In 1993 Russia and the United States reached an agreement to convert Russian highly enriched weapons-grade uranium into LEU for reactors. The goal was twofold: to profitably divert mate- rial that posed substantial proliferation risks into a less risky form, and to generate cash flow to closed Russian nuclear facilities that would allow that country to continue employing scientists who might otherwise seek to market their nuclear know-how throughout the world—and in ways that might exacerbate security concerns (Neff 1998). USEC was appointed the sole marketing agent for this LEU within U.S. markets.
The deal made a great deal of sense in terms of nonproliferation, as leakage of this material or the spread of this know-how could have greatly threatened national and global security. However, because USEC had the missions both of serving the U.S. government and maximizing value for shareholders, the deal also created tensions between USEC’s financial interests and the country’s non- proliferation goals. Nobel laureate Joseph Stiglitz noted in 1998 that, “This potential conflict of interest could be a major threat to national security
because of the crucial role of USEC in our nuclear nonproliferation efforts” (Stiglitz 1998, cited in Guttman 2001).
In terms of impact, the deal appears to have (a) successfully diverted substantial quantities of HEU from weapons markets, (b) reduced the cost of uranium fuels in the civilian sector, (c) eroded the market position of the U.S. mining and milling industry, and (d) boosted earnings to USEC. The deal also illustrates some of the conflicts of interest that can arise when nonproliferation goals intersect with profit motives. These challenges are likely to grow should reactor and fuel-cycle facilities expand throughout the developing world. Unfortunately, as nonproliferation expert Sharon Squassoni notes (though not in reference to USEC), “usually, profit wins over proliferation” (Squassoni 2009b).
Depressed prices for enrichment due to supply expansion. As noted above, USEC received large uranium stockpiles prior to privatization that gradually entered the LEU marketplace. In addi- tion, substantial quantities of blended Russian HEU had the effect of depressing uranium prices (GAO 2000). The combination greatly increased the share of reactor demand that could be met with stockpiles rather than with freshly mined
ore. The impact on the uranium mining and mill- ing industries was immediate: while spending on exploration was $21.7 million in 1997, it was only $9 million in 1998 (GAO 2000: 20). Employment also fell sharply, though total nuclear fuel demand from utilities rose.
The mining and milling industries attributed the decline in their industry to USEC sales from inventory (GAO 2000: 18). USEC attributed the decline to mandated sales of Russian blended LEU, which led to the closure of USEC’s Portsmouth enrichment facility in 2001, four years before the privatization agreement had permitted such closure (GAO 2000: 22). USEC argued that this action was required because it could not maintain suffi- cient capacity utilization at both of its plants.
USEC has pointed to the closure as evidence that the HEU deal, for which USEC has been the sole marketing agent since its inception, was a competitive negative. But the logic of this claim is unsupportable on two fronts. First, USEC had the right to terminate its role as marketing agent if the deal were really detrimental to its operations. While it discussed doing so, it never did. Second, the decline in pricing was an inevitable result of a surge in supply from the blended Russian HEU, some- thing that would have occurred regardless of what marketing agent was used. The dislocations on pric- ing were similar to what happened in a number of other commodity markets, such as aluminum and steel, following the opening of the former Soviet Union’s production capacity to global markets.
Conflicts between profitability of commercial operations and expeditious reduction of Russian HEU stockpiles. The HEU deal required that the U.S. government purchase at least 10 metric tons of Russian HEU per year for the first five years and at least 30 metric tons of HEU per year for the next 15 years. Although USEC was the sole agent for carrying out this task, the commercial
contract did not contain matching terms—another indication of the government’s failure to follow proper risk-management practices and procedures when structuring complex deals. The commercial contract stipulated that USEC had the option to purchase up to the levels stipulated in the govern- ment contract, and that the price would be rene- gotiated every year. The conflict was exacerbated by the fact that the U.S. government had pledged pricing of $82/SWU to the Russians—an attractive figure for them, given that the market value of an SWU at the time was roughly $110. The rub was that USEC also had financial pressures to maximize its profits, and it earned a higher margin on produc- ing domestic SWUs than in marketing the Russian ones (Falkenrath 2000).
Ironically, the cost advantage that spurred this problem seems to have been caused in part by sub- sidies to USEC that predated formal privatization. Neff notes two factors: the transfer of below-mar- ket-value electricity supplies to the new government corporation, and the failure to charge a capital cost per SWU for the use of the enrichment plants. He suggests that these terms “not only destroyed any incentive to overfeed and thus buy the uranium, but it also subsidized USEC production costs for SWUs so that they were below what was promised Russia” (Neff 1998).72
A second source of conflict came through ura- nium pricing. The deal between governments paid roughly two-thirds based on enrichment content and one-third on the value of the basic uranium (the “feed”). The U.S. government set a price in its agreement with Russia, but the timing of the pay- ment was contingent on the use or sale of the ura- nium by USEC. The provision gave USEC great power over when the Russians could monetize this part of the value chain.
The tensions between public purpose and pri- vate profit reached a head in 1996, when USEC’s 72 Enrichment plants can extract more U-235 from a set amount of uranium feed by applying more SWUs to the ore, or reduce the energy needed per unit of U-235 produced by “overfeeding” the volume of natural uranium through the enrichment process. There is a trade-off between enrichment costs, energy costs, and the cost to buy the ore and manage the residuals.
IPO was almost scuttled because it turned down an offer to take additional HEU. Facing termination of the IPO, USEC did enter a five-year deal at the gov- ernment-agreed price (Falkenrath 2000: 42–43).