[House Hearing, 106 Congress]
[From the U.S. Government Printing 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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.)
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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:
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \13\ USEC Board Transcripts, July 22, 1998, pp. 53
---------------------------------------------------------------------------
    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:
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    \15\ USEC Board Transcripts, July 22, 1998, pp.93
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \16\ USEC Board Transcripts, June 2, 1998, pp. 177
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    \21\ USEC Board Transcripts, June 3, 1998, pp. 215
---------------------------------------------------------------------------
    Mr. Timbers further proclaimed:

 ``[AVLIS] is going to be the method by which this company 
        stays viable'' 22
---------------------------------------------------------------------------
    \22\ USEC Board Transcripts, June 3, 1998, pp.242
---------------------------------------------------------------------------
 ``every day that privatization is delayed is delay of 
        deployment of AVLIS.'' 23
---------------------------------------------------------------------------
    \23\ USEC Board Transcripts, June 3, 1998, pp.244
---------------------------------------------------------------------------
 ``we feel confident . . . in the successes of the AVLIS 
        development.'' 24
---------------------------------------------------------------------------
    \24\ USEC Board Transcripts, June 3, 1998, pp. 299
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \25\ USEC Board Transcripts, June 3, 1998, pp. 268
---------------------------------------------------------------------------
    Mr. Timbers declared that AVLIS was uniformly supported by external 
studies: 26
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    \33\ 42 USC 2297h-7(a)(4)
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.]