DOE envisioned that two contractors would build and operate demonstration facilities that would initially treat at least 6 percent of the waste. DOE referred to this part of the waste treatment effort as phase I. DOE estimated that phase I would last at least until 2007 and cost about $3.2 billion and another $1.1 billion in contract support costs, for a total of about $4.3 billion. DOE’s Current Approach Differs Significantly From Original Project Strategy

DOE’s August 1998 contract with BNFL is a substantial departure from DOE’s original privatization strategy. Competition

Unlike DOE’s original approach, the project no longer includes competition between contractors. Financial Issues

DOE’s approach to financing the project has shifted from requiring the contractor to obtain all needed financing to a strategy of agreeing to repay BNFL’s debts above its equity, insurance, and other limited funds if BNFL defaults on its loans and DOE terminates the contract. DOE is now estimating that the first phase will last until at least 2017 and 10 percent of the waste will be processed. Design activities have been extended by 2 years, construction will take about 4 years longer, and the time to process the waste increased from 5 years to about 10 years. The total project costs for phase I, including DOE’s support costs, increased from $4.3 billion in the original estimate to $8.9 billion in the current estimate (in constant fiscal year 1997 dollars). Revised Approach Shifts Significant Financial Risk to the Government

Under the revised contract approach, DOE faces a substantial financial risk that could be in the billions of dollars. This risk comes mainly in the form of an agreement to pay BNFL for much of the debt incurred in constructing and operating the waste treatment facilities if BNFL defaults on its loan payments and DOE terminates the contract. This agreement has the same practical effect as a loan guarantee and is a dramatic departure from the original privatization strategy. DOE’s financial risks hinge on a number of factors that could potentially affect the project. Under its revised approach, DOE retains a significant part of the risk for the success of this technology. However, even with this change, construction will begin well before all of the design work is completed. DOE has had difficulty managing other large projects. At least in part to respond to these past difficulties, DOE has developed several systems and processes to manage the tank waste project at Hanford and has subjected its plans to outside review. DOE’s Director of Contract Reform and Privatization said that the Hanford unit does not have all of the technical skills necessary to ensure success in overseeing the project. The potential problem is not with DOE’s efforts to date but with its willingness to fully implement the oversight plans it has developed for the project. Mr. Chairman, in the report we are releasing today, we recommended that DOE take immediate action to fully implement the project’s management and oversight plan, and we suggested to the Congress that an additional review of the project at the end of the extended design phase would be appropriate given the many uncertainties and decisions that remain.
Why GAO Did This Study

GAO discussed the challenges facing the Department of Energy (DOE) in cleaning up the waste in the 177 underground storage tanks at Hanford, Washington, focusing on: (1) how DOE's current approach has changed from its original privatization strategy; (2) how this change has affected the project's schedule, cost, and estimated savings over conventional DOE approaches; (3) what risks DOE is now assuming with this change in approach; and (4) what steps DOE is taking to carry out its responsibilities for overseeing the project.

What GAO Found

GAO noted that: (1) the project as currently envisioned is substantially different from DOE's 1996 initial privatization strategy; (2) the most significant changes include eliminating further competition between contractors, building permanent facilities that could operate for 30 years or more instead of temporary facilities, and extending by 2 years the design phase and the dates for completing project financing arrangements and agreeing on the final contract price; (3) the revised approach extends the completion date for processing the first portion of the waste from 2007 to 2017, and total costs rise from $4.3 billion to $8.9 billion, including $2 billion in DOE's support costs; (4) the increased costs are mainly the result of DOE's decision to build permanent facilities that will take longer and cost more to design and build and the higher financing costs and contractor profits involved in operating these facilities over a longer period of time; (5) DOE estimates that this approach has the potential to save 26 to 36 percent over the contracting approaches it has used in the past; (6) the revised approach represents a dramatic departure from DOE's original privatization strategy of shifting most financial risk to the contractor; (7) the contract now calls for DOE to pay BNFL, Inc. for most of the debt incurred in building and operating the facility if BNFL should default on its loans; (8) DOE agreed to assume this risk because it did not think BNFL would be able to obtain affordable financing unless the government provided some assurance that the loans would be repaid; (9) DOE's financial risks are significant because the project has a number of technical uncertainties such as using waste treatment technology that has yet to be successfully tested at production levels on Hanford's complex and unique wastes, and other management challenges; (10) in an attempt to avoid repeating past mistakes in managing large projects, DOE has identified additional expertise it needs and has developed several management tools to strengthen its oversight of the project; (11) the success of the project, however, will depend heavily on how well DOE implements these plans; and (12) DOE has a history of not fully implementing its management and oversight plans, and there are some early indications on this project that DOE may be having difficulty ensuring that the proper expertise is in place and fully funding project support activities.