Staff Paper Prepared for the President's Commission to Study Capital Budgeting

June 19, 1998

I. Description of Investment

The Department of Energy builds facilities for programs in its four main mission areas -- national security, science and technology, energy resources, and environmental quality. Many of DOE's facilities are large, technically complex, state-of-the-art research or industrial facilities, which may take ten years or more to design and build. Examples include particle accelerators for physics research such as the Fermi Main Injector and the Superconducting Super Collider (SSC), nuclear reactors for civilian and defense programs, facilities to treat and dispose of radioactive waste, lasers as big as football fields, factories to produce parts for and assemble nuclear weapons, and large experimental facilities to investigate fusion energy and central station electricity generation using solar energy or fossil fuels.

Since 1994, DOE's budget for design and construction of new facilities has averaged $1 billion per year. That is down from an average of $2.5 billion per year through most of the 1980s and early 1990s, when many more new facilities were being built to support DOE's science, defense and energy programs.

II. Decision making Process

DOE typically builds new facilities to provide unique new capabilities to the nation, e.g. new capabilities for scientific research. Traditional investment analyses that judge investment in new technologies for their ability to reduce the organization's operating costs are not generally relevant. Rather, DOE's decision making process largely involves identification of those new projects that can best support its missions and garner the political support necessary to obtain funding.

A defining feature of DOE's process of budgeting and planning for construction of new facilities has been incremental funding. Until recently, each year DOE has requested and Congress has appropriated only enough funds to cover designated spending on each construction project for the upcoming year.(1)

One benefit of incremental funding is that it helps smooth out lumpiness or spikes in the Department's budget that might result if DOE had to request full funding for large projects in a single year. On a department wide basis, spending on construction projects has varied by less than $300 million (2 percent of the total DOE budget) over the past five years. A large spike in funding would be needed to change from incremental funding to full up front funding of DOE's construction projects. Congress has been unwilling to provide DOE the large amounts of Budget Authority needed to make that change.

A drawback of incremental funding is that large projects may be initiated with relatively small budget requests in the first year or two. This practice reduces the attention paid by the Administration and the Congress to projects until they are already underway.

DOE's annual strategic planning and budgeting process focuses almost exclusively on the upcoming year. The Department does a good job in adjusting annual budget requests to balance priorities among the Departments various missions and programs. There is, however, little central control or coordination of individual programs longer term spending plans.

The combination of incremental funding and limited outyear planning creates an incentive for program managers to begin projects with low initial-year funds in the hope that future budget increases will allow them to continue. Such "betting on the come" was a common practice in DOE until recently. In many cases, the expected increase in funding did not materialize and projects were either canceled after significant spending had already occurred or had their construction schedules stretched out with resulting cost overruns.

III. DOE's Performance on Major System Acquisitions

In November 1996, the General Accounting Office (GAO) reported that of 80 projects which DOE had designated as major systems acquisitions from 1980 through 1996, 31 projects were terminated prior to completion and most of those that were finished had significant cost overruns.(2)

The complete list of DOE major projects canceled between 1980 and 1996 from GAO Report RCED-97-17 is Attachment A.

Projects Canceled After Significant Spending Had Occurred

     Since 1983, construction of at least four major Department of Energy facilities has been halted after significant spending had occurred (see table below). All four were controversial projects which never had widespread support. They were funded in the early years, because enthusiastic supporters were able to gain approval of the relatively small amounts of funding without thorough review of the full cost implications by the entire Congress. In almost every case, the opposition grew each year as the funding requests grew. In addition, annual debates and votes on the projects provided multiple opportunities for committed opponents to marshal support. There are several reasons why each was ultimately canceled, including problems with new technologies, charges of poor management, poor project design, cost overruns, and that the original purpose for which the projects were intended was no longer relevant. Ultimately, however, the major reason for cancellation in each case was that the majority of the Congress did not think that completion of the project was justified in light of the cost. Requests for full funding would have prompted more through debates at the outset which may have kept the projects from being started in the first place or garnered broader commitment and support from the Congress.

(dollars in billions)
  Year Year Initial Final Funds
Project Name Started Canceled Cost Est. Cost Est. Spend
Superconducting Super Collider 1990 1994 5.9 8.3 2.1
New Production Reactor 1988 1993 none none 1.3
Gas Centrifuge Enrichment Plant 1977 1985 4.5 8.6 3.0
Clinch River Breeder Reactor 1972 1983 0.4 4.0 1.7
1. The Administration proposed full funding for a limited number of DOE's projects in 1997 and for most DOE projects in 1998 and 1999, but Congress rejected those proposals.

2. U.S. General Accounting Office. Department of Energy: Opportunity to Improve Management of Major Systems Acquisitions. GAO/RCED-97-17, November 1996.

Attachment A:

(Dollars in millions)
Project name and
construction line               Original cost               Cost at                    Original
item number\a                  estimate                termination       completion date      Termination date
---------------------       --------------  --------------       ----------------        ----------------
50 MWe Geothermal      $70.0                           $28.0            March 1982           January 1982
 Demonstration Power
 Plant (80-G-001)

Advanced Isotope           N/A                           $275.3                         N/A                 May 1982
 Separation Program

Clinch River Breeder       $699.0                    $1,600.0                        1979        December 1983

Compact Ignition             $444.5                       $107.1     September 1993                          1992
 Tokamak (88-R-902)

Electric Vehicle                 N/A                           $180.0                         N/A                         1983

Elmo Bumpy Torus          $173.9                         $28.1                June 1982                         1984

Fuel Processing                 $270.0\b                 $305.8\b     September 1992                April 1992
 Restoration (85-D-

Fusion Materials                $134.4                      $105.9      September 1983                        1985
 Irradiation Test
 Facility (78-3-b)

Gas Centrifuge                   $5,100.0               $2,814.1                 June 1993                June 1985
 Enrichment Plant

Hanford Waste                   $1,010.2                 $418.3       September 1996           August 1996
 Vitrification Plant

High BTU Synthetic           $198.8                      $53.7               March 1981                July 1981
 Pipeline Gas
 Demonstration Plant

High BTU Synthetic           $156.8                      $77.8               March 1981                July 1981
 Pipeline Gas
 Demonstration Plant

Intersecting Storage           $398.6                    $201.3                  June 1986                       1983
 Accelerator (78-10- b)

Low-Level Waste               $141.8                       $7.0        September 2004    September 1996
 Disposal Facilities

Medium BTU Industrial      $93.0                      $65.6         September 1981                July 1981
 Fuel Gas
 Demonstration Plant

Monitored Retrievable        N/A                        $35.7                              N/A                        N/A
 Storage Project (93-

Multi-Tank Waste               $240.0                    $56.1                    June 1999     December 1995
 Storage Facility

New Production                  N/A                   $1,257.0                             2000        October 1992
 Reactor Capacity

Plutonium Recovery            $370.8\b              $24.3\b         September 1997        October 1990

Process Facility                    $140.0\b             $57.9\b                              N/A               June 1988
 Modification (84-D-

Reactor Safety                      $109.1\b             $15.6\b        September 1994               June 1994
 Assurance (90-D-

Reactor Seismic                    $103.4                     N/A        September 1996          August 1993
 Improvements (92-D-

Solvent Refined Coal            N/A                      $70.8        September 1984                July 1981
 Demon. Plant (SRC-2)

Solvent Refined Coal            N/A                    $190.7                   June 1984          August 1984
 Demon. Plant (SRC-1)

Space Nuclear Reactor         $22.7\b               $36.3\b        December 1988                      1992
 Power System (86-N-

Special Nuclear                     $210.0\b              $37.0\b              March 1994       February 1991
 Materials Research
 and Development
 Replacement (88-D-

Special Isotope                      $530.0\b              $85.0\b              March 1995                       N/A
 Separation Project

Strategic Petroleum                $1,460.0                  $6.0                           N/A    December 1993
 Reserve Expansion

Superconducting Super         $5,893.6        $2,201.9\d              March 1998       October 1993
 Collider (90-R-106)

Tokamak Physics                   $694.0                   $73.7       September 2000                     1995
 Experiment (94-E-

Uranium                                  $85.0\b              $116.3\b              March 1988     February 1994
 Facility (formerly
 Fuel Production
 Facility) (85-D-
                     \a Projects that are not funded as construction line items do not have
                     project numbers.  All costs, unless otherwise specified, are "Total Project
                     Costs." The cost data were obtained from initial budget submissions, final
                     cost reports, and other DOE-provided data.  The term "N/A" means cost
                     or schedule information is not available or not yet developed.

                     \b These amounts represent the project's "Total Estimated Cost," which
                     includes costs such as land, engineering, design, and construction.  Other
                     costs, such as research and development, conceptual design, startup, and
                     initial training, are not available.

                     \c The Monitored Retrievable Storage Project was terminated; however,
                     portions of the project were continued and have now been combined with
                     other activities into the Civilian Radioactive Waste Management Strategic

                     \d The termination activities for the Superconducting Super Collider are
                     not yet complete.  The cost at termination for this project is based on data
                     through fiscal year 1996.

President's Commission to Study Capital Budgeting