BP

Kenneth Feinberg, the adminstrator of BP's $20 billion fund to compensate parties for damages from the Horizon oil spill, is a fascinating guy.  Not so much for his current role (though it is certainly important), but rather for his willingness to step in to administer settlements to victims' families from the 9/11 attacks in New York.  That task, which he took on willingly, entailed trying to use logic, reason, encouragement, and pursuasion to navigate seemingly impossible human conflicts. 

A lecture Feinberg gave at the University of Massachusetts in 2008 provides powerful resolution to the challenges he faced, and his balancing act in trading off amongst the many constraints.  Through that process, he was careful to lay out what he was required to do by Congress, what assumptions and factors he was incorporating into his decisions, and why he felt his approach was justified.  It was not a perfect system, but in the end, it worked.

The BP fund is different.  The spill was a public disaster, but administration of the settlement fund is private.  Feinberg's firm has been hired by BP to administer the claims process, not the government.  He is not overseen by outside judges, as many settlement funds are.  And now, the transparency of Feinberg's pay has become an issue, as nicely summarized in this Reuters article by Moira Herbst.

Feinberg's pay is substantial:  his small firm is receiving $850,000 per month from BP as a flat fee.  He claims there is no conflict; others are worried.  But that's not really the point.  It is likely that his firm is worth this level of compensation -- if he can deliver payments to affected parties in a way deemed fair and transparent; avoids protracted litigation (think Exxon Valdez); and that gets money to the spill-affected parties sooner rather than later so they can get back on their feet and restart their economic lives. 

But the buy-in he got on the World Trade Center payouts was in large part due to the transparency he provided.  That disclosure allowed people to understand and trust the process, and therefore to accept the solutions he promulgated.  The lack of visibility on his compensation this time, and perhaps even that his pay is coming directly from BP rather than from funds over which BP no longer holds any ongoing control, undermines the very transparency on which Feinberg's ultimate success will rest.  It is a conflict far more simple to resolve than the ones he had to grapple with on the WTC fund; hopefully he will resolve it soon.

BP acknowledges that it lobbied for early release of Lockerbie bomber Abdel Basset al-Megrahi in 2007, in order to boost the chances of an oil deal it had going with Libya. 

Released on compassionate grounds because he was supposedly near death's door, the very same doctor who made that prouncement now says Megrahi could live "10 years or more."  Not so for the 270 people killed in the bombing.

The article further notes that

Jack Straw, then Justice Secretary at Westminster, admitted last year that trade and oil agreements were an essential part of the British government’s decision to include Megrahi in a previously planned prisoner transfer agreement with Libya.

With billions of dollars on the line and public wrath at extremely high levels, is it any surprise that every group involved with the BP drilling site are blaming everybody but themselves?  The benefits to the firms of deflecting responsibility and delaying payouts can be immense.  The 1989 Exxon Valdez spill was not finally paid until August 2008, nearly 20 years later -- and at amounts paid were far less than the original awards.  In games like this, even high-priced lawyers are cheap if you can get the damages reduced and hang on to the funds within the company for much longer.  

The greatest point of influence for dealing with catastrophic liabilities is in setting up appropriate insurance requirements before an accident, and ensuring government oversight agencies actually do their jobs on a recurring basis to flag poor safety practices before there is a large accident. 

It is not just about offshore oil and gas.  Adequate oversight seems to have been an issue in April's coal mine accident that killed 29 miners in West Virginia; and periodically in the nuclear power sector as well, as so clearly illustrated by the near breach of a reactor head at the Davis-Besse plant in Ohio. 

Unfortunately, our liability regimes are not well structured to deal with these types of incidents.  Indeed, the industry continually works to weaken them in order to reduce the operating costs of carrying higher levels of insurance. 

Consider nuclear accident risk.  Anybody carry $1,000 of coverage on their home, possessions, and bodily harm?  Unlikely, since aside from being far too low if there were a loss, the mortgage company wouldn't allow it.  But under the terms of the Price-Anderson Act, that is about the level of coverage anybody in the Baltimore Metropolitan Statistical Area would have were there to be an accident at Calvert Cliffs in Lusby, MD (see Table 4, p. 19).  And don't count on your existing policy filling in the gap:  all private homeowners and tenant policies explicitly exclude nuclear risks from their coverage. Price-Anderson is as good as it gets for third party nuclear liability; coverage levels in other countries are even lower.  Dam failures and problems from underground injection of CO2 from carbon sequestration are two other areas where the liability regime is, at present, not well structured to properly incent good safety behavior or protect the taxpayer.

Update, May 12th:  Big Oil Bailout Prevention Act, the first of what is likely to be many legislative efforts to increase oil spill liability levels appropriate for the type of damage that major spills can cause.  A less provocative title might increase the bill's chance of success.