Managing supply chain risk4 October 2017
Vincent Zabielski examines the issues supply chain companies may face in relation to liability and outlines a three-stage plan for managing the associated risks.
According to the World Nuclear Association, there are currently 447 commercial nuclear power reactors operable in 30 countries, with 58 more reactors under construction. This presents a huge potential market for a wide range of equipment and service providers, across the full scope of the supply chain. New nuclear plants cost tens of billions of pounds to construct and commission, and typically have a useful service life of up to sixty years. While nuclear plants do have some special attributes, the current designs are fundamentally the same as fossil plants: they boil water to make steam to drive a turbine-generator to make electricity.
The large scale of nuclear power development projects presents a huge opportunity for suppliers of every tier and there are conscious efforts in countries such as the UK to revitalise the nuclear supply chain. There is a broad spectrum of opportunity for manufacturers and service providers who have not traditionally participated in the nuclear supply chain, but such participation should be only with a clear understanding of the nuclear liability risks involved. But what risks should be considered by a prospective supplier and how might such risks be addressed?
Consider what could happen in the event that something goes wrong at a nuclear plant and your firm’s goods or services were a contributing cause. For example, what if your company is the supplier of an emergency generator that fails to start, resulting in damage to the nuclear plant and subsequent damage to the public at large and the environment? What if your company is the supplier of control systems for critical plant equipment that fails to work when called upon? Events at nuclear plants resulting in core damage occur very infrequently, but history has shown that they do occur.
Many potential suppliers to nuclear power installations find themselves in a position where they need to weigh the potential reward of a sale against the potential risk of a nuclear accident. This can be a difficult balancing act. If a company is too conservative, it may miss many lucrative business opportunities. But a nuclear incident can pose an existential threat to a company that has not properly managed the risk.
Surprisingly, suppliers to the nuclear industry seldom implement a risk-informed and disciplined approach to evaluating the risk-reward balance of a particular project. Smaller suppliers tend not to think too much about their potential liability, believing that the risk is adequately addressed by domestic nuclear liability laws and international treaties regarding nuclear liability. Larger companies tend to have a more formal risk assessment process, typically at the Board level or through dedicated risk committees, but I have not seen a process yet by which risks are identified, assessed, and actioned in a consistent and methodical manner.
There are business implications to being too conservative, as well as being recklessly ignorant of nuclear liability. If a business unit has to take every potential sale to the Board, there will be a lot of process inefficiency. Under some threshold value, the effort of getting the reviews will outweigh the benefit, resulting in lost sales. But if a supplier ignores the risks altogether, it can pose an existential threat to the company in the event of a nuclear accident.
There is a straightforward alternative. Develop a suitably detailed comprehensive nuclear liability risk evaluation procedure, approved once by the Board, and then apply the procedure to each business opportunity. This is how such a risk evaluation procedure would work.
Step 1: Assess the safety importance of the product or service being delivered.
The first factor in nuclear risk assessment that is often overlooked is how close the parts or services provided are to a safety function. Parts closer to a nuclear safety function carry more risk. For example, the supplier of a power plant’s primary emergency diesel generators would have a greater risk exposure than the supplier of the main power transformers. Suppliers of office products probably do not need to worry about nuclear liability but suppliers of diesel fuel for emergency generators should. Since nuclear plant services and equipment are classified according to importance to safety, criteria could easily be developed that consider the potential safety impact of the product or service supplied.
Step 2: Assess the nuclear liability framework
The next step in the risk assessment process is to take a close look at the nuclear liability regimes of the host country and the supplier country. Supplier-friendly liability regimes channel nuclear liability (either by strict liability channelling or by economic channelling) to the operator of the facility, protecting the suppliers from being sued in the host country and other counties that are party to the particular liability treaty. If the host country is not party to any of the international treaties dealing with nuclear civil liability, or if the host country has not implemented comprehensive domestic legislation regarding nuclear liability, then it is probably best to walk away from the deal unless you are supplying a non safety-related product or service. There are holes in all the international nuclear conventions and domestic liability regimes. For example, some countries allow recovery for nuclear damage from suppliers. Others strictly channel liability to the operator of the plant, providing suppliers with fairly robust protections – but these protections can vary from jurisdiction to jurisdiction even among parties to the same nuclear liability treaty. The US domestic liability regime uses “economic channelling” rather than strict liability, so the protections afforded to suppliers may not be as robust as they appear. Not all types of nuclear facilities are covered to the same level of protection.
It is also important to look at the countries surrounding the host country, the location of the power plant and the potential for cross-border damage, and the applicable liability regime covering such damage. Although the details are complicated, there are a finite number of approaches to nuclear liability regimes, so it would be a relatively straightforward exercise for a supplier to develop assessment criteria.
Step 3: Assess the availability of an indemnity from the host government or utility
Suppliers should see whether the host government or the purchasing utility is willing to indemnify the supplier against nuclear liability. In the past, reactor suppliers have insisted on open-ended indemnities, but nuclear operators are becoming more sophisticated and are less willing to provide them. Indemnities can be in the form of clauses in the contract
for goods and services, or they can be separate stand-alone nuclear liability protection agreements. However, utilities and governments increasingly argue that providing such indemnities undermines the objectives of the major international nuclear liability treaties. It is always preferable to obtain as broad an indemnity as possible, but the actual level of protection is tied to the applicable nuclear liability regime. Any acceptable nuclear liability regime should give adequate in-country protection, so the supplier really only needs to worry about damage that is not covered by the nuclear liability regime – primary claims brought in foreign jurisdictions and holes in the level of protection provided by the liability regime. For example, in the USA, fuel fabrication, conversion and some enrichment facilities are not indemnified by the government beyond the liability limits of the insurance that those facilities have in place. Depending on the market, there may be insurance available to cover the risk. Moreover, unless the party providing the indemnity has very deep pockets, a supplier may not be able to collect on such an indemnity after a major accident. Again, there are only a limited number of questions to be answered regarding indemnities, so it would be a relatively straightforward exercise to develop acceptance criteria.
Current and prospective suppliers to the worldwide nuclear industry would benefit greatly from developing an in-house nuclear liability risk evaluation procedure. While the risk can never be reduced to zero, there is no reason why, with careful consideration and the creation of a coherent, codified risk assessment process, companies cannot supply nuclear power plants with confidence. As with all things, planning ahead is the key.
Vincent Zabielski is a senior lawyer in Pillsbury Winthrop Shaw Pittman’s Nuclear Energy practice and is based in London. He can be contacted on +44 20 7847 9537 or by email: email@example.com