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									                                            Research Proposal
                                        U.S. Department of Energy
                                           Clemson University

Descriptive Title:
       Analysis of Privatization of Russia's Nuclear Ministry on the Nuclear Nonproliferation
Objectives of the United States

Short Title:
       Nuclear Nonproliferation & Russian Nuclear Privatization

Proposed Research:
        We intend to study the impact of the institutional restructuring of Russia's nuclear sector
on the nuclear nonproliferation goals and objectives of the United States. Our research is
intended to lay the groundwork for more detailed analysis in the future. The analysis will be
based on the best information available concerning the restructuring of Russia's Ministry of
Atomic Energy (MINATOM), which is still unfolding.

         There is a move in Russia to realign the nuclear power industry. MINATOM is developing
the idea of splitting the nuclear sector in Russia into two groups. One group would be comprised
of the nuclear power plants, nuclear fuel reprocessing, and certain other nuclear technology
initiatives. The other group would be devoted to the maintenance and control of nuclear
weapons. Currently, the nuclear power plants (NPPs) are not under the direct control of MINATOM.
Furthermore, the people and facilities associated with nuclear fuel reprocessing and technology
development are integrated with nuclear weapons maintenance and control. The restructuring
would consolidate control of the NPPs and separate the activities of nuclear scientists and
engineers between nuclear energy and weapons control.
         The power system is currently controlled by a "joint-stock" company EES Rossii that
owns the conventional fuel plants and owns/controls the transmission system.1 EES Rossii uses
power from the nuclear plants, but the terms of trade vary. While some power is simply taken
without any compensation, most is contracted for. However, hard currency is paid only part of
the time.2 The cash flow afforded the nuclear plants under this scheme is taxed to support the
regional government. What remains appears to be barely enough to pay for operating costs, and a
shortfall looms on long term maintenance and overhaul of the nuclear plants.3
         The proposal being promoted by MINATOM is to separate the nuclear activities that
generate cash from nuclear weapons. This would include the power plants and the nuclear fuel

  The ownership structure of this company is not perfectly clear. It seems that the government has some residual
interest along with private citizens, but more research is required on this point.
  Presumably, some credits are exchanged for the remainder.
  The Office of International Nuclear Safety and Cooperation at DOE should have detailed information on this. The
information found on the Office's web site does not give evidence on this point. However, most of the discussion
concerns safety accomplishments and current efforts to improve safety.

5212edd7-57de-4306-94f3-6692c8ea7f00.doc                                                             March 1, 2001
                          Nuclear Nonproliferation & Russian Nuclear Privatization

reprocessing activities along with some nuclear technology initiatives. These would become a
private corporation, currently being called ATOMPROM, the structure of which has not been
clearly identified. The power production from the plants would be sold at one price to EES
Rossii. Additionally, there is some idea that power from the nuclear power plants (NPPs) could be
more actively marketed in western Europe. That option is allegedly being restricted currently by
EES Rossii. On this margin, the restructuring seems to be a consolidation move under which the
nuclear plants, marketing their power in concert, could extract better terms from EES Rossii. The
distribution of any additional cash flows and/or the redistribution of existing cash flows is a
contentious issue.
        The sanguine assessment is that the extra cash that ATOMPROM might generate would be
spent in maintenance and modernizing of the NPPs. This is viewed skeptically by many who think
that privatizing ATOMPROM will mean that the cash will flow into private pockets, leaving the
NPPs worse off than they are now and the regional communities, which would lose funding from
NPP taxation, in shambles.
        The new venture would also actively market certain nuclear reprocessing services. In
particular, it seems that Russia is offering to become the dumping ground for spent nuclear fuel,
some of which would be reprocessed back to fuel grade. Press reports from Russia indicate that
ATOMPROM will take over the Highly Enriched Uranium (HEU) Agreement that was signed in
1993 under which the U.S. buys nuclear fuel from Russia.4 In addition the reports suggest that
Russia will begin accepting spent nuclear fuel from U.S. nuclear power plants as well as from
plants in the Newly Independent States (NIS)5, India, and possibly elsewhere. ATOMPROM would
then sell refurbished fuel assemblies certainly to the NIS and possibly everywhere. There is some
notion that it would also sell certain nuclear technologies.

United States:
       The U.S. Department of Energy is vested with the mission to restrict the proliferation of
nuclear weapons world wide. The goals and objectives of this mission are broad and far-
reaching. As they have applied to Russia, DOE has been deeply involved on several fronts. The
main goal has been to help Russia downsize its nuclear weapons infrastructure. Of principal
concern is securing nuclear materials, technology and expertise in Russia and the NIS.
       To accomplish this, Soviet nuclear weapons were gathered from the satellite countries
back to Russian soil and a substantial portion of these devices have been and are being
dismantled and the weapons-grade nuclear material converted to commercial-grade nuclear
energy material.6 The security of the weapons sites has been increased to assure containment of
nuclear material. Also, the safety of the operation of the NPPs in Russia and the NIS has been a
focus of DOE efforts.7 In order to protect against proliferation of technology, DOE has
undertaken several programs to prevent "economic hardship from driving Russian nuclear
weapons scientists into employment in places like Iran and North Korea."8

  Under the Highly Enriched Uranium Agreement, Russia is converting highly enriched uranium extracted from
dismantled nuclear weapons to low-enriched uranium which is delivered to the U.S. for use in commercial nuclear
reactors. Russia receives substantial payments for this material from the U.S. Enrichment Corporation.
  That is, the former Soviet states.
  Under the auspices of the HEU agreement.
  For instance, DOE is working closely with the Ukraine to improve the safety of the damaged part of the Chornobyl
plant (Ukrainian spelling) and to decommission the remaining reactors.
  Comment by Secretary Richardson in a press release Sept. 22, 1998.

                          Nuclear Nonproliferation & Russian Nuclear Privatization

        There is little doubt that restructuring of the nuclear sector in Russia will necessarily
impact the nonproliferation mission of DOE in both general and specific ways. Some specific
points are worthy of mention.

1)      Privatizing nuclear activities in the form of ATOMPROM that controls the commercial
potential of nuclear research, development, and production in Russia will change the face of the
beast facing DOE. It is not clear how these groups can or will be effectively split from the people
involved in weapons control. Several questions emerge:
 Will nuclear scientists working on weapons be cordoned off from the scientists working on
    commercial projects?
 Will the activities that DOE is pursuing in projects like IPP and NCI come under the aegis of
    ATOMPROM, the weapons division, or split between them?
 If DOE funding goes into ATOMPROM what problems will that create in monitoring the
    success of DOE programs? What changes in the structure of DOE programs will be required?
        The most cynical thought is that ATOMPROM is nothing more than a scam to convert DOE
funding into personal wealth for Russian insiders. While this is probably overly sardonic, more
information about the current and proposed structure of the Russian nuclear industry is required
to fully explore the impact that restructuring will have on DOE's programs.9

2)       Breaking MINATOM into ATOMPROM and a weapons division could mean that the weapons
scientists and engineers would be further isolated into activities that are not likely to be revenue
generating from peaceful activities. Possibly this is not true, but the structure of the sector would
surely change and it seems very likely that ATOMPROM, which would be a for-profit entity, would
cream off anything that might generate cash. The remaining group of people might need to
become the specific target of DOE observation. As Secretary Richardson said, "I cannot
emphasize enough how important it is to us all that economic hardship not drive Russian nuclear
weapons scientists into employment in places like Iran and North Korea." Potentially the group
that is the biggest focus of this concern will be more clearly defined.

3)       The political viability and stability of a private entity controlling nuclear reprocessing and
power generation is an issue. The gloom and doom view is that this company would gut the
industry until the plants wear out and then dissolve, leaving a giant mess. How such an outcome
would impact DOE's nuclear non-proliferation goals is a reasonable question, and the likelihood
that it might happen needs to be explored. From a pure profit perspective, it seems unlikely that
ATOMPROM will find it in its interest to depreciate its nuclear power facilities to the point that
they are unproductive and unsafe. Even so, an assessment of the maintenance and repair that will
be required in the near future to keep the nuclear plants safely operating should be undertaken.

4)     Nuclear material reprocessing is even more complicated. Arguably, nuclear material
reprocessing is a business that has a large future. Nuclear waste is an ever-lasting debate in the
U.S. and clearly will be in the rest of world where nuclear power is more accepted.

 For instance, a more precise assessment of how many people are employed in nuclear material processing and
handling, and the split between the ones that would go to ATOMPROM and those that would remain in the weapons
division would be useful.

                          Nuclear Nonproliferation & Russian Nuclear Privatization

    However, what are the implications of Russia becoming a nuclear waste dumping ground? It
     is not at all clear that the idea behind the HEU agreement was to increase the amount of
     nuclear material (albeit not weapons grade) flowing into Russia.10
    Would this threaten nuclear proliferation?
    Could a private entity be counted on to pursue only peaceful activities?
    Could it be counted on to safely and securely re-process nuclear material and store waste?

Research Objectives and Methods:
         The issues sketched above form the basis of the research that we are proposing. Our goal
is to investigate the possible dimensions that restructuring the nuclear sector in Russia might take
and to link these to the mission and current programs of DOE in nuclear nonproliferation.
         Our approach will be first to develop an understanding of the current structure of the
Russian nuclear sector, which includes both energy and weapons activities. This understanding
will be drawn from knowledge that DOE has already obtained through its contacts and activities
in Russia.
         Next we will investigate and monitor the restructuring proposals in the most detail
available. We will study the privatization and restructurings in other sectors of the Russia
economy and project the likely outcome of restructuring in the Russian nuclear sector from
         Finally, we will lay out the impacts as we see them from the nuclear sector restructuring
on DOE's interests in nonproliferation. These will take the form of answers to the many
questions posed above. It will also identify where additional research and knowledge are most
keenly needed.

        This research will be principally conducted by Professor Michael T. Maloney in the
College of Business & Public Affairs at Clemson University. Resources in college will be at
Maloney's disposal which include graduate student assistants, many of which have Russia
connections and backgrounds. Currently there are two graduate students from Russia and the NIS,
several others from eastern Europe.

        Maloney's expertise includes public policy and regulation analysis. In particular, he has
had a continuing interest in the regulation of the power industry. Michael T. Maloney has been in
the forefront of analysis of the deregulation of the electric industry in this country. He was a co-
author in 1996 on an important study of the effect of separating the generation, transmission, and
distribution functions in electricity industry. He has published numerous scholarly articles on
various elements of this issue including a paper on the cost of electric generation that approaches
the effects of capacity utilization in a novel way. Maloney has been publishing research in the
field of electric energy since the early 1980s. In addition to the electric industry, Maloney is an
expert in financial economics and corporate organization. He served as senior financial analyst at
the U.S. Securities and Exchange Commission in 1990. He has published numerous papers in
financial economics including papers on the capital structure of the firm, bankruptcy and

  In a press release on September 22, 1998, Secretary of Energy Richardson said, "The HEU purchase agreement is
important to both our nations because it gets nuclear weapons grade material out of circulation and brings much
needed hard currency to the Russian economy."

                       Nuclear Nonproliferation & Russian Nuclear Privatization

reorganization, and managerial decision making. His vita is attached and is available on his web

Dissemination of Findings:
        It is expected that this research will be of substantial public interest. A final research
report will be submitted to DOE. The research report will be made publicly available after it has
been approved for release by DOE. It will disseminated to the public through the auspices of the
Strom Thurmond Institute at Clemson University as well as through the normal channels. The
research report will be posted on the Clemson University web site and released through the
university news services. Furthermore the findings will be submitted to academic policy journals
for publication.

      It is expected that this project can be commenced immediately upon approval and can be
completed in less than twelve months.

      Michael T. Maloney
       Professor of Economics                                                     Phone: 864 656 3430
       223 Sirrine Hall                                                             Fax: 864 654 0802
       Clemson University                                               E-mail:
       Clemson SC 29634                                      Web: http:\\\~maloney

       David Grigsby, Associate Dean
       College of Business and Public Affairs
       165 Sirrine Hall
       Clemson University
       Clemson SC 29634
       Ph: 864-656-6371

      Vita for Michael T. Maloney

                      Nuclear Nonproliferation & Russian Nuclear Privatization

                                      Michael T. Maloney

Office:                                                                                     Home:
Department of Economics                                                      303 Edgewood Avenue
Clemson University                                                              Clemson, SC 29631
Clemson, SC 29634                                                                   (864) 654-9929
(864) 656-3430 FAX-4192

Birth Place:   Jackson, Mississippi (12/7/1949)

B.A., Lewis College, Lockport, IL, 1970
M.A., Western Illinois University, Macomb, IL, 1971
Ph.D., Louisiana State University, Baton Rouge, LA, 1978
       Dissertation: Bargaining Solutions in Cases of Externalities

Graduate Fields of Concentration:
(1) Economic Theory
(2) Econometrics
(3) Industrial Organization and Government Regulation
(4) Public Finance
(5) Quantitative Methods

Academic Experience:
1984-present:     Professor of Economics, Clemson University
1984-1992:        Head, Department of Economics, Clemson University
1990:             Senior Financial Economist, Securities & Exchange Commission
1982-1984:        Associate Professor of Economics, Clemson University
1981-1982:        Associate Professor of Economics, Emory University
1981:             Visiting Associate Professor of Economics, Emory University
1979-1981:        Associate Professor of Economics, Clemson University
1975-1979:        Assistant Professor of Economics, Clemson University
1974-1975:        Instructor of Economics, Clemson University

Associate Editor: Journal of Corporate Finance

Teaching Interests:
Financial Economics: corporate control issues and contracting problems.
Industrial Organization: empirical with financial economics orientation; pricing problems;
        effects of government regulation.
Graduate Price Theory: neoclassical theory with empirical relevance.

                      Nuclear Nonproliferation & Russian Nuclear Privatization


Economies and Diseconomies: Estimating Electricity Cost Functions, forthcoming, Review of
Industrial Organization.

"The Response of Workers to Wages in Tournaments: Evidence from Foot Races," with R.E.
McCormick, Journal of Sports Economics, 1(2), May 2000, 99-123.

“Stranded Costs in Non-Utility Generation,” with David Dismukes, Electricity Journal, June

"A Principled Approach to the Stranded Cost Issue," with R.D. Sauer, Electricity Journal, April

“Stranded on the Road to Electricity Competition,” with R.E. McCormick and R.D. Sauer,
Forum for Applied Research and Public Policy, 12(3) Fall 1997, 18-21.

“The Wires Charge: Risk and Rates for the Regulated Distributor,” with Robert E. McCormick
and Cleve B. Tyler, Public Utilities Fortnightly, September 1, 1997, 26-33.

“On Stranded Cost Recovery in the Deregulation of the U.S. Electric Power Industry,” with
Robert E. McCormick and R.D. Sauer, Natural Resources Journal, Winter 1997.

“Do Rate And Volume Matter? Transaction Cost Limits To Economies Of Scale,” with C.M.
Lindsay, Studies in Economics and Finance, Fall 1996.

“Stranded Cost Recovery: All FERC’ed Up,” with Robert E. McCormick and Chad McGowan,
Public Utilities Fortnightly, November 15, 1996.

Customer Choice, Consumer Value: An Analysis of Retail Competition in America’s Electric
Industry, with R.E. McCormick and Raymond Sauer, (Washington, D.C.: Citizens for a Sound
Economy) 1996.

“Realignment in Telecommunications,” with R.E. McCormick, Managerial and Decision
Economics, vol. 16, 1995, 401-425.

“A Theory of Credit Bureaus,” with David Laband, Public Choice, September 1994, 275-292.

"Residual Claims in Bankruptcy: An Agency Theory Explanation," with Katherine Daigle,
Journal of Law & Economics, April 1994.

"Managerial Decision Making and Capital Structure," with Mark Mitchell and R.E. McCormick.
Journal of Business, April 1993, 189-217.

                      Nuclear Nonproliferation & Russian Nuclear Privatization

"An Examination of the Role that Intercollegiate Athletic Participation Plays in Academic
Achievement: Athletes' Feats in the Classroom," with R.E. McCormick, Journal of Human
Resources, Summer 1993, 555-570.

"Shipping the Good Tickets Out: Some Evidence on the Alchian and Allen Theorem," with R.E.
McCormick and Eric Bertonazzi, Economic Inquiry, July 1993, 383-393.

"The Effect of Splitting on the Ex: A Microstructure Reconciliation" with J. Harold Mulherin,
Financial Management, winter 1992.

"Crisis in the Cockpit? The Role of Market Forces in Assuring Air Traffic Safety" with Mark
Mitchell, Journal of Law & Economics, October 1989.

"A Model and Some Evidence Concerning the Influence of Discrimination on Wages," with
C.M. Lindsay, Economic Inquiry, October 1988, vol. 26, 645-660.

"Excess Capacity, Cyclical Production, and Merger Motives: Some Evidence from Capital
Markets," with R.E. McCormick, Journal of Law & Economics, October 1988.

"Capital Turnover and Marketable Pollution Rights," with Gordon Brady, Journal of Law &
Economics, April 1988.

"Political Parties and the Price of Payola," with C.M. Lindsay, Economic Inquiry, April 1988.

"Financing the Unemployment Insurance System and the Interest Group Theory of
Government," with Rob Roy McGregor, Public Choice, 1988.

"Economic Regulation, Competitive Governments, and Specialized Resources," with R.E.
McCormick and R.D. Tollison, Journal of Law & Economics, October 1984, 329-338.

"The Cost of Air Pollution Control," with Bruce Yandle, Journal of Environmental Economics
and Management, September 1984, 244-263.

"Building Markets for Tradable Pollution Rights," with Bruce Yandle, in Terry Anderson, ed.,
Water Rights, Pacific Institute for Policy Studies, July 1983, 283-320.

"Intermittent Production, Cost, and the Multiproduct Firm," with R.E. McCormick, Journal of
Business, April 1983, 139-154.

"A Positive Theory of Environmental Quality Regulation," with R.E. McCormick, Journal of
Law & Economics, April 1982, 99-123.

"Inflation, Taxes, and Capital Formation," with Joe Prinzinger and Holley Ulbrich, Southern
Economic Journal, January 1982, 651-661.

"Bubbles and Efficiency," with Bruce Yandle, Regulation, May/June 1980, 49-52.

                            Nuclear Nonproliferation & Russian Nuclear Privatization

"Fiscal Versus Monetary Policy: An Application of Transfer Functions," with M.E. Ireland,
Journal of Econometrics, Vol. 13, 1980, 253-266.

"Achieving Cartel Profits Through Unionization," with R.E. McCormick and R.D. Tollison,
Southern Economic Journal, October 1979, 628-634.

"The Coase Theorem and Long-Run Industry Equilibrium," Quarterly Review of Economics and
Business, Winter 1977, 113-118.

Working Papers

Monopoly and Durability: This paper shows is that when consumers choose the optimal life of the product, the
consumer choice is affected by the level of consumer surplus they enjoy. If a monopolist extracts consumer surplus
in the purchase price of the product, the consumer will extend the product life. Because consumers respond in this
way, the monopolist is then induced to provide a product that is more durable.

Pot Luck in the Job Market Lottery: Job training offers the opportunity to improve productivity inside the
firm. At the same time it offers the possibility of efficiently switching employers. Efficient separation is an option
that has value. Employers and employees seek to capitalize on this value, and under many circumstances a zero
profits equilibrium is only achieved by “excessive” investment in training. Firms are willing to pay for job training
that is not firm specific and workers playing the job market lottery willingly abandon training that proves to have
less than the expected productivity.

Road Warrior Booty: Prize Structures In Motorcycle Racing: with Kristina Terkun We look at the
tournament organizer and its equilibrium adaptation of the tournament structure in the face of competition from
other organizers. The data examined come from the motorcycle racing industry. Bikers in a single race compete for
the awards of several sponsors and many sponsors are in direct competition. When a racer chooses to compete for
the prizes offered by one sponsor, prizes paid by sponsors of similar products are foregone. We find that there is
systematic variation in the structure of prize differentials in the face of direct competition among sponsors for
endorsements by racers. When the purse paid by competitors goes up, a sponsor must raise its own purse or reduce
its incentive intensity by lowering the spread of the prizes that it pays. This finding supports a prediction of the
tournament model developed by Lazear and Rosen.


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