Making the case (again) for launch indemnification

It’s that time again for the commercial launch industry in the US: every three to five years, they head up to Capitol Hill to make the case for extending a provision of commercial space law that’s little known outside the industry and obscure to some even within it: launch indemnification. That process is gearing up once again, as both government and industry officials seek another extension of that law.

The launch indemnification “regime”, as it’s widely known, involves the sharing of responsibility of third-party damages from a commercial launch accident. As part of the commercial launch licensing process, the FAA’s Office of Commercial Space Transportation (AST) calculates the “maximum probable loss”, or MPL, to third parties that a launch vehicle could typically cause, a dollar amount dependent on the vehicle and launch site but averaging around $100 million. Launch providers must demonstrate financial responsibility, usually through insurance, for the value of the MPL. The federal government then agrees to indemnify the launch provider for any losses above that MPL value, up to $1.5 billion in 1988 dollars (approximately $2.7 billion today when adjusted for inflation.) Responsibility for any losses above that level reverts back to the launch provider.

In practice, there has never been a commercial launch accident that has created third-party losses that have triggered indemnification. However, the industry believes that the regime is important in order to protect launch providers from unforeseen catastrophes, as well as to provide a level playing field internationally, because launch providers in other countries have similar protections. A few critics have grumbled that the system puts the government on the hook for potentially billions of dollars in losses should such a catastrophe take place (although Congress would have to appropriate the funds to pay any damages above the MPL level.)

At a hearing by the House Science Committee’s space subcommittee earlier this month on this topic, both AST and industry argued for an extension. George Nield, the FAA associate administrator for commercial space transportation, said that the White House was seeking a five-year extension of the regime, a bit longer than the three-year extension passed by Congress in 2009. (Before that, Congress passed a five-year extension in 2004.)

Industry warned that if Congress failed to renew the indemnification regime, it could further hurt the competitiveness of the US launch industry, which is already struggling to compete with European and Russian firms because of higher prices. Alison Alfers, a vice president with DigitalGlobe, said that the company seriously considered a non-US launch of its upcoming WorldView-3 remote sensing satellite because foreign vehicles were, on average, 40% cheaper than similar American rockets. “We believe we are at a tipping point” for the US launch industry because of its high prices and eroding technological edge, she warned. “Any changes in the indemnification program that may lead to higher prices will result in foreign providers being the first choice for consumers like DigitalGlobe.”

At the same hearing, Alicia Cackley of the Government Accountability Office (GAO) did raise one concern about the system, and that is with how AST calculates the MPL value. “It is quite different from the way the industry in general does it,” she said. The FAA calculates casualty losses and then computes property losses as a fraction of that; Cackley said the industry instead starts with property losses using more sophisticated models. “We are definitely looking at the methodology and have some questions and suggestions for them about ways to improve it.” Nield noted at the hearing that they’re open to working with GAO on alternative MPL approaches, although he cautioned that some of those models may be significantly more expensive to use but may not yield a significantly different result.

At a hearing on the commercial space industry held earlier this week by the Senate Commerce Committee, GAO’s George Dillingham also noted his office’s concerns about MPL calculations, but said that it should not delay a renewal of the indemnification regime. “I think so,” he said when Sen. John Boozman (R-AR) asked him if it should be extended even if the MPL calculation issue hasn’t been fully addressed. “We didn’t talk to anyone in the industry who would say that this is something that shouldn’t be extended.”

Sen. Bill Nelson (D-FL), who chaired the hearing, agreed that indemnification should be extended. “Companies have to know what they can buy insurance for,” he said. “That’s why we’ve simply got to continue this.”

At the House hearing, though, there were some more critical questions about the indemnification system, including why the launch industry should get this kind of support from the federal government when most other industries do not, as well as general concerns about the liability posed to the government under such a system. Panelists argued that the chance of an accident whose third-party losses exceed the MPL is very remote (less than one in 10 million, Nield said) and that the launch industry is a strategic capability of the nation with national security implications. An extension did appear to have the support of key committee members like Palazzo, though.

Despite those expressions of support, neither the House nor the Senate has yet to formally introduce legislation to extend the launch indemnification regime. That is not necessarily a surprise: in 2009 the extension was passed by Congress late in the year, and signed into law just days before it was set to expire at the end of the calendar year. With a limited number of legislative days remaining this year, though, and a lot of high-priority issues that Congress needs to take up, action now rather than at the last minute might be appreciated by the industry.