Power Co., and Yankee Atomic Electric Co. These utilities have continued their strong interest in the project and have all agreed to fuel load contracts for the reactors which they are now operating. This group during 1960 and 1961 spent some $450,000 in studies of the project and arrived at a positive conclusion as to its technical and economic feasibility.

In the later part of 1961 Grace decided to go forward at its own expense with the development of necessary financial and contractual matters prerequisite to plant construction with the full encouragement of IRG. In the spring of 1962, the American Machine & Foundry Co. agreed to participate with W. R. Grace & Co. in this project. The broad experience of American Machine & Foundry in mechanical handling of nuclear fuels and in the construction of research reactors complemented the chemical experience of Grace in the chemical aspects of nuclear fuels.

During the first 10 months of 1962 the Grace company expended about $600,000 in continuing the studies for this project and AMF spent in excess of $125,000. These initial expenditures by the IRG, by Grace, and by AMF under ordinary accounting procedures would have appeared as assets of NFS. They do not appear on the balance sheet even though substantial benefits accrue to NFS.

These studies resulted in a number of fundamental decisions concerning the project which I propose to outline briefly.

BASIC DECISIONS

Versatility of plant: We concluded that the plant should be designed to permit processing in common facilities to the greatest practical extent substantially all types of fuel elements in use or contemplated for industrial and Government power reactors. We are deferring installation of certain equipment necessary to process sodium bonded and stainless steel cermet fuels. However, this equipment can be installed whenever agreement is reached for the processing of these fuels by NFS. We are submitting to the committee a technical description of the capabilities of the plant as included in the technical statement which we filed with the Atomic Energy Commission. (See app. 7, p. 220.) A more detailed description is included in the safety analysis filed as part of our application for a construction permit.

Size of plant: After considerable study we concluded that the optimum size of the plant would be a throughput of 1 ton per day of unalloyed or unmixed fuels of low enriched uranium which are amenable to dissolution in nitric acid with proportionately lower throughputs for uranium of high enrichment. A smaller plant in our judgment would have resulted in greatly increased unit costs of reprocessing; a larger plant could not be justified by the anticipated fuel load during the next 5 or 10 years. We anticipated that our initial customers would not pay for the cost of greater capacity which would be largely idle for the first 5 years of operation.

The plant and its extraction system would operate continuously while processing each material lot. However, there would be a period for cleanout and maintenance after the processing of each lot before the plant would accommodate the next fuel. This method of operation is necessary in a plant processing a great variety of fuels derived from many commercial customers whose lots must be kept separate. The

later detailed engineering confirmed our initial judgment that a minimum size plant would more nearly accommodate this method of operation than would a larger plant and would, under existing conditions, be the most economical.

The plant could be expanded to a limited degree if available load justified such an expansion. The 15-year amortization of the plant which we are proposing is longer than customarily used by the chemical industry but shorter than that practiced by the utility industry and is a compromise to both.

The process: The process together with a complete analysis of safety factors is fully described in the license application on file with the Commission and is summarized in the technical statement which we are submitting to the committee. (See app. 7, p. 220.) I should like to emphasize here that our decision was to rely on technology which, except for the mechanical head end, had largely been proven at AEC sites. Among several possible processes for the head end we chose to rely on mechanical treatment, removing extraneous hardware from the fuel elements and chopping them to short lengths before an effort is made to dissolve them in nitric acid. This process has not actually been utilized in AEC plants, although considerable research has been conducted by the Commission to demonstrate its feasibility. One primary basis in selection of the mechanical head end treatment of fuels (as opposed to chemical decladding or total dissolution) was to minimize the huge costs of waste generated by these procedures. We are satisfied that we have chosen the best and most economical process. We have no doubts with respect to the ultimate workability of the technology but recognize the likelihood of startup problems before the plant will achieve routine operation, and we have established substantial allowances for this contingency.

Location of the plant: After considerable study we determined to locate the plant at its present site in western New York. The particular site, Riceville, in Cattaraugus County, N.Y., was selected after careful analysis by New York State and NFS of safety factors for the full protection of the general public as well as plant personnel. The prime consideration which led to this location was the proximity of the New York site to the majority of first generation reactors in the East and Northeast and which will come on stream during the next 5 years. These reactors are largely concentrated from western Massachusetts in the East to eastern South Dakota and Nebraska in the West. In the period 1968-71 a substantial fuel load is expected to materialize from reactors located in California.

Another factor which induced us to reach our decision was that New York State had already established a development authority which after extensive study was in a position to provide immediately a suitable site and to make arrangements for the State of New York to assume the long-term responsibility for care of radioactive wastes. Timing: The timing of the construction of the plant depended primarily upon the delivery schedules of the potential plant load. The first spent fuel elements of existing commercial reactors became available from Yankee and Commonwealth for reprocessing in the latter part of 1962. By 1965 the backlog of spent fuels requiring reprocessing would reach considerable proportions and would create storage problems both at the reactor sites and in other available storage facili

21-261-64- -6

ties. Accordingly, we determined that it was highly desirable that the plant should be in operation not later than January 1966. This has involved an extremely tight schedule both in connection with the construction of the plant and in connection with licensing procedures of the Commission.

The winters at the plant site are severe with much snow. Unless the plant is above ground before the bad weather commences in late fall, the construction costs might be increased as much as $1 million. This in turn would affect our rate structure. To meet this schedule, detailed engineering was begun in October 1962 and construction is essentially underway at the present time.

Austerity: The fifth major decision can be described with the one word "austerity." We understood fully the Commission's position that charges for chemical processing must not place undue burdens upon the infant nuclear power industry. The Commission determined reasonable charges through hypothesizing a conceptual plant and working out the charges which this plant would be required to make. The Commission offered to process commercial fuels at such a rate through 1967. It must be emphasized that the conceptual plant was never anything but a hypothesis. It became apparent that in order for NFS to come even close to the charges envisioned for the conceptual plant all expenses would have to be cut to the bone. There was no room for elaborate buildings or for large staffs. It is for this reason that we believe that our proposals can be characterized as austere. It is underscored, however, that this austerity has not extended to any shortcuts in the health and safety of the design or operations. Filtration of gaseous effluents, storage of liquid wastes, and exposures to radiation in our opinion conform to standards that are equal to or in some cases more stringent than those practiced in AEC operations and in all cases conform to the published standards of AEC. This would appear also to be the opinion of the Committee on Reactor Safeguards and of the Division of Licensing and Regulations of AEC. It is a matter of record that both the New York State Department of Health and the U.S. Department of Health concurred in the favorable decision for the construction permit.

NEGOTIATIONS

In the spring of 1962 upon the decision of Grace to seek additional equity investment in the project it organized Nuclear Fuel Services, Inc., as a subsidiary. Thereafter, as previously explained, American Machine & Foundry decided to join in the venture. We are furnishing the committee with biographical data on some of our key personnel. (See app. 7, p. 242.) At this time the decision to go forward with the project depended upon realization of the following conditions, all of which were essential to an economically feasible project. These conditions are stated in our proposal to the Atomic Energy Commission as follows:

1. It will be necessary for NFS to reach agreement with private utility companies with nuclear reactors to furnish to NFS a substantial load of nuclear fuels requiring processing over the next 15 years.

2. It will be necessary for the Bechtel Corp., the general contractor for the construction of the project, to guarantee that the construction costs will not exceed an acceptable peak figure.

3. It will be necessary to reach suitable lease arrangements with the State where the plant will be located.

4. It will be necessary to reach an agreement with the Atomic Energy Commission for additional load for the plant from Government fuels and for the other arrangements detailed in this letter in connection with the construction and operation of this plant.

It thus became necessary to embark upon a series of four interlocking negotiations and arrangements all of which have gone forward simultaneously. These negotiations and arrangements were 1. The negotiation of a guaranteed lump-sum construction contract with the Bechtel Corp.

2. The negotiation of a lease for plant site and other arrangements with the New York Atomic Energy Research and Development Authority (ARDA) including the perpetual care of wastes. 3. The negotiation of load contracts with utilities suitable for obtaining necessary finances.

4. The negotiation of an AEC load contract.

Directly related to these negotiations and procedures is, of course, the problem of securing necessary AEC licenses and of financial arrangements which were projected to reflect the results of the other negotiations. Let us describe briefly each of these negotiations and arrangements.

1. The negotiation with the Bechtel Corp. for a lump-sum construction contract: NFS from the outset found it necessary that the construction contract guarantee a peak price for substantially all of the construction that will be required so as to be able to fix the cost of processing services. The amortization of this cost and interest on the funds required for the construction form a large portion of the charges which NFS must make to its customers. Therefore, such a construction contract with Bechtel was a prerequisite for fixing the prices in the utility AEC fuel load contracts. As we pointed out in detail in the AEC licensing procedures, Bechtel in its agreement has guaranteed the cost of approximately 90 percent of the entire facility. Practically all of the remaining 10 percent of the cost is likewise guaranteed either by subcontractors of Bechtel or through auxiliary fixed price contracts covering items not included within the Bechtel contract, and adequate contingencies have been allowed for any override. Bechtel has given us an extensive engineering guarantee concerning the portions of the plant which it is constructing and installing. As is customary in cases in which the construction company does not own the process, Bechtel does not guarantee the process to be used in the plant.

We are furnishing to you a table showing the indicated costs of the plant, the extent to which such costs are guaranteed, and the contingency allowances and the sources of these funds.

2. The ARDA and ESADA agreements: Negotiations with ARDA which are now in the final stage will result in a leasehold arrangement under which ARDA will lease the plant site to NFS and will construct and lease fuel receiving and waste storage facilities amounting to $8 million. In addition, ARDA has assumed responsibility for perpetual care of wastes generated on the premises upon payment of agreed funds by NFS.

The payments to ARDA are a part of NFS operating costs and are factors in determining the prices to be charged to the utilities and to the Commission for reprocessing.

The Empire State Atomic Development Associates, a group of seven New York utilities, has provided a grant of $2 million for the project. 3. The utility load contracts: Agreement has been reached with five utilities on contracts to reprocess their loads. Each of these contracts lasts for 15 years, with the right of the utilities to terminate the contracts after 5 years in case NFS fails to meet a competing offer. NFS has not yet concluded agreements with any other utilities largely because its staff has been fully occupied with the other negotiations. We have provided draft contracts to all of the utilities with anticipated loads and propose to enter into detailed negotiations in the near future.

The basic charge of $23,500 per ton for low enriched fuels includes the cost of perpetual waste care established by ARDA. A turnaround charge at the same rate is also applied. Incremental charges apply to more complex fuels. The margin of our profit is thin and it will not be easy for NFS to realize a fair return on its investment. The Atomic Energy Commission has secured the benefit of the utility negotiations and is subject to the same charge schedule as the utilities. By the same token, the utilities have in turn benefited from the AEC negotiations.

4. The AEC load contract: While preliminary discussions of an AEC fuel load contract commenced as far back as May 1962, the Commission declined to enter into detailed negotiations until NFS had reached substantial agreement with a number of utilities. This in turn was not possible until the negotiations with ARDA and with Bechtel, as well as the banks, had progressed to a point where NFS could determine with reasonable accuracy its most important costs and therefore its charges to the utilities. The basic terms of an AEC contract were finally communicated to NFS in a letter from the Chairman of the AEC dated December 26, 1962. Thereafter the Commission staff and the representatives of NFS have worked expeditiously to solve the many technical details of the contract. The charges and general conditions are the same as those provided in the utility contracts except that the Commission has provided maximum flexibility in scheduling its loads so as to permit optimum operation of the plant. The Commission, however, in accordance with its previous policy pronouncements, is providing NFS a fuel load of 125 days per year for a period of 5 years, together with the backlog of utility loads which will be turned over to the Commission prior to the commencement of operations of the NFS plant.

The commitment represented by the AEC load contract for 500 days would be $11,687,500 plus turnaround charges. This excludes any backlog generated by private power reactors such as Yankee or Commonwealth Edison. For more complex fuels additional charges related to the actual costs of specialized waste tanks and waste care charged to ARDA would be added. As of this point, NFS has not been definitely advised which fuels the Commission may choose to have processed.

The Commission load excluding the backlog of any fuels from commercial reactors during the first 5 years of operation would represent approximately 34 percent of the anticipated plant capacity.

5. Licensing: In July 1962 NFS applied for a construction permit and operating license for the facility and after a public hearing held