Power, Profits and the
by Jeffrey St. Clair
Killing Salmon With Paul O'Neill
Paul O'Neill, Bush's first Secretary of the Treasury, is an unlikely apostle for the crusade to combat global warming. But for the past couple of years the former corporate executive has been preaching the virtues of moving away from fossil fuels. In 1998, while head of aluminum giant Alcoa, O'Neill gave a speech to the aluminum industry's trade association in which he named what he believed to be the world's two most pressing problems. "One is nuclear holocaust," he said. "The second is environmental: specifically, the issue of global climate change and the potential of global warming." O'Neill handed out copies of his 1998 speech at Bush's first cabinet meeting.
O'Neill, who just called for the abolition of the corporate income tax, is not an altruistic green. For more than a decade he ran one of the world's most rapacious timber giants, International Paper. However, he's a financial opportunist. While helming Alcoa, O'Neill correctly devined that new clean air rules could help the aluminum makers, which stood to profit if Detroit was forced to switch to lighter weight cars made with more aluminum.
More deviously, O'Neill also foresaw the possibility of making a killing by getting in on the front end of the new energy market, which he did for Alcoa, the company that he ran for a decade. In the process, he made himself a bundle of money.
Aluminum companies are the biggest energy hogs in the Pacific Northwest. The aluminum industry was lured to the Columbia River basin during the manufacturing frenzy of World War II, where it was given cheap federal power for arms manufacturing. But aluminum making is an incredibly inefficient industry. Even at current market rates, the Northwest Energy Coalition estimates that it takes anywhere from $2 to $5 worth of electricity to produce a single pound of aluminum, which then sells for only 70 cents.
These companies could never make it on their own, thus they turned to the Bonneville Power Administration (BPA) for help. BPA is the federal agency based in Portland, Oregon, which markets the hydropower from the federally operated dams in the Columbia River system and provides 46 percent of the electricity for Oregon, Washington, Idaho, and western Montana. It deals away 102 megawatts of power every day. In the past, BPA has sold the power at only the cost of generation with no mark up-one of the reasons that the Pacific Northwest has enjoyed the cheapest electric rates in the country, about $25 per megawatt hour. But the cheap power isn't shared equally. The biggest power gluttons, namely the aluminum smelters, get the lowest rates. These smelters buy 2,000 megawatts of power each year from BPA.
But even these below-market rates weren't enough to satiate Alcoa. In 1996, the aluminum companies convinced the Clinton administration to give them so-called remarketing rights that would allow them to purchase subsidized power from BPA then resell the power at market rates.
When energy prices surged in May of 2000 and California felt its first power crunch in decades, utilities scrambled to find new power at nearly any price. "Oregonians always feared that Californians would come for our water," says Larry Tuttle, director of the Portland-based Citizens for Environmental Equity. "But few realized that the first raid would be on water-power."
Because of these changes in contracts, the big companies were primed to cash in on California's misery. Thus, the aluminum companies promptly idled their plants, sent thousands of workers home and sold their subsidized power to California to capitalize on the skyrocketing rates. The profits are staggering. The aluminum companies have taken power that they bought for about $25 a megawatt hour and sold it on the wholesale market for between $200 and $1,000 a megawatt hour.
In 2002 alone, Alcoa made more than $250 million on BPA subsidized "load curtailments" designed to redirect power to California.
After being tapped as treasury secretary, Paul O'Neill chose not to immediately divest himself of $90 million in share and stock options in Alcoa. When asked if this presented a conflict of interest, O'Neill told Meet the Press that, "The ethics department lawyers said they thought it was OK for me to maintain these shares. You know, I can't imagine that, as treasury secretary, I'm going to have decisions come before me that have anything to do with this."
Ethical questions aside, it was a shrewd business move. Alcoa's first quarter earnings for 2001 were a company record $404 million-far surpassing Wall Street's expectations and $57 million more than the previous year. Since most of the company's plants had been idled, much of the windfall can be attributed to the remarketing of its federal power. Alcoa's stock rose by more than 7 percent during the same period, meaning that O'Neill's bankroll increased by $6 million.
And Alcoa's far from alone. According to a report by the Northwest congressional delegation, the aluminum companies Kaiser, Goldendale Northwest, and Columbia Falls-all with smelters in the Northwest-have profited the most from the resale of BPA power. Kaiser netted $426 million; Goldendale Northwest, $344 million; and Columbia Falls, $292 million according to the report, which analyzed data supplied by BPA.
Kaiser's refusal to share its unused power with the federal agency has put the BPA in the position of buying back power for up to twenty-two times more than it cost to produce it. Kaiser is controlled by the modern day robber baron Charles Hurwitz, the butcher of the California redwoods. In a nasty labor dispute, Kaiser had locked out workers at most of its plants at the same time as it was raking in millions from the resale of federal power. Typically, Kaiser is blissfully unrepentant about its profit-making off the energy crisis. "We are making significant revenue here," Peter Forsyth, Kaiser's vice-president for Northwest Regional Affairs, gloated. "Why give it up?"
Altogether these so-called Direct Service Industries have reaped approximately $1.7 billion off these remarketed power deals. And remember the rationale behind giving these companies preferential rates was that aluminum companies helped to industrialize the West and provide high-paying jobs in rural areas.
The prolonged drought that has gripped the Pacific Northwest for nearly five years has only compounded the problems. For much of 2001, for example, Los Angeles had received more rainfall than Seattle. Meanwhile, Portland was twelve inches short of its normal rainfall level and counting. The snowpack in the Northwest, which feeds the Columbia River system, was just 53 percent of normal, just shy of the all-time low of 1977. Run-off levels were also the second lowest in seventy-two years and streamflows were the third worst ever. The situation remains dire.
At the same time, the Pacific Northwest faces an 8,000-megawatt power deficit. "We are becoming increasingly concerned that this may be a long-term crisis," confessed Steve Wright, acting administrator for the BPA. "Meanwhile, Canadian reservoirs, which store half the Columbia basin's water, remain extremely low, which means we could start next year with less than a full tank."
With BPA short of power because of the drought, it was forced to go back to those same companies and at astronomical rates, buy back the power it just sold them for the cost of generation. As a result, the BPA depleted its coffers and faced bankruptcy.
While the big corporations and executives like O'Neill and Hurwitz made a killing, residential consumers were hit with blackouts, ruined salmon streams, and the prospect of rate increases of between 50 to 250 percent over current costs. There's a direct relationship. According to Oregon Congressman Peter Defazio, for every 100 megawatts of power BPA has to purchase to service the big aluminum companies, rates for other Northwest consumers increase by 10 percent.
The timing of all this couldn't have been worse for the salmon stocks that once ran the Columbia watershed in numbers seen nowhere else on earth, but which now teeter at the edge of extinction. The eight hydropower dams on the lower Snake and Columbia Rivers block passage to spawning grounds for migratory salmon and the migration to the ocean of young salmon and steelhead. Environmentalists, Indian tribes and most fish biologists believe that for the salmon to survive many of these dams will have to come down. But the Clinton administration decided not to anger the aluminum industry and instead opted for an "aggressive nonbreach strategy." The cornerstone of this approach was a plan to require the dam operators to increase the flow of water through the spillways, hoping to flush juvenile salmon safely downstream. The Bush administration followed up by deciding that the demand for increased power production trumped the needs of the salmon for better flows. Instead of flowing through fish passages, nearly all of the Columbia River water is being channeled into the giant hyrdoturbines.
The number of Snake River chinook, an endangered species, heading toward the ocean in 2001 was the third lowest on record. The dams are bound by court orders and a salmon recovery plan to provide enough spillwater to flush migrating salmon downstream. To circumvent this legal roadblock, the Bush administration, at the behest of Paul O'Neill, declared a power emergency, which enabled the US Army Corps of Engineers, which operates the dams, to override the salmon-recovery plan and send all of the water into the hydroturbines, which slice and dice the salmon like a giant cuisinart.
How bad is it? At the turn of the century more than 16 million salmon and steelhead spawned in the Columbia River system. Today, there are fewer than a million, and more than 90 percent of those are hatchery bred fish. The wild Columbia salmon are nearly extinct. The National Marine Fisheries Service estimates that the salmon death toll will climb by 13.3 percent because of the lack of flows-that's more than 133,000 fish.
Instead of giving the fish the flows they need to survive, which most fish scientists conclude will ultimately require the breaching of several dams, the aluminum industry and the BPA want to collect the fish in the upper basin, put them into barges or big trucks, and transport them past the dams.
One study estimates that 85 percent of the Snake River salmon will conduct their journey to the Pacific mostly on barges. But the barged salmon fare worse than the ones that face decimation in the giant hydro turbines. "This is no way to recover salmon," says Ted Koch, a federal fish biologist in Boise, Idaho. "We are lying to ourselves if we think that we are recovering salmon stocks and meeting power needs, too." Other federal fish biologists concur that the BPA's power-generating schemes will doom the world's most prolific salmon river. "What's happening makes me extremely nervous," says Howard Schaller, a salmon expert with the US Fish and Wildlife Service. "It makes me think that this region doesn't have the will to do what it needs to recover these fish."
The aluminum companies say that they have given the BPA millions of dollars a year to mitigate the damage their operations do to salmon and steelhead. But much of that money simply goes to hatcheries, not to save wild fish or their habitat. And, according to documents unearthed by environmental economist Karyn Moscowitz, the BPA spends more than $4.4 million every year on the Columbia Basin Law Enforcement Program, a four-state police force that patrols the Columbia and Snake largely harassing Indians trying to assert their salmon-fishing rights. The $4 million pays for about thirty-five full-time officers and deluxe state-of-the-art equipment, including airplanes, radar equipment, guns, and numerous vehicles and horses. "In 1995, the force made 1,484 arrests, but tracked only down 139 illegally caught salmon," says Moscowitz. "At a total of $3.6 million, BPA pays nearly $26,000 a fish for this program."
Peter DeFazio, however, advocates a plan that could aid both the salmon and Northwest power consumers. The congressman argues that the BPA must be forced to sever its contracts with the aluminum companies and reroute that power to residential consumers and provide fish. He pins much of the blame for the current crisis on the 1992 Energy Act, a federal deregulation bill fostered the freewheeling marketing of federally generated power. Defazio, one of only sixty house members to vote against the deregulation bill, has introduced legislation introduced to revoke the deregulation provision of the 1992 Energy Act and re-regulate the energy industry.
"These have been dark days for Californians, but an extremely profitable times for a few giant power marketers," said DeFazio. "Congress made a colossal mistake in allowing the deregulation of wholesale production and distribution of energy. It eliminated the mandate that generators serve the public and provide stable, affordable, and reliable at-cost power. We were left with private power buccaneers capitalizing on the energy crisis while we struggle to conserve, suffer from lost jobs, and brace for the lights to go out in our area. I continue to support regional energy price caps for a short-term solution, but I think we need an aggressive solution for the long run. We need to return to a regulated energy market, with stable, reliable, cost-based power."
This essay is excerpted from "Born Under a Bad Sky: Notes from the Dark Side of the Earth" by Jeffrey St. Clair (AK Press, 2008).
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