Cincinnati Gas and Electric Co.

DECISION AND ORDER

OF THE DEPARTMENT OF ENERGY

Appeal

Name of Petitioner: Cincinnati Gas and Electric Co.

Date of Filing: January 6, 1995

Case Number: VEA-0002

On January 6, 1995, Cincinnati Gas and Electric Co. (CG&E) filed an Appeal from an October 3, 1994 determination issued by the Department of Energy's (DOE) Office of Environmental Management (OEM). Appeal of Cincinnati Gas and Electric Co. (November 9, 1994). In this decision, we consider CG&E's claim that the OEM has erroneously determined its liability for payment into the Uranium Enrichment Decontamination and Decommissioning Fund (the D&D Fund) established under the Energy Policy Act of 1992, Pub. L. No. 102-486, § 1101, 106 Stat. 2953 (1992) (codified at 42 U.S.C. § 2297(g)-1 (1994)). CG&E's D&D Fund assessment was based on 8,803.517 separative work units (SWUs). If CG&E's Appeal were granted, it would pay no assessment into the D&D Fund.

I. Background

Since the era of the Manhattan Project, the DOE and its predecessors have engaged in the process of uranium enrichment in order to meet the nation's national security, research and electrical generation requirements.(1) Uranium enrichment is the process by which uranium is prepared for use in commercial electrical generation or weapons production. This process increases the concentration of a particular isotope of uranium-- uranium-235 (U-235)--above the naturally occurring percentage of 0.711%. The percentage of U-235 contained in a parcel of uranium is referred to as its "assay." Most commercial power generating plants require fuel with assays between 2.5 and 4.5 percent.

The enrichment process involves separating uranium feed into two portions, and transferring U-235 molecules from one portion to the other. The resulting portions of uranium are called "the product" and "the tails." The product consists of enriched uranium (having a higher than natural percentage of U-235). The other portion, the tails, consists of depleted uranium (having a lower than natural

percentage of U-235). The effort required to separate the two isotopes is referred to as separative work and is measured in terms of separative work units (which are commonly referred to as SWUs). The SWU is the common unit of measure of uranium enrichment services used in the nuclear power industry.

In the United States the uranium enrichment process has been performed solely at three DOE plants which used gaseous diffusion technology to achieve separation of the isotopes. The emergence of newer, more efficient technologies and the globalization of the uranium enrichment market have rendered the government-owned plants obsolete and uncompetitive. It therefore became necessary to decommission and replace the gaseous diffusion plants and to recover the costs of these operations. On October 24, 1992, Congress enacted the Energy Policy Act. The Act established a Uranium Enrichment Decontamination and Decommissioning Fund (the D&D Fund) to pay for the costs of decontamination, decommissioning and other remedial action activities at DOE's uranium enrichment facilities, and for reimbursement of certain decontamination and decommissioning, reclamation, and other remedial action costs incurred by licensees at active uranium or thorium processing sites.

The legislative history indicates that Congress intended that the D&D Fund be financed by those entities that had directly benefited from the operation of the plants, and that the allocation of assessments be apportioned in accordance with the degree which those entities had benefited from the uranium enrichment program. H. Rep. No. 474, 102nd. Cong., 2d sess.144, reprinted in 1992 U.S. Code Cong. & Admin. News 1954, 1967 ("The prevailing view on the allocation of costs of cleaning up these plants is that it should be based on benefits received from the program").(2) Accordingly, the statute mandates contributions to the D&D Fund from both the governmental entities and the domestic utilities that took delivery of enriched uranium from the plants. After considering various methods of apportioning responsibility for the D&D Fund, Congress determined that the benefits received from the program could best be measured by each entity's receipt of DOE-originated SWUs. See id.(3) Therefore, the statute requires that each domestic utility's D&D Fund assessment be based upon the total number of SWUs that it purchased from the DOE prior to October 24, 1992. However, since Congress recognized that utilities often purchased or sold enrichment services in the secondary market, the statute further provides:

(1) a utility shall be considered to have purchased a separative work unit from the Department if such separative work unit was produced by the Department, but purchased by the utility from another source; and

(2) a utility shall not be considered to have purchased a separative work unit from the Department if such separative work unit was purchased by the utility, but sold to another source.

42 U.S.C. § 2297g-1(c). As a result, a domestic utility's D&D Fund assessment is based upon the following formula: A+B-C=X, where X is the number of SWUs upon which the utility's D&D Fund assessment is based; A is the total number of SWUs that the utility purchased from the DOE prior to October 24, 1992; B is the number of DOE-produced SWUs purchased by the utility in the secondary market prior to October 24, 1992; and C is the number of DOE-produced SWUs transferred or sold by the utility prior to October 24, 1992.

Utilities were required to purchase and then deliver to the DOE enough natural uranium feed for DOE to conduct the enrichment requested by the utility. DOE then charged the utility, on a per SWU basis, for the amount of the separative work necessary to enrich the natural uranium feed provided by the utility to the weight and product assay sought by the utility.

The relationship between separative work, feed and enriched uranium can be analogized to the production of apple cider. One making apple cider might squeeze twenty apples with a great deal of force to make one gallon of apple cider (therefore leaving relatively little juice remaining in the crushed apples). Alternatively, one might choose to squeeze the apples only half as hard but use forty apples instead of twenty and still end up with one gallon of apple cider (leaving a relatively greater amount of juice in the crushed apples). The apples in this example can be analogized to uranium feed, the apple juice to the U-235 isotope, the squeezing force to separative work, the crushed apples to the tails, and the apple cider itself to the product. Just as the production of a given quantity of apple cider can be achieved through the use of different combinations of apples and squeezing force, a given quantity of uranium enrichment can be produced by different combinations of feed and separative work. For example, an enrichment could be performed using X SWUs and Y kilograms of natural uranium feed at a tails assay of .2 or it could be performed using fewer SWUs and more natural uranium feed (and therefore a higher tails assay) with exactly the same result in terms of quantity and product assay. The varying quantities of separative work and feed required to produce a given quantity of enriched uranium at a given level of enrichment are set forth in the Standard Table of Enrichment Services published by the DOE. By ascertaining the tails assay (the percentage of the U-235 isotope remaining in the tails after the enrichment is completed), the combination of separative work and natural uranium feed needed to produce the desired quantity and product assay can be determined. An increased tails assay results in fewer SWUs and a higher natural feed requirement. Conversely, a decreased tails assay results in a higher number of SWUs and a lower natural feed requirement. When utilities placed orders for enrichment services with the DOE, in addition to selecting the quantity and level of enrichment (the product assay) they chose the tails assay to which the uranium feed was to be depleted (and therefore the specific amounts of separative work and natural uranium feed to be used). The DOE in turn required that the utility provide the corresponding amount of uranium feed and charged the utility for the number of SWUs needed to produce the product ordered at the selected tails assay.

Adding a layer of complexity to this process is the fact that the uranium enrichment market relies upon the "transaction tails" method of determining tails assay. There are two methods of determining the tails assay percentage to be used in a SWU calculation: (1) the "operating" or "as produced" tails method; and (2) the "transaction tails" method. Under the operating or as produced method, the tails assay used to calculate the amount of natural uranium feed to be supplied by the purchaser and the amount of separative work to be purchased is the actual tails assay at which the enrichment was conducted. In contrast, under the transaction tails method, computations of separative work and feed requirements are independent of the actual tails assay used by the DOE to conduct the enrichment. Instead, under the transaction tails method, the purchaser would select the tails assay that was most economically beneficial to it and then provide the corresponding amount of natural uranium feed. The utility would then be charged for the number of SWUs indicated by the Standard Table of Enrichment Services. In other words, the number of SWUs purchased in a transaction using the transaction tails method was determined by the tails assay selected by the purchaser instead of the actual tails assay produced by the enrichment. During the assessment period the DOE used the "transaction tails" method to determine the tails assay to be used when calculating how many SWUs were to be purchased by domestic utilities seeking uranium enrichment services.

The practice of using the transaction tails method was also adopted in the secondary market for enriched uranium, where utilities resold enriched uranium originally purchased from the DOE, as well as SWU credits and feed credits. In the secondary market, the price of enriched uranium was based upon the market value of its two components, natural uranium feed and separative work. In some circumstances, utilities seeking to sell enriched uranium found separate purchasers for the feed and separative work components or purchasers who wished to purchase a different combination of separative work and feed than the enriched uranium had when it was first purchased from DOE. The use of the transaction tails assay method in the secondary market facilitated such transactions.(4) As a result, the tails assay used to determine the amount of separative work and natural uranium feed purchased in the secondary market transaction could vary from both that which was actually used to enrich the uranium and the transaction tails assay used in the original purchase.

II. Analysis

The present case involves a domestic utility, CG&E, that purchased SWUs from the DOE and then later resold the enriched uranium produced by the SWUs to five other domestic utilities and one fuel fabricator. From 1977 through 1983, the DOE provided enriched uranium to CG&E, which the company intended to use in its unconstructed Wm. H. Zimmer Nuclear Generating Station. However, after CG&E canceled construction of the Zimmer plant in 1984, the company entered into a series of transactions to divest itself of the enriched uranium. Due to a loss of uranium in the fabrication of the plant's initial core and because of the difference in the transaction tails assays between CG&E's original purchase from the DOE and two of the resale transactions, CG&E sold 8,803.517 fewer SWUs than it had originally purchased from the DOE. The question before us is whether CG&E's D&D Fund assessment should include the 8,803.517 SWU difference.

In one of the transactions at issue in this case, CG&E sold the initial core for the Zimmer Unit to Pennsylvania Power & Light Company (PP&L). CG&E originally purchased 210,219.917 SWUs from the DOE for the enrichment of the initial core. However, when the initial core arrived at the Zimmer Unit after fabrication, it had a separative work value of 208,164.085 SWUs. The OEM therefore concluded that there was a loss of 2,055.832 SWUs in the fabrication of the initial core, and that CG&E sold only 208,164.085 SWUs in its sale of the core to PP&L. In reaching this conclusion, the OEM relied on data contained in the Nuclear Materials Management and Safeguards System (NMSS), a data base containing records of the movement of all nuclear materials. The OEM also based its conclusion on contemporaneous contractual documentation submitted by PP&L, including a list of the shipments of enriched uranium from the Zimmer unit to PP&L's fuel fabricator.

The other two transactions at issue involve enriched uranium originally obtained by CG&E in 1982 and 1983. In 1982, CG&E received 3,160.059 kgs of uranium enriched by the DOE at a transaction tails assay of 0.2%. To pay for the enrichment of this material, CG&E purchased 19,911.532 SWUs from the DOE. The following year, CG&E received 21,633.618 kgs of uranium enriched at a transaction tails assay of 0.28%, and purchased 69,190.138 SWUs from the DOE for its enrichment.

In the secondary market, as was the case when CG&E purchased from the DOE, the number of SWUs purchased for a transaction involving a given quantity of enriched uranium was based in part on the transaction tails assay agreed to by the parties. In both secondary market transactions at issue, the parties based this quantity on an assumed tails assay of 0.3%. Thus, the same enriched uranium which had originally been purchased from the DOE based on a transaction tails assay of 0.2% and 0.28% was now being resold based on a tails assay of 0.3%.

As explained above, the transaction tails assay and the resulting SWU and feed components assigned to a given quantity of enriched uranium for the purposes of a sale bear no relation to the number of SWUs and amount of feed actually used in the process of enriching the uranium. Thus, in the primary (DOE to CG&E) and secondary (CG&E to other sources) market transactions at issue in this case, the tails assays were assumed to be 0.2% and 0.28% (in the primary market) and 0.3% ( in the secondary market). Because of this change in assumed tails assay, the enriched uranium at resale had a lesser "SWU component" and a greater "feed material component" than when CG&E first purchased it from the DOE.

In calculating CG&E's special assessment, the OEM found that CG&E purchased a total of 498,947.057 SWUs from the DOE but, due to fabrication loss and the difference in tails assays in the transactions described above, sold a total of only 490,143.540 SWUs to other sources. Accordingly, the OEM concluded that CG&E should be held responsible for a D&D Fund assessment based on 8,803.517 SWUs, the difference between the number of SWUs purchased by CG&E and the number of SWUs it sold to other sources.

CG&E, contending that it is not subject to the special assessment, filed the present Appeal on January 6, 1995. Comments on CG&E's Appeal were submitted by the OEM on March 22, 1995, and by PECO Energy Company (PECO), the buyer in one of the transactions at issue, on January 18, 1995. On July 20, 1995, CG&E submitted a reply to the OEM's comments.

CG&E argues that it is not subject to the special assessment because: (1) it "sold all of its material that was enriched by the DOE;" (2) the utility "may be prevented from passing on the Special Assessment to current ratepayers because Ohio law only allows recovery for actual fuel consumed in the generation of electricity;" and (3) the assessment constitutes an "unlawful exaction" by the Government in violation of the Fifth Amendment to the U.S. Constitution. Reply of CG&E (July 20, 1995) at 2-7.

PECO acknowledges in its reply that it purchased SWUs from CG&E, and notes that this purchase was correctly accounted for in its Special Assessment. Letter from Edward J. Cullen, Jr., PECO, to OHA (January 13, 1995). However, PECO argues that the Energy Policy Act does not impose upon it "the responsibility for assessments based upon SWU's which are not shown by the transfer documents between PECO Energy and CG&E to have been acquired by PECO Energy." Id. PECO opposes any resolution of the present Appeal that would result in it paying a Special Assessment based on SWUs that it never acquired. Id.

For the reasons explained below, after considering the arguments and reviewing the record in this case, we find that the DOE properly assessed CG&E for the contested 8,803.517 SWUs.

A. CG&E's Sales of SWUs in the Secondary Market

We turn initially to CG&E's claim that since it resold all of the uranium in its inventory enriched by DOE, it must have resold all of the 498,947.057 SWUs it purchased in order to obtain that uranium as well. We must reject this claim for two reasons. First, CG&E could not have sold all of the SWUs it purchased as 2,055.832 SWUs were lost in the fabrication of the initial core of the Zimmer plant. This is not disputed by CG&E, nor does the company argue in its Appeal or in its reply why it should not be assessed for SWUs associated with uranium it clearly could not have resold.

Second, regarding the two secondary market transactions at issue based on an assumed tails assay of 0.3%, we are not persuaded that CG&E sold the same number of SWUs that it purchased from the DOE. As discussed above, the DOE and the secondary market used the transaction tails method to calculate the number of SWUs transferred in a transaction. As a result, the number of SWUs purchased in order to obtain a given parcel of enriched uranium was not fixed, but rather was determined by tails assay selected by the purchaser (or agreed to by both parties in the case of a secondary market transaction). Therefore, the assumption upon which CG&E's contention is based, that the number of SWUs associated with a given parcel of enriched uranium remains constant, is incorrect. Long Island Lighting Company, 25 DOE ¶ 80,146 (1995).(5)

CG&E further relies for support on the Energy Policy Act of 1992, contending that it would be contrary to the intent of the Act to levy an assessment on a utility that sold all the DOE-enriched uranium it had ever received simply because some of the uranium was sold at a different tails assay. "[N]owhere in the Act is there any reference to differentiation of SWUs purchased on the basis of tails assays." Reply of CG&E, Inc. (July 20, 1995) at 2-3.

CG&E is correct that there is no specific reference in the Energy Policy Act to tails assay as the basis for the special assessment. However, neither is the assessment based on the quantity of enriched uranium purchased and sold by a utility, as implied by the Appellant. Rather, the statute clearly states that a utility's assessment is to be based on the number of SWUs it purchased from the DOE, unless the SWUs were "purchased by the utility, but sold to another source." There is no dispute that CG&E purchased a total of 498,947.057 SWUs from the DOE. This is the basis for CG&E's special assessment before accounting for SWUs it sold to other sources. The method of adjusting the assessment to account for CG&E's sales of SWUs in the secondary market was explained by the OEM in issuing the Part 766 regulations.

If a utility purchased DOE-produced SWUs from another utility, the purchasing utility's assessment will be based on the SWUs specified in contracts or other probative documents generated at the time of the secondary market purchase. The selling utility's assessment will be reduced by an amount that will be determined by the SWUs sold to the purchasing utility.

Uranium Enrichment Decontamination and Decommissioning Fund; Procedures for Special Assessment of Domestic Utilities, 59 Fed. Reg. 41956, 41958 (1994). Accordingly, CG&E's assessment could only be reduced by the number of SWUs sold by CG&E as "specified in contracts or other probative documents generated at the time of the secondary market purchase."

CG&E has never disputed the OEM's finding that "CG&E's resale documentation indicates that some of the resales were at a higher percent tails assay." Appeal at 2. Neither has the company submitted any probative documents to substantiate its claim that it sold more than 82,353.976 SWUs in the two transactions at issue based on a 0.3% tails assay. Because CG&E originally purchased 89,101.67 SWUs from the DOE for the enrichment of the uranium transferred in these two transactions, we reject the company's unsupported argument that it "sold all of the SWU that it purchased . . . ." Appeal at 2.

Therefore, we must agree with the OEM that CG&E, having purchased 498,947.057 SWUs from the DOE, sold only 490,143.540 SWUs to other sources, and therefore was properly assessed for the 8,803.517 SWUs it did not sell in the secondary market.

B. Ability of CG&E to Recover the Special Assessment in its Utility Rates

The Energy Policy Act provides that "[a]ny special assessment . . . shall be deemed a necessary and reasonable current cost of fuel and shall be fully recoverable in rates in all jurisdictions in the same manner as the utility's other fuel cost." 42 U.S.C. § 2297g-1(g). CG&E argues that despite this language "it may be prevented from passing on the Special Assessment to current ratepayers because Ohio law only allows recovery for actual fuel costs for fuel consumed in the generation of electricity . . . ." Reply of CG&E (July 20, 1995) at 3.

DOE responds that the above provision of the statute

makes a utility's historical SWU costs comparable, for ratemaking purposes, to its current fuel costs, so that its Special Assessment may be ?fully' recovered, notwithstanding the criteria for fuel cost recovery under state law. Otherwise, the provision would have no meaning since utilities are already subject to state-level rate recovery requirements, which often restrict fuel cost recovery to actual fuel costs.

Response of the Department of Energy (March 22, 1995) at 12.

CG&E has not made a persuasive showing that it cannot recover the cost of the Special Assessment under state law. Rather, the utility merely asserts in general terms that it "may" be prevented from doing so. Reply of CG&E (July 20, 1995) at 3, 4-5. Moreover, even if we were to assume that Ohio state law might prevent CG&E from passing through the Special Assessment in its rates, it is clear that the state law would be preempted by the federal Energy Policy Act.

In determining whether state law is preempted by a federal statute, the first question is whether an intent to preempt is "express in the terms of the statute." Wisconsin Pub. Intervenor v. Mortier, 501 U.S. 597, 604-05 (1991). In the absence of express language, the intent of Congress to preempt state law can be "implicit if . . . the goals ?sought to be obtained' and the ?obligations imposed' reveal a purpose to preclude state authority." Id. at 605 (quoting Rice v. Santa Fe Elevator Corp., 331 U. S. 218, 230 (1947)). Finally, "[e]ven when Congress has not chosen to occupy a particular field, pre-emption may occur to the extent that state and federal law actually conflict." Id.

In the present case, the intent of the Congress to preempt state law is express in the terms of the Energy Policy Act. The statute declares that the special assessment "shall be fully recoverable in rates in all jurisdictions . . . ." 42 U.S.C. § 2297g-1(g). As the OEM argues, we cannot discern what meaning this provision could have other than to preempt state laws "in all jurisdictions" that would not allow recovery of the special assessment in a utility's rates. In addition, such state laws would be preempted because they would "actually conflict" with the express terms of the Energy Policy Act. Mortier, 501 U.S. at 605.

Moreover, "the goals ?sought to be obtained'" by the special assessment "and the ?obligations imposed' reveal a purpose to preclude state authority." Id. The legislative history of the Energy Policy Act discusses the need to allocate the "cost of cleaning up" the gaseous diffusion plants "based on the benefits received from the program." H. Rep. No. 474, 102nd. Cong., 2d sess.144, reprinted in 1992 U.S. Code Cong. & Admin. News 1954, 1967. State laws that would not allow for the recovery of the special assessment in utility rates would frustrate the stated purpose of the legislation--to apply the special assessment in a fair and equitable manner to all beneficiaries of the program. Each of the above considerations leads us to conclude that, in the event of an actual conflict, Ohio state law would be preempted by the federal Energy Policy Act's mandate that the special assessment "shall be fully recoverable in rates in all jurisdictions . . . ." 42 U.S.C. § 2297g-1(g).

C. Constitutionality of the Energy Policy Act

Finally, CG&E argues that the special assessment constitutes an "unlawful exaction" by the Government, and cites a recent decision of the United States Court of Federal Claims. Reply of CG&E (July 20, 1995) at 5-7 (citing Yankee Atomic Electric Company v. United States, No. 94-555C (June 22, 1995)). In Yankee Atomic, the court found that, because of the "fixed-price character" of the contracts by which the DOE's predecessor sold SWUs to a utility,

by imposing the assessment . . . , the Government dishonors the very promise it had earlier made: that the price to be charged for its services would not exceed the contract-stated maximum. Legislation so plainly directed at undoing a contract liability previously assumed by the Government is an impermissible exercise of sovereign power.

Yankee Atomic, slip op. at 7-8.

We will ultimately defer to the rulings of the federal courts on the issue of the constitutionality of this provision of the Energy Policy Act. However, to date no order has been issued enjoining the DOE's enforcement of the Act in cases like the present one, and the United States has filed an appeal in the Yankee Atomic case. The appeal will be heard by the United States Court of Appeals for the Federal Circuit. While this litigation is pending, the Department has stated that it "must continue to fulfill its statutory obligation under the Energy Policy Act of 1992 by collecting special assessments." Letter from Judy C. Fulner, Uranium Enrichment Decontamination and Decommissioning Fund Manager, DOE, to Donald P. Bogard, Cinergy Corporation (November 27, 1995).

III. Conclusion

There is no question that Congress' choice of DOE-produced SWUs as the means of measuring a utility's proportionate share of uranium enrichment cleanup costs has had an unforeseen economic consequence for CG&E and its rate-payers. When the firm resold to other sources the uranium enriched with SWUs purchased from the DOE, it certainly had no idea that changing the tails assay (and thus reducing the "SWU component" of the enriched uranium) would later cause it to be assessed for SWUs it did not resell. Nor could it have known that it would be assessed for SWUs lost in the fabrication of fuel that it never burned, and later sold. However, CG&E's situation is by no means unique among domestic utilities, none of whom could have foreseen the eventual creation of the D&D Fund and the institution of the SWU assessment and all of whom, if they would have been able to foresee the SWU assessment, could have accordingly changed their behavior. Nor is it unusual in today's world to assign by law the responsibility for cleaning up the environment to any party that ever had an interest in a particular site which requires remediation. That is the way the law was made, and DOE has no other choice but to assess CG&E on the basis of the net amount of DOE-produced SWUs that the utility bought and sold

For the reasons set forth above, we find that the contentions set forth in the CG&E's Appeal are without merit. Accordingly, we have determined that its Appeal shall be denied.

It Is Therefore Ordered That:

(1) The Appeal filed by Cincinnati Gas & Electric Company, Case No. VEA-0002, on January 6, 1995, is hereby denied.

(2) This is a Final Order of the Department of Energy

George B. Breznay

Director

Office of Hearings and Appeals

Date:

(1)In this decision we make frequent reference to the DOE's uranium enrichment program, which prior to the DOE's creation in 1977 had been conducted by its predecessors, the Energy Research and Development Administration, which administered the program from 1974 through 1977, and the Atomic Energy Commission, which administered the program from its inception until 1974. In 1993, Congress created the United States Enrichment Services Corporation and transferred administration of the uranium enrichment program to it. Unless stated otherwise, when we refer to the DOE's uranium enrichment program, we are also referring to the program as administered by DOE's predecessors.

(2)The D&D Fund is to consist of annual deposits of $480 million per fiscal year, to be adjusted for inflation on an annual basis.

(3)Collection of special assessments is authorized for either a period of fifteen years or until $2.25 billion (adjusted for inflation) has been collected, whichever occurs first.

(4)For example, a purchaser that wished to purchase fewer SWUs and more feed could bargain for the use of a higher transaction tails assay to meet its needs. Similarly a seller could meet the needs of a purchaser seeking only feed credits by first finding a second purchaser to sell its enriched uranium to at a higher transaction tails assay than had been used in its original enrichment in exchange for feed credits and then reselling the feed credits to the first purchaser.

(5) If the DOE and the secondary market had used the as produced method to calculate the number of SWUs sold to utilities, CG&E's contention would be valid. Had this been the case, a fixed number of SWUs could have been associated with a given parcel of enriched uranium and the laws of physics would have dictated that if a utility had received a parcel of uranium from the DOE and then sold it, the number of SWUs purchased would always equal the number of SWUs sold.