Case Study 6: Privatization of Hanford Tank Waste Remediation System

Background

Radioactive waste has been stored in large underground storage tanks at the Hanford Site in Washington State since 1944. Approximately 56 million gallons of waste containing approximately 240,000 metric tons of processed chemicals and 177 mega-curies of radionuclides are currently being stored in 177 tanks. These caustic wastes are in the form of liquids, slurries, saltcakes, and sludge. In 1991, the Tank Waste Remediation System (TWRS) program was established to manage, retrieve, treat, immobilize, and dispose of these wastes in a safe, environmentally sound, and cost- effective manner.

Construction of the double-shell underground storage tanks at the Hanford Site began in 1977. Each tank has a capacity of 1 million gallons of high-level liquid radioactive waste.

The TWRS contracting strategy traditionally has involved government-owned, contractor-operated (GOCO) facilities under a cost plus award-fee contract. Under its privatization strategy, DOE plans to change its contracting approach to purchase services from contractor-financed, contractor-owned, contractor-operated (that is, privatized) facilities under fixed-price contracts.

Effort

At the start of the TWRS privatization initiative, DOE’s Office of Environmental Management performed a series of studies to determine the feasibility of privatization. Feasibility was reviewed with respect to the services that could best be provided, the scale of the services, the timing of the services, and the regulatory framework for the services. This required an evaluation of various issues, including: (1) the TWRS activities that could best be performed on a privatized basis, (2) the contracting approach that should be employed (for example, how many phases and contracts should be awarded), (3) the desired product types and the acceptance specifications for each product type, (4) the level of risk that should be assumed by the Government and the contractors, and (5) the costs that should be incurred by the contractors and the price that should be charged to DOE.

Photographs taken in 1978 shows the nearly completed tank farm. The concrete-reinforced vessels have two carbon steel shells, and the space between the shells is monitored for leakage.

Various TWRS activities were separately reviewed as candidates for privatization. These reviews looked at the storage, characterization, retrieval, treatment, and immobilization of waste. Treatment and immobilization services were determined to be most suitable for privatization because they could be defined with sufficient precision to be subject to a fixed-price procurement. In addition, treatment technology of similar complexity and scale to the first phase of the TWRS privatization had been demonstrated commercially at various locations, including production facilities in Great Britain and France.

Once it was determined that there was a service that industry could perform on a privatized basis, DOE sought to determine the best approach to procure the service. DOE determined that a phased implementation approach would ensure the greatest likelihood of success because this approach would allow the Department to reduce various financial, technical, and regulatory uncertainties before it commits itself to various subsequent stages of the privatizationeffort.

In order to purchase the waste treatment and immobilization services, DOE had to establish requirements for both the primary and secondary process products and identify those services that the contractor should provide to DOE. DOE developed specifications for the primary products (immobilized low-activity and high-activity waste) and the secondary process products (cesium and other radionuclides). The contractors will be responsible for the disposal of products that do not meet the required specifications. Without such precise specifications, it is possible that a contractor could provide an unacceptable service incompatible with DOE requirements.

This 1978 view of the nearly completed tank farm at Hanford shows the mass backfill operation

Under the TWRS privatization, DOE also will change its traditional approach of assuming all risk for waste remediation. Instead, DOE will provide a cost-effective balancing of risks between the Government and the contractor. For example, the private contractor will be responsible for performance risk (for example, producing immobilized waste that meets DOE specifications). In comparison, under the traditional cost plus award-fee contract, payment is made as work is performed, whether or not the waste is treated to produce acceptable waste forms.

To develop an estimate of the cost of privatization, DOE prepared a financial model. This model takes a capital cost estimate (design, construction, permitting, operation, and deactivation) and estimates “private industry” costs (profit, taxes, return on equity, interest). By adding the “private industry” costs, it is possible to develop a more realistic estimate of the price DOE will pay.

Currently, two phases of TWRS privatization are envisioned: Phase I, a proof-of-concept and commercial demonstration phase; and Phase II, a full-scale production phase.

Phase I has the following objectives:

• Demonstrate the technical and business viability of using privatized facilities to treat Hanford tank waste

• Define and maintain required levels of radiological, nuclear, process, and occupational safety

• Maintain environmental protection and compliance

• Substantially reduce the life-cycle costs and time required to treat Hanford tank waste.

Phase I consists of two parts. Part A is a 20-month period to establish the technical, operational, regulatory, business, and financial elements required by privatized facilities that will provide tank waste treatment services on a fixed-unit-price basis. Based on Part A performance, one or more of the contractors who successfully perform Part A will be authorized to perform waste-treatment services for DOE in Part B. Part B is a period of 10 to 14 years during which the authorized contractor(s) will finance, design, construct, operate, and deactivate the waste-treatment facilities. During Part B, fixed unit prices will be paid only for completion and acceptance of waste-treatment services meeting contract specifications. Part B has a potential value exceeding $5 billion.

If Phase I efforts are successful, DOE plans a second competitive procurement for Phase II activities. Phase II would be the full-scale production phase, and it is currently expected to begin in 2004. The current Phase II plan involves two competitively selected fixed-price contractors who will finance, design, construct, operate, and deactivate waste-treatment facilities. The objectives of Phase II include implementing the lessons learned from Phase I, processing all tank waste into forms suitable for final disposal, and meeting or exceeding regulatory performance milestones.

Current Status

In November, 1995, DOE issued for public comment a draft request for proposal (RFP) for Phase I of the privatization effort. Comments from vendors and other interested parties were received, and DOE issued the final RFP in February 1996. The RFP incorporated numerous suggestions from the public comments. It contemplated at least two awards to take advantage of alternate technical approaches and to foster competition in both cost and technology.

In the spring of 1996, two contractor teams submitted proposals. Each of the offerors satisfied the qualification criterion set forth in the RFP and provided a basis for negotiations. Negotiations with the contractor teams began in mid-1996. In September 1996, awards were made to each of the contractor teams that had submitted proposals.

In preparation for contract award, DOE established an in-house organization responsible for the regulation of the radiological, nuclear, and process safety of the contractor’s facilities in Phase I. In Phase II, it is planned that the Nuclear Regulatory Commission will assume responsibility for regulating radiological and nuclear safety. The Occupational Safety and Health Administration will regulate occupational safety and health in both phases. In addition, DOE will continue to maintain overall accountability for safety and health matters throughout the privatization effort.

With the TWRS privatization strategy, the Department is embarking on the most complex and most expensive environmental management project in the Nation’s history. The strategy is characterized by the following:

• Technical challenges—for example, in retrieval, immobilization, storage, and disposal

• Private-sector challenges and demands

• Stakeholder challenges and demands

• Political challenges exacerbated by the high cost and long duration of the project.

Lessons Learned to Date

Draft RFP. The technique of issuing a draft RFP was invaluable both in signaling to industry DOE’s privatization intent and in obtaining the views of the stakeholders and potential offerors prior to finalizing the procurement approach.

Qualified Source Evaluation Team. Many complex issues must be understood before privatization can be successful. A qualified team should be established and co-located to ensure that all personnel understand the overall objectives and the specific needs of all the specialties. The core of the team should transition from preparation of the solicitation to contract negotiations and then to contract administration. It also is essential for the team to have clear guidance, support, and access to senior management.

Risk Allocation. This is the single most important feature of the “deal” to be established. There must be an equitable allocation of risk between DOE and the contractor. The contractor must be held responsible for the risks that it can control—for example, technical and performance risks. DOE needs to be responsible for risks that it can control—for example, government-furnished items and minimum waste quantities.

Bridge to Privatized Service. In the TWRS privatization, the contractors will be paid a fixed amount for satisfactory completion and acceptance of all Part A deliverables (those that will define the technical, operational, regulatory, business, and financial elements). This payment approach is a key element in the privatization strategy because the Part B contractor(s) will receive no payments whatsoever until waste-treatment services are delivered and accepted, a period which could be as long as 8 to 10 years.

Regulatory Issues. Regulatory issues will be complex and require extensive time and resources to resolve. Transfer of regulatory oversight to an external regulatory agency, such as the Occupational Safety and Health Administration or the Nuclear Regulatory Commission, does not happen automatically. There may be jurisdictional issues as to Federal or State regulation, and the regulator may need resources to develop and enforce regulations (see the discussion later in this chapter). Resolution of these issues involves substantial time and effort.

Competition. Competition is broader than the number of contractors submitting proposals. In the TWRS instance, each of the contractor teams submitted two proposals, one for low-activity waste-treatment services only and one for low-activity and high-level waste-treatment services. These proposals provided the ideal combination for competition: one contractor team’s proposal embodied a new technology that offered the potential for significant performance improvements and reduced ultimate waste disposal requirements. Competition was further enhanced by the possibility of different services from each contractor (differing combinations of treatment of low-activity and high- activity waste) and the performance and business characteristics of each contractor’s proposals.

In addition, competition between the two contractors during Part A serves to maintain price competitiveness and fosters the likelihood of more favorable (to the Government) Part B terms and conditions. During Part A, the Government maintains the flexibility to select parallel solutions (low only, or combined low plus high) and has the right to authorize none, one, or both contractors to proceed with Part B.