Alcan: With new power deal, all hurdles are cleared for $2-billion project
COMMENT: Still no obligation to build a new smelter, and seldom has a Commission conclusion had such a large paragraph of "concerns."
Scott Simpson
Vancouver Sun
Thursday, January 31, 2008
Rio Tinto Alcan will push ahead with its $2-billion plan to modernize its Kitimat smelter after a favourable ruling this week from the B.C.Utilities Commission, the company said Wednesday.
Alcan Decision at www.bcuc.com
Company spokesman Stefano Bertolli said the commission's approval this week of a long-term power sales deal with BC Hydro means the multinational mining company has cleared all three major hurdles to getting the project underway.
The company had previously secured a five-year labour contract with unionized workers at the smelter and, in December, gained the approval of B.C.'s environmental assessment office.
The Rio Tinto Alcan board of directors won't make a final decision on the project for several months, but Bertolli said the company is committed to updating the smelter, which would boost its annual global aluminum production by three per cent.
In a telephone interview from Montreal, Bertolli described the power-sales deal as good news "for the company, for the people of Kitimat and for the province of British Columbia."
"At this point, we are obviously very pleased with the decision," Bertolli said. "We are now able to complete our final studies [on the revitalization] and present them to the board of directors."
Response from the city of Kitimat, where the smelter is the primary source of employment and economic activity, was more muted.
City manager Trafford Hall said that the modernized plant will require about 550 fewer workers than the facility it is replacing, and that there was enough surplus power available from Alcan's Kemano power station to sustain a much larger plant supporting more workers.
Prior upgrades of the smelter, which first opened in 1954, have already reduced the workforce by about 400 people, Hall noted.
A decade ago, the plant had 2,000 workers. That will drop to 1,000 by the time the modernization is complete.
"Almost 1,000 jobs are being shed here because of meaningless technological change," Hall said in a telephone interview from Kitimat city hall.
Energy for the Kitimat smelter comes from the Kemano power station, which the company has owned for a half-century. Kemano produces electricity at a rate only marginally above the nominal water rental fee charged by the province.
Hydro wanted a long-term contract to buy all of the surplus power output from Kemano, as a means of addressing the B.C. government's ambition to transform the province from a net importer to a net exporter of electricity to U.S. markets.
BC Hydro and Alcan, with the involvement of the provincial government, appeared to have struck a deal involving power sales and smelter modernization in 2006, but it fell apart after the utilities commission ruled it was a bad one for Hydro customers.
The BCUC ruled that Hydro was offering to pay too much for the power, given the age and low production cost at the Kemano facility, and rejected the deal.
A revised deal, saving Hydro customers between $65 million and $120 million between now and 2034, was approved by the BCUC on Tuesday afternoon.
In a news release, Rio Tinto Alcan primary metal president Jacynthe Côté said the company is "very pleased with BCUC's decision to accept the new power agreement between Rio Tinto Alcan and BC Hydro. Final approval of the project will allow us to stay on target to deliver first metal by 2012 and reduce greenhouse gas emissions by half a million tonnes per year."
Rio Tinto Alcan projects the modernized facility will increase production capacity over the existing facility by 125,000 tonnes per year.
The city of Kitimat had argued in front of the BCUC that a bigger plant requiring more power, rather than a smaller one with surplus electricity, would be better for the city and the province.
"This power sales initiative has brought down what was a very powerful aluminum industry in Kitimat," Hall said. "We see this deal as further undermining the industry here."
He described the power generated at Kemano as "the cheapest in the world" because the facility has long since been paid off, and because B.C. only charges $5 per megawatt hour in water rentals.
By contrast, Hall noted, B.C. collects royalties on a sliding scale for other resources. He cited natural gas, where the royalty collected by the province increases as the North American market price for gas goes up.
"It's the only energy resource where the rent does not fluctuate with the value of the end product," Hall said.
© The Vancouver Sun 2008
Alcan Decision at www.bcuc.com
9.0 CONCLUSION
The Commission accepts the approach and objectives of BC Hydro to the bilateral negotiations with Alcan. The objectives were to obtain the best possible deal for BC Hydro and its ratepayers and to ensure the concerns raised by the Commission in the LTEPA+ Decision were dealt with.
The Commission accepts the general conclusion, if not the specific results, of the cost-effectiveness analysis of BC Hydro; that is, the 2007 EPA is cost-effective, and is in the public interest. The Commission has concerns regarding BC Hydro’s treatment of transmission costs in estimating its avoided costs, its approach to estimating capacity benefits arising from the 2007 EPA, its estimate of average energy production at Kemano, its weighting of different price scenarios, and its justification and analysis of exchange rates. Alternative assumptions have the potential to reduce the net benefits of the 2007 EPA. However, the Commission concludes the net benefits to ratepayers, calculated by comparing the cost of the 2007 EPA to other resource alternatives, are still positive under most reasonable scenarios, and likely range from approximately $65 million to $120 million under the EIA gas price forecast.
The Commission concludes that the opportunity costs of the seller are both within its jurisdiction to consider and are particularly relevant to the determination of the public interest where a contract is reached through bilateral negotiations rather than competitive processes, such as the 2007 EPA. The Commission finds the value of the 2007 EPA lies between BC Hydro’s expected avoided costs and Alcan’s opportunity costs.
Some Intervenors, including the CAW, BCOAPO and the DoK, are of the view that the 2007 EPA should not be accepted without further assurance, if not a commitment, that Alcan will proceed with the Modernization Project. The Commission concludes that the decision as to whether or not to proceed with the Modernization Project rests with the Board of Directors of Rio Tinto. The evidence of Alcan suggests the Modernization Project is more likely to be completed with acceptance of the 2007 EPA than any of the alternatives proposed by Intervenors. In these circumstances, the Commission cannot 127 conclude that the 2007 EPA is either at the expense of, or to the benefit of, the Modernization Project. For the same reason, the Commission Panel cannot conclude that acceptance of the 2007 EPA has probable economic effects on Kitimat or the surrounding communities. The Commission concludes that it should accept the 2007 EPA because it is cost-effective and, while the Modernization Project is in the public interest, the Commission finds no reasonable alternative to acceptance of the 2007 EPA that would increase the probability that Alcan will proceed with the Modernization Project.
DATED at the City of Vancouver, in the Province of British Columbia, this 29th day of January 2008.
ROBERT H. HOBBS, CHAIR
NADINE F. NICHOLLS, COMMISSIONER
A.J. PULLMAN, COMMISSIONER