Summary
British Energy (the Company) is the largest electricity
generator in the United Kingdom, with an annual turnover of £2.6
billion in 2005-06. Its eight nuclear power stations generate
approximately 20% of the electricity used in England and Wales
and half of that used in Scotland. The 1996 privatisation raised
£2.1 billion for the Government, and British Energy took
responsibility for all its nuclear liabilities, including the
disposal of spent nuclear fuels and the decommissioning of power
stations.
In September 2002, the Company approached the former
Department of Trade and Industry (the Department)[1]
for assistance as it could not meet its liabilities. The Department
does not normally intervene when private companies get into financial
difficulty but in this case it decided to do so to preserve electricity
supplies and ensure nuclear safety. As a result the taxpayer has
taken on responsibility for underwriting the Company's nuclear
liabilities valued in February 2006 on a discounted basis at £5.3
billion, a figure that is likely to increase. The Committee reported
on the events leading up to the Company's request for support
in its report Risk Management: the nuclear liabilities of British
Energy PLC.[2] This
report deals with the financial aid provided to British Energy
and the terms of the restructuring arrangement.
The Department supported a financial restructuring
of the Company with the latter undertaking to make an annual contribution
to its liabilities of a fixed sum of £20 million a year plus
a payment expected to be about £4 million a year for each
tonne of fuel loaded into Sizewell B. In addition the Company
will also pay 65% of its free cash each year. Free cash is defined
as the Company's available cash after tax and payment of its financing
costs but before any dividend payments. This payment is known
as the cash sweep.
The Department sought to share the cost of the restructuring
with the Company's shareholders and creditors. The shareholders,
who would have received nothing in administration, agreed to exchange
100% of the existing equity for 2.5% of the equity in the restructured
company. The Company's major creditors took 97.5% of the equity
in the restructured Company. By February 2006 this holding was
worth £3.9 billion, far more than the creditors would have
received under administration and without any responsibility for
meeting the nuclear liabilities.
In considering the proposed restructuring plan the
Department looked in detail at the prospects for the Company if
electricity prices remained low but not if they increased. In
the event prices have risen from £24 per megawatt hour to
just under £40 per megawatt hour since restructuring.
British Energy now poses a significant risk to the
taxpayer but the Department plays no formal role in approving
the Company's commercial strategy. The Department now has the
legal authority to obtain information from the Company and has
placed some limits on British Energy's actions through conditions
agreed as part of the restructuring.
A potential benefit for the taxpayer is that the
Department can convert the stake it has in British Energy through
the cash sweep into shares in the Company that it can then sell.
On 30 May 2007 the Government announced that it intended to dispose
of part of its interest in British Energy. The Government has
stated that the net receipts will be paid into the Nuclear Liabilities
Fund set up to help meet the Company's nuclear liabilities.
The Department's monitoring of the Company's performance
will be key to preserving the taxpayer's interests. Monitoring
responsibilities are currently split between different teams within
the Department.
On the basis of a report produced by the Comptroller
& Auditor General[3]
the Committee took evidence from the Department and British Energy
on the Department's role in the restructuring of the Company and
how it is monitoring and influencing the Company's performance
and managing the nuclear liabilities taken on by the taxpayer.
1 Three new departments were set up by the Prime Minister
on 28 June 2007 replacing, amongst others, the Department for
Trade and Industry. The new Department for Business, Enterprise
and Regulatory Reform brings together functions from the
former Department of Trade and Industry, including responsibilities
for productivity, business relations, energy, competition and
consumers, with the Better Regulation Executive (BRE), previously
part of the Cabinet Office. Back
2
Committee of Public Accounts, Thirty-Seventh Report of Session
2003-04, Risk Management: the nuclear liabilities of British
Energy plc, HC 354 Back
3
C&AG's Report, The Restructuring of British Energy,
HC (2005-06) 943 Back
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