Obstacles to CSC for Nuclear Damage

22 December 2014

The New Year will likely bring a sea change to the international regime of financial protection for nuclear incidents, writes James A. Glasgow, partner at Pillsbury Winthrop.

Some governmental and industry stakeholders have great expectations for the Convention on Supplementary Compensation for Nuclear Damage (CSC)*. They have long predicted that it will create a new safe harbor for nuclear vendors and enhanced protection for members of the public.

Adopting a more cautious outlook, many nuclear industry participants will likely assess the important gaps in international nuclear liability protection that will remain after the CSC enters into force. Depending on government decisions, nuclear vendors and operators who plan to rely on the CSC's financial protection may face a perfect storm, fueled by a proposed rule of the US Department of Energy (DOE), coupled with lawsuits against nuclear vendors and nuclear plant operators and augmented by doubts that the CSC will gain sufficient members to constitute a global regime.

This editorial probes recent governmental actions that ostensibly seek to support the CSC, but are likely instead to create a challenging climate for the CSC and its member states as well as the global community of nuclear suppliers and their customers who construct and operate nuclear power stations.

From its beginnings in the 1960s, the nuclear power industry has depended on national laws and international agreements that provide financial protection for nuclear vendors and facility operators as well as persons who suffer injury or damage resulting from a release of radiation from a nuclear power station. Following the nuclear incident that destroyed unit 4 of the Chernobyl Nuclear Power Station in Ukraine, the International Atomic Energy Agency (IAEA) led an effort by IAEA member states to strengthen the global nuclear liability regime. In 1997, the participating governments adopted the CSC. Initial great expectations for the CSC have been tempered by the long road to its entry into force and the likelihood that the path to near-universal adherence to the CSC will be even longer.

Following the recent approval by Japan's Diet, Japan is likely to ratify the CSC in 2015, an action that would cause the CSC to enter into force 90 days thereafter. Anticipating the CSC’s entry into force, the U.S. DOE recently issued its proposed rule regarding "contingent cost allocation" under the CSC.

DOE's proposed rule essentially requires U.S. nuclear suppliers to participate in a zero-sum game.

Industry comments may cause DOE to revise its proposed rule in some respects, with some categories of suppliers benefitting from a reduction (or even elimination) of their financial responsibility under the rule and others suffering an increased responsibility. Congress imposed severe constraints on this DOE rulemaking through its previous enactment of Section 934 of the Energy Independence and Security Act of 2007, concerning "allocation of contingent costs" under the CSC.

Section 934 requires the USA's nuclear suppliers to reimburse the U.S. Government for the country's share of any supplementary compensation payments under the CSC following a nuclear incident in a CSC member state at a nuclear power station or other "covered" facility, causing damage in excess of that country's "national" tier of compensation. To comply with Section 934, DOE's final rule must identify classes of suppliers and calculate their respective shares so that their contributions will equal the U.S. Government's share of supplementary compensation payments under the CSC.

Notably, the USA is the only CSC adherent that has required nuclear suppliers to pay the government's share of supplementary compensation under the CSC. Unless other CSC parties follow this U.S. precedent, U.S. suppliers to CSC countries will face a unique economic burden that is not shared by their international competitors.

DOE's proposed rule includes two alternatives for (1) identifying the classes of U.S. nuclear suppliers who must fund the U.S. Government's supplementary compensation payments and (2) determining such suppliers' respective shares of this responsibility. The Government's payment could be about $150 million, according to DOE, if "the 30 countries that have nuclear operating capacity in 2014 [have] joined the CSC" at the time of a nuclear incident in a CSC country.

According to DOE, its proposed alternatives "take into account specified risk factors and exclusionary criteria to provide a fair and equitable proration of costs among U.S. nuclear suppliers benefitted" by the CSC.

Definitions of "nuclear supplier" and other terms are important elements of DOE’ s "retrospective risk pooling program" for nuclear suppliers to CSC countries whose products and services are significant from a nuclear safety perspective.

One of DOE's two "alternatives" would require U.S. suppliers in the nuclear "facilities" sector to reimburse the U.S. Government for half of the U.S. share of supplementary compensation. Other U.S. suppliers would pay the other half, according to "risk-informed" percentages ("equipment and technology" - 25%; "nuclear materials and transportation"- 15%; "services"- 10%).

Congress directed DOE to provide information to support the "voluntary establishment" of "private insurance" to cover U.S. suppliers’ liability under DOE's rule. However, in light of U.S. insurers' previous comments to DOE, such insurance may not be available. Therefore, DOE should determine what types of information and support may facilitate private insurers' provision of such insurance.

Amendment of Section 934 is one of the remedies that may be pursued by U.S. suppliers who have a significant contingent liability, under DOE's final rule. Supporters of such an amendment may argue that Section 934's requirement that U.S. nuclear suppliers bear the cost of U.S. supplementary compensation payments (1) clashes with the CSC's "channeling" of third party nuclear liability exclusively to operators of nuclear facilities; (2) fails to recognize that the CSC's supplementary compensation primarily benefits "third parties" who claim personal injury or property damage and provides only indirect and limited protection to suppliers, especially since that compensation will be sufficient to pay only a small fraction of the nuclear damage resulting from a major nuclear incident, such as occurred at the Fukushima Daiichi reactors and Chernobyl Unit 4; (3) is based on Congress' incorrect assumptions that the CSC will "relieve" nuclear suppliers from "potential liability" and "in effect provides nuclear suppliers with insurance" for nuclear damage; (4) may cause some suppliers to decline to provide products and services to covered facilities in CSC countries if such supply would expose them to a significant contingent liability, under DOE's rule; and (5) will add another impediment to the U.S. industry's ability to compete globally.

Wholly apart from the CSC’s supplementary compensation feature, the CSC's "channeling" of jurisdiction exclusively to the courts of the CSC member state in which a nuclear incident occurred ("installation state") may benefit some U.S. suppliers to "covered" facilities in other CSC countries.

Upon the CSC’s entry into force, U.S. courts will be required to dismiss lawsuits against such suppliers if the courts of a CSC installation state have exclusive jurisdiction over such claims. However, the liability protection resulting from such channeling of jurisdiction will have significant gaps until most countries have joined the CSC and it is applicable to most of the world's nuclear power stations. Countries that have not joined the CSC are not bound by the CSC's channeling of jurisdiction to the courts of the CSC installation state.

In preparing its final rule, DOE should re-evaluate key assumptions of its proposed rule regarding U.S. suppliers' risk of nuclear liability. Important aspects of that risk are illustrated by a lawsuit against Tokyo Electric Power Company (TEPCO), filed in a U.S. District Court in California by approximately 80 plaintiffs who allege health injuries resulting from exposure to radiation, while aboard U.S. Navy ships and helicopters that flew over the Fukushima reactors to provide assistance.

DOE should re-examine its assumptions concerning "lead suppliers" in light of this lawsuit. The defendants named in the amended complaint include not only the "lead supplier" of the Fukushima Daiichi reactors but also architect-engineers and other suppliers. TEPCO recently moved to dismiss the amended complaint, arguing that the court lacked jurisdiction and should exercise its discretion to dismiss the case, based on (1) deference to another country (Japan) having more substantial involvement with the subject matter of the lawsuit; and (2) deference to another country whose courts will provide a more convenient forum for the lawsuit. Because it refused to dismiss the lawsuit, the court presumably will schedule the case for a jury trial, culminating in the court's issuance of a judgment.

James A. Glasgow

Comments? Please send them to editor@world-nuclear-news.org

* The author has summarised and analysed the CSC in a previous assessment: pillsburylaw.com/publications/convention-on-supp-comp-liability-implications-for-nuclear-industry