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Electricity Market Turns on Kaiser by John Stucke - Staff writer The Spokesman Review, August 10, 2001

Whether it makes aluminum again or not, company finds itself positioned to lose money In the next 50 days, Kaiser Aluminum Corp. has a decision to make: Should it resume making metal and lose money? Or should it keep its Mead smelter idled and lose money?

Company vice president Pete Forsyth this week called it a dilemma: Either way, the company finds itself unprofitable.

"It's not about making money, it's about losing the least amount," he said.

The best decision, unfortunately for Kaiser, lies in thorny negotiations with the Bonneville Power Administration.

Kaiser wants the federal agency to pay it to remain shut down. In return, Kaiser would give its load of 251 megawatts to BPA -- enough to serve more than 150,000 homes. It's the sort of deal BPA struck with every other aluminum company in the Northwest at the height of the energy crunch.

But, there's a problem. Suddenly, BPA doesn't need Kaiser's electricity and has told the company so.

Now that power prices have dropped, river levels have stabilized and the tight electricity supplies have relaxed, BPA isn't in a hurry to pay Kaiser a premium for the aluminum maker's allocation of power.

Caught in the middle are hundreds of employees -- Steelworkers and managers alike -- whose lives are on hold as Kaiser and BPA negotiate.

Last week the company called several dozen workers back to prepare the plant for possible restart, Forsyth said.

"This is simply Boy Scout activity, being prepared," he said. "We haven't made a decision, but to be ready, there's some work to do."

Starting Oct. 1, BPA is set to deliver 251 megawatts to Kaiser. Each megawatt would cost the company about $37 an hour.

That may be too high for profitable aluminum smelting, especially since prices for the metal have fallen below 65 cents a pound, Forsyth said.

Last year prices were near 73 cents.

If Kaiser declines the power, said BPA spokesman Ed Mosey, BPA could sell it into the market. This time, however, Kaiser won't be reaping any of the profits, as it had earlier this year.

The new contracts between BPA and aluminum companies beginning Oct. 1 closed controversial provisions that allowed aluminum companies to resell federally produced power into the soaring electricity markets for spectacular profits.

Kaiser exploited this contract provision to earn about $468 million during the past nine months.

The failure of BPA and the company to reach an agreement on the use and sharing of the proceeds sparked a high stakes dispute that remains unresolved.

Now, as Kaiser looks ahead at trying to operate its smelter with expensive BPA power and, perhaps, even costlier power from private suppliers, there's little incentive for BPA to offer Kaiser any sort of financial out.

Mosey said the two sides were negotiating a BPA buyback for Kaiser's allotted megawatts beginning in October, but the gap in what Kaiser wants and what BPA is offering is wide.

Discussions are continuing but it remains unknown if Kaiser will restart.

"They were asking for what we paid the other aluminum companies," Mosey said. "That's out of the question."

Kaiser first wanted about $27.40 for each megawatt hour, Forsyth said. Other aluminum companies received between $18 and $20.

He said Kaiser's initial offer included spending money to help its suppliers offset losses caused by more months of smelter shutdowns.

The company has retreated and seeks about $17, a price Forsyth said reflects changing market conditions.

BPA, though, isn't interested in offering Kaiser the same sort of deal extended to other aluminum companies, Mosey said.

The times have changed, he said, and now favors the federal agency.

"What they're asking for doesn't make economic sense for our other customers and ratepayers," Mosey said. "The market has not turned in their favor."

Forsyth said BPA's standing offer to pay $4 a megawatt hour to stay shut down for two years is too low.

Power prices have dipped from about $200 a megawatt early this summer to about $67 Thursday.

Even so, Forsyth said, BPA still would be better off paying Kaiser $17 a megawatt hour and reselling the electricity into the market than selling it to Kaiser for $37.

If BPA's reluctance to deal with Kaiser is tied to the earlier dispute, it's not being discussed.

In late June, BPA announced rates would rise 46 percent from October through March. It was considered a victory for customers.

The agency had warned for months that rates were poised to jump 250 percent unless Northwest aluminum companies shut down and private and public utilities conserved 10 percent.

BPA got what it wanted from every aluminum concern but Kaiser. The two sides were still stuck on Kaiser's refusal to share the $468 million windfall from the resale of federal power.

Neither the company nor BPA would speculate whether that dispute lingers during the new round of negotiations.

Mosey said: "Here's where we are: We can't justify paying them the sort of price that we paid other (aluminum companies). But we do intend to honor our contract with them and stand ready to deliver power."