Examination of Witnesses (Questions 20-39)
DEPARTMENT OF
TRADE AND
INDUSTRY AND
BRITISH ENERGY
27 MARCH 2007
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 10 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 10 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.
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