Nuclear sell off-gets green light

The Government yesterday approved the £3bn privatisation of the nuclear industry, which will be carried out after a controversial merger of Nuclear Electric with Scottish Nuclear.

But the electricity regulator, Professor Stephen Littlechild, is likely to react with dismay. He has told the Government he is against any further concentration in the generating market.

The combined company would have a UK market share of 22 per cent, according to Nuclear Electric, and a share of about 18 per cent in England and Wales. The headquarters will be in Edinburgh - a move intended to avert fears over job losses in Scotland and the loss of Scottish identity.

The decision, to be formally announced on Tuesday, is a bitter blow to Scottish Nuclear, which has lobbied fiercely for its independence. Robin Jeffrey, chief executive, has said between 300 and 400 jobs are at risk in Scotland in the merger.

Plans to merge Nuclear Electric and Scottish Nuclear are likely to dismay Professor Littlechild, who is against any concentration of interests in the generating market.

It is believed that the Government plans to complete the sale by next summer. Should the rumoured price tag of £2bn to £3bn be achieved, it would allow a cut of about 1.5p on the standard tax rate.

Plans for the privatisation have been revived in spite of billions of pounds of liabilities in the industry relating to decommissing and nuclear waste management. City nerves over the extent and uncertainty of these liabilities caused nuclear to be suddenly pulled from the privatisation of the electricity industry five years ago.

The main difference this time is that the Government is expected to retain Nuclear Electric's older Magnox reactors in a separate state-owned company, ring-fencing liabilities that are thought to be in the region of £9bn. Both Nuclear Electric and Scottish Nuclear have also increased their efficiency substantially and believe they can compete in the generating marketplace.

The liabilities relating to Nuclear Electric's five advanced gas-cooled reactors and the new pressurised water reactor at Sizewell in Suffolk would amount to about £6bn at the time of privatisation. Scottish Nuclear has two AGRs in operation and has liabilities of £1.8bn. About £700m of those are thought to relate to an old Magnox station, which will probably remain in state ownership.

The consensus in the City is that the Government will be able to sell the industry if the price is low enough. One analyst said: "I think they can do it but the crucial thing is what liabilities the Government will keep. This time around things are better quantified but the basic issues have not changed." He added: "The Government has set its heart on tax cuts and of they do not come from privatisations where do they come from?"

Another analyst said: "It has got to have to be on a very generous yield." He said that it was far too early to speculate on a price as investors would also be watching for the outcome of the review of electricity prices by the regulator, Professor Littlechild. There is also some nervousness that Professor Littlechild will refer National Power and PowerGen to the Monopolies and Mergers Commission if they fail to meet his demand that they sell some power plants.

Professor Littlechild, who in the past suggested that the two companies swap power stations to increase competition north and south of the border, would have the power to refer the new organisation to the MMC. This could, however, be overturned by Michael Heseltine, the President of the Board of Trade.

The Government will also announce an early end to the £1bn annual subsidy for Nuclear Electric, raised through a levy on electricity bills. The move would allow a cut of about eight per cent on electricity bills in England and Wales but would raise questions about the funding for decommissioning Magnox plants and treating their fuel.