOE paid USEC. Until DCAA‘s audits are complete, DOE cannot be
certain whether the compensation it provided to USEC matches USEC‘s
actual decontamination costs. As a result, USEC may need to repay money
to the government or DOE may owe additional money to USEC upon
completion of these audits. In addition, the Congress has not received
information to assist in the appropriations process on the progress and
costs of decontamination.
Figure: USEC‘s Inventory of Technetium-Contaminated Uranium, June 2002
through February 2006:
[See PDF for Image]
[End of Figure]
What GAO Recommends:
GAO recommends that DOE (1) clarify with USEC the department‘s
oversight role in the uranium decontamination agreement and (2) report
to the Congress on, among other things, USEC‘s progress in
decontaminating uranium and its costs. DOE agreed with our
recommendations.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-723].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Gene Aloise at (202) 512-
3841 or aloisee@gao.gov.
[End of Section]
Report to the Chairman, Committee on Energy and Natural Resources, U.S.
Senate:
United States Government Accountability Office:
GAO:
June 2006:
U.S. Enrichment Corporation Privatization:
USEC's Delays in Providing Data Hinder DOE's Oversight of the Uranium
Decontamination Agreement:
Uranium Decontamination:
GAO-06-723:
Contents:
Letter:
Results in Brief:
Background:
USEC Reported About 10 Percent of the Contaminated Uranium DOE
Transferred to the Corporation before Privatization Remains to Be
Decontaminated:
DOE's Oversight of USEC's Uranium Decontamination Activities Has Been
Hindered by Delays in Obtaining Key Information from USEC:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the Department of Energy:
Appendix III: Comments from USEC, Inc.
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: USEC's Invoiced Decontamination Costs:
Table 2: USEC's Schedule for Submitting Decontamination Cost Data to
DCAA:
Figures:
Figure 1: USEC's Uranium Decontamination Process:
Figure 2: USEC's Inventory of Technetium-Contaminated Uranium, June
2002 through February 2006:
Figure 3: DOE's Inventory of Technetium-Contaminated Uranium, October
2004 through February 2006:
Abbreviations:
ASTM: American Society for Testing and Materials:
DCAA: Defense Contract Audit Agency:
DOE: Department of Energy:
HEU: highly enriched uranium:
ppb: parts per billion:
USEC: U.S. Enrichment Corporation:
United States Government Accountability Office:
Washington, DC 20548:
June 16, 2006:
The Honorable Pete V. Domenici:
Chairman:
Committee on Energy and Natural Resources:
United States Senate:
Dear Mr. Chairman:
Nuclear power plants rely on nuclear fuel that complies with certain
quality standards to ensure its efficiency and to allow workers to
handle it safely. One of the critical processes in the production of
nuclear fuel is uranium enrichment--processing natural uranium to
increase the concentration of the fissile uranium-235 isotope.[Footnote
1] Prior to 1992, nuclear power plants purchased uranium enrichment
services directly from the federal government and foreign suppliers.
Specifically, the Department of Energy (DOE) and its predecessors--the
Energy Research and Development Administration and the Atomic Energy
Commission--operated uranium enrichment plants in Tennessee, Ohio, and
Kentucky. Currently, only one uranium enrichment plant in the United
States remains in operation--the Paducah Gaseous Diffusion Plant in
Paducah, Kentucky.[Footnote 2]
The Energy Policy Act of 1992 created the U.S. Enrichment Corporation
(USEC) as a wholly owned government corporation to conduct and market
uranium enrichment services to commercial nuclear power plants. USEC
leases DOE's Paducah plant and is currently the sole domestic producer
of enriched uranium for use as fuel in commercial nuclear power
reactors.[Footnote 3] USEC also leases DOE's Portsmouth Gaseous
Diffusion Plant in Piketon, Ohio, which ceased enriching uranium in
2001. In July 1998, USEC was privatized through an initial public
offering that resulted in a payment of about $3.1 billion to the U.S.
Treasury.[Footnote 4]
Between USEC's creation in 1992 and its privatization in 1998, DOE
transferred about 45,000 metric tons of natural uranium to the
corporation for, among other things, fulfilling enrichment contracts
with USEC's customers. In early 2001, USEC notified DOE that up to
9,550 metric tons of this uranium was potentially contaminated with
technetium, a radioactive metal that is produced as a by-product of
fission in a nuclear reactor, at levels exceeding the commercial
specification for nuclear fuel.[Footnote 5] According to USEC,
replacing this contaminated uranium would cost USEC approximately $238
million in 2001. (With recent increases in the market price of uranium,
the 9,550 metric tons would now be worth approximately $1.1 billion.)
USEC requested that DOE replace USEC's contaminated uranium with
uncontaminated (or clean) uranium from DOE's inventory.
DOE did not admit legal liability for compensating USEC for the
contaminated uranium, nor, according to DOE officials, did DOE have
enough available clean uranium in its inventory to replace all of
USEC's contaminated uranium.[Footnote 6] However, for a variety of
reasons, discussed below, DOE and USEC agreed in June 2002 that, among
other things, USEC would process some of the contaminated uranium at
the Portsmouth plant for 15 months in order to remove the
technetium.[Footnote 7] USEC would initially pay about half of the
costs associated with decontamination, and DOE would compensate USEC by
taking title to some of USEC's depleted uranium--a product that is
generated by the uranium enrichment process--reducing USEC's costs for
eventually disposing of this material. As part of the June 2002
agreement, USEC agreed to formally release the department from any
potential claims of liability as USEC decontaminated the uranium. In
addition, the June 2002 agreement permitted DOE to replace some of
USEC's contaminated uranium with clean uranium from its own inventory.
Under these circumstances, USEC also agreed to release DOE from any
potential claims of liability if the contaminated uranium was replaced.
According to DOE and USEC officials with whom we spoke and documents we
reviewed, the June 2002 agreement to compensate USEC for
decontaminating uranium provided the following benefits:
* Maintaining a domestic uranium enrichment capability--USEC committed
to maintain a minimum production level at the Paducah plant, which is
now the sole domestic plant for producing enriched uranium following
USEC's decision to cease uranium enrichment at Portsmouth. Under the
USEC Privatization Act of 1996, USEC has an exclusive option to lease
DOE's uranium enrichment plants.
* Deploying advanced uranium enrichment technology--The June 2002
agreement placed USEC on a clearly defined schedule to deploy a new,
more advanced uranium enrichment technology. USEC's current enrichment
technology--gaseous diffusion--was developed during World War II.
Gaseous diffusion is very inefficient and costly, compared with the
technology USEC's foreign competitors use, which is based on using
centrifuges to enrich uranium. For example, centrifuges require
approximately 5 percent of the energy required by gaseous diffusion
technology. In the June 2002 agreement, USEC committed to deploy an
advanced technology by 2009. DOE and USEC believe that enriching
uranium through centrifuges will increase USEC's cost effectiveness and
competitiveness and will help ensure a continued domestic uranium
enrichment capability.
* Employing workers at the Portsmouth plant--Decontamination facilities
at the Portsmouth plant would employ USEC employees who would otherwise
be laid off following USEC's decision to close the plant. Under the
USEC Privatization Act of 1996, DOE is responsible for a portion of
severance and other worker transition costs incurred in connection with
persons who formerly worked for DOE or a DOE contractor and who now
work for USEC. Therefore, continuing the employment of these
individuals allows DOE to delay or avoid these costs.
* Reducing uranium decontamination costs--Both DOE and USEC have
uranium inventories that need to be decontaminated before the uranium
can be sold commercially. DOE believed that having USEC conduct the
decontamination work would result in significant cost savings. This is
because USEC has the unique capability of using uranium at the Paducah
plant that does not need to be decontaminated as much as would be
required if the uranium were to be sold commercially. In addition, USEC
officials told us that the corporation developed an exclusive, cost-
effective technology for separating technetium from the contaminated
uranium, which these officials said gave USEC a unique capability to do
the decontamination work.
Decontamination of uranium under the June 2002 agreement between DOE
and USEC was intended, as a trial period, to last for 15 months. At the
conclusion of this period, USEC would release DOE from potential claims
of liability for at least 2,800 metric tons of contaminated uranium,
regardless of the amount actually decontaminated.[Footnote 8] Over the
15-month period of the June 2002 agreement, DOE would attempt to find
other entities besides USEC that could either replace or remediate
USEC's remaining contaminated uranium. DOE assessed various options and
concluded that USEC's decontamination process and existing facilities
made the corporation uniquely qualified to decontaminate the uranium.
As a result, in April 2004, DOE agreed that USEC should continue
decontaminating uranium.[Footnote 9] DOE agreed to compensate USEC for
these decontamination costs using appropriated funds instead of taking
title to USEC's depleted uranium as under the 2002 agreement.[Footnote
10]
In December 2004, DOE and USEC signed another agreement--which DOE and
others have referred to as a "barter arrangement"--that again modified
the way USEC was compensated. Instead of using appropriated funds to
compensate USEC for its decontamination costs, as done under the April
2004 agreement, or taking title to USEC's depleted uranium, as done
under the June 2002 agreement, DOE agreed to transfer clean uranium
from its inventory to USEC. USEC would then sell this clean uranium on
the commercial market and use the proceeds to pay its decontamination
costs for its remaining contaminated uranium.[Footnote 11] These
proceeds also would be used to compensate USEC for its costs of
decontaminating uranium in DOE's inventory.
DOE did not request appropriations for uranium decontamination for
fiscal year 2005. Instead, DOE compensated USEC for its decontamination
work, as specified in the December 2004 agreement. In November 2005,
Congress expressly authorized DOE to "barter, transfer or sell uranium"
and to use any proceeds from such transactions to decontaminate uranium
held by DOE.[Footnote 12]
Questions have been raised about certain aspects of the December 2004
agreement, under which proceeds from the sale of government-owned
uranium are used to compensate USEC for its decontamination services.
Because DOE has decided not to seek appropriations to compensate USEC,
Congress has not received information on the decontamination program's
progress and costs as part of the annual budget process. We will be
issuing a separate legal opinion regarding DOE's legal authority to
transfer clean uranium to USEC for commercial sale and to use the
resulting proceeds to compensate USEC for its decontamination services
prior to November 2005.
In this context, we examined (1) USEC's progress in decontaminating
uranium and (2) DOE's oversight of USEC's uranium decontamination
activities. To accomplish these objectives, we reviewed the
preprivatization agreements between DOE and USEC that transferred
uranium inventories to the corporation; memorandums of agreement and
memorandums of understanding between DOE and USEC on the
decontamination of technetium-contaminated uranium; DOE and USEC
memorandums concerning DOE's potential liability to replace uranium or
compensate USEC; Federal Acquisition Regulations; and relevant
statutes, including the Energy Policy Act of 1992 and the USEC
Privatization Act of 1996. We also examined USEC reports detailing its
monthly progress in decontaminating uranium and its commercial sales of
uranium. We also reviewed decontamination cost data USEC submitted to
DOE. In addition, we interviewed officials from DOE's Office of Nuclear
Energy; Office of General Counsel; Office of Environmental Management;
Office of the Under Secretary for Energy, Science, and Environment; the
Portsmouth and Paducah Project Office; and the Oak Ridge Operations
Office. We interviewed officials with USEC and officials from the
Defense Contract Audit Agency (DCAA), which conducts audits of USEC's
decontamination costs. Additional information on our scope and
methodology can be found in appendix I. We conducted our work between
August 2005 and May 2006 in accordance with generally accepted
government auditing standards, which included an assessment of data
reliability and internal controls that determined that the data were
sufficiently reliable for the purposes of this report.
Results in Brief:
As of February 28, 2006, USEC reported that about 10 percent of the
contaminated uranium that DOE transferred to the corporation prior to
privatization remains to be decontaminated, or about 960 metric tons of
the 9,550 metric tons transferred. USEC estimates it will finish
decontaminating this uranium by the end of December 2006. Through the
end of February 2006, USEC has invoiced DOE about $152 million for its
decontamination costs. About $62 million of USEC's compensation was
from the proceeds generated from the commercial sale of clean uranium
that DOE transferred as compensation under the December 2004 agreement.
DOE has also paid USEC about $62 million from appropriations to
compensate the corporation for its decontamination services. In
addition, DOE has compensated USEC for its decontamination services by
taking title to approximately 30,000 metric tons of USEC's depleted
uranium, which DOE estimated in 2004 would cost the department about
$27 million to convert to a more stable form.
DOE takes several steps to oversee USEC's uranium decontamination
activities; however, DOE has been unable to complete some of its
oversight because it has not obtained some financial and other data
from USEC. For example, DOE reviews monthly USEC reports that detail,
among other things, the corporation's decontamination progress and
costs, remaining contaminated uranium inventories to be processed, and
technetium contamination levels in uranium cylinders before and after
processing. In addition, DOE, through DCAA, audits USEC to verify
USEC's actual decontamination costs. Finally, DOE tracks the proceeds
USEC generates from selling clean uranium that DOE transferred to the
corporation under the December 2004 agreement.
DOE has had difficulties completing some of its oversight because of
USEC's delays in providing financial data and other information. DOE
officials told us that USEC sometimes takes up to 6 months before
responding to its inquiries about the corporation's monthly reports. As
a result, DOE has some concerns about whether USEC consistently
conducts decontamination work in a cost-effective manner. For example,
when DOE questioned USEC about its worker training and overtime
charges, DOE officials told us that USEC often only selectively
responded to these questions. USEC officials told us that they attempt
to provide answers in a timely way, but that delays sometimes occur
when personnel from both DOE and DCAA were asking similar questions.
USEC officials told us that they were sometimes confused about whether
they should respond to DOE, DCAA, or both. Moreover, USEC indicated
that DOE's inquiries were often poorly communicated and not delivered
to the appropriate personnel in a timely fashion. In addition, USEC
officials told us that DOE often requests very detailed data that are
difficult to provide quickly. DOE officials indicated that they
believed that the inquiries were adequately communicated and delivered
to the appropriate USEC personnel in a timely fashion. Further, DOE
officials stated that although some inquiries were more detailed, this
certainly would not have justified the delays in USEC's responses to
the department. DCAA has also experienced significant delays obtaining
the detailed financial data from USEC that it requires for its annual
audit of USEC's costs, which DOE uses to verify that USEC's actual
decontamination costs match what DOE paid USEC. A Federal Acquisition
Regulation contract clause, included in DOE's agreements with USEC,
requires USEC to provide financial data detailing its indirect costs
within 6 months of the end of each of USEC's fiscal years.[Footnote 13]
DCAA requires this information to complete its audit. However, USEC has
not submitted these data to DOE or DCAA for its uranium decontamination
costs covering any period since July 2002, and DCAA has yet to complete
an annual audit of these costs. USEC officials told us the delays are
due to a number of factors, including limited internal accounting
resources that are familiar with federal requirements and extended
negotiations with DOE over how employee pension and post-retirement
benefits should be treated in USEC's accounting systems. DOE officials
with whom we spoke disagreed that these reasons should cause such a
significant delay in providing this information to DCAA. Until DCAA's
audits are complete, DOE cannot be certain whether the compensation it
provided to USEC matches USEC's actual decontamination costs. As a
result, upon completion of these audits, USEC may need to pay money to
the government, or DOE may owe additional money to USEC. USEC asserts
that its decontamination costs have exceeded DOE's compensation of the
corporation by about $3 million. However, DOE has refused to pay this
difference until USEC supplies DCAA with the required financial data to
complete DCAA's audits.
We are recommending that the Secretary of Energy clarify with USEC (1)
the specific oversight steps that DOE and DCAA conduct and (2)
procedures that USEC should follow in responding to the department's
and DCAA's questions on the corporation's performance. In addition, to
aid the Congress's continuing oversight of DOE's activities, we are
further recommending that the Secretary provide information in DOE's
annual budget request on, among other things, the remaining amount of
uranium to be decontaminated, the total expected costs of the
decontamination, and DCAA's progress in auditing USEC's costs.
We provided a draft of this report to DOE and USEC for comment. DOE and
USEC agreed with the recommendations, but commented that the report
would be more accurate if it acknowledged the value and successful
performance of the program. We believe our draft report clearly
described what DOE and USEC officials told us were the benefits of the
uranium decontamination agreements.
Background:
Uranium undergoes a number of processing steps in the production of
nuclear fuel. To ensure its efficiency and ability to be used safely in
nuclear reactors, nuclear fuel must meet rigorous technical
specifications. For example, if certain contaminants are present in the
material, they must be at or below specified levels so as not to harm
workers or the environment or contaminate equipment.
Technetium, a radioactive metal that is produced as a by-product of
fission in a nuclear reactor, is considered a contaminant by commercial
specifications for nuclear fuel. Its presence in the nuclear fuel
production process can contaminate equipment, lead to increased worker
radiation doses, and raise environmental concerns. Therefore,
specifications require that uranium that is to be enriched should
contain no more technetium than one part per billion. USEC first
discovered that some of the uranium DOE previously transferred to the
corporation may have been contaminated with technetium in March 2000,
when DOE requested that USEC sample uranium storage cylinders for
technetium content.[Footnote 14] DOE believed that, during the 1970s,
technetium-contaminated recycled uranium that it processed through
certain production lines at the Paducah plant inadvertently left
residual amounts of technetium in certain equipment. Subsequent
processing of uranium using that equipment contaminated the
material.[Footnote 15] USEC was able to determine that up to 9,550
metric tons of the 45,000 metric tons of uranium that DOE had
transferred to the corporation prior to privatization had been
processed through the contaminated production lines at Paducah and
therefore was contaminated with technetium. USEC's initial sampling
indicated technetium contamination levels ranging from 11 to 148 parts
per billion, all in excess of the commercial specification of one part
per billion. In addition, DOE was able to determine that about 5,500
metric tons of uranium in its inventory had also been processed through
the contaminated production lines at the Paducah plant and was also
likely to be contaminated with technetium.
USEC conducts uranium decontamination work using equipment at the
Portsmouth plant. Figure 1 illustrates the decontamination process.
Figure 1: USEC's Uranium Decontamination Process:
[See PDF for image]
[End of figure]
USEC Reported About 10 Percent of the Contaminated Uranium DOE
Transferred to the Corporation before Privatization Remains to Be
Decontaminated:
Through the end of February 2006, USEC reported that about 960 metric
tons, or 10 percent, of the 9,550 metric tons of technetium-
contaminated uranium transferred to it by DOE prior to privatization
remains to be decontaminated. DOE estimates USEC will finish
decontaminating this uranium by the end of December 2006. In total,
USEC has decontaminated about 6,500 metric tons of its contaminated
uranium. Specifically:
* USEC decontaminated nearly 3,600 metric tons of its inventory between
June 2002 and December 2003 under the terms of the June 2002 agreement
between USEC and DOE.[Footnote 16] Under this agreement, DOE
compensated USEC for its decontamination costs by taking title to some
of USEC's depleted uranium, reducing USEC's costs for eventually
disposing of the material.[Footnote 17]
* About 2,050 metric tons of USEC's uranium were decontaminated between
December 2003 and December 2004 under the terms of the April 2004
agreement between USEC and DOE.[Footnote 18] DOE compensated USEC for
its decontamination costs using appropriated funds.[Footnote 19]
* USEC decontaminated approximately 842 metric tons of its uranium
between December 2004 and February 2006 under the December 2004
agreement, which provided that USEC cover its decontamination costs
using proceeds from the commercial sale of clean uranium transferred
from DOE's inventory to USEC for sale.
The June 2002 agreement between DOE and USEC also provided for DOE to
replace some of USEC's contaminated uranium with clean uranium from
DOE's inventory.[Footnote 20] In October 2004, DOE exchanged 2,116
metric tons of USEC's contaminated uranium with an equal amount of
clean uranium from its inventory.
In addition to USEC's inventory, since October 2004 USEC has been
decontaminating about 7,600 metric tons of contaminated uranium in
DOE's inventory: 2,116 metric tons exchanged with USEC in October 2004
and 5,517 metric tons of contaminated uranium that were already in
DOE's inventory. As of February 28, 2006, USEC had decontaminated 2,065
of the 2,116 metric tons it transferred to DOE in October 2004 and 248
of the 5,517 metric tons that was already in DOE's inventory.[Footnote
21] DOE estimates USEC will finish decontaminating the 5,327 metric
tons of contaminated uranium that remain in DOE's inventory by the end
of October 2008. Figures 2 and 3 illustrate the amount of technetium-
contaminated uranium in USEC's and DOE's inventories.
Figure 2: USEC's Inventory of Technetium-Contaminated Uranium, June
2002 through February 2006:
[See PDF for image]
Note: The large drop in USEC's inventory of contaminated uranium in
October 2004 is the result of DOE's transfer of 2,116 metric tons of
clean uranium to USEC in exchange for an equal amount of USEC's
contaminated uranium.
[End of figure]
Figure 3: DOE's Inventory of Technetium-Contaminated Uranium, October
2004 through February 2006:
[See PDF for image]
Note: DOE's inventory includes 2,116 metric tons of contaminated
uranium USEC transferred to the department in October 2004 in exchange
for 2,116 metric tons of clean uranium and the 5,500 metric tons of
contaminated uranium that were already in DOE's inventory.
[End of figure]
From June 2002 through the end of February 2006, USEC had invoiced DOE
for decontamination costs totaling about $152 million. Of this amount,
about $67 million was spent for direct costs, such as labor and
decontamination equipment and supplies, and about $85 million was spent
for indirect costs. These indirect costs included utilities and other
plant overhead costs and administrative costs. Table 1 details USEC's
decontamination costs.
Table 1: USEC's Invoiced Decontamination Costs:
Nominal dollars in thousands, unadjusted for inflation.
Fiscal Year: 2002;
Labor: $2,260;
Other direct costs: $633;
Indirect costs: $3,411;
Total: $6,304.
Fiscal Year: 2003;
Labor: 13,409;
Other direct costs: 3,116;
Indirect costs: 21,146;
Total: 37,672.
Fiscal Year: 2004;
Labor: 13,331;
Other direct costs: 3,112;
Indirect costs: 21,719;
Total: 38,162.
Fiscal Year: 2005;
Labor: 16,612;
Other direct costs: 3,854;
Indirect costs: 26,002;
Total: 46,469.
Fiscal Year: 2006 (through February 2006);
Labor: 7,940;
Other direct costs: 2,366;
Indirect costs: 12,983;
Total: 23,289.
Fiscal Year: Total;
Labor: $53,552;
Other direct costs: $13,082;
Indirect costs: $85,262;
Total: $151,896.
Source: GAO presentation of USEC data.
Note: Totals may not add because of rounding.
[End of table]
DOE has compensated USEC for its decontamination services in three
ways. First, DOE has paid USEC about $62 million in appropriated funds.
Second, DOE officials told us that the department has taken title to
about 30,000 metric tons of USEC's depleted uranium, which DOE
estimated in 2004 would cost the department about $27 million to
convert to a more stable form. Third, DOE compensated USEC for its
remaining decontamination services using the proceeds from the
commercial sale of clean uranium transferred from DOE to USEC pursuant
to the December 2004 agreement between USEC and DOE.
In total, DOE has transferred about 1,100 metric tons of clean uranium
to USEC for commercial sale under the December 2004 agreement. DOE
transferred about 900 metric tons of clean uranium to USEC in December
2004, which USEC sold to four different buyers, resulting in total
proceeds of $62 million. DOE officials told us that increases in market
prices for uranium resulted in more money than DOE originally
estimated. These additional proceeds allowed USEC to decontaminate
about 280 metric tons more uranium than DOE originally believed the
sale would fund. By February 2006, however, USEC had completely spent
the proceeds generated from the sale of the 900 metric tons of clean
uranium. Therefore, DOE transferred an additional 200 metric tons of
clean uranium to generate additional funds for decontamination. USEC
sold this uranium in February 2006, resulting in total proceeds of
$22.4 million, which USEC expects will fund its decontamination
services through June 2006. In addition, instead of transferring clean
uranium to USEC and having USEC conduct additional uranium sales, DOE
sold 200 metric tons of clean uranium in April 2006 to obtain money to
compensate USEC for its decontamination services. These sales resulted
in total proceeds of $23.4 million, which USEC expects will fund its
decontamination services from July 2006 through November 2006.
According to DOE officials, the department itself will likely conduct
additional uranium sales to fund USEC's decontamination services,
rather than transferring additional uranium to USEC.
DOE's Oversight of USEC's Uranium Decontamination Activities Has Been
Hindered by Delays in Obtaining Key Information from USEC:
DOE takes several steps to oversee USEC's uranium decontamination
activities, including reviewing monthly reports submitted by USEC
detailing decontamination progress and costs and tracking the proceeds
USEC generates from selling clean uranium that DOE has transferred to
the corporation under the December 2004 agreement. DOE has also
contracted with DCAA to audit USEC's decontamination costs. However,
DOE and DCAA have been unable to complete some of their oversight steps
because they have been unable to obtain some financial and other data
from USEC in a timely manner. As a result, DOE has some concerns about
whether USEC consistently conducts decontamination work in a cost-
effective manner and is currently uncertain whether the compensation
the department provided the corporation matches USEC's actual
decontamination costs.
DOE Oversees USEC's Activities by Reviewing Monthly Reports and DCAA
Audits and Conducting On-Site Verification:
DOE takes several steps to oversee USEC's uranium decontamination
activities. For example, DOE reviews a number of monthly reports that
USEC submits to the department. These monthly reports contain detailed
information on USEC's uranium decontamination activities. Specifically,
these reports include the following:
* Information on the amount of uranium decontaminated each month,
USEC's estimate of the remaining contaminated uranium in USEC's and
DOE's inventories, and data on the level of technetium contamination
for uranium storage cylinders before and after processing. These data
verify whether the uranium in each cylinder meets commercial
specification after it has been through the decontamination process.
* Summary data on USEC's monthly decontamination costs as well as
USEC's estimate of the project's total cost when the decontamination is
completed. USEC also submits a breakdown of its costs into specific
categories, such as, among other things, labor, employee benefits,
materials, site security, and electricity.
* Information on waste generated from the decontamination process.
DOE officials told us that they perform detailed analyses of these
reports to verify that USEC is consistently conducting decontamination
work in a cost-effective and efficient manner. If these officials
identify inconsistencies or trends in the data that generate concerns
or questions, they follow up with USEC each month through written
inquiries to resolve uncertainties and obtain adequate justification
for costs such as overtime and training. DOE officials at the
Portsmouth and Paducah plants also conduct on-site inspections of the
uranium cylinders in order to verify that USEC's and DOE's actual
uranium inventories match what appear in USEC's monthly reports.
DOE also tracks the proceeds from USEC's sale of clean uranium
transferred to the corporation under the December 2004 agreement. DOE
obtains copies of all sales contracts between USEC and the buyers of
this uranium. These contracts provide detailed information on the
buyer, the quantity sold, its sale price, and the date of the sale. In
addition, USEC provides DOE with a copy of the wire transfer between
the buyer and USEC to verify the receipt of funds. DOE requires that
USEC segregate the proceeds of the uranium sales into an account
separate from USEC's other funds. USEC maintains these funds in a
separate brokerage account that invests in tax-exempt short-term
securities. Each month, USEC submits a cost invoice to DOE for the
decontamination work it performed during the preceding month. DOE then
reviews and approves USEC's invoice and USEC withdraws money from the
brokerage account equivalent to its invoiced costs. DOE monitors the
withdrawal rate to estimate when more uranium will need to be sold to
obtain additional funding for the account.
Finally, DOE has also contracted with DCAA to audit the annual costs
submitted by USEC, which DOE uses to verify that USEC's decontamination
costs match what DOE paid the corporation. To receive compensation for
its indirect costs under the agreement, USEC provides estimates of its
costs to DOE annually. These estimates, called "provisional billing
rates," are the basis of DOE's compensation to USEC for its costs for
that year. USEC submits monthly invoices to DOE using the provisional
billing rates. DOE then compensates the corporation for its invoiced
costs. Following the end of each calendar year, USEC is to submit
financial data to DCAA that details the corporation's actual incurred
indirect costs. DCAA uses these data in its audits to verify that
USEC's incurred costs are reasonable.[Footnote 22] Any differences
between USEC's provisional billing rates and USEC's incurred
decontamination costs would mean either that DOE owes USEC additional
money or that USEC owes DOE for any compensation in excess of incurred
costs.
USEC's Delays in Responding to Inquiries and Providing Financial Data
Have Affected DOE's Oversight:
DOE officials told us that they have had difficulties receiving
complete and timely responses to their inquiries on USEC's monthly
reports. Following their detailed analyses of USEC's monthly reports to
verify that USEC is conducting decontamination work in a cost-effective
and efficient manner, DOE often submits written inquiries to USEC to
resolve inconsistencies or other concerns. For example, DOE officials
have submitted numerous inquiries to USEC questioning the amount of
overtime hours USEC has billed to the project, which these officials
think are unusually high. DOE officials have also questioned the large
amounts of worker training that USEC has billed to the project. In
addition, DOE officials have also inquired about certain materials USEC
has purchased. According to DOE officials, DOE submits about five
concerns per month to USEC. However, in its comments on a draft version
of this report, USEC told us that DOE submits about 15 inquiries per
month.[Footnote 23]
DOE officials told us that USEC sometimes takes up to 6 months before
responding to DOE's inquiries and then often only selectively respond
to certain questions. In comments on a draft version of this report,
USEC disagreed with DOE and stated that it has responded completely to
DOE's inquiries in an average of about 3 months. While USEC officials
told us they attempt to provide timely responses to DOE's inquiries,
they also stated that the inquiries often request very specific data
that are difficult to provide quickly. In addition, USEC officials told
us that delays sometimes occurred when personnel from both DOE and DCAA
were asking similar questions. USEC officials stated that they were
sometimes confused about whether they should respond to DOE, DCAA, or
both. Moreover, USEC indicated that DOE's inquiries were often poorly
communicated and not delivered to the appropriate personnel in a timely
fashion. DOE officials indicated that they believed that the inquiries
were adequately communicated and delivered to the appropriate USEC
personnel in a timely fashion. Further, DOE officials stated that
although some of the inquiries were more detailed, this would not
justify the delays in USEC's responses to the department. USEC
officials also told us that despite their belief that DOE's inquiries
are often unnecessary and redundant, USEC is working to improve the
timeliness and completeness of their responses. According to USEC
officials, they met with DOE in March 2005 to try to reduce the size
and redundancy of these inquiries. However, DOE officials stated that
the reason for the apparent redundancy was USEC's inability to respond
to the original inquiries in a timely manner.
DOE's inquiries have resulted in some benefits to the government. For
example, USEC officials told us that, in response to DOE's inquiries,
USEC has adjusted some monthly invoices to remove some charges USEC
incorrectly billed to the project because of administrative errors.
According to DOE officials, these errors were only discovered after DOE
submitted written inquiries to USEC after it had analyzed USEC's
monthly reports.
DCAA has also experienced delays in obtaining the financial data from
USEC that are necessary to complete its annual audits of USEC's
decontamination costs. At the end of each fiscal year, USEC has 6
months to submit financial data to DCAA detailing the corporation's
indirect costs for that year.[Footnote 24] DCAA then completes an audit
of these costs, which allows DOE to verify that USEC's actual incurred
costs for the year match what DOE paid the corporation. However, USEC
has not submitted incurred cost data to DOE or DCAA for decontamination
conducted during any time period from July 2002 to the present. DCAA
has not completed any of its full annual audits of USEC's incurred
decontamination costs. DCAA has completed five limited-scope audits of
USEC's incurred costs for the individual months of December 2004 and
January, March, May, and November 2005 to verify that USEC's incurred
costs are in accordance with applicable laws, regulations, and the
provisions of the December 2004 agreement. According to DCAA officials,
these limited audits of USEC's monthly incurred costs have not found
significant problems.[Footnote 25] In addition, DCAA has conducted
other audits to examine, among other things, USEC's internal controls
and accounting systems. According to USEC, these other audits have not
found significant deficiencies.
According to USEC officials, the delays in providing incurred cost data
to DCAA are caused by several factors including:
* limited internal accounting resources that are familiar with Federal
Acquisition Regulations and government cost accounting standards:
* protracted contract negotiations with DOE over how employee pension
and post-retirement benefits should be treated in USEC's accounting
systems.
DOE officials with whom we spoke disagreed that these reasons should
cause such a significant delay in providing incurred cost data to DCAA.
USEC has submitted a revised schedule to DOE that estimates when it
will provide incurred cost data to DCAA. (See table 2.)
Table 2: USEC's Schedule for Submitting Decontamination Cost Data to
DCAA:
Decontamination work completed in: July through December 2002;
Date on which USEC estimates incurred cost data will be submitted to
DCAA: August 31, 2006.
Decontamination work completed in: Calendar year 2003;
Date on which USEC estimates incurred cost data will be submitted to
DCAA: December 31, 2006.
Decontamination work completed in: Calendar year 2004;
Date on which USEC estimates incurred cost data will be submitted to
DCAA: June 30, 2007.
Decontamination work completed in: Calendar year 2005;
Date on which USEC estimates incurred cost data will be submitted to
DCAA: December 31, 2007.
Source: USEC.
[End of table]
In the absence of DCAA audits of USEC's annual decontamination costs,
DOE has taken steps to protect the government's interests by limiting
the amount of compensation paid to USEC. For example, USEC has stated
that its actual decontamination costs in calendar year 2004 exceeded
DOE's compensation for that year. However, because DCAA was unable to
complete its audit of USEC's costs for that year, DOE refused to pay
this difference. In addition, provisional billing rates were not
revised in 2005, and USEC was compensated using 2004 provisional
billing rates. USEC officials told us that the failure to revise the
provisional billing rates has only increased the difference between
USEC's actual decontamination costs and the amount the corporation is
being compensated. According to USEC officials, the difference between
the corporation's actual decontamination costs and the amount it has
been compensated is about $3 million and will continue to grow until
new billing rates are approved by DOE. DOE officials told us that they
plan to approve new billing rates in June 2006. Furthermore, DOE
officials said that the department will pay USEC any difference between
the corporation's actual decontamination costs and the amount already
compensated once USEC submits its actual incurred costs and DCAA has
been able to complete its audits.
Conclusions:
Almost 8 years after USEC's privatization, USEC and DOE are still
dealing with the cleanup of technetium-contaminated uranium. According
to DOE officials, the department decided to compensate USEC for
decontaminating uranium to resolve potential legal liabilities and to
help achieve other policy goals, such as the continuation of a reliable
domestic source of uranium enrichment today and in the future. In our
view, however, DOE has left the Congress and the public largely
uninformed about these policy goals, as well as about the amount of
progress USEC has made decontaminating uranium and the costs incurred
in doing so. DOE deserves credit for attempting to protect the public
interest by limiting the amount of compensation paid to USEC until the
corporation provides the key financial data that are necessary for
DOE's oversight of USEC's activities. However, because of the
complexity of the issues, including the need to achieve multiple policy
goals and the importance of maintaining a reliable, domestic source of
uranium enrichment, it is important for DOE to provide the Congress
with the information necessary for congressional oversight of the
department's activities.
Recommendations for Executive Action:
We are recommending that the Secretary of Energy clarify with USEC (1)
the specific oversight steps that DOE and DCAA conduct and (2)
procedures that USEC should follow in responding to the department's
and DCAA's questions on the corporation's performance.
In addition, to assist the Congress in its continuing oversight of the
department, we further recommend that the Secretary of Energy report
the following information in DOE's annual budget request to the
Congress until USEC has completed uranium decontamination:
* the remaining quantities of uranium in USEC's and DOE's inventories
that need to be decontaminated,
* the estimated costs of completing this decontamination work,
* the source of funds necessary to compensate USEC, and:
* the progress DCAA has made completing the annual audits of USEC's
decontamination costs.
Agency Comments and Our Evaluation:
We provided a draft copy of this report to DOE and USEC for their
review and comment. DOE's letter is presented as appendix II, and
USEC's letter is presented as appendix III.
In its written comments, DOE agreed with our recommendations, but
requested that any report to the Congress be done on an annual basis,
as part of the annual budget process. We agree with DOE and have
modified our recommendation to provide for DOE reporting uranium
decontamination performance and cost information in its annual budget
requests rather than semiannually.
Both DOE and USEC commented that the report would be more accurate if
it acknowledged the value and the successful performance of the
program. DOE's comments stated that the overall value of the program is
not stated clearly and is somewhat overshadowed by detailed issues
related to USEC's cost reports. USEC believes that the report would be
more precise if it acknowledged the successful technical and financial
performance of the program. The objectives of our review were to
provide factual information on USEC's progress in decontaminating
uranium and on DOE's oversight of USEC's uranium decontamination
activities. Contrary to DOE's and USEC's assertions, our draft report
clearly described what DOE and USEC officials told us were the benefits
of the uranium decontamination agreements, including the amounts of
uranium in USEC's and DOE's inventories that have been decontaminated,
the technology developed to decontaminate the uranium, the continued
employment of workers at the Portsmouth plant, and the maintenance of a
reliable, domestic source of uranium enrichment. However, it is also
important to note that these benefits did not come without significant
cost. Specifically, DOE has provided over $150 million in various forms
of compensation to USEC. To provide detailed information concerning the
overall value of the program was beyond the scope of this review.
USEC generally agreed with the draft report's findings and supported
our recommendations to DOE. However, USEC commented that the report
contained shortcomings in the presentation of its supporting analysis.
Specifically, USEC said that the draft report does not acknowledge that
USEC provided detailed invoice data to DOE that conformed to DOE's
rules on invoice review. On the contrary, our draft report contained
detailed information on the types of information provided to DOE
including reports on the amounts of uranium decontaminated each month,
the amounts of waste generated, and the decontamination costs incurred.
USEC states that DOE's rules contain no requirements for incurred cost
submissions. However, as our draft report stated, the contract clause
in Federal Acquisition Regulation §52.216-7, which is specifically
incorporated in DOE's agreements with USEC, requires contractors to
submit their final indirect cost rates, based on actual costs, to the
cognizant federal agency within 6 months of the end of the contractor's
fiscal year. USEC has not complied with this requirement. In addition,
USEC stated in its comments that the draft report's discussion of
USEC's delays in responding to DOE's follow-up questions is incomplete
and inaccurate. In response, we have modified our report to note USEC's
disagreement with DOE officials' statements regarding the number of DOE
inquiries each month and USEC's responsiveness.
USEC also stated that the draft report's title overstates the report's
findings and implies a materiality to USEC's delays that is not
supported in the body of the report. We disagree that the draft
report's title makes this implication. USEC recommends that the title
be changed to better reflect the report's recommendation that
clarification of procedures would improve DOE's oversight of the
uranium decontamination agreement. The purpose of the recommendation is
not for DOE to change its oversight of USEC's activities, as is implied
by USEC's suggested title. Rather, the recommendation is intended to
encourage DOE to better communicate its existing oversight steps to
USEC and instruct the corporation how to properly respond to the
department's inquiries.
DOE and USEC also provided technical comments that we incorporated into
the report as appropriate.
We will send copies of this report to interested congressional
committees, the Secretary of Energy, and USEC, Inc. We will also make
copies available to others upon request. In addition, the report will
be available at no charge on GAO's Web site at www.gao.gov.
If you or your staff have any questions about this report, please
contact me at (202) 512-3841 or aloisee@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made major contributions to
this report are listed in appendix IV.
Sincerely yours,
Signed by:
Gene Aloise Director, Natural Resources and Environment:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
At the request of the Chairman, Committee on Energy and Natural
Resources, United States Senate, we examined (1) the United States
Enrichment Corporation's (USEC) progress in decontaminating technetium-
contaminated uranium transferred to it by the Department of Energy
(DOE) prior to its privatization and (2) DOE's oversight of USEC's
decontamination activities.
To accomplish these objectives, we reviewed the preprivatization
agreements between DOE and USEC that transferred uranium inventories to
the corporation; memorandums of agreement and memorandums of
understanding between DOE and USEC on the decontamination of technetium-
contaminated uranium, signed in June 2002, April 2004, October 2004,
and December 2004; DOE and USEC legal memorandums detailing DOE's
potential liability to replace uranium or compensate USEC; Federal
Acquisition Regulations; and appropriate statutes, including the Energy
Policy Act of 1992 and the USEC Privatization Act of 1996. We also
interviewed officials from DOE's Portsmouth and Paducah Project Office;
Oak Ridge Operations Office; Environmental Management Consolidated
Business Center; Office of Environmental Management; Office of Nuclear
Energy; Office of General Counsel; and Office of the Under Secretary
for Energy, Science, and Environment. In addition, we interviewed USEC
officials at the corporation's headquarters in Bethesda, Maryland, and
at the Portsmouth Gaseous Diffusion Plant in Piketon, Ohio. We also
interviewed officials with the Defense Contract Audit Agency (DCAA),
which conducts audits of USEC's decontamination costs.
To determine USEC's progress in decontaminating uranium, we reviewed
USEC's monthly reports detailing its monthly decontamination progress
as well as remaining uranium inventories to be decontaminated. We also
reviewed USEC data on uranium storage cylinders processed each month
and the specific amount of uranium in each cylinder. We also obtained
USEC's monthly cost statements submitted to DOE, which detail USEC's
monthly costs under a variety of categories, such as labor, plant
overhead, and materials. We examined the reliability of uranium
decontamination and cost data by obtaining responses from DOE to a
series of data reliability questions covering issues such as data entry
access, internal control procedures, and the accuracy and completeness
of the data. We asked follow-up questions whenever necessary. We
determined that these data were sufficiently reliable for the purposes
of this report. Furthermore, we reviewed USEC's marketing strategy for
selling clean uranium transferred to the corporation by DOE under the
December 2004 agreement and reviewed USEC's sales reports submitted to
DOE detailing the amount of uranium USEC sold to each buyer, the
contract price of the uranium, its delivery date, and the date of
payment. In addition, we reviewed the sales contracts between USEC and
buyers of the clean uranium as well as invoices confirming receipt of
funds from each uranium sale. We also visited the Portsmouth Gaseous
Diffusion Plant site to inspect uranium decontamination facilities and
to interview DOE and USEC officials.
To assess DOE's oversight of USEC's uranium decontamination activities,
we interviewed DOE officials that conduct oversight of USEC's
decontamination work at the Portsmouth and Paducah Project Office, Oak
Ridge Operations Office, and the Environmental Management Consolidated
Business Center. We discussed DOE's processes for conducting analyses
of USEC's monthly reports on decontamination progress and costs and the
steps DOE takes to oversee USEC's sales of clean uranium transferred by
DOE under the December 2004 agreement. We also discussed DOE's
oversight with USEC officials. In addition, we obtained copies of five
audits conducted by DCAA of USEC's monthly decontamination costs and
interviewed DCAA auditors to discuss the objectives, scope, and
methodology of DCAA's audit work.
We conducted our work between August 2005 and May 2006 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the Department of Energy:
Department of Energy:
Washington, DC 20585:
June 9, 2006:
Mr. Gene Aloise:
Director:
Natural Resources and Environment:
Government Accountability Office:
Washington, D.C. 20548:
Dear Mr. Aloise:
Please find enclosed the Department of Energy's (DOE) comments on the
draft report entitled "U.S. Enrichment Corporation Privatization:
USEC's Delays in Providing Data Hinder DOE's Oversight of the Uranium
Decontamination Agreement (GAO-06-723). "
We agree with the GAO proposed recommendations. We are enclosing
comments to clarify and correct errors in the report. There are two
comments we request be incorporated in the final report. First, the
draft recommendation for DOE to report to Congress on a semi-annual
basis is more frequent than for other programs. We request that any
report to Congress be done on an annual basis to be part of the annual
budget process.
The second comment is that the overall value of the project is not
stated clearly and is somewhat overshadowed by detailed issues related
to U. S. Enrichment Corporation cost reports. We request GAO advise DOE
on their view of the value of uranium decontamination program.
If you have any further questions, please contact Mr. Mark W. Frei,
Deputy Assistant Secretary for Program Planning and Budget, at (202)
586-8754.
Sincerely,
Signed by:
James A. Risp:
Assistant Secretary for Environmental Management:
Enclosure:
[End of section]
Appendix III: Comments from USEC, Inc.
USEC:
A Global Energy Company:
Philip G. Sewell:
Senior Vice President:
301/564-3305 phone:
301/564-3205 fax:
June 1, 2006:
By Electronic and FedEx:
Ms. Diane B. Raynes:
Assistant Director,
Natural Resources & Environment:
United States Government Accountability:
Office 441 G Street, NW:
Washington, D.C. 20548:
raynesd@gao.gov:
Re: May 19, 2006 Draft of GAO Report 06-723:
Dear Ms. Raynes:
Thank you for the opportunity to comment on the draft GAO report. USEC
appreciates the GAO's professionalism and diligence in reviewing a
series of contractual arrangements between the Department of Energy
("DOE") and USEC Inc. and its subsidiary, the United States Enrichment
Corporation ("USEC"). USEC voluntarily entered into these agreements at
the request of DOE, and has implemented this program in a transparent
and cost effective manner. The success of this arrangement illustrates
how underutilized or impaired government assets can be used to achieve
government and industry mission objectives within a highly constrained
federal budget environment.
USEC supports the recommendations for follow-up executive action set
forth on page 23 of the draft report. We would be pleased to support
and assist DOE in actions to improve its oversight, and to keep the
Congress fully abreast of developments in the program. We also concur
with the conclusions that implicitly underlie these recommendations,
namely that the basic technical and financial management of the program
does not require any change, and that no additional legislative action
is warranted at this time. Further, USEC notes that neither DOE's
oversight of the program, the DCAA audits, or the GAO review,
identified any irregularity or impropriety in the management of the
proceeds from uranium sales or the application of those proceeds to the
costs of the program. As listed in Attachment B to this letter, DCAA
has conducted 14 separate audits of the program to date and has not
found a single significant deficiency.
USEC also agrees with the GAO finding, stated on page 7 of the report,
that "DOE has not been able to complete some of its oversight because
it has not obtained some financial data from USEC." Because our
principal line of business is supplying commercial uranium enrichment
to the private sector, we have not had a robust government contracts
management capability. However, our new CEO, John Welch, has directed
the company to take corrective action to address this shortcoming, and
we are increasing our cost accounting staff, engaging a consulting firm
to assist in preparing the incurred cost submissions, and working
diligently to complete those submissions as soon as possible.
While USEC generally agrees with the report's findings, we believe that
there are two shortcomings in the presentation of its supporting
analysis.[Footnote 26]:
First, the draft report does not acknowledge that USEC provided
detailed invoice data to DOE that conformed to the requirements of
DOE's rules on invoice review. The monthly project status reports and
the monthly invoices supplied by USEC provided ample information to
support DOE oversight of the program, notwithstanding the delay in the
submission of the incurred cost reports.
Each month, USEC provides a project status report that shows the amount
of material processed during the month and the amount of contaminated
material that remains to be processed. This report also indicates the
project waste generated and shipped off-site during the month. Also
included in the report are the current month and cumulative amounts
invoiced, unbilled indirect costs, allowable financing costs incurred,
and investment income earned from advanced sales of uranium.
Each month, USEC also provides DOE with an invoice that includes more
than 50 pages of supporting detail for amounts being invoiced. The
invoice is delineated into a work breakdown structure that allows DOE
to see the cost of the various types of work performed during the
month. The invoice detail also shows the hours worked by employee and
direct wages for each department performing the work. The invoice also
provides transaction descriptions for all of the "non-labor" costs
being invoiced. Included within the invoice detail is an application of
the approved billing rates used to invoice indirect costs. These
reports and invoices provide DOE with abundant data to evaluate the
program.
While the incurred cost submissions have been delayed, we note that the
most recent DOE rules, published in April 2006 and entitled "Invoice
Review Process" (Attachment D), contain no requirements for incurred
cost submissions, and no requirement that would prohibit DOE from
reviewing and approving invoices in the interim time pending submission
of incurred cost reports. These rules set forth guidance to ensure that
DOE personnel properly review invoices received from prime contractors.
They direct the review of invoices to ensure that materials and/or
services were delivered, costs were incurred in accordance with the
scope of work, and direct costs appear reasonable in light of known
performance. (See, for example, Attachment D at §2.1). The reports and
invoices submitted by USEC would seem to be more than adequate to
enable DOE to conduct the review contemplated by these rules[Footnote
27].
Second, the discussion in the draft report of USEC's delays in
responding to follow-up questions is incomplete and inaccurate. The
draft report states that DOE says it submits "about five concerns per
month" to USEC and that "USEC sometimes takes up to 6 months before
responding to DOE's inquiries and then only selectively responds to
certain questions." [Draft Report at 20] These claims are simply not
true. As is explained in Attachment A (at page 3) and illustrated on
Attachment C, in the 23 months between January 2004 and November 2005,
DOE sent USEC 342 inquiries, or an average of 15 a month. In 6 of the
months, more than 25 inquiries were made per month, and in June 2005
alone DOE made more than 50 inquiries. The statement that USEC
"sometimes takes up to 6 months before responding" is also inaccurate.
In fact there was one and only one such delay, and that delay was due
to a mix-up in communications discussed on page 20 of the draft report.
Since the inception of the program in June 2002, USEC's response time
to DOE questions has ranged from 4 to 184 days, with a weighted average
response time of 91 days. Given the number and frequency of inquiries,
we think this is a reasonable response time, but we are, nonetheless,
working to improve it.
We note, in this connection, that the report would be more accurate if
it distinguished between USEC's responses to DOE and its responses to
the DCAA. As we stated in our comments on the draft Statement of Facts,
in July 2005 USEC requested clarification as to who had lead audit
responsibility (i.e. DOE or DCAA) and was informed by DCAA that all
inquiries regarding financial information reflected on decontamination
invoices would be coordinated through DCAA. Accordingly, USEC always
provided prompt responses within 30 days to DCAA auditors since they
were the official cognizant auditor.
The statement that USEC has "selectively" responded to DOE's questions
is incorrect. We have answered some questions in phases, where portions
of answers were provided in the initial response, followed by remaining
portions at a later date. However, our records show that all questions
were eventually answered in their totality and that DOE has not, in
fact, made any inquiries about invoices for decontamination work
performed since November 2005.
We also believe that the statement on page 20 of the draft report that
DOE's inquiries have resulted in "some benefits" to the government
requires clarification. While the statement is, strictly speaking,
correct, the report does not mention the magnitude of the claimed
benefits. As far as we are aware, the only benefits derived from DOE's
inquiries are listed in footnote 24 of the draft report; namely, in two
instances it was determined that costs should be attributed to one
decontamination agreement rather than another and in one instance DCAA
questioned $3,600 in labor costs that USEC agreed to offset[Footnote
28]. We note in this connection that the DCAA did not believe these
issues were significant.
Finally, USEC recommends that the title of the report be modified to
better reflect the full scope of the body of the report. The draft
title overstates and is therefore inconsistent with the body of the
analysis and findings in the text of the draft report. The draft title
also implies a materiality to USEC's delays that is not supported in
the body of the report.
The draft report describes numerous steps that DOE takes to oversee the
decontamination program. These steps, which are discussed in detail on
pages 17 - 19 of the draft report, include reviewing USEC's monthly
reports and DCAA audits and conducting on-site verifications. The draft
report also identifies areas where USEC has been slow in providing
information to DOE, but the body of the report puts the issue into
better context. For example, page 7 of the draft report states that
"DOE has been unable to complete some of its oversight because it has
not obtained some financial and other data from USEC" [emphasis added].
Similarly, the summary page states that "DOE has had difficulties
completing some of its oversight. . ." [emphasis added] The draft title
does not capture the essence of the statements in the text, nor does it
reflect the recommendations in the report. A title that would better
reflect the body of the report would be, "Clarification of Oversight
Procedures Would Improve DOE's Oversight of the Uranium Decontamination
Agreement."
In conclusion, the uranium decontamination program has been a technical
and financial success. In our meeting on May 16, GAO representatives
stated that the GAO did not believe that an evaluation of the program
was within the scope of its assignment, and, therefore, GAO believed it
was neither necessary nor even appropriate to discuss whether. the
program had been a success. Nonetheless, USEC believes that the report
would be more complete if it acknowledged the successful technical and
financial performance of the program:
* Significantly, the GAO found no structural flaws in the December 2004
barter MOA or in USEC's implementation of that agreement. The
agreements enabled DOE to leverage an item of government inventory in a
manner that met program needs in an otherwise tight budget environment.
* USEC developed processes by which contaminated uranium could be
cleaned - processes that were being tested, but had not been proven, in
June 2002. The industry's knowledge base has been substantially
increased by this program.
* USEC has performed all decontamination work with no profit.
The program has preserved numerous high-quality jobs in southern Ohio.
* Because it operates the Paducah gaseous diffusion plant, USEC can
accept uranium that is still slightly contaminated with technetium and,
therefore, could not be sold commercially because it does not meet the
ASTM specification[Footnote 29]. This ability - unique to USEC - saved
the taxpayer nearly 50% of the cost of decontamination.
* In 2002 the cost of natural uranium was $30.50 KgU. Thus, had DOE
replaced USEC': 9,550 MTU in that year the cost to the taxpayer would
have been $291 million. Based on our experience to date, we anticipate
that the total cost of cleaning all 9,550 MTU to either the ASTM
specification or the (less restrictive) Paducah specification will be
approximately $168 million. It should be noted, in this connection,
that since 2002 the price of natural uranium has increased by almost
300% - to $120 per KgU. Replacing the contaminated material at current
prices would cost $1.1 billion.
* Finally, USEC has cleaned 2,057 MTU of DOE uranium under the program.
In total, through December 31, 2005, USEC had cleaned nearly 8,300 MTU
of contaminated UF6 at a cost of only $146 million - or about $17.61
per KgU. Given that, today, the market price for natural uranium is
about $120 per KgU, this represents a 681% return on investment.
Sincerely,
Signed by:
Philip G. Sewell:
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Gene Aloise, (202) 512-3841 or aloisee@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Diane B. Raynes (Assistant
Director), Ryan T. Coles, Jessica A. Evans, Doreen S. Feldman,
Christopher E. Ferencik, Neill W. Martin-Rolsky, Mehrzad Nadji, Omari
A. Norman, Susan A. Poling, Katherine M. Raheb, Keith A. Rhodes, Susan
D. Sawtelle, and Rebecca Shea made key contributions to this report.
FOOTNOTES
[1] Natural uranium, the raw material required for the uranium
enrichment process, comprises a mixture of several isotopes--forms of
the same element with different atomic weights. Less than 1 percent of
natural uranium is the isotope uranium-235--the fissile isotope used in
nuclear reactors and in nuclear weapons. Natural uranium is enriched to
a concentration of from 3 to 5 percent uranium-235 to produce fuel for
nuclear power reactors. Natural uranium that is enriched to a
concentration of over 90 percent uranium-235 is highly enriched and is
weapons-grade material.
[2] DOE closed the K-25 uranium enrichment plant in Oak Ridge,
Tennessee, in 1985. In addition, the Portsmouth Gaseous Diffusion Plant
in Piketon, Ohio, ceased enriching uranium in 2001. DOE was maintaining
the plant in a "cold standby" status to be restarted in the event of
significant disruptions in the supply of enriched uranium until it was
determined this condition was no longer required. DOE is currently
transitioning the plant from cold standby to cold shutdown status. DOE
expects to complete the transition to cold shutdown by September 30,
2006.
[3] USEC also acts as executive agent in the implementation of a
February 1993 agreement between the United States and the Russian
Federation under which highly enriched uranium (HEU) from Russian
nuclear weapons is diluted, or blended-down, and sold as nuclear fuel.
This agreement, known as the HEU agreement, supports U.S.
nonproliferation goals by eliminating material that could potentially
be used in a nuclear weapon. See GAO, Nuclear Nonproliferation:
Implications of the U.S. Purchase of Russian Highly Enriched Uranium,
GAO-01-148 (Dec. 15, 2000).
[4] Of the $3.1 billion gross proceeds to the government, $1.9 billion
was the result of the initial public offering, and the remaining $1.2
billion resulted from the United States retaining cash from accounts
held by USEC in the U.S. Treasury.
[5] Commercial specifications for nuclear fuel are established by the
American Society for Testing and Materials (ASTM). ASTM's commercial
specification, established in 1990, states that uranium should not
contain more technetium than 1 part per billion prior to enrichment.
Samples taken from 13 of the 1,255 storage cylinders that contain the
uranium that DOE transferred to USEC indicated technetium contamination
ranging from 11 to 148 parts per billion, all in excess of ASTM's
commercial specification.
[6] After USEC notified DOE that up to 9,550 metric tons of its uranium
was contaminated, DOE determined that about 5,517 metric tons of
uranium in DOE's inventory was also contaminated with technetium. In
addition, DOE took title to 2,116 metric tons of contaminated uranium
from USEC in October 2004 in exchange for clean uranium from DOE's
inventory. This exchange resulted in a total of about 7,633 metric tons
of contaminated uranium in DOE's inventory. All of the contaminated
uranium would eventually need to be decontaminated before DOE could
make it commercially available.
[7] The Portsmouth plant was available to perform the uranium
decontamination because USEC had ceased uranium enrichment operations
there in 2001 due to the high costs of operating the plant in an
increasingly competitive uranium enrichment market.
[8] Between June 2002 and September 2003, the 15-month period of the
agreement, USEC actually decontaminated about 2,900 metric tons of
uranium.
[9] DOE and USEC signed two agreements in September 2003 and November
2003 that extended decontamination work through December 2003. In
addition, the April 2004 agreement retroactively included
decontamination work conducted from December 2003 through April 2004.
[10] USEC's allowable decontamination costs under the April 2004
agreement included direct and indirect costs, plant overhead costs
incurred in operating the facilities for processing the contaminated
uranium, costs related to uranium storage cylinders, audit support
costs, and other expenses of processing the contaminated uranium. USEC
was not entitled to earn a profit.
[11] USEC's allowable costs under the December 2004 agreement were
essentially the same as under the April 2004 agreement; again, USEC was
not entitled to earn a profit.
[12] Energy and Water Development Appropriations Act, 2006, Pub. L. No.
109-103, § 314, 119 Stat. 2247, 2281 (Nov. 19, 2005).
[13] Federal Acquisition Regulation § 52.216-7.
[14] DOE requested this information to assist in the characterization
of potential contaminants in its depleted uranium inventories in
support of its planned depleted uranium conversion program, which will
convert the depleted uranium to a more stable form for reuse or
disposal.
[15] DOE closed the contaminated production lines at Paducah in 1977.
Any uranium processed at Paducah after that date was therefore not
technetium contaminated.
[16] Decontamination of USEC's contaminated uranium under the June 2002
agreement was intended to last for 15 months. However, DOE and USEC
also signed two agreements in September 2003 and November 2003 that
extended decontamination work through December 2003.
[17] DOE agreed in the June 2002 agreement to pay USEC's site
infrastructure costs (e.g., indirect costs such as utilities and other
plant overhead costs) using appropriations, subject to availability.
[18] Although DOE and USEC did not sign this agreement until April
2004, it retroactively included decontamination work beginning in
December 2003.
[19] The April 2004 agreement also provided a performance incentive to
USEC. If USEC successfully decontaminated more than 1,750 metric tons
of uranium before October 2004, DOE would take title to some depleted
uranium in addition to compensating USEC for its decontamination costs.
[20] Specifically, the June 2002 agreement stated that DOE would, at
its option, "exchange, replace, or reimburse" USEC to decontaminate an
amount of uranium equal to 3,293 metric tons of contaminated uranium
less the amount USEC actually decontaminated between June 2002 and
March 2003. USEC decontaminated 1,177 metric tons of uranium between
June 2002 and March 2003. Therefore, DOE transferred 2,116 metric tons
of clean uranium from its inventory to USEC in October 2004 in exchange
for an equal amount of contaminated uranium from USEC's inventory.
[21] USEC's costs for decontaminating DOE's uranium have also been paid
using proceeds from the sale of the clean uranium transferred to USEC
under the December 2004 agreement.
[22] DCAA's audits compare USEC's claimed incurred costs with USEC's
internal records and determines whether the costs are reasonable and in
accordance with applicable laws, regulations, and the provisions of the
December 2004 agreement. At DOE's request, DCAA has also conducted
internal control reviews of USEC's accounting systems as well as
several other reporting systems.
[23] In its comments on a draft version of this report, USEC also
stated that DOE submitted a total of 342 inquiries between January 2004
and November 2005.
[24] A Federal Acquisition Regulation contract clause, "Allowable Cost
and Payment," is included in DOE's agreements with USEC. The clause
requires a contractor to submit its final incurred cost rates to the
cognizant federal agency within 6 months of the end of each of the
contractor's fiscal years. Federal Acquisition Regulation § 52.216-7.
[25] DCAA's audit of USEC's December 2004 costs found that about
$108,000 that DOE had paid USEC under the terms of the April 2004
agreement should have been paid instead under the terms of the December
2004 agreement. Similarly, DCAA's audit of USEC's January 2005 costs
found that about $220,000 of USEC's claimed costs were actually
incurred prior to the December 2004 agreement and should have been paid
by DOE under the terms of the April 2004 agreement. DCAA's audit of
USEC's January 2005 costs also questioned about $3,600 in USEC's direct
labor and other procurement costs. USEC agreed that the $3,600 had been
overstated and subsequently offset these costs. Overall, DCAA officials
with whom we spoke did not believe that these issues were significant.
[26] Detailed Comments on the draft report are set out in Attachment A
to this letter.
[27] The statement on page 20 of the draft report that DCAA has
completed five "limited-scope" audits of USEC's incurred costs is
misleading in that it implies that these were the only audits done. In
fact, as is shown on Attachment B, DCAA conducted 9 audits in addition
to those described on page 20.
[28] As the draft report recognizes, USEC has performed decontamination
work under five separate contractual arrangements: the June 2002
agreement, two letter agreements, a work authorization, and a barter
agreement, and DOE has compensated USEC by taking title to tails
material, paying USEC with appropriated funds, and delivering clean
uranium to USEC for USEC to sell. This multitude of complex and varying
arrangements, covering periods from a short as two weeks to over two
years, has imposed significant administrative burdens on USEC.
[29] The ASTM limit on technetium is lppb; USEC can accept natural
uranium containing as much as 6 ppb technetium (so long as the average
doesn't exceed 3 ppb). This means that the contaminated material
generally needs to be trapped only twice, rather than three times,
which significantly lowers the cost of decontamination.
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