Canada: Nuclear New Build - Owner/Operator Structures

Introduction

One of the key decisions to make in the early stages of planning any nuclear new build project is the overall structure of the project and how ownership and operational interests may be separated. One of the principle drivers behind this decision is said to be the allocation of nuclear liability, which in most cases will fall on the "Operator" - but the term "Operator" has a distinct meaning when used in the context of a nuclear power project. A further reason for the separation of ownership and operation is the possibility of distancing investors who may have no experience or expertise in nuclear projects from nuclear operational issues and regulatory requirements that fall on the "Operator" of a nuclear plant.

Liability conventions and principles

For many countries, the relevant principles relating to Operators and nuclear liability are embodied in either the Paris Convention on Third Party Liability in the Field of Nuclear Energy (the Paris Convention) or the Vienna Convention on Civil Liability for Nuclear Damage (the Vienna Convention) (together the Conventions). The applicable terms of the Conventions depends on which version of which Convention and its amending protocols have been adopted by each country. We do not propose to deal with the differences between the Conventions here but intend to focus on the overriding principles to which both Conventions adhere.

It should be noted that there are a number of notable exceptions to the countries who have signed the Conventions, including the United States of America, Japan and India. However, these countries (but not all nuclear states) have domestic legislation in place which applies largely the same principles as those set out in the Conventions.

When considering the structuring of any nuclear project advice should be sought on the specific application of the Conventions, domestic legislation and the principles as they apply to the specific project.

In this regard, it is important to understand the scope of the Conventions and the meaning of "Operator" and "nuclear liability" as covered by the Conventions.

Nuclear liability

The meaning of Operator is discussed in more detail below, but what is the Operator liable for?

Under each Convention, the Operator is strictly liable up to a capped level1, for third party damage arising from a nuclear incident within states which are a party to the same Convention. For those countries which are also a party to the Joint Protocol Relating to the Application of the Vienna Convention and the Paris Convention, the Operator's strict liability is extended to cover damage caused to property or people in the states which are a party to the other Convention.

The Operator's liability under the Conventions broadly covers damage to or loss of life to any person and damage to or loss of any property other than the nuclear installation itself and any other nuclear installation, including a nuclear installation under construction on the site where the installation is located and any property on that same site which is used or to be used in connection with any such installation2.

Therefore the Conventions do not cover:

  • Damage to the power station itself or any property on the power station used in connection with the station.
  • Costs of decommissioning, reinstatement or making safe the station following a nuclear incident.
  • Damage to property or people outside the Paris and/or Vienna Convention states (as applicable), which would be covered by international law. This means that entities other than the Operator could potentially be held liable for nuclear damage to such third parties or property.

When speaking of the strict liability of the Operator one is simply referring to the liability to third parties for damage to people and property in the relevant states. This third party liability under the Conventions has traditionally being covered by nuclear insurance and therefore although the Operator has strict liability the insurance has covered the damages (subject to a deductible).

The Operator can have a right of recourse for its nuclear liability against third parties who caused the damage (for example, its contractors and subcontractors) but the Conventions only permit this if the damage was caused intentionally or if and to the extent that this is expressly permitted by a contract. Contractors (including technology providers) and other interested parties generally refuse to accept any nuclear liability.

Therefore although the reasoning behind splitting ownership and operational interests is generally to ring-fence nuclear liability with an Operator entity (thereby distancing investors) this only works in relation to third party nuclear liability which is, in any event, generally covered by nuclear insurance. The costs associated with the rectification/decommissioning of the station will need to be borne by the project and thus, depending on the terms of the financing, the lenders may have some exposure in respect of those costs.

Footnotes

1. The cap depends upon which Convention (and amending protocols etc) the state is a party to, together with the applicable domestic legislation of that state.

2. A number of European states are seeking to implement the 2004 Amending Protocol to the Paris Convention which, among other changes, will increase the Operator's liability and extend the definition of nuclear damage to include environmental damage and economic loss.

The operator

The Paris and Vienna Conventions have similar definitions of Operator. The Paris Convention provides that "an Operator in relation to a nuclear installation means the person designated or recognised by the competent public authority as the operator of the installation". By contrast the Vienna Convention provides that "an Operator means that person designated or recognised by the Installation State as the operator of that installation".

Therefore, although there is power under both Conventions for the state or the competent public authority to designate who is the Operator for the purpose of the Convention; this provision is rarely used in modern projects. The provision was historically used where a state entity was the developer and Operator of nuclear stations. However in today's market with private sector involvement, ECA financing, debt and equity financing and a move away from government financing and development, this provision is rarely used.

The Operator is generally seen as the entity which has day to day responsibility for the operation of the nuclear site. However to become a nuclear Operator an entity must take on much more than day to day operational responsibility. The Operator needs to take responsibility for all aspects of a nuclear plant that relate to safety, security and safeguarding, would need to be a nuclear licensed entity and be staffed with Suitably Qualified and Experience Personnel (SQEP), who could carry out the function of being the intelligent customer and supervising any contracts containing safety, security or safeguarding implications.

This regime is not limited to the operations phase, but also applies to the construction phase. The entity responsible for the construction phase will also be the Operator for the purposes of nuclear liability, and will be responsible for obtaining the nuclear licences required for the construction phase.

It is possible to have different entities responsible for the construction and operation phases, although this is more complicated in jurisdictions such as the UK where a single licence is granted for each plant which is intended to apply from cradle to grave. In other jurisdictions, such as the US, separate licences are granted for construction and operation which makes the division of these responsibilities more straightforward and this division often occurs in practice.

The Operator (ie, the holder of the construction or operation licence, as applicable) will also have the obligation to decommission or make safe the plant following a nuclear event or at the end of the life of the plant, and to establish a decommissioning fund and/or waste fund.

Owner/operator structures

It is not uncommon for investors in a nuclear project to seek to divest themselves of nuclear liability. This is often achieved through a separate owner / "Operator" structure, with the owner of the plant (into which equity is invested and debt facilities are paid) passing all nuclear related responsibilities and liabilities to a third party "Operator".

This structure should achieve the desired result, subject to the following qualifications and limitations:

  • All responsibilities relating to nuclear safety, security and safeguarding must sit with the Operator and the Operator must be the counterparty to all subcontracts relating to such responsibilities, for example the EPC contract, the fuel supply contract etc. If the owner retains any such responsibilities or contracts, then the owner would need to hold a nuclear licence and may be an Operator for the purpose of nuclear liability. The owner would be able to enter into contracts unrelated to nuclear safety, security and safeguarding, such as financing documents (although step-in becomes an issue as the main contracts would sit with the Operator) and offtake arrangements.
  • The Operator must be staffed with SQEP who could carry out the function of being the intelligent customer and supervising any contracts containing safety, security or safeguarding implications.
  • The terms of the contract between the Operator and the owner will need to reflect the fact that in relation to all safety, security and safeguarding issues the Operator (as the holder of the operation licence) will need to make all decisions ie, be the "Controlling Mind". The owner (assuming it does not hold a nuclear licence at this point) would not be allowed to influence the Operator on any issues relating to safety, security and safeguarding.
  • Consideration will also need to be given to the funding of the Operator. The payment mechanism under the contract between the owner and the Operator is likely to be on a cost reimbursable basis. Under a cost reimbursable mechanism, costs are usually divided between allowable costs and disallowable costs which must be funded by the Operator. How is the Operator to fund these costs? Will these be covered by a parent company guarantee? The Operator will also need to have access to funds which could be used in emergency situations. Consideration should also be given to how such a fund is accumulated and/or guaranteed.

Conclusion

A structure which has a separate owner and Operator of a nuclear plant is fast becoming the approach favoured in the international nuclear market especially on projects where ECA, equity and debt financing are in place/ being sought. While this is not unusual, as can be seen from the points made above consideration needs to be given as to how the structure is to be established and how lenders can be protected whilst also meeting the strict requirements of the nuclear regulators in relation to safety, security and safeguarding.

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