STATEMENTS OF MAHLON GATES, ACTING ASSISTANT SECRETARY, NUCLEAR ENERGY, DEPARTMENT OF ENERGY, ACCOMPANIED BY LOCHLIN CAFFEY, DIRECTOR, CLINCH RIVER BREEDER REACTOR; PAUL SHLEMON, COUNSEL, DOE; WARREN BERGHOLZ, COUNSEL, DOE; JOHN KEARNEY, SENIOR VICE PRESIDENT, EDISON ELECTRIC INSTITUTE; CARL HOBELMAN, COUNSEL, BRC; AND J. DEXTER PEACH, DIRECTOR, ENERGY AND MINERALS DIVISION, GAO, ACCOMPANIED BY CLIFF FOWLER, SENIOR EVALUATOR, ENERGY AND MINERALS DIVISION, GAO Mr. GATES. Mr. Chairman and members of the committee, it is an honor to be here before you today. In response to your letter, sir, we understood the testimony today would be confined to questions and answers relative to termination costs, and you further requested we bring the most knowledgeable people. We brought Mr. Caffey, the project manager from Oak Ridge for the Clinch breeder reactor, and on my right is Mr. Jack Kearney, senior vice president of the Edison Electric Institute, and he is here at the request of the Project Management Corporation. On his right is Mr. Carl Hobelman, counsel for the Breeder Reactor Corporation. Inasmuch as the understanding that you and I seem to share in common was that we were to be responsive to questions relative to termination costs, there is no introductory or written testimony, Mr. Chairman. Therefore, we are subject to your questions. The CHAIRMAN. I also would like to introduce Mr. Dexter Peach, General Accounting Office, Director of Energy and Minerals Divi son. Mr. Peach, we are happy to have you here. Mr. PEACH. I have with me today, Mr. Chairman, Mr. Cliff Fowler. The CHAIRMAN. Do you have any opening comments to make? Mr. PEACH. Yes, Mr. Chairman, we have a statement. The CHAIRMAN. Very well. We will be glad to hear from you and then we will proceed as a panel. Mr. PEACH. Mr. Chairman, my statement comes in the context of a number of reports that we have issued over the last few years dealing with the breeder reactor research program in general and the Clinch River breeder reactor in particular. The two most recent reports were issued about 2 years ago in May and July 1979. Those two reports, as we were able to update them on Friday, May 8, form the principal basis of my statement today. In our May 7, 1979 report we concluded that if the Congress chose to terminate Clinch River at the end of fiscal year 1979 the remaining Federal commitment would have been between $152 million and $350 million.1 The lower figure represented the cost of meeting contractual obligations plus $20 million for continuing selected design activities of value to the future fast breeder reactor program. The high figure, reflecting estimates by some industry groups, depended on the results of possible lawsuits against the Government for failing to complete the project. "The Clinch River Breeder Reactor-Should the Congress Continue to Fund It?" EMD-79-62, May 7, 1979. Subsequently, in our July 10, 1979 report to the Energy Research and Production Subcommittee of this committee, we stated that if the Government had to refund industry's contributions to the Clinch River project, the termination costs would be still higher than our earlier estimate.2 We noted that as of September 30, 1979, industry's contributions would total $102 million, but pointed out that the Government's liability to refund these contributions is unclear. Industry's view has been that its contributions must be refunded if Clinch River is not completed. The Government position at that point was that it would not have to refund these moneys. As we said in our July report, the issue of Government liability in case of project termination might have to be resolved in litigation. Thus, we estimated that as of September 1979 the cost of terminating Clinch River could range from as low as $152 million in contractual obligations and selected design work to as high as $452 million, depending on the outcome of any termination-related litigation that might ensue. On the afternoon of Thursday, May 7, we were asked to testify here today, and on Friday, May 8, we obtained DOE's most current estimate on the costs of terminating the Clinch River project and attempted to reconcile this estimate with the estimates we reported in 1979. I mention the dates to emphasize that the short time period did not permit us to prepare our own independent estimate or even to evaluate DOE's estimate. DOE now estimates that if the project is terminated as of September 30, 1981, the cost may be between $248.2 million and $422 million, depending on how the termination is carried out. The variance is primarily due to the degree to which additional design work will be done on the project. If there is no additional design work done and the termination activity is limited to the preparation of a final engineering report, the cost could be about $248.2 million. If the final design work is completed, developmental tasks needed to support a final design are done, and a final report on engineering design and development is issued, the termination costs will be about $422 million. The major portion of the difference in these estimates is that the preparation of a final engineering report would cost about $23.1 million, while the completion of all design work is estimated to cost about $187.4 million. The other costs for terminating the project are substantially the same for either method of termination. These are contractual obligations of about $102.5 million; reimbursement of utility and industry contributions, if required, of about $117.2 million; and a contingency cost of about $5.4 million to $10.5 million to cover unanticipated cost increases in the various termination activities. However, if final design is completed there will be an additional cost of about $4.4 million to resolve generic issues that are still open with the Nuclear Regulatory Commission. Further, we would like to note that as with the earlier estimates we provided, there may be additional termination costs involved if the utilities and private industry bring suit against the Government for damages they might have incurred in relying on the 2 "Comments on the Administration's White Paper: "The Clinch River Breeder Reactor Project-An End to the Impasse'," EMD-79-89, July 10, 1979. Government's promise to use its best efforts to carry out the Clinch River project. Also, the estimate does not include an allowance for any reimbursement of interest on utility and industry contributions. To put the potential termination costs in perspective, as of December 31, 1980, sunk costs in the Clinch River project totaled about $1 billion and the estimated additional cost of completing the project is about $2.2 billion, for a total cost of $3.2 billion. I might add a thought to that, Mr. Chairman, that a little better than $2.8 billion of the $3.2 billion would be the Government's contribution, with the remaining contributions from utility interests. Against this backdrop, Mr. Chairman, there are several points which our past work indicates the committee might wish to consider regarding termination of the Clinch River project. Specifically: What is to follow if Clinch River is terminated? Will the large plant visualized in the recently completed conceptual design study be constructed? If not, what will substitute for Clinch River as the focus of the Nation's breeder reactor program, and what form will the program take? Will the domestic industrial infrastructure be available when needed to design and fabricate components, and build the large plant at some future time? Is it prudent to construct and operate a large breeder reactor on a utility grid without the benefit of intermediate scale-up? What effect will termination of the Clinch River project have on utility confidence in the Federal Government's commitment to fast breeder reactor development and on possible utility financial participation in any future project? On a broader note, Mr. Chairman, these questions raise the larger issue of the role of nuclear power as a long-term energy option. As we stated in our September 1980 report on the overall fast breeder research and development program, if the Congress wishes to maintain a nuclear option or if it wishes to commit to nuclear power as a long-term energy source, a breeder reactor-not necessarily Clinch River-should be constructed and operated to demonstrate the technology.1 If Congress is unable to agree on an approach for preserving the breeder option or if it does not wish to do so, we believe it should consider terminating the breeder program. Once terminated, any future decision to restart the program could cost many years of development time and leave the United States with the possible alternative of purchasing breeder reactors from foreign sources if future energy developments indicate a need for the technology. That concludes my statement, Mr. Chairman. As I indicated, the dollar figures that I have provided today were obtained, as best we could, from DOE sources on Friday. We were not able to audit or verify those figures as such and if there would be a need for us to subsequently do such work for the committee we would be glad to assist you as best we could. The CHAIRMAN. Thank you. Mrs. SCHNEIDER. Mr. Chairman, I would like to register my concern with the testimony that has been submitted. As you initially introduced them you said the discussion would be based on termi 1 "U.S. Fast Breeder Reactor Program Needs Direction," EMD-80-81, September 22, 1980. nation costs. I think the questions raised toward the end of the testimony, I think, are questions that you had indicated earlier are not to be discussed at this point. Just for a point of clarification, I would like to raise that point again. The CHAIRMAN. I think Mr. Peach indicated this, and I did want to limit our discussion to the termination of Clinch River. We may go into other things when we mark up the bill, but the purpose of this was to determine primarily what the closeout costs might be on Clinch River. Possibly when the statement was prepared, Mr. Peach didn't know I was going to make my statement. Of course we will stick with what our original intention was going to be. Mr. LUJAN. I happen to think the comments are proper; in terminating a program and looking at the termination costs you have to take into consideration what other costs would be involved further on down the line, and that is exactly what Mr. Peach has done. I don't find that those are out of line completely. How can you make a decision without looking further on down the line? Mr. WEBER. Since I am not a member of the Subcommittee on Energy Research and Production, I am not aware of who testified before that subcommittee. Was testimony taken from any of these gentleman on behalf of the Clinch River project? Mr. LUJAN. Surely. Mr. WEBER. I would presume, then, the comments the gentleman has made or the case in favor of Clinch River remains a part of the record of the subcommittee and there is really no point in rehashing that. The CHAIRMAN. Let me say, Mr. Lujan makes a good point. I think we have to consider that when we are marking up the bill. Today we are trying to find out what actually would be the cost to the minute. It is certainly a very valid question and it should be addressed, but I wanted to try today to limit the discussion to those matters relating to the termination of the project. I would like to ask Mr. Caffey about two or three issues Mr. Peach mentioned. One was the termination design costs. Do you agree with the figures related in his statement? Mr. CAFFEY. Yes, sir, I do. The CHAIRMAN. Mr. Kearney, if no funds were authorized to be appropriated for the utility contribution, what in your opinion might occur in the range of costs that might be included by the Government? Mr. KEARNEY. If there were no provisions made for the electric utility industry? I don't think I can respond to that properly, Mr. Chairman. The gist of my statement was to talk about what would be the impact on the utility industry. I think these gentleman from the Department of Energy would be more appropriate to answer that question. At the proper time I would just like to make a short statement. The CHAIRMAN. Please proceed. Mr. KEARNEY. First of all, I would like to submit a statement for the record. I apologize we don't have it for you here today. But I only found out about this late Friday night. The gist of the statement would be, first, to point out in a chronological way how the project was developed and indicate the fact that the electric utility industry was responding to a request from the Government to participate in the project. We think that that is germane to discuss, even within the narrow focus that you have suggested, because I think that suggests why the utility industry is concerned with the termination and what we would feel is the impact on the industry as a result of the termination. Having hopefully established that to your satisfaction, I will be indicating in the statement that a figure somewhere in the neighborhood of $115 million has been contributed by the electric utility industry and that is both the investor-owned and noninvestorowned segments of the industry, toward the project. I believe that is a figure that the Department of Energy has suggested is the impact of the utility industry's contribution. I would further point out that in our judgment that may not necessarily be the entire amount of money that may be at issue. It does not include any interest on those funds that the utility industry has given to the project. It does not include taking care of any services in kind which some utilities have made to the project. It does not include any of the windup costs for either BRC or PMC, after the end of year 1981. While probably-as a matter of contractual arrangement-this is maybe not at issue, I would just like to call to the attention of the committee the fact that the termination of this project will have the detrimental effect on the utility industry in that continued financial investment that is required for nuclear power will undoubtedly be hurt. Mr. OTTINGER. Will the chairman yield for a question? The CHAIRMAN. When he gets through, we will ask all the witnesses to answer questions. Mr. KEARNEY. That is all I have, Mr. Chairman. The CHAIRMAN. There would be a provision whereby the utilities could go to the Court of Claims and establish some type of claim, would there not? Mr. KEARNEY. That is my understanding, Mr. Chairman. The CHAIRMAN. Is it your opinion we should include money for that without prejudicing either you or the Government? Mr. KEARNEY. As long as you don't prejudice either of us, I think you should consider that because, as Mr. Lujan pointed out, you ought to look broadly at what the complications of a termination would be. The CHAIRMAN. What other actions could be taken to reduce the overhead and administrative costs associated with termination? How could we make it as low as possible? Would that be the $248.2 million that was mentioned by Mr. Peach? Mr. CAFFEY. Mr. Chairman, I think about the only way we can improve upon that number by lessening it is to do a more studied |