LONDON - British Energy creditors signed a restructuring deal recently that hands them control of the stricken nuclear power producer in exchange for forgiving more than half its 1.3 billion pounds ($2.2 billion) of debts. The government hopes the deal will avoid a renationalisation of the loss-making firm, which produces of a fifth of the UK's electricity.

But it will cost tax payers hundreds of millions of pounds a year for decades and existing shareholders will be almost shut out as creditors take 97.5 percent of the firm. British Energy ran into trouble last year as prices fell below its cost of production in an oversupplied market after the industry was opened to competition.

Its share price collapsed and bank and trade creditors were left wondering if they would ever see their money again. An emergency state rescue package followed, attracting hostility from anti-nuclear campaigners and some of British Energy's competitors.

The terms of the deal are broadly those proposed in February by the government, but recently it was revealed how much creditors would hold in exchange for forgiveness of about 65 percent of what they were owed. "We are determined to see British Energy return to being a prominent and respected participant in the UK energy market," said Chief Executive Mike Alexander.

EYES ON EUROPE

The deal still hinges on clearance by the European Commission, whose energy and trade officials are scrutinizing the plan to see if it constitutes illegal state aid. The government said it hoped to secure EU clearance by mid-2004, but warned that failure to do so would result in insolvency and renationalisation.

A wider group of creditors must also give their approval by October 31.

A return to investment grade was one of the aims of the restructuring, and the company said it would continue discussions with the agencies about this. The company's bombed-out shares, once a member of the FTSE 100 index of the UK's biggest companies, were quoted at 6.16 pence, having closed on Tuesday at 5.35p, valuing the current equity in the company at about 35 million pounds.

TAXPAYERS HIT

While shareholders and creditors take some pain, the state will be picking up an extra bill of up to 200 million pounds a year for a decade, and an unspecified amount after that.

This is because the main plank of the restructuring is an agreement from loss-making state-owned British Nuclear Fuels Ltd (BNFL) to accept a lower price for reprocessing fuel for British Energy.

Tax payers foot the bill for BNFL's rising losses. The state has also agreed to take over British Energy's multi-billion pound clean-up liabilities.

Opposition politicians criticised the plan.

"The British government demands that other EU countries...stop unfair government aid for failing enterprises, and it is a double standard to demand the right for the UK," said member of parliament Vince Cable, industry spokesman for the Liberal Democrats party.

"British Energy ought to be placed into administration."

The crisis has become the backdrop to a fierce environmental, economic and strategic debate about the pros and cons of nuclear power.

Recent power blackouts in North America, Britain and Italy have also focused attention on the industry. British Energy is the latest formerly state-owned UK firm to hit difficulties and be relaunched into the private sector with state backing. Two years ago, privatised rail network operator Railtrack collapsed to be replaced by state-backed Network Rail.