India-US nuclear deal: the liability impasse

M V Ramana and Suvrat Raju | New York Times

Following Prime Minister Manmohan Singh’s visit to the White House last month, President Obama announced that the first commercial agreement between an American company and India had been achieved. The details of this agreement —reportedly worth just $16 million — are more modest than Mr. Obama’s rosy language might suggest. Some propriety information will be transferred from Westinghouse to the public-sector Indian Nuclear Power Corporation, but the signing of a reactor contract remains a long distance away.

India and the United States have been engaged in intense discussions on civilian nuclear power for more than seven years. In 2008, in return for Washington’s help in persuading the Nuclear Suppliers Group to create a special exemption —which allowed its members to engage in nuclear trade with India, although it is not a signatory to the nuclear nonproliferation treaty— the Manmohan Singh government promised the United States that it would buy reactors with a minimum generating capacity of 10,000 megawatts from American companies. This commitment was made without any economic studies, or even a comparison of reactors available in the world market. Going by the current capital costs of nuclear reactors, this would have translated into $50 billion or more in reactor sales.

These deals have failed to fructify, even partially, because American companies have refused to accept the liability framework that the Indian government set in place in 2010 to deal with nuclear accidents. This law was passed at the urging of the United States government and nuclear industry. Nevertheless, American corporations are now unhappy because the law departs slightly from the framework that they laid out.

In many parts of the world, the nuclear industry functions under special laws. There are usually two major entities involved in constructing and running a nuclear plant, which are the supplier, like Westinghouse or General Electric, and the operator, which is typically a utility company. Several countries have laws that deal with nuclear accidents on the basis of two principles: first, the supplier is indemnified from any legal action; second, the economic liability of the operator is capped at a small figure. This cap varies by country, but is usually set below $1 billion—a number that is almost a hundred times smaller than the financial impact of a severe nuclear accident like Fukushima.

This cap is usually justified on the basis that no private company would enter into the nuclear business if they had to risk bankruptcy. The residual financial costs are borne either by taxpayers—as in the United States, where the federal government has unlimited liability—or largely by the victims themselves, as in India, where the government is legally bound to provide only a small additional contribution. This is widely, and justifiably, regarded as a subsidy to the nuclear industry.

The first principle has little to do with the actual dynamics of past mishaps, since suppliers’ choices and actions have caused accidents. Consider the three best-studied nuclear accidents — at Three Mile Island, Chernobyl and Fukushima. All were caused by a combination of design defects and operator errors.

The President’s Commission that analyzed the Three Mile Island accident concluded that the failure of the supplier, Babcock and Wilcox, to provide the operator with timely information about the emergency cooling system contributed to the accident. In Chernobyl, a key role was played by the “positive void coefficient” of the reactor core and the lack of an adequate containment structure. At Fukushima, well-known weaknesses in General Electric’s Mark-1 design contributed to the accident.

Partly as a result of liability laws, suppliers have escaped unscathed in the past, and this offers them a motivation to push against any liability. But why would any country be willing to sign away its right to claim damages from the supplier? This would be like someone agreeing never to sue the manufacturer of a car, even for accidents caused by manufacturing defects.

The basic answer has to do with the role of power in international relations, compounded by technology monopolies during certain historical periods. In a nutshell, powerful governments in the United States, and, further along Western Europe extracted these legislative concessions for their companies, as they expanded to build reactors around the world.

For example, the first international liability convention, called the Paris Convention, was drafted when American nuclear suppliers were exporting reactors to Europe, starting in the 1950s. Because of the limited bargaining capacity of European countries in that period, the Paris Convention closely followed the recommendations of American industry groups in indemnifying suppliers. Later, as companies from Western Europe started constructing reactors elsewhere, their governments helped push the Vienna Convention. As opposed to the Paris convention, which did not allow the cap on the liability of the operator to exceed a certain threshold, the Vienna convention allowed countries to choose this cap, but continued to indemnify suppliers.

Most recently, as part of its attempt to keep its nuclear industry afloat, the United States created the Convention on Supplementary Compensation, with a special “grandfather clause” that allowed it to retain its own distinctive domestic law.

As soon as the Nuclear Suppliers Group granted a waiver to India, the United States demanded that it should accede to the Convention on Supplementary Compensation. American interlocutors even made it clear that they wanted India to sign this convention to provide American companies with “a very important legal protection and open the way for billions of dollars in American reactor exports.”

The abandoned Union Carbide plant in Bhopal, Madhya Pradesh, on March 13, 2012.Rafiq Maqbool/Associated Press The abandoned Union Carbide plant in Bhopal, Madhya Pradesh, on March 13, 2012.

Eager to establish its credibility as an American ally, the Indian government largely copied an annex of the convention into a draft law. However, it could not negate the historical context: an estimated 15,000 people have died in Bhopal as a result of poisoning by methyl isocyanate, a chemical that escaped from a plant run by a subsidiary of the American company Union Carbide in 1984. The accident clearly resulted from corporate negligence, and there is considerable anger in India that top executives — including the C.E.O. of Union Carbide at the time of the Bhopal disaster, Warren Anderson, who lives openly in the United States despite having been declared an “absconder” by Indian courts —have never been brought to book.

The effect of the Indian government’s proposal for the nuclear liability law was to override the “absolute liability” principle laid down by the Indian Supreme Court after the Bhopal disaster. Under this principle, both the operator and supplier would have been jointly liable, with no cap on their liability. Instead, the government wanted to indemnify the supplier and transfer responsibility for an accident onto the public-sector Nuclear Power Corporation. This would have led to a situation where Indian victims and taxpayers were entirely liable for an accident, with no way of holding the supplier to account.

The final Indian law does cap the Nuclear Power Corporation’s liability at about $250 million. However, even though the government went to farcical lengths to prevent this, the law also contains a small clause that allows the public-sector company a “right of recourse,” which it can use to reclaim some of this money from the supplier if the accident was caused by a design defect.

Taken at face value, this clause does not seem significant and it is not clear why Westinghouse and G.E. are unwilling to sell reactors to India. After all, the maximum exposure is only $250 million — a tiny fraction of the multibillion price tags for each reactor. However, suppliers are probably worried about the consequences of opening the door to supplier liability by even an inch.

For instance, a future government may simply ignore the liability cap and demand that the supplier pay up a much larger figure in the event of an accident. This is precisely what the Obama administration did to BP, forcing it to pay compensation well in excess of the liability cap of $75 million for the Deepwater Horizon disaster.

Furthermore, the Indian law sets a precedent. Other countries may decide to follow suit, and this could undermine an international liability system that has been carefully crafted by Western governments to protect their companies.

In response to the strenuous demands made by the United States Government and industry, the Indian government has repeatedly attempted to subvert the law. Most recently, on the eve of Mr. Singh’s visit to Washington, the Indian government sought a legal opinion from the attorney general on whether the Nuclear Power Corporation could “choose” not to exercise its right of recourse.

The law allows Nuclear Power Corporation to sue the manufacturer, but the government wanted to know whether the company could renounce this right in a contract. This bizarre plan to surrender the rights of a public-sector company to a multinational corporation led to an outcry in India, forcing the government to undertake a damage-control exercise.

This is also reminiscent of Bhopal. There, the Indian government first granted itself the right to represent all the victims in court, and then let Union Carbide off the hook. Here, the government wanted to promise a similar legal capitulation, ahead of time.

This debate on liability has not escaped the attention of local populations. Their question is rather simple: if Westinghouse genuinely believes that its reactors are so safe — in its public documents, it claims that a severe accident may occur only once in 3.5 million years— why is it so reluctant to accept responsibility for an accident?

In a “tractor rally” on Sept. 23 at Mithi Virdi, the site of the planned Westinghouse plant, local residents protested against the Nuclear Power Corporation-Westinghouse agreement but also focused on government attempts to weaken the liability law even further. Kovvada, which is the site that has been awarded to G.E., has seen the rise of a similar protest movement.

While addressing the United Nations the next day, Mr. Obama said that America seeks “a world where human beings can live with dignity and meet their basic needs, whether they live in New York or Nairobi; in Peshawar or Damascus.” If so, why is the United States government relentlessly insisting that India should override the “basic needs” and “dignity” of the residents of Mithi Virdi and Kovvada, just to promote the profits of Westinghouse and G.E.?

The authors are physicists associated with the Coalition for Nuclear Disarmament and Peace, India. Mr. Ramana is the author of “The Power of Promise: Examining Nuclear Energy in India” (Penguin, 2012).

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