[Federal Register Volume 80, Number 88 (Thursday, May 7, 2015)]
[Notices]
[Pages 26366-26419]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-11035]
[[Page 26365]]
Vol. 80
Thursday,
No. 88
May 7, 2015
Part III
Department of Energy
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Excess Uranium Management: Secretarial Determination of No Adverse
Impact on the Domestic Uranium Mining, Conversion, and Enrichment
Industries; Notice
Federal Register / Vol. 80 , No. 88 / Thursday, May 7, 2015 /
Notices
[[Page 26366]]
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DEPARTMENT OF ENERGY
Excess Uranium Management: Secretarial Determination of No
Adverse Impact on the Domestic Uranium Mining, Conversion, and
Enrichment Industries
AGENCY: Office of Nuclear Energy, Department of Energy.
ACTION: Notice.
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SUMMARY: On May 1, 2015, the Secretary of Energy issued a determination
(``Secretarial Determination'') covering continued transfers of uranium
for cleanup services at the Portsmouth Gaseous Diffusion Plant and for
down-blending of highly-enriched uranium to low-enriched uranium. The
Secretarial Determination covers transfers of up to the equivalent of
2,500 metric tons of natural uranium (``MTU'') per year in 2015 and up
to the equivalent of 2,100 MTU in each year thereafter. For the reasons
set forth in the Department's ``Analysis of Potential Impacts of
Uranium Transfers on the Domestic Uranium Mining, Conversion, and
Enrichment Industries,'' which is incorporated into the determination,
the Secretary determined that these transfers will not have an adverse
material impact on the domestic uranium mining, conversion, or
enrichment industry.
DATES: Effective May 1, 2015.
ADDRESSES: The 2015 Secretarial Determination and supporting documents
are available on the Department's Web site at http://www.energy.gov/ne/downloads/2015-secretarial-determination.
FOR FURTHER INFORMATION CONTACT: Mr. David Henderson, U.S. Department
of Energy, Office of Nuclear Energy, Mailstop NE-52, 19901 Germantown
Rd., Germantown, MD 20874-1290. Phone: (301) 903-2590. Email:
[email protected].
SUPPLEMENTARY INFORMATION: The Department of Energy (DOE) holds
inventories of uranium in various forms and quantities--including low-
enriched uranium (LEU) and natural uranium--that have been declared as
excess and are not dedicated to U.S. national security missions. Within
DOE, the Office of Nuclear Energy (NE), the Office of Environmental
Management (EM), and the National Nuclear Security Administration
(NNSA) coordinate the management of these excess uranium inventories.
Much of this excess uranium has substantial economic value on the open
market. One tool that DOE has used to manage its excess uranium
inventory has been to enter into transactions in which DOE exchanges
excess uranium for services. This notice involves uranium transfers of
this type under two separate programs. Specifically, DOE transfers
uranium in exchange for cleanup services at the Portsmouth Gaseous
Diffusion Plant and for down-blending of highly-enriched uranium to
LEU.
These transfers are conducted in accordance with the Atomic Energy
Act of 1954 (42 U.S.C. 2011 et seq., ``AEA'') and other applicable law.
Specifically, Title I, Chapters 6-7, 14, of the AEA authorize DOE to
transfer special nuclear material and source material. LEU and natural
uranium are types of special nuclear material and source material,
respectively. The USEC Privatization Act (Pub. L. 104-134, 42 U.S.C.
2297h et seq.) places certain limitations on DOE's authority to
transfer uranium from its excess uranium inventory. Specifically, under
section 3112(d)(2) of the USEC Privatization Act (42 U.S.C. 2297h-
10(d)(2)), the Secretary must determine that the transfers ``will not
have an adverse material impact on the domestic uranium mining,
conversion or enrichment industry, taking into account the sales of
uranium under the Russian Highly Enriched Uranium Agreement and the
Suspension Agreement'' before DOE makes certain transfers of natural or
low-enriched uranium under the AEA.
On May 1, 2015, the Secretary of Energy determined that continued
uranium transfers for cleanup services at Portsmouth and down-blending
services will not have an adverse material impact on the domestic
uranium mining, conversion, or enrichment industry (``2015 Secretarial
Determination''). This determination covers transfers of up to the
equivalent of 2,500 metric tons of natural uranium (``MTU'') per year
in 2015 and up to the equivalent of 2,100 MTU in each year thereafter.
The Secretary based his conclusion on the Department's ``Analysis of
Potential Impacts of Uranium Transfers on the Domestic Uranium Mining,
Conversion, and Enrichment Industries,'' which is incorporated into the
determination. The Secretary considered, inter alia, the requirements
of the USEC Privatization Act of 1996 (42 U.S.C. 2297h et seq.), the
nature of uranium markets, and the current status of the domestic
uranium industries, as well as sales of uranium under the Russian HEU
Agreement and the Suspension Agreement. This Determination replaces the
previous determination issued in May 2014, which covered transfers for
these two programs of up to the equivalent of 2,705 MTU per year.
The full text of the 2015 Secretarial Determination is set forth
below.
Issued in Washington, DC, on May 1, 2015.
Peter B. Lyons,
Assistant Secretary for Nuclear Energy, Office of Nuclear Energy.
Set forth below is the full text of the Secretarial Determination.
Secretarial Determination for the Sale or Transfer of Uranium
Since May 15, 2014, the Department of Energy (``Department,''
``DOE'') has transferred natural uranium and low-enriched uranium in
specified amounts and transactions, subject to a determination I made
on that date pursuant to Sec. 3112(d)(2) of the USEC Privatization
Act, 42 U.S.C. 2297h-10(d) (``2014 Determination''). For the reasons
provided herein, the 2014 Determination is replaced by the
determination described below, and no further transfers pursuant to the
2014 Determination will take place.
The 2014 Determination covered transfers of up to the equivalent of
2,705 metric tons of natural uranium (``MTU'') per year, in natural
uranium hexafluoride provided to contractors for cleanup services at
the Paducah or Portsmouth Gaseous Diffusion Plant and in low-enriched
uranium transferred to contractors for down-blending highly enriched
uranium. The 2014 Determination concluded that the transfers it
described would not have adverse material impacts on the domestic
uranium industries. In issuing this determination to supersede the 2014
Determination, I do not repudiate that conclusion or invalidate
transfers made pursuant to the 2014 Determination.
However, after balancing the Department's goals regarding the
projects being partly supported by uranium transactions with the
Department's goal to help maintain healthy domestic nuclear industries,
and reviewing responses to the Department's solicitations for public
input, I have concluded that the lower rates of uranium transfers
described herein are appropriate in the near term. I have therefore
determined to permit transfers only at the lower rates described below.
To avoid disruption to the projects involved, the Department will
continue transferring at the pre-existing rates for approximately two
months, as described below.
Accordingly, I determine that the following transfers will not have
an adverse material impact on the domestic
[[Page 26367]]
mining, conversion, or enrichment industry:
(1) In calendar year 2015, up to 2,000 MTU contained in natural
uranium hexafluoride, transferred to contractors for cleanup services
at the Portsmouth Gaseous Diffusion Plant, in transfers of up to 600
MTU per quarter until June 30, 2015 and up to 400 MTU per quarter for
the remainder of 2015; and
(2) in calendar year 2016 and thereafter, up to 1,600 MTU per
calendar year contained in natural uranium hexafluoride, transferred to
contractors for cleanup services at the Portsmouth Gaseous Diffusion
Plant, in transfers of up to 400 MTU per quarter; and
(3) in calendar year 2015 and thereafter, an amount of low-enriched
uranium equivalent to up to 500 MTU of natural uranium per calendar
year, transferred to contractors for down-blending highly-enriched
uranium to low-enriched uranium;
PROVIDED THAT
(4) in the event transfers of low-enriched uranium do not reach the
equivalent of 500 MTU of natural uranium in any calendar year,
transfers of natural uranium may exceed 400 MTU in the fourth quarter
of that calendar year so long as the total amount transferred by the
Department does not exceed the equivalent of 2,500 MTU of natural
uranium in calendar year 2015 or the equivalent of 2,100 MTU of natural
uranium in a subsequent year.
I base my conclusions on the Department's ``Analysis of Potential
Impacts of Uranium Transfers on the Domestic Uranium Mining,
Conversion, and Enrichment Industries,'' which is incorporated herein.
As explained in that document, I have considered, inter alia, the
requirements of the USEC Privatization Act of 1996 (42 U.S.C. 2297h et
seq.), the nature of uranium markets, and the current status of the
domestic uranium industries. I have also taken into account the sales
of uranium under the Russian HEU Agreement and the Suspension
Agreement.
Date: May 1, 2015.
Ernest J. Moniz,
Secretary of Energy.
Analysis of Potential Impacts of Uranium Transfers on the Domestic
Uranium Mining, Conversion, and Enrichment Industries
May 1, 2015
Executive Summary
The Department of Energy (``Department'' or ``DOE'') plans to
transfer the equivalent of up to 2,100 metric tons (``MTU'') of natural
uranium per year (with a higher total for calendar year 2015, mainly
because of transfers already executed or under way before today's
determination). These transfers would include 1,600 MTU in natural
uranium hexafluoride transferred in exchange for cleanup services at
the Portsmouth Gaseous Diffusion Plant; and low-enriched uranium, at an
assay of 4.95 wt-% U-235, equivalent to 500 MTU of natural uranium,
transferred for services to down-blend highly enriched uranium. In
support of a determination whether these transfers will have an adverse
material impact on the domestic mining, conversion, or enrichment
industry, the analysis below assesses the potential impacts of DOE's
transfers. It takes account of the transfers just described as well as
past DOE transfers still affecting the markets and certain transfers
contemplated for later years.
For purposes of the Department's determination, transfers will have
an ``adverse material impact'' when a reasonable forecast predicts that
an industry will experience ``material'' harm that is reasonably
attributable to the transfers. To test that attribution, the analysis
compares the expected state of each industry in light of the planned
transfers to what would happen in the absence of transfers. Such ``but-
for'' analysis identifies what impacts DOE's transfers can be said to
cause. As a corollary proposition, the analysis does not conclude that
transfers would be impermissible solely because an industry is weak.
Conversely, it also does not regard transfers as permissible so long as
they are not the sole or primary cause of an industry's problem. The
analysis must reflect existing conditions, whether prosperous or
difficult; and the proper question is to what degree the effects of
DOE's transfers would make an industry weaker.
Not every impact will be an ``adverse material impact'' for these
purposes. In general, the Department regards an ``adverse material
impact'' as a harm of real import and great consequence, beyond the
scale of what normal market fluctuations would cause.
The analysis evaluates six factors for each industry: changes to
prices; changes in production levels at existing facilities; changes to
employment in the industry; changes in capital improvement plans; the
long-term viability of the industry; and, as required by statute, sales
under certain agreements permitting the import of Russian-origin
uranium. The analysis relies on myriad inputs, including a study
prepared for the Department by consultant Energy Resources
International, Inc., market data and forecasts from several sources,
reports by other market consultants, and additional submissions in
response to the Department's requests for comment.
The uranium mining industry serves the market for uranium
concentrates. DOE's transfers, including those described above,
constitute less than 4% of global demand for uranium concentrates. The
Department forecasts, on the basis of consonant results from multiple
economic models that these transfers will tend to suppress prices (on
average over a 10 year period) by about $2.70 per pound. While this
price effect will decrease producers' revenues, the near-term impact
will be smaller because most producers primarily sell on long-term
contracts and therefore have limited exposure to price fluctuations.
The impact on production and employment in the industry will also be
limited. As prices increase over the coming decade, there appears to be
little domestic production for which DOE's transfers would make the
difference between expansion and contraction. In the long-term, the
Department concludes that the effect of its transfers would delay
decisions to expand or increase production capacity but would not
change the eventual outcomes.
The uranium conversion industry processes uranium concentrates into
uranium hexafluoride suitable for enrichment. Most conversion is sold
on long-term contracts, and the sole domestic converter makes
essentially all its sales that way. The distinctive feature of the
conversion market is that the price for long-term contracts appears not
to be the product of ordinary market forces. It has been stable for
five years despite market changes that have caused the prices for
uranium and enrichment to change by 50% or more, and despite the fact
that none of the major converters in Western countries is producing at
full capacity. These conditions arise in part because conversion is a
key step in the nuclear fuel cycle, but one that makes up fairly little
of the overall price of uranium fuel. At the same time, most of the
costs of conversion are fixed costs. It appears that fuel customers are
willing to pay the prices converters demand to secure long-term
supplies. In light of these conditions, the Department concludes that
the term price will remain stable despite DOE's transfers. Transfers
will tend to cause a suppression of the global spot price by about
$0.70 per kgU, but the domestic industry has no or almost no exposure
to the spot price. DOE assumes the domestic industry will lose
[[Page 26368]]
some sales as a consequence of DOE-sourced material's appearing on the
market. Those sales will reduce the industry's revenues. But if the
decrease in production were to increase average costs above current
term prices, the industry would be able to increase prices
correspondingly. The Department also concludes that its transfers will
have, at most, limited impact on employment and plans for capital
improvement and expansion. As it did with respect to the uranium mining
industry, the Department concludes that the effect of its transfers
would, at worst, slightly delay decisions to undertake major capital
improvements or capacity expansions.
The enrichment industry applies enrichment capacity to produce low-
enriched uranium. It can also, by appropriate use of enrichment
capacity, conserve natural uranium (through a mechanism called
``underfeeding'') and effectively generate additional uranium supply.
On the basis of several different models, DOE forecasts that its
transfers will cause a price suppression of about $5.25 per SWU
(separative work units, the unit for measuring enrichment services) in
the near term and $5.40 per SWU over the longer term. The vast majority
of enrichment is sold on long-term contracts, and indeed an enrichment
provider typically will not invest in capacity without having such
contracts in hand. The sole domestic enricher began operations in 2008,
and contracts typically last 10 years or more. The domestic industry
therefore has little exposure to current prices for enrichment. Because
enrichers can also sell conserved natural uranium, a suppression of
uranium concentrate and conversion prices can also affect their
revenues. But that impact should be relatively small because natural-
uranium sales consume only 10-15% of enrichment capacity. The
Department also concludes that because enrichment facilities cannot
easily decrease capacity, DOE transfers will not cause changes in
production levels or employment at existing facilities. In the longer
term, DOE's transfers will not significantly affect investment
decisions because substantially higher prices would be needed to
justify investment than could be obtained without market growth, even
absent DOE's transfers. As it did with respect to the mining and
conversion industries, the Department concludes that the effect of its
transfers would, at most, slightly delay decisions to construct
additional capacity.
The Department recognizes that market conditions have been
difficult in recent years for all three industries. But its analytical
task under section 3112(d)(2) is to forecast what additional harm
industry would suffer that can reasonably be attributed to its
transfers of uranium. The Department concludes that the potential
impacts to the domestic uranium mining, conversion, and enrichment
industries from transfers at the rates described above are not so great
as to constitute adverse material impacts.
Table of Contents
I. Introduction
A. Review of Procedural History
B. Legal Authority
C. Brief History of DOE Transfers
D. Transfers Considered in This Determination
II. Overview of Uranium Markets
A. The Nuclear Fuel Cycle
B. The Uranium Markets
C. The Nature of Demand for Uranium
D. The Nature of Uranium Supply
E. Uranium Prices
III. Analytical Approach
A. Overview
B. Comments on DOE's Interpretation of Section 3112(d)(2)
C. Factors Under Consideration
IV. Assessment of Potential Impacts
A. Uranium Mining Industry
B. Uranium Conversion Industry
C. Uranium Enrichment Industry
V. Other Comments
VI. Conclusion
I. Introduction
A. Review of Procedural History
In preparation for this Secretarial Determination, DOE sought
information from the public through a Request for Information (RFI)
published in the Federal Register on December 8, 2014 (79 FR 72661).
DOE specifically requested comment on the effects of continued uranium
transfers on the domestic uranium industries and recommendations about
factors to be considered in assessing the possible impacts of DOE
transfers. In response to the RFI, DOE received comments from a diverse
group of parties representing interests across the nuclear industry.
DOE also received comments from trade associations, nuclear utilities,
local governmental bodies, and members of the public.
In addition, DOE tasked Energy Resources International, Inc., (ERI)
to assess the potential effects on the domestic uranium mining,
conversion, and enrichment industries of the introduction of DOE excess
uranium inventory in various forms and quantities through sale or
transfer during calendar years 2015 through 2024 (``2015 ERI Report'').
This study also updated an earlier analysis that ERI prepared prior to
the May 2014 Secretarial Determination \1\ (``2014 ERI Report'').
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\1\ The May 2014 Secretarial Determination is available on DOE's
Web site at: http://www.energy.gov/articles/energy-department-announces-secretarial-determination-no-adverse-material-impact-uranium.
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On March 18, 2015, DOE published a Notice of Issues for Public
Comment (NIPC) in the Federal Register (80 FR 14107). That notice
announced the public availability of comments received in response to
the December 2014 Request for Information, 2015 ERI Report, and a list
of factors for analysis of the impacts of DOE transfers on the uranium
mining, conversion, and enrichment industries. DOE received comments
from members of the uranium mining, conversion, and enrichment
industries, trade associations, and DOE contractors.\2\
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\2\ The 2014 ERI Report, the 2015 ERI Report, and the comments
received in response to the RFI and the NIPC are available at http://www.energy.gov/ne/downloads/excess-uranium-management. Some
comments were marked as containing confidential information. Those
comments are provided with confidential information removed.
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B. Legal Authority
DOE manages its excess uranium inventory in accordance with the
Atomic Energy Act of 1954 (42 U.S.C. 2011 et seq., ``AEA'') and other
applicable law. Specifically, Title I, Chapters 6-7, 14, of the AEA
authorize DOE to transfer special nuclear material and source material.
Low-enriched uranium (LEU) and natural uranium are types of special
nuclear material and source material, respectively.
The USEC Privatization Act (Pub. L. 104-134, 42 U.S.C. 2297h et
seq.) places certain limitations on DOE's authority to transfer uranium
from its excess uranium inventory. Specifically, under section 3112(d)
of the USEC Privatization Act (42 U.S.C. 2297h-10(d)), DOE may make
certain transfers of natural or low-enriched uranium if the Secretary
determines that the transfers ``will not have an adverse material
impact on the domestic uranium mining, conversion or enrichment
industry, taking into account the sales of uranium under the Russian
Highly Enriched Uranium Agreement and the Suspension Agreement.'' 42
U.S.C. 2297h-10(d)(2)(B). The validity of any determination under this
section is limited to no more than two calendar years subsequent to the
determination. See Section 306(a) of Division D, Title III of the
Consolidated and Further Continuing Appropriations Act, 2015 (Pub. L.
113-235).
Section 3112 of the USEC Privatization Act also contains
[[Page 26369]]
provisions covering transfers of enriched uranium to other federal
agencies, Sec. 2297h-10(e)(1), to any person for national security
purposes, Sec. 2297h-10(e)(2), and to State or local agencies or
nonprofit, charitable, or educational institutions, Sec. 2297h-
10(e)(3). For transfers to these entities, the Act does not require
that the Secretary determine that there will not be an adverse material
act on the domestic uranium industries. Other subsections of section
3112 cover transfers related to the down-blending of Russian highly
enriched uranium. Sec. 2297h-10(b).
C. Brief History of DOE Transfers
1. 2008 Plan
In March 2008, then-Secretary of Energy Bodman released a Policy
Statement outlining a framework within which DOE intended to make
decisions concerning use and disposition of its excess uranium
inventory (``2008 Policy Statement'').\3\ The Policy Statement observed
that uranium DOE possesses ``is a valuable commodity both in terms of
monetary value and the role it could play in achieving vital
Departmental missions and maintaining a healthy domestic nuclear
infrastructure,'' and it laid out certain principles for managing the
inventory prudently to achieve those values. The 2008 Policy Statement
established that the Department would engage, when appropriate, in
transactions in which it would exchange uranium for services or for
other uranium. All transactions involving transfers or sales outside
the Government, the Statement noted, must provide ``reasonable value''
for the Department. ``Reasonable value takes into account market value,
as well as other factors such as the relationship of a particular
transaction to overall Departmental objectives and the extent to which
costs to the Department have been or will be incurred or avoided.'' The
Policy Statement declared that DOE would maintain sufficient uranium
inventories to meet its own needs and would sell or transfer only
uranium excess to those needs. In addition, the Policy Statement
asserted that DOE would manage its uranium ``in a manner that is
consistent with and supportive of the maintenance of a strong domestic
nuclear industry.'' In that vein, the Statement noted that ``as a
general matter, the introduction into the domestic market of uranium
from Departmental inventories in amounts that do not exceed ten percent
of the total annual fuel requirements of all licensed nuclear power
plants should not have an adverse material impact on the domestic
uranium industry.'' 2008 Policy Statement, at 2.
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\3\ The 2008 Policy Statement and the 2008 Excess Uranium
Inventory Management Plan are available at http://www.energy.gov/ne/downloads/excess-uranium-inventory-management-plan-2008.
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Based on this policy statement, in December 2008 DOE released its
Excess Uranium Inventory Management Plan providing a comprehensive
inventory of its excess uranium and details about DOE's preliminary
plans for future management of its excess uranium inventory (``2008
Plan''). DOE's excess uranium inventory in 2008 consisted of highly
enriched uranium (HEU), natural uranium hexafluoride (UF6)
of various origins, uranium of various enrichments in forms other than
UF6 that does not meet commercial specifications (``off-spec
non-UF6''), and depleted uranium in the form of
UF6. The volumes of these inventories at the time of the
issuance of the 2008 Plan are listed in Table 1. The 2008 Plan
identified several transactions that were ongoing, planned, or under
consideration for disposition of DOE's excess uranium.
Table 1--Excess Uranium Inventory From Table 1 of 2008 Plan
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Natural
uranium
Inventory Amount (in MTU) equivalent (in
MTU)
------------------------------------------------------------------------
Unallocated HEU \4\.................... 67.6 12,440
U.S.-origin natural UF6................ 5,156 N/A
Russian-origin natural UF6............. 12,440 N/A
Off-spec non-UF6 \5\................... 4,461 2,900
Depleted UF6 \6\....................... 75,300 25,950
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2. Recent Uranium Transfers
Since 2008, DOE has managed its inventory in accordance with the
2008 Policy Statement and Plan. The survey below includes the transfers
involving the largest volumes, which are the ones most relevant for
assessing how DOE's transfers have affected uranium markets.
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\4\ The 2008 Plan explained that ``unallocated'' means HEU that
``is not presently obligated or approved for a specific purpose or
DOE program.'' 2008 Plan, at 1 n.1.
\5\ 1,680 MTU of this material is either natural or low-
enriched. The remaining amount is depleted. The figure for the
natural uranium equivalent of this material includes only the
natural and low-enriched uranium.
\6\ The quantity of depleted uranium includes only the
UF6 with an assay above 0.35 wt-% U-235.
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DOE's National Nuclear Security Administration (NNSA) has
transferred LEU down-blended from HEU (``blended LEU,'' or ``BLEU'') to
the Tennessee Valley Authority for use in its Brown's Ferry Nuclear
Plant. This program is discussed below in Section I.D.2.a. DOE and NNSA
have also been transferring a small amount of high-assay LEU (i.e.
above 5 wt-% U-235) to foreign and domestic research reactors. This
program is discussed below in Section I.D.2.e.
In 2008, NNSA began an additional program of down-blending
approximately 12.1 metric tons of HEU. In the course of this program,
NNSA has transferred a portion of the resulting LEU to the contractor
in exchange for the down-blending services. Prior to the start of this
program the Secretary determined in October 2008 that the transfer of
LEU in exchange for the down-blending of up to 12.1 metric tons of HEU
would not have an adverse material impact on the domestic uranium
mining, conversion, or enrichment industries. The amount of derived LEU
was expected to be equivalent to approximately 336 MTU of natural
uranium. 2008 Plan, at 11. NNSA is currently engaged in a successor
program to down-blend another 3 metric tons of HEU, and the transfers
considered in this analysis include further LEU in exchange for the
down-blending services.
In July 2009, DOE announced that it would accelerate cleanup
efforts at the Portsmouth Gaseous Diffusion Plant through increased
funding and through transferring uranium in exchange for cleanup
services. Beginning in
[[Page 26370]]
November 2009, DOE's Office of Environmental Management (EM)
transferred up to 300 MTU per quarter of natural uranium hexafluoride
to the contractor at Portsmouth. Transfers during the period of
November 2009 to December 2010 were limited to no more than 1,125 MTU,
in accordance with the Secretary's determination in November 2009 that
these transfers up to those rates would not have an adverse material
impact on the domestic uranium mining, conversion, or enrichment
industries.
Beginning in March 2011, EM transferred uranium for cleanup
services at Portsmouth at an increased rate of 450 MTU per quarter.
These transfers were conducted in accordance with the Secretary's
Determination in March 2011 that such transfers between the first
quarter of 2011 and the end of calendar year 2013 would not have an
adverse material impact on the domestic uranium mining, conversion, or
enrichment industry. Transfers during this period were limited to no
more than 1,605 MTU per calendar year.
Beginning in 2012, EM transferred uranium for cleanup services at
Portsmouth at an increased rate of 600 MTU per quarter and no more than
2,400 MTU per year. NNSA also extended its program of transferring LEU
in exchange for down-blending services. The rate of transfers for down-
blending after May 2012 was equivalent to 400 MTU of natural uranium.
These transfers were conducted in accordance with the Secretary's
determination in May 2012 that the sale or transfer of these amounts of
uranium would not have an adverse material impact on the domestic
uranium mining, conversion, or enrichment industries. In addition to
these transfers, DOE also transferred in 2012 and 2013 approximately
9,156 MTU of depleted uranium to Energy Northwest. This transfer was
included in the May 2012 Secretarial Determination and is discussed
further in Section I.D.2.b.
In March 2013, DOE transferred approximately 48 MTU of LEU to USEC
Inc. in exchange for an amount of natural uranium hexafluoride
equivalent to the feed component of that LEU--409 MTU--and the value of
approximately 299,000 SWU of enrichment services. The value of these
services was retained by USEC to fund a portion of DOE's cost share
under a 2012 Cooperative Agreement between DOE and USEC. This transfer
was conducted in accordance with the Secretary's March 2013
determination that the sale or transfer of this uranium would not have
an adverse material impact on the domestic uranium mining, conversion,
or enrichment industries.
3. 2013 Plan
In July 2013, the Secretary issued a revised Excess Uranium
Inventory Management Plan (``2013 Plan''), based on an updated
inventory of the Department's uranium as of December 31, 2012.\7\ This
updated inventory is summarized in Table 2.
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\7\ The 2013 Excess Uranium Inventory Management Plan is
available at http://www.energy.gov/ne/downloads/excess-uranium-inventory-management-plan.
Table 2--Excess Uranium Inventory From Table 1 of 2013 Plan
------------------------------------------------------------------------
Natural
Amount (in uranium
Inventory MTU) equivalent
(in MTU)
------------------------------------------------------------------------
Unallocated HEU........................ 18.0 3,394
Allocated HEU.......................... 11.4 2,077
LEU.................................... 47.6 409
U.S.-origin natural UF6................ 5,234 N/A
Russian-origin natural UF6............. 7,705 N/A
Off-spec LEU as UF6.................... 1,106 1,876
Off-spec non-UF6 \8\................... 221 600
Depleted UF6 \9\....................... 114,000 25,000-35,000
------------------------------------------------------------------------
The 2013 Plan reaffirmed the Department's goals of maintaining
sufficient inventories to meet DOE needs, transacting ``in a
transparent and competitive manner,'' and managing inventories in a
manner ``consistent with and supportive of the maintenance of a strong
domestic uranium industry.'' The plan included the transfer of enriched
uranium to pay for down-blending of HEU to LEU and the transfer of
natural uranium in exchange for cleanup services at the Portsmouth
Gaseous Diffusion Plant through 2021. 2013 Plan, 13-15. The 2013 Plan
also announced that DOE would no longer use the ten percent guideline
established in the 2008 Policy and Plan. The 2013 Plan explained that
DOE's experience between 2008 and 2013, including a 2012 market impact
analysis and a 2009 Finding of No Significant Impact and Mitigation
Action Plan, led it to determine that DOE ``can meet its statutory and
policy objectives in regard to DOE uranium sales or transfers without
an established guideline.'' In addition, the plan noted that in light
of the two-year limit on the validity of a determination under section
3112(d), an established guideline was no longer necessary.
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\8\ This figure includes only natural and low-enriched uranium.
As of the 2013 Plan, DOE had disposed of the depleted uranium in
forms other than UF6 either through disposal or sale.
\9\ The quantity of depleted uranium in this table includes only
the UF6 with an assay above 0.34 wt-% U-235. The
corresponding figure from the 2008 plan included UF6 with
an assay above 0.35 wt-% U-235.
---------------------------------------------------------------------------
4. 2014 Determination
On May 15, 2014, the Secretary determined that sales or transfers
of a total of 2,705 MTU per calendar year will not have an adverse
material impact on the domestic uranium mining, conversion, or
enrichment industries (``2014 Secretarial Determination''). The 2,705
MTU was broken down as follows:
Up to 2,055 MTU per year to DOE contractors for cleanup
services at the Paducah or Portsmouth Gaseous Diffusion Plant, in
quarterly transfers of up to 600 MTU for the period 2014 through 2021;
Up to 650 MTU per year to the National Nuclear Security
Administration (NNSA)'s contractors for down-blending of HEU to LEU for
the period 2014 through 2022;
Provided that, in the event down-blending transfers do not
reach 650 MTU in any year, transfers for cleanup
[[Page 26371]]
services may exceed 600 MTU in the fourth quarter of that same calendar
year so long as the total amount does not exceed 2,705 MTU.
D. Transfers Considered in This Determination
This section provides an overview of the various uranium
transactions considered in this analysis. The first category of
transfers are those that DOE plans to undertake during the next two
years pursuant to today's determination under section 3112(d). The
second category includes other transfers that have been made or may be
made that may be relevant to DOE's analysis of the possible impacts of
transfers in the first category. The third category includes the
Russian HEU Agreement and Suspension Agreement. This last category of
transactions does not directly involve DOE, but section 3112(d) of the
USEC Privatization Act instructs DOE to take account of them.
1. Planned Transfers That are Covered by Today's Determination Under
Section 3112(d)
Today's determination concludes that certain transfers will not
cause adverse material impacts on the domestic uranium industries.
Those transfers, outlined below, include transfers of natural uranium
for cleanup services at the Portsmouth Gaseous Diffusion Plant and of
LEU for down-blending services.
a. Portsmouth Cleanup
Through its Office of Environmental Management (EM), DOE contracts
with Fluor B&W Portsmouth for cleanup services at the Portsmouth
Gaseous Diffusion Plant. This work involves decontamination and
decommissioning of approximately 415 facilities (including buildings,
utilities, systems, ponds, and infrastructure units) that make up the
former uranium enrichment facility. In recent years, work under this
contract has been funded through both appropriated dollars and uranium
transfers. As the value of transferred uranium changes depending on
market prices and on the Department's decisions regarding how much
uranium to transfer, uranium can constitute a greater or lesser
proportion of the total funding.
During the period covered by today's determination, DOE plans to
transfer up to 1,600 MTU per calendar year of natural uranium
hexafluoride in exchange for cleanup services at the Portsmouth Gaseous
Diffusion Plant. Today's determination will be issued in the middle of
calendar year 2015, after DOE has transferred material for part of the
year at the higher rates permitted by the 2014 Determination. However,
performing the analysis and determination on a calendar-year basis will
just mean that DOE's analysis reflects a higher overall rate for 2015,
in light of the material already transferred. Accordingly, for the sake
of simplicity, DOE will analyze 2015 transfers for the cleanup program
of up to 2,000 MTU.
b. Down-Blending of HEU
NNSA contracts with WesDyne International for down-blending of HEU
to LEU. The HEU is transferred to WesDyne's contractor, Nuclear Fuel
Services, Inc., in many forms--including metal, oxide, and compounds--
and the resulting LEU is in the form of aqueous uranyl nitrate. This
program is part of the United States' efforts to eliminate more than
200 metric tons of excess HEU, which is a material that is costly to
store securely and represents a proliferation risk. To complete down-
blending, the contractor buys natural uranium and uses it to dilute the
U-235 contained in the HEU, producing LEU enriched to 4.95 wt-% U-235.
Work under these contracts continues to be funded through the
transfer of some of the LEU that results from the down-blending. Under
the terms of the contract with WesDyne, DOE can use a mix of money and
uranium--ranging from entirely money to entirely uranium--to fund this
contract, but in practice funding has been entirely through uranium
transfers and is expected to continue to be entirely through uranium
unless circumstances necessitate the use of appropriated money.
During the period covered by today's determination, DOE plans to
transfer an amount of low-enriched uranium equivalent to up to 500 MTU
of natural uranium. This amount is derived by transferring up to 60 MTU
per calendar year of low-enriched uranium at 4.95 wt-% U-235 in the
form of aqueous uranyl nitrate for down-blending services. Assuming a
tails assay of 0.20 wt-% U-235, it would require approximately 555 MTU
of natural uranium and approximately 520,000 separative work units
(``SWU'') to produce that quantity of LEU. In order to down-blend the
HEU to LEU, the down-blending contractor must purchase natural uranium
hexafluoride for use as diluent in an amount equal to about 10% of the
natural uranium equivalent contained in the LEU, i.e. 55 MTU. Thus, DOE
considers the natural uranium equivalent of this amount of LEU to be
500 MTU.
As with the transfers for cleanup services at the Portsmouth
Gaseous Diffusion Plant, DOE has already transferred some amount of LEU
during 2015 at rates permitted by the 2014 determination. For the sake
of clarity and for simplicity, and for reasons like those discussed
above, today's determination and this analysis cover an amount of low-
enriched uranium equivalent to up to 500 MTU of natural uranium for
2015.
2. Other Uranium Transfers by DOE
In addition to transfers described above, this analysis considers
several transfers that are not covered by today's determination, for
various reasons. Although some of these transfers are not subject to
section 3112(d), the Department has analyzed their potential impacts on
domestic industries, for those transfers already concluded, and will
analyze such impacts for those yet to be carried out, to provide a
complete picture of the Department's uranium transfers. In addition, in
2009, DOE issued a Finding of No Significant Impact (``FONSI'') in
connection with its National Environmental Policy Act review of its
proposed action to sell or disposition excess depleted, natural, and
low-enriched uranium. In the Mitigation Action Plan included as part of
the 2009 FONSI, DOE undertook to ``conduct an analysis prior to
particular sales or transfers . . . to ensure there would be no
potentially significant impacts to the domestic uranium industry.'' As
part of its Mitigation Action Plan, the Department committed to
conducting a market impact analysis of depleted uranium sales or
transfers to determine whether such sales or transfers would cause
potentially significant impacts on the domestic uranium industries, and
to adjust the proposed sales or transfers ``as necessary to ensure that
such potentially significant impacts are avoided or mitigated.'' 74 FR
31420, at 31421-22 (July 1, 2009).
In addition, this analysis considers some transfers that may be
subject to section 3112(d) but that are still only being planned. While
today's determination does not cover those transfers because they are
not yet close enough to fruition, DOE conducts this analysis with
awareness that these other transfers may happen in years to come.
a. Blended Low-Enriched Uranium to Tennessee Valley Authority
DOE has a significant quantity of HEU inventory that contains
various contaminants, so that the down-blended LEU product would not
meet American Society for Testing and Materials commercial nuclear fuel
specifications. Under a 2001 Interagency Agreement
[[Page 26372]]
between DOE and the Tennessee Valley Authority (TVA), DOE provides such
``off-spec'' blended low-enriched uranium (BLEU) to TVA, which uses it
in its Brown's Ferry Nuclear Plant. Through 2012, NNSA had down-blended
and transferred to TVA an amount of LEU derived from 46 MTU of HEU. In
July 2013, NNSA and TVA modified the Interagency Agreement to add a
small amount of additional down-blended material.
b. Depleted Uranium Hexafluoride to Energy Northwest
In 2012 and 2013, DOE transferred 9,075 MTU of high assay depleted
uranium hexafluoride (DUF6) to Energy Northwest. Energy
Northwest then contracted with USEC, Inc.--now known as Centrus Energy
Corp.--to enrich the tails to LEU. Energy Northwest sold most of the
resulting LEU to TVA, for use in its reactors between 2015 and 2022.
Energy Northwest retained the remaining LEU for use in its own
reactors. DOE accepted title to 8,582 MTU of secondary tails resulting
from the enrichment of the high-assay tails.
c. Depleted Uranium Hexafluoride to Global Laser Enrichment
In July 2013, DOE issued a Request for Offers for the sale of
depleted and off-specification uranium hexafluoride inventories. These
inventories include large amounts of high-assay and low-assay depleted
UF6 (DUF6). In total, the material includes
approximately 538 thousand MTU of DUF6 contained in over
65,000 cylinders currently stored at DOE's Paducah and Portsmouth
sites. Under the terms of the Request for Offers, transfers of
DUF6 would begin in calendar year 2019 and would not exceed
2,000 metric tons natural uranium equivalent each year.\10\ In November
2013, DOE announced that it was entering into negotiations with GE-
Hitachi Global Laser Enrichment, LLC (GLE) for the sale of this
material. GLE proposed to license, construct, and operate a new laser
enrichment facility in Paducah, KY, to re-enrich the depleted tails.
---------------------------------------------------------------------------
\10\ Note that the amount of ``natural uranium equivalent''
contained in a given amount of depleted uranium depends on the assay
of the depleted uranium. These terms are discussed more fully below.
---------------------------------------------------------------------------
d. Off-Specification Uranium
The July 2013 Request for Offers also sought offers for the sale of
certain amounts of uranium hexafluoride that, like the LEU provided to
TVA mentioned above, do not meet American Society for Testing and
Materials specifications. This ``off-spec'' material consists of
approximately 1,106 MTU contained in 239 cylinders at the Paducah and
Portsmouth Gaseous Diffusion Plants. In November 2013, DOE announced
that it would enter into negotiations with AREVA for the sale of this
inventory.
In 2008, a DOE contractor issued a Request for Proposals for the
sale and disposition of off-specification, non-UF6 uranium
located at the Portsmouth Gaseous Diffusion Plant. This inventory
consists of approximately 4,461 MTU of uranium in various forms,
including metal, oxides, fluorides, and aqueous solutions.
e. Uranium Transfers for Research Applications
DOE also transfers LEU enriched to assays between 5 and 20 wt-% U-
235 for domestic and foreign research applications. Most of these
transfers are conducted in accordance with section 3112(e) of the USEC
Privatization Act, such as transfers to domestic and foreign research
reactors; however, some may fall within section 3112(d), such as
transfers for use in commercial research and isotope production
applications. In general, these transfers do not contribute to any
impacts that DOE uranium transfers overall have on domestic uranium
industries, because the transfers do not displace commercially supplied
uranium, conversion, or enrichment from the market. No commercial
supplier is currently capable of providing LEU at these assays, so a
research reactor operator would not be able to replace DOE-sourced
material by buying uranium hexafluoride and having it enriched to those
levels. In general, it would also be technologically infeasible for
research reactor operators to replace DOE-sourced high-assay LEU by
converting the reactors to use commercial-assay LEU and retain the
ability of the reactor to be used for research. Even if these reactors
could use LEU (either at high or low assay) from commercial suppliers,
the amounts are extremely small. Thus, DOE's supply of high-assay LEU
for research applications has at most a de minimis effect on the
commercial uranium markets, and this analysis therefore does not
consider these transfers further.
3. Transactions Under Russian HEU Agreement and Suspension Agreement
As explained below, section 3112(d) of the USEC Privatization Act
states that a Secretarial Determination must take into account the
sales of uranium under two agreements relating to uranium from the
Russian Federation: The Agreement Between the Government of the United
States of America and the Government of the Russian Federation
Concerning the Disposition of Highly Enriched Uranium Extracted from
Nuclear Weapons, Feb. 18, 1993 (``Russian HEU Agreement''), and the
Agreement Suspending the Antidumping Investigation on Uranium from the
Russian Federation, 57 FR 49220, at 49235 (Oct. 30, 1992) (``Suspension
Agreement'').
a. Russian HEU Agreement
The Russian HEU Agreement was originally signed on February 18,
1993, and provided for the purchase over a 20-year period of LEU
derived from 500 MTU of weapons-origin HEU from Russia. In total, this
material contained the equivalent of almost 400 million pounds
U3O8, 150 million kilograms of uranium (kgU) of
conversion services, and approximately 92 million SWU of enrichment
services.
The sale of this uranium into the commercial market has not
directly involved DOE. The material was actually transferred to the
United States through a commercial agreement between the U.S. and
Russian Executive Agents. The U.S. Executive Agent--initially the
United States Enrichment Corporation, and later the private corporation
USEC, Inc.--then sold the LEU into the U.S. nuclear fuel market to
commercial utilities.
The USEC Privatization Act altered the implementation of the
Russian HEU Agreement. The Act directed the Executive Agent to enter
into an agreement to return to the Russian Executive Agent an amount of
uranium equivalent to the natural uranium component of LEU received
under the agreement after January 1, 1997, or, if the Russian Executive
Agent did not enter such an agreement, to auction the uranium.\11\ The
Act also placed annual limits on the delivery to U.S. utilities of the
uranium thus provided to the Russian Executive Agent. Specifically, the
Act limited deliveries to no more than 2 million pounds
U3O8 equivalent in 1998. The limit increased
annually, finally reaching 20 million pounds U3O8
equivalent in 2009 and each year thereafter. 42 U.S.C. 2297h-10(b)(5).
The USEC Privatization Act did not place any limit on the delivery of
the conversion component of uranium
[[Page 26373]]
returned to the Russian Executive Agent or auctioned in the absence of
a return agreement. 42 U.S.C. 2297h-10(b)(8). The last deliveries under
the Russian HEU Agreement took place in 2013.
---------------------------------------------------------------------------
\11\ Under this arrangement, USEC received LEU from Russia, sold
the enrichment component, and then returned the natural uranium
component in the form of natural uranium hexafluoride to the Russian
Executive Agent. The Russian Executive Agent entered into a separate
agreement with a consortium of western uranium producers to sell the
natural uranium and conversion.
---------------------------------------------------------------------------
b. Suspension Agreement
In 1991, the Department of Commerce initiated an antidumping duty
investigation under the Tariff and Trade Act to determine whether
imports of uranium from the U.S.S.R. were being sold into the United
States at less than fair value. In 1992, the Department of Commerce
entered into an agreement with the Russian Federation (``Suspension
Agreement'') suspending the antidumping investigation and establishing
export limits on uranium from those countries. 57 FR 49220 (Oct. 30,
1992).
The Suspension Agreement has been amended several times since it
first came into force. At the time the USEC Privatization Act was
passed in 1996, the Suspension Agreement allowed Russian natural
uranium and SWU to be imported only if it was matched with an equal
portion of newly-produced U.S.-origin natural uranium or SWU. These
``matched sales'' were subject to annual volume limits ranging from 1.9
million to 6.6 million pounds U3O8 equivalent
between 1994 and 2003. 59 FR 15373, at 15374 (Apr. 1, 1994). The USEC
Privatization Act specifically stated that sales of the natural uranium
component of HEU under the Russian HEU Agreement were excluded from the
Suspension Agreement limits. 42 U.S.C. 2297h-10(b)(6).
The most recent iteration of the Suspension Agreement entered into
force in 2008. 73 FR 7705 (Feb. 11, 2008). That agreement provides for
the resumption of sales of natural uranium and SWU beginning in 2011.
While the HEU Agreement remained active (i.e. 2011-2013), the annual
export limits were relatively small--between 0.4 and 1.1 million pounds
U3O8 equivalent. After the end of the Russian HEU
Agreement, restrictions range between 11.9 and 13.4 million pounds
U3O8 equivalent per year between 2014 and 2020.
73 FR 7705, at 7706 (Feb. 11, 2008).
II. Overview of Uranium Markets
The nuclear fuel market consists of four separate industries:
mining/milling, conversion, enrichment, and fabrication. These
industries interact in complicated and sometimes counterintuitive ways.
In order to analyze the effect on the various industries of introducing
a given amount of uranium into the market, it is necessary to
understand how uranium is processed into nuclear fuel, how the
different aspects of this process interact, and how the consumers of
uranium--nuclear reactor owners/operators--procure uranium. This
section provides an overview of these industries and markets, beginning
with the process for producing nuclear fuel from uranium ore.
A. The Nuclear Fuel Cycle
In order to be useful as fuel for a reactor, uranium must be in a
specific chemical form, it must have the correct isotopic
concentration, and it must be fabricated into the correct physical
shape and orientation. The four nuclear fuel cycle industries--mining,
conversion, enrichment, and fabrication--ensure that reactor operators
have a steady supply of usable fissile material to fuel their reactors.
1. Mining
The first step in the nuclear fuel cycle is mining. Uranium is
relatively common throughout the world and is found in most rocks and
soils at varying concentrations. There are two primary methods of
mining uranium: Conventional and in-situ recovery. Which method is used
for a particular deposit depends on the specific characteristics of the
deposit and surrounding rock.
Conventional mining can involve either open pit or underground
removal of uranium ore. Once removed from the ground, the uranium ore
must be transported to a mill for processing. Many mining operations
are located close to mills; where mines are close together, one mill
may process ore from several different mines. Once at the mill, the ore
is crushed and chemically treated to remove the uranium from the other
minerals, a process called ``leaching.'' The solids are then separated
from the solution and dried. The final result is a powdered uranium
oxide concentrate, often known as ``yellowcake'' and predominately made
of triuranium octoxide, or U3O8. This powdered
yellowcake can be packed in drums and shipped for the next stage of
processing.
An alternative mining process is known as in-situ recovery (ISR).
In ISR mining, the uranium ore is not removed from the ground as a
solid. Instead, an aqueous solution--either acid or alkali--is pumped
into the ground through injection wells, through a porous ore deposit,
and back out through production wells. As the solution moves through
the ore deposit, the uranium in the ore dissolves or leaches into the
solution. Once the uranium-laden solution is pumped out, it is pumped
to a treatment plant where uranium is recovered and dried into
yellowcake. In order to maintain a stable rate of production,
wellfields must be continually developed and placed into production.
There are several key differences between conventional and ISR
mines. ISR mining typically has lower costs, both capital and
operational. ISR mines also have a shorter lead-time for development.
There are other advantages compared to conventional mining such as
decreased radiation exposure for workers, reduced surface disturbance,
and reduced solid waste. However, ISR mining can only extract uranium
located in deposits that are permeable to the liquid solution used to
recover the uranium, and the permeable deposit must have an impermeable
layer above and below to prevent the solution from leaching into
groundwater. To the extent that uranium is located in other types of
deposit ISR mining may not be possible.
2. Conversion
The second step in the nuclear fuel cycle is conversion. When
yellowcake arrives at conversion facilities it may contain various
impurities. The conversion process refines the uranium compounds and
prepares it for the next stage.
As discussed in the next section, most nuclear reactors require
uranium that is enriched in the isotope U-235.\12\ The enrichment
process typically requires uranium to be in a gaseous form. To meet
this need, U3O8 is converted into uranium
hexafluoride (UF6), which sublimes--i.e. converts directly
from solid to gas--at a temperature (at normal atmospheric pressure) of
approximately 134[emsp14][deg]F (56.5 [deg]C). The UF6 is
then loaded into large cylinders and shipped to an enrichment facility.
---------------------------------------------------------------------------
\12\ Some nuclear reactors, particularly pressurized heavy water
reactors, use natural uranium.
---------------------------------------------------------------------------
There are several different processes for converting
U3O8 to UF6. The two most significant
processes are known as the ``wet process'' and ``dry process.'' Both
processes have three essential steps: Reduction, hydrofluorination, and
fluorination. These steps do not differ substantially between the two
processes. The main difference between the wet process and dry process
is in how they remove impurities. In the wet process, used in
facilities in France and Canada, yellowcake is treated with nitric
acid, concentrated, and dried into UO3 powder prior to
reduction.\13\ In the dry
[[Page 26374]]
process, used at the Metropolis Works facility in Illinois,
purification takes place at the very end of the process through
distillation of UF6.\14\
---------------------------------------------------------------------------
\13\ Port Hope, Ontario, Canada, and COMURHEX Malv[eacute]si/
Pierrelatte, France, use the wet process. See AREVA, ``Chemical
Operations Around the World,'' http://www.areva.com/EN/operations-687/chemistry-business-unit-sites-around-the-world.html (accessed
Mar. 31, 2015); Cameco, ``Port Hope Conversion,'' http://www.cameco.com/fuel_services/port_hope_conversion/ (accessed Mar.
31, 2015).
\14\ Details on the dry process are described at: ConverDyn,
``Honeywell Dry Fluoride Volatility Conversion Process,'' http://www.converdyn.com/product/conversion.html (accessed Mar. 31, 2015).
Although the three most significant western converters use either
the wet or dry process, conversion plants in Russia use a slightly
different process called the ``direct fluorination'' method. This
method is described in UxC Conversion Market Outlook--December 2014,
8-9 (2014).
---------------------------------------------------------------------------
3. Enrichment
The third step in the nuclear fuel cycle is enrichment. As found in
nature, uranium consists of a mixture of different uranium isotopes.
The two most significant isotopes are U-235 and U-238. The relative
concentration of the various isotopes of uranium in a given amount is
referred to as the isotopic concentration or ``assay.'' \15\ Uranium as
found in nature consists of approximately 0.711% U-235, 99.283% U-238,
and trace amounts of U-234. Uranium that exhibits the naturally
occurring isotopic concentration is called ``natural uranium.''
---------------------------------------------------------------------------
\15\ The measure of assay is sometimes referred to in terms of
``weight-percent'' or ``wt-%.''
---------------------------------------------------------------------------
Nuclear reactors typically require uranium that is enriched in the
isotope U-235, meaning that it has a higher concentration of U-235
compared to natural uranium. Commercial light water reactors, which are
the most common type of nuclear reactor, typically require an assay of
3% to 5% U-235. Uranium enriched in the isotope U-235 is referred to as
low-enriched uranium (LEU) if the assay is less than 20% but above
0.711%, and highly-enriched uranium (HEU) if the assay is greater than
20%.
There are many different enrichment processes, but only two have
been used commercially: Gaseous diffusion and gas centrifugation. These
technologies exploit the mass difference between U-238 and U-235 atoms.
In a centrifuge, centripetal acceleration tends to concentrate lighter
materials towards the center of the rotation and heavier materials
towards the outside of the rotating vessel. The mass difference between
a UF6 molecule with U-238 and one with U-235 is slight, so
even at high rotation speeds the concentration changes are small. To
achieve a concentration increase from 0.711% to 5%, a facility passes
material through many stages of centrifugation. Currently, all
commercial enrichment services use gas centrifuge technology; the last
commercial-scale gaseous diffusion facility ceased operating in 2013.
After UF6 arrives from a conversion facility, it can be
introduced into the enrichment centrifuges. Material introduced in this
manner is referred to as ``feed.'' The centrifuges then separate the
isotopes into varying levels of enrichment and produce two streams of
material: Product and tails. The product is the enriched UF6
output. This LEU is then pumped into a 2.5 ton cylinder and shipped to
a fabrication facility. Just as the product stream has a higher
proportion of U-235 to U-238 than the original feed, the other stream,
the tails, has a lower proportion of U-235 to U-238. This material is
referred to as ``depleted.'' It is pumped into large (typically 10 or
14 ton) cylinders and then stored on site at the enrichment facility
for eventual disposal or other use. The assay of U-235 in the tails
from an enrichment process depends on what concentration of U-235 was
needed in the enriched product and how much natural uranium was used as
feed. Typical tails assays range from 0.1% to 0.4%.
4. Fabrication
The final step in the process is fabrication. Almost all nuclear
reactors require fuel to be in the form of uranium dioxide
(UO2). At the fabrication facility, the enriched
UF6 is converted into UO2 powder, and then formed
into small ceramic pellets. These pellets are then loaded into metal
tubes and attached together to form fuel assemblies. Fuel design is
reactor specific, and thus each fuel assembly is manufactured to the
unique specifications of the reactor operator. Although fabrication is
an important step in the fuel cycle, this analysis does not cover
effects in the fabrication market.
5. Secondary Supply
Uranium that undergoes the above-described four steps without any
intermediate use is generally termed ``primary supply.'' However, there
are other sources of uranium available in the market. Uranium from
these other sources is collectively known as ``secondary supply.'' In
addition to government inventories of uranium left over from other uses
such as weapons production, the most significant secondary supplies
come from excess enrichment capacity.
Due to technical constraints, enrichers generally cannot easily
decrease capacity that is already constructed and operating. If an
enricher were to shut down a centrifuge that is currently spinning, it
may not be possible to restart the centrifuge. Due to this possibility,
decreasing capacity risks damaging the machines and destroying the
substantial capital investment in construction. As a result, enrichers
that have unsold capacity will tend to apply the excess enrichment work
in one of two ways.
First, enrichers can apply extra separative work to a given amount
of feed material, thus extracting more of the U-235. This is known as
``underfeeding'' because it enables the production of a given amount of
enriched product with a smaller amount of feed material. Normally, a
purchaser of enrichment services seeking a specific amount of enriched
product would need to determine (1) how much natural uranium feed to
provide and (2) how much SWU to apply to it. Increasing the amount of
enrichment services has a cost, but the additional work will extract
more of the U-235 content of the feed material so that less is needed,
at less cost. The relationship between the prices of uranium
concentrates, conversion, and enrichment can be used to determine the
amount of feed and SWU--and thus also the resulting tails assay--that
will lead to the lowest cost per kilogram of enriched product. This is
known as the ``optimal tails assay.'' If an enricher knows that it has
excess capacity, it may choose to feed in a smaller amount of natural
uranium and apply more SWU to that material than was purchased. Thus,
the end result is the desired amount of enriched product, depleted
tails, and the natural uranium that was delivered to the enricher but
was not fed into the enrichment process. The enricher can then sell
this natural uranium on the open market.
Second, enrichers can feed depleted tails back into the enrichment
process and apply additional separative work to them. This is known as
re-enrichment of tails. As described above, the optimum tails assay
varies over time as the prices of uranium concentrates, conversion, and
enrichment change relative to each other. Over time, depleted tails
with relatively high assays may accumulate. An enricher may choose to
select the highest-assay tails and feed them back into the enrichment
process. These tails can be enriched up to the level of natural uranium
(0.711%) or higher. The enricher may then sell the resulting natural
uranium or LEU on the open market.
An additional source of secondary supply is from recycled uranium
and plutonium either from reprocessing of commercial spent fuel or from
weapons-
[[Page 26375]]
grade plutonium disposition. The product of these processes enters the
fuel cycle and is fabricated into mixed oxide (MOX) fuel. MOX fuel is
currently in use in Europe and Japan. Two commercial facilities
currently produce MOX fuel in France and in the United Kingdom. Other
facilities, such as the J-MOX project in Japan, are either planned or
under construction.
6. Note on Units
As discussed above, the different uranium industries use slightly
different units. Uranium concentrates are generally measured in pounds
U3O8, conversion services are generally measured
in kgU as UF6, and enrichment services are measured in SWU.
It is worth noting that the measures of uranium concentrates and
conversion services are not identical for several reasons. In addition
to the fact that one is denominated according to U.S. customary units
and the other is denominated under the international system of units
(SI), the measure of uranium concentrates refers to the mass of
U3O8 whereas the conversion metric refers only to
the mass of the uranium atoms. Only about 85% of the mass of
U3O8 consists of uranium. Thus, one kilogram of
U3O8 contains approximately 0.848 kgU.
Furthermore, converting between pounds U3O8 and
kgU as UF6 must take into account an estimated 0.5% loss
during the conversion process. Taking all this into account, one pound
U3O8 is equivalent to 0.383 kgU as
UF6, and one kgU as UF6 is equivalent to 2.61
pounds U3O8.
Converting between uranium concentrates or conversion services and
enrichment is more difficult because the amount of SWU necessary to
produce a given amount of product depends on the desired product assay,
the feed assay, and the tails assay. An example will serve to
illustrate the significance of different assumptions. Assuming a tails
assay of 0.30%, enriching 1,000 kgU as UF6 of natural
uranium to an assay of 4.50% would require approximately 609.7 SWU and
would yield 97.9 kgU of enriched uranium; if a tails assay of 0.20% is
used instead, enrichment would require approximately 913.9 SWU and
would yield 118.8 kgU of enriched uranium.
DOE typically describes its uranium inventory in terms of MTU for
natural uranium and MTU ``natural uranium equivalent'' for depleted and
enriched uranium. These terms have a slightly different meaning
depending on the form. For natural UF6--i.e. with an assay
of 0.711%--1 MTU would represent 2,610 pounds
U3O8, 1,000 kgU as UF6 of conversion
services, and 0 SWU. For enriched or depleted UF6, the
amount of natural uranium equivalent depends on the assay. For depleted
UF6, DOE calculates natural uranium equivalent as the amount
of natural uranium product that could be produced by re-enriching the
depleted material. For the purposes of this analysis, DOE assumes the
enrichment process would use a tails assay of 0.20%. As an example,
1,000 MTU of DUF6 with an average assay of 0.40% would yield
approximately 350 MTU natural uranium equivalent. For LEU, DOE
calculates natural uranium equivalent as the amount of natural uranium
that would be needed as feed material to produce the LEU, given the
assay of the LEU and assuming a tails assay of 0.20% and a feed assay
of 0.711%. For LEU resulting from down-blending of HEU, DOE then
subtracts out the amount of natural uranium feed--``diluent''--that is
necessary to down-blend the HEU to the desired product assay. The
amount of diluent required is typically equivalent to approximately 10%
of the natural uranium that would be needed as feed for enrichment.
This subtraction is appropriate for purposes of section 3112(d)
analysis to indicate how much natural uranium a given amount of LEU
would displace from the market. Because DOE's contractor procures
diluent on the market (rather than from DOE inventory) in order to
produce the transferred LEU, the transfer displaces that much less
commercially supplied natural uranium.
B. The Uranium Markets
1. The Uranium Markets Are Separate
Uranium concentrates, conversion services, and enrichment services
can be traded separately. Prices for uranium concentrates are typically
quoted in terms of dollars per pound U3O8. Prices
for conversion services are typically quoted in terms of dollars per
kilogram uranium (kgU). Prices for enrichment services are typically
quoted in terms of dollars per SWU.
A typical transaction may involve a single purchaser purchasing a
given amount of uranium concentrate through a contract directly with
the mining company. The uranium concentrate is typically delivered
directly to a conversion facility rather than to the purchaser. The
purchaser will also enter into a separate contract for conversion
services. The terms of this contract will require the purchaser to
deliver U3O8 to the converter, and the converter
will provide UF6 in return. The UF6 will then be
shipped directly to an enricher. As with conversion, the purchaser will
enter into a separate contract for SWU from an enricher. Contracts
terms vary, but this contract will likely require the purchaser to
deliver a specific amount of natural UF6 feed and the
enricher to deliver a specific amount of UF6 enriched to the
desired assay. This LEU will typically be delivered directly to the
fabricator to be made into nuclear fuel.
Although there are separate markets for each step in the process,
the different steps are sometimes combined. It is possible to buy
natural UF6, which would reflect both the uranium
concentrate and the conversion services. Similarly, it is possible to
buy enriched UF6--usually known as enriched uranium product
(EUP)--which would reflect all three steps. The price for these
products is typically developed by adding the cost of the various steps
together. Thus, the price of EUP would be based on the price of an
equivalent amount of uranium concentrates, conversion, and enrichment.
In practice, however, the price of a product material, like EUP or
natural UF6, may occasionally differ somewhat from the sum of the input
prices. Because most volume is transacted in long-term contracts, a
small price gap may not be eliminated quickly by arbitrage. In
addition, the price of a product material reflects transaction and
shipping costs needed to move material through the various steps.
In addition, even though the three components are traded
separately, there is some interrelationship between the prices. Since
optimal tails assay is a function of the relative price of uranium
concentrates, conversion, and SWU, changes in one price can lead to
shifts in demand and supply in the other markets. Similarly, excess
enrichment capacity used for underfeeding or re-enrichment of tails
increases supply of uranium concentrates and conversion services. Thus,
changes in enrichment supply may contribute to changes in uranium
concentrate and conversion prices.
2. Uranium Is Fungible
Although the above represents a typical series of uranium
transactions, there are many other potential types of transactions.
These other forms are possible because uranium at each stage of the
fuel cycle is fungible. As long as the basic characteristics like form
and assay are the same, one kilogram of material is essentially the
same as any
[[Page 26376]]
other.\16\ Accounting mechanisms allow the ownership of each kilogram
of material to be traceable, and they also allow ownership to be
exchanged freely without physically manipulating the material.
---------------------------------------------------------------------------
\16\ Other important characteristics include the presence and
concentration of contaminants, some of which can render material
unusable as nuclear fuel. Industry standards specify the acceptable
levels of contamination.
---------------------------------------------------------------------------
A simple example illustrates the types of transaction that this
fungibility enables. After U3O8 is converted into
UF6, it will typically be shipped to a specific enrichment
facility. If the uranium was mined and converted in North America, it
will typically be sent to an enricher in North America. However, the
purchaser is not necessarily required to purchase enrichment services
from the company whose facility the material is shipped to. Instead,
the purchaser may be able to exchange ownership of an amount of
UF6 located at a North American enrichment facility with an
equivalent amount located at a facility in Europe. This is referred to
as a ``book transfer.''
An entity can also sell conversion services or enrichment services
without actually physically converting or enriching any material. A
person that owns enriched UF6 may enter into a contract to
sell SWU whereby it provides the desired amount of enriched
UF6 in exchange for the cost of the SWU and a specific
amount of natural UF6 ``feed.'' A person can also use
natural UF6 to sell conversion services by exchanging it for
the cost of the conversion services plus the equivalent amount of
U3O8.
3. The Uranium Markets Are Global
All three markets are global in nature. Purchasers are able to buy
from suppliers worldwide and vice versa. Pricing for uranium
concentrates and enrichment are essentially the same worldwide.
Shipping costs are relatively low compared to other components of the
prices, and the fungibility of the material allows suppliers and
purchasers to minimize shipping costs through book transfers.
Although conversion services also trade on a worldwide market, in
recent years there has been a persistent difference between prices in
North America and those in Europe. DOE believes this stems from a
geographical imbalance in conversion capacity relative to enrichment
capacity. There is more conversion capacity in North America than
enrichment capacity, and conversely in Europe there is more enrichment
than conversion capacity. Consequently, there is a regular net flow of
conversion services from North America to Europe. Meanwhile, it seems
likely that the cost of shipping is larger relative to the conversion
price than it is relative to the price of uranium or enrichment--mainly
because conversion is the least costly input among the three, roughly
$7.50 per kilogram at current spot prices compared to just over $100
per kilogram for uranium in concentrates. DOE believes the price
difference between North American conversion and European conversion
reflect simply the additional cost of shipping converted material from
North America to Europe, together with the fact that net flow is from
North America to Europe.
C. The Nature of Demand for Uranium
1. Utility Use of Uranium
The vast majority of uranium in commercial use is fuel for
commercial power generation. According to the International Atomic
Energy Agency (IAEA), there are 440 commercial reactors operating
worldwide, 99 of which are in the United States. See IAEA, ``Power
Reactor Information System,'' Mar. 2015, http://www.iaea.org/pris/
(accessed March 24, 2015). The total installed electricity generation
capacity of all reactors worldwide is 378,220 MWe (megawatt
electrical), 98,638 MWe of which is from U.S. reactors. Id.
Nuclear reactors typically provide what is known as ``baseload''
electricity supply. This means that nuclear reactors generally operate
close to their full practical capacity continuously. Thus, the amount
of uranium needed for each reactor in a given year does not generally
fluctuate with electricity use patterns. It depends instead on the
total capacity of the reactor and the fuel reload schedule. The average
reactor capacity worldwide is approximately 860 MWe, and the
average capacity of U.S. reactors is 996 MWe. Id. Reload
schedules vary, but reactors typically must reload a portion of the
total fuel in the core every 18 to 24 months.
According to the World Nuclear Association (WNA), a typical 1,000
MWe light water reactor operating today requires
approximately 24 MTU of LEU at an assay of 4% each year.\17\ At a tails
assay of 0.25%, this corresponds to approximately 140,000 SWU of
enrichment, 195,000 kgU of conversion services, and 510,000 pounds
U3O8. See WNA, ``The Nuclear Fuel Cycle,'' Oct.
2014, http://www.world-nuclear.org/info/Nuclear-Fuel-Cycle/Introduction/Nuclear-Fuel-Cycle-Overview/ (accessed March 24, 2015).
Reload amounts and schedules differ depending on reactor size and type.
Pressurized heavy water reactors, for example, do not require
enrichment at all.
---------------------------------------------------------------------------
\17\ This is an annual average. Since reactors do not
necessarily refuel every year, each reactor would actually require
somewhat more than 24 MTU every 18-24 months.
---------------------------------------------------------------------------
It is also worth noting that nuclear fuel makes up a very small
percentage of overall costs for nuclear reactors--typically less than
10%. According to DOE's Energy Information Administration (EIA), for
new nuclear generation, variable operations and maintenance costs,
which include fuel costs, account for only about 12% of total system
levelized costs. See EIA, ``Levelized Cost of New Generation Resources
in the Annual Energy Outlook 2014,'' Apr. 2014, http://www.eia.gov/forecasts/aeo/electricity_generation.cfm (accessed Mar. 24, 2015).
Further, the Nuclear Energy Institute reports that nuclear fuel costs
make up about 30% of total operating costs. See NEI, ``Fuel as a
Percentage of Electric Power Production Costs,'' http://www.nei.org/Knowledge-Center/Nuclear-Statistics/Costs-Fuel,-Operation,-Waste-Disposal-Life-Cycle/Fuel-as-a-Percent-of-Production-Costs (accessed
Mar. 30, 2015).
2. Uranium Requirements
The amount of fuel necessary to keep a reactor operating is
relatively predictable. Although there is always the possibility of
unplanned outages, reactor operators generally know how much enriched
uranium they will need. The amount of uranium needed to fuel operating
reactors is generally referred to as ``requirements.'' Small
uncertainties in predictions about requirements are possible in the
short run because an operator can vary its need for fuel to some degree
by changing operating conditions.
For a given reactor operator, this predictability enables the
operator to purchase uranium, conversion, and enrichment on long-term
contracts. These contracts often have first delivery as much as five
years in the future and can extend as long as ten or even fifteen years
from the contract date. In addition, because shutting down a reactor
for refueling is a complex and carefully orchestrated process that
requires extensive planning, a reactor operator generally has strong
incentives to ensure well in advance of each refueling that the reactor
will be sufficiently supplied with fuel. Long-term contracts help meet
that goal by providing a reactor operator guaranteed quantities of
supply. Consequently, the vast majority of purchases of uranium
concentrates, conversion, and
[[Page 26377]]
enrichment are through term contracts--above 80%. The specific
proportions of short-term versus long-term contracts are discussed
below in Section II.E.1.
Aggregate requirements are also relatively predictable. However,
long-term projections of future requirements must take into account
changes in requirements from short-term outages, permanent shutdowns,
and new reactor construction. Various entities develop and publish
projections of future uranium requirements based on different
assumptions about the rates of these changes, as well as different
assumptions about operating conditions like reload schedules and fuel
utilization (``burnup''), and about the possibility of unplanned
outages or other temporary fluctuations in nuclear fuel use. These
forecasts typically are based only on the nuclear fuel expected to be
used in operating reactors; they do not include purchases of strategic
or discretionary inventory.
3. Requirements Versus Demand
Demand for uranium, conversion, or enrichment is generally not the
same as reactor requirements in a given year. Some sources of demand
are either in excess of or unconnected to reactor requirements. For
example, many reactor operators hold strategic inventories of uranium
beyond their requirements. This material provides flexibility in the
event of a supply disruption. Different operators may have different
strategic inventory policies, and those policies will shift over time.
Changes in the level of strategic inventories held by individual
reactors can produce additional demand or remove demand. Demand from
reactor operators purchasing uranium for strategic inventory is
commonly referred to as ``discretionary demand.''
There are a number of market participants that are currently
building inventory well above the strategic inventory that is typical
of other operators. China, for example, has in recent years purchased
as much as three times its current annual requirements. Japanese
reactors have also been building inventory well in excess of
requirements. Many Japanese reactors were shut down following the
accident at the Fukushima Daiichi nuclear power plant in March 2011.
Even though the reactors are not currently operating, many Japanese
operators have continued to receive contracted deliveries of uranium.
In addition to reactor operators purchasing in excess of demand,
there are a number of market participants that do not operate reactors
at all. These include traders, brokers, and investment funds. These
entities may purchase uranium when prices are low and resell it to
reactor operators under future delivery contracts or hold uranium
inventory until prices increase.
These activities mostly involve only uranium concentrates. However,
some purchases in excess of requirements involve natural UF6
or EUP. Thus, this behavior typically affects demand for uranium
concentrates much more than it affects conversion and enrichment
demand.
Finally, changes in optimal tails assay can affect demand in a
given year. Estimates of future reactor requirements typically assume a
specific tails assay for enrichment. However, if enrichment prices
change relative to uranium concentrate and conversion prices, some
purchasers may have flexibility to specify a different tails assay for
enrichment. This changes the amount of uranium concentrates,
conversion, and SWU that are necessary to produce a given amount of
fuel.
4. Price Elasticity of Demand
Price elasticity of demand is an economic measure that shows how
the quantity demanded of a good or service responds to a change in
price. If purchasers are highly responsive to changes in price, demand
is relatively elastic. If purchasers are weakly responsive to changes
in price, demand is relatively inelastic. If purchasers demand the same
amount regardless of the price, demand is perfectly inelastic.
In general, demand for uranium, conversion, and enrichment are
relatively inelastic. Since requirements are largely fixed, changes in
price have a weak effect on demand. However, uranium markets exhibit
different degrees of elasticity on different time frames.
a. Short Term
In the short term, DOE expects that demand is more elastic than in
the medium and long terms. Some of the behaviors discussed in the
previous section are responsive to short term changes in price. Traders
and investment funds are more likely to make speculative purchases when
prices are low. Similarly, large-scale strategic buying, as China is
doing, has corresponded with a period of very low prices. It seems
likely that these purchases would decrease if short term uranium prices
increased substantially.
These practices may be somewhat counteracted by the behavior of
utilities. Although some utilities choose to build inventories when
prices are low, others do the opposite. Somewhat counterintuitively,
some reactor operators actually purchase less strategic inventory when
prices are low. This appears to be related to perceptions about long-
term security of supply. When prices are high, it may suggest scarcity
in long term supplies. When prices are low, this may signal that long
term supplies are relatively secure. Thus, reactor operators may
paradoxically purchase more strategic inventory when prices are high.
As mentioned above, these behaviors are much more prevalent in the
uranium concentrates markets. Demand in the conversion and enrichment
markets may therefore exhibit less elasticity in the short term than
the uranium market.
b. Medium and Long Term
DOE expects that demand in the medium and long term is less elastic
than in the short term. Indeed, in the medium term, demand for long-
term contracts may actually increase, relative to spot purchases, as
prices rise. As discussed above, fuel costs represent a very small
portion of the overall cost of nuclear power.
Conversely, the cost of not having fuel can be very high, because
the economics of nuclear reactors--i.e. large up front capital costs
and low marginal operating costs--incentivize operators to operate more
or less continuously. Compared to the opportunity cost of an extended
period where the reactor is not generating electricity, fuel costs are
relatively small. Typically, fuel costs are about 1 cent per kilowatt
hour generated, while the market value of the electricity is between 5
and 8 cents per kilowatt hour.
An increase in prices generally indicates a tightening of supply
relative to demand. That signal can encourage reactor operators to
increase, rather than decrease, long-term contracting to ensure future
fuel supplies in the face of the anticipated tightening. The additional
cost of a high-priced contract may be less important than the avoided
risk of not having enough fuel. As a possible example of such behavior,
long-term contracting for uranium concentrates increased significantly
in 2005 and remained high in 2006 and 2007 as prices rose from
approximately $20 per pounds in 2004 to over $90 in 2007; long-term
contracting activity then fell in 2008 and 2009 as term prices fell
from above $90 to closer to $60.
In the long term, elasticity of demand for nuclear fuel would
reflect decisions about whether to construct new reactors or shut down
existing reactors in response to long-run prices for fuel. This
contribution to elasticity is likely to be small. Because fuel costs
are such
[[Page 26378]]
a small portion of the overall cost of nuclear power, even a large
increase in fuel price would be unlikely to significantly affect
decisions about new reactor construction. Meanwhile, for existing
reactors the capital costs are ``sunk.'' And ongoing variable fuel
costs for nuclear power are, at current prices, lower than for most
other types of generation.\18\ Thus, among existing plants, it would
take a very large increase in the cost of fuel to influence a decision
about whether to shut down a reactor early.
---------------------------------------------------------------------------
\18\ Variable costs are higher for fossil fuel technologies by a
factor of 4 for natural gas, and by a factor of almost 3 for
conventional coal. The only technologies with lower variable costs
are geothermal, wind, solar, and hydro. Id.
---------------------------------------------------------------------------
As noted above, plans for reactor construction do change over time,
so that uranium requirements will evolve over time. Demand for uranium
is not constant. However, the changes in long-term demand are unlikely
to be responses to uranium price signals. For these reasons, the
analysis below will assume that medium- and long-term demand has low
elasticity.
D. The Nature of Uranium Supply
1. Primary Versus Secondary Supply
As explained above, supply of uranium concentrates, conversion, and
enrichment includes both primary and secondary supply. According to
charts developed by uranium market consultancy ERI, total production of
uranium concentrates in 2015 and 2016 will be approximately 190 million
pounds U3O8. 2015 ERI Report, 9.\19\ Secondary
supply is expected to total approximately 40 million pounds, about 20%
of the total. Over half of secondary supplies of uranium concentrates
come from enricher underfeeding and tails re-enrichment. Other sources
of secondary supply include DOE inventory, plutonium/uranium recycle
(MOX), and other commercial inventories. 2015 ERI Report, 80. Prior to
2014, the natural uranium component of LEU delivered under the Russian
HEU Agreement represented a significant source of secondary supply.
This program ended in 2013. Consequently, natural uranium from Russian
HEU is no longer a significant source of secondary supply.
---------------------------------------------------------------------------
\19\ DOE tasked ERI to assess the potential effects on the
domestic uranium mining, conversion, and enrichment industries of
the introduction into the market of DOE excess uranium inventory.
ERI's analysis of these effects is contained in the 2015 ERI Report.
ERI's analysis is based in part on information it collects to
develop its forecasts for annual reactor requirements, uranium
demand, and uranium production. ERI develops these forecasts for
various customers. The references to information from ERI in Section
II are generally based on this type of information rather than on
ERI's economic analysis of these data specifically for DOE. Because
of ERI's expertise in the uranium markets and contacts with market
participants, DOE believes ERI's general market information is
reliable.
---------------------------------------------------------------------------
For conversion services, ERI expects that primary supply in 2015
and 2016 will total approximately 65 million kgU as UF6,
with secondary supply representing between 15 and 16 million kgU or
about 25%. 2015 ERI Report, 14. As with uranium concentrates, over half
of secondary supplies of conversion come from enricher underfeeding and
tails re-enrichment. Other sources of secondary supply include DOE
inventory, plutonium/uranium recycle (MOX), and other commercial
inventories. Id.
For enrichment services, ERI expects that primary supply in 2015
and 2016 will total approximately 63 million SWU, with secondary supply
representing between 4 and 5 million SWU or about 8%. 2015 ERI Report,
16. Unlike uranium concentrates and conversion services, underfeeding
and tails re-enrichment do not constitute a secondary supply of
enrichment because those processes utilize enrichment capacity. Sources
of secondary supply of enrichment include DOE inventory, plutonium/
uranium recycle (MOX), and other commercial inventories. Id.
2. Price Elasticity of Supply
Price elasticity of supply measures how the quantity supplied of a
good or service responds to a change in price. If suppliers are highly
responsive to changes in price, supply is relatively elastic. If
suppliers are weakly responsive to changes in price, supply is
relatively inelastic.
Enrichment services are relatively inelastic, and conversion
services are complicated by pricing phenomena described below. With
respect to uranium concentrates, the level of elasticity in the uranium
markets varies depending on the time frame, just as demand elasticity
does.
a. Short Term
In the short term, supplies of uranium concentrates from primary
producers are relatively inelastic. There is some limited capability
for mines to decrease production. Conventional mines may choose to
continue operation and stockpile uranium ore without milling it into
yellowcake. ISR mines require constant development of new wellfields;
these mines may slow production gradually by slowing wellfield
development. These measures may take many months. Thus, in the short
term, mines will be weakly responsive to changes in price. In contrast,
secondary sources of uranium concentrates may respond more to changes
in price. Underfeeding and tails re-enrichment, for example, depend on
the relationship between SWU and uranium concentrate prices. In the
short-term, enrichers cannot increase or decrease capacity, but they
can quickly shift how much capacity is devoted to underfeeding versus
primary enrichment.
Primary supply of conversion services is relatively inelastic in
the short term. Conversion plants typically have high fixed production
costs. Thus, there is relatively little incentive to change production
in response to changes in price. (As discussed below, conversion supply
has fluctuated in recent years; but those changes were not necessarily
caused by price changes.) Secondary supplies of conversion, however,
are more able to respond to changes in price. Underfeeding and tails
re-enrichment results in natural UF6, which includes both
uranium concentrates and conversion services. Since the price of
uranium concentrates is a larger proportion of the value of that
UF6, secondary supplies of conversion from these two sources
can be expected to respond more strongly to the uranium concentrates
price than to the conversion price.
Primary supply of enrichment is also relatively inelastic in the
short term. As discussed above, enrichers typically cannot remove
machines from production due to technical concerns. Enrichers also
cannot bring additional machines online in the short term to respond to
changes in price because it takes several years to add new machines.
Secondary supply of enrichment is a smaller proportion of the total
supply than for uranium concentrates or conversion services. In
addition, enrichers can change the amount of capacity devoted to
primary enrichment as opposed to underfeeding. These supplies are more
able to respond to changes in price.
b. Medium and Long Term
In the medium and long term, primary supplies of uranium
concentrates and enrichment should be more elastic than in the short
term. Producers can develop and install additional capacity in response
to projections that prices will increase. These decisions, however,
typically involve very long time frames. It may take several years of
active development before a new mine may begin production. New
enrichment and conversion capacity may take on the order of ten
years.\20\ Alternatively,
[[Page 26379]]
producers can reduce production and accelerate plans to retire capacity
if prices are projected to decrease. URENCO, for example, has chosen to
retire enrichment capacity at its European facility without
replacement. See 2015 ERI Report, 16.
---------------------------------------------------------------------------
\20\ Louisiana Energy Services, LLC, now a subsidiary of URENCO,
submitted a license application for a gas centrifuge enrichment
plant in late 2003. The facility, known as Urenco USA (UUSA), began
operation in mid-2010, almost seven years after the license
application was submitted. Given the licensing process, planning for
the facility would have had to have begun well before the license
application was submitted. Similarly, the timeline for AREVA's
COMURHEX II conversion project included feasibility and design
studies taking place between 2004 and 2007, with full production
capacity reached in 2015. AREVA, ``COMURHEX II: Investing for the
Future,'' Nov. 2010, available at http://www.areva.com/mediatheque/liblocal/docs/activites/amont/chimie/plaket%20CXII%20GB%20MD.pdf.
---------------------------------------------------------------------------
E. Uranium Prices
Uranium markets function in two ways, broadly speaking: Short-term
deliveries, called the spot market, and longer-term commitments, called
the term market.
1. Spot and Term Prices
For all three markets discussed here, there is a price for an
immediate delivery, called the spot price, and a price for long-term
contractual commitments, commonly called the term price. The vast
majority of purchases on these markets are through term contracts.
According to data from EIA, over 80% of purchases of uranium by U.S.
owners and operators of nuclear power reactors in 2013 were through
term contracts.\21\ EIA, 2013 Uranium Marketing Report, 3 (2014). In
addition approximately 97% of enrichment services purchased by U.S.
owners and operators in 2013 were through term contracts. Id. at 46.
EIA does not report data on conversion contracts. Ux Consulting
Company, LLC (UxC), a private consulting firm, publishes data on spot
and term contract volume for conversion services. According to UxC,
deliveries in 2013 under term contracts--[REDACTED]. UxC Conversion
Market Outlook--December 2014, 36 (2014). In contrast, spot contract
volume in 2013 [REDACTED]. Id. at 26. Thus, term contract deliveries
represented [REDACTED] of 2013 deliveries of conversion services.
---------------------------------------------------------------------------
\21\ EIA defines these contracts as those having one or more
deliveries to occur after a year following contract execution.
---------------------------------------------------------------------------
Several commenters say that medium-term futures contracts have
increased in importance in recent years. Such a contract entitles a
buyer to delivery of material at a future date between one and a few
years after contract execution. The commenters observe that these
contracts differ from traditional term contracts in that they involve
one-time-only deliveries and that buyers ordinarily do not use them to
secure long-term fuel supplies. In a sense, the commenters suggest,
these contracts form an extension of the spot market to deliveries up
to a few years in the future.
2. Price Information
Unlike many other commodities, most uranium contracts are not
traded through a commodities exchange. Instead, a handful of entities
with access to the terms of many bids, offers, and contracts develop
what are called ``price indicators'' based on those transactions. Two
private consulting firms--UxC and TradeTech, LLC (TradeTech)--publish
monthly spot and term price indicators for uranium concentrates,
conversion, and enrichment. Both also publish weekly spot price
indicators for uranium concentrates.\22\ Note, however, that the UxC
and TradeTech indicators do not necessarily summarize completed
transactions. They may be based only on offers. The UxC and TradeTech
price indicators are influential; industry practice is generally to
price sales contracts based on one or both of these price indicators.
---------------------------------------------------------------------------
\22\ The Euratom Supply Agency (ESA) also publishes spot and
term price indicators for U3O8 based on
deliveries to EU utilities. These prices are published annually
rather than monthly or weekly. See ESA, ``ESA Average Uranium
Prices,'' http://ec.europa.eu/euratom/observatory_price.html
(accessed Mar. 25, 2015).
---------------------------------------------------------------------------
There are also a number of related published prices for
U3O8. These include a Broker Average Price (BAP)
and a Fund Implied Price (FIP), both published by UxC. The former is
based on pricing data from ``commodity style'' brokers that have agreed
to provide information to UxC and the latter is based on the traded
value of the Uranium Participation Corporation (UPC) compared to its
uranium holdings.\23\ UxC Uranium Market Outlook--Q4 2014, 35-37
(2014). Futures contracts for U3O8 are also
traded through CME/NYMEX. Through this platform, futures contracts are
traded with delivery dates ranging from a month to five years. See UxC,
``CME/NYMEX Uranium Futures (UX) Contract,'' http://www.uxc.com/data/nymex/NymexOverview.aspx (accessed Mar. 25, 2015); CME Group, ``UxC
Uranium U3O8 Futures Quotes,'' http://www.cmegroup.com/trading/metals/other/uranium.html (accessed Mar. 25, 2015).
---------------------------------------------------------------------------
\23\ UPC is a publicly traded holding company that invests
substantially all of its assets in uranium. UPC's stated investment
strategy is to buy and hold uranium rather than actively trading in
response to short-term shifts in prices. UPC, Investor Update
Presentation, 17 (Aug. 2014), available at http://www.uraniumparticipation.com/i/pdf/ppt/UPC-Investor-Update-August-2014.pdf.
---------------------------------------------------------------------------
III. Analytical Approach
As noted above, section 3112(d) states that DOE may transfer
``natural and low-enriched uranium'' \24\ if, among other things, ``the
Secretary determines that the sale of the material will not have an
adverse material impact on the domestic uranium mining, conversion, or
enrichment industry, taking into account the sales of uranium under the
Russian HEU Agreement and the Suspension Agreement.'' After considering
this statutory language, DOE has developed a set of factors that this
analysis considers in the section 3112(d)(2) assessment.
---------------------------------------------------------------------------
\24\ In the nuclear industry, the term ``natural,'' with respect
to uranium, ordinarily refers to material that contains the various
uranium isotopes in their naturally occurring concentrations--most
significantly, U-235 at 0.711 wt-%. Uranium can be converted into
many different physical or chemical forms without necessarily
altering the isotopic concentrations, and in common usage any
physical or chemical form with the naturally occurring
concentrations is called ``natural uranium.'' Although the USEC
Privatization Act does not define the term, it appears to use
``natural uranium'' in accordance with its customary technical
meaning. In particular, section 3112(a) refers to ``natural uranium
concentrates'' and ``natural uranium hexafluoride'' as being species
of ``uranium.'' This usage indicates that being ``natural'' is a
characteristic that cuts across chemical and physical form, and
confirms that ``natural'' does not refer to the form in which
uranium is found in nature (uranium ore). Moreover, section 3112(d)
establishes prerequisites for a transfer of ``natural uranium.'' If
``natural uranium'' were only a particular physical or chemical
form, the Department would be permitted to transfer other forms of
uranium without regard to the section 3112(d) conditions. For
example, if ``natural uranium'' meant uranium concentrates, DOE need
not make a section 3112(d)(2) determination before transferring
uranium hexafluoride. DOE believes such a limited understanding of
``natural'' would not best serve the purposes of section 3112.
Accordingly, DOE understands ``natural uranium'' to refer to the
isotopic concentrations, regardless of the physical or chemical
form.
One commenter has argued that section 3112 does not permit DOE
to transfer uranium hexafluoride (except pursuant to section
3112(b)). According to the commenter, ``natural uranium'' as used in
section 3112(d) does not include uranium hexafluoride, at any
isotopic concentration. For the reasons just given, DOE interprets
``natural uranium'' section 3112(d) to encompass transfers of
uranium hexafluoride with the naturally occurring isotopic
concentrations.
---------------------------------------------------------------------------
A. Overview
The USEC Privatization Act does not clearly indicate what kind or
degree of effect or influence on an industry would constitute an
``adverse material impact.'' As discussed below, these words are
susceptible of many meanings. Contextual clues provide some guidance in
understanding the phrase, but DOE has not identified context (such as a
[[Page 26380]]
statutory definition) that would unambiguously settle what an ``adverse
material impact'' is.
Moreover, the meaning of the phrase is likely to depend in part on
the factual context in which it is to be applied.\25\ Uranium
transactions can take myriad forms, and the effect of any given
transaction on any one or all of these industries will depend on the
facts and circumstances at the time of the transaction. DOE's inventory
of uranium is changing over time, and Congress could not have
anticipated the specific characteristics of every potential
transaction. Thus, it would be unsurprising for the statute to describe
DOE's mandate in open-ended terms, leaving DOE to elaborate details as
and when DOE applied the statute over time.
---------------------------------------------------------------------------
\25\ Some commenters objected that the meaning of ``adverse
material impact'' cannot change depending on circumstance. DOE did
not suggest that it would alter its interpretation of the statutory
language over time. But statutory interpretation is not simply a
matter of supplying for one word, like ``material,'' a longer
recitation drawn from a dictionary. Applying a statute to a given
factual circumstance inevitably involves an exercise in
interpretation, and no verbal formula developed ex ante can answer
all questions that may arise. Indeed, some phrases are, by their
nature, best ``given concrete meaning through a process of case-by-
case adjudication.'' INS v. Cardoza-Fonseca, 480 U.S. 421, 446
(1987). ``Adverse material impact'' is such a phrase.
---------------------------------------------------------------------------
Thus, the Department will need to exercise judgment to develop an
understanding of ``adverse material impact,'' in its statutory context,
as applicable to a given potential transfer or sale of uranium. Part of
that task involves establishing an analytical framework to form the
basis of and reach a determination about the impacts of DOE's
transfers. The Department is responsible for analyzing relevant
information in light of the statutory text and purposes to determine
whether a particular sale or transfer will have an ``adverse material
impact'' on the domestic uranium mining, conversion, or enrichment
industry.
To make that assessment, DOE must first articulate what is the
``domestic industry'' for each of these markets. DOE interprets the
word ``domestic'' to refer to activities taking place in the United
States, regardless of whether the entity undertaking those activities
is itself foreign. Hence, a facility operating in the United States
would be part of ``domestic industry'' even if the facility is owned by
a foreign corporation. DOE believes that the phrase ``uranium mining,
conversion or enrichment industry'' includes only those activities
concerned with the actual physical processes of mining, converting,
and/or enriching uranium. Thus, acting solely as a broker for material
mined, converted, or enriched by other entities does not constitute
part of the domestic ``industry.'' The relevant purpose of section
3112(d) is to help preserve, to the degree possible, viable mining,
conversion, and enrichment capacity in the United States. That purpose
depends on the actual operation of facilities. To that end, DOE
believes ``domestic industry'' should also include, to some extent,
activities to develop and activate a facility in the United States,
even if the facility has not yet entered production.
One commenter suggested that DOE should interpret ``domestic . . .
industry'' to include secondary suppliers and supply chain companies,
including remediation, reclamation, decontamination, decommissioning,
and waste management. NIPC Comment of Fluor B&W Portsmouth (FBP), at 2-
3. DOE believes that these other entities should not be included
because doing so would not be necessary for the purpose noted above of
preserving viable mining, conversion, and enrichment capacity in the
United States. Participants in those industries need various services
and supplies to be available, but they need not as a general matter
obtain those services or supplies from domestic suppliers.
Next, DOE elaborates what it means for transfers to ``have'' an
``impact.'' DOE believes that it can appropriately fulfill the purpose
of the statute by reading this phrase to refer to ``impacts'' that have
a causal relationship to DOE transfers. The overall thrust of section
3112 is to permit transfers and sales of uranium to the degree
consistent with various policy considerations set forth in various
paragraphs.\26\ Section 3112(d) calls for the Secretary's predictive
judgment, before DOE engages in a transaction, whether the transaction
will have an adverse material impact on the domestic uranium
industries. The notion of causation is implicit in this structure. If
domestic industries would experience a given negative condition
regardless of whether DOE made a particular transfer, it would ill
serve the purposes of the USEC Privatization Act for section 3112(d) to
block the transfer.
---------------------------------------------------------------------------
\26\ In passing the USEC Privatization Act, Congress recognized
that DOE would have a substantial uranium inventory after
privatization. Congress included section 3112(d) to ensure that DOE
could continue to use sales or transfers from its uranium inventory
as a management tool. See S. Rep. 104-173, at 16-17; see also 141
Cong. Rec. S6106-07 (daily ed. May 3, 1995) (statement of Sen.
Domenici).
---------------------------------------------------------------------------
Thus, in assessing a given transfer, DOE will essentially evaluate
two forecasts: One reflecting the state of the domestic uranium
industries if DOE goes forward with the transfer, and one reflecting
the state of the domestic uranium industries if DOE does not go forward
with the transfer. DOE will then compare these two forecasts to
determine the relevant impacts on the domestic uranium industries.
Some commenters agreed that DOE's approach is reasonable. But other
commenters believed DOE's approach amounted to saying DOE could justify
a transfer solely on the basis that it has less impact than other
factors. These commenters appear to have misunderstood DOE's analytical
approach. DOE has not suggested that it will compare the impact of its
transfers to the impact of other factors and consider an impact from
its transfers ``material'' only if it is larger than others. Rather,
DOE simply believes that if a given state of affairs would exist
whether or not DOE made a certain transfer of uranium, that status
should not be regarded as an ``impact'' that the transfer ``ha[s],''
for purposes of section 3112(d). Other comments argued that it should
not be relevant whether a given negative outcome for domestic industry
would occur independent of DOE's transfers. DOE disagrees. If, for
example, a set of industry participants have halted plans to invest in
production, and they would maintain that position with or without DOE
transfers, it is appropriate under section 3112(d) to conclude that the
transfers do not ``have'' the abandoned investments as an ``impact.''
Commenters also suggested that DOE should not try to ``justify''
transfers on the ground that DOE transfers ``are not the driver of the
current negative state'' of domestic uranium industries. Whether DOE's
transfers are the ``driver'' of an industry's current state is not
directly at issue. The statute uses the future tense; it directs DOE to
determine, before a transfer, that the transfer ``will not have an
adverse material impact.'' Thus, DOE's task is to make a prediction,
before engaging in a transfer, about what consequences will flow from
that transfer in the future. What contribution past transfers have made
to the existing situation can be important for informing DOE's
predictive judgment, and this analysis appropriately considers such
matters. But whether or how DOE's past transfers caused or contributed
to current circumstances is not, itself, the question that section
3112(d) poses.
DOE recognizes that causation can be difficult to determine,
especially with respect to something as complex as a set of three
interlocking markets and industries being possibly affected by DOE
transactions that may vary over
[[Page 26381]]
time. It will often not be possible to have certainty that past
transfers did or did not cause a present state of affairs, and it will
be less certain that a possible future outcome was actually the result
of DOE transfers. Accordingly, DOE does not interpret the statute to
require certainty about what impacts its transfers will or will not
have. DOE will regard its transfers as having as impacts, for purposes
of section 3112(d), the consequences that can reasonably be attributed
to the transfers.
DOE also notes that the statute directs DOE's attention to the
``impact'' on ``industry.'' Consistent with common understandings of
these words, DOE believes a section 3112(d) analysis should address the
actual effects on each industry. A set of transfers may have various
influences on a given market (for uranium, conversion, or enrichment),
but section 3112(d) does not instruct DOE to assess effects on the
markets. Of course, market effects will be the most common mechanism
through which transfers have impacts, if any, on domestic industry. But
DOE will focus ultimately on the impacts to industry, rather than the
market effects in the abstract. For example, if a hypothetical domestic
company had locked in prices for the next ten years in long-term
contracts, a decrease in prices during that time would not have an
adverse impact on that company. Indeed, the price decrease could
ultimately be beneficial to that company, if competitors were more
exposed to and thus suffered greater harm from the price change.
With respect to assessing whether the adverse impacts of a transfer
would be ``material,'' DOE observes that the word ``material'' is used
to denote situations ``of real importance or great consequence.'' See
Webster's Third New International Dictionary 31, 1392 (1961). How large
consequences must be to qualify as ``material'' varies in different
legal contexts. In light of the overall goals and structure of the USEC
Privatization Act, DOE takes ``adverse material impact'' to mean harms
that go beyond the effects of normal market fluctuations, such as those
that threaten the viability of an industry.
As noted above, one purpose of the USEC Privatization Act was that
DOE should manage and eventually dispose of the large legacy inventory
that the privatization of USEC would leave it. In privatizing the
United States Enrichment Corporation, Congress recognized that DOE
would have uranium inventory left over and that this inventory would
have substantial economic value. By including section 3112(d), Congress
preserved the Secretary's discretion to utilize uranium transfers as a
tool in managing the uranium inventory, and the substantial value
embodied therein. If Congress had not wanted DOE to make productive use
of its inventory, it could have prohibited all sales by the Department
with or without a determination. Instead, the USEC Privatization Act
explicitly directed DOE to transfer various quantities of uranium to
market participants and permitted certain other transfers. 42 U.S.C.
2297h-10(b)(2), (c) & (e).
Section 3112 also provides helpful context that indicates the
magnitude of industry impact that Congress considered acceptable. The
statute specifically authorized material delivered under the Russian
HEU Agreement to enter the U.S. market notwithstanding a preexisting
suspension agreement limiting the entry of this material. 42 U.S.C.
2297h-10(b)(3), (5)-(7). The act contained annual limits on deliveries
of the natural uranium content of the Russian material. The limits
started at 2 million pounds U3O8 equivalent in
1998, and increased by 2 million pounds each year reaching a maximum of
20 million pounds U3O8 equivalent in 2009 and
each year thereafter. 42 U.S.C. 2297h-10(b)(5).\27\ For comparison
purposes, this last figure represented over four times the volume of
U3O8 produced at U.S. mines in 1996, the year the
statute was passed. EIA, Domestic Uranium Production Report (2005). The
size of this explicit authorization informs DOE's understanding of what
impacts Congress would have regarded as ``material.'' It seems unlikely
that Congress would have authorized in section 3112(b) transfers that
would have been inconsistent with the policy goals of section 3112(d).
---------------------------------------------------------------------------
\27\ Sales under the Russian HEU Agreement ceased at the end of
2013.
---------------------------------------------------------------------------
Indeed, the structure and legislative history of section 3112(b)
confirm that the schedule for Russian material's entering domestic
markets reflects Congress's balancing of concerns similar to those that
motivated section 3112(d)(2). Congress could have simply allowed all
Russian material into the United States without limitation. Instead,
Congress provided a schedule that ramped up over a period of 20 years.
Congress evidently balanced the competing concerns of providing a
market for down-blended Russian HEU and protecting the domestic uranium
industries from large-scale disruption. The schedule outlined in
section 3112(b) reveals the level of market interference that Congress
believed struck that balance. This notion is further confirmed by the
legislative history of this provision, which specifically states that
Congress was trying to balance the interests in maintaining the Russian
HEU Agreement with the interests of the domestic uranium industries.
See S. Rep. 104-173, at 14. Further, the legislative history explains
that the schedule of maximum deliveries was designed to protect against
disruptions to the uranium markets by providing a ``reasonable,
predictable, and measured introduction of this Russian material into
the domestic uranium market.'' Id. at 28.
The preceding discussion is not intended automatically to support
transfers of up to 20 million pounds under section 3112(d). DOE must
exercise judgment as to whether a given set of transfers would cause an
adverse material impact, in light of market and industry conditions
today. However, DOE believes that this provision provides some insight
into what scale of market interference Congress considered acceptable
and expected would not cause ``adverse material impact.''
B. Comments on DOE's Interpretation of Section 3112(d)(2)
Several commenters stated their belief that DOE's understanding of
``material'' sets an impermissibly high bar and would make the section
3112(d)(2) restriction meaningless. NIPC Comments of ConverDyn, at 3;
NIPC Comment of UPA, at 3. DOE clarifies that it does not read section
3112(d)(2) to mean that an impact must threaten the viability of an
industry to be ``material.'' That example illustrates a type of impact
that would be material, but other impacts could, depending on the
circumstances, also be material. Exactly what impacts would rank as
``material'' cannot be specified in advance; as noted above, ``adverse
material impact'' is a phrase the meaning of which is best developed by
applying it to specific situations, as in the analysis below. DOE does
believe that ``adverse material impact,'' in section 3112(d)(2), should
be taken to mean harmful effects of great consequence, and it adheres
to the view that effects comparable to what would result from ordinary
market fluctuations will usually not qualify as ``material.'' As the
example of the Russian uranium supply authorized by section 3112(b)
illustrates, Congress contemplated that the government would affect
uranium markets to a substantially greater extent than do commercial
market participants. In addition, the USEC Privatization Act left DOE
with a large inventory of
[[Page 26382]]
surplus uranium. Section 3112 reflects an intent to enable DOE to
reduce that inventory--and the associated storage costs the government
bears--while making productive use of the uranium, so long as the
domestic industries are adequately protected from harm. That framework
does not suggest that DOE should be limited to the scale of
participation of a typical commercial market participant.
Some commenters also stated that ``material'' should mean any
impact that is greater than de miminis. NIPC Comment of ConverDyn, at
4; NIPC Comment of UPA, at 3-4. This suggestion is at odds with
ordinary methods of statutory interpretation. Because an effect that
was only de minimis would not really be an adverse impact at all, the
word ``material'' would add little if it simply reinforced the point
that section 3112(d) is concerned only with non-trivial effects. In
addition, the suggested interpretation would make section 3112(d)
largely irrelevant to DOE transfers as a practical matter. Nearly every
transfer has some nontrivial impact on some segment of the industry; if
DOE could transfer uranium pursuant to section 3112(d) only when the
forecast impacts were de minimis, it would make use of section 3112(d)
rarely if at all.\28\ DOE believes section 3112(d) was meant to be a
practical mechanism for managing the uranium inventory subject to
certain constraints, not a restriction so severe it becomes a virtual
dead letter. Consistent with that view, section 3112(e)(2) permits DOE
to transfer enriched uranium in any quantity to any person ``for
national security purposes.'' It would be odd for Congress to commit
such open-ended authority to DOE, with such extensive discretion, for
one type of transfer, while simultaneously constricting section 3112(d)
transfers to essentially zero. For these reasons, DOE rejects the
suggestion that any impact that is more than de minimis is material.
---------------------------------------------------------------------------
\28\ DOE has identified one type of transfer for which the
impacts, if any, may truly be de minimis, namely the transfers of
high-assay LEU for research reactors mentioned above in section
I.D.2.e. The rarity of this circumstance demonstrates the point.
---------------------------------------------------------------------------
Commenters also cited examples of other meanings of ``material,''
particularly in statutes that include definitions for the term. There
is no such definition in the USEC Privatization Act, however. These
examples confirm that ``material'' can have a variety of meanings,
depending on context, but are of little help for identifying a specific
meaning for the phrase ``adverse material impact'' in the particular
context of section 3112(d)(2).
Commenters also contended that DOE's transfers would have material
impacts because they would affect prices or profits by a given
percentage. To the extent commenters tied these claims to specific
arguments why the given numerical effects are material in current
circumstances, DOE addresses those arguments below. However, some
commenters appear to believe that a change in price or profits is
material solely because it exceeds some threshold percentage. DOE does
not believe such rigid formulas are appropriate. First, as discussed
above, DOE's task under section 3112(d)(2) is to predict impacts on the
domestic industries, not just market effects. How much a given change
in price affects an industry depends on the circumstances, including
the degree to which industry members are exposed to that price change.
Second, whether a given impact is material will generally depend on the
circumstances as well. As a hypothetical example, suppose a transfer
had the consequence of forcing a production facility to close. That
outcome might not rank as a material impact on the industry if the
facility were one out of fifteen facilities industry-wide and the
others were in good financial condition.
With respect to the relationship DOE observes between section
3112(d) and uranium permitted under the Russian HEU Agreement, several
commenters objected to DOE's observation, for several reasons. NIPC
Comments of ConverDyn, Uranerz, and UPA. Some argued that the language
in section 3112(d)(2) directing DOE to ``take account'' of the Russian
HEU Agreement was meant only to ensure the viability of the Agreement.
Under this view, section 3112(b) was the more important provision
because it permitted the reduction of weapons stockpiles. Congress knew
that section 3112(b) sales might severely disrupt domestic industries,
and, the argument continues, it did not want section 3112(d) transfers
to interfere with the process by disrupting them further. To that end,
these commenters say, the statute directed DOE to bear the section
3112(b) sales in mind in making section 3112(d) determinations, so that
DOE transfers would not ``get in the way'' of the Russian HEU
Agreement.
The commenters' interpretation of the ``taking account'' language
seems unduly constrained. Section 3112(d)(2) does not, by its terms,
indicate that DOE's goal in taking account of Russian-origin uranium
sales should be to facilitate or preserve those sales. To be sure, as
commenters note, the successful implementation of the Russian HEU
Agreement was an important policy goal of section 3112. However, the
``taking account'' clause also covers sales under the Suspension
Agreement. Congress is unlikely to have had as strong an interest in
ensuring the success of the Suspension Agreement, because it was simply
the settlement of a trade dispute regarding Russian uranium producers.
The mention of the Suspension Agreement supports DOE's view that it
should ``tak[e] account'' of the two categories of Russian-origin
uranium in various ways that depend on the circumstances. When sales of
uranium under the two Agreements are high, that contribution to supply
should be an important consideration when DOE makes a determination
under section 3112(d)(2). When sales under the Agreements decrease,
that decrease in supply can also be important to a determination.
Some commenters pointed out that market participants took steps to
mitigate the effects of section 3112(b) sales, for example by
committing the uranium on long-term contracts. DOE recognizes that the
practical consequences of section 3112(b) were not as significant as
section 3112(b) would have permitted. In addition to the mitigation
efforts commenters described, the actual amounts delivered have
generally been lower than the section 3112(b) caps. But as DOE stressed
in the Notice, it does not believe the comparison to section 3112(b)
leads to the conclusion that any transfers short of 20 million pounds
per year would be permissible under section 3112(d). Section 3112(d)
directs DOE to predict the actual impacts of transfers, in current
conditions; DOE does not seek to rely on a numerical trigger like 20
million pounds. Rather, the comparison to section 3112(b) informs DOE's
understanding of what degree of impact is ``material'' in the section
3112(d) sense.
It also bears mention that DOE's use of the section 3112(b) caps to
inform interpretation of section 3112(d)(2) is not the mechanism by
which DOE ``tak[es] account of the sales of uranium'' under the two
Russian Agreements. As commenters point out, the sales that have
actually occurred under the Russian HEU Agreement were smaller than
what section 3112(b) permitted. DOE takes account of these sales--as
well as those under the Suspension Agreement--in its analysis, below,
of impacts on the domestic uranium industries. Apart from that analysis
and the amounts of actual sales, DOE considers the volumes that
Congress authorized in section 3112(b) to be informative for
understanding what degree of consequence would
[[Page 26383]]
constitute an ``adverse material impact.'' The section 3112(b) limits
would be relevant in that regard even if section 3112(d) lacked the
``taking account'' clause. But the inclusion of that clause confirms
DOE's view because it indicates that Congress legislated the two
provisions congruently.
Section 3112(b) itself provides further evidence in support of that
conclusion. It directs the President to monitor sales under the Russian
HEU Agreement and report on any actions the President proposes to take
``to prevent or mitigate any material adverse impact'' the sales might
have on the domestic uranium industries. But it does not require any
particular presidential action. Thus, Congress evidently intended
section 3112(b) sales not to have material adverse impacts but realized
that they might. Notably, the possibility of material impact was
uncertain enough that Congress deemed it unnecessary to mandate any
preventative steps. Taken together, the structure of section 3112(b)
suggests that ``material'' impacts refers to consequences of such
significance that they might or might not result from sales at the
rates section 3112(b) contemplated.
In general, commenters on this topic suggest that by instructing
DOE to ``tak[e] account'' of sales under the Russian HEU Agreement,
section 3112(d) meant to limit DOE's sales in light of the impact of
the Agreement. These commenters argue that in the past DOE implicitly
viewed the ``taking account'' clause as such a limit; Secretary
Richardson placed a 10-year moratorium on transfers of Russian-origin
uranium hexafluoride in DOE's inventory. DOE agrees that the ``taking
account'' language can limit DOE's transfers: To the extent that sales
under the Russian HEU Agreement are causing impacts on an industry, DOE
must consider those impacts when assessing the possible impacts of a
transfer it contemplates pursuant to section 3112(d). The discussion
above is consistent with that view.
Finally, commenters argued that section 3112(b) sales have less
impact, relative to the amount of uranium, than DOE's section 3112(d)
transfers because they are capped, predictable, and transparent. DOE
notes that the cap was 10 million pounds in 2002 and has now increased
to 20 million pounds. Neither DOE's section 3112(d) transfers nor the
section 3112(b) sales have ever reached those scales, so it seems
unlikely that simply having the cap would make a difference to the
actual economic impact of the transactions. DOE does recognize that the
predictability of supply is an important factor, and predictability or
lack thereof can increase or decrease the impact of a program of
transfers. The analysis below considers this factor. With respect to
transparency, as distinct from predictability, DOE believes it provides
at least as much public notice about planned section 3112(d) transfers
as was available for section 3112(b) sales. The Department publicly
announces its determinations, each of which reflects an amount actually
to be transferred; and the Department has published an accounting of
the quantities of uranium it has available for transfer. By contrast,
section 3112(b) sales happened through a private entity that had no
obligation to release data publicly about sales. The statutory limit on
sales, being much larger than the sales that actually occurred,
provided little information about how sales of Russian uranium would
affect the markets in practice.
One commenter pointed out that Russian-origin material continues to
be available from commercial sources. NIPC Comment of ConverDyn,
Enclosure, at 4. DOE believes this commenter was referring to the 2008
amendment to the Suspension Agreement discussed in Section I.D.3.b. DOE
will take account of any sales under the Suspension Agreement in the
analysis below.
Several commenters suggested that DOE should utilize a quantitative
annual cap on transfers. Although the specific proposals varied,
several suggested a rate of approximately 5.0 million pounds
U3O8 per year. E.g. RFI Comment of UPA, at 9; RFI
Comment of ConverDyn, at 8; NIPC Comment of Cameco, at 2-3.\29\
---------------------------------------------------------------------------
\29\ One commenter suggested the possibility of waiver of future
Secretarial Determinations if DOE would maintain such a cap. NIPC
Comment of Cameco, at 3. The commenter did not suggest who might
waive DOE's obligation to perform a determination before a transfer
pursuant to section 3112(d). The statute imposes that duty and does
not seem to provide a mechanism for it to be waived.
---------------------------------------------------------------------------
These commenters appear to have two chief reasons for their
proposal. First, the commenters seem to think the various limits they
propose are, in fact, the outside bounds of what DOE can transfer
consistent with section 3112(d). Thus they would have DOE keep
transfers below their preferred limits to avoid material impacts.
However, DOE does not believe a quantitative trigger--whether
implemented as an annual cap or only as a guideline--is a necessary or
appropriate way to analyze whether DOE transfers will cause adverse
material impacts. In the past, DOE has stated that, as a general
matter, the introduction into the domestic market of uranium in amounts
that are less than ten percent of the annual fuel requirements for U.S.
nuclear power plants should not have an adverse material impact on the
domestic uranium industries.\30\ See 2008 Policy Statement, at 2; 2008
Plan, at ES-1. In July 2013, DOE noted that DOE's experience between
2008 and 2013 led it to determine that DOE ``can meet its statutory and
policy objectives in regard to DOE uranium sales or transfers without
an established guideline.'' In addition, DOE noted that in light of the
two-year limit on the validity of a determination under section
3112(d), an established guideline was no longer necessary. 2013 Plan,
at 2. DOE further notes that the global nature of the markets for
uranium concentrates, conversion services, and enrichment services
suggests that a focus on U.S. reactor needs will not adequately capture
the impact on domestic industries. DOE therefore adheres to the views
it expressed in 2013. It further notes that what impacts would be
material will depend on the circumstances expected to prevail at the
time of a transfer, and what impacts a transfer has will depend on
those circumstances as well as on the details of the transfer. A simple
rule that transfers below a certain amount are acceptable and those
above are not would be inaccurate. In some circumstances, a transfer
below the trigger could actually cause an adverse material impact to
one or more of the domestic uranium industries; and in some
circumstances a transfer above the trigger would actually not cause
adverse material impacts. Rather than commit itself to a course that
risks both types of inaccuracy, DOE prefers to perform the relevant
analysis for each determination.
---------------------------------------------------------------------------
\30\ Commenters argue it was impermissible for DOE to eliminate
the ``cap'' they say the 2008 Plan imposed. DOE does not regard the
2008 plan as having prescribed a strict cap on transfers. The plan
itself said only that transfers below ten percent of annual U.S.
reactor requirements would generally not be an adverse material
impact. It did not purport to prohibit DOE from making section
3112(d) determinations for transfers above that amount. Moreover,
the 2008 Plan specifically stated that DOE may transfer more than
the 10 percent figure for certain purposes. 2008 Policy Statement,
at 2. DOE announced in July 2013 that it would no longer utilize
that guideline. 2013 Plan, at 2.
---------------------------------------------------------------------------
Commenters also urge DOE to maintain a cap because they believe
long-term certainty about the maximum scale of transfers would mitigate
the impact of the transfers and help industry attract investors. DOE
recognizes that certainty and predictability are important for planning
investments and industrial activities, especially in industries like
the uranium
[[Page 26384]]
industries where developing new facilities can take many years. At the
same time, DOE needs some degree of flexibility for transferring
uranium as appropriate--and consistent with section 3112--in support of
its various missions. After balancing the value of certainty for
fostering industrial investment against the mandate to make effective
use of the excess uranium inventory, DOE declines to commit to a preset
limit on transfers.
C. Factors Under Consideration
For these reasons, DOE believes that whether the effects of a given
transfer constitute an ``adverse material impact'' should not depend on
a quantitative bright-line test, but rather should be based on an
evaluation of potential impacts by examining a number of factors.
Accordingly, this analysis considers the effects of DOE transfers using
the following six factors:
1. Prices
2. Production at existing facilities
3. Employment levels in the industry
4. Changes in capital improvement plans and development of future
facilities
5. Long-term viability and health of the industry
6. Russian HEU Agreement and Suspension Agreement
While no single factor is dispositive of the issue, DOE believes
that these factors are representative of the types of impacts that the
proposed transfers might have on the domestic uranium industries. Not
every factor will necessarily be relevant on a given occasion or to a
particular industry; DOE intends this list of factors only as a guide
to its analysis.
DOE notes two ways that these factors differ from the list of
factors DOE provided in the March 2015 Notice of Issues for Public
Comment. First, DOE has combined the first two factors listed in the
NIPC, ``market price'' and ``realized prices of current operators.''
DOE continues to believe that the effect of DOE transfers in these two
areas is a relevant consideration. However, DOE recognizes that market
prices, in the abstract, will not always be directly relevant for
assessing the impact on an industry. More important will be the prices
that various industry members actually receive for their products or
services, which under most circumstances is a function of both the
change in price and the contours of the various contracts through which
industry members sell their uranium. As DOE's focus is ultimately the
effect on industry, it is appropriate to consider these two aspects of
price together. Second, DOE has added a factor regarding the Russian
HEU Agreement and Suspension Agreement. Although the analysis below, to
a certain extent, considers these transfers as part of the discussion
for all of the factors, DOE believes it is appropriate to discuss these
two Agreements separately as well.
Several comments submitted in response to the March 2015 Notice of
Issues for Public Comment refer to some or all of these factors.
Uranerz Energy Corporation expressed its view that the six factors
listed in the NIPC provide significant context for analyzing the
impacts to the domestic uranium industries. NIPC Comment of Uranerz, at
1. Similarly, Fluor B&W Portsmouth (FBP), contractor to DOE for cleanup
services at Portsmouth, noted that these factors are ``reasonable and
indicative of the types of impacts that DOE Transfers of Excess Uranium
could have on the domestic industries.'' NIPC Comment of FBP, at 3.
Nuclear Fuel Services, Inc. (NFS), which conducts down-blending
services for DOE through a subcontract with WesDyne, suggested that DOE
should consider the potential impact of DOE transfers on the ability of
DOE to meet nonproliferation and defense missions. NIPC Comment of NFS,
at 2-3. While DOE agrees that these policy concerns can be significant
to DOE's decision whether to undertake a given transfers, DOE does not
believe these concerns are relevant to the prerequisite section
3112(d)(2) finding on whether DOE transfers will have an adverse
material impact on the domestic uranium industries.
ConverDyn states that DOE should consider ``displaced sales'' as a
separate factor. NIPC Comment of ConverDyn, at 6. DOE disagrees that
this should be considered separately. DOE believes that displaced sales
are an aspect of production at existing facilities. Thus, these
considerations fit within that category and do not need to be
considered separately. ConverDyn also commented that DOE appears to
give double weight to prices by considering both ``market price'' and
``realized price.'' Id. at 7. As discussed above, DOE has combined
these two concepts into a single factor, ``prices.'' However, as
discussed above, DOE continues to believe it is appropriate to consider
the effect of DOE transfers on ``market price'' and ``realized price.''
In any case, it bears emphasis that DOE does not place extra
``weight'' on price or any other individual factor. DOE's analysis
considers all the factors taken together as a whole. DOE has not
assigned specific ``weights'' to the factors. To the extent that some
considerations overlap multiple factors, DOE will take this into
account in its analysis. ConverDyn also argues that the long-term
viability and health of the industry factor should be ``of minimal
weight'' because the Secretarial Determinations are only valid for two
years. Id. at 8. As stated above, DOE has not assigned any particular
weight to each factor. DOE agrees that the relevant analysis for this
factor should focus on the impact of DOE transfers on the long-term
viability and health of each industry, not simply on the long-term
prospects for each industry in the abstract. Finally, ConverDyn
suggests that DOE should expressly consider the need for domestic
capacity to produce material for national defense needs. Id. DOE notes
that section 3112 of the USEC Privatization Act implements a policy of
ensuring, to the degree consistent with the statute's purpose, that
domestic capacity remains within the uranium mining, conversion, and
enrichment industries. DOE believes that section 3112(d), which
requires the Secretary to determine whether DOE transfers will have an
``adverse material impact'' on these industries, itself addresses, in
part, the national security concern ConverDyn mentions.
In addition to the above discussion, several comments in response
to the December 2014 Request for Information suggested additional
factors that DOE should consider. DOE has chosen not to consider those
factors in the manner commenters suggested, for the reasons given in
the March 2015 Notice of Issues for Public Comment.\31\
---------------------------------------------------------------------------
\31\ One commenter takes issue with DOE's assertion in the NIPC
that many domestic producers are part of multiline businesses, so
that their share prices are not related solely to uranium markets.
The commenter does not dispute DOE's related observations that share
price reflects myriad inputs such as the nature of company
management, gearing ratio (debt vs. equity), inflation, and the
particular risks associated with the uranium market (such as the
influence of political changes, like the shift in energy policy in
Germany, or public responses to nuclear accidents). Because of this
complexity, it is difficult to meaningfully attribute a change in a
company's share price to DOE transfers; and it is also not fully
meaningful to predict how a given change in share price will affect
investment decisions. Indeed, while the commenter contends that
ERI's report shows market capitalization to be tied to market
prices, in fact ERI notes that producers' share prices have not
reacted to recent price increases as much as could be expected based
on the rough correlation between share prices and market prices in
the aftermath of the Fukushima disaster. For these reasons, DOE
remains convinced that analyzing the economic case for investments
in new production is a more reliable and appropriate method for
assessing the impact of transfers than would be a focus on share
prices.
---------------------------------------------------------------------------
Several commenters also inquired whether the analytical method DOE
is now articulating is consistent with the analyses supporting prior
section
[[Page 26385]]
3112(d) determinations. While today's approach is broadly tracks DOE's
analyses of past transfers, DOE recognizes that this analysis
elaborates in much greater detail than DOE has provided before. The
level of detail with which DOE has performed this analysis, the set of
factors being considered, and the process in which DOE has engaged are
appropriate for this determination for several reasons, including the
scale of the transfers considered in this analysis and the rate at
which market conditions have changed in the recent past. Depending on
the circumstances, a different approach may be warranted for subsequent
determinations.
IV. Assessment of Potential Impacts
This section assesses the potential impacts of DOE transfers at the
levels and for the purposes described above in Section I.D.1. The
overall volume of transfers for cleanup services at Portsmouth and
down-blending services in each year from 2015 to 2024 is provided in
Table 3. Although this assessment focuses on the impacts of transfers
in the next few years, parts of the analysis make assumptions about
transfers under these programs in future years.
This assessment assumes that DOE transfers for cleanup at the
Portsmouth Gaseous Diffusion Plant will continue at the preexisting
rates through the first six months of 2015. Beginning in July 2015, DOE
would transfer at a rate of 1,600 MTU per year of natural uranium
hexafluoride. DOE has a finite amount of natural uranium hexafluoride.
DOE anticipates that at this rate, this material would be exhausted in
the year 2020. Transfers for down-blending services would decrease to a
total of no more than 60 MTU of enriched uranyl nitrate at an assay of
4.95 wt-% in 2015 and each year thereafter. DOE assumes transfers for
down-blending will continue at this rate throughout the next 10 years
Together, the natural uranium and LEU to be transferred each year are
the equivalent of 2,100 MTU contained in uranium concentrates, 2,100
MTU as UF6 in conversion services, and 520,000 SWU of
enrichment services.
Table 3--Volume of Transfers for Portsmouth Cleanup and HEU Down-Blending in the ``Assessed Case''
----------------------------------------------------------------------------------------------------------------
Concentrates Conversion
(MTU/million lbs services (MTU as Enrichment
U3O8) UF6) services (SWU)
----------------------------------------------------------------------------------------------------------------
2015................................................... 2,500/6.5 2,500 520,000
2016................................................... 2,100/5.5 2,100 520,000
2017................................................... 2,100/5.5 2,100 520,000
2018................................................... 2,100/5.5 2,100 520,000
2019................................................... 2,100/5.5 2,100 520,000
2020................................................... 992/2.6 992 520,000
2021................................................... 500/1.3 500 520,000
2022................................................... 500/1.3 500 520,000
2023................................................... 500/1.3 500 520,000
2024................................................... 500/1.3 500 520,000
----------------------------------------------------------------------------------------------------------------
In addition to the transfers listed in Table 3, this assessment
also includes potential impacts associated with transfers that are not
subject to section 3112(d). Specifically, this analysis includes prior
transfers of depleted uranium hexafluoride to Energy Northwest, prior
and continuing transfers to the Tennessee Valley Authority of blended
low-enriched uranium, potential future transfers of off-specification
uranium, and potential future transfers of depleted uranium
hexafluoride to GE-Hitachi Global Laser Enrichment.\32\ These transfers
are discussed above in Section I.D.2.\33\
---------------------------------------------------------------------------
\32\ Although some of these transfers have already taken place,
DOE nevertheless recognizes they can affect the uranium industries
in future years. DOE believes it is reasonable to view these
transfers as affecting the market in the years and quantities ERI
analyzes--typically one year prior to the material being reloaded
into a reactor for uranium concentrates and conversion, and six
months prior for enrichment.
\33\ This assessment also takes account of sales of uranium
under the Russian HEU Agreement and the Suspension Agreement.
However, these transfers are considered as part of the background
market, and are not part of the ``assessed case.''
---------------------------------------------------------------------------
Collectively, this assessment refers to the transfers described
above as the ``assessed case.'' Consistent with the analytical approach
described above, this section reflects comparison of two forecasts: one
reflecting the state of each domestic uranium industry if DOE goes
forward with transfers at this level, and one reflecting the state of
each domestic uranium industry if DOE does not go forward with these
transfers.
A. Uranium Mining Industry
The domestic uranium mining industry consists of a relatively small
number of companies that either operate currently producing mines or
are in the process of developing projects expected to begin production
at some point in the near future. These projects are mostly
concentrated in the western states--in recent years, there have been
producing facilities in Arizona, Nebraska, Utah, Texas, and Wyoming.
Most uranium mining facilities are owned and operated by publicly
traded companies based in the United States or Canada. According to
DOE's Energy Information Agency (``EIA''), production from domestic
producers in 2014 totaled approximately 4.9 million pounds
U3O8. EIA, Domestic Uranium Production Report Q4
2014, 2 (January 2015). For comparison, the World Nuclear Association
(WNA) reports that worldwide production in 2013 was approximately 155
million pounds U3O8.
1. Prices for Uranium Concentrates
The effect of DOE transfers on prices is one of the chief vehicles
through which the transfers can cause impacts on an industry.
Accordingly, DOE has considered numerous inputs to forecast how
transfers in the assessed case will affect prices. DOE analyzes both
market prices and the prices that, on average, industry actually
realizes for its products. Realized prices may be more significant for
assessing the impact of transfers, but, as discussed below, they are
not necessarily the same as market prices at any given time.
As described above, market prices for uranium concentrates are
generally described in terms of the spot price and the term price.
Although there are other types of published uranium prices, these two
prices are the ones most frequently used as the basis for pricing terms
in contracts for the purchase and sale of uranium concentrates. This
section discusses the potential impacts
[[Page 26386]]
of DOE transfers on these two prices.\34\ For reference, as of March
30, 2015, UxC's spot price indicator was $39.50 per pound
U3O8 and its term price indicator was $49.00 per
pound U3O8.
---------------------------------------------------------------------------
\34\ DOE further notes that several of the other published
uranium prices described in Section II.E appear to be based--either
directly or indirectly--on either the spot or term price. To the
extent there are differences between these and other published
prices, DOE believes that the behavior of the spot and term price is
representative of changes its transfers may cause in other prices.
---------------------------------------------------------------------------
DOE has reviewed several different estimates of the effect of DOE
transfers on the market prices for uranium concentrates based on
different economic models. These estimates appear in market analyses
from four different uranium market consultants: ERI, TradeTech, NAC
International (NAC), and UxC. DOE has reviewed and evaluated to the
extent possible the methodology, assumptions, data sources, and
conclusions of each of the market analyses.
a. Energy Resources International Report
DOE tasked ERI with estimating the effect of DOE transfers on the
market prices for uranium concentrates. In the 2015 ERI Report, as in
previous reports, ERI estimated this effect by employing two different
types of model that rely on somewhat different assumptions and methods:
a market clearing price model and an econometric model. For its market
clearing price model, ERI constructs individual supply and demand
curves and compares the clearing price with and without DOE
transfers.\35\ To develop its supply curves, ERI gathers available
information on the costs facing each individual supply source. ERI then
uses that information to estimate the marginal cost of supply for each
source using a discounted cash flow model. 2015 ERI Report, 41 n.22. To
develop its demand curve, ERI assumes a perfectly inelastic demand
curve based on its Reference Nuclear Power Growth forecast.\36\ ERI
develops this forecast by combining estimates of the needs and reload
schedules for operating plants with projections about future reactor
retirements and new development. 2015 ERI Report, 17-18. The second
model that ERI used to predict the effects of DOE transfers on the spot
price for uranium is an econometric model. ERI compared the monthly
spot and term market prices published by TradeTech with published
offers to sell uranium for delivery within one year of publication and
published inquiries to purchase uranium for delivery within one year.
Based on this information, ERI developed a multivariable correlation to
estimate how the market prices would respond to the availability of new
supply from DOE. 2015 ERI Report, 50.
---------------------------------------------------------------------------
\35\ The market clearing price is the price at which quantity
supplied is equal to quantity demanded.
\36\ In other words, ERI assumes that demand for uranium will
stay the same regardless of variations in market price.
---------------------------------------------------------------------------
Several commenters requested that DOE subject the 2015 ERI Report
to peer review. E.g. NIPC Comment of UPA, at 9; NIPC Comment of
ConverDyn, Enclosure, at 1. DOE is not obligated to subject the 2015
ERI Report to peer review. DOE also does not believe the lack of peer
review is a reason to doubt the ERI Report. Peer review is not
appropriate in all circumstances, particularly outside of the
scientific research context; and market analyses like ERI's are
commonly not subject to peer review. DOE has reviewed the 2015 ERI
Report for completeness and evaluated ERI's methodology, assumptions,
and conclusions, particularly in comparison to other reports submitted
by commenters. Meanwhile, DOE made the 2015 ERI Report available for
public review through the March 2015 Notice of Issues for Public
Comment. DOE also made public in May 2014 an analogous report that ERI
prepared to assist the deliberations for the 2014 Determination. The
analytical methods in the 2015 report are largely the same as those ERI
used in the 2014 report. The public has thus had opportunities to offer
substantive criticisms of ERI's analyses. One commenter points out that
the Office of Management and Budget has advised that notice-and-comment
procedures for agency rulemaking would not be considered an adequate
substitute for peer review. DOE notes, however, that the concern
motivating this advice was that the relevant experts may not file
comments in such a process.\37\ This concern seems less significant
here, because commenters on the RFI submitted reports that three expert
uranium market consultancies prepared specifically to address DOE's
proposed transfers. To the extent commenters offered critiques of ERI's
work, DOE has considered that input in its evaluation of the 2015 ERI
Report.
---------------------------------------------------------------------------
\37\ Office of Management & Budget, Final Information Quality
Bulletin for Peer Review, (Dec. 16, 2004), available at https://www.whitehouse.gov/sites/default/files/omb/assets/omb/memoranda/fy2005/m05-03.pdf.
---------------------------------------------------------------------------
After reviewing the 2015 ERI Report and ERI's explanation of its
methodology, as well as comments such as those that provided additional
or alternative forecasts of market prices, DOE believes that ERI's
first methodology described above is reasonable for estimating the
impact of DOE transfers in the long-term. The methodology is consistent
with common economic principles applicable to a competitive market. In
general in such a market, competition from DOE-sourced uranium can be
expected to displace units of supply that have the highest marginal
cost. Given buyers that demand uranium at the lowest price available,
the displacement of those supplies would cause the price to decrease
towards the highest marginal cost of the remaining supplies. However,
some producers with relatively high marginal cost have entered into
long-term contracts based at least partially on fixed price mechanisms.
Under such circumstances, DOE-sourced uranium might not immediately
displace units of supply with the highest marginal cost. Over the
longer term, these fixed price contracts will eventually expire and the
higher marginal cost producers would have to enter into new contracts
at the then-prevailing market prices. Therefore, DOE believes the price
for uranium concentrates reflects an ordinary price-setting mechanism
over the long term.
In a market with elastic demand, calculating the effect of an
addition to supply would be more complicated than ERI's analysis. ERI
assumes a perfectly inelastic demand curve, and in that case the ERI
analysis is consistent with the pricing mechanism just described. As
stated above, it appears that the uranium concentrate market exhibits
behavior suggesting that demand is relatively inelastic, but perhaps
not completely inelastic. To the extent that demand is at all elastic,
this would tend to dampen the price effect of DOE material. However,
given that ERI's assumption about the market is conservative, in that
it will tend to produce overestimates of the effect of DOE's transfers
on prices, DOE believes it is reasonable for achieving the purposes of
this analysis.
ERI relies upon an extensive collection of data about the
production costs for various aspects of supply. ERI has explained the
various sources from which it collects data about the different primary
producers. ERI then applies a discounted cash flow analysis to
determine an expected production cost. Where information is not
available publicly, ERI makes assumptions based on information from
similar production facilities. DOE believes that this approach would
yield reasonably accurate data because most of the uranium producers
are publicly traded companies that must disclose company financial and
production information to
[[Page 26387]]
regulatory agencies. DOE also notes that this approach to data
collection about the industry appears to be standard among similar
consulting firms. DOE is aware of no errors that would call ERI's data
and methodology into question. In addition, the cost curve that ERI
constructed from its data is comparable to analogous curves published
by its industry peers.
DOE tasked ERI with estimating the effects of DOE transfers under
three scenarios.\38\ Under Scenario 1, DOE would transfer 2,055 MTU per
year in the form of natural UF6 and 650 MTU natural uranium
equivalent per year of LEU for a total of no more than 2,705 MTU per
year. Under Scenario 2, DOE would transfer 1,410 MTU per year in the
form of natural UF6 and 445 MTU natural uranium equivalent
per year of LEU for a total of no more than 1,855 MTU per year. Under
Scenario 3, DOE would transfer no uranium under these two programs. The
transfer rates in these scenarios refer only to the level of uranium
transfers for cleanup at the Portsmouth Gaseous Diffusion Plant and
down-blending of LEU. For each scenario, ERI also analyzes the impacts
of transfers under the following programs: TVA BLEU, Energy Northwest
depleted uranium, potential future transfer of off-specification
uranium, and a possible future sale of depleted uranium currently under
negotiation. 2015 ERI Report, 21-32. The level of transfers across
these three programs is the same in all three scenarios, and ERI's
predictions about market price reflect these transfers as well as the
cleanup services and down-blending transfers.
---------------------------------------------------------------------------
\38\ One commenter suggests that DOE should not have tasked ERI
to consider specific scenarios; instead the commenter states that
DOE should have asked ERI to evaluate the ``optimal conditions for
transfers, including how to minimize the adverse impact of the
transfers on domestic industry while also maximizing the benefit to
DOE.'' NIPC Comment of ConverDyn, Enclosure, at 9. As the impact of
DOE transfers depends heavily on the specific circumstances, it is
unlikely that there is a single ``optimal'' level of transfers. DOE
believes a more appropriate approach is for DOE to seek out
information regarding how its uranium transfers will affect the
domestic uranium industries--including through tasking ERI to
analyze these effects--and then for DOE to assess whether those
effects amount to an adverse material impact on one or more of the
domestic uranium industries.
---------------------------------------------------------------------------
ERI notes that uranium transfers do not necessarily impact the
market at the time of transfer. In general, the market impact will take
place at the point in time where the transfers displace commercial
supply. This can be estimated based on the expected schedule for
delivery as reactor fuel. Thus, even though most of the TVA BLEU and
all of the Energy Northwest transfers have already taken place, ERI
estimates that these transfers will affect the market at various times
in the future based on the expected delivery schedule. 2015 ERI Report,
21-22. Given that these transfers are targeted for specific reactors on
predictable time-frames, DOE believes it is reasonable to assume that
these transfers affect the market at the point when they displace
commercial supply.
The transfer rates analyzed by ERI for down-blending services and
cleanup at the Portsmouth Gaseous Diffusion Plant are summarized in
Table 4. The assessed case is included for reference. Transfers under
the other three programs mentioned above are included in ERI's analysis
but are not included in this table because they are the same under any
of the scenarios.\39\
---------------------------------------------------------------------------
\39\ Under each of the three scenarios analyzed by ERI and the
assessed case, the annual rate listed in Table 4 represents the rate
only until uranium available for the Portsmouth cleanup is
exhausted. Under scenarios 1 and 2 and the assessed case, this will
occur by 2019, 2021, and 2020, respectively. The rates transferred
for down-blending are the same throughout the study period.
Table 4--Different Scenarios Considered in This Analysis
----------------------------------------------------------------------------------------------------------------
MTU natural uranium equivalent
-----------------------------------------------------------------------------------------------------------------
Portsmouth
cleanup Down-blending Total
----------------------------------------------------------------------------------------------------------------
ERI Scenario 1......................................... 2,055 650 2,705
ERI Scenario 2......................................... 1,410 445 1,855
ERI Scenario 3......................................... 0 0 0
Assessed Case (2016 and after)......................... 1,600 500 2,100
----------------------------------------------------------------------------------------------------------------
Using its market clearing approach, ERI estimates that DOE
transfers will have the effects listed in Table 5. For each year ERI
included (2015-2024), the relationship between the amount of transfers
under each scenario and the price effect is essentially linear. Compare
Table 3.6 to Table 4.1 of 2015 ERI Report, 25-26, 45. This linearity is
unsurprising, because the slope of ERI's cost curve does not change
much as a function of supply at the levels of current supply.
Therefore, the price effect of DOE transfers under the assessed case
can be interpolated from ERI's estimates. Table 5 presents ERI's
estimates of the price effect of DOE transfers for all three scenarios
and DOE's interpolation of the price effect for the assessed case.\40\
---------------------------------------------------------------------------
\40\ Note that to infer the price effect, DOE has not simply
interpolated the 2,100 MTU figure between the annual rate for
Scenarios 1 and 2. As discussed above, the appropriate time for
assigning a price effect to a quantity of transferred uranium is the
time at which it would displace commercial supply. In addition, both
Scenario 2 and the assessed case involve transferring natural
uranium more slowly than Scenario 1, yet DOE assumes (as ERI did)
that it will continue transferring natural uranium until it exhausts
its current inventory. Thus, in Scenario 2 and the assessed case,
the Department will be transferring uranium in later years when,
under Scenario 1, natural-uranium transfers would have ceased. The
Department's interpolation reflects these calculations.
Table 5--ERI's Estimate of Effect of DOE Transfers on Uranium Concentrate Spot and Term Prices in $ per Pound
U3O8
[Market clearing approach]
----------------------------------------------------------------------------------------------------------------
2015 ERI Report
-----------------------------------------------------------------------------------------------------------------
Assessed case
ERI Scenario 1 ERI Scenario 2 ERI Scenario 3 (interpolated)
----------------------------------------------------------------------------------------------------------------
2015................................ $3.00 $2.10 $0.30 $2.80
2016................................ 2.80 1.90 0.10 2.20
[[Page 26388]]
2017................................ 2.70 1.80 0.00 2.10
2018................................ 3.30 2.50 0.60 2.70
2019................................ 2.50 3.00 1.20 3.20
2020................................ 2.80 4.00 2.10 3.10
2021................................ 3.00 3.20 2.40 2.90
2022................................ 2.70 2.50 2.10 2.60
2023................................ 3.20 3.00 2.50 3.10
2024................................ 2.60 2.40 2.00 2.50
Average (2015-2024)................. 2.80 2.60 1.30 2.70
----------------------------------------------------------------------------------------------------------------
It is important to emphasize that this is not a prediction that
prices will drop by the specified amount once DOE begins transfers
following a new determination. A level of price suppression consistent
with the estimate for Scenario 1 would, in this model, already be
roughly reflected in the current market price because DOE is currently
transferring uranium at that rate. 2015 ERI Report, 44. The price
suppression that ERI estimates would persist under Scenario 3 is
largely attributable to past DOE transfers, from which some of the
uranium is still expected to be entering the market in future years.
Similarly, if DOE begins transferring at the level of the assessed
case, instead of at current rates, a positive effect on market prices
of $0.60, compared to existing prices, could be expected in 2016, the
first full year of DOE transfers at the rate of 2,100 MTU per year.
One commenter argues that the price effect described by ERI under
Scenario 1 is not already built into current market prices and suggests
that the price effect described by ERI should be cumulative. NIPC
Comment of UPA, at 9. This commenter appears to misunderstand the
nature of ERI's analysis. ERI's market-clearing approach is based on
the economic principle that the market price will tend toward the
competitive equilibrium price, i.e. the price at which the demand curve
intersects the supply curve. The existing supply and demand curves
include DOE transfers at the existing rates. Thus, the current market
price should reflect, in part, this level of supply.\41\ The price
effect estimated by ERI is based on a calculation of where the two
curves would intersect in the absence of DOE-sourced material. ERI uses
its production data to estimate the amount of
U3O8 that will be supplied each year over the
next ten years, and uses these annual supply curves to estimate the
price effect. 2015 ERI Report, 42. Since ERI is comparing the volume of
DOE transfers in each year to the expected amount of supply in that
year, these estimates take account of future changes in supply. For
these reasons, it would be inappropriate to add the estimated price
effect in separate years together, as the commenter proposes to do. In
addition, the commenter's argument that adding 2,705 MTU to a market
will necessarily cause a further price decrease does not take account
of the fact that material is continually produced and consumed over
time. Transfers at a rate of 2,705 MTU per year would be at the same
rate as (or slightly below) transfers in the past few years. It is
appropriate to assess the effect of that rate of transfers in light of
the ongoing rates of production and consumption. DOE notes that the
commenter's suggestion is also contrary to the forecasts of the three
other market reports discussed below.
---------------------------------------------------------------------------
\41\ As noted above, the majority of uranium production is sold
on long-term contracts. While DOE has been transferring at a rate at
or below 2,800 MTU per year since 2012, contract terms may run 10
years. Thus, the market may not have fully equilibrated in response
to continued transfers at the current rate.
---------------------------------------------------------------------------
ERI also used its econometric model to estimate the effect of DOE
transfers on the spot market price. As with ERI's market clearing price
analysis, the relationship between the average volume of DOE transfers
and ERI's estimated price effect over each time period is roughly
linear. Thus, the price effect of transfers at the levels in the
assessed case can be interpolated.\42\ ERI's predictions based on its
econometric model and the interpolated price effect for the assessed
case are summarized in Table 6. By comparison to the market clearing
analysis, the econometric model deals with short-term supply and demand
and spot prices. Existing market prices should reflect already ongoing
transfers at the levels of Scenario 1. Thus, on ERI's analysis prices
already exhibit a level of price suppression similar to the level
predicted in the near term under Scenario 1. 2015 ERI Report, 52-53.
Thus, ERI's econometric model estimates suggest that if DOE begins
transferring at the lower level represented by the assessed case, a
positive influence on market prices approximately $0.40 would be
expected in the near term.
---------------------------------------------------------------------------
\42\ See note 40 above for details of how DOE performs the
interpolation.
[[Page 26389]]
Table 6--ERI's Estimate of Effect of DOE Transfers on Uranium
Concentrate Spot Price in $ per Pound U3O8
[Econometric model]
------------------------------------------------------------------------
2015 ERI Report
-------------------------------------------------------------------------
Estimated Estimated
price effect price effect
(2015-2017) (2018-2024)
------------------------------------------------------------------------
ERI Scenario 1.......................... $2.40 $5.10
ERI Scenario 2.......................... 1.70 4.80
ERI Scenario 3.......................... 0.30 2.00
Assessed Case (Interpolated)............ 2.00 4.80
------------------------------------------------------------------------
DOE notes that certain assumptions in the model seem relatively
uncertain over the longer term. The basic nature of the model is that
ERI calculated a functional relationship between published prices and
certain supply and demand variables representing, in essence,
uncommitted supply and demand. ERI established this relationship by
means of statistical correlations between past prices and past supply
and demand variables. The model then predicts future prices based on
the future course of the supply and demand variables. However,
forecasts of uncommitted supply and demand require assumptions not only
about how supply and uranium requirements will evolve, but also about
how suppliers and purchasers will vary their mix of long-term and
short-term purchasing. In the short-term, the mix of long- and short-
term purchasing can be predicted based on the mix in recent years and
on the estimates of uncovered supply. Such forecasts become
significantly less reliable for later years. Thus, for example, market
consultant UxC provides only limited future projections of future
contracting activity in its annual Uranium Market Outlook--[REDACTED].
UxC Uranium Market Outlook--Q4 2014, 63, 66 (2014). Consequently, while
DOE believes that ERI's econometric model provides a reasonable
estimate of the response of the spot price to DOE transfers in the near
term, it believes estimates of this response in future years will be
increasingly less reliable the further out in time the estimate.
Commenters urge DOE to distinguish between spot sales, term sales,
and other types of ``forward sales.'' Cameco Corporation (Cameco)
states that forward delivery contracts are ``simply contracts along the
forward price curve, which is essentially the spot price with a minor
adjustment for carrying costs.'' NIPC Comment of Cameco, at 3.
Similarly, ConverDyn states that a new market has arisen for ``buy and
hold'' or ``carry trade'' sales that should be characterizes as ``an
extension of the spot market to approximately a 3-year term.'' NIPC
Comment of ConverDyn, Enclosure, at 5. DOE recognizes that market
participants use a range of contracts with characteristics that fall
somewhere between the ``traditional'' term contracts and spot contracts
described by commenters. EIA defines a ``spot contract'' to call for
delivery of the entire contracted amount within one year. A ``term
contract''--of short, medium, or long term--involves one or more
deliveries after one year. A contract that would be a ``term contract''
under this definition may influence either the spot market or the term
market (as defined by UxC and TradeTech) more or less depending on
various contractual terms such as length of time before initial
delivery, number of deliveries, and the pricing mechanism. Consistent
with this notion, and as noted above in Section II.E.2, sources other
than the UxC and TradeTech offer price indicators for future-delivery
contracts that appear to be similar to what commenters describe.
With respect to DOE transfers affecting the spot market, ERI
assumes that 50% of DOE transfers for cleanup at Portsmouth are
introduced through term contracts. 2015 ERI Report, 34. ERI's
assumption relies in part on statements by Traxys North America LLC
(Traxys), the entity that currently purchases the material that DOE
transfers to Fluor B&W Portsmouth for cleanup work at the Portsmouth
Gaseous Diffusion Plant. Traxys has stated it sells as much as 90% of
the material it purchases from Fluor under forward delivery contracts
that do not affect the spot market. Declaration of Kevin P. Smith,
ConverDyn v. Moniz, Case no. 1:14-cv-01012-RBW, Document 17-7, at ] 14
(July 7, 2014); RFI Comment of Traxys, at 1. Some of the commenters
that made observations about the difference between forward delivery
contracts and term contracts also rejected ERI's assumption because,
these commenters say, the Traxys sales are actually spot sales even if
they are for future delivery.
DOE notes that ERI's assumption that only 50% of these sales enter
the term market is conservative, in that Traxys claims this figure is
closer to 90%. In any case, if in fact more or less than 50% of DOE
transfers for Portsmouth cleanup in fact are not sold through term
contracts--in that they do not affect the term price indicators
published by UxC and TradeTech--such an error in ERI's assumptions
would simply decrease the reliability and certainty of ERI's
econometric forecast in the mid- to long-term.\43\ As described above,
DOE concludes that this analysis is likely to be less reliable over the
longer term anyway, because predictions about uncommitted supply and
demand in future years are uncertain. Comments about the nature of
Traxys's sales do not call into question the utility of ERI's
econometric analysis for near-term forecasting, because commenters do
not dispute that Traxys sells at least 50% of its material on contracts
with deliveries more than a year in the future.\44\ Even if those
deliveries would affect future spot prices, it is appropriate for ERI's
econometric model not to include the material in present supply.\45\
[[Page 26390]]
Furthermore, ERI's market clearing approach forecasts how prices will
respond to changes in supply over the longer term and depends on the
overall level of supply rather than on the specific mix of spot versus
term contracts in a given year. Accordingly, ERI's market-clearing
analysis did not use the assumption about Traxys's mix of spot and term
deliveries of DOE-sourced uranium.
---------------------------------------------------------------------------
\43\ ERI's report includes tables laying out how much DOE-
sourced material will enter each spot market--uranium, conversion,
and enrichment--in coming years. These tables would be relevant for
comparing the scale of DOE's transfers to the volume of uncommitted
supply and demand in the various markets. However, as explained in
the NIPC, DOE does not consider such a comparison, on its own, as
useful for assessing the impact of transfers as forecasts about
price.
\44\ Commenters suggest that sometimes a seller of a future-
delivery contract will ``forfeit'' its contract. They do not claim
Traxys does so with DOE-sourced material.
\45\ In the analysis ERI prepared for the Department's
deliberations on the 2014 Determination, it made a similar
assumption that around 50% of the material transferred for cleanup
services at Portsmouth would only affect term markets. If in fact
those sales have essentially been one- to three-year spot sales, the
material transferred in 2012 through 2014 could be affecting spot
markets at present and in the near term. The econometric analysis of
future transfers need not account for that material explicitly,
because existing uncommitted supply and demand already reflect those
quantities.
ERI assumed that the other past transfers included in the
assessed case--such as the blended LEU provided to the TVA--are
effectively on term contracts. Commenters do not contest that
characterization, and DOE believes it is reasonable to assume these
materials are not appearing on spot markets.
---------------------------------------------------------------------------
b. TradeTech Report
The Uranium Producers of America (UPA) attached to its comment in
response to the RFI a market analysis it commissioned from TradeTech,
LLC, a uranium market consultant. RFI Comment of UPA, Attachment,
TradeTech, ``UPA DOE Material Transfer Study'' (2015) (hereinafter
``TradeTech Report''). A summary of TradeTech's estimates appears in
Table 7. TradeTech explains that it estimated the price effect of DOE
transfers using its proprietary Dynamic Pricing Model. This model uses
an econometric forecasting approach to estimate the equilibrium between
two dimensions TradeTech calls ``active supply'' and ``active demand.''
\46\ In its estimates, TradeTech assumes that 50 percent of DOE
transfers enter the spot market and 50 percent enter the term market.
TradeTech Report, 14. Using its model, TradeTech estimates that DOE's
transfer reduced the spot price by an average of $3.55 per pound
between January 2012 and December 2014. TradeTech Report, 15. TradeTech
also estimates that continued DOE transfers at current rates would
reduce the spot price by an average of $2.43 per pound between January
2015 and December 2016. TradeTech Report, 20.
---------------------------------------------------------------------------
\46\ TradeTech states that the uranium markets are relatively
illiquid and are characterized by periods of high price volatility.
TradeTech Report, at 2-5. It does not appear that TradeTech is
suggesting that DOE transfers significantly affect these
characteristics of the market. Instead, it appears that TradeTech
believes these are mechanisms by which DOE transfers impact the
market price. DOE assumes that TradeTech's prediction of the price
effect of DOE transfers reflects these market characteristics that
TradeTech highlights.
---------------------------------------------------------------------------
DOE understands this ``reduction'' to mean, as with ERI's analysis,
not an additional decrease in prices beginning in January 2015, but a
continued price suppression. In other words, TradeTech suggests that if
DOE ceased transferring at current rates then prices could be higher by
an average of $2.43 per pound in 2015 and 2016.
TradeTech also provides estimates for the effect of DOE transfers
at several decreased transfer rates. If DOE transfers decreased to 75%
of current levels, TradeTech estimates that the spot price would
increase by an average of $0.53 per pound between January 2015 and
December 2016. TradeTech Report, 26.\47\ Based on TradeTech's estimate
of the price suppression of DOE transfers at current levels, it appears
that TradeTech is estimating that price suppression at 75% of current
levels would be $1.90. If DOE transfers decreased to 50% of current
levels, TradeTech estimates that the spot price would increase by an
average of $1.10 per pound between January 2015 and December 2016.
TradeTech Report, 25. This corresponds to a price suppression of $1.33.
If DOE transfers decreased to 25% of current levels, TradeTech
estimates that the spot price would increase by an average of $1.73 per
pound between January 2015 and December 2016. TradeTech Report, 24.
This corresponds to a price suppression of $0.70. The TradeTech Report
does not state the numerical volumes that correspond to these decreased
transfer rates. However, DOE notes that the 2,100 MTU rate is slightly
above 75% of the level included in the May 2014 Determination. Thus,
DOE believes that TradeTech's ``75%'' figure is roughly equivalent to,
although slightly below, that level.
---------------------------------------------------------------------------
\47\ Figures 16-19 of the TradeTech Report show TradeTech's
estimates for the price impact at a range of different transfer
rates. Although these charts and the related text refer to
``Transfers at [25, 50, or 75] Percent of Established 2014
Volumes,'' it appears that these charts actually reflect an estimate
for a 25%, 50%, or 75% decrease relative to current levels, rather
than transfers at the specified percentage of current levels.
Table 7--TradeTech's Estimate of Effect of DOE Transfers on Uranium
Concentrate Spot Price in $ per Pound U3O8
------------------------------------------------------------------------
TradeTech Report
-------------------------------------------------------------------------
Estimated
Transfer rate (compared to current) price effect
(2015-2016)
------------------------------------------------------------------------
100%.................................................... $2.43
75%..................................................... 1.90
50%..................................................... 1.33
25%..................................................... 0.70
------------------------------------------------------------------------
TradeTech's forecast for the scenario in which DOE continues
transferring uranium at current rates is fairly similar to the forecast
ERI generated for that scenario using its econometric model. This
apparent agreement could be taken as confirmation that the forecasts
are reasonable. Alternatively, the agreement between the two could just
indicate that TradeTech and ERI have applied similar mathematical tools
to similar inputs and modeling assumptions. It does not necessarily
validate either the assumptions or the choice of mathematical model.
As with ERI's econometric model, DOE notes that TradeTech's
assumptions about the amounts of uncommitted supply and demand seem
relatively uncertain over the longer term because they depend on the
actions of individual market participants that may reflect economic
influences about which little information is available. For example, a
strategic buyer or seller of uranium does not have to buy uranium at a
given time; that participant may or may not contribute to uncommitted
supply and demand depending on current prices, the participant's
expectations of prices, and other factors. In responding to the
possibility of such effects, ERI assumes that uncommitted supply and
demand will repeat their courses of recent years. Meanwhile TradeTech
introduces a ``quadratic coefficient to capture market exuberance,
which measures market momentum.'' TradeTech Report, 14. Although the
mix of long- and short-term purchasing can likely be predicted in the
short-term based on prior contracting activity, forecasts based on this
type of data would be significantly less reliable in the long-term.\48\
---------------------------------------------------------------------------
\48\ In addition, TradeTech has assumed that 50% of the uranium
that DOE transfers ultimately goes on the term market. As noted
above, commenters suggest that assumption is incorrect because, they
say, the material is actually sold on spot-like future-delivery
contracts. As explained above with respect to ERI, this argument
simply serves to decrease further the reliability of medium- and
long-term price forecasts based on these econometric models.
---------------------------------------------------------------------------
For reasons like these, although TradeTech's forecast based on
uncommitted supply and demand may provide a reasonable estimate of the
price response of DOE transfers in the short term, DOE believes the
price response over the medium- and long-term is most appropriately
estimated and forecast using information and assumptions about overall
demand and supply. ERI's ``market-clearing'' model is a reasonable
implementation of this approach.
c. NAC International Report
Fluor-B&W Portsmouth attached to its comment in response to the RFI
an April 2014 market analysis from NAC
[[Page 26391]]
International (NAC). RFI Comment of Fluor-B&W Portsmouth, Attachment A,
NAC International, ``Impact of DOE Excess Uranium Sales on the
U3O8 Market'' (April 2014) (hereinafter ``NAC
Report'').\49\ In its analysis, NAC based its production cost estimates
on its Uranium Supply Analysis System (USAS). NAC updates this model
each year based on a review of various published reports and
presentations. NAC then applies cost models to derive specific cost
estimates for individual properties. NAC Report, C-1. Specifically, NAC
applies a discounted cash flow rate of return model based on both full
cost (including sunk costs) and forward costs for each property. NAC
Report, C-2 to C-3. NAC also utilized an estimate of reactor
requirements and uncommitted demand developed from its Fuel-Trac
database. NAC Report, D-1.
---------------------------------------------------------------------------
\49\ As this report was prepared in April 2014, it does not
contain updated information on developments in the markets since
that time. The level of uranium transfers that it analyzes is based
on the levels specified in the May 2012 Secretarial Determination,
which is roughly similar to, though slightly higher than, the
current rate of transfers. NAC Report, A-1 to A-3.
Some commenters expressed concern that DOE's 2014 Determination
relied on information from Fluor-B&W that was outdated and that,
because Fluor-B&W is not a regular participant in uranium markets,
warranted no reliance. DOE recognizes that the NAC Report is based
on data that are now more than one year old. DOE's analysis relies
on information from myriad sources, described throughout, and uses
the data currently available. Data from EIA and other sources may
lag the market by as much as several months, but given the rate at
which these markets change, it is appropriate to rely on data after
such a limited delay.
---------------------------------------------------------------------------
NAC developed a range of estimates of the impact of DOE transfers
utilizing its production cost estimates at three different rates: 2,800
MTU per year, 2,400 MTU per year, and 10% of U.S. reactor requirements.
NAC Report, 3-21 to 3-22. First, NAC applied a methodology it believes
approximates ERI's approach to its own cost estimates. Specifically,
NAC identified the incremental cost of the last property needed to meet
demand in a given year based on total supply and demand. NAC Report, 3-
22. NAC then explains that because long-term contracts with fixed
pricing mechanisms have allowed some high-cost producers to produce
ahead of lower cost supply, it believes a better approach is to base
the model on uncommitted supply and demand. NAC then applies a
multiplier to these estimates to account for additional incremental
costs not included in its site forward production costs estimate. These
additional costs include increased site forward costs due to operation
at less than nominal capacity, taxes, corporate overhead, and
variations in the required rate of return. NAC Report, 3-23. NAC also
applies a time shift to the cost trend to account for the fact that
producers need a price signal before investing in a new production
center--i.e. producers need to have prices that justify an investment
before actually making the investment. NAC Report, 3-24. The specific
quantitative impact projected by NAC is summarized in Table 8.
Table 8--NAC Estimates of Price Effect of DOE Transfers on Uranium Concentrate Spot Price in $ Per Pound U3O8 \51\
--------------------------------------------------------------------------------------------------------------------------------------------------------
NAC Report
---------------------------------------------------------------------------------------------------------------------------------------------------------
Uncommitted supply demand Uncommitted supply demand adjusted by [REDACTED]
------------------------------------------------------ \50\
-----------------------------------------------------
2400 MTU 2800 MTU 10% of US Req. 2400 MTU 2800 MTU 10% of US Req.
--------------------------------------------------------------------------------------------------------------------------------------------------------
2014
2015
2016
2017 [REDACTED]
2018
2019
Average (2014-2018)
--------------------------------------------------------------------------------------------------------------------------------------------------------
DOE has considered NAC's forecast, but does not place much weight
on these estimates for the reasons explained below. DOE notes that NAC
estimates a price effect from DOE transfers that is much smaller than
what other experts (including ERI) conclude. While, as noted above, an
agreement between two similar models does not necessarily increase the
credibility of either, a substantial difference like that between NAC's
model and others creates some doubt. Some important input, either of
data or of modeling assumption, must have caused the departure; the
difference in predictions thus represents a disagreement between the
modeler and other experts. That is not to say that NAC's model is
necessarily incorrect. But in this context, where an error would mean
substantially misestimating the potential impact of DOE's transfers,
DOE would only rely on the estimate if the difference from other
forecasts were well understood and justified.
---------------------------------------------------------------------------
\50\ Note that NAC states that it believes it is appropriate to
apply a multiplier [REDACTED]. See NAC Report, 3-22 to 3-24.
\51\ NAC also provides estimates based on Total Supply and
Demand at Table 3.4. NAC Report, 3-22. Given that the report states
that NAC believes this approach is inaccurate, these estimates are
not reproduced in this table.
---------------------------------------------------------------------------
In addition, DOE does not agree that it is appropriate to focus on
uncommitted supply and uncommitted demand, as opposed to total supply
and demand, in the manner described by NAC. Entities other than primary
producers and reactor owners/operators participated in the uranium
concentrates market. NAC's estimate of uncommitted supply and demand
appears not to incorporate these other participants. See NAC Report, 3-
20.\52\ Given this uncertainty, DOE does not believe relying on NAC's
conclusions would be justified.
---------------------------------------------------------------------------
\52\ NAC explains that its estimate of uncommitted demand
consists of uncommitted utility demand plus supplier delivery
commitments in excess of estimated production capability. This
second aspect may refer to some of the demand created by brokers and
traders. However, it is not clear whether this includes strategic or
discretionary purchases by utilities or other entities.
---------------------------------------------------------------------------
d. UxC Report
Cameco Corp. attached to its comment in response to the RFI a
market analysis it commissioned from UxC, another uranium market
consultant. RFI Comment of Cameco Corp., Attachment, UxC Special
Report, ``Impact of DOE Inventory Sales on the Nuclear Fuel Markets''
(January 2015) (hereinafter ``UxC Report''). A summary of UxC's
[[Page 26392]]
estimates of the effect of DOE transfers on future prices appears in
Table 9. UxC explains that it estimated the price effect of DOE
transfers using two proprietary econometric models: The U-PRICE model
and the SWU-PRICE model. UxC explains that these models were developed
using historical data on the nuclear fuel markets collected and
compiled by UxC. These two models take into account and quantify the
impact of ``key factors influencing the markets.'' UxC also explains
that the two models can be linked to simulate the interrelationship
between uranium concentrates and enrichment. UxC Report, 3.
Using these two models, UxC estimates the effects of DOE transfers
on prices during the period between 2012 and 2014. UxC provides two
estimates. It derived the first, which it labels the ``incremental
approach,'' by running its models from 2011 onwards, with and without
DOE transfers. It prepared the second, which it calls the ``total
impact approach,'' by running its models from 2008 onwards. UxC's
models generally ascribe to DOE's transfers an accumulating effect on
price, because, according to UxC, past transfers ``have a longer-term
effect on market perceptions among both buyers and sellers.'' UxC
Report, 5. Thus, by running its models from 2008 onwards, UxC produces
2012 estimates that reflect cumulative effects it ascribes to transfers
between 2008 and 2011. UxC's ``incremental'' estimate is that between
2012 and 2014 DOE's transfer reduced the spot price by an average of
$4.50 per pound and the term price by an average of $2.88 per pound.
UxC's ``total impact'' estimate is that between 2008 and 2014 DOE's
transfers reduced the spot price by an average of $7.11 per pound and
the term price by an average of $5.10 per pound. UxC Report, 6-7.
UxC also forecasts the effect of continued DOE transfers at current
rates for the period 2015 to 2030. UxC predicts that such transfers in
the near and medium terms would reduce the spot price by an average of
$5.78 per pound. UxC projects that this effect will change slightly in
the medium term as market prices start to recover. Specifically, DOE
transfers (at current rates) would reduce the spot price between 2018
and 2030 by an average of $4.47 per pound. UxC also notes that the
former number is larger relative to the expected price of uranium than
the latter number (14.1% versus 7.1%). UxC Report, 10. UxC forecasts
that DOE transfers (at current rates) in the near and medium terms
would reduce the term price by an average of $4.86 per pound. Between
2018 and 2030, DOE transfers are predicted to reduce the term price by
an average of $5.30 per pound. Again, the near and medium term impact
is larger in relation to the expected price (9.0% versus 7.1%). UxC
Report, 11.
Table 9--UxC's Estimate of Effect of DOE Transfers on Uranium Concentrate Spot and Term Prices in $ per pound
U3O8
----------------------------------------------------------------------------------------------------------------
UxC Report
-----------------------------------------------------------------------------------------------------------------
Near- & mid-
term price Percent of Long-term Percent of
effect expected price price effect expected price
----------------------------------------------------------------------------------------------------------------
Spot Price...................................... $5.78 14.1% $4.47 7.1%
Term Price...................................... 4.86 9.0% 5.30 7.1%
----------------------------------------------------------------------------------------------------------------
UxC puts particular emphasis on the interrelationship between the
uranium and enrichment markets. UxC states that uranium and SWU are
``substitutes.'' Thus, UxC uses enrichment prices as an input into its
uranium concentrate price forecast, and vice versa. UxC Report, 5, 8,
17. As described in Section II.A.5, DOE understands that this interplay
can take several forms. First, to the extent that enrichers have unsold
enrichment capacity, they may apply that excess capacity to
underfeeding and/or re-enriching DUF6 tails. This
essentially allows enrichers to generate additional natural uranium
hexafluoride, which could then be sold on the open market. Second, if
the price of enrichment decreases relative to the price of uranium
concentrates, the optimum tails assay decreases, so that customers may
deliver less natural uranium feed to get the same amount of enriched
uranium output.
The other market analyses do not appear to take these interactions
into account.\53\ DOE has carefully considered UxC's analysis. However,
DOE does not believe UxC's consideration of the above-referenced
interactions is a reason to place greater weight on UxC's modeling for
the following reasons. Among other things, the contribution of
enrichment price changes to the uranium price, in the conditions
relevant here, is quite small, even compared to the effect of DOE's
transfers, particularly in the short term. Assuming an enriched product
assay of 4.5% and a tails assay of around 0.25%, applying one SWU of
additional enrichment can generate roughly one kilogram of additional
natural uranium. Thus, if the price for one SWU decreases by 4% and the
price for one kilogram of uranium decreases by 7%, as UxC forecasts to
be the average effect of continued transfers at current rates, the
comparative value of using spare capacity to provide enrichment or for
underfeeding would change by only 3%. ERI forecasts that underfeeding
will supply about 8 million kg of natural uranium per year in the
medium term, about 11-12% of predicted world requirements. Changing
that supply by 3% would mean a change of about 200 MTU, much less than
the 2,705 MTU of DOE transfers that UxC assumed.
---------------------------------------------------------------------------
\53\ ERI's market clearing price analysis, for example, includes
material from underfeeding as ``Secondary Supply.'' However, ERI
does not consider how a change in uranium concentrate and/or
conversion prices would affect the price of SWU or the level of
underfeeding present in secondary supply. In effect, ERI assumes
that secondary supply based on enrichment services has a marginal
cost lower than any primary producer in the market, so that this
source would contribute the same amount of supply at any price level
among those likely to be attained. TradeTech's and NAC's reports do
not mention accounting for enrichment-based secondary supply.
---------------------------------------------------------------------------
Furthermore, UxC's forecast for the price effect attributed to DOE
transfers in coming years is substantially higher than what any of the
other reports predict. That difference may be a reason to scrutinize
UxC's predictions. In addition, aspects of UxC's models, as explained
below, appear to make them less reliable in this regard, especially for
the task of attributing price effects to a discrete element of supply,
specifically DOE's transfers. UxC uses several exogenous variables to
account for subjective, unquantifiable phenomena such as ``market
participants' general perception of the industry outlook'' and
``changes in market psychology.'' These exogenous variables appear to
play key
[[Page 26393]]
roles at certain steps in the models. UxC assigns values for the
variables prior to running its model in order to define the scenario
that the model will forecast. Thus, the outputs depend in part on UxC's
subjective decisions about input factors such as ``market sentiment.''
Perhaps that characteristic does not impair UxC's ability to forecast
prices in the near future, because it might be possible to choose
appropriate values for these variables by finding those for which the
model best reproduces the recent past. But to assign a price change to
DOE's transfers, UxC necessarily ran its models with counterfactual
scenarios, namely the markets without DOE transfers, and it made
different assumptions about future markets. While UxC has not said
whether it used the same values for its exogenous variables in running
the model with and without DOE transfers, DOE must presume it used
different values because the report stresses that DOE's transfers have
a long-term effect on ``market perceptions,'' the type of
unquantifiable factor the variables are meant to represent. For all
these reasons, DOE concludes that a model reliant on subjective
exogenous variables is likely to be less reliable than those used by
the other reports.
e. Effect of DOE transfers on market price
In light of these market analyses and its review of them, DOE
concludes that transfers under the assessed case will continue to exert
some downward pressure on the market price for uranium concentrates.
DOE believes $2.70 per pound is a reasonable estimate of how much
downward price pressure transfers under the assessed case will
contribute on average over the next decade. In 2016 and 2017, the price
impact will be even lower, between $2.10 and $2.20 according to ERI's
market clearing analysis, and approximately $1.90-$2.00 according to
ERI and TradeTech's econometric forecasts. To be cautious, DOE will
base its analysis on the full amount of $2.70.\54\
---------------------------------------------------------------------------
\54\ Two commenters contended that DOE's forecast of the price
effect is implausibly low because, they said, the spot price has in
the past changed by almost $6 per pound in response to volume
changes less than 2% of DOE's transfers. DOE notes that 2% of DOE's
transfers would amount to around 54 MTU per year. It seems highly
unlikely that a change in supply by 54 MTU per year would cause a
price change of $6 per pound, and the commenters cited no specific
examples.
---------------------------------------------------------------------------
The significance of price suppression at this level depends, at
least in part, on market price. Recent spot and term price indicators
published by UxC on March 30, 2015, were $39.50 per pound
U3O8 on the spot market and $49.00 per pound
U3O8 on the term market. The forecast price
effect reasonably attributable to DOE transfers represents 6.8% and
5.5% of these values, respectively. But comparing future price changes
to current prices provides at most a sense of scale. DOE believes it is
more appropriate to compare the price effect in future years to
forecasted market prices in those years.
Several sources generally predict an increase in market prices over
the next several years. ERI notes that term prices are expected to
increase in the future, but does not provide a specific forecast. 2015
ERI Report, 46. ERI's econometric model, however, does show an increase
in the spot price. Specifically, ERI forecasts that spot prices will
recover over the course of 2015-2018 eventually settling in the $52-57
range after 2019. 2015 ERI Report, 52. TradeTech's Exchange Value spot-
price forecast increases to approximately $50 as early as June 2016,
even with DOE transfers. TradeTech Report, 20. UxC's estimates of the
effect of DOE transfers assume that market conditions will improve in
the medium term. [REDACTED]. Figures 5 & 6, UxC Report, 11. In its
annual Uranium Market Outlook, UxC provides a more detailed explanation
of its price forecast, which generally predicts an increase in price
over the next 10 years. UxC Uranium Market Outlook--Q4 2014, 111-19
(2014). [REDACTED]. Id. at 119.\55\
---------------------------------------------------------------------------
\55\ Commenters describe a variety of different market effects
that will affect market prices in future years, including currency
exchange rates, changes in demand due to Fukushima, high near-term
production. UxC's appears to take these various factors into account
in developing its price projections. Given these considerations, and
given that UxC's projections of prices are in general agreement with
the other models, DOE has noted UxC's price projections in the above
discussion, although, for the reasons discussed above, DOE does not
take the same view with respect to UxC's forecast of the price
effect attributable to DOE transfers. Forecasts of the overall trend
of prices ultimately reflect predictions about total requirements
and total supply, which are less susceptible to some of the
uncertainties that arise for the econometric models discussed in
this analysis.
---------------------------------------------------------------------------
Using these price forecasts, it is possible to project the
estimated price effect in future years as a percentage of the expected
market price. ERI's market clearing price model predicts that the price
effect will remain relatively stable over the next years. As prices
increase, this price effect will represent a smaller proportion of the
then-prevailing market prices. As spot prices increase above $50, which
DOE expects will happen by 2019 or 2020, the long-term price effect
attributable to DOE transfers would represent approximately 5.4% of the
spot price.
f. Effect on realized prices
A principal mechanism through which a change in market price could
impact the domestic uranium mining industry is through the effect on
the prices that various production companies actually receive for the
uranium they sell--the ``realized price.'' The market prices published
by TradeTech and UxC are based on information about recent offers,
bids, and transactions. Thus, the market price is a snapshot of
contracting activity at the time of the publication. It includes
activity that does not involve the domestic uranium producers--i.e.
transactions involving international producers, traders, and brokers.
In addition, the current market prices do not reflect the fact that
many uranium producers actually achieve prices well above the market
prices due to the prevalence of long-term contracts that lock in
pricing terms over a period of several years.
Most deliveries of uranium concentrates take place under term
contracts. According to contracting data published by UxC, utilities
made spot purchases of [REDACTED].\56\ UxC Uranium Market Outlook--Q4
2014, 27 (2014). UxC projects that spot purchases in 2015 and 2016
[REDACTED]. Id. at 63.\57\ These figures indicate that utilities met
approximately [REDACTED] of their requirements in 2014 through
contracts greater than one year in duration.\58\
---------------------------------------------------------------------------
\56\ As this figure was published in December 2014, it does not
include contracting activity for the balance of 2014. UxC projects
that spot purchases by utilities in the remainder of [REDACTED]. UxC
Uranium Market Outlook--Q4 2014, 63 (2014).
\57\ UxC also reports that purchases by traders, brokers, and
entities other than utilities [REDACTED]. UxC Uranium Market
Outlook--Q4 2014, 27 (2014). UxC projects that purchases by non-
utilities [REDACTED]. Id. at 63.
\58\ EIA defines the spot market to include contracts for
delivery in less than one year. UxC appears to use the same
definition.
---------------------------------------------------------------------------
It is also significant that long-term contracting volume has not
been uniform in recent years. [REDACTED].\59\ [REDACTED]. Id. at 29.
[REDACTED]. Id. at 28, 61, 66. [REDACTED]. Id. at 28. Based on this
information, DOE notes that the vast majority of current term contracts
were entered into when market prices were significantly higher,
[[Page 26394]]
i.e. when term prices were above $60.00.
---------------------------------------------------------------------------
\59\ This figure refers to the aggregate volume purchased under
all term contracts entered into during each year. However, actual
deliveries would not take place for several years. For example, a
hypothetical term contract entered into in 2010 might provide for a
specified amount of U3O8--say 200,000 pounds--
to be delivered in each year beginning in in 2012 and ending in
2019. The number included in the 2010 total volume figure for this
contract would be 1.6 million pounds.
---------------------------------------------------------------------------
These observations are particularly significant because uranium
prices have declined in recent years and only recently began to
recover. In 2014, the spot price reached a low of $28.25, after
decreasing from a high of $136.00 in 2007. Compared to the low of
$28.25, a price effect from DOE transfers of $2.70 per pound would
represent 9.6%. However, the actual effect experienced by a primary
producer would be the proportionate change in its realized prices. As
mentioned above, several of the market analyses that DOE reviewed
forecast that prices will be increasing substantially in the next few
years and should reach $50 by 2019 or 2020. Consistent with those
forecasts, spot prices are currently 16-20% higher than they were one
year ago. Because the low prices of 2013-2014 were only temporary,
realized prices for most producers can be expected to be more in line
with the longer-term trend of prices. Consequently, the price effect of
DOE's transfers should be regarded in comparison to the longer-term
trend rather than to the recent past of especially low prices.
Furthermore, based on current trends in term contracting, there will be
relatively few new term contracts entered into on the basis of current
prices and they will likely have a shorter average duration than in
years past. Thus, although the price effect attributable to DOE
transfers in the term market would have an effect that would persist
through the life of any new term contracts, this effect is likely to be
limited in the near term.
ERI estimates the prices realized by U.S. producers by gathering
information from public filings representing approximately 95% of U.S.
production. 2015 ERI Report, 60-61. Realized prices declined for most
primary producers in 2014, an outcome that presumably reflects the fact
that market prices had, by 2014, been declining continually for several
years. 2015 ERI Report, 61. Still, ERI estimates that several producers
achieved realized prices in 2014 well above the average spot price over
the course of the year. At least one producer achieved a realized price
well above the average term price for 2014. 2015 ERI Report, 61.
ERI reports that some mining companies have negotiated contracts
that base the price paid at least partially on a fixed or base-
escalated pricing mechanism. As an example, Cameco has reported that
the price sensitivity of its current contract portfolio is about 50% of
any change in spot market price. ERI estimates that less than 30% of
U.S. production currently comes from companies that are effectively
unhedged against changes in spot price. 2015 ERI Report, 60-61.
TradeTech also provides its estimates of the decline in realized
price for several producers--both U.S. and foreign. Although TradeTech
does not provide specific figures, it provides information on several
firms in chart form. It appears from the chart that among the firms for
which TradeTech provides estimates, realized prices in 2013 varied from
as low as about $38 to as high as about $57. For most producers, there
was a decline in realized price between 2011 and 2013. The magnitude of
that decline ranges from approximately $12 to as low as $2 or $3.
TradeTech Report, 13. TradeTech notes that one reason for declining
realized prices is the expiration of long-term contracts signed when
prices were substantially higher. TradeTech Report, 12.
NAC similarly notes that some higher cost suppliers have locked in
higher prices through fixed price contracts that allow them to realize
prices greater than current market prices. NAC Report, 3-22. Although
NAC estimates the effect of DOE transfers on market price, as described
above, NAC does not provide specific estimates of the effect on the
price realized by individual producers.
EIA reports several figures that are relevant to the prices
realized by current producers. EIA reports that the weighted average
price in sales directly from U.S. producers in 2013 was $44.65. EIA,
2013 Uranium Production Report, 7 (2014). Similarly, EIA reports that
the weighted average price paid by U.S. reactor operators in 2013 was
$51.99 per pound U3O8 equivalent. Id. at 4.
Although EIA does not provide a complete range of prices paid by U.S.
reactor operators, it does report that the bottom 7.1 million pounds
U3O8 equivalent (approximately \1/8\th of uranium
delivered in 2013) purchased by U.S. operators had a weighted average
price of $34.34. The top 7.1 million pounds had a weighted average
price of $72.62.\60\ Id. at 26. EIA also provides average prices broken
down by origin--foreign vs. U.S.--and by seller--U.S. producer, U.S.
brokers and traders, other U.S. suppliers (i.e. other reactor
operators, converters, enrichers, or fabricators), and foreign
suppliers. The weighted average price in 2013 for U.S. origin uranium
was $56.37 per pound U3O8. The weighted average
price in 2013 from U.S. brokers and traders was $50.44. For 2013, EIA
does not report the weighted average price of uranium purchased by U.S.
reactor operators directly from U.S. producers to avoid disclosure of
individual company data. However, in recent years when that value is
reported, it has been above the average price paid for U.S. origin
uranium. Id. at 4. For comparison, DOE notes that the 2013 average spot
price was around $39.00 and the average term price was around
$54.00.\61\
---------------------------------------------------------------------------
\60\ These two figures do not differentiate between U.S.-origin
versus foreign material. However, EIA reports that the weighted
average price of U.S. origin material is higher than the average for
all foreign material. EIA, 2013 Uranium Marketing Report, 20 (2014).
\61\ As calculated according to monthly price indicator data
from UxC.
---------------------------------------------------------------------------
EIA provides data about sales using different pricing mechanisms.
EIA reports that of the approximately 23.3 million pounds
U3O8 equivalent purchased by U.S. reactor
operators from domestic sources \62\ and delivered in 2013, 14.5
million pounds were purchased based on fixed or base-escalated
pricing--approximately 62.3%--with a weighted-average price of $54.95.
Approximately 3.6 million pounds were purchased based purely on spot-
market pricing--approximately 15.6%--with a weighted-average price of
$42.55. The remaining 5.1 million pounds--approximately 22%--was sold
based on some other pricing mechanism with a weighted average price of
$52.68. EIA, Uranium Marketing Report, 24 (2014).
---------------------------------------------------------------------------
\62\ Note that EIA's figure includes purchases of U.S.-origin
uranium as well as purchases from a firm located in the United
States. Therefore, this number includes uranium from sources other
than the domestic uranium industry. EIA reports that approximately
9.5 million pounds of U.S. origin uranium was delivered to U.S.
reactor operators in 2013. EIA, Uranium Marketing Report, 20 (2014).
---------------------------------------------------------------------------
Many companies report their realized prices in public filings.
Based on average market prices over the time-frame these filings cover,
this information can be used to infer the extent to which each firm is
exposed to market price fluctuations. DOE has reviewed public filings
with the SEC and other public financial information for several U.S.
producers. This information is summarized in Table 10. Based on this
information, it appears that only two producers sell
U3O8 exclusively at the spot price. Although ERI
estimates that less than 30% of U.S. producers are currently unhedged
against changes in the spot price, data from public filings, many of
which were released after publication of the 2015 ERI Report, indicate
that producers selling exclusively at the spot price represented less
than 15% of reported production in 2014.
[[Page 26395]]
Table 10--Reported Sales and Realized Price by U.S. Producers \69\
------------------------------------------------------------------------
Information from public filings
-------------------------------------------------------------------------
2014 Sales (lbs
Producer U3O8) Realized price
------------------------------------------------------------------------
Uranium One \63\.................. 410,800 $32
Ur-Energy \64\.................... 90,000 55
Cameco \65\....................... 2,700,000 48
Uranerz \66\...................... 175,000 57
Energy Fuels \67\................. 800,000 57
Uranium Energy Corp \68\.......... N/A N/A
------------------------------------------------------------------------
Contracting decisions are specific to the buyer and the particulars
related to these decisions are not routinely made public. However, from
the information that is available, DOE notes the following key points
related to the effect of DOE transfers on realized prices in the
domestic uranium mining industry. Most high cost suppliers hold fixed
price contracts that allow them to realize prices significantly greater
than current market prices. These fixed price contracts insulate the
producers from changes in market price and tend to dampen the short-run
effect of DOE transfers. To be sure, new long-term contracts expected
to be signed in the next few years, would reflect any continued
suppression of market prices resulting from DOE transfers. However, as
mentioned above, term contract activity is expected to remain low in
the near term. In addition, prices have already increased from recent
lows and are expected to increase substantially in the next few years.
Given that the vast majority of uranium is purchased from producers
under term contracts,\70\ DOE believes the effect on future term
contracts will be small compared to the effect on existing contractual
deliveries.
---------------------------------------------------------------------------
\63\ These figures represent sales only through Sept. 30, 2014.
Uranium One operates the Willow Creek mine in Wyoming. Uranium One
Inc., Management's Discussion and Analysis, Quarter Ending September
30, 2014, at 2, 17 (Nov. 14, 2014), http://www.uranium1.com/index.php/en/component/docman/doc_download/926-q3-2014-managements-discussion-a-analysis.
\64\ UR-Energy operates the Lost Creek ISR mine in Wyoming. UR-
Energy Inc. Form 10-K, Securities and Exchange Commission, at 50
(Mar. 2, 2015) https://www.sec.gov/Archives/edgar/data/1375205/000155837015000251/urg-20141231x10k.htm (accessed Mar. 27, 2015).
\65\ Cameco operates the Smith Ranch-Highland (Wyoming) and Crow
Butte (Nebraska) ISR mines. Cameco, Management's Discussion and
Analysis, Quarter Ending December 31, 2014, at 40, 69-70 (Feb. 9,
2015), http://s3-us-west-2.amazonaws.com/assets-us-west-2/quarterly/CCO_2014_Q4_MDA_and_Financial_Statements.pdf.
\66\ Uranerz Energy Corp., which operates the Nichols Ranch ISR
mine in Wyoming, reports that it sold 175,000 pounds of uranium
oxide in 2014 for a revenue of $10,006,673. Uranerz Energy Corp.
Form 10-K, Securities and Exchange Commission, at 50 (Mar. 16, 2015)
https://www.sec.gov/Archives/edgar/data/1162324/000106299315001350/form10k.htm (accessed Mar. 27, 2015).
\67\ Energy Fuels, which operates the White Mesa conventional
mill in Utah, reports that its realized price in 2014 averaged
$57.19. Energy Fuels Inc., Management's Discussion and Analysis,
Year Ending December 31, 2014, at 4 (Mar. 18, 2015), https://www.sec.gov/Archives/edgar/data/1385849/000106299315001408/exhibit99-2.htm.
\68\ Uranium Energy Corp. (UEC) operates the Hobson/Palanga ISR
mine in Texas. UEC reports that it had no sales during the fiscal
year ending July 31, 2014, although it continued to produce uranium
concentrates. UEC states that future uranium concentrates sale are
expected to occur at the spot price. Uranium Energy Corp. Form 10-K,
Securities and Exchange Commission, at 72 (Oct. 10, 2014) https://www.sec.gov/Archives/edgar/data/1334933/000106299314005923/form10k.htm (accessed Mar. 27, 2015).
\69\ In addition to the companies listed in text, DOE's EIA also
reports one additional operating mine at the end of Q4 2014: Alta
Mesa in Texas. The parent company for this mine, Mestena Uranium
LLC, is closely held and publishes little information publically.
UxC reports [REDACTED]. UxC Uranium Suppliers Annual--December 2014,
225-26 (2014).
\70\ For example in 2014--[REDACTED]--producers worldwide
contracted to deliver [REDACTED] through term contracts, but only
[REDACTED] on the spot market. UxC Uranium Market Outlook--Q4 2014,
126-127 (2014). In 2012, [REDACTED], producers contracted to deliver
approximately [REDACTED] through term contracts, but only [REDACTED]
on the spot market. Id.
---------------------------------------------------------------------------
In light of all these factors, DOE concludes that the anticipated
effect of its transfers on market prices will tend to overstate the
effect on the domestic uranium mining industry in terms of actual
realized price. Although public filings suggest that only 15% of
producers are unhedged against fluctuations in the spot price, DOE will
conservatively assume that 30% of the industry is not insulated from
these fluctuations due to preexisting long-term contracts as ERI
suggests. Further assuming that this insulation is equivalent to 50%
exposure to the changes in market price, the average price effect on
the domestic uranium industry's realized prices in the near term would
be closer to $1.75. DOE notes that this price effect is relatively
small when compared to the market prices forecasted for the next
several years--between 3.5% and 4.5% of expected spot market prices.
That said, consideration of the effect on realized prices on its own is
not sufficient to determine whether the impacts will be material. The
implications of transfers for the factors discussed in the next four
sections have also been considered.
2. Production at Existing Facilities
DOE believes that primary producers consider a range of different
inputs in determining whether to decrease, continue, or increase
production at currently operating facilities. Market prices are
certainly one element of this calculation, but producers also consider
contractual obligations (and what these contracts may mean for realized
prices), projections about future prices, and the various costs
associated with changing production levels. In order to forecast how
DOE transfers will affect production levels, DOE has considered how
producers have responded to price changes in the past. Some of the
primary inputs in these decisions are the relationship between market
prices and production costs, and expectations about future price
trends.
EIA reports data on production levels in the domestic uranium
industry on a quarterly and annual basis. EIA's most recent quarterly
report provides preliminary data for 2014. U.S. primary production in
2014 stood at 4.9 million pounds U3O8. This is
about 5% higher than in 2013 and 15% higher than in 2012. In fact, this
represents the highest production total in any calendar year since
1997. EIA, Domestic Uranium Production Report Q4 2014, 2 (January
2015). ERI also notes that U.S. production has risen since the recent
program of DOE uranium transfers began in December 2009. In 2014,
production was 5% higher compared to the previous year. However, ERI
reports that production in 2015 is expected to decline to 2013 levels.
2015 ERI Report, 58.
Since 2009, four new operations have begun production in the United
States: Willow Creek in 2010, Hobson/Palangana in late 2010/early 2011,
Lost Creek in 2013, and Nichols Ranch in 2014. ERI also reports that
one
[[Page 26396]]
additional production center is expected to begin operations in 2015.
Despite these new operations, ERI notes that several conventional and
in-situ leach operations have scaled back operations. 2015 ERI Report,
57. EIA reports that the same number of uranium concentrate processing
facilities--seven--operated in 2014 as in 2013. Specifically, while the
Nichols Ranch ISR plant began operation in the second quarter of 2014,
the White Mesa conventional mill halted production in the fourth
quarter of 2014. EIA Domestic Uranium Production Report Q4 2014, 3-6
(January 2015).
ERI presents a chart showing the price levels at the time cutbacks
were announced at various U.S. suppliers. ERI reports price points for
cutbacks at four operations: $45 per pound in the spot market for
conventional mines in Utah; $40 per pound in the spot market for two
in-situ-leach operations; and $35 per pound in the spot market for
additional conventional mines and a uranium mill. 2015 ERI Report, 62.
ERI then estimates average production costs for existing mines by
referring to EIA's published data on production expenditures across the
uranium industry. Using a three year average to smooth out year-to-year
differences, ERI notes that average production costs have remained
fairly constant since 2009 at about $40 per pound. 2015 ERI Report, 63.
ERI further reports that it estimates production costs at U.S. in-situ-
leach facilities to range from the low $30s to the mid $40s per pound.
ERI concludes that the pattern of cutbacks and estimated production
costs ``do not seem to indicate that adding back the $3 per pound price
effect attributed to all DOE inventory material for Scenario 1 would
move current prices enough to cause U.S. producers to ramp well field
development and production activities back up.'' 2015 ERI Report, 64.
ERI further notes that the spot price would remain near $40 per pound
and ``may still not be sufficient for higher cost ISL producers to
restart well field development or higher cost conventional mines to
resume mining activities, and likely would not have prevented the
decisions to cut back when prices declined to $35/lb in mid 2013 and
then below $30/lb in mid 2014.'' 2015 ERI Report, 64.
The UxC Report does not provide any specific estimates of
production levels or costs at currently operating facilities. However,
UxC has developed production cost data elsewhere in its annual report
on uranium suppliers and a 2013 production cost study. UxC Uranium
Suppliers Annual--December 2014 (2014); UxC Uranium Production Cost
Study (2013). [REDACTED].\71\
---------------------------------------------------------------------------
\71\ Information from this paragraph is collected from the two
UxC studies mentioned above. The price bands come from UxC Uranium
Production Cost Study, 80-84 (2013), and cost estimates in
parentheses comes from UxC Uranium Suppliers Annual--December 2014
(2014) (except for data on [REDACTED] which comes from UxC Uranium
Production Cost Study, 111-12 (2013).
---------------------------------------------------------------------------
The TradeTech Report predicts a ``potential reduction in the number
of market participants.'' TradeTech Report, 21. It applies the price
effect it estimates for DOE transfers to a hypothetical uranium
producer with a production cost of $47.41 per pound. See Figure 15 of
TradeTech Report, 22. TradeTech does not apply its estimate to any
particular producer. TradeTech does, however, provide estimates for the
production costs of several firms in both 2011 and 2013.\72\ Although
TradeTech does not provide numerical cost data, it does provide
information on several firms in chart form. It appears from the chart
that among the firms TradeTech provides estimates for, production costs
in 2013 varied from as low as $30 to as high as $50. TradeTech also
notes that many producers have been able to reduce or stabilize costs
in recent years. This is also reflected in the difference between the
producers' costs in 2011 and in 2013. TradeTech Report, 13.
---------------------------------------------------------------------------
\72\ This figure includes information on some projects that are
not part of the domestic uranium mining industry, such as Uranium
One's Kazakh projects.
---------------------------------------------------------------------------
NAC provides estimated production cost ranges for segments of
current supply, but it does not directly estimate the effect of DOE
transfers on production levels. NAC Report, 3-9 to 3-11. Specifically,
NAC provides a chart showing the breakdown of worldwide operating
production capacity [REDACTED]. NAC Report, 3-10. DOE notes that this
chart does not provide separate estimates of production from U.S.
facilities, although NAC does state that [REDACTED]. NAC Report, 3-11.
A commenter noted that production in the recent past is not an
accurate indicator of how DOE's transfers affect the mining industry,
because current production reflects conditions of three or four years
ago when the investment decisions were made. This commenter suggested
that exploration data would be a better guide for assessing how
industry is responding to current conditions. In addition, the
commenter submitted information it received from Cameco indicating that
production at Cameco's two main areas will decline from 2.7 million
pounds in 2014 to 1.7 million pounds in 2015. This information is
generally consistent with the data provided by the various reports
summarized above.
DOE recognizes that large-scale changes in production can take
several years, and for that reason among others it does not base its
analysis simply on the fact that current production is comparable to
2013 production. At the same time, DOE notes that declines in
production in 2015 are not, in their entirety, reasonably attributable
to DOE's transfers. According to the commenter, the effect of market
conditions takes three to four years to be fully manifest in production
levels. If so, then a decline in production in 2015 would presumably
result primarily from the large-scale market changes in the second half
of 2011 and then in 2012 as a result of the Fukushima disaster. To
forecast the effects reasonably attributable to DOE's transfers, a more
careful analysis like that described below is more appropriate.
As actual production levels and costs are usually proprietary
information, DOE must generally rely on estimates. The production cost
estimates from TradeTech, NAC, and UxC are all generally consistent
with ERI's conclusions. Each market analysis describes production costs
falling within a similar range.
As noted above, based on the current spot price of $39.50 \73\ and
ERI's estimates of the price effect of DOE transfers, removing DOE-
sourced material from the market altogether--including material already
transferred in the past as well as the material to be transferred under
the assessed case--could lead to spot prices around $42.50 and DOE
transfers under the assessed case could lead to market prices between
$39.70 and $40.10. Although UxC estimates [REDACTED].
---------------------------------------------------------------------------
\73\ UxC's monthly spot price as of March 30, 2015.
---------------------------------------------------------------------------
To summarize, it does not appear that the price effect of DOE
transfers would cause realized prices to be below production costs at
any particular facility. DOE recognizes that receiving prices barely
above production costs would not provide enough return to justify
investing in production, and a producer needs to receive a certain
amount of margin. The TradeTech Report suggests 10% is an appropriate
margin. But elevating the threshold for these mines from production
cost to production cost plus 10% would not alter the conclusions
discussed above.\74\
[[Page 26397]]
Accordingly, DOE concludes that ceasing transfers entirely--which could
cause prices to increase by up to $2.70 per pound--would not cause U.S.
producers to increase production levels substantially in the near term.
---------------------------------------------------------------------------
\74\ One commenter suggests that DOE calculate the effect of its
transfers on average margins, which it claims would be a
straightforward calculation. The commenter cites as an example a
hypothetical model included in the TradeTech report. In DOE's view,
the TradeTech hypothetical, as discussed below, seems to bear little
relation to any actual mine. To calculate margins, DOE would need to
know actual realized prices, linked to production costs, on a mine-
by-mine basis. Absent such details, DOE believes the estimation
method described above is a sufficiently robust approach to
forecasting the effect on production reasonably attributable to
DOE's transfers.
---------------------------------------------------------------------------
The estimates in the preceding paragraph are based on a comparison
of expected realized prices of specific mines and estimates of
production cost at those mines. However, DOE notes that this is a
somewhat oversimplified comparison. Decisions regarding whether to
increase or decrease production are based on a number of
considerations, of which the instantaneous market price is only one.
Recent production data provides some evidence that market prices are
not the sole consideration. Despite the fact that market prices were at
their lowest levels in recent memory, EIA's most recent quarterly
report states that U.S. primary production in 2014 was higher than in
any calendar year since 1997. Even while production ceased at some
facilities, production began for the first time at others. Meanwhile,
producers with production costs above the average spot price in recent
years have continued operations. One of those considerations is
included in the above discussion, namely the difference between
realized price and market price. In addition, DOE believes that this
behavior is related to the significant cost and time lag involved in
ceasing or slowing production at an existing facility. Due to these
facts, DOE believes that production decisions are likely to be based on
future expectations about market prices and contracting trends in
addition to current market prices.
Given that removing the price effect associated with DOE transfers
is not likely to be enough to materially change the relationship
between price and cost for any particular producer and that production
decisions are based on additional considerations that include future
expectations about market prices and contracting trends, DOE agrees
with ERI's conclusion that adding back the price effect of DOE
transfers would not move current prices enough to cause U.S. producers
to increase production at existing facilities.
Some commenters objected that this conclusion is irrelevant.
However, it is an appropriate implementation of the analytical approach
discussed above, in which DOE assesses the impact reasonably
attributable to its transfers. To do so, DOE compares the likely state
of affairs with transfers and without DOE transfers. The conclusion
that continuing transfers under the assessed case would not result in
U.S. production's being markedly lower than it would in the absence of
DOE transfers constitutes such a comparison.
3. Employment Levels in the Industry
DOE has considered information from EIA reports relating to
employment in the domestic uranium production industry. EIA's most
recent Uranium Production Report states that employment stood at 1,156
person-years in 2013, 1,196 person-years in 2012, and 1,191 person-
years in 2011. EIA, 2013 Uranium Production Report, 10 (May 2014).
In its analysis, ERI compared EIA's employment figures with changes
in uranium spot and term prices. Based on a statistical correlation,
ERI infers that employment responds to changes in price. 2015 ERI
Report, 73. ERI then uses this correlation to estimate that the
decrease in uranium prices over the course of 2014 resulted in a loss
of 114 person-years from the 2013 value of 1,156. 2015 ERI Report, 55.
ERI then estimates that the price effect it attributes to DOE transfers
lowered employment by 41 person years in 2013, and 44 person years in
2014. 2015 ERI Report, 56. ERI further estimates that price effects due
to DOE transfers at the levels described in Scenario 1 would result in
an average employment loss of 42 person years over the next 10 years.
For Scenario 2 and 3, ERI estimated that the average employment loss
would be 39 and 21 person years, respectively. Again, it is important
to note that this estimate is not a prediction that the uranium
production industry under Scenario 1 would shed 42 jobs in 2015 and
each subsequent year. Instead, this figure reflects ERI's estimate that
total employment in the industry would be higher by an average of 42
person-years without DOE transfers compared to with DOE transfers.
Several commenters asserted that employment has decreased in recent
years as a consequence of decreases in uranium prices. E.g., RFI
Comment of Mark S. Pelizza, at 1. Some commenters stated that the
uranium production industry has lost half its workforce since May 2012.
RFI Comment of UPA, at 2; RFI Comment of Uranerz, at 2.
Several uranium producers provided data regarding their employment.
The combined figures from several producers come to employment of 845
in 2012 and 424 in 2014. NIPC Comment of UPA, at 7-8.
DOE nonetheless does not believe that employment in the uranium
mining industry has decreased by half since May 2012. That claim runs
contrary to reporting by EIA that employment was 1,191 in 2011, 1,196
in 2012, and 1,156 in 2013. EIA, 2013 Uranium Production Report, 10
(May 2014). This is only a 3% decline between 2011 and 2013. Although
EIA has not yet reported uranium employment in 2014, DOE notes that
production levels in 2014 were very close to levels in 2013 and that
one new facility began operation in 2014. Thus it seems reasonable to
assume that employment levels were similar as well. EIA Domestic
Uranium Production Report Q4 2014, 3-6 (January 2015).
DOE believes the EIA reports on uranium-industry employment are
more reliable than the commenter's submission on this point. In
general, the EIA collects its data through a survey, responses to which
are mandatory. The survey terms are well defined and, with respect to
employment, should capture the relevant employment. By contrast, the
commenter describes its data as counting ``current employment
activities.'' It is not clear which employees are included in the count
or whether the inclusion criteria are even uniform across companies.
More significantly, the commenter's submission does not encompass the
whole domestic industry. A number of the companies represented did
decrease production, but the commenter's figures appear not to include
some mines that have increased production.
Even if industry employment had decreased by half since 2012, for
predicting the effect of DOE's transfers in the assessed case it is
important to understand what portion of recent employment decreases is
reasonably attributable to past transfers. No commenter attempted such
an estimation. While it is difficult to infer causal connections
between employment and any particular market phenomenon, DOE thinks it
is likely that most if not all of the reduction in employment in the
mining industry since 2011 can reasonably be attributed to the downturn
in the demand for uranium, primarily due to the Fukushima events.
DOE believes that ERI's method for attributing an employment effect
to DOE transfers is reasonable. ERI's method is based on an empirical
observation that prices (particularly the two-year moving average of
price) have been strongly correlated with employment over the last
decade. This correlation exists despite the remarkable fluctuations in
market conditions that have taken place
[[Page 26398]]
in that period. The relatively small price effects likely to result
from DOE's transfers--even the price effects that UxC forecasts--are
much smaller than the variations of the past decade. Therefore, the
correlation ERI observes should hold true for these small price
effects. In addition, it is reasonable to expect that prices and
employment will continue to correlate in such a way, because the
correlation reflects persistent market phenomena. DOE expects that a
producer increases or decreases employment in order to increase or
decrease production, and it does so in response to increases or
decreases in the price it will receive. For any given producer the
relationship between employment and price will depend on multiple
factors such as the producer's cost of production and its cost
structure (e.g. what proportion of cost depends on employee numbers)
and the producer's sales structure and realized prices. Aggregated over
producers, the result would be the sort of correlation between prices
and employment that ERI observes.
ERI forecasts that employment will be persistently lower by 42
person-years over the next decade if DOE transfers uranium at the rates
specified in Scenario 1. While the assessed case involves significantly
lower rates, DOE uses the Scenario 1 forecast in order to forecast
employment effects conservatively. A decrease of 42 person-years is
relatively small--approximately 4%--compared to overall employment.
Notably, the industry has weathered significantly larger changes in
employment in the past. Between 1998 and 2001, the industry went from
employment at 1120 to 423. EIA, Domestic Uranium Production Report
(2005). Similarly, from 2008-2009, the industry went from 1563 to 1096;
a drop of 467 in a single year. EIA, 2013 Uranium Production Report, 10
(May 2014). Additionally, ERI points out that employment for 2014
likely declined by 114 person-years, even though DOE transfers did not
change appreciably from 2013 to 2014. These comparisons indicate that
the small change attributable to DOE's transfers will be well within
the range of employment fluctuations that independent market conditions
produce.
Some comments in response to the RFI, mentioned above, warn that
employment losses may lead to a loss of intellectual capacity. The
relevant employees have technical skills that can take time to acquire.
If the lost employees have retired or moved into other fields, it may
not be possible to restore them even as demand increases. While in
principle replacements could be trained, these commenters argued that
employment losses have been so severe that the industry is losing the
capability to train replacements. Commenters provided no evidence to
support these claims. Moreover, these commenters' suggestion is
inconsistent with the industry experience of the past 20 years. The
industry has more than once in the last 20 years experienced decreases
in employment an order of magnitude above what ERI attributes to recent
DOE transfers, and has maintained and, when appropriate, increased
production. Thus, DOE does not expect its transfers in the assessed
case will cause employment losses that threaten the intellectual
reserves of the industry. DOE believes that the current levels of
employment (and the expected future levels of employment) adequately
protect against loss of this resource.
4. Changes in Capital Improvement Plans and Development of Future
Facilities
As stated above, ERI reports that four new production centers began
operation since 2009: One in 2010, one in late 2010/early 2011, one in
2013, and one in 2014. In addition, one new production center--
Peninsula's Lance project--is expected to begin operations in 2015.
2015 ERI Report, 57. ERI explains that the new production centers may
have been able to begin operations only because they were supported by
fixed price term contracts that were signed when prices were
substantially higher than they are currently--i.e. $55 to $70 per pound
term price. At least one of these companies has directly stated that
its project would not have been able to proceed at current price
levels--$45 to $50 per pound term price. ERI also reports that some
owners of proposed conventional mines outside the U.S. have stated that
prices in the range of $60 to $70 per pound would be necessary for
further development. 2015 ERI Report, 61.
Based on the above, ERI concludes, ``[i]t does not appear that
removing the DOE inventory from the market and adding back the $2 to $3
per pound price effect attributed to the DOE inventory material . . .
would necessarily increase current prices enough to change the
situation regarding the viability of new production centers in the
U.S.'' 2015 ERI Report, 62. However, ERI reports that some lower cost
ISL projects in the U.S. may be able to move forward at current prices.
2015 ERI Report, 62.
NAC provides estimates of the site forward cost, including rate of
return, for ten properties it considers to be under development.\75\
[REDACTED]. NAC Report, 3-11. NAC does not directly apply its estimate
of the price effect of DOE transfers to the production costs for these
specific properties.
---------------------------------------------------------------------------
\75\ NAC defines ``under development'' as a property for which
ground breaking has begun. Note that NAC considers ten properties
worldwide to be ``under development''; they are not limited to U.S.
properties. NAC Report, 3-11.
---------------------------------------------------------------------------
The UxC Report does not provide any specific estimates of
production levels or costs at planned facilities. However, UxC has
developed production cost data elsewhere in reports cited. UxC Uranium
Suppliers Annual--December 2014 (2014); UxC Uranium Production Cost
Study (2013). [REDACTED]. UxC Uranium Production Cost Study, 62,
(2013). [REDACTED].
As with existing production centers, UxC [REDACTED].\76\
[REDACTED]. Id. at 82-83.
---------------------------------------------------------------------------
\76\ Information from this paragraph is collected from the two
UxC studies mentioned above. The price bands come from UxC Uranium
Production Cost Study, 80-84 (2013), and cost estimates in
parentheses comes from UxC Uranium Suppliers Annual--December 2014
(2014) (except for data on [REDACTED], which come from UxC Uranium
Production Cost Study, 111-12 (2013).
---------------------------------------------------------------------------
EIA reports that production expenditures were $168.8 million in
2011, $187 million in 2012 and $168 million in 2013--when spread across
annual production, these numbers represent approximately $41 per pound
in 2011, $43 per pound in 2012, and $36 per pound in 2013. EIA, 2013
Domestic Uranium Production Report, 7, 11 (2014). Including costs
related to drilling between 2011 and 2013 raises this figure by about
$56 million per year per pound, and including land, exploration, and
reclamation costs in those years increases these figures by a further
$96 million per year. EIA, 2013 Domestic Uranium Production Report, 11
(2014). Some commenters argued that the average cost for a U.S.
producer is $67.10 per pound--apparently the sum of the EIA figures for
all costs, divided by the total of recent production. NIPC Comment of
UPA, at 7. DOE is not convinced that this simple aggregation provides
an accurate estimate of production costs. For one thing, some expenses,
like reclamation, occur after production and therefore should be
attributed to past production (sometimes long-past production) rather
than current production. Some expenses, like exploration costs, relate
to future production. U.S. production has varied over time, and will
continue to do so. So accounting for past and future production costs
as part of the cost of current production can lead to error. DOE
believes a more reliable method for estimating the cost of
[[Page 26399]]
production, for purposes of forecasting the consequences of DOE uranium
transfers, is to use industry reports such as UxC's, which provide data
about the expected costs of actual projects.\77\
---------------------------------------------------------------------------
\77\ UPA and others also stated that DOE should consider the
fact that total drilling, exploration, and development expenditures
decreased in 2013 compared to 2012 according to EIA. They also state
that it is reasonable to expect that these expenditures were even
lower in 2014. RFI Comment of UPA, at 3; RFI Comment of Uranerz, at
3. Since uranium prices decreased over this period, it is not
surprising that producers reduced their activities to develop new
resources. However, consistent with the analytical approach
described above, the relevant question is what will be the effect on
these activities of DOE transfers. DOE believes that a more reliable
approach is to compare the expected market price with and without
DOE transfers to estimated production costs at potential new
production centers.
---------------------------------------------------------------------------
As with production at existing mines, DOE believes that production
decisions are more likely to be based on future expectations about
market prices and contracting trends than on a straightforward
comparison of current market prices to production cost. The comments
received were consistent with DOE's understanding. New production
centers are a long-term investment, and new facilities require several
years of lead-time before production can begin. Since market prices
fluctuate over time, many producers are unwilling to bring a new
facility into production without long-term supply contracts in place.
TradeTech's report included an estimate that DOE's transfers, at
the 2,705 MTU per year rate, ``could be the deciding factor'' in
whether a hypothetical miner continues production. TradeTech Report, at
22. The hypothetical mine has a marginal production cost of $47.41 per
pound, a 50% exposure to the spot market price, and a long-term
component to its realized price of $50. In addition, TradeTech assumes
that the hypothetical mine requires a 10% margin to justify production.
Observing that prices in the next couple years are forecast to range
from $40 to $55 per pound, and that DOE transfers at 2,705 MTU per year
would in TradeTech's estimate reduce prices by on average $2.43 per
pound, TradeTech concludes that the $2.43 per pound difference
``could'' matter for the hypothetical mine.
Some commenters characterized the TradeTech report as
``overwhelming evidence'' that DOE's transfers are ``threatening the
very existence of several U.S. producers.'' NIPC Comment of UPA, at 4.
These commenters urged DOE to rely on TradeTech's hypothetical example
for assessing the consequences of DOE transfers for future production.
NIPC Comment of UPA, at 7. DOE does not consider this example
appropriate for that purpose, and does not think it constitutes
evidence that DOE's transfers actually threaten the viability of U.S.
producers, for several reasons. The analysis appears to compare current
production costs at the hypothetical mine to near-term spot prices. DOE
believes a producer would actually make its long-term investment
decisions on the basis of expectations about prices over the longer
term and the availability of long-term contracts at an acceptable
price. TradeTech's example does not reflect either of these factors. In
addition, the hypothetical example uses assumptions that do not appear
well justified. The hypothetical mine has average production costs of
$47.41 per pound.\78\ There also appear to be only one or two projects,
out of the number being developed in the United States, that have
expected production costs near the assumed figure. The hypothetical
producer also has long-term contracts at an average price of $50 per
pound, just 5.5% higher than the producer's assumed average cost. Yet,
according to TradeTech's hypothetical, this producer needs a 10% margin
to justify production. This hypothetical producer would have needed
spot prices to be not just 10% higher than its costs, but even higher
($54.30 per pound) to compensate for the low price of its long-term
contracts. It seems unlikely a producer would actually have developed
such a speculative project. In short, the hypothetical example as a
whole is inconsistent with DOE's understanding of how producers decide
whether and when to invest in production resources.
---------------------------------------------------------------------------
\78\ That figure is well below what some commenters argued DOE
should use--$67.10 per pound, based on the aggregate of EIA-reported
costs and the amount of 2014 production.
---------------------------------------------------------------------------
Consistent with the analytical approach outlined above, DOE's task
is to assess what the state of affairs would be with and without
transfers in the assessed case. DOE agrees with ERI's conclusion that
whether DOE makes these transfers is not likely to affect the economic
viability of new U.S. production centers in development. The production
cost estimates from NAC and UxC are consistent with ERI's conclusions.
ERI reports that there may be some low-cost ISR production centers that
can move forward at current market prices. This is consistent with
estimates from NAC and UxC's of production costs at specific facilities
that are currently under development. The only production center
expected to begin operations in the near future is Peninsula's Lance.
Both NAC and UxC estimate [REDACTED]. For such a project, DOE transfers
may affect overall revenues but seem unlikely to change whether the
project proceeds. [REDACTED]. Compared to current term market prices,
one or two projects have production costs that are close to or just
above the current market price, but in light of the low rate of term
contracting activity in the next one or two years, these projects are
unlikely to settle on contracts at the current term price.
DOE recognizes that, as some commenters explained, there has been
limited investment in uranium projects in recent years. E.g., RFI
Comment of Uranerz, 4; RFI Comment of Energy Fuels, 4-5. However,
although commenters attribute the decrease in investment to DOE's
transfers of uranium, DOE believes that investment decisions reflect
market conditions overall, primarily current market prices and
expectations of future market price. The analysis described above
identifies the amount of decrease that can reasonably be attributed to
DOE's transfers. Ultimately, DOE must assess what the effect of future
transfers will be. Prices have increased since the lows of the past two
years, and future prices are now expected to be higher. As prices
increase in the coming few years, term contracts will become available
that would justify one or more additional projects with higher costs. A
persistent $2-3 per pound price effect, as DOE forecasts for the
assessed case, may delay investment on a given project for a time. But
it does not appear that eliminating the effects of DOE transfers, would
markedly change decisions whether to develop future production centers.
5. Long-Term Viability and Health of the Industry
As described above, ERI notes that U.S. industry production has
risen since the start of DOE uranium inventory transfers for Portsmouth
cleanup in December 2009. ERI also notes that four new operations began
production since 2009, and one additional production center is expected
to begin operations in 2015. 2015 ERI Report, 57.
ERI also presents its future expectations regarding demand for
uranium. ERI's most recent Reference Nuclear Power Growth forecasts
project global requirements to grow to approximately 182 million pounds
annually between 2018 and 2020, approximately 15% higher than current
requirements. Global requirements are expected to continue to rise to a
level of 203 million pounds in 2025, approximately 28% higher than
current
[[Page 26400]]
requirements. 2015 ERI Report, 6-7. ERI presents a graph comparing
global requirements, demand, and supply from 2013-2035. Global
secondary supply and supply from current mines are expected to exceed
global reactor demand until approximately 2018. However, if China's
practice of purchasing amounts of uranium well in excess of its current
reactor demand is included--what ERI terms ``Discretionary Strategic''
demand--global demand approximately equals supply from secondary supply
and currently operating mines. 2015 ERI Report, 9-10. If planned
expansions and new mines under development are included, supply is
expected to exceed demand until approximately 2024, regardless of
whether ``Discretionary Strategic'' demand is included.\79\ In the time
period following 2025, ERI forecasts that demand will significantly
exceed supply. 2015 ERI Report, 9. In order to meet this demand, ERI
anticipates that mines it terms ``planned'' and ``prospective'' will
need to begin operations. 2015 ERI Report, 11.
---------------------------------------------------------------------------
\79\ ERI assumes that China's discretionary strategic inventory
building will taper off by 2023. 2015 ERI Report, 10. This is
generally consistent with other projections regarding Chinese
strategic inventory purchasing behavior. See TradeTech Report, 41-
42; NAC Report, at 3-4.
---------------------------------------------------------------------------
A variety of other sources predict substantial increases in reactor
requirements and/or demand.\80\ TradeTech forecasts reactor-only growth
at 3.52% per year through 2024. Total uranium requirements growth is
much slower during this period due to stock building purchases which
taper downward.\81\ TradeTech Report, 34. The OECD and IAEA expect
reactor requirements to grow by at least 35.4 million pounds \82\ by
2025--representing approximately 21% of 2015 requirements.\83\ OECD-
IAEA, Uranium 2014: Resource, Production, and Demand, 105 (2014). In
its Uranium Market Outlook for the 4th quarter of 2014, UxC similarly
predicts significant increases in both requirements and demand in the
long-term. UxC Uranium Market Outlook--Q4 2014, 56-60 (2014).
Specifically, [REDACTED]. Id. at 60. [REDACTED]. Id. at 57.
---------------------------------------------------------------------------
\80\ DOE notes that uranium ``demand'' and reactor
``requirements'' are different. Requirements refers to an estimate
of the amount of uranium needed to support operating reactors in a
particular year. Demand includes additional purchased quantities for
strategic or discretionary purposes. For example, in recent years
China has purchased quantities of uranium far in excess of its
reactor requirements. 2015 ERI Report, 10-11; TradeTech Report, 41-
42; NAC Report, 3-2 to 3-5.
\81\ TradeTech also appears to assume China's stock building
purchases will cease to outpace Chinese requirements around 2023.
TradeTech Report, 41-42. TradeTech also notes that most Japanese
reactors are expected to resume operation by 2020 while around 70%
of contracted deliveries continue to be made. Id. at 35. TradeTech
projects that this will lead to decreased demand from Japan after
2020 as Japanese reactors utilize excess stocks that were delivered
while the reactors were not operating. Id. at 36. Despite decreased
demand during this period from Japan, China, and other countries,
TradeTech still predicts that uranium demand will grow by
approximately one percent per year between 2015 and 2030. Id. at 33.
\82\ Converted from metric tons uranium in
U3O8 (MTU) using a conversion rate of 2,599.79
pounds U3O8 per MTU.
\83\ This represents OECD-IAEA's low growth scenario. The high
growth scenario anticipates growth of almost 90 million pounds,
approximately 50% above the high-growth scenario for 2015. Id.
---------------------------------------------------------------------------
Other sources also generally agree with ERI's forecast for supply.
UxC's annual Uranium Market Outlook projects [REDACTED]. UxC Uranium
Market Outlook--Q4 2014, 68 (2014). [REDACTED]. Id. at 69.
In addition to a predicted increase in demand, several sources
predict a recovery in either spot or term uranium prices--or both.
These forecasts are discussed above in Section IV.A.1, but they
generally predict an increase in spot price to $50 by 2019 or 2020, and
to $55.00 or $60.00 in the years thereafter.
Finally, DOE recognizes that the predictability of transfers from
its excess uranium inventory over time is important to the long-term
viability and health of the uranium industries. ERI has noted the
importance of predictability ``for long-term planning and investment
decisions by the domestic industry.'' 2015 ERI Report, 100; 2014 ERI
Report, 60-61. Some commenters also stated that DOE transfers should be
predictable. RFI Comment of UPA, at 2; RFI Comment of Cameco, at 2.
Other comments stressed the importance of predictability to permit the
industry to engage in long-term planning. NIPC Comment of Cameco, at 4;
NIPC Comment of UPA, at 5. DOE notes that the upper scenario considered
by ERI would represent continued transfers at rates consistent with the
May 2014 determination and roughly similar to the May 2012
determination. Compare 2015 ERI Report, 25, with 2014 ERI Report, 28.
Thus, DOE's section 3112(d) transfers have been stable for three years:
DOE has transferred at essentially the rate identified in the May 2012
determination. The series of Secretarial Determinations has, DOE
believes, made these transfers predictable. While the assessed case
involves a lower rate of transfers, DOE does not believe a reduction of
this magnitude will cause harmful uncertainty for the industry.
DOE recognizes that, as with any prediction, the future course of
events may differ from forecasts. But section 3112(d) itself instructs
DOE to predict the impact of its transfers, in that the statute
requires a determination that a transfer ``will not'' have adverse
material impacts on the domestic industries. Forecasts of reactor
requirements should be fairly reliable, because constructing a nuclear
reactor is a major investment requiring years to come to fruition and a
reactor then operates for decades. A reactor that will need uranium in
the next decade must either exist now or be at least in the planning
stages now. Conversely, if a reactor is operating now, its operator has
strong incentives to keep it running as long as possible, and the
licensed lifetimes for reactors are known. Therefore, barring extreme
events such as the Fukushima disaster and various large-scale policy
responses to it, DOE believes it is possible to forecast reactor
requirements with a fairly high degree of precision. The various
sources DOE has consulted, including the ERI report, offer similar
forecasts, and DOE concludes it is appropriate to rely on those
forecasts.
Forecasts of production may be somewhat more uncertain, for several
reasons. Developing a new mining project does not take as long as
building a new reactor, and the process differs also in terms of when
money is spent over the course of the development. If a new reactor
would be running in 2020, a significant amount of investment will
already have been made by this point. So it is likely that, while
schedules might slip, the reactor would indeed begin operating. Mines
that might be operating in 2020 include projects that are still in a
more speculative phase of development. A producer might halt
development for various reasons, including market conditions or a
discovery that the uranium resource was smaller than expected. These
factors could make the eventual supply smaller than forecasted.
Nonetheless, the rough course of future supply can be predicted
with a reasonable degree of reliability. Producers know the amount of
uranium available at their existing resources. Technology might improve
to permit more uranium to be recovered at a given price--a phenomenon
that has reshaped the oil industry. But DOE is not aware of any
technology in development that would significantly alter mine economics
in the next few years. Consequently, DOE believes it can rely on
forecasts about the depletion of
[[Page 26401]]
existing production centers. Forecasts about the amount of uranium
available at a mine still in the planning phase are necessarily more
uncertain. Any given mine might prove to have more or less capacity
than currently forecasted. In aggregate, these differences should
average out to some degree, so that overall forecasts of aggregate
supply are appropriate predictions of the likeliest course of events.
The various sources DOE has consulted offer similar forecasts on this
point, and DOE concludes it is appropriate to rely on them.
Even if existing production centers continued producing uranium at
their current rates, prices could be expected to increase because
requirements will increase. Consistent with the ordinary operation of
supply and demand, higher prices would be necessary to bring additional
supplies into the market. In fact, as existing production centers are
depleted, the predicted replacements will have slightly higher
production costs. Thus, higher prices will be necessary in the future
even to maintain production at current levels. For these reasons the
price of uranium is likely to increase over the coming decade.
Most sources DOE has reviewed agree that there will be an increase,
although the specific estimates of that increase vary. This price
increase is expected to take place even with DOE transfers. See Figures
5 & 6, UxC Report, 11.
The effect of DOE transfers on this process is not certain. UxC
projects that DOE transfers will essentially slow the rate of this
price increase. For example, [REDACTED]. Id. Even if this projection is
correct, DOE transfers would only have the effect of slightly delaying
the development of future production facilities. Significantly, DOE
transfers will not prevent new facilities from coming online, and is
not expected to permanently affect the viability of any new production
centers. At worst, the effect of DOE transfers in the long run is
equivalent to the difference in present value based on earnings
beginning later in time. DOE does not believe that this difference is
significant enough to appreciably affect the long-term viability and
health of the industry.
6. Russian HEU Agreement and Suspension Agreement
Section 3112(d) of the USEC Privatization Act requires DOE to
``take into account'' the sales of uranium under the Russian HEU
Agreement and the Suspension Agreement. Consistent with this
instruction, DOE believes this assessment should consider any sales
under these two agreements that are ongoing at the time of DOE's
transfers.
Under the Russian HEU Agreement, upon delivery of LEU derived from
Russian HEU, the U.S. Executive Agent, USEC Inc., was to deliver to the
Russian Executive Agent, Technabexport (Tenex), an amount of natural
uranium hexafluoride equivalent to the natural uranium component of the
LEU. The USEC Privatization Act limited the volume of that natural
uranium hexafluoride that could be delivered to end users in the United
States to no more than 20 million pounds U3O8 in
each year after 2009. ERI has in the past analyzed material from the
Russian HEU Agreement as part of worldwide secondary supply. DOE notes
that the Russian HEU Agreement concluded in December 2013. Thus, there
are no ongoing transfers under this agreement.\84\
---------------------------------------------------------------------------
\84\ Following the end of the Russian HEU Agreement, Tenex
signed a commercial agreement to provide EUP to customers in the
United States. Commenters appear to suggest that this material is
equivalent to a continuation of the Russian HEU Agreement. NIPC
Comment of ConverDyn, Enclosure, at 4. DOE notes that this material
is not produced from down-blended HEU; it is from commercial primary
supply. Thus, it is covered under the Suspension Agreement and
included within ERI's estimates of worldwide supply, as described in
text.
---------------------------------------------------------------------------
The current iteration of the Suspension Agreement, described above
in Section I.D.3.b, sets an annual export limit on natural uranium from
Russia. 73 FR 7705 (Feb. 11, 2008). That agreement provides for the
resumption of sales of natural uranium and SWU beginning in 2011. While
the HEU Agreement remained active (i.e. 2011-2013), the annual export
limits were relatively small--equivalent to between 0.4 and 1.1 million
pounds U3O8. After the end of the Russian HEU
Agreement, restrictions range between an amount equivalent to 11.9 and
13.4 million pounds U3O8 per year between 2014
and 2020. 73 FR 7705, at 7706 (Feb. 11, 2008). Material imported from
Russia in accordance with the Suspension Agreement is not derived from
down-blended HEU; thus, this material is part of worldwide primary
supply as analyzed by ERI in the 2015 ERI Report. This material is also
presumably accounted for in the various projections and models
developed by TradeTech, UxC, and NAC International. Thus, DOE's
analysis takes sales of uranium under the Suspension Agreement into
account as part of overall supply available in the market.
7. Mining Industry Conclusion
After considering the factors discussed above, DOE concludes that
transfers under the assessed case will not have an adverse material
impact on the domestic uranium mining industry. As explained above, DOE
transfers under the assessed case will continue to exert some downward
pressure on the market price for uranium concentrates. DOE forecasts
that about $2.70 of price suppression will be reasonably attributable
to DOE transfers; this is somewhat smaller than the effect attributable
to transfers in the past few years.
Because the vast majority of deliveries of uranium concentrates
take place under long-term contracts that allow producers to realize
prices based on term prices prevailing at the time the contracts were
entered, DOE concludes that the average effect on the realized price of
U.S. producers under current contracts is closer to $1.75. For future
term contracts, price suppression associated with DOE transfers would
decrease the base price for these contracts, potentially decreasing the
average realized price over the life of each contract. However, DOE
concludes that this type of effect will be minimal because term
contracting activity is expected to remain low during the next few
years.
DOE transfers are expected to have a small effect on employment in
the domestic industry, but the magnitude of this effect is well within
the range of employment fluctuations the industry has experienced in
the past due to market conditions unrelated to DOE transfers.
Even focusing on the entities most likely to be impacted--i.e.
producers that sell primarily on the spot market and are thus not
protected from fluctuations in the spot price--it is not likely that
removing the $2.70 price effect attributable to DOE transfers under the
assessed case would be enough to materially change the relationship
between price and cost for any producer with respect to production
levels at currently operating facilities or decisions whether to
proceed with developing new production centers. Both types of decisions
involve considerations beyond current spot prices, and they likely will
be based on expectations about future trends in market price. DOE
concludes that, given the expected increases in future demand for
uranium concentrates and, more importantly, the expected increases in
market prices, the price effect attributable to DOE might delay
decisions to expand or increase production capacity but would not
change the eventual outcomes. DOE does not believe that these effects
have the substantial importance that would make them ``adverse material
impacts'' within the meaning of section 3112(d).
[[Page 26402]]
B. Uranium Conversion Industry
The domestic uranium conversion industry consists of a single
facility, the Metropolis Works (MTW) in Metropolis, Illinois. This
facility is owned and operated by Honeywell International Inc. MTW has
a nameplate capacity of 15,000 MTU as UF6. ConverDyn, Inc.,
(``ConverDyn'') is the exclusive marketing agent for MTW and submitted
comments in response to DOE's notices. In what follows, DOE will refer
to MTW or ConverDyn, interchangeably, because the two appear to have
essentially the same interests in uranium markets.
1. Prices for Conversion Services
Like market prices for uranium concentrates, conversion market
prices are generally described in terms of the spot price and the term
price. This section discusses the potential impacts of DOE transfers on
these two prices. For reference, as of March 30, 2015, UxC's spot price
indicator was $7.50 per kgU as UF6 and its term price
indicator was $16.00 per kgU as UF6.
Three of the market analyses discussed above--those by ERI,
TradeTech, and UxC--contain estimates of the effect of DOE transfers on
the market prices for conversion services: ERI, TradeTech, and UxC.
This section begins with a summary of each report and then discusses
DOE's review of the reports' methodologies and conclusions. This
section concludes with a discussion of how a change in conversion
market prices would affect the domestic uranium conversion industry. A
principal mechanism through which such a change in market price could
impact individual producers is through the effect on the realized price
of primary converters.
a. Energy Resources International Report
DOE tasked ERI with estimating the effect of DOE transfers on the
market prices for conversion services. To estimate this effect, ERI
employed a market clearing price model very similar to what is
described above for the uranium market. As with uranium concentrates,
ERI constructed individual supply and demand curves for conversion
services and estimated the clearing price with and without DOE
transfers. 2015 ERI Report, 44.
DOE tasked ERI with estimating the effects of DOE transfers under
the same three scenarios described in Section IV.A.1. The levels of the
different scenarios are outlined above in Table 4 in terms of natural
uranium equivalent.\85\ All the transfers in the assessed case have the
potential to displace conversion services. The natural uranium
hexafluoride that DOE transfers could displace conversion services
directly, in that this material is the ordinary output of a conversion
facility. The low-enriched uranium that DOE transfers could also
displace conversion services because natural uranium must be converted
into uranium hexafluoride before it can be enriched. A purchaser of
low-enriched uranium from DOE transfers would purchase correspondingly
less conversion services.\86\ As conversion services are denominated in
kgU as UF6, the figures reported in Table 4 also refer to
the amount of conversion services embodied in the DOE inventory. As
with uranium concentrates, the assessed case falls between Scenarios 1
and 2.
---------------------------------------------------------------------------
\85\ As noted above, the transfer rates for these scenarios
refer only to the level of uranium transfers for cleanup at
Portsmouth and down-blending of LEU. The level of transfers for
other DOE programs is the same in all three scenarios.
\86\ The LEU that DOE transfers is in the form of uranyl
nitrate, which must be converted to uranium oxide in the fuel
fabrication process. Analogously, enriched uranium hexafluoride must
also be transformed into uranium oxide. If there were a difference
in cost between these two chemical processes, buyers might be
willing to pay more (or less) for the enriched nitrate than for
enriched hexafluoride, and the market effect of LEU transfers would
be somewhat more complicated to predict. However, DOE is not aware
of any substantial difference in these costs.
---------------------------------------------------------------------------
Using its market clearing approach, ERI estimates that DOE
transfers will have the effects listed in Table 11. As with uranium
concentrates, the relationship between the amount of transfers under
each scenario and the price effect is essentially linear for each year
ERI analyzed (2015-2024). Compare Table 3.7 to Table 4.2 of 2015 ERI
Report, 25-26, 45. Therefore, the price effect of DOE transfers in the
assessed case can be interpolated from ERI's estimates.
Table 11--ERI's Estimate of Effect of DOE Transfers on Conversion Prices in $ per kgU as UF6
[Market clearing approach]
----------------------------------------------------------------------------------------------------------------
2015 ERI Report
-----------------------------------------------------------------------------------------------------------------
Assessed case
ERI Scenario 1 ERI Scenario 2 ERI Scenario 3 (interpolated)
----------------------------------------------------------------------------------------------------------------
2015............................................ $0.90 $0.70 $0.10 $0.90
2016............................................ 0.90 0.60 0.00 0.70
2017............................................ 0.80 0.60 0.00 0.70
2018............................................ 1.00 0.80 0.20 0.90
2019............................................ 0.80 0.90 0.40 1.00
2020............................................ 0.90 1.30 0.70 1.00
2021............................................ 1.00 1.00 0.80 1.00
2022............................................ 0.90 0.80 0.70 0.80
2023............................................ 1.00 0.90 0.80 0.90
2024............................................ 0.80 0.80 0.60 0.80
Average (2015-2024)............................. 0.90 0.80 0.40 0.90
----------------------------------------------------------------------------------------------------------------
As with uranium concentrates, it is important to emphasize that
this is not a prediction that prices will drop by the specified amount
once DOE begins transfers following a new determination. A level of
price suppression consistent with the estimate for Scenario 1 would, on
ERI's analysis, already be reflected to some degree in the current
market price because DOE is currently transferring uranium at that
rate. 2015 ERI Report, 44. The price suppression that ERI estimates
would persist under Scenario 3 is largely ERI's estimate of the
consequence of past DOE transfers, from which some of the uranium is
still expected to be entering the market in future years.
[[Page 26403]]
b. TradeTech Report
In addition to its estimate of the price effect of DOE transfers on
the uranium concentrate market, TradeTech estimates the effect on the
price of conversion services. A summary of TradeTech's estimates
appears in Table 12. It appears that TradeTech developed this estimate
using its econometric Dynamic Pricing Model. TradeTech Report, 14.
Using its model, TradeTech estimates that DOE's transfer reduced the
spot price by an average of $2.13 per kgU as UF6 between
January 2012 and December 2014. TradeTech Report, 17. TradeTech also
forecasts that continued DOE transfers at current rates would reduce
the spot price by an average of $0.91 per kgU as UF6 between
January 2015 and December 2016. TradeTech Report, 21.
TradeTech also provides predictions for the effect of DOE transfers
at several decreased transfer rates. If DOE transfers decreased to 75%
of current levels, TradeTech estimates that the spot price would
increase by an average of $0.21 per kgU as UF6 between
January and 2015 and December 2016. TradeTech, 31.\87\ Based on
TradeTech's estimate of the price suppression caused by DOE transfers
at current levels, it appears that TradeTech is forecasting that price
suppression given transfers at 75% of current levels would be $0.70. If
DOE transfers decreased to 50% of current levels, TradeTech predicts
that the spot price would increase by an average of $0.43 per kgU as
UF6 between January and 2015 and December 2016. TradeTech,
30. This corresponds to a price suppression of $0.48. If DOE transfers
decreased to 25% of current levels, TradeTech forecasts that the spot
price would increase by an average of $0.66 per kgU as UF6
between January and 2015 and December 2016. TradeTech, 29. This
corresponds to a price suppression of $0.25. As with uranium
concentrates, the TradeTech Report does not state the numerical volumes
that correspond to these decreased transfer rates. However, DOE notes
that the 2,100 MTU rate is slightly above 75% of the level included in
the May 2014 Determination. Thus, DOE believes that TradeTech's ``75%''
figure is roughly equivalent, although slightly below, that level.
---------------------------------------------------------------------------
\87\ Figures 21-24 of the TradeTech Report show TradeTech's
estimates for the price impact at a range of different transfer
rates. Although these charts and the related text refer to
``Transfers at [25, 50, or 75] Percent of Established 2014
Volumes,'' it appears that these charts actually reflect an estimate
for a 25%, 50%, or 75% decrease relative to current levels, rather
than transfers at the specified percentage of current levels.
Table 12--TradeTech's Estimate of Effect of DOE Transfers on Conversion
Spot Price in $ per kgU as UF6
------------------------------------------------------------------------
TradeTech Report
-------------------------------------------------------------------------
Estimated
Transfer rate (compared to current) price effect
(2015-2016)
------------------------------------------------------------------------
100%.................................................... $0.91
75%..................................................... 0.70
50%..................................................... 0.48
25%..................................................... 0.25
------------------------------------------------------------------------
c. UxC Report
UxC's U-PRICE and SWU-PRICE econometric models predict the markets'
reaction to changes in supply for the uranium concentrate and
enrichment industries. UxC does not directly model the conversion
services market. Instead, UxC relies on other evidence to conclude that
the price effect of DOE transfers on spot conversion prices have been
``at least equal to, if not greater than, the impact on spot uranium
prices.'' Specifically, UxC notes that much of the world's spot
conversion is sold in conjunction with uranium through contracts for
UF6. UxC also notes that over the past few years the
UF6 price has fallen as much as the
U3O8 price has on a percentage basis. Finally,
UxC notes that the Ux North American UF6 Price has been
below the Ux NA UF6 value (i.e. the sum of spot uranium and
spot conversion prices for a given quantity of UF6) over
most of the period of DOE transfers. UxC Report, 15. With respect to
the future effect of DOE transfers, UxC expects that DOE transfers will
continue to have a similar effect on spot conversion prices and a
somewhat less but still ``noticeable'' effect on term conversion
prices. UxC Report, 16.
d. Effect of DOE Transfers on Market Price
DOE has reviewed each of the market analyses described above. Each
report uses a somewhat different methodology in estimating the effects
of DOE's uranium sales. ERI's approach is likely to greatly
overestimate the effect of DOE's transfers on term conversion prices
because it rests on the assumption that conversion prices arise from a
competitive market price-setting mechanism. While the analysis would be
reasonable if the term price for conversion had a competitive price-
setting mechanism, DOE believes that it does not. The market includes
only five significant suppliers, one of which provides services almost
exclusively to Chinese purchasers. This market structure could, on its
own, make the market susceptible to parallel pricing in which rational
pricing decisions by individual firms could lead the market price to be
unresponsive to supply and demand changes.\88\ Conversion services are
also homogeneous from the market's point of view; converters take in
uranium concentrates meeting industry standards and produce uranium
hexafluoride meeting industry standards. The main buyers of conversion
services, nuclear utilities, are relatively insensitive to the price of
conversion. As noted above, medium-term demand is generally inelastic
because a utility must supply fuel for its reactors and the price of
fuel is a relatively small part of its generation cost. Conversion is
an even smaller fraction of that cost, because (using current term
prices) conversion accounts for only seven to nine percent of the total
cost of enriched uranium product. Meanwhile, conversion is a necessary
step in the fuel cycle, and conversion facilities operate with a
relatively high degree of investment compared to their variable costs.
To ensure that conversion capacity remains available, it could be
rational for utilities to accept and commit to higher prices than a
free price mechanism reflecting available supply and demand would
produce. In short, the insensitivity of buyers to conversion prices in
the medium term, combined with the market structure, would make it
likely that market-based pricing mechanisms would not function freely
in the medium-term conversion market.
---------------------------------------------------------------------------
\88\ See generally DOJ/FTC Horizontal Merger Guidelines, chapter
7. Depending on the calculation basis, the Herfindahl-Hirschman
Index of the conversion services market is between 1200 and 2800.
The former is near the threshold of what, under the Guidelines,
would be considered an unconcentrated market in which, absent
additional circumstances, uncompetitive behavior would not likely be
a concern. The latter figure would qualify the market as highly
concentrated.
---------------------------------------------------------------------------
Consistent with this expectation, the term price for conversion has
not reacted to fairly large market shocks, much less changes in the
rate of DOE's transfers. In 2010, when term prices were around $11-13
per kgU, ConverDyn announced that it would no longer enter long-term
contracts for less than $15 per kgU. 2014 ERI Report, 12; Michael
Schwartz & Julian Steyn, ``Supply Margins Erode,'' Nuclear Engineering
International (Oct. 6, 2011), available at http://www.neimagazine.com/features/featuresupply-margins-erode/. This behavior would be
surprising if the medium-term conversion market were a competitive
market in which the lowest
[[Page 26404]]
price attracts the most business. By contrast, it is consistent with
the notion that this market is prone to parallel pricing decisions.
Furthermore, the term market price increased shortly after ConverDyn's
announcement to $15 per kgU, and then to $16.50 per kgU after ConverDyn
made another announcement that it would not enter into long-term
contracts for less than $16.50 per kgU. See Kevin P. Smith, ConverDyn
v. Moniz, Case no. 1:14-cv-01012-RBW, Document 17-7, at ] 16 (July 7,
2014). It remained at $16.50 per kgU even as the Fukushima disaster led
to a 25% decrease in demand for conversion, and while the uranium term
price decreased by 50% and the conversion spot price decreased by 50%.
The price also did not respond when DOE announced in May 2012 that it
would increase transfers for Portsmouth cleanup to 2,400 MTU per year,
or when the much larger-scale sales of Russian-origin uranium ceased in
2013.
In sum, the conversion term price has not responded in recent years
to major market disruptions. It appears that conversion providers are
able to command roughly $16 per kgU regardless of the level of demand
or of secondary supply. While it remains conceivable that some very
small price effect could be attributed to DOE's transfers, DOE
concludes that ERI's forecast of $0.90 per kgU is a very substantial
overestimate.
By contrast, the spot market in conversion would be more likely to
have a competitive price-setting mechanism. In the spot market,
conversion providers are in full competition with sources of secondary
supply, many of which might not participate on the medium-term market.
For example, enrichers that engage in underfeeding depending on spot
prices of uranium and enrichment are unlikely to enter into long-term
contracts to supply the resulting excess uranium. Meanwhile, demand on
the spot market includes some buyers, like brokers, that purchase
relatively little on the long-term market and may be more sensitive to
price. Indeed, conversion spot prices do fluctuate by amounts
comparable to the fluctuations in uranium concentrates spot prices. And
conversion spot prices appear to respond to disruptions in supply or
demand. For example, spot prices decreased by 50% in the months
following the Fukushima disaster, and they also increased by 50% after
MTW announced an extended shutdown in 2012. For these reasons, DOE
concludes that market-based economic modeling like what ERI and
TradeTech performed for uranium spot prices is also an appropriate
method to forecast conversion spot prices in the near term.
TradeTech provides an econometric model that is based roughly on
uncommitted supply and demand. For that reason, and reasons like those
discussed above with respect to the analogous models for uranium
prices, DOE relies on TradeTech's forecast for near-term conversion
spot prices.\89\ It bears emphasis that as with uranium prices,
forecasts of conversion spot prices in the medium term are highly
uncertain because uncommitted supply and demand are only a small
portion of the overall market.\90\
---------------------------------------------------------------------------
\89\ ConverDyn states that DOE should recognize the limits of an
economic model in a market with low liquidity. TradeTech's forecast
explicitly takes the liquidity of these markets into account in
modeling active supply and active demand. TradeTech Report, at 2-4.
\90\ DOE does not place much weight on UxC's rough estimate of
conversion spot prices based on a premise that the effect of DOE
transfers on spot prices should be about the same, proportionally,
as the effect on uranium prices. UxC's U-PRICE and SWU-PRICE models
appear not to be designed to forecast conversion prices, and UxC's
premise is not well justified. The conversion and uranium markets
are distinct in many ways. Uncommitted conversion supply is
different from uncommitted uranium supply, among other reasons
because conversion providers have much higher ratios of fixed to
variable costs than do uranium producers.
---------------------------------------------------------------------------
As mentioned above, the assessed case is similar to the 75%
scenario that TradeTech analyzed. TradeTech forecasts that in the near
term, DOE transfers at that rate would produce a persistent price
suppression of about $0.70 per kgU, on average, or about 8.7% of
current spot prices. In addition, ERI employs its market clearing model
to predict a very similar price effect, approximately $0.90 in 2015 and
$0.70 in 2016 and 2017.\91\ For these reasons, DOE concludes that
$0.70-$0.80 is a reasonable, although somewhat conservative, estimate
of the effect of DOE transfers in the spot market over the next several
years and notes that, given that the market price currently reflects
DOE transfers at a rate of 2,705 MTU, conversion spot prices will be
subject to a smaller price suppression than at present. DOE concludes
that its transfers have had essentially no effect on the term price for
conversion and will continue not to affect the term price.
---------------------------------------------------------------------------
\91\ ConverDyn argues that DOE and ERI have confused sales on
the ``term market'' with ``buy and hold'' or ``carry trade'' sales.
NIPC Comment of ConverDyn, Enclosure, at 5. DOE notes that ERI's
market clearing model does not depend on whether DOE sales are made
under spot contracts, term contracts, or some other type of
contract.
---------------------------------------------------------------------------
e. Effect on Realized Price
As with uranium concentrates, market prices would affect MTW
chiefly through their effect on the price it actually realizes for its
services. Since the domestic conversion industry consists of only one
producer, the effect of DOE transfers depends on the mix of contracts
on which MTW's services are sold: The proportion of spot and term
contracts, and the extent to which these contracts lock in prices
higher (or lower) than current market prices or conversely expose MTW
to spot prices.
No commenter provides specific information about the current
realized prices achieved in the conversion industry, and no commenter
directly estimates the effect of DOE's transfers on realized prices.
ConverDyn is not a publicly traded company, and neither it nor
Honeywell routinely make public information about contracting
strategies and realized prices for MTW.\92\ However, DOE believes that
the following information is relevant to ConverDyn's contracting
practices and its realized price.
---------------------------------------------------------------------------
\92\ ERI notes that ConverDyn's realized price has increased
over the last decade. Even in the absence of publicly available data
about ConverDyn's pricing, this conclusion seems nearly inevitable
because term prices have increased from $10 to $16 per kgU. ERI also
suggests that ConverDyn may have an average realized price, at
present, of around $14 per kgU. While ConverDyn's average realized
price is probably lower than current term prices because some
proportion of its long-term contracts date from a time of lower
prices, ERI's particular figure seems to be based mainly on
ConverDyn's claim to be operating at a loss. It is thus not a very
precise estimate. In any case, DOE's analytical task is to
understand how ConverDyn's realized price would be different with
and without transfers under the assessed case. As the discussion
below indicates, DOE can perform that task without necessarily
having a precise figure for ConverDyn's current average realized
price.
---------------------------------------------------------------------------
ConverDyn has stated in the past that the conversion market
generally relies on long-term contracts. Declaration of Malcolm
Critchley, ConverDyn v. Moniz, Case no. 1:14-cv-01012-RBW, Document 7-
3, at ] 37 (June 23, 2014). ConverDyn has also stated that these long-
term contracts are generally ``linked, at least in part, to market
prices at the time of the contract.'' Id. ConverDyn's March 10, 2014
letter to DOE [REDACTED]. See Letter from Malcolm Critchley, ConverDyn,
to Peter B. Lyons, DOE, 6 (Mar. 10, 2014). In that same letter,
ConverDyn explained [REDACTED]. Id. at 7. ConverDyn then states,
[REDACTED]. Id.
Traxys, a brokerage and trading firm active in the uranium markets,
has stated that ConverDyn specifically sells conversion services
``almost exclusively'' on long-term contracts. Declaration of Kevin P.
Smith, ConverDyn v. Moniz, Case no. 1:14-cv-01012-RBW, Document 17-7,
at ] 16 (July 7, 2014). Because Traxys is a frequent participant in the
markets in
[[Page 26405]]
which ConverDyn sells, and because this statement appeared in a
declaration filed in court, DOE considers Traxys's observation
reliable. Traxys has also stated that ConverDyn exercises significant
pricing power in the market. Traxys refers to a 2011 letter from
ConverDyn to its customers notifying them that it would not sell
conversion services for less than $16.50 per kgU. Id. Since then, the
term price indicator for conversion services has remained remarkably
stable, even as spot prices for conversion have fluctuated. 2015 ERI
Report, 12. UxC's annual conversion outlook [REDACTED]. UxC Conversion
Market Outlook--December 2014 (2014). [REDACTED]. Id. at 32.
[REDACTED]. Id. at 36.\93\ UxC also estimates that primary production
totaled approximately [REDACTED], about [REDACTED] of which was from
MTW. Id. at 45. Assuming the spot contracting activity from primary
producers was divided proportionately by production among the Western
converters,\94\ ConverDyn's share would be [REDACTED]. Id. Conducting
the same calculation using [REDACTED]. Id.
---------------------------------------------------------------------------
\93\ [REDACTED]. UxC Conversion Market Outlook--December 2014,
34-36 (2014).
\94\ The converters are typically divided into two groups, the
``Western'' converters and the ``non-Western'' converters in Russia
and China. The Western converters consist of MTW, Cameco's Port Hope
facility in Ontario, Canada, AREVA's Comurhex facility in France,
and the former Springfield-Westinghouse plant in the UK (closed in
2014). There is also a very small conversion facility in Sao Paulo,
Brazil, with a capacity of approximately 100,000 kgU as
UF6. For comparison, the nameplate capacity of MTW is 15
million kgU as UF6.
---------------------------------------------------------------------------
To the extent that ConverDyn engages in spot sales, they represent
no more than 5% of its total sales, and likely represent significantly
less. Considering this in combination with ConverDyn's statements about
its contracting practices, namely that ConverDyn's long-term contracts
are priced at the prevailing term price (with some escalation for
inflation), DOE concludes that ConverDyn has virtually no exposure to
the spot price.
This conclusion is somewhat counterintuitive. ConverDyn evidently
has a high proportion of fixed costs. If variable costs are low, then
the marginal cost of an additional unit of production should be very
low, likely below the current spot price. In addition, ConverDyn states
that it has excess capacity at its facility. NIPC Comment of ConverDyn,
Enclosure, at 7. One would expect a facility with low marginal cost and
excess capacity to sell any additional capacity on the spot market.
However, the conversion market is characterized by a very small number
of primary producers, and ConverDyn has demonstrated that it has
significant influence over the price. Furthermore, the vast majority of
contracting activity in conversion services continues to take place on
the term market. DOE believes that this can be explained by utilities'
preference for security of long-term supply. As ConverDyn explains, the
term price for conversion is set based on the price necessary to
include all costs of operations, capital recovery, and a return on
investment. NIPC Comment of ConverDyn, Enclosure, at 5. Although
utilities obviously have an interest in keeping variable costs for fuel
as low as possible, paying prices that are not sufficient to cover a
conversion providers' costs may, over time, jeopardize the continued
operation of primary conversion facilities. By paying the premium
associated with the term price, utilities can help prevent this outcome
by paying a price that allows these facilities to cover their full
operation and capital costs. UxC's reports regarding industry concerns
support this concept, reflecting [REDACTED]. UxC Conversion Market
Outlook--December 2014, 73 (2014).
Based on the above, it is unsurprising that ConverDyn is unwilling
to enter into contracts at the spot price. A rational producer of
conversion services with high fixed cost may be willing to reduce
production rather than sell conversion services at a price that is not
sufficient to cover the set of forward costs described below, even if
the market price is higher than its marginal cost per unit. UxC's
estimates of current production provide evidence that some primary
converters have in fact adopted this strategy. Specifically,
[REDACTED]. UxC Conversion Market Outlook--December 2014, 46 (2014).
Given that ConverDyn sells conversion services almost exclusively
through term contracts, it follows that the effect on ConverDyn's
realized price depends on the effect of DOE transfers on the term
price. However, as noted above, DOE concludes that its transfers have
had, and will likely continue to have, essentially no effect on term
prices for conversion. Consequently, DOE transfers under the assessed
case will have very little effect, if any, on the pricing of
ConverDyn's term contracts.
DOE recognizes that this conclusion is contrary to an assertion
that ConverDyn has made. ConverDyn has claimed that price suppression
due to DOE transfers has caused it to lose millions of dollars in
revenue. ConverDyn's analysis apparently applied the supposed price
suppression across all the company's sales. DOE does not find
ConverDyn's analysis convincing. ConverDyn stated in its March 10, 2014
letter that price suppression [REDACTED]. Letter from Malcolm
Critchley, ConverDyn, to Peter B. Lyons, DOE, 7 (Mar. 10, 2014).
ConverDyn, citing to the 2012 ERI report, states that it developed
these estimates by applying a 5.8% price impact to contracts awarded
since the start of the DOE sales program in 2009, and to expected
futures sales between 2014 and 2016. Id.; Supplemental Declaration of
Malcolm Critchley, ConverDyn v. Moniz, Case no. 1:14-cv-01012-RBW,
Document 21-2, at ] 8 (July 14, 2014). But in 2009, DOE transferred
uranium at a rate closer to 1,200 MTU per year, and it did not begin
transferring at 2,800 MTU per year until 2012. Even if DOE transfers
beginning in May 2012 suppressed term prices by 5.8%--which DOE has
concluded they did not--ConverDyn offers no explanation for why
transfers at the prior, lower rate should also have had a 5.8% price
impact. More importantly, as discussed in the previous section, the
term conversion price appears to respond very weakly, if at all, to
changes in supply and demand for conversion services. Given the
stability of the term conversion price since 2010, in the face of major
market shocks and also despite the May 2012 increase in DOE's
transfers, DOE does not believe transfers under the assessed case will
appreciably affect the price at which ConverDyn makes long-term
contracts.
2. Production at Existing Facilities
As stated above, there is only one conversion facility in the
United States, the Metropolis Works facility (MTW) operated by
Honeywell International. ConverDyn is the exclusive marketing agent for
conversion services from this facility. This section focuses on two
types of potential effects of DOE transfers on production levels at
MTW: Loss of sales volume for conversion services from MTW, and change
in average production costs at MTW.
a. Sales Volume
The nominal capacity of the Metropolis Works facility is 15 million
kgU as UF6. However, the facility generally operates below
that level and has consistently produced no more than 11-12 million kgU
in recent years. Supplemental Declaration of Malcolm Critchley,
ConverDyn v. Moniz, Case no. 1:14-cv-01012-RBW, Document 21-2, at ] 10
(July 14, 2014).
ERI estimated the effect of DOE transfers on production at MTW on a
series of assumptions based in part, on
[[Page 26406]]
various statements from ConverDyn.\95\ ERI estimates that production at
this facility was approximately 11 million kgU as UF6 per
year prior to the loss of sales associated with Fukushima. Because
ConverDyn has stated that this volume loss was approximately 25%, ERI
estimates current sales volume at 8.25 million kgU as UF6.
2015 ERI Report, 65. Based on statements from Traxys, the entity that
currently purchases the material that DOE transfers to Fluor B&W
Portsmouth for cleanup work at the Portsmouth Gaseous Diffusion Plant,
ERI assumes that 50% of the material used for cleanup at Portsmouth and
100% of all other DOE material enters the U.S. market. 2015 ERI Report,
65-66. To estimate ConverDyn's U.S. and worldwide market share, ERI
refers to a statement from ConverDyn that its share of the U.S. market
for conversion services is 25%. ERI uses this to calculate ConverDyn's
share of the international market as 16% by subtracting an amount
equivalent to 25% of the U.S. market from ERI's estimate of ConverDyn's
total sales volume. 2015 ERI Report, 68.
---------------------------------------------------------------------------
\95\ The analysis below differs from the discussion above
regarding production by the domestic mining industry. The two
industries and markets have different characteristics. With respect
to mining, the presence or absence of DOE transfers is expected to
result in a small change in uranium prices. The result of a price
increase or decrease would be to motivate a production increase or
decrease, respectively, by the producers with marginal costs in the
relevant range. By contrast, as discussed below, converters
generally have relatively low variable costs. DOE estimates that
ConverDyn's marginal cost is substantially lower than the current
spot price for conversion. Thus, changes in price do not motivate
production in the same way as in the uranium markets, and a
different approach is warranted for estimating production changes.
---------------------------------------------------------------------------
A summary of ERI's estimates of the effect of DOE transfers on
ConverDyn's sales volume appears in Table 13. Using the assumptions
described above, ERI estimates that under Scenario 1, DOE transfers
decrease ConverDyn's market volume by 0.7 million kgU, or 8%. Under
Scenario 2, ERI estimates that DOE transfers decrease ConverDyn's
market volume by 0.5 million kgU, or 6%. Under Scenario 3, ERI
estimates that DOE transfers decrease ConverDyn's market volume by 0.1
million kgU, or 1%. 2015 ERI Report, 69-70. As with ERI's price
estimates discussed above, these estimates do not suggest that were DOE
to transfer uranium in accordance with Scenario 1, ConverDyn would lose
the predicted volume of sales. DOE has been transferring at or above
the rate of Scenario 1 for nearly three years. On ERI's analysis, to
some degree the estimated effect has already occurred. Transfers in
accordance with Scenario 1 would continue the effect, and transfers in
accordance with Scenario 2 or 3 would lead to an increase in
ConverDyn's sales volume in the long term by the amount ERI predicts.
Table 13--ERI's Estimate of Decrease in ConverDyn's Sales Volume \96\
------------------------------------------------------------------------
Volume
(million Percent
kgU) change
------------------------------------------------------------------------
Scenario 1..................................... 0.7 8
Scenario 2..................................... 0.5 6
Scenario 3..................................... 0.1 1
------------------------------------------------------------------------
ConverDyn's comments in response to the RFI and NIPC do not provide
a separate estimate of the effect of DOE transfers on its sales
volume.\97\ ConverDyn's comments refer to the relevant sections of the
2014 ERI Report and 2015 ERI Report regarding its sales volume and
production costs. RFI Comment of ConverDyn, Enclosure, at 5; NIPC
Comment of ConverDyn, Enclosure, at 9. With respect to the ERI Reports,
ConverDyn does not refute or confirm the assumptions ERI used in its
analysis regarding ConverDyn's sales volume, market share, or
production costs.\98\ ConverDyn also incorporated by reference into its
comments a document it submitted to DOE in March 2014. RFI Comment of
ConverDyn, Enclosure, at 5 n.12; NIPC Comment of ConverDyn, Enclosure,
at 1 n.1. That document provides estimates of the effect of DOE
transfers on ConverDyn's sales volume and profits, but it does not
provide financial information demonstrating that those effects have
occurred or supporting analysis explaining why a given change in
ConverDyn's sales or revenue should be attributed to DOE transfers.
Letter from Malcolm Critchley, ConverDyn, to Peter B. Lyons, DOE (Mar.
10, 2014); see also Supplemental Declaration of Malcolm Critchley,
ConverDyn v. Moniz, Case no. 1:14-cv-01012-RBW, Document 21-2, at ] 7
(July 14, 2014). Specifically, ConverDyn [REDACTED] and that the lost
sales associated with DOE transfers would be equally distributed among
itself, Areva and Cameco. This amounts to 933 MTU per year, [REDACTED].
Id. at 5 n.3. ConverDyn then provides a table asserting that it would
experience [REDACTED]. Id. at 4-5.
---------------------------------------------------------------------------
\96\ A version of this table appeared as Table 7 in Section
III.B.3 of the Department's March 18, 2015, Notice of Issues for
Public Comment. 80 FR 14,119. The figures in that table and
accompanying text were slightly different from those found in the
2015 ERI Report. This version of the table includes the correct
figures from page 68-70 of the 2015 ERI Report. This difference
between the two sets of figures is minimal.
\97\ ConverDyn states that any economic model should analyze
actual sales data including both historic and forward sales. RFI
Comment of ConverDyn, Enclosure, at 2. To the extent that such data
has been provided to DOE through responses to the RFI, NIPC, and
ConverDyn's March 10, 2014 letter, this analysis considers those
data. However, if the suggestion is that no economic model
constructed without such data is reasonable, DOE does not agree.
\98\ ConverDyn suggests that it believes DOE is requesting or
requiring it to submit specific information. NIPC Comment of
ConverDyn, Enclosure, at 1-2. To the contrary, DOE is merely
describing its assumptions and its reasoning. In some respects DOE
has made use of information that ConverDyn provided, and on some
points DOE has used other inputs. It is appropriate for DOE to
consider, in making factual inferences, whether a given inference is
consistent with information provided by ConverDyn, conflicts with a
submission, or is made in the absence of information from ConverDyn.
---------------------------------------------------------------------------
In addition to the above, ConverDyn notes in its RFI comment that
the Metropolis Works facility ceased production beginning in January
2015 for a period of approximately three months. The facility
apparently stops operating on an annual basis for maintenance and
upgrades, but ConverDyn states that the pause is ordinarily only one
month long. ConverDyn states that the longer shutdown was necessitated
by ``the continued depressed state of the conversion market.'' Although
ConverDyn refers to the displacement of conversion sales by DOE's
transfers, it acknowledges that DOE's transfers are not the sole cause
of the lengthening of Metropolis Works facility's annual shutdown.
ConverDyn does not include supporting data or otherwise provide a
proportionate breakdown of the impact of DOE material versus other
factors in causing this shutdown. RFI Comment of ConverDyn, Enclosure,
at 4.
The UxC Report does not provide estimates for production levels or
production costs at individual facilities, but its report does note
that the cost for primary producers is ``known to be in the range of
$10-$15/kgU.'' UxC Report, 15. In a separate publication, UxC provides
more detailed estimates of both current production levels and projected
future production for individual facilities. Market share can be
determined by comparing production levels to those of other primary
producers and secondary sources. UxC Conversion Market Outlook--
December 2014, 45-47 (2014). Notably, UxC's estimates of production at
MTW [REDACTED]. Id. at 47. [REDACTED].\99\ Id. at 46. [REDACTED]. Id.
at 48.
---------------------------------------------------------------------------
\99\ UxC's figures for worldwide supply include both primary
production and secondary supplies from sources such as re-enrichment
of tails and underfeeding. [REDACTED]. UxC Conversion Market
Outlook--December 2014, 46 (2014).
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[[Page 26407]]
Traxys provides some information relevant to DOE's assessment of
the likely impact its transfers will have on production by the domestic
conversion industry. Traxys explains that in selling material obtained
from Fluor-B&W Portsmouth, it pursues a goal to sell at least 50% of
the material to non-U.S. customers. Traxys states that it has
consistently met this goal. RFI Comment of Traxys, at 1. Traxys further
explains that in 2014 no more than 40% of DOE-derived material was sold
in the U.S. market. RFI Comment of Traxys, at 2.\100\ This is similar
to the amount of conversion that Traxys has separately stated went to
the U.S. market in prior years. Traxys stated in July 2014 that 42% of
DOE-derived conversion entered the U.S. marketplace during calendar
year 2013. Declaration of Kevin P. Smith, ConverDyn v. Moniz, Case no.
1:14-cv-01012-RBW, Document 17-7 at ]11 (July 7, 2014).
---------------------------------------------------------------------------
\100\ Traxys also states that it purchased additional conversion
in 2014 above and beyond what it purchased from Fluor B&W
Portsmouth. Traxys suggests that these purchases ``offset'' an
equivalent of DOE-introduced quantities. RFI Comment of Traxys, at
1. As far as DOE is aware, these purchases are unrelated to its
transfers of natural uranium hexafluoride to FBP. Thus, DOE does not
treat these purchases as ``offsetting.''
---------------------------------------------------------------------------
MTW's actual production has fluctuated dramatically in recent
years, ranging from 4.5 to 11 million kgU, for a number of reasons
including work stoppages due to labor disputes, shutdowns imposed by
MTW's safety regulator, and plant upgrades as well as possibly
competition with other sources of conversion. The scale of those
fluctuations, and of the associated financial consequences, makes it
difficult to identify an amount of reduced production that could
reasonably be attributed to DOE's past transfers--an analytical step
that would otherwise help inform DOE's forecast of the effect of future
transfers on MTW's production. In what follows, DOE will apply basic
economic principles to information gleaned from ConverDyn and other
sources to make that evaluation.
ConverDyn offers a scenario in which DOE transfers at 2,800 MTU per
year would cause ConverDyn to lose sales of 933 MTU per year. Letter
from Malcolm Critchley, ConverDyn, to Peter B. Lyons, DOE, 4-5 (Mar.
10, 2014); see also Supplemental Declaration of Malcolm Critchley,
ConverDyn v. Moniz, Case no. 1:14-cv-01012-RBW, Document 21-2, at ] 7
(July 14, 2014). DOE does not believe that ConverDyn's estimate that it
would lose volume of 933 MTU per year is accurate. ConverDyn estimated
that loss by reasoning that each of three Western conversion
providers--i.e. not those providers in Russia or China--would
experience volume losses equal to one third of the amount of DOE
transfers (at the old 2,800 MTU per year rate). That analysis is overly
simplistic. As ERI explains, approximately one third of DOE-sourced
uranium is distributed in the world outside the United States, whereas
ConverDyn's U.S. sales generally represent more than a third of its
recent production. Assuming that ConverDyn's domestic market share is
25%, or 4.5 million kgU, data from UxC indicate that approximately
[REDACTED] would be devoted to U.S. sales. UxC Conversion Market
Outlook--December 2014, 45-46 (2014). The relative volume loss to the
different converters should depend on the relative proportions of each
converter's production that ends up on the U.S. versus world market. It
seems unlikely that the three converters have identical market shares
in the various world markets. Thus, all else being equal, one would not
expect ConverDyn to have the same volume loss as its peers elsewhere.
ERI's analysis takes account of this difference in market share
between the U.S. and the rest of the world. DOE believes that ERI's
approach to estimating lost sales volume based on market share is
reasonable.\101\ However, ERI's estimate assumes that ConverDyn's
production volume will be 8.25 million kgU in 2015. Based on other
available information, DOE believes that that both sales and production
at MTW are significantly higher. Specifically, ConverDyn has provided
information about sales, and UxC estimates and forecasts MTW's
production. ConverDyn's March 10, 2014 Letter suggested [REDACTED].
Letter from Malcolm Critchley, ConverDyn, to Peter B. Lyons, DOE, 5 n.3
(Mar. 10, 2014). Similarly, UxC estimates [REDACTED]. UxC Conversion
Market Outlook--December 2014, 46 (2014). Applying ERI's approach to
this higher estimate of MTW production, DOE concludes that as a
consequence of DOE transfers under the assessed case, MTW can be
expected to experience a reduction in production volume of about
700,000 kgU in 2015, and 600,000 kgU in 2016 and 2017.\102\
---------------------------------------------------------------------------
\101\ ConverDyn urges DOE to consider the effects of prior
uranium inventory transfers in assessing the reduction in demand and
sales volume. DOE believes that for transfers for Portsmouth cleanup
and down-blending services, any displaced sales volume will take
place in the year of transfer. However, DOE agrees that certain
prior transfers have effects in the market several years after the
actual transfer, and it has taken these effects into account.
\102\ This calculation assumes MTW production volumes in line
with UxC's base case primary conversion supply estimate for 2015,
2016, and 2016. UxC Conversion Market Outlook--December 2014, 46
(2014). Specifically, UxC estimates [REDACTED]. Id.
---------------------------------------------------------------------------
In addition to the above effects, ConverDyn's March 10, 2014,
letter also refers to [REDACTED]. Letter from Malcolm Critchley,
ConverDyn, to Peter B. Lyons, DOE, 5-6 (Mar. 10, 2014). DOE believes
that these [REDACTED]. ConverDyn acknowledges that this may be the case
[REDACTED]. Id. at 5 n.3. [REDACTED]. [REDACTED] on the basis of the
total price gap between term and spot prices, which is about $8.50 per
kgU. As discussed above, DOE's best estimate of the price effect under
the assessed case is a suppression of about $0.80. That amount
represents about 9% of the current gap between the spot and term
prices.
b. Production Costs
Based on the estimates of the effect of DOE transfers on
ConverDyn's production volume, ERI also estimated the change in average
per unit production costs that a volume decrease would cause. ERI's
approach to calculating this effect is straightforward. Average per
unit production cost can be calculated by dividing the total production
cost by the number of units produced. If MTW's costs were 100%
variable, then average production costs would not change, regardless of
the volume produced. However, if some portion of MTW's costs are fixed,
then a decrease in the number of units produced would lead to increased
production costs, and vice versa. If the proportion of fixed costs,
current production volume, and current per unit production cost are all
known, the change in average production cost can be easily calculated.
ERI looked to various public sources and estimates to provide a basis
for its assumptions. DOE believes that this a reasonable approach for
estimating the effect of DOE transfers on production cost at MTW.
As discussed above, ERI estimates that ConverDyn's current sales
volume is 8.25 million kgU. This estimate is based on ConverDyn's
statements about prior production levels at MTW and a stated 25%
decrease in volume associated with the Fukushima accident. 2015 ERI
Report, 65. ERI then estimates that MTW's current average per unit
production cost is $15 kgU. This cost is primarily based on ConverDyn's
claim that it has lost more than $100 million in the past decade.
Finally, ERI analyzed two scenarios
[[Page 26408]]
assuming fixed costs make up 80% or 100% of MTW's total production
costs. ERI states that these assumptions are based on the fact that
conversion facilities in general have fairly high fixed costs relative
to variable costs. 2015 ERI Report, 71.
DOE believes that ERI's estimate of production cost at $15 per kgU
is reasonable. This appears to be a conservative estimate because it
falls at the upper end of UxC's estimate, and because it is about as
high as production costs could be for ConverDyn to have a viable
business at the price point it set by its own announcement in 2010 and
2011. In addition, ConverDyn has not disputed ERI's estimate of MTW's
production costs.
However, as stated above, based on ConverDyn's statements and
estimates from UxC, DOE believes MTW's current production volume is
higher than 8.25 million kgU. Thus, ERI's estimate of MTW production
volume appears to be an underestimate. In addition, DOE believes that
ConverDyn's fixed costs are somewhat lower than 80%. ConverDyn has not
provided details of its cost structure, but it has provided information
that is consistent with ERI's analysis while suggesting that ERI
overestimated ConverDyn's fixed costs. ConverDyn offers a scenario in
which DOE transfers at 2,800 MTU per year would cause ConverDyn to lose
sales of 933 MTU per year. The company says that decrease in volume
would result in [REDACTED]. Letter from Malcolm Critchley, ConverDyn,
to Peter B. Lyons, DOE, 4-5 (Mar. 10, 2014). ConverDyn's fixed costs
would not change if ConverDyn lost sales, so the change in profit would
be due to the decrease in revenues, offset by the elimination of the
variable costs that would have been incurred to produce the lost
volume. See Supplemental Declaration of Malcolm Critchley, ConverDyn v.
Moniz, Case no. 1:14-cv-01012-RBW, Document 21-2, at ] 7 (July 14,
2014). The revenue decrease from losing 933 MTU in volume would be
about $14.9 million. [REDACTED].\103\ Assuming MTW has production costs
of $15 per kgU and MTW's variable costs are [REDACTED], then fixed
costs at MTW should be [REDACTED]. This represents about [REDACTED] of
total costs. DOE adopts this estimate of ConverDyn's variable costs,
because it is based on information ConverDyn has provided.
---------------------------------------------------------------------------
\103\ DOE assumes that ConverDyn's calculation is based on the
loss of sales at the prevailing term price in March 2014, i.e.
$16.00 per kgU. DOE recognizes that there are actually two
mechanisms by which ConverDyn may lose sales. [REDACTED] Letter from
Malcolm Critchley, ConverDyn, to Peter B. Lyons, DOE, 5 n.3 (Mar.
10, 2014). To the extent that some reduced sales come from this
latter category, [REDACTED]. Given that term prices have remained
relatively steady for the past several years, DOE does not believe
the difference would be significant for the purposes of this
analysis.
---------------------------------------------------------------------------
DOE has performed an analysis like ERI's, using the different
assumptions discussed above. Specifically, this calculation uses $15
per kgU as MTW's current production cost, [REDACTED] as the proportion
of fixed cost, and UxC's base case primary conversion supply estimate
of MTW's production volume as MTW's production volume with DOE
transfers \104\--namely[REDACTED]. UxC Conversion Market Outlook--
December 2014, 46 (2014). Based on these inputs, DOE concludes that
transfers in the assessed case would increase MTW's average production
cost by $0.63 in 2015, $0.49 in 2016, and $0.45 in 2017.
---------------------------------------------------------------------------
\104\ UxC's conversion market outlook bases these estimates
based on current market conditions. As described above, DOE believes
that the ConverDyn's current sales volume should reflect a level of
transfers at 2,705 MTU per year. DOE notes that this is somewhat
higher than the assessed case. Thus, MTW's production volume in
future years should be slightly higher due to this reduction. DOE
does not believe this difference is significant enough to markedly
change this calculation.
---------------------------------------------------------------------------
DOE does not believe this increase indicates an adverse material
impact. In recent years MTW has experienced several significant
disruptions in its business that are not attributable to DOE transfers.
These disruptions have caused MTW's annual production to vary
significantly--from as high as 11 million kgU to as low as 4.5 million
kgU, the latter figure representing less than a third of MTW's
nameplate capacity. DOE notes that the predicted decrease in volume
reasonably attributable to DOE--i.e. 700,000 kgU in 2015 and 600,000
kgU in 2016 and 2017--and the associated decrease in MTW's average
production cost, are substantially smaller than the production
decreases at MTW from these other disruptions. The production swings
experienced at MTW in recent years have been as much as seven times the
magnitude of the sales volume decreases attributable to DOE.
Moreover, the conversion industry has maintained term prices at
around $16 per kgU notwithstanding those fluctuations. As discussed
above, converters seem able to demand, and conversion purchasers seem
willing to accept, prices high enough to cover production costs and
justify the investment to maintain conversion capacity. As average
production costs increase over time--which they will do even absent
DOE's transfers--it seems likely the prices of term contracts will keep
pace.
3. Employment Levels in the Industry
ERI notes that Metropolis Works restarted after an extended
shutdown in summer 2013 with approximately 270 employees. Prior to the
2012-2013 shutdown, ERI estimates that the facility employed
approximately 334 people. As this change coincided with a change in
long-term production volume, ERI concludes that it is unlikely that
100% of Metropolis Works' production costs are fixed. 2015 ERI Report,
72-73. Although it does not provide specific estimates, ERI states that
``[a] portion of the reduction in work force at Metropolis Works may be
associated with the introduction of DOE inventory into the market.''
However, ERI also notes that several other factors likely played a part
as well. 2015 ERI Report, 73. ConverDyn does not provide a separate
estimate of decreased employment levels due to DOE transfers; instead
ConverDyn referred to the relevant sections of the 2014 ERI Report,
which reaches conclusions similar to those in the 2015 ERI Report. RFI
Comment of ConverDyn, Enclosure, at 5.
The Department recognizes that employment at the MTW facility is
lower than in prior years. Little of this decrease can reasonably be
attributed to DOE transfers. While some portion of MTW's labor force is
a fixed cost that does not depend on volume, DOE estimates the maximum
amount of decrease attributable to DOE transfers by assuming all
employment at ConverDyn and MTW varies directly with production. As
discussed above, DOE forecasts that transfers under the assessed case
will reduce MTW's production by 700,000 kgU in 2015 and 600,000 kgU in
2016 and 2017, or 7% of expected 2015 production and 5% expected
production in 2016 and 2017. Assuming all of ConverDyn's current labor
force is fully variable with production, the employment decrease
reasonably attributable to DOE transfers in futures years would be
approximately 19 person-years in 2015, 14 person-years in 2016, and 13
person-years in 2017. Of course, the assumption that labor is fully
variable is likely to be quite conservative, and it is more likely that
a substantial portion of the labor force is a fixed cost. If 50% of
labor costs are variable, this would result in a reduction of 9 lost
person-years in 2015 and 7 lost person-years in 2016 and 2017. As with
comparable analyses discussed above, these figures represent a
persistently lower employee count; DOE is not forecasting that every
year ConverDyn will lose an additional 7 to 19 employees.
[[Page 26409]]
A reduction in employment of 7 or even 19 person-years is
relatively small, particularly in comparison to MTW's reduction of
approximately 64 after the 2012-2013 shutdown. The industry has been
able to weather employment losses much larger than any that could
reasonably be attributed to DOE transfers.
4. Changes in Capital Improvement Plans and Development of Future
Facilities
Although there are several large-scale development projects
currently planned or underway outside the United States--namely AREVA's
COMURHEX II modernization project and TVEL's plan for a new facility at
SCC--DOE is not aware of any such plans in the United States. See
Eileen Supko & Thomas Meade, ``New facilities are on the horizon,''
Nuclear Engineering International (Oct. 6, 2014), available at http://www.neimagazine.com/features/featurenew-facilities-are-on-the-horizon-4394892; UxC Conversion Market Outlook--December 2014, 50, 56-57, 73
(2014).\105\
---------------------------------------------------------------------------
\105\ ConverDyn states that large-scale projects outside the
United States are immaterial. NIPC Comment of ConverDyn, Enclosure,
at 7. Consistent with the analytical approach described above, DOE's
task is to forecast the state of the domestic uranium conversion
industry with and without DOE transfers under the assessed case.
However, DOE believes activities in the global conversion industry
may in some cases be relevant for predicting how DOE transfers will
affect the domestic conversion industry.
---------------------------------------------------------------------------
Metropolis Works has, however, undertaken substantial capital
expenditures at its existing facility in recent years. Honeywell has
stated that it has invested ``nearly $177 million over the past 10
years in capital improvements, including $50 million in safety
projects.'' ``About Us,'' Honeywell, http://www.honeywell-metropolisworks.com/about-us.\106\ Some of these upgrades came during
an extended shutdown in 2012 and 2013, in which Metropolis Works made
upgrades to ensure the facility could withstand extreme natural
disasters. These changes were made under an agreement with the U.S.
Nuclear Regulatory Commission (``NRC'') in response to an inspection
NRC conducted in the wake of the Fukushima disaster in Japan.
``Honeywell and U.S. Nuclear Regulatory Commission Reach Agreement on
Necessary Upgrades to Metropolis Nuclear Conversion Facility,'' News
Release (Oct. 16, 2012), available at http://www.honeywell-metropolisworks.com/?document=oct-16-2012-press-release-honeywell-and-u-s-nuclear-regulatory-commission-reach-agreement-on-necessary-upgrades-to-metropolis-nuclear-conversion-facility&download=1.
---------------------------------------------------------------------------
\106\ Letters from Honeywell management include similar numbers.
A November 20, 2014, letter included identical figures. Jim
Pritchett, Honeywell Metropolis Works, Letter to Employees (Nov. 20,
2014), available at http://www.honeywell-metropolisworks.com/?document=letter-to-employees-23&download=1. Older letters provided
slightly different figures. Jim Pritchett, Honeywell Metropolis
Works, Letter to Community (Dec. 19, 2013), available at http://www.honeywell-metropolisworks.com/?document=letter-to-the-community-from-new-metropolis-works-plant-manager&download=1.
---------------------------------------------------------------------------
In terms of current plans, Metropolis Works announced in November
2014 that it would be shutting down for approximately 90 days beginning
in early January 2015. Honeywell noted that it would use the extended
shutdown to make updates and capital improvements. Jim Pritchett,
Honeywell Metropolis Works, Letter to Employees (Nov. 20, 2014),
available at http://www.honeywell-metropolisworks.com/?document=letter-to-employees-23&download=1; see also Comment of ConverDyn, Enclosure,
at 4. Honeywell has further stated that the company plans to spend
$17.5 million in improvements during 2015. Jim Pritchett, Honeywell
Metropolis Works, Letter to Employees (Jan. 30, 2014), available at
http://www.honeywell-metropolisworks.com/?document=letter-to-employees-24&download=1. Honeywell recently announced that MTW would restart
production on or about April 1, 2015. Honeywell Metropolis Works, News
Item (Mar. 27, 2015), http://www.honeywell-metropolisworks.com/news/
(accessed Mar. 31, 2015).
With the expected increase in demand for conversion services
worldwide, DOE believes that it is likely that MTW will continue to
make capital improvements and refurbishments necessary to maintain
current capacity. Honeywell has invested a substantial amount in such
capital improvements in recent years. UxC reports that [REDACTED]. UxC
Conversion Market Outlook--December 2014, 70 (2014). ConverDyn's
comments agree with that proposition; ConverDyn indicates that it is
not planning to expand capacity but does intend to maintain its
capacity. NIPC Comment of ConverDyn, Enclosure, at 7.
DOE does not believe that the price effect associated with DOE
transfers would make a significant difference in plans for new
facilities or other capital improvements at existing facilities. As
described above, the term price, at which the vast majority of capacity
is transacted, appears to respond weakly to changes in supply. DOE
transfers are expected to decrease ConverDyn's sales volume, but even
without DOE transfers, ConverDyn's total sales would still be below
MTW's current maximum nameplate capacity. In addition, transfers under
the assessed case will represent only about 3% of total supply in
coming years, and about 11% of secondary supply. In light of forecasts
of supply and demand by ERI and UxC, DOE concludes that eliminating
this amount of conversion would not make a difference to the assessment
that new capacity is not warranted.
5. Long-Term Viability and Health of the Industry
ERI's most recent Reference Nuclear Power Growth forecast predicts
global requirements for conversion services will grow to approximately
67.2 million kgU by 2020, approximately 20% higher than current
requirements. Global requirements are expected to continue to rise to a
level of 91.4 million kgU by 2035, approximately 63% higher than
current requirements. 2015 ERI Report, 13.\107\ ERI presents a graph
comparing global requirements, demand, and supply from 2013-2035.
Global secondary supply and supply from primary converters are expected
to exceed global demand until at least 2025. Beyond that point, supply
is forecast generally to keep pace with growth in requirements. 2015
ERI Report, 14.
---------------------------------------------------------------------------
\107\ ERI's reference requirements include anticipated future
reactor shutdowns, both in the United States and elsewhere, due to
reasons such as competition with natural gas and other energy
sources.
---------------------------------------------------------------------------
Although not focused on conversion, the requirements forecasts
noted above in Section IV.A.5 are also relevant to the conversion
industry. In general, requirements and/or uranium concentrate demand
forecasts should also apply to demand for conversion services.\108\
However, there may be some small differences due to strategic and
discretionary inventory building. For example, China has been
purchasing strategic supply well in excess of its requirements. Those
purchases have come in the form of U3O8. 2015 ERI
Report, 13. Thus, these purchases affect near-term uranium concentrate
demand, but do not affect near-term conversion demand.
---------------------------------------------------------------------------
\108\ ConverDyn suggests that forward demand from Japanese
reactors should be assumed to be zero until at least 2018. As stated
above, the requirements and demand outlooks of TradeTech predict
growth in demand despite planned reactor shutdowns in Germany and
decreased demand from Japan. It also appears that UxC projections
account for decreased demand from Japan as well.
---------------------------------------------------------------------------
In its December 2014 Conversion Market Outlook, UxC predicts
significant increases in both
[[Page 26410]]
requirements and demand in the long-term. UxC Conversion Market
Outlook--December 2014, 40, 44 (2014). Specifically, [REDACTED]. Id. at
44. In the longer term, [REDACTED]. Id. UxC projects that conversion
supply [REDACTED]. Id. at 46. [REDACTED]. Id. at 47.
UxC also provides a more detailed explanation of its price
forecast, which generally predicts an increase in price over the next
10 years. UxC Conversion Market Outlook--December 2014, 82, 85 (2014).
[REDACTED]. Id. at 82. [REDACTED]. Id. at 75. UxC provides a separate
forecast for the term price. [REDACTED]. Id. at 85. UxC also notes that
some market participants [REDACTED]. Id. at 73.
Finally, as with uranium concentrates, DOE recognizes that the
predictability of transfers from its excess uranium inventory over time
is important to the long-term viability and health of the uranium
conversion industry. Again, DOE notes that the upper scenario
considered by ERI would represent continued transfers at rates
consistent with the May 2012 and May 2014 determinations. Compare 2015
ERI Report, 25, with 2014 ERI Report, 28.
As described above, demand is expected to increase substantially in
the next several years. Along with it, as the existing conversion
facilities age, additional capital improvement for refurbishments will
be required. Even with these refurbishments, eventually, new conversion
capacity will be necessary to match increasing demand. Given that
demand in North America is not expected to decrease substantially and
that enrichment capacity is expected to increase, it is likely that the
domestic uranium conversion industry will retain its capacity, either
through continuing refurbishments at MTW or through the development of
one or more new conversion facilities.\109\
---------------------------------------------------------------------------
\109\ ConverDyn suggests that Russian, Chinese, and Indian
demand should be excluded because these markets are closed to sales
from the domestic conversion industry. DOE notes that even if North
American converters lack access to these markets, converters in
those countries have access to markets worldwide. ConverDyn does not
contest the notion that conversion is essentially a global
commodity. Thus, increased demand in Russia, China, and India will
consume capacity with which ConverDyn would otherwise compete in
markets that it can access.
---------------------------------------------------------------------------
Although DOE transfers may not have a large effect on the
conversion term price, displaced production volume increases average
production costs for primary producers. DOE does not believe this
effect will be large enough to significantly alter planned decisions
about conversion capacity in the United States. At worst, as with the
uranium mining industry, the effect of DOE transfers would be to shift
major capital improvements later in time. DOE does not believe that
this difference is significant enough to appreciably affect the long-
term viability and health of the domestic uranium conversion industry.
ConverDyn has submitted, on several occasions, figures for losses
it says it has suffered in the recent past. These figures vary.
ConverDyn stated in its March 10, 2014 letter that [REDACTED]. Letter
from Malcolm Critchley, ConverDyn, to Peter B. Lyons, DOE, 1 (Mar. 10,
2014). In addition, ConverDyn asserts that it is a marginal business,
by which it appears to mean that it is only barely viable. There is
some tension between these assertions, together with the fact that MTW
has continued to invest substantial amounts of money to maintain and
upgrade the facility, most recently in the beginning of 2015. In any
case, many causes have contributed to ConverDyn's financial results.
Those causes include, among others, the consequences of the Fukushima
disaster \110\ and the various production stoppages MTW has
experienced. Indeed, some of the losses ConverDyn has cited predate any
substantial DOE transfers of uranium hexafluoride. As explained above,
DOE bases its determination on an analysis of what the state of an
industry would be with DOE transfers as compared to its state without
transfers, and an assessment of what impacts can reasonably be
attributed to the transfers. ConverDyn's submissions do not include
such an analysis that would attribute some portion of the losses to
DOE's transfers. They therefore do not call into question the economic
analysis described above.
---------------------------------------------------------------------------
\110\ ConverDyn further states [REDACTED]. Letter from Malcolm
Critchley, ConverDyn, to Peter B. Lyons, DOE, 4 (Mar. 10, 2014).
[REDACTED].
---------------------------------------------------------------------------
6. Russian HEU Agreement and Suspension Agreement
Section 3112(d) of the USEC Privatization Act requires DOE to
``take into account'' the sales of uranium under the Russian HEU
Agreement and the Suspension Agreement. As discussed above, DOE
believes this assessment should consider any transfers under these two
agreements that are ongoing at the time of DOE's transfers.
Under the Russian HEU Agreement, upon delivery of LEU derived from
Russian HEU, the U.S. Executive Agent, USEC Inc., was to deliver to the
Russian Executive Agent, Technabexport (Tenex), an amount of natural
uranium hexafluoride equivalent to the natural uranium component of the
LEU. DOE notes that the Russian HEU Agreement concluded in December
2013. Thus, there are no ongoing transfers under this agreement.
The current iteration of the Suspension Agreement, described above
in Section I.D.3.b, sets an annual export limit on natural uranium from
Russia. 73 FR 7705 (Feb. 11, 2008). That agreement provides for the
resumption of sales of natural uranium and SWU beginning in 2011. While
the HEU Agreement remained active (i.e. 2011-2013), the annual export
limits were relatively small-- equivalent to between 170,000 and
410,000 kgU as UF6. After the end of the Russian HEU
Agreement, restrictions range between an amount equivalent to 4,540,000
and 5,140,000 kgU as UF6 per year between 2014 and 2020. 73
FR 7705, at 7706 (Feb. 11, 2008). Material imported from Russia in
accordance with the Suspension Agreement is not derived from down-
blended HEU; thus, this material is part of worldwide primary supply as
analyzed by ERI in the 2015 ERI Report.\111\ This material is also
presumably accounted for in the various projections and models
developed by TradeTech and UxC. Thus, DOE's analysis takes those sales
that have a conversion component under the Suspension Agreement into
account as part of overall supply available in the market.
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\111\ ERI states that it assumes 80% of the material supplied
under the Suspension Agreement includes a conversion component. ERI
further states that it believes Rosatom would not have a market for
these included conversion sales without the Suspension Agreement.
2015 ERI Report, 83. In any case, it appears that ERI's analysis
includes this material as part of the overall conversion supply.
---------------------------------------------------------------------------
7. Conversion Industry Conclusion
After considering the six factors as discussed above, DOE concludes
that transfers under the assessed case will not have an adverse
material impact on the domestic uranium conversion industry. MTW and
ConverDyn, together the sole conversion provider in the United States,
sell nearly exclusively on term contracts. As explained above, DOE
transfers will not affect the term price at which those contracts are
transacted. DOE transfers under the assessed case will contribute to
the spot price a continued $0.70-$0.80 suppression, a somewhat smaller
effect than transfers in the past few years have had. Because only a
very small proportion--if any--of MTW's sales take place at the spot
price, that price suppression will not be material for the domestic
industry.
In addition, DOE forecasts that over time, MTW's production will be
smaller
[[Page 26411]]
than it would have been in the absence of DOE transfers by 700,000 kgU
in 2015 and 600,000 kgU in 2016 and 2017. DOE conservatively estimates
such a reduction would increase MTW's average production costs by about
$0.63 in 2015, $0.49 in 2016, and $0.45 in 2016. DOE does not believe
this change would constitute an adverse material impact, within the
meaning of section 3112(d), because it is well within the range of
production changes that MTW has experienced in recent years independent
of DOE transfers. The reduced production may also lead to a decrease in
employment, but DOE expects that decrease to be no more than a
persistent 19 person-years in 2015 and 14 person-years thereafter, a
smaller change than what MTW has implemented on its own in ordinary
business decisions.
Honeywell, the owner and operator of MTW, continues to invest in
maintaining and refurbishing the MTW facility, and DOE transfers seem
unlikely to change those plans. ConverDyn claims that MTW is on the
verge of collapse. If that is so, DOE does not believe that MTW's state
is reasonably attributable to DOE's recent transfers or that the dire
outcomes ConverDyn predicts will reasonably be attributable to
transfers under the assessed case.
DOE does not believe that any of the effects described for the
domestic uranium conversion industry have the substantial importance
that would make them ``adverse material impacts'' within the meaning of
section 3112(d).
C. Uranium Enrichment Industry
The domestic uranium enrichment industry consists of a relatively
small number of companies, one of which operates a currently operating
enrichment facility and several of which are developing facilities
expected to begin production in the near future. The Paducah Gaseous
Diffusion Plant, which was operated by USEC Inc.--since restructured as
Centrus Energy Corp.--closed in 2013. Centrus may still be selling SWU
from its inventory of uranium enriched at that facility, but this
material is finite. Thus, there is only one currently operating
enrichment facility in the United States, the URENCO USA (UUSA) gas
centrifuge facility in New Mexico.\112\ DOE is also aware of three
other planned enrichment facilities in Idaho, Ohio, and North Carolina.
---------------------------------------------------------------------------
\112\ This facility is operated through Louisiana Energy
Services, LLC, a subsidiary of Urenco Limited.
---------------------------------------------------------------------------
The current capacity of the UUSA facility is 3.7 million SWU. For
comparison, the World Nuclear Association reports that worldwide
capacity in 2015 is approximately 61 million SWU. See WNA, ``Uranium
Enrichment'' (Jan. 2015), http://www.world-nuclear.org/info/Nuclear-Fuel-Cycle/Conversion-Enrichment-and-Fabrication/Uranium-Enrichment/
(accessed Mar. 31, 2015).
1. Prices for Enrichment Services
Like market prices for uranium concentrates and conversion,
enrichment market prices are generally described in terms of the spot
price and the term price. This section discusses the potential impacts
of DOE transfers on these two prices. For reference, as of March 30,
2015, UxC's spot price indicator is $79.00 per separative work unit
(SWU) and its term price indicator is $90.00 per SWU.
Two of the market analyses discussed above contain estimates of the
effect of DOE transfers on the market prices for conversion services:
ERI and UxC. This section begins with a summary of each report and then
discusses DOE's review of the reports' methodologies and conclusions.
This section concludes with a discussion of how a change in conversion
market prices would affect the domestic uranium enrichment industry. A
principal mechanism through which such a change in market price could
impact individual producers is through the effect on the realized price
of primary enrichers.
a. Energy Resources International Report
In its analysis, ERI estimates the effect of DOE transfers on the
market prices for enrichment services. To estimate this effect, ERI
employed a market clearing price model similar to what is described
above for the uranium and conversion markets. As with uranium
concentrates and conversion, ERI constructed individual supply and
demand curves for enrichment services and estimated the clearing price
with and without DOE transfers. 2015 ERI Report, 44. The discussion in
Section IV.A.1 regarding DOE's analysis of ERI's market clearing
approach analysis also applies to ERI's estimates of the effect of DOE
transfers on market prices for enrichment services. A summary of ERI's
estimates of the effect of DOE transfers on the market price for SWU
appears in Table 15.
As with uranium concentrates, DOE tasked ERI with estimating the
effects of DOE transfers under the same three scenarios described in
Section IV.A.1. The amounts of uranium entering the market at various
times in different scenarios are outlined above in Table 4 in terms of
MTU natural uranium equivalent.\113\ Not all of the uranium under these
scenarios includes an enrichment component--denominated in SWU. The
amount of SWU that is necessary to produce the volumes contemplated
under the different scenarios are listed in Table 14. For the LEU
transferred for down-blending services, these figures are calculated
assuming natural uranium feed, a tails assay of 0.20 wt-% U-235, and a
product assay of 4.95 wt-% U235.\114\ As with uranium concentrates, the
assessed case falls somewhere between Scenarios 1 and 2 when calculated
in terms of SWU.
---------------------------------------------------------------------------
\113\ As noted above, the transfer rates for these scenarios
refer only to the level of uranium transfers for cleanup at
Portsmouth and down-blending of LEU. Uranium transfers under other
programs--i.e. blended LEU to TVA, depleted uranium hexafluoride to
Energy Northwest, and the possible future transfer of depleted
uranium hexafluoride to GE-Hitachi Global Laser Enrichment--are the
same in all three scenarios.
\114\ The ``natural uranium equivalent'' figures for material
from down-blending listed in Table 4 are also based on these
assumptions. The natural uranium equivalent is then adjusted to take
account of the natural uranium required as diluent as part of the
down-blending process--typically 10% of the total natural uranium
equivalent.
Table 14--Enrichment Component of Scenarios Considered in This Analysis
----------------------------------------------------------------------------------------------------------------
Enrichment component of transfers for Portsmouth cleanup and down-blending in SWU
-----------------------------------------------------------------------------------------------------------------
Portsmouth
cleanup Down-blending Total
----------------------------------------------------------------------------------------------------------------
ERI Scenario 1......................................... 0 680,000 680,000
ERI Scenario 2......................................... 0 470,000 470,000
ERI Scenario 3......................................... 0 0 0
Assessed Case.......................................... 0 520,000 520,000
----------------------------------------------------------------------------------------------------------------
[[Page 26412]]
Table 15 summarizes ERI's results. As with uranium concentrates,
the relationship between the amount of transfers under each scenario
and the price effect is essentially linear for each year ERI analyzed
(2015-2024). Compare Table 3.8 to Table 4.3 of 2015 ERI Report, 25-26,
45. Thus, it possible to interpolate the price effect that ERI's
analysis would predict for other levels of transfers. The estimated
price effect for the assessed case is approximately $0.20 higher than
ERI's estimates for Scenario 2. These interpolated values are included
in Table 15.
Table 15--ERI's Estimate of Effect of DOE Transfers on Uranium Enrichment Prices in $ per SWU
[Market clearing approach]
----------------------------------------------------------------------------------------------------------------
2015 ERI Report
-----------------------------------------------------------------------------------------------------------------
Assessed case
ERI Scenario 1 ERI Scenario 2 ERI Scenario 3 (interpolated)
----------------------------------------------------------------------------------------------------------------
2015................................ $5.90 $5.10 $3.20 $5.30
2016................................ 3.80 3.00 1.10 3.20
2017................................ 3.50 2.60 0.70 2.80
2018................................ 4.70 3.90 2.00 4.10
2019................................ 5.10 4.20 2.30 4.40
2020................................ 4.90 4.00 2.10 4.20
2021................................ 5.20 4.30 2.40 4.50
2022................................ 4.60 3.70 1.80 3.90
2023................................ 4.40 3.50 1.60 3.70
2024................................ 2.80 1.90 0.00 2.10
Average (2015-2024)................. 4.50 3.60 1.70 3.80
----------------------------------------------------------------------------------------------------------------
As with uranium concentrates and conversion, it is important to
emphasize that this is not a prediction that prices will drop by the
specified amount once DOE begins transfers following a new
determination. A level of price suppression consistent with the
estimate for Scenario 1 would, on ERI's analysis, already be reflected
to some extent in the current market price because DOE has been
transferring uranium at that rate for some time. 2015 ERI Report, 44.
The price suppression that ERI estimates would persist under Scenario 3
is largely ERI's estimate of the consequence of past DOE transfers,
from which some of the uranium is still expected to be entering the
market in future years.
b. UxC Report
UxC estimates past effects of DOE uranium transfers on the price of
enrichment services using its proprietary U-PRICE and SWU-PRICE models
and then uses those models to forecast the effects of continued
transfers at the rates described in the May 2014 Determination. UxC
Report, 5. As with its uranium concentrate estimates discussed above,
UxC provides ``incremental'' and ``total impact'' figures. In UxC's
models, continued transfers at a given rate have a cumulative effect,
so that the change to prices increases over time. UxC's ``incremental
approach'' estimates the effect of DOE transfers beginning in 2012. The
``total impact approach'' estimates the effect of DOE transfers
beginning in 2008, so as, in UxC's view, to take full account of the
cumulative effect of all transfers.
Using its incremental approach, UxC estimates that between 2012 and
2014 DOE's transfers reduced the spot price by an average of $7.49 per
SWU and the term price by an average of $5.37 per SWU. Using its total
impact approach, UxC estimates that DOE's transfers between 2008 and
2014 reduced the spot price in the period from 2012 to 2014 by an
average of $9.19 per SWU and the term price by an average of $6.96 per
SWU. UxC Report, 8-9.
UxC also forecasts the effect of DOE's continuing transfers at
current rates for the period 2015 to 2030. A summary of UxC's estimates
of the effect of DOE transfers on future enrichment prices appears in
Table 16. UxC estimates that DOE transfers in the near and medium terms
would reduce the spot price by an average of $5.31 per SWU. UxC
projects that this effect will change slightly in the medium term as
market prices start to recover. Specifically, DOE transfers would
reduce the spot price between 2018 and 2030 by an average of $4.86 per
SWU. UxC also notes that the former number is larger relative to the
expected price of enrichment than the latter number (5.9% versus
3.8%)--both, DOE surmises, because the longer-term price effect is
smaller, and because the longer-term price is higher. UxC Report, 12.
UxC forecasts that DOE transfers in the near and medium terms would
reduce the term price by an average of $5.50 per SWU. Between 2018 and
2030, UxC forecasts that DOE transfers would reduce the term price by
an average of $5.00 per SWU. Again, the near and medium term impact is
larger in relation to the expected price (5.6% versus 3.6%). UxC
Report, 11.
Table 16--UxC's Estimate of Effect of DOE Transfers on Enrichment Spot
and Term Prices in $ per SWU
------------------------------------------------------------------------
UxC Report
-------------------------------------------------------------------------
Near- & mid-
term price Long-term
effect price effect
------------------------------------------------------------------------
Spot Price.............................. $5.31 $4.86
Term Price.............................. 5.50 5.00
------------------------------------------------------------------------
[[Page 26413]]
c. Effect of DOE Transfers on Market Price
After reviewing the market analyses described above, and other
information including other comments received, DOE concludes that ERI's
method for estimating and forecasting the price effects reasonably
attributable to DOE's transfers is reasonable. As explained above, the
market-clearing price analysis is consistent with basic economic
principles and should be a reasonable way to estimate relatively small
changes in price, assuming the market has a competitive price-setting
mechanism. It is not clear whether the enrichment market functions in
that way. The market is even more concentrated than the conversion
market: Only four companies worldwide provide enrichment services, and
one provides services essentially exclusively to Chinese purchasers.
Unlike uranium and conversion, the enrichment market does not include
significant sources of secondary supply.\115\ On the other hand, buyers
may be more sensitive to enrichment prices, both because enrichment
constitutes a larger portion of the total cost of enriched uranium
product and because natural uranium can be substituted, in the
``underfeeding'' sense described above, with uranium.\116\ DOE observes
that enrichment prices have been more variable than conversion prices
and nearly as variable as uranium prices. For example, while enrichment
prices did not drop immediately after the Fukushima incident, as
uranium spot prices did, they have decreased by about 45% since 2011.
Finally, there is not a large gap between spot and term prices for
enrichment, as there is for conversion.
---------------------------------------------------------------------------
\115\ In principle, overfeeding could generate surplus
enrichment services just as underfeeding generates surplus natural
uranium. At the prices prevailing in the recent past and anticipated
in the near future, overfeeding would not be economical. Other
sources of secondary supply in the uranium and conversion markets
provide natural uranium, not enriched uranium. DOE's transfers for
down-blending are secondary supply, but they constitute a much
smaller portion of overall supply than total transfers do relative
to uranium and conversion supplies.
\116\ As noted elsewhere in this analysis, DOE believes the
magnitude of any effect of DOE transfers on the uranium or
enrichment price that is transmitted through the interaction with
the enrichment or uranium price, respectively, is small. It is not
inconsistent with that conclusion to believe that the interaction of
the two prices could help limit the market's susceptibility to
parallel pricing conduct.
---------------------------------------------------------------------------
To be conservative, DOE will assume that a competitive price-
setting mechanism does determine enrichment prices. On that assumption,
ERI's market-clearing analysis should provide an appropriate forecast
for the effects of DOE's transfers. To the extent that enrichment
prices are uncompetitive, the price effect will tend to be smaller than
what ERI forecasts.
Also, DOE notes that ERI's analysis assumes demand for enrichment
to be perfectly inelastic. This assumption is a reasonable
approximation, because, as discussed above, nuclear utilities have
predictable requirements that must be filled. In reality, demand may
have some small degree of elasticity. That elasticity would also tend
to make the price effect smaller than what ERI forecasts.
However, as noted above, ERI's model does not take account of the
interplay between uranium concentrates and enrichment prices. As
explained above, for the uranium concentrates market, DOE expects that
this interplay is not large enough to make a significant difference to
this analysis. With respect to the enrichment market, DOE notes that
only about one quarter of DOE's future transfers under the assessed
case will displace enrichment services. Consequently, the effect of
DOE's transfers on uranium hexafluoride prices should generally be
larger than the effect on enrichment prices. Both ERI and UxC forecast
such a relative difference--about 7% for concentrates for a rate of
2,705 MTU per year, compared to about 4% for enrichment. The amount of
enrichment currently devoted to underfeeding depends in part on the
relative prices of natural uranium hexafluoride and enrichment. If
uranium prices decrease by a relative 3%, enrichers can be expected to
devote less primary supply to underfeeding--on the order of 3% less, or
about 200,000 SWU given that enrichers currently use about 8 million
SWU for underfeeding. This is close to 40% of the total amount of SWU
from DOE transfers under the assessed case.
UxC's model takes these interactions into account. DOE further
notes that UxC's forecast of the effect on SWU prices is quite similar
to ERI's, although it predicts a slightly larger effect on the price.
UxC analyzed transfers that are equivalent to ERI's Scenario 1. Whereas
ERI forecasts a price effect in the near term (2015-2017) of $4.40 for
Scenario 1, UxC forecasts a near-term price effect of $5.31 (spot) or
$5.50 (term). ERI forecasts a longer-term effect averaging $4.50 over
the next decade. By comparison, UxC forecasts an effect of $4.86 (spot)
or $5.00 (term).
While UxC did not provide forecasts for other possible transfer
rates, it is reasonable to assume the price change would be
proportional to the market displacement for supply changes that, like
DOE's, constitute small proportions of total supply and have small
effects on price. Accordingly, DOE concludes that UxC's model would
forecast, for transfers under the assessed case, price effects of $4.55
(spot) or $4.70 (term) in the near-term and $4.15 (spot) or $4.30
(term) in the longer term.\117\ DOE does not place much weight on UxC's
forecast because, as discussed above, UxC's model relies on subjective
exogenous variables such as ``market participants' general perception
of the industry outlook'' and ``changes in market psychology'' that UxC
sets prior to running its model in order to define the scenario that
the model will predict.
---------------------------------------------------------------------------
\117\ Transfers under the assessed case contain, on average,
about 14% less SWU per year than the prior transfer rate.
---------------------------------------------------------------------------
However, DOE does believe that the consistency between UxC's
forecast and ERI's indicates that the effect of interactions between
the uranium and enrichment markets is unlikely to be larger than what
DOE estimates here. Because the forecast price effects are only
estimates, not precise to the penny, and because the underlying
assumptions of ERI's model are reasonable, DOE concludes it is
appropriate to rely on ERI's model with a revision to account for
underfeeding. Accordingly, DOE adjusts the resulting estimate upward by
40% to reflect the additional enrichment supply that may become
available due to the relative changes in uranium and enrichment
prices.\118\ Based on the above, DOE forecasts that transfers under the
assessed case will continue to exert some downward pressure on the
market prices for enrichment services, ranging from around $5.25 in the
near term and $5.40 over the longer term.
---------------------------------------------------------------------------
\118\ DOE notes that the additional suppression in enrichment
prices would itself affect the interaction between the enrichment
and uranium markets. Because that effect would tend push more
enrichment capacity back to underfeeding, DOE believes it would at
worst cause DOE's 40% adjustment to be an overestimate.
---------------------------------------------------------------------------
The significance of price suppression at this level depends, at
least in part, on market price. The 2015 ERI Report relies on the price
indicators for SWU published by TradeTech on January 31, 2015. The spot
price for SWU has decreased by about $9.00 since that date. The current
price indicators, as published by UxC, are $79.00 per SWU in the spot
market and $90.00 per SWU in the term market.\119\ Thus, the estimated
near-term price effect attributable to DOE transfers represents 6.7%
and 5.9% of the spot and term
[[Page 26414]]
prices, respectively. Although it may be useful to compare the
estimated price effect to current market prices for a sense of scale,
comparing a longer term price effect to current market prices can be
somewhat misleading; it is more appropriate to compare the price effect
in future years to forecasted market prices in those years.
---------------------------------------------------------------------------
\119\ URENCO states that the term enrichment price is currently
$87.00 per SWU. NIPC Comment of URENCO, at 2. The most recent data
available to DOE do not support this figure.
---------------------------------------------------------------------------
In its annual Enrichment Market Outlook, UxC provides a detailed
explanation of its price forecast, which generally predicts an increase
in term prices over the next 10 years. UxC Enrichment Market Outlook--
Q4 2014, 91-94 (2014). [REDACTED]. Id. at 94. UxC reports [REDACTED].
Id. at 74. In the mid-term, UxC projects that the term price for SWU
[REDACTED]. Id. at 94. UxC does not provide a separate forecast for the
spot price. Id. at 79.
Using these price forecasts, it is possible to project the
estimated price effect in future years as a percentage of the expected
market price. DOE predicts that the price effect reasonably
attributable to DOE transfers under the assessed case will be around
$5.25 in the near term, and then average approximately $5.40 between
2018 and 2024. As prices increase, this price effect will represent a
smaller proportion of the then-prevailing market prices. Based on UxC
forecasts, which DOE believes to be a reasonable expectation for future
prices, the price effect will average approximately [REDACTED] of the
term price in 2015-2017, and [REDACTED] between 2018 and 2024.
d. Effect on Realized Price
As with uranium concentrates and conversion, the principal
mechanism through which a change in market price would impact the
domestic uranium enrichment industry is through the effect on what
prices an enricher actually receives for its services. The market
prices published by TradeTech and UxC are based on information about
recent offers, bids, and transactions, and are thus a snapshot of
contracting activity at the time of the publication. Enrichment, like
uranium concentrates and conversion, is primarily sold on long-term
contracts. Consequently an enricher's actual revenues are somewhat
insulated from short-run fluctuations in price.
There is only one currently operating enrichment facility in the
United States, the UUSA gas centrifuge facility in New Mexico. No
commenter provides information about the realized price achieved by
URENCO or the effect of DOE transfers on that price. However, other
sources provide some relevant information.
In recent years, the vast majority of SWU has been sold on the term
market. UxC Enrichment Market Outlook--Q4 2014, 17, 20 (2014). UxC
reports that approximately [REDACTED] SWU were sold through spot
contracts in 2014. Id. at 19. UxC estimates that 2014 enrichment demand
stood at approximately [REDACTED]. Id. at 38. Based on these figures,
spot sales in 2014 accounted for [REDACTED] of total SWU demand. ERI
estimates that more than 95% of enrichment requirements are covered
under long-term contracts. 2015 ERI Report, 74. Long-term contracts for
SWU typically last for 10 or more years, in some cases and in some
cases 15 or more years. UxC Enrichment Market Outlook--Q4 2014, 100
(2014).
Current term contracting volume is much smaller than pre-2010
volumes. Id. at 9, 21. UxC reports that long-term contracting activity
[REDACTED]. Id. at 20. [REDACTED]. Id. at 20. UxC also projects that
term contracting activity will [REDACTED]. Id. at 21. Therefore, DOE
concludes that only 10-20% of term sales will reflect current prices.
For the next few years, most sales will be on contracts concluded
several years ago when prices were higher. More contracting will take
place when those contracts expire, and those contracts will reflect the
relevant future term prices.
Consistent with DOE's analysis, EIA reports that in 2013, the
average price paid for SWU was $142.22. EIA, Uranium Marketing Report,
7 (2014). This is well above the average market prices for 2013,
approximately $110 in the spot market and $120 in the term market
according to UxC.
URENCO's most recent financial statements indicate that at least a
portion of its contract portfolio ``extend[s] beyond 2025.'' URENCO
Limited, Interim Financial Statements for the 6 Months Ended 30 June
2014, at 6, available at http://www.urenco.com/_/uploads/content-files/Urenco_Group_Interim_Accounts_to_30_June_2014-final-02092014.pdf.\120\
URENCO has also stated that its enrichment contracts are usually fixed
base price with escalation, leaving URENCO with ``no direct exposure to
uranium prices.'' URENCO Investor Update, 4 (Sept. 9, 2014), available
at http://www.urenco.com/_/uploads/results-and-presentations/URENCO_Bond_Investor_Presentation_2014.pdf. These statements reflect
all enrichment activity at URENCO, not just production at the UUSA
facility. But URENCO has controlled the U.S. facility since the
beginning of planning, and it is unlikely U.S. sales depart from the
company's overall practices. Because UUSA began operating in 2010, its
contract terms will only have begun at that time. And it is likely that
the vast majority of the facility's capacity was under long-term
contracts at inception, because an enrichment plant operator ordinarily
does not construct a plant before having contractual commitments for
virtually the entire capacity. That approach would also be consistent
with what URENCO reports for its overall contracting approach.
---------------------------------------------------------------------------
\120\ DOE notes that URENCO's financial statements have referred
to its order book as ``extending up to and beyond 2025'' at least
since 2010. See URENCO, Annual Report & Accounts 2010, at 3 (2010),
available at http://media.urenco.com/corp-Web site/298/
annualreportandaccounts2010_1.pdf.
---------------------------------------------------------------------------
Therefore, DOE concludes that URENCO USA has essentially zero
exposure to current term prices. Transfers under the assessed case will
eventually affect URENCO's realized price, because URENCO's contracts
will expire and URENCO will enter new contracts at the prevailing
future term prices. Therefore, DOE concludes that the effect of DOE
transfers on URENCO's prices will be through the effect on longer-term,
rather than near-term, prices. As noted above, the longer-term price
effect forecast for transfers under the assessed case is $5.40 per SWU.
As noted above, URENCO has stated that a small amount of its
capacity is devoted to underfeeding. RFI Comment of URENCO, at 3.\121\
ERI notes that URENCO estimates it is using 10-15% of its capacity for
underfeeding. 2015 ERI Report, 75. To the extent that URENCO sells the
natural uranium hexafluoride yielded from underfeeding, DOE transfers
could affect its revenues to the extent the transfers cause decreases
in the prices for uranium concentrates and conversion services. Using
the price effects forecast above for the uranium and conversion spot
prices, transfers under the assessed case would affect the price for
that amount of material by 7.1%.
---------------------------------------------------------------------------
\121\ On May 22, 2014, URENCO submitted an application to the
U.S. NRC to amend its license for the facility to allow it to use
high assay tails (approximately 0.4 wt-% U-235) as feed material.
See 79 FR 43099 (July 24, 2014); ``Redacted--Supplement to License
Amendment Request for Capacity Expansion of URENCO USA Facility
(LAR-12-10),'' Letter from URENCO to U.S. NRC, LES-14-00071-NRC
(June 17, 2014).
---------------------------------------------------------------------------
2. Production at Existing Facilities
URENCO reports that the nameplate capacity for the UUSA facility is
3.7 million SWU. RFI Comment of URENCO, at 1. URENCO has also stated
[[Page 26415]]
that construction of additional centrifuges will continue until the
facility reaches 5.7 million SWU. ``About Us, URENCO USA,'' URENCO,
http://www.urenco.com/about-us/company-structure/urenco-usa (accessed
Feb. 21, 2015).
Due to the nature of gas centrifuges, it is highly unlikely that
UUSA will decrease production of SWU. As URENCO states, due to the low
level of electricity required to run the centrifuges, slowing
production would have almost no effect on operating expenses.
Furthermore, stopping and restarting a centrifuge may damage the
equipment. RFI Comment of URENCO, at 3. That said, there is a
possibility that URENCO will divert capacity currently used to produce
LEU to underfeeding or tails re-enrichment. Specifically, UxC notes
[REDACTED]. UxC Enrichment Market Outlook--Q4 2014, 42 (2014). Given
how little spot contracting activity there has been in recent years,
DOE believes that this effect will be small.
3. Employment Levels in the Industry
ERI does not provide an estimate of the change in employment due to
DOE transfers in the enrichment industry. No commenter references
changes in employment in the enrichment industry. URENCO states that
its business is essentially fixed-cost and makes no reference to
changes in employment.
Although DOE notes that there have been changes in employment in
the enrichment industry in recent years, mostly related to the closure
of the Paducah Gaseous Diffusion Plant, DOE does not believe that its
transfers will have any significant effect on employment levels in the
enrichment industry.
4. Changes in Capital Improvement Plans and Development of Future
Facilities
URENCO recently completed ``Phase II'' of its expansion plans,
bringing the capacity of its facility to 3.7 million SWU. ``Phase II
Completion,'' URENCO (Apr. 9, 2014), http://www.urenco.com/news/detail/phase-ii-completion (accessed Feb. 22, 2014). URENCO is continuing to
move forward with ``Phase III'' expansion, which will bring plant
capacity to approximately 5.7 million SWU. URENCO notes that it has
slowed its plan for construction of additional capacity. RFI Comment of
URENCO, at 3. URENCO expects to reach 5.7 million SWU capacity by 2023.
URENCO Investor Update, 31 (Sept. 9, 2014). Although the company
recently received a license amendment that would allow it to expand
capacity to 10 million SWU per year, URENCO states that this move is
``to provide for future licensing flexibility should the market
recover.'' URENCO notes that it cancelled construction of ``Phase IV''
in 2013. RFI Comment of URENCO, at 3.
DOE is aware of several other planned or proposed enrichment
facilities in the U.S., namely, AREVA's Eagle Rock Enrichment Facility
in Idaho, Centrus Energy's--formerly USEC Inc.--American Centrifuge
Plant in Piketon, OH, and Global Laser Enrichment's facility in
Wilmington, NC.\122\ Development of each of these facilities has been
put on hold or slowed until market prices improve.
---------------------------------------------------------------------------
\122\ Although not the subject of this determination, DOE notes
that ERI analyzed the possible future transfer to GLE of high-assay
depleted uranium. 2015 ERI Report, 27-28. As this transaction would
involve re-enrichment of depleted tails, it would tend to support
additional demand for enrichment services.
---------------------------------------------------------------------------
The Eagle Rock Enrichment Facility would use gas centrifuge
technology and would have a capacity of approximately 3.3 million SWU.
``Eagle Rock Enrichment Facility,'' AREVA, http://us.areva.com/EN/home-203/eagle-rock-enrichment-facility.html (accessed Feb. 21, 2015). After
announcing several delays in construction, AREVA stated in May 2013
that it was no longer projecting a start date for building the
facility. ``French company won't set date for Idaho nuclear facility,''
The Oregonian (May 23, 2013), http://www.oregonlive.com/pacific-northwest-news/index.ssf/2013/05/french_company_wont_set_date_f.html
(accessed Feb. 21, 2015). At the time of this announcement, the term
market price for SWU was approximately $130, according to UxC's monthly
price indicator.
The proposed American Centrifuge Plant would use gas centrifuge
technology and would have a capacity of approximately 3.8 million SWU.
``USEC Inc. Gas Centrifuge,'' U.S. NRC, http://www.nrc.gov/materials/fuel-cycle-fac/usecfacility.html (accessed Feb. 22, 2015). Active
construction of new centrifuges has ceased. In a November 2013
quarterly filing with the SEC, Centrus Energy, then known as USEC,
stated, ``[a]t current market prices USEC does not believe that its
plans for American Centrifuge commercialization are economically viable
without additional government support.'' USEC Form 10-Q, Securities and
Exchange Commission, at 10 (Nov. 5, 2013) https://www.sec.gov/Archives/edgar/data/1065059/000106505913000049/usu-2013930x10q.htm (accessed
Feb. 22, 2015). When this form was submitted to the SEC, the term
market price for SWU was approximately $115, according to UxC's monthly
price indicator.
Global Laser Enrichment, a venture of GE-Hitachi and Cameco, has
proposed an enrichment plant that would use laser enrichment technology
developed by Silex Systems, an Australian company. The proposed
facility in Wilmington, NC, would have a capacity of about 6 million
SWU. GLE License Application, Rev. 7, U.S. NRC, Docket 70-7016, at 1-16
(August 20, 2012), available at http://pbadupws.nrc.gov/docs/ML1224/ML12242A227.pdf. In July 2014, GLE announced that it would slow
continued development of the facility ``in line with current and future
market realities.'' ``Global Laser Enrichment,'' GE-Hitachi, https://nuclear.gepower.com/fuel-a-plant/products/gle.html (accessed Feb. 22,
2015). At the time of GLE's announcement, the term market price for SWU
was approximately $95, according to UxC's monthly price indicator.
Based on ERI's estimate, as adjusted to account for underfeeding,
eliminating all DOE-transferred material from the market--including
material already transferred in the past as well as the material to be
transferred under the assessed case--could cause prices to rise by no
more than $7.40 in 2015 and less than $4.50 in 2016 and 2017, which
could result in a term price of around $97.00 in 2015 and just under
$95.00 in 2016 and 2017.
The timing of the above announcements suggests that enrichers would
require a substantially higher price signal in order to move forward
with adding new capacity. Specifically, the American Centrifuge project
was put on hold when term prices were close to $115 and the Eagle Rock
facility was put on hold when prices were close to $130. Although GLE's
announcement came at a time when prices were $95, the level of near-
term uncovered requirements is low--[REDACTED], UxC Enrichment Market
Outlook--Q4 2014, 39 (2014)--and it is not clear that GLE would be able
secure the necessary long-term contracts even at that price. Because
the developers stopped the projects just discussed on the basis of
prices at or above $95, DOE concludes that DOE transfers in the near
term will not change the decisions whether to complete those projects.
In the longer term, as prices improve, there may come a point for each
of these projects at which its owner is willing to invest to complete
the project. The price effect forecast for transfers under the assessed
[[Page 26416]]
case may delay that point, but given the forecasts and the announced
decisions, DOE does not believe it would change the long-term outcome
for these projects. Meanwhile, although URENCO is still moving forward
with a capacity expansion from 3.7 million SWU to 5.7 million SWU, it
has slowed the pace of expansion and stated that it does not expect to
reach this capacity until 2023. Even though URENCO has announced
expansion plans for UUSA, it presumably still intends to secure long-
term contracts prior to construction. It appears that URENCO has
decided to slow expansion to await higher prices that it expects will
prevail in a few years--UxC's [REDACTED]. Id. at 114. Thus, DOE
believes that a term price of $95.00-$97.00 would likely not be
sufficient to support URENCO's planned price expansion.\123\
---------------------------------------------------------------------------
\123\ URENCO similarly notes that uncovered requirements are
low. URENCO further notes that DOE transfers are equivalent to about
72% of unfilled global demand in 2015. RFI Comment of URENCO, at 4.
As noted in the NIPC, DOE believes that figures for unfilled
enrichment demand or uncovered enrichment requirements likely
already reflect DOE uranium transfers at recent rates. Even if this
were not true, the prediction above for the price effect of DOE
transfers does not depend on an estimate of uncovered requirements.
Thus, changing this input would not alter DOE's forecast. URENCO may
also be suggesting that the lack of uncovered requirements means
that DOE is directly displacing its own sales. However, as described
above, even if DOE transfers were removed from the market, it does
not appear that prices would rise enough to justify UUSA's
increasing capacity substantially.
---------------------------------------------------------------------------
As a result, DOE believes that transfers under the assessed case
will not have a significant effect on capacity expansion at UUSA or at
other planned facilities.
5. Long-Term Viability and Health of the Industry
ERI's most recent Reference Nuclear Power Growth forecast projects
global requirements for enrichment services to grow to approximately 59
million SWU between 2021 and 2025, approximately 31% higher than
current requirements. Global requirements are expected to continue to
rise to a level of 74 million SWU between 2031 and 2035, approximately
64% higher than current requirements. 2015 ERI Report, 13. ERI presents
a graph comparing global requirements, demand, and supply from 2013-
2035. Global supply is expected to continue to significantly exceed
global demand over the long term. 2015 ERI Report, 16.
Although not focused on enrichment, the requirements forecasts
noted above in Section IV.A.5 are also somewhat relevant to the
enrichment industry. In general, requirements and/or uranium
concentrate demand forecasts should also apply to demand for low
enriched uranium. As with conversion, there may be some small
differences due to strategic and discretionary inventory building. For
example, China has been purchasing strategic supply well in excess of
its requirements. Those purchases have come in the form of
U3O8. 2015 ERI Report, 13. Thus, these purchases
affect near-term uranium concentrate demand, but do not affect near-
term demand for LEU.
In addition to demand for LEU, higher demand for uranium
concentrates can affect demand for enrichment because of the
relationship described above between natural uranium and enrichment as
inputs for producing enriched uranium product. In the medium to long
term, supply from current mines will cease to exceed demand. Meanwhile,
enrichment supply will continue to exceed requirements for LEU. As
prices for uranium concentrates and conversion increase relative to SWU
prices, it may become more economical to re-enrich high-assay tails. In
this vein, ERI suggests that enrichers will continue to redirect
capacity to underfeeding and that Rosatom will continue to re-enrich
tails. 2015 ERI Report, 16.\124\
---------------------------------------------------------------------------
\124\ Again, DOE notes that although it is not included in ERI's
chart of enrichment supply, GLE's proposed Paducah Laser Enrichment
Facility would represent additional enrichment supply that is not
intended to be devoted to producing LEU. Compare 2015 ERI Report,
16, with 2015 ERI Report, 27-28.
---------------------------------------------------------------------------
In its Uranium Enrichment Outlook for the 4th quarter of 2014, UxC
predicts significant increases in both requirements and demand in the
long-term. UxC Enrichment Market Outlook--Q4 2014, 36, 38 (2014).
Specifically, [REDACTED]. Id. at 38. In the longer term, UxC estimates
that enrichment demand [REDACTED]. Id. UxC's base case supply outlook
projects that supply [REDACTED]. Id. at 46. UxC's projected base case
supply [REDACTED]. Id. at 50. DOE recognizes that a significant amount
of the forecast increase in demand will be in China (and to a lesser
extent in Russia), markets that URENCO asserts it cannot access. But
enrichers in those countries do currently have access to markets
elsewhere in the world, and enrichment is fungible. URENCO does not
contest the notion that enrichment is essentially a global commodity
with a single world price. Thus, increased demand in China and Russia
will consume capacity with which URENCO would otherwise compete in
markets that it can access.\125\
---------------------------------------------------------------------------
\125\ DOE also notes that the Russian Suspension Agreement
places limits on EUP imported into the United States from Russia.
Thus, URENCO is somewhat protected from the effects of competition
with Russian enrichers for domestic demand.
---------------------------------------------------------------------------
As discussed above in Section IV.C.1, UxC also predicts a
significant increase in enrichment prices over the next ten years.
Finally, as with uranium concentrates and conversion services, DOE
recognizes that the predictability of transfers from its excess uranium
inventory over time is important to the long-term viability and health
of the uranium enrichment industries. Again, DOE notes that the upper
scenario considered by ERI would represent continued transfers at rates
consistent with the May 2012 and May 2014 determinations. Compare 2015
ERI Report, 25, with 2014 ERI Report, 28.
DOE notes that enrichment market prices are at levels not seen in
the past decade. There is also tremendous uncertainty in the market
regarding future production. Centrus Energy Corp. (formerly USEC, Inc.)
emerged from bankruptcy in the past year and has been forced to rethink
its business model since the closure of the Paducah Gaseous Diffusion
Plant. A significant source of business for Centrus and URENCO in
recent years has been from the Asian markets, specifically Japan,
Taiwan, and South Korea. Demand in these markets has been directly
affected by the Fukushima Daiichi accident. In addition, the enrichment
market faces uncertainty related to Areva's finances and the potential
for GLE to build and operate a new facility utilizing the Silex
technology. DOE is cognizant of these uncertainties facing the market.
However, as described above, enrichment capacity is expected to
shift over time toward a trajectory that more closely tracks demand.
The moves in recent years by several enrichers to curtail or postpone
planned capacity increases contributes to this. As a result, prices are
expected to recover over the next ten years. DOE does not believe that
the price effect attributable to DOE transfers is large enough to cause
a significant change to production and development plans at existing or
planned facilities. At worst, as with the uranium mining industry, the
effect of DOE transfers would be to shift major capital investments
later in time. DOE does not believe that this difference is significant
enough to appreciably affect the long-term viability and health of the
domestic uranium enrichment industry.
6. Russian HEU Agreement and Suspension Agreement
Section 3112(d) of the USEC Privatization Act requires DOE to
``take into account'' the sales of uranium
[[Page 26417]]
under the Russian HEU Agreement and the Suspension Agreement. As
discussed above, DOE believes this assessment should consider any
transfers under these two agreements that are ongoing at the time of
DOE's transfers.
Under the Russian HEU Agreement, Russian HEU was down-blended to
LEU and then delivered to USEC Inc. for sale to end users in the United
States. DOE notes that the Russian HEU Agreement concluded in December
2013. Thus, there are no ongoing transfers under this agreement.
The current iteration of the Suspension Agreement, described above
in Section I.D.3.b, sets an annual export limit on natural uranium from
Russia. 73 FR 7705 (Feb. 11, 2008). That agreement provides for the
resumption of sales of natural uranium and SWU beginning in 2011. While
the HEU Agreement remained active (i.e. 2011-2013), the annual export
limits were relatively small--equivalent to between 100,000 and 250,000
SWU. After the end of the Russian HEU Agreement, restrictions range
between an amount equivalent to 2,750,000 and 3,110,000 SWU per year
between 2014 and 2020. 73 FR 7705, at 7706 (Feb. 11, 2008). Material
having a SWU component imported from Russia in accordance with the
Suspension Agreement is not derived from down-blended HEU; thus, this
material is part of worldwide primary enrichment supply as analyzed by
ERI in the 2015 ERI Report. This material is also presumably accounted
for in the various projections and models developed by UxC. Thus, DOE's
analysis takes those sales that have an enrichment component under the
Suspension Agreement into account as part of overall supply available
in the market.
7. Enrichment Industry Conclusion
After considering the six factors as discussed above, DOE concludes
that transfers under the assessed case will not have an adverse
material impact on the domestic uranium enrichment industry. As
explained above, DOE transfers under the assessed case will continue to
exert some downward pressure on the market price for enrichment
services. DOE believes that $5.25 per SWU in the near-term and $5.40
per SWU over the longer term is a reasonable estimate of the price
effect attributable to DOE transfers; this is somewhat smaller than the
effect transfers in the past few years have had. Sales from UUSA, the
sole operating enrichment facility in the United States, are almost
exclusively under term contracts with no exposure to the spot price.
Thus, the effect of DOE transfers on realized price for enrichment from
UUSA will come through the effect on new term contracts that URENCO
will enter into in the longer term, i.e. $5.40 per SWU. DOE transfers
may also affect the price realized for natural uranium hexafluoride
from underfeeding at UUSA by about 7%. Because DOE believes that less
than 15% of UUSA's capacity is devoted to underfeeding, this effect is
expected to be small. Due to technical constraints, DOE concludes that
the price effect attributable to DOE transfers under the assessed case
will not cause URENCO to decrease capacity or change employment levels
at UUSA.
DOE believes that decisions to expand capacity at UUSA or at other
planned enrichment facilities require prices significantly higher than
current prices. This would be true with or without DOE transfers. Thus,
DOE concludes that transfers under the assessed case will not have a
significant effect on near-term decisions to build future enrichment
capacity in the United States. DOE expects that SWU prices will
increase in the medium- to long-term enough to support these expansion
plans. DOE transfers would, at worst, have the effect of slightly
delaying the development of such future capacity without preventing
these new facilities from coming online. As such, DOE concludes that
transfers under the assessed case would not significantly affect the
long-term viability or financial health of the domestic uranium
enrichment industry. DOE does not believe that any of these effects has
the substantial importance that would make it an ``adverse material
impact'' within the meaning of section 3112(d).
V. Other Comments
DOE received a number of comments in response to the NIPC and RFI
that warrant additional discussion. Many comments included suggestions
for how DOE might mitigate any potential adverse impacts.
Several commenters asserted that for a given amount of transferred
uranium, introducing the material into the spot market is particularly
harmful to industry. These commenters contend that DOE should analyze
its transfers on the assumption that the material is primarily
appearing on the spot market. They also urge DOE to take steps to
ensure that the uranium it transfers is sold through term contracts,
rather than through spot contracts or through future-delivery contracts
that commenters say are little different from future spot contracts.
Some of these commenters, representing members of the domestic mining
industry, suggest that DOE could achieve this goal by distributing its
material through uranium concentrate producers. These producers, the
commenters say, have incentives to place DOE-sourced uranium into long-
term deliveries, in order to mitigate the effect on spot prices. To the
extent such an arrangement led to higher spot prices, DOE would also
receive greater value for the uranium.
With respect to the impacts caused by DOE transfers, the foregoing
analysis has, in almost all respects, assumed the material contributes
to the spot markets over time.\126\ DOE therefore believes its analysis
has comported with commenters' suggestion. Assuming the commenters are
correct that spot sales of DOE-sourced uranium are the most harmful way
for the material to enter the markets, DOE has assessed the
consequences.
---------------------------------------------------------------------------
\126\ As noted above, one exception to this approach is ERI's
econometric model for the spot price of uranium concentrates, for
which the difference between term sales and spot sales of DOE-
sourced uranium could influence the model's medium- and long-term
forecasts. Because DOE considers those forecasts fairly uncertain
anyway, the possibility that less DOE-sourced uranium is delivered
on term contracts than ERI assumed would not alter DOE's
conclusions.
---------------------------------------------------------------------------
DOE recognizes that if some or all of its transfers entered the
markets through term contracts, the effects on spot prices could be
smaller.\127\ However, for DOE itself to make transfers on the
equivalent of traditional term contracts would not serve the purposes
for which, in the main, DOE transfers uranium. In DOE's understanding,
a buyer on a term contract has a right to receive material at various
future delivery dates; and it ordinarily pays for the material at or
near the time of delivery, at a price determined by the contract. By
contrast, DOE transfers uranium in exchange for services provided
substantially contemporaneously with the transactions, not years in the
future.
---------------------------------------------------------------------------
\127\ Assessing whether the effects would actually be smaller,
and by how much, would require additional analysis. For example, if
a term sale of DOE-sourced uranium displaced a corresponding amount
of supply onto the spot market, the overall effect could be the same
as if the DOE-sourced uranium were sold directly on the spot market.
The likelihood of such a direct displacement differs among the
uranium concentrates, conversion, and enrichment markets.
---------------------------------------------------------------------------
At least one commenter says that some utility buyers have the
financial capacity to buy uranium and hold it for a few years before
using it. According to the commenter, the price curve for uranium,
coupled with the financial environment in which interest rates have
remained very low, makes such transactions advantageous for utilities.
DOE notes, however, that holding the
[[Page 26418]]
material for a few years would not, apparently, serve the purpose of
commenters who seek to remove DOE-sourced material from the spot
markets. These commenters stress that what they consider the true term
market involves deliveries five to ten years in the future. No
commenter identified a person or group of persons that would have the
financial wherewithal to pay the spot price for DOE-sourced uranium in
the present and then retain the uranium for delivery that far in the
future.
Commenters from the mining industry did indicate that they would be
interested in managing the distribution of DOE-sourced uranium.
However, DOE notes that the commenters appear to contemplate that DOE
would receive in such an arrangement substantially less than the
prevailing spot market price for the uranium. If, on the other hand,
the commenters expect to pay prevailing spot market prices, DOE
believes they could in principle already undertake to manage how the
material enters the markets. DOE transfers uranium to commercial
businesses; and one of them, DOE believes, sells its uranium to Traxys,
a uranium trading firm. A person that wanted to buy uranium from DOE to
transfer it from the spot market to the term market could buy the
equivalent amount of material from Traxys instead.
For these reasons, while DOE is willing to explore whether it would
be feasible for some persons, such as uranium concentrate producers, to
manage the appearance of DOE-sourced uranium on the markets, DOE does
not consider it appropriate to incorporate this suggestion in today's
determination.
Commenters also suggested a variety of other actions that could
help to mitigate the impact of DOE transfers. Several suggested that
DOE consider a matched sales arrangement similar to the arrangement
used during an earlier iteration of the Suspension Agreement with
Russia. Under that program, Russian-origin natural uranium
(U3O8 or UF6) or SWU could only be
imported into the U.S. if it was ``matched'' to an equal portion of
newly-produced U.S. origin natural uranium or SWU and the two
quantities were sold together as a unit. See generally 59 FR 15,373
(Apr. 1, 1994). Commenters suggest that an arrangement of this type for
DOE-sourced uranium would incentivize new production capacity that is
not already committed to long-term contracts. DOE acknowledges that a
matching program could benefit domestic producers, but it is concerned
that it would not serve the purposes for which DOE transfers uranium.
In general, domestic producers already participate in domestic and
global spot markets for uranium. A new sale that would not have
occurred absent the matching program will tend to be from production
that would not have been economic at current prices. The effect of a
matching program would be to secure a viable, somewhat above-market
price for the new sale. Because buyers will presumably be unwilling to
pay more than the relevant market prices overall, the DOE-sourced
uranium would have to be transferred at a lower price to compensate.
The net effect would be for DOE to receive less value for its uranium
in exchange for an additional monetary benefit to producers. For these
reasons, DOE declines to incorporate a matched sales approach into
today's determination.
One commenter suggested several alternatives to DOE's exchanging
LEU for down-blending services. First, the commenter suggested that DOE
down-blend only to an assay of 19.75 wt-% U-235, an assay that
commercial enrichers do not provide and therefore will not compete with
commercial supply. However, because there is very little demand for LEU
at this assay--which is predominantly used in research reactors--the
resulting LEU would have little value to a contractor receiving it in
exchange for services. Granted, the contractor could down-blend the LEU
further to assays of 5 wt-% or below; but that outcome would affect
markets the same as if DOE itself transferred the low-assay LEU.
Further, DOE allocates the portion of the down-blended LEU that is not
transferred to the down-blending contractor to various programmatic
needs, many of which require LEU with an assay of 5 wt-% or below. The
commenter also suggests that DOE devote the LEU resulting from down-
blending to either the U.S. nuclear fuel bank, the American Assured
Fuel Supply, or to the IAEA's nuclear fuel bank. Both proposals amount
to a request that DOE cease exchanging LEU for down-blending services
altogether. The second proposal suggests that the difference in funding
could be made up by decreasing U.S. financial contributions to the IAEA
by an amount equivalent to the value of the LEU. The Agency currently
plans to purchase LEU from the market to stock its fuel bank. If the
United States provided LEU, the IAEA would need to purchase less LEU
from the market. Thus, it appears that this type of transaction would
not decrease the impacts on the domestic enrichment industry because it
would displace purchases of LEU on the open market that the IAEA would
have otherwise made. In any case, DOE believes that it can meet its
purpose of exchanging 4.95 wt-% LEU for down-blending services without
causing an adverse material impact on the domestic uranium industries;
thus, DOE declines to incorporate these alternatives into today's
determination.
One commenter suggested that DOE should consider as a mitigating
strategy implementing regulations that limit the amount of secondary
supply obtained from underfeeding that enrichers can sell in the United
States. Doing so would mean protecting producers from competition with
underfeeding by enrichers, at enrichers' expense. DOE is not inclined
to engage in such capacity controls.
With respect to the domestic conversion industry, one commenter
suggested stopping transfers of conversion services would have a
positive effect. DOE does not transfer conversion services; it
transfers natural uranium hexafluoride. This displaces primary
conversion because in order to obtain natural uranium hexafluoride from
primary production, one would need to buy uranium concentrates and then
pay for that material to be converted into uranium hexafluoride. The
commenter is presumably suggesting that DOE should accept in exchange
for its uranium an amount of services equivalent to the value of the
uranium concentrates and ``credits'' for the amount of conversion
services necessary to produce the material from primary production.
These ``credits'' would be in the form of a tradeable contract for
conversion services from a primary supplier. This process would mean
that DOE would receive less services in exchange for its uranium while
making the individual transfers substantially more complicated. DOE
further notes that this would decrease the impacts on the domestic
conversion industry, but it would have no effect on the impacts to the
domestic uranium mining or enrichment industries. For these reasons,
DOE declines to engage in this type of transaction.
One commenter also suggested that DOE could establish price bands
below which DOE would not transfer uranium. The commenter presented
this proposal specifically for conversion services. Thus, this would
require DOE to accept conversion ``credits'' as described in the
preceding paragraph if the conversion price fell below a given
threshold. However, DOE recognizes that this approach could in
principle apply to any uranium transfers. As DOE has concluded that its
transfers will not have an adverse material impact on the domestic
uranium industries in market conditions that are expected to occur,
[[Page 26419]]
DOE declines to establish price thresholds below which DOE will
transfer less uranium. However, DOE expects to reassess its transfers
at least every two years, consistent with the statutory limit on the
validity of section 3112(d)(2) determinations. Such reassessments are,
among other things, an opportunity to ensure that DOE evaluates its
transfers in light of changing market conditions.
In addition to comments regarding potential ways to mitigate any
impacts caused by DOE transfers, DOE received a number of comments that
are related to DOE's current plans, but do not directly implicate how
DOE conducts its analysis of whether DOE transfers will cause adverse
material impacts.
One commenter suggested that DOE should prepare two separate
Secretarial Determinations--one for Portsmouth cleanup, and one for
down-blending services. DOE agrees that it could conceivably prepare
separate determinations for these two programs. However, DOE believes
it is more informative to analyze these transfers together, to assess
their cumulative impacts on the domestic uranium industries. Thus, DOE
declines to adopt separate determinations for these programs at this
time. This commenter also suggests that DOE could potentially conduct
transfers for down-blending under section 3112(e)(2) of the USEC
Privatization Act, which allows certain transfers for national security
purposes. DOE recognizes that certain programs may potentially fall
under more than one subsection of the Act. DOE believes it is
unnecessary to determine whether these transfers could be conducted
under section 3112(e)(2) because DOE has concluded that these transfers
will not have an adverse material impact on the domestic uranium
industries.
Several commenters suggested that DOE is not getting fair market
value for its uranium--as section 3112(d)(2)(C) of the USEC
Privatization Act requires--because DOE values the material at the spot
price rather than the term price. This assessment does not analyze
whether DOE will receive fair market value for its transfers. DOE
evaluates whether it receives fair market value prior to each transfer
through a separate process. With respect to this analysis, DOE has
assumed that in its uranium transfers it will receive roughly the
prevailing spot price for its material. That assumption is reasonable
because it is consistent with DOE's past experience and with the
contracts under which DOE transfers uranium.
DOE received a number of comments requesting that it publish a
draft Secretarial Determination for notice and comment. DOE notes that
notice and comment is not required for determinations pursuant to
section 3112(d)(2). However, DOE has solicited public comment on two
occasions in preparation for this determination, through a December
2014 Request for Information and a March 2015 Notice of Issues for
Public Comment. DOE received substantial input, described above, in
response to those two notices, and it has carefully considered these
comments.\128\
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\128\ One commenter suggested that DOE subject each Secretarial
Determination to an analysis under the National Environmental Policy
Act. DOE notes that the actual uranium transfers--as opposed to the
Secretarial Determination--are already covered under other NEPA
processes. Thus, it is unnecessary to conduct further NEPA analysis
for today's determination.
---------------------------------------------------------------------------
VI. Conclusion
For the reasons discussed above, DOE concludes that transfers under
the assessed case will not have an adverse material impact on the
domestic uranium mining, conversion, or enrichment industries, taking
into account the Russian HEU Agreement and Suspension Agreement.
[FR Doc. 2015-11035 Filed 5-6-15; 8:45 am]
BILLING CODE 6450-01-P