Impending AECL sale puts Ontario, Ottawa on collision course

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Ontario is on a collision course with Ottawa over the Harper government's impending deal to sell off Atomic Energy of Canada Ltd., and get out of the business of subsidizing nuclear reactor sales.

With a fall election looming, the Ontario government is demanding that Ottawa help underwrite the construction of two new Candu reactors, just as Prime Minister Stephen Harper committed to back the Lower Churchill hydroelectric project in Newfoundland and Labrador.

The federal government is set to announce the sale of AECL's commercial division to Montreal-based engineering company, SNC-Lavalin Group, a move that would achieve Ottawa's long-standing plan to end taxpayers' subsidies for the money-losing nuclear company.

Ontario's plans to build the province's first new reactors in a generation are crucial to AECL's hopes to continue as a viable competitor in the global nuclear market. But with Ottawa pulling out of the nuclear business, that has only increased the uncertainty surrounding the project, a senior Ontario government source said.

"Ontario has always maintained that we would prefer to do a deal, but not at any price," he said.

The province wants Ottawa to help cover potential cost overruns of an AECL project, which could be substantial given that the company is offering a new generation of reactor technology that is still in the design stage. AECL says the enhanced Candu 6 is less risky because it is based on existing technology.

Without federal backing, Ontario fears the multibillion-dollar price tag will climb dramatically, and the risk of cost overruns will be borne by provincial taxpayers. SNC has signaled it is not prepared to take on the kind of financial risks that are typical in the nuclear business around the world.

The province does not have a veto over the sale, but AECL's value would certainly diminish if there was no prospect for the company to sell reactors in its own backyard. Still, as the only bidder in the game, SNC is expected to pay a low price for the company, and may not be counting on reactor sales to provide much profit.

Ontario Finance Minister Dwight Duncan said on Tuesday that the pending sale of AECL does not absolve Ottawa of its role in supporting the company or participating in the reactor deal. Premier Dalton McGuinty has repeatedly urged Ottawa to postpone the privatization until the two governments could agree on a reactor deal.

With the sale to SNC now looming, Mr. Duncan said, Ontario should be treated the same as Newfoundland and Labrador, where Mr. Harper has pledged a $4.2-billion loan guarantee for the Lower Churchill hydro project.

"They are certainly backstopping Newfoundland in exporting power to the United States," he told reporters. "Now I guess the question to them will become as we move forward, 'What are they going to do for Ontario?' "

The provincial Conservatives - who are leading in the polls ahead of the October election - also support the construction of two reactors at the current Darlington site, but the party's energy critic, John Yakabuski, declined to say whether Ottawa should help finance it.

New Democratic Party energy critic Peter Tabuns said Mr. Duncan is "not being realistic at all" if he expects Ottawa to provide subsidies. "They're selling off AECL to cut their losses, not to open up a new opportunity to subsidize the technology," he said.

Ontario is counting on nuclear power to form the basis of its electricity system, as it shuts down coal-fired plants to cut greenhouse-gas emissions. Under its long-term plan, the province needs to build new reactors - and refurbish some existing ones - to meet electricity demand.

At the same time, a sale to Ontario would allow AECL to demonstrate confidence in its new technology as it attempts to recover from a 10-year drought in new reactor deals. The company and its Canadian-based suppliers had been struggling even before the meltdown at the Japanese Fukushima plant in March, and now face a global marketplace that is increasingly wary of nuclear technology.

For its part, SNC insists it will not put its balance sheet in jeopardy as it prepares to acquire AECL's money-losing commercial division from the federal government.

SNC's financial clout is a key competitive strength, allowing the company to offer to help underwrite major infrastructure projects around the globe for which it wins engineering contracts. But the privatization of AECL raises difficult questions about how the company will finance the sale of reactors - or even take on major projects to refurbish existing plants - without taking on too much risk.

"The thing we like about SNC is that they have been quite disciplined in their capital allocation," said Frederic Bastien, an analyst with Raymond James investment bank. "I would certainly expect them to be disciplined here."

Mr. Bastien said he'll be looking to ensure that SNC is not left holding liabilities from AECL's existing slate of projects, including the behind-schedule, overbudget refurbishment of the Candu 6 reactor at New Brunswick's Point Lepreau.