Statement of Barry P. Brownstein, Ph.D. Before the Subcommittee on Energy and the Environment U.S. House of Representatives The Price - Anderson Act: Should It Be Renewed? I am happy to have the opportunity to explain why the PriceAnderson Act should be allowed to expire. I am not an expert on the safety of nuclear power plants, but I need not apoligize for that omission in my background. Indeed no one in this room, nor no potential witness, could ever hope to match the expertise of the capital and insurance markets in judging the safety and viability of nuclear power. What the Price-Anderson Act does is allow the impartial judgment of the capital and insurance markets to be overridden by special interest groups and self-proclaimed experts. The consequences of overriding the judgment of the market place are not in keeping with a sound energy policy. Since the Price-Anderson Act was originally passed over 150 billion dollars has been spent on the construction alone of nuclear power plants 150 billion dollars which may well have been spent on other energy alternatives in the absence of Price-Anderson. Not a single nuclear power plant can purchase more than 160 million dollars of liability insurance, which is but a small fraction of the possible losses in case of an accident. By means of com parison, liability insurance coverage of $500 million per flight is not uncommon in the airline industry. Although nuclear power plants probably would not have to carry enough insurance to cover the worst case scenario, it is not clear whether sufficient insurance to satisfy the financial markets could be obtained if Price-Anderson was to expire. Without "adequate" insurance, as judged by the financial markets, it is possible that the utility borrowing funds in the bond market could not obtain financing at a reasonable cost or perhaps at all. Pro-nuclear forces might argue that nuclear power plants are not fully insurable not because they are unsafe, but because precise odds of an accident cannot be worked out. This objection displays a total lack of understanding of the nature of the insurance in a free market. It is precisely the available information or lack of it which must be taken into account when an insurance company sets its premiums or decides not to market insurance at all for a particular activity. On a free market, premiums tend to settle towards an actuarial fair premium (the odds of an accident, as calculated by the insurance company, multiplied by the possible damages in an accident), plus a "normal" rate of profit. If all insurance companies are miscalculating the uncertainty involved with nuclear energy, one would expect other firms to enter into the industry in search of profits. Thus the Price-Anderson Act is a subsidy without which it is possible the industry would not exist. But we need not worry about the consequences of this possibility. One of the great strengths of the market place is that it does not require experts to allocate resources or to forecast the future. Indeed the information needed to coordinate a market is not, cannot, and need not be in the hands of any single individual. When an energy resource becomes scarcer, the market mechanism working through prices and profits ensures that there is no disruption in energy supplies. Motivated by profits, entrepreneurs are continually seeking out less costly means of producing energy. The earning of profits is possible when there is a divergence between where a resource is being used and where it could be used to better satisfy the most urgent needs of consumers and society. if nuclear energy was desirable from the standpoint of the most urgent needs of consumers, there would be no need for governmental policies to encourage its use. Thus On the other hand a nuclear power plant is unprofitable only if the consuming public would realize more satisfaction from the production and consumption of another energy project. Hence a major result of the government subsidization of any form of energy is that resources are diverted from the area of their highest-valued use. Since Price - Anderson reduces the cost of nuclear energy below the free-market cost, it is a subsidy that encourages the use of nuclear power at the expense of other forms of energy. 38-299 0-84--43 3 The recent NRC proposal which amends Price-Anderson by substituting for the liability ceiling an expanded system of retrospective premiums is also inconsistent with a sound energy policy. To be fair such a proposal has at least one advantage over the current system. That is the financial markets would more closely examine the industry, taking into account the possibility of substantially higher costs in their ratings. However since under the NRC proposal the amount of insurance nuclear power plants would carry still would not be determined by the financial markets, the proposed review would still leave the act as a subsidy that misallocates resources to nuclear energy. Government policies which subsidize any energy source, be it nuclear or solar, promote energy problems. Instead, allowing the Price-Anderson Act to expire and relying on the free-market will ensure that the current trend of falling energy which is the long-term historical trend will continue. - Of all the seemingly endless debates in American society, certainly one of the most needless has been the debate over the safety and economic viability of nuclear energy. Citing statistics and using arguments that range from sophisticated sophistry to incredible idiocy, a vast army of politicians, intellectuals, academics, and lobbying groups has been debating this issue for almost three decades. In all, the debate has been an excellent example of Thomas Sowell's point that sometimes the only ultimate validation of an idea is if it sounds plausible enough to people or to the right people. [1] While the debate goes on, usually centered on the role of government, few individuals seem to realize that nuclear power might not exist in the absence of government intervention. The conservative, usually in favor of more nuclear power, generally sees the problem as a surfeit of regulation. [2] The liberal, generally opposed to nuclear power, sees the problem one of too little governmental regulation of this dangerous power source and reacts with such suggestions as Ralph Nader's proposal to hire one million government guards for nuclear power plants. [3] as There are many forms of government subsidization of the nuclear power industry. These subsidies include the sponsorship of research, enrichment of fuels, and disposal of nuclear wastes. Through payments by the nuclear utilities into a trust fund, the government is to take possession of all used fuel by 1998. [4] In spite of its free-market rhetoric, the Reagan administration has favored extending financial backing to the nuclear industry, including the Clinch River Breeder Reactor. As Richard Holwill of the Heritage Foundation writes, the Reagan administration "gives the appearance of being for a free market in all things conventional, but virtually socialist on nuclear power." [5] These subsidies do not necessarily establish the nonviability of the nuclear power industry, in that it is conceivable that these functions could be taken over by private industry. However, the one government-furnished privilege that the nuclear Barry P. Brownstein is an associate professor of economics |