The Honorable Don Fugua
Page Two

June 10, 1981

On page 57 of the transcript, Representative Bouquard asked for "an assessment of all . . contingent liabilities," referring to the Government's legal exposure. In response, we can indicate that in the event of litigation, we anticipate seeking the following elements of relief:

Return of all funds contributed to the Project
with interest thereon from the date of contri-
bution to the Project;

Damages corresponding to the goods and services
furnished to the Project in kind, with interest
from the date of contribution;

RMC/BRC wind-up costs;

Reimbursement of PMC/BRC in the event they are
sued by third parties as a result of cancellation
of the Project; and

Damages in an amount equal to the financial loss
accruing because of the delay or cancellation of
breeder technology that would have benefited
utilities in the future.

Of these five elements of recovery, only the first three have been estimated at this time. I am advised that, as of April 30, 1981, the utilities have paid $107 million in cash and approximately $3.2 million in goods and services directly to meet costs of design, procurement, and administration. Other indirect costs have been incurred to organize and operate the organizations, PMC and BRC, which have served as vehicles for utility participation in the Project. These costs exceed $2,500,000. PMC and BRC wind-up costs occasioned by Project cancellation are estimated at approximately $500,000, but may be as high as $1 million. We have not calculated the interest due on utility payments, although obviously it would be a substantial sum, probably exceeding $40 million.

On page 70 of the transcript, Representative Ertel inquired as to how much more of a contribution the utilities currently owe. On the same page Representative Schneider asked that we "respond for the record," presumably to Mr. Ertel's question. This question reflects, with respect, a misreading of the contractual arrangements. BRC has repeatedly advised the Government that the Government's actions over a period of several years represent a continuing material breach of the contract. A breach such as that committed by the Government, in our view, at the very least suspends the obligation of the utilities to make further contributions. The contract

The Honorable Don Fuqua

Page Three

June 10, 1981

is very specific about the circumstances under which the termination provisions come into play; an absence of good faith, best efforts on the part of the Government to keep the Project moving forward is not one of the stated bases for "termination"; rather, it is a case of breach, pure and simple. In the circumstances, I believe that a court, faced with an allegation that the utilities had a further obligation to contribute to the Project to meet "termination" costs in the face of the material Government breach, would reject the argument as too brash to warrant serious consideration. See, e.g., Weir v. United States, 200 Ct. Cl. 501, 474 F.2d 617, 620, cert. denied, 414 U.S. 1066 (1973). As a consequence, it would be imprudent, in calculating the Government's "close-out" cost exposure, to assume that there will be any further utility contributions which would serve to reduce the cost of the close-out occasioned by the Government's breach. The utilities have no obligation to fund the Government's breach.

Finally, on page 74 of the transcript, Representative Schneider asked for the date of the last payment by PMC. As stated in Mr. Kearney's letter of May 13, the last such payment was made to the Government in January 1977. Thereafter, payments were withheld by Project Management Corporation because of the Government's material breach of the Project Agreements. I should add that monies presently held by PMC are solely within the control of PMC and are not held "in escrow", as several Members appeared to believe.

I trust this information will be of assistance.

Sincerely yours,

Care D. Hobelman

Carl D. Hobelman

CC:

Jack J. Kearney

Enclosed are answers to the seven questions contained in your April 23, 1981, letter asking us for clarification of certain information contained in our report entitled, "U.S. Fast Breeder Reactor Program Needs Direction," EMD-80-81, dated September 22, 1980.

In reading the responses to your questions it is important to realize, however, that the September 1980 report was prepared at a time of intense debate among Congress and Executive Branch officials as to what was the best way to proceed with the breeder reactor program, in general, and whether to build the Clinch River plant, in particular. After weighing the evidence on both sides of the debate, we concluded that if the Nation wanted to maintain a strong breeder reactor program the time had come to build a plant and demonstrate the viability of the technology. If not, we thought Congress should consider terminating the program. In essence, from a program development and management point of view, we concluded it was time to either develop a serious program effort or move to phase out the program. Consequently, our earlier report and our answers to the questions you have on it should be placed in that context.

In providing the answers to your specific questions, we wish to emphasize that because of the extremely short period of time allowed in responding to the questions, we relied heavily on data provided by the Department of Energy which we did not independently verify. However, in addition, we used (1) data collected in support of our September 1980 report and other work we have done involving the Clinch River Breeder Reactor, (2) information obtained in interviews with industry officials, and

B-199272

(3) information obtained from publications of various trade associations and interest groups.

A list of your questions and our responses is included as Enclosure I to this letter. Further, for your convenience, we have also included a copy of our September 1980 report as Enclosure II and copies of two 1979 reports we prepared on various issues surrounding the Clinch River Breeder Reactor Project as Enclosures III and IV.

If you have any questions or if we can be of any further assistance, please let us know.

March

J. Dexter Peach
Director

ENCLOSURE I

ENCLOSURE I

ANSWERS TO QUESTIONS ON GAO REPORT ENTITLED

"U.S. FAST BREEDER REACTOR PROGRAM NEEDS DIRECTION,

EMD-80-81, SEPTEMBER 22, 1980

Following is a listing of the specific questions you wanted answered on various aspects of our report on the Department of Energy's (DOE) breeder reactor program.

QUESTION 1:

What is GAO's best available estimate of the cost of construction of the Clinch River LMFBR (liquid metal fast breeder reactor) after adjusting for inflation and cost overruns?

ANSWER 1:

According to information we obtained from DOE the total estimated cost for the Clinch River plant is now about

$3196.5 million. The following table provides a cost breakdown based on a schedule leading to plant criticality in February 1990, for all engineering, construction and support activities and 5 years of demonstration operation.

The figures in the table include an allowance for contingencies to cover uncertainties in the scope of the project and an assumed 8 percent annual inflation rate.