The Nuclear Industry is Too Big To Fail too
Tepco, the giant Japanese electricity utility, is in deep… financial troubles following the Fukushima incident. Some in Japan are considering nationalising it as an option to keep all kind of risks under control, from decontamination to dismantlement. This would be an unlikely atomic interference in the free-market, and a serious step back for its zealots. But let’s get it straight: the nuclear industry is “Too Big Too Fail” too!
Tepco, the owner and operator of the 6 nuclear reactor compound at Fukushima I, is facing growing criticism. Yet, weeks of weak management in the deadly aftermath of the massive earthquake and subsequent tsunami has not stopped the western media1 from reporting on a national ‘stoicism’ winning the admiration of the rest of the world. Probably a classic case of our compulsive tendency to westernise everything, when it is really Shintoism here.
Tepco lied several times to the public, reporting ‘wrong radiation rates’, when reporting at all. This is corporate coded jargon for errors2 and Tepco’s Managing Director had to apologise3 to the people, which is serious business in Japan4. Unfortunately this breach of trust is not an isolated incident: Tepco lied5 many times before by covering-up severe breakdowns6. These misleading practices being exposed, public opinion seems to finally object.
The Media are finally on Tepco’s case. The company used to be a public relations expert7, and a big sponsor to newspapers and TV stations like many in the nuclear industry. It is now faltering and things got to the point that media trainings are unlikely to hide its the true face, at least for a while.
Nuclear Transparency
Estimated Financial Liabilities are huge, but might be only short-term threats to Tepco. Indeed, given the extent of the damages and radiation leaks reported worldwide (see the ‘air parcel trajectories’), compensation claims would put it out of business. As the WSJ Asia8 reports, it is likely to be saved by Japan’s 1961 Act on Compensation for Nuclear Damage: “the operator of a nuclear facility won’t be responsible for damage caused by its reactors if the damage was the result of ‘a grave natural disaster of an exceptional character.’ That means insurers of the nuclear plant are likely to be exempt from payment.”
Instead, it is the Government that would have to pay for farmers with radioactive fields, for fishers with contaminated resources, for homeless refugees, etc. Less financial consequences for Tepco eventually, that will be left to deal with the radioactive side of the drama.
Investors are also concerned about the cost of rebuilding the units damaged by the quake and tsunami, as well as to dismantle what cannot be repaired such as the cores covered with sea salt. Here again the WSJ Asia also reports that the broad support from the Japanese banks could not be big enough, and would require the government to step in.
Debt is also adding to the risk according to the systemic process observed in many other sectors. In short, because huge amount of money are required to build these humongous plants, there is not much left to pay for the damages. Besides, to get this capital the company raised debt in the form of Credit Default Swaps (CDS) on the financial markets. Those Tepco CDS are now shooting through the roof and analysts recommend to get rid of them9. Raising debt to operate, issuing Credit Default Swaps, which end-up up becoming volatile in the face of dramatic events… sounds familiar? This means that the same scenario faced by the Banks in 2008 during the credit crisis is likely to be repeated for Tepco: the company won’t be able to raise credit to pay for its operations and will need to be bailed-out one way or the other.
Detroit, USA
Dismantling a nuclear unit is a very long process, as demonstrated at the French unit of Brennilis in Brittany10. It can only start once the core has long cooled down and the task is enormous. At Brennillis the process started in 1996. In 2009 “all that remains of the plant are the heat exchangers and the reactor block, plus various nuclear waste. If authorization to proceed with the final stage of the dismantling is received, it could begin in the second half of 2010 and last to around 2019.” And anyway, would Tepco be interested in managing a protracted process that would eventually lead to leaving a waste-land behind, such as around the old industrial cities in Europe and America?
All aspects of the crisis lead to the conclusion that Japan cannot leave it to the private giant, likely to go bankrupt sooner or later. If Tepco cannot pay to secure safety, the last resort would be for the Government to step in, hence the idea of nationalization or majority state ownership. Can you imagine the Government not making a move if so many people, much of the economy and part of the land get so impacted?
So for all these reasons a Bail-out is likely to be required. Because at the end of the day, like the banking industry, the nuclear industry is Too Big Too Fail.
Let’s hope it will get under control sooner than later.
{ NKN, Paris – leLaissezFaire, Sydney – 9 April 2011 }
References and further reading:
(1): “Frustration grows as Japan’s nuclear evacuees wait and hope” – thewest.com.au
(2): TEPCO chairman apologized at press conference “There have been frequent delays and errors in the disclosure of data” – The Denki Shimhun – The Electric Daily News : http://www.shimbun.denki.or.jp/en/news/20110401_01.html
(3): “The moment nuclear plant chief WEPT as Japanese finally admit that radiation leak is serious enough to kill people” dailymail.co.uk
(4): Japanese-apologies-vs-foreign-apologies: http://www.japanprobe.com/2011/01/14/japanese-apologies-vs-foreign-apologies/
(5): TEPCO’s shady history: http://timshorrock.com/?p=1113
(6): “Fukushima nuclear plant owner falsified inspection records” – The Australian
(7): Tepco corporate website: “Increasing transparency of business operations” – http://www.tepco.co.jp/en/challenge/csr/c_g/open-e.html
(8): “Plant Operator Seeks $25 Billion” – Wall-Street Journal Asia
(9): CHART OF THE DAY: TEPCO CDS Explode Higher After An “Unforgivable Mistake” http://www.businessinsider.com/chart-of-the-day-tepco-cds-2011-3
(10): French unit of Brennilis in Brittany: http://www.francenuc.org/en_sites/brit_brenn_e.htm
The TBTF idea comes from this short comment on http://www.zerohedge.com/article/time-dump-tepco-cds-japan-considering-nationalization
‘Unusual event’ declared at a Washington nuclear power plan: http://www.msnbc.msn.com/id/42488215/ns/us_news-environment/
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