[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
PRIVATIZATION OF THE U.S. ENRICHMENT CORPORATION AND ITS IMPACT ON THE
DOMESTIC URANIUM INDUSTRY
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
APRIL 13, 2000
__________
Serial No. 106-129
__________
Printed for the use of the Committee on Commerce
U.S. GOVERNMENT PRINTING OFFICE
64-028 CC WASHINGTON : 2000
COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING,
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Oversight and Investigations
FRED UPTON, Michigan, Chairman
JOE BARTON, Texas RON KLINK, Pennsylvania
CHRISTOPHER COX, California HENRY A. WAXMAN, California
RICHARD BURR, North Carolina BART STUPAK, Michigan
Vice Chairman GENE GREEN, Texas
BRIAN P. BILBRAY, California KAREN McCARTHY, Missouri
ED WHITFIELD, Kentucky TED STRICKLAND, Ohio
GREG GANSKE, Iowa DIANA DeGETTE, Colorado
ROY BLUNT, Missouri JOHN D. DINGELL, Michigan,
ED BRYANT, Tennessee (Ex Officio)
TOM BLILEY, Virginia,
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Brewer, Shelby, S. Brewer Enterprises, Inc................... 264
Gensler, Gary, Under Secretary, U.S. Department of Treasury.. 203
Graham, James J., President, Converdyn....................... 233
Miller, Richard D., Policy Analyst, Pace International....... 273
Moniz, Ernest J., Under Secretary, U.S. Department of Energy. 211
Paperiello, Carl J., Deputy Executive Director for Materials,
Research and State Programs, U.S. Nuclear Regulatory
Commission................................................. 218
Stiglitz, Joseph, World Bank................................. 269
Stout, Mark, Vice President, Land and Marketing, Uranium
Producers of America....................................... 241
Timbers, William H., President and CEO, USEC, Inc............ 11
(iii)
PRIVATIZATION OF THE U.S. ENRICHMENT CORPORATION AND ITS IMPACT ON THE
DOMESTIC URANIUM INDUSTRY
----------
THURSDAY, APRIL 13, 2000
House of Representatives,
Committee on Commerce,
Subcommittee on Oversight and Investigations,
Washington, DC.
The subcommittee met, pursuant to notice, at 3 p.m., in
room 2123, Rayburn House Office Building, Hon. Richard Burr
(vice chairman) presiding.
Members present: Representatives Barton, Burr, Bilbray,
Whitfield, Bryant, Stupak, Green, and Strickland.
Also present: Representative Wilson.
Staff present: Dwight Cates, majority investigator; Amy
Davidge, legislative clerk; and Edith Holleman, minority
counsel.
Mr. Burr. At this time, the Chair would call to order the
Subcommittee on Oversight and Investigations hearing, a review
of the U.S. Enrichment Corporation's privatization and its
impact on the domestic uranium industry. At this time the Chair
would recognize himself for an opening statement. The
Portsmouth and Paducah gaseous diffusion plants were built by
the Atomic Energy Commission in the 1950's for the purposes of
enriching uranium for defense needs. In the 1960's, the plants
were no longer required for bomb production and their mission
shifted to meet fuel demands of the nuclear power industry.
For decades, the government controlled this uranium
production. However, in the early 1990's, it became
increasingly clear to Congress that the government had no
business controlling an enterprise which markets its services
exclusively to the private sector. In response to the 1992
Energy Policy Act, in 1993 the enrichment enterprise was
transferred from the Department of Energy to a newly formed
government-owned corporation called the United States
Enrichment Corporation. Pursuant to the USEC Privatization Act
of 1996, the Clinton administration, led by the Treasury
Department, determined that the complete transfer of the
government's interest in USEC through an initial public
offering of stock met all the statutory criteria set out by
Congress. The IPO stock sale was completed in July, 1998.
The committee began its review of USEC's privatization and
the impact it has had on the uranium industry 12 months ago.
This committee is interested in whether the Clinton
administration followed the law when it privatized USEC and
whether USEC has lived up to its ongoing agreement with the
government, agreements it freely entered into before
privatization.
The committee has also focused on USEC's activities as
executive agent to the Russian Highly Enriched Uranium
Agreement, a critical nuclear non-proliferation agreement. The
administration has said as recently as today's Wall Street
Journal senior administration official was quoted, it only
followed the directions of Congress in privatizing USEC. I wish
it were that simple. Congress most certainly did provide
direction to the administration, but I question whether the
administration actually followed those directions.
I have a few things I am interested in and would like to
hear from our witnesses about. I have a number of concerns
about the role played by executive branch agencies in USEC's
privatization. The Department of Energy transferred a large
amount of natural uranium to USEC a few weeks before
privatization. According to the Department, these transfers
really didn't amount to much but according to the uranium
industry, USEC's subsequent sale of this uranium has hurt their
viability.
If this is true, then the Clinton administration clearly
acted outside the terms of the USEC Privatization Act of 1996
which required that the manner of privatization chosen by the
administration ensures the viability of the uranium mining and
conversion service industries. I would like to know what the
Treasury knew about the financial health of USEC and the
enrichment industry when it decided to privatize USEC through
the stock sale. It appears that Treasury and its financial
advisors relied primarily on information provided by USEC.
I am concerned that USEC did not make it clear to Treasury
or to stock investors that the market price of uranium was
trending down and USEC's production costs were trending up
indicating future viability was not certain. There are many
complicated and wide ranging issues to discuss today. I look
forward to the testimony of all of our witnesses.
At this time, I would recognize the ranking member, Mr.
Stupak, for an opening statement.
Mr. Stupak. Thank you, Mr. Chairman. I want to thank you
for holding this hearing. It is long overdue. The legislation
authorizing a privatization of the U.S. Enrichment Corporation,
USEC, came from this committee. But when the actual agreement
was proposed and resulted in much skepticism from the press,
this committee had held no oversight. Nor do I believe that the
administration did an independent review it was tasked with
before letting a public offering occur.
Even today, the Treasury Department, which set up this deal
and is now faced with the reality of junk bond rating which in
effect would allow USEC to shut down a plant, seems reluctant
to do the essential review. Oversight before privatization
might have avoided some of the problems we are facing today
because they were publicly identified at the time. It was well
known that there was an overcapacity of enrichment services and
that prices were dropping to below USEC's cost of production
and escalating price of the Russian product. It was known that
the power prices in the United States were increasing, not
dropping, and that an expectation of obtaining power costs
lower than the government's subsidized contract USEC probably
were not realistic. Currently, power costs make up 50 percent
of the production costs.
There are many, many questions about the viability of the
proposed next generation technology that should have been fully
debated. But at the time, of all the agencies that were
required to declare that USEC display economic viability as
required by Congress, only Commerce had the foresight to state,
``Commerce emphasized that any in-depth analysis on its part
award privatization of USEC through an IPO, initial public
offering, meets the statutory criteria would require great
speculation as to the future of the suspension agreements as
well as the future market and political conditions.''
The Nuclear Regulatory Commission which was tasked by
Congress to determine if a reliable and economic domestic
source of uranium rich services would be provided was told by
the USEC board that an investment-grade credit rating was the
only criteria it should look at. Since USEC had received that
rating, the NRC washed its hands of any further responsibility.
So much for independence. Oversight might have avoided the loss
as sustained by the uranium industry because of what it alleges
were illegal transfers of uranium by the Department of Energy
to USEC and the illegal sales of the uranium in a manner that
has almost destroyed the domestic industry. Oversight might
well have helped avoid multimillion dollar losses suffered by
the stock and bond holders because they were not fully aware of
the market and technology realities. It might have avoided the
privatization completely by forcing a closer look at the long-
term economics of the deal. It might have avoided the
overselling of and overreliance of an unproven technology that
at best was still less economical than that of competing
producers and at worse was a bottomless pit from which little
would emerge. It might have forced USEC to have a credible
back-up plan if its technology choice failed, a plan that could
have been implemented immediately.
If that had been done, USEC would not be here today. Nine
months after pulling the plug on its failed technology with no
clear path to go forward, generating the majority of their
cash-flow by dumping cheap uranium on a market and selling its
unused power contracts at a profit that would both junk stocks
and junk bonds. If oversight had been done, the administration
would not be here today also with no clear path forward. The
provision of nuclear fuel to our defense and energy industry is
essentially a government function. The government and this body
cannot wash its hands of its responsibility. Nor can the U.S.
Enrichment Corporation be allowed to run a company into the
ground because of bad business and financial judgments on the
theory that the government must bail it out because it plays
such an important role in our nation's defense.
A recent report rating USEC's $500 million in junk bond
says that they are a good buy because the government won't let
the corporation fail. We should not be in a position to be held
hostage by incompetent but highly paid management for their
personal and their stockholders' benefit. I must say that in a
real company, if a chairman and board allowed their stock to
lose two-thirds of its value and their bonds to go below the
investment rating and has no serious plan for recovery, that
they would very likely have been gone by now. The chairman of a
serious company asking for government assistance will start by
cutting their own salary much as Lee Iacocca did many years
ago.
This matter, Mr. Chairman, requires more than one hearing
if we are going to have any real impact. USEC is partly our
creation and it is our responsibility to make sure the
legislation is carried out. With that, Mr. Chairman, I yield
back my time.
Mr. Burr. The gentleman's time has expired. The Chair would
recognize the gentleman from Kentucky, Mr. Whitfield, for an
opening statement.
Mr. Whitfield. Mr. Chairman, thank you very much. We
appreciate Chairman Bliley agreeing to this hearing which we
consider particularly important at this time. Events
surrounding the two plants, the one in Paducah in my district
and the one in Piketon, Ohio in Congressman Ted Strickland's
district have both been the subject of extensive media coverage
and numerous House and Senate hearings over the last year.
Those hearings, including a previous hearing by this
subcommittee, focused on revelations about worker exposure to
contaminated materials without their knowledge, the results of
DOE investigations about warter safety and environmental damage
at the plants and in the surrounding communities, proposed
budgets affecting plan operations, and the need for a newly
established Federal program to compensate workers or their
surviving family members for illnesses they contracted while
exposed to hazardous materials and chemicals used in the
enrichment process.
Although USEC is a private corporation, it is the only
company in the United States which enriches uranium to fuel
nuclear power plants and the only company designated as the
U.S. agent in a nuclear disarmament arrangement with the
Russians. Therefore, USEC's future is important both in terms
of our national security interests and because nuclear power
supplies 20 percent of this Nation's electricity. Congress has
a responsibility to obtain the facts surrounding USEC's
financial condition.
Rumors in the communities of Paducah and Portsmouth as well
as on Wall Street about possible plant closures and the
financial status of USEC and also concerns expressed by
institutional investors and independent financial analysts make
this hearing imperative. Some are saying the government should
assume responsibility for the operation of the two plants. Some
are forecasting such serious financial problems in the long run
for USEC that it may be necessary to find a merger or
acquisition partner even though the law which privatized USEC
prohibits any one entity from owning more than 10 percent of
the company.
Some say that USEC loses money serving as the government's
executive agent of the Russian enrich uranium while others say
the company makes money off this arrangement. These are just a
few of the issues raised by interested parties directly
impacted by USEC's ability to remain competitive. So our
purpose today is to obtain some facts. We already know some of
them. USEC did announce the layoff of 850 workers at Paducah
and Portsmouth. Moody's and Standard & Poor's have downgraded
the credit rating of USEC below investment grade so the
company's corporate bonds are now considered junk bonds.
Electricity accounts for between 50 to 55 percent of USEC's
production costs and the company is currently the beneficiary
of power at an average cost of 2 cents per kilowatt hour.
The Paducah and Portsmouth plants are currently operating
at 25 to 35 percent capacity. SWU market share end prices are
falling. USEC's net income has fallen from $360 million
approximately 5 years ago to a projected $35 million next year.
As production decreases, costs per SWU increase. The NRC has
launched its own investigation into the economic viability of
USEC. Dividend payouts to stockholders have been reduced by 50
percent. It appears that the company may be using its free
cash-flow to buy back outstanding shares of stock. All of this
sounds quite ominous but is it? We hope to find out today from
our panel of witnesses what are the real problems and are there
some solutions.
Let me close by saying this hearing is not just about jobs.
Regardless of what the future may hold for USEC, our government
cannot let this industry fail. We must have a domestic supply
of enriched uranium to meet our energy needs, and we must
continue to demilitarize the Russian nuclear arsenal. And, of
course, we are particularly interested in this hearing to
determine the impact of privatization and the Russian agreement
on the uranium mining and conversion service industries. Mr.
Chairman, I look forward to the testimony of the witnesses.
Mr. Burr. The gentleman's time has expired. The Chair would
ask unanimous consent that all members of the subcommittee be
allowed to enter opening statements at any time in their
entirety. At this time, hearing no objection, so ordered. At
this time, the Chair would recognize the gentleman from Ohio,
Mr. Strickland, for the purposes of an opening statement.
Mr. Strickland. Thank you, Mr. Chairman. I look forward to
this hearing. I hope it will spark a thorough and revealing
debate about the Federal Government's role in the uranium
enrichment industry. Thorough because I do not think that all
of the stakeholders in this debate are present today. Revealing
because I think we must ask some tough questions today in order
to better understand the current financial condition of the
United States Enrichment Corporation, how we got here, and how
we move forward to ensure a reliable and economic domestic
uranium mining conversion and enrichment industry.
I opposed the privatization of USEC. I was gravely
concerned that designating a private USEC as the executive
agent for the Russian HEU Agreement was a recipe for disaster.
It made no sense to me to require an inherent governmental
function to rest in the hands of a corporation responsible to
its shareholders and its bottom line. I raised concerns that
USEC as the executive agent of the HEU Agreement could lead the
corporation to undertake actions which conflict with the
statutory criteria established by Congress and threaten the
viability of the uranium enrichment industry.
As the representative of the uranium enrichment facility in
Piketon, Ohio, I have obviously followed USEC's course with
tremendous interest, and it seems to me the corporation's
priorities are wrong. In less than 2 years after privatization,
USEC has already publicly debated walking away from the Russian
deal. In less than 2 years, they have visited Capitol Hill
offices asking for a $200 million bailout and as this industry
declines, management profits.
According to the Associated Press, USEC's CEO and president
receives a total compensation package of $2.48 million and has
negotiated a $3.6 million golden parachute should he resign or
be replaced. That same individual's salary under the public
corporation was approximately $350. With these facts as a
backdrop, I am proud to admit that a major concern of mine
throughout the privatization process has been the effect it has
had on the workers and the communities of southern Ohio.
This privatization process intertwines national security,
energy security, and Wall Street issues in a complicated manner
but given what we know about the personal enrichment of certain
individuals, we must not forget the families in Piketon, Ohio,
and Paducah, Kentucky, who fear a plant closure and brace
themselves for the impact such a closure would have on the
local economies. Southern Ohio and western Kentucky do not
weather this transition alone. Other local communities such as
Metropolis, Illinois, also feel the negative effects of
privatization.
We must remember that USEC provides 75 percent of the
nuclear fuel for nearly 20 percent of our nation's electricity
producers. We have 103 operating nuclear power plants in this
country located in 31 different States. It seems very clear to
me that our Nation's energy supply depends a great deal on
USEC's viability. I understand that foreign competitors offer
enrichment services and conversion services, but do we want to
depend on other nations for our nuclear fuel supply just like
we depend on OPEC for our oil supply. I think the answer is no.
I think that many of my colleagues here today will agree that
the Federal Government has an obligation to safeguard this
industry but not necessarily this corporation and that is why I
think we should seriously look at the government once again
assuming ownership of this industry.
Mr. Chairman, what we know now about privatization is that
it was a classic case of massive insider enrichment. A handful
of insiders got rich at the expense of national security,
domestic energy security, the well-being of workers, local
economies, and taxpayers.
How did it happen? It happened because every time a
legitimate concern was raised, it was minimized and ignored. If
personal gain overshadowed national security issues, then it is
time we understand what went wrong. Mr. Whitfield and I will
see over 800 workers at our facilities lose their jobs this
summer and that will bring the total number of separations at
the plants to nearly 1,500 workers, approximately one-third of
the workforce.
If the IPO method of privatization was chosen in large part
because it meant significantly fewer layoffs as I was told,
then I ask who did the math. Some of our witnesses here today
first blew the whistle on privatization pitfalls we are now
experiencing. Still other highly regarded individuals like Dr.
Thomas Nef, the father of the Russian HEU Agreement, and
Senator Domenici sent shots across the bow that this
privatization was potentially lethal to our national security.
Too many people predicted USEC's current situation, and I hope
today is not the last hearing on this issue. I also hope it is
not too late for government to step in and to do the right
thing. Mr. Chairman, I have a letter from Senator Mike DeWine.
He has asked if we could enter this into the record.
Mr. Burr. Without objection, so ordered.
Mr. Strickland. Thank you, sir.
Mr. Burr. The gentleman's time has expired. Does the
gentlemen from California have an opening statement?
Mr. Bilbray. I have no opening statement.
Mr. Burr. Does the gentleman from Tennessee have an opening
statement?
Mr. Bryant. Thank you, Mr. Chairman. I too add my
appreciation for your conducting this hearing. I appreciate the
panel that we have assembled today. We will be, in my case,
going in and out today because of conflicting other matters in
our schedule; and I apologize in advance for that. Out of a
great deal of respect for our Chairman and courtesy to the
panels, I am going to take advantage of your generous offer to
submit my full statement into the record and would yield back
my time.
[The prepared statement of Hon. Ed Bryant follows:]
Prepared Statement of Hon. Ed Bryant, a Representative in Congress from
the State of Tennessee
Thank you Mr. Chairman, Mr. Chairman, I appreciate your holding
this timely hearing today, and I want to welcome all of our
distinguished witnesses. Because of the importance of this issue, I am
very anxious to hear from the panels you've assembled today.
Mr. Chairman, the federal government has never been accused of
being the most efficient operation the world has ever seen. From the
military's thousand dollar toilet seats to the billions and billions of
dollars lost every year in Medicare waste and fraud, the government's
reputation as inefficient has been well earned.
Today, however, this subcommittee finds itself in the strange
position of investigating the inefficiencies of a private company. As
the Wall Street Journal points out in today's addition, the financially
troubled United States Enrichment Corporation ``may be about to close
one of the nation's two remaining uranium-enrichment plants . . .'' It
also reports that USEC announced in February that it will reduce its
workforce by 850 people and cut its annual dividend in half all in an
effort to reduce costs.
Having been in the private sector before coming to Congress, I am
very much aware of the fact that becoming more competitive may mean the
need for periodic reductions in a company's workforce. However, a 20%
reduction is a large enough cut to indicate that USEC is either
burdened with a bloated workforce or that it is in very serious
financial trouble. In either case, because of the national security
implications of what USEC produces, the February announcement is
extremely troubling.
If USEC can function more efficiently with 850 fewer employees,
why, when the Treasury Department was developing the USEC privatization
plan, did it apparently set this company up for failure by mandating
that it maintain so many employees. On the other hand, if USEC is
simply trying to jettison everything but the life boats in an attempt
to remain solvent, then we need to ask what has happened in the last
two years to cause this crisis? Are we looking at gross mismanagement,
incompetence, or simply the harsh reality of market forces?
With a 70% drop in the price of its stock since USEC's initial
public offering, I think the solvency of this company is in question.
While the U.S. has not produced uranium since the 60s, uranium
production is still vital to the national security of this country, and
I think this subcommittee should spend its time today trying to learn
as much as possible about USEC's current position so as to avoid some
of the worst case scenarios.
Again, I thank the chairman for holding this hearing, I look
forward to questioning the members of the assembled panels and I yield
back the balance of my time.
Mr. Burr. I appreciate that from the gentleman. Does the
gentleman from Texas, Mr. Green, have an opening statement?
Mr. Green. Mr. Chairman, I have an opening statement but I
will submit it for the record.
[The prepared statement of Hon. Gene Green follows:]
Prepared Statement of Hon. Gene Green, a Representative in Congress
from the State of Texas
Thank you, Mr. Chairman for scheduling today's hearing. I look
forward to the opportunity to have the testimony of the witnesses on
the record on the issues that we will raise here today.
Almost two years ago, the Treasury Department, based on the
recommendation of the United States Enrichment Corporation board and
the agreement of several other federal agencies, approved the sale of
the USEC through an initial public offering of stock (IPO). This IPO,
combined with additional expenses, brought the Treasury over $1.8
billion in revenue. The future seemed bright.
Now, however, the picture is muddled. Despite the seemingly rosy
forecast that existed at the time, current conditions, according to
USEC, are dire. The stock price has fallen from over $14 at the IPO to
just under $5 as of last week. USEC's credit rating has been downgraded
by Standard and Poor's to junk-bond status. The company has announced
plans to terminate 850 employees in June of this year, on top of the
500 it has already let go since privatization. Additionally, USEC is
said to be considering closing one of the two gaseous diffusion plants
(GDPs) prior to 2005, which may or may not be a violation of the
privatization agreement.
Further, the damage is not limited solely to USEC. When privatized,
the Department of Energy (DOE) transferred stockpiles of unenriched
uranium to the corporation. In an attempt to generate cash flow, USEC
has since sold those stockpiles on the open market, threatening the
viability of the domestic uranium mining industry.
Finally, the troubles with USEC have threatened our national
security. When USEC was privatized, they willingly assumed the role as
the executive agent for the HEU Agreement, under which we purchase
uranium from dismantled Russian nuclear warheads and reprocess it for
use in the commercial market. This agreement not only allowed USEC to
control the flow of uranium out of Russia, one of the only other world
producers, but ensured that Russian weapons-grade uranium did not make
its way into the hands of undesirable nations or organizations.
Last November, USEC threatened to pull out of this agreement unless
the U.S. government paid it $200 million dollars over the next two
years. After DOE examined and raised questions about that request, the
corporation backed down and agreed to continue with the agreement. The
threat, however, combined with the financial straits faced by USEC,
raise alarm and concern about the future of the HEU Agreement.
Today, Mr. Chairman, I hope that we can start down the road to
discovering where we went wrong with the United States Enrichment
Corporation. Did we choose the wrong time for privatization? Could
anyone have foreseen some of these events, such as a drop in the price
of enriched uranium on the world markets? Is government intervention or
a bailout of the corporation necessary? Maybe we should buy back the
corporation if it benefits taxpayers. Who, if anyone, is to blame for
the mess that we have before us today? I hope that we will find the
answers to these and other questions, if not today, then in the near
future.
Again, I would like to thank the witnesses for appearing today and
I look forward to their testimony.
Mr. Burr. The Chair also appreciates Mr. Green's request.
The Chair would ask unanimous consent that Mrs. Wilson be
allowed to provide an opening statement even though she is not
a member of the subcommittee but is a member of the full
committee. Without objection, the Chair would recognize Mrs.
Wilson for an opening statement.
Mrs. Wilson. Thank you, Mr. Chairman. I appreciate your
forbearance in allowing me to participate in this hearing
today. I think this hearing is not only about the management of
the U.S. Enrichment Corporation but it is also about what can
be done to save the front end of the domestic nuclear fuel
cycle.
My State of New Mexico has been the leading producer of
uranium since the 1950's. Today we are no longer producing
uranium to fuel almost one quarter of our electric needs in the
nuclear power industry. This is unacceptable energy policy. The
domestic uranium industry has been forced to compete with
Russian and U.S. uranium stockpiles available for commercial
use since the end of the cold war.
Our Nation's non-proliferation policy calls for the Russian
stocks to be absorbed by the commercial market in competition
with our domestic producers. In 1996, these producers thought
they had worked with Congress to meter in the government
uranium in a way that would keep the price of uranium
reasonable and, to the extent possible, maximize the value of
the government reserves. However, Congress and the producers
were surprised to learn shortly before USEC's privatization
that the government corporation had amassed huge amounts of
natural uranium and planned to sell this material with its
enriched product at a very aggressive pace.
These sales of national uranium have resulted in a drop of
uranium prices from over $15 in 1996 to almost $9 today. This
policy is driving our producers to the brink of extinction.
This has all occurred even though Congress has twice directed
DOE to only sell its surplus uranium if it would not have an
adverse impact on domestic producers. Mr. Chairman, I look
forward to working with you and others on this committee to fix
this problem. It is extremely important to me and to our
Nation, and I thank you for allowing me to participate in this
important hearing. I yield the balance of my time.
Mr. Burr. The gentlelady's time has expired. For what
purpose does the gentleman from California----
Mr. Bilbray. To address the committee, Mr. Chairman. An
opening statement I wasn't going to make. I just want to point
out to all my colleagues here as we get our testimony about
this issue, it is such a habit for those of us on this side of
the counter to be pointing fingers and saying what is or isn't
being done or should have been done. I just want to point out
that this Congress, both Republicans and Democrats in the past
have not supported the export of technologies that might have
helped to mitigate this problem.
Let me give you an example. Americans--American
manufacturers have the capability of producing gas reactors,
nuclear reactors that would convert weapons-grade uranium into
power generation in the past Soviet Union in Russia. The
capability of actually encouraging the past Soviet republics to
use their weapons-grade material for their domestic energy
generation is something that we basically walked away from and
we did that starting in 1985--I mean 1995 and we sort of--the
fact is it wasn't popular to talk about nuclear technology
either if you are Republican or Democrat.
And I only want to raise this because we have commodities
out there in the world market. And when we do not encourage our
new friends to utilize those commodities for their own domestic
use, they obviously are going to put that into the world
market; and it is going to have impacts on the available price
of certain commodities. And I just brought that up, but there
is an example where those of us in Congress could have done
more and helped mitigate this to some degree. There would have
been less Soviet material out there to flood the market if I
can use that term because the ex-Soviet would have been using
that to generate their own clean, non-greenhouse gas creating
power and also not sending this material into our market. I
yield back, Mr. Chairman.
Mr. Burr. The gentleman's time is expired. The gentleman
raises a very valid point.
[Additional statement submitted for the record follows:]
Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
Today we will review the privatization of the United States
Enrichment Corporation and the impact privatization has had on the
domestic uranium industry. USEC serves an important role in our
domestic energy needs--it is the only domestic source of enriched
uranium. USEC provides 70% of the enriched uranium used in our nuclear
power reactors. A healthy USEC, and a healthy domestic uranium industry
reduces our reliance on foreign countries for our energy needs. USEC
also acts as the government's Executive Agent to the Russian HEU
Agreement. As Executive Agent to this critical non-proliferation
agreement, USEC purchases uranium from dismantled warheads that were
once aimed at our country and resells this uranium as nuclear fuel for
a profit.
I supported legislation that called on the Clinton Administration
to bring the efficiencies of the private sector to the government-owned
uranium enrichment enterprise. In passing the USEC Privatization Act of
1996, Congress supported the concept of privatization but only if
certain conditions were first met, namely that privatization would not
adversely affect the uranium industry or national security. We charged
the Administration with making those determinations and relied on its
findings. The Treasury Department completed USEC privatization in July
of 1998, and everyone seemed happy with the big return we got from the
sale of USEC stock.
Today, less than two years after privatization, USEC is in bad
financial shape, the outlook for the uranium industry is very bad, and
the Russian HEU Agreement is in jeopardy. We will never know if these
troubling developments could have been avoided had the Administration
chosen to privatize USEC in an alternative manner. But I do know that
the path forward chosen by the Administration has had serious adverse
consequences for the uranium industry and our national security.
Considering the quick decline in USEC's financial condition so soon
after privatization, it is entirely appropriate for Congress to assess
what information USEC provided Treasury before privatization, and what
decisions the Clinton Administration made in its efforts to privatize
USEC. We must evaluate whether certain facts and concerns were swept
aside in the Administration's rush to sell USEC stock. For instance,
before privatization USEC promised to replace its aging and inefficient
enrichment plants with a low-cost alternative. But today, USEC's long
term viability is in question because its plans for a new enrichment
plant fell through, and it has not come up with an alternative.
Additionally, we must evaluate the impact USEC has had on the
uranium mining and conversion service industries since privatization.
We will hear testimony today that USEC has engaged in aggressive
marketing tactics that have undercut the viability of these industries.
Additionally, because the Clinton Administration has failed to
adequately oversee USEC's activities as Executive Agent to the Russia
deal, Congress must also step in to review the status of this critical
non-proliferation agreement.
In the end, USEC's problems must be solved by USEC. If the company
is unable to survive, there is little Congress can do to make it
survive. However, a viable domestic uranium industry is essential for
the country's long term energy needs. The nuclear energy community,
particularly nuclear power companies, better start thinking hard about
whether USEC will survive. What would happen if the only domestic
source of enriched uranium no longer existed? Similarly, the government
must decide what our future uranium needs are, and develop a plan which
ensures those needs are met. Unfortunately, the Clinton/Gore
Administration has not thought much about these issues, and is has no
plan.
I expect today's testimony to help the Committee understand whether
the Clinton Administration privatized this company in a manner that set
USEC up for failure. I also expect this hearing will help me understand
whether USEC is committed to long term survival, and whether the
uranium industry can survive. After this hearing, I will continue to
monitor USEC's financial outlook, but I will focus on the national
security issues related to USEC privatization. I plan to schedule
another hearing later this year regarding national security issues. I
will be working closely with Representative Whitfield on these very
important issues today, and in the future. Thank you, and I yield back.
Mr. Burr. At this time, the Chair would call up Mr. Timbers
who is our witness on the first panel. Mr. Timbers, you are
aware that this subcommittee is an investigative subcommittee
and as such it has had the practice of taking in testimony
under oath. Do you have any objection to taking testimony under
oath?
Mr. Timbers. No.
Mr. Burr. The Chair then advises you that under the rules
of the House and the rules of the committee, you are entitled
to be advised by counsel. Do you desire to be advised by
counsel?
Mr. Timbers. No.
Mr. Burr. I would ask you to rise with me and take the
oath.
[Witness sworn.]
Mr. Burr. The Chair would recognize Mr. Timbers for 5
minutes for purposes of his opening statement.
TESTIMONY OF WILLIAM H. TIMBERS, PRESIDENT AND CEO, USEC, INC.
Mr. Timbers. Mr. Chairman, members of the committee, my
name is William Timbers; and I am the president and chief
executive officer of USEC, Inc., and its subsidiary, the United
States Enrichment Corporation. Thank you for the opportunity to
participate in this hearing concerning USEC which was
privatized by the government nearly 2 years ago.
Privatization of the government's uranium enrichment
operation was a congressional objective for some 30 years and
14 consecutive congresses. A bipartisan member--group of
members on this committee and in the Senate led these efforts.
It also took the efforts of the Nixon, Ford, carter, Reagan,
Bush, and Clinton administrations to complete the job. As a
demonstration of continuing bipartisanship and bicameral
cooperation, this was truly a landmark accomplishment. The 1992
Energy Policy Act recognized that the government's uranium
enrichment enterprise was failing and that life as a business
in the private sector was the best hope for preserving this
important domestic energy resource.
The act created the United States Enrichment Corporation, a
government corporation and gave them a number of
responsibilities. The act transferred all the uranium
enrichment activities from the Department of Energy to the new
government corporation. The act directed the new corporation to
restructure the enrichment enterprise, run it like a business,
make a profit, commercially implement the Russian HEU Agreement
and prepare the restructured business for sale to the private
sector.
The 1996 USEC Privatization Act provided the additional
preparations needed for the privatization of the corporation.
As directed by Congress, the USEC Federal board of directors
and the Secretary of Treasury consummated the sale of USEC in
July 1998 in a public offering of securities to investors. This
sale became the largest privatization of Federal assets since
CONRAIL yielding a total of over $3 billion to taxpayers.
On a number of occasions, I have appeared before
congressional committees to report on the government's
corporation's progress and prospects. Today I am here to
represent USEC, Inc., a private enterprise now entirely owned
by approximately 40,000 investors. As an investor-owned
company, we have a fiduciary responsibility to our owners with
an obligation to create shareholder value. We also continue to
fulfill our national security obligation to Federal Government
serving as its executive agent to implement the megatons to
megawatts program on a commercial basis. And we continue as
well our commitments to ensure a long-term domestic enrichment
capability and to protect the health and safety of our workers.
During the 22 months since privatization, market conditions
have changed dramatically. There has been a 15 percent drop in
global market prices for enrichment, an 18 percent drop in
global demand for enrichment, a 12 percent drop in uranium
prices, and an 18 percent drop in global demand for uranium. At
the same time, our costs have increased dramatically. Our
summer power prices have tripled at Paducah and electricity is
55 percent of our production costs. Our cost of purchasing the
Russian material has increased. Our purchase costs are now
higher than our selling price. And our obligations have forced
us to substantially reduce production levels resulting in
higher unit costs. These and other conditions have produced a
triple whammy of fewer sales, reduced revenues, and greatly
increased costs.
Now, any business faced with this situation must take
prompt action to change that equation. That is what we are
doing, taking action; but we have had to act under a unique
constraint. Let me quote to you directly from our SEC form 10-Q
disclosure document dated December 31, 1999. ``USEC has been
constrained in responding to these market conditions by its
privatization agreement with the U.S. Treasury Department. This
agreement restricts the actions that USEC could take to reduce
operating costs.''
I am sure you can appreciate that no other business has had
to contend with such changed market conditions limited by such
constraints. Coming to grips with these changed market
conditions means making tough decisions. These decisions and
their implementation are in all of our interests. They will
help us to ensure that USEC, Inc., remains a dependable,
domestic supplier of enriched uranium services and retains this
global leadership in a fiercely competitive business.
The workforce reduction constraints in the Treasury
agreement expire this coming July. We have already announced a
reduction of up to 850 employees at the Paducah and Portsmouth
enrichment plants. We regret the necessity of having to lay off
employees, but we must take this action to reduce costs and to
make us more competitive. The fact that we are taking a hard
look at all of our costs--the fact that we are taking a hard
look at all of our costs to seek reductions, everything is on
the table for consideration. The combined results of these
factors have been a deterioration of our market, our
profitability and our share price. Share price is a barometer.
In USEC's case, the barometer has fallen 67 percent since the
initial public offering 2 years ago. This indicates recognition
by investors of changed market conditions and the other factors
I have previously mentioned.
As we stated in a public announcement last February, we
expect much lower earnings for fiscal year 2001. We have also
cut our dividend to investors and both Standard & Poor's and
Moody's have dropped our credit rating to below investment
grade. To be sure the dot com phenomenon has made the stock
markets chaotic. During the past year, more than 50 percent of
companies in America listed in the S&P 500 index have had their
stock price decline and many well-known, respected companies
have ratings below investment grade. Neither of these facts is
any comfort to us or to our shareholders. The initiatives we
are taking are aimed at improving both situations.
Another contributing reason for the decline in our share
price is investor concern about the continuing legacy
contamination issues being revealed about the Paducah and
Portsmouth DOE reservations. While USEC liability in these
matters was limited by the Privatization Act, some confusion
exists because of the press reports. They do not clearly point
out that these contamination issues arise from operational
practices before USEC, Inc. was created, and they remain the
responsibility of the U.S. Government.
From the day we began operations in 1993, USEC has set a
high standard of commitment to safety. As directed by the
Energy Policy Act, we earned certification of the plants by the
U.S. Nuclear Regulatory Commission; and we are under their
regulatory purview. Last September, we participated in this
committee's hearings on legacy contamination issues at Paducah
and Portsmouth. We clearly stated that for the benefit of our
workers and host communities, we take the issues of worker
protection and legacy contamination issues very seriously. We
are cooperating fully with DOE as they address these historical
issues. We have also taken initiatives to reinsure that current
work in our plant areas is conducted safely and that we provide
a strong safe working environment for our employees.
As you will recall, an NRC spokesperson also testified
before your committee that day stating that NRC had determined
that USEC operations were being conducted safely and our safety
programs were in full compliance with their regulations. I
would like to now turn to the matter of preprivatization
government transfers of uranium to USEC.
Mr. Burr. Mr. Timbers, I really need to ask you to come to
a conclusion. And I think all the members have had an
opportunity to read your full testimony. And it certainly will
be entered into the record in its entirety, but we do need to
allow members on this day to try to make available your time
for questions. So I would ask you to summarize if you could.
Mr. Timbers. Okay. I think I would like to make two final
points to this. First on the Russian HEU Agreement that this
has been a deal that has been successful and working for the
benefit of this Nation. We are now in the sixth year of the
commercial implementation of this program and that the
equivalent of over 3,254 nuclear warheads have been converted
to power plant fuel purchased by Russia--purchased by USEC from
Russia. We have paid the Russians over $1.3 billion. Over half
of that has come from a private company partly supported by the
shareholders. And we are actually ahead of the 1993 schedule.
In addition, I think it is also clear to point out that
this company continues to provide a secure and dependable
source of uranium enrichment. We do remain the world leader in
sales of uranium enrichment services. We have a strong business
fundamentals that include over $6 billion in backlog and a
robust cash-flow from sales. We are a well-run, service-
oriented business focused on safety, customer service,
identifying and seizing opportunities, solving problems and
producing results. While we are a work in progress, we have
been making progress. To fulfill the promise of a privatized
USEC, all concerns have to realize that the cold war is over
and the war we are now fighting is global competition. Thank
you, Mr. Chairman. I will submit the rest of the testimony for
the record.
[The prepared statement of William H. Timbers follows:]
Prepared Statement of William H. Timbers, President and CEO, USEC Inc.
Mr. Chairman and Members of the Committee. My name is William H.
Timbers, and I am President and Chief Executive Officer of USEC Inc.
and its subsidiary, the United States Enrichment Corporation.
Thank you for the opportunity to participate in this hearing
concerning USEC, which was privatized by the government nearly two
years ago.
The privatization of the government's uranium enrichment operations
was a Congressional objective for some thirty years and fourteen
consecutive Congresses. A bi-partisan group of Members on this
Committee and in the Senate led these efforts. It also took the efforts
of the Nixon, Ford, Carter, Reagan, Bush and Clinton Administrations to
complete the job. As a demonstration of continuing bipartisan and
bicameral cooperation, this was a truly a landmark accomplishment.
The 1992 Energy Policy Act recognized that the government's uranium
enrichment enterprise was failing and that life as a business in the
private sector was the best hope for preserving this important domestic
energy resource. The Act created the United States Enrichment
Corporation, a government corporation, and gave it a number of
responsibilities. The Act transferred all uranium enrichment activities
from the Department of Energy to the new government corporation.
The Act directed the new corporation to restructure the enrichment
enterprise, run it like a business, make a profit, commercially
implement the Russian HEU agreement and prepare the restructured
business for sale to the private sector.
The 1996 USEC Privatization Act provided the additional
preparations needed for the privatization of the corporation. As
directed by the Congress, the USEC Federal Board of Directors and the
Secretary of the Treasury consummated the sale of USEC in July 1998 by
a public offering of securities to investors. This sale became the
largest privatization of a federal asset since Conrail, yielding a
total of over $3 billion to taxpayers.
On a number of occasions, I have appeared before Congressional
committees to report on the government corporation's progress and
prospects. Today, I am here to represent USEC Inc. as a private
enterprise, now entirely owned by approximately 40,000 investors.
As an investor-owned company, we have a fiduciary responsibility to
our owners with an obligation to create shareholder value. We also
continue to fulfill our national security obligation to the federal
government, serving as its Executive Agent to implement the Megatons to
Megawatts program on a commercial basis. And we continue, as well, our
commitments to ensure a long-term domestic enrichment capability and to
protect the health and safety of our workers.
usec business challenges
During the 22 months since privatization, market conditions have
changed drastically. There have been:
A 15 percent drop in global market prices for enrichment
An 18 percent drop in global demand for enrichment
A 12 percent drop in uranium prices
An 18 percent drop in global demand for uranium
At the same time our costs have increased dramatically:
Our summer power prices have tripled at Paducah--and
electricity is 55 percent of our production cost,
Our cost of purchasing the Russian material has increased--our
purchase costs are now higher than our selling price, and
Our obligations have forced us to substantially reduce
production levels, resulting in higher unit costs.
These and other conditions have produced a triple-whammy of fewer
sales, reduced revenues and greatly increased costs. Any business faced
with this situation must take prompt action to change that equation.
That's what we are doing--taking action. But we have had to act under a
unique constraint.
Let me quote to you directly from our SEC form 10Q disclosure
document dated December 31, 1999. ``USEC has been constrained in
responding to these market conditions by its privatization agreement
with the U.S. Treasury Department. This agreement restricts the actions
that USEC could take to reduce operating costs.'' I am sure you can
appreciate that no other business has had to contend with such changed
market conditions while limited by such constraints.
Coming to grips with these changed market conditions means making
tough decisions. These decisions and their implementation are in all of
our interests. They will help to ensure that USEC Inc. remains a
dependable domestic supplier of enriched uranium services and retains
its global leadership in a fiercely competitive business.
The workforce reduction constraints in the Treasury agreement
expire this coming July. We have already announced a reduction of up to
850 employees at the Paducah and Portsmouth enrichment plants. We
regret the necessity of having to lay off employees. But we must take
this action to reduce costs to make us more competitive. The fact is
that we are taking a hard look at all of our costs to seek reductions.
Everything is on the table for consideration.
The combined results of these factors have been a deterioration of
our market, our profitability and our share price. Share price is a
barometer. In USEC's case, the barometer has fallen 67 percent since
the initial public offering two years ago. This indicates recognition
by investors of changed market conditions and the other factors I
previously mentioned.
As we stated in our public announcement last February, we expect
much lower earnings for fiscal year 2001. We have also cut our dividend
to investors, and both Standard and Poor and Moody's have dropped our
credit rating to below investment grade. To be sure, the dot com
phenomenon has made the stock markets chaotic. During the past year,
more than 50 percent of the companies in America listed in the S&P 500
index had stock price declines, and many well-known and respected
companies have ratings below investment grade. Neither of these facts
is of any comfort to us or to our shareholders. The initiatives we are
taking are aimed at improving both situations.
Another contributing reason for the decline in our share price is
investor concern about the continuing legacy contamination issues being
revealed about the Paducah and Portsmouth DOE reservations. While USEC
liability in these matters was limited by the Privatization Act, some
confusion exists because press reports do not clearly point out that
these contamination issues arise from operational practices years
before USEC Inc. was created and they remain the responsibility of the
U. S. Government.
our commitment to safety
From the day we began operations in 1993, USEC has set a high
standard of commitment to safety. As directed by the Energy Policy Act,
we earned certification of the plants by the U.S. Nuclear Regulatory
Commission, and we are under their regulatory purview. Last September,
we participated in this Committee's hearings on legacy contamination
issues at Paducah and Portsmouth. We clearly stated that, for the
benefit of our workers and host communities, we take these issues of
worker protection and legacy contamination very seriously.
We are cooperating fully with DOE as they address these historical
issues. We have also taken initiatives to re-ensure that current work
in our plant areas is conducted safely and that we provide a safe
working environment for our employees. As you will recall, an NRC
spokesperson also testified before your Committee that day, stating
that NRC had determined that USEC operations were being conducted
safely and that our safety program was in full compliance with their
regulations.
usec uranium inventories
I would like to now turn to the matter of the pre-privatization
government transfers of uranium to USEC and our sale of this material.
Let me summarize the situation. Uranium was transferred to USEC by the
government as directed by the Energy Policy Act of 1992 and the USEC
Privatization Act of 1996, and information on the transfers was
publicly reported.
I have made commitments to the U.S. government that USEC would
limit its sales of its uranium, and I also gave assurances that our
sales would be made in a market-sensitive manner. We have lived up to
those commitments. I would also point out that we have a fiduciary duty
to our shareholders to maximize the value of our uranium assets.
Clearly, we do not want to sell our uranium in a market-disruptive
manner that might lower the value of our uranium assets.
megatons to megawatts progress
We are also meeting our obligation as Executive Agent of the
government by implementing the Megatons to Megawatts national security
program. We are now in the sixth year of commercial implementation of
the program. The equivalent of over 3,254 nuclear warheads has been
converted to power plant fuel purchased by USEC from Russia. We have
paid Russia over $1.3 billion thus far, and over half of that was paid
by the privately owned USEC--not the taxpayer. And, we are actually
ahead of the 1993 U.S./Russian schedule for purchases and deliveries.
The scoreboard clearly shows that we have been successful in meeting
our commitments to implement this national security program.
the goal of worker transition
Before concluding my remarks, I would like to return to the very
important matter of workforce reductions this coming July. While these
reductions will result in considerable savings, they will also result
in a substantial impact on those affected employees, their families and
their communities.
We have proposed that all concerned constituencies, including USEC,
Congress, the Administration, DOE, the unions and the communities, work
together to mitigate these impacts. Worker transition to cleanup
programs is the most logical and feasible way to address this matter.
We are prepared to cooperate with all constituencies to pursue a
seamless worker transition. But to achieve this goal, we must put aside
differences and begin working together.
I would like to conclude by expressing my appreciation to the
Committee for your consideration. My five years of public service as
USEC's Transition Manager, President and CEO of the government
corporation have afforded me an opportunity to work with a wonderful
group of employees and with many dedicated public servants in the
Congress and the Administration.
As President and CEO of the private-sector USEC, I am determined
that we will meet our commitments to our owners for creation of
shareholder value and will fulfill our obligations and commitments to
the government. I firmly believe that we can and will achieve continued
profitability for our shareholders. We will continue to succeed in
implementing the Megatons to Megawatts program. And we will continue to
provide a secure and dependable domestic source of uranium enrichment.
We remain the world leader in sales of uranium enrichment services.
We have strong business fundamentals that include over $6 billion in
backlog and a robust cash flow from sales. We are a well run, service-
oriented business focused on safety, customer service, identifying and
seizing opportunities, solving problems and producing results.
While we are a work-in-progress, we have been making progress. To
fulfill the promise of a privatized USEC, all concerned have to realize
that the Cold War is over and the war we are now fighting is global
competition.Thank you for your consideration. I welcome your questions.
Mr. Burr. Thank you, Mr. Timbers, for accommodating the
committee, and I will assure you that we all take it with great
interest, your entire testimony.
The Chair at this time would ask unanimous consent that
this set of documents previously agreed to by the majority and
the minority be entered into the record with the understanding
that staff will work with all interested parties after this
hearing to make whatever redactions that are deemed appropriate
part of the documents insertion into the formal public record.
Without objection and hearing none, so ordered.
[The information referred to follows:]
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Mr. Burr. The Chair would recognize himself at this time
for the purposes of questions of Mr. Timbers.
Mr. Timbers, you said that there was a great effort to
control costs and that all things are on the table. Tell me,
was Mr. Strickland's remarks relative to your compensation
accurate?
Mr. Timbers. Mr. Chairman, which part of Mr. Strickland's--
--
Mr. Burr. Let me rephrase the question. If you added up all
the salary, the bonus, the stock options or dividends, whatever
is in your package, what do you make on an annual basis?
Mr. Timbers. I make a salary of $600,000 a year, and the
rest of compensation is at risk. Last year, there was a bonus
approximately of 600,000; and the balance was in stock.
Mr. Burr. That stock would have been valued at what?
Mr. Timbers. I would have to check what the value was at
that time. I am not sure right now.
Mr. Burr. Were those stock options you were referring to?
Mr. Timbers. Combination of stock options. Most of it was
in stock options, and there was restricted stock as well.
Mr. Burr. When can you exercise those options?
Mr. Timbers. There is a vesting period that is--I think it
is prorated over a 5-year period so one-fifth is vested in the
first year, and then the second fifth is vested in the second
year and so on through 5 years.
Mr. Burr. Let me ask you, we are in the 21st or 22nd month
of the privatization. Was your salary bigger this year than
last or less this year than the prior year?
Mr. Timbers. According to the agreements with the Treasury
at the time of privatization, my compensation could not change
for 6 months following privatization. After that 6-month
period--we privatized in July 1998. That 6-months period
expired in February 1999.
Mr. Burr. Where is your salary in compensation today
relative to where it was for the first 6 months when it
couldn't be changed?
Mr. Timbers. The first 6 months I think as Mr. Strickland
indicated I think was $325,000.
Mr. Burr. It has gone up significantly.
Mr. Timbers. It has gone up from the government sector
salary to a private sector salary.
Mr. Burr. Is your salary on the table as it relates to all
things on the table?
Mr. Timbers. My salary has not been discussed in that
context.
Mr. Burr. Let me ask you if you were fired today, how much
would you walk away with with the agreements--I think he
referred to a parachute.
Mr. Timbers. I would have to go back and check that. I
can't quote you those numbers.
Mr. Burr. Can anybody behind you help you? Is it 3 years of
pay? Am I close?
Mr. Timbers. I think it is approximately 3 years of pay.
Mr. Burr. So if you were fired, you would get 3 years of
pay. If you quit, how much would you get?
Mr. Timbers. Zero.
Mr. Burr. Is that to the best of your knowledge? Do you
need any help from the people behind you?
Mr. Timbers. If I were to quit, it would be zero. There is
not compensation. I would point out, Mr. Chairman, that this
compensation structure was evaluated by an outside independent
company. It is structured so as to be comparable to like,
similar size companies in similar type businesses.
Mr. Burr. Mr. Timbers, I am sure whoever did those
calculations probably used something as a guide. I am not
asking technical questions about USEC because I think that we
have some people who are integrally interested, Mr. Strickland,
Mr. Whitfield, but I did come out of business and I know that
when a company's stock devaluates 75 percent, there is a board
of directors that usually looks at the officer's salary first
and tries to make adjustments that are reflective of that. The
simple question I am asking you as president, as head of the
board, has your board of directors come to you and said we need
to talk to you about your salaries or have you talked to
officers about the level of salaries?
Mr. Timbers. No, that discussion has not occurred.
Mr. Burr. So your salary and officers' salary is off the
table when we talk about cost-cutting procedures as it relates
to a company whose stock has depreciated 75 percent of its open
value.
Mr. Timbers. Mr. Chairman, I said that discussion has not
occurred.
Mr. Burr. Will it occur?
Mr. Timbers. There are not plans of that right now.
Mr. Burr. Did the changes in the market condition come as a
surprise to you?
Mr. Timbers. There were expectations that it was a
challenging environment in terms of the market. I think those
expectations were reflected in our disclosure statement, both
in the offering memorandum and subsequent 10-K and 10-Q
statements.
Mr. Burr. If you had to close the facility today, which one
would it be of the two?
Mr. Timbers. We don't have--we have not made any kind of
determination of that sort.
Mr. Burr. Do you have any detailed plan on cost-cutting
procedures?
Mr. Timbers. Pardon?
Mr. Burr. Do you have any detailed plan on cost-cutting
procedures?
Mr. Timbers. Mr. Chairman, I still didn't----
Mr. Burr. Do you have any written plan on cost-cutting
procedures?
Mr. Timbers. We are looking at a number of different
alternatives of how we may be able to save costs for the
company in terms of power, in terms of labor, in terms of plant
operations and a variety of different scenarios have been
looked at. Do they constitute a plan? We do have an operating
plan in place that has a number of different scenarios being
considered.
Mr. Burr. Your company recently purchased 10 million shares
of its own stock back for an average price of $10 a share. You
have already lost $55 million based upon my calculation of
where the stock price is today at roughly $4.50. Explain how
this has been an effective cost-cutting effort.
Mr. Timbers. The stock buy-back program that you refer to
was initiated in July 1999; and at that time, there was a view
in terms of purchasing that stock that it was an effective use
of the cash of the corporation. Cash of the corporation belongs
to the shareholder, and we need to make a determination as
stewards of that cash for the shareholder as to how best to
effectively deploy that cash. If a determination was made that
the stock of the company was under valued at that time and that
would be a good investment to make, that amount was I think
completed at approximately the price you are talking about.
Mr. Burr. The Chair has really concluded the question it
wanted to ask but would take this opportunity to make a
statement that in fact the price of stock in the marketplace is
indicative of what individual investors are willing to pay,
based upon their comfort level of not only the business that
the company is in but in the leadership of the individuals that
run the company; and I think that, Mr. Timbers, for the trend
that you suggest today, my No. 1 suggestion would be you need a
written plan. Without a written plan, it puts everything on the
table, everything, including salaries that don't reflect the
trend that is currently happening to your company stock. I
think with some certainty I would know what the value would be
a year from now.
At this time the Chair would recognize Mr. Stupak for
purposes of questions.
Mr. Stupak. Thank you, Mr. Chairman. Mr. Timbers, in my
opening statement I said we all share some responsibility here,
and I stick with that statement. If we are going to share the
responsibility, I guess I would pick up a little bit where Mr.
Burr was.
I mentioned in my opening statement about Lee Iacocca
coming here before Congress, actually this committee and Jim
Blanchard was the Congressman from Michigan. And we helped out
the Chrysler company, but Mr. Iacocca's salary was $1 and from
what I have heard thus far today, it looks like your salary is
about $1.2 million in cash not counting stock options where
those values may be. It could very well be over $2 million. So
if we are going to share this responsibility which I think we
have to, if we are going to come and ask the Congress for a
$200 million bail-out request, we have to all share in some of
that responsibility.
When Congress privatized the USEC probably before any of us
sitting on this dias, it is fair to say before any of us on
this dias were in Congress, the purpose was to gain money for
the Treasury; is that correct?
Mr. Timbers. Yes.
Mr. Stupak. And, in fact, in 1991 you proposed
privatization of USEC to the Bush administration; did you not?
Mr. Timbers. I am trying to think. In 1990, I worked for
Smith Barney.
Mr. Stupak. 1991 I said.
Mr. Timbers. I am not sure what you are referring to in
1991. There was proposals in another endeavor that I had.
Mr. Stupak. Did you propose privatization of USEC to the
Bush administration, you personally?
Mr. Timbers. If there was a proposal being made at that
time, it was in the context of a report prepared under the
company Smith Barney; and I was acting on behalf of Smith
Barney so if there was a proposal----
Mr. Stupak. On behalf of the corporation, you recommended
that USEC should be privatized?
Mr. Timbers. We recommended that the existing business of
the uranium enrichment under the guise of operating within the
full government had a great deal of difficulty for its future
success. We recommended at that time that it would be----
Mr. Stupak. Let's fast forward. I think the answer is yes
that Smith Barney recommended it. You were part of that group.
Let's go to 1998. In 1998 you supported, in the clearest terms,
privatization of USEC through a public offering; did you not?
Mr. Timbers. I am sorry, did I----
Mr. Stupak. In 1998 did you support privatization of USEC
through a public offering IPO in 1998?
Mr. Timbers. I was asked by the Federal board of directors
to give my views as to what was the best way to privatize and
in responding to these views indicated that I thought the best
plan was to privatize it through an IPO in terms of getting--
maximizing----
Mr. Stupak. The answer is yes then.
Mr. Timbers. [continuing] maximizing the criteria set by
Congress.
Mr. Stupak. I am not trying to cut you off. I am down to 2
minutes so I am trying to get through some of these questions.
USEC agreed to all those constraints you talked about in
your statement in 1998, did they not?
Mr. Timbers. Yes.
Mr. Stupak. In fact, if you had thought it was not
workable, you would have recommended that privatization was not
feasible; would you have not?
Mr. Timbers. That is correct.
Mr. Stupak. But you didn't do that. You thought it was
feasible, and you recommended in 1998 that they move forward?
Mr. Timbers. I did, yes.
Mr. Stupak. According to the minutes of the board meetings
in June and July 1998, you knew the market price of the SWU in
new contracts was below your production costs and even below
what you are paying for the Russian SWU and the price of that
SWU would go up even if the market price went down. In fact, on
page 44 of the minutes of July 22, 1998, the board is told that
the average price of new contract is already below $90 an SWU,
and there was concern reported in the press that it would go as
low as 80 which would be the low production cost and the cost
of Russian SWU. So you already knew that when you made these
IPOs, right?
Mr. Timbers. I don't believe those were my observations,
but I would like to go back and check the record.
Mr. Stupak. June and July board minutes of 1998, I guess
that was also based upon something from J. P. Morgan; right?
Mr. Timbers. Mr. Stupak, I would have to check the record
on that.
Mr. Stupak. In the book right there, I believe it is
document number 22.
Mr. Timbers. This is my book.
Mr. Stupak. Do we have document number 22 there we could
show the witness. The same white book, wrong contents.
Under document number 22 it is on page 44. I stand
corrected. Document 27, page 44 I am looking at--the second
issue, on line 14, the second issue was the falling of new
contracts below $80 per SWU. The intent at the time it was
agreed to was not the very next contract you signed. This
became a major issue because there was some concern that as you
all know, the prices have been falling and the average price of
new contracts has been heading below $90. There was some
concerns stated in the press that it would be as low as 85, 84,
and $80 would be breached within the next year.
So is that correct? That is what I am really trying to get
at. And that's your board minutes.
Mr. Timbers. Mr. Stupak, I was not on the board of
directors. And as I look at this document, this is the July 22,
1998 meeting; if I see the attendance, I was not present at
that meeting.
Mr. Stupak. So you were not at the meeting, but you were
the CEO of the company?
Mr. Timbers. The Federal board of USEC did not have the CEO
on the board. There are five Presidentially appointed, Senate
confirmed members. That did not include the CEO.
Mr. Stupak. Okay. But you knew the price of your contracts,
did you not?
Mr. Timbers. Do you know who was saying this? Because this
is somewhat out of context.
Mr. Stupak. Mr. Goldman.
Mr. Timbers. Mr. Goldman is an attorney?
Mr. Stupak. Right. You know the price of your contracts;
right? Yes or no? Did you know the price of your contracts?
Mr. Timbers. Yes, I knew the price of the contracts.
Mr. Stupak. So that is correct? That is the prices that you
thought it would be?
Mr. Timbers. No, I believe that the contracts prior to
privatization were approximately about $92 that were being
added to the book. It says here there is some concern in the
press that things would go lower. That is not necessarily what
our view was at that time.
Mr. Stupak. You are saying that you thought the new
contracts were $92?
Mr. Timbers. I believe they were $92, which is higher--if I
can refer to your statement, that is higher than the price we
were paying to Russia.
Mr. Stupak. Correct.
Mr. Whitfield [presiding]. Mr. Stupak, you have run over by
about 2 minutes. If you could make this your last question.
Mr. Stupak. Would you provide us some evidence that you
knew it would be $92?
Mr. Timbers. In our disclosure documents, in terms of both
the prospectus and the offering memorandum that we provided to
potential bidders, I believe the price on there was $92 per
SWU, to the best of my recollection. But I would be glad to go
back and check that for the record, Mr. Stupak.
Mr. Stupak. And you projected out that they would be $92?
Would be your projected cost?
Mr. Timbers. We projected that the price would be stable at
that time.
Mr. Stupak. Really, even though the newspaper and everyone
else said everything was going, if I can use the word, ``to
hell in a hand basket'' in a big hurry. You had excess
production capacity----
Mr. Timbers. I'm not exactly sure.
Mr. Stupak. [continuing] of a uranium stock.
Mr. Timbers. Pardon me?
Mr. Stupak. Everyone was saying that, look, excess
production capacity, yet falling prices and liquidation of
uranium stocks. The newspapers was saying it was going to be
down in the low 80's, but still you projected out to the 90's
and $92 in the future?
Mr. Timbers. We believed at that time that the market would
be stable in terms of the pricing. The pricing that has dropped
since privatization, as I indicated, which is about 15 percent,
is a level that dropped the prices below a level that we were
projecting at that time.
Mr. Stupak. Mr. Chairman, thank you for the extra time.
Mr. Whitfield. Okay, I will ask questions next. Mr.
Timbers, in the strategic plan that was developed in
preparation for privatization in document 5 in the book you
have a page with key assumptions on estimated new sales prices
for SWU. In the year 1999, the estimated new sales price for
SWU is $95 per SWU. And it show it's going up to $110 per SWU
in the year 2007.
Mr. Timbers. With escalation. That includes escalation.
Mr. Whitfield. Now, we're talking about new sales; we are
not talking about old contracts.
Mr. Timbers. That's correct.
Mr. Whitfield. And SWU never did reach any of these prices
during these years, did it? I mean, right now you are selling
them at about $80 a SWU.
Mr. Timbers. That's correct.
Mr. Whitfield. So where did these numbers come from that
would show a projection of $95, $96, and $98 a SWU?
Mr. Timbers. The strategic plan in 1997. Obviously, market
factors have changed since that time.
Mr. Whitfield. And what year did you prepare the strategic
plan? 1997?
Mr. Timbers. Yes.
Mr. Whitfield. So things dramatically changed. Instead of
having SWU at $95 in 1999, it is down to around $80.
Mr. Timbers. Things have considerably changed. There has
been a fundamental change in terms of competitor pricing. There
has been a contraction of the marketplace. There has been
aggressive liquidation of inventories by customers here and
abroad. And since this time period, the market is fundamentally
different, even within the short period from September 1997.
Mr. Whitfield. So for whatever reason, the strategic plan
is wrong on the SWU price.
Mr. Timbers. Well, anytime you develop a strategic plan, a
strategic plan dynamic document, it is appropriate at that
time----
Mr. Whitfield. Let me ask you another question. You have
been with USEC since 1993?
Mr. Timbers. Yes.
Mr. Whitfield. And during that time that you have been
associated with USEC, there has been a lot of discussion about
AVLIS technology. Now in the board meeting on June 3, 1998,
there was quite a bit of discussion about AVLIS technology in
the context of which offer, IPO, merger and acquisition, would
be the best way to go. And I know that Mrs. Green on page 253
made the comment: If you don't invest in AVLIS, there really is
no future for enrichment. And on page 244, you said that every
day that privatization is delayed, we delay the deployment of
AVLIS. And then you said the No. 1 thing for the privatized
company within the first 90 days is to begin the siting process
for AVLIS. Technology is not the question, it is a siting
delay.
And then in the prospectus, they talk about the competitive
advantage of this company is the AVLIS technology. And it says
that USEC plans to complete the development and commence
commercialization of the next generation of uranium enrichment
technology, AVLIS, and that it will be deployed at full-scale
facility by 2005.
Now that was in 1998. What changed that made you all drop
the AVLIS technology so completely after it had been sold as
the technology that could make this industry succeed?
Mr. Timbers. AVLIS, prior to their privatization for a
period of about 18 months, had a significant string of
successes of demonstration performance at the Lawrence
Livermore lab, and that gave us a considerable degree of
confidence that the technology was being proven to be
successful and that we can move to the level of deployment. And
if you recall, subsequent to privatization, we began a
deployment process where we began to make inquiries throughout
the United States about possible sites, including Paducah and
Portsmouth.
Now, what really has happened--what happened since that
time is the technology did work. AVLIS technology did work, did
enrich uranium. But what happened is that we could not get the
further development in terms of longevity of operations of the
enrichment process such that, as we tried at the Lawrence
Livermore labs, the rate of return that we could get out of the
project could not exceed the double digits.
Economically, we could not make this thing work from an
investment standpoint. Technically, it worked. Technically, it
reflected the results that we had, but we could not improve it
to the point of making it economic.
Can I just explain how that works? In order to run AVLIS
successfully, it had to run for a long period of time so that
between a refurbishment module and what happened during our
testing, subsequent to our good string of 18 months of tests,
is that we could not extend that period sufficiently enough to
get a great--a run rate of return on material that we were
enriching.
Mr. Whitfield. So basically, the technology works but from
a commercial standpoint, the return is simply not there?
Mr. Timbers. It did not work well enough.
Mr. Whitfield. Now, let me ask you, your production costs
are in the $90 range using gaseous diffusion. You are selling
SWU at $80. AVLIS technology does not work. So what's the
answer?
Mr. Timbers. I've indicated in public disclosure and a
number of different forums that we're looking at a two-pronged
approach in terms of looking at acquiring centrifuge technology
and also the R&D development of the Silex technology in
Australia. Acquiring centrifuge technology can be either
directly in reinstituting the DOE technology in Oak Ridge--and
we are in discussions with DOE about doing that--and No. 2, it
could be acquiring centrifuge technology from a European
producer or from the Russians.
Mr. Whitfield. Now there are many independent analysts who
say that because of the downgrading of the credit rating of
USEC that it would be difficult for USEC to raise the money to
pay for installing centrifuge technology.
Mr. Timbers. If there is an appropriate technology that is
economic, I believe the money can be raised for it.
Mr. Whitfield. Okay. I see my time has expired. Mr.
Strickland.
Mr. Strickland. Thank you, Mr. Chairman.
Mr. Timbers, do you recall a meeting in Senator DeWine's
office where Senator Voinovich was present, I was present, as
well as members of our staff, when you said that it took a
private corporation to be able to stop investing in AVLIS and
that a government corporation would never have been able to do
that? Do you recall that conversation?
Mr. Timbers. I recall the meeting, but I don't recall that
conversation.
Mr. Strickland. I think our staffs recall it very clearly.
And I think I recall you saying in that meeting that when you
first came on board, or early when you came on board USEC, that
you said we ought to stop and take a look at this technology
before we continue to invest in it.
The reason I think that is relevant is this: I assume the
investors who bought stock in this private corporation
rightfully believed that AVLIS was a viable technology that
held out great promise to this industry. And I am wondering if
those who bought the stock may feel just a little misled if, in
fact, that was your feeling prior to the time of privatization.
If you do not recall that conversation, then I'll accept that
response, but I recall it clearly. And I think the two Senators
do.
Mr. Timbers, do you remember requesting a waiver to allow
you to participate in the privatization process?
Mr. Timbers. There was a series of waivers that were
requested by the chairman of the board to waive government
ethics issues.
Mr. Strickland. You say they were requested by the chairman
of the board?
Mr. Timbers. Yes.
Mr. Strickland. I have a letter here from the chairman of
the board to you, and it says: On September 25, 1995, you
provided me with a request for a waiver under section 208(b)1
to allow you to participate in matters directed toward the
implementation of the plan of privatization of the United
States Enrichment Corporation. Your request----
Mr. Whitfield. Mr. Strickland, would you care to introduce
those into the record?
Mr. Strickland. I would. This waiver letter, it is dated
September 26, 1995, from Mr. Rainer.
He further says: Your request stated that such matters
would include--and I won't list all of them--but one of things
that you requested was to be able to participate in the method
that USEC should utilize in privatizing; e.g., an IPO or an M&A
transaction. You also requested to be able to participate in
the selection of individuals to be appointed to serve on the
board of the privatized corporation. And I think that may be
relevant to the discussion about whether or not there had been
a discussion of whether or not your compensation was on the
board--was on the table, since you had great influence,
apparently, in the selection of the board.
But the law says, and i quote from the law, under Title 18,
Crimes and Criminal Procedure of the United States Code section
208 A, ``Whoever, being an officer or employee of the executive
branch of the U.S. Government or of any independent agency of
the government, participates personally and substantially as a
government officer or employee through decision approval,
disapproval, recommendation, their rendering of advice,
investigation, or otherwise in a contract claim controversy or
other particular matter in which he has a financial interest
shall be subject to penalties set forth.''
But then Mr. Rainer says, given the scope--given these
factors and the scope of this waiver as delineated herein, I do
not find your disqualifying financial interest to be so
substantial as to be deemed likely to affect the integrity of
your service to the government.
Now, we have heard here today that your salary went from
$350,000, approximately, to perhaps over $2 million. I don't
know what you or Mr. Rainer would consider substantial. To me,
that is incredibly substantial. And so it seems as if you were
intimately involved in these decisions regarding how to
privatize, the selection of the board members for the new
corporation, and it troubles me greatly that I think the--
certainly the intent of the law, the intent of the law was not
carried out in this procedure.
And it calls into question whether or not all of the
decisions that were made between you and the board and the
Department of Treasury were decisions that were made in the
best interest of this country or if they were made to further
the personal financial interests of those involved.
It is a troubling set of circumstances, and as we move
forward I think it is appropriate that we look at where we have
been, because we need to know who and what it is, Mr. Chairman,
that we are dealing with as we look forward to the future of
this industry. And with that I yield back my time.
Mr. Whitfield. Mr. Bilbray.
Mr. Timbers. Mr. Chairman, if I could actually make one
comment. I appreciate Mr. Strickland bringing parts of that
letter to my attention. I had forgotten the procedures about
who requested what waiver process, so that I stand corrected by
Mr. Strickland identifying those who requested. I just did not
recall.
Mr. Whitfield. Mr. Strickland--Mr. Bilbray.
Mr. Bilbray. Mr. Chairman, how many times have you been to
Mr. Strickland's Ohio or Mr. Whitfield's Kentucky facility?
Mr. Timbers. Dozens of times. I have had board meetings
there both in the private and in the government corporation.
Mr. Bilbray. Have you been to the plants to see the
operations themselves?
Mr. Timbers. Dozens of times.
Mr. Bilbray. How long ago was the last time you were there.
Mr. Timbers. About a year ago at both plants. I've had
board meetings--I took the private board to a board meeting at
both of the plants over the past year.
Mr. Bilbray. But when you talk about--it has been a year
since you have actually seen the operation in the plants?
Mr. Timbers. The last visit was the board meeting that we
had which was in approximately--about a year ago.
Mr. Bilbray. Now, the board meeting, I'm just trying to see
as the CEO of the corporation, what was the last time you were
in and actually witnessed the operation itself at those plants?
Mr. Timbers. I do not have the date, Mr. Bilbray, but the
date that board meeting was, we saw the operations of the
plants. If you have a board meeting there, you conduct
business, but the primary reason is to have the board view the
plants, take a tour of the plants, talk to management and talk
to workers.
Mr. Bilbray. So it has been a year since you have been at
the physical plants?
Mr. Timbers. Approximately that. Whenever date that board
meeting is.
Mr. Bilbray. Thank you. I appreciate that. Mr. Chairman, I
yield back.
Mr. Whitfield. We have a vote on the floor. I want to ask
one other question. Mr. Strickland, do you have any additional
questions for Mr. Timbers?
Mr. Strickland. Mr. Chairman, could we submit questions to
have answered in writing?
Mr. Whitfield. Yes, without objection, so ordered.
Mr. Strickland. Thank you, Mr. Chairman.
Mr. Whitfield. I have one other question. Mr. Timbers, in
the past several days, my office has been receiving a lot of
fax letters from employees at USEC. They are blaming the
Nuclear Regulatory Commission, or at least stating that in the
new criticality safety standards which they say are delaying
your efforts to certify the Paducah plant for a high assay
upgrade, that the NRC is using different standards at Paducah
than they are using at the Piketon plant.
However, according to a letter we received from the NRC,
they say the reason why your announced plans to get the high
assay upgrade approval by the end of the year won't take place
is because USEC has failed to follow the proper documentation
in a timely manner. Do you have any comment about those
letters?
Mr. Timbers. I'm not aware of those letters. If there is a
difference in terms of the views about what is corporate
criticality safety, I will be glad to look into it, but I am
not aware of what those letters are referring to.
Mr. Whitfield. You are not aware of the letter from the NRC
saying that USEC has not filed its documentation in a timely
manner and that the information that you have provided is
incomplete and not factual?
Mr. Timbers. I'd like to go take a look at that letter.
Mr. Whitfield. It is in document 18 of the book.
Mr. Timbers. It is in 18?
Mr. Whitfield. It is a letter addressed evidently to Steven
Toelle.
Mr. Timbers. This is about the financial review conducted
by the NRC? The letter I'm pointed to is March 29, 2000,
regarding USEC financial evaluation. Is that the letter?
Mr. Whitfield. Just a minute. I tell you what we'll do, we
will get that to you in writing as well. And a copy of the
letter.
Mr. Timbers. Be glad to answer that Mr. Chairman.
Mr. Whitfield. As soon as we get back from voting we will
call up the second panel. I understand we have a vote in about
5 minutes and then we are going to have another 5-minute vote
and then we will be right back.
But, Mr. Timbers, in concluding I would simply say that
production costs are up in the $90 range and you are selling
SWU around $80. Your old contracts were around $110 a SWU.
AVLIS is off the table. We don't know if centrifuge is going to
work or not. Many people are concerned that you are buying back
stock and that the long-term viability of USEC is in danger.
And that's one of our primary concerns and that's why we are
looking forward to additional testimony today from other people
who have analyzed it. But I want to thank you for coming today.
We appreciate your being here. And there may be some additional
questions that we would like to submit to you in writing.
Mr. Timbers. That would be fine.
Mr. Whitfield. Thank you.
Mr. Timbers. Mr. Chairman?
Mr. Whitfield. Yes?
Mr. Timbers. There are two submissions--there were two
points I would like to make, just before we adjourn for a
moment, in answering Mr. Stupak's question about the trends
toward lower pricing. And he was inquiring about what our views
were at the time of privatization. We would like to submit for
the record page 13 of our offering prospectus in 1998 that
talks specifically about our disclosure on trends toward lower
pricing. And the second point--if that meets with your
approval.
Mr. Whitfield. That's fine.
Mr. Timbers. The second point is that, gee, my salaries
were mentioned a couple of times and Mr. Stupak has mentioned
that it is $1.2 million. My salary is $600,000, as I stated.
The balance of the compensation is at risk.
Mr. Whitfield. Page 13 is already in the record of your
prospectus. So we've got it.
Mr. Timbers. Okay.
Mr. Whitfield. Thank you very much. As soon as we come
back, we are going to call up panel II----
Mr. Strickland. Mr. Chairman, could I ask another question?
And I'll be happy to miss the vote in order to ask this
question.
Mr. Whitfield. Sure, go right ahead.
Mr. Strickland. Thank you. Mr. Timbers, there has been
speculation that in order to reach one of the significant
events necessary to enable USEC to close one of the two plants
before their obligation ends in 2005, that there has been some
manipulative behavior on the part of USEC which would enable
them to reach a significant event.
In fact, Morgan Stanley has written this: With aggressive
stock buy-backs, the debt could be downgraded to below
investment grade. That would be a formal condition allowing
USEC to shut down one of the unneeded production plants which
would save $100 million annually, according to management. But
the physical--the physical capacity to do all needed production
at one plant may be a year or more away, and there will be
heavy political pressure fighting any such shutdown.
Are you aware of Morgan Stanley's suggestion?
Mr. Timbers. I think I do. My best recollection is I do
recall a statement like that.
Mr. Strickland. And were you aware of this recommendation
prior to the decision to buy back the stock?
Mr. Timbers. I don't know the date of that recommendation.
The decision to buy back the stock is independent. You know,
you're making, I think, a connection between a significant
event under the Treasury agreement and the stock buy-back. In
February we announced three major actions by the corporation.
One was the announcement that our earnings for fiscal year
2000, beginning in July of this year, would be about 60 percent
below this year's earnings. No. 2, we announced a stock buy-
back. And No. 3, we cut the dividend by one-half.
What I would like to point out is that the amount of money
that the corporation saved by cutting the dividend by one-half
is about equivalent over this period of time to the amount of
money that would be used for a stock buy-back program if
completed.
I would note very carefully that if there was an intention
by anybody in regard to--by the rating agencies in regard to
these three announcements, the reduction of earnings by 60
percent was the most dramatic element that the rating agencies
would pay attention to.
Mr. Whitfield. Mr. Strickland, I am going to have to ask to
you finish up. I need to make this vote, even though you may
not.
Mr. Strickland. Your December 1999 quarterly report lists
all of the things that could occur that would enable one of the
plants to be closed.
Mr. Timbers. I think we have listed that in a number of
different quarters, not just that one quarter.
Mr. Strickland. On February 4, 2000, Standard & Poors
revised its credit rating of USEC's long-term debt to below
investment grade. It troubles me that there appears to be
perhaps a manipulative behavior on the part of the corporation
which would enable them to violate an agreement which they have
had, a legally binding contract with the Department of
Treasury. And when we talk to Mr. Gensler, I'm going to ask him
if he is aware of any such behavior and what the action of the
Department of Treasury will be in response.
Mr. Timbers. Mr. Strickland, that view is not accurate. And
it is not accurate about the conduct of the company.
Mr. Whitfield. Thank you very much, Mr. Timbers. We will be
right back.
[Brief recess.]
Mr. Whitfield. I will call the meeting back to order. We
have the gentlemen from panel II, the Honorable Gary Gensler,
Under Secretary, United States Department of Treasury, we
appreciate your being here very much. Mr. Ernest Moniz, Under
Secretary, Department of Energy, we appreciate your being here.
And Mr. Carl Paperiello, Deputy Executive Director for
Materials Research and State Programs the U.S. Nuclear
Regulatory Commission. Thank you for being here.
With that, Mr. Gensler, if you would like to proceed with
your opening statement. And, of course, the entire statement
will be submitted for the record.
TESTIMONY OF GARY GENSLER, UNDER SECRETARY, U.S. DEPARTMENT OF
TREASURY; ERNEST J. MONIZ, UNDER SECRETARY, U.S. DEPARTMENT OF
ENERGY; AND CARL J. PAPERIELLO, DEPUTY EXECUTIVE DIRECTOR FOR
MATERIALS, RESEARCH AND STATE PROGRAMS, U.S. NUCLEAR REGULATORY
COMMISSION
Mr. Gensler. I thank you, Mr. Chairman, ranking member. I
appreciate your calling this hearing. I know this is a very
important matter to the Congress and very important to you and
your district and Congressman Strickland's district, and we
take these matters very seriously at Treasury and throughout
the administration.
I'd like to just summarize my remarks and I appreciate
submitting them for the record.
The statutory framework for the privatization of USEC was
laid out in two important acts by Congress in 1992 and in 1996,
best recollection. Throughout the privatization process we
followed the statutory framework provided by Congress closely,
thoroughly, and conscientiously. Between those two acts in 1992
and 1996, the U.S. Government entered into a very important
arrangement with the Russian Federation as it related to the
sale of the bomb grade material out of Russia, known as the HEU
Agreement.
The President had submitted to him a privatization plan,
the same plan that Congress considered in 1996. That plan was
submitted to the President and the President signed off to the
privatization plan in 1997, which considered what was called a
dual-path process. And as you most likely recall, this is a
process whereby outside financial experts, working with the
USEC board of directors, would look and explore the sale by
merger and look and explore the sale by the initial public
offering.
The most attractive third party proposal, if I could just
highlight this, and this is much more detailed in the public
record and in my prepared remarks, but the most attractive
third party sale proposal was a leveraged buyout. And just to
pause for a moment, the USEC searched with 50 companies to see
if there was an interest in buying the company. What was found
is that there was a limited interest in the purchase of the
company by large commercial firms. There was more of an
interest by financial parties through what's called a leveraged
buyout, and in fact those were the only two proposals received.
This put a significant amount of leverage on the company,
approximately $1.5 billion of fixed rate securities, and then
had investors in the equity.
The USEC board determined that both the proposed sale
transaction, this leveraged buyout transaction, and the public
stock offering satisfied the statutory criteria that Congress
had laid out. But they concluded that the offering was the best
of the two alternatives.
Treasury's role was then to take an extensive review of
USEC's board decision, based upon all the available information
at the time. As part of this review it sought and obtained
advice from over a dozen Federal agencies with regard to the
statutory criteria laid out by Congress. And I would say that
it was a very complex set of circumstances. As many commercial
firms are, USEC is also complex, but the statute itself had
many criteria that we sought to review.
In coordinating that interagency process, all the essential
decisions that were made on the privatization reflected a
collective judgment of the appropriate government agencies,
whether it be national security issues, the very important
issues of labor and the environment, very important issues of
the continuation of the plants.
Mr. Whitfield. May I interrupt you just a minute Mr.
Gensler. I have just been reminded, which I should have
remembered at the beginning, this is an oversight hearing. We
would like to ask you, unless you have some objection, to stand
and be sworn that what you are testifying to will be the whole
truth and nothing but the truth. All witnesses, if you would
raise your right hand.
[Witnesses sworn.]
Mr. Whitfield. Thank you very much. Now we're sworn in.
Mr. Gensler. I appreciate that. I always assume, if I am in
front of Congress, that to be the case.
In consultation with the other agencies, Treasury
determined that both the public offering and the merger path
met the statutory criteria but determined the offering was best
in meeting those statutory criteria. And while I detail it more
in the testimony, this involved at least four areas: expected
level of debt--the leveraged buyout, as I said, had close to
three times the amount of fixed rate obligations, and two, the
higher level, at least initially, of employment. The leveraged
buyout was suggesting as many as 1,700 layoffs and the initial
public offering, in the order of 500 layoffs. And we were able
to at least memorialize for 2 years in the Treasury agreement
higher expected proceeds and lower expected market and
financing fiscal risks.
Additionally, I would note in the terms of the level of
debt and long-term viability, the credit rating by independent
credit rating agencies came in at what's called triple B plus,
which was higher than the level that would have been in the
leveraged buyout of only triple B rating, both of which were
above the minimum rate that the NRC, who I know probably will
be commenting later, had initially laid out in their draft
standard review plan.
To address many of the concerns raised by Congress, there
were numerous arrangements with USEC during the privatization
and post privatization. And just highlighting them briefly, on
the national security side there were numerous arrangements
with the State Department, of course, the Enrichment Oversight
Committee, the Department of Energy and the NRC, a very
important issue as we all know today.
There is the certification process with the NRC itself, and
I would of course defer to the NRC, but those standards in
terms of compliance with health and safety standards,
compliance with very important issues as laid out by Congress.
Labor and environmental issues. Very importantly, many
agreements were entered into with the Department of Energy and
following up also in agreements with the OMB.
Treasury did not have any explicit requirement in the
statute beyond privatization, but we thought it was appropriate
to enter into a contractual arrangement to best forward the
statutory criteria as laid out by Congress. And that agreement
I think is, as you know--had four specific arrangements for
post privatization. One related to the compensation levels of
the private firm after privatization. The second was the labor
component with regard to the 2 years for the 500 employees.
Third, it related to the sale of assets. The statute actually
said that this company could not sell more than 10 percent of
its stock for 3 years, consistent with that we embodied that
about assets. And fourthly and very importantly with regard to
the plants, continued operation of the plants through January
2005, unless the actual viability of the company in some way
was in question through a significant event. A significant
commercial event was defined as either a significant decline in
earnings, pricing, operating results or, as is somewhat focus
in this hearing, loss of the investment grade rating.
Treasury has vigorously enforced this agreement. Just as
one example, subsequent to the privatization, USEC management
attempted to renegotiate the restrictions on the layoffs.
Treasury did not allow this and thought very carefully but very
clearly that we should not deviate from those obligations. In
addition, earlier this year in January when we first heard that
the board may be considering something with regard to the
plants, we requested that the company notify Treasury
immediately if they were considering such a closing. We asked
for ample time to review and the legal justifications of any
considerations the board may have in this regard.
I would note for the record that USEC has not notified us
to this day that they see that there has been such an event or
that they are taking such actions. While there is no statutory
basis for ongoing Treasury oversight of USEC, we take our role
with regard to that contract very seriously. And despite our
limited role, we also feel that we must be and should be
responsive to this Congress with regard to these matters.
Mr. Whitfield. If you could summarize for us, Mr. Gensler.
Mr. Gensler. I was actually done, so that was perfect
timing.
[The prepared statement of Gary Gensler follows:]
Prepared Statement of Gary Gensler, Treasury Under Secretary
Mr. Chairman and members of the Subcommittee, I appreciate the
opportunity to testify on the privatization of the United States
Enrichment Corporation (``USEC''). The privatization of USEC was the
culmination of a process mandated by Congress through the enactment of
the Energy Policy Act of 1992 and the 1996 USEC Privatization Act.
Throughout the entire privatization process, we followed the statutory
framework provided by Congress very closely, thoroughly, and
conscientiously.
I will divide my remarks into five parts: first, a general
discussion of the statutory framework on which the privatization
process was based; second, a discussion of the privatization decision
of the USEC board of directors (the ``USEC Board''); third, a summary
of the governmental review of the USEC Board's decision and reasons the
government agencies approved the public stock offering as the best
means of achieving privatization; fourth, the measures taken by the
federal government relating to USEC's conduct during and after the
privatization; and fifth, Treasury's involvement in USEC-related
matters following privatization.
statutory framework
The process that culminated in the privatization of USEC was begun
by Congress in 1992, when it enacted the Energy Policy Act. That
legislation established USEC as a government corporation and gave it a
mandate to develop a strategic plan for privatization. The 1992 Act set
up a board of directors that was composed of members appointed by the
President and confirmed by the Senate.
The 1992 Act authorized USEC to implement its privatization plan
upon the occurrence of two events. First, the President had to approve
the plan. Second, the USEC Board had to determine, in consultation with
appropriate agencies of the United States, that privatization would
satisfy four statutory criteria: a return to the United States at least
equal to the net present value of USEC as a government corporation;
protection against foreign ownership, control, or domination of USEC;
protection of public health and safety and common defense and security;
and a reasonable assurance of adequate enrichment capacity to meet the
demand of the domestic electric utility industry.
In 1996, before the President had approved USEC's privatization
plan, Congress again passed legislation aimed at prompting the sale of
USEC. The USEC Privatization Act established additional requirements
for the certification and licensing of USEC's uranium enrichment
activities by the Nuclear Regulatory Commission (``NRC'') and contained
provisions to clarify the allocation of assets and liabilities between
the government and a privatized USEC, including a section that provided
for the transfer of substantial quantities of natural and enriched
uranium from the Department of Energy (``DOE'') to USEC. The 1996 Act
also enacted protections for USEC's workers, including a requirement
that DOE provide benefits to certain USEC workers in the event of a
plant closing or mass layoff.
Finally, the 1996 Act directed USEC to privatize, with the approval
of the Secretary of the Treasury, in a manner that satisfied the
additional statutory criteria of providing for: the long-term viability
of USEC, the continued operation of the gaseous diffusion plants that
USEC leases from DOE, and the maintenance of a reliable and economical
domestic source of uranium mining, enrichment, and conversion; and, to
the extent not inconsistent with these three criteria, obtaining the
maximum proceeds for the United States.
the usec board's decision
First Steps
In 1995, USEC submitted its plan for privatization to the President
and Congress. The plan accomplished the statutory requirement to
evaluate alternative means of privatization by establishing a ``dual-
path'' process, in which USEC simultaneously prepared for an initial
public offering of stock and a negotiated sale to a third party. The
plan concluded that such a dual-path process would allow decision-
makers to select the best means of privatization on the basis of
concrete information about the relative merits of specific transaction
alternatives. In July 1997, the President approved the privatization
plan subject to the development of an adequate post-privatization
oversight process.
Third-Party Sale
To initiate the negotiated third-party sale path of the dual-path
process, USEC's transaction manager distributed over 50 preliminary
information packages to industrial, utility and financial firms. USEC
received expressions of interest from five parties. The USEC Board
reviewed these submissions and consulted with the appropriate federal
agencies for national security clearance of the interested parties.
Based on its review, the USEC Board invited three of the parties to
conduct due diligence at USEC's facilities. After extensive due
diligence by the interested parties, USEC received two firm proposals
for the acquisition of USEC through a negotiated third-party sale.
Interested parties were directed to submit an extensive package of
information, including a firm, all-cash proposal; a definitive mark-up
of a draft merger agreement; binding financial arrangements; strategic
business plans for the privatized corporation; comprehensive disclosure
on their consortium arrangements, including charter documents and
shareholder agreements; regulatory information; and information on how
the interested party would satisfy the statutory criteria of the
privatization legislation.
Public Stock Offering
Simultaneous with the third-party sale path, the USEC Board and
USEC's management worked with their financial and legal advisors to
prepare for a possible public stock offering. The involvement of
private sector financial and legal advisors in transactions of this
nature is necessary and standard, and we believe their involvement
contributed greatly to the decision-making process. Once the USEC Board
procured the services of these advisors, USEC worked with them to
prepare the necessary Securities and Exchange Commission registration
statement. The advisors also provided advice on the timing of a stock
offering and valuation range, and coordinated appropriate marketing
efforts, including road shows.
In addition, USEC's advisors each provided independent advice on
the appropriate levels of debt that USEC should incur to maximize value
for the federal government. These financial advisors concluded that
incurring a reasonable amount of debt prior to an offering would
increase the gross proceeds to the federal government, reduce the
aggregate amount of fees paid to financial advisors, and reduce the
amount of proceeds subject to market risk. The inclusion of debt in
connection with an initial public offering is a standard financing
practice that is utilized in privatizations around the world. Upon
review of those analyses, Treasury and OMB agreed that the USEC
financing structure, in the event of a public stock offering, should
include net debt of $500 million. The financial advisors advised
Treasury that this net debt would not affect the long-term viability of
the privatized corporation.
The Decision
The USEC Board considered third-party sale proposals from two
potential buyers. The most attractive proposal (the ``Carlyle
proposal'') was a leveraged buy-out that offered $1.9 billion for the
acquisition of USEC, subject to a number of conditions. The second
third-party sale proposal was also a leveraged buy-out, but it offered
less attractive terms than either the Carlyle proposal or the public
stock offering proposal.
On June 11, 1998, the USEC Board determined that both the Carlyle
proposal and the public stock offering proposal satisfied the statutory
requirements, but that the offering provided the superior method of
addressing the special areas of concern identified in the two
privatization statutes. The USEC Board unanimously approved
privatization through the public stock offering.
governmental review of the usec board's decision, and reasons for
approving the public stock offering
Governmental Review Process
During the entire privatization process, judgments were made
collectively by the appropriate agencies of the Administration.
Treasury coordinated this inter-agency process. To ensure that the
views of the appropriate agencies were taken into account, during the
entire dual-path process Treasury consulted extensively with such
agencies as the Council of Economic Advisors (``CEA''), the Central
Intelligence Agency (``CIA''), the Department of Commerce (``DOC''),
the Department of Defense (``DOD''), DOE, the Department of Justice
(``DOJ''), the Department of State (``DOS''), the National Economic
Council (``NEC''), NRC, the National Security Council (``NSC''), and
the Office of Management and Budget (``OMB''). All of the essential
decisions made during the privatization process reflected the
collective judgment of these government agencies.
As part of our review of the USEC Board's decision to approve the
public stock offering as the method of privatizing the corporation, we
sought and obtained advice from federal agencies having expertise
relevant to the statutory criteria specified by Congress in the two
privatization statutes. Specifically, we obtained advice in writing
from: (1) DOE on the satisfaction of the statutory criteria related to
long-term viability, continued operation of the enrichment facilities,
and a reliable and economical domestic source of uranium mining,
enrichment and conversion services; (2) DOC and NRC on the satisfaction
of the statutory criterion related to reliable and economical domestic
source of uranium mining, enrichment and conversion services; and (3)
OMB on the satisfaction of the statutory criterion related to securing
maximized proceeds to the United States. The consultative process
included extensive discussions with senior representatives from DOE and
OMB.
In addition, Treasury asked the CIA, DOD, DOE, DOS, the Federal
Bureau of Investigation, NRC, NSC, and OMB to provide any information
about the members of the parties (and their affiliates) that submitted
final third-party sale proposals that might, in the view of these
agencies, have a material effect on the government's review of the
proposals. None of these agencies informed Treasury of any information
on this subject. Finally, the NSC was fully involved throughout the
privatization process and chaired a number of meetings on national
security-related matters. The NSC, in consultation with appropriate
national security agencies, determined that the privatization plan was
consistent with the national security requirements of the statutes.
In addition, staffs from Treasury and other agencies undertook an
extensive review of the available information, including the following:
(1) written materials and oral presentations provided by USEC's
management on the Corporation, its strategic plans, and the uranium
enrichment industry; (2) proposals received from the parties interested
in the acquisition of USEC through a negotiated third-party sale; (3)
written materials from, presentations by, and discussions with USEC's
financial and legal advisors, including a formal written opinion from
its financial advisor; (4) four meetings of the USEC Board on the
method and manner of sale (which included meetings with each of the
parties interested in a negotiated third-party sale, union
representatives, and a Congressional representative); (5) discussions
with the leading candidate for a negotiated third-party sale regarding
its proposal; (6) ``bring-down'' discussions and presentations by the
financial advisors; and (7) discussions with the Oil, Chemical, and
Atomic Workers Union.
Reasons for Approving the Public Stock Offering
Treasury determined that both the public stock offering and the
Carlyle proposal met the statutory criteria for privatization, but that
the offering was the superior method of addressing the special concerns
identified in the privatization legislation. The primary reasons for
our determination were a lower expected level of debt, higher expected
levels of employment, higher expected proceeds, unresolved contract
points with Carlyle, and lower expected market and financing risks.
Debt Levels/Credit Rating--The debt level under the Carlyle
proposal would have been $1.2 billion, as compared with $500 million
under the stock offering. In addition, the Carlyle proposal included
about $355 million in preferred stock, which would have been a fixed-
rate obligation. The actual credit rating under the public stock
offering proposal was BBB+. This was higher than the expected credit
rating under the Carlyle approach (BBB). The credit rating under the
stock offering was also higher than the minimum level deemed acceptable
by the USEC Board (BBB) for its statutory determinations. Also, as I
will discuss later in this testimony, the credit rating under the stock
offering was higher than the credit rating suggested by NRC as the
minimum threshold for transfer of the certificate to the privatized
corporation without further review of USEC's financial structure (BBB-
). The reduced debt level and higher credit rating under the stock
offering were key factors supporting the determination that
privatization provided for the long-term viability of USEC.
Relative Impact on Employment--The Carlyle proposal included large,
rapid reductions in employment at the two gaseous diffusion plants
within the first two years of over 1,700 jobs (gross figure). The
reduction would have been partially offset by plant reconfiguration and
other activities, but the net decrease in employment over two years
would have been about 1,400 jobs. In contrast, the public stock
offering proposal included job reductions within the first two years of
about 500, plus normal attrition.
Expected Proceeds--
The mid-point of the expected range of the estimated net proceeds
from the public stock offering was approximately $40 million greater
than the estimated net proceeds from the Carlyle proposal. Moreover,
the estimated difference between the two approaches might have been
even greater because the Carlyle proposal included the establishment of
an escrow account of $100 million, which would be held aside for up to
six years to indemnify Carlyle against certain contingencies. The
escrow proposal created uncertainty as to the ultimate amount of net
proceeds that would result from the Carlyle proposal. Carlyle also
conditioned its proposal upon the issuance of a favorable determination
from the Internal Revenue Service concerning the tax treatment of the
proposed transaction.
Relative Financing Risks--USEC's transaction manager advised the
government that, although there would be market exposure for the public
stock offering during the marketing period of three to four weeks, the
market risk was low. The Carlyle proposal, on the other hand, involved
certain financing risks, as the commitment letters were subject to
material market changes, equity investments by members of the Carlyle
Consortium, due diligence, and other factors.
meaures taken by the federal government relating to usec's conduct
Restrictions During Privatization Process
During the privatization process, Treasury required that USEC take
certain actions to protect the integrity of the process. Treasury
insisted that the pre-privatization members of the USEC Board not
continue with the privatized corporation and that the transaction
manager be precluded from representing USEC for a period of two years
after privatization. Treasury also insisted that only one member of
USEC's current management serve on the board of directors of the
privatized corporation, and not initially as the chairman, and that the
privatized corporation's charter documents not contain ``anti-
takeover'' provisions that might entrench management.
Agreements Governing USEC's Post-Privatization Conduct
The federal government negotiated a number of contracts with USEC
that would govern the corporation's conduct after privatization to
address special areas of concern reflected in the privatization
statutes.
National Security--Since 1993, USEC had served as the United States
Government's Executive Agent under the agreement between the United
States and the Russian Federation concerning the disposition of highly
enriched uranium extracted from nuclear weapons (the ``Russian HEU
Agreement''). In anticipation of the possibility of USEC's
privatization, the President in 1998 established, by executive order, a
federal inter-agency Enrichment Oversight Committee. Among other
functions, this committee coordinates the government's monitoring of
the privatized corporation's implementation of the Russian HEU
Agreement.
Shortly before the privatization, USEC entered into an agreement
with DOE under which USEC agreed that the privatized corporation would
supply periodic information reports to DOE to support the functions of
the Enrichment Oversight Committee. The privatized corporation has
succeeded to USEC's rights and responsibilities under the agreement
among DOS, DOE, and USEC guiding USEC's performance as the United
States Government's Executive Agent under the Russian HEU Agreement. At
DOS's request, Treasury also obtained a written statement from USEC
indicating its intent to limit the amount of natural uranium that it
would sell into the marketplace.
The National Industrial Security Program, which is administered by
DOE and NRC, restricts foreign involvement in entities that require
access to classified information. Because enrichment operations require
access to classified information, the privatized successor to USEC must
meet the requirements of this program. The program requires annual re-
certification that the privatized corporation is free from foreign
ownership, control, or influence that may result in the compromise of
classified information. In addition, the privatized corporation has an
ongoing responsibility under the program to report any changes in the
nature or extent of foreign ownership, control, or influence.
Nuclear Regulatory Commission Certification--In the USEC
Privatization Act, Congress gave the NRC ongoing authority to review
USEC's compliance with three of the privatization criteria in
connection with periodic NRC certification proceedings. Specifically,
NRC must determine that (1) USEC is not subject to foreign ownership,
control, or domination, (2) the certification of USEC would not be
inimical to the common defense and security, and (3) the certification
of USEC would not be inimical to the maintenance of a reliable and
economical domestic source of enrichment services. NRC certification
also focuses on health, safety, and environmental concerns. Under the
statute, USEC or any successor corporation must apply for certification
at least every five years.
To assist in implementing this provision, NRC staff prepared a
standard review plan that described information to be examined and
factors that it would consider in applying the three statutory
criteria. For the criterion relating to a reliable and economical
domestic source of enrichment services, the review plan provides that
approval should be automatic if USEC or a successor corporation has an
investment grade credit rating. An investment grade rating is generally
considered to mean at least a BBB-rating. The NRC review plan also
provides, however, that an applicant with a lower credit rating, or no
credit rating at all, may receive certification if other factors
support a favorable determination.
Labor and Environment--USEC entered into two agreements with DOE to
ameliorate the effect of job reductions resulting from the
privatization. USEC agreed with DOE in the first agreement that the
privatized corporation would provide certain worker transition
assistance benefits using an agreed-upon amount of USEC's pre-
privatization funds. Under the second agreement, USEC agreed to pay DOE
a certain amount of USEC's pre-privatization funds for DOE to assume
responsibility for a certain amount of depleted uranium produced by the
privatized corporation, and DOE agreed to apply these funds in ways
aimed at creating new jobs or giving hiring preferences to qualified
laid-off workers.
With respect to environmental matters, USEC entered into an
agreement with OMB allocating costs between the privatized corporation
and the federal government for certain environmental liabilities.
In addition to the agreements concerning post-privatization
conduct, the privatized corporation is subject to the Occupational
Safety and Health Review Commission's worker health and safety
regulations and the Environmental Protection Agency's environmental
regulations.
The Post-Closing Agreement--Treasury also entered into a separate
agreement with USEC a few days before privatization that limited the
corporation's conduct after privatization. This agreement, entitled the
Agreement Regarding Post-Closing Conduct (the ``Post-Closing
Agreement''), was not explicitly required by the statutes. Treasury
felt, however, that this agreement was the best way to address special
areas of concern identified in the privatization.
The Post-Closing Agreement imposed four main limitations on the
corporation's conduct after privatization: first, restrictions on
executive compensation; second, a two-year restriction on layoffs;
third, a three-year restriction on a sale of all or substantially all
of USEC's assets; and fourth, a restriction on plant closings until
January 1, 2005.
On the subject of executive compensation, Treasury obtained USEC's
agreement that the privatized corporation's executive officers would
not receive any increase in salary for at least 180 days after the
privatization and would not receive any stock options unless the plans
under which they were granted were approved by the new shareholders.
Treasury sought these agreements to protect the integrity of the
privatization process.
On the subject of employment, Treasury obtained USEC's agreement
that layoffs at the gaseous diffusion plants through the privatized
corporation's fiscal year 2000 would not exceed 500, and that they
would be conducted in substantially equal parts in fiscal years 1999
and 2000.
On the subject of asset sales, Treasury obtained USEC's agreement
that the privatized corporation would not sell all or substantially all
of its uranium enrichment assets or operations for a three-year period
after the closing of the privatization. This provision in the Post-
Closing Agreement was designed to complement a provision in the 1996
Act, in which Congress restricted any person from acquiring more than
10% of USEC's stock during the three-year period after privatization.
The provision in the Post-Closing agreement was also designed to ensure
that USEC's operations could not be sold off piecemeal by USEC during
the period immediately after privatization.
On the subject of continuous operation of the plants, Treasury
obtained USEC's agreement that the privatized corporation would
continue to operate the gaseous diffusion plants until January 1, 2005,
unless a ``Significant Event'' (as defined in the Post-Closing
Agreement) occurs that could threaten the corporation's viability or
the maintenance of a reliable domestic enrichment industry.
treasury's involvement subsequent to privatization
Treasury has vigorously enforced the restrictions contained in the
Post-Closing Agreement. For example, subsequent to privatization, USEC
attempted to renegotiate the restriction on layoffs. Treasury, however,
refused to allow USEC to deviate from its obligations under the Post-
Closing Agreement.
In addition, earlier this year, Treasury sent a letter to the
Chairman of USEC stating that we had been informed that the Board was
about to consider the closure of a plant. In that letter, we referred
USEC to the plant closing restrictions in the Post-Closing Agreement.
We also stated that, as a party to the Post-Closing Agreement, Treasury
has an interest in receiving information concerning proposed plant
closings. Accordingly, we said that we would like to review and comment
on the legal justification for any proposed plant closing prior to any
meeting of USEC's Board of Directors which may consider such a closing.
Further, we requested that USEC notify Treasury immediately if it
is considering a closing based on the occurrence of one or more
Significant Events and that USEC provide the factual basis for
concluding that a Significant Event has occurred or is likely to occur
in the near future. We explained that it is important that Treasury has
ample time to evaluate independently the merits of such a plan, so that
we may verify USEC's adherence to the requirements of the Post-Closing
Agreement.
Senior Treasury officials have met with members of Congress and
their staffs to discuss USEC. Treasury has also attended meetings of
the Enrichment Oversight Committee since privatization. The meetings
have focused on energy and national security issues. As a result, our
participation in the meetings has been limited.
There is no statutory basis for ongoing Treasury oversight of
USEC--which is now a private corporation--other than the Post-Closing
Agreement. In addition, although USEC's operations involve important
issues in the areas of national security, labor, and energy, these
topics are outside of Treasury's area of expertise. Despite our limited
role since privatization, however, we are committed to being as
responsive as possible to concerns raised by Congress and others.
conclusion
Mr. Chairman, we went to great lengths to fulfill the statutory
direction for privatization in a manner consistent with the special
areas of concern identified by Congress. Decisions at every juncture
were the result of a careful, collective determination by the many
federal agencies and organizations involved in the process. In entering
into the Post-Closing Agreement, we believe we even went beyond the
express requirements of the privatization statutes.
It's been almost two years since the privatization occurred. During
such a timeframe, markets can change dramatically. Global and domestic
economic conditions can shift considerably. Private sector firms must
continually make business decisions in order to compete in a changing
market environment.
At the time of the privatization, the appropriate federal agencies
made the best decisions possible given the information we had at our
disposal. We believed the decisions were the most judicious ones
possible at the time and the most likely means of achieving the
purposes of the statutes.
We believe that Congress provided a clear process for the
government agencies to follow in accomplishing the privatization. The
legislation set up a deliberation process that started with a Senate-
confirmed board of directors outside of executive departments. The
legislation also developed a rigorous process through which national
security, labor, environmental, and post-closing conduct issues were
collectively addressed by appropriate federal agencies. We believe
Treasury and the other federal agencies involved in the process
accomplished the objectives of the legislation in the most prudent
manner possible at the time.
This concludes my written remarks. I will be happy to answer any
questions you may have.
Mr. Whitfield. Okay. Mr. Moniz.
TESTIMONY OF ERNEST J. MONIZ
Mr. Moniz. Mr. Chairman, thank you for the opportunity to
present the Department of Energy's views on the issues before
us today.
The Department has three core interests in the performance
of a privatized USEC: Nonproliferation, particularly
implementation of the HEU Agreement with Russia; security of
supply, that is, the capability to secure or produce the
enrichment requirements for meeting nuclear power industry and
certain defense needs; and third, public policy commitments,
particularly helping the gaseous diffusion plant work force and
communities through a period of transition.
The administration and Department have been active in
promoting these equities and I will spend a few minutes
summarizing those actions. I will organize the remarks around
two time periods following privatization, the relatively near
term say the first 5 to 7 years, and the longer term beyond.
Let me start with the near term. At the time of
privatization, a clear set of assets and responsibilities was
transferred to USEC. These assets and responsibilities
included, first, a robust market share of the domestic and
international enrichment markets with significant long-term
contracts in place at favorable SWU prices; a favorable lease
arrangement for the Portsmouth and Paducah plants; favorable
power rates for SWU production, thereby addressing the
principal cost driver for the gaseous diffusion technology;
transfer of significant uranium inventories with restrictions
on entry into the U.S. market of approximately half of that
inventory; HEU Agreement executive agency with a predictable
cost of Russian LEU purchase negotiated by USEC and well below
the market SWU price at the time of privatization; agreed
restrictions designed to assist the work force and communities
through the near term, including a cap on work force reductions
and the requirement to operate both GDPs until January 2005
barring significant defined financial events; seventh, transfer
advanced enrichment technology; and finally, virtually no
liabilities from pre-privatization operations.
The private sector clearly viewed this balanced set of
assets and opportunities and responsibilities favorably at the
time of privatization, but the uranium-based markets have
certainly proved to be weaker than was viewed then.
I would like to briefly describe some actions that we have
taken in the last 20 months, but first let me emphasize that
USEC has performed satisfactorily to this point as executive
agent for the HEU Agreement. There has been much discussion
over the last half year over whether the HEU Agreement
responsibilities were an asset or liability for USEC. Perhaps
the clearest indication of the HEU Agreement as a net asset to
USEC is that USEC made the business decision on December 1,
1999, to continue as executive agent. If USEC had elected not
to continue in that role, we were prepared--we had taken steps
to identify alternative and/or additional agents interested in
implementing the HEU Agreement from 2002 on.
A critical issue to the success of the HEU Agreement was
resolution of the uranium feed issue about a year ago. I will
just note that the administration played an important role in
facilitating a solution to that problem. As part of it, of
course, the Congress helped with appropriations allowing us to
purchase 2 years' worth of uranium. We also pulled 22,000
metric tons of natural uranium off the market in the United
States and, similarly, Russia is building up a comparable
stockpile.
Currently, of course, a key issue is negotiation of the
future pricing of the SWU component of the HEU contract between
the U.S. and Russian executive agents for 2002 and beyond. The
long-term market-based solution that we engineered for the feed
component provides something of a template. And indeed the
Russian Minister of Atomic Energy in meetings with the
Secretary has explicitly acknowledged the need for a long-term
agreement on market terms. The administration is actively
supporting the negotiations and believes that market-based
prices can and will be attained.
USEC's continuing strong order book and substantial cash-
flow will help them sustain domestic enrichment capability for
this period. However, a privatized USEC has also announced that
further streamlining is required to maintain market
competitiveness. The Secretary is strongly committed to
assisting the GDP work force and communities through this
period and will work closely with the congressional
delegations, the unions, and others that represent these
interests.
In addition to our work on the HEU Agreement in this
context, several other actions have been taken. The
administration has submitted a strong fiscal year 2001 budget
request and an fiscal year 2000 supplemental request of $26
million designed to aid workers in the transition. The
Department is consulting with the workers, the local community,
and elected officials to determine the most appropriate means
to minimize involuntary separations and the mix of separation
benefits given available funds. The Department has provided
about $14 million in local community assistance for developing
employment opportunities. The Department is proceeding with
plans to build and operate the DUF6 conversion facilities and
plans to issue an RFP by October 2000 and award a contract in
fiscal year 2001.
And finally, the administration is addressing significant
environmental safety and health concerns at Paducah and
Portsmouth. Just yesterday the Secretary, accompanied by key
Members of this body, including Mr. Strickland, announced a
major initiative to compensate workers made ill by exposure to
radiation and toxic substances.
With the administration and congressional cooperation, we
feel we can continue to balance public equities during this
transition period.
But turning to the longer term, a key issue recognized very
clearly prior to and at the time of privatization, is that a
successor technology to gaseous diffusion--one that is less
energy intensive and available for deployment in this decade--
was needed. The June 1999 USEC business decision to discontinue
AVLIS has clouded the path forward, at least temporarily.
USEC is actively addressing the alternatives, both
centrifuge and laser-based technologies. The government has a
continuing interest for both security of supply and workforce
reasons. Steps taken include: a study on security of supply now
ready for interagency review and requested by the Secretary
immediately after the USEC AVLIS decision; the United States
worked with the Australian government to facilitate cooperation
on SILEX technology; and USEC has expressed an interest in
evaluating centrifuge technology options and the Department,
within appropriate bounds, is cooperating to provide technology
access.
There is no doubt that heightened attention must be paid to
long-term domestic enrichment capability in the aftermath of
USEC's AVLIS decision. At the same time, implementation of a
long-term market-based HEU Agreement will help provide
stability in both the SWU and feed areas and we will continue
multi-pronged support of programs that aid the workforce and
communities by addressing health, remediation, and job creation
issues.
Privatization of USEC reflects a long-standing bipartisan
commitment by successive administrations and Congresses, as
does the commitment to balancing the public interests of
nonproliferation, security of supply, and community
responsibility. We hope to continue that bipartisan commitment
through the sometimes difficult period of transition. Thank
you.
[The prepared statement of Ernest J. Moniz follows:]
Prepared Statement of Hon. Ernest J. Moniz, Under Secretary of Energy
introduction
Mr. Chairman, thank you for the opportunity to appear before your
committee today and represent the Department of Energy in these
deliberations concerning the United States Enrichment Corporation
(USEC), its privatization and the domestic uranium industry.
I am Ernest Moniz. I have been Under Secretary at the Department of
Energy since the end of 1997. Prior to that, I was Head of the
Department of Physics at MIT and served as Associate Director for
Science in the Office of Science and Technology Policy.
At the Department of Energy my areas of responsibility have been
focused principally on the DOE's science and national security
programs. My oversight in the latter area has included maintaining the
nuclear stockpile and addressing nonproliferation challenges,
particularly our cooperative programs to secure nuclear materials in
Russia and to dispose of excess plutonium. As a result of the
Department's work on a broad front with the Ministry of Atomic Energy
of Russia, I have also been directly engaged in working to implement
the US-Russian HEU Purchase Agreement. My work on integrating the DOE's
R&D programs has included the issue of nuclear energy R&D for the
future.
I will organize my brief remarks on USEC and the domestic uranium
industry around several national level goals that reflect a Department
of Energy perspective:
First, nonproliferation: carrying out and sustaining the 1993
US-Russian HEU Purchase Agreement under which 500 metric tons
of highly enriched uranium (HEU) are extracted from nuclear
weapons in Russia and blended down, never to be used in weapons
again.
Second, energy policy: ensuring an adequate capability for
securing or producing the enrichment and nuclear industry
requirements of the United States.
Third, defense needs: ensuring that we can meet defense needs
that require domestic enriched uranium.
Fourth, public policy commitments: supporting the equities
embodied in the ``Treasury Agreement'' to our workers at the
gaseous diffusion plants (GDPs).
These are not the only priority issues. But any path forward should
address them.
The Energy Policy Act of 1992 created USEC to privatize the
enrichment operations. The USEC Privatization Act of 1996 clarified
many details of privatization and explicitly provided for the 1993 US-
Russian HEU Purchase Agreement (``HEU Agreement'') to supply uranium
markets of the United States. Pursuant to such legislation, the
President subsequently approved a privatization plan in 1997, and after
conclusion of many complex agreements defining the terms of
privatization, USEC became a private corporation in July 1998. Each
step reflected a longstanding bipartisan commitment to privatization by
successive Administrations and Congresses. The government's interests
and role of USEC in various public policy issues and the uranium market
are touched on below.
1. Nonproliferation and National Security
First, on national security, I will discuss the HEU Agreement,
USEC's role in its implementation, and various challenges faced and
overcome.
The end of the Cold War and collapse of the Soviet Union inevitably
affected the world nuclear supply industry and uranium markets. Excess
weapons material was destined to be sold into the world market. Such
material contains much enrichment value (measured in separative work
units, or SWUs) and uranium. The HEU Agreement provides an incentive
for Russia to take material from nuclear warheads and blend them into
low enriched uranium (LEU), instead of simply enriching more in their
centrifuges and selling it on the world market, perhaps in a manner
that lowers prices in the world market, as happened before the HEU
Agreement.
The magnitude of the challenge in reversing the Cold War buildup of
nuclear materials involves expenditures on the multi-billion-dollar
scale. This inevitably leads to an intersection of governmental
interests and the private sector, where the market for uranium based
fuel involves revenues on the scale of billions of dollars. The HEU
Agreement provides Russia incentives for continued dismantlement of
weapons, and revenues that support Russia during a time of transition.
The HEU Agreement serves US national security interests, and is in
Russia's interest as well. It is designed to take 500 metric tons of
HEU (equivalent to about 20,000 weapons) from Russian weapons and blend
it down for use and sale as commercial reactor fuel over twenty years.
To date, the material derived from over 80 metric tons of HEU has been
purchased and sold, ridding the equivalent of more than 3,000 nuclear
weapons. The HEU Agreement is a government to government agreement that
defines a framework that is implemented through commercial means.
USEC is the current US executive agent, having signed an
implementing contract with Russia's executive agent in 1994, and begun
payments to Russia in 1995 for deliveries that have continued yearly
since then. USEC has performed satisfactorily under an agreement that
defines USEC's role as executive agent. The US can replace or add an
additional agent, just as USEC can give notice that it no longer
desires to serve as such.
It should be noted that there are essentially two tracks in
implementing the HEU Agreement, as it has evolved. First, the portion
USEC pays Russia for the SWUs, which is about two thirds of the value
of what Russia physically delivers to USEC. USEC uses the Russian
delivery to provide enriched uranium to its utility customers. Second,
Russia, for every delivery to USEC, is by US law awarded title to an
amount of natural uranium that is contained in the enriched uranium
purchased by USEC. Russia then seeks to realize the remaining value of
the HEU Agreement through natural uranium sales, in the US under the
schedule limits set out in the Privatization Act of 1996, or
internationally.
The natural uranium track (or ``feed component'', as it is
sometimes called) complicated implementation of the entire HEU
Agreement on several occasions starting in early1997. Russia's export
guidelines in the past stopped deliveries to USEC, because of the lack
of payment and a path forward on payment for its natural uranium. An
agreement signed by Secretary of Energy Richardson with his Russian
counterpart early last year solved this problem. This ``HEU Feed
Transfer Agreement'' (``Transfer Agreement'') used $325 million
appropriated by the Congress for DOE to purchase the 11,000 metric tons
of unsold Russian natural uranium that had accumulated in the United
States, added it to an existing 11,000 metric ton DOE stockpile,
provided for holding this total off the market for 10 years, and
defined a long term commercial path forward for the feed component for
the duration of the HEU Agreement.
The DOE through the Transfer Agreement, and in the interest of the
market, thus pulled 22,000 metric tons (nearly 60 million pounds) of
natural uranium off the market for a decade, uranium that was otherwise
slated to be sold over this period and the future proceeds for which
will go to the Treasury. In addition, what Russia does not sell to a
western consortium of companies pursuant to the annual quotas in the
1996 US law, will be returned to a Russian stockpile where, until it
reaches a 22,000 metric ton amount, can only be sold into long term
contracts with the consortium, or used to blend down more HEU from
Russian weapons. To date, because of the current market, most of the
Russian feed is slated for transport back to Russia's stockpile, and
thus will not soon come into the US market.
More recently, issues have arisen in implementing the HEU Agreement
that directly involve USEC. One involves the question whether the SWU
portion of the HEU Agreement is a liability or an asset to USEC, and if
so, what the government should do. Another is the pricing of SWU from
Russia for the balance of the HEU Agreement.
Public statements by USEC prior to privatization suggested that
USEC viewed the Russian supply of SWU as a strategic asset,
particularly after USEC negotiated a pricing mechanism with Russia that
went into effect in 1997 and extends through 2001 deliveries. Indeed,
this pricing mechanism reflected a discount off the spot market price
at the time of the signing of the contract amendment, escalated by an
agreed inflation metric. The low enriched uranium (LEU) supplied by
Russia under the HEU Agreement and its pricing was therefore part of a
known mosaic of assets (e.g., favorable electricity rates for SWU
production, sales contracts, transfers of uranium inventories, Russian
LEU at a price negotiated by USEC) and responsibilities that
transferred to the privatized USEC. The US government did not rule out
in the latter part of 1999 examining what, if anything, might be
appropriate under changed conditions, particularly in the full context
of other public equities to be discussed below. But based on our
assessments, we are not persuaded that the HEU Agreement was a net
liability, compared to USEC's ability to produce and replace the
enrichment services from Russia.
In certain respects, the issue was put to the test on December 1,
1999. USEC made a business decision to continue as executive agent with
certain legal obligations to perform through 2001. The US also took
steps to identify other alternative or additional agents interested in
implementing the HEU Agreement.
The US endorses USEC's efforts to reach agreement on commercial
terms with Russia's executive agent on a pricing mechanism for SWU to
succeed the current mechanism that applies through 2001. Indeed, Russia
acknowledges a continuing need for market based contracts, as in the
agreement on HEU feed. Both the Russian and US governments are
monitoring these discussions, mindful of the interests of their agents,
as well as broader equities. A stable commercial mechanism for the SWU
that complements the long-term commercial agreement for the feed
component is desirable.
2. Security of Supply and Enrichment
Second, I will discuss the impact of the HEU Agreement on the US,
and related issues on security of supply and enrichment of uranium for
the United States, as they have evolved since 1998.
The uranium imported into the US as a result of the HEU Agreement
affects the US market (as would the absence of such an agreement). This
is more evident now that the HEU Agreement has proceeded from an
initial annual purchase of 6 metric tons in 1995 to an annual 30 metric
ton annual amount in 1999 and for the duration of the agreement to
2013. In addition, various nuclear plant closures over this period have
also impacted world demand. An annual report provided to the Congress
reflects the impacts of implementing the HEU Agreement, in conjunction
with other developments.
The HEU Agreement is slated to provide from 1999 onward 5.5 million
SWU per year which represents somewhat less than half of USEC sales in
recent years when combined with their production at the gaseous
diffusion plants in Ohio and Kentucky. DOE leases these plants to USEC.
USEC may not close one of these plants until January 2005 because of
its obligation to continue operating the plants until that time, absent
a significant financial event.
The US government, therefore, for reasons of national security and
energy policy needs to ensure that the balance of interests is
maintained in regard to security of supply in the coming years. There
are several noteworthy points in this regard:
One, the HEU Agreement has over time become an important
source of supply for enrichment for the U.S. nuclear industry.
Given the availability of nuclear material for such purposes,
the benefits of this commerce outweigh, in general terms, the
risks on the supply side.
Two, USEC's decision in June 1999 to discontinue the Atomic
Vapor Laser Isotope Separation (AVLIS) enrichment technology
clouds the path forward for a replacement technology for the
GDPs, particularly one that is less energy intensive and
available in the desired time frame. Secretary Richardson asked
for a study of the consequences of this decision for US energy
security immediately after USEC's decision. The Department has
completed this study and, at the direction of the Enrichment
Oversight Committee, it is ready for review by other agencies.
USEC, meanwhile, is reviewing other possible enrichment
technologies, such as centrifuges and laser-based approaches.
The Department is, as appropriate, aiding USEC's evaluation of
certain enrichment technologies.
Three, the evaluation of USEC's credit rating this year has
raised concerns about USEC plans for the GDP's over the next
several years as they evaluate long term replacement
technologies.
Until last year, on the basis of the combination of factors such as
favorable power contracts through 2005, low costs of leasing the GDPs
from the Department, and ongoing R&D on AVLIS, a path forward on future
domestic enrichment capability was clearer. In the aftermath of USEC's
decision in 1999 on AVLIS, however, the Secretary immediately focused
on what the long-term implications would be. USEC is pursuing its R&D
on the SILEX enrichment technology, and the US worked with the
Government of Australia to enable this cooperation funded by USEC to
proceed. Meanwhile, more recently, USEC has expressed interest in
evaluating centrifuge technology options, and the Department has
cooperated to that end, within appropriate bounds. The study on
security of supply initiated last year by the Secretary is part of the
heightened attention that must be paid to long-term domestic enrichment
capability following the USEC cancellation of AVLIS development.
3. Defense Needs
Third, I will note briefly specialized but important defense needs
that pertain to domestic enrichment capacity and uranium inventory
management, as well as some potentially beneficial market consequences
that may result.
In late 1998, the US decided to produce its future tritium needed
for the stockpile in Tennessee Valley Authority (TVA) light water
reactors. To comply with various nonproliferation commitments it is
important to ensure that the uranium and enrichment are of US origin in
the reactors producing tritium. The TVA and USEC last year signed an
enrichment services contract that some uranium analysts believe may
cover some 15-20 million pounds of natural uranium for the 10-year
contract. Thus, USEC planning for the TVA contract may address some
concerns over the disposition of its uranium inventory in the market.
In addition, the Department monitors the long-term enriched uranium
needs of its naval reactors program.
4. Public Policy Commitments
Fourth, I want to return to public policy commitments to workers at
the GDPs that I noted above in a different context of security of
supply. Secretary Richardson feels very strongly about these issues.
I noted earlier the Treasury Agreement that USEC signed shortly
before privatization. The working premise of the agreement is that both
enrichment plants, leased by DOE, to USEC would be kept open through
2004 and work force reductions were capped until June 2000. For the
Secretary's part, any prospect of federal support that had not been
contemplated prior to privatization certainly should not be considered
now if it did not reinforce previous commitments made to the federal
government and to GDP workers. Indeed, any other approach would put the
government in the position of appearing to benefit private sector
parties while ignoring or harming existing federal commitments.
I know you are aware of recent reports regarding significant
environmental, health and safety concerns at the gaseous diffusion
plants. As part of our response to these developments, the Department
has developed initiatives for additional funding in fiscal year 2001 to
accelerate cleanup and protect health and safety at the GDPs in Ohio
and Kentucky. Such initiatives include remedial actions to dispose of
low-level waste and clean up old landfills, oversight investigation of
past and current practices, reviewing uranium flows to assess potential
worker exposures, establishing worker radiation exposure profiles, and
expanding medical surveillance for current and former workers.
The Administration has a proposed an initiative to compensate
workers made ill by exposure to radiation and toxic substances while
working to build America's nuclear defense. The levels of compensation
for federal and contractor workers at the three GDPs in Kentucky, Ohio
and Tennessee formerly run by DOE, are similar to those established in
the initial compensation legislation proposal submitted to Congress in
November 1999.
The Administration has also submitted a $26 million fiscal year
2000 Supplemental Budget Request to the Congress to address additional
concerns, including $10 million for Environmental, Safety and Health
activities (health studies, oversight), and $16 million for
environmental restoration. The Department urges the Congress to act on
these requests as soon as possible.
USEC earlier this year announced some 850 layoffs at the GDPs to
occur this summer that were long anticipated. The FY 2001 budget and
the supplemental request for the Environmental Management program
support the Secretary's efforts to aid workers in the transition.
The Department is consulting with workers, the local community, and
elected officials to determine the most appropriate means to minimize
involuntary separations and the mix of separation benefits for workers
who do not transition that can be supported with available funds. The
Department has provided $13.8 million in assistance to local
communities for activities that can provide employment opportunities
for displaced workers and additional community assistance requests are
currently under review.
In addition, the Department is proceeding with plans for a project
to build and operate conversion facilities to chemically convert
depleted uranium hexafloride inventories into a form better suited to
both storage and ultimate disposition. This has been paced principally
by characterization of contamination in the depleted uranium inventory,
sampling analysis of which should enable an RFP to be issued by October
of this year, award of contract in fiscal year 2001, and the initiation
of design.
Concluding Remarks
I have set out some of the basic governmental interests from DOE's
perspective in:
Performance on the HEU Agreement;
Monitoring security of supply of enrichment, relative to
private sector plans, market availability and national
reserves;
Meeting defense needs; and
Fulfilling public policy equities to GDP workers.
I have noted, where appropriate, USEC's role, or uranium market
impacts of the HEU Agreement or governmental actions.
In closing, I note that the end of the Cold War has posed novel
challenges and opportunities.
The impetus to create USEC came out of the 1980s and was to
privatize enrichment in a bipolar world. It would have been hard to
imagine in the mid-1980s during a build up of nuclear weapons that,
little more than a decade latter, concerns would be raised about the
rate at which material from dismantled Russian nuclear weapons comes
into the US, or that questions would arise about sustaining US
enrichment capability or what future options are best.
In the post Cold War context, it has always been understood that a
private executive agent implementing the HEU Agreement with Russia
could experience tensions between its commercial interests and the
government's immediate preferences. This is a perpetual tension to be
managed. In the end, the government will have its interests served, or
take corrective steps. However, the complex intersection of
governmental and private interests is a fact of life driven by the
large scale of resources needed to reverse Cold War buildups (HEU,
plutonium, weapons complex). Much has been accomplished, and given the
scale of the problems created over many years, much remains to be done.
We need the support of the Congress on all these issues and look
forward to working with you. I would be pleased to respond to any
questions you may have. Thank you.
Mr. Whitfield. Thank you.
Mr. Paperiello.
TESTIMONY OF CARL J. PAPERIELLO
Mr. Paperiello. Mr. Chairman, it is my pleasure to appear
before you today to discuss the U.S. NRC's financial review of
the USEC. Under the USEC Privatization Act of 1996, the NRC is
required to determine if the issuance of a certificate of
compliance would be inimicable to the maintenance of a reliable
and economic domestic source of enrichment services. In
February of this year the NRC initiated a review of USEC's
financial condition because NRC's basis for its previous
determination had changed, when on February 4, Standard & Poors
downgraded USEC's corporate credit rating to below investment
grade.
I'd like to clarify something that I heard today. The NRC
used the corporate credit rating for the initial public
offering path. And we had developed a standard review plan to
deal with either path, a sale of the company or an IPO. The
decision to use the credit rating was based upon extensive
conversations with both financial managers in the private
sector as well as Federal agencies, including the U.S. Treasury
and the Securities and Exchange Commission.
When the NRC recertified USEC's operation of the gaseous
diffusion plants in January 1999, USEC had investment grade
credit ratings from both Moody's investors service and Standard
& Poors. On February 3 of this year, USEC announced lower
financial projections for fiscal 2001, a plan to lay off 850
employees, a dividend rate cut to half its previous value, and
a program to repurchase stock. On the next day, Standard &
Poors reacted to this announcement by downgrading USEC's credit
rating from BBB to BB+, a below investment grade rating. And on
February 23, Moody's downgraded USEC from Baa1 to Ba1, also
below investment grade rating.
As I note, recertification was based in part on USEC's
investment credit ratings. Consequently, we have reopened the
financial review of USEC to evaluate changed conditions. And
this review of the financial status is consistent with typical
agency practice whenever the basis for issuing a license, in
this case a certificate for operating the gaseous diffusion
plants--when that changes we will then turn around and
reinvestigate the basis for our licensing decision.
We are evaluating the projected financial condition of USEC
anticipated for the next 5-year period consistent with the
guidance that we have published in our standard review plan for
recertification of the gaseous diffusion plants. I should point
out that when we wrote the initial standard review plan for the
initial certification, it was a public document. We shared it
with everybody. The uranium--the Enrichment Oversight Committee
saw it, so it was not something that we did in a vacuum.
And, of course, since they have dropped below investment
grade, additional analysis will have to be done. We will be
using consultants. We don't have that many people on our own
staff who are qualified to look into business plans, projected
financial statements, and other financial information. We plan
on providing our analysis and recommendation to the Commission
in early summer of this year. And any Commission
recommendations, as appropriate, would be forwarded to Congress
and the Enrichment Oversight Committee.
I also have to note that the NRC staff's major efforts at
the gaseous diffusion plants remain the protection of the
workers' and public's health and safety, protection of the
environment, and the assurance of the common defense and
security of the United States.
In conclusion, we have reopened our financial evaluation of
USEC following the recent corporate credit rating downgrades
from Moody's and Standard & Poors, and based on a staff
evaluation the Commission will forward any appropriate
recommendations to Congress and the Enrichment Oversight
Committee for use in making future decisions regarding domestic
enrichment service.
This is concludes my oral statement.
[The prepared statement of Carl J. Paperiello follows:]
Prepared Statement Carl J. Paperiello, Deputy Executive Director for
Materials, Research, and State Programs, U.S. Nuclear Regulatory
Commission
Mr. Chairman and Members of the Subcommittee: It is a pleasure to
appear before you today to discuss the U.S. Nuclear Regulatory
Commission's (NRC's) financial review of the U.S. Enrichment
Corporation (USEC) and the status of several important regulatory
activities. Under the USEC Privatization Act of 1996 (P.L. 104-134),
the NRC is required to determine if the issuance of a certificate would
be inimical to the maintenance of a reliable and economical domestic
source of enrichment services. In February of this year, NRC initiated
a review of USEC's financial condition because NRC's basis for its
previous determination had changed when, on February 4, 2000, Standard
& Poor's (S&P) downgraded USEC's corporate credit rating to below
investment grade.
When NRC recertified USEC's operation of the gaseous diffusion
plants in January 1999, USEC had investment-grade credit ratings from
both Moody's Investors Service (Moody's) and S&P. On February 3, 2000,
USEC announced lower financial projections for fiscal year 2001, a plan
to lay off 850 employees, a dividend rate cut to half of its previous
value, and a program to repurchase stock. On February 4, 2000, S&P
reacted to this announcement by downgrading USEC's credit rating from
BBB to BB+, a speculative rating. On February 23, 2000, Moody's
downgraded USEC from Baa1 to Ba1, also a speculative-grade rating.
NRC's recertification of USEC in early 1999, in part, was based on
USEC's investment-grade credit ratings. Consequently, NRC re-opened the
financial review of USEC to evaluate the changed conditions in light of
the changes that occurred in the financial market in February.
Reviewing the financial status is consistent with typical agency
practice if the basis for authorizing an activity, such as operating
the gaseous diffusion plants, changes anytime after the authorization.
We believe this is consistent with the authority Congress provided to
the NRC in the USEC Privatization Act of 1996.
NRC staff is evaluating the projected financial condition of USEC
anticipated for the next five-year period consistent with the NRC
guidance developed specifically for USEC. This review examines business
plans, projected financial statements, and other information applicable
to the critical issues affecting USEC. On February 25, 2000, NRC
requested USEC to provide the information to support this review by the
end of March. Last month, USEC requested some additional time to
assemble and submit the information.
To guide such certification reviews required in 10 CFR Part 76, NRC
staff developed a ``Standard Review Plan for Recertification of the
Gaseous Diffusion Plants,'' NUREG-1671 (SRP), last updated in February
1999. The section of the SRP describing the financial review was
approved by the Commission in November 1997 to include the
privatization effort. Chapter 16 of the SRP describes the procedures
and criteria for conducting these reviews to implement the requirement
in 10 CFR 76.22(b)(2), which states ``A certificate of compliance may
not be issued to [USEC] if the Commission determines that . . . the
issuance of such a certificate of compliance would be inimical to . . .
the maintenance of a reliable and economical domestic source of
enrichment services.'' The NRC established this requirement to
implement section 193(f) of the Atomic Energy Act, et. seq. (42 USC
2243). The SRP includes an examination of the credit strength and
financial condition based on credit ratings from rating services such
as Moody's and S&P. During the transfer of the certificate to the
privatized corporation in July 1998, consistent with the SRP, NRC
determined that USEC had a financial structure that included an
investment-grade rating from Moody's or S&P and, therefore, met the
long-term economic viability requirements. Under the SRP, a speculative
rating could also be acceptable, but additional criteria and an
analysis would be required.
NRC staff plans to provide its analysis and recommendations to the
Commission in early Summer 2000. Any Commission recommendations, as
appropriate, would be forwarded to Congress and the Enrichment
Oversight Committee, a group of representatives from several Executive
Branch agencies including the Departments of Treasury, Commerce,
Energy, and Defense, the Office of Management and Budget, and the
National Security Council. Any recommendations could then be used by
Congress and the Executive Branch to determine the need for any future
government actions.
The NRC staff is also working on several other important regulatory
activities associated with the gaseous diffusion plants, including the
Paducah seismic modification project, the Paducah enrichment upgrade
project, a review of USEC's safety program, and continued oversight to
ensure that layoffs at Paducah and Portsmouth do not adversely impact
safety and safeguards at either plant. DOE identified in 1995 the
vulnerability to earthquakes of two of the process buildings at
Paducah. NRC incorporated requirements to strengthen building
structures in the Compliance Plan when the plant was certified in 1997.
The Compliance Plan is an NRC-approved plan requiring USEC to achieve
compliance with regulatory standards on a set schedule. Since that time
there have been several program delays in the seismic upgrades due to
the identification of several unreviewed safety questions, unexpected
construction difficulties, and characterization by the DOE of its
Material Storage Areas, where some of the seismic construction work is
taking place. DOE and USEC reached agreement on an approach in early
February 2000, which allows characterization of the DMSAs by July 2000
and completion of the seismic upgrades by September 2000. Since that
time, USEC has continued to make progress on both programs.
In 1999, USEC announced its intent to increase the enrichment level
of uranium processed at Paducah. The Paducah Higher Assay Upgrade
Project would increase the maximum product enrichment from 2.75 weight
percent to 5.0 weight percent uranium-235 (U-235). Because 5 weight
percent enriched uranium cannot be used for military applications,
there are no national security issues from this upgrade. The increase
in enrichments must be authorized by USEC requesting and NRC amending
the certificate for Paducah. NRC approval of the enrichment amendment
request depends on a number of factors, including the technical
adequacy of several licensing submittals that USEC plans to submit
between now and September. The NRC expects to review the submittals
during the remainder of this year and into early 2001.
The third significant regulatory activity for both Paducah and
Portsmouth involves confirmation of the adequacy of the safety programs
to protect workers, the public, and the environment. In response to
public and Congressional concerns about worker protection and
historical exposures as a result of processing and handling reprocessed
reactor fuel material from the 1950s to the mid-1970s at Paducah and
Portsmouth the NRC conducted special confirmatory inspections in
September and October of 1999 of USEC's radiation safety programs.
Following the inspections, the NRC held public exit meetings near the
Paducah and Portsmouth sites. NRC's inspections concluded that USEC's
radiation protection programs at both sites were adequate and met NRC
requirements. The inspections also confirmed that the environmental
releases of radioactive materials from USEC's operations were well
within NRC limits and that the environmental monitoring programs were
adequate. However, the inspections identified that some of the workers
were not aware of certain radiological hazards or radiation protection
requirements and that the radiation protection training did not include
site-specific information regarding radiological hazards from
transuranic radionuclides. In addition, at Paducah, the NRC concluded
that certain unsupported assumptions were being made in calculating
internal doses because they did not adequately include a contribution
from some transuranic radionuclides. Although the inspection confirmed
that the sites' airborne radioactivity levels and, thus, worker and
public risks were low, the NRC concluded that USEC's assumption that
there was no contribution from some transuranic radionuclides was not
supported by recent measurements. Since the inspections, USEC has taken
actions to strengthen its radiation protection programs. The NRC staff
continues to review USEC's corrective actions as part of its ongoing
inspections.
NRC has also been conducting similar licensing reviews to confirm
the adequacy of each site's nuclear criticality safety program to
protect against the risk of a nuclear criticality accident. USEC is
required by regulation to demonstrate the adequacy of its nuclear
criticality safety program in preventing a criticality accident in
plant areas where it judges that there is a potential for criticality
accidents. The staff has several review actions under way in an attempt
to confirm the adequacy of each criticality program and to require USEC
to correct or mitigate any significant deficiencies.
The final activity that I would like to discuss briefly is NRC's
continuing review of USEC's performance in the transition phase leading
up to and following any layoffs. There are regulatory requirements for
minimum staffing levels and overtime usage, and reduced staffing can
affect critical functions such as plant operations and maintenance.
There are two resident inspectors at each gaseous diffusion plant, who
regularly observe daily plant operations and interface with the plant
staff. The resident inspections are supplemented with specialist
inspections in such areas as radiation protection, fire protection,
nuclear criticality safety, chemical process safety, and material
control and accounting. To ensure that continued staffing changes do
not detract from the protection of public health and safety and
safeguards at the plants, NRC staff has increased its regulatory
oversight during the transition phase. In addition, NRC will conduct
increased safety and safeguards inspections, conduct meetings with USEC
management, the public, and other stakeholders on the transition
activities, and monitor performance trends such as backlogs,
operational events, overtime usage, and compliance with regulatory
commitments.
In conclusion, we have re-opened our financial evaluation of USEC
following the recent corporate credit rating downgrades from Moody's
and S&P. Based on the staff evaluation, the Commission will forward any
appropriate recommendations to Congress and the Enrichment Oversight
Committee for use in making future decisions regarding domestic
enrichment services. The NRC staff is also continuing to monitor
closely USEC's performance at the plants to ensure protection of public
health and safety and safeguards.
Thank you, Mr. Chairman. I would be pleased to answer any questions
that you and Members of the Subcommittee may have.
Mr. Whitfield. Mr. Paperiello thank you very much and thank
all of you for your testimony.
Mr. Paperiello, let me ask you a couple of questions. Since
USEC has been privatized, how many times has the NRC fined USEC
for unsafe operations?
Mr. Paperiello. In the past year, year and a half, I'm
aware of two occasions. There might have been some earlier. I
just don't have the number--I could find it out, but I just
don't know.
Mr. Whitfield. Were there civil fines associated with that?
Mr. Paperiello. Yes, in the past year, maybe 15 months, we
have issued a fine to Portsmouth as a consequence of a fire
that occurred in December 1998. And we recently issued a fine
to Paducah for employment discrimination.
Mr. Whitfield. And do you know about what the dollar figure
was?
Mr. Paperiello. The second one was, I believe, $88,000. I
think the one at Portsmouth was $50,000 in that range, but I
know I'm under oath. It is in that order.
Mr. Whitfield. The NRC is now considering an application of
USEC to enrich uranium up to 5 percent or 5.5 percent at the
Paducah plant. And allegations have been made by certain
employees there, as well as others, that in the criticality
safety area that NRC is applying a different standard in this
evaluation than they have in the past. What is your comment
about that?
Mr. Paperiello. Yes, they have a program to upgrade the
enrichment percentage at Paducah. It is a program--as explained
to us, will require them to submit, I think, as many as five
license or certificate amendments.
The first amendment came in, I think, at the end of last
year and somewhere in the February timeframe. We rejected that
application. It was an application to change the limit on
enrichment at certain portions of the plant. We rejected it
because they did not provide an adequate technical basis. As
you're aware, criticality is potentially a very serious problem
at any fuel facility. We all know what happened in Japan last
year. And there was not an adequate technical basis--that was
the basis of our rejection. It had nothing to do with change in
policy, at least from our viewpoint, but it was an increase in
the enrichment over what the facility--at those stations that
had been originally designed for without an adequate technical
basis.
Mr. Whitfield. And when do you expect a decision would be
made upon this application?
Mr. Paperiello. We don't have applications in front of us.
They laid out a timeframe to us for when they would be
submitting information. You made reference to a letter that we
sent them. I don't know if it is the letter I read, but the
letter I read, we basically said we are not going to be able to
do this by the end of this calendar year if some of the
information you're going to submit to us isn't going to come in
until November. That was the point.
Mr. Whitfield. Okay. And so you don't have all the
information at this point.
Mr. Paperiello. We do not have all the information. What we
were replying to was the timeframe that they were laying out to
us.
Mr. Whitfield. Mr. Moniz, at privatization, a large sum of
uranium was transferred to USEC as a part of that privatization
agreement. Did you have any concern that their selling it on
the open market would possibly drive down the price of uranium?
Mr. Moniz. First, I should note there was a large transfer
of uranium consistent with the EPACT requirements and then a
second transfer----
Mr. Whitfield. Was the first transfer 30 million pounds?
Mr. Moniz. No, that was approximately 120 million pounds, I
believe. However, of that only 23 million pounds was DOE-owned
uranium.
Mr. Whitfield. And what was the second one?
Mr. Moniz. I could get that for you later on. Quite a bit
of the first transfer, more than 90 million pounds was actually
owned by utilities. The second part--thank you, here it is. The
total EPACT transfers were about 140 million pounds, and the
Privatization Act transfers 31 million pounds.
Also I will note that we have taken, as I mentioned in my
oral statement, we have actually taken 58 million pounds of DOE
uranium off the market for 10 years which compensates for part
of that. In the transfer, more than half of the uranium had
restrictions on its entry into the market. We--the Secretary
wrote to the corporation, in fact, late last year, asking
questions about this, and the corporation has responded in
terms of their plans to market at the rate of 10 percent of
worldwide market demand.
Mr. Whitfield. Mr. Mark Stout of the Uranium Producers of
America will be testifying later today and in his testimony he
says that USEC's selling of this uranium on the market is
decimating their industry. Do you have any reaction to that?
Mr. Moniz. Well, it's clear the market is soft, prices have
fallen substantially. I think the USEC sales certainly
contribute to it, although we believe they are not the only
element. There have been significant liquidations of supplies,
for example, by various groups.
Mr. Whitfield. I have one more question and then we will
proceed.
Mr. Gensler, Mr. Stiglitz was chairman of the President's
Council of Economic Advisors and was serving in that capacity
when discussions were being considered in the administration
about whether or not USEC should be privatized. And he was very
strong in his view that it should not be privatized, and he
enumerated certain reasons that have come to pass. In your
involvement with the discussions on the decision to privatize
or not privatize, were there other people in the administration
that were as opposed to it as Mr. Stiglitz, from your
recollection?
Mr. Gensler. Just for the record, I actually joined the
administration after, I think, Mr. Stiglitz went on to his
important duties at the World Bank, so I don't know in a
comparative sense. But I am aware of his points of view and
that as we move forward, we looked at this in a thorough way
with regard to the statutory criteria. And having had that
debate before the President--before the 1997 opinion to move
forward, which actually was before I joined the administration.
Mr. Whitfield. Mr. Stupak.
Mr. Stupak. Thank you, Mr. Chairman. Mr. Moniz, I thought
you just said in your testimony that dumping on the market was
not driving down the price of the U.S. SWUs; correct?
Mr. Moniz. The discussion we just had of natural uranium?
And I said certainly sales in fact by anyone, and certainly by
USEC, added to the current market condition. What I added was
that there were other sources as well of uranium that lowered
the market price.
Mr. Stupak. Okay. There was a document that was just handed
in front of you and it is part of the record. Right there by
your name plate there. If you could take a look at it. It
goes--it states: As a result, USEC has been selling natural
uranium stocks received through privatization and conversion
services to raise cash to sustain itself.
This is about the third paragraph, last line.
Natural uranium prices have as a result fallen to new lows
despite the March 1999 U.S.-Russian Transfer Agreement intended
to shore up the natural uranium tract of the HEU Agreement.
Is that an accurate statement?
Mr. Moniz. Yes, again I would just add it is not the only
driver of the prices.
Mr. Stupak. Let's read on here a little bit. It says the
Russians feel like they don't have to reduce their returns to
benefit USEC stockholders, so it wouldn't give USEC a lower
price on SWUs this year. Is that also correct?
Mr. Moniz. I cannot confirm the Russian attitude. This was
an analysis done.
Mr. Stupak. That's what it says in the next paragraph
there; right?
Mr. Moniz. Yes, but this was one person's analysis.
Mr. Stupak. DOE analysis.
Mr. Moniz. Correct. All I'm saying is I don't know if it
correctly reflects the Russian view.
Mr. Stupak. Or DOE is not correct?
Mr. Moniz. It could be. This is an analysis.
Mr. Stupak. Okay. Let's get down to the bottom line of
USEC's bailout proposal as DOE saw it. The USEC wanted $200
million or USEC would withdraw as the executive agent under the
HEU plant and--quoting now--in addition, USEC might choose to
close the Portsmouth, Ohio, plant in the near term. This would
save the company approximately $113 million per year, but would
cause unemployment for 1,500 people that were provided some
assurances or reassurance in a 1998 Treasury agreement that
they would be employed through 2004.
So either USEC gets $200 million, or 1,500 people are out
of work and the government has no executive agent. That
basically was the proposal and that's the way it was analyzed
there; right?
Mr. Moniz. That was one analysis presented. You are
certainly correct that at that time, people----
Mr. Stupak. That is one analysis by DOE; right?
Mr. Moniz. Correct.
Mr. Stupak. That sounds a bit like blackmail, doesn't it?
Either you give us $200 million or we close down this plant and
1,500 people are unemployed.
Mr. Moniz. USEC made an argument in terms of statements
about spot market prices versus HEU Agreement prices and from
that calculated $200 million.
Mr. Stupak. Or 1,500 people are laid off.
Mr. Moniz. Sir, I am certainly not aware--I am personally
not aware of that statement ever having been made.
Mr. Stupak. But you cannot close a plant before 2005 unless
there is a significant event; right? Is that the agreement?
Mr. Moniz. Correct. That is part of the Treasury agreement;
yes, sir.
Mr. Stupak. And now we get this proposal or analysis that
was made--and I guess it was made at the White House--dated
November 12, 1999, stating that the bailout would protect,
``continued plant operations that otherwise would be in
jeopardy in Ohio and Kentucky.'' What would be a significant
event which would lead to the closure if you have assurance it
is going to be open until 2005?
Mr. Moniz. Actually, Mr. Gensler may want to answer that.
There are a set of conditions spelled out in the Treasury
agreement as to what would constitute such a significant event.
They are well-defined financial benchmarks.
Mr. Stupak. Okay.
Mr. Gensler. The concept was that which might go to the
viability of the organization. And they were reductions of
earnings to certain levels, reductions of SWU pricing to
certain levels or operating margins, and as we have talked
about here----
Mr. Stupak. Have any of these significant events occurred
yet?
Mr. Gensler. As I said in my prepared remarks, we informed
USEC in January that if they thought there was a significant
event, they should so notify us. They haven't notified.
Mr. Stupak. They have noticed you of any significant event?
Mr. Gensler. They have not done so.
Mr. Stupak. Is their credit rating below what it should be,
the investment credit?
Mr. Whitfield. Mr. Stupak, if you would finish up this
question, then we will move on to Mr. Strickland.
Mr. Stupak. Oh, I'm sorry.
Mr. Gensler. I think if the question is--let me just state
factually as I understand it, that in early February, as noted
earlier by one of my administration colleagues, was downgraded
by Moody's and S&P. Each of those downgrades, as was currently
stated on the record, are noninvestment great.
Mr. Stupak. So in your agreement that is a significant
event?
Mr. Gensler. Again, we have not been notified as such by
USEC, and we think it is really, as we said in January,
incumbent upon them to come to us and tell us their thinking if
they are so considering such an action.
Mr. Stupak. That is one of the events in that agreement.
Right? That's one of the significant events in the agreement,
yes or no?
Mr. Gensler. The agreement does list noninvestment grade
rating as you so suggest.
Mr. Stupak. Thank you.
Mr. Whitfield. Mr. Strickland.
Mr. Strickland. Mr. Gensler, is there anything in the
Treasury agreement that requires USEC to notify Treasury that a
significant event has occurred?
Mr. Gensler. We believe that they do have that obligation.
We so put them on notice in January with regard to that.
Mr. Strickland. If they have got that obligation and one of
the conditions had been met, then who has got the
responsibility for pursuing this? Under the terms of the
agreement, who has an obligation to determine a significant
event has occurred?
Mr. Gensler. The terms of the agreement are that they have
an obligation to keep those plants, both plants open till----
Mr. Strickland. How do they inform you of that?
Mr. Gensler. I think there are many ways they can inform
us. They haven't sought any of those ways----
Mr. Strickland. Then are we assuming that USEC----
Mr. Gensler. [continuing] ways to inform us if they were so
considering taking it to their board.
Mr. Strickland. Then can we assume--and as the Treasury
Department, I think you have an obligation here. Can we assume
that USEC is not meeting their obligation to inform you that a
significant event has occurred if a significant event has
occurred and we all know it has? Come on, we can read.
Mr. Gensler. I actually have to say there are two
components of it. Whether they are considering and taking to
their board such dramatic action that I know this committee, we
are all very interested in, and the question of significant
event. They have not informed us of either of those.
Mr. Strickland. If they inform you that such an event has
occurred, will you commit to us that you will investigate
whether or not Morgan Stanley's recommendation was followed by
USEC's management in manipulating circumstances so that such an
event would occur?
Mr. Gensler. I would say that if such time comes that they
inform us, that we will look at all relevant factors at that
point in time. To your earlier question, sir, as I recall from
the earlier panel, I would say that I think it would be quite a
risky path for any company to take, but particularly this
company and quite an unusual a path to take to try to----
Mr. Strickland. Don't you think it is interesting that
Morgan Stanley would put in writing such a recommendation? I
assume that would be unusual for a company like Morgan Stanley
as well, but they obviously have. I don't think it would be
unusual for us to presume that USEC may have taken advice from
Morgan Stanley since Morgan Stanley was intricately involved in
advising over the entire privatization process having received
multiple, multiple, multiple millions of dollars; and Morgan
Stanley has been very public in saying they think that USEC
needs to close one of the two plants. It seems to me there is a
relationship, some relationship between USEC and Morgan
Stanley.
I have a series of questions that I think you could answer
yes or no. Were you aware that administration officials,
including Dr. Stiglitz, opposed privatization based on national
security concerns? Just a yes or no answer if you would.
Mr. Gensler. I was aware of that.
Mr. Strickland. Were you aware of concerns raised by
Senator Domenici in this letter to Secretary Burger raising
concerns about national security matters regarding
privatization?
Mr. Gensler. I was aware, and I know that the national
security part of the administration did a thorough review of
those matters.
Mr. Strickland. Did it surprise you that USEC showed up
last fall asking for a $200 million bailout or threatening to
possibly walk away from the executive agent status?
Mr. Gensler. I would say that I was very encouraged that on
December 1--they stayed with that status--that they tried to
negotiate or bring to Congress their private sector concerns. I
think we are fortunate that they stayed with that agreement
even though Congress saw fit to move forward without giving
them that money.
Mr. Strickland. Were you responsible as a senior official
of the administration for advising the USEC board on national
security issues before privatization?
Mr. Gensler. No, I was not.
Mr. Strickland. I have a copy of a transcript here in which
Chairman Rainer--this was immediately before privatization--in
reaction to questions raised by Mr. Burton, who was one of the
board members, regarding being briefed by the NSC in regard to
the matters raised by Senator Domenici and others and I quote
from Mr. Rainer in response to Mr. Burton, ``I gave you some
information saying that I talked to Gensler and they are
prepared to move ahead. Can't you derive answers from that?
Don't you have the ability to derive answers from the fact that
Gary Gensler said senior people in the administration had been
all over this thing for days and days and days and we should
take confidence in the fact that they are expecting us to move
ahead with privatization?''
Was Mr. Rainer inaccurate in describing his conversation
with you regarding these national security matters?
Mr. Gensler. With all respect, I am not sure what the
context of that conversation was in the meeting that you are
referring to.
Mr. Strickland. Well, Mr. Burton was raising questions and
Mr. Burton was asking that before privatization the board be
briefed on these national security matters, and his request for
such a briefing was denied. Does this seem improper to you that
on a five-member board before such a momentous decision to
privatize this industry, when one of the five board members
asked for a national security briefing before that final
decision was made that that board member would be denied
getting such a national security briefing? Does that seem
appropriate?
Mr. Gensler. The role of Treasury was to review; and as I
said, we were very much in touch with the national security
part of the administration, the National Security Council, the
NSC, the State Department, CIA, Department of Energy on these
matters. The board deliberations as Congress had set up were
separate from the deliberations. We were not--I was not party
to that board meeting that you are referring to. And if board
members requested that, it was certainly amongst the board
members. This would be the first time I would be familiar with
that.
Mr. Strickland. I would hope you would feel disappointed to
know that Mr. Rainer was using a conversation that he had had
with you as a way of denying such a briefing.
One further question, if I could, Mr. Chairman. Mr.
Gensler, I think you say in your testimony that privatization
occurred as a result of the unanimous vote of the board, and I
think it is important for us to understand that on that five-
member board, three members voted to privatize, one member
abstained, and one member voted no. This was a decision that
was made in a conflictual atmosphere, and it was an important
national security decision; and it seems to me that it was
pushed forward, national security concerns were put by the
wayside and even a Senator, even a Senator writing a letter
raising national security concerns was, for all practical
purposes, just ignored in order to get this privatization taken
care of as quickly as possible.
Mr. Gensler. If I could just respond to help out a bit. If
I in any way left you with the wrong impression, I didn't mean
to. The vote of the board in June 1998 on whether to move
forward with the privatization through the initial public
offering or the leverage buyout proposal was actually a
unanimous vote. I think the vote that you are referring to was
on the pricing, on the day of the pricing when the road show
had been completed after about a month, at that point in time,
which was the split vote.
Mr. Strickland. Thank you.
Mr. Whitfield. Thank you. I have a couple of more
questions, and then Mr. Stupak and Mr. Strickland if you have a
couple more, and then we will dismiss this panel.
Mr. Moniz, October 27, 1999, Mike Telson, this is in
document 17, has a memorandum to the Deputy Secretary. This is
in conjunction with USEC's request for a $200 million
appropriation from the government because of the money that
they calculated they were losing by implementing the agreement
with the Russians. In this document USEC calculates what it
would cost them to enrich 5,500,000 SWU. And then the
Department of Energy calculated what they thought it would cost
them to enrich 5,500,000 SWU. According to this document, DOE's
calculation was twice per SWU what the USEC calculation was. Is
it true that you used that document as one of the factors in
deciding not to pursue the $200 million appropriation?
Mr. Moniz. There were several inputs in the discussion at
that time period, including--this probably comes from the
analysis that the Department had performed. The analysis that
was done, and I must stress that was not a validated analysis.
In fact they did not have access to all of the data from either
the corporation or from the Department of Energy. This was a
group that was familiar with the industry. We felt we could
still learn something from that. They clearly came out with
results that were quite different from some of the USEC
analyses. I am not sure if those discrepancies have been fully
resolved, but clearly one of them in the discussion involved
power issues.
Mr. Whitfield. Would you agree that USEC is the beneficiary
of very low kilowatt hour costs?
Mr. Moniz. We have the government contract which gives them
a significant amount of very low-cost power, although not all
their power is low cost and that becomes the issue at the
margin. If it then goes to much higher cost power, the
implications are very, very significant.
Mr. Whitfield. Implications are catastrophic, really.
Mr. Moniz. One cent per kilowatt hour additional cost
translates into $25 additional per SWU, so it has a significant
impact.
Mr. Whitfield. Which can be disastrous.
Mr. Moniz. Right. In the end, the Secretary had some
exchanges by letter with Mr. Timbers. We performed analyses,
had discussions with the corporation. In the end we clearly
came to the conclusion that the HEU Agreement was an asset for
USEC, and again all I can say is that their decision,
presumably a business decision in my view, supports the idea
that it is a net asset.
Mr. Whitfield. Mr. Gensler, if USEC tomorrow made the
announcement that they intended to close the Paducah plant or
the Portsmouth plant, what would Treasury do?
Mr. Gensler. Well, I think under our arrangements, they
need to come to us before they make such announcements. We have
put them on notice of that, and I think they understand we have
had dialog with their lawyers on that matter as well. So I
think the time to talk with Treasury is before such
announcement, and they have indicated they understand that full
well.
Mr. Whitfield. At this point they have had no discussions
with you about this.
Mr. Gensler. That is right.
Mr. Whitfield. Mr. Stupak.
Mr. Stupak. Thank you. Mr. Moniz, do you think the
conversion industry in the United States should be eliminated?
Mr. Moniz. No, I don't.
Mr. Stupak. Then ConverDyn, should they just go out of
business sooner rather than later then?
Mr. Moniz. I have no basis to judge that. Certainly, I
realize the conversion prices have fallen by more than a factor
of two.
Mr. Stupak. I want to discuss a little bit about that
because the president of the Uranium Producers of America is
going to testify later today that DOE's transfer of an
equivalent of 11.6 million pounds of uranium through USEC with
no restriction on when it could be sold, plus large amounts of
uranium in USEC had accumulated by underfeeding, have destroyed
the domestic uranium market as uranium is being sold at less
than the cost of producing it. As you know, USEC has been
actively selling its uranium inventory to generate short-term
cash and earnings and the price has fallen. Do you agree with
this analysis?
Mr. Moniz. Certainly, that USEC has sold substantial
amounts of uranium is a fact. As I said earlier, that has
certainly been one of the factors in driving down the prices
and causing the soft market.
Mr. Stupak. Do you think Congress intended the domestic
uranium industry should pay for the privatization of USEC?
Mr. Moniz. Well, as stated earlier, first of all, the
transfers of the Department's uranium to USEC upon
privatization, first 56 percent flowed directly from EPAct. The
remainder is authorized in the privatization act and
counterbalancing that, the USEC Privatization Act was 31
million pounds of the total 73 million pounds of DOE uranium.
Countervailing that, is that DOE has taken--in the context of
the HEU Agreement 58 million pounds off the market.
Mr. Stupak. But it hasn't lifted the price that much,
though.
Mr. Moniz. It certainly has not.
Mr. Stupak. Apparently DOE and no one else knew that USEC
had accumulated over 30 million pounds of uranium that it could
sell without restrictions prior to privatization and that those
sales would be pressed to markets. So why did DOE transfer
uranium without restrictions on the sale?
Mr. Moniz. Roughly half of the uranium transferred had
restrictions or its entry into market.
Mr. Stupak. How about the other 30 million? No one knew
about it?
Mr. Moniz. I don't know that in detail. I could get back to
you for the record.
[The following was received for the record:]
From 1993 through 1998, the Department of Energy transferred about
172 million pounds of uranium in the form of natural uranium
hexaflouride to USEC in order to meet requirements under the Energy
Policy Act of 1992 (EPACT) and the USEC Privatization Act. Of the total
172 million pounds transferred, approximately 99 million pounds was
customer-owned uranium. The remaining amount, of approximately 73
million pounds represents the Department's transfers of its uranium to
USEC.
Forty-two million pounds or about 57 percent of the total DOE
transfers of 73 million pounds was restricted by law or agreement in
terms of the manner in which it can be introduced into the uranium
market. While the 31 million pound difference was not market-
restricted, the majority of it--about 22 million pounds--represented
the Department's working inventory for non-government operations and
became USEC Inc's initial working inventory. The transfer of the
working inventory--a requirement under the EPACT--occurred in 1993 and
was the subject of a 1994 review by the General Accounting Office that
concluded that the initial transfers had been completed consistent with
the requirements of the EPACT. Another 0.9 million pounds of DOE's
working inventory was transferred in 1995. The remaining 7 million
pounds in uranium inventory transfers were accomplished over the next
several years to satisfy other requirements of the EPACT. A table
showing the transfers of uranium inventories follows:
------------------------------------------------------------------------
Quantity of
Uranium
(Millions
Document Date MTU of lbs. of
U08,
equivalent)
------------------------------------------------------------------------
EPACT TRANSFERS..................
Determination Order (interim).... 7/1/93
--customer owned uranium......... ........... 37,982 98.75
--government owned working ........... 8,800 22.88
inventory.......................
-------------------------
Subtotal, uranium initially ........... 46,782 121.63
transferred.....................
Memorandum of Agreement (MOA).... 12/15/94
--HEU (USEC receives blended down ........... 2,400 6.24
LEU)............................
Determination Order (final)...... 11/21/95
--adjustment for actuals in ........... 340 .88
government owned working
inventory.......................
Amendment to MOA FY98-1.......... 5/15/98
--Natural and low enriched ........... \1\4,253 \1\11.06
uranium.........................
Amendment to MOA FY98-2.......... 5/15/98
--correction in amount of HEU ........... 208 .54
expected to be recovered by USEC
-------------------------
Total, uranium transferred to ........... 53,983 140.35
meet EPAct......................
USEC PRIVATIZATION ACT TRANSFERS.
Memorandum of Agreement.......... 4/21/98
--50 Metric Tons of HEU (To be ........... \2\5,000 \2\12.97
delivered 1999-2004)............
--7,000 Metric Tons of Natural... ........... \2\7,000 \2\18.20
-------------------------
Total, uranium transferred to ........... 12,000 31.17
meet USEC Priv. Act.............
-------------------------
Total, uranium transferred to ........... 65,983 171.52
USEC............................
Less: customer owned uranium ........... -37,982 -98.75
(transferred 7/l/93)............
-------------------------
Net, uranium transfers from DOE ........... 28,001 72.77
to USEC.........................
------------------------------------------------------------------------
\1\ The MOA restricts the introduction of the uranium into the market to
not less than 4 years and no more than 35 percent in any one year. A
Secretarial Determination of No Material Adverse Impact covering this
transfer was signed by Secretary Pena on May 15, 1998.
\2\ The USEC Privatization Act and the MOA restricted the introduction
of the uranium into the market such that no more than 10 percent of
the uranium could enter the market each year after 1997 or 4,000,000
pounds, whichever is less. The Act exempts this material from the
Secretarial Determination requirement.
Mr. Stupak. That is the problem. No one knew about it
before; and it sounds like you know the answer, but you are not
telling us.
Mr. Moniz. No. I will tell you anything I know. I am afraid
I don't know specifically about this 30 million pounds. Again,
over half of the uranium transferred had very clear
restrictions on sale into the U.S. market. The other issue, of
course, is that within the restriction on their uranium sales,
one certainly anticipates they would also make business
decisions in terms of the overall market. And also I should add
some of those sales have come from overseas.
Mr. Stupak. But they need cash so they are selling at less
than market value and really hurting the domestic industry
because they got it basically for free?
Mr. Moniz. I would say that in the privatization, there was
a rather complex set of assets and responsibilities
transferred. Part of it was inventories. Part of it was the
power contracts. There were also responsibilities in terms of
the restrictions on employment, the restrictions on the
operation of the plant.
Mr. Stupak. They basically got the uranium for free.
Mr. Moniz. It was a transfer of assets and responsibilities
that was judged in the private sector.
Mr. Stupak. Was there monetary paid to the U.S. Treasury
for that uranium end responsibility?
Mr. Moniz. It was one of the assets in the privatization,
and Treasury received $1.9 billion total when this private
sector judged the set of assets and responsibilities.
Mr. Stupak. They dump it when they want, drive down the
private industry and the private market, and that is what we
are experiencing now; and that is what the next testimony will
be.
Mr. Moniz. Some unrestricted and some restricted uranium.
Mr. Stupak. Thank you, Mr. Chairman.
Mr. Whitfield. Mr. Strickland.
Mr. Strickland. Thank you. Mr. Gensler, just one more
question. Is USEC legally obligated to inform you that a
significant event has occurred; and if USEC chooses to close a
plant without informing you, is there any legal reason why they
should be required to inform you? Is there anything in the
Treasury agreement that legally binds USEC to inform Treasury
that a significant event has occurred?
Mr. Gensler. Let me say again I am sorry because that was
our counsel. We think that it is most definitely implied in our
contract. We so informed them in our dialogs with them counsel
to counsel. They have understood that and as I said earlier
haven't come to us at this point in time, but there has been no
debate when we have talked to them about that.
Mr. Strickland. I guess my response would be this is an
important transaction, and I would hope that there would have
been some with all due respect to your legal counsel someone
associated with Treasury that would know how to write a binding
legal contract which would have made such an obligation very
clear.
Dr. Moniz, one of my favorite people as a matter of fact.
Mr. Moniz. Thank you.
Mr. Strickland. This is my question. Under Public Law 104-
134, the USEC Privatization Act section 3108, which deals with
the effect of the transfer of contracts, isn't it true that the
Government remains obligated to the parties--and by parties I
mean customers or consumers with whom USEC contracts--even if
USEC breaches these contracts so that in effect the Government
is the guarantor who is on the hook for any of USEC's actions?
Mr. Moniz. As you know, I am not a lawyer; and I would like
to clarify this to make sure it is correct. I believe this is
correct that we have a liability there.
Mr. Strickland. So these provisions basically relieve USEC
of any----
Mr. Moniz. If I may add. Yes, sir, unless the contracts are
changed.
Mr. Strickland. So these provisions relieve USEC of any
ultimate accountability to those with whom they contract?
Mr. Moniz. Well, presumably to run a viable business at
least, they would want to be honoring their contracts.
Mr. Strickland. Well, other scenarios where they may for
some reason choose not to continue to operate a viable
business.
Mr. Moniz. It is not for me to speculate on that at the
moment. Again, I would just repeat that from our perspective, I
think there are three critical public equities for us to pay
attention to and quite frankly be concerned about: the
operation issue, the security of supply issue, and the
commitments to the communities and workforce in Paducah and
Portsmouth.
Mr. Strickland. The reason I raise the question with you,
because we say privatization was something that was widely
supported and a good thing, but at the end of the day it is
Uncle Sam, it is the taxpayer that ultimately is still
accountable for any decision that USEC makes; and that is one
of the reasons I continually find myself asking why
privatization.
Mr. Paperiello, when you make your analysis, will the
Russian material be counted as supply in determining a reliable
supply of enrichment during your review of these matters?
Mr. Paperiello. I don't know. I mean, I am sure people on
my staff do. I just don't know.
Mr. Strickland. It seems to me that if the requirement is
to have a reliable domestic supply that we ought not to be able
to count as a part of that supply material coming in from a
foreign source subject to changes within the Russian Government
or any number of other circumstances. Will you investigate that
question and provide us with an answer?
Mr. Paperiello. Yes, sir.
[The following was received for the record:]
In NRC's financial review, we are looking at business plans,
contracts, and other related documents in order to conclude whether
USEC will have the ability to continue operating and thus provide a
``reliable and economical source of domestic enrichment services.''
With respect to contractual commitments, uranium downblended by Russia
from the HEU Agreement once it has entered the U.S. market will be
considered as a non-domestic source for filling USEC contractual
commitments. The financial effects on USEC of the requirement for it to
be the Executive Agent for the Russian HEU Agreement will be reflected
in USEC's financial projections and will be a part of our review.
Mr. Whitfield. Mr. Strickland, one more question. I would
like to remind Mr. Paperiello, emphasize that we very much
would like to have an answer to that question.
Mr. Paperiello. Yes, sir.
Mr. Strickland. One final question quickly. If after you do
your analysis, which I am sure will not be made available
public, but you will submit this analysis to the commission, if
your findings are such that you are unable to tell the
commission that USEC in your judgment as a result of your
analysis is unable to continue to be a reliable supplier of
domestic product, what are the choices that face the commission
under the law?
Mr. Paperiello. I think our major option is to inform the
administration and the Congress. If you think of our authority,
I can revoke or suspend the certificate. That would mean the
plant couldn't operate. So, therefore, you wouldn't have a
domestic supply. As a regulatory safety agency, we are sort of
in a--this is an unusual situation for us to be in.
Mr. Strickland. That is why I think it is important for
this committee and for this Congress to understand that if you
reach such a determination and you cannot legally license or
certify these plants for continued operation, the only
reasonable thing to happen in my judgment is for this
government to once more assume ownership and control of this
industry because we cannot allow these plants simply to
continue to cease functioning. And I just point that out
because I think that could be a very real possibility and that
as a government, as I said earlier, we cannot allow this
industry to fail; but we can allow this corporation to fail.
Thank you, Mr. Chairman. I turn back my time.
Mr. Whitfield. I want to thank this panel for your
statements and answering our questions. We may have some
additional questions that we will get to you and would hope
that you would respond to those in writing. This panel is
dismissed. Thank you very much.
I will now call the third panel: Mr. James Graham,
president of ConverDyn; Dr. Shelby Brewer, president of S.
Brewer Enterprises; Mr. Richard Miller, policy analyst for PACE
International; Mr. Mark Stout, vice president, Uranium
Producers of America; and Dr. Joseph Stiglitz with the World
Bank.
The Chair would advise each of you that under the rules of
the House and rules of the committee, you are entitled to be
advised by counsel. Do any of you desire to be advised by
counsel during your testimony here today? The anticipated
response is no. In that case, if you would please rise and
raise your right hand, I will swear you in.
[Witnesses sworn.]
Thank you all very much for being with us this afternoon.
We genuinely appreciate your coming to testify. All of you are
well versed on this issue, and we look forward to your
testimony. Mr. Graham, if you would like to start.
TESTIMONY OF JAMES J. GRAHAM, PRESIDENT, CONVERDYN; MARK STOUT,
VICE PRESIDENT, LAND AND MARKETING, URANIUM PRODUCERS OF
AMERICA; SHELBY T. BREWER, S. BREWER ENTERPRISES, INC.; JOSEPH
E. STIGLITZ, WORLD BANK; AND RICHARD D. MILLER, POLICY ANALYST,
PACE INTERNATIONAL
Mr. Graham. Mr. Chairman and members of the subcommittee,
my name is Jim Graham; and I am the president and CEO of
ConverDyn, and I would like to thank you for the opportunity to
participate on behalf of the U.S. domestic conversion industry.
For the sake of brevity, I have submitted my written testimony
and will speak along some key issues and points for our
business and really would state that the situation of the
conversion industry today is one of desperation. This should be
a time of optimism because in 1999 the U.S. industry elevated
their record output of electricity from the nuclear industry to
over 23 percent. But instead we may be witnessing a demise of
the conversion industry and of the nuclear fuel cycle here in
the United States.
ConverDyn is the sole provider of conversion services in
the United States. Conversion is just a chemical process of
converting U308, an oxide and UF6, a gas. It is a small
component, less than 4 percent of the nuclear fuel cycle cost;
but it is a critical component in the fuel cycle. Our facility
in Metropolis, Illinois, is the only facility as I mentioned
and represents 60 percent of the conversion capacity in North
America. We are one of five in the world. The future of the
facility and the 350 remaining workers and more importantly a
secure domestic supply of nuclear fuel for the U.S. industry
today is in doubt. Primarily two actions by the U.S. Government
has placed our industry in peril: first, the HEU Agreement
between the governments of the United States and Russia and,
second, the privatization of the U.S. Enrichment Corporation.
The HEU Agreement was fully supported by ConverDyn and its
parent companies, and we continue to support that agreement
today. The second, privatization of U.S. Enrichment
Corporation, occurred almost simultaneously with the HEU
Agreement. The key point here, had, one, the HEU Agreement been
signed and supported by all, the industry today would be okay
in our opinion. But simultaneously these two events and
aggressive action of marketing the material transferred to U.S.
Enrichment Corporation has basically put our industry at peril.
An example is the HEU Agreement. Over the next 15 years, the
annual amount of conversion services delivered into the United
States is almost the same output from our conversion facility
in Metropolis, Illinois.
Unfortunately, the commercial fuel created by the HEU
Agreement is sold primarily into the United States market. It
has not in Europe. Ias not in Asia. It is all in the United
States. For 50 years the U.S. Government has been a good
participant in the U.S. nuclear industry but never as a
competitor. With the privatization of the U.S. Enrichment
Corporation, a competitor to both the conversion industry and
the uranium industry was created overnight. This company at
privatization had an inventory in excess of 28,000 metric tons
of conversion services. This is the equivalent of almost 3\1/2\
years of output from our facility. Their cost basis of this
material was basically zero. There is no cost basis.
I have an interesting chart that I would like to show to
illustrate the points of our industry, if I may. This first
chart shows the decline in price for the conversion services
over the last 3 years. You can see the decline in the last 2
years were very dramatic; and you can see the events,
privatization of the U.S. Enrichment Corporation and the HEU
Agreement, both impacted.
The next chart shows the annual sales, forward sales for
ConverDyn; and you can see that two occurrences, primarily the
U.S. Enrichment Corporation, you can see the decline in our
forward sales as an industry in the United States. The next
chart shows the same period of time that the sales from the
U.S. Enrichment Corporation of their uranium and conversion
into the marketplace. This information is obtained from their
own annual reports, 10-Ks, 10-Qs, and public information. It is
this decline in our own business sector and a growth of the new
competitor that is basically putting our industry in peril.
The continued loss of ConverDyn of sales from this
aggressive government-created competitor may make it
uneconomical for us to continue. We estimate at the current
rate of sales by the U.S. Enrichment Corporation that their
inventory may be exhausted in 3 to 4 years. The problem is
ConverDyn and our facility in Metropolis, Illinois, may not
survive that long. We are in this business to make money and to
survive. In the future if we are gone, the need will be there
for conversion but the Metropolis plant may not be. So, Mr.
Chairman, the combination of these two sources of conversion
services, the Russian HEU and the transfers of material from
DOE, is a burden that the sole U.S. domestic supply of
conversion services cannot bear. Without relief, the demise of
our industry is very likely. Thank you.
[The prepared statement of James J. Graham follows:]
Prepared Statement of James J. Graham, President and CEO of ConverDyn
on Behalf of the Domestic Uranium Conversion Industry
Mr. Chairman, and Members of the Subcommittee, my name is Jim
Graham and I am the President and CEO of ConverDyn. I would like to
thank you for the opportunity to speak before you today on behalf of
the U.S. domestic uranium conversion industry. The situation for the
uranium conversion industry is one of desperation. In 1999, nuclear
power generated a record twenty three percent of the electricity output
for the United States. This should be a cause for optimism, but instead
we may be witnessing the end of the domestic nuclear fuel cycle
industry.
ConverDyn is the sole manufacturer in the U.S. uranium conversion
industry. Conversion is the chemical process by which the form of
uranium is changed from U308 to UF6 and is a small (representing less
than 4% of the fuel cycle cost) but critical chemical step in the
production of nuclear fuel for electric power production. Our facility
in Metropolis, Illinois is the only such production facility in the
U.S. and represents approximately 60% of the conversion capability that
exists in North America. The future of this facility, its 350 remaining
workers, and more importantly a secure domestic supply of nuclear fuel
for the U.S. industry are in doubt.
Unfortunately, there have been two actions by the U.S. government,
which have placed the future of this facility in peril. The first was
the agreement between U.S. and Russian governments (the HEU Agreement)
to turn former Soviet nuclear weapons into fuel for commercial
reactors. ConverDyn and its affiliated parent companies supported and
continue to support this effort. The second was the privatization of
the United States Enrichment Corporation. These occurred almost
simultaneously in the U.S. and placed undue burden on the domestic
industry. One of these events could have been dealt with in the normal
commercial environment, but both events together have forced the
domestic uranium conversion industry out of balance and at great risk
of being eliminated.
The HEU agreement will turn former Soviet nuclear weapons material
into commercial nuclear fuel for the next 15 years. This creates an
annual quantity of nuclear fuel in the U.S. nearly equal to the yearly
output of the Metropolis facility.
U.S. & Russia HEU Agreement
Delivery Schedule vs ConverDyn Production
(MTU @ UF6)
------------------------------------------------------------------------
Year gLRussian ConverDyn
------------------------------------------------------------------------
1996................................ 3,636 Actual........... 11,600
1997................................ 5,454 Actual........... 11,500
1998................................ 7,300 Actual........... 11,600
1999................................ 4,545 Actual........... 9,300
2000................................ 9,100 Projected........ 9,300
2001................................ 9,100 Projected........ 9,300
2002................................ 9,100 Projected........ 9,300
2003................................ 9,100 Projected........ 9,300
------------------------------------------------------------------------
The reduction of nuclear weapons is a cause that should be
supported economically by the entire country. Unfortunately, the
commercial nuclear fuel created by the HEU program is sold into the
U.S. market to the detriment of the established commercial processing
facilities, such as the Metropolis facility.
However, the HEU agreement by itself would not have significantly
impacted the domestic industry. It was the subsequent privatization of
the United States Enrichment Corporation (USEC) that has placed the
domestic uranium conversion industry at risk.
For more than fifty years, the U.S. government has been a
participant in the U.S. nuclear industry, but never as a competitor.
Almost overnight, the U.S. government created a new competitor in the
U.S. for uranium and conversion companies as a result of this action.
Specifically, the privatization of USEC created a private company whose
primary liquid asset is the 28,000 plus metric tons equivalent of UF6
transferred at privatization by DOE. This is the product of ConverDyn
and as such, does not require conversion. USEC was privatized with
enough former U.S. government inventory to replace almost three years
of production from the Metropolis facility.
USEC Inventory At Privatization
(MTU @ UF6)
------------------------------------------------------------------------
Year USEC ConverDyn
------------------------------------------------------------------------
1998................................ 28,000+............... 11,500
1999................................ ?................. 9,300
2000................................ ?................. 9,300
2001................................ ?................. 9,300
------------------------------------------------------------------------
Public documents from USEC indicate that this former U.S.
government inventory is being sold aggressively to the commercial
nuclear industry as direct competition to the Metropolis facility
contrary to what the government intended in the Privatization Act of
1996. (Attachment 1).
The USEC UF6 inventory has no cash cost and since privatization,
USEC has been aggressively selling their inventory and obtaining a
significant portion of conversion market share and revenue from the
industry. Continued loss of sales by ConverDyn to this aggressive
government created competitor may make it uneconomical to continue to
maintain the Metropolis facility. We estimate that at the current rate
of sale, this inventory will be exhausted in approximately 3 to 4
years. At that time conversion services from a facility like Metropolis
will again be needed by the U.S. nuclear industry. However, unless some
action is taken in the interim, the ConverDyn facility is likely to be
shut down. Attachment 2 of this statement describes proposed remedies.
Mr. Chairman, the combination of these two sources of conversion
services--Russian HEU imports and USEC transfers from DOE--is a burden
that the sole U.S. domestic provider of primary uranium conversion
services cannot bear. Without relief, the demise of the only domestic
conversion provider, ConverDyn, is likely!
background
What is uranium conversion and what is its role in nuclear power?
Uranium conversion is a process of chemical transformation by which
natural uranium concentrates in the form of U3O8 are converted to
natural uranium hexafluoride (UF6). Uranium conversion is one of the
four major steps in the production of nuclear fuel. These steps are
components of the nuclear fuel cycle illustrated herewith.
1. Uranium Production--Uranium is a naturally occurring element in
the earth's crust. When sufficiently concentrated by natural physical
and chemical forces, it may be economic to mine the ore by open-pit,
underground methods. Uranium is typically recovered from the ores by
alkaline or acid leaching. Uranium is also produced by in-situ leaching
and as a by-product of phosphate fertilizer, gold, and copper. The
final product of uranium mining and processing is usually a mixture of
uranium oxides referred to as either natural uranium concentrates,
U3O8, or ``yellowcake.'' Natural uranium concentrates contain 0.711
percent 235U, the active isotope in the nuclear process. The remaining
99.3 percent is the inactive isotope 238U.
2. Uranium Conversion--Natural uranium concentrates in the form of
U3O8 are converted to natural uranium
hexafluoride (UF6) in order to provide an appropriate feed
material for the next step in the nuclear fuel cycle: enrichment. The
conversion process includes feed preparation, reduction with hydrogen
to UO2, hydrofluorination to UF4, fluorination to
UF6, which is a gas at moderate temperatures and
purification. Uranium in this form retains the natural isotopic
concentration of \235\U of 0.711 percent.
3. Uranium Enrichment--Enrichment is a process of concentrating the
\235\U isotope to higher levels of 3 to 5 percent in order to increase
the efficiency of the fuel for nuclear reactors. Concentration of the
\235\U isotope occurs by molecular weight in the gaseous diffusion
process used in the U.S. and Europe, as well as in the centrifuge
process used in Russia and Europe.
4. Fuel Fabrication--Enriched uranium hexafluoride is converted by
fabricating companies to UO2, pelletized, and inserted into
zirconium alloy tubes which are then combined into bundles of nuclear
fuel.
Each of these steps must be completed in order to produce a final
product. Each step in the production process has a different character,
different participants, different regional distribution, and a
different value. These characteristics are referred to as the
``Industry Value Chain.'' It is notable that most of the world's
nuclear fuel cycle participants are foreign-owned, yet the U.S. is the
world's largest user of nuclear fuel with over one hundred operating
nuclear units.
Impact of HEU Agreement and USEC Privatization.
The sole manufacturer in the U.S. domestic uranium conversion
industry is ConverDyn. Today, ConverDyn is being threatened by two
recent actions by the U.S. Government:
1) The U.S.--Russian agreement on the conversion of highly-enriched
uranium (HEU) in Russian nuclear weapons to nuclear fuel; and
2) The Privatization of the United States Enrichment Corporation.
Impact of Russian HEU Agreement--Nuclear warheads contains the same
three components as nuclear fuel: 1) natural uranium concentrates, 2)
conversion services, and 3) enrichment services. When the U.S.
government devised a plan in 1995 to subsidize the dismantlement of
Soviet nuclear weapons, the enrichment services component of those
weapons received the bulk of the attention since it accounts for the
bulk of the value.. Unfortunately, this plan failed to fully address
the disposition of either the natural uranium concentrates component or
the conversion components. As a government corporation, USEC was
appointed as Executive Agent for the implementation of this plan.
Ultimately, in 1999, an agreement for disposition of uranium
concentrates was reached between three western, but non-U.S., companies
and the Russian government. This agreement provides a defined structure
for the disposition of uranium, but, again, no format for the
disposition of conversion addressed. As a result, conversion is
available from a variety of uncontrolled sources, which disrupt the
stability of the industry.
The quantity of natural uranium concentrates and conversion
services contained in dismantled Russian nuclear warheads amounts to
approximately 9.1 million kgU as UF6 per year. Not all of this material
can be sold in the U.S. each year due to the existing quota provision,
but it is imported physically and is seen by nuclear utilities as a
vast resource which will provide an abundant supply of uranium,
conversion and enrichment far into the future. The U.S./Russian HEU
agreement provides for the enrichment component to be used by USEC. The
USEC Privatization Act specified that natural uranium concentrates
could enter the country only in gradually increasing quantities. No
limitations of any kind were applied to conversion services. ConverDyn
attempted during the drafting of the Privatization Act to obtain the
same quota provisions provided to the natural uranium component but was
advised by the government that we were considered a monopoly. ConverDyn
protested unsuccessfully that the U.S. market was truly international
and that all primary conversion providers have access to the available
U.S. market.
Impact of the USEC Privatization--When USEC was privatized, it
received a substantial endowment of both uranium concentrates and
conversion services contained in excess of 28,000 metric tons of
uranium hexafluoride. This endowment was designed to provide USEC with
a working inventory, to fund certain clean-up operations and to provide
sufficient assets to ensure that the privatization process would be
well received by investors. Both in terms of the privatization process
and certain of the transfers of material to USEC, some strings were
attached to prevent dumping of USEC products. These strings included
limitations on the annual sales of the natural uranium concentrates
transferred to USEC. No restrictions, however, were placed on sales of
the conversion services contained in those transfers.
In its S-1 registration statement of June 29, 1998, USEC published
its plans to sell most of its inventory between 2000 and 2005. USEC's
CEO Mr. William Timbers later stated that these sales would amount to
less than 10 percent of the world requirements. USEC's major sales
arena, however, is the U.S. and 10 percent of world requirements
equates to approximately 40 percent of U.S. requirements. Even worse, a
large portion of U.S. requirements for that period have already been
filled. Hence, there is little or no room for additional sales by
others, especially a newly created competitor with significant cash
needs. Since most of these sales are to be in the form of UF6, the U.S.
conversion industry is suffering a crippling blow.
USEC does not seem to understand the impact of sales of this
magnitude on the nuclear fuel components industries. In a July 27, 1998
letter to the State department, Mr. Timbers stated: ``USEC will dispose
of natural uranium in a gradual and flexible manner so that the
company, as well as all participants in the global uranium marketplace,
can benefit from the maintenance of a healthy uranium market.'' A few
months later, Mr. Timbers further stated: ``We will dispose of our
uranium inventory in a gradual market-sensitive manner.'' Reality has
proven this not to be the case.
Prices Have Fallen--Conversion prices in the spot market fell from
$6.00 per kgU as UF6 in 1997 to $2.45 in early 2000. Primary
supply has remained unchanged during this period while at the same time
consumption has increased slightly, but secondary supply from U.S.
Government inventories transferred to USEC pursuant to the
privatization process and from converted Russian nuclear weapons has
entered the market in massive quantities. Historically, the uranium
conversion business as been supported by long term contracts. The
volume of activity in the spot market remained less than ten percent
until the early-nineties when secondary supplies started to impact the
market increasingly. Additionally, long-term prices were historically
higher than spot prices and did not follow the spot market activity
until the last several years. The market dynamics created by an
aggressive government-created competitor in the market place has forced
the long-term market value down and forced the long-term prices to
nearly track the spot market.
Sales Have Dropped--The primary conversion sales volume has been
cut to less than half of the 1997 level. Aggressive sales at below
market prices by USEC has reduced the amount of material sold through
the competitive bidding process as utilities obtain more and more
material in ``Off-market'' transactions at discount prices.
Revenues Have Collapsed--As a consequence of reduced prices in
combination with reduced volume; revenue expectations for the domestic
uranium conversion company have been cut by a factor of four.
Unfair Competition--HEU and USEC inventories of conversion services
have no current cost basis. Uranium conversion services contained in
the converted Russian HEU were produced by the Soviet Union in the
distant past for military purposes. Conversion services currently being
marketed by USEC were produced by the U.S. government over the past
half-century as strategic and working inventories. Primary converters
such as ConverDyn, which have current costs for labor, chemicals and
electricity, cannot compete with this supply. These old inventories are
valued at market price and there is no loss to be incurred or reported
no matter how low the price goes. At present market consumption rates,
the USEC UF6 inventories will significantly impact the market for
another three to four years.
Importantly, the USEC Privatization Act itself makes it clear that
the impact on the domestic uranium conversion industry shall be
monitored and that action is to be taken ``to prevent or mitigate any
material adverse impact on such industries.''
To date, it is clear that if any such monitoring has been done, it
has missed the indisputable and devastating impact that the
privatization has had on the conversion industry. In fact, prior to and
since privatization, the conversion industry has not even been
consulted. Further, and almost needless to say, no action has been
taken to mitigate the impact on our industry.
[GRAPHIC] [TIFF OMITTED]64028.175
Attachment 2
potential u.s. government actions to save the domestic nuclear fuel
cycle
Proposed Remedies--Mitigation of the impact of USEC and/or the HEU
UF6 sales may be easily accomplished by a combination of the following:
1. Amend the Privatization Act to eliminate unfair competition from
conversion services contained in converted Russian HEU. Such
competition may be mitigated by including conversion services
in the already established quota for the contained uranium.
Such a quota would not impact the implementation of the HEU
deal; rather it would ensure that resultant materials did not
severely impact the U.S. market.
2. DOE could purchase the remaining uncommitted portion of the USEC UF6
inventory for a negotiated market value. This would provide DOE
with an asset that could be sold later at a greater value and
at such time as a Secretarial determination could show that
release of incremental portions would not have a major impact
on the marketplace.
3. Alternatively, DOE could borrow the uncommitted portion of the USEC
UF6 inventory at a negotiated interest rate and return to USEC
for sale (not delivery) at such time as a Secretarial
determination could show that release of incremental portions
would not have a major impact on the marketplace. Such a plan
preserves the inventory as an asset for USEC, yet provides a
means for it to earn current revenue. Certainly, just
withholding the material from the market will increase the
asset value and provide for even greater interest payments.
4. DOE could purchase an amount of conversion services for a four-year
period of time at a negotiated price to assure the viability of
the sole domestic uranium conversion facility. DOE would be
able to sell the conversion at such time as a Secretarial
determination could show that release of incremental portions
would not have a major impact on the marketplace.
Attachment 3
converdyn: history and facilities
In November 1992 affiliates of Honeywell and General Atomics formed
ConverDyn, a 50-50 partnership to more effectively market the uranium
conversion services provided by Honeywell's Metropolis, Illinois plant.
This facility has operated since the late 1950's. Both Honeywell and
General Atomics are U.S. companies that have been in existence for more
than 50 years. Honeywell is a publicly held corporation listed on the
New York stock exchange while General Atomics is a privately held
company.
ConverDyn's major activity is the supply of UF6
conversion services to its nuclear power utility customers worldwide.
The major activity at the Metropolis facility is the production of
UF6 and related services.
Production Capacity--Annual production capacity is 12,700 mtU as
UF6.
History of Production--Metropolis production has increased steadily
over the years commensurate with our customers' demands. Production was
curtailed to 8.2 million kgU as UF6 in 1999 from 12.7
million kgU due to deteriorating market conditions.
Property and Personnel--The Metropolis Works is located on 1,000
acres of property with the actual operation occupying 50 acres with the
balance in farms and woodlands. Approximately 350 people are employed
at the plant; total annual payroll exceeds $16 million. The Company
place strong emphasis on excellence in performance especially in the
areas of safety, environmental and regulatory matters. Metropolis Works
sets the standard for safety and environmental/regulatory performance
in its industry. Its personal injury record is consistently better than
the chemical or nuclear industries as a whole, and it enjoys a good
relationship with all regulatory agencies, including Environmental
Protection Agency, Occupational Safety and Health Administration, and
the Nuclear Regulatory Commission. The UF6 operation is
conducted under NRC License, SUB-526.
Product Quality and Performance--UF6 production quality
is 99.99% and has been consistently supplied to all Western enrichment
facilities. The Metropolis facility was among the first plants to
receive ISO-9000 certification at Honeywell. The UF6 quality
assurance program includes formal operating procedures and operator
training, as well as preventive maintenance for process equipment and
assurance programs for cylinders and laboratory equipment and
instrumentation.
Mr. Whitfield. Mr. Graham, thank you.
Mr. Stout, if you would give your statement. We will try to
keep these to about 5 minutes.
TESTIMONY OF MARK STOUT
Mr. Stout. Mr. Chairman, members of the committee, my name
is Mark Stout. I am vice president of marketing for Rio Algom
Mining Corporation and president of the uranium Producers of
America.
Mr. Chairman, Congress has repeatedly recognized the
importance of maintaining a healthy domestic uranium industry.
In the 1992 Energy Policy Act, Congress mandated that U.S.
Government stockpiles must not be introduced into the
commercial marketplace in a manner that would adversely impact
the domestic uranium industry. That principle was reiterated
again in 1996 in the USEC Privatization Act. Nevertheless,
domestic production has declined by 50 percent, and the value
of uranium assets worldwide have plummeted in the 2 years since
USEC was privatized. The principal cause is the Department of
Energy has failed to meet their congressional mandate to use
U.S. Government stockpiles in a manner not detrimental to
domestic uranium industry.
Two government initiatives which greatly influenced the
precarious position we find ourselves in today: first, through
the Russian HEU Agreement, our government has chosen to pay for
its non-proliferation policies concerning former Soviet nuclear
weaponry by requiring the commercial marketplace to absorb this
material and bear the burden--most of the burden of the cost.
Second, in an effort to maximize the value of the corporation--
of the enrichment Corporation when it was privatized, huge
government inventories were assigned to USEC before the
corporation went public. The amount of U.S. Government uranium
given to USEC is equivalent to about 25 times the amount of
current domestic production.
Together these two initiatives have severely depressed the
price of natural uranium. The depressed price threatens not
only the viability of the domestic uranium industry, but
ironically it also threatens the Russian HEU Agreement. It was
clearly foreseen in 1995 by sponsors of the USEC privatization
that a balance needed to be achieved in metering into the U.S.
and western markets Russian HEU uranium and U.S. Government
uranium transferred to USEC.
During 1995 representatives of the domestic uranium
industry and USEC met congressional staff and DOE to work out a
reasonable schedule for the sale of Russian HEU and USEC
uranium. The results of these discussions were incorporated
into the 1996 USEC Privatization Act. The privatization act
limited to approximately 31 million pounds the amount of
uranium to be transferred to USEC and restricted annual USEC
uranium deliveries in the U.S. to no more than 10 percent of
the amount transferred or 4 million pounds, whichever was less.
In April 1996, President Clinton signed the privatization
act. Shortly thereafter, USEC began to market uranium far more
aggressively and in much greater quantities than envisioned.
The USEC S1 registration statement filed with the SEC over 2
years later revealed publicly for the first time that about two
and a half times the amount of uranium inventory allowed in the
privatization act was to be transferred to USEC and that USEC's
projected sales volume would far exceed the limitations set
forth in the act.
After reviewing the surprised disclosures contained in the
S1, Senator Domenici expressed concern over the impact of the
additional transfers on both the uranium market and on the
Russian HEU Agreement. He urged the National Security Council
to review the impact of these transfers prior to the
administration's decision to approve the sale of the enrichment
corporation. Shortly thereafter, Senator Domenici explicitly
requested the administration not to transfer the excessive
uranium to USEC. Senator Domenici's recommendations were not
taken. The results of the excessive government transfers have
been production curtailments, mine closures, termination of
development plans, departure of critical talent, layoffs, large
asset write-downs and a total cessation of expiration by every
uranium mining company in the U.S. and most overseas, for that
matter.
When President Clinton signed the privatization act, the
price of uranium was $16.15 per pound on the spot market. Since
that time it has now dropped to about $9.10 a pound. Domestic
production in 1996 totaled 6.3 million pounds. This year we
will be lucky to make 3 million pounds. Perhaps even a better
measure of what the USEC privatization has meant to our
industry which is reflected in the CAMECO which is the largest
publicly traded uranium company in the world stock price which
has declined from $72.90 in April 1996 to 16.80 at last week's
close of the foreign exchange, a loss of some 80 percent of its
value. The domestic uranium industry cannot survive for much
longer the uncontrolled dumping of transferred U.S. Government
stockpiles by USEC.
Mr. Chairman, we urge this committee to look into why the
quantities of uranium transferred from DOE to USEC increased so
dramatically from the time the initial privatization plans were
agreed to in 1995 and into the details of USEC's sales
activities today, especially in light of a report issued
earlier this week by the bank of New York that cites USEC-
estimated uranium sales totaling over 67 million pounds through
fiscal year 2006, an amount which would seriously limit the
ability of Russian HEU uranium and U.S. uranium to enter the
market. We urge the committee to consider legislation, to
reaffirm the intent of the privatization act with respect to
USEC uranium transfers and sales and make it clear that USEC
does not have legal immunity from taking actions contrary to
the provisions of that act. Thank you.
[The prepared statement of Mark Stout follows:]
Prepared Statement of Mark Stout, President, Uranium Producers of
America
Mr. Chairman and distinguished members of the Committee, my name is
Mark Stout. I am Vice President, Land and Marketing, for Rio Algom
Mining Corporation, and I currently serve as President of the Uranium
Producers of America (UPA), a trade association of domestic uranium
mining and milling companies. I am testifying today on behalf of the
UPA.
Mr. Chairman, the domestic uranium producing industry has a
remarkable and unique relationship with the United States Congress
dating back to the enactment of the Atomic Energy Act in 1954. The
uranium industry was created by the Federal Government to serve
national security needs in the early years of the Cold War. Private
industry responded admirably to the government's urgent need for
uranium. After satisfying the national security need to fuel the
nation's nuclear defense, the domestic industry became a reliable
source for the country's nuclear power industry. The domestic industry
has established and maintains today valuable strategic resources. These
resources include skilled operators, coveted technology and competitive
uranium operations and reserves.
Congress has repeatedly recognized the importance of maintaining a
healthy domestic uranium industry. When Congress addressed energy
policy in the 1992 Energy Policy Act, it mandated government stockpiled
uranium must not be introduced to the commercial marketplace in a
manner that would adversely impact the domestic mining industry. That
principal was reiterated again in 1996 in the United States Enrichment
Corporation Privatization Act.1
---------------------------------------------------------------------------
\1\ See Exhibit 1 (showing EPACT and Priv. Act. impact provisions).
---------------------------------------------------------------------------
Mr. Chairman, despite repeated efforts by Congress, the domestic
uranium industry is rapidly becoming an endangered species. The
Department of Energy has continuously failed to meet its charge to use
U. S. government uranium stockpiles in a manner not to adversely impact
the domestic uranium industry. As this committee considers the impact
of recent U.S. government owned uranium transfers to USEC, we ask that
a way be found to enforce and monitor existing uranium policy. Despite
DOE's contention that its actions would have no adverse impact, the
facts show the contrary. The U.S. is rapidly becoming totally dependent
on U.S. and Russian government stockpiles and production from foreign
producers. In our view, this is shortsighted energy policy and
dangerous economic policy. This is true for any valuable natural
resource commodity, especially one that fuels almost one-fourth of our
nation's electrical generation.2
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\2\ The most notable energy trend in the U.S. today is the
continued electrification of our economy. Approximately 23% of
electricity produced in the U.S. comes from uranium-fueled nuclear
power reactors. At present, the majority of the natural uranium to be
processed and fabricated into fuel for these reactors is supplied from
foreign sources. Title X, Subtitle B of the Energy Policy Act of 1992
recognized the national need to avoid dependence on imports in this
critical energy sector.
---------------------------------------------------------------------------
Two government initiatives have greatly influenced the precarious
position in which the domestic producers find themselves today. First,
our government has attempted to conduct its non-proliferation policies
concerning former Soviet nuclear weaponry by requiring the commercial
marketplace to absorb this material and bear the lion's share of the
cost of its implementation. Second, in an effort to maximize the value
of the Enrichment Corporation's privatization, large government
inventories were transferred to USEC before the Corporation went
public.
Together, these two initiatives have severely depressed the price
of natural uranium. The depressed price threatens not only the
viability of the domestic uranium industry, but ironically it also has
negative implications on the U.S./Russian HEU Agreement, which is an
important part of our national nuclear non-proliferation program.
More specifically, the transfer of DOE inventories to the United
States Enrichment Corporation (USEC) has created devastating material
adverse impacts on domestic uranium production due to the ensuing
aggressive selling of these transferred inventories by USEC. According
to the government's Energy Information Administration in 1998, USEC's
level of marketable inventory approached 60 million pounds
U3O8 equivalent. EIA stated this was enough to
supply six-eight million pounds per year to the market roughly over the
next decade. As shown by the chart attached as Exhibit 2, utility
uncommitted demand cannot absorb these supplies, especially when
Russian HEU uranium and conventional producers are interjected into the
mix.3
---------------------------------------------------------------------------
\3\ See Exhibit 2 (Estimated Uncovered Uranium Requirements, 2000-
2018).
---------------------------------------------------------------------------
Despite U.S. mining technology that allows domestic producers to
compete in productivity with foreign producers, USEC sales have pushed
the price of uranium below any valid cost of production.4
USEC uranium sales combined with sales resulting from the
implementation of other U.S. government initiatives have in effect
``taken'' the good faith investments made by domestic uranium
producers. The adverse impact on the price of uranium from these
secondary sources has severely impacted the domestic producers. We
believe that the substantial damage to the producing industry is in
direct contravention of the congressional mandate concerning the
disposition of government uranium stockpiles expressed both in the
Energy Policy Act of 1992 and the USEC Privatization Act.
---------------------------------------------------------------------------
\4\ With the advent of in situ leach technology, U.S. production
centers' productivity has compared favorably with foreign producers as
shown on Exhibit 3.
---------------------------------------------------------------------------
Today we are faced with an extremely unusual economic situation in
uranium. World uranium production is only one-half the demand for
nuclear power reactor fuel. In 1999, uranium production was
approximately 80 million pounds U3O8 compared to
demand of 160 million pounds. This magnitude of a supply/demand
imbalance is unprecedented in industrial commodity markets. Generally,
in energy or metals markets an imbalance of only 1 or 2 percent will
bring on substantial swings in the commodity price, as we have
witnessed most recently with crude oil. This huge supply/demand
imbalance in uranium, which has developed over the past ten years, is
primarily the result of massive sales of Russian and U.S. government-
owned inventories. In the early 1990's several hundred million pounds
of natural uranium stockpiled in the Soviet bloc countries were dumped
in Western markets.5 By 1995, a major portion of these
inventories had been absorbed. However, as natural uranium imports from
the former Soviet Union declined due to consumption and as a result of
``Suspension Agreements'' limiting their entry into the U.S., Russian
HEU (highly enriched uranium from dismantled nuclear weapons) began to
be imported. It appeared in 1995 that Western markets could accommodate
the deliveries of uranium purchases specified by the U.S./Russian HEU
Agreement. This schedule called for natural uranium deliveries from HEU
to be about eight million pounds U3O8 in 1995
through 1999, increasing to about 24 million pounds
U3O8 in the year 2000 and beyond. As the HEU
agreements were being finalized, 6 progressing along a
somewhat independent path were plans to privatize the U.S. Enrichment
Corporation. It was clearly foreseen in 1995 by sponsors of USEC
privatization that a balance needed to be achieved in metering into
U.S. and Western markets HEU uranium and U.S. government uranium
inventories to be transferred to USEC.
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\5\ In the late 1980s, the Soviet Union began selling uranium in
all forms into the Western World market at sales prices significantly
below the production costs of all western producers. In response, in
late 1991, a group of domestic uranium producers (the Ad Hoc Committee)
joined by the Oil Chemical and Atomic Workers (OCAW) union filed an
anti-dumping suit against the Soviet Union. About one month after the
suit was filed, the Soviet Union dissolved and the case proceeded
against the individual republics of Kazakhstan, Krygystan, Uzbekistan,
Tajikistan, Ukraine, and Russia. The preliminary finding by the
Department of Commerce ruled in favor of the Ad Hoc Committee and OCAW
and determined that a dumping duty of 115.82% was appropriate. This
extremely large dumping duty would have effectively precluded any
imports of uranium from these republics. However, a provision of U.S.
trade law allowed the U.S. government to settle these cases without
domestic industry participation or agreement because these republics
were considered non-market economy countries. Therefore, rather than
letting the cases proceed to final dumping orders, in 1992 the U.S.
Government entered into ``Suspension Agreements'' with Russia,
Uzbekistan, and Kazakhstan. The ``Suspension Agreements'' set up CIS
sales quotas legal in the U.S. as a function of market price, U.S.
production, and other metering mechanisms. These republics were granted
market quotas under the suspension agreements notwithstanding the prior
determination that affirmed dumping. Since 1992, a total of almost 30
million lbs. U3O8 has been imported into the U.S.
duty free from these countries.
\6\ Once again, the Administration recognized the need to not
adversely impact the domestic production industry in the U.S./Russian
HEU Agreements. The Agreement provided that its implementation should
be accomplished in a manner that minimizes impact upon the U.S. uranium
industry. This position was ratified in a letter from the DOE Director
of the Office of Nuclear Energy, Terry Lash, to Senator Craig Thomas in
1994. (See Exhibit 4.)
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During 1995, representatives of the domestic uranium producers and
USEC met congressional staff and DOE to work out a reasonable schedule
for the sale of HEU uranium and USEC's sales of U.S. government
inventories. The results of these discussions were incorporated into
the 1996 Privatization Act.7 The Privatization Act that
resulted from these negotiations limited to approximately 30 million
pounds U3O8 the amount of uranium to be
transferred from DOE to USEC and limited annual uranium sales by USEC
to no more than four million pounds per year. The Privatization Act
also specified the rate at which HEU uranium feed could be sold in the
U.S. This schedule allowed two million pounds
U3O8 of HEU uranium to be sold in 1998,
increasing by one or two million pounds each year to a level of 20
million pounds per year in 2009 and beyond. The purpose of this section
of the Privatization Act was to prevent the suppression of the price of
uranium. This would benefit uranium producers and enhance the value of
government stockpiles. It also served to promote long-term
competitiveness.8
---------------------------------------------------------------------------
\7\ See 42 U.S.C. 2297h-10
\8\ ``Privatization legislation should enhance the long-term
competitiveness of the nuclear fuel markets. Long-term competitiveness
means that the market includes multiple suppliers and avoids
concentration of market power. * * * The [nuclear utility] industry
believes that U.S. HEU transferred to USEC prior to privatization will
provide some competitive advantage . . . The provisions which provide
quantitative limits on the amount of material to be transferred and the
rate at which the material can enter the market provides a useful
framework for metering the introduction of the material to the
market.'' Testimony of Joe Colvin, Executive Vice President, Nuclear
Energy Institute, Before the Committee on Energy and Natural Resources,
United States Senate, June 13, 1995 (USEC Privatization Hearing).
---------------------------------------------------------------------------
U.S. uranium producers supported USEC's privatization and believed
that the limited transfers and schedules for uranium sales set forth in
the Privatization Act provided a reasonable transition period during
which the uranium production industry and commercial markets could
adjust to the implementation of the HEU Agreement and USEC
privatization. Our support was misplaced.
In April 1996, President Clinton signed the Privatization Act.
Shortly thereafter, USEC apparently began to market uranium far more
aggressively and in much greater quantities than envisioned. The USEC
S-1 registration statement filed with the SEC over two years later
(shortly before privatization in the summer of 1998) revealed publicly
for the first time that about two and one-half times the quantity of
uranium inventory allowed in the Privatization Act was to be
transferred to USEC and that USEC's projected sales volume would far
exceed the limitations set forth in the Act.
the usec privatization act
In 1996, Congress passed the Privatization Act in order to
authorize and facilitate the privatization of the enrichment program.
Congress again recognized that USEC's ties with DOE posed a threat to
private uranium producers and therefore built on the protections
against the sale or transfers of U.S. government stockpiles mandated by
the provisions of the Energy Policy Act.
Congress carefully included in the Privatization Act constraints on
DOE's authority to transfer or sell uranium. Thus, Sec. 2297h-10(a) of
the Act first makes it clear that the ``Secretary shall not . . .
transfer or sell any uranium (including natural uranium concentrate,
natural uranium hexaflouride, or enriched uranium in any form) to any
person except as consistent with this section.'' DOE was authorized in
the Act to transfer without charge up to 50 metric tons of HEU and
7,000 metric tons of natural uranium to USEC.9 This transfer
was the equivalent of approximately 30 million pounds of natural
uranium. The legislative history indicates that this transfer was
intended ``as a means of enhancing the value of USEC in the marketplace
and reducing DOE's costs of safeguarding surplus [highly enriched
uranium].10 In order to lessen the impact of USEC's sales of
this transferred material, USEC was restricted in delivering the
material for commercial end use in the United States ``to no more than
10 percent of the uranium transferred under this subsection or more
than 4,000,000 pounds, whichever is less, in any calendar year after
1997.'' 11
---------------------------------------------------------------------------
\9\ See 42 U.S.C. Sec. 2997h-10(c).
\10\ S. Rep. 104-173, November 17, 1995.
\11\ See 42 U.S.C. Sec. 2297h-10(c)(2)(B).
---------------------------------------------------------------------------
The Privatization Act went on to restrict commercial sales of DOE's
remaining stockpiles. Such sales were limited to those determined by
the Secretary that will not have an adverse impact on the domestic
uranium mining, conversion or enrichment industry. DOE was further
required to take into account in its determination sales of uranium
under the Russian HEU Agreement and the Suspension Agreement. Finally,
DOE could only sell the government stockpiled uranium at a price that
was not less than the fair market value of the material.12
---------------------------------------------------------------------------
\12\ See 42 U.S.C. Sec. 2297h-10(d)(2).
---------------------------------------------------------------------------
The presence of the USEC transfer provisions in the Act described
above establish that Congress intended that the sales provisions of
subsection (d) would apply principally to sales of uranium to parties
other than USEC. In fact, the legislative history of the Act indicates
that ``[t]o enhance the competitiveness of the enrichment market, it is
the intent of Congress that the Secretary shall sell material directly
into the market in lots of a size that end users can bid on it.''
13 This establishes that Congress envisioned sales directly
to end users such as electric utilities rather than sole-source sales
to USEC. This was critical to domestic producers because USEC has tied
sales of uranium with sales of enrichment services. USEC is the only
domestic provider of uranium enrichment services and controls through
prior U.S. government contracts the majority of U.S. enrichment supply
for several more years. Thus, USEC already wields enormous power over
consumers of enriched uranium. USEC's tying of sales of uranium with
sales of enrichment services enhances its ability to increase its
presence in the uranium services market, and also allows it to dominate
the market for sales of uranium as they have apparently chosen to do.
---------------------------------------------------------------------------
\13\ S. Rep. 104-173, dated November 17, 1995 at 28.
---------------------------------------------------------------------------
While the domestic producers continue to support a strong domestic
enrichment industry, we do not believe that subsidizing enrichment
sales with transferred U.S. government owned inventories is fair or
consistent with the principals in the privatization legislation.
usec inventory / doe transfers to usec
In addition to the authorized DOE transfer of approximately 30
million pounds mentioned above, USEC disclosed in its Prospectus that
it held additional inventories at March 31, 1998 totaling about 31.5
million pounds. The revelation of this large inventory came as a
complete surprise to the industry and was clearly not contemplated by
the sponsors of the Privatization Act.
In addition to this 31.5 million pounds, on May 18, 1998 the
Secretary of Energy issued a Determination (Secretarial Determination)
which authorized the transfer from U.S. government stockpiles of 3,800
metric tons of natural uranium and 45 metric tons of low-enriched
uranium to USEC.14 USEC also transferred .8 metric tons of
HEU at this time. The action of transferring the equivalent of 11.6
million pounds of DOE uranium to USEC violated the restrictions
contained in the Privatization Act on the amounts of uranium that could
be transferred by DOE to USEC.15
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\14\ The Secretarial Determination did provide some protections,
stating: ``In order to mitigate potential adverse impacts on industry,
the Department will restrict the United States Enrichment Corporation's
sale of the transferred uranium to a maximum of 35 percent of the total
in any single year, with the total quantity to be sold over a minimum
of 4 years.'' However, these restrictions were over and above those
established by the Privatization Act. Further, USEC's other uranium
inventories were not subjected to these restrictions. Finally, DOE put
no enforcement provisions in place to monitor USEC inventory sales of
any kind.
\15\ See 42 USC Sec. 2297 h-10(a).
---------------------------------------------------------------------------
To support this transfer, DOE prepared a Secretarial Determination.
It is worth noting that the Secretarial Determination and accompanying
analysis of potential market impacts characterized the transaction as a
transfer of uranium rather than a sale. Even if this transaction was a
sale, the only discussion of whether DOE received any value for this
transfer over and above the transfer set forth in the Act, is a passing
reference at page 2 of the DOE Analysis which stated that the transfer
is ``to settle certain Departmental liabilities at the gaseous
diffusion plants.'' The DOE Analysis offered no explanation of the
nature and dollar amount of any such liabilities and whether the
settlement of them was intended to represent the fair market value of
the transferred uranium. The Secretarial Determination is devoid of any
finding that the price paid to the Secretary was the fair market value
of the government's material.
More importantly, the Secretarial Determination and Analysis of
impacts of the transaction on the domestic uranium industry were
fatally flawed. For example, in the Analysis, DOE failed to consider
the cumulative effect of the significant quantities of uranium that had
previously been transferred to USEC, the effects of higher than
expected recovery rates from HEU received under the Russian HEU
Agreement, and large quantities of uranium that USEC amassed through
underfeeding in the enrichment process.16
---------------------------------------------------------------------------
\16\ Underfeeding refers to a process that uses more electricity
and less uranium to attain the desired enrichment, which results in a
buildup of excess uranium inventory. When the electricity used during
the enrichment is government funded, the net result is windfall of
surplus uranium to USEC. EPACT had urged the government enrichment
corporation to overfeed, that is, more uranium to boost the market.
However, underfeeding proved to be USEC's choice in order to build up
its uranium inventory.
---------------------------------------------------------------------------
DOE's Analysis also compared the material transferred with total
domestic utility requirements instead of comparing the transaction
material to the uncommitted demand of these utilities. DOE's analysis
greatly favored a low impact result as it ignored what utilities had
already purchased for future deliveries. The volume transferred should
have been compared to the uncommitted supply available for a fair and
meaningful analysis.
The domestic uranium industry, although the subject of this
Determination, was given no opportunity to comment and point out the
flaws in the Determination. In fact, the transaction took the industry
and the privatization sponsors by surprise. DOE's failure to allow
comments was somewhat surprising as the Senate Energy Committee staff
had stated in a memorandum, ``After the date of privatization, S. 755
allows DOE to market enriched uranium by competitive bid after DOE
certifies (through a full rulemaking process with public comment) that
the sale of the material will not have adverse impact on the domestic
mining or enrichment facilities.'' 17
---------------------------------------------------------------------------
\17\ June 19, 1995 memo from David Garmen and Sam Fowler to Members
and Legislative Assistants, Committee on Energy and Natural Resources.
---------------------------------------------------------------------------
DOE's 1998 determination of no adverse impact caused by the entry
of 11.6 million pounds is particularly puzzling due to the fact that in
1997 DOE reduced the amount of uranium it was to sell pursuant to a
1997 Secretarial Determination from 3.2 million pounds to one million
pounds in recognition of the producing industries warnings of the
adverse impacts the sale of 3.2 million pounds would cause. Further,
DOE canceled future sales due to changing market conditions that
magnified the adverse impacts to the production industry. Certainly
nothing changed to lessen impacts of the sales of government
transferred uranium between the time DOE canceled its 1997 and beyond
sales and redirected their uranium to USEC.
Again, the revelation that much larger uranium inventories would be
transferred to USEC first surfaced publicly in USEC's S-1 Privatization
Statement.18 After reviewing the initial surprise
disclosures of USEC's unexpected uranium inventory largesse, Senator
Domenici (a key privatization supporter) expressed strong concern over
the impacts on the additional transfers on the uranium
market.19 Senator Domenici also expressed grave reservations
about the inventory impacts on the Russian HEU Agreement. Senator
Domenici felt this was a national security concern and implored the
National Security Council to review the impact of the transfer prior to
the Administration's decision to approving the sale of the Enrichment
Corporation.20 The announcement of DOE's additional
transfers had an almost immediate adverse impact on the uranium market
and the domestic industry.
---------------------------------------------------------------------------
\18\ At page 7 of USEC's S-1, USEC championed its ability to
complete sales from national uranium inventory. USEC announced it was
``positioned to supplement its uranium enrichment revenues through new
sales of natural uranium. USEC's existing inventory contains a
substantial amount of natural uranium, which has been supplemented by
the transfer of additional uranium from the U.S. Government.''
\19\ See Exhibit 5 (Domenici to Berger letter of June 26, 1998).
\20\ Senator Domenici's concerns were well placed as the U.S.
government was forced to pay $325 million in 1998 for the Russian
natural uranium components made in 1997 and 1998 deliveries pursuant to
the Russian HEU Agreement. See Exhibit 6 (Domenici letter to Frueth, et
al. of July 20, 1998).
---------------------------------------------------------------------------
An initial response to USEC's revelation of its expanded inventory
holdings and its intent to bring these substantial inventories to the
market was the prediction of a major drop in prices by one of the
leading industry consulting companies. The Uranium Exchange Company's
(Ux) ``Market Impact of USEC Inventory Sales'' published in July 1998,
predicted if, as advertised in the S-1, USEC sold 60 million pounds of
those inventories into the market by the end of 2005, the spot market
price of uranium would decline to $8 to $10 from 1999 to
2004.21 If USEC utilized ``underfeeding'' as they apparently
have, the price according to Ux's projection could drop to $6.00 to
$9.00 from 1999 to 2004. Ux may have been a bit too pessimistic with
their price projection but it appears they did not project that Russian
HEU feed would be squeezed out of the market to the extent it has been.
---------------------------------------------------------------------------
\21\ This compares to UX's projection of $11 to $13 without the
addition of USEC's extra material.
---------------------------------------------------------------------------
In addition to the damage done to the domestic uranium industry as
a result of USEC's uranium, the U.S. Treasury has also paid a big
price. Only three months after USEC's privatization, Congress was
required to bail out the Russian HEU Agreement by purchasing the
natural feed component of the Russian HEU material delivered in 1997
and 1998. An appropriation of $325 million was required to make this
purchase. DOE, in recognition of the adverse impacts of its USEC
transfers, put this purchase material and its remaining uranium
inventories on hold for a ten-year period in an effort to bring some
order to the commercial market. While it would be difficult to perceive
how the sale of additional DOE material could survive a Secretarial
Determination, DOE's action has not had an effect in correcting price
imbalances.
In fact, every U.S. uranium producer has curtailed its uranium
production since USEC's privatization. Many producers have placed their
operations on standby, while others have cut back on production. New
Mexico, the historic leader of domestic production, is producing no
uranium for the first time since 1955. Many foreign producers have also
reduced production as production costs, in most if not all instances,
exceed the market price of uranium.22 It has been
devastating to our industry that quantities of uranium beyond those
specified in the Privatization Act were transferred and that the Act's
four million pounds U3O8 per year sales limit has
been ignored.
---------------------------------------------------------------------------
\22\ See Exhibit 7.
---------------------------------------------------------------------------
In retrospect, it was a serious mistake to have transferred any
U.S. government-owned inventories to USEC beyond a necessary in-process
working inventory. The success of the HEU Agreement and an entire
industry are now at stake. The result of the excessive government
transfers has been production curtailments, mine closures, the
termination of development plans, the departure of critical talent, and
a total cessation of exploration by every uranium mining company in the
U.S. and most overseas companies.
U.S. utilities generally contract two to five years in advance of
their actual uranium delivery requirements, leaving some flexibility in
their contracts for spot purchases if the spot market is attractive
enough. Overseas utilities generally contract even further into the
future. Therefore, when USEC was privatized with a large uranium
inventory, in order to convert that inventory to cash, USEC was forced
to sell at deep discounts into a market already largely committed. This
has suppressed the price of natural uranium obtained by real producers
and has devalued the uranium component of the Russian HEU material.
When President Clinton signed the Privatization Act in April 1996,
the published uranium price was $16.15 per pound
U3O8. Since that time, it has dropped to $9.10
per pound U3O8. Domestic production in 1996
totaled 6.3 million pounds. This year, production will be approximately
3 million pounds. Perhaps even a better measure of what the USEC
Privatization has meant to our industry is reflected in the CAMECO (the
largest publicly traded uranium company) share price which has declined
from $72.90 in April 1996 to $16.80 at last week's close of the Toronto
Exchange--a loss of approximately 80 percent of its value before the
USEC privatization.23
---------------------------------------------------------------------------
\23\ See Exhibit 8.
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If nothing is done to correct this situation, our nation will lose
valuable mining operations, ore resources and the skilled operators
that can produce uranium at very reasonable prices. Due in part to NRC
bonding and decommissioning requirements, it is extremely difficult and
costly to hold uranium mines in a standby mode.
In 1999, uranium provided about 23 percent of the electric power in
the United States. More capital is invested in nuclear generation
facilities than all other generating plants combined. In the U.S., only
coal fuels more electricity supply, and in Europe and Japan, nuclear
power ranks first in electricity production. Because of its low fuel
cost, reliability, air quality benefits and secure supply lines,
uranium has now become a fundamental energy source in the
industrialized world. Yet, it seems that in the United States, some
policy makers have come to view the nuclear power industry as a way to
absorb surplus military stockpiles of uranium over the short-run rather
than as a key power source for the long-run.
The uranium industry can relinquish a substantial share of the
commercial market to Russian uranium as provided by the HEU Agreements
and the Privatization Act and still maintain a reasonable level of
production to maintain competitiveness. However, it cannot survive the
uncontrolled dumping of transferred U.S. government stockpiles by USEC.
Mr. Chairman, we urge this Committee to look into why the
quantities of uranium to be transferred from DOE to USEC increased from
the time the initial privatization plans were agreed to in 1995 and the
actual public offering in 1998.
We urge the Committee to inquire as to whether DOE's economic
impact analysis of the USEC privatization that determined ``no adverse
impact on the domestic uranium industry'' presumed that the four
million pounds U3O8 per year USEC sales
restriction would be adhered to.
We urge the Committee to consider legislation to clarify the intent
of the Privatization Act with respect to uranium transfers and sales
and also whether USEC should continue to be granted legal immunity from
taking action contrary to the provisions of the Act.
We believe legislation should be adopted to make clear that further
transfers of uranium from DOE to USEC would only be authorized after a
full hearing from all affected parties and that U.S. government
contracts intended to subsidize USEC operations such as low-cost power
supply deals with TVA, be evaluated as to their impact on uranium
markets and the HEU Agreements.
The domestic producers have met with DOE and other members of the
front end of the nuclear fuel cycle to discuss potential remedies to
the current situation. In November 1999, the uranium and conversion
producers proposed that DOE repurchase the uranium transferred to USEC
during the privatization process.24 This proposal allowed
DOE to sell the repurchased uranium when uncommitted demand expanded.
This would have allowed DOE to recapture its expenditure and recognize
a positive return in the future.25
---------------------------------------------------------------------------
\24\ See Exhibit 9 (Stout letter to Richardson dated November 24,
1999).
\25\ See Exhibit 10 (Rate of Return on DOE Repurchase).
---------------------------------------------------------------------------
While DOE recognized ``that many issues intersect at the juncture
of the domestic uranium market--including the continued success of the
U.S./Russian agreement on highly enriched uranium,'' DOE was unwilling
to pursue this proposal.26 DOE did, however, agree to work
with industry and other stakeholders to resolve the complex issues
raised. We eagerly await any initiatives DOE might put forward. These
initiatives may require U.S. taxpayer involvement in financing the
Russian HEU Agreement or possibly a tax credit for nuclear utilities
purchasing new mined uranium, conversion and enrichment services. We
believe a solution can be achieved with Congress' assistance.
---------------------------------------------------------------------------
\26\ See Exhibit 11 (Magwood letter to Stout dated February 16,
2000).
---------------------------------------------------------------------------
Mr. Chairman, it is my fervent hope that we will look back at this
hearing as a milestone in refocusing the Congress and the
Administration in correcting past missteps in the handling of issues
affecting the front end of the nuclear fuel cycle. We believe that
nuclear power will play a vital role in producing clean, efficient
electrical power for our nation, lessening our dependence on coal and
foreign oil. The domestic uranium industry, given a level playing
field, can compete economically with producers in the western world and
assist in maintaining a secure source of fuel for our nation's nuclear
power plants. We also need strong conversion and enrichment programs to
complete the nuclear fuel cycle. It is of the utmost importance that
Congress takes the lead in correcting the errors of the past, and we
look forward to working with you and others that recognize the need to
do this.
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Mr. Whitfield. Thank you, Mr. Stout.
We have been called for our last vote of the day, but I
would like to go on with Dr. Brewer and get your opening
statement.
TESTIMONY OF SHELBY T. BREWER
Mr. Brewer. Thank you, Mr. Chairman. I am pleased to be
here to give you whatever perspective I can on this situation.
As you know, I had--I have had less than 1 week to prepare.
About 17 years ago, I was in the Reagan administration during
the first term; and I had responsibility for all of the nuclear
activities in the Department except weapons production. Uranium
enrichment was one of the responsibilities, and we had a very
severe market crisis during my tenure there. We took very acute
and realistic actions to turn that situation around and got the
market back. We reduced cost. We reformed the contract format.
We made provisions to burn out the secondary market which was
being fed by overpricing and take-or-pay contracts, et cetera;
and I emerged from that near-death experience with a conviction
that we needed to run this business like a business.
Now 17 years later and 2 years after the celebrated IPO,
the ox is in the ditch and you know the statistics. They have
been cited several times today. The stock value has depressed
70 percent. Market cap is down to $400 million. The company has
lost its credit standing, credit rating. Market share is down.
Costs are up. Backlog is down and most important, the quality
of the backlog, the margin implicit in the backlog is not
there. It is gone. And so--and reported earnings and projected
earnings are down. Moreover, USEC is selling their inventory,
$1 billion worth of inventory roughly that they inherited from
the Department of Energy. They are selling it rapidly to cover
these operating deficits. You have just heard that.
This raises a very crucial issue in my mind. What did USEC
management know in 1998 at the time of the IPO that is now
known? I should have said what did they not know then that is
obvious now. It was obvious then. It was obvious 5 or 6 years
ago that there was an elephant in the living room, and it is
just that simple. Now you have them here on Capitol Hill with
this pathetic the ``dog ate my lunch''--or ``dog ate my
homework'' excuse. It was the market that did it. It was the
Russian deal that trashed them. And it is baloney; it really
is. They negotiated the Russian deal. Why would they negotiate
something that places them at disadvantage?
So I would like to refer--and I will be very brief. As
Henry the IV said to his wives, I won't keep you long--to the
figure in my testimony and I will make these points very
briefly. They are selling below their total cost of production
plus margin. And that can't go on indefinitely. Their proposal
now is to renegotiate the Russian contract. Well, they can add
maybe--they can reduce their cost by maybe $5 an SWU, not much
to write home about.
There are--the other proposal that is being discussed is
the shutdown of a GDP, either Portsmouth or Paducah. That too
is only a temporary Band-Aid because Avlis has been terminated.
Avlis has been terminated. If you look at my chart, Mr.
Chairman, they are back in the soup even with the termination
of a GDP in the year 2004. And that is because the negative
backlog or the nonquality backlog in their order books keeps
growing on. It is a gift that keeps on giving year after year
after year. So I wish I could be more responsive to your
invitation for finding a magic bullet that would fix all of
this and in 1 week's time I have not done that.
But I know that blaming the Russian deal is a red herring.
That is not it. The way they are contracting for SWU production
now is not it. The backlog that they inherited was $125 an SWU
which is--or the contracts I signed in the early 1980's. And
then of course as has been discussed today and I won't go into
it, the IPO process itself is suspect. With the borrowing of
half a billion dollars in order to trump the bid of a private
company to acquire USEC, where was the SEC and the Treasury
during this oversight, during this process? I will quit at that
point. I think I am in enough trouble.
[The prepared statement of Shelby T. Brewer follows:]
Prepared Statement of Shelby T. Brewer, S. Brewer Enterprises, Inc.
Mr. Chairman and members of the Committee, I wish I could say that
I am pleased to present testimony on this subject. The Uranium
Enrichment Enterprise was one of my responsibilities when I was in the
Reagan Administration in the early 1980s. We faced a severe market
crisis in those days, and were able to turn it around and save the
business from insolvency. We owe much of the credit to John Longnecker
who I appointed to head the enrichment enterprise. The business emerged
stronger because we took painful actions to reduce costs, became more
customer attentive. We slimmed down, shaped the business, and became
competitive. John and I emerged from this ``near death experience''
with the conviction that the Uranium Enrichment Enterprise urgently
needed to be fundamentally restructured and run like a business,
market-driven, rather than an instrument of U.S. foreign policy, a
contractor feeding trough, and as a federal cash cow, an irresistible
plaything for federal budget aficionados barnacling onto any available
revenue stream. John and I strongly supported the government
corporation element of the 1992 Energy Policy Act.
The financial performance of the privatized entity, United States
Enrichment Corporation (USEC), has been dismal, and it's future looks
grave. I cite the following indicators:
1. The stock price has fallen by more than 70%, reducing USEC market
capitalization from $1.6 Billion in 1998 to about $400 million
in early year 2000.
2. Standard and Poors downgraded its credit rating at the end of August
1999, and again in February 2000 to below investment grade,
with a future outlook as ``negative''.
3. On February 23, 2000, Moody's also downgraded USEC's senior
unsecured bank credit and short-term debt ratings.
4. Merrill Lynch, one of the IPO underwriters, downgraded USEC's stock
in February 2000 based on concerns regarding future cost
compositeness.
5. USEC slashed its dividend in February 2000 due to poor financial
performance.
6. Fiscal year 1999 sales were less than promised, and fiscal year 2000
revenue estimates were lowered by about $100 million.
7. Despite aggressive sales of uranium inventories (transferred from
the Department of Energy to USEC), fiscal year 2001 earnings
estimates have been lowered to about $35 Million. USEC's annual
report for 1999 noted that net income has fallen consistently.
Selling this inventory is like living on principal rather than
earnings.
8. Gaseous Diffusion Plant (GDP) production costs increased and
exceeded $95/SWU, in contrast to USEC's goal of achieving GDP
production costs of $75/SWU.
9. USEC market share both world and US has declined: the US market
share has declined from 90% to 75%, and the world market share
has declined from 70% to about 40%. The backlog has declined,
and the quality of the backlog (margin) has declined
drastically as USEC began contracting SWU deliveries below
cost.
What concerns me most is the trend toward an ultimate liquidity
(cash flow) problem, a short step away from bankruptcy. I have no
access to USEC internal data, and properly so. I am using only data
which is in the public domain, and have had less than one week since
the invitation to testify, to data-gather and analyze. In recent trade
press interviews, USEC's senior management has discussed USEC's
declining revenue and increasing costs.
Using USEC's method of comparison, my projection of USEC's
financial condition (based on its SEC filing) is quite daunting as
shown in the attached figure. Terminology in the figure is defined as
follows:
USEC Breakeven Cost is the sum of direct GDP production cost, plus
Sales, General and Administrative Expenses (SG&A), plus
Research Development, plus Dividends. This is the price that
would recover all Production costs, overhead costs, and return
a profit margin.
GDP Cost is the sum of Power Purchase Cost, plus Depreciation, plus
Maintenance and Other Operating Costs.
Average Sales Price is the Revenue divided by SWU production.
The figure is intended to show fundamental concepts and trends.
Data has been taken from public domain sources, since I do not have
access to USEC's internal books. One can argue about the absolute
magnitudes and the dates in the figure, but the point is to illustrate
trends and prospects.
Several points can me made from the figure.
1. First, Average Sales Price in the immediate future drops below
USEC Breakeven Cost, that is, the price the actual price is
insufficient to cover costs and provide a return to the stockholders.
2. This condition persists until about 2003, when USEC when USEC
Breakeven crosses under the Average Sales Price.
3. This assumes that (a) the Soviet deal is renegotiated to trim
about $10/SWU off the Soviet price (a net savings to the enterprise of
about $5/SWU); (b) one GDP is closed (about 2002).
4. Beyond about 2004, Average Sales Price falls below USEC
Breakeven again, so that the Soviet renegotiation and the GDP shutdown
are not permanent fixes as long as USEC continues to contract product
sales under cost. Recent sales prices are just about $80/SWU, and
impact of these sales roll out into the future.
Again, I do not want to imply that this chart is based on rocket-
science analysis. It is intended to define the crisis, show major trend
lines, and to roughly measure impacts of remedies which have been
discussed.
From the analysis summarized in the figure, believe, I believe that
USEC will continue to experience significant financial problems, namely
losses from its core business that USEC-management will try to offset
by selling inventories inherited from DOE, a non-viable and non-
substantive stratagem for the short or long term.
One (of the several) excuses that USEC management has made for its
poor performance is the that the uranium purchase deal with the
Russians, for National Security and diplomatic purposes, injures USEC'S
bottom line. This is a red herring. First of all, the Soviet Union deal
was negotiated in by USEC itself as the executive agent of the US
Government. They negotiated a deal which they are now complaining
about. Second, the classical ``make or buy'' mathematics was applicable
in the early 1990s when Soviet quantities were small and the marginal
cost of U.S. production was significantly lower than it is now. In that
time frame, there was indeed a penalty for buying the Soviet material.
Now, however, the quantities to be purchased from the Soviets will
account for almost half of the total USEC SWU deliveries, and the cost
of producing this material internally at the US GDP's is significantly
above the Soviet price. This is because new, firm power, power purchase
agreements will have to be negotiated, probably significantly above the
roughly 2 c/kwh price USEC now pays. The price for purchased power
could be as high as 3 c/kwh. In short, the purchase of the Soviet
material is a plus, not a negative, to USEC's bottom line. Third, the
transfer of the DOE stockpile, valued at about $1 Billion, offset any
disadvantage the Soviet deal imposed on USEC in early days of
implementing the deal. For USEC to come to Capital Hill with a tin cup,
pleading for a subsidy, is disingenuous. The Soviet deal cannot be used
as a crutch to excuse poor management.
USEC will argue that all of the maladies their business suffers
were and are beyond their control. I disagree. Apparently not
understanding that it was in an oversupplied, buyers-market, USEC did
not adopt a competitive price ceiling once the Atomic Energy Act
Section 161v evaporated in 1992. Over the side went my and John
Longnecker's pledges to reduce costs/prices further below the $125/SWU
we contracted for in the early 1980s. As a result of this gouging, USEC
lost market share, and actually sued its customers for terminating
contracts and seeking other supply options. When this strategy proved
ineffective, USEC began selling SWUs under its current cost. The
customer population regards USEC as a very unstable source of supply,
and this perception results from the arrogance and ineptitude of the
company.
Another critical question is the foundation of the Initial Public
Offering (IPO) process itself, and the representations made at the
time. It is clear to me that the enterprise was hugely overvalued in
garnering in excess of $1.5 Billion in stock placement. For one thing,
the uranium stockpile inheritance (evaluated at about $1 Billion) was a
gross overstatement, in that this is not immediately fungible. If one
tried to convert this to dollars rapidly, the market price would
collapse. The correct way to evaluate the stockpile is to compute the
present value of a long Stream of modest stockpile sales, using
classical discounted cash flow methods. The selling would stop when the
inventory level reached that working inventory needed to run the
business efficiently Another issue with the EPO process is the curious
loan of $500 Million that USEC management obtained to trump the bid of
a private company to acquire USEC. The industry knew of course that the
last thing that USEC management wanted was a simple straightforward
acquisition of the business as a method of privatizing. The transaction
was sort of characterized as a hybrid LBO/IPO transaction. Whatever,
the debt service on the $500 Million loan is on the backs of the USEC
IPO stockholders. Where was Federal (Treasury and SEC) oversight during
this process?
The Treasury and the taxpayer cannot complain, because the money to
trump the private company offering was obtained and deposited in the
Treasury. What makes it public business now, however, is that USEC is
seeking a federal subsidy, and because the future of U.S. uranium
enrichment capacity is a national security issue. Therefore, Mr.
Chairman, your oversight is timely.
Subsidizing this failed business and its management is not a
solution, but another invitation to further industry cynicism, by
rewarding sloppy and inept commercial practice.
Since I received the invitation less than one week ago to be here I
have thought long and hard about an equitable solution for the U.S.
Government, the USEC stockholders, and an operational fix to the
financial meltdown we see in USEC. I am sorry that I cannot present to
you a surgical failsafe recommendation at this time, a set of silver
bullets.
The first set of recommendations are peripheral, obvious, hard, and
do not solve the endemic problem.
(a) renegotiate the prices paid to the Soviets--this is the USEC
proposition, and I wish them well, although they negotiated the
current Soviet scenario and have little credibility. Also, from
the Figure, the potential improvement on the USEC bottom line
(about $5/SWU), is not large.
(b) close one of the two GDPs, and try to make significant savings in
operating and maintenance expenses--this could significantly
improve USEC's bottom line, but would not be a lasting
solution, as USEC's poor quality backlog will continue to flow
through (prices below cost) the books.
(c) negotiate new power supply contracts--I doubt if this would reduce
power price--in all likelihood, the price would increase;
(d) advise USEC to enter new adjacent businesses, to diversify--
However, USEC has no cash or credit-worthiness to make
acquisitions, and the management team is not credible, so this
approach is not viable.
None of the above nibbling-at-the edges approaches have a high
success probability, enough to offset the financial disaster, nor could
they arrive in time to save the enterprise. Therefore, deep and major
structural changes are in order. I am totally opposed to subsidizing
USEC from the tax base. (If anything, USEC should pay back a portion of
the advantage it enjoys from the Soviet windfall.)
Therefore I believe major structural changes must be contemplated,
and that will involve legislation. These are my thoughts:
A) First, separate and delineate clearly and budget separately roles of
national security/diplomacy from USEC.
B) Have the Departments of Defense or Energy reclaim beneficial control
over one GDP for national security purposes. The plant could be
put in a hot standby configuration if there is no near-term
need for HEU production. If there is a payment owed to USEC
stockholders, make it.
C) Compute mathematically any loss of USEC stockholder value due to the
Soviet deal as it was implemented when marginal costs of
production were less than the Soviet price, less any gain from
the Soviet deal more recently (when USEC's production costs
have increased significantly).
D) Encourage USEC stockholders to examine creatively the prospect of a
merger or divestment with another enrichment supplier, or
successful adjacent operator in the nuclear fuel cycle.
Mr. Chairman, I wish I could be more optimistic, and more helpful
to the Committee. I wish I had more definitive recommendations as to a
solution. Thank you for the invitation to be here.
[GRAPHIC] [TIFF OMITTED]64028.191
Mr. Whitfield. We will recess for about 10 minutes; and
then we will come back, Dr. Stiglitz, and have your testimony
and Mr. Miller's. I apologize for this delay, but it won't be
very long.
[Brief recess.]
Mr. Whitfield. I would like to reconvene the hearing and
Dr. Brewer had just finished his testimony. So, Dr. Stiglitz,
if you would give us your testimony.
TESTIMONY OF JOSEPH E. STIGLITZ
Mr. Stiglitz. Thank you. It is a pleasure for me to appear
before you to testify on this subject of the privatization of
the U.S. Enrichment Corporation. As I point out in my written
testimony, from 1993 through 1997 I served as a member and
chairman of the President's Council of Economic Advisors. In
that capacity I participated in extensive discussions on the
privatization issue. In my years on the council, I faced a
large number of complicated and technical issues in which there
was considerable uncertainty about the merits of alternative
courses of actions. Decisions had to be made and these
decisions entailed difficult judgment calls. The privatization
of USEC was different. This was an issue where there were
serious large down-side risks and virtually no upside gains.
What I want to do is describe what I thought of as the central
down-side risks and what are the alleged benefits and why I
thought they were so minuscule.
The main basis of our opposition was really one that went
to the issue of nuclear nonproliferation. And as economists,
the reason that we were involved is that we had to assess what
the incentives of USEC as a privatized entity would be. There
had been this important agreement that has been referred to a
number of in--a number of times where we were bringing in the
HEU from Russia. I think all of us believed very strongly this
was a bipartisan Bush-Clinton initiative, getting as much of
that into the United States as fast as possible. So we thought
that was very important; and as economists we then had to ask
the question if it were privatized, would there--what would
their incentives be. We came to the very strong conclusion that
it was not--it would not be in their interest as a privatized
entity to maintain that flow of HEU and that they would engage
in one way or another a variety of ways of trying to do
everything they could to stop that flow coming in.
One way of putting it, we argued that there was an
inevitable conflict of interest between the interest of the
privatized new monopoly in the U.S. and the national interest
in seeing that as much of the uranium be brought into the
United States as possible. We have seen--even while USEC
remained under Timbers within the U.S. Government, we have seen
manifestations of the potential conflict of interest and the
dissembling to which it could give rise.
When Russia offered to increase its sales substantially,
USEC declined the offer and payment could only be interpreted
as hush money to keep the agreement secret. Even after the
secret agreement was signed, representatives of USEC in a
meeting at the old executive office building denied that they
would ever engage in activities that would slow down the flow
of enriched uranium. They would always put the national
interests first and they said it with seeming conviction. But
to be sure when they made those strong denials, they were
unaware that there were those at the meeting who already new
about the secret agreement that they had already signed or that
the council of economic advisors would manage to learn of its
contents within days. There were other examples, manifestations
of conflicts of interest that I don't have time here to talk
about and I didn't in my testimony; but if you want a more
extended discussion, I could do that.
At the council, we also addressed the issue of whether
there were mechanisms of regulatory oversight that would be
able to address effectively the issues of conflict of interest;
and we came to the conclusion that that would be very
difficult, and some of the discussion earlier today has
highlighted some of the difficulties, for instance, oversight
on the safety issue and the kind of bind that the government
would get into if they failed to meet the regulatory
requirements. So we, in fact, had anticipated that; and that
had been a source of our concern. Those on the other side said
well, don't worry about these things. Regulation oversight will
take care of it.
There were other problematic issues associated with
privatization, one of them being competition policy. Those in
the antitrust division shared our view that this was not an
industry that was competitive; and, therefore, normal private
market forces were not at play.
The conclusion I just had time to touch on was that there
were clear down-side risks, and the question then is were there
off-setting benefits. And our belief was strongly that there
were not beliefs--there were not benefits to anyone who is not
absolutely committed to privatization as an end in itself. Only
if you took that as your goal, would privatization be something
that you would say is valuable.
The economic benefits, the efficiency gains that had been
hoped from privatization, actually there have been enormous
gains already in the preceding years through the process of
corporationization. So the benefits that one would hope to get
from privatization, we do not anticipate any significant
further benefits.
Moreover, the standard argument for privatization which is
derived from intense competition from private firms were not
applicable in this case precisely because this is not a market
in which most of the other firms are private. In fact, all of
the other firms in the world have a very large public role. And
there is actually a high degree of market concentration.
One of the alleged benefits of privatization was that it
would provide funding for the new AVLIS technology. We engaged
in consultations on this matter and came to the view that the
prospects for the new technology were limited at best.
We also came to the view that this was not what you might
call a clean privatization. That is to say the government was
assuming a whole variety of liabilities not only environmental
but the kind that Representative Strickland talked about
earlier; and so this is not the kind of usual privatization
that you think of where you have a clean transfer of assets to
the private sector of a steel mill or something like this. This
was an area where there was inherent conflict, inherent
important public role that could not be separated from the
privatization process.
One of the driving forces for privatization was obtaining
the President's commitment to a balanced budget, an issue which
seems particularly irrelevant given today's budgetary
situation. Things turn around quickly in this world. But as an
economist, this argument was especially questionable since
privatization revenue shouldn't even be included in the budget
since they constitute a sale of an asset. So our view was this
was a whole bogus issue. But even if you took it on its face,
the fact of it is that if you look at the privatization and how
much revenue did the Government get and a point that has
already been made, $1.9 billion; but then you ought to subtract
out the fact that it was given all this uranium. Anybody can
sell uranium. You were talking about selling the corporation.
At one time they actually also talked about putting cash
reserves. Selling cash is not very difficult either.
The interesting thing, of course, is that there is an
incentive to boost up the value of the total enterprise, the
corporation including the uranium, because, of course, the
commissions that are given are based on the total asset sale--
the commission to the companies that do the sale are usually
based on asset value. So they include the $1.9 billion, not the
$900 million or whatever is the value of the company. So they
were getting very large commissions on the sale of uranium, and
I am sure anybody else selling uranium would have enjoyed
commissions at those levels.
As it turned out, many of the concerns that we raised in
the course of the privatization debate seemed unfortunately to
have been borne out. The AVLIS technology was abandoned. The
revenues raised were not substantial and the budgetary
situation clearly made the whole issue barely germane.
According to newspaper reports, the privatization at times has
put at risk a broad range of negotiations over nuclear
proliferation issues.
And again USEC has expressed at times reluctance at
continuing the importation of material from Russia. The
regulatory issues that we were concerned about have again
surfaced in an important way. The national benefits from the
privatization have yet to be demonstrated. The risks presented
are already all too apparent. And let me just conclude on one
remark about the decisionmaking process itself.
I regret that there was not a full, open discussion of the
issues prior to privatization. I cannot see how any issue of
national security was served by the secrecy and lack of
transparency that surrounded so much of the privatization
process. Greater openness would have subjected the decision to
more intensive public scrutiny, and that scrutiny I believe may
well have led to a different outcome, one that I still believe
would have been far more in accord with our overall national
interests. Thank you.
[The prepared statement of Joseph E. Stiglitz follows:]
Prepared Statement of Joseph E. Stiglitz, World bank
It is a pleasure for me to appear before you to testify on the
subject of the privatization of the U.S. Enrichment Corporation (USEC).
During the period 1993 through 1997 I served as a member, and then
Chairman, of the President's Council of Economic Advisers. In that
capacity, I participated in extensive discussions on that issue. In my
years on the Council, I faced a large number of complicated and
technical issues, in which there was considerable uncertainty about the
merits of alternative courses of actions. Decisions have to be made,
and these decisions entail hard judgment calls.
The privatization of USEC was different. This was an issue where
there were serious, large downside risks, and virtually no upside
gains. It was an easy judgment call, one that I came to feel strongly
about, and where my judgment was shared by all those in the Council and
its staff who looked at the issue. It was a view, by the way, which was
also shared by those in the academic community (mainly those involved
in national security issues), with whom I discussed the
issue.1 While I was Chairman, we succeeded in presenting the
adverse case against privatization sufficiently effectively that it was
delayed, but as you all know, shortly into the Administration's second
term, the privatization was finalized.
---------------------------------------------------------------------------
\1\ At a meeting of the Council of Foreign Relations in which the
issue was discussed, not a single individual could identify benefits of
privatization which were at all commensurate with the risks.
---------------------------------------------------------------------------
Central to the Council's opposition to privatization was a concern
about issues of nuclear non-proliferation. We strongly agreed with the
commitment of both the Bush and Clinton Administrations that it was in
everyone's interest that as much of the enriched uranium from the
nuclear warheads be deenriched and transferred to the United States as
quickly as possible, and were highly supportive of the swords-to-
ploughshares agreement made with Russia that entailed the de-enriched
uranium being use for nuclear power plants. USEC had been assigned the
role of the exclusive agent for bringing the material into the United
States and marketing the LEU (low enriched uranium) to electric
utilities. This made sense, given the dominant market share that the
USEC, at the time, a public entity, had, not only in the United States,
but around the world. But privatization would change all that. Our
analysis showed convincingly and beyond any shadow of a doubt that it
would not be in the interests of a privatized USEC to bring the
material into the United States; the costs of producing enriched
uranium (especially at the low rates--arguably below market--at which
USEC obtained electricity) were less than the fair market price at
which USEC would be required to purchase the material from Russia.
There was an inevitable conflict of interest--between the interests of
the privatized near-monopoly in the U.S., and the national interests in
seeing that as much of the uranium be brought into the United States as
possible.
We had seen manifestations of the potential conflict of interest--
and the dissembling to which it could give rise--even while USEC
remained within the public sector. When Russia offered to increase its
sales substantially, USEC declined the offer and paid what can only be
interpreted as hush money to keep the agreement in secret. Even after
the secret agreement was signed, representatives of USEC denied, in a
meeting at the Old Executive Office Building, that they would ever
engage in activities that would slow down the flow of enriched uranium;
they would always put the national interests first! To be sure, when
they made those strong denials, they were unaware that there were those
at the meeting who know about the secret agreement, or that the Council
would manage to learn of its contents within days. But this was not the
only example of a manifestation of a conflict of interest which I could
relate before you today.
An issue that we debated extensively was whether there were forms
of regulatory oversight that could adequately address this and other
conflicts of interest issues. There was also a debate about whether the
threat of terminating USEC's exclusivity in importing the enriched
uranium sufficed to ensure ``good behavior'' on the part of the USEC.
Our conclusion was that it was not, nor did we have confidence that an
effective regulatory mechanism could be set into place.
There were other problematic issues associated with privatization.
For instance, the high level of market share raised concerns about the
effectiveness of competition. Given that, had USEC been in the private
sector, it is unlikely that an agreement to become the exclusive agent
for importing the material from one of the few competing sources would
have passed anti-trust scrutiny. My concerns for the anti-competitive
effects were shared by those in the anti-trust division of the
Department of Justice with whom I spoke.
There were thus clear down-side risks. Were there offsetting
benefits? These were not apparent to anyone not absolutely committed to
privatization as an end in itself. Major efficiency gains had already
been achieved, and it was not apparent that there were significant
further efficiency gains to be had from privatization. Moreover, the
standard arguments for privatization, derived from intense competition
from private firms, were not fully applicable in this case. USEC had a
major share of the world market, there were only a few other firms; all
of the other firms had substantially public sector ownership; and even
if were later to become privatized, governmental interests in
maintaining a supply of enriched uranium implied that there might not
be the standard arms-length relationship to government. One of the
alleged benefits of privatization was that it would provide funding for
the new AVLIS technology. We engaged in consultations on this matter,
and came to the view that the prospects for the new technology were
limited at best.
One of the driving forces for privatization was attaining the
President's commitment to a balanced budget--an issue which seems
particularly irrelevant given today's budgetary situation. As an
economist, this argument was especially questionable, since
privatization revenues should not even included in the budget, since
they constitute just a sale of an asset. Indeed, while revenues in the
year of the sale increase, revenues in subsequent years would decline.
The long run impact on the public debt accordingly was likely to be
small at best. As it turned out, the net revenue attained from the sale
of USEC (net of fees paid for privatization and net of the sale of
uranium which accompanied the sale of USEC) were sufficiently small--
especially when account is taken of the future lost revenues--to make
it clear that the benefit was not at all commensurate with the risks.
As it turned out, many of the concerns that we raised in the course
of the privatization debate seem, unfortunately, to have been borne
out. The AVLIS technology was abandoned. The revenues raised were not
substantial, and the budgetary situation clearly made that whole issue
barely germane. According to newspaper reports, the privatization, at
least at times, has put at risk a broad range of negotiations over
nuclear proliferation issues. And, again, according to newspaper
reports, USEC has expressed at times reluctance at continuing the
importation of the material from Russia. The national benefits from the
privatization have yet to have been demonstrated. The risks presented
are already all too apparent.
Let me conclude by a remark about the decision making process
itself. I regret that there was not a full, open discussion of this
issue prior to privatization. I cannot see any issue of national
security that was served by the secrecy and lack of transparency that
surrounded so much of the process of privatization. Greater openness
would have subjected the decision to more intense public scrutiny, and
that scrutiny, I believe, might well have led to a different outcome,
one that I still believe would have been far more in accord with our
overall national interests.
Mr. Whitfield. Thank you, Dr. Stiglitz.
Mr. Miller.
TESTIMONY OF RICHARD D. MILLER
Mr. Miller. Thank you, Mr. Chairman. I am Richard Miller a
policy analyst for the Paper Allied Industrial Chemical and
Energy Workers Union, which, as you know, represents 2,000
worker at Portsmouth and Paducah gaseous diffusion plants, and
another 250 workers at the Honeywell-operated ConverDyn
facility in Metropolis, Illinois. And with me are
representatives of the local unions and workers at the Paducah
and Portsmouth plants.
USEC, it is important to understand, is more than a private
company simply seeking to satisfy shareholders. In order to
privatize USEC, Congress mandated that USEC fulfill important
public responsibilities. Privatization would never have been
approved by Congress had those important public
responsibilities been abandoned. So for USEC today to come in
and say these are shackles, these are restrictions that were
imposed upon us by the Government you have to understand
fundamentally this never would have happened if those
obligations had been abandoned.
In fact, they were proposed by USEC in their privatization
plan. How in fact did we wind up in the predicament where we
are today? At least one point is that every red flag that was
raised--and there were numerous--whether it was the conflicts
of incentives between shareholders and our national security;
whether it was whether you could mesh imports from Russia and
maintain and operate two gaseous diffusion plants; whether it
was possible to have a viable and economic domestic supply
while the company was relying on cash-flow from glutting the
uranium and conversion markets; whether it was even anyone did
any due diligence to find out if AVLIS will work. As we know,
the joke was you will see Elvis before you see AVLIS. And I
wish I had my Elvis mask today.
Today, USEC is in deep financial trouble. Not only was $325
million required to bail out the Russian agreement just after
privatization, largely as a result of the impact on the
national uranium markets, USEC came back looking for another
$200 million precisely as one of the panelists here predicted.
USEC is digging itself a deeper hole. It has borrowed another
$200 million to finance stock buy-backs, it is paying out
dividends in excess of its earnings, and, in fact, it appears
as though that stock buy-back was precisely designed to drive
down the credit rating in order to escape the Treasury
agreement so they could close one, if not both, of the gaseous
diffusion plants when the cost lines cross the revenue lines
some time at end of 2003.
The junk bond rating has clearly impaired their ability to
finance new technology. And selling general and administrative
costs have jumped 36 percent in the first 6 month of the
current fiscal year, reflecting higher senior management
salaries and the addition of blue-chip lobbyists who are plying
the halls of government looking for assistance and seeking
relief, particularly from this congressional oversight hearing.
The central reason USEC was privatized through an IPO was
based on Mr. Timbers' claim that the private corporation was
going to promptly deploy AVLIS. Transcripts, however, of the
board of directors meetings reveal that the other two companies
bidding for USEC didn't think AVLIS was going to work and
several board members were troubled that highly sophisticated
firms were saying that their basic business plan wasn't going
to work.
Well, the independent advisor, J.P. Morgan, upon whom both
the USEC board and the Department of Treasury relied for
independent advice, said this about those who doubted AVLIS,
quote, Let's don't forget what you all heard yesterday was not
an unbiased technical expertise advice. Every one of those guys
are clearly professional board spookers and they clearly had an
agenda which was to convince this board, meaning the Federal
USEC board, that what they were saying was right and what you
all have done for the past 4 years is wrong. But rather than
seek an independent review, the Chairman of the board called on
Mr. Timbers, one who clearly had a self interest in the IPO
outcome, to disparage his competitor's view of AVLIS. He said
every day privatization is delayed is a day we delay the
deployment of AVLIS. And yet less than a year after
privatization, AVLIS is gone. Now USEC is disclosing its
considering closing one of the GDPs in contravention of the
privatization act. And I would add none of the significant
events that were testified to by Mr. Gensler can be found
anywhere in the privatization act or the EPAct of 1992. They
got invented out of thin air.
Wall Street is urging closure of a plant on the grounds
they would save $65 million a year. And yet experts, some of
whom I know have briefed this committee, including John
Longanecker, are of the view that USEC will likely have no
uranium enrichment industry in this country sometime after 2003
or 2004. So it won't be a debate about which goes first,
Portsmouth or Paducah. It will be both.
In July 2001, the restrictions on stock ownership which
restricts shareholders from holding more than 10 percent of
USEC's stock expire. And at that point if USEC is worth more
dead than alive as some suspect as they today, a liquidator
will come in and will break them up. Now the question is, what
would Congress do in that case? Would they be able to act at
that point? Would the administration be able to act? Is there
any reason to believe on the other hand that another solution
which has been touted, which is a takeover by a bigger more
financially solvent firm, might help? They may be more
financially solvent, but they have the same shareholder
incentives; and for that reason there will be no likelihood
that both plants will be operated, there is no assurance the
Russian agreement will be implemented if it is not in their
economic interest, and the $1 billion to deploy centrifuges
will never be coughed up, particularly if it is cheaper to
liquidate than it is to invest.
In fact, it is more likely than not that both gaseous
diffusion plants will be closed before any new enrichment
technology is ever deployed in this country.
I see my time is running down. I would like to point to one
other commitment Mr. Timbers made. Many of us doubted both
gaseous diffusion plants would last to 2005; and the reason we
doubted it was because of 5.5 million SWU a year coming into
the country and how was he going to manage both GDPs at the
same time. There were options proposed. Mr. Whitfield and Mr.
Strickland here proposed legislation to create what we called
at SWU bank a way for the Government to play a role taking some
of the Russian SWU off the market and metering it in a
responsible fashion, but that was rejected.
Yet Mr. Timbers said in letters to us all operating plants
considered by USEC require the running of both GDPs until the
year 2004. He said I clearly stated no matter what scenario we
looked at we will have to keep both plants up and producing for
the foreseeable future until at least 2004 just to meet
customer demands. And I would like to further clarify these
matters in the hope that there would be no further
miscommunications by the union about them.
Mr. Rainer reiterated those commitments just 2 months
before privatization, and yet here we find ourselves
confronting USEC manipulating its balance sheet in order to get
out of Treasury agreement by buying back stock and driving down
its credit rating. That was a Treasury agreement shot through
with loopholes. Everybody knew it. We tried to call the
Treasury on it. They would not meet with us. They refused
meetings. We tried to meet with the USEC board and you know
what USEC's advisors said? The union is complaining about
nothing. They continue to complain about nothing.
Mr. Whitfield. Mr. Miller, excuse me, if you could
conclude.
Mr. Miller. I apologize, Mr. Whitfield.
Mr. Whitfield. Your testimony is very good.
Mr. Miller. I am sure you will have an opportunity to
already have read it. Let me just go to where we are. We have
got two choices. We can follow the administration's asleep-at-
the-switch approach, which is where we are. And you heard it in
the testimony before us. We can issue severance checks and seek
appropriations for cleanup work that might hire 150 people. But
there is no administration policy with respect to the problems
wrought by this privatization. USEC's signalling it's triggered
a significant event. They have told me privately they have
triggered a significant event. It is pretty hard to imagine
that anybody could believe they haven't.
Moreover, I expect fully that the administration, as Mr.
Gensler testified, will continue to sit there like a deer
staring in the headlights, while they close the plants. We have
heard nothing that causes us to believe they will investigate
the breach of contract into which USEC has manipulated itself.
Finally, how do we get out of it? And I'm sure this panel
will explore it. We're not abashed to say that you are not
going to save the domestic uranium mining and conversion
industry unless this goes back in the Government, and the only
question is how do we get there.
[The prepared statement of Richard D. Miller follows:]
Prepared Statement of Richard D. Miller, Policy Analyst, Paper, Allied-
Industrial, Chemical & Energy Workers Union
I am Richard Miller, a policy analyst for the Paper, Allied-
Industrial, Chemical & Energy Workers Union (``PACE''). PACE represents
2,000 hourly workers at the Paducah, Kentucky and Portsmouth, Ohio
gaseous diffusion plants, and 250 workers at the Honeywell uranium
hexaflouride conversion plant in Metropolis, Illinois--the only
enrichment and conversion plants in the United States.
summary
Congress authorized the Administration to privatize the government-
owned USEC only on the condition that privatization: (1) would not be
inimical to national security; (2) would provide for the continued
operation of the Kentucky and Ohio uranium enrichment plants; (3) would
provide for a reliable and economic domestic uranium mining, enrichment
and conversion industry; (4) would provide for the long term viability
of the enterprise; and that (5) the buyer would not be foreign owned or
controlled. Subject to the fulfillment of Congressional mandates,
Treasury was required to maximize the proceeds from privatization. On
July 22, 1998, USEC's Board led, by its Chairman, William Rainer, voted
3-1 (with the fifth member abstaining) to approve privatization via an
Initial Public Offering (``IPO'').
USEC, Inc. (hereafter, the private company will be referred to
``USEC, Inc.'') operates the Department of Energy's (``DOE'') two
uranium enrichments plants in Ohio and Kentucky, the only domestic
sources of enrichment capacity in the US. These plants supply fuel
generating plants that provide approximately 20% of the country's
electricity.
USEC was also vested with the responsibility for the uneconomic,
but essential, non-proliferation agreement on behalf of the US
government: the U.S.-Russia Highly Enriched Uranium (``HEU'')
Agreement. USEC markets $475 million/year of blended-down highly
enriched uranium derived from Russian warheads to nuclear utilities for
use as reactor fuel.
Today, USEC is in financial trouble. It has sought $200 million in
government aid to cure the defects that were evident from the outset of
privatization. Prior to privatization, the contradictions inherent in
USEC's fulfillment of its domestic, national security and shareholder
obligations were brought to the attention of USEC's Board, the Treasury
Department, the Energy Department and the White House. These
decisionmakers knew that implementation of the Russian agreement would
displace 47% of USEC's production and drive up production costs at the
enrichment plants. These decisionmakers also knew USEC would become the
high-cost producer in an oversupplied world market with declining
prices, making it difficult to survive against its three other
competitors--all government-controlled enterprises. But the entire
process was conducted in needless and unlawful secrecy. Smart people
are more likely to do stupid things when they close themselves off from
outside criticism and advice.
The central reason USEC was privatized through an IPO was based Mr.
Timbers' claim that the private corporation would promptly deploy an
AVLIS, a new technology that had the potential to make USEC the low-
cost supplier worldwide. Transcripts of USEC's secret Board Meetings
reveal that the other two companies who were bidding for USEC were
dubious, at best, about commercializing AVLIS. One Board member
recalled industry joke: ``You'll see Elvis before you see AVLIS.''
Rather than obtain an independent review of the commercial viability of
AVLIS, the Chairman called upon an admittedly ``very biased'' CEO Nick
Timbers, to disparage his competitors' views of AVLIS. Less than a year
after privatization, the same managers pulled the plug on AVLIS.
USEC has disclosed that it is considering the closure of one
gaseous diffusion plant (``GDP''), in contravention of the
Privatization Act and USEC's pre-privatization commitments to run both
plants through 2004. Wall Street is urging closure, on the premise that
USEC would save net $65 million/year 1. Meanwhile, USEC
continues to spend heavily on dividends, stock buybacks, and high
executive salaries.
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\1\ BNY Capital Markets, Research Report, April 7, 2000, pp 11USEC
will likely shutdown the nation's enrichment industry over the next 3
years. This will result in total dependence on foreign sources for
nuclear power plant fuel. 1USEC, Inc's. liquidation, or its gradual
transformation into a uranium brokerage operation, both plausible
outcomes, would eliminate all domestic production. Some believe that a
takeover by a larger company will rescue USEC, Inc. But there is no
reason to believe that a takeover will keep two plants open, assure the
Russian agreement is implemented, or provide the $1+ billion needed to
deploy lower-cost enrichment technology. It is more likely than not
that both gaseous diffusion plants will close before a new technology
can be designed, licensed and deployed--unless the government is
running the enterprise.
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Today our testimony will ask why was privatization was botched so
badly, what is the prognosis, and what steps should Congress take next?
One feasible solution: establish a government-owned corporation similar
to the one establishing USEC in EPAct of 1992, and have this enterprise
develop a plan to take over the US Russia HEU Agreement, the operations
of the GDPs, and the competent management of USEC's inventories.
usec, inc. has already jeopardized four mandated public
responsibilities that it freely assumed as predicate to privatization
USEC Inc. was vested by statute and contract with important public
responsibilities. USEC now portrays these responsibilities as shackles;
in fact, they were proposed by USEC in the plan submitted to the
Administration on behalf of privatization. Now, only 18 months after
privatization, four of these responsibilities have been or will soon be
jeopardized, absent government intervention.
implement a 20 year government-to-government agreement between
the United States and Russia to import 5.5 million SWU/year of
Low Enriched Uranium derived from nuclear warheads. EPAct of
1992 required that privatization ``not be inimical to the
common defense and security.'' (42 USC 2297d-1)
continue operations of the Energy Department's two gaseous
diffusion plants in Portsmouth, Ohio and Paducah, Kentucky (42
USC 2297h-2);
provide for the protection of the public interest in
maintaining a reliable and economical domestic source of
uranium mining, enrichment and conversion services (42 USC
2297h-2); and
provide for the long-term viability of the corporation (i.e.
deploy next generation technology) (42 USC 2297h-2).
usec's financial plight impairs its fulfillment of public obligations
In the 18 months since privatization, the commitments that were
made prior to privatization--especially those to maintain a reliable
and economic domestic uranium mining, enrichment and conversion
industry--are dissolving amidst the force of USEC's financial
difficulties. Objective indicators include:
USEC, Inc. has announced layoffs/separation of 1450 workers--
fully 1/3 of the workforce. Honeywell, the sole domestic UF6
``conversion'' plant, has laid off 20% of its workforce since
privatization.
USEC, Inc.'s credit ratings were downgraded 3 notches by
Standard & Poors from BBB+ (investment grade) to BB+ (below
investment grade or ``junk bond'' status).
The Nuclear Regulatory Commission has commenced a review to
determine if the credit downgrades will be inimical to the
maintenance of a reliable and economic source of domestic
enrichment services over a 5-year period.
USEC's key to long-term viability--low cost AVLIS enrichment
technology--was terminated as uneconomic less than a year after
privatization. The non classified portion of the government's
$1.7 billion investment was auctioned off at an abandoned K-
Mart for less than $1 million.
USEC, Inc's power costs are up 50% at Paducah since
privatization.
USEC, Inc. projects a steep decline in earnings in the year
beginning July 1 ($35-$45 million). This is <10% of the
earnings in 1995. The lion's share of 2001 earnings will come
from monetizing part of the Energy Department's firm power
contracts at Portsmouth.
Merrill Lynch, one of USEC's IPO underwriters, downgraded its
recommendation on USEC, Inc.'s stock to ``neutral'' and noted
that USEC's condition is ``worse than we feared.''
USEC, Inc.'s stock price, which measures investors' reaction
to its plan for maintaining competitiveness, has dropped to
$4.50 from the $14.25 IPO price.
USEC, Inc. is digging an even deeper hole for itself:
Since privatization, USEC, Inc. borrowed another $200 million,
largely to finance the buyback of 30 million shares and pay
dividends that exceed earnings. The debt to equity ratio has
increased from 33% to 40%.
Selling, general and administrative costs have jumped 36% in
the first 6 months of the current fiscal year 2.
This reflects significantly higher senior management salaries,
an increase in headquarters staff, and the addition of blue
chip lobbyists who are plying the halls of government looking
for ``assistance'' and relief from Congressional oversight.
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\2\ SEC Form 10-Q for USEC, pp. 11, February 7, 2000
---------------------------------------------------------------------------
The junk bond credit rating has impaired USEC, Inc's ability
to finance new technology. Even with possible technology
sharing arrangements with the Energy Department, USEC, Inc. may
be bankrupt or liquidated by the time it is ready to break
ground on centrifuge technology--assuming it is an economic
path forward.
USEC, Inc. is losing 785,000 lbs of R-114 freon coolant per
year. At this rate, USEC, Inc. will run out of its inventories
of R-114 by September 2001. R-114 has been banned under the
Montreal Protocol, costs about $12/lb and is very scarce.
Equipment modifications at Portsmouth are needed for
alternative coolants, but these have not commenced. USEC, Inc.
will have to close the Portsmouth plant if it does not upgrade
for alternative coolant. Without replacement coolant, even the
government could not run these plants.
Privatization has jeopardized implementation of the U.S.-Russia HEU
Agreement:
Shipments under the U.S.-Russia HEU agreement were suspended
shortly after privatization because of privatization's adverse
impact on natural uranium markets. A $325 million bailout was
required to restore shipments in April 1999.
USEC, Inc. informed the Administration and Congress that it
would terminate its role as Executive Agent of the HEU
Agreement on December 1, 1999, if it did not receive $200
million in assistance. USEC, Inc. argued it deserved assistance
to compensate for low market prices. This assistance was
denied, in part, because USEC, Inc. advised Wall Street that it
was going to announce a stock repurchase plan, and keep paying
dividends, and in part because it was unwilling to keep its
commitment to operate both GDPs through 2004.
the root of usec's economic problems
USEC is a high-cost producer in an oversupplied market competing
with government-controlled enterprises. Its production, brokerage, and
technology development activities are independently and collectively
impaired.
A. Domestic uranium enrichment economics:
Today, USEC is writing new long-term contracts at $80-83/SWU, but
its production costs at the GDP's average $95+/SWU. The reason USEC is
generating profits at all is that the ``order book'' of customer
contracts assumed by USEC upon privatization included contracts priced
at $125/SWU, which has fortunately kept its average selling price at
approximately $110/SWU this year. But this cash cow is going to run
dry, because the high-priced contracts will expire between 2001 and
2003. At that point USEC will confront negative operating margins on
its GDPs, absent a major recovery in SWU prices or dramatically lower
electricity costs.
USEC's domestic production economics have been substantially
impaired by brokering 5.5 million SWU/year of Russian-origin Low
Enriched Uranium (``LEU) derived from nuclear warheads. The HEU deal
has displaced 47% of USEC's domestic production. Prior to the Russian
Agreement, USEC made 13.6 million SWU/year at the two plants. But USEC
has had to cut production by nearly 50%. This raises unit production
costs, as there are fewer units of production over which to distribute
fixed costs. Thus, even as USEC cut payrolls by 500 in 1998-1999, its
average production costs nonetheless jumped from $78.50/SWU in 1995 to
$97 SWU in 2000. The additional 850 layoffs slated for July 14, 2000
will cut production costs by approximately $5.50/SWU, but will not
restore profitability to domestic production.
Pressured by the need for cash flow to pay out dividends that
exceed its earnings, and implementing a 30 million share buyback, USEC
has raised cash by selling off its inventory of natural uranium and UF6
conversion products. These aggressive sales have driven down the market
price for UF6 conversion services 3. Without some
improvement in the conversion market, major layoffs are inevitable.
USEC's sales of government-provided inventory, in short, are eroding
the viability of the only domestic conversion plant in the US.
---------------------------------------------------------------------------
\3\ ``Conversion'' is the process of converting yellow cake to UF6.
UF6 is the feedstock that goes into the GDPs.
---------------------------------------------------------------------------
USEC's production costs have also been driven up by summertime
spikes in power cost. The Paducah is plant is exceptionally vulnerable
to price spikes because it is almost exclusively reliant upon off peak
power. However, the impact has been partially offset by sale of blocks
of unused firm power at Portsmouth.
B. Brokering the Russian HEU Agreement Economics
USEC pays an average of $88/SWU (including shipping) for the 5.5
million/year of SWU from Russia. These sales are economic when USEC,
Inc. fills its order book of contracts valued at as much as $125/SWU.
It is not economic when, as now, USEC enters in new contracts at a
market price of $80-85/SWU.
USEC is trying to extend the Russian contract at a much lower
price, estimated to be 15% below market price ($68-70/SWU). The
Russians are reportedly willing to consider market realities, but the
size of the price reduction sought by USEC is unlikely to be accepted
by the Russians. Moreover, USEC is unlikely to close a deal anytime
soon, as the Russians gain leverage the closer they get to the contract
expiration date of December 31, 2001. Political developments in Russia
also counsel against swiftly concluding a deal for a 20% price
reduction.
USEC's marginal cost of production (outside of four summer months)
is about $60/SWU Based on the $88/SWU Russian cost, USEC points out
this amounts to an opportunity cost of approximately $100 million per
year to USEC shareholders (a cost disclosed in USEC's S-1 prospectus).
This disincentive, as noted above, drove USEC to threaten to terminate
as the US Government's Executive Agent due to the impact to its
shareholders.
C. USEC, Inc. Has No Advanced Technology and Cannot be Competitive with
GDPs Alone
Although the Energy Department and USEC invested $1.7 billion,
AVLIS was determined by USEC, Inc. not to be commercially feasible.
With 50 year old GDPs and no proven advanced technology option, USEC,
Inc. has no clear path to future competitiveness. With weakened
financials USEC, Inc. would find it difficult, if not prohibitively
costly, to raise funds to deploy replacement centrifuge enrichment
technology that is used by Urenco, its primary European competitor.
the determination to privatize was made in disregard of repeated and
numerous ``red flags'' showing that public mandates could not be
honored
Pursuant to Court order, PACE obtained transcripts of the secret
USEC Board of Director's meetings. The transcripts show the decision to
privatize was made in disregard of red flags that should have given
pause regarding the viability of the privatized corporation and its
ability to meet national security and domestic mandates. Rather than
investigate these warnings, those responsible for privatization too
eagerly deferred to the claims of (a) USEC management, who stood to
retain their jobs and attain major pay increases and (b) the
``independent'' financial advisors, who had $7.5 million in success
fees tied to a ``Yes'' vote to privatize.
A. Prior to Privatization USEC Steadfastly Committed to Continued GDP
Operation; It Contrived an Escape from these Commitments Within
18 Months of Privatization
Prior to privatization, USEC management vigorously maintained it
could implement the US Russia HEU agreement and continue operations of
both uranium enrichment plants. On April 24, 1997, USEC's CEO Mr.
Timbers wrote to OCAW 4 President Robert Wages:
---------------------------------------------------------------------------
\4\ OCAW--the Oil, Chemical & Atomic Workers Union--is the
predecessor to PACE. On January 5, 1999 OCAW merged with the United
Paper Workers International Union to form PACE.
---------------------------------------------------------------------------
``All operating plans considered by USEC require the running
of both GDP's (gaseous diffusion plants) until the year 2004.''
``I clearly stated no matter what scenario we looked at, we
will have to keep both plants open and producing for the
foreseeable future, at least until 2004, in order to meet
customer demands.''
USEC refused to produce numbers to show how USEC could operate both
GDP's. Mr. Timbers nonetheless scolded the union for doubting
management's credibility:
I would like to further clarify these matters in hopes that
there would be no further miscommunications by OCAW about them.
When, on May 1, 1998 OCAW questioned how the statutory requirement
to operate both GDPs would be enforced post-privatization, Board
Chairman William Rainer wrote:
``We would remind you that Nick Timber's letter of April 24,
1997 to you advised OCAW of USEC's policy position that both
GDPs would operate at least through 2004. This remains our
position as we review the various privatization options.''
On June 29, 1998, the Treasury Department and USEC released an
agreement on Post Closing Conduct (``Treasury Agreement''). The
agreement, incorporated in the sales contract, requires USEC to
maintain operations of both gaseous diffusion plants through December
31, 2004. On review of the agreement, OCAW wrote to Assistant Secretary
of Treasury Gary Gensler that the Agreement was ``booby trapped'' with
loopholes, including the following ``significant events'' by which USEC
can escape the statutory requirement: 5 1. events beyond the
reasonable control of USEC, such as natural disasters; 2. a decrease in
annual worldwide demand to no less than 28 million SWU; 3. a decline in
the average price for all SWU under USEC's long-term firm contracts to
no less than $80 per SWU (in 1998 dollars); 4. a decline in operating
margin below 10% in a consecutive 12 month period; 5. a decline in the
interest coverage ratio to below 2.5x in a consecutive 12 month period;
or 6. if the long term corporate credit rating of USEC is, or is
reasonably expected in the next 12 months to be, downgraded below and
investment grade rating.
---------------------------------------------------------------------------
\5\ These exceptions were not found anywhere in the USEC
Privatization Act.
---------------------------------------------------------------------------
OCAW also asked the USEC Board for the opportunity to appear before
it to explain the problems with these loopholes. The request was denied
and the Board transcripts show USEC's legal advisors ridiculed OCAW's
concerns. Les Goldman of Skadden, Arps stated: ``they [the union]
continued to complain without giving reason.'' 6
---------------------------------------------------------------------------
\6\ Transcript, July 22, 1998, pp. 48
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Within 18 months of privatization, USEC has engineered a ``two-
step'' escape from the Treasury Agreement.
Step One: Mr. Timbers advised shareholders of his desire to
rationalize ``global over capacity.'' 7 In January, 2000
Congressional staff were advised that ``USEC anticipates plant closure
at either Portsmouth or Paducah to occur sooner than 2004. The January
25 USEC Board meeting discussed the possibility of plant closure.''
8
---------------------------------------------------------------------------
\7\ Remarks of William H. Timbers, USEC, Inc. Board of Directors
Meeting, November 3, 1999
\8\ Letter from Senators George Voinovich and Mike DeWine and
Representative Ted Strickland to William H. Timbers, January 26, 2000.
---------------------------------------------------------------------------
Morgan Stanley, the lead underwriter for USEC, Inc.'s Initial
Public Offering, publically outlined a plan it had privately urged USEC
to take to escape the Treasury Agreement:
With aggressive stock buybacks, the debt could be downgraded
to below investment grade. That would be a formal condition
allowing USU 9 to shut down one unneeded production
plant, which would save $100 million/year annually, according
to management. But the physical capability to do all needed
production at one plant may be year or more away. And there
will be heavy political pressure fighting any such
shutdown.10
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\9\ USU is the stock trading symbol for USEC.
\10\ Stock analyst report by Kit Konolige, Morgan, Stanley, Dean
Witter, Downgrade, Another Miss, Catalysts Still Far off, February 4,
2000, pp. 4.
---------------------------------------------------------------------------
Step Two: USEC followed the script laid out by Morgan Stanley. On
February 3, USEC announced that, despite poor earnings prospects, it
was repurchasing 20 million shares of stock. On February 4 Standard and
Poors immediately downgraded USEC's credit two notches to ``below
investment grade''. USEC verbally advised PACE that a ``significant
event'' had been triggered under the Treasury Agreement.
On January 26, PACE wrote to USEC's Board urging it to hold off on
rumored stock buybacks and dividend payments because this would
compromise the Treasury Agreement. We urged USEC, Inc.'s Board to
evaluate whether the corporation could be viable without substantial
government assistance. USEC, Inc.'s Board never acknowledged our
letter, leading us to question whether Mr. Timbers ever shared it with
his Board.
At the same time, Senators Voinovich, DeWine and Representative
Strickland wrote USEC's Board:
``We are forced to question whether USEC entered into the
Agreement on Post Closing Conduct in good faith. It appears to
us because of USEC's current consideration of plant closure,
whether it is Portsmouth or Paducah, that USEC entered into the
agreement with fully considering the effects that market supply
[from Russia] would have on our country's enrichment
activities.''
Minutes of USEC's Board meetings from 1996, that had been
unlawfully withheld for a year under the Government in the Sunshine
Act, reveal that as a government-owned corporation USEC had, in fact,
considered plans that included closing a plant prior to privatization.
The August 7, 1996 minutes state:
``the supply mix assumed in the `Strategic Plan' was not a vote
to shut down the plants, but represents a possibility.''
This raises concerns about the veracity of USEC's management's
representations. The USEC Privatization Act of 1996 (PL 104-134) had
already been signed into law on April 26, 1996, with a requirement to
continue operations of both gaseous diffusion plants as a pre-requisite
for privatization.
On February 22, 2000, PACE verbally advised Treasury officials that
USEC, Inc. had triggered a ``significant event'' under the Treasury
Agreement, and that USEC, Inc. had taken steps which appeared to
involve bad faith conduct. Treasury refuses to investigate whether
USEC, Inc. has subverted the Treasury Agreement in bad faith. Treasury
refuses to even acknowledge that a ``significant event'' has occurred,
even as USEC, Inc. announced that fact in February 7, 2000 Securities
and Exchange Commission filing. We are at a loss to explain the
calculated indifference by the Administration.
The lessons are clear. USEC made promises before privatization, but
they were memorialized in loophole-ridden agreements. Protestations
that the loopholes were big enough to drive a truck through were
summarily dismissed. With the Administration looking the other way,
these promises are now being broken.
B. USEC and the Administration Ignored a Congressionally Proposed
Solution to the Conflict Between the Russian Agreement and
Continued Operations of the GDPs
The twin goals of Implementing the US-Russia HEU Agreement and
continuing operations of the both gaseous diffusion plants were never
meshed prior to privatization.
Seeking to pre-empt the conflict that has predictably emerged,
Representatives Ted Strickland and Ed Whitfield filed HR 3491, the
Assisting Acquisition of Russian Material Act, on May 21, 1998, two
months prior to privatization. The ``Findings and Purposes'' spelled
out the problem and a possible solution to the problem USEC, Inc.
claims unfairly shackles it two years later:
``The execution of the Russian HEU Agreement will
significantly increase the supply of LEU (Low enriched) fuel
available in the United States marketplace; and, as a result
and in order to balance supply with demand, the privatized
United States Enrichment Corporation may have to take actions
contrary to or inconsistent with maintaining long-term
viability, continued operation of the gaseous diffusion plants,
and a reliable and economical domestic source of uranium
mining, enrichment, and conversion services, and other
statutory requirements . . .''
``The principal responsibility for ensuring the faithful
implementation of the United States obligations under the
Russian HEU Agreement, which is a government-to-government
agreement, lies with the Department of Energy; and the
execution of those obligations is an inherently governmental
function under the foreign policy of the United States.''
``Therefore, the Department of Energy shall, subject to
appropriations, acquire directly or from the United States
Executive Agent such amounts of the Russian HEU converted to
LEU under the Russian HEU Agreement, and withhold such amounts
from resale into the private market for such period of time, as
may be necessary to fully achieve the national security goals
of the United States under the Russian HEU Agreement and to
allow a privatized United States Enrichment Corporation to meet
the statutory requirements of the privatization.''
At the time the bill was filed, USEC management, not wanting to
concede the incompatibility of the privatization with operating two
GDPs and keeping the Russian HEU deal alive, rejected the concept
offered by HR 3491. They said Congress would never appropriate funds
because the Russian Agreement had to be cost free for the government.
Ironically, USEC was back 18 months later looking for a way to have the
government carry the costs of the Russian HEU Agreement on behalf of
their shareholders.
C. The Secret Transcripts Confirm that the Decisionmakers Failed to
Perform Due Diligence on the National Security Impacts of
Privatization
1. At the time they decided to privatize, the USEC Board and the
Treasury Department were on the broadest notice that due diligence
required renewed review of the conflict between national security and
shareholder interests.
In the weeks before the July 28, 1998 the Administration was put on
the most visible notice of the uniform concern of independent experts
that privatization would imperil national security. In a Wall Street
Journal op-ed, Joseph Stiglitz, former Chairman of the Council of
Economic Advisors, wrote 11:
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\11\ Oped entitled, ``This Privatization Proposal is Radioactive,''
Wall Street Journal, Joseph E. Stiglitz, June 2, 1998.
---------------------------------------------------------------------------
``That privatization is generally desirable is a core belief
of modern economists. Still many economists, including me,
oppose the auction [of USEC] which would be the most
significant privatization effort in a decade.''
``As an economist I believe in the power of incentives.
That's why the auction [of USEC] is so worrisome. The
management of a privatized USEC would have a responsibility to
its shareholders to maximize market value. That goal is likely
to conflict with national security. This potential conflict of
interest could be a major threat to national security because
of the crucial role of USEC in our nuclear non proliferation
efforts.''
At the time of the Board's final deliberations, nationally
recognized experts on the Russian agreement expressed strong concern
about the effect of privatization.12 On June 26, 1998
Senator Pete Domenici--a prominent proponent of privatization--wrote to
National Security Advisor Sandy Berger: ``In recent days I have become
concerned that aspects of the pending sale . . . may have a serious
impact on implementation of the HEU Agreement and therefore national
security.'' He added, ``I am not certain that a privatized executive
agent can still function in the ways necessary to carry out the
national security objectives of the HEU Agreement.''
---------------------------------------------------------------------------
\12\ The experts included Tom Neff, the MIT physicist who has been
credited with conceiving the HEU agreement; Richard Falkenrath, a
national security scholar at Harvard; General Burns, the now-retired
officer who negotiated the HEU Agreement with Russia; and as mentioned
above, Joseph Stiglitz.
---------------------------------------------------------------------------
Days before the IPO was announced, Senator Domenici learned that
USEC would enter the private market with 30 million more pounds of
government uranium than was assumed when the 1996 USEC Privatization
Act was adopted. Mr. Domenici was concerned that the unanticipated sale
of this inventory into the market would lead to a reduction in uranium
market price, thereby causing an unplanned reduction in the value
received by the Russian government as part of the U.S.-Russia HEU
Agreement. These developments ``could significantly reduce the Russian
Federation's incentive to continue the Agreement.''
In fact, the Russian government stated its concern that privatizing
USEC with a 70 million pound inventory of natural uranium would
significantly devalue a major component of the US Russia HEU Agreement.
In a July, 1998 letter to Senator Domenici, Russian Minister E.O.
Adamov stated ``the execution of the Agreement [US-Russia HEU
Agreement] is rapidly deteriorating'' as a result of privatization.
(Letter attached).
On July 16, PACE asked to address USEC's final board meeting to
discuss whether a bailout of the Russian Agreement might be required.
This request was denied. Meanwhile 47 members of the House wrote the
Administration asking them to stop the privatization.
On July 20, Senator Domenici advised the Vice President's National
Security Advisor Leon Feurth, and others that the Administration would
be wise not to proceed with privatization, as conceived, because it
``could imperil the HEU Agreement''. Senator Domenici wrote: ``If this
means that you would have to resticker the S-1 [Prospectus], so be
it.''
A July 20, New York Times editorial (``Nuclear Security for Sale) ,
predicted that privatization ``promises rich underwriting fees for Wall
Street. But this deal offers little economic gain for the taxpayer and
risks big losses for American nuclear security.''
2. The Secret Transcripts Show that USEC Board Chairman William
Rainer, and USEC's consultants, thwarted due diligence on national
security.
On July 22, 1998 the USEC Board met to finalize its privatization
decision. The transcripts show that USEC Board Member William Burton's
multiple requests that the USEC Board be briefed by Senator Domenici
and National Security staff were denied because ``I was told that might
inflame the market and so they wouldn't be invited.'' 13
Indeed, Mr. Burton noted that Board had not even been provided with the
Senator's June 20th letter.
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\13\ USEC Board Transcripts, July 22, 1998, pp. 53
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In lieu of a briefing by official national security experts,
Chairman Rainer asked USEC's private lawyer from Skadden, Arps to brief
the Board on national security.14 Following the lawyer's
statements, Board Member Burton reiterated that the Board was being
kept in the dark:
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\14\ USEC Board Transcripts, July 22, 1998, pp. 50
---------------------------------------------------------------------------
I don't think we have enough information in light of this
issue that has risen up. There has been a ton of press, a ton
of meetings, everybody who's been involved in it except this
Board, and we can't even get a briefing on them.15
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\15\ USEC Board Transcripts, July 22, 1998, pp.93
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Shortly following the July 28, 1998 privatization, Russia suspended
shipments under the HEU Agreement due to the adverse impacts of USEC
privatization on natural uranium markets. At the Administration's
request, Congress was asked to appropriate $325 million to bail out the
Agreement as part of a deal to offset the harm to Russia from USEC
privatization. Cynically, senior Administration officials were planning
to seek Congressional bailouts even before the Initial Public Offering
was concluded. But this information was conveniently kept away from
those who were asking questions on the USEC Board.
3. The Public Concerns Soon Proved Correct--In fact, in October and
November 1999, USEC, Inc. threatened to terminate its role as the
Executive Agent under the US Russia HEU Agreement if it didn't obtain
substantial (up to $200 million) in government assistance. Predictions
made by Dr. Stiglitz were confirmed.
This threat induced the US government to seek out replacement
executive agents. The Administration quickly discovered that a
replacement executive agent would require a subsidy to take on this
uneconomic brokerage agreement, and that the conflicts built-in to the
privatization, which the Administration it had dismissed were, in fact,
quite real. In response to USEC's concerns, (a) the Administration was
prepared to offer no more than it would have to expend to hire a
replacement executive agent, and, (b) to the credit of the Energy
Secretary, only if USEC, Inc. lived up to its previous commitments to
keep both gaseous diffusion plants open through 2004. USEC refused to
cement the commitment that it had made only 16 months earlier, and
further declared it was laying of 850 more workers regardless of
government assistance.
D. The Secret Transcripts Reveal that While Serious Doubts Surfaced
About Whether AVLIS Could be Commercialized and USEC Could Ever
Be Viable, Due Diligence Was Not Performed
The transcripts show that the primary private bidders--Lockheed/
Carlyle and General Atomics/Texas Pacific--told the USEC board that
they planned to limit investment in or defer deployment of AVLIS. Board
members quickly realized that the doubt cast on AVLIS by technically
sophisticated bidders called USEC management's claims into question.
USEC Board Member Christopher Coburn stated:
It seems to me that we have a problem, because we have a
critical technology which we have based our assumptions on for
future performance throughout. We have one source of
information. Now finally, we have several independent, if you
count these bidders as being independent, sources seem to
disagree with us.16
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\16\ USEC Board Transcripts, June 2, 1998, pp. 177
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Similarly, Board Member Margaret Greene stated:
we got pretty consistent input from our first opportunity to
have external sources give us input, that the AVLIS projections
were not realistic.17
---------------------------------------------------------------------------
\17\ USEC Board Transcripts, June 3, 1998, pp. 206
---------------------------------------------------------------------------
However, the transcripts show that USEC Board Chairman William
Rainer was determined not to secure the requisite independent review of
USEC's management claims:
``[i]t is not practical at this moment to bring in an
independent knowledgeable, up to date expert on some of the
issues that we heard yesterday that were in conflict with the
business plan that management has put together and that this
Board has supported now for over four years.'' 18
---------------------------------------------------------------------------
\18\ USEC Board Transcripts, June 3, 1998, pp. 198
---------------------------------------------------------------------------
Indeed, Chairman Rainer permitted J.P. Morgan--USEC's ostensibly
independent financial advisor--to deprecate the technical analysis
provided by management's competition. With regard to the Lockheed/
Carlyle presentation of their $1.8 billion bid, J.P. Morgan's Jim
Derryberry advised the Board of Directors:
Let's don't forget what you all heard yesterday was not an
unbiased technical expertise advice. Every one of those guys
are clearly professional board-spookers and they clearly had an
agenda, which was to convince this Board that what they were
saying was right and what you all have done for the past four
years is wrong.19 (Emphasis added)
---------------------------------------------------------------------------
\19\ USEC Board Transcripts, June 3, 1998, pp. 206-207
---------------------------------------------------------------------------
The Lockheed advice, Mr. Derryberry declared, ``was very biased.''
In lieu of independent review, Chairman Rainer invited USEC
management to critique its competition behind closed doors:
And at the risk of knowing that some of us may be tempted to
dilute management's argument about the IPO from the standpoint
of potential conflict of interest, we know these people pretty
well and each has a factor to divide it by. I nonetheless would
like to hear management's view, A, of some of the things that
were raised yesterday that opposed to its and our current
business plans; because, if management cares to talk about the
advantages of an IPO as opposed to an M&A.20
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\20\ USEC Board Transcripts, June 2, 1998, pp. 177
---------------------------------------------------------------------------
USEC's CEO Nick Timbers proceeded to attack his competition:
We made the decision not to do, specifically not to do what
[Lockheed] Carlyle's proposing. And we think that all the test
results that we've had over the last 18 months, that it has
proven probably to be the right decision.21
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\21\ USEC Board Transcripts, June 3, 1998, pp. 215
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Mr. Timbers further proclaimed:
``[AVLIS] is going to be the method by which this company
stays viable'' 22
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\22\ USEC Board Transcripts, June 3, 1998, pp.242
---------------------------------------------------------------------------
``every day that privatization is delayed is delay of
deployment of AVLIS.'' 23
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\23\ USEC Board Transcripts, June 3, 1998, pp.244
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``we feel confident . . . in the successes of the AVLIS
development.'' 24
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\24\ USEC Board Transcripts, June 3, 1998, pp. 299
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Mr. Timbers assailed his competition in secret while proclaiming he
was ``very biased'':
I'm very biased. I'm biased to our plan. I'm biased to the
AVLIS plan that we have and I'm biased to what I think is a
good operating plan that we have.25
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\25\ USEC Board Transcripts, June 3, 1998, pp. 268
---------------------------------------------------------------------------
Mr. Timbers declared that AVLIS was uniformly supported by external
studies: 26
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\26\ USEC Board Transcripts, June 3, 1998, pp. 211-212
---------------------------------------------------------------------------
First of all, there have been extensive external analysis of
AVLIS . . . Since 1994 . . . there has been one, two, three,
four, five, six, external independent analyses . . . so that
there is substantial documentation about whether this is the
correct approach, to check our theory.
PACE asked for the analyses referred to by Mr Timbers. When the
documents were provided a year after privatization, pursuant to PACE's
Freedom of Information of Act litigation, one of the reports stated
that:
Negative cash flows resulting from the deployment of either
an AVLIS plant or a centrifuge plant are substantial. In none
of the AVLIS cases does the cumulative cash flow turn positive
in less than 12 years; the usual turning point is 16-18
years.27
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\27\ ``Advanced Technology Business Assessment,'' United States
Enrichment Corporation, Draft February 21, 1994, pp.102.
---------------------------------------------------------------------------
USEC in-house and outside counsel--who both had a self-interest in
the choice of the IPO 28--advised the USEC Board that the
statutory criteria of ``viability'' would not be met absent commitment
to AVLIS.29 When challenged, Counsel necessarily
acknowledged that continuation of AVLIS did not itself appear as an
express statutory requirement. 30 Similarly, USEC Board
Members, Treasury and OMB officials (the latter attended all meetings)
relied, it appears, on an ``independent financial advisor,'' J.P.
Morgan. The transcripts show J.P. Morgan heavily favored privatization
through an IPO. Indeed, it was to be given an additional $7.5 million
``success fee'' if privatization went forward, above and beyond their
basic fee of $80,000 per month.
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\28\ USEC in-house Counsel Robert Moore is now Counsel to USEC,
Inc. PACE understands that Skadden, Arps, which received over $15
million for its services during privatization, remains as an outside
law firm to USEC, Inc. Coincident with Skadden, Arps' statement of its
view that AVLIS was essentially a statutory condition, Board Member
Burton pointed out that Skadden, Arps was likely not to be retained by
Lockheed if Lockheed were chosen (USEC Board Transcripts, June 3, 1998,
pp. 224-229).
\29\ USEC Board Transcripts, June 3, 1998, pp. 223-224
\30\ USEC Board Transcripts, June 3, 1998, pp. 200-202 and pp. 204-
206
---------------------------------------------------------------------------
The secret transcripts show that in the end, with the support of
the private consultants, Mr. Timbers' advocacy was central to the
Board's choice of the IPO
Only three of five Board members (Rainer, Greene, and Youngblood)
voted to privatize through the IPO. At least one of the three (Board
Member Youngblood) made plain that his decision was based on the
premise--erroneous as it turned out to be--that management's proposal
was distinguished by its commitment to AVLIS:
I will simply make the statement that I think both of them
[Lockheed and management] feel that they satisfy these
[statutory] criteria. They just do it in radically different
ways, one [USEC management] with an investment in AVLIS and the
other an investment, a greater investment in the GDPs (existing
gaseous diffusion plants).
It is my opinion that I would rather see the investment--
having been here since the beginning of this company--to have
the proceeds of these billion-plus dollars go toward the
reinvestment in AVLIS and the success of the company as [as
claimed by USEC management] compared to paying down the debt
[as ostensibly proposed by Lockheed].31
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\31\ USEC Board Transcripts, June 3, 1998, pp. 131-132
---------------------------------------------------------------------------
Despite the substantial uncertainty with respect the feasibility of
commercializing AVLIS, and thus doubts about the viability of the
corporation, USEC's public prospectus failed to disclose the red flags
regarding AVLIS:
USEC's public prospectus (``S-1'') filed with the U.S. Securities
and Exchange Commission stated that the new corporation would:
Commercialize AVLIS Technology: USEC plans to complete the
development and commence commercialization of the next
generation of uranium enrichment technology, AVLIS, which uses
lasers to enrich uranium, and which should permit USEC to
remain one of the lowest cost suppliers of uranium enrichment
services and enhance its competitive position. Commercial
deployment of AVLIS is anticipated in 2005.32
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\32\ Prospectus for 100,000,000 shares of USEC Stock, June 29,
1998, pp. 6
---------------------------------------------------------------------------
The public prospectus failed to disclose to the investing public,
for example, that: (i) all knowledgeable private bidders had cast doubt
on the viability of AVLIS; (ii) independent expertise was not empaneled
to review management's self-interested claims; and (iii) the Board
relied on the admittedly biased management group to critique its
competition.
In sum, the secret transcripts provide compelling testimony that
USEC management, with the support of USEC private advisers, made
commitments it knew would not be fulfilled. If it conceded that
critical statutory requirements could not be fulfilled, privatization--
and their large pay and benefit increases--would have been jeopardized.
the transcripts provide strong evidence that the privatization occurred
because of secrecy and conflict of interest
A. USEC and Other Officials Took a Broad Immunity from Lawsuit and
Abused It
The 1996 Privatization act provided broad statutory immunity from
suit for any act arising our of privatization:
``Any stated or implied consent for the United States, or any
agent or officer of the United States, to be sued by any person
for any legal, equitable, or other relief with respect to any
claim arising any action taken by any agent or officer of the
United States in connection with the privatization of the
Corporation is hereby withdrawn.'' 33
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\33\ 42 USC 2297h-7(a)(4)
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USEC managed to take this broad immunity and abuse it. USEC, under
the watchful eye of the Treasury Department and OMB, closed the
entirety of essentially all USEC meetings in blatant violation of the
Government in the Sunshine Act. Then, when OCAW took USEC to court, the
Department of Justice, on USEC's behalf, relied on this immunity from
litigation to oppose opening the proceedings. It was only in July
1999--following a court ordered deadline--that the Government provided
thousands of pages of secret transcripts of the USEC Board meetings.
USEC also withheld numerous documents in response to OCAW's December,
1997 Freedom of Information Act request. These documents form the core
of this testimony before your Committee.
B. The Transcripts Show that the Decision to Privatize through an IPO
was Bedrocked on Conflict of Interest
Chairman Rainer's solicitation of the admittedly ``very biased''
Mr. Timbers to secretly attack his competitors' claims in lieu of the
admittedly needed independent review of Mr. Timbers claims, was not
merely a conflict of interest, but a conflict that, as Mr. Timbers'
subsequent cancellation of AVLIS shows, provides textbook demonstration
of the importance of Federal conflict of interest law.
How could this conflict have occurred? Chairman Rainer and Mr.
Timbers sought to paper the conflict over with a purported ``waiver''
of the governing criminal conflict of interest prohibitions.
18 U.S.C. Section 208 (``Section 208'')). permits a waiver only
where the waiving official finds that the disqualifying ``interest is
not so substantial as to be deemed likely to effect the integrity of
the services which the Government may expect from such officer or
employee.''
Chairman Rainer's waiver letter for CEO Timbers confirmed that
Timbers' financial interest in the privatization decision was
substantial (because he stood to significantly benefit depending on the
method of privatization, if any, that was chosen). In fact, Timbers,
the CEO and President of the new and old company, earned $325,000 when
USEC was in public hands. Last February (1999), the board of the newly
privatized USEC, Inc. set his base pay at $600,000 per years, gave him
a $617,625 bonus and awarded him stock shares currently worth $900,000.
34 In addition, he received a ``golden parachute'' with 3
years pay and benefits if he is terminated.
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\34\ Unjust Enrichment, Nation, December 13, 1999, pp. 4-5
---------------------------------------------------------------------------
As noted above, the transcripts record that Mr. Timbers himself
declared that he was ``very biased''. The letter sought to justify the
waiver on grounds that Timbers' services were needed (i.e.,
expediency), and that Mr. Timbers would be overseen by the Board. There
is nothing in the language of Section 208, or to PACE's knowledge, in
judicial precedent, that permits a waiver in the presence of an
admittedly substantial conflict.
Chairman Rainer's letter declared that Mr. Timbers' admitted bias
would be kept in check because the USEC Board would monitor Mr.
Timbers' conflict of interest. However, far from keeping conflict in
check, the transcripts show--as summarized above--that Chairman Rainer
solicited Mr. Timbers' evaluation of USEC management's competition
behind closed doors. Mr. Timbers admittedly biased evaluation, in turn,
was critical to the Board's split decision to award USEC to Mr.
Timbers' IPO team.
PACE requested an investigation by the Public Integrity Section of
the Justice Department. In an August 13, 1999 letter to PACE, Mr. Lee
Radek, chief of the Public Integrity Section, asserted that since there
was a waiver letter, there could be no violation of the conflict of
interest law. PACE wrote the Attorney General again asking whether
conflicts of interests can simply be papered over with waiver letter,
no matter how egregious the conflict.
By letter of September 29, 1999, Mr. John C. Keeney, Deputy
Assistant Attorney General for the Criminal Division responded. Mr.
Keeney did not take issue with the facts presented by PACE or dispute
that Mr. Rainer's waiver was, on its face, in flat out violation of
Section 208. Mr. Keeney nonetheless declared:
Nevertheless, successful prosecution requires that the
government prove beyond a reasonable doubt each and every
element of an offense. Prosecution of USEC's president would
inevitably fail because he sought and obtained a waiver of the
conflict of interest.
Thus, according to Mr. Keeney (and Mr. Radek) the Department of
Justice's view is that anyone who wants to violate Federal criminal
conflict of interest law can do so with absolute impunity by simply
papering over the conflict--however raw and even admitted--with a
waiver. Conspicuously absent from both the Radek and Keeney letters is
any legal analysis, or statutory or court authority in support of their
view that the country's bedrock conflict of interest prohibition can be
so readily evaded.
In letters of October 8, 1999 and February 5, 2000, PACE, requested
the opportunity to meet with Attorney General and staff to discuss
determine of the DOJ really intends to modify the 150-year old conflict
of interest precedent without any evident basis. Despite repeated
inquiries, we have not received a response.
usec's prognosis: will its public responsibilities be abandoned or
fulfilled?
Fifteen months from now--on July 28, 2001--the statutory
restriction on shareholder control of more than 10% of USEC's stock
will expire. USEC could be taken over, and the new buyer will
presumably assume responsibility for the HEU Agreement. But there is no
reason to believe that a takeover will keep two plants open, assure the
Russian agreement is implemented, or provide the $1+ billion needed to
deploy lower-cost enrichment technology. It is more likely than not
that both gaseous diffusion plants will close before a new technology
can be designed, licensed and deployed.
If USEC's market value remains, as it is today, far below its
breakup value, efficient markets will likely unlock its breakup value
through liquidation. Investors could sell off USEC's inventories,
receivables, the ``order book'' of any remaining above market sales
contracts, and the HEU Agreement with Russia (assuming it is economic).
Over time, the US government would be handed the keys to the Energy
Department's uranium enrichment plants. Unfortunately, the US
government, at that point, would have watched as investors separated
the order book from the plants. Without customers, the plants are not
viable.
One prominent analyst stated: ``Our bottom line is that making and
keeping USEC profitable for the next 5-10 years would require the
stringing together of a number of near miracles. In fact, we believe
that USEC is unlikely to exist in its present form 2-3 years hence.
With 50 year old GDPs and no proven advanced technology option, USEC
has no clear path to future competitiveness.''
Under the asleep-at-the-switch approach currently followed by the
Administration and the bail-me-out approach followed by USEC, the
domestic mining, conversion and enrichment industry, as we know it,
will disappear this decade.
However, given the non-proliferation imperative inherent in the
Russian HEU Agreement, an Executive Agent for HEU deal is required to
broker Russian SWU. If USEC's order book is not liquidated, perhaps a
brokerage operation will fill these orders with increased Russian
imports or subcontract production to fill out the order book.
the path forward: what are the government's options?
The Administration and Congress have at least three choices with
respect to maintaining a reliable and economic domestic supply of
mining, conversion and enrichment services, while managing the US
Russia HEU Agreement.
A. The Administration's Asleep-at-the-Switch Approach
Aside from issuing severance checks and seeking appropriations for
cleanup work that will generate 100-150 jobs, there is no
administration policy with respect to the problems wrought by USEC
privatization. USEC is signaling that it triggered a significant event
under the Treasury Agreement and will announce plant closure as soon as
feasible. The Administration is signaling that it has no obligations
under the USEC Privatization Act. A cash-hungry USEC that is paying out
more in dividends than it is earning will maintain cash flow by
liquidating its inventories of uranium and SWU, to the detriment of the
conversion and mining industries and USEC's own SWU market. If USEC
negotiates a long term reduction in Russian SWU prices to below market,
it will be far more economic to broker than operate the GDPs. If USEC
goes bankrupt, the creditors will take control of the USEC's order
book. The government will confront the nasty question of whether it has
to negotiate with creditors in front of a bankruptcy judge over who
should control the Russian HEU agreement.
B. USEC's Current Approach to Government Assistance
USEC appears interested in Administration support for extending the
Russian HEU Agreement for 15 years at market-based pricing plus a
brokerage premium. USEC's financials indicate that, absent dramatic
reductions in electricity costs and/or increases in SWU pricing, it
will go negative on operating cash flow from the GDPs and likely close
both by the end of 2003. USEC appears interested in the government
providing financial assistance to deploy new technology, through in-
kind DOE research, buildings and equipment, and loan guarantees.
Long term investments in new technology--if feasible--require that
USEC is not liquidated, nor bankrupt, before completing the
construction project in the 2006-2007 time period. Under the current
pathway it is likely that both GDPs will be closed before any new
technology is deployed and operating successfully.
C. It is Time to Create a Government-Owned Corporation to Assure the
Public Interest is Not Further Compromised
The Administration and Congress should develop a plan to create a
new government-owned corporation modeled after the original United
States Enrichment Corporation which was established under the Energy
Policy Act of 1992.
Initially, this new corporation would be charged with assuming the
role as an Executive Agent for the U.S.-Russia HEU Agreement to
guarantee performance of the Russia HEU deal. USEC could purchase SWU
from the Executive Agent up to the 5.5 million SWU that it needs to
fill orders. The Corporation would be authorized to request
appropriations, as necessary, to assure the full implementation of the
U.S.-Russia HEU Agreement. However, the Executive Agent could stockpile
SWU if deemed necessary, to maintain security of supply, and sell it
consistent with the 1996 USEC Privatization Act.
The government-controlled corporation, in cooperation with the
Secretary of Treasury and Energy, would evaluate and develop options
for maintaining domestic production enrichment capacity, if and when,
USEC fails to do so. The government-owned corporation could operate the
gaseous diffusion plants, develop, test and deploy advanced technology,
and utilize the DOE's electricity contracts.
Mr. Whitfield. Thank you very much.
Mr. Stiglitz, I had referred earlier to a letter that you
wrote to the President and the Vice President--I'm sorry, Dr.
Neff wrote the letter expressing similar concerns to what you
had. But in your testimony you talk about the fact that there
was a lack of transparency and lack of open discussion. Did you
have discussions with Treasury officials about this prior to
the decision being made to privatize?
Mr. Stiglitz. Oh, within the administration, there were a
large number of discussions. And all the issues that I raised
and more we tried to bring forward.
The general stance was this is a done deal, why are you
fighting something that's already a fait accompli. And we were
just a little bit more obstinate because we thought what was at
issue was extremely important. But what I was referring to in
lack of transparency there was very little public discussion.
We found it very difficult. And the ethics was that within the
White House you don't discuss public issues unless there is a
decision to make in public. And so the view was that we could
discuss it within ourselves, but if there is any disagreements,
or these issues, nobody else should be brought into the
decisionmaking process.
Mr. Whitfield. Were there other members of the National
Security Council that had the same reservations that you did?
Mr. Stiglitz. There were other people within the national
security community, but not within the National Security
Council. I might add that after I left the administration, we
had a meeting at the Council of Foreign Relations in New York
of a large number of national security experts on the issue of
nonproliferation, and there was not a single one that could
identify a positive argument for privatization.
Mr. Whitfield. Right. Mr. Graham, in your testimony you
talked about how your industry is slowly being driven out of
business. Someone, I can't remember who, talked about how USEC
is using both its control of uranium and the only enrichment
facility in the country to obtain business and that they're
using that excessive power to drive other people out. Would you
elaborate on that a little bit.
Mr. Graham. Mr. Chairman, I would think that the answer to
that question is that since USEC is the dominant player in the
fuel cycle representing over 50 percent of the value chain of
nuclear fuel, that they have the ability with their large
inventory of uranium and conversion services, to couple these
products together to go to customers and sell them the final
product, which in this case is the three components, uranium
conversion and SWU, as EUP. And the value of that EUP is such
that if you lower it just a little bit, you are able to put a
great deal of pressure both on the uranium and conversion
components and thus take a larger market share.
Mr. Whitfield. And they did receive UF6 from the Government
as well. Correct?
Mr. Graham. The bulk of the material that was transferred
to them that was in their inventory at the time of
privatization was in the form of UF6.
Mr. Whitfield. So that eliminates the need for your
service?
Mr. Graham. Exactly, sir.
Mr. Whitfield. Dr. Brewer, you had discussed how USEC is
selling its uranium, and that's one of the things that's really
keeping them afloat right now, isn't it?
Mr. Brewer. Yes, that's correct. It's like if you were
running a company, as I did for 10 years as CEO, and you had--
you were relying on your current profitability from operations
that existed in the past their contingency reserves put on the
balance sheet and then when those are exhausted or when you are
no longer obligated, you drop those into the P&L, it is like
that. If you are not profitable on current operations, you are
in bad trouble. And this did not happen to me, but I saw it
happen to other business units in combustion engineering.
Mr. Whitfield. But they are basically cannibalizing
themselves.
Mr. Brewer. Yes, they are eating their seed corn, and it is
like living on principal rather than earnings.
Mr. Whitfield. And they are losing market share; is that
correct?
Mr. Brewer. Yes, they are losing market share. They are
losing backlog, and most important is the quality of the
backlog. In other words the profit margin embedded in the
backlog is south of costs. And you can see from the figure that
they're negative now. The only thing that's--that's hiding this
or concealing it is the sale of the uranium stockpile.
Mr. Whitfield. And Mr. Timbers talks a lot about the
Russian agreement, how harmful it has been to his company; but
his production costs now are even greater than what he is
buying it for, isn't it?
Mr. Brewer. That's correct. In the early days of the
Russian agreement, there was--the marginal cost of production
was less than the price of the Russian uranium in dollars per
SWU. The marginal cost was about $50 an SWU and now it is $75.
But, moreover, most important is that you cannot go out and
purchase the power to produce that 5.5 million SWUs from the
Russians; you cannot replace that purchase because you have to
go out and contract for power probably at 3 or 4 cents a
kilowatt hour. They are paying about 2.1 cents per kilowatt
hour now. I'm paying in Virginia 9 cents a kilowatt hour. So
you know----
Mr. Whitfield. I think Mr. Moniz and others talked about if
their electrical costs go up just a cent, it can make a
gigantic difference to them.
Mr. Brewer. Yes, if you go out and try to contract to
replace that Russian import, the cost is going to be
astronomical. So when you hear them tout and make this excuse,
this ``dog ate my homework'' excuse, that it's the Russian deal
that's the blame, it's false.
Mr. Whitfield. Well, it's obvious that they're in a very
serious condition right now and all of us have a lot at stake
here and we are going to have to try to come up with some
answers.
Mr. Stupak.
Mr. Stupak. I've been sitting here some 5 hours, and we had
to prepare for this hearing, and I'm just looking at this whole
thing. What gain was there for the Government or the taxpayers
in this whole deal? I don't see a silver lining here for
anybody. You guys are on the way out trying to keep your head
above water. We have extra uranium coming here and just sitting
here, and here is this contract that we entered into and there
is supposed to be some benefit for the Government, the
taxpayers if you will of this country; and I don't see any. Am
I wrong? I mean, Wall Street made a few bucks off of it, I
guess. That's about it.
Mr. Stout, when I looked at your letter that you received
from DOE in February of this year it seems to say that it can't
do anything about USEC's dumping of uranium except to talk to
them about it. Is that your impression? I don't mean to put
words in your mouth. That's the impression I got.
Mr. Stout. That could well be the case. I guess to this
point no specific concrete proposals have been forwarded by
DOE.
Mr. Stupak. Other than talk to them? You know, what do you
think--I will ask Mr. Miller on down, what do you think
government should do here? What do you think we in Congress
should do? Let's have an open discussion here a little bit
about this. There is no benefit to us. What do we do? Tear it
up and start all over?
Mr. Miller. Well, you have a tricky problem because the
shareholders control; and if they go bankrupt, you will do
business with the creditors.
Mr. Stupak. Well, if we don't give them $200 million
bailout, there won't be anything to----
Mr. Miller. Well, they have uranium inventories they could
liquidate to carry on so they at least continue to cover the
interest on their debt for some time. But I think one of the
things that is important to keep in mind, the Russian
agreement--I would beg to differ slightly with Dr. Brewer on
the impact on USEC. A report that was done--this was based on
public sources by Energy Resources International, shows that
when you cut your production by 47 percent, as has happened to
USEC in order to accommodate that important Russian agreement,
you wind up raising your unit costs. As a result, we have seen
labor costs per SWU climb from $15.70 in 1995 up to $27.70. I
can assure you it isn't like Mr. Timbers where we got a pay
increase. Okay? It is because you are amortizing those costs
over fewer SWU, and there is a certain point where you cannot
cut workers as much as you cut production and maintain safety.
So as a result, I do think that government has a role here
to ensure the security of supply under the Russian agreement
and security of supply with respect to maintaining a domestic
industry. It is not economic for a private sector firm to do it
whose first priority is to take care of their shareholders, and
that is why I think some kind of alternative structure has to
be developed that takes this out of the private sector.
If you don't care, if Congress makes the conclusion that it
doesn't matter whether we have a domestic industry and if the
uranium industry is not viewed as important, if the conversion
industry is not viewed as important and you don't want a
domestic source of enrichment and you prepared to be dependent
upon foreign suppliers, then put a fork in it. If you don't
come to that conclusion, then I think government has a role
here.
Mr. Stupak. Anyone else? Dr. Brewer?
Mr. Brewer. I would suggest that, first of all, that you
separate the national security and diplomatic roles that USEC
has been given, which they sought and were given, from USEC as
a stand-alone business. And let the CEO go run that business,
if he can, and bring the other functions back to the U.S.
Government, the functions of Russian importation et cetera.
Second thing that should be studied is for the Department
of Defense and the Department of Energy to reclaim beneficial
control over one of the GDPs in the national interest, as a
national security matter. If it's not needed for production of
LEU, then--which it probably is not since we do not have the
cold war anymore you don't need it for weapons and you need
very little for Navy use, you could run it in a hot stand-by
condition. But take one GDP and keep it in a hot stand-by
condition under the control of either DOE or DOD. I would
prefer DOD, but--but at any rate, separate this terrible
conflict of interest you have got between the national security
and running a business going through the head of one former
bond salesman.
Mr. Stiglitz. Let me just--I think the two points that Dr.
Brewer raised are the essential ones that the national security
issue is first priority, getting that taken back into the
Government. It is a little more complicated though because
unless the government wants simply to stockpile it, most--a lot
of the contracts in the past have been through USEC, and that's
one of the assets which they have. So this would have to be a
accompanied, I think, by this kind of detailed security
analysis of how important is it to the United States to
maintain a production, a conversion, a mining capacity in each
of these areas.
And I would suspect they would decide that it is important
to keep some level of capacity and the question is what level
of capacity. And then ask, having decided that how do we go
about--what are the impediments to doing that? And almost
surely the answer will entail some restrictions on the sale of
this huge stockpile. Any industry, if all of a sudden we took
our oil stockpile in a normal circumstance and started selling
it all of the sudden, it would have a shock effect on the oil
market. It wasn't put there as a method of bailing out a firm;
it was put there for a whole set of national strategic reasons
to be sold over a longer period of time.
So it is probably the case that you have instruments of
control under the privatization; but you may not, in which case
you will have to have legislation that would address how do you
control the pace of sale of those stockpiles.
Mr. Stupak. I see my time has expired. My follow-up
question was going to be how much is it going to cost us, but I
guess that is for another day. Thank you, Mr. Chairman.
Mr. Whitfield. Mr. Strickland.
Mr. Strickland. I want to thank this panel. I only wish
that Mr. Timbers and Mr. Gensler from Treasury were sitting in
this room listening to what you have to say. These are
important matters, and I hope to God that they at least read
your statements.
You are very credible and believable people. I was
especially struck by your comments, Dr. Stiglitz, regarding the
secrecy. Before privatization, I told the Vice President that
it was impossible for me to know if anything illegal or
unethical was happening, but that there was so much secrecy
surrounding the process that it was impossible to know for
sure. And then he referred me to Mr. Gensler, and others within
the administration. And I asked for information, and it was
refused me. Even that waiver letter that I made reference to
earlier in this hearing I received only after filing a freedom
of information request, a document that should have been
available to every American citizen. And that's just one
example of the secrecy that surrounded this process.
Now you are all credible people. Dr. Stiglitz, you are a
person that is well known in the economic world. I want to ask
a question. We've talked about what to do. If, in fact, a
national security matter and an economic security matter is at
risk here, and if privatization at least as it occurred was a
bad idea and it was carried out poorly, why not reverse that
process? And I would like to ask each of you if you would like
to see this government resume responsibility and ownership and
control of this industry. I'm not asking you if we can or how
we could do it, but I'm first of all asking you if that's
something you would like to see.
Mr. Graham. Congressman, from the conversion industry, life
before privatization was a level playing field. We could
compete with all the competitors on an international basis. In
the current form, we cannot compete and cannot survive; and we
would vote for it to be returned to the government.
Mr. Stout. I think it is good energy policy to ensure that
we always have a strong domestic uranium enrichment
corporation. I guess from what I've learned in the past and
what I've heard today, I have serious doubts about whether
that's going to be the case much longer under the current
situation.
Mr. Brewer. Mr. Strickland, I would take it back to a
government-owned corporation. I would take it back that step. I
would not take it all the way back to the business I had to run
as assistant secretary because you have so much
dysfunctionality in the annual appropriations cycle and the
section 161(B) and inability to compete.
But, yes, I would take it back to a government-owned
corporation, something like a COMSAT.
Mr. Stiglitz. I agree. I think the inherent conflicts of
interest between public and private purposes that are virtually
impossible to address through regulatory mechanisms make it
very difficult for it to be a conventional private enterprise,
particularly given the global market structure in which it is
embedded.
Mr. Miller. Mr. Strickland, I guess I've already identified
that our preference would be a government-owned corporation as
well. This committee marked up and reported a bill, an EPAct of
1992, that created a government-owned corporation. What the
logistics would be perhaps would be for another day, but we
would strongly support putting this back in the Government.
Mr. Strickland. Thank you. I think at least from my
perspective what we have heard today casts serious doubt upon
the credibility of the management of USEC and their intentions.
The word ``cannibalization'' has been used here. We are talking
about selling off assets in order just to stay alive perhaps
for a short period of time. We have talked about a management
that has a golden parachute in place. And so, Mr. Miller, I
want to ask you a question that I think gets to what may be a
very large problem here. And it has to do with concerns that
may exist regarding an adequate supply of coolants for the GDP
plants.
How concerned are you about that matter? And the reason I
ask is it is because if there is a management that is serious
about maintaining these facilities, continuing to operate this
industry, then they've got to think ahead in terms of what is
required of them. And my understanding is that this is a
serious problem; that the freon issue is a serious problem;
that they at this very moment should be engaged in planning for
how to deal with this problem. And if they are not doing it,
then it makes me wonder if they're serious about maintaining
the viability of this industry or if they're just going to rape
it for all of its assets and then walk away leaving Uncle Sam
and the taxpayer holding the bag. Would one of you answer that,
please.
Mr. Stiglitz. I have to run catch a plane, can I be
excused?
Mr. Whitfield. Yes, sir. Thank you, Dr. Stiglitz, for being
here. We are sorry we detained you.
Mr. Strickland. Thank you, Dr. Stiglitz.
Mr. Miller. Well, Dr. Brewer, our assessment of this at
least is that unless we have missed something from USEC
management, their inventories of R114 run out. They have about
1.25 million pounds in inventory. It is almost impossible to
buy; it has been banned under the Montreal Protocol, properly.
The problem is they run out in September 2000 at their current
leak rate. Unless the leak rate is dramatically slowed, they
should be making mechanical upgrades to permit them to use
replacement coolant. We have seen no construction work which
would cause us to believe that. And if the keys were turned
back over to the government to run these plants, they couldn't
run them either because there is no coolant.
Mr. Brewer. One of the reasons why the production costs for
GDPs has gone up from $50 an SWU up to $95 is because lack of
maintenance and lack of attention to detail and training and so
forth. And I won't go all the way and say they're treating it
like a cash cow or milking a cash cow, but it's close.
Mr. Whitfield. Any further questions, Mr. Strickland?
Mr. Strickland. No, thank you. Thank you, Mr. Whitfield,
for your patience.
Mr. Whitfield. Well, I want to thank the panel. We looked
at the management of USEC, and in one of their board meetings
when they talked about going to an IPO they said their debt
would never exceed 25 percent of their market capitalization,
and today it's about 110 percent. They said their market share
was going to increase; it's decreased. They said the SWU prices
were going up; they're going down. They said the production
costs were going down; they went up. They said that they were
going to save the enrichment business with AVLIS technology,
and no sooner were they privatized than they scrapped it.
We are damaging our uranium industry and our conversion
industry of uranium. And we have a lot of individuals and their
families who are suffering as a result of it. And we have
placed this Russian agreement in jeopardy in a way.
So I think we have a very serious problem here, and your
testimony has been quite helpful as we explore some options and
some ways to try to deal with this. I want to thank you very
much for your time. It has taken about all afternoon. I
apologize for that. We thank you and we look forward to working
with you as we try to address this problem.
Thanks. The hearing is adjourned.
[Whereupon, at 7:01 p.m., the subcommittee was adjourned.]