The major goals which have been established for the U.S. uranium enrichment enterprise, as articulated in the June 1985 strategy, include: to bring supply and demand of DOE-origin enriched to capture uncommitted market consistent with to minimize the cost of operating existing to retain the U.S. leadership in advanced to adopt a more businesslike institutional Important progress has been made toward achieving these goals. A summary of some of the more significant accomplishments during the past 2 years follows. BRING SUPPLY AND DEMAND INTO BALANCE The US contracts, introduced in January 1984, were a major step which have enabled the enrichment enterprise to compete more effectively in the international marketplace. About 90 percent of DOE customers converted to these contracts. They have brought stability to our projected sales base and corresponding revenues. They have permitted DOE customers to reduce enriched and natural uranium inventories, and produced a more orderly market serving the nuclear fuel cycle. Subsequently, representatives of the uranium mining industry brought suit against DOE based on the procedures which were used to introduce the terms of the new contract form. Litigation concerning the US enrichment contract is proceeding in both the U.S. District Court for the District of Colorado and in the U.S. Court of Appeals for the Tenth Circuit. DOE has noticed its appeal of the judgment of the district court in which the court ruled that the US contract was null and void. OFFER RELIABLE CUSTOMER SERVICES Reliability of supply is a term we hope will become synonymous with U.S.-supplied enrichment goods and services. We strive continually to offer the world's most reliable enrichment services and to respond quickly to changes in the marketplace. We believe this is a significant factor in utility decisions, both here and abroad, to contract with DOE for their enrichment services. OFFER COMPETITIVE PRICES pricing. A crucial element of our competitive strategy is the approach to The market is extremely price sensitive and DOE prices must be competitive. The key to the survival of the U.S. uranium enrichment business is to get near-term prices down into the competitive range by aggressively reducing costs. The price for US contract holders in 1985 was $135 per separative work unit (SWU). In announcing the June 5, 1985, enrichment program decisions, Secretary Herrington pointed out that maintaining the DOE price at uncompetitive levels was, in effect, a going out of business strategy. On October 1, 1985, a price reduction to $125 per SWU became effective. This price is still significantly higher than those currently offered by competitors. Accordingly, DOE has announced its plans to continue its price reduction policy by offering a FY 1987 base price of $119 per SWU effective October 1, 1986. This declining pricing pattern for the U.S. adds credibility to plans for even lower prices in the future. The results of not following a competitive pricing strategy would have serious impact on the enterprise. It is estimated that DOE would lose about $7 billion in revenues between now and the year 2000 if it were to keep prices at the current $125 per SWU level. Thus, our pricing policy is crucial to the competitive strategy. CAPTURE UNCOMMITTED MARKET During the past year, we have taken strong actions to revitalize this country's uranium enrichment enterprise. Most notably, through several creative marketing initiatives, we were able to increase our share of the free world enrichment market from 46 percent in 1985 to 53 percent in 1990. In 1985, there remained 6 million SWU's of uncommitted sales opportunities with DOE enrichment customers available from FY 1987 through FY 1990. During this period, DOE has excess production capacity that could produce SWU's at low marginal costs. To allow its customers to benefit from this capability, in April 1985, DOE offered an incentive price of $90 per SWU to customers with uncommitted sales in FY 1987 through FY 1990. This incentive pricing offer proved very successful--nearly 87 percent of DOE customers with uncommitted requirements accepted the incentive price proposal. As a result, DOE sales for FY 1987 through FY 1990 time period increased by 14 percent, or over 5 million SWU's. In 1986, we hope to solidify and increase our market share for the period 1991-1995. By April 1, 1986, DOE customers must decide how much of their fuel supply they will take from DOE in FY 1991. Over 25 percent of DOE's US contract enrichment demand is uncommitted from FY 1991 through FY 1995. Total sales opportunities are about 20 million SWU's with a sales value of about $2 billion. In light of our previously successful pricing effort, we have made a new incentive pricing offer to our customers. In return for customer commitments to purchase 100 percent of their enrichment requirements from DOE in the 5-year period from FY 1991 to FY 1995, DOE has proposed a price of about $85 per SWU for the remaining 30 percent fraction of their enrichment requirements. Under US contracts, 70 percent of the customers' enrichment requirements would be priced at the DOE base price. I am pleased to announce that we have had a very favorable response to our incentive price offer. Those customers who took advantage of this highly attractive offer represent about 75 percent of DOE's uncommitted sales opportunities in the FY 1991-1995 time period. We plan to continue aggressive market initiatives in the future to increase DOE's market and revenues, discourage competitor investment in new capacity, improve the U.S. trade balance, prevent competitor penetration of DOE's market share, and effectively utilize excess DOE production capacity. In addition, a larger sales volume to DOE will result in lower unit production costs which could be passed along to all customers in the form of lower prices. MINIMIZE COSTS OF EXISTING PLANT OPERATIONS Because minimizing the cost of existing plant operations is key to near term DOE price competitiveness, Secretary Herrington decided in June 1985 to place the Oak Ridge (Tennessee) Gaseous Diffusion Plant in standby status at the earliest possible date. This major, near-term cost reduction decision followed extensive analysis that showed that about $250 million could be saved between FY 1986 and FY 1991 by taking that action. The Oak Ridge Gaseous Diffusion Plant has been in standby status since August 1985, and will remain in that condition with the DOE Office of Defense Programs providing the standby funding because of projected defense demands for enriched uranium in the outyears. If the standby funding is not provided, the plant will be shut down permanently. If the plant is permanently shut down, it will not be operable because critical components will no longer be maintained. The costs of operating the Portsmouth and Paducah Gaseous Diffusion Plants (GDP's) were also reduced in FY 1985. New and innovative ways of operation, coupled with the use of lower cost unfirm power which is about 30 percent cheaper than firm power, improved the economics of operating the GDP's. Significant savings have been demonstrated through the use of low-cost evening, weekend, and offpeak seasonal power. It is planned to continue to take advantage of this lower cost, unfirm power to the maximum extent possible in the future. Another strategically necessary but very difficult cost reduction decision was the termination of the GCEP project. After extensive analyses, the Department concluded that any GCEP completion scenario that required the outlay of significant amounts of additional capital was unjustifiable from an investment point of view. Simply put, the best GCEP scenarios resulted in production costs that were about equal to the production costs of the GDP's that are operating today, and all GCEP scenarios involved greater technical and economic risks than continued GDP operation. Closeout of GCEP-related activities is proceeding well and DOE is working diligently to identify alternative uses for the GCEP equipment and facilities as well as other centrifuge facilities throughout the country. |