Examination of Witnesses (Questions 1-19)
DEPARTMENT OF
TRADE AND
INDUSTRY AND
BRITISH ENERGY
27 MARCH 2007
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 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. 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. 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 governance 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.[1]
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.[2]
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.
1 Note by witness: Mr Robson's answer to question
24 clarifies this position: Figure 18 represents only the NLF's
liabilities (the decommissioning and uncontracted liabilities)
not the £2.3 billion of historic spent fuel liabilities. Back
2
See supplementary memorandum on Use of Discount Rates (Ev 16):
this memorandum verifies that the Department used the appropriate
discount rate, as set out in HM Treasury's Resource Accounting
Manual. Back
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