----

            COMMISSION DECISION         

of 22 September 2004         

on the State aid which the United Kingdom is planning to implement for British Energy plc

(notified under document number C(2004)3474)

(Only the English text is authentic)

(Text with EEA relevance)

(2005/407/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community, and in particular the first subparagraph of Article 88(2) thereof,

Having regard to the Agreement on the European Economic Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments pursuant to the provision(s) cited above (1) and having regard to their comments,

Whereas:

I.   PROCEDURE

II.   DETAILED DESCRIPTION OF THE AID

1.   Beneficiary of the aid

(a)   The British Energy plc group

(b)   The recent developments

2.   The restructuring plan

(a)   Origin of BE’s difficulties

BE’s unhedged position

BE’s high proportion of non-avoidable costs

Significant unplanned outages at BE’s nuclear stations

(b)   The restructuring measures

Measure A: measures linked to the funding of nuclear liabilities

The nuclear liabilities

The creation of a new fund

Aid from the UK Government in relation to the funding of nuclear liabilities

—   Assumption of responsibility for BE’s liabilities under historic spent fuel contracts

—   Undertaking to cover any shortfall in NLF funding for stage 1 decommissioning liabilities and uncontracted liabilities

—   Undertaking to cover shortfall in NLF funding for stage 2 and 3 decommissioning liabilities

—   Specific tax disregard

Measure B: measures concerning fuel cycle agreed with British Nuclear Fuel Limited (BNFL)

Measures concerning fuel supply (front-end contracts)

Measures concerning spent fuel (back-end contracts)

Fuel supply and reprocessing measures impact

Measures concerning uranics

Measure C: standstill measures

BE’s standstill obligations

BNFL and Significant Creditor standstill obligations

Standstill impact

Measure D: significant creditors restructuring package

Measure E: Introduction of a new trading strategy

Background

BE’s new trading strategy

Measure F: asset disposals to help finance restructuring

Bruce Power

AmerGen

Measure G: local tax deferrals

(c)   Financial implications of the restructuring package

3.   Grounds for initiating the proceedings

III.   COMMENTS FROM INTERESTED PARTIES

British Energy plc (BE)

BE’s contribution to the restructuring plan

Duration of the plan

The standstill agreements with BNFL and other significant creditors

The new contracts with BNFL

The return to viability

The effect of the aid on competition

British Nuclear Fuels plc - BNFL

The negotiations that led to the revised agreements (Measure B)

Comparison of the implications for BNFL of a solvent restructuring of BE versus BE’s insolvency

Comparison with the positions of other creditors

The standstill arrangements agreed between BNFL and BE

The relation between BNFL and the UK Government

Greenpeace

Measure A

Measure B

Compatibility of the aid

Applicable Treaty

Powergen

InterGen

First third party wishing to remain anonymous

Drax Power Limited

Measures B and C

Compatibility of the aid measure

Restoration of viability

Duration of the aid

Distortion of competition

Relationship between the Euratom and the EC Treaty

Other interested parties

IV.   COMMENTS FROM THE UNITED KINGDOM ON THE INITIATION OF PROCEEDINGS

Measure G

Existence of aid in BNFL’s concessions to BE in Measures B and C

Measure B

Measure C

Doubts on the restoration of BE’s viability within a reasonable timescale

The uncapped amount of aid

Compensatory measures

V.   COMMENTS FROM THE UNITED KINGDOM ON COMMENTS FROM INTERESTED PARTIES

Powergen’s observations

Greenpeace’s observations

Drax’s observations

Observations of the first anonymous third party

Concerning observations of Enfield Energy Centre Limited (EECL)

Concerning observations of Intergen

Concerning observations of the second anonymous third party

VI.   ASSESSMENT

1.   Euratom Treaty

2.   Aid in the sense of Article 87(1) of the EC Treaty

(a)   On the existence of aid in Measure G

(b)   On the existence of aid in Measures B and C

As regards Measure B

Did BNFL act in conformity with the private creditor principle?

Was BNFL treated on an equal footing with private creditors?

Did BNFL act independently of the UK Government?

Conclusion

Measure C

Assessment by the Commission

3.   Compatibility assessment under the EC Treaty

(a)   On the restoration of BE’s viability

Duration of the aid

Content of the restructuring plan

The specific case of Dungeness B

(b)   On the question whether the aid is restricted to the minimum necessary

(c)   On the avoidance of undue distortion of competition

(i)   The relevant market

(ii)   Capacity situation on the market

Assessment in view of the evolution of electricity prices

Assessment in view of capacity margin

England and Wales

Global Great Britain

Conclusion

(iii)   Impact of the aid on competition on the relevant market

(iv)   Compensatory measures to be implemented

Compensatory measure No 1.

Compensatory measure No 2.

Compensatory measure No 3.

(v)   Compensatory measures that were considered by the Commission but rejected

(d)   Full implementation of the restructuring plan

(e)   Monitoring and annual report

VII.   CONCLUSION

HAS ADOPTED THIS DECISION:

Article 1

The aid which the United Kingdom is planning to implement under Measure A of the restructuring plan for British Energy plc (‘British Energy’) notified to the Commission on 7 March 2003, which consists in the undertaking by the United Kingdom Government to fund:

is compatible with the common market and the objectives of the Euratom Treaty, subject to compliance with the conditions set out in Article 2 to Article 10.

Article 2

1.   The United Kingdom shall ensure that the restructuring plan as communicated to the Commission by the United Kingdom is fully implemented.

2.   The United Kingdom shall submit a report on the implementation of the restructuring not later than six months after the present decision and each year thereafter until such time as the Commission informs it that no further reports are necessary

Article 3

As soon as expenditure corresponding to the liabilities referred to in point (b) of Article 1 exceed 1 629 000 000 GBP in December 2002 value, the United Kingdom shall submit enhanced additional reports to the Commission demonstrating that the Government payments are restricted to meeting the liabilities referred to in that point, and that proper steps have been taken to limit expenditure to the minimum necessary to meet those liabilities. Those reports shall be submitted yearly. They shall be appended to the yearly reports referred to in Article 2.

Article 4

For the purpose of computing amounts in December 2002 value referred to in Article 1 and Article 3, the United Kingdom shall use the reference and discount rate published by the Commission for the United Kingdom, updating this rate every five years.

Article 5

1.   The United Kingdom shall require British Energy to undertake by not later than 1 April 2005:

2.   In the event that the undertaking in paragraph (c) is not implemented by licence condition, the United Kingdom shall submit a yearly report to the Commission establishing evidence that there has been no cross-subsidisation by the existing nuclear generation business to any other business of the British Energy group. This report shall be based on analysis carried out by independent accounting experts. It can be added to the report referred to in Article 2. This should not prejudice the possibility that an implementation by licence condition be put in place later on if it becomes possible.

3.   The United Kingdom shall inform the Commission as soon as undertakings in paragraphs 1 and 2 are implemented.

Article 6

The United Kingdom shall require British Energy to undertake, for a period of six years from the date of this decision, not to own or have rights of control over:

(both types of capacity being known hereunder as restricted capacity) which in aggregate exceeds 2 020 MW provided that:

Article 7

The United Kingdom shall require British Energy to undertake, for a period of six years from the date of this decision, not to own or have rights of control over registered operational nuclear generating capacity in the European Economic Area other than its existing nuclear generation assets or operation and maintenance contracts where British Energy has no interest in the electricity output, without the prior written consent of the Commission.

Article 8

The United Kingdom shall appoint, within four months of this decision, and following an open and transparent process, an independent expert for the purpose of monitoring the compliance of BE with the conditions set out in Article 9 (hereafter the independent expert). It shall inform the Commission immediately of this appointment.

Article 9

1.   The United Kingdom shall require British Energy to undertake:

2.   The independent expert shall report yearly to the United Kingdom on the compliance of British Energy with these conditions. The United Kingdom shall make the reports available to the Commission.

Article 10

1.   The tests used for the purpose of deciding whether exceptional market circumstances occur shall be the following:

2.   When faced with circumstances approaching these and if British Energy considers it was possible it might need to invoke exceptional market circumstances, British Energy shall first inform the Independent Expert, outlining its analysis of the situation and the position in relation to the objective tests (Amber Notice).

3.   If circumstances do not improve following the Amber Notice, and if test (a) together with test (b) or test (c) above is met, British Energy shall notify the Independent Expert that it is going to respond to competition by pricing below the wholesale price and supplies the most recent evidence available to British Energy. The independent expert shall have then no more than 24 hours to confirm or otherwise that test (a) together with (b) or (c) above are met and accordingly declare the existence of Exceptional Market Circumstances.

4.   If the independent expert declares the existence of exceptional market circumstances, British Energy shall be entitled for a period of [...] of the Independent Expert’s decision to make bona fide offers at prices to meet competition in the direct sales to business market.

5.   The [...] period may be renewed by the independent expert for as long as test c) above is met.

6.   At the end of the period, the price restriction set out in Article 9 shall apply again to British Energy.

7.   After the period, British Energy shall provide a report to the independent expert summarising its sales activities during the period. This information shall be reviewed in the Independent Expert’s yearly report.

8.   Following the end of the contract round during which Exceptional Market Circumstances occurred, the Independent Expert shall publish the fact that he had made a determination of such circumstances and how long they lasted.

Article 11

This Decision is addressed to the United Kingdom of Great Britain and Northern Ireland.

Done at Brussels, 22 September 2004.

For the Commission

Mario MONTI            

Member of the Commission

----

(1)OJ C 180, 31.7.2003, p. 5.

(2)OJ C 39, 18.2.2003, p. 15.

(3)  See footnote 1.

(4)  That is, those costs which cannot be avoided by ceasing to generate or by shutting down stations.

(5)  That is, those costs which can be avoided by ceasing to generate or by shutting down stations.

(6)  Original submission: cash flow valued as of March 2003, In December 2002 prices. Current projections: cash flow valued as of March 2004, in March 2004 prices.

(7)  The discount rate is the 5,4 % nominal rate recommended as the reference rate from 1 January 2003 in accordance with Commission notice on the method for setting the reference and discount rates (OJ C 273, 9.9.1997, p. 3).

(8)  BE purchases the fuel for its only PWR nuclear plant from another party, and has no contract for PWR spent fuel as it stores it on site.

(9)  This percentage corresponds to the public sector discount rate.

(10)  The definition of these three scenarios is given at recital (111) below.

(11)  This assumes that the restructuring effective date is 1 April 2004. NPV at March 2003.

(12)  Gross margin is based on total revenue before interest and tax less direct cost of supply (including electricity and delivery costs). Source: BE.

(13)  Vulnerabilities are areas where BE and its advisers feel there is a higher risk that underlying assumptions may not be achieved. Sensitivities relate to output levels in the various cases to reflect the historically poor performance of the plants.

(*1)  Business secret.

(14)OJ C 368, 23.12.1994, p. 12.

(15)  [1982] ECR 2545.

(16)OJ C 37, 3.2.2001, p. 3.

(17)  TUSNE describes itself as ‘an informal organisation of trade unionists who are supportive of the civil use of nuclear power as means of energy generation within a balanced energy policy and a safe and clean environment’.

(18)  Robert Freer is a consultant.

(19)  CIA is a trade association comprising 180 operating companies, which comprise some of the major electricity consumers in the United Kingdom.

(20)  JHA is a large British energy market analyst.

(21)  EIUG is an organisation that represents consumers in the energy intensive sectors of the UK industry.

(22)  Terra Nitrogen is a nitrogen producer, part of the Terra group, that also produces methanol. It is a major electricity consumer in the United Kingdom.

(23)  Energywatch is a non-departmental public body representing the interests of gas and electricity consumers across Great Britain.

(24)  TVO is a Finnish electricity generator and nuclear plant operator.

(25)  National Grid Transco is the owner and operator of the England and Wales transmission system. It is a privately owned company, which independent from generation and supply business interests.

(26)  Royal Chartered academy founded in 1976 with the purpose to promote excellence in engineering.

(27)  EECL operates a 396 MW CCGT in north London. It belongs to the American company Indeck Energy Services Inc.

(28)  EIC is an independent organisation whose objective is to provide support and market information to business energy users in the UK.

(29)  Body that represents the interests of some 200 large industrial, commercial retail and public sector for whom the cost of electricity and gas is an important factor.

(30)  Case C-256/97 [1999] ECR I-3913.

(31)  Article 305(2) of the EC Treaty lays down that ‘the provisions of this Treaty shall not derogate from those of the Treaty establishing the European Atomic Energy Community’.

(32)  Judgment of the Court of Justice of 10 December 2002 in Case C-29/99 [2002] ECR I-11221.

(33)OJ L 27, 30.1.1997, p. 20.

(34)  See Judgment of the Court of 29 April 1999 in Case C-342/96, Kingdom of Spain v Commission of the European Communities [1999] ECR I-2459.

(35)  Including all liabilities in relation to the final disposal of such historic spent fuel.

(*2)  Determined on the basis that BE efficiency results in GBP [...] /MWh being equivalent to GBP [...] /kgU.

(36)  The outturn electricity price reflects the value of baseload electricity traded in NETA.

(37)  BE has at present finally disposed of none of its spent fuel due to the fact that the way nuclear spent fuel will be finally disposed of in the United Kingdom has not yet been defined.

(38)  This report is available on Greenpeace UK’s website at the following url: http://www.greenpeace.org.uk/MultimediaFiles/Live/FullReport/6273.pdf.

(39)  Using the same GBP 1= USD1,82 conversion rate as in the report.

(40)  M. Bunn et al. The Economics of Reprocessing vs. Direct Disposal of Spent Nuclear Fuel. Final Report December 2003.

(41)  In July 2003, Argus reported the winter 2003/2004 baseload contract at GBP 20,96/MWh. On 7 August 2003, UKPX reported the baseload future contracts prices for same period at GBP 22,55/MWh. On the same day, UKPX reported summer 2006 future baseload contract at GBP 20,50/MWh and settlement price for winter 2006 at GBP 27,15/MWh. Source: Argus and UKPX as cited by the Frontier Economics report ‘            Plant margins in the markets where BE operates in Great Britain            ’, August 2003, attached to BE’s submission.

(42)  See Judgment of the Court of 16 May 2002 in Case C-482/99 French Republic v Commission of the European Communities [2002] ECR I-04397, at paragraph 24.

(43)OJ L 195, 29.7.1980, p. 35. Directive as last amended by Directive 2000/52/EC (OJ L 193, 29.7.2000, p. 75).

(44)  Opinion of Advocate General Jacobs in Case C-482/99.

(45)  Using a exchange rate of GBP 1= EUR 1,5.

(46)Source: website of Posiva Oy, www.posiva.fi. This estimate is based on the costs per kg of spent fuel. Translating this value in tons per uranium (loaded prior to use) may very slightly understate the actual costs since the spent fuel elements also include a small share of non uranium material in spacers and tubes.

(47)  See also section VI(1) above.

(48)  The electricity baseload price on the wholesale market has an impact on BE’s plant’s costs structure, since it an input for the price BE pays to BNFL for the management of its spent fuel.

(49)  Net present value at December 2002 discounted at 5,4 % nominal.

(50)  According to the International Atomic Energy Agency, only 6 nuclear power plants worldwide had been completely decommissioned in 2003. Source: IAEA – Nuclear Technology Review 2003.

(51)  See ‘            A European Perspective on the Funding of Decommissioning and Related Activities of the End of the Nuclear Cycle            ’. José A. Hoyos Pérez. NEA International Seminar on ‘Strategy Selection for the Decommissioning of Nuclear Facilities’; Tarragona, Spain; 1 to 5 September 2003.

(52)  Radioactive Waste Management and Decommissioning in an Enlarged European Union. Derek M. Taylor. 19th Residential Summer School on Decommissioning and Radioactive Waste Management; Cambridge UK; 30 June to 4 July 2003.

(53)  Net present value at December 2002 discounted at 5,4 % nominal.

(54)  See Commission notice on the method for setting the reference and discount rates (OJ C 273, 9.9.1997, p. 3) in conjunction with Commission notice on technical adaptations to the method for setting the reference and discount rates (OJ C 241, 26.8.1999, p. 9) and Article 9 of Commission Regulation (EC) No 794/2004 of 21 April 2004 implementing Council Regulation (EC) No 659/1999 laying detailed rules for the Application of Article 93 of the EC Treaty (OJ L 140, 30.4.2004, p. 1).

(55)OJ L 176, 15.7.2003, p. 11.

(56)  This conclusion is in addition in line with the one drawn by the Commission in the Merger cases where the geographic market was considered as national.

(57)  In July 2003, Argus reported the winter 2003/2004 baseload contract at GBP 20,96/MWh. On 7 August 2003, UKPX reported the baseload future contracts prices for same period at GBP 22,55/MWh. On the same day, UKPX reported summer 2006 future baseload contract at GBP 20,50/MWh and settlement price for winter 2006 at GBP 27,15/MWh. Source: Argus and UKPX as cited by the Frontier Economics report ‘            Plant margins in the markets where BE operates in Great Britain            ’, August 2003, attached to BE’s submission.

(58)  PowerInk report ‘            Survey of the markets served by British Energy            ’, March 2003, attached to the UK authorities’ notification quotes best new entrant prices between GBP 20 and 25/MWh. Previous Commission decisions in the sector have been based on best new entrance costs estimates of EUR 35,5/MWh (about GBP 23,7/MWh). See for instance Commission decision in case N133/01 – Stranded costs in Greece (OJ C 9, 15.1.2003, p. 6).

(59)  Average cold spell peak demand is that scenario of winter peak demand that has 50 % chance of being exceeded for reasons of weather only. This definition is the one that is used by the England and Wales Network Operator: National Grid Transco.

(60)  20 % in report The Closure of British Energy’s UK Nuclear Power Plants' by John H Large from Large & Associates, April 2003, attached to Greenpeace’s submission. 20 % in report The closure of British Energy’s UK nuclear power stations by ILEX energy consulting, September 2002, attached to Greenpeace’s submission.

(61)  The report is published on the web at the following url:

http://www.nationalgrid.com/uk/library/documents/sys_04/default.asp?action=&sNode=SYS&Exp=Y.

(62)              57 000 MW is the average of the forecast ACS peak demand for the three years concerned.

(63)  Available at http://www.scottish-southern.co.uk/popups/7yearstatement.asp.

(64)  Available at http://www.scottishpower.com/applications/publish/downloadPublicDocument.jsp?guid=2e0a12_fa5719a547_-7ff60a026463&folderPath=/root/ScottishPower Media Library/Documents and Reports/&downloadParameter=Attachment.

(65)  ACS peak demand in each zone may differ slightly from forecasted maximum peak depending on the severity of expected weather as compared to ACS weather. The actual ACS peak demand in Great Britain may also differ slightly from the straightforward sum of the three geographical values. Computing it precisely would require an analysis of the correlations between demands in the three regions, for which no figures are available. However, it is reasonable to trust that peaks are indeed correlated since there is no significant time lag between the geographical areas and the three regions are subject to the same type of weather.

(66)              76 469 exceeds 61 853 by 23,6 %.

(67)  This can remain beneficial for the customer since there is no intermediary between the generator and the customer.

(68)  Except BNFL, none of BE’s competitors operates nuclear reactors in Great Britain.

(69)  Within the meaning of the Renewable Obligation Order 2002.

(70)  See recital (186) above.

(71)  See in that sense Energywatch Annual report April 2002-March 2003, available at http://www.energywatch.org.uk/uploads/20022003_Annual_Report.pdf.

(72)  Excluding auxiliary fossil-fuelled capacity at its nuclear stations.

----