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6 Feb 2003 : Column 470—continued
Dr. Cable: The hon. Gentleman is absolutely right. There is massive uncertainty about whether the 7 per cent. coupon yield that, I think, has been offered is sufficient to overcome that problem, but I am not an expert in securities markets. At the very least, there are doubts. Equally, there are doubts about whether the 65 per cent. free funds will be available. The economics are very questionable indeed.
British Energy, which has been making enormous efforts to improve the productive efficiency of its units, is currently producing at about £18.50 a megawatt-hour. That is its production cost, but for the additional cash flow to materialise, it will need to get its costs down by about £2 a megawatt-hour. It will need to achieve an extra 10 per cent. in efficiency to get the margin to generate the cash flow. I have seen no indication, other than a hope, about how that increased efficiency will be achieved. It is assumed that the plants will work flat out and at optimal efficiency and that the problems that have occurred at Torness and elsewhere will not arise. It is an heroic assumption and, if the assumptions are not realised, the benefit will not be maintained. Those are the two elusive financial benefits that may come from the solvent restructuring solution.
The Government will have to contemplate paying out money that would not be paid out in the administration solution. Other factors also have to be taken into account. There is the balance of the free funds—the 35 per cent.—and, more important, there will be a commitment to continue paying interest on the bonds, which will amount to about £50 million a year. That money will have to be paid to outstanding creditors in the private sector, which would not happen in administration.
If we put the two elements together, we can see that the case is finely balanced and that there is a lot of uncertainty. However, in an uncertain environment, several compelling reasons arise for pursuing administration. We are dealing with a private company that has manifestly failed in the past. I know that it has a new chief executive who may turn things round. However, we are being asked to believe that, despite their record of failure, the same company and the same chain of management can deliver spectacular improvements that have not been seen before.
If the company went into administration, we would not have the problem that the restructured company will have—that of having to justify its treatment relative to its competitors. It is not yet clear that the restructuring proposal will get through the European Commission. Some of Mr. Monti's comments suggest that the Commission does not regard the Government's proposal as acceptable state aid, although we do not yet know the final outcome of that. He has certainly made it clear that the Commission's assessment is that administration is the preferable solution. With administration, the Government would not be committed—as they will be under the present proposals—to open-ended financial support for this private company.
The Government keep reassuring us that their £650 million loan is secure, that they have first charge on all the assets, that the money will be paid, and that the taxpayer has nothing particular to worry about from the bail-out. They keep telling us that and, in purely legal terms, they may well be right. However, the Government's optimism is belied by other things that they are doing. As we know, their submission to the European Commission had a much higher ceiling level, and this Bill has an unlimited ceiling.
Let us assume that solvent restructuring is agreed by the City and the Commission and that it goes ahead. What will happen if the price of electricity falls? British Energy is already losing money with the financial terms under which it is required to operate. Its costs, including capital charges, are well above the market price. However, what if the price falls further? We know that the industry has a lot of excess capacity. None of that is being removed by British Energy, which will be required to operate flat out to meet its financial objectives. We could well be coming into a difficult economic environment. We do not know what will be the economic consequences of a war in Iraq. The effects on the economy and the price of electricity could well be to drive that price down much further. There will then be open-ended liabilities that the Government will be required to pay to this private company. The £650 million—or some other form of assistance—could well be the minimum rather than the maximum.
Mr. Mark Field (Cities of London and Westminster) rose—
Dr. Cable: I will finish my point and then take an intervention.
Whatever we think about the controversial issue of nuclear power, if we take all those factors into account, and if we take into account the body language that we see in Whitehall Departments—notably the Treasury—administration would seem to be a more prudent solution for the taxpayer than the route that the Government are taking.
Mr. Field: The hon. Gentleman has rightly pointed out the commercial risks. None the less, it is fair to say that commercial risk is inherent in this. The City of London, although it would take account of his concerns, would be able to price things accordingly. Will he say a little more about the risk that the whole financial assistance package falls foul of European Union law? That was not discussed in any great detail on Second Reading and the Minister for Energy and Construction has not given a full analysis of those concerns.
Dr. Cable: For several reasons, the proposals may run into difficulties because of the need to consider competitors. We await the ruling of the European Commission. We know that some private creditors, such as Barclays, have taken the view that administration would be no worse and would probably be better than the Government's proposal. Those creditors may well take court action on that point. There is the Greenpeace legal case as well. For any one of a variety of reasons, competitors may well be able to stop the process.
I will conclude now—remembering that I started my speech by invoking the issue of time. I want just to refer briefly to the other amendments. My points will flow from the discussion that we have just had.
Amendments Nos. 10 and 11 seek to limit the extent of the financial liabilities that the Government are undertaking. They try to limit the liabilities to
decommissioning liabilities. We would all accept, given the Government's position, that the taxpayer will have to assume decommissioning liabilities in some form. Years ago, it was hoped that the private sector would be able to finance nuclear power and its decommissioning liabilities, but those hopes seem to have gone. There is little prospect of them being realised. We concede, in these two amendments, that the Government will have to make a substantial increase in their contribution to nuclear decommissioning liabilities. However, we say, "Why not leave it at that? Why do the Government need extra financial provision?" The Minister has always forcefully said that, even in the event of the industry going into administration, the economics of nuclear power are clear because the operating costs justify keeping the industry going. A sane administrator would keep the industry going because the operating costs mean that there would be a bit left over for interest obligations, if not all of them. Why, therefore, is there a need for additional financial support beyond the decommissioning assistance?
Dr. Stephen Ladyman (South Thanet): Has the hon. Gentleman not touched on the reason why the Government are right to try what they are trying? Under administration, the Government would not be able to avoid decommissioning costs. Under successful solvent restructuring, there is at least a possibility that, in the long term, the industry could do what it was always intended that it would do, and pay the decommissioning costs itself.
Dr. Cable: The hon. Gentleman is right. The upside of the story is that, under solvent restructuring, private companies would make a modest contribution to decommissioning costs. If that part of the package realised its full potential—which is, I believe, around £100 million—that would be a positive element of restructuring. I accept that that would go on the plus side of the balance sheet, but we have to consider the overall balance.
We are dealing with very complex financial calculations and none of us here is qualified to make professional judgments. I urge now, and will urge in amendments to follow, that before the Bill has completed its passage, we must build in some mechanism whereby auditing authorities, and the House through its Committees, can consider properly the economics and the financing arrangements. At the moment, those arrangements are highly opaque. That obscurity is one of the most unsatisfactory parts of the Bill.
Paddy Tipping (Sherwood): I am pleased to follow the hon. Member for Twickenham (Dr. Cable), who rightly concluded that this is a complex matter. He would like more transparency, and so would we all. He offered a range of possibilities for the direction that the energy market will take. He wondered whether electricity prices would fall as a result of war. I suspect that they would go up rather than down. He also spoke about the range of liability costs over the coming years.
I want to be more practical and more down to earth than the hon. Gentleman. The rescue package will cost the Government a great deal of money. These amendments seek to cap or restrain those financial consequences. Can my hon. Friend the Minister tell us whether the money is there to do the job? In the short term, there is a £650 million loan, with contributions of between £150 million and £200 million over 10 years, amounting to something like £2.1 billion. My impression—I put it this mildly—is that that clears out the Department of Trade and Industry energy budget in one stroke. Many of the issues that we have been discussing relate to the consequences and the direction of future energy policy and the cost of this rescue package, however it is done, over the next 10 years.
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