Projects and Related Studies
Tank Waste Remediation System (TWRS) Privatization: The Use of Risk, Economic and Financial Models to Ensure Its Success
The Pacific Northwest National Laboratory (PNNL) led the financial market analysis and price reasonableness task for privatizing tank waste cleanup at Hanford as part of the Tank Waste Remediation System (TWRS) privatization effort. Following a thorough analysis of the components of the TWRS, the United States Department of Energy (DOE) decided that the application of privatization techniques could save the department money, improve the efficiency of its operations, level department budgets and control cost growth. The TWRS glassiciation (vitrification) plants were proposed as potential privatization candidates.
TWRS is necessary as a result of the approximately 54 million gallons of highly radioactive waste that is stored in 177 underground tanks, including 149 older single-shell tanks, at the Hanford Site in Washington State. That waste, which was derived from production of plutonium for the nation's nuclear defense program, has been accumulating at Hanford since 1944. The waste poses a serious safety concern to the public and to the environment. Since most of the single-shell tanks have exceeded their design life, that risk is growing. Sixty-seven of the single-shell tanks are known to have leaked, and several additional tanks are being investigated for potential leaks. The United States Department of Energy (DOE) is taking active measures to reduce the chance of additional tank leaks. However, it is not possible to predict when the next tank will leak, and with passage of time, even the new, safer double-shell tanks are approaching the end of their design lives. Removal of the waste from the tanks, treatment, and immobilization as an inert waste form will constitute a lasting solution to the problem.
Because DOE was interested in using a unique contracting approach for the TWRS privatization, it had to develop some unique tools, including risk-allocation matrices, financial and risk-allocation models, and programmatic risk management tools. These tools were used to help determine how to allocate risks between the contractor and DOE, develop pricing structures and analyze costs, manage programmatic risk, and evaluate contracting alternatives during each stage of the project. The tools were used over the four-year development period that was required to obtain a fixed price with private financing.
A risk allocation model was developed for TWRS to estimate the total cost to the government under several different risk-allocation scenarios. Using Monte Carlo simulation, the model calculated the probability and consequences of different risks being accepted by the different parties. The results of the various model runs provided the chairman of the Source Evaluation Board (a government contracting entity) with sufficient technical data to convince DOT headquarters that the proposed contractual approach to allocating risk would be beneficial to DOE.
A financial model was developed to analyze the impacts of increased interest rates, longer construction periods, longer operating periods, and different financing mixes (i.e., progress payments, mix of progress payments, and complete private financing) on the TWRS privatization project. The primary concern addressed by the financial model was the cost of private sector financing. Different contracting and financing alternatives were investigated to determine if there were less expensive alternative financing approaches. In order to perform these analyses, the financial model was adapted to compare the future values of these approaches. The financial model, developed by PNNL, allowed DOE to get a realistic picture of the cost differential between near-term cash outlays in the construction period and paying for services at a later date. After adjusting the financial model's calculated price for the cost of government capital and reducing profits for any federal taxes paid, the only significant difference (between near-term and out-year cash outlays) was the cost of equity, approximately $1.2 billion (in constant-dollar terms).
The tools and decision process developed for TWRS privatization provided the basis for a number of the decisions DOE made over the five-year period required to privatize the tank waste vitrification facility. Without the cost, schedule, risk, contingency and financial tools, DOE would not have had a valid and justifiable basis for proceeding from one phase of the project to the next. DOE's decision to terminate the contract did not result from a failure of its own analytical tools, but rather was a direct result of the planning, preparation, and utilization of accurate decision-making models.
Project contact: Mark Weimar