refer the matter--if AEC felt it was significant--to the steering committee, the PMC board, and finally to the heads of AEC, TVA, and Commonwealth for resolution.

The proposed contract states that PMC and AEC intend to develop administrative understandings and procedures further defining their relationship and responsibilities to insure that project business will be conducted efficiently. AEC officials told us that PMC and AEC have such understandings and procedures under consideration but that details had not been developed.

INDEMNITY PROVISIONS

The original memorandum required AEC to seek legislative authority to indemnify PMC, TVA, and Commonwealth and, after obtaining such authority, to provide written agreements indemnifying each party. Under the terms of the indemnification agreement in the proposed contract (section 9.0), AEC holds PMC, Commonwealth, and TVA 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.

The revised language provides indemnification for all expenses, whether or not they are related to claims and liabilities. However, AEC is not liable for a claim or expense which arises out of a material breach by PMC, TVA, or Commonwealth, due to willful misconduct or bad faith of their officers or directors, in their duties to use their best efforts to carry out their undertakings under the project, including the obligation not to spend funds or intentionally incur contractual commitments exceeding the limitation in the agreements. The clear inference is that, in the absence of willful misconduct or bad faith on the part of an officer or director, AEC is liable for expenditures or commitments of PMC, TVA, or Commonwealth which exceed the limitations in the agreements. This provision could extend AEC's liability to a considerable extent and leave it without any opportunity to exercise before-the-fact

control.

The proposed contract also provides the terms of the indemnity agreements, which are to be executed by AEC, and requires that, at the time the agreements are delivered to the parties, AEC's General Counsel also deliver an opinion that each agreement is authorized, properly executed, enforceable, and not inconsistent with any provision of law. In addition, AEC must try to obtain such an opinion from the Attorney General or the Comptroller General of the United States. AEC officials told us that the utilities asked for these additional opinions to insure that, at the time construction started, their financial commitments would be limited to the amount of their contributions.

ARBITRATION PROCEDURES

The original memorandum provided that, if the parties disagreed as to whether one or more of the termination criteria listed in the memorandum have been met, the disagreement would be submitted to binding arbitration. The original memorandum did not specify who would arbitrate the disagreement.

The proposed contract among AEC, PMC, TVA, and Commonwealth provides that AEC seek legislative authority, or confirm its existing authority, to provide that, if the parties disagree as to whether termination criteria have been met, the issue shall be submitted to the American Arbitration Association or some other appropriate forum for expedited and binding arbitration.

AEC officials told us that, at the time the original memorandum was prepared, it was assumed that AEC had the authority to submit to arbitration. They said that AEC later became aware of a Comptroller General's Decision dated July 17, 1972, which reiterated an earlier Comptroller General's Decision (32 Comp. Gen. 333) stating that, without specific statutory authority, the rights of the United States or claims against the United States may not be determined by arbitration. The officials stated that, pursuant to this decision, AEC does not have the statutory authority to arbitrate under the proposed contract and must therefore seek such authority.

Until the necessary legislative authority is obtained and the contract is appropriately amended to provide for arbitration or if such legislative authority is denied, the proposed contract among AEC, PMC, TVA, and Commonwealth provides that agreement of at least three of the five parties involved in the project (AEC, PMC, BRC, TVA, and Commonwealth) will be required to establish that project termination criteria have been met.

OTHER MATTERS

The following section of this report sets forth a number of other matters which may be of interest to the Joint Committee in its hearings on the breeder reactor cooperative arrangement.

Additional AEC contribution

Under the terms of the memorandum and the proposed changes, AEC is to contribute about $92 million in direct assistance and is to provide assistance estimated at about $330 million in research and development, services, facilities, equipment, and special nuclear materials. 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 site would not be charged to the breeder reactor demonstration project. They stated that its present accounting system does not identify and allocate the cost of program direction and administration activities to such projects; therefore AEC had not estimated these costs. 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 contribution agreements as collateral for project loans. A1though the original memorandum does 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.

We talked with AEC officials about the reason for the new provision permitting the use of AEC funds to pay interest on project loans. They told us that it was not intended that AEC funds be used to pay any interest. In commenting on this report, they said that a proposed amendment has been drawn up stating that interest cost is not an allowable cost against AEC provided funds. According to AEC, the other parties to the contract have informally agreed to make this change.

Special nuclear material

Under the original memorandum and the proposed contract among AEC, PMC, TVA, and Commonwealth, AEC will provide but retain ownership of all source and special nuclear material required for the demonstration plant during the project term. The original memorandum provided that AEC pay for the nuclear material and the costs of consumption and reprocessing of the material. The proposed contract has essentially the same provision but also states that AEC must absorb the cost of any "losses of nuclear material." AEC officials told us that the cost for such losses, although not specifically mentioned in the original memorandum, was always contemplated as part of AEC's responsibility for the costs of consumption and reprocessing of the material. They emphasized that the majority of nuclear material losses occurred during fabrication and reprocessing.

Independence of licensing review

The proposed contract provides that ACC assist, as appropriate, PMC and TVA in applying for all permits and licenses necessary for constructing and operating the breeder reactor plant. Such assistance is to include "access to documents necessary in any proceedings relating to such applications and making available personnel for consultation and statements and/or appearances before hearing or review bodies." This provision makes no distinction 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 regulatory personnel could possibly review the application during the licensing process and defend it before a hearing or review body, such as the Atomic Safety and Licensing Board. 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. AEC officials told us that under no circumstances would AEC consider it appropriate to use regulatory organization personnel in providing such assistance.

Income tax aspects

The proposed contract between PMC and BRC provides that BRC not pay PMC any funds collected from the utilities unless