B-131115, APR. 23, 1964

B-131115: Apr 23, 1964

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UNITED STATES ATOMIC ENERGY COMMISSION: REFERENCE IS MADE TO A LETTER DATED MARCH 26. A REAFFIRMATION OF OUR OPINION IS NOW SOUGHT IN RELATION TO THE PROPOSED CONTRACT. IT IS NOTED THAT PARAGRAPH S OF ARTICLE II THEREOF WOULD SHOW SPECIFICALLY THAT THE OPINION HAD BEEN REAFFIRMED BEFORE EXECUTION OF THE CONTRACT. IT IS STATED IN THE LETTER OF MARCH 26. THAT THE COMMISSION CONCLUDED THAT THE CAPITAL EXPENDITURE FOR SEFOR (SOUTHWEST EXPERIMENTAL FAST OXIDE REACTOR) LESS ITS RESIDUAL VALUE WILL REPRESENT A SIGNIFICANT AMOUNT IN CONTEXT OF THE TOTAL CONTRACT COST OF THE PROJECT. THAT UNDER ALL THE FACTS AND CIRCUMSTANCES APPARENT AT THIS TIME IT APPEARS TO THE COMMISSION THAT THERE IS NOT MUCH QUESTION BUT THAT THE CAPITAL COST FOR SEFOR LESS SEFOR'S RESIDUAL VALUE WILL BE SUBSTANTIAL AND AN APPRECIABLE PORTION OF THE TOTAL PROJECT EXPENSE.

B-131115, APR. 23, 1964

TO CHAIRMAN, UNITED STATES ATOMIC ENERGY COMMISSION:

REFERENCE IS MADE TO A LETTER DATED MARCH 26, 1964, FROM THE ASSISTANT GENERAL MANAGER, ENCLOSING A COPY OF A PROPOSED RESEARCH AND DEVELOPMENT CONTRACT, NUMBERED AT/04-3/-540, BETWEEN THE ATOMIC ENERGY COMMISSION AND SOUTHWEST ATOMIC ENERGY ASSOCIATES (SAEA), A NONPROFIT MUTUAL BENEFIT ASSOCIATION OF UTILITY COMPANIES IN THE UNITED STATES. THE GENERAL ELECTRIC COMPANY AND A WEST GERMAN NONPROFIT CORPORATION, GESELLSCHAFT FUR KERNFORSCHUNG M.B.H. (GESELLSCHAFT), WOULD BE ASSOCIATED WITH AND CONTRIBUTE FINANCIALLY AND OTHERWISE TO THE CARRYING OUT OF THE PARTICULAR RESEARCH PROJECT.

THE LETTER REFERS TO THE FACT THAT ON NOVEMBER 13, 1963, THE COMMISSION REQUESTED OUR OPINION RESPECTING A DRAFT OF A MEMORANDUM OF UNDERSTANDING, LOOKING TOWARD A CONTRACT WITH SAEA ON THE AUTHORITY OF SUBSECTION (U) (2) OF SECTION 161 OF THE ATOMIC ENERGY ACT, AS AMENDED, 42 U.S.C. 2201 (U) (2), COUPLED WITH THE GENERAL AUTHORITY AFFORDED THE COMMISSION UNDER SECTION 31 OF THAT ACT, AS AMENDED, 42 U.S.C. 2051, TO MAKE ARRANGEMENTS FOR RESEARCH AND DEVELOPMENT. AS STATED IN THE LETTER, OUR RESPONSE ON DECEMBER 17, 1963, CONFIRMED THE COMMISSION'S VIEW OF ITS AUTHORITY TO ENTER INTO THE DESCRIBED COMMITMENT UNDER THE CITED STATUTORY PROVISIONS.

IN ACCORDANCE WITH THE REPORTED DESIRE OF SAEA, A REAFFIRMATION OF OUR OPINION IS NOW SOUGHT IN RELATION TO THE PROPOSED CONTRACT, AND IT IS NOTED THAT PARAGRAPH S OF ARTICLE II THEREOF WOULD SHOW SPECIFICALLY THAT THE OPINION HAD BEEN REAFFIRMED BEFORE EXECUTION OF THE CONTRACT.

IT IS STATED IN THE LETTER OF MARCH 26, 1964, THAT THE COMMISSION HAS MADE THE FINDING MENTIONED IN THE CONCLUDING SENTENCE OF OUR OPINION; THAT THE COMMISSION CONCLUDED THAT THE CAPITAL EXPENDITURE FOR SEFOR (SOUTHWEST EXPERIMENTAL FAST OXIDE REACTOR) LESS ITS RESIDUAL VALUE WILL REPRESENT A SIGNIFICANT AMOUNT IN CONTEXT OF THE TOTAL CONTRACT COST OF THE PROJECT, NAMELY, THE COST OF THE FACILITY, PLUS THE COST OF OPERATION AND MAINTENANCE EXCLUSIVE OF THE COST OF MATERIALS; THAT UNDER ALL THE FACTS AND CIRCUMSTANCES APPARENT AT THIS TIME IT APPEARS TO THE COMMISSION THAT THERE IS NOT MUCH QUESTION BUT THAT THE CAPITAL COST FOR SEFOR LESS SEFOR'S RESIDUAL VALUE WILL BE SUBSTANTIAL AND AN APPRECIABLE PORTION OF THE TOTAL PROJECT EXPENSE; AND THAT, ALTHOUGH SAEA AND ITS ASSOCIATES HAVE INDICATED INTEREST IN THE POSSIBLE USE OF SEFOR FOR ADDITIONAL RESEARCH SUBSEQUENT TO COMPLETION OF THE PROGRAM IN WHICH THE COMMISSION IS INTERESTED, THE PRESENT INDICATIONS ARE THAT SEFOR MAY HAVE NO RESIDUAL VALUE AT ALL EXCEPT FOR THE SALVAGE VALUE OF ITS PARTICULAR COMPONENTS.

THE PROPOSED CONTRACT WOULD PROVIDE FOR THE DESIGN AND CONSTRUCTION OF AN EXPERIMENTAL FACILITY TO BE CALLED THE SOUTHWEST EXPERIMENTAL FAST OXIDE REACTOR, FOR WHICH SAEA WOULD PAY TO THE GENERAL ELECTRIC COMPANY A PRICE NOT TO EXCEED $10,900,000, OF WHICH NOT MORE THAN $5,000,000 WOULD BE CONTRIBUTED BY GESELLSCHAFT. IN ADDITION TO BUILDING THE REACTOR, THE GENERAL ELECTRIC COMPANY WOULD PERFORM THE BASIC EXPERIMENTAL AND MANAGEMENT WORK WITH THE UNDERSTANDING THAT THE COMMISSION WOULD SUPPLY CERTAIN MATERIALS, PERMIT THE USE OF CERTAIN GOVERNMENT-OWNED EQUIPMENT AND FACILITIES, AND REIMBURSE THE GENERAL ELECTRIC COMPANY EITHER DIRECTLY OR THROUGH SAEA FOR INCIDENTAL PRE OPERATIONAL RESEARCH AND DEVELOPMENT, TESTING, ETC. (PHASE I), AND FOR OPERATION AND MAINTENANCE OF SEFOR, CONDUCT OF THE RESEARCH PROGRAM AND RENDERING OF SEFOR INOPERATIVE FROM THE STANDPOINT OF SAFETY AND REGULATORY REQUIREMENTS (PHASE II). THE COMMISSION WOULD NOT CHARGE FOR THE USE OF GOVERNMENT-OWNED EQUIPMENT AND FACILITIES BUT A RENTAL CREDIT THEREFOR WOULD BE APPLICABLE IN THE COMPUTATION OF ALLOWABLE COSTS OF PERFORMANCE BY THE GENERAL ELECTRIC COMPANY INSOFAR AS SUCH COSTS RELATED TO THE CONTRACTUAL OBLIGATIONS OF THE COMMISSION. SUBJECTTO ESCALATION FOR CERTAIN CONTINGENCIES, ALLOWABLE PERFORMANCE COSTS TO BE REIMBURSED BY THE COMMISSION WOULD BE LIMITED TO $6,902,130 AND $5,487,870, RESPECTIVELY, FOR PHASES I AND II, BUT IN NO EVENT WOULD THE COMMISSION'S PAYMENT OBLIGATIONS UNDER THE CONTRACT EXCEED THE TOTAL SUM OF $12,699,750, EXCLUSIVE OF ANY OBLIGATION THE COMMISSION MAY HAVE UNDER AN AGREEMENT OF INDEMNIFICATION EXECUTED BY THE COMMISSION UNDER THE PROVISIONS OF SECTION 170 OF THE ATOMIC ENERGY ACT OF 1954, AS AMENDED, 42 U.S.C. 2210.

THE PROPOSED CONTRACT CONTEMPLATES THAT CONSTRUCTION OF SEFOR, TITLE TO WHICH WOULD BE DELIVERED BY THE GENERAL ELECTRIC COMPANY TO SAEA, WILL BE COMPLETED WITHIN THREE YEARS AFTER THE EFFECTIVE DATE OF THE CONTRACT AND THAT THE ENTIRE RESEARCH AND DEVELOPMENT PROGRAM WILL BE COMPLETED WITHIN SIX YEARS AFTER THE EFFECTIVE DATE OF THE CONTRACT. WITH RESPECT TO ALLOWABLE COSTS TO BE REIMBURSED BY THE COMMISSION FOR PHASES I AND II, ESTIMATES OF SUCH COSTS FOR PERIODS EXTENDING FROM OCTOBER 1, 1964, THROUGH FEBRUARY 14, 1970, ARE SET FORTH AS AN INDICATION OF THE BASIS UPON WHICH THE COMMISSION WOULD OBLIGATE APPROPRIATED FUNDS TO COVER THE COMMISSION'S COMMITMENTS UNDER THE CONTRACT.

AT PAGE 2 OF THE PROPOSED CONTRACT IT IS RECITED THAT THE COMMISSION HAS MADE THE DETERMINATIONS RELATIVE TO THE EXERCISE BY IT OF ITS LONG-TERM CONTRACTUAL AUTHORITY UNDER SUBSECTION (U) (2) (A) OF SECTION 161 OF THE ATOMIC ENERGY ACT OF 1954, AS AMENDED.

SUBSECTION (U) (2) (A) OF SECTION 161 OF THE ATOMIC ENERGY ACT OF 1954, AS AMENDED, AUTHORIZES THE COMMISSION TO ENTER INTO CONTRACTS FOR SUCH PERIODS OF TIME AS MAY BE DEEMED NECESSARY FOR THE PURCHASE OR ACQUISITION OF ANY SUPPLIES, EQUIPMENT, MATERIALS, OR SERVICES REQUIRED BY THE COMMISSION, SUBJECT TO CERTAIN CONDITIONS AMONG WHICH IS THE REQUIREMENT THAT SUCH CONTRACTS SHALL BE ENTERED INTO FOR PERIODS NOT TO EXCEED FIVE YEARS EACH FROM THE DATE OF INITIAL DELIVERY OF SUCH SUPPLIES, EQUIPMENT, MATERIALS, OR SERVICES, OR TEN YEARS FROM THE DATE OF EXECUTION OF THE CONTRACTS EXCLUDING PERIODS OF RENEWAL UNDER OPTION. IT IS OTHERWISE REQUIRED THAT THE COMMISSION DETERMINE THAT: (I) IT IS ADVANTAGEOUS TO THE GOVERNMENT TO MAKE SUCH PURCHASE OR ACQUISITION FROM COMMERCIAL SOURCES; (II) THE FURNISHING OF SUCH SUPPLIES, EQUIPMENT, MATERIALS, OR SERVICES WILL REQUIRE THE CONSTRUCTION OR ACQUISITION OF SPECIAL FACILITIES BY THE VENDORS OR SUPPLIERS THEREOF; (III) THE AMORTIZATION CHARGEABLE TO THE COMMISSION CONSTITUTES AN APPRECIABLE PORTION OF THE COST OF CONTRACT PERFORMANCE, EXCLUDING COST OF MATERIALS; AND (IV) THE CONTRACT FOR SUCH PERIOD IS MORE ADVANTAGEOUS TO THE GOVERNMENT THAN A SIMILAR CONTRACT NOT EXECUTED UNDER THE AUTHORITY OF SUBSECTION (U).

ADDITIONALLY, PARAGRAPH (B) OF SUBSECTION (U) (2) PROVIDES THAT, IN ENTERING INTO SUCH CONTRACTS, THE COMMISSION SHALL BE GUIDED BY THE FOLLOWING PRINCIPLES: (I) THE PERCENTAGE OF THE TOTAL COST OF SPECIAL FACILITIES DEVOTED TO CONTRACT PERFORMANCE AND CHARGEABLE TO THE COMMISSION SHOULD NOT EXCEED THE RATIO BETWEEN THE PERIOD OF CONTRACT DELIVERIES AND THE ANTICIPATED USEFUL LIFE OF SUCH FACILITIES; (II) THE DESIRABILITY OF OBTAINING OPTIONS TO RENEW THE CONTRACT FOR REASONABLE PERIODS AT PRICES NOT TO INCLUDE CHARGES FOR SPECIAL FACILITIES ALREADY AMORTIZED; AND (III) THE DESIRABILITY OF RESERVING IN THE COMMISSION THE RIGHT TO TAKE TITLE TO THE SPECIAL FACILITIES UNDER APPROPRIATE CIRCUMSTANCES.

AS INDICATED IN OUR PREVIOUS OPINION, THE PURPOSE OF THE CITED STATUTORY PROVISIONS IS TO PERMIT THE COMMISSION TO ENTER INTO LONG TERM CONTRACTS IN INSTANCES WHERE THE PROCUREMENT ENTAILS A SIGNIFICANT CAPITAL INVESTMENT WITH LITTLE OR NO CONCURRENT OR SUBSEQUENT APPLICATION OR VALUE WHICH WOULD ENABLE SUCH INVESTMENT TO BE CAPITALIZED OVER A PERIOD OF YEARS. IT WAS ASSUMED THAT IN THIS CASE THE CAPITAL INVESTMENT WOULD HAVE LITTLE RESIDUAL VALUE AND WAS THEREFORE CONCLUDED THAT THE REQUIREMENT OF SECTION 161 (U) (2) (A) (III) WOULD BE MET IF THE CAPITAL EXPENDITURE LESS RESIDUAL VALUE WERE FOUND BY THE COMMISSION TO REPRESENT "AN APPRECIABLE PORTION OF THE COST OF CONTRACT PERFORMANCE, EXCLUDING COST OF MATERIALS.' THE COMMISSION HAS MADE THIS FINDING AND IN OUR REVIEW OF THE CASE THERE HAS BEEN FOUND NO REASON TO CHANGE OUR VIEW CONCERNING THE PROPOSITION THAT AN ADMINISTRATIVE DETERMINATION OF SUCH NATURE, RESPECTING THE COSTS CHARGEABLE TO THE COMMISSION FOR PHASES I AND II OF THIS COOPERATIVE RESEARCH AND DEVELOPMENT PROJECT, WOULD MEET THE REQUIREMENT OF SUBSECTION (U) (2) (A) (III).

ACCORDINGLY THE OPINION OF DECEMBER 17, 1963, IS HEREBY REAFFIRMED IN RELATION TO THE PROPOSED CONTRACT.

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