State aid — United Kingdom — State aid C 39/2004 (ex N 613/2003) — Nuclear Decommissioning Agency — Invitation to submit comments pursuant to Article 88(2) of the EC TreatyText with EEA relevance
Date: 2004-12-21
Institutions: European Commission
Subjects: State aid, United Kingdom, control of State aid, decommissioning of power stations, polluter pays principle, public institution

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STATE AID — UNITED KINGDOM

State aid C 39/2004 (ex N 613/2003) — Nuclear Decommissioning Agency

Invitation to submit comments pursuant to Article 88(2) of the EC Treaty

(2004/C 315/05)

(Text with EEA relevance)

By means of the letter dated 1 December 2004, reproduced in the authentic language on the pages
following this summary, the Commission notified the United Kingdom of its decision to initiate the proce-
dure laid down in Article 88(2) of the EC Treaty concerning the abovementioned measures.

Interested parties may submit their comments on measures in respect of which the Commission is initi-
ating the procedure within one month of the date of publication of this summary and the following letter,
to:

Commission of the European Communities
Competition DG, State aid Greffe
B-1049 Brussels
Fax: (32-2) 29612 42

These comments will be communicated to the United Kingdom. Confidential treatment of the identity of
the interested party submitting the comments may be requested in writing, stating the reasons for the
request.

SUMMARY

1. PROCEDURE

Conversely, BNFL is a commercial entity. The measure confers
on BNFL a selective competitive advantage since it releases it
from its duties under the polluter-pays principle. This advan-
tage is financed via State resources.

By letter dated 19 December 2003, the United Kingdom (UK)
authorities notified the Commission of the State aid implica-
tions of
the law setting up the Nuclear Decommissioning
Agency (hereafter the measure). Information was requested by
the Commission and submitted by the UK authorities, for the
last time on 19 October 2004.

2. DESCRIPTION OF THE MEASURE

The UK Government will set up a public body, the Nuclear
Decommissioning Agency (NDA), whose task will be to handle
the decommissioning of nuclear sites that belong to the
Government or more generally to the public sector.

The NDA will be transferred to the nuclear sites that belong to
the UK Atomic Energy Agency (UKAEA) and most of the
nuclear sites that belong to British Nuclear Fuels Limited
(BNFL), that is, in particular, the magnox power stations, the
Sellafield site,
the Drigg site and the
Capenhurst site.

the Springfields site,

Liabilities will be transferred to the NDA along with the
physical assets, together with financial assets that were designed
to pay in part for their decommissioning. The UK authorities
will finance the shortfall.

The UK authorities have estimated that this shortfall could vary
between GBP 0 and 2 billion.

3. ANALYSIS OF THE MEASURE

The UK authorities argue that BNFL's areas of activity are not
therefore the State
within competitive markets, and that
support included in the measure does not have an impact on
competition, and hence on intra-Community trade. The
It
Commission doubts that
considers therefore, at
the
this stage of
measure represents State aid within the meaning of Article
87(1) of the EC Treaty.

it can follow this

its analysis,

reasoning.

that

The Commission first analysed the case in the light of the Com-
munity guidelines on State aid for environmental protection (1),
and more precisely in the light of their provisions concerning
aid to the rehabilitation of polluted industrial sites.
It has
doubts that the aid is compatible with these provisions since it
seems that the party responsible for the pollution can be identi-
fied and at least partly made to bear the costs of the rehabilita-
tion.

The Commission then analysed the case directly in the light of
Article 87(3)c of the EC Treaty, taking into account the objec-
tives of the Euratom Treaty in order to assess the positive
impact of the measure on Community economy.

It came to the conclusion that, at this stage of its analysis, it
doubts that the positive impact of the measure in helping to
fulfil the Euratom Treaty's objectives outweighs its negative
impact on intra-Community trading conditions.

The UKAEA has no commercial activity. The transfer of its
liabilities to the NDA is therefore not subject to State aid rules.

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

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the Commission also doubts that

Finally,
the aid can be
authorised in the light of the Community guidelines on State
aid for rescuing and restructuring firms in difficulty (2) or as a
compensation for the discharging of a service of general
economic interest.

Taking into account the foregoing considerations, the Commis-
sion considers that there are doubts as to whether the measure
can be considered as compatible with the common market. The
Commission has therefore decided to initiate the procedure laid
down in Article 88(2) of the EC Treaty.

This decision is without prejudice to the application of the
Euratom Treaty. The measure has to be assessed in view of the
objectives of the Euratom Treaty. Therefore, the Commission
requests the United Kingdom to provide all such information as
may help to assess the measures in the light of the objectives of
the Euratom Treaty.

In accordance with Article 14 of Council Regulation (EC) No
659/1999, all unlawful aid can be subject to recovery from the
recipient.

TEXT OF THE LETTER

‘The Commission wishes to inform the United Kingdom that,
having examined the information supplied by your authorities
on the measures referred to above, it has decided to initiate
partially the procedure laid down in Article 88(2) of the EC
Treaty, while examining to which extent
the measures are
necessary to fulfil objectives of the Euratom Treaty.

1. PROCEDURE

By letter dated 19 December 2003, registered by the Commis-
sion on 22 December 2003, the United Kingdom (“UK”) autho-
rities notified the Commission of the State aid implications of
the law setting up the Nuclear Decommissioning Authority
(hereafter “the Measure”).

By letter ref. D/51248 of 20 February 2004, the Commission
asked questions on the Measure. The UK authorities replied by
letter dated 29 March 2004, registered by the Commission on
15 April 2004.

By letter ref. D/54319 of 16 June 2004, the Commission asked
further questions on the Measure. The UK authorities replied
by letter dated 14 July 2004, registered by the Commission on
19 July 2004.

The UK authorities submitted additional
information on the
Measure by letter dated 10 September 2004, registered by the
Commission on 14 September 2004, and by letter dated 14
October 2004, registered by the Commission on 19 October
2004.

Meetings with the UK authorities were held on 16 January
2004, 14 July 2004 and 28 September 2004.

2. DESCRIPTION OF THE MEASURE

2.1. Nuclear liabilities in the UK

The UK has been one of the first countries world wide to
engage in the technologies of nuclear industry, both for civil
and military purposes.

the time these technologies were first

the
At
emphasis of the industry was put on scientific improvements

introduced,

(2) OJ C 288, 9.10.1999, p. 2.

and on gains on efficiency. The management of nuclear liabil-
ities was generally not taken into consideration, or only in a
very limited way.

The rising awareness of the need to ultimately decommission
nuclear sites progressively resulted in some funds for the
management of nuclear liabilities being set aside. But these
funds were generally insufficient to face liabilities the estimated
amount of which was still very uncertain, but growing. Even at
the end of the 20th century, the management of nuclear liabil-
ities was still handled independently by each of their owners,
and very much on a case by case basis.

The UK authorities consider that this way of management has
reached its limits and that a new and more efficient method
should be put in place in order for nuclear liabilities to be
more efficiently handled, while preserving the highest level of
safety.

In 2001, the UK Government decided to start a review of the
way the management of the public sector nuclear liabilities
could be concentrated in the hands of a single public body. A
White Paper titled “Managing the Nuclear Legacy — A strategy
for action” was published in July 2002. After a consultation
process, the ideas of the White Paper were implemented in a
draft legislation: the Energy Bill 2004 (3).

2.2. The Nuclear Decommissioning Authority

Under the provisions of the draft legislation, a new non-depart-
mental public body, known as the Nuclear Decommissioning
Authority (“NDA”), will be created. It is presently foreseen that
it will be set up formally as of 1 April 2005.

The NDA will progressively be made responsible for the
management of most of the nuclear liabilities of the public
sector in the UK. For this purpose, the ownership of the sites
will be transferred to the NDA. Along with the ownership of
the sites, the NDA will be transferred nuclear liabilities linked
to them as well as all financial assets that are clearly attached
to these sites.

The management of nuclear liabilities in an efficient and safe
way will be the NDA's only objective. The NDA will have the
possibility to continue to operate the physical assets that will
be transferred to it if the continued operation of these assets
covers more than their avoidable costs and therefore contri-
butes to reducing the value of their liabilities.

The NDA will not decommission the sites it will have the
responsibility of itself. It will delegate this task to other entities.
Competition will be progressively introduced in this respect,
with a view to trigger the development of a real nuclear
decommissioning and clean up market. The continued opera-
tion of nuclear assets may be similarly delegated by the NDA
to site licensee companies, which will probably at first be the
former owners of the sites and will
later on be chosen via
competition procedures.

In order to fund its activities, the NDA will use the value of the
transferred financial assets and the net revenues that the trans-
ferred physical assets may generate. Since it is very likely that
these resources will not be sufficient to pay for the entire costs
of management of the nuclear liabilities, the State will finance
the shortfall.

(3) This draft legislation can be found at the following web site :

http://www.publications.parliament.uk/pa/ld200304/ldbills/002/
2004002.pdf.

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It is currently foreseen that the NDA will be transferred assets
belonging to the UK Atomic Energy Authority (“UKAEA”) and
to British Nuclear Fuels Limited (“BNFL”).

2.3. Sites and financial assets that will be transferred to

the NDA

UKAEA sites

The UKAEA is a non departmental public body which was
created with a view to conduct research in the atomic energy
field. During the second part of the 20th century, it worked on
a number of programmes involving many nuclear sites.
Its
main focus has now shifted to research on nuclear sites decom-
missioning. It is also in charge of the Joint European Torus
nuclear fusion research site in Culham.

At present, all UKAEA nuclear sites, but the Culham site, are in
the process of being decommissioned, the decommissioning
expenses being shared between the UKAEA and the Ministry
Of Defence (“MOD”). All UKAEA sites will eventually be trans-
ferred to the NDA.

BNFL sites

BNFL is a publicly owned limited company that operates in
many fields in the nuclear sector. It is present in nearly all steps
of the nuclear fuel cycle: it enriches uranium, supplies nuclear
fuel, generates electricity and manages spent nuclear fuel.

Most of BNFL's nuclear activities and sites will be transferred to
the NDA, but not all of them. The NDA will receive:

— all magnox electricity generation sites (10 sites, only 5 of

which are operational),

— the Sellafield site, including in particular the Thermal Oxide
Reprocessing Plant (“THORP”) and the Sellafield Mox Plant
(“SMP”). The Sellafield site also includes one of the magnox
plants referred to above (the Calder Hall station) and a
small Combined Heat and Power plant (the Fellside plant),

— the Springfields site, which is dedicated to nuclear fuel

manufacturing,

— the Drigg low level waste disposal site,

— the Capenhurst site, which is presently focused on the

decommissioning and storage of uranics material.

Other BNFL activitieswill not be transferred to the NDA, and
will remain in a smaller residual company, that will be there-
after referred to as “the New BNFL”. The New BNFL's activities
will comprise mostly uranium enrichment and nuclear plants
design, maintenance and services. The Commission understands
that BNFL's rail subsidiary, Direct Rail Services, will also remain
with the New BNFL.

Together with the sites mentioned above, BNFL will transfer to
the NDA a number of financial assets linked to these sites, and
that were set up in the past to fund at least in part their decom-
missioning. These assets are:

— the Nuclear Liabilities Investment Portfolio. This financial
instrument includes the proceeds of the fund owned by
Magnox Electric, from whom BNFL inherited the magnox
power stations, and was later funded by BNFL,

— the Magnox Undertaking. This is an undertaking by the
United Kingdom's Secretary of State for Trade and Industry
to fund part of the magnox power plants' nuclear liabilities.
It is considered as an asset in BNFL's accounts,

— other, more minor, contributions,

including in particular
the Springfields gilts, that are funds earmarked to cover
decommissioning costs at the Springfields site.

Technically, these assets will not be transferred directly to the
NDA, but rather consolidated in a Government
the
Nuclear Decommissioning Funding Account (“NDFA”) (4). The
funds in the NDFA will be available for the NDA to use in the
discharge of its statutory responsibilities and duties, under the
control of the Government. They will not be earmarked for the
decommissioning of specific assets.

fund:

2.4. Valuation of liabilities and assets transferred to the

NDA

The valuation of liabilities and assets that will be transferred to
the NDA is difficult, in particular in view of the limited experi-
ence accumulated in the field of decommissioning and the very
long time span during which decommissioning operations will
take place.

Furthermore, because of the historical development of nuclear
energy in the UK, sites and even individual assets might have
been used for many different purposes, ranging from the devel-
opment of nuclear weapons
to strictly civil commercial
programmes.

The UK authorities have provided the Commission with an esti-
mate of the nuclear liabilities and assets that will be transferred
to the NDA, together with a split of these amounts between
the ones that originate from commercial activities and the ones
that originate from non-commercial activities.

All liabilities linked to UKAEA sites are viewed as non-commer-
cial.

In order to estimate the share of the liabilities linked to BNFL
sites that originate from non-commercial activities, they have
taken the approach that only financial liabilities still recognised
by either the MOD or the UKAEA are non-commercial. Liabil-
ities linked to assets with dual (commercial/non-commercial)
use and that are not still recognised by either the MOD or the
UKAEA were attributed to BNFL's commercial activities, since
BNFL is the present operator and owner of these assets, even
where they might have been used by the MOD or UKAEA in
the past.

The estimated liabilities associated with sites presently owned
by the UKAEA are as follows:

(4) As for the Magnox Undertaking, due to its specific nature, it will be
extinguished, and an amount equivalent to its value will be credited
to the NDFA.

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Table 1 — UKAEA nuclear liabilities — breakdown by site, esti-
mates as of March 2003, 2003 prices, amounts in billion GBP

Table 3 — Difference between commercial liabilities and assets
value as of 31 March 2003, 2003 prices, amounts in billion GBP

Sites

Discounted at
5,4 % nominal

Undiscounted

Discounted at
5,4 % nominal

Undiscounted

Culham

Dounreay

Harwell

Windscale

Winfrith

Programme Management

0,1

2,5

0,6

0,3

0,4

0

Subtotal

4,0 (1)

BNFL Pre & Post 1971 Liabilities

Management of UKAEA fuels &
wastes at Sellafield

Deep disposal (NIREX)

0,9

0,2

0,4

Total

5,6 (1)

(1) The sum of items differs from the total due to rounding.

0,2

3,8

0,9

0,7

0,6

0,1

6,3

2,0

0,3

1,1

9,7

The estimated liabilities associated with sites presently owned
by BNFL, split between commercial and non-commercial activ-
ities, are as follows:

Table 2 — Nuclear Liabilities to be transferred to the NDA, esti-
mates as of March 2003, 2003 prices, discounted at 5,4 %
nominal, amounts in billion GBP

Non-
commercial

Commercial

Total
Liabilities

0

3,9

3,9

stations

Magnox
sites
(except Calder Hall/Chapel-
cross)

Sellafield
Calder Hall station)

site

(except

3,8

10,1

13,9

Calder Hall/Chapelcross (1)

Springfields site

Capenhurst site

0,3

0,1

0

0,6

0,2

0,2

0,9

0,2

0,3

Total

4,1 (2)

15,0

19,1 (2)

The following table was provided by the UK authorities in their
notification. It compares the estimated value of the commercial
part of the liabilities linked to sites to be transferred to the
NDA by BNFL and the economic value of the assets to be trans-
ferred to the NDA along with these sites. For physical assets,
the economic value is considered to be equal to the cash flows
that their continued operation is expected to generate.

Total commercial nuclear liabil-
ities

– 15,0

– 36,4

Magnox stations future cash flows

– 1,3

– 1,4

THORP future cash flows

SMP future cash flows

Springfields future cash flows

Nuclear
Portfolio

Liabilities

Investment

Magnox Undertaking

Other customer contributions not
included above

Cash and liquid assets

2,0

0,3

0

4,1

7,5

0,1

0,2

Total

– 2,0 (2)

(1) This item is expected to be positive, but lesser than GBP 50 m.
(2) The sum of items differs from the total due to rounding.

2,5

0,3

0 (1)

4,1

26,5

0,1

0,2

– 4,1

The UK authorities provided later on an update of these esti-
mates aimed at taking account of updates in the evaluation of
nuclear liabilities and of the recent upward evolution of electri-
city prices.

Table 4 — September 2004 update of the difference between
commercial liabilities and assets value as of 31 March 2003, 2003
prices, amounts in billion GBP

Discounted at
5,4 % nominal

Undiscounted

Total commercial nuclear liabil-
ities

– 14,7

– 36,0

Magnox stations future cash flows

– 0,1

– 0,2

Sellafield operations
(THORP & SMP)

cash flow

Springfields future cash flows

Nuclear
Portfolio

Liabilities

Investment

Other customer contributions not
included above

Cash and liquid assets

2,3

0,2

4,3

7,9

0,2

0,1

2,3

0,2

4,3

27,2

0,2

0,1

Total

0,0 (1)

– 2,0 (1)

(1) The sum of items differs from the total due to rounding.

(1) Unlike the other magnox plants, these two power plants feature some non-

commercial liabilities since they originally were military power plants.

(2) The sum of items differs from the total due to rounding.

Magnox Undertaking

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2.5. Transitional arrangements

The UK authorities intend to formally set up the NDA on 1
April 2005. For this purpose, a number of steps have to be
taken as from the end of year 2004.

The UK authorities are aware that the setting up of the NDA
might have implications in terms of State aid. They are aware
of the suspensive effect of Article 88(3) of the EC Treaty, which
provides that Member States should refrain from putting State
aid into effect before approval by the Commission.

For the purpose of being able to formally set up the NDA
while complying with Article 88(3) of the EC Treaty, the UK
authorities will put in place transitional arrangements that, in
their view, ensure that no State aid is granted without a
Commission approval.

that part of the Measure which concerns the transfer of sites
from the UKAEA to the NDA is not subject to State aid rules.

this decision concentrates on the part of

the
The rest of
the transfer of assets presently
Measure which concerns
belonging to BNFL.
Indeed, BNFL is clearly an undertaking
within the meaning of the EC Treaty. Commercial activities are
its very purpose.

The Commission considers in this respect that the split of
nuclear liabilities between commercial ones and non-commer-
cial ones that was drawn by the UK authorities is relevant. It is
based on a conservative approach which can only result in
underestimating the part of the liabilities that can be attributed
to non-commercial activities.

These transitional arrangements concern the transfer of sites
from BNFL to the NDA. The transfer of sites from the UKAEA
will take place as initially foreseen.

Advantage

Under the transitional arrangements, assets will be transferred
from BNFL to the NDA, but the NDA funding possibilities will
be capped.

Financial assets linked to the transferred sites — with the exclu-
sion of the Magnox Undertaking — will be credited to the
NDFA, as well as net revenues from the operation of trans-
ferred sites.

The NDA's funding by the Government will be limited in a stat-
utory statement to these amounts.

As a result of this step, the New BNFL will only be allowed to
decrease its nuclear liabilities by the value of the financial assets
and future net revenues that will have been taken away from it
without compensation. Site licensee contracts for the operation
of the sites that will be passed between the NDA and the New
BNFL during the transitional period will explicitly ensure that
no further liabilities are taken out from the New BNFL.

The transitional arrangements will remain in place until a final
Commission decision on the Measure.

3. ASSESSMENT

At least part of the Measure concerns issues covered by the
Euratom Treaty and therefore has to be assessed accordingly (5).
However, to the extent that it is not necessary for or goes
beyond the objectives of the Euratom Treaty or distorts or
threatens to distort competition in the internal market, it has to
be assessed under the EC Treaty.

3.1. Existence of aid within the meaning of Article 87(1)

of the EC Treaty

For a measure to constitute State aid within the meaning of
Article 87(1) of the EC Treaty,
if must provide a selective
competitive advantage to certain undertakings, be funded by
State resources, and affect trade between Member States.

The Commission first notes that the UKAEA is a Government
research Authority that has no commercial activities. It is not
an undertaking within the meaning of the EC Treaty. Therefore,

The normal operational framework for companies the commer-
cial activity of which generates pollution is the polluter pays
principle. Under this principle, which is enshrined in Article
174 of the EC Treaty, a company that generates pollution
should in normal commercial operations internalise the costs
of managing this pollution. This is in particular the case for
companies that produce waste or companies that pollute land
in such a way that land restoration activities are necessary to
make the land available again for other uses after they have
ceased operations.

This implies that any payment by the State of costs linked to
pollution management relieves the beneficiary company of
costs that it should normally bear.

While transferring nuclear liabilities and assets to the NDA, the
UK Government will undertake to pay for any shortfall in the
funds available for the decommissioning of the sites.

The estimates in Table 3 and Table 4 of the respective values of
the liabilities and assets that will be transferred by BNFL to the
NDA show that the value of the physical assets, as determined
by their future cash flows, does not match the nuclear liabilities
attached to them.

The difference between the two values is reduced when one
takes account of the financial assets that are attached to the
sites and that will be transferred to the NDA along with the
It does not however come to zero in all
physical assets.
scenarios. Furthermore, as will be described in section 3.2, at
this stage of the analysis, the Commission considers that the
amount of the Magnox Undertaking should not be netted off
the liabilities while computing the size of the State support
included in the Measure.

Furthermore, among the financial assets transferred to the NDA
by BNFL, at least one: the Magnox Undertaking is itself a
promise of payment by the State. It can therefore not be netted
off the liabilities when computing how much of these will be
paid for by the company itself in accordance with the polluter
pays principle.

(5) 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‘.

The Measure therefore involves an advantage for BNFL that
would have to meet the liabilities with its proper funds alone if
the State did not intervene.

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Indeed,

the New BNFL.

At this stage of its analysis, the Commission considers that this
advantage will mainly benefit
the
majority of the value of the commercial
liabilities linked to
sites that will be transferred to the NDA originate from the
operation of these sites by this company or companies that it
previously purchased. The polluter pays principle therefore
traces the charge for these liabilities to this company. Further-
more, if the sites had been sold in a normal commercial way
by BNFL to another company, for example in some restruc-
turing plan, it is the Commission's view that BNFL would have
received a negative price for
(corresponding
precisely to the net
liabilities). The competitive advantage
linked to the transfer therefore clearly goes in large majority to
the New BNFL.

these assets

However, at this stage of its analysis, the Commission cannot
exclude either that some competitive advantage might also
accrue to the economic entity that the NDA might constitute.
Indeed, the NDA will be a economic entity as its own, since it
will own a number of assets and the revenues that are gener-
ated by them. By operating the nuclear assets, it may generate
new liabilities, for instance in the form of waste to be treated.
As was discussed above, under the polluter pays principle, the
NDA is required to cover these new liabilities with its own
resources. Now the State will undertake to cover all NDA liabil-
ities if the NDA's resources are insufficient to meet them, be
these liabilities transferred to the NDA by BNFL or generated
by the operation of the assets by the NDA after their transfer.
The Commission cannot at this stage exclude that this State
coverage implies some advantage to the NDA itself.

To end with, the Commission notes that, after the sites have
been transferred to the NDA, the New BNFL will continue for
some time to operate the sites on behalf of the NDA, before a
competition process can be organised to select
the site
operator. At this stage of its reasoning, the Commission is of
the opinion that this delegation without a competition process
may also include some advantage if it is not duly proved that
the contracts under which the New BNFL will operate do not
provide it with more that a remuneration for its services under
market conditions.

Selectivity

The measure is clearly selective since it benefits at most two
economic entities: the New BNFL and the NDA.

State resources

to the NDA will come
Payments by the UK Government
directly from the State budget. These payments are therefore
unquestionably made of State resources.

Impact on trade between Member States

The UK authorities argue that BNFL's activities are so specific
that giving State support to them cannot have an impact on
competition in general. The absence of impact on competition
would imply in particular the absence of
impact on trade
between Member States.

More precise arguments used by the UK authorities to conclude
that the aid has no impact on competition are summarised
below for major BNFL activities that will be transferred to the
NDA.

— Regarding the magnox power plants, the UK authorities
argue that their share of the UK electricity market is negli-
gible (about 3,7 %), and that the electrical
links between
the UK and other Member States are very limited. This is all
the more true of the small Fellside CHP plant which serves
to provide steam to the Sellafield site, and which will be
transferred along with this site. The magnox plants also are
to close within the next few years.

The UK authorities also argue that BNFL's magnox plants
have very low short term marginal costs, which makes
them baseload producers who do not directly set the electri-
city price.

— Regarding the THORP plant, the UK authorities argue that
some of the spent fuel to be reprocessed by the plant has
already been transferred to Sellafield. It would be difficult
and for customers to turn now to BNFL's competitors for
these services, all the more as France, the Member State
where BNFL's larger competitor — Areva — is located, has
a ban on import of spent fuel for long term storage. Safety
and time considerations would also be critical.

Furthermore, BNFL mostly
and
Advanced Gas cooled Reactor's (“AGR”) fuel. Such reactors
exist only in the UK. Areva does not have at present the
proper tools to handle this type of fuel.

reprocesses magnox

To end with, the little spare capacity in the future left to
Areva even further reduces the risk of distortion of compe-
tition in the future, even if THORP takes new contracts
after it is transferred to the NDA. Such contracts would be
entered into on an economic basis and would cover all
incremental costs including those of decommissioning.

— Regarding the SMP plant, the UK authorities argue that it
has only two competitors in the Union: the Dessel plant in
Belgium and the Melox plant in France. The Dessel plant's
capacity is much smaller than the Melox plant's. They add
that safety considerations linked to international transport
of plutonium to France or Belgium adds
important
constraints for customers which would wish to choose
BNFL's competitors for MOX manufacturing services.

— Regarding the Springfields site,

the UK authorities give
similar arguments to the ones developed for THORP. 85 %
the nuclear fuel supplied by the Springfields site is
of
magnox or AGR, for which competitors do not own proper
manufacturing tools.

— Regarding the Drigg site, the UK authorities note that it is

the sole low level waste repository in Britain.

The practise of the Commission and the jurisprudence of the
Court in the State aid field usually give a broad interpretation
to the concept of impact on trade between Member States. In
particular,
it is not necessary that the beneficiary of a State
support be actually involved in export to another Member State
for the support to be considered to have an impact on trade.

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In practice, at present, the Commission has found that State
support did not have an impact on trade only in the case of
local services, mostly in the tourism and leisure sector (6).

The scope for the Commission to conclude that a State support
has no impact on trade is therefore limited. At this stage of its
analysis, the Commission considers that the arguments put
forward by the UK authorities are not sufficient to draw such a
conclusion.

In particular:

— Regarding the magnox stations and the Fellside plant, the
Commission doubts that the fact that BNFL has a limited
share of the electricity market is sufficient to exclude the
existence of impact on trade. The size of the beneficiary's
market share cannot be construed as an argument for the
inexistence of impact on trade. The limited electricity inter-
connection between the UK and other Member States does
not seem sufficient either since this interconnection at least
exists. Besides, although BNFL's share of the market is not
large, it remains bigger than this of many of its competitors
in the UK electricity market.

support

conditions,

The size of the support provided may, on the opposite,
have an impact on the existence of a State aid. Under
than
certain
EUR 100 000 for three years for one undertaking is no
State aid within the meaning of Article 87(1) of the EC
Treaty (7). This is however far from being the case for the
Measure, since the size of the support it brings to BNFL
may reach billions of GBP.

limited

less

to

The Commission also doubts that the fact that BNFL's short
run marginal costs make it a baseload producer is sufficient
to exclude an impact on competition. Without prejudice to
a deeper analysis of competition between BNFL's nuclear
plants and other types of energy, the Commission notes
that British Energy also uses nuclear power plants on the
UK market, the short run marginal costs of which also
makes them baseload plants. The aid to BNFL's magnox
plants could therefore at least be detrimental to British
Energy.

— The Commission takes note of the United Kingdom's argu-
ment on the fact that BNFL is the only company that has
the ability to supply AGR and magnox fuel (via its Spring-
fields plant) or to handle AGR or magnox spent fuel (via
THORP). The Commission however doubts that this is suffi-
cient to conclude that there is no impact on trade.

In particular, the Commission cannot at present make a
judgment on whether Areva is scientifically unable to build
AGR fuel supply or reprocessing lines, or whether it is only
not economically viable for it to invest in such assets. In
the State
the latter case at least, one could argue that
support to BNFL is one of the reasons why Areva does not
consider it economically viable to invest in a new AGR fuel
management plant. The Commission is aware that Frama-
tome ANP, an Areva and Siemens subsidiary, has been at
least studying the possibility to supply AGR fuel, and has

(6) See Commission decisions in cases N 258/2000 — Germany —
Freizeitbad Dorsten (OJ C 72, 16.6.2001, p. 14); NN 136/A/2001
— France — Mesures concernant l'Ecomusée d'Alsace (OJ C 97,
24.4.2003, p. 10); C 10/2003 — The Netherlands — Steunverl-
ening aan non-profit jachthavens (OJ L 34,6.2.2004, p. 63).

(7) Commission Regulation (EC) No 69/2001 of 12 January 2001 on
the application of Articles 87 and 88 of the EC Treaty to de minimis
aid. OJ L 10, 13.1.2001, p. 30.

gone as far as proposing prices to customers for this opera-
tion.

the absence of reprocessing of

Moreover, the Commission notes that the AGR spent fuel
that will be managed by BNFL in the future may not be
reprocessed but rather directly stored. The Commission
the AGR
considers that
spent fuel may make it easier for BNFL's potential competi-
tors, and in particular Areva, to handle the spent fuel in its
place. The Commission is aware that
there are legal
constraints in many Member States on the transfer of spent
nuclear fuel, and even more on the storage of such waste in
countries other than their countries of origin. Without
prejudice to the Commission's view on the conformity of
such constraints with the Community rules, the Commis-
sion notes at least that these rules would not preclude a
non-British operator to settle in the UK and compete with
BNFL in the field of the storage of spent AGR fuel without
prior reprocessing. These considerations may also apply to
the case of the Drigg repository.

Finally, the Commission notes that BNFL also manufactures
Light Water Reactor (“LWR”) and manages LWR spent fuel,
in non negligible amounts. This type of fuel is more widely
used in the world. The Commission doubts that it can be
held that there is a limited impact on trade for this type of
fuel.

— The Commission also doubts that the fact that part of the
spent fuel to be reprocessed by THORP is already in the UK
can lead to the conclusion that the support has no impact
on trade, be it for this very spent fuel.

It is indeed likely that it would not be economically viable
for the owners of this spent fuel to decide now to drop
their contract with BNFL. However, one cannot exclude
that, in the absence of aid, BNFL may end up in a position
where it can no longer fulfil its contractual duties with at
least one of its customers. The owners of the non-managed
fuel would then have to turn to another service provider.
One may argue that the owners might actually prefer to
leave their waste in the UK and forget about it rather than
pay the expenses linked to finding another spent
fuel
management service provider. The Commission considers
however that this behaviour would probably be illegal from
the part of the waste owners. The Commission doubts that
it can take account of such circumstances to determine the
existence of State aid.

— The Commission also doubts that the fact that SMP has
only a few European competitors, of lesser capacity, can
lead to the conclusion that there is no impact on trade
either. As a matter of
the mere existence of one
competitor should be sufficient to conclude that there is an
impact on trade.

fact,

Information available to the Commission show that spent
fuel management services customers may indeed arbitrate
between SMP and its competitors to manage their spent
fuel.

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The recent increase of interest for MOX generation in the
framework of neutralisation of military grade plutonium
stocks has shown that there was indeed some interest for
the European technology in this respect. This could give
rise to a non negligible market in the future, for which
BNFL and Areva may be competitors. It also shows that
safety considerations linked to the transportation of pluto-
nium to a plant within inland France do not necessarily
prevent customers from choosing Areva.

Nuclear Electric was later partly privatised. The part of it which
remained public took the name of Magnox Electric.

In 1996, an undertaking was made by the UK Government to
assist Magnox Electric in meeting its nuclear liabilities. It is
unclear to which extent this undertaking replaced whole or
part of the original undertaking towards Nuclear Electric, nor
whether the guaranteed amounts were in excess of the original
amounts that could be attributed to the magnox power plants.

It is also important to recall that, in the Commission's view, the
main beneficiary of the support is the New BNFL. The analysis
of impact on trade of this support therefore also takes account
of the activities which stay within the New BNFL, since these
activities will benefit from the relief in the company's liabilities.

The New BNFL will be active in particular in the field of
nuclear plants design and services, via its subsidiary, Westing-
house.

Westinghouse is one of the world leaders in the field of nuclear
plants design. Within the Union, it competes with Framatome
ANP, an Areva (France) and Siemens (Germany) company. The
market for new nuclear reactors in Europe is not very large at
present since a number of Member States have announced that
they would renounce to nuclear power. However, Finland has
started the construction of a new plant, and France is preparing
the way for its new generation of nuclear stations. Furthermore,
the market for nuclear plants in non-EU countries is important,
with over 30 new power plants in construction, mainly in
Asia. Westinghouse and Framatome ANP compete for this
market.

Westinghouse and Framatome ANP also compete for
the
market of services (in particular maintenance) of nuclear plants.
This market is very active even in the Union, and is very
competitive. For instance, EDF,
the French nuclear power
from
stations utility, purchases
Westinghouse. Of course, Framatome ANP and Westinhouse
also compete for the market of nuclear power plants services
outside the Union.

steam generator

services

Conclusion

From the above, the Commission considers, in the present state
of its analysis, that the Measure is State aid within the meaning
of Article 87(1) of the EC Treaty.

3.2. On the question whether part of the aid is existing

As was indicated above, one of the financial assets that will be
transferred from BNFL to the NDA, namely the Magnox Under-
taking, consists in itself of a promise by the State to participate
to a given level to the payment nuclear liabilities linked to
Magnox nuclear plants.

The history of this undertaking is complex. Based on informa-
tion provided by the UK authorities and other publicly available
information,
it can be
summarised as below.

the Commission understands

that

In 1990 the UK Government agreed to meet a shortfall in the
funds then available to the company Nuclear Electric to meet
its nuclear liabilities. This agreement, which took the form of a
Letter of Comfort, was notified to the Commission and
approved by it (8).

In 1998, Magnox Electric was acquired by BNFL for a price of
1 GBP. By that transaction, BNFL acquired the stations together
with their liabilities and the benefit of the undertaking.

At this stage of its analysis, in view of the limited information
available to it, the Commission is not in a position to decide
whether the Magnox Undertaking is itself an aid to BNFL, nor
to which extent this aid, if it exists, is existing aid within the
meaning of Article 1, letter (b), of Council Regulation (EC) No
659/1999 of 22 March 1999 laying down detailed rules for the
application of Article 93 of the EC Treaty (9) (hereafter “the
Procedural Regulation”).

Indeed,
it is clear that the original undertaking granted to
Nuclear Electric was authorised by the Commission, and is
therefore an existing aid in the aforementioned meaning. The
later undertaking towards Magnox Electric could also be
existing aid to the extent that it did not constitute a substantive
modification of the original undertaking.

At this stage of its analysis, the Commission considers that the
acquisition of Magnox Electric by BNFL did not change the
State aid status of the undertaking.

Finally, the transfer of the Magnox Undertaking to the NDA
will not change its value, but it will substantially modify its
reach. Indeed, the amounts that were originally foreseen for the
use of covering the liabilities linked to the Magnox stations will
then become available for the use of covering any of the liabil-
ities transferred to the NDA, which is a much broader scope.

The Commission is at the present stage of its analysis of the
opinion that this increase of flexibility will create a new aid
within the meaning of Article 1, letter (c), of the Procedural
Regulation, whatever its status initially was.

In view of the above, the Commission expresses doubts about
the fact that the value of the Magnox Undertaking can be
netted off the value of nuclear liabilities while computing the
amount of new State aid included in the Measure.

3.3. Compatibility of the aid — General framework

Article 87(1) of the EC Treaty provides for the general principle
of interdiction of State aid within the Community.

Article 87(2) and 87(3) of the EC Treaty foresee exemptions to
the general incompatibility principle as stated in Article 87(1).

The exemptions in Article 87(2) of the EC Treaty do not apply
in the present case because the Measure neither have a social
character and are granted to individual consumers, nor make
good the damage caused by natural disasters or exceptional
occurrences, nor are granted to the economy of certain areas of
the Federal Republic of Germany affected by its division.

(8) Commission decision in State aid case N 34/90. Letter SG(90)D/

2049.

(9) OJ L 83, 27.3.1999, p. 1.

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Further exemptions are laid 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 the present case because the aid neither
promotes the economic development of areas where the stand-
ard of living is abnormally low or where there is serious under-
employment, nor promotes the execution of an important
project of common European interest or remedy a serious
disturbance in the economy of a Member State, nor promotes
culture and heritage conservation.

Only the exemption of 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.

The Commission has published a number of documents aimed
at explaining the conditions in the light of which it would
analyse cases under Article 87(3)c of the Treaty. Each of these
documents aims at a particular sectoral or horizontal State aid
objective.

When the objective of a measure does not fall entirely within
the scope of the objectives of these documents, the Commis-
sion may also analyse the compatibility of a measure directly in
the light of Article 87(3)c. The Commission considers that,
where the measure concerns the nuclear sector, the objectives
of the Euratom Treaty can then be used as a background for
such an analysis.

3.4. Compatibility of

the aid — analysis in view of

Commission guidelines

3 . 4 . 1 . A n a ly si s

i n t h e

t h e Co m m u n i t y
li g h t of
g u i de li ne s on S ta te a i d for e nv i r on me nta l
p r ot e c t i o n

Point 6 of the Community guidelines on State aid for environ-
mental protection (10) (hereafter “the Environmental Guidelines”)
defines the concept of “environmental protection” as any action
designed to remedy or prevent damage to our physical
surroundings or natural resources, or to encourage the efficient
use of these resources.

The aim of the Measure, which is to manage safely liabilities
linked to dangerously radioactive material, might fall within
this scope.

The Environmental Guidelines list different categories of State
aid for the protection of environment that can be approved.

Section E.1.8 of the Environmental Guidelines provides that
interventions made by firms repairing environmental damage
by rehabilitating polluted industrial sites may come within the
scope of the guidelines. The Commission has major doubts
whether the decommissioning of nuclear installations can be
considered as such an intervention. The rehabilitation refers to
legacy in order to
repairing damages of European industrial
enable a new activity to take place in the polluted site. The

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

decommissioning only ends an activity of existing plant
without any direct objectives to utilise the site for another or
similar purpose

Furthermore, the Commission doubts that the conditions set
out in the Environmental Guidelines for the approval of aid to
such interventions are fulfilled in the present case.

Indeed, the Environmental Guidelines foresee that State aid can
be granted for such purpose only in the case where the person
responsible for the pollution is not identified or cannot be
made to bear the rehabilitation costs.

Now the Commission considers that the person responsible for
the pollution of BNFL's nuclear sites is clearly identified as
BNFL itself, either as the originator of the pollution or as the
legal successor to the originators, having taken over all liabil-
ities from them.

The Commission doubts that BNFL cannot be at least partly
made to bear the costs of rehabilitation of its sites that will be
transferred to the NDA.

Indeed, at that stage of its analysis, the Commission is of the
opinion that the full application of the polluter pays principle
that underlies the reasoning of this section of the Environ-
mental Guidelines may impose on BNFL to go as far as selling
as many of its profitable assets as is necessary to meet rehabili-
tation costs by its own means. In the foreseen situation, on the
opposite, BNFL would isolate its profitable activities, which
remain in the New BNFL, from any need to participate to the
funding of the liabilities transferred to the NDA.

3. 4 . 2 . A na l ysi s

i n th e

li g h t of

g u i de l i ne s on S ta te
r e str u c tu r i ng fi r ms i n di f f i c u lty

a i d for

t h e Commu ni t y
r e sc u i ng a n d

The Measure also shares some features with cases where the
State intervenes to support the restructuring of a firm in diffi-
culty.

Indeed, the transfer of BNFL's loss making assets to the NDA at
no cost of the remaining and profitable part of the company is
very akin to the transfer of sunk assets to structures of defea-
sance owned and operated by the State that often takes place in
such cases.

Besides, the taking over of nuclear liabilities by the State was
also one of the most important measures in the restructuring
plan of another British nuclear stations operator: British Energy
plc (11).

The aid may therefore be analysed in the light of the Com-
munity guidelines on State aid for rescuing and restructuring
firms in difficulty (12).

However, at the present stage of its analysis, the Commission
considers that the UK authorities have not given sufficient
evidence that the aid would fulfil the criteria set out in these
guidelines, and chiefly the fact that BNFL could be viewed as a
firm in difficulty within the meaning of the guidelines.

(11) See Commission decision on case C52/03 — UK — Restructuring
of British Energy plc. Not yet published in the Official Journal.
(12) In view of the date of notification of the Measure, the applicable
guidelines would be the ones that where published in OJ C 288 of
9.10.1999, p. 2.

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3.5. Compatibility of the aid — analysis directly in the
light of Article 87(3)c of the EC Treaty and of the
objectives of the Euratom Treaty

Article 87(3)c of the EC Treaty states that aid may be compa-
tible with the common market if facilitates the development of
certain economic activities or of certain economic areas, where
such aid does not adversely affect trading conditions to an
extent contrary to the common interest.

In order to analyse the compatibility of a State aid with the
the
common market directly in the light of
Commission must
the positive
effects of the aid on the development of certain economic activ-
ities or of certain economic areas outweighs its negative impact
on trading conditions between Member States.

therefore examine whether

this Article,

The value of the positive impact of the aid on the development
of certain economic activities is traditionally assessed in the
light of community objectives or policies, like the promotion
of research and development, the preservation of the environ-
ment of the development of regions in difficulty.

In the present case, the Commission considers that, as the
Measure concerns the nuclear sector, the positive impact of the
aid can be assessed in the light of the objectives of the Euratom
Treaty.

In order to analyse the compatibility of the aid directly under
Article 87(3)c of the EC Treaty, it would therefore be necessary
to check whether the positive contribution of the measure to
the achievement of the Euratom Treaty outweighs its negative
impact on trade between Member States.

As was explained above, the UK authorities consider that the
aid has limited impact on competition, if any. They also put
forward a number of qualitative elements to demonstrate the
positive contribution of the measure to the achievement of the
Euratom Treaty:

— the Government bears the ultimate responsibility for deli-
vering, and, where necessary,
for financing decommis-
sioning and clean-up of nuclear sites. The Measure aims at
fulfilling this objective,

— the establishment of the NDA is an efficient way to manage

nuclear liabilities,

— the NDA will introduce competition for the provision of

decommissioning services,

— the NDA will ensure that the aid is kept to the minimum,

— the NDA is a permanent solution for the management of

nuclear liabilities.

In view of the above, the UK authorities consider that the posi-
tive contribution of the measure to the achievement of the
Euratom Treaty clearly outweighs its very limited negative
impact on trade between Member States.

aforementioned
The Commission acknowledges
elements show that the Measure has indeed a positive impact
in the achievement of safe and efficient management of nuclear
liabilities, which is within the objectives of the Euratom Treaty.

that

the

However, at this stage of its analysis, the Commission doubts
that
the UK authorities have sufficiently demonstrated that
these positive elements outweigh the impact of the aid on
trading conditions.

To begin with, the Commission considers that the Govern-
ments' responsibility for the decommissioning and clean-up of
nuclear sites is a responsibility in last resort. The primary
responsibility for the decommissioning and clean-up of sites
remains with the undertakings. Competition issues may
precisely occur in particular in cases where an undertaking is
relieved by the State of this responsibility while being allowed
to continue its other, potentially profitable, activities.

As was described in section 3.1, the Commission does not at
that point of its analysis share the UK authorities' view on the
absence or near absence of impact of the aid on competition
and therefore on trading conditions to an extent contrary to
the common interest.

In view of the very large potential amount of the aid, of the
very long time span of the decommissioning activities, and of
the absence of previous experience in the assessment of State
aid to that sector outside the scope of classical Commission
guidelines for State aid, the Commission considers that much
more detailed and quantitative arguments should be provided
in order to assess the compatibility of the aid.

At this stage of this analysis, the Commission is of the opinion
that it would be necessary to determine first precisely which
are the markets served by BNFL. Then, one should determine
for each of these markets the extent of trade between Member
States and the impact of the Measure on this trade.

Then, in order to determine whether the Measure is propor-
tionate to the Euratom Treaty objective it aims at fulfilling, it
would be necessary to determine to which extent BNFL's
competitors in each of the markets would be in a position to
participate to the achievement of these objectives in BNFL's
place should the measure not be put in place, and if so, at what
cost. This analysis would allow a much more precise view of
the balance between the real contribution of the Measure to the
Euratom objectives and its real impact on trading conditions.

3.6. Analysis in view of provisions concerning services of

general economic interest

Finally, the Commission analysed whether the Measure could
be viewed as a compensation for the achievement of a service
of general economic interest.

In its Judgement of 24 July 2003, in case C-280/00 (13) (here-
after “the Altmark Judgement”), the Court gave a number of
cumulative conditions for such a measure to be considered as
no aid within the meaning of Article 87(1) of the EC Treaty.

The Commission doubts that these conditions are met.

Indeed, the very first condition set out by the Court is that the
recipient undertaking be actually required to discharge public
service obligations and those obligations be clearly defined.

(13) Judgement of the Court of 24.07.2003 in case C-280/00, Altmark
trans Gmbh, Regierungsprasidium Magdeburg and Nahverkehrsge-
sellschaft Altmark Gmbh.

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It could be argued that
the law that establishes the NDA
defines the obligations of this entity and entrusts it of a service
of general economic interest that consists in managing nuclear
liabilities.

already noted that it was not at present in the position to
analyse this effect with sufficient precision in view of the large
potential amounts of aid concerned and of the many specifici-
ties of the nuclear sector.

At this stage of its analysis, the Commission doubts that such a
task can be considered as a service of general economic
interest, in particular in the case where the undertaking which
is responsible for the pollution and bears the primary responsi-
bility for the management of the liabilities is still operating and
active.

However,
in any circumstance, as was described above, the
Commission considers that the main beneficiary of the Measure
is the New BNFL, that is discharged from liabilities it should
normally face. The Commission doubts that the New BNFL can
be in any respect viewed as being required to discharge the
service of managing the nuclear liabilities, since, on the oppo-
site, the law relieves it from any such activity.

At this stage of its analysis, the Commission is therefore of the
opinion that the Measure does not fulfil the first of the four
cumulative conditions set out in the Altmark Judgement. The
Measure can therefore not be considered as no aid within the
meaning of Article 87(1) of the EC Treaty in application of this
Judgement.

Irrespective of whether the Almark Judgement applies to the
case, the Measure could still be authorised by the Commission
as State aid within the meaning of Article 87(1) of the EC
Treaty, but compatible with the common market in the light or
Article 86(2).

For this purpose, it would be necessary to show that a service
of general economic interest was entrusted to the beneficiary
by the State, that the compensations for the charges linked to
the service are proportionate with this service and that the aid
does not affect trade to an extent contrary to the interests of
the community.

At this stage of its analysis, the Commission considers that the
UK authorities did not provide sufficient evidence to be able to
decide that these four criteria are met. In particular, the analysis
of the absence of effect on trade to an extent contrary to the
interests of the community is identical to the type of analysis
that was discussed above in the framework of the direct appli-
cation of Article 87(3)c of the EC Treaty. The Commission

The Commission therefore doubts that the Measure can be
authorised as a compensation for the achievement of a service
of general economic interest.

4. CONCLUSIONS

requests The United Kingdom to submit

In the light of the foregoing considerations, the Commission,
acting under the procedure laid down in Article 88(2) of the
EC Treaty,
its
comments and to provide all such information as may help to
assess the Measure, within one month of the date of receipt of
this letter. It requests your authorities to forward a copy of this
letter to the potential recipient of the aid immediately.

This procedure concerns only the transfer of assets from BNFL
to the NDA. The transfer of assets belonging to the UKAEA is
not subject to State aid rules.

The Commission wishes to remind the United Kingdom that
Article 88(3) of the EC Treaty has suspensive effect, and would
draw your attention to Article 14 of Council Regulation (EC)
No 659/1999, which provides that all unlawful aid may be
recovered from the recipient.

The Commission warns the United Kingdom that it will inform
interested parties by publishing this letter and a meaningful
summary of it in the Official Journal of the European Union. It
will also inform interested parties in the EFTA countries which
are signatories to the EEA Agreement, by publication of a
notice in the EEA Supplement to the Official Journal of the Euro-
pean Union and will inform the EFTA Surveillance Authority by
sending a copy of this letter. All such interested parties will be
invited to submit their comments within one month of the
date of such publication.

This decision is without prejudice to the application of the
Euratom Treaty. As already stated, the Measure also has to be
assessed in view of the objectives of the Euratom Treaty. There-
fore, the Commission requests the United Kingdom to provide
all such information as may help to assess the Measure in the
light of the objectives of the Euratom Treaty’.