2005/407/EC: 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)   (Text with EEA relevance)
Date: 2004-09-22
Institutions: European Commission
Subjects: State aid, United Kingdom, application of EU law, control of State aid, nuclear energy, nuclear industry

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Official Journal of the European Union

6.6.2005

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 Commu-
nity, 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 pur-
suant to the provision(s) cited above (1) and having regard to their
comments,

Whereas:

I. PROCEDURE

(1)

(2)

On 9 September 2002, the United Kingdom (UK) Govern-
ment put in place a rescue aid package for the UK electric-
ity company British Energy plc (BE). The Commission took
a decision not to raise objection in this case on 27 Novem-
ber 2002 (2). Under that decision, the UK authorities had
until 9 March 2003 to submit a restructuring or liquida-
tion plan for BE, or to demonstrate that the aid had been
repaid.

On 7 March 2003, the UK authorities notified a restruc-
turing 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 Commis-
sion sent the UK authorities a request for information on
21 April 2003, to which the UK authorities replied on
2 May 2003.

(3)

(4)

(5)

(6)

(7)

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

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.

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.

The Commission received comments from interested par-
ties. 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 Com-
mission on 30 October 2003.

The Commission met the United Kingdom authorities on
7 October 2003. Following that meeting, the United King-
dom 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 informa-
tion 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 King-
dom 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

(1) OJ C 180, 31.7.2003, p. 5.
(2) OJ C 39, 18.2.2003, p. 15.

(3) See footnote 1.

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II. DETAILED DESCRIPTION OF THE AID

— Eggborough Power (Holdings) Ltd (EPL), which owns
and operates the Eggborough coal fired power station
in England;

1. Beneficiary of the aid

and

(a) The British Energy plc group

— 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.

(8)

(9)

(10)

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 pri-
vate investors.

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) custom-
ers but not otherwise by retail.

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;

(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, rev-
enues generated by BE’s power stations decreased mark-
edly 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 bal-
ances 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 bal-
ances, BE anticipated substantial cash outflows in the
period from September 2002 to March 2003. These out-
flows included payments to British Nuclear Fuel Limited
(BNFL) under its spent fuel management contracts, signifi-
cant 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 offer-
ing 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 finan-
cial support from the UK authorities in order to avoid
insolvency proceedings. That
support was
approved as rescue aid by the Commission’s decision of
27 November 2002.

financial

— British Energy Generation (UK) Ltd (BEGUK), which
owns and operates the two nuclear power stations in
Scotland;

(4) That is, those costs which cannot be avoided by ceasing to generate

or by shutting down stations.

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Official Journal of the European Union

6.6.2005

(17)

That decision referred to the undertaking by the UK Gov-
ernment 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 autho-
rised. 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 diffi-
culties to be as follows:

B E ’ s u n h e d g e d p o s i t i o n

(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 mar-
ket 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 com-
petition 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.

h i g h

p r o p o r t i o n

o f

n o n - a v o i d a b l e

B E ’ s
c o s t s

(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 avoid-
able 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)

(25)

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.

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.

S i g n i f i c a n t
n u c l e a r s t a t i o n s

u n p l a n n e d

o u t a g e s

a t

B E ’ s

(26)

further

BE’s loss of income following the drop in electricity whole-
sale prices was
exacerbated by significant
unplanned outages at BE’s Torness 2 and Dungeness B sta-
tions. 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 com-
pany BNFL), and the UK Government:

— Measure A :

— Measure B :

measures linked to the funding of
nuclear liabilities;

measures concerning fuel cycle agreed
with BNFL;

— Measure C :

standstill measures;

— Measure D :

significant
package;

creditors

restructuring

— Measure E :

— Measure F :

introduction of a new trading strat-
egy;

asset disposals to help finance the
restructuring;

— Measure G :

local tax deferrals.

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

by shutting down stations.

(28)

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

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M e a s u r e A : m e a s u r e s l i n k e d t o t h e f u n d i n g
o f n u c l e a r l i a b i l i t i e s

The nuclear liabilities

(29) Nuclear liabilities arise primarily from the need to repro-
cess 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)

(31)

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 man-
agement of the spent fuel. The contracts cover reprocess-
ing 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 repro-
cessing 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.

There are other back-end liabilities, which may or may not
be associated with the same spent fuel, for which no con-
tract 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 opera-
tional wastes.

(32) Decommissioning liabilities relate to the costs of defuel-
ling, decontamination and dismantling of the nuclear
power stations after the stations have ceased to generate
electricity. Normally decommissioning is described as three
stages:

(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 dis-
charge 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 fund-
ing 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 fund-
ing. 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.

The creation of a new fund

(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 com-
pany limited by shares owned by an independent trust. The
NLF is intended to meet the costs of Uncontracted Liabili-
ties 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 Com-
mission 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;

— stage 1: defuelling the reactor shortly after station clo-

sure and removing the fuel from the power station;

and

— stage 2: dismantling redundant ancillary buildings and
making the reactor complex secure and weather proof,
following which it is maintained and monitored, usu-
ally over long periods;

(c) all stage 2 and 3 decommissioning liabilities of BE to
the extent that the accrued value of the NDF is insuf-
ficient to meet the stage 2 and 3 decommissioning
liabilities as payments fall due.

and

(36) Once the restructuring is put in place, BE will contribute to

the NLF, in paying:

— 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).

(a)

fixed decommissioning contributions of GBP 20 mil-
lion per annum -indexed to the retail price index (RPI)-
but tapering off as stations close;

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(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 Restructur-
ing Effective Date. According to the UK authorities
GBP 150 000 per tonne is comparable to interna-
tional costs for spent fuel management;

(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 manage-
ment and rail transport under existing contracts with
BNFL.

(c) GBP 275 million of new bonds to the NFL. The new

bonds will be high ranking and unsecured;

(42)

(d) payments initially amounting to 65 % of BE’s consoli-
dated 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.

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 sharehold-
ers or other corporate actions.

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.

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 Pay-
ments into equity. The trustees of the NLF will not have
any powers to review liabilities, funding requirements or
set the contributions of BE.

(37)

(38)

(39)

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 pay-
ments 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.

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

(46)

(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

In order to avoid this, the UK authorities are in the process
of introducing specific tax disregard legislation via the Elec-
tricity 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 legis-
lation 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 tax-
able, thereby matching the tax relief received by BE when
the extra expense is recorded in the profit and loss
accounts.

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(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 contribu-
tion to those costs are highly uncertain. Indeed, the dis-
charge of the liabilities will occur over extremely long time
periods. For example, BE would not expect to begin dis-
mantling an AGR until at least 85 years after a station has
ceased generating, while spent fuel management must con-
tinue indefinitely. In addition, there are many tasks, includ-
ing 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 improve-
ments 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 effec-
tive date and the increase in value of the assets held within
the Nuclear Generation Decommissioning Fund to reflect
the latest market value.

Valuation of Measure A aid instruments based on projections of July 2004 (6)

Table 1

Undertaking for Historic Spent Fuel Contracts

Undertaking for uncontracted liabilities

Undertaking for decommissioning liabilities

Amounts contributed by BE to NLF

Net amounts payable by Secretary of State

Tax disregard

Total

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 pay-
ments
(undiscounted)

(GBP million)

2 185

750

879

– 1 432

197

916

3 298

3 218

3 166

4 917

– 1 845

6 238

946

10 402

2 377

951

1 115

– 2 007

59

1 047

3 483

3 067

3 375

5 062

– 2 510

5 927

1 077

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.

M e a s u r e B : m e a s u r e s c o n c e r n i n g f u e l c y c l e
a g r e e d w i t h B r i t i s h N u c l e a r F u e l L i m i t e d
( B N F L )

Measures concerning fuel supply (front-end contracts)

(48)

BNFL both provides nuclear fuel to BE for all its AGR reac-
tors 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 process-
ing of spent fuel.

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

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

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

(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 adjust-
ment 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.

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(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 base-
load electricity prices, but subject to a cap of GBP 15 mil-
lion (both at 2003 prices and subject to RPI indexation).
Prices will otherwise remain as in the prior contracts.

of THORP (the thermal oxide reprocessing plant) at Sell-
afield, 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.

(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 dis-
count 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 recom-
mendations of a joint BE and BNFL team, following a study
of the end of life optimisation programme of BNFL’s fuel
fabrication plant.

Measures concerning spent fuel (back-end contracts)

(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 con-
tract 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).

(59)

The payment streams for the 1995 storage and reprocess-
ing 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 tim-
ing and tonnage of fuel deliveries to BNFL. These fixed pay-
ments correspond to a lump sum paid over a fixed
schedule.

(60)

The renegotiated spent fuel management agreement (here-
under 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 restruc-
turing effective date will be as follows:

(a)

(b)

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;

the contracts’ termination clauses will be modified in
such a way that, should BE become insolvent despite
the restructuring, the contracts would terminate with-
out 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 arrange-
ments 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.

(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.

(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;

(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

(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;

6.6.2005

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Official Journal of the European Union

L 142/33

(c)

the base price for spent fuel will be GBP 150 000 per
tonne of uranium, payable on loading of the unirradi-
ated fuel, at 2003 prices. Thereafter it will be indexed
to RPI. In each year an upwards or downwards adjust-
ment 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
adjustment.

the upwards or downwards

Fuel supply and reprocessing measures impact

(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

Computation of fuel supply savings

Year to 31 March

2004

2005

2006

2007

2008

(GBP million)

Pre-restructuring costs

— Bank case and upside case

— Downside case

Post restructuring costs

— Bank case

— Upside case

— Downside case

Savings

— Bank case

— Upside case

— Downside case

221

216

206

207

200

15

14

16

247

241

231

231

220

16

16

21

232

227

218

227

205

14

5

22

203

198

188

198

176

15

5

22

213

208

201

207

186

12

6

22

(64)

The UK authorities have submitted that giving precise esti-
mates 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 con-
tracts’ 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 (dis-
counted 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 scena-

rios (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 effec-
tive 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 sub-
mitted that a subjective estimate of the benefit for BE of this
transfer of title would be at around GBP 1 421 million (undis-
counted) and GBP 148 million (discounted at 5,4 % nominal).
This benefit is not included in table 3.

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

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

L 142/34

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Official Journal of the European Union

6.6.2005

NPV impact of changes to future AGR spent fuel contracts (11)

Table 3

Pre-restructuring

— Bank case

Post restructuring

— Bank case

— Upside case

— Downside case

Savings

— Bank case

— Upside case

— Downside case

(GBP million)

NPV

Undiscounted total
payments

592

418

881

3

174

– 289

589

1 117

558

1 204

4

559

– 87

1 113

Measures concerning uranics

Fina Elf (TFE); and Enron (hereunder collectively the PPA
Counterparties).

(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 arrange-
ments 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.

M e a s u r e C : s t a n d s t i l l m e a s u r e s

(68) As part of the restructuring plan, BE has reached agree-
ments (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 con-
tracts for differences: Teaside Power Limited (TPL), Total

(11) This assumes that the restructuring effective date is 1 April 2004.

NPV at March 2003.

(69) Under the Standstill Agreements, the standstill period com-
mences 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 pro-
ceedings 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).

BE’s standstill obligations

(71) Under the Standstill Agreements:

(a)

(b)

interest will continue to be paid to bondholders and
the Eggborough banks in accordance with existing
arrangements,

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
the
curve
Restructuring;

electricity until

completion of

for

6.6.2005

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Official Journal of the European Union

L 142/35

(e)

interest will accrue to BNFL in respect of the amounts
owed under the existing spent fuel management agree-
ments 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 Effec-
tive 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 restruc-
turing takes place.

BNFL and Significant Creditor standstill obligations

(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 man-
agement agreements;

(b) bondholders will stand still principal due under the

2003 bonds;

(c) Eggborough banks will stand still principal repay-
ments 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 aris-
ing under the PPAs except those included in BE’s con-
tinuing obligations.

(73)

The obligations of a significant creditor under its agree-
ment 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 contin-
ues 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 guar-
anteed 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 subsidiar-
ies which provides for distributions to significant
creditors different to those in the Heads of Terms
agreed by the significant creditors.

Standstill impact

(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

Year ending March 2003

Year ending March 2004

(GBP million)

132

110

47

13

3

4

0

– 9

300

300

265

0

40

33

14

19

– 8

– 21

342

642

BNFL

Bondholders

Eggborough banks

TPL

TFE

Enron

VAT impact

Interest impact

Standstill impact

Cumulative cash

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M e a s u r e
r e s t r u c t u r i n g p a c k a g e

D :

s i g n i f i c a n t

c r e d i t o r s

(81)

(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 credi-
tors for the compromise and allocation of their claims.

(76)

The liabilities of the significant creditors to be compro-
mised, 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:

The trading arm of BE, BEPET is responsible for selling the
output of BE’s generation portfolio, managing the expo-
sure 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)

(83)

The coal-fired Eggborough plant is also an important ele-
ment 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.

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 expo-
sure to the typically volatile prices in the balancing mecha-
nism. 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.

(a) GBP 275 million of new bonds will be issued to the
bondholders, bank lenders, RBS, TPL, TFE, and Enron;

(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.

(b) a revised CTA will be entered into with the Eggbor-
ough 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 bondhold-

ers, bank lenders, RBS, TPL, TFE, and Enron.

M e a s u r e E :
s t r a t e g y

I n t r o d u c t i o n o f a n e w t r a d i n g

(79)

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

(86)

Background

(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 gen-
eration (17 % by capacity), capable of producing approxi-
mately 75 TWh per annum.

(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 approxi-
mately 2 % (12) on its direct sales reflecting the competi-
tive nature of this market.

The reasons for the financial difficulties faced by BE in Sep-
tember 2002 included three substantially out-of-the-
money power purchase agreements and contracts for
differences into which it had entered as part of earlier trad-
ing and corporate activity. Each was included in the com-
promise agreement with significant creditors reached as
part of the restructuring package.

(12) Gross margin is based on total revenue before interest and tax
supply (including electricity and delivery

less direct cost of
costs). Source: BE.

6.6.2005

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Official Journal of the European Union

L 142/37

(87)

(88)

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

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.

BE’s new trading strategy

(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 rein-
force the longer-term financial viability of the Company.

(91) Under the new strategy, fixed price forward sales of out-
put 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)

(93)

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 genera-
tion volumes, and (iii) to provide additional cash to main-
tain adequate financial reserves.

Since the new strategy was articulated in early December
2002, BE has succeeded in selling or extending an addi-
tional 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 counterpar-
ties 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 mar-
ket prices, the new agreements with BNFL provide a par-
tial 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 reli-
able route to market. This will be achieved through a
mixture of contract terms, access to flexible genera-
tion through Eggborough and DSB, focusing prima-
rily on the I & C Consumer sector;

(d) developing a profitable renewables business to sup-

port the competitiveness of the DSB;

(e) a

continuing

supporting
commitment
EU-sponsored safety-related activities in the former
Soviet Union and Eastern Europe.

to

M e a s u r e F : a s s e t d i s p o s a l s t o h e l p f i n a n c e
r e s t r u c t u r i n g

Bruce Power

(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 Consor-
tium) 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 mil-
lion from contingent on the restart of two Bruce A units
and escrow accounts.

L 142/38

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Official Journal of the European Union

6.6.2005

(98)

less certain
The initial proceeds of GBP 275 million,
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).

AmerGen

(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 approxi-
mately USD 277 million in cash.

M e a s u r e G :

l o c a l

t a x d e f e r r a l s

(100) A number of local authorities have agreed to defer with-
out 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 Hartle-

pool 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 moti-
vated 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 suc-
ceeds,
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 busi-
ness, enhance robustness and reduce the scope of the
business;

(b)

reduction in BE’s ongoing cost base through commer-
cial 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 renegotia-
tion 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 elec-
tricity price movements;

6.6.2005

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Official Journal of the European Union

L 142/39

(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 financ-
ing. It foresees the creation and build-up of cash reserves.
These cash reserves would be designed to enable the com-
pany to enter into electricity trading contracts requiring
collateral cover and to sustain cash shortfalls without the
need to rely on external funding. Accordingly, the restruc-
turing 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 identi-
fied, it is intended that these reserves will be fungible giv-
ing 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 posi-

tion through:

(a)

reducing the impact of seasonality by managing pay-
ment 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 per-
formance of its plant.

(111) The UK authorities have developed three financial sce-
narios to take into account the variables to which BE’s
financial position is particularly sensitive: generation out-
put 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 busi-
ness planning cases have been reviewed by WS Atkins in
its capacity as technical adviser to BE and Citigroup and by
in its
Stone & Webster Management Consultants, Inc.
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 Pro-
gramme (PIP) aimed at improving the nuclear plant reli-
ability 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 ben-
efits from PIP should derive from cultural and organisa-
tional change and increased investment in capital and staff.
It should result, over time, in reductions in plant unreliabil-
ity and increased output.

(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 res-
cue aid Credit Facility Agreement.

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

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Official Journal of the European Union

6.6.2005

(116)

In order to determine the impact on BE’s financial position
of alternative assumptions for generation output and elec-
tricity prices, BE has considered one upside and one down-
side sensitivity which all take into account the evolution of
electricity prices, the benefits of the PIP and estimated col-
lateral 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 ‘relist-
ing 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 uncer-
tainties 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

Liquidity reserve

[…] (*)

Relisting case/Bank case

2005

2006

2007

2008

2009

2010

(GBP million)

Impact of seasonality and receivables facility

Headroom post seasonibility

Cumulative impact of cash, output and collateral vulnerabilities (1)

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

(1) Vulnerabilities are areas where BE and its advisers feel there is a higher risk that underlying assumptions may not be achieved. Sensitivities relate to output levels in the vari-

ous cases to reflect the historically poor performance of the plants.

(*) Business secret.

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(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

Profit and loss account

2005

2006

5-year forecast period

2008

2009

2007

[…]

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

Minority interests (share of PBT)

Profit before tax (and HMG indemnity)

Movement in HMG indemnity

Profit before tax (and exceptionals)

Exceptionals

Profit before tax (post exceptionals)

Tax

Profit after tax and exceptionals (before tax on exceptionals)

17

0

17

0

17

4 068

4 085

0

4 085

171

0

171

– 96

75

0

75

0

75

186

0

186

336

0

336

355

0

355

– 133

– 206

– 156

53

0

53

0

53

130

– 40

90

– 26

64

199

0

199

– 87

112

BE.

Source:
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).

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(119) This estimate shows that profit before tax, minority inter-
ests, 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 inclu-
sion 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 main-
tain 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 uncon-
tracted 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 com-
petitive 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.

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 restruc-
turing 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 competi-
tors. In this respect, the Commission acknowledged that it
is likely that there was no or very little structural overca-
pacity 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 neces-
sary for the aid to be compatible, even if this compensa-
tory 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 mecha-
nism 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.

(123) The Commission analysed the aid in the light of the Com-
munity guidelines on State aid for rescuing and restructur-
ing firms in difficulty (13) (hereafter the guidelines).

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

(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, nota-
bly Measures A and B, have to be assessed in view of the
objectives of the Euratom Treaty. Therefore, the Commis-
sion requested the United Kingdom to provide all such
information as might help it to assess the measures, in par-
ticular Measures A and B, in the light of the objectives of
the Euratom Treaty.

(125) The Commission had doubts as to whether the plan would
result in a restoration of BE’s viability in a reasonable time-
frame. 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 sup-
port 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

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

III. COMMENTS FROM INTERESTED PARTIES

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

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British Energy plc (BE)

The return to viability

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

BE’s contribution to the restructuring plan

(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 con-
tracts 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 inves-
tors as well as the issue of new bonds.

Duration of the plan

(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.

The standstill agreements with BNFL and other significant
creditors

(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 sta-
tions were unviable.

The new contracts with BNFL

(135) BE stresses that BNFL adopted an extremely tough stance
and may have been eventually constrained only by a con-
cern 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 Restruc-
turing 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 restruc-
turing plan successfully addresses that problem.

The effect of the aid on competition

(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 sup-
plier, BE’s nuclear plants are always bound to run. But the
precise level of BE’s SRMCs is irrelevant for the determina-
tion of electricity prices, which reflect the higher SRMC of
the marginal supplier.

(138) BE explains that nuclear stations are technically and eco-
nomically 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 econom-
ics of nuclear generation tend to lead BE to focus on sell-
ing its output forward in longer-term markets.

(139)

In the view of BE, there is no overcapacity in the genera-
tion of electricity in Great Britain. As far as compensatory
measures are concerned, BE argues that requiring prema-
ture closure of any of BE’s nuclear plant would be eco-
nomically inefficient since the purpose of the aid package
is to preserve BE’s nuclear capacity which, in terms of pro-
duction of electricity, with the minimum avoidable expen-
diture of resources is the most cost-effective capacity in the
British market. In addition it would encroach on the exer-
cise 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

British Nuclear Fuels plc - BNFL

(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 fol-
lowed the private investor in a market economy principle,
and therefore contain no aid elements.

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

(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 res-
cue package’ with value for BNFL was preferable to allow-
ing BE to become insolvent given the very vulnerable
position of BNFL as BE’s largest creditor, its lack of secu-
rity 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 pro-
posed to BE would need to establish the commercial advan-
tage 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 Roths-
child’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 dis-
cussions between BE and the UK Government. On the basis
of the analysis of its independent legal and financial advis-
ers, BNFL concluded that proceeding with a solvent restruc-
turing was in its best commercial interest and came to an
agreement with BE on the Final Term Sheet on 28 Novem-
ber 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 simi-
larities between the two term sheets and that the final out-
come was significantly closer to BNFL’s opening position
than to that of BE.

Comparison of
restructuring of BE versus BE’s insolvency

implications

the

for BNFL of a solvent

(146) BNFL gives details of its assessment of the commercial ben-
efits 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 pre-
vious insolvencies. Besides, as the only creditor that ben-
efited 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 pro-
viding 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 legisla-
tion. 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 per-
ceived 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 lead-
ing 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 exist-
ing 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 rev-
enue stream for BNFL than insolvency. BNFL is therefore
deemed to have acted in the same way as any other private
creditor.

Comparison with the positions of other creditors

(150) Finally, BNFL compared the return of other major credi-
tors 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 credi-
tors. Furthermore, none of the revised contractual arrange-
the
ments will come into effect unless and until
restructuring is completed.

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The standstill arrangements agreed between BNFL and BE

Measure B

(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 restructur-
ing 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.

The relation between BNFL and the UK Government

(152) BNFL submits that its decision to enter into the arrange-
ments 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 Govern-
ment 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 share-
holder (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 corpo-
rate government arrangements with the DTI) revised
arrangements with BE that were on a commercial basis for
BNFL.

Greenpeace

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

Measure A

(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 sup-
port 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 docu-
ments to see whether BNFL was privy to BE’s discus-
sions with the UK Government;

(c)

(d)

the agreements are in any event lacking in genuine
commercial character; according to Greenpeace,
BNFL’s contracts with BE are not and were not com-
mercial 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;

the renegotiated pricing terms do not reflect the actual
costs associated with the service provided but are
linked to wholesale prices; since the advantage con-
ferred 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.

Compatibility of the aid

(156) Greenpeace supports all Commission doubts, and con-
cludes 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 exploit-
ing their own efficiency. Supporting nuclear energy opera-
tors 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, Green-
peace 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.

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(158) Greenpeace doubts that the closure of some of BE’s plants
would be more expensive to the taxpayers since BE’s abil-
ity to contribute towards paying off its existing liabilities is
doubtful. Greenpeace adds that in the short term perspec-
tive 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 commis-
sioned 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.

Applicable Treaty

(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 pro-
visions of the EC Treaty should therefore apply. Green-
peace quotes Joined Cases 188 and 190/80 France and
others v Commission (14). Greenpeace further contends
that the aid measures relate to matters which may be regu-
lated 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 (15).

Powergen

(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 corre-
sponding 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 elec-
tricity 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 commer-
cial 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 restructur-
ing 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.

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

(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.

(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, Pow-
ergen 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.

(14) [1982] ECR 2545.
(15) OJ C 37, 3.2.2001, p. 3.

InterGen

(169)

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

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(170)

Intergen submits that there is security of supply concern in
the United Kingdom, and that nuclear safety could be man-
aged by company receivers. They draw the Commission’s
attention to the fact that aid to BE has been and is damag-
ing InterGen, and to the fact that other InterGen competi-
tors, 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.

First third party wishing to remain anonymous

(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 restruc-
turing 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
if the reprocessing costs
up. Against this background,
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 cov-
ering 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.

Drax Power Limited

(173) Drax is the largest coal-fired electricity generator in West-
ern Europe. It was previously part of the AES Corporation,
a US based energy group with interests in generation, dis-
tribution, 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.

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 decom-
missioning 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.

Measures B and C

(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 posi-
tion. It will lead to a reduction of the fixed annual payment
in respect of fuel supply agreement of between GBP 5 mil-
lion 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 ques-
tion 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 busi-
ness 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.

Compatibility of the aid measure

(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

Restoration of viability

(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 dif-
ficult to estimate. As regards Measure A, DRAX believes
that its amount could be considerably greater than cur-
rently estimated in particular due to the fact that decom-
missioning liabilities are uncharted in the United Kingdom

(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.

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(179) DRAX objects to the UK Government’s use of SRMCs as
the proper measure of the viability of BE. The restructur-
ing 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 rea-
lise a reasonable return on its investment. This is not the
case of BE, which has all the commercial risk removed
from it.

Duration of the aid

(180) Concerning the duration of the aid, DRAX is of the opin-
ion 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 uncer-
tainty 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.

Distortion of competition

(181) On the issue of over-capacity and compensation to credi-
tors, DRAX notes that the capacity margin of 20 % quoted
in the decision to initiate the procedure only concerns win-
ter peak demand. According to the NGC, the capacity mar-
gin over average peak winter demand is 20,3 %. According
to DRAX, it would be a rational approach for any opera-
tor of BE to close down a proportion of generating capac-
ity 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 compensa-
tions for unaided competitors. DRAX proposes the
following:

(a)

removing BE from the competitive market by creat-
ing 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 accord-
ing to cost of capital and other traditional price regu-
lation 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.

Relationship between the Euratom and the EC Treaty

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

Other interested parties

(184) Comments were also introduced by the Trade Unionists for
Safe Nuclear Energy (within a Balanced Energy Policy) –
TUSNE (16), Mr Robert Freer (17), the UK Chemical Indus-
tries Association (CIA) (18), John Hall Associates (JHA) (19),
the Energy Intensive Users Group (EIUG) (20), Terra Nitro-
gen (21), Energywatch (22), Teollisuuden Voima Oy
(TVO) (23), National Grid Transco (24), the Royal Academy
of Engineering (25), Enfield Energy Centre Limited
(EECL) (26), the Energy Information Centre Ltd (EIC) (27),
Major Energy Users’ Council Ltd (MEUC) (28) and a second
third party willing to remain anonymous.

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

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

(19) JHA is a large British energy market analyst.
(20) EIUG is an organisation that represents consumers in the energy

intensive sectors of the UK industry.

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

(22) Energywatch is a non-departmental public body representing the
interests of gas and electricity consumers across Great Britain.
(23) TVO is a Finnish electricity generator and nuclear plant operator.
(24) National Grid Transco is the owner and operator of the England and
Wales transmission system. It is a privately owned company, which
independent from generation and supply business interests.

(25) Royal Chartered academy founded in 1976 with the purpose to pro-

mote excellence in engineering.

(26) EECL operates a 396 MW CCGT in north London. It belongs to the

American company Indeck Energy Services Inc.

(27) EIC is an independent organisation whose objective is to provide sup-
port and market information to business energy users in the UK.
(28) Body that represents the interests of some 200 large industrial, com-
mercial retail and public sector for whom the cost of electricity and
gas is an important factor.

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(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 diver-
sity 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 diffi-
culties 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 overca-
pacity. National Grid Transco refers to 20 % security mar-
gin as the level above which one may consider there to be
overcapacity. National Grid Transco foresees that the secu-
rity margin will be below 20 % until at least 2006, in an
optimistic scenario. Pessimistic scenarios would see secu-
rity 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 com-
pensate 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 dis-
tortive effect of the aid, as these costs do not reflect a plant’s
medium to long term viability. EECL submits that low for-
ward 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

Measure G

(190) The UK authorities informed the Commission that local

taxes were finally paid with normal interest.

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

Measure B

(191) As a preliminary comment, the UK authorities argue that
even in the event that the Commission concludes that Mea-
sure 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 particu-
lar 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 compa-
rable 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 (29).

the existing contracts prior

(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
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 resolv-
ing 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.

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

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(194) The United Kingdom adds that BNFL, as the only remain-
ing commercial UK provider of nuclear fuel cycle services,
would be particularly exposed in the event of BE’s insol-
vency; 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 Gov-
ernment with considerable uncertainty about the level of
its ongoing remuneration. Faced with the same risk, dis-
ruption and uncertainty, the United Kingdom submits that
a private creditor would undoubtedly have sought to par-
ticipate 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 consist-
ing 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 encour-
age 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.

Measure C

(199) The United Kingdom also submits that it is wrong to con-
trast 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 King-
dom 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.

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

(200) The UK authorities submit that paragraph 32 of the guide-
lines does not require the aid measures to be of limited
duration. It requires that the restructuring plan be as short
a duration as possible and that long-term viability be
restored ‘within a reasonable time-scale’. According to the
United Kingdom the intention of the guidelines appears to
be that the grant of aid must be once-and-for-all and that
it must not constitute ongoing operating aid. The intention
is not to exclude aid to relieve long-tail liabilities.

(201) The United Kingdom submits that the restructuring will be
complete, that viability will be restored within a reasonable
timescale and that the aid is once-and-for-all, even though
BE’s liabilities are long-tail liabilities. BE will be cash gen-
erative from 2004 and will have positive annual operating
cash-flows from 2005. Under the Re-listing scenario BE
returns to viability in 2005. The restructuring plan is
intended to secure that BE will stand alone without further
support in the form of facilities from the UK Government
from the date of restructuring; The restructuring plan dem-
onstrates that this level of reserves generated by the com-
pany is sufficient
to withstand reasonable downside
scenarios and hence ensure viability.

(198) The United Kingdom submits that many of the same argu-
ments 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 rela-
tionship between the two and the amount of BE’s liabili-
ties to BNFL it is unsurprising that the standstill of liabilities
to BNFL accounts for the largest absolute share of the ben-
efit 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.

(202) On the issue of ongoing relief of current expenditure, the
UK Government recalls that the Government’s undertak-
ing covers only contracted historic liabilities, decommis-
sioning liabilities and uncontracted liabilities associated
with historic AGR spent-fuel, all PWR spent fuel and
operational waste and other ancillary liabilities. The United
Kingdom submits that contracted historic spent fuel liabili-
ties relate to AGR fuel loaded into reactors prior to the
restructuring effective date. BE has an obligation under the
nuclear site licence to manage that fuel and consequently
incur costs in so doing. These costs can therefore not be
avoided.

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(203) A similar argument applies to the decommissioning of
sites. BE will for these costs make contributions towards
the decommissioning of
the reactors to the Nuclear
Decommissioning Fund and contribute consequently sig-
nificantly to the overall decommissioning costs.

(204) As far as the uncontracted liabilities associated with his-
toric AGR spent fuel are concerned, the United Kingdom
submits that these liabilities relate solely to AGR fuel
loaded into reactors before the Restructuring Effective
Date. The liabilities associated with PWR spent fuel con-
cern all liabilities associated with PWR fuel loaded into the
Sizewell B reactor. For the future liabilities BE will contrib-
ute GBP 150 000 for every tonne of PWR fuel loaded into
Sizewell B after the Restructuring Effective Date. The level
of contribution has been benchmarked against comparable
international costs for spent fuel management with a view
to covering all the future costs of PWR fuel. The remain-
ing uncontracted liabilities relate to various types of non-
fuel waste associated with the operation of BE’s plants and
are not expected to be significant.

(205) The costs of decommissioning and uncontracted liabilities
are largely fixed and there is little scope for BE to increase
them significantly through normal station operation.
Besides any material increase in liabilities arising from a
discretionary change in operating procedures for BE’s eco-
nomic benefit or resulting from a breach of a minimum
performance standard will have to be paid by BE. In addi-
tion, it is important to note that even if the Government
directly pays for BE’s contracted liabilities, the Government
support for decommissioning and uncontracted liabilities
is in the form of a contingent guarantee. The United King-
dom submits that Measure A should not, therefore, be cat-
egorised as an ongoing relief of current expenditure. The
accounting treatment of Measure A, which is accounted for
in BE’s balance sheet as an asset, is consistent with this con-
clusion. BE is not in receipt of an on-going subsidy because
Measure A is in no way related to the on-going operations
of BE and the costs covered by Measure A will need to be
borne irrespective of the duration and scale of BE’s future
operations.

(206) As to Measure B, the United Kingdom does not accept that

it constitutes State aid.

(208) The United Kingdom reacts further to the doubts expressed
by the Commission in its decision to initiate proceedings
on the question as to whether the restoration of viability of
BE can be considered as mainly deriving from internal
resources. The United Kingdom explains that the main rea-
son for BE’s current predicament is its inability to meet
unavoidable historic liabilities and regulatory and mini-
mum safety requirements. Notwithstanding this the United
Kingdom submits that the internal measures taken by BE
are not insignificant. It has sold its stake in Bruce Power
and in Amergen and is undertaking significant internal
restructuring which will
include the […]. It has also
increased the proportion of medium term fixed price con-
tracts, including with large industrial and commercial cus-
tomers, with a view to limiting price risks in the wholesale
market. In addition the most significant internal measures
are its renegotiation of the fuel supply and spent fuel man-
agement contracts with BNFL.

(209) Finally the United Kingdom considers that the guidelines
require a balance to be struck between State contributions,
private contributions and the company’s own contribution
but does not mean that the company must be able to turn
itself around without intervention from the State.

The uncapped amount of aid

(210) After having recalled why it is not possible to quantify pre-
cisely the costs of the nuclear liabilities, the UK authorities
submitted that it is not necessary in this case to know the
precise quantum of aid or to determine which measures
amount to aid to reach a view on whether the package is
the minimum necessary. The Government’s undertaking,
covering defined categories of liabilities, is fundamental to
the Restructuring Package and the restoration of BE’s viabil-
ity. The UK authorities argued that the level of aid to BE is
structurally minimised by the sale of assets (Bruce Power
and Amergen), the reduction of liabilities owed to credi-
tors, continued contribution by BE to the funding of its
nuclear liabilities, other internal measures to reduce costs,
and the mechanism by which BE will contribute in the
future by 65 % of its free cash flow to the funding of its
nuclear liabilities.

Compensatory measures

(207) The United Kingdom also submits that it is inappropriate
to view Measure A as objectionable on the ground that it
relieves BE from part of its ‘polluter pays’ obligations.
Under the restructuring plan BE will be paying for pollu-
tion costs from future operations. In addition it will be
contributing towards historic pollution costs through the
cash sweep and its other contributions to the NLF. With-
out the Government’s undertaking, BE would have become
insolvent and would have been unable to pay any future
‘polluter pays’ obligations.

(211) The UK authorities recalled the arguments presented in the
notification according to which the aid has no impact on
the competition structure since it has no impact on BE’s
short run marginal costs which determine the day-to-day
operations of a station. They recalled, based on updated
data and comparisons with other Member States, that the
market is not in structural overcapacity and claimed that,
consequently, no compensatory measure should be
imposed.

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

would be an aid to its shareholders. The UK authorities
note that BE’s shareholders give up 97,5 % of their interest
in BE’s equity capital.

(212)

In their comments, the UK authorities concentrate on
those observations which take issue with their position,
while noting other observations which support their
position.

Powergen’s observations

(213) The UK authorities first recall their reasoning regarding
BE’s SRMCs and their position according to which the aid
package would have no effect on competitors. The argu-
ment is further supported by figures on BE’s offers on the
DSB market, which show that BE has no incentive not to
maximise its profit by pricing at marginal cost. The UK
authorities continue by noting that BE has no incentive to
leave plants on the market that could not recover their
avoidable costs. In this respect, they present cost analysis
aimed at proving that the Dungeness B plant does cover its
avoidable costs with reasonable assumptions on electricity
market prices.

(214) The UK authorities go on to recall their view on the fact
that there is no structural overcapacity on the market. They
indicate that Powergen had demothballed plants for win-
ter 2003-2004, which would indicate that Powergen itself
considers that there is no structural overcapacity on the
market. The UK authorities recall their view on the absence
of necessity of compensatory measures and give their view
on each of the measures proposed by Powergen.

(215) The UK authorities then recall their position on Measures
B and C and stress, in particular, that BNFL based itself on
external advice. They claim that Powergen’s position on
these measures are based on wrong assumptions on dates.

(216) On viability, the UK authorities contest Powergen’s opin-
ion regarding BE’s plant’s reliability and have submitted to
the Commission a report from external consultant for the
purpose of checking viability hypothesis.

(217) Finally the UK authorities state, contrary to what is claimed
by Powergen, that if electricity prices did recover, the claw-
back mechanism would ensure that no unnecessary aid
wasgiven to BE.

(219) The UK authorities again state that they do not consider
that BNFL acted under Government pressure when rene-
gotiating its contracts with BE and note that BNFL’s own
detailed accounts of events, which were sent to the Com-
mission in parallel, would demonstrate the opposite. The
extract from BE’s 2002/2003 Report, and the article in
‘The Business’, referring to the collapse of talks between
BNFL and BE in August/beginning September 2002 are
wrongly interpreted by Greenpeace as a sign that BNFL
acted later under pressure from the Government. On the
contrary they would show that BNFL was not ready to par-
ticipate in BE’s plans without other creditors bringing simi-
lar contributions. The UK authorities note that BNFL had
already submitted the internal documents that Greenpeace
suggested the Commission require from it. Concerning the
contracts between BE and BNFL which according to Green-
peace are designed to provide BNFL with a guaranteed
income stream, the UK authorities note that most of these
contracts were signed or renegotiated after BE was priva-
tised and that therefore these contracts could not have been
imposed on BE by the Government. Finally, the UK authori-
ties indicate that the link between BNFL’s concession and
electricity prices is proof that BNFL behaved commercially,
by requiring BE to share some of the possible benefits with
it and not the opposite.

(220) The UK authorities recall their view on the application of
the polluter pays principle to this case. They consider that
Greenpeace did not add any new fact or argument in this
respect.

(221) Regarding the impact of the aid on competition, the UK
authorities first object to Greenpeace’s view that the effect
of the aid package is to maintain an inefficient producer in
the market. BE cannot be considered as an inefficient gen-
erator since its avoidable costs are among the lowest on the
market. Its problems are only linked to historical liabilities.
Furthermore, the UK authorities recall their view that the
aid does not distort competition, and therefore does not
deter any entry to the market.

Greenpeace’s observations

(218) The UK authorities do not accept Greenpeace’s view that
the aid should be examined as aid to shareholders. Such a
theory would mean that any aid to a quoted company

(222) The UK authorities state that Greenpeace’s comments on
overcapacity on the market were flawed because they were
based on outdated forecasts, they wrongly interpreted
NGTransco’s benchmark for capacity margin, they used
wrong figures for present capacity margin, they envisaged
only the more optimistic of the three possible scenarios for
the future, and they ignored the difficulties in returning
certain mothballed plants to the market.

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(223) The UK authorities go on to question the economics of
Greenpeace’s arguments on the impact on the taxpayer of
the possible closure of BE’s plants. They explain that Green-
peace itself acknowledged that this closure would increase
electricity prices. Furthermore, a study by Deloitte and
Touche showed that the early closure of a single nuclear
power plant could incur additional costs. The early closure
of more than one plant would bring even more costs
because of constraints in the Sellafield plant that is used for
the treatment of radioactive material. Finally, the UK
authorities mention that both reports attached to Green-
peace’s comments (by Large & Associates and ILEX) are
based on outdated capacity figures from NGTransco and
overoptimistic hypotheses. They attach to their comments
a counter expertise on the reports, by George Yarrow and
Tim Keyworth of DKY Limited.

(224) Finally, on the basis of the foregoing, the UK authorities
aid is not

challenge Greenpeace’s view that
proportionate.

the

Drax’s observations

(225) Firstly, the UK authorities challenge Drax’s view that the
aid package shows that the UK Government will never
allow BE to fail. They recall that the package is subject to
the approval by the Government of BE’s prospects for
viability.

(226) Concerning Measure A, the UK authorities recall that the
UK Government will not assume all BE’s decommission-
ing liabilities but will only make up the shortfall in the
NLF. On the issue of the estimate of the costs in Measure
A, the United Kingdom notes that requiring that there be
absolutely no uncertainty in their computation would
make it impossible to grant relief for such long term liabili-
ties, which would lead to a perverse application of State aid
rules and go against the objectives of the Euratom Treaty.
The UK authorities also dismiss Drax’s claim that the fact
that the UK Government bears ultimate responsibility for
nuclear safety under international agreements constitutes a
State guarantee, and recall that the National Audit Office’s
ultimate involvement in this respect is irrelevant since it is
independent from the Government.

(227) Concerning Measure B, the UK authorities note that BNFL’s
observations contradict Drax’s opinion that BNFL would
fare as well if BE was insolvent. They also recall that the
renegotiation of BNFL’s agreements with BE was done at
arm’s length. Concerning Measure C, the UK authorities

indicate that the absence of payment of interest by BE to
BNFL during the standstill is to be analysed as a part of the
whole involvement of BNFL in the restructuring plan rather
than a single element, since the whole package was nego-
tiated together. As a whole, the package does not disfavour
BNFL as compared to other BE creditors.

(228) Concerning Measure G, the UK authorities recall that they
had previously put forward proof that business rates had
been finally paid by BE, with due interest.

(229) On the compatibility of the restructuring plan with the
guidelines, the UK authorities challenge Drax’s view that
the plan will not restore BE’s viability because BE will not
cover all its present avoidable and non avoidable costs. The
United Kingdom recall that for BE to survive, it is neces-
sary that part of the burden of the past, the unavoidable
costs, be lifted from it. But as soon as it is, BE will become
viable again since it will not only be able to repay all its
ongoing costs but also to bring a significant contribution
to its unavoidable costs of the past. It is therefore economi-
cally more efficient to run BE’s nuclear plants in order to
get some contribution to the payment of unavoidable costs
of the past. Advancing the closure of BE’s plants would
actually bring more costs.

(230) The UK authorities reject Drax’ argument that the aid will
induce BE to sell into the market at any price. They claim
that, as a baseload generator, BE has no generation in
reserve that it could sell in addition by cutting price. On
the contrary, its interest is to sell its generation at maxi-
mum price. BE’s bondholders and shareholders will also
ensure that BE does maximise its profit, since they will
benefit from part of it.

(231) The UK authorities also reject Drax’ argument that the
restructuring plan is too long in duration. They explain
that the actual requirement stemming from the guidelines
is that BE’s viability be restored within a reasonable times-
cale. According to them, the effect of Measure A, which
they claim is the only one that constitutes State aid, will
appear immediately in BE’s balance sheet.

(232) Regarding the existence of overcapacity on the market, the
UK authorities indicate that Drax’s assessment is based on
outdated figures and on an error on the benchmark
NGTransco applies for capacity margin. Drax’s suggestion
to close nuclear plants in summer would be economically
dubious and could also raise nuclear safety or security of
supply concerns. The UK authorities then examine each of
the four compensatory measures and conclude that putting
them in place would either endanger the balance of the
restructuring plan or affect BE’s viability prospects.

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Observations of the first anonymous third party

(233) The UK authorities explain that the price referred to by the
third party (around GBP 1 000/kgU) refers to prices for
baseload spent fuel management contracts. Baseload con-
tracts were the first batch of contracts signed by BNFL with
BE or companies that now are a part of BE. These contracts
were supposed to cover largely fixed costs associated to
BNFL’s spent fuel management facilities. Later on, BNFL
signed with BE, or companies that now belong to BE,
incremental, post baseload contracts that no longer had to
include a costs element linked to the repayment of fixed
costs. These new contracts were priced […], and therefore
at a much lower price than the one quoted by the third
party. Any meaningful comparison of prices charged by
BNFL to BE before and after the renegotiation of their
arrangements would have to be based on post baseload
contract prices, which were the ones prevailing at the time
just before the renegotiation, rather than on baseload con-
tracts prices.

Concerning observations of Enfield Energy Centre
Limited (EECL)

(234) The UK authorities do not accept EECL’s claim that the
announcement of the aid package has exacerbated whole-
sale price falls. According to the UK authorities, spot prices
were volatile both prior to and after the UK Government’s
announcement of its involvement in BE’s rescue on 9 Sep-
tember 2002. They did not however show a sharp fall. As
for forward prices, they were relatively unaffected. Finally,
forward prices for summer 2004 baseload have increased
since September 2003 despite the agreement of the restruc-
turing package.

(235) The UK authorities then object to EECL’s observation that
they wrongly based their conclusion on the premise that
BE would decide whether to close its nuclear plants by
examining their SRMCs rather than their avoidable costs.
The UK authorities did examine the impact of the aid pack-
age on BE’s avoidable costs and proved that these remained
well below forward market prices, which is the right basis
for an operator to decide not to close a plant.

(236) Finally, the UK authorities recall their arguments on the

absence of overcapacity on the market.

Concerning observations of Intergen

UK authorities go on to note that the guidelines do not
foresee any type of monetary compensation of the type
Intergen suggests it should receive. Finally, as regards the
various types of arrangements between BE and its credi-
tors, including, inter alia, Intergen, TFE and Centrica, the
UK authorities indicate that these are complex arrange-
ments that were all negotiated commercially prior to the
restructuring. They are unrelated to the State aid package.

Concerning observations of the second anonymous
third party

(238) The UK authorities have submitted quantitative informa-
tion aimed at showing that BE’s prices in the DSB segment
have been consistently above forward wholesale prices,
and that BE secured less than 20 % of the business for
which it tendered, which goes against the third party’s alle-
gation that BE offered unduly low prices. The UK authori-
ties go on to recall that they consider that BE, as a baseload
producer, has no incentive to offer artificially low prices.

VI. ASSESSMENT

(239) At least part of the measures in question concern issues
covered by the Euratom Treaty and therefore have to be
assessed accordingly (30). However, to the extent that they
are not necessary for or go beyond the objectives of the
Euratom Treaty or distort or threaten to distort competi-
tion in the internal market, they have to be assessed under
the EC Treaty.

1. Euratom Treaty

(240) The measures under review, and notably, measures A and
B, would have an impact on the funding of nuclear liabili-
ties and the treatment of spent fuel. Decommissioning and
waste management constitute costs which are necessary
for a correct and responsible operation of the nuclear
industry. In the context of nuclear industry, the need to
address the risks linked to the dangers arising from ionis-
ing radiations constitute one of its major priorities. In fact,
the Commission notes that these two aspects of the nuclear
chain are becoming increasingly important and necessary
to ensure the safety of workers and of the population.

(237) The UK authorities object to Intergen’s view that appropri-
ate security of supply could be achieved even if BE was
insolvent via a security arrangement with the receiver. The

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

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(241)

In this particular regard, the Euratom Treaty, takes due care
of this objective while at the same time, aiming at creating
the ‘conditions necessary for the development of a power-
ful nuclear industry which will provide extensive energy
sources…’. These objectives are further reiterated in Article
1 of the Euratom Treaty, which establishes that ‘it shall be
the task of the Community to contribute to the raising of
the standard of living in the Member States (…) by creat-
ing the conditions necessary for the speedy establishment
and growth of nuclear industries’. The relevance of this
objective today has been underlined in the recent Green
Paper of the Commission ‘Towards a European strategy for
the security of energy supply’ (COM (2002) 321 final of
22 June 2002). Furthermore, Article 2(b) of the Euratom
Treaty provides that the Community, in order to perform
its task, shall establish uniform safety standards to protect
the health of workers and of the general public and ensure
that they are applied. Article 2(e) of the Euratom Treaty
also provides that the Community shall make certain, by
appropriate supervision, that nuclear materials are not
diverted to purposes other than those for which they are
intended. On this basis, the Euratom Treaty establishes the
Euratom Community, foreseeing the necessary instru-
ments and attribution of responsibilities to achieve these
objectives. In this regard, and as confirmed by the Court of
Justice, nuclear safety is a Community competence which
must be linked to the protection against the dangers aris-
laid down in Article 30,
ing from ionising radiations,
Chapter 3 of the Euratom Treaty, relating to Health and
Supply (31). The Commission, must ensure that the provi-
sions of this Treaty are applied and can therefore adopt
decisions in the manner provided for in this Treaty or
deliver opinions if it considers it necessary.

(242) The Commission notes that the evidence provided by the
UK authorities shows that the effect of the measures under
review are, amongst others, to preserve the safety of
nuclear power stations, to ensure the safe management of
the nuclear liabilities, to enhance security of supply by
maintaining diversity of fuel sources in Great Britain as
well as to avoid carbon dioxide emissions. Sections III and
IV above detail the arguments brought forward by the UK
authorities and by third parties in this respect.

(243) When assessing this information and notably in determin-
ing as to whether these measures are necessary or fall
within the objectives of the Euratom Treaty, the Commis-
sion notes that the state aids and measures are addressing
the risks linked to the current situation of British Energy
and its eventual impact on the referred objectives of the
Treaty. In fact, the UK authorities have decided to intervene
in support of British Energy, inter alia, with a view of
ensuring the continuity of the conditions for a safe and
secure nuclear industry, whereas at the same time main-
taining in functioning the nuclear plants as an extensive
energy resource. This intervention has taken place in a
context of risk of bankruptcy of the major UK nuclear
operator. The continuity of a specific economic operator is

not directly linked to the continuity of its nuclear activi-
ties. However in a case of insolvency, safety and security
and/or security of supply issues have to be dealt with. The
Commission therefore understands that the UK authorities
have addressed these risks in a correct and responsible
manner in a way which is compatible with the objectives
of the Euratom Treaty.

(244) The three compensatory measures that will be described
below even further reinforce the fulfilment of the Euratom
Treaty objectives by ensuring that the public intervention
will not be used for other purposes that than payment of
nuclear liabilities. Finally, a system of cap and threshold for
the three types of historic liabilities payment will ensure
that enough funds are available for the fulfilment of these
goals, while restricting the intervention to the minimum
necessary for their achievement.

(245) The Commission concludes that the measures foreseen by
the UK authorities are appropriate to address the combi-
nation of objectives pursued and which are fully endorsed
by the Euratom Treaty.

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

(246) According to Article 87(1) of the EC Treaty, State aid is
defined as aid granted by a Member State or through State
resources in any form whatsoever which distorts or threat-
ens to distort competition by favouring certain undertak-
ings or the production of certain goods and affects trade
between Member States.

(247)

It is obvious that the State’s intervention in BE’s restructur-
ing plan is selective, since it favours only one undertaking.

(248) Electricity is traded between the UK and other Member
States via interconnectors to France and Ireland. Electricity
has been traded between Member States for a long time
and in particular since the entry into force of Directive
96/92/EC of the European Parliament and of the Council
of 19 December 1996 concerning common rules for the
internal market in electricity (32). According to figures sent
by the UK in the notification, BE is the second largest elec-
tricity producer in capacity in England and Wales, and the
third in Scotland. The State’s intervention in the restruc-
turing plan may therefore clearly affect trade between
Member States.

(249) Among the seven restructuring measures, three: Measure D
(Significant creditors restructuring package), Measure E
(the new trading strategy) and Measure F (Assets disposal)
do not derive from public resources. They can therefore
not be qualified as State aid under Article 87(1) of the EC
Treaty.

(31) Judgment of the Court of Justice of 10 December 2002 in Case

C-29/99 [2002] ECR I-11221.

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

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(250) Measure A, in contrast, derives from public resources since
it consists of a number of payments or undertakings to
make payments by the UK Government. Since the pay-
ments from the UK Government will take over part of the
Nuclear Liabilities that BE should normally have borne,
Measure A also provides an advantage to BE. Taking into
account all the above, the Commission concludes that
Measure A is State aid within the meaning of Article 87(1)
of the EC Treaty. This is not disputed by the United
Kingdom.

at arm’s length. The Commission came to the same pre-
liminary conclusions as regards Measure C.

(255) Using the data that was made available to it since the ini-
tiation of proceedings, the Commission has carried out a
more in depth analysis as to whether Measures B and C
met the criteria to be considered as State aid, and in par-
ticular whether they entailed a competitive advantage to
BE. It came to the following conclusions:

(251) Measures B and C involve resources from BNFL (totally for
Measure B and partly for Measure C), which is a publicly
owned undertaking. Resources belonging to a publicly
owned undertaking are State resources. In view of the
above, Measures B and C are State aid within the meaning
of Article 87(1) of the EC Treaty if and only if they provide
a competitive advantage to BE and the granting of this
advantage is imputable to the State. Since this question was
raised in the decision to initiate procedings, it will be analy-
sed in depth in section VI(2)(b) below.

(252) Measure G also involves resources from local authorities.
Resources from such authorities constitute State resources.
Measure G is therefore State aid within the meaning of
Article 87(1) of the EC Treaty if and only if it provides a
competitive advantage to BE and the granting of this
advantage is imputable to the State. Since this question too
was raised in the decision to initiate proceedings, it will be
analysed in depth in section VI(2)(a) below.

(a) On the existence of aid in Measure G

(253) The UK authorities proved that local taxes addressed in
Measure G were paid by BE with interest computed with
the use of the reference and discount rate prescribed by the
Commission for the United Kingdom. There is no specific
provision in UK law that would require the use of any
higher interest rate in the event that local taxes are deferred
by local authorities. The Commission therefore considers
that the rate that was used is a proper benchmark for
deciding whether the tax deferral provides a competitive
advantage to BE. In view of the above, the Commission
concludes that Measure G does not constitute State aid
within the meaning of Article 87(1) of the EC Treaty.

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

(254)

In its decision to initiate proceedings, the Commission
stated that ‘at this stage of its assessment, the Commission
thinks that the renegotiation of the contracts between
BNFL and BE can be considered as being State aid’. This
was based on the fact that BNFL, a publicly owned com-
pany, announced that it was willing to amend the com-
mercial terms of its existing contracts with BE only once
BE had announced that it had initiated talks with the UK
Government with a view to obtain financial support. It
seemed doubtful that these contracts were renegotiated

A s r e g a r d s M e a s u r e B

(256) Measure B consists of the renegotiation of contracts
between BNFL, a publicly owned company, and BE. The
Commission has examined whether Measure B confers an
advantage on BE that no private operator would have con-
ceded to this ailing firm in similar circumstances. In other
words, the Commission has considered whether BNFL
acted in conformity with the market economy creditor
principle when agreeing to Measure B.

(257) For this purpose, the Commission has in particular exam-
ined whether the renegotiation of BNFL’s contracts with BE
were done at arm’s length and whether the concessions
made by BNFL were of a commercial nature.

Did BNFL act in conformity with the private creditor
principle?

(258) The first question the Commission has to consider is
whether the new arrangements between BNFL and BE were
negotiated at arm’s length. It has to be recalled that BNFL
is BE’s largest single creditor and that BE is BNFL’s biggest
customer. The Commission has
therefore examined
whether the conditions accepted by BNFL could have been
accepted by a private operator put in a similar position.
Within the context of a supplier faced with the difficulties
of its major customer, this consists in checking whether
BNFL acted as a diligent private creditor trying to maximise
the chances of recovering its claims (33).

(259) The Commission has examined the relevant reports of
BNFL’s legal and financial advisers and extracts of BNFL’s
board meetings, which were submitted by BNFL.

(260) First, the Commission notes that BNFL already asked its
advisers to consider its position vis-à-vis BE at the begin-
ning of 2002, when BE first invoked the hardship clause of
its agreements with BNFL. It was not possible to reach the
definitive conclusion that the conditions of the hardship
clause were indeed fulfilled, but its board instructed BNFL
to consider the possible deals which would address BE’s
difficulties, under the ex plicit condition that any deal must
be commercially advantageous for BNFL.

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

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(261) The reports submitted by BNFL, that were written at that
time, illustrate the particular situation of BNFL as a credi-
tor and supplier of BE and analyse the impact of BE’s insol-
vency on BNFL. They conclude that in view of the great
exposure of BNFL, a solvent restructuring would be in
BNFL’s best interests, but not at any cost. They therefore
define a proposed package of concessions to BE, and fol-
low the evolution of this package during the negotiations
with BE. It is clear from these reports that during these
negotiations, BNFL always kept its initial idea which was to
try and best preserve its interest by avoiding that BE be put
under administration, but not at all cost, and within a bal-
anced deal.

(262) The UK authorities have submitted that BNFL’s renegoti-
ated agreements must be seen as a package, and compared
with the position BNFL might have been in if BE had
become insolvent, rather than picking out individual ele-
ments. The reports submitted by the UK authorities and by
BNFL conclude that the Final Term Sheets are more advan-
tageous to BNFL than any insolvency scenario.

(263)

(264)

In view of the above, the Commission has come to the first
conclusion that, in case of insolvency of BE, BNFL would
be put in a very uncertain and most likely disadvantaged
situation.

It is true that BE insolvency would not automatically mean
that all its nuclears stations would be immediately closed
nor would affect completely the need of decommissioning
of existing stations and the management of historical spent
fuel.

(265) But in the case of an insolvency of BE, the Commission
considers that BNFL would have been in a more difficult

position to negotiate to whoever would be BE’s successor,
either for running the stations or for decommissioning
them. This would have implied a lot of risks and uncertain-
ties, that a private investor has to take into account when
considering the renegotiation of arrangements, in particu-
lar with its main client. The fact that BNFL’s advisors stud-
ied carefully this alternative gives a clear indication that
BNFL took due account of these facts.

(266) Trying and achieve a solvent restructuring of BE was there-

fore indeed the commercial interest of BNFL.

(267) After having established this initial conclusion, the Com-
mission considered the impact of the renegotiated agree-
ments on BNFL revenues in view in particular of third
parties’ comments, in order to check in more microeco-
nomic terms whether these renegotiated agreements could
have been accepted by a private company in a similar
position.

(268) As far as spent fuel management is concerned, spent fuel
obligations are split between historic and future liabilities.

(269) As far as the historic spent fuel liabilities are concerned,
under Measure A of the restructuring plan, the UK Gov-
ernment will take over all these liabilities from BE (34).

(270) Concerning future spent fuel management, the existing
arrangements were amended. BNFL has submitted the fol-
lowing table concerning the new spent fuel management
arrangements which shows that BE will pay BNFL on a
sliding scale. The data in italics have been added by the
Commission:

Table 7

New spent fuel management arrangement prices

Outturn electricity price (35) in GBP/MWh real
2003 terms

Unit amount of (rebate)/surcharge in
GBP/MWh real 2003 terms
(in comparison with the original contracts)

Net unit amount of spent fuel payment in
GBP/MWh real 2003 Terms

Payment in GBP/kgU (*)

14,8 and below

15

16

17

18

19

20

21 and above

– 0,6

– 0,5

0

0,5

1

1,5

1,75

2,0

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

[…]

(34) Including all liabilities in relation to the final disposal of such historic

(35) The outturn electricity price reflects the value of baseload electricity

spent fuel.

traded in NETA.

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(271)

It is important to note that the rebates and surcharge in
Table 7 are in comparison with the arrangements for the
management of spent fuel that were in place just before the
restructuring, and not with older arrangements. This is the
right benchmark for the analysis of BNFL’s concessions to
BE, since this represents what BNFL would have received
from BE had BE not run into difficulties. In contrast, com-
paring the new arrangements with older contracts, like the
initial, baseload, contracts to which the first anonymous
third party refers, would make no sense in terms of anal-
ysing the actual concessions made by BNFL during the
negotiation of the restructuring plan.

(272) Table 7 shows that if the outturn electricity price is less
than the strike price of GBP 16/MWh, BNFL will grant a
rebate to BE in comparison with the pre-restructuring
spent fuel management arrangements. If the electricity
price is greater than the strike price, BNFL will be paid a
surcharge in comparison with the payments it received
under the original spent fuel management arrangements.

(273) As observed in recital (270), the income BNFL receives for
the management and disposal of future spent fuel is depen-
dent on wholesale UK electricity prices. Such a disposition
cannot be construed by itself as non-commercial. It is
rather usual in the sector, where actors want to share the
risks linked to the large potential fluctuations in prices.

(274)

In order to check whether these price levels could have
been accepted by a private company, the Commission
checked to which extent they would allow BNFL to cover
its avoidable costs in view of the foreseen evolution of elec-
tricity prices. Indeed, where faced with the likelihood of
losing such a crucial customer as BE is for BNFL, a private
company would be ready to go as far as decreasing its
prices down to those costs that it could avoid by closing its
operations. These costs are precisely the avoidable costs.

(275)

In this case, under the new spent fuel management arrange-
ments, BNFL will receive title to the spent fuel when it is
delivered by BE. This means that final disposal of this fuel
will have to be handled by BNFL, which was not the case
under the previous arrangements (36). Since this is an addi-
tional charge for BNFL as compared to previous arrange-
ments, one cannot simply rely on the comparison between
previous payments and new payments and conclude that
BNFL recovers its avoidable costs as soon as electricity
wholesale price exceeds GBP […]/MWh. On the other
hand, the new spent fuel arrangements do not prescribe
the way BNFL must handle the spent fuel to which it has
title. BNFL can choose whether it wishes to reprocess the
fuel before final disposal or not.

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

(276) A further analysis is necessary, based on the actual avoid-
able costs for BNFL, including charges for final spent fuel
disposal.

(277) The Commission asked the UK authorities to provide it
with a detailed description of these costs. Documentation
provided by the UK authorities in this respect indicates that
BNFL will cover its avoidable costs as soon as electricity
prices are above a GBP […]/MWh to GBP […]/MWh range,
depending on whether BNFL allows for risk provisions.
The slight difference with the GBP […]/MWh figure in
recital (275) is mainly due to the fact that ponds for long
term storage already exist in BNFL’s site, and are presently
in use for storage of fuel prior to reprocessing. […]

(278)

In order to cross-check this evaluation, the Commission
has compared avoidable costs as computed by the UK
authorities with costs reported by another source.

(279) Greenpeace has published on its web site a report by Gor-
don MacKerron of National Economic Research Associ-
ates (37). This report quotes figures of USD 200/kgU (GBP
110/kgU (38)) for the temporary storage of spent fuel, and
USD 400/kgU (GBP 220/kgU)for its final storage. Accord-
ing to the author of the report, they were extracted from
an American study (39). There are many differences
between the American types of reactors (primary LWR
ones) and BE’s ones. Furthermore, it is not clear from the
report whether the costs to which it refers are avoidable
costs or include fixed costs elements, which would be out
of the scope of the following analysis. They are also very
dependent on discount rates since most ultimate disposal
costs will be incurred far in the future. The Commission
has used these figures nonetheless because it considered
that figures published by a third party were a relevant
source for the cross checking of figures sent by the UK
authorities.

(280)

In view of the figures stated in recital (279), the electricity
price above which BNFL could recover its costs would be
GBP […]/MWh. These figures must now be compared with
the anticipated evolution of electricity prices.

(37) This report is available on Greenpeace UK’s website at the following

url:
http://www.greenpeace.org.uk/MultimediaFiles/Live/FullReport/6273.pdf.

(38) Using the same GBP 1= USD1,82 conversion rate as in the report.
(39) M. Bunn et al. The Economics of Reprocessing vs. Direct Disposal of Spent

Nuclear Fuel. Final Report December 2003.

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(281) The proper benchmark for this comparison is the develop-
ment of electricity prices now and in the future as expected
by BNFL when the new arrangements between BNFL and
BE were negotiated. It is indeed against that potential back-
ground that BNFL assessed the value of its concessions to
BE.

(288) An in depth examination of avoidable costs therefore
reveals nothing to suggest that BNFL acted uncommer-
cially. To the contrary, the actual evolution of electricity
prices suggests that BNFL may very well improve its posi-
tion as compared to the previous situation, while at the
same time having shown enough flexibility to allow its
main customer to remain in the market.

(282) From the documents provided by BNFL, it appears that the
general expectations were that prices would stay in the
range of GBP 16/MWh to GBP 19/MWh in the near future,
and then raise to higher, more sustainable values.

(283)

In its assessment of the final terms of the plan, BNFL used
four possible scenarios. Only the most pessimistic of them
featured electricity price values staying consistently below
GBP 17/MWh, reaching only values of around GBP
16,5/MWh in the medium term. The three others assumed
that these prices would reach values around GBP 18/MWh
as soon as 2007, and then gradually reach prices ranging
from around GBP 19,5/MWh to GBP 23/MWh.

(284) BNFL’s assessment of the renegotiation of its arrangements
with BE was therefore done against a background of price
evolution forecasts that were such that, even in the most
pessimistic assumptions, prices would enable it to recover
its avoidable costs as valued internally, and that in all but
the most pessimistic scenario, prices would enable it to
recover
its avoidable costs as valued by Gordon
MacKerron.

(285) The actual evolution of electricity prices was finally higher
than even the most optimistic of all four scenarios used by
Indeed, various price reporting agencies have
BNFL.
reported values above GBP 20/MWh for winter baseload
prices in the near future, even reaching figures as high as
GBP 27/MWh (40). As far as summer prices are concerned
a value of around GBP 20/MWh has been reported by the
same agencies. The scenarios used by BNFL were therefore
globally rather pessimistic.

(286) One can conclude from this that BNFL expected to be able
to cover its avoidable costs under the new arrangements,
despite the fact that it would bear the costs of final disposal
of spent fuel.

(287) Similarly, the analysis of the new fuel supply arrangements,
which are much simpler since they contain a variable
charge that is not indexed on electricity prices, show that
BNFL will cover its avoidable costs for fuel supply in all
cases.

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

Was BNFL treated on an equal footing with private
creditors?

(289) After having examined the renegotiation from a microeco-
nomic point of view, the Commission has checked whether
BNFL was treated on an equal footing with that of private
creditors of BE. In this second step of analysis, the Com-
mission has examined whether the concessions made by
BNFL are similar to those of the private creditors.

(290) The information submitted by the United Kingdom and

BNFL show that:

(a)

even if BNFL established terms with BE prior to the
negotiation by BE of individual terms with each of its
major creditors, it required the inclusion of a clause
allowing the withdrawal of the suggested concessions
in the event that any other material creditor was
offered more favourable terms than BNFL;

(b)

in the whole negotiation process, BNFL always
checked that other private BE creditors would be asked
to contribute in a comparable way to that of BNFL;

(c) detailed quantified comparison of the creditors’ claims
and the amounts compromised under the finally
agreed restructuring package shows that relative to
other creditors, BNFL has forgone a smaller propor-
tion of outstanding liabilities. It must be also noted in
this respect that BNFL had no security of its debt over
any of BE’s assets.

(291) Therefore, the Commission concludes that BNFL was
treated on an equal footing vis-à-vis the private creditors.
This further indicates that BNFL did not behave differently
in the restructuring plan negotiation than private creditors.

Did BNFL act independently of the UK Government?

(292) The Commission considers that the conclusion above gives
sufficient proof that BNFL acted in conformity with the
market creditor principle, and that therefore Measure B
does not involve State aid within the meaning of Article
87(1) of the EC Treaty.

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(293) Moreover, the Commission considers that in the present
case there is no indication whatsoever of the imputability
of BNFL’s behaviour to the State. The imputability condi-
tion was recalled by the Court of Justice of the European
Communities in its judgment in Stardust (41). As the Court
held, it cannot be automatically presumed that a measure
is a State aid because it was taken by a public undertaking.
It is not sufficient that the body granting the aid is a public
undertaking within Article 2(1)(b) of Commission Direc-
tive 80/723/EEC of 25 June 1980 on the transparency of
financial relations between Member States and public
undertakings (42). The fact that the public authorities may
exercise directly or indirectly a dominant influence does
not prove that they actually exercised that influence in a
given case. As explained by Advocate General Jacobs in his
opinion on the Stardust case (43), the imputability to the
State of an aid measure taken by a public undertaking may
be inferred by a set of indicators from the circumstances of
the case and the context in which the measures were taken.
The Advocate General gives a list of facts and circum-
stances which could be taken into account in his view such
as the evidence that the measure was taken at the instiga-
tion of the State, the scale and the nature of the measure,
the degree of control which the State enjoys over the pub-
lic undertaking in question and a general practice of using
the undertaking in question for ends other than commer-
cial ones or of influencing its decisions.

third parties,

(294) On the basis of the submissions of the UK Government
the Commission has examined
and of
whether Measure B (and Measure C) could be attributable
to the conduct of the State. It took into account the fact
that BNFL decided well before BE’s financial distress was
publicly announced and well before the UK Government
announced its role in a potential solvent restructuring that
it was in its best interests to make concessions to ensure
the ongoing solvency of BE. From a chronological point of
view, there is no evidence that the renegotiation took place
at the instigation of the State. On the contrary, the fact that
BNFL did not finally accept to participate in the restructur-
ing plan before the UK Government announced its involve-
ment can be viewed as proof that BNFL was not ready to
save BE at any cost, and would preferred to wait for the
intervention of the State, like all other creditors did.

(295) The Commission also took into account that according to
UK law it is the fiduciary obligation of BNFL’s directors to
act in the best commercial interests of BNFL in order to
maximise value and minimise financial exposure on the
basis of the information available to them at the relevant
time. This is substantiated by the relevant extracts of Board
meetings minutes available to the Commission.

Conclusion

(296) On the basis of all the above elements, the Commission
concludes that Measure B does not constitute State aid
within the meaning of Article 87(1) of the EC Treaty.

Measure C

(297) Measure C consists in standstill agreements concerning
payments due by BNFL and a number of significant finan-
cial creditors of BE for a period starting on 14 February
2003 and ending at the earliest on 30 September 2004.
Unlike other participating creditors, BNFL will not receive
interest during the standstill period.

Assessment by the Commission

(298) On the basis of the information available, the Commission
notes that BNFL’s financial advisers’ reports, which were
drawn up at the time BNFL was negotiating with BE, con-
clude that in its share of the restructuring package, BNFL
has not conceded more overall than other creditors, as is
shown by a comparison of each significant creditor’s con-
tribution. As mentioned in recital (290), BNFL had no
security over any of BE’s assets.

(299) Furthermore, the Commission concludes that agreeing not
to demand the payment of interest in order to preserve the
agreed solvent restructuring option is conform to the
behaviour of a private creditor aiming to ensure that the
best possible commercial option available is preserved. The
analysis of BNFL’s financial and legal advisers shows that
demanding the renegotiation of the standstill conditions
would have put at risk the whole of the agreements with
BE and, above all, the solvency of BE as such. The risk
would have been significant in that demanding the pay-
ment of interest would have led to BE’s insolvency, which
BNFL thought would not be favourable to its interests. In
renouncing to these interests, BNFL has acted in in a man-
ner consistent with the conduct of a private creditor wish-
ing to ensure the best revenue possible.

(300) To conclude, the Commission could not establish that the
part of Measure C involving BNFL was imputable to the
State, for the reasons set out in the assessment of Measure
B in recitals (256) to (296).

(301) The Commission has therefore come to the conclusion that
Measure C does not contain State aid within the meaning
of Article 87(1) of the EC Treaty.

3. Compatibility assessment under the EC Treaty

(41) See Judgment of the Court of 16 May 2002 in Case C-482/99 French
the European Communities [2002] ECR

Republic v Commission of
I-04397, at paragraph 24.

(42) OJ L 195, 29.7.1980, p. 35. Directive as last amended by Directive

2000/52/EC (OJ L 193, 29.7.2000, p. 75).

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

(302) Article 87(1) of the EC Treaty provides for the general prin-

ciple of prohibition of State aid within the Community.

(303) Article 87(2) and 87(3) of the EC Treaty provide for
incompatibility set out in

exemptions to the general
Article 87(1).

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(304) The exemptions in Article 87(2) of the EC Treaty do not
apply in this case because the aid measures do not have a
social character and are not granted to individual consum-
ers, they do not make good the damage caused by natural
disasters or exceptional occurrences and they are not
granted to the economy of certain areas of the Federal
Republic of Germany affected by its division.

provide for a turnaround that will enable the company
after completing its restructuring to cover all its costs
including depreciation and financial charges. The expected
return on capital should be enough to enable the restruc-
tured firm to compete in the market place on its own
merits.

(305) Further exemptions are set out in Article 87(3) of the EC
Treaty. Exemptions in Articles 87(3)(a), 87(3)(b) and
87(3)(d) do not apply in this case because the aid does not
promote the economic development of areas where the
standard of living is abnormally low or where there is seri-
ous underemployment, it does not promote the execution
of an important project of common European interest or
remedy a serious disturbance in the economy of a Member
State, and it does not promote culture and heritage
conservation.

(306) Only the exemption in Article 87(3)(c) of the EC Treaty
may therefore apply. Article 87(3)(c) provides for the
authorisation of State aid that is granted to promote the
development of certain economic sectors, where such aid
does not adversely affect trading conditions to an extent
contrary to the common interest.

(307)

In the guidelines, the Commission spelled out the precon-
ditions for a favourable exercise of its powers of apprecia-
tion according to Article 87(3)(c) in cases such as this one.

(308)

In its decision to initiate proceedings, the Commission
expressed a number of doubts on the compatibility of the
restructuring plan with the guidelines. These doubts were
recalled in section 3) above. The following sections present
the assessment and the final conclusions of the Commis-
sion on each of those doubts.

(a) On the restoration of BE’s viability

(309) The award of restructuring aid requires a feasible, coherent
and far reaching restructuring plan capable of restoring the
long-term viability of the firm within a reasonable time
span and on the basis of realistic assumptions. According
to point 32 of the guidelines, the improvement in viability
must derive mainly from internal measures contained in
the restructuring plan and may be based on external fac-
tors such as variations in prices and demand over which
the company has no influence if the market assumptions
made are generally acknowledged.

(310) Point 33 of the guidelines require the Member State to sub-
mit a restructuring plan describing the circumstances that
led to the company’s difficulties and considering scenarios
reflecting best-case, worst-case and intermediate assump-
tions. Point 34 of the guidelines adds that the plan should

(311)

In its decision to initiate proceedings, the Commission
raised several issues in relation to the restoration of viabil-
ity of BE. These doubts were based on two observations.
Firstly, the time span of certain items of Measure A and of
Measure B seemed unlimited, which raised doubts as to
whether the restructuring plan would allow BE to become
able to face competition again on its own feet within a rea-
sonable time frame. Secondly, it seemed that the restruc-
turing plan did not include enough measures internal to
BE.

D u r a t i o n o f

t h e a i d

(312) The doubts of the Commission related in particular to Mea-
sures A and B. In view of the long duration of Measure A
and the open ended nature of Measure B, the Commission
wondered whether the restructuring aid in favour of BE
was not awarded in the form of an on-going subsidy which
would be contrary to the requirements of the guidelines.
This concern was shared by third parties such as Drax.

(313) As far as Measure B is concerned, the Commission came to
the conclusion that it does not contain state aid in the
sense of Article 87(1) of the EC Treaty. Consequently, the
issue related to the open ended nature of Measure B is no
longer relevant.

(314) As regards Measure A, the Commission was concerned that
the costs related to the decommissioning of the nuclear
plants could arise until 2086 and that the financing of the
costs associated with the management of PWR spent fuel
loaded into the Sizewell B reactor of BE was also
open-ended.

(315) Concerning the decommissioning costs, the Commission
notes that these costs will occur in the future but relate to
the construction of nuclear plants which took place in the
past. The Commission accepts the UK argument that it is
not possible to quantify precisely the amount relating to
decommissioning in view of the absence of precedent for
AGR plants and the fact that it will be done in the distant
future with possible technological evolution. In addition,
the UK Government submits that decommissioning costs
are already largely fixed and that any material increase in
liabilities arising from a discretionary change in operating
procedures for BE’s economic benefit or resulting from a
breach of minimum performance standard will have to be
paid by BE. In addition it is important to recall that the
intervention of the State is foreseen in case of shortfall of
the funding through the NLF.

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(316) Taking into account the particular nature of the nuclear
industry that does not allow the handling of radioactive
material before its radiation rate has reached safer levels
and the inevitable time-scale of financing the decommis-
sioning liabilities, the Commission concludes that part of
Measure A relating to those liabilities cannot be qualified
as on-going subsidy to BE since they are defined and relate
to costs already incurred. A provision for these costs has
already been made in BE’s balance sheet. The Commission
concludes further that the late payment of the aid linked to
these costs cannot be viewed as postponing the restoration
of viability to the future.

(317) Concerning the financing by the State of the management
of PWR fuel loaded into Sizewell B, the Commission recalls
that BE will contribute to the NLF in the amount of GBP
150/kgU for PWR fuel loaded into the Sizewell B reactor
after the Restructuring Effective Date.

(318) This value is certainly lower than the total costs of PWR
spent fuel management, including final disposal. Indeed,
this total cost was estimated by BE itself in its 2001/2002
accounts at GBP 240/kgU. The fact that only a part of these
costs are covered by the BE payments to the NLF confirms
that the NLF contribution to the management of this fuel
contains State aid within the meaning of Article 87(1) of
the EC Treaty.

(319)

In order to decide whether this aid is open-ended, the
Commission must determine the split of the total costs
between avoidable costs and unavoidable costs.

(320) Unavoidable costs are sunk. It is thus economically ratio-
nal for a company to operate as long as it can cover its
avoidable costs, so that as much sunk cost as possible can
be repaid. Granting aid for unavoidable costs therefore
clearly gives an advantage to the beneficiary company in
that it shifts its breakeven point. For companies facing dif-
ficulties, it aims precisely at helping them to return to
viability more quickly. But since the company would oper-
ate in any case as soon as it cover its avoidable costs, aid to
cover unavoidable costs does not result in artificially pro-
longing the life of the company. Such aid is therefore not
open ended.

(322) The UK authorities have indicated that, out of the GBP
240/kgU costs referred to in recital (318), about GBP
[…]/kgU were avoidable. The remaining costs are mostly
related to the unavoidable costs linked to the construction
of the final repository for both historic and future PWR
spent fuel, which will be done on the Sizewell B site. This
repository is scheduled to be available late in this century,
which, in view of the discounting effects, explains the rela-
tively small value of these costs as compared to costs in
other countries.

(323) The figures provided by the Gordon MacKerron report
referred to in footnote 38 cannot be used for the purpose
of cross checking this estimate since the report does not
indicate the extent to which they include unavoidable
costs.

(324)

In order to cross-check the UK authorities’ evaluation, the
Commission has used information available to the public
concerning the Finnish nuclear programme, which is one
of the most transparent nuclear programmes in the world.
Like Sizewell’s waste, the waste produced by Finnish
nuclear reactors will not be reprocessed before it is ulti-
mately disposed of. The costs of the management of Finn-
ish spent fuel is estimated by the Finnish company in
charge of the disposal at EUR 325/kgU (GBP 217/kgU (44)),
of which EUR 217/kgU (GBP 145/kgU) are related to
avoidable costs (45).

(325) The Commission notes that these figures are similar to the
ones provided by the UK authorities. The Commission
considers that they confirm the indication that a GBP
150/kgU payment is sufficient to cover avoidable costs of
spent fuel management, plus a part of the unavoidable
costs thereof.

(326)

In view of the above, the Commission concludes that the
restructuring plan does not provide for an on-going sub-
sidy to BE and that its duration is compatible with the
guidelines in view of the specificities of the nuclear indus-
try and the obligations of the UK under the Euratom
Treaty (46).

C o n t e n t o f

t h e r e s t r u c t u r i n g p l a n

(327) The Commission notes that the UK Government has sub-
mitted a detailed plan containing a market survey and sce-
narios reflecting best-case, worst-case and intermediate
assumptions, as required by point 33 of the guidelines.
They have in addition provided a detailed cash-flow analy-
sis updated in July 2004.

(321)

In contrast, aid aimed at covering avoidable costs, in par-
ticular variable costs, aims at artificially maintaining in
operation a company that would otherwise have no eco-
nomical reason to prolong its activities. Such aid is open-
ended in that it ensures the company’s viability only if it is
not limited in time.

(44) Using a exchange rate of GBP 1= EUR 1,5.
(45) Source: website of Posiva Oy, www.posiva.fi. This estimate is based on
the costs per kg of spent fuel. Translating this value in tons per ura-
nium (loaded prior to use) may very slightly understate the actual
costs since the spent fuel elements also include a small share of non
uranium material in spacers and tubes.

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

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(328) The plan describes in detail the origin of BE’s difficulties
and the measures which have been or will be introduced to
address these as already summarised in paragraph II(2)(c)
of this Decision. The restructuring plan foresees the imple-
mentation of a new trading strategy (Measure E) seeking to
address the unhedged position of BE. In securing more
medium term fixed price sales of its output, BE aims at
reducing the volatility of cash flows and reinforce its long-
term viability. It will also reduce its exposure to wholesale
electricity prices in the United Kingdom whilst continuing
to maintain a reliable route to market through a mixture
of contract terms, access to flexible generation through
Eggborough and the Direct Sales to Business focusing on I
& C consumers. Measures A and B aim at addressing the
issue of the high proportion of non-avoidable costs faced
by BE as a nuclear operator in partly relieving BE from its
historic nuclear liabilities including historic spent fuel
liabilities and decommissioning costs and in reducing its
costs for future front end and back end fuel contracts with
BNFL. In addition, the plan foresees the renegotiation of
three out-of-money purchase agreements and the sale of
BE’s North American assets which should contribute to
solving BE’s problem linked to high shorter term non-
avoidable costs in the form of financing expenses. As
regards the third cause of BE’s difficulties, the significant
unplanned outages, BE has defined a plan, the PIP, designed
to improve the reliability of BE’s nuclear plants. In particu-
lar, the PIP foresees an increased investment in capital and
staff to improve the quality of maintenance and the avail-
ability of its plants. Furthermore one of the vulnerabilities
considered is the scenario where the availability of BE’s
plants’ does not improve. Under that scenario, BE would
still be cash generative.

(329) The financial projections submitted by the UK Govern-
ment indicate that viability would be restored within a rea-
sonable time-scale since BE would be cash generative from
2004 and would have positive annual operating cash flow
from 2005.

(330) On the basis of the above, the Commission concludes that
the restructuring plan addresses the problems at the origin
of BE’s difficulties and is based on realistic assumptions as
required by the guidelines, in particular in view of the evo-
lution of electricity prices and the implementation of the
PIP.

(331)

In its decision to initiate proceedings, the Commission
doubted whether the restoration of viability could be con-
sidered as deriving mainly from internal measures. In par-
ticular, the Commission wondered whether the economies
realised by BE following those measures were only due to
concessions by creditors and suppliers and not any ratio-
nalisation of BE’s activities.

not a real restructuring since it does not derive from inter-
nal measures and gives BE the guarantee that it will never
be allowed to fail. Besides it adds that there is some uncer-
tainty about BE’s contribution to the restructuring and that
closing some nuclear plants would have been a better
option. This last comment is shared by Greenpeace. The
United Kingdom contests this view and replied that the
package is subject to the approval by the Government of
BE’s prospects for viability. The UK Government also made
the point that the guidelines require a balance to be struck
between State contributions, private contributions and the
company’s own contribution but do not mean that the
company must be able to turn itself around without inter-
vention from the State.

(333) The Commission accepts that the restructuring must not
only be based on internal measures but can also include
measures from the State and private parties such as credi-
tors and suppliers. The Commission notes that BE has
already implemented the following measures: it disposed
of its North American assets (Measure F) and […]. From
a commercial point of view, the Commission takes note
of the fact that in line with its new trading strategy (Mea-
sure G), BE has increased the number of medium term
fixed contracts to reduce its unhedged position. Further-
more, BE is not released of its nuclear liabilities but will
contribute to the funding of the NLF.

(334) As explained in section VI(3)(c)(v) below, the Commission
also takes into account the fact that the closure of one or
several BE nuclear plants is not a feasible option and that
disposing of Eggborough would threaten BE’s prospects of
returning to viability and would be disproportionate.

(335) Considering the measures already undertaken and to be
undertaken by BE and taking into account the fact that the
issues at the origin of BE’s difficulties are addressed by the
restructuring plan, the Commission concludes that the
requirement of point 32 of the guidelines is fulfilled.

T h e s p e c i f i c c a s e o f D u n g e n e s s B

(336) Some third parties have questioned in particular the pros-
pects of return to viability of Dungeness B, which is the
oldest of BE’s nuclear plants.

(332) Following the opening of proceedings, Drax commented
on this point. It is of the opinion that BE’s restructuring is

(337) Powergen, the third party which best substantiated its rea-
soning, based its analysis of Dungeness B’s situation on a
review of the power plant’s cost structure as originally sub-
mitted by the UK authorities, and set out in the decision to
inititate proceedings.

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(338) According to Powergen, Dungeness B is a very inefficient
power plant. Historic figures show that its load factor is
small. Powergen estimates it at 46 %. With such a load fac-
tor, the power plant would produce about 4,5 TWh per
year. According to Powergen producing this amount of
electricity would cost about GBP 73,8 million, taking into
account avoidable costs only. Powergen concludes that
Dungeness B’s avoidable costs are about GBP 16,4/MWh
where the electricity baseload price on the wholesale mar-
ket is GBP 16/MWh (47).

(339)

In their comments on Powergen’s analysis, the United
Kingdom authorities gave their own view on Powergen’s
counter analysis of Dungeness B’s viability. According to
the UK authorities, there are two mistakes in Powergen’s
analysis. Firstly, Powergen’s hypothesis on the plant’s total
costs was too low. BE’s data suggests that actual Dungeness
B costs are higher than was estimated by Powergen, in par-
ticular for operation and maintenance costs. This tends to
increase Dungeness B’s costs per MWh.

(340)

In contrast, the UK authorities consider that Dungeness B’s
efficiency record has much improved in recent years. They
claim that, since historical data show it is improving, one
should not take for the future the hypothesis that it will
perform like it did in its worst years, but rather that it will
perform like it did in the most recent years. This would
raise the power plant’s load factor to 61 %. This tends to
decrease Dungeness B’s costs per MWh.

(341) Taking into account both considerations in recitals (339)
and (340), the UK authorities calculate Dungeness B’s
avoidable costs as approximately GBP […]/MWh where
the electricity baseload price on the wholesale market is
GBP […]/MWh.

(342) The Commission has examined Dungeness B’s avoidable
costs, taking into account different hypotheses, depending
on which estimates are correct for total costs and load fac-
tor. It has arrived at the following matrix:

Dungeness B’s avoidable costs per MWh where the electricity baseload price on the wholesale
market is GBP 16/MWh.

Table 8

UK authorities’ hypothesis for costs

Powergen’s hypothesis for costs.

UK authorities’ hypothesis for
output

Powergen’s hypothesis for
output

[…]

[…]

[…]

GBP 16,4/MWh

(343) Taking into account the sharing of the benefit of electric-
ity price increases where the electricity baseload price on
the wholesale market differs from GBP 16/MWh between

BE and BNFL, the Commission has computed the electric-
ity strike price above which Dungeness B covers its avoid-
able costs in the different hypotheses:

Electricity baseload price on the wholesale market above which Dungeness B covers its avoidable
costs

Table 9

UK authorities’ hypothesis for costs

Powergen’s hypothesis for costs.

UK authorities’ hypothesis for
output

Powergen’s hypothesis for
output

[…]

[…]

[…]

GBP 16,8/MWh

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

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(344)

In view of Table 9, it appears that in all but the worst sce-
narios, Dungeness B is able to recover its avoidable costs,
and is therefore not loss making, as soon as the electricity
baseload price on the wholesale market is above about
GBP […]/MWh. This strike price corresponds to baseload
electricity prices on the wholesale market, which, as was
shown in recitals (282) to (285), is now reported as some-
times being well above GBP 20/MWh, and was in any case
always expected to range between 16 and GBP 19/MWh
even in the short term during which Dungeness B will
remain operational. Furthermore, the Commission notes
that, with present electricity prices, Dungeness B is able to
cover its avoidable costs even under the most pessimistic
scenario.

(345) The Commission therefore considers that Dungeness B is

a viable asset.

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

necessary

(346)

In its decision to initiate proceedings, the Commission
expressed doubts as to whether the aid was restricted to the
minimum necessary, because the State aid nature of Mea-
sure B, C and G was not established, and because the exact
amount of aid in Measure A was not fixed.

(347) The Commission notes that it concluded in sections
VI(2)(a) and VI(2)(b) above that Measures B, C and G do not
constitute State aid within the meaning of Article 87(1) of
the EC Treaty. The aid package is therefore restricted to
Measure A only.

(348) Measure A includes State aid aimed at meeting three cat-
egories of liabilities: the management of historic spent fuel,
the management of uncontracted liabilities, and the
decommissioning of nuclear power plants. At the time of
the initiation of proceedings, the liabilities linked to each
of these three categories, and consequently the State aid
attached to them, was only estimated, but not capped.

(349) Liabilities linked to the management of spent fuel repre-
sent the largest share of the total liabilities. They consist in
the payment to BNFL of management services for fuel
loaded in BE’s reactors prior to the restructuring plan’s
effective date. These services are already contracted, and
the amount owed by BE to BNFL in this respect is well
defined in most circumstances.

(350) For this reason, the Commission still considers that the
extent to which these liabilities could be funded by the UK
Government should be capped. The UK authorities have
therefore accepted to turn their original estimate for these
liabilities, namely GBP 2 185 000 000 (48) into a cap for
the aid linked to such liabilities.

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

(351)

In contrast, liabilities linked to the decommissioning of
nuclear power plant and to uncontracted liabilities are dif-
ficult to quantify precisely.

(352) The decommissioning of nuclear plants is a very specific
activity. There is little experience world wide of totally
completed work in this field (49). Experts indicate that such
investments costs or
costs may be 15 % of the total
more (50), or 50 % of the nuclear part of the invest-
ment (51). Even if such estimates proved completely con-
sistent and accurate, one would need to compute the exact
original investment costs in a power plant in order to esti-
mate its decommissioning costs, which would be particu-
larly difficult for old power plants like BE’s, for which costs
history is very imprecise.

(353) Furthermore, most of BE’s plants are AGR plants, which
are not only different from plants existing in other coun-
tries, but also to a certain extent different from each other.
One can therefore not expect to build on experience
acquired either in other countries or in the United King-
dom to improve the accuracy of BE’s reactors’ decommis-
sioning costs estimate.

(354) Similarly, uncontracted liabilities are by their very nature
difficult to determine. They relate mostly to the final dis-
posal of spent fuel. The manner in which nuclear fuel will
be finally disposed of in the United Kingdom remains
uncertain, as the experience of the Nirex Intermediate Level
Waste repository has shown. Experience in other countries
has also shown that finding places to dispose of certain
types of waste can be both technically and politically chal-
lenging. It is very hard to quantify with sufficient precision
the cost of an activity where so little information is avail-
able as to how it will be achieved. Information forwarded
by the UK authorities also shows that estimates of storage
costs by institutions of other Member States may vary
drastically.

(355)

In view of the above, the Commission considers that try-
ing to determine a maximum cost for decommissioning
and uncontracted liabilities would only be possible with a
large margin of error. There would be a serious risk of
overestimating that value.

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

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

(51) Radioactive Waste Management and Decommissioning in an
Enlarged European Union. Derek M. Taylor. 19th Residential Sum-
mer School on Decommissioning and Radioactive Waste Manage-
ment; Cambridge UK; 30 June to 4 July 2003.

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(356) This is why, in this case, the Commission considers that
setting a highly uncertain and probably overestimated
value as a cap for the aid would actually go against the
minimum aid necessary requirement, as uncertainty mar-
gins may, where they do not materialise, turn into scope
for granting unnecessary aid.

(360) For the purpose of computing the amounts referred to in
recitals (350) and (358), the Commission considers that
the normal Commission reference rate should be used.
Nevertheless, given the length of the period concerned the
reference rate should be adapted every five years (53).

(357) A much better way to ensure the fulfilment of the mini-
mum necessary principle would consist in not trying to
compute a cap for the aid but, rather, setting up a mecha-
nism aimed at ensuring that future expenditure will be
restricted to the minimum.

(361)

It is important to note that the cap and threshold referred
to in recitals (350) and (358) apply to all expenditures
made to meet liabilities, be they funded by the NLF or by
the State. This means that the cap and threshold mecha-
nism will automatically take account of moneys available
in the fund.

(358) The UK authorities have therefore undertaken to put in
place a series of mechanisms in this respect. In particular:

(a)

categories of liabilities the cost of which can be taken
over by the State will be precisely defined;

(b)

the UK authorities will closely monitor these costs via
the Nuclear Decommissioning Agency (NDA); This
monitoring will be both ex ante and ex post;

(c) decommissioning activities will be tendered by the
NDA, which will ensure that costs are kept to market
standards;

(d)

the NDA activities themselves will be ultimately con-
trolled by the UK Department of Trade and Industry
and the National Audit Office;

(e)

to further strengthen the Commission’s control on the
spending, the original aggregate estimate of both
liabilities (e.g. GBP 1 629 000 000 (52)) will be used as
a threshold. Should the cumulated expenditure linked
to the two liabilities exceed this threshold, the Com-
mission will receive enhanced reporting both on pay-
ments made to meet liabilities costs and on steps taken
to minimise these costs. This report shall be based on
analysis carried out by independent accounting
experts.

(359)

It could be possible that some very limited payments due
by BE to BNFL in the framework of spent fuel liabilities
exceed their original estimate. This is the case in particular
where some spent fuel elements do not conform to speci-
fication and require special treatment. Indeed, in such a
case, existing arrangements contracts between BE and
BNFL allow the normal spent fuel management price to be
increased. Should this happen, amounts to be paid by the
State to discharge BE from these liabilities in excess of the
original estimate would be counted against the GBP
1 629 000 000 threshold mentioned above, without that
threshold being altered.

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

(362) Finally, the restructuring package also contains a tax disre-
gard with respect to the increase of the accounting value of
BE’s power plants due to the fact that part of the liabilities
that are attached to them will be paid for by the UK Gov-
ernment. Since these liabilities used to be laid down in BE’s
accounts, their partial and potential relief by the UK Gov-
ernment’s undertaking increases their value by an amount
potentially up to the maximum value undertaken by the
UK Government.

(363) Under normal UK accounting and financial rules, this
increase should be taxable. Its disregard by the Govern-
ment is therefore a potential competitive advantage for BE
within the meaning of Article 87(1) of the EC Treaty. How-
ever, the potential taxation would decrease BE’s ability to
fund the liabilities itself, which would in turn increase the
UK Government’s actual liabilities. Hence, all or part of the
State aid element in the tax disregard may be offset by the
increase in the final funding of the liabilities to be met by
the Government. The actual State aid element in the tax
disregard is only equal to that part of the disregard that is
not offset by the increase of payments to be made by the
UK Government to honour its undertaking to meet the
nuclear liabilities.

(364) This increase in power plant value is only artificial, since
the liabilities will still remain until the UK Government
undertaking is called for, and to the extent that it is actu-
ally available, and will have to be met as much as possible
by the NLF to which BE contributes. Furthermore, should
the Government have paid for the shortfall in liability
funding in another way or at another time, for example
through ad hoc grants paid at the time the liabilities were
actually incurred, it is possible that no tax disregard would
have been necessary.

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

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(365)

In view of the above, the Commission considers that the
State aid element in the tax disregard does not go beyond
what is necessary for the aid to meet the restructuring
objective.

(373) However, electricity trade between Member States is lim-
ited by physical constraints due to shortfalls in intercon-
nection capacity. These constraints are all the tighter where
geographical limitations further limit the opportunities for
the development of new interconnectors.

(366) Finally, the Commission notes that any increase in BE’s
profits, like in the case of an increase of electricity prices,
will largely be destined to finance BE’s contribution to the
NLF. Such increase in BE’s contribution would automati-
cally imply a reduction of the amount of aid.

(367) The Commission considers that the mechanisms described
above will altogether ensure that the State aid contained in
Measure A will be reduced to the minimum necessary.

(c) On the avoidance of undue distortion of competition

(368) Point 35 of the guidelines provides that ‘measures must be
taken to mitigate as far as possible any adverse effects of
the aid on competitors’.

(369) Except in exceptional cases where the size of the relevant
market is negligible at Community and at EEA level or the
firm’s share of the relevant market is negligible, such mea-
sures must be implemented in order for the aid element of
a restructuring plan to be compatible with the Common
market. They must take the form of a limitation of the
company’s presence on the market and be in proportion to
the distortive effect of the aid. A relaxation of the need for
these measures may be contemplated where they could
lead to a manifest deterioration in the structure of the
market.

(370) Where they are necessary, the form and extent of compen-
satory measures depend on the market capacity position.
Where there is structural overcapacity on the market, com-
pensatory measures must take the form of an irreversible
reduction of production capacity. Where there is no struc-
tural overcapacity, compensatory measures may still be
required, but they may take other forms than irreversible
reductions of production capacity.

(i) The relevant market

(371) Footnote 20 of the guidelines indicates that the relevant
geographical market usually comprises the EEA or, alter-
natively, any significant part of it if the conditions of com-
petition in this area can be sufficiently distinguished from
other areas of the EEA.

(374) Within the framework of trans-European networks policy,
the Commission has made a list of such bottlenecks in the
internal electricity market. Annex 1 to Decision No
1229/2003/EC of the European Parliament and of the
Council of 26 June 2003 laying down a series of guidelines
for trans-European energy networks and repealing Deci-
sion No 1254/96/EC (54) shows that the United Kingdom
is one of those geographical regions that are insufficiently
connected to the rest of the network for the single market
to function as a whole entity.

(375) On top of its insulation from the rest of the Community’s
electricity network, the United Kingdom’s electricity mar-
ket is further characterised by its very specific trading sys-
tem. This specific trading system, known as the New
Electricity Trading Arrangements (NETA), is based mostly
on bilateral contracts between generators, suppliers and
customers, as opposed to more classical pool markets.
Conditions of competition on NETA are very different
from those on a pool market, as is evidenced by the fact
that the transition in the United Kingdom from a pool
structure to NETA in 2001 resulted in a large drop in elec-
tricity wholesale prices.

(376) At present, NETA covers only England and Wales. How-
ever, the Scottish market is very much linked to NETA via
the indexation of electricity prices in Scotland to prices
witnessed in England and Wales. Furthermore, NETA is
planned to be very soon extended to Scotland. The result-
ing Great Britain market is due to start operations in 2005.
It must be noted though that Scotland will represent only
a small part of this market, as installed capacity in Scot-
land is no more than slightly above 10 % of installed
capacity in England and Wales.

(377) The Northern Ireland electricity market will not be joined
to the Great Britain market in the foreseeable future.
Indeed, electricity links between Great Britain and North-
ern Ireland are for the moment weak (its nominal power is
0,5 GW, which represents less than 1 % of the registered
installed capacity in Great Britain). Competition conditions
in Northern Ireland will therefore remain very different
from those in Great Britain.

(372) Electricity has been traded between Member States for a
long time and in particular since the entry into force of
Directive 96/92/EC.

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

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(378)

In view of the above, and since BE operates only in Great
Britain, the Commission considers that the relevant geo-
graphical market for the purpose of this Decision is Great
Britain (55).

(379) According to figures submitted by the UK authorities, the
total installed capacity in the 15 States that were Members
States at the time the restructuring plan was notified is
about 565 GW. The total registered installed capacity in
Great Britain is about 10 % of that value. Furthermore, the
United Kingdom market, of which the Great Britain mar-
ket represents about 95 %, is one of the largest in the EEA,
second only to those of Germany and France. It can there-
fore not be considered that this market is negligible at
Community and EEA level.

(380) BE’s capacity represents about 14 % of the registered capac-
ity in England and Wales and about 24 % in Scotland. BE
can therefore not be considered to have a negligible share
of the relevant market.

(381) To conclude, there are many other actors in the relevant
market than BE: BNFL, EDF-Energy, Innogy, Scottish and
Southern Electricity, Scottish Power and Powergen to name
only a few major ones. Should BE disappear, the relevant
market would neither become a monopoly, nor a tight
oligopoly.

(382) The findings above confirm the Commission’s initial mar-
ket analysis as described in the Decision to initiate proceed-
ings. The Commission notes that none of the third parties
that submitted comments questioned these preliminary
findings.

(ii) Capacity situation on the market

A s s e s s m e n t
e l e c t r i c i t y p r i c e s

i n v i e w o f

t h e

e v o l u t i o n o f

(384) The Commission noted that the capacity margin existed on
the relevant market was not particularly high as compared
to international standards and to past values. It noted how-
ever that there might have been room for a small decrease
in that capacity margin as compared to a few other Mem-
ber States or to values in the United Kingdom in
1995/1996.

(385) Third parties’ comments as regards the existence of struc-
tural overcapacity have focused on the evolution of prices,
and on the assessment of the existing capacity margin in
Great Britain.

(386) Some third parties have indicated that there was a link
between the evolution of electricity prices and the exist-
ence of structural overcapacity on the market. They con-
sider that in such a competitive market as NETA, price
plays the role of a signal for the need of new capacity.
Where new capacity would be needed at a specific period
in the future, the foreseen shortfall in capacity for this
period would trigger an increase of corresponding forward
prices. Prices would reach such a level as to enable the
recovery of new plant construction costs, which would
trigger new entry on the market.

(387) At present, according to these third parties, although they
have been increasing in the recent past, prices would not
yet have reached a sufficient level to trigger new entry. This
would demonstrate that there is overcapacity on the
market.

(388) The Commission acknowledges that there is a relationship
between prices on a market and the capacity situation on
that market. However, it considers that electricity markets
like NETA are too complex to allow a definitive conclusion
to be drawn as to the existence of structural overcapacity
on the market on the basis only of price observation.

(383)

In its decision to initiate proceedings, the Commission
made it clear that the assessment of the capacity situation
of an electricity market should take account of the physi-
cal specificities of electricity, and of the potentially enor-
mous disturbance that electricity black-outs can create
both for the economy and for citizens’ everyday life. The
assessment of the existence of structural overcapacity
should therefore include a sufficient capacity margin such
as to allow the satisfaction of peak demand under any rea-
sonable scenario.

(55) This conclusion is in addition in line with the one drawn by the Com-
mission in the Merger cases where the geographic market was con-
sidered as national.

(389) Firstly, unlike in markets structured around a pool, there is
no such thing as a clearing price in NETA. NETA is based
around bilateral contracts, that may take very different
forms, and that do not always provide very transparent
price reporting mechanisms. Power exchanges like UKPX
are more transparent, but they do not represent a sufficient
share of the market to make it possible to to draw signifi-
cant conclusions. Furthermore, they focus on short term
trade and are hence of limited use for gaining knowledge
on future trends. One therefore has to rely on price indexes
reported by independent sources like Heren or Argus.
These price indexes themselves have their limits, since they
represent only the wholesale market, which is about two
thirds of the total exchanged electricity, and are therefore
unable to catch non extreme shortfalls in foreseen electric-
ity generation.

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(390) Secondly, the reasoning in recital (389) is based on the
assumption that forward prices represent faithfully the
market situation in the future. The Commission considers
this might not always be the case. As a matter of fact, these
prices reflect a more complex situation, rather based upon
what both the buyer and the seller think their position will
be in the future. This means that they are based on expec-
tations on the future market, which can be very far from
the reality, since both demand and offer are subject to
many fluctuations on this market. In other words, forward
prices do not really represent the balance between demand
and offer in the future, but rather what current actors think
the balance will be. Aside from fuel price fluctuation, this
is one of the reasons why forward prices can fluctuate a lot
with time, even for a fixed period in the future.

A s s e s s m e n t

i n v i e w o f c a p a c i t y m a r g i n

(394) The Commission trusts that the existence of overcapacity
is easier to assess by analysing the actual physical figures
of installed capacity and peak demand. The margin by
which installed capacity exceeds average cold spell peak
demand (58) is known as the system’s capacity margin. In
this framework, to assess whether the market is in struc-
tural overcapacity means to assess whether the present and
foreseen capacity margin is adequate.

(391) Thirdly, even if one accepts that reported prices are totally
pertinent and reflect faithfully the offer and demand, there
is a logical gap between the conclusion that prices do not
allow the full repayment of new entrants’ costs and the
conclusion that there is overcapacity on the market, and
even more so that there is structural overcapacity on the
market.

(395)

It is obvious that setting a definitive quantitative norm for
adequate capacity margin is a very difficult task. The norm
would have to depend on a number of parameters that
vary from one network to the other. It would also depend
very much on the level of security of supply to be achieved,
which would in turn be linked to less objective notions,
like the psychological impact of a given period without
electricity in a specific region.

(392)

In view of the above, the Commission considers that the
observation of prices alone is not a sufficiently reliable
indicator to decide whether an electricity market such as
NETA is in a situation of structural overcapacity.

(393) The Commission notes however that since the time BE
encountered difficulties, winter forward prices have very
much increased. Various price reporting agencies have
reported values above GBP 20/MWh for winter baseload
prices in the next few years, even reaching figures as high
as GBP 27/MWh (56). The upward trend seems to be con-
tinuing and sustainable. New entrant costs estimates range
between GBP 20/MWh and GBP 25/MWh (57).

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

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

(396) Furthermore, even if all physical and psychological param-
eters were under control, the necessary capacity margin
would certainly also depend very much on market struc-
ture. Some experts believe that more liberalised markets
need less capacity margin than strongly regulated centra-
lised markets, although most agree that quantifying this
effect is not possible at present in view of the lack of his-
torical evidence.

(397) Also, comments by third parties provide different views on
the capacity margin that should be adequate for Great Brit-
ain. Most of the comments which address this issue quote
figures from the England and Wales network operator’s
(NGTransco) Seven Year Statements. In these statements,
NGTransco states that it considers that a 20 % capacity
margin should be the nominal benchmark for planning
purposes. It hints though that smaller capacity margin
could be possible for real time management of the system,
and refers to a possible 10 % figure for such a use.

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

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(398) Drax and Greenpeace have suggested that this 10 % figure
should be used as the proper reference for adequate capac-
ity margin for the purpose of the assessment of the exist-
ence of structural overcapacity. Other organisations have
preferred to keep the reference to the 20 % figure, includ-
ing institutes commissioned by Greenpeace to provide
reports on the subject (59).

that shares a border with England, considers the intercon-
nection’s capacity to be dedicated to export. In view of the
above, and to be consistent with both past experience and
the hypothesis put forward by the local operators, the
Commission will consider in the rest of this Decision that
the England and Wales/Scotland interconnector’s capacity
is attributed to England and Wales.

(399)

In its own observations, NGTransco made it clear which of
the two figures it considered should be used for the pur-
pose of assessing the existence of structural overcapacity,
by stating ‘In our role as System Operator for England and
Wales, we would consider that any plant margin below the
20 % level can not represent overcapacity within the
England and Wales market’.

(403) There is only one network operator for the whole of
England and Wales: NGTransco. The Commission has
based its analysis of the capacity situation on this segment
on NGTransco’s forecast, which are published periodically
in the company’s Seven Year Statement.

(400)

In view of the above, the Commission considers that the
20 % level is a proper benchmark to assess the capacity
situation in the England and Wales market. Although the
Scotland market will soon be joined to the England and
Wales market, it is still very much physically segregated
from it. The 2 200 MW interconnection between the two
regions is too small to allow a completely flexible use to
balance each region’s lack or excess of power. As a matter
of fact, it is nearly always used for export of energy from
Scotland to England and Wales. Because of this major con-
straint, the Commission considers that the 20 % bench-
mark should be increased while considering the global
Great Britain figures.

E n g l a n d a n d W a l e s

(401) The England and Wales market is by far the largest geo-
graphical segment of the Great Britain market. It is also the
segment on which most of the economical data are set,
since prices in Scotland are set in line with the England and
Wales data. The vast majority of third parties’ comments
also concentrate on the England and Wales segment. The
Commission has therefore begun its analysis of the market
with this segment.

(402) Historical experience has proven that the interconnector
between the two segments was nearly only used for export
from Scotland to England and Wales. NGTransco consid-
ers this interconnectors’ capacity as a source of power for
England and Wales. Conversely, Scottish Power, which is
the Scottish operator responsible for the part of Scotland

(404) Since the opening of proceedings, NGTransco has revised
its forecast for capacity margin in the England and Wales
market. A new forecast was sent to the Commission with
NGTransco’s submission. An even newer version of the
same forecast has been published by NGTransco in its
2004 Seven Year Statement (60).

(405) The Commission used this later newer version for the pur-
pose of its analysis. Indeed, this newer version is based on
the same fundamental hypothesis, in particular for input
data, as that taken in the forecast that was considered as
relevant by NGTransco in its submission to the Commis-
sion. It only incorporates more up to date input on market
development.

(406) This forecast envisages three scenarios. The most optimis-
tic scenario (SYS background) assumes that generation
availability will correspond to signed transmission con-
tracts. The most pessimistic scenario (‘existing or under
construction background’) assumes that no plants other
than existing ones and plants currently under construction
will be available. The intermediate scenario (‘consents back-
ground’) assumes that available plants will be the existing
ones, the ones already under construction and the ones for
which necessary consents under the Electricity Act and the
Energy Act have already been granted.

(407) The following chart summarises the forecast in the three

scenarios.

(59) 20 % in report The Closure of British Energy’s UK Nuclear Power Plants’
by John H Large from Large & Associates, April 2003, attached to
Greenpeace’s submission. 20 % in report The closure of British Energy’s
UK nuclear power stations by ILEX energy consulting, September 2002,
attached to Greenpeace’s submission.

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

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

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Table 10

2004 NGTransco capacity margin scenarios for England and Wales

Scenario

2004/05

2005/06

2006/07

2007/08

2008/09

2009/10

2010/11

SYS background

Consents background

Existing and under construction
background

22

22

22

21

23,1

26,8

24,5

25,6

22,5

21,1

22,8

24,3

21,6

22,5

19,1

21,1

18,7

17,1

14,5

12,8

9,5

Note: Capacity margin is over ACS peak demand. Interconnectors with France and Scotland are assumed to be fully used for import.

(408) The three scenarios differ principally on the latest years,
which is not surprising in view of the fact that their under-
lying hypotheses make differences mainly in the future.
However, these years are not as relevant to assess the exist-
ence of structural overcapacity at present on the market.

(411) The Commission concludes from the above that there is no
structural overcapacity on the England and Wales electric-
ity market.

(409)

In the next three years, the three scenarios foresee a capac-
ity margin between 18,7 and 23,1 %, with an average of
around 21,5 %. This value is slightly above the 20 % bench-
mark. However, the difference between 21,5 and 20 % of
the ACS peak demand is 1,5 % of 57 000 MW (61), that is,
855 MW. This value is smaller than any of British Energy’s
nuclear plants’ capacity. As it is furthermore the result of a
statistical average, the Commission considers that it can-
not be deemed to be statistically significant enough to rep-
resent a structural overcapacity.

(410)

In the following years, the difference between the three sce-
narios grows, which makes it even more difficult to draw
meaningful conclusions from them. However, the Com-
mission notes that during these years the average of the
three scenarios fluctuates between 17,0 and 22,7 %, with
two years at around 20,2 % This seems to indicate that
there is an overall tendency for the capacity margin to stay
very much around 20 %, including some margin of error.

(61) 57 000 MW is the average of the forecast ACS peak demand for the

three years concerned.

G l o b a l G r e a t B r i t a i n

(412)

In contrast with England and Wales, there are two network
operators in Scotland: Scottish and Southern Electricity
and Scottish Power. These two operators publish forecasts
for their own regional area. These forecasts are however
less detailed than NGTransco’s as to possible scenarios for
the future. For these reasons, the Commission has concen-
trated its analysis for Scotland on the present situation, for
which there is less need to envisage various scenarios.

(413) Since neither of the two Scottish operators has submitted
comments to the Commission in the context of these pro-
ceedings, the analysis is based on documents available to
the public. For Scottish and Southern Electricity, the Com-
mission used the figures provided in its 2003 Seven-year
Statement (62). For Scottish Power, the Commission used
the figures provided in its April 2003 Transmission Seven-
year Statement (63).

(414) The following chart summarises forecast peak demand and
installed capacity in the various geographical regions for
2004/2005.

(62) Available at

http://www.scottish-southern.co.uk/popups/7yearstatement.asp.

(63) Available at

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

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Great Britain Capacity and demand forecasts for 2004/2005. All figures are in MW

Table 11

Capacity connected to Scottish Power’s network

Capacity connected to Scottish and Southern Electricity’s network

Capacity connected to NGTransco’s network, excluding interconnectors

Ireland/Scotland interconnector capacity

France/England interconnector capacity

Available capacity in Great Britain

Maximum demand in Scottish Power’s zone

Maximum demand in Scottish and Southern Electricity’s zone

ACS peak demand in NGTransco’s zone

Aggregate peak demand (64)

7 127

2 844

63 998

500

2 000

76 469

4 269

1 684

55 900

61 853

(415) Capacity margin for Great Britain is therefore about
23,6 % (65). This figure is higher than the 20 % benchmark
referred to in recital (400), but as was noted, the 20 %
benchmark that applies to a flexible network such as the
one in England and Wales has to be increased to accom-
modate constraints in networks with bottlenecks. Further-
more, these figures are computed on the hypothesis that
both interconnectors with Northern Ireland and France are
available at full capacity for imports, which is not always
granted. Should these interconnectors be used for export at
the time of ACS peak demand, their capacity should be
netted of the available capacity, and at the same time added
to the power demand, which would decrease the capacity
margin to 15,5 %.

(416)

In view of the above, the Commission considers that there
is no statistically significant structural overcapacity on the
Great Britain market.

C o n c l u s i o n

(417)

In view of the above, the Commission judges that there is
no structural overcapacity on the relevant market.

(418) Compensatory measures in the form of irreversible reduc-
tion of production capacity are therefore not mandatory.

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

(65) 76 469 exceeds 61 853 by 23,6 %.

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

market

(419) Since there is no structural overcapacity on the relevant
market, the Commission must assess the necessity of com-
pensatory measures and the form they should take on the
case’s merit. Possible compensatory measures must take
account of the potentially distortive effects of the aid on
competition.

(420)

‘The UK authorities argue that the aid package has no
impact on competition. According to them, within NETA,
power plants’ economical ability to generate is determined
by their short run marginal costs (SRMC). At a given time,
the market operates as if power plants were called by their
SRMC ranking, from the lowest to the largest, until their
cumulated capacity reaches demand. Electricity price at
that time is set by the SRMC of the last power plant called,
which is known as the marginal power plant.

(421) According to the UK authorities, the aid is aimed solely at
the nuclear plants. It would not change their SRMC to such
an extent as to modify their rank in the SRMC order. Fur-
thermore, BE’s nuclear plants’ SRMC would be such that
they are at all times below the marginal plant’s SRMC. The
aid would never have an impact on BE’s competitors’ abil-
ity to generate, nor the price at which they can sell the elec-
tricity generated. There would therefore be no impact on
BE’s competitors.

(422) The Commission considers that the UK authorities’ reason-
ing might hold in a perfect market based on a single totally
transparent auctioning process. However, as was explained
in recitals (389) and (390), NETA is not such a market.

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(423) The Commission considers that the aid may have an impact
on BE’s competitors in many ways. Two of them might
have a major impact on competition.

(424) Firstly, BE does not only own nuclear power plants. It also
owns the Eggborough coal fired plant, which is by itself as
big as some of BE’s competitors’ total capacity.

(425) BE could use the aid it receives for its nuclear plants for the

benefit of the Eggborough power plant.

(426) For instance, it could use this money in order to fit Egg-
borough with flue gas desulphurisation devices that would
allow it to comply with new environment regulations,
which would in turn extend significantly the plant’s
lifetime.

(433) Therefore, even though BE’s plants’ SRMC ranking might
remain the same and hence not have any impact on its
competitors’ load, the variation of their level will allow BE
to shift part of its sales from the wholesale market to the
DSB market. This in turn will shift part of the competitors’
output from the DSB to the wholesale market. In this way,
the aid might increase BE’s profits and decrease those of its
competitors.

(434)

In view of the above, the Commission considers that the
aid has a significant impact on BE’s competitors, and that
compensatory measures are necessary to mitigate this
impact.

(iv) Compensatory measures to be implemented

(427) Alternatively, BE could also use the funds made available
by the aid in order to purchase more non-nuclear genera-
tion assets.

(435) Compensatory measures must strike a balance between the
need to mitigate the impact of the aid on competitors and
the need to preserve the beneficiary company’s prospects
of viability.

(428) Admittedly, BE needs some flexible source of electricity
generation to compensate for its nuclear stations’ inflex-
ibility. Whenever the aid allows BE to extend its non
nuclear portfolio, it allows it to have more internal access
to flexible generation, and therefore increases its possibil-
ity to offer better deals to its customers, while at the same
time decreasing its need to purchase flexible generation
from its competitors.

(429) Secondly, NETA is not a single market. NETA comprises in
particular a wholesale market segment, in which genera-
tors sell electricity to suppliers and a direct sales to busi-
ness (DSB) segment, in which generators sell electricity
directly to large end users.

(430) Generators generally sell electricity on the DSB market
with a premium over the wholesale market (66). It is thus
preferable for a generator to sell electricity on the DSB
market segment.

(436) For this purpose, the Commission considers that compen-
satory measures should target precisely the mechanisms by
which the aid could be detrimental to BE’s competitors.

(437) This means that compensatory measures in this case
should aim at ensuring that BE will not use the aid granted
by the Government for the purpose of unduly increasing
its flexible generation portfolio or gaining DSB market
shares.

(438) This goal has lead the Commission to ask for three com-
pensatory measures. These compensatory measures were
proposed by the UK authorities on the basis of the mea-
sures suggested by BE’s competitors in their submission.

C o m p e n s a t o r y m e a s u r e N o 1 .

(431) While analysing the impact of the aid, one should there-
fore consider not only the global amount of electricity sold
by each generator, but also the spread of its sales on the
wholesale and DSB market segments.

(439) As was explained in recital (437), one way the aid could
potentially have a greater impact on BE’s competitors
would be if, instead of paying for charges incurred by BE’s
nuclear fleet as intended, it was used for the purpose of
improving BE’s non nuclear generation capacity.

(432) One element of the BE restructuring plan aims to increase
the company’s share in the DSB segment. In order to do so,
the company will have to try to offer DSB customers a
competitively low premium over wholesale electricity
prices. BE will be able to finance part or whole of this com-
petitive offer via the decrease in its nuclear plants’ SRMC.

(440) This would allow BE to compete with its competitors’
plants more easily (67), and would give it more access to
flexible generation than it presently has, which would in
turn decrease BE’s need to purchase this flexibility from
outside.

(66) This can remain beneficial for the customer since there is no inter-

(67) Except BNFL, none of BE’s competitors operates nuclear reactors in

mediary between the generator and the customer.

Great Britain.

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(441)

In order to avoid this possibility, BE’s different businesses
should be separated into different legal entities with sepa-
rate accounts.

(450)

In order to cope with those concerns, a series of prohibi-
tions should be imposed on BE as regards its possible
expansion in the generation fields where its competitors
are active.

(442) For this purpose, BE’s structure should be modified in such
a way that nuclear generation, non-nuclear generation,
sales to the wholesale market and DSB sales are established
in separate subsidiaries. The aid should be attributed solely
to the nuclear generation business.

(451) For that purpose, a specific type of capacity should be iden-
tified (‘Restricted Capacity’). That capacity is composed of:

(443) Cross subsidisation between the various subsidiaries

should be forbidden.

(a)

registered operational fossil-fuelled capacity located in
the European Economic Area,

(444) This prohibition should be implemented as much as pos-
sible through the companies’ licensing regime and as such
monitored by the Great Britain electricity system regula-
tor: OFGEM. However, the Commission recognises that
operators’ licences cannot be modified freely by OFGEM,
which has a duty to consult third parties on such modifi-
cations and take account of comments received.

(445) Should it not be possible for OFGEM to modify one of BE’s
licences in such a way as to forbid cross subsidisation, the
UK Government should provide the Commission with a
not limited in time undertaking with the same effect. In
such a case, in order to further ensure that trade between
the subsidiaries does not involve elements of cross-subsidy,
the UK authorities should provide the Commission with an
annual report displaying evidence that no such cross sub-
sidy has occurred. The report should be based on an analy-
sis by independent accounting experts.

(446) The UK authorities have undertaken to implement this

compensatory measure.

and

(b)

registered operational large scale hydro (68) capacity
located in the United Kingdom.

(452) BE should be prohibited, for a period of six year from the
date of this Decision, from owning or having the right of
control over Restricted Capacity in excess of 2 020MW,
its existing Eggborough
which is
(1 970 MW) and District Energy (50 MW) stations.

the capacity of

(453) The reason for the need to prohibit any increase in BE’s fos-
sil fuel capacity was explained in recital (437). The Com-
mission considers that there is a need to extend the
prohibition to large scale hydroelectric stations to avoid
any risk that BE might acquire existing large scale hydro
stations especially in Scotland.

C o m p e n s a t o r y m e a s u r e N o 2 .

(454) The prohibition should last for six years, which is roughly
twice the time necessary for the construction of a com-
bined cycle gas turbine power plant.

(447) Compensatory measure No 1 should in principle be suffi-
cient to ensure that BE does not use the aid it receives for
its nuclear reactors to improve or enlarge its existing non-
nuclear fleet.

(455) The objective of the prohibition is to prevent BE from
acquiring more flexibility than it presently has with its Egg-
borough power plant, which should be sufficient to ensure
its viability.

(448) However, in view of the complexity of the electricity sec-
tor and in particular of the very large range of possible rela-
tionships between the different actors that NETA allows,
the Commission considers that it is necessary to enforce
other, more specific, measures, to further ensure that BE
does not use the aid it receives for its nuclear reactors in
other fields of its business.

(449) Furthermore, although the capacity situation in the mar-
ket does not make it economically sound to impose capac-
ity reductions upon BE, the Commission judges that BE
should nevertheless be required not to increase the scope
of its activities.

(456) However, the Commission is aware that, under the restruc-
turing plan, the bank syndicate that provided finance for
the Eggborough project will retain the option to purchase
Eggborough from BE. Should the banks decide to exercise
this option, BE would be deprived of its only source of flex-
ibility, which the Commission recognises is necessary for
the success restructuring plan. In this case, BE should be
allowed to prepare for the replacement of Eggborough as
soon as it receives notice from the banks of their intention
to exercise their option.

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

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(457) For this reason, the Commission considers that there
should be some exception to the prohibition in the event
that the banks exercise their option, in order to allow BE
to acquire a source of flexibility to replace Eggborough, or
in the event that Eggborough becomes definitively unavail-
able for a reason outside BE’s control. This should not
however have the ultimate effect of allowing BE to acquire
more flexibility capacity than it presently has, nor to use
this replacement capacity to make profit during the pos-
sible overlap period between the end of its construction
and the disposal of Eggborough.

(458)

In view of the above, BE should be allowed to own or have
rights of control over more than 2 020 MW of Restricted
Capacity, for the period between the date on which it
receives the notice from the banks and the date on which
Eggborough’s capacity is no longer available to BE, or the
end of the six year period referred to in recital (452) if ear-
lier than the date on which where Eggborough’s capacity
is no longer available to BE, under the condition that it
does not operate the Restricted Capacity in excess of
2 020 MW or that it divests itself of all operational control
and interest in that excess Restricted Capacity.

(459) From the time Eggborough becomes unavailable to BE,
either as referred to in recital (458) or after an event of
force majeure or an irreparable failure, BE should be
allowed to own or have right of control of up to 2 222 MW
of Restricted Capacity, under the condition that, until the
end of the 6 year period referred to in recital (452), it
declares its Restricted Capacity to the network operator as
2 020 MW and does not operate more than 2 020 MW of
this capacity. This provision aims at allowing BE to have
more flexibility for the replacement of Eggborough, with-
out relaxing the prohibition in practice.

(460) Finally, on top of the restrictions on Restricted Capacity as
defined in recital (451), and in order to respect the philoso-
phy of the guidelines on the necessity not to allow benefi-
ciaries to use the State aid for the purpose of extending
their market share, BE should also be forbidden to own
nuclear generation assets other than those it presently
owns,
in the European Economic Area, without prior
authorisation by the Commission, for six years following
the date of adoption of this Decision.

(461) The UK authorities have undertaken to implement this

compensatory measure.

C o m p e n s a t o r y m e a s u r e N o 3 .

(462) As was explained in recital (437), the aid would also be
misused if, instead of aiming at covering BE’s nuclear reac-
tors charges, it was used by BE to unduly acquire shares in
the more profitable DSB market.

(463) The sensitivity of this potential misuse is particularly dem-
onstrated by the content of the comments sent to the
Commission by a third party that wished to remain anony-
mous (69). Even if BE does not actually offer prices abnor-
mally below market standards, the very suggestion that it
might be able to do so thanks to the aid could also be
harmful for BE’s competitors, since they would have to
face customers with commercially incorrect expectations.

(464) The Commission therefore considers that it is necessary to
reinforce the guarantees already offered by Compensatory
measure No 1 by a more specific compensatory measure
aimed at BE’s behaviour on the DSB market. BE should be
required not to act on this market in ways that are not
similar to its competitors’ standard.

(465) To ensure this, BE should be forbidden to offer prices
below the prevailing wholesale market prices on the DSB
market. The duration of this measure should be six years
from the date of this decision, as for Compensatory mea-
sure No 2.

(466) The compliance of BE with the prohibition should be
monitored by an independent body to be selected via a
transparent tendering process organised by the UK authori-
ties. The independent body should report annually to the
Commission.

(467)

In the past, DSB market prices have always followed the
evolution of wholesale market prices with a premium. This
prohibition will therefore ensure that BE does not behave
commercially in a different way from that of
its
competitors.

(468) However, NETA is only three years old. It is not impossible
that, in the upcoming 6 years, the relationship between the
DSB and the wholesale market could during some times
differ from what has been experienced until today. One
could imagine for instance that the wholesale market could
become illiquid for some period, which could lead to
abnormally high prices on this market. In this case, the
Commission considers that in order not to lose their cus-
tomers, generators would certainly offer prices on the DSB
market that would be somewhat below the wholesale mar-
ket price. If such a thing happened and BE did not have the
capacity to react accordingly, it would be likely to lose its
customer base on the DSB market, which would put its
restructuring goal in peril.

(469)

It is therefore necessary that BE be left some flexibility to
accommodate such exceptional events.
Its margin of
manoeuvre should however be very limited, described in
objective terms, and monitored carefully to avoid any
abuse. Criteria to allow BE to use its flexibility margin
should be testable ex ante in order to avoid any abuse.

(69) See recital (186) above.

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(470) Since there is much less reliable reporting for DSB market
prices than for wholesale market prices, it is very difficult
to know during a DSB contract round whether DSB mar-
ket prices will be offered below the wholesale market
price. This means that the objective criteria referred to in
recital (469) cannot be directly based on checking whether
BE’s competitors offer DSB prices under wholesale market
prices. Instead, tests must rely on indirect indications that
are accessible in the short term to BE, and that could sig-
nal that the wholesale market has become illiquid and that
pricing at or above the wholesale market price on the DSB
market is no longer commercially viable.

(471) The tests should be the following:

(a)

in any period of […], (ending not more than […]
before the date BE invokes exceptional market circum-
stances) […] of those existing BE non-domestic end-
users to whom BE has made offers of supply on terms
where the margin on the supply of energy element of
the contract over the prevailing wholesale price is […]
have rejected BE’s offer;

(b) volumes traded in the wholesale electricity market
over a […] period have dropped to less than […] of
the average of those traded in the same period in the
last […] for which data is available;

(c) BE offers to supply a minimum of […] of electricity in
the wholesale market […] and that volume is not sold
within a period of […] hours.

(472) The same independent body that monitors the compliance
of BE with the prohibition should be responsible for check-
ing whether BE is aware that the tests have been fulfilled.
The independent body will verify that test (a) together with
either test (b) or (c) is fulfilled. If it is indeed the case, BE
should be entitled to price on the DSB market below
wholesale market price for […] from the independent
body’s decision That time limit may be extended by a deci-
sion of the independent body if exceptional market condi-
tions continue to prevail. During the […], BE should be
obliged to behave in good faith and offer discounts that are
comparable to what it can reasonably consider its competi-
tors offer. The independent body should assess the com-
pliance of BE with this criterion ex post, where the […] is
over.

(473) For the sake of

transparency,

the independent body
should publish a statement at the end of the contract
rounds confirming that the exceptional market circum-
stances actually occurred, and specifying the duration of
the period of the exceptional circumstances. Details of the
assessment should be forwarded to the Commission.

(474) The UK authorities have agreed to implement this compen-

satory measure.

(v) Compensatory measures that were considered by the

Commission but rejected

(475) The Commission judges that the three compensatory
measures described in section 0 are sufficient in scope to
mitigate the potentially distortive effect of the aid on com-
petition, and thus meet the requirements of point 39(ii) of
the guidelines. They are also to be considered as specific
conditions attached to the authorisation of aid within the
meaning of point (42)(ii) of those guidelines.

(476) Other possible compensatory measures had been sug-

gested by third parties.

(477) Greenpeace suggested that BE’s nuclear plants be closed in
a phased process. The Commission considers that in view
of the absence of overcapacity on the relevant market,
requesting the closure of BE’s generating assets would be
disproportionate to the distortion of competition that the
aid generates.

(478) Powergen suggested that the Dungeness B reactor could be
closed, since it is the least profitable BE asset. The viability
of Dungeness B was already discussed in section VI(3)(a)
above. The Commission notes that it is already planned to
close Dungeness B in 2008 and that according to data pro-
vided by NGTransco on the notice necessary for significant
closures, Dungeness B could at best be closed in mid 2007.
The Commission considers that such a small shift would
not justify the expenses that it would cause.

(479) Drax suggested to remove BE’s nuclear assets 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. This would mean that
BE would become in practice totally and indefinitely
assisted by the State which would be in total opposition
with the Community competition policy.

(480) Drax suggested allowing BNFL a greater share of BE’s
potential profits if electricity prices grow in order to
decrease the amount of aid. As was discussed in section
VI(2)(b) above, the Commission came to the conclusion
that Measure B did not include State aid elements. Allow-
ing BNFL more of BE’s possible upside would have the
effect of increasing the aid since it would decrease BE’s free
cash-flow and hence its contribution to the NLF. This can-
not be accepted by the Commission.

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(481) Drax suggested that the Eggborough plant should be
divested. The Commission acknowledges that the divest-
ment of Eggborough would not run against the necessity
to preserve a capacity margin in the electricity system since
the power plant would very probably still be operated by
its new owner. However, in order to be able to achieve its
restructuring plan and restore its viability, BE needs to have
access to some source of flexible electricity generation.
Should BE sell Eggborough, it would have to acquire this
flexibility from outside sources.

(482) On the basis of trials, the UK authorities came to the con-
clusion that it would not be economic for BE to purchase
the services it gets from Eggborough from other genera-
tors. These services consist in insurance against nuclear
reactors unexpected failures, power shaping for business
contracts and flexibility to meet planned maintenance of
reactors. The UK authorities have indicated that BE would
save in total GBP 11million a year by keeping Eggborough.
This estimate is based on Eggborough’s costs, which means
that BE could possibly get the same services at the same
costs only by owning another plants. Purchasing the ser-
vices on the market would be much more expensive, if
indeed possible.

(483)

In view of the above, the Commission considers that
requiring BE to divest Eggborough would threaten BE’s
prospects of returning to viability and would be dispropor-
tionate. The Commission judges that Compensatory mea-
sures No 1 and No 2 above impose the same type of
restriction in a more proportionate way.

(484) Powergen suggested imposing a cap on BE’s DSB market
share. The Commission considers that imposing such a cap
would be detrimental to competition on this market. Com-
pensatory measure No 3 will be more efficient in mitigat-
ing the impact of the aid on competitors on this market
without restricting BE’s ability to offer competitive deals on
the market on its own feet.

(485) Powergen suggested forbidding BE to enter new retail mar-
kets. This suggested measure would mostly affect the
households’ market, which is at present served only by
suppliers. The Commission considers that such a restric-
tion would deprive customers of a possible source of com-
petition in a market which is already the least competitive
part of the UK electricity market (70). The Commission
considers that Compensatory measure No 1 will be in this
respect sufficient to ensure that, should BE wish to enter
this market, it would do so on the basis of its own strength,
without undue distortion of competition.

(486) To conclude, the Commission considers that all other com-
pensatory measures suggested by third parties that submit-
ted comments are embedded in the three compensatory
measures that were selected by the Commission.

(d) Full implementation of the restructuring plan

(487) The company should be required fully to implement the
restructuring plan submitted to the Commission. The UK
Government committed to ensure full implementation of
the restructuring plan if approved.

(e) Monitoring and annual report

(488)

If the aid package is approved, the UK Government com-
mitted to provide to the Commission a report not later
than six months after the approval of the Aid Package and
thereafter annual reports so that the Commission can
monitor BE’s progress until the position has stabilised to a
point at which the Commission no longer feels the need
for further reports.

VII. CONCLUSION

(489) The Commission concludes that, insofar as they fulfil the
guidelines in respect of restructuring aid and are in line
with the objectives of the Euratom Treaty, the aids in ques-
tionnaire compatible with the common market.

HAS ADOPTED THIS DECISION:

Article 1

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

(a) The payment of liabilities related to the management of spent
fuel loaded in British Energy’s nuclear reactors prior to the
restructuring plan’s effective date, as long as expenditures
related to these liabilities, with the exception of Incremental
Historic Liabilities as defined in the Historic Liabilities Fund-
ing Agreement between British Energy and the United King-
dom Government, do not exceed 2 185 000 000 GBP in
December 2002 value;

and

(b) Any shortfall of the Nuclear Liabilities Fund as regards the
payment of liabilities related to British Energy’s nuclear assets
decommissioning, British Energy’s uncontracted liabilities
and the Incremental Historic Liabilities as defined in the His-
toric Liabilities Funding Agreement between British Energy
and the United Kingdom Government,

(70) See in that sense Energywatch Annual report April 2002-March

2003, available at
http://www.energywatch.org.uk/uploads/20022003_Annual_Report.pdf.

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

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Article 2

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

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

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

The United Kingdom shall inform the Commission as soon

3.
as undertakings in paragraphs 1 and 2 are implemented.

Article 3

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

Article 6

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

— registered operational fossil-fuelled generating capacity (71) in

the European Economic Area,

Article 4

or

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

Article 5

The United Kingdom shall require British Energy to under-

1.
take by not later than 1 April 2005:

(a)

to extract its electricity supply business from British Energy
Generation Limited and incorporate it as a separate subsid-
iary company of British Energy plc (or successor parents);

(b)

to consolidate the existing nuclear generation activities in a
single company;

and

(c)

to use all reasonable endeavours to obtain licence modifica-
tions under the Electricity Act 1989 or, if such licence modi-
fications cannot be obtained, to give binding undertakings to
the United Kingdom Government not limited in time to the
effect that: (i) British Energy shall treat its existing nuclear and
non-nuclear generation businesses as separate businesses for
licensing purposes (or for the purposes of any undertaking to
the United Kingdom Government); and (ii) the existing
nuclear generation business shall not provide any cross-
subsidy to any other business in the British Energy group.

— large scale registered hydro-electric, as defined in the Renew-
ables Obligation Order 2002, generating capacity in the
United Kingdom,

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

(a) during a pending disposal period (as defined below), British
Energy shall be entitled to own or have rights of control over
restricted capacity in excess of 2 020 MW on condition that
it does not operate such excess restricted capacity or divests
itself of all operational control and interest in the excess
restricted capacity or the power generated from the excess
restricted capacity. For this purpose, a ‘pending disposal
period’ is the period between:

(i)

the receipt by Eggborough Power Limited or Eggbor-
ough Power Holdings Limited of a notice that: 1. an
option to acquire the shares in Eggborough Power Lim-
ited or the Eggborough station is to be exercised; or any
of the security over the shares in Eggborough Power
Limited or the Eggborough station is to be exercised;

and

(ii)

the date on which the registered generating capacity of
the Eggborough station is no longer available to the Brit-
ish Energy group;

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

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(b)

if one of the disposal options over the shares in Eggborough
Power Limited or the Eggborough station is completed, Brit-
ish Energy shall be entitled to own or have rights of control
over restricted capacity not exceeding 2 222 MW on condi-
tion that it declares its restricted capacity to the operator of
the National Grid as 2 020 MW and does not operate more
than 2 020 MW of restricted capacity;

at below the prevailing wholesale market price in good faith
where necessary to enable British Energy to respond to com-
petition, under the conditions of Article 10;

and

or

(c)

if the capacity at the Eggborough stations becomes unavail-
able to the British Energy group through irreparable failure or
force majeure, British Energy shall be entitled to own or have
rights of control over restricted capacity not exceeding
2 222 MW on condition that it declares its restricted capac-
ity to the operator of the National Grid as 2 020 MW and
does not operate more than 2 020 MW of restricted capacity.

(b)

to cooperate in good faith with the independent expert, and
to comply with all reasonable requests from the Independent
Expert in a timely manner including requests for information,
documents or access to staff or management.

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

Article 7

Article 10

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

Article 8

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

Article 9

The United Kingdom shall require British Energy to

1.
undertake:

(a)

for a period of six years following the appointment of the
Independent Expert, not to offer to supply non-domestic
end-users who purchase electricity directly from British
Energy on terms where the price of the energy element of the
contract with the users is below the prevailing wholesale
market price, provided that in exceptional market circum-
stances where certain objective tests are judged by the inde-
pendent expert to be satisfied as described in Article 10
(exceptional market circumstances), then British Energy shall
be entitled, while such exceptional circumstances continue to
the contract
prevail,

to price the energy element of

The tests used for the purpose of deciding whether excep-

1.
tional market circumstances occur shall be the following:

(a)

in any period of […] (ending not more than […] before the
date of the Amber Notice as defined below), […] of those
existing British Energy non-domestic end-users to whom
British Energy has made offers of supply on terms where the
margin on the supply of energy element of the contract over
the prevailing wholesale price is […] have rejected British
Energy’s offer;

(b) volumes traded in the wholesale electricity market over a […]
period have dropped to less than […] of the average of those
traded in the same period in the last […] for which data is
available;

(c) British Energy offers to supply a minimum of […] of electric-
ity in the wholesale market […] and that volume is not sold
within a period of […].

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

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

L 142/80

EN

Official Journal of the European Union

6.6.2005

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

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

The […] period may be renewed by the independent expert

5.
for as long as test c) above is met.

At the end of the period, the price restriction set out in

6.
Article 9 shall apply again to British Energy.

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

Article 11

This Decision is addressed to the United Kingdom of Great Brit-
ain and Northern Ireland.

Done at Brussels, 22 September 2004.

For the Commission
Mario MONTI
Member of the Commission