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Alcoa OKs Deal with BPA by Allan Brettmann & Gail Kinsey Hill The Oregonian, May 17, 2001

The company agrees to a multiyear smelter closure, and if others follow,
the power agency says it'll keep rates down

Alcoa Inc. on Wednesday announced plans to immediately shut down a smelter in Northwest Washington and keep the plant closed for up to two years.

The agreement, the first multiyear shutdown negotiated by the Bonneville Power Administration, is a key part of the federal agency's plan to hold down rate increases set to jump by as much as 250 percent in October.

BPA officials hope the agreement will push other aluminum companies toward similar deals. The agency, which markets almost half the electric power in the Northwest, also is pressuring utilities to increase conservation efforts and reduce purchases by 10 percent.

Without the smelter closures and the conservation commitments, the BPA will be forced to purchase large quantities of high-priced power on the wholesale market in order to fulfill its contractual commitments.

The West's energy shortage and runaway wholesale electricity prices have boxed in the BPA and given it little choice but to ask for reductions from all its customers, officials said.

Most of the Northwest's 10 aluminum smelters already are closed or operating at dramatically reduced levels. But company officials had hoped to restart operations in October when new contracts with the BPA became effective.

The smelters had lobbied hard for a rate structure that would provide some power at low prices and some at the high market rates. They've resisted the proposed two-year shutdown, saying it would cripple the industry in the Northwest.

The agreement with Alcoa, which applies to the Intalco smelter in Ferndale, Wash., could signal a breakthrough for the BPA.

"We are extremely proud of this agreement," said Stephen Wright, the BPA's acting director. "We think it sets a great model for where we want to go with the other companies."

Under contracts that begin Oct. 1 and last through September 2006, the BPA is obligated to sell its industrial customers -- predominately aluminum smelters -- 1,500 megawatts on average annually for the length of the contract.

Alcoa, the BPA's largest customer, has agreed to give up 400 average megawatts, from now through September 2003. In March 2002, six months into the new contract period, the BPA may begin selling power to Alcoa again, if wholesale prices drop to acceptable levels, according to the agreement.

Alcoa also operates a smelter in Wenatchee, Wash. That plant will remain open at curtailed capacity, primarily using electricity from other sources.

In exchange for the power, the BPA will pay the company roughly $65 million annually. Alcoa has agreed to use the money to pay the 900 workers at the Intalco plant full wages and benefits. The rest of the money will be used to pay local taxes.

"Clearly we'd prefer to operate," said Sharon Kanareff, a spokeswoman for Alcoa. "But we understand the situation. We're trying to get the outcome that is best for everyone."

Current contracts, which expire Sept. 30, allow smelters to buy BPA power for $22.50 a megawatt hour. A 250 percent increase would take that rate to almost $78.75 a megawatt hour. Industry officials say they can't buy electricity at that price and remain profitable.

When operating at full capacity, Northwest smelters account for roughly 40 percent of aluminum in the United States and 17 percent worldwide.

Simultaneously, BPA negotiators are working to secure conservation commitments from investor-owned utilities -- such as Portland General Electric and PacifiCorp -- and from more than 130 government- and consumer-owned utilities.

At stake, BPA officials say, is its ability to keep a strategic advantage for Northwest businesses: electricity that costs less than in other parts of the nation.

Mass conservation agreements with the agency's customers are vital, they say. "We're making good progress, but the jury's still out," said Paul Norman, the BPA's senior vice president for power.

The BPA said it would re-examine prices every six months to adjust to changing market conditions. Energy analysts expect market-based prices to decline during the next two years as more power generation plants are brought on line.

The BPA wants to secure signed customer amendments by the end of this month, but has until July 1 to submit a final rate contract to the Federal Energy Regulatory Commission.

"All or nothing" offer
Stephen Wright, the BPA's acting director, Wednesday said that the agency is close to a 10 percent reduction agreement with six investor-owned utilities.

The agency advanced negotiations by offering a contingency clause that allows a utility to walk away from a deal if other utilities decline to commit to the reductions, Wright said.

The arrangement makes it "an all-or-nothing game," Wright said. But "our view is, it's the right way to go."

Besides PGE and PacifiCorp, the investor-owned utilities purchasing BPA power include Puget Sound Energy of Bellevue, Wash., Avista of Spokane, Idaho Power in Boise and Montana Power in Butte.

With reductions from utiliites and from aluminum smelters, the agency will have eliminated 3,000 megawatts it otherwise would have to purchase on the wholesale market. That's the amount by which commitments exceed the 9,000 megawatts generated at 29 federal dams and a nuclear power plant that the BPA markets.

Representatives for the companies said they're willing to work with the BPA, but none have signed amendments altering the contracts they signed last year.

"We're committed to working with Bonneville to resolve this issue," said Jan Mitchell, PacifiCorp spokeswoman.

"We're willing to share the pain as long as the publicly owned utilities and investor owned utilities are asked to give an equal share," PGE spokesman Kregg Arnston said.

Puget Sound spokesman Grant Ringel said, "We support the 10 percent reduction settlement request," but want more detail from the BPA about the benefits for its customers.

Public utilities balk
More problematic, apparently, will be herding the more than 130 public utilities in the Northwest, ranging from Seattle City Light to McMinnville Water and Light, to a common conservation goal.

"The (investor-owned utilities) are signing contracts contingent on participation by publics. The whole deal collapses if the publics don't come through," said Ed Mosey, a BPA spokesman.

No public utility has signed up, however. The BPA wants to announce by late next week the expected rates for its customers.

The Portland-based Public Power Council, which represents nearly all of the BPA's public power customers, has urged its members to sign up for the 10 percent conservation amendment, manager Jerry Leone said.

"I have been on the bully pulpit," Leone said. But "whenever you have a group of people you have all ends of the spectrum represented. They certainly aren't as recalcitrant as the (aluminum companies)."