Nuclear Regulation: NRC's Liability Insurance Requirements for Nuclear Power Plants Owned by Limited Liability Companies
Released: 2004-06-08T00:00:00

Letter

Background

The Atomic Energy Act of 1954 authorized a comprehensive regulatory program to permit private industry to develop and apply atomic energy for peaceful uses, such as generating electricity from privately owned nuclear power plants. Soon thereafter, government and industry experts identified a major impediment to accomplishing the act’s objective: the potential for payment of damages resulting from a nuclear accident and the lack of adequate available insurance. Unwilling to risk huge financial liability, private companies viewed even the remote specter of a serious accident as a roadblock to their participating in the development and use of nuclear power. In addition, congressional concern developed over ensuring adequate financial protection to the public because the public had no assurance that it would receive compensation for personal injury or property damages from the liable party in event of a serious accident. Faced with these concerns, the Congress enacted the Price-Anderson Act in September 1957. The Price-Anderson Act has two underlying objectives: (1) to establish a mechanism for compensating the public for personal injury or property damage in the event of a nuclear accident and (2) to encourage the development of nuclear power.

To provide financial protection, the Price-Anderson Act requires commercial nuclear reactors to be insured to the maximum level of primary insurance available from private insurers. To implement this provision, NRC periodically revises its regulations to require licensees of nuclear reactors to increase their coverage level as the private insurance market increases the maximum level of primary insurance that it is willing to offer. For example, in January 2003, NRC increased the required coverage from $200 million to the current $300 million, when American Nuclear Insurers informed NRC that $300 million per site in coverage was now available in its insurance pool.

In 1975, the Price-Anderson Act was amended to require licensees to pay a pro-rated share of the damages in excess of the primary insurance amount.

Under this amendment, each licensee would pay up to $5 million in retrospective premiums per facility it owned per incident if a nuclear accident resulted in damages exceeding the amount of primary insurance coverage. In 1988, the act was further amended to increase the maximum retrospective premium to $63 million per reactor per incident to be adjusted by NRC for inflation. The amendment also limited the maximum annual retrospective premium per reactor to $10 million. Under the act, NRC is to adjust the maximum amount of retrospective premiums every 5 years using the aggregate change in the Consumer Price Index for urban consumers. In August 2003, NRC set the current maximum retrospective payment at $95.8 million per reactor per incident. With 103 operating nuclear power plants, this secondary insurance pool would total about $10 billion.

The Price-Anderson Act also provides a process to deal with incidents in which the damages exceed the primary and secondary insurance coverage. Under the act, NRC shall survey the causes and extent of the damage and submit a report on the results to, among others, the Congress and the courts. The courts must determine whether public liability exceeds the liability limits available in the primary insurance and secondary retrospective premiums. Then the President would submit to the Congress an estimate of the financial extent of damages, recommendations for additional sources of funds, and one or more compensation plans for full and prompt compensation for all valid claims. In addition, NRC can request the Congress to appropriate funds. The most serious incident at a U.S. nuclear power plant took place in 1979 at the Three Mile Island Nuclear Station in Pennsylvania. That incident has resulted in $70 million in liability claims.

NRC’s regulatory activities include licensing nuclear reactors and overseeing their safe operation. Licensees must meet NRC regulations to obtain and retain their license to operate a nuclear facility. NRC carries out reviews of financial qualifications of reactor licensees when they apply for a license or if the license is transferred, including requiring applicants to demonstrate that they possess or have reasonable assurance of obtaining funds necessary to cover estimated operating costs for the period of the license. NRC does not systematically review its licensees’ financial qualifications once it has issued the license unless it has reason to believe this is necessary. In addition, NRC performs inspections to verify that a licensee’s activities are properly conducted to ensure safe operations in accordance with NRC’s regulations. NRC can issue sanctions to licensees who violate its regulations. These sanctions include notices of violation; civil penalties of up to $100,000 per violation per day; and orders that may modify, suspend, or revoke a license.

Limited Liability Companies Are Licensees for 31 of the 103 Operating Commercial Nuclear Power Plants in the United States

Thirty-one commercial nuclear power plants nationwide are licensed to limited liability companies. In total, 11 limited liability companies are licensed to own nuclear power plants. Three energy corporations—Exelon, Entergy, and the Constellation Energy Group—are the parent companies for 8 of these limited liability companies. These eight subsidiaries are licensed or co-licensed to operate 27 of the 31 plants. The two subsidiaries of the Exelon Corporation are the licensees for 15 plants and the co- licensees for 4 others. Constellation Energy Group, Inc., and Entergy Corporation are the parent companies of limited liability companies that are licensees for four nuclear power plants each. (See table 1.)

Of all the limited liability companies, Exelon Generation Company, LLC, has the largest number of plants. It is the licensee for 12 plants and co- licensee with PSEG Nuclear, LLC, for 4 other plants. For these 4 plants, Exelon Generation owns 43 percent of Salem Nuclear Generating Stations 1 and 2 and 50 percent of Peach Bottom Atomic Power Stations 2 and 3. (App. I lists all the licensees and their nuclear power plants.)

NRC Has Specific Requirements and Procedures to Ensure That All Licensees Comply with the Price- Anderson Act’s Liability Provisions

NRC requires licensees of nuclear power plants to comply with the Price- Anderson Act’s liability insurance provisions by maintaining the necessary primary and secondary insurance coverage. First, NRC ensures that licensees comply with the primary insurance coverage requirement by requiring them to submit proof of coverage in the amount of $300 million. Second, NRC ensures compliance with the requirement for secondary coverage by accepting the certified copy of the licensee’s bond for payment of retrospective premiums.

All the nuclear power plant licensees purchase their primary insurance from American Nuclear Insurers. American Nuclear Insurers sends NRC annual endorsements documenting proof of primary insurance after the licensees have paid their annual premiums. NRC and each licensee also sign an indemnity agreement, stating that the licensee will maintain an insurance policy in the required amount. This agreement, which is in effect as long as the owner is licensed to operate the plant, guarantees reimbursement of liability claims against the licensee in the event of a nuclear incident through the liability insurance. The agency can suspend or revoke the license if a licensee does not maintain the insurance, but according to an NRC official, no licensee has ever failed to pay its annual primary insurance premium and American Nuclear Insurers would notify NRC if a licensee failed to pay.

As proof of their secondary insurance coverage, licensees must provide evidence that they are maintaining a guarantee of payment of retrospective premiums. Under NRC regulations, the licensee must provide NRC with evidence that it maintains one of the following six types of guarantees: (1) surety bond, (2) letter of credit, (3) revolving credit/term loan arrangement, (4) maintenance of escrow deposits of government securities, (5) annual certified financial statement showing either that a cash flow can be generated and would be available for payment of retrospective premiums within 3 months after submission of the statement or a cash reserve or combination of these, or (6) such other type of guarantee as may be approved by the Commission.

Before the late 1990s, the licensees provided financial statements to NRC as evidence of their ability to pay retrospective premiums. According to NRC officials, in the late 1990s, Entergy asked NRC to accept the bond for payment of retrospective premiums that it had with American Nuclear Insurers as complying with the sixth option under NRC’s regulations: such other type of guarantee as may be approved by the Commission. After reviewing and agreeing to Entergy’s request, NRC decided to accept the bond from all the licensees as meeting NRC’s requirements. NRC officials told us that they did not document this decision with Commission papers or incorporate it into the regulations because they did not view this as necessary under the regulations.

The bond for payment of retrospective premiums is a contractual agreement between the licensee and American Nuclear Insurers that obligates the licensee to pay American Nuclear Insurers the retrospective premiums. Each licensee signs this bond and furnishes NRC with a certified copy. In the event that claims exhaust primary coverage, American Nuclear Insurers would collect the retrospective premiums. If a licensee were not to pay its share of these retrospective premiums, American Nuclear Insurers would, under its agreement with the licensees, pay for up to three defaults or up to $30 million in 1 year of the premiums and attempt to collect this amount later from the defaulting licensees. According to an American Nuclear Insurers official, any additional defaults would reduce the amount available for retrospective payments. An American Nuclear Insurers official told us that his organization believes that the bond for payment of retrospective premiums is legally binding and obligates the licensee to pay the premium. Under NRC regulations, if a licensee fails to pay the assessed deferred premium, NRC reserves the right to pay those premiums on behalf of the licensee and recover the amount of such premiums from the licensee.

NRC Treats Limited Liability Companies the Same as Other Licensees, but the Insurance Industry Has Added Important Requirements for These Companies

NRC applies the same rules to limited liability companies that it does to other licensees of nuclear power plants with respect to liability requirements under the Price-Anderson Act.

All licensees must meet the same requirements regardless of whether they are limited liability companies. American Nuclear Insurers applies an additional requirement for limited liability companies with respect to secondary insurance coverage in order to ensure that they have sufficient assets to pay retrospective premiums. Given the growing number of nuclear power plants licensed to limited liability companies, NRC is examining the need to revise its procedures and regulations for such companies.

NRC requires all licensees of nuclear power plants to follow the same regulations and procedures. Limited liability companies, like other licensees, are required to show that they are maintaining the $300 million in primary insurance coverage and provide NRC a copy of the bond for payment of retrospective premiums or other approved evidence of guarantee of retrospective premium payments. According to NRC officials, all its licensees, including those that are limited liability companies, have sufficient assets to cover the retrospective premiums. While NRC does not conduct in-depth financial reviews specifically to determine licensees’ ability to pay retrospective premiums, it reviews the licensees’ financial ability to safely operate their plants and to contribute decommissioning funds for the future retirement of the plants. According to NRC officials, if licensees have the financial resources to cover these two larger expenses, they are likely to be capable of paying their retrospective premiums.

American Nuclear Insurers goes further than NRC and requires licensees that are limited liability companies to provide a letter of guarantee from their parent or other affiliated companies with sufficient assets to cover the retrospective premiums. An American Nuclear Insurers official stated that American Nuclear Insurers obtains these letters as a matter of good business practice. These letters state that the parent or an affiliated company is responsible for paying the retrospective premiums if the limited liability company does not. If the parent company or other affiliated company of a limited liability company does not provide a letter of guarantee, American Nuclear Insurers could refuse to issue the bond for payment of retrospective premiums and the company would have to have another means to show NRC proof of secondary insurance. American Nuclear Insurers informs NRC that it has received these letters of guarantee. The official also told us that American Nuclear Insurers believes that the letters from the parent companies or other affiliated companies of the limited liability company licensed by NRC are valid and legally enforceable contracts.

NRC officials told us that they were not aware of any problems caused by limited liability companies owning nuclear power plants and that NRC currently does not regard limited liability companies’ ownership of nuclear power plants as a concern. However, because these companies are becoming more prevalent as owners of nuclear power plants, NRC is examining whether it needs to revise any of its regulations or procedures for these licensees. NRC estimates that it will complete its study by the end of summer 2004.

Agency Comments

We provided a draft of this report to NRC for review and comment. In its written comments (see app. II), NRC stated that it believes the report accurately reflects the present insurance system for nuclear power plants. NRC said that we correctly conclude that the agency does not treat limited liability companies differently than other licensees with respect to Price- Anderson’s insurance requirements. NRC also stated that we are correct in noting that it is not aware of any problems caused by limited liability companies owning nuclear power plants and that NRC currently does not regard limited liability companies’ ownership of nuclear power plants as a concern. In addition, NRC commented that we agree with the agency’s conclusion that all its reactor licensees have sufficient assets that they are likely to be able to pay the retrospective premiums. With respect to this last comment, the report does not take a position on the licensees’ ability to pay the retrospective premiums. We did not evaluate the sufficiency of the individual licensees’ assets to make these payments. Instead, we reviewed NRC’s and the American Nuclear Insurers’ requirements and procedures for retrospective premiums.

Scope and Methodology

We performed our review at NRC headquarters in Washington, D.C. We reviewed statutes, regulations, and appropriate guidance as well as interviewed agency officials to determine the relevant statutory framework of the Price-Anderson Act. To determine the number of nuclear power plant licensees that are limited liability companies, we surveyed, through electronic mail, all the NRC project managers responsible for maintaining nuclear power plant licenses. We asked them to provide data on the licensees, including the licensee’s name and whether it was a limited liability company. If it was a limited liability company, we asked when the license was transferred to the limited liability company and who is the parent company of the limited liability company. We received responses for all 103 nuclear power plants currently licensed to operate. We analyzed the results of the survey responses. We verified the reliability of the data from a random sample of project managers by requesting copies of the power plant licenses and then comparing the power plant licenses to the data provided by the project managers. The data agreed in all cases. We concluded that the data were reliable enough for the purposes of this report.

To determine NRC’s requirements for ensuring that licensees of nuclear power plants comply with the Price-Anderson Act’s liability requirements, we reviewed relevant statutes and NRC regulations and interviewed NRC officials responsible for ensuring that licensees have primary and secondary insurance coverage. We also spoke with American Nuclear Insurers officials responsible for issuing the insurance coverage to nuclear power plant licensees, and we reviewed relevant documents associated with the insurance. To determine whether and how these procedures differ for licensees that are limited liability companies, we reviewed relevant documents, including NRC regulations, and interviewed NRC officials responsible for ensuring licensee compliance with Price-Anderson Act requirements.

As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 7 days from the date of this letter. We will then send copies to interested congressional committees; the Commissioners, Nuclear Regulatory Commission; the Director, Office of Management and Budget; and other interested parties. We will make copies available to others on request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov.

If you or your staff have any questions about this report, I can be reached at (202) 512-3841. Major contributors to this report include Ray Smith, Ilene Pollack, and Amy Webbink. John Delicath and Judy Pagano also contributed to this report.

Nuclear Power Plant Ownership

Entergy Arkansas, Inc.

Entergy Arkansas, Inc.

FirstEnergy Nuclear Operating Company No Cleveland Electric Illuminating Company No FirstEnergy Nuclear Operating Company No Exelon Generation Company, LLC Exelon Generation Company, LLC Carolina Power & Light Co.

North Carolina Eastern Municipal Power Agency Carolina Power & Light Co.

Constellation Energy Group, Inc.

Constellation Energy Group, Inc.

Catawba Nuclear Station 1 North Carolina Electric Membership Saluda River Electric Cooperative, Inc.

Catawba Nuclear Station 2 North Carolina Municipal Power Agency AmerGen Energy Company, LLC City of New Smyrna Beach and Utilities Commission Orlando Utilities Commission and City of Orlando Seminole Electric Cooperative, Inc.

Pacific Gas and Electric Company Exelon Generation Company, LLC Exelon Generation Company, LLC Entergy Nuclear FitzPatrick, LLC Rochester Gas and Electric Corporation No 39 Grand Gulf Nuclear Station System Energy Resources, Inc.

South Mississippi Electric Power Assoc. No Carolina Power & Light Co.

Entergy Nuclear Indian Point 2, LLC Entergy Nuclear Indian Point 3, LLC Wisconsin Public Service Corp.

Exelon Generation Company, LLC Exelon Generation Company, LLC Exelon Generation Company, LLC Exelon Generation Company, LLC Dominion Nuclear Connecticut, Inc.

Dominion Nuclear Connecticut, Inc.

Central Vermont Public Service Corporation Massachusetts Municipal Wholesale Electric Co.

Entergy Nuclear Generation Co.

Exelon Generation Company, LLC Exelon Generation Company, LLC Entergy Gulf States, Inc.

Carolina Power & Light Co.

FPL Group, Inc.

Massachusetts Municipal Wholesale Electric Co.

AmerGen Energy Company, LLC Florida Power and Light Company Florida Power and Light Company Entergy Nuclear Vermont Yankee, LLC Entergy Nuclear Operations, Inc.

Municipal Electric Authority of Georgia City of Dalton, Georgia Municipal Electric Authority of Georgia City of Dalton, Georgia Entergy Operations, Inc.

Comments from the Nuclear Regulatory Commission

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