EN Official Journal of the European Union L 142/26

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

(1) On 9 September 2002, the United Kingdom (UK) Government put in place a rescue aid package for the UK electricity company British Energy plc (BE). The Commission took a decision not to raise objection in this case on 27 November 2002 (2). Under that decision, the UK authorities had until 9 March 2003 to submit a restructuring or liquidation plan for BE, or to demonstrate that the aid had been repaid.

(2) On 7 March 2003, the UK authorities notified a restructuring plan to the Commission. The submission by the UK Government was registered under State aid case number NN 45/2003 since certain restructuring measures possibly containing aid had already entered into force. Further information was submitted on 13 March 2003. A meeting between representatives of the Commission and of the UK authorities took place on 28 March 2003. The Commission sent the UK authorities a request for information on 21 April 2003, to which the UK authorities replied on 2 May 2003.

(3) By letter dated 23 July 2003, the Commission informed the United Kingdom that it had decided to initiate the procedure laid down in Article 88(2) of the EC Treaty in respect of the aid.

(4) The Commission decision to initiate the procedure was published in the Official Journal of the European Union (3). The Commission called on interested parties to submit their comments.

(5) The UK authorities provided the Commission with their comments on the opening of the procedure by letter dated 22 August 2003, registered by the Commission on the same day.

(6) The Commission received comments from interested parties. It forwarded them to the United Kingdom, which was given the opportunity to react; its comments were received by letter dated 29 October 2003, registered by the Commission on 30 October 2003.

(7) The Commission met the United Kingdom authorities on 7 October 2003. Following that meeting, the United Kingdom submitted information in a letter dated 5 November 2003, registered on 10 November 2003. Another meeting took place on 28 November 2003. The Commission sent a request for information to the United Kingdom on 5 December 2003 to which the United Kingdom replied on 22 December 2003. Another meeting took place on 2 February 2004. The United Kingdom submitted information on 4 February 2004. New information was submitted by the United Kingdom on 10 March 2004. A meeting took place on 22 March 2004. The Commission sent a new request on 19 April 2004 to which the United Kingdom replied on 11 May 2004. A meeting took place on 7 June 2004. New information was submitted on 1 July 2004 and a meeting was held on 29 July 2004. The United Kingdom submitted further information on 23 August 2004

II. DETAILED DESCRIPTION OF THE AID

1. Beneficiary of the aid

(a) The British Energy plc group

(8) BE is an electricity generator. It was privatised by the UK authorities in 1996. Except for three special shares held by the UK authorities (one in BE and one in each of its two principal UK subsidiaries), BE is now wholly owned by private investors.

(9) At the time of privatisation the primary components of BE’s business were six nuclear power stations in England and two nuclear power stations in Scotland. BE continues to operate these stations which have a total registered capacity of 9 820 MW, of which 7 281 MW is in England and Wales and 2 539 MW is in Scotland. BE is the only private sector owned operator of nuclear power stations in the UK. It supplies electricity to the wholesale market and to certain large industrial and commercial (I & C) customers but not otherwise by retail.

(10) Since privatisation, BE has entered a 50:50 joint venture in the USA (called Amergen) to purchase and operate US nuclear generating plants and acquired an 82,4 % interest in the lease of Bruce Power LP in Ontario, Canada. In the United Kingdom BE acquired in 1999 the retail supply business of South Wales Electricity (subsequently sold in 2000) and, in 2000, the 1 970 MW Eggborough coal-fired station to get greater flexibility and a measure of security against outage of its nuclear plants.

(11) Of the eight UK BE nuclear stations, seven are advanced gas-cooled reactors (AGR), a design and technology unique to the UK. The eighth, Sizewell B, is a pressurised water reactor (PWR), a design and technology widely adopted internationally.

(12) BE’s principal UK subsidiaries are: — British Energy Generation Ltd (BEG), which owns and operates the six nuclear power stations in England and holds the supply licence for the direct supply business; — British Energy Generation (UK) Ltd (BEGUK), which owns and operates the two nuclear power stations in Scotland; — Eggborough Power (Holdings) Ltd (EPL), which owns and operates the Eggborough coal fired power station in England; and — British Energy Power & Energy Trading Ltd (BEPET), which sells all of BE’s output (other than in relation to the direct supply business) and manages market risks.

(b) The recent developments

(13) As a consequence of the substantial fall in electricity prices in the market in which BE operates coupled with BE’s lack of hedging and the unplanned power station outages, revenues generated by BE’s power stations decreased markedly during 2002. The high proportion of non avoidable costs (4) in BE’s cost structure in its nuclear power stations has also given it little opportunity to respond to lower prices by reducing costs.

(14) A price fall of GBP 8,56/MWh, that has occurred in two years preceding 2002, is equivalent to an annual reduction of income of GBP 642 million per annum on output of 75 TWh (the output of BE’s power stations in the financial year). Neither electricity trading contracts nor the direct sales business have sufficiently mitigated the effect of this price fall on BE’s income.

(15) As a result of these factors, BE’s cash position deteriorated significantly during the summer of 2002, with cash balances reducing from GBP 231 million at the beginning of April 2002 to only GBP 78 million at the end of August 2002, with the decline accelerating from the end of June 2002. In addition to the significant reduction in cash balances, BE anticipated substantial cash outflows in the period from September 2002 to March 2003. These outflows included payments to British Nuclear Fuel Limited (BNFL) under its spent fuel management contracts, significant capital expenditure at BE’s Bruce Power facility in Canada and the repayment of the first tranche of its bonds, due on 25 March 2003.

(16) On 5 September 2002, in the light of a failed bond offering in the summer and concern about its ability to access its undrawn bank facilities, BE’s Board received legal advice that the company would not be able to draw down credit facilities. Indeed, as the directors were not in a position to state that they believed that the Company could repay those credit facilities, drawing them down would have been equivalent to trading without any reasonable prospect of avoiding insolvent liquidation. This led BE to seek financial support from the UK authorities in order to avoid insolvency proceedings. That financial support was approved as rescue aid by the Commission’s decision of 27 November 2002.

(17) That decision referred to the undertaking by the UK Government to notify a liquidation or a restructuring plan or proof that the facilities had been reimbursed in full and/or that the guarantee had been terminated to the Commission no later than six months after the rescue aid was authorised. On 7 March 2003, the UK Government notified BE’s restructuring plan to the Commission.

2. The restructuring plan

(a) Origin of BE’s difficulties

(18) The UK Government has identified the origin of BE’s difficulties to be as follows:

(19) Unlike the other large private sector generating companies, BE does not own a retail customer business that provides a natural hedge for its wholesale electricity price risk. BE instead sells its electricity primarily in the wholesale market and a small share to large Industrial and Commercial (I & C) Consumers.

(20) BE’s position in the market for retail supply to large I & C Consumers did not provide a hedge against the fall in wholesale prices. This market has been fully open to competition since 1994. It is competitive with price sensitive consumers. Prices in this market have also fallen. These are largely passed directly through to customers. Accordingly, there has been no increase in retail margins to offset the effects of falling wholesale prices.

(21) The cost structures of nuclear plants are characterised by very high non-avoidable costs and low avoidable costs (5).

(22) Some of BE’s non-avoidable costs are unique to nuclear power stations. Firstly, nuclear decommissioning liabilities are unrelated to output, except in respect to their timing, which is based on the timing of station closures. Secondly, spent fuel management costs, the costs of reprocessing, storage and final disposal of spent fuel, are also not avoidable for fuel that has already been loaded into the reactor.

(23) On the other hand, avoidable costs of nuclear plants are below those of other plants on the system, including other baseload power stations.

(24) The fall in market prices has led to a large reduction in the margin BE earns above its avoidable costs. Consequently the funds available to meet its high non-avoidable costs, being mainly financing costs and nuclear liabilities arising from past actions, have been greatly reduced. This has led to difficulties in meeting payments to creditors, which have required a financial restructuring of the business.

(25) In addition to long term non-avoidable costs arising from the nuclear liabilities, BE also suffered from high shorter term non-avoidable costs in the form of financing expenses, increased as a result of its return of capital to shareholders and its Eggborough and North American acquisitions, and the cost of power purchase agreements.

(26) BE’s loss of income following the drop in electricity wholesale prices was further exacerbated by significant unplanned outages at BE’s Torness 2 and Dungeness B stations. On 13 August 2002, BE announced that, following the unplanned outages at Torness, the target for nuclear output in the United Kingdom had been reduced from 67,5 TWh to 63 TWh (± 1 TWh).

(b) The restructuring measures

(27) The restructuring package consists of the following seven measures, that were agreed between BE, its major creditors (including the publicly owned nuclear fuel processing company BNFL), and the UK Government: — Measure A : measures linked to the funding of nuclear liabilities; — Measure B : measures concerning fuel cycle agreed with BNFL; — Measure C : standstill measures; — Measure D : significant creditors restructuring package; — Measure E : introduction of a new trading strategy; — Measure F : asset disposals to help finance the restructuring; — Measure G : local tax deferrals.

(28) These measures are described in further detail in recitals (29) to (102).

(29) Nuclear liabilities arise primarily from the need to reprocess or store and ultimately dispose of spent nuclear fuel (back-end liabilities) and from the need to decommission nuclear power stations at the end of their commercial lives (decommissioning liabilities).

(30) For some of the Back-end Liabilities, BE has contracts for the provision of spent fuel management services by BNFL (contracted liabilities). Contracted liabilities represent amounts that BE is contractually liable to pay to BNFL in the future for the reprocessing and/or storage of AGR spent fuel and other services in connection with the management of the spent fuel. The contracts cover reprocessing and storage of spent fuel and associated waste products for the fuel of the AGR stations up to at least 2038 or 2086. These contracts are primarily for a fixed price with all the technical risks associated with the storage and reprocessing of spent nuclear fuel residing with BNFL. Title to all spent fuel and most associated wastes remains with BE throughout the life of the contracts.

(31) There are other back-end liabilities, which may or may not be associated with the same spent fuel, for which no contract for services currently exists (uUncontracted liabilities). Uncontracted liabilities principally relate to final disposal of spent fuel, plutonium, uranium and wastes arising from the reprocessing of AGR fuel, the storage and final disposal of spent PWR fuel, including the construction of a dry store at Sizewell B, and the storage and disposal of operational wastes.

(32) Decommissioning liabilities relate to the costs of defuelling, decontamination and dismantling of the nuclear power stations after the stations have ceased to generate electricity. Normally decommissioning is described as three stages: — stage 1: defuelling the reactor shortly after station closure and removing the fuel from the power station; — stage 2: dismantling redundant ancillary buildings and making the reactor complex secure and weather proof, following which it is maintained and monitored, usually over long periods; and — stage 3: dismantling the reactor to allow the site to be reused (at least 85 years after the end of generation for AGR stations and up to 50 years for PWR stations).

(33) Until now several arrangements have been put in place for funding the nuclear liabilities. At the time of privatisation, a separate fund, the Nuclear Decommissioning Fund (‘NDF’) was established in the form of a company limited by shares owned by an independent trust. Its purpose has been to accumulate a segregated fund, to be applied to discharge part of the decommissioning liabilities. Funding of all other Nuclear Liabilities has been expected to be met out of operational cash flows from BE’s ongoing business. However as a consequence of the fall in BE’s revenues, these existing arrangements are not sufficient for the funding of nuclear liabilities.

(34) The UK Government has included in its restructuring plan a number of instruments in order to take on the financial responsibility for at least part of the nuclear liabilities funding. These new instruments will be established along with new arrangements for the contribution of funds by BE towards the costs of the Nuclear Liabilities together with the management of BE’s nuclear liabilities.

(35) The restructuring plan provides for the existing NDF to be enlarged into, or supplemented by, a new fund, the Nuclear Liabilities Fund (NLF). The NLF is intended to be a company limited by shares owned by an independent trust. The NLF is intended to meet the costs of Uncontracted Liabilities and decommissioning liabilities for: (a) all AGR fuel that has been loaded into BE’s reactors prior to the date on which all the conditions precedent to the Restructuring are fulfilled, including the Commission decision on the Restructuring plan (the restructuring effective date) for all PWR fuel, as well as the storage and disposal of operational wastes from the power stations; (b) all stage 1 decommissioning liabilities of BE; and (c) all stage 2 and 3 decommissioning liabilities of BE to the extent that the accrued value of the NDF is insufficient to meet the stage 2 and 3 decommissioning liabilities as payments fall due.

(36) Once the restructuring is put in place, BE will contribute to the NLF, in paying: (a) fixed decommissioning contributions of GBP 20 million per annum -indexed to the retail price index (RPI)- but tapering off as stations close; (b) GBP 150 000, indexed to RPI, for every tonne of PWR fuel loaded into the Sizewell B reactor after the date where all the conditions precedent to the Restructuring Effective Date. According to the UK authorities GBP 150 000 per tonne is comparable to international costs for spent fuel management; (c) GBP 275 million of new bonds to the NFL. The new bonds will be high ranking and unsecured; (d) payments initially amounting to 65 % of BE’s consolidated net cash flow after tax and financing costs and after funding Cash Reserves (‘the NLF Payments’). These payments are hereunder known as ‘the cash sweep’. The trustees of the NLF will also have the right, from time to time, to convert all or part of the NLF Payments into a number of shares of BE. For so long as these shares are held by the NLF, they will be non-voting to the extent they would otherwise carry 30 % or more of the voting rights of BE.

(37) The percentage of cash flow on which the NLF Payments are based may be adjusted from time to time on a fair and reasonable basis, so that shareholders benefit from retained cash flow and proceeds of new subscriptions for shares of BE and so that the NLF and shareholders are not adversely affected by any demerger, issue of securities to shareholders or other corporate actions.

(38) Payment of the fixed contributions of GBP 20 million per annum (indexed and tapering as stations close) to the NLF or NDF for Decommissioning Liabilities will be accelerated to a net present value basis (discounted at a discount rate appropriate to the NLF or the NDF, as the case may be) and become immediately due and payable in the event of the insolvency of BEG or BEGUK. The accelerated payment(s) will be guaranteed by all principal companies in the BE Group and secured by charges on their assets.

(39) The trustees of the NLF will have no roles or duties apart from the management of the fund and its investments and making payments against qualifying expenditure. This will include assessing whether it would be beneficial for the NLF to defer any NLF Payments or convert the NLF Payments into equity. The trustees of the NLF will not have any powers to review liabilities, funding requirements or set the contributions of BE.

(40) The UK Government will take the four following measures in relation to the funding of nuclear liabilities:

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

(41) The UK Government undertakes to assume responsibility for BE’s liabilities under contracts between BE and BNFL (the Historic Spent Fuel Contracts), concerning: (i) the reprocessing and/or storage of AGR spent fuel loaded into reactors before the restructuring effective date, and (ii) other services relating to flask maintenance, oxide management and rail transport under existing contracts with BNFL.

(42) That undertaking does not cover the payments for fuel loaded into the AGRs after the restructuring effective date, the costs of which will continue to be borne by BE under new contracts which have resulted from the commercial negotiations between BE and BNFL. It does not cover payments in respect of PWR fuel, as PWR is not reprocessed by BNFL, but managed directly, as a matter of fact stored, by BE.

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

(43) The UK Government undertakes to cover any shortfall in funding within the NLF for stage 1 decommissioning liabilities and for uncontracted liabilities (including the cost of building the Sizewell B dry store and ultimate fuel disposal).

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

(44) The UK Government undertakes to cover any shortfall in funding within the NLF in relation to Stages 2 and 3 of decommissioning.

— Specific tax disregard

(45) The aforementioned undertakings by the UK Government will be accounted for as an asset on the BE balance sheet with a corresponding credit to the profit and loss account. Under normal circumstances, the undertaking would be taxable. According to the UK Government, this would require the UK Government to ‘gross up’ the level of aid provided to BE in the restructuring process by the amount of tax arising on the grant of the undertaking in order to ensure that BE is solvent post restructuring.

(46) In order to avoid this, the UK authorities are in the process of introducing specific tax disregard legislation via the Electricity Bill. Without this tax disregard legislation, a taxable receipt of approximately GBP 3 152 million would arise. According to the UK government, the tax disregard legislation has been drafted in a manner that aims to ensure that no asymmetrical tax relief is given to BE in the future. Any subsequent increases in the value of the undertaking, whether due to price changes or revalorisation, will be taxable, thereby matching the tax relief received by BE when the extra expense is recorded in the profit and loss accounts.

(47) Table 1 below contains a valuation by the UK authorities of the instruments of aid described above. These estimates of the value are subject to considerable uncertainty. Both the costs of the Nuclear Liabilities relieved and BE’s contribution to those costs are highly uncertain. Indeed, the discharge of the liabilities will occur over extremely long time periods. For example, BE would not expect to begin dismantling an AGR until at least 85 years after a station has ceased generating, while spent fuel management must continue indefinitely. In addition, there are many tasks, including the decommissioning of AGRs, for which there is to date no direct experience. The estimated value of the aid has changed since notification. The main reasons are the increased returns from the cash sweep due to improvements in BE’s forecast performance, the impact of inflation, the updating of the amounts due under the Undertaking for Historic Spent Fuel Contracts, the increased volumes of historic AGR spent fuel due to the later restructuring effective date and the increase in value of the assets held within the Nuclear Generation Decommissioning Fund to reflect the latest market value. Table 1 Valuation of Measure A aid instruments based on projections of July 2004 (6) (GBP million) Original submission Current projections NPV (discounted at 5,4 % nominal (7)) Total future cash payments (undiscounted) NPV (discounted at 5,4 % nominal (7)) Total future cash payments (undiscounted) Undertaking for Historic Spent Fuel Contracts 2 185 3 218 2 377 3 067 Undertaking for uncontracted liabilities 750 3 166 951 3 375 Undertaking for decommissioning liabilities 879 4 917 1 115 5 062 Amounts contributed by BE to NLF – 1 432 – 1 845 – 2 007 – 2 510 Net amounts payable by Secretary of State 197 6 238 59 5 927 Tax disregard 916 946 1 047 1 077 Total 3 298 10 402 3 483 10 071 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.

(48) BNFL both provides nuclear fuel to BE for all its AGR reactors and processes or stores this fuel when it is spent (8).

(49) As a part of the restructuring plan, BNFL, which is BE’s largest single creditor, has agreed to modify its contracts with BE both as regards fuel supply and as regards processing of spent fuel.

(50) Pre-restructuring fuel supply agreements between BE and BNFL dated from 1997 and 1995 for BEG and BEGUK respectively. They were supposed to continue in force until 31 March 2006, but with the intent to renegotiate and extend those contracts from that date in respect of BEG and an option to extend in respect of BEGUK.

(51) Charges for the supply of fuel comprised an annual fixed charge and an additional variable charge per fuel element delivered. The charges were defined, subject to an adjustment in accordance with an inflation index.

(52) The renegotiated fuel supply terms came into effect from 1 April 2003 by way of addenda to the prior agreements. The new terms will also form the basis of new lifetime agreements for AGR fuel supply after 31 March 2006, to come into effect on 1 April 2006.

(53) Under the new conditions, the fixed annual payment under the prior agreements will be reduced by GBP 5 million a year and there will be a further discount, linked to baseload electricity prices, but subject to a cap of GBP 15 million (both at 2003 prices and subject to RPI indexation). Prices will otherwise remain as in the prior contracts.

(54) In respect of fuel supply from 1 April 2006, and subject to at least 4 of the 7 AGR stations remaining open, the fixed charge payable by BE will be GBP 25,5 million, less the discount described above, with a variable charge (as per the existing contracts) equivalent to GBP 191 000 per tonne of uranium. These prices are at July 2002 money values and will be indexed in accordance with RPI.

(55) For the period when only three or fewer power stations remain open, the price may be set on the basis of recommendations of a joint BE and BNFL team, following a study of the end of life optimisation programme of BNFL’s fuel fabrication plant.

(56) In 1995, the legal predecessors of BEG and BEGUK (Nuclear Electric and Scottish Nuclear respectively) entered into long-term contracts with BNFL for the storage and reprocessing of irradiated AGR fuel and related services. BEGUK (then Scottish Nuclear) entered a further contract in 1995 for the long-term storage of all AGR fuel arisings in excess of the quantity already contracted for reprocessing. In 1997, BEG also signed a further contract for spent fuel management services, which dealt with all lifetime arisings of irradiated AGR fuel in excess of those delivered under the 1995 contract from BEG reactors. All the contracts referred above will be referred to hereunder as ‘the existing spent fuel management agreements’. They provide services through to at least 2038 or 2086 (depending on the category of waste).

(57) Under the existing spent fuel agreements, BE retains title to all spent fuel. Eventually, BEG and BEGUK will be required to receive from BNFL’s stores the vitrified high level waste, spent fuel, certain intermediate level waste and reprocessed uranium and plutonium to fulfil their responsibilities for the disposal thereof.

(58) Pricing for these agreements is essentially fixed, subject to adjustment for inflation and, in the case of the storage and reprocessing commitments, based on the tonnage of fuel delivered. The pricing of the initial 1995 contracts also incorporates amounts in respect of the decommissioning of THORP (the thermal oxide reprocessing plant) at Sellafield, in which AGR fuel is being reprocessed. Given the nature of the services provided by BNFL, BE is committed to make continuing payments in respect of fuel delivered whether or not it terminates the contracts in respect of undelivered fuel.

(59) The payment streams for the 1995 storage and reprocessing contracts are fixed and run through to completion of the contracts in 2086, with payments made monthly. The payment stream for the 1997 contract is based on the timing and tonnage of fuel deliveries to BNFL. These fixed payments correspond to a lump sum paid over a fixed schedule.

(60) The renegotiated spent fuel management agreement (hereunder the new spent fuel management agreements) apply differently depending on whether the managed fuel was loaded prior to or after the Restructuring Effective Date.

(61) The significant revisions for fuel loaded prior to the restructuring effective date will be as follows: (a) the payment scheduling will be foreshortened, in such a way that the Net Present Value of future payments, computed using the UK public sector discount rates, is unchanged; (b) the contracts’ termination clauses will be modified in such a way that, should BE become insolvent despite the restructuring, the contracts would terminate without recourse to BE. The UK authorities have indicated that, in this case, it would be likely that it would be necessary to continue to manage this fuel at BNFL’s site at Sellafield and that the UK Government or the NLF would need to enter into contractual arrangements with BNFL, or any successor company, to do this. In this event, the UK authorities have indicated that they would expect these new arrangements to be based on a review of all the relevant circumstances at the time, including existing contractual terms.

(62) The significant revisions for fuel loaded on or after the restructuring effective date will be as follows: (a) title to the spent fuel will pass to BNFL at the time it takes on the risk for managing the spent fuel (that is, on delivery of the spent fuel to BNFL), after which point BE will have no further liability in respect of it; (b) payment for the spent fuel services will be payable in relation to the time of loading the unirradiated fuel to BE’s reactors, rather than at any later stage (for example, on delivery of the spent fuel to BNFL) and will be based on a loading plan with an annual reconciliation; (c) the base price for spent fuel will be GBP 150 000 per tonne of uranium, payable on loading of the unirradiated fuel, at 2003 prices. Thereafter it will be indexed to RPI. In each year an upwards or downwards adjustment will also be made according to a formula based on the amount of electricity generated by the AGR power stations and the value of baseload electricity in England and Wales, thereby offering BE protection from fluctuations in the price of electricity. The base price for spent fuel management approximates to GBP 0,6/MWh, before the upwards or downwards adjustment.

(63) Table 2 shows the effect for BE of changes to BNFL fuel supply contracts, as estimated by the UK authorities under three possible scenarios for the evolution of the electricity market. Table 2 Effect of changes to BNFL fuel supply contracts (GBP million) Computation of fuel supply savings Year to 31 March 2004 2005 2006 2007 2008 Pre-restructuring costs — Bank case and upside case 221 247 232 203 213 — Downside case 216 241 227 198 208 Post restructuring costs — Bank case 206 231 218 188 201 — Upside case 207 231 227 198 207 — Downside case 200 220 205 176 186 Savings — Bank case 15 16 14 15 12 — Upside case 14 16 5 5 6 — Downside case 16 21 22 22 22

(64) The UK authorities have submitted that giving precise estimates of the savings by BE after 2006 would be difficult, as the pre-restructuring fuel supply contracts were planned to end in 2006. Any estimate of the benefit for BE of the changes would therefore have to take account in some way of the benefit to BNFL of the prolongation of the contracts until the end of BE’s plants’ lifetime, which is reflected in the new contracts’ prices. Bearing in mind these uncertainties, the UK authorities have indicated that BE's internal estimate of the cost savings over the lifetime of the plants would be GBP 239 million (undiscounted) and GBP 140 million (discounted at a real rate of 3,5 % (9)). Table 3 shows the effect for BE of changes to BNFL AGR spent fuel contracts, as estimated by the UK authorities, under the same three possible scenarios (10). The net present value is computed using the UK public sector discount rate of 3,5 % real. This table addresses only the impact of price changes in contracts for fuel loaded on or after the restructuring effective date. Impact of changes in contracts for fuel loaded prior to the restructuring effective date is difficult to quantify, at it would materialise only in the event that BE becomes insolvent. Besides, the benefit for BE of the transfer of title of spent fuel, and liabilities attached to it, to BNFL, is difficult to estimate, according to the UK authorities. The UK authorities have nevertheless submitted that a subjective estimate of the benefit for BE of this transfer of title would be at around GBP 1 421 million (undiscounted) and GBP 148 million (discounted at 5,4 % nominal). This benefit is not included in table 3. Table 3 NPV impact of changes to future AGR spent fuel contracts (11) (GBP million) NPV Undiscounted total payments Pre-restructuring — Bank case 592 1 117 Post restructuring — Bank case 418 558 — Upside case 881 1 204 — Downside case 3 4 Savings — Bank case 174 559 — Upside case – 289 – 87 — Downside case 589 1 113

(65) Originally, the companies that are now BEG and BEGUK both themselves acquired uranics for transfer to BNFL and used by it in the production and fabrication of nuclear fuel for their AGR plants. The company that is now BEGUK then transferred its uranics procurement contracts to BNFL. Those pre-existing contracts were long-term and, in any event, sufficient only for the relatively small quantities of material required by BEGUK, and therefore that change gave BNFL only a limited base for the development of a uranics procurement and supply business unit.

(66) As part of the renegotiation between BE and BNFL of the contracts for the future supply of fabricated nuclear fuel by BNFL to BE, it was agreed that BEG should also transfer its uranics procurement contracts to BNFL which thus becomes responsible for the making of future arrangements for the procurement of uranics for nuclear fuel for BEG’s AGR plants.

(67) At the same time, BNFL will purchase BEG’s uranics stocks, the estimated book value of which is up to GBP 67 million.

(68) As part of the restructuring plan, BE has reached agreements (the Standstill Agreements) in relation to a standstill, subject to certain conditions, of payments due to BNFL and a number of significant financial creditors (the significant creditors) which comprise the holders of the majority of the 2003, 2006 and 2016 sterling bonds issued by BE (the bondholders, the Eggborough bank syndicate including the Royal Bank of Scotland as letter of credit provider (RBS) (together the Bank lenders) and counter-parties to three out of the money Power Purchase Agreements (PPAs) and contracts for differences: Teaside Power Limited (TPL), Total Fina Elf (TFE); and Enron (hereunder collectively the PPA Counterparties).

(69) Under the Standstill Agreements, the standstill period commences on 14 February 2003 and ends at the earliest on 30 September 2004 or the occurrence of a termination event or the completion of the restructuring. During this period, BNFL and significant creditors have agreed with BE that they will not take any steps to initiate insolvency proceedings or demand or accelerate any amounts due and payable by BE.

(70) BE’s and BNFL and Significant Creditors’ obligations under the Standstill Agreements are described in recitals (71) to (73).

(71) Under the Standstill Agreements: (a) interest will continue to be paid to bondholders and the Eggborough banks in accordance with existing arrangements, (b) interest at 6 % per annum will be paid to RBS (in respect of its letter of credit) on an amount of GBP 34 million and to the PPA Counterparties on their claim amounts (RBS GBP 37,5 million; TPL GBP 159 million; TFE GBP 85 million; Enron GBP 72 million); (c) EPL will be paid amounts attributable to its operating costs and capital expenditure; (d) BE will continue to purchase power from TPL at fixed prices at levels based on the current forward price curve for electricity until completion of the Restructuring; (e) interest will accrue to BNFL in respect of the amounts owed under the existing spent fuel management agreements from 1 April 2003 and will be waived if the Restructuring takes place. Amounts accruing under the existing spent fuel management agreements in respect of fuel loaded prior to the Restructuring Effective Date will be frozen to the extent they exceed the amounts that would have been payable had the new spent fuel management agreements been effective from 1 April 2003 and will be waived if the restructuring takes place.

(72) Under the Standstill Agreements: (a) from November 2002 up to 31 March 2003, BNFL will freeze all payments due under the existing spent fuel management agreements from 1 April 2003, BNFL will stand still the difference between payments due under the existing and the new spent fuel management agreements; (b) bondholders will stand still principal due under the 2003 bonds; (c) Eggborough banks will stand still principal repayments and other payments due under the Capacity and Tolling Agreement (CTA) except those included in BE’s continuing obligations; (d) RBS will stand still all amounts in respect of the RBS counter-indemnity, composite guarantee or letter of credit; and (e) the PPA counterparties will stand still all amounts arising under the PPAs except those included in BE’s continuing obligations.

(73) The obligations of a significant creditor under its agreement to standstill payments will cease to apply if any of the following occurs and a Significant Creditor gives notice of termination to BE: (a) there is a default in payment of the non-deferred amounts due to that significant creditor which continues for more than 20 Business Days; (b) a winding up or administration petition or order is made in respect of BE or any of its subsidiaries; (c) the UK Government makes a written demand for repayment of the Credit Facility Agreement or under any replacement facility from commercial banks guaranteed by the UK Government and the related counter indemnity by BE and its subsidiaries in favour of the UK Government; (d) the requisite approvals have not been obtained from the Eggborough Credit Facility Agent, RBS, the TPL bank syndicate or Enron. (e) documentation is issued by BE or any of its subsidiaries which provides for distributions to significant creditors different to those in the Heads of Terms agreed by the significant creditors.

(74) Table 4 sets out the level of cash that would be saved by BE through the Standstill Agreements according to the UK authorities, should the restructuring effective date be on 31 March 2004. Table 4 Cash saved by BE through Standstill Agreements (GBP million) Year ending March 2003 Year ending March 2004 BNFL 132 265 Bondholders 110 0 Eggborough banks 47 40 TPL 13 33 TFE 3 14 Enron 4 19 VAT impact 0 – 8 Interest impact – 9 – 21 Standstill impact 300 342 Cumulative cash 300 642

(75) In addition to the Standstill Agreements, the restructuring plan provides for the claims of the significant creditors to be restructured and rescheduled. On 14 February 2003, BE reached non-binding agreement with the significant creditors for the compromise and allocation of their claims.

(76) The liabilities of the significant creditors to be compromised, as reflected in BE’s unaudited financial statements for the six months to 30 September 2002, were as follows: — bondholders: GBP 408 million — bank lenders: GBP 490 million — PPA counterparties: GBP 365 million.

(77) Under the Heads of Terms the claim amounts in relation to the PPAs have since been set at GBP 316 million for the purposes of the Restructuring Package.

(78) The liabilities will be restructured and rescheduled as follows: (a) GBP 275 million of new bonds will be issued to the bondholders, bank lenders, RBS, TPL, TFE, and Enron; (b) a revised CTA will be entered into with the Eggborough banks with a financial return for the banks equivalent to GBP 150 million of New Bonds; (c) ordinary shares in BE will be issued to the bondholders, bank lenders, RBS, TPL, TFE, and Enron.

(79) BE has revised its trading strategy, seeking to reduce its exposure to output and price risks. The revisions constitute one of the elements in the restructuring package which enhance BE’s financial robustness.

(80) BE is one of the largest electricity generators within the United Kingdom, contributing over 20 % of UK power generation. This electricity generation portfolio consists of nuclear generation (83 % by capacity) and coal-fired generation (17 % by capacity), capable of producing approximately 75 TWh per annum.

(81) The trading arm of BE, BEPET is responsible for selling the output of BE’s generation portfolio, managing the exposure of BE to electricity market price fluctuations and maximising the sales prices achieved by BE relative to the market. Since 83 % of BE’s generation capacity is nuclear, a key focus for BEPET is the sale of this mainly continuous production.

(82) The coal-fired Eggborough plant is also an important element in the trading portfolio. It offers output flexibility to accommodate changing customers’ demand levels and valuable ‘insurance’ in the event of a nuclear outage. It offers flexibility in relation to the purposes of its large I & C customers and also part of its wholesale trading.

(83) In order to manage BE’s exposure to market prices whilst maximising the sales price achieved relative to market, BEPET sells its output forward. By the time the electricity is produced, BEPET, in common with other generators, seeks to have sold 100 % of its generation to avoid exposure to the typically volatile prices in the balancing mechanism. By selling ahead, the Company is able to ensure that future output volumes are sold at the prevailing price at that time and, in some cases, that prices for future output are fixed.

(84) BEPET has a number of routes through which it can sell BE generation and sells 32 % of its total generation through the Direct Supply Business (DSB). The DSB has grown organically and represents a key element of BE’s business strategy.

(85) BE’s retail market position accounts for a small part of its generating output relative to other significant generators in Great Britain. BE’s growth in this market is driven by the goal of diversifying delivery channels for generation output rather than any goal with respect to the retail market by itself. BE achieves a gross margin of approximately 2 % (12) on its direct sales reflecting the competitive nature of this market.

(86) The reasons for the financial difficulties faced by BE in September 2002 included three substantially out-of-the-money power purchase agreements and contracts for differences into which it had entered as part of earlier trading and corporate activity. Each was included in the compromise agreement with significant creditors reached as part of the restructuring package.

(87) The first one is the contract with TFE. Compared to today’s prevailing market prices, the exercise price within this contract is very high. The agreement was struck in 1997, at a time when prices were on average much higher than is currently the case. The agreement is substantially out-of-the-money for BE and the claim amount due to TFE is GBP 85 million.

(88) The second relates to the swap contract with Enron, dated 1 April 1996, which is a financially settled instrument, based on the difference between peak and off-peak pool prices. The contract was entered into by BE prior to its acquisition of Eggborough. It was intended as a hedge against the varying shape of BE’s growing I & C consumer business. The claim amount due to Enron recognised in respect of this out-of-the-money PPA in the restructuring package is GBP 72 million.

(89) The third one concerns an agreement inherited through BE’s 1999 acquisition of SWALEC, with TPL. The contract was originally signed on 26 June 1991. The contract is substantially out-of-the-money. The claim amount due to TPL recognised in respect of this PPA in the Restructuring Package is GBP 159 million.

(90) As part of the restructuring package, BE has determined to secure more medium-term fixed price sales of its output. According to the UK Government, the implementation of this strategy will reduce the volatility of cash flow and reinforce the longer-term financial viability of the Company.

(91) Under the new strategy, fixed price forward sales of output will result in the Company pre-selling a higher portion of its output for the next three to five years at a fixed price, such that BEPET fixes the value of a greater proportion of its future generation.

(92) The key objectives of the new trading strategy are: (i) to limit price risks by securing further fixed-price contracts; (ii) to maintain viable sales channels for significant generation volumes, and (iii) to provide additional cash to maintain adequate financial reserves.

(93) Since the new strategy was articulated in early December 2002, BE has succeeded in selling or extending an additional 14,8 TWh of DSB sales for 2003 to 2006 through the renewal of annual contracts and some extensions to multi-year agreements. As at 6 March 2003, BE had also had negotiations with a number of wholesale counterparties on the subject of structured trades.

(94) On 6 February 2003, a significant contract was signed with British Gas Trading Limited for the sale of approximately 10 TWh per annum until 1 April 2007, more than half of which is at a fixed price.

(95) The new contracts with BNFL also provide some element of electricity price hedging to BE due to the variable price, linked to electricity prices, to be paid for AGR fuel supply and AGR spent fuel management services. At current market prices, the new agreements with BNFL provide a partial hedge on approximately 60 % of BE’s AGR output of approx. 58 TWh p.a.

(96) BE proposes to focus on the following objectives in its medium-term strategy: (a) ensuring that BE’s nuclear plants are operating to world safety and performance levels, (b) enhancing safety while improving productivity and competitiveness; (c) reducing exposure to wholesale electricity prices in the United Kingdom whilst continuing to maintain a reliable route to market. This will be achieved through a mixture of contract terms, access to flexible generation through Eggborough and DSB, focusing primarily on the I & C Consumer sector; (d) developing a profitable renewables business to support the competitiveness of the DSB; (e) a continuing commitment to supporting EU-sponsored safety-related activities in the former Soviet Union and Eastern Europe.

(97) On 23 December 2002, BE announced that it had entered into binding heads of agreement to dispose of its 82,4 % interest in Bruce Power as follows: 79,8 % to a consortium made up of Cameco, BPC Generation Infrastructure Trust and TransCanada PipeLines Limited (together, the Consortium) and 2,6 % to the Power Workers’ Union Trust No1 and The Society. In addition, the Consortium agreed to acquire BE’s 50 % interest in Huron Wind, a wind turbine project in Ontario. The sale of Bruce Power and Huron Wind to the Consortium was completed on 14 February 2003. At the closing, BE received CAD 678 million in cash. In addition, BE expects to receive up to CAD 140 million from contingent on the restart of two Bruce A units and escrow accounts.

(98) The initial proceeds of GBP 275 million, less certain amounts for transaction costs, have been paid into an account approved by and charged in favour of the DTI under the rescue Credit Facility Agreement (CFA).

(99) Exelon Generation Company, LLC (Exelon) and British Energy Investment Ltd. have been soliciting proposals for their respective interests in AmerGen with respect to a sale of AmerGen. On 22 December 2003, BE shareholders approved the disposal to Exelon Generation Company LLC of BE’s 50 % interest in Amergen. BE received approximately USD 277 million in cash.

(100) A number of local authorities have agreed to defer without interest the payment of business rates owed to them by BE.

(101) According to the information forwarded by the UK authorities, these authorities are: — Lancaster City Council, in respect of the Heysham plant, for GBP 1 775 240, — Shepway District Council, in respect of the Dungeness plant, for GBP 578 524, — Hartlepool Borough Council, in respect of the Hartlepool plant, for GBP 447 508, — North Ayrshire Council, in respect of the Hunterston plant, for GBP 735 947, — East Lothian Council, in respect of the Torness plant, for GBP 765 986.

(102) In total, as much as GBP 4 303 205 in rates payments were postponed from November 2002 to February 2003. As to Measure G the rates were paid by BE in full in February 2003 and interest of GBP 65 656,24 for late payment was paid on 7 October 2003. The interest rate calculation is based on the Commission reference rates for the United Kingdom of 6,01 % up to 31 December 2002 and 5,42 % thereafter.

(c) Financial implications of the restructuring package

(103) Before presenting the effect of the restructuring plan on the viability of BE, the UK authorities described the economics of nuclear generation. In assessing the economics of BE’s generation activities the notification distinguishes between the avoidable costs and non-avoidable costs of running BE’s stations. Nuclear plants are characterised by very high non-avoidable costs and comparatively low avoidable costs, in particular short run marginal costs. According to the UK authorities, since the decision to generate is motivated by the level of avoidable costs and in view of the fact that nuclear plants have the lowest short run marginal costs, running nuclear plants is economically rational.

(104) The UK authorities then argue that if BE’s restructuring succeeds, the firm will not structurally be loss-making. According to the UK authorities, the plan is able to address the issues at the origin of BE’s difficulties and lead to long-term viability. In particular, it will improve BE’s trading strategy to try to offset its unhedged position, relieve BE of some of its very high fixed costs in taking over historic nuclear liabilities and enable it to build sufficient cash reserves to secure its activities.

(105) The objective of BE’s restructuring plan is to restructure BE’s costs and liabilities and to put in place a stable capital structure in order for BE to continue to operate in the long term as a financially viable entity. In order for BE to be considered financially viable, the UK Government has assumed that, over a period of time, the company must be profitable, with positive cash flow and able to finance its activities on an ongoing basis.

(106) The following components of the restructuring plan were developed in order to achieve the objective of financial viability: (a) the sale of BE’s interests in Bruce Power and AmerGen, in order to build up cash resources within the business, enhance robustness and reduce the scope of the business; (b) reduction in BE’s ongoing cost base through commercial negotiations with existing significant creditors to compromise their historic claims, and enter into Standstill Agreements until the restructuring is effected, in exchange for a combination of new debt and new equity in BE following completion of the Restructuring; (c) the assumption of costs of certain nuclear liabilities by the UK Government; and the commercial renegotiation of front end and back end nuclear fuel contracts with BNFL; the new commercial arrangements with BNFL have also reduced BE’s exposure to adverse electricity price movements; (d) implementation of a new trading strategy to reduce BE’s exposure to electricity wholesale market volume and price risk.

(107) According to the UK authorities, the restructuring plan has been developed to take account of a key requirement of financial viability, namely the ability of the company to finance its activities. Since the company would expect to face difficulty in obtaining financing from the bank or bond markets, particularly considering the relatively small number of lenders prepared to provide financing to a nuclear generating company, the restructuring plan has to be considered as an alternative to seeking external financing. It foresees the creation and build-up of cash reserves. These cash reserves would be designed to enable the company to enter into electricity trading contracts requiring collateral cover and to sustain cash shortfalls without the need to rely on external funding. Accordingly, the restructuring plan envisages the creation of two reserves: a cash collateral reserve and an outage and liquidity reserve. Although two separate pools of reserves have been identified, it is intended that these reserves will be fungible giving the ability to call on the outage and liquidity reserve to meet additional collateral requirements and vice-versa. This is to provide additional robustness for BE.

(108) BE has undertaken several actions to improve its cash position through: (a) reducing the impact of seasonality by managing payment profiles where possible; (b) further cost saving initiatives; (c) securitising direct sales receivables.

(109) In addition BE went through a business planning process which resulted in updated financial projections and has conducted a detailed review of issues surrounding the performance of its plant.

(110) In the period ending 31 March 2004, the cash reserves were built up through two sources of funds: the Standstill Agreements (Measure C) and asset disposals (Measure F), after repayment of the liabilities outstanding under the rescue aid Credit Facility Agreement.

(111) The UK authorities have developed three financial scenarios to take into account the variables to which BE’s financial position is particularly sensitive: generation output and electricity prices. The financial projections were reviewed by Deloitte & Touche in its capacity as economic and energy market consultants to the UK Government. Output and capex assumptions incorporated in the business planning cases have been reviewed by WS Atkins in its capacity as technical adviser to BE and Citigroup and by Stone & Webster Management Consultants, Inc. in its capacity as technical adviser to the UK Government.

(112) The review has taken account of three main changes since the original notification in March 2003, namely the level of electricity prices, the Performance Improvement Programme (PIP) aimed at improving the nuclear plant reliability and the trading collateral.

(113) Electricity prices have evolved significantly in recent months. According to the UK authorities, electricity prices are currently above GBP 28/MWh compared to GBP 16,4/MWh in March 2003. The key drivers of changes in electricity price forecasts are the movement in underlying fuel prices (coal, gas, oil), the carbon pricing introduced by the European Emissions Trading scheme and the capacity reserve margins.

(114) BE’s nuclear fleet has historically been less performant than its international peers. The oldest plants have suffered from underinvestment and all plants have major potential for improvement and high short-term risk of outages. BE has therefore developed recovery plans for the plants. The benefits from PIP should derive from cultural and organisational change and increased investment in capital and staff. It should result, over time, in reductions in plant unreliability and increased output.

(115) BE has also taken into account the recent significant increase in collateral requirements resulting from the market price increases.

(116) In order to determine the impact on BE’s financial position of alternative assumptions for generation output and electricity prices, BE has considered one upside and one downside sensitivity which all take into account the evolution of electricity prices, the benefits of the PIP and estimated collateral projections: (a) the ‘upside case’ which is the basis for BE’s budget for the year and is used to set performance targets; It is broadly equivalent to the ‘upside case’ described in the decision to initiate proceedings; (b) the ‘relisting case’ which is the basis for disclosure in public statements and in the prospectus to be issued on listing; it is to be seen as a ‘bank case’. The ‘relisting case’ prices are derived from the forward curve using a market model which incorporates BE’s views on fuel costs and carbon pricing; (c) the ‘reasonable worst case’ (RWC) which is equivalent to the downside case and takes into account uncertainties regarding prices and output; the RWC prices are based on a price curve developed by BE.

(117) The UK Government has taken as basis for testing the viability of BE the headroom numbers of the company. They have come to the following estimates for the period 2005-2010: Table 5 Headroom figures (GBP million) Relisting case/Bank case 2005 2006 2007 2008 2009 2010 Liquidity reserve […] (14) Impact of seasonality and receivables facility Headroom post seasonibility Cumulative impact of cash, output and collateral vulnerabilities (13) Headroom post vulnerabilities Cumulative impact of management actions on cash and collaterals Headroom post management actions RWC/Downside Case Liquidity Reserve Impact of seasonality and receivables facility Headroom post seasonality Cumulative impact of management actions on cash and collateral Headroom post vulnerabilities Cumulative impact of management actions on cash and collateral Headroom post management actions

(118) The UK authorities have also provided an estimated profit and loss account for the period 2005/2009 relating to the re-listing case. Table 6 Profit and loss account in the relisting case 5-year forecast period Profit and loss account 2005 2006 2007 2008 2009 Nuclear output TWh […] Income Generation sales Miscellaneous sales Total income Operating costs Fuel costs Staff costs Materials and services Capital expensed to P/L Depreciation and amortisation Total operating costs Operating profit/(loss) Contributions from new business activities (PBIT): AmerGen (before revalorisation) Profit before finance charges and tax Finance charges Revalorisation (net) Net interest and other finance charges Total finance charges Profit before tax 17 171 186 336 355 Minority interests (share of PBT) 0 0 0 0 0 Profit before tax (and HMG indemnity) 17 171 186 336 355 Movement in HMG indemnity 0 – 96 – 133 – 206 – 156 Profit before tax (and exceptionals) 17 75 53 130 199 Exceptionals 4 068 0 0 – 40 0 Profit before tax (post exceptionals) 4 085 75 53 90 199 Tax 0 0 0 – 26 – 87 Profit after tax and exceptionals (before tax on exceptionals) 4 085 75 53 64 112 Source: BE. Note: The figures for 2004/2005 have been prepared on a pro-forma basis (i.e. to make comparability easier, for accounting purposes the fuel costs and revalorisation numbers reflect the new fuel contracts, even though technically these will not be in place until the restructuring effective date).

(119) This estimate shows that profit before tax, minority interests, the UK Government’s undertakings and exceptional items improves from GBP 17 million in 2005 to between GBP 171 million and GBP 355 million in subsequent years. In 2005 the exceptional item relates to accounting inclusion of the UK Government’s undertaking to fund nuclear liabilities referred to in Measure A.

(120) Profit before tax is substantially reduced by contributions to the NLF from 2005. However, these contributions are 65 % of cash flows available after debt service and are not payable when cash flows are negative or transfers to maintain target Cash Reserve levels are required.

(121) An analysis of BE’s financial projections demonstrates that under the Re-listing Case, the restructured business is expected to generate profits and cash flows to service the various stakeholders and that significant contributions are expected to be made towards the discharge of uncontracted liabilities and decommissioning liabilities before any return to shareholders.

3. Grounds for initiating the proceedings

(122) In its decision to initiate proceedings, the Commission noted that the restructuring plan conferred a selective competitive advantage on BE in a sector where there is intra-Community trade. Measures A and G directly involve the United Kingdom central or local authorities’ budgets, hence State resources. They are State aid within the meaning of Article 87(1) of the Treaty. It is also possible that Measure B, and, at least partly, Measure C, involve State resources to the extent that the publicly owned company BNFL would not have acted following the private investor in a market economy principle. It therefore appears that these measures also constitute State aid within the meaning of Article 87(1) of the Treaty.

(123) The Commission analysed the aid in the light of the Community guidelines on State aid for rescuing and restructuring firms in difficulty (15) (hereafter the guidelines).

(124) This analyse raised the following doubts as regards the compatibility of the aid with the common market:

(125) The Commission had doubts as to whether the plan would result in a restoration of BE’s viability in a reasonable timeframe. Indeed, some of the measures have a very long time span (until at least 2086). Furthermore, the improvement of BE’s position would seem to be only due to external support conceded by the Government and major creditors, rather than physical internal restructuring. Furthermore, should it be State aid, the renegotiation of fuel supply and spent fuel management prices with BNFL could be viewed as a life long operating aid for nuclear stations, which would be incompatible with the requirement that BE must face the market with its own forces alone after the restructuring is over, and with the polluter pays principle.

(126) The Commission had doubts as to whether the aid could be authorised without any compensatory measure being offered in order to offset the impact of the aid on competitors. In this respect, the Commission acknowledged that it is likely that there was no or very little structural overcapacity on the relevant market. However, the Commission considered that, in view of the highly competitive nature of this market and of the high amount of the aid, it was likely that some sort of compensatory measure would be necessary for the aid to be compatible, even if this compensatory measure did not consist in irreversibly closing power plants.

(127) The Commission had doubts as to whether the aid was restricted to the minimum necessary. In this respect, the Commission noted that the plan provided for a mechanism by which BE would participate in the restructuring costs via a percentage of its free cash flow. However, in view in particular of the great uncertainty as to the amounts of aid to be granted, the Commission was not then in a position to assess whether this aid was limited to the minimum.

(128) Taking into account the foregoing considerations, the Commission concluded that there were doubts as to whether the restructuring plan complied with the criteria laid down in the guidelines and whether the aid awarded and to be awarded by the UK Government to BE could be considered as compatible with the common market. The Commission therefore decided to initiate the procedure laid down in Article 88(2) of the Treaty.

(129) In the same decision, the Commission also added that the decision to open proceedings was without prejudice to the application of the Euratom Treaty. Some measures, notably Measures A and B, have to be assessed in view of the objectives of the Euratom Treaty. Therefore, the Commission requested the United Kingdom to provide all such information as might help it to assess the measures, in particular Measures A and B, in the light of the objectives of the Euratom Treaty.

III. COMMENTS FROM INTERESTED PARTIES

(130) Following the publication of the decision to initiate proceedings and within the deadline foreseen by that publication, the Commission received comments from 20 third parties including from BE itself. They can be summarised as follows:

(131) BE stresses that the case is unusual due to the way the electricity market operates and due to the economic structure of nuclear plants.

(132) BE stresses the fact that the costs of the past represented by BE’s nuclear liabilities could no longer be met by BE with the substantial fall in electricity prices that has taken place in the United Kingdom. Under the restructuring plan, BE is also required to make large contributions towards costs of the past. With regard to the costs of decommissioning and the other nuclear liabilities not covered by the new contracts with BNFL, a contribution will be made through the NDF/NLF. Other measures affecting BE and its investors include the sale of BE’s North American assets, the loss by the pre-existing equity shareholders of the whole of their investment, and the settlement by the pre-existing investors as well as the issue of new bonds.

(133) BE stresses that a lump sum payment to the recipient would not be practicable, in particular because certain of these costs will be incurred at dates in the very distant future. Rejecting BE’s restructuring plan because it relieved BE once-and-for-all of certain defined, albeit presently unquantifiable, liabilities, would create a precedent against the approval of restructuring aid that was necessitated by the existence of costs of the past.

(134) BE is of the opinion that no inferences can be drawn from a comparison of the arrangements with the privately owned creditors. In particular, in the case of BNFL, an important part of its core business would be threatened and perhaps rendered unviable if operations of BE’s stations were unviable.

(135) BE stresses that BNFL adopted an extremely tough stance and may have been eventually constrained only by a concern that BE would otherwise face insolvency. The terms that were renegotiated were the least that BE believed could be commercially obtained while being robust following restructuring. According to BE, the Commission may have misunderstood the commercial nature of the new BNFL Contracts as a result of misunderstanding the facts and in particular their chronology. BE provides an annex to its submission that shows why it believes that the prices under the new contracts are not particularly favourable to it.

(136) BE recalls that the problem to be addressed by the Restructuring Plan was essentially that in the new environment of much lower wholesale electricity prices, BE could no longer sustain the ‘costs of the past’. According to BE, the restructuring plan successfully addresses that problem.

(137) Concerning the effect of the aid package on competition, BE argues that because the SRMCs of BE’s nuclear plants are so much lower than those of any other baseload supplier, BE’s nuclear plants are always bound to run. But the precise level of BE’s SRMCs is irrelevant for the determination of electricity prices, which reflect the higher SRMC of the marginal supplier.

(138) BE explains that nuclear stations are technically and economically inflexible and that the operation of such plants other than as baseload plant is uneconomic. As far as its trading strategy is concerned, BE explains that the economics of nuclear generation tend to lead BE to focus on selling its output forward in longer-term markets.

(139) In the view of BE, there is no overcapacity in the generation of electricity in Great Britain. As far as compensatory measures are concerned, BE argues that requiring premature closure of any of BE’s nuclear plant would be economically inefficient since the purpose of the aid package is to preserve BE’s nuclear capacity which, in terms of production of electricity, with the minimum avoidable expenditure of resources is the most cost-effective capacity in the British market. In addition it would encroach on the exercise by the UK Government of its competence in relation to sources of energy supply to the United Kingdom and would increase the emission of environmentally harmful gases into the atmosphere

(140) BNFL is a publicly owned company operating in the nuclear sector. It supplies and reprocesses or stores BE's AGR nuclear fuel. Apart from its activities in the fuel cycle, BNFL also operates a few Magnox nuclear plants, and has activities as a nuclear plants designer.

(141) The BNFL submission concentrates on the questions of the existence of aid to BE in Measure B and C. BNFL submits that all BNFL interventions in BE's restructuring plan followed the private investor in a market economy principle, and therefore contain no aid elements.

(142) BNFL explains that following the advice of their financial advisers’ (NM Rothschild & Sons Limited – Rothschild), BNFL already concluded in April 2002 that an ‘orderly rescue package’ with value for BNFL was preferable to allowing BE to become insolvent given the very vulnerable position of BNFL as BE’s largest creditor, its lack of security and the weaknesses of its legal position. BNFL adds that its Board, however, agreed with a restructuring of the existing contracts with BE on the conditions that BE should not be kept solvent at any cost and that any package proposed to BE would need to establish the commercial advantage to BNFL, given its own balance sheet deficit.

(143) BNFL gives details of each of the successive proposals and counterproposals from each side, together with Rothschild’s view on them. BNFL also sets out in great detail the chronology and content of the discussions that took place between BE and BNFL, which shows that BNFL already expressed itself willing to help BE before BE turned to the UK Government for assistance but realised that this would not be possible without a global restructuring plan.. The discussions already started in May 2000 when BE first requested, without success, the application of the hardship clause contained in the contracts. New discussions were initiated during 2002.

(144) BNFL also stresses that it had no involvement in the discussions between BE and the UK Government. On the basis of the analysis of its independent legal and financial advisers, BNFL concluded that proceeding with a solvent restructuring was in its best commercial interest and came to an agreement with BE on the Final Term Sheet on 28 November 2002. It is only after it had agreed on its Final Term Sheet with BE that it was aware of precise details of the UK involvement.

(145) BNFL’s comparison of the 3 September term sheet and the final term sheet concludes that there are considerable similarities between the two term sheets and that the final outcome was significantly closer to BNFL’s opening position than to that of BE.

(146) BNFL gives details of its assessment of the commercial benefits to it of the solvent restructuring as compared to a BE insolvency based on the analysis by financial and legal advisers. It has identified considerable risks to BNFL in the event of BE’s insolvency in particular due to the fact that BE had large undocumented intercompany loan balances between different BE group companies and that BNFL’s contractual arrangements with BE were in many ways unique and no clear precedent could be drawn from previous insolvencies. Besides, as the only creditor that benefited from security on BE’s nuclear power plants, the UK Government would have had a central role in the outcome of insolvency. However BNFL was not granted any insights into the UK Government’s likely approach during any insolvency proceedings.

(147) While BNFL’s role as a key supplier to BE might be expected to have placed it in a strong negotiating position in any insolvency, its ability to make a credible threat to stop providing goods and services to BE was undermined by a number of factors. In particular, BNFL notes that BNFL as BE’s largest single creditor would be the major financial loser if BE’s nuclear power stations were to shut down as a result of it exercising this threat. In addition, it is doubtful whether it could lawfully terminate the contracts and return to BE spent fuel and waste already received by it as this would not be permitted by UK nuclear safety legislation. Finally as a responsible nuclear services company, BNFL had to continue providing services to BE to the extent that not to do so would be unsafe or could even be perceived as being unsafe to third parties.

(148) BNFL’s analysis of BE insolvency focused on three possible outcomes namely the closure of BE’s nuclear plants leading to a minimal recovery, BNFL taking ownership of BE’s nuclear plants meaning that it would assume all nuclear liabilities of BE, which is highly risky and unattractive, and the UK Government taking ownership and asking the existing creditors to accept very substantial write-downs.

(149) Consequently, the proposed solvent restructuring appeared to be more commercially attractive since it reduced BNFL exposure to BE and offered a higher and more certain revenue stream for BNFL than insolvency. BNFL is therefore deemed to have acted in the same way as any other private creditor.

(150) Finally, BNFL compared the return of other major creditors in aggregate to its own return to ensure that the terms did offer BNFL a reasonable deal. In order to protect its position further, BNFL also secured the inclusion of a clause in the Final Term Sheet allowing the withdrawal of the suggested concessions in the event that any other material creditor was offered more favourable terms than BNFL. Rothschild updated its analysis once the detailed terms that BE was agreeing with other major creditors were established and it confirmed that BNFL’s arrangements actually appeared to be no worse than other major creditors. Furthermore, none of the revised contractual arrangements will come into effect unless and until the restructuring is completed.

(151) As regards Measure C, BNFL submits that, with the help of Rothschild, it checked that it did not concede more in the way of debt standstill than other significant creditors. When BNFL became aware that other creditors were obtaining more favourable terms than BNFL under the standstill arrangements (albeit that BNFL’s position was not directly comparable with BE’s other major creditors), it considered whether it should seek renegotiation and ask for interest. It concluded that it was unlikely that BE could pay interest to BNFL and generate sufficient surplus cash during the standstill period to allow the solvent restructuring to proceed. In addition despite its position under the standstill arrangements, BNFL would achieve better overall recovery if a solvent restructuring were to go ahead.

(152) BNFL submits that its decision to enter into the arrangements with BE was an autonomous decision of BNFL and was not at the direction of the UK Government. The fact that BNFL is a publicly owned company does not suffice to consider that BNFL’s decisions are imputable to the UK Government. Although the UK Government is BNFL’s sole shareholder, BNFL is autonomous from the UK Government in relation to its day-to-day commercial business and is required to operate on a commercial basis. BNFL submits its legal status as an underlying document. BNFL adds that throughout its negotiations with BE, BNFL kept its shareholder (the DTI) informed of its discussions with BE. It describes that as a typical commercial situation where a company has a controlling shareholder. The DTI indicated to BNFL that it would only approve (under BNFL’s corporate government arrangements with the DTI) revised arrangements with BE that were on a commercial basis for BNFL.

(153) Greenpeace Limited is the UK arm of Greenpeace International, two of the main activities of which are campaigning to end the use of nuclear power and promoting the use of clean and renewable energy resources in the United Kingdom.

(154) Greenpeace submits that, in capping BE’s contributions to the funding of nuclear liabilities, Measure A constitutes unjustifiable operating aid to BE and/or BE’s shareholders as a means of enhancing BE’s attraction to investors on the market.

(155) According to Greenpeace, Measures B and C constitute unjustifiable operating aid since they confer ongoing support by BNFL acting or deemed to be acting as the State or at the behest of the State in circumstances where: (a) BNFL is an ailing undertaking which survives only with the benefit of State aid; (b) BNFL was party to tri-partite negotiations with the government and BE which led to the formulation of BE’s restructuring package immediately following BNFL’s own refusal to vary the terms of its contracts with BE; Greenpeace therefore asked the Commission to ask BNFL to produce copies of internal BNFL documents to see whether BNFL was privy to BE’s discussions with the UK Government; (c) the agreements are in any event lacking in genuine commercial character; according to Greenpeace, BNFL’s contracts with BE are not and were not commercial arrangements from the outset and look more like an artificial device designed to provide BNFL with a guaranteed income stream; the restructuring aid package continues to provide BNFL with this income stream; (d) the renegotiated pricing terms do not reflect the actual costs associated with the service provided but are linked to wholesale prices; since the advantage conferred by the contracts is ongoing and pursuant to an open-ended agreement, the aid involves long-term support for BE, not a one-off benefit designed to restore its viability; the benefit is therefore ‘operating’ and not ‘restructuring aid’ and cannot be compatible with the common market.

(156) Greenpeace supports all Commission doubts, and concludes that the aid is incompatible with the EC Treaty. It stresses in particular that the restructuring aid would not only have an effect on the existing operators but would also deter competition from new entry because other incumbents and new entrants are prevented from exploiting their own efficiency. Supporting nuclear energy operators would in addition be inconsistent with the Government declaration on diversity of energy sources including renewables.

(157) As far as the issue of overcapacity is concerned, Greenpeace is of the view that the ‘planning margin’ used by the National Grid for planning the need for future generation in order to maintain safe capacity is not the appropriate data to take into consideration for assessing whether there is overcapacity on the market. According to Greenpeace, it is likely that significant structural overcapacity already exists in the relevant market and is set to increase.

(158) Greenpeace doubts that the closure of some of BE’s plants would be more expensive to the taxpayers since BE’s ability to contribute towards paying off its existing liabilities is doubtful. Greenpeace adds that in the short term perspective there is no reason to believe that the United Kingdom would not be able to achieve its targets under the Kyoto Protocol.

(159) Greenpeace submits that according to reports commissioned by it, it is both practicable and safe to close down nuclear plants immediately or progressively. Greenpeace concludes that the option of partial or phased closure of BE’s plants may result in a more limited intensity of aid being required.

(160) Greenpeace is of the opinion that the Euratom Treaty does not preclude any State aid analysis under the EC Treaty. In the absence of sectoral rules applicable to aid to the nuclear industry in the Euratom Treaty, the general State aid provisions of the EC Treaty should therefore apply. Greenpeace quotes Joined Cases 188 and 190/80 France and others v Commission (16). Greenpeace further contends that the aid measures relate to matters which may be regulated by the Euratom Treaty, only to the extent that they relate to the safety of nuclear installations on the safety aspects of decommissioning. Greenpeace concludes that the measures in question are not necessary to achieve the stated objectives and that continuing operating aid of any sort cannot be considered necessary to preserve safety in circumstances where there exists a safe, viable option of a phased total or partial closure of BE’s plants. According to Greenpeace, the Commission ought to have regard to the Community guidelines on State aid for environmental protection (17).

(161) Powergen is one of the major actors in the electricity sector in England and Wales. It has a 11 % share of the generation capacity (BE has 14 %), and has significant supply business aimed at large industrial and commercial customers as well as SMEs and residential customers. It is owned by E-ON.

(162) Powergen is against the aid package. It submits that the aid will allow BE to continue the operation of its nuclear plants that it would otherwise have closed. In this respect, Powergen disputes the UK authorities' view that the plants would be run in any event. Powergen is afraid that the aid would allow BE to offer artificially low prices in order to gain market share in the supply to large customer business and to enter the supply to households business. BE may also be able to fund investments in non nuclear generation.

(163) Concerning compensatory measures, Powergen wishes to be consulted on any compensatory measure that would be put in place and suggest three possible ones:

(164) Firstly, advancing the closure of the Dungeness B nuclear reactor to April 2004. According to Powergen, if this advanced closure was made known sufficiently in advance, there would be time for the market to build up the corresponding capacity to keep sufficient margin.

(165) Secondly, ring-fencing the aid, by forbidding cross-subsidy between BE’s loss-making assets (the AGR plants) and other BE business, constituting BE’s generation and supply business into separate bodies with separate accountancy, and imposing specific controls on the use of cash by BE to ensure that it will not divert cash paid by the State to fund its nuclear liabilities to other uses. These measures should remain in place as long as the restructuring plan measures are in place.

(166) Thirdly, preventing distortion of competition on the electricity retail market, by prohibiting BE from selling power below cost (the cost of acquiring the power from the wholesale market plus other sales related costs), imposing a cap on BE’s market share in its industrial and commercial supply business (a 20 % indicative cap is given), and prohibiting BE from entering new retail markets. These measures should remain in place as long as the restructuring plan measures are in place and there efficiency should be reviewed by the Commission after five years from implementation.

(167) Concerning the return to viability, Powergen submits that the scenarios taken into account by the UK authorities to assert BE’s future viability are too optimistic, in particular as regards the availability of BE’s plants as compared to past benchmark.

(168) Finally, Powergen considers that ‘it is well established that the state aid rules contained in the EC Treaty apply to the nuclear industry, notwithstanding the existence of the Euratom Treaty’. They refer to the same 1990 case as the one referred to by Greenpeace.

(169) InterGen is a global power generation firm, with activities in all continents. It has a 2 % share of the generation capacity in England and Wales, with two plants operating and one in construction (BE has 14 %). It sells most of its electricity to the wholesale market, and a part of it through long term contracts. It is also active in the gas trading market. It is jointly owned by Shell and Bechtel.

(170) Intergen submits that there is security of supply concern in the United Kingdom, and that nuclear safety could be managed by company receivers. They draw the Commission's attention to the fact that aid to BE has been and is damaging InterGen, and to the fact that other InterGen competitors, like Teeside Power Limited, which are among BE creditors, are also favoured as compared to InterGen within the framework of the restructuring plan. InterGen submits that, should the Commission authorise the aid, it and its affiliate should be compensated for the damage they suffer.

(171) This third party submits that earlier press reports suggest a reprocessing price prior to BE’s restructuring of some GBP 1 000/kg heavy metal (HM). Following BE’s restructuring a price of some GBP 150/kg HM has been agreed between BNFL and BE, which is 85 % below the original agreement. It adds that the initial reprocessing contracts between BNFL and BE were prices at cost plus value, which means that the baseload customers could by contract obtain reprocessing only if they accepted (pro rata) assumption of full costs of reprocessing plus a profit mark up. Against this background, if the reprocessing costs agreed with the baseload customers cover costs only at the level of GBP 1 000/kg HM, this means that the new price now agreed with BE cannot in any way come near to covering costs. Even in the case of new contracts, the price amounts to GBP 1 000/kg HM (prices as at 2003).

(172) It concludes that these prices indicate that BNFL has not acted as a private investor in a market economy in its negotiations with BE, unless BNFL would be willing to extend these favourable conditions to other customers.

(173) Drax is the largest coal-fired electricity generator in Western Europe. It was previously part of the AES Corporation, a US based energy group with interests in generation, distribution, and supply of electricity throughout the world. On 5 August AES Corporation ceded control of Drax to its creditors. On 30 August 2003, Drax announced that it had entered into an exclusive arrangement with International Power plc to participate in the restructuring of Drax.

(174) According to DRAX, Measures A, B and G all constitute state aid in the sense of Article 87(1) of the EC Treaty. DRAX agrees that Measures D, E and F do not constitute state aid. DRAX is of the view that the amount of aid is difficult to estimate. As regards Measure A, DRAX believes that its amount could be considerably greater than currently estimated in particular due to the fact that decommissioning liabilities are uncharted in the United Kingdom and that it is unlikely that BE would contribute to the nuclear liabilities costs. The UK Government will always remain ultimately responsible for the back-end and decommissioning liabilities. The UK government will never allow BE to fail. DRAX is of the opinion that the tax disregard itself should be notified as aid.

(175) DRAX believed concerning the re-negotiation of contracts with BNFL that no private investor would ever have agreed such uncommercial terms committing it to significant present and future losses, irrespective of the hardship clause and the fact that BE is its largest customer. It is clear that the re-negotiation severely disadvantaged BNFL’s position. It will lead to a reduction of the fixed annual payment in respect of fuel supply agreement of between GBP 5 million and GBP 20 million per year. This view is confirmed by BNFL’s 2004 Accounts report. Besides it appears that even if BE had to be placed under administration, BE plants would continue to operate and have the same need for the supply of fuel as well as management services, processing and disposal of that fuel after it has been used. The question should then be whether the administrator would have been able to extract those terms from BNFL. In addition, BNFL could pursue other business opportunities if its business with BE were to be reduced. BNFL is not organised on the basis of the market investor principle. Consequently Measure B is state aid.

(176) DRAX is of the opinion that the BNFL standstill agreement contained in Measure C also constitutes state aid since BNFL does not receive interest during the standstill period unlike the other participating creditors.

(177) Drax further commented on the compatibility of the aid package. DRAX does not question the fact that BE is a firm in difficulty. However it is of the opinion that BE’s unhedged position was entirely due to a curious decision on the part of its management to sell its retail business. Besides, BE could have reduced its costs by closing some or all of its plants as it is more expensive to run some nuclear plants than it is to temporarily close them

(178) Concerning the restoration of viability, DRAX is of the opinion that the proposed plan is not a real restructuring plan. Furthermore, BE is and will always be in a different position from its competitors. It will continue to generate power and sell into the market at any price and will exert a permanent downward pressure on price to the detriment of all other competitors.

(179) DRAX objects to the UK Government’s use of SRMCs as the proper measure of the viability of BE. The restructuring relieves BE of the liabilities for the major costs of a nuclear generator. A company’s decision on whether or not to enter a particular market or indeed to continue to compete in that market will be based on whether it can, over a reasonable period, meet its average costs, plus realise a reasonable return on its investment. This is not the case of BE, which has all the commercial risk removed from it.

(180) Concerning the duration of the aid, DRAX is of the opinion that the funding of open-ended liabilities so far into the future is not compatible with the guidelines. It also argued that ongoing operational aid cannot be considered to be limited to the minimum necessary. Furthermore, as regards BE’s own contribution, DRAX notes that there is an uncertainty about the proceeds of the sale of assets and that BE’s contribution to the NLF derives from aided cash flow which cannot be taken into account.

(181) On the issue of over-capacity and compensation to creditors, DRAX notes that the capacity margin of 20 % quoted in the decision to initiate the procedure only concerns winter peak demand. According to the NGC, the capacity margin over average peak winter demand is 20,3 %. According to DRAX, it would be a rational approach for any operator of BE to close down a proportion of generating capacity during the summer months. This would result in a net saving.

(182) DRAX believes that there are a number of compensatory measures and/or amendments to the restructuring plan which would go some way to ensure that the restructuring is in accordance with the guidelines and offers compensations for unaided competitors. DRAX proposes the following: (a) removing BE from the competitive market by creating a system of compulsory purchase of nuclear energy at a fixed price that would be similar to the Renewable Obligation. BE can never be properly restructured to allow it to compete on the merits with non-aided market participants. The best solution if BE generation cannot be withdrawn from the market is that BE’s output be partitioned from the competitive market. The price of the nuclear generated electricity would need to be regulated and could be set according to cost of capital and other traditional price regulation parameters. This would meet the UK government’s concerns regarding security of supply and nuclear safety and there would no longer be any distortion of competition; (b) reducing the term and re-balancing the risk of BNFL contracts in favour of BNFL; (c) divesting of Eggborough; (d) banning further acquisitions or acting as market leader; (e) obtaining a commitment of the UK Government on the one time last time principle.

(183) DRAX also commented on the relationship with the Euratom Treaty. DRAX is of the opinion that the EC and the Euratom Treaties pursue complementary rather than conflicting objectives.

(184) Comments were also introduced by the Trade Unionists for Safe Nuclear Energy (within a Balanced Energy Policy) – TUSNE (18), Mr Robert Freer (19), the UK Chemical Industries Association (CIA) (20), John Hall Associates (JHA) (21), the Energy Intensive Users Group (EIUG) (22), Terra Nitrogen (23), Energywatch (24), Teollisuuden Voima Oy (TVO) (25), National Grid Transco (26), the Royal Academy of Engineering (27), Enfield Energy Centre Limited (EECL) (28), the Energy Information Centre Ltd (EIC) (29), Major Energy Users’ Council Ltd (MEUC) (30) and a second third party willing to remain anonymous.

(185) TUSNE, Robert Freer, CIA, JHA, EUIG, Terra Nitrogen, EIC and MEUC are all concerned about the security of supply in the United Kingdom and submit that closing down BE’s nuclear plants would create the risk of power cuts and be contrary to consumers’ interests. Some of them also stress that the withdrawal of BE’s nuclear plants would make the United Kingdom’s commitment under the Kyoto Protocol very difficult to achieve since they participate in the diversity of power supply. They submit that the cost to the economy of allowing BE to fail would far outweigh the price of its restructuring and that the aid is necessary.

(186) The anonymous third party submits that BE is using the State support in order to aggressively gain market share at dumped prices. It quotes cases where BE allegedly offered prices 10 to 15 % below competition. It submits that such offers could not be sustained without State backing, and can therefore not be claimed to restore the company's viability.

(187) TVO submits that it should not be inferred from the difficulties undergone by BE that nuclear power cannot be competitive in a liberalised electricity market.

(188) National Grid Transco submits that the present capacity margin in England and Wales is smaller than originally foreseen, and cannot be considered as structural overcapacity. National Grid Transco refers to 20 % security margin as the level above which one may consider there to be overcapacity. National Grid Transco foresees that the security margin will be below 20 % until at least 2006, in an optimistic scenario. Pessimistic scenarios would see security always below 20 %, even declining to 8,5 % in 2009. National Grid Transco concludes that if any plant closure was to be requested as a compensatory measure, it would need to be communicated to the markets well in advance (three to four years) in order to allow the market to compensate for it.

(189) EECL submits that all electricity generators (not only BE) have been hit by low wholesale electricity prices in the United Kingdom. EECL disputes the UK authorities’ view that SRMC should be the benchmark to establish the distortive effect of the aid, as these costs do not reflect a plant’s medium to long term viability. EECL submits that low forward market prices are the best indicator that there is structural overcapacity on the market.

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

(190) The UK authorities informed the Commission that local taxes were finally paid with normal interest.

(191) As a preliminary comment, the UK authorities argue that even in the event that the Commission concludes that Measure B contains aid, the way the contracts are conceived ensures that any consequential benefit temporarily enjoyed by BE will automatically be eliminated with interest if the aid package is not authorised. The new contracts foresee that the new contracts will not take permanent effect if the aid package is not authorised.

(192) The United Kingdom further comments on the private investor test. The United Kingdom submits that BNFL acted in the same way as any private creditor would. In particular the UK authorities argue that it cannot be said that the terms agreed by BNFL are more generous than those which would have been granted by a private creditor in comparable circumstances. The United Kingdom submits that it is necessary to analyse whether BNFL acted in a similar way to private creditors in renegotiating its contracts as defined by the Court of Justice in its judgment in DM Transport (31).

(193) The United Kingdom argues that the Commission appears to have misunderstood the course of events. According to the UK authorities, BNFL did not resist the invocation of the hardship clause but, contrary to the Commission’s belief, had expressed itself willing to consider the possible amendments of the existing contracts prior to the announcement that BE had entered into negotiations with the UK Government. However following discussions with BE it became clear that no commercial offer which BNFL was reasonably able to make would be capable of resolving BE’s financial crisis in isolation. The development of a wider restructuring plan enabled the negotiations between BE and BNFL to restart and agreement was reached on terms which had many similarities to BNFL’s original offer. The United Kingdom considers that BNFL’s actions are consistent with those of a private creditor.

(194) The United Kingdom adds that BNFL, as the only remaining commercial UK provider of nuclear fuel cycle services, would be particularly exposed in the event of BE’s insolvency; it would have no immediate income stream for the storing or reprocessing of the large quantities of AGR fuel already delivered to it and limited prospects of recovering much in the insolvency. It would have had to renegotiate a new spent fuel agreement with the liquidator or the Government with considerable uncertainty about the level of its ongoing remuneration. Faced with the same risk, disruption and uncertainty, the United Kingdom submits that a private creditor would undoubtedly have sought to participate in a restructuring that would necessarily have included the renegotiation of its contracts with BE with to a view to maximising the overall revenues and to ensuring BE’s viability was restored.

(195) Furthermore, the United Kingdom submits that the fact that BNFL is publicly owned does not mean that BNFL’s actions were any less commercial as a result. It notes that BNFL is a public limited company incorporated under the Companies Act 1985. It has a board of directors consisting of executives engaged in its commercial activities and non-executive directors with corporate experience from other private sector activities. The board of BNFL has a duty to act autonomously in the interests of the company. The United Kingdom adds that the UK Government did not intervene to direct BNFL’s decision-making to encourage it to act other than commercially.

(196) Finally, the United Kingdom has submitted an analysis of the creditor’s claims and the amounts compromised under the restructuring package.

(197) The UK authorities conclude that Measure B should be considered as not containing State aid.

(198) The United Kingdom submits that many of the same arguments set out in recitals (191) to (197) with respect to Measure B apply equally to Measure C. In particular the United Kingdom argues that it is necessary to consider the actions of BNFL in the context of its exceptional position as BE’s principal creditor, and with BE as BNFL’s largest customer. In view of the on-going long-term trading relationship between the two and the amount of BE’s liabilities to BNFL it is unsurprising that the standstill of liabilities to BNFL accounts for the largest absolute share of the benefit accruing to BE by virtue of the standstill arrangements. A private creditor in the same position as BNFL, with the greatest exposure in the event of BE’s insolvency, would have little option but to act similarly.

(199) The United Kingdom also submits that it is wrong to contrast the standstill arrangements of BNFL on the one hand with those of all the other private creditors on the other. Without the participation of any significant creditor, the arrangements as a whole could not work. The United Kingdom submits a comparison of all BE’s outstanding debts with each party’s contribution to the standstill agreements and concludes that BNFL is actually contributing less as a percentage of its outstanding liabilities than most of the privately-owned creditors.

(200) The UK authorities submit that paragraph 32 of the guidelines does not require the aid measures to be of limited duration. It requires that the restructuring plan be as short a dur