Inquiry gives all clear to UK generator sale

Date: 18/07/1996

INVESTIGATORS from the European Commission have given the UK a clean bill of health for its 1.7-billion-ecu privatisation of the country's third largest electricity generator as it went on sale this week.

Officials had been routinely looking into the possibility that London might have granted illegal state aids to British Energy - the holding company of Nuclear Electric and Scottish Nuclear and operator of eight nuclear power stations.

Over-the-counter trading in British Energy stock began this week after a series of glitches forced the government to sell British Energy at below its book value of 1.8 billion ecu.

Investors, suffering from privatisation fatigue and worried that the allocations of stock were too small, were less willing to buy heavily than at other asset sales.

Detailed discussions between DGIV, the Directorate-General for competition, and the UK's Department of Trade and Industry have been under way since last autumn.

The inquiry focused on the write-off of debt associated with the sale.

At the end of March, the company had a total debt of 2.3 billion ecu. This was comprised of around 120 million ecu in term loans owed to the government and about 2.2 billion ecu classified as 'reorganisation debt', owed specifically to the secretary of state for trade and industry.

The 120 million ecu has been repaid and, in June, British Energy itself raised 620 million ecu through a syndicate of banks.

The reorganisation debt - earmarked specifically for the privatisation - was converted, with 865 million ecu transformed into share capital and 740 million ecu into bonds and other forms of company-held debt. The balance of 550 million ecu has been written-off.

In its investigation, DGIV applied the principle of the 'private investor' in assessing how much debt should be written off by the owner of a company when it came to selling it.

As a rule of thumb, it judges whether the write-off of the debt exceeds the amount raised in the sale. In fact, the privatisation proceeds of 1.7 billion ecu greatly outstrip the debt waiver.

The Commission also looked into how the government had handled the question of liability for environmental damage and the decommissioning of stations.

When the privatisation was planned, London chose to leave the oldest commercial nuclear power stations - the Magnox reactors - outside British Energy and in the hands of British Nuclear Fuels Ltd. Six of these are still in operation and will be expensive to decommission.

The advanced gas-cooled reactors, which will be owned and operated by the new company, have a longer life expectancy of up to 30 years, and decommissioning will be financed from a segregated fund.