Press Notice No. 37 of Session 2003-04, dated 9 September 2004
THIRTY-SEVENTH REPORT: RISK MANAGEMENT: THE NUCLEAR LIABILITIES OF BRITISH ENERGY PLC (HC 354)
Mr Edward Leigh MP, Chairman of the Committee of Public Accounts, today said the DTI has been too 'hands off' in dealing with the privatised British Energy, and that it failed to put in place proper risk management arrangements. The taxpayer has now been burdened with at least £1.7 billion of nuclear liabilities.
Mr Leigh was speaking as the Committee published its 37th Report of this Session, which examined the extent to which nuclear risks originally transferred from Government to the privatised British Energy have been accepted back, and the adequacy of the Department of Trade and Industry's monitoring of the risks posed to the taxpayer by British Energy's nuclear liabilities.
In 1998 when reporting on the privatisation, this Committee raised concerns about the taxpayer's potential exposure to British Energy's large nuclear liabilities, because the Government is ultimately responsible for ensuring the safe management or disposal of spent nuclear fuel and for decommissioning nuclear stations. We recommended and the Department accepted that it should monitor carefully British Energy's ongoing ability to meet its liabilities in full without recourse to the taxpayer.
The Committee found that despite retaining, under international treaty obligations, ultimate responsibility for the large residual liabilities associated with nuclear power, the Department treated British Energy after privatisation as just another company. The Department needed to behave as a prudent business would in managing the residual risk but failed to put in place any proper risk management arrangements to protect the taxpayer from these risks as set out in our predecessors' Report.
British Energy is the largest electricity generator in the UK, with an annual turnover of over £2 billion. Its eight nuclear 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 accepted responsibility for all its nuclear liabilities (then £5.6 billion), including the disposal of spent nuclear fuels and decommissioning of power stations.
Following a period of sustained falling prices for generating electricity, in September 2002 British Energy declared that it might no longer be able to meet its liabilities as they fell due. The Government granted a £410 million credit facility to provide working capital and to allow British Energy to stabilise its trading position. In October 2003 British Energy formally agreed a restructuring deal with its key creditors and the Government, under which the DTI has assumed £1.7 billion of British Energy related liabilities and is ultimately exposed to British Energy's remaining £3.9 billion liabilities.
The Department assumed that privatisation obliged it to distance itself from British Energy's potential problems, but that constraint was to a large extent self imposed. The Department failed to update the risk analysis it prepared at privatisation, and omitted British Energy from its work underpinning the 1998 White Paper on energy for power generation.
The Department placed too much emphasis on British Energy's dividend payments, particularly the £432 million special dividend in 1999, as an indicator of its financial position. Dividend payments are not necessarily a good indicator of a company's financial health and departments should not rely on them. In the private sector financial institutions will make arrangements to prevent companies leaking value through paying dividends and other fees to investors where underlying performance is poor. The Department should make similar arrangements in the restructured British Energy. In future where departments are exposed to potential liabilities, they should equip themselves with rights of access to company information similar to those obtained by financial institutions in a comparable position.
The Department failed to establish a credible overview of British Energy's deteriorating financial position, and did little more than gather information. Its inaction was compounded by split responsibilities for monitoring British Energy and the design of the New Electricity Trading Arrangements. In designing and coordinating energy policy it failed to consider the taxpayer's potential exposure.
British Energy executives may receive bonuses as a result of improvements in the company's finances accruing from restructuring funded by the taxpayer, including the Government's £410 million credit facility. The Department should require that financial improvements brought about through its support for restructuring are excluded when considering directors' remuneration and bonuses.
British Energy's management did not respond effectively to the changes in the electricity market and the Department did not challenge the company's strategic direction. British Energy's failure to invest in domestic electricity supply significantly contributed to the company's eventual difficulties. Where departments may have to bear residual liabilities from private companies, they should undertake strategic benchmarking of the company against its major competitors and seek explanations for significant variations as a matter of course. In future where departments face significant risks reverting back to them, they should consider whether a Public Private Partnership, with its closer relationships between departments and the private sector and scope for joint risk management, would provide a more appropriate arrangement than privatisation.
Mr Leigh said today:
"Given the huge nuclear liabilities associated with British Energy, which run to over £5 billion pounds, and my Committee's earlier warnings about the taxpayer's potential exposure to these liabilities, the DTI has been much too 'hands off'. The Department failed to put in place proper risk management arrangements, to respond to British Energy's deteriorating financial health and did not challenge the company's strategic direction. The taxpayer has now been burdened with at least £1.7 billion of liabilities.
The DTI must now get a grip in overseeing British Energy's financial health and make sure that the company's executives do not profit personally through bonuses as a result of the financial restructuring at the taxpayer's expense."
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