06 April 2011

Where's The "Fukushima Response Fund"?

A prominent feature of the U.S. government's response to the Deepwater Horizon / Macondo blowout disaster was the creation of the "Spill Response Fund", a $20 billion escrow account set up by BP to cover anticipated damage claims, clean-up and mitigation expenses, and other costs. Why has the Japanese government not negotiate a similar fund to cover claims arising from the Fukushima nuclear power plant disaster?

The establishment of this fund was a key political response of the Obama administration to show the nation that it was going to hold BP responsible for the damage the blowout would cause, including reimbursing the government for many of its costs. The fund was announced less than four weeks after the initial explosion at the Deepwater Horizon. The Government of Japan seems much less astute about the need to show that it is going to hold Tokyo Electric Power Company to account.

According to this Reuters story TEPCO is already in negotiations with the government on what share of damages the taxpayers will cover. TEPCO "said it must first assess the extent of damage before paying actual compensation. 'We are still in discussion as to what extent we will pay on our own and to what extent we will have assistance from the government,' TEPCO executive vice-president Takashi Fujimotohe told a news conference." As far as I know the government has not denied this. What a contrast with the U.S. response to Macondo.

[Update 19 April 2011 2320 GMT: This MSNBC story quotes Japanese Economy, Trade and Industry Minister Banri Kaieda: "While TEPCO will be primarily responsible for damages payments, the government may have to support the firm, we are considering taxation, the electricity charge and other measures to enable the government to shoulder some of the burden." Imagine if Obama had said that.]

[Update 9 May 2012 1400 GMT: BBC reports that Japanese government will effectively take over TEPCO, owning more than half its voting shares "in return for a one trillion yen ($12.5bn; £7.8bn) taxpayer bailout". Actually the cost to taxpayers and electricity ratepayers is much higher than that. And who says the Japanese government will be wiser managers of TEPCO than its own incompetent former management?]

Since the anticipated costs of the Fukushima disaster run to $40 billion or more (see estimates in this earlier post), and this amount may exceed TEPCO's resources of cash, credit and salable assets, the company and the government are in a difficult position.

How Would a "Nuclear Disaster Response Fund" Work?

One of the key features of the Deepwater Horizon Spill Response Fund was that BP didn't have to come up with the cash all at once. It was required to pay $3 billion into the fund in third quarter of 2010 and $2 billion in fourth quarter, followed by payments of $1.25 billion per quarter until it had set aside the full $20 billion. This means that as of now, one year after the disaster, it has only actually paid in about $7-8 billion. The fund is supposed to cover claims under "the claims process required under the Oil Pollution Act of 1990 . . . and certain other claims, including natural resource damages and state and local response costs." [Source BP press release]

At the time the fund was announced BP said it would post its U.S. assets as bond to assure that the fund contributions would be made. (Later this was modified to back the fund with BP's future U.S. production revenues.) This bond is perhaps moot, since it now looks like the fund will only have to cover about $10 billion in payouts (see this Bloomberg article), and that amount will have been deposited in the fund within a few months.

The Japanese government could make a similar deal with TEPCO. The size of the fund would have to be about $20 billion. (This would cover estimated damage claims and costs related to releases of radioactivity form the plant, and much of the cost of containment, clean-up and mothballing of the damaged facility.)

Since TEPCO is a much smaller company than BP (about one-fifth in terms of revenues) such a commitment would be much more difficult for it to meet. But TEPCO still has billions of dollars in annual cash flow from ongoing electricity sales even without the output of Fukushima Number One. This revenue stream could be pledged to guarantee the fund would be completed. Alternatively, the assets that generate this revenue stream are worth about $20 billion. They could be put up as collateral, and if necessary sold to generate the cash to complete the fund.

I don't know what remaining borrowing capacity TEPCO has, and its existing bondholders are already justifiably nervous. But the government could make guaranteed or otherwise subsidized loans to TEPCO to enable it to build the fund. This would be another way for the government to shift some of the costs of the disaster to taxpayers without obviously paying costs directly.

And of course as a regulated utility monopoly its rates are set in consultation with government regulators. Those regulators could raise rates to account for higher costs due to the disaster, essentially getting electricity consumers to subsidize some of the anticipated expenses. We have not heard about this yet, but I am sure it will be part of the government's response to rescue TEPCO.

The Japanese government does have some ways to minimize TEPCO's exposure and costs without actually taking on those costs itself. This Reuters story indicates the government may impose energy conservation measures to prevent the need for blackouts, which might otherwise be needed this summer when electricity demand in eastern Japan is expected to exceed supply by about 10% due to the loss of Fukushima Number One's generating capacity. This could effectively shield TEPCO from liability claims for harm business would have suffered due to such blackouts. This would reduce its potential liability by many billions of dollars without the government having to pay out anything.

Eventually TEPCO may have to be broken up and its remaining generating and distribution assets sold. Indeed this might be a fair result. It reaped profits for years operating in a certain way, and now that that mode of operation has resulted in huge losses it is only fair that the shareholders bear the burden. Their company is now worth next to nothing (market capitalization is down to about 10% of what it was before the recent events).

So here is a scenario:
  • The Japanese government and TEPCO agree to the establishment of a $20 billion fund to pay claims for economic losses associated with the Fukushima Number One incident, especially losses associated with release of radioactive material from the plant. The fund could also be used for environmental cleanup, acquisition of contaminated land, and other such costs.
  • TEPCO pledges its assets as collateral for completion of the fund. 
  • TEPCO makes an initial $3 billion contribution to the fund, and undertakes to contribute another $1.5 billion quarterly until the facility is fully funded.
  • The government guarantees special disaster loans to TEPCO, enabling it to make the contributions to the fund. (The government may already effectively be doing this, since major banks have continued to make loans to TEPCO. I doubt they would do so for a company with such an uncertain future unless they had assurance that the government would back the loans if needed.)
  • Electricity regulators increase rates to TEPCO customers to assure an adequate revenue stream to pay back the loans.
  • Optional: TEPCO is forced into bankruptcy and a reorganized "New TEPCO" emerges with significant government ownership (similar to the way the U.S. government took stakes in Chrysler and General Motors to support their bankruptcies and reorganization). "New TEPCO" leaves behind its major liabilities such as the damaged Fukushima Number One plant (perhaps in government hands) and eventually the government can sell its shares and re-privatize the company. Current bondholders take a haircut.  
  • Optional: Eventually the mothballed Fukushima Number One site is transferred to the Japanese government, together with any nearby contaminated land that has been acquired. The government is responsible for monitoring the site for some decades and then decommissioning it. Maybe TEPCO or its successors can be required to post a bond or create a fund to cover the eventual cost of decommissioning.
  • If the experience of the Spill Response Fund is a guide, the total of claims paid and remediation costs may be less than $20 billion. Any funds remaining can be used to pay down the loans made to create the fund.
  • In order for the government to get paid back for its loans, or to eventually sell its shares if it has become part-owner of "New TEPCO", the company will have to be allowed to rebuild and increase its revenues, through construction of new generating capacity and rate increases. Obviously the entire top management has to go, and better management practices must be adopted.
This approach essentially combines the "response fund" concept developed to reassure the public after the Macondo blowout, and aspects of the U.S. government's financing of the bankruptcies and reorganizations of Chrysler and General Motors.

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