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Aluminum Industry Offers High-Powered Energy Proposal by Tom Detzel, Oregonian staff Guest column, Spokesman Review, February 17, 2001

By idling some smelting lines and pocketing profits from the saved electricity,
companies propose to offset rate increases

WASHINGTON -- Northwest aluminum companies have taken their concern about electricity rate increases directly to the top, meeting with Energy Secretary Spencer Abraham to pitch a relief plan that critics call an industry subsidy.

The companies, which already have curtailed operations because of high power rates, say the large increases being proposed by the Bonneville Power Administration put thousands of jobs at risk in the Northwest.

They are pushing a plan to offset the rate increases by giving up some of the BPA power allocated to them and asking the agency to sell it -- for more than the companies would have paid -- on the open market.

That profit would be used to "buy down" the rate for the rest of their BPA power, allowing the companies to continue operating pot lines at reduced levels.

Sen. Gordon Smith, R-Ore., who set up the meeting between the aluminum company representatives and Abraham, said his hope is to put the electricity-hungry industry on "life support" during the West's power crisis.

But opponents attacked the industry's proposal, saying it would shift higher power costs and economic problems elsewhere in the region.

"Every other ratepayer and every other industry and small business in the Northwest would pay more so they (the aluminum companies) could get cheap power," said Rep. Peter DeFazio, D-Ore. "If that's not a subsidy, then what is?"

Smith said he hasn't yet decided whether he supports the industry proposal. Nor did Abraham make a commitment, according to his spokesman, Joe Davis, and to Smith and one industry lobbyist who was in the meeting.

Still, the session underscores the high stakes for both the aluminum companies and other Northwest ratepayers as the BPA struggles with the politics of a rate boost that could range from 59 percent to 108 percent over five years.

The first increases would take effect next October, when new contracts with the BPA's "direct service industries" also take effect.

Mostly aluminum companies, the 11 direct service industries, or DSIs, have historically been important customers for the BPA, using a substantial portion of the power the agency sells from 29 federally-owned hydroelectric dams and one nuclear plant in the region.

Now, however, the region faces a power shortage and record open-market prices for electricity outside the BPA's system. The aluminum company contracts have emerged as a key issue in setting rates.

The contracts call for the BPA to provide the industry with a flow of power averaging 1,500 megawatts a year. That would cost $3 billion over their five-year life, according to BPA estimates based on current wholesale power rates.

The "buy-down" proposal For the industry's "buy-down" proposal to work, the BPA would first have to acquire that power on the open market. Costs would be spread across the agency's entire customer base, largely the public utilities that have first rights to BPA resources under the law.

The DSIs would be the only customer class able to "buy down" rates, said John Taves, a BPA liaison for public interest groups.

"This would virtually ensure a very large rate increase for other BPA customers and the significant economic impact that (increase) would entail for the region," Taves wrote in an agency e-mail to clients this week.

Public utilities are fighting the idea. Even the tiny Canby Utility District is running newspaper ads asking customers to complain to members of the Oregon congressional delegation, said Jerry Leone of the Public Power Council, which represents 120 public utilities in the region.

Leone said there's no doubt that the huge wholesale power rate increases being proposed would hurt aluminum companies, which require enormous amounts of power to run their smelting operations. But, she said, "buying power first to serve them is at our expense, and we don't intend to put up with it."

"It's too bad the DSIs are in trouble. It's also too bad that millions of others are in trouble -- everyone else connected with consumer-owned public power," Leone said.

Stampede from deregulation DeFazio called the buy-down proposal "another nonstarter as far as I'm concerned" and portrayed it as hypocritical, given that aluminum companies eagerly wanted to buy electricity on the open market five years ago, when there was a surplus and the BPA's contract rates were viewed as too high.

"These were the people who were leading the stampede to deregulation and market power, and now they're leading the stampede back to the shelter of BPA," he said.

The companies argue that there's no way they can survive in a global market for aluminum with rates as high as those proposed. Nor is it fair to single out their industry as the cause of the BPA's power deficit, they say. The agency has resources of 8,000 average annual megawatts but commitments to provide 11,000.

"If Bonneville is 3,000 megawatts short, and we eliminate the aluminum industry, what other 1,500 megawatts will we eliminate?" said Pete Forsyth, vice president of regional affairs for Kaiser Aluminum in the Northwest. "Eastern Washington irrigators? Will it be the food processing business?"

"The question is, are we trying to preserve the lowest possible rate for some group at the expense of some other group?" he said.

Forsyth acknowledged that the buy-down proposal would mean higher rates for the BPA's other customers, but he said it would be temporary and "a way to keep catastrophic things from happening throughout the economy."

Aluminum companies have been hard-hit since wholesale power prices began spiking last summer in the West. As prices rose, smelters laid off workers, cut production or shut down.

Smelters resell power already But Kaiser is one of three of the BPA's customers that are earning millions of dollars by idling their smelters and selling the electricity earmarked for them on the open market.

To help cut ratepayer costs, the BPA is receiving part of the profits from two of the companies. But Kaiser, which is expected to earn $500 million from the arrangement by September, hasn't agreed to share its profits with the BPA.

A Kaiser official, two representatives from Alcoa Aluminum, two lobbyists for the DSIs and Smith attended the meeting with Abraham, who as energy secretary oversees the BPA and three other power-marketing agencies.

"They were trying to make the case that it was important to the national interest that America continue to have a metals industry," Smith said. "And they were making the case that Bonneville needs them, and they need Bonneville when this crisis passes."

A study done for the BPA in December concluded that closing the aluminum smelter industry in the Northwest would result in a direct loss of 6,069 jobs, three-fourths of them in Washington, a fifth of them in Oregon.

Although communities with smelters would be hard-hit, the region as a whole would be "relatively unaffected by the loss," the study said.