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Electricity (Miscellaneous Provisions) Bill


 

These notes refer to the Electricity (Miscellaneous Provisions) Bill as brought from the House
of Commons on 6th February 2003 [HL Bill 30]

ELECTRICITY (MISCELLANEOUS PROVISIONS) BILL


EXPLANATORY NOTES

INTRODUCTION

1.     These explanatory notes relate to the Electricity (Miscellaneous Provisions) Bill as brought from the House of Commons on 6th February 2003. They have been prepared by the Department of Trade and Industry in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament.

2.     The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given.

BACKGROUND AND SUMMARY

3.     This Bill is being introduced to facilitate the Government's response to the financial difficulties of British Energy 1, Britain biggest electricity generator and only private sector nuclear generator, and to allow the Government to plan for a smoother path through administration should the British Energy not be able to deliver the restructuring it announced. Patricia Hewitt, Secretary of State for Trade and Industry announced her intention to legislate in her statement to the House of Commons on 28th November 2002, a statement repeated in the House of Lords by Lord McIntosh of Haringey.

    1 meaning the British Energy group of companies, including British Energy plc and its various subsidiaries.

4.     Although the provisions of the Bill are especially relevant to British Energy's position, with the exception of Clause 1, they have general application.

5.     The Bill is an enabling bill and will—

  • provide parliamentary authority for Government to incur expenditure on British Energy plc or its subsidiaries.

  • amend the Electricity Act 1989 to remove the barrier to Government acquiring shares in 'successor companies' (companies formed by the restructuring of the Electricity Industry prior to privatisation); and provide for the repeal of Part 2 of that Act.

  • amend the 1989 Act to remove the ceiling on financial assistance in relation to nuclear liabilities (under Schedule 12 to that Act), and to change the tax status of such assistance.

TERRITORIAL APPLICATION: WALES

6.     The whole Bill applies to Wales. There is no effect on the National Assembly for Wales.

COMMENTARY ON CLAUSES

Clause 1:     Expenditure relating to British Energy plc

7.     This clause provides authority for incurring various expenditure, out of money provided by Parliament through normal supply procedures, in relation to British Energy. The exercise of these powers is subject to the consent of the Treasury. This conforms with the long standing practice that significant ongoing expenditure should have specific statutory authority.

8.     Subsection (1)(a) authorises expenditure in relation to British Energy plc or any of its subsidiaries. This is in addition to the power that already exists to give financial assistance for nuclear liabilities under Schedule 12 to the Electricity Act 1989. Subsection (1)(a) could be used while the British Energy companies remain in the private sector, but could equally be used to fund the administration of the companies or to fund the company if the Government has acquired British Energy plc or its subsidiaries (as foreseen in subsection (b)(i)). Financial assistance includes assistance by way of grant or loan or by entering into a guarantee in respect of any obligations of British Energy.

9.     Subsection (1)(b) authorises expenditure in connection with acquisition of a British Energy company or its assets. This could be done either through the purchase of British Energy plc or its subsidiaries directly (through the purchase of the ordinary shares), or alternatively through buying the underlying business (undertaking) and assets without buying the Companies Act company that contains them. These provisions merely give Parliamentary authority to incur expenditure for this purpose. They do not give the Government any special power to acquire (compared with a normal buyer) nor do they put the company under any obligation to sell. They enable expenditure to be incurred but do not require it to be incurred.

10.     Subsection (1)(b)(i) enables the acquisition of ordinary shares and also other securities such as bonds and debentures. Acquisition could be made directly by Government, its nominee, or through a 100% Government owned company (a 'Crown company').

11.     Subsection 1(c) follows on from subsection 1(b) and authorises continued funding if Government acquires the business and assets of a British Energy company under (1)(b)(ii). If Government acquired companies under (1)(b)(i) then it would be authorised to continue to fund those companies under subsection (1)(a). But if it only acquired the businesses and assets separately from the British Energy companies, then (1)(a) would not provide the relevant authority, hence this additional provision.

12.      Any expenditure under this Clause could only take place to the extent that it is permitted by the EC State Aid rules.

Clause 2: Removal of restrictions on capacity to acquire certain securities

13.     Part 2 of the Electricity Act 1989 contains a number of provisions that restructured the Electricity Industry, allowing for its subsequent sale (privatisation). In the main, Part 2 has served its purpose and the provisions no longer apply or are now irrelevant.

14.     However, within Part 2 is a provision, section 74 (Target Investment Limits) which does still have effect. It originally ensured that the privatisation of a Government owned electricity company could not be subsequently reversed. It did this by restricting the Secretary of State's common law powers to acquire ordinary 2 shares in certain privatised electricity companies beyond a specified limit. In the specific case of British Energy Generation (UK) Ltd (a operating company within the British Energy group of companies) it would prevent Government from re-purchasing ordinary shares, since the limit for that company is set at 0% 3.

    2 But note that the Government holds a 'special' share in each of British Energy plc, British Energy Generation (UK) Limited, and British Energy Generation Limited.

    3 Electricity Act (Scottish Nuclear Limited) (Target Investment Limit) Order 1996 (SI No.3221 (S243)).

15.     Clause 2(1) of this Bill repeals section 74 of the 1989 Act. It also repeals section 72 of that Act which is a special provision for purchase of shares in successor companies (which, again, comprise certain of the privatised electricity companies). This section creates an unnecessary distinction between these companies and other companies in the electricity industry. The effect of these repeals would be to restore the Secretary of State's natural powers to acquire shares in successor companies.

16.     Clause 2(2) of this Bill gives a power to repeal any of the other provisions of Part 2 of the 1989 Act, which as stated above are, in the main, long since spent. This power is to be exercised by statutory instrument subject to a negative resolution procedure and enables the making of transitional and consequential provision and savings.

17.     The negative resolution procedure is considered appropriate because the power is a narrow one to repeal outdated provisions. The power in subsection (3) to make consequential and transitional provisions is also narrow and would permit for example the deletion of cross references in other Acts to provisions being repealed in Part 2 of the Electricity Act 1989.

Clause 3: Amendment of Schedule 12 to the Electricity Act 1989

18.     Schedule 12 to the Electricity Act 1989 provides Government with a power to give financial assistance in relation to certain nuclear liabilities, such as dealing with spent fuel and decommissioning costs, defined in the Schedule as "qualifying expenditure". Assistance can be provided in the form of grants, loans or loan guarantees. Paragraph 4 of the Schedule sets a ceiling on the level of assistance at £1 billion. This ceiling can be raised to £2.5 billion by statutory instrument, but no further.

19.     Clause 3(2) of this Bill removes the ceiling on financial assistance under Schedule 12.

20.     Clauses 3(3) and 3(4) make minor amendments to the Schedule to ensure that Government can give financial assistance for nuclear liabilities, via a third party if necessary.

Clause 4: Undertaking to provide assistance disregarded for tax purposes

21.     The relevant background to this Clause is the accounting and tax treatment of nuclear liabilities and payments towards them. In the main, nuclear liabilities are accounted for on an accruals basis - ie a company accounts for a liability as that liability is incurred, rather than when cash is actually paid out. (For example, liabilities relating to dealing with spent fuel are recognised as soon as the fuel is irradiated (used) within a reactor, and decommissioning liabilities are recognised once a reactor is switched on). Similarly, the bulk of liabilities are treated for tax purposes on an accruals basis. Companies can claim tax relief on the provisions they make against liabilities as these are accrued (to the extent that the actual expenditure would be allowable for tax) - they would not then receive tax relief when actual cash payments are made since the liabilities are treated on an accruals basis. An undertaking to provide financial assistance for liabilities that are taxable on an accruals basis would be treated in a similar way - that undertaking would be recognised for accounting and tax purposes on an accruals basis (ie when the undertaking is given and the entitlement arises) not on a cash basis (when individual payments are made).

22.     If the Government gives an undertaking to a company to provide a grant in respect of accrued expenditure this undertaking will be recognised - under generally accepted accounting practice - as an asset to the company in its balance sheet.

23.     When a company first recognises such an asset in its balance sheet, this recognition would give rise to a credit in its profit and loss account. And under tax law, this credit would be included in the tax computation to establish the amount of profit made by the company which is liable for corporation tax. So if the company is already making a profit, the amount of taxable profit would increase, meaning that the company would pay more tax. Alternatively if the company is otherwise making a loss, the level of the loss would be reduced by the recognition of the undertaking and so the amount of loss available to be carried forward to later years would be reduced (so the company may pay more tax in later years once it does make a profit).

24.     Clause 4 provides that the initial recognition of a Government undertaking to make a grant under Schedule 12 to the Electricity Act in respect of qualifying expenditure in a company's accounts would not be included in the tax computation ("a disregard").

25.     This disregard would only apply to the initial recognition of an undertaking - ie the value recognised by the company when it first receives the undertaking. It would not apply to any subsequent change in estimated value of the undertaking or the expenditure to which it relates (which would also generate a corresponding credit or debit in the profit and loss account). The valuation of the undertaking may change over time for different reasons for example:

  • an undertaking which relates to expenditure in the distant future would be recognised in the accounts on a present value basis (cash cost discounted over time); subsequently as time moves on and the payments become closer, so the valuation of the undertaking would increase (because the discount becomes less significant)

  • if the undertaking is written in terms of paying for a particular liability without setting a price, then any change to the expected cost of the liability would be reflected in the value of the undertaking

26.     Where the undertaking has been treated on an accruals basis for tax purposes, actual flows of cash coming from the undertaking would not then themselves be subject to tax (just as, similarly, cash payments by the company on nuclear liabilities would not be eligible for tax relief, where relief had already been given on an accruals basis).

27.     This particular tax disregard for Schedule 12 grants will only be available for undertakings given prior to 31st March 2008. But this latter date can itself be extended by Statutory Instrument up to 31st March 2011 at the latest.

REGULATORY IMPACT ASSESSMENT

28.     No Regulatory Impact Assessment has been prepared since this Bill imposes no significant cost on business.

29.     The Bill does not in itself impose any regulatory requirements on business or make anything happen 4. It is an enabling measure - enabling actions that the Government may subsequently take.

    4 Strictly, Clause 4 on taxation does immediately change the tax status of Schedule 12 Grants. But Schedule 12 is itself a discretionary power for Government to give Grants, so the effect is similar to an enabling power.

30.     Action enabled and taken subsequent to the Bill will not impose a direct cost on business. And any support to British Energy or another company subsequent to this Bill will need to be provided in compliance with the European Union State Aids rules. These aim to ensure that any support is proportionate and does not unduly harm competitors.

31.     The removal of the legal block on acquiring shares in companies does not impose obligations on companies. It allows the Secretary of State to act like any other legal person in being able to acquire shares in a normal commercial (voluntary) transaction. It removes a provision which appears designed for the privatisation process, but now appears outdated given the significant changes to the structure of the Electricity market since.

PUBLIC SECTOR FINANCIAL COST AND PUBLIC SECTOR MANPOWER EFFECTS

32.     The Bill does not of itself incur expenditure or cause a change in manpower. It will permit, but will not require, spending money on British Energy or potentially acquiring a successor company. The financial cost / manpower implications would depend on how the Government acted in any particular case.

33.     In the case of British Energy, the Government has already set out its position on what support it is prepared to give in the statement given by Patricia Hewitt, Secretary of State for Trade and Industry, to the House of Commons on 28th November 2002.

COMMENCEMENT

34.     The Bill will come into force on the date that it receives Royal Assent.

EUROPEAN CONVENTION ON HUMAN RIGHTS

35.     Section 19 of the Human Rights Act 1998 requires the Minister in charge of a Bill in either House of Parliament to make a statement, before second reading, about the compatibility of the provisions of the Bill with the Convention rights (as defined by section 1 of that Act). This statement has to be made before second reading. The Lord Sainsbury of Turville, Parliamentary-Under Secretary of State has made the following statement—

    "In my view the provisions of the Electricity (Miscellaneous Provisions) Bill are compatible with the Convention Rights".

 
 
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Prepared: 10 February 2003