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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1025-i House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE THE COMMITTEE OF PUBLIC ACCOUNTS Monday 27 March 2006
THE RESTRUCTURING OF BRITISH ENERGY
DEPARTMENT OF TRADE AND INDUSTRY SIR BRIAN BENDER KCB, MR HUGO ROBSON BRITISH ENERGY
Evidence heard in Public Questions 1-152
USE OF THE TRANSCRIPT
Oral evidence Taken before the Committee of Public Accounts on Monday 27 March 2006 Members present: Mr Edward Leigh, in the Chair Mr Richard Bacon Greg Clark Mr Ian Davidson Helen Goodman Mr Sadiq Khan Mr Austin Mitchell Mr Alan Williams ________________ Sir John Bourn KCB, Comptroller and Auditor General, National Audit Office, gave evidence Ms Paula Diggle, Treasury Officer of Accounts, HM Treasury, gave evidence REPORT BY THE COMPTROLLER AND AUDITOR GENERAL THE RESTRUCTURING OF BRITISH ENERGY (HC 943) Examination of Witnesses Witnesses: Sir Brian Bender KCB, Permanent Secretary, Mr Hugo Robson, Director, Shareholder Executive, Department of Trade and Industry and Sir Adrian Montague CBE, Chairman, British Energy, gave evidence. Q1 Chairman: Good afternoon and welcome to the Committee of Public Accounts where today we are looking at the Comptroller and Auditor General's report on The restructuring of British Energy. We welcome Sir Brian Bender, Permanent Secretary for the Department of Trade and Industry. Have we seen you recently Sir Brian? Sir Brian Bender: It has faded from my memory. Q2 Chairman: Do you want to introduce your colleagues then? Sir Brian Bender: On my left is Mr Hugo Robson, who works in the Shareholder Executive and on my right is Sir Adrian Montague, who is the Chairman of British Energy. Q3 Chairman: May I ask you first about the decommissioning liabilities? The latest figure for the decommissioning liabilities is now over £5.3 billion; it was announced in February that it was £5.3 billion. Is that right? Sir Brian Bender: That is correct, yes. Q4 Chairman: You understand that figure, do you? That is a rise of £1 billion, which is a very large sum of money. Are we going to see any further rises do you think? Sir Brian Bender: The short answer is that we cannot rule that out. As I understand the matter globally, and particularly taking anecdotal evidence from the United States, costs tend to increase over the first few years as the estimating methods are refined and then decrease as cost optimisation kicks in. The NDA has set itself the task of providing a robust baseline of decommissioning costs of its sites by March 2008 and they will be producing some decommissioning estimates as part of their strategy in a few days time which will apply across their suite of operations. Q5 Chairman: So the answer is that we do not know. Sir Brian Bender: We do not know and it may well go up. It is part of a process, as technology and regulation change and learning and experience. Q6 Chairman: It is very possibly going to go up, but we do not know. Sir Brian Bender: It is very possibly going to go up, at least initially, and then likely to come down over time as cost optimisation kicks in. Q7 Chairman: Can we now talk about the contributions, because when the restructuring took place they were supposed to give you some contributions. There is a mention of this in paragraph 3.15, if colleagues are interested, on page 36. So if these liabilities increase, why do the contributions not increase? It seems a logical thing to do. Why did the Department not require the company to do this at the time? Sir Brian Bender: This was a process of a restructuring and a negotiated settlement with the aim of creating a viable company and if we had had a variable contribution like that, it was unlikely that we would have got a viable outcome that would satisfy the market at the time. So this was considered to be the right way of setting up a framework looking forward and the contributions are, of course, linked, as the report points out, to the company's ability to pay. Q8 Chairman: This is all part of contributions, but tell us a bit about this scheme by which you can take an option out to take shares and sell some of them as an alternative? Tell us about that would you? Sir Brian Bender: This is called the cash sweep and I might ask Mr Robson to explain a little more. Essentially, as the Chancellor said in his Budget statement last week, as part of the process of diversifying risk we may sell part of that stake in British Energy after the Energy Review. Q9 Chairman: Am I right in saying that the share price was £2.63 at the time of restructuring and yesterday it was £6.40? Is that right? Sir Brian Bender: Something like that; close to that. Q10 Chairman: So you can sell up to 65% of the company then, is that right? How does it work? Mr Robson: The position on the cash sweep is that it is like a convertible. It gives you the entitlement to 65% of the free cash flow of the business. It is owned by the NLF, but Government have the right to direct the NLF to convert it into ordinary shares which it can then place into the market. Q11 Chairman: Will the share price not be affected by whether more nuclear power stations are going to be built? Mr Robson: The position in terms of the value of the company is that primarily it is valued on the basis of the current plants that it operates, that is it is valued on a discounted cash flow of the value going forward. It is important to point out that in terms of the Energy Review no decision has been taken in relation to whether there will be new build or not. In the event there were to be new build, then clearly it would be quite some time away before that new build would actually be in place and therefore the value of the company is limited in terms of the new build opportunity. Q12 Chairman: Of course the Chancellor can never be guilty of insider trading; I would never suggest that. However, he is not going to be entirely unaware of the nature of this review and what is happening when he sells these shares. Mr Robson: That was indeed one of the reasons why the Chancellor took the view, and we obviously discussed with Treasury colleagues that it was appropriate not to do any sort of sale ahead of the Energy Review and that was indeed the reason why we thought it was important, from a perception point of view, to do everything once it was clear what the outcome of the Energy Review was. Q13 Chairman: That is very fair. Thank you very much. Let us look at the creditors now and figure three on page five. This is the value of the holdings in British Energy of creditors. They have done rather well, have they not? Do you think that the Department should have pressed for a better deal with the creditors? Sir Brian Bender: They took significant pain as part of the restructuring and the Government's view was that the pain was reasonably well shared through the restructuring deal and the taxpayer has, of course, benefited from the enhanced value of the NLF. Q14 Chairman: All right; we shall leave it at that. What happens if there is a decline in performance? Would you like to look please at paragraph 1.7, page 13? Obviously the company's performance has a direct bearing on the contributions, does it not? So how are you going to manage the risk of a decline in performance? It has been performing quite well recently, but what happens if it does less well? Sir Brian Bender: When the restructuring was being decided on, the arrangements the Government set out were intended to ensure that a suite of scenarios could be covered and addressed. Consequently, there was a worst case scenario, a base case and a best case and we believe that the risks are covered adequately in any of those scenario outcomes in any real world situation which is likely to emerge. Q15 Chairman: What about the risks and protecting the taxpayer's interests? Would you like to look please at paragraph 20 on page 7? It mentions there "Overall responsibility for managing the taxpayer's interest ... lies with a senior official within the Department". Do you think this is an adequate way of managing the risks to the taxpayer? Sir Brian Bender: We have set up much tougher monitoring arrangements under the restructuring; tougher monitoring arrangements by the Department, some conditions on British Energy and then two parts of the Department have an interest in this. The Shareholder Executive monitors the arrangements in relation to British Energy and the Energy Group monitors the arrangements as far as the energy market is concerned and that is brought together with meetings on a regular basis between the two, regular discussions with the company and regular risk reports to the board. I have also asked, as the report says, my internal audit department to look at our internal government arrangements to make sure that we have this as effective as it needs to be. Q16 Helen Goodman: I wonder whether I could draw your attention to footnote five on page four which says "Liabilities and other monetary amounts shown in this report ... are discounted to present values using a real discount rate of 3.5% unless stated". I am working on the assumption that in figure three the figure of £5,287 million, which is the figure for estimated nuclear liabilities, has been calculated using that 3.5% figure and that is the net present value of those liabilities. Would that be correct? Mr Robson: Yes, that is correct. Q17 Helen Goodman: Turning to page 36, figure 18, you have set out the profile of nuclear liabilities and I am assuming that that profile of liabilities is the profile which you then discounted to reach the £5,287 million figure. Is that correct? Mr Robson: Yes, I believe that is correct. Q18 Helen Goodman: Are you aware of the guidance in the 2003 Treasury Green Book about the long-term discount rate? Mr Robson: Yes, I am. I cannot precisely remember which figure it is. Q19 Helen Goodman: I am interested in drawing your attention to annex six in the Green Book on long-term discount rates. In paragraph 12 it says that it is recommended that, for costs and benefits accruing more than 30 years into the future, appraisers use the schedule of discount rates provided in table 6.1. That shows that a discount rate of 3.5% should be used only for the first 30 years; for years 31 to 75 the figure should be 3% and for years 76 to 125 the figure should be 2.5%. Could I ask you why you have not used those discount rates to calculate the net present value? Sir Brian Bender: If we are not able to answer that question now, we shall give the Committee a note on it. Ms Diggle: May I make one small guess or suggestion, which is that these are very, very uncertain figures. The way in which the actual work will be done is not known with any confidence at this stage. Q20 Helen Goodman: I am sorry, but that is not the point. We are not talking about the physical costs of the decommissioning. We are talking about the discounted value of the costs on the basis of the best estimate which British Energy and the DTI have provided. So if I might draw your attention again to figure 18, what that means is that from 2035 to 2080 you should be using a figure of 3% and from 2080 onwards you should be using a figure of 2.5%. If you do that, the net present value will turn out to be quite a lot higher than £5,287 million. I wonder whether you could possibly provide the Committee with a note on the basis which is recommended in the Treasury Green Book. Sir Brian Bender: We shall do that. Q21 Chairman: I should like to press you further. Are you sure you cannot say anything now to the Committee rather than just offer a note which will get buried? Helen Goodman asked a very sensible and serious question and I think she should have an answer now. Mr Robson: What you say is clearly correct, that if you use different discount rates from 3.5% to 2.5%, that is clearly going to make a difference to the value of the liabilities. At the end of the day, what we have taken is the Treasury guidance as to what it should be at the 3.5% level. Q22 Helen Goodman: You clearly have not used the Treasury guidance. Mr Robson: We shall certainly provide a note, but what we should remember is that we are talking about liabilities that are over 80 years away, at which time it will be a very different situation in terms of the management of those liabilities as well. Q23 Helen Goodman: In footnote 33 on page 36 it says "The Trustees undertook a first Quinquennial Review in 2001, concluding that the assessed value of the Fund at that date was not less than its total discounted liabilities". If you recalculate using the recommended discount rate, can you still be sure that that is the case? Mr Robson: One thing that is worth pointing out about the NLF and the way the NLF work on this is that we are dealing with two situations: we are dealing with the liabilities on one side and the value of cash sweep on the other. In terms of the responsibility of the NLF, its purpose, and it was clearly stated in the report, it is not specifically there and designed to cover the overall costs of decommissioning and historic fuel liabilities. What it is there and designed to do is indeed to maximise the value of the contribution from British Energy towards meeting those liabilities. What we have here is a situation where, based on the situation of the 3.5% discount rate, what we are saying is that there is a £2.9 billion benefit based on today's share price to the taxpayer. Quite clearly if you take a different discount rate, that £2.9 billion will be reduced. Sir Brian Bender: I am sorry that we are not able to provide the answer; we shall provide a note. There is one additional fact which I can add to the discussion which is, as I understand it, that £2.3 billion of the £5 billion relates to the historic spent fuel liability which will mostly come over the next ten years. We shall provide a note on this. Q24 Helen Goodman: That is not what the chart in figure 18 shows. You can see that the peak of the costs falls after 2075 and you have a very substantial difference. There is a systematic bias in the way the numbers have been presented. Mr Robson: This is the uncontracted liabilities, the decommissioning liabilities and excludes the historic fuel liabilities which are paid by the DTI. The uncontracted liabilities and the decommissioning liabilities are the ones that the NLF are specifically required to cover and that is more in the region of about £2.5 billion. The historic fuel liabilities are primarily over the next ten years and therefore unaffected by the discount rate. Q25 Helen Goodman: It does not look like that from the information provided in the NAO report. Would you still say, reflecting on this point about the systematic bias because of the way you have used the discount rate, would you still hold to the position in paragraph 3.15 that the Department has adopted a prudent position? Mr Robson: Yes, in terms of our position in relation to the way we set this up, we have indeed taken a prudent position in terms of looking at how the cash sweep can lead towards meeting the liabilities going forward and on the discussion about whether it is at 3.5% and 2.5%, we have conceded that that would affect and will reduce the £2.9 billion positive effect for the taxpayer, but it will not increase it by a very significant amount. We shall get back to you in terms of what that is. Q26 Helen Goodman: Could you explain why there does not appear to have been any cash sweep for the period September 2002 to January 2005? Sir Brian Bender: We were prevented from doing it for the initial period. Q27 Helen Goodman: In what sense were you prevented from doing it in the initial period? Mr Robson: The cash sweep in 2002 was not actually in place. The cash sweep came into existence upon restructuring in January 2005 when the company was restructured and that was the point at which the cash sweep effectively became effective. You are right that there was no cash repayment in the period from January 2005 to March 2005. Q28 Helen Goodman: Would I be right in saying that this is because you were more concerned with the viability of the company than in covering the cost of the liabilities to the taxpayer of the nuclear decommissioning? Sir Brian Bender: I would not make that assertion, no. It was important to make sure that the company that was set up was viable and would then, as part of its commercial success, contribute to the handling of those liabilities. Q29 Helen Goodman: Could you explain why the contribution to the Nuclear Liabilities Fund made by the company is dependent on the cash generated in the company, not the nuclear liabilities generated, which is the practice in Belgium, Finland, Germany and Japan? Mr Robson: The position there is very much in terms of restructuring. The purpose of restructuring was to create a viable company. It was required under state aid rules anyway to give the minimum amount of aid to British Energy. We established what was a viable company, which was to remove the liabilities which were a fixed cost, and then, as a result of that, put in a cash sweep which was variable depending on the success of the company so that we were able to benefit from the success going forward of the company. If we had put in a position whereby the liabilities were to increase, then the contributions would have had to go up. We would not, as of January 2005, have been able to say that this was a viable company because the purpose was to remove these fixed and uncertain costs. Q30 Helen Goodman: I can see that you might have had problems with the European Union on state aid, but presumably all we are doing is shuffling the burden around between taxpayers today and taxpayers in the future because of the way you have restructured this? Sir Brian Bender: In most countries the taxpayer is heavily involved in one way or another in nuclear costs and risks. In the circumstances in 2002, the analysis showed that we needed to remove those fixed liabilities in order to be able to create a viable company so that the taxpayer could get a return. That was why we did it in this way. Q31 Helen Goodman: It may be the case that in most countries the taxpayer is involved, but it is in this country that shareholders are receiving dividends and creditors have debts converted into equity. Your point does not explain whether or not that is, and I am contending that it is not, an appropriate distribution of the risk between the taxpayer and the shareholders. Sir Brian Bender: We have imposed limits about the company's ability to give dividends in the future, if there are problems in relation to the liabilities. These are set out later in the report in chapter three. Q32 Greg Clark: May I pick up on Helen Goodman's excellent questions? I am astonished that you cannot come up with an answer as to why you used a different discount rate. I should have thought the fact that you used a variation on the Treasury's rate would mean that you would know exactly why, and what the justification was. I just find it astonishing that it is something you have to take away and come back to the Committee with a note. If the default is the Treasury rate, how can you not use that? Are you able to choose whichever rate you want? Sir Brian Bender: I apologise for the fact that we are not able to answer this question now; I simply do not have the information with me to provide that answer and I regret that. Q33 Greg Clark: I am very surprised. Just on the restructuring. You obviously face a choice between restructuring and administration and, as we understand it from the NAO report, there is a fairly finely balanced financial case at least between the two. The best case had restructuring costing the taxpayer more, the worst case had administration costing more and so the solution is for the public purse to absorb more or less all of the liabilities, which are £5 billion. The report is pretty clear, looking at page 21 paragraph 2.5, that when it actually came to the choice between restructuring and administration that there was no potential purchaser in prospect for administration. The report says "The Department concluded that given the prevailing low wholesale electricity prices and the scale of British Energy's nuclear liabilities, no credible and qualified purchaser existed" with an exception. So given that, given that the creditors of this company had nowhere else to go, why were they given 97.5% of the share capital? Mr Robson: They were given 97.5% of the company with 2.5% going to the shareholders. At the end of the day the restructuring plan was a company plan. What the Government received was, in effect, 65% interest on a converted basis. So to say that the creditors got 97.5% of the company is not quite correct, because in effect, in terms of financial interest, it is down to around 30% of the company as opposed to --- Q34 Greg Clark: Nevertheless, they had a major financial interest in a company when actually this must have been a windfall for them. I am sure they did the same assessment and, like the Department no doubt, concluded that they should write off the sums of money they had exposed to this company. They had no basis for expecting any sort of financial return and yet they were given 97.5% of the share capital. Now you say that this is a shared risk and the taxpayer is exposed to it too, but the fact is that this stake is now worth £4 billion. They have been given £4 billion worth of value for no risk. Mr Robson: What the report demonstrates is that at the time, and of course we were looking at a very different period of time with electricity prices down to the £15 level, at that point analysis was done and showed that creditors were indeed taking a very significant pain. They were losing effectively around £300 million out of the £1 billion that they were owed. Q35 Greg Clark: Yes, but they had lost that money. The fact was that because of the low electricity prices and because of the liabilities, they had waved goodbye to that and the white knight of the public purse came riding to the rescue and gave them £4 billion for nothing. Mr Robson: It did not give £4 billion. Q36 Greg Clark: That is what it is worth. Mr Robson: It is worth that today, but it was not worth that at the time. Q37 Greg Clark: What was the downside for them? Mr Robson: The downside in what respect? Q38 Greg Clark: They were given this. They could not anticipate any further reward. Mr Robson: Yes, but the creditors were owed £1.1 billion. Q39 Greg Clark: But if it went into administration, they would not have got a penny of it. Mr Robson: Correct. The amount that they would have got in return would have been extremely uncertain. Q40 Greg Clark: We need to be clear here. The amount that they got may have been uncertain, but it would also have been infinitesimally small, if it went into administration at that point. That is correct, is it not? Mr Robson: I do not have the precise details. Q41 Greg Clark: It is not a question of detail Mr Robson. Are you saying that the creditors, if British Energy had gone into administration at the time of this restructuring, would not have had an extremely small reward from it, if any? The fact is that it would have been virtually zero. You are not trying to tell the Committee that it would have been in any way significant, are you? Mr Robson: I am not trying to say that it would have been significant. Q42 Greg Clark: Would you agree that would have been insignificant? Mr Robson: It would have been less than the £700 million that they took in terms of value at that point. Q43 Greg Clark: I do not think this is terribly satisfactory. It is pretty clear from the finances of this organisation that this was, effectively, almost a bankrupt organisation. It is clear from that, that the creditors were not expecting any significant sum of money. If it was so valuable, why is it not the case that some other purchaser has stepped in? The assessment is very clear that this was unsaleable. Mr Robson: The assessment is absolutely clear that it was unlikely that any buyer for the entire business would come forward. What precisely would have happened, if it had gone into administration, is clearly uncertain and that was indeed why it was important to come to a position whereby there was, if we could achieve it, a solvent restructuring, because under the solvent restructuring route, then we did not have indeed that uncertainty that you mentioned. Q44 Greg Clark: The report makes clear that actually the possibility of a planned administration was possible; one can see the disadvantages of an abrupt administration but page 22 of the report is very clear that a planned administration was a perfectly feasible thing. I am slightly mystified as to why it is the case that British Energy, with £5 billion of nuclear liabilities, should have been left in the private sector and restructured with creditors, who contributed very little, who had low expectations of what they should get back, benefiting significantly, whereas, not far from that time, it was felt that Railtrack, which did not have such significant liabilities from a public safety point of view, had to be taken back into the state sector. I do not quibble with that here, but it seems bizarre that a nuclear company should have been found fit to stay in the private sector and the creditors rewarded but not the shareholders of Railtrack. What would you say to that? Sir Brian Bender: The conclusion reached as part of the discussion on restructuring, as stated in the report, was that the costs of the two were roughly equal, but the risks of going into administration were greater and therefore a solvent restructuring was likely to provide the better return to the taxpayer as well as protection of the interests of security of supply and safety. Q45 Greg Clark: On reading the report it is clear that those risks attached to an unplanned, abrupt administration, not to a planned administration. It is slightly misleading to posit a distinction between administration and restructuring as being as stark as that. Sir Adrian Montague: The difficulty of a planned administration is that there is no such thing as a sure plan when you enter administration, because the administrators tend to have minds of their own, they have duties to the creditors as a whole, not to Government, not to health and safety. This was not directly my concern, it was a government matter rather than my matter; I was looking after the company at this stage. I think that there would probably have been worries as to whether it would be as easy to get out of administration as it would have been to get into it. Q46 Greg Clark: The report makes clear that the Department could have funded an administrator and thereby kept the company running and satisfied safety standards. If administration is so unpalatable, and there are one or two remarks which mention the loss of staff morale, for example, if these are significant, then surely these things apply just as much to British Energy today running nuclear power stations as they did before the restructuring. Okay, we have taken out the nuclear liabilities, but these risks remain, so is it any more conceivable today that British Energy could be allowed to go into administration if it were to fail financially? Sir Brian Bender: There is a NAO recommendation in the report that we are looking at which is that, if the company were to go into administration in the future, a special administration regime should apply. That is something we are looking at and we are discussing it currently with the NII, the Nuclear Industry Inspectorate. Q47 Greg Clark: It is the case, is it not, that this is a private company and the evidence from this report is that the Government were not allowed to go bust, which puts it in a very unique position? Sir Brian Bender: There were issues then, as there may well be now, to do with security of energy supply, electricity supply and safety, which caused the Government to decide, since the costs were about equal and those risks skewed it one way, that solvent restructuring was the better option. That was the reason the decision was taken, as it was, in 2002 onwards. Q48 Greg Clark: Are you concerned as to the consequences of administration and that the duties would be to creditors rather than the Health and Safety Executive and all the rest of it? It strikes me that, sitting where we are today, those risks continue to be there for administration, if you are to be consistent, and therefore this company, where another tranche of shares is about to be sold, comes with a government guarantee behind it. Sir Brian Bender: The point I was trying to make a couple of minutes ago, and there is a recommendation in the report on this point, is that we are currently reviewing whether legislation is required to establish provisions which could assist if it were to go into administration. In other words, there is an issue being looked at now as to whether it would be useful to have a special administration regime to address this type of problem in legislative form. Q49 Greg Clark: When will that be decided? Sir Brian Bender: I cannot answer that; it is currently being considered. Q50 Greg Clark: Before the sale of shares? Sir Brian Bender: I cannot answer that. Q51 Chairman: May I just ask one thing on the line of questioning of Helen Goodman and the early part of Greg Clark's before we move on? I want to ask the Treasury, if I may? It is quite clear from the questions that Mrs Goodman put to you that the DTI did not follow the Green Book rules on the discount rate. Did the Treasury specifically accept this departure from their own rules? Ms Diggle: We are going to have to look into that for you Chairman. Q52 Chairman: We do want to know. Ms Diggle: I certainly want to have a look at this note before it is sent. Q53 Chairman: We want to know what you think of this answer that it is all rather vague in 2085. That does not sound a very good answer to me. A rule is a rule is it not? Ms Diggle: Certainly. Q54 Mr Mitchell: I wonder whether we really have a situation here where the sky is black with chickens coming home to roost. The accounts of the whole nuclear industry have been fiddled for so long to try to show it as profitable, when it is not, and to try to show it as competitive, when it is not, that you have just got lost in a miasma of figures. I have been corresponding for several years with the DTI about the accounts of British Nuclear Fuels. I have brought the papers along for Sir Brian, because they might just have gone into that black hole marked DTI. We had reports done in an association of business and accountancy which proved that British Nuclear Fuels had been capitalising on the repairs and the maintenance expenditure for years, that they had been fiddling the depreciation levels, they had been fiddling the provision relative to long-term nuclear liabilities, they had been fiddling accounting standard FRS12, they had given a pension holiday to add to profits and, long term, they had shown income above the line. Now here is British Nuclear Fuels, they are a creditor, they are a beneficiary of what you did for British Energy. If the accounts of British Nuclear Fuels, and I imagine the accounts of the rest of the industry, have been fiddled as vigorously as that for so long, it was no wonder you had no figures you could rely on in 2002. You did not know where the hell you were. Sir Brian Bender: It seems to me largely a rhetorical question, but --- Q55 Mr Mitchell: No, no, no; my question was pointed. I shall give you the papers afterwards. The accounts were in a mess. Sir Brian Bender: I am not aware of the issues to do with British Nuclear Fuels and you will give me those papers afterwards. The NAO report states that the analysis the Department did, at the time of the risks that the taxpayer and the economy were facing, were properly examined. That is the conclusion NAO have reached in relation to this restructuring. Q56 Mr Mitchell: But it also says there was some confusion as to the figures and what the accurate figures were. That is true, is it not? Sir Brian Bender: We did not have the liabilities figures, as is evident from the report. Q57 Mr Mitchell: When it comes to the decision whether to put it into administration or to carry it on, it was a very different decision to the one for Rover we were talking about last week. Of course, as the report says, normally when private companies get into difficulties, the Department's policy is not to intervene, on the argument that the United Kingdom productivity goes up if a relatively inefficient firm is allowed to close. Here was an inefficient loss-making electricity producer and you decided to keep it going. That is really a political decision, is it not? You can disguise it with figures, but essentially they had got you by the balls. Sir Brian Bender: I was explaining in reply to previous questions that the costs of administration versus solvent restructuring were roughly equal, not much to choose between them, but there were issues around nuclear safety and security of energy supply that led to the policy decision that the lower risk option would be to go down the road of restructuring. Those considerations did not apply in relation to the Rover Group; it was a very different context. Q58 Mr Mitchell: Those safety issues could possibly have been dealt with, but the basic argument was that you did not want and you could not afford nuclear to fail in that kind of fashion. Sir Brian Bender: The decision was taken at the time that there were very significant risks to do with nuclear safety and electricity supply if it went into administration, for the very reasons I was trying to explain to Mr Clark. Q59 Mr Mitchell: Did the fact that you could not find anybody else who was willing to come forward and run it, even at a knock-down price - that is what administration is all about, finding some sucker to take it on - not tell you something about the viability of this organisation? Sir Brian Bender: It was an issue around the greater risks, as I described earlier, of going into administration rather than restructuring. Q60 Mr Mitchell: Why did you get rid of bits in the United States which I assume were more profitable? I do not know, perhaps you will tell us whether they were profitable or not. Why were they got rid of? Sir Brian Bender: In order to realise some assets to help with the potential --- Q61 Mr Mitchell: To save the British company, the non-profitable company. Sir Brian Bender: To help the potential cost to the taxpayer. Q62 Mr Mitchell: Yes, but were the American assets more profitable and more saleable than the British assets? Sir Brian Bender: Yes. Mr Robson: They were clearly more saleable because they were indeed sold. The position, very firmly, was that in relation to any company that goes into severe difficulty, as indeed British Energy did, you look around and you try to sell those parts of the business that you are able to sell. That was very firmly the case with both Bruce in Canada and Amergen in the US. In relation to Bruce in particular, one of the problems would have been that, had the company gone into administration, there were terms in the lease of the stations in Canada which would have effectively been an equivalent of a change-of-control clause, which would have meant that there would have been great difficulty in getting any value from that business. That indeed was a factor that was put into the reason why it was considered better from a financial point of view to go down the solvent restructuring route. Q63 Mr Mitchell: But the North American assets were sold at a loss in a kind of fire sale, were they not? Sir Brian Bender: No, they were sold for the best price that we got. Q64 Mr Mitchell: Which was a loss. Mr Robson: They were sold for a positive value in each case. It is true to say that this was a fire sale and that therefore we did not have a good negotiating platform, but we got good value in the circumstances. Q65 Mr Mitchell: You do not accept my contention, because of long years of fiddling the figures, the inference, as I read it from the report, that the Department was largely working in the dark with its wide variations between the best and worst case estimates of the likely costs of restructuring versus administration. You do not accept that contention. Sir Brian Bender: No. The only aspect where it would be fair to say we were in the dark was the exact sum of the liabilities that we then removed from the company. The report makes clear that we did not know that figure at the time, but, for the rest, we were looking at a range of assumptions, this of course against a background that when you last had a hearing on this issue, one of the criticisms of the Department was that we had not looked at a very wide range of assumptions on electricity prices post 1996. This time we looked at a wide range of assumptions, including prices, including other aspects and it was right to do that. Q66 Mr Mitchell: Was the fact that the restructuring so substantially benefited the shareholders and the creditors and the costs fell on the state, which is the usual pattern with nuclear, a deliberate decision to keep shareholders and creditors sweet or was it just an accidental consequence of the way it was done? Sir Brian Bender: It was not an accidental consequence, but the rationale for what was done was to remove the liabilities and then have arrangements in the restructured company which would enable the company, if it was robust and successful, to contribute towards the reduction of those liabilities and that was indeed what the Chancellor was announcing as a possibility in the Budget last week. Q67 Mr Mitchell: Why? It is unlike the situation in other countries. Why is there virtually no link between the size of the contributions back to the state to be made by the company and the size of its liabilities? Why is all the risk placed in the public sector? Sir Brian Bender: The basis of the restructuring was that the company would contribute according to what it could afford and when it performed well it would make a larger contribution. That was the rationale and indeed I hope that in the months ahead, we may see some of the benefit of that. Q68 Mr Mitchell: Why do they apparently do it better in other countries? Is it that they have smarter accountants better at fiddling the figures or a smarter government better at setting up the financial size and investment patterns of the nuclear industry? Sir Brian Bender: There are issues about how the liabilities were assessed in the first place, for which we have to go back to the decisions taken in the 1970s and 1980s, but ultimately, one way or another, in most countries, as the NAO report says, in the last resort it does come back to the state to deal with the liabilities, particularly around nuclear waste. Q69 Mr Mitchell: Is it on this scale in other countries? Sir Brian Bender: As the report says, there are many different models but the general characteristic is that the costs and the risks do come back eventually to the taxpayer. Mr Mitchell: I frankly feel a bit resentful, as a taxpayer, at having paid for all those years of propaganda and lies about the nuclear industry. Q70 Mr Bacon: Mr Robson, I should like to ask you about this discount rate question which Helen Goodman asked you about earlier. I heard you say to Helen Goodman, in answer to one question, that the Department and you had followed the Green Book, except you were stopped by Helen Goodman who waved the Green Book in your face and said you did not. Can you just confirm now, even if you are not able to give the full explanation, as Sir Brian said you are not, that you did not follow the Green Book guidance? That is correct, is it not? Mr Robson: All I would say is that we took guidance from the Treasury and from the NAO. Mr Bacon: That is not what I want you to say. My question was: did you follow the Green Book, yes or no? Q71 Chairman: Did you say you took advice from the NAO? Is that right? Mr Robson: According to NAO rules. Q72 Chairman: The Comptroller and Auditor General indicated no. Mr Robson: Apologies; according to NAO rules. Q73 Mr Bacon: Did you follow the Green Book? In calculating what discount you would use over the life of this, did you follow the Green Book? Mr Robson: Clearly not. Q74 Mr Bacon: So the answer is no? Mr Robson: The answer is no. Q75 Mr Bacon: Thank you; I just wanted to be clear about that. Sir John Bourn: I should just say that it is not the task of the NAO to lay down what discount rates executive government uses in its calculations. There were no rules that we had laid down here. Q76 Mr Bacon: I understand Mr Robson that you did not follow the Green Book. So you effectively made up the rules as you went along, did you, in terms of what discount rate you would use? Mr Robson: I cannot answer further. We said we shall provide an additional note on this. I understood it to be the Treasury rules that 3.5% --- Q77 Mr Bacon: You understood it to be the Treasury rules? Sir Brian Bender: I apologise, but we are clearly not able to answer. Q78 Mr Bacon: No hang on; Mr Robson just said an interesting thing. You thought you were following Treasury guidance? Is that what you are saying? Mr Robson: We took guidance from Treasury; yes. Q79 Mr Bacon: So the Treasury advised the DTI and British Energy not to follow Treasury guidance? Ms Diggle: I can only offer to go back and look at precisely what did happen at the time. Q80 Mr Bacon: It would be quite interesting to see. Ms Diggle: You are absolutely right that we need to know. Q81 Mr Bacon: Okay, that is fine; I shall move on. Sir Brian, Sir Adrian made a very interesting point when he said that once it is in administration, administrators have duties to all the creditors not to Government, not to health and safety. This may be a better question for Sir Adrian to answer, who I understand is a lawyer. Is it the case in company law that health and safety law is suspended in administration and that the administrators do not have duties to health and safety, because that is what you said? Sir Adrian Montague: I do not believe so. I am a renegade lawyer of no current standing, so you must not take my word as gospel on this, but I believe it is correct. Q82 Mr Bacon: That there are circumstances in which health and safety law is, at it were, suspended? Sir Adrian Montague: No, the way that this works is that health and safety law must continue. To be honest, in operating the power stations safety is the paramount concern but in the financial implications of an administration, the administrator's duty is to the creditors as a whole. I was not party to these discussions, but I could imagine that NII could possibly have had some concerns about the reliance on administrators to operate these stations. Sir Brian Bender: That is my understanding. It was essentially an expression of NII concern about the uncertainties, if it went into administration, for nuclear safety. It was not a certainty; it was a concern on their part that that was one of the risks that the Government took into account in going down the road, all other things being equal, of restructuring versus administration. Q83 Mr Bacon: What slightly surprises me is that when the analysis and the risk assessment were done in the first place, when the company was first sold, no-one asked the obvious due diligence question in this circumstance "What happens if it goes bust?" or did they? Sir Brian Bender: I cannot answer that beyond the hearing this Committee had a couple of years ago that looked at the circumstances up to that. I have read the transcript of that hearing, I have read the Committee report and the Treasury minutes, but I have not looked at that particular question. Q84 Mr Bacon: I should like to ask about the professional fees. On page 29 there is a chart which explains the amount paid to different professional advisers. This is figure 15. Could you say why the Department is not able to appoint all its advisers using competition? Sir Brian Bender: If I may say so, I think that the NAO recommendation here is quite right. The Department should have had a competition and the recommendation here is something we shall need to implement as soon as we can. I am advised there may be a question in relation to what is described as the magic circle of legal advisers, who have some doubts about whether they want to be on such a list because it might rule them out of other business. My general point is that we should not have been in this position and I accept the NAO recommendation on this point. Q85 Mr Bacon: You only reviewed the fees once between September 2002 and January 2005. Why did you not review the fees more regularly and what savings did you make as a result of the reviews you did make? Sir Brian Bender: We did have a new risk-sharing arrangement with Slaughter and May in early 2004 when that review happened. We did, of course, get a recovery from British Energy of a large part --- Q86 Mr Bacon: I was going to come onto that in a minute. Could you talk about the savings from the advisers? The British Energy compensation is a separate matter. Sir Brian Bender: I understand that. I do not have data with me on what savings we did obtain, but we had contracts by monthly fees and success criteria that we built in, or hourly rates for Deloitte and Slaughter and May and we did carry out the review as described. For example, Slaughter and May were reviewed in early 2004, but I do not have with me the data of what saving that brought about. Again, I can provide material for the Committee, if that is helpful. Q87 Mr Bacon: Is it the case that you now have professional panels in place, rather like framework agreements for consultants in other departments? Sir Brian Bender: We have in most cases. On this particular area, this is still work in progress and it needs to be completed quickly. Q88 Mr Bacon: Why did you not reclaim all of the professional fees for external advisers used by British Energy? Mr Robson: It was a matter for negotiation with British Energy at the start of the process and an amount of £15 million was negotiated with British Energy as what would be covered. All of the costs of managing the credit facility, the £6.5 million, were recovered in full. Q89 Mr Bacon: In paragraph 2.28 it says "The original contract with Credit Suisse First Boston was capped at £5 million". It says in the next sentence that the actual value of the work undertaken was £11.1 million. It is possible to read from that that therefore Credit Suisse First Boston did £6.1 million of work for free. Am I right in supposing that Credit Suisse First Boston does nothing for free and indeed you paid them the £11 million? Sir Brian Bender: You are correct in the last part. Q90 Mr Bacon: How did you go from having a cap of £5 million to paying them £11 million? Sir Brian Bender: Looking at the report again, there is something that comes across as slightly misleading. The cap related to a contract they already had for working for the Department on British Nuclear Fuel's matters and we used those contractual arrangements --- Q91 Mr Bacon: It says "... extended an existing contract". Sir Brian Bender: Exactly. So we had the arrangements that were in place for BNFL that we then brought across to apply to this restructuring and early on it became clear that this would be a long project and we needed to negotiate new contractual terms. We then negotiated a new contract with Credit Suisse to cover the British Energy work and it had fixed monthly fees and success fees as part of it. The £11 million was entirely subject to the new contract and unrelated to the capped fees. Q92 Mr Bacon: What lessons have you learned from this and how will these be applied in the future? Sir Brian Bender: There are two main lessons. One is the one we touched on earlier, that we do need to have panels and have companies on those lists that we can draw from. Secondly, we do need to have methods of benchmarking which we do have in the Department; we need to make sure we use benchmarking. Q93 Mr Bacon: You have them, but you just have to make sure you use them. Sir Brian Bender: Correct. Q94 Mr Bacon: It is the case is it not, that many big consulting firms and law firms and banks have done very well out of Government in recent years through all kinds of projects, including PFI/PPP. I am thinking particularly of London Underground where the fees were over £450 million from recollection. In fact this £29 million total here, from memory, was exactly the same as Freshfields got in total, so compared with London Underground you are doing very well on this, but it is still a lot of money. I have met people who say that when they are negotiating with Government, compared with when they are negotiating to provide professional services to the private sector, it is usually a lot easier; they do not encounter the same reluctance to pay their high professional fees as they do from private sector clients and there is less of a negotiation than has to be had with the public sector client to get the public sector to pay what they want. Sir Brian Bender: Well I am sorry to hear that. I have some data with me which say that when Telewest, the cable company, was restructured, there was a total of £110 million in adviser fees for a £3.8 billion rescue and for Marconi the legal costs alone were £56 million. This was one of the most complicated restructuring packages in British commercial history. It is therefore not surprising that the fees were high and the NAO report does talk about the importance of us having the right sort of professional advice. Nonetheless, there are plainly lessons about how we can make sure that we do not pay over the odds for that advice. Q95 Mr Bacon: Finally, if I might return to my second question about being in administration and the legal framework, you say this is something that is currently being considered. Obviously a policy matter is not really an issue for this Committee, but at the same time, getting this right or wrong could have considerable implications for the taxpayer and I was surprised you were unable to answer Mr Clark's question about whether any legal changes would be put in place before the sale of shares. Sir Brian Bender: I cannot answer that. If there is any more we can say when I have gone back and provided a note subsequently, I shall cover it in that, but that is the present position. Q96 Mr Bacon: In what sort of timescale, roughly, without signing your name in blood, do you think you are looking at before shares are sold? Sir Brian Bender: I really do not want to be drawn and it would be unwise of me to speculate on the timing. It is market-sensitive and I simply do not know. The only commitment the Chancellor gave last week was that it would not be before the Energy Review report was published and the public timetable for that is the summer. Q97 Mr Khan: Sir Adrian, are you pleased with the way the restructuring has gone? Sir Adrian Montague: There are two parts to our restructuring process: firstly, arriving at a stable financial framework, which is what the restructuring itself delivered; then secondly, there is, as the report says, work to do on the operational side. Q98 Mr Khan: So happy with the first and reasonably happy with the second. Sir Adrian Montague: We are making good progress on the second and the first has delivered a stable framework. Q99 Mr Khan: Sir Brian, could I ask you whether you think that the Department has achieved an equitable sharing of the costs, the benefits and the risks of restructuring? Sir Brian Bender: In what was an extraordinarily difficult position that we were discussing in response to earlier questions and given the importance of nuclear safety and security of supply and given that we shall not actually know for certain the answer to that for many tens of years, the answer is that it is a reasonable outcome. We now need to make sure that we monitor the situation closely and secure the best return for the taxpayer as well as the policy objective in the period ahead. Q100 Mr Khan: Do you really mean that? Do you think it is a reasonable outcome at this stage? Sir Brian Bender: We are in a middle stage at the moment. The restructuring has happened and it has only been completed for about 12 months. I read the NAO report as saying that in all the circumstances it was a reasonable position, although the Comptroller and Auditor General can answer for himself. Looking forward, the question is then the performance of the company and the effectiveness and efficiency of managing the liabilities and the decommissioning costs. Q101 Mr Khan: You have not touched upon the cost and the risk to the taxpayer, yet you are reasonably pleased with that. Sir Brian Bender: For as long as the company is viable and being successful, the cost to the taxpayer is actually an asset not a cost, as the table at the back that has a figure in it describes. Q102 Mr Khan: Quite clearly this is a complex restructuring, huge financial figures at stake and you are reliant upon the advice you receive. Mr Bacon touched upon concerns about the lack of competition and you have acknowledged that. Are you happy with the advice you received from those people who were given the job without competition? Sir Brian Bender: I believe, from having read the files, that we received good advice. Again, the Comptroller and Auditor General can speak for himself, but I understood the report to be saying we examined the right sort of issues and received the right sort of advice. There are other people, of course, who will be giving advice on these matters. I believe the NDA will themselves be publishing a strategy later this week and they will be setting some of the framework for the future decommissioning costs and therefore the liabilities over the next decades. So there is another source of advice there. Q103 Mr Khan: Are you pleased with the outcomes to your negotiations? Sir Brian Bender: I think that, in the light of the really difficult circumstances that were faced in 2002, we are now in an adequate position. We have a solvent company which is still producing electricity, doing so safely and potentially there is an asset here for the taxpayer. The question is how we manage those liabilities to make sure that actually it is an asset for the taxpayer and not a liability. Q104 Mr Khan: Do you wish you had had either the advisers or the negotiators that the creditors had? Sir Brian Bender: I believe, having talked to people who were involved at the time, having read the files, that we had good advice. Q105 Mr Khan: Do you believe that you pushed hard enough to get a better deal on the cash sweep? Sir Brian Bender: We shall see, later this year, or whenever it may be, how the cash sweep works when it is first deployed and what return that brings. Again, this was a balance in terms of trying to ensure the viability of the company with the Government and taxpayer sharing, if it was successful, and the risk that if we had struck too hard a deal there, it would not have been a successful restructuring. That was the balance to be struck. Q106 Mr Khan: Sir Adrian, do you think that your creditors and shareholders have a fantastic deal vis-à-vis the risks to them with regard to nuclear liabilities or lack thereof? Sir Adrian Montague: The decisions which were taken very early in the restructuring process were taken with a view to securing a solvent restructuring. As I understand it, the cash sweep which we were discussing earlier on was intended to create a way of the contributions that the Government received from British Energy fluctuating over time according to the fortunes of the company. Actually, as things have turned out, we are now creating value in excess of the liabilities that have been transferred to Government. Q107 Mr Khan: So they have done pretty well and have not shared any of the risks. Sir Adrian Montague: Clearly there is risk around the long-term evolution of these costs, but, as matters stand today, in my judgment it is a successful restructuring. Q108 Mr Khan: If you are a creditor or a shareholder. Sir Adrian Montague: No, no. I would suggest, although it is not for me to say, also as regards the Government. Q109 Mr Khan: Sir Brian, you have heard what Sir Adrian has said. Why did you not take a direct shareholding in the company? Sir Brian Bender: We took the view that the monitoring arrangements we had and the cash sweep arrangements we had and the controls we set on the company would provide the right sort of framework to give us the returns without us being involved in actually running it and therefore potentially diluting the --- Q110 Mr Khan: Just pausing there. Paragraph 2.24 talks about the huge cash payments all the executive directors received when they left. It says at the bottom of that paragraph "Since the completion of restructuring the Department has no right of consultation on executive remuneration". That is one example where you have no control at all. Sir Brian Bender: We have no control over that. The money which was paid out at the time was subject to contract and the Department received its operating loan back from the company. The controls we do have relate to the financial trading and other trading arrangements of the company, so it must adhere --- Q111 Mr Khan: Okay, let me read paragraph 3.15 "The Department plays no formal role in approving the company's commercial strategy"'. Another example of your lack of leverage. Sir Brian Bender: We have set a number of conditions for the company: it must adhere to prudent trading principles; it cannot make capital distributions until it has built up sufficient cash reserves; it cannot undertake corporate restructuring without the Department's consent and its borrowing ability and scope of business activity is limited. Q112 Mr Khan: Sure; I have read that as well. What control do you have over the performance of British Energy's operational side? Sir Brian Bender: None. Q113 Mr Khan: Am I able, for example, to ask you for your comments and your influence over figure 17, paragraph 3.2, where you see that the company is lagging well behind not just upon the maximum annual load factor, but also vis-à-vis international comparators? Do you have any say over that? Mr Robson: What we have and what we put in place are monitoring arrangements which did not exist previously. Our main focus is to lead British Energy, as a company operating in the private sector, to being a FTSE 100 company now and having the private disciplines with shareholders. We are looking to have significant monitoring arrangements, so we can actually determine how the company is performing as well as having, through various controls, ability to ensure that, for example, dividend payments are not able to be made until a certain amount of cash is within the business. We think we have the right balance between the controls that we feel we need, but also allowing the company to put forward its own strategy and take the business forward. Sir Brian Bender: And we do discuss operational performance with them as part of the regular monitoring meetings. Q114 Mr Khan: But they can ignore you, can they not? You have fantastic teamwork today, but they can ignore you if they want to. You would have much more stake if you were a shareholder, would you not? Mr Robson: May I just deal with the point about why we did not take a direct shareholding? One of the issues that we considered was whether there was any additional benefit in having equity which would obviously have entitlement to dividends. One of the benefits of the cash sweep is that we have a contractual entitlement to 65% of the cash created by the company. So if the company were to decide that it did not want to pay a dividend, which is at the discretion of the directors, we nevertheless would have a contractual right to 65%, with the ability to convert if we wished to do so. Q115 Mr Khan: I have one final question I wish to put. I have heard all that. How can you assure us that you have adequate contingency plans to minimise the risks for the taxpayer should things take a dip? Sir Brian Bender: We have close monitoring, as I have described already. Q116 Mr Khan: You cannot impact the way the company behaves. You can monitor, yes. Sir Brian Bender: We can monitor closely, we have controls in the way described. As part of the restructuring process, we did have detailed contingency plans for different scenarios. The company itself now has a stronger hedging strategy so that it will not be as vulnerable to movements in electricity prices as it was in the past and we have reviewed, and keep under review, the contingency plans. Q117 Mr Davidson: May I clarify this point about liabilities? Do I take it that essentially there is an unlimited liability to the taxpayer in the event of catastrophic failure of any sort and ultimately responsibility for anything like that would fall back on us? Sir Brian Bender: The liability essentially is to do with the waste and the other material that is described there. That, as the report makes clear was not calculated at the time of the restructuring and that was removed from the company. Q118 Mr Davidson: But it still falls back on the taxpayer. So any catastrophic event, any outage, the ultimate liability falls back on the taxpayer, does it? I am seeking to clarify where it does fall, if it does not fall on us. Mr Robson: The answer is that under the network of international treaties, which regulate not just the nuclear business here but the nuclear business worldwide, each state, as it says in paragraph 1.8 of the report, "... must bear the responsibility and by implication meet the costs in those cases where no other party is able to discharge those obligations". That does not mean that the primary recourse is to the operator. Clearly that is right. Our responsibility as nuclear energy producers is to run these businesses competently. Q119 Mr Davidson: Once you have finished, it falls back on us. Sir Adrian Montague: I believe that is correct. Sir Brian Bender: That was the case before the restructuring. Q120 Mr Davidson: I just wanted to be clear about that. Page 21, figure 10 on the cost of closing power plants. May I clarify whether, knowing now what you know now and looking back, those figures are accurate or are there factors which have been discovered since which would have changed those? Sir Brian Bender: Subject only to Helen Goodman's questions about the discount rates, I believe those figures to be accurate. Q121 Mr Davidson: May I turn to page 23, figure11, where we have the restructuring costs: best and worst, then best, central and worst? Can you just clarify for me what the actual figure was at the end of the day and how it relates to these? Mr Robson: These were looking at different scenarios at different times. Obviously, it was in a way looking at a theoretical position looking forward and therefore it is not possible to say --- Q122 Mr Davidson: So these are useless, are they? Mr Robson: No, they were relevant at the time, but obviously --- Q123 Mr Davidson: How accurate? I just want to clarify how accurate they can be said to have been? Sir Brian Bender: There was a range of scenarios for planning. At any point in time they are still predictions. We were talking about liabilities many decades out. Q124 Mr Davidson: Yes, but obviously we have moved on a bit since the date that these were drawn up and I am just wondering to what extent there is anything that has changed so badly. I am trying to work out whether or not any of this was actually accurate at the time. Mr Robson: The position with restructuring is obviously here. What it is talking about is the cost and, as we discussed earlier, there is a benefit of £2.9 billion and therefore, by definition, the forecasts at that time were incorrect. In terms of administration, we obviously have not been updating those numbers, given that administration was not the chosen option. Q125 Mr Davidson: What I am not clear about then is just what value for money you got for the advisers and others who drew up these sorts of figures, if, several years down the road now, you cannot tell me whether or not there was any accuracy in this at all. I could just as easily go out and ask a couple of people in a pub for a couple of figures and then come back and give you those figures, because there is no way of assessing. Mr Robson: The test though is what the NAO report did and what the advisers to the NAO Grant Thornton and Lumis did, which was to go back and look at the situation at the time, review the numbers and review on that basis whether the forecasts were appropriate and relevant to come to a sensible view. Q126 Mr Davidson: I am seeking to clarify whether or not then they were all wrong. Can you not help me at all with that? Sir Brian Bender: The calculation now is influenced by the share price. So the share price is £6.40 and that impacts on the value of the assets or the contingent asset to the Government. When the share price was different, then that gave different calculations. Q127 Mr Davidson: The possible movements in the share price should have been reflected in the best case presumably then? Was it? Is it? Mr Robson: No. On the basis that you could regard the share price as a proxy for the forecast cash flows coming in, and that is effectively what the share price is trying to get at, or at least analysts are trying to get at, at the time we looked at the forecast cash flows coming in from the business based on various assumptions in terms of electricity price between £15 and £21. That was the basis on which we looked at it at that point, as Sir Adrian has mentioned. At the moment prices are very different to that level and, as a result, result in a very different value. Q128 Mr Davidson: Sorry. Prices are very different to what they were at that level means that effectively all these best and worst paradigms are pointless or useless. I ask this not just for fun but in the sense that on other occasions we will be asked to make judgments having been given various figures. What I am just seeking to clarify for our benefit is that these things can be made up just as easily by a couple of guys in a pub and they would not be much the wiser. Sir Adrian Montague: Fundamentally these negotiations were carried out in a world where power prices were £15, £16, £17 per megawatt hour. They are now £55 per megawatt hour; during this month they have reached that figure and nobody anticipated that huge growth in prices. The report says that the £15 to £20 band was regarded as a --- Q129 Mr Davidson: What is the point of scenario planning which did not actually include the scenarios which came to pass? Mr Robson: One point that we were clearly looking at in terms of the restructuring was the downside scenarios, because the downside was what we were particularly concerned about. Q130 Mr Davidson: It strikes me, in terms of dealing with professional advisers, that they gave you figures and so on based on scenarios which did not actually include what happened. Sir Brian Bender: The criticism of the Department when the Committee had its last hearing was that between the Department and the company there had been inadequate planning for the worst case, which was where electricity prices then got to around the turn of the millennium. In this instance we were planning for a range of scenarios including a worst case one. Q131 Mr Davidson: The best case has turned out even better than you expected. So we can get you for that one then. Sir Brian Bender: But if the best case is better, then the taxpayer is going to benefit because of the value of the cash sweep. Q132 Mr Davidson: I understand where the benefit falls. I understand that completely. It is a question of the accuracy of the scenarios which quite often get put in front of us and I think you are confirming my view that they are not much better than asking a couple of people in a pub and it would be a great deal cheaper to do it that way. I can take you to pubs which would give you much cheaper estimates. May I just clarify a point with Mr Robson? Is that note going to help you with this? Mr Robson: No, it is confirming the point about Grant Thornton. Q133 Mr Davidson: May I just clarify the role of the Shareholder Executive in all of this? You did seem to be rather all part of the one team. I am not sure whether or not Sir Adrian is holding someone very close to you as a hostage, but you do seem very much to be just simply defending the position of the company. At what point do you actually stand back from them, or what differences are there? What is the point of having the Shareholder Executive involved? Mr Robson: The role of the Shareholder Executive, which was set up nearly three years ago, was to try to bring in more expert analysis and skills for where the Government is a shareholder in a company. So the Shareholder Executive is on the side of the taxpayer and Government in getting value out of its shareholding, whether in the energy sector or indeed in other publicly owned companies. Q134 Mr Davidson: Do you understand why we can be forgiven for assuming that you have been captured by the company, since you seem to be so closely implicated and drawn in and so defensive of the decisions that I cannot see the join? Mr Robson: The position is that we are called the Shareholder Executive but we do not have any shares in British Energy; it is the other companies where we tend to have our shares. Q135 Mr Davidson: And you do not have executive powers either. Mr Robson: At the end of the day what we are trying to achieve is a good relationship with the companies within the portfolio so that we can work with the companies in order to be able to maximise the value of those shareholdings. It is very important that we do recognise that there is a mutual interest here in terms of British Energy being very successful. Q136 Mr Davidson: I understand that. Give me an example where you have clashed. Mr Robson: Since the restructuring? Q137 Mr Davidson: Since the restructuring. Mr Robson: There is a point coming up where we shall have what I would describe as an interesting debate, as opposed to a clash, which is potentially in relation to the cash sweep payment. If any cash sweep payment were to be due, there would be a debate that we would potentially need to have there. In relation to any point on which we have clashed, I cannot think of one. Sir Adrian Montague: It is worth saying that you are slightly conjuring up the picture of a cosy relationship. It is not my view that it works that way. It is handled professionally and you can handle professional relationships cordially without compromising people's independence. I cannot think of any major issue or principle that has separated us from the Executive since re-listing, but we are conscious of an active monitoring from the Executive. Nothing is taken for granted. Q138 Mr Davidson: I understand that, but if we had specialist advisers inside the Department who were doing the same thing, presumably the relationship would be the same. I do not quite understand how having a Shareholder Executive adds value to the whole process. Sir Brian Bender: It adds value as far as the department is concerned by making sure that we have the investment analysts and specialist expertise that we need to have the right sort of relationship with companies with whom the state has a particular relationship, whether it is Royal Mail which the Shareholder Executives is heavily involved in or British Energy in this type of case. It is not a skill that the Civil Service has naturally and we therefore need to have a mixed team of secondees from outside and civil servants to make sure that we have those skills. Q139 Helen Goodman: Mr Robson, when you were answering questions about the restructuring earlier on in the session, you made it clear that the way things have turned out was not as you had expected because the electricity price had gone up and the share price had gone up and that, of course, affects the distribution of benefits and risks between the three parties. Obviously the electricity price is highly dependent on the oil price. Could you say what the forecast for the long-term oil price was at the time of the restructuring in the Department? Mr Robson: I should have to check to see precisely on that point. Q140 Helen Goodman: Would you say that it was perfectly realistic to expect the oil price to rise again since it is only in the past year that it has reached the real terms level that it was already at in 1983? In real terms the oil price is now back where it was about 20 years ago. So why is it a surprise that it should go up and push up the electricity price and push up the share price? Mr Robson: People were indeed forecasting a rise at the time, but not to the extent that has been the case. Q141 Helen Goodman: Sir Adrian, in answer to questions from Sadiq Khan you talked about the annual load factor. What assurances can you give the Committee that British Energy will get nearer to the maximum annual load factor or indeed achieve the annual maximum load factor in the future? Sir Adrian Montague: The best way of answering that question is to spend a moment just on the performance improvement programme that we have at British Energy. The causes of British Energy's bad performance in the past were both a lack of investment in the plants and some operating inefficiencies in the way that the business was managed. The performance improvement programme tries to hit both of those categories. We are spending large amounts on restoring the material condition of the plant. This year we shall have spent somewhere in excess of £200 million; next year we expect to spend between £250 and £300 million. There is a lag factor before the mechanical condition starts to improve, but the encouraging sign for us is that when it comes to human performance, we are seeing huge improvements in things like the accident statistics, the defect backlog, indicators of improvement short of output. Output is clearly the most important consideration and we are driving towards restoring the output at least to where it was in the best year of British Energy's performance in the past and I hope to improve that. Q142 Helen Goodman: You are saying that, even though the performance has in fact declined between 2002 and 2005. Sir Adrian Montague: Yes. Q143 Helen Goodman: What is your forecast for where we shall be in 2010? Sir Adrian Montague: I am not able to give you that forecast, partly because it might get me into difficulty with the Stock Exchange. I can give you some indication of how things are going. At the moment we are at 79% across the fleet. Sizewell, which is admittedly the most modern plant, has now been operating continuously without any form of interruption for more than 300 days and this is a sign of a business which is consolidating an improvement. Q144 Greg Clark: Sir Brian, you assured Sadiq Khan that the Department was actively and robustly monitoring British Energy at the moment, but the last time this Committee looked into the matter and commented on the situation in 2004, the Department's inaction on British Energy was compounded by split responsibilities for monitoring British Energy. Yet today, two years on, the NAO conclude that responsibility for managing these risks remains distributed across a number of teams within the Department and there is a real possibility that information learned by the different teams is not shared quickly and evaluated as a whole. How can you be confident in giving Mr Khan the answer you gave him? Sir Brian Bender: I did say in response to somebody earlier that I had asked my internal audit team to look at the way we are managing these relationships and give me whatever assurance or recommendations for changes which are necessary. The risk is pulled together at one individual at board level, the Director General for Energy; so the two different teams pull in at that one level. The monitoring, for the reasons described and set out in the report, is a lot tougher and tighter than it was previously. The answer as to whether or not I can give that assurance is a combination of the tighter and tougher arrangements, but also the work underway by my internal audit to look at the point, and it is referred to in the report, that the NAO raised and to see whether --- Q145 Greg Clark: A recommendation was made two years ago and the NAO now find it has not been followed up. Sir Brian Bender: The risk does come together with the Director General for Energy in the Department, but there are different teams under him: one reports direct and one is the Shareholder Executive. The question is therefore whether it is pulled together adequately or whether there are other improvements that my internal audit will recommend we make. Q146 Mr Bacon: On page 21 there is a chart, figure 10, which says in the note at the bottom of it "The costs estimated in November 2002" this is the net cost of early closure for these various different stations, Sizewell B at the bottom there being £839 million, have been worked out and discounted at a nominal rate of 8%. I just wanted to know how the nominal rate of 8% got chosen. Mr Robson: It would probably be best to respond to you in a fuller note on that point. Q147 Mr Bacon: In so doing, could you indicate whether it was following Treasury guidance or following some other kind of guidance, or Treasury guidance to avoid their guidance? That would be very helpful. Mr Robson: Absolutely. Sir Brian Bender: We shall cover that. Q148 Chairman: I wanted to ask you about this note as well, because Helen Goodman drew my attention to it. Let us read it for a moment, figure 10, page 21 "The costs estimated in November 2002, based on the Net Present Value of foregone future income and decommissioning costs brought forward, less future costs avoided (discounted at a nominal rate of 8 per cent)". That sounds to me like an explanation of Sir Humphrey to Mr Hacker. It is utterly meaningless to me. Would you like to explain this to me now? Sir Brian Bender: I cannot do it justice Chairman beyond what it says there. Q149 Chairman: Can anybody in the National Audit Office help me with this? Sir Brian Bender: Mr Robson can make a better effort of it than I can, that is for sure. Q150 Chairman: In a way that I shall understand. Mr Robson: It was looking at the forecast cash flows of the stations, discounted by the 8%, versus the forecast cash flows of the business if you had to close early and, as a result, the decommissioning payments, as opposed to being further out, would be further forward. That is probably still Sir Humphrey; apologies. Q151 Helen Goodman: I understand that that is what you have done, but I do not understand why you would use one discount rate for one stream and another discount rate for another stream. Mr Robson: We shall need to check. My supposition is that in November 2002 something needed to be done reasonably quickly, so we were probably taking the company's discount rate at that point. However, that is a guess and therefore we should come back with a proper note. Q152 Chairman: My last question is on paragraph 17, page 6 "The existing equity investments of the Nuclear Liabilities Fund will be converted to gilts". Why limited to gilts? Sir Brian Bender: If I may, this is a question I shall ask the Treasury to reply to because these are Treasury rules. Ms Diggle: It is a matter of prudence. If we did not do that, it would mean essentially borrowing at the margin from the gilts market and then putting it into something else, equities, which is far more risky. Chairman: Thank you very much gentlemen. |