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Japan's Nuclear Rescue Plan: The Unintended Consequence of Unlimited Liability

The Japanese government -- once bosom buddies with Tokyo Electric Power -- wants the company to face unlimited liability for damages from its troubled Fukushima nuclear power plant. TEPCO certainly deserves this treatment. The company's repeated bungling of the nuclear power plant disaster has endangered its own workers, led to a ban on imports, damaged the credit ratings of other Japanese utilities, and sent radioactive water into the sea that threatens to undermine the fishing industry. Still, this hard line approach could have an unintended consequence for the Japanese government.

Japan's rescue plan
The goal is for TEPCO to compensate victims of the nuclear disaster, including the thousands of displaced residents, without the government taking it over. The rescue plan would create a fund to provide loans for and buy preferred shares from TEPCO.

The debate is over whether there should be a limit on compensation. Not surprisingly, TEPCO and creditor banks have argued for a cap. The government has argued for unlimited liability.

Unintended consequence
The Japanese government is treading a fine line here. Yes, it needs to go after TEPCO. But unlimited liability could push TEPCO into insolvency and force the government to take a majority stake in the company.

TEPCO execs fear that its credit rating, which has already taken a hit, could be cut to junk if there's unlimited liability, making it difficult for the company to raise funds. What's needed a solution that makes TEPCO pay, but doesn't totally annihilate is ratings.

Other utilities could be affected as well. A solid investment-grade rating for TEPCO could give some stability to the corporate bond market, which other utilities rely on for capital investments.

Question of total liability
Of course, we simply don't know what TEPCO's total liability will be for the Fukushima nuclear disaster. The estimates vary wildly. JP Morgan had estimated $25 billion in compensation losses. Bank of America-Merrill Lynch has said it could reach $130 billion. And those projections continue to change as the Fukushima nuclear disaster unfolds.

The total liability for a company in crisis takes a while to shake out and it's often smaller than analysts' projections. Take, for example Merck, the drug company that pulled Vioxx off the market back in 2004 after a clinical trial suggested it could increase the risk of heart attack and stroke. As my BNET colleague Jim Edwards noted recently, at one point Wall Street analysts thought Merck could be liable for as much as $50 billion. In the end, Merck managed to cap its liability at $4.5 billion, a mere one-tenth of that amount.

Photo from TEPCO via cryptome.org
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