Outlook: Good money after bad as nuclear again taps the public purse

FSA in the dock

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British Energy rescue to cost taxpayers £3bn

British Energy rescue leaves shareholders out in the cold

Suave banker chosen to avert nuclear meltdown

City's cry of pain over rising cost of regulation

Outlook

Britain's entanglement with the nuclear power industry has been a bungling tale of astronomically expensive political bravado and managerial ineptitude from the moment the first Magnox stations were opened more than 40 years ago. Yesterday's British Energy bail-out demonstrates that privatisation and the passage of years has done nothing to dampen nuclear's need for taxpayers' money.

When British Energy was privatised by the last administration in 1996, it was hoped that the liability, or at least a part of it, had been removed from the public books once and for all. No such luck. Like a bad penny, it has come bouncing back. Privatisation proved to be no more than a temporary, sticking plaster solution. On the Government's own figures, the total eventual cost of bailing out British Energy will be £3.4bn. That's a discounted figure to the value of today's money, mind. The actual cost will a good deal higher.

By any standards, this is a huge sum of money, though it pales into insignificance set aside the £50bn plus of public money that was effectively written off when the industry was privatised. Is this not just good money after bad? Is it really worth spending so much more to save an industry that has already cost so much? Certainly it would not be were it not for the fact that the alternatives, administration followed inevitably by enforced public ownership of the reactors, would in all likelihood cost even more. This is not like the great state bail-outs of the late 1970s, for shipbuilding, autos and steel. In the case of nuclear, the Government has no option.

From the moment British Energy admitted its insolvency, the only issue for ministers has been how to extricate themselves from the mess at the lowest possible cost to the public purse. In the event of an administration, all the long term liabilities bounce back onto the Government. There would be no one else to pick up the tab. Nor has this ever been an issue of keeping the nuclear reactors going so as to keep the lights on. Nuclear accounts for something like a fifth of all electricity generated in the UK, but that generating capacity was never in any danger of being closed outright. It costs a great deal more to close a nuclear generator than to keep it running, when at least it is still generating some cash, whatever it charges for the juice.

The Government is betting that yesterday's deal, which maintains at least the pretence of private sector ownership, will end up cheaper than outright nationalisation. Whether this is true or not is anyone's guess. Some bondholders are already saying they would get more out of administration than yesterday's proposals, so the Government may well be right. Certainly Adrian Montague, the new chairman, will need all his project finance skills to persuade debt holders that the restructuring is their best hope of salvaging at least something from the wreckage.

As it is, the package is virtually a renationalisation anyway. The Government takes back all the historic liabilities for getting rid of spent fuel at a cost of £200m a year for the next ten years. It has also been forced to agree to a cut of up to £120m a year in the cost of providing British Energy with fuel from BNFL. On top of that, it has agreed to assume responsibility for the Nuclear Liability Fund, which will eventually pay for the costs of decommissioning. In return, British Energy has agreed to pay the first 65 per cent of any profits it makes into the Fund. That leaves just 35 per cent for equity and debt holders, assuming British Energy ever returns to profit.

Debtholders get a quarter of their money back, though only in the form of new, longer-dated bonds. The rest is to be converted into equity, leaving existing shareholders with a maximum of 5 per cent of the stock. A mighty fuss was kicked up over the fate of Railtrack shareholders, but this is much worse.

The Government hopes that yesterday's measures will give British Energy a new start. But to guarantee nuclear's long-term participation in the energy mix, ministers must also give nuclear monetary credit for carbon free electricity generation in next year's energy review.

FSA in the dock

You wouldn't expect high praise from financial practitioners for the Financial Services Authority but perhaps the most surprising thing about yesterday's "Practitioner Survey" is that the change to a single City regulator is generally regarded as "beneficial" by those it regulates. What's more, there is support for "strong regulation", for a firm line being taken with persistent offenders, and for the FSA's wearying propensity to consult on all it does. Better that, says the City, than that the FSA ignorantly imposes unnecessary rules. Unfortunately for Sir Howard Davies, chairman of the FSA, that's where the praise ends.

The rest of the survey makes worrying reading. There is growing concern over the effectiveness of regulation and its cost. Practitioners reckon the FSA is giving undue weight to the interests of consumers over practitioners, they think the level of guidance from the FSA on what's expected of them is poor, and they think the degree of regulation and the perceived need constantly to adjust it is beginning to damage Britain's position as an international financial centre.

The last time the Financial Services Practitioners Panel surveyed the industry was in 1999, before the FSA came into existence. The latest survey shows a marked deterioration in views across a wide range of issues. Donald Brydon, chairman of the Panel, regards this as an "amber light" for the FSA and the Government. I would go further and describe it as the clearest warning yet that the FSA needs urgently to rethink its approach if it is not to throw the baby out with the bathwater. Financial regulation is becoming too costly, too complex and too bureaucratic.

It takes time, but the end result of too much regulation is that business eventually leaves for places where the demands are less onerous. The whole point of the FSA was that the City could be made more competitive if it were seen to be properly regulated. To judge from this survey, the pendulum may already have swung too far.

To be fair on Sir Howard, getting the balance right is a virtually impossible task. In the eyes of the outside world, there is always either too much regulation or too little. With Equitable, the FSA is accused of being "asleep at the wheel". The hundreds of cases annually where regulators show prescience and thereby save the public from calamity necessarily go unseen and unreported. But to achieve such success requires a degree of intrusion that honest and solvent practitioners find oppressive and unnecessary.

Sir Howard insists that he cannot catch everything, or at least that if he attempted to the costs would become unacceptably high. Besides, the financial system needs failures, provided they don't pose systemic risk, in order to renew and reinvigorate itself. Absolutely right, but he is, perhaps, already trying to catch too much.

The most worrying aspect of yesterday's survey are the pie charts (see below) showing the cost of compliance. Even among larger firms, nearly 40 per cent report that compliance takes up more than 5 per cent of their costs. That's far too high. Among smaller firms, which in most industries is where the bulk of the employment and innovation comes from, the situation is much worse. More than 60 per cent of respondents said compliance was 5 per cent or more of costs, and more than a third said it was more than 10 per cent. Thus does unduly onerous regulation unduly penalise the smaller player.

Perhaps unsurprisingly, it is smaller, retail financial services companies that are the most vocal in their concern about the flood of extra regulation. Bigger companies find it both easier to cope with regulation and to pay its costs. But even the big boys are grumbling. At a time of general belt tightening, the only thing that seems still to be inflating away as if there were no tomorrow is the cost of regulation – a growth industry if ever there was one.

jeremy.warner@independent.co.uk