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