DECISION AND ORDER

OF THE DEPARTMENT OF ENERGY

Appeal

Name of Petitioner: Carolina Power & Light Company

Date of Filing: March 1, 1995

Case Number: VEA-0005

On March 2, 1995, Carolina Power & Light Company (CP&L) filed an Appeal from a February 2, 1995 determination issued by the Department of Energy's (DOE) Office of Environmental Management (OEM). Under that determination, CP&L's assessment for the DOE's Uranium Enrichment Decontamination and Decommissioning Fund (the D&D Fund) is based on 4,855,691.167 separative work units (SWUs). In its Appeal, CP&L contends that 78,917.709 SWUs were erroneously included in that amount.

I. Background

Beginning with the era of the Manhattan Project, the DOE and its predecessors engaged in the process of uranium enrichment in order to meet the nation's security, research, and electrical generation requirements (hereinafter the DOE's uranium enrichment program). This case concerns legislation requiring that domestic utilities contribute to a fund to pay clean-up costs associated with the program.

A. Uranium Enrichment

Nuclear-powered utilities require enriched uranium. Enriched uranium is uranium in which the concentration of a particular isotope of uranium, uranium-235 (U-235), is increased above the naturally occurring percentage of 0.711%. The percentage of U-235 contained in uranium is referred to as its "assay." Most commercial power plants require fuel with assays between 2.5 and 4.5 percent.

The uranium 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, i.e., SWUs.

B. The DOE's Uranium Enrichment Program

The DOE's uranium enrichment program was administered by the DOE and two predecessor agencies. The Atomic Energy Commission (AEC) administered the program from its inception until 1974; the Energy Research and Development Administration administered the program from 1974 until the DOE's creation in 1977. The DOE administered the program until 1993, when Congress transferred the program to the newly-created United States Enrichment Services Corporation. Unless otherwise indicated, references to the DOE's uranium enrichment program include the program, as administered by the DOE's predecessors.

The DOE performed its uranium enrichment services at three plants, which were the sole source of uranium enrichment services in the United States. Utilities paid for such services in one of two ways. In cases where the utility leased the enriched uranium from the DOE, the utility paid lease and "burnup" charges. The burnup charge was based on the separative work, or SWUs, associated with the consumed material. In cases where the utility did not lease enriched uranium from the DOE, the utility provided natural uranium to the DOE, and the DOE enriched the uranium to the utility's specifications. The utility paid the DOE for the enrichment services based on the separative work, or SWUs, required.

The emergence of newer, more efficient technologies and the globalization of the uranium enrichment market rendered the DOE plants obsolete. It therefore became necessary to decommission and replace the gaseous diffusion plants and to recover the costs of these operations. Congress addressed these issues in Sections 1101 through 1105 of the Energy Policy Act of 1992, which added Sections 1801 through 1805 to the Atomic Energy Act of 1954 (the Act), providing for the establishment of the D&D Fund. 42 U.S.C. §§ 2297g through 2297g-4.

C. The Act's Provisions

Section 1801 of the Act provides for the establishment of the Decontamination and Decommissioning Fund, i.e., the D&D Fund. 42 U.S.C. § 2297g. Section 1801 also provides for the investment of such funds pending their expenditure. Id.

Section 1802 of the Act sets forth the mechanism for funding the D&D Fund. 42 U.S.C. § 2297g-1. Section 1802(a) provides for total yearly deposits of $480,000,000, adjusted for inflation. Section 1102(b) provides for contributions from domestic utilities that purchased uranium enrichment services from the DOE and from other sources. Section 1802© sets forth the formula to be used in determining a given utility's assessment. Sections 1802(d) through (g) deal with other aspects of the assessment.

Section 1802© of the Act requires contributions from domestic utilities based on their proportional use of the DOE uranium enrichment program prior to the date of the Act, subject to a $150,000,000 maximum. 42 U.S.C. § 2297g-1(c). Each utility's contribution percentage is measured as a fraction in which the numerator is the total number of SWUs that the utility purchased "for the purpose of commercial electricity generation" and the denominator is the total number of DOE-produced SWUs, regardless of their purpose.

Section 1802© further specifies that the number of SWUs purchased from the DOE be adjusted to reflect SWUs purchased or sold in the secondary market. As a result, a domestic utility's D&D Fund assessment equals the total number of SWUs that the utility purchased from the DOE, plus the number of DOE-produced SWUs purchased by the utility in the secondary market, minus the number of DOE-produced SWUs sold by the utility.

Consistent with the statutory language, the legislative history indicates that Congress intended that the D&D Fund be financed by those entities that had directly benefited from the DOE's enrichment program, and that a given entity's assessment reflect the degree to which it had benefited from the program. H. Rep. No. 474, 102d Cong., 2d sess. 144, reprinted in 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."). The legislative history further indicates, that after considering various methods for measuring the benefits received from the program, Congress determined that such benefits could best be measured based on the receipt of DOE-originated SWUs. See H. Rep. at 144-45, U.S. Code Cong. & Admin. News at 1967-68.

D. The D&D Fund Regulations

On August 8, 1994, the DOE issued regulations implementing the relevant provisions of the Act. 59 Fed. Reg. 41956 (August 15, 1994). These regulations are set forth at 10 C.F.R. Part 766.

Pursuant to the regulations, a domestic utility that objects to the OEM's determination of its D&D Fund assessment may file an appeal with the DOE's Office of Hearings and Appeals (OHA). 10 C.F.R. § 766.104(d). Thus far, the OHA has issued three decisions with respect to such appeals. Cincinnati Gas and Electric Co., 25 DOE ¶ _____ (August 19, 1996); PSI Energy, Inc., 25 DOE ¶ 80,165 (1996); Long Island Lighting Co., 25 DOE ¶ 80,146 (1995).

II. CP&L's Appeal

CP&L contends that its D&D Fund assessment should be reduced by a total of 78,917.709 SWUs. These SWUs represent 1.6 percent of CP&L's total assessment (78,917.709/4,855,691.167 = .016).

The disputed SWUs fall into three categories. The first category consists of 4,907.278 SWUs associated with enriched uranium that CP&L leased and then consumed pursuant to a 1969 Agreement. The second category consists of 37,399.278 SWUs purchased from a foreign utility. The third category consists of 36,610.652 SWUs that CP&L identifies as "fabrication overage."

III. Analysis

A. SWUs Associated with Leased Enriched Uranium

CP&L contends that the SWUs associated with enriched uranium that was leased from the AEC and consumed by CP&L were "leased" and, therefore, not "purchased" within the meaning of the Act. As explained below, we have concluded that these SWUs were "purchased" and, therefore, are subject to the assessment.

As an initial matter, we have difficulty conceptualizing a "leased" SWU. A SWU is the measure of a service, i.e., an enrichment service. Thus, while a SWU can be "purchased," we fail to see how it can be "leased." What can be leased is the enriched uranium produced by the enrichment service.

Despite the foregoing, CP&L contends that the SWUs in question were not purchased SWUs. CP&L maintains that the 1969 Agreement provides for the "lease" of SWUs and, therefore, that such SWUs cannot be considered as "purchased."

1. The 1969 Agreement

Contrary to CP&L's assertion, the 1969 Agreement did not provide for the lease of SWUs. The 1969 Agreement is entitled "Special Nuclear Material Lease Agreement." The word "lease" refers to nuclear material, i.e., the enriched uranium provided by the AEC.

Moreover, the economic substance of the 1969 Agreement was the purchase of separative work, or SWUs, from the DOE. As explained below, the DOE had historically provided separative work to utilities through leases of enriched uranium.

CP&L does not dispute that AEC historically provided enriched uranium to utilities pursuant to lease agreements. It is also undisputed that utilities paid a burnup charge based on the separative work, or SWUs, associated with the enriched uranium that was consumed.

As the result of subsequent legislation permitting the private ownership of enriched uranium,(1) the AEC provided utilities with the option to purchase enriched uranium held under their lease agreements. Utilities electing to do so entered into in-situ agreements in which they purchased the unconsumed enriched uranium and associated SWUs.

As the foregoing indicates, the economic substance of the lease of enriched uranium was the purchase of separative work or SWUs. The AEC provided to a utility a given amount of enriched uranium, and the payments made by the utility to the AEC included a payment based on the separative work associated with the enriched uranium consumed by the utility. That fact alone is a sufficient basis upon which to conclude that CP&L purchased that separative work. Moreover, in 1970, CP&L entered into an in-situ purchase agreement with the AEC, pursuant to which CP&L purchased the remaining enriched uranium and paid for that material based on the SWUs associated therewith. There can be no doubt that in both transactions, CP&L paid for separative work performed by the AEC to enrich uranium provided to CP&L and the economic substance of the lease agreement was the same as the purchase agreement insofar as the acquisition of enrichment services is concerned.

2. The Meaning of "Purchase" in the Act

Based on the foregoing, it is clear that SWUs associated with consumed leased uranium are "purchased" within the meaning of the Act and the D&D Fund regulations. 42 U.S.C. § 2297g-1(c); 10 C.F.R. § 766.102(a). The Act and the D&D Fund regulations base the special assessment on "SWUs purchased" from the DOE, not on "enriched uranium purchased" from the DOE. Thus, the status of the enriched uranium as "purchased" or "leased" is not relevant. In both cases, the utility paid for DOE enrichment services, based on the separative work performed by the DOE to produce enriched uranium. Because the word "purchased" would apply to separative work regardless of whether it is used to produce purchased or leased uranium, the Act and the D&D Fund regulations apply to that separative work.

Consistent with the foregoing, the preamble to the D&D regulations states that SWUs associated with leased enriched uranium that is consumed are "purchased" SWUs. The preamble states in relevant part:

Leased material is appropriately included as part of the Special Assessment to the extent that the material was for the purpose of electricity generation. Utilities paid "use and burnup charges" for the portion of leased material that they consumed. Therefore, leased material is being treated as purchased material and is subject to the Special Assessment. A utility's Special Assessment will be adjusted for those portions of SWUs in leased material that it did not consume and that were returned to the Government. ...

59 Fed. Reg. 41957. Thus, the preamble clearly addresses the situation of SWUs associated with consumed leased material.

Moreover, CP&L's attempted exclusion of SWUs associated with consumed leased uranium is contrary to the purpose of the Act. The purpose of the Act is to assess utilities based on the benefit they derived from the DOE's enrichment services, the unit measure of which is separative work or SWUs. Historically, the DOE provided enrichment services to utilities through leases of enriched uranium, and utilities benefited from those services to the extent that they consumed the enriched uranium. CP&L has provided no argument as to why the exclusion of such services in this instance would be consistent with the Act's purpose and we see none. Instead, we find that the exclusion of SWUs associated with consumed leased uranium would be contrary to the Act.

As the foregoing indicates, we have determined that the SWUs associated with the enriched uranium that was leased and consumed by CP&L pursuant to the 1969 Agreement are "purchased" within the meaning of the Act. Accordingly, they should not be deducted from CP&L's assessment.

B. SWUs Recovered from a Waste Stream Purchased from a Foreign Utility

CP&L contends that the SWUs recovered from a waste stream purchased from a foreign utility are not "purchased" within the meaning of the Act.(2) CP&L argues that the purchase of such SWUs is "too remote" to be a "purchase" from the DOE. CP&L July 1995 submission at 4.

It is undisputed that the Act provides that a utility's assessment includes DOE-produced SWUs purchased in the secondary market.(3) It is also undisputed that the Act does not contain an exception for DOE-produced SWUs that are purchased from a foreign utility. In fact, such an exception would be contrary to the purpose of the Act, i.e., to assess domestic utilities based on the extent to which they benefited from the DOE's enrichment services.

Consistent with the foregoing, the preamble to the D&D regulations specifically provides that DOE-produced SWUs purchased from a foreign utility are not excepted from a domestic utility's SWU purchases:

During the reconciliation process, DOE will identify these SWUs from information provided by utilities and from other sources to which DOE has access, such as the Nuclear Materials Management and Safeguards System (NMMSS), a joint DOE-Nuclear Regulatory Commission (NRC) database. DOE-produced SWUs that were sold to foreign utilities and later re-entered the domestic commercial market would have the effect of increasing the number of DOE-produced SWUs purchased by domestic utilities for the purpose of commercial electricity generation in relation to the total number of DOE-produced SWUs purchased from the DOE for all purposes, as stated in the [Act]. The Special Assessment invoices will contain information on the total number of DOE-produced SWUs purchased by domestic utilities, including those purchased from foreign utilities. When the reconciliation process is complete, DOE will provide utilities with a summary of all adjustments made during the process.

59 Fed. Reg. 41958. As the preamble indicates, in order to determine the extent to which domestic utilities benefited from the DOE's enrichment services, the DOE's calculation must include DOE-produced SWUs purchased from foreign utilities.

The fact that the SWUs in question were associated with a waste stream purchased from a foreign utility does not change the fact that they were DOE-produced SWUs purchased by CP&L. The SWUs represented the enriched uranium that remained in the waste stream. Because the enriched uranium resulted from separative work performed by the DOE, the separative work or SWUs was a benefit that CP&L obtained from the DOE's enrichment program. Accordingly, there is simply no basis for excluding them from CP&L's purchases.

C. SWUs Identified by CP&L as "Fabrication Overage"

CP&L contends that SWUs associated with what it refers to as "fabrication overage" should not be included in its assessment. Before discussing CP&L's legal arguments, it is important to understand what CP&L means when it refers to "fabrication overage."

1. CP&L's "Fabrication Overage"

CP&L identifies "fabrication overage" by reference to excerpts from two agreements between CP&L and fuel fabricators. Those excerpts indicate that CP&L was required to furnish to the fabricator a quantity of enriched uranium slightly in excess of 100 percent of the amount required by the fuel design. These amounts ranged from 100.5 percent to 101.5 percent. The only excerpt submitted that describes the excess refers to it as "an allowance for scrap, losses incurred during fabrication processes, process sampling and archive material removal." CP&L July 1995 Submission, Extract 7 (emphasis added). Based on the foreging excerpt, we will henceforth refer to the extra enriched uranium as a "fabrication allowance."

2. Whether the SWUs Associated with Fabrication Allowances are Properly Included in CP&L's D&D Fund Assessment

a. Whether the SWUs at issue were "purchased for the purpose of commercial electricity generation"

CP&L argues that even though it purchased the SWUs associated with the fabrication allowance, CP&L did not purchase those SWUs "for the purpose of commercial electricity generation." CP&L maintains that SWUs must be associated with enriched uranium included in the fabricated fuel in order to be "for the purpose of commercial electricity generation."

As an initial matter, we note that the record does not permit a conclusion as to whether any of the fabrication allowance was actually included in the fabricated fuel. It seems to us that it is theoretically possible that a substantial part or even all of the extra enriched uranium provided as an allowance could be included in the final product. In many types of fabrications, compliance with a design specification is subject to certain variances. Neither party has addressed the issue of whether that could occur in reactor fuel fabrication and, therefore, the record is silent on the issue.

More importantly, however, we need not reach the issue of whether any of the fabrication allowance was included in the fabricated fuel. As explained below, in either case, the SWUs associated with the fabrication allowance would be "purchased for purpose of commercial electricity generation" within the meaning of the Act.

Enrichment services associated with fabrication allowances fall within the plain meaning of the statutory phrase "purchased for the purpose of commercial electricity generation." It is undisputed that fabrication allowances are a necessary part of the fabrication of reactor fuel. Fuel fabricators required that utilities furnish an amount of enriched uranium in excess of the amount required by the fuel design in order to cover losses during the fabrication process.(4) Accordingly, the enrichment services associated with those allowances are "purchased for the purpose of commercial electricity generation." Had Congress intended to exclude such enrichment services from the Act, Congress would have based the assessment on enriched uranium "used in reactor fuel."(5)

Consistent with the foregoing, the preamble to the D&D regulations clearly provides that SWUs associated with fabrication allowances are "purchased for the purpose of commercial electricity generation." The preamble states:

Several commenters requested clarification as to how DOE will treat fabrication losses in calculating the Special Assessment. The commenters stated that fuel fabrication losses were not used in commercial electricity generation and therefore should not be included in the calculation of the Special Assessments.

In determining a utility's Special Assessment, the [Act] does not require a SWU to have actually been used in

commercial electricity generation, but only to have been purchased for that purpose. Therefore, DOE will not adjust Special Assessments to exclude fabrication losses.

59 Fed. Reg. 41958. As the preamble indicates, to exclude SWUs lost in the fabrication process would be inconsistent with the Act.

Moreover, the inclusion of fabrication allowances is consistent with the intent of the Act. The legislative history reflects a clear congressional intent that utilities be assessed based on the degree to which they had benefited from the DOE's enrichment program. "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." H. Rep. No. 474, 102d Cong., 2d sess. 144, reprinted in U.S. Code Cong. & Admin. News 1954, 1967. Utilities benefited from enrichment services associated with fabrication allowances, just as they benefited from enrichment services associated with the enriched uranium included in the reactor fuel. Accordingly, the inclusion of enrichment services associated with fabrication allowances is consistent with Congress' stated intent.

b. Whether the SWUs at issue were "sold" to another party

CP&L's alternative argument is that even if the SWUs associated with the fabrication allowance were purchased for the purpose of commercial electricity generation, the fabrication allowance was "sold" to the fabricator and, therefore, the associated SWUs are deductible from CP&L's assessment. In support of that characterization, CP&L quotes from two agreements providing for the passage of title to the fabricators of any enriched uranium that was not part of the fabricated fuel delivered to CP&L.

The OEM disagrees with CP&L's position that the fabrication allowance was "sold" within the meaning of the Act. The OEM notes that it was industry practice for a utility and fabricator to have a settlement statement which identified whether the amount of enriched uranium provided by the utility exceeded, or was less than, the contract amount. Where the settlement sheet showed that the enriched uranium provided exceeded that amount, the settlement statement showed an amount owing to the utility based on the excess SWUs. The OEM treated those excess SWUs as "sold" to the fabricator within the meaning of the Act. The OEM states that because the fabrication allowance was included in the contract amount, it was not the basis for an adjustment. CP&L has not challenged the OEM's description of the general nature of settlement statements or argued that this general description does not accurately describe CP&L's settlement statements.

Our analysis starts with the Act, pursuant to which DOE-produced SWUs purchased by a utility are subject to the assessment unless they are "sold." Consistent with this provision of the Act, the DOE regulations provide that the utility that purchased SWUs from the DOE is subject to an assessment based on those SWUs unless the utility demonstrates that it "sold" those SWUs to another party within the meaning of the Act. In order to demonstrate that it "sold" the SWUs to another the utility must submit "reliable and adequately probative records." 10 C.F.R. § 766.104(c).

CP&L has failed to demonstrate that the fabrication allowance at issue was "sold" within the meaning of the Act. CP&L has never asserted, let alone demonstrated, that any of enriched uranium that constituted the fabrication allowance was not needed for the fabrication process. Instead, CP&L merely asserted that the fabrication allowance was not "necessarily" needed for the fabrication. That is not a sufficient basis upon which to conclude that, after the fabrication, there remained excess enriched uranium as to which title could pass. Thus, CP&L has failed to submit "reliable and adequately probative records" demonstrating that there was any excess material as to which title passed.

The foregoing conclusion is supported by the excerpts of the fabrication agreements submitted by CP&L. As discussed above, the fabrication allowance is defined as "for scrap, losses incurred during fabrication processes, process sampling and archive material removal." Thus, the apparent intent of the provision providing for the passage of title to any enriched uranium not included in the fabricated fuel was to protect the fabricator for having to account for the enriched uranium lost or otherwise used in the fabrication process.

In any event, to permit the characterization of the fabrication allowances at issue as "sold" within the meaning of the Act would defeat the purpose of the Act, which was to allocate responsibility for contributions based on the benefits received from the DOE's uranium enrichment program. The provision for the deduction for SWUs sold to another party was intended to excuse a utility from an assessment for separative work from which it did not benefit. CP&L benefited from the separative work required to produce the enriched uranium needed to fabricate its fuel, including the separative work associated with the fabrication allowance. Accordingly, the inclusion of the SWUs associated with the fabrication allowance in its assessment is consistent with the intent of the Act.

D. The Lawfulness of the D&D Fund Assessment

Finally, CP&L argues that its objections to the calculation of its SWU assessment should not be construed as a waiver of any right to challenge the lawfulness of the assessment program in general. We recognize that the United States Court of Federal Claims has held a particular D&D Fund assessment to be an unlawful exaction. Yankee Atomic Electric Co. v. United States, 33 Fed. Cl. 580 (1995). The United States has filed an appeal with the United States Court of Appeals for the Federal Circuit. The DOE will ultimately defer to the rulings of the federal courts on the constitutionality of the assessments. Nonetheless, to date no order has been issued enjoining the DOE's enforcement of the Act in cases like the present one. Accordingly, in such cases, pending the resolution of the Yankee Atomic litigation, the OEM is continuing to collect the assessments required by the Act. PSI Energy, Inc., 25 DOE ¶ 80,165 at 80,671 (1996).

IV. Conclusion

For the reasons set forth above, we find that the contentions set forth in CP&L's Appeal are without merit. Accordingly, we have determined that the Appeal should be denied.

It Is Therefore Ordered That:

(1) The Appeal filed by Carolina Power & Light Company, VEA-0005, on March 2, 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)Private Ownership of Special Nuclear Materials Act, Pub. Law 88-489, 78 Stat. 601 (1964).

(2)CP&L originally contended that the DOE had already assessed another utility for the SWUs in question. CP&L withdrew that contention after the OEM stated that it had subtracted the SWUs from the account of the utility that sold the enriched material to CP&L.

(3)Section 1802(c) 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).

(4)The OEM provided the following description of fuel fabrication:

... First, the Department delivers enriched uranium to fuel fabricators in the form of uranium hexaflouride (UF6) for the account of utilities. The fabricators use chemical conversion operations to transform the UF6 into uranium dioxide (UO2), a powder. The UO2 powder is then mixed with a binder, cold-pressed into small cylindrical pellets, and sintered to increase the density of the UO2. The pellets are then ground to a specified diameter. These pellets vary in size according to design characteristics of the reactor in which they will be used, but the typical dimensions are .35 inches in diameter and .6 inches in length. The pellets are stacked in zirconium alloy tubes (called cladding) to form long thin fuel rods. Normally, between 64 and 100 fuel rods are combined to complete either the fuel assembly or fuel bundle.

June 23, 1995 OEM Submission at 6 n.2.

(5)For this reason, CP&L's submission of a 1989 DOE employee's letter to a fabricator concerning what constitutes "excess enriched uranium" under a "Utility Services Contract" is irrelevant. That letter refers to "excess enriched uranium" as "material never intended to be used in a DOE's customer's reactor." As an initial matter, we question whether that letter represents a correct interpretation of the relevant contract, which is not a part of the record. More importantly, however, assuming arguendo that that letter is a proper interpretation of the relevant contract, the letter is irrelevant to whether a fabrication allowance is includable in a utility's D&D Fund assessment. As indicated above, the Act does not define covered SWUs as those "intended to be used in a DOE's customer's reactor," and, therefore, that standard is irrelevant to whether the Act covers fabrication allowances.