Failings by Britain's nuclear energy firm could have been prevented, according to the official spending watchdog.

British Energy failed to respond effectively to changes in the electricity market and continued to trade while failing to prepare for the problems it was facing, a report claimed on Friday.

The National Audit Office said its predictions about the firm's problems, which took a £410 million grant from the government in September 2002, had been realised and questioned why its management did not take action.

Privatisation

British energy, which produces about a fifth of the country's electricity, was privatised in 1996 and made profits until competition in the wholesale energy market cut its margins.

The cost of decommissioning old nuclear power stations added to the company's problems.

The DTI took action in September 2002 after the firm revealed losses of £337 million.

Ministers are criticised by the NAO for failing to evaluate the effect of deregulating the energy market on the company's ability to meet the cost of its obligations.

But their swift preparations for stepping in were welcomed by the watchdog.

Criticised

British Energy bosses are criticised for sending out mixed messages about the state of its operations and not responding effectively to changes in the market.

Sir John Bourn, head of the National Audit Office, argued British Energy were well aware of what the problems were and could have prevented the firm's slide to disaster.

"It is regrettable that risks identified in my report of 1998 have materialised," he said.

"British Energy’s actions contributed significantly to its difficulties, and the department was constrained in what it could do. But this case highlights the importance of monitoring and managing previously identified risks to ensure that the taxpayer is well protected."

The report drew an angry response from the opposition.

Shareholders

Malcolm Bruce, the Liberal Democrat's DTI spokesman, argued that a failing company should not have been paying off its shareholders.

"This report shows that British Energy continued to pay dividends that the company's performance could not justify. At the same time the DTI failed to realise the effect the new market for electricity would have on British Energy's profitability and the exposure of taxpayers to the company's nuclear liabilities," he said.

"The rise in the price of British Energy shares in the past week shows that shareholders are still hopeful of getting some return. It is unacceptable that shareholders in a private company who have failed to hold the management to account should be bailed out by the British taxpayer."