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Canadian Nuclear Energy Policy: Changing Ideas, Institutions, and Interests
 9781442672260

Table of contents :
Contents
Preface
Abbreviations
Chapter One. Precarious Opportunity: Canada's Changing Nuclear Energy Policies and Institutional Choices
Chapter Two. Global Nuclear Markets in the Context of Climate Change and Sustainable Development
Chapter Three. Nuclear Power and Deregulation in the United Kingdom
Chapter Four. Transforming AECL into an Export Company: Institutional Challenges and Change
Chapter Five. Nuclear Regulation in Transition: The Atomic Energy Control Board
Chapter Six. Nuclear Fuel Waste Policy in Canada
Chapter Seven. Ontario's Role in Nuclear Energy
Chapter Eight. The Future of Nuclear Power in a Restructured Electricity Market
Chapter Nine. Power Switch: The Ontario Energy Board in the New Electricity Regime
Chapter Ten. Conclusions
Contributors

Citation preview

CANADIAN NUCLEAR ENERGY POLICY: CHANGING IDEAS, INSTITUTIONS, AND INTERESTS

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Canadian Nuclear

Energy Policy Changing Ideas, Institutions, and Interests

EDITED BY

G. Bruce Doern Arslan Dorman Robert W. Morrison

UNIVERSITY

OF TORONTO

Toronto Buffalo London

PRESS

www.utppublishing.com University of Toronto Press Incorporated 2001 Toronto Buffalo London Printed in Canada ISBN: 0-8020-4788-2 (cloth)

Printed on acid-free paper

National Library of Canada Cataloguing in Publication Data Main entry under title: Canadian nuclear energy policy : changing ideas, institutions, and interests Drafts of the chapters, along with other papers, were presented at the CRUISE Conference on the Future of Nuclear Energy in Canada, held in Ottawa, Sept. 30-Oct. 1,1999. Includes bibliographical references. ISBN 0-8020-4788-2 1. Nuclear energy - Government policy - Canada. 2. Nuclear energy Government policy - Ontario. I. Doern, G. Bruce, 1942- . II. Dorman, Arslan. III. Morrison, Robert W. IV. CRUISE Conference on the Future of Nuclear Energy in Canada (1999 : Ottawa, Ont.). HD9698.C22C36 2001

333.792'4'0971

C2001-930250-9

The University of Toronto Press acknowledges the financial assistance to its publishing program of the Canada Council for the Arts and the Ontario Arts Council. University of Toronto Press acknowledges the financial support for its publishing activities of the Government of Canada through the Book Publishing Industry Development Program (BPIDP).

Contents

Preface vii Abbreviations

ix

1 Precarious Opportunity: Canada's Changing Nuclear Energy Policies and Institutional Choices 3 Bruce Doern, Arslan Dorman, and Robert Morrison 2 Global Nuclear Markets in the Context of Climate Change and Sustainable Development 34 Robert Morrison 3 Nuclear Power and Deregulation in the United Kingdom Steve Thomas 4 Transforming AECL into an Export Company: Institutional Challenges and Change 74 Bruce Doern, Arslan Dorman, and Robert Morrison 5 Nuclear Regulation in Transition: The Atomic Energy Control Board 96 David Jackson and John de la Mothe 6 Nuclear Fuel Waste Policy in Canada 113 Peter A. Brown and Carmel Letourneau 7 Ontario's Role in Nuclear Energy 129 Rick Jennings and Russell Chute

52

vi Contents 8 The Future of Nuclear Power in a Restructured Electricity Market 147 Donald N. Dewees 9 Power Switch: The Ontario Energy Board in the New Electricity Regime 174 Bruce Doern 10 Conclusions 199 Bruce Doern, Arslan Dorman, and Robert Morrison Contributors

217

Preface

This book is the product of a collaborative effort initiated by the editors and the Carleton Research Unit on Innovation, Science and Environment (CRUISE) in the School of Public Policy and Administration at Carleton University. In addition, it builds on research work on the nuclear industry in Canada by Doern and Morrison, which dates back to the mid-1970s; it also draws on recent and current research conducted in the past two years at CRUISE by Morrison and by Doern and Reed, and on a current project on the wider issues faced by Canadian and global energy regulatory institutions being funded by the Social Science and Humanities Research Council of Canada. Initial drafts of the chapters, along with a broad range of other papers, were presented at the CRUISE Conference on the Future of Nuclear Energy in Canada held in Ottawa on 30 September and 1 October 1999. In addition to the authors represented in this book, we were very fortunate in securing the involvement of leading nuclear practitioners and academics, including Bill Hancox of AECL; Gerald Grandey of Cameco; Arnaud de Bourayne and Tim Gitzel of Cogema; Linda Gunter of the Nuclear Energy Institute; Mike Cleland, Brian Moore, and Sylvana Guindon of Natural Resources Canada; Mark Gwozdecky of the Department of Foreign Affairs and International Trade; Mark Ronayne from the Competition Bureau; Pat McNeil and Ken Nash of Ontario Hydro (now Ontario Power Generation); Stephen Probyn from the Independent Power Producers; Stuart Smith, chair of the National Round Table on the Economy and Environment; and Rick Smith of the Office of the Commissioner of Environment and Sustainable Development; as well as our CRUISE colleagues, Keith Newton

viii Preface

and Glen Toner. Two anonymous reviewers also provided extremely useful and constructive comments on this book. Like the array of participants noted above, our authors bring to the analysis diverse academic backgrounds and perspectives. These include science and physics, engineering, political science and institutions, economics and finance, and various Canadian and comparative perspectives. Some of our authors are broadly supportive of the nuclear energy option, while others are quite critical, especially and increasingly on economic grounds. Three of our authors are government officials with current responsibilities for energy, electricity, and nuclear policy. All these perspectives are needed to provide a reasonably comprehensive view of how Canadian nuclear policy ideas, institutions, and interests are evolving as the twenty-first century begins. Because of the interdisciplinary nature of the authors (not to mention the editors), we have not sought to utilize or impose any one, single-discipline analytical framework on the book as a whole. Overall, we have sought to examine how ideas, interests, and institutions have changed nuclear policy. Our intention is to pose and analyse key policy and institutional questions and to provide a considered set of views about nuclear energy policy - and a particularly needed one, given that the last academic overview of the field in Canada was about twenty years ago. This overall research enterprise would have been impossible without the generous financial assistance of several bodies, and we would like to thank CRUISE, the School of Public Policy and Administration at Carleton University, the Politics Department at the University of Exeter, the Social Science and Humanities Research Council of Canada, Atomic Energy of Canada Ltd, Natural Resources Canada, Ontario Hydro, the Department of Foreign Affairs and International Trade, the Ontario Ministry of Energy, Science and Technology, Cameco, Cogema, Canatom, and Zircatech. G. Bruce Doern, Arslan Dorman, and Bob Morrison August 2000

Abbreviations

AECB AECL AG BNFL CANDU CCGT CEA CEAA CEGB CNA CNF CNSC COG EARP FERC GATT HEU IAEA IEA IMO LLRWMO LUEC LWR MDC MEU MPMA

Atomic Energy Control Board Atomic Energy of Canada Ltd. Auditor General of Canada British Nuclear Fuels Ltd Canada deuterium uranium (reactor) Combined cycle gas turbine Canadian Electricity Association Canadian Environmental Assessment Agency Central Electricity Generating Board Canadian Nuclear Association Canadian Neutron Facility Canadian Nuclear Safety Commission (renamed successor to AECB) CANDU Owners Group Environmental assessment and review process Federal Energy Regulatory Commission (U.S.) General Agreement on Tariffs and Trade Highly enriched uranium International Atomic Energy Agency International Energy Agency Independent Market Operator Low-Level Radioactive Waste Management Office Lifetime unit energy cost Light water reactor Market Design Committee Municipal electric utility Market Power Mitigation Agreement

x Abbreviations NGO NRC NRCan NRU NRX NUG OEB OECD OHSC OMA OPG PBR R&D SSS S&T UKAEA U.S. NRC WMO WTO

Non-governmental organization National Research Council of Canada Natural Resources Canada Nuclear reactor universal Nuclear reactor x-perimental Non-utility generator Ontario Energy Board Organization for Economic Cooperation and Development Ontario Hydro Services Company Ontario Medical Association Ontario Power Generation Inc Performance-based regulation Research and development Standard supply service Science and technology United Kingdom Atomic Energy Agency U.S. Nuclear Regulatory Commission Waste Management Organization World Trade Organization

CANADIAN NUCLEAR ENERGY POLICY: CHANGING IDEAS, INSTITUTIONS, AND INTERESTS

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Chapter One

Precarious Opportunity: Canada's Changing Nuclear Energy Policies and Institutional Choices Bruce Doern, Arslan Dorman, and Robert Morrison

Canadian nuclear policies, institutions, and interests have changed markedly in the past two decades and enter the twenty-first century in a situation of precarious opportunity. 'Precarious opportunity' is a useful starting term because there are in essence two main scenarios typically advanced for Canada's nuclear energy future. On the one hand, some offer the view that the nuclear energy industry can prosper and make an important contribution to energy and the environment in this age of climate change policy (Hancox, 1999; Doucet, 1999; Watson, 1998). Other recent international studies also express cautious optimism about nuclear energy in the early decades of the twenty-first century (Royal Academy of Engineering and Royal Society, 1999; Atlantic Council, 1999). On the other hand, there are some who perceive the nuclear energy industry as economically in decline and environmentally questionable (Lermer, 1996; Martin and Argue, 1996; Patterson, 1999). Some of these latter views have emerged as a result of recent events in the United Kingdom and Germany. In the U.K., serious safety concerns have been raised about British Nuclear Fuels Ltd (BNFL) regarding MOX fuel; it has been alleged that data on safety were faked by BNFL workers (Arthur, 2000). In Germany, the government of Gerhard Schroder, whose cabinet includes members of the German Green Party, has announced a policy agreement between the government and the industry that calls for the decommissioning of all German nuclear power plants after the thirty-second year of their existence, which means roughly over the next twenty years (Karacs, 2000). Both the opportunities and the precarious state of Canada's nuclear industry are not necessarily well known to Canadians or understood

4 Doern, Dorman, and Morrison

by Canadian voters and citizens, in part because nuclear policy only receives intermittent political and media attention. Indeed, the last burst of focused analytical attention in Canada was arguably about twenty years ago (Doern and Morrison, 1980). Another reason why nuclear policy often flies below the radar of political consciousness is that it is embedded in other kinds of policy. Put another way, nuclear policy cannot be divorced from industrial policy, science and technology policy, foreign policy, energy policy, environmental policy, and global security concerns about nuclear proliferation. In one sense, of course, the four core nuclear policy values and concerns are the same as they were at the dawn of the Second World War and in the postwar nuclear age (Bothwell, 1988; Doern and Morrison, 1980; Hare, 1977). These values and concerns, which are shared, disputed, and debated by governments and stakeholders, are (1) a belief that nuclear energy is an important source of energy; (2) an understanding that it is a key element of Canada's scientific and technological capacity and a source of considerable employment, especially in Ontario; (3) a deeply embedded concern about the safety of nuclear reactors; and (4) core values, which are fundamentally global, about ensuring that nuclear materials are not diverted to military use and that nuclear waste materials are convincingly made safe by long-term storage. However, the context in which these core policy and politicaleconomic concerns are examined has changed out of all recognition as the twenty-first century dawns. This book examines how Canadian nuclear policy has been influenced by changing ideas, institutions, and interests; it also assesses possible future issues. The focus is on the federal government because it has primary jurisdiction over nuclear matters, but we also pay special attention to key changes in Ontario, Canada's main nuclear energy province. We make only limited reference to Quebec and New Brunswick, provinces that have smaller nuclear programs, and to Saskatchewan, where the uranium mining industry is important. We also compare changes in Canada to changes in other countries, such as the United Kingdom, Germany, the United States, and countries that have bought CANDU reactors (e.g., South Korea and China). The structure of this book is quite straightforward. Chapters 2 and 3 are in essence global and comparative in nature. Chapter 2 by Robert Morrison focuses on global nuclear markets in the context of policies

Canada's Changing Nuclear Energy Policies 5

regarding climate change and sustainable development. Chapter 3 by Steve Thomas reviews the development of the British nuclear industry and that country's experience - much earlier than Canada's - with privatized and liberalized electricity markets. The U.K. industry is of special interest because a British firm, British Energy, has leased the Bruce A and B nuclear stations until 2018. Chapters 4, 5, and 6 are devoted to federal policy and institutions. Chapter 4 by Bruce Doern, Arslan Dorman, and Robert Morrison examines the transformation of Atomic Energy of Canada Ltd (AECL), Canada's leading nuclear research and commercial institution. Chapter 5 by David Jackson and John de la Mothe examines the Atomic Energy Control Board (AECB), now the Canadian Nuclear Safety Commission. Chapter 6 by Peter Brown and Carmel Letourneau considers the changes in federal policy being contemplated for nuclear fuel waste management. Chapters 7, 8, and 9 discuss the crucial changes underway in Ontario. In Chapter 7, Rick Jennings and Russell Chute provide an overview of Ontario's electricity liberalization-competition policy, launched in 1998. Chapter 8 by Don Dewees focuses on Ontario's new electricity supply market and on how it will likely affect nuclear generating plants. Chapter 9 by Bruce Doern looks closely at the new role of the Ontario Energy Board (OEB) in a vastly more complex, competition-centred regime. Chapter 10 provides the editors' overall conclusions on the medium-term prospects for nuclear energy in Canada. It centres on these issues: nuclear market performance; public opinion and nuclear futures; and nuclear waste management and intergenerational institutions. The remainder of this chapter has two main purposes. First, it provides an overview of how nuclear policy ideas, policy institutions, and policy interests have changed. Second, it draws out in more detail five key policy and institutional choices confronting Canada's nuclear policy makers. These current and future choices, which also emerge from the chapters as a whole, reflect our views as editors of the book. Changing Ideas, Institutions, and Interests All realms of public policy are complex; hence, any informed understanding must begin with a stock-taking of core policy ideas, policy institutions, and policy interests. In Table 1, we show in snapshot form some of the key ways in which nuclear policy ideas, institutions, and interests have changed over the last twenty to twenty-five years. The discussion that follows is brief and is intended to set the scene not only

6 Doern, Dorman, and Morrison Table 1.1 Changing Canadian nuclear policy elements in the last twenty-five years Policy element

Late 1970s and early 1980s

Early 21st century

Policy ideas and paradigms

Core ideas and values: • a belief in nuclear as key source of energy • important to S&T capacity and employment, especially in Ontario • embedded public concern about safety of reactors • strong concern about nonproliferation of nuclear materials, and about longterm storage of nuclear wastes.

Core ideas and values: • same four core ideas except even stronger concerns about long-term storage of wastes

Related ideas/paradigms • industrial and trade policy: subsidies still in vogue • S&T policy as linear spectrum (basic; applied; development) • fiscal crisis and deficits • GATT-centred liberalized trade policy • support for public enterprise still quite strong (AECL; provincial hydros) • energy policy centred on 'fuel by fuel' policy (oil, gas, nuclear, coal, hydro) • environmental policy focus on 'clean-up and control' • ideas of risk and safety have primacy

Related ideas/paradigms • micro-economic policies expressed as innovation and competitiveness ideas • S&T policy shifts to innovation policy & national systems of innovation model • deficit reduction and program review ideas resulting in surpluses • free trade dominant (NAFTA and WTO), subsidies declining, and focus on North American electricity markets and on offshore markets for CANDU • privatization, and scepticism about funding Crown corporations set in changing ideas about role of markets versus the state • energy policy centred on interfuel substitution, shift to 'natural resource' policy, and competitive electricity markets, especially in Alberta and Ontario, but also globally (U.S. and U.K.) • environmental policy focus shifts to 'sustainable development,' to internalization of environmental costs in prices, and to climate change and reduction of global carbon emissions • broader ideas about riskbenefit management and risk communication

Canada's Changing Nuclear Energy Policies 7 Table 1.1 — Continued Changing Canadian nuclear policy elements in the last twenty-five years Policy element

Late 1 970s and early 1 980s

Early 2 1st century

Policy institutions

Federal • Minister and Dept. of Energy, Mines and Resources • Atomic Energy of Canada • Atomic Energy Control Board • Department of External Affairs • environmental assessment panels (based on federal guidelines)

Federal • Minister and Dept. of Natural Resources • Atomic Energy of Canada • Canadian Nuclear Safety Commission • Department of Foreign Affairs and International Trade • Environment Canada • Canadian Environmental Assessment Agency (based on federal law) • Climate Change Secretariat • Commissioner of the Environment and Sustainable Development

Provincial • Ontario Hydro • Hydro Quebec; New Brunswick Hydro • occupational health regulators

Provincial • Ontario Power Generation • Ontario Ministry of Energy, Science and Technology • Ontario Energy Board • Independent Electricity Market Organization • Hydro-Qulbec; New Brunswick Hydro • provincial environment ministries

International and other countries' institutions • International Atomic Energy Agency (IAEA) • U.S. Nuclear Regulatory Commission (NRC)

International and other countries' institutions • International Atomic Energy Agency (IAEA) • International Energy Agency (IE A) • Kyoto processes and negotiations • U.S. Nuclear Regulatory Commission (NRC) • U.S. Federal Energy Regulatory Agency (FERC)

• individual agencies in list of institutions above • Canadian Nuclear Association • energy and environmental NGOs (e.g., Energy Probe; Pollution Probe; Greenpeace; local green lobbies in communities with reactors)

• individual agencies in list of institutions above • Canadian Nuclear Association • energy and environmental NGOs (e.g., Energy Probe; Pollution Probe; Greenpeace; local green lobbies in communities with reactors)

Policy interests

8 Doern, Dorman, and Morrison Table 1 .1— Concluded Changing Canadian nuclear policy elements in the last twenty-five years Policy element

Late 1970s and early 1980s

Early 21st century

• labour unions (uranium mining) • medical facilities using nuclear medicine processes and products

• Campaign for Nuclear Phaseout • labour unions (uranium mining) • medical facilities using nuclear medicine processes and products • U.K. and U.S. nuclear firms interested in possible purchase of Ontario Power Generation reactors • AECLs Chalk River scientists as explicit interest • alternative energy firms and gas-fired electricity supply firms • MDS Nordion (privatized medical isotope company formerly a part of AECL) • consumer interests (made more manifest by Ontario competitive supply electricity and energy market reforms)

for the five choices explored later in the chapter but also, of course, for our authors' analytical work. The middle column in Table 1.1 captures key features of nuclear energy policy in the late 1970s and early 1980s; the third column highlights changes or additions needed to understand the nuclear policy field as the twenty-first century begins. Policy Ideas and Paradigms

The core ideas and values at the heart of nuclear policy are in one sense the same in both periods, but they are nested within a cluster of related policy ideas and paradigms that have shifted considerably. First, several related federal policies on the micro-economy are increasingly being grouped together under the broad rubric of innovation and competitiveness (Industry Canada, 1994; Doern, 1995). This policy paradigm has gradually supplanted earlier views about industrial policy, and raises serious questions as to whether the nuclear industry, centred around CANDU reactors, ought to be a focus of Canada's future efforts to compete internationally in high-tech industrial products and pro-

Canada's Changing Nuclear Energy Policies 9

cesses. Second, federal science and technology (S&T) policy is focusing much more closely than before on innovation. This challenges, among other things, the notion that basic research proceeds in a linear fashion toward eventual applied work and then to a development and products stage. A third change is that state support or subsidies for national industries have declined, and that there is now intense debate about exactly what 'public goods' investment versus 'private subsidized benefit' actually means. Fiscal discipline, initially prompted by the need to reduce the huge federal deficit, has brought Canada into an era of federal budgetary surpluses; nowadays, key federal science and technology (S&T) departments and agencies, including Atomic Energy of Canada Ltd (AECL), find themselves competing intensely for federal funding to invest again in infrastructure and human capital (Swimmer, 1996). In the face of fierce political competition from many sources, there is no guarantee that nuclear energy will automatically garner its historic share of such funding. Fourth, ideas regarding foreign and trade policy and international security have also shifted. Central to this paradigm shift is the spate of free trade agreements which simply means that nuclear industries are tested increasingly against trade and competitiveness criteria and also in terms of how they fit into North American energy markets. Ultimately, of course, these aspects of change are all tied to changing views about the relative roles and responsibilities of governments, markets, and institutional partnerships in determining who will fund, operate, and regulate in all policy realms (Yergin and Stanislaw, 1998; Doern, Hill, Prince and Schultz, 1999; Joskow, 1996). Nuclear energy and alternative energy sources, both in Canada and abroad, are not immune from these powerful ideas. Nuclear policy was first established in an earlier era of support for public enterprise; this approach has been replaced, federally and provincially, by support for privatization and by scepticism as to whether governments ought to fund Crown corporations. In nuclear matters, there is an extra factor in play: the rise of non-proliferation regimes in a post-Cold War context to prevent the spread of nuclear materials for non-peaceful purposes, and the need to ensure (whatever the expense or controversy) the safe and very longterm management of nuclear wastes. A fifth shift in ideas relates to how nuclear policy is viewed as a subset of energy policy. Energy policy has evolved from an earlier era of, in effect, 'fuel by fuel' policy (oil, gas, nuclear, coal, uranium, etc.). The focus now is on interfuel substitution, on 'natural resource' policy

10 Doern, Dorman, and Morrison

based on an integrated view of natural resources and sustainable development and on full-scale or managed competition (Doern, 1995). Competitive electricity markets are being introduced in Alberta and Ontario and - even more importantly in terms of policy learning - in the United States and the United Kingdom. The idea of competitive electricity markets has been greeted with scepticism in some quarters, but there is little doubt that it has considerable momentum in key energy policy circles on a global basis, and as we see later in this chapter and throughout this book, it is doing a great deal to determine the nuclear industry's future in Canada and elsewhere. A sixth feature of paradigm change centres on environmental policy (Connelly and Smith, 1999). Two decades ago, environmental policy was much more in a 'clean-up and control' mode; nowadays, the greater or additional focus is on sustainable development and on preserving global ecosystems (Toner, 2000; Lafferty and Meadowcroft, 2000). The greatest challenge in the present day is global warming and the need to establish policies about climate change and for reducing carbon and acid emissions (Commissioner for Sustainable Development, 1999). The climate change debate has allowed the nuclear industry to position itself as a green energy source relative to carbon-based sources such as oil and gas. This may well make it easier (i.e., more politic) for governments in Canada to support and strengthen this country's nuclear energy industry; the same may be true in other countries. The new, green paradigms generate both old and newly reconfigured combinations of ideas. The old and continuing issue is whether the public accepts nuclear power as an electricity source in the light of the above changes; the newer issue is whether the public considers the benefits of nuclear power to be worth the risks, and views the risks as manageable. This debate extends well beyond nuclear energy to other innovation industries such as biotechnology and genetics, and the use of drugs for various therapeutic purposes (Castle, 1995; Trebilcock and Winter 1997; Doern and Reed, 2000). Public opinion polls (see Chapter 10) indicate considerable support for the use of nuclear power, but that support is invariably conditional on basic public trust in key institutions (i.e., Can the industry and the regulators be trusted to safely manage ageing nuclear reactors in a more competitive milieu? And can issues such as non-proliferation and the long-term management of nuclear wastes be resolved?). The nuclear performance problems at Ontario Hydro, and to a lesser extent at Point Lepreau in New Brunswick, have done much to condition the public's concerns about nuclear energy. The future of nuclear energy in Canada will depend

Canada's Changing Nuclear Energy Policies 11

greatly on how those problems are resolved. Developments in other countries, such as decisions to build or not to build new nuclear power plants (as in the United States and United Kingdom), or to phase out nuclear power entirely (as in Germany and Sweden) will also have an impact. Changing market forces emerge from this complex mix of ideas. Market forces refer explicitly to the market for nuclear reactors - a market in which CANDU reactors have a small share and are competing with larger players in the context of other countries' complex assessments of their own energy needs and financial resources. For its first four decades, Canada's nuclear power program focused mainly on meeting domestic electricity needs, primarily in Ontario. Exports were seen as an additional opportunity and as a way of ensuring that the CANDU would be competitive. In the early 1990s the domestic market dried up, and looked as if it would remain that way for decades. Ontario concentrated on trying to run its existing reactors. At the same time, export markets opened up and became AECL's main focus. AECL's future thus ultimately turns on sales of reactors abroad. If AECL's CANDU marketing is successful, it will have access to more funds in a direct sense. Such success may garner further political support from the government, or it may simply reduce the federal government's need to invest in nuclear development. However, in this context it is worth noting that AECL's prospects for CANDU sales in Turkey have been put on hold indefinitely, and further sales in Korea look extremely unlikely as it appears that Korea has opted to pursue a light water reactor program. China will likely not consider new CANDU sales for several years (until operational experience is gained with the CANDU reactors there), and a second CANDU in Romania is proving difficult to finance. Thus, AECL's CANDU export orientation, and the policy rationales it faces, may undergo further changes, as AECL shifts its focus to servicing existing CANDU reactors and to the possibility of a new research reactor at Chalk River. International security issues centring on nuclear non-proliferation are no longer influenced by Cold War ideas. The security issues now are arguably more complex and uncertain: they centre on subnational groups, terrorism, and criminals' access to nuclear materials. All of this is mainly but not exclusively a result of the break-up of the former Soviet Union (Baylis and O'Neill, 2000). Because AECL is now largely an export-oriented agency, it faces different policy rationales tied to trade and competitiveness and to issues of international security.

12 Doern, Dorman, and Morrison Policy Institutions Ideas eventually permeate policy institutions and become central to the way they function. But policy institutions are also amalgams of laws, bureaucracies, politicians, and cultures and core modes of operation. The quick review of the key nuclear public policy institutions in Table 1 centres on the transformation of core bodies (sometimes partly revealed through changed titles for the agency) and the occasional addition of new ones. At the federal level, energy policy was once overseen by Energy, Mines and Resources (EMR); in 1993 this became Natural Resources Canada, a department more concerned with natural resources in an overall systematic sense, but now also a key player in debates over climate change and sustainable development. AECL and the AECB are central to both periods; however, as Chapters 4 and 5 will show in detail, they are very different entities, with the AECB having been transformed into the Canadian Nuclear Safety Commission (CNSC). The old Department of External Affairs has become the Department of Foreign Affairs and Trade, with trade a much more crucial part of its mandate. Environment Canada does not even show up in our capsule view of nuclear policy players from two decades ago, largely because environment ministers carefully and consciously left nuclear matters to other ministers. There was of course some institutional presence in the form of environmental assessment but environmental assessment of a general kind was not then based on federal law but rather on federal guidelines. This changed in the 1990s, and thus both Environment Canada and the Canadian Environmental Assessment Agency are listed; as is the Commissioner for the Environment and Sustainable Development, who now reports regularly to Parliament on Canada's progress (or lack thereof) in carrying out its policies on sustainable development (Toner, 2000; Doern and Conway, 1994). Also added are bodies such as the Climate Change Secretariat and its numerous 'tables' of discussion, advice, and negotiation (see Chapter 2). At the provincial level, the institutional inventory of change is simple but stark. Ontario Hydro, as a monopoly utility, was clearly a key player in the earlier period captured by Table 1.1; but as we will show later on, it went through an institutional crisis as it failed to adjust from a company used to building more reactors on a continuous basis to one that had to manage them as an efficient operational entity. Ontario Hydro was joined by other provincial utilities that used nuclear power,

Canada's Changing Nuclear Energy Policies 13

such as New Brunswick Power and Hydro-Quebec, but the latter were much smaller institutional players. In the current era, now that Ontario Hydro has broken up, Ontario Power Generation (OPG) has become the key player, along with the Ontario Ministry of Energy, Science and Technology, which influenced and implemented the major restructuring of the Ontario electricity industry, and the Independent Market Operator and the Ontario Energy Board, which have major new regulatory responsibilities over energy sectors in Ontario. Key international institutions are also noted. The International Atomic Energy Agency (IAEA) in Vienna and the International Energy Agency (IEA) and Nuclear Energy Agency (NEA) of the OECD family are still key players, but the array of international agencies is also somewhat more complex nowadays. The IEA, like its domestic national energy agency counterparts, tends to be more interested than it once was in all energy sources and can less easily leave nuclear matters aside. The climate change policy process has led to important, Kyoto-centred arrangements, which take the form of several negotiating arenas and processes (as opposed to one entrenched body). U.S. regulatory bodies, both the Nuclear Regulatory Commission (NRC) and the Federal Energy Regulatory Commission (FERC), also have a significant presence in Canadian energy and nuclear matters - a role increased greatly by the growing presence of a North American energy market, which includes regional electricity markets in the northeast and northwest of the continent. Policy Interests

The term policy interests is intended to include not only interest groups and associations as such but also any identifiable stakeholder or even a sub-element of an organization (e.g., an environmental assessment panel, or the Chalk River scientists at AECL) that can have influence or that possesses expertise and policy knowledge. Many of the agencies listed above under the institutional list could have or express such political interests. The earlier period list thus includes bodies such as the Canadian Nuclear Association, the main nuclear industrial supplier association and lobby, as well as the CANDU Owners Group (COG), the Canadian Electricity Association (CEA), the Electricity Roundtable, and the Energy Council of Canada; and nuclear, energy, and environmental non-governmental organizations (NGOs), including Energy Probe, Pollution Probe; Greenpeace, and local green

14 Doern, Dorman, and Morrison

lobbies such as those concerned with local reactor safety in CANDU reactor locations such as Pickering. The Campaign for Nuclear Phaseout is a newer presence. Two decades ago, coal, oil and gas, and alternative energy supply groups and industries were in most respects only latent or background players; but they are now engaged precisely because direct comparisons of the economics and environmental costs of these alternatives are now being made more explicitly. Key firms are also active here, including MDS Nordion, a former AECL subsidiary that has been spun off into a privatized firm. Consumer interests are also more explicitly present in the early twenty-first century than they were two decades ago. In the past, organized labour was often a key player in raising occupational health issues regarding uranium miners, but these issues have been affected by the much more competitive global pressures facing uranium companies. All Canadian uranium companies are now located in Saskatchewan. Five Key Nuclear Policy and Institutional Choices With the preceding profile of changing ideas, institutions, and interests as background, we can now examine five key nuclear policy questions: (1) Who will pay for and carry out nuclear R&D and waste management? (2) What models of regulation will govern nuclear energy in the global innovation age? (3) What are Canada's prospects for marketing CANDU reactors and uranium abroad, what long-term commitments do these efforts imply, and what is the role of government in this area? (4) Will a renewed federal-Ontario nuclear partnership be reconstructed to replace the more distant relationships of the last decade, one that makes sense in the context of the new quasi-competitive regime for Ontario electricity generation and AECL's focus on CANDU exports? (5) Can new forms of trust and transparency be built between the Canadian public and the array of public and private institutions that govern nuclear energy in Canada and abroad, especially in the context of climate change and sustainable development? Paying for and Performing Nuclear R&D and Waste Management

Canada faces a series of related choices regarding investing in nuclear R&D and paying for waste management. As Chapters 4, 5 and 6 make clear, these choices must be made under any conceivable scenario that nuclear energy critics or supporters may devise. If Canada never sold

Canada's Changing Nuclear Energy Policies 15

another CANDU reactor anywhere, it would still face R&D and waste management obligations extending well into the twenty-first century. These arise from the need to support existing CANDU reactors, from the continuing role of nuclear medicine, and from the imperatives of long-term nuclear waste management (Canadian Environmental Assessment Agency, 1998). But the need for investment goes well beyond these continuing situations, since - as Morrison's analysis in Chapter 2 shows - there are quite reasonable grounds to expect future foreign CANDU and uranium sales. Moreover, materials research is making increasing use of nuclear research tools and techniques. The most immediate choice is federal funding of the Canadian Neutron Facility (CNF). Doern, Dorman, and Morrison's analysis in Chapter 4 shows that this proposed $400 million facility is necessary to ensure the continuation and augmentation of two key functions now performed at AECUs Chalk River Laboratories by the NRU Reactor, which began operation in 1957 and cannot continue beyond 2005. The first function is to be an essential testing facility to support and advance the CANDU power reactor design. In this regard it is pivotal to the long-term credibility of AECL as a high-tech commercial company, and to Canada's nuclear industry internationally and domestically (AECL, 1999). There is a need not only to support the performance and safety of existing CANDU units, but also to develop a next-generation reactor that can compete in the decade beyond 2010 to replace the current generation of plants and to meet new growth in demand. New designs will have to have lower capital costs, shorter construction times, and similar or higher levels of safety (Hancox, 1999). The relative roles of AECL, the private sector, and the federal government in supporting existing and new reactors is one of the issues to be decided. It cannot be emphasized too much that many of these key choices are inherently choices about the role and financing of AECL as the lead federal agency of Canadian nuclear involvement. As we see below, they are intricately tied to AECL's capacity to market CANDU reactors abroad and to generally become a more export-oriented company. Chapter 4 also shows that more crucially than before, the second function of the proposed CNF is to be a world-class neutron beam laboratory that supports advanced materials research in Canadian universities and industry. Such advanced materials are already essential to Canadian industry and will be all the more so in the coming decades. Thus the CNF will be one of the key facilities for Canadian R&D gener-

16 Doern, Dorman, and Morrison

ally, with applications in many sectors. The CNF is being proposed jointly by both AECL and the National Research Council of Canada (NRC), not only because of its broad range of scientific applications, but also out of the need to pursue partnered funding amidst the myriad S&T funding demands. While the CNF is the focal point for nuclear investment choices, it is not disconnected from other choices. Much of the other R&D infrastructure at Chalk River is in need of renewal. Program Review decisions in 1995 severely reduced AECL's fundamental 'public good' research capability, as well as its role as a training ground for Canadian scientists. Canada now faces a severe shortage of nuclear engineers. Both the overall size of the federal pie for public good R&D, and the share of the pie that should go to nuclear facilities, are issues for discussion. The funding of long-term waste management is also a part of the budgetary and policy agenda, and competes to some extent with federal support for R&D. As Brown and Letourneau's .assessment in Chapter 6 shows, past federal funding for waste was primarily for AECL to carry out an R&D program on a disposal concept for nuclear fuel waste based on geological burial in the stable rocks of the Canadian Shield. The program went on for twenty years and cost about $700 million, mainly in federal funding but with increasing contributions by Ontario Hydro toward the end. After ten years of work, a federal environmental review panel concluded in 1998 that the concept was technically safe but not yet socially acceptable (Canadian Environmental Assessment Agency, 1998). The funding choices are by no means only a federal issue. Chapter 6 argues that the nuclear utilities will be responsible for future funding for the management of their wastes, and for any required R&D. However, the federal government has its own waste liabilities - low-level wastes generated by Eldorado's uranium refinery near Port Hope when it a was federal Crown corporation, and by AECL at its research facilities at Chalk River in Ontario and at Whiteshell in Manitoba. The latter include a range of fuel and other high-level wastes from research reactors. Regardless of the federal government's position on the future of nuclear energy, utility and federal wastes will require long-term management. The Ontario government and Ontario Power Generation also face choices. Ontario is a major beneficiary of nuclear power and of the private nuclear industry. In the past, Ontario has paid for some of these costs, but not in proportion to the benefits that have flowed to its

Canada's Changing Nuclear Energy Policies 17

citizens and industries. We take up the issue of the federal-Ontario partnership in more detail below. Regulating in the Global Innovation Age

The regulation of nuclear power in the global innovation age requires governments to think of entire systems of regulation rather than just particular regulatory bodies. In the past, nuclear energy regulation focused on health and safety and on non-proliferation regimes. In Canada, the lead nuclear regulator has been the Atomic Energy Control Board (AECB), a federal regulatory body; other environmental regulators in areas such as uranium mine tailings are seen as secondary players (Doern, 1976; Sims, 1980). Jackson and de la Mothe's analysis in Chapter 5 shows that the AECB has faced pressure emanating in part from the choice of different inherent models of regulation, partly based on U.S. experience and on the AECB's own concerns about reactor safety in Ontario. While the authors show how the AECB's legislation has recently been updated, the issue of the economic regulation of nuclear power has not received much focused attention until recently. This simple image of regulation has now changed in several important respects. Steve Thomas in Chapter 3 offers an essentially pessimistic account of the British experience in the 1990s with liberalized electricity markets and gradually privatized nuclear firms. Thomas shows that some improvements occurred in reactor performance and efficiency, but is very doubtful that nuclear power is compatible with competitive electricity markets. In Chapters 7, 8, and 9, Jennings, Dewees, and Doern respectively offer different perspectives on the changes in Ontario's regime in the late 1990s. First, Ontario's policy to encourage competition from new sources of electricity supply has brought with it a system of de facto economic regulation and managed competition centred on the Independent Electricity Market Operator (IMO), an expanded Ontario Energy Board that now regulates electricity as well as gas, and on the successor Ontario Hydro companies, particularly Ontario Power Generation (OPG), which now faces severe pressures regarding its own investment choices in CANDU nuclear capacity. Second, the uranium industry, centred in Saskatchewan, has been pressuring Ottawa, in the face of stronger international competition, to reform federal environmental and AECB regulation so as to make the regulatory process more performance oriented rather than proce-

18 Doern, Dorman, and Morrison

dure dominated, and to resolve issues of federal/provincial overlap (Grandey, 1999). The pressure for regulation that is sensitive to performance and competition extends far beyond the nuclear industry and is emerging from recent international trade agreements such as NAFTA and the WTO (Doern, Hill, Prince, and Schultz, 1999). Third, Dewees in Chapter 8 shows how the growing importance of gas-fired electricity generation coupled with the climate change debate and Kyoto obligations has brought to the fore the greatest of all regulatory issues: how to ensure through regulatory or incentive-based regimes that all competing energy sources internalize their environmental costs. The nuclear industry sees itself as an industry that has largely done this, whereas other sources of electricity fuels have not. For instance, its policy has always been to contain its wastes over their entire life cycle. In fact, while utilities have charged a fee in their electricity tariffs to cover the future costs of waste management, they have not channelled these fees into separate funds. They are now looking at setting up such funds as well as a separate organization dedicated entirely to the safe and cost-effective management of wastes (Nash, 1999). These regulatory developments do not all point in the same direction. For example, as Jackson and de la Mothe show in Chapter 5, the chair of the AECB (now the Canadian Nuclear Safety Commission) has recently written to the three provincial hydro utilities that use nuclear power, expressing serious concerns about the adequacy of their underlying R&D and technical support to sustain the safety of Canada's existing nuclear reactors. This suggests a necessary and even detailed procedural scrutiny by the regulator rather than a tilt toward a more performance-oriented regime. Safety is increasingly being perceived as a management issue, with management responsible for ensuring that a safety culture permeates the entire operating organization. Regulators will have to learn to recognize deviations from this safety culture and take action accordingly. Regulation will also have to address the need to maintain high levels of safety in a system that is becoming more competitive at the same time that reactors are ageing. As noted earlier, new reactors will have to be designed for lower capital costs and faster construction schedules, while maintaining levels of safety as high as or higher than at present. As the twenty-first century begins, it is clear that federal and provincial policy will have to address whole systems of regulation rather than just separate regulatory bodies. This theme is also developed by Doern in Chapter 9, in his account of Ontario's greatly transformed regulatory regime.

Canada's Changing Nuclear Energy Policies 19 The Marketing ofCANDU Reactors and Uranium Canada's CANDU and uranium industries have had a significant export component since their inception, and as Morrison stresses in Chapter 2, Canada has always paid close attention to its nuclear export policies. However, Canada faces new policy challenges as a result of AECL's current export orientation. AECL is seen increasingly as a commercial business based on the CANDU, and export sales are now its principal objective and source of revenue. All of AECL's CANDU sales for the past decade have been exports, and CANDU sales over the next decade will likely be offshore as well, as domestic prospects for this period are at present virtually nonexistent. In a number of ways, the government's policy on nuclear energy and financial support for AECL will be conditioned by AECL's export sales performance. First, CANDU exports, and the benefits that flow from them, now provide the government's main rationale for continuing to support AECL. Thus AECL's financial viability, its future as a business, and its claims for government support are now closely linked to its success in selling the CANDU in the international market. This changed orientation is affecting many of the ideas that shape nuclear policy in Canada, and has implications for the other key policy choices as well. Previously, the government supported AECL with public funds for domestic reasons: as an engine for industrial development, as a national laboratory that served as an essential element of Canada's S&T capability, and as the designer and vendor of an electricity source based on Canadian resources and technology that offered security and diversity of energy supply. These rationales were seen as closely intertwined. They are less compelling now, and less integrated. The provinces, which are responsible for electricity, show little interest nowadays in nuclear reactors as a future option for electricity supply. Ontario is preoccupied with getting its existing CANDU assets back up to an acceptable level of performance (McNeil, 1999; Osborne, 1999). The energy policy role and climate change considerations still serve as rationales for keeping the nuclear option open for a later date, but this is not presently seen as an urgent priority. Nuclear technologies are still perceived as highly relevant for isotope production and for research in areas such as materials (through the CNF reactor), but these are not rationales for supporting the CANDU business per se. Thus, without export CANDU sales, it will be increasingly questioned whether the government should continue to support AECL and the CANDU business.

20 Doern, Dorman, and Morrison

Second, continuing export sales would bring significant income to AECL, thus lessening the government's financial burden and enabling AECL to cover a larger share of its own R&D costs. They would also mean that the government was supporting a product that was competing effectively in the international market. A successful reactor project can be a flagship for the exporting country's high-tech industry. The jobs that CANDU export projects bring to Canada - many of them in private sector firms - help increase support for the sales. Prime Minister Chretien has been a champion of CANDU in his Team Canada export promotion efforts. Continuing success - especially repeat orders from satisfied customers - enhances AECL's credibility and makes government support easier to obtain. A third export policy consideration is that increased sales may require increased financial commitments from the Government of Canada. Funds needed can be in the order of $1 billion per reactor for the Canadian content. As the loans will be at risk to some extent during the project - especially during the construction period - funds must be earmarked as insurance against the possibility of non-repayment. Current loans are made on commercial terms, with no concessional financing. The record for repayment of loans for CANDU sales has been good. Nonetheless, the government will look carefully at each sale to ensure that the risks of non-repayment are fully addressed. A fourth policy consideration is that CANDU sales can be controversial (Martin, 1996). Potential customers for CANDU are emerging economies that, owing to their location and their rapid development, are prone to both external and internal political instability. AECL's new emphasis on CANDU exports has placed more pressure on the federal government to provide assurances that these sales are acceptable in terms of non-proliferation, safety, and environmental impacts. Since 1965, an overriding goal of Canada's nuclear export policy has been to ensure that exported nuclear material, equipment, and technology is used for peaceful, non-explosive purposes only, and that such exports do not contribute to the proliferation of nuclear weapons. The proliferation of such weapons is driven primarily by political incentives; controls on civilian nuclear exports are necessary to close off one possible route for acquiring some of the key components. Canada substantially upgraded its nuclear export requirements in this regard after the Indian nuclear explosion of 1974, which used plutonium from a research reactor Canada had given to India in the 1950s. Canada's nuclear co-operation with India and Pakistan was terminated in 1976,

Canada's Changing Nuclear Energy Policies 21

when those countries would not agree to the new requirements, and has never resumed (Morrison and Wonder, 1979). Since then, Canada has been at the forefront of international initiatives to prevent the proliferation of nuclear weapons. Canada's nuclear export policy tries to balance the benefits of nuclear commerce with the requirements of international security (Bratt, 1996). Canada requires stringent nonproliferation commitments, verified by international safeguards, on all its nuclear exports, considering this to be a necessary political condition for continuing those exports. Nonetheless, some Canadians believe we should not be exporting nuclear reactors in the first place. For a while, Canada was alone to quite an extent in pursuing its more stringent policies, and risked the loss of several reactor sales to competing vendors. Since then, the other industrialized countries have gradually come around to Canada's position, and non-proliferation is less of an issue in most markets of interest to Canada. With respect to the non-proliferation of nuclear weapons, the policies of Canada and other countries have been complicated by the collapse of the former Soviet Union and concerns about the control of nuclear materials there. Recently, Russia and the United States have agreed to dismantle some of their nuclear weapons and stockpiles of fissile material; while welcome, these initiatives have raised the issue of what to do with the resulting weapons material. This material, highly enriched uranium (HEU) or plutonium, remains in a highly dangerous form, probably under controls that are less adequate than for missile warheads. Ironically, rather than a concern about the potential diversion of nuclear material from civilian to military uses, this is a question about materials on their way from military to civilian control. HEU can be 'downblended' to a very low concentration of fissile material, about 3 per cent, and used as low enriched uranium, which is the normal fuel for light-water reactors, the type most prevalent in the world today. Cameco and Cogema, the leading companies in Canadian uranium development, are playing roles in marketing this material in ways that do not disrupt the nuclear fuel market (Grandey, 1999; de Bourayne, 1999). Maintaining access to markets for uranium, and ensuring that the markets are not flooded by excess material, will be key factors in Canada's nuclear export policy. Through AECL, Canada has been involved in tests to determine whether plutonium extracted from dismantled weapons can be incorporated - with a fissile concentration of about 3 per cent - into fuel for

22 Doern, Dorman, and Morrison

CANDU reactors, which would burn most of it and render the rest much less suitable for weapons purposes. This initiative is controversial from a number of perspectives, including OPG's desire to concentrate on its own nuclear recovery program and not be distracted by other goals. Despite the useful contribution that Canada could make to disarmament, Canada is not likely to be a key player in the overall effort to deal with this material, and the government has other, more pressing priorities in its nuclear file. Another area of controversy is the safety - especially environmental safety - of exported CANDUs. The safety of a CANDU is clearly the responsibility of the host country. Canada provides regulatory assistance to CANDU customers to ensure that this country's regulatory standards and procedures are well understood, and works through international organizations to help bring about high safety standards worldwide. Critics of CANDU exports have taken the government to court on the grounds that Canadian legislation obliges it to ensure that a valid environmental assessment has been carried out, and that one was not done in the case of the China CANDU sales. The government's position is that assessments are not required of Crown corporations; rather, they are the responsibility of the host government. The issue goes beyond CANDU to a range of other exports, and to the question of how Canada could apply its own assessment process to other countries. Far from seeing CANDU exports as a health and environmental risk, supporters of nuclear energy believe they help meet climate change and air quality goals; in their view, far more greenhouse and acid gases would be emitted if fossil fuel generating plants - most likely coal were built instead of the CANDUs. Canada has pushed for credits for its nuclear exports under the Clean Development Mechanism of the Kyoto Protocol, which will allocate emission credits according to the reduction in emissions achieved. So far these efforts have not met with success, but it seems clear that nuclear energy will have to be considered seriously if greenhouse and acid gas emissions are to be reduced in the face of increasing global demand for electricity (Goodale, 1999). Renewing the Federal-Ontario Nuclear Partnership

As mentioned earlier, Ontario is without any doubt the province that has benefited most from Canada's overall nuclear energy investment, in terms of electricity supply, lessened exposure to carbon emissions

Canada's Changing Nuclear Energy Policies 23

over the last three decades, and the private sector nuclear business, which consists largely of technology-based manufacturing, engineering, and consulting firms in Ontario. Moreover, AECL's operations in Mississauga and Chalk River provide plenty of jobs in Ontario. In the 1960s, 1970s, and 1980s, there was an explicitly recognized partnership between federal nuclear policy and activity and the Ontario government, either directly or through Ontario Hydro (Bothwell, 1988; Doern and Morrison, 1980). As Ontario Hydro built its first CANDU reactors, there was considerable positive collaboration, including Ontario contributions to the R&D activity of AECL through joint projects and through the nuclear fuel waste R&D program. Also, Ontario Hydro contracted a lot of work on its CANDU stations to AECL, although it took over more of this work in the late 1970s as AECL began focusing more on markets outside Ontario. The chapters by Jennings and Dewees show in different ways that by the mid-1980s, and certainly into the 1990s, the relationship between Ontario and the federal government had become strained by a number of factors - some relating to separate goals, some market and technology-based, and some political in nature - as both levels of government faced fiscal deficits and a changing global economy. Ontario Hydro's focus was clearly on the investment of tens of billions of dollars it was making in a thirty-year construction program of twenty nuclear power plants. Through decades of steady growth in electricity demand averaging close to 7 per cent per year, Ontario Hydro had invested in expanded generation capacity using dams, coal-fired generation, and (in the 1960s and 1970s) nuclear power, on the assumption that demand would continue to increase at this rate (Daniels, 1996). However, the rate of demand growth in electricity consumption fell, initially in the 1970s and then extensively in the 1980s and 1990s, due to the combined effects of economic recession and energy conservation. Also, Ontario was gradually becoming more of a service economy than a manufacturing economy, which dampened electricity demand, since the service sector uses less electricity. The size of Ontario Hydro's debt was exceeded only by growing concerns about a public enterprise that no political authority seemed able to control and whose accountability was oblique at best (Ontario, 1996). In the 1990s these political and economic pressures increased in intensity. Their political salience was in particular propelled by a 30 per cent increase in power rates for consumers in the early 1990s, at a time

24 Doern, Dorman, and Morrison of economic recession and hardship for many ordinary Ontario citizens. Ontario's electricity demand remained below its 1989 levels for the better part of a decade. Anticipated load growth of 3 per cent per year - or more than 30 per cent for the decade - failed to materialize. When the Darlington nuclear station with its four large CANDU units came on line in the early 1990s, its capacity was surplus to Ontario's needs. The rate increases were a direct result of the inflated debt that Ontario Hydro had taken on to pay for its nuclear plants and for other mechanisms to reconcile supply and demand. Other factors were also coalescing to produce change in the 1990s. These were expressed in various ways by the MacDonald Commission (Ontario, 1996) and other advisory bodies, and eventually by the Harris Conservative government's own 1997 White Paper (Ontario, 1997). The White Paper identified four main factors driving change: 1. Deregulation in the United States. Federal regulators in the United States had recently mandated competition among wholesale electricity customers (municipal and rural distribution utilities) and many states were passing legislation creating choice for retail electricity customers. 2. Economic competitiveness. The globalization of Ontario's economy meant greater competitive pressures for industry. Industries were looking to cut costs, including electricity costs, and were looking at how deregulation in other sectors (e.g., the natural gas sector) had succeeded in driving prices down. 3. Technology. New-generation technologies were capable of providing financially and environmentally attractive alternatives to large-scale, capital-intensive electricity generation. 4. Financial soundness. Concern about public sector debt. Other assessments of the causes of change focused on nuclear power per se. Some authors explicitly linked Ontario Hydro's problems regarding the overestimation of future demand to the 'over-expansion and related borrowings with respect to its nuclear facilities in the 1970s and 1980s' and to the 'substantial cost over-runs and disappointing operating performance of a number of these facilities, in part itself a function of a federal-provincial industrial strategy designed to promote the atomic energy sector in Ontario through the Atomic Energy of Canada Ltd.' (Trebilcock and Daniels 1995). This assessment also drew attention, in the economic sphere, to 'an anachronistic regulatory

Canada's Changing Nuclear Energy Policies 25

structure characterized by dispersed and fragmented authority that has at times subverted public transparency and fostered government micro-management.' Ontario Hydro's management of its nuclear operations was severely criticized in August 1997 by a special team of American nuclear experts, who had been called in by Ontario Hydro's president. The president then resigned, and the experts were placed in charge of the nuclear operations. They decided to shut down seven of the company's nineteen reactors and to focus on getting the other twelve back up to top performance (Farlinger, 1997). This dramatic move had significant implications for the future of nuclear energy in Canada. Although safety was not an immediate issue, the scope of the problem cast long shadows over the entire Canadian nuclear energy program. The American experts placed the blame on management and took great pains to exonerate the CANDU design; even so, the initiative created resentment within the federal government that Ontario Hydro was damaging the reputation of Canada's nuclear technology. The developments were particularly galling in that Ontario Hydro's CANDUs had outperformed American nuclear plants by a wide margin in the 1980s. It was precisely the experience of helping overcome the earlier performance problems in the United States that gave the American experts their insights. The causes of the nuclear performance failures in Ontario are complex and would make a good subject for a comprehensive separate analysis. While the American experts brought in to remedy the situation focused on correcting the problems rather than seeking their origins, they thought that one reason for the poor management performance was that Ontario Hydro's nuclear division never made the transition from a design and construction organization to an operating one (Andognini, 1998). The nuclear construction program went on for thirty years. As long as construction was underway, and plants were continually starting up, there was a great sense of momentum, of exciting things happening, and there were powerful incentives to get things done and to meet new challenges. The operation and maintenance of an existing plant is a more routine, procedure-oriented activity, with less sense of excitement and of achievement. In these circumstances it is perhaps harder to maintain a high level of motivation and to focus on mundane performance issues, especially if the same staff have been through the heady times of expansion. (Interestingly, Thomas in Chapter 3 notes an opposite effect in Britain, where

26 Doern, Dorman, and Morrison

staff were able to concentrate their efforts on making existing plants work well in the absence of new reactor orders.) Some feel that Hydro's early successes may have led to complacency. Some of the older staff felt that they could rely on their experience and judgment, and did not want to follow procedures designed by less experienced juniors. At the same time, they did not improve the procedures, nor did they prepare the succession. Training was haphazard and inadequate. The downsizing of the early 1990s offered generous buyouts to everyone, but without taking into account the precise manpower needs of the organization. Many of the most experienced people took the buyout, which left holes in the organization. The antinuclear attitude of the NDP government from 1990 to 1995 and the concomitant changes in senior management did not help morale. Work procedures and union rules may have hampered both efficient operation and the transfer of staff to high-priority work sectors and locations. At the senior management and board levels, insufficient attention was paid to maintenance and to regulatory concerns (Peabody, Andognini, and Machon, 1998). The decision to bring in an American management team to correct the situation was a difficult one. The decision to shut down seven older CANDU units in order to focus existing technical expertise and trained manpower on the twelve newest plants was even more controversial. Some would argue that Ontario Hydro was already taking corrective measures that would have borne fruit, especially if the resources that became available later for the cure had been there earlier for the prevention. However, the situation had clearly deterioriated to the point where drastic remedies were called for. The idea of bringing in a completely fresh approach, one honed by experience at achieving turnarounds in underperforming American plants, had an obvious appeal. A judgment as to whether these decisions were ultimately the right ones will depend on the results of current efforts to improve performance. In the near future, OPG management will have to decide whether to refurbish the shut-down plants and bring them back into service, or sell them - perhaps along with some operating plants - to other firms. In July 2000, OPG announced that it would lease the Bruce A and B nuclear stations, including the four shut-down reactors at Bruce A and four operation reactors at Bruce B, to British Energy until 2018. Such actions are part of a global trend in the nuclear industry to consolidate plant ownership in fewer but ideally more expert hands. The Ontario government's plans for OPG are based to some extent

Canada's Changing Nuclear Energy Policies 27

on its view of an expanded market for power in the northeastern United States. While American firms will compete in Ontario, OPG's nuclear units should be strongly competitive in the American market because their operating costs are lower. While this is not likely to lead to new nuclear plants, given their high capital costs, it could be an important factor in any decision to refurbish and reopen the seven CANDU units that are currently shut down. It is important to stress that the growth potential of regional North American electricity markets is not just a function of the changes above. It is also the result of NAFTA and the general encouragement of free trade. In the new, competitive Ontario electricity market, CANDU reactors will have to compete with newer, mainly gas-fired generating plants, which will be able to enter the Ontario electricity market under private ownership (McNeil, 1999). AECL is affected negatively by these choices in respect of any domestic CANDU reactor sales (which seem highly unlikely in this decade), but also positively, because new opportunities for commercial service and refurbishment work will emerge as OPG tries to get its nuclear plants into competitive shape, and to penetrate the neighbouring American market. A strong case can be made that whatever nuclear energy scenario is projected for the next twenty to thirty years, a new federal-Ontario partnership is badly needed (Osborne, 1999). To reweave the frayed relationships of the past decade, frank and open discussions and new, cooperative approaches will be essential. There is certainly a persuasive argument that Ontario, through the government or the utility, should pay some share of the nuclear R&D needed to sustain CANDU operations and improvements. Certainly there are compelling reasons to get the existing CANDU plants running reliably. Ontario will have also have to think about their replacement or refurbishment when they reach obsolescence, and this will also weigh in the federal government's climate change strategy. Ontario-federal cooperation is also crucial to any resolution of the problems of the long-term storage of nuclear wastes. Separate funds and a separate organization appear to be prerequisites for moving forward on this issue, and the federal government will have to address its own waste problems. There are still significant nuclear regulatory issues, ranging from local emergency preparedness to recent concerns by the AECB that OPG may be pressured by the new economics of electricity competition to skimp on its margin of nuclear safety and its maintenance of appropriate staff and operational research capacity.

28 Doern, Dorman, and Morrison Renewing Institutions of Trust and Transparency in a Climate Change and Sustainable Development Era

All realms of public policy must constantly strive to keep the public's trust. This need is especially crucial for the future of nuclear energy, cast as it now is in the wider debate over climate change and sustainable development. Public support for nuclear electricity has always been conditioned by strong fears about nuclear accidents, about the international proliferation of nuclear materials for non-peaceful purposes, and increasingly about the long-term management of nuclear waste. In matters nuclear, public trust is especially easy to lose and hard to regain. Nuclear agencies and the industry in general have at times been seen as arrogant and secretive, in part because of an ingrained view held by nuclear insiders that only they can understand nuclear power and that society has little choice but to trust them (Castle, 1995; Canadian Environmental Assessment Agency, 1998). This arrogance has undoubtedly softened in the past decade, simply because it is now compellingly obvious that no industry or set of institutions can survive without scrutiny in the current climate of sceptical democracy, in which governments face numerous demands for action and investment and in which technologies (including alternative energy technologies and sources) are creating new choices and options. Three points must be emphasized here about the present realities. First, some of the relationships of trust and accountability are at the individual agency level. Thus, bodies such as AECL, the AECB, the OEB, OPG, and federal and provincial environment regulators must be beyond reproach in their attitudes toward transparency, communications with the public, and overall accountability. Second, key Cabinet ministers in both levels of government must be much more forthright and ready to publicly discuss all aspects of the nuclear industry in Canada, including nuclear energy and long-term waste management; nuclear energy and climate change; and nuclear energy and linked technologies (e.g., materials research and medical diagnostics). Nuclear energy policy deserves a full debate, not a closet discussion. In any such debate, the process may be as important as the content. The third aspect of trust and transparency applies not only to nuclear choices but also to financial and investment choices in relation to climate change and sustainable development. More considered public debate must be encouraged regarding whether governments should

Canada's Changing Nuclear Energy Policies 29

invest in nuclear R&D and, if they should, what form that investment should take. Canadians must be given sufficient information to compare available energy sources and make judgments about their economic and environmental costs and benefits, for this generation and future ones. Overall, then, nuclear policy deserves renewed scrutiny in the broader context of energy and environment issues and the complexity of the choices and trade-offs involved. Networks of institutions are involved that are now more interconnected. Political and economic choices on nuclear energy can no longer be avoided or simply shunted aside. They must be made in a comprehensive and integrated way. Conclusions Canadian nuclear policy ideas, institutions, and interests have changed markedly in the past two decades. In this chapter we have suggested two general approaches to examining these changes. First, our initial overview of ideas, institutions, and interests has shown that while core nuclear policy ideas may be largely unchanged over the past two decades, they are embedded in a quite different configuration of policy ideas and paradigms, which are evident in closely related policy fields such as industrial and innovation policy; environmental, climate change, and sustainable development policy; trade policy and markets; and energy policy. Nuclear policy institutions and interests have also been broadly shown to be more complex and diverse and thus far less composed of a narrow club of policy makers and interest groups than was the case in the late 1970s and early 1980s. Second, the five policy questions we considered in this chapter suggest a complex interplay of changed ideas, institutions, and interests. They also suggest different entry points for considering the opportunities confronting the nuclear industry and nuclear policy makers. Each of the questions necessarily yields highly conditional answers and commentary. The observations in this chapter represent our views and interpretations of some of the key points our authors raise in the next eight chapters. However, the authors that follow have much more to say in the specific context of the areas they examine; and, of course, each has individual views about nuclear energy as a whole. We urge you, therefore, to read the next eight chapters before we return in the final chapter to make some final observations on the medium-term prospects of

30 Doern, Dorman, and Morrison Canadian nuclear energy in this era of competitive electricity and climate change. Our concluding views will focus on three aspects of nuclear policy: likely performance in nuclear markets, both regional and global; the structure of public opinion concerning different aspects of nuclear energy; and long-term waste management and the design and accountability of intergenerational institutions, especially in the context of climate change and sustainable development. REFERENCES Andognini, Carl. 1998. Improving Nuclear Performance: The Key to Becoming Competitive. Paper presented to Eleventh Pacific Basin Nuclear Conference. Banff, Alberta, May. Arthur, Charles. 2000. The Sellafield Safety Scandal Will Cost Us £100 Million. The Independent (12 July): 4. Atlantic Council. 1999. An Appropriate Role for Nuclear Power in Meeting Global Energy Needs. Washington: Atlantic Council. Atomic Energy of Canada Ltd (AECL). 1999. Annual Report: 1998-1999. Ottawa: AECL. Baylis, John, and Robert O'Neill, eds. 2000. Alternative Nuclear Futures. Oxford: Oxford University Press. Bothwell, R. 1988. Nucleus: The History of Atomic Energy of Canada Limited. Toronto: University of Toronto Press. Bratt, D. 1996. Is Business Booming: Canada's Nuclear Reactor Export Policy. International Journal 51, no. 3:487-505. Canadian Environmental Assessment Agency (CEAA). 1998. Report of the Nuclear Fuel Waste Management and Disposal Concept Environmental Assessment Panel. Ottawa: Minister of Public Works and Government Services, February. Castle, Pamela. 1995. Environmental Issues and the Nuclear Industry. Energy Policy 23, no. 2:139-47. Commissioner for Sustainable Development. 1999. Annual Report. Ottawa: Office of the Auditor General. Connelly, James, and Graham Smith. 1999. Politics and the Environment. London: Routledge. Daniels, Ronald J., ed. 1996. Ontario Hydro at the Millennium. Montreal: McGillQueen's University Press. De Bourayne, Arnaud. 1999. Prospects for the Uranium Market in the 21st Century Paper presented to CRUISE Conference on the Future of Nuclear Energy in Canada. Ottawa, 1 October.

Canada's Changing Nuclear Energy Policies 31 Doern, G. Bruce. 1995. Natural Resources Canada: New Synergies or Competing Fiefdoms? Paper prepared for the Canadian Centre for Management Development. Ottawa. - 1980. Government Intervention in the Canadian Nuclear Industry. Montreal: Institute for Research on Public Policy. - 1976. The Atomic Energy Control Board. Ottawa: Law Reform Commission of Canada. Doern, G. Bruce, and Tom Conway. 1994. The Greening of Canada. Toronto: University of Toronto Press. Doern, G. Bruce, M. Hill, M. Prince, and R. Schultz, eds. 1999. Changing the Rules: Canada's Changing Regulatory Regimes and Institutions. Toronto: University of Toronto Press. Doern, G. Bruce, and Robert Morrison, eds. 1980. Canadian Nuclear Policies. Montreal: Institute for Research on Public Policy. Doern, G. Bruce, and Ted Reed, eds. 2000. Risky Business: Canada's Changing Science-Based Policy and Regulatory Regime. Toronto: University of Toronto Press. Doern G. Bruce, and G.H. Sims. 1981. Atomic Energy of Canada Limited. In G. Bruce Doern and A. Tupper, eds., Public Corporations and Public Policy in Canada, 51-94. Montreal: Institute for Research on Public Policy. Doucet, Gerald. 1999. The Energy Industry: Embracing the 21st Century. Paper presented to Sixth Annual Handelsblatt Conference. Berlin, 10 January. Electricity Table. 2000. Canada's National Climate Change Process: Electricity Table Options Report. November, www.nccp.ca/html/index.htm Farlinger, William. 1997. Statement by William Farlinger, Chairman and Interim CEO, Ontario Hydro re Hydro Announcement. Toronto, 13 August. Goodale, Ralph. 1999. Notes for a Speech, Climate Change and Energy Options Symposium. Ottawa, November. Grandey, Gerald. 1999. The Role and Challenges of Canada's Uranium Industry in the International Fuel Market. Paper presented to CRUISE Conference on the Future of Nuclear Energy in Canada. Ottawa, 1 October. Hafele, Wolf. 1992. Energy, Risk and Environment. Energy Systems and Policy 15: 237-43. Hancox, Bill. 1999. The International Market for Nuclear Energy: An AECL Perspective. Paper presented to CRUISE Conference on the Future of Nuclear Energy in Canada. Ottawa, 1 October. Hare, F.K., et al. 1977. The Management of Canada's Nuclear Wastes. Ottawa: Department of Energy, Mines and Resources. Industry Canada. 1994. Building a More Innovative Economy. Ottawa: Minister of Supply and Services.

32 Doern, Dorman, and Morrison Joskow, Paul. 1996. Introducing Competition into Regulated Network Industries: From Hierarchies to Markets in Electricity. Industrial and Corporate Change 5, no. 2: 341-82. Karacs, Imre. 2000. German Greens in Uproar over Nuclear Pledge. The Independent. 16 June: 14. Kuhn, Richard G. 1998. Social and Political Issues in Siting a Nuclear-Fuel Waste Disposal Facility in Ontario Canada. The Canadian Geographer 42, no. 1: 14-28. Lafferty, William M., and James R. Meadowcroft, eds. 2000. Implementing Sustainable Development: Strategies and Initiatives in High Consumption Societies. Oxford: Oxford University Press. Lermer, George. 1996. The Dismal Economics of CANDU. Policy Options (April): 16-20. Martin, David H. 1996. Exporting Disaster. Ottawa: Campaign for Nuclear Phaseout. Martin, David H., and David Argue. 1996. Nuclear Sunset. Ottawa: Campaign for Nuclear Phaseout. McNeil, Patrick D. 1999. The Future of the Ontario Nuclear Program. Paper presented to CRUISE Conference on the Future of Nuclear Energy in Canada. Ottawa. 1 October. Morrison, Robert. 1998. Nuclear Energy Policy in Canada: 1942 to 1997. Ottawa: Carleton University. Morrison, Robert, and Edward F. Wonder. 1979. Canada's Nuclear Export Policy. Ottawa: Norman Paterson School of International Affairs, Carleton University. Nash, Ken. 1999. Nuclear Waste Management and the Future of Nuclear Energy in Canada. Paper presented to CRUISE Conference on the Future of Nuclear Energy in Canada. Ottawa, 1 October. Ontario. 1997. White Paper. Direction for Change. Toronto: Minister of Energy, Science and Technology. November. - 1996. A Framework For Competition. Report of the Advisory Committee on Competition in the Ontario Electricity System to the Ontario Ministry of Environment and Energy. Ontario Power Generation. 1999. A New Company with a Proud History. Toronto. Osborne, Ronald. 1999. Remarks to the WANO Biennial Meeting. Victoria. 21 September. Patterson, Matthew. 1999. Global Warming and Global Politics. London: Routledge. Peabody, Warren, Carl Andognini, and Richard Machon. 1998. Ontario Hydro:

Canada's Changing Nuclear Energy Policies 33 Restoring Nuclear Excellence. Paper presented to Eleventh Pacific Basin Nuclear Conference. Banff Alberta, May. Royal Academy of Engineering and The Royal Society. 1999. Nuclear Energy: The Future Climate. London: Royal Academy of Engineering and The Royal Society. Sims, Gordon H. 1980. A History of the Atomic Energy Control Board. Ottawa: Minister of Supply and Services. - 1979. The Evolution of AECL. MA thesis, Carleton University. Stothart, Paul. 1996. Nuclear Electricity: The Best Option Given the Alternatives. Policy Options (April): 14-16. Swimmer, Gene, eds. 1996. How Ottawa Spends, 1996-97: Life under the Knife. Ottawa: Carleton University Press. Toner, Glen. 2000. Canada: From Early Frontrunner to Plodding Anchorman. In William M. Lafferty and James R. Meadowcroft, eds., Implementing Sustainable Development: Strategies and Initiatives in High Consumption Societies. Oxford: Oxford University Press. Trebilcock, Michael, and Ronald Daniels. 1995. The Future of Ontario Hydro. Utilities Law Review (Winter): 152-61. Trebilcock, Michael, and Ralph A. 1997. The Economics of Nuclear Accident Law. International Review of Law and Economics 17 (Winter): 215-43. Watson, Robert T. 1998. Climate Change: The Challenge for Energy Supply. Paper presented to the Uranium Institute, 23rd Annual Symposium. London. Wilson, Robert. 1998. Efficiency Considerations in Designing Competitive Electricity Markets. Ottawa: Competition Bureau, April. Yergin, Daniel and Joseph Stanislaw. 1998. The Commanding Heights: The Battle between Government and the Marketplace That Is Remaking the Modern World. New York: Simon and Schuster.

Chapter Two

Global Nuclear Markets in the

Context of Climate Change and Sustainable Development Robert Morrison

This chapter explores key changes in, and features of, global nuclear and uranium markets in the context of issues of climate change and sustainable development. Increasingly, global market realities and the export potential of the Canadian nuclear industry are becoming crucial features of the nuclear political economy. These forces are interacting in complex ways and need to be understood at several different levels. They embrace the structure of electricity markets, changing nuclear reactor technologies, the ageing stock of reactors, the changing economics and technology of alternative supply sources, the strategies of industrializing countries (which are the main buyers of nuclear reactors), and the nature of nuclear power in the context of sustainable development and climate change. To deal with these developments, I have organized this chapter into four sections. In the first, I examine the role of exports in the evolution of nuclear policy in Canada. In the second, I look more closely at nuclear power and CANDU projects in the specific context of global competitive markets. In the third, I examine trends in electricity and nuclear energy in the market for nuclear reactors. In the fourth, I locate these changes in the context of the issues that are inherent in climate change and sustainable development. Exports in Canada's Nuclear Policies Exports have always been a major factor in Canada's nuclear policies (Morrison and Wonder, 1979). The uranium industry was developed in the 1940s and 1950s to supply the defence markets of the United States and United Kingdom. Since the shift to peaceful uses in 1965, it has continued to be export-oriented. The early research reactors, NRX and

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NRU, were built with the intention of earning revenue from sales of plutonium to the same markets. These reactors also produced radioisotopes for medical and other purposes, and these were exported from the beginning. Canada gave India a research reactor in the mid-1950s, at Lester Pearson's initiative, as an indication of Canada's interest in assisting developing countries and in exporting nuclear technology to world markets. This was followed by sales of small CANDU-type reactors to India and Pakistan in the 1960s. Since taking over the mandate for CANDU exports in 1968, AECL has always sought export markets in addition to domestic sales. In the 1990s the focus on export CANDU sales became complete (Morrison, 1998). Uranium As noted in Chapter 1, Canada's nuclear exports since 1965 have been for peaceful purposes only. Canada's uranium industry has remained export-oriented. The industry slumped in the late 1960s and early 1970s, following the end of the defence contracts. It was supported strongly by the Canadian government, through uranium stockpiling programs and orderly marketing arrangements to ensure minimum prices at a time when the U.S. market, the world's largest, was closed to imports. A few years later, the government also intervened to cut off uranium customers in Europe and Japan for several years, while previous arrangements were renegotiated to meet Canada's new, tougher non-proliferation requirements. Since then, the government has moved away from direct intervention and its uranium policies have become increasingly marketoriented. It has privatized its interest in Eldorado Nuclear, the Crown corporation that it set up during the Second World War to manage its uranium interests. Cameco, the company that was established to replace it, is now one of the world's major uranium producers. Canada has become the world's leading producer and supplier of uranium for civilian nuclear power programs. It has a well-diversified customer base that includes most of the industrialized countries. It has a very large and rich resource endowment and is seen as a reliable supplier to world markets. For the past several decades, uranium exports have consistently topped $500 million annually. As indicated in Chapter 1, the main policy concerns in the export market will be continued access to markets, and management of the surplus material from military programs so as not to disrupt the civilian market. A recent series of joint federal/provincial environmental assess-

36 Robert Morrison

ments have given the green light to a number of new, large-scale projects in northern Saskatchewan, where the industry is concentrated. Regulation of health, safety, and environmental matters remains the main domestic policy concern, notably with respect to the division of labour between the federal and provincial governments (Grandey, 1999). Radioisotopes Radioisotopes have also been an export-oriented industry since the beginning. Canada is the world's leading producer and exporter of a broad range of radioisotopes, mainly because of the capacity of AECL's research reactors NRX and NRU. Also, Canadian CANDUs are the main producers of Cobalt-60 for therapeutic and other applications. Canada's radioisotope industry supplies isotopes for about 20 million medical procedures worldwide annually, largely for medical diagnostics, sterilization, and therapy (J. Morrison, 1999); it brings in over $200 million each year in export revenue. It represents the kind of high-tech, health-oriented industry that Canada seeks to encourage. Policy decisions in this area have included the privatization of AECL's isotope processing and manufacturing operations, Nordion and Theratronics, which are now part of MDS Inc. Security and continuity of supply is a concern in this industry, as some of the short-lived isotopes must be produced and shipped on a daily basis. On several occasions in recent years, labour disputes at Chalk River have threatened a cut-off of supplies, but have been resolved successfully without any interruption. Canada must ensure supply in order to maintain its dominant position. As part of the privatization deal, the government agreed to have AECL build two dedicated MAPLE-type isotope production reactors at Chalk River to produce isotopes for Nordion. They will replace NRU, which has been operating since 1957 and is due to shut down in a few years, and should help ensure both continuity of radioisotope supply and Canada's leading position as a supplier. CANDU The first large CANDU nuclear reactors sold outside Ontario were CANDU 6 units to Quebec and New Brunswick in the early 1970s, shortly after Ontario Hydro's Pickering A multi-unit station began successful operation, and to Argentina and Korea at about the same time.

Global Markets, Climate Change, and Sustainable Development 37

Nuclear energy provides a significant share of New Brunswick's electricity supply, but a small share of Quebec's. In the late 1970s a sale was made to Romania as part of an ambitious program of five units, but the program progressed very slowly under the communist regime then in power. In the early 1990s, after a decade of drought, AECL sold three more CANDU 6 units to South Korea, which are now in operation. The four-unit CANDU station in Korea is arguably Canada's biggest export project to date. In the mid-1990s, AECL set itself the target of selling ten reactors in ten years (AECL, 1997). The first two sales in this campaign were made to China in 1996. These are under construction. AECL was also able to salvage and complete the first CANDU 6 unit in Romania, which went into operation in 1996. Romania has purchased most of the equipment for a second unit, and discussions continue on the financing required to complete the project. All the operating CANDU 6 units are performing well, which suggests that they are adaptable to a range of operating environments. The first unit in Korea has an outstanding performance record. AECL has had a significant share of the nuclear reactors sold internationally in the 1990s. However, AECL is not on track to achieve its goal of ten in ten. Each sale is a struggle, with long delays in purchasing decisions. Also, there is intense competition from other vendors, primarily French and American, or French-German and Japanese-American consortia, who are equally dependent on foreign sales for their survival. These problems were exhibited again in July 2000 when the Turkish prime minister announced that his country would not proceed with its planned nuclear project, and in March 2001, when Korea opted for a light water reactor program. The large size of the projects, their uncertainty and sporadic timing, the all-or-nothing decisions from the vendors' perspective, and the long planning, construction, and decision times, all underline the difficulty of medium-term planning in this industry, and the notion of precarious opportunity. Nuclear Power and CANDU Projects in a Competitive Market Nuclear reactor projects have a number of characteristics that affect how they compete with other electricity sources. Chief among these are their high capital costs, their large size, and their long planning and construction times. Because of the size of the commitment, and the

38 Robert Morrison

technical and human infrastructure required to support them, most countries that buy reactors do so as part of a long-term commitment to a nuclear program involving several (and possibly many) reactor units. This has been the case for CANDU in Korea, Romania, and China, and will likely be the case for Turkey as well, if that country eventually decides in favour of CANDU. A country is unlikely to buy a reactor on a one-off, trial basis. Success with an initial sale may well presage further commitments down the road, whereas failure to gain a foothold in a country may mean a vendor is shut out of all future prospects there. This enhances the all-or-nothing nature of the nuclear reactor market. However, even after a foothold is gained, the choice of reactor and vendor will be under continual review. A country embarking on a nuclear reactor program is likely to have a large, integrated generating capacity (in order to accommodate large new units); high or at least steady growth in electricity demand; a lack of access to, or desire to diversify away from, fossil fuels in the highergrowth regions; a desire for greater energy independence; and a need to improve air quality in large cities. It may also have a strategic interest in reducing carbon emissions, though this does not seem to have been a visible factor in market decisions to date. A purchasing country will also recognize the need for long-term commitment that a nuclear program requires, in terms of regulation, training, and technical skills. If foreign financing is available, it may allow the country to add capacity at a higher rate in order to meet rapid growth in demand. Because of its high capital cost, it is best to run a nuclear reactor at full capacity all the time, and to use it as a provider of baseload power, as opposed to the intermittent power required to meet the fluctuating component of demand. Also, it needs to run a high percentage of the time over its lifetime in order to earn the revenue to repay the capital cost. The high capital cost and the longer construction period mean that the investment is at risk until the reactor begins to operate and to generate revenue, and that the final cost of the reactor is very sensitive to the cost of capital. Nuclear reactors have the advantage of low fuelling and operating costs. This is an advantage for existing reactors in a competitive market, as in most instances the operating cost determines the price of electricity in the market. Also, nuclear reactors are relatively inflationproof once they begin operating and as long as they continue to run well. However, the characteristics of nuclear power come under particular scrutiny in competitive markets. With deregulation and increasing

Global Markets, Climate Change, and Sustainable Development 39

competition, and in countries where the growth in demand is less certain, or where decentralized supply is desirable, flexibility and low capital cost will be major factors in decisions about which technology to buy. Much of the world's new generating capacity is likely to be based on coal and natural gas, the latter especially where pipeline gas is available. Natural gas plants offer a number of advantages, including short construction times, low capital costs, flexibility in planning, and lower emissions than coal. They also have high thermal efficiencies, with potential for further improvements. The overall cost of electricity from nuclear sources is about 70 per cent due to capital costs, whereas for natural gas plants it is about 70 per cent due to the cost of the gas itself (NEA/IEA, 1998; Guindon and Moore 1999). Gas plants can be bought 'off the shelf as needed, and there are private operators who can supply them and provide financing. At this point, utilities do not seem to be deterred by either the price or the security of supply of natural gas. Coal plants fall in between nuclear and natural gas plants with respect to the division of cost between capital and fuel. Coal is cheap and the technology is well proven, but coal faces challenges with respect to both air quality and greenhouse gas emissions. In some countries, nuclear energy appears to be competitive with natural gas on a lifetime unit energy cost (LUEC) basis (NEA/IEA, 1998). Even so, the lower financial risk associated with the shorter lead times for gas plants may make gas more attractive. However, countries with a high dependence on energy imports, such as Japan, France, and South Korea, are likely to continue to rely on nuclear power for some fraction of their new capacity because of the diversity and security of supply that it offers. In order to compete with natural gas under current conditions in most countries, nuclear will probably have to lower its capital costs and its construction times, and also ensure high capacity over long plant lifetimes. Thus new designs, or significant modifications to existing designs, will be needed. A recent AECL paper suggests that CANDU costs should be lowered by 30 per cent, to a level equivalent to the costs of coal plants (Hancox, 1999). Hancox estimates the current overnight capital cost of a single-unit 676 Megawatt (MWe) CANDU-6 at US$1.85 billion, or US$2700 per kilowatt. A two-unit station would be 10 per cent less. A comparable gas plant costs US$600 million for 350 MWe, or US$1700 per kilowatt. This is a moving target, as gas technology continues to improve. If AECL achieves its cost reduction tar-

40

Robert Morrison

get, future CANDUs will be able to compete with natural gas at discount rates up to about 10 per cent, assuming gas prices remain stable. A truly commercial market may demand even higher discount rates. AECL is focusing its product development effort on the goal of reducing costs and construction times, while enhancing safety (Torgerson, 1999). New Reactor Designs Beyond the 2010 horizon, new designs will be required to meet new demand and to replace existing nuclear plants. Most of the world's power reactors will come to the end of their design lives in the decade after 2010. Refurbishment to extend the lifetime of existing plants may be an option. In any case, the plants will likely face increasingly stringent safety standards at the same time as competition puts increasing pressure on costs. Three international agencies - the NEA, the IEA, and the IAEA - are collaborating on a project to look at new reactor designs that will meet both safety and economic requirements for that period. An advanced CANDU design is among those to be considered. CANDUs and Light Water Reactors (LWRs) Among current reactor types, the CANDU has some decided advantages. Its capacity for on-line refuelling, with no need to shut down, means that it can achieve high capacity factors. Its use of natural or low-enriched uranium fuel means that it uses mined uranium with high efficiency. It can burn the spent fuel from LWRs with relatively little processing, as the spent fuel still contains enough fissile material to serve as fresh fuel for the CANDU. This is an advantage for countries that Kave both types of reactor, such as Korea and China (Hancox, 1999). The CANDU needs only small amounts of make-up heavy water once the initial charge is obtained. Many of its components, including the fuel, can be manufactured locally. Its pressure tubes are easier to manufacture than the large pressure vessels required by LWRs. However, LWRs - the dominant type in the world - are available from a range of sources, which means that buyers are not dependent on the vendor alone. The CANDU design is available only from Canada, although as other countries gain experience with the CANDU, they are developing the capability to supply components and engineering services. Customers look to Canada to carry out ongo-

Global Markets, Climate Change, and Sustainable Development

41

ing R&D to support the CANDU as well. This raises the question of CANDU's role in supporting the new research reactor, and how it should be paid for in a period when new CANDU sales are likely to be outside Canada. LWRs have achieved excellent performance records over the past decade in many countries, including the United States, where their previous performance, on average, left much to be desired. CANDUs have also achieved excellent performance records in a variety of environments. Ironically, the CANDUs in Canada have run into performance problems in the past decade, while those abroad have continued to perform well. As noted in Chapter 1, the Ontario Hydro CANDUs suffered a period of poor performance in the mid-1990s, but now appear to be coming back up to their old high standards, except of course for those currently shut down (Andognini, 1999). The CANDU unit at Point Lepreau in New Brunswick, which was a world leader for many years, also suffered some performance declines, but is now recovering (White, 1999). As in Ontario, the problem is considered to be one of management and not of the technical capability of the CANDU reactor itself. However, it will undoubtedly be helpful to the CANDU's reputation if OPG can bring the twelve Ontario reactors currently operating back up to high performance levels, and if it can restart the others and bring them up as well. Financing

As discussed in Chapter 1, financing is a major issue with respect to CANDU exports. AECL's most likely markets are in the emerging industrial economies, many of which require financing in order to manage the purchase of such large items. Each sale is worth in the order of C$2 billion, a good proportion of which comes back to AECL and to Canadian companies that act as component suppliers and provide engineering and consultant services. AECL acts as the vendor and project manager and takes much of the financial risk on the project, with the federal government standing behind it. The private sector firms benefit from the government's financial backing and from its support of AECL's R&D. Financing of reactor exports is now done largely at commercial rates, with no concessional financing, by consensus among the OECD countries. Nonetheless, governments get involved because of the large scope of the reactor projects, the nature of the risk, and the long pay-

42 Robert Morrison

back period. Even though the government should make money on the loans at commercial rates, some critics see this involvement as a subsidy. The Canadian government has decided whether to support each sale on a case-by-case basis, balancing the financial and political risks against the benefits in terms of jobs and future prospects. The record for repayment of loans for CANDU sales has been good. Nuclear projects are important to host countries because of the heavy investment involved and the electricity the reactors supply. Continuing good relations with the manufacturer can help maintain good performance and safety. All of this provides a strong incentive to keep payments up to date. Nonetheless, the Canadian government looks carefully at each sale to ensure that the risks of non-repayment are fully addressed. The sales are major items of trade and politics, and clearly commit Canada to close relations with the recipient country for three or four decades. The decision on financing is critical for many CANDU sales (the recent sales to Korea have not required government financing), and each sale is critical to the future of AECL. Trends in Electricity and Nuclear Energy: The Market for Nuclear Power Reactors The global market for nuclear reactors is part of the overall market for electricity generation, which in turn is part of the energy sector. Other uses of nuclear energy, such as process heat, district heating, and desalination, are not likely to make a big contribution to the nuclear market over the next few decades. Worldwide sales of nuclear reactors, including the CANDU, will depend on the market for new electrical generation capacity, and on the share of that market that nuclear is able to capture. Canada

About two-thirds of Canada's electricity supply comes from hydro power. The rest is roughly equally divided between nuclear and fossil. Most of the nuclear capacity is in Ontario. Quebec and New Brunswick have one CANDU reactor each. Canada has ample resources of hydro power, fossil fuels, and renewables such as wind, solar energy, and wood and other biomass. Coal is the leading source in Alberta, Saskatchewan, and Nova Scotia and is a significant presence in Ontario. Natural gas is the fastest-growing major source of electricity,

Global Markets, Climate Change, and Sustainable Development 43

for reasons outlined earlier. Renewables have a very small share of Canada's electricity market but are expected to grow rapidly. They are still relatively expensive. Intermittent sources such as wind and solar require storage or back-up capacity. Energy conservation and efficiency will also make significant contributions to reducing the growth in energy demand, but this is built into business-as-usual demand forecasts. Electricity is under provincial jurisdiction in Canada. No Canadian utility currently plans to add any nuclear capacity to its system within the planning horizon. Ontario Power Generation's main focus is on getting its twelve operating CANDUs back up to their previous high level of performance. It, or successor companies that may buy some of the assets, will face decisions over the next few years about whether to restart the reactors that are currently shut down. At present OPG is engaged in a major program to assess the feasibility of restarting the four CANDU units of the Pickering A station. AECL will receive some business in helping Ontario get its CANDU reactors back up to good performance, and possibly in helping restart some or all of those that are shut down. However, as noted earlier, it is not expected to make new sales in the Canadian market for some time to come. This raises the issue - closely related to the funding of the new research reactor - of whether and to what extent the government should support nuclear energy as a future electricity and energy option for Canada in the absence of domestic orders, in parallel with its support for CANDU exports. Industrializing Countries Electricity demand is expected to grow fairly slowly in the industrialized countries of the OECD, at an annual rate of about 2 per cent (IEA, 1998b). This is because the economies of these countries are growing fairly slowly and have shifted (like Ontario) or are shifting from a manufacturing economy to a less energy-intensive service economy. However, electricity demand from services is still expected to grow slowly but steadily with the information economy. Most of the industrialized OECD countries that have an interest in nuclear power have substantial nuclear industries of their own, and are largely committed to light water designs. Currently the OECD countries represent 53 per cent of primary energy use, 63 per cent of electricity use, and about 85 per cent of

44 Robert Morrison

nuclear power use. However, the main areas of growth in energy demand are in the developing and industrializing countries outside the OECD, so these percentages will decline. Inside the OECD, the fastest growth is also in the industrializing economies such as South Korea, Turkey, and Mexico. This suggests strongly that the main impact of growth in electricity and nuclear power, in both economic and environmental terms, will be in the developing and industrializing countries. It also implies that the best opportunities for influencing the environmental impact of growth in generating capacity will be in those countries, although they can least afford the necessary measures in the near term. In the developing and industrializing countries, electricity demand is expected to grow more rapidly, at rates up to 5 per cent per year. Two billion of the world's six billion people still have no access to electricity (Flavin and Dunn, 1999). Since electricity is versatile, flexible, and clean at the point of use, and admirably suited to the needs of information economies, it will likely grow at these rapid rates for some time to come. The major markets for new nuclear capacity that are open to international competition are thus expected to be in the emerging and industrializing economies, especially in Asia. China and Korea are the main current markets, and CANDU has a foothold in both. Indonesia and Thailand are possible candidates. These are precisely the countries where the CANDU is attractive, as it allows them to embark on nuclear power programs that will provide them with a fair degree of technological independence. When the CANDU was originally designed in the 1950s, Canada was in a situation with respect to the development of its industry similar to that of many industrializing countries now. Sustainable Development and Climate Change Climate Change and Air Quality

Nuclear plants do not emit acid or greenhouse gas, and in the decades to come this should offer them an increasingly important competitive advantage, in terms of both local air quality issues and climate change strategies. Some in the nuclear industry hope that it will be enough to turn the tide away from fossil fuels in favour of nuclear energy. At the least, it makes possible a realistic cost-benefit analysis in the context of environmental concerns.

Global Markets, Climate Change, and Sustainable Development 45

Many of the countries whose demand for electricity is growing rapidly are also facing rapid growth in urbanization and transport, accompanied by serious air pollution problems in their urban centres. Electricity and transport are the fastest-growing uses of energy. Transport will likely continue to be based on petroleum products, so emissions from that sector will continue to grow. Thus, developing countries look to electricity as a sector where the growth of emissions can be reduced. Nuclear and renewables can provide emission-free electricity, clean not only at the point of use but also at the source. To the extent that transport can be based more on electricity or hydrogen, and that the source of the electricity or hydrogen can be made carbon-free, there can be a net reduction in emissions from transport as well. However, this is likely to be a longer-term development. If emissions of greenhouse gases - of which carbon dioxide is the most important - must be reduced, nuclear is likely to have a role to play. Any value assigned to carbon emissions, through carbon taxes or tradeable emission permits, will affect the competitive position of nuclear energy vis-a-vis fossil fuels. The kind of carbon value needed to have a significant impact on carbon emissions would be in the order of $100 per tonne of carbon (IEA, 1998b). This would render coal noncompetitive with nuclear energy, and in most situations would have a strong effect on the competitive position of nuclear energy relative to gas. Given the importance of fossil fuels to the world economy, it is not likely that such a carbon penalty will be imposed soon, if ever; and the nuclear industry cannot count on it to ensure a competitive advantage. Current values set by informal emissions trading suggest a value in the $10 per tonne range. In Chapter 8, Dewees looks at the impact of various emission costs. Developing and industrializing countries are likely to resist emission charges even more than the industrialized countries. Nonetheless, nuclear energy will have an important role to play in the overall climate change and air quality strategies of many countries, as they will need all the help they can get to meet emission reduction targets. A range of energy options will be required, including fossil, renewables, and nuclear. Nuclear energy plays an important role in Canada in this regard. It displaces an amount of carbon emissions equal to roughly 15 per cent of Canada's total emissions; this number would be about 20 per cent if all reactors were operating. Phasing out nuclear power in Canada, and replacing it with fossil energy, would significantly increase greenhouse gas emissions at a time when Canada finds itself hard pressed to limit

46 Robert Morrison

growth in emissions, let alone meet or surpass its Kyoto emission reduction targets. A 676 MW CANDU 6 reactor will reduce carbon emissions by about 1.2 million tonnes per year if it displaces coal, and 660 thousand tonnes if it displaces natural gas (AECL, 1999). These are significant contributions to emission reduction targets. This consequence will receive increasing attention as we approach the time for meeting the Kyoto commitments, and for making decisions about further reductions beyond Kyoto and about the future of existing nuclear plants. It will also weigh on decisions whether to restart the shut-down reactors in Ontario, and later on whether to extend the lives of the currently operating reactors. Nuclear energy also plays a significant role in reducing the emissions that affect air quality, notably in large urban centres such as Toronto. Since air quality has a more immediate effect on people than global warming, and is more amenable to local solutions, this will also be a significant factor in decisions on reactor restart and life extension (OMA, 2000). In Canada, the process for moving forward with climate change strategies has involved eighteen 'tables' on a range of topics. Each table comprises a broad range of representatives of relevant interests. The Electricity Table found that if the Bruce A nuclear station, with 3000 Megawatts of capacity, is brought back into full operation, carbon emissions will be 8 million tonnes less than if it remains shut down. However, perhaps not surprisingly, this table was divided on the issue of nuclear energy (Electricity Table, 1999). The Electricity Table put the question back to the goverments of Canada and the key provinces to clarify whether there is a place for nuclear power in Canada's future electricity supply industry, with regard to climate change in particular. The table recommended that if there is a future for it, the government should also resolve regulatory issues regarding nuclear power in this context. The latter point sounds more like a reflection of the industry's concerns about a level playing field, and about what the federal regulatory agency (the Canadian Nuclear Safety Commission, formerly the Atomic Energy Control Board) will do with its new legislation and regulations, than of concerns about climate change strategy per se. As is noted elsewhere in this book, climate change will be an important issue for nuclear energy, but it is not likely to be its saviour.

Global Markets, Climate Change, and Sustainable Development 47 Sustainable Development

Increasingly, human activities are being measured against the goals of sustainable development. One way of looking at sustainable development is that we should pass on to future generations the capacity to live as well as or better than ourselves. They should have at least as many options open to them as we have. Resources should not be depleted, nor environmental burdens passed on, unless some offsetting asset is also passed on that more than compensates for the negative inheritance (OECD, 1999). This means that the total of capital assets in different forms should remain the same or increase, but not diminish. If we use up capital in the form of natural resources, we should pass on more of other forms: man-made capital, human and intellectual capital, and social capital. Man-made assets include buildings, machinery, and infrastructure such as roads, ports, and physical networks. Natural assets include minerals and forests as well as the environment and the value we place on it. Human and intellectual assets include our store of knowledge, including science and technology, the arts, and our capacity for further learning. Social assets include institutions, our capacity for communication, and our experience of social, economic, and political behaviours. To some extent these assets can be traded off; for example, we use up natural resources but create man-made and intellectual capital. At the same time, some assets may be very valuable and difficult or impossible to replace, so their loss may simply be unacceptable (Pearce, 1993). Changes that threaten critical environmental systems should be avoided. Clean air and water, and special habitats such as coral reefs and rain forests, fall into this category. Climate change, with its uncertain but potentially huge implications for the global environment, is probably such a change. In any case, the goals of sustainable development suggest that we should use resources carefully and reduce material and energy flows whenever possible. How does nuclear energy fit into the goals of sustainable development? It meets a number of the criteria. It has a large resource base. Advanced fuel cycles will eventually allow the recycling of much of the fuel, thus extending the resource by a factor of sixty or more. The high energy density of nuclear fuel means that material flows are much smaller than for fossil fuels. A single tonne of natural uranium fuel is equivalent to about 15 000 tonnes of coal.

48 Robert Morrison

Nuclear energy has a strong intellectual base. Much of the value of a nuclear plant is embodied science and technology, rather than resources, so nuclear energy is amenable to further improvement through research and development and through the application of information technology. Nuclear energy also has a strong institutional base - both nationally and internationally - in design, operations, regulation, and R&D. Nuclear plants carry a large inventory of radioactivity, mainly in the form of fission products, which are intensely radioactive but whose radioactivity decreases rapidly with time. The wastes must be contained so as to protect populations: against the shorter-lived external radiation in the near term, and against ingestion and internal radiation from longer-lived components in the long term. The high energy density of nuclear fuel means that it has high value added. The energy extracted from the fuel is adequate to pay for the long-term management of the resulting wastes, and the costs are largely internalized (i.e., charged to the current consumers of electricity and set aside for the longer term). Technical experts agree that nuclear waste can be managed safely over the long term, at costs that should not influence the competitive position of nuclear electricity (NEA/IEA, 1998). Thus, while nuclear energy does introduce long-lived wastes into the biosphere, it also provides the means for dealing with those wastes safely in the long term. The cost of keeping the wastes contained is internalized and paid for by the consumers of electricity. Any major environmental impacts of nuclear energy on health and the environment will be due to accident rather than routine conditions. Yet despite these advantages, nuclear energy will have to address continuing public concerns about safety and waste (Smith, 1999). For large baseload generation, the main alternatives to nuclear are coal and natural gas plants. Efficiency gains and renewable sources will be very much part of the future electricity situation. However, efficiency gains are not likely to eliminate the net growth in electricity demand, especially in developing countries, and renewables are not likely to provide a cost-effective source of baseload electricity for large urban industrial areas. The health and environmental impacts of different electricity sources have been compared in detail elsewhere (ExternE, 1995 et seq.). Without claiming to be comprehensive, we touch here on some key aspects of nuclear energy and fossil fuels in the context of sustainable development. Fossil-fuel generating plants use much larger volumes of fuel than

Global Markets, Climate Change, and Sustainable Development 49

nuclear plants. They also emit much of their wastes directly into the atmosphere under routine operations. The health and environmental costs of routine fossil emissions are considered to be significant, especially for coal (ExternE, 1995 et seq.) As yet there are few or no limitations on greenhouse gas emissions from specific facilities, and it is not clear whether or how most of the industrial countries will meet their Kyoto commitments. Thus, many of the health and environmental costs of fossil fuel plants are external costs from routine operations that are borne by society at large or by future generations, rather than charged to the consumers of fossil-generated electricity. Sustainable development has an economic aspect. Other things being equal, options that deliver electricity at the lowest cost will be preferred. Nuclear energy will have to cut its costs and shorten its construction times in order to remain competitive in most situations, and will have to maintain high safety standards in the process. At the same time, the external costs of fossil fuels should be internalized as much as possible. This will have some impact on the competitive situation. However, as noted earlier, this is not likely to happen quickly, especially in industrializing countries that place a high value on growth. Fossil fuels are and will continue to be the lifeblood of industrial civilization. Nuclear plants should be designed to compete as effectively as possible under the conditions that currently prevail. Under routine operations, fossil fuel plants have greater health and environmental impacts than nuclear plants. For the future, and under accident conditions, both fossil and nuclear energy are highly uncertain with respect to their potential impacts. With nuclear energy, the worst that could conceivably happen is a severe accident leading to the release of radioactivity off-site. With fossil fuels, the worst case involves significant climate change. From the perspective of sustainable development, decisions between the two options, or about their relative share of future electricity generation, will be based heavily on decision-makers' perceptions of the likelihood and consequences of severe nuclear accidents and of significant climate change. For the time being it would seem prudent - and consistent with sustainable development goals - to keep all options open. Conclusions CANDU exports are the key to AECL's future. This is true despite recent disappointments regarding sales to Turkey and Korea. This

50 Robert Morrison

export orientation requires new policy perspectives. AECL and the CANDU are well placed to compete for new reactor sales to industrializing countries. In order to compete with other alternatives for new generation capacity, CANDU capital costs and construction times will have to be reduced. Nuclear energy can make a contribution to sustainable development goals and to climate change strategies. Under routine operations, its health and environmental impacts are relatively small, and its costs are largely internalized. Only a severe accident or a serious leak from a waste repository would produce a significant impact. However, the nuclear industry has yet to engage the public in processes that will build confidence in its ability to avoid such accidents. The Canadian government should formulate a medium-term (twenty-year) strategy for nuclear energy in terms of both broader public policy goals and specific nuclear needs: commercial export potential, the desirability of maintaining the nuclear option for domestic supply, the need for R&D to support existing and new designs, and the nuclear industry's contribution to climate change and sustainable development strategies. Meanwhile, the government should also ensure effective regulation of existing nuclear facilities and move toward resolving the issue of longer-term waste management. REFERENCES Andognini, Carl. 1999. Ontario Hydro Nuclear Recovery Program. Paper presented to the Canadian Nuclear Association Winter Seminar. Ottawa, February. Atomic Energy of Canada Limited (AECL). 1999. Annual Report, 1998-99. - 1997. Annual Report, 1996-97. Electricity Table. 1999. Canada's National Climate Change Process: Electricity Table Options Report. November, www.nccp.ca/html/index.htm. ExternE. 1995. Externalities of Energy. Vol. 1. Summary. European Commission, DC XII, Science, Research and Development. See also www.externe.jrc.es/ Flavin, Christopher, and Seth Dunn. 1999. Reinventing the Energy System. State of the World 1999. Washington: World watch Institute. Grandey, Gerald. 1999. The Role and Challenges of Canada's Uranium Industry in the International Uranium Fuel Market. Paper presented to the CRUISE Conference on the Future of Nuclear Energy in Canada. Ottawa, 30 September.

Global Markets, Climate Change, and Sustainable Development 51 Guindon, Sylvana, and Brian Moore. 1999. Competitiveness of Nuclear Energy. Paper presented to CRUISE Conference on the Future of Nuclear Energy in Canada. Ottawa. 30 September. Hancox, Bill. 1999. The International Market for Nuclear Energy: An AECL Perspective. Paper presented to the CRUISE Conference on the Future of Nuclear Energy in Canada. Ottawa, 30 September. International Energy Agency (IEA). 1998a. Key World Energy Statistics. Paris: OECD. - 1998b. World Energy Outlook (WEO). Paris: OECD. Morrison, John. 1999. Face Forward: Another View of the Nuclear Industry. Paper presented to Canadian Nuclear Association Annual Conference. Montreal. May. Morrison, R.W. 1998. Nuclear Energy Policy in Canada, 1942-1997. Ottawa: Natural Resources Canada. June. Morrison, R.W., and Edward F. Wonder. 1978. Canada's Nuclear Export Policy. Ottawa: Norman Paterson School of International Affairs, Carleton University. October. Nuclear Energy Agency (NBA)/International Energy Agency (IEA). 1998. Projected Costs of Generating Electricity: Update 1998. Paris: OECD. Ontario Medical Association (OMA). 2000. The Illness Costs of Air Pollution in Ontario. June. See also www.oma.org. Organization for Economic Cooperation and Development (OECD). 1999. Interim Report on the OECD Three-Year Project on Sustainable Development. Paris: OECD. Pearce, David. 1993. Blueprint 3: Measuring Sustainable Development. London: Earthscan. Smith, Stuart. 1999. Sustainable Development and Nuclear Energy. Paper presented to the CRUISE Conference on the Future of Nuclear Energy in Canada. Ottawa, 1 October. Torgerson, David F. 1999. Reducing the Cost of the CANDU System. Paper presented to the Canadian Nuclear Society Climate Change Symposium. Ottawa, 19 November. White, Rod. 1999. The Nuclear Power Program at NB Power. Paper presented at the Canadian Nuclear Association Winter Seminar. Ottawa, February.

Chapter Three

Nuclear Power and Deregulation in the United Kingdom Steve Thomas

When the Conservative Party was re-elected in Britain in 1987, its manifesto contained two pledges of relevance to the nuclear power sector. It promised to privatize the electricity supply industry with a competitive generation structure, and it promised to continue developing civil nuclear power in the United Kingdom. Government supporters and enthusiasts for nuclear power believed that a sharp dose of market discipline would force the nuclear industry to become competitive and that further nuclear power orders would be feasible. Sceptics (Holmes, Chesshire, and Thomas, 1987) believed it would bring about a steep and irreversible decline in the contribution of nuclear power to British electricity supplies and that the two promises were incompatible. Neither prediction has proved entirely accurate, although it does seem that ultimately, fulfilling the two promises will not have proved possible. The non-nuclear part of the British electricity supply industry was privatized in 1990,1 but despite efforts to sell off the nuclear plant in 1990, it *vas not until 1996 that the newer nuclear power stations were privatized. It is most unlikely that the older nuclear power stations can ever be privatized. Nuclear power now makes a much larger contribution to Britain's electricity supplies than it did before 1990 (about 30 per cent compared to 22 per cent in 1990). Nuclear output is up by 70 per cent despite only a 5 per cent increase in installed capacity, and running costs have been reduced by two-thirds. However, technology development has been abandoned, and unless the measures to run the electricity industry along competitive lines are completely undone, there is no prospect of new nuclear power plants being built in Britain. In this chapter I try to explain how the economic transformation of nuclear power has been achieved, and why nuclear power and a com-

Nuclear Power and Deregulation in the United Kingdom 53

petitive electricity market are so hard to reconcile. I have divided this chapter into eight sections: a brief history of nuclear power in Britain up to 1987; a summary of the main events relating to nuclear power from the announcement of electricity privatization to the present day; a discussion of why nuclear power and competitive electricity markets do not mix; an analysis of why nuclear could not be privatized in 1990, but could be (in part) in 1996; a look at improvements in cost and competitiveness since 1990; a discussion of the issues surrounding the discharge of nuclear liabilities; the future for British Energy, Britain's leading nuclear company, and nuclear power in Britain; and, finally, changes to other nuclear companies in Britain. A Brief History of U.K. Nuclear Power up to 1987 The history of nuclear power in Britain is far from typical. It was a pioneer of civil nuclear power, adapting the design of reactors built to produce plutonium for the weapons program for power generation purposes. These 'Magnox' plants used natural uranium fuel, graphite as the moderator, and carbon dioxide gas as the coolant. Nine civil stations were commissioned between 1962 and 1971, each comprising twin, interdependent reactors, giving a total installed capacity of 4.8GW net (see Table 3.1). After early success with the first reactors, things started to go wrong, and from then until privatization was announced in 1987, practically every nuclear decision in Britain was misconceived and badly implemented (Williams, 1980). The later Magnoxes began to overrun their projected lead times and costs, and suffered from corrosion problems that reduced their output significantly. By 1964 it was clear that the Magnox technology could not be competitive and that a new technology was needed. The technology chosen, the advanced gas-cooled reactor (AGR), was famously described by the chairman of the Central Electricity Generating Board (CEGB) as 'a catastrophe we must never repeat' (Select Committee on Science and Technology, 1974). Three of the five AGRs (each station comprises twin units) ordered in the 1960s took more than fifteen years from start of construction to first power. By 1987 most of the plants had been in a testing phase for three or four years, unable to operate at capacity factors better than 10 to 30 per cent (Rush, MacKerron, and Surrey, 1977). A successor technology choice, the steam-generating heavy water reactor, chosen in 1973, wasted four years of development work until a decision was taken in 1977 to abandon it and move to building PWRs.

Table 3.1 Britain's nuclear power plants

Magnox Berkeley Bradwell Hunterston A Hinkley Point A Trawsfynydd Dungeness A Sizewell A Oldbury Wylfa

Size MW

Constr. start

First power

Comm. op,

Shutdown

2 x 138 2 X 150 2 x 150

1957 1957

1962 1962 1964 1965

11989

1957 1957 1959 1960 1961 1962 1963

1962 1961 1964 1964 1965 1965 1966 1967 1971

1966 1967 1967 1968 1970 1980 1980

1983,85 1976, , 76 1976,77 1983,84 , 1983,84 1 988, 88 1988,89

1985,89 1978,76 1976,77 1989,89 1989,89 1989,89 1988,89

1988

1995

-

2 2 2 2 2 2

x 250 X250 X275 X 290 X 300 X 590

Total

4786

AGR Dungeness B Hinkley Point B Hunterston B Hartlepool Heysham 1 Heysham 2 Torness

2 2 2 2 2 2 2

Total

8654

PWR Sizewell B

1188

Total Nuclear

14628

X X X X X X X

607 625 624 600 611 615 645

1965 1965 1966 1967 1971

1990 1999

1991

Life-time capacity factor end 1989

end 1 998

63.2 61.2 83.2 73.2 61.1 56.7 57.7 56.7 50.5

63.2 59.3 83.2 71.8 57.0 60.0 55.5 59.2 58.2

20.4, 16.7 55.4, 52.7 55.1,55.3 20.2, 25.9 31.5,34.7 49.6,71.8 51.0,72.6

31.6,33.4 65.7, 62.2 63.2,, 63.2 48.5, , 54.6 51.7,56.6 68.3, , 68.9 67.4, , 69.5 ,

80.9

Notes: The fact that all the remaining AGRs not then declared commercial were declared commercial on 1 April 1990 suggests that commercial operation was not declared after a user acceptance test, as is normally the case, but was related to the implementation of the new structure for the electricity system. Source: Nuclear Engineering International (1999).

Nuclear Power and Deregulation in the United Kingdom 55

Two more AGRs were then ordered as a stopgap. When Margaret Thatcher came to power in 1979, her government promised a program of ten PWRs to be ordered over a decade, with the first order to be placed in 1981 (Secretary of State for Energy, 1979). Further delays ensued, so it was not till 1987 that the order for the first, Sizewell B, was ready to be placed. A public inquiry into a second unit had by then started,2 by which time, the 'program of 10' had become a 'small family of 4' and the CEGB was no longer basing its case for this second unit on an economic advantage over coal. While there are intrinsic reasons why nuclear power and competitive, privatized electricity markets do not mix easily, the particular history of nuclear power in the U.K. compounded these problems. Various attempts were made to fit nuclear power into the privatization of the electricity industry (HM Government, 1988). These included: • The creation of a consumer subsidy to underwrite the excess costs. • An obligation on bulk power purchasers to source a fixed proportion of their power purchases from nuclear plant (meant to ensure that new nuclear plants were ordered). • The creation of a dominant generation company to 'shelter' the nuclear plants. These efforts proved fruitless. Five months before the new system was due to go live, the government admitted defeat and withdrew the nuclear sector, creating a new, nationally owned company, Nuclear Electric, to run the nuclear plants. A similar solution was applied in Scotland, with the two Scottish AGRs going to Scottish Nuclear. The consumer subsidy remained (50 per cent of Nuclear Electric's income in 1990), but the European Commission judged it an unfair state subsidy and required it be phased out by 1998. Bulk purchasers of power were required to do no more than purchase the output of the existing nuclear plants, not meet a target nuclear share set by the government. While Sizewell B was allowed to proceed, a moratorium on new orders was placed until a review of the experience with nuclear power in a privatized context had been carried out, then expected for 1994. Experience in the 1990s The future for nuclear power looked bleak at the time of privatization. All the Magnox stations were beyond their design life (twenty years).

56 Steve Thomas

The two earliest plants, Berkeley and Hunterston A, had already been retired on cost grounds, and the other plants were expected to follow, at the latest, by 2000. The seven AGRs were of four entirely different designs, and only the last two orders were fully standardized. So the AGRs must all be characterized essentially as prototypes. As many as three of the seven AGRs appeared likely to be abandoned because they could not expect ever to operate reliably and economically, and even Sizewell B was still at risk of abandonment. The market share of nuclear power, then about 17 per cent in England and Wales, seemed likely to fall rapidly to below 5 per cent, given the unlikelihood of new orders. Against expectations, Nuclear Electric and Scottish Nuclear moved quickly to turn the situation round. The impact was most spectacular with the AGRs, which were transformed from being among the poorest reactors in the world to reasonably respectable performers. No such feat was possible with the Magnoxes because of their age. Nevertheless, keeping all except one of the plants in service with capacity factors at a steady level was no small achievement. With respect to Sizewell B, Nuclear Electric successfully fought off attempts in 1992 to have the project abandoned on cost grounds (Nuclear Electric, 1992a), and the plant entered service in 1995. It had taken eight years to build and cost about £3,000 per kW, but most of the cost and time overruns occurred before 1990, so even completing such an expensive plant gave some prestige to Nuclear Electric. It has since performed at a level comparable to that achieved by other European PWRs, with capacity factors averaging about 80 per cent. By the time of the government's review of nuclear policy, started in 1995, Nuclear Electric and Scottish Nuclear had built up some considerable credibility as efficient nuclear operators. They argued strongly for a renewed attempt at privatization. Nuclear Electric put forward a case to be allowed to build a new nuclear plant (Nuclear Electric, 1994). Whether it felt obliged to do this, as the national 'flag carrier' for nuclear power, or whether it really believed that a new nuclear power plant was feasible is not clear. However, the proposal, requiring £1 billion in government subsidies as well as a full range of government guarantees against adverse developments, was never likely to succeed. As a result of the review (Department of Trade and Industry and the Scottish Office, 1995), the nuclear assets were redivided, with the English and Scottish AGRs and Sizewell B being placed in a new company, British Energy, which was to be privatized. The Magnoxes were

Nuclear Power and Deregulation in the United Kingdom 57

placed in another new company, Magnox Electric, which was to remain in public hands and was expected to be absorbed into the fuel cycle company, British Nuclear Fuels Limited (BNFL). In July 1996, British Energy was privatized by public subscription. By 1997 the process of transferring the Magnox stations had begun. The company is now a subsidiary of BNFL, known as BNFL Magnox Generation. The Labour government proposed in July 1999 to privatize BNFL itself in a 49/51 per cent private/public partnership. However, plans are still at an early stage, and it is not clear how they would affect the Magnox plants. Why Nuclear Power and Competitive Electricity Markets Do Not Mix There are two clear reasons why nuclear power and competitive electricity markets do not mix - the discount rate and economic risk - and one less obvious reason, which is the difficulty of developing expensive new generation technologies in a competitive environment. The Discount Rate

Electric utilities, especially publicly owned ones, have generally been able to discount investments at a much lower rate and over a longer period than private companies operating in a competitive environment would apply. When Sizewell B was proposed, its costs were to be discounted at 5 per cent real and amortized over thirty-five years. When Nuclear Electric sought advice in 1994 about the conditions that would apply for financing a new nuclear power plant, it was advised that 11 per cent real was a minimum and that this would apply only if the government underwrote all major risks (Nuclear Electric, 1994). The investment would have to be amortized over twenty years. In part, this toughening of conditions reflects the fact that publicly owned companies often are allowed to operate with much lower rates of return than the private sector. Mostly, it reflects the fact that in a competitive electricity market, the risks associated with building new generating plants lie not with electricity consumers, as was generally the case in the past, but rather with shareholders. This change amounts to a disincentive to construct new, large-scale capital-intensive options, including coal, hydro, and renewables as well as nuclear. To illustrate the consequences of this change, let us assume the following:

58 Steve Thomas

• A nuclear power plant can be built for £l,000/kW, about one-third of the cost of Sizewell B. • Its lifetime capacity factor will be 80 per cent. • Its O&M costs, including fuel, will be Ip/kWh, half the cost incurred in 1998-9 by British Energy for its stations. Using the accounting criteria laid out for Nuclear Electric in 1994, this would give an approximate generation cost of about 3.4p/kWh. This is 70 per cent higher than the total cost of new gas-fired stations using the same (or tougher) criteria, and about the same price as for the wind power facilities that are now being built in Britain. The price of gas would have to increase by 150 per cent just to bring gas up to nuclear. If we choose less extreme assumptions - say, £2,000/kW (the cost projected by Nuclear Electric in 1994) and an O&M cost of 2p/kWh - the nuclear cost increases to nearly 6p/kWh. Economic Risk

Past experience shows that nuclear power is economically risky. Lead times, capital costs, and operating performance are unpredictable, and suppliers are unwilling to give cost and performance guarantees. Other important risks are not within the utility's control. These include the risk of extra costs arising from experience, such as accidents elsewhere, the cost of waste disposal, and escalating safety regulatory requirements. All these could impose huge additional costs on a utility, with little prospect of recovery from consumers or government. Investment analysts, who generally have no prior position on nuclear power, are very leery of recommending investment in such risky propositions. So even if nuclear could match the costs of its competitors, no utility would choose it. New Nuclear Technologies

Historically, nuclear technology has been developed using consumers' and taxpayers' money. Equipment supply companies have seldom had to risk their own money developing new technologies. In the future, few governments will see any political wisdom in committing large sums of taxpayers' money to new nuclear technologies, given the poor return on publicly funded R&D to date. Electric utilities will not be able to pass such costs on to electricity consumers and will therefore

Nuclear Power and Deregulation in the United Kingdom 59

not be able to justify incurring them to their shareholders (who would be bearing the risk). Equipment supply companies are equally unlikely to risk their own money on new technology without a guaranteed customer. The economics of the current generation of nuclear power plants are dubious, and higher safety requirements may soon make new orders a pipe-dream at best. Why Nuclear Power Could Not Be Privatized in 1990 but Could Be in 1996 Beyond the general problems with nuclear power and markets, there were essentially four specific reasons why nuclear could not be privatized in 1990. The first was the credibility and track record of the CEGB. CEGB staff would inevitably make up the core of staff in National Power, the company to which the nuclear power plants were to be allocated. Given the dismal record of the CEGB with nuclear power, this did not inspire confidence. The other three reasons were specific to the technologies used. The Magnox plants were near the end of their operating lives, and no provisions were extant for their decommissioning. Their operating costs alone were above the level of the projected wholesale (Pool) price, mainly because of the very high reprocessing costs. The Pool price was expected to be about 2.8p/kWh, while the generating cost of Magnoxes was over 4p/kWh (Nuclear Electric, 1992b). It is hard to understand how policy makers and consultants thought privatizing such plants would be possible. The AGR fuel cycle costs were much lower, but the appalling reliability of the plants meant that the operating and maintenance costs per kWh were as high as for the Magnoxes, and these too could not cover their costs from the sale of electricity (Nuclear Electric, 1992c). Sizewell B was a different case. This was still in the early stages of construction, and the consequences of any cost and time overruns - highly likely, given previous experience - would fall on shareholders. There was also the risk that once completed it would not operate reliably. Beyond Sizewell B, government policy foresaw that further PWRs would be built to replace the Magnoxes and AGRs as they were retired, in order to maintain the nuclear market share at about 20 per cent. These future projects and their associated risks would fall to the privatized company, National Power. Three main strategies were arrived at to overcome these problems. The first was to split the generating assets between only two compa-

60 Steve Thomas

nies, National Power with two-thirds of the capacity, and PowerGen with the rest. It was hoped that the size of National Power would allow it to absorb the risks of nuclear power. This hope was not realized, and potential investors and (probably) prospective National Power management warned that the company was not saleable with the nuclear plants. The non-fossil fuel obligation (NFFO) was intended to ensure that new nuclear power plants would be ordered. It was to oblige bulk purchasers of power to ensure that a certain minimum proportion of their power needs came from non-fossil fuel sources (code for nuclear). The proportion was expected to be about 20 per cent and would be set by a government minister. If suppliers foresaw they would not be able to meet this obligation, they would be obliged to commission the construction of new plant. It soon became clear that this mechanism could not work, and the NFFO was quickly redefined as an instrument to ensure only that all the potential output of existing plants was purchased at a premium price. The fossil fuel levy (FFL) was a consumer subsidy intended to compensate purchasers of nuclear power for the extra cost over and above the market cost they had to pay for nuclear electricity. It was to have been an open-ended subsidy, but the European Commission judged it an unfair state subsidy and required that it be phased out by 1998. The FFL was retained in the actual solution and was preset for its eight-year lifetime at about 10 per cent of all consumers' bills (Nuclear Electric, 1992d). Initially it made up about half of Nuclear Electric's income, which serves to emphasize how poor the economics of nuclear power in Britain were when seen through the eyes of a competitive market. By 1996, many of these problems had been overcome or sidestepped. Nuclear Electric and Scottish Nuclear had built up strong reputations as competent companies, so the issue of track record was no longer such a problem. No attempt was made this time to privatize the Magnox plants. The AGRs had become sufficiently reliable that their operating costs could be covered by sales of electricity, despite the fall in the Pool price to little more than 2p/kWh. Sizewell B was finished, and early signs suggested that it would operate reliably also, at a marginal cost less than the Pool price. In its review, the government found no case for the early ordering of new nuclear power plant, and this removed the risk that the privatized company would have to build further such plants. The reduction in costs and improvement in performance was such that the nuclear subsidy was no longer required, and it was largely phased out nearly two years early.

Nuclear Power and Deregulation in the United Kingdom 61

One potential problem, the stranded cost of the nuclear power stations, did not arise, largely because those bearing it, electricity consumers, were unaware of it. British Energy was sold in July 1996 with assets that included the new Sizewell B station and seven AGRs with between seven and twenty years of service. The cash proceeds of privatization were only about £1.5 billion even though Sizewell B had been completed only a year earlier for in excess of £3 billion (National Audit Office, 1998). If we assume conservatively that the replacement cost of each of the AGRs would be about £2 billion, the assets were sold for about 10 per cent of their replacement value. If Nuclear Electric had been a privately owned utility facing a competitive market, consumers would likely have had to pay somewhere in the order of £10 billion in stranded costs to the plant owners to reflect the difference between their economic value and their replacement cost. Improvements in Cost and Competitiveness since 1990 The extent of the problems facing Nuclear Electric can be judged by the fact that it needed a 50 per cent subsidy (about £1.2 billion) just to break even in 1990. Its priorities clearly had to be to reduce costs and increase output and, specifically, to manage the completion of Sizewell B efficiently, which, as noted earlier, it broadly succeeded in doing. On the cost side, it had reduced its workforce by just over one-third by 1995. This sounds dramatic, but given that construction of Sizewell B was finished by then, and that in the same period National Power reduced its workforce by two-thirds, the reduction does not seem so severe. It cut its R&D budget by about 60 per cent, mainly because the completion of Sizewell B meant that R&D for this technology could be scaled back, but also by withdrawing from some more speculative projects such as the European Breeder Reactor program. The Trawsfynydd Magnox plant was formally retired in 1993 after more than two years of downtime, during which measures to combat ageing were being negotiated with the regulator. But it was in the area of increased output that the greatest gains were made. Table 3.2 shows that Magnox productivity was marginally improved despite the age of the plants.3 This was made possible by the performance of the two newest and largest plants, Oldbury and Wylfa, which were transformed from being the most troublesome of the Magnoxes to being the most reliable. The productivity of the AGRs was improved by two-thirds. Here it is worth emphasizing again the

62 Steve Thomas Table 3.2 Performance of Britain's nuclear power plants (capacity factor - %)*

AGRs Magnox Sizewell B

1990

1991

43.3 60.0

50.2 58.0

1992

61.1 63.0

1993 72.1

67.9

1994 1994

1995**

72.4

66.4

1

1996 76.3 56.2 81.4

1997

1998

77.4 65.3 81.5

78.8 62.1 97.6

*Mean capacity factors are weighted by unit size to give greater weight to the larger plants. "Data for 1995 were withheld because of the privatization process. Source: IAEA (various), 'Operating experience with nuclear power plants in member states,' IAEA, Vienna, and Nucleonics Week.

importance of operating performance to nuclear economics, especially in a competitive electricity generation environment. An improvement in capacity factor of even one percentage point for the seven AGRs would produce extra income, at minimal extra cost, of about £20 million per year. The improvement in performance of 30 per cent from 1990 to 1995 resulted in extra income equal to about half the £1.2 billion per annum subsidy that Nuclear Electric was receiving. Improved reliability also meant that maintenance and repair costs were lower. No rigorous analysis exists showing how these improvements to AGR performance were made, but a number of factors, some cultural and some technical, have been cited. One particular difficulty is knowing how the plants would have performed had the CEGB not been split up and privatized. The AGRs were still relatively new in 1990, and it is likely that as errors in design and construction were rectified, some improvement would have occurred anyway. Equally, at least some of the plants might have been permanently closed. This is impossible to know. On the cultural side, a strong factor was probably the unlikelihood that there would be further nuclear orders. In the past, those working for the CEGB had been able to ignore problems with existing nuclear plants, blaming them on previous staff. Making existing plants work well may have received too little attention, since energies were being concentrated on the next plants to be built. With no prospect of new orders, the staff, many of whom were deeply committed to nuclear power, were forced to concentrate on making the existing plants work if the company was to have a future. The existence of a market price for electricity, albeit imperfect, served to focus attention on the importance of maximizing electrical output. Because Nuclear Electric was a nuclear-only company, the economic consequences of poor nuclear

Nuclear Power and Deregulation in the United Kingdom 63

performance could no longer be hidden by mixing them up with the costs of all the other power plants on the system. On the technical side, there were three main factors. The first had to do with an increase in the maximum authorized power rating. In 1990, the seven AGRs were authorized only to run at 70 per cent of their design rating. By 1995, this had been increased to 96 per cent of design, partly through improvements to the core and partly through improved efficiency in the turbine generators. The second factor was an improvement in the on-line refuelling capability. All the AGRs had serious design errors in their on-line refuelling systems, and it is likely that online refuelling at full power - as the plants were designed to achieve will never be allowed. However, in 1990, several of the plants were required to go into cold shutdown frequently for refuelling. Sufficient progress was made with all the plants that by 1995, all were allowed to remain critical, albeit often at zero power, while refuelling took place; this significantly reduced lost output. The third factor was the introduction of longer intervals between maintenance periods. The plants were designed to be serviced every second year, but Nuclear Electric was able to get regulatory approval to stretch this interval to three years for some of the less problematic plants. There are now signs that output from the AGRs cannot be increased much further. By 1998, Dungeness B had still only achieved a capacity factor of 41.9 per cent. If this plant is excluded, the average capacity factor for the AGRs goes up to 85 per cent, a level it will be difficult to better. The trend toward reduced O&M costs also seems to have flattened out, and as the plants get older, further reductions will be hard to achieve. Discharging Nuclear Liabilities While major changes have taken place in the operation of nuclear plant, little or no progress has been made in 'back end' issues. Britain's record in this area is probably no worse, but certainly no better, than that of other countries with large nuclear programs. Britain is still locked into a policy of reprocessing fuel at Sellafield from the AGRs and perhaps Sizewell B, even though direct disposal would clearly be cheaper.4 This policy has much to do with political expediency and with justifying the massive expenditure that went into the THORP reprocessing plant at Sellafield. The policy on high-level waste disposal, established in principle in about 1980 and confirmed in 1995,

64 Steve Thomas

remains unformed. High-level waste will be stored at the surface and disposed of eventually in deep repositories, but no attempt to identify sites is expected to be made until 2030 (Department of Environment, 1995). Regarding intermediate-level waste, the policy decided in 1985 was to search for engineered sites where disposal could take place. It was expected that a site could be operational in the mid-1990s, and in 1986 four possible sites were identified. However, in June 1987, after powerful opposition movements arose at each of the locations, the policy was changed, and investigation of the sites was abandoned just before the 1987 general election. Cynical analysis suggested this had as much to do with the fact that the proposed sites were all located in Tory marginal seats. The new policy called for deep disposal, which would inevitably dramatically increase the cost. Long-lived low-level waste was also to be disposed of in this deep repository. Only one site, at Sellafield, was investigated. Again, this seemed to have more to do with political expediency (i.e., with providing ongoing work for the area as employment at the nuclear complex at Sellafield began to decline) than with identifying the best site on technical grounds. A lengthy public inquiry was held, with the result that the Sellafield site was rejected in 1997 on technical grounds. The whole process is now back at square one (Department of Environment, 1997). If the process of identifying a site was started tomorrow and all went smoothly, it is unlikely that a site could be operational before 2025. Regarding low-level waste, the long-established site at Drigg near Sellafield is being kept going by compaction and economies in waste production. The failure to identify an intermediate-level waste disposal site leaves the policy on long-lived low-level waste in similar disarray. Regarding reactor decommissioning, there has been significant movement since 1990 in financial provisioning policy. British policy on decommissioning has always been different from that of most other countries, especially as to time scales. It has long been assumed in Britain that it would be possible to delay completion of the final, most expensive stage of decommissioning (stage 3) for at least a century and, on current plans, 135 years after plant closure. Provisions are discounted at 2 per cent real; over 135 years, this reduces the net present value to about 7 per cent of the undiscounted value. The estimated decommissioning cost of British-designed reactors is high because of the physical size of the plants - about £500 to 600 million per two-unit

Nuclear Power and Deregulation in the United Kingdom 65

station. This makes the total undiscounted cost of decommissioning the Magnoxes (including the two retired units) and the AGRs about £10 billion; however, much of this burden is 'discounted away/ Once decommissioning becomes a serious public policy issue, it is doubtful that this time scale will survive public scrutiny. For the eleven years prior to privatization, consumers had been making contributions for decommissioning in their electricity bills. These were listed in the last annual report of the CEGB as amounting to about £2 billion (CEGB, 1989). However, these were of the internal, unsegregated type; in other words, they existed in the form of the assets of the CEGB. These were essentially lost at privatization, because the assets of the CEGB were sold for only a small fraction of their book value and because the government passed on no provisions to Nuclear Electric. There was a common misconception, apparently shared by some senior government ministers, that the nuclear subsidy was specifically designed to go toward paying for decommissioning and other long-term liabilities. The relevant minister, the president of the Board of Trade, announced in the House of Commons that the levy was to pay for 'decommissioning old and unsafe stations' (Heseltine, 1992). In fact, the subsidy was unassigned additional income that Nuclear Electric was free to spend in any way it saw fit. Thus, a technically insolvent company was able to build a £3 billion PWR with no recourse to borrowing. In effect, some of the subsidy paid for the construction of Sizewell B. Nevertheless, by the time nuclear assets were privatized in 1996, nearly £3 billion of subsidy income remained unspent, effectively as a provision for long-term liabilities, including waste disposal and decommissioning. This sum was by no means sufficient to discharge these liabilities. It was deposited in a Treasury account, and most of it was transferred to Magnox Electric. However, Magnox Electric was allowed to continue its past practice of running an internal unsegregated fund to pay for decommissioning and waste disposal. Decommissioning liabilities for Magnox Electric were estimated at an undiscounted £6.2 billion, with waste disposal a further £12 billion (MacKerron & Sadnicki, 1995). Since the absorption of Magnox Electric into BNFL, the liabilities for the civil Magnox stations have not been distinguished in the accounts from other long-term liabilities against BNFL, including waste disposal and the decommissioning of fuel cycle facilities. BNFL has set up what it calls a 'nuclear liabilities investment portfolio/ On 1 April 1999, the value of the fund stood at £3,940 million (BNFL, 1999). BNFL

66 Steve Thomas assumes that this will grow by 2.5 per cent real per year for an unlimited period. This means that a liability to be met in 135 years is valued at only 3.6 per cent of its undiscounted value. This portfolio is supplemented by a commitment from the Treasury (the Secretary of State's undertaking) in March 1998 to pay £3,700 million (in March 1998 values), payable between 2008 and 2116. This sum is to grow in real terms by 4.5 per cent a year, and at 1 April 1999, stood at £3,934 million. So, by 2008 when it is first payable, the undertaking will stand at £5.75 billion. Any funds that are not spent until toward the end of the period during which they are payable will have grown in value by a factor of more than 100. Under the present planned decommissioning timing, the most expensive phase of decommissioning will not take place until about a hundred years from now. Assuming that a government commitment to provide funds in more than a hundred years' time is in any way meaningful, the Secretary of State's undertaking is effectively a blank cheque. This undertaking may facilitate privatization by underwriting any plausible liabilities, but it does not provide actual resources. With part-privatization in view, and given that the investment portfolio is not strictly segregated, there can be little confidence that even the money in the liabilities investment portfolio is safe. British Energy was required to set up a segregated fund for its liabilities. These were then estimated at £4.2 billion for decommissioning and £8.9 billion for waste disposal (British Energy, 1998). Effectively from the surplus accrued by Nuclear Electric, £228 million was paid into this fund by the government at the time of British Energy's flotation. However, for three reasons, the payments British Energy must make into this fund could be kept down initially to only £16 million per year. First, the discount rate for decommissioning provisions has been increased from 2 per cent to 3 per cent real, although growth in the funds is only assumed for seventy years after plant closure. This reduces a liability incurred more than seventy years forward to only about 13 per cent of its undiscounted value. Second, British Energy will be allowed to pay for stage 1 of decommissioning - essentially, removal of the fuel and securing of the site - from cash flow. In undiscounted terms, stage 1 represents about 10 per cent of the total cost; however, discounted and with lengthy delays planned for stages 2 and 3, it is by far the major cost. Third, some post-closedown waste disposal costs - notably, fuel disposal costs - are no longer covered by the segregated fund. All of this has had a major short-term positive impact on British

Nuclear Power and Deregulation in the United Kingdom 67

Energy's cash flow and has contributed strongly to British Energy's profitability. However, once plants start to be retired and are incurring costs, not generating income, there will be intense pressure on the revenue-earning capability of the remaining plants. If British Energy goes bankrupt as a result, or if the timetable for completion of decommissioning is shortened, future taxpayers may be left to foot much of the decommissioning bill, and to incur the physical risk of carrying out the job. This is not compatible with the 'polluter pays' principle on which the government's environmental policy is based. The Future of British Energy Nuclear Electric already had permission to build another PWR at Hinkley Point when, during the 1995 government review, it had applied to build another two-unit PWR station at Sizewell. Almost the first act of British Energy was to abandon both these projects and attempt to diversify away from nuclear, at least in the British market. British Energy was highly successful after privatization, increasing profits and its share price markedly. However, its cost structure is inflexible, which makes it vulnerable to changes in the wholesale electricity price and to problems with AGRs. By 2000, a fall in the wholesale electricity price meant that its plants were barely able to cover their operating costs from electricity sales. Given the chequered history of AGRs and their prototype status, the risk that a major problem with at least one of these plants could occur must be considered significant. If one AGR were knocked out of service for a full year, a large part of British Energy's annual profit of £300 million would be wiped out. A particular problem is the Dungeness B AGR, which is still a very poor performer. Its average capacity in 1996-8 was about 50 per cent, and even this has deteriorated since British Energy was established. Retiring the plant may make some economic sense in the long run, but the attention such a decision would bring to the decommissioning and waste disposal policies of the government and British Energy would not be welcome to either party. British Energy immediately took a small stake in a new gas-fired power plant and would probably have built more gas-fired plants if the government had not severely restricted the construction of new gas-fired plants beginning in 1997. British Energy is now the largest electricity generation company in Britain, and the economic regulator has been taking forceful steps to reduce the size of the other generation companies. It would be inconsistent if British Energy were allowed to

68 Steve Thomas build or acquire generation assets in Britain without retiring at least some of its nuclear capacity. It has been attempting to diversify into electricity supply - purchasing wholesale electricity and retailing it to final consumers - by trying to take over one or more of the twelve companies that operate the country's distribution system so that it can retail electricity to final consumers. In a competitive electricity market, selling power to the wholesale market is highly risky business, as it requires the company to compete successfully every thirty minutes of every day. If the generator supplies power to final consumers, there is at least some security of market share, regarding residential consumers, who in Britain have shown little inclination to switch electricity suppliers. British Energy's initial attempts to buy a distribution company or at least the retail arm of a distribution company were unsuccessful; it was outbid on two occasions by EDF. In June 1999 it finally bought the supply business of the smallest of Britain's distribution companies for £105 million. However, only a year later it resold this business and it appears to be relying on competing successfully in the power contract market to sell its output. Overseas, it has formed a joint venture with Philadelphia Electric (PECO), known as Amergen. This partnership has traded on the reputation that both companies have acquired for turning around nuclear power plants that were in serious financial and technical difficulties. By autumn 1999 it had taken over five existing American nuclear plants and had examined a number of other options. It has recently taken a long-term lease on the Bruce nuclear power station in Ontario. In general terms, the prospects for nuclear power in Britain are mixed. The existing plants look set to operate for some time yet. The oldest Magnox plants, the military plants (now part of BNFL Magnox Generation), have been given permission in principle to operate for fifty years, and if this is applied to the civil plants, even the oldest Magnox plant will not be retired until after 2010. In part, this is attributable to improved economic performance since privatization, but in strategic terms, there would be a downside to the government and the nuclear companies to early retirement. First, it would open up policies on waste disposal and decommissioning to public scrutiny. Second, financing stage 1 of decommissioning from cash flow would put pressure on BNFL's balance sheet. Third, it would result in extra emissions of carbon dioxide, making the meeting of greenhouse gas emissions targets more difficult, because it seems inevitable that gas-fired stations will replace the Magnoxes.

Nuclear Power and Deregulation in the United Kingdom 69

It would not be appropriate to comment on the impact that privatization has had on nuclear safety. There has been no systematic analysis of this issue, nor have there been any major incidents or accidents since 1990. However, it is worth noting that the oldest plants seem likely to be kept in service for some time yet, even though they lack features whose absence in Soviet-designed reactors is roundly condemned in the West. It is possible that the Nuclear Installations Inspectorate (Nil) has adjusted its policies to take into account that the plant owner's priority is now maximizing kilowatt hours for its shareholders, not the public good. However, the Nil's procedures remain closed to public scrutiny, and important decisions have been made with no attempt to alert the public to them. For example, in the summer of 1998, cracking was discovered in welds at one of the Sizewell A Magnoxes. This problem will require a reduction in the output of the plant, and Magnox Electric has been given twelve months to develop methods to solve the problem. However, the public was not notified of any of this until February 1999, in the Nil's routine quarterly report (Health and Safety Executive, 1999). In August 1999 there were signs that the Nil was concerned that job cuts at British Energy were reducing expertise in key safety areas and that the workload was only being met by British Energy staff working excessive amounts of overtime. The Nil has requested that British Energy halt its staff reductions until it can demonstrate that they are consistent with safe plant operation ("British Energy Safety Levels 'Unacceptable,'" 1999). In all likelihood, there will be further nuclear orders in Britain only if most of the following conditions are met: • A nuclear power plant design is available that meets the latest regulatory requirements. • Tough greenhouse gas emission targets are pursued seriously and nuclear is found to be a more cost-effective option than energy efficiency and renewables for meeting them. • British taxpayers and/or electricity consumers are willing to pay a subsidy to meet nuclear power's extra costs. • The government is willing to commit taxpayers' money to underwrite the economic risks of building and operating more nuclear power plants. • Local opposition to the siting of new nuclear power plants can be overcome.

70 Steve Thomas

Changes to Other Nuclear Companies in Britain There have been significant changes to the other nuclear companies in Britain since 1990. The nuclear power plant supply industry has never been strong in Britain, and by the time Sizewell B was ordered in 1987, the one surviving company, NNC, had been relegated to a minor role at Sizewell. The company still exists, but it is not a significant international player in reactor sales and servicing. BNFL, whose traditional role was fuel supply, waste disposal, and fuel reprocessing - mainly for the U.K. market, has begun to transform itself into a broader, more international company. It was already a major player in the United States in clean-up operations when, in 1998, it took over the nuclear division of Westinghouse. This gives it a new capability in reactor supply and servicing and an expanded capability in fuel supply, besides expanding its American clean-up operations. The acquisition of Magnox Electric gives it new options in the electricity supply industry. It is still too early, especially given its proposed privatization, to determine what strategic directions it will take in the electricity supply industry. The U.K. Atomic Energy Agency (UKAEA), the government's nuclear R&D agency, was split up and privatized in 1996. A nuclear technology company, AEA Technology, was created. Although it has remained reasonably successful, in 2001 it withdrew from all nuclear activities. Nuclear liabilities and the responsibility for fusion research remain with a government-owned organization, still known as the UKAEA. In 1998 a report by the U.K. Health and Safety Executive of the UKAEA severely criticized the poor safety record of the Dounreay site (Health and Safety Executive, 1998). This report blamed the problems partly on key resources being allocated to AEA Technology. Conclusions The British experience demonstrates that nuclear does not sit comfortably in an electricity system run on competitive criteria. The very poor record of nuclear power in Britain up to 1990 exacerbated the problems of fitting nuclear power into such a system. However, the fact that it was not necessary to compensate the previous owners of the electricity supply industry, taxpayers, for the stranded cost of the nuclear power stations created by liberalization made the task much easier. There is strong evidence that market discipline has had a beneficial

Nuclear Power and Deregulation in the United Kingdom 71

effect on the economics of nuclear power in Britain. Operating performance and costs have improved dramatically. As a result, the existing plants will remain in service for much longer, and generate power at much lower cost than seemed likely in 1990. This has meant that most of the nuclear assets that could not be sold in 1990, were able to be privatized in 1996. The resulting company, British Energy, has been highly successful in increasing profits and its share price since its creation. However, economic and political barriers mean that the prospects for further orders for nuclear plants in Britain are minimal; thus, a key objective of British Energy in the U.K. is to diversify away from nuclear power generation. Other nuclear technology companies have been or are in the process of being privatized, and they may well find profitable niches in world nuclear markets. Long-term, intractable problems such as waste disposal and decommissioning do not appear to have been eased by privatization/liberalization and measures to ensure that future generations do not have to pay the cost of cleaning up current facilities do not inspire much confidence. NOTES 1 There are three separate electricity industries in the United Kingdom. The largest part is that covering England and Wales (about 85 per cent of U.K. electricity demand), where most of the nuclear capacity is installed. There is a much smaller interconnected system supplying Scotland, where there are two operational nuclear power plants, and there is a small, isolated system covering Northern Ireland with no nuclear power plants. All three systems have been reformed and privatized, although the competition provisions were most radical in England and Wales. Most of this account relates to the England and Wales system, with occasional references to Scotland. 2 The inquiry into Hinkley Point C was completed, and permission to build the plant was given by the government, but never taken up. 3 Capacity factor is calculated as the output produced in a year as a percentage of the power that would have been produced had the plant operated uninterrupted at full design output rating throughout the year. It is a good measure of reliability and productivity because utilities almost invariably aim to operate nuclear plants on base-load. 4 Magnox fuel is also reprocessed at Sellafield. For technical reasons, storage and direct disposal would be more difficult and perhaps not feasible for Magnox fuel.

72 Steve Thomas REFERENCES British Energy. 1998. Annual Report and Accounts. Edinburgh: British Energy. British Energy Safety Levels 'Unacceptable.' 1999. Utility Week (13 August): 3. British Nuclear Fuels Limited. 1999. Annual Report and Accounts. Risley: BNFL. Central Electricity Generating Board. 1989. Annual Report and Accounts. London: CEGB. Department of Environment. 1997. John Gummer refuse NIREX planning appeal. Press notice, 17 March 1997. London: Department of Environment. - 1995. Review of Radioactive Waste Management Policy: Final Conclusions. White paper, Cm 2919, London: Department of Environment. Department of Trade and Industry and the Scottish Office. 1995. The Prospects for Nuclear Power in the UK: Conclusions of the Government's Nuclear Review, Department of Trade and Industry and the Scottish Office. London: Her Majesty's Stationery Office. Health and Safety Executive. 1999. Nuclear Safety Newsletter 18. London: Health and Safety Executive. February. - 1998. Report on Safety Audit ofDounreay. London: Health and Safety Executive. Heseltine, M. 1992. Hansard. 19 October 1992. 309. HM Government. 1988. Privatising Electricity. Cm 322. London: Her Majesty's Stationery Office. Holmes, A., J. Chesshire, and S. Thomas. 1987. Power on the Market: Strategies for Privatising the UK Electricity Industry. Financial Times Business Information. London: Financial Times. MacKerron, G., and M. Sadnicki. 1995. UK nuclear privatisation and public sector liabilities. STEEP Special Report no. 4. Brighton: Science Policy Research Unit. National Audit Office. 1998. The Sale of British Energy. House of Commons, 694, Parliamentary Session 1997-98. London: Her Majesty's Stationery Office. Nuclear Electric. 1994. The Government's Review of Nuclear Energy: Submission from Nuclear Electric pic. London: Nuclear Electric. - 1992a. Evidence to the Trade and Industry Committee Inquiry: British Energy Policy and the Market for Coal. Minutes of Evidence, 24 November: 299. London: Her Majesty's Stationery Office. - 1992b. Evidence to the Trade and Industry Committee Inquiry: British Energy Policy and the Market for Coal. Minutes of Evidence, 24 November: 296. London: Her Majesty's Stationery Office. - 1992c. Evidence to the Trade and Industry Committee Inquiry: British

Nuclear Power and Deregulation in the United Kingdom 73 Energy Policy and the Market for Coal. Minutes of Evidence, 24 November: 298. London: Her Majesty's Stationery Office. - 1992d. Evidence to the Trade and Industry Committee Inquiry: British Energy Policy and the Market for Coal. Minutes of Evidence, 24 November: 301. London: Her Majesty's Stationery Office. Nuclear Engineering International. 1999. World Nuclear Industry Handbook. Dartford: Wilmington Business Publishing. Rush, H., G. MacKerron, and J. Surrey. 1977. The Advanced Gas-cooled Reactor: A Case Study in Reactor Choice. Energy Policy 8, no. 2: 95-105. Secretary of State for Energy. 1979. The New Nuclear Power Programme. Statement in the House of Commons by the Secretary of State for Energy. 18 December. Select Committee on Science and Technology. 1974. The Choice of Reactor System. First report from the Select Committee on Science and Technology, Session 1973-74:55-6. London: Her Majesty's Stationery Office. Williams, R. 1980. The Nuclear Power Decisions: British Policies, 1953-78. London: Croom Helm.

Chapter Four

Transforming AECL into an

Export Company: Institutional Challenges and Change Bruce Doern, Arslan Dorman, and Robert Morrison

Atomic Energy of Canada Limited (AECL) is the core agency in the Canadian nuclear industry, which is generally considered to be one of the most important high-tech components of the nation's economy. In the past decade, AECL has focused increasingly on the CANDU reactor business, with a deliberate emphasis on exports. In this chapter we examine this transformation of AECL from a research institution into a commercial entity with an international outlook. By concentrating on some of the key changes in the past decade, we provide a focused look at one of Canada's key S&T-based agencies, which, like other federal bodies, has gone through a period of often turbulent change propelled by both national and global forces. We also discuss AECL's future challenges and choices. We examine five aspects of AECL as a public sector institution that is confronting sweeping changes in electricity, nuclear, and climate change policy in both national and global arenas. This five-part framework represents a very pragmatic effort on our part to understand AECL as a public sector institution. We examine AECL as (1) an entity that exhibited difficult problems of leadership change and that became more stable in the mid-1990s; (2) an organization whose dynamics of planning became more difficult in a climate of shifting politicaleconomic markets and policy reviews; (3) a Crown corporation whose links to government (the shareholder) became more problematical as the political context of nuclear power shifted; (4) an arm of government whose budgeting and financial processes were transformed; and (5) an entity whose human resources needs and internal cultures exhibited a difficult struggle between change and inertia. The context for recent change centres on how AECL is positioning

Transforming AECL into an Export Company 75

itself vis-a-vis developments in global and federal/provincial electricity, nuclear, and climate change policies. As Chapters 1 and 2 showed, Canada's nuclear power development has, at its core, been a federalOntario partnership, in that Ontario Hydro (OH) was the most important customer, builder, and operator of CANDU reactors designed by AECL, and relied on them to expand its generation capacity in the 1970s and 1980s. Once AECL began focusing on its role as vendor and project manager outside Ontario, and Ontario Hydro began changing from a reactor builder to an operator, the two Crown corporations drifted apart. Ontario Hydro ran into management problems in the early 1990s that affected the performance of its CANDU reactors. The Progressive Conservative government elected in Ontario in 1995 opted for a more competitive electricity regime, in both structure and regulation, and this has significantly changed the economic prospects for CANDU reactors relative to alternative sources of electricity supply (see Chapters 7 and 8). This shift in direction has been accompanied by broader developments associated with the global issue of climate change, which is focusing attention on the environmental emissions of all energy and electricity sources. This has allowed AECL, with the nuclear industry generally, to position itself as a central contributor to the project of reducing carbon emissions, because nuclear plants emit only very small amounts of greenhouse gas and because the nuclear industry has already internalized most of its environmental and safety costs (AECL, 1999). At the same time, all of this has raised anew the public's central concern about nuclear power and hence about AECL's long-term future: the safety of nuclear power and the long-term storage of nuclear wastes. Before proceeding with our five-part institutional framework, we need to sketch the current mandate and structure of AECL. AECL's Current Mandate and Structure AECL was established in 1952 as a federal Crown corporation, and reports to Parliament through the Minister of Natural Resources. Its 3,400 staff are located at several sites in Canada (Mississauga, Chalk River, Ottawa, and Whiteshell), as well as abroad in countries such as China, South Korea, and Romania, where CANDU reactors have been or are being constructed. AECL is pre-eminently an S&T-based company that develops, designs, and markets CANDU power reactors,

76 Doern, Dorman, and Morrison

MAPLE research reactors, and MACSTOR waste storage facilities (AECL, 1999). It also manages the construction of nuclear reactor projects in several countries. CANDU reactors supply 15 per cent of Canada's electricity, most of it in Ontario. AECL is governed by a board of directors appointed by the Governor-in-Council. It is led by a president and CEO, under whom are six vice-presidents, one each for finance, strategic development, human resources and administration, commercial operations, research and product development, and marketing and sales. As this chapter will show, the latter three of these realms are at the core of the company's activities, and also of the struggle to move AECL off its historic base as a national research institution and transform it into a more integrated commercial export-oriented company (Doern and Sims, 1981; Bothwell, 1988). AECL is a Schedule III Part I Crown corporation under the Financial Administration Act (FAA) and is exempt from income taxes in Canada. In 1998-9, AECL had revenues of $544.4 million from its commercial operations, which consisted mainly of its CANDU reactor projects in China, Romania, and South Korea, but also included its MAPLE project, which will supply medical isotopes to MDS Nordion. MDS Nordion is a private company that was spun off from AECL as a privatization initiative (AECL, 1999, 30). In 1998-9 the research budget of AECL was $150.9 million. Overall, the net research expenses of AECL that year exceeded its profit from commercial operations and other Parliamentary appropriations, resulting in a net loss of $10.3 million (AECL, 1999, 30). We will return later to the central issue of subsidies and perceptions of subsidies as reflected in this one-year snapshot. Suffice it to say at this point that even though commercial operations are helping pay for the research side of AECL, the public perception is if anything the reverse. There are complex issues here that are fundamental to AECL's future prospects and to the level of public support it will likely obtain. AECL's product development strategy is described by the company as that of consolidating 'the corporation's position as a leading supplier of full-scope nuclear power capabilities. This gives it the capacity, in collaboration with Canadian and international partners, to capture a substantial share of the emerging global nuclear power market with a competitive and superior product' (AECL, 1999, 1). AECL states further that it is 'dedicated to meeting its customers' needs, and to continuous improvement and sustainable development' (AECL, 1999, 1). It

Transforming AECL into an Export Company 77

also reiterates its research and engineering role, which underpins its reactor products and which has 'enhanced national science and energy objectives and contributed to the evolution of Canada's nuclear policies' (AECL, 1999,1). As Chapter 2 showed, AECL is facing a very difficult environment for new reactor sales, as natural gas technology is proving to be competitive on cost and performance, flexible in terms of meeting changing demand growth patterns, and lower in financial risk. AECL's goal is to cut capital costs on next-generation designs by 30 to 40 per cent while maintaining high levels of safety. As the twenty-first century begins, AECL's commercial mandate is in the ascendancy. We have yet to tell the story of its rise or to consider the serious questions about the public good aspects of AECL's research role. However, with its current mandate as context, we can now focus on the institutional challenges and changes within AECL that became especially manifest in the past decade. Throughout the chapter, we will discuss how AECL has changed and the forces that drove those changes. Leadership Change A key factor in the mid to late 1990s was that AECL achieved a stability of leadership that had eluded it for a number of years. After a high turnover of presidents in the late 1980s and early 1990s - itself an indicator of the government's lack of focus on nuclear matters - AECL settled into a period of stable leadership in 1993 that lasted for the rest of the decade. This stability came in the persons of Reid Morden and Allan Kilpatrick, both career foreign service officers. Morden served as president from 1993 to 1998, and Kilpatrick has been president since 1998. They built on an agenda partially launched by their immediate predecessors, Bruce Howe and Stan Hatcher. This agenda, already enshrined in the 1990 federal nuclear review (see more below), focused on the need to integrate AECL into a single company dedicated unambiguously to a commercial mandate based on the CANDU. Morden and Kilpatrick did not always have enormous room for manoeuvre, but they still had choices to make. They applied contrasting styles of management that either reflected their personalities or simply emerged from the realpolitik that all organizational leaders inevitably face. Morden has been given considerable credit for being a tough-minded leader. He almost immediately eliminated the division of AECL into two companies with their own presidents, thus signal-

78 Doern, Dorman, and Morrison

ling his determination to forge a single company. He made it clear to colleagues and employees that he wanted to see a greater emphasis on the CANDU business and on the overall company and its needs and challenges. As a result, he especially challenged the research wing of AECL, centred at Chalk River. His style was blunt and forthright, and he ruffled feathers. This style was further entrenched by the budgetary cuts imposed on AECL by the 1994-5 federal Program Review (Swimmer, 1996), in the wake of earlier large cutbacks from the 1990 nuclear review, whose impacts had still not run their course. Morden's leadership resulted in an intense concentration on CANDU sales abroad. Drawing on his international experience, and propelled by the evident fact that no domestic sales of CANDU were in the cards, Morden insisted on a more focused and multidimensional managerial and marketing approach to secure foreign sales, first to South Korea and then to China. Morden also brought to AECL a much stronger ability to deal with the federal government. He knew the internal channels of influence in the federal government much better than some of his immediate predecessors, and was more comfortable using them. Allan Kilpatrick became president in August 1998, after serving as Vice President Marketing between 1995 and 1998; thus he had been a part of the transformation of AECL, including the considerable institutional angst it was experiencing. He inherited the continuing process of consolidating AECL into one company, as well as the impacts of Program Review. With respect to consolidation, Kilpatrick was taking over a company that had passed the 'resistance to change' phase but that had not achieved anything approaching enthusiastic acceptance, especially from those who were unhappy about the de-emphasizing of the functions of the national research laboratory. Two other features of the times are worth noting. First, when Kilpatrick assumed office, AECL was still institutionally a 'cost-plus' organization; but by the late 1990s it was increasingly clear that AECL's customers were changing and that a more complex approach to price, quality, and service would have to be adopted. Ontario's competition-oriented electricity reforms (see below) were an obvious manifestation of this trend, but it was evident in other, ways as well, such as the globalization of electricity and nuclear power markets (see Chapter 2). Second, the decade-long federal attack on deficits was now yielding federal surpluses, and thus for the first time since the early 1980s, AECL could at least contemplate reinvesting in its own infrastructure.

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Nothing was guaranteed or automatic about these new circumstances, but both shaped Kilpatrick's approach to leadership. Kilpatrick is seen as having a more open and consultative style of management. He conducts quarterly briefings and discussions with senior and middle-level managers throughout AECL and has been prepared to show them details of the AECL budget - something that previous presidents were not prepared to do. He has put considerable effort into internal company communications. Like Morden, he has continued to build better connections with different parts of the federal government, drawing on his considerable network of contacts as a former Deputy Minister of Foreign Affairs and International Trade. In the new federal environment of policies on innovation and climate change, and lessened fiscal pressures, he has been prepared to lobby ministers and senior officials with the goal of convincing them to overcome their innate political fear of associating themselves too closely with nuclear matters. In general, then, leadership factors and leadership stability have been important in the past decade, but the leadership function must be carried out in an intense and complex institutional and political-economic milieu. Thus AECL's transformation must also be linked to the other elements with which this chapter is concerned. The Dynamics of Planning As a federal Crown corporation, AECL is required under the federal Financial Administration Act to submit to the federal government both annual and five-year corporate plans. These planning and prioritysetting exercises have a strong impact on everything AECL does. But in other respects, the real dynamics of AECL priority-setting and strategic planning in the 1990s have centred on four major reviews: the 1989 review of nuclear policy initiated by Conservative Energy Minister Jake Epp, which led to a funding agreement with Ontario Hydro in 1990; an Ontario review of its electricity overcapacity, which led to the development of a competitive electricity market; the 1995 federal Program Review; and the 1999 Comprehensive Management Plan (CMP). In this section we look at each of these briefly as an aspect of the rapidly changing political-economic market in the 1990s. Other implications of these changes are examined in a later section on AECL's finances. The 1989-90 review led to the federal government's decision in 1990 to require AECL to focus more intently on its commercial role. The

80 Doern, Dorman, and Morrison

Mulroney government also committed itself to a seven-year funding program of over $1 billion for AECL. This figure involved significant cuts from mainstream 1980s funding, but included, as compensation, a significant Ontario component of $80 million annually, eventually funded through Ontario Hydro via the CANDU Owner's Group (COG). Bruce Howe, then deputy minister at NRCan, and later president of AECL, chose a seven-year period in the hope that the funding agreement would last through two elections. In the early stages of this review, a restructuring model was discussed that would have seen AECL's service business separated out through a company that would have included significant equity ownership by Ontario Hydro. This option was eventually rejected by Ontario Hydro. The 1989-90 review was premised on the view that AECL would be essentially planning for an expanded domestic reactor market and a slow international market that would be exploited as opportunities arose. The market situation soon turned out to be the exact opposite of this projection. There was also interest in the American market, driven by a perception within the Department of Finance that AECL's traditional customers were not creditworthy, and that it should compete in countries that could pay for CANDU purchases without the need for Canadian government financing. The second policy and strategic review process resided outside the federal government arena but was of great import for AECL. In the late 1980s, and certainly into the 1990s, the relationship between Ontario and the federal government became strained by a number of factors, some arising from the pursuit of separate goals, some market and technology based, and some political in nature, as both levels of government faced fiscal deficits and a changing global economy. As already mentioned in Chapter 1, ultimately the key change was Ontario's decision in 1998 to restructure its electricity system and to encourage competition from new sources of electricity (see also Chapters 7, 8, and 9). In the new, competitive Ontario electricity market, CANDU reactors will have to compete with newer, mainly gas-fired sources of electricity generation, which will be able to enter the Ontario electricity market under private ownership. AECL will be affected negatively with respect to any domestic CANDU reactor sales, which seem highly unlikely in the next decade; as well, any refurbishments will have to compete with new gas plants. AECL will be affected positively by new opportunities for commercial service and refurbishment work that will emerge as OPG tries to get its

Transforming AECL into an Export Company 81

nuclear plants back into competitive shape and to penetrate the electricity market in the United States. The third process that had a strong impact on AECL was the federal Program Review, which was designed both to achieve deficit reduction targets and to rationalize federal programs of many kinds across the government (Swimmer, 1996). Program Review, which challenged the rationale for many government programs, hit AECL just as it was at midstream in its corporate integration process. In effect, AECL's future was in question again well before the seven-year 1990 review agreement had run its course. Program Review looked at many of the same issues and potential choices as in 1990. There was pressure both from the government and from within AECL to make commercial operations even more central to AECL's mandate. By this time in the mid-1990s, CANDUs had already been sold to Korea and sales to China were in the offing. Nesbitt-Burns was contracted to help devise a ten-year business plan, a plan that saw a decent probability that international sales would soon anchor AECL's business. Very early in the Program Review, senior finance officials had settled on a figure of $100 million as annual federal core funding for AECL. This was a significant reduction, especially as they wanted that $100 million to cover not just CANDU R&D support but also waste management, closure of regional facilities, and basic research. As in the 1990 review, key officials explored the possibility of a joint AECL-Ontario Hydro service company, but again this proved not to be an acceptable option. Also rejected was the option of privatizing the core CANDU operations and leaving the research function (mainly Chalk River) in the public sector. Program Review triggered very real cuts in AECL's activities, mainly in its research programs. Thus, some basic research facilities at Chalk River were closed, and so was the National Fusion Program, which had tritium programs in Ontario and magnetic confinement programs in Quebec, supported by the federal government through AECL in partnership with the provincial utilities. The neutron scattering program was rescued by transferring it to the National Research Council (NRC). Program Reviews also led to the downsizing or closing of AECL's Whiteshell labs, its regional offices in Saskatchewan, Montreal, and Fredericton, and the headquarters office in Ottawa, which Morden moved to the CANDU premises in Mississauga, leaving only a skeleton staff in the national capital.

82 Doern, Dorman, and Morrison

Program Review kept unrelenting pressure on AECL throughout the Morden and Kilpatrick eras. Nonetheless, by the late 1990s the corporate integration process was well underway. The annual corporate planning process was more stable but also essentially revenue-driven. In essence, AECL had to determine the likely revenues first from its CANDU reactor business, then from its growing service business, and finally from its federal appropriations, which were fixed at $100 million. In the late 1990s AECL's strategic decisions had to be filtered through the government's requirement for a Comprehensive Management Plan (CMP). Despite its title, the CMP is very much like another Program Review. The CMP is still underway at time of writing and is focusing on four issues: the future of Chalk River; AECL's historic waste management liabilities; the replacement of the NRU research reactor at Chalk River; and CANDU innovation, sales, and management. The CMP is also feeding into the federal budget process, where for the first time a significant surplus is up for 'bidding,' not only by other federal S&T programs but of course by broader social spending interests, not to mention the forces in favour of tax cutting and debt reduction. In this context Canada, through AECL, faces a series of related choices about investing in nuclear R&D. These choices were discussed in Chapter 1 and, as emphasized there, must be made under any conceivable scenario that nuclear energy critics or supporters might devise. Thus, federal funding of the Canadian Neutron Facility (CNF), while crucial, is not disconnected from other choices such as whether to renew the R&D infrastructure at Chalk River and how to fund longterm waste management (see also Chapter 6). Both the Ontario government and Ontario Power Generation (OPG) are also a part of any funding scenarios. The Political Context of Nuclear Power In the past decade, all of AECL's links to the federal government have changed. Four such links need to be appreciated: those between government and the AECL board of directors; those between AECL and the Minister of Natural Resources (NRCan) and his(her) department; those between AECL and other ministers and ministries; and those between AECL and the many diverse voices in the political debate about climate change.

Transforming AECL into an Export Company 83

As with all Crown corporations, some of AECL's links with the government are through the board of directors and the chair of the board, who are appointees of the prime minister. Unlike a private corporate board, the AECL board does not appoint the company president or set that person's salary. In parallel with the greater leadership stability noted earlier regarding AECL presidents, there was more stability and clout on the board in the 1990s, mainly as a result of the appointment in 1993 of Robert Nixon, who was Ontario's Treasurer in the Peterson government of the late 1980s. Nixon has extensive political connections, including direct links with Prime Minister Jean Chretien. His duties go beyond ensuring AECL's accountability to the 'shareholder'; he is also there to improve the political environment in which AECL operates. Nixon meets once a week with the president of AECL - a practice that was not the norm in the previous decade. On the accountability side, the board has been reduced from seventeen members to twelve, and its composition has shifted somewhat to include a greater proportion of members with business and financial expertise. The board does what most boards do in the private sector; for example, it approves corporate plans and budgets. Its basic attitudes have changed in recent years; it has become more commercially oriented and more interested in overall corporate governance. The board is constantly rethinking AECL's mission and considering what the government wants the company to achieve. Attached to the board is an outside advisory committee of scientists, whose reports to the board are available to the public (AECL Research and Development Advisory Panel, 1999). The board's political appointees could in theory be a source of political intelligence and quiet or even public advocacy. A case can be made that all nuclear issues need far greater debate (see more below). In actual fact the board - or individual board members on an independent basis - cannot easily start such a debate. In part this is because of the 'closet' nature of nuclear politics among many Cabinet members and Members of Parliament. By 'closet nature' we are referring to the fact that for most of the 1990s, the Cabinet as a whole and many key ministers were simply not very keen to associate themselves publicly in a positive way with nuclear power. This state of political disquiet can only be appreciated through a closer look at AECL's relations with the Minister of Natural Resources, through whom AECL reports, and with other ministers. Within the government, NRCan's policy officials are the main conduits for advice

84 Doern, Dorman, and Morrison

to the minister about nuclear matters, which include those relating to AECL, uranium policy, nuclear waste management, and the Atomic Energy Control Board (AECB), the nuclear safety regulator. But the minister also receives advice directly from AECL, the AECB, the industry, and other sources. And NRCan was itself going through considerable turbulence during the 1990s, which meant that its ministers had many other issues on their plate. First, NRCan was itself created in 1993 out of a reorganization and merger of other federal units; this process, combined with budget cuts, led to a reduction in NRCan's capacity to formulate policy (Doern, 1995). Second, there were a number of nuclear policy challenges, such as various cost-cutting exercises and nuclear waste management issues, that were not seen as good news. Ontario Hydro's well-publicized problems did not help. Third, from the mid-1990s on, NRCan's main policy preoccupation was climate change, particularly as it sought to ensure that Canada's energy and resource industries were properly engaged as the federal Climate Change Secretariat began its post-Kyoto analyses and negotiations. While nuclear energy clearly had a role in this discussion, ministers did not want to overemphasize nuclear energy as a major part of the solution to this problem. Fourth and finally, NRCan ministers for the past decade have been from Western Canada, where fossil fuel interests tend to predominate. Nonetheless, NRCan ministers Anne McLellan and Ralph Goodale were quietly supportive of the nuclear and uranium industries and their efforts to achieve export sales. McLellan championed the passage of new legislation to provide a stronger legal foundation for the regulatory activities of the AECB. The 1990 policy review and the 1995 Program Review were run from outside the ministry, and in both cases fiscal imperatives as much as anything drove the policy strategies toward AECL, despite the reluctance of many ministers to cut R&D funding. During the late 1990s, AECL's relations with ministers were decidedly mixed. On the one hand, AECL had a strong supporter in Prime Minister Chretien, who had helped facilitate sales to China and who was quite prepared to speak positively of Canada's nuclear high-tech achievements. On the other hand, other ministers (and their departments) seemed to be cautious in the extreme or potentially opposed, depending on which way the political winds were blowing and what else was on the overall federal agenda at any given time. In many nuclear industry quarters, there were concerns that Finance Minister Paul Martin might be inclined to see the nuclear industry as 'yester-

Transforming AECL into an Export Company 85

day's industry.' Most Ministers of the Environment have studiously avoided any association with nuclear matters and have certainly not been prepared to associate themselves with any view or analysis that nuclear power is a form of green power that reduces carbon emissions. However, it is interesting that at the Climate Change Conference in Berlin in the fall of 1999, Canada pushed - albeit unsuccessfully - for recognition of nuclear energy as an energy source that could obtain credits for reducing carbon emissions through various international mechanisms. The Minister of Foreign Affairs and International Trade also has to take a dual view of nuclear matters, on the one hand facilitating the sale of reactors as beneficial trade, while on the other being a guardian of Canada's concerns about preventing the diversion of nuclear materials and technology for weapons purposes. All of these shifting political and governmental links and perceptions are being placed on what will undoubtedly be the agenda for nuclear policy as a new century begins: the climate change debate and its links with the issue of sustainable development. Ultimately this full agenda will be linked with whether the public will accept the risks of nuclear power, and whether it will trust the institutions that regulate and manage nuclear power (See Chapter 10). It is clear that AECL will increasingly require overt public support in order to obtain government support and funding. Officials in line departments in the federal government who deal with AECL on a regular basis are generally supportive, but they believe that the public is much less so, which inevitably makes their own support more tenuous. While the degree of public support depends in turn, to some extent, on visible government support, it is also a function of the nuclear industry's image in terms of general trustworthiness - more specifically, in terms of safety, environmental impact, and economic viability. Finances and Budgeting The above analysis of AECL's planning dynamics has already revealed some aspects of the company's finances. We now need to explore the past decade's financial trends more concretely. These were at best a mixed blessing for AECL. On the one hand, federal support for AECL's R&D activities was reduced; on the other, AECL was successful in marketing of CANDU reactors internationally. Starting with the 1989 nuclear review initiated by the Conservative's energy minister, Jake Epp, AECL faced challenges in funding its

86 Doern, Dorman, and Morrison Table 4.1 Federal funding for AECL's R&D, adjusted for CPI (thousands of dollars) Years

R&D support

R&D support adjusted for CPI*

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

153,722 154,323 153,124 156,681 156,956 159,339 156,752 167,415 142,386 102,400

153,722 150,927 146,459 146,564 143,590 142,563 137,162 143,269 119,168 83,817

*The authors have used average CPI over the years 1990-98, 2.25 per cent, to deflate the numbers in the R&D support column [1992 = 100]. The CPI data can be found on the Statistics Canada web page [www.statcan.ca/english/Pgdb/Economy/Economic/ econ46.htm]. Source: AECL Annual Reports, 1991-2 to 1998-9.

research and development program. As noted earlier, this review resulted in a seven-year funding agreement, the purpose of which was to put AECL's R&D on a sound financial footing. The level of funding agreed upon was less than in 1985 but somewhat greater than had been anticipated in the wake of the earlier round of cuts. The impact of the federal cuts was partially offset by the CANDU Owner's Group (COG) agreement. An $87 million contribution by Ontario Hydro helped AECL increase its R&D spending to $293 million in 1991 from $259 million in 1990 (AECL, 1991, 15). Between 1990 and 1996, annual federal funding for R&D was kept at a steady level, within the range of $150 to 160 million. In March 1996 the federal government announced the results of its Program Review of AECL. By April 1998, federal funding for AECL R&D had been reduced to $142 million, down from $167 million; in 1999 this amount was further reduced to the ultimate Program Review target of $100 million (and even this amount also expected to include various other expenses). The reduction in federal funding for AECL R&D forced a phase-out of programs that were not essential to the CANDU business. An independent task force was assigned to review the future of Whiteshell Laboratories, and in 1999 those facilities were shut down. Table 4.1 summarizes the federal funding for AECL R&D in the 1990s. The authors have deflated the nominal dollar figures by the average CPI between 1990 and 1998 to reflect the real decline in federal funding that accompanied the funding arrangement of 1990. This

Transforming AECL into an Export Company 87

• R&D Support adjusted for CPI

A R&D Support

Figure 4.1 Federal R&D funding adjusted for average CPI

reveals that by 1999, AECL's research activities were receiving only 54 per cent of the funding they had been allocated at the beginning ofthe decade. Figure 4.1 depicts this trend graphically, and indicates a decline in the purchasing power of parliamentary appropriations for nuclear R&D that had to be offset at least in part by AECL's own funds. By 1999 AECL's R&D budget was showing a $52.7 million deficit, which was covered mainly by profits from nuclear operations. On the commercial side, AECL was successful in the 1990s. In that decade, the company sold three CANDU 6 units to Korea, successfully completed Romania's Cernavoda 1 station, and signed a contract with China for two 700 Mwe class CANDU 6 reactors. In Canada the company sold two MAPLE reactors for producing medical radioisotopes, as part of the final arrangements for the purchase of Nordion by MDS. Table 4.2 shows AECL's revenue, expenditures, and net income from nuclear power operations, R&D, and decommissioning. After 1992, revenues from nuclear supply and services increased sharply over the previous period, and then stayed around $300 million for five consecutive years, despite the stagnant domestic market for AECL's services. As Ontario Hydro decreased its demand for AECL's services due to fiscal restraints, the proceeds from the Korean and Romanian contracts took up the slack, keeping the company in solid financial shape. Another jump in revenues from nuclear power operations occurred in 1998, mainly due to new contracts for the Quinshan stations and MAPLE research reactors, and heavy water sales (AECL, 1998, p. 24).

Table 4.2 AECL's corporate income between 1990 and 1999 (millions of dollars) Nuclear power operations

Decommissioning*

R&D*

Years

Rev.

Exp.

Net

Rev.

Exp.

Net

Rev.

Exp.

Net

Net

1990

168.4 187.2 267.4 336.5 327.7 374.8 320.7 381.6 500.1 552.6

156.1 168.3 245.5 304.7 312.7 362.6 301.7 362.0 463.9 510.2

12.3 18.9 21.9 31.8 15.0 12.3 19.0 19.6 36.2 42.4

236.4 282.2 278.7 294.8 293.3 262.7 250.4 252.1 203.0 150.9

259.0 293.3

22.6 11.1 5.5 21.8 19.3 9.0 4.0 4.2 29.2 52.7

16.0 14.6 14.3 13.8 11.2 11.5 10.2 10.9 15.3 16.3

16.0 14.5 14.3 13.8 11.2 11.5 10.2 10.9 15.3 16.3

0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10.2 7.9 16.4 10.0 4.3 3.3 15 15.4 7.0 10.3

1991 1992 1993 1994 1995** 1996** 1997t 1998tt 19994:

284.2 316.6 312.6 271.7 254.4 256.3 232.2 203.6

*Revenue figures include parliamentary appropriations. "Revenue figures from nuclear power operations include interest earnings and other income. fRevenue figure from nuclear power operations includes a $19.3 million government contribution toward phasing out the investment in the Fusion Program; an offsetting figure is included in expenditures. tfRevenue figures from nuclear power operations include other parliamentary appropriations allocated for offsetting termination and restructuring costs related to Whiteshell Laboratories. tRevenue figures from nuclear power operations include other parliamentary appropriations allocated for offsetting Y2K costs. Source: AECL Annual Reports, 1991-2 to 1998-9

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Figure 4.2 Revenues from nuclear power operations compared with R&D expenditures

Figure 4.2 reveals the relative financial positions of the nuclear power and R&D operations of AECL. As noted earlier, AECL has transformed itself from a national research institution into a mid-size, innovative engineering firm. At first, it may seem awkward to compare revenues from nuclear operations with R&D expenditures. However, doing so clearly illustrates the two strategies that AECL was following simultaneously in the 1990s. The steady increase in revenues indicates that AECL was following an aggressive marketing strategy that focused mainly on East Asian markets. Sales to China and South Korea proved the worth of that strategy. More importantly, this trend signified the ascendancy of AECL's commercial aspirations as a Crown agency. The accompanying decline in R&D expenditures indicates not only the results of a series of reviews and associated funding cuts, but also the relative decline of 'basic science' in AECL's operations. Human Resources, Cultural Change, and Inertia Last but far from least in this account of AECL in the 1990s are the related areas of human resources, internal cultural change, and institutional inertia. Ultimately, all these areas are linked to the various ways

90 Doern, Dorman, and Morrison

that AECL's employees reacted to policy and institutional change. We have already discussed some aspects of this - for example, the tension between the research and commercial 'companies' during the integration process and thus the disjuncture between Chalk River and the commercial operations centred in Mississauga. We also glimpsed these dynamics in our earlier discussion of the 'cost-plus' mentality and we have also noted that AECL was known in the larger federal milieu as an at times arrogant institution, in that AECL scientists had a strong disposition to believe that only nuclear experts could understand the complexities of nuclear power. Having noted all of this, we must now make specific reference to four aspects of personnel change in the 1990s: personnel cuts and the redistribution of personnel; the closing of Whiteshell and related efforts to attract personnel to Chalk River and to the nuclear power sector as a whole; the development of human resource policies for AECL's scientists and engineers and for all employees; and the extent to which performance review has become institutionalized or accepted among scientists and engineers and in AECL's larger managerial culture. With respect to personnel cuts and transformations, major changes in the 1980s saw AECL shrink in size due to headquarters cuts and the privatization of the radioisotope operations. Further cuts were made in the early 1990s. Then, from 1996 to 1999, AECL's overall employee complement fell from 3,881 to 3,384, a 12.8 per cent cut. The distribution of changes in the last half of the 1990s is of interest because in terms of net cuts, commercial operations saw an increase of 9.6 per cent whereas the research and product development component of AECL fell by 11 per cent, and common services (including nuclear operations) fell by 21.6 per cent. These cuts and related changes involved employees, 80 per cent of whom were unionized through membership in thirteen unions. Two or three of these unions were aggressive and vocal. They and some individual scientists raised issues vigorously at several levels during the 1990s; this included protests to the media about the demise of AECL's national laboratory role, as well as direct representations to members of the AECL board of directors. But for the most part, the issues involved were resolved or at least handled through difficult though eventually constructive union/management negotiations. AECL's internal culture is more than just an interplay between research and commercial operations; it is also a process of accommodating isolated regional centres with big city operations. Both Chalk River and Whiteshell are hinterland locations that were originally

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picked for security and safety reasons, the former in wartime and the latter in the 1960s, with its choice perhaps also due to the influence of a key regional minister, Gordon Churchill, a senior player in the Conservative government of John Diefenbaker. But neither location was of the hardship variety, in that the two communities that grew up around the AECL operations had attractive lifestyles and community strengths. In the 1990s this changed in two key ways. First, it was decided in the early 1990s to close AECL's Whiteshell operations. However, the process of closing Whiteshell was extremely slow as ministers - including the regional minister for Manitoba, Lloyd Axworthy - sought to ameliorate the adverse effects of this decision in regional political terms. Whiteshell was the biggest federal laboratory west of Ontario, with a staff of over one thousand (at its peak), and was important to the economy of eastern Manitoba. Various efforts were made to find a commercial basis for Whiteshell, but these were unsuccessful. Ontario Hydro took over funding of some of the waste management activities, but it too was under pressure, and its efforts were not adequate to save Whiteshell. By the late 1990s, AECL was unambiguously an Ontariocentred public institution, and its already meagre presence outside Ontario had shrunk to near zero. A second way that hinterland-centre relations were affected had to do with the changing dynamics of recruiting scientists to Chalk River. AECL began to experience recruiting difficulties, in part because younger scientists were more likely to prefer life in the bigger cities. Many scientists perceived Chalk River as a bad career move, as it distanced them from the community of their peers, with its attractions and opportunities, and isolated their families from established social networks. These purely locational concerns were, and are, part of a much larger dilemma for AECL - namely, the nuclear industry is becoming less and less attractive for younger scientists and engineers. In the past decade, nuclear energy has been perceived at best as a steady-state industry, and at worst as an industry in decline. One concrete manifestation of this is the rapid decline in the supply of nuclear engineers being graduated by Canadian universities. Younger scientists have plenty of dynamic career areas to choose from, such as computers and information science, and biotechnology and the health sciences. These and other related factors have prompted AECL to take a more systematic approach to its human resources and to its longer-term succession planning. Historically, all federal S&T agencies have had weak human resource policies; indeed, few have had any real personnel

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planning approaches at all. AECL is not alone among these agencies in trying to rectify this situation and to buttress its claims about being a modern, innovating institution. In the mid-1990s, AECL began developing a human resources strategy. It held numerous workshops with groups of about twenty employees, and developed criteria about what was needed. It has since developed about eight program initiatives, some of which have emerged from this bottom-up review process, including several for handling the human issues arising from the closing of Whiteshell. The new human resources strategy especially takes note of what may be needed in the near to medium term future at AECL. To increase its service business, AECL will have to attract more engineers and trained managers rather than scientists per se. The scientists and engineers hired for research in the future will likely have to be much more multi-skilled. For example, the older NRU research reactor - now approaching the end of its long life - required quite specific job skills. The proposed CNF research reactor will undoubtedly require a more flexible and multi-skilled workforce. The CNF may also become a multi-purpose business or the centre of a commercial research park; if it does, it will need to be staffed with people who have strong entrepreneurial and financial skills. In sum, the AECL human resources strategy has four main goals: to attract and keep a flexible workforce; to provide employees with the tools, training, and flexibility they need to be held accountable; to ensure that employees clearly understand their role in AECL's business; and to implement a viable HR planning process to develop and acquire talent required for the future. All of this implies that AECL's internal culture is trying to move toward a more performance and export oriented commercial and innovation culture. Many within the company see considerable progress in recent years, but many also point to continuing inertia. This comes as the twenty-first century begins for AECL. The challenge now comes less in the form of dogged resistance to change, and more in the form of genuinely difficult issues related to learning new approaches to overcoming new pressures. AECL is probably better at producing some key kinds of performance information, but it does not yet manage through a performance management culture. Indeed, in some respects it cannot. It is still a Crown corporation serving a political master. It cannot borrow money on its own. It is undoubtedly more commercial than it once was, but its role in supporting CANDU reac-

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tors and developing future reactor designs, and as a national laboratory for basic nuclear science, is still one for active discussion. Conclusions In this chapter we have conducted an institutional analysis of AECL in the past decade. Each aspect of the five-part framework we have employed in this chapter has revealed key realities of transformation and change for AECL. Regarding leadership change, a certain kind of stability re-emerged at AECL after a period of relative instability in the 1980s. Interestingly, the two most influential presidents of the 1990s came from a foreignservice background, at a time when AECL's market for new reactors was (as it still is) overseas. Though both are given much of the credit for integrating AECL into a single entity and for reinforcing the exportoriented direction of AECL, they also achieved the important goal of strengthening AECL's links - and its credibility - with the rest of the government. As an organization, AECL has seen its dynamics of planning become more difficult in the face of shifting political-economic markets and policy reviews. It has had to react to at least four cycles of policy review in the past decade. The impact of these has been more profound than any of the company's 'normal/ internal planning exercises. This is not to suggest that AECL's leadership opposed all the waves of change coming at it through these reviews, but it does indicate that not all of the changes were welcomed as to their exact degree and timing. Federal finances are now stabilizing, and surpluses are actually developing, so it is likely that AECL's own planning can be somewhat less turbulent. But this is by no means guaranteed, since AECL still faces great uncertainty as a result of the changing nature of the global market for reactors and the deregulated electricity regime being established in Ontario, and as a result of evolving ideas about the role of government in supporting particular energy technologies. It follows from all this that AECL's links to government (the shareholder) are likely to become more problematical as the political context of nuclear power shifts due to changed electricity markets and the debate over global climate change. These links are now both more complex and more subtle than AECL has generally faced in its history. In the debate about climate change, AECL has the opportunity to present itself more aggressively as a positive environmental force. Yet

94 Doern, Dorman, and Morrison it still faces an array of Cabinet ministers whose approach is very cautious and even timid. As we have shown in this chapter, ministers are still reluctant to be seen as nuclear boosters, largely because if they are, they will simultaneously have to come up with convincing explanations about exactly how they are going to deal with issues such as the long-term management of nuclear wastes. Our conclusions about AECL's budgeting and financial processes and choices are, of course, closely linked to the planning dynamics we referred to earlier. However, they go beyond these to consider likely changes in the future politics of public finance (federal and provincial), as well as AECL's likely political capacity (including public support) to gain its fair or needed share of the public purse. There is a dual aspect to this: the politics of S&T funding on the one hand, and the larger politics of public finance on the other. In the realm of S&T budgets, several federal science-based departments will be bidding in the next few years for any available 'new money/ many on the grounds that their research facilities have, as it were, 'rusted out' and need reinvestment. There are many claimants within the government, so increasingly AECL will have to find political allies and funding partners as it seeks resources. But recent federal S&T budgets have indicated a strong federal preference for funding newer, arm's-length institutions, such as the Canadian Foundation for Innovation (CFI) and the Canadian Institutes for Health Research (CIHR), that are linked more closely to business and universities and fully networked both nationally and internationally. And, of course, ultimately AECL is competing for reinvestment resources and new money against even larger sets of interests in Canadian society in the form of social programs and tax reductions. Last but not least, we have drawn attention to AECL's changing human resource needs and internal cultures. There is, of course, an intensely human dimension to this, exemplified by the strong resentment felt by many in AECL - especially at Chalk River - about the company's shift away from its role as a national research institution. But beyond this, AECL faces several human resource and cultural challenges, which we have highlighted. One is that the company must keep finding new ways to attract scientists and engineers into the field of nuclear research, in the face of the strong 'career choice' competition from dynamic industries such computers and communications, health and genome research, and biotechnology more generally. Another is that within AECL, current and new research staff will have to become

Transforming AECL into an Export Company 95 much more multi-skilled, and will have to learn the competitive ways of an innovating economy. AECL's overall institutional situation as the twenty-first century dawns is a curious mixture of steady state and potential but contentious opportunity. The past decade has bought some time and needed consolidation, and there are some opportunities to be seized. But we cannot emphasize enough that AECL will need to change its capacities as an institution, as well as its institutional and political allies, if it is to cope successfully with the future. The changed economics and politics of energy and climate change policy are both an opportunity and a threat to AECL's medium-term future. REFERENCES Atomic Energy of Canada Ltd (AECL). 1999. Annual Report: 1998-1999. Ottawa: AECL - 1998. Annual Report: 1997-1998. Ottawa: AECL - 1997. Annual Report: 1996-1997. Ottawa: AECL - 1996. Annual Report: 1995-1996. Ottawa: AECL - 1995. Annual Report: 1994-1995. Ottawa: AECL - 1994. Annual Report: 1993-1994. Ottawa: AECL - 1993. Annual Report: 1992-1993. Ottawa: AECL - 1991. Annual Report: 1990-1991. Ottawa: AECL AECL Research and Development Advisory Panel. 1999. Report of the AECL Research and Development Advisory Panel for 1999: CNF Reactor Systems. Mississauga: AECL. Bothwell, Robert. 1988. Nucleus: The History of Atomic Energy of Canada Limited. Toronto: University of Toronto Press. Doern, G. Bruce. 1995. Natural Resources Canada: New Synergies or Competing Fiefdoms? Paper prepared for the Canadian Centre for Management Development. Ottawa. Doern, G. Bruce, and Gordon Sims. 1981. Atomic Energy of Canada Ltd. In Allan Tupper and Bruce Doern, eds., Crown Corporations and Public Policy in Canada, 51-94. Montreal: Institute for Research on Public Policy. Swimmer, Gene, eds. 1996. How Ottawa Spends, 1996-97: Life under the Knife. Ottawa: Carleton University Press.

Chapter Five

Nuclear Regulation in Transition: The Atomic Energy Control Board David Jackson and John de la Mothe

The advent of a new century is an especially appropriate time to examine the Atomic Energy Control Board (AECB). This agency is just reaching the end of a long transition process; in the past fifty years it has evolved from a legal entity used by government to control and promote nuclear technology, into a fully independent regulatory agency. A new act has been passed to replace the 1946 act under which it has always operated; with the act now proclaimed, the AECB has been reborn as the Canadian Nuclear Safety Commission (CNSC). Further timeliness is added by the ongoing difficulties with Ontario Hydro's nuclear reactors. This very serious and complex situation has presented the AECB with its most difficult regulatory challenge to date. The deregulation of the electricity market and the breaking up of Ontario Hydro into new companies has further complicated an already complex situation. These problems are driving another, more subtle transition in the board's regulatory philosophy: it is abandoning an almost purely performance-based approach in favour of a more compliance-based system - a change that may be accelerated by media perceptions of the board's role. And interestingly, these shifts regarding the AECB and Canada's nuclear sector have not been driven by larger policy transitions, such as the federal Science and Technology Review (1994-6) and the Program Review exercises for better governmental management (de la Mothe, 1996). The Evolution of Regulation In order to appreciate the changes in nuclear regulation now underway, a short discussion of the types of regulation is required. Barra-

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clough and Carnino (1998) have classified nuclear regulation into three overall approaches: compliance-based; performance-based; and process-based. Compliance-Based Regulation

This regime is based on standards and regulations that are comprehensive and detailed and that apply equally to every nuclear installation. Once these rules are set, the process of regulation is one of inspection and reporting in order to ensure compliance, and of imposing penalties in cases of non-compliance. This type of regulation can also be termed the prescriptive approach. Prescriptive regulation has been the traditional approach of the U.S. Nuclear Regulatory Commission (U.S. NRC). Historically, this came about because the first civilian nuclear power reactor in the United States, the Shippingport Atomic Power Station, was built by the U.S. Navy as an outgrowth of the development of nuclear propulsion systems for submarines. The stringent requirements for submarine reactors were established by the usual military method of elaborating complete and detailed specifications for every component. This in turn was a consequence of the 'lowest bidder' and multiple subcontractor approaches that prevail in military procurement. This method of regulation places a heavy burden on regulators and on reactor manufacturers first to produce and then to maintain the required detailed specifications. It also reduces the flexibility of the operators of nuclear stations to the extent that they have little freedom to improve or even modify their operations in any meaningful manner. In practice, this approach presents another difficult problem for reactor operators in that the resulting regulations are so complex and allencompassing that a conceptually minor modification in the requirements can lead to myriad changes in the regulations. After the 1979 Three Mile Island accident (Jackson, 1981), operators were deluged by thousands of required changes from the U.S. NRC. This prescriptive but constantly changing regulatory regime is often cited by the U.S. nuclear industry as one of the main reasons why no new power reactor has been ordered by an American utility since the 1970s. For example, the Watts Bar-1 reactor operated by the Tennessee Valley Authority started producing commercial electrical power in 1996, some twentyfour years after construction started in 1972. This delay can in part be attributed to changes in U.S. NRC regulations: the design had to be

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altered continuously during construction to meet the ever-changing specifications promulgated by the U.S. NRC. The introduction of new reactor systems in the United States, different from the two closely related types already in use there, would require an enormous effort to provide the specifications and detailed regulations that are necessary under the U.S. NRC system. This means it would be very difficult, if not impossible, to introduce a foreign reactor type into service in the United States. AECL has occasionally explored the possibility of selling CANDU reactors in the United States. However, the heavy costs involved in surmounting the regulatory barrier have always been assessed as unwarranted, in view of the small probability of successful sales in the moribund American reactor market (Morrison, 1998). This is yet another instance of regulation acting as a barrier to trade. That being said, the barrier in this situation was not raised deliberately; rather, it was an unintentional consequence of the choice of regulatory system. Performance-Based Regulation

In the performance-based approach, the regulators set targets for reactors, and the onus is on the operators to meet them. A well-known example of this approach is summarized in the acronym ALARA ('as low as reasonably achievable') in the context of radiation exposure to the public. The onus is on the designers, builders, and operators of a nuclear facility to demonstrate to regulators that the plant performs within the established safety and emission limits. Traditionally the AECB has regulated largely on a performance basis. This choice is understandable, considering the close relationships between the operators of nuclear facilities and the regulators in the early days of the Canadian nuclear industry (Doern, 1977). Performance-based regulation is especially suited to the design phase of nuclear projects, when safety and environmental requirements can readily become design objectives. However, as Barraclough and Carnino point out, the problem of identifying and applying specific safety and environmental indicators makes the application of a performance-based program much more difficult for the operations of nuclear plants. In Canada, the AECB uses incident reporting - that is, the reporting and analysis of non-routine events at reactors, and their frequency and severity - as a key regulatory tool. Everyone would agree that such incidents bear on the safety of the reactors and should

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be monitored; the problem is how to relate this information to the original safety performance objectives of the design. Process-Based Regulation

Process-based regulation is based on ideas originating in modern quality control procedures, and involves developing and documenting organizational processes that lead to the safe operation of reactors. This method concentrates on developing management processes rather than specifying components and operating instructions, and aims to preserve the spirit of the prescriptive method. Organizational processes are rigorously delineated, but enough flexibility is retained that those processes can be modified and adapted to suit local conditions. While there has been valuable and worthwhile progress in this direction (notably in efforts to inculcate a safety culture at all levels in nuclear organizations), no nuclear regulatory system has yet evolved to the point that it can be based extensively on this approach. In practice, the regulatory climate in any particular country will consist of some combination of all three approaches, since they are not mutually exclusive. For example, in the United States the U.S. NRC is gradually increasing the performance-based and process-based components of its regulatory mix rather than continuing with a purely compliancebased system. The reason apparently has to do with the Commission's potential liability in nuclear accidents. For example, it could be argued in court, 'We [the operators of the reactor] complied with all of your [U.S. NRC] regulations and yet an accident still occurred, and therefore your regulations were flawed and you [U.S. NRC] are to some degree responsible for damages.' The opposite trend has developed in Canada in the past decade or so, in that there has been an increase in the compliance-based component in nuclear regulation (Boyd, 1993). The Jarman et al. (1998) analysis of steam generators is just one of many recent examples that typify the AECB's desire to become more prescriptive with respect to reactor systems in contrast to merely setting overall performance measures for nuclear power plants. Indeed, the revised regulations accompanying the new act are more prescriptive than in the past, and this is creating difficulties in consultations with the industry. The reasons for this development are discussed below.

100, David Jackson and John de la Mothe The Evolving Role of the AECB

The AECB was established under the Atomic Energy Control Act in 1946 to control a powerful new technology in the wake of the nuclear bombings at Hiroshima and Nagasaki, and at the threshold of the era of the 'atom spies/ the Iron Curtain, and the Cold War. So it is not surprising that the 1946 legislation emphasized national security as a rationale for granting the federal government control over all aspects of nuclear energy. The powers given the AECB were remarkable even for that period: the act empowered the board to expropriate companies and private property at will, to create Crown corporations, to control and suppress information, and to seize intellectual property. While it is true that Canada was the first country to put nuclear technology under civilian regulation, the spirit of the act is very much one of tight and secretive control by the federal government. More specifically, direct control was exerted by the legendary C.D. Howe, the 'Minister of Everything/ whose agenda in the postwar years was the industrialization of Canada. Referring to the early 1950s, Bothwell (1988) notes that at that time 'the AECB was, to be sure, largely symbolic.' The main activities of the AECB in the first fifteen years of its existence revolved around developing and actively promoting nuclear technology; this included setting up Crown corporations such as Eldorado Nuclear and Atomic Energy of Canada Limited (AECL). In fact, the only amendment to the 1946 act was in 1952, to allow the creation of AECL. Sometimes during those early days, the AECB, AECL, and Eldorado even shared the same president (Sims, 1980). Thus, the board was intimately entwined with those bodies it was ostensibly - but not primarily - established to regulate. The framework for the Canadian nuclear system was completed by the mid-1950s, by which time the role of the AECB in establishing that system was essentially finished. Sims (1980) notes that in 1959, 'the first indication that there could be a major expansion in the responsibilities of the Board came with the application from McMaster University for permission to install a small research reactor on its campus/ The fact that the McMaster Nuclear Reactor is still going strong, licensed by the AECB, some forty years later, is a source of some satisfaction to one of the authors of this paper. By the opening years of the 1960s, AECL was beginning to conduct research on the CANDU reactor system, and the demands of American

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and British nuclear weapons production were spurring a rapid increase in uranium mining. It was around this time that the AECB began to focus more sharply on safety issues. After a lean period in the 1960s, uranium markets picked up again in the 1970s, this time for peaceful uses. The Ham Report of 1976 on the health of uranium miners marked the beginning of effective regulation of the uranium industry by the AECB (Doern, 1980). This trend toward regulation for health and safety was accelerated in the 1970s, which saw the construction and start-up of CANDU power reactors. All of these developments led to unprecedented demands on the AECB and a rapid expansion in its personnel. During the same period, new players in the nuclear game provincial utilities and privately owned uranium mining companies came on the scene, thereby completely removing all remaining vestiges of the board's origins as part of a suite of nuclear entities embedded in the federal government. In 1979 the Three Mile Island nuclear accident in Pennsylvania underlined the need for regulation to ensure the safety of nuclear power reactors. This propelled the AECB further yet along its already determined path to becoming a true arm's-length regulatory body. By the time of the Chernobyl accident in 1986, the board's independent stance was well established, but it was still operating under the 1946 act, which did not reflect its new role in health, safety, and environmental regulation. The Current Operations of the AECB The AECB, which will soon become the Canadian Nuclear Safety Commission (CNSC), is the federal agency responsible for regulating the development and use of nuclear energy in Canada. To be specific: The Atomic Energy Control Board's mission is to ensure that the use of nuclear energy in Canada does not pose undue risk to health, safety, security and the environment' (AECB, 1998a, p. 1). The 'Board' referred to in the AECB's name consists of five individuals, four of them appointed by order-in-council and the fifth always being the president of the National Research Council (as specified by the act). The president of the board (currently Dr Agnes Bishop) is the only member with full-time AECB duties. However, the other members participate in board meetings (approximately monthly) and in related activities. The main instrument of regulation is a system of licences for nuclear

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facilities of all kinds, including reactors, uranium mines and refineries, nuclear research laboratories, and radioactive waste depositories. The board licenses the use of particle accelerators, radioisotopes, and radioactive sources for industrial applications, as well as their packaging and transportation. Export controls of various types are applied to enforce Canada's policies on nuclear non-proliferation. Corresponding to these broad categories, three types of licences are issued: facilities licenses, nuclear material licences, and import-export licences. About 4,000 licences of all kinds are now in effect. In this chapter we concentrate on electrical power generating reactors, but this is only one of several areas regulated by the AECB. The AECB currently employs about 425 staff. Most are located at the Ottawa headquarters, but about sixty are assigned as on-site inspectors at nuclear power reactors, or work out of the AECB's four regional offices. The 1997-8 budget was about $49 million, of which some $35 million was recovered from fees charged to licence holders. Almost $23 million of this $35 million in fees came from nuclear reactor licences. (AECB, 1998a). It is noteworthy that the AECB only spends $2.1 million on R&D, which is intended to allow it to keep up with developments in the field. Questions can certainly be raised as to whether this is enough for safety, risk assessment, and technology development purposes. As the Annual Report states, The Board functions as a quasi-judicial decision making body' (AECB, 1998a). This means that while its decisions have force in law, its licensing hearings are not a duly constituted court. The board rules on applications for the granting, extension, or renewal of licences. The process is that applicants make written submissions, which must demonstrate that the activities to be undertaken will not 'pose undue risk to health, safety, security and the environment.' The board's staff also provide written submissions commenting on the application and making recommendations. When appropriate, outside 'intervenors,' such as antinuclear organizations and people living near a nuclear facility, may also make submissions. The board makes its decisions on the basis of these written submissions and oral presentations. Licensing may be more or less elaborate depending on the size and complexity of the application. Thus, it would be routine to grant a licence for a small radioactive source to an organization with an established safety record. At the other extreme, a power reactor is licensed in stages: first a site licence is granted, then a construction licence, and

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finally an operating licence. Each of these licences requires comprehensive documentation based a large number of studies of all aspects of the reactor; the entire process can take many years. Human resources issues involving reactor staff and their training and testing is an important consideration in reactor licensing. Usually the board has resident on-site inspectors at the major power plants. The AECB can revoke a licence it has granted if its inspectors detect safety or environmental violations. In circumstances where the holders of the licence must correct some less urgent problem, the validity of their licence may be limited to a shorter time period. The AECB makes every attempt to keep its proceedings open and transparent to the public. Essentially all of the written material (details of security arrangements at nuclear facilities and proprietary commercial information being obvious exceptions) is publicly available, as are the decisions of the board. Meetings are open to the public, and every year some meetings are held outside Ottawa to hear the concerns of citizens in various parts of the country. The AECB is also involved in the work of the various international organizations devoted to the international regulation of nuclear technology, notably the International Atomic Energy Agency (IAEA). The IAEA's main purpose is to promote the peaceful uses of nuclear energy; in particular, it presides over an international framework of treaties and agreements (Flakus and Johnson, 1998). The major objectives of this framework are to prevent the proliferation of nuclear weapons, to facilitate the safe operation of nuclear power plants, and to transfer the benefits of nuclear technologies to the less developed countries. Individuals on secondment from the AECB hold and have held senior appointments in this agency, and continue to contribute to many of its wide-ranging activities. The New Nuclear Safety and Control Act The new act represents the culmination of the AECB's fifty-year transition from a government agency charged with facilitating the establishment of a nuclear industry, to an arm's-length regulatory agency. On 20 March 1997 the federal Nuclear Safety and Control Act received Royal Assent. It replaces the 1946 Atomic Energy Control Act, but will not come into effect until it is proclaimed by order of the Governor in Council; this awaits the development and approval of regulations that will be applied under the new statute. These new regulations will be

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extensive, and the board has undertaken a comprehensive consultation process with the nuclear industry and other sectors of society. This process is now well into its third year. It is hoped that these consultations will be completed in 2001. Once the new act is proclaimed, the AECB will become the Canadian Nuclear Safety Commission (CNSC). Antinuclear critics sometimes attacked the AECB because of the similarity of its acronym to that of AECL, which suggested that the two organizations were in collusion. Indeed, it is said that this similarity was deliberate on the part of C.D. Howe so that he could keep his nuclear organizations straight (i.e., both began with the same three letters). Notwithstanding Howe's intention, the similarity has confused others ever since. Ironically, the new acronym is similar to that of the Canadian Nuclear Society (CNS), the learned society for nuclear professionals. The CNS is now completely independent of, but still confused with, the CNA (Canadian Nuclear Association), a nuclear industry association. It will be interesting to see whether this becomes an symbolic issue for the new CNSC. The Nuclear Safety and Control Act mandates the CNSC to establish and enforce national standards in the areas of health, safety, and the environment (admittedly, the AECB has effectively been doing this for years, without legal sanction). It establishes a basis for implementing Canadian policy and fulfilling Canada's obligations with respect to the non-proliferation of nuclear weapons. Enactment will provide CNSC compliance inspectors with enforcement powers, as well as the power to impose penalties for infractions in line with current legislative practices. The CNSC will be a 'court of record' with the power to hear witnesses, take evidence, and control its own proceedings. It will be empowered to require financial guarantees, to order remedial action in hazardous situations, and to require responsible parties to bear the costs of decontamination and other remedial measures. As well, the Nuclear Safety and Control act provides for the recovery of costs of regulation from persons licensed under the act. It also incorporates many of the concepts of the cost-benefit philosophy of government regulation developed by the central agencies of the federal government (Harvie,1996; Martin and Iwanko,1996). Thus, the new act recognizes the modern realities of nuclear regulation in Canada. It provides a legal foundation for the current modes of operation more than it takes the regulatory authority into new territory.

The Atomic Energy Control Board 105 The Nuclear Problems at Ontario Hydro Ontario Hydro has constructed and operates three multi-unit nuclear stations with reactors of the CANDU type developed by AECL. These stations are Pickering (divided into 'A' and 'B' phases, each with four reactors), Bruce (similarly, an 'A' with four units and a 'B' with four units), and Darlington (four units). (Bruce reactor #2 was shut down in 1995 due to massive corrosion accidentally incurred in its steam generators, and is unlikely to operate again.) These stations came onto the electrical grid over a period of some twenty years, starting with Pickering A in the early 1970s and ending with Darlington in the late 1980s. By 1989, they were together producing about 60 per cent of Ontario's electricity and 17 per cent of Canada's total. In the rest of Canada, there is a single reactor in Quebec and another in New Brunswick; thus, as previous chapters have mentioned, Ontario with its twenty reactors very much dominates the domestic nuclear power scene. During the 1970s and early 1980s, Ontario Hydro's reactors were continually among the top ten performers of all the nuclear power reactors in the world. Performance in this context is measured in terms of 'capacity factor' - that is, the electricity actually generated by a reactor in a given year as a percentage of the maximum possible electricity that it could generate. A score of 100 per cent means that there were no unplanned shutdowns or maintenance outages, and thus that all of the plant systems operated perfectly. Ontario Hydro reactors often achieved scores in the 90 per cent range, easily bettering the scores in the 60 to 70 per cent range typically achieved by American reactors of that era. Indeed, the Ontario Hydro reactors set many world performance records. However, beginning in about the mid-1980s, the previously superb performance of these reactors began a slide that could not be arrested no matter what Hydro management tried. Between 1989 and 1996, the utility made several attempts to bring its reactors back up to standard, but all of them failed. Particularly telling were statements by Marc Eliessen, Ontario Hydro's chairman at the time, in a report to the Hydro Board on his meeting with the AECB president (7 October 1991, noted in the testimony before the Ontario Select Committee of 1997): The president of AECB expressed the frustration of the Board with respect to the performance of all stations, performances which in some cases

106 David Jackson and John de la Mothe seem to be deteriorating instead of improving as continuously promised by Ontario Hydro, with no apparent results. One would expect that a new station like Darlington would be exemplary and be an indication of what one should expect in the future. In fact, the contrary is happening. After a very short running time, Darlington is already joining the ranks of the other stations with maintenance backlog increasing, operating procedures not being strictly adhered to.

Performance did not improve in the rest of the 1990s. The mean capacity factors (Smith, 1998) of the four Darlington reactors were 86.9, 90.1, 84.4, and 61.5 per cent for the years 1994 to 1997 respectively. The same figures for the eight Pickering units were 78.2, 62.5,43.2, and 57.5 per cent; for the seven Bruce units they were 64.5, 65.5, 72.4, and 62.1 per cent. By 1996 the AECB was willing to renew the Pickering station's licence for only six months, the usual licence period for a power station being two years. In essence, this constituted a severe censure of Ontario Hydro's performance by the AECB. Finding itself unable to resolve these problems with internal resources alone, Ontario Hydro brought in American consultants to perform an 'independent integrated performance assessment' (IIPA) of its nuclear operations. The IIPA report, released in August 1997, revealed severe ongoing problems in the utility's nuclear operations. It proposed a recovery plan involving the shutdown of seven reactors (the four at Pickering A and the remaining three operable reactors at Bruce A) in order to free the resources needed to bring the other twelve reactors up to their former performance levels. This plan was approved by the Hydro Board, and worked started in late 1997. Progress has been slow, with high expenditures especially on additional consulting resources, mainly from the United States. At the time of writing the number of American consultants working at Hydro reactors is said to be around two thousand. It is not yet clear whether the recovery plan will eventually succeed, and what the cost will be. The reasons for the performance failures at Ontario Hydro are complex. The present consensus is that organizational, attitudinal, and political factors rather the CANDU technology itself were the root causes of the problem. No doubt the frequent, politically driven changes in the chairmanship, several ineptly managed downsizing programs, and confrontational labour relations all played a part in shaping negative and unproductive attitudes among employees. Among the most bizarre explanations is the one put forward by Wil-

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Ham Farlinger, Ontario Hydro chairman, who declared at the August 1997 press conference announcing the UFA report that 'the real problem was that there's this cult running this place. That's a big part of the problem.' He seemed to be referring to some sort of conspiracy on the part of the nuclear people in his corporation. However, this nuclear cult, if indeed it existed, did not succeed in getting the financial resources needed to fix the nuclear deficiencies from Mr Farlinger and the chairmen who preceded him. Although the events of August 1997 were intended to bring the situation to a head, and to prompt drastic remedial action, the problems at Ontario Hydro were of long standing. A major factor was that the organizational attitudes within Ontario Hydro did not change when the company's main nuclear activity became the operation and maintenance of reactors rather than their design and construction. This suggests that the performance-based regulation system so useful in setting design goals should have been replaced with a more compliance-based system once the reactors started operation. Indeed, hearings by a select committee of the Ontario legislature to investigate the problems at Ontario Hydro concluded that the AECB should be more prescriptive and aggressive. In April 1999, Ontario Hydro was reorganized into separate companies as a step toward privatization (see Chapters 7, 8, and 9). The new entity, Ontario Power Generation (OPG) has taken over all the generation assets, including the nuclear stations. Concerns about the impact of privatization on the safety of OPG 's reactors have been voiced. The central question here is whether a profit-oriented electrical generation company will cut corners compared to a provincial Crown corporation. Experience in other countries has been that commercial operations can be well regulated and operate safely. Successful privately operated nuclear utilities such as Duke Power and British Energy are showing an interest in acquiring OPG when it becomes privatized. If they do, then OPG's operations would stand to greatly benefit from the experience and proven management skills of these companies. Public and Media Perceptions It is a commonplace observation that there is a subjective component in assessing the comparative safety of various activities. People often exaggerate the risks of some activities and discount the risks of others, in spite of statistical evidence to the contrary. So it is a small conceptual

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leap to argue that perceptions must also play a role in public and media attitudes toward regulators. Like all other government agencies, the AECB is sensitive to these attitudes. Indeed, as discussed earlier, the board conducts its licensing process in a notably open manner. In this vein, the president of the AECB was anxious to correct two public misconceptions (Bishop, 1998) that she felt had sprung up around the IIPA process namely: • 'Only through the findings of the IIPA was it recognized that Ontario Hydro was operating well below the level of good or excellent by world standards/ • 'A large part of the public believed Ontario Hydro shut down the reactors for safety reasons not as part of its recovery and plan and therefore, criticized the AECB for not shutting the reactors down prior to the licensee doing so.' The first assertion can be rebutted easily, since the record clearly shows that the AECB had long been aware of the deficiencies in Hydro's nuclear operations, had been urging the utility to remedy them, and had applied sanctions such as licence renewal for shorter periods. The latter was a particularly hard blow to Ontario Hydro because it delivered a strong message that the board deemed it necessary to subject the company to much closer oversight than had been customary in the past. The second point is more difficult to disprove, since it seems at first sight to run counter to one's everyday experience. We will resort here to an analogy: If a car is so poorly maintained that it has to be taken off the road, does it immediately follow that it has defects in its steering, brakes, and other safety systems? What if poor gas mileage and mechanical unreliability were the primary symptoms and, at least in the short term, the safety items were still functioning adequately? The situation with the Ontario Hydro reactors was that poor maintenance and increased problems with reliability had not yet extended sufficiently into the safety systems to cause the reactors to be unsafe. Nevertheless, the AECB was concerned that this was going to happen, and that is why, in 1996, it renewed the company's licence for only six months. The situation was further muddied by the media's misunderstanding of the terms 'below standard' and 'minimally acceptable' as used in the IIPA report. Expressed in terms of the grading scale commonly

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used in schools, the former is a 'C' and the latter is a 'D'; but the media interpreted them the other way round. In fact, one of the few areas in which Ontario Hydro got all C's as distinct from the much more common D's was the important safety-related area of emergency preparedness. Radiation protection was another area with some C's. Perceptions of compliance-based regulation may be described with words like active, strict, definite, distrusting, and rigid. The corresponding words characterizing performance-based regulation would be passive, forgiving, vague, trusting, and flexible. The former system implies an arm's-length and adversarial relationship between regulator and licensee and the latter, one that is close and cooperative. While it would be inaccurate to claim too large an influence for factors of perception, the board's increasing sensitivity to its public image encourages the trend toward a more prescriptive regulatory climate. Overall, the AECB has so far weathered the nuclear crisis at Ontario Hydro very well. It fulfilled it regulatory mission by ensuring that the difficulties with the Ontario Hydro reactors did not develop into a situation threatening public safety, and at the same time it emerged with its reputation largely intact. R&D has also emerged very recently as an issue for the AECB, but will be noted here only briefly. In its July 1999 report on significant developments (AECB, 1999), the board noted its concern about the impact of severe cutbacks on power reactor safety. What it calls 'dramatic reductions' in R&D have been made by both government (AECL) and the nuclear utilities. The AECB's president has written to the senior executives of the nuclear utilities to request their plans for dealing with the medium and long term impacts of R&D cuts on the safety of their reactors. AECB staff are preparing a report on this issue. It is worth considering why the federal government does not perceive nuclear R&D as an integral part of its science and technology priorities. It stands effectively alone from such transdepartmental envelopes as the Industry Portfolio and the Science Portfolio. Conclusions The Nuclear Safety and Control Act of 1997 completes the AECB's metamorphosis from the government's in-house facilitator of nuclear development to a truly independent arm's-length regulatory agency. Accompanying this has been a subtler evolution in the board's regu-

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latory philosophy toward a compliance-based system. The poor operating performance of Ontario Hydro's nuclear reactors over the past decade has put a permanent end to the paternal stance that the nuclear industry took toward the board in earlier days. As part of its trend toward privatization, Ontario Hydro has reorganized itself into a cluster of quasi-commercial enterprises, and this presents particular challenges to the AECB. It seems that nuclear generation facilities can be made commercially profitable in the near term, provided the purchase price is well below the asset replacement cost; but it is not yet clear how reactor performance, reliability, and safety will hold up in the longer term. The issue is whether maintenance, training, and in-house expertise and research capacity - all necessary for the long-term viability of nuclear power - will be reduced in order to boost short-term profits. As we have seen, the AECB is already showing concern about the level of nuclear R&D supported by Canada's nuclear utilities, notably Ontario's. Therefore, it would seem prudent for the AECB to exercise an even higher level of vigilance with respect to the new Ontario nuclear enterprise, at least until more concrete experience of its nuclear operations is available. Public perceptions and expectations of regulation are very important in the sense that nuclear activities must not only be safe but also must be seen to be safe. The nuclear industry as a whole has been slow to grasp this point, and some still believe that the public can be convinced of nuclear safety by the mere recitation of facts. The AECB has been quicker than the industry itself to recognize the significance of public attitudes. This was apparent in the board's behaviour when the Ontario Hydro crisis went public, and in its subsequent actions. The AECB did well in this situation and came out of it with its credibility increased. While the nuclear industry will no doubt complain about a more compliance-based regulatory climate, it must recognize that credible and effective regulation is essential to the survival of nuclear activities in Canada. The public will not trust the nuclear industry nor, indeed, any industry involving a potentially hazardous technology - to regulate itself. The Canadian public and thus, their governments, will not tolerate the operation of nuclear power plants if there is any widely acknowledged perception that regulation is not working. Therefore, it is essential to the future of nuclear power in this country that the AECB, and its successor the CNSC, not only be strong and effective but also be perceived as such.

The Atomic Energy Control Board 111 NOTE The authors would like to thank Fred Boyd and Bob Morrison for their many helpful comments and suggestions on this chapter.

REFERENCES Atomic Energy Control Board. 1999. Significant Development Report 1999-7. BMD 99-98, dated 27 July 1999: 2. - 1998a. Annual Report, 1997-8. Ottawa: Government of Canada. - 1998b. AECB Response to the Report of the Select Committee on Ontario Hydro Nuclear Affairs. News release. 29 January. Barraclough, Ian, and Annick Carnino. 1998. Safety Culture Keys for Sustaining Progress. International Atomic Energy Agency Bulletin 40, no. 2: 27-30. Bishop, Agnes J. 1998. A Regulatory Perspective on Recent Developments in the Canadian Nuclear Power Sector. Speech to the CAN/CNS Nuclear Industry Winter Seminar. Ottawa. 10 February. As reported in Canadian Nuclear Society Bulletin 19, no. 2:17-19. Bothwell, Robert. 1988. Nucleus: A History of Atomic Energy of Canada Limited. Toronto: University of Toronto Press. Boyd, Frederick C. 1993. The Distinctive Aspects of the Canadian Approach to Reactor Safety. Proceedings of the International Nuclear Conference, Toronto. 3-6 October. Toronto: Canadian Nuclear Association. De la Mothe, John. 1996. One Small Step in an Uncertain Direction: the Science and Technology Review and Public Administration in Canada. Canadian Public Administration 39, no. 3:403-17. Doern, G. Bruce. 1980. Government Intervention in the Canadian Nuclear Industry. Montreal: Institute for Research on Public Policy. - 1977. The Atomic Energy Control Board. Ottawa: Law Reform Commission of Canada. Flakus, Franz-Nikolaus, and Larry D. Johnson. 1998. Binding Agreements for Nuclear Safety: The Global Legal Framework. International Atomic Energy Agency Bulletin 40, no. 2: 21-6. Harvie, Jim. 1996. Cost-Benefit and Regulatory Decision Making. Canadian Nuclear Society Bulletin 17, no. 3:11-13. IIPA Report. 1997. Report to Management: Independent, Integrated Performance Assessment of Ontario Hydro Nuclear. Toronto: Ontario Hydro. Jackson, D.P. 1981. Three Mile Island: a Personal Commentary. Energy Studies Journal 1:4-13.

112 David Jackson and John de la Mothe Jarman, B.L., I.M. Grant, and R. Garg. Regulation of Aging Steam Generators. Paper presented at the Canadian Nuclear Society Third International Steam Generator and Heat Exchanger Conference. Toronto. 21-4 June. As published in Canadian Nuclear Society Bulletin 19, no. 2:18-22. Martin, James K., and Cassaundra Iwanko. 1996. The Canadian Government Perspective on Cost Effective Regulation. Proceedings of the 36th Annual Conference of the Canadian Nuclear Association, Fredericton, NB, 1996 June 9-12. Toronto: Canadian Nuclear Association. Morrison, R.W. 1998. Nuclear Energy Policy in Canada, 1942-1997. Carleton Research Unit on Innovation, Science and Environment. Ottawa: Carleton University. Ontario Select Committee. 1997. Report of the Select Committee on Ontario Hydro Nuclear Affairs. Toronto: Legislative Assembly of Ontario. Sims, Gordon H.E. 1980. A History of the Atomic Energy Control Board. Ottawa: Government of Canada. Smith, K.L. 1998. CANDU Performance for 1997. UNECAN News 8, no. 2:1-3.

Chapter Six

Nuclear Fuel Waste Policy in Canada Peter A. Brown and Carmel Letourneau

Like any energy source, nuclear energy generates some waste, in this case mostly radioactive waste. A cornerstone of Canada's approach to addressing nuclear waste issues is the federal government's 1996 Policy Framework for Radioactive Waste, which has established the approach for dealing with all radioactive waste from the nuclear fuel cycle (i.e., nuclear fuel waste, low-level radioactive waste, and uranium mine and mill waste). The policy framework defines the respective roles of the government and waste producers and owners. It also sets the stage for developing institutional and financial arrangements to implement long-term waste management solutions in a safe, environmentally sound, comprehensive, cost-effective, and integrated manner. In this chapter we focus on the long-term management of nuclear fuel waste. In March 1998 a federal government panel completed a tenyear environmental assessment of the concept of burying nuclear fuel waste bundles at a depth of 500 to 1000 metres in the stable rock of the Canadian Shield. This independent panel found that while the concept was technically safe, it did not enjoy the required level of public acceptability to be adopted at this time as Canada's approach to managing nuclear fuel waste. As a next step, the panel recommended that a Waste Management Organization be established at arm's length from the nuclear industry, entirely funded by the waste producers and owners, and that it be subject to oversight by the government. In its December 1998 response to the panel, the government provided policy direction on the next steps to be taken for the long-term management of nuclear fuel waste. The government chose to continue to hold the waste producers and owners primarily responsible for

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managing these wastes, consistent with the 1996 Policy Framework for Radioactive Waste. This approach necessarily requires the federal government to exercise oversight, and the Minister of Natural Resources undertook year-long consultations with major stakeholders on the best way to implement this oversight. In this chapter we review key developments in nuclear waste management over the last two decades. We also explore the key issues and institutional choices still being debated, including the social issues and the need to instil public confidence in those oversight and waste management institutions which must be put in place in the early twenty-first century. Background The federal government has legislative authority over the development and control of nuclear energy through the Constitution Act, 1867, and the 1946 Atomic Energy Control (AEC) Act. Once it is proclaimed, the Nuclear Safety and Control (NSC) Act, which received Royal Assent in 1997, will replace the AEC Act and provide more explicit and effective regulation of the Canadian nuclear industry, including the management of nuclear fuel waste from a health and safety perspective. However, this act will not cover broader financial and socioeconomic oversight. Nuclear fuel waste refers to the irradiated fuel bundles that come out of domestic nuclear reactors and includes those bundles discharged from twenty-two Canadian CANDU reactors. Twenty of these reactors are owned by Ontario Power Generation Inc (OPG), and the other two are owned by Hydro-Quebec and New Brunswick Power. Most of Canada's nuclear power generation began in the mid to late 1970s. A federal Crown corporation, Atomic Energy of Canada Ltd (AECL), produces a small amount of waste from its prototype and research reactors. OPG thus produces about 90 per cent, of the waste, the other two nuclear utilities about 8 per cent, and AECL 2 per cent. Other waste producers and owners, such as universities, produce a small quantity of nuclear fuel waste (AECL, 1994). About 1 million bundles of nuclear fuel waste are currently stored at nuclear reactor sites in Canada; it is forecast that 60,000 bundles will continue to be produced annually (LLRWMO, 1999). The independent federal nuclear regulatory body, the Atomic Energy Control Board (AECB), considers that this nuclear fuel waste is stored safely at

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present and can continue to be stored safely for several more decades. Nevertheless, the AECB has also indicated that for health and safety reasons, a more permanent solution should be developed, the goal being 'disposal with passive institutional controls.' Much research has been conducted in Canada and internationally to develop solutions for disposing of nuclear fuel waste. In 1977 the Minister of Energy, Mines and Resources engaged a group of experts led by Dr Kenneth Hare to provide the government and the public with alternatives for nuclear fuel waste disposal. In their report, The Management of Canada's Nuclear Wastes, the authors considered various waste disposal options and concluded that burial in geologic formations had the best potential for Canada (Aikin et al., 1977). The governments of Canada and Ontario formally accepted the group's report in 1978 and launched the Canadian Nuclear Fuel Waste Management Program. This program was conceived to be generic rather than site specific, and was developed to meet national regulatory criteria. It was based on burial, at depths of 500 to 1000 metres, in plutonic rock of the Canadian Shield, using a multi-barrier approach with a series of engineered and natural barriers. This would be a major undertaking and would cost about $10 to 13 billion over seventy to one hundred years. The program involved the cooperative R&D efforts of AECL (as the federal agent) and Ontario Hydro (as the provincial agent). The nuclear fuel waste disposal concept was developed over twenty years at a cost of about $700 million, largely funded by the federal government. In 1988 the Minister of Natural Resources referred AECL's concept for deep geological disposal to the Minister of the Environment for a public review by an independent panel, pursuant to the Environmental Assessment and Review Process (EARP) Guidelines Order. AECL submitted its Environmental Impact Statement to the panel in 1994 (AECL, 1994). In 1995 the Auditor General of Canada (AG) concluded after its audit of federal radioactive waste management activities that to minimize future federal liabilities and the burden on future generations, Canada must now translate its technical knowledge into the implementation of long-term, cost-effective solutions for disposing of its radioactive waste (Auditor General of Canada, 1995). The AG also indicated that funding arrangements must be put in place to meet the financial requirements of future solutions. In 1996, the Government of Canada established its official Policy Framework for Radioactive Waste, which covers radioactive waste

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from the nuclear fuel cycle. The Policy Framework, developed in consultation with a broad range of stakeholders, states that: • The federal government will ensure that radioactive waste disposal is carried out in a safe, environmentally-sound, comprehensive, costeffective and integrated manner; • The federal government has the responsibility to develop policy, to regulate, and to oversee waste producers and owners to ensure that they comply with legal requirements and meet their funding and operational responsibilities, in accordance with approved waste disposal plans; and, • The waste producers and owners are responsible, in accordance with the principle of 'polluter pays/ for the funding, organisation, management and operation of disposal and for other facilities required for their wastes. This recognises that arrangements may be different for nuclear fuel waste, low-level radioactive waste and uranium mine and mill tailings. (Natural Resources Canada, 1995) Report of the Environment Assessment Panel and Government Response From March 1996 to March 1997, the panel held public hearings across Canada on AECL's concept of deep geological disposal. The panel released its report, with conclusions and recommendations, to the government on 13 March, 1998 (Canadian Environmental Assessment Agency, 1998). Its main conclusion was that 'from a technical perspective, safety of the AECL concept has been on balance adequately demonstrated for a conceptual stage of development but from a social perspective, it has not. As it stands, the AECL concept for deep geological disposal has not been demonstrated to have broad public support. The concept in its current form does not have the required level of acceptability to be adopted as Canada's approach to managing for nuclear fuel waste.' The panel's principal recommendation was that 'a not-for-profit corporation, perhaps formed by the utilities and subject to regulatory controls' be established 'at arm's-length from the utilities and AECL,' or that a new 'Crown Corporation be created by federal legislation' to carry out Canada's nuclear fuel waste management activities that would be fully funded by waste producers and owners. In its response of 3 December 1998, the government generally agreed

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with most of the panel's recommendations, including its call for waste producers and owners to establish a segregated Fund (Natural Resources Canada, 1998). However, the government did not adopt the panel's recommendation that a government organization be created 'at arm's length' from the nuclear industry to carry out future waste management activities. Consistent with the 1996 Policy Framework for Radioactive Waste, the government placed the greater responsibility on the producers and owners that profit from the operation of the nuclear reactors, on the grounds that they have first-hand knowledge of how to manage their waste effectively. This approach will limit unnecessary government intervention, overlap, and duplication. The government also made it clear that it expected waste producers and owners to establish, organize, and manage a Waste Management Organization as a separate legal entity, over which it would exercise appropriate federal oversight. The Waste Management Organization The government agrees with most of the panel's recommendations for increasing public confidence that nuclear fuel wastes will be managed safety and effectively in the long term, and expects that: • Waste producers and owners will establish a Waste Management Organization (WMO), incorporated as a separate legal entity, with a mandate to manage and coordinate the full range of activities relating to the long-term management, including disposal, of nuclear fuel waste. Indeed, the major producers and owners are in the best position to proceed effectively with waste management operations. The WMO would: —> have a Board of Directors, with fair representation of waste producers and owners; —> have an advisory council, possibly including representatives from the public, academia, workers, international experts, environmental and other non-governmental organizations as appropriate; and, —> be comprehensive, i.e., allow for the participation of all waste producers and owners. The WMO would have to consider not only all existing waste producers and owners but the possibility of future producers as well.

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• The Government also expects that waste producers and owners will establish a segregated Fund to finance fully all activities of the WMO, including the cost for the long-term management, including disposal, of nuclear fuel waste; • The WMO will report back to the Government setting out its preferred overall approach for long-term management, including disposal, of nuclear fuel waste, with justification and including: —> a comprehensive public participation plan, particularly for members around potential siting areas; —> a framework to assess ethical and social considerations, such as potential impacts on future generations, impacts on socioeconomic life of the community; —> an Aboriginal environmental participation process to ensure fair participation by Canada's Aboriginal peoples, which takes into account their particular needs, concerns and lifestyle; —> practicable long-term waste management options for Canada, including the following: a modified concept for deep geological disposal, for example including the retrievability option; storage at reactor sites; and centralized storage, either above or below ground; —> a comparison of risks, costs and benefits of the options from, e.g., a health, environmental, economic, social, and security/safeguards perspective; these options would need to be analysed within the context of proposed siting areas; and, —> future steps; it is expected that the WMO will make recommendations for proceeding after the Government decision on its preferred technical option, and where the facility could be built. The Government will then decide if it accepts the WMO's report and consider its preferred approach for disposal. In its response to the panel's report, the government reiterated that the overall responsibility for the long-term management of nuclear fuel waste will be with the waste producers and owners. This approach is consistent with that of many other countries, where associations of waste producers and owners have been effective, since (1) waste producers and owners already have the operational expertise to deal with their waste; (2) they already have management structures and processes in place to do so; and (3) they can likely set up a separate legal entity in much less time than it would take a government.

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This approach necessarily requires that the government oversee effectively the activities of the utilities and the WMO. Thus it is important to demonstrate that the government will do so. Federal Oversight For a project of such importance and with so many ramifications, it not sufficient for the government, through its nuclear regulator, to control only the health, safety, security, and environmental protection aspects of nuclear fuel waste disposal. The impact of the project goes much further than this, and the government wants to ensure that the wastes will be taken care of in a comprehensive, cost-effective, and integrated manner. Federal oversight is needed to ensure that the project is consistent with relevant government policies, including those relating to sustainable development. The government has identified three key policy objectives of a proposed oversight mechanism: • To establish a segregated fund to be paid by the producers and owners of nuclear fuel waste for financing fully the long-term management, including the disposal, of nuclear fuel waste. • To establish a reporting relationship between the federal government and the Waste Management Organization, for reviewing progress on a regular basis. • To establish a federal review and approval process to exercise federal oversight and to provide access to the segregated fund for operational activities leading to the ultimate disposal of the waste. Following the public release of the December 1998 government response, Natural Resources Canada officials consulted with federal departments, the AECB, waste producers and owners, the provinces, and the public on how best to implement government oversight. The government response was posted on the Internet on 3 December 1998, and copies were sent out to individuals, interest groups, and public libraries. Public consultations were held in various cities across Canada, ending on 28 February 1999. NRCan then prepared a report summarizing the results of the consultations (Natural Resources Canada, 1999). Various options suggested during the consultations included legal mechanisms (e.g., contractual agreements, or memoranda of under-

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standing or agreement) and voluntary mechanisms (e.g., verbal agreements, or the inclusion of federal requirements into corporate bylaws). However, the consultations highlighted and confirmed that federal legislation would likely be the best means for ensuring that policy objectives of the government were met. Legislation would clearly signal a long-term commitment and a definitive statement of the federal policy objectives. Addressing the nuclear fuel waste issue in law would provide stability and would help ensure a more transparent process, with more public debate and input. In view of the unique role of Aboriginal groups in Canadian society, a separate, ongoing consultative process for them was initiated, as recommended by the panel. The Minister of Natural Resources contacted the Assembly of First Nations, the Inuit Tapirisat of Canada, the Metis National Council, the Congress of Aboriginal People, and the Native Women's Association of Canada. It is expected that once the WMO is operational, it will consult directly and on an ongoing basis with these groups. Federal-Provincial Consultations Canada is a federation of ten provinces. Under the constitution the federal and provincial governments have distinct responsibilities related to radioactive waste management. The federal government has responsibilities for developing and controlling nuclear energy, including radioactive wastes; the provinces have jurisdiction over their natural resources and the production of electricity, including that produced by nuclear energy. The major nuclear stakeholders are the three provinces with CANDU reactors, namely, Ontario, Quebec, and New Brunswick, and their utilities, Ontario Power Generation (OPG), Hydro-Quebec, and New Brunswick Power. In 1995, AECL, Ontario Hydro, and NRCan made an effort to explore operational principles for disposing of nuclear fuel waste (Natural Resources Canada, 1995). With respect to federal-provincial issues, it was agreed that one national facility was desirable in Canada, rather than one in each province. It was also agreed that when federal oversight was being developed, it should take into account each province's regulations and policies. Consultations with the three provinces have been undertaken over the past few years. During recent consultations with the provinces, the federal government clarified its expectations for oversight. There was general support

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for the principle of depositing moneys into a segregated fund, to demonstrate that financial resources would be available over the long term for all required waste management operations. Although no federalprovincial issue was identified that would preclude federal oversight, each province raised specific concerns about proposed oversight, which federal officials have either addressed or are continuing to discuss. Is Waste Legislation the Way to Go? During earlier consultations with major stakeholders, concerns were expressed about possible overlap and duplication, and about whether any proposed legislation would conflict with the Nuclear Safety and Control Act. It was clarified and emphasized that the proposed legislation would deal mainly with financial and socio-economic issues that were not covered under that act. Moreover, amending the act to include these issues might lead to compromising the AECB on its health and safety decisions. It is vital for the Government of Canada to ensure that its health and safety nuclear regulatory body is not perceived as in a conflict of interest. The government's goal is to ensure that the oversight processes are conducted separately but in an harmonized fashion (i.e., health, safety, security, and environmental aspects under the NSC Act, and socio-economic and financial aspects under proposed oversight legislation). Clear separation of oversight processes is encouraged at the international level, and is enshrined in an explicit clause in the IAEA Joint Convention on the Safety of Spent Fuel Management and on the Safety of Radioactive Waste Management, which Canada ratified in 1998 (International Atomic Energy Agency, 1997). Complementary oversight carried out by separate organizations is not a new concept. For example, the Department of Foreign Affairs and International Trade coordinates interdepartmental reviews on nuclear exports under the Export and Imports Permit Act; at the same time, nuclear exports must be approved by the AECB under the NSC Act. The proposed legislation should address the following obligations: • That nuclear utilities create a waste management organization (WMO). • That nuclear utilities establish one or more trust funds. • That WMO report to government regularly on financial and program plans.

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• That the Minister of Natural Resources be entitled to make an order to require ministerial approval for WMO to access the fund. The legislation should take into account the need for both stringent controls and effective government oversight. Considerations should include the current and potential state of the nuclear industry, the duties and responsibilities of waste producers and owners, the government's responsibilities and waste liabilities, and the concerns of the Canadian public. With respect to public concerns, the government expects that the development of oversight legislation will go far to allay fears that the WMO will conduct long-term waste management activities under no constraints. With respect to industry concerns, the proposed legislation should allow maximum flexibility in the conduct of business affairs. With respect to government responsibilities and waste liabilities, the proposed legislation should allow the government to carry out effectively its oversight responsibilities under federal jurisdiction, while taking care not to allow it to exercise undue control over the WMO. Social Concerns In 1995 the Auditor General highlighted that there have been many delays in finding a solution for nuclear fuel waste, and that these delays were not caused by technical difficulties but rather by various social concerns (Auditor General of Canada, 1995). These concerns were raised again during the environment assessment public hearings held across Canada in 1996-97 on the proposed disposal concept (Canadian Environmental Assessment Agency, 1998). These concerns impressed the panel, which concluded that although it considered the project technically safe, it could not recommend that it go ahead, since broad public support had not been demonstrated. Canada was not the only country experiencing delays. In preparation for the November 1999 international workshop on the 'Disposition of High-Level Radioactive Waste Through Geological Isolation Development, Current Status and Technical and Policy Challenges/ the U.S. National Research Council reported that several countries were experiencing delays (e.g., U.S./Yucca, Germany, the U.K., Canada), and that some had gone so far as to suspend their programs indefinitely (e.g., Holland, Spain) (Nuclear Regulatory Commission, 1999). However, it was also noted that a few countries had encountered some successes (Finland, Sweden, U.S./WIPP). It has become apparent

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that if progress is to be made and delays are to be minimized, social concerns will have to be addressed more aggressively than in the past, with the goal of increasing public confidence. Public Confidence

The Environmental Assessment Panel concluded that AECL had not demonstrated that its proposal for deep geological disposal enjoyed broad public support, and that in its current form the proposal lacked the required level of acceptability to be adopted as Canada's approach to managing nuclear fuel waste. This conclusion led to several questions: what did the panel mean by 'demonstrated/ 'broad/ 'support/ and 'required level of acceptability'? In particular, the latter term caused much difficulty. These questions are also being asked at the international level - for example, the OECD Nuclear Energy Agency (NEA) seems to favour actions that will 'increase public confidence/ rather than bring about a 'required level of acceptance' (Nuclear Energy Agency, 1999). The NEA has concluded that if effective progress is to be made, the public's confidence in the following must increase: • • • • •

technical safety ethical aspects financial aspects and economics operational structures government oversight

The NEA suggests that public confidence can be increased through greater public involvement in decision-making processes, and through a phased approach toward finding solutions to eventual disposal. Public Involvement The importance of public involvement has long been recognized in Canada. In 1988 the House of Commons Standing Committee on Environment and Forestry submitted its report on the storage and disposal of high-level waste (House of Commons, 1988). It put forward fifteen recommendations, which took into account comments received from the public. More than half of these recommendations called for more public involvement in decision-making processes. The government's efforts to consult with the public have been increasing considerably. Nevertheless, in Canada and throughout the world, the nuclear energy

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option has been, and still is, scrutinized intensely by a sceptical media and public. What is new in recent years is that other electricity options, such as hydro and fossil fuels, are increasingly being scrutinized in the same way. Perhaps this will allow for a more balanced public debate to take place. Also, the public is becoming increasingly less satisfied with simply being 'involved' in decision-making processes; it wants to be able to make final decisions itself (e.g., through a legal veto on where repositories will be built). In the years ahead, the challenge will be to involve more extensively interested parties, as appropriate under the Canadian democratic regime. Phased Approach Many countries are developing a phased approach to disposing of their nuclear fuel waste. The Government of Canada adopted this approach long ago and has clearly stated that it has not yet made a decision on the long-term management and disposal of nuclear fuel waste. It has adopted a stepped approach that allows for the reasoned development of the most effective long-term solution for managing nuclear fuel waste in Canada. By taking this approach, the government should be able to move ahead; a 'wait and see' approach is no longer tenable, since it may lead to a time when present storage methods are no longer considered safe and yet no permanent solution has been developed as a result of unwarranted delays. A Key Social Concern: Generational Fairness

With respect to increasing public confidence in Canada and abroad in the deep geological repository option, the single most important issue to address is probably that of fairness, both intergenerational (i.e., this current generation's interests versus those of the next) and intragenerational (i.e., interests among different groups of a same generation) (Nuclear Energy Agency, 1995; Riverin, 1999). The outcome of this debate will lead to technical decisions, for example, whether to store waste or dispose of it, and whether to permanently isolate it or store it in a 'retrievable' form. In Canada, the Environment Assessment Panel on the Deep Geological Concept for Nuclear Fuel Waste was asked to take into account the degree to which we, as a society, should relieve future generations of the burden of looking after our waste (Riverin, 1999). All participants

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in the public review, whether they favoured retrievability or not, recognized this generation's responsibility to relieve future generations of the burden of looking after our waste. They disagreed, however, on what constituted a burden and what did not. The responsibilities of the current generation toward future generations can be viewed from two ethical perspectives. On the one hand, it is considered inappropriate to pass on to future generations the burden of looking after the wastes we have created. On the other hand, it is considered unethical to prevent future generations from looking after those wastes if they choose to do so. These two views were a point of contention between participants at the public hearings where the merits of retrievability were discussed. It should be noted that most national authorities, including the AECB, see issues of nuclear waste disposal as relating more to safety than to ethics. In 1987 the AECB developed the following regulatory statement: For the long-term management of radioactive waste, the preferred approach is disposal. A permanent method of management in which there is no intention of retrieval and which, ideally, uses techniques and designs that do not rely for their success on long-term institutional control beyond a reasonable time ... Where reasonable disposal alternatives clearly exist, those options which rely on monitoring, surveillance or other institutional controls as a primary safety feature for very long periods are not recommended ... This is because methods for ensuring the continuity of controls are not considered very reliable beyond a few hundred years. (Atomic Energy Control Board, 1987)

These ethical/safety questions are currently being debated at the international level, and Canada will be participating actively in developing a future consensus. While Canada has not made a decision yet on the best technical option for the long-term management of nuclear fuel waste, many countries are favouring the deep geological repository option. Most member states of the NEA support this option but also recognize that to gain the necessary public confidence, they will have to demonstrate that they have accepted that geological disposal must be implemented cautiously and systematically, with opportunities for review, and taking into account both technical and public interest concerns. Ultimately, if geological disposal, either in general or at a specific site, is found to be an inadequate solution, it must be possible to reverse the process. And the waste management community must

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show that it is ready for this possibility (Nuclear Energy Agency, 2000). Within the next few years the NEA and other international and national bodies will be closely looking at this issue, with the goal of formulating some generally accepted principles. Conclusions While we acknowledge that a greater effort needs to be made to increase public confidence, it is prudent not to unnecessarily delay progress toward disposal. It would be cavalier to suggest that there is no urgent need to establish the necessary policies, including regulatory and financial, for the long-term management of nuclear fuel waste. While the time frame for setting up an operational long-term management site is long, continued storage at reactor sites will at some point not be appropriate. Pressure to move forward also stems from the desire to relieve future generations of the disposal burden. It is therefore of paramount importance to proceed now with the next steps for the long-term management of nuclear fuel waste. Indeed, the Government of Canada needs to maintain the existing momentum, and wants to make good progress toward a permanent solution for the long-term management of nuclear waste - albeit carefully, democratically, and in a step-by-step manner. Managing Canada's nuclear fuel waste is a significantly large project that will involve $10 billion or more and take place over seventy to one hundred years. The government will assume its federal oversight responsibilities, and expects the cooperation of the waste producers and owners based on currently accepted principles of environmental stewardship. With respect to the long-term management of nuclear fuel waste, the key principle of concern is the 'polluter pays' principle. This principle has been incorporated into many current national environmental laws and international conventions. It has not always been so; in the past, the concept of the 'benefactor pays' often prevailed, and governments around the world have been willing to assume at least part of the environmental bill for various reasons ranging from protectionism to national security. With the 1992 UNEP Rio Declaration, it became very clear that polluters and industry, not citizens, would be held financially responsible for necessary environmental activities. Cooperation by industry will lead to effective nuclear waste management activities that will be in the best interests of both present and

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future generations of Canadians. Canada is considering whether the legislative route, as adopted by many countries, is the way to ensure that this happens. REFERENCES Aikin, A.M., J.M. Harrison, and F.K. Hare. 1977. The Management of Canada's Nuclear Wastes. Report of a study prepared under contract for the Minister of Energy, Mines and Resources. EP 77-6. Atomic Energy Control Board. 1987. Regulatory Document R-104. Regulatory Policy Statement: Regulatory Objectives, Requirements and Guidelines for the Disposal of Radioactive Waste - Long-Term Aspects. Ottawa: Atomic Energy Control Board. Atomic Energy of Canada Ltd (AECL) 1994. Environmental Impact Statement on the Concept for Disposal of Canada's Nuclear Fuel Waste. AECL-10711. Ottawa: Atomic Energy of Canada Ltd. Auditor General of Canada. 1995. Report of the Auditor General of Canada to the House of Commons. Chapter 3. Federal Radioactive Waste Management. Ottawa: Minister of Public Works and Government Services. Brown, P.A., and R.W. Morrison. 1992. Radioactive Waste Management Policy in Canada. Paper by Energy, Mines and Resources presented at Waste Management '92. Tucson, Arizona. Canadian Environmental Assessment Agency. 1998. Report of the Nuclear Fuel Waste Management and Disposal Concept Environmental Assessment Panel. Ottawa: Canadian Environmental Assessment Agency. House of Commons. 1988. High-Level Radioactive Waste in Canada: The Eleventh Hour. Report of the House of Commons Standing Committee on Environment and Forestry. B. Brisco (chair). Ottawa: House of Commons. International Atomic Energy Agency. 1997. Joint Convention on the Safety of Spent Fuel Management and the Safety of Radioactive Waste Management. Vienna: International Atomic Energy Agency, December. LLRWMO. 1999. Inventory of Radioactive Waste in Canada. November. Natural Resources Canada. Natural Resources Canada. 1999. Options for Federal Oversight: Nuclear Fuel Waste Management - Results of Consultations with Stakeholders. Ottawa: Natural Resources Canada, February. - 1998. Government of Canada Response to Recommendations of the Nuclear Fuel

128 Peter A. Brown and Carmel Letourneau Waste Management and Disposal Concept Environmental Assessment Panel. Ottawa: Natural Resources Canada, December. - 1995. Discussion Paper on the Development of a Federal Policy Framework for the Disposal of Radioactive Wastes in Canada. Ottawa: Natural Resources Canada. Nuclear Energy Agency. 2000 (draft). Retrievability and Reversibility with Geologic Disposal of Radioactive Waste: An Overview of the Relevant Issues. Paris: OECD. - 1999. Progress towards Geologic Disposal of Radioactive Waste: Where Do We Stand? An International Assessment by the OECD Nuclear Energy Agency. Paris: OECD. - Nuclear Energy Agency. 1995. The Environmental and Ethical Basis of Geological Disposal ofLong-Lived Radioactive Wastes: A Collective Opinion of the OECD Nuclear Energy Agency. Paris: OECD. Nuclear Regulatory Commission. 1999. Disposition of High-level Waste through Geological Isolation: Development, Current Status, and Technical and Policy Challenges. Discussion paper prepared for the 4-5 November workshop of the U.S. National Research Council. Washington. Riverin, G. 1999. Retrievability - A Matter of Public Acceptance? Reflections on the Public Review of the Proposed Nuclear Fuel Waste Disposal Concept in Canada. International Seminar on Retrievability Issues, Stockholm.

Chapter Seven

Ontario's Role in Nuclear Energy Rick Jennings and Russell Chute

The future of nuclear energy in Canada is an important and timely topic. Ontario, the principle user of nuclear generation and the home of twenty of the twenty-two commercial reactors in Canada, has invested heavily in this technology. In fact, one point of view is that the future of nuclear energy is the future of Ontario's electricity industry. A contrary point of view holds that the nuclear industry represents the past of Ontario's electricity industry. From either perspective, there is no doubt that the nuclear industry is now and will remain a key influence on the electricity industry restructuring process in Ontario. The Electricity Policy Context and Restructuring Ontario has a long history of examining its electricity supply industry. There have been numerous legislative committee reports, royal commissions, and regulatory hearings over the past ninety years. Often these inquiries were stimulated by the need to respond to a particular issue or set of issues. Usually these examinations proceeded without questioning the basic premise that was the foundation of Ontario's electricity industry. That basic premise - that a vertically integrated, Crown owned and controlled monopoly was the best institution to deliver the benefits of electricity service to the people of Ontario - has been overturned. For a good part of the ninety-year history of Ontario Hydro, there was no need to challenge this premise. The evidence to support it was readily available and quite obvious. A quick comparison of average monthly electricity bills for typical customers in Ontario with those of

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similar customers in neighbouring jurisdictions was all the evidence that was needed to justify this faith. But around the mid-1980s, signs began to appear that all was not right in Ontario's electricity sector. End user electricity prices began to rise faster than in other jurisdictions; Ontario Hydro's debt load and debt service costs increased substantially; the utility seemed to be operating autonomously and without restraint or accountability; and balance sheets increasingly were showing 'one-time write-offs and adjustments' of generous proportions. At the same time, technological and ideological shifts opened the doors to new paradigms in both engineering and business. The development of cost-effective, small-scale generation technologies challenged the 'economies of scale' religion of the electricity industry. A general trend in economic policy, initiated by the Thatcher government in the United Kingdom, and followed to some extent by the United States, and embraced with gusto by some smaller economies (Chile, New Zealand), placed more faith in market forces than in regulatory oversight to deliver the benefits of economic efficiency and rational resource allocation. In the mid-1980s Canada abandoned 'made in Canada' oil prices and deregulated its natural gas markets. These early indicators of market-based policies for the energy industry were reinforced in the late 1980s, when the U.K. deregulated and privatized its state-owned monopoly in electricity production and distribution. These actions, and moves in the United States to deregulate telecommunications and transportation, indicated that 'business as usual' was no longer the only way to view the so-called 'natural monopoly' businesses. These developments did not go unnoticed by successive Ontario governments. Political campaign rhetoric and opposition party cries of 'Hydro is out of control' were followed with vows to 'rein in Hydro.' But for all the hue and cry, mostly it was business as usual. Meaningful reform and control of the largest corporation in Canada eluded even the best-intentioned government. Internal restructuring, essentially the shedding of the construction division, took place at Ontario Hydro in the early 1990s. Although this reduced some costs, it did not translate into cheaper electricity for Ontario customers. By the mid-1990s, industrial electricity users were becoming increasingly alarmed by the deterioration in their competitive position resulting from a narrowing of their electricity cost advantage over their mainly American competitors. The calls for serious reform in

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the electricity sector became increasingly strident. In 1995, early in their mandate, the current Ontario government decided that restructuring the electricity sector was a priority. It began a process - still underway - that relied on a tried and true formula: study all the options; select a course of action; prepare legislation to enable the desired structure and outcome; and mobilize the resources to realize the goal. This glib recitation of a bureaucrat's dream project disguised the enormous effort required to achieve the goal, as well as the costs involved. Restructuring on this scale is time consuming, rife with competing interests, and enormously complicated. It requires commitment and courage, as well as confidence that the goal is worth achieving and that real benefits will result. The first step in this process, the examination of the options available, was the appointing of the Advisory Committee on Competition in Ontario's Electricity System, also known as the Macdonald Committee (Ontario, 1996). The committee's mandate reflected its formal title: it was to advise the provincial government on how to transform Ontario's electricity industry from a vertically integrated monopoly into a competitive structure. The recommendations of the committee were wide-ranging and unprecedented and challenged the old monopoly paradigm. With regard to the nuclear business, the Macdonald Report recommended that these generation assets have a single owner but be operated as four distinct, separate stations competing in the new electricity market. The committee recommended that these facilities remain under public ownership but be organized as corporations under the Ontario Business Corporations Act. The second step, the government's response to the Macdonald Committee report, was a White Paper, on electricity reform, titled Direction for Change (Ontario, 1997). This document clearly spelled out the government's strategy for restructuring and presented a somewhat different vision for the future than the Macdonald Report. One of the most important departures from the Macdonald recommendations was that Ontario Hydro's generation assets, including its nuclear assets, would be kept intact under a single corporate owner, the Province of Ontario. However, this policy declaration was not carved in stone. The actual wording leaves open the door for divestiture, partnerships, or other ownership arrangements for the existing Ontario Hydro generation assets at some point in the future. The White Paper was clear on several other issues: legislation to enable the envisioned changes would be tabled quickly; open transmission access would be a fundamental

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requirement; an Independent Market Operator would be necessary; a Market Design Committee would be created to establish the rules and parameters for the new competitive market; the Ontario Energy Board would be reformed to enable it to assume true regulatory responsibilities in electricity; monopoly functions would be separated from competitive ones; there would be simultaneous movement to wholesale and retail competition; the distribution (MEU) sector would be reformed; and financial restructuring would be carried out to establish the successor corporations of Ontario Hydro. Regarding the third step, legislation to enable the reforms envisioned in the White Paper was tabled in the summer of 1998 and passed in the early fall. This comprehensive legislation, the Energy Competition Act, 1998, actually contains three separate pieces of legislation: The Electricity Act, 1998, The Ontario Energy Board Act, 1998, and The Toronto District Heating Corporation Act, 1998, as well as amendments to numerous other acts. The first two laws are the key pieces of legislation that enabled the fundamental reforms of the electricity industry to proceed. The fourth and last step, financial restructuring of the utility, was of particular importance to the successor generation company, Ontario Power Generation, Inc. (OPG). The existing stranded, governmentguaranteed debt was largely attributable to a few very costly generation mega-projects. This debt could have been a significant impediment to the commercial operations of OPG, had the new corporation been required to carry all these liabilities on its books. The financial restructuring announced on 1 April 1999 placed OPG under a capital structure appropriate to an electricity generating company that is expected to operate in a competitive market environment. At the same time, the size of the stranded debt, both total and residual, was established, and appropriate mechanisms for servicing and retiring this debt were proposed. The 'policy transformation' of Ontario Hydro from a vertically integrated monopoly into a cluster of commercially competitive corporations was complete. However, the 'operational transformation' lies ahead, and awaits the declaration of 'market opening/ which is planned for early 2001. A number of challenges remain. Ontario's Goals for Electricity Policy Clearly, the government, the ministry, and the entire electricity indus-

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try did not undertake this massive transformation without some fairly high expectations of real benefits and gains. However, as is often the case with these types of transformations, it is not the tangible, 'can see it now' types of benefits that are most important. Often, it is more important to avoid the nasty consequences of hanging on to an untenable paradigm than it is to earn any immediate benefits. The broad goals of Ontario's reform of the electricity sector can be summarized in a few simple but very important objectives. The first is improved efficiency and a greater focus on costs. Many observers conclude mistakenly that 'competition for competition's sake' is the objective of electricity sector restructuring. This notion is incorrect. Competition is a means to achieve the objective of increased economic efficiency in the production, transmission, and distribution of a commodity. In this particular case the commodity is electricity. Electricity as a commodity is a relatively new concept in our economy. Electricity is often perceived as a service. But in the restructured industry the lines between 'commodity' and 'service' are sharply drawn. There is a service component to virtually any good we purchase on a day-to-day basis, and the same with electricity. The final price of the commodity will include many non-commodity elements. This view of electricity as a commodity is a key concept in reforming this industry. A commodity is a generic, undifferentiated product that can be produced readily and sold easily to a large number of customers in standardized quantities. Electrical energy, which is basically a collection of electrons, fits this description well. For many years we have combined the electrons with a whole bunch of other services (voltage regulation, reactive power, operating and standby reserves) that, although essential for the delivery of power and the reliability of a transmission system, are not commodities. Consumers bought a whole lot of other 'things' when they paid the electricity bill. Separating the commodity from the services allows buyers and sellers to establish a marketplace that focuses on producing power at the lowest possible cost. Prices, specifically the prices of electric power, become a very important signal for both sides of the market. Existing generators will be able to evaluate the costs of operating against the risks of not selling power and submit offers to sell that balance these trade-offs. Potential generators will be able to assess projects on commercial terms and assume the risks of their investments. Customers will be able to evaluate their costs of power in both absolute and relative terms and make decisions as to which production

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technologies will enable them to achieve their budget targets. However, not all the electricity industry lends itself to competition. The 'wires' services - transmission and distribution - are indispensable to an efficient electricity system but are considered by most experts to be 'natural monopolies/ These services require a different type of driver to achieve efficiency improvements and a regulator with the power to enforce service standards and establish compensation levels for the costs incurred. Performance-based regulation (PBR) is used extensively in regulated industries to provide incentives to reduce costs while maintaining acceptable service standards. The fundamental approach of PBR is to force cost reductions through 'benchmarking' - that is, best-practice comparisons - and a formula that provides for productivity increases when annual tariffs are being established. Generally, when firms are able to increase productivity beyond the formula, shareholders retain the proceeds. Customers benefit from the formulaic reductions in tariffs. Other elements of restructuring will further tighten the focus on efficiency and cost reduction. For example, the Independent Market Operator (IMO) will be an independent market maker and transmission system operator, and will ensure open access to the transmission system as well as fair market procedures for buyers and sellers. These fair market practices will facilitate maximum participation in the IMO-run wholesale spot market, thus contributing to efficient price discovery and transparency in the commercial buying and selling of electricity. Licences and rules compliance will ensure that all market participants fulfil their obligations and compete fairly; this will reinforce the integrity of the wholesale spot market. The second important objective of restructuring is to ensure the reliability of the electricity delivery system, including generation, transmission, and distribution. The IMO will have a central role in this, as the operator of the transmission system and the agency for defining and enforcing the minimum standards for connecting to the transmission network. Both operations and equipment will be under its purview. For the sake of ensuring that its standards are reasonable and do not restrict market participation by imposing excessive costs, the IMO will be accountable to electricity market participants through its board of directors, and will be liable for its actions. The IMO will also enforce NERC (North American Electricity Reliability Council) standards for the operations of connected facilities and for the interconnects with other transmission systems and equipment.

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The financial reliability of market participants will be another important feature of the electricity market. The IMO will require bonds, indemnities, and creditworthiness tests to make certain that market participants can meet their obligations without imposing costs on other market participants. Finally, the IMO and the OEB will share responsibility for the longer-term reliability of the electricity system. On a regular basis, the IMO and OEB will review transmission capability, supply adequacy, and system expansion plans to ensure that the integrity of the electricity supply system is maintained and that a high degree of operational reliability continues. The third major objective of restructuring is to secure market-based investment in new generation and related facilities and services. New investment stimulates employment and income growth, which supports the long-term expansion of Ontario's economy. New investment also supports another related goal - keeping Ontario's industries and services competitive in an increasingly competitive world. Ontario cannot afford to pass up the benefits of increased efficiency and reduced costs. Other nations are restructuring their electricity industries. For the government to ignore this would be irresponsible: it must respond with a strategy of its own. A fourth fundamental goal of restructuring is responsible environmental management through the mechanism of market-based institutions and consumer choice options. In the new market, consumers will be able to choose 'green' electricity suppliers based on portfolios of generation, prices, and services that meet their standards. Information about emissions in a standardized form will be available to consumers so that they can make informed choices in the market. Also, an emissions trading system is expected to be in place to encourage the adoption of least-cost solutions for emissions reduction. These four goals are the major reasons why Ontario chose to embark on this major undertaking to reform and restructure its electricity system. Nuclear energy has a major role in this restructuring, as it provides about half of the province's total electricity. Reform of the industry cannot be considered without reform of the nuclear business as well. Structure of the Industry and Ontario Hydro In reforming the electricity industry in Ontario, the government focused on the incumbent utility. It was Ontario Hydro, a government-

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controlled corporation, that was most directly amenable to policy direction and control compared to private-sector participants and the municipal electric utilities (MEUs). The structural reform of this vertically integrated utility required a clear delineation of the products and services provided by it. It was possible to make a rough categorical split on the basis of whether the product or service could be provided efficiently by competitive, or contestable, market structures, or whether a streamlined, regulated monopoly was the better model. Using these broad categories, it was clear that declines in fuel prices - especially natural gas - and improvements in smaller-scale generation technologies made generation a competitive activity. Increased conversion efficiencies in natural gas turbines and combined cycle units helped reduce the economies-ofscale barriers to such projects, which could be located closer to load centres, and could be sized appropriately to meet incremental demand growth. The smaller size of generation units, and their lower associated capital costs, and the reduced environmental impacts of these new facilities, opens opportunities for merchant plants, distributed generation, and co-generators. These technological advances also make alternatives to the incumbent utility commercially viable. These alternatives include different owners, different operators, and different sites. To prepare the incumbent utility for this new competitive environment, the government established a separate generation company. Ontario Hydro's generation facilities and functions were transferred to the new, Crown-owned corporation, OPG. The wire-based services of transmission and distribution are considered to be functional monopolies, although they need not necessarily be owned by a single corporate entity. The ISO (independent system operator) model envisions the coordinated operation of the transmission facility (including dispatch of generation), but with no limitations as to ownership of the system. In the United States, ISOs operate interconnected transmission systems within a particular region and with multiple owners. In Ontario we have a single owner for transmission, with some notable exceptions such as Great Lakes Power and Niagara Mohawk Power. But ownership does not define the monopoly function - rather, the service defines the monopoly function. As long as electricity is moved by a specific point-to-point technology like wires, transmission will remain a functional monopoly. In the future, satellite or microwave

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transportation of power could make transmission a contestable service, but we are not there yet. The actual selling of power at the wholesale and retail levels is obviously a contestable or competitive function. This distinction between the commodity function, power, and the service function, the transportation and delivery of that power, required that assets and responsibilities be separated in order to prevent cross-subsidization from the regulated to the competitive functions. For this reason, the transmission and distribution functions of Ontario Hydro have been separated from the retail functions, but have remained within one corporation, Ontario Hydro Services Company (OHSC). The OEB will determine what type of separation within the corporation will constitute adequate protection against cross-subsidization and unfair competitive practices. A similar structure is expected to prevail for the distribution and retail functions within municipal utilities. Three other corporations have been created from the incumbent utility: the Electricity Safety Authority will be responsible for electrical inspections and safety code enforcement; the Independent Electricity Market Operator will be responsible for running the competitive spot market, dispatching generation to meet expected load, administering the market rules, operating the electrical grid, and advising the OEB on future system expansion requirements; and the Ontario Electricity Financial Corporation will assume the stranded debt liabilities of Ontario Hydro and will administer the servicing and retirement of this debt by collecting dividends, proxy taxes, and special charges. The generation sector will be significantly affected by restructuring. The shift from the 'cost determines price' mode of business to the new dynamic of 'price determines cost' is a fundamental change. This change is likely to have significant repercussions within both OPG and the nuclear generation division. The Impact of Competition on Generation Business The competitive spot market for power that is embodied in the Market Design Committee's recommendations, and has been accepted by the government, is a fundamentally new environment for the generation business in Ontario. A truly competitive market imposes a whole new set of risks and rewards on utility managers, and forces a rigorous evaluation of operational decisions, and ruthlessly emphasizes the bottom line. Such a market is designed to discover the value of power

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through a price determination mechanism that is based on the free interplay of buyers and sellers, and provides clear rules to govern their behaviour in the market. This design is close to the theoretical construct of a perfectly competitive market - a model that is often taught in Economics 101 but seldom realized in practice. However, in the case at hand this is not a fanciful construct that will operate in reality far differently than in theory. When some basic conditions are met, price determination in this market should be based on fair, transparent, and open expressions of what power is worth to buyers and what sellers are willing to accept to provide that power. In theory and in practice, provided that there are enough independent buyers and sellers, power prices will be determined by the marginal cost of production. More correctly, the market price for power will be the offer price to sell of the last unit of energy needed to 'clear the market' - that is, the last unit of energy to meet the demand at that time. The time dimension is important because the value of power will fluctuate significantly as demand and supply rise and fall during a normal day's operations. Because electrical power is difficult to store, increased demand is met by adding more generation. In an integrated utility with a number of generating units, supply is added according to availability and cost considerations, but the price of power represents an average of these individual unit costs. In the competitive market, a discrete price will be available at all times on the spot market. Price signals will be exact and will reflect market conditions. Generation operators will need to be aware of market conditions, and will need to develop bidding strategies to maximize revenues and profits. Unplanned outages and failing to be scheduled will have serious 'bottom line' consequences. The price signal will also convey valuable information to prospective investors. Investment will be a market-based decision that depends on expected price paths and demand growth and on the marginal costs of production. The generation type, technology choice and capacity will be driven by these market assessments and by decisions about what type of generation business to be in - peaking plants, baseload, or midmerit. In a competitive spot market, operational decisions become important business decisions. The costs of 'ramping up and down' and of maintenance outages become key business decisions. 'Real time' market information acquires new value and importance, and operational planning and supply contracts with loads are used to offset market

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risks. The competitive market also gives rise to some new products and additional markets. Futures and derivatives markets provide buyers and sellers with mechanisms to reduce market risk and exposure, while also providing additional liquidity. The impact of the competitive market on nuclear generating facilities is generically the same as for other facilities, but there are also some unique concerns. Nuclear plants have low marginal costs, and this makes them ideal baseload plants and potentially very profitable. The level of profitability will depend on achieving high-capacity factors. Turnaround times for refuelling and maintenance, plus rapid recovery from planned and unplanned outages, will determine the bottom line. The pricing concerns of nuclear operators are less critical than those of mid-merit or peaking plant operators. Nuclear plants should seldom be 'on the margin/ so most of the time they will not be setting the system price. In essence, they will be price takers and will always submit offers to sell that are certain to be accepted. The ultimate sin of the nuclear operator will be to try to 'game' the market by submitting offers to sell above the marginal cost of production and then have another, lower-cost operator displace them in the merit order of dispatch. Even one such mistake would be extremely costly. To protect against such occurrences, nuclear plant operators may submit very low offers to sell around the clock. They may even offer power for free to avoid the high costs of shutdown if there are a number of competitors with similar cost structures in the market at the same time. Critics of this market restructuring often cite decreased attention to safety in nuclear operations as a significant risk. The premise is that 'bottom line thinking' will drive operators to cut corners to reduce costs, and lead to a greater likelihood that accidents will occur. These are false concerns and an example of faulty logic. First, the 'bottom line thinking' in these arguments gets the incentives reversed. No rational nuclear facility operator would risk even a short-term shutdown from either a regulatory order or an avoidable accident. The bottom-line costs would simply be too high. If anything, competitive markets should increase the awareness of the costs of shutdown, thus promoting additional safety awareness and more careful training of nuclear operators. Second, these arguments ignore the existence of a very strong regulator with sufficient authority to enforce any level of safety compliance deemed in the public interest. Up until now, no restructuring plans

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anywhere in the world have included reducing nuclear safety regulation as an objective. It is highly unlikely that any restructuring plan that did consider reduced nuclear safety as an objective would withstand even minimal public scrutiny. The Impact of Competition on Nuclear: The Operator's Perspective As stated earlier, nuclear generating facilities are low marginal cost plants, make ideal baseload suppliers, and are potentially very profitable. In general, the operator's perspective on nuclear facilities is congruent with the shareholder's - that is, keep plants operating at high capacity factors, avoid costly outages, and adopt conservative bidding strategies. How these operational objectives are achieved is a primary concern of the operator. At the present time, only twelve of twenty reactors in Ontario are operating. Two stations, Pickering A and Bruce A, with a total of seven units, have been laid up for refitting, retraining, and rehabilitation. This was an expensive decision - expensive to Ontario Hydro's bottom line, expensive in lost opportunities to export power, expensive in additional emissions from coal-fired replacement power, and expensive in the impact on the morale of the nuclear station workforce. These plants may return to service, but there are hurdles to clear before they do. Undoubtedly, the decision whether to restart any of these reactors will be multi-faceted and very complicated - too complicated to discuss in great detail in this chapter. But there are some principles that will have to be followed when the decision whether to restart is made. First, safety is the highest priority. The CNSC is charged with ensuring that these plants meet their safety standards before they return to service. This is as close to a certainty as you can get in this business there is no alternative position that is acceptable to the public, the shareholder, or the operator. Second, environmental concerns have a high priority. This is a corollary of the safety issue, and the CNSC has signalled that these plants will require an environmental assessment before they are restarted. The extent of this assessment is still being determined, but it will be thorough and extensive, and - if an approval to restart is given - will satisfy reasonable people that environmental concerns have been addressed in a responsible manner. Third, decisions to restart these plants must be made on a commercial basis and must take into account all the associated costs and risks. The market conditions facing these plants will have to be evaluated carefully, as

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will the relative costs of the individual units and the bottom-line impacts of restarting them. In sum, this decision will require a detailed, thorough, and critical business plan that considers all aspects of the decision and presents options and alternatives to decision makers. The decision to restart the laid-up plants is essentially a short-term one that has immediate ramifications for how OPG performs in the near future. A longer-term decision relates to decommissioning and waste disposal. These concerns were thoroughly discussed in the restructuring discussions between the provincial government and Ontario Hydro. These discussions continue, but the principles guiding decisions around these issues are unchanged. Waste disposal - relating mainly to spent fuel and other high and low level waste materials - is a shared responsibility between OPG and the government of Ontario. Ongoing discussions have focused on how much each party will contribute financially to the chosen disposal facility or technology, and on how cost escalation risks will be apportioned. Decommissioning is the operator's responsibility. At the present time, the costs and liabilities associated with decommissioning are uncertain. Regulatory requirements are also uncertain, and actual experience with decommissioning is limited so the financial bounds of addressing this problem are fluid. However, as with most issues associated with nuclear technology, the proposed solutions and courses of action are likely to be expensive, so the sooner that OPG plans and accounts for these costs, the better from an operational standpoint. One other issue that has raised some concerns is that of partnerships in the nuclear generating business. OPG recently announced that it has restarted its search and evaluation process for potential investors with Salomon Smith Barney, a New York-based investment banking firm. Nuclear experience and expertise, including 'turn around' talent, is vested in a few well-known firms that operate in several markets around the world. The Ontario government has stated on many occasions that public/private partnerships in the electricity industry are a welcome development. The government's principle concern is that these proposals be evaluated on a commercial basis, with adequate consideration given to the costs, benefits, and risks of any proposed arrangement. Market Design: Impacts on Nuclear Assets In this chapter we have emphasized at several points that 'commercial'

142 Rick Jennings and Russell Chute

considerations should govern decision making in the generation business about operations, investment, and partnerships. Before these types of commercial decisions are made, the nature of the commercial environment in which OPG will operate needs to be understood. In particular, the environment for nuclear operations should be examined closely. The market design recommended by the MDC follows closely the general outline in the White Paper. The recommended basic market design is a 'hybrid market' that permits both bilateral contracts and a spot market, which could be considered a residual market, depending on the strength of bilateral activity. Some other jurisdictions have opted for more specific direction in the market design by requiring a mandatory spot market. This hybrid design offers a degree of flexibility to OPG's operations. OPG can contract with wholesale customers to supply their needs while using the spot market for power that is surplus to contract requirements. The hybrid market gives OPG some financial flexibility as well, by providing it with the opportunity to take advantage of market conditions to maximize revenues or spread risks. The MDC also recommended that competitive markets be established for capacity and ancillary services. These additional markets would increase the opportunity for OPG to operate its assets in a more flexible manner, increase the opportunities for profit, and allow a generator to realize returns on surplus capacity without affecting prices in the energy market. One particular aspect of the MDC market design that directly affects OPG's operations and business plans is the Market Power Mitigation Agreement. This agreement is the result of complex negotiations between the MDC and OPG. Very early in the MDC process, market power was identified as a major issue. The reason why is self-evident the generation sector is dominated by OPG, which has over 80 per cent of provincial generating capacity. Without some controls, OPG could use its market power to force market prices well above the competitive equilibrium by strategically withdrawing generating capacity from the market. The MPMA is a very detailed agreement. However, the sections most relevant to the nuclear generation business deal with price caps and rebates, decontrol, and the expansion of competition through increased intertie access. The price cap provisions of the MPMA apply to 90 per cent of OPG's generation as determined by a detailed schedule of station-by-station

Ontario's Role in Nuclear Energy 143

projections of power production. The price cap was established as an average price of 3.8 cents per kilowatt-hour. There is a lot of extra detail in the MPMA that deals with how the average price is to be computed, how rebates are to be calculated, and what types of actions and market developments can trigger various adjustments to the rebate and averaging formulas. With respect to the nuclear facilities, the important point is that the price cap is well above the marginal cost of nuclear power. The operational impact on these facilities should be minimal - other generation can more readily cycle to adapt to market conditions and respond to market price movements. The decontrol provisions of the MPMA focus on two distinct periods. There is a short-term provision for decontrolling 'price setting' plant, with a time limit of forty-two months from the date of market opening. This provision requires OPG to transfer control of enough generation capacity that by the end of this period it has just a 35 per cent share of price-setting capacity . Nuclear plants are not considered to be within the price-setting portfolio. Regarding the long term, the MPMA specifies that within ten years of the market opening, OPG will decontrol sufficient generating capacity that it has just 35 per cent of total generating capacity. Depending on total capacity additions and decisions around the return of the laid-up nuclear facilities, nuclear capacity in Ontario could account for 35 per cent of Ontario capacity. However, limit restrictions on the transfer of control to other parties may prevent a 'one owner' transfer of control over all nuclear plants. The MPMA blocks OPG from transferring control of its facilities to owners or operators that already control - or, by virtue of the transfer, would control - 25 per cent of the total generating capacity in Ontario. This provision is in place to prevent the transferring of market power from OPG to another generator. If a prospective transferee has no additional capacity, then a nuclear-only transfer may be within this provision, depending on additions to capacity made during the intervening period. The interconnect provisions of the MPMA are intended to make it easier for out-of-province generators to compete in the Ontario market and thus offset OPG's overwhelming presence. The MPMA requires OHSC to undertake 'best efforts' to expand intertie capability by 2000 MW, or 40 per cent, within thirty-six months of market opening. There are also provisions to prevent OPG from monopolizing import capacity. The revenue implications for OPG of the MPMA are favourable.

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Generation revenues at the price cap are estimated to be over $4 billion per year, not including ancillary services, capacity payment revenues, and additional revenues from the 10 per cent of generation not under the price cap. These revenues should be sufficient to meet all operating costs. Impact of Competition on Nuclear Generation: The Shareholder's Perspective The competitive generation market will open new opportunities for OPG to operate in a commercial, profit-seeking manner. However, the shareholder, the Ontario government, is not a typical investor with a single objective for managing OPG (i.e., enhance shareholder value). As a government, it has broader concerns than one company's bottom line; it also needs to consider costs in other sectors that OPG affects for example, the environment. In many respects, these concerns should coincide with those of the management of a well-run corporation participating in a competitive business. Investment has been mentioned several times in this chapter. That is because it is so important to this industry and has been the source of so much concern in the past. In the competitive market that nuclear generation will operate in, investment signals will be one of the most important considerations. Market prices will be a key input in investment decisions. Also, the market-based investment environment will change the rules of the game when it comes to investing in nuclear assets. First, government guarantees of borrowing will be gone - capital financing will be on the basis of full commercial terms and market rates of return. Second, capital projects will be subject to a full risk assessment, including assessment of the impact of competitive market conditions on future cash flows. As a shareholder, the government will want its equity position to receive a market-based rate of return. To that end, it will require credible business plans for operations and investment. OPG's board of directors has already been given firm direction as to the shareholder's expectations and will be expected to govern accordingly. Cost control is also a concern. In the past, costs often escalated well beyond projections and plans. Undoubtedly, some of these increases were justified or caused by circumstances beyond the control of Ontario Hydro. But clearly, some were not and were the result of a 'rate base' mentality that permitted virtually open-ended cost escalation. Although the mar-

Ontario's Role in Nuclear Energy 145

ginal costs of nuclear generation are relatively low, in a competitive market profitability will suffer if non-marginal costs are not controlled. To minimize impacts on the bottom line, OPG may have to consider benchmarking or some other form of best practice cost control. OPG may have to consider positive and negative incentives for management to improve performance and meet its rate-of-return targets. And it may have to extend these incentives to non-management staff to encourage behaviour and performance that will enhance profitability, improve productivity, and increase competitiveness. The shareholder will always be keenly interested in the safety, reliability, and environmental performance of the nuclear plants. Safe operation of the plants is the primary concern, and OPG will need to cooperate closely with the CNSC to ensure that all safety requirements are met at all times. Downtime at these facilities is extremely expensive; the failure to maintain high unit-capacity factors has serious financial implications for cash flow and for returns to the shareholder. The government has stated frequently that it supports the injection of private capital and expertise into the electricity industry. To this end, it has encouraged OPG to seek partners to help enhance the value of the existing nuclear plant. Often a new perspective will lead to new ideas and improvements. Concerns about nuclear liability have often been cited in the past as a barrier to developing partnerships. Currently, nuclear liabilities are capped at a fairly low level. However, the Nuclear Liability Act is presently under review. Expectations are that the revised statute will provide greater certainty to prospective partners and lead to serious joint ventures and partnerships. Finally, the Ontario government is well aware of the economic benefits of nuclear R&D. OPG will have a business relationship with Ontario Power Technologies, the research arm of the old, integrated utility.Research should be funded on a commercial basis and be subject to the same business plans and risk assessments as other investments. The possibilities for nuclear-based research are many. Waste disposal and storage will require a technological solution, and in this regard there is a strong possibility of partnerships with other researchers. Worthwhile research can also be done to enhance the performance of existing plants through improvements in refuelling methods and technologies. Finally, metallurgical research to lengthen the life of pressure tubes, fuel channels, and steam generators could add years to the useful life of existing facilities and improve the economics of new investments.

146 Rick Jennings and Russell Chute Conclusions

The restructuring of the electricity industry in Ontario will likely prove to be one of the most significant economic events in the history of the province. That being true, it will also be a milestone in the evolution of Canada's nuclear industry. The next few years will be an interesting time to be in the nuclear generating business. Challenges that were not contemplated when this industry was developed in Ontario will need to be confronted and overcome if the nuclear industry is to survive and thrive in the twentyfirst century. Nuclear operators will need to adopt new modes of thinking, and respond to market conditions and opportunities with a whole new set of decision-making parameters. OPG's nuclear division employees will need to adapt to changing priorities while maintaining the high operating standards required by both the AECB and their shareholder. And the shareholder will be insisting that commercial considerations be given a high priority in operations and strategic planning. Clearly, a great opportunity is awaiting Ontario's nuclear industry in the competitive electricity market. Like most opportunities, it comes with risks and rewards arising from the decisions that are made and the paths that are chosen. These decisions and paths will do much to determine Ontario's economic future in Canada and the world. REFERENCES Ontario. 1997. White Paper. Direction for Change. Toronto: Minister of Energy Science and Technology. - 1996. A Framework for Competition. Report of the Advisory Committee on Competition in the Ontario Electricity System to the Ontario Ministry of Environment and Energy. Toronto: Government of Ontario.

Chapter Eight

The Future of Nuclear Power in a

Restructured Electricity Market Donald N. Dewees

For an economist, the future of nuclear power in a restructured electricity market depends in the first place on the economics of nuclear generation in such a market.1 If we regulate the environmental effects of nuclear and non-nuclear forms of generation in order to achieve the right balance between cost and environmental protection, then the decision about the operation, refurbishment, or construction of nuclear units or any other units should depend primarily on the cost of the power from that operation or construction in comparison with the cost of other competing sources of power. This is a big 'if of course, and I would not want to argue that the government has always found the right balance in the past. Those who believe that existing regulations have not fully incorporated the environmental costs of electricity generation into the overall costs can argue that the underregulated form of generation should be subject to some form of penalty - perhaps an 'environmental adder' to represent social costs not captured in regulation. In this way, even those who are not satisfied with existing regulations will still be able to participate in an economic evaluation of alternative modes of generation. What does electricity restructuring have to do with the future of nuclear energy? In principle, restructuring means taking power away from monopolists and regulators where feasible and giving it to the competitive market. This means eliminating the existing monopoly on generation and allowing competitors to invest in generation subject only to market forces and transmission capacity. The 1997 government White Paper (Ontario, 1997, 13) contends that decisions whether to invest in generation should follow sound business principles; in other words, the future of nuclear power should not depend on government

148 Donald N. Dewees policy toward nuclear power, nor should it depend on the relative clout of the nuclear division within the bureaucracy of Ontario Power Generation (OPG), the successor to Ontario Hydro. Rather, that future should depend on how investors and bankers assess the projected costs, revenues, and risks of proposed nuclear projects. Restructuring also means that the transmission system and the distributors must provide open access so that power can flow from competitive generators to end users. In a regulated market, the monopoly utility invests in generation and the regulator allows it to earn a reasonable return on its assets. If new capacity is more expensive than existing capacity, the regulator allows rates to rise to cover the cost, unless the regulator believes that some of the cost is not reasonable and should be disallowed (Joskow, 1997, 125). If the new capacity is less expensive, its commissioning should reduce electricity rates. In a restructured market, when new capacity comes on line it bids into the market or sells under private contracts for whatever price it can get. So an evaluation of the economics of nuclear power in a restructured market is quite different from that same evaluation in a regulated market. How has restructuring proceeded in Ontario? In late 1995 the Ontario government appointed the Advisory Committee on Competition in Ontario's Electricity System, chaired by the Honourable Donald MacDonald and more conveniently known as the MacDonald Committee, 'to study and assess options for phasing in competition in Ontario's electricity system/ That committee reported in 1996, and recommended the establishment of wholesale electricity competition, with retail competition to follow as soon as possible (ACCOES, 1996 iii.) In November 1997 the government issued a White Paper, Direction for Change, which set out a plan for introducing full competition into Ontario's electrical system in the year 2000 (Ontario, 1997). In early 1998 the government appointed the Market Design Committee to develop recommendations for the design of this market; it received four reports from this committee roughly at the end of each quarter in 1998. The MDC completed its work and made its final recommendations in January 1999; responsibility for refining and implementing those recommendations then fell to the government, the Ontario Energy Board, and the Independent Market Operator, which was to administer the market rules. This chapter discusses the status of restructuring in Ontario and focuses on the recommendations of the MDC, of which I was vice-chair.

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The elements of a restructured electricity market in Ontario are similar to those in many other jurisdictions. They include the following: • An independent system or market operator (ISO or IMO) dispatches generation in merit order and establishes a spot price, thereby ensuring supply. • Generators bid their units and invest according to private profit calculations. • The transmission owners and operators keep the transmission wires operational, charge a regulated tariff, and invest according to private profit calculations or orders from the regulator. • Distributors keep the distribution wires operational, charge regulated rates, and provide a standard price to customers who have not chosen a competitive retailer. • An environmental agency regulates the environmental aspects of the electricity system, including air emissions from generators. • Parties can enter into contracts for the purchase or sale of electricity at the wholesale and retail levels. This chapter reviews the operation of the wholesale market, which determines who generates power and the spot price. It looks at the rules for investment in generation capacity, including investment in the renovation or life extension of existing plant. It looks at retail competition to see how end users have access to generation of any type. It examines environmental regulations that may significantly affect the price of price-setting thermal plants. It considers evidence regarding the future price of electricity - a price that is crucial to any generation investment decision. Finally, it assembles these elements to assess the principal factors influencing the future of nuclear power in Ontario. The Wholesale Market In a regulated monopoly electricity regime, the regulator approves rates for electricity consumers. These rates are designed to cover reasonable utility costs and a reasonable rate of return on assets. Typically, the rates are set annually. In Ontario, the Ontario Energy Board (OEB) has had the authority to review Ontario Hydro's rate proposals and to hold hearings on them, but in practice the rates have ultimately been set by Ontario Hydro, not by the OEB. This procedure is quite unlike the one in most American states, and presumably reflects Ontario

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Hydro's status as a Crown corporation, which should make it more attentive to the public interest than an investor-owned utility. Ontario Hydro's mandate has been to produce 'power at cost/ so the result should be similar to that in an American jurisdiction: rates cover all costs, including capital costs. In a restructured electricity market, wholesale prices are set by competition rather than by regulation. In the Ontario market, the Independent Market Operator (IMO) accepts bids by generators to supply electricity and ancillary services for each hour of the day, on a dayahead basis. The IMO accepts bids in merit order, starting with the lowest bids and moving up to higher-priced bids until the anticipated demand is satisfied. Wholesale customers can submit demand bids, which are offers to reduce their demand if the price reaches specified levels. Once the IMO has determined the market-clearing bids, it directs the generators whose bids are accepted to run as bid, and announces the market-clearing price. All generators that are so dispatched receive the market-clearing or 'spot' price for the amounts they actually generate. Wholesale customers pay this spot price plus any 'uplift' specified in the market rules. Participants in the wholesale market can operate in the pool as described above, or they can operate on the basis of 'physical bilateral' contracts. Physical bilateral contracts are agreements between individual buyers and sellers of electricity regarding both quantity and price, and are netted out of the IMO settlement process. Parties to a physical bilateral contract notify the IMO of the amount of energy they have scheduled between them, and where it is to be injected and withdrawn from the transmission grid, and the price at which they would vary these amounts. The IMO dispatches the generation as scheduled and subtracts such scheduled quantities before doing the settlement calculations for payments to generators and charges to loads. In this way, the financial transactions for these amounts bypass the IMO, except that deviations from scheduled quantities are settled at the spot price and the IMO may levy any uplift charges applicable to all energy. The Ontario electricity market is a hybrid market with a voluntary pool and physical bilateral scheduling. Of course, pool participants can enter into financial contracts with each other that will be settled as differences from the spot price. Thus, wholesale participants can buy and sell at the spot price, or at any other price they choose, and settle either through the IMO (with contracts for differences) or outside the IMO (except for deviations). The IMO is responsible for accepting bids and

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for dispatching generation sufficient to satisfy all loads at all times; in the process, a spot market price is established. In such a market, if generation is competitive, the profit-maximizing strategy for any generator is to bid its short-run marginal costs, just as the profit-maximizing strategy for any competitive firm in general is to set output so that price equals marginal cost. The result is a spot market price that reflects, every hour of every day, the short-run marginal cost of the most expensive plant that must be dispatched to satisfy the load. This price will vary hourly, and rise as load increases or as available generation capacity falls. The price should be higher during the day and on weekdays than at night and on weekends because of business demand; it should be higher in winter when heating demand peaks, and in summer when air conditioning demand peaks; it should be lower in the spring and fall when demand is lower; and it should be lower in the spring when the flow of water available for hydroelectric generation is greatest. Nuclear plants have high capital costs and low operating costs and are not well adapted to rapid changes in output. The preferred mode of operation for a nuclear plant is to bring it up to its capability and then run it at that output continuously. This means that in the very short run, marginal costs are very low - the cost of shutting down for a few hours may exceed the cost of operating at full power for that time. This is why nuclear plants may bid a price close to or equal to zero: it indicates that they are prepared to operate at their capability regardless of the market price resulting from the bidding process. This discussion of the wholesale price has dealt with a single price for the entire province of Ontario. However, the transmission grid can be congested at times of peak usage, and this congestion causes the value of generation to vary with location. If a transmission constraint exists between zone A and zone B because of the flow of electricity from A to B, low-cost generators in A may be constrained off, and more expensive generators in B may be dispatched. In this situation, the value of electricity in B will be greater than in A. In consequence, the MDC has recommended that nineteen months after the market opens a system of locational pricing be established so that the price of electricity will reflect transmission constraints. This will provide incentives to locate new generation and new loads (MDC, 1998b, RM 3-6, p. 3-18). This locational pricing will likely cause only small differences in the annual average price in various locations, but even these differences may have some effect on investment decisions, including invest-

152 Donald N. Dewees ments in nuclear power. Over the long run, locational pricing should encourage the location of new generation in areas where there is insufficient generation capacity, and should reduce the revenue of existing generators in areas with excess capacity and in areas that are isolated from high-demand areas by constrained transmission capacity. Locational pricing may also encourage investment in transmission capacity in areas where congestion is more common. The price to the consumer must include a charge for use of the transmission network. Setting a transmission charge efficiently is difficult because the marginal cost of sending electricity over an existing transmission network is approximately zero unless the network is seriously congested, so marginal cost pricing cannot recover the sunk cost of the existing network. The solution the MDC has recommended for Ontario - at least for the first few years - is average cost pricing, under which the OEB would approve a transmission tariff that covers the fixed and operating costs of the existing transmission operators. The tariff would be uniform for all customers in the province. During this time, investment in new transmission facilities would be centrally planned. However the MDC has also recommended that after congestion pricing for electricity is introduced, the OEB consider a new system for pricing the transmission system that would also provide incentives for investor-driven new investment in transmission capacity. To avoid uneconomic bypass of the transmission system, if new generation is built to serve local customers ('embedded generation'), those customers will pay for their electricity consumption on a 'gross load' basis, as if the load served by the new generation used the transmission system (MDC, 1998c, RMs 2-1, 2-2, p. 2-11). In other words, if Acme Ltd. consumes power at the rate of 10 MW and builds a 5 MW generator on site, it will still pay transmission charges on 10 MW of power. These recommendations remove the incentive to build imbedded generation that would have marginal costs higher than the marginal cost of the existing generators (the spot price) but lower than the spot price plus the transmission charge. This means that existing generation plants, including nuclear plants, will compete on a level playing field with new generation plants, whether they are located on the grid or within the service area of a distribution company. Generation Investment In a monopoly electricity market the utility is responsible for ensuring

Nuclear Power in a Restructured Electricity Market 153

adequate capacity within its own plant after considering the available excess capacity in adjoining utilities. In Canada, where most electric utilities are owned by provincial governments, there may have been some temptation to encourage new generation investment to 'create jobs/ with the cost appearing in electricity prices, not taxes. Investments in new capacity are paid for by customers, as their costs are rolled into the cost base when the capacity comes on line, subject to review of the reasonableness of the investment by the regulatory agency. In Ontario, the ultimate responsibility for setting rates has resided with Ontario Hydro, with the costs of new investments simply rolled into the overall cost of electricity. As a result, when the Darlington plant was completed and brought into service between 1990 and 1993, bulk power rates increased by a cumulative total of about 28 per cent over a four-year period.2 The final cost of the plant was much greater than the original cost estimate, and slow economic growth meant that much of the capacity was surplus when it became available. The 1997 White Paper explicitly called for investment decisions to be made in a more business-like fashion: History has shown that competitive businesses invest more carefully than monopoly businesses. They manage costs and risks more carefully. They choose their priorities rationally and thoughtfully to yield the highest returns. This is the kind of investment behaviour that should predominate in the future electricity industry in Ontario. They serve their customers better and they maintain competitive prices because of the threat of competition. An important objective of reform is to ensure that new supply decisions - including replacement supply decisions made over the 1998-2000 period - are made on businesslike grounds, and subject to normal market tests. A competitive market will impose more discipline on investment decisions and will help the industry avoid both the overbuilding and asset impairment that occurred in the past. (Ontario, 1997,13)

The MDC's market design embraces this philosophy, leaving generation investment decisions to the private market. The IMO will be responsible for performing long-term market outlook studies from time to time, based on the best information available to it, and these may provide input to individual generation investment decisions. But those decisions will be in the hands of private investors. The MDC is

154 Donald N. Dewees Table 8.1 Ontario demand by customer classes (approx.) (tWh, 1997)

Customer class

Ontario Hydro (Servco)*

Large (>5 MW) General service (