food for thought

There was a report in some paper – probably the Post, but I can’t be
bothered to search for it – over the weekend about concerns that the
electric company responsible for the cleanup at Fukushima might be
cutting corners on worker safety. Evidently the company is just barely
not insolvent, and so it makes financial sense for them to do the
minimum they can get away with in terms of providing low-level workers
with safety equipment and training.

I find the notion that a major nuclear disaster would render the
owner/operator of the plant potentially insolvent to be an interesting
one.

I should note at the outset that I am broadly pro-nuclear-power. I
take the lesson of eastern europe’s environmental problems to be that
coal is the worst possible form of energy generation; I take the
lesson of global warming as being that we desperately need to reduce
our dependence on fossil fuels for energy generation, and while
alternative energy is broadly good, they also carry an environmental
cost, and are not feasible currently on the scale needed to provide
all of our energy. Nuclear power, despite the potential for a
substantial increase in the cost of raw material, is the least bad
alternative. Most of the public opposition comes from the fact that
nuclear accidents, while low likelihood, are extremely high cost when
they happen – and it’s a natural human bias to value low-probability
high-impact events more highly than high-probability low-impact
events; we can focus on the cost of the single high impact event much
more easily than we can conceptualize the aggregate costs of all the
low impact events.

And yet, Fukushima presents ani nteresting question for pro-nuclear
people, because of the fact that the power company is borderline
insolvent.

Imagine, if you will, a comparable meltdown at Indian Point. The costs
of cleanup would be enormous; it seems highly unlikely that ConEdison
would remain solvent after those costs were incurred.

At that point, one of two things will happen. Either the government
(maybe NY state, maybe the Feds) will front a bunch of money to
ConEdison under the theory that it is too big to fail, OR ConEdison
will go bankrupt, its assets will be sold off, and the major liability
- the cleanup of the disaster – will devolve on the government
because, once ConEdison goes under, there’s nobody else to assume the
cost.

This is a low probability event, but it’s a low probability event
whose cost will very likely be covered by the state, because *not*
covering it will be unacceptable to almost everyone, and because the
cost will likely exceed ConEdison’s available resources. (And by
‘state’ here, I mean the federal government; New York State will
shoulder some of the cost but is unlikely to be able to pay for all of
it – Indian Point’s location is such that, if it melts down in
Fukushima-style fashion, the state’s economy will be severely
disrupted, too).

So, the question is – and I really don’t have an answer to this – what
kind of demands can the state legitimately place on ConEdison and
other nuclear operators to help counteract this potential problem?
Would it be reasonable, say, to create an FDIC analog where the
nuclear operators are all required to put up a certain amount of money
into a fund which then becomes the primary source of funding for
cleanup if a nuclear operator goes under after a meltdown? Do the
numbers on that work? (Even if they don’t work perfectly, it’s
probably better than the alternative).

Fundamentally, from an economic perspective, the question is how to
ensure those investing in nuclear energy internalize the cost of a
meltdown rather than simply assuming that they can slough it off on
the state. Because the costs are so large and the probability is so
low, the economically rational thing to do is to simply accept that if
it happens, you’ll go under and lose everything, and not plan to have
enough cash around to deal with it; so we have to have a structure
which keeps such operators from externalizing the cost.

Any ideas?
November 07, 2011 at 10:05AM