CANADA'S NUCLEAR SECTOR: REACTOR SHUTDOWN

UNCLAS SECTION 01 OF 04 OTTAWA 000156

SIPDIS

SENSITIVE
SIPDIS

DEPARTMENT FOR WHA, OES, EB, AND ISN
DOE FOR P&I, NE AND NNSA
EPA FOR OFFICE OF THE AMINISTRATOR AND INTERNATIONAL AFFAIRS
COMMERCE FOR 4320/ITA/MAC/WH/ONIA - WORD

E.O. 12958: N/A
TAGS: TRGY TBIO PGOV BTIO ENRG CA
SUBJECT: CANADA'S NUCLEAR SECTOR: REACTOR SHUTDOWN
HIGHLIGHTS BROADER CONCERNS

REF: A. 2007 OTTAWA 2276


B. 2007 OTTAWA 2260

C. 2007 OTTAWA 2255

SENSITIVE BUT UNCLASSIFIED. Not for Internet distribution.


1. (SBU) Summary. Natural Resources Minister Gary Lunn
removed Linda Keen from the Presidency of the Canadian
Nuclear Safety Commission (CNSC) late on January 15. (While
no longer CNSC President, she remains a member of the
Commission.) Undoubtedly the government hoped this would wrap
up the two-month drama that began with a routine shutdown of
the NRU reactor in Chalk River in mid-November (reported
reftels),but this seems certain not to be the case. This
episode serves to illustrate several distinct problems
surrounding Canada's nuclear sector.

-- The dependence of half of the global market for certain
short-lived medical isotopes on the operation of a single,
half-century-old reactor.

-- Long-run financing problems facing GOC-owned reactor
supplier Atomic Energy of Canada Limited (AECL),and the
government's strategy for the company's future.

-- Staffing and capacity challenges faced by the CNSC, the
nuclear regulator, not just vis-a-vis its current mission,
but also in the face of a possible resurgence of the nuclear
industry in Canada over the coming decade.


2. (SBU) Comment: We think that, as a consequence of this
affair, the very real resource and capacity problems of the
Canadian nuclear regulator have gained greater prominence in
Parliament and the public mind, and stand a better chance of
being addressed. The prognosis for AECL, however, may be
darker. This imbroglio has served to highlight the
difficulty AECL is having with its replacement technology
(now eight years behind schedule) for the aging reactor which
produces the medical isotopes and its lack of success in
moving its new power reactor design forward and finding early
customers )- all at a juncture when the GoC has been
considering putting the money-losing company on the auction
block or otherwise divesting itself of it. The affair may
also affect Canada's position as the world's largest supplier
of medical isotopes as other countries, in particular the
United States, consider whether to pursue their own domestic
production capacity. The significant political facets of
this episode are discussed septel. End Summary and Comment.

Overview of CNSC and AECL
--------------

3. In Canada nuclear regulation is solely a federal
jurisdiction; the Canadian Nuclear Safety Commission (CNSC),
formed in 2000 out of the former Atomic Energy Control Board,
is the independent, quasi-judicial administrative tribunal
and regulatory agency charged with that responsibility. It
reports to Parliament through the Minister of Natural
Resources (Gary Lunn). With roughly 500 employees, the CNSC
has as its principal mandate to "protect people and the
environment from licensed sources of man-made radiation
resulting from the use of nuclear energy and materials." It
also regulates the use of nuclear energy and materials in
line with Canada's international commitments on the peaceful
use of nuclear energy. In a series of reports over the past
eight years Canada's independent Auditor General (AG)
identified a series of challenges facing CNSC, in particular
human resources issues of capacity, recruitment, and
Qhuman resources issues of capacity, recruitment, and
retention of capable staff, and clarification of roles and
responsibilities. In its first audit, in 2000, the AG found
that CNSC's regulatory activities were not based on a
rigorous, well-documented system of risk analysis; and that
only a few CNSC divisions had developed formal approaches to
risk analysis as a basis for proposing regulatory activity.


4. (SBU) Canada's federal government owns Atomic Energy of
Canada Ltd. (AECL),a money-losing, 55-year-old reactor
design/supply/service firm. AECL has sold 12 reactors to
Argentina, India, China, South Korea and other developing
countries (the last reactor sale was to China in 1999),but
it is not clear AECL will be competitive for future
international business against U.S. and European competitors,
and even its prospects for domestic Canadian new builds are

OTTAWA 00000156 002 OF 004


very uncertain.


5. (SBU) While all reactors now in use in Canada are of AECL
design, only the oldest unit is directly operated by AECL:
the so-called National Research Universal or NRU reactor
built in the early 1950s at Chalk River, Ontario, about 100
miles west of Ottawa. Approximately half of all diagnostic
nuclear medicine procedures performed worldwide depend on
Molybdenum-99 from the NRU reactor; these isotopes are
packaged and distributed by MDS Nordion, Inc. (a private
sector concern spun off from AECL around 1990). Because
these isotopes have half-lives of a few days or less, this
business depends on more or less continuous operation of the
NRU. Construction of two new reactors dedicated to isotope
supply (known as "Maple 1 and 2") and intended to replace the
NRU in that capacity are significantly over budget and over
eight years behind schedule. Current AECL expectations are
that the Maples will come on-line in late 2008 and early 2009.

What Happened?
--------------

6. (U) When the NRU was shut down for routine maintenance on
November 18, CNSC inspectors verified that modifications to
the reactor's cooling system called for in an August 2006
licensing review had not been installed. CNSC notified AECL
the NRU was not in compliance with its license and could not
therefore be restarted. AECL did not restart the reactor,
but claimed the modifications were upgrades, not mission
critical, and could be accomplished over a longer period of
time during forthcoming monthly maintenance periods. AECL
claimed it could continue to operate the NRU safely without
the additional equipment, at least as an interim measure.
The impasse between the regulator and AECL extended the
scheduled NRU shutdown from one week to over a month, and the
shutdown would have gone longer had the government not
intervened and temporarily exempted the reactor from CNSC
oversight (through emergency legislation that had all party
support) to allow its restart (ref a).

Medical Isotopes ) No Security of Supply?
--------------

7. (U) As a result of the extended NRU shutdown, global
supplies of critical medical radio-isotopes dwindled. (Only
five reactors around the world produce these radio-isotopes,
one each in France, Belgium, Netherlands, South Africa, and
Canada.) Since many isotopes have half-lives measured in
hours, any unplanned reactor shutdown easily leads to supply
disruption. The NRU alone accounts for over 50 percent of
global supply of Molybdenum 99, which is the source of
Technetium-99m, the most widely used isotope for diagnosing
disease. Compounding the shortage, the South African reactor
went down for scheduled maintenance in early December.
(Maintenance schedules are coordinated among reactor
operators well in advance, but it had been anticipated the
NRU would be back on-line by the end of November.)


8. (SBU) In early December as medical concerns heightened --
the head of the Canadian Medical Association indicated he was
"very concerned" -- Health Canada initiated efforts at some
800 hospitals and clinics to monitor radioisotope shortages
and plan a response. (The government in fact portrayed the
issue as one of public health from the beginning, leading the
Prime Minister to claim in the House of Commons that
QPrime Minister to claim in the House of Commons that
operating the NRU without the safety upgrades posed "no
threat to nuclear safety at all.") The NRU shutdown exposed
the lack of additional production capacity worldwide, and in
particular the vulnerability of the United States which,
although the largest consumer of medical isotopes, has no
commercial production capacity at all for key elements such
as Molybdenum 99. Indeed, Congress has tasked the U.S.
National Research Council to examine further the risks to the
American public due to the lack of domestic production
capacity.

Precarious Finances ) End ahead for AECL?
--------------

9. (SBU) Atomic Energy of Canada Ltd., established in 1951,
is wholly owned by the GOC and has always required subsidies,
which have been trimmed over the past decade even as reactor
sales have gone flat. (The last AECL sales were to China (2)
and Korea (4) in the 1990s.) Indeed, Minister Lunn himself
noted that there has been a "chronic shortage of funding for

OTTAWA 00000156 003 OF 004


AECL going back over 14 years," and the firm's
under-capitalization and poor accounting have been documented
repeatedly by the Auditor General. In an otherwise bleak
immediate market, much hope has been invested in the putative
"nuclear renaissance" expected as a consequence of policies
aimed at reducing greenhouse gas emissions.

10. (SBU) AECL has been lobbying the Ontario provincial
government and utility firms to spend about C$12 billion on
eight new reactors required to meet the province's energy
needs over the next 20 years. However, a 2007 public
declaration by Ontario premier Dalton McGuinty that AECL,s
heavy-water reactor technology (so-called CANDU for "CANada
Deuterium Uranium", a reference to its heavy water moderator)
was not a shoo-in and that all technologies would be
considered, was a blow to AECL expectations. This distress
was exacerbated when the CNSC decided to discontinue its
"pre-licensing assessments" (citing resource constraints) of
AECL's new flagship reactor design, the Advanced CANDU
Reactor (ACR),which was to be pitched to Ontario. The loss
of this pre-licensing assessment puts AECL at a competitive
disadvantage in marketing the ACR, which has so far cost
about C$300 million to develop.


11. (SBU) In November 2007, just before the NRU isotope story
broke publicly, the Conservative federal government announced
a broad review of AECL's future, including the possibility of
selling the company. That long-rumored review is now on hold
due to the turbulence around the isotope affair.


12. Comment: This may, however, only be a stay of execution.
There is no shortage of criticism of AECL, fueled by reports
from the Auditor General, not just in 2007, but also in 2002
and 1996, pointing to mismanagement and lack of transparency
as critical and on-going failures at AECL. And contrary to
normal practice, AECL had not previously made the earlier
reports public. Divestment is certainly a political option,
as governments of both parties have participated in the
gradual privatization of, for example, PetroCanada, an
integrated oil company, Air Canada, and the CN railroad over
the past two decades. However, if the ACR fails to attract
Canadian buyers, AECL's financial prospects and its
attractiveness to potential investors are open to question.
End comment.

CNSC Capacity ) Is Confidence Warranted?
--------------

13. (SBU) Since inception, CNSC has struggled with problems
of under-capacity, caught between limited funding, the aging
demographics of nuclear professionals, and a current and
anticipated rise in regulatory demands due to reactor
refurbishments, redesigns, probable new builds, and plans for
waste management. In this case, although the downstream
supply of medical isotopes is not formally the regulator's
concern, Linda Keen's choice to stick to the licensing rule
book suggests that the capacity to assess the broader impacts
of CNSC decisions may have been lacking )- perhaps a direct
consequence of a relatively young organization lacking
sufficient resources. On the plus side, in its most recent
assessment (2005),the Auditor General found CNSC was making
satisfactory progress in implementing its recommendations
from the 2000 audit in areas such as human resource planning
Qfrom the 2000 audit in areas such as human resource planning
and implementation of an integrated, risk-informed approach
to regulatory activities. Comment: The high profile events
of the past two months have clearly served to make Parliament
aware of the regulator's constraints. Given that Canada
cannot do without a nuclear regulator, these events may
compel the government and Parliament to provide additional
resources needed to remedy them, rather than to sweep them
under the carpet yet again. On the other hand, rational
assessment and treatment of these events in the political
domain is anything but assured. End comment.

What Does It All Mean?
--------------

14. (SBU) Despite the resource and organizational challenges
faced by the CNSC and the apparent lack of a robust response
by the regulator in the face of this unique set of
circumstances, the evidence, including assessments by the
Auditor General, still suggests that the CNSC is a capable
and credible nuclear regulator that should retain the trust
of its international peers. Realistically, the government
cannot dispense with CNSC, and may well be forced to find

OTTAWA 00000156 004 OF 004


additional resources to address its identified problems. On
the other hand, the fate of AECL in the wake of this
imbroglio is cloudy. The company undoubtedly lost some
government goodwill, from an already diminished reserve, and
its failure to comply with NRU licensing conditions (i.e.,
the installation of the two back-up cooling pumps) for 18
months certainly will not help the firm's credibility with
prospective customers in Canada, the United States, or
elsewhere. While to the casual observer AECL seems to have
come out of the squabble over NRU relatively unscathed, the
real implications for the company may be far different, and
it is unclear to what extent the government will continue to
support the loss-making firm. In broader terms, this may be
welcome news for AECL's international competitors.

Visit Canada,s Economy and Environment Forum at
http://www.intelink.gov/communities/state/can ada

WILKINS