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Economic and dam related articles

BPA Offers Deal
to Aluminum Plants

by Michael Jamison
Missoulian - July 10, 2005

COLUMBIA FALLS - The region's largest supplier of cheap hydropower is offering a cut-rate deal to big aluminum producers, but the industry remains unsure whether it will be enough to keep them operating.

"This is really challenging," said Haley Beaudry, external affairs manager for Columbia Falls Aluminum Co. "I think it's the very best they could do - but the possibility that we might have to close, that possibility exists all the time. That never goes away."

For decades, the Bonneville Power Administration has sold cheap electricity in bulk to big industrial users, also known as "direct service industries." The DSIs, in fact, have become heavily reliant upon Bonneville, a quasi-governmental outfit that markets the power generated at federal hydroelectric dams in the Columbia River Basin.

In recent years, however, demand for electricity has increased along with the region's population, leaving less juice available for the big DSIs.

With current contracts set to expire in fall 2006, industrial operators had been anxiously awaiting word on how much they could count on from BPA.

On June 30, BPA announced it would set aside $59 million, the equivalent of about 570 megawatts, to be shared primarily among the region's four remaining aluminum plants. Aluminum smelters are notoriously power-hungry, as electricity is the catalyst for turning alumina powder into aluminum. At one time, when operating at full capacity, CFAC consumed about a quarter of all the electricity used in Montana.

That percentage has shrunk, however, with market pressures forcing the company to cut back in recent years. Currently, the company is operating at just

20 percent, with one of five "potlines" active.

Under the Bonneville Power proposal, CFAC would receive a cash allocation equivalent to about 140 megawatts, to be used for buying power on the open market. Divide that into the total $59 million, and then divide that by the 8,760 hours in a year, and it comes to about $12 per megawatt-hour.

"They would give CFAC the money," Beaudry said, "then CFAC would use it to buy power on the market."

Problem is, the current market price is about $50 per megawatt hour, and the futures market predicts prices of $57 per megawatt hour by next year.

That means even with the $12-per-megawatt hour stipend, CFAC management is still looking at power in the $40 range.

"We can't operate at that price," Beaudry said. "Oh no. No. Not even close."

There is, however, a silver lining.

BPA has set aside cash enough for 140 megawatts at CFAC. But it takes just half that - 70 megawatts - to run a potline.

According to Bonneville's Mike Hansen, CFAC could take the money received for 140 megawatts, but purchase only 70. That would essentially give the company twice the $12 stipend - or $24 per megawatt hour - buying down the market cost to a price closer to the magic $30 mark Beaudry says is needed.

"That's a real option we're looking at," Beaudry said.

There are, however, some caveats.

Bonneville Power will not allow CFAC and other direct service industries to buy down the cost of market power to a price below Bonneville's "prime rate," which currently is set at slightly more than $30 per megawatt.

And it's a use-it-or-lose-it deal. If a company does not use its entire cash allocation during a given year, then it will be offered up to the other DSIs the following year.

And if CFAC wants to buy less than 140 megawatts with the money BPA provides, it can do so only so long as the discount does not exceed $24 per megawatt hour. That means CFAC would have to purchase at least 70 megawatts, or enough to maintain the single potline currently operating.

"This is as good as it gets," BPA's Hansen said.

And even that didn't come easy.

"This was a very difficult decision," said BPA top boss Steve Wright. "There is not enough low-cost federal system power to satisfy all interests, and we have worked hard to appropriately balance regional interests."

Too much help for industry, he said, and other ratepayers would feel the pinch.

"On the one hand," Wright said, "low-cost federal power keeps important jobs in the region and helps support the economy of many Northwest communities. On the other hand, we have a responsibility to the rest of the region's ratepayers not to inappropriately shift costs to them."

The DSI companies have no legal right to cheap power, he said, but they are long-standing BPA customers and are major contributors to the regional economy, which makes the subsidy important.

The writing, however, may be on the wall for the BPA-DSI relationship. Prior to 1995, the five-year BPA contracts set aside more than 3,000 megawatts for the big users. Then, in that year, contracts were reduced to 2,000 megawatts. In 2002, they were cut to 1,500. The latest promise of cash equivalent to 577 megawatts is a low point for direct service industries.

If the DSIs lay claim to the full $59 million pot, Wright said, general utility customers would see an increase of about $1 per megawatt-hour - negligible, really, for the region's homeowners.

"We believe the agency is striking a balance between the need to keep our costs as low as possible and the chance to support jobs," Wright said, "through limited benefits to the DSIs that may make it possible for them to continue to operate."

Just how possible remains to be seen.

According to Beaudry, CFAC can likely keep its one potline open with power that approaches the $30 mark. But the cost of raw materials and the price of aluminum also must be factored in, and for now his crystal ball's as murky as the next.

"The whole package needs to make good business sense," Beaudry said. "As to our long-term health, well, there's no answer to that yet."

Beaudry would like to see an additional potline or two come online, but BPA's latest proposal, he said, is not sufficient for adding any capacity at CFAC.

"At best," Beaudry said, "we could keep the one potline up and running."

Which, although not great news, is good enough for the 150 men and women that potline employs.

The next step is for BPA and the individual DSIs to negotiate five-year contracts based on the current offer, and then to put the deal out for public review. If all goes smoothly, Hansen said, contracts could be signed by early 2006.

"This is not a guarantee that they will be able to operate," Wright said of the aluminum producers, "but it is an opportunity."

Michael Jamison
BPA Offers Deal to Aluminum Plants
Missoulian, July 10, 2005

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