Hurdles ahead

The most important outcome of President Barack Obama’s visit to India was the breaking of the logjam in the implementation of the civil nuclear cooperation agreement (or “123 Agreement”) between India and the United States, which came into force on December 6, 2008. The agreement was in limbo following the provisions of supplier liability in the Indian Civil Liability for Nuclear Damage Act (CLNDA) of 2010.

The CLNDA allows the operator of a nuclear power plant (NPP) to channel the operator’s legal liability in case of a nuclear accident to supplier(s) of nuclear equipment, goods and services—partly or wholly—through its Right of Recourse (ROR) provision (Article 17; see box) under some conditions. However, the international norm —as codified in the three conventions, two operational and one yet to come into force—is of strict and absolute liability of the operator alone, irrespective of the cause of the accident, and thus the suppliers stand totally indemnified. These provisions of the CLNDA apply equally to both domestic and foreign suppliers. In the Indian context, there is only one NPP operator as of now—Nuclear Power Corporation of India Ltd (NPCIL), a public sector undertaking (PSU) under the Department of Atomic Energy. Domestic suppliers, such as L&T and Walchandnagar Industries, had all along enjoyed indemnity against nuclear liability under the provisions of the General Conditions of Contract of NPCIL before the CLNDA was passed ( Frontline , December 16, 2011).

The entry of foreign nuclear suppliers to NPCIL is, however, new. This has happened pursuant to the India-specific waiver given by the Nuclear Suppliers Group (NSG) for nuclear supplier countries to engage in nuclear trade with India even though India does not wish to have full scope or comprehensive safeguards of the International Atomic Energy Agency (IAEA) on its soil. At present, the foreign suppliers include Rosatom (Russia), Areva (France) and Westinghouse and General Electric (U.S.). They have been allocated specific sites to build NPPs.

According to Article 6 of the CLNDA, the maximum amount of liability for any nuclear incident is the rupee equivalent of 300 million SDRs (whose current value is about Rs.2,600 crore) and the maximum liability for the operator of an NPP is Rs.1,500 crore. The chief concern of these suppliers was that the provisions of Article 17 were open-ended and they could be vulnerable to unlimited liability over an unlimited period. Another issue of their concern was Article 46 (see box), which allows for initiation of tort and other criminal proceedings against the operator under other Indian laws independent of the operator’s liability under the CLNDA. The suppliers felt that rulings under these could also have a bearing on them. The suppliers had, therefore, wanted clarity on these issues and sought appropriate cover for the risk they entailed before they could ink any commercial contract with NPCIL. Even domestic suppliers were not ready to supply items for the upcoming indigenous Pressurised Heavy Water Reactors (PHWRs) unless the issues were clarified properly.

International conventions have the ROR provision but only under the extraordinary circumstances of demonstrable “act with intent to cause damage” by the supplier. The Indian Act, however, goes beyond the international practice (operationalised either through the conventions or through enacted domestic laws of countries) and provides for ROR in any nuclear accident, provided the operator can prove in a court of law that the accident was caused by the “latent” and “patent” defect(s) (Article 17 (b)) in the suppliers’ equipment.

India is not a party to the two conventions in force—the Paris Convention of 1960 and the Vienna Convention of 1977—but is a signatory to the Convention on Supplementary Compensation (CSC) of 1997, which is promoted by the IAEA. Article 10 of the CSC provides for ROR when it is “expressly provided for in the [operator-supplier commercial] contract” or “if the nuclear incident results from an act or omission done with the intent to cause damage”.

The CSC requires that the domestic nuclear liability law of a country that is not a party to the Paris Convention of 1960 or the Vienna Convention of 1977 should be consistent with certain provisions laid down in the Annex of the CSC, which include the operator’s “right of recourse” (Article 10). Given the CLNDA’s Article 17, the Indian Act would seem to be not in conformity with the international nuclear liability regime, either the CSC or the other conventions.

The rules for the implementation of the Act (CLND Rules), which would form the basis for how the law would be interpreted and enforced, were notified on November 11, 2011, with which the Act too became operational ( Frontline , December 16, 2011) effective that date. Most significantly, the Rules clarify that question of open-endedness of supplier liability. They limit both the time period for which ROR can be exercised and the extent of the supplier’s liability. The latter is capped below the operator’s liability, which, according to Article 6(2) of the Act, is Rs.1,500 crore, and the value of the contract. That is, if the value of the contract is more than Rs.1,500 crore, the supplier’s liability will be capped at Rs.1,500 crore and if it is less the supplier’s exposure will only be equal to the value of the contract. In the case of the former, ROR can be exercised only until the initial licence period or the product liability period, whichever is longer. The licence period, according to the Atomic Energy (Radiation Protection) Rules, 2004, is, unless otherwise specified, five years from the date of issue of such licence. The product liability period is the period for which the supplier has undertaken liability under a contract for patent or latent defects or substandard services.

However, despite the explanations offered in the Rules, some of the issues have remained somewhat vague, leaving room for continued misgivings among the suppliers. For instance, in Article 17, with appropriate articles of conjunction (and⁄or) missing, it is not clear if the subclauses (a), (b) and (c) are to be taken together, or are applicable separately, or (a) is mandatory and would go with either (b) or (c). If they are applicable separately, then, since the Rule does not refer specifically to the contentious Article 17(b), the caps on the extent of liability and the extinction period mentioned above become somewhat ambiguous.

Similarly, while Rule 24 does define a “supplier”, which the Act did not, the way this rule has been constructed still leaves room for ambiguity. Only recently it has been clarified that domestic companies supplying nuclear equipment for the NPPs are not “suppliers” as per this definition, something which was not obvious even to the domestic companies, let alone commentators or the public. They are “vendors” who are distinct from “suppliers”.

Rule 24 (b) says:

“supplier” shall include a person who—

(i) manufactures and supplies, either directly or through an agent, a system, equipment or component, or builds a structure on the basis of functional specification; or

(ii) provides build to print or detailed design specifications to a vendor for manufacturing a system, equipment or component or building a structure and, is responsible to the operator for design and quality assurance; or

(iii) provides quality assurance or design services (emphasis added).

Since, in the Indian context it is NPCIL which provides “build to print or detailed design specifications” to domestic companies, it is both the operator and the supplier and Indian companies are vendors. Given this explanation, domestic companies will not be subject to the operator’s ROR through Article 17(b&c) and will not have any liability in case of a nuclear incident, unless they too begin to evolve functional specifications and develop their own designs. This could happen in the future, and L&T, according to a company official, is already beginning to do so. This would mean that L&T (or any other company) could graduate from vendor status to supplier status, and would have to take an appropriate insurance cover from the Indian insurance pool.

Interestingly, as pointed out by an official of L&T, a recent tender issued by NPCIL for the proposed 700 MWe PHWR units in Haryana, shows that despite all these clarifications through Rules and other means, the tender uses the term “Contractor”—neither supplier nor vendor —for a “firm/company/ joint venture/ consortium with whom or with which the purchase order for the supply of Stores is placed [by NPCIL]”. The tender also states, “Purchaser shall have a right of recourse against the Contractor in accordance with the provisions contained in The Civil Liability for Nuclear Damage Act, 2010 (38 of 2010) and The Civil Liability for Nuclear Damage Rules, 2011, as may be amended from time to time.” This has led to a lot of confusion among Indian companies wanting to bid for the contract. It is not clear whether, despite being termed as vendors via Rule 24, Indian companies are exposed to liability through ROR or not. This matter is yet to be sorted out and there could be other such blunders in other NPCIL tenders, which have prevented Indian companies from bidding for selling goods and services for forthcoming NPPs.

Article 8(1) mandates that the operator, before beginning the operation of a nuclear installation, take appropriate insurance cover or financial security. Article 8(3) says that 8(1) is not applicable to nuclear installations owned by the Central government. Commentators have always understood this to mean that NPCIL, being a PSU, will fall under this category and will not require any insurance cover. But it was recently clarified that NPCIL, according to the Law Ministry, does not fall under this category and will require an insurance cover against the stipulated Rs.1,500 crore liability. The Rules too do not state this explicitly.

As regards the other contentious issue concerning Article 46, while the word supplier is not mentioned anywhere in it, an explicit clarification under the Rules on its applicability or not to suppliers was lacking. Clarification in this regard actually comes from a reading of the dissent note of Saman Pathak (of the Communist Party of India) in the Rajya Sabha Parliamentary Standing Committee Report on the CLND Bill (No. 212 of August 18, 2010). In his note, Pathak stated that he proposed an amendment to Article 46 to specifically include the supplier also in the ambit of possible tort proceedings under other Acts, but the committee did not accept it. Given the fact that the final Act does not mention supplier, the implication of Pathak’s note is that the legislature specifically intended that the supplier be excluded from the applicability of Article 46.

Nuclear Liability Issue Besides the nuclear liability issue, the other outstanding issue was the administrative arrangement with regard to implementing the “Agreement and Procedures” agreed to by the two countries with regard to reprocessing of spent fuel in March 2010. Fuel in U.S.-built reactors, by U.S. law, becomes obligated to the U.S. irrespective of where it was sourced from. The U.S. had, therefore, demanded that it be allowed to track the movement of reprocessed U.S.-obligated fuel even if the plants were under IAEA safeguards. This was not acceptable to India, which had argued that the IAEA regime of safeguards were adequate and that should be sufficient to assure the U.S. of its non-diversion. This administrative arrangement also seems to have been favourably concluded now.

As regards nuclear liability, one could ask how it was sorted out between India and Russia with regard to Kudankulam (KK) NPP units 3&4 during the visit of Russian President Vladimir Putin in December 2014 when a commercial contract between NPCIL and Rosatom was signed for KK-3&4.

The Indo-Russian inter-governmental agreement (IGA), which covers KK-3&4 as well as other reactors to be supplied by Russia at KK or any other site in the country, was signed on December 5, 2008, two years before the CLNDA was put in place. Thus, the implications of the CLNDA (on supplier liability) are not strictly applicable in the Russian case. Even if India decided to terminate this agreement now in the light of the CLNDA, it had been agreed in the IGA of 2008 that its applicability to KK-Units 3-6 cannot be annulled.

Insurance pool Key to the resolution of the impasse over nuclear liability in the Indo-U.S. deal has been the coming together of the four big Indian insurance companies to create an insurance pool as a consortium, which will provide the necessary cover to both the operator and the suppliers (domestic and foreign). This is the kind of system that operates in major nuclear power-producing countries such as the U.S., France, Russia and Japan.

As G. Balachandran of the Institute for Defence Studies and Analyses (IDSA) points out, given the fact that nuclear accidents have been rare, insuring the nuclear industry is a profitable business for insurance companies. For instance, in the U.S., where civil nuclear liability is governed by the Price-Anderson Act of 1957, the consortium of American Nuclear Insurers (ANI), which operates the nuclear insurance pool, has to date only about $304 million [indemnity claims (chiefly towards the TMI accident) = $64.4 + litigation expenses = $243], while all NPP operators of the 104 reactors in operation pay a total of about $100 m a year towards an insurance cover of $375 m for each NPP site. Similarly in France, where there has been no nuclear accident of level 5 or more, which would call for claims of civil nuclear damage, the nuclear operator EDF has been paying an annual insurance premium of €6.4 m per unit for all 59 operating NPPs while the insurance pool has not had to pay towards any liability claims to date.

Keen on implementing the Indo-U.S. nuclear deal fully, Prime Minister Narendra Modi and President Obama established a contact group to sort out the vexing issues during the former’s visit to the U.S. in September 2014. In fact, according to sources in the Ministry of External Affairs (MEA), about 15 days before the visit, informal negotiations to resolve the liability conundrum began between U.S. and Indian officials. According to Sujatha Singh, who was the Foreign Secretary during Obama’s visit to India, based on three rounds of discussions (in New Delhi, Vienna and finally in London) in the Contact Group during the past three months, the two sides reached an understanding on both the outstanding issues, namely, the civil nuclear liability and the administrative arrangements for implementing the 123 agreement.

“Let me underline,” she said in her post-Obama visit media briefing, “we have reached an understanding. The deal is done. Both these understandings are squarely within our law, our international legal obligations, and our practice.”

As part of the negotiations, the idea of the India Nuclear Insurance Pool (INIP) for providing cover against the liability exposure of U.S. suppliers was also presented, which has apparently convinced the U.S. side. “There is a general bilateral understanding that our law is compatible with the CSC,” Sujatha Singh said. Given the clear non-conformity of our law with the CSC, this statement should actually be read to mean that the U.S. will not raise any objection to the Indian law with the CSC Secretariat now that its suppliers have been provided the necessary cover against potential liability claims in the event of an accident. Also, as one analyst pointed out, the U.S. would be keen to have South Korea, whose liability law also has an ROR provision, join the CSC following the Indian precedent. It is learnt from MEA sources that India will soon be ratifying the CSC as well. According to Sujatha Singh, the administrative arrangements for implementing the agreement on reprocessing of spent fuel have also been finalised and “they,” she said, “conform to our bilateral legal arrangements as well as our practice on IAEA safeguards”. One would, therefore, naturally ask why this idea of an insurance pool for the nuclear industry was not put in place three years ago once the CLND Rules were notified, especially when a similar insurance pool against terrorism has been in place since 2002 with the current exposure limited to Rs.1,500 crore. First, nuclear insurance is an entirely new area of business that Indian insurance companies have no experience or familiarity with. Two, even their combined capacities is not adequate to cater to the minimum insurance cover equal to the maximum operator liability (of Rs.1,500 crore) mandated under the CLNDA due to regulatory issues that prevent a higher risk exposure of these companies.

Since foreign insurance companies, on the other hand, are not allowed majority stake in the Indian insurance industry, companies with experience in the field will not be willing to invest in India. Reinsurance with foreign companies is also not possible because the Indian government prohibits foreign companies from inspecting and rating the Indian NPPs for the purpose of evaluating the premium that the operator would be required to pay. Resolution of these various issues, coupled with events during the last couple of years that had slowed down the working of the government system in general, resulted in this inordinate delay, said a former NPCIL official who is now working with the insurance industry to finalise the insurance product that will be on offer to the nuclear industry. According to MEA sources, the government is currently in the process of dotting the i’s and crossing the t’s so that a formal memorandum, giving details of the working of the nuclear insurance pool, can be given to the U.S. government. It is also learnt that the Russian government has been urged to take advantage of this insurance pool for its nuclear plants construction activities in the future.

According to media reports, given the constraints imposed by the Insurance Regulatory and Development Authority (IRDA), at present the combined capacities of the four insurance companies for the purpose of the INIP stands at Rs.750 crore. What remains of the Rs.1,500 crore liability will be made good from a consolidated fund of India. But this government contribution is expected to come down as the capacities of the companies grow over time. Already, there are indications from the insurance companies that their contribution to the INIP could be raised to Rs.900 crore. It is learnt that with its largest contribution to the INIP, the consortium will be led by the General Insurance Company (GIC) of India. Of course, both the INIP and the government will first have to arrive at suitable annual premium rates at which the operator and suppliers will take their insurance cover policies with the INIP. A rough idea of what the premium rates could be, and their impact on the nuclear power tariff, can be judged from the following.

If a supplier, foreign or Indian, takes an insurance policy with the INIP for Rs.1,500 crore liability, an annual insurance premium, say 0.1 per cent or 0.2 per cent, would be Rs.1.5 crore or Rs.3.0 crore respectively. Given the current capital cost of a PHWR at about Rs.8 crore per MWe, NPCIL can easily afford to pay Rs.1.5 crore for a (700 MWe) plant costing about Rs.6,000 crore. Similarly, a foreign supplier building a 1,000 MWe NPP costing about $1.5 b can easily pay an annual premium of less than $0.5 million. The premium that the supplier will pay over the reactor lifetime will naturally get front-loaded into the NPP costs.

The impact of that on power tariff will be insignificant given the current nuclear tariff of around Rs.4/unit. NPCIL can also shore up its own financial resources towards meeting its operator’s liability. For example, a 1,000 MWe NPP, operating for about 300 days, will produce about 720 units of electricity. A Re.0.05-surcharge/unit will generate Rs.36 crore a year. Given the current total installed capacity of about 6,000 MWe, it will be able to generate about Rs.200 crore a year towards a liability fund.

While the vexing issues that had led to an impasse in India expanding its nuclear power programme following the Indo-U.S. nuclear deal, and the other developments that would allow India to engage in global nuclear trade fully, now seem to be resolved, there still remains a good gap between the cup and the lip. First, the mechanism of how the INIP will operate needs to be spelt out in a White Paper or an FAQ document. Also, given the lingering confusions among both the foreign and domestic suppliers/vendors, the government would do well to clarify the various terms and explanations used in the Act and the Rules through a public explanatory document. And then there are also public interest litigation (PIL) petitions pending in Indian courts, one of them questioning the very constitutional validity of the CLND Rules, which need to be disposed of before nuclear commerce that can help to significantly expand the Indian nuclear programme can begin.