Examination of Witnesses (Questions 140-152)
DEPARTMENT OF
TRADE AND
INDUSTRY AND
BRITISH ENERGY
27 MARCH 2007
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%)".
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.
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