Examination of Witnesses (Questions 26-39)
BNFL LIMITED
16 MARCH 2005
Q26 Chairman: Good morning, Mr Parker.
I think it is your first appearance before the Committee. I think
some of your colleagues have been here before, but perhaps you
could introduce your colleagues and then we will get started.
Mr Parker: Thank you, Chairman.
Good morning. I would like to capture a couple of things for you,
as I explain who my colleagues are and why we are the three who
are here representing the BNFL today. As you may remember, we
went through a major strategic review with the Government, our
shareholder, from August 2003 through to December 2003, basically
as I arrived at BNFL, and one of the things we decided to do in
parallel with that was to drive major organisational change in
BNFL as a group, so we reduced the scope of the corporate centre
where I sit and built up a business structure: basically, Westinghouse,
already a well-established business, and then the UK activities
of BNFL being driven much more into a business organisation and
business structure. So we have had major change going on. The
folks who are sitting here today sit at the centre of BNFL, overseeing
the business structure. I am the group Chief Executive. David
Bonser sits on our board and also has a number of responsibilities:
he has had oversight for our BNFL ALFA which was the internal
customer basically acting as the NDA; he also has a leadership
role for Spent Fuel Services, our reprocessing activities, from
a strategic point of view and a commercial consideration; and
he also has been given recently an oversight for human resource
responsibilities at BNFL. On my right is Alvin Shuttleworth. He
is the general counsel of BNFL and is also our Company Secretary.
Q27 Chairman: Thank you. Paragraph 6
of your memorandum draws attention to the fact that the Government
has given you a fairly challenging timetable, which has forced
you to take some tough decisions to get into shape as the `contractor
of choice'. In some respects the challenges are not dissimilar
to those of UKAEA but on a large scale, given the size of the
operation. Could you maybe elaborate on the nature of the changes
that you have been required to face and how you are shaping up,
as someone coming in at a time of change, both internally and
externally.
Mr Parker: Yes, there is clearly
a huge amount of change going on. I think the way to describe
it, as we would see it and certainly our shareholder would see
it, is this need to focus on the NDA and to dispatch decommissioning
and clean-up activities within BNFL's purview in an extremely
efficient and effective way. That is why we have created British
Nuclear Group, to do that. But obviously the company does a lot
more things than decommissioning and clean-up. We are operating
major facilities up there, reprocessing facilities, we are a world's
major nuclear fuels manufacturer and nuclear reactor service player
and we have the broadest nuclear reactor technology available
in the world today. So we are a very broad company and that is
why we had to drive to this business organisation and this business
change. Clearly we have agreed with our shareholder that the primary
focus of BNFL right now is focusing on working with the NDA to
ensure that it is set up very well and very efficiently and it
works well, and that we transition that part of our organisation
away from an owner/operator cultural mindset and into a manager/operator
cultural mindset; that is, that of a contractor. That is what
we are doing and that is why we have created British Nuclear Group.
Really we recognised when all this was happening that, although
we have excellent science and technology and a very good base
and grasp around operations, we were not as strong in the commercial
areas—you know, supply chain, programme management, purchasing,
etc.—and that we really needed to get on with strengthening
that. So we created British Nuclear Group (which was called Government
Services Group) and we drove that basically as soon as I arrived
and named it what it is today in sort-of April last year, but,
in parallel, as we have gone through all this, we have been looking
to add people to complement at senior levels our commercial supply
chain/purchasing activities. That is what we have been doing and
we are very pleased with the people we have been able to attract.
Q28 Mr Hoyle: How will the international
commercial activities of Westinghouse be separated from the commercial
and clean-up work that is being done for the NDA, so that the
NDA is not funding and not cross-subsidising those activities?
Mr Parker: As I mentioned, we
have established the business structure that we have, so Westinghouse
is a well-established business organisation. It has been managed,
by the way, by BNFL since its acquisition—and we made acquisitions
then of ASEA Brown Boveri Combustion Engineering businesses—essentially
as a stand-alone business, which is given governance and oversight
and strategic challenge—and, of course, demand in terms
of performance—from the corporate centre. So that stands
very clearly on its own. Westinghouse has M&O responsibility
for the Springfields site because that is where fuel is manufactured.
There is also a decommissioning clean-up activity that really
Westinghouse will act as an M&O for that site, working for
the NDA. That is how it will be done. It will be just as clean
and as clear-cut in terms of that as it will be for the British
Nuclear Group's businesses.
Q29 Mr Hoyle: Will you subsidise Westinghouse
reactor bids, either through direct use of NDA money or through
indirect use; for example, using NDA money for an operation it
would normally have funded, leaving it free—and this is
the key—to allocate the same money to Westinghouse, reversing
it round?
Mr Shuttleworth: As well as the
business structure which Mike has just pointed out, which is complete
separation coming to the centre for oversight and test and challenging
of the business going forward, there is also the contractual arrangement
with the NDA, which will, I am sure, have the effect of eliminating
any potential for subsidy. Let alone there being any, the contract
and the funding mechanisms will rule that out.
Q30 Mr Hoyle: So you have all the safeguards,
all the measures being taken, you have all the bean-counters watching
for any money moving across that should not.
Mr Shuttleworth: Yes, and I think
it will not just be our bean-counters. I am sure the NDA will
be keeping a very close eye on that.
Q31 Mr Hoyle: Let's hope so. The last
thing we need is someone else crying foul. Your memorandum notes
the passing of responsibility for THORP and SMP over to the NDA
but makes no mention of the difficulties you have encountered
in trying to make the SMP commercial viable. Is there a reason?
Mr Parker: No particular reason
at all. The SMP plant has been in commissioning now for some time
and it has been a challenging plant to commission. You may know
that this plant was built some time ago and went through quite
a lot of challenges before in fact we were even given authorisation
to start commissioning. I am very pleased to say that we have
been making a lot of progress on this facility in the last nine
months and in fact we are on schedule, by our opinion, to meet
our first major milestone, which is the production of fuel assemblies
for a Swiss customer. The aim is to get that done by the middle
of this year, so we are making good progress now. David has oversight.
I do not know whether you would care to add anything else to that,
David.
Mr Bonser: As Mike says, we have
been having difficulties. We are pleased to be able to say that
the plant is now producing high quality pellets, which is the
first thing. Those pellets are being put into rods and producing
high quality rods.
Q32 Mr Hoyle: They must be, given they
are from Preston!
Mr Bonser: Some of it is from
Preston but it is actually at Sellafield! The rods, we are just
about ready now to start producing the first fuel assembly and
assembling that. So we do think that over the past few months
we have been making good progress with the assembly.
Q33 Mr Hoyle: Are the income projections
viable? Are they going to stack up? Is your plant going to make
money?
Mr Parker: For SMP?
Q34 Mr Hoyle: For SMP.
Mr Bonser: Clearly delays would
mean extra cost on the cost side of the projections. Together
with our shareholder we keep a good review, a regular review.
In fact, I chair a regular meeting which in future will be chaired
by the NDA, that keeps monitoring progress, both physical progress
on the plant and also the economic and business progress on the
plant. The customers remain keen to buy the product. All the indications
are that the economic assessments that were done previously, the
parameters that were put in those assessments for price and for
quantity, are likely to be achieved. Until the contracts are all
signed and so on, you cannot actually say that has happened, and
many of the customers would like to see fuel manufactured and
performing well in a reactor before they come forward to sign
contracts, but the indications are that all the parameters that
went into the previous assessments, apart from the delay in the
first production, are being maintained.
Q35 Mr Hoyle: The critics would say that
with all its problems would it not be better to put an end to
its misery and close it down. What would you say to the critics?
Mr Bonser: I would say that is
always an option and that we need to keep looking at that option.
It is not a clean option because there is plutonium that has been
separated through the reprocessing process which is at Sellafield.
It belongs to our overseas customers. That plutonium would need
to be returned to those customers. They would prefer to see it
as MOX fuel, so we believe and the customers, I think, would say
that is the best way of doing that and that we should do that.
If it is not possible to do that and if the plant was shut down,
then it would mean transporting extra quantities of plutonium-oxide,
which is something I think our critics would also say is not a
good thing to be doing.
Sir Robert Smith: Caught between a rock
and a hard place.
Mr Hoyle: A rod and a hard place?
Sir Robert Smith: Moving on—
Mr Hoyle: They do not get any better
than that!
Q36 Sir Robert Smith: Moving on, in paragraph
17 of your submission you say that short incumbent contracts will
not necessarily facilitate contractors being suitably incentivised
to invest for future programmes. Are you dissatisfied in the way
initial contracts have been framed? Or are you laying down a marker
for the future when contracts are put out to competitive tender?
Mr Parker: I think the real commentary
there is that we know as a company, as we create British Nuclear
Group, that we have strengths—as I commented earlier—and
we have areas in which we need to become stronger, and the more
time that you can have to do that, then clearly the more capable
and the more competitive you are going to be. Obviously, therefore,
that is a question of time. I think the NDA has chosen—and
it varies by site here: you mentioned two-plus-one for UKAEA,
and some of ours, I think, are two-plus-one and some are two-plus-one-plus-one.
That is a question for the NDA to decide on those timeframes and
it is our job to respond to that. One of the key things we are
doing here is making sure we know all of the other players in
the marketplace, whether they are UK players or whether they are
international players, and start to get to know them better and
assess their strengths and weaknesses versus ours and their knowledge
and understanding, so that we can make the best decisions in terms
of how we go about winning those contracts when they are competed.
That is really our mindset and point of view right now.
Q37 Sir Robert Smith: Do you stand by
your warning that if they remain short you are worried that the
incentive to think long term on the contractor's part—
Mr Parker: Let's put it this way:
I would certainly say that we need always to keep that in mind.
We are going to be working very hard from our point of view to
make sure that we do not lose sight of the longer term. I must
say that the Life-Cycle Baselines and the Near-Term Work Plan
disciplines that have been brought in by the NDA are all going
to help with that a lot actually.
Q38 Sir Robert Smith: The chances of
getting renewal of a contract will depend on the fact that you
have some forward vision as to how you are going to operate.
Mr Parker: Exactly.
Q39 Sir Robert Smith: The other issue
is the one raised by UKAEA about clustering sites. How do you
feel about that? Their view is that the very large sites could
possibly be broken up but that smaller sites would benefit from
economy of management, being put together in clusters.
Mr Parker: As you know, Sellafield
is a huge site and represents 60/65% of this total of the whole
of the UK here. It is absolutely enormous. The NDA will have to
decide how it wants to complete that, and that is the most challenging
side to compete—how they do that it will be interesting
to see, as they evolve their thoughts. With regards to all the
other sites we have, you really need to look at them in two ways.
First, there are four sites that are still operating (ie, Magnox
power plants that are producing electricity) and they will all
come to finish—the last one being Wylfa in 2010—so
those have a unique aspect for the next few years. You could think
of bundling them, for example, because they are operating sites.
The others are either sites like Springfield, which is dual-site
but has some decommissioning and clean-up, and then you have Capenhurst,
which is really for us decommissioning and clean-up, and then
you have this other number of Magnox sites that are either well
advanced in their decommissioning and clean-up or just starting.
How you choose to bundle those together is critical. One of the
things we have done is to enable the NDA to compete those sites
the way they want, in whatever bundling they want to. We started
to address major organisational issues at Berkeley, which was
historically and still is today, the corporate centre for Magnox
reactors.
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