ML23151A570

PRM-050-051 A&B - 53FR36335 - American Nuclear Insurers and Maerp Reinsurance Association, Et Al. Filing of Petition for Rulemaking

ML23151A570
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Issue date:	09/19/1988
From:	Chilk S NRC/SECY
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PRM-050-051 A&B, 53FR36335
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ADAMS Template: SECY-067 09/19/1988

,r PRM-050-051 A&B - 53FR36335 - AMERICAN NUCLEAR INSURERS AND MAERP REINSURANCE ASSOCIATION, ET AL. FILING OF PETITION FOR RULEMAKING PRM-050-051 A&B 53FR36335 RULEMAKING COMMENTS Document Sensitivity: Non-sensitive - SUNSI Review Complete

STATUS OF RULBMAltING PROPOSED RULE:

PRM-050-051 A&B RULB HAMB:

AMERICAN NUCLEAR INSURERS AND IIAERP REINSURANCE AS SOCIATION, ET AL. PILING OP PETITION FOR RULBMAKIN G

PROPOSED RULE PED REG CITES 53FR36335 PROPOSED RULE PUBLICATION DATE:

09/19/88 ORIGINAL DATE FOR COMMENTS1 11/18/88 NUMBER OF COMMENTS:

EXTENSION DATE:

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4 PINAL RULB PED. REG. CITEI 55FR12163 FINAL RULE PUBLICATION DATE: 04/02/90 NOTES ON PETITION IS CONCERNED WITH PROPERTY INSURANCE REQUIREMENTS. SEB LA TATOS TER DEVELOPMEN'l' OP A PROPOSED RULE, PR-SO (54 FR 46624). PETITION RUL GRA!JTED AT 55 FR 12163.

PILE LOCATED ON Pl.

TO FIND THE STAFP' CONTACT OR VIEW THE RULEMAKING HISTORY PRESS PAGE DOWN KEY HISTORY OP THE RULE PART AJ'FECTED: PRM-050-051 A&B RULB TITLE:

,.OPOSED ROLB AMERICAN NUCLEAR INSURERS AND MAERP REINSURANCE AS SOCIATION, ET AL. PILING OP PETITION FOR RULEMAKIN G

PROPOSED ROLE DATE PROPOSED ROLE SECY PAPER: 89-258 SRM DATE:

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SIGNED BY SECRETARY:

PINAL RULE PINAL RULB DATE FINAL ROLE SECY PAPER:

SRM DATE:

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SIGNED BY SECRETARY:

STAPF CONTACTS ON THE RULE 09/14/88 I

I CONTACTl: JUANITA BEESON CONTACT2:

MAIL STOP: W-537 MAIL STOP:

PHONE: 492-8926 PHONE:

DOCKET NO. PRM-050-051 AlB (53FR36335)

In the Matter of AMERICAN NUCLEAR INSURERS AND MAERP REINSURANCE AS SOCIATION, ET AL. FILING OF PETITION FOR RULEMAKIN G

DATE DATE OF TITLE OR DOCKETED DOCUMENT DESCRIPTION OF DOCUMENT 07/07/87 07/05/87 07/07/87 07/05/87 07/22/87 07/21/87 08/25/88 08/22/88 09/08/88 09/02/88 10/17/88 10/14/88 ll/!7/88 11/15/88 PROPOSED RULE PETITION FOR RULEMAKING PETITION FOR RULEMAKING FROM BISHOP, COOK, PURCELL l REYNOLDS COMMENT OF WISCONSIN POWER l LIGHT COMPANY (EUGENE 0. GEHL, EXECUTIVE Y.P.) (

1)

COMMENT OF MADISON GAS AND ELECTRIC (DAVID C. MEBANE, SENIOR Y. P.) {

2)

COMMENT OF PACIFIC GAS AND ELECTIRIC COMPANY (J. D. SHIFFER) (

3)

COMMENT OF BISHOP, COOK, PURCELL l REYNOLDS (JOSEPH B. KNOTTS) (

4)

DOCKET NUMBER SOJ s I PRM PET\\TION RULE_ -

is 3 FR 3b33Ls,:,CES B'°5HOP, COOK, PURCELL & REYNOLDS 1400 L STREET, N.W.

WASHINGTON, D.C. 20005 -350 2 (202) 371-5 700 vf~,t.,

,.\\JlLI oocKE I 1H WRITER'S DIRECT DIAL November 15, 1988 Secretary

u. s. Nuclear Regulatory Commission Washington, D.C. 20555 Attention: Docketing and Service Branch T ELEX: 440S7 I~

~ UI TELECOPIER: (202) 371-5 9 50 Re: American Nuclear Insurers and MAERP Reinsurance Association, et al.; Filing of Petitions for Rulemaking (PRM-50-51, -51A, -51B, 53 Fed. Reg. 36335, September 19, 1988).

Dear Mr. Chilk:

on September 19, 1988, the Nuclear Regulatory Commission published in the Federal Register a notice of the filing of petitions for rulemaking, captioned as above.

On behalf of the Edison Electric Institute ("EEI") and the Nuclear Utility Management and Resources Council ("NUMARC") we urge that the EEI/NUMARC petition be adopted.

The reasons for our position with respect to the EEI/NUMARC petition are stated therein.

We believe that the other two filings are consistent with the EEI/NUMARC petition and that they can be accommodated by adopting changes along the lines of the amendments to 10 C.F.R. §50.54(w) proposed in the EEI/NUMARC petition.

Oz

Pacific Gas and Electric Company October 14, 1988 PG&E Letter No. DCL-88-241 Samuel J. Chilk, Secretary 77 Beale Street San Francisco, CA 94106 415/972-7000 TWX 910-372-6587 U. S. Nuclear Regulatory Commission Washington, D.C.

20555 Attention Docketing and Service Branch

Dear Mr. Chil k:

James D. Shiffer Vice President NuclW~IMet Generation

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Petitions for Rulemaking Regarding Property Insurance for NRC-Licensed Power Plants 53 FR 36335 On June 21, 1988, the Edison Electric Institute (EEI), the Nuclear Utility Management and Resources Council (NUMARC), and several nuclear licensees submitted a petition for rulemaking in connection with certain insurance requirements set forth in 10 CFR 50.54(w).

While Pacific Gas and Electric Company (PG&E) was not a named petititoner in that matter, we support the petition for modification of the insurance provisions of 10 CFR 50.54(w) for the reasons set forth in the petition.

Sincerely, J. D. S 2310S/0063K/EMG/2173 PACIFIC GAS AND ELECTRIC COM~ ~y Nuclear Regulatory Affairs 333 Market Street IA613 San Francisco, CA 94106

• *Cf EAR REGULA TORY COMM! SSIOR

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Madison Gas and Electric Company P.O. Box 1231 Madison, Wisconsin 53701 -1231 608-252-7000 mG6e.

September 2, 1988 Mr. Samuel J. Chilk Secretary U.S. Nuclear Regulatory Commission Washington, D. C.

20555

Dear Mr. Chilk:

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Subject:

In the Matter of Proposed Rulemaking Regarding Property Insurance for NRC-Licensed Power Plants, Docket No. PRM 50-As one of the co-owners of the Kewaunee nuclear plant in the town of Carlton, Wisconsin, an NRC-licensed plant, Madison Gas and Electric Company urges the NRC to accept the petition submitted on June 21, 1988, by Edison Electric Institute (EEI) and Nuclear Utility Management and Resources Council (NUMARC) relative to property insurance for NRC-licensed power plants.

The subject rulemaking, as proposed by the NRC, causes our Company some concerns because the rule, as promulgated, is in conflict with the terms of our mortgage indenture and would cause us some significant problems with our Trustee.

The

• f outlined in the petition submitted by EE! and d alleviate our concerns.

j and db General Offices: 133 South Blair Street, Madison, Wisconsin 53701 1231

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Wisconsin Power 6 Light Company Investor-Owned Energy 222 West Washington Avenue P.O. Box 192 Madison WI 53701-0192 Phone 608/252-331"-88 AUG 25 P 3 :35 EXECUTIVE OFFICES Mr. Samuel J. Chilk Secretary August 22, 1988 U. S. Nuclear Regulatory Commission Washington, D.C.

20555 RE:

In the Matter of Proposed Rulemaking Regarding Property Insurance For NRC-Licensed Power Plants Docket No. PRM 50-__ _

Dear Mr. Chilk:

On June 21, 1988, Edison Electric Institute (EEI) and Nuclear Utility Management and Resources Council (NUMARC) submitted a Petition for Rulemaking relative to property insurance for NRC-licensed power plants.

Wisconsin Power and Light Company (WP&L) was not one of the petitioners; however, it is a co-owner of the Kewaunee Nuclear Power Plant in the Town of Carlton, an NRC-licensed plant, and therefore has an interest in this proceeding.

WP&L has significant concerns as to the insurance requirements in the rule promulgated by NRC because it is at variance with the provisions of its mortgage indenture.

Such variance creates problems whoch do not advance the interests sought to be advanced by NRC and are disruptive of WP&L's insurance program.

WP&L would urge NRC to accept the petition and to grant the relief requested.

EOG:jb Very truly yours, e_'i -i.-o. h.t Eugene 0. Gehl Executive Vice President and General Counsel Wisconsin 's heartland *.* on the g~.-

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DOCKETING & SERVICE SECT IC OFFICE OF THE SECR ET ARY OF THE COMMISS IO '

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DOCKET NUMBER I

PETITION RULE PRM =A_S

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PETITION FOR RULEMAKING Introduction

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We submit this petition for rulemaking pursuant to 10 C.F.R.

§ 2.802 on behalf of our clients, Nuclear Mutual Limited

("NML")

and Nuclear Electric Insurance Limited

("NEIL"),

two utility-owned Bermuda mutual insurance companies which provide insurance coverage, as described herein, with respect to nuclear power plant risks.

On July 31, 1987, the Nuclear Regulatory Commission (the "Commission")

issued by final rulemaking "Changes in Property Insurance Requirements for NRC Licensed Nuclear Power Plants," 10 C.F.R. § 50.54(w) (the "Rule").

52 Fed. Reg. 28963-73.

The Rule mandates that each nuclear reactor licensee, as a condition of its

license, meet certain onsite property damage insurance requirements for each of its nuclear reactor station sites.

Petitioners request that the Commission amend the Rule by adopting the amendments set forth in Attachment No. l* hereto.

To allow the Commission time to consider our comments and those of other petitioners, we request that the Commission immediately

suspend, or grant exemptions to, or otherwise relieve the licensees from, the requirement of the Rule that the proceeds of property insurance maintained pursuant to the Rule be payable to This attachment was prepared by the Edison Electric Institute

("EEI")

and the Nuclear Utility Management and Resources Council ("NUMARC") and submitted as part of their petition for rulemaking.

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an independent special trustee (the "Special Trustee").

At a

minimum, if the Commission should decide not to grant the requested relief, we ask that the Commission amend the Rule to require that the trust (the "Special Trust") and decontamination priority provisions be incorporated in insurance policies becoming effective on or after October 4, 1988.*

Petitioners Interest As insurers of nuclear property risks, petitioners have an obvious interest in the Rule.

NML provides

$500 million of primary property insurance to about 50% of the nation's nuclear reactor station sites.

NEIL provides

$775 million of decontamination liability and excess property insurance to virtually every nuclear reactor station site in the country.

Without purchasing insurance from NEIL, a licensee cannot meet the $1.06 billion minimum amount required by the Rule.

Petitioners have previously submitted comments on the Commission's Advance Notice of Proposed Rulemaking on Mandatory Property Insurance for Decontamination of Nuclear Reactors

( 4 7 Fed. Reg. 27371).**

Petitioners also wrote to the Commission with By letter dated January 27, 1988 Petitioners advised the Commission of its view that the Rule required that the Special Trust provisions be incorporated in insurance policies becoming effective on or after October 4,

1988.

The Commission advised Petitioners on April 13, 1988 that policies in effect on October 4, 1988 would need to contain the Special Trust provisions.

The Commission noted that it had determined the effective date, in part, by relying on an Apri 1 15, 19 85 letter from Baker

& McKenzie, counsel to Petitioners.

We point out,

however, that the concerns raised in the 1985 letter are identical to the concerns raised in 1988:

The policies are bi lateral contracts which can only be amended mid-term with the consent of each party.

Such consent may require permission from regulatory officials and reinsurers.

In 1985 we asked that the effective date be one "that permitted consideration of proposed policy changes

• at an annual meeting [held each June], with the new policies there-approved then issuing at next renewal date."

Then and now, this would be after October of the relevant year.

• • See letters from Baker & McKenzie, on behalf of NML and NEIL, respectively, dated September 20, 1982.

1694n/sdp 2 -

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respect to the effective date of the Rule and with respect to miscellaneous problems relating to the new Rule.*

Argument in support of Petition BACKGROUND The Rule is intended to insure that sufficient funds are available to stabilize and decontaminate a damaged reactor to the extent necessary to protect public health and safety.

The provisions relating to the Special Trustee, in particular, are designed to avoid the possible competing claims on such funds by the trustee under the utility"s mortgage indenture (the "Indenture Trustee")

or, in the event of insolvency, the creditors or claimants against the bankrupt estate or the receiver or trustee in bankruptcy (collectively referred to as the "Bankrupt Estate").

Under the

Rule, each licensee must obtain insurance coverage for each nuclear reactor station site in an amount equal to the lesser of

$1.06 billion or the amount of insurance generally available.

Section 50.54(w) (1).

The proceeds of such insurance must be used first to ensure the reactor is in a safe and stable condition and can be maintained in that condition.

Section 50.54(w)(3)(i).

The licensee must then prepare and submit a

cleanup plan for the Director's approval.

Following review of the licensee's plan, the Director will order the licensee to complete all operations necessary to decontaminate the reactor.

Section 50.54(w)(3)(iii).

Any remaining insurance proceeds must then be used first to complete the decontamination operations specified in the Director's order.

.I_d.

The insurance proceeds subject to the paragraph (w)(3) decontamination priority must be paid to a

"separate trust established for the sole purpose of paying for costs incurred in decontaminating the reactor and removing radioactive debris."

The Special Trust and the Special Trustee must "be acceptable" to the Commission.

Section 50.54(w)(4).

See letters from Baker & McKenzie, on behalf of NEIL and NML, dated April 16, 1985 and January 29, 1988, to Mr. Robert S.

Wood of the Office of Nuclear Reactor Regulation and January 27, 1988, to Dr. Thomas E. Murley, Director of the Office of Nuclear Reactor Regulation.

1694n/sdp 3 -

SUMMARY

OF ARGUMENT The Commission adopted the Special Trust provisions without notice to interested parties.

The Commission was thus not afforded the benefit of comments from these parties on the effectiveness and feasibility of the Special Trust provisions.

Interested parties, including Petitioners, were precluded from proposing workable alternative arrangements to achieve the Commission"s objectives.

The Special Trust provisions of the Rule should be deleted. They are unnecessary and do not advance the Commission's goal of making funds available for decontamination.

First, the licensees can provide the Commission with satisfactory assurance that insurance proceeds will not be diverted to nondecontamination purposes by purchasing insurance under a

combination liability/property form with a

decontamination priority.

Second, recent judicial decisions have substantially enhanced the Commission"s ability to compel the Bankrupt Estate to comply with Commission regulations aimed at protecting the public health and safety.

The Special Trust fails to protect the insurance proceeds from claims of Indenture Trustees.

The Rule should be amended so that it does not refer to property insurance, but to insurance for the licensee"s liability or obligation to stabilize or decontaminate.

Finally, it is well possible that an acceptable Special Trustee will not be found easily, or at all.

Even if found, interposing a

Special Trustee may increase the potential for conflicts and thus may delay rather than expedite the disbursement of the insurance proceeds.

DISCUSSION I. No Opportunity to Comment The requirement that insurance policy proceeds be paid to a Special Trustee is a major change from the interim rule issued in March 1982 and the rule proposed in 1984.

• The Commission Changes in Property Insurance Requirements for NRC Licensed Nuclear Power Plants, 49 Fed. Reg. 44654.

1694n/sdp 4 -

introduced this provision without notice to interested parties.

Such parties, including the Petitioners, were thus denied the opportunity to comment.

The Commission should have allowed discussion on this significant matter and thus afforded itself and others the benefit of other submissions.

The Commission should suspend the Special Trust provisions of the Rule, or grant exemptions to or otherwise relieve the licensees from such provisions, or at least delay their effective date until all interested parties have had a

reasonable opportunity to make submissions regarding this matter.

In particular, the Commission should allow insurers and insureds an opportunity to comment on this major change in insurance requirements which has such a major impact on them.

II.

The Need For A Special Trust The Commission adopted the Special Trust in response to comments received from the Association of the Bar of the City of New York (the "Bar Association").*

The Bar Association recommended the Special Trust because of its concern that the licensee might be prevented from using the insurance proceeds it received to decontaminate the damaged reactor.

In particular, the Bar Association was concerned about the claims of creditors of a bankrupt licensee and was uncertain about the Commission's ability to compel the licensee to decontaminate in the bankruptcy context.

The Bar Association and the Commission assumed that under an insurance policy with a decontamination priority the licensee would have access to insurance proceeds with discretion over their use.

This assumption may rest on a misapprehension.

Under the NEIL policy, for example, insurance policy proceeds are not payable for decontamination until after the licensee has incurred a decontamination expense.

This inaccuracy only highlights the problem with issuing the Rule without the benefit of comment from insurers and others knowledgeable in this area.

A.

The Nuclear Insurance Policies The primary property policies issued by NML and American Nuclear Insurers

("ANI"),

which carry policy limits of

$500 million, are very similar.

The insurer agrees to indemnify the

insured, in the event of accidental damage to the insured property, up to the actual cash value (or replacement cost value)

See 52 Fed. Reg. at 28971.

1694n/sdp 5 -

of the loss, but not exceeding the cost to repair or replace the damaged property.

The insurer also agrees to indemnify the insured for costs necessarily incurred in decontaminating and removing debris of the damaged property.

In the event of a loss, the insured must submit a proof of loss, or claim, stating, among other things, the amount of its loss.

If the insured chooses to repair or decontaminate or remove debris of the damaged property, it can recover the amounts so expended.

If not, it can recover the actual cash value of the damaged property, subject to the limitations referred to above, and then use the proceeds as it wishes (subject to the claim of the Indenture Trustee, discussed below).

NEIL offers a combination decontamination liability and excess property insurance policy, with a policy limit of $775

million, providing coverage for losses in excess of

$500 million.,

NEIL agrees to indemnify the insured for the expenses necessarily incurred in discharging the insured' s obligation to decontaminate the damaged property.

To the extent proceeds are not so utilized, NEIL' s policy covers property losses which, in general, would be covered by the underlying property policy, if its limit of liability were not exhausted.

In the event of a loss, the insured must submit a proof of loss.

If it seeks recovery under the liability coverage, the insured must attest to its liability and indicate the expenses it has incurred.

If it seeks recovery for property losses, the insured must attest that no funds are needed to discharge its decontamination liability, or that the funds needed will not exceed a stated amount (freeing the balance of the funds for property losses).

The basis of the recovery for property losses is the same as that under the primary policies.

With a decontamination priority, the primary policies and the excess policies would restrict payment to the insured until it incurs a decontamination expense.

In effect, the insured must decontaminate property before submitting a claim to the insurance company.

Thus, it is not possible for the insurance proceeds to be diverted to other purposes.

A Special Trust does not provide additional protection against diversion.

B.

The Commission's Ability To Compel Decontamination Both the Bar Association and the Commission expressed concerns regarding the Commission"s ability to compel a bankrupt licensee to decontaminate and to assure priority under the Bankruptcy Code for expenditures of funds for public heal th and safety.

Bar Association Letter to NRC, 2/5/85, at 7; 52 Fed.

Reg. at 28971.

There have been helpful decisions in this area since the Bar Association made its comments,

however, which indicate that the Commission can require decontamination and can require the Bankrupt Estate to give priority to expenditures for 1694n/sdp 6 -

this purpose.*

We have summarized below recent decisions which bear on these issues.

1. The Bankrupt Estate's Obligation to Decontaminate The Bankrupt Estate cannot abandon property in contravention of regulations designed to protect the public health and safety, Midlantic National Bank v.

New Jersey Department of Environmental Protection, 4743 u.s. 494 (1986),

and also cannot maintain property in contravention of such regulations.

In Re Wall Tube & Metal Products Co., 831 F.2d 118 (6th Cir. 1987).

In Midlantic, the Supreme Court ruled that the bankruptcy trustee cannot avoid its obligations to comply with environmental laws by seeking to abandon the prope,rty pursuant to Section 554 of the Bankruptcy Code.

The debtor had violated certain state hazardous substance laws.

The debtor declared bankruptcy and the trustee in bankruptcy sought to abandon the property pursuant to Section 554.

The City and the State of New York objected, contending that abandonment would threaten the public's heal th and safety, and would violate state and federal environmental law.

The Supreme Court held that a

bankruptcy trustee "may not abandon property in contravention of a state statute or regulation that is reasonably designed to protect the public health or safety from identified hazards."

474 U.S. at 501.

The Supreme Court quoted from its earlier opinion in Ohio v.

Kovacs, 469 u.s. 274, 285 (1985):

[W]e do not question that anyone in possession of the site whether it is [the debtor]

or the bankruptcy trustee must comply with the environmental laws of the State of Ohio.

Plainly, that person or firm may not maintain a nuisance, pollute the waters of the State, or refuse to remove the source of such conditions.

.Id. at 499.

There can be no question that the abandonment power is equally restricted by federal law and regulations protecting the public's health and safety.

Commission regulations, including the Rule, should be deemed to constitute regulations "reasonably designed to protect the public health ot safety from identified hazards."

The Bar Association, by letter submitted this week, in which it asked the Commission to revise the Rule (primarily because of concerns with respect to the conflict with utility mortgage indentures),

noted that recent decisions in this area have improved the Commission's ability to compel a bankrupt licensee to decontaminate.

1694n/sdp 7 -

The Sixth Circuit has followed Kovacs and Midlantic and has also held that the bankruptcy trustee must comply with environmental laws.

In Wall Tube, the debtor was responsible for the release of certain hazardous wastes on its site and shortly thereafter filed a petition in bankruptcy.

The Sixth Circuit held that if the bankruptcy trustee could not abandon the site, "neither then should he have maintained or possessed the estate in continuous violation" of the applicable hazardous substance laws.

831 F.2d at 122.

The Court, citing Kovacs and Midlantic, stated:

"Just as plainly, Wall Tube, and later its trustee, should have complied with the State's hazardous substance laws."

.I..d.

In.In Re Peerless Plating Co., 70 B.R. 943 (Bkrptcy. W.D. Mich. 1987),

the Court reached a similar conclusion.

The debtor had caused the site of its business operations to become contaminated with hazardous waste and had shortly thereafter filed for bankruptcy.

Under the Comprehensive Envi ronmenta 1 Response, Compensation and Liability Act of 1980 ("CERCLA"), 42 U.S.C. § 9607, the owner of a hazardous waste site is liable for all costs of remedial action incurred by the United States Government.

The Court held that the bankrupt estate was subject to CERCLA and the estate could not avoid liability by abandonment.

The Court stated that "if the Trustee cannot abandon the property under Midlantic without complying with

CERCLA, that creates an implicit duty on the Trustee's part to expend the estate's unencumbered assets in cleaning up the site in compliance with CERCLA."

70 B.R. at 948.

As the Rule constitutes a

fundamental element of regulations reasonably designed to protect the public health or safety from identified hazards, the Bankrupt Estate (as the person in possession and control of the contaminated site) would be bound by the stabilization and decontamination priorities set forth in the Rule.

Therefore, the Bankrupt Estate will not be permitted to abandon the site and must comply with applicable Commission regulations.

The Bankrupt Estate also must use the property in the estate to pay for the costs of stabilization and decontamination prior to the payment of such funds to creditors of the utility.

2. Enforcement Actions by the Commission Under the Bankruptcy Code, the Commission has a clear right, despite the commencement of bankruptcy proceedings, to take action to enforce the Bankrupt Estate's obligation to clean up.

Section 362(a) of the Bankruptcy Code provides that the filing of a petition in bankruptcy operates as an automatic stay of most creditor claims and legal proceedings against the debtor.

However, the filing of a petition will not operate as a stay of

( i) "the commencement or continuation of an action or proceeding by a governmental unit to enforce such governmental unit's police or regulatory power" or (ii) "the enforcement of a judgment, other than a money judgment, obtained in an action or proceeding by a 1694n/sdp 8 -

governmental unit regulatory power."

to enforce such governmental unit's police Sections 362(b)(4) and (5), respectively.

or Under Sections 362(b) (4) and (5), a governmental unit, such as the Commission, can commence an action to compel a person to comply with its police or regulatory power.

The Commission also will be able to enforce judgments (other than monetary judgments) obtained in such regard, such as affirmative equitable injunctions ordering compliance with the relevant regulatory law.

An action commenced by an agency to protect the environment or the public health and safety is such an exercise of the police or regulatory power of the government.

Such actions, therefore, will not be automatically stayed by Section 3 62 (a).

Furthermore, enforcement actions which may require the debtor to expend money to enable it to comply with a judgment ordering compliance with environmental or public protection laws do not constitute enforcement of a money judgment.

Such actions, therefore, will be permitted and not

stayed, even though compliance with such judgments would require expenditure of the estate's property to the detriment of its creditors.

Therefore, the Bankrupt Estate can be required to expend funds to comply with Commission regulations and the Commission can commence actions to enforce such compliance.

These principles are illustrated by Penn Terra Limited

v. Department of Environmental Resources, 733 F.2d 267 (3d Cir.

1984).

The debtor was engaged in strip mining and had violated certain state environmental laws in operating its business.

The debtor entered into a consent order listing corrective measures to be taken, and subsequently, the debtor filed for bankruptcy.

The Department of Environmental Resources ("DER") then sought an injunction in state court requiring the debtor to correct the environmental violations and to enforce the terms of the consent order.

The state court granted the injunction, whereupon the debtor brought a contempt action against the DER, contending that the state injunction proceedings violated the automatic stay provision of Section 362(a).

The Third Circuit affirmed the grant of the state injunction and rejected an argument that such an injunction constituted the enforcement of a money judgment.

The Court held that the DER's actions came within the police or regulatory power of the state and that the injunction was, neither in form nor substance, the type of remedy traditionally associated with a conventional money judgment.

The injunction was not a monetary judgment even though it necessarily required the expenditure of funds by the debtor to comply with the injunction.

The Court said that in enacting the exceptions to the automatic stay in Section 362, "Congress recognized that in some circumstances, bankruptcy policy must yield to higher priori ties."

.I.d, at 278.

The injunction granted by the Court was intended to prevent future harm to, and to restore, the 1694n/sdp 9 -

environment.

The Third Circuit's position is well supported by other cases.

See, ~, Matter of Commonwealth Oil and Refining

.c.o__,,_,

805 F.2d 1175 (5th Cir.

1986);

U.S.

y.

ILCO, Inc.,

48 B.R. 1016 (N.D. Ala. 1985).

III.

The Workability Of The Special Trust Even if there were a

need to provide a

mechanism to segregate insurance

proceeds, petitioners believe that the Special Trust provisions of the Rule fail to provide assurance that funds will be available for decontamination.

The Special Trust provisions do not insulate the insurance proceeds from claims by the Indenture Trustee.

Moreover, the Commission may have underestimated the difficulty of finding an acceptable trustee.

A.

The Indenture Trustee Problem The standard utility mortgage indenture contains two provisions which require consideration.

The first provision (the "Insurance Clause"), requires that the utility mortgagor maintain such property insurance as is maintained by S'imilar companies operating similar properties.

The second provision (the "Loss Payee Clause"),

requires that the proceeds of

.fillY property insurance which the utility does purchase on the mortgaged property (even if not required by the Insurance Clause) must be paid in the first instance to the Indenture Trustee.

In its letters of comment to the Commission, the Bar Association stated that a

decontamination priority would not directly violate the Insurance Clause.

It noted that this provision does not give the bondholders any vested right to a given amount or type of coverage.

Bar Association Letter to NRC, 2/5/85, at 3; Bar Association Letter to NRC, 9/22/82, at 6.

The Commission, in its notice of rulemaking, concurred with the Bar Association's comments.

52 Fed. Reg. at 28969.

It is the Loss Payee Clause which creates the problem.

Under the current primary property policies, payments made prior to the entry of an order to decontaminate must be made to the Indenture Trustee and generally will be released to pay the costs of stabilization only if such expenditures are deemed necessary to repair or replace the damaged property.

Upon the issuance of the Di'rector' s order, under the present NML and ANI policies, payment of policy proceeds to a Special Trustee risks conflicting claims from the Indenture Trustee.

Absent revision of the Rule, the insurers, to avoid liability, could find themselves compelled to make payment into court or jointly to a 11 parties, as their interests appear.

In both situations, availability of the 1694n/sdp 10 -

insurance proceeds for decontamination could be long delayed.*

NEIL's present approach avoids the Indenture Trustee

problem, since it has structured its policy as a

combination "liability/property" insurance policy.

Coverage for the utility's obligation to decontaminate is regarded as a "liability insurance" coverage and payments are made directly to the utility.

Payments made for property

losses, once the decontamination liability is met, are paid to the Indenture Trustee.

The NEIL approach, which NML is prepared to emulate, seeks to avoid conflict with the Indenture Trustee.

Absent this approach, it is difficult to see how the claims of the Indenture Trustee can be avoided.

Petitioners believe the NEIL excess policy as presently drafted adequately protects the insurance proceeds from claims by the Indenture Trustee.

The Rule's Special Trust provisions do not provide such protection.

Rather, the Special Trust provisions conflict with the standard mortgage indenture's Loss Payee

Clause, forcing the Indenture Trustee to contest the payment of the insurance proceeds to the Special Trustee.

The Bar Association did recognize that requiring payment of policy proceeds to an entity other than the Indenture Trustee would violate the Loss Payee Clause.

It wrote:

[U]tility indentures generally require the utility to maintain in force property insurance to the same extent as companies similarly situated and operating like properties, and not a particular level of coverage.

We therefore believe that the present form of primary property insurance policy would have to be modified along the lines of the NEIL II excess policy to become something of a

hybrid decontamination liability and property insurance policy.

Otherwise as a pure property insurance policy, the proceeds must, according to the indenture, be paid to the indenture trustee.

By specifying coverage for decontamination liability as distinct from property damage, we believe that the NEIL II approach overcomes the utility indenture problems discussed above.

[Emphasis added.]

Bar Association Letter to

NRC, 2/5/85, at

14.

The Bar Association suggested that the NEIL combination "liability/property" form be used, since liability insurance does not constitute insurance on the mortgaged property.

.I..d__.__

The Commission did not adopt this part of the recommendation.

1694n/sdp 11 -

B.

Identifying An Acceptable Special Trustee Section 50.54(w)(4) provides that the Special Trustee must be acceptable to the Commission.

Our conversations to date with representative of potential trustees suggest that it may be very difficult to convince any institution to act as Special Trustee, absent total relief from exercising any discretion whatsoever and assurance that suitable indemnification protection can be arranged.

There are also significant conflicts of interest issues to be addressed since almost every major commercial bank or trust company also acts as Indenture Trustee to at least one utility.

It is well possible that an acceptable Special Trustee will not be found easily, or at all.

IV.

Alternatives To The Special Trust There are workable alternatives for dealing with potential claims of the Indenture Trustee or the Bankrupt Estate.

We believe that the Commission's goals can be more readily achieved if the Commission adopted the draft rule appended hereto as Attachment No. 1.

Under the draft rule proposed, licensees would purchase insurance covering their liability to decontaminate the reactor station site.

It may be helpful to use an example to illustrate how the insurance policy would work to prevent the diversion of insurance proceeds to nondecontamination purposes.

In the event of a

nuclear accident, the NEIL policy would require that proceeds first be used to pay the expenses necessarily incurred in discharging the insured's liability to decontaminate the plant.

As noted above, payments to the utility for this purpose do not violate the mortgage indenture because the coverage does not constitute property insurance.

The NEIL form (unlike the existing primary property

forms, which do not have a

decontamination priority), however, also helps in the bankruptcy context.

It pays for such expenses only as they are incurred.

Only by decontaminating the plant can the utility or the Bankrupt Estate (since the bankruptcy cannot increase the insured's rights under the policy*)

receive insurance proceeds for The NEIL policy requires that the proceeds be used first to pay expenses necessarily incurred in discharging the insured's obligation to decontaminate the damaged reactor.

The Bankrupt Estate may elect to assume or reject executory contracts, such as the NEIL policy, but it cannot assume or reject them in part.

In Re Nitec Paper Corporation, 43 B.R.

492, 498 (S.D.N.Y. 1984).

Thus, once it assumes the contract, it will be bound by its terms.

1694n/sdp 12 -

decontamination.*

Thus, absent decontamination, neither the Indenture Trustee nor the Bankrupt Estate would have a claim on the insurance proceeds.

Conclusions As written, the Rule does not achieve the Commission's objective --

to provide assurance that sufficient funds will be available, in the event of an

accident, to stabilize and decontaminate a nuclear reactor station site.

The Special Trust provisions do not protect the insurance proceeds from claims of the Indenture Trustee and may well further complicate an already difficult situation.

In any event, as noted above, there are better ways to achieve the Commission's objectives.

We therefore urge the issuance of a

rule in the form attached hereto as Attachment No. 1.

Respectfully submitted, BAKER & McKENZIE, on behalf of NUCLEAR MUTUAL LIMITED and NUCLEAR ELECTRIC INSURANCE LIMITED As noted on page 5, the NEIL policy is not totally inflexible.

If the insured seeks funds for property losses, it must attest that no funds are needed to discharge its decontamination liability, or that the funds needed will not exceed a stated amount.

The balance of the funds are thus freed to pay for property losses, notwithstanding that the funds "earmarked" for decontamination have not actually been expended.

NML is prepared to emulate this feature of the NEIL policy as well.

1694n/sdp 13 -

1 Attachrrent No. 1 Prepared by the Edison Electric Institute and the Nuclear Utility r'anagerent and Resources Council MARK-UP OF§ S0,54Cw) WITH PROPOSED CHANGES (Proposed additions are shown in bold with underscoring; proposed deletions are indicated by brackets and striking through the language to be deleted.)

S 50.54 Conditions ot licenses.

(w)

(1) 1.ll Each electric utility licensee under this part for a production or utilization facility of the type described in§ 50.21(b) or§ 50.22 shall, by June 29, 1982, take reasonable steps to obtain [e~-s1/4~e-pre~er~y-damage) insurance, available at reasonable costs and on reasonable terms from private sources or to demonstrate to the satisfaction of the commission that it possesses an equivalent amount of protection covering the

[foei1/4itYTl licensee's obligation, in the event of a siqnificut contamination event at the li9ensee 1s reactor, to stabilize and decontaminate the reacto; station site at which the unit experiencing such event is located as provided in this subsection, Provided that:

[~n~s]-fht insurance required by this subsection must have a minimum coverage limit [£er-~ne] with respect to ugh reactor station site of either $1.06 billion or whatever amount of insurance is generally available from private sources, whichever is less. The required insurance may, at the option ot the licensee, be included within policies that also provids coverage tor other risks, including, but not limited to, the risk of direct physical damage. In such cases, all such policies shall clearly state that any proceeds shall be payable first for stabilization and next for decontamination of the reactor station site as and to the extent provided herein, and that any such optional 99verage or coverages are subject thereto, If a licensee's coverage falls below the required minimum, the licensee shall within 60 days take all reasonable steps to restore its coverage to the required minimum.

Effective ____,

, [a date which allows sufficient time for development and approval of changes in policies

1, I

of insurance after the effective date of a final rule adopted in accordance with this petition] with respect to policies issued or annually renewed thereafter, the proceeds of such required insurance shall be dedicated, as and to the extent provided herein, to reimbursement or payment op behalf of the insured of reasonablt expenses incurred by the licensee in taking action to fulfill the licensee's obligation, in the event ot a significant contamination event at the 1iaens1*11 reactor, unless otherwise ordered or approved by the Director of the ottioe ot Nuclear Reactor Regulation, to ensure that the reactor is in, or is returned to, and maintained in, a sate and stable condition and tbat radioactive contamination is removed or controlled such that personnel exposures are consistent with th*

occupational exposure limits in 10 CFR Part 20.

such actions shall be consistent with any other obligation the licensee may have under this chapter and shall be subject to paragraphs <4> and hereof, As used in this paragraph, a "significant contamination event" means an event that involves the release of radioactive material from its intended place ot confinement within the plant or on the reactor station site such that there is a present danger of release offsit* in amounts that would pose a threat to public health and safety it stabilization and decontamination expenses or expenses for other appropriate remedial action in an amount equal to or greater than the threshhold level set forth in suparagrapb (41 were not taken,

([i]A) The licensee shall report to the NRC on Aprill of each year the current levels of this insurance or financial security it maintains and the sources of this insurance or financial security.

{[~]!) (i) The proceeds ot the insurance required by paragraph (21 hereof, if and to the extent applicable, shall be used first to ensure that the licensed reactor is in a safe and stable condition and can be maintained in that condition so as to prevent any significant risk to the public health and safety.

The licensee shall inform the Director of the Office of Nuclear Reactor Regulation in writing when that condition is attained. This priority on insurance proceeds for such stabilization of th*

reactor shall attach where expenditures for ptabilization and decontamination with respect to a significant contamination event appear likely to exceed s100 million, and shall remain in effect for 30 days or,

µpon order ot the Director, for such longer period, in ingrements not to exceed 30 days, as the Director may find is necessary to protect the public health and

• safety, The actions appropriate to bring the reactor tg a sate and stable qondition and maintain it in that condition generally include thosez

.J.Al_ to shut down the reactorz 1.BL to establish long-term cooling:

J.QL to control radioactive releases: and

~

to secure structures, systems. or components to minimize el(posure to onsite personnel or the otfsite public to radiation or to tacilitate later decontamination or both.

(ii) Within thirty (30) days after the licensee informs the Director of the Office of Nuclear Re.actor Regulation that the reactor is and can be maintained in a safe and stable condition, or at such earlier time as the licensee may elect or the Director may tor good cause direct, the licensee shall prepare and submit a cleanup plan for the Director's approval.

The plan shall identify all cleanup operations that will be required to decontaminate the reactor sufficiently to permit the licensee either to resume operation or to [eel!lll\\eftee] undertake measure*

leading to decommissioning of the reactor in a manner that is consistent with the Commission's occupational exposure limits in 10 C.F.R. Part 20, and shall provide the estimated expenditures for each suoh operation, If applicable, such operations shall include:

(A)

Processing any contaminated water generated by the accident and by decontamination operations to remove radioactive materials; (B)

Decontamination of surfaces inside the auxiliary and fuel handling buildings and the reactor building to levels consistent with the Commission's occupational exposure limits in 10 CFR Part 20, and decontamination or disposal of equipment; (C)

Decontamination or removal and disposal of internal parts and damaged fuel from the reactor vessel; and (D)

Cleanup of the reactor coolant system.

(iii)

Following review of the licensee's plan, the Director will order that the licensee complete all operations that the Director finds are necessary to decontaminate the reactor sufficiently to permit the licensee either to resume operation or to [eel!llllenee] undertake measures leading to.decommissioning of the reactor, in a manner that is consistent with the Commission's occupational exposure limits in 10 CFR Part 20.

[Any-prepeny insttranee-preeeeas-ne~-a1/4ready-expended-~e-p1/4aee-~e-reae~er-1/4n-a safe-and-s~ab1/4e-eend1/4~1/4en-pttrsttan~-~e-para!rapn-tvttStt1/4t-ef-~1/4s eee~1/4en-sha1/41/4-be-~sed-£!rs~-te-eemp1/4e~e-~hese-deeen~amina~ien epera~1/4ens-~ha~-are-~he-stth;eet-ef-~he-B1/4ree~erLs-erderT]

rll§.

Director shall approve or disapprove, tor stated.reasons, the licensee's estimate of expenditures tor such operations, Such order may not be effective for more than one year, at which time it may be renewed.

Each subsequent renewal order, if imposed, may be etfective for not more than six months.

riv> ot the balance ot the proceeds of the required insurance not already expended to place the reactor in a sate and stabl*

condition pursuant to paragraph <*><4> ot this sUbsection, an amount sufficient to cover the expenses of completion of those decontamination operations that are tbe sUbject ot the Director's order shall be dedicated to such use, Provided that, upon certification to the Director of the amounts expended previously an4 trom time to time tor stabilization and decontamination and upon turtbar certification to tbe pirector*as to the sufficiency ot the dedicated amount remaining, policies ot insurance may

rovide for payment to the licensee or other loss payees of amounts not so dedicated, and the licensee may proceed to usa in parallel <and not in preference thereto> any insurance proceeds not so dedicated for other purposes,

[t+t Preper~y-iftsttranee-preeeeds-stth;ee~-~e-~he deeen~am1/4na~1/4en-pr1/4er1/4~y-1/4n-~aragraph-tvtf9t-ef-~1/4s see~1/4en-m~s~-ee-payab1/4e-~e-a-separaee-~rtts~-es~ab1/41/4shed fer-~he-se1/4e-pttrpese-e£-pay1/4n!-£er-eests-1/4nettrred-1/4n

• deeentam1/4na~1/4ft!-the-reaeter-and-remevin!-rad1/4eae~1/4ve debrisT--~he-tirtts~-and-~rtts~ee-mtts~-8e-aeeep~ab1/4e-~e-~e eeffll!liss1/4enT--An-aeeeptae1/4e-~irttstee-ine1/4ttdes-an appreprfate-S~e~e-er-redera1/4-gevernmen~-ageney-er-an en~i~y-whieh-has-~he-attther1/4~y-~e-aet-as-a-~rttstee-and vhese-~rttst-eperat1/4ens-are-re!tt1/4a~ed-and-exam1/4ned-by-a Pedera1/4-er-state-ageneyT]

(5)

The sta~ilization and decontamination [pr1/4er1/4~y-and trtts~] requirements set forth in paragraph[s-tvtf9t-and]

{w) (4) of this section must[~

t1/4t Be-ineerpera~ed-1/4n-ensiee-preperey-damage-insttranee pe1/4ieies-fer-ntte1/4ear-pewer-p1/4an~s-nee-1/4a~er-~han-ee~e~er 4';-1/4988-and-t1/4it A]m,ply uniformly to all [ensi~e-preper~y-damage]

insurance policies [!er-n~e1/4ear-pewer-p1/4en~s] required under paragraph (w) ([:]a) of this section.

DOCKET NUMmitt PETITION RUL fl~

_, ~

L AW O FFICES

..53~~

BISHOP, COOK, PuRcELL & REYNo L os r':ot'KTr?*

,J--. "ft*.L WRITER' S DIRECT DIAL Mr. Samuel J. Chilk Secretary 1400 L STREET, N.W.

WASH INGTON, D.C. 20005*3502 (202) 371-5700 June 21, 1988 U.S. Nuclear Regulatory Commission Washington, D.C.

20555 ATTN:

Chief Docketing and Service Branch

Dear Mr. Chilk:

• aa J.IN 22 A11 :Q 7 OFF:.,::.

ooc Kr TEL.E~:"440574 INljL.AW u, T

ECO E : (202) 371-5950 I*

Transmitted herewith is a petition for rulemaking submitted on behalf of the Edison Electric Institute, NUMARC, and the other within-named petitioners.

The petition pertains to certain insurance requirements set forth in 10 C.F.R. §50.54 (w).

We are informed that certain insurers are filing petitions on the same subject, and we would respectfully suggest the consolidation of such petitions with the enclosed in a single rulemaking docket.

V~ry truly yours,

/ '

f. B. !~not ts, Jr.

~

el for Petitioners

.,I

(

p

UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION In the Matter of Proposed Rulemaking Regarding Property Insurance For NRC-Licensed Power Plants

)

)

)

)

PETITION FOR RULEMAKING Introduction Docket No.

PRM 50 -

5/l'J This petition for rulemaking is submitted pursuant to 10 C.F.R. §2.802 on behalf of the Edison Electric Institute

("EEI"), the Nuclear Utility Managem~nt and Resources Council

("NUMARC 111 and the power reactor licensees listed in the footnote.

Petitioners request that the Nuclear Regulatory Commission ("NRC") (1) suspend2forthwith (or otherwise relieve licensees from compliance with

}, pending completion of this

.l/ Arizona Public Service Company, Arkansas Power & Light Company, Baltimore Gas & Electric Company, Carolina Power &

Light Company, Cleveland Electric Illuminating Company, Commonwealth Edison Company, Consolidated Edison Company of New York, Inc., Duke Power Company, Florida Power & Light Company, Kansas city Power & Light company, Kansas Electric Power Cooperative, Kansas Gas & Electric Company, Louisiana Power & Light Company, Maine Yankee Atomic, New Hampshire Yankee, Ohio Edison Company, System Energy Resources, Inc.,

Toledo Edison Company, Union Electric Company, Vermont Yankee Nuclear, Wisconsin Electric Power, and Yankee Atomic Electric company.

y As explained herein, it appears that neither is it by any means assured that insurance policies providing for payment to an independent trustee will be available, nor is it likely that any such trustee willing, able, and ready to so serve will have beer. _located, and trust arrangements completed, by October 4, 1988.

In suspending or otherwise relieving licensees from compliance with the independent trustee provisions, the Commission could of course reserve the right to issue such orders to licensees regarding the use of available funds, including insurance proceeds, as may be (Footnote 2 continued*on next page)

2 -

rulemaking, the requirement that the proceeds of property insurance maintained pursuant to 10 c.F.R. §50.54(w) and subject to a decontamination priority imposed by order pursuant thereto be payable to an independent trustee and (2) amend, following notice and opportunity for comment, §50.54(w) to (a) delete the independent trustee provision, (b) define the concept of stabilization and subject stabilization costs, when they exceed a threshold amount, to the automatic priority, (c) require licensees to maintain $1.06 billion of insurance for their liability (established in the rule we propose) to stabilize and decontaminate a damaged reactor, and (d) clarify the means by which insurance proceeds not needed for stabilization or decontamination can be released from the priorities.

Petitioners' Interest Petitioner EEI is the association of investor-owned electric companies.

Its members operate 96 nuclear plants and currently have five additional units under construction, which is 88% of the nuclear electric generating capa~ity licensed for construction or operation in the United States.

NUMARC is an organization that represents, inter alia, all electric utilities licensed by the NRC to construct or operate nuclear power plants.

NUMARC is responsible for coordinating the combined efforts of its members in addressing generic operational and technical regulatory issues and to work with the NRC to obtain solutions to regulatory issues affecting nuclear plant construction and operation.

The individual electric utilities listed in footnote 1 are each licensed by the NRC to operate one or more nuclear power plants, each of which is subject to the property insurance requirements in §50.54(w).

Petitioners are therefore "interested persons" within the meaning of 10 C.F.R. §2.802.

Argument in Support of Petition

Background

Utilities licensed by the NRC to operate nuclear power reactors are currently subject to §50.54(w), which, as recently (Footnote 2 continued from previous page) required to protect the pubic health and safety in the unlikely event of a major accident (giving rise to the type of situation which the rule is designed to deal with) occurring in the interim pending completion of the rulemaking.

3 -

amended, 3 requires them to maintain $1.06 billion in property insurance to provide an assured source of funds for stabilizing and decontaminating their reactors in the event of an accident.

Following an accident, the proceeds of such insurance must be used first to ensure that the licensed reactor is in a safe and stable condition and can be maintained in that condition so as to prevent any significant risk to the public health and safety.

(What constitutes a "safe and stable condition" and what efforts, equipment and associated expenditures to achieve and maintain such condition are intended to be comprehended by the rule are not otherwise defined.)

The licensee must inform the NRC in writing when that condition is attained.

Within thirty days after the licensee informs the NRC that the reactor is, and can be maintained, in a safe and stable condition, the licensee must prepare and submit a cleanup plan for the NRC's approval.

The plan must identify all operations required to achieve the objectives of decontaminating the reactor sufficiently to resume operation or ~ommence decommissioning in a manner consistent with the occupational exposure limits in 10 C.F.R. Part 20.

(Unlike stabilization, examples are given of operations that may be included in the concept of decontamination: processing of contaminated water; surface decontamination of structures and decontamination or disposal of equipment; decontamination or removal and disposal of reactor internals and damaged fuel; and cleanup of the reactor coolant system.)

Following NRC review of the plan, it will order that the licensee complete all operations that are necessary to achieve the same objectives as specified in the rule for the plan itself.

All insurance proceeds not already expended to place the reactor in a safe and stable condition (i.e., the unexpended balance of the required $1.06 billion), shall be used first to complete those decontamina~ion operations that are the subject of the Director's order.

V 52 Fed. Reg. 28963, August 5, 1987.

.if It is not clear from the rule itself whether the plan submitted by the licensee can or must contain estimated expenditures for each operation, nor whether, if it does, the NRC will approve the estimated amounts, and thus free the unneeded proceeds for other purposes.

Some flexibility to use proceeds not needed for stabilization or decontamination was intended, however, since the statement of considerations that accompanied the amendments to the rule providing for the (Footnote 4 continued on next page)

4 -

Finally, the rule requires that property insurance proceeds subject to the decontamination priority must be payable to a separate trust established for the sole purpose of paying for costs incurred in decontaminating the reactor and removing radioactive debris.

The rule further provides that the trust and trustee must be acceptable to the NRC; however, no mechanism is specified for securing such approval.

The only standard provided is that the trustee can be an appropriate state or federal agency or an entity which has the authority to act as a trustee and whose trust operations are regulated and examined by a federal or a state agency.

The trust provision was never a part of a proposed rule; it was extracted (incompletely -- as explained in note 7) from one of the comments on the proposed rule and adopted without prior notice and opportunity for comment.

The trust provisions become effective October 4, 1988 (as we understand the effective date is being interpreted by NRC).

(Footnote 4 continued from previous page) plan and the priority order states that:

[t]he decontamination priority was not meant to be applied sequentially in that all expenditures on cleanup would have to be made before any others.

The priority has been worded to allow licensees flexibility, particularly after a reactor has been stabilized after an accident.

(52 Fed. Reg. 28963, 28970 col. 2)

5 -

summary of Argument As will be shown below, the trust provisions appear to be unworkable, unnecessary, ineffective, and will likely be counterproductive.

In any event, it seems clear that insurance policies providing for payment to such an independent trustee will not be available, and trust arrangements cannot be established and approved, in the late 1988 timeframe, if ever.

The trust provisions should therefore be suspended5 (or licensees otherwise relieved from compliance therewith) pending completion of this rulemaking.

Following notice and comment, the rule should be amended by deleting the requirement that proceeds subject to the priority be payable to an independent trustee and substituting the new requirement explained below.

A principal reason for deleting the independent trustee provisions is that they may lead to unwarranted delay in the availability of funding for post-accident cleanup while being ineffective to assure that one of the purposes of the rule can be achieved.

That purpose, of course, was to establish stabilization and decontamination as priority applications of policy proceeds so that the licensee need not obtain the release of such proceeds from the bond trustee under the typical first mortgage indenture.

But the NRC cannot require that property insurance proceeds be payable to anyone other than the indenture trustee since, unless and until the property insurance proceeds are released to be used for repair and return to service or replacement of damaged property, it is substitute collateral subject to the lien of the mortgage.

To avoid the bondholder issue, the NRC should delete the independent trustee provision and instead require insurance that covers the licensee's liability to make expenditures for stabilization and decontamination.

In addition, that liability needs to be clearly established in order to facilitate insurability.

We therefore recommend that stabilization and decontamination liability coverage be required.

The NRC may wish to state in its statement of considerations that the coverage

~ Since, as noted below, the independent trustee requirement was adopted without notice and opportunity for comment, it would appear that it can be suspended on a similar basis, particularly when the health and safety of the public can be fully protected, and the purpose of the rule accomplished, in the interim as pointed out in note 2, above.

6 -

afforded by the NEIL II "hybrid" liability/property policy is an example of a form that would satisfy the rule's requirements.

Finally, the stabilization provisions as presently framed will not be effective and workable unless the automatic priority attaches only above a threshold amount for a limited time (such as 30 days following the accident), unless extended by the NRC.

The rule also should give examples of stabilization expenditures, as is done for decontamination expenditures.

Further, the licensee should be permitted to file the cleanup plan even though some long-term stabilization measures are ongoing, and the Commission should be able to require that the plan be submitted within a reasonable time in any event.

In addition, it is not clear how expenditures of amounts not within the $1.06 billion required, or within that amount but not needed for stabilization or decontamination, will be permitted.

The rule therefore should be expanded and clarified as explained below.

Discussion The purpose of the rule.

As we understand it, the NRC was trying to assure that, following a major reactor accident, the licensee would have a reasonably assured source of funds to clean up the facility and the site. It decided to require the use of a specified amount of property insurance proceeds for this purpose.

Insofar as is relevant here, NRC perceived two major potential flaws in the degree to which the availability of this source of funds was assured:

{l) that a utility's first mortgage trust indenture obligates the utility to purchase insurance that is payable in tge first instance to the trustee for the bondholders, with the result that the consent of the trustee would likely be required to release funds for decontamination, and This is a distinct matter from the amount of insurance required to be maintained, which is generally the amount maintained by companies similarly situated on like properties.

The policies provide for payment to the indenture trustee because the mortgage indenture so requires.

The NRC's conclusion that payment can be made to a party other than the indenture trustee under a property insurance policy without violating the mortgage indenture is at variance with the conclusion reached by the bar association comments on which the Commission relied.

See, comments of February 5, 1985, Committee on Nuclear Technology and Law of the Association of the Bar of the City of New York, at 14.

7 -

(2) if the licensee were bankrupt, the creditors might claim all cash collateral, including insurance proceeds in the estate, and other potential constraints might be asserted on expenditures, such as the automatic stay of legal proceedings against the debtor.

NRC sought to avoid or minimize these two problems by imposing the decontamination priority and the requirement that proceed, subject to the priority be payable to an independent trustee.

The rule does not accomplish its intended purposes.

The decontamination priority applicable to up to $1.06 billion in property insurance proceeds represents a policy choice by NRC that we do not here dispute.

However, neither the priority nor the trust provision solves the bond trustee probYem, and the trust provision is not needed to address the bankruptcy situation.

Moreover, not only is the trust provision ineffective and unnecessary, it is unworkable and counterproductive.

The rule's independent trustee p~ovision introduces new sources of delay in the availability of insurance proceeds to the licensee or its contractors for post-accident cleanup expenses, delays that are not warranted by any offsetting benefits.

While 1J In this regard, the NRC did not adopt all of the bar association's comment (note 6, supra); the trust provision was suggested only in conjunction with decontamination liability coverage.

The latter requirement was proposed to address the bond trustee problem, but the NRC did not adopt this part of the comment.

As we explain herein, the decontamination liability approach is the only avenue that has been identified to provide a high degree of insulation against invoking the duty of the trustee for the bondholders to protect their interest in property insurance proceeds, thus putting such trustees in the position of having to compete for funds that may be needed for cleanup.

Second, the comment recommending the independent trustee was directed at the bankruptcy situation, not the bond trustee problem, and was made at a time when the state of bankruptcy law on environmental cleanup expenditures was much less clear than it is now.

As explained in Appendix A, it now seems well-established that the trustee in bankruptcy or the debtor in possession can be required to use cash collateral, including such insurance proceeds as may be part of the bankrupt estate, to comply with health and safety or environmental laws, regulations, and orders.

Such expenditures will likely be treated as administative expenses, and thus would be p~id before claims of pre-petition creditors.

8 -

the rule is intended to assure funds for prompt cleanup following an accident, it adds two levels of uncertainty: insurers may not know whom to pay (and so may pay everyone or no one); and the independent trustee (if one is found) may not know whom to pay for what.

Placing insurers in the position of having to decide among competing loss payees will create substantial delay.

That is, there is a serious risk that the rule may well lead insurers to make checks payable to multiple loss payees, including the independent trustee (if one can be found) and the trustee for the bondhold8rs, or file interpleader or declaratory judgment actions.

Payment to all payees would require the independent trustee to obtain the endorsement of the bond trustee, and this could well lead to disputes and litigation.

Alternatively, the bond trustee might file an action against the independent trustee or the insurers or both if the latter proposed to make unrestricted payment of property insurance proceeds to the independent trustee.

Since the NRC lacks jurisdiction over the bond trustee or over property insurers (unless and uµtil they seek to take some action that requires an NRC license), it should prescribe only actions that one party to a contract (namely, the affected NRC licensee) can take unilaterally to accomplish the purposes of the rule.

In the recently-adopted amendments to §50.54(w), the Commission has in effect assumed that bond trustees and insurers will consider themselves bound by a rule that can only operate on licensees, or will extend cooperation so far as to put their own rights, duties, or interests aside.

That may not be the case.

The bond trustee may well conclude that he is duty-bound to protect vested rights of bondholders to property insurance against subsequent actions that purport to curtail those rights.

Thus, it does not appear that the rule forecloses claims to insurance proceeds (that, if not used for repair and return to service or replacement, are substitute collateral under long-standing indentures, subject to the lien of existing mortgages) by the trustee for the bondholders.

Moreover, there are the practical constraints that for the independent trustee requirement to have any meaning at all, there must be a willing trustee, which, as we explain below, there may not be.

Similarly, insurance requirements ~re meaningless unless such insurance is or can be made available.

Policies that put y

See letter from Baker & McKenzie on behalf of NML and NEIL to Dr. Murley dated January 27, 1988, at 2.

V As explained above, in notes 6 and 7, although the NRC extracted the trustee concept from the bar association (Footnote 9 continued on next page)

9 -

insurers in the position of choosing between loss payees and defending lawsuits on the basis of a regulation that is binding on neither them nor the bond trustee are unlikely to be made available.

Thus, the independent trustee provision does not solve the bondholder issue.

In contrast, we have been advised, as the comments to the Commission on the proposed rule pointed out, that the proceeds of decontamination liability coverage, like any liability coverage purchased by the utility for its own risks, are not subject tc the requirements of the mortgage indenture.

Thus, coverage along the lines of the decontamination liability coverage afforded under the NEIL II hybrid property/liability policy should be effective to avoid the duty of the bond trustee to protect the interest of the bondholders with respect to the proceeds of property insurance, since the proceeds under our proposal would be payable as a liability coverage.

Requiring such hybrid policies would be an effective means of remedying the bondholder issue without creating the difficulties associated with the independent trustee concept~

In the bankruptcy situation, the independent trustee arrangement is not needed.

Under the cases decided in recent years, it seems clear that a licensee as debtor in possession (or the trustee of the bankrupt estate) would be permitted, and could be required, to comply with NRC regulations and cleanup orders even thou9h such orders result in substantial expenditures and reduce collateral.

such orders would not be subject to the automatic stay of legal proceedings against the debtor.

A number of such cases are discussed in the memorandum attached hereto as Appendix A.

In a nutshell, it now seems well-established that the trustee in bankruptcy or the debtor in possession will not be permitted to abandon the licensed facility or avoid its obligations with respect thereto, and indeed can be required to use cash collateral, including such insurance proceeds as may be part of the bankrupt estate, to comply with health and safety or environmental laws, regulations, and orders, including those mandating the cleanup of hazardous materials.

Such expenditures have been treated as administrative expenses.

Liability insurance proceeds paid on behalf of the insured to cleanup (Footnote 9 continued from previous page) comments, the bar association did not recommend the trust idea to deal with the bond trustee issue, but with bankruptcy under the then-unsettled state of the law.

Indeed, the bar association concluded that payment to the indenture trustee could not be avoided unless a form along the lines of the NEIL II hybrid property/liability policy were required.

10 -

contractors, by assignment or under the policy, may not even be a part of the bankrupt estate and thus would be beyond the claims of creditors, whether secured or unsecured.

Thus, the independent trustee provision is not necessary to assure that expenditures of insurance proceeds that are a part of the bankrupt estate can and will be made to comply with NRC regulations and cleanup orders.

Accordingly, we recommend that stabilization and decontamination liability coverage be required instead of payment to an independent Trustee, with the NEIL-II "hybrid" policy being an example of an acceptable form.

To facilitate insurability of this liability, such an obligation should be made part of the rule.

The trust arrangement is not feasible.

Quite apart from questions of need or efficacy, there are serious problems of trustee availability.

Any institution that serves as bond trustee for the securities of any licensee as to which it might be asked to serve as independent tru~tee under the rule would have a conflict of interest.

Such a conflict would undoubtedly be unacceptable to insurers, licensees and trustees alike.

More broadly, utilities and potential trustees may well conclude that such a trustee would have an institutional conflict if it serves as bond trustee with respect to the indenture of any utility.

Thus, though it obviously would be desirable to have a single form of trust and a single trustee, no major corporate trustee has been identified that does not also serve as bondholders' trustee under at least one nuclear utility's indenture.

Just as importantly, any major corporate trustee would want to minimize ibs exposure to claims.

Thus, several such companies have advised that, even if they were otherwise interested, they would insist on having only ministerial functions, as is the case under some state environmental laws that employ prefunded trusts for environmental cleanup (and the trustee makes payments only upon certification by the state agency having jurisdiction).

Even with very limited discretion, potential trustees may well perceive a residual liability.

Therefore, such a trustee would seek indemnification, and probably would not be satisfied with indemnification by the licensee that had the accident.

In addition, such a trustee would want to have applicable insurance to provide defense and indemnity for claims arising out of its l.Q/ See letter from Baker & McKenzie on behalf of NML and NEIL to Mr. Wood dated January 29, 1988 at 5.

11 -

duties as trustee, as well as directors' and officers' liability and indemnity insurance coverage, which may well be unavailable.

Finally, there is little incentive for trustees to seek the special trustee role.

In addition to the the disincentive of having to forego more attractive business because of conflicts of interest, we have been informed that the traditional financial incentives for trust management would be lacking.

Normally, the trustee gains an opportunity to earn a fee for managing the trust assets, a fee often measured by the value of those assets.

There would be no such opportunity under the arrangement envisioned by the rule.

The trust would be "dry", that is, an unfunded standby arrangement that may never be used.

Moreover, even when funded, there would be only a short time when the funds are actually under management -- in other words, 'it would be merely a conduit.

The scope of the rule should be clarified.

We are advised that it is difficult for the insurers to know what is and is not "stabilization", and when it stops and starts.

This is somewhat clearer in the case of decontaminati~n, since an NRC order is expected, and since examples are given in the rule.

However, actual decontamination could conceivably be delayed for several years if "mothballing" of certain areas is elected to permit short-lived isotopes to decay.

In addition, provisions are needed such that the stabilization priority attaches only in the case of substantial accidents, since only such accidents would involve the potential shortage of funds that led NRC to issue this rule in the first place.

We propose a threshold of $100 million.

The automatic priority for stabilization would initially last for thirty days, unless extended.

Release of proceeds from this priority as well as non-inclusion in the decontamination priority could be accomplished in the NRC order with respect to the licensee's decontamination plan.

Further, the licensee should be permitted to file the cleanup plan before all stabilization measures are completed, i.e., even though some long-term stabilization measures are ongoing, and the Commission should be able to require that the plan be submitted within a reasonable time in any event.

A mechanism is needed for authorization of expenditures of proceeds either (a) not within the $1.06 billion of required insurance or (2) greater than the difference between all policy limits and $1.06 billion, but not needed for stabilization or decontamination.

While the statement of considerations provides that it is contemplated that other expenditures may be made in parallel, no mechanism is provided to do this.

We submit that the rule should be amended to permit licensees to include reasonable estimates for the various activities in the plan, and to require NRC to approve or, for stated reasons, disapprove such

12 -

estimates so that remaining proceeds may be disbursed ih parallel as warranted by proof(s) of loss so long as other uses of proceeds are not given precedence and so long as the balance of the required or approved amount not already expended for stabilization or decontamination remains available for such use.

This will require tracking and accounting for amounts expended and remaining, and we have proposed a certification process to accomplish this in the amendments set forth below.

Conclusions To summarize, for the following reasons, the independent trustee arrangement is not effective or even needed to address either the bond trustee problem or the bankruptcy situation, and could lead to unwarranted delays in funding post-accident cleanup.

Such a trust arrangement could lead to disputes, litigation, and associated* delays in the availability of proceeds, because insurers might well make checks payable to both the trustee for the bondholders and the independent trustee, and may file interpleader or declaratory judgment actions, and because bond trustees might be duty-bound to claim the proceeds of property insurance.

Recent bankruptcy decisions make clear that expenditures required for compliance with health and safety laws and orders will be permitted and can be enforced.

Thus, first, the independent trustee provision should be initially suspended (or licensees otherwise relieved from compliance with the independent trust requirement) and ultimately deleted.

Second, the rule should be amended to require that licensees purchase insurance that provides coverage against liability (which would be explicitly established in the rule) for stabilization and decontamination expense (hybrid policies along the lines of the NEIL II form would be acceptable), to avoid needlessly invoking the duty of trustees for bondholders to assert their interest in property insurance proceeds.

Third. the rule (or at least the statement of considerations) should be clarified by defining or at least giving examples of stabilization and subjecting stabilization expenditures to the automatic priority only when a reasonable threshold, such as $100 million, is exceeded for a reasonable period of time such as thirty days, subject to extension.

13 -

Fourth and finally, the rule should provide a mechanism for releasing from the priorities such insurance proceeds as will not be needed for stabilization or decontamination.

We have set forth below the text of the changes that we propose.

14 -

MARK-UP OF§ 50.54(w) WITH PROPOSED CHANGES (Proposed additions are shown in bold with underscoring; proposed deletions are indicated by brackets and striking through the language to be deleted.)

§ 50.54 Conditions of licenses.

(w)

Each electric utility licensee under this part for a production or utilization facility of the type described in§ 50.21(b) or§ 50.22 shall, by June 29, 1982, take reasonable steps to obtain [efl-si~e-~~e~e~~y-aamage]

insurance, available at reasonable costs and on reasonable terms from private sources or to demonstrate to the satisfaction of the commission that it possesses an equivalent amount of protection covering the

[£eei~t~Y,] licensee's obligation, in the event of a significant contamination event at the licensee's reactor, to stabilize and decontaminate the reactor station site at which the unit experiencing such event is located as provided in this subsection, Provided that:

(1)

[~his]-The insurance required by this subsection must have a minimum coverage limit [£e~-~he] with respect to each reactor station site of either $1.06 billion or whatever amount of insurance is generally available from private sources, whichever is less.

The required insurance may, at the option of the licensee, be included within policies that also provids coverage for other risks, including, but not limited to, the risk of direct physical damage.

In such cases, all such policies shall clearly state that any proceeds shall be payable first for stabilization and next ~or decontamination of the reactor station site as and to the extent provided herein, and that any such optional coverage or coverages are subject thereto.

If a licensee's coverage falls below the required minimum, the licensee shall within 60 days take all reasonable steps to restore its coverage to the required minimum *

.ill Effective _____, __, [a date which allows sufficient time for development and approval of changes in policies

15 -

of insurance after the effective date of a final rule adopted in accordance with this petition] with respect to policies issued or annually renewed thereafter, the proceeds of such required insurance shall be dedicated, as and to the extent provided herein, to reimbursement or payment on behalf of the insured of reasonable expenses incurred by the licensee in taking action to fulfill the licensee's obligation, in the event of a significant contamination event at the licensee's reactor, unless otherwise ordered or approved by the Director of the Office of Nuclear Reactor Regulation, to ensure that the reactor is in, or is returned to, and maintained in, a safe and stable condition and that radioactive contamination is removed or controlled such that personnel exposures are consistent with the occupational exposure limits in 10 CFR Part 20.

such actions shall be consistent with any other obligation the licensee may have under this chapter and shall be subject to paragraphs (4) and (5) hereof.

As used in this paragraph, a "significant contamination event" means an event that involves the release of radioactive material from its intended place of confinement within the plant or on the reactor station site such that there is a present danger of release offsite in amounts that would pose a threat to public health and safety if stabilization and decontamination expenses or expenses for other appropriate remedial action in an amount equal to or greater than the threshhold level set forth in suparagraph (4) were not taken.

([~]~) The licensee shall report to the NRC on April 1 of each year the current levels of this insurance or financial security it maintains and the sources of this insurance or financial security.

([3]~) (i) The proceeds of the insurance required by paragraph (2) hereof, if and to the extent applicable, shall be used first to ensure that the licensed reactor is in a safe and stable condition and can be maintained in that condition so as to prevent any significant risk to the public health and safety.

The licensee shall inform the Director of the Office of Nuclear Reactor.Regulation in writing when that condition is attained.

This priority on insurance proceeds for such stabilization of the reactor shall attach where expenditures for stabilization and decontamination with respect to a significant contamination event appear likely to exceed

$100 million, and shall remain in effect for 30 days or,

16 -

upon order of the Director, for such longer period, in increments not to exceed 30 days, as the Director may find is necessary to protect the public health and safety.

The actions appropriate to bring the reactor to a safe and stable condition and maintain it in that condition generally include those:

JAL to shut down the reactor; ill_ to establish long-term cooling;

_1gl__ to control radioactive releases; and

.fill_ to secure structures, systems, or components to minimize exposure to onsite personnel or the offsite public to radiation or to facilitate later decontamination or both.

(ii) Within thirty (30) days after the licensee informs the Director of the Office of Nuclear Re?ctor Regulation that the reactor is and can be maintained in a safe and stable condition, or at such earlier time as the licensee may elect or the Director may for good cause direct, the licensee shall prepare and submit a cleanup plan for the Director's approval.

The plan shall identify all cleanup operations that will be required to decontaminate the reactor sufficiently to permit the licensee either to resume operation or to [eemmeHee] undertake measures leading to decommissioning of the reactor in a manner that is consistent with the Commission's occupational exposure limits in 10 C.F.R. Part 20, and shall provide the estimated expenditures for each such operation.

If applicable, such operations shall include:

(A)

Processing any contaminated water generated by the accident and by decontamination operations to remove radioactive materials; (B)

Decontamination of surfaces inside the auxiliary and fuel handling buildings and the reactor building to levels consistent with the Commission's occupational exposure limits in 10 CFR Part 20, and decontamination or disposal of equipment; (C)

Decontamination or removal and disposal of internal parts and damaged fuel from the reactor vessel; and (D)

Cleanup of the reactor coolant system.

17 -

(iii)

Following review of the licensee's plan, the Director will order that the licensee complete all operations that the Director finds are necessary to decontaminate the reactor sufficiently to permit the licensee either to resume operation or to [eemmeHee] undertake measures leading to decommissioning of the reactor, in a manner that is consistent with the Commission's occupational exposure limits in 10 CFR Part 20.

[Any-~reperty in~ttraHee-p~eeeed~-nee-a+/-reaay-expeHaed-~e-p+/-aee-~he-~eae~er-+/-n-a sa£e-aHa-s~able-eena+/-~+/-eH-pttrsttan~-~e-~aragra~h-fwtf3tf+/-t-e£-~+/-s

~ee~+/-en-~ha+/-+/--he-ttsea-£+/-r~e-~e-eemp+/-e~e-~hese-deeen~am+/-Ha~ieH epera~ien~-eha~-are-~he-stthjeee-e£-ehe-B+/-~ee~erLs-erae~7]

The Director shall approve or disapprove, for stated reasons, the licensee's estimate of expenditures for such operations.

Such order may not be effective for more than one year, at which time it may be renewed.

Each subsequent renewal order, if imposed, may be effective for not more than six months.

<iv) Of the balance of the proceeds of the required insurance not already expended to place the reactor in a safe and stable condition pursuant to paragraph Cw)(~) Ci) of this subsection, an amount sufficient to cover the expenses of completion of those decontamination operations that are the subject of the Director's order shall be dedicated to such use, Provided that, upon certi~ication to the Director of the amounts expended previously and from time to time for stabilization and decontamination and upon further certification to the Director as to the sufficiency of the dedicated amount remaining, policies of insurance may provide for payment to the licensee or other loss payees of amounts not so dedicated, and the licensee may proceed to use in parallel (and not in preference thereto) any insurance proceeds not so dedicated for other purposes.

[f+t Preper~y-+/-HsttraHee-preeeeds-stthjee~-~e-~he deeen~am+/-Ha~ieH-p~+/-e~+/-~y-+/-H-~a~ag~aph-fwtf3t-e£-~h+/-s

~ee~ien-mtts~-~e-payahle-~e-a-~e~a~a~e-~~tts~-es~ah!+/-shea

£er-~he-~e+/-e-ptt~ese-e£-pay+/-ng-£e~-ees~~-+/-Hett~~ed-in deeeH~am+/-na~+/-Hg-~he-~eae~er-and-~emev+/-Hg-rad+/-eae~+/-ve dehr+/-s7--~he-ertt~~-aHa-~~tts~ee-mttse-be-aeeepeab!e-~e-~he eemm+/-ss+/-eH7--AH-aeeepeable-~~s~ee-+/-He+/-ttaes-aH app~ep~+/-a~e-S~a~e-e~-Feaeral-geverHmeH~-ageHey-e~-aH eHeiey-whieh-has-~he-att~he~+/-~y-~e-ae~-as-a-~ri:1s~ee-ana whese-~~s~-epe~a~+/-eHs-are-regtt+/-a~ea-and-exam+/-Hed-hy-a Feae~a!-e~-s~aee-ageney~]

(5)

The stabilization and decontamination [pr+/-e~+/-~y-aHd

~~~~] requirements set forth in paragraph[s-fwtf3t-ana]

(w) (4) of this section must[~

0

• 18 -

fit Be-+/-Hee~pe~a~ed-in-en~+/-~e-p~epe~~y-damage-+/-Hstt~anee pe+/-+/-e+/-e~-£e~-Htte+/-ea~-pewe~-p+/-aH~s-He~-+/-a~e~-~haH-8e~eber 4,-:1:988-ano.-

fift A]fil>ply uniformly to all [en~+/-~e-p~epe~~y-o.amage]

insurance policies [£e~-ntte+/-ea~-pewe~-~+/-an~s] required under paragraph (w) ([:I:]~) of this section.

espectfully submitted,

• h

/1.1 /,

I l/{/\\.AJJ !

Jose h B. Knotts, Jr/'

op, Cook, Purcell &

Reynolds Counsel for the within-named petitioners

FROM:

DATE:

SUBJ:

APPENDIX A M E M O R

A N

D U

M Joseph B. Knott>'l!l~~C.,

Bishop, Cook, Pu Reynolds February 8, 19 Implications of Post-Accident Licensee Bankruptcy For Ability of Licensee To Make, And NRC To Require, Cleanup Expenditures I.

BACKGROUND NRC regulations require power reactor licensees to maintain a specified amount of property insurance to provide assurance that there will be a source of funds for on-site stabilization and decontamination expenditures following an accident.

10 CFR §50.54(w).

Unless modified, the regulations will, as of October 4, 1988, require that policies provide that the proceeds of such insurance be payable to an independent trustee.

One of the reasons for the independent trustee requirement was NRC's concern that insurance proceeds would otherwise be subject to the claims of creditors in the event of the licensee's bankruptcy precipitated by the accident that necessitates the cleanup expenditures.

Recent developments in bankruptcy law suggest that this concern may not be warranted.

Accordingly, this memorandum reviews the pertinent provisions of the federal bankruptcy law and bankruptcy decisions involving other regulatory programs to assess the extent to which in the absence of an independent trustee to receive insurance proceeds:

(1) a trustee in liquidation or reorganization, 1 or a licensee as debtor in possession, will be allowed under bankruptcy law to make expenditures to comply with the Atomic Energy Act of 1954, as amended, NRC regUlations, licenses, and orders, and i

(2) the NRC can enforce those requirements.

We also consider:

II.

(3) whether insurance proceeds are part of the bankrupt estate and whether they are treated any differently from other cash collateral.

SUMMARY

A debtor in possession or a trustee may make expenditures to comply with an agency's regulations or orders if the expenditure is necessary to comply with an action by the agency to enforce its police or regulatory power *

.l/

A trustee may not take possession of a licensed facility without prior NRC approval.

42 u.s.c. §2234; 10 CFR §§50.80, 50.81.

Agency enforcement actions to protect the public health and safety or the environment constitute valid police powers, and such actions are exempt from the automatic statutory stay of proceedings against the debtor.

Moreover, the Supreme Court has made it clear that a debtor in possession or trustee may not abandon its obligations to comply with laws which are reasonably designed to protect public health or safety.

Proceeds of property insurance are normally part of the bankrupt estate and are treated like any other cash collateral.

III.

DISCUSSION A.

Overview Generally, when a debtor or its creditors invoke voluntary or involuntary liquidation or reorganization under Chapter 7 or Chapter 11 of the federal bankruptcy statute, the filing of the petition operates as an automatic stay of most creditor claims and legal proceedings against the debtor.

11 u.s.c. § 362(a) (1979).

The debtor or trustee may abandon property that is burdensome to the estate or is of inconsequential value.

11 u.s.c. §554(a) (1979).

These two provisions may be thought to undercut the licensee's obligation to comply with, or the NRC's ability to enforce, post-accident cleanup requirements, but, as will be seen below, they do not.

We begin with the automatic stay.

B.

Automatic Stay Although the filing of the petition automatically stays most actions against the the debtor or the estate, the stay will not apply to a proceeding or action by a governmental unit ("agency") seeking to enforce its regulatory or police power.

11 U.S.C § 362(b).

Sections 362(b) (4) and (5) provide:

(b)

The filing of a petition under section 301, 302, or 303 of this title does not operate as a stay (4) under subsection (a) (1) of this section, of the commencement or continuation of an action or proceeding by a governmental unit to enforce such governmental unit's police or regulatory authority; (5) under subsection (a) (2) of this section, of the enforcement of a judgment, other than~

money judgment, obtained in an action or proceeding by a governmental unit to enforce such governmental unit's police or regulatory power; (emphasis added) 11 U.S.C. §§ 362(b) (4)-(5).

The police or regulatory exception applies to both pre-and post-petition actions, 2 and extends to the enforcement of judgments for injunctive-V It is assumed for purposes of this analysis that the financial impact of an accident precipitates, and thus precedes, the bankruptcy filing, and that the cleanup obligation is hence a pre-petition obligation.

Compliance obligations for a post-petition accident are no less and payment obligations may be greater.

type relief.

Attempts to enforce money judgments, however, will be stayed.

11 u.s.c. § 362(b) (5).

Thus, a debtor may make expenditures to comply with an agency's regulations or orders if the expenditure is necessary to comply with an action by the agency to enforce its police or regulatory power, and such expenditures may take precedence over any distributions to pre-petition creditors.

1.

Agency Regulations or Actions That Are Exempt From the Auton1atic Stay

~

Before reaching the question of whether a debtor may make an expenditure to comply with an agency's regulations, the court must determine whether the agency enforcement action is an exercise of police or regulatory power. 3 The courts will generally apply a pecuniary interest test to determine whether an agency's enforcement action is a police or regulatory power, and thus, should not be stayed.

Penn Terra Limited v. Department of Environmental Resources, 733 F.2d 267, 272 (3rd Cir. 1984); Missouri v.

U.S. Bankruptcy Court for the Eastern District of Arkansas, 647 F.2d 768, 776 (8th Cir. 1981), cert. denied, 454 U.S.

1167 (1982); In re Porter, 42 Bankr. 61 (S.D. Tex. 1984);

Y The issue typically arises when the debtor or trustee seeks bankruptcy court protection from a regulatory order.

However, creditors may be moving parties as well.

but cf. In re Herr, 28 Bankr. 465, 468 (D. Me. 1983) (the court applied a public policy test).

Under the pecuniary interest test, the court will determine whether the purpose of the enforcement action is to protect the public health and safety or whether it is to gain a pecuniary advantage.

Penn Terra, 733 F.2d at 272.

Agency enforcement actions to protect the public welfare will constitute a valid police or regulatory power, and thus, will not be stayed; agency enforcement actions to protect a pecuniary interest will be stayed.

Id.

~

The legislative history of the Bankruptcy Reform Act makes it clear that an agency's action to enforce regulations or orders to protect the environment or the public health and safety are valid exercises of police or regulatory powers.

The House Report states:

Paragraph (4) excepts commencement or continuation of actions and proceedings by governmental units to enforce police or regulatory powers.

Thus, where a governmental unit is suing a debtor to prevent or stop violation of fraud, environmental protection, consumer protection, safety or similar police or regulatory laws, or attempting to fix damages for violation of such law, the action or proceeding is not stayed under the automatic stay.

Paragraph (5) makes clear that the exception extends to permit an injunction and enforcement of an injunction, and to permit the entry of a money judgment, but does not extend to permit the enforcement of a money judgment.

(emphasis added)

H.R. Rep. No. 595, 95th Cong., 1st Sess. (1977).

The legislative history indicates that the governmental unit exception should be construed to permit agencies to protect the public welfare, but not the pecuniary interests of debtors or creditors.

124 Cong. Rec. 11089, reprinted in 1978 U.S. Code Cong. and Admin. News 6436, 6444-45 (statement of Congressman Edwards).

See also Missouri v.

Bankruptcy Court, supra, 647 F.2d at 776.

The courts have also held that agency enforcement actions to protect the environment or public health constitute valid police powers, and thus, should not be stayed.

In Penn Terra, 733 F.2d at 274, the court of appeals found that a state action to force a debtor to rectify environmental hazards fell squarely within the state's police and regulatory powers:

DER seeks to force Penn Terra [the debtor] to rectify harmful environmental hazards.

No more obvious exercise of the states's power to protect health, safety, and welfare of the public can be imagined.

Id. at 274.

In Matter of Commonwealth Oil and Refining co.,

805 F.2d 1175 at 1183, (5th Cir. 1986), cert. denied 107 S.

ct. 3228 (1987), the court of appeals held that the EPA's enforcement of federal and state environmental laws was an "obvious exercise of the [government's] power to protect the health, safety, and welfare of the public".

v, ILCO. Inc., 48 Bankr. 1016 (N.D. Ala. 1985) (enforcement of laws to require cleanup of hazardous waste site within 4

police powers).

On the other hand, the courts have found that an agency regulation or action is not an exercise of police power but instead protects a pecuniary interest where it seeks to:

(i) protect the pockets of a group or the public at large or the pockets of creditors, or (ii) collect money judgments, including the civil penalties. 5 While an agency may seek an injunction, seek to assess a penalty or seek to enter a money judgment against a debtor for violating regulations which protect the public health and safety, it may not seek to collect that penalty or money

.Y To similar effect are numerous cases involving the National Labor Relations Act and Title VII of the Civil Rights Act (Equal Employment Opportunity). See,~, N.L.R.B. v. Evans Plumbing Co., 639 F.2d 291, 293 (5th Cir. 1981).

E.E.O.C, v.

Rath Packing Co., 787 F.2d 318 (8th Cir. 1986) cert. denied, 101 s. ct. 307 (1987).

[J/

Thus, in Missouri v. Bankruptcy Court, supra, 647 F.2d at 776, for example, the court of appeals held that a state agency's enforcement of laws which governed the operation and liquidation of a debtor's grain inventory protected the creditor's pecuniary interest in the debtor's grain and did not relate to the protection of public health or safety, and, if not stayed, would give certain of the debtor's creditors an unfair preference.

See also In re Sampson, 17 Bankr. 528 (D. Conn. 1982) (statute directed at debtor's financial obligations); In re Joe Delisi Fruit Co., 11 Bankr. 694 (D.

Minn. 1981) (statute designed to protect financial interests of certain class of individuals not within police or regulatory powers).

judgment.

Such collection actions will be stayed.

In Penn Terra, supra, the court of appeals found that the entry of money judgment is "quite separate" from a proceeding to enforce (i.e., collect) that money judgment.

Penn Terra, 733 F.2d at 275. 6

2.

Exemption From Automatic Stay For Agency Requirements That Are Similar To Those Of NRC The NRC is plainly a governmental unit, 7 that may enforce its health and safety regulations or orders against a licensee in bankruptcy, and such enforcement action will not be subject to the automatic stay,..

Moreover, it appears the licensee or bankruptcy trustee will be permitted, and can be required, to spend money to comply with NRC's health and safety regulations or orders.

Though the Supreme Court has not squarely addressed the distinction between

£/ To similar effect are:

In re Tauscher, 7 Bankr. 918 (E.D.

Wis. 1981), (assessment of penalties for violations of child labor laws not subject to automatic stay, but collection would be); In re Allied Mechanical Services, Inc., 38 Bankr.

959 (N.D. Ga. 1984} (assessing penalties for violations of o.s.H.A. not stayed, but collection not allowed}; Rath Packing, supra, 787 F.2d at 326-27 (entry of a judgment for Title VII backpay permitted, but not collection).

1J Units that comprise "actual governmental groups" with enforcement powers constitute a governmental unit which may be exempt from the automatic stay.

Penn Terra, 733 F.2d at 273 (Pennsylvania's Department of Environmental Resources constitutes governmental unit); Evans, 639 F.2d at 293; l..n J;:g Colin. Hochstin Co., 41 Bankr. 322, 324 (S.D.N.Y. 1984} (New York Stock exchange not a "governmental unit" but merely acts in governmental capacity).

collecting money and requiring that money be expended to 8

protect public health and safety, the import of its "abandonment" opinion9 is to recognize the paramount importance of such protection of public health and safety, and the courts of appeals have uniformly recognized the distinction.

The Third and Fifth circuits have squarely addressed the issue as to environmental laws.

In Penn Terra, 733 F.2d at 277-78, the court of appeals held that a debtor or trustee may make incidental expenditures to comply with an agency's action to enforce environmental laws.

In Penn Terra, a debtor operated coal surface mines in Y

In Ohio v. Kovacs, 681 F.2d 454, 456 (6th Cir. 1982)

(12slt'.

curiam) the Court of Appeals for the Sixth Circuit affirmed a lower court decision that stayed an attempt by the state to determine a debtor's financial status in order to apply a part of the debtor's income to complete the debtor's unfulfilled obligation to clean up a hazardous waste site.

Id.

The court of appeals found that the state's action, while an exercise of police powers, amounted to a money judgment, and therefore should be stayed.

Id.

The Supreme Court granted certiorari, but subsequently vacated and remanded the case to the Sixth Circuit to consider the question of mootness.

Ohio v. Kovacs, 459 U.S. 1167 (1983).

The case again reached the Supreme Court in Ohio v. Kovacs, 469 U.S. 274 (1984), but on a different issue --- whether the debtor's obligation to reimburse the state for clean up at the site was dischargeable under the Code.

The Court held that because the state appointed a receiver to take possession of the debtor's assets and to clean up the site, and the state now sought reimbursement, the order had been converted to an obligation to pay money that was dischargeable in bankruptcy.

V Midlantic National Bank v. New Jersey DEP, discussed infra at

p. 15.

Pennsylvania in violation of various state environmental laws.

In 1981, Pennsylvania's Department of Environmental Resources (DER) served the debtor and its president with thirty-six citations for the violations. 10 During the following year, the debtor filed for bankruptcy under Chapter 711 of the Code without having corrected the environmental violations.

Unaware of the debtor's filing, the DER sought an injunction in state court requiring the debtor to correct the environmental violations.

The state court granted the injunction.

The

~

debtor filed contempt charges against the DER in the bankruptcy court alleging that the DER violated the automatic stay.

The court of appeals rejected the lower court finding that the DER's action was an attempt to enforce a money judgment.

Id. at 275-78.

After determining that the DER's enforcement action to correct the environmental violations was an exercise of police power, the court of appeals reviewed the bankruptcy 10/ On November 8, 1981, by consent order with the DER, the debtor's president agreed to correct the violations by a certain date.

As part of the consent order, the debtor furnished the DER with $13,500 worth of certificates of deposit as bonds for compliance with the consent order.

The debtor, however, never complied with the consent order.

.l1/ § 362 applies equally to all bankruptcy actions; we have found no distinction between Chapter 7 and Chapter 11 actions in interpreting the governmental unit exception.

courts' analysis to the effect that the action was a money judgment because the debtor had to spend money to comply with the injunction, and found it wanting.

The court of appeals concluded that, on its face, the DER's action was not a money judgment.

Id. at 275.

The court of appeals defined a money judgment to be an order entered by the court after the plaintiff receives a verdict requiring the defendant to pay the plaintiff a certain sum of money.

Id.

In contrast, the action at issue could not be a money judgment because (i) the injunction compelled performance of certain remedial acts, (ii) did not seek payment to the state, and (iii) the actual injunction issued by the state did not direct such a payment.

Id.

Finally, the court of appeals reasoned that the DER's injunction was not a money judgment in substance.

Id. at 277-78.

The court appeals held that an agency action which seeks to protect against future harm and restore the environment, rather than impose sanctions or compensate for past wrongful acts, is not a money judgment even though it necessarily implicated the expenditure of funds by a debtor:

It [the injunction] was not intended to provide compensation for past injuries.

It was not reducible to a sum certain.

No monies were sought by the Commonwealth as a creditor or obligee.

The Commonwealth was not seeking a traditional form of damages in toTt or contract.... Rather, the Commonwealth Court's injunction was meant to prevent future harm to, and to restore the environment.

.Ig. at 278.

Recently, the Court of Appeals for the Fifth Circuit has also held that a debtor may make expenditures to comply with a federal agency's enforcement action under federal and state environmental laws.

Commonwealth Oil and Refining Co., supra, 805 F.2d at 1186.

In Commonwealth, the Environmental Protection Agency ("EPA") issued an administrative complaint against a debtor who had filed a Chapter 11 petition.

The administrative complaint, among other things, required the debtor to file a closure plan or seek a permit for a hazardous waste facility and to cease acting as a treatment, storage, and disposal facility unless the debtor complied with certain state regulations.

Citing Penn Terra, the court of appeals found that the EPA's administrative complaint fell squarely within the government's police and regulatory powers.

Id. at 1183.

Importantly, the court of appeals held that, although the debtor would be required to expend money to comply with the EPA's action, the action was not an attempt to enforce a money judgment.

l,g. at 1185-86.

The court of appeals stated:

We must reject appellant's argument that the EPA'S enforcement action in this case is an attempt to enforce a money judgment, thus proscribed under

§ 362(b) (5), since either the filing of a Part B application or the filing of a closure plan and commencement of closure activities would require CORCO [debtor] to expend funds.

The action is one to compel compliance with federal and state environmental laws.

The action does not seek the entry of a money judgment or the adjudication of liability for a sum certain.

Further, mere payment of money, even if it could be estimated, would not satisfy the EPA's requests.

Finally, the EPA's action cannot be seen as an attempt to obtain compensation for past damage.

Additionally, the bankruptcy court in U.S. v. ILCO, Inc., 48 Bankr. at 1023, rejected th~ notion that the expenditure of funds will convert an agency enforcement action into an enforcement of a money judgment.

In finding that there was no money judgment even though a debtor would be forced to spend money to clean up a hazardous waste site, which would deplete the debtor's assets to the detriment of other creditors, the court stated:

The legislative history... indicates that the enforcement of an injunction ordering compliance with environmental laws is more important than the debtor's right to have a breathing spell from its creditors or than the creditors' rights to an orderly administration of the estate.

Furthermore, if courts were to find, as ILCO contends, that an order which required the expenditure of money is a 'money judgment,' then 'the exception to section 362 for government police [and regulatory] action, which should be construed broadly, would instead be narrowed into virtual non existence.... [A]lmost everything costs something.

An injunction which does not compel some expenditure or loss of monies may often be an effective nullity.' [citations omitted]

c.

Abandonment Although, as noted above, the Supreme Court has not squarely addressed the collection/expenditure issue, the Court made it clear that it will not elevate protection of creditors over protection of health and safety when it held that a debtor or trustee may not abandon property which was financially burdensome because it entailed obligations to comply with laws that are reasonably designed to protect public health or safety.

In Midlantic National Bank v. New Jersey Department of Environmental Protection, 474 U.S. 494, 506-07 (1986), the Court held that a trustee may not abandon property under Section 554(a) of the Code, which governs the abandonment of burdensome property, in "contravention of a state statute or regulation that is reasonably designed to protect the public health or safety from identified hazards. "12 In Midlantic, a debtor processed waste oil at facilities located in New Jersey and New York.

The New Jersey Department of Environmental Protection ("NJDEP") found that

.W Similarly, a bankruptcy court has, in a case involving an NRC materials licensee, held that a trustee was responsible for maintaining a debtor's property in compliance with NRC regulations.

See In re METCOA, Inc., No. 1383-00415 (Bankr.

N.D. Ohio 1986) (unpublished) cited in METCOA, Inc., EA-85-122 (unpublished order of the Nuclear Regulatory Commission, June 12, 1987).

the debtor had violated the debtor's operating permit by accepting toxic materials at a facility located in New Jersey. 13 The NJDEP ordered the debtor to cease operations.

During negotiations with the NJDEP, the debtor filed a petition for bankruptcy under Chapter 11, which was later converted to a Chapter 7 liquidation.

After the filing, the trustee notified the parties and the bankruptcy court of his intent to abandon the the property under Section 554(a). 14 The NJDEP objected to the abandonment because it would threaten the public health and safety.

ti The court found that because Congress did not intend for the abandonment power to abrogate certain state and local laws and because of Congress' "undisputed" concern over the risks of hazardous waste disposal, the bankruptcy court does not have the power to authorize an abandonment "without formulating conditions that will adequately protect the public's health and safety."

Id.

W Similarly, the City and the State of New York found that the debtor had illegally accepted and stored toxic materials at another facility located in New York.

Because the issues were identical, the City and State cases were subsequently consolidated with the NJDEP case on appeal.

14/ Section 554(a) authorizes a trustee to "abandon any property of the estate that is burdensome to the estate or that is or inconsequential value to the estate".

11 u.s.c. § 554(a).

The bankruptcy court approved the abandonment.

The district court affirmed.

The court of Appeals for the Third Circuit reversed.

D.

Insurance Proceeds The debtor's interest in the post-petition proceeds of insurance policies are normally part of the bankrupt estate.

See, 11 USC §541; Bradt v. Woodlawn Auto Workers Federal Credit Union. 747 F. 2d 512, 515 (2d Cir. 1985).

As such, they are available, along with the other cash collateral of the estate (such as operating income where the business continues under Ch. 11) for post-petition cleanup of pre-petition pollution.

Such expenditures are treated as priority expenses of administration, ahead of pre-petition unsecured creditors. See,~, In Re Stevens, 15 B.C.D.

556 (D. Me. 1987).

IV. CONCLUSION There is every reason to believe that the federal courts will not permit the bankruptcy laws to be used to prevent expenditure of available funds for cleaning up after a nuclear reactor accident as necessary to protect the public health and safety in the judgment of the agency charged with that duty, the NRC.

Thus, it can be expected that NRC will be permitted to enforce the Atomic Energy Act, its own regulations, licenses, and orders, even if that requires expenditure of cash collateral of the bankrupt estate by the debtor in possession or the trustee in bankruptcy.

DOCKET NUMBER iETITIQN RULE PRM o-sJ

, STEPTOE & JOHNSON

{53 IR 3£33[)

LINDA S. STEIN (202) 429-8185 Mr. Emil Julian Chief, Docketing and Service Branch ATTORNEYS AT !.Aw 1330 CONNECTICUT AVENUE WASHINGTON, O. C. 20036 (202) 429-3000 TELEX: 89*2503 June 3, 1988 U.S. Nuclear Regulatory Commission 11555 Rockville Pike Room 16H20 Rockville, MD 20852

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DOCK ti lhG 1t r}EYv !Cf.

8RANL.~

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Re:

Proposed Rulemaking Regarding Property Insurance for NRC Licensed Nuclear Power Plants

Dear :

Jr"*. Julian:

Enclosed for filing in the above-entitled matter are an original and three copies of a Petition for Rulemaking.

Please date stamp one copy and return it to me in the enclosed envelope.

LSS/bjp Enclosures Sincerely, Linda s. Stein

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• ~~C*Jt AlORY COMMIS~IVf'o oor*" * *~ ' SERVICE SECTION r

J THE SECRETARY

!E.::oMMISSION

, -*, Statistici Postmark '.,

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UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION In the Matter of Proposed Rulemaking Regarding Property Insurance for NRC Licensed Nuclear Power Plants PETITION FOR RULEMAKING Introduction 1ill.!'

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• 6 1988 DOCXL"TING&

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,/JCT BRANC SECY-NRC This is a petition for rulemaking submitted pursuant to 10 CFR 2.802 {1988) on behalf of American Nuclear Insurers and MAERP Reinsurance Association {"ANI/MAERP" or the "Petitioners").

Since 1982 the Nuclear Regulatory Commission {"Commission") has required each commercial reactor licensee to "take reasonable steps to obtain on-site property damage insurance available at reasonable costs and on reasonable terms from private sources or to demonstrate to the satisfaction of the Commission that it possesses an equivalent amount of protection coveri ng the facility,... " 10 CFR 50.54{w) {1987) {the "original Rule").

The insurance available from pri vate sources covered three kinds of economic losses:

{l) the reduction in value of the facility, or the equivalent cost of its repair or replacement, resulting from actual physical damage to the facility

("Physical Damage Loss");

{2) the cost of stabilizing the reactor following an accident {"Stabilization Loss"); and (3) the cost of decontaminating the facility after an accident {"Decontamination Loss").

While this insurance, acceptable to the Commission for compliance with its original Rule, imposed no priorities for payment of the three types of losses, it was clear that the coverage for Physical Damage Loss was paramount.

There was no coverage for a Stabilization or a Decontamination Loss unless there was first a covered Physical Damage Loss.

On July 31, 1987 the Commission revised this rule.

See 10 CFR 50.54(w) {1988) {the "revised Rule").

The revised Rul e,

2 -

effective October 5, 1987, increases the amount of required insurance to $1.06 billion and dedicates all of the proceeds of the required insurance to the payment first, of stabilization Loss, and then of Decontamination Loss.

Insurance proceeds for Decontamination Loss must be paid to a separate trust.

Only those proceeds not needed to pay for stabilization and decontamination may be used to pay Physical Damage Loss.

The Commission's new priorities will increase the demand for higher amounts of nuclear property insurance in order to cover adequately the risk of Physical Damage Loss.

The Petitioners are convinced, as persons long engaged in the business of writing high limit nuclear property insurance policies, that certain provisions of the revised Rule will result in uncertainty, delay and substantial additional administrative expense in the process of proving loss and the prompt payment of valid claims.

They will also hinder the ability of private sources to meet the need for larger amounts of nuclear property insurance.

The Petitioners accordingly request the Commission to suspend, pending completion of this rulemaking, those provisions of the revised Rule which require that:

(1) insurance proceeds for Decontamination Loss be paid to a separate trust, and (2) the priorities for Stabilization Loss and Decontamination Loss {including the related trust provision) be incorporated in property insurance policies not later than October 4, 1988.

The Petitioners also request th~ Commission to amend the revised Rule, after notice and comment:

(1) to define more clearly the nature and extent of the obligations and priorities set forth in paragraphs (w) (3) and (w) ( 4),

(2) to clarify the rights and obligations of insurers with respect to securing appropriate proofs of loss for the coverages affected by the Rule and making timely and proper payments in accordance with insurance practice and policy provisions, (3) to delete the provision requiring payment of Decontamination Loss proceeds to a separate trust, apd

3 -

(4) to provide insurers a more definite method for paying promptly reasonable amounts of loss unencumbered by the priorities established by the revised Rule when there is more than enough insurance in force.

The Petitioners' Interest The Petitioners are duly organized associations of insurance companies.

Their members have been engaged in providing on-site property coverage for nuclear risks since 1957.

The Commission's commercial reactor licensees, as a group, purchase by far the largest share of this form of coverage.

over the years the Petitioners have increased the_ maximum amount of such insurance available for a single plant from $60 million to $750 million.

Assuming continued good operating experience, they would expect to provide higher limits in the future.

The availability of large amounts of such insurance at reasonable cost from private insurers inures to the benefit of the public as well as to the Commission's licensees and their ratepayers.

If the Petitioners are to offer licensees insurance that will be acceptable to the Commission, they will be required to amend their insurance policies to accommodate the special requirements of the revised Rule.

Accordingly, the Petitioners are interested in the promulgation of a rule relating to required insurance which will meet the Commission's objectives, but will also avoid the uncertainty, delay and additional administrative expense that the revised Rule encourages.

The Petitioners, therefore, submit that they are 6 interested persons* under the Commission's Rules.

Argument in Support of the Petition Evolution of Nuclear Property Insurance ci

~

Nuclear property insurance was created in 1957 by the Petitioners when it became apparent that the normal insurance markets would not be able to provide the high limits and special insurance required for the nuclear energy hazard.

The Petitioners modeled this new insurance on the property damage policies used for large commercial risks.

In accordance with standard practice, the paramount coverage was for the risk of Physical Damage Loss, a coverage primarily designed to provide for the repair or replacement of the plant.

Loss is commonly payable under such policies to a mortgagee or trustee named in the policy as having a secured financial interest in the property.

4 -

The standard debris removal coverage was expanded to include the risk of incurring the special costs associated with decontaminating the plant (Decontamination Loss).

Special coverage was added for the risk of incurring extra expense in bringing the plant to a cold shutdown in case of emergency and for expediting repairs or making temporary repairs (Stabilization Loss).

coverage for Stabilization or Decontamination Loss, however, was triggered only by a Physical Damage Loss for which the insurers were liable to indemnify the insured under the policy.

Each coverage applied only to costs actually incurred for the purpose stated in the particular coverage.

No Stabilization or Decontamination Loss became payable on the basis of the estimated costs that might be required in the future.

4t Originally the Petitioners were the sole source of primary coverage.

There was no excess coverage.

Today's insurance arrangements are much more complex, and the amounts available are much higher.

on-site property damage insurance can now be obtained from the nuclear pools (ANI/MAERP) operated by the Petitioners and the utility formed insurers known as NML and NEIL II.

The nuclear pools and NML offer separate, non-combinable programs of primary insurance, each with a $500 million maximum limit.

The nuclear pools and NEIL II offer complementary programs of combinable excess insurance.

The first $500 million of coverage has never been subject to payment priorities, whether written by the Petitioners or NML.

NEIL II imposes a priority on its excess coverage for the insured's obligation or liability to decontaminate the reactor station site.

ANI/MAERP offer excess coverage with an optional priority for decontamination, but the priority has never been chosen.

Evolution of the Property Insurance Rule 1

~

The Price-Anderson Act: expressly requires financial protection against tort liability. Its purpose is to protect the public against the financial consequences of off-site injury or damage caused by the nuclear energy hazard.

The Act does not similarly require insurance covering on-site property damage or stabilization and decontamination expense.

Historically, Congress~has encouraged the development of large amounts of property.in~urance, but has never assigned any special role to the use of thejproceeds.

Property insurance has been regarded primarily as,~ rather conventional means of encouraging private financing of industrial activities at reasonable cost --

in this case, the development of nuclear power plants.

5 -

It was only after the accident at Three Mile Island in 1979 that the Commission, acting under its general authority to inquire into the financial qualifications of its licensees, decided to require on-site property damage insurance.

The original Rule, promulgated in 1982, required operating reactor licensees to carry both:

(1) the maximum amount of primary coverage offered by the Petitioners or NML, and

{2) any excess coverage in an amount no less than that offered by either the Petitioners or NEIL II.

As of mid-1987, this requirement could be satisfied by purchasing

$620 million of primary and excess coverage, while the maximum coverage available to utilities was $1.23 billion.

The Commission's original Rule did not impose a priority for stabilization or decontamination.

Losses could be proved and adjusted under the standard mortgagee or trustee loss payable clauses, although NEIL II applied a decontamination priority as of November, 1982 which bypassed these arrangements.

On November 8, 1984 the Commission published a proposed rule for comment which substantially increased the amount of on-site property damage insurance it required and established a modified decontamination priority.

The proposed rule, however, did not require payment of proceeds for Decontamination Loss to a separate trust.

See 49 Fed. Reg. 44645-651 (1984) (to be codified at 10 CFR pt. 50).

Thus, in late 1984 the Commission's view of the purpose of the required property insurance was consistent with the historical view that property insurance is relevant to the financial qualifications of its licensees to fulfill their safety obligations under the Act.

Recently, however, it appears that the Commission's view of the function of its insurance requirement has changed.

In the Supplementary Information accompanying the publication of the final Rule, the Commission stated:

The Commission has determined that $1.06 billion of nuclear property damage insurance is needed to stabilize, decontaminate and clean up a reactor after an accident so as to mitigate potential threats to the health and safety of workers and the public and to the environment.

Accordingly, the Com.mission is requiring reactor licensees to purchase this insurance.

(52 Fed. Reg. 28966 (1987)).

Any amount above that has not been shown to be significant in protecting public health and safety, but represents the

6 -

economic replacement of the facility itself.

(lg. at 28964-6~.)

[The demand for insurance] is not only comprised of funds necessary for decontamination and debris removal, but also reflects the needs of insureds and their owners for compensation to replace the facility, a concern beyond the province of the NRC.

(isl. at 28965.)

These comments clearly indicate a major shift. Originally, the Commission required licensees to maintain property insurance which primarily afforded coverage for direct physical damage to the facility, and only secondarily included decontamination and stabilization coverage.

The Commission required substantially less coverage ($620 million maximum) than it d,oes under the revised Rule, and did not dedicate any portion of the insurance proceeds of the required insurance, let alone the entire proceeds, to the payment of Stabilization Loss and Decontamination Loss.

summary of Argument In a relatively short time the Commission has shifted from the 30-year old historical view of the purpose of nuclear property insurance, a purpose implicitly recognized in its original Rule which focused on Physical Damage Loss. It now appears to be saying that the risk of Physical Damage Loss is beyond its concern or, at least, beyond the concern of its property insurance requirement.

The Petitioners do not dispute the commission's right to make the shift or the wisdom in doing so.

They do submit, however, that the Commission's more sharply focused and limited view of the purpose of its required insurance will necessitate restructuring, or at least redefining private insurance arrangements if they are to meet satisfactorily the continuing need to cover the risk of Physical Damage Loss.

It would be unfortunate to cast the new insurance priorities in so rigid a form that they hinder the growth of insurance against the risk of ~11 three types of losses which the nuclear industry faces -- Stabilization, Decontamination and Physical Dam.age Loss.

And it would be equally unfortunate, and economically wasteful, to introduce the prospects of uncertainty, delay and additional administrative expense into the complex process of proving and paying losses in the three separate loss categories by providing special provisions for each type of loss.

In particular, the decontamination trust provisions, which were adopted without opportunity for careful review and comment by professional insurers, are likely to have the unfortunate effects outlined above.

The Petitioners submit that the provisions are

7 -

not needed.

Their objectives can be accomplished by refining 10 CFR 50.54(w) and modifying the terms of the insurance contracts.

The revised Rule also inhibits achieving a harmonious, efficient use of 6 excess capacityw (that is, capacity that is not subject to the $1.06 million priority, or that may be released from such priority when it becomes apparent that the total Stabilization Loss and Decontamination Loss will not reach that amount).

This problem can be cured.

But to be effective under the natural and most efficient structure of private insurance arrangements, release of insurance proceeds to pay Physical Damage Loss must be from the *bottom up 6

-- not from the *top down.*

The stabilization of a reactor following an accident is consistent with both public health and safety and the sound insurance practice of preserving the plant investment from further unnecessary loss.

One would not expect, therefore, that a loss payee, such as a mortgagee or indenture trustee, would object to and refuse to approve the use of insurance proceeds for this purpose.

However, since the Commission has decided to impose a specific obligation on the insured and a specific priority on any proceeds of the property insurance, the Petitioners request amendments to the revised Rule which can form the basis for changes in the Emergency Cold Shutdown Coverage of their policies.

This in turn will allow insurers to make such payments, on customary sworn proof of loss, directly to the insured, rather than jointly to the insured and any other loss payee such as a mortgagee or indenture trustee.

Finally, the Petitioners submit that is not possible to resolve the questions presented by the revised Rule and this Petition by October 4, 1988.

They submit further that there is very little risk under present policy provisions that in fact the priorities established by the Commission would not be carried out or that insurance proceeds would be diverted for other purposes in the unlikely event that a serious accident should occur while this Petition is being considered.

Hence, temporary, limited suspension of the revised Rule is warranted.

Specific Argument with Respect to the Trust Provisions The revised Rule, first, places a priority on the use of any insurance proceeds to pay Decontamination Loss and, second, requires the payment of such proceeds to a separate trust.

The dual purpose of these provisions, as the Petitioners understand it, is to ensure:

(1) that the insurance proceeds will actually be spent for decontamination and not diverted to some other use (such as payment of Physical Damage Loss), and (2) that, in the event of bankruptcy, the proceeds will not become available to general creditors.

The Petitioners' insurance contracts have provisions on the proof and payment of Decontamination Loss which serve these purposes well.

If the Commission is convinced that on careful examination the policies have a substantial deficiency in this respect, the policies then can be adjusted to remove it.

Under the Petitioners' insurance, Decontamination Loss is not payable on the basis of estimates of decontamination costs.

On the contrary, no insurance proceeds are available for payment to anyone, whether the named insured, a loss payee named in the policy or a trustee appointed under the revised Rule, except for those costs of decontamination that have actually been incurred (that is, for work that has been done and payment therefor is due the insured or someone who has assumed an obligation to do the work under a contract or agreement).

Since, in essence, proof of decontamination work completed is required before there are any insurance proceeds, the proceeds of the decontamination coverage cannot be diverted to another purpose.

Payment to a separate trust does not add security to the anti-diversion objective.

Under policies as presently worded (except the NEIL II policy),

there remains the possibility that some Physical Damage Loss could be proved and paid before the Decontamination Loss, thus reducing the amount of insurance available for decontamination.

This concern can be met by establishing a priority on the use of any proceeds of insurance for decontamination, a provision which the Petitioners are willing to incorporate in their policies issued to be effective on or after October 4, 1988.

The Petitioners submit that realization of the Commission's first objective can be virtually guaranteed simply by:

(1) having the Commission establish a valid priority, (2) requiring the Commission's licensees to purchase available insurance contracts that recognize the priority, and (3) including provisions in the insurance contracts which state clearly that there is no right to any proceeds of insurance subject to the decontamination priority except, in essence, for reimbursing or indemnifying costs of decontamination work actually done.

Once these three conditions are met, payment of proceeds to a separate trust will provide no additional security.*

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The Petitioners submit that satisfying these three conditions also virtually insures that the Commission's second objective will be met without the need for a separate trust.

Insurance law recognizes the general principle that bankruptcy or insolvency of an insured does not relieve the insurer of its obligations under the policy.

But it would be strange indeed to suggest that either of these events substantially alters those obligations.

Accordingly, it follows that the proceeds of insurance would only flow to a trustee in bankruptcy under the same priorities and conditions that would have applied to the insured in the absence of bankruptcy.

There is, consequently, no reason to expect that a trustee in bankruptcy could recover or divert proceeds for other purposes if the three conditions set forth above are satisfied.

Nor is there any reason to expect that the trustee would refuse to permit the expenditure of funds for decontamination knowing that funds expended would be reimbursed by insurance dedicated to payment of decontamination costs.

In short, the Petitioners submit that payment of proceeds for decontamination to a separate trust is not appropriate.

They believe the Commission's objectives can be met through refinements of the revised Rule and the insurance contracts.

specific Argument on the Need for a Definite Release from Priorities While the Commission does not specifically require coverage for the risk of Physical Damage Loss, the Commission has suggested that:

If capacity continues to grow at a pace that substantially exceeds possible increases in estimated facility decontamination costs, it would be expected that investors would find a decontamination priority progressively less onerous as more funds would be made available exceeding those subject to a priority.

(52 Fed. Reg. 28970 (1987)).

In commenting on the *flexibility* needed in responding to an accident, the Commission has also suggested:

Further, the decontamination priority is meant to be invoked only when there would be serious concern over the availability of funds for decontamination *

.l.I!L.)

However, there is not much flexibility inherent in the actual wording of the revised Rule.

Nor is there any procedure in the Rule for obtaining an immediate release from the priorities when there is *excess capacity.* The Commission may in fact have assumed that excess capacity will become immediately available

10 -

without any formal release of insurance proceeds from the priorities.

Unfortunately, the structure of the private insurance markets is such that excess capacity is not likely to become immediately available for the payment of Physical Damage Loss.

This results from the process of building capacity in layers.

The excess layers of insurance do not come into play until the underlying layers are exhausted by actual payment of losses.

Since Decontamination Loss is paid only as costs are incurred, considerable time, perhaps several years, will elapse before the paid losses reach the upper limit of the priority.

Further, releasing insurance from the priority from the *top down* may not help very much.

What is lacking, and very much needed, to satisfy the Commission's suggestions is a relatively quick and simple method of releasing the underlying layers of insurance from the priorities.

In principle, the Petitioners submit that the underlying layers of insurance should be released from the priorities to the extent that the total limit of property damage coverage carried by a power plant exceeds the upper limit of the priorities.

conclusion Because it is somewhat difficult to deal with the intricacies of different insurance structures in relation to capacity and the ability of insurance to respond to priorities, a fuller discussion is contained in APPENDIX A for the Commission's information.

The development of a workable procedure for releasing *excess capacity* efficiently must take into account the need for the Commission to know what costs have been paid for stabilization and decontamination and the need for insurers to know when, and the extent to which, priorities have been released.

The Petitioners believe that ultimately it will prove necessary to establish, with the cooperation of the commission, its licensees and their various insurers, some reasonable method of allocating to each of the three kinds of losses, the relevant loss costs and insurance proceeds paid and potentially available.

This seems essential to the determination of the amount of excess capacity available at any point during the loss adjustment process.

Once the Commission is satisfied that it has up-to-date, reliable information of the amount of *excess capacityw available for a particular accident, there is then a reasonable basis for releasing insurers from the priorities applicable to stabilization Loss and Decontamination Loss to the extent of the excess.

There are practices in the insurance business, such as

11 -

those relating to certificates of insurance, loss experience reports and releases, which while not perfectly analogous, might be adaptable to developing a workable procedure satisfactory to the Commission and other interested parties.

The Petitioners wish to assure the commission that this petition for relief is motivated by their desire to assist the Commission in obtaining its objectives with minimum adverse effect on the availability and cost of high limit property insurance.

They would be pleased to cooperate, within the context of this rulemaking, with the Commission and other interested persons in suggesting appropriate modifications to the revised Rule and the insurance contracts affected.

June 3, 1988 Respectfully submitted, 6kd Ir, ~dtk Richard A. Schmalz

~

212 Pattonwood Drive Southington, Connecticut 06489 (203) 747-5332 w

Mark F. Horning Linda s. Stein Steptoe & Johnson 1330 Connecticut Avenue, N.W.

Washington, D.C.

20036 (202) 429-3000 Attorneys for Petitioners American Nuclear Insurers and MAERP Reinsurance Association

APPENDIX A The total risk insured under nuclear property insurance can be broken roughly into three parts and represented as follows:

Total Risk= Physical Damage Risk+ Stabilization Risk+

Decontamination Risk.

By insurance convention and the provisions of insurance contracts:

Physical Damage Risk losses are payable on proof of the fact that the value of the property insured has been diminished by actual physical damage to the property by a covered peril; Stabilization Risk and Decontamination Risk losses are NOT payable unless they (1) result from a Physical Damage Risk loss that is payable under the terms of the insurance, and (2) represent-costs that have actually been incurred for stabilization or decontamination work done.

In particular, Stabilization Risk and Decontamination Risk losses are not payable on estimates of the amounts that may be necessary to complete stabilization or decontamination.

The long standing common insurance practice has been to assign a de facto priority on the insurance proceeds to Physical Damage Risk losses through loss payee clauses in favor of mortgagees and trustees named in the insurance policies.

A nuclear accident may result in almost any combination of Physical Damage Risk, Stabilization Risk and Decontamination Risk losses.

Given the above constraints on the proving and payment of losses, the imposition of a rigid priority on insurance proceeds for Stabilization Risk and Decontamination Risk loss raises a potential conflict with insurance conventions and contractual arrangements.

It also raises potential inefficiencies relating to the cost and availability of nuclear insurance.

The impact of the Stabilization Risk and Decontamination Risk loss priorities can be illustrated by assuming that Total Insurance capacity from world-wide sources for the Total Risk insured is achieved in accordance with one of two common types of insurance arrangements:

a Monolithic Quota Share Model or a Conglomerate Layered Model.

Both models are simplified, but represent quite well two different concepts.

In each case we will assume that Total Insurance Capacity is $1.56 billion, which is close to the maximum available today.

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Monolithic ouota Share Model This model assumes that:

(1)

(2)

Total Insurance Capacity consists of a uniform block of coverage equal to the sum of the individual risk taking commitments of each insurance Participant, and each Participant is at risk with respect to any loss, whether from Physical Damage Risk, Stab-ilization Risk or Decontamination Risk, on a quota share basis determined by the ratio of the Participant's commitment to Total Insurance capacity.

Total Risk under this model can be evaluated and priced so that it does not matter from any one Participant's point of view when a particular kind of loss is paid.

This has some favorable consequences.

We may note at once that all of Total Insurance capacity in excess of $1.06 billion (the total priority for Stabilization Risk and Decontamination Risk losses) is immediately available for Physical Damage Risk losses ($500 million under our assumption).

This recognizes the de facto priority historically attached to Physical Damage Risk.

Further, $1.06 billion can be immediately earmarked for Stabilization Risk and Decontamination Risk losses that have resulted from a Physical Damage Risk loss that is clearly payable under the insurance.

Finally, whenever it becomes apparent that the total Stabilization Risk and Decontamination Risk losses are not expected to reach $1.06 billion, an additional portion of Total Insurance Capacity can be unfrozen and used to pay any unpaid Physical Damage Risk losses without requiring that any particular amount actually be first paid for Stabilization Risk or Decontamination Risk losses.

These desirable characteristics flow from the fact that the Total Risk has been evaluated and priced as a block and distributed to Participants on a quota share basis.

The Total Risk premium can reflect the principles that Stabilization Risk and Decontamination Risk losses will not be paid until the costs have been actually incurred and that the risk at higher levels of payment is less than at lower levels.

But the order of payment does not prejudice any Participant with respect to any other Participant.

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conglomerate Layered Model This model assumes that Total Insurance Capacity is not a uniform block, but consists of many blocks arranged in layers.

Total Insurance Capacity is still the sum of the individual commitments of each Participant, but the shares are allocated to the blocks and layers.

A given Participant may subscribe to more than one block at more than one layer, but the commitment of each Participant is not a simple quota share of Total Insurance Capacity, as in the monolithic model.

The concept of layering implies that Total Insurance Capacity is evaluated and priced in accordance with the remoteness of each layer from the actual payment of losses, not estimates of losses.

One block within the same layer may be evaluated and priced differently from another, but both will be priced on the same assumption of remoteness from the actual payment of losses.

Assume a simple layered structure of $500 million Primary, $506 million of 1st Excess and $500 million of 2d Excess.

The 1st Excess is priced on the assumption that it will not attach to any Physical Damage Risk, Stabilization Risk or Decontamination Risk loss until $500 million has actually been paid for any combination of such losses under the Primary coverage.

Similarly, the 2d Excess is priced on the assumption that it will not attach until $1.06 billion has been paid for any combination of Physical Damage Risk, Stabilization Risk or Decontamination Risk losses.

In the layered model the impact of the Stabiliz~~ion Risk and Decontamination Risk priorities can be very significant in the case of an accident moderately more serious than the accident at Three Mile Island.

There may be a reasonable initial expectation that the total Stabilization Risk and Decontamination Risk losses will reach

$1.06 billion, but in practice, decontamination costs of such magnitude will actually be paid gradually over a long period of time, perhaps several years.

The Primary layer of $500 million is immediately frozen for the payment of Stabilization Risk and Decontamination Risk losses.

The mere freezing of this amount, making it impossible to pay Physical Damage Risk losses, raises a question whether there is any coverage for the Stabilization Risk and Decontamination Risk losses, since coverage is contingent on a payable Physical Damage Risk loss.

Leaving this question aside, however, as one that can be resolved, other serious problems arise.

Assume the Stabilization Risk losses are $100 million.

No money can be made immediately available from the 1st Excess for the payment of Physical Damage

4 -

Risk losses for two reasons.

First, it too is subject to the priority, which at this stage must be retained at the maximum possible, and second, $500 million has not actually been paid under the Primary.

similarly, no money can be made available under the 2d Excess *for Physical Damage Risk losses, even though it is not subject to the priority, perhaps for many years, because a total of $1.06 billion must first be paid with respect to the total loss.

Finally, even if it becomes apparent rather soon after the accident that the total Stabilization Risk and Decontamination Risk losses will not exceed, let us say $806 million, it does little immediate good to lower the Stabilization Risk-Decontamination Risk priority by

$200 million.

There would still be no money available from the 1st Excess for Physical Damage Risk losses until $806 million has been paid.

comparison of the Models The Monolithic Model is able to accommodate the Commission's Property Damage Rule quite well even though it reverses the historic priority on Physical Damage Risk losses.

The Layered Model does very poorly in this respect.

on the other hand, the layered model is* almost universally used when the objective is to achieve the highest possible capacity at a reasonable cost.

The reason is that the Participants (insurance risk takers) can then be drawn from the widest possible range of risk takers having different views as to the remoteness from loss that best suits their tastes. It would be virtually impossible to marshal! maximum capacity within a monolithic block.

The concept of pooling, as used by ANI/MAERP, and the organization of utility risk takers into organizations such as NML and NEIL II, helps reduce substantially the complexity of the Layered Model, as applied to most commercial insurance situations, but it cannot produce the equivalent of the Monolithic Model.

For example, the $500 million of Primary Coverage is written separately as monolithic blocks.

But the coverages provided by ANI/MAERP and NEIL II in the range of the 1st and 2d Excess Layers described in the illustration of the Layered Model are distinctly separate from the coverage in the Primary layer.

The principles of the Layered Model will almost certainly govern the development of increased capacity in the future.

That being the case, the revised Rule will almost inevitably result in delaying payment of Physical Damage Risk losses even when there is clearly enough capacity in excess of $1.06 billion to warrant prompt payment.

And the introduction of another potential loss payee to receive the proceeds of insurance for

5 -

Decontamination Risk losses is certain to complicate the process if for no other reason than the fact that the revised Rule is, on its face, rather unequivocal, even though the Commission expresses the view that it can be interpreted flexibly.

The Layered Model can be made to approximate closely the performance of the Monolithic Model, without interfering with its own virtues relating to high capacity at low cost, if the commission were to release the underlying layers from the priorities to the extent that the total capacity in place for a plant exceeds the upper limit of the priorities (as adjusted from time to time on the basis of better estimates as to the expected cost of decontamination).

To illustrate, the Petitioners' Primary layer insurers have priced that layer without regard to any priority, so they would not be concerned with an immediate release from priority of the entire amount of their insurance (if the total capacity justified that course).

They would welcome it, because it would allow them to respond in the most flexible way possible to the loss proven by their policyholder in any of the three categories.

Their 1st Excess Layer insurers would not object, because their main concern is that $500 million of loss in any category is paid before their coverage attaches.

While of course the Petitioners cannot speak for other insurers, it does seem apparent that the release of insurance proceeds from the priorities imposed by the Commission from the *bottom up,* in principle, merely restores the situation to its former state.

AGENCY:

ACTION:

NUCLEAR REGULATORY COMMISSION 10 CFR Part 50 Docket No. PRM-50-51. PRM-50-SlA, and PRM-50-518

.88 SEP 14 Al 1 :os American Nuclear Insurers and MAERP Reinsurance Association, et al., Fi ling of Petitio~ for Rulemaking Nuclear Regulatory Co111T1ission.

Notice of Receipt of Petitions for Rulemaking.

SUMMARY

The Conmission is publishing for public co111T1ent this notice of receipt of petitions for rulemaking that were filed with the Commission.

The first petition, dated June 3, 1988, was submitted by Steptoe and Johnson on behalf of American Nuclear Insurer and MAERP Reinsurance Association and has been assigned Docket No. PRM-50-51.

The second petition, dated June 21, 1988, was submitted by Bishop, Cook, Purcell, and Reynolds on behalf of the Edison Electric Institute and the Nuclear Utility Management and Resource Council and has been assigned Docket No. PRM-50-51A.

The third petition (undated) docketed by the NRC on July 7, 1988, was submitted by Baker and McKenzie on behalf of Nuclear Mutual Limited and Nuclear Electric Insurance Limited and has been assigned Docket No. PRM-50-518.

The petitions, which are similar, request that the Co11111ission amend, after notice and opportunity for comment, certain insurance requirements in 10 CFR 50.54(w) as such require-ments relate to special trustees established to receive and disburse property damage insurance proceeds after an accident.

2 DATE:

Submit comments by November 18,1988.

Corrments received after this date will be considered if it is practical to do so, but assurance of consideration cannot be given except as to comments received on or before this date.

ADDRESSES:

Submit comments to: Secretary, U.S. Nuclear Regulatory Co11111ission,

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Washington, DC 20555.

Attention: Docketing and Service Branch.

For a copy of the petition, write: Rules Review and Editorial Section, Regulatory Publications Branch, Division of Freedom of Information and Publications Services, Office of Administration and Resources Management, U.S. Nuclear Regulatory CoD'Dllission, Washington, DC 20555.

FOR FURTHER INFORMATION CONTACT:

Juanita Beeson, Chief, Rules Review and Editorial Section, Regulatory Publications Branch, Division of Freedom of Information and Publications Services, Office of Administration and Resources Management, Washington, DC 20555, Telephone (301) 492-8926.

SUPPLEMENTARY INFORMATION:

Background

On August 5, 1987 (52 FR 28963), the NRC issued a final rule entitled "Changes in Property Insurance Requirements for NRC Licensed Nuclear Power Plants." The rule required that each nuclear reactor licensee, as a condition of its license, meet certain onsite property damage insurance requirements for each of its nuclear reactor station sites. Utilities licensed by the NRC to operate nuclear power plants are currently subject to §50.54(w) that requires them to maintain $1.06 billion in property insurance.

As insurers of nuclear power plants, the petitioners are concerned with those

3 provisions of the final rule which require that (1) any insurance claims be paid first for the stabilization of the reactor facility and secondly, for decontamination of the facility, and (2) any insurance proceeds be paid to a trustee who would disburse the proceeds according to the priorities.

Basis for Request

1. Priority Provision The petitioners state that they will be unable to include the priority provision in their insurance policies by the mandated date of October 4, 1988, and that implementing this provision is complex and will result in substantial administrative expense. Furthermore, the petitioner, American Nuclear Insurers and MAERP Reinsurance Association, is concerned that the new priorities for the proceeds of the required insurance will increase the demand for higher amounts of nuclear property insurance in order to cover physical damage loss.

2.

Special Trust Provision The petitioners, all of whom request NRC to temporarily suspend and eventually delete the provision in the final rule that requires insurance proceeds for decontamination loss to be paid to a separate trust, argue that the special trust provision was not included in the proposed rule issued on November 8, 1984 (49 FR 44645), but was introduced in the final rule issued on August 5, 1987.

The petitioners state that NRC issued the special trust provision without notice to interested parties, thus denying

4 them opportunity to coR111ent.

The petitioners believe the special trust provision is a significant matter and that NRC should have allowed discussion that would have afforded them and others the opportunity to address this provision. Therefore, the petitioners request the provisions contained in §50.54(w) of the final rul~b.e,_suspended until this petition for rulemaking is completed.

American Nuclear Insurers and riAERP Reinsurance Association (ANI/MAERP)

PRM-So-61 Petitioners (ANI/MAERP) are an organized association of insurance companies whose members have been engaged in providing on-site property coverage for nuclear facilities since 1957.

ANI/MAERP state that the Commission's co1J111ercial reactor licensees, as a group, purchase the largest share of this form of coverage.

ANI/MAERP believe that the current provisions in the final rule will result in uncertainty, delay, and substantial administrative expense in the process of 4t proving loss and prompt payment of valid claims.

ANI/MAERP claim that these provisions will also hinder the ability of private sources to meet the need for large amounts of nuclear property insurance. Therefore, ANI/MAERP request that the CoR111ission suspend those provisions of the current rule that require:

(1) insurance proceeds for decontamination loss be paid to a separate trust, and (2) the priorities for stabilization loss and decontamination loss (including the related trust provision) be incorporated in property insurance policies not later than October 4, 1988.

5 ANI/MAERP also request that the Commission amend the current rule, after notice and cormnent:

(1) to define more clearly the nature and extent of the obligations and priorities set forth in §50.54(w) (3) and (4),

(2) to clarify the rights ana obligat°!;_o.n_..s__of insurers with respect to securing appropriate proofs of loss for the coverages affected by the rule and making timely and proper payments in accordance with insurance practice and policy provisions, (3) to delete the provision requiring payment of decontamination loss proceeds to a separate trust, and

{4) to provide insurers a more definite method for paying promptly reasonable amounts of loss encumbered by the priorities established by the current rule when there is more than enough insurance in force.

Edison Electric Institute (EEI) and the Nuclear Utility Management and Resources Council (NOMARC) PRM-50-51A EEI is the association of investor-owned electric companies whose members operate 96 nuclear plants and have five additional units under construction.

NUMARC is an organization that represePts all electric utilities licensed by the NRC to construct or operate nuclear power plants.

NUMARC is responsible for coordinating the combined efforts of its members in addressing generic operational and technical regulatory issues and to work with the NRC to obtain solutions to regulatory issues affecting nuclear plant construction and operation.

6 The petitioners, EEi and NUMARC, share concerns similar to those of the petitioners in PRM-50-51.

They contend that the independent trustee arrangement is neither effective nor even needed to address either the bond trustee problem or the bankruptcy situation and could lead to unwarranted delays in funding post-accident cleanup.

Therefore, the petitioners request that the NRC:

(1) initially suspend the independent trustee provision or relieve licensees from compliance with the independent trust requirement and ultimatel; delete it, (2) amend the rule to require that licensees purchase insurance that provides coverage against liability (which would be explicitly established in the rule) for stabilization and decontamination expense (the form along the lines of the Nuclear Electric Insurance Limited (NEIL II) hybrid policies would be acceptable), to avoid needlessly invoking the duty of trustees for bondholders to assert their interest in property insurance proceeds, (3) clarify the rule (or at least the statement of considerations) by defining or at least giving examples of stabilization and by subjecting stabilization expenditures to the automatic priority only when a reasonable threshold, such as $100 million, is exceeded for a reasonable period of time such as thirty days, subject to extension, and (4) provide a mechanism for releasing from the priorities insurance proceeds as will not be needed for stabilization and decontamination.

7 Nuclear Mutual limited (NML) and Nucler Electric Insurance limited (NEIL)

PRM-50-S!B As insurers of nuclear property r1sks, NML provides $500 million of primary property insurance to about 50 percent of the nation's nuclear reactor stations sites in the country.

NEIL states that a licensee cannot meet the

$1.06 billion minimum amount required by thecurrent rule without purchasing insurance from their company.

The petitioners, NML and NEIL, state that the current rule does not achieve the Co11111ission 1s objective, i.e., to provide assurance in the event of an accident that the licensee would have sufficient funds to stabilize and decontaminate a nuclear reactor station site.

NML and NEIL indicate that the special trust provisions do not protect insurance proceeds against potential claims by the indenture trustee and may further complicate an already difficult situation. Therefore, the petitioners urge the issuance of the proposed amendments submitted by EEI and NUMARC.

Petitioners* Proposal The petitioners request that §50.54(w) be revised to read as follows:

§50.54 Conditions of licenses.

(w) Each electric utility licensee under this part for a production or utilization facility of the type described in §50.21{b) or §50.22 shall, by June 29, 1982, take reasonable steps to obtain insurance, available at reasonable costs and on reasonable terms from private sources or to demonstrate to the satisfaction of the Coumission that it possesses an equivalent amount of protection covering the licensee 1s obligation, in the event of a significant contamination event at the licensee 1s reactor, to stabilize and decontaminate the reactor station site at which the unit experiencing such event is located as provided in this subsection, provided that:

8 (1) The insurance required by this subsection must have a m1n1mum coverage limit with respect to each reactor station site of either

$1.06 billion or whatever amount of insurance is generally available from private sources, whichever is less. The required insurance may, at the option of the licensee, be included within policies that also provide coverage for other risks, including, but not limited to, the risk of direct physical damage.

In such cases, all such policies shall clearly state that any proceeds shall be payable first for stabilization and next for deconta_llination of the reactor station site as and to the extent provided herein, and that any such optional coverage or coverages are subject thereto. If a licensee 1s coverage falls below the required minimum, the licensee shall within 60 days take all reasonable steps to restore its coverage to the required minimum.

(2) Effective 2 [a date which allows sufficient time for development and approval of changes in policies of insurance after the effective date of a final rule adopted in accordance with this petition] with respect to policies issued or annually renewed thereafter, the proceeds of such required insurance shall be dedicated, as and to the extent provided herein, to reimbursement or payment on behalf of the insured of reasonable expenses incurred by the licensee in taking action to fulfill the licensee's obligation, in the event of a significant contamination event at the licensee 1s reactor, unless otherwise ordered or approved by the Director of the Office of Nuclear Reactor Regulation, to ensure that the reactor is in, or is returned to, and maintained in, a safe and stable condition and that radioactive contamination is removed or controlled such that personnel exposures are consistent with the occupational exposure limits in 10 CFR Part 20.

Such actions shall be consistent with any other obligation the licensee may have under this chapter and shall be subject to paragraphs (4) and (5) hereof.

As used in this paragraph. a "significant contamination event 11 means an event that involves the release of radioactive material from its intended place of confinement within the plant or on the reactor station site such that there is a present danger of release offsite in amounts that would pose a threat to public health and safety if stabilization and decontamination expenses or expenses for other appropriate remedial action in an amount equal to or greater than the threshold level set forth in subparagraph (4) were not taken.

(3) The licensee shall report to the NRC on April 1 of each year the current levels of this insurance or financial security it maintains and the sources of this insurance or financial security.

(4) {i) The proceeds of the insurance required by paragraph (2) hereof,

, if and to the extent applicable, shall be used first to ensure that the licensed reactor is in a safe and stable condition and can be maintained in that condition so as to prevent any significant risk to the public health and safety. The licensee shall inform the Director of the Office of Nuclear Reactor Regulation in writing when that condition is attained. This priority on insurance proceeds for

9 such stabilization of the reactor shall attach where expenditures for stabilization and decontamination with respect to a significant contafflination event appear likely to exceed $100 million, and shall remain in effect for 30 days or, upon order of the Director, for such longer period, in increments not to exceed 30 days, as the Director may find is necessary to protect the public health and safety. The actions appropriate to bring the reactor to a safe and stable condition and maintain 1t in that condition generally include those:

(A) to shut down the reactor; (B) to establish long-term cooling; (C) to control radioactive releases; and (D) to secure structures, systems, or components to minimize exposure to onsite personnel or the offsite public to radiation or to facilitate later decontamination or both.

(ii) Within thirty (30) days after the licensee informs the Director of the Office of Nuclear Reactor Regulation that the reactor is and can be maintained in a safe and stable condition, or at such earlier time as the licensee may elect or the Director may for good cause direct, the licensee shall prepare and submit a cleanup plan for the Director's approval.

The plan shall identify all cleanup operations that will be required to decontaminate the reactor sufficiently to permit the licensee either to resume operation or to undertake measures leading to decommissioning of the reactor in a manner that is consistent with the Conmission's occupational exposure limits in 10 CFR Part 20, and shall provide the estimated expenditures for each such operation. If applicable, such operations shall include:

(A) Processing any contaminated water generated by the accident and by decontam1nation operations to remove radioactive materials; (B) Decontamination of surfaces inside the auxiliary and fuel handling buildings and the reactor building to levels consistent with the CoD111ission 1s occupational exposure limits in 10 CFR Part 20, and decontamination or disposal of equipment; (C) Decontamination or removal and disposal of internal parts and dainaged fuel from the reactor vessel; and (D) Cleanup of the reactor coolant system.

10 (iii) Following review of the licensee's plan, the Director will order that the licensee c081plete all operations that the Director finds are necessary to decontaminate the reactor sufficiently to permit the licensee either to resume operation or to undertake measures leading to decommissioning of the reactor, in a manner that is consistent with the CoDDission's occupational exposure limits in 10 CFR Part 20.

The Director shall approve or disapprove, for stated reasons, the licensee 1 s estimate of expenditures for such operations. Such order may not be:;ceffective for more than one year, at which time it may be renewed.

Each subsequent renewal order, if imposed, may be effective for not more than six months.

(iv) Of the balance of the proceeds of the required insurance not already expended to place the reactor in a safe and stable condition pursuant to paragraph (w) (4) (1) of this subsection, an amount sufficient to cover the expenses of completion of those decontam-ination operations that are the subject of the Director 1s order shall be dedicated to such use, provided that, upon certification to the Director of the amounts expended previous.ly and from time to time for stabilization and decontamination and upon further certification to the Director as to the sufficiency of the dedicated amount remaining, policies of insurance may provide for payment to the licensee or other loss payees of amounts not so dedicated, and the licensee may proceed to use in parallel (and not in preference thereto) any insurance proceeds not so dedicated for other purposes.

(5) The stabilization and decontamination requirements set forth in paragraph (w) (4) of this section must apply uniformly to all insurance policies required under paragraph (w) {2) of this section.

r,rl<

< I '

Dated at Rockville, MD. this ___..'::f::. __ day of~l988.

the Nuclear Regulatory Co11111ission.