NEW BRUNSWICK STILL BULLISH ON NUCLEAR POWER DESPITE DELAYS

UNCLAS SECTION 01 OF 02 HALIFAX 000010

SIPDIS

STATE FOR WHA/CAN, EB/ESC/ISC
USDOE FOR IA (DEUTSCH)

E.O. 12958: N/A
TAGS: ENRG ECON EFIN PGOV CA
SUBJECT: NEW BRUNSWICK STILL BULLISH ON NUCLEAR POWER DESPITE DELAYS
WITH POINT LEPREAU REFURBISHMENT

REF: 08 HALIFAX 0084 AND PREVIOUS

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1. SUMMARY: The New Brunswick government is hopeful that the
$1.4 billion project to refit the province's aging nuclear
reactor gets back on track soon. Meanwhile the delay in
finishing the refurbishment has had no impact on the
government's study into whether to build a second or a third
reactor at Lepreau, an idea that comes with both high financial
and political risks. END SUMMARY.


2. Officials with New Brunswick Power (NBP),the provincially
owned utility, are cautiously optimistic that their $1.4 billion
project to refurbish the Point Lepreau nuclear power plant
outside Saint John will meet a new deadline of December 2009.
NBP executives revealed on January 20 that the project was three
to four months behind schedule and would not be finished by
September as originally planned. The refurbishment is a complex
undertaking consisting of a replacement of all fuel channels,
tubes and pipes, plus other station maintenance work. According
to NBP, project engineers are experiencing problems using
specially designed remote control equipment that allows them to
work outside the radioactive zone. Apparently the equipment is
not performing the way the designers had predicted and work has
fallen at least three months behind schedule. (Details of the
refit project can be found at:
http://poweringthefuture.nbpower.com/en)


3. NBP started the refurbishment project in April 2008, in
partnership with Atomic Energy of Canada Limited (AECL),the
federal crown corporation that designs, markets and builds
Canada's CANDU reactors. AECL designed and built the Lepreau
reactor, a CANDU 6, and brought it into service in 1983. In
recent years, and as Lepreau was nearing the end of its
lifespan, NBP and the provincial government were forced to
decide whether to mothball the aging plant or refurbish it, both
options an expensive undertaking. Although NBP operates at
arm's length from the provincial government, what happens with
the utility is ultimately the responsibility of the government
of the day and consequently the decision on what option to take
would rest with provincial politicians. In 2005, the former New
Brunswick Tory Government decided on the refurbishment option,
but not without much handwringing over the cost and the
potential impact on the utility if the project ran into
significant cost overruns. However, the Tories were defeated in
a September 2006 general election and the new Liberal government
under Premier Shawn Graham inherited the project. Graham and
his government have embraced the project, seeing it and a
potential second reactor, as cornerstones of their strategy to
develop the Saint John area into a new energy hub for North
America.


4. The overall budget for the Lepreau refit was originally set
at $1.4 billion, including $400 million to pay for replacement
power. Lepreau produces one-third of the province's power
needs, so NBP has being buying replacement power from
neighboring Hydro-Quebec since taking the reactor offline last
spring. Now with the delay in getting Lepreau back in service,
NBP estimates that it will have to pay as much as $90 million in
extra costs. NBP is already burdened with a $6.9 billion net
debt, so there is no room for the utility to absorb the extra
expense. Going to the customers to get an increase in power
rates is not an option since the Graham government was elected
on a promise not to raise electricity rates any more than 3%
annually before 2010. The utility will have no option other
than to realign its financing and spread the extra cost over the
new 25-year lifespan of the plant.


5. Despite the delay in getting Lepreau back in service, the
Graham government maintains that this setback will have no
impact on its ongoing study into whether to build a second
reactor at Lepreau. The Premier said on February 2 that he was
still optimistic that Saint John would house a second, or even a
third, reactor. To that end, the province is courting two
unnamed private sector companies to invest in a 1,100 megawatt
reactor, which would export most of its output to the
northeastern United States. The new players would join an
existing group already studying the proposal called Team CANDU,
led by AECL in partnership with private sector technology and
engineering firms. While funding is a major factor in deciding
to go ahead with the second reactor, another concern for New
Brunswick electricity customers is AECL which ratepayers and
media editorial writers have criticized for its management of
the Lepreau I refit, especially for not assuming more of the
risks. Those criticisms prompted the Premier to publicly confirm
his support for AECL, saying that he still had confidence in the
corporation both in completing the Lepreau I refit and its
ability to handle the construction of a new reactor.


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6. COMMENT: Premier Graham acknowledges that the massive
Lepreau refit is the one issue that keeps him awake at night
because of the financial consequences for his small and
fiscally-challenged province. It comes as no surprise therefore
that the provincial energy department is working closely with
NBP and AECL in trying to get the project back on track by
bringing in new staff and realigning work priorities. In the
meantime, senior energy officials have told us that there has
been no let up in their research into whether Lepreau II will
become a reality. There are already investors lined up willing
to pay for the estimated $50 million cost of a three-year
licensing application and environmental review, but details on
construction, operating and financing costs, and rates of return
to investors all need to be fleshed out as well as market
conditions in New England. For now, Lepreau II is still a
viable project on the drawing board, but no one is
underestimating the financial and political risks particularly
for a government which has staked its future on using nuclear
power as a significant component in its energy hub plan. END
COMMENT.
FOSTER