Sunday, July 03, 2005
Idaho Falls: From the Outside
In a few posts over the last week, I started wondering about what was behind a news article on the US's proposed new Plutonium 238 production facilities, at Idaho Falls, Idaho. (Links to those earlier posts will appear at the foot of this one.)
Today I'd like to start working from the outside in, as it were, to see what larger forces are at work behind the deal to build and manage the production site.
First, it helps to know some of the background of how the US has historically managed its national laboratories (including Oak Ridge, Los Alamos, Lawrence Livermore, and INL). In a recent LA Times column, Kai Bird and Martin J. Sherwin (biographers of J. Robert Oppenheimer) summarize this history (speaking here of Los Alamos, or LANL):
There are a couple of advantages to the LLC approach to forming a company, as I understand it. One is that the individual members of the LLC are insulated from legal and financial liability claims; only the assets of the overall LLC are at risk. (This can be very convenient if the LLC has responsibility for building and/or managing something like a nuclear production facility.) The other is a tax advantage, something like the inverse of the first advantage: income to the overall LLC is not taxed. Individual members of the LLC are simply taxed in proportion to their share of the LLC's stock. (This avoids the so-called "double taxation" which normally applies to corporate earnings -- first on the earnings themselves, and second on the dividends paid to individual shareholders.)
In connection with this second advantage, imagine an LLC set up between public and private enterprises. Suppose the private enterprise graciously allows much, perhaps most, of the stock to be held by the public one which, of course -- as a public-sector entity -- pays no taxes at all. For every dollar paid by the facility's "owner" (the government, in this case), only a fraction of the taxes normally due must be paid by the private enterprise, as opposed to the 100%-taxable revenue if the private partner had gone it alone.
According to the authors of the LA Times column, annual management fees for LANL are expected to jump from $8.7 million (when the lab was run entirely by the University of California) to somewhere in the range of $63 to $79 million (under a joint UC-private LLC mandated by the Bush misAdministration). The income stream, of course, need not be divided equally between the two partners. And the tax consequences will almost certainly not be. True, UC won't be taxed at all. On the other hand, its private partners will be taxed much less than if they'd been contracted to do the management themselves -- and, given the UC participation, with less contribution to the overall effort.
Let's take a look, though, not at LANL but at the INL contract. According to a Department of Energy press release dated November 9, 2004:
In general, as I quoted earlier from an INL press release:
Over the next week or so I'll try to dig a little deeper to "connect the dots." If there's anything we've learned from the misAdministration's handling of huge contracts, there are always dots to be connected.
Earlier posts in this series:
Today I'd like to start working from the outside in, as it were, to see what larger forces are at work behind the deal to build and manage the production site.
First, it helps to know some of the background of how the US has historically managed its national laboratories (including Oak Ridge, Los Alamos, Lawrence Livermore, and INL). In a recent LA Times column, Kai Bird and Martin J. Sherwin (biographers of J. Robert Oppenheimer) summarize this history (speaking here of Los Alamos, or LANL):
Sixty years ago, J. Robert Oppenheimer, the World War II director of the Los Alamos National Laboratory, proved that there are some things that government-university partnerships can do better than any private-sector entity. In just 27 months — from April 1943 to August 1945 — Oppenheimer and his team of scientists produced a combat-ready atomic bomb. The military head of the Manhattan Project, Gen. Leslie Groves had awarded the contract for the new laboratory to the University of California because he understood that no private corporation was capable of attracting the talented scientists needed to meet this challenge.It's hardly necessary to point out that Oppenheimer's view of public-sector partnerships, vs. private-sector projects, is not a common view shared in these days of corporate [IRONY ALERT ON]infallibility[IRONY ALERT OFF]. As the LA Times article excerpted above goes on to explain, the Bush administration's preference for managing LANL -- and now INL as well -- is a limited-liability corporation (LLC) comprising both university and private-sector members. (Note that government as such is no longer formally part of the picture -- although, as we shall see, it doesn't really drop out of the picture.)
There are a couple of advantages to the LLC approach to forming a company, as I understand it. One is that the individual members of the LLC are insulated from legal and financial liability claims; only the assets of the overall LLC are at risk. (This can be very convenient if the LLC has responsibility for building and/or managing something like a nuclear production facility.) The other is a tax advantage, something like the inverse of the first advantage: income to the overall LLC is not taxed. Individual members of the LLC are simply taxed in proportion to their share of the LLC's stock. (This avoids the so-called "double taxation" which normally applies to corporate earnings -- first on the earnings themselves, and second on the dividends paid to individual shareholders.)
In connection with this second advantage, imagine an LLC set up between public and private enterprises. Suppose the private enterprise graciously allows much, perhaps most, of the stock to be held by the public one which, of course -- as a public-sector entity -- pays no taxes at all. For every dollar paid by the facility's "owner" (the government, in this case), only a fraction of the taxes normally due must be paid by the private enterprise, as opposed to the 100%-taxable revenue if the private partner had gone it alone.
According to the authors of the LA Times column, annual management fees for LANL are expected to jump from $8.7 million (when the lab was run entirely by the University of California) to somewhere in the range of $63 to $79 million (under a joint UC-private LLC mandated by the Bush misAdministration). The income stream, of course, need not be divided equally between the two partners. And the tax consequences will almost certainly not be. True, UC won't be taxed at all. On the other hand, its private partners will be taxed much less than if they'd been contracted to do the management themselves -- and, given the UC participation, with less contribution to the overall effort.
Let's take a look, though, not at LANL but at the INL contract. According to a Department of Energy press release dated November 9, 2004:
"We are very pleased to announce today that the Battelle Energy Alliance has been selected to develop the new Idaho National Laboratory as the Nation’s command center for advanced civilian nuclear technology research and development," [then DOE] Secretary [Spencer] Abraham said.(Unfortunately, the link is broken from the press release to "[a]dditional information on the new laboratory contract." I'll see if I can find a copy elsewhere.)
"The Battelle team brings an outstanding reputation, an excellent plan and a superior management team that will make the INL a world-class multi-program laboratory. This new laboratory was the missing element in our strategy to provide long-term energy security for the nation. We needed a laboratory that can work with the other labs in our complex, academia, and industry to advance nuclear power technology and create an entirely new type of nuclear energy plant for the longer term future. The Idaho National Laboratory will play a very important role in our nation’s energy future and I look forward to the exciting, ground-breaking technology that will emerge from this new focus."
"We are very grateful for the strong and consistent support we have received from Governor Dirk Kempthorne, Senator Larry Craig, Senator Mike Crapo, Representative Mike Simpson, and Representative Butch Otter. They have been tireless in their support for the people of Idaho, the lab and its nuclear energy mission."
[...]
The BEA team was selected over three other bidders after a rigorous proposal evaluation process.
In general, as I quoted earlier from an INL press release:
On November 9, 2004, the U.S. Department of Energy awarded BEA [the Battelle Energy Alliance, LLC] a $4.8 billion, 10 year contract to transform the Idaho facility into the “preeminent” national nuclear energy laboratory.Here's some initial background on the LLC's private members (for additional information, see this comment on an earlier post):
BEA is owned by the Battelle Memorial Institute. Team members include BWXT Services Inc. of Lynchburg, VA; Washington Group International of Boise, ID; the Electric Power Research Institute and the Massachusetts Institute of Technology.
- Battelle Memorial Institute: technically (according to biz.yahoo.com) a "not-for-profit trust [which] operates one of the world's largest research enterprises, with more than 16,000 scientists and engineers serving some 2,000 corporate and government customers in the US and Europe." Carl F. Kohrt, President and CEO.
- BWXT Services, Inc.: a subsidiary of BWXT Technologies. President and COO of the latter is John A. Fees. On their Web sites, both corporations are identified as "a McDermott company." This would be McDermott International, a giant and diverse company you've never heard of whose chairman and CEO is one Bruce W. Wilkinson. According to a McDermott press release from last August, BWXT -- the "government operations segment" of the McDermott family -- saw its revenues increase from "$13.0 million to $140.5 million in the 2004 second quarter, primarily due to higher volumes from the manufacture of nuclear components for certain U.S. government programs, and increased volumes from commercial nuclear environmental services."
- Washington Group International: Based in Boise, Idaho, this company -- Stephen G. Hanks, President and CEO -- "provides the talent, innovation, and proven performance to deliver integrated engineering, construction, and management solutions for businesses and governments worldwide." Among WGI's accomplishments during its history:
- Putting together the consortium of companies that constructed one of the world's most historic projects - the Hoover Dam
- Building the world's longest power transmission line - across 1,000 miles of jungle in central Africa
- Constructing the most challenging section of the TransAlaska Pipeline - 153 miles north from the Port of Valdez
- Managing the largest engineering, construction, and operations contract underway in the United States today - the U.S. Department of Energy's Savannah River Site in South Carolina
- Electric Power Research Institute: a non-profit "center for electricity and environmental research." Corporate officers: Eugene W. Zeltmann (Chairman); Jeffry E. Sterba (Vice Chairman); Steven R. Specker (President and CEO); Richard L. Rudman (Executive Vice President and COO). From their page on "EPRI's Public Interest and Societal Mission":
EPRI's researchers are independent scientists and engineers with total freedom to assure solid science is brought to bear on challenging and often controversial issues. Environmental research is regularly submitted to outside scientific committees and to peer-reviewed journals to assure it meets every criterion of best scientific practice.
EPRI is committed to its mission to lead public-interest research on key issues facing the power industry on behalf of all electricity stakeholders and society.
Over the next week or so I'll try to dig a little deeper to "connect the dots." If there's anything we've learned from the misAdministration's handling of huge contracts, there are always dots to be connected.
Earlier posts in this series:
- Department of Looney Tunes: Plutonium Redux: original post, on hearing news of the resumption of Pu-238 production
- Idaho Falls: Follow the Money?: first starting to lay out some connections
- Idaho Falls: Plutonium (Footnote): qualification about the health dangers of plutonium
