Select Committee on Trade and Industry Appendices to the Minutes of Evidence


APPENDIX 4

Memorandum by Mr Gordon MacKerron

 sDuring the course of my oral evidence to the Committee I promised to send a supplementary note, particularly to clarify the question of the timing of past increases in the estimates of BNFL liability costs.

BNFL COST ESTIMATES FOR LIABILITIES

 sIn the course of my evidence to the Committee, there was some confusion about the timing of past increases in the valuation of the undiscounted liabilities for which BNFL has management responsibility.

 sWhile liability estimates have been rising for many years, there have been two major increases at BNFL sites since March 1999. In the BNFL Accounts for March 2000 (pp 65/66, note 19a), an increase of just over £7 billion was announced, from £27.2 billion to £34.2 billion. As the Committee is aware, a further large increase was announced (in discounted form) by the Secretary of State for Trade and Industry in November 2001, and has now been confirmed as a further £6 billion undiscounted (in round numbers). The total BNFL site liability estimate now therefore stands at £40.5 billion, an increase of over £13 billion in three years, or just under 50 per cent. Only a very small part of this increase may be explained by general price increases (less than 10 per cent of the total escalation). The new White Paper also warns that further increases may be expected.

 sIn October 1997, I published (together with Mike Sadnicki) a report[4] which forecast that the combined UKAEA/BNFL liabilities would rise from £28 billion as at March 1997, to an eventual £51 billion. As of March 2002, the combined estimate has now reached £48 billion, only £3 billion short of our forecast, (price increases again accounting for only a small part of the escalation.)

 sIt is worth noting that a high proportion of the £13 billion worth of liability escalations at BNFL sites is ascribed by BNFL to its customers. Given that overseas reprocessing customers' liability payments appear to be handled elsewhere in the BNFL Accounts, that UKAEA's financial liabilities appear to be broadly stable, and that British Energy now has fixed price contracts with BNFL, the implication is that the bulk of these increases are the financial responsibility of MoD. The process by which MoD agrees to these large liability bills is not clear[5].

 sThe scale of these recent increases in liabilities, and their probable continuation, are cause for serious concern. The extent of "discovery" of increased liabilities is partly a matter of fully characterising and valuing liabilities (a complex process at sites like Sellafield), but it also reflects the economic incentives organisations face. It may well be that the emphasis on customers' liabilities in recent years reflects incentives on BNFL, as constituted to date, to ensure that it had fully covered the liabilities for which others would have to pay. BNFL may have had less incentive to give priority to costing fully the liabilities for which it has financial responsibility: the Accounts published yesterday illustrate the effects on profit and loss account of discovering new liabilities. Under the proposed new structure ("new" BNFL and LMA) the incentives to discover the full value of liabilities ought to be stronger, and this may well account for the White Paper's expectation that liability estimates will rise yet further.

MAGNOX CLOSEDOWN

 sI was asked about the consequences of closing down the remaining operational Magnox stations more rapidly than on the maximum timescale announced by BNFL. I replied to the effect that immediate closure of all stations might have an effect on the ability of the electricity system to meet winter peak demands. While this remains the case, it is not true that the needs of the electricity system require all Magnox stations to be kept open for the maximum periods outlined by BNFL. It would be possible to close all the Magnox stations substantially faster than the BNFL timetable suggests, provided this was done in a phased way, with sufficient notice given.

BNFL AND WASTE TREATMENT

 sThere was one area of BNFL's oral evidence which seemed unclear. Mr Askew explained to the Committee that no agency had told BNFL how to manage and package its wastes, and that BNFL had been forced to make its own decisions on this. This appeared to account for much of the most recent increase in liability cost estimates.

 sThe difficulty is that a combination of Nirex and the NII already give guidance to BNFL on waste packaging—Nirex for intermediate level wastes (the bulk by volume) and NII for such issues as the management of the Highly Active Liquor tanks (high level liquid waste). It is not therefore clear why BNFL argues that it has no guidance on managing and packaging its wastes, and it may be worth exploring this further with BNFL.

NERA

17 July 2002


4   M Sadnicki and G MacKerron Managing UK Nuclear Liabilities STEEP Special Report no 7, SPRU, University of Sussex, October 1997, Chapter 5, especially Figure 6. Back

5   These issues are further explored in M Sadnicki's recent report Examination of BNFL Reports and Accounts 12 March 2002. M Sadnicki also raises important questions about BNFL accounting, especially on its treatment of the Nuclear Liabilities Investment Portfolio and its handling of depreciation charges. Back


 
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