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Industry Defends Decision to Resell Electricity for Profit by Gail Kinsey Hill The Oregonian, March 11, 2001

Politicians and unions call the tactic greedy,
but aluminum executives say it's a matter of survival

A maelstrom hit aluminum companies the moment they decided to resell their unused electricity and pocket tidy profits.

Politicians and union leaders accused the companies of "profiteering," of "greed" and of much worse.

Industry executives said a will to survive, not a penchant to plunder, motivated their actions.

Corporate strategies and opportunities for profit vary so much from company to company that conclusions of either altruism or avarice are difficult to make. But a look at individual circumstance helps explain why the major players acted as they did and why all but one chose the power-selling game.

First, some background.

Until the mid-1990s, Bonneville Power Administration insulated aluminum companies from the risk of buying electricity on the wholesale market. BPA, the Portland-based marketer of power from 29 federal dams, sold electricity at cost -- about $22.50 a megawatt hour -- and provided smelters with all the juice they wanted.

The equation changed in 1995 when new federal laws gave aluminum companies the chance to buy electricity on the wholesale market, where prices had dipped below BPA rates. The industry jumped at the opportunity for greater purchasing freedom.

Some hedged their bets, maintaining partial contracts with BPA. Others, such as Vanalco, shed the federal power altogether.

Either way, just about everyone got stung as prices jumped last summer from about $20 a megawatt hour to well above $200 a megawatt hour. Even a blend of wholesale and BPA rates proved too high for profitable production.

The worst fate came to Vanalco, a privately held smelter in Vancouver, Wash. Totally exposed to the market and holding no low-priced contracts to resell, it filed for bankruptcy protection in January.

In most cases, power arrangements took on bizarre twists. Under BPA contracts good through September, Golden Northwest Aluminum, Columbia Falls Aluminum and Kaiser Aluminum held rights to remarket their power rather than use the electricity.

When negotiated in 1995, the remarketing provision was seen as a way to ease the losses of smelters forced to curtail production but still under contract to buy from BPA. No one envisioned that companies could make huge profits on the exchange.

Events of the past 10 months turned the equation on its head. Those with remarketing rights realized they could make a lot more money selling electricity than they could producing aluminum.

"We had this power, and suddenly it was like gold," said Mac Seyhanli, chief operating officer of Golden Northwest Aluminum in The Dalles, the parent company of Goldendale Aluminum and Northwest Aluminum.

In January, Golden Northwest and Columbia Falls Aluminum in Montana cut back operations and called on BPA to resell the unused power. On the wholesale market, electricity was going for more than 10 times what the companies initially had paid.

BPA handed over $300 million to Golden Northwest and $200 million to Columbia Falls, but the deal came with strings. The companies agreed to use the proceeds to pay full wages and benefits to employees, improve plant operations and invest in generation.

Kaiser, with remarketing rights similar to those of Golden Northwest and Columbia Falls, began reselling electricity earlier this year. But Kaiser and BPA never reached an agreement regarding employee compensation or generation investment.

Kaiser's actions frustrate BPA officials and anger workers, who speculate that Kaiser will keep selling power until remarketing rights end Sept. 30, take a windfall of an estimated $500 million and leave town.

"They've got this scorched earth approach to reselling power," fumes Gaylan Prescott, field representative for the United Steelworkers of America.

Kaiser executives maintain they are doing what it takes to ensure continued production in the Northwest. Employees received full wages and benefits in December and January after production cutbacks, and they continue to receive 70 percent of base pay. The company also provides health care and other benefits, company officials said.

"I understand we're behaving differently," said Raymond Milchovich, Kaiser's chief executive. "But I've got the ongoing viability of the company to be responsible for."

In different power buyback deals, BPA paid McCook Metals Group of Chicago $225 million for electricity that otherwise would have operated a smelter in Longview, Wash., and it paid Alcoa an undisclosed sum for a six-month, 150-megawatt reduction at the company's Wenatchee, Wash., smelter.

These companies didn't hold remarketing rights and didn't receive as much per megawatt hour as their colleagues. But they cleared enough cash to justify production cutbacks. The deal cost BPA less than a purchase on the wholesale market.

"We think it's absolutely the right approach," said Michael Lynch, chairman of McCook Metals, a subsidiary of Michigan Avenue Partners.