Struggling for control of the world market in nuclear fuel, the Energy Department is negotiating to buy and distribute enriched uranium from the Soviet Union.

If an agreement is reached, according to uranium industry sources, it will be strictly a marriage of economic convenience: the Soviets would have a market for their excess production and the Energy Department could supply its customers, among them nuclear power plants and the Navy, more cheaply than it can from its own obsolete facilities.

Purchase of Soviet nuclear fuel would be a politically sensitive but economically rational way for the Energy Department to buy time to modernize its uranium factories, which once held a free-world monopoly on uranium fuel but have been losing customers to lower-cost competitors, including the Soviets. Industry analysts say the Energy Department must spend billions of dollars to salvage the Uranium Enrichment Enterprise (UEE), an industry owned and operated by the department.

Under an agreement with the Soviets, they would earn hard currency by exporting one of their few marketable products and the Energy Department would stave off Soviet dumping, retain its customers by offering them lower prices and earn enough profit to finance modernization of its production facilities. It would be analogous to the arrangements General Motors Corp. made in the 1980s to market some Japanese cars while it retooled.

The Energy Department has confirmed negotiations are taking place and uranium brokers and some congressional analysts said they think a deal is imminent, but the House Appropriations Committee threw up a potential roadblock last Wednesday.

The committee rejected "appropriation language that would allow the Department of Energy to purchase enrichment services at prices below the Department's cost of production" until Congress votes on a bill to restructure the UEE.

The U.S.-Soviet negotiations are only part of a scenario that includes national security issues, energy policy, the future of nuclear power and a great deal of money.

It also features domestic politics, highly visible last month when Energy Secretary James D. Watkins went to Ohio for a pep rally. Backed by cheerleaders and school bands, Ohio politicians -- Sen. John Glenn (D), Gov. Richard F. Celeste (D) and Rep. Bob McEwen (R) -- joined 2,500 residents of the Portsmouth area in urging the Energy Department to locate a uranium processing facility there that the government has yet to decide to build. Paducah, Ky., and Oak Ridge, Tenn., are also clamoring for the plant for the same reason: about 1,500 jobs.

The facility, which would implement a new uranium enrichment technology known as AVLIS, would be the key to restructuring the UEE. Before 1974, the UEE had a free-world monopoly on the supply of nuclear fuel. Now its share of the $3.5 billion world market is less than 50 percent. Its enrichment plants are obsolete electricity-guzzlers.

Soviet enriched uranium is so cheap some U.S. utilities are buying it, according to uranium brokers. The Soviets are also making inroads into U.S. markets in Asia.

Were the Energy Department's UEE a separate corporation -- as it would be under legislation passed by the Senate and pending in the House -- it would rank 243rd on the Fortune 500 list of U.S. industrial companies. In 1989, it had $1.68 billion in revenue and profits of $494.6 million, according to an analysis the Energy Department commissioned from Smith Barney & Co., the investment bank.

But with its market share dwindling and its costs fixed, the UEE faces a grim future, according the Smith Barney team.

The Energy Department agrees. Assistant Energy Secretary William H. Young told a Senate subcommittee last month that "evolving market forces have intensified the need for the uranium enrichment enterprise to improve its ability to compete in the world market."

The beginning of the Energy Department's problem was a management mistake in 1974 when the Arab oil embargo stimulated a large increase in orders for nuclear power plants, analysts say. The UEE could have cemented its monopoly through expansion. Instead, it closed its order books to new customers, stimulating the creation of competitors.

By contrast, in the early 1980s as orders for nuclear power plants were declining, the UEE decided to spend $2.6 billion on an enrichment plant near Portsmouth, Ohio. That building, now unused, is where the Ohioans want to put the AVLIS facility.

A Glenn spokesman said the Ohio senator, who is chairman of the Governmental Affairs Committee and on good terms with Watkins, has made clear that if AVLIS is developed, he wants it in economically depressed Pike County.

Enrichment is the process of increasing the content of fissionable U-235 in uranium. AVLIS is atomic vapor laser isotope separation, a technology to increase U-235 developed at Lawrence Livermore National Laboratory in California.

The Energy Department says it will be more efficient than the gas centrifuge process used by its European competitors and much more efficient than the gas diffusion process used in existing UEE plants. But AVLIS has never been tested commercially, so the Energy Department plans a large-scale test at Livermore before deciding whether to go ahead with the plant.

Enriched uranium is measured in separative work units, or SWU (pronounced swoo.) The Energy Department estimates that current worldwide demand, about 25 million SWU, will grow to 35 million by 2010. The question is which processor can offer a low enough price to capture control of that market.

European processors have been charging as much as $193 per SWU, according to industry sources. The Energy Department's average price is $117. The Soviets have been offering $60. The "factory production cost" in an AVLIS facility would be only $25, according to the Energy Department.

Smith Barney project director Nick Timbers said at a briefing for the nuclear industry last week the cost would probably be 25 percent higher than that but "we think AVLIS is a sound technology that will offer a significant cost advantage."

The Energy Department cannot abandon the enrichment business because it is the only supplier of uranium fuel to the Navy. Like any business, UEE wants to maximize the number of customers it serves to hold down the costs per unit. But how can it hold on to its commercial customers -- a few of which have already notified the UEE of their intention to terminate fuel contracts and take bids from other suppliers -- until AVLIS deployment makes UEE competitive again? Under the most optimistic projections, AVLIS is seven years away.

Enter the Soviets.

Assistant Secretary Young told senators that "the Soviets' declared objective has been to sell 3 million to 5 million SWU annually from excess production capacity to generate hard currency as part of their effort to revitalize their economy."

An agreement with the Soviet Union would be "a bridge to AVLIS," said Daniel R. Einbund, vice-president of New York Nuclear Corp., the broker credited with having been first to propose it.

Einbund said he was a go-between in early rounds of the discussions, in which the U.S. side demanded, and got, assurances that the Soviets would not use their hard-currency earnings for military purposes. Einbund said he arranged a March high-level U.S.-Soviet meeting, after which the two countries began direct bilateral negotiations, cutting him out.

Why would U.S. nuclear utilities use the Energy Department as a middleman, paying a markup, rather than buy fuel directly from the Soviet Union or through an independent broker?

According to Einbund and Paul F. Schutt, chairman of Nuclear Fuel Services Inc. of Norcross, Ga., the reasons are practical and political. No utility wants to get involved in discussions of Lithuanian independence or Jewish emigration, they said, and the Soviets do not have the sophistication or banking system to arrange letters of credit, insurance or invoices. In addition, they said, UEE has a storage and distribution system in place and could guarantee reliable shipments.

The wild card in the game is a proposal by a consortium of U.S. nuclear utilities and Urenco, a European enrichment company, to build this country's first privately owned enrichment plant in Louisiana. Louisiana Energy Services Inc. has said it intends to capture 15 percent of the U.S. market, but legislation that would expedite its license from the U.S. Nuclear Regulatory Commission is stalled in the House.