As the book title Too Dumb to Meter: Follies, Fiascoes, Dead Ends, and Duds on the U.S. Road to Atomic Energy implies, nuclear power has traveled a rough road. In this POWER exclusive, we present the 16th and 17th chapters, “Uranium Rush and the New ’49ers” and “Naked Shorts at Westinghouse,” the first two chapters of the “False Scarcity and Fools for Fuels” section.
British grammar school teacher and science fiction writer Henry George Wells in 1913 wrote one of the most astonishingly prescient passages in literary history. In his largely unreadable novel, The World Set Free, Wells invents a physicist lecturing to a class in Edinburgh. The physicist, named Rufus, proclaims:
A little while ago we thought of the atoms as we thought of bricks, as solid building material, as substantial matter, as unit masses of lifeless stuff, and behold! These bricks are boxes, treasure boxes, boxes full of the intensest force. This little bottle contains about a pint of uranium oxide; that is to say about fourteen ounces of the element uranium. It is worth a pound. And in this bottle, ladies and gentlemen, in the atoms in this bottle there slumbers at least as much energy as we could get by burning a hundred and sixty tons of coal. If at a word, in one instant, I could suddenly release that energy here and now it would blow us and everything about us to fragments; if I could turn it into the machinery that lights this city, it could keep Edinburgh brightly lit for a week. But at present no man has an inkling of how this little lump of stuff can be made to hasten the release of its store.
As the United States pursued the panoply of nuclear pipedreams in the 1950s, 1960s, and 1970s, the nation faced what it believed, erroneously, was a limited supply of fuel for the energy revolution that Wells described. In chasing supposedly scarce uranium in order to build its ever burgeoning backlog of bombs, fuel bombers, propel the nation into space, and rearrange the world’s geography with fission and fusion, the Atomic Energy Commission and the Joint Committee on Atomic Energy set off a uranium rush in the U.S. Southwest with attendant boom-time effects. The inevitable collapse left miners unemployed, communities abandoned, and large piles of radioactive detritus from the mills that converted ore into yellowcake (uranium oxide ready to turn into fissionable material).
The government’s efforts to find domestic supplies of uranium—by establishing an almost perfectly imperfect market—also set the perfect conditions for market chaos. The AEC’s uranium frenzy led to a series of irrational fuel supply contracts, a firestorm of contract cancellations and the largest commercial lawsuit in history. Another unanticipated result was an international cartel formed to corner the uranium market and drive up prices. In the end, the fuel fiasco offered a classic display of government wimping out in the face of an international confrontation, led by the political exemplar of wimpishness—the Carter administration.
The search for technologies to supplant uranium also led to feckless government attempts to invent the equivalent of perpetual motion machines—breeder reactors that created more fuel than they used, as the government repeatedly proved its willingness to spend a dollar today to save fifty cents tomorrow.
16. Uranium Rush and the New ’49ers
When the Royalton, Michigan, shop where Vernon J. Pick rewound electric motors burned down in early 1951, the successful small businessman was left with only $13,000 in an insurance settlement. Emotionally as well as physically burned out, Pick, forty-eight, and his wife Ruth packed up a panel truck and a travel trailer and headed toward Mexico for an extended vacation, intending then to migrate to California for a new start in life.
They never made it all the way. When the couple got to Colorado Springs, Colorado, Pick heard about a boom in uranium prospecting that was rolling over the region. So they headed to Grand Junction, west of Colorado Springs on the Utah border, where the Atomic Energy Commission had set up a regional office coordinating the agency’s red-hot quest for uranium. Pick made friends with Charles “Al” Rasor, a geologist who headed the AEC’s mining office, hoping to pick up some tips about uranium prospecting. Rasor pointed the Michigander to the tiny town of Hanksville in the remote Henry Mountains in the southeastern Utah desert, just north of today’s Lake Powell. “If I were going after the stuff,” Rasor told Pick, “I’d look here.”
That’s where Pick looked…and looked…and looked. After nine months of wandering in the desert, mostly in harsh territory where he could only hike in by foot, Pick was ready to give up. He was footsore and sick from drinking the arsenic-laced, alkali water, subsisting on oatmeal and dried milk. Resting on a boulder along Muddy Creek on June 2, 1952, facing a four-day trek back to civilization, Pick notices that his scintillation monitor didn’t seem to be working. It was stuck on the high end. He figured it had a dead battery. But when he moved away from his perch, the device for registering radioactive disintegrations acted normally. When he moved back to the boulder where he had been resting, the instrument pegged out again.
Pick suspected, hoped against hope, that he might have found uranium ore. When he chipped pieces off the boulder with his prospector’s hammer, he found the characteristic tint that indicates uranium ore. “It was all beautiful yellow-orange-colored ore,” he said later. Pick chipped off some more pieces and put them in his pack, stumbled and limped slowly back to his truck over the next four days and soon had the material assayed in Grand Junction. It was high-grade uranium ore. Pick staked his claim, raised money based on the guaranteed high price that AEC was paying for uranium, and was soon mining ore by primitive methods, grossing $50,000 a month. He had struck it rich.
In August 1954, Pick sold his mine to New York–based Atlas Corp. for $9 million in cash and stock, after already taking about $1 million worth of ore out of the mine. At the time of the sale, Pick told the New York Times that he remained “interested in the broader prospect of developing uranium as a new national resource for the production of nuclear power and energy for peacetime uses.”
Vernon Pick was a beneficiary of an artificial market the U.S. government created for an element that wasn’t identified until the late eighteenth century and had little commercial value until scientists realized it could be turned into the most fearsome weapons in history. In its lust to control the supply of uranium in the years during and after the war, the Atomic Energy Commission purposefully built a mining and milling boom that turned portions of the western U.S. desert into the modern equivalent of the California gold fields of the 1850s, creating instant millionaires like Vernon Pick.
From 1789, when German pharmacist Martin Heinrich Klaproth discovered the element uranium, until 1939, when Italian physicist Enrico Fermi proved that the strange metallic element could sustain a controlled fission reaction that released enormous amounts of energy, uranium was a scientific curiosity. When Fermi’s pile of graphite and uranium on a squash court under the University of Chicago’s Amos Alonzo Stagg Football Stadium demonstrated the controlled chain reaction in 1942, uranium had already become the object of a concerted U.S. government program to acquire a large supply in anticipation of building a new kind of bomb. Over the years that followed, the government created a freakish market— a total monopsony in which the government was, by law, the only buyer of uranium and could determine supply by setting prices and controlling demand.
The government realized even before the outbreak of World War II in the fall of 1939 that the silvery, dense element could be the key to bombs of magnitude dwarfing anything the world had seen before. One of the first to foresee the implications was Hungarian scientist Leo Szilard, another of the extraordinary European scientific talents who fled Nazi persecution and landed in the United States in the years leading to war and holocaust. Szilard, one of the leading theorists of fission, became concerned about keeping uranium out of Hitler’s hands and under free-world control. He shared his concerns with another expatriate Hungarian physicist, Eugene Wigner. Together in the United States in the summer of 1939 and fretting about uranium, they decided to ask Washington to warn the Belgian government of the need to secure its large uranium mine in its Congo colony in Africa. Szilard and Wigner persuaded the most prominent scientific refugee from Nazi oppression, Albert Einstein, to write a letter to President Roosevelt, raising the alarm about uranium.
Investment banker Alexander Sachs, who had access to the White House, agreed to hand-deliver the letter to Roosevelt. By the time Sachs was able to see Roosevelt in the Oval Office and deliver Einstein’s letter on October 11, 1939, Germany had already invaded Poland, and the war was on.
The Einstein letter began:
Some recent work by E. Fermi and L. Szilard which has been communicated to me in manuscript, leads me to believe that the element uranium may be turned into a new and important source of energy in the immediate future. Certain aspects of the situation which has arisen seem to call for watchfulness and, if necessary, quick action on the part of the administration.
Einstein noted that the United States “has only very poor ores of uranium in moderate quantities,” adding that the best resources were to be found in Canada, Czechoslovakia, and the Belgian Congo. The letter suggested that Roosevelt designate someone to coordinate the federal government’s interest in uranium, “giving particular attention to the problem of uranium ore in the United States.”
Most of the world’s uranium in 1939 came from two sources: the Shinkolobwe mine in the Belgian Congo jungle and the former silver mines at Joachimsthal in the Germanic region of Czechoslovakia, annexed as the Sudetenland by the Nazis in 1938. Most geologists believed uranium was an extremely rare mineral. Only a few other locations were known to have appreciable amounts of uranium ore. There was uranium in Canada and some in the U.S. in the Four Corners area where Colorado, Utah, New Mexico, and Arizona meet in the high desert, although many geologists doubted the U.S. prospects.
Uranium had only two uses prior to its development as a source of energy. It was used in mineral form to color glass, including ceramic glazes. Refined, it yielded radium, the rare radioactive element discovered by Marie Curie, which formed as the uranium spontaneously split apart. In the early twentieth century, radium was viewed as a wonder element, described by the New York Times in 1908 as having “practically no commercial use, but its value in laboratory experiments has created a demand that cannot be satisfied.” The curiously radioactive element became the most expensive substance on earth. The Times reported in 1918 that radium was selling for $2.8 million an ounce.
Uranium was generally sought only for the radium. The world’s richest source was the Belgian Congo mine under the control of Union Miniere du Haut Katanga, a subsidiary of the mammoth Belgian firm Societe Generale. The ore in the Congo mine was so rich it gave Union Miniere a worldwide radium monopoly. At the time of World War II, Union Miniere’s Katanga holdings represented over 7 percent of the world’s copper production and about 90 percent of the cobalt, an extremely important mineral for the coming war effort.
Journalist Tom Zoeller in his book Uranium, War, Energy, and the Rock That Shaped the World, describes how Union Miniere and its director, Edgar Sengier, responded to the accumulating war clouds of the 1930s. “As Europe began sliding toward war in the late 1930s,” Zoeller writes, “the market for radium began to suffer, and Sengier closed down the Shinkolobwe mine. He neglected to have it pumped, and the pit flooded with dirty water. A visitor described it as ‘a gray ulcer.’”
But there was some unusual interest in the uranium oxide, refined in the Congo from the Shinkolobwe ore, which Sengier had stockpiled by 1937, some five thousand tons in all. Officials from Britain sounded him out rather cryptically about use of the uranium, and never mentioned a price. He accepted an offer from a French delegation for his uranium stockpile, which would give Union Miniere half of the royalties from any patents developed to use the uranium the French scientists were able to develop. Germany’s invasion of Belgium killed the nascent deal, and Hitler’s forces seized eight hundred tons of uranium sitting on French docks. Some forty two hundred tons of uranium oxide remained in Katanga.
Sengier, a fierce opponent of the Nazis, concluded that the best way to continue his business following the fall of Belgium in 1940 was to move his operation to New York. He set up business in Manhattan, continuing to control the mines in the Congo, which had not fallen under German hegemony. Sengier had hungry customers for his cobalt, needed in aircraft engines. He also decided to move some of his uranium oxide stockpile from Africa to New York, shipping twelve hundred fifty tons in barrels on two freighters to an empty Archer Daniels Midland warehouse on Long Island.
The United States was beginning to take a serious look at acquiring uranium for its own uses. Einstein’s letter to President Roosevelt coincided with new scientific understandings of fission. Articles in the March and April 1939 editions of Physical Review confirmed fission, the splitting of the atoms and release of neutrons, in U235. An American Physical Society meeting in Washington at the end of April focused on U235 and how to obtain it from the more abundant U238.
Einstein’s letter to Roosevelt got the president’s immediate attention. When he finished reading the letter in the Oval Office, Roosevelt said to Alexander Sachs, the intermediary who delivered it, “Alex, what you are after is to see that the Nazis don’t blow us up,” and then told his trusted aide, Edwin “Pa” Watson, “This requires action.”
Roosevelt’s instruction resulted, within ten days, in the creation of a government uranium advisory committee including Lyman Briggs, director of the National Bureau of Standards, and a trio of Hungarian expat scientists: Szilard, Wigner, and Edward Teller, invited by Sachs to join the group. The group moved rapidly, reporting to Roosevelt on November 1 that a nuclear chain reaction was possible, although not yet proved, and could be useful for submarine power and might also produce “bombs with a destructiveness vastly greater than anything now known.”
Vannevar Bush, a mathematician and electrical engineer who headed the non-profit Carnegie Institution in Washington, soon persuaded his old friend Roosevelt to name him to head a new government group, the National Defense Research Committee. Roosevelt on June 28, 1941, issued Executive Order 8807, establishing the Office of Scientific Research and Development in the executive office of the president, subsuming Bush’s research committee. The new organization included a section on uranium, known as S-1. That became the foundation of an Army special project, named the Manhattan Engineering District. The Manhattan Project was born.
One of the first Army officers assigned to the new program was a West Point graduate with a PhD in hydraulic engineering, Kenneth D. “Nick” Nichols. He became the chief “fixer” for the project, locating supplies of needed raw materials and acquiring land for the sprawling enterprise, working for the hard-driving Gen. Leslie Groves. One of Nichols’s key tasks was procuring the uranium needed for the bomb builders.
Union Miniere’s Sengier, working out of his Manhattan office, approached the U.S. government in early 1942 seeking a market for his uranium, with no success. The creation of the Manhattan Project changed Sengier’s prospects. In September 1942, Nichols ventured to Sengier’s office and promptly reached a deal to buy the twelve hundred tons of uranium dioxide sitting in the barrels at the Long Island warehouse, and the three thousand tons still in Katanga, at a price of $1.04 per pound. As AEC historian Richard Hewlett recounts, the uranium from the Congo left in “several hundred-ton lots from West African ports. Sea transport over the U-boat-infested waters of the South Atlantic was a dangerous enterprise, but by using sixteen-knot-ships, the company brought through all but two cargoes.”
At the same time, Nichols contracted with Eldorado Gold Mines Ltd. for ore from their Canadian mines and for refining Canadian and Congolese ore. He then persuaded Sengier to reopen the Shinkolobwe mine. The Army also contracted with producers on the Colorado Plateau to buy all of their uranium output, only a tiny amount at that time. By 1944, the United States had secured all the uranium it needed for the war effort and effectively controlled the free world’s existing uranium production capacity.
But the U.S. supply of uranium at the end of the war was not enough for the needs and ambitions of the newly-created Atomic Energy Commission. The United States had barely enough fissile material on hand to make the bombs that fell on Japan and nothing to spare for new weapons, atomic bombers, or any of the hyperbolic atomic dreams featured in the popular press and the fantasies of the AEC. The commission and the congressional Joint Committee on Atomic Energy were also convinced that uranium was an extremely scarce mineral. Locking up the supply would require buying up all the uranium the commission could find, at any price needed to secure that supply.
Another issue that troubled the government policymakers was that most of the uranium for the atomic energy program was still coming from foreign sources, mostly from Shinkolobwe and some from Canada. AEC historians Mazuzan and Walker observed, “No proven uranium reserves existed in the United States, and experts doubted that sufficient or even significant quantities of domestic ore could be found.” In 1952, the Joint Committee on Atomic Energy’s raw materials subcommittee, headed by New Mexico Democratic Sen. Clinton Anderson, commented, “The subcommittee places heavy stress upon the objective of reducing the dependence of the United States upon foreign sources of uranium ore.”
The AEC decided that throwing money at the uranium problem would solve it. The commission in April 1948 announced that it would pay a guaranteed minimum of $3.50 per pound for ten years for high-grade U.S. ore. The offer also included a $10,000 bounty for discoveries of new domestic ore bodies.
Initially, the AEC program faltered. Only a tiny amount of new U.S. uranium flowed to the agency. So the commission in March 1951 doubled down, announcing it would extend its purchase guarantee through March 1962. It was simply a matter of the time it takes to find commercial quantities of ore in vast, unexplored territory before prospectors would hit pay dirt. It was quite easy for the AEC to kick off a uranium rush, as most of the land in the Colorado Plateau was owned by the federal government and managed by the Interior Department’s Bureau of Land Management. The liberal 1872 federal law governing filing of mineral claims on federal land, designed to boost development in the western United States, also aided the twentieth century quest for uranium by making it easy for a prospector to secure a mine site.
MIT economist Paul Joskow, in a famous 1976 paper on uranium markets, described the AEC uranium policies succinctly:
The AEC established a fixed minimum price schedule for the purchase of uranium ore of various qualities and provided firms with additional bonus payments for initial production of uranium, for development expenditures, and for the production of ore with U3O8 contents of greater than .20 percent. The AEC also let participation contracts to encourage uranium exploration and paid for access roads to mining areas. The AEC ran the milling part of the supply stream something like a regulated utility. A prospective mill owner would have to apply to the AEC for a certificate of need. If granted, the AEC would sign a long-term (five to seven year) cost plus profit contract for the delivery of a specified quantity of U3O8, over the contract period.
The AEC’s generous guaranteed purchases and mill subsidies finally produced results. In fiscal year 1948, the AEC spent $35.5 million in “raw and feed materials,” out of a total budget of $672 million, or 5.3 percent of the agency’s budget. By fiscal year 1953 (unadjusted for inflation), the AEC spent $148 million on raw materials (primarily uranium) from a budget of $1.744 billion, or 8.5 percent. The AEC year-by-year raised the amount of uranium it was buying, from 12,500 tons in 1953 to 15,000 tons in April 1954, upped to 20,000 tons six months later. By February 1956, the AEC quota was 27,000 tons annually. In 1948, the AEC estimated U.S. uranium reserves at a million tons. By 1957, according to historians Mazuzan and Walker, the estimate had grown to 70 million tons.
The price the AEC was paying for uranium had also escalated dramatically. The maximum price—which the AEC always paid—rose from fifteen dollars per pound to twenty-five dollars per pound. The extremely generous price provided enormous profits for those who found and processed uranium.
Vernon Pick wasn’t the only prospector who got rich from AEC uranium purchases. Mines and mills sprung up all over the Colorado Plateau, along with new car dealers to supply the miners and millers with fancy new trucks; bars, eateries, and extravagant houses popped up in the western desert like spring mushrooms in the forests of the East.
One uranium millionaire, petroleum geologist Charlie Steen, began prospecting for uranium on the plateau in 1949, a hundred years after the famous California gold rush. In July 1952, living in penury and a month after Vernon Pick’s pick struck pay dirt, Steen struck it rich southeast of Moab, Utah. The $250,000 mansion he later built for himself and his family to replace their tarpaper shack from his prospecting days was famous for its opulence. The house featured a swimming pool, a lavish greenhouse, and servants’ quarters. He named the house Mi Vida, the same as his fabulous uranium mine. Steen lived la vida loca in the 1950s. He hosted parties that included Hollywood guests such as Anthony Quinn and Henry Fonda. He flew his private plane to Salt Lake City weekly for rumba lessons. In 1958, the profane and secular Steen persuaded the Mormon majority in the region to send him to the Utah legislature, but he found politics boring and confining, resigning in 1961 in the dying days of the uranium rush. The boom all too soon came to the predictable bust. Born at the hands of the AEC, the uranium balloon burst as a result of deliberate AEC policy.
17. Naked Shorts at Westinghouse
On October 28, 1957, Jesse Johnson, head of the Atomic Energy Commission’s raw materials program, traveled to New York for the annual meeting of the Atomic Industrial Forum, the nuclear industry’s trade group. He made an announcement that Time magazine two weeks later described as hitting the uranium mining and milling business “with a hydrogen bomb.”
Johnson said, “We have reached the point where it is no longer in the interest of the government to expand production of uranium concentrate.” After a decade of all-out pursuit of uranium at almost any cost, the AEC was abruptly changing course. Time said the AEC “put on the squeeze: any big new uranium discoveries will probably not be able to find a market.” In the words of country music icon Willie Nelson, “Turn out the lights; the party’s over. They say that all good things must end.”
Facing a hostile audience, Johnson explained that the commission now was able to assure a stockpile of fifteen thousand tons of yellowcake a year for the next decade, more than enough for the commission’s weapons program and the still unborn commercial electric power business. Johnson said that ending the AEC uranium incentive would force the miners to seek new markets. “Much of this incentive will have to come from confidence in the future market for atomic power,” he said.
But the commercial market did not yet exist and was developing extremely slowly. Time noted that the nation’s first nuclear power plant, which Westinghouse Electric Co. was building for the AEC at Shippingport, outside Pittsburgh, Pennsylvania, was not yet commercially viable. “Westinghouse has spent eighty cents on research and development for every dollar spent on construction,” the magazine observed. Time added that the Indian Point plant that Consolidated Edison, New York City’s utility, was putting up with AEC funds in West Chester County, had seen its costs jump from $55 million to $90 million.
Recapitulating the days of the nineteenth century gold and silver rushes in the Colorado Plateau, the uranium boom of the 1950s turned into the uranium bust of the 1960s. Mines closed, and mills were abandoned, leaving mildly radioactive mill tailings piles behind; once-thriving towns returned to dust. The market the AEC had created was not, in a term loved by environmentalists, sustainable. When the government pulled out its props, the entire enterprise slowly caved in like an abandoned mine.
Among the victims of the AEC-created boom-and-bust was the ebullient Charlie Steen. When the uranium market tanked, Steen attempted various other businesses, investing in an airplane factory, a marble quarry, and a pickle plant. His ventures failed, and the Internal Revenue Service drove him into bankruptcy in 1968, pursuing him for unpaid taxes. In 1971, Steen suffered a severe head injury while prospecting, struck in the head by a wrench attached to a drill pipe. He never fully recovered. Charlie Steen, born in 1919, died of complications from Alzheimer’s disease in 2006. His Mi Vida hacienda became a Moab steakhouse.
With no government-made market and no commercial demand, the uranium business simply stalled out in the 1960s and then began to crash. MIT economist Joskow wrote, “During this period the uranium industry reached its peak in terms of production and capacity. More uranium oxide was produced by the industry during 1961 and 1962 than has ever been produced subsequently. However, exploration activity peaked in 1957 and then began to decline in response to AEC policy.”
Between 1962 and 1968, the uranium industry contracted dramatically, wiping out the small producers and producing mergers and acquisitions among the bigger players with deeper pockets, often integrated oil companies such as Gulf and Standard Oil of Ohio, companies affiliated with international mining conglomerates based in Canada and Australia, such as Rio Tinto Zinc, and foreign government agencies in France, Canada, and South Africa.
The AEC kept in place a program to buy minimal amounts of concentrate at eight dollars per pound, designed to keep some fuel infrastructure in place in case the hoped-for market for commercial nuclear power plants materialized. This was known as the eight-dollar reserve. Beginning in 1962, the AEC began purchasing only five hundred tons of oxide yearly at the reserve price, with purchases running through 1966. The AEC also forbade commercial buyers of uranium—the nascent power industry—to buy foreign uranium from the rapidly expanded supplies coming from French, British, Australian, Canadian, and South African producers. That policy lasted into the late 1970s and helped fuel a secretive international uranium cartel.
The AEC foresaw a boom in nuclear power plants. In its 1962 annual report, the commission predicted five thousand megawatts of nuclear capacity in place by 1970 and forty thousand by 1980. By 1966, it looked like the power plants might finally make their blockbuster appearance in the commercial market. Both General Electric and Westinghouse were heavily promoting their plant designs to utilities, touting the benefits of low and stable fuel prices in order to compete with the dominant coal-fired technology. Anticipating a new market for uranium, uranium exploration and investment in milling capacity began picking up in 1967 in order to be ready to roll by the early 1970s. According to Eugene Grutt, the manager of the AEC’s Grand Junction office, “1969 was the peak year with nearly thirty million feet” of exploratory cores drilled.
Both GE and Westinghouse employed uranium fuel as a marketing ploy. They agreed to provide buyers of their reactors with free fuel—usually the first fuel load for the plant, about a year’s worth of enriched uranium—and varying amounts of fuel for reloads for up to ten years of operation of the plant. This was a rational sales incentive by the suppliers of the nuclear steam supply systems, because the chief attraction of nuclear power was the prospect of cheap fuel. With the uranium market in free fall, it looked to GE and Westinghouse like supplying fuel to the plant buyers would be a low-cost way to generate market share.
Pittsburgh-based Westinghouse, with the most experience in power plant technology by virtue of its work in the Navy’s submarine program and its development of the reactor for the Shippingport plant, was the most aggressive marketer. For reasons not entirely clear, Westinghouse also made a catastrophic decision about its marketing pledge to supply its plants with uranium fuel far into the future. The company—its excellence concentrated in engineering but not in economics—decided to go short on the uranium market. What’s more, Westinghouse decided on what commodity traders call a naked short.
Without getting deeply into the weeds of stock and commodities trading law and theory, a “short,” or a “short sale” is a bet by an investor that the price of a stock or a commodity, such as uranium, will fall. The investor buys in the falling market, and recoups by selling when the market price for the stock or commodity eventually rebounds. Investors, particularly in commodity markets, also use shorts to hedge against changes in markets, much as bookmakers “lay off” bets to even out fluctuations and cover themselves regardless of the outcome of the events on which they are taking bets. Smart commodities players and bookies hedge shorts by buying contracts to assure that they are made whole if the market goes up. When an overconfident investor decides to bet against the market and do it without a hedge against disaster, that’s a “naked short.”
During the sweet spot in the market for nuclear power plants—the late 1960s to mid-1970s—Westinghouse was a major player. By 1975, Westinghouse was the world’s largest supplier of nuclear steam supply systems. By 2005, according to the nuclear consulting firm Scientech, forty eight of the operating commercial nuclear reactors in the United States were Westinghouse pressurized water designs and thirty-five were GE’s competing boiling water units.
In making sales to fifteen U.S. electric utility systems in the 1960s and 1970s, Westinghouse took on an obligation to provide its customers with about eighty million tons of yellowcake, which it would enrich and fabricate into finished fuel. Through the early 1970s, Westinghouse covered its marketing offer by buying fuel contracts from uranium suppliers at fixed prices.
In 1972, some genius at Westinghouse decided to get naked, not covering its commitments to its reactor customers with fuel in hand in the form of futures contracts or physical inventory. To a bean counter, this may have looked like a way to save money by not tying up cash in long contracts or physical supply.
But the naked short was a massive bet that the current market for uranium would at least stay the same and never go up. At best, it would continue to fall. As James J. Friedberg, a young lawyer at the Tennessee Valley Authority in the 1970s, wrote later, “Had the market price stayed where it had been for over a decade (in the range of six to eight dollars a pound for U3O8), Westinghouse’s short sales would not have caused a problem. Westinghouse simply could have bought the uranium on the open market as its needs came due.” But if the market went up, Westinghouse was screwed.
At the time Westinghouse decided to strip down to shorts, the uranium market looked very weak indeed. Energy reporter Gene Smith in the New York Times wrote in January 1972, “Exploration is down and so are prices. A surplus is building up as nuclear power plants are delayed by environmental regulations. The government plans to unload its stockpile and mining costs are escalating rapidly, particularly because of more rigid safety requirements. ‘Personally, I feel sorry for the industry,’ George White, president of the Nuclear Exchange Corporation of Palo Alto, California, said in a telephone interview last week.”
On the contrary, the market price for uranium started going up in 1973, driven in large part by the flood of orders for nuclear plants from Westinghouse, GE, and other reactor vendors, including Babcock & Wilcox, Combustion Engineering, and General Atomics. Smith of the Times wrote in November 1973, “Electric utilities are convinced that nuclear power is the best way to beat the problems of rising costs for fuels and environmental problems. Last week, in separate statements, the chairman of the General Electric Company, which makes nuclear reactors, and the president of the Exxon Corporation, which sells uranium as well as petroleum, agreed that nuclear power plants would be a major factor in electric power generation in this century. But the utilities, needing uranium to fuel their reactors, are finding it more difficult to get firm supply commitments from uranium producers, who want to see their prices increase.” Smith reported that Chicago-based Commonwealth Edison sought bids for twenty-two million pounds of uranium for the period from 1981 through 1992. “Glenn W. Beeman, vice president of the giant Chicago utility, said bids were asked for twenty-two companies ‘but not many have been received yet. I guess they’re waiting for the market to firm up.’” TVA and General Public Utilities also reported lack of interest on the part of bidders for new uranium supply.
By September 1975, the market price for uranium oxide had hit twenty-six dollars a pound, and rose to over forty dollars a pound through 1980. Westinghouse’s bet had turned very sour and extremely dangerous to the energy giant.
Facing the need to eat billions of dollars in its contracts with its customers—an event that was clearly life-threatening to the company—Westinghouse predictably took the dishonorable but easy course of action. The company hinted at what was coming in July 1975, as the Times reported on Westinghouse’s second-quarter earnings. While the company reported a 75 percent earnings increase for the quarter, compared to the second quarter of 1974, Westinghouse also warned of a dark cloud on the business horizon. “In a separate but related announcement,” said the newspaper, “the Pittsburgh-based company also said that it was uncertain about its ability to meet uranium supply demands from its customers beyond 1978 because of a variety of recent developments in the marketplace.” Westinghouse linked its problems to the oil price run-up of the first Arab oil embargo of 1973, although oil constituted a small portion of electricity generating capacity in those years.
Westinghouse dropped the radioactive shoe two months later, notifying its customers that it would renege on its contracts. On September 8, 1975, fifteen Westinghouse reactor customers got curt letters informing them that the company would not honor its contracts to supply fuel. Accompanying the letters was a legal analysis by the Chicago law firm of Kirkland and Ellis and an economic analysis by James Lorie of the University of Chicago and Washington economics consultant Celia Gody. The New York Times the next day reported that Westinghouse claimed “that the purchase of uranium in the open market at current prices would involve such an unfavorable and large burden as to be ‘commercially impracticable’ from a legal viewpoint,” and the company “is therefore legally excused from a portion of its obligations to deliver uranium.” The source of increase in uranium prices, Westinghouse argued, was beyond its control, a function of the Arab oil embargo, “government policies and actions of foreign uranium-producing countries.” In short, Westinghouse claimed that the Arabs, the government, and other foreigners made them do it.
The uranium consumers reacted instantly. The Times the next day reported that the Tennessee Valley Authority and Richmond-based Virginia Electric and Power Co. were aghast at the Westinghouse move. The TVA, the nation’s largest electric power producer, said it took a “dim view” of the uranium supplier’s announcement. VEPCO senior vice president Stanley Ragone hinted at a lawsuit, saying that his company’s lawyers “do not agree that they [Westinghouse] can be legally excused as they contend.” The newspaper also noted that Florida Power and Light, also a Westinghouse reactor customer, immediately postponed a $75 million stock offer, citing “uncertainties presented by the Westinghouse announcement.”
The implicit threat of legal action quickly became explicit, when the TVA sued the Pittsburgh reactor vendor in federal court on October 20. That was the first of fifteen other lawsuits against Westinghouse: thirteen in federal courts, one in Pennsylvania, and one in Sweden. In its filing in U.S. District Court for the Eastern District of Tennessee, the TVA asserted that Westinghouse had enough uranium on hand to meet its obligations through 1978, but had told the utility it would only get 18 percent of its contract amount of fuel. What soon became the largest civil litigation in U.S. history to date was now underway.
The TVA’s status in the suit was quite interesting. No utility in the country went as crazy for nuclear power as the giant regional power agency, which got into the electric generating business in the 1930s, largely as an afterthought. The TVA’s original mandate was for flood control along the Tennessee River system and regional economic development. The TVA started generating power because the flood control dams it built on the river system also offered easy opportunities for manufacturing power. The political model for the TVA was the statewide agency that then New York governor Franklin D. Roosevelt created before he moved to Washington, the Power Authority of the State of New York. PASNY had explicit instructions to harness the kinetic energy of the Niagara River.
The TVA had the authority to sell excess power from its hydro network to local distribution utilities, all either owned by local governments, or rural cooperatives owned by the customers. In World War II, driven by the power needs of the war effort—making aluminum and powering the Manhattan Project—the TVA built coal-fired generating plants to supply the growing electricity load.
Sitting on a major river system in the middle of one of the richest coal fields in the world, nuclear power seemed ill-suited to the TVA’s needs. But the longtime head of the agency, Aubrey “Red” Wagner, became convinced of the value of nuclear power in producing cheap electricity, and he plunged the TVA headfirst into the first generation of nuclear power. Between 1966 and 1978, the TVA committed to develop nineteen new base load generating plants—seventeen were nuclear plants. The TVA ordered plants from all of the major nuclear vendors: pressurized water reactors from Westinghouse, Babcock & Wilcox, and Combustion Engineering; boiling water reactors from General Electric; and gas-cooled reactors from General Atomics.
Former TVA lawyer James Friedberg noted that TVA had “special reasons to be indignant” when Westinghouse abrogated its contracts. “Just a year earlier, at an August 1974 meeting,” Friedberg wrote, “TVA officials had sought assurance from Westinghouse that the uranium for the initial cores of the Sequoyah and Watts Bar nuclear plants would be delivered. The assurance was sought partly because of rumors of a Westinghouse uranium shortage and partly because of a Westinghouse refusal to offer TVA reload uranium to which TVA officials believed TVA had contractual rights. The Westinghouse officials at the August 1974 meeting gave the TVA personnel the assurance they sought.”
Because the lawsuits against Westinghouse were being filed at federal courthouses all across the country, the federal Judicial Panel on Multidistrict Litigation held a hearing in December 1975. The panel consolidated the cases and ordered that they be tried in the Eastern District of Virginia with Judge Robert R. Merhige in command.
Appointed to the federal court in 1967 by President Johnson, Merhige became a legendary jurist, presiding over a series of crucial school desegregation cases in which he ordered an end to the state of Virginia’s policy of “massive resistance” to school integration. In 1970, Merhige ordered the University of Virginia to admit women. He also played a major role in landmark environmental legislation. Merhige was a no-nonsense judge who valued consensus and settlement rather than contention and argument. The Washington Post noted in its 2006 obituary, “He was known for his kindness and integrity and for brooking no delays or foolishness in his court, part of the Eastern District of Virginia known as the ‘rocket docket.’ He once ordered a marshal to remove a man who had fallen asleep in the courtroom. The man, it turned out, was his father.”
Merhige convened a pre-trial conference on January 6, 1976, in a venerable Richmond courthouse filled wall-to-wall with lawyers, journalists, and sundry hangers-on. Merhige commented, “I have a feeling that this case is going to be for the legal profession what the Chicago fire was for the construction industry.”
The TVA’s Friedberg, one of three TVA lawyers involved in the suit, commented, “Discovery entailed the production of millions of documents from all over the world. Many hundreds of days of depositions were conducted, often running simultaneously, at opposite ends of the country or places in between. Over a hundred attorneys spent a substantial portion or all of their time on the case over a three-year period and hundreds more were involved peripherally for a few hours, days, or months.”
Westinghouse based its decision to abrogate the contracts and its legal defense on an opinion from its outside lawyers. The lawyers said Westinghouse could justify its actions on the basis of section 2-615 of the Uniform Commercial Code, a model for business relationships adopted throughout the United States. In a confidential July memo to its client, later disclosed by the New York Times, Kirkland and Ellis advised that “delay in delivery or non-delivery in whole or in part by a seller is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was basic assumption on which the contract was made.”
The Westinghouse claim drew skeptical reviews from the business bar. Friedberg noted, “Congress has never passed legislation making [the Uniform Commercial Code] generally applicable to federal commercial law. Consequently, government contract law continues to be governed by case law and particular federal statutes, not by the UCC.” Alan Schwartz, a business law professor at the University of Indiana, told the Times, “If Westinghouse were to lose, it would not astonish anybody. But it may be that the courts will do differently this time because the money is bigger.”
It was clear from the start that Westinghouse was on thin legal ice with Kirkland and Ellis’s strategy. In his first hearing in January 1976, Merhige demonstrated his penchant for speed and implied he wanted to see the case settled, not tried. “But all of you better recognize that nobody forced anybody to take the case, and you have got it and you are going to have to move on it,” he said. “It is as simple as that.”
In February 1976, under prodding from Merhige, Westinghouse agreed to parcel out the 14.9 million pounds of uranium it had in its inventory or on order to its utility customers under the terms and prices of the disputed contract. That left Westinghouse still some 60 million pounds short of what it owed to the utilities. The initial settlement also set up a utility committee to negotiate a settlement with Westinghouse and report back to the court monthly on progress.
By October 1978, the case was still pending and Merhige, fed up with the delay, issued a bench order that “Westinghouse did not meet its burden of establishing that it is entitled to excuse from the contractual obligations which the court finds exist with plaintiffs.” Merhige then strongly warned Westinghouse and the utilities to settle the dispute. “If anything,” he said, “the court is disposed to believe that, just as Westinghouse is not entitled to excuse from its contractual obligations, the plaintiffs are not entitled to anything near the full measure of their prayer for relief…These are cases which I think everyone admits should be settled if at all possible, in the public interest, and they are really business problems, and should be settled as business problems by businessmen, as I have been urging from the very first.”
Westinghouse got Merhige’s message. The company settled separately with each of its uranium customers over the next two years, agreeing to supply what they could and reimburse the customers for the failed uranium deliveries. The largest settlement was with the TVA, in a May 1979 deal. The TVA said it received $130 million in cash, goods, and services, while Westinghouse reported the settlement cost it $36 million. As Friedberg explains, the difference, “other than each side telling its own fish story,” was because there were elements that Westinghouse could provide to the TVA with little cost to the vendor but were worth real money to the utility. Also, the TVA got some mineral rights that were close to other reserves it already owned in Wyoming. Because of the location of the uranium reserves, they were worth more to the TVA than to Westinghouse.
The total costs of the settlement took a big chunk out of the Westinghouse bottom line. The company reported that it had a net loss of $74 million for 1979, most of it related to the uranium settlements. By contrast, the company had recorded 1978 profits of $243 million. For the fourth quarter of 1979, when the settlements really started biting, Westinghouse booked a loss of $117 million. Those figures represented settlements of thirteen of the sixteen outstanding uranium disputes. Westinghouse also said it had put aside a $118 million reserve for future uranium settlements.
The same day it released its 1979 earnings, Westinghouse said it had reached a settlement with Union Electric in St. Louis. Westinghouse chairman Robert E. Kirby said the Union Electric deal would result in a pretax loss of $125 million, consisting of $55 million in cash up front and another $55 million if Union Electric finished its second nuclear unit, scheduled for completion in 1987 (and later cancelled).
Westinghouse ended up buying the most expensive shorts in U.S. business history.
—Kennedy Maize is a POWER contributing editor and executive editor of MANAGING POWER. Too Dumb to Meter is available from the POWER Bookstore or Amazon.com and is serialized by permission.