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Balance of responsibility

For nuclear development, India must be part of a stable liability regime.

Updated: July 28, 2014 12:00:26 am
From a policy perspective, sophisticated parties may agree to cap liability or provide a right of recourse under a contract. (Source: PTI photo) From a policy perspective, sophisticated parties may agree to cap liability or provide a right of recourse under a contract. (Source: PTI photo)

By Tyson R Smith

In 2008, India and the US reached an agreement on nuclear cooperation that was hailed in many quarters — by nuclear suppliers and vendors in the US, India and across the world — as an opportunity to facilitate the rapid expansion of India’s civilian nuclear programme. India envisaged expanding its civilian nuclear programme from its current capacity of 4.8 GW to 30 GW by 2030. To fully engage with international nuclear suppliers, however, India needed to harmonise certain laws, particularly those addressing civil nuclear liability in the case of an accident, with international norms.

Internationally, the fundamental nuclear liability principles include: strict liability, relieving victims of the need to prove fault or negligence; exclusive liability, ensuring that the operator is the only entity liable to compensating for damage (even if caused by a supplier or vendor); financial protection covering the operator’s liability, ensuring that funds are available to compensate victims; limitation of operator liability in time and amount, enabling the operator to set up a cost-effective mechanism to cover the liability amount; a single court for victims’ claims, providing consistent treatment in the recognition and execution of judgments.

India’s nuclear liability law, enacted in 2010, contains elements that address each of the above principles.  However, Section 17(b) grants the operator the right to seek recourse from suppliers and vendors (only after the operator compensates victims) if the accident was the result of a patent or latent defect in equipment or substandard services. This provision is fundamentally different from those in nearly all other jurisdictions. It is a significant difference, at least from the perspective of the international nuclear industry.

From a policy perspective, sophisticated parties may agree to cap liability or provide a right of recourse under a contract. This is a perfectly acceptable mechanism when the only damage is economic harm to one or both of the parties to the contract (such as damage to a reactor in the event of an accident). In that case, there is no need for a legislation. The situation is different when the victim of an accidental release is not in a contractual relationship with either the vendor or the operator but is a member of the public. In that case, the transaction costs are prohibitive — the vendor and operator cannot negotiate with each potentially affected party separately. There is then a need for legislative action (for example, liability caps, financial protection, a single court) to reduce transaction costs to an acceptable level. The legislation should create proper incentives to ensure that the entity with the greatest ability to influence accident risk adopts an optimal activity level. For nuclear power, this full internalisation of responsibility occurs when the operator is exposed to the activity’s full costs. This is because the operator is responsible for selecting the supplier/ vendor, qualifying equipment, overseeing construction and the installation of equipment, choosing maintenance priorities, monitoring performance, repairing equipment and operating the plant.  In short, it is the operator who is ultimately responsible for the safe operation of a nuclear power plant.

In the context of India’s nuclear liability law, the right to seek recourse from suppliers and vendors has two significant implications. First, it increases the costs of nuclear projects. Second, it alters the operator’s incentives by shifting some responsibility for safety to vendors. The first implication is fundamentally a matter of price. Because India’s liability regime is different from the international regime, it creates more uncertainty (or risk) for the vendor that must be accommodated in the contract price. And, when choosing between a half-century-old approach used internationally and an untested liability provision, a rational company will demand a significant price increase to accommodate the unique provision. This dynamic, which is far from surprising, is a major reason why negotiations remain at an impasse.

Nuclear vendors are also concerned that the right of recourse fundamentally alters the balance of responsibility between the operator and the vendor. Not only should a regulator and the public be able to demand accountability from a single entity (the operator), but the operator must also take responsibility for the actions of its suppliers and vendors. The operator should, and must, uncover latent or patent defects before equipment is put into service. Anything less would be an abdication of its responsibility to protect public safety. Vendors, therefore, are justified in being concerned that a right to recourse creates the wrong incentive, by giving an operator a mechanism for shifting responsibility from its role in an accident to the vendor. This concern is probably compounded by the fact that the sole operator in India, the Nuclear Power Corporation of India Limited, is government-owned and therefore would have the bully pulpit and motivation to blame a foreign vendor in the unlikely event of an accident.

At a recent Nuclear Law Association meeting in New Delhi, a number of participants raised questions on the effects of the liability law on the expansion of nuclear energy in India and on public acceptance of nuclear power.  Some hailed the law as a paradigm shift in nuclear liability, ensuring that vendors have a stake in the safe operation of plants. But the benefits of vendors having a stake in safe operation are overstated. The international nuclear supply chain is transparent. Reputations matter. The loss of business associated with the discovery of a defect could cripple a company just as quickly as the financial effects of the right of recourse. And the right of recourse does not result in additional compensation for victims, so there is no direct “public” benefit. More importantly, providing a means for the operator to shift responsibility for an accident ultimately undermines safety by not exposing the operator to the full cost of any failure to safely design, construct, operate and maintain a plant. This increases the risk, even if only in a small way, that operators will accept items of dubious quality and provenance, rely more heavily on the assurances of contractors and vendors without independent verification and treat the safety of systems, structures and components as someone else’s responsibility.

All of this does not mean that a change to India’s liability law is necessary, but it does suggest the contours of any possible solution. One solution, of course, would be to change the law to fully align with international principles. But it might also include a process for endorsing the absence of defects or confirming acceptable service. Or, though less ideal, the operator could purchase an insurance policy that would indemnify vendors in the event of a claim under Section 17(b). The last two options ensure that the operator is exposed to the full costs of generating nuclear power, though in a somewhat roundabout way.

Ultimately, the tangible benefits of nuclear power (efficient baseload power, climate, economic development) outweigh its costs, including the low probability of accidents. But broad nuclear development will only take place when there is a stable liability regime that all parties find acceptable. That will not happen until the economic and regulatory framework for nuclear power creates complementary and efficient incentives.

The writer is partner, Winston & Strawn LLP, and was an attorney for the US Nuclear Regulatory Commission

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