Re/insurers and governments are preparing for a time when nuclear power plant operators face unlimited liability
So far, so pragmatic. That was the sentiment registering among nuclear power plant operators and their re/insurers and financiers throughout the European Union (EU) last December when the European Parliament voted to exempt the nuclear industry from the EU's Environmental Liability Directive.
A broad coalition of left wing and Green Party Members of the European Parliament (MEPs) had sponsored an amendment to the directive which, had it been passed, would have imposed unlimited liability for nuclear accidents on the operators of nuclear power plants.
But this is only a five-year respite. During this period, the EU's nuclear industry will have to find a way of compensating for environmental as well as human and commercial damage from nuclear accidents. According to the Environmental Liability Directive's rapporteur, Toine Manders, the aim is to devise a way to compensate the victims of another Chernobyl.
The 1986 explosion of one reactor at the four-unit Chernobyl power plant in Ukraine spread detritus as far as the shores of the Atlantic Ocean and caused continuing genetic problems in populations in Ukraine and Belarus who lived near the plant.
The Chernobyl accident triggered a major effort to amend existing international nuclear liability conventions (see box, p79). This event made it clear that a nuclear accident in one country could have serious effects on a neighbouring country, but the victims in the neighbouring country could not be compensated.
The effort to amend began in 1988 with the adoption of a Joint Protocol linking the two major international liability regimes, the Paris Convention, administered by the Organisation for Economic Co-operation and Development's (OECD's) Nuclear Energy Agency (NEA) in Paris, and the Vienna Convention, administered by the Vienna-based International Atomic Energy Agency (IAEA) under the auspices of the United Nations. In 1997, the Vienna Convention increased nuclear operators' liability to a minimum of 300 million Special Drawing Rights (SDRs), or about $400m. (An SDR is an IMF unit of account.)
The Paris and Brussels Supplementary Convention parties began a revision process in 1998 with the aim of completing it in three years. The Brussels Convention, also administered by the NEA, deals with compensation in addition to that paid as a consequence of liability. But it took until February this year for the revision to be signed, principally because of the collision between these liability regimes and EU law. The revision allows many more victims to claim compensation for damage suffered, including those in certain states which are not even parties to the conventions. In addition, it enables victims to receive compensation for a much broader range of damage than ever before. Finally, it will make significantly more compensation available to victims who suffer damage as a result of a nuclear accident.
The revised Paris Convention increases the operator's liability to a new minimum of EUR700m from a previous maximum of 15 million SDRs, (about $17.8m). Operators of so-called low-risk installations, such as research facilities, and those that transport nuclear substances, will see their own liability limits increase to a minimum of EUR70m and EUR80m respectively.
Revision of the Brussels Supplementary Convention sets up a three-tier compensation structure of EUR1.5bn, and for the first time, nuclear operators will be liable for nuclear accident damage resulting from a natural disaster.
Speaking at a February conference in Paris on the revised conventions, Patrick Reyners, head of the NEA legal division, observed that the new minimum liability limits and the increased need for terrorism insurance for nuclear covers could shrink available capacity in the insurance and reinsurance industries. This will set a challenge for both governments and the re/insurance industries to structure the necessary financial guarantees for nuclear operators.
"We already have EUR500m of nuclear insurance capacity," said Mark Tetley, Managing Director of London-based Nuclear Risk Insurers, which manages the British nuclear insurance pool. Insurers should make an effort to provide capacity to the new minimum limit, he added.
But the costs associated with the nuclear energy industry have been the subject of a fierce and polarised political debate worldwide. The purpose of the international nuclear liability conventions has been twofold; to provide compensation for the victims of nuclear accidents, and to protect the nuclear industry itself. Even before Chernobyl or the 1979 Three Mile Island incident in the US, the protection of the nuclear industry was becoming politically unacceptable. Germany introduced the concept of unlimited nuclear liability in 1977 and Switzerland followed suit in 1983. Finland is likely to continue the trend later this year, and Sweden is expected to follow. A Finnish government spokesman said that this is a theoretical rather than a practical solution, however. No company has unlimited financial resources, so in practice it is the government which pays.
But the politically driven process of both increasing liabilities and expanding the scope of coverage has concerned insurers. According to Sebastiaan Reitsma, Zurich-based manager of the Swiss nuclear insurance pool, insurers have always been invited to participate in the revision processes of international nuclear liability conventions. "We have always warned where the limits of insurance lay," he explained.
Mark Tetley believes that there is a point at which the insurance coverage required by nuclear operators moves away from what is acceptable to the private sector market. The original purpose of the liability regimes is to provide compensation to victims; the broader the coverage required, such as for environmental damage or legal costs, the less will be available for victims.
The German nuclear insurance pool covers only a EUR255m first layer for nuclear operators. Under a 2001 agreement between the German government and the nuclear industry to phase out nuclear plants over the coming 25 years, the operator's liability was increased to EUR2.5bn, effectively unlimited for the companies. Dirk Harbrucker, manager of the German nuclear insurance pool, said that the insurance industry was not prepared to expose its capital to this extent. Previously, insurers had arranged a fronting agreement with the nuclear operators to cover liability to a lower limit of DEM500m (EUR255.6m). But this fronting arrangement was cancelled when the limits increased.
The US Price-Andersen Act provides for a $10bn liability limit, but this is only insured to a first layer of $300m. For claims in excess of this, all nuclear operators are required to contribute on a pro rata market share basis. But this solution cannot be transposed into Europe, said Mr Harbrucker. The US has over 100 operating nuclear power plants and nearly 40 nuclear operators. By contrast, European countries predominantly only have one nuclear operating company, often state-owned. Germany has four nuclear operators but one is controlled by Sweden's Vattenfall, one of two operators in that country, and another is 15% owned by Electricite de France (EDF), France's state-owned nuclear power monopoly. Britain has just one nuclear operator, as do all the former communist states, while Finland has two. There just isn't the financial capability among European nuclear operators to spread any high liability risk, he observed.
But there is a growing body of opinion within European government and policymaking circles that certain facets of the US nuclear liability regime should be adopted. The Paris, Brussels and Vienna Conventions are based on the concept of legal channelling, namely that the nuclear operator alone, and not any sub-contractor, is liable for any damage. The US concept of economic channelling makes all sub-contractors and operator's agents liable. Thus the US liability regime permits the recovery of legal costs, something not possible under the other regimes. But according to NEA lawyer Julia Schwartz, as legal cost recovery is excluded, the Paris and Brussels Conventions permit a greater compensation to victims than does the Price-Andersen Act.
Conflict with the EU
The revised Paris and Brussels Conventions are heading for further conflict with EU law, according to Norbert Pelzer, Gottingen-based honorary Chairman of the International Nuclear Law Association. He said that the EU does not like the system of legal channelling and EU member states such as the Republic of Ireland, Austria and Luxembourg which do not have a nuclear industry are particularly opposed to the channelling of all liability to the operator. Furthermore, he said, the EU itself is opposed to the existence of any international convention outside its control.
EU legal developments held up the Paris and Brussels Conventions revisions for nearly three years, due to the adoption in March 2002 of the European Council Regulation 44/2001. This particular regulation places international commercial disputes into EU jurisdiction for all EU member states, except Denmark, which received an opt-out for this in its negotiation of the Maastricht Treaty. Regulation 44/2001 directly conflicts with the Paris and Brussels Conventions which recognise national jurisdiction.
Mr Pelzer recollected that during the various negotiations, separate delegations from EU member states attending the Paris Convention revision and those attending talks concerning Regulation 44/2001 were unaware of each other's existence. The EU is not a party to any international nuclear convention, but Mr Pelzer thought that it may become such by default.
The ratification process for the revised conventions may take some years, and if these are not complete within five years, the Environmental Liability Directive could be enforced in the nuclear energy sector. New EU member states of central and Eastern Europe which have nuclear power, such as the Czech Republic, Slovakia, Hungary and Lithuania, have signed up to the Vienna Convention, but their legislatures have not ratified this.
Since this was not achieved prior to their EU accession on 1 May this year, their national competence over nuclear matters may be lost.
This legal limbo is opening up potentially new liabilities, Mr Pelzer contended. But Russia's nuclear energy sector is also posing a future danger. Russia is not a signatory to any international nuclear liability convention. This limits its ability to improve its existing plants as foreign operators would be unable to acquire liability insurance for any work there. The small Russian nuclear insurance pool only has a capacity of some EUR40m. Participants at a recent InternationaI Atomic Energy Agency (IAEA) meeting in Vienna which included Russian observers noted that Russia's membership of any such convention is not a priority for its government.
So while Soviet-era nuclear reactors which, like Chernobyl, had no containment structure, are being either upgraded or decommissioned in former communist states, such progress in Russia is slow. While one part of Europe is wrangling about who picks up the bill for nuclear energy, the physical risk of a second Chernobyl remains.
International nuclear liability conventions
The Paris Convention on Third Party Liability in the Field of Nuclear Energy was adopted in 1960 by the Organisation for Economic Co-operation and Development (OECD) member countries in western Europe. In 1963, the Brussels Supplementary Convention was adopted by most of the Paris Convention states to provide additional compensation for victims of nuclear accidents in cases where the amounts stipulated under the Paris Convention could be inadequate. Thirteen of the 15 contracting parties to the Paris Convention are EU members, the others being Norway and Turkey. Eleven of the twelve contracting parties to the Brussels Convention are EU members, together with Norway. Switzerland is expected to join the Brussels Convention.
The Paris and Brussels Conventions are administered by the Paris-based Nuclear Energy Agency, a division of the OECD.
The Vienna Convention on Civil Liability for Nuclear Damage was adopted in 1963 and was designed to be of greater geographical scope than the Paris and Brussels Conventions. There are 32 parties to the Vienna Convention, but only 14 of these parties are signatories of the Convention, while just six states have ratified their accession. None of the new EU member states such as Poland, Czech Republic, Slovakia, Hungary, Latvia or Lithuania have ratified it. Slovenia terminated its application to the Vienna Convention in 2002 and became a party to the Paris Convention. Malta and Cyprus are not parties to the Vienna or to the Paris Conventions.
In 1988, the Paris and Vienna Conventions were linked by the Joint Protocol Relating to the Applications of the Vienna Convention and the Paris Convention, thus extending their application throughout most of Europe. In 1997, the Vienna Convention was revised, increasing nuclear operators' liability to a minimum of 300 million SDRs ($400m).
In 1997, the Convention on Supplementary Compensation for Nuclear Damage was drafted to create a global regime of liability and compensation for nuclear damage, but this has stalled due to differing views in Europe and the US on the nature of liability.
US nuclear liability is defined by the 1957 Price Andersen Act. This is reviewed every ten years and requires operators to purchase two layers of insurance cover. The first layer is up to a limit of $300m and purchased from private sector insurers, while the second layer is provided by a pool of US nuclear operators. The total provides cover up to $10bn. The US Department of Energy provides $9.5bn for public sector nuclear liabilities.