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Study of the Liability Risk Sharing Regime in the United States for Commercial Space Transportation. James A. Vedda, Ph.D. The Aerospace Corporation Center for Space Policy & Strategy. October 2006. Background.

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slide1

Study of the Liability Risk Sharing Regime

in the United States

for Commercial Space Transportation

James A. Vedda, Ph.D.

The Aerospace Corporation

Center for Space Policy & Strategy

October 2006

background
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
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
Chapter 1: Introduction
  • Description of current risk-sharing regime
  • Acknowledgement of U.S. treaty obligation for 3rd 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
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
... 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
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
... 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
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
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

House and Senate staffers requested that the report present options rather than make specific recommendations

... 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

FAA should continue to monitor indicators of industry maturity, stability, and financial strength and alert Congress when the landscape has evolved sufficiently to warrant changes

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
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

3

3

1.5

3

Industry responsibility

3

1.0

1988 dollars (billions)

2

USG risk sharing (subject to congressional appropriation)

2

2

0.5

2

2015

2020

2025

Phase-Out Strategy, Tiers 2 & 3
implementation concerns of phase out plan
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