Nuclear Waste: Schedule, Cost, and Management Issues at DOE's Hanford
Tank Waste Project (Testimony, 10/08/98, GAO/T-RCED-99-21).

GAO discussed the challenges facing the Department of Energy (DOE) in
cleaning up the waste in the 177 underground storage tanks at Hanford,
focusing on: (1) how DOE's current approach has changed from its
original privatization strategy; (2) how this change has affected the
project's schedule, cost, and estimated savings over conventional DOE
approaches; (3) what risks DOE is now assuming with this change in
approach; and (4) what steps DOE is taking to carry out its
responsibilities for overseeing the project.

GAO noted that: (1) the project as currently envisioned is substantially
different from DOE's 1996 initial privatization strategy; (2) the most
significant changes include eliminating further competition between
contractors, building permanent facilities that could operate for 30
years or more instead of temporary facilities, and extending by 2 years
the design phase and the dates for completing project financing
arrangements and agreeing on the final contract price; (3) the revised
approach extends the completion date for processing the first portion of
the waste from 2007 to 2017, and total costs rise from $4.3 billion to
$8.9 billion, including $2 billion in DOE's support costs; (4) the
increased costs are mainly the result of DOE's decision to build
permanent facilities that will take longer and cost more to design and
build and the higher financing costs and contractor profits involved in
operating these facilities over a longer period of time; (5) DOE
estimates that this approach has the potential to save 26 to 36 percent
over the contracting approaches it has used in the past; (6) the revised
approach represents a dramatic departure from DOE's original
privatization strategy of shifting most financial risk to the
contractor; (7) the contract now calls for DOE to pay BNFL, Inc. for
most of the debt incurred in building and operating the facility if BNFL
should default on its loans; (8) DOE agreed to assume this risk because
it did not think BNFL would be able to obtain affordable financing
unless the government provided some assurance that the loans would be
repaid; (9) DOE's financial risks are significant because the project
has a number of technical uncertainties such as using waste treatment
technology that has yet to be successfully tested at production levels
on Hanford's complex and unique wastes, and other management challenges;
(10) in an attempt to avoid repeating past mistakes in managing large
projects, DOE has identified additional expertise it needs and has
developed several management tools to strengthen its oversight of the
project; (11) the success of the project, however, will depend heavily
on how well DOE implements these plans; and (12) DOE has a history of
not fully implementing its management and oversight plans, and there are
some early indications on this project that DOE may be having difficulty
ensuring that the proper expertise is in place and fully funding project
support activities.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-99-21
     TITLE:  Nuclear Waste: Schedule, Cost, and Management Issues at 
             DOE's Hanford Tank Waste Project
      DATE:  10/08/98
   SUBJECT:  Hazardous substances
             Privatization
             Waste treatment
             Federal procurement
             Radioactive waste disposal
             Cost control
             Nuclear waste storage
             Tanks (containers)
             Nuclear waste management
IDENTIFIER:  Hanford (WA)
             
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Cover
================================================================ COVER


Before the Subcommittee on Oversight and Investigations, Committee on
Commerce, House of Representatives

For Release
on Delivery
Expected at
10:00 a.m.  EDT
Thursday
October 8, 1998

NUCLEAR WASTE - SCHEDULE, COST,
AND MANAGEMENT ISSUES AT DOE'S
HANFORD TANK WASTE PROJECT

Statement of Ms.  Gary L.  Jones, Associate Director,
Energy, Resources, and Science Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-99-21

GAO/RCED-99-21T


(141254)


Abbreviations
=============================================================== ABBREV

  BNFL -
  DOE -
  M&O -
  OSHA -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss one of the most difficult
challenges facing the Department of Energy--cleaning up the waste in
the 177 underground storage tanks at Hanford that hold highly
radioactive liquid waste, sludge, and other materials.  Cleaning up
this waste is important because it poses a significant risk to the
environment and to surrounding communities.  Recently, DOE disclosed
that waste leaking from some of the tanks has reached the groundwater
and threatens the nearby Columbia River. 

To begin treating the waste, in 1996, DOE decided it would purchase
waste treatment services through competitively awarded, fixed-price
contracts to demonstrate treatment technologies and treat at least 6
percent of the waste.  Under these contracts, competing contractors
would finance, design, build, and operate temporary waste processing
facilities and be paid on a per-unit basis if they successfully
immobilized the waste for storage.  DOE referred to this approach as
its privatization strategy.  However, on August 24, 1998, DOE signed
a contract with only one contractor--BNFL, Inc.  (BNFL),\1 a
subsidiary of British Nuclear Fuels, plc., to design, build, and
operate permanent facilities to treat about 10 percent of Hanford's
tank waste. 

In view of the billions of dollars that the government will spend
treating this waste, you requested that we assess the implications of
DOE's revised approach.  Our testimony today discusses (1) how DOE's
current approach has changed from its original privatization
strategy; (2) how this change has affected the project's schedule,
cost, and estimated savings over conventional DOE approaches; (3)
what risks DOE is now assuming with this change in approach; and (4)
what steps DOE is taking to carry out its responsibilities for
overseeing the project. 

In summary, we found the following: 

  -- The project as currently envisioned is substantially different
     from DOE's 1996 initial privatization strategy.  The most
     significant changes include eliminating further competition
     between contractors, building permanent facilities that could
     operate for 30 years or more instead of temporary facilities,
     and extending by 2 years the design phase and the dates for
     completing project financing arrangements and agreeing on the
     final contract price.  In addition, to ensure that BNFL can
     obtain affordable private financing, DOE has agreed to repay
     much of the project's debt if BNFL defaults on its loans and DOE
     terminates the contract.  This is an unusual feature of a
     fixed-price contract because the government normally does not
     agree to pay a contractor's debt as an allowable cost.  If this
     commitment were structured as a conventional loan guarantee, DOE
     would have had to estimate the potential subsidy cost over the
     term of the loans and have the budget authority to fund them
     before making the guarantees. 

  -- The revised approach extends the completion date for processing
     the first portion of the waste from 2007 to 2017, and total
     costs rise from $4.3 billion to $8.9 billion, including $2
     billion in DOE's support costs (in constant 1997 dollars).  The
     increased costs are mainly the result of DOE's decision to build
     permanent facilities that will take longer and cost more to
     design and build and the higher financing costs and contractor
     profits involved in operating these facilities over a longer
     period of time.  DOE estimates that this approach has the
     potential to save 26 to 36 percent over the contracting
     approaches it has used in the past.  Because of questions about
     DOE's methodology for estimating savings, considerable caution
     is needed in assuming how much the revised approach will save. 

  -- The revised approach represents a dramatic departure from DOE's
     original privatization strategy of shifting most financial risk
     to the contractor.  The contract now calls for DOE to pay BNFL
     for most of the debt incurred in building and operating the
     facility if BNFL should default on its loans.\2 Thus, DOE faces
     a financial risk not initially contemplated on the project that
     could be in the billions of dollars.  DOE agreed to assume this
     risk because it did not think BNFL would be able to obtain
     affordable financing unless the government provided some
     assurance that the loans would be repaid.  DOE's financial risks
     are significant because the project has a number of technical
     uncertainties such as using waste treatment technology that has
     yet to be successfully tested at production levels on Hanford's
     complex and unique waste, and management challenges such as
     obtaining needed contracting expertise. 

  -- In an attempt to avoid repeating past mistakes in managing large
     projects, DOE has identified additional expertise it needs and
     has developed several management tools to strengthen its
     oversight of the project.  For example, DOE plans to have a team
     with about 80 members to manage this effort, and it has taken a
     number of steps to plan for better coordination among BNFL, the
     contractors providing support services at Hanford, and its own
     staff.  The success of the project, however, will depend heavily
     on how well DOE implements these plans.  DOE has a history of
     not fully implementing its management and oversight plans, and
     there are some early indications on this project that DOE may be
     having difficulty ensuring that the proper expertise is in place
     and fully funding project support activities. 

Mr.  Chairman, before discussing the details of our findings, we
would like to briefly explain DOE 's strategy for cleaning up
Hanford's tank waste. 


--------------------
\1 DOE and BNFL signed a modification to an existing contract.  For
simplicity, we refer to this as a contract throughout this testimony. 

\2 Under the terms of the contract, if the lenders declare BNFL in
default and accelerate the debt due, DOE will terminate the contract
for default or for the convenience of the government.  In this event,
DOE will pay BNFL, as an allowable cost, the outstanding principal
amount of the loans plus all accrued and unpaid interest, less
certain other adjustments. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

Hanford's aging underground tanks contain about 54 million gallons of
highly radioactive waste.  DOE currently estimates the total cost of
cleaning up the tank waste at more than $50 billion (in actual year
dollars).  To convert the waste into a form for more permanent
storage, the waste will be separated into high-level and low-activity
components\3 and then, through a process called vitrification,
converted into a glass-like material that can be poured into steel
containers where it will harden.  The immobilized high-level waste
will be stored on-site for eventual shipment to a national
repository, while the low-activity waste will be permanently disposed
of on the Hanford Site. 

DOE envisioned that two contractors would build and operate
demonstration facilities that would initially treat at least 6
percent of the waste.  DOE referred to this part of the waste
treatment effort as phase I.  DOE estimated that phase I would last
at least until 2007 and cost about $3.2 billion and another $1.1
billion in contract support costs, for a total of about $4.3 billion. 
In September 1996, DOE awarded a fixed-price contract for $27 million
to each of the two contractor teams to begin phase I by developing
preliminary facility designs and other preliminary project plans. 
One team was led by BNFL and the other team was led by Lockheed
Martin Advanced Environmental Systems (Lockheed).  In phase II,
contractors would compete for a contract to process the remaining
tank waste. 

DOE's experience during the initial part of phase I led to a change
in the contracting approach.  In May 1998, after reviewing the
preliminary designs and plans submitted by the two competing teams,
DOE decided to continue phase I with only one contractor--BNFL.  On
August 24, 1998, DOE signed a fixed-price contract with BNFL for $6.9
billion to continue with phase I.  DOE estimated that its other costs
related to supporting BNFL's efforts would be about $2 billion,
bringing the project's total estimated cost to about $8.9 billion. 


--------------------
\3 Hanford's tanks contain highly radioactive waste.  When separated
into high-level and low-activity components, most of the waste will
be low-activity radioactive waste.  Low-activity waste has a wide
range of characteristics, but most of it contains small amounts of
radioactivity in large volumes of materials.  The tanks also contain
hazardous chemicals and heavy metals. 


   DOE'S CURRENT APPROACH DIFFERS
   SIGNIFICANTLY FROM ORIGINAL
   PROJECT STRATEGY
---------------------------------------------------------- Chapter 0:2

DOE's August 1998 contract with BNFL is a substantial departure from
DOE's original privatization strategy.  According to DOE, changes to
its initial approach were made to optimize the technical approach and
to make the project financially feasible or to reduce the likelihood
of performance failure.  These changes fall into four main areas: 
competition, financial issues, facility issues, and schedule
revisions. 


      COMPETITION
-------------------------------------------------------- Chapter 0:2.1

Unlike DOE's original approach, the project no longer includes
competition between contractors.  DOE and outside expert reviewers
found that the approach set forth by the Lockheed team presented an
unacceptably high technical risk in attaining DOE's cleanup goals. 
In contrast, DOE concluded that BNFL's technical approach was sound,
using technologies for waste treatment and vitrification that were
well developed and had been used in other waste treatment situations. 
Therefore, DOE authorized only BNFL to proceed through the remainder
of phase I.  The extent to which competition will be present in phase
II is unknown. 


      FINANCIAL ISSUES
-------------------------------------------------------- Chapter 0:2.2

DOE's approach to financing the project has shifted from requiring
the contractor to obtain all needed financing to a strategy of
agreeing to repay BNFL's debts above its equity, insurance, and other
limited funds if BNFL defaults on its loans and DOE terminates the
contract.  DOE officials said that the government's commitment to
repay the contractor's debt was needed, in large part, to make the
project financially feasible.  Government backing of the private debt
is an unusual feature for a fixed-price contract because the
government normally does not agree to pay a contractor's debt as an
allowable cost.  Another change was that neither contractor was
willing to commit to a fixed-unit price and schedule without adding
significant contingency to the price of the contract.  The August
1998 contract identified a target price and set August 2000 as the
date at which the unit price will be fixed and BNFL's funding
commitments will be established. 


      FACILITY ISSUES
-------------------------------------------------------- Chapter 0:2.3

The original proposal included temporary facilities that were
estimated to have a useful life of approximately 10 years.  According
to DOE, however, both BNFL and Lockheed concluded that shorter-term
facilities were not feasible and that more permanent facilities were
needed to provide the required levels of safety, operability, and
maintainability.  The contract now requires the waste treatment
facilities to be designed to operate for a minimum of 30 years and
have the capability to increase capacity.  DOE said that although
this approach means much more expensive facilities than originally
anticipated and, therefore, an increase in project costs for phase I,
the more permanent and expandable facilities allow DOE more
flexibility and options in how the waste cleanup is completed. 


      SCHEDULE REVISION
-------------------------------------------------------- Chapter 0:2.4

In addition to more permanent, costly facilities, the new contract
extends the design period and delays the start of construction about
19 months beyond what was originally planned.  Both BNFL and Lockheed
indicated that additional time was needed to further develop the
project's design and plans for meeting regulatory and permitting
requirements.  The contractors believed that adhering to the original
schedule would carry too many uncertainties and that they would be
unable to obtain needed financing for the project unless a more
realistic schedule could be negotiated. 


   DIFFERENT APPROACH TO THE
   PROJECT EXTENDED SCHEDULE AND
   INCREASED COSTS
---------------------------------------------------------- Chapter 0:3

The current schedule and cost estimates for the project are
substantially greater than DOE's original estimates.  In 1996, DOE
estimated that in the first phase of the project, two contractors
would process 6 percent of the waste by 2007 and up to 13 percent of
the waste by 2011.  DOE is now estimating that the first phase will
last until at least 2017 and 10 percent of the waste will be
processed.  Design activities have been extended by 2 years,
construction will take about 4 years longer, and the time to process
the waste increased from 5 years to about 10 years. 

Estimated costs for the project have also increased significantly. 
The total project costs for phase I, including DOE's support costs,
increased from $4.3 billion in the original estimate to $8.9 billion
in the current estimate (in constant fiscal year 1997 dollars).  The
waste processing facilities now being designed will cost nearly $1
billion more to build than the demonstration facilities DOE
originally proposed.  Because of the longer period during which
investors will expect a return on investments, equity and debt
financing costs are expected to increase from about $1 billion to
more than $3 billion.  And, the average cost to process waste will
double from $760,000 per metric ton to $1.5 million per metric ton. 


      COST SAVINGS ESTIMATE MUST
      BE VIEWED WITH CAUTION
-------------------------------------------------------- Chapter 0:3.1

Despite the dramatic increase in estimated costs for this project, in
July 1998, DOE estimated that its revised approach for phase I would
provide savings of 26 to 36 percent when compared with two
alternatives--a management and operations (M&O) contract or a
cost-reimbursement contract with performance-based incentives.  The
savings estimate of 36 percent was based on comparing the proposed
BNFL fixed-price approach with an M&O approach based on past Hanford
management and operating contractor cost data; the estimate of 26
percent was based on a comparison with the estimated cost for BNFL to
perform the work under a cost-reimbursement contract.  However, our
review of DOE's most recent estimates indicate that the savings
amounts should be viewed with considerable caution.  Specifically,

  -- Comparing its revised approach to a M&O contracting approach is
     not meaningful because DOE would no longer seriously consider
     using such an approach.  DOE's cost savings analysis could be
     more meaningful if it included a range of contracting and
     financing options such as various combinations of government and
     private financing. 

  -- For the contract alternatives DOE considered in its analysis,
     the margin of error was plus or minus 40 percent, meaning that
     the actual cost could be up to 40 percent less than or greater
     than the estimate presented.  Because the order of magnitude
     estimates are subject to so much variability, it is difficult to
     assign much credence to this overall savings estimate. 

  -- Cost growth estimates were not used consistently.  For the
     comparison between a fixed-price contract and a
     cost-reimbursement contract with performance incentives, DOE
     assumed that cost growth would be 68 percent for the
     cost-reimbursement contract, and the fixed-price contract would
     have no cost growth.  However, other evidence indicates that
     fixed-price contracts may have greater cost growth than
     cost-reimbursement contracts.  Specifically, a DOE funded study
     found that fixed-price contracts had greater cost growth than
     cost-reimbursement contracts.\4


--------------------
\4 See Department of Energy, Office of Environmental Restoration and
Waste Management, Project Performance Study, Independent Project
Analysis, Inc.  (Reston, Va.  Nov.  30, 1993). 


   REVISED APPROACH SHIFTS
   SIGNIFICANT FINANCIAL RISK TO
   THE GOVERNMENT
---------------------------------------------------------- Chapter 0:4

Under the revised contract approach, DOE faces a substantial
financial risk that could be in the billions of dollars.  This risk
comes mainly in the form of an agreement to pay BNFL for much of the
debt incurred in constructing and operating the waste treatment
facilities if BNFL defaults on its loan payments and DOE terminates
the contract.  This agreement has the same practical effect as a loan
guarantee and is a dramatic departure from the original privatization
strategy.\5 If DOE had provided a guarantee for BNFL's loans from a
private lender, the Federal Credit Reform Act would have required DOE
to estimate the net present value of the subsidy cost of the loan
guarantee over the term of the loan and to have budget authority
available for this full cost before the guarantee could be provided. 

The amount of DOE's potential liability is unknown, because the
amount of borrowing that will be covered under the commitment will
likely not be determined until the contract price is established in
August 2000.  However, BNFL's vice president and project manager told
us that DOE's potential liability could be as much as $3 billion.  He
said that in the case of a default, $3 billion is about the maximum
debt that would be outstanding after BNFL's equity and contingency
funds were applied.\6

DOE's financial risks hinge on a number of factors that could
potentially affect the project.  We identified six main types of
factors, which we believe merit continued attention as the project
proceeds. 


--------------------
\5 DOE's agreement to pay BNFL its outstanding debt as an allowable
cost if the contract is terminated is close to, but not the same as,
a federal loan guarantee.  DOE's agreement is a commitment DOE has
with BNFL, not with BNFL's lenders, and therefore it does not meet
the definition of a loan guarantee, which is provided directly to a
lender, not to the borrower.  Agencies need legislative authority to
provide a loan guarantee. 

\6 Debt for financing the project can be of two types:  debt that is
secured by BNFL's assets (called "recourse" debt) and debt that is
secured only by the revenues BNFL expects to receive from treating
the waste (called "nonrecourse" debt).  The agreement between DOE and
BNFL applies only to recourse debt.  However, to this point, lenders
appear reluctant to provide a significant amount of nonrecourse
funding because of the project's numerous technical and operating
risks.  DOE's risk is made even more substantial because BNFL is a
separate corporation from its parent company and, therefore, lenders
may not be able to pursue BNFL's parent company in the event of a
contract termination. 


      UNVERIFIED TECHNOLOGY
-------------------------------------------------------- Chapter 0:4.1

BNFL officials acknowledge that although the technology they plan to
use has been successfully applied in other settings, it has been
tested only on small amounts of Hanford waste in laboratories and has
not been used at production facilities to vitrify the unique types of
waste at Hanford.  Under DOE's original approach, the success of the
selected technologies was to be demonstrated in temporary plants; in
DOE's revised approach, permanent plants will be built. 

BNFL has developed various other approaches to deal with the need to
ensure that the technology will work.  These include conducting tests
on certain aspects of the technology at existing facilities at other
DOE sites and in the United Kingdom and constructing a prototype
melter for the low-activity waste vitrification process.\7 DOE
expects to hire experts to review BNFL's demonstration plans and
testing results. 

Under its revised approach, DOE retains a significant part of the
risk for the success of this technology.  In the worst case, if
demonstration activities fail or prove inadequate to ensure the
success of full-scale operations, the overall project may fail, and
DOE will be liable for paying off a significant portion of BNFL's
debt after BNFL's resources are exhausted.  If demonstration
activities show that the technology is usable but flawed, treatment
facilities may require expensive retrofitting to make them viable. 
This could raise the cost of the fixed-price contract that DOE will
negotiate with BNFL. 


--------------------
\7 The melter is a large furnace that heats the waste to a high
temperature and combines it with other materials to produce a
glass-like product. 


      RAPID PLANT CONSTRUCTION
-------------------------------------------------------- Chapter 0:4.2

Although the revised approach gives BNFL additional time to design
the waste treatment and vitrification facilities, the schedule still
poses some potential risk.  To give BNFL more time to design the
facilities, DOE set back the start of construction by about 2 years. 
However, even with this change, construction will begin well before
all of the design work is completed.  BNFL officials estimate that
overall design work will be less than 50 percent complete at the
start of construction and acknowledged that conducting simultaneous
design, construction, and technology testing carries some risk.  To
reduce this risk, BNFL is performing a periodic risk assessment to
ensure that design and technology testing concerns will be addressed
as quickly as possible in the next 24 months. 


      SAFETY AND REGULATORY ISSUES
-------------------------------------------------------- Chapter 0:4.3

Another factor potentially affecting the success of the project--and
therefore DOE's financial risk--is whether the safety and other
regulatory requirements can be successfully met.  For example, DOE's
Regulatory Unit raised 90 issues with safety documents that BNFL
submitted in January 1998.  The manager of the Regulatory Unit
described the quality of the BNFL safety documents as poor and said
that the next set of safety documents, submitted in August 1998, was
also poorly done.  Unless the required safety documentation is
approved, BNFL will be unable to start construction on schedule. 

The BNFL project manager attributed the safety documentation problems
primarily to the early level of the project's design and said that
BNFL will greatly increase the staff addressing safety-related issues
during the rest of phase I.  BNFL also has recently hired an
experienced nuclear facilities licensing manager to lead this effort. 
DOE has also taken steps to help ensure that BNFL is addressing
safety issues.  For example, DOE has negotiated into the contract
provisions that (1) require periodic meetings between its regulatory
staff and BNFL to discuss safety issues and (2) provide for DOE's
attendance at BNFL's safety committee facility design review
meetings. 

The project also presents another regulatory challenge.  DOE planned
to have the Occupational Safety and Health Administration (OSHA)
regulate worker safety at the plant.  However, in May 1998, OSHA
declined to assume responsibility, citing a need first for statutory
and regulatory changes to be in place, as well as a full complement
of the resources required.  If OSHA does not regulate worker safety,
then DOE must do so.  The manager of DOE's Regulatory Unit said that
if this issue is not resolved by January 2000, his unit will assume
responsibility for regulating worker safety so that construction can
begin on schedule. 


      DOE'S SUPPORT ACTIVITIES
-------------------------------------------------------- Chapter 0:4.4

DOE is responsible for the following major support activities: 
sampling and analyzing tank waste (characterization); providing
infrastructure, which includes roads, water, electricity, and
wastewater treatment; retrieving waste, which requires DOE to
retrieve waste from the tanks and deliver it to BNFL while keeping
the chemical makeup of the waste within specified ranges; and storing
and disposing of waste after processing, which requires DOE to
temporarily store the high-level waste and permanently store
low-activity waste.  DOE estimates that support activities will cost
about $2 billion, including about $600 million for waste retrieval,
$40 million for characterization, and about $370 million for waste
storage and disposal.  Although support activities are essential to
project success, many of them are still in the planning stages and
potential problems are not yet apparent.  At this time, the areas
that appear to be most prone to problems are waste retrieval and
waste storage and disposal.  DOE's site support contractor concluded
that these two problems have a high risk of adversely affecting the
project.  As a result, DOE could have to make idle facility payments. 
In response, the site support contractor identified a set of
mitigating actions that it believes will reduce the risk that the
problems will adversely affect the project. 


      DOE'S FUNDING STREAM FOR THE
      PROJECT
-------------------------------------------------------- Chapter 0:4.5

DOE's ability to fund the project within its own budget is an
important factor in ensuring that lack of funding does not lead to
project termination.  DOE estimates that it will need more than $10
billion in actual year dollars from fiscal year 1999 through 2017 to
fund the $6.9 billion project cost--an average of $537 million
annually.  This funding represents a substantially increased need for
funding at the Hanford Site, where current annual budgets for all
on-site cleanup activities total about $1 billion.  If DOE could not
provide funding for the privatization project when needed, the
contract would likely be terminated, triggering DOE's liability to
pay BNFL for the amounts borrowed against the company's assets. 

DOE officials said they did not yet have a detailed funding plan for
how they would find the additional funding within their budget. 
However, assuming no significant increase from the Congress, DOE
indicated that a major source of funds would likely be funding made
available when other DOE sites, such as Rocky Flats and Fernald, are
cleaned up and closed.  Given DOE's track record in completing
environmental cleanup projects, however, we are concerned that the
funds may not be available when they are needed. 

Another issue that could potentially affect DOE's ability to ensure
that sufficient funding is available for the project relates to how
the new contracting approach is classified in the budget.  Because of
budget limitations contained in the Budget Enforcement Act, cost
estimates are prepared for programs, including projects in DOE's
privatization program, to ensure that the limitations are not
exceeded.  If a federal agency offered a federal government guarantee
to a private lender for a contractor's debt financing, the agency
would have to estimate the subsidy cost of the loan guarantee.  This
is a complex process and is based on the risk of a default or
nonpayment of the loans and other factors.  The agency would then
need the budget authority for the full net present value of the
subsidy cost before it could make the guarantee. 

Although the tank waste project is not structured as an explicit loan
guarantee, there is an increase in the government's potential
liability associated with making BNFL's loans an allowable contract
cost.  Neither DOE nor the Office of Management and Budget has
estimated this potential cost.  This is of consequence because it
affects how much funding DOE will have to have on hand for the
project, and when. 


      INCONSISTENCIES WITH
      GUIDELINES FOR FIXED-PRICE
      CONTRACTS
-------------------------------------------------------- Chapter 0:4.6

In an effort to balance risks and realize cost savings, DOE selected
a fixed-price contracting approach for the project.  Federal
acquisition regulation guidelines note that fixed-price contracting
works best when the possibility is low for changes with cost and
schedule implications.  However, the BNFL contract cites at least 15
events, such as regulatory changes or failure to provide waste on a
timely basis, that could cause cost or schedule increases.  The
consequence of such changes is that they would constitute a potential
basis for adjusting the fixed price or paying agreed-upon additional
amounts. 

Federal guidelines state that another factor contributing to the
successful use of fixed-price contracting is competition, which helps
determine a price that minimizes the cost to the government while
providing a fair profit to the contractor.  DOE's revised approach
removes competition as a check on price.  Instead, DOE has required
BNFL to provide certified cost or pricing information for use in
evaluating BNFL's basis for its proposed fixed unit prices.  Without
competition, however, DOE may not have the same assurance of
obtaining the best value for the negotiated price. 


   EFFECTIVE DOE OVERSIGHT IS
   CRITICAL TO PROJECT SUCCESS
---------------------------------------------------------- Chapter 0:5

Managing this large, complex project presents a significant challenge
to DOE.  The agency's continuing challenge will be to translate the
plans it has made into sustainable oversight efforts that are capable
of overcoming problems that have plagued many past waste cleanup
projects. 

DOE has had difficulty managing other large projects.  Our past
reviews have shown a consistent pattern of poor management and
oversight by DOE.  For example, in our 1996 report on DOE's major
system acquisition projects (generally projects costing $100 million
or more), we reported that at least half of the ongoing projects and
most of the completed ones had cost overruns and/or schedule
slippage.\8 Some of the reasons for cost overruns and schedule
slippage included inadequate project oversight and insufficient
attention to technical, institutional, and management issues.  In
addition, our reviews of individual DOE cleanup projects such as the
Defense Waste Processing Facility at Savannah River, the Pit 9
cleanup at Idaho Falls, and the Spent Fuel Storage Project at Hanford
all identified problems with DOE's oversight activities as factors
contributing to project difficulties. 

At least in part to respond to these past difficulties, DOE has
developed several systems and processes to manage the tank waste
project at Hanford and has subjected its plans to outside review. 
Despite these efforts, however, outstanding issues concerning
technical staff, site support activities, and project administration
may keep DOE from being fully prepared to oversee the project. 

Technical staff:  DOE has established a team eventually expected to
number about 80 technical and managerial staff to oversee the
project.  As of August 31, 1998, there were about 30 vacancies,
including key staff such as the Deputy Project Manager and five of
nine DOE staff in the contract management group.  DOE's Director of
Contract Reform and Privatization said that the Hanford unit does not
have all of the technical skills necessary to ensure success in
overseeing the project.  He was especially concerned about the
shortage of contract expertise related to administering fixed-price
contracts.  According to DOE's contracting officer at Hanford, none
of the current DOE staff are experts in fixed-priced contracting. 
DOE officials plan to hire these and other needed staff during fiscal
year 1999. 

Site support activities:  Also critical to the project's success will
be the support that site contractors must provide in preparing
infrastructure improvements, retrieving waste, and removing and
storing the containers of vitrified material.  Outside reviewers
commissioned by DOE and the contractor managing the Hanford site have
concluded that the support could be provided if adequate funding was
forthcoming.  However, DOE and tank farm officials said that the
project is funded at about $23 million less than needed for fiscal
year 1999.  DOE has requested full funding for fiscal year 2000, but
the budget has not yet been finalized.  According to the Director of
the Waste Disposal Division, not fully funding support activities in
the next couple of years could delay the project. 

Project administration:  Our past work on other DOE projects
indicates that carefully administering the contract may also be
critical to ensuring that DOE and the contractor work together
effectively.  DOE has paid considerable attention to developing an
approach to overseeing BNFL's operations and among other things has

  -- followed a systems engineering process that involved developing
     23 "interface control documents" for those areas such as
     infrastructure, emergency response, and permitting where DOE or
     the site contractor have interrelationships with the BNFL
     contract and

  -- specified in the contract that BNFL must deliver completed test
     reports to DOE for numerous activities, such as validation of
     chemical processes, qualification of proposed products, and
     effectiveness of a nonradioactive pilot melter. 

The potential problem is not with DOE's efforts to date but with its
willingness to fully implement the oversight plans it has developed
for the project.  Our work over several years and on a variety of DOE
activities has disclosed a consistent pattern of failure on the part
of DOE to fully implement the plans that it develops.  For example,
in 1997 we reported\9 that two projects at the Fernald, Ohio, site
had weaknesses, including insufficient DOE oversight of the
contractor, inadequate testing of the technology, and delays in
completing planning documents.  These problems contributed to a $65
million cost overrun and almost 6 years of schedule slippage.  More
recently, in a review of DOE's management of contaminated soils above
the groundwater at Hanford,\10 we found that although DOE drafted a
management plan by 1994, it never implemented the plan.  Four years
later, after admitting that the tank waste has leaked into the
groundwater, DOE has still not implemented a comprehensive management
strategy. 


--------------------
\8 See Department of Energy:  Opportunity to Improve Management of
Major System Acquisitions (GAO/RCED-97-17, Nov.  26, 1996). 

\9 Department of Energy:  Management and Oversight of Cleanup
Activities at Fernald (GAO/RCED-97-63, Mar.  14, 1997). 

\10 Nuclear Waste:  Understanding of Waste Migration at Hanford is
Inadequate for Key Decisions (GAO/RCED-98-80, Mar.  13, 1998). 


-------------------------------------------------------- Chapter 0:5.1

Mr.  Chairman, in the report we are releasing today, we recommended
that DOE take immediate action to fully implement the project's
management and oversight plan, and we suggested to the Congress that
an additional review of the project at the end of the extended design
phase would be appropriate given the many uncertainties and decisions
that remain. 

Thank you, Mr.  Chairman and Members of the Subcommittee.  That
concludes our testimony.  We would be pleased to respond to any
questions that you may have. 


*** End of document. ***