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Rate Hike may be the Last Straw for Smelters by Steve Wilhelm Puget Sound Business Journal, March 14, 2003

The beleaguered Bonneville Power Administration's plan to raise power rates about 15 percent could snuff out the few remaining embers of Washington's aluminum-smelting industry.

Of the seven aluminum smelters in the state, only two are running, and those only at stunted production rates. Alcoa Inc.'s Intalco plant in Ferndale is operating just two of its three aluminum-smelting potlines, while Golden Northwest Aluminum Inc. is operating just a few pots at its plant in Goldendale.

Washington's aluminum industry is being squeezed between the region's rising power rates, slack global demand for aluminum, and proliferating low-cost aluminum smelters around the world. While just a few decades ago the Northwest, fed by BPA's seemingly endless supply of low-cost power, was one of the world's top producers of aluminum, now the state's plants are facing electricity rates too high to profitably make aluminum.

"The price increase proposed by BPA would make it virtually impossible to operate aluminum smelters in the Pacific Northwest," said Jake Siewert, vice president for Alcoa in New York. "The rate that they have proposed is higher than any other power price than we pay anywhere else in the world, and makes those plants globally noncompetitive."

While Alcoa is cutting back its presence here, the company plans to invest $1 billion in a smelter in Quebec City, Canada, to double its capacity. As an incentive the company will get preferential rates for the region's cheap hydropower, and an interest-free government loan.

"They are offering us a very competitive power price, substantially below what is being charged by BPA," Siewert said.

Golden Northwest Aluminum CEO Brett Wilcox said his company is already paying about $38 a megawatt hour, including $3 for transportation. The proposed boost would put it above $40, he said.

"The rate already is way too high, as compared to power rates that aluminum smelters in other parts of the world face. The future increase makes it something that's unworkable," Wilcox said.

The company laid off 93 workers on Feb. 28, leaving about 140 in Goldendale, said Bob Hughes, a state Department of Employment Security official. The Goldendale plant employed about 720 when at full production.

BPA officials say they're being forced to raise rates to cope with the tremendous losses the utility incurred during the energy crisis of 2000, and with reduced power generation potential of the low snowpack.

In a Feb. 7 letter, BPA CEO Stephen Wright said the utility entered the 2003 fiscal year with just $200 million in reserves, which will be swiftly depleted at current projections. While the proposed 15 percent rate increase is scheduled for Oct. 1, BPA officials are negotiating with users to see if the increase can be reduced.

"I am painfully aware of the impact that a rate increase would have on the people and businesses of the Northwest," Wright said. "We would not take this action if there were any other alternative."

Most of the new smelters popping up around the world are being built in areas of abundant hydropower or geothermal power, including Canada, Brazil, Iceland and some parts of Africa. A relatively new competitor is China, which has been flooding the market with low-cost aluminum produced from smelters powered by coal-fired power plants.

"All of a sudden it (China) has become a very large producer of aluminum, much to everyone's surprise, and exceeded projections very quickly," said Wilcox said.

The global, inflation-adjusted price for aluminum has drifted downward for the last two decades at about 0.8 percent annually. The slowed global economy and new smelting capacity being created around the world are contributing to the decline, said Terry Morlan, manager of economic analysis for the Northwest Power Planning Council in Portland.

Morlan said the slumping value of aluminum means that of the nine Northwest aluminum smelters, only the Ferndale Intalco plant can run profitably with electricity rates substantial over $30 per megawatt hour. That plant, built in 1969, is one of the newest and most efficient in the region.

"The others, if they were able to work some special contracts for electricity, or if they invested a significant amount of money in trying to improve the efficiency of the plant, they might be able to hang on," he said.

Already past revival is the former Kaiser Aluminum Corp. plant in Tacoma, which has been purchased by the Port of Tacoma and will be demolished to make way for growing container traffic. Houston-based Kaiser's other smelter near Spokane is closed, while the company itself is in Chapter 11 bankruptcy.

On March 4, Longview Aluminum LLC also filed for Chapter 11 bankruptcy protection, after BPA announced plans to cut off Longview's power because the company had millions in unpaid power bills. That plant is not operating, and only a few of its former 1,000 workers are employed there.

Golden Northwest Aluminum's Wilcox said his Goldendale smelter's only hope of survival may be to build its own gas-fired generating plant, in collaboration with BPA.

"We are fighting hard to survive. We are trying to develop our own independent power projects for a long-term energy supply" he said. "If we can achieve that, we believe we can be viable long term."