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Thursday, 28 November, 2002, 14:42 GMT
Q&A: British Energy's crisis
The future of the UK power giant British Energy has been on the line since September 2002.

The firm, which was privatised in 1996, made a loss of 500m in the past financial year and had to go cap-in-hand to the government to ask for cash.

A total of 650m in emergency funding was granted but the group had until 14 February to sort out new financial restructuring or face administration.

BBC News Online looks at what went wrong.

Is this another Railtrack-style fiasco in the making?

There are certainly some similarities.

It is another privatised company that has had to go to the government and beg for money to save it from insolvency.

And once again the government seems to have got rid of a state-owned company without getting rid of its responsibility for that business.

But in other ways, this is very different from the Railtrack situation.

Please explain?

You could argue that many of Railtrack's problems were simply down to bad management.

But the reason British Energy is losing so much money is that the price of electricity on the wholesale market has dropped 40% in the past four years.

It is costing more for the company to produce electricity than it can earn from selling it in the marketplace.

The sums just do not add up.

Why has the price of electricity fallen so much?

It is because the wholesale market was opened up to competition after years of inefficiency and price-rigging.

There was too much electricity available and with more companies vying to sell the electricity, the price was forced down.

Competition also exposed the fact that many of the plants being operated were uneconomic.

Julian Sinclair, a fund manager from Gartmore, said it was not just a problem for the electricity industry.

"It happens in many industries where competition is opened up and so many people come into the industry that... supply exceeds demand and prices fall and players have to exit again."

So British Energy is not the only one with problems then?

No, British Energy is not alone. All of the electricity generating companies are struggling to make money at the moment.

Some generators have switched off plants while others have defaulted on debt repayments and one has gone bust.

But British Energy's problems are more serious than those of its peers because it is a nuclear power producer.

That means it cannot simply switch off generators when prices fall.

Big rivals such as Scottish Power and PowerGen also deliver power to end-users who pay the full price for electricity. That cushions them from the effect of a fall in wholesale prices.

British Energy cannot do this as it does not have a retail arm.

Could it be game over for British Energy then?

That scenario is very unlikely. With British Energy supplying a quarter of the country's electricity, that would leave a very big hole in the electricity grid.

The BBC's business correspondent Hugh Pym says that, if BE folds, the government is likely to take over the running of the company since it is a major creditor

But advisors have suggested a more likely scenario is for creditors to swap the 1.3bn debt owed to them by British Energy in return for a stake in the company.

At the moment there is no money and little incentive to build new power stations.

And it is hard to see who would run the nuclear stations in BE's absence.

Could the government come to the rescue?

British Energy says it needed the government cash for its immediate survival.

The government meanwhile has insisted there is no question of taxpayers handing a blank cheque to British Energy.

So while the emergency loan has been extended, no fresh cash has been injected by the government.

But we are talking about a nuclear power company, and the government has said it has to be involved because it has a responsibility for the safety of nuclear power.

Which is why the government has agreed to underwrite the multi-billion pound clean-up risk which British Energy would face if disaster struck.

What about the shareholders?

It looks like one of those investments where shares can go down as well as further down.

If bondholders and creditors accept a large stake in the company in exchange for the debt, that will leave a much smaller piece of the pie to be divided among the other shareholders.

They were worth 80.75p when British Energy announced it was appealing to the government for help earlier this month.

And when trading resumed after the first emergency funding deal, they quickly slumped more than 80% to 14p.

That have since fallen further to 6p per share.

See also:

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