Energy > 21. Department of Energy's Isotope Program
Assessing the value of isotopes to customers, and other factors such as prices of alternatives, may show that the Department of Energy could increase prices for isotopes that it sells to commercial customers to create cost savings by generating additional revenue.
- Why This Area
Is Important - What GAO
Found - Actions
Needed - How GAO Conducted
Its Work - Agency Comments
& GAO Contact - Related
Products
Why This Area Is Important
Overall, approximately 20 million medical procedures are performed each year in the United States using isotopes.[1] For example, isotopes are used to diagnose heart disease. Other applications for isotopes include oil and gas exploration, physics research, and radiation detection monitors that screen cargo and vehicles at ports and border crossings. The Department of Energys (DOE) Isotope Development and Production for Research and Applications program (Isotope Program) is the only domestic supplier for many of the more than 300 different isotopes that it sells because DOE facilities associated with the Isotope Program are recognized as uniquely capable of producing some isotopes that are critical to medical, commercial, research, and national security applications.
The Isotope Programs three-pronged mission is to (1) produce or distribute isotopes in short supply, as well as their associated by-products and surplus materials, and deliver isotope-related services; (2) maintain the infrastructure required to produce and supply isotopes and related services; and (3) investigate and develop new or improved isotope production and processing techniques that can make new isotopes available for research and other applications. To achieve its mission, the Isotope Program relies on annual appropriations and revenues from isotope sales. In fiscal year 2012, annual appropriations totaled almost $20 million, and revenues from sales of isotopes alone totaled over $25 million, according to data provided by agency officials.[2] All funding, including sales revenues, is deposited into a revolving fund from which the Isotope Program obligates funds to operate its facilities, produce isotopes, and fund research, among other activities. Moreover, the revolving fund allows the program to carry over balances from year to year, giving it budgeting flexibility.
When selling isotopes, the Isotope Program may produce or make available to customers more than 300 different isotopes, but fewer than that number are sold in a given year. In fiscal year 2012, for example, the program sold less than 180 distinct isotopes. In the same year, the Isotope Program sold isotopes or provided isotope-related services to more than 100 customers, both in the United States and internationally; 6 of those customers accounted for almost 90 percent of the programs sales revenue in fiscal year 2012. About 95 percent of the Isotope Programs annual revenue came from the sale of 6 different isotopes in fiscal year 2012; these 6 isotopes generated over $24 million in revenue (see the following table).
The Six Top-Selling Isotopes of DOEs Isotope Program, Fiscal Year 2012
|
Isotope |
2012 revenue |
|---|---|
|
Strontium-82 |
$10,982,000 |
|
Californium-252 |
6,866,000a |
|
Helium-3 |
3,015,000 |
|
Germanium-68 |
2,214,000 |
|
Strontium-90 |
618,000 |
|
Nickel-63 |
526,000 |
|
Total |
$24,221,000 |
Source: DOE.
aThis amount includes $2 million that was paid in fiscal year 2009 by customers as advance payments for future production costs.
[1]Isotopes are varieties of a given chemical element with the same number of protons but different numbers of neutrons. For example, the helium-3 isotope, which is used in research and to detect neutrons in radiation detection equipment, has one less neutron than the helium-4 isotope, which is the helium isotope commonly used in party balloons.
[2]The Isotope Programs yearly appropriations are used to, among other things, pay for infrastructure costs associated with producing isotopes that are used for research purposes, thus allowing the Isotope Program to sell research isotopes at a reduced price.
What GAO Found
GAO reported in May 2012 that the Isotope Program may be forgoing revenue that could further its mission because it is not using thorough assessments to set prices for commercial isotopes. The Atomic Energy Act of 1954 states that the federal government should be reasonably compensated for isotopes it sells and that isotope prices should not discourage commercial isotope producers from entering the market. Aside from these constraints, the Isotope Program has broad authority in setting isotope prices. To this end, the Isotope Program established a pricing policy in 1990updated in May 2012that provides the program latitude in establishing prices for isotopes. The policy states that isotopes for the commercial market are to be priced to recover the full cost of producing the isotopesfull cost recoveryor, if a market price already exists that is higher than full cost recovery, the market price should be used. The policy also states that additional factors may be considered when establishing prices, including the value of the product to the customer, the number of domestic or foreign suppliers, and current and future demand. Additionally, in cases where no market currently existsas is the case for many of the commercial isotopes produced and sold by the Isotope Programguidance from the Office of Management and Budget states that prices can be set by taking into account the prevailing prices for goods that are the same as or substantially similar to those provided by the government and then adjusting the supply made available, prices of the goods, or both so that there will be neither a shortage nor a surplus.
In practice, according to Isotope Program officials, the Isotope Program generally sets the prices for commercial isotopes at full cost recoverythe lowest price possible for the program to recover its costs for providing an isotope. According to program officials, prices for commercial isotopes are set above full cost recovery only when a higher price for the isotope already exists in the commercial market and pricing the isotope at full cost recovery would be so low as to distort the existing market. Program officials told us, however, that in instances where the Isotope Program is the only domestic supplier, which it is for most of the isotopes it produces and sells, the program has not formally assessed such factors as determining the value of isotopes to customers or prices of alternatives. Instead, Isotope Program officials told us that they gain a sense of customers value for isotopes through their communications with these customers. According to Isotope Program documents, the program has also collected limited market information for a small number of isotopes, but these studies are outdated or do not consider pricing. For example, a 2002 market study projected the future demand and potential revenues for 25 different isotopes used in medicine over the next 5 to 10 years, but this study is now outdated. Without thoroughly assessing isotopes, including such factors as assessing the value of isotopes to commercial customers or the prices of alternatives for isotopes where the Isotope Program is the only domestic supplier, the Isotope Program does not know if its full cost recovery prices are appropriate. If the Isotope Programs prices are artificially low, for example, the prices may, in turn, discourage private entities from entering the isotope market, discourage commercial entities or researchers from exploring alternatives to using some isotopes, or encourage overconsumption. Increasing prices, in these instances, could, among other things, generate additional revenue and reduce the programs level of appropriated funds.
Moreover, in the absence of established market prices and without current information on the value customers place on isotopes and prices of similar products, the Isotope Program cannot ensure that the prices it sets are appropriate. If such assessments show that prices can be increased above full cost recovery for some commercial isotopes, the additional revenue could be used to reduce appropriated funds or to further the Isotope Programs mission. For example, revenues could be used to fund research for the development of new or more efficient production capabilities for additional isotopes.
Actions Needed
GAO recommended in May 2012 that the Secretary of Energy direct the Isotope Program to improve the programs transparency in setting prices by taking the following action:
- clearly define the factors to be considered when the program sets prices for isotopes sold commercially, including defining under what circumstances it will set prices at or above full cost recovery. This should include assessing, when appropriate, current information on the value of isotopes to customers and the prices of similar products.
GAO is unable to quantify the potential for further financial benefits because Isotope Program officials have not performed the assessments needed to determine the market value or what customers are willing to pay for most of the isotopes it sells. Although GAO cannot quantify the potential for additional financial benefits, further efforts by the Isotope Program to examine the prices it sets for commercial isotopes could present opportunities for cost savings by generating additional revenues.
How GAO Conducted Its Work
The information contained in this analysis is based on findings from the products in the related GAO products section. GAO reviewed documents from DOEs Isotope Program, including budget data for fiscal year 2012 obligations and revenues and the Isotope Programs updated pricing policy, dated May 29, 2012. GAO also interviewed relevant agency officials. Table 17 in appendix IV lists the program GAO identified that might have opportunities for cost savings or revenue enhancement.
Agency Comments & GAO Contact
In commenting on the May 2012 report on which this analysis is based, DOE stated that it will address GAOs recommendations, but took exception to GAOs characterization of how the Isotope Program sets prices for commercial isotopes. In its comments, DOE states that the Isotope Program does consider value of isotopes to customers when setting prices for commercial isotopes. Nevertheless, none of the documents provided by the Isotope Program during GAOs review show that the program conducted a current, formal analysis of what customers are willing to pay for commercial isotopes. GAOs May 2012 report points out that program officials gain a sense of the value customers place on commercial isotopes through communication with the customers themselves. Such communications, in GAOs view, do not provide a rigorous approach to determining a customers value for commercial isotopes, as customers generally strive to obtain needed materials, including isotopes, at the lowest possible cost. In its comments, DOE also expressed concern that GAOs May 2012 report suggests maximizing revenue and pricing commercial isotopes to increase revenue. The report does not emphasize maximizing revenue or setting prices solely to increase revenue. Rather, the report shows that the Isotope Program has not performed the formal market analyses required by its own pricing policy. Such analyses, including assessing the value of isotopes to customers and prices of alternatives, may show that prices could be increased, thus increasing revenue.
GAO provided a draft of this report section to DOE for review and comment. DOE did not provide comments on this report section.
For additional information about this area, contact David Trimble at (202) 512-3841, or trimbled@gao.gov.
