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The Arms Control Association is an "exceptional organization that effectively addresses pressing national and international challenges with an impact that is disproportionate to its small size." 

– John D. and Catherine T. MacArthur Foundation
January 19, 2011
Decision Time for the HEU Deal: U.S. Security vs. Private Interests
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Thomas L. Neff

In 1992, the Bush administration initiated a program with Russia to destroy 500 metric tons of highly enriched uranium (HEU) from Russian nuclear weapons—the equivalent of about 25,000 nuclear weapons—and turn it into fuel for U.S. nuclear power plants.Codified in a 1993 government-to-government agreement, this program has become the centerpiece of U.S. efforts to prevent the nuclear arsenal of the former Soviet Union, and the personnel responsible for it, from proliferating around the world.

The flow of nuclear fuel from Russian nuclear weapons has also become essential to the 100 nuclear power plants in the United States, which supply more than 20 percent of the nation’s electricity. Half of all U.S. nuclear fuel now comes from Russia, with the other half being provided by a single aging domestic facility and imports from Western Europe, which are restricted by capacity limits. This makes a secure supply of nuclear fuel from Russia at reasonable prices critical to U.S. electricity supply.

The Highly Enriched Uranium Purchase Agreement, or “HEU deal” as it is called, is thus now fundamental to U.S. energy security, as well as national and international security. Although the HEU deal was originally administered by the U.S. government, it is now run by the private U.S. Enrichment Corporation (USEC), formerly a government company under Washington’s direct control. When USEC was privatized, it was given control of U.S. enrichment facilities and supply from Russia, effectively putting the future of the nation’s nuclear fuel supply in the hands of a single private company.2

USEC’s actions as a private company have often been in conflict with the public objectives of the HEU deal, but two recent actions the corporation has taken to better its financial situation have now brought this tension to a crisis point.

Late last year, USEC filed a trade action with the Commerce Department against the only other foreign suppliers of nuclear fuel to the United States, the European companies Urenco and Eurodif, potentially eliminating competitive supply to U.S. utilities. A successful trade action, together with exclusive control over Russian supply and U.S. domestic production, would give USEC monopoly power over the U.S. nuclear fuel supply and drive up electricity prices in the United States.

USEC is also in the process of renegotiating the terms of its contract to purchase Russian HEU and is seeking to pay a far-below-market price, a strategy that threatens the non-proliferation goals of the agreement. In 1996, before USEC was privatized, the United States directed the company to enter into a five-year, fixed-price contract with Russia. Under the terms of that contract, USEC paid Russia a discounted, but acceptable, price below what USEC resold the material for. However, that contract expires at the end of this year, and the new terms USEC has proposed could, given current and expected market conditions, result in a profit markup for USEC of 50 percent or more.3

As the only U.S. authorized buyer, USEC has tremendous power to dictate low prices to Russia. This power is limited only to the extent that the U.S. government is willing, or even able, to direct USEC’s commercial activities. The great danger is that a Russia forced by USEC and the United States to accept a bad deal will lose political support for, and ultimately end, a program that is important not only to U.S. national security but also to domestic energy supply. A situation in which USEC can survive only by charging high prices to U.S. utilities while paying Russia prices far below market levels is a thus a serious threat to the United States, and steps must be taken to change it.

The HEU Deal

Nuclear fuel is made by enriching uranium so that it contains higher levels of the isotope U235 (from the naturally occurring 0.7 percent U235 to about 5 percent U235). This can be done either by using enrichment services, which are measured in separative work units (SWU), or by blending down uranium that has already been enriched to very high levels for use in nuclear weapons (HEU, which typically has greater than 90 percent U235). The result is known as low-enriched uranium (LEU), and it is suitable for use in nuclear power plants.

The price component of low-enriched uranium thus consists of two parts: the natural uranium and the work required to enrich it. Blended-down HEU is priced as if it had started as natural uranium and been enriched to low levels of U235. When the United States purchases low-enriched uranium from Russia that was blended-down from HEU, it pays only for the SWU component. The amount of natural uranium that would have been needed to produce the received quantity of low-enriched uranium is then returned to Russia. In short, when USEC buys blended-down HEU, it is not buying the uranium itself, which can be obtained from many sources, but rather the SWU, of which there are very few providers.

From the beginning, the HEU deal was intended to be a government-to-government arrangement, with fuel derived from Russian weapons to be sold in commercial markets to defray the costs of the program. With luck, the deal would be “budget neutral” for the United States. It was never envisioned that the HEU deal would become a profit center for a private U.S. company. Indeed, discussions in April 1993 between the U.S. government and Russian Minister of Atomic Energy Victor Mikhailov emphasized the need to pay Russia a fair market price, and in correspondence the parties agreed to certain principles:

    Partnership: Neither side subsidizes the other.

    Commercial transaction: No profits or losses.

     —Reasonable fixed costs covered.

     —All avoided costs returned to Russia.

     Prices and cost adjusted for inflation and changes in market conditions.


The government-to-government agreement signed on February 18, 1993, reiterates this intent:


    The Executive Agent of the United States of America shall use the LEU converted from HEU in such a manner so as to minimize disruptions in the market and maximize the overall economic benefit for both Parties.


The HEU deal is unusual for a government project in that it requires the products of weapons destruction to be sold in commercial markets. Originally, when the Department of Energy (DOE) ran the enrichment supply business, it delivered the HEU SWU along with domestic production to utilities. As a government business, there was no strong profit motive: domestic supply and non-proliferation were the main objectives. The Energy Policy Act of 1992 created a new government corporation, USEC, which took over from DOE in July 1993. USEC was, in turn, privatized in July 1998.

The original assumptions of the HEU deal started to erode soon after deliveries began in 1995. For example, in July 1996, Russia offered to increase the amount of HEU destroyed (as called for in the government-to-government agreement) to 18 metric tons of HEU, but USEC refused to take LEU from more than 12 metric tons of HEU on the grounds it would reduce the profitability of its U.S. production operations. USEC was at the time operating two domestic enrichment plants, and larger Russian deliveries would have reduced output and increased unit costs of production by spreading fixed costs over a smaller volume of production. The U.S. government attempted to force the government corporation to perform according to the HEU deal. In the end, however, USEC took delivery of LEU from only 13.4 metric tons of HEU in 1997.

When it was privatized in July 1998, USEC gained even more autonomy from the U.S. government and became responsible primarily to private shareholders. Government influence over USEC is now quite limited. The United States has the legal right to appoint additional agents, or transfer the HEU agency to another party, but little other enforcement power. USEC is supposed to obtain State Department approval of commercial terms proposed to Russia, but lack of commercial intelligence and analysis capability puts the government at a severe disadvantage.4  As a result of this, and a lack of alternatives, U.S. energy security and national security are currently hostage to a private company.

The conflict between public and private interests did not become serious until late 1999, when USEC faced rising prices from Russia, declining sales prices, and high corporate overhead. USEC then threatened to resign as the U.S. agent for the deal unless it received a $200 million subsidy from the United States, contending that it needed to be paid to carry out U.S. policy.

It is instructive to examine closely USEC’s 1999 complaint that it was subsidizing U.S. national security and its “need” for a subsidy. Under the 1996 contract amendment negotiated under government direction, USEC has paid fixed prices to Russia for SWU that have roughly tracked prices for new enrichment contracts, with a modest discount of about 12 percent to cover USEC costs. These contract provisions nominally expire at the end of 2001, but the 2001 price would apply to 2002 deliveries if the contracting parties do not agree on a price for that year.

Contrary to its repeated complaints, USEC has, until recently, been making substantial cash profits on the HEU deal for two reasons. First, it inherited from the Department of Energy a number of long-term contracts to provide enrichment services at above-market prices. Second, the company had the advantage of certain credits that DOE had provided to Russia which were repaid through discounts on HEU SWU prices in 1998 and 1999, subsequent to USEC privatization in July 1998. Instead of USEC subsidizing national security, the reverse was true: USEC was profiting greatly from the HEU deal.

Figure 1 shows the average price USEC has received for selling enrichment services to customers since 1996 and the price actually paid to Russia (taking into account credits in 1998 and 1999). Until the year 2000, USEC earned a profit of about $30/SWU on the HEU SWU because of credits and high prices in the contracts it took over from DOE. From the Russian perspective, the price it received was close to the market price for new long-term contracts at the time of delivery, as also shown in Figure 1, before it took account of the repayment of credits.

It was in the fall of 1999, when credits ran out and USEC contract sales prices began to decline as DOE contracts expired, thereby shrinking profit margins, that USEC demanded its subsidy, contending erroneously that it could produce SWU cheaper than what it paid Russia.6  In December, when it did not receive such a subsidy, the company threatened to resign as the U.S. agent for the HEU deal. USEC subsequently backed down when the United States not only still refused to provide the subsidy but also began to interview companies that might replace USEC as the U.S. agent.

This skirmish did not end USEC’s efforts to obtain an HEU subsidy for its business. Instead of seeking such a subsidy from the United States, USEC sought a subsidy from Russia, in the form of steep discounts on HEU SWU.

The Current Situation

In May 2000, USEC proposed a new pricing mechanism to its Russian counterpart, the government-run Techsnabexport (Tenex). Based on the best available information, the new price, which would take effect beginning in January 2002, represents a discount from the average of seven published price indicators.7 Three of these reflect spot, or short-term, market prices outside the United States; three represent the spot price in the United States; and one is the estimated U.S. price for new long-term contracts. The contract price in a given year is the rolling average of the previous three years’ prices minus a 12-13 percent discount.

In May 2000, such terms may have seemed fair to Russia and to U.S. government overseers. However, neither government party appears to have known what USEC knew. In June 2000, USEC announced that in June 2001 it would shut down the Portsmouth, Ohio, enrichment plant—one of only two in the United States—virtually eliminating what had been a world surplus of enrichment capacity and driving enrichment prices up (Portsmouth ceased production in May 2001). Although the natural uranium market is diverse and competitive, the SWU market is highly concentrated. (Figure 2 shows the major sources of supply to Western countries, along with annual Western requirements.) The shutdown of the Portsmouth plant thus replaced what had previously been a world oversupply of SWU with a tight supply-demand balance.

During this period, USEC was also preparing a trade action against its only real competitors in the U.S. market, Eurodif and Urenco, an action finally filed in December 2000 that would quickly drive up U.S. prices.8  The trade action alleged that European suppliers were not only subsidized by their governments, but were dumping, or selling below cost, in the United States. Because the procedures and calculations used by the Department of Commerce in reviewing trade actions strongly favor domestic suppliers, USEC’s action is likely to succeed.

The possibility of a successful trade action, combined with the already tight SWU market, presents a potentially serious problem for the United States. Of the supplies shown, Russian commercial SWU (listed as “Tenex” in Figure 2) cannot be imported into the United States because of a 1992 suspension agreement. If USEC prevails in its trade action against Urenco and Eurodif, supplies from Europe may also effectively be excluded from the United States. If so, the United States will have access to only limited domestic production, with the rest coming from Russian HEU SWU. This supply would be entirely controlled by USEC. Because up to half of domestic SWU production must go to Asia under existing contracts that require SWU of U.S. origin, USEC would have to increase imports from Russia, making the United States even more dependent on Russian supply.

In the past five months, the U.S. price for enrichment services has risen rapidly due to the USEC trade action, reduced overall supply from the closing of the Portsmouth plant, and prospects for monopoly supply to U.S. utilities. Because of the time lag built into the price formula proposed by USEC for the new contract, Russia would not see an improvement in price for several years. Moreover, when prices did go up, they would not do so with a commensurate increase because the price index proposed to Russia is nearly 45 percent weighted by prices outside the United States. Those prices will not rise, and they may even decline if the USEC trade action forces European suppliers to sell outside the United States, causing an oversupply situation abroad. The gap between what Russia would be paid and what USEC would resell the SWU for in the United States would thus remain wide, maintaining USEC’s large profit margin.

Figure 3 shows how the new price proposal would compare with market prices over time. The data are actuals through the end of April 2001; thereafter they are projections. The U.S. price projections assume that USEC is at least partially successful in its trade action, allowing prices to rise to $120/SWU (the price is currently about $105/SWU). If USEC were to achieve the maximum duty on foreign imports it seeks, the price in the United States could rise to about $145/SWU. If the pricing provision proposed by USEC to Russia were in place today, USEC would pay about $73/SWU to Russia and earn a profit of about $32/SWU from reselling Russian HEU SWU. This would represent a markup of more than 40 percent on resales. If prices rise to $145/SWU for USEC resales, the markup over the price paid Russia would be nearly 100 percent.

U.S. utilities estimate that the potential resulting increase in cost for nuclear fuel would be on the order of $1 billion per year.9 USEC maintains that this would not make nuclear power uncompetitive with coal,10  but the utilities believe that the increased costs would undermine the economics of existing nuclear plants and make it even more difficult to build new ones. Obviously, increased costs for fuel would increase electricity rates, and at a time when the Bush administration is considering new nuclear power plants to offset the growing “energy crisis,” USEC’s actions could deal a devastating blow to U.S. energy policy.

USEC argues that it would use the large gains from the Russian deal to subsidize the sole remaining U.S. enrichment plant, located in Paducah, Kentucky. However, USEC has refused to guarantee that it will keep Paducah open, and it is highly unlikely that any company with a fiduciary duty to shareholders would waste profits on more expensive supply when it could simply buy additional cheap supply.11  In fact, USEC is proposing just that to Russia: to buy more HEU SWU, and newly produced commercial SWU (which would require amendment of the 1992 suspension agreement), all at low prices.12  If it does so, the more likely outcome is the shutdown of Paducah, making the nation largely dependent on Russian supply for its nuclear power plants.

Ironically, recent increases in SWU prices due to the USEC trade action and capacity reductions have eliminated any urgent need to replace the current contract between USEC and Tenex. Under the existing deal, USEC is now paying $90.42 per SWU to Russia but can sell at $105 or higher, a substantial margin.

Such a margin, however, is not enough for USEC. A deeply discounted deal with Russia is essential to USEC survival if USEC is to cover its high business overhead and generate any profit. These high overhead costs mean it is virtually impossible for the United States to utilize USEC to implement the HEU deal, unless either Russia or the United States provides a substantial subsidy. Even with a low-priced Russian deal beginning January 1, 2002, USEC would be close to the financial edge: in April, it predicted negative cash flow of $30-50 million for its fiscal year 2002 (beginning July 1) even if it got the Russian deal and cut costs.

Based on its filings with the Securities and Exchange Commission, USEC’s overhead costs can be broken down as follows: headquarters costs total about $50 million per year; interest on bonds with a face value of $500 million that USEC issued at privatization totals about $40 million per year13  (there is no current provision for repayment of principal); and dividend costs total about $40 million per year, even after USEC cut the dividend from $1.10 to $0.55 per share and bought back shares. The total for these costs is about $130 million. If USEC sells 10 million SWU (e.g., 4.5 million domestic and 5.5 million Russian), these costs amount to about $13/SWU.

If USEC were to set aside funds for repayment of debt, research and development, or other investments, there might be an additional cost of $70 million per year. A company with more than $1 billion in annual sales might expect to earn on the order of $100 million per year in profits if it were to succeed and invest for the future. If one adds these amounts, USEC would need to make about $30/SWU over and above production or Russian acquisition cost to be a successful company.

USEC’s proposal to Russia would generate such a margin today, and in 2000 USEC lobbied the Clinton administration heavily to approve its offer to Russia, an approval held back largely by the Department of Energy. In January 2001, in the waning hours of the administration, DOE capitulated and the United States cabled Moscow that it favored the offer. By this time, however, Russian authorities had become aware of rising U.S. prices and the potentially unfair nature of the USEC offer and held back approval of the deal until the new U.S. administration could review it.

It is unlikely that either Russia or the Clinton administration knew in advance of USEC’s plans for the trade action or understood the market effect of capacity reductions and the potentially huge differential between what USEC might pay Russia and what it might receive on resale. Nevertheless, these effects are now known, as is the fact that the price formula offered by USEC in May 2000 is already far out of line with market conditions. According to Russian authorities, USEC has rebuffed Russian proposals to bring new contract prices closer to market levels on the grounds the United States would not approve any such changes.

Improving U.S. Security

Given the importance of the HEU deal to both U.S. energy and national security, it is essential that the implementation be put on a fair and solid footing. Disruption of cash flow to Russia is not in the U.S. non-proliferation interest—the money from HEU does more than any other U.S. nuclear security program in Russia to protect the weapons-usable fissile material and human assets coveted by rogue states. Disruption of fuel supply to U.S. utilities is not in the interest of a stable electricity supply, and high prices and an insecure supply would seriously undermine the Bush administration’s efforts to make nuclear power an option for the United States.

The risk of disruption arises largely from efforts to force Russia into signing a deal it cannot live with. By granting an exclusive right to USEC, the United States has essentially allowed it to dictate self-interested terms to Russia, restrained only to the extent that the government can control USEC’s commercial actions. But the government is compromised by lack of information and competence in commercial matters and by susceptibility to lobbying and other political influence. As already mentioned, the Clinton administration gave in to USEC in its last hours in office, urging Russia to sign the USEC proposal.

The effort to privatize the U.S. enrichment enterprise, a process that originated in the Energy Policy Act of 1992, was intended to make U.S. enrichment services more business-like and efficient. In the intervening nine years, however, that effort has led to an unfortunate collision of commercial issues with U.S. domestic policy and national security imperatives. Today, it appears that USEC can survive and prosper only at the expense of U.S. security and a competitive domestic supply of nuclear fuel and that it can only do so with exclusive rights granted by the government. An experiment that results in such outcomes must be deemed a failure.

What then might be done? One alternative is to try to save the experiment by subsidizing USEC with government funds in exchange for USEC writing a fair contract with Russia, withdrawing its trade action against European suppliers, and committing to continue U.S. enrichment production. The cost of this would be perhaps $200-300 million per year, perhaps for the 12 or more years remaining in the HEU deal.


A second alternative would be to eliminate the special government dispensations that put USEC in control of the HEU deal and domestic supply. Competition is capitalism’s principal weapon against economic inefficiencies and monopoly behavior. It can also be the solution to the HEU problem.

When the HEU deal was negotiated, and when the five-year contract was signed in 1996, the only way to place the large amounts of Russian HEU SWU was through the large portfolio of DOE contracts being fulfilled by USEC. That is no longer the case. In contrast to the situation in 1996, other agents could begin to implement the HEU deal beginning in 2002 or 2003 because USEC’s contract portfolio is rapidly shrinking, as shown in Figure 4. The ultimate users of the HEU SWU are U.S. nuclear utilities, many of whom argue that they could pay Russia a fairer price than USEC is offering and thus stabilize this important supply. The United States has the legal right to appoint additional agents for the HEU deal.

The real principals in the HEU deal are U.S. utilities—the ultimate users of HEU material—and Russian facilities destroying nuclear weapons, acting under the umbrella of the two governments. Anyone else is a middleman.14  To give a fair price to Russia and to U.S. utilities and electricity ratepayers, it is essential to minimize the cost of intermediation. This simple brokerage task can be accomplished for a tenth of the current and prospective cost of having USEC do the job.

Appointing an additional U.S. agent would introduce competition that would lower enrichment prices in the United States while ensuring a fairer deal for Russia. This would stabilize supply from that now essential source to the United States as well as protect the HEU deal itself. An additional agent would also give the U.S. government options in dealing with USEC and Russia, options it does not now have. With only one agent, the United States must serve that agent’s interest, rather than the reverse. Major U.S. utilities have already met with administration and congressional leaders to propose introducing one or more additional agents.

Because of the long-term contract commitments shown in Figure 4, it is unlikely that an additional agent could immediately replace USEC as the U.S. agent. Instead, it would be a gradual process, over several years, as existing enrichment contracts expired. In the meantime, Russia would sell to a new agent, probably at a higher price, and USEC would continue to buy what it needs to meet its contract commitments, perhaps at a lower price because Russia could not immediately place the entire volume at higher prices. With less cheap Russian supply, USEC would favor continuing domestic production to meet its contract commitments, stabilizing supply from domestic sources.15

USEC is lobbying heavily to remain the sole agent of the United States in order to preserve its bargaining power with Russia as the only possible buyer. It is also seeking to enlist congressional pressure to induce the Bush administration to support USEC’s May 2000 proposal to Russia, apparently believing that endorsement by the new administration would force Russia to accept its terms.

The Bush administration has deferred any decisions, pending a comprehensive review ordered by Condoleezza Rice, the president’s national security adviser. Given the importance of the HEU deal for national security as well as domestic energy security, it is imperative that the United States decide whether to subsidize USEC so that it can continue to act as agent and be the sole supplier to U.S. utilities, or to introduce competition that will stabilize and reduce the cost of implementing the HEU deal, and the cost of nuclear fuel, by introducing an additional agent. The United States needs a better approach to implementing the HEU deal if it is to reap the agreement’s non-proliferation benefits and secure a cost-effective fuel supply for U.S. power plants.

Figure 1. HEU Purchase Price vs. USEC Sales Price and New U.S. Long-term Contract Price

Figure 2. SWU Supplies Available to Meet Future Western Requirements

Figure 3. Proposed HEU Contract Price vs. New U.S. Long-term Contract Price

Figure 4. U.S. SWU Requirements vs. Commitments

NOTES

The author thanks Ux Consulting Company (UxC) for the market data used in the figures in this article. UxC bears no responsibility for the conclusions drawn from that data.  For additional information, see www.uxc.com.

1. This initiative was proposed by the author to officials of both governments in October 1991.

2. There are two possible sources of Russian enrichment supplies: from blending down HEU, and from new production from Russian commercial facilities. Under a 1992 trade agreement (“Suspension Agreement”) between the United States and Russia, the latter cannot be sold in the United States.

3. Russia is typically willing to price its exports with a small discount to capture business in the West, but a larger discount raises suspicions in Russia and is likely to result in cancellation of any such deal. Russia is particularly sensitive in the case of weapons material, a national patrimony and source of great-power status.

4. U.S. government officials appear to rely on information provided by USEC about commercial negotiations with Russia, rather than having information directly from Russian sources.

5. The United States made $260 million in advance payments to Russia through USEC, when it was a government corporation, in order to facilitate removal of nuclear weapons from former Soviet states to Russia and for other non-proliferation purposes. USEC was privatized in 1998 but took with it the repayment obligations by Russia of $48 million in 1998 and $50 million in 1999. These repayments took the form of reductions in the prices paid for HEU SWU. As a result, the private company did not pay the full contract price to Russia until 2000.

6. USEC’s argument was that its marginal cost of production was lower than the price it paid Russia. This might be true for a small volume of SWU, but certainly not for the 5.5 million SWU per year to be purchased from Russia. USEC’s marginal cost for larger volumes is set by the cost of electric power, which has risen tremendously, especially in the summer. Production of one SWU by gaseous diffusion requires about 2,500 kilowatt-hours of electricity. USEC has operated its plant(s) only part of the year, when power is cheap; to replace the large volume of HEU SWU, USEC would have to buy power at rates that would put its production cost well above what it pays Russia.

7. Although uranium contract prices are often indexed to published spot-price indicators, buyers of enrichment services will not write contracts indexed to published spot indicators because the spot enrichment market is very thin and for this reason is not considered representative of prices at which much larger volumes can be transacted. In addition, because the spot market is thin, it is easily subject to considerable downward pressure by even modest inventory sales by major companies. Long-term enrichment price indicators are also unreliable because of the secrecy of such contracts and the complexity of their terms, which makes it difficult to determine a specific price.

8. Because import duties on imports would be retroactive, prices would rise immediately.

9. Letter from Ad Hoc Utilities Group (representing 20 U.S. nuclear utilities) to Congressman Joe Barton (R-TX), April 26, 2001.

10. Letter from Philip Sewell, senior vice president of USEC, to Congressman Joe Barton (R-TX), April 12, 2001. If one accepts the figure for nuclear generation cost of 1.83 cents/kilowatt-hour cited by USEC, the 27 percent figure for percentage fuel cost by the Ad Hoc Utilities Group, and a 73 percent duty rate, the increase in cost of nuclear electricity would be 0.36 cents, raising the cost of nuclear generation to 2.19 cents. This is greater than the average cost of coal generation cited by USEC of 2.07 cents/kilowatt-hour.

11. For domestic production, USEC estimates “factory” production costs at Paducah of about $105/SWU. Outside estimates are for about $110/SWU. Russian supply would be $32-37 cheaper than production. According to congressional sources, USEC has argued that it would match one Russian SWU with one U.S. produced SWU to get an average cost of about $90/SWU. There are two problems with this argument: first, this would not generate enough to cover USEC’s overhead and profit in today’s market (and certainly not if USEC does not succeed in its trade action); second, shareholders are unlikely to allow nearly $200 million in profits from Russian resales to be wasted on high-cost domestic production.

12. USEC, which has long supported the exclusion of Russian commercial SWU from the U.S. market, has proposed making an exception for purchases by itself (but not other parties) as an inducement to Russia to sign the May 2000 HEU contract extension terms USEC proposed. Russian commercial sales generate cash flow that is not overseen as carefully by the central government as that from HEU sales.

13. USEC management and the board of the government corporation had a choice of how to privatize the company: through merger and acquisition (M&A) or initial public offering (IPO). M&A bids were in excess of $1.8 billion. USEC bankers could only raise $1.425 billion by sale of shares, and in order to proceed by IPO, USEC sold $500 million in bonds to increase the amount it could pay the U.S. Treasury by going this route. In effect, USEC’s current cost structure is the result of how the privatization was done.

14. A similar statement applies to domestic production: U.S. and Asian utilities are the end-users and would buy at or near the cost of production, without the substantial markup required by some agents. Any number of contractors could operate the Paducah plant—the government-owned plant and the trained workers are the essential factors; the rest is merely administrative.

15. USEC’s lease on the Paducah plant expires in 2005.

Thomas L. Neff is senior researcher at the Massachusetts Institute of Technology’s Center for International Studies in Cambridge.