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Utilities ride out nuclear decommissioning fallout

The management of nuclear power plant decommissioning provisions is stirring up a storm in the EU. With each member state defining its own policy, there is concern among environmental campaigners that the funds, to be set aside for the dismantling and decontamination of nuclear plants, are being channelled for uses other than their intended purpose, writes James Gavin

THE EUROPEAN Union's (EU) battle with the UK government over its attempted £1bn ($1.7bn) bail-out of the struggling nuclear generator, British Energy (BE), has re-ignited a simmering debate over European utilities' use of public money in the decommissioning of nuclear power plants. Environmental lobbyists and members of the European parliament (MEPs) have been turning up the heat on the EU Commission in the past year to take the funds out of the companies' control, alleging that the practice provides leeway for their misuse.

But powerful European energy giants have launched a rearguard campaign to ensure provisions do not end up as a political football for Brussels.

Nuclear power plant decommissioning provisions, spread over a number of decades, are conservatively estimated to be worth some Euro100bn ($114.9bn). These funds are designed to finance the dismantling and decontamination of the EU's 136 nuclear reactors when they have generated their last kilowatt of electricity. In some cases, this could be in 40 years' time.

Campaigners claim state aid is keeping ailing utilities afloat. BE is reported to have received a £5bn rescue package (of which £3.3bn is said to have been earmarked for decommissioning). The BE bailout has clearly raised the ire of the Commission, but insiders say Brussels is unlikely to exploit the UK government's action to clamp down on other European operators.

Despite hectic blandishments from activist MEPs, such as the Green Party's Claude Turmes, the European Parliament's special rapporteur on electricity-market reform, EU policymakers are already retreating from stated commitments to remove decommissioning provisions from companies' accounts. 

Do it yourself

In the absence of common EU legislation governing the financial implications of dismantling nuclear power plants, member states have largely made up their own rules. Germany announced its accelerated decommissioning programme in 2000, forcing its power utility giants, RWE and E.on, to take on the greatest provisioning burden in the continent. Despite having less than a third of France's combined reactors in operation, conservative provisioning means their reserves are higher than those of Electricité de France (EdF).

While some countries demand that decommissioning funds are transparent and kept off the balance sheet - such as the UK - others are less stringent. It's apples and pears. There are different regimes in different countries, says Marc Watton, power and utilities analyst at BNP Paribas Bank. Some countries insist that nuclear decommissioning funds are separated from the balance sheet of the utility. In others, they are allowed to keep them. In others still, the state takes over all the liabilities. 

Table 1: Nuclear decommissioning provisions

   

Expected size of

 

Companies

fund (Euro bn)

Belgium

Electrabel, EdF, SPE

18-23

Finland

IVO, TVO

2

France

EdF

63

Germany

EnBW, E.on, RWE, HEW

30

Netherlands

EPZ, NVGKN

1

Spain

HI, Nuclenor, CSE, UE,

 
 

Fecsa, Enseds, Hidruna,

 
 

Segre, Uefsa, ID, Iberdrola,

 
 

Iberduero, Hifrensa, EIA

10

Sweden

Sydkraft, FKA, OKG, Vattenfall

5

UK

British Energy, BNFL

58

 

Source: European Parliament



However, EdF, the French state-owned power monopoly, is said to have around Euro29bn in nuclear liabilities, with some 58 reactors set for the chop. Edf says it has kept wholly adequate reserves for nuclear decommissioning.

Powers at play

But both the French and German governments are united in wanting the nuclear issue de-linked from the wider EU electricity-liberalisation effort. Robust lobbying from the two most powerful member states has successfully neutralised efforts by the European Parliament and, inter alia, the Commission, to use the Electricity Market Directive, issued in January, to push reform of the use of decommissioning funds. An EU Transport and Energy spokesman confirms that it is not proposing to remove the decommissioning provisions from companies' accounts and put them in government-run funds.

However, the EU institutions are not singing from the same hymn sheet on the issue. The Commission rejected a resolution passed in the European Parliament in March 2002 that called for segregated funds and the non-use of these funds other than for the purposes intended. While acknowledging it was an important issue, Brussels regards the Electricity Market Directive as an inappropriate mechanism to deliver the policy.

Environmental campaigners are complaining of a stalemate. Even a watered-down proposal to allow the utilities to retain the provisions, but commit governments to guarantee the funds' integrity, has fallen on deaf ears.

A new proposal by Brussels, issued in late July, seeks to add transparency to the control of investment in nuclear installations, but it steers clear of the vexed issue of decommissioning funds. Post-hoc policy shifts are off the agenda.

Fund management

Instead, the Commission is betting on annexing legislation on decommissioning plants to the nuclear-safety directive, first outlined in January, to break the ice. This states that decommissioning funds set up by operators must be managed separately from their other financial resources. In particular, it must be possible to mobilise these decommissioning funds when the time comes. 

But commissioners appear to be increasingly irritated by the absence of ministerial action on the issue. It's high time that MEPs speak to each other and start negotiating our proposal, says the spokesman.

Some lobbyists claim the proposal on the table evades the issue. The language is relatively strong, but a key paragraph states that if the utility has exceptional reasons why it cannot meet its requirement for segregated funds, it doesn't need to. But as there's no definition of what exceptional circumstances are, it's meaningless, says Antony Froggatt, an energy consultant and former adviser to Turmes.

That the proposal is protected under the EU's Euratom treaty, which calls for the development of a powerful nuclear industry, adds further weight to sceptics qualms.

Analysts say the more ambitious legislative proposals are unlikely to be back on the agenda in the near future. The commercial and economic implications of more radical action will stall any attempt at resurrection. Take the cost of having to fund EdF's liability - you're talking the GDP of a small African country, says Watton.

At the European policy level, the entrenched interests of the powerful duo of France and Germany will quash attempts to resurrect more ambitious legislation. Despite differing provisioning records, neither is about to shackle their utilities. They've been trying to create national champions and they're not about to damage them, says Watton.

Environmental campaigners stand accused of latching onto the decommissioning issue, pushing their anti-nuclear prejudices through the back door. But the use and abuse of funds is a particular bugbear. As the time-period between the closure of the facility and the activity is so long, particular attention needs to be paid to management of those accounts, says Froggatt.

Decommissioning cost

Gauging the cost of decommissioning nuclear power stations is an imprecise business. British Nuclear Fuels (BNFL) said in July that it has been able to put a definite cost of decommissioning on only two of its eight Magnox nuclear plants. The soaring cost of disabling power stations could deal a heavy blow to UK taxpayers, with a potential £3bn-plus bill for the Magnox programme alone.

Turmes has argued that the funds need to be placed in secure and low-risk investments out of the reach of utilities for two reasons: to guarantee sufficient financing for the necessary work; and to prevent market distortions. Nuclear companies in France and Germany are not required to have segregated decommissioning and waste-management funds, while those in Spain and Sweden are.

There are some unhappy precedents over nuclear operators' management of funds. BE reported in an interim financial report in September 2002 that a £103m drop in the value of its decommissioning-fund assets had contributed to a deficit of £337m.

But the big European players deny that there is any potential for misuse of the funds, whether intentional or not. Plans to remove the funds from company control get universal short shrift. It's not a good idea and, in any case, it's not even the EU's position, says a spokesman for RWE.

European power utilities also point out that there is no guarantee that government-run funds will perform any better. For example, a Swiss government-run fund lost 13% of its value last year.

German operators are said to fear their funds being misappropriated by less conservative utilities, including new entrant countries from eastern Europe with problem assets. Conservative practices appear a particular German trait. RWE recently released funds from the nuclear reserves, under auditors' orders, for being far too conservatively provisioned.

A grey area

But the segregation of provisions appears something of a grey area. Because German utilities are very conservatively managed from a financial perspective, they tend to have large hordes of securities and cash on their balance sheet, which they will tell you are there to meet future provisions. That includes nuclear provisions, but also includes pensions provisions, says Watton.

Wilder accusations heard in the European Parliament, to the effect that resources are being used to finance other investments across Europe, have little foundation say analysts. Suggestions that decommissioning funds had been used to tighten grips on domestic markets or overseas expansion are unproved. E.on's arranging, in late 2002, of a Euro15bn credit facility provided sufficient liquidity to cover its ambitious acquisition programme.

RWE is now holding back from more shopping expeditions, having largely exhausted its liquidity (and appetite).

But for EdF, saddled with billions of euros of debt and other off-balance sheet liabilities, there will always be those who see the nuclear provisions as a convenient source of corporate liquidity.

Given the extreme long-term nature of the provisions, it might be expected that power companies would in time start to regard them as equity.

Still, companies are phlegmatic. Buttressed by firm political support at national government level, the big European utilities are confident of riding out any pressure to release funds to the control of non-corporate entities.

In any case, few companies, of any hue, would be willing to let government entities get their hands on funds, even if the fund manager had Warren Buffett's success rate. Without a seismic shift in wider corporate behaviour, nuclear operators look set to remain the gatekeepers of their decommissioning funds for some time to come.





UK under fire

London was back in Brussels' firing line in July, as the European Commission defied the UK government by launching a major investigation into the proposed £5bn ($8.3bn) rescue package for the nuclear operator, British Energy. The Commission scents that the bailout may have involved illegal state aid. This is said to include £3.3bn in liabilities absorbed by the government to decommission plants and hundreds of millions of pounds from renegotiated contracts with British Nuclear Fuels.

If the more ambitious regulators in Brussels get their way, the rescue could be blocked. It's not a done deal. It needs European Union (EU) approval, says Marc Watton, an energy analyst at BNP Paribas. The EU also said in an analysis of the UK government's measures that it had doubts whether the plan will result in a restoration of BE's viability in a reasonable time-frame.

But the smart money is on the deal receiving the green light, no doubt after a public mauling for the government. My understanding is that they got an implicit nod from Europe that it would be OK to go through in the end, says Watton.

With at least 22% of UK electricity needs met by nuclear energy, from a pure environmental perspective there appears little mileage in pulling the plug on BE. Although it depends on the final format of the support, including whether BE will have to repay the cash, the UK taxpayer may find himself coming to the rescue in the end.

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