AECL deal focus-shift: the real negotiation intensifies

• See also “Nuclear Ontario: the end of the beginning?” March 1, 2011

Negotiations over the sale of Atomic Energy Canada Limited to a private sector buyer have broken down, and nobody should be surprised. The crux of the issue is the Darlington new reactor construction project. This issue is essentially between the governments of Canada, which owns AECL, and Ontario, which wants to buy a couple AECL reactors. Ontario wasn’t part of the negotiations over the sale of AECL’s reactor division; hence the negotiations went nowhere. Another way to put it is, AECL’s future is bound up in Darlington. Until Darlington gets settled, it’s tough to settle AECL. Once it is settled, the private buyer will be looking at a clearer picture. So we should look at the privatization process as having been deferred, not finished.

On Darlington, Ontario wants certainty on the price, and also wants the price to be reasonably low. It was the second of these that put the process on the shelf. The feds left the problem of determining the financial definition of “certainty” to AECL, which, in order to comply with the bid requirements, had no choice but to highball its estimate of that financial definition. So, when AECL in mid-2009 tendered its bid to be the maker of new nuclear reactors at Darlington, the Ontario government liked the technology—it has for decades provided most of Ontario’s electricity—but not the price tag. AECL’s final price included an estimate of how much it would cost if construction were delayed and the highly skilled, highly paid project workforce were paid to stick around until construction could resume.

Nobody is a soothsayer; nobody can tell with certainty the cause or duration of a future event. What could cause a project delay? In this case, there are three big potential causes. First, the nuclear regulator might demand time-consuming changes in some aspect of the reactor design. Second, other engineering or construction problems could arise; this is not uncommon when building a large first-of-a-kind machine and especially a nuclear reactor. Third, the buyer might wonder if it really needs the power.

The third of these causes was the biggest factor that drove up the final cost of the original Darlington project. As I described in “Nuclear Ontario: fed-prov negotiation needs to continue,” Ontario politicians responded to differing projections of electricity demand by halting, then resuming, the project. The project was never outright cancelled, which meant the construction workforce was paid to sit idle. And they were paid with borrowed money, during a period of historically high interest rates. No wonder the project cost ballooned.

If that were to happen on the new Darlington project, it would clearly be the buyer’s fault.

In the event of a change demanded by the regulator, the buyer could, with reason, say that that is the seller’s problem. If the seller offers a reactor, then it’s the seller’s responsibility to make sure all the regulatory ducks are in a row. If that proves, during the project, not to have been the case, the seller should absorb the cost of that delay.

In this case, AECL could say that it has, so far, done as much as could be reasonably expected: it began working with the Canadian Nuclear Safety Commission to assess the design of the ACR1000, the reactor it offered to Ontario, in December 2008. Since then it has passed Phases 1 and 2 of the design review.

In announcing the results of its phase 2 review, the CNSC said the following:

Based on the Phase 2 review, CNSC staff concludes that there are no fundamental barriers to licensing the ACR-1000 design in Canada. It should be noted that this is subject to the successful completion of AECL’s planned activities, in particular those related to research and development.

Regarding research and development, CNSC said this:

Some key R&D work is in progress and AECL has a plan to complete the work in three phases over a number of years. CNSC staff expects all key safety-related R&D to be completed prior to the submission of an application for a licence to construct. Detailed CNSC review of the adequacy of individual test programs for specific applications was considered beyond the scope of Phase 2 …

According to CNSC’s website, as of today (January 20, 2011), the follow-up phase of the design review has not been completed; it was to have been completed by December 2010.

Of course, since Phase 2 of the design review was in progress when AECL handed in its bid for Darlington in June 2009, the nature of a possible regulatory-related delay would have been an even bigger uncertainty than it is today.

Could that have been the reason for the size of AECL’s price tag? Confidential documents indicated that the federal government had told AECL not to expect any federal support in the event of an unforeseen cost increase on the new Darlington project; the company should factor that contingency into the final price. Let’s remember AECL had received sizable dollars in the 2008 and 2009 federal budgets for developing the ACR. And let’s also remember the Chalk River saga which began in late 2007. That involved AECL and highlighted its difficulty both in commissioning two dedicated medical diagnostic radioisotope production reactors and in accurately estimating the nature and duration of maintenance outages at the NRU reactor at Chalk River. Chalk River erupted, in late 2007, into a noisy public issue and resulted in the demotion of the CNSC president. So it is understandable that the feds would have been averse to backstopping Darlington reactors in those circumstances.

But those circumstances have subsided somewhat. The level of regulatory uncertainty should be less today than it was in mid-2009—though industry insiders say there is still a lot of uncertainty surrounding the ACR.

Can’t Ontario and Ottawa take another crack at it? Both are now blaming each other—in today’s Toronto Star and National Post—for the inaction on Darlington. Thousands of high-paid jobs are at stake; these jobs would be created with a stroke of a pen. Canada would take by far its biggest step toward the low-carbon electricity goal the government set out in its post-election Throne Speech in 2008.

So settle Darlington. The United States has codified financial mechanisms for jump starting new nuclear construction, in the form of loan guarantees. Loan guarantees are a low-risk way of drawing private money to the table. With such a mechanism in Canada, maybe private sector buyers would take another look at AECL.

This would be a certain way to create thousands of jobs, almost instantly, in Ontario’s economic heartland. It would put Canada immediately back in the running as a major international reactor vendor.

See related posts:

• Nuclear Ontario: the end of the beginning? March 1, 2011
• Nuclear Ontario: fed-prov negotiation needs to continue
• Ontario’s electrical future: another go at Darlington?
• A cold-blooded look at the CANDU: problems and opportunities
• State support for nuclear power in Canada and France: a tale of two countries