# Presentation: 528529

## James A. Vedda, Ph.D.

**James A. Vedda, Ph.D.**
***The Aerospace Corporation***
***Center for Space Policy & Strategy***

**October 2006**

## Background

**Since 1988, USG has indemnified FAA-licensed commercial launchers against catastrophic third-party liability claims**
**3-tier system; USG covers second tier up to $1.5 billion (1988 dollars)**
**Requires congressional appropriation of funds**
**No catastrophic claims to date**
**Statute includes sunset provision**
**Renewed 4 times, most recently in December 2004**
**Current statute expires December 31, 2009**
**Study mandated in December 2004 legislation**
**Managed by FAA; congressional space committees are the customers**
**Assess methods by which the current system could be eliminated**
**Suggest alternative steps needed to maintain a viable and competitive U.S. space transportation industry**
**Examine liability risk-sharing in other launching states**
**A congressionally mandated study released in April 2002 addressed similar issues**

## Report Outline

**Executive Summary**
**Ch. 1: Introduction**
**Ch. 2: The Current Market and U.S. Government Risk-Sharing **
**Ch. 3: Elimination of U.S. Government Risk-Sharing and Possible Consequences**
**Ch. 4: Risk-sharing Regimes of Foreign Competitors**
**Ch. 5: Analysis and Options**
**Appendix A: Acronyms and Abbreviations**
**Appendix B: Statutory Language**
**Appendix C: Participants**

## Chapter 1: Introduction

**Description of current risk-sharing regime**
**Acknowledgement of U.S. treaty obligation for 3****rd**** party liability**
**Brief history of launch indemnification statute**
**Summary of existing law and policy supporting commercial space launch**
**Identification of policy objectives**
**Assure adequate liability coverage for catastrophic launch-related events**
**Minimize U.S. government (taxpayer) risk exposure and annual outlays/subsidies**
**Improve economic benefits and strengthen the U.S. industrial base in space launch capabilities by:**
**Enhancing international competitiveness of the U.S. space transportation industry**
**Maintaining continuity in the business/risk environment for U.S. launch providers**
**Encouraging new entrants to the U.S. launch market**

## Chapter 2: The Current Market...

**Industry maturity and market share**
**Launch industry is mature by some measures: ****continued investment, tech evolution, ongoing partnerships, consolidation, and new entrants**
**But maturity does not equal successfully competitive or profitable**
**Global industry has become more competitive**
**U.S. market share has declined and will continue to do so in next several years**
**Additional considerations**
**Government policies have mixed effects on industry**
**Government as dominant customer and regulator**
**“****Buy domestic” policies here and abroad**
**International agreements (e.g., damage liability, use of excess missiles)**
**Strict export controls**
**Government responsibility for safety at federal ranges implies acceptance of some risk-sharing**
**Contribution of indemnification to industry’s bottom line is not clear**

## ... and USG Risk-Sharing Experience

**Overseas Private Investment Corporation (OPIC)**
**National Flood Insurance Program (NFIP)**
**Terrorism Risk Insurance Act (TRIA)**
**Price-Anderson Act (nuclear power industry)**
**Closest (but not perfect) analogy – model for CSLA indemnification**
**Addresses third-party liability**
**High consequence, low probability risk**
**Never experienced catastrophic claims**
**Nuclear power industry much larger than launch industry in number of companies (~30) and revenues**
**Nuclear power industry not directed at international markets, national security, or national prestige**

## Chapter 3: Elimination of USG Risk-Sharing...

**Alternative funding schemes for catastrophic liability claims**
**Self-insurance**
**Trust fund**
**Captive insurance**
**Catastrophe bonds**
**Publicly subsidized insurance**
**Applicability to the commercial launch industry**
**Price-Anderson analogy**
**Industry-funded secondary pool is activated in the wake of an incident**
**Government indemnification is third tier – beyond ~$9.5 billion in catastrophic claims**
**Alternative: Pre-funded industry pool managed by federal agency**
**Ongoing administrative costs, even in the absence of claims**
**Small number of participants means that the exit of a single member could significantly undermine the viability of the pool**

## ... and Possible Consequences

**Industry position has not changed since April 2002 study**
**Indemnification regime should be retained and strengthened**
**“****Nascent industry” argument for phasing out indemnification is inaccurate**
**While industry has matured, market environment has changed too**
**If government indemnification is eliminated, buying more insurance is not the answer**
**Elimination of indemnification would drive business overseas, and U.S. companies would reconsider the risks and benefits of staying in the commercial launch business**
**Fragility of launch liability insurance market is a critical concern**
**Premiums are far from adequate to replenish the commercial insurance pool in the event of a major claim**
**New enterprises will put further strain on the limited pool**
**Catastrophic claims in unrelated areas could reduce the launch liability insurance pool**

## Chapter 4:Risk-sharing Regimes of Foreign Competitors 

**Description of risk-sharing regimes by country**
**Australia**
**Brazil**
**China**
**Europe (with details on France, UK, Sweden)**
**India**
**Japan**
**Russia**
**Status of foreign regimes has not changed since the April 2002 study, and no changes are on the horizon**
**Foreign launching states do not expect to respond in any way if the U.S. changes or eliminates its risk-sharing regime**

## Chapter 5: Analysis...

**The current indemnification regime has become the industry standard**
**Elimination could send the wrong signal to international customers and competitors, which could negatively affect competitiveness**
**USG risk-sharing in other industries has involved a gradual ramping down of government risk exposure – however:**
**Launch industry is not directly comparable in size, resources, or experience**
**Not all indicators are positive, such as competitiveness and profitability**
**Launch and insurance industries are uncomfortable with trusts and pools**
**Number of participants too small to build reserves in a reasonable time**
**Many participants are small; lack resources to make a significant contribution**
**The indemnification regime, originally envisioned as a supplement for catastrophic accidents, can also be a backup in case a large third-party liability claim anywhere in the world curtails insurance availability**
**Without backup, some U.S. commercial launch providers may have to suspend activity for an indefinite period, or even exit the market**
**Alternatives that involve government subsidies or increased oversight would cost more than the current regime (in the absence of a catastrophic accident)**

## ... and Options

**Maintain government sharing of low-probability, but potentially high-consequence, third-party liability risk**
**or**
**Phase-out U.S. government (taxpayer) risk exposure for this hazardous private-sector activity**

## Option 1: Maintain USG Risk-Sharing

**Make indemnification permanent**
**The sunset provision introduces uncertainty in the business environment and provides ammunition for the marketing efforts of foreign competitors**
**Remove the cap on Tier 2 indemnification**
**Since the payment of a Tier 2 claim is subject to the congressional appropriations process, the cap is unnecessary – Congress has complete control over the size of any payment**

## Option 2: Phase Out USG Risk-Sharing

**Upon expiration of current indemnification statute, initiate requirement for industry to cover Tier 3 liability by creating a pool or trust. USG's Tier 2 commitment remains unchanged initially. **
**When pool reaches $500 million, or after 5 years – whichever comes first – USG's Tier 2 commitment is reduced to $1 billion.***
**When pool reaches $1 billion/10 years, USG's Tier 2 commitment reduces to $500 million.**
**When pool reaches $1.5 billion/15 years, the roles reverse. The industry pool, with a regulatory requirement to maintain a minimum value of $1.5 billion, becomes Tier 2. USG risk-sharing moves to Tier 3, with no cap and no sunset provision, but retaining the requirement for an appropriations bill.**
**At this stage and at regular intervals thereafter, FAA does an assessment of the minimum required value of the industry pool, and recommends to Congress any changes deemed necessary.**

*** All values stated in 1988 dollars**

## Phase-Out Strategy, Tiers 2 & 3

## Implementation Concerns of Phase-Out Plan

**Is five years a long enough interval between stages?**
**Requires industry to increase pool's value an average of $100 million per year ($171 million in 2006 dollars) to match USG indemnification withdrawn at each stage**
**What would be a fair contribution scheme that could achieve the pool’s targets?**
**Industry has diverse array of companies with widely varying resources**
**Large companies may be forced to provide the bulk of contributions due to small number of players in U.S. launch market**
**If the industry experiences high turnover during the process, will this doom the effort to reach the pool's targets?**
**Companies that leave the industry would rightfully expect their pool contributions, plus interest, to be returned**
**Would this be the last straw for either large launch providers or entrepreneurs?**
**Cost of participating in pool could drive companies out of the commercial launch business or offshore**