NAO notes tax-payer risks from British Energy liabilities

30 March 2006

The UK’s National Audit Office (NAO) has issued a report on the January 2005 restructuring of nuclear generation company British Energy (BE). The report examines the support provided to the company by the government's Department of Trade and Industry (DTI) and the department’s management of the risks to the taxpayer arising from the BE’s activities since the completion of restructuring.

As a result of the negotiated restructuring that prevented BE from falling into administration, the DTI agreed to take responsibility for meeting some nuclear liabilities. In return, BE is to contribute to a nuclear liabilities fund comprising an annual fixed amount plus a variable payment based on the company’s future financial performance.

However, the DTI decided that it would not require BE to provide updated estimates of the liabilities during the restructuring and a new estimate of the liabilities, produced in February 2006, increased these costs by £1 billion ($1.7 billion) to £5.1 billion ($8.8 billion).

To protect BE’s viability there is only a very small link between the contributions to be made and the scale of the nuclear liabilities, says the NAO, but given the current state of the UK power market, the fund would benefit from contributions at a level higher than the most optimistic scenarios considered by the DTI during restructuring.

The electricity market has, however, proved to be particularly volatile over recent years, says the report, and the fund is “therefore particularly exposed to British Energy’s future financial and operational performance. This uncertainty places a significant risk in the hands of the taxpayer.”

Sir John Bourn, head of the NAO, said: "The Department of Trade and Industry intervened when British Energy could no longer meet its debts. As a result the taxpayer is responsible for underwriting a large and uncertain liability. The scale of the net liability to be borne by the public purse will depend crucially on British Energy’s performance in future years. It is therefore vital that the department keeps close scrutiny to ensure the taxpayer’s position is safeguarded."

In a related development, the UK government has announced plans to sell part of its stake in BE. Chancellor Gordon Brown announced the move to raise some £2 billion ($3.4 billion) from the partial sale of its cashflow interest the company in his latest budget. Following the company’s restructuring, the government has a right to 65% of the company’s net cashflow. Details of the sale have not yet been disclosed.

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