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
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
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
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
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.
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.
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
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 packagingNirex
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.
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
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