Barclays de Zoete Wedd, front runner to advise the Government on nuclear privatisation, has failed to win in the first round of tendering.
The Government has been forced into a second round in its efforts to find merchant bank advisers for the privatisation of a large part of the nuclear industry, planned for next year.
There is speculation that BZW may now be excluded because of its advisory role in the controversial pounds 4bn sale of shares in National Power and PowerGen. BZW was unable to comment on the issue.
The Stock Exchange last week demanded a Treasury inquiry into the sale because shares were hit almost immediately by a warning on electricity distribution prices from the regulator, Offer.
BZW was considered a front runner for the nuclear job because of its key role in preparing the nuclear industry White Paper, which concluded that the company could be privatised. But it is believed there has been disagreement on the issue of the appointment between the Treasury and the Department of Trade and Industry.
The Treasury and its advisers, BZW and Kleinwort Benson, were aware before the electricity share sale that Offer was considering an announcement on prices. The fiasco over the generators sale has damaged the reputation of the London market, particularly among US investors. There is already a view that it will threaten future privatisations, including that of nuclear power.
The sale of Nuclear Electric and Scottish Nuclear - minus the ageing Magnox plants - is scheduled for next summer and could raise up to pounds 3bn. But John Collier, chairman of Nuclear Electric, has already warned that the tight timetable for the sale, announced in early May, is "just about feasible".
The DTI, responsible for the appointment, refused to say when advisers would be chosen. The department circulated its second invitation to tender at the start of this month. Its problem is exacerbated by existing relationships between several big banks and companies in the electricity industry. National Power and PowerGen, main rivals for the nuclear industry, are advised respectively by Schroders and SG Warburg. Nuclear Electric has appointed Morgan Stanley, and Lazard acts for Scottish Nuclear. There is also a view banks would prefer not to lead the international sale of the company formed by merging Nuclear Electric and Scottish Nuclear, which will have massive liabilities.
Separately, directors of PowerGen were preparing yesterday to sue the Observer newspaper for defamation over allegations that they cashed in pounds 3.5m worth of shares when they were in possession of a gloomy five-year internal forecast. The six directors, which include Ed Wallis, the chief executive, are expected to pay their own legal costs.