Price-Anderson

With the eighth anniversary of the Fukushima accident having recently passed, I wanted to mention a few Fukushima-related threads.

1.  A Japanese translation of Learning from Fukushima was released in February, making the material accessible to more people within Japan.  Namatame Norifumi was the main translator, with assistance from Suzuki Tatsujiro.  The original volume was edited by Peter van Ness and Mel Gurtov, and covers a wide variety of issues related to the accident and to nuclear power in Asia. 

My chapter focuses on the scale of subsidies and some of the reasons that the most important subsidies to nuclear often get missed. 

The Japanese version can be purchased here.  The English version can be accessed (free PDF downloads) here.

2.  Cost estimates for cleaning up after the Fukushima accident continue to grow; highlight inadequacy of Price-Anderson coverage levels in the US.  The Tokyo-based Japan Center for Economic Research (JCER) has continued to revise its estimates of Fukushima accident costs upwards, with their latest figure from March 2019 of between between 35 trillion yen and 81 trillion yen ($315 billion and $728 billion).  The government estimate by the Ministry of Economy, Trade and Industry, was much lower, though still a sobering 22 trillion yen ($198 billion).

The low-end of the JCER range involves entombing the most damaged plant (Fukushima 1) in concrete and releasing radioactive water to the sea.  The higher cost part of these estimate range includes treating contaminated water and soil.  The implications for nuclear liability coverage globally is instructive:

• The US liability system under the Price-Anderson Act, which provides the largest pool of insurance for nuclear accident damage in the world, will generate a gross insurance pool of less than $12.5 billion.1   This assumes all reactors will be able to pay in their retrospective premium in full, and ignores the facts that payments are made over roughly six years so have a significantly lower value in present value terms, and that the pool shrinks as reactors close.
• Even assuming the official Japanese government estimate (i.e., the lowest one) for Fukushima cleanup costs is accurate, liabilities in Japan exceed the maximum US insurance pool by more than 15x.

The implication is that any moderately-sized nuclear accident in the US will quickly exhaust the available insurance coverage and taxpayers -- rather than reactor owners or their insurers -- will shoulder most of the burden.  Because they are too low, the Price-Anderson caps on US reactor accident liability provide a recurring and significant subsidy to reactor operations.

What about Japan?  As of 2016, the government of Japan had lent more than $120 billion to TEPCO, all of it interest free.  The TEPCO long-term borrowing costs listed in financial statements around that time are less than 1 percent.  The values are so low for a firm in distress, strongly suggesting that they are skewed by the subsidized government loans themselves. 

A better proxy is the weighted average cost of capital (WACC) for Japanese firms -- though even those values are likely also to be too low given that TEPCO would be deemed extremely high risk or insolvent absent the government bailouts.

Data from PWC for 2015 provides some benchmarks, with an average WACC of 5.6% for the JPX-400 index of stocks;  6.7% for the electric sector; and 3.0% for the power sector.  The capital subsidy from this loan alone is between $3.6 and $8.0 billion per year.  Normally, interest would compound, resulting in even larger subsidies over time.  Even without compounding, the capital subsidy alone provided by Japan to TEPCO exceeds the total value of the nuclear accident insurance pool in the US every 1.5 to 4 years. 

3.  Fukushima health effects, widely conflicting claims.  Staunch nuclear advocates such as Michael Schellenberger frequently discuss how safe they view nuclear power as being.  Often, a comparison is made to coal.  It is true that the coal fuel cycle does trigger massive numbers of deaths worldwide both through mining accidents and air pollution.  Future-looking comparisons need to look at natural gas and renewables more than coal, however, as coal investments are on a strong downward trajectory and existing plants continue to close. 

Further, the concerns with nuclear are primarily linked to worries about large incidents caused either by accidents at civilian reactor or fuel cycle facilities; or from military activities resulting from proliferation leaking from civilian activities.  This is in contrast to other fuel cycles where deaths associated with extraction and emissions dominate.

Schellenberger argues that even with catastrophic reactor events such as Fukushima, the accidents ain't no biggie.  In an article he wrote for Forbes last month, he says that no radiation-related deaths have been linked to the Fukushima accident.  He argues that health impacts from radiation have been overstated, with cancer incidence even from the Hiroshima and Nagasaki bombs much lower than predicted, the implication being that the impacts of reactor incidents will be smaller still.  And he notes that a financial settlement on litigation involving a worker who died from lung cancer was a political settlement, not one based on good science, and his illness was unrelated to the reactor. 

Tilman Ruff of International Physicians for the Prevention of Nuclear War (and who also wrote a chapter in the Learning from Fukushima book) has a very different take:

By 2017, a total of 40,000 workers had been involved in the extensive decommissioning work which will be required for many decades.  About 8000 work at any one time. Over 90% of these are subcontractors, who have poorer training and conditions and receive on average more than twice the radiation exposure compared with TEPCO employees. Maximum exposures for subcontractors in Jan 2018 were documented at over 10 mSv/month. Thus far 5 cases of cancer among clean-up workers have been officially recognised as occupationally-related – including 3 cases of leukemia, one thyroid cancer, and 1 case of lung cancer...

By Sep 2018, the Japan Reconstruction Agency identified 2202 deaths as related to the nuclear disaster – principally through suicide and interrupted or diminished medical care. However comprehensive long-term prospective mechanisms linked to radiation exposure have not been established to monitor population health impacts of the nuclear disaster. If you don’t look, you won’t find. Given the fragmented and incomplete nature of cancer registries in Japan, it is quite possible that health effects would not be detected.

Tracking of thyroid cancers should have been an area with strong and consistent data, Ruff notes, but it is not being properly tracked by the Japanese government.  Monitoring of animals and plants in the accident area is indicating effects from the radiation as well.

So either the Fukushima accident has caused no cancer deaths, but many deaths from ill-advised evacuation orders by the government in 2011 triggering dislocation, stress, and loneliness; or cancer effects are not so small and yet government actions are pushing people back into radioactive areas that are still not safe and failing, whether on purpose or not, to track critical health data.  Given a lack of transparency on past nuclear sector problems in Japan, I put more faith in Ruff's assessment of the situation.

• 1Coverage requirements are periodically adjusted for inflation, and decline as reactors are retired. This estimate reflects mandated coverages and reactor counts as of November 2018.

It was pure coincidence that the release event for my detailed review of US subsidies to nuclear power -- a document a couple of years in the making -- was on March 11, 2011, the day of the Fukushima accident.  I was in DC for the launch, traveling in a cab to the event with David Lochbaum of the Union of Concerned Scientists, who was also releasing a new report. 

Lochbaum's analysis examined 14 "near misses" at US nuclear plants during 2010 and how the NRC dealt with them.   He is also a world-recognized independent expert on nuclear power and power reactors.  His encyclopedic knowledge of the industry was known by many five years ago, and his cell phone rang of the hook as the accident unfolded.  Questions from the press and government flooded in, trying to get context on the event, its causes, and how it was likely to play out over the coming days. 

Over the past fives years, the nuclear sector in some ways has changed greatly, but in others remained remarkably the same.  The sector is still heavily subsidized across the world; still promising innovation will bring costs down to competitive levels; still struggling with delivering on those cost promises on the ground; and still facing little interest in projects by investors. 

Within Japan, the accident is still playing out.  The stabilization and cleanup of the accident area remains fiendishly complex, as this snapshot in today's New York Times illustrates.  And while one silver lining from the accident might someday be a world-class export industry in Japan for advanced robots, at present even the robots are having trouble surviving the harsh conditions.

The human costs of the accident continue to mount -- not just in terms of health, but in broken communities, scattered families, and lost professions.  There are some interesting first-person accounts on the GreenWorld blog, documenting meetings and conversations across the affected regions with people still struggling with the after-effects of the accident. 

Economists (myself included) tend to focus on things that can be measured and quantified.  So before I shift to discuss the numbers, it is important to recognize that much of the suffering that accidents like this cause are not easily quantified.  Quantitative damage estimates are a useful proxy for the suffering an accident has caused, but should be viewed as the lower bound to reflect all of the impacts they miss.

Reasonable questions to ask five years on include how the prospects for commercial nuclear power have changed, whether reactors are safer as a result of post-Fukushima requirements, and what the scale of damages from the accident have been.  It is notable that key details even of critical, world-changing events, may not be known until years later.  A recent article on the Fukushima accident highlights that poor transparency and communications by TEPCO brought the government very close to evacuating tens of millions of people from Tokyo.  That's a pretty big deal.

So what's in play?  Here's a quick synopsis on three areas:  health effects of the accident; costs of the accident; and nuclear economics.

Health Effects

The health impacts from nuclear accidents are always points of contention.  Immediate deaths from accident-associated trauma are fairly easy to tally.  In contrast, morbidity and mortality from exposure to radioactivity play out slowly over time, can be tough to disaggregate from baseline levels of disease, and are subject to data collection challenges.  Because the data matter in terms of political support for current and future reactors, and in terms of the amount and distribution of compensation, getting "clean" data are not easy. 

Here is the World Nuclear Association describing the Fukushima accident in a posting updated this month.  Basically, they conclude that there is no problem from the accident.  But gosh, that government "nervousness" over the accident sure did cause a bunch of hardship and death:

• "There have been no deaths or cases of radiation sickness from the nuclear accident, but over 100,000 people were evacuated from their homes to ensure this. Government nervousness delays the return of many.
• Official figures show that there have been well over 1000 deaths from maintaining the evacuation, in contrast to little risk from radiation if early return had been allowed."

Given that people still don't want to move back to areas designated by the government as safe, WNA's characterization seems a bit simplistic.  Ironically, this same article then states that "[m]ajor releases of radionuclides, including long-lived caesium, occurred to air, mainly in mid-March. The population within a 20km radius had been evacuated three days earlier."  So one might conclude that the evacuation wasn't so dumb after all.

The WNA also points to the the UN Scientific Committee on the Effects of Atomic Radiation (UNSCEAR)'s final report of radiation effects in April 2014:

This concluded that the rates of cancer or hereditary diseases were unlikely to show any discernible rise in affected areas because the radiation doses people received were too low. People were promptly evacuated from the vicinity of the nuclear power plant, and later from a neighbouring area where radionuclides had accumulated. This action reduced their radiation exposure by a factor of ten, to levels that were "low or very low."

Radiation expert Andrew Kadam also sees very little risk to human health or even ecosystems.  End of story?  Probably not.  A Greenpeace review of health effects is not quite so sanguine.  Soil contamination remains a problem, and they discuss the  mental health impacts of the accident and its aftermath.  Many of the people in the affected regions still have no plans to return.  And the workforce used to do the decontamination is often marginalized and shunned; work violations are common.

Damages and compensation

The United States has less than $15 billion in insurance to cover damages to third parties from a nuclear accident, and we are the biggest pool in the world.  The system we rely on, set up by the Price-Anderson Nuclear Industries Indemnity Act of 1957, is actually fairly fragile.  The coverage requirements for the policies each reactor must buy for itself have barely kept up with inflation.  The majority of coverage comes not through these reactor-specific policies, but rather based on commitments for each reactor to pay money into a common fund over five years, should a major accident occur.  

As old reactors close, this pool gets smaller.  And even for operating reactors, there are significant counterparty risks that make the availability of funds far less secure.  Accidents anywhere cause increased oversight and costs everywhere.  Reactor consolidation means that a single parent company could be on the hook for many retrospective premiums at once.  These obligations would arise for corporate managers at the same time costs to maintain the rest of their nuclear fleet would be rising.  This could make it difficult for firms to meet their restrospective premium obligations.  The funds, after all, aren't provided in advance.  One need to look no further than recent coal bankruptcies to see how quickly a system of payments reliant almost exclusively on the financial health and solvency of the payors, can go bad. 

One thing Fukishima made clear is that available coverage under Price-Anderson is insufficient to cover the cost of any significant nuclear accident.  In the US, as in Japan, the taxpayer would end up paying most of the money. 

And if we know the pool is insufficient upfront, yet continue to cap liability requirements, this is very clearly a subsidy.  Industry always claims it's not; that the incremental subsidy is tiny.  If that's the case, end the Price-Anderson cap, and they'll ramp up their policy coverage at almost no cost.  Problem solved.

Here's my review of TEPCO's poor liability coverage from March 2011.  Five years later, how big have the damages been? 

Last year, TEPCO estimated it would pay out $57 billion in compensation costs.  James Conca at Forbes, ever the ardent supporter of nuclear, comes out on the low end here.  Conca reports a total cost of roughly $75 billion over the next 20 years, only $15 billion of which is associated with cleanup and the remaining $60 billion in "refugee compensation."  The biggest cost, he says, is not the accident; its the higher price of Japan's replacement power. 

No doubt this is expensive:  nuclear utilities in the US routinely buy more insurance to cover replacement power and damages to their own plant than they are required to purchase to cover third party damage from accidents to all of the people and property outside their walls. 

But the figures Conca sites need more vetting.  They are quite sensitive to the cost of input fuels, and these have plummeted in the years after the paper he refers to was done.  Further, the baseline price of nuclear clearly excludes some relevant costs -- adequate accident coverage being an obvious one.  

In contrast to Conca, the Financial Times estimates that the nuclear accident has already cost Japanese taxpayers $100 billion, in the form of direct government grants and artificially high power surcharges allowed to make it seem like TEPCO was covering the cleanup costs.  NPR notes that "At the government level, the cost of decontaminating houses and farmland in Fukushima prefecture alone carries a $50 billion price tag." 

Estimates in 2013 by the Japan Center for Economic Research, TEPCO itself, and other experts rose as high as $600 billion.  This included decommissioning of the damaged reactors, compensation to dislocated people, and decontamination of affected lands.   

While the final cost is obviously still unknown, these types of projects tend not to come in under budget.  Expect a long, expensive slog.  And it is clear that post-Fukushima, accident liability systems need not only higher mandated levels of coverage but also a re-think in terms of structure if they are to achieve the dual goals of incenting prudent risk management and operations, and ensuring adequate funds are available to cover the costs of any future accident. 

Nuclear Power Economics

Despite investments and a big shout-out for nuclear coming from people like Bill Gates, nuclear fission has not emerged from the wilderness as a viable solution to world energy needs for low carbon fuels.  Clearly, Fukushima did not help:  a big accident affects the operating environment for everybody else. 

But the pace of innovation and cost reductions are coming faster for nuclear's competitors than for nuclear.  New reactor projects are struggling, not only in the West (see below; slides are from this presentation), but also in parts of the developing world as well.  Competitively, nukes are not doing well. I expect that to continue.

The Japanese Parliament has just passed a new law that pumps the equivalent of $26 billion into a fund to pay for damages caused by TEPCO's Fukushima disaster.  This is an "initial" contribution, so more could be on the way.  Rather than viewing this massive bailout to nuclear power as a failure in all dimensions of the regulatory oversight and financial assurance system of Japan, the payment is characterized as a "major step forward" by Yukio Edano, the chief cabinet secretary.

From the perspective of victims of the accident, it is a step forward -- since otherwise they would have received virtually no compensation for the damages the accident has caused to their health, their jobs, and their lives.  But this should not by any means obscure the fact that clearly nuclear power has been wildly mispriced in Japan; and that had it been properly priced their energy system could well have evolved in very different ways.  Further, other countries ought to look to this example as Exhibit A on why they need to fix their own nuclear liability regimes.

This type of bailout certaintly won't change the minds of "see-no subsidy" groups who can rationalize any level of pork as somehow not really a subsidy-- here's the World Nuclear Association ("Nowhere in the world is nuclear power subsidised per unit of production.  In some countries however it is taxed because production costs are so low.")  But the hope is that more open-minded folk will look a bit more realistically at the economics of various energy options inclusive of subsidies, and adjust policy and investment decisions accordingly.  

According to the US Energy Information Administration, Japan generated roughly 6,650 billion net kWh of nuclear power for the time period covered by EIA's data (1980 through 2009).  This single bailout contribution is equivalent to a subsidy of 0.39 cents/kWh for the entire period, a value that provides a rough proxy for what an actuarily-fair insurance premium should have been.  While there was some generation outside the range captured in the EIA time series (which would reduce the subsidy/kWh), the errors are more likely to understate the subsidy than to overstate it.  First, this calculation assumes break-even; real insurance operates to earn a return and would have set premiums higher in line with that objective.  Further, this "initial" contribution is well below the cost estimates of the accident. 

To provide a more robust range for the liability subsidy, we can use as a ballpark figure for the liability subsidy the $246 billion estimate put forth by the Japan Center for Economic Research (JCER) for the cost of the Fukushima accident.  The Center is an institution that, according to the Economist magazine, "is heavily financed by a federation of electricity utilities, all but one of which use nuclear power," so would not seem likely to unnecessarily inflate the cost of the accident.  This massive cost will not be financed by TEPCO, which is struggling to survive.  Instead, it is quite likely to be paid by taxpayers.  The full bailout would translate to a subsidy of roughly 3.7 US cents for every kWh generated in Japan between 1980 and 2009.  Clearly, proper pricing of liability alone would have greatly altered the energy landscape of Japan.

(Thanks to Ron Steenblik for the original article link)

Though there have been very few quantitative estimates of the subsidy value of the accident liability cap under the Price-Anderson Act, it is clear that this value has not remained static.  On the positive side, increases in required coverage over the past 20 years have provided some  additional insurance, and sharp increases in plant load factors increase total kWh of nuclear-generated electricity, helping to reduce the subsidy per kWh of power.

Working in the opposite direction are a number of other important factors that more than overwhelm these positive trends.  Higher damage awards in accident cases of all sorts reduce the share of total damages that individuals incur in an accident that can be met by the required coverage levels under Price-Anderson's.  Surging populations, the real estate they live and work in, and the value of that real estate, all make the magnitude of damage from any accident scenario substantially larger than thirty years ago.

The Associated Press has modeled just how much population has surged around the nation's nuclear plants, dramatically illustrating this point.  Using a computer-assisted population analysis, they conclude that the population surrounding plants is 4 1/2 times larger than in 1980.  Roughly 120 million people -- 40 percent of the US population -- live within 50 miles of a reactor.  This is the radius that the US government suggested people evacuate from in the recent Japanese accident.  The AP notes that the evacuation zone at US reactors has remained frozen at only 10 miles since 1978.  Many of the evacuation scenarios remain poorly updated and untested, particularly given the enormous changes in the affected populations since those plans were first developed. 

It is useful to remember that the emergency plans for the BP Horizon rig were also poorly constructed, boilerplate, and untested; and that this was a factor in the resultant problems.  The situation with nuclear plants seems even worse:

Last week, the AP reported that federal regulators, working in concert with industry, have repeatedly weakened or failed to enforce safety standards so old reactors can keep operating. The records review included tens of thousands of pages of government and industry studies, test results, inspection reports and regulatory policy statements.

A nice piece of work by AP, though certainly a sobering read.  It seems unlikely that the NRC plans to do much about this problem, though it is certainly a core part of its regulatory mission.

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 2003.1

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).2

$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.3 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.4

$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.5   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)

• 1The 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."
• 2The 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.
• 3See section 3 of Act on Indemnity Agreements for Compensation of Nuclear Damage (Act No. 148 of 1961, as amended in 2009).
• 4This statistic and the following ones are from Doug Koplow, Nuclear Power: Still Not Viable Without Subsidies, February 2011. See pages 80-82.
• 5Scroll down page to reach table titled "The Ten Most Costly Catastrophes, United States."

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.