Sir John Bourn, head of the National Audit Office, reported today on the support provided by the Department of Trade and Industry to the restructuring of British Energy completed in January 2005; and the Department’s management of the risks to the taxpayer arising from the Company’s activities since the completion of restructuring.
The Company was privatised in 1996. But in September 2002, following a significant and sustained deterioration in its financial position, British Energy approached the Department for financial assistance because it otherwise risked falling into administration. Following negotiations, the Department agreed to support a plan for restructuring which was completed in January 2005. As a result, the Department agreed to take responsibility for meeting certain of the Company’s nuclear liabilities. In return, the Company will contribute to a Nuclear Liabilities Fund from future cash streams. This contribution will comprise an annual fixed amount plus a variable payment based on British Energy’s future financial performance.
Normally, when private companies get into difficulty the Department’s policy is not to intervene on the argument that United Kingdom productivity goes up if relatively inefficient firms are allowed to close. In this instance, the Department justified its decision to intervene in the light of its assessment of the threat to electricity supplies and to safety.
The Department decided to support the restructuring of the Company in preference to letting it fall into administration. Its decision was supported by an extensive review of both options. As a result of its analysis the Department concluded that the taxpayer would have to take responsibility for a large proportion of the Company’s nuclear liabilities. This decision reflected the fact that the liabilities would have fallen to it anyway in the event of the Company’s liquidation.
Estimates of key elements of British Energy’s liabilities had not been updated other than through indexation since the Company was privatised in 1996. As the Department had already decided to take on a large proportion of the liabilities and given that new estimates would have been time consuming for the Company to produce it decided that it would not require the Company to provide updated estimates of the liabilities during the restructuring process as this would not have changed its analysis of the situation. The Department decided that it should focus its attention on maximising future contributions from the Company. A new estimate of the liabilities was produced in February 2006 and this increased the liabilities by £1 billion to £5.1 billion.
The main mechanism the Department established for securing contributions from the Company, known as the cash sweep, requires the Company to make a bigger contribution when it is doing well. To protect the Company’s viability there is only a very small link between the contributions to be made and the scale of the nuclear liabilities. In the 13 months following completion of restructuring in January 2005, the wholesale electricity price and the Company’s share price more than doubled. If this market persists, the Nuclear Liabilities Fund would benefit from contributions from the cash sweep at a level higher than the most optimistic scenarios considered by the Department during restructuring. Between January 2005 and the end of February 2006 the paper value of the cash sweep rose from £2.7 billion to £6.5 billion.
The electricity market has, however, proved to be particularly volatile over recent years. With only a very small direct link between the level of contributions and the likely liabilities, the structure of the Nuclear Liabilities Fund is therefore particularly exposed to British Energy’s future financial and operational performance. This uncertainty places a significant risk in the hands of the taxpayer. The Department has put in place arrangements to manage this risk, but the report identifies scope to strengthen these arrangements further.
During the restructuring, the Department made effective use of advice provided by a range of advisers but there were weaknesses in the procedures used by the Department to procure this expertise. Of the four main firms used only one was appointed through a competitive process, the others having been appointed through a competitive process for other nuclear related work with the Department. The net cost to the Department of this expertise was £15.1 million. The report identifies ways in which the Department might appoint advisers in future at short notice whilst ensuring that competition still takes place.