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

2 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

3 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

4 Chapter 1: Introduction Description of current risk-sharing regime Acknowledgement of U.S. treaty obligation for 3 rd 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: oEnhancing international competitiveness of the U.S. space transportation industry oMaintaining continuity in the business/risk environment for U.S. launch providers oEncouraging new entrants to the U.S. launch market

5 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

6... 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

7 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

8... 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

9 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

10 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)

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

12 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 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

13 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

14 Phase-Out Strategy, Tiers 2 & dollars (billions) USG risk sharing (subject to congressional appropriation) Industry responsibility

15 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