ACP and World Enrichment Market Presentation for U. S ACP and World Enrichment Market Presentation for U.S. Department of Energy Edward Kee Vice President Jennifer Cascone-Fauver Senior Consultant 16 October 2013

Assignment NERA was retained by USEC to study the ACP’s impact on competition in enrichment supply NERA used a competition/antitrust analytical framework, similar to what global competition authorities would use to analyze a merger The results of NERA’s study were provided to USEC on September 5, 2013

Summary of Conclusions Absent Commercial Deployment of the ACP With Commercial Deployment of the ACP U.S. utilities will be totally dependent on foreign-owned (including Russian) suppliers of enrichment A U.S.-owned and located supplier of enrichment to the world market is guaranteed Non-ACP enrichment suppliers will have increased market power Competition in enrichment supply will increase Higher risk of anti-competitive behavior by the remaining (non-ACP) enrichment suppliers Reduces the risk of coordination and anti-competitive behavior by non-ACP suppliers An increased risk of higher enrichment prices and less attractive contract terms for buyers Helps ensure competitive enrichment prices and reasonable contract terms for buyers

Global Enrichment Supply in 2012 90% share from 4 suppliers: AREVA, TENEX, URENCO, USEC 3 suppliers if URENCO and AREVA linked ETC joint venture (manufactures centrifuges) Cooperative business arrangements As a single supplier, URENCO/AREVA supply a large share of enrichment (~45%) Loss of the ACP reduces suppliers from 4 to 3 (or from 3 to 2 if URENCO and AREVA are considered as a single supplier)

Framework for NERA’s Analysis NERA used the framework described in the U.S. Merger Guidelines We treated ACP loss like a merger that resulted in complete elimination of a competitor’s output/capacity Relevant product market is enrichment Limited substitution for enrichment in response to somewhat higher prices Relevant geographic market is the world But, trade restrictions and other factors suggest that U.S. enrichment market alone should also be studied

Measuring Concentration Levels Herfindahl–Hirschman Index (“HHI”): equal to the sum of squared market shares: Firma2 + Firmb2 + . . . + Firmi2 US merger guidelines partition markets by HHI (level) and delta*: Presumption of significant anticompetitive effects Possibility of anticompetitive effects; would warrant scrutiny Does not raise concern > 200 200 Delta 100 Pre-Merger HHI Level 1,500 2,500 10,000 Unconcentrated Moderately Concentrated Highly Concentrated *Delta = HHIpost-merger – HHIpre-merger

NERA Analysis

Calculate Baseline Concentration Levels (HHIs) NERA calculated baseline HHIs for 2020 (world and U.S.) and 2025 (U.S. only) with the ACP in commercial operation World market with ACP is close to being classified as highly concentrated (2,500), while the U.S. enrichment market is highly concentrated World Enrichment Supply 2020 Share 2025 TENEX 30% -- URENCO AREVA 15% China & Japan 14% USEC (with ACP) 10% U.S. Enrichment Supply 2020 Share 2025 TENEX 15% 28% URENCO 59% 50% AREVA 4% China & Japan 0% USEC (with ACP) 22% 19% HHI: 2,357 (2020) HHI: 4,231 (2020); 3,609 (2025) Source: NERA Report, Figures: IV-1 (page 51); IV-4 and IV-5 (page 56).

Scenarios without the ACP NERA reviewed 7 scenarios where expected ACP supply (3.8 million SWUs/year) replaced by: #1 – TENEX #2 – TENEX & URENCO (half each) #3 – TENEX & AREVA (half each) #4 – URENCO #5 – AREVA #6 – URENCO & AREVA (half each) #7 – AREVA (after acquiring all of URENCO – this also reflects a view that AREVA and URENCO act as a single supplier)

2020 Results for World Enrichment Scenario without the ACP 2020 HHI HHI Delta from Baseline (2,357) 1. TENEX 2,688 331 2. TENEX + URENCO (half each) 2,665 308 3. TENEX + AREVA (half each) 2,573 216 4. URENCO 2,681 324 5. AREVA 2,499 142 6. URENCO + AREVA (half each) 2,570 213 7. AREVA/URENCO (as one company) 3,800 1,443 Source: NERA Report, Figure: IV-2, page 52.

2020 & 2025 Results for U.S. Enrichment Scenario without the ACP 2020 HHI HHI Delta from Baseline (4,231) 2025 (3,609) 1. TENEX 4,689 458 4,651 1,042 2. TENEX + URENCO (half each) 5,329 1,098 4,885 1,276 3. TENEX + AREVA (half each) 4,300 69 4,024 415 4. URENCO 6,311 2,080 5,472 1,863 5. AREVA 4,254 23 3,749 140 6. URENCO + AREVA (half each) 5,111 880 4,434 825 7. AREVA/URENCO (as one company) 6,887 2,656 5,985 2,376 Source: NERA Report, Figure IV-6, page 57 and Figure IV-7, page 58.

Anticompetitive Effects are Likely Absent Mitigating Circumstances Results are mostly outside of the “safe harbors” used by competition authorities in merger situations 7 7 7 1,2,4 2,4,6 World 2020 Scenarios > 200 3,6 1 1-4,6 U.S. 2020 Scenarios 200 Delta Without the ACP (Change from Baseline) 5 5 U.S. 2025 Scenarios 100 3,5 Unconcentrated 1,500 2,500 10,000 Moderately Concentrated Highly HHI Level with the ACP (Baseline)

Without the ACP, enrichment suppliers: Anticompetitive Effects are Likely Absent Mitigating Circumstances (continued) Without the ACP, enrichment suppliers: May be able to earn substantial profits by coordinating pricing and other actions Are less likely to be constrained by a pricing response from competing enrichment suppliers Would have incentive to raise prices and increase profits rather gaining market share with lower prices Without the ACP, enrichment buyers face increased risk of higher enrichment prices and less favorable contract terms

New Entry is an Important Issue New entry can alleviate concerns about competitive effects if such entry will deter or counteract (mitigate) the anticompetitive effects of concern High prices tell entrants there are profits to be made and thus, drive new entry Prices needed for new entry constrain the prices charged by incumbent suppliers A market with high barriers to entry: Reduces constraints on market price, since incumbent suppliers do not fear competition from a new supplier Provides opportunity for incumbent suppliers to profitably raise prices or offer less favorable purchasing terms

There are High Barriers to Entry in Enrichment A new (de novo) supplier of enrichment or enrichment technology is unlikely by 2020 or 2025 Significant time to develop and deploy new technology Large capital investments are required Limits and controls imposed by NPT, nuclear safety regulation, trade restrictions, etc. If new entry is feasible, new entrant prices likely to be high due to capital investment and limited initial output Example is Resende (centrifuge facility in Brazil): Full levelized costs estimated to be $160 per SWU 2 x cost for existing Western facilities 3 x cost for existing Russian facilities

Enrichment Industry Has High Barriers to Entry (continued) Any additional capacity will be added by existing suppliers at existing facilities (e.g., LES and GBII), using already developed technology These are the same suppliers that have, absent the ACP, the market power to demand higher prices from enrichment buyers in exchange for guarantees that sufficient enrichment capacity will be available New capacity additions by existing suppliers will not make enrichment market more competitive

Conclusions Enrichment market without the ACP will: Have greater supplier concentration and result in changes in concentration that would raise concerns in a merger situation Have more supplier market power Increase buyer risk of higher enrichment prices. Enrichment market with the ACP will: Increase market competition Likely result in benefits to enrichment buyers Add domestic supplier for U.S. enrichment buyers

Appendix

Sample HHI Calculation Takes into account the number and relative size distribution of the firms in a market and increases both as the number of firms in the market decreases and as the disparity in size between those firms increases. Large number of firms: HHI → Zero Monopoly (one firm): HHI → 10,000 points Sample calculation Firm Market Share HHI (Points) Firm #1 30% 302 Firm #2 Firm #3 20% 202 Firm #4 Total 100% 2,600

2012 World Enrichment Market Shares Source: NERA Report, Figure II-2, page 17.

2012 World Enrichment Market Concentration Source: NERA Report, Table II-4, page 20.

2012 U.S. Enrichment Market Shares Source: NERA Report, Figure II-3, page 19.

2012 U.S. Enrichment Market Concentration Source: NERA Report, Table II-5, page 20.

2020 World Enrichment Market Shares – Baseline with the ACP Source: NERA Report, Figure III-3, page 43.

2020 World Enrichment Market Concentration – Baseline with the ACP Source: NERA Report, Table IV-1, page 51.

2020 World Enrichment Market Concentration – Scenarios without the ACP Source: NERA Report, Table IV-2, page 52.

2020 U.S. Enrichment Market Shares – Baseline with the ACP Source: NERA Report, Figure III-4, page 44.

2020 U.S. Enrichment Market Concentration – Baseline with the ACP Source: NERA Report, Table IV-4, page 56.

2020 U.S. Enrichment Market Concentration – Scenarios without the ACP Source: NERA Report, Table IV-6, page 57.

2025 U.S. Enrichment Market Shares – Baseline with the ACP Source: NERA Report, Figure III-5, page 45.

2025 U.S. Enrichment Market Concentration – Baseline with the ACP Source: NERA Report, Table IV-5, page 56.

2025 U.S. Enrichment Market Concentration – Scenarios without the ACP Source: NERA Report, Table IV-7, page 58.

Contact Us Edward Kee Vice President NERA - Washington, DC +1 202 370 7713 edward.kee@nera.com Jennifer Cascone Fauver Senior Consultant NERA - Washington, DC +1 202 466 9233 jennifer.fauver@nera.com © Copyright 2013 National Economic Research Associates, Inc. All rights reserved.