European Commission regulators and the U.K. government are close to an agreement on a 1.5 billion-pound ($2.7 billion) state bailout for British Energy Plc, the country's biggest power generator, people familiar with the situation said.

The U.K. government in 2002 agreed to lend British Energy 650 million pounds and assume some liabilities. The company said a 40 percent drop in power prices following liberalization of the market left it unable to pay its bills.

The plan will leave intact a utility whose nuclear plants provide a fifth of the U.K.'s power. The government convinced the commission, the European Union's regulatory arm, that forcing the East Kilbride, Scotland-based utility to shut down any of its plants may lead to shortages during peak demand and drive away customers, said the people, who declined to be identified. The EU will demand assurances the aid won't be used to subsidize power generation or acquisitions.

``British Energy will live to fight another day,'' said Trevor Sikorski, head of Global Insight Inc.'s European Energy Services unit. ``From an operational perspective it is essential that a majority of nuclear capacity stays on line -- without it there would be an extreme impact on prices.''

Commission spokesman Tilman Lueder and British Energy spokesman Andrew Dowler both declined to comment.

Coal-Fired Plant

A final agreement, expected by the end of June or July, will allow the utility to keep operational control over its 2,000- megawatt Eggborough coal-fired plant. British Energy won't face restrictions on future investments in renewable energy, such as wind power, the people said.

In return the company will come under the oversight of a regulator to ensure the aid is used to cover the decommissioning of nuclear power plants, which costs at least 150 million pounds a year, the people said. Under EU state aid rules, companies receiving restructuring aid are expected to sell assets and reduce their market share.

Banks and bondholders in February last year gave preliminary backing to the plan, under which the company will sell 550 million pounds of new bonds and give creditors as much as 97.5 percent of the equity in British Energy.

The U.K. also plans to change the terms of contracts British Energy has with state-owned British Nuclear Fuels Plc to trim the more than 300 million pounds a year that British Energy pays for buying fuel and having waste recycled.

EU antitrust regulators opened the formal probe of the bailout last July. Competition Commissioner Mario Monti recommended the investigation because of concern the rescue package may jeopardize competition in the U.K. power market.

To contact the reporter on this story:
Robert McLeod in Brussels on rmcleod@bloomberg.net

To contact the editor responsible for this story:
Eamonn Sullivan at esullivan@bloomberg.net.