Case No. VEA-0014September 5, 2001
DECISION AND ORDER
OF THE DEPARTMENT OF ENERGY
Appeal
Name of Petitioner: Atlas Corporation
Date of Filing: February 28, 2000
Case Number: VEA-0014
Atlas Corporation (Atlas) appeals a determination by the DOE’s Albuquerque Operations Office (the DOE office) that disallowed $1,010,711 in costs claimed pursuant to 10 C.F.R. Part 765. Atlas claims that the $1,010,711 represents the value of salvage transferred to a contractor in exchange for demolition, decontamination, and disposal of a uranium mill and equipment. As explained below, the DOE office correctly disallowed the claimed costs.
I. Background
In 1978, Congress enacted the Uranium Mill Tailings Radiation Control Act of 1978, which requires that mill owners remediate the contamination caused by uranium tailings and other by-product material.(1) In 1980, Congress directed the DOE to develop a plan for assisting mill owners for the portion of the work attributable to the processing of uranium sold to the federal government.(2) Congress directed that DOE, in developing the plan, study the amount of contamination attributable to such processing, as well as different methodologies for determining the costs of remediating the contamination.(3) Finally, Congress directed the DOE to consult with the mill owners in connection with its development of a plan.(4)
In 1982, the cognizant DOE office issued a report setting forth the results of its visits to mill sites and consultation with mill site owners.(5) The 1982 report includes the results of a site visit to Atlas’ mill near Moab, Utah (hereinafter the Moab mill site),(6) including Atlas’ comments on the various suggested methodologies for determining the federal portion of the remediation costs.(7)
In 1992, Congress enacted the Energy Policy Act of 1992 (the 1992 cost reimbursement statute), which requires that licensees be reimbursed for the portion of their total remedial action costs that is attributable to the processing of uranium sold to the federal government.(8) Pursuant to the statute’s direction to issue implementing regulations,(9) the DOE published proposed regulations in August 1993 and final regulations in May 1994.(10) In conjunction with the final regulations, the DOE published a “Draft DOE Guidance” for the preparation of claims,(11) which was finalized in April 1995.
The 1992 cost reimbursement statute provides for reimbursement for costs “incurred.(12) The statute also requires that claims for reimbursement be accompanied by “reasonable documentation.(13)
The implementing regulations require that costs be “incurred” and that the licensee “utilize generally accepted accounting principles consistently throughout the claim.” 10 C.F.R. § 765.20(f). With respect to the statutory requirement that the licensee submit “reasonable documentation,” the regulations require that the licensee use documentation contemporaneous to the time the cost was incurred “when available.” The regulations limit the use of non- contemporaneous documentation to situations when it is the “only means available” to document the claimed costs. 10 C.F.R. § 765.20(d)(2).
Under the regulations, a licensee submits its claimed total remedial action costs to the DOE. The DOE then reviews those costs and issues a determination, either allowing or disallowing the claimed costs. The licensee is entitled to reimbursement for the federal portion of those costs. The federal portion is based on the mill’s federal reimbursement ratio, i.e., the mill’s by-product material attributable to processing of uranium sold to the federal government divided by the licensee’s total by-product material as of October 24, 1992. The reimbursable amount is determined by multiplying the federal reimbursement ratio by the firm’s total approved remedial action costs.
This case concerns Atlas’ remediation of its Moab mill site. Atlas has a federal reimbursement ratio of .561, which is not in dispute.
In 1994, Atlas submitted a claim for its remediation work for June 1987 through June 1994.(14) The DOE allowed $4.5 million of the claim, but did not allow the $500,000 that Atlas claimed represented the value of salvage transferred to a contractor in exchange for its demolition, dismantling, decontamination, and disposal of the mill and equipment.(15) Atlas resubmitted the claim, which it had upwardly revised to $1 million, and the DOE disallowed the revised claim in the January 2000 determination that is the subject of this appeal.(16) During the course of the appeal, Atlas upwardly revised its claim again, to $1.3 million (hereinafter referred to as the $1 million salvage value claim or the salvage value claim).
The salvage value claim concerns Atlas’ contract with American Reclamation and Disposal (ARD). In 1992, Atlas contracted with ARD to “decommission, demolish, and dispose” of the mill and equipment.(17) The contract provided that ARD’s compensation for this work would be $315,000 plus the “amounts, if any” that Atlas received for salvage.(18) Thus, the contract gave ARD an incentive to maximum the amount of salvage that it produced while minimizing the associated costs.
ARD’s subcontractor did not adequately decontaminate some of the salvage, and a subsequent Nuclear Regulatory Commission (NRC) investigation confirmed that contaminated salvage had left the site, the most notable being two ball mills sold and transported to a firm located in Washington state.(19) The NRC fined Atlas $5,000 and required that it arrange for the decontamination of such salvage and that Atlas adopt sufficient procedures to avoid any more such releases.(20)
Recognizing ARD’s incentive to minimize decontamination costs,(21) Atlas terminated the ARD contract and hired a new contractor. At that time, Atlas had paid ARD $30,000, and ARD had removed a significant amount of salvage from the site. Atlas paid the successor contractor approximately $1 million to complete the work. The DOE allowed the $30,000 and $1 million payments as costs; the disallowed claim for the salvage value of material that ARD removed from the site is the only matter at issue in this appeal.
Atlas originally did not provide any documentation of the salvage claim. After the DOE questioned the claim, Atlas submitted undated and unsigned ARD “purchase order” forms, which form the basis of its salvage claim. These forms were not prepared during the decommissioning work but rather during the pendency of the instant claim. During the decommissioning work, Atlas used “bills of sale” to transfer the salvage to ARD. Atlas maintains that, in connection with its claim, it furnished the bills of sale to ARD and requested that ARD assign a value to the property listed. Atlas further maintains that, in response, ARD produced the “purchase orders.”
After consulting with the Department of Defense Contract Audit Agency (the DCAA), the DOE office denied Atlas’ salvage claim. The DOE office maintains that the claimed costs were not incurred, not computed in accordance with generally accepted accounting principles, and not supported by reasonable documentation.
Atlas appealed the denial of its claim. During our consideration of the appeal, we accepted pre-hearing and post-hearing briefs. An interdisciplinary panel, including an economist, heard oral argument. See June 29, 2000 Hearing Transcript (hereinafter Tr.). In May 2001, Atlas filed its final brief.
Atlas disagrees with each of DOE’s grounds for disallowing the costs. Atlas contends that the Atlas/ARD contract was a nonmonetary exchange in which Atlas gave up the salvage in exchange for ARD’s decommissioning work. Atlas argues that it could have sold the salvage for $1 million, used the $1 million to pay a contractor to perform the decommissioning work, and then requested reimbursement for the $1 million payment. Accordingly, Atlas argues, failure to recognize the claimed salvage value as an incurred cost elevates form over substance. Further, Atlas contends, it has provided reasonable documentation of the $1 million salvage value. Atlas argues that the total of the values shown on the ARD forms is consistent with various bids and estimates that Atlas received for the decommissioning work. In addition, Atlas argues that the total of the values shown on these forms is consistent with an appraisal by an independent accounting firm that Atlas retained during the course of this appeal.
As explained below, Atlas has not demonstrated that it incurred costs equal to the claimed salvage value. Atlas has not demonstrated that the potential salvage had any value, let alone the claimed value.
II. Analysis
A. Whether the Salvage Value Is an Incurred Cost
The value of salvage which is produced by a decommissioning project is an offset to the cost of the project. This is true, regardless whether a licensee performs its decommissioning work in-house or contracts with another firm to do the work. If a licensee performs the decommissioning work in-house, and the licensee incurs $1 million in costs and receives $50,000 for resulting salvage, the licensee has incurred a net cost of $950,000. Similarly, if a licensee contracts with an outside party to perform the work in exchange for the material salvaged in that work, the cost of decommissioning work is zero. In the latter case, the contractor, not the licensee, incurs the costs of the demolition and dismantling that produces the salvage, as well the costs of decontaminating, organizing, transporting, and marketing the salvage. Without the contractor’s decommissioning efforts, there is mere potential salvage value. For this reason, viewing salvage as independent of the decommissioning effort overstates salvage value.(22)
The failure to reduce the cost of the decommissioning project by the value of the salvage produced by the project would encourage licensees to incur excessive costs to produce salvage, uneconomic behavior that would inflate reimbursable costs. A licensee with a .5 reimbursement ratio, such as Atlas, would have an incentive to incur incremental costs up to two times the amount realized for the salvage, because until that point the licensee’s out-of-pocket costs would be less than the resulting salvage. Accordingly, we reject any argument that a licensee’s costs are its total costs, without an offset for the value of salvage produced.
Indeed, we question whether giving up the right to salvage produced by a decommissioning project would ever give rise to an incurred cost. As indicated above, the value of salvage produced by a decommissioning project is an integral part of the project and thus is an offset to the cost of the project. If the right to the salvage of a portion of the facility is so valuable that a third party would pay the licensee for the right to perform the decommissioning work and retain the salvage, then the licensee would not have incurred a decommissioning cost but rather profited from the decommissioning project. We recognize that prior to the decommissioning project some items from the plant may have been sold by Atlas. These are examples of items where the cost of salvaging the item was less than the price that the item could be sold for. The DOE has not suggested that that benefit be used to offset the $1,030,000 in costs that the DOE approved.
We recognize that Atlas has argued that its arrangement with ARD was a nonmonetary exchange. Accounting rules recognize that the value of an item given up in an exchange for services can constitute the cost of those services. In this case, however, Atlas did not give up material with independent value in exchange for ARD’s work. Instead, Atlas gave up the right to potential salvage that only would be realized during the salvage process. Indeed, a review of the ARD “purchase orders” indicates that almost half of Atlas’ original claim is attributable to “scrap steel.(23) Thus, at the time that Atlas entered into the agreement with ARD, Atlas had only potential salvage. Atlas had not incurred the demolition and dismantling costs necessary to produce the salvage, let alone the decontamination, transportation, and marketing costs necessary to sell the salvage. The value of the salvage, if any, would have been the estimated market value of the salvage minus (i) the estimated costs of demolition and dismantling necessary to produce the salvage, (ii) the estimated costs of decontamination, transportation, and marketing of the salvage, and (iii) an estimated profit margin that took into account the risks associated with salvaging contaminated material. Thus, what Atlas gave up -- the right to potential salvage -- was worth, if anything, significantly less than the salvaged material.
We also recognize that a licensee might argue that it had equipment or materials that it could have excluded from the decommissioning project, i.e., equipment or material that could be easily marketed without any demolition, dismantling, decontamination or other expenses. The licensee might argue that, in that case, the licensee could sell the equipment and material and pocket the proceeds, while making a larger cash payment to the decommissioning contractor, which would in turn be reimbursable under Part 765.
The foregoing argument would raise an issue of the extent to which a licensee could structure its decommissioning effort in order to maximize its reimbursement. We need not address that issue here, however, because Atlas has failed to present reasonable documentation that any of the items that were sold as salvage could have been sold independent of the decommissioning project.
B. Whether Atlas Has Provided Reasonable Documentation That It Incurred a Cost
The reimbursement regulations and DOE Guidance address the issue of what constitutes reasonable documentation. The reimbursement regulations provide that contemporaneous documentation should be used if available and that non-contemporaneous documentation should be used only if it is the only documentation available. The DOE Guidance states that when a firm’s contemporaneous accounting records reflect a zero book value for property, the firm cannot incur a reimbursable cost in connection with that property. We applied that principle in Quivira Mining Co., 26 DOE ¶ 80,167 (1997). In that case, we held that the licensee did not incur a reimbursable cost for the use of equipment that had already been fully depreciated on the licensee’s books.
This case is similar to Quivira, because Atlas’ contemporaneous accounting records did not show any value for the mill and equipment. Atlas’ actual accounting records for the years 1992 to 1994 do not show any value for the mill and equipment.(24) Atlas argues, however, that one can infer from a comparison of its Securities and Exchange Commission filings that Atlas assigned a market value to the salvage. As we discussed above, the supposed market value of the salvage does not represent the value of the potential salvage. Accordingly, Atlas’ strained reading of its SEC filings, even if accepted, does not contradict the fact that its books indicate that the value of the potential salvage, i.e., the value of the mill and equipment independent of a decommissioning effort and its associated costs, was zero. As we stated in Quivira, allowing costs for property with a zero book value would be contrary to the 1992 cost reimbursement statute, because the net effect would be to shift previously reported capital costs forward to the claim period, thereby creating the potential for reimbursement for capital costs not attributable to the reclamation effort. 26 DOE at 80,718.
As just indicated, we find that Atlas’ contemporaneous accounting records, showing no value for the mill and equipment, are dispositive of the appeal. Nonetheless, we recognize that Atlas points to other contemporaneous and non-contemporaneous documentation to support its claim and, therefore, we will address that documentation.
Atlas’ documentation is designed to support Atlas’ claim that the value of the salvage transferred to ARD was $1 million. The documentation consists of (i) ARD’s “purchase orders,” (ii) sample bills of sales ranging from June 1993 to August 1994, (iii) an independent appraisal, (iv) 1981 and 1987 estimates of decommissioning costs prepared by an independent firm, (v) various bids for the decommissioning work, (vi) the cost of completing the decommissioning after ARD’s default, and (vii) before and after pictures of the site. Atlas argues that the ARD valuation and independent appraisal are consistent with the other documents, which show the cost of the work and the amount of demolition.
Atlas’ documentation is inadequate for a number of reasons. First, the independent appraisal is based on the descriptions of salvage in the ARD “purchase orders,” which are in turn supposed to be based on the descriptions of salvage in the bills of sale. However, as the DOE office points out, the bills of sale are lacking in specificity. For example, the sample bills of sale do not list specific quantities for scrap steel that was salvaged. Instead, they refer to a “load” of scrap steel or, in one case, an approximate amount.(25) Accordingly, the record does not support the descriptions of the property upon which the valuations by ARD and the independent appraiser are based. Second, although Atlas maintains that the valuations take into account the costs associated with producing, decontaminating and marketing the salvage, the record does not support that claim. Instead, the record indicates that the valuations do not adequately consider those costs, particularly the costs and risks associated with the need to decontaminate the equipment. This is amply illustrated in the case of the ball mills, in which Atlas became involved in a contracted dispute over Atlas’ liability for its failure to adequately decontaminate. Accordingly, Atlas’ documentation does not establish the value of the salvage, either before, or after, decommissioning. In any event, however, as explained above, such documentation would simply not be sufficient to overcome the fact that the most relevant contemporaneous records, i.e., Atlas’ accounting records, accorded no value to the mill and equipment.
III. Conclusion
For the reasons set forth above, we find that Atlas has not demonstrated that the DOE incorrectly disallowed the costs at issue. Accordingly, Atlas’ appeal is denied.
It Is Therefore Ordered That:
(1) The Appeal filed by Atlas Corporation, VEA-0014, on February 28, 2000, is hereby denied.
(2) This is a Final Order of the Department of Energy.
George B. Breznay
Director
Office of Hearings and Appeals
Date: September 5, 2001
(1)42 U.S.C. § 7901 et seq.
(2)Department of Energy National Security and Military Applications of Nuclear Energy Authorization Act of 1981, Pub. L. No. 96-540, § 213, 94 Stat. 3197.
(3)Id.
(4)Id.
(5)U.S. Dep’t of Energy Grand Junction Area Office, Commingled Uranium-Tailings Study, DOE/DP-0011 (June 30, 1982).
(6)Id., pt. 2, A-95 to A-104.
(7)Id. at 103-04.
(8)42 U.S.C. § 2296a(b)(1).
(9)Id. § 2296a-1.
(10)See 58 Fed. Reg. 42450 (August 9, 1993) (proposed regulations); 59 Fed. Reg. 26726 (May 23, 1994) (final regulations, codified at 10 C.F.R. Part 765).
(11)59 Fed. Reg. 26714 (May 23, 1994).
(12)”42 U.S.C. § 2296a(b)(1).
(13)”Id. § 2296a-1.
(14)Atlas Appeal, Exs. 1, 2.
(15)Id., Exs. 3, 5.
(16)Id., Ex. 22.
(17)DOE Brief, Ex. B, at 1.
(18)Id.
(19)DOE Final Brief, Exs. 13-20.
(20)Id., Exs. 20, 21.
(21)Id., Ex. 21.
(22)See DOE Brief, Ex. C (affidavit of DCAA auditor); Transcript of Hearing at 88-94, 107-14.
(23)”See Atlas Brief, Ex. 7, Att. D (ARD “purchase orders”).
(24)See DOE Brief, Ex. C (affidavit of Defense Contract Audit Agency auditor).
(25)See Atlas Reply Brief, Ex. 2 (sample bills of sale).