Saturday, July 4, 2009

AECL future? Who’s really ‘dysfunctional’ in Canada?

It's time for the crown corporation to stop being an Ottawa sucker and act like an Ice Road Trucker

overloadedConservative Prime Minister Stephen Harper may come to regret his blunt language reported in the Economist June 18 in which his spokesman called Atomic Energy Canada Limited (AECL) “dysfunctional.” The insulting language, which will undoubtedly affect at least 30,000 votes in Ontario for the next election, came after a series of calamitous events involving AECL’s repeated failures to keep the flow of medical isotopes moving from Chalk River and a pre-emptive vote of no confidence from Ontario’s Energy Minister over AECL’s expensive bid for the $22 billion Darlington project.

Chalk River and Darlington projects

Buck stops here

The situation has developed in several parts, but all the pieces come together, but not in a cohesive whole, at AECL’s doorstep. The first, and most visible problem, is that ultimately the failures at Chalk River and with the Maple Reactors, while blamed on AECL, in fact represent a failure of political leadership that hits the Harper government with the same force as Harry Truman’s famous characterization of accountability – “The Buck Stops Here.”

For years the Harper government and previous administrations have ignored AECL's calls for replacement of Chalk River, built in the 1950s, with a modern facility. The fact that the isotope business made money hand-over-fist seemed lost on the government. The failure of the Maple Reactor projects is also in reality a failure of political leadership because the government allowed the future of a critical medical service, with global importance, to be turned into a sandbox for scientists instead of a focused project.

The second, and more damaging development relative to AECL’s long-term future, is the action taken by Ontario’s Energy Minister George Smitherman. He suspended negotiations with AECL over its bid for the $22 billion Darlington new nuclear build claiming the crown corporation had failed to adequately sharpen its pencil on price. He also rejected bids by Areva and Westinghouse as being “noncompliant” with the tender. If AECL cannot close a deal on its home turf of Ontario with its new ACR1000 reactor, it is unlikely it will ever sell any for export.

Who will stand behind costs and why?

Smitherman should be forgiven, at least in part, for assuming that since AECL is a creature of the Canadian federal government, and as crown corporation, that it would stand behind any cost over runs on the Darlington project. PM Harper said nothing doing and warned that Ontario should not expect a subsidy for its energy needs. The fact that the liberals in Ontario and the conservatives in Ottawa hate each others' guts has plenty to do with the dysfunctional nature of the lack of an agreement on costs.

medical isotopesAt the same time the Harper government also threw the future of AECL into further turmoil by announcing a plan to split the organization into two parts. The first part, which is the isotope operations, would shut down Chalk River, along with its $7 billion cleanup bill, and perhaps build a smaller, conventional reactor for the lucrative medical isotope business.

In the process, Lisa Raitt, the Harper government’s minister for energy issues, was caught on tape speculating how her career might be advanced by resolving the isotope shortfalls caused by the Chalk River shutdown. She also left sensitive government documents about the Darlington bid at a TV station resulting in the premature release of confidential business information. She offered her resignation, but it was refused and a 20-something aide took the fall. Understandably, Mr. Harper is not going to brand one of his own ministers as being “dysfunctional” even if her behavior clearly merits the label.

The second part of the Harper/Raitt plan is to sell off for whatever it can get for AECL’s nuclear engineering capabilities including services to the global fleet of CANDU reactors. The second step is clearly dysfunctional since it subverts the value proposition of AECL in several ways.

Even a used car salesman would do a better job

used-car-salesmanInstead of supporting AECL to provide a winning bid at Darlington, Harper harried it by calling its history of cost overruns a fiscal “sinkhole.” This is the equivalent of a used car dealer telling a potential customer the ride in question is a “beater.”

In terms of the conventions of salesmanship, there could not be a more “dysfunctional” approach to the problem. It pre-disposed Smitherman to ratchet up the volume on controlling costs setting up all the bidders for failure. Tens of millions in engineering time has been wasted by all three bidders on a dysfunctional process.

In a press release June 29 Smitherman said the AECL bid was “complaint,” but was too expensive. In order to achieve a workable deal with AECL, he wants the firm to address reactor new build costs as well as the lifetime cost of power. Normally, with nuclear plants, once they have been depreciated, they are venerable cash cows. The key issue is that AECL bid an untried reactor, one that has never been built before, and which is still in the middle of the design process.

How to really handle ‘first-of-a kind’ nuclear new builds

Since no one knows what it will really cost to build one of the ACR1000s, Smitherman turned to the Harper government to share the risk of getting at least one unit into revenue service. His assumption was that whatever cost over runs the Harper government might incur at Ontario, they would make it up in volume with export earnings. The idea is build the first-of-a-kind reactor in Ontario, make it a show piece, and then sell it globally. It was an eminently useful idea and the Harper government turned it down flat.

dysfunctionalThe fact that the Harper government didn’t buy it illustrates an incredible fit of narrow mindedness. It is a classic formula for the wheels coming off any deal between the provincial Ontario government and AECL. Ms. Raitt, the government’s energy minister, told AECL is must build the new reactors at Darlington at a commercially attractive price that would cover all costs. Once that happened, the Harper government said would be happy to reap the export earnings that would follow.

This is also a case of wanting the cake and frosting and both for free. Anyone who knows anything about the nuclear industry also knows that construction of first-of-a-kind reactors always has risks of cost over runs. Developing workable means of sharing these risks can produce success for all parties. Zero sum political posturing, which is what has happened in Canada, has left all parties concerned with giant headaches and bad feelings about their ability to get along.

AECL must manage upwards

What it will take for AECL to succeed is to manage upwards convincing the opportunistic Ms. Raitt and the parsimonious Mr. Harper that it has a plan to put the organization on the right track. It must re-capture its global leadership position for medical isotopes and win the Ontario new reactor bid with the full political support of the federal government.

To do this AECL must mount a national campaign to convince Canada’s voters that it is in the nation’s national interest to revitalize the crown corporation as a technology leader in the global nuclear industry.

ice road truckers It will take business horse sense, technology vision, and real determination to achieve these results. A nation that can convince ice road truckers to brave the winter driving season in the Northwest Territories ought to be able to tackle a few politicians in Ottawa. ACEL has heard the ice cracking underneath its wheels. It should take a lesson from the fact that these truckers wouldn’t be able to do the job if they weren’t some of the toughest guys out there. It’s time for AECL to get tough.

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DV8 2XL said...

OK. Back from helping some Yank expats up here by drinking their excess beer and eating their excess BBQ, always willing to help a fried in need, I am.

First Atomic Energy Canada Limited is dysfunctional, and most of the people working there will be the first to agree. Crown Corporations suffer from a particular malaise where over time they become overly bureaucratized, and overly politicized, and top heavy with mandarins who have obtained their positions via their connections. What happens is a form of paralysis where decisions are not made and bad news is suppressed. This is at the root of the isotope crises. I know of what I speak; I worked for a Crown corp. for many years. The cure is privatization and the discipline of a real business.

Harper governments (there have been two as we count such things) has actually shown more political leadership in this matter than the Liberal governments that preceded his. The dismissal of that nit wit regulator two years ago over the last isotope crises an excellent example. The problem he faces is twofold, one he does not have a majority position in the House, which means that any legislation that is passed needs the votes of at least one of the three Parties in opposition, and two like anywhere, legislating anything nuclear is going to have the usual 'interested parties' crawling out of every crack and from under every rock in the nation. These two factors in concert means that he needs a position that is going to have to be very nuanced and minimizes the possibility of anything but token objections.

You said; "The fact that the liberals in Ontario and the conservatives in Ottawa hate each others' guts has plenty to do with the dysfunctional nature of the lack of an agreement on costs." This is not how Canadian party politics work. Provincial parties are absolutely independent from federal parties of the same name. To give an example a past leader of the federal Progressive-Conservative party was invited to become the leader of the Quebec Liberal party and no one batted an eyelash.

DV8 2XL said...

Part II...

The issue is strictly who will pay for what, which is par for the course for large projects up here always. But given what I wrote previously about the need for a sound approach to this issue at the federal level, I would not be surprised if there had been a phone call suggesting that a cancellation might be a useful development to get things moving...

The Raitt situation was problematic, however it should be noted that the conversation in question was made several months before this last failure of the NRU, and in fact she was right that the Minister that was responsible was doing nothing, and it was going to be a personal advantage to her if she solved it first. Her idiot of an assistant taped this conversation then left the recorder and the documents to be found by a reporter, who tried to give them back to the girl, but the kid didn't return his calls.

It's not the Raitt isn't a bitch or that I would cry over her dismissal, but it was played up by the opposition to make it sound worse than it was.

The ACR1000 in my opinion is a lose. It diverges from the basic CANDU design philosophy in too many ways and is real an unknown. Deviations from the basic design have not had a good history. Gentilly-1 was a prototype CANDU-BWR reactor, based on the SGHWR design managed only 180 days of criticality over the seven years they struggled with it. Gentilly-2 is a standard CANDU 6 reactor and has worked fine for 25 years and will probably be overhauled and run another 25. Given the state of AECL I wouldn't take a chance on this reactor when two CANDU 6A (advanced) would be the better choice.

At rate the fact is that there is no market for this reactor because it competes with all the other +1000MWe offerings out there. CANDUs are a poor mans reactor that has always occupied the niche below the big light water jobs. In fact it's looking like India is going to offer a 220MWe heavy water unit that's a small CANDU in everything but name to Third World customers, a design that AECL abandoned decades ago. They are going to eat our lunch while AECL is trying to build a penis-extension to prove they can play at the top.

In the end AECL has to be broken up, MDS Nordion, is going to have to find investors that will make the MAPLEs work (and they can be made to work) and a consortium led by SNC-Lavalin Nuclear Inc. has to take the reactor division over if the nuclear industry is going to survive in Canada. The only question is how this can be piloted through the political shoals without casing the company to collapse or the government to fall.

djysrv said...

I'm equally critical of AECL and the Harper government and the legislative branch for failure of leadership to preserve, maintain, and grow an internationally significant isotope facility.

The situation with Chalk River is a disgrace. Insofar as "dismissal of the nit wit regulator" is concerned, while she over-reacted to the problem, it was caused by the fact that AECL essentially misled her agency on the issue of electrical systems for emergency pumps at Chalk River.

The fact remains that the Harper government has mishandled the financial future of AECL with another nit wit, namely Ms. Raitt.

Finally, as I see it party politics do play a role. We disagree here.

My advice stands. AECL should stop relying on tax revenues from Ottawa and act like a real business. It is the only way it will survive.


Canon said...

The fact is, the plans and designs for the ACR1000 are not even finished. The fuel development is likewise not complete. This tends to complicate matters. I don't think anyone at AECL ever believed that ACR1000 would win the bid, but this is how the checkers game works. Submit a bid for ACR1000; get that bid rejected; but get a bid accepted for EC6's, a lesser, but proven reactor.

In all fairness, GE-Hitachi had their CONTRACT -- not bid, but contract -- for 3 of their relatively newly-designed ABWRs in the southern United States unceremoniously cancelled. This kind of embarassment is not, then, unique to AECL, though we would like to think so.

French-government-owned Areva has had multi-billion-dollar cost overruns on their new reactor types in Finland, and they are also years behind schedule.

This is the nuclear industry. It is not for the miserly. Nor, I believe, should it be. Nuclear reactors are meant to last 60 years. And if we want the technology to see any improvements, then we must invest a lot now, for even greater rewards later. Hell, look how much has been spent on the space race, and that is not even a revenue-generating business.
The bottom line is that the AECL has incalculable value stored inside its walls. That value must be unlocked. The "mandarins" do not have the capability of doing such a thing, and never did. Businesses, especially complex businesses, cannot be run by scientists and bureaucrats. They must be run by businessmen -- whether they work for the public or private sector is irrelevant.

djysrv said...

In response to Canon - GE Hitachi had three ESBWRs cancelled not ABWRs. The ESBWR is still in design certification review at the NRC. The ABWR is certified and units have been built in Asia. Two are slated for the South Texas Project (STP). As for the ESBWR, the only utility still committed to it is Detroit Edison with Fermi III. The reactor will not likely be built soon due to the collapse of the U.S. auto industry which would have been a key customer for electricity from the plant.

Canon said...

ESBWR.Thank you for correcting me.

Steve Aplin said...

Nice work Dan. I'm also scratching my head over the "dysfunctional sinkhole" comments. Seems a strange way to sell something: tell the world it is crap. That’ll guarantee that potential buyers will offer top dollar. The whole thing is just weird. On one hand, Harper has been the only PM in memory to provide a level of funding anywhere near what AECL needs (though still not enough); on the other, he says stuff like this.

But I'm more inclined to put this on Ontario. The McGuinty crowd is trying to appease the anti-nuclear crowd by being extra tough on the price, but they should know that it is their own action or inaction that will move the project forward or delay it, and hence affect the final cost -- just like in the first Darlington go-round. They are the ones who need to show some backbone: they've been apologizing for nuclear since they came to power. Get a thick skin, accept that there will always be anti-nuclear insects buzzing around, and go forward.

Ontario is essentially demanding federal insurance against cost overruns due to provincial decisions. No amount of money is big enough to cover that. When the federal interlocutor is a tightfist like Harper -- who has just held his nose and handed billions to the auto industry -- the bargaining will naturally get very tough.

Ontario's position is similar to that of the NHL owners during the lockout a few years ago. The owners demanded the players accept a salary cap. Salary discipline has to come from somewhere and it sure as hell wasn't going to come from the owners. “We, the owners, need you -- the players -- to agree to not ask for too much, because we’re so dumb that we might agree.”

What Canada needs is codified provisions similar to what went into the EPAct in 2005: loan guarantees, construction delay insurance, and power production tax credits.