The sale of the Government's interest in British Energy - Public Accounts Committee Contents

Conclusions and recommendations

1.  The Department received a good price as it sold the Government's interest in British Energy when energy prices were at a peak. The sale increased the value of the Nuclear Liabilities Fund to £8.3 billion, more than double the estimated cost of decommissioning British Energy's existing power stations, which the Fund is responsible for meeting. However, there were some weaknesses which the following recommendations are designed to address.

2.  The Department has no guarantee that EDF will build new nuclear power stations without public subsidy, which could have potentially serious implications for future energy security. The Department should, as a matter of urgency, complete and publish the result of its work with the Treasury to determine whether the market as it is currently configured will deliver the new generating capacity needed to avoid an energy shortage. It should also develop contingency plans showing how energy demands will be met if EDF does not proceed with its plans to build new nuclear power stations. We intend to return to this subject in due course to examine progress.

3.  The Department does not know how much nuclear generating capacity will be required to meet future energy needs. The Department should develop a more systematic approach to assessing how and when new generating capacity will be delivered, and consult with Infrastructure UK on its approach.

4.  The Shareholder Executive and the Department demonstrated scant regard for the potentially adverse impacts of the sale on competition in electricity markets. The Department should closely monitor the operation of the electricity market to determine whether the sale contributes to future price increases, and should be prepared to intervene should this risk materialise. In future sales, departments should set out how they are addressing the risk of adverse impacts on competition from selling Government shareholdings.

5.  Treasury guidelines required all the sale proceeds to be invested in the National Loans Fund, which carries a lower risk of capital losses than equity investments but, in the longer term, may offer lower returns. The Treasury should carry out a cost-benefit analysis of the investment policy it has set for the Nuclear Liabilities Fund to assess whether a more balanced investment portfolio would be likely to provide a better balance of risk and return.

6.  The failure by the Department and the Shareholder Executive to carry out a timely risk assessment indicates a systemic weakness in their approach to monitoring and managing risk, a weakness that persists despite recommendations in this Committee's three previous reports on British Energy that risk management should be strengthened. The Department should carry out systematic and timely risk assessments in sales of strategically important assets, particularly where there are residual liabilities that could fall to taxpayers. It should also set out each year in its Annual Report how it has monitored British Energy, and the results. In future asset sales emerging from the Operational Efficiency Programme, departments should allocate clear responsibilities for managing all the risks associated with these sales.

7.  The Shareholder Executive is supposed to bring its own financial and commercial expertise to bear on deals of this type, but it still considered it necessary to hire UBS at a cost of £4 million to assist with negotiations and the valuation of British Energy. In future sales, the Shareholder Executive should seek to make full use of the skills it already possesses and avoid placing undue reliance on costly external advisors.

8.  The Shareholder Executive approved a £4 million success fee for financial advice that significantly under-estimated what EDF was willing to pay for British Energy and did not reflect the judgement of the other main shareholders. Departments should require financial advisors to take into account the views of the other main shareholders and the value to the buyer. In future sales, departments should also ask prospective advisors to propose alternative fee structures, such as separate prices that reward more directly the work done, rather than opting for a blanket success fee that may not, in practice, reflect their performance.

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Prepared 24 March 2010