Archive for June, 2010|Monthly archive page

Holding BP Accountable (Hopefully): The Case to Remove Liability Limits

By William Schoell and Jeremy Koulish

One cannot turn on the news today and not get pelted with an overload of Deep Horizon oil leakage updates and BP slamming.  The president is consulting with experts so he knows whose ass to kick on this whole ordeal.  So when it’s time to settle up with BP, what laws are in place to allow our government to hold BP accountable and ensure taxpayers aren’t stuck with the bill? You likely have heard about the current $75 million cap on liability for damages.  So how did that cap get into place, is it justified, and what can be done to rectify the situation?  The House Transportation and Infrastructure Committee held a hearing to examine these issues on June 9th.

For starters, here’s a brief overview of the current law.  The Oil Pollution Act of 1990, or OPA90, was written in response to the Exxon Valdez Oil spill in 1989.  This bill requires the responsible company to pay all of the damages associated with cleanup and pay economic damages related to lost incomes of newly unemployed fishermen, decreased tourism and more.  The catch is that OPA90 has a liability limit for those economic damages of $75 million.  That amount is utterly dwarfed by estimates for the damages related to Deep Horizon ranging from a “modest” $1-$3 billion as quoted by Chairman James Oberstar (D-MN08) to more current projections of closer to $40 billion.  Clearly that $75 million cap will not do the trick when holding BP accountable on its promises to cover all costs related to the spill.  Aside from the cleanup responsibilities and responsibilities for economic damages (with the cap), the bill also has created an industry-financed $150 million trust fund for emergency spending.  Its purpose is to fund the Coast Guard to start containment and cleanup work before any company pays the government or starts working themselves.  Problem is, the Coast Guard is almost out of that money.

Some valuable ideas emerged from this hearing, although their fate remains unclear given the institutional obstacles in Congress.  A few possible actions the Congress could take are increasing the liability cap, removing the cap altogether, expanding the emergency trust fund and implementing tighter regulations on offshore drilling.  At the hearing, those supportive of action seemed content with expanding the emergency trust fund and raising the cap on liabilities, although there were differences over how much to raise the cap, how much to expand the trust fund and when to pay for it.  But seeing how most Americans want to see swift actions taken on this issue, these kinds of deals will most likely be worked out in the near future.  Indeed, Chairman Oberstar said he hopes to see a bill on the floor and passed before the 4th of July recess.

One of the hearing’s witnesses, MIT economics professor Dr. Michael Greenstone, set forth a concise argument for why there should be no cap at all on damages.  The main problem with capping damages is its moral hazard effect, in other words that it creates an incentive to ignore safety protocol and cut corners in order to save money.  This is because a company knowing of a cap will not care if damages exceed the cap’s value.  In this case, BP will not care if damages are $75.1 million or $75 billion; with the cap they are only responsible for $75 million.  Not only does BP not care, insurance companies will only insure them up to that $75 million because the insurance company knows quite well that $75 million is all BP would be responsible for.  So in effect a cap gives a company incentive to act with excessive risk because they know that they will only be responsible for the cap’s value.

One of the arguments against removing the caps (or even raising them) that served as the g0-to point for Republicans including Ranking Member John Mica (R-FL07), was the unintended consequence of small and medium sized businesses would not be able to afford insurance with raised caps or no caps at all.  If the cap were raised significantly, the argument goes, companies would have to be able to pay higher premiums on more coverage, driving out smaller companies with less money.

However, regardless of the issue that barriers to entry in the oil-drilling business are already extremely high for all but the largest conglomerates, another major  problem with this argument exists. As Robert P. Hartwig of the Insurance Information Institute and others pointed out, insurance companies generally price premiums based not on company size but rather on risk.  It does not matter to an insurer if your company is worth $500,000 or $20 billion, the riskier the behavior the more their premiums will be.  So as long any company, small or large, takes the right levels of safety precaution then no company should have a problem getting insurance.  Looking at the issue a slightly different way, an efficient market for oil-drilling operations would price the full costs of unforeseen events to society into the cost of doing business. Therefore, if a company cannot afford insurance in the absence of a liability cap, drilling on oil well is not an economically viable endeavor and therefore should not be undertaken. Thus, the argument favored by most Republicans seemed oddly out of step with their traditional embrace of free market principles.

In summary, removing liability caps actually creates proper incentives for companies and insurers to act safely.  As Dr. Greenstone mentioned, the goals of off shore drillers and the public are not in line, and a cap on liability only increases this effect.  Without a cap, companies will be forced to place their drills in the safest areas with proper safety regulations in order to get insurance and/or avoid paying damages.

Congressman Rush Holt (D-NJ12) has introduced a Big Oil Bailout Prevention Act that would retroactively increase the cap limit from $75 million to $10 billion. In the hearing, Rep. Holt said he did not close the door on removing all cap limits, but he did not include it in the bill. That bill is matched by a similar proposal in the Senate by Sen. Robert Menendez (D-NJ), which has been brought to the Senate floor only to be blocked multiple times, first by Sen. Lisa Murkowski (R-AK) and then by Sen. James Inhofe (R-OK).

Event Review: Is Government Broken?

by Carrots and Sticks intern William Schoell; edited by Jeremy

On Tuesday June 1st, the Brookings Institution held a seminar discussing one the fastest growing problems in American politics today. The American public, in particular 86% of it according to a recent study, feels that their government is not functioning for them, that it is “broken.”  By broken, the speakers meant that Americans feel as if their voice is not heard in government while lobbyists, special interest and big time donors have all the power.  Also by broken they implied that there is a growing generalized distrust of government amongst the public and vice versa.  During this seminar the audience heard from a bevy of speakers including White House ethics consultant Norm Eisen, professors, and advocacy and non-profit group leaders.  Although at times the seminar seemed to lack a consistent message, it was encouraging to hear many powerful minds discuss one of the more unflattering problems facing this country today.

The first panel focused on election reforms that could possibly help cure this problem.  By reforming elections, a positive change will (hopefully) come about in the method and frequency in which Americans exercise their political voices.  Various reforms were discussed such as campaign finance reform, reaffirming an explicit right to vote in the Constitution and voter registration issues.  Nick Nyhart, President/CEO of Public Campaign, advocated for large sweeping change to the campaign finance system.  He said that large changes can better harness the anger in public to make it easier to get mass support for reform ideas.  He wants to see private donations be matched by public funding by four times the amount of private donations.  If a candidate accepts public money then he/she would be subjected to a limit of how much spending they can use during a campaign.  Although this is a popular notion within the public one should note that it may be hard to achieve this type of reform because the people that get elected are not going to be very willing to change the rules that got them to their powerful positions.  He did mention a bill along the lines of public campaign financing, the Fair Elections Now Act, that has been co-sponsored by over 150 House members and over 20 Senators.

Campaign finance reform was not the only reform discussed. Eddie Hailes, Managing Director for the Advancement Project would like to see felons who have paid the dues to society have the right to vote and also see an explicit right to vote in the Constitution.  Out of the 109 developed democracies in the world, the US is one of just 11 that do not guarantee an explicit constitutional right to vote.  In addition, Jon Greenbaum, Legal Director for the Lawyers’ Committee for Civil Rights, discussed ways to ease voter registration laws.  Voter registration rules are one of the key determinants of voter turnout; the easier it is to register to vote, the higher the turnout.  He advocated for all states to use election-day registration as nine states already do.  He also advocated for permanent in-state registration, so if one moves within a state they do not have to register to vote after their move. With further discussion and public action these thoughts can be transformed into actual results.  Hopefully, with these and other reforms, the public will start to feel as if their voice and vote mean something and as turnout grows, mutual trust between citizens and their elected officials can be reestablished.

The second panel was supposed to focus on governance reform, procedural rules Congress and the President must follow.  For the most part, however, the panel discussed ways in which the public should change and/or get involved.  One idea was to set up non-partisan funded public discourse arenas to bring about constructive discussion about the happenings in our government.  This is a great idea, to get the public involved in politics and get to a point where disagreement does not yield distrust.  But, the only real governance reform discussed there seemed to be about transparency laws.  Gary Bass, Executive Director of OMB Watch, called for laws that would require Congress to not only show where they Congress is spending tax dollars but also what they are being spent.  For example, listing $1 million given to a university is not sufficiency for Mr. Bass.  The specific programs that the money is being spent should also be provided to the public (for example $500,000 for a research program on comparing democracies in Europe and $500,000 for a project studying half lives or radioactive elements).  Mr. Bass called “information the lifeblood of democracy” and “transparency the heart of democracy”.  Calling for actual legislation requiring transparency might have been the only actual government rule change called for by the second panel which was to focus on governance reform.  Nevertheless, this call for transparency could indeed instill more trust in the public by helping to coax more honesty or at least less secrecy out of our elected officials.  Again this seminar provided no way of actually achieving this call for more transparency.  It is not worthless though, thinking about these reforms is the first step to achieving them.

The ideas offered in this forum are very interesting thoughts, and necessary in moving toward a more just society, but sadly there were no real details on how to achieve these goals.  To borrow from writer John Burroughs “The smallest deed is better than the greatest intention.”  These intentions are great but hopefully somewhere in the near future, seminars and speeches like these will provide some concrete means to achieve these goals of election reform.

Fact is, without massive and mobilized public support for election and governance reforms it will be impossible to change this government.  The elected officials will not be willing to change the rules that got them to their powerful jobs unless they face the threat of being voted out of office if they fail to act.  There may have been some disappointments from the Brookings Institute seminar, “Is Government Broken,” like a lack of discussion on ending or reforming the filibuster, but it did do one thing.  It discussed a major structural problem in American politics and starting a robust discussion is the first step in order to reform our broken government.