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The India-US nuclear deal ratified, amidst scandal, in 2008 gave great hope to the country’s hopelessly inadequate energy sector. For the deal to be operationalised, however, India needed to create a nuclear regulatory framework for security and safety as well as liability. Such a framework consists of ex ante and ex post components, neither of which can stand alone. Ex ante legislation concerns itself with strict regulatory mechanisms to improve safety of nuclear operations and hopefully prevent a nuclear incident, while ex post legislation deals with compensation in the rare case of an accident. Security has been addressed by the Atomic Energy Act (1962), while the compensation question was only recently considered and addressed in the Civil Liability for Nuclear Damage Act (CLNDA).

The CLNDA has succeeded in upsetting all sides involved – some are insulted by the paltry liability limit of ₹1,500 crores, while others insist that allowing nuclear power plant operators right of recourse against suppliers will hamstring a nascent industry. Both are right…sort of.

Presently, India’s CLNDA applies to nuclear installations owned and/or operated by the Government of India [Art. 1(4)]. This includes all of India’s fleet of reactors, but a larger role for the private sector in the future will have to see this clause modified. Furthermore, the operator is not liable for damages caused by acts of personal negligence, war, terrorism, or the gods [Art. 5]. As far as the victims of a nuclear accident are concerned, the operator is solely liable for all damages [Art. 4]. This means that victims need not prove fault, merely that an accident has happened, to receive compensation. It also channels all responsibility for compensation to one source, the operator, so the victim is not burdened by following up with many players.

So far, so good. However, Articles 6 and 7 of the CLNDA caps operator liability to varying amounts depending upon the facility at which an accident may take place – nuclear power reactors ₹1,500 crores, reprocessing plants ₹300 crores, and research reactors ₹100 crores. A Nuclear Liability Fund, set up by levying contributions from each operator – in this case, the government-owned Nuclear Power Corporation of India Limited (NPCIL) and Bhartiya Nabhikiya Vidyut Nigam Limited (BHAVINI) – will help defray liabilities beyond the operator caps, and the Central Government stands in as the guarantor of last resort up to a limit of 300 million Special Drawing Rights (SDR). The government has reserved the right to raise these limits at any point in the future.

The ₹1,500-crore cap on operator liability has been considered low by most experts. In the event of a Level 7 INES (International Nuclear Event Scale) nuclear accident, damages could easily reach into the billions of dollars. The cap is undoubtedly low, but it must be understood in its context. International experience has been that a higher limit is built gradually as the industry expands and the insurance asset base increases. Actuaries calculate insurance limits and premiums based on the number of people covered, frequency of claims, insurance pool, safety protocols, operating track record, and other factors. Unlike other industries, nuclear insurers have few customers – in India, the government is presently the only client, but even in countries with private nuclear utilities, the number is still small.

The US nuclear industry, regulated by the Price-Anderson Act, increased liability coverage from an initial $60 million operator liability and $500 million government guarantees to a liability pool of nearly $13 billion today that includes an operators’ indemnity above private insurance and no government coverage. In France, the limit was set at €91 million but is now being raised to €700 million; in the United Kingdom, the limit has been in a phased increase from about €150 million in 1994 to the present €1.2 billion; Sweden has also seen its operator liability cap increase from around €350 million to €700 million; in Canada, a 1976 limit of $75 million has been raised to $650 million in 2008.

Insurance companies will also hesitate to insure single reactor facilities because a serious accident would probably render the main source of income, the reactor, worthless. Insurers therefore prefer to pool the risk of all facilities to create a larger asset base and allow a greater coverage while simultaneously lowering the cost. Thus, a large nuclear industry presents a greater asset base and will allow for a higher liability limit. India presently has only 14 civilian reactors, making a small collective pool. By comparison, South Korea, approximately the size of Bihar, has 23 reactors. It is only with the growth of India’s nuclear industry that operator liability will rise to reflect the actual cost of damages.

It must be noted here that India signed the Convention on Supplementary Compensation for Nuclear Damage (CSC) in 2010, allowing it access to a supplement of 300 million SDRs for damages beyond the first tier operator liability. As per Article IX of the CSC, 50% of this shall be for damages within the installation state and the remaining 50% for damages without.

The second bugbear in the CLNDA is the GoI’s decision to allow the operator to have a right of recourse against the supplier. While the operator’s right of recourse against the supplier in case of i) the nuclear incident arising out of an act or omission by the supplier with an intent to cause damage or ii) a contractual right of recourse has been well-established in international law, Article 17(b) of India’s CLNDA extends the scope of such a right of recourse to consider “consequence[s] of an act of [the] supplier or his employee, which includes supply of equipment or material with patent or latent defects or sub-standard services.” In addition, Article 46 states that the CLNDA provisions “shall be in addition to, and not in derogation of, any other law…and nothing contained herein shall exempt the operator.” This exposes the operator, and thereby the supplier, to additional proceedings under Indian law.

Sections 17(a) and (c) of the CLNDA are standard provisions under international law too, and can be compared directly with Article X of the Vienna Convention on Civil Liability for Nuclear Damage, Article 6(f) of the Paris Convention on Third Party Liability in the Field of Nuclear Energy, and even Article 10 of the Annex to the CSC. However, the expanded right of recourse against the supplier mentioned in Section 17(b) of the CLNDA has been objected to strenuously by international nuclear vendors on grounds that it violates international law and India’s treaty obligation to the CSC.

Supplier liability is an interesting notion that has been suggested in other countries too, with proponents arguing that exemptions are a hidden subsidy to nuclear vendors; given that the nuclear power industry has grown since the 1950s, it no longer needs such subsidies. This logic betrays a lack of understanding of nuclear economics – suppliers will pass on the additional costs of liability to the end consumer, the taxpayer, but the insurance industry will have to allocate funds to cover entities other than the operator. By making only the operator liable, the amount of coverage insurers can make available, via the operator, to the victims of a nuclear incident is maximum.

A second reason floated to pass liability on to suppliers is that there would be no incentive for them to improve their reactor designs otherwise. This is fear-mongering for two reasons: 1. regulatory requirements can force them to consistently improve on their designs, and 2. operators, cognisant of the liability they face, will veer towards safer designs and even a minor accident can affect the sales of a product line adversely.

The CLNDA has raised flags in France, Russia, and the United States, three of the world’s largest nuclear suppliers and important to India’s military and economic growth. While state-owned nuclear firms or firms with a large government stake such as Areva and Rosatom have expressed strong dissatisfaction with India’s liability law, private concerns such as General Electric and Westinghouse have declared that they would not enter the Indian market on such onerous terms. The impact of the CLNDA can already be seen – at Kudankulam, when India decided to retroactively apply liability to Russian-supplied reactors provided under a 1988 agreement, Moscow raised the price of the reactor, thereby passing the cost on to the consumer.

India’s leaders had arrogantly thought that the sheer size of their market would bring anyone to their doors; they have been proven horribly wrong. The nuclear renaissance everyone had expected from the Indo-US nuclear deal, even after five years, has not materialised. As a result, Delhi has started considering waivers to foreign companies or a curtailment of the duration of their liability to lure them to Indian shores. This will, in all likelihood, be found illegal by Indian courts. While a plain reading of Section 17 may suggest that clauses (a), (b), and (c) are distinctive and separate, they are interlinked. For example, if a contractual understanding between an operator and a supplier as per 17(a) can invalidate supplier liability in case of accident, can the same contract be extended to exonerate willful damage too? Furthermore, the Supreme Court of India (SCI) has declared in Krishna Bahadur v. Purna Theatre that a statutory right in favour of a party can be waived as long as no public interest or policy is adversely affected. In addition, Section 23 of the Indian Contract Act clearly stipulates that clauses of a contract would be unlawful if they go against the law or declared public policy. This was upheld by the SCI in Rattan Chand Hira Chand v. Askar Nawaz Jung in 1991.

Although Article 45 give the GoI discretionary powers to waive liability for some nuclear facilities, it stipulates that this power exists only in cases where the amount of nuclear material is insignificant.

In sum, the CLNDA appears to be a piece of legislation framed in the shadow of Bhopal than by pragmatism. The supplier liability clause and the vague additional torts clause will keep foreign vendors out of India – with the United Arab Emirates, Saudi Arabia, and China pushing hard on nuclear energy, India’s disorganised market, despite its size, is not a draw. These clauses do not make economic sense either; safety must be balanced by costs, probability and scale of accidents, and affordability – the reason everyone does not commute in tanks.

The liability limits are admittedly small, but these must be continually raised as India’s nuclear industry develops. It is unrealistic to expect the country’s insurance sector and nuclear industry to perform at European levels when they are half a century behind.

There is nothing stopping the GoI from setting an operator liability of ₹10,000 crores, but premia will be correspondingly high and nuclear power will become unaffordable. This is not something India can afford, environmentally or economically. Consider this: there are 115,000 premature deaths per year in India alone due to respiratory problems caused by coal, and there has been a shift for the worse in the climactic conditions over a startling 27% of the Indian landmass. The costs of myopia over the CLNDA are far greater than one realises.

This post appeared on Daily News & Analysis on October 05, 2013.