Rust occupies a greater volume than the steel it used to be, so when things rust they expand. (If it happens to reinforcing rods in concrete the expansion of the rods causes the surrounding concrete to burst, which is why they call it 'concrete cancer'.) Your coil has delaminated because rust formed in between the laminations, requiring space in between, which forced the laminations apart. It means water got into the coil and stayed there for a long time. I don't think you can really fix it without ruining the insulation. Rust converter would reduce the volume occupied by the rust by turning it into FeO instead of Fe3O4, but rust converter is extremely unfriendly to insulation.
The problem you have is that rust is hygroscopic: it absorbs water from the atmosphere and continues to rust. You might get some relief by warming your coil enough to dry it out without destroying the insulation - maybe about 80-90 degrees C - for an hour, then sealing it with suitable paint or epoxy. If you keep water out, it shouldn't get any worse for a while - maybe years. However I'm just guessing with that temperature - I don't know what they've used for insulation in various parts of the coil. Replacing the coil and keeping the next one dry is the real solution.
Grinding the rust off the outside of the coil is irrelevant to the problem: the problem is the rust in between the laminations. Yes, removing the varnish from the laminations would cause them to short-circuit each other and increase the hysteresis losses, but that is irrelevant too: the only insulation that matters is in between the laminations, and you can't remove that anyway.
If you can dry the coil out and encapsulate it, it shouldn't rust any more, in theory. Encapsulating it without drying it out will just end up causing your potting material to burst.
Last edited by grumpy; 25/10/09 02:36 AM. Reason: even more detail