It’s taken nearly two decades, but the Nuclear Regulatory Commission has finally given a green light for the pre-startup test of a “new” reactor at Oak Ridge, Tennessee. Better late than never, perhaps, but the announcement should cause head scratching about why the United States is so far behind the nuclear curve. 

The United States produces about one-third of the world’s nuclear-generated electricity, but many of its existing atomic power plants are technologically obsolete. When the Tennessee Valley Authority brings its Watts Bar Unit 2 online, the  “Generation II” reactor will already have been surpassed by Generation III reactors in Canada, France and Japan. 

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Half a century ago, the United States was the only member of the global nuclear club. After detonating atomic bombs at Hiroshima and Nagasaki, Washington’s attention turned to civilian uses of nuclear power. “Atoms for Peace” was a catchphrase of the day. The Cold War was well underway then and civilian reactors were seen as a key producer of nuclear materials destined for military use. 

To jumpstart nuclear power in the United States, and to assuage fears that utilities would go bankrupt if radioactive materials were accidentally released into the atmosphere, Congress passed – and President Eisenhower signed – the Price-Anderson Nuclear Industries Indemnity Act in 1957.  

Price-Anderson caps financial liabilities arising from a nuclear “incident” at any private company that handles, processes or uses radioactive materials, including generating electric power. The cap is $12.6 billion as of 2011. Private insurers nowadays indemnify the nuclear industry’s accident losses up to $375 million, up from just $60 million in 1957.

Price-Anderson is triggered only when a company and its private insurers are unable to pay claims for accident-related damage to persons and property. In such an event, but not until it happens, the entire industry is required to contribute up to $121.255 million per installed reactor into a fund to compensate victims.

Taxpayers potentially are on the hook for nuclear accidents only for the amount of damages that exceeds the fund’s capacity to pay. Price-Anderson also allows the insurance fund’s administrator to seek supplementary payments from the industry, and so taxpayers’ financial exposure following a major accident is unclear. 

Fortunately, the United States never has witnessed a nuclear event beyond the ability of the industry and its private insurers to cover damage claims. Payouts of $70 million followed the 1979 accident at Pennsylvania’s Three-Mile Island; another $65 million in compensation has been paid since 1957 for nuclear accident victims at facilities operated by the Department of Energy, which also fall under Price-Anderson’s rules. 

Some critics charge that the federal liability limit encourages the nuclear power industry not to insure adequately against accidents. But that criticism is untested because all damage claims thus far have been paid without recourse to Price-Anderson’s secondary insurance fund. Nevertheless, the very large expected costs of a major nuclear event, unlikely as it may be, explain why private insurers are unwilling to underwrite fully any and all future accident claims. 

Price-Anderson clearly is a form of corporate welfare that indemnifies the nuclear industry in a worst-case scenario. Although the law doesn’t allow the industry to get off scot-free for all injuries it may cause and it doesn’t prevent injured parties from seeking compensation, the industry’s support for its periodic reauthorization suggests that it highly values Price-Anderson protections. 

From an economist’s perspective, the downside of Price-Anderson, as with insurance in general, is that it encourages behavior known as “moral hazard.” Because the nuclear industry itself will not bear the full costs of a devastating accident, such accidents are more likely to happen than otherwise.

Shughart, research director of Independent Institute, is J. Fish Smith Professor in Public Choice at Utah State University’s Huntsman School of Business.