Allison Giles
Chief of Staff
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515

Re: Request for comments on temporary suspension of duty on nuclear facility boilers

Subheading 9902.84.02/Permanent subheading 8402.11.00

Dear Ms. Giles:

McDermott International is strongly opposed to the proposed temporary suspension of tariffs on certain steam or other vapor generating boilers used in nuclear facilities as referenced in the above subheadings. Such action would appear to be contrary to the guidelines for tariff reductions which are established within the committee.

McDermott is a leading energy services and manufacturing company providing engineering, procurement, and manufacturing of equipment and project management for customers involved in the production of energy and in other industries. Babcock & Wilcox is a subsidiary of McDermott that manufactures power generation systems, including steam or other vapor generating boilers used in nuclear facilities. McDermott's North American facilities, inclusive of those of Babcock & Wilcox are located in Alliance, Ohio; Barberton, Ohio; Cambridge, Ontario, Canada; Ebensburg, Pennsylvania; Harbour Island, Texas; Lancaster, Ohio; Melville, Saskatchewan, Canada; Morgan City. Louisiana; Mt. Vernon, Indiana; West Palm Beach, Florida; and West Point, Mississippi.

Suspension of the 4.9% duty to 2003 and the 5.2% duty from January 1, 2004 through the end of 2006 on certain steam or other vapor generating boilers used in nuclear facilities would result in substantial loss of revenue to the U.S. Treasury. Enclosure 1 is an excerpt from the U.S. International Trade Commission report last year to the House Ways and Means Committee. The potential amount of customs duty loss stated in this report for the period 2000-2005 exceeds $30 million. This is far in excess of the revenue neutral criteria utilized by the Committee in judging the merits of a tariff suspension.

To further support the ITC Report, in calendar year 2000, dutiable imports into the US were $96,208,070. At the applied rate of 5.2%, revenue to the US Treasury was $5,002,819. This would have been lost had the duty suspension been in effect. Again, this amount cannot be considered revenue neutral. Through February 2001, there has been a further dutiable import from Italy amounting to $23,415,000. At the applied duty rate of 4.9% in effect in 2001 this translates to a duty of $1,147,000. This also would be lost if the duty suspension being considered in the Ways and Means Committee was enacted into law, and the duty loss in 2001 for this import alone exceeds the revenue neutral criteria.

Enclosure 2 details dutiable and potentially dutiable imports into the US of vapor generating boilers used in nuclear facilities that are expected to be imported into the US during the 2001-2005 timeframe. Per the enclosure, a number of these projects have already been awarded to overseas manufacturers. Excluding the Italian import earlier this year, there are already-contracted imports on nuclear boiler contracts for six units that are expected to enter the U.S. between 2001 and 2005. They aggregate $256 million in imports with a duty totaling $12.7 million. In addition, and also noted on Enclosure 2, are as-yet-unawarded but potentially dutiable imports of $400 million which are expected to enter into the US by 2005. Total duty on these is expected to be an additional $20.7 million. This revenue to the US Treasury of $33.4 million would be lost if the duty suspension being considered by the House Ways and Means Committee is enacted.

Nuclear boiler contracts are often awarded on a supply, remove and install basis. The company awards the overall contract and then contracts with a nuclear boiler manufacturer for the supply of the equipment. The contract price for the overall contract, including removal and installation, is often public knowledge. However, the price just for the equipment is often not made public. But, there are only a few major models of nuclear boilers in the U.S. and by knowing the pricing of nuclear boilers at another plant with the same basic model of boilers, one can closely approximate the pricing of nuclear boilers at a plant where the pricing of the boilers is not publicly known. We have used our extensive knowledge of nuclear boiler models at specific plants to complete the pricing shown on Enclosure 2.

A second criteria of the House Ways and Means Committee in reviewing possible tariff suspensions deals with US production. Babcock & Wilcox maintains the capability to manufacture steam or other vapor generating boilers for use in nuclear facilities at our plants in Cambridge, Ontario, Canada; Mt. Vernon, Indiana and Barberton, Ohio. We have performed significant nuclear boiler manufacturing work in our U. S. facilities (component fabrication, component installation, heavy assembly, final inspection and testing). There are a number of upcoming nuclear plants requiring replacement nuclear boilers, which for which the U.S. facilities are the only ones capable of performing the work. This is a principally a size issue. We conduct virtually all of our research and development in the United States. Our North American manufacturing requires significant procurement of U.S. sourced materials and services - 14 suppliers in 12 states. We also undertake extensive manufacturing of boilers for non-nuclear use in the United States. Our ability to manufacture boilers for nuclear use in the United States will depend on how future orders develop and the duty of HTSUS Subheading 8402.11 remaining at current levels only through 2003.

A temporary duty suspension would have an adverse economic impact on US suppliers to Babcock & Wilcox. Over the past 3 years, Babcock & Wilcox's operations in Cambridge, Ontario have issued purchase orders to US suppliers exceeding $8 million. These purchase orders were strictly issued against Babcock & Wilcox's nuclear boiler contracts. These vital suppliers are located in California, Connecticut, Maine, Michigan, Missouri, Nevada, North Carolina, Ohio, Pennsylvania, Texas, Virginia and West Virginia. As the duty suspension being considered by the Ways and Means Committee would make Babcock & Wilcox less competitive, then this could have a direct adverse impact on our US suppliers.

While the House Ways and Means Committee considers the suspension of the U.S. duty under HTSUS Subheading 8402.11, U.S. competitors, such as the European Union and Korea (a significant supplier,) both maintain duties on this product -- 2.7 percent and 8.0 percent, respectively. The continued existence of duties in the EU and Korea coupled with the concomitant suspension of duties on U.S. imports would undermine the intent of NAFTA and encourage the migration of production from North America to overseas.

As a final point, suspension of the duty on these boilers would have absolutely no impact on the energy crisis in California or any other state. It is the reliable supply of electricity that is crucial. A tariff suspension, if it would have any impact at all, would be so extremely minimal as to be invisible to the ratepayer.

In conclusion, the suspension of the duty on certain boilers classified under HTSUS Subheading 8402.11 would adversely impact McDermott International and its subsidiary Babcock & Wilcox and would affect its production of such boilers in the United States. For the reasons stated above, McDermott International and Babcock & Wilcox oppose the suspension of the duty and request that these comments be given formal consideration.

Sincerely,

Bruce N. Hatton
Vice President and General Manager

TO: David Kavanaugh

FROM: Robert S. Aiken

SUBJECT: Babcock & Wilcox Steam Generator Backlog

The attached letter from Carl Churchman, Director, Palo Verde Steam Generator Replacement Project, dated April 27, 2001 provides specific details to support the contention that the B&W Canada SG manufacturing facility was backlogged and unable to meet the replacement schedule for Palo Verde. And, therefore, it has been necessary for Palo Verde and other nuclear plants to order SGs from manufacturing facilities in other countries.

To summarize the key facts I offer the following as outlined in the letter:

1. Palo Verde management selected Ansaldo in Milan, Italy because of two important factors - price and schedule.
2. In 1996, Palo Verde management after reviewing B&W Canada’s shop capability believed there to be a significant risk for a delay due to the possible backlog in the manufacturing facility.
3. This proved to be correct when B&W Canada announced two years later in 1998 that "This contract…maintains a backlog of work through the year 2002", after a new steam generator order was signed. (See attached)
4. This backlog, as self-described by the B&W press release, is buttressed by the announcement of the six replacement steam generators for Duke Oconee Nuclear Station in 1999. (See attached)
5. The backlog is further supported by the phone call placed by Jim Smith (General Manager of the steam generator fabrication shop at B&W Canada) to Carl Churchman in June of 2000 when unbelievably he attempted to drum up new business for the Canadian firm by offering to contract with Palo Verde to manufacture the four replacement SGs for units one and three for delivery in the 2006-2008 range. Remarkably, he told Carl Churchman that the SGs would have to be fabricated in Korea through a joint venture because the Canadian shop was at capacity and B&W had "no plans to pour millions of dollars into their Mt. Vernon shop in Ohio."
6. The attached documentation further demonstrates that the Canadian plant is backlogged because B&W Canada is touting the fact that they are "exporting a billion dollars in business over the next 10 years and has 50% of the world market."
7. Nuclear plants (such as Palo Verde), who have ordered replacement SGs directly from fabrication plants in those countries for price and schedule considerations shouldn’t be penalized by having to pay the 4.9% duty to have them delivered into the US.

I’ll be pleased to answer any further questions you may have. Thank you for your support.

Attachment

Pinnacle West Capital Corporation
Washington, DC 20006
April 6, 2001

TO: David Kavanaugh

Office of Congressman Bill Thomas

FROM: Robert S. Aiken

Palo Verde Nuclear Generating Station is essential to the energy security and day-to-day lives of citizens in the American Southwest, including California. When the plant began operation in 1986, Energy Secretary John Herrington called it the "energy cornerstone of the Southwest" and a vital asset for generations to come. That was true then, as it is today, with the added relevance underscored by the ongoing energy crisis in California.

Palo Verde provides hope that the lights can stay on and that the economy can remain strong and return to the levels we continue to strive to achieve.

Every year for the last six years, Palo Verde has set successive records for total generation. Last year, Palo Verde produced more than 30 billion kilowatt hours of electricity. The next largest producer – the Grand Coulee Dam in the state of Washington – has topped out at 26.8 billion kilowatt hours (in 1997). And it is important to point out that Palo Verde’s production is not simply the result of its impressive size – three identical units of nearly 1,300 megawatts (MW) apiece. It is a testament of Palo Verde’s sustained excellence since 1994. In the past seven years, Palo Verde has attained three ratings of "INPO 1". The Institute of Nuclear Power Operations (INPO) is the industry organization formed after the accident at Three-Mile Island to define and help bring about excellence in the operation of America’s fleet of more than 100 nuclear plants. INPO’s top rating – "1" – is elusive and much coveted.

Palo Verde has come to the forefront. And I must point out that Palo Verde – located in the Arizona desert – is not for Arizona alone. Its owners are based additionally in Texas, New Mexico and California. In fact, more than a quarter of the interest in Palo Verde is owned by California entities – Southern California Edison, the Los Angeles Department of Water and Power and Southern California Public Power Authority. Fully 27.3 percent of the electricity Palo Verde produces, goes to California homes and businesses. That’s nearly 8 billion kilowatt hours a year, or enough for more than a million citizens.

It is clear that Palo Verde is an essential resource – especially today – that must be kept strong and at the current level of excellence and production. But that won’t happen by itself. Ongoing maintenance and upgrades are required.

The staff at Palo Verde has done an outstanding job in that regard, at least according to standards set by INPO as well as the U.S. Nuclear Regulatory Commission. But they need our help.

Like every other nuclear plant of its design and vintage, Palo Verde needs new steam generators. They are required in Unit 2 simply to maintain operation through the current license, which expires in 2026. Units 1 and 3 will need new steam generators in the coming years as well, if those licenses are to be extended.

Work is proceeding aggressively on the steam generator replacement at Unit 2. The project will improve plant efficiency and increase output by 55 MW. Without replacement of these components, the units would soon lose output at the very substantial rate of 4.7 percent per year and face a forced shutdown by 2010. As we complete the replacement project and avoid the negative effects and accrue the benefits, the 27% of the generation owned by California will be protected and increased.

But Palo Verde faces an unfair penalty. Steam generators are produced in Canada, Spain, Italy and Korea. Ansaldo of Italy is now building the steam generators for the Unit 2 replacement project, a more than $40 million undertaking. No U.S. companies manufacture steam generators on American soil. So you can see, Palo Verde has no other choice.

Nonetheless, Palo Verde faces a ‘penalty’ of approximately $2 million for this required, strategic and forward-looking undertaking. A half-million dollars of this cost would go directly to California rate payers. Today, a tariff of 4.9 percent is in place on the import of steam generators into the United States.

The evidence clearly shows that this project is critical to the energy future of California and the economy of the West and beyond. We ought to be providing incentives for solutions to this crisis, not hurdles that serve only to lengthen and exacerbate the situation.

What I propose, therefore, is a permanent repeal of the tariff through 2012. This will allow relief to the Palo Verde Unit 2 steam generator replacement project and provide the flexibility for the owners of Palo Verde to move forward without penalty on steam generator replacement for Units 1 and 3, if and when they decide over the next few years.

The logic and priority is clear. I urge you to do all you can to enact this tariff relief.

Thank you

Graph 1
Owners of Palo Verde Nuclear Generating Station

                                California Owners:

Graph 2

**Totals are in megawatt hours

[Additional attachments are being retained in the Committee files.]