March 13, 1997
DECISION AND ORDER
OF THE DEPARTMENT OF ENERGY
Name of Petitioner: Quivira Mining Company
Date of Filing: October 12, 1995
Case Number: VEA-0007
Quivira Mining Company (Quivira) filed an Appeal of a determination issued by the Environmental Restoration Division of the Department of Energy Albuquerque Operations Office (Environmental Restoration). The determination concerned Quivira's request for reimbursement for the federal portion of its remedial action costs at its Lake Ambrosia mill site. 10 C.F.R. Part 765 ("Reimbursement for Costs of Remedial Action at Active Uranium and Thorium Processing Sites"). Quivira appeals the disallowance of $2,181,428 in total remedial action costs, the federal portion of which would be $658,791. As explained below, we have determined that Environmental Restoration correctly disallowed the claimed costs, but that Quivira should be permitted the opportunity to file an amended claim with respect to one of the categories of disallowed costs.
I. Regulatory Background
Historically, uranium mills produced uranium for the federal government and commercial entities. The production of uranium resulted in uranium tailings, which are radioactive sand-like particles produced when uranium is extracted from uranium ore. Originally, neither the owners of uranium mills nor the federal government understood the potential hazard posed by the tailings. As a result, the owners of uranium mills simply piled the tailings on site.
As a result of the realization that the uranium tailings posed a health hazard, Congress passed two statutes. The first was the Uranium Mill Tailings Radiation Control Act of 1978 (UMTRCA). The second was Title X of the Energy Policy Act of 1992 (EPACT).
B. The UMTRCA
The UMTRCA requires that owners of active uranium sites, such as Quivira, take remedial action with respect to the uranium tailings and other by-product material on site. The UMTRCA applies to all such material and, therefore, applies to by-product material that resulted from uranium produced for the federal government, as well as that produced for commercial purposes. The UMTRCA does not contain any provision permitting reimbursement to the uranium mill owners for their remedial action costs.
C. The EPACT
The EPACT provides that uranium mill owners may claim reimbursement for that portion of their remedial action costs that is attributable to uranium sales to the federal government, hereinafter referred to as the federal portion. 42 U.S.C. § 2296a(b). The EPACT provides that claims for reimbursement shall be accompanied by "reasonable documentation." Id. § 2296a-1.
The EPACT further provides for the promulgation of implementing regulations. The DOE subsequently promulgated such regulations, which are set forth at 10 C.F.R. Part 765.(1)
D. Part 765
Part 765 sets forth the regulatory requirements governing reimbursement for remedial action costs at uranium and thorium processing sites. Under the regulations, the mill owner submits its claimed total remedial action costs. The DOE reviews those costs and issues a determination, either allowing or disallowing the claimed costs. The mill owner is entitled to reimbursement for the federal portion of those costs. The federal portion is based on the mill's federal reimbursement ratio, i.e., the mill's by- product material attributable to production of uranium for the federal government divided by the mill's total by-product material as of October 24, 1992. The reimbursable amount is determined by multiplying the federal reimbursement ratio by the firm's total approved remedial action costs.
Section 765.20 sets forth the procedures for submitting claims. Section 765.20(d) addresses the issue of documentation. Section 765.20(d)(1) provides that documentation prepared contemporaneous to the time the cost was incurred "should be used when available." Section 765.20(d)(2) provides that documentation not prepared contemporaneous to the time the cost was incurred "may be used" when it is the "only means available" to document the claimed costs. Section 765.20(f) provides that each licensee "should utilize generally accepted accounting principles consistently throughout the claim."
Upon the promulgation of Part 765, the DOE published a "Draft DOE Guidance" for the preparation of claims. In April 1995, the DOE published a final "DOE Guidance." The DOE Guidance provides detailed guidance concerning the preparation of claims.
II. Factual Background
This case concerns Quivira's Lake Ambrosia site, which is located near its Grants, New Mexico field office. Quivira produced uranium at the Lake Ambrosia site from 1958 to 1985. Although there is no uranium being mined at present, some uranium is still being recovered from waste water. As a result of this recovery, Quivira is an "active site" within the meaning of the EPACT.
At least as early as 1978, when the UMTRCA was passed, Quivira has undertaken remedial action at the Lake Ambrosia site. This action has included the use of heavy equipment to move and stabilize tailings and other by-product material. The claimed depreciation cost for some of this equipment is one of the two categories of costs at issue in this Appeal.
In addition to its Grants, New Mexico field office, Quivira has two field offices located in Utah and Wyoming, as well as a home office in Oklahoma. Quivira's reallocation of home office overhead expenses to the New Mexico office is the other matter at issue in this Appeal.
III. Procedural Background
In 1994, Quivira filed the reimbursement claim at issue in this Appeal. This was the first claim filed by Quivira and covers the period 1989 through 1993. Quivira subsequently filed a claim for an earlier period, 1985 through 1988. Quivira then filed a third claim, for 1994.
For the period 1989 through 1993, Quivira claimed $15,129,884 in remedial action costs. In a July 6, 1995 determination, Environmental Restoration allowed $12,543,172, and disallowed $2,586,712, in claimed costs.
On October 12, 1995, Quivira filed the instant appeal. Quivira's appeal is limited to two categories of disallowed costs totaling $2,121,428, i.e., (i) depreciation of equipment that had already been expensed or fully depreciated prior to the claim period and (ii) home office expenses reallocated to the New Mexico field office and, hence, the reclamation project.
Subsequent to the filing of the Appeal, Environmental Restoration filed comments, and Quivira filed a reply. A hearing was held on June 27, 1996. Subsequent to the hearing both parties filed post- hearing comments. The final submission was received on October 8, 1996.
Both categories of claimed costs at issue in this Appeal concern costs that were not reflected on Quivira's historical accounting records. Instead, Quivira developed the costs for the purpose of claiming reimbursement under the EPACT. Quivira claims that both departures from its historical books and records are necessary for Quivira to obtain the reimbursement contemplated by the EPACT.
A. Depreciation of Equipment That Had Already Been Expensed or Fully Depreciated
1. The Disallowed Depreciation
Quivira appeals $1,091,968 in disallowed depreciation. It is undisputed that this depreciation concerns equipment that had a zero book value throughout the claim period, because it had been expensed or fully depreciated prior to 1989. It is also undisputed that Quivira calculated the claimed depreciation solely for the purpose of filing the instant claim and did not make any modification to its historical books and records to reflect the claimed depreciation.
In support of its calculation of the claimed depreciation for the purpose of making the instant claim, Quivira contends that it could have recorded the depreciation in question during the claim period and would have done so had it known then that it would be able to receive reimbursement. In support of its contention that it could have recorded the depreciation in question, Quivira cites the acquisition of its stock by Rio Algom Mining Corporation (Rio Algom) in 1989. Quivira contends that Rio Algom could have (i) written up the value of the equipment to 1989 market values and (ii) pushed down those values to Quivira's books.
Aside from its assertion that it could have contemporaneously reported the claimed depreciation, Quivira argues that the equipment in question decreased in value over the course of the reclamation effort and that Quivira is entitled to reimbursement for that decrease. Quivira also appears to argue that, regardless of the decrease in value, the government benefitted from the use of the equipment and, therefore, must reimburse Quivira for that benefit.
2. Whether the Claimed Depreciation is Allowable
The EPACT provides for reimbursement of the federal portion of a licensee's reclamation "costs." Thus, contrary to Quivira's argument, the EPACT does not provide for reimbursement based on the purported "benefit" to the federal government.
Although the EPACT provides for the reimbursement of "costs" supported by "reasonable documentation," the EPACT does not specify the types of costs that are allowable or what constitutes "reasonable documentation." Instead, the EPACT confers upon the DOE the responsibility for promulgating regulations and making determinations concerning those issues.
The DOE made a general determination in the DOE Guidance that depreciation of equipment that has already been expensed or fully depreciated is not an allowable cost. The Draft DOE Guidance had identified "charges for fully depreciated or fully costed equipment" in a list of "non-reimbursable" costs. Draft DOE Guidance at II-8. The final DOE Guidance reiterated that rule:
Depreciation also should not be charged for equipment which has been fully depreciated or fully costed, regardless of whether the depreciation or costing occurred during the conduct of reimbursable or non-reimbursable activities.
DOE Guidance at II-4. The final DOE Guidance also identified "charges for fully depreciated or fully costed equipment" in a list of "non-reimbursable" costs. Id. at II-8.
Quivira argues, in essence, that the DOE Guidance should not be applied to the instant situation, because Quivira has not recovered the full value of the equipment from the DOE. Thus, under Quivira's view, the DOE Guidance would be applied only when a licensee had, over a period of time, been reimbursed for the full value of the equipment and then attempted to claim (i) depreciation a second time or (ii) a use charge. That view is contrary to the DOE Guidance, which expressly states that depreciation on equipment that has already been expensed or fully depreciated is non- reimbursable "regardless of whether the depreciation or costing occurred during the conduct of reimbursable or non-reimbursable activities." DOE Guidance at II-4.
Quivira also argues that, regardless of the DOE Guidance, it is entitled, as an equitable matter, to the claimed depreciation under the EPACT. Quivira argues that the equipment had value which decreased over the course of the claim period.
As an initial matter, we question Quivira's assertions concerning the market value of the equipment at the beginning of the claim period. The market values were based on general industry 1989 data for the relevant model and age of each piece of equipment. Thus, the valuation of the equipment (i) was not based on an actual inspection by an independent appraiser and (ii) did not take into account the radioactive contamination of the equipment. Quivira itself has indicated that the cost of decontaminating the equipment would preclude its sale and, instead, result in on-site burial.
We also question whether the value of the equipment declined over the claim period. The DOE has reimbursed Quivira for $690,000 for major maintenance work, including engine overhauls and rebuilding transmissions, which may have preserved the useful life of the equipment. That amount was in addition to another $167,000 for parts and consumable supplies that were installed or consumed in Quivira's maintenance shop.
Finally, even assuming that some decline in actual value may have occurred, that decline is not a reimbursable cost under the EPACT. Even Quivira concedes that the conventional method of recognizing the cost of capital equipment is amortization at the time of purchase and the recognition of that cost over its useful life as depreciation expense. Quivira also concedes that the disputed depreciation departs from this conventional method in that it is based on a reamortization of the equipment at the beginning of the claim period based on a determination of the current "market value." There is nothing in the EPACT that suggests that Congress intended such an unorthodox and expanded definition of costs. In fact, such an approach would be contrary to the EPACT, because its net effect would be to shift previously reported capital costs forward to the claim period, thereby creating the potential for reimbursement for capital costs other than those attributable to the reclamation effort.
In making the foregoing determination, we have considered and rejected Quivira's position that its 1989 acquisition by Rio Algom is relevant to its claim. As an initial matter, we note that regardless of whether Rio Algom "could have" written up the value of the equipment in 1989 and pushed down the values to Quivira's books, Rio Algom did not do so. As a result, Quivira's contemporaneous records do not support the instant claim. See 10 C.F.R. § 765.20(d). More importantly, even if Rio Algom had written up the value of the equipment and pushed down those values to Quivira's books, Quivira would not be entitled to the claimed depreciation. Under Quivira's theory, each subsequent acquisition of Quivira by another entity would permit another write up and round of depreciation on the equipment. The simple fact is that Quivira, not Rio Algom or any subsequent purchaser, is the licensee. Thus, it is Quivira's costs, not those of an acquiring entity, that are reimbursable under the EPACT.
Having concluded that Quivira is not entitled to the claimed depreciation, the question remains whether there is any depreciation that may be claimed on the equipment. Quivira requests the opportunity to amend its claim to request reimbursement for equipment purchased in 1987 and 1988 that, if depreciated from the date of acquisition, would result in depreciation in the claim period. When this issue was raised at oral argument, there was some uncertainty concerning what equipment was at issue, whether it had already been depreciated, and whether the submission of a claim for any such equipment would raise other issues. From the record, it appears that Quivira's ability to document the purchase price of the equipment is one such issue. Based on the foregoing, we have determined that Quivira should be permitted to file an amended claim with respect to depreciation for equipment purchased in 1987 and 1988 for DOE's review and a subsequent determination. Any such determination would be appealable to this Office.
B. Overhead Expenses
1. The Disputed Overhead Expenses
Quivira appeals Environmental Restoration's disallowance of $1,089,460 in reallocated home office expenses. During the claim period, Quivira had allocated home office expenses based on "estimated time to be spent."
Quivira argues that the allocation during the claim period, based on "estimated time to be spent," turned out to be inaccurate for 1991 through 1993. Quivira states that the estimates were based on the assumption that the Wyoming site would require an increased amount of home office attention, based in turn on the assumption that construction would begin on that site. Quivira states that as a result of delay in the initiation of construction, a significant amount of the home office support estimated for the Wyoming site was redirected to support the New Mexico field office, which in turn managed the Lake Ambrosia mill site.
2. Whether the Reallocated Home Office Expenses are Allowable
The regulations provide that documentation prepared contemporaneous to the time the cost was incurred should be used "when available." 10 C.F.R. § 765.20(d)(1). The rationale for relying on a licensee's contemporaneous records is obvious. Allowing a licensee to claim that the costs (or in this instance the allocation of costs) set forth in its contemporaneous records are understated creates an upward bias in claimed costs: a licensee will rely on its contemporaneous records when it is to the licensee's advantage and argue for upward adjustments when it can muster an argument that those records are somehow inaccurate. Accordingly, the ultimate issue is not whether a given cost could have been calculated a different way: instead, the question is whether a licensee can demonstrate that allowing it to depart from its contemporaneous records in a given instance will result in a more accurate statement of its total costs.
As indicated above, Quivira's contemporaneous records did not allocate the claimed costs to the New Mexico field office. As also indicated above, Quivira did not subsequently revise its records to allocate the claimed costs to the New Mexico field office. Thus, contemporaneous records are available and do not support the claimed costs.
Quivira has not demonstrated that a departure from its contemporaneous records in appropriate. Quivira does not challenge the appropriateness of allocating home office expenses based on the time devoted to each field office. Instead, Quivira argues that its contemporaneous estimates of that time were incorrect. We are simply not persuaded that we should disregard the estimates used in Quivira's contemporaneous records in favor of the current recollections of Quivira employees. It is not clear to us that the latter are more accurate, particularly given the potential for bias. More importantly, we are not convinced that reimbursement for the reallocated home office expenses will result in a more accurate overall statement of costs. It may be correct that the "estimated time to be spent" methodology was based on an erroneous assumption that a construction project would begin on the Wyoming site, and that various other methodologies, if applied at the time, would have resulted in an allocation of a greater proportion of home office expenses to the New Mexico field office. Nonetheless, there may well be other instances in which the methodologies utilized by Quivira were to its advantage. Based on the foregoing, we do not believe that Environmental Restoration abused its discretion in determining that the reallocated costs were not supported by "reasonable documentation" within the meaning of the EPACT.
We recognize that Quivira has argued that a "double standard" exists, i.e, that Environmental Restoration will challenge contemporaneous records when it believes they result in inflated costs, but that Quivira is not entitled to challenge its contemporaneous records when it believes they result in understated costs. Quivira cites the fact that Environmental Restoration did not permit Quivira to record the purchase price of capital equipment as an expense in the year of purchase, even though Quivira had done so in its contemporaneous records.
Quivira's argument ignores the fact that Environmental Restoration undoubtedly relies in numerous instances on the licensee's records and that Environmental Restoration has accepted some of Quivira's requested departures from its records. There is no doubt, however, that Environmental Restoration has the right to disallow a cost when it determines that the licensee has not demonstrated that it is entitled to reimbursement under the EPACT. Thus, in the particular example cited by Quivira, i.e., Environmental Restoration's refusal to allow Quivira to rely on its records showing the cost of equipment as an expense in the year of purchase, Environmental Restoration correctly determined that the cost of equipment should be determined through amortization and depreciation and, therefore, it was entirely appropriate to require that claimed equipment costs be presented in that manner.
For the reasons set forth above, we find that the Quivira has not demonstrated that Environmental Restoration incorrectly disallowed the costs at issue. Quivira will, however, be permitted to file an amended claim concerning depreciation for equipment purchased in 1987 and 1988, to be the subject of a further determination by Environmental Restoration.
It Is Therefore Ordered That:
(1) The Appeal filed by Quivira Mining Company, VEA-0007, on October 12, 1995, is hereby granted in part. Quivira may amend its 1989-1993 claim to request depreciation for equipment purchased in 1987 and 1988 and used on the reclamation project. In all other respects, the Appeal is denied.
(2) This is a Final Order of the Department of Energy.
George B. Breznay
Office of Hearings and Appeals
Date: March 13, 1997
(1)59 Fed. Reg. 26714 (May 24, 1994). The promulgation of these rules followed a proposed notice of rulemaking issued in August 1993. 58 Fed. Reg. 42450 (August 9, 1993).