There's no loss of power in Alcan's deals

KONRAD YAKABUSKI
Globe and Mail
8 Feb 2007

MONTREAL -- Before you can even access the website of Eskom, the state-owned utility that produces 95 per cent of South Africa's electricity, a disclaimer pops up warning customers to expect supply interruptions.

Development in post-apartheid South Africa has put such a strain on the country's transmission grid and aging coal-fired power generators that blackouts are a fact of life. More than a quarter of the country's generators were down last month and resource-rich South Africa -- ironically, the world's second-biggest exporter of coal -- is facing an energy crunch.

You might think this is the kind of country an electricity-intensive aluminum producer would want to avoid. Not Alcan. The Montreal-based multinational recently signed a 25-year deal with Eskom to supply its proposed $2.7-billion (U.S.) Coega aluminum smelter with 1,350 megawatts of cheap electricity. That's enough to light up a city of about half a million.

Just how little Alcan will pay for the power is secret. Suffice it to say that the deal is part of the government's "developmental electricity pricing" program, which is a nifty name for subsidies. "This is designed to give potential major investors (most importantly Alcan . . .) whatever electricity price is necessary to make it profitable to invest in [South Africa]," note Matthew Stern and Frank Flatters, two African economists who publish a newsletter called Geekonomics.

To feed the smelter, in which Alcan is to be the main private partner with an expected 40-per-cent stake, Eskom is spending $1.5-billion to build new coal-fired generators and transmission lines. The development will further mar the unenviable environmental record of a country that already uses coal to produce 98 per cent of its electricity.

At the very least, this calls into question the usefulness -- for anything other than public relations purposes -- of the Global 100 list of the "world's most sustainable corporations." Alcan and U.S. rival Alcoa are both part of the annual ranking published by Corporate Knights. They're also partners in a bauxite mine with the government of Guinea -- which is No. 4 on Transparency International's ranking of the world's most corrupt countries and where the military recently mowed down striking workers. But we digress.

The point is that wherever Alcan buys power to feed its smelters it insists on paying below-market prices -- or else it walks, as it has pretty much done in Europe where the smelters it inherited in its takeovers of Alusuisse and Pechiney are mostly history.

Elsewhere, from South Africa to Iceland to Quebec, Alcan demands and gets cheap power in exchange for investment and jobs. Since almost everywhere it operates Alcan buys power from state-owned electrical utilities, that amounts to a direct transfer from taxpayers to Alcan shareholders.

In British Columbia, where Alcan is a net seller of electricity, it has turned this profit-spinning equation around. There it demands prices for the power it sells to government-owned B.C. Hydro that meet or even exceed market rates -- or else it threatens to pull out of a proposed $1.8-billion modernization of its smelter in Kitimat.

No one can fault a corporation for doing what it's supposed do -- that is, maximize profits. But to hear Alcan executives warn that the company "needs" to sell power at 14 times its cost of production in order to invest in the Kitimat upgrade is a bit rich. Either producing aluminum at Kitimat is profitable or it's not -- and with power at $5 (Canadian) per megawatt-hour, you'd have to be fairly lousy at making aluminum for it not to be.

Asserting that an upgrade of the Kitimat smelter would not be profitable without the ability to sell a minimum of 105 MW (170 MW during the construction phase) of surplus power at $71 per MW/h is tantamount to confirming suspicions that without its various electricity deals -- below cost where it's a buyer, at a premium where it's a seller -- Alcan might be firmly in the red. Alcan chief executive officer Dick Evans might want to think about whether that's the message he should be sending to shareholders.

If anything, the more Alcan gets from selling surplus power to B.C. Hydro, the less it has an incentive to invest in its 53-year-old Kitimat smelter. It all comes down to Alcan's opportunity costs. The British Columbia Utilities Commission, which just rejected the $71 MW/h price as contrary to the public interest, faulted B.C. Hydro for failing to take Alcan's options into account. Alcan could not net anywhere near $71 if it tried to export the power itself, since it would have to pay hundreds of millions of dollars to improve its transmission grid and fork over $16 per MW/h in "wheeling" fees to British Columbia Transmission to carry the power to the border.

Why, then, would a buyer, supposedly representing taxpayers, not consider a seller's options before making an offer? Maybe because politics, more than economics, is at the root of all this? Just asking.

kyakabuski@globeandmail.com