Assessing the U.S. House of Representatives’ SPACE Act of 2015 (H.R. 2262) and the related U.S. Senate Bill (S. 1297), Part III – Updating Maximum Probable Loss (MPL) Calculations

© Matthew Schaefer. All rights reserved.

Before looking at the provisions on Maximum Probable Loss (MPL) determinations in H.R. 2262 and S.1297, a short primer on how the MPL calculation fits into the U.S. third-party liability regime for commercial launches is beneficial: “The US third-party liability regime is broken into three tiers. First, the US Government requires, as one of the conditions for obtaining a license, that commercial space flight operators obtain third-party liability insurance in the amount of the maximum probable loss (MPL), according to a calculation performed by the FAA. This amount of required insurance cannot exceed $500 million nor the amount of insurance available on world markets at reasonable cost. Second, if third-party liability claims exceed the insured amount (MPL), the government has in essence made a statutory promise to pay for the next tier or traunch of $2.8 billion dollars in any third-party liability claims faced by a space flight entity. In the third tier, where third-party claims exceed the MPL plus the amount of promised government indemnification, liability reverts back to the operator. (footnotes omitted). ” See Schaefer, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2420538

Some factual background is useful as well. In the 200 plus commercial launches in the United States, since the first one in 1989, the maximum probable loss has averaged around $99 million dollars. Calculations can vary from launch site (think closeness to populations) and launch a vehicle (think fuel aboard). For example, a Falcon 9 launch from Cape Canaveral has third-party MPL of $57million (45 launch + 12 pre-launch) and a Falcon 9 launch from Vandenberg has a third-party MPL of $99million (90 launch + 9 pre-launch). Antares launches from Wallops (Virginia) have an MPL of $43 million (34 launch = 9 pre-launch). Atlas V launches have higher MPL that both of the others. The GAO report prepared in 2012 recommended an update to the MPL calculations performed by the FAA. An example of one factor in the formula that might need updating according to the report was the value of the loss of life. Keep in mind an MPL-exceeding accident has never occurred in those 200 plus commercial launches. In fact, there has been basically no third-party injury or damage connected with any of the 200 plus commercial launches.  Both H.R. 2262 and S.1297 appear to favor updating the MPL calculation formula. The House bill states: “…An appropriately updated methodology will help ensure that the Federal Government is not exposed to greater financial risks than intended and that launch companies are not required to purchase more insurance coverage than necessary.” The Senate bill leads with “sense of Congress that it is in the public interest to update the methodology used to calculate the maximum probable loss…”

Interestingly, while favoring an updating, neither bill appears to absolutely require it, only that updating be studied and strongly considered. H.R. 2262 calls on the Secretary of Transportation to submit a plan to the Congress that considers a variety of mandates – including the following: 1) the reasonableness of the single casualty estimate currently used, and “if needed,” an estimate of when it will be updated; 2) the reasonableness of the required insurance amount commercial launch providers must obtain, and calculations as to a reasonable threshold if determined the current one must change; 3) a schedule for when updates to methodology and calculations will be implemented; and 4) consideration of the costs of implementing new methodology and calculations, both on industry and government. The House Bill then directs the Comptroller General of the United States to conduct an independent assessment of the plan.

The Senate bill provisions are even less strong and less detailed. The Senate bill calls for the Secretary of Transportation, in consultation with the commercial space industry and the insurance industry, to “evaluate and, if necessary, develop a plan to update the methodology used to calculate the maximum probable loss…” (emphasis added).

One common feature of both bills is that they recognize the dual goals of ensuring the “federal government is not exposed to greater costs than intended” and that “launch companies are not required to purchase more insurance than necessary.” Further, both bills want the costs (on both government and industry) of any new methodology considered in any plan.

In a November 2013 White Paper prepared for Nebraska Law’s 6th Annual DC space law conference –and that subsequently was refined into a law review-styled article appearing in Vol. 33 of the Berkeley Journal of International Law, pp. 223-273 (2015), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2420538

I made the following recommendation :

“FAA should not modify the current model for MPL calculations.

Rationale: Current MPL is already calculated such that chance of loss exceeding that amount is lower than 1 in 10 million. Any new model is highly likely to increase required insurance and thus launch costs with no proven benefit given the exceedingly low probability of third-party damages exceeding the MPL as currently calculated. One concern with creating a third-party liability cap is that it might lead to increased calls to adjust the current calculation for MPL. Indeed, some want the MPL calculation factor on the value of the loss of life to be adjusted. However, a large factor affecting MPL already is the choice to base the calculation on a 1 in 10 million probability of loss exceeding that figure. That choice already leads to a very conservative approach to MPL and one that does not need to be adjusted given the familiarity the FAA, the launch industry, and insurance market have with the current calculation. US commercial launches over the past 20 years have averaged less than 9 per year and new estimates only anticipate this figure increasing to somewhere between 20-30 launches per year in the next decade. Even with a launch rate of 100 per year, an MPL-exceeding third-party loss event could only be expected once every 100,000 years.”

In any consideration by a conference committee, the Senate bill’s more modest, succinct approach probably makes the most sense, basically encouraging FAA to look at MPL calculations but only take action to change “if necessary.”

First, despite the concerns by Congress over government being on the hook for a MPL-exceeding third-party damage event, one has never occurred and never even come close to occurring.   There simply is little to no risk to the government to making a longer-term promise of indemnification at the current MPL formula (or for that matter one that even reduces the amount of required insurance to half of current MPL), even though reentries will likely be added to the mix with launches with the development of reusable vehicles (that will be game changers in the economics of launch). Should an MPL-exceeding event occur Congress could live up to its promise to indemnify launch operators (and others involved in the launch) for third-part losses above the MPL, but simultaneously re-examine the approach for future events.

Second, Congress and the Administration must be careful that any recalculation does not raise current MPLs, particularly for frequent sub-orbital flights. Foreign industry benefits from permanent liability caps. The US approach already provides US industry less certainty so to raise MPLs by a new calculation method would be a step backwards for US industry – one that is truly important to national security and the national economy as Congress itself has recognized. Increased MPLs might particularly affect the soon-to-be sub-orbital market that anticipates frequent flights – with more frequent insurance purchases, although discounted bulk buys of coverage may be possible.

Third, it’s important to keep in mind that accuracy in predicting effects of such a low probability event are always going to be hard to be performed100% accurately.

Fourth, it’s hard to re-examine the value of a loss of life, for example, in the calculation without also re-examining the somewhat arbitrary choice of 1 in ten million probability of the loss exceeding the MPL amount. If one in a million or one in 100,000 were chosen instead MPL may shrink considerably or even be non-existent. One in ten million was selected, in part, to achieve an MPL that was not infinitesimal but if other factors are increased significantly, then the rationale/justification for one-in-ten million probability of an MPL-exceeding event dissipates.

Fifth, it’s important to remember why government says we are going to serve as a backstop in cases of massive, catastrophic damage for certain industries in the first place – it is so industry involving particular technologies do not risk or suffer “crushing liability” in pursuing activities that are beneficial for society. It’s the reason Congress gave the nuclear energy industry a liability cap for several decades in its early evolution and it’s the reason the Congress passed the SAFTEY ACT giving protection to the anti-terrorism technology industry since 2001. It’s not to protect owners, investors, and shareholders in those particular industries but rather because of the benefits those industries produce for the society – for national security, economic growth, and the like – that would be at risk without the government backstop.

Next blog post analyzing H.R. 2262 & S. 1297 coming soon; see last week’s posts on SFP and government indemnification for third party liability.

(©Matthew Schaefer. All rights reserved).

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