Is trade action fair on U?

1 February 2002

USEC's trade complaint against its European competitors poses significant threats to US energy security, trade relations and energy prices. Staff Report

On 22 January 2002, the US International Trade Commission (ITC) voted unanimously to approve import duties of 2.23% on Urenco and 32.10% on Eurodif. The ruling follows the 13 December, 2001 announcement by the US Department of Commerce (DoC) of its final decision in the trade case brought by United States Enrichment Corporation (USEC) against its two main competitors in the US enrichment services market.

Last year, a report prepared by Washington Policy & Analysis warned that the imposition of duties on uranium imports might degrade US energy security by forcing US utilities to become increasingly dependent on USEC's Russian-origin enriched uranium.

  Such trade restrictions would allow USEC to assert effective control over the US enrichment market, and this could drive up nuclear fuel costs for US electric generators and associated electricity prices for US consumers. The DoC and ITC rulings may force at least one of the two European companies to exit the US market, allowing USEC to use its enhanced market power to raise prices. The loss of US utility access to stable enrichment supplies and the disruption of competitive markets will ultimately hurt the American public in terms of higher electricity prices.

Furthermore, the decision threatens to intensify ongoing trade friction at a time when international cooperation is essential.

However, Charles Yulish, vice president of corporate communications at USEC said that since the imposition of the duties by the DoC, and their confirmation by the ITC, the price of enriched uranium to US utilities has not risen significantly. It also has to be noted that the cost of enriched uranium forms only a relatively small portion of the total cost of producing electricity from nuclear power plants.

Disruption of the US enrichment market began in December 2000, when USEC filed its anti-dumping (AD) and counter-vailing duty (CVD) petitions against Eurodif, majority-owned by France's Cogema; and Urenco, jointly owned by the UK, Germany and the Netherlands. USEC alleged that Eurodif and Urenco were trying to expand their share of the US enrichment services market by intentionally selling below the cost of performing the services and were receiving unfair subsidisation.

In such trade cases, the investigations into alleged unfair pricing and subsidisation are handled separately. If the DoC finds evidence of subsidies, the US government would impose a CVD to offset them. If unfair pricing is found, an AD margin is assessed. If both are found, the CVD and AD are both imposed. These are intended to offset market interference and to allow for fairer competition. In reality, in many cases the imposition of duties may reward the domestic company at the expense of competition and penalise consumers with higher prices.

Products VS services

Since the investigation was initiated, the DoC has based its decisions on the premise that uranium enrichers sell goods rather than services. In accepting USEC's definition of enrichment services as a product, DoC created a legal precedent that blurs the distinctions under trade remedy law between a product and a service. It is possible that such a move could embolden other countries to attempt to use trade remedy law to keep US service companies out of their markets, creating a threat to trade liberalisation worldwide.

If it had been determined that enrichers sell services, there would have been no statutory basis to award USEC any protection from its European competition, as services are exempt from trade law remedy. In recommending imposition of CVDs and AD margins against Eurodif and Urenco, the DoC apparently failed to give weight to a number of facts that should have led to an early dismissal of the investigation.

In the past, USEC has successfully defended itself in other court cases, arguing in harmony with statutory basis for the birth of the US Enrichment Enterprise (USEC's predecessor) that the company sells services not goods. In its marketing, financial and contractual dealings, USEC has consistently characterised its business as the "rendering [of] enrichment services."

In January 2001, the ITC made a preliminary finding of "reasonable indication" of threat of injury. This allowed a full investigation by the DoC to proceed.

DoC issued its preliminary decision regarding the subsidy allegation on 8 May 2001, and recommended a CVD of 13.94% against Eurodif and 3.72% against Urenco. While these CVDs were lower than those requested by USEC, those intended for Eurodif are substantial nonetheless, especially in combination with AD margins.

On 6 July 2001, DoC issued a preliminary ruling, recommending AD duty rates of 17.52% on Eurodif imports from France and 3.35% for Urenco imports from the UK.

If duties in the range of preliminary CVD and AD figures were to be imposed, it would be more than enough to allow USEC to substantially raise its prices to enrich US utilities' uranium while seizing market share from its European competitors. Spot market prices for SWU have already risen by 25% since the trade investigation.

Moving forward from the preliminary stage the two cases were aligned, and a final decision both for CVD and AD margins was announced by DoC on 13 December, 2001. It ruled that combined anti-dumping and countevailing duties of 32.78% should be imposed on imports of LEU produced by Eurodif and countervailing duties of 2.26% to be applied to the value of imported LEU produced by Urenco.

The ITC unanimously supported the DoC decision with a 4-0 vote, changing the duties only slightly. The final duty orders, along with the reasons for the decision, are due to be announced in February 2002.

Consequences of success

In reaction to the ITC and DoC rulings, the European Union (EU) has expressed 'serious concern' and stated that it may bring the case before the World Trade Organisation (WTO) on the basis that the rulings violate WTO rules and represent unwarranted protectionism for USEC.

Following the ITC's crucial decision on 22 January, European trade commissioner Pascal Lamy warned that the EU could challenge the ruling at the WTO. There is also the option of an appeal to the US Court of International Trade, but it does not have to be exercised prior to an appeal to the WTO.

The European Commission (EC) has been vocal in pointing out that "under established US case law, USEC is a service provider and does not sell the product concerned" and therefore, "falls outside the scope of anti-dumping and counter-vailing remedies and has no standing to complain."

The EC warned that this case could open a Pandora's box for future trade complaints involving the USA and the EU. Major US companies that sell services (such as financial, communications or consulting) in Europe could become the target of trade action in the event that European companies decide to emulate USEC's tactics. Assuming the USEC trade case is brought before the WTO, it could prove to be detrimental to US-European relations at a time when harmony and cooperation are essential in light of recent world events.

History of USEC

The enrichment industry has been going through a period of rationalisation and downsizing since the early 1980s. Over two decades ago, the US enrichment industry began confronting its weakening grip on the global enrichment market, but many of the problems are rooted in government decisions made in the 1970s.

In the early 1970s, planners at DoE's Uranium Enrichment Enterprise (USEC's predecessor) had anticipated such a dramatic increase in demand for enrichment services through the 1980s and 1990s, based on the expectation that hundreds of new nuclear power stations would come on-line during the period, that they closed their order books to all new customers, including European utilities. At the same time, DoE was dictating terms to its customers and raising prices. DoE's actions led to the formation of Eurodif and Urenco as European customers began looking for a reliable source of future enrichment services.

During the 1980s, the DoE Uranium Enrichment Enterprise was confronted with rising costs due to ageing technology, inefficient enrichment facilities, overcapacity, declining defence-related requirements, and loss of customers to new competitors. It was slow responding to the challenge of oversupply, but took some steps in 1985 when it mothballed the Oak Ridge plant, the oldest of its three gaseous diffusion plants, made a decision to proceed with development efforts on only one advanced technology, the Atomic Vapour Laser Isotope Separation (AVLIS) process, and discontinued funding for a second project aimed at gas centrifuge development.

The need to put the ailing Uranium Enrichment Enterprise on a sound commercial footing gained added urgency in the 1990s as military enrichment requirements disappeared and surplus weapons material began to be introduced into Western markets. As a result of this effort to restructure the Uranium Enrichment Enterprise, USEC was initially formed as a government-owned corporation in 1993, before being privatised in 1998.

The privatisation of USEC included a number of provisions intended to help USEC in its transition to a for-profit entity. It inherited a portfolio of above market price long-term enrichment services contracts from DoE. It reportedly benefited from credits that DoE had extended to Russia during the early years of the HEU deal, which were repaid by discounted HEU SWU prices for USEC in 1998 and 1999. Furthermore, before USEC was privatised, approximately 74 million pounds of stockpiled DoE uranium were transferred to the company (an amount equivalent to about 17 years of domestic production). The company was also given the exclusive rights to access advanced laser enrichment technology being developed by DoE.

Soon after privatisation, USEC recognised that its domestic enrichment facilities were not sized appropriately for today's market and were not competitive. Its first step was to close the Portsmouth Ohio Plant and the consolidation of its domestic output at the Paducah, Kentucky plant. The Paducah facility, which uses a 50-year old gaseous diffusion technology to provide enrichment services, is unable to compete effectively against lower cost competitors with more modern facilities employing advanced technology. Due to the vast amount of electricity required to operate Paducah, the plant's costs rise significantly as it approaches full capacity (which on paper is 11 million SWU/year, but realistically, is closer to 7 million SWU/year). Based on the electricity supply agreement that USEC concluded with TVA last year, it is estimated that Paducah will operate at a level of about 4.5 million SWU/year.

Before privatisation, USEC said it intended to develop the AVLIS process. DoE spent nearly $2 billion testing the technology prior to USEC privatisation. At the time of privatisation, USEC expected that AVLIS facilities ultimately would replace the less efficient plants at the Ohio and Kentucky sites. In 1999, USEC terminated AVLIS, after spending approximately $120 million a year on the technology's development. USEC's management has indicated that they are developing new domestic enrichment capability to replace the Paducah plant. The company is providing R&D funding for two advanced technology options: SILEX, a laser-based enrichment technology currently under development in Australia; and a pilot programme, based on reviving the former DoE effort to build a large-scale demonstration centrifuge enrichment facility at the Oak Ridge National Laboratory.

The US government played a dominant role in the enrichment industry's development, at a time when a major segment of enrichment capacity was devoted to the defence sector. But following the end of the Cold War, government support and involvement has logically been withdrawn. As the enrichment services industry now focuses almost exclusively on the civilian market, a more competitive marketplace continues to evolve, creating both opportunities and challenges for enrichment companies. The market for enrichment services is dependent on the fleet of nuclear power reactors around the world. Through much of the 1990s, growth prospects were dim, with East Asia representing the only bright spot for new reactor orders. However, with the rationalisation of enrichment services supply now largely complete, and the possibility of new reactor orders under serious discussion, prospects for the market appear brighter than they have in years.

The enrichment market

Over the longer term, if there is a strong commitment to new reactor orders in the USA and Asia, and a stabilisation of the situation in Europe, global demand for enrichment services could rise more than 20% from the current level of about 35 million SWU/year to 43

million SWU in 2010. What happens beyond that time frame will depend on the policies that are put in place in the next few years and the ability of nuclear power to compete effectively with other fuels as an economical source of electricity generation. Indeed, the outlook for the US enrichment services market will depend on diverse factors such as US economic growth, efforts to enhance US energy independence, the development of a robust climate change strategy that embraces nuclear power as a non-greenhouse gas emitting energy resource, effective plant life management, and further development of a competitive nuclear fuel and enrichment services market.

Four companies — USEC, Eurodif, Urenco and Tenex — control 97% of world enrichment capacity. However, capacity does not directly translate into market share. A trend toward realignment of the enrichment industry continues, as uneconomic capacity is taken out of service.

In addition, the US-Russian HEU Agreement signed in February 1993 - under which the US agreed to purchase the SWU equivalent of 500 tonnes of enriched uranium over 20 years - has become a major source of supply in the USA. SWU derived from down-blending HEU represents almost half of the enrichment services supplied to the US market by USEC.

In 2000, approximately 11.8 million SWU were purchased by US utilities under enrichment service contracts for use in civilian reactors. USEC supplied 70% of US demand in 2000: about 60% from its own facilities and 40% from purchases made under the Russian HEU agreement. Deliveries of SWU to USEC in 2001 derived from down-blended Russian HEU are expected to increase to 5.5 million SWU (representing about 46% of US market share) from about 3 million in 2000. European SWU supplied about 30% of US utility enrichment requirements in 2000.

Another variable in the enrichment market impacting competitiveness of supplies is the exchange rate. The appreciation of the dollar against European currencies - particularly the Euro - has not helped USEC sell its services internationally, especially during the period covered in USEC's trade petition. It is a basic economic reality that the decline of the Euro relative to the dollar over the past two years has given European enrichers an advantage. However, fluctuations in currency values are simply part of cross-border commerce. The weakening of the dollar against the Euro in recent months should strengthen USEC's position in the US and foreign markets.

Effect on utilities

If Eurodif is removed from the US market and duties imposed on Urenco's US sales, US utilities will have little choice but to buy more SWU from USEC, possibly at higher prices than what would exist with a fully competitive market. As the electricity market has become more competitive in recent years through deregulation, corporate restructuring and consolidation, utility customers have placed greater emphasis on short-term flexibility and profitability. Utilities are moving toward shorter contracts while diversifying their supplier relationships. Such actions have required enrichment companies to be more responsive to customer needs and more aggressive in their offers. These developments have not been favourable from USEC's perspective, since its current technology makes USEC the highest cost enrichment provider.

Most of the remaining long-term contracts (at higher price levels of $110-$130 per SWU) that USEC inherited from DoE are expected to expire in late 2002 and early 2003. Over the last two years, the company has signed new contracts in the $80-85 per SWU region. These terms are thought to be below the price level where it can fully recover its costs of production at Paducah. At the same time, USEC has been losing contracts in foreign markets.

The company lacks the technology necessary to compete effectively with Eurodif's more modern gaseous diffusion enrichment plant, or with Urenco's advanced gas centrifuge technology. USEC executive vice president Philip Sewell, writing recently in the July/August 2001 issue of Arms Control Today, stated that "USEC cannot economically service total US utility demand under current economic conditions" while arguing that "USEC's trade action will not preclude US utilities from purchasing enrichment services in a competitive market with alternative supplies." However, since USEC launched the trade action, the enrichment market price rose by nearly 25% (see figure p27) in the wake of the preliminary findings of the US government investigations against Eurodif and Urenco. The enrichment price has since stabilised at $90-105//SWU.

An estimate by US utilities indicates that the cost increase for nuclear fuel that would result from USEC winning its trade case could be in excess of $1 billion annually. The increasing cost of nuclear generation would undoubtedly be passed on to American consumers in the form of higher electricity rates.

Over half the SWU from USEC's Paducah facility is sold to the Asian market, due to existing contracts that stipulate US origin SWU, partially for political reasons. Any reduction in US production would translate directly into greater domestic reliance on Russian imports. From a business perspective, it is highly likely that USEC would reduce output from the higher-cost Paducah facility in favour of lower-cost Russian SWU purchases. In the event of a disruption of Russian supply there is no short-term supply alternative for the US market. Output from a new domestic enrichment facility would take between five and ten years to complete. Urenco's recently announced plan to construct an enrichment plant in the US would take at least five years to be approved and built. Unrestricted availability of European enrichment, therefore, is essential to ensure US energy security.

Megatons to Megawatts

Roughly 125 tonnes of the HEU have been converted to low enriched uranium (LEU) by Tenex (the Russian executive agent) and purchased by USEC (the US executive agent) for sale to US electric utilities since 1994. The "Megatons to Megawatts" programme has proved beneficial in reducing proliferation risk, but means a growing share of US SWU supply is sourced from Russia.

Given the condition of USEC's domestic enrichment capability and that LEU shipments from Russia have been interrupted five times, there is a risk of supply disruption. About 50% of the SWU supplied for the US market now comes from Russia, with the rest coming from the Paducah plant and from the enrichment services currently provided by Urenco and Eurodif to upgrade the utility owned uranium. As the sole US executive agent in the Russian HEU deal, USEC is clearly in control of a large share of the US SWU supply.

The existing contract between USEC and Tenex expired in December 2001 and a new contract has not yet been approved by the Bush administration or by the Russian government. Most parties had expected any new contract to have market-based pricing as opposed to the previous contract which had a fixed price per SWU. This would have allowed USEC to widen the gap between what it pays Russia for SWU and the price charged to resell it to US utility customers.

Because a new contract was not agreed upon before the end of last year, the existing agreement was to have remained in effect through the end of 2002.

USEC and the administration have reportedly agreed to terms that would allow USEC to remain the sole US executive agent, but the details have not yet been publicly released.

Threat to energy security

Despite the goals of the administration on nuclear energy policy, imposing duties on European enrichment services will lead to higher fuel costs for US nuclear power operators, and ultimately raise electricity prices to consumers. The enrichment capacity provided by Eurodif and Urenco to the US market is limited but important, especially at a time when dependence on Russian HEU SWU is increasing and USEC's domestic production faces a variety of problems.

If one or both European enrichers were forced out of the US market by the trade action, it would move the market out of balance and provide USEC with monopolistic market power. For that reason, US nuclear utilities have vigourously been fighting efforts by USEC to impose the AD and CVDs. In 26 April, in a letter to the House Energy and Commerce subcommittee, several utility executives suggested that USEC should have no competitive advantage in the uranium enrichment marketplace if electricity consumers in the USA are to be better served.

Making the existing domestic capability competitive is predicated on blending the high-cost production with lower-cost Russian HEU-derived SWU. Without unrestricted access to other sources of competitive enrichment services, US utilities are at risk of over-reliance on a source of enrichment services that could be affected by international politics, potentially compromising US energy security.

To achieve an open competitive enrichment market for the long-term, US generators must have access to diverse sources of supply, new technology must be deployed in the US in the next decade, and the US-Russian HEU agreement must be maintained.

Adoption of nuclear power by many industrialised countries and consolidation in the nuclear industry has resulted in a global market for supply of nuclear fuel, reactor technology and services, and treatment and storage of spent fuel. Fractious US relations with trading partners that are world leaders in advanced nuclear technologies, particularly France, could have significant negative consequences on the administration's goal of sound US nuclear growth. The trade action also could become an impediment to international cooperation on R&D for nuclear energy technology, which is crucial to the resurgence of nuclear power as a viable choice for new energy investment.

When the USA is working to increase international cooperation, it is time to correct the mistake made in a trade case that lacks merit, drives a wedge between USEC and its own customers, alienates US trading partners, raises energy prices, and undermines energy security.

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