Alcoa Ceases Aluminum Production in the Pacific Northwest

Alcoa Inc. has recently agreed to shut down an energy-intensive aluminum smelter in Washington to help ease the growing power crunch in the Pacific Northwest region.

Under the agreement with the Bonneville Power Administration (BPA), Alcoa said it would immediately idle its Intalco smelter in Ferndale, WA, and sell the power contracted for the facility between now and October 2001 back to the BPA to meet regional demands for electricity. In addition, Alcoa will return to the BPA approximately 90% of its electricity allocation for the Oct. 1, 2001--Sept. 30, 2003 period.

In return, Alcoa will receive revenue to compensate a majority of its employees at Intalco for their wages and benefits. Alcoa said the remainder of its electricity allocation would be used at the company's magnesium production facility in Addy, WA, and for lighting, maintenance and security purposes at Intalco. Alcoa said there were no immediate layoffs planned for the 900 employees at the Ferndale smelter.

Alcoa took this action after the BPA called on nine aluminum facilities in the Pacific Northwest to curtail production for one to two years to help with the drought-induced power shortage. BPA said the Alcoa agreement was a big slice of the 2,000 MWs or more of load reduction that the region still will need to avoid severe rate increases in the months ahead.

The BPA warned in early April that the federal power system in the Pacific Northwest was headed for wholesale rate increases of 250% or more after current contracts expire on Oct. 1 (see NGI, April 16). To help alleviate the crunch, BPA asked the region's retail utilities and large industrial customers to agree to reduce energy usage within the next 60 days. BPA also called on aluminum plants in the area --- sited in the Pacific Northwest because of the access to formerly cheap hydroelectric power --- to shut down for up to two years.

"The critical energy crisis in the Western U.S., the expiration of Alcoa's existing BPA power contracts, and the growing regional demand for electricity combined to create a difficult situation for Alcoa and the aluminum industry in the state of Washington," said Al Renken, Alcoa vice president and president of Alcoa Primary Metals. "Alcoa has forged an agreement with the BPA which is in the best interests of our stakeholders. While this agreement is not our preferred outcome, it is more advantageous to employees, communities and shareholders than the long-term closures we would have experienced under Bonneville's blended-rate approach. We still find it unacceptable as public policy that the aluminum industry has been asked by BPA to shutter its facilities, thus carrying a disproportional cost, while other customers are being asked only to reduce their usage by 5% to 10%."

Steve Wright, acting BPA administrator, said, "This agreement will enable Alcoa to keep its plant poised to operate when the price of electricity declines and makes that economically feasible. Meanwhile, affected workers will get full pay and benefits. At Alcoa's request, plant communities will also receive compensation for decreased tax revenues."

With the agreement, BPA's overall energy obligation will drop by over 400 average MW, thereby avoiding power purchases of $600 million next year at today's prices, BPA officials said. Wright said that the money will stay in the Northwest economy and will help keep the lights on as the Northwest continues to deal with a severe energy shortage.

"Alcoa certainly has a goal of running its smelters and doing so with cost-effective power," Renkens stated. "The energy situation in the Northwest, however, makes this difficult, at best."

In clarifying the compensation that Alcoa will receive, Renken added, "First, the payments BPA is making to Alcoa are sufficient to cover labor and labor-related costs for employees who would have had continued normal employment under the amount of power provided in the new contract, which is effective Oct. 1. Second, while it is difficult to face not running our smelters at normal levels, we understand the current energy crisis in the Northwest and are working closely with BPA for the best solutions for all involved."

Wright said BPA is working with other Northwest aluminum companies as well as with public and investor-owned utilities to reduce purchases from BPA.

Ed Mosey, a spokesman with the BPA, said, "we are optimistic that the others [aluminum companies] will come onboard, but they are simultaneously running a heavy-duty ad campaign here in the Northwest with radio ads accusing the Bonneville Power Administration of not purchasing enough power early on, and therefore laying the burden of the region's power shortage on their backs. While at the same time, they are negotiating to receive money from us to be offline, so there is a bit of a credibility gap."

Mosey said he believes the offer, while not optimal, is better than the alternative. "In all likelihood, unless they wanted to bleed red ink until the market comes down which would be a pretty risky thing to do, they would be out of production in any case."

Wright said, "Northwest consumers can actually do something to keep their power rates down. Through conservation and other means of cutting back on electricity use, they and their utilities and businesses can limit the region's exposure to the skyrocketing wholesale power market."

The goal is to reduce load sufficiently to hold the October wholesale rate increase below 100%, still high but considerably less than an increase of 250% or more if BPA is forced into the market to buy power, Wright said. A wholesale rate increase of 250% could double retail rates for many Northwest consumers, BPA officials said.

With this agreement, Alcoa has 550,000 metric tons per year of its worldwide aluminum capacity of 4.1 million metric tons per year idled.

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