Nuclear Power: Our Government’s Got the Industry’s Back

Taxpayers could end up being on the hook for a very large bill.

Subsidies have been very much on the minds of lawmakers of late. The Obama administration failed in its bid to get Congress to withdraw the substantial subsidies we provide to the oil and gas industry. And the New York Times reports that “neither President Obama nor Republicans in Congress have voiced opposition to an expected $8.3 billion Energy Department guarantee to help the Southern Company, a utility giant, build nuclear reactors in Georgia.”

As long as the subject on the Hill is on subsidies, here’s one that might deserve some Congressional attention. This one comes in the guise of the Price-Anderson Act, a nice little monetary leg up from the federal government to the nuclear industry.

Insuring Against a Low-Probability, High-Risk Event

First some background and context. In 1953, as the United States began tooling up to put Dwight D. Eisenhower’s Atoms for Peace program into high gear, we ran into a glitch: insurance for nuclear power plants. (More on Atoms for Peace.) The need for insurance when the possibility of an accident lurks is well understood. How much such insurance costs is a generally a function of two factors: (i) the probability of an accident and (ii) the potential cost of an accident. The larger either of these factors is, the greater the exposure of an insurance company and so, generally speaking, the higher the premiums charged to the insured, and of course vice versa.

But what happens to insurance costs when one factor argues for a low premium and the other a high one, as when the probability of a nuclear accident is very low but the potential cost of one is very, very high? Such a scenario can be especially problematic if the potential payout following a disaster could be so astronomically high that it could bankrupt the insurance company. Under such circumstances insurance companies might decide not to take on the risk even if the probability is extremely low.

This is a classic problem in risk management: dealing with a low-probability, high-risk event. And this was the dilemma facing the nuclear industry in the 1950s. Insurance companies were unwilling to take on the uncertainty and risks surrounding the new nuclear technology. So along came the federal government to the rescue with the Price-Anderson Act, first passed in 1957 and most recently reauthorized by the Energy Policy Act of 2005, which updated and extended its provisions out to 2025, its longest extension to date.

How Price-Anderson Works

The basic idea behind Price-Anderson is to encourage private investment in commercial nuclear plants by limiting plant owners’ liability in the case of an accident. The way it works is that nuclear power plant owners “pay a premium each year for $375 million in private insurance for offsite liability coverage for each reactor unit.” In the event of damages exceeding this amount, the law provides a second larger pool of self-funded insurance where each and every licensed plant would be assessed a prorated share of the damages up to a specified total. That total is currently set at $111.9 million for each plant. Currently, there are 104 licensees, which bring the total pool of industry funds available to cover an accident to about $12 billion. If damages exceed $12 billion, compensation remedies revert to Congress.

Is $12 Billion Enough?

To the industry’s credit, there have been only two serious nuclear accidents in the United States [pdf]: the partial meltdown of the Fermi 1 reactor in Michigan in 1966 (which gave us the term “China syndrome”) and the infamous Three Mile Island accident in Pennsylvania in 1979, whose cleanup costs totaled about $1 billion — an amount well under the current Price-Anderson cap.

But things have changed — a dollar just ain’t worth what it used to be. And, more important, we now have another data point on how expensive a nuclear accident can be: last year’s nuclear disaster in Japan, a disaster that’s still playing out and whose price tag for cleanup could reach into the hundreds of billions dollars.

While we wait to find out the ultimate costs of Fukushima, should an accident of such magnitude befall the United States, the Price-Anderson Act’s $12 billion fund looks woefully short. And who would be on the hook for the rest? Well, identifying the payers is in the hands of our good representatives on Capitol Hill who could decide to follow a variety of courses to make up the shortfall (including demanding more from the nuclear industry), but it’s a fair bet that we — meaning you and I and the rest of the American taxpayers — would foot the remainder.

Now there are those, including nuclear industry folks, who will argue, and perhaps justifiably so, that Fukushima was a fluke and that the chances of an accident of that scale in the United States are remote and not even worth worrying about.

There are others who are not so sanguine. (See for example this 2007 assessment [pdf] by Geoffrey Heal of Columbia University’s Business School and Howard Kunreuther of the University of Pennsylvania’s Wharton School.) All accidents are by their very nature “flukes” — that’s why we call them accidents. These other, less sanguine folks have argued that amid all the talk of a nuclear energy renaissance in the United States, with new plants being built on the strength of federal government loan guarantees, it’s time for Congress to reconsider that $12 billion dollar cap.

And why should the industry be opposed to such a change? After all, if an accident carrying a price tag of a few hundred billion dollars is so remote that it’s not even worth worrying about, what’s the problem committing to being liable for the damages? If it can’t happen, the industry will never have to pay, right? I mean, who would you prefer having to worry about paying for a nuclear accident, the American taxpayer or the folks minding the nuclear store?