Examination of Witnesses (Questions 120-139)
DEPARTMENT OF
TRADE AND
INDUSTRY AND
BRITISH ENERGY
27 MARCH 2007
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?
Sir Brian Bender: 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.
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