USEC Privatization and the Russian HEU Agreement

Nikhil Anand and Mary Byrd Davis

June 1999
Updated November 2001  

 I.  The Privatization of the United States Enrichment Corporation (USEC)

Introduction

        The privatization of the United States Enrichment Corporation was intended to benefit USEC and US taxpayers.  Back in 1995, when privatization plans were being drafted, a deposition made by the President and CEO of USEC, William Timbers, claimed that privatization was a process that would be a win-win situation for all. “American taxpayers will benefit from both the one time sale proceeds and an annual infusion of tax dollars.  The domestic utility industry will benefit by continuing to have access to an economical domestic supply of high quality enriched uranium”.[i]  USEC would, as a consequence of privatization, “be free to focus on [its] customers, and [its] growing business.”[ii]

        US taxpayers received approximately $3 billion for USEC.[iii]  To obtain this amount they gave away the largest uranium enrichment operation in the world[iv] (processing approximately 40% of the world’s uranium), the rights to a new technology (AVLIS) that had cost US taxpayers more than $1.5 billion to develop, as well as a portion of the surplus US defense inventories of uranium.  And for good measure the taxpayer also agreed to assume cleanup costs at the two enrichment facilities[v] for waste generated prior to the privatization date.

        The privatization of USEC appears to have been a privatization of the assets and not the liabilities.  Although the process was finally concluded in July 1998, the ramifications of USEC’s privatization will extend far into the foreseeable future.

The First Steps to Privatization

        The early days of commercial nuclear energy found the Atomic Energy Commission (AEC), a precursor to USEC, with a monopoly over the global enrichment market.  Some in the administration felt that this dominance could be better exploited by a private corporation.  In 1974 the AEC inadvertently consolidated this sentiment and played a role in creating its own competitors, by refusing to accept new orders for enrichment services for commercial nuclear reactors.[vi]  The commission soon reversed its policy, but by that time it had catalyzed the entry into the market of two semi-private European enrichment companies, EURODIF and URENCO.  Operating under vastly different principles, and able to respond more quickly to market dynamics, these companies reduced the US government’s global market share to around 40 percent by 1992. 

        To counter the competition, the federal government had first proposed building a more efficient gas centrifuge enrichment plant.[vii]  After spending approximately $2 billion for this facility, the government canceled the project in 1985 , stating that it was to be replaced by a more advanced, efficient technology called AVLIS. At the turn of the decade, with the commercialization of AVLIS still in the future, and the looming threat of additional cheap, commercial enriched uranium from the Russian Federation, the US Congress began talk of restructuring its enrichment enterprise by creating a government corporation, the United States Enrichment Corporation (USEC).  In a report on the financial viability of USEC presented in Congress in 1990, William Timbers Jr. of the investment banking firm Smith Barney claimed that the sale of the DOE’s Uranium Enrichment Enterprise could bring more than $5 billion to the US treasury.[viii]  The thought of this financial inflow was pleasing to legislators who were battling to reduce the federal deficit as well to those who were looking for some way to offset federal nuclear cleanup costs.

        In 1992 Congress passed an Energy Policy Act (EPACT),[ix] which, among other things, initiated a two-step process that was to ultimately lead to the formation of a private enrichment corporation.  The first step was the establishment of a government-owned corporation (the US Enrichment Corporation, USEC) that was to be both responsive to business cycles and responsible for assuring the domestic supply of enriched uranium. USEC took over the operation of DOE’s uranium enrichment enterprise on July 1, 1993. The second step was to be the privatization of this corporation (USEC) either by merger and acquisition (M&A) by another company or via an Initial Public Offering (IPO) on the stock market. William Timbers, the consultant from Smith Barney who through his 1990 report to Congress was instrumental in proposing privatization, was appointed Transition CEO and President of the USEC board in 1992.

Early Days

        Following its creation on July 1, 1993, USEC renegotiated its contracts with its service contractors as well as with its consumers (electric utilities).[x]   Flexibility in regard to the contracts earned USEC some early successes as a corporation.  In the three years succeeding its creation (1993-1995), USEC paid more than a total of $205 million to the US treasury in dividends. The Chairman of USEC attributed this success to doing “unglamorous things” such as maintenance and paying attention to detail.[xi]  But in a separate testimony to the House subcommittee on Energy and Power, Timbers admitted that USEC’s success between 1993 and 1995 was largely due to a windfall of contracts peculiar to that given period,[xii] a windfall that DOE had predicted. He also admitted that he did not anticipate such brisk business during the following years owing to USEC’s falling market share and a general unwillingness of consumers to enter into long term contracts.[xiii]

        In 1992, Timbers reduced the estimated selling price of USEC from $5 billion[xiv]  to $3 billion.[xv]  Three years later, after being appointed as Transition Manager for USEC, Timbers further reduced his price estimate to 1.5 billion dollars.[xvi]  Timbers claimed that the reduced price tag was due to the expiration of key long term contracts, with none as large to take their place;[xvii] but the reduction raises questions about Timber’s motives. Moreover, despite turning over significant profits, USEC paid the treasury a smaller annual dividend than normal, choosing instead to allocate a significant amount to working capital in its account at the Treasury.  A study done by the General Accounting Office (GAO)[xviii] found the proportion of working capital retained by USEC to be excessive. Despite turning in significant profits USEC was probably retaining this extra working capital for use as a private corporation.

        Questions about the prospective success and value of USEC were critical in making decisions regarding the fate of USEC as a government corporation. In 1995, when Congress was refining the privatization plan, the goal was to “maximize the value of the Corporation to the US taxpayer.”  Therefore, if USEC was consistently turning in a significant profit, and was expected to do so in the future, the arguments for privatization were not compelling unless (a) the private sector could turn over a significantly higher profit than the government enterprise and (b) this profit would result in tax revenues that exceeded the dividend paid to the Government by USEC. The “maximum value” to the US taxpayer also depended on the manner in which business ‘uncertainties’ and ‘externalities’ were allocated between the State and the proposed private corporation.  This was recognized by the then Director of the GAO, Victor Rezendes who pointed out that it was necessary  to examine “whether the increased liabilities that the Federal Government would be assuming would be worth the increased return [it] would receive for privatizing the Corporation.”[xix]  Timbers, having the interests of the corporation at heart, would have been keen to limit the liabilities of the Corporation, especially the environmental liabilities.

Concessions for Privatizers

        The Board of USEC played the decisive role in the privatization of USEC, although it was hardly a neutral party.  USEC’s privatization was determined by individuals who could make significant gains post-privatization at a cost to the stockholders of the Government Corporation, the US taxpayers.  With the Government being the principal stakeholder of USEC eager to cash in on a large sellout of the corporation, the USEC management was able to secure most of the privileges it sought, some of which are detailed below.

        The first of these concessions guaranteed USEC relatively low production costs.  One of the main production costs at any nuclear enrichment facility is electrical power.  The DOE had negotiated contracts with electricity providers to provide electricity at low prices to its enrichment plants.  The Board of USEC was able to negotiate a continuation of the cheap electricity contracts at both the Paducah and Portsmouth Gaseous Diffusion Plants even after USEC became a private corporation.[xx]

        Also included in the government’s concessions was the extension of Price-Anderson Coverage (federal liability insurance) for both operating enrichment plants and for work on AVLIS at Lawrence Livermore National Laboratory. Timbers insisted that federal coverage was necessary to make USEC more appealing to investors.  Yet the basic principal is somewhat distressing.  Not only does the taxpayer end up with the financial burden if an accident occurs, but USEC has less incentive to monitor safety issues closely.  Representative Markey identified the issue correctly when he asserted that Timbers was trying to “privatize the gains for shareholders and socialize the risks for taxpayers.”[xxi]

        In 1995 USEC also succeeded in eliminating the annual review by the Nuclear Regulatory Commission (NRC) set forth by the Energy Policy Act of 1992.  Citing the time and expenditure needed to evaluate USEC, the management succeeded in convincing the legislature that the review was necessary only every five years.  While this might have been more understandable had USEC maintained an impeccable safety record, the safety of USEC’s enrichment plants has always been cause for concern.  In late 1994, for example, the DOE held an enforcement conference at USEC for an unspecified serious safety violation at the Portsmouth plant,[xxii] and in July 1998, Ralph Nader, Public Citizen’s Critical Mass Energy Project, and the Union of Concerned Scientists (UCS) issued a press release[xxiii] alleging that federal regulators from the NRC covered up serious safety problems at the Paducah, Kentucky, and Portsmouth, Ohio, enrichment plants to expedite the privatization of USEC.

        USEC was also given exclusive rights to the marketing and use of AVLIS, a new technology that promised to reduce SWU production costs.  For more than fifteen years, AVLIS had been researched and studied at taxpayer funded facilities in Lawrence Livermore National Laboratory, California.  In this time, DOE had spent more than 1.5 billion dollars trying to make AVLIS a commercially viable operation. USEC will be the key beneficiary of the years of taxpayer funded research, should the technology ever prove to be feasible, and as such, should have had to compensate the taxpayer for research done before 1993.

        Consolidating its position as the only US provider of enrichment services, USEC is also the US Executive Agent for the Russian HEU deal. In the early part of the decade, the United States, and Russia declared certain parts of their defense inventory of uranium to be excess, and slated the excess stockpile for commercialization (see Section 2).  The position of Executive Agent gives USEC strong power and presence in the market. Through the terms of the Privatization Act of 1996, USEC was also able to secure rights to a portion of the excess uranium from DOE stockpiles.  Subject to certain provisions,[xxiv]  USEC has received a DOE transfer of 7000 tons of natural uranium and will receive 50 metric tons of HEU.

        Furthermore, as the USEC Privatization Act states,  DOE is responsible for “the payment of any costs of decontamination and decommissioning response actions, or corrective actions with respect to conditions existing before July 1, 1993, at the gaseous diffusion plants.” In other words, when USEC closes down operations at the plants, it will be able to walk away from them. It will not have to concern itself, as nuclear operators normally must, with decontaminating and decommissioning the plants. DOE will oversee this operation and USEC will have to pay only for cleanup of any contamination and wastes produced after 1993.

The Path of Privatization

        The management of USEC worked hard to secure these and other concessions from Congress, all, ostensibly, to maximize the return to the US taxpayer. With such rhetoric, the management team also succeeded in bolstering the desirability of USEC to private investors.   There was just one tricky hurdle to overcome.  USEC was supposedly exploring a dual path to privatization, with a merger being one option and a sale of shares on the stock exchange being the other.  Were USEC to have been privatized through a merger or acquisition,  the USEC management would most likely  have been replaced by a team from the parent company.  If this were to take place, the USEC management would not be able to enjoy the fruits of the laborious process of bargaining with the government.  The management, therefore, had a strong interest in ensuring that USEC was privatized by an IPO.  Fortunately for the management, they were both the jury and the judge in determining USEC’s fate.  Time and again it was shown that the USEC management had a strong bias towards guaranteeing their own future at USEC as opposed to garnering the best deal for the government.[xxv]  Therefore the rejection of offers made by Lockheed Martin and General Atomic to acquire USEC was not surprising.  Lockheed Martin’s bid of $1.9 billion fell squarely in the middle of estimates of revenue.[xxvi]   Furthermore, Lockheed Martin expressed a willingness to up its bid to at least $2 billion.[xxvii]

        In a statement of July 23, the USEC Board declared that it selected the IPO path because it offered the least overall workforce reductions, more favorable contract terms and a strong stewardship plan for the sales of its excess inventories.[xxviii] Yet Lockheed Martin declared that its proposal was superior in satisfying the interests of the U.S. taxpayers, U.S. national security interests[xxix] and USEC employees. It is hard to support Lockheed Martin’s assertion nor is it possible to prove because all the deliberations, negotiations and decisions made by the USEC board were held in secrecy and have not been disclosed to the public.  Even certain key  provisions of the privatization process were undisclosed to anyone outside the USEC board.[xxx]  Efforts by the OCAW to make public the criteria the Board used to compare the bidders’ proposal with the IPO were not successful.  Citing the delicate nature of the negotiations, the Board was able to insulate itself from public scrutiny and accountability.

II. The Russian HEU Agreement: From Conception to Conflict

        The breakup of the Soviet Union, and the economic hardship that followed, left many wondering about the fate of the ex-Soviet nuclear arsenal.  Fearing the dangers of nuclear-proliferation should these weapons be sold to non-nuclear Countries or should special nuclear materials for weapons get into the hands of rogue nations or terrorists, the United States quickly negotiated the Agreement between the Government of the United States and the Government of the Russian Federation Concerning the Disposition of Highly Enriched Uranium Extracted from Nuclear Weapons (the Russian HEU agreement).[xxxi]  By this agreement both the United States and Russia agreed to blend down their excess inventories of High Enriched Uranium (HEU) for sale as fuel in the nuclear energy market  The idealism of agreement soon ran into practical difficulties when US uranium producers, fearing a glut of uranium in the market, took steps to hamper the functioning of the agreement.

A History of the Russian HEU agreement

        Close on the heels of the breakup of the Soviet Union and the Gulf War, the two superpowers agreed in principle to the need to eliminate the excess nuclear inventories from the arsenals of Russia and the United States.  The Energy Policy Act of 1992, which created USEC, was also responsible for providing a legal framework for the transfer of highly enriched uranium from ex-Soviet nations.[xxxii]  The act permitted surplus uranium transfers from the US defense arsenal, as long as the US uranium industry was protected from supply side shocks.  Thus, the Energy Policy Act of 1992 was one of the first instances in which the three interests: USEC, Russian HEU and the uranium producers, found themselves at odds with each other.

        A year later, in February 1993, the United States and Russia formally signed the Russian HEU Agreement in which the United States agreed to purchase 500 metric tons of weapons grade HEU that was to come from dismantled nuclear warheads.  Russia would blend down this HEU at its own facilities to provide the US with LEU that could be directly used as nuclear fuel in US reactors.  Over the twenty year contract period, the US would pay Russia approximately $11.9 billion (in 1993 dollars) for the equivalent of 15,259 tons of low-enriched uranium (LEU).[xxxiii]  The LEU would  displace about 398 million pounds U3O8 of mined uranium and 92 million SWU (Separative Work Units) of enrichment that would be necessary to turn the mined uranium into LEU.  In a token gesture of reciprocity, the United States declared its commitment to commercialize 50 metric tons of HEU and 7000 metric tons of natural uranium that it had declared surplus a few months earlier,[xxxiv] subject to the important caveat that they not disrupt the US uranium producers market. 

        The initial contract for the commercialization of Russian HEU was signed on May 1st 1993. At that time, USEC, as the United States Executive Agent was contracted to purchase LEU at a mutually agreeable price. The contract stated that “the DOE is authorized to enter into contracts for the purchase of Russian LEU by the Atomic Energy Act.”[xxxv]  The United States thus made no distinction in the contract between the components of LEU: the natural uranium oxide (together with the conversion of the oxide to UF6 for the purpose of enrichment), on the one hand, and the actual enrichment of the UF6 (denominated in terms of SWUs), on the other.  A statement made in 1995 by Sen. Pete Domenici illustrates this point: “USEC is responsible for purchasing the low enriched uranium from the Russian Federation.”[xxxvi]  Yet, to the embarrassment of the United States, the Russian HEU Agreement contradicted another US-Russia trade agreement, the Suspension Agreement,  signed only a few months earlier.[xxxvii]

        In the years preceding the Suspension Agreement, ex-Soviet uranium had been flooding the US market, in large part due to the competitive prices these countries  could offer.  In response to the depressed prices, the Uranium Producers of America (UPA) and Oil, Chemical, and Atomic Workers (OCAW) had filed an anti-dumping suit against the ex-Soviet nations with the US Department of Commerce (DOC).  Following extended negotiations with the ex-Soviet nations, the DOC agreed to drop the anti-dumping investigation in return for an imposition of import quotas on Soviet uranium.  Russian LEU became a restricted import.  Between 1992 and 1994, the Suspension Agreement did not permit ex-Soviet nations to sell natural uranium below a certain threshold price.[xxxviii]  In 1994, an amendment was passed that scrapped price floors and instead mandated matched sales quotas.  Matched Sales require that for each transaction, Russian imports be matched with equivalent sales of domestic uranium.[xxxix]  The Russian HEU agreement which mandated the introduction of LEU into the US market, was in conflict with the goals of the Suspension Agreement, which attempted to restrict this flow.

        Negotiations in House subcommittees as a result of the conflict reflected favor for the trade concerns of the uranium industry.  While both Senators and Representatives were willing to admit to the gravity of non-proliferation issues, they were unable to match their words with proactive steps to ensure implementation of the HEU agreement. They chose instead to protect the domestic economy from market shocks.  The onus therefore fell on those supporting the Russian HEU agreement to find a way to make it consistent with the Suspension Agreement.  They did so by making the Russian LEU meet the Department of Commerce’s guidelines for the import of Russian uranium.  Following the path of least resistance, supporters of the agreement split the Russian LEU into its two components, the raw material and conversion services (or feed component) and the enrichment services (SWU).[xl]  While there were no obstacles in the way of importing enrichment services from Russia, selling Russian enriched uranium was restricted within the United States.  Because of this, Russia had to accept an amount of US uranium  equivalent to the LEU it provided. USEC now provides this ore to Russia, (labeled Russian Feed) which USEC purchases from US mining industries.[xli]  In creating this convoluted mechanism, the US government merely transferred the problem from the import of Russian LEU to the problem of Russian Feed.[xlii]  Russia, understandably was livid with these developments.  “Russia would wish to receive full payment for the material it produced and delivered to the USA in accordance with [the Russian HEU] agreement.”  The payment should not be divided  into “payments for the feed component and payments for the enrichment component.”[xliii]  USEC could not do this without violating the Suspension Agreement.  The latter half of 1995 witnessed intensive lobbying and a multitude of plans regarding the fate of the Russian Feed.  Two of these were especially influential, USEC’s plan, endorsed by the Administration, and the plan put forth by New Mexico Senator Pete Domenici in US Senate Bill S.755.

        Domenici’s proposal for a futures market[xliv] in uranium tried both to guarantee Russia payment for the Russian Feed and to be consistent with the Suspension Agreement.  According to Domenici’s proposal, although USEC could purchase the SWU, the feed component would be returned to the Russian Executive Agent.  Alternatively, the uranium could also be resold in the US for future consumption beyond 2002.  Uranium delivered for the latter purpose would follow a certain timetable for introduction to reduce the impact on the US market.

        USEC, on the other hand proposed a ‘tiered’ approach with regard to the fate of the uranium whereby USEC would try and sell the feed component of the uranium by using a prioritized sequence of strategies. The first would be export sales, followed by an attempt by USEC to secure futures contracts from US utilities.  Following this, USEC would offer the Russian feed component to miners at cost.  If this also failed, USEC would sell the uranium on the market.

        Although USEC’s proposal seemed to be rather comprehensive, two problems were associated with it.  The first was that some features of the agreement were in conflict with the Suspension Agreement.  To implement the strategy would require a presidential waiver.  This was not going to be simple given the pressures on the US administration by the Uranium Producers of both America and Canada (who invoked NAFTA to support their cause).  Secondly and more critically, the mechanism put USEC in charge of an extraordinarily large amount of uranium, which it could then use to manipulate the market.  Moreover, the first three tiers were so designed as to be inoperative from the start,[xlv] in order that USEC would have the ability to sell this uranium on the market.  For example, selling the feed to uranium producers ‘at cost’ would never actually take place since the price of Russian Feed was higher than the selling price of US uranium.

        After hectic lobbying by special interests as far off as Australia and as local as the OCAW, the US Senate passed S. 755 with a compromise on the issue of Russian Feed.  After negotiations in a House-Senate conference committee, the USEC Privatization Act emerged and was signed by President Clinton.  The Act stated that USEC was to transfer to DOE without charge an amount of uranium hexafluoride equivalent to the natural uranium component of the LEU delivered by Russia in 1995 and 1996 and purchased by USEC.  DOE was to sell the hexafluoride within seven years of 1996, for overfeeding enrichment plants, for export, or for use in the United States after 2001. The issue of post 1996 transfers was more complex.  Russia had not been enthusiastic about the futures market approach because of the discount value of such transactions.  While futures markets make possible long term investment decisions, uranium prices are susceptible to dramatic long term fluctuations.  Russia would only be able to realize a fraction of the present value of natural uranium by trading in uranium futures.  Instead, Russia proposed that this uranium be returned to the Russian Executive agent for disposition on the spot market.  The Privatization Act therefore requires  the natural uranium content of LEU to be returned to Russia.

        This step put the Russians in a very difficult situation.  Russian uranium faced severe import restrictions both in North America and Europe.  Nevertheless, Russia proceeded to take its natural uranium to three commercial nuclear fuel marketers, Camaeco, Cogema, and Nukem for resale.  Unfortunately, due to contemporary events to be discussed in the next chapter, by the end of 1998 neither the final terms, nor the price for this uranium has been agreed upon by Russia and its would-be agents.  In the meantime, Russia was only receiving payment for the enrichment component of the uranium it had delivered to the United States.

III. And what happened was…

        At the time that USEC was designated as the US Executive Agent for the Russian HEU deal, USEC was a publicly owned corporation not driven solely by the bottom line and was especially suited to providing the public benefit of non proliferation.  Unfortunately, the administration did not have a contingency plan for use after USEC became a private corporation.  Indeed a few hoped that the Russian HEU agreement, coupled with the reasons against privatization discussed in the first chapter, would provide sufficient reason to prevent the privatization of USEC.  Although these concerns were discussed and consternation expressed, USEC was privatized after its Board assured the government that it would continue to act as a responsible agent of the HEU agreement.

The Impact of Privatization on the HEU Agreement

        The concerns surrounding the Russian HEU aspect of the privatization of USEC were formalized in a study done by Richard Falkenrath, a professor at Harvard University’s Center for Science and International Affairs.  In his report, Avoiding Nuclear Anarchy, Falkenrath worries that the privatization of USEC would threaten the HEU agreement.[xlvi] “The US government could resolve many of the problems with the US purchase of Russian HEU if it simply were to cancel the privatization of USEC… As a government-owned corporation, USEC could be instructed to accept lower profits for the foreign policy gains associated with the purchase of Russian HEU—a trade the corporation would resist making if it were owned by normal, profit maximizing investors.”[xlvii]

        Falkenrath’s apprehensions strike the crux of the problem. A public corporation would be able to serve public interests more ably than a private corporation would.  The privatization of USEC, weakened the Russian HEU agreement by taking it into the realm of private decisions based on corporate profit.

        Such an argument is easy to understand and hard to disprove.  If USEC was nevertheless privatized, one could only assume that it was because there were some additional benefits to privatization that were too large to ignore.  In the Senate hearings on the USEC Privatization Act, Timbers insisted that privatization was necessary to enhance and continue the profit-making trend that USEC began as a public corporation.  Yet arguments for the private sector’s increasing USEC’s net value are weak.  Neither USEC’s management nor its marketing strategy changed significantly after privatization. In fact, to the contrary, Falkenrath maintains that the net present value of the corporation was actually higher while in public hands than it would be in private hands.[xlviii]

        In making his case for privatization, Timbers assured the Senate Committee on Energy and Natural Resources that USEC was, and as a private corporation would continue to be, deeply committed to making the HEU agreement work in the future.  How Timbers could assure the public of continuing support for Russian HEU is not at all clear, especially given the uncertainties of the privatization path USEC would take.[xlix]  Prior to the Senate hearing, in separate testimony to the House subcommittee, Timbers suggested that a privatized USEC would require some monetary incentive to keep the Russian HEU deal afloat, especially since the purchase price of Russian LEU exceeded the production price of LEU at USEC.  Nevertheless, the government endorsed the idea of privatization in 1995/96 and again in 1997.

        One precautionary measure was taken, however. Anticipating the impending privatization of USEC, President Clinton, by an executive order, established an Enrichment Oversight Committee on May 26, 1998 (Executive Order 13085). The committee was to ensure the smooth and unfettered functioning of the Russian HEU deal, to make certain that USEC did not fall under foreign control or influence, to monitor the development and implementation of US government enrichment policy, and to collect relevant information from USEC.  The Committee consists of members from the National Security Council, the Treasury, and the Departments of State, Defense, Commerce, and Energy, among others.

        Following its privatization through an IPO, USEC retained the management it had had before it was privatized.  As CEO, Timbers again affirmed his support for the Russian HEU Agreement.  At a meeting of the Uranium Institute in September 1998, he assured the attendees that “it benefits all of us to turn these megatons of destruction into megawatts that power peaceful commerce.”[l] To critics who were skeptical about how long USEC would continue to accommodate the loss in earnings for maintaining the Russian HEU deal, Timbers pointed out that the loss was a responsibility that USEC was willing to shoulder for the American people.  But then again, in statements to the Securities and Exchange Commission, USEC declared that “The company’s cost of sales has been and will continue to be adversely affected by amounts paid to purchase HEU under the Russian HEU contract…”[li]  Tom Neff, of the Massachusetts Institute of Technology showed that USEC could benefit upwards of $220 million a year if the Russian HEU deal were canceled.[lii]

        If USEC is already privatized, and is losing money by sticking to the Russian HEU deal, why is it still the Executive Agent for the agreement? USEC can resign (or be terminated) as Executive Agent following thirty days’ notice [SEC 1, p. 62].[liii]  USEC may be trying to fulfill its announced intention of protecting the public good, more likely USEC realizes that it derives considerable benefit from serving as the Executive Agent for the Russian HEU deal.  As Executive Agent, the company is able to control the flow of a significant quantity of uranium.  Yet, USEC is paying a price for this benefit.  Although USEC sells Russian HEU and its own HEU at the same price, it can produce SWU for far less than it pays to buy Russian SWU.  USEC could, by just selling its own uranium, increase investor dividends and confidence in USEC stock.  Therefore, as a private corporation, USEC would like to be the Executive agent for the Russian HEU deal as long as the deal exists, but it may prefer that there be no HEU deal at all.

        In fact, USEC has not always done what it could to support the agreement.  In August, 1996 when USEC was still a government-owned corporation, it turned down an offer from Russia to increase deliveries of low-enriched uranium by 50%  for the following year and tried to hide the offer and refusal.  The word got out. Furious, Senator Domenici accused USEC of “acting directly contrary to the national-security interests of the United States.”  USEC was forced to take the additional six metric tons of HEU in question.[liv]

        Furthermore, USEC announced, in forms filed with the SEC in June and September 1998, that it planned to sell almost five sixths of the uranium inventory that it had receive free of charge from DOE.  Of the 29,000 tons of natural uranium in its inventory in September 1998, it would, it said, retain only 5000 tons, to meet operational needs. Although USEC promised to sell the balance “gradually . . . through 2005,” the prospects of the company’s releasing thousands of tons of uranium contributed to an unsettled market and a slide in the price of uranium in the autumn of 1998. As a result of the market’s condition, prospective buyers of the “Russian feed,” Cameco, Cogema, and Nukem, refused at that time to sign a long-term contract for the Russian uranium.

        Domenici in November 1998 described what happened, “For a series of complicated reasons, [the Russian HEU Agreement] disintegrated this year. The main cause was the privatization of the United States Enrichment Corporation by the administration in such a way that large stocks of natural uranium were suddenly placed on the market.  My strong arguments against the administration’s actions were not heeded. . . Their action collapsed the worldwide uranium market overnight and scuttled the agreement because the Russians could no longer obtain contracts for their uranium at agreed-upon prices.”[lv]

        In an article published in Arms Control Today in late 1998, Tom Neff, who was an architect of the original HEU deal, felt it necessary to set forth ways of pressuring USEC to continue to buy SWU from Russia. His suggestions were drastic and included DOE’s increasing the costs of electricity at the gaseous diffusion plants in order to narrow the price difference between enrichment at the US plants and Russian SWUs; and the government’s creating a new government-owned corporation to handle surplus HEU and plutonium.[lvi]

        In the fall of 1998 the Russian HEU Agreement teetered at the edge of existence, as Domenici stated.  Faced by Russia’s desperate need to earn dollars, the US Congress in October passed and the president signed legislation that would permit the United States to pay up to $325 million for almost 11,000 metric tons of Russian Feed delivered or to be delivered in 1997 and 1998.[lvii]  This measure was supposedly to be the last such buyout of Russian Feed and was intended to give Russia the time to negotiate a commercial agreement with its marketing agents. As an incentive to a commercial agreement, the United States said that it would not release the $325 million until such an agreement was reached.  In 1999, with US assistance in the negotiations, an agreement on the Russian Feed was, in fact, signed.

The Commercial Accord

        March 26 Canada’s Cameco, France’s Cogema, and the US branch of Germany’s Nukem signed a 15-year contract with Russia’s Techsnabexport  (Tenex) giving them the exclusive option to purchase 72% of the natural uranium component of the downblended Russian HEU.  Since the downblending of Russian HEU results in an annual feed containing about 9000 metric tons of uranium as UF6 or about 24 million pounds U3O8 equivalent (plus conversion from U308 to UF6),  the 72% will be the equivalent of 17.3 million pounds of U3O8 a year. If all options are exercised, the 17.3 million pounds will be divided initially as follows: Cameco 45%; Cogema, 45%, Nukem, 10%.  In 2002 the percentages will become: Cameco and Cogema 42.5%, Nukem, 15%. Tenex, the Russian commercial agent, will retain 28% of the yearly stock for sale. The contract includes a floor price believed to be $29/kg uranium or UF6, a figure that was reportedly approved by the Russian government.

        The solution to the problem of the “Russian feed” will be no solution if the western companies fail to exercise their options, but Bernard Michel, CEO of Cameco, is reported as saying, “We have done market analyses, and this material is necessary to meet demand. The companies are going to exercise their options.”  Supporting documents have been signed by the Russian and US governments.

        An agreement between DOE and Russia’s Ministry of Atomic Energy (Minatom) states that DOE will arrange for the “distribution,” i.e., the return to Russia, of the feed not sold by Tenex to Cogema, Cameco, or Nukem and that, in order to help maintain market stability, stockpiles of uranium will be set up in the United States and Russia. It also establishes rules for use and maintenance of these stockpiles.

        The DOE stockpile will be maintained for ten years and will consist of 22,000 metric tons uranium equivalent or 58 million pounds U3O8. The 58 million pounds will be made up of 28 million pounds of U3O8 equivalent that DOE is purchasing from Russia as the feed component of the 1997 and 1998 sales of downblended Russian HEU and 30 million pounds of U308 already owned by DOE.  The Russian stockpile will be maintained for the life of the HEU agreement signed in 1993 (presumably 15 more years) and built up from the uranium not sold by Tenex to Cameco, Cogema, or Nukem and thus returned to Russia. Tenex may withdraw from the stockpile annually 2580 metric tons of uranium (6.7 million pounds U3O8 equivalent) to be used in downblending Russian HEU. (In actual practice, Tenex enriches depleted uranium for the downblending. Tenex will be allowed to continue to do so, but nevertheless to draw the 2580 metric tons annually from the stockpile and to sell or otherwise use it as it sees fit.) Tenex may also withdraw from the stockpile uranium to sell to meet the terms of other commercial contracts provided that they were in force on March 24 and that the stockpile will afterwards remain at or above 22,000 metric tons uranium.[lviii]

The Next Complication

        The problem of the HEU deal, nevertheless, lingers.  USEC’s profits are dwindling.  As stated in USEC’s 10-Q Report to the Securities and Exchange Commission for the first quarter of 1999, dated May 7, 1999, the company’s financial position has worsened since privatization, which occurred July 28, 1998.  For the nine months ending March 31, 1999, revenue was $990.7 million, down  $66 million from the $1,056.7 million for the nine months ending March 31, 1998. Gross profit (revenue minus cost of sales) was $204.3 million for the nine months ending March 31, 1999, down $60.2 million from the $264.5 million for the corresponding period ending March 31, 1998. Net income was $56.9 million excluding a special tax benefit ($111.4 million including the tax benefit) for the nine months ending in 1999 as opposed to $142.0 million for the nine months ending in 1998.  The revenue, gross profit, and net income figures for the three months ending March 31, 1999 are also less than those for the three months ending March 31, 1998. Net income was $16.2 million ($0.16/share) for the first quarter of 1999; $40.3 million for the first quarter of 1998.

        USEC announced that its fourth quarter results will be much better. It predicts, in fact, that it will have net earnings for  fiscal year 99 of $120 million ($1.20/share) and revenues of $1.5 billion. However, Morgan Stanley and Merrill Lynch, the two main underwriters of USEC’s initial public offering  have downgraded their evaluations of USEC stock. [lix] A measure of the financial state of USEC is that it has indefinitely suspended  its plans to complete development of the AVLIS enrichment technology in the midst of its search for a site for a new plant.[lx]

        Nuclear Fuel reported in May 31, 1999 that “Congress is beginning to take notice that USEC Inc. is in some financial trouble and there are apparently some discussions under way about how Congress or individual members might be able to help USEC short of subsidizing the company’s purchase of the [Russian] SWU.”   In its SEC reports, USEC continues to link its cost of sales to the Russian HEU.  The 10-Q report for the quarter ending March 31, 1999,  repeats a theme heard before: “Cost of sales has been, and will continue to be, affected by amounts paid to purchase SWU under the Russian Contract at prices that are substantially higher than marginal production cost at the plants.  As a result of Russian SWU purchases, USEC has operated the plants at lower production levels resulting in higher unit production costs.”  USEC , “some have suggested” to Nuclear Fuel, may be seeking a subsidy of up to $100 million a year for its purchases. A “Capitol Hill source” stated that there is no chance of a subsidy but that USEC may be able to obtain other help, such as assistance with contract negotiations with Russia.  According to Nuclear Fuel, negotiations for a new SWU deal are expected to begin this year,.[lxi] although under  the Russian Contract does not require negotiations on quantities and prices of SWU until 2000.[lxii]

        Even a casual observer could have seen that the Russian HEU agreement was incompatible with the privatization of USEC.  While good reasons for the Russian Agreement existed, no compelling reasons existed for the privatization of USEC.  Instead reasons not to privatize USEC existed. At least in regard to nonproliferation, the Government made a mistake by the privatization and is now literally paying for it.

                                    ADDENDUM (November 2001)

 In November 1999 the United States Enrichment Corporation (USEC) requested $200 million from US tax payers to offset losses from purchases of Russian SWU at a price above the marginal production cost of enrichment at its Portsmouth and Paducah plants.  In an attempt to negotiate the subsidy, USEC threatened to resign its position as executive agent for the US-Russian HEU accord.  While seeking alternatives to USEC, federal officials rejected USEC’s request, and Congress adjourned without providing the subsidy.   December 1, USEC’s board voted to continue serving as the executive agent until the end of 2001 despite the company’s estimates that the accord would cause it to lose $10 million dollars in earnings in the coming year.  As of September  2001, with implementation of the agreement in its seventh year, USEC had  imported 125 metric tons of HEU in downblended form (22.4 million SWU).[i]  

The agreement that fixes the price that USEC pays for downblended weapons uranium from Russia expires at the end of 2001.  In mid-2000 USEC negotiated an arrangement with the Russian executive agent Techsnabexport (Tenex), according to which, from 2002 through 2013, Tenex would lower the price it charges USEC for uranium that has been down blended from weapons uranium. In return for Russia’s lowering the price of low-enriched uranium derived from weapons uranium, USEC would buy additional uranium that has never been in the form of high-enriched uranium.  In 2000, USEC paid Tenex approximately $88 per SWU for weapons uranium, although the spot price in the uranium market was about $80 per SWU.  The new agreement was reported, in 2000, to allow USEC to purchase blended-down uranium in the low $60s per SWU, and commercial Russian SWU at $60 per SWU.  In 2001 the agreed upon new price for the SWU from weapons uranium is generally referred to only as “market-based.”  The Russians could lose millions of dollars with the new pricing for weapons SWU, but Tenex would be able to keep the money for the sales of commercial uranium instead of losing it to the Russian general treasury.[ii] 

In its final days, the Clinton administration reportedly took steps towards approval of a tentative agreement between the US and Russian executive agents, which included a provision for USEC’s importing three million Separate Work Units (SWU) from Russia’s commercial enrichment plants over the next five years in addition to down-blended uranium.  To make the importation of the commercial uranium possible, the Department of Commerce had to approve an amendment to the Russian anti-dumping suspension agreement now in force, a step that did not take place.

The Bush administration has not approved the tentative agreement, and the Russian government may no longer be willing to accept it.  The administration, in fact, told USEC in October, 2001, to negotiate a price for and to order weapons-uranium SWU from Russia for calendar year 2002, but not to arrange to import Russian commercial SWU.  The final price for 2002 could scarcely be lower than the price for 2001, since under the terms of the existing contract between USEC and Tenex, the 2001 price is in effect for 2002 if no new agreement is reached.

The price of the Russian SWU is crucial to USEC’s balance sheet.  As a money-saving measure, USEC closed its Portsmouth enrichment plant in May 2001. USEC planned to produce only about 5 million SWU at Paducah and to obtain 60% of its produced-plus-purchased supply of SWU from Russia in its fiscal year 2002.[iii]

According to an informed source, the cost to USEC for enriched product from Paducah, at less than 4% uranium 235, averages around $140 per SWU.  The market price for SWU in the United States under long-term contracts was $102 per SWU on June 30, 2001.[iv]   Combining the high-cost Paducah product with low-cost Russian SWU would enable USEC to sell SWU at a competitive price.  As the situation now stands, the price that USEC will have to pay for Russian weapons SWU for 2002 will not be low enough to keep USEC in the black.

As of late November 2001, the Bush administration was in the process of deciding whether the United States needs domestic enrichment capacity and also under what terms to continue to implement the US-Russian HEU.  USEC was lobbying to remain the exclusive US agent for the agreement.  However, officials of Exelon and Duke had sent a letter to President Bush stating that a group of US utilities and additional partners were planning to apply to license a centrifuge enrichment plant in the United States.  They asked the administration to consider appointing a group known as Nuclear & Energy Security Partnerships as a second executive agent under the US-Russian agreement.[v]   Furthermore, the administration is under pressure from advocates of non-proliferation measures to increase purchases of weapons uranium from the Russian Federation.

Acknowledgements

        We are grateful to the John Merck Fund for providing the funding that allows us to monitor the US uranium enrichment complex.  We would also like to thank Paul Robinson of the Southwest Research and Information Center for making valuable comments on the first draft and PRESS and Tri-Valley CAREs for helping us to obtain documentation. 

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