Index

Nuclear Waste: DOE's Advanced Mixed Waste Treatment
Project--Uncertainties May Affect Performance, Schedule, and Price
(Letter Report, 04/28/2000, GAO/RCED-00-106).

Pursuant to a congressional request, GAO assessed the Department of
Energy's (DOE) Advanced Mixed Waste Treatment Project's status and
potential uncertainties with regard to: (1) successfully treating mixed
waste; (2) meeting the project's deadlines; and (3) minimizing increases
in the contract price.

GAO noted that: (1) changes in the technical approach have simplified
the treatment of most of the waste, but successful treatment of almost
one-fourth of the waste is less certain; (2) for the bulk of the waste,
these changes have brought less complexity to the treatment process; (3)
instead of incinerating about 75 percent of the waste and then putting
it into a glass-like or cement-like form, DOE's contractor, British
Nuclear Fuels Limited, Inc. (BNFL), determined that most of the waste
could simply be mechanically compressed and then packaged; (4) for the
remaining waste that was to be incinerated, however, recent events have
forced BNFL to reexamine its approach; (5) in March 2000, in order to
resolve a lawsuit over incinerating the waste and allow facility
construction to move forward, DOE agreed to appoint a special panel of
experts to identify possible alternatives to incineration; (6)
alternatives could include trying to obtain a waiver from current
regulations for transporting and disposing of organic substances or
identifying another technology to treat the waste; (7) BNFL's plan for
starting construction, originally set for May 1999, is now set for May
2000 at the earliest and will be postponed even longer; (8) this delay
is also likely to delay the start of the facility's operations, one of
the interim milestones in DOE's agreement with the state of Idaho,
scheduled for March 2003; (9) the main cause for the delay was BNFL's
overly optimistic assumption of the time needed for the state and the
Environmental Protection Agency to review and approve the construction
permits for the project; (10) changes in the requirements for permit
applications and the search for alternatives to incineration also
affected the permits; (11) as of April 2000, the permits still have not
been issued; (12) despite some opportunities to reduce the $876 million
contract price, including an $18 million reduction that occurred in
January 2000, other uncertainties make it likely that the contract price
will increase in the future; (13) the $18 million price reduction
occurred after BNFL simplified the technology for treating most of the
waste and, therefore, did not have to stabilize it before shipping it
out of state; and (14) regarding potential price increases, two main
uncertainties exist: (a) BNFL may be able to obtain additional payments
for the costs associated with the delays in starting construction of the
treatment facility; and (b) the costs associated with searching for an
alternative to incinerating about one-fourth of the waste may also
affect the contract price.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-00-106
     TITLE:  Nuclear Waste: DOE's Advanced Mixed Waste Treatment
	     Project--Uncertainties May Affect Performance, Schedule,
	     and Price
      DATE:  04/28/2000
   SUBJECT:  Hazardous substances
	     Nuclear facilities
	     Environmental monitoring
	     Schedule slippages
	     Nuclear waste disposal
	     Fixed price contracts
	     Cost effectiveness analysis
	     Cost control
	     Privatization
	     Atomic energy defense activities
IDENTIFIER:  DOE Advanced Mixed Waste Treatment Project
	     DOE Environmental Management Program
	     Idaho

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GAO/RCED-00-106

Appendix I: Comments From the Department of Energy

28

Table 1: Original Proposed Treatment Process and Currently
Planned Process 12

Table 2: Comparison of Selected Schedule Milestones for the
Project 16

Figure 1: Location of DOE's Idaho National Engineering and Environmental
Laboratory 7

Figure 2: Mixed Waste Boxes and Drums Being Placed on an
Asphalt Pad at INEEL 9

Resources, Community, and
Economic Development Division

B-284385

April 28, 2000

The Honorable Thomas J. Bliley, Jr.
Chairman, Committee on Commerce
House of Representatives

Dear Mr. Chairman:

For over 50 years, the Department of Energy (DOE) has produced nuclear
materials for weapons. As a result of that effort, large quantities of
radiological and hazardous wastes now contaminate the nation's nuclear
production facilities. DOE spends over $5 billion per year through its
environmental management program to clean up and/or ensure proper storage of
these wastes. DOE's Idaho National Engineering and Environmental Laboratory
(INEEL), located in eastern Idaho, has a large concentration of "mixed"
waste--that is, a combination of radiological contaminants (such as
plutonium) and hazardous but nonradiological contaminants (such as
degreasing agents or acids). This mixed waste, which takes such forms as
contaminated paper, cloth, and other materials (some of it saturated with
liquids), is currently stored in metal drums and wooden boxes in a facility
intended for temporary storage. Cleaning it up is important to both DOE and
the state of Idaho. DOE has committed to having this waste treated and moved
out of Idaho and to a disposal facility no later than December 31, 2018.

To treat the mixed waste and prepare it for disposal, DOE awarded a
fixed-price contract for the Advanced Mixed Waste Treatment Project to BNFL
Inc. effective January 1997.1 BNFL plans to construct a treatment facility
at INEEL near where the waste is being stored. BNFL's initial plan was to
use the treatment facility to characterize the waste containers to determine
their contents and radioactivity; separate the waste into different
treatment paths; treat the waste primarily by using incineration to reduce
its volume and stabilizing the waste by either converting it into a
glass-like material or adding a cement-like material; package the waste; and
certify it for shipment for off-site disposal. Stabilizing the waste in
glass or cement was planned primarily as a backup strategy in case DOE's
off-site disposal location was not available, and therefore, temporary
on-site storage was required after treatment. Treating the waste will not
reduce its radioactivity but will prepare the waste for disposal or
long-term storage. Because of the radioactive content of the waste, the
treatment process was designed to require the workers to have little or no
direct contact with the waste.

DOE considers the contract with BNFL to be a "privatization" contract. BNFL
is responsible for financing the construction and start-up costs of the
project instead of receiving cost reimbursements or progress payments to pay
for these costs. BNFL will receive payments only after delivering items or
services specified in the contract. Most of the contract payments will be
for successfully treating and delivering to DOE packaged waste that meets
all of the requirements for shipment off-site. The original contract with
BNFL was for about $876 million (1996 dollars). With adjustments for
inflation over the 20-year life of the contract, DOE estimates that its
expenditures on the project will total at least $1.1 billion. Although the
contract is a fixed-price contract, the Federal Acquisition Regulation
allows for price adjustment if, for example, the scope of work changes
drastically or BNFL encounters circumstances beyond its control. Given the
potential cost of this project and concerns about DOE's management of
previous large cleanup projects, you asked us to assess the project's status
and potential uncertainties with regard to (1) successfully treating the
waste, (2) meeting the project's deadlines, and (3) minimizing increases in
the contract price.

Changes in the technical approach have simplified the treatment of most of
the waste, but successful treatment of almost one-fourth of the waste is
less certain. For the bulk of the waste, these changes have brought less
complexity to the treatment process. Instead of incinerating about
75 percent of the waste and then putting it into a glass-like or cement-like
form, BNFL determined that most of the waste could simply be mechanically
compressed and then packaged. For the remaining waste that was to be
incinerated, however, recent events have forced BNFL to reexamine its
approach. In March 2000, in order to resolve a lawsuit over incinerating the
waste and allow facility construction to move forward, DOE agreed to appoint
a special panel of experts to identify possible alternatives to
incineration. Alternatives could include trying to obtain a waiver from
current regulations for transporting and disposing of organic substances or
identifying another technology to treat the waste. The outcome of these
efforts may not be known for several years. If viable alternatives are not
found, DOE may need to return to its plan to incinerate a portion of the
waste or attempt to renegotiate the disposition of the waste with the state
of Idaho.

The project is beginning to fall behind the pace needed to meet certain
interim milestones. BNFL's plan for starting construction, originally set
for May 1999, is now set for May 2000 at the earliest and will be postponed
even longer. This delay is also likely to delay the start of the facility's
operations, one of the interim milestones in DOE's agreement with the state
of Idaho, scheduled for March 2003. The main cause for the delay was BNFL's
overly optimistic assumption, which DOE approved, of the time needed for the
state and the Environmental Protection Agency to review and approve the
construction permits for the project. Changes in the requirements for permit
applications and the search for alternatives to incineration also affected
the permits. As of April 2000, after 2 years of review, the permits still
have not been issued. Because of the flexibility built into the project's
schedule over the many years of the operational phase, however, it is too
early to determine if any of these developments will affect BNFL's ability
to complete all work by 2018, the deadline agreed to by DOE and the state of
Idaho.

Despite some opportunities to reduce the $876 million contract price,
including an $18 million reduction that occurred in January 2000, other
uncertainties make it likely that the contract price will increase in the
future. The $18 million price reduction occurred after BNFL simplified the
technology for treating most of the waste and, therefore, did not have to
stabilize it before shipping it out of state. Other savings are possible if
alternatives to privately financing the project are pursued, but DOE does
not intend to assume more of the risk by assisting with financing. BNFL
officials are reporting difficulty in the efforts to obtain private
financing. An option available to DOE is to help finance the project and
negotiate for a corresponding reduction in the contract price. Regarding
potential price increases, two main uncertainties exist. First, BNFL may be
able to obtain additional payments for the costs associated with the delays
in starting construction of the treatment facility. DOE has estimated that
delaying construction until May 2000 could increase the contract price by
about
$44 million. But because the start of construction will be delayed beyond
May 2000, the price increase could be even greater. Second, the costs
associated with searching for an alternative to incinerating about
one-fourth of the waste may also affect the contract price. DOE said that
activities that BNFL could be involved in, such as exploring regulatory
waivers and identifying alternative treatment technologies, could be outside
the current scope of work in the contract and thus could trigger the need
for an equitable adjustment to the price.

DOE's Idaho National Engineering and Environmental Laboratory is situated in
southeast Idaho on about 900 square miles of the eastern Snake River plain
(see fig. 1).

Figure 1: Location of DOE's Idaho National Engineering and Environmental
Laboratory
Source: DOE's Idaho Operations Office.

Since the early 1970s, DOE has been storing transuranic waste2 at the INEEL
site. Most of this waste was shipped from DOE's Rocky Flats site in
Colorado. About 95 percent of the transuranic waste is classified as mixed
waste because it also contains chemically hazardous materials that are
regulated under the Resource Conservation and Recovery Act.3 Some of the
waste also contains polychlorinated biphenyls (PCB), which are regulated
under the Toxic Substances Control Act.4 The mixed waste is stored in metal
drums and wooden boxes that are stacked on asphalt pads in an enclosed
building in the Radioactive Waste Management Complex. The drums and boxes
are covered with tarps, plywood, and soil. The quantity of waste totals
about 65,000 cubic meters--an amount that would cover an entire football
field to a height of almost 48 feet, or about as high as a
four-story building. The drums and boxes have a 20-year design life and are
not intended for permanent storage. Figure 2 shows the drums and boxes being
placed on the pads prior to being covered and enclosed within a building.

Figure 2: Mixed Waste Boxes and Drums Being Placed on an Asphalt Pad at
INEEL
Source: BNFL's project files.

In October 1995, DOE and the state of Idaho agreed that DOE would ship the
transuranic waste stored at INEEL to a location outside of Idaho no later
than December 2018.5 The agreement also specified interim deadlines,
including having a contract for a mixed waste treatment facility by June
1997, completing construction of the facility by December 2002, and
beginning operation of the facility by March 2003. The agreement noted that
the start of construction was contingent on the state's approving any
necessary permits. Under the agreement, if DOE failed to meet these interim
milestones, the state of Idaho could take action to stop additional
shipments of spent nuclear fuel from entering the state until the milestones
have been achieved.

In January 1996, DOE issued a request for proposals for the treatment of
65,000 cubic meters of transuranic and other mixed wastes. DOE specified
performance requirements for the treatment process, including treating waste
to meet current regulatory standards and reducing the volume of waste, and
left the choice of technology to the bidders. After reviewing proposals from
four companies, DOE awarded a fixed-price contract to BNFL, effective
January 1997, to provide waste treatment services. The contract included
milestones agreed to with the state of Idaho for completing construction,
beginning waste treatment operations, and completing waste treatment
operations. The total contract price was $876,093,000 and included three
project phases:

 Phase I--designing, licensing, and permitting activities, and ensuring
environmental compliance: This phase was to last from January 1997 through
January 2000. The firm fixed-price amount of $16.3 million available for
this phase was to be paid for deliverables, such as the project management
plan and various construction permits issued by state and federal
regulators.

 Phase II--constructing the facility, installing equipment, and testing all
systems to ensure the facility is ready to begin operations: Phase II was to
start in January 2000 and to be completed by March 2003. DOE intends to make
no payments to BNFL during phase II for expenses incurred during this phase.
Instead, DOE will reimburse BNFL for the $569.4 million associated with this
phase as the waste is treated in phase III.

 Phase III--treating 65,000 cubic meters of mixed waste: Phase III was
expected to last from March 2003 through December 2015, but to end no later
than December 2018. The contract provided for payment of
$4,468 per cubic meter of treated waste, or a total of $290.4 million. In
addition, for the first 25,000 cubic meters of treated waste, BNFL was also
to receive $22,776 per cubic meter to recover the costs of phase II.

Because of the length of the contract--from its effective date in January
1997 until at least 2015--two contract provisions were added to recognize
changing costs over time. First, the contract contains a provision for an
annual price adjustment that is to be applied only to the first 25,000 cubic
meters of waste processed. The contract's unit price of $4,468 will be
adjusted annually based on an employment cost index from the Bureau of Labor
Statistics.6 This price adjustment was first applied in calendar year 1997.
According to DOE's estimate, adjustments for inflation over the life of the
contract, including this annual price adjustment, will increase the total
expenditures on the contract to about $1.1 billion by 2018. The second type
of price adjustment will come into effect after BNFL treats the first
25,000 cubic meters of waste. While treating the remaining 40,000 cubic
meters of waste, BNFL can request a new unit price every 5 years by
submitting its current costs and proposed new unit prices to DOE. This
second price adjustment is not automatic, but will be negotiated between DOE
and BNFL. Because this would be a negotiated price adjustment based on
future operating costs, DOE has not estimated the impact of this provision
on the contract price.7

The contract also required that BNFL reduce the volume of waste by at least
65 percent to save on transportation costs and future storage costs.
Finally, the contract had a list of assumptions that were considered
material to contract performance--for example, that any project-related
litigation will not affect the schedule or work activities and that the
proposed construction site will not be contaminated with radioactive or
hazardous materials. Any changes to these assumptions that are outside of
BNFL's control can form the basis for a request to DOE for an adjustment of
the contract price.

the Successful Treatment of Some Waste Less Certain

Between the effective date of the contract in January 1997 and March 2000,
major changes have been made to the project's technical approach. For the
bulk of the waste, these changes have brought less complexity to the
treatment process. In March 2000, however, to resolve a pending lawsuit over
the treatment process for about one-fourth of the waste and allow facility
construction to move forward, DOE agreed to examine alternative
approaches--all relatively unproven--for this portion of the waste. The
outcome of this action may not be known for several years. If viable
alternatives are not found, DOE may need to return to its plan to incinerate
a portion of the waste or attempt to renegotiate disposition of the waste
with the state of Idaho.

Since the contract took effect in January 1997, significant changes have
been made to the technical approach for treating the waste. Table 1 shows
the treatment process originally proposed in September 1996 and the process
as currently designed.

Table 1: Original Proposed Treatment Process and Currently Planned Process

 Original proposal                    Currently planned process
 (September 1996)                     (March 2000)
 Retrieve the waste from storage;
 characterize and sort the waste      Same
                                      For about 22 percent of the waste,
                                      postpone treatment and study
                                      alternatives to meeting treatment
                                      requirements by means other than
                                      incineration (through new technology
 Incinerate about 75 percent of the   or a waiver from existing
 waste to meet treatment requirements regulations)
 and achieve volume reduction

                                      Compress the other 78 percent of the
                                      waste to meet volume reduction
                                      requirements in the contract
 Process the incinerated material into
 glass logs in containers to stabilize
 it for permanent disposal            No course of action in place for the
                                      waste still under study

 For the 25 percent of the waste not
 incinerated, add a cement-like       Place compressed waste into
 substance (grout) to the containers  containers for permanent disposal
 to stabilize the waste for permanent off-site
 disposal
 Certify the waste containers for
 shipment to off-site disposal        Same

Source: BNFL's project documentation.

Several factors have led to the changes in the design of the treatment
process:

 First, based on its review of the inventory records of the stored waste
and further clarification from DOE personnel at Rocky Flats, BNFL determined
that much of the waste could be classified as "debris" under the regulations
of the Environmental Protection Agency. The regulations define debris as
certain solid particles larger than 60 millimeters in size and provide that
the debris does not have to be incinerated before disposal. Determining that
much of the waste on this project met the definition of debris enabled BNFL
to reduce the amount of waste to be incinerated from about 75 percent to
about 22 percent. BNFL retained incineration as the proposed approach for
about 22 percent of the materials because incineration (1) will treat waste
to meet the requirements at DOE's disposal site in New Mexico and (2) is
specified in the regulations for destroying the PCBs found within the
specific waste forms at INEEL.

 Second, melting or grouting the waste became unnecessary because a
disposal site became available that did not require this step as a condition
for receiving the waste. When the contract was initially awarded, BNFL and
DOE thought that converting the waste to a glass or cement form would be
necessary mainly because the availability of such a site was uncertain. If
the treated waste could not be sent off-site for disposal, it would have to
meet other land disposal requirements, which included using the glass or
cement material. However, DOE's disposal site for transuranic waste opened
in New Mexico in March 1999. Because the New Mexico facility has other
disposal safeguards, material sent there does not have to undergo this
treatment.8

For the most part, these changes in the proposed approach have resulted in a
less technically complex treatment process that primarily involves
compressing the waste to reduce its volume. BNFL has experience with
compressing plutonium-contaminated waste at other nuclear facilities,
including its Sellafield site in the United Kingdom. The simplified approach
also increases the likelihood that the treatment facility can operate
successfully for the 12 to 16 years necessary to treat the waste.

For about one-fourth of the waste, however, recent events will likely
complicate the treatment approach. In March 2000, DOE settled a lawsuit
brought by outside groups over BNFL's plans to incinerate part of the
waste.9 Currently, incineration is the only proven technology and approved
method for destroying PCBs in mixed waste. PCBs and other organic substances
in the mixed waste must be destroyed to satisfy the requirements for
transporting the waste and to meet the waste acceptance criteria at DOE's
disposal site in New Mexico.

Under the agreement to settle the lawsuit, the incineration component of the
treatment process was put on hold. This will allow a major portion of the
project to move forward but also means that for about 22 percent of the
waste, including waste contaminated with PCBs, no treatment plan is in
place. DOE agreed to pursue alternatives to incineration by exploring both
alternative technologies and potential waivers of regulatory requirements.
To identify alternative treatment processes, DOE agreed to appoint a panel
of independent scientific experts.10 The panel's report to the Secretary of
Energy is due in December 2000. DOE is also evaluating regulatory options
that, if accepted, could reduce the amount of waste that needs to be
incinerated to about 3 percent. These options include less restrictive
requirements for packaging and transporting the waste and disposing of the
PCBs without treatment.

Treatment alternatives to incineration may be difficult to develop, and DOE
is unsure whether this effort will be successful. According to the DOE
Environmental Management program waste management scientist responsible for
oversight of the Idaho project, there is a chemical treatment process that
can destroy PCBs. However, this alternative technology has not been used or
demonstrated on transuranic mixed waste. Before this alternative process
could be used to treat transuranic mixed waste, additional research and
development would be required. He said that DOE would need to demonstrate
through a pilot project that the chemical treatment process could be used on
transuranic waste and then obtain approval from the Environmental Protection
Agency to use the process.

As for the option of obtaining waivers to allow packaging, transporting, and
disposing of the waste containing PCBs and other organic substances without
treatment, DOE's decision on packaging options is expected in May 2000. The
timing of decisions on transporting and disposing of the waste without
further treatment is unknown. DOE also said that disposal without treatment
would require the modification of the mixed waste disposal permit issued by
the state of New Mexico.

If DOE is not successful in either developing new technology or obtaining
the regulatory waivers, DOE may need to proceed with plans to incinerate the
waste. Under those circumstances, the plaintiffs in the lawsuit have
reserved the right to reinstate the lawsuit challenging use of the
incinerator. At that point, if incineration is not an option for DOE, it may
need to attempt to renegotiate disposition of the waste with the state of
Idaho.

Final Completion Date Is Unclear

Although the project is still in its early stages and construction has not
started, completion of the earliest steps is already about 3 months behind
the milestones in the contract and about 1 year behind the schedule included
in BNFL's original project management plan. Additional delays are likely to
occur while the permit applications are modified to eliminate incineration
from the treatment process. BNFL underestimated the time required to obtain
construction permits from state and federal regulators, and subsequent
milestones for starting construction and for starting treatment operations
are also in jeopardy. The flexibility built into the operational phase of
the project should absorb some of these delays, but it is too early in the
project to determine if BNFL can treat and remove all waste by the
agreed-upon milestone of December 31, 2018.

Although it is still early in the project, BNFL has fallen at least 1 year
behind interim milestone dates in its original project management plan for
the construction and start-up of the treatment facility. According to BNFL's
current estimate, construction will not be complete until August 2002, and
treatment operations will not start until November 2003. As a result, DOE
will most likely miss the March 2003 interim milestone for the start of
operations specified in the agreement with the state of Idaho (see table 2).

Table 2: Comparison of Selected Schedule Milestones for the Project

                 Milestones in  Initial       Revised      BNFL's working
                                approved      approved     estimate of
                 contract with  project       project      project
                 BNFL (Jan.
                 1997)          schedule      schedule     schedulea (Feb.
                                (Apr. 1997)   (May 1999)   2000)
 Submit permit                  Jan. - Apr.   Completed on
 applications    None           1998          time         Completed

 Permits issued  Jan. 2000      Jan. - Mar.   Aug. 1999    Apr. 2000
                                1999
 Start
 construction    None           May 1999      Sept. 1999   May 2000
 Complete
 construction    Dec. 2002      Dec. 2001     Dec. 2001    Aug. 2002
 Start
 operations      Mar. 2003      Mar. 2003     Mar. 2003    Nov. 2003
 Complete
 project         Dec. 2018      Dec. 2018     Dec. 2018    Dec. 2018

aThese dates have not been reviewed or approved by DOE.

Source: BNFL's project documentation.

DOE's contract with BNFL specified that all construction permits would be
issued by January 2000 and that construction would be completed by December
2002. However, to have more contingency time in the schedule, BNFL modified
those dates in its original project management plan. BNFL's accelerated
schedule anticipated receiving the permits and starting construction a year
earlier than DOE specified in the contract. This would also have allowed
BNFL a full 15 months after construction was completed for operational
testing and review.

BNFL is behind its construction schedule because it underestimated, with
DOE's approval, the amount of time needed to obtain the permits necessary to
begin construction. BNFL needed to obtain three key permits from state and
federal regulators:11

 Clean Air Act permit. This permit addresses air pollution control and
testing and limits the amount of air pollution allowed during the
construction and operation of the facility. The state of Idaho issues this
permit consistent with state law and the federal Clean Air Act.

 Hazardous Waste Management Act permit. This permit addresses the treatment
requirements for materials such as mercury and organic compounds such as
industrial cleaning solvents. Without this permit, the facility cannot be
constructed or operated. The state of Idaho also issues this permit
consistent with state law and the federal Resource Conservation and Recovery
Act.

 Toxic Substances Control Act permit. This permit addresses the treatment
requirements for toxic substances such as PCBs. The Environmental Protection
Agency issues this permit.

BNFL's original project management plan called for obtaining all permits
necessary to begin construction by March 1999. As a result, BNFL's project
schedule allowed only about 1 year after submitting the permits for the
regulators to complete review, public comment, and issuance. BNFL wanted the
permits to be issued by March 1999 to provide additional time for
construction and testing activities and, therefore, to increase the
likelihood of its meeting the project's other interim milestone dates. Both
BNFL and DOE acknowledged that planning to obtain the permits by March 1999
represented a very aggressive schedule but stated that they believed that it
was essential to meet the interim milestones that DOE and the state of Idaho
had agreed to in 1995 for completing construction and beginning waste
treatment operations.

The application for the Clean Air Act permit was completed on schedule and
submitted to the state of Idaho for review. Idaho's review of this permit,
including the public comment period, was completed in October 1999, but it
is unclear when the state will issue the permit. The state chose to wait
until the public comment phase on the other two permits was completed before
taking further action. According to state officials, this decision was made
to ensure consistency among all three permits.12

Review of the applications for the Idaho Hazardous Waste Management Act13
and Toxic Substances Control Act permits is still under way. These two
permits are being processed simultaneously since the technical issues are
much the same. The public comment period for the two permits closed February
7, 2000, but regulators believed it would take at least until April 2000 for
the state and the Environmental Protection Agency to resolve the comments
received. Moreover, under Idaho law, once permits are issued, the contractor
will have to wait 30 days before starting construction to allow any
concerned citizens to file appeals questioning the decision. Such appeals
would be handled by the state of Idaho or the Environmental Protection
Agency rather than by DOE, but their resolution could delay the project
further.

State of Idaho officials said that BNFL's original schedule for obtaining
the permits by March 1999 was unrealistic. They said, for example, that
although it can take between 3 and 5 years for the state to review and
approve a hazardous waste permit, the state agreed to try to complete its
review in about 2 years. In contrast, BNFL allowed only about 1 year in its
schedule for the regulatory review process. Idaho officials said that before
the project began, they were very candid with DOE and BNFL about the time
required to obtain the permits. However, they also acknowledged that the
permit application paperwork that BNFL submitted was of high quality and
this helped speed up the review process. The review of the permits was also
affected by new draft guidelines the Environmental Protection Agency issued
in July 1998 on assessing the risks to human health and the environment from
a project. These new requirements for identifying risks associated with the
wastes and chemicals to be treated caused BNFL to rework a portion of its
permit application.

BNFL's current working estimate of the project's schedule anticipated that
the permits would be issued by April 2000. This is 13 months later than
planned in BNFL's original schedule and 3 months later than specified in the
contract. However, the search for an alternative to incineration will also
affect the issuance of the permits. As part of the settlement agreement, DOE
and BNFL asked the state of Idaho and the Environmental Protection Agency to
postpone regulatory approval of the incinerator portion of the permit
applications.14 The impact of this change on the issuance of the three
permits needed to start construction is currently unknown. If the
applications for the permits need to be revised and resubmitted, this
process could add considerably to the schedule for obtaining them. However,
if the regulators are able to simply remove the incinerator component from
the permit applications, it could take less time. According to state of
Idaho officials, even if the more expedient approach can be used, it is
unlikely that the permits can be approved and issued before July 2000.

Other Interim Milestones

Although the project has fallen behind the initial schedule for obtaining
permits and starting construction, the dates specified in the contract for
completing construction and starting operations have not changed. Therefore,
the time available to complete some project activities has been reduced. For
example, BNFL had originally planned on completing construction by December
2001, or 12 months earlier than the contract's milestone date. This would
have allowed 15 months to complete all operational testing and readiness
reviews in time to meet the March 2003 milestone for the start of
operations. Both DOE and BNFL officials said that allowing 15 months for the
operational testing and readiness reviews is prudent.

To maintain the 15 months for operational testing, given the delays that
have occurred so far, BNFL has had to reduce the time available for
constructing the treatment facility. The initial project schedule allowed
31 months for constructing the treatment facility. Assuming no further delay
beyond May 2000 for starting construction, the time available for
constructing the facility has been reduced by 5 months to 26 months.
According to the BNFL project manager, reducing the time available for
construction will require BNFL to overlap construction activities, to reduce
the contingency time available for addressing problems, and to incur higher
construction costs if adding a third shift is necessary. He said that
although the compressed construction schedule is necessary to preserve the
15 months needed for operational testing, the shorter construction period
increases the risk of not being able to complete construction or start
operations on schedule.

Incorporating the provisions of the agreement to eliminate the incinerator
from the permit applications may make it even more difficult to begin
construction in 2000. Because the construction site is in an area of the
state that experiences severe winter weather, BNFL's initial construction
schedule provided for beginning the work early enough in the year--no later
than March or April--to have the building shell enclosed by the beginning of
severe winter weather in October or November. In that way, the interior
construction work could proceed throughout the winter. If construction is
delayed beyond the spring of 2000, BNFL could lose another construction
season and further delay the start of operations.

Unknown

At this point in the project, it is too early to determine if slippage on
interim schedule milestones will affect the December 2018 milestone for
completing the entire project. BNFL will try to make up time after
construction starts by overlapping activities and adding extra personnel.
Also, because of the flexibility built into the operational phase of the
project, BNFL said that it could slip completion of construction somewhat
and still complete treating and disposing of the waste on or before December
2018. The flexibility in the operational phase of the project exists because
the contract allows almost 16 years to complete the processing of the waste.
Working at capacity, the treatment facility is designed to process about
7,000 cubic meters of waste each year, meaning that it could process the
entire 65,000 cubic meters in less than 10 years.

However, it is difficult to predict what impact the March 2000 settlement of
the environmental lawsuit will have on the goal of completing the project by
December 2018. If an alternative technology is identified, it may take
considerable time to fully test, develop, and obtain approval to use it.
DOE's alternative strategy of attempting to obtain regulatory waivers may
also involve a lengthy process. It is unclear if the flexibility in the
operational phase of the project will be sufficient to absorb these delays.

Although the initial fixed-price contract with BNFL was for $876 million,
the contract contains provisions for either decreasing or increasing the
price to account for such things as changes in contract requirements or
unforeseen circumstances beyond the contractor's control.15 A price
reduction of $18 million has already occurred because of the steps taken to
simplify treatment of most of the waste. Other savings are unlikely to occur
but are possible if alternatives to private financing are pursued. However,
uncertainties in two other areas could affect BNFL's ability to carry out
the project as planned and could result in increases to the contract price.
These uncertainties involve the delays in starting construction and the
search for alternatives to incinerating a portion of the waste.

Changes in the technical approach can affect a contractor's scope of work
and, therefore, the contract price. When BNFL shifted to a simpler
technology for treating the waste by eliminating from the treatment process
the step to stabilize the waste in cement, the contract price was reduced.
In January 2000, DOE approved a contract modification that reduced the
contract price by $18 million. The price reduction occurred because the
simpler technology will result in lower labor and material costs.

It is possible that decisions on the project's financing, if they depart
from the initial approach, could also reduce the contract price. In its
offer submitted in September 1996, BNFL proposed financing phase II of the
project--construction and testing--with internal funds obtained from its
parent company. Phase III of the project--operations--was to be financed
with commercial debt and with revenues received from DOE for successfully
processing the waste. However, BNFL also planned to review its financing
options during the first 3 years of the contract to identify the most
efficient financial arrangements, including obtaining commercial financing
for phase II construction activities. Financing costs are significant--of
the estimated $570 million of construction and testing costs in phase II of
the contract, almost $300 million represents BNFL's financing costs if it
funds this phase from internal sources.16

At this point, BNFL is unsure if it will try to obtain commercial financing
for the project or continue to finance the project internally. BNFL's Senior
Vice President said that BNFL has concluded, after discussions with the
financial community, that commercial banks would not lend money for
construction until all of the necessary permits had been issued, and that
the banks would also require other changes to the contract before making
funds available. BNFL concluded that lenders would require contract changes
that would, among other things, (1) limit the decision-making authority of
the DOE contracting officer to decide what payments BNFL would be entitled
to if disagreements arise and instead establish predetermined performance
criteria and some form of third-party dispute resolution, and (2) ensure
that under a termination of the contract for convenience, the government's
payment to BNFL would include not only the outstanding principal, but also
include interest and fees.

DOE's Director of Contract Reform and Privatization said that DOE expects
BNFL to finance the project from its internal sources of funds if it cannot
obtain commercial financing. However, in the unlikely event that financing
is not available from commercial lenders and/or BNFL's parent company, and
BNFL is unable to carry out the contract, DOE would have to take some
action, such as terminating the contract or modifying the contract to
facilitate financing of the project.17

It is unclear what approach DOE would take if BNFL could not complete the
project as planned. DOE's Director of Contract Reform and Privatization said
that he cannot envision a scenario in which BNFL would be unable to obtain
financing for the project. However, he also said that if BNFL could not
finance the project, DOE would have the option of making progress payments
during construction and testing or agreeing to other contract modifications
to make financing the project more attractive to commercial lenders. These
potential changes to the contract would also likely change the way that risk
is allocated between the two parties since DOE's cost exposure would be
greater. Because BNFL's offer was based on the allocation of risk between
BNFL and DOE in the original proposal, any major changes to the contract
that result in a reallocation of risk away from BNFL may also indicate the
need for a corresponding reduction to the contract price.

Price

Delays in starting construction of the treatment facility will likely result
in contract price increases. DOE officials in Idaho have examined the
possible effects on the project's schedule because of the delays from the
January 2000 date in obtaining permits. DOE concluded that if the start of
construction is delayed until May 2000, as projected in BNFL's working
estimate, the potential price increase to the government would be about $44
million. Major components of the price increase include the costs associated
with paying contractor personnel during the delay and the financing costs.
If the start of construction is delayed beyond May 2000, the price increase
would be even greater.

DOE could have avoided at least some of the price increase associated with
the construction delays by requiring BNFL to bid the project using a more
realistic estimate of the time required to obtain the permits. BNFL would
have factored the longer period for obtaining permits into the pricing of
the contract. Although DOE may then have paid a higher initial price for the
contract, both DOE and BNFL officials agree that the price increase likely
would have been less than what BNFL may now request once the permits are
finally issued and construction can begin.

DOE's vulnerability to this potential contract price increase raises the
question of why DOE agreed to the 2-year time frame for obtaining the
permits. According to DOE's project manager at the Idaho site, DOE agreed to
the milestone date, even though it was considered a challenging date to
meet, because the only other alternative was to try to negotiate with the
state of Idaho to change the interim project milestone dates DOE and the
state agreed to in 1995. He said that DOE did not think that the state would
be willing to renegotiate the agreement even if the project's completion
date remained the same. DOE's Director of Contract Reform and Privatization
said that this situation was a good example of the trade-off DOE must make
between making a good business decision to keep the contract price down and
meeting its commitments to individual states, potentially at a higher price.
He said that in this case, the commitment to the state took precedence over
a good business decision.

The recent decision to suspend the use of incineration for about 22 percent
of the waste and to pursue other alternatives for meeting disposal
requirements could also affect the contract price. According to the DOE
contracting officer, activities that BNFL could be involved in, such as
exploring regulatory waivers and identifying alternative treatment
technologies, could be outside the current scope of work in the contract and
thus could trigger the need for an equitable adjustment in the contract
price. But DOE also believes the possibility exists that with changes in
technology or waivers of regulatory requirements for disposal, the contract
price could decrease. So far, it is unclear what the full scope of the
changes to the project will be or how much they will cost.

We provided a draft of this report to DOE and BNFL for their review and
comment. DOE said that the draft report was comprehensive and fairly
characterized several of the uncertainties on the project. However, DOE
believed that the draft report contained some factual inaccuracies and was
incomplete or misleading in three respects. First, DOE said that the
advantage of settling the lawsuit concerning the incinerator was not fully
described in the draft report. When DOE settled the suit, the plaintiffs
agreed not to file appeals to the construction permits. As a result, DOE
expects that BNFL will be able to proceed with the construction of the
facility without additional delay. We modified our report to make it clear
that the settlement agreement could allow construction to move forward.

Second, DOE said that the draft report overstated the potential difficulties
of pursuing alternatives to incineration. DOE believes that there will be
opportunities to accelerate and resequence construction and readiness review
activities and that a treatment facility without incineration will be
somewhat smaller, allowing construction to be completed by December 2002.
DOE also said that waste not requiring treatment could be retrieved,
characterized, and shipped starting in March 2003 or earlier. We believe
that our report fairly describes the difficulties associated with making the
project fully operational by March 2003. DOE may be able to find shortcuts
for completing some of the work, and our report recognizes this possibility.
But the construction permits have not been issued, and uncertainties remain
about how to treat up to about 22 percent of the waste. It is possible that
DOE may have to include the incinerator in the project to successfully treat
all of the waste. Given these delays and uncertainties, having a fully
operational facility by the contract date of March 2003 is doubtful. In
fact, in its comments on the draft report, DOE acknowledged that completing
construction and operational testing in time to have the facility fully
operational by March 2003 is questionable.

Finally, DOE said that the draft report does not adequately acknowledge that
any project of this scale and complexity has uncertainty that can affect
cost, schedule, and performance. We disagree and believe that our report
fairly presents these uncertainties and their potential effects on the
project.

DOE also provided several technical corrections that we incorporated as
appropriate. DOE's comments and our responses to specific comments are
presented in appendix I.

BNFL's Senior Vice President advised us that the draft report was a fair and
reasonable representation of the status of the project. He also provided
clarifications on BNFL's financing strategy for the project, which we
incorporated as appropriate.

To determine how the current project compares with the initial plans in
terms of approach and schedule, we reviewed the proposal submitted by BNFL
in September 1996 and subsequent documents that reflected the changes to the
technical approach. We also reviewed the contract between DOE and BNFL,
BNFL's project management plans that included the original and approved
baseline schedules, and DOE's environmental impact statement and record of
decision on the Advanced Mixed Waste Treatment Project. In addition, we
interviewed officials with DOE's Idaho Operations Office, BNFL in Idaho
Falls, and Idaho's Department of Environmental Quality. We also toured the
Radioactive Waste Management Complex at the Idaho Falls site where the
facility will be constructed.

To determine what uncertainties might affect the ability to successfully
complete the project on time and within budget, in addition to our work on
the changes in the technical approach and the project's schedule, we
reviewed contract requirements, DOE and BNFL's reports and records on the
permit applications, and available records pertaining to the legal challenge
to DOE's environmental assessment process for the incinerator. We also
interviewed the DOE contracting officer and Advanced Mixed Waste Treatment
Project manager at DOE's Idaho Falls Operations Office and officials with
DOE's Offices of General Counsel, Contract Reform and Privatization, and
Environmental Management. In addition, we interviewed officials with BNFL's
Idaho Falls project office and the Vice President responsible for the
project. We also interviewed officials with the Idaho Department of
Environmental Quality and the Environmental Protection Agency to determine
the status of the permits for the project.

We performed our review from September 1999 through April 2000 in accordance
with generally accepted government auditing standards.

As arranged with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days after
the date of this report. At that time, we will send copies to the Honorable
Bill Richardson, the Secretary of Energy. We will also make copies available
to others on request. Please call me or Derek Stewart at
(202) 512-3841 if you or your staff have any further questions. Major
contributors to this report were Margaret L. Armen, Carole J. Blackwell,
Thomas C. Perry, Stan G. Stenersen, William R. Swick, and Charles A. Sylvis.

Sincerely yours,
Jim Wells
Director, Energy, Resources,
and Science Issues

Comments From the Department of Energy

1. We address these comments in the Agency and Company Comments section of
the report.

2. The draft report presented BNFL's view that it can slip the project's
construction dates somewhat and still meet the December 2018 completion
date. We also stated that it is unclear if flexibility in the operational
phase of the project will be sufficient to absorb these delays. Therefore,
we believe the report fairly presents this uncertainty.

3. We believe the term incineration adequately describes the thermal
desorption treatment process because thermal desorption involves burning
substances using an indirect heat source.

4. We agree. The final report was modified to reflect this comment as
appropriate.

5. We modified the final report to clarify that price adjustments are
provided for in the Federal Acquisition Regulation.

6. We disagree that the $44 million reflects the upper bounding of the
potential price increase. The $44 million estimate is based on a 3-month
delay in the start of construction. DOE's analysis also shows that a
24-month delay would add about $71 million to the project. Therefore, we
believe that the use of the term "about" is appropriate.

7. We modified the final report to clarify that additional delays will
likely occur because of the need to modify the permit applications to remove
the incinerator component.

8. We modified the final report to clarify that the discussion about the
project's schedule dates in this paragraph related to the dates in the
contract, not to those in BNFL's project management plan.

(141378)

Table 1: Original Proposed Treatment Process and Currently
Planned Process 12

Table 2: Comparison of Selected Schedule Milestones for the
Project 16

Figure 1: Location of DOE's Idaho National Engineering and Environmental
Laboratory 7

Figure 2: Mixed Waste Boxes and Drums Being Placed on an
Asphalt Pad at INEEL 9
  

1. BNFL Inc. is the U.S. subsidiary of British Nuclear Fuels plc, a public
limited company in the United Kingdom. The British government is the sole
stockholder of British Nuclear Fuels plc.

2. Transuranic waste contains man-made radioactive elements with atomic
numbers higher than uranium, such as plutonium.

3. Under the Resource Conservation and Recovery Act of 1976, as amended, a
facility that treats, stores, or disposes of hazardous waste must obtain a
permit from the Environmental Protection Agency or a state authorized by the
Environmental Protection Agency to establish its own program. The permit
sets out, among other things, the detailed conditions under which the
facility may operate. In Idaho, the act is implemented by the state
Department of Environmental Quality.

4. The Toxic Substances Control Act, enacted in 1976, authorizes the
Environmental Protection Agency to regulate all chemicals that present an
unreasonable risk of injury to health or the environment. The act includes a
provision that specifically required the Environmental Protection Agency to
issue a rule governing PCB disposal. Under the rule, incineration is one of
the principal disposal methods for PCBs, and approval from the Environmental
Protection Agency is required before incineration can occur.

5. The October 16, 1995, agreement between the state of Idaho, the
Department of the Navy, and DOE settled the case of Public Service Co. of
Colorado v. Batt. In the Batt case, the 9th Circuit Court of Appeals
strictly limited shipments of spent nuclear fuel to INEEL, finding that
DOE's environmental analysis was inadequate to support additional spent fuel
shipments to the site. The consent agreement allowed more spent fuel to be
sent to INEEL, provided that all transuranic waste at INEEL would be treated
and removed from the state before December 2015, or December 2018 at the
latest. Consistent with the agreement, both DOE and the Navy continue to
ship spent nuclear fuel to INEEL.

6. The annual price adjustment applies only to the $4,468 unit price for
treated waste and does not apply to the $22,776 per cubic meter that
recovers the costs of phase II. The employment cost index measures changes
in compensation costs, which include wages, salaries, and the cost of
employee benefits. The contract is adjusted based on changes to the
"Employment Cost Index, Wages and Salaries, All Private Industry Workers
(Labor)."

7. The contract also calls for BNFL to conduct "decontamination and
decommissioning" activities after the waste is processed. At the time the
contract was awarded, the price of this activity was not determined because
it was not expected to occur until about 2018. However, in its fiscal year
2000 budget request, DOE estimated the cost at $22.7 million. In addition,
DOE estimated the cost of infrastructure and other support for the project
at
$72.2 million.

8. A small amount of waste may still have to be mixed with cement to meet
criteria for transport or to meet land disposal requirements.

9. In September 1999, two plaintiff groups--Keep Yellowstone Nuclear Free
and the Environmental Defense Institute--filed suit in U.S. District Court
in Wyoming requesting an injunction against the construction of the
incinerator. The complaint alleged that DOE's environmental impact statement
on the project was deficient. The plaintiffs alleged that DOE failed to
study the likely impacts of the airborne pollutants from the project's
incinerator on areas in Wyoming that the plaintiffs believe would be
affected.

10. Under the settlement agreement, DOE also agreed to pay $150,000 to the
plaintiffs to cover attorney and expert witness fees and other costs
associated with the lawsuit.

11. In addition to these three key permits, the state of Idaho also required
a Hazardous Waste Facility Siting license, which was issued in September
1997.

12. In October 1999, DOE paid BNFL $2.2 million for the Clean Air Act permit
even though the state had not issued the permit. DOE did so because it
decided that the reasons for BNFL's not receiving the permit as scheduled in
March 1999 were outside of BNFL's control. Therefore, the contract allowed
for the payment, even though the permit was not issued, because BNFL had
satisfactorily completed all of its work on the permit application.

13. This state law implements the federal Resource Conservation and Recovery
Act in Idaho.

14. If the regulators issue permits for the entire treatment facility,
including the incinerator, the settlement agreement will no longer be valid,
and the plaintiffs may refile the claim.

15. Under the Federal Acquisition Regulation, fixed-price contracts normally
allow for equitable adjustments to the contract price for changes that occur
outside the control of the contractor.

16. Private financing is a fundamental feature of DOE's privatization
strategy for cleanup projects. The strategy was established in 1994 in an
effort to reduce costs and improve the timeliness of cleanup projects. DOE
expects that private financing will provide contractors with a greater
incentive to perform because recovering their investment depends on
performance and because outside lenders will provide third-party oversight
to ensure that their investment is sound. For a discussion of how different
financing and contracting strategies on DOE's projects, such as the Advanced
Mixed Waste Treatment Project, can affect the risks and costs to the
government, see Department of Energy: Alternative Financing and Contracting
Strategies for Cleanup Projects (GAO/RCED-98-169 , May 29, 1998).

17. The contract provides that it will not be considered a termination for
default if project financing is not available from the private sector and/or
the corporate parent for reasons outside of the control of BNFL.
*** End of document. ***