Select Committee on Trade and Industry Appendices to the Minutes of Evidence


Memorandum by the Department of Trade and Industry



  1.  Liabilities estimates may be expressed in real ie undiscounted numbers (ie £47.9 billion, reflecting the total amount of today's money that will need to be spent over the lifetime of the project) or discounted (ie £13.6 billion, discounted at 6 per cent, in order to reflect the time value of money, where future payments cost less to a business than those made today. (A discounted liability essentially represents the amounts needed to be invested now in government bonds in order for funds to be available to discharge the liabilities.)

  2.  UKAEA liabilities are based on a discount rate of 6 per cent. This is the real discount rate which is most commonly used in central Government applications.

  3.  BNFL liabilities are based on a discount rate of 2.5 per cent. This is a real risk free rate of return, ie index linked government bonds, as prescribed by the applicable accounting standard. This rate can vary due to the tax regime, yield on government securities and individual judgements and will change over time.

  4.  The Secretary of State's undertaking to make a series of payments based on the profile of expenditure on Magnox liabilities, which will commence in 2008, is discounted by BNFL at a real rate of 4.5 per cent. This is the interest rate explicitly stated in the undertaking agreement. The Secretary of State's undertaking is discounted by the DTI at 6 per cent, the rate prescribed for government accounting.

  5.  The smaller the discount rate the less effect it has on the liabilities or assets when compared to the undiscounted cash flows. As a discount rate rises the discounted amount reduces in proportion to the undiscounted amount ie the current government rate of 6 per cent creates smaller liabilities than the equivalent rate used by BNFL even when based on the same actual costs.

  6.  The discounting of liabilities introduces a further movement in the liabilities each year commonly called "revalorisation". This increases the liabilities each year and represents changes in price levels and the unwinding of the discount and can be compared to interest paid on a bank loan.

Liabilities estimates (31 March 2002 figures unless otherwise stated)

  7.  Liabilities estimates represent the current estimate of total lifetime (60-150 years) future cash expenditure involved in decommissioning; processing; long term management, storage and final disposal of waste material and spent fuel; and environmental remediation of nuclear sites.

8.   Liabilities to be taken on by LMA (ie UKAEA's and BNFL's current liabilities)
£47.9 billion* Undiscounted
£23.0 billion*Discounted (UKAEA's liabilities discounted at 6 per cent; BNFL's liabilities discounted at 2.5 per cent**)

  *  The liabilities figures above include UKAEA figures net of contributions to clean up at Sellafield, which have already been included in BNFL cost estimates.

  **  The actual liabilities taken on by the LMA will use prescribed government discount rates, currently 6 per cent, which will have the effect of reducing the impact the BNFL liabilities have on the LMA's balance sheet.

9.   BNFL liabilities
£40.5 billionUndiscounted
£20.0 billionDiscounted at 2.5 per cent

10.   Changes in BNFL liabilities
1999-20002000-01 2001-02
Undiscounted£34.2 billion £34.8 billion£40.5 billion
Discounted at 2.5 per cent£16.0 billion £15.8 billion£20.0 billion

11.   UKAEA liabilities
£7.4 billionUndiscounted
£3.0 billionDiscounted at 6 per cent

Changes in UKAEA liabilities
1999-20002000-01 2001-02
Undiscounted£7.0 billion £7.2 billion£7.4 billion
Discounted at 6 per cent£2.8 billion £2.9 billion£3.0 billion

Assets to fund liabilities

12.   NLIP
£4.2 billionThis is the current market value of the fund. The fund is targeted to grow at a real rate of return 2.5 per cent gross of tax. It is expected to generate between £0.5 billion to £1.0 billion over the next five years investment returns.

13.   Magnox Undertaking*
£26.0 billionUndiscounted
£4.8 billionDiscounted at 4.5 per cent in BNFL accounts
£3.8 billionDiscounted at 6 per cent in DTI accounts

*  Cash is payable from 2008 to 2116.

14.   Commercial customers contribution to liabilities
£5.1 billionUndiscounted
£2.5 billionDiscounted at 2.5 per cent
£1.8 billionDiscounted at 6 per cent

15.   MoD commitments to pay for clean up at Sellafield
£6.7 billionUndiscounted
£3.4 billionDiscounted at 2.5 per cent
£2.1 billionDiscounted at 6 per cent

16.   UKAEA commitments to pay for clean up at Sellafield
£1.5 billionUndiscounted
£0.8 billionDiscounted at 2.5 per cent
£0.3 billionDiscounted at 6 per cent

17.  DTI/MoD commitments to pay for UKAEA liabilities (excluding UKAEA's contribution to liabilities at Sellafield)*
£7.4 billionUndiscounted
£3.0 billionDiscounted at 6 per cent

*  UKAEA's liabilities are funded by Government from annual grant/grant in aid.

18. Summary Table

at 6%
Discounted at rates
in respective
accounts £billion
Total liabilities (47.9)
(13.6) (23.0)**
Assets to fund liabilities
Magnox undertaking26.0
BNFL Customers (incl MoD/UKAEA)13.3
UKAEA funding commitment7.4

Total assets
Net surplus (deficit) 3.0

 s * sThis is market value. The fund is expected to generate between £0.5 billion to £1 billion over the next 5 years in investment returns. s** sThe discounted future cash flows are different to the balance sheet provisions included in BNFL's accounts as the balance sheet provisions include some non-cash balances and exclude future discounted cash flows for liabilities yet to be incurred. sAs this table shows, on an undiscounted basis there is a surplus while on a discounted basis the figures show a possible gap. This is not an immediate cause for concern. The Treasury has factored the expenditure into its expenditure plans and there is no funding gap in relation to upcoming annual clean up payments. In the longer term there is considerable uncertainty over the precise costs which may alter depending on further study of the legacy, any changes to regulatory requirements or policy options eg re long term disposal, and greater efficiencies in clean up.

Head, Nuclear Liabilities and NBFL Directorate

16 July 2002

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