Free Post Trial Brief - District Court of Federal Claims - federal

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No. 98-488C (Judge Braden)

IN THE UNITED STATES COURT OF FEDERAL CLAIMS

SACRAMENTO MUNICIPAL UTILITY DISTRICT,

Plaintiff,

v.

UNITED STATES OF AMERICA,

Defendant.

SACRAMENTO MUNICIPAL UTILITY DISTRICT'S POST-TRIAL LEGAL BRIEF

OF COUNSEL: David S. Neslin Timothy R. Macdonald ARNOLD & PORTER LLP 370 Seventeenth Street, Suite 4500 Denver, CO 80202 (303) 863-1000 August 22, 2005

Howard N. Cayne ARNOLD & PORTER LLP 555 Twelfth Street, N.W. Washington, D.C. 20004 (202) 942-5899

Counsel of Record for Plaintiff Sacramento Municipal Utility District

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TABLE OF CONTENTS Page INTRODUCTION ...........................................................................................................................1 BACKGROUND .............................................................................................................................4 ARGUMENT.................................................................................................................................11 I. II. SMUD Is Entitled To Its Expectation Damages In The Form Of Mitigation Expenses And Substitute Performance Costs. ...................................................................11 The Government's Failure To Begin Acceptance Of Spent Fuel Caused SMUD To Incur Damages..............................................................................................................17 A. DOE's Failure To Begin Acceptance Of Spent Fuel In 1998 Was Preceded By Eleven Years Of Announcements And Actions Indicating That Such Acceptance Would Be Delayed Significantly........................................................19 SMUD's Initial Decisions To Begin And Continue Funding The Dry Storage Project From 1992 Through 1997 Were Caused By The Government's Statements Indicating That Fuel Acceptance Would Be Delayed. .................................................................................................................22 SMUD's Decisions To Re-Start The Dry Storage Project In 1998 And Continue With The Project In 2000 and 2001 Were Directly Caused By The Government's Failure To Begin Accepting Fuel In 1998. .............................27

B.

C.

III. IV.

The Damages Incurred By SMUD Were Reasonably Foreseeable. ..................................33 SMUD Has Proven Its Damages With Reasonable Certainty. ..........................................37 A. B. C. SMUD's Damages From 1992 Through 1997.......................................................41 SMUD's Damages From 1998 Through 2003.......................................................42 Offsets To Damages That SMUD Made And Acknowledged Prior To Trial........................................................................................................................44

V.

SMUD's Mitigation Efforts Were Reasonable. .................................................................45 A. SMUD's Management Of The Dry Storage Project Was Commercially Reasonable. ............................................................................................................47

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B. C. D. VI.

Leaving Its Fuel In The Wet Pool Would Have Caused SMUD Significant Damages.................................................................................................................51 The Government's "Dry Transfer" And "Store-Only" Arguments Are Unsupported...........................................................................................................54 The Government's "NAC" Argument Is Unsupported..........................................57

Potential Offsets Raised At Trial. ......................................................................................60 A. B. C. D. Wet To Dry Savings For 2003. ..............................................................................60 Costs Of Loading And Transfer Of Fuel To Dry Storage. ....................................61 Labor Costs And Labor Burden.............................................................................63 Decommissioning Costs.........................................................................................68

VII.

Additional Issues Raised By The Government Do Not Affect SMUD's Damages. .........69 A. B. C. Greater-Than-Class-C Waste Does Not Affect SMUD's Damages. .....................69 Damaged Or Failed Fuel Does Not Affect SMUD's Damages. ............................70 The Government's New "Canister" Arguments Are Litigation Inspired And Unsupported. ..................................................................................................72

VIII. IX.

If The Court Needs To Reference A Non-Breach World Acceptance Rate, All Of The Evidence Demonstrates That DOE Would Perform At A 3,000-Ton Rate................74 The Issue Of Notice Raised By The Court At Trial...........................................................76

CONCLUSION..............................................................................................................................78

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TABLE OF AUTHORITIES Page(s) Cases Air et Chaleur, S.A. v. Janeway, 757 F.2d 489 (2d Cir. 1985) ..................................................................................................... 13 American Capital Corp. v. United States, No. 95-523C, 2005 WL 1308314 (Fed. Cl. May 31, 2005) ............................................................................................................................. 17, 18, 33 Am-Pro Protective Agency, Inc. v. United States, 281 F.3d 1234 (Fed. Cir. 2002) ................................................................................................ 73 Bluebonnet Sav. Bank, FSB v. United States, 266 F.3d 1348 (Fed. Cir. 2001) .............................................................................. 16, 33, 37, 38 Boston Edison Co. v. United States, 64 Fed. Cl. 167 (2005) .................................................................................................. 15, 37, 75 California Federal Bank v. United States, 395 F.3d 1263 (Fed. Cir. 2005) ................................................................................................ 17 Chain Belt Co. v. United States, 115 F. Supp. 701 (Ct. Cl. 1953).................................................................................... 13, 14, 15 Cities Service Helex, Inc. v. United States, 543 F.2d 1306 (Ct. Cl. 1976) .................................................................................................... 12 Commonwealth Edison Co. v. United States, 56 Fed. Cl. 652 (2003) ........................ 37, 69, 74, 76 Consumers Energy Co. v. United States, 65 Fed. Cl. 364 (2005) ........................................................................................................ 12, 53 Convoy Co. v. Sperry Rand Corp., 672 F.2d 781 (9th Cir. 1982) ................................................ 67 Cuyahoga Metro. Housing Auth. v. United States, 65 Fed. Cl. 534 (2005) ...................................................................................... 13, 15, 17, 46, 57 Dunn Appraisal Co. v. Honeywell Information Sys. Inc., 687 F.2d 877 (6th Cir. 1982) .................................................................................................... 66 Entergy Nuclear Generation v. United States, 64 Fed. Cl. 336 (2005) ........................................ 16 Entergy Nuclear Indian Point 2, LLC v. United States, 64 Fed. Cl. 515 (2005) .................................................................................................. 13, 15, 16

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First Heights Bank, FSB v. United States, No. 04-5021, -5022, 2005 WL 1962989 (Fed. Cir. Aug. 17, 2005) ................. 14, 16, 45, 46, 55 Fontenot v. Mesa Petroleum Corp., 791 F.2d 1207 (5th Cir. 1986) .................................................................................................. 76 Freeport Sulphur Co.v. S/S Hermosa, 526 F.2d 300 (5th Cir. 1976) ........................................................................................ 65, 66, 67 Glendale Fed. Bank, FSB v. United States, 378 F.3d 1308 (Fed. Cir. 2004) ................................................................................................ 38 Home Sav. of Am., FSB v. United States , 399 F.3d 1341 (Fed. Cir. 2005) ................................................................................................ 14 Home Sav. of Am., FSB v. United States, 57 Fed. Cl. 694 (2003), aff'd in part, 399 F.3d 1341 (Fed. Cir. 2005)..................................... 15 Hughes Communications Galaxy, Inc. v. United States, 271 F.3d 1060 (Fed. Cir. 2002) .............................................................................. 15, 16, 33, 36 In re Kellett Aircraft Corp., 186 F.2d 197 (3d Cir. 1950) ............................................................................................... 15, 46 Indiana Michigan Power Co. v. U.S. Dep't of Energy, 88 F.3d 1272 (D.C. Cir. 1996).............................................................................................. 4, 74 Koby v. United States, 53 Fed. Cl. 493 (2002) .............................................................................................................. 55 LaSalle Talman Bank, FSB v. United States, 317 F.3d 1363 (Fed. Cir. 2003) ................................................................................................ 45 Locke v. United States, 283 F.2d 521 (Ct. Cl. 1960) ................................................................................................ 38, 41 LTV Corp. v. Gulf States Steel, Inc., 969 F.2d 1050 (D.C. Cir. 1992)................................................................................................ 76 Maine Yankee Atomic Power Co. v. United States, 225 F.3d 1336 (Fed. Cir. 2000) .................................................................................................. 4 Mass. Bay Transp. Auth. v. United States, 129 F.3d 1226 (Fed. Cir. 1997) ................................................................................................ 15

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Mid-America Tablewares Inc. v. Mogi Trading Co., 100 F.3d 1353 (7th Cir. 1996) .................................................................................................. 45 Northern Helex Co. v. United States, 524 F.2d 707 (Ct. Cl. 1975) ...................................................................................................... 46 Northern States Power Co. v. U.S. Dep't of Energy, 128 F.3d 754 (D.C. Cir. 1997).................................................................................................... 4 Premier Corp. v. Economic Research Analysts, Inc., 578 F.2d 551 (4th Cir. 1978) .................................................................................................... 76 R.E. Davis Chemical Corp. v. Diasonics, Inc., 924 F.2d 709 (7th Cir. 1991) .................................................................................................... 45 Record Club of Am. v. United Artists Records, Inc., 643 F. Supp. 925 (S.D.N.Y. 1986) ........................................................................................... 13 Robinson v. United States, 305 F.3d 1330 (Fed. Cir. 2002) ................................................................................................ 14 S.N.A. Nut Co. v. Häagen-Dazs Co., 247 B.R. 7 (Bankr. N.D. Ill. 2002) ........................................................................................... 14 Sacramento Municipal Utility District v. United States, 63 Fed. Cl. 495 (2005) ........................................................................................................ 11, 75 Specialty Assembling & Packing Co. v. United States, 355 F.2d 554 (Ct. Cl. 1966) ...................................................................................................... 38 System Fuels Inc. v. United States No. 03-2642C, 2005 WL 1804314 (Fed. Cl. July 29, 2005) ........................ 7, 12, 13, 53, 75, 76 System Fuels, Inc. v. United States, 65 Fed. Cl. 163 (2005) .................................................................................................. 12, 15, 16 Tennessee Valley Authority v. United States, 60 Fed. Cl. 665 (2004) ...................................................................................... 12, 13, 16, 36, 37 United States v. The John R. Williams, 144 F.2d 451 (2d Cir. 1944) ..................................................................................................... 66 Yankee Atomic Elec. Co. v. United States, No. 98-126C, 2004 WL 1535688 (Fed. Cl. June 28, 2004).......................................... 13, 37, 74 Statutes

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42 U.S.C. § 10131(a)(2)................................................................................................................ 36 42 U.S.C. § 10198(a) .................................................................................................................... 36 48 Fed. Reg. 16,590 (Apr. 18, 1983) ............................................................................................ 34 U.C.C. § 2-712 (1997) .................................................................................................................. 15 Other Authorities 11 Corbin On Contracts § 1009 (2002)......................................................................................... 37 128 Cong. Rec. 27,775 (daily ed. Nov. 29, 1982) ........................................................................ 36 128 Cong. Rec. 7,974 (daily ed. Apr. 28, 1982) ........................................................................... 35 24 Williston on Contracts § 66.44 (4th ed. 1990)......................................................................... 72 RESTATEMENT (SECOND) OF CONTRACTS § 236 (1981)................................................................ 12 RESTATEMENT (SECOND) OF CONTRACTS § 347 (1981).................................................... 14, 15, 16 RESTATEMENT (SECOND) OF CONTRACTS § 350 (1981).................................................... 12, 14, 57 RESTATEMENT (SECOND) OF CONTRACTS § 351 (1981)................................................................ 16 RESTATEMENT (SECOND) OF CONTRACTS § 352 (1981).......................................................... 16, 37 RESTATEMENT (SECOND) OF JUDGMENTS § 26(1)(b) and (e) ........................................................ 16

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS

SACRAMENTO MUNICIPAL UTILITY DISTRICT, Plaintiff, v. THE UNITED STATES OF AMERICA, Defendant.

) ) ) ) ) ) ) ) ) ) ) )

No. 98-488 C (Judge Braden)

SACRAMENTO MUNICIPAL UTILITY DISTRICT'S POST-TRIAL LEGAL BRIEF INTRODUCTION Plaintiff Sacramento Municipal Utility District ("SMUD") respectfully files this PostTrial Legal Brief in support of its claim for damages resulting from the government's partial breach of contract. In this case, SMUD seeks to recover the damages it incurred as a result of the government's delay in performing its obligations under the June 13, 1983 Contract between the Department of Energy ("DOE") and SMUD. See generally Plaintiff's Exhibit ("PX") 44 (Contract for the Disposal of Spent Nuclear Fuel between DOE and SMUD) ("Contract" or "Standard Contract"). The evidence demonstrates that SMUD is entitled to recover the expenses it incurred as a reasonable effort to mitigate its damages and to provide substitute interim performance as a result of the government's failure to perform. From the moment that SMUD began its mitigation efforts to design, license, and fabricate an on-site dry storage facility, it engaged in a continuous

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process of evaluation, reevaluation, and reconsideration of the project. The initial contract with Pacific Nuclear and then VECTRA Technologies ("Vectra") went through 11 contract change orders from 1992 through Vectra's bankruptcy in 1997. PX 267. The subsequent contract with Transnuclear West ("TNW") went through 11 contract change orders of its own from 1998 to 2003. PX 598. SMUD also undertook additional, and in some cases full-scale, reevaluations of its storage options in 1997, 1998, 2000, and 2001. See PFF ¶¶ 145-67. There is no question that the development of the on-site dry storage facility at SMUD was a long and difficult process, and that these difficulties led SMUD to reconsider the direction of its mitigation efforts repeatedly. See PFF ¶¶ 92-110, 145-67, 287-326. At no time during the design and implementation of this project, however, did SMUD have any certainty about when the government would perform or how long its delay would last. The ever-growing likelihood and then certainty that DOE would fail to timely perform its contractual obligations drove SMUD to initiate and continue implementing its dry storage program notwithstanding the obstacles and difficulties it encountered. Had the government been actively preparing to perform throughout the 1990s, or actually performing in 1998, SMUD would have avoided the myriad risks associated with its first-of-a-kind dry storage project and left its fuel in the wet pool. See PFF ¶¶ 130-36, 139, 145-55, 157, 160-68. As demonstrated by the evidence at trial, SMUD in a "non-breach" world would not have contracted for dry storage in 1992, nor continued with the project during subsequent reassessments, including restarting the project in 1998 after a two-year hiatus stemming from the Vectra bankruptcy.

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From 1992 through 1997, SMUD incurred approximately $21.5 million in damages for the initial dry storage design work, including $12.1 million paid to outside vendors, $3.7 million in internal SMUD labor, and $3.4 million for materials. See PFF ¶¶ 199-06. From 1998 through 2003, following the restart of the project with TNW, SMUD incurred approximately $55.05 million in damages for the final design, licensing, fabrication, operation, loading and transfer of spent fuel to the Independent Spent Fuel Storage Installation ("ISFSI"). See PFF ¶¶ 212-41. These costs include approximately $42.2 million paid to outside vendors, $10.1 million in internal SMUD labor, and $1.1 million for materials (agreed offsets for both time periods are described in § IV.C below).1 See PFF ¶¶ 215-32. SMUD's efforts to seek substitute performance or "cover" for the government's failure to dispose of SMUD's spent fuel ultimately were successful and enabled SMUD to substantially mitigate the damages caused by DOE's breach. With the completion of the transfer of its fuel to the ISFSI in 2002, SMUD was able to reduce its annual fuel storage costs by approximately $4.2 million. See PFF ¶¶ 392-95. This reduction will produce significant savings compared to the damages SMUD would have incurred had it remained in the wet pool during the period of the government's delay in performance.

1

SMUD does not seek to recover the tens of millions of dollars that it spent storing its spent fuel in the wet pool through 2002 or the approximately $300 million it has spent on decommissioning. Transcript ("Tr.") at 698 (Redeker).

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BACKGROUND2 Under the Contract, the government was obligated to begin accepting spent nuclear fuel ("SNF") and high-level radioactive waste ("HLW") on January 31, 1998. This obligation was "unconditional," "unqualified," and "unequivocal." Northern States Power Co. v. U.S. Dep't of Energy, 128 F.3d 754, 758-61 (D.C. Cir. 1997); Indiana Michigan Power Co. v. U.S. Dep't of Energy, 88 F.3d 1272, 1274-77 (D.C. Cir. 1996). The Federal Circuit explained that "Congress found [the January 31, 1998 start date] so important when it promulgated the [Nuclear Waste Policy] Act that it took the unusual action of specifying that all the contracts must contain this explicit requirement." Maine Yankee Atomic Power Co. v. United States, 225 F.3d 1336, 1342 (Fed. Cir. 2000). The government did not begin accepting fuel on January 31, 1998, and more than 7½ years after the contractually-required start date, still has not provided any date when it will begin accepting SMUD's spent fuel. During most of the period at issue, the government has acknowledged that its performance would be delayed by at least 12 years, from 1998 until 2010. See PFF ¶¶ 117, 120, 122. Recently, it has admitted that there will be additional delay, with performance not beginning until 2012 or later. PX 972 (announcing additional delay); PX 812 (aborting resumption of renewed DCS planning). The government first began informing SMUD and other utilities about delays in the repository program in 1987 and 1988. PX 109, 118, 113, 142, 143, 144; see also PFF ¶¶ 117-18.

2

A more complete and detailed description of the factual background with citations to the record is set forth in Plaintiff's Proposed Findings of Fact ("PFF") which accompany this brief.

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In mid-1988, DOE sent SMUD a letter stating that its projected waste acceptance would not begin until 2003, a 5-year delay in performance. PX 144. These DOE acknowledgements forced SMUD to analyze and address the need to store fuel at Rancho Seco over an uncertain and extended duration. See PFF ¶¶ 126-33. In June 1989, SMUD decided to permanently shut down Rancho Seco following a public referendum in favor of closing the plant. Tr. at 889-95 (Ferreira). SMUD then began the process of evaluating what to do with the plant and the spent fuel, with the knowledge that DOE's performance likely would be delayed. See PFF ¶¶ 123, 125-27. What SMUD did not have was any assurance, certainty, or progress report indicating how long DOE's delay likely would last. In November 1989, shortly after SMUD's decision to shut down, DOE announced another delay in its performance--"a significant slip in the expected start of repository operations--from the year 2003 to approximately 2010." PX 169 at vii. Although DOE suggested that it might still begin accepting fuel in 1998 on an interim basis through a monitored retrievable storage facility ("MRS"), it also acknowledged that this would require the identification of a host site and the amendment of the Nuclear Waste Policy Act ("NWPA") provisions which tied the development of such a facility to development of the repository. Id. at x, 11-12. In response to the premature closure of Rancho Seco and the growing uncertainty surrounding the date on which DOE would begin accepting spent fuel, SMUD sought to responsibly evaluate and address its fuel storage needs. See PFF ¶¶ 125-31. This multi-step process began with the retention of a consultant, S. Levy, Incorporated ("Levy"), to address the

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uncertainties in long-term fuel storage options in light of DOE's announced delays. PX 176; see also PX 297 at 7. Because of the unsettled environment and uncertainties associated with DOE performance, Levy recommended in 1990 that SMUD pursue a "dual-purpose" or transportable dry storage system, which would offer the best opportunity for early offsite shipment to an interim DOE storage facility, if one were ever developed, or for interim acceptance by DOE onsite at the Rancho Seco facility. PX 176 at ii. As suggested by Levy, and in furtherance of its early mitigation efforts, SMUD began having discussions and meetings with DOE officials regarding the prospect of a "demonstration project" or Cooperative Agreement involving dry storage technology. See PFF ¶¶ 129, 573. Meanwhile, DOE's continued announcements and actions during this period indicated that a delay in fuel acceptance was growing ever more likely. E.g., PX 188, 217, 973; see also Corrected Appendix to Accompany SMUD's Motion to File Designated Deposition And Trial Testimony, dated February 24, 2005 (hereinafter "Designations Appendix") (Dckt. #310) at 2290-91 (Freeman); id. at 2237-40, 2251-52 (Bowser); PFF ¶¶ 11721. Therefore, in order to position itself to deal responsibly with the long-term storage problems arising from the threatened breach, SMUD signed a contract with Pacific Nuclear (which later became Vectra Technologies, Inc.) in October 1992 for the design, licensing, and fabrication of dual-purpose casks and canisters. PX 267; PFF ¶¶ 91-92, 130-32. Pacific Nuclear's original contract cost was approximately $12 million. Id. The project, however, got off to a rocky start and, within months, the Nuclear Regulatory Commission ("NRC") advised Pacific Nuclear that additional testing would be required for its proposed design. PX 267, 295;

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PFF ¶¶ 93-94. As a result of NRC safety and technical requirements, the project experienced substantial schedule delays and cost increases from the outset, and these problems continued as NRC scrutiny intensified during the decade. PFF ¶¶ 289-93. These delays and cost increases resulted in 11 change orders to the Pacific Nuclear contract over the next 4 years, all of which presented potential off-ramps to the project had there been any improvement in DOE's prospects for performance. Tr. at 433 (Shetler); DX 425 at 2-3 (discussing efforts for "back loading the dollar expenditures as much as possible"); PX 267; see also DX 53, 406, 415, 434, 483, 490, 561, 590, 615, 643, 683, 762, 792, 797. In May 1994, and again in May 1995, DOE issued formal pronouncements in the Federal Register reiterating that it would not begin performance until at least 2010. PX 251, 410; see also System Fuels, Inc. v. United States, No. 03-2642C, 2005 WL 1804314, at *2 (Fed. Cl. July 29, 2005) (noting that "[o]n May 25, 1994, however, DOE announced that it would not be able to start accepting SNF from any nuclear utilities until 2010, at the earliest"). In response to DOE's May 1994 notice, SMUD informed DOE that it should reimburse SMUD for the costs of dry storage if the government failed to accept SMUD's spent fuel as contractually required. PX 369 at 7-8. Also in late 1994, SMUD and DOE formally entered into a "Cooperative Agreement" for the demonstration of a dual-purpose transportable storage cask. Under this Cooperative Agreement, SMUD regularly reported to DOE on the status and costs of the dry storage project during the next five years. See PX 411, 424, 434, 448, 459, 476, 492, 514, 571, 845; PFF 296.

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On December 17, 1996, DOE sent formal notice to SMUD, again stating that it would not meet its obligations under the Contract. PX 500. In response, SMUD formally requested that DOE assist it in mitigating the consequences of the impending breach by implementing the socalled "Fort St. Vrain solution," whereby DOE would take title to SMUD's SNF at the Rancho Seco site and reimburse SMUD for the on-site storage costs.3 PX 528 at 2-3. SMUD explained that it was doing "everything possible to reduce the interim costs of storage by proceeding with its plan for dry storage." id. at 2. SMUD informed the government that if DOE failed to begin acceptance of SNF as required by the Contract, "SMUD will have no alternative but to seek reimbursement from DOE for the cost of design, licensing, construction and operation until such time that DOE takes title." Id. In response, DOE did not suggest that SMUD should leave its SNF in the wet pool or that it should abandon the dry storage project, charge vendors, or pursue other alternatives. DOE never suggested that SMUD should pursue a "storage-only" system or the dual-purpose cask designed by Nuclear Assurance Corporation ("NAC"). Instead, in 1997, DOE "recognize[d] that such delay may have resulted in hardship to certain contract holders" and that it was willing to consider "compensation for onsite storage costs." PX 544 at 2; see also PX 537 at 3 (DOE
3

DOE had suggested since Contract formation that one option in the event of a delay in the repository was for DOE to take title of a utility's spent fuel at the reactor site. See infra at pp. 35-36; PFF ¶¶ 49-51. One of SMUD's primary goals, since shutdown and still today, was to have DOE take responsibility for the spent fuel as soon as possible, and SMUD has sought to facilitate and foster that objective throughout its mitigation efforts. Tr. at 152 (Shetler); PX 528; PX 1012. Despite DOE's earlier acknowledgements that it could take title to spent fuel at a utility's site in the event of a delay in DOE performance, and its actual actions in doing so at the Fort St. Vrain reactor, DOE has refused to accept responsibility for the fuel at Rancho Seco. DX 861; PX 1013.

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testimony to Congress in 1997 stating that DOE was considering approaches to address its delay, including "financial compensation and the Department taking title to some fuel at the reactor sites"). During the same period, from 1996 through 1998, there was essentially no progress on SMUD's dry storage project because of technical difficulties and the bankruptcy of its primary vendor, Vectra Technologies Inc. ("Vectra"). PFF ¶¶ 297-301. At that time, no casks or canisters had been delivered, and the project faced continuing regulatory risks. As a result, SMUD conducted a comprehensive study to reevaluate its options and reconsider what to do with its spent fuel during the long period of DOE's already announced delay. PX 502, 503, 519, 524. One of the options explicitly studied and carefully considered by SMUD was leaving the fuel in the pool during the government's announced minimum 12-year delay and incurring the significantly higher operating costs of wet storage throughout the breach. PFF ¶¶ 145-51. That option was rejected, however, due to what SMUD management reasonably viewed as the even greater uncertainties, risks and costs that would result from leaving the fuel in the pool during the entirety of DOE's indefinite delay. PFF ¶¶ 152, 154-55. TNW purchased Vectra's assets out of the bankruptcy estate in November 1997. PFF ¶ 104. SMUD conducted extensive contract negotiations with TNW in 1998 for the completion of the dry-storage project, ultimately signing a contract with TNW in September 1998. PX 598, 598A. By order of the Bankruptcy Court, TNW agreed to complete the SMUD project at "costwithout-profit," and it restarted fabrication of the casks and canisters in late 1998. PX 585; PFF ¶¶ 105-06, 305-07, 311. Like the original contract, the new TNW contract was the subject of 11

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change orders to address cost increases and delays resulting from NRC requirements, and in approving these changes, SMUD again expressly considered the option of leaving its fuel in wet storage. PX 598; see also DX 950, 915, 947, 963, 978A, 1039, 1054, 1099, 1142, 1149, 1144, 1279. In 1999 and 2000, SMUD experienced additional difficulties with TNW and its subcontractors. PFF ¶¶ 314-21. Due to the project delays experienced in prior years, SMUD and TNW were forced to transfer the canister fabrication work to a new subcontractor. See, e.g., PX 624, 631. This led SMUD to conduct another reevaluation of the alternatives to the dry storage project. PX 642, 672. Because of the actual delay in DOE's fuel acceptance, this reevalution similarly concluded that continuing with the dry storage project would best mitigate SMUD's damages during the delay. SMUD also updated security requirements, developed procedures, fabricated necessary equipment, and trained staff in preparation to transfer SNF from the pool to the ISFSI. PFF ¶¶ 230, 323-26. Rancho Seco received the first canister in September 2000. PFF ¶ 109. In early 2001, SMUD worked to resolve fabrication and other issues with the remaining 20 canisters. PFF ¶¶ 319-22. Because of these continuing issues, SMUD again reevaluated alternatives to the dry storage project. See PX 689. Ultimately, however, SMUD management concluded that the alternatives, including remaining in wet storage, presented risks "significantly greater" than the current system, id. at 2, and so SMUD chose to finish the project with TNW. PFF ¶¶ 166-67.

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SMUD loaded the first canister with SNF in April 2001. Following the resolution of additional fabrication issues, SMUD received and loaded the remaining 20 canisters over a 16-month period in 2001 and 2002, completing this work in August 2002. PFF ¶¶ 110-16. In 2002 and 2003, SMUD incurred approximately $700,000 in annual costs associated with the operation and maintenance of the ISFSI. PFF ¶¶ 396-98. SMUD began dismantling its wet pool in 2003. At any point prior to 2003, SMUD could have left its SNF in the wet pool for indefinite storage pending eventual acceptance by DOE under the Contract. Had SMUD done so, it likely would have incurred higher damages because of the greater costs of operating and maintaining the wet pool during the entire period of DOE's continuing, open-ended delay. PFF ¶¶ 340-48. SMUD, however, did not sit back with its fuel in the pool and incur the higher operating costs of wet storage for a lengthy and indefinite period. Instead, SMUD took fair and reasonable steps to mitigate its contractual losses and seek substitute performance by becoming an industry leader in pursuing the development of a dual-purpose dry storage system, a step that has now been replicated by dozens of other utilities. ARGUMENT I. SMUD Is Entitled To Its Expectation Damages In The Form Of Mitigation Expenses And Substitute Performance Costs.

This Court has already concluded that the government breached the SMUD Contract, ruling that "the Government was obligated under the June 14, 1983 DOE Standard Contract to begin accepting SNF and/or HLW from utilities no later than January 31, 1998." Sacramento Municipal Utility District v. United States, 63 Fed. Cl. 495, 505 (2005); see also, e.g., System

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Fuels, Inc., 2005 WL 1804314, at *6-7; Consumers Energy Co. v. United States, 65 Fed. Cl. 364, 374-75 (2005); System Fuels, Inc. v. United States, 65 Fed. Cl. 163, 176-77 (2005). Because it remains of utmost importance to SMUD, for a range of financial and regulatory reasons, to have DOE accept its fuel in the future, SMUD has chosen to pursue damages for partial breach, rather than declaring the Contract at an end and pursuing all damages that would stem from a total breach.4 SMUD is entitled to choose this remedy. See Cities Service Helex, Inc. v. United States, 543 F.2d 1306, 1313 (Ct. Cl. 1976) (holding that a material breach "merely gives the injured party the right to end the agreement; the injured party can choose between canceling the contract and continuing it"); RESTATEMENT (SECOND) OF CONTRACTS § 236 (1981) ("RESTATEMENT"). Once DOE began announcing that it would not likely commence performance as required by the Contract, as well as when it actually failed to perform beginning in 1998, SMUD was entitled, and likely contractually required, to engage in mitigation efforts and to seek substitute arrangements or cover for DOE's lack of performance. Id. § 350 cmt. b ("Once a party has reason to know that performance by the other party will not be forthcoming," he is "expected to take such affirmative steps as are appropriate in the circumstances to avoid loss by making substitute arrangements or otherwise."). In Tennessee Valley Authority v. United States, 60 Fed. Cl. 665, 674 (2004), the Court recognized the obligation of utilities to mitigate their damages, explaining that:

4

Notably, neither has the government sought to end its obligations under the Contract.

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When it became obvious to TVA that DOE would not perform under the contract, TVA was justified, indeed obligated, to take steps to minimize its losses in light of DOE's imminent nonperformance. . . . TVA's construction of dry storage facilities for spent fuel at its [plants] must be viewed as an affirmative step toward mitigation to avoid loss for the government's partial ongoing breach. The government's notifications that it would not perform as required by the Contract constituted a partial repudiation of its contract obligations that entitled, if not required, SMUD to begin immediately mitigating its damages. Id.; see also Yankee Atomic Elec. Co. v. United States, No. 98-126C, 2004 WL 1535688, at *6 (Fed. Cl. June 28, 2004) ("Should plaintiffs have waited until [January] 31, 1998, and then decided what to do with their nuclear waste? The court thinks not . . . ."); Entergy Nuclear Indian Point 2 v. United States, 64 Fed. Cl. 515, 522 (2005) (concluding that costs to design, license, and construct a dry storage facility could be recovered as incidental losses if incurred to mitigate damages); Cuyahoga Metro. Housing Auth. v. United States, 65 Fed. Cl. 534, 547 (2005) (concluding that "reasonable cost-avoiding steps include affirmative efforts to make substitute arrangements"); cf. System Fuels Inc., 2005 WL 1804314, at *10 ("A long lead time is required to plan and construct SNF dry storage facilities due to the extremely hazardous nature of SNF, the logistical problems associated with storing it safely, and the significant public interest in safely storing such materials.").5 SMUD's duty to mitigate
5

See, e.g., Chain Belt Co. v. United States, 115 F. Supp. 701, 714 (Ct. Cl. 1953); Record Club of Am. v. United Artists Records, Inc., 643 F. Supp. 925, 941 (S.D.N.Y. 1986) (plaintiff properly mitigated its damages where the plaintiff had reason to doubt the defendant's future performance "[b]ased on [the defendant's] shoddy performance under the contract from the beginning, and [the defendant's] repeated unequivocal repudiations of the contract"); Air et Chaleur, S.A. v. Janeway, 757 F.2d 489, 494 (2d Cir. 1985) (holding that "[w]hen plaintiffs learned . . . that [the defendant] intended to breach the contract, . . . [t]hey were obligated to take whatever reasonable actions they could to minimize their damages"); S.N.A. Nut Co. v. Häagen-Dazs Co., 247 B.R. 7, Footnote continued on next page

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continues during DOE's delay until the government performs its obligations under the Contract. RESTATEMENT § 350 cmt. g (where "the breach is accompanied by assurances that performance will be forthcoming," the injured party "may be expected to take some steps to avoid loss due to a delay in performance"). "When mitigating damages from a breach, a party `must only make those efforts that are fair and reasonable under the circumstances.'" Home Sav. of Am., FSB v. United States, 399 F.3d 1341, 1353 (Fed. Cir. 2005) (quoting Robinson v. United States, 305 F.3d 1330, 1333 (Fed. Cir. 2002)); First Heights Bank, FSB v. United States, No. 04-5021, -5022, 2005 WL 1962989, at *3-4 (Fed. Cir. Aug. 17, 2005). The non-breaching party is not required to mitigate damages in the "cheapest form" possible or at "least cost" to the defendant. Home Sav., 399 F.3d at 1353. "[F]air and reasonable efforts to mitigate are all that the law requires." Id. Moreover, all "costs incurred in a reasonable effort, whether successful or not, to avoid loss" are recoverable. RESTATEMENT § 347 cmt. c; see also Chain Belt, 115 F. Supp. at 714 (plaintiff in a partial breach case was entitled to recover expenses incurred "in a reasonable effort to avoid the harm which both parties had reason to foresee would be the probable result of defendant's breach of the contract"). "Reasonableness, in turn, `is to be determined from all the facts and circumstances of each case . . . the person whose wrong forced the choice can not

Footnote continued from previous page 17-18 (Bankr. N.D. Ill. 2002) (holding that where supplier indicated that goods would be temporarily unavailable in the future, supplier "partially repudiated" the contract, and the buyer was entitled to immediately mitigate its damages for the partial repudiation).

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complain that one rather than the other was chosen.'" Home Sav. of Am., FSB v. United States, 57 Fed. Cl. 694, 729 (2003) (quoting In re Kellett Aircraft Corp., 186 F.2d 197, 198 (3d Cir. 1950)), aff'd in part, 399 F.3d 1341 (Fed. Cir. 2005). Finally, "[i]t makes no difference whether the breach has already occurred, or where . . . it is merely impending under circumstances such that it was not reasonable for plaintiff to expect defendant to prevent the harm." Chain Belt, 115 F. Supp. at 714. SMUD's mitigation expenses and the costs of providing substitute or alternative performance during the government's partial breach are recoverable as a form of expectancy damages. See, e.g., Entergy Nuclear Indian Point 2, 64 Fed. Cl. at 522; System Fuels, Inc., 65 Fed. Cl. at 175-76; Cuyahoga Metro., 65 Fed. Cl. at 543-44, 547; Boston Edison Co. v. United States, 64 Fed. Cl. 167, 179-80 (2005) (holding that expectancy damages were proper in a partial breach case). The injured party's expectation interest is "intended to give him the benefit of his bargain by awarding him a sum of money that will, to the extent possible, put him in as good a position as he would have been in had the contract been performed." RESTATEMENT § 347 cmt. a; see also Hughes Communications Galaxy, Inc. v. United States, 271 F.3d 1060, 1066 (Fed. Cir. 2002); Mass. Bay Transp. Auth. v. United States, 129 F.3d 1226, 1232 (Fed. Cir. 1997).6

Under the Uniform Commercial Code ("UCC"), "[i]f a seller breaches a contract for goods, the buyer may `cover' or, in other words, obtain substitute goods from another seller." Hughes Communications, 271 F.3d at 1066 (citing UCC § 2-712 (1997)). Even where the UCC is inapplicable, the Federal Circuit has found that the concept of cover "provides useful guidance in applying general contract principles." Id. Applying these principles, the reasonable costs of obtaining substitute goods or services may be recovered. Id. at 1066-67. As the victim of the Footnote continued on next page

6

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To recover its damages, SMUD must show that they were reasonably foreseeable, caused by the breach, and proven with reasonable certainty. Bluebonnet Sav. Bank, FSB v. United States, 266 F.3d 1348, 1355 (Fed. Cir. 2001) (citing RESTATEMENT §§ 347, 351, 352). Here, the evidence demonstrates that SMUD's many actions to continue funding the design, licensing, and fabrication of an interim on-site dry storage facility were caused by the government's breach, were reasonably foreseeable, and were proven with reasonable certainty. SMUD's efforts were also fair and reasonable under the circumstances. First Heights Bank, 2005 WL 1962989 at *34. As such, SMUD's damages incurred from 1992 to 1997 and from 1998 to 2003 are recoverable in this case.7

Footnote continued from previous page breach, a party is "within its rights to obtain commercially reasonable substitute . . . services, even if the substitute services [are] not identical to those covered by the [contract]." Id. at 1067. 7 The parties entered into a stipulation and the Court entered an Order preserving SMUD's ability to seek damages incurred after 2003. See Joint Stipulation and Order Regarding Damages, dated Sept. 27, 2004 (Dckt. #257); see also System Fuels Inc., 65 Fed. Cl. at 177 (adopting the exceptions to the rule of merger and bar in accordance with RESTATEMENT (SECOND) OF JUDGMENTS § 26(1)(b) and (e) and holding that plaintiffs may bring subsequent claims for future damages); Entergy Nuclear Indian Point 2, 64 Fed. Cl. at 525-26 (same); Entergy Nuclear Generation v. United States, 64 Fed. Cl. 336, 345-46 (2005) (same); Tennessee Valley Authority, 60 Fed. Cl. at 677-78 (same). Because SMUD effectively mitigated its damages and reduced operating and maintenance costs for the dry storage facility to approximately $700,000 in 2003, SMUD expects that any future damages claim would be modest. SMUD anticipates that the operating costs for the ISFSI will remain relatively constant until basic decommissioning activities at the reactor are completed, which is planned for 2008. After 2008, costs for operating and securing the ISFSI will likely increase because all activity at the site will relate only to the ISFSI.

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II.

The Government's Failure To Begin Acceptance Of Spent Fuel Caused SMUD To Incur Damages.

The Federal Circuit has recently held that the "causal connection between the breach and the loss of profits must be `definitely established.'" California Federal Bank v. United States, 395 F.3d 1263, 1268 (Fed. Cir. 2005)(citations omitted). The Federal Circuit further explained, however, that the breach need not "be the sole factor or sole cause" of the loss of profits, and that the "existence of other factors operating in confluence with the breach will not necessary preclude recovery based on the breach." Id. This standard has been satisfied by SMUD here.8 SMUD's multiple and discrete decisions to pursue and continue with its dry storage project were each preceded and motivated by DOE announcements, statements, and actions which initially indicated and then confirmed that DOE's acceptance of spent fuel would be delayed substantially. PFF ¶¶ 117-24. This created significant uncertainty about DOE's future fuel acceptance and led SMUD to believe that it would have to continue to store spent fuel at the non-operating Rancho Seco facility for an extended and unknown time period, which would increase SMUD's future storage costs. This uncertainty and delay caused SMUD to contract for and continue with the dry storage project during the initial development phase from 1992 through 1997. Although SMUD

The Federal Circuit has not spoken directly to the issue of whether the "definitely established" standard articulated in California Federal Bank for lost profits is equally applicable to other forms of expectancy damages. However, this Court has suggested that the standard articulated in California Federal is essentially the same as the multi-faceted approach that the Court has previously applied in addressing causation. See, e.g., American Capital Corp. v. United States, No. 95-523C, 2005 WL 1308314, at *84 (Fed. Cl. May 31, 2005), ; Cuyahoga Metro., 65 Fed. Cl. at 546 n.15.

8

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plainly recognized that dry storage would facilitate decommissioning Rancho Seco and early DOE acceptance of SMUD fuel, the trial evidence demonstrated that the decision to initiate and continue with the dry storage program was driven by the growing uncertainties and anticipated delay associated with DOE's future fuel acceptance. PFF ¶¶ 125-44. If DOE had at any time during this period provided SMUD with adequate assurance of contractual performance, as opposed to constant insecurity and uncertainties, then SMUD would have abandoned its dry storage mitigation efforts, given the licensing, manufacturing, and acceptance queue risks. See infra n.12; PFF ¶ 134. The causal connection is even more dramatic with respect to SMUD's later decisions to restart work on the dry storage project in 1998, after work had been suspended, and to continue with the project in 2000 and 2001, when further problems with substantial financial consequences were experienced. PFF ¶¶ 145-68. At each of these junctures, SMUD reconsidered its options with the knowledge that DOE had already failed to meet its 1998 start date and that extended and open-ended onsite storage was a reality. Had DOE been accepting fuel at that time as required by the Standard Contract, then SMUD would have not have continued with dry storage given the continuing problems and risks involved.9

9

This Court has cited with approval Professor Corbin's discussion of causation as "uniformity of sequence" between action and injury. See American Capital Corp., 2005 WL 1308314, at *7980. Insofar as this approach is applied here it further supports the conclusion that DOE's actions caused SMUD to initiate, restart, and continue with the dry storage project as many other utilities that have prematurely shutdown or are still operating have similarly developed or are developing dual-purpose dry storage systems. See E. Supko Written Direct at ¶ 113, ¶ 122, Table 9 (PX 1002); Tr. at 1458 (Stuart).

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A.

DOE's Failure To Begin Acceptance Of Spent Fuel In 1998 Was Preceded By Eleven Years Of Announcements And Actions Indicating That Such Acceptance Would Be Delayed Significantly.

Although DOE's breach of the Standard Contract occurred on January 31, 1998 when it failed to start accepting spent fuel, see Sacramento Municipal Utility District, 63 Fed. Cl. at 503, that failure had been preceded by eleven years of DOE announcements, statements, and actions indicating that it would not meet the 1998 start date and that its acceptance of fuel from SMUD and other utilities would be delayed until 2010 or later. See PFF ¶¶ 117-24. Early DOE announcements of anticipated delay included the January 1987 Draft Mission Plan Amendment, the June 1987 Final Mission Plan Amendment, the March 1987 Monitored Retrievable Storage Submission to Congress, the June 1988 Draft Mission Plan Amendment, the 1988 Annual Capacity Report, and a July 1988 letter to SMUD, all of which stated that DOE would not begin accepting spent fuel at a permanent repository until 2003, see PX 109 at 5; PX 118 at 6; PX 113 at 2, 10, 22; PX 143 at 15; PX 142 at 4-5; and PX 144, and the November 1989 Report to Congress on Reassessment of the Civilian Radioactivity Waste Management Program, which announced a further "significant slip" in the opening of the repository until "approximately 2010." PX 169 at vii.10 Subsequent DOE statements of delay included the May 1994 Notice of Inquiry and May 1995 Final Interpretation, both of which were published in the Federal Register and stated
10

In addition, in the 1989-1991 period, the head of DOE's Office Civilian Radioactive Waste Management ("OCRWM"), John Bartlett, and his deputy, Ron Milner, verbally advised SMUD of delays in the development of the permanent repository. Designations Appendix (Dckt. #310) at 2237, 2239-40 (Bowser).

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DOE's belief that its obligation to commence fuel acceptance was conditional upon the existence of an operating repository or interim storage facility and reiterated that the earliest possible date for acceptance of waste at a repository would be 2010, see PX 351 at 3, 4; PX 410 at 2, 3, 9, and DOE's December 1996 letter advising SMUD that DOE would be unable to begin accepting spent fuel by January 31, 1998. PX 500. Although DOE suggested in the late 1980s and early 1990s that it might still meet the 1998 start date by accepting fuel on an interim basis at an MRS, it also recognized that this would require not only that the federal government identify a host site, but also that Congress amend the NWPA and abolish the statutory linkages between an MRS and the repository; those linkages effectively preclude operation of an MRS until three years before the repository opens, that is, until 2007 at the earliest. See PFF ¶ 119. Early DOE announcements that discussed the siting requirements and statutory linkages and their effect in delaying the future development of an MRS include the June 1988 Draft Mission Plan Amendment, the November 1989 Reassessment Report, and the 1990, 1991, and 1992 Annual Capacity Reports. PX 143 at 15; PX 169 at x, 11-12; PX 188 at 5; PX 231 at 4; PX 294 at 3. Other developments during the early 1990s confirmed that the timely receipt of spent fuel by DOE was unlikely. See PFF ¶ 121. These developments included: the General Accounting Office's 1991 finding that an MRS was unlikely to open by 1998, PX 217 at 3-4, 19-23, 30-31; the failure and termination of the federal government's efforts to locate a host site for an MRS, PX 265; PX 363 at 7; DOE's inability to meet any siting, engineering, permitting, or construction milestones for an MRS, Tr. at 2170-2173 (Kouts); the 1993 cancellation of DOE's program to

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develop transportation casks, see I. Stuart Written Direct at ¶ 7 (PX 1001); and DOE's failure to make progress generally. See Designations Appendix (Dckt. #310) at 2290-91 (Freeman); id. at 2251-52 (Bowser). These DOE announcements, statements, and actions led SMUD to believe that DOE likely would not begin accepting spent fuel until sometime well after 1998 and that Rancho Seco would probably have to continue to store spent fuel until well after 2010. PFF ¶ 123. This belief initially arose in the late 1980s and became progressively more certain throughout the 1990s. It is reflected in various SMUD documents, including the 1990 Levy report, e.g., PX 176 at 59, the 1992 staff recommendations to the Board of Directors regarding the Pacific Nuclear contract, PX 259 at 2; PX 269A, a 1993 environmental assessment on Rancho Seco decommissioning, PX 297 at 7, and SMUD's March 1997 response to the DOE's December 1996 letter, PX 528 at 2. It was also the subject of testimony by current and former SMUD officials, including former General Manager David Freeman, Assistant General Manager Jim Shetler, Rancho Seco Plant Manager Steve Redeker, and former Rancho Seco Fuel Disposition Manager Rita Bowser. See PFF ¶¶ 123-24. Although some at SMUD were hopeful that an MRS could be developed, SMUD recognized that this would require legislative action, and it considered this increasingly unlikely to occur and understood that the MRS process terminated entirely by the mid-90s. See Designations Appendix (Dckt. #310) at 2310-13 (Freeman) (testifying that his view in the early 1990s was that "monitored retrievable storage wasn't going to work").11
11

See also PX 973; Designations Appendix (Dckt. #310) at 43-44, 205-08 (Barrett) (testifying that by Oct. 1993, when the funding for the MRS was cut by Congress, an MRS was "unlikely"); Footnote continued on next page

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Thus, throughout the period in question, SMUD knew that DOE would likely breach the Standard Contract and that SMUD would therefore have to store fuel at Rancho Seco for an extended and uncertain period of time. This knowledge drove SMUD's efforts to pursue reasonable damages mitigation through the development of the dry storage system as explained below. PFF ¶¶ 124-27, 130-34, 150-52, 160-67. B. SMUD's Initial Decisions To Begin And Continue Funding The Dry Storage Project From 1992 Through 1997 Were Caused By The Government's Statements Indicating That Fuel Acceptance Would Be Delayed.

By the time that SMUD's Rancho Seco reactor prematurely shut down in June 1989, DOE already was projecting that it would probably not begin accepting fuel in 1998. See PFF ¶ 117; see also Tr. at 154 (Shetler) ("By the late `80s, early `90s, it was becoming apparent that the 1998 receipt date from DOE was not going to be met."). This forced SMUD to consider how to manage spent fuel at a non-operating reactor for up to several decades in a manner that would be safe, cost effective, and allow for the loss of experienced staff. See PFF ¶¶ 126-27. For this purpose, SMUD retained S. Levy, Incorporated to evaluate its fuel management options in light of the increasing probability that DOE's fuel acceptance would be delayed. See PFF ¶¶ 128-30; PX 297 at 7 (explaining that the Levy report was prepared in light of DOE's

Footnote continued from previous page id. at 223, 273 (testifying that by late 1994 and early 1995, the MRS concept was "not viable"); id. at 419-22 (Milner) (testifying that DOE had given up plans for an MRS by 1994); id. at 649 (Brownstein); see also PX 380 at 1 (DOE December 1994 Program Plan concluding that "by 1993, it had become clear that continuation of the Program with then current approach was no longer a viable option").

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announcements of delay). Levy's March 1990 report analyzed 15 fuel storage options for Rancho Seco, including both wet and dry storage both on-site and off-site. See PX 176 at ii, 943. A key factor was Levy's recognition that the "schedule for DOE pickup is currently highly uncertain with the earliest conceivable pickup date being 1998 and a much more likely pickup date well after 2010." Id. at 59; Motion for Leave to File Testimony of S. Levy & R. Powers, dated March 7, 2005 ("Levy Motion") (Dckt. #300) at 143 (Levy Dep.) (describing this as "the key assumption") (emphasis added). Levy also determined that the most certain approach would be continued wet storage until disposal at the DOE repository in 2010 or later, but that dry storage in transportable casks, i.e., a dual-purpose system, offered the best opportunity for early offsite shipment to an interim DOE storage facility or for interim acceptance by DOE on-site at Rancho Seco. PX 176 at ii, 56-65. Under these circumstances, Levy "strongly recommended" that SMUD pursue the transportable cask option, particularly if coupled with a joint SMUD/DOE demonstration program to resolve any technical or regulatory requirements for such casks. Id. Based upon the Levy study, which as noted was prepared in light of the government's announcements of likely delay in performance, SMUD decided in 1990 and 1991 to pursue dualpurpose dry storage (although SMUD opted to utilize less expensive dual-purpose canisters, as opposed to a fleet of dual-purpose casks) to address the uncertainties and prospective delay in DOE fuel acceptance, while also continuing to consider further wet storage as an option. See PFF ¶¶ 130-34; see also Tr. at 160 (Shetler) ("we were now talking rather than maybe eight or ten years of storage, a couple of decades of potential storage"). SMUD believed that a dualpurpose dry storage system could help address the uncertainties created by DOE's announced

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delays in the program by encouraging prompt DOE acceptance of SMUD's fuel, either at the Rancho Seco site or whenever DOE began taking fuel to a storage facility, and by reducing annual operation and maintenance costs over the long term if DOE did not begin accepting fuel until 2010 or later. See PFF ¶¶ 131, 138-39; see also Tr. at 172 (Shetler) (dry storage offered "a cheaper way of dealing with storage of the fuel" and "could facilitate transport to the DOE"). SMUD's expectation of delay is illustrated by the 1992 recommendations by SMUD's staff to its Board of Directors to negotiate and execute the contract with Pacific Nuclear for the dry storage cask and canisters, which assume that the opening of the federal repository will be delayed by 12 years and project that dry storage will yield savings during this period. PX 259 at 2; PX 269A; PFF ¶¶ 132-33. The effect that this uncertainty and anticipated delay had on SMUD's decision to contract for dry storage was further addressed in the trial testimony of SMUD's then-Deputy Assistant General Manager Jim Shetler: [O]ur first alternative and our preference would have been to keep it in the pool and have the DOE receive it if there were an ability on the part of DOE to accept the fuel on the original schedule, such that it would be off site in a timely manner. Based on the schedule delays that were known in the early 1990s, what we were facing is a significant cost associated with delays in that performance and then having to store that for a long period of time. So we did not consider that [storage in the pool] to be the [solution], though it was probably the preferred [solution] from the standpoint of assuming acceptance, it was not from the standpoint of cost of storage in the long term. Tr. at 194; see also id. at 360 (Shetler) (stating that if SMUD had assurance that DOE would begin fuel acceptance in 1998 it would have kept the fuel in wet storage to avoid the risks of

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pursuing a first of its kind technology and of DOE characterizing the canistered fuel as nonstandard and further delaying its acceptance).12 SMUD's then-General Manager, S. David Freeman, provided similar testimony at his deposition: [SMUD's actions] were driven by the fact that the federal government had taken our money, hadn't come to take our [spent fuel], and was telling us they weren't going to come until at least 2010, which put us in a horrible financial situation having to spend a bunch of money that really was owed to us by the government. * * *

And we had an obligation to try to make those damages as small as possible, both to protect our own cash flow because you wouldn't pay for it, and also because that's what you would claim we should have done in the lawsuit, which is what we did and it wasn't easy. Designations Appendix (Dckt. #310) at 2288-89 (Freeman) (emphasis added).13 The causal relationship between DOE's anticipated delay in fuel acceptance and SMUD's decision to develop dry storage is corroborated by the NRC's 1994 Environmental Assessment on the Rancho Seco ISFSI. See PX 363 (Att. 2). In the Environmental Assessment, the NRC recounts SMUD's consideration of various alternatives, including shipping the spent fuel to a
12

SMUD had received verbal and written assurance from DOE that DOE would accept canistered fuel for disposal at a federal facility so long as the canister had been licensed for storage and transportation by the NRC. See DX 425 at 1-2; PX 320 at 1; PX 325 at 1. However, DOE had declined to address whether it would later seek to characterize such fuel as "nonstandard" under the Standard Contract and move it to the end of the fuel queue. Id. If this occurred, it could further delay the acceptance of SMUD's fuel. Tr. at 364-365 (Shetler). See generally PFF ¶¶ 148, 512-21. 13 SMUD consultant Soloman Levy similarly testified at deposition that if he had assurance that DOE would begin accepting fuel in 1998, he would have recommended that SMUD leave its fuel in wet storage. Levy Motion (Dckt. #300) at 111 (Levy Dep.).

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permanent federal repository and wet and dry storage. It explains that shipping the fuel to a permanent repository "is SMUD's preferred solution to the storage of spent fuel from Rancho Seco; however no permanent Federal repository is available" and it discusses in detail "the uncertainties of schedule for a repository or MRS." Id. at 7. Accordingly, it states that "[t]he absence of a Federal repository makes storage of spent fuel in dry [storage] SMUD's primary alternative." Id. at 8.14 DOE's May 1994 Notice of Inquiry and May 1995 Final Interpretation further reinforced SMUD's decision to develop dry storage because they indicated that DOE would neither accept fuel on a timely basis nor provide interim assistance. See PFF ¶ 136. The same was true of DOE's December 1996 letter. See PFF ¶ 122. Thus, DOE's announcements and other actions during the late 1980s and early 1990s created significant insecurity for SMUD and uncertainty about DOE's future fuel acceptance and led SMUD to believe that it would likely have to continue to store fuel at Rancho Seco for an extended period. This uncertainty and belief were the direct and proximate cause of SMUD's

The dry storage project was part of SMUD's decommissioning plan for Rancho Seco, and was expected to facilitate decommissioning by reducing the required long-term staff and allowing decommissioning of the wet pool. However, it was not a prerequisite for decommissioning, and, in fact, SMUD will now have to complete additional decommissioning activities at the ISFSI because of the contamination created by storing fuel there. In addition, decommissioning was not initially projected to begin at Rancho Seco until 2008 due to funding limitations; continued operation of the spent fuel pool would not have precluded SMUD from decommissioning the remainder of Rancho Seco, and indeed SMUD began active decommissioning of the site in the 1990s while the pool was in operation; and no matter how the fuel was stored, final decommissioning cannot conclude until all fuel is removed by DOE. See PFF ¶¶ 438-59.

14

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