Report to Congress Treatment & Immobilization of Hanford Radioactive Tank Waste

5.0 Description of the BNFL Contract

DOE has negotiated a contract with BNFL for Phase I of TWRS that builds on BNFL’s very promising technical approach and includes future options for expanding facility capacity to complete most or all of the TWRS mission. The contract places strong incentives on BNFL’s performance and provides for only limited payment to BNFL until waste is successfully processed. DOE’s path forward includes a series of explicit decision points that will allow optimization of the approach and will maintain a level of competitive pressure on BNFL by allowing DOE to consider alternative approaches at each decision point. The contract provides for the first major decision point after a 24-month period during which the design, permitting, and financing approach will be taken to a point where fixed-unit prices will be established. This contract places DOE on a firm path toward beginning treatment of Hanford’s highly radioactive tank waste.

This section describes the key features of this contract. Section 5.1 provides an overview of the structure (i.e., phases and decision points) of the negotiated BNFL contract. Section 5.2 describes the design phase, including its scope of work, the products that are required to be completed, and the approach to securing project financing. Section 5.3 describes DOE’s current expectations regarding the construction and operations phase (referred to as Part B-2 in the contract). Subsequent sections describe the schedule for Phase I (5.4), the allocation of project risks between the government and the contractor (Section 5.5), expected project costs (Section 5.6), funding requirements (Section 5.7), and planning for completion of the TWRS mission (i.e., Phase II) (Section 5.8).

5.1 Structure of Part B

Figure 5-1 shows the overall project structure with its two parts: a design phase and a construction and operations phase. Key decision points are depicted for moving forward with Phase I and initiating Phase II. The BNFL contract includes two distinct parts that together will complete Phase I.

• Design Phase. During this period (projected to be 24 months), DOE and BNFL will refine the technical requirements, further clarify the regulatory requirements, and finalize the project’s financial and incentive structure. BNFL will further develop its project design and technical approach, secure project financing, establish firm fixed-unit prices for Phase I waste treatment services, and enhance its approach to regulatory compliance by submitting necessary permit applications. DOE will review the project throughout this phase to ensure that necessary progress is maintained. At the end of the design phase, DOE will decide whether to proceed with the subsequent construction and operations portion of Phase I or to pursue one of several other approaches to complete Phase I. Details of the design phase are provided in Section 5.2.

Figure 5-1. Part B Project Structure (5 Kb)

• Construction and Operations Phase. This part of Phase I will include the completion of design, construction, startup, testing, and operation of the facility to provide waste treatment services at the fixed-unit prices established at the end of the design phase. DOE currently forecasts that waste treatment will begin in 2005 to 2006 and will continue for about 10 years. During that period, the contractor will immobilize approximately 10% of Hanford’s tank waste volume and 20% to 25% of the inventory of radioactivity. Details of the construction and operations phase are provided in Section 5.3.

As shown in Figure 5-1, DOE will maintain a series of decision points throughout Phase I. These decision points will enable DOE to further optimize the project and realize potential cost savings based on lessons learned and new information. Also, these decision points provide opportunities for DOE to move to alternative approaches and exert competitive pressure on BNFL, particularly with the decision at the end of the design phase.

5.2 Design Phase

DOE’s approach to TWRS has been to use an iterative strategy with explicit decision points so that the approach is enhanced as new information becomes available. The current decision on how to proceed with Part B continues this strategy with the specification of the design phase. At the end of this phase, DOE expects that BNFL’s fixed-unit prices will be set, private financing will be secured, and a decision will be made about proceeding with the construction of the BNFL facility. Independent reviewers of DOE’s approach strongly supported this strategy (see Appendix B), particularly the use of a period of approximately two years to optimize the approach. The key building blocks of DOE’s overall strategy are shown in Figure 5-2.

The design phase constitutes the first 24 months of Part B and will allow BNFL to:

• Advance the design from the conceptual design stage to approximately the 30% level, which is required for start of construction and to obtain private financing;
• Ensure that testing and demonstration (i.e., scale-up) of the proposed waste melter technology yield acceptable results;
• Conduct process testing on radiological and non-radiological materials and submit plans and qualification reports for waste products to be returned to DOE during the construction and operations phase;
• Complete regulatory permitting applications;
• Finalize project financing by committing BNFL’s corporate equity and securing private, third-party financing;
• Provide fixed prices for treatment services during the constructions and operations phase; and
• Complete a revised standards approval package based on a more mature hazards analysis, a Limited Construction Authorization Request, and a complete Construction Authorization Request including a Preliminary Safety Analysis Report.

Figure 5-2. Design Phase Strategy (13 Kb)

The design phase also will include efforts by DOE and BNFL to optimize the technical specifications and financing approach. These efforts will reduce uncertainty about the costs of waste treatment. By the end of this phase, BNFL and DOE should have a higher level of confidence in the basis of the prices, which should yield lower fixed-unit prices than the targets set at the end of Part A because of the optimization efforts and reductions in contingency costs. The fixed-unit price after the design phase will be based on certified cost and pricing data provided by BNFL. At the end of the design phase, BNFL and its joint venture partners will invest equity in the construction of the facility. At financial closing, BNFL also will obtain commitments from private lenders to finance project construction costs.

As shown in Figure 5-1, DOE will review BNFL’s progress throughout the design phase. DOE has the right to terminate the contract for convenience at any time, with an option to obtain technical data and intellectual property needed to continue with another contractor or a different acquisition strategy. DOE’s review of the contractor’s progress during the design phase will:

• Assess the method that BNFL will use to establish final fixed-unit prices;
• Confirm that BNFL is still viable for the construction and operations phase based on the quality and timeliness of work products and a refined technical approach; and
• Determine whether the final fixed price at the end of the design phase is likely to be significantly different (i.e., greater than ~10%) from the current target price.

The design phase will conclude with a DOE decision—authorization to proceed with the subsequent construction and operations phase. This decision has the following two parts.

• Evaluation of Design Phase Deliverables and Payment Determination. By the end of this phase, BNFL will complete a series of technical, regulatory, and financial deliverables, and will commit its own equity to the project, which will be augmented with additional financial backing to pay for facility construction. The negotiated contract provides an incentive fee to be paid for successful completion of these steps and for reducing project construction and operating costs.
• Proceed with Construction and Operations. At the end of the 24-month design phase, DOE will decide whether to proceed with the subsequent construction and operations portion of Phase I or to pursue one of several other approaches to complete Phase I. BNFL’s authorization to proceed will depend on DOE receiving acceptable fixed-unit prices, a substantial equity commitment by BNFL, other significant financing arranged by BNFL, and acceptance for review of their design for nuclear and chemical process safety. A key element of this financing will be BNFL equity, which represents BNFL’s investment in the success of the project. If DOE decides not to proceed with BNFL, other approaches to consider include: (1) obtaining the treatment services under another contracting process or (2) proceeding with a modified work scope that would be developed through optimization efforts during the design phase.

During the design phase, DOE will continue to use independent reviews by outside experts. These reviews will bring independent perspectives to strengthen the approach taken and will ensure that a decision by DOE to proceed is the best possible approach.

The following sections summarize the approach to finalizing the project’s financing structure, (Section 5.2.1), the optimization efforts that will seek to improve the cost-effectiveness of Phase I (Section 5.2.2), and the expected advancements in the project’s regulatory approach (Section 5.2.3).

5.2.1 Completion of Project Financing Approach

During the contract negotiations with BNFL, DOE’s objective was to assign substantial levels of technical, performance, and financing risk to BNFL to retain strong performance incentives. At the same time, DOE sought an appropriate balance between the allocation of risks to the contractor and the ultimate cost of the project to the government as discussed in Section 3.4. The negotiated contract with BNFL contains a framework for the private financing structure. During the 24-month design period following the contract authorization to proceed, DOE and BNFL plan to finalize that financing structure and establish final fixed-unit prices that are commensurate with the risks faced by each party. The financing structure is organized around the two separate parts of Phase I, Part B: financing for the design phase and financing for the construction and operations phase. Figure 5-3 presents an overview of these elements.

Financing for the Design Phase. Based on the current scope of work, the estimated cost for the design phase is approximately $350 million.¹ BNFL will finance this work with its working capital. No government involvement in financing project costs is contemplated during this 24-month period.

With successful completion of the design phase, the contractor has the opportunity to receive immediate payment of $50 million of the estimated $350 million. This payment involves a base fee payment of approximately $20 million and an incentive fee payment of up to $30 million. Both fee payments are dependent upon BNFL reaching financial closure. In addition, the amount of the incentive fee is dependent on BNFL’s success in reducing the project’s construction and operations costs. BNFL’s costs during the design phase are not paid by DOE at financial closing and will be carried into the construction and operations phase. They will be paid out as treated waste is delivered to DOE. In effect, the majority of BNFL’s investment during the 24-month period would not be recovered until waste is successfully processed. BNFL’s working capital is at risk during the design phase in the event that DOE terminates the contract for default. If DOE terminates the contract for convenience, then DOE would compensate BNFL for its negotiated settlement costs.

Financing for the Construction and Operations Phase. If authorized by DOE, the construction and operations phase of the project will begin immediately after BNFL secures adequate project financing and provides acceptable fixed-unit prices. In addition to equity funding, the financing structure for this contract phase may involve two other sources of funds:

• Non-Recourse Debt; and
• Recourse Debt.

Figure 5-3. Financing Strategy for TWRS Project (8 Kb)

The definition and the use of each of these types of funds are described below.

• Equity. Equity represents BNFL’s direct corporate investment in the success of the project. BNFL’s equity investment would be at risk if the project should fail because of its inadequate performance. This money would be placed at risk by BNFL and is in a "first-loss position," i.e., if the project generates lower than expected revenues, BNFL may not recover its equity or earn a return on that equity. Therefore, this project financing requires a commensurate financial return. The return BNFL actually realizes will depend directly on the contractor’s ability to design, construct, and operate the facility in an efficient, cost-effective manner.

  Increasing the equity commitment by BNFL will strengthen the incentive to perform, but will lead to higher fixed-unit prices. DOE and BNFL will seek an appropriate balance between equity commitment and fixed prices. If the equity commitment is insignificant, it will provide limited motivation to the contractor for successful project completion because the contractor has little to lose as a result of non-performance. However, if DOE requires an inordinately high level of equity commitment, this financing approach unnecessarily increases the price of the project. This occurs because the contractor return requirements for equity financing are much higher than debt interest rates. BNFL equity can be supplied by the BNFL parent company, other contractor team members (Bechtel, GTS Duratek), and third-party investors.

  The BNFL equity would include direct funding of project costs and "firm and irrevocable undertakings" (e.g., letters of credit) to pay project costs and fund company obligations, such as performance warranty payments.

• Non-Recourse Debt. Non-recourse debt is lent to a project by banks and other lending institutions. Payment of this debt is secured solely by the revenues of the project, liquidated damages, contingency reserves, process warranties, and other funds. The payment is non-recourse to BNFL as a corporation and receives no support under the contract in the event of non-payment because of contractor fault. That is, lenders will focus solely on the cash flows of the project and the project’s ability to meet debt service requirements. Lenders of this type of debt are first to receive project cash flows but do not have additional assurances for repayment of principal and interest (see Recourse Debt below). This debt is in a "second-loss" position because, to the extent that revenues do not cover costs, its principal and interest will not be paid.

  Non-recourse debt commands a higher interest rate in the market than recourse debt but is substantially less expensive than the equity funds. Prior to lending funds, the non-recourse lender would conduct independent oversight of the project for construction and operations of the facility. This independent third-party review will give DOE additional assurances that the team and technology selected have a high probability of success in the construction and operations phase of the contract. DOE recognizes that lenders perceive "nuclear" waste remediation projects as having a high-risk profile. Accordingly, DOE is working with non-recourse lenders to help potential lenders understand the technical risks. This will increase the likelihood of obtaining non-resource financing and help to achieve an acceptable balance of risk.

• Recourse Debt. As with non-recourse debt, recourse debt is lent to a project by banks and other lending institutions. Also, as with non-recourse debt, in the event the contractor has performance problems that increase the internal project costs, available sources of project funds (not money from the lender or DOE) would be accessed to fund necessary modifications to the project. Those sources normally would include liquidated damages, equipment and process warranties, contingency, and the contractor’s standby equity. However, recourse debt relies, in part, on the government’s commitment to support and/or take over ownership of the project after all contractor resources have been depleted. If DOE determines that the contract should be terminated, the termination settlement would include, as an allowable cost for the contractor, the amount of the outstanding recourse debt. The provision of recourse debt will substantially reduce the interest costs associated with the project, and without this provision, the contractor is unlikely to be able to arrange project financing with any private lender.

  The anticipated structure places significant levels of private equity and debt at risk prior to DOE being adversely impacted. By placing the equity and non-recourse debt commitments in "first-loss" and "second-loss" positions, respectively, the financing package ensures that the contractor is motivated to successfully complete the project.

The design phase of the contract will be used to structure a financing package that balances the use of equity, non-recourse debt, and recourse debt. The contract establishes a minimum level of equity that BNFL will invest in the project, and BNFL must use its best efforts to attract non-recourse debt. In addition, DOE will evaluate the tradeoffs between government and private debt to determine the best overall mix of equity, non-recourse, and recourse debt, as well as the amount of any other government participation.

5.2.2 Optimization of the Technical Approach

During the first six months of the design phase, DOE and BNFL will address selected technical specifications to seek improvements in cost and technical performance, and BNFL will submit their design safety approach. A value engineering process will be used to assess the impacts of engineering changes on cost. This process also will determine tradeoffs among the changes and will find lowest-cost solutions. DOE and BNFL will work together to identify beneficial changes, and selected changes will be implemented early in the design process to minimize the impacts on project schedule.

BNFL’s Part A deliverables provided some insights regarding the potential cost impacts of some project specifications. For example, project specifications led to a LAW treatment service that was more expensive than estimated previously, and both DOE and independent reviewers concluded that opportunities to lower costs without reducing quality should be sought. Detailed analysis of BNFL costs indicated two areas of cost savings that will be a particular focus of attention are:

• LAW Container Specifications. The contract specifications require BNFL to produce an immobilized LAW that fits in a metal box suitable for handling and storage. This specification was established in response to public concerns over uncertainties in final waste form performance and the desire to ensure that wastes could be retrieved in the future. Retrievability is not a legal or regulatory requirement and is not applied at other DOE sites. Based on BNFL’s Part A cost estimates, independent reviewers determined that this specification may be a significant driver on overall LAW treatment costs and should be assessed during the design phase.
• Immobilized LAW Product Specifications: The BNFL approach produces a glass monolith within the container. Other waste forms—either non-monolithic glass or non-glass—could be acceptable if they can be demonstrated to meet performance requirements. Also, prior studies at Hanford have indicated that the total cost of immobilization with glass would not be significantly different from the cost for alternative waste forms. Cost information from the BNFL Part A deliverables, however, suggests that this issue should be re-examined.

Optimization is planned to continue beyond the design phase and will include additional technology development by DOE in preparation for future Phase II requirements. Such technology development can provide upgrades (e.g., more cost-effective technology than the current technology planned for use by BNFL). In addition, technology development will help to maintain competitive pressure on BNFL because the technology will be available to competitors. DOE will pursue using technology development funds (possibly cost-sharing with private companies) for further development of current technologies or to further demonstrate high-potential, but still unproven, technologies. This approach will benefit future DOE national needs (including Phase II of TWRS waste treatment) by making a broader range of technical solutions available for bidders.

5.2.3 Regulatory Activities During the Design Phase

During Part A and subsequent negotiations, the approach to regulatory compliance has been defined and agreed upon by DOE and BNFL. However, uncertainty remains in the details, and the design phase will further refine the approach.

During this design phase, BNFL will submit a number of deliverables and draft compliance documents for DOE review and/or concurrence where joint responsibility exists for environmental compliance. These deliverables are a vehicle for BNFL to propose the details of its approach to meet the environmental requirements under the Phase I contract and will, after DOE review and/or concurrence, provide assignment of the BNFL and DOE responsibilities for the achievement of these key environmental, safety, and health accomplishments. These deliverables and draft compliance documents include those listed below.

• Revised Environmental Plan. This plan identifies BNFL’s approach for environmental protection, compliance, and permitting, including: (1) all planned environmental permitting and compliance activities for Part B, (2) a detailed permitting and compliance schedule, and (3) environmental monitoring and reporting requirements.
• RCRA Permitting. BNFL will prepare a RCRA permit application for its facility and will also prepare a permit modification for its operation of the DST provided as a feed tank. BNFL’s permit conditions will be incorporated into the Hanford Site’s overall RCRA permit (Ecology 1994), which will then be co-signed by BNFL.
• Risk Assessment Work Product. The Risk Assessment Work Product will be the document developed as a result of BNFL’s negotiated agreement with the regulators to demonstrate that the treatment facility will meet required environmental performance standards for a thermal treatment facility under RCRA.
• Approach for Immobilized HLW Delisting. BNFL will document for DOE review and concurrence an approach to obtain an exclusion and/or exemption (delisting) for the removal of the immobilized HLW product from RCRA and Hazardous Waste Management Act regulation.
• Approach to Land Disposal Restriction Compliance for Immobilized LAW: BNFL will develop and document the approach for demonstrating compliance with the RCRA land disposal restrictions for LAW and collect characterization and demonstration-scale treated waste product data to support the compliance demonstration.

During the design phase, BNFL also must submit several nuclear-safety-related deliverables to the Regulatory Unit as part of a comprehensive regulatory process. These deliverables must demonstrate that BNFL will achieve adequate radiological, nuclear, and process safety through requirements that are properly defined, implemented, and maintained. The required deliverables include the following.

• Revised Standards Approval Package. This submittal will include BNFL’s revised set of recommended radiological, nuclear, and process safety standards and requirements. It also will describe BNFL’s approach to standards-based integrated safety management. Regulatory approval of this submittal will provide assurance to BNFL that its safety basis (safety technical approach and safety management practices) for the balance of design and for projected construction, operation, and deactivation activities is adequate and acceptable.
• Construction Authorization Request. BNFL will formally request authorization to commence construction activities. The Regulatory Unit will issue a construction authorization upon determination that
  • BNFL’s safety-related activities and design are being conducted in accordance with its approved Standards Approval Package;
  • BNFL’s design properly accounts for the natural and man-made external events associated with the designated site;
  • BNFL is qualified, by reason of experience and training, to perform the proposed construction;
  • BNFL’s construction procedures are adequate to ensure that the construction-related aspects of safety standards and requirements will be properly implemented;
  • BNFL’s quality assurance plan is adequate and has been implemented such that the intended quality will be assured in the safety-related portions of the design, construction, and pre-operational testing and that the quality assurance records will attest thereto;
  • The radiological, nuclear, and process hazards associated with facility operation, including those from postulated accidents, have been adequately by assessed, sufficiently controlled or mitigated, and adequately documented in a formally controlled Preliminary Safety Analysis Report submitted by BNFL and formally approved by the Regulatory Unit, to establish a basis for safe operation and an unambiguous definition of the safe-operating envelope;
  • The deactivation plan is acceptable;
  • The drafts of plans and programs to be finalized as elements of the operating authorization request and implemented during operation are adequate and acceptable; and
  • BNFL has made a commitment to comply with the conditions of the authorization agreement associated with the construction authorization.

As part of the overall Construction Authorization Request, BNFL intends to submit a Limited Construction Authorization Request for site preparation and excavation. Approval of this request by the Regulatory Unit will permit early construction activities with little or no potential to impact adversely the radiological, nuclear, or process safety aspects of the facility. BNFL must provide sufficient detail for the Regulatory Unit to review the request and reach an approval decision.

The fundamental regulatory requirements were established in the initial contract for Phase I. During the design phase, the design will be developed consistent with standards committed to by the contractor during Phase I. As the design develops, the contract calls for technical exchanges between DOE and the contractor regarding the implementation of the requirements. This will help avoid situations where the contractor’s design or facility fail to be adopted by DOE because of failure to communicate regulatory requirements.

5.3 Construction and Operations Phase

This part of Phase I will include the completion of detailed design, construction, startup, testing, and operation of the facility to provide waste treatment services at the fixed-unit prices established at the end of the design phase. DOE will provide tank waste and will order at least a minimum quantity of waste treatment services from BNFL during construction and operations. As an option, DOE may order additional treatment services if feed is available and BNFL has the processing capability.

The negotiated contract sets a minimum-order quantity of 6,000 "units" of LAW feed processed, and 600 (4.5-meter-long) canisters of immobilized HLW. Units of LAW are defined as 1 unit per metric ton of sodium for Envelope A, 2.5 units per metric ton of sodium for Envelope B, and 1.15 units per metric ton of sodium for Envelope C. The difference among feed envelopes reflects the difference in difficulty of processing because of the feed composition. The HLW canisters will contain optimally loaded, immobilized waste, where the optimal loading is defined in the contract based on the limiting constituents of the specific feed batch. These minimum order quantities are approximately equivalent to those expressed previously for two contractors in the 1996 contracts in metric tons of sodium processed for LAW and metric tons of oxides for HLW.

During construction and operations, BNFL will initiate an HLW vitrification service that will be capable of treating the minimum-order quantity (i.e., producing 600 canisters of optimally loaded, immobilized HLW) during Phase I. BNFL also will include LAW vitrification services capable of immobilizing a minimum of 6,000 units of LAW during Phase I. BNFL will operate DST AP-106 as a waste feed receipt tank. This minimum-order quantity will treat approximately 10% of the Hanford tank waste and 20% to 25% of the radioactivity.

The Phase I waste processing will immobilize some of the most dangerous wastes stored at the Hanford Site and will significantly reduce risks associated with tank waste storage. The candidate wastes for the Phase I service are currently stored in 9 DSTs and 2 SSTs. Because of waste transfers among tanks, processing of those wastes will free up valuable DST space to enable transfer of waste from high-risk SSTs. The 11 tanks are detailed below.

• Two tanks (AZ-101 and AZ-102) contain 12% of the radioactivity in the Hanford tanks (40% of the radioactivity in the DSTs).
• Two tanks (AN-102 and AN-107) have high levels of complexed strontium-90, plutonium, and americium. Should these tanks leak, these complexed radionuclides are believed to be mobile in the vadose zone.
• Four tanks (AN-103, AN-104, AN-105, and AW-101) are among the six DSTs that generate flammable gases and are on the Hanford Tank Watch List.
• One SST (C-106) contains a relatively large fraction of insoluble solids. This tank is the only high-heat tank on the Hanford Tank Watch List.
• One SST (C-104) contains a relatively large fraction of insoluble solids.
• One DST (AY-102) will accept the waste retrieved from tanks C-106 and C-104. The liquid from tanks AY-102 will be used for sluicing tanks C-106 and C-104 to assist in retrieval.

If DOE exercises the option for additional waste treatment and immobilization beyond the stated minimum-order quantities, BNFL will provide waste treatment services at fixed-unit prices to be negotiated. LAW and HLW feed envelopes, the quantity to be processed, and the price for treatment will be defined and agreed upon at the time the option is exercised.

5.3.1 Project Interfaces

The Phase I project identified all interfaces between BNFL and DOE, as shown in Figure 5-4. The details of these interfaces are specified in Interface Control Documents (BNFL 1998a), which are contractual documents that describe the BNFL and DOE requirements at each interface. The ICDs specify all physical interfaces (i.e., what item is transferred, who is responsible for each action, and where the item is transferred), interface schedule (i.e., when a specific item is transferred), and administrative interface (i.e., procedural details of how items are transferred).

Figure 5-4 shows that DOE is responsible for providing utilities, services, facilities, equipment, land, and roads at no cost to BNFL. BNFL will produce the immobilized products, which will be provided to the DOE. DOE also is responsible for taking certain wastes (e.g., radioactive solid waste), while BNFL remains responsible for some of their waste (e.g., liquid sanitary waste).

The Interface Control Documents have been developed over the course of Part A and have been reviewed by DOE, BNFL, and the Hanford M&I Contractor in meetings of the Integrated Product/Process Teams. Section 6 contains additional detail on the Integrated Product/Process Teams. The Integrated Product/Process Teams interactions have been extremely valuable in defining the details of integration that must occur if the waste is to be retrieved, transferred, immobilized, and stored successfully. Section 5.5 discusses specific obligations incurred by the DOE for these interfaces.

5.3.2 Waste Feed Specifications

A critical success factor for Phase I waste treatment and immobilization will be DOE’s ability to reliably deliver waste feed to BNFL with a well-characterized chemical and radiological composition. The waste feed characteristics have a direct impact on the facility design and in particular the waste separations steps that are required. DOE’s strategy for tank waste feed specification has been to define waste feed envelopes, rather than to specify actual tank contents. These envelopes define the maximum chemical and radionuclide concentrations to be sent to BNFL for three LAW envelopes and one HLW envelope.

Figure 5-4. TWRS Phase I Project Interfaces (25 Kb)

DOE has defined feed characteristics that it can meet with high assurance, yet are specific enough to enable cost-effective facility design and operation. DOE used available characterization data and has focused additional characterization activities on the specific needs for Phase I waste processing. Waste feed conforming to the defined waste feed envelopes will undergo the following specific treatment prior to immobilization in BNFL’s facility.

• Envelope A (LAW) feed requires the removal of radioactive cesium-137 and technetium-99.
• Envelope B (LAW) feed requires the removal of radioactive cesium-137, technetium-99, and may contain constituents, such as sulfate, that limit the quantity of waste that can be immobilized in a fixed quantity of glass.
• Envelope C (LAW) feed requires the removal of radioactive cesium-137, technetium-99, strontium-90, and transuranic elements.
• Envelope D (HLW) feed requires removal of soluble components.

The specifications for the waste envelopes were developed for the 1996 RFP and are based on existing characterization data and estimated waste process limits. To refine these waste envelopes during Part A, both contractors provided input to DOE’s waste characterization objectives. Subsequent characterization efforts have sought to provide better information on those waste constituents that have the greatest impact on waste processing limits (both pretreatment and vitrification). Since the waste envelopes were first established, several changes have been made to optimize them in an effort to increase DOE’s ability to deliver feed and to reduce project cost.

Based on projections and historical data, DOE expects that approximately 90% of the total TWRS waste inventory will fall within the waste envelopes. For waste that does not fall within the specified envelopes during Phase I, DOE can reserve that waste for Phase II, blend it with other wastes to bring it within specification, or process it at a negotiated price with BNFL, provided that BNFL’s facility is capable of treating the out-of-specification waste.

DOE will retrieve Phase I LAW feed from several DSTs. The identified tanks contain 50% more feed than the contract requires, which provides DOE with additional assurance that sufficient Phase I feed can be provided. The candidate HLW feed is currently located in a small number of DSTs and SSTs. All candidate source tanks for LAW and HLW feed have been placed under configuration control to ensure that the compositions are not unknowingly altered.

All waste in candidate source tanks was characterized for chemical composition and radionuclide content prior to the definition of waste feed envelopes. More than half of the tanks with LAW feed have been recharacterized since that time and were found to be within the waste feed envelope specifications. DOE also has recharacterized one of the potential HLW source SSTs, and this tank waste also was found to be within specifications. The remaining source tanks for both LAW and HLW will be fully characterized early in the design phase.

Small-quantity waste feed samples from all four envelopes were supplied to both BNFL and LMAES during Part A. The analysis of all of those samples indicated that the compositions fell within the waste feed envelopes. DOE will supply BNFL with additional samples during the design phase, which will provide further confidence in the feed characterization.

During operation of BNFL’s Phase I facility, DOE will certify that the waste is within specifications, and BNFL will concur with this certification prior to receiving the feed. Prior to transferring the feed to BNFL, DOE will provide the contractor with samples to confirm the analysis. Characterization for processing will occur within BNFL’s facility to ensure that each unit operation is functioning properly and that the final product will meet requirements.

DOE recognizes that robust feed delivery systems and procedures are keys to the success of the TWRS Phase I project. The Hanford M&I Contractor’s plans for feed delivery were subjected to extensive review during the readiness-to-proceed assessment (see Appendix B). DOE already has begun to establish binding and financially significant performance agreements with the Hanford M&I Contractor to help ensure that DOE meets its commitments for timely delivery of feed meeting required specifications.

5.3.3 Waste Product Specifications

The requirements for the immobilized waste products are described below.

• Immobilized LAW. Under current specifications, BNFL will produce an immobilized LAW glass encased in a stainless steel box. The requirements of the immobilized LAW are based on nationally recognized standards (10 CFR Part 61, i.e., "Licensing Requirements for Land Disposal of Radioactive Waste") for LAW and specific requirements for the disposal of LAW at the Hanford Site as developed with regulators and stakeholders over several years.
• Immobilized HLW: Under current specifications, BNFL will produce an immobilized HLW form—borosilicate glass encased in a stainless steel canister. The waste form requirements are defined by the Office of Civilian Radioactive Waste Management for acceptance of treated HLW at the proposed national repository. The requirements are very similar to those required of the Defense Waste Processing Facility at the Savannah River Site and the West Valley Demonstration Project in New York State for their immobilized HLW.

Changes in the product specifications could result from optimization work in the design phase and/or changes in external requirements (e.g., repository waste acceptance criteria). Such changes would be implemented through contract modification.

DOE will make payment after BNFL demonstrates that products and secondary wastes resulting from waste processing meet specifications. The basis for payment is the defined units for the LAW and the number of HLW canisters produced. BNFL is not compensated for the secondary waste produced in process operations, but will have incentives for waste minimization.

5.4 Phase I Schedule

Table 5-1 shows the current schedule for the BNFL contract, including the major project milestones. This schedule may be refined as a result of work in the design phase. As shown in Figure 5-5, BNFL has provided two sets of milestone dates that differ depending on BNFL’s estimate of their likelihood of achievement (i.e., either 50% confidence or 90% confidence). For consideration of potential impacts on TPA milestones, the 90% confidence dates, which are set forth as targets in the contract, are assumed.

The Phase I contract, with fixed-unit pricing and private financing, provides a strong incentive for the contractor to improve upon the schedule estimates shown in Table 5-1. BNFL has a strong financial motivation to successfully and efficiently process waste. The longer it takes to process waste, the greater the finance costs, which will then erode BNFL’s return on its investment. BNFL’s profit also will be at risk if there are schedule delays.

The schedule shows that the BNFL HLW facility can be brought on-line earlier than the LAW facility. This is largely because of HLW experience gained at the Defense Waste Processing Facility at Savannah River, South Carolina, and the West Valley Demonstration Project at West Valley, New York. HLW vitrification has been ongoing for several years now, and the operations and design requirements are better understood. With LAW vitrification, the melter size needs to be significantly larger than for HLW (approximately a factor of 10 times the size). This larger melter requires a pilot melter demonstration to establish melter design prior to finalizing the facility design and results in a longer design period for LAW vitrification than for HLW vitrification.

The TPA includes two sets of milestones that directly apply to the Phase I project. The first set, known as the Primary Path, applies to the previous plan where two contractors would process waste during Phase I. This path would have required start of hot operations for LAW processing by December 2002. The second set of milestones, known as the Alternate Path, applies to situations where DOE does not authorize two contractors to proceed. The Alternate Path requires start of hot operations for LAW processing by December 2003.

The BNFL target schedule will put DOE on a path to closure of SSTs and DSTs and completing the vitrification of HLW and LAW. The schedule will not be finalized, however, until completion of the design phase. The start of HLW pretreatment and vitrification with BNFL’s target schedule would occur more than two to three years early (between February 2006 and February 2007) under the BNFL contract. The BNFL target schedule would, however, require some changes in near-term TPA milestones. The targeted start of LAW vitrification (TPA milestone date of December 2003) would occur about three to four years later (between January 2007 and January 2008).

These schedule changes result from the reduction of concurrent design and construction. BNFL developed its schedule assuming that design would be largely completed before initiation of construction. This revised scheduling assumption leads to greater confidence that the facilities will come on-line as scheduled, and once on-line, will operate successfully and safely. The inclusion of the design phase as a separate phase in the contract does not delay BNFL’s waste processing schedule; it simply delays the point in the schedule at which fixed prices are established.

In general, BNFL’s schedules for some Phase I hot operations will favorably affect the confidence levels assigned to schedules for several TWRS projects that are necessary to support BNFL’s operations (e.g., infrastructure support and interim storage).

The proposed schedule for Phase I will require approval by the state of Washington and EPA through the renegotiation of applicable TPA milestones. Figure 5-5 compares the current Phase I schedule with the current TPA milestones. The Department is currently conducting a detailed review of potential impacts of the BNFL schedule on the out-year TPA milestones. DOE has requested the Hanford M&I Contractor to determine the effect of the revised contract schedule on the TWRS baseline, particularly on SST retrieval and associated TPA milestones. As schedules are finalized through the end of the design phase, DOE will further refine the schedule and will propose and negotiate any necessary changes to the TPA milestones with the state of Washington and EPA.

5.5 Allocation of Project Risks and Obligations

A key consideration in building this contract is the allocation of risks and other obligations (e.g., financial, regulatory, and environmental) between DOE and the contractor. As discussed in Section 3, the DOE strategy for allocating risks has evolved. The design phase has been developed to reduce project risks and to arrive at the best allocation of the remaining risks. Section 5.2.1 addresses the allocation of financial obligations under this contract.

Figure 5-5. Comparison of Tri-Party Agreement and BNFL Milestones (7 Kb)

5.5.1 Allocation of Project Risks

Figure 5-6 illustrates the allocation of risks under this contract. Understanding the risks allocated to either party or shared by both parties is particularly important to understanding the agreement for the two phases of this contract.

During the negotiations for Part B of the contract, the 1996 contract with BNFL was modified to reduce significant risks to the contractor, particularly financing risks. These changes were motivated by a desire to lower the ultimate unit price for waste treatment services.

Under this contract, BNFL is ultimately accountable for the successful design, construction, and efficient operation of its facility. Among the principal risks allocated to BNFL are those detailed below.

• Performance During the Construction and Operations Phase. BNFL is responsible for constructing and operating the waste treatment plants and for producing acceptable immobilized waste products. DOE will verify that the immobilized products meet storage and disposal specifications. BNFL’s investment in construction and operations will only be recovered by successful treatment and delivery of waste products. If those operations do not meet expectations because of poor technical performance, shortcomings in design, or other reasons, BNFL’s revenues will suffer.

Figure 5-6. Risk Allocation (17 Kb)

• Termination for Default. During the design phase, if DOE terminates the contract for default, BNFL risks losing its investment in the project including up to $25 million of internal research and developments funds invested in a pilot melter needed to test and demonstrate its design. During the construction and operations phase, BNFL equity will be at risk (BNFL will seek to maximize its equity commitment such that it falls within a range of $200 million to $500 million).
• Regulatory Compliance. Once environmental permits are in place, BNFL will be responsible for operating its facility in compliance with those permits. Failure to do so will directly affect BNFL’s operating schedule and costs and erode potential profits. In addition, BNFL will be required to reimburse DOE for the amount of fines and other associated costs for violations caused by contractor activities that are not in accord with the contract.

Under this contract, many risks, including the following, are shared by DOE and BNFL.

• Permitting Risks. After the Draft Permit and Notices of Construction for Operations of a Dangerous Waste Treatment Facility are issued, DOE and BNFL work together to secure the final permits from regulatory agencies. Issues will be handled by the most appropriate party, or both, on a good-faith basis. BNFL may be reimbursed for costs if permits are denied following a good faith effort and if the problems are not the fault of BNFL.
• Performance During the Design Phase. BNFL has incentives that increase payment for the design phase based on reducing target prices and reaching financial closure. DOE retains some risks because, if it chooses to terminate the contract, it must pay BNFL termination costs. These costs would approach $275 to $350 million towards the design phase, depending on the circumstances surrounding the termination.
• Financing. Financing risks are shared through equity and private financing by BNFL and termination payment commitments by DOE. The exact mix of financing for the construction and operations phase will be determined in the first 20 months of Part B. In addition, BNFL faces the risk associated with private financing interest rates, and DOE faces the inflation rate risk.
• Decommissioning. A specific amount of BNFL’s payments will be set aside for deactivation. If deactivation costs exceed budgeted funds, BNFL is responsible for the additional cost. DOE is responsible for decommissioning facilities after deactivation by BNFL.
• Intellectual Property Rights. To ensure that the project can proceed on another basis, if that becomes necessary, DOE has the right to obtain BNFL’s intellectual property (design and technical information) if the contract is terminated for convenience. DOE, however, faces the risk under this circumstance that transferring this information to another contractor could cause a delay in the overall project.

The risks that are allocated to DOE through this contract include the following.

• Pre-existing Site Conditions. DOE agrees to reimburse BNFL for any expense that may be incurred by the contractor arising out of any pre-existing site condition, such as radiological contamination.
• Termination for Convenience. DOE has the right to terminate the contact for convenience of the government. However, such termination will result in obligations and costs under the terms and conditions of the contract, including those relating to reimbursement of financing costs.
• Uncontrollable Circumstances. DOE will assume the risk, for certain acts, events, or conditions uncontrollable by the contractor that have a material and adverse effect, including cost or schedule, on the contractor to perform its obligations.
• Idle Facilities. DOE may incur idle facilities payments if the Department does not provide waste feed according to terms of the contract for schedule, quantity, and type.

5.5.2 Project Obligations of BNFL and DOE

DOE provides certain utilities and services to BNFL under the contract. For the most part, DOE carries out its obligations through the Hanford M&I Contractor and does so at no cost to BNFL.

The most significant of these obligations are described in a separate set of documents called Interface Control Documents, as shown in Figure 5.4 and discussed in Section 5.3.1. Specific obligations of the DOE include the following.

• Raw and Potable Water. DOE is required to provide adequate water for waste processing operations and fire control.
• Electricity. DOE will provide 33 MW of electricity.
• Land and Roads. DOE will provide BNFL land for siting its plants, parking lots, and road access to that land.
• Waste Treatability Samples. DOE will provide BNFL samples of the waste for the contractor’s use in testing its treatment and immobilization processes.
• Waste Feed Tank. DOE will provide to BNFL a feed tank for its use. The tank will be warranted by DOE for use on the project. BNFL will prepare all permit changes and carry out all modifications and upgrades.
• Waste Feed. DOE will provide BNFL with LAW and HLW in the amounts and type specified in the contract. Through the Hanford M&I Contractor, DOE will retrieve the waste from SSTs and DSTs, transfer it to a staging tank, test the waste to ensure it meets the chemical specifications, and deliver the waste feed to BNFL.
• Returned Pretreated LAW and Entrained Solids. DOE will accept and store pretreated waste during the first two years of operation and entrained solids for the duration of the contract from the pretreatment process.
• Liquid Effluents and Solid Waste. DOE will accept liquid effluents and solid wastes meeting acceptance criteria that are generated in the course of waste treatment and will dispose of them on the Hanford Site.
• Immobilized Products. DOE will verify that immobilized LAW and immobilized HLW products meet specifications and then accept these products for storage and disposal, as appropriate.

DOE and the contractor have allocated regulatory and environmental obligations on the basis that: (1) where DOE and the contractor have joint obligations, the contractor is required to take lead responsibility; and (2) where DOE has no obligation, the contractor has sole responsibility. Given the current project maturity and the responsibilities that DOE could delegate, the following allocations have been made for operations.

• The contractor is responsible for occupational safety and health under regulatory oversight.
• The contractor is responsible for radiological, nuclear, and process safety under regulatory oversight.
• DOE is responsible for regulating radiological, nuclear, and process safety (through the independent TWRS Regulatory Unit).
• The contractor is responsible for assuring its treatment facilities are permitted and operated within Hanford’s environmental compliance framework and applicable laws and regulations.

The following allocations have been made for waste management.

• The contractor is responsible, with DOE concurrence, for identifying and implementing a technical and regulatory path for producing RCRA-compliant HLW and LAW waste forms.
• DOE is responsible for obtaining RCRA delisting for HLW (using contractor data and technical support).

Further definition of responsibilities is needed and provided for in the contract. The contract has provisions that will drive both parties toward increasingly well-defined roles and responsibilities as the project matures. In effect, the contractor is accountable for its environmental, safety, and health program with respect to both safe operations and production of treated defense nuclear waste. DOE assumes responsibility for its roles as regulator for radiological, nuclear, and process safety; land owner; and customer for waste treatment services.

5.6 Project Costs and Cost Savings

This section addresses project costs and estimated cost savings that are expected over the duration of the contract with BNFL. These assessments are based on conceptual design work and other information developed by BNFL during the first 20 months of the TWRS Phase I contract as well as data developed by DOE. The estimates will be updated during the next phase of the contract as the BNFL design becomes more mature, the technical approach is optimized, the specific mix of private and public financing is determined, and final fixed-unit prices are set. Specifically, this section addresses the following questions.

• What are the expected costs for the design phase and the construction and operations phase? (Section 5.6.1)
  • What incentives will be used to contain costs?
  • How and why do these costs differ from previous estimates?
  • What is the cost of private versus government financing?
• Do the expected project costs represent savings relative to other possible contracting approaches? (Section 5.6.2)
• How do these costs compare to other DOE vitrification projects? (Section 5.6.3)

5.6.1 Project Costs

This section addresses project costs that are expected over the two phases of the BNFL contract—the 24-month design phase and the construction and operations phase. For each phase, DOE has defined incentives to contain future cost growth.

Design Phase Costs. Based on the contract scope of work, the estimated cost for the design phase is approximately $350 million. BNFL will finance this work with its working capital. No government involvement in financing project costs is contemplated during this 24-month period.

With successful completion of the design phase, the contractor has the opportunity to receive immediate payment of $50 million of the estimated $350 million. This payment involves a base payment of approximately $20 million and an incentive fee payment of up to $30 million. Both fee payments are dependent upon BNFL reaching financial closure. In addition, the amount of incentive fee is determined by BNFL’s success in reducing the project’s construction and operations costs.

BNFL’s remaining costs of approximately $300 million for the design phase are not paid by DOE at financial closing and will be carried into the construction and operations phase. BNFL’s working capital is at risk during the design phase in the event that DOE terminates the contract for default. If DOE terminates the contract for convenience, then DOE would compensate BNFL for its negotiated settlement costs.

To ensure that design phase costs are reasonable, BNFL’s costs will be subject to certified cost and pricing requirements. DOE will only allow actual costs consistent with the contract to be included in the waste processing fixed-unit prices. Early in the design phase, BNFL will implement a cost accounting system that will provide certified cost and pricing data for both the design phase and the construction and operations phase. This system will help DOE ensure that only appropriate costs are included in the final fixed-unit prices.

Construction and Operations Phase Costs. The BNFL contract contains target prices for treatment and immobilization services during the construction and operations phase. These target prices will be refined during the design phase as new information becomes available. The agreement negotiated with BNFL establishes a $6.9 billion target price (constant FY1997 dollars) for a 10-year, minimum-order quantity of treatment and immobilization services. (This price includes allowable design phase costs.) This minimum-order quantity will treat 10% of the Hanford tank waste (by mass) and 20% to 25% of the radioactivity (see Section 5.3).

This target price is significantly higher than the original DOE estimate for Phase I. The current Construction Project Data Sheet, included as Appendix C, shows an estimated cost of $3.95 billion ($3.2 billion in constant FY1997 dollars). The higher price is, in part, because the hazards presented by the operations to be performed under the contract necessitated robust facilities for processing and confinement of the waste. These facilities will have a 30-year design life rather than the original concept of a 5- to 9-year demonstration facility. As a by-product of the longer design life, the plant has the potential to treat waste for a longer period, to treat waste with a broader range of composition, and to treat more than half of the tank waste by mass and approximately 95% of the long-lived radionuclides if the plant is expanded with limited additional investment (see Section 4.1.2).

Table 5-2 shows the separate cost elements that comprise BNFL’s target total price for the minimum order quantity. DOE compared the individual cost elements of BNFL’s target price to a separate government estimate of the target prices to ensure that the negotiated target prices were appropriate given the current level of certainty in facility design and financing. This initial comparison identified approximately $1.9 billion in differences between the government’s price estimate and BNFL’s target price. The construction and operations cost in both were similar. The main differences were in fee/profit, general and administrative expenses, insurance, and research and technology costs. Many of these issues were resolved during contract negotiations and led to roughly a $700 million reduction in BNFL’s target prices compared to those offered in its January 1998 submittal. The remainder of the cost issues will be resolved during the first 20 to 22 months of Part B. A final price-reasonableness determination will be completed when fixed-unit prices are finalized at 20 to 22 months after the start of Part B. If prices are too high, BNFL will not be authorized to proceed beyond the 24-month design phase.

Mechanisms to Contain Costs. Prior to the construction and operations phase, DOE will consider the merits of potential changes in the target prices that may be proposed in the context of BNFL’s cost elements and the contract-specified bounds. BNFL will have to supply certified cost and pricing information and must track and explicitly justify the basis for each change from the current cost baseline. Regular reviews are planned during the design phase, including an important review at six months, which will focus on terms and methodology that BNFL will use to establish fixed-unit prices and the mechanism by which cost savings during the construction and operations phase will be shared with DOE.

During the construction and operations phase, DOE will apply several mechanisms to contain project costs.

• The fixed-unit prices established at the end of the design phase will be subjected to price adjustments that are intended to reduce contingencies in BNFL’s fixed-unit price. The precise adjustment mechanisms will be defined during the first six months of the design phase.
• DOE will retain the right to acquire BNFL’s facility design and rights to intellectual property if the contract is terminated for convenience. In addition, DOE may obtain the facility at the end of the construction and operations phase if BNFL’s prices for processing in excess of the minimum order quantity are deemed unreasonable.
• DOE and BNFL also will negotiate waste minimization incentives during the design phase. These incentives are intended to reduce the total lifecycle cost for the project.

Private versus Government Financing. It might appear that substituting the project’s private financing sources with public funding (as in a cost-reimbursement contract) would enable tapping of the government’s relatively lower cost of capital (typically two to four percent lower) and effect cost reductions in the project. Although this argument might appear logical, it oversimplifies the process of allocating risks and costs between the government and its contractor. Often, the debate over private financing assumes the project being financed will achieve the same degree of success regardless of its financing source. Indeed, under this assumption, the interest rate premium attached to private financing is difficult to justify. However, the incentives to contain costs and to ensure project success must be considered in determining the merits of private versus government financing. For example, in a recent report on alternative financing strategies for cleanup projects (GAO 1998), the General Accounting Office concluded:

"While government financing of construction costs would appear to be the most attractive option, under this approach the government is assuming a much greater level of performance risk than it would face under a private financing option. This risk includes the risk that the facility the government finances will not be completed successfully or that the facility will experience significant cost growth. The potential costs associated with these risks could offset – or more than offset – any potential benefits of lower-cost government financing."

Financing costs (i.e., return on equity and interest on debt) account for a significant portion of BNFL’s total target price. The target price also assumes that the project is financed with both equity and debt capital, including between $200 million and $500 million of equity. The remaining portion is financed by debt. The target price also assumes that the pre-tax internal rate of return for the equity portion would be approximately 35% to 40%, while the real interest rate for the debt portion (assuming government credit support) would be 6.8%. Given these assumptions, the finance costs (including the financing, income tax and BNFL fee/profit categories shown in Table 5.2) would be $3.27 billion (constant FY1997 dollars). This results in a weighted average cost of capital of approximately 9% (with rate of inflation removed), assuming the capital is spent over 7 years and repaid over the next 9 years.

By comparison, if the project was financed by the United States instead of by private sector commercial lenders, a real interest rate of 3.8% (comparable to the 9% weighted average cost of capital) would apply (per January 1998 guidance from the Office of Management and Budget) and the interest charge would be approximately $1.1 billion (constant FY1997 dollars).

It should be emphasized that the contractor will not be guaranteed any specific equity return and will only earn the assumed equity return if the project is successful. If the project fails, the contractor’s entire equity is at risk.

During the design phase, DOE and BNFL will finalize the project financing approach, including the specific rates for equity and debt financing, and seek to optimize the relative amounts of public and private financing. The goal of the Department is to develop a final balanced approach in which the higher cost of private financing (compared to government financing) should be offset by the strong incentives to contain cost growth (compared to a cost-reimbursement contract).

The following section addresses the potential for cost savings that could result from this contract.

5.6.2 Potential for Cost Savings

The negotiated contract terms and target prices provide a potential for cost savings to the government compared to traditional contracting methods. However, it is premature to reach a definitive assessment of cost savings until the end of the design phase, when final fixed-unit prices are set and the project financing approach is finalized. In developing preliminary estimates of cost savings, DOE considered the current target prices, including estimates of construction, operation, finance, and other costs, and compared these to the costs expected from a cost-reimbursement contracting approach. Table 5-3 summarizes DOE’s cost comparison of the BNFL contract with potential cost-reimbursement contracting. As the table shows, these comparisons led to a range of estimated cost savings for the BNFL contract.²

As shown in Table 5-3, DOE prepared two separate estimates of the costs that could be incurred under a cost-reimburseable contract. The range of these estimates is typical of the cost estimates prepared at this stage in design development (such estimates typically have a range of + 40%). This range of estimates reflects uncertainties in various assumptions underlying the cost estimates (e.g., the amount of cost growth) and assumptions used to place privately financed and government-financed projects on comparable terms. These cost estimates provide a range of costs that DOE could incur if TWRS privatization was not pursued.

The first cost estimate, shown in column C, used past Hanford Management and Operations contractor cost data and assumed that a cost-reimbursement contractor was requested to proceed with the treatment and immobilization of the tank waste. This estimate was intended to show the costs that would be incurred if the Hanford M&O contractor was asked to perform the Phase I work scope. This cost estimate assumed that there were no lessons learned from the privatization contractors and that the M&O contractor proceeded with the design, construction, permitting and operation of a facility in a manner comparable to historical practices.

The second estimate, shown in column D of Table 5-3, was developed by updating an estimate provided by BNFL prior to delivery of their Part B proposal in January 1998. This estimate assumes that the current technologies proposed by BNFL, as well as their proposed construction, operation and deactivation processes, would be used by BNFL under a traditional DOE cost-reimburseable contract. DOE developed factors that estimate the differences between a privatized fixed price contracting approach and a traditional DOE cost-reimburseable contracting approach.

The estimates in columns C and D were compared with the cost of the BNFL contract, assuming the currently negotiated target price (shown in column B of Table 5-3). It should be noted that various mechanisms in the contract provide the potential to reduce this target price, including technical optimization and incentives to drive down costs. To determine the net cost to the government of the BNFL contract, BNFL’s target prices were adjusted for federal taxes paid back to the government.

As shown in Table 5-3, before comparisons of the costs to the government could be made, adjustments were made to account for three key differences: (1) the Government cost of capital under the cost-reimbursement approach; (2) the amount of federal taxes paid; and (3) estimates of potential cost growth. These adjustments are discussed below.

Government Cost of Capital. The price paid for services under the BNFL contract includes the cost of capital for both equity and debt capital requirements. However, the cost of capital is not included in DOE’s payments to the cost-reimbursement contractor, even though the government has a cost of capital. In effect, there is a cost of money associated with paying a cost-reimbursement contractor as the costs are incurred compared to a fixed-price contractor, which is, for the most part, not paid until waste is processed. To allow for a fair cost comparison, the government’s cost of capital should be added to DOE’s cost of performing the work under the cost-reimbursement contract. This approach is consistent with both public and private financial analysis practices used to place competing investments on common terms.³

Credit for Federal Taxes Paid. The fixed-priced contractor pays considerably more federal taxes than would be paid by a cost-reimbursement contractor. BNFL’s potential profit will likely be substantially larger than the typical 2% to 3% fee earned under a cost-reimbursement contract to compensate for higher risks. Thus, BNFL will pay more in federal taxes than would be paid under a cost-reimbursement contract.

Expected Cost Growth. The last adjustment is made to account for the difference in the potential cost growth under the BNFL contract compared with the potential cost growth under a cost-reimbursement contract. The BNFL contract contains several factors not present in typical cost-reimbursement contracts, which are expected to minimize the potential for cost growth. These factors include:

• The fixed-price nature of the BNFL contract should improve technical and schedule performance relative to a cost-reimbursement approach. BNFL must stay within budget or potentially suffer a reduction in profit. This will lead BNFL to minimize costs in order to
  maximize profits. On the other hand, cost-reimbursement contracts generally have schedule slippage that leads to cost growth. The added costs result from the same quantity of staff taking longer to do the same job.
• The BNFL contract shifts substantial performance risk for construction and operations (including processing technology) to the contractor, thereby creating incentives for the contractor to ensure the success of their approach. This risk sharing for the overall performance of the facility and technology is not present in cost-reimbursement contracts. BNFL’s equity and the desire to recover it, plus an equitable rate of return, drives performance.
• Additionally, private lenders will add a further layer of oversight to the project. The lending community will want assurances that they will recover their principal and interest. To ensure that recovery, they will employ independent engineers and other consultants to study BNFL’s approach, validate the technical approach and the cost estimates, and monitor progress of the project throughout.

5.6.3 Comparison with other DOE Vitrification Projects

DOE has initiated a preliminary analysis to compare the BNFL HLW target prices to the cost of making HLW glass at the Defense Waste Processing Facility (Savannah River, South Carolina) and the West Valley Demonstration Project (West Valley, New York).

The BNFL estimated price for HLW treatment services is approximately $300,000 per metric ton of glass produced for the minimum order quantity. Actual fixed-unit prices will be established at the end of the design phase.

A fair and accurate comparison of this price with the costs of treatment at the South Carolina and New York facilities is made difficult due to differences in the processing configurations, design-life of plants, and designed and realized throughput. In addition, the scope of work to be performed at the facilities differs. The BNFL facility will be used to produce both high-level and low-activity waste glass, whereas the Savannah River and West Valley facilities produce high-level waste glass and cementitious low-level waste forms.

The following comparisons represent an initial assessment that will be refined as the design phase moves forward. Although the comparisons are complex to perform, all three facilities use similar technology and must meet similar requirements for their HLW products.

All three facilities use a joule-heated, liquid-fed, ceramic melter and pour molten glass into stainless-steel canisters to produce glass "logs." The canisterized borosilicate HLW glass from all three facilities must meet specifications and quality assurance requirements prescribed by the Office of Civilian Radioactive Waste Management and the Office of Environmental Management. With appropriate adjustments, cost comparisons with these two existing facilities can provide a reasonable benchmark for BNFL’s estimated price. The following adjustments were made to provide a basis for comparison:

• BNFL’s estimated price for HLW processing (price per metric ton of HLW oxides) was converted to a price per metric ton of immobilized HLW glass.
• West Valley’s costs were adjusted to exclude those costs not associated with HLW vitrification, such as some storage costs, tank farm operations and closure, and waste retrieval.
• Savannah River’s costs were similarly adjusted to exclude costs not associated with HLW vitrification, such as waste water treatment, construction and operation of LAW disposal (saltstone facility), waste retrieval, and tank farm operations and closure.

The adjusted average unit cost for the Defense Waste Processing Facility is $670,000 per metric ton, which assumes a 22-year operating life. The adjusted average unit cost for the West Valley Demonstration Project is $1,228,000 per metric ton for its planned 2.5-year operating life.

In comparison, BNFL’s estimated unit price is approximately $300,000 per metric ton of glass for the minimum-order quantity (assumed to be the first 10 years of operations). BNFL’s facility, however, is expected to have a useful life of 30 years or more. Because the capital cost of the contractor’s facility will be recovered during the processing of the minimum-order quantity, DOE expects to negotiate a substantially lower price on treatment of any waste in excess of the minimum-order quantity. These "post-minimum-order quantity" prices will be established at the end of the design phase.

5.7 Phase I Funding Requirements

Proceeding with the design phase will require that sufficient funds are appropriated to DOE for both the BNFL contract and for the various support projects, which must be completed by the Hanford M&I Contractor. The funding requirements are described in Section 5.7.1 for the BNFL contract and in Section 5.7.2 for the various Hanford M&I Contractor projects required to accomplish Phase I Part B.

5.7.1 TWRS Phase I Funding Requirements

Annual budget appropriations will be required through FY2017 to allow DOE to pay for the treatment, immobilization, and deactivation services to be provided by BNFL during Phase I of the TWRS program, if BNFL is authorized to proceed to the construction and operations phase of the contract.

When DOE pays for waste treatment services under the contract with BNFL, these payments will have two components: a capital portion that pays for amortization of the BNFL waste treatment and immobilization facility and an operating portion that pays for the labor, materials, and other costs associated with providing waste treatment and immobilization services. Since 1997, Congress has appropriated budget authority (BA), totaling $285 million, for the capital portion ("capital BA") through the Environmental Management privatization account. When waste treatment is initiated, the capital BA accumulated in this account will be the source of funds for budget outlays (BO) for the capital portion of the payments for waste treatment services. BA for the operating portion of the payments for waste treatment services ("operating BA") is outlayed in the same year that it is appropriated.

Table 5-4 provides current estimates of BA and BO profiles for Phase I. The operating BA and BO profiles are based on the current BNFL target prices and schedule and will be adjusted during the 24-month design phase. As a result, they do not represent precise budget estimates.

A number of additional factors were considered in developing the capital BA profile, including the following:

• Coverage will be provided for termination liability in accordance with the Anti-Deficiency Act.
• Sufficient funding will be provided to allow BNFL to accelerate the design, construction, and permitting of its facility or to continue design, construction, and permitting in the event of a continuing resolution. The ability to accelerate the project could lead to cost reductions for DOE as a result of the reduced financing costs of the project.
• A level budget request is desirable to avoid the need for unsustainable out-year funding increases.
• Assurance needs to be provided to the private financial community that DOE and the Congress are committed to TWRS privatization; thereby, providing downward pressure on the cost of capital.
• Funds will be provided for the capital portion of the payment to BNFL for services provided.

The capital BA profile will result in instances where there will be unobligated funds and uncosted balances. In the event that BNFL finds a means of accelerating the construction schedule by doing work faster or by ordering material sooner, the unobligated funds serve as a reserve to allow DOE to meet its contractual obligations and cover the additional costs for the accelerated performance. By allowing acceleration of the construction schedule, BNFL should be able to start the facility sooner, reduce the interest costs, and decrease the total cost to DOE. The capital BA profile shown in Table 5-4 would allow an acceleration estimated to be approximately 6-9 months. Since the capital BA provided to DOE is assigned to the BNFL contract, there will be strict accountability of these funds.

The operating BA will be used to pay for the operations costs of the facility when it is treating and immobilizing tank waste. Capital BA has been requested since FY1997 through the privatization account and will continue to be requested through FY2008. Operating BA will be requested from FY2008 through FY2017. As shown in Table 5-5, an overlap in the construction and operation of the BNFL facilities will require DOE to request both capital and operating dollars in some years.

Table 5-4 is based on the assumption that BNFL will be authorized to proceed to the construction and operations phase. If not, a termination settlement would be negotiated with BNFL. The estimated costs of a termination for convenience settlement at the end of the 24-month design phase range from approximately $275 to $350 million, depending on the circumstances surrounding the termination.

If the project moves forward to the construction and operations phase, DOE does not plan to provide a payment in FY2000 equal to the BNFL costs for the 24-month design phase. A maximum payment of $50 million is planned in FY2000, consisting of a base fee of $20 million and an incentive payment of no more than $30 million. The incentive payment is based on BNFL’s ability to minimize the construction and operating costs of the facility. An incentive based on reductions in construction and operations costs was selected because BNFL has the

greatest control over these costs. These costs are also the elements that drive the financing costs of the facility. The payment will be outlayed from the funds currently appropriated in the TWRS privatization account.

If DOE authorizes BNFL to proceed to the construction and operations phase, payments to BNFL for delivery of acceptable product starting in FY2005 to FY2006 will provide the mechanism for repaying that portion of the BNFL costs for the design phase which are not covered by the DOE payment in FY2000.

5.7.2 Hanford M&I Contractor Funding Requirements for Support of Privatization

There are three components of the TWRS program: TWRS base operations, TWRS support to BNFL, and the work to be performed by BNFL. The Hanford M&I Contractor will perform the work associated with TWRS base operations and TWRS support to BNFL. All costs for these two components of the TWRS program are shown on Table 5-5. Costs associated with work to be performed by BNFL were shown on Table 5-4.

The work associated with TWRS base operations shown in Column B must be performed whether or not DOE authorizes BNFL to proceed to the construction and operations phase. These activities include routine surveillance and maintenance of the tanks, receipt of liquid wastes from other site cleanup efforts, continued characterization of the tank wastes, and resolution of safety issues associated with continued storage of the waste in the tanks.

The work associated with TWRS support to BNFL, shown in Column C, includes retrieving wastes from the tanks, delivering feed to BNFL, accepting and storing the low-activity and high-level vitrified waste products, and providing other services to BNFL, such as roads, water, and electricity.

The total cost of TWRS base operations and TWRS support to BNFL (Column D) through the year 2018 is estimated to be approximately $4 billion. This estimate is based on a preliminary analysis that will be refined and verified in FY1999. Although this refinement and verification is likely to result in some changes, DOE is confident that the costs shown are realistic and the Department does not expect any major changes.

Column E of Table 5-5 provides the baseline funding profile for TWRS base operations plus TWRS support to BNFL. This funding profile was developed prior to the time that the decision was made to not consider LMAES for Part B work and before the current agreement was negotiated with BNFL. The treatment and immobilization of tank wastes according to the terms of the agreement with BNFL will necessitate only minimal changes to the baseline funding profile.

5.8 Planning for Phase II

Following completion of the BNFL contract, either after the minimum-order quantity or after possible contract extension(s), DOE will be responsible for decommissioning the Phase I facilities after deactivation by the contractor. DOE will also be responsible for continued safe storage of any returned intermediate waste products (e.g., entrained solids), disposal of all immobilized LAW, and interim storage and eventual transfer to the geologic repository of the immobilized HLW produced by the contractor.

Completion of the TWRS mission will require waste processing beyond that provided under the BNFL Phase I contract. A TWRS Phase II will be required to complete the TWRS program mission by implementing systems to retrieve, treat, and immobilize the remaining inventory of tank waste. Phase II activities will also need to dispose of all immobilized LAW, store immobilized HLW pending shipment to the repository, close all waste tanks, decontaminate and decommission all TWRS facilities, and conduct post-closure monitoring of closed tanks and facilities.

Processing by BNFL of the Phase I minimum-order quantity will result in treatment and immobilization of approximately 10% of the Hanford tank waste by mass and 20% to 25% of the radionuclide content. The BNFL contract does provide DOE with some flexibility in how it approaches Phase II and completion of the tank waste cleanup. If the BNFL facility operates efficiently and effectively, DOE may request BNFL to process additional quantities of waste in Phase I, thus reducing Phase II requirements. BNFL’s design also includes the capability to expand capacity and extend operations beyond Phase I. This expansion capability could be used to process most of the remaining tank waste during the expanded plant’s remaining operating life.

The TPA requires that DOE complete all tank waste immobilization by 2028. To meet this milestone, DOE would need to add Phase II capacity that is greater than the expansion option currently envisioned. BNFL’s pretreatment facilities were sized to accommodate a capacity increase of 100%. The HLW vitrification facility was designed with sufficient space for two melters; only one melter was required for the minimum-order quantity specified in the BNFL contract. A second, larger HLW melter could be added to increase the initial Phase I capacity (by greater than a factor of four). The LAW vitrification facility was designed with the connections and flexibility in common support systems to add a second LAW facility with capacity similar to that of the Phase I facility. BNFL estimates that these capacity expansions could be accomplished for a limited additional investment. (See Section 4.1.2.)

If those changes are authorized by DOE, the modifications would effectively double the LAW capacity of the BNFL facility and quadruple the HLW capacity. If the expansion were completed in approximately 2012, BNFL estimates that the capacity expansions could enable this facility to immobilize 55% to 65% of the total tank waste (by mass) by 2028. The balance of the waste requiring treatment by 2028 would require additional capacity. Preliminary estimates by DOE indicate that the addition of a separate facility operating in parallel with the BNFL expanded facility, with HLW and LAW capacities approximately equal to the expanded BNFL facility, could complete the TWRS cleanup mission by 2028 if brought on-line by 2016.

DOE will initiate planning for Phase II during the Phase I design phase, and decisions regarding how best to deploy Phase II services will occur during Phase I construction and operations. These decisions will occur some time after hot start of the Phase I facility, thus allowing some Phase I operating experience to be incorporated into the Phase II plan. This schedule represents a change to the Phase II planning activities contained in the current official TWRS baseline schedule and will require a change in the baseline. The current TWRS baseline shows Phase II planning starting in FY2002 and continuing through initiation of Phase II contract award in FY2005. Given the BNFL schedule for a Phase I hot start, the TWRS baseline dates for Phase II planning and execution need to be updated. The costs for Phase II planning are not shown in Table 5-4 and are expected to be approximately $10 million per year above the spending shown in Table 5-4. In addition, there will be requests for capital BA to cover the anticipated termination-for-convenience costs for the Phase II contractors, as there were for Phase I.

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