Asset Transfers - Chapter 6

The Department of Energy is responsible for what once was the largest government-owned industrial complex in the country, comparable to the largest of the “Fortune 500” corporations. In many ways, the DOE complex is analogous to any aging industrial complex where maintenance and other infrastructure costs generally increase while production declines. This situation is exacerbated by the custodial responsibility for an asset inventory that exceeds requirements, is expensive to maintain, and faces increasing environmental compliance costs. These custodial costs—for surveillance and maintenance of excess facilities, provision of power and other utilities, environmental monitoring and security, and warehousing excess equipment and materials—are estimated to be at least $2 billion per year, based on site cost data collected by the Department’s Office of Environmental Management. With the end of nuclear weapons production, much of the inventory associated with this activity is surplus. The Department estimates it will cost $11.3 billion to stabilize, deactivate, decontaminate, and decommission surplus nuclear facilities.

The Department launched a series of initiatives to assess the nature and extent of the asset and materials inventory. A survey was conducted to provide a broad view of the size and characteristics of the inventory. For a subset of that inventory, those materials that may pose significant waste costs, an initiative referred to as the Materials-In-Inventory was launched to determine management practices and systems for guiding disposition decisions and to identify barriers to proper materials management and prompt disposition.

In response to these efforts, the Department is currently developing a Materials and Asset Management Program. The overall aim is to align the Department’s assets and materials with its current and future missions, reduce management costs, promote the transformation of potential waste into useful assets, designate some excess assets for sale, and promote environmental goals through innovative reclamation and recycling initiatives. The Department plans to reform its current policies and practices, apply incentives for safe and efficient management through contract reform, privatize certain materials and assets, and use excess physical assets to promote local private economic opportunities.

In its first large-scale asset sale, which occurred in late 1995 (see case study on page 6–4), the Department netted $3 million from the sale of surplus gold, silver, and other precious metals. The Department completed a number of asset sales in 1996, including a $3.1 million sale of precious metals, $1.1 million sale of Normal Uranium, $5.2 million sale of timber, and $800,000 sale of gas turbine generators. In addition, DOE is pursuing a sale of 780 metric tons of heavy water at the Savannah River Site with a potential net value of more than $35 million.

The asset inventory of DOE falls into four categories: (1) real property, including land, buildings, and facilities; (2) personal property, such as machines and equipment, that are not structurally a part of abuilding or structure; (3) personal property in the form of nuclear materials; and (4) personal property in the form of nonnuclear materials, such as metals and chemicals.

The land holdings of the Department encompass more than 2.4 million acres, an area greater in size than the District of Columbia and the States of Delaware and Rhode Island combined. More than 20,700 specialized facilities and associated buildings are located on this land, including more than 1,600 laboratories, 89 nuclear reactors, 208 accelerators and related structures, and 665 production and manufacturing facilities. The uses of these facilities include radiochemical processing, precision machining, electrical component assembly, warehousing, and administrative functions.

The Department’s personal property inventory includes items needed to fulfill the industrial missions of the Department (such as equipment and tools), carry out the management functions of the Department (such as office furniture and equipment), and oversee the operation of large reservations (such as vehicles and aircraft). Included within this inventory are more than 17,000 pieces of large industrial or construction equipment. This equipment inventory ranges from unique pieces designed for the construction of critical nuclear weapon components to equipment commonly found in machine shops.

The inventory of nuclear materials and radioisotopes with commercial potential includes depleted uranium and enriched uranium, as well as more than 17,000 radioactive sources used in research, industry, and medical treatment.

• More than 130,000 tons of chemicals––a quantity that is roughly equivalent to the annual production output of a large chemical manufacturer.

• More than 270,000 tons of scrap metal—equivalent to more than two modern U.S. Navy aircraft carriers in weight. (In addition to what is already in the inventory, large amounts of scrap will become available as buildings are cleaned out and taken down. The dismantlement of just one of DOE’s facilities, the Gaseous Diffusion Plant in Oak Ridge, Tennessee, is projected to generate an additional 300,000 tons.)

• More than 40,000 tons of base metals, including over 10,000 pounds of precious metals.

• Approximately 55,000 tons of stockpiled fuel oil and coal for some 67 steam and power plants at DOE industrial sites.

• Approximately 246 million barrels of crude oil and 58 trillion cubic meters of natural gas in DOE’s Naval Petroleum Reserve.

The Department must maintain some of its key assets to meet U.S. national security missions and to conduct science and environmental research. For the remainder of these assets, transfers of some type may be possible. For example, the Department currently plans to dispose of much of the excess enriched uranium by transferring it to the U.S. Enrichment Corporation to produce fuel for commercial nuclear reactors. Other assets may not have a readily recognizable private-sector use or may not be in a condition attractive to potential private-sector users. For these assets, DOE should assess strategies of alternative uses, reclamation, or disposal. For example, the Department is considering ideas for economic utilization of much of the depleted uranium inventory as an alternative to expensive disposal as a waste.

A number of issues arise in developing major asset transfer initiatives within DOE: legal authorities, national security needs, environmental issues, cost/benefit analyses, sales strategies, financial accounting, institutional incentives, and institutional competencies. A brief discussion of each of these issues, and several case studies, follow.

Key authorities for transferring real property and personal property are listed at the end of this chapter. It is important to recognize that DOE has limitations on its authority to transfer real property and that there are specific steps it must follow prior to disposition of personal property.

The underlying status of ownership of DOE real estate defines the opportunities available to the Department to transfer real property. Most of the land managed by DOE is either (1) purchased outright for DOE activities, (2) leased from the Defense Department and other agencies, or (3) withdrawn from the public domain. Generally, lands withdrawn from the public domain are occupied under withdrawal authority from the Department of the Interior. Disposition of such properties is limited by the original grant of withdrawal. Therefore, privatization opportunities on such lands may be constrained. Similarly, lands leased from the Defense Department remain subject to the limits of agreements signed with that agency. With respect to lands purchased outright for DOE activities, the Department, like most Federal agencies, reports its excess real property holdings to the General Services Administration (GSA) for disposal. However, DOE also has authority to dispose of its own real property under the Atomic Energy Act and to a limited extent under the Atomic Energy Community Act.

With regard to the disposal of personal property, the Department must first report personal property to the GSA to enable other Federal agencies to utilize such property. Property not utilized by other Federal agencies is subject to screening for donation before offering the materials for sale in private markets (see the section on Sales Strategies on page 6–8 for additional discussion on this process).

The Department’s economic development programs have, from the beginning, been based on the proposition that stakeholders in the affected communities were best judges of appropriate economicmitigation programs. The Department’s Worker and Community Transition program has encouraged creation of local organizations, called Community Reuse Organizations, in communities affected by Departmental downsizing to determine the best strategies for economic adjustment. These activities may be governed by Public Law 103-160, Section 3154, Lease of Property at Department of Energy Weapons Production Facilities, and Section 3155, Authority to Transfer Certain Department of Energy Property (see the outline of key legal authorities on pages 6–18 through 6–25).

Export control and nuclear nonproliferation issues relating to certain DOE personal property have had a significant impact on the way that DOE conducts property transfers and the overall business of disposal, as in the sale of usable reprocessing equipment at the Idaho National Engineering Laboratory in 1993.¹ A hasty disposition effort can have significant and expensive implications. The Department has established several new policies and procedures for the control of property disposition, which are embodied in “Personal Property Letter,” 970-3, March 25, 1996, issued by the DOE Deputy Assistant Secretary for Procurement and Assistance Management. This guidance sets up a screening process for excess equipment and materials to determine whether these assets have the potential, either alone or in combination with other such assets, to be used in a national-security–sensitive manner. The guidance also includes screening criteria to ensure that the Department does not release assets that might cause environmental and public safety concerns. It specifies the responsibilities and outlines the procedures that DOE must undertake when the Department disposes of so-called “high risk” surplus property.

A related national security concern may arise because of the classified nature of some of the sites and materials involved in asset transfers. Classification often results in restricting access to the assets by interested private entities and, in some cases, to information important to conducting the sale. Declassification of the assets, involving assessments of national security sensitivity, current tactical and strategic need, and impact on related materials and missions, will be a critical step in such cases. The recent sale of lithium by the Oak Ridge Operations Office is an example of a successful declassification effort in support of an asset sale. Demilitarization by disassembly, shredding, or other means, such as occurs in recycling activities associated with nuclear weapon components, will also be required in many instances. Finally, physical access to a restricted site may not be available, necessitating a move of the assets, if possible, to an open area. Whether alleviating a national security concern involves declassification, demilitarization, physical movement, or some combination of these, the end result will be to increase the cost of the transaction to the Government and the overall complexity of the transaction.

The protection and restoration of the environment is a fundamental responsibility of the Department and its contractors. DOE is committed to maintaining and enhancing environmental quality when considering proposals for asset transfers. Since an asset transfer can involve the transfer of real property or the leasing of facilities to the private sector, any proposed action must comply with applicable environmental laws, including the National Environmental Policy Act (NEPA), as appropriate. Transfer conditions need to ensure that potential transferees, grantees, and lessees have the capability to carry out appropriate environment, safety, and health requirements effectively.

In addition, real estate disposal actions involving DOE land or facilities are conducted under GSA regulations and procedures, unless otherwise authorized. When reporting property excess to GSA for disposal, GSA meets with DOE representatives to assess the environmental remediation necessary for GSA to accept the property for disposal. With respect to the outleasing of DOE land and facilities to the private sector, appropriate conditions must be in the lease to identify the environmental liability of both the Government and the private entity, including the establishment of a baseline inventory and condition report of the land or facility to be leased, and notice of any existing commitments with regulatory authorities.

A large portion of the DOE asset inventory is potentially radioactively contaminated, including large stocks of scrap metals. At present, there is no national standard with respect to radioactively contaminated materials. Absent such a standard, DOE follows the DOE 5400.5 process, which requires casebycase or sitespecific reviews to determine authorized limits. The process requires that doses associated with release of the material must be below DOE dose limits and dose constraints and must be as low as is reasonably achievable considering costs and other factors. Materials that, as a result of this process, are determined to pose a potential health risk are not available for transfer outside of the DOE complex. For certain of these materials, restricted uses within the complex are available and are being explored. An example of such a restricted use is the use of slightly contaminated metals as containers (casks) for storage of radioactive waste. However, for most other materials, treatment and disposal as a low-level radioactive waste is the only option.

The U.S. Environmental Protection Agency (EPA) and the U.S. Nuclear Regulatory Commission (NRC) are in the early stages of considering promulgating a national standard for radioactively contaminated scrap metals. Standards for reuse and recycle are highly controversial. Thus, EPA and NRC are thoroughly exploring the issue and proceeding cautiously. DOE supports the EPA and NRC effort to identify an appropriate standard that is protective of public health and the environment and will continue to provide EPA and NRC with data and information to support their analyses in this area.

The safety and health of workers and the public are fundamental responsibilities of the Department and its contractors. Where issues arise regarding regulatory jurisdiction, the Department must be prepared to maintain an ongoing role in environmental, safety, and health oversight to ensure the continuity of protection, until external regulation is in place. In the transition of privatized sites, facilities, and operations to external regulation of safety and health, a number of important issues may arise. This section discusses those issues.

Regulatory authorities must be advised of any jurisdictional change for safety regulation and the rights of employees to report regulatory violations to these authorities. As learned at Savannah River (see case study on page 5–24)the Federal or State OSHA may not immediately assume jurisdiction over DOE facilities for a variety of reasons. In the Savannah River case, a privatization with both asset transfer and contracting out components, the transfer of regulatory jurisdiction was delayed as a result of questions concerning how the Government obtained the land and whether or not the operation was truly a private enterprise. And, as DOE learned during the privatization of the Portsmouth and Paducah gaseous diffusion plants, DOE is liable for correcting significant OSHA-based noncompliances identified prior to the transition.

For OSHA to assume jurisdiction of a privatized facility, regulatory authority must be transferred from DOE to OSHA in a clear and definitive way. DOE and OSHA must provide public notice in the Federal Register that regulatory authority is being transferred. The vehicle used to transfer authority is an addendum to the memorandum of understanding (MOU) entered into between DOE and OSHA in 1992, which delineates their respective regulatory authorities. The DOE Office of Worker Health and Safety has developed a process to modify the MOU and develop the Federal Register notice. This office must be involved early in privatization initiatives to ensure that these important transition activities occur in a timely manner (see Recommendation 8).

OSHA has been concerned that the pace and scope of DOE privatizations will strain OSHA’s limited resources. As a result, DOE and OSHA have formed an ad hoc working group to review interagency issues surrounding privatization. In addition, the National Academy of Public Administrators (NAPA), under a DOE grant, is analyzing privatization issues in its broader review of DOE transition to external regulation. NAPA expects to publish its report later this year. Both efforts will identify resource impacts, as well as the legal and jurisdictional issues associated with privatization and external regulation, and will support a smooth transition to external regulation.

To determine whether or not the Department should keep, sell, or dispose of assets, managers should perform a cost/benefit analysis, the nature of which should be tailored to the complexity of the transaction. These analyses should reflect the full life-cycle costs of asset transfer decisions, even in cases where Federal Government accounting of costs and receipts tends to focus only on the current fiscal year in which the sale is conducted.

The purpose of the life-cycle cost/benefit analysis is to ensure that appropriate recognition is given to long-term costs of maintenance or disposition as waste materials. For example, the costs of selling assets that require decontamination prior to sale could exceed the revenues generated by the sale. However, the sale could mean the elimination of substantial long-term costs for asset maintenance or waste disposal. In many instances, the costs avoided by asset transfer may be the ultimate arbitrator of the cost/benefit analysis.

In selling personal property, DOE must follow the requirements of the DOE and Federal Property Management Regulations. These regulations require DOE to advertise an offer of property and to utilize standard forms that define the terms and conditions of the sale in detail. DOE, often through its M&O contractor, announces a request for proposal (RFP) in the Commerce Business Daily (CBD) in which the asset is identified in detail (including the amount and condition), the mechanism and any qualifications for the transfer are defined, and the highest price for the asset is solicited.

Although DOE has conducted asset sales in the past, the sales tended to be small-scale scrap and surplus disposal sales. To meet the Secretary’s commitments to efforts to reduce the Federal budget deficit, DOE will have to make use of creative approaches to asset sales. Among those approaches under consideration are increased use of consignment sales, request for qualifications (RFQ) approach, and joint ventures with business.

Numerous industries in the private sector are devoted to selling surplus equipment or inventories, often on a consignment basis. Firms such as liquidators accept surplus inventory, prepare sales and deliver goods into markets while splitting the proceeds with the original owner on a predetermined basis. This type of arrangement was used by the Rocky Flats Field Office in the disposition of personal property located at the Oxnard Site in California (see case study on page 6–14). Used equipment vendors typically purchaseold equipment outright at substantial discount, refurbish the equipment, and offer it for sale. Since the broker or resale firm is involved in the market on a day-to-day basis, it can achieve substantial economies of scale that provide adequate profit margins, with the potential for larger returns to the Government over traditional disposal methods. These arrangements can be especially useful to entities such as DOE that normally will not enter the market on an ongoing basis. Managers involved in large-scale asset transfers should consider these types of companies in planning their sale program.

Under an RFP arrangement, DOE defines the terms and conditions of sale in detail. These requirements effectively prevent the private sector from participating in developing alternative, possibly more cost-effective ways to meet the objective. A growing number of Federal agencies now routinely involve private-sector expertise in divesting assets through the use of the more flexible RFQ approach. This method may secure better results by engaging the private sector in more of a partnership role from the outset. This approach has also been endorsed by the National Performance Review. DOE managers should explore how they may utilize the RFQ approach to improve asset management efforts.

One approach to using an RFQ would be to issue a CBD notice that (1) describes the assets to be disposed of and (2) announces an RFQ inviting bidders to propose the best private-sector practice for the disposition and use of those assets. The selection of a private partner would then be based on proposals that deliver the most value to the Government, not just in terms of price but also on demonstrated ability to provide superior asset management, financial skills, and services. Under these contracts, compensation can be based on performance and results. This RFQ approach may be an attractive means of capturing the value of DOE’s physical assets and services because it secures early and extensive private-sector involvement in developing conditions of sale that maximize the value of Federal assets. This RFQ approach has been used successfully by other Federal agencies, including the U.S. Postal Service and the National Institutes of Health (NIH).

Since 1982, the Postal Service has operated an Office of Asset Management that has used the RFQ approach to capitalize on underperforming assets. This office now generates more than $140 million per year in earnings, and the assets range from excess land, buildings, and services to even the lease of antenna space at thousands of postal sites across the country. Using the RFQ approach, GSA and NIH have worked with the Postal Service asset management group to design, finance, and, ultimately, construct a $380 million clinical research center at NIH’s Bethesda, Maryland, medical complex. NASA has used the Postal Service expertise to lease out unused time on its wind tunnels. Through a memorandum of understanding, DOE could obtain the expertise of the Postal Service’s Office of Asset Management, as well. The potential benefits to the Department of such an arrangement should be explored.

Using an RFQ approach, the relationship between DOE and its private-sector partners can take a number of forms, based on the response judged most likely to achieve the objectives for the assets or services under negotiation. For example, the Department could enter into a joint-venture partnership designed to maximize the return to the Federal Government from the sale of surplus assets while minimizing the up-front costs to DOE. Under such joint-venture relationships, the successful bidder becomes the general partner, and the Government takes the role of limited partner. The general partner would be responsible for all activities necessary to sell the assets, including marketing, packaging, and other processing costs. These costs would be recouped by the general partner from the proceeds of the successful sale or project development. The profits from the sale would be split between the partners (that is, the Government and the general partner) according to the percentages negotiated at the beginning of the process. This approach has the advantage of creating an incentive to maximize return and minimize the cost of the transaction, because the private partner would realize a share of the net profits. It would also allow DOE to use private-sector marketing expertise to enhance the salability of the asset.

The joint-venture approach to managing asset divestiture was successfully used by the U.S. Resolution Trust Corporation (RTC), and is now being considered by the Defense Logistics Agency (DLA). The RTC was able to sell off billions of dollars of assets using only a handful of Federal staff because the joint-venture partners provided specialized private-sector expertise necessary for divesting assets as diverse as shopping centers, oil wells, and bank loans.

Joint ventures could have broad applicability to the DOE asset transfer program. One example is a regional liquidation concept, whereby DOE enters into an arrangement with a firm specializing in liquidating excess assets. The bulk of the inventory burden, including condition assessment and identification of potential value, would be placed on the joint venture, which would operate under incentives to maximize net return. This could limit the Department’s up-front inventory costs, which can be substantial in situations where major portions of a site are no longer required for DOE programmatic missions. This concept has been applied in the private sector where, for example, a regional liquidator was brought in to divest the assets of Pan American Airlines. The joint-venture concept also could play a major role in divesting DOE assets that have either a very narrow use or no readily recognizable counterpart in the private sector. This type of asset sale would require flexible partnerships with particular industrial sectors, possibly leading to the creation and spinoff of new industrial concerns.

Although DOE has been disposing of surplus assets for many years, past disposals have been on a small scale and have generated annual revenues of only approximately $4 million to $5 million.

The transfer of assets on a significantly larger scale raises several financial accounting issues, including the following:

• Scoring the transfers of assets for Federal budget deficit-reduction purposes

Under the Department’s Strategic Alignment Initiative, certain revenues resulting from large-scale asset sales will be credited to the Treasury Department for deficit reduction. The fiscal year 1996 budget required DOE to generate a total of $15 million of revenues from asset sales in fiscal year 1996 with a fiscal year 1996–2001 total of $75 million.

Accurate and complete records of all revenues generated through asset sales are necessary to ensure proper credit to the Department and efficient transfers of money to the Treasury. Accordingly, the Office of the Chief Financial Officer, in conjunction with the Office of Policy and the Oak Ridge Precious Metals Business Center, has developed an accounting procedure to manage receipts generated by asset sales under the Department’s Strategic Alignment Initiative. The procedural guidance from the Chief Financial Officer, entitled “Guidance on Asset Sales Under the Department’s Strategic Alignment Initiative,” has been distributed throughout the complex.

This guidance directs how the costs of each large- scale asset sale are to be accounted for since substantial costs will be incurred for activities directly related to sales, such as separation, decontamination, packaging, and transportation. However, it is sometimes difficult to distinguish such costs from the costs of other programmatic activities for the purposes of either Federal budgeting or life-cycle costing. For example, decontamination of an asset may be a requirement of the Environmental Management program, although the operating plan might not call for decontamination for several years. In such cases, costs may have to be applied to the sale under Federal budgeting rules of net receipts.²

The Chief Financial Officer guidance also identifies legitimate costs associated with asset sales (for example, hiring in-house or outside experts, preparing assets for disposition, transportation, etc.). The deduction of costs will differ based on whether the sale is conducted by DOE or by a contractor. Efforts are under way between the Department and OMB to work out the details of crediting asset transfers for purposes of deficit reduction.

In accordance with congressional mandates in the Conference Report for the fiscal year 1997 Energy and Water Appropriations Act, DOE will seek specific authority in the fiscal year 1998 appropriations process for specified pilot projects that will allow for reinvestment of derived proceeds into efforts designed to reduce the cost of maintaining DOE assets.

The success of privatization in an era of scarce resources will depend on managerial incentives that encourage innovation, reward risk-taking and build support. However, funding asset sales may not be a high priority for a program responsible for meeting legally enforceable compliance milestones or Presidentially mandated strategic stockpile levels. It will be necessary to create incentives that encourage these programs to allocate sufficient funding for privatization efforts to maximize the revenue stream to the Federal Government.

Section 608 of the Treasury, Postal Service and General Government Appropriations Act for Fiscal Year 1996 may provide some incentives by authorizing all Federal agencies to receive and reuse funds resulting from the sale of material recovered through recycling or waste-prevention programs. The Department will assess the potential for linking this authority to proceeds resulting from future sales of Department assets that result from recycling or waste-management cost-avoidance efforts.

The Department has submitted proposed legislation that addresses the issue of institutional incentives more directly. This legislation, developed in conjunction with the Office of Management and Budget, authorizes the Department to conduct an asset management and disposition program. Proceeds from that program, up to a level of $110 million by the end of fiscal year 2002, are to be used for Federal budget deficit reduction. These proceeds are clearly stated as net of administrative costs necessary to prepare the assets for sale and other direct costs necessary to conduct the sale, thus eliminating the disincentive of providing programmatic funding to conduct the sale.

Receipts from either the lease or sale of government assets, less the costs directly related to the lease or sale, are expected to be remitted to the United States Treasury unless specific authority is contained in the Appropriations Act permitting the Department to retain these receipts to offset funding requirements (according to the fiscal year 1997 Energy and Water Appropriations Bill Conference report.)

In addition to the above, the conferees also suggested that the Department perform a comprehensive review of current government assets that may be available for lease or sale and the potential revenues available from such sources, and be prepared to discuss this issue and the need for additional legislation during the fiscal year 1998 appropriations process. Such a review is currently under way at the Department.

A key element in this draft legislation is the provision for pilot efforts designed to improve the Department’s ability to reduce the custodial costs of maintaining the asset base through creative use ofasset transfers, thus creating a significant incentive for increased programmatic participation. This provision allows the Department to conduct pilot programs for recovering, reusing, decontaminating, decommissioning, and disposing of excess Department assets and using, as necessary, the proceeds from dispositions conducted under the program as a source of funds for the program.

The reuse of surplus electronic equipment from DOE facilities is an example of a possible pilot project. DOE could become a major player in the development of a domestic industry focused on the reuse of electronic equipment, while creating a solid revenue stream.³ The emergence of this industry responds in part to legislative and regulatory initiatives in Europe that will require manufacturers to take back their products at the end of their useful life. It also recognizes potential profitability to U.S. business of focusing on the tail end of a sector that has experienced immense growth (for example, personal computers). The major constraint on industry has been a lack of supply of surplus equipment, not demand for recycled products. Thus, DOE’s vast inventories of surplus equipment could be important to industry’s success. The Department sponsored a workshop with more than 80 electronic and recycling industry representatives in late August 1996 to further explore this issue. A number of recommendations were issued, including the establishment of a national pilot project, sponsored by both the Federal Government and private sector. The Department is currently preparing an action plan to implement the recommendations.

Another potential pilot involves implementation of the Record of Decision for the Stockpile Stewardship and Management Environmental Impact Statement, that will result in large numbers of DOE facilities becoming excess to the defense mission. The costs for deactivation, surveillance and maintenance, decontamination and decommissioning, and, ultimately, disposal will be substantial. The many valuable assets that will become excess to the Department’s needs could potentially be used to leverage private economic development. The Department of Defense has created successful joint ventures with businesses at Army munitions facilities; DOE is now studying their potential as pilot projects at weapon sites. These joint ventures have the potential to preserve industrial capabilities, reduce or eliminate government landlord costs and provide employment and economic growth. DOE may include one or more pilot proposals covering sites affected by the Stockpile Stewardship and Management decisions as part of the congressionally mandated asset management proposals, if such a direction is determined to be the most appropriate solution to the site-specific decision.

Other potential pilots include implementation of Vision 2010 at Oak Ridge, a portion of which involves the transfer of scrap metals to a private concern and using the resulting revenues to perform much needed decommissioning and decontamination at the site (see case study on page 6–10). An asset disposal effort at the Rocky Flats site would speed up the disposal of surplus equipment and materials by making a portion of the proceeds from the sales available for use in performing the required environmental and security clearances before the materials can be released.

Successful asset transfer efforts require strong business management skills. Knowledge of markets, specific industrial sectors, emerging industrial process changes, contract law, and countless other financial and business conditions are necessary to ensure a fair return to the taxpayer.

DOE staff sometimes do not have the specialized knowledge and skills required for asset transfers, although some of this expertise is available to its contractor’s parent organizations. Other agencies have obtained the requisite expert financial advice from noted private-sector investment advisors. For example, the U.S. Enrichment Corporation, a government-owned corporation, has recently contracted for expertise to assist the corporation in its privatization efforts. Similarly, the Resolution Trust Corporation engaged financial advisors to assist in its divestiture operations, enabling the sales of billions of dollars of assets with minimal additional Federal staff (see Recommendation 4).

The charts that follow represent the key legal authorities governing asset transfers by the Department of Energy. They should not, however, be construed as a comprehensive listing of all legal authorities that may be applicable to a particular privatization activity.

¹ See U.S. Department of Energy Deputy Assistant Secretary for Security Evaluations, Office of Environment, Safety and Health. “Release of Nuclear-Related Property and Associated Documentation by the Department of Energy since 1989.” December 1994.

² Language provided in the Conference Report for the fiscal year 1997 Energy and Water Appropriations Act clarified that only costs directly associated with the sale may be deducted from resulting proceeds.

Case Study 9: Precious Metals Sales

Background

At the request of the Secretary of Energy, the Office of Policy conducted the first-ever complex-wide inventory of Departmental assets. That baseline effort identified large inventories of materials and other assets that exceeded declining mission needs, including more than 10,000 pounds of gold, silver, platinum, and other precious metals. The inventory did not count precious metals in weapons scheduled for dismantlement or consider what DOE’s nonweapon precious metals are worth—about $52 million.¹

During the same time, the Department’s Inspector General reviewed the management of precious metals throughout DOE and concluded that a large portion of the precious metals inventory was potentially surplus to current missions. As a result of the inventory and the Inspector General’s report, the first sale focused on the disposition of surplus precious metals. DOE field organizations were asked to identify surplus materials within their inventories. Their response was the basis of Secretary O’Leary’s announcement in May 1995 that the Department would conduct its first sale of surplus precious metals.

Initially, the Department approached the Defense Logistics Agency for its assistance in conducting the sale on behalf of DOE. Subsequently, the Department decided that DOE’s Oak Ridge Operations Office could conduct the sale more efficiently because it has maintained and operated a precious metals pool for the Department’s Defense Programs Office for many years. As part of the new asset management effort, the Oak Ridge precious metals pool was converted into a Precious Metals Business Center, which conducted the initial sale as its first order of business.

Tiny gold microshells on a U.S. quarter

The Effort

In preparation for the sale, the Oak Ridge Precious Metals Business Center explored whether the amount of precious metals identified in the May 1995 announcement was still available for sale and determined the materials’ condition. The Oak Ridge Precious Metals Business Center found that, in the interim, the amount had decreased somewhat due to new requirements and that about half the amount needed additional refining before it was marketable. However, the Center also determined that a significant amount of precious metals could be made available from other sources within the Department. Thus, the sale was split into three phases. The first phase focused on the precious metals that were already on consignment with precious metals brokers and thus were available for immediate sale. The second phase focused on inventory that needed to be refined prior to sale. The third phase will involve materials now identified as “in use” and, therefore, will require additional coordination and a determination of need prior to sale.

Current Status

The sale under phase 1 was announced in the Commerce Business Daily (CBD) and consummated in November 1995. The Department obtained more than $3 million in net proceeds from the sale.

The second phase of the sale commenced in March 1996. A contract for precious metals refining was awarded by the M&O contractor for the Precious Metals Business Center, to the Engelhard Corporation. Under this contract, approximately 1,900 troy ounces were recovered, most of which was platinum. The remainder included gold, iridium, rhodium, ruthenium, and palladium. In addition, 1,700 troy ounces of mostly gold was recovered from Pantex’s weapon disassembly efforts (discussed later in this case study).

In planning the sale of these recovered metals, DOE coordinated with the Department of Defense (DOD) since the fiscal year 1996 National Defense Authorization Act requires DOE to transfer certain precious metals for disposition to DOD, unless DOD determines they are not suitable for DOD stockpile disposition activities. By letter of June 17, 1996, DOD concurred with a DOE sale of the gold and silver. The platinum was not sold, but rather used to fill a request from DOE’s own National Ignition Facility. A CBD announcement for the gold and silver was issued by DOE in June 1996. Although DOE received three bids on the metals, none was near market value and the sale was not consummated. DOE is currently analyzing why the bids were low.

The third phase of the sale involves metals that are in the “in use” inventory and as such allows the Center to focus on long-range management issues. In February 1996, the Center issued a request throughout the Department for annual forecasts ofwithdrawals and returns to the Precious Metals Pool. The request covered the 1996–1998 period to allow for management planning. Initial responses were received from 17 DOE sites. Additional responses are still being received as sites identify metals being released from program use.

The third sale will be of precious metals recovered from the material identified as surplus by these 17 sites. Approximately 7,500 troy ounces of material containing precious metals is included. This is about twice as much material as was sent to the refining contractor in preparation for the second sale. Although material composition will vary, it appears that the precious metals recovered after refining will be considerably larger than the amount recovered in the earlier effort.

Lessons Learned

A number of institutional barriers were identified during phase 1. The first was the lack of a formalized process for determining what assets were excess throughout the Department. The inventory available for the sale was identified by querying the DOE field offices rather than through a more formal mechanism. Although adequate for this relatively small sale, this informal process would not suffice for larger volumes or more complex sale efforts. A complete inventory should assist the Department’s planners in determining what assets are needed to meet mission goals.

Other institutional barriers involved internal accounting concerns. Precious metals purchased through programmatic funding were required to be maintained on that particular program office’s accounting records. To make the precious metals available for sale, the accounting system would have required that the Oak Ridge Precious Metals Business Center purchase this inventory from the other DOE field components. This approach would require the Materials and Asset Management Program to obtain large-scale funding prior to any sale. This issue was resolved for the first sale by directing field components to transfer surplus precious metal inventories to the Center for subsequent sale. Long-term resolution will require accounting changes to provide incentives for future sales. DOE plans to seek specific authority in the fiscal year 1998 appropriations process for specified pilot projects that will allow for reinvestment of derived proceeds into efforts designed to reduce the cost of maintaining DOE assets.

A second accounting concern involved recording receipts from the sale. In keeping with the deficit-reduction goals of the Administration, these proceeds are slated for return to the Federal Treasury. This step, however, required the creation of a new accounting mechanism within both the Treasury Department and DOE to accept the receipts. (See related discussion under Financial Accounting Issues in this chapter).

The lessons learned from the November 1995 sale are significant, particularly in the context of the total potential precious metals available for sale in the future. Starting in February 1996, the Department of Energy started “mining” precious metals from dismantled nuclear weapons. Published reports cited by the DOE Inspector General estimate that the U.S. nuclear weapon inventory will be reduced from an excess of 25,000 weapons to less than 5,000 weapons. The precious metals include primarily gold and silver and are contained in electronic nonnuclear and other components of nuclear weapons. There are about 1,000 tons of precious metal-bearing scrap projected to be generated from weapon dismantlement over the next 10 years with a potential value estimated by DOE’s Inspector General at $36 million.

The goal of the “mining” program for precious metals from nuclear weapons is to return money from precious metal sales to the U.S. Treasury and to avoid hazardous-waste regulatory costs. The effort is succeeding. The first of many anticipated shipments to the precious metal refinery have already returned more than 1,300 troy ounces of gold and 1,400 troy ounces of silver. The cost to DOE to dispose of these materials was estimated to be approximately $180,000. The cost to DOE to recover the metals was $120,000. The striking result from these efforts is that the metal from this first shipment is valued at over a half million dollars and will be included in follow-on sales by the Precious Metals Business Center.

¹U.S. Department of Energy Office of Inspector General. Audit of Department of Energy’s Administration of Precious Metals. DOE/IG–0375. June 20, 1995.

Case Study 10: Oak Ridge Reindustrialization InitiativeVision 2010

Background

The DOE Oak Ridge reservation in Oak Ridge, Tennessee, is one of the original Manhattan Project sites. Its mission has historically revolved around the production and use of enriched uranium in defense and commercial applications. The reservation is administratively divided into three sites. The Oak Ridge National Laboratory (ORNL), where much of the original uranium process research and development was performed, is now a multiprogram laboratory. The K–25 site is the location for the Oak Ridge Gaseous Diffusion Plant, an inactive uranium-enrichment facility. Currently, the primary mission at the K–25 site is environmental restoration and waste management. The Y–12 site is a production facility with specialized capabilities in such areas as precision machining and forging. The Lockheed-Martin Corporation is the current managementand operating contractor for all three sites.

The Effort

The DOE Oak Ridge Operations Office (ORO) has embarked on its plan to reduce the Federal presence in Oak Ridge and to create local employment opportunities through private enterprise. This initiative, called Vision 2010, makes excess Federal facilities and other assets available for private-sector use as a means of defederalizing and reindustrializing portions of the Oak Ridge reservation. Initially, the initiative focuses on excess facilities at the K96-25 site. However, it is envisioned to ultimately include eligible properties at ORNL and Y–12. Recently passed legislation (the Defense Authorization Act of 1994, Public Law 103-160, Section 3154), pertaining to facilities to be closed or reconfigured, authorized the Secretary of Energy to lease facilities and equipment for less than market value under appropriate terms and conditions. Under the legislation, ORO can lease such facilities to the Community Reuse Organization of East Tennessee (CROET) for industrial development. ORO envisions proposals that would bring private tenants to the facilities, in some cases leveraging proceeds from sales of very large inventories of scrap metal for necessary decommissioning and decontamination efforts to make the facilities more attractive to potential tenants.

Current Status

Three leases between ORO and CROET are currently in place or under development. One lease, for 1,000 acres for industrial development at the K–25 site, was executed on January 16, 1996. A second lease, for metal fabrication at a portion of Building 1401 at the K–25 site, was executed on April 5, 1996. A third lease, for the barge facility at K–25, was signed on April 26, 1996.

The ORO announced the availability of properties at the K–25 and Y–12 sites in the Wall Street Journal, on the Internet, and in the Commerce Business Daily. These properties were showcased to industry representatives at an information exchange workshop conducted on April 2–4, 1996. As a result of the workshop, there are a dozen serious proposals for use of specific facilities at the K–25 site.

Lessons Learned

A number of issues have surfaced that can pose significant obstacles to realizing the goals of Vision 2010. First, DOE currently lacks the authority to retain revenues gained from these activities to use in funding future activities. This ability is crucial to providing the necessary funds to maintain progress (see page 6–13 for discussion of proposed legislation). Again, in accordance with Congressional mandates in the fiscal year 1997 Energy and Water Conference Report, DOE will seek specific authority in the fiscal year 1998 appropriations process for specified pilot projects that will allow for reinvestment of proceeds into efforts designed to reduce the cost of maintaining DOE assets

Second, DOE accounting guidance is also of primary importance. The ability to plan for funding via revenues, determine the proper distribution of costs, and agree on accounting principles will facilitate actions to reuse or recycle assets. Efforts are under way to establish a DOE-wide accounting system for managing proceeds from asset sales.

The third issue is declassification of information pertaining to the manufacture and use of gaseous diffusion barrier technology. Declassification is necessary to make the assets attractive, and in some cases available, to commercial parties. DOE is studying whether the technology should be declassified and to what extent it can be made available to the private sector. DOE is continuing discussions with private industry regarding the possible leasing of gaseous diffusion technology for commercial use and establishing a private manufacturing capability at Oak Ridge.

Fourth, Vision 2010 has made it clear that DOE needs to be able to offer a contract or lease of Federal property for an extended period to interest businesses in investing in capital improvements on the property. An early exchange of draft “generic” lease terms and conditions can greatly speed up the process. DOE is examining the legal authorities required to permit longer term leasing arrangements at its facilities.

Finally, early identification of the environmental issues and involvement with the appropriate regulators is essential. Notification and approval for permit and other compliance purposes, as well as NEPA requirements, may take significant time. ORO found that environmental compliance requirements can pose some difficult challenges. This was particularly evident when the State of Tennessee determined that CROET would be considered an “operator” under applicable environmental laws, creating additional potential responsibilities and liabilities for the organization.

Case Study 11: Sale of The Oxnard Facility

Background

The historic mission of the DOE High Energy Rate Forging (HERF) facility, located in Oxnard, California, was the production of forgings for weapon parts. The Department initially contracted with the facility to secure this service. The HERF technology is unique to the Oxnard facility and was never adopted by commercial industry. In 1984, when it was clear that the company was going out of business, DOE purchased the facility to support its needs. In 1994, DOE decided to close the facility upon completion of its defense-related mission in 1996. The site is administered by the DOE Rocky Flats Field Office (RFFO).

The Effort

In the fall of 1994, RFFO and the Greater Oxnard Economic Development Corporation (GOEDC) began exploring economic development opportunities associated with the closing of the Oxnard facility. GOEDC is a nonprofit adjunct of the City of Oxnard, California. In May 1995, DOE approved a plan to sell the Oxnard facility to GOEDC, with GOEDC then reselling the facility to a private end-user. DOE also provided a Community Reuse Organization grant to GOEDC.

Early on in this process, DOE commissioned a market analysis to better understand the commercialization potential of the technology. This analysis demonstrated that potential specialty niches for HERF products existed in the aerospace and medical industries but did not determine whether HERF could be cost-effective. Further exacerbating the situation was the fact that the forging industry in the United States is in decline, with little capital reinvestment or expansion occurring. The forging industry has shrunk approximately 10 percent per decade since World War II.

Current Status

GOEDC first identified interest by the private sector in purchasing the facility and then moved ahead with preparations for the sale. To learn the level of interest, GOEDC published a request for interest in the Commerce Business Daily (CBD). They received more than 30 responses, including responses from a number of “mainstream” forging companies. Based on this level of response, GOEDC published a request for proposals in the CBD to solicit offers to purchase the Oxnard facility. The selection criteria included the following: price, terms, and conditions; business plans; ability to utilize existing employees and technology; and environmental compliance. Although four proposals were received by the due date, two were judged nonresponsive.

GOEDC requested “best and final offers” from the two responsive proposers and informed both proposers that their offers were too low. Based on recommendations from GOEDC’s Source Selection Board, GOEDC began exclusive negotiations with one of the companies. After a series of negotiations, in January 1996, RFFO and GOEDC reached a tentative sales agreement reflecting a better return to the Government. However, GOEDC’s purchaser subsequently informed GOEDC and RFFO that they were not able to obtain financing and would not be able to purchase the facility.

After a round of proposals and counterproposals between RFFO and GOEDC failed to reach a workable deal, RFFO proceeded to dispose of the property through more conventional (that is, non-economic development) methods. The personal property was sold on June 25, 1996, for $1.8 million, of which DOE netted nearly $1.4 million. The $1.8 million sale amount was well above the appraised value. RFFO is proceeding with the General Counsel’s office and GSA on the sale of the real property.

Lessons Learned

RFFO tried to sell Oxnard as an integrated business unit versus simply liquidating its constituent parts. Considering the number of responses to the request for interest (30), it appears that the availability of the facility was well known, but the limited response to the request for proposals (4), revealed that the facility was not very attractive to industry, especially to the forging industry, from which no company submitted a proposal.

The experience with Oxnard highlights the potential difficulties encountered in attempting to sell a surplus business in an integrated ongoing fashion rather than simply liquidating its surplus assets. Generally, an integrated facility (real property, equipment, supplies, and so forth) is assumed to be of higher value than the total of its constituent parts. This will not always be the case, however, as demonstrated by this case study; sometimes the market for a facility is just not there.

It is interesting to note that the company that was to have bought the facility from GOEDC intended to purchase the Oxnard facility as part of a larger complex merger and acquisition involving three separate businesses. Whenfinancing for the larger deal fell through, the Oxnard sale fell victim as well. This aspect of the experience points out the need for DOE to have a betterappreciation for what is behind a purchase proposal.

Case Study 12: Privatization of The Pinellas Plant

Background

The DOE Pinellas Plant, located in Largo, Florida, was built in 1957. The plant’s historic mission included the design, development, and production of special electronic and mechanical equipment for nuclear weapons applications, including neutron generators, specialty capacitors, thermal batteries, crystal resonators, oscillators, and clocks. In late 1993, DOE made a decision to close the Pinellas Plant as a result of the declining weapon production mission. Production of components was completed at the end of fiscal year 1994. Nuclear weapon reconfiguration was completed in fiscal year 1995. Operations at the plant now consist of production capacity consolidation, records and property dispositioning, and deactivation and characterization activities required to leave the plant available for commercial use. All DOE activities are scheduled for completion by the end of fiscal year 1997. Lockheed-Martin is the current DOE management and operating contractor for the site.

The Effort

In March 1995, the Federal Government sold the Pinellas plant to the Pinellas County Industry Council (PCIC). PCIC is a nonprofit organization created by State legislation to promote industrial growth in the local community. DOE leased back space required for administrative personnel as well as the space in which deactivation and characterization activities will continue until the end of fiscal year 1997.

Current Status

DOE deactivation, characterization, consolidation, and dispositioning efforts are complete on approximately one-third of the facility. Activities are on schedule for transferring approximately 98 percent of the facility to the full control and responsibility of PCIC by the end of fiscal year 1997. The contract with Lockheed-Martin was recently modified to include specific performance incentives for exceeding the cleanup schedule. The PCIC is actively seeking tenants to occupy the facility. To date, 80 percent of the available rental space is leased. Among these new businesses are three specialty electronic manufacturing firms, two of which involve the commercialization of technologies developed at DOE facilities. One firm is manufacturing highly specialized radiation detectors developed at the DOE Santa Barbara facility, while the other is manufacturing a tumor-detecting instrument developed at the DOE Los Alamos National Laboratory. The third firm is taking advantage of the electronics manufacturing basis of the site and will be designing and manufacturing communications electronics. In addition to these three firms, a soldering school and a graphics design company have moved onto the site as a result of the low cost.

Lessons Learned

In privatizing a facility such as the Pinellas Plant where the DOE mission is being eliminated, local community involvement is crucial. In this case, the community established a nonprofit economic development corporation to take ownership of the facility. The community must be involved with all efforts to make the facility economically viable and consistent with the community’s long-range needs. It also is essential for DOE and local community interests to reach consensus on privatization goals and methods. Once achieved, this consensus must be maintained as adjustments and updates are made to changing priorities and circumstances. This requires that the DOE field office have the authority and means to lead the process. It also requires that the DOE field office be an aggressive, proactive force to promote privatization.

Case Study 13: Privatization of The Mound Site

Background

DOE’s Mound Plant, in Miamisburg, Ohio, supported the nuclear weapons program since 1948. The historic mission of the Mound site was to be an integrated research, development, and production facility focusing on nonnuclear and tritium-containing components for nuclear weapons. In May 1993, the Department determined that the plant was no longer needed to meet the defense mission. Continuing efforts at the plant include the completion of defense work over the next 2 years, transfer of special nuclear materials to other sites, and continuation of the Radioisotope Thermoelectric Generator (RTG) program of the Department. An accelerated program—“Mound 2000”—focuses on completing the cleanup no later than 2005. The current management and operating contractor for the site is EG&G Mound Applied Technologies, Inc.

The Effort

The Mound site comprises about 300 acres of land. Two-thirds is developed with more than 150 buildings and a self-contained utility infrastructure. The remaining one-third of the site is vacant, unimproved land. The site is also designated as a CERCLA Superfund site. The surrounding region is a heavy industrial area of Southwestern Ohio. The local community is promoting the economic development of the site, trying to attract private business to the site to use the buildings, equipment, and technology for commercial business.

The Department’s plan is to restore and convey for value the entire Mound site to the City of Miamisburg to reduce Federal custodial and maintenance costs. Approximately 100 acres of vacant land will be included in the conveyance to the City.

The Mound Plant stopped making parts for nuclear weapons in 1995 and is now a cleanup site
Current Status
An agreement in principle regarding the sale of the site to the Miamisburg Mound Community Improvement Corporation, as agent for the City of Miamisburg, Ohio, was signed in October 1996. This document is not a contract for sale, but rather an agreement to negotiate terms for any future sale, if a sale of the property is determined to be in the best interests of both parties.

Lessons Learned

Two lessons were learned in this effort. The first was that disposing of a Superfund site before the completion of environmental cleanup is difficult. The ability to market the site to potential owners is limited by the perception of environmental contamination and the associated potential liability. The U.S. Environmental Protection Agency (EPA) is legally required to provide its approval before title to such property can transfer. Although parcels can be sold or transferred as cleanup proceeds, demands from the local community and commercial business for key parts of the site, coupled with DOE’s continuing operations at the site, complicate the overall cleanup schedule.

The second lesson learned was the recognition that an integrated site utility system can be an impediment to site development. The community’s vision for the future of the Mound site, consistent with the size and scope of other industrial companies in the region, is one of multiple owners of buildings and land, and the layout of the Mound site supports that vision. However, small businesses or business that are less dependent on a variety of utility services may require separate links to those services, and incur associated higher costs as a result.