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This report is in response to your letter of January 30, 1973, asking the General Accounting Office to examine certain aspects of the Atomic Energy Commission's (AEC's) cooperative arrangement for designing, constructing, and operating the liquid metal fast breeder reactor demonstration project authorized by Public Law 91-273, as amended by Public Law 92-84.

You pointed out that (1) on August 11, 1972, AEC submitted to the Joint Committee a Memorandum of Understanding describing the proposed arrangement for carrying out this project, (2) the Joint Committee held extensive hearings on this arrangement on September 7, 8, and 12, 1972, and (3) on January 26, 1973, AEC submitted certain documents to the Joint Committee describing changes to this proposed arrangement.

As discussed with your office, we did not make an exhaustive examination of the proposed cooperative arrangement because of time limitations. As agreed with your office, we limited our review to an analysis of the proposed changes to the arrangement which AEC submitted to the Joint Committee on January 26, 1973, and certain other aspects which we believed would be of interest to the Joint Committee.

We made our review at AEC Headquarters, Germantown, Maryland. We examined documents describing the cooperative arrangement and held discussions with AEC representatives knowledgeable of, and responsible for, negotiating the cooperative arrangement.

The amendment to the Memorandum of Understanding proposed changes to the original memorandum and provided for implement ing certain sections of the memorandum. The proposed changes concerned:

-- The number of contracts among the parties participating

in the cooperative arrangement: AEC, the Breeder

Reactor Corporation (BRC), the Project Management
Corporation (PNC), the Tennessee Valley Authority
(TVA), and the Commonwealth Edison Company. (See
p. 10.) PMC was created to administer the contracts
for the design, construction, and operation of the
breeder reactor demonstration plant. BRC was created
to collect contributions from various electric utili-
ties and to remit the collected funds to PMC to carry
out the project.

-- The management structure and responsibilities of the

parties carrying out the project, including assignment
of AEC employees to serve on the P^1C staff. (See
p. 11.)

-- The prerequisites for the start of project construc

tion. (See p. 17.)

-- The responsibility for technical supervision of the

nuclear steam supply system. (See p. 20.)

--AEC's responsibility for indemnification of PMC, TVA,

and Commonwealth. (See p. 21.)

to

-- Arbitration procedures if the parties disagree as

whether project termination criteria have been met. (See p. 22.)

The details of our analysis are in the appendix, The highlights of certain aspects of the proposed changes which may particularly interest the Joint Committee are discussed below'.

CONSOLIDATION OF CONTRACTS

As part of the proposed changes, the parties agreed to consolidate the seven contracts called for in the original memorandum into two contracts: one among AEC, PNC, TVA, and Commonwealth and one between PMC and BRC. One of the contracts eliminated was a contract between AEC and BRC. Under the original memorandum, AEC would have had direct legal

recourse against BRC if BRC breached its contract with AEC. We understand AEC's position to be that, under the proposed contractual arrangement, its legal rights would have to be exercised under its proposed contract with PMC, TVA, and Commonwealth. Under this arrangement, therefore, it appears that AEC may not have any directly enforceable legal rights against BRC. (See p. 10.)

MANAGEMENT STRUCTURE

The proposed contract among AEC, PMC, TVA, and Commonwealth provides that disagreements on significant matters among the members of PMC's Board of Directors be referred to the heads of AEC, TVA, and Commonwealth for their unanimous resolution. The proposed contract does not, however, indicate how disagreements among the heads of these organizations would be settled. AEC officials told us that, if the heads could not unanimously agree on such matters, the project could possibly be terminated pursuant to the termination criteria in the proposed contract. (See p. 12.)

One section of the proposed contract provides that PMC or its project steering committee can not take any action on a matter referred to the heads of AEC, TVA, and Commonwealth until they have resolved the matter. Another section, however, permits PMC to continue to act, or to refrain from acting, on a matter referred to and being decided by the heads, if PMC otherwise could be in breach of the proposed contract. In view of the apparent conflict between these sections, the contract should be clarified to indicate whether, and under what conditions, PMC may proceed on matters which are pending resolution by the heads.

Without such clarification, an instance could arise whereby PMC could continue work on a project matter which the heads subsequently decided not to approve. Under such circumstances, costs incurred for this work could contribute to a project cost overrun which otherwise may have been avoidable. (See p. 13.)

INDEMNITY PROVISIONS

The original memorandum required AEC to seek the legislative authority to indemnify PMC, TVA, and Commonwealth and, upon obtaining such authority, to execute and deliver written agreements providing for indemnifying each party. Under the indemnification agreement of the proposed contract, AEC holds PMC, TVA, and Commonwealth and their officers and directors harmless against any and all claims, expenses, and liabilities arising from the project to the extent they are not satisfied by project funds or insurance. This expands the original language in the memorandum which provided only for indemnification against claims and liabilities and expenses related to those claims and liabilities, (See p. 21.)

ADDITIONAL AEC CONTRIBUTIONS

In addition to AEC's contribution and assistance totaling about $ 422 million called for in the original memorandum and the proposed changes thereto, AEC will incur costs for program direction and administration activities relating to the demonstration project, AEC has not, however, prepared an estimate of such costs. AEC officials told us that, consistent with the treatment of all previous cooperative power demonstration projects, the costs of its program direction and administration activities at AEC Headquarters and at the project site would not be charged to the breeder reactor demonstration project. (See p. 24.)

Also, under the terms of the proposed contract, AEC is to seek legislative authorization to provide five of its employees to serve on the PMC staff while remaining on AEC's payroll. These costs represent an additional AEC contribution to the project which AEC estimates could range from $125,000 to $175,000 annually over the expected 10-year life of the project. (See p. 15.)

PROPOSED USE OF AEC FUNDS FOR INTEREST
EXPENSE ON PROJECT LOANS

Under the terms of both the original memorandum and the proposed contract, PMC is permitted to use the utility

72-818 0.10.2

contribution agreements as collateral for project loans. Although the original memorandum did not provide for the payment of interest on these loans, the proposed contract among AEC, PMC, TVA, and Commonwealth specifically permits the use of AEC-provided funds to pay the interest on these loans. In addition, the proposed contract permits the use of AEC funds to pay any other interest cost the steering committee may specifically allow. AEC officials told us also that a proposed amendment has been drawn up, stating that interest cost is not an allowable cost against AEC-provided funds. (See p. 24.)

INDEPENDENCE OF LICENSING REVIEW

The proposed contract provides that AEC assist, as appropriate, PMC and TVA in applying for all permits and licenses necessary for constructing and operating the breeder reactor plant. Such assistance will, among other things, make AEC personnel available for consultation and statements and/or appearance before hearing or review bodies, such as the Atomic Safety and Licensing Board. The proposed contract, however, does not distinguish between personnel involved in AEC's regulatory activities and personnel involved in AEC's promotional activities. If this provision is applied to proceedings for an AEC construction permit and operating license, AEC's regulatory personnel could possibly review the application during the licensing process and defend it before a hearing or review body. It appears that such assistance might be inconsistent with AEC's responsibility to independently review license applications to insure the health and safety of the public. (See p. 25.)

ALLOWABLE COST PRINCIPLES

The proposed contract among AEC, PMC, TVA, and Commonwealth specifies the cost principles to be used for funds initially provided by AEC. Funds provided by BRC from utility contributions do not appear to be subject to these principles. The contract is silent on what cost principles will apply to any subsequent funds AEC may provide to the project. Unless all funds are subject to the specified cost principles, the

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