Tom Adams
Financial Post
January 14, 2005

Atomic Energy of Canada Limited (AECL) has cost federal taxpayers an estimated $17-billion in failed attempts to develop commercially viable nuclear reactors. Even the sales that AECL has made have proven to be wildly unprofitable, going back a generation to its perplexing reactor sale to Argentina, when AECL agreed to price its contract in pesos. Today, the federal Crown corporation is poised to blow more billions.

AECL is currently negotiating performance guarantees with two domestic clients – Hydro Quebec and New Brunswick Power – that have had disappointing experiences with their own nuclear power plants. These provincially owned power utilities, fearing a repeat of the cost overrun of more than 300% for the ongoing nuclear refurbishment at Ontario’s Pickering station, are looking for guarantees to backstop their own proposed mega renovations.

These utilities have good reason to doubt AECL’s estimates of the cost of refurbishing their plants. The only time nuclear power’s economics have been subject to regulatory review in Canada was in 2002, when the NB Public Utilities Board considered NB Power’s proposed $865-million renovation. As part of that proposal, AECL provided extensive guarantees around renovation costs and post-renovation production. AECL assured the board the government of Canada stood behind its promises, including the price guarantee. Despite the assurances, the board decided the proposal remained too risky for consumers and rejected it. Meanwhile, the estimated cost has risen to $1.4-billion. The provincial government promised an answer on whether a better deal had been reached with AECL by the end of 2004 and is now expected to make an announcement later this month.

AECL is also trying to sell commercial nuclear reactors in the United States, where privately owned utilities generate most of the country’s power. These private utilities got badly burned in the 1970s and 1980s – some were effectively driven into bankruptcy – when they found themselves on the hook for reactor construction projects that went sour. This time around, shareholders are pressing for reactor vendors to assume more of the risks involved in this notoriously cost-overrun-prone industry. According to The Wall Street Journal, AECL has agreed to share the financial risks of building new nuclear plants.

Commercial power reactor customers aside, AECL also has growing business problems with another of its major customers – MDS, an international health and life sciences company. MDS is preparing to battle AECL over its failure to deliver on another major reactor project.

In 1996, MDS entered into a contract with AECL to build two isotope production reactors and associated facilities, designed to produce ingredients used for medical diagnostics and radiological treatments. The original plan anticipated completion of the first reactor, called MAPLE 1, by 1999 and MAPLE 2 in 2000. The entire two-reactor project was supposed to be delivered for $140-million.

In 2000, already well behind schedule on the delivery of the first reactor, AECL encountered a reactor safety equipment failure. The shut-off rod emergency shutdown system, a central part of the safety system, jammed open, leaving the reactor without brakes. MDS would also be alarmed to hear that CNSC, Canada’s nuclear safety regulator, found AECL had attempted to conceal the extent of the problem from its regulator. The inquiry that followed forced AECL to admit guilt. A comprehensive reorganization of AECL’s MAPLE project management team ensued.

In 2003, AECL discovered another serious safety flaw, this time a design miscalculation related to the reactor’s fundamental physics, leading to more project delays.

Then, during the third quarter of 2004, AECL notified MDS that yet another safety problem was discovered in one of the reactors. Operating tests of the shut-off rod safety system, which was supposed to be fixed back in 2000, showed it was again malfunctioning, and AECL is having difficulty coming to grips with the problem. It was scheduled to present its findings to the Canadian Nuclear Safety Commission at its November meeting but missed the deadline.

MDS has poured $330-million into MAPLE so far, but does not know how high the final tab will go. MDS’s third-quarter financial statement notes: “Given current uncertainties, it is not possible, at this time, to predict the final construction costs or operating costs that will be borne by MDS.”

Not surprisingly, MDS is leaving the door open to litigation. “We continue to be disappointed by AECL’s performance in resolving technical and regulatory issues on this project,” it states. “Financial responsibility for construction cost overruns and portions of pre- and post-commissioning operating costs are the subject of a dispute with AECL. We intend to vigorously pursue our interests in this dispute.”

It may have lots of company.