Nuclear Energy's Double Moral Hazard

Tepco, the owner and operator of the stricken Japanese nuclear power plant, announced record losses of 1.25 trillion yen related to the cost of containing the worst nuclear accident since Chernobyl. That is almost 1,000 times Tepco's annual profit of 135 billion yen last year.

Granted that the triggering event for this nuclear catastrophe was an extraordinary earthquake and tsunami, but the facts so far suggest that the utility made decisions that increased the risks and harms -- from a design that put back-up generators in a part of the plant that would be underwater if a tsunami struck, to delays in emergency cooling measures after the event which some say was an effort to avoid taking actions that would render the plant inoperable in the future.

Tepco's managers, shareholders, and bondholders received the benefits and shared in the profits of this risky plant before the disaster. Will they suffer the losses and other consequences now?

The first "moral hazard" issue is:  Is Tepco too big too fail? It is the largest electric utility in Asia and the fourth largest in the world. It supplies power to a large portion of Japan including Tokyo. Will the government let the utility fail?

Of course not. The utility is too big to fail. The only issues are (a) how it will be kept alive so it can continue providing power, and (b) how much of the losses will be suffered by management, stockholders, and bondholders.

So far, the answer is muddled. The government has not taken over. Yes, the President of Tepco has resigned. But before leaving he appointed his own successor from inside the company.

On the investment side, the government must decide how to treat shareholders and bondholders when it bails out the utility in order to keep it running. The investors knew this company had nuclear power plants in one of the most earthquake and tsunami prone nations on earth.

This moral hazard may be in the past, because Japan may be finished with nuclear power (at least for now). But if Japan has any intention of building new nuclear power plants, how it treats Tepco investors in a bailout now will have a significant impact on the availability and cost of capital for those plants in the future.

Which brings us to the second moral hazard. Is it moral to place the health and environmental risks of nuclear power -- serious illness, death, contamination of the earth for generations -- on those who live and work near the plants?

John Howley
Woodbridge, New Jersey