1. 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

2. 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

3. 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

4. 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)

5. 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

6. Measuring Concentration Levels
Herfindahl–Hirschman Index (“HHI”): equal to the sum of squared market shares: Firma2 + Firmb 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

7. NERA Analysis

8. Calculate Baseline Concentration Levels (HHIs)
NERA calculated baseline HHIs for 2020 (world and U.S.) and (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).

9. 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)

10. 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.

11. 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.

12. 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 Scenarios
200
Delta Without the ACP
(Change from Baseline) 5 5
U.S Scenarios
100
3,5
Unconcentrated
1,500
2,500
10,000
Moderately
Concentrated
Highly
HHI Level with the ACP (Baseline)

13. 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

14. 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

15. 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

16. 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

17. 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

18. Appendix

19. 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

20. 2012 World Enrichment Market Shares
Source: NERA Report, Figure II-2, page 17.

21. 2012 World Enrichment Market Concentration
Source: NERA Report, Table II-4, page 20.

22. 2012 U.S. Enrichment Market Shares
Source: NERA Report, Figure II-3, page 19.

23. 2012 U.S. Enrichment Market Concentration
Source: NERA Report, Table II-5, page 20.

24. 2020 World Enrichment Market Shares – Baseline with the ACP
Source: NERA Report, Figure III-3, page 43.

25. 2020 World Enrichment Market Concentration – Baseline with the ACP
Source: NERA Report, Table IV-1, page 51.

26. 2020 World Enrichment Market Concentration – Scenarios without the ACP
Source: NERA Report, Table IV-2, page 52.

27. 2020 U.S. Enrichment Market Shares – Baseline with the ACP
Source: NERA Report, Figure III-4, page 44.

28. 2020 U.S. Enrichment Market Concentration – Baseline with the ACP
Source: NERA Report, Table IV-4, page 56.

29. 2020 U.S. Enrichment Market Concentration – Scenarios without the ACP
Source: NERA Report, Table IV-6, page 57.

30. 2025 U.S. Enrichment Market Shares – Baseline with the ACP
Source: NERA Report, Figure III-5, page 45.

31. 2025 U.S. Enrichment Market Concentration – Baseline with the ACP
Source: NERA Report, Table IV-5, page 56.

32. 2025 U.S. Enrichment Market Concentration – Scenarios without the ACP
Source: NERA Report, Table IV-7, page 58.

33. Contact Us Edward Kee Vice President NERA - Washington, DC
Jennifer Cascone Fauver
Senior Consultant
NERA - Washington, DC
© Copyright 2013
National Economic Research Associates, Inc.
All rights reserved.