Nuclear Liability

Energy Fair, based in the UK, has just launched a case before the European Commission challenging a range of subsidies to nuclear power in the UK.  Among other issues, the complaint attacks artificially low caps on operator liabilities for accidents and waste disposal.  They estimate that the accident liability cap alone, were it removed, would increase the price of nuclear-generated electricity by a minimum of 14 euro-cents per kWh.  This would be enough to make the resource uncompetitive with alternatives. These policies are clearly subsidies, not only in the UK, but in most countries of the world.  It will be interesting to watch how the EC rules on the issue. 

The action is being overseen by lawyer Dorte Fouquet, who a few years ago brought another case before the EC regarding illegal state aid through subsidized credit support to nuclear projects.  The EC ruled against her at that time, under the incorrect assumption that nuclear projects were not incrementally riskier than other types of projects, and therefore didn't need to carry a higher interest rate.  On the liability side, nuclear insurance is clearly not like insuring an automobile or an ice cream shop.  An appropriate nuclear liability policy needs much higher limits than what is currently required anywhere in the world.  Further, the cost of coverage will, by definition, be higher per unit of coverage than for lower risk activities.  Here's hoping the EC doesn't apply its flawed logic from the credit side onto the liability portions of the new case.

The Energy Fair complaint also views the introduction of a carbon price floor as a windfall subsidy to existing nuclear reactors.  I diverge a bit with them on this issue.  Clearly, absent the elimination of other subsidies to nuclear, if you simply start charging for carbon the policy shift will be distortionary to energy markets, in favor of nuclear.  However, it is also true that relatively lower (though not zero as the industry likes to claim) carbon emissions from nuclear is a benefit of the nuclear fuel cycle relative to conventional fossil fuels.  Logically, this advantage should be reflected in relative prices in a carbon-constrained power market.  But stripping the many other subsidies the nuclear industry unfairly gets must be part of the picture; and once you do, it is unlikely that new reactors would be cost-competitive even with the benefit of its lower ghg emissions.

Energy Fair Website - Energy Fair Summary of Complaint

When the World Nuclear Association (WNA), the nuclear industry's global cheerleader, describes potential damages from a reactor accident, they do so in a strategically simplistic way:

Operators of nuclear power plants are liable for any damage caused by them, regardless of fault. They therefore normally take out insurance for third-party liability, and in most countries they are required to do so.

The potential cross boundary consequences of a nuclear accident require an international nuclear liability regime, so national laws are supplemented by a number of international conventions.

Liability is limited by both international conventions and by national legislation, so that beyond the limit (normally covered by insurance) the state can accept responsibility as insurer of last resort, as in all other aspects of industrial society.

To paraphrase here:  we've got you covered even if contamination came in across national boundaries; and in the tiny, tiny, tiny chance of an accident where our pot of money isn't big enough to cover, we have the backing of our governments.  No, this backing is not "special" (and therefore a subsidy).  It is simply what every other industry in an "industrial society" gets so the countries can get on with the business of economic growth and development.

Unfortunately, when there are real accidents and real money is at stake, WNA's happy town starts to break down.  As Rick Wallace writes in The Australian:

In terms of sheer chutzpah, Tokyo Electric Power Co's claim that it no longer owns the radioactive isotopes that spewed out of its Fukushima Daiichi nuclear plant in March takes some beating.

In defending a lawsuit from a Fukushima Prefecture golf club, lawyers said the radioactive cesium that had blighted the Sunfield Nihonmatsu golf course's fairways and greens was the club's problem. The utility has taken a similarly hard line defending claims from ryokan (inn) and onsen (spa) owners.

TEPCO's lawyers used the arcane legal principle of res nullius to argue the emissions that escaped after the tsunami and earthquake triggered a meltdown were no longer its responsibility. "Radioactive materials (such as cesium) that scattered and fell from the Fukushima Daiichi nuclear plant belong to individual landowners, not TEPCO," the utility told Tokyo District Court.

The chief operating officer of the prestigious golf course, Tsutomo Yamane, told The Australian that he and his staff were stunned: "I couldn't believe my ears. I told my employees, 'TEPCO is saying the radiation doesn't belong to them', and they said 'I beg your pardon'."

That's right:  the radiative cesium "belongs" to whomever it lands on.  Luckily, the court rejected TEPCO's argument, though still dumped the liability on the municipality to clean up.

Compare and contrast to Monsanto and similar "aerial drift" issues.  In that case, it wasn't radioative cesium that clearly came from TEPCO's plant, but "Roundup-ready" (Roundup is a Monsanto pesticide) Canola seeds that clearly came from surrounding farms that were planting the stuff to boost yields.  Some of these seeds drifted in by air to a nearby farm that had neither licensed them or sought to plant them.  That farmer didn't rush to pay royalties to Monsanto for the unasked-for plants; nor did he pull them up one-by-one.  Unlike TEPCO, Monsanto did not conclude that these emissions "belonged to the individual landowners" on which the seeds fell.  Rather, the firm sued for copyright infringement (Monsanto v. Schmeiser, nicely summarized in this article by Stephanie Bernhardt).  The case went all the way to the Canadian Supreme Court, which ruled that intent didn't matter and that Monsanto deserved payments.  Monsanto had launched 138 "seed piracy" suits in the United States alone through 2009; no word yet of any "cesium piracy" suits bubbling up in Japan.

An obvious question here is what happens when the aerial drift of Monsanto's seeds spreads not benefits, but harm.  After all, organic produce requires certification, and obtains premium market prices.  Contamination with genetically modified seed attributes can destroy both.  These are not theoretical problems: the USDA views such contamination as unavoidable.  Further, USDA's national organic certification does not require testing for GMOs, and by removing the economic pressure to avoid it, the USDA loophole actually makes the spread of such cross-contamination more likely.  Indeed, this Austrialian apple farmer has already suffered damages. 

Facing both the risk of damages to crop value from crop contamination and the ironic risk that Monsanto will then sue them for violating crop genetic copyrights, a consortium of organic farmers launched a pre-emptive suit against Monsanto in March 2011.  Monsanto has argued the case should be summarily dismissed; oral arguments will begin later this month. 

Residents surrounding reactors ought to take note of both the TEPCO and Monsanto cases, as it is clear that WNA's happy assurances about industry responsibility for accidents are 90% symbolic.

1,000,000 - Number of years for there to be a radiation-related fatality at a Japanese nuclear plant according to the goals put forth by the Japanese Nuclear Safety Commission in 2003.[fn]The specific wording used by the NSC was "The mean value of acute fatality risk by radiation exposure resultant from an accident of a nuclear installation to individuals of the public, who live in the vicinity of the site boundary of the nuclear installation, should not exceed the probability of about 1x10^-6 per year. And, the mean value of fatality risk by latent cancer caused by radiation exposure resulting from an accident of a nuclear installation of individuals of the public, who live in the area but some distance from the nuclear installation, should not exceed the probability of approximately 1x10^-6 per year."  Nassim Nicholas Taleb, author of The Black Swan and professor of risk engineering at NYU, notes that "...we are incapable scientifically of measuring the risk of rare events. We tend to underestimate both the probabilities and the damage."[/fn]

8 - Number of years into the million year period before the Fukushima accident in Japan.

$2.1 billion - Maximum amount of liability borne by Tokyo Electric Power Company (Tepco) for an accident at one of its reactors under Japan's nuclear liability laws.  (WSJ pegs this figure at only $1.5 billion).[fn]The WSJ cites Ower Brown noting that the $2.1 billion payment (120 billion yen) is not a formal cap. Section 16 of the Act on Compensation for Nuclear Damage states that "Where nuclear damage occurs, the Government shall give a nuclear operator (except the nuclear operator of a foreign nuclear ship) such aid as is required for him to compensate the damage, when the actual amount which he should pay for the nuclear damage pursuant to Section 3 exceeds the financial security amount and when the Government deems it necessary in order to attain the objectives of this act." The "and" clause does suggest such a payment is not mandatory, and indeed the government must be "authorised to do so by decision of the National Diet." However, the language indicates such payments are likely.[/fn]

$0 - Actual amount Tokyo Electric Power will likely have to pay in damages to people and property, including its own workers, since accident was caused by an earthquake.[fn]See section 3 of Act on Indemnity Agreements for Compensation of Nuclear Damage (Act No. 148 of 1961, as amended in 2009).[/fn] Update:  There are competing views on Tepco liability, and the ultimate exposure remains uncertain.  Merrill Lynch has prepared a good overview of this.  Japanese politicians have stated that they did not think the accident would be characterized as an "exceptional disaster" that would exempt Tepco from liability.  However, that same article by Reuters notes that:

Insurers of the stricken nuclear plant have already cited Japan's 1961 Act on Compensation for Nuclear Damage to signal that claims would be unlikely.  Chaucer, one of the world's leading nuclear-risk insurers, has said it expected the act to absolve the operator of liability.  Nuclear Risk Insurers, the underwriting agent for all UK nuclear insurers, has also cited the 1961 act in stating that it did not "anticipate significant losses from this event."

Tepco has indicated it expects financial distress.  However, there are many elements of the liability, some of which are purely business-related such as damage to the plant and power interruption.  In addition, were Tepco to be nationalized (as has been discussed), the accident liability would also rest with Japanese taxpayers.

$17.5 billion - Current Japanese government estimate of compensation to businesses and individuals for damages from the nuclear accident.  This estimate does not include direct government response costs to the accident.  Estimates in the Japanese media put costs much higher, and more than $30 billion has been erased from Tepco's market capitalization since the accident.

$40.9 billion - BP loss reserve to cover its estimated costs from the Horizon blow-out in the US Gulf of Mexico, an accident that had a small number of fatalities and occurred far from human population centers. 

$386 billion - Estimated mortality costs from a nuclear accident near New York City in a 2009 paper by economists Geoffrey Heal (Columbia University Business School) and Howard Kunreuther (Wharton School, University of Pennsylvania).  Business interruption costs would be an additional $50-100 billion.

$12.7 billion - Gross value of insurance pool to cover off-site damages to people and property from an accident at a US nuclear power plant under the Price-Anderson Act.  Amount is paid in over nearly seven years.[fn]This statistic and the following ones are from Doug Koplow, Nuclear Power: Still Not Viable Without Subsidies, February 2011. See pages 80-82.[/fn]

$8.5 billion - Present value of Price-Anderson pool to cover losses offsite for a nuclear accident in the United States.

5 - Number of hurricanes since 1990 where US insured losses (total losses were much higher since not all damage is insured) exceeded the $8.5 billion pool available for a nuclear accident.[fn]Scroll down page to reach table titled "The Ten Most Costly Catastrophes, United States."[/fn]  Hurricanes obviously involve no radiation.

$2.1 billion - Maximum amount of liability coverage available outside the United States to compensate for a nuclear accident under the main international conventions on nuclear liability (Table 13-1).

$453 million - Total present value at-risk amount for each reactor to cover third party liabilities from an accident at its own plant, as mandated under Price-Anderson.   US operators routinely purchase more than 10x this level of coverage to protect their own assets in an accident, including both property coverage and replacement power.

$1,123 - Total available insurance payment (present value) for each person in the Baltimore-Washington metropolitan statistical area under the terms of the Price-Anderson Act, should there be an accident at the Calvert Cliffs plant in Lusby, MD.  Funds would need to cover mortality, morbidity, and property damage.   Allowability of pool to compensate for economic losses and natural resource damages is less clear.

$60 - Portion of the $1,123 in per capita coverage that will be paid by the accident-affected plant itself under the terms of Price-Anderson.  Price-Anderson provides the largest private insurance pool in the world to cover offsite damages from a nuclear accident.

$12 - Value per resident of the "payment for their troubles" offered by Tokyo Electric Power to the town of Naime, severely affected by the Fukushima accident.  Tepco has insisted this is merely an initial payment and not instead of compensation for damages the accident has caused.  However, the town as rejected the payment as being far to small to make up for the drastic reduction in their quality of life and ability to earn a living since the accident.

(Thanks to Simon Carroll for providing links to the Japanese nuclear liability laws)

The Deepwater Horizon oil spill clearly demonstrated that really bad accidents -- the ones that the industry (and too often the government as well) say never happen -- do actually happen sometimes.  Not merely a figment of some pointy-headed actuary, these low probability but very large damage events really do need to be built into government policy. 

I had hoped that connections would be drawn between the oil spill and nuclear accidents, as there are number of important parallels.  Like oil spills, nuclear accidents are infrequent but can cause devastating damage if they do occur.  In both markets, Congress has set caps on private sector liability by statute.  The result has been to shift liability risks away from the private operators onto surrounding residents or taxpayers, effectively subsidizing oil and nuclear power.  My hope had been that the scale of damages from the BP spill would highlight the inadequacies of nuclear liability insurance, forcing much needed strengthening of both.

Enter energy investors Howard Newman and Craig Jarchow.  In an article in Rollcall, they make exactly the opposite points:  that the nuclear liability system works so well it should be adopted almost whole cloth to deal with oil spills.  In their own words:  "For a solution, we need look no further than the nuclear-power industry's Price-Anderson Nuclear Industries Idemnity Act."

They are wrong.

While they share a similar end goal to mine ("the cost of insuring oil spill liability should be paid by the oil industry, not the taxpayer"), Newman and Jarchow overstate the coverage that Price-Anderson provides while understating what is actually needed to properly internalize operational risk in both energy markets. 

Some examples:

• Primary insurance cover is too low.  Newman and Jarchow highlight the $300 million in insurance that the reactors must purchase to cover damages to people and property off-site.  While this may look rich compared to the $75 million limit now in place on economic damages from an oil spill, there is little cause for celebration.  There have been 50 years of actuarial data on the nuclear industry to guide underwriters, massive growth in the population and real assets at risk surrounding nuclear plants, ever higher valuations on damages to human health and loss of life, and tremendous innovation in methods to syndicate risk in the marketplace.  Yet, once you adjust for inflation the mandated coverage level for primary insurance today is actually lower than when the Price-Anderson Act first became law in the 1950s.   Arguments that insurers simply can't write more coverage seem unlikely:  plant owners routinely purchase more than ten times as much coverage to protect their own assets (onsite damage to plant and equipment and business interruption) as what they buy to protect all of us outside their gates.  Rather more likely is that they simply don't want to pay for more.

• Aggregate coverage amounts and adequacy have been overstated.  Scale of the insurance pool is the main benefit of Price-Anderson according to Newman and Jarchow.  "[T]he entire nuclear industry is on the hook for more than $10 billion of third-party liability if an individual facility's coverage is exceeded," they note, touting this as "enormous insurance capacity without bankrupting the industry."  This is certaintly better than the situation in many other parts of the world.  But that doesn't mean it is good.  Their conclusions suffer three main problems:  
  • Value isn't really $10 billion.  These "retrospective premiums" are paid in over seven years, not immediately.  This reduces the aggregate cover to roughly $7.6 billion on a present value basis.  Even that is not guaranteed.  Despite letters of credit that reactors will make good on their retrospective payment commitments, the market distress to all reactors that will follow any substantial nuclear accident will create significant financial stress on owners.  Bankruptcy, government dispensation to slow or eliminate retrospective premiums, concentrated ownership of large numbers of reactors by single firms (with each required to make separate payments each year) all suggest total take will be lower than expected.  Available insurance for non-payment of these premiums is quite limited.
    
    The authors note as a feature the ability for the government to fund the restropective premiums immediately, subsequently "recouping its costs from the industry over time".  This arrangement will likely provide more industry subsidies (through artificially low interest charges on delayed payments).  More importantly, there seems little novel about such an option.  Even absent any insurance program governments could front the funds and try to recover it over time (such as through litigation).  However, such an approach would not constitute an effective risk internalization strategy in my book.
  • Coverage levels are far below need.  Far from demonstrating the value of P-A, the BP oil spill actually underscores the inadequacy of the nuclear limits.   BP has already pledged to fund a segregated trust fund of $20 billion.  While this is still far short of the estimated damages of any major nuclear accident (estimates in the $100 billion range*), BP's current pledge is nearly three times the aggregate coverage available from reactor owners for all offsite damages in a nuclear power plant accident.  Shortfalls following a nuclear accident are most likely to fall on the taxpayer, or in uncompensated damages to health and property for the surrounding population. 
  • What coverage is available varies widely by type of nuclear facility.  Price-Anderson requirements differ by type of entity.  While Newman and Jarchow focus on reactors, coverage levels are lower or non-existent for other portions of the nuclear fuel chain such as enrichment facilities.

The authors underscore how the incentive alignment of Price-Anderson promotes plant safety.  The theory here is interesting (shared losses for accidents anywhere should promote more self-policing), but I think far from proven.  There have been enough near misses at US reactors since Three Mile Island to indicate that if self-policing is happening, it isn't very robust.  Their promotion of a prospective premium for oil, collected as a fee per barrel, is a good one and perhaps could be adopted in P-A reform.  The approach is not without risks, however.  One needs to be concerned that the industry characterizes the fee as covering the entire risk rather than just part of it, increasing the actuarial shortfall.

What the article doesn't mention at all is simply eliminating the liability cap.  If the upper tier of damages is as improbable as industry says it is, an actuarily-fair premium should be no big deal for either industry.  Congress wouldn't get to dump uncompensated risks on to the surrounding population or taxpayers, and Newman and Jarchow's stated goal of having the cost of liability insurance borne by the industry rather than the taxpayer would really be met.

_________________________________

Bob Herbert (NYT) has a more realistic view on liability in these industries here.

Thanks to Simon Carroll for links to the Rollcall and NYT articles.

*See, for example, Beyea, J., E. Lyman, and F. von Hippel. 2004. "Damages from a major release of ¹³⁷Cs into the atmosphere of the United States," Science and Global Security 12:125–139.