James A. Glasgow
Morgan, Lewis & Bockius LLP
1800 M Street, N.W.
Washington, D.C. 20036-5869

This paper analyzes the impediment to execution of privatized waste remediation contracts that arises from the Government’s mandatory termination for convenience clause, taken together with the Anti-Deficiency Act. It then summarizes relevant aspects of the Anti-Deficiency Act and analyzes DOE’s efforts to meet the requirements of that Act while simultaneously providing sufficient assurances to prospective contractors and financiers. It also reviews and comments on solutions to this problem that were offered in several bills introduced in the 104th Congress. The paper concludes that the failure of Congress to appropriate the sums sought by DOE for the above-mentioned purpose for use during fiscal year 1998 illustrates a potential short-coming in DOE’s approach to satisfying the requirements of the Anti-Deficiency Act.

The Anti-Deficiency Act is a concern for those who submit proposals to the Department of Energy (DOE) regarding privatized waste remediation contracts, because of its impact on the U.S. Government’s contractual implementation of its right to terminate for convenience of the Government. Lenders are unlikely to commit large sums of money for the construction of nuclear waste treatment facilities pursuant to privatized contracts with DOE unless they have reasonable assurance that they will be made whole in the event that DOE terminates the contract for convenience before the treatment facility has operated and the contractor and lenders have fully recouped their investments. The Anti-Deficiency Act prevents DOE from giving such assurances unless they are expressly contingent on the availability of appropriated funds or pursuant to a statutory waiver of that Act.

In several contracts executed to date, DOE has pledged to seek annual appropriations from Congress (that are sufficient to compensate the contractor for its work if the contract were terminated in that fiscal year. Such money is to be available until expended (so called "no year" money) and the appropriated amount thus accumulates year by year during the design and construction of the treatment facility. If DOE fails to obtain such annual appropriations in the requisite amount, the contractor has the right to terminate and obtain compensation for time and materials expended to the date of termination, subject to certain conditions.

Postponement of the Congress’ appropriation of funds is one of the chief advantages cited in support of DOE’s privatized approach to remediation of radioactive waste stored at DOE sites. Balancing the federal budget and near-term reduction of the budget deficit are obviously aided if DOE is able to postpone asking Congress to appropriate money until funds are needed for DOE’s payments to the contractor who is providing waste processing services. However, these budgetary advantages of privatization are reduced if DOE must ask Congress to appropriate funds on an annual basis to cover the contract termination expenses in the event that the contract is terminated by DOE before the facility is completed, thus depriving the contractor and the private sector providers of capital of the opportunity to recoup their investment and earn a profit through DOE’s payment of waste processing fees.

During the brief history of DOE’s privatized waste remediation program, Congress has appropriated significantly less than DOE has requested for this program. Therefore, DOE’s reliance on annual congressional appropriations to fund DOE’s contingent liability in the event of DOE’s termination of a privatized project appears to present a potential weakness that could jeopardize particular projects or perhaps even the entire privatized approach to waste remediation.

The Federal Acquisition Regulation (FAR) (Subpart 49.5) prescribes the termination for convenience clauses that are required for various types of contracts. These clauses provide the Government with the unilateral right to terminate a contract, at any time, when the contracting officer determines that it is in the Government’s interest. In a Report to the Secretary of Energy entitled, "Harnessing the Market: The Opportunities and Challenges of Privatization (January 1997), DOE Staff observed that "termination clauses also predetermine the allowability of certain costs and the procedures for handling disputes, to simplify the termination process."

As DOE also observed in the above-mentioned report, "Termination for Convenience" (T for C) "reflects the traditional relationship between the Government and private contractors, but may require adjustment for privatizations." In its report, DOE acknowledged the views of some industry representatives that the Government’s use of the T for C clause "can impede participation in privatization efforts, particularly with respect to securing financing for capital-intensive projects." According to DOE, the industry has identified the following two problems with the T for C clause in privatizations that involve third-party financing: " (1) the high risk of the Government terminating a contract prior to completion and (2) the unallowability of interest charges and the limitation on the amount of recoverable profit." DOE’s report acknowledged that "these risks can drive up the cost of obtaining financing and in some cases even cut off the prospects of obtaining financing."

In its report, DOE defended the T for C clause, noting that the Government "needs the flexibility to react to the Nation’s needs in a constantly changing environment." According to DOE, it is important that the Government be able to use its unilateral right to cancel projects due to, for example, inadequate funding, change of direction from Congress, or reallocation of limited financial resources." While recognizing the importance of the T for C concept to the Government, in its negotiation of privatized waste remediation contracts, DOE observed that "this concern needs to be carefully and appropriately balanced with the needs and expectations of contractors and financiers that they will receive appropriate compensation and a reasonable rate of return."

As DOE has observed with regard to privatized waste remediation contracts, "large up-front costs will not be recovered by the vendor until the delivery of services." Consequently, DOE has acknowledged that "contractors are at substantial risk if a project is terminated by DOE prior to full recovery of the capital provided by private investors." Recognizing this problem, DOE has noted that "unless the needs of private industry and the Government are carefully balanced, contractors and financiers would be hesitant to devote necessary resources for government projects."

As DOE’s report acknowledges, "one approach used to successfully address the forgoing important concerns of the vendor has been to include contract language that states that the Government intends to obligate sufficient funds to meet or exceed any annual termination liability and incurred performance payment requirements." Furthermore, DOE has indicated that where private financing is a critical element, the clause could, "in an approved deviation from the FAR," provide that allowable costs will include the following if they are reasonable and allowable: (1) the financing cost; (2) any legal, underwriter, third-party credit support; and (3) other professional fees directly related to obtaining the financing. Recognizing the requirements of the Anti-Deficiency Act, DOE has further observed that the "Government’s entire obligation under the T for C clause would be contingent upon the availability of appropriated funds from which payment for contract purposes can be made." DOE has stated that "under certain circumstances, it may be appropriate to negotiate a ceiling on termination costs prior to contract award." However, DOE has noted that it "should also explore other alternatives that can provide the necessary balance between government and private-sector needs and requirements." Nevertheless, DOE has not identified any such alternatives.

The U.S. Constitution (Art. I, Section 9, Clause 7) provides that "no money shall be drawn from the treasury but in consequence of appropriations made by law . . ." As interpreted by the U.S. Supreme Court, this clause acts as a limitation on the power of the Executive Branch to expend funds. This constitutional requirement was implemented by Congress in the Anti-Deficiency Act (31 U.S.C. 1341(A)(1), which provides, in part, that an officer or employee of the U.S. government . . . may not . . .(b) involve [the United States] in a contract or obligation for the payment of money before an appropriation is made unless authorized by law."

The Anti-Deficiency Act contains two distinct prohibitions:

1. making expenditures or incurring obligations in excess of available appropriations
2. making expenditures or incurring obligations in advance of appropriations

To satisfy the requirements of the Anti-Deficiency Act while implementing its privatization program, DOE has two options. First, DOE may restrict its expenditures and obligations under that program to amounts enacted by Congress in the annual appropriations legislation. Second, DOE may ask Congress to enact specific authorizing legislation.

As the U.S. Supreme Court has repeatedly recognized, "the established rule is that the expenditure of public funds is proper only when authorized by Congress, not that public funds may be expended unless prohibited by Congress." United States v. MacCollous, 426 U.S. 317, 321 (1976). The U.S. General Accounting Office (GAO) has observed that "[r]egardless of the nature of the payment--salaries, payments promised under a contract, payments ordered by a court, whatever--a federal agency may not make a payment from the U.S. Treasury unless Congress has made the funds available."U.S. GAO, Office of General Counsel, Principles of Federal Appropriations Law, Vol. I at page 1-3 (2d ed.)

Most congressional appropriations are made on an annual basis (also called fiscal year or one-year appropriations) and are available for obligation only during the fiscal year for which they are made. As the GAO had observed, all appropriations are presumed to be annual appropriations unless the appropriation act expressly provides otherwise. If an agency fails to obligate its annual funds by the end of the fiscal year for which they were appropriated, they cease to be available for obligation and are said to have "expired" for obligational purposes. West Virginia Association of Community Health Centers Inc. v. Heckler, 734 F.2d 1570, 1576 (D.C. Cir. 1984). However, annual appropriations remain available for an additional five fiscal years beyond expiration to make payments to liquidate liabilities arising from obligations made within the fiscal year for which the funds were appropriated. 31 U.S.C. § 1553(a).

DOE’s administration of its privatization program is clearly affected by the fundamental rule that "an appropriation may not be used for the needs of some time period subsequent to the expiration of the period of availability."

A key question is whether DOE’s statutory authority to enter into long-term contracts may be construed as a waiver of the Anti-Deficiency Act. For the following reasons, that authority does not constitute a waiver of the Anti-Deficiency Act. Chapter 14 of the Atomic Energy Act (AEA) (§§ 11-170B) sets forth the Atomic Energy Commission’s (now DOE’s) general contracting authority. Section 161u authorizes DOE to "enter into contracts for such periods of time as [DOE] may deem necessary or desirable for the purchase of any supplies, equipment, materials or services." Section 161u(2)(a). Long-term contracts are expressly authorized: "Such contracts shall be entered into for periods not to exceed five years from the date of initial delivery of such supplies, equipment, materials, or services or ten years from the date of execution of the contract . . . ."

Over its forty-year history, Section 161u has not been invoked by DOE as the basis for contracting without appropriated funds. Section 161u(2)(a)’s authorization of contracts less than ten years was enacted at a time (1954) when express authority to support multi-year contracts was considered necessary.

As noted, DOE and its predecessors apparently have never invoked Section 161u as "contract authority" for its entry into long-term contracts containing binding obligations not supported by appropriated funds. In this regard, the GAO has observed that "contract authority "must be specific authority to incur the obligation in advance of appropriations, not merely the general authority any agency has to enter into contracts to carry out its functions." GAO, Principles of Federal Appropriations Law, Vol. II at 6-53 (2d ed.). As is well established, an agency does not need specific statutory authority to enter into contracts. Therefore, statutory provisions, such as Section 161u of the Atomic Energy Act, conveying authority to enter into contracts "cannot be sufficient to constitute exceptions to the Anti-Deficiency Act, else the Act would be meaningless."GAO, Principles of Federal Appropriations Law, Vol. II

Notably, DOE’s authority under Section 161u to enter into multi-year contracts does not contain the plainly worded authority specified in Section 164 for DOE to enter into long-term electric supply contracts (up to twenty-five years) notwithstanding the lack of appropriated funds covering the entire contract period. Hence, Congress apparently did not intend Section 161u to authorize DOE to enter into long-term contracts without regard to the availability of appropriated funds.

DOE’s Budget Request to Congress for FY 1997 included a request for $185 million to "provide funding to be set aside to meet the termination liability clause of the Waste Tank Treatment Service contract for Richland, should the Government decide to terminate for its own convenience." DOE noted that "setting aside these funds meets requirements of the Anti-Deficiency Act while demonstrating the Department’s serious commitment to signing a contract for this service." DOE also stated that "an additional $182 million is being proposed in the Government-wide General Provisions in the Appendix Volume of the President’s FY 1997 Budget to provide up-front funding for additional environmental management privatization efforts." DOE explained that "this request is part of an initiative to improve planning and budgeting for the acquisition of fixed assets and similar procurements."

In July 1996, the House of Representatives and the Senate approved their versions of the Energy and Water Appropriations bill that contain funding to support DOE’s privatization initiatives for defense waste cleanup. The House appropriated $185 million and the Senate appropriated $150 million for the high-level waste storage tank cleanup at the Hanford defense waste facility. The House and Senate appropriated an additional $182 million to fund privatization programs beyond 1997, including Idaho’s mixed waste treatment center and the Oak Ridge transuranic waste treatment project.

DOE proposed this funding request for environmental management privatization initiatives to reassure contractors that it will have sufficient funds to meet its long-term financial commitments and to compensate contractors in the event of project cancellation. However, both the House and Senate expressed the need for DOE to implement a more cost-effective way to handle waste remediation at its facilities. They also expressed some reservations about DOE’s ability to accomplish its goal.

In the report from the Senate Appropriations Committee on the Energy and Water Development Appropriations bill, the Committee stated that while it supports the Department’s efforts to explore innovative options to reduce environmental management costs, it was concerned that the "limited response to DOE’s recent bid solicitation raises serious questions regarding the Department’s current approach to privatization." Therefore, the Appropriations Committee directed DOE to report no later than December 31, 1996, on the implications of recent limited responses to DOE RFPs involving its privatization proposal with respect to (1) DOE’s projected cost saving, (2) the extent of commercial competition and participation in the initiative, and (3) recommendations on any changes or new approaches which would make the privatization initiative more effective.

The House Appropriations Committee stated in its report on the Energy and Water Appropriations legislation that it supports DOE’s privatization initiative for environmental remediation, but urged DOE to "use every means possible to broaden its use of existing companies with cleanup technologies and to maximize competition in its procurement processes." The House Appropriations Committee said that while it approved an appropriation of $185 million for the Hanford Tank Waste Remediation System, this funding was not an endorsement of DOE’s proposal to retrieve ninety-nine percent of the radioactive waste stored in tanks at Hanford, which the Committee stated would cost almost $40 billion. Furthermore, the Committee said that it is aware that DOE has already spent millions of dollars for remediation at Hanford and therefore expects the tank clean-up project to be executed cautiously, with any cost savings resulting from the selection of a new lead contractor reallocated to the privatization program.

On July 17, 1997, the House Appropriations Committee favorably reported the Energy and Water Appropriations bill (H.R. 2203). Citing serious concerns about DOE’s $1 billion request, the House Committee recommended no funding for DOE’ defense environmental management privatization initiatives.

The House Committee stated that it was withholding funds because it has been unable to obtain consistent information about DOE’s privatization projects. For example, the Committee stated that answers on financial data and requirements have varied. Questions have been raised concerning DOE’s cost estimates, the accuracy of potential cost savings and the need for the projects. The Committee also criticized DOE’s privatization concept. It noted that DOE’s program to procure environmental management services from the private sector through fixed price contracts, with payments due after services are rendered, is not privatization in the true sense of the word, because DOE already uses private sector contractors to perform all of its cleanup activities.

The Senate Appropriations Committee also cited in its report problems with DOE’s privatization program. For example, it said "serious questions and issues remain to be addressed if DOE’s privatization program, as currently structured, is to be successful."

Responding to the House’s failure to appropriate any funds for this purpose, the Senate appropriated $300 million for the privatization program. The House-Senate Conferees compromised, approving $200 million for DOE’s privatization initiatives.

Testimony by DOE officials before congressional subcommittees, concerning DOE’s FY’98 budget request, also offers insights into DOE’s perception of the principal hurdles to implementation of its privatization program. Responding to questions concerning his testimony on March 12, 1997 before the House Appropriations Subcommittee on Energy and Water, Alvin Alm, Assistant Secretary for Environmental Management, stated as follows:

Termination costs on privatized projects were also the subject of congressional questions during the House Appropriations subcommittee hearing on March 12, 1997:

A portion of Assistant Secretary Alm’s testimony on April 22, 1997, before the Senate Appropriations Subcommittee on Energy and Water Development, also shows DOE’s sensitivity to the problem of termination of privatized waste remediation contracts:

The defense environmental management (EM) privatization request for FY 1999 is $516.9 million, an increase of $316.9 million over the amount provided for privatization within the FY 1998 privatization account of the defense environmental restoration and waste management appropriation. The EM privatization program was the subject of intense public and congressional scrutiny during the review of the FY 1998 Presidential budget request in 1997. As DOE acknowledged, the program has been the subject of two reviews by the GAO which found in part that privatization "has the potential to save several hundred million dollars compared to the current M&O contracting approach."

During a hearing on February 5, 1998, before the Energy and Power Subcommittee of the House Commerce Committee, Deputy Secretary of Energy Elizebeth Moler testified as follows concerning DOE’s privatized approach to nuclear waste remediation:

During the 104th Congress, legislation was introduced to authorize specific DOE privatization programs. For example, Congressman Hastings (R-Washington) has stated that DOE’s privatization of the Hanford clean-up and other former defense sites cannot succeed on the basis of an ad hoc legislative approach consisting solely of Congress’ authorization of funds on an annual basis. Hastings and a few other members of Congress believe that a successful DOE privatization program requires omnibus legislation to authorize funding on a multi-year basis. Such funding would allay the concerns of contractors and investors regarding reimbursement in the event of termination for the Government convenience.

On March 21, 1995, Senator Slade Gorton (R-Washington) introduced S. 570, a bill to authorize the Secretary of Energy to enter into one or more contracts with facilities located within 25 miles of a current or former DOE defense nuclear facility for the procurement of products and services to support waste cleanup and modernization activities at such nuclear facilities. The legislation prohibits any person from bringing a claim against a contractor or subcontractor for injury, cost, damage, illness, damage to property or economic injury caused by a release of a hazardous contaminant during performance of the contract unless it is caused by the contractor’s negligence.

Senator Gorton’s bill expressly authorized DOE to commit itself to pay termination costs:

On April 7, 1995, Congressman Hastings introduced similar legislation in the Defense Nuclear Waste Cleanup Privatization Act. This legislation would give the Secretary of Energy authority to enter into long term contracts for the procurement of products and services determined by the Secretary of Energy to be necessary to support waste cleanup and modernization at nuclear defense facilities. Such products and services may include: waste remediation and environmental restoration, treatment, storage and disposal of waste, technical services, energy production, research and testing, and effluent treatment. The legislation provides authority for contracts lasting as long as thirty years, with two ten-year extensions, and indemnification for contractors against all personal liabilities and liabilities from third parties. The legislation also contains provisions governing amendments to contracts between DOE and contractors.

No action was taken on the above-mentioned omnibus DOE privatization bills introduced in the 104th Congress. Consequently, they died at the end of that Congress. Similar legislation has not been introduced in the 105th Congress, which is scheduled to end in October 1998.

Except for very small projects, all of DOE’s privatized waste remediation contracts will be multi-year contracts because design, construction and operation of a remediation facility will extend over many years. Yet, as GAO has repeatedly recognized, "an agency may enter into a multi-year contract with fiscal year appropriation (or for a term exceeding the period of availability of multiple-year appropriations) only if it has specific statutory authority to do so." Many examples may be found of Comptroller General rulings that an agency’s multi-year contract violated the Anti-Deficiency Act or other provisions of law. See e.g., 67 Comp. Gen. 190 (1988); 66 Comp Gen. 556 (1987); 64 Comp. Gen. 359 (1985). If DOE continues to pursue its privatization program with annual appropriations--as appears likely in view of Congress’ hostility to multiple-year appropriations--it may someday face a congressional or a U.S. Comptroller General investigation into whether a privatized DOE remediation contract to be carried out over many years involves obligations of the U.S. Government in violation of the Anti-Deficiency Act. DOE does not commit itself to a multi-year obligation, of course, where the performance of the contract is subject to the availability of appropriated funds. However, most contractors and venture capitalists will probably require some legally enforceable assurance of reimbursement from DOE for their investment in a facility that could be terminated for the Government’s convenience before it can operate and generate revenues. GAO has observed that "if an agency is contracting with fiscal year appropriations and does not have multi-year contracting authority, the only authorized course of action, apart from a series of separate fiscal-year contracts, is a fiscal-year contract with renewable options with each renewal option (1) contingent on the availability of future appropriations; and (2) to be exercised only by affirmative action on the part of the government (as opposed to automatic renewal unless the Government refuses)." Leifer v. United States, 271 U.S. 204 (1926).

DOE recognizes that in order to attract a sufficient number of qualified bidders on privatized remediation projects, it must include provisions to reimburse the contractor for its investment in the project if DOE terminates for convenience (as would occur if Congress failed to appropriate funds to continue a waste remediation project). However, to be safe from attack on Anti-Deficiency Act grounds, DOE must reasonably relate the annual appropriation allocated for termination costs to the costs that would be incurred if the project were terminated that year. The termination cost that would be acceptable to the contractor clearly increases each year during the period in which the contractor is designing and constructing the facility.

In order to provide sufficient assurance to the contractor and equity participants under privatized waste remediation contracts that they will recoup their investment if DOE exercises the T for C clause, DOE has three options: (1) obtain legislative authority to waive requirements of the Anti-Deficiency Act; (2) obligate all funds needed for contract performance, including termination costs, up front at time of contract execution; or (3) incrementally obligate funds needed by the contractor for the next period of performance to cover the contractor’s costs and the Government’s termination liabilities. The advantages and disadvantages of each of these options is addressed below.

On several occasions, Congress has waived requirements of the Anti-Deficiency Act. A recent example is the Act’s waiver to permit government indemnification of response action contractors under Section 119(c)(3) of the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund"), 42 U.S.C. 9619(c)(3). This waiver was deemed necessary to make funds available to contractors in future years for long-term liabilities associated with hazardous waste site cleanups. However, a waiver requires congressional action which DOE has not requested with respect to its environmental restoration program.

An Anti-Deficiency Act waiver does not guarantee that funds will be available at a future date to "make whole" a contractor whose contract is terminated for the convenience of the Government. Fundamentally, a waiver grants legal authority to enter into a multi-year contract in the absence of funds to obligate for an entire contract performance period. If the contract is terminated for the Government’s convenience, a contractor’s ability to recover against the Government would be limited to funds appropriated to DOE and not otherwise appropriated and to a claim against the Judgment Fund, which is appropriated annually by Congress to cover certain government liabilities. Thus, while waiver of the Anti-Deficiency Act can make legal a multi-year contract without multi-year appropriations, it does not assure a contractor a reserve of funds to be "made whole" upon the Government’s termination for convenience.

To date, DOE was not supported legislation such as that introduced in the previous Congress, to waive the requirements of the Anti-Deficiency Act with respect to DOE’s privatized nuclear waste remediation program.

DOE may also obligate appropriated funds to cover the entire amounts of funds necessary for a contract’s performance. In legislation now pending before Congress, funds are proposed for appropriation to DOE for its privatization initiative If these funds are available for obligation until expended, which is the case for most DOE environmental restoration and waste management appropriations, DOE conceivably could accumulate these sums over a several year period to be used up front to cover all contract performance, including termination costs, of even large privatization projects.

DOE’s Idaho RFP Amendment 2 adopts an incremental approach to obligations even though DOE proposes to obligate sufficient funds for Phase II to cover "total estimated capital costs of the Contractor’s treatment facility." To determine the amount of funds needed, DOE says it will apply OMB’s scoring policy for capital leases. OMB Circular No. A-11, Appendix A. While that policy relates primarily to the arcane rules of "scoring" expenditures and revenues for developing the President’s annual budget to Congress, its provisions can be used to determine fund obligations for DOE’s contracts. The policy provides that for a contract for the lease of a capital asset, the scoring (or obligation under DOE’s Amendment 002) would be "in the amount of the Government’s total estimated legal obligations." Amendment 002 provides that at "any time during performance under the contract, DOE’s obligations to the contractor will be commensurate with [the payment] schedule of Section L . . . . This will insure that sufficient funds are obligated at any point in time to enable the contractor to recover its investment in the event a termination for convenience by the Government becomes necessary."

DOE’s approach is supported by OMB’s scoring policy, which states that appropriations (or obligations under Amendment 002) for capital leases should be in annual amounts equal to the principal (or asset cost) and the differential cost of financing (annual interest payments on any debt issued less the interest payments that would occur at the U.S. Treasury rate). The asset cost is defined as the present value of the agency’s lease payments discounted from the date of the first payment using the Treasury interest rate. The policy makes clear, however, that when an agency enters into a capital lease (as DOE is treating the contract) under the agency’s general authority, as contrasted to project-specific authority, the agency must do so within the limits of the budgetary resources otherwise available to it as no additional resources are provided.

Another recent example of DOE’s approach is set forth in its RFP for the Hanford Tank Waste Remediation System (TWRS) Among other things, the contractors must include the following information regarding the possibility of DOE’s termination for convenience:

The "Special Contract Requirements" set forth in Section H of DOE’s TWRS RFP include provisions dealing with DOE’s right to terminate for the convenience of the Government. Section H.25 provides that "DOE's maximum liability under a termination for convenience shall not exceed the amount of funds obligated under Clause H.2 of this Contract."

Notably, the TWRS RFP contains the following acknowledgment of the special termination costs that would be incurred by the contractor during Phase I.B. of the TWRS project:

DOE’s Budget request for FY’99 provides $330 million for Phase I of the Hanford TWRS Project. In FY’98, $115 million was appropriated for this purpose. DOE’s total estimated cost for Phase I is $1.45 billion. This is "the value DOE has established for the capital investment by the private sector." As DOE recognizes in its budget request for FY’99, "for multi-year funded projects, appropriation is needed a year ahead for contractual commitments to preclude Anti-Deficiencies."

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