James A. Vedda, Ph.D. The Aerospace Corporation Center for Space Policy & Strategy

1. 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

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 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

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. 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

12. 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

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. 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

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