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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