D. Dowd Muska


The Failure of a ‘Privatization’ That Never Was

August 02, 2012

USEC is not a stock you want to own.

The company went public in 1998, with shares offered at $14.25. Within two years, investor disinterest depressed USEC’s value by 70 percent. A brief bubble inflated shares to nearly $24 in 2007. But today, the stock sags beneath a buck, and it appears to be on the path to delistment.

What happened? Privatization gone horribly wrong.

USEC is one of many toxic stepchildren of the Cold War’s technocracy. To wage its crusade against the Soviet Union, Washington’s globocops needed oodles of fissile material. Uranium, enriched to a precise isotopic composition, was used to make bombs and propel naval vessels. In addition to the Manhattan Project’s cavernous Tennessee facility, the Atomic Energy Commission acquired the proper mixture of Element 92 at huge gaseous-diffusion plants in Kentucky and Ohio.

As the decades passed, utilities obtained a growing share of their juice from nukes, and the East-West standoff cooled off. Federal uranium behemoths weren’t in the warfighting business anymore -- they manufactured the fuel reactors “burn” to generate electricity. In 1992, Congress created a government-owned firm, the United States Enrichment Corporation. Six years later, USEC went Wall Street, and its sale of 100 million shares returned over a billion dollars to taxpayers.

Fourteen years after USEC’s IPO, it’s clear that the company has congenital defects it just can’t overcome. For starters, privatization arrived much too late. In 1969, Richard Nixon, in a rare display of pro-market sentiment, recommended that the feds get out of the uranium racket. Privatization didn’t happen until the end of the Clinton administration, and during the interim, domestic isotope-separation engineering stagnated. (Rest assured, billions were spent on studies and experiments.) USEC continues to employ the cumbersome, electricity-ravenous method developed during World War II.

Another albatross: USEC hasn’t fully detached itself from the U.S. Department of Energy. Its Paducah, Kentucky factory is owned by the DOE. Management flexibility is hamstrung by deals with the department. And the company serves as the “executive agent” for a treaty with Moscow. The agreement, signed in the early 1990s, downblends uranium once housed in Soviet bombs for use in U.S. commercial reactors. When the program ends next year, it will have de-armed thousands of warheads, and produced enough electricity to power America for two years. “Megatons to Megawatts” is arguably good foreign policy, but it was foolish to put the project in the hands of a for-profit entity that should focus on maximizing shareholder value, not fighting nuclear proliferation.

USEC’s too-cozy relations with the government extend to its plan -- well behind schedule, dramatically over budget -- to develop a cheaper, more efficient production capacity. Enamored, at first, with laser enrichment, in 2001 USEC settled on a “disciplined evolution of classified U.S. centrifuge technology originally developed by DOE and successfully demonstrated during the 1980s.” An executive beamed that the process “is already proven, conservative, reliable, manufacturable and operable.”

A new centrifuge complex would be expensive, but in its 2003 annual report, USEC predicted that finding funding wouldn’t be a problem: “We have full confidence that once we demonstrate the high efficiency and potential returns of our … technology, the financial markets and other potential partners will view [it] as an attractive investment.”

Within a few years, those “other potential partners” included Uncle Sucker -- USEC went to D.C. for the big bucks it needed to secure private investment. In July 2009, the DOE unexpectedly balked at granting a $2 billion loan guarantee. But the following March, the department signed off on a $45 million gift to the company’s demonstration facility. This June, DOE committed to as much as $280 million to “enhance the technical and financial readiness of the centrifuge … for commercialization.”

A stock price in the sewer. Bonds rated as junk. A half-billion-dollar loss in 2011. Withering market share at home and abroad. And a record of relentless begging for bailouts.

Enough. If USEC can’t survive as a genuine commercial entity, it’s time for the takeover/liquidation vultures to swoop down and carry off whatever value remains. (It’s what should have happened in 1998.) Don’t panic, economic nationalists -- America will retain a uranium-refinement infrastructure. A European consortium is expanding its existing centrifuge plant in New Mexico, and GE Hitachi Nuclear Energy is moving forward with a pilot laser-separation proposal in North Carolina.

USEC’s reckoning will be brutal. Shareholders will suffer. Pols and unions will give angry speeches. Laid-off employees will whine.

Too bad. Taxpayers have sacrificed enough for Washington’s disastrous adventure in uranium-enrichment “privatization.”

D. Dowd Muska (www.dowdmuska.com) writes about government, economics, and technology. Follow him on Twitter @dowdmuska.

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