FEDS TO BLAME
By Jim Paxton
April 16, 2000
Reading the tea leaves as to whether the United States Enrichment Corporation (USEC) is financially mortally wounded is no easy task. Our suspicion is that it is not; not yet anyway.
But it is difficult to get an honest read on the situation because despite hopes that the privatization of the operation (formerly run by the U.S. Department of Energy) would allow USEC to operate as a free enterprise, it continues to be hamstrung by politics.
In fact it is our view that to the extent there are problems at USEC, they are the result of the fact that for reasons largely parochial, Congress did not truly privatize it.
First, Congress blessed a Treasury Department agreement binding the fledgling company, which employs thousands of workers at uranium enrichment plants it operates in Paducah and Portsmouth, Ohio, to continue to operate both plants for seven years regardless of whether that made financial sense. Only if the cost of operating both plants brought USEC to the verge of insolvency could one of the two plants be closed. (USEC has now reached that point, unfortunately.)
This is like telling a doctor he can't start to treat a patient for cancer unless and until the patient falls into a coma. By then it's too late. This is a ludicrous restriction to place on any business.
Granted, the politics behind the restriction looks out for local interests in Paducah and Portsmouth. Neither of the communities' congressional delegations wanted to face the fallout of a plant closing or massive layoffs in close proximity to their votes to take the operations private. Yet almost all of those voting for privatization agreed that the best prospects for long-term survival of the domestic enrichment industry was if the plants were allowed under USEC to operate as a private — translated "free-market" — business.
This has not happened.
In addition to tying USEC's hands for seven years on controlling expenses, Congress and the administration assured an immediate, dramatic downturn in the demand for USEC's product by signing off on a uranium purchase agreement with the Russians that artificially flooded the world market for reactor fuel. Prices predictably nose-dived and USEC's profit margins were accordingly ground thin. The price of USEC stock plummeted in response.
It strikes us that Congress has made the same type of mistake with USEC that the Kentucky legislature made when it destroyed the health insurance business in this state six years ago: it tried to legislate away fundamental laws of economics. Congress now is learning what Kentucky's lawmakers learned: economic laws are as immutable as the laws of physics. One cannot simply wish them away.
Another key mistake now coming squarely into play is a restriction placed on USEC stock providing that no single person or outside entity can own more than 10 percent of the company until July of 2001.
In addition to operating its existing plants, USEC is in dire need of developing a replacement enrichment technology to more efficiently compete on the world market. The impact of the government-created squeeze on USEC's earnings and stock price raises the issue of whether USEC is so undercapitalized as to be unable to finance research and development of that replacement technology.
In the free market, a company with USEC's present woes but viable as a long-term business would be a merger or buyout candidate for a larger firm. In fact the government less than two years ago had two such ready, willing and able buyers, including former Paducah enrichment plant operator Lockheed Martin. Such huge companies, were they to acquire USEC, clearly would have adequate excess cash flow to nurse the existing operation along until the replacement technology could be developed and made operational.
But again an artificial restriction on the USEC deal — the 10 percent ownership limit — stands in the way of free-market functions.
Put another way, Congress and the administration structured this privatization deal in such a way as to frustrate the free market at every turn. USEC can't quickly downsize, it can't close a plant (until it's too late), it can't find a merger partner or do any of the other things that a truly private company would do to mitigate the present mess and ride it out until market conditions improve.
We grant that some of the decisions made by USEC management, such as the size of its initial dividend relative to earnings, and arguably the decision to go public independently rather than be bought by an existing corporation, are open to serious question. But we believe that attempts at a congressional hearing Thursday to lay all of USEC's woes at the feet of the company's management was more than a little disingenuous.
It was primarily the government, Congress and the Clinton administration, that screwed this one up from the git-go. And that's par for the course any time government attempts to stick its fingers into operational decisions of private businesses.
We also believe the solution sought by some at the hearing — somehow returning the Paducah and Portsmouth plants to federal control — is unrealistic, even phony.
Among other things, people in Paducah no longer trust the government to responsibly oversee and operate an enrichment plant. And even if the government did resume operating the plants, such that profit were no longer an imperative, any jobs saved thereby would be short-lived. Gaseous diffusion is on its last legs as a viable enrichment process, and people in Paducah and Portsmouth best face up to that reality.
We believe the best thing the government could do at this point is to find a way to make USEC whole for the damage the Russian uranium deal wrought; then scrap the remaining shackles on the enterprise and allow the free market to work as intended.