Monday, July 28, 2008

British Energy - Another Giveaway?

Taxpayers heading for a second nuking?

The imminent £11-12bn sale of British Energy is something taxpayers need to watch very closely, because we own 35% of the company. And our interests are in the hands of a panicky discredited government that is desperate for money.

Regular readers will recall that taxpayers have already suffered one serious nuking over BE (see this blog). Back in 2002, the company virtually went bust, and was only saved by the government chucking in a large wad of our cash.

As the National Audit Office subsequently reported, the DTI not only bailed out the company- which nobody else would have done- but it then led a financial restructuring that left taxpayers holding a £5.3bn nuclear decommissioning liability, while the majority de-risked ownership stake was left with the original shareholders and creditors. It was a dismally naive Simple Shopper deal, only partially rescued by the subsequent sharp rise in energy prices which gave taxpayers a windfall additional share allocation (cf the abysmal sale of Qinetiq - see previous blogs eg here).

So here we are again. EDF is currently bidding to buy British Energy so it can acquire the sites and rights to build our new generation of nukes. And there are some BIG question marks.

For one thing, EDF is owned by A Foreign Power, and as Oxford Prof Dieter Helm asks, "do we want to hand over our nuclear the British nuclear industry to the French government?" Yes, yes, of course, Waterloo was a long time ago, these days we've got the Chunnel, we love their surrender cheese, and we're all friends together. Marvellous. But do you reckon Les Grenouilles would permit the same thing in reverse? It certainly needs discussing out in the open.

Second, British Energy is currently our largest independent electricity generator - ie the largest wholesale electricity supplier that is is not part of an integrated retail/generation company. And as today's report from the Commons Business and Enterprise Committee details, there are growing concerns about the competitiveness of the wholesale elecricity market, where the Big Six integrated firms (EDF, Npower/RWE, Centrica, Eon, Scottish Power, and Scottish and Southern) produce 55% of the output themselves.

If British Energy now disappears into EDF, EDF's output share goes up to 27%, and the Big Six controls three-quarters of our electricity generation. Which means that the residual wholesale market becomes little more than an illiquid rump, rather than the place where demand and supply meet to set the fair market price, like the textbooks say is supposed to happen.

Does that sound like a good idea for taxpaying consumers?

Clearly, the Big Six vehemently deny any price collusion - but see here for how their top executives do meet together regularly, carrying with them "a laminated print-out" reminding them not to use language such as “stitch up the market”.

Ah, you say, surely we don't need to worry because we've got a regulator to safeguard us against abuses. Well, yes, except that as the Commons Committee points out, "Ofgem’s terms of reference suggest it may pay relatively little attention to the wholesale markets".

Now in truth, we don't want the government to own an electricity generator, so we support a sale. We're just worried that our clownish government will be bounced into yet another giveaway, either in terms of the sale price, or in terms of the longer term erosion of competition in the wholesale electricity market. To summarise:

  • EDF is currently the only bidder, RWE and others having reportedly declined to bid (Centrica may take a minority stake, but that's not a competitive bid)
  • The government is desperate for cash
  • The government is also desperate to get the new nukes built, having faffed around for a decade
  • The Shopper has a dire record on asset sales

In the circs, EDF has every incentive to play hardball. And this morning we hear that's precisely what they're doing. They're sticking at a price that's way below what the government and the BE Board thinks it's worth (reports suggest the gap is at least 10%), and they're offering precisely the same deal to taxpayers that we got back in 2002 - ie a further payment sometime in the future, conditional on future revenues.

It's called an "earn-out", and the FT Lex column is scathing:

"Earn-outs are normally seen in creative and knowledge-intensive industries such as technology and pharmaceuticals, where there may be genuine differences of opinion over the value of the intellectual capital the seller is bringing to the table. Here, there are hard (albeit ageing) assets in the form of eight nuclear plants, sites for a lot more, and a tangible trading history...

If a structure emerges as reported, it will reflect a cash-strapped Treasury’s determination to keep buyers onside... As long as an earn-out lets a value discrepancy stand between buyer and seller, both sides are forestalling the inevitable. As with the consumer credit bubble, somebody will win eventually and somebody will lose." (HTP Joan W)

Given that future earn-out revenues will depend principally on future energy prices, and given that energy prices are currently at an all-time peak, there are no prizes whatsoever for guessing who would be the loser.


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