Realising the dream, or not21 October 2016
The historic nuclear accord, signed by India and the US in 2008, enabled India not only to import uranium for its fuel- starved operating reactors, but also build nuclear power plants in collaboration with the international giants. However, challenges for nuclear power and capacity growth remain as Kapil Patil of the Department of Atomic Energy at Indian Pugwash Society reveals.
The lifting of sanctions on the import of reactor technology and fuel allowed India to set ambitious targets for the expansion of the country’s nuclear energy sector, and made it necessary for the country to put into place a comprehensive legal and administrative framework for nuclear energy governance. One of the key elements of such a governance framework was an appropriate legal mechanism for addressing liability- related issues, as India had no domestic
law, nor was it party to any international conventions, dealing with liability issues that might arise in the event of a nuclear accident.
The need for such a mechanism was felt for the first time when India entered into an agreement with the Russian Federation in late 1990s for reactor supply. The two countries agreed to build two 1000MWe VVER reactors at the Kudankulam site in southern India, just 250km from the Sri Lankan coast.
The issue gained serious importance as a result of the Indo-US nuclear deal, as it enabled India to seek to drastically increase its nuclear energy provision, by importing reactors from countries such as the US, France and the Russian Federation. After much deliberation, therefore, on 21st September 2010 the Indian parliament adopted the Civil Liability for Nuclear Damage (CLND) Act. Subsequently it signed the Convention on Supplementary Compensation for Nuclear Damage (CSC), which seeks to establish a worldwide liability regime and assures supplementary financial assistance to member counties in the event of nuclear damages.
However, the CLND Act has proved to be a major hurdle in facilitating the growth of India’s nuclear energy sector. The supplier’s liability clause, as stipulated in the act, has seriously deterred international players – as well as India’s domestic industry – from participating in new nuclear power projects in the country. Despite the promise of vibrant international cooperation, India has been unable to sign contracts with foreign vendors to supply reactors until very recently, due to concerns over liability.
Now, however, the situation is expected to change as the Indian government is enacting several administrative measures – including the insurance policies that will minimise risks for the nuclear suppliers’ industry. It should also usher in greater predictability in India’s nuclear energy market. Against this backdrop, this article seeks to review the emerging nuclear liability framework in India, and discusses challenges and opportunities for moving forward rapidly on contractual arrangements to build new nuclear plants in the country.
CLND Act, 2010 & Supplier’s Liability
The CLND bill was first introduced in the Indian Parliament on 7th May 2010 and included some of the well-known features of established international liability law such as strict and no-fault liability of the operator. The original draft was fully in consonance with existing nuclear liability conventions such as the Paris and Vienna regimes, as well as the Convention on Supplementary Compensation (CSC).
On 7th June 2016, however, the verdict of the Indian Supreme Court on the 1984 Bhopal Gas Tragedy petition caused massive public anger, as the government failed to bring the culprits of the accident to justice. Owing to a strong public reaction over the verdict, the Indian parliament included a right of recourse provision in the CLND Act, whereby the suppliers can be held liable for damages in the event of an accident at a nuclear power plant.
The suppliers’ liability clause outlined in section 17(b) of the CLND Act thus became a unique diversion from the existing principle that channels liability solely to the operator, as expressed in various nuclear liability conventions such as the Paris and Vienna regimes, as well as the CSC. Section 17(b) stipulates that the operator of the nuclear installation, after paying compensation for nuclear damage, shall have a right of recourse (RoR) where:
- such a right is expressly provided for in a contract in writing;
- the nuclear accident is a consequence of an act of the supplier or its employee, which includes supply of equipment or materials with patent or latent defects or sub-standard services; and
- the nuclear accident has resulted from an act of commission or omission of an individual, done with the intent to cause nuclear damage.
The inclusion of such a widespread right of resource provision in the act, which left the amount and duration of the suppliers’ liability largely undefined and open-ended – caused much uncertainty and consternation among the nuclear supply industry in India and abroad. The unease over suppliers’ liability led to calls for an amendment to the CLND Act. The lack of political will to amend the Act, however, led the government to explore all four corners of the law to find another solution. The following sections analyse various these measures, which seek to clarify the risks pertaining to suppliers’ liability in the India.
Suppliers’ liability rules
One of first measures adopted by the Indian Government to assuage concerns over suppliers’ liability was the notification of Civil Liability for Nuclear Damages Rules, 2011 (Rules), which defined and clarified various provisions in the CLND Act.
The rule-making process is one of the important instruments in the hands of policy administrators, whereby rules are adopted for implementing the legislation. The rules for exercising the operator’s right of recourse are crucial in terms of clarifying the potential risks involved in suppliers’ liability. Section 24 of the CLND Rules defines the ‘Right of Recourse’ clause outlined in section 17(a) of the CLND Act as follows: ‘the amount of liability of a supplier cannot be less than the operator’s liability for the nuclear incident or the value of the contract itself, whichever is less; and that the right of recourse shall be for the duration of the initial licence issued under the Atomic Radiation Protection Rules or the product liability period whichever is longer. The period for initial licence is up to five years, as given by India’s Atomic Energy Regulatory Board. Rule 24, however does not define section 17(b) or (c) of the CLND Act.’
By defining section 17(a) alone, Rule 24 makes it contingent that the right of recourse can be exercised only if such a right is expressly provided for in the contract between the operator and supplier. Secondly, Rule 24 limits the amount and duration of the liability to a reasonable period in cases, where such right is provided in a contract in express terms rather than leaving it open-ended, which was one of the suppliers’ complaints. Rule 24 has therefore sought to provide relief to suppliers from potentially open-ended liability, while carefully balancing it with the lawmakers’ intent of holding suppliers accountable for the quality of their products.
However, at present the rules are under challenge in India’s apex court through a writ petition filed by a civil society group. Some well-known Indian jurists, like former Attorney General Mr Soli Sorabji, have also found the rules to be ultra-vires of the parent statute. The legal position on suppliers’ liability is therefore yet to evolve fully, and it remains to be seen whether the Indian courts will uphold or set aside the rules that have sought to limit the amount and duration of recourse liability under the CLND Act.
Supplier’s liability insurance
To cover the risk of invoking right of recourse by an operator against suppliers, the Indian Government has instituted a nuclear liability insurance pool (INIP).
The absence of a suitable insurance product has long been regarded by both Indian and foreign vendors as a major impediment in covering the risk of suppliers against the recourse liability. Also, section 8(1) of the CLND Act requires that the operator of the nuclear installation take out an insurance policy or such financial security covering his liability before commencing operation of the nuclear installation. Accordingly, the Indian Government instituted the India Nuclear Insurance Pool (INIP) with a capacity of Rs1500 Crore ($225 million) under the aegis of India’s General Insurance Corporation (GIC) along with several other Indian insurance companies. Launched on 12th June 2016, the INIP became the 27th nuclear insurance pool in the world, with GIC – Re (General Insurance Corporation of India), the only re-insurer in the country, as its chief administrator. The pool will cover the liability of the nuclear operator under Section 6(2) of the CLND Act and of the suppliers under Section 17 of the Act.
On 26th May 2016, the INIP issued the operator’s Tier-1 policy cover, for a premium of approximately INR 100 Crore ($15 million) to 21 nuclear plants currently operated by the Nuclear Power Corporation of India Limited (NPCIL). The policy will also include all the future nuclear plants once they are commissioned and connected to the grid. In addition to the operator’s mandatory insurance policy, the INIP has also recently unveiled a standalone supplier’s insurance policy.
The premium for supplier’s insurance is likely to be calculated based on a probabilistic assessment of risk for individual components and groups of components used in a nuclear reactor, as well as factors such as risk, possible severity of damage and exposure to people and property around nuclear installations. By subscribing to the INIP, the operators’ Right to Recourse remains subrogated to INIP. The INIP may, therefore, exercise Right of Recourse (RoR) on behalf of the operator. However, by providing insurance cover to suppliers, the INIP covers the risks on part of both operator and suppliers.
The INIP can issue the insurance policy to the supplier only after the operator has obtained insurance cover for the new unit, by commissioning and connecting it to the grid. The suppliers are, nevertheless, wary of obtaining such insurance cover, due to a significant time gap between the delivery of equipment and the commissioning of the plant. Obtaining insurance cover after the delivery of equipment, is likely to be a serious financial burden for the firms concerned. The nuclear manufacturers in India have therefore pleaded that the NPCIL should reimburse the premiums paid by suppliers for obtaining the insurance policy. NPCIL, however, has refused to address industry concerns in this matter and sought to enforce tenders conditions unconditionally.
Furthermore, the ambiguities in the definition of suppliers have led Indian manufacturers to demand a blanket waiver from recourse liability. Given such complexities, the attitude of Indian suppliers towards INIP will be a crucial determinant for future expansion of India’s indigenous programme.
India and CSC
Another important step towards facilitating the participation of international suppliers is the ratification of the Convention on Supplementary Compensation (CSC) on 4th February 2016. The CSC is a free-standing instrument open to all states to become members.
Members can become a party to the CSC without acceding to the Vienna or Paris Conventions. In that case, however, the CSC requires the joining State to have national legislation that conforms to the provisions
of the Convention and the Annex. The need for India to join an international regime on nuclear liability such as the CSC was long- felt, mainly because CSC provides for prompt compensation to the victims of nuclear accident on a no-fault liability basis, but also because it guarantees supplementary financial assistance from the international community in managing the compensation claims that might arise in the event of a nuclear incident.
Following the enactment of the CLND Act by the Indian Parliament in September 2010, the Indian Government signed the CSC in December 2010. However, it took more than five years for India to ratify the convention.
The delay has been attributed mainly to the fears that successive US administrations had expressed over the compliance of CLND Act with the broad principles of the CSC.
On several occasions in the past US officials and legal experts in India and abroad debated that conformity. For instance, Article 10 of the Annex to the Convention stipulates that national law may provide the operator with a right of recourse only if this is expressly provided for, by a contract in writing; or if the nuclear incident results from an act or omission done with intent to cause damage, against the individual who has acted or omitted to Act with such intent.
For its part, India always held that the CLND Act was broadly in conformity with the CSC and that Article XVIII (a) of the CSC only requires the acceding State to declare its national law complies with the provisions of the Annex to the Convention. Furthermore, the Indian officials have justified the inclusion of Section 17(b) on the grounds of Article XII (2) of the CSC, which stipulates that “nothing in this Convention shall prevent any Contracting Party from making provisions outside the scope of the Vienna or the Paris Convention and of this Convention, provided that such provision shall not involve any further obligation on the part of the other Contracting Parties....”.
Subsequently, through the release of frequently asked questions (FAQs) on civil nuclear liability, the Indian Government unambiguously stated that section 17(b) relates to product liability or service contracts, which are “ordinarily part of a contract between the operator and the supplier”. It said: “Its operationalisation will be through contract conditions agreed by operator and supplier,” and therefore is not contrary to Article 10(a) of the CSC Annex. The provisions of the CLND Act are therefore, broadly in conformity with the CSC and its Annex.
During President Obama’s visit to India in January 2015, the two countries announced a “breakthrough” on these divergent interpretations and the US hailed India’s ratification of the CSC as a watershed in creating a global nuclear liability regime. Since then, there has been little dissension from the US over India’s CLND Act.
It is not clear how the debate over the conformity of India’s CNLD Act with internationally established principles, especially the principle of legal channelling, will unfold in future with CSC’s future expansion. But at this juncture the US administration at least appears content with India’s CSC ratification and is keen on moving forward on nuclear cooperation.
Challenges and prospects
Since India’s nuclear liability law was enacted in 2010, the policy framework for enforcing liability has evolved considerably in terms of addressing concerns of the suppliers at home and abroad. As a result, the prospects for nuclear suppliers in India and aboard have improved considerably.
Since the enactment of the Act, the NPCIL, India’s monopoly for building and operating nuclear plants has been unable to initiate construction work on new projects, such Gorakhpur Haryana Anu Vidyut Pariyojna (GHAVP) in Haryana state. The land acquisition for this project was completed in 2013 in preparation for construction of four 700MWe indigenously designed pressurised heavy water reactors (PHWRs).
The bids invited for the GHAVP 1&2 projects, in August 2014, reportedly lapsed as Indian manufacturers expressed serious concerns and demanded exemption from suppliers’ liability under the CLND Act. The NPCIL reportedly faced similar difficulties in sourcing components and sub-systems for some of its ongoing projects, such as Rajasthan Atomic Power Station (RAPS) Unit 7&8 and Karapara Atomic Power Station (KAPS) Unit 3&4.
With the clarification of suppliers’ liability rules, as well as the availability of supplier’s insurance policy, the NPCIL has invited fresh bids for the GHAVP project. NPCIL hopes to break the logjam over the domestic industry’s participation in new nuclear projects. The success of the bids will mark the beginning of a new era in India’s domestic nuclear industry. The outcome of the new bids remain to be seen and the potential results have caused much curiosity among industry stakeholders.
With regard to international suppliers, the NPCIL have so far been able to finalise contracts only with the Russian Atromstroyexport (ASE) to build Unit 3&4 at the Kudankulam site. Although NPCIL has initiated project activities at the Kudankulam site, where ASE has already built Unit 1&2, the Russian Federation reportedly demanded that all new reactors be built at the Kudankulam site (after Unit 1&2) and kept outside India’s nuclear liability law, since the inter-governmental agreement for setting up additional units at Kudankulam predates India’s civil nuclear liability law. The Indian Government, however, has reportedly insisted on bringing the new units under the purview of the CLND Act due to unfavourable legal opinions from government attorneys in this matter.
Public interest litigation was filed in this context in India’s Supreme Court, which demanded the new units at the Kudankulam site must be brought under the purview of the CLND Act. The contract for building Unit 3&4, which was signed in April 2014, has reportedly taken into account costs arising from suppliers’ liability that will be covered by the liability insurance pool floated under the aegis of India’s General Insurance Co.
India’s nuclear cooperation with the US has also moved forward after the two countries reached a breakthrough understanding on nuclear liability during President Obama’s visit in January 2015. As part of this understanding, India signed the ‘Convention on Supplementary Compensation’ (CSC) in February this year and also launched a liability insurance pool to cover the liability of operators as well as suppliers of nuclear plants.
The Obama administration praised India’s efforts to address liability issues and assured full support to leading US firms to help sign contractual agreements that will enable them to win a share of India’s nuclear market. As a result, Westinghouse Corporation has moved forward on a nuclear agreement with India; however, General Electric (GE) continues to hold back due to concerns over nuclear liability.
Westinghouse has agreed, in principle, to start the preparatory site work for six AP1000 reactors, though the final contract is not expected to be signed before June 2017 after the two countries resolve pricing-related issues.
In the case of France, there remain serious differences over the pricing of reactors between the two countries, which have stalled progress on nuclear cooperation. The French firm, EDF, had expressed some concern over India’s liability law, while offering fresh pricing proposals for a proposed six EPR units to be built at the Jaitapur site in Maharashtra. The differences over pricing of reactors appears to have eclipsed liability concerns, as the two countries are unable to arrive at mutually agreeable pricing formula despite the prolonged negotiations.
In hindsight it can be argued the various steps taken by India to resolve the liability impasse have yet to generate new opportunities for the industry. Whether suppliers decide to participate in India’s nuclear energy sector would therefore
be determined on the basis of their interpretation of the various sections of the CLND Act, including those pertaining to recourse liability. This is clearly evident from the divergent risk perceptions of US entities such as Westinghouse and GE, in which the latter has chosen to stay out of the Indian market despite India’s allocation of a site for building as many as six reactors.
The law also contain certain ambiguities which are potentially open to diverse legal interpretations. In the absence of any
legal precedent in this regard, the nuclear industry continues to face uncertainty. An early decision by the courts will
help immensely in clarifying the various ambiguities of the act. More importantly, it will pave the way to realise India’s ambitious plans for building a large number of nuclear power plants. Until such clarity is restored, new nuclear power capacity in India is likely to face delay and uncertainty.