Comment: Why the nuclear industry is a risky business

If you thought Professor (Forrest Gump) Stephen Littlechild, the electricity regulator, was a difficult man to predict, wait for the emergence into the public eye of Sam Harbison, the chief inspector of nuclear installations. He may be about to bring a whole new meaning to the term "regulatory risk". Dr Harbison, the man charged with preventing a Chernobyl or Three Mile Island in the UK, has not so far had any influence at all on the fortunes of private investors.

Yet when the nuclear generating companies are privatised he will have power of life and death over their operations; safety is, or should be, paramount. He could, for instance, with little if any warning, decide to shorten the century or more proposed for decommissioning reactors, thus throwing into dissarray present calculations on the cost of provisions. Changing the time-scale would have a dramatic impact on costs.

Another risk is that the inspectorate may demand more frequent plant shutdowns for inspections, reducing revenue. And most catastrophically from the point of view of investors, any serious generic fault emerging in the reactors could lead to an order from the inspectors to reduce output semi-permanently.

Corrosion problems have led the inspectorate to impose long-term output restrictions in the past. The power companies say these were caused by teething problems, but it would be foolish to rule out restrictions for some other reason as plants grow older.

Conventional power stations have safety problems, too, but they are by their nature easier to put right and less catastrophic in their consequences if they occur. For all these reasons, regulatory risk, already highlighted by Professor Littlechild's interventions in electricity pricing, will be well nigh impossible for investors to price into nuclear privatisation.

The issue is not whether there will be a movement a few per cent either way for power sales tariffs but whether there could be large and unforeseen changes in revenue for the company. The prospectus, if we ever get to that stage, is therefore going to make fascinating reading.

Ignoring such problems, the finances of a privatised nuclear company are in fact beginning to look quite respectable, largely because the older Magnox stations will be kept by the Government. Last year, Nuclear Electric lost £434m, before counting the £1.2bn nuclear levy, but £240m of that was because of the Magnox stations and £210m was one-off restructuring costs.

The advanced gas-cooled reactors and the pressurised water reactor at Sizewell in Suffolk pretty well broke even, and as the PWR gets up to full capacity over the next year, the company, excluding the Magnox stations, will begin to look adequately profitable to sell. Nuclear's improving financial position helps to explain why the Government is planning to drop the nuclear levy two years early.

The levy is essentially a tax on consumers to pay decommissioning and particularly the spent fuel treatment costs. Given the new look to the nuclear industry's finances, it is hard to justify continuing it a moment longer.

None of this helps the Government very much in selling nuclear to the City. The risks of another Chernobyl in the UK are certainly tiny; the industry would in any case be largely ring-fenced from the costs of such a disaster. The Government is nonetheless going to have a tough task convincing investors this is anything but a highly risky industry from both a regulatory and technical point of view. The Government will be lucky indeed to get the £3bn the optimists expect for both companies.

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