A huge loss of government revenues

A huge loss of government revenues
Richard Wozney, Vancouver Sun, 18-Aug-2006

So far, tough love has failed to deliver on B.C.'s aluminum dreams
Vaughn Palmer, Vancouver Sun, 18-Aug-2006

Alcan and the government's announcement of a $1.8 billion modernization of Alcan's Kitimat smelter was lauded by Premier Gordon Campbell as good for British Columbia. The details of this agreement are still emerging. A careful look at what we do know tells a different story -- of massive subsidies to a single firm, and a huge loss of government revenues and industrial potential.

Water rentals of under $5 per megawatt hour (MWh) make the publicly-owned Nechako/Kemano river system a virtual gift. It costs Alcan under $5 per MWh to produce the electricity. The people of B.C. are to buy this back for $71 per MWh -- a profit of over 1,000 per cent. Alcan will sell on average 210 MW per hour of electricity, meaning the company will yield over $2 billion in subsidized profits from the new deal's 22-year term. Who's paying for this $2 billion subsidy? You, the taxpaying citizens of B.C.

Access to the Nechako/Kemano public water resource provides Alcan with one of the world's most valuable business assets. The question was not whether Alcan would modernize its smelter, but when it would do so and how big it would be. This deal is a much smaller smelter than the public resources will support.

Kitimat is a long-term supporter of Alcan's right to use public water resources for industrial use. But the sales of raw electricity undermine the industry. Profits from power sales are greater than those in the profitable aluminum industry and far in excess of fair market return. The water rentals are a pittance of the value of this resource. The public gets its value from the industrial activity and jobs for British Columbians.

Under the new deal, power from Alcan's Kemano station will be diverted from expanding the aluminum industry to bulk sales to the grid to capture this windfall profit. Under the original 1950 Agreement, any surplus electricity is intended to attract industry to the vicinity of Alcan's works.

Our district has lost over 300 jobs already due to power sales, and this new deal means another 550 will be lost. Alcan knows it can make much more money from exploiting this resource for power sales than using it to smelt aluminum.

- Richard Wozney is the mayor of the District of Kitimat.

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No recent B.C. government pushed harder to increase jobs and investment in aluminum smelting than the one headed by Glen Clark.

On taking office as premier a decade ago, Clark inherited a showdown with Alcan, operator of the lone existing smelter in Kitimat.

His predecessor, Mike Harcourt, had cancelled the company's expansion of its Kemano power station when the project was already half built.

Alcan was preparing a half-a-billion dollar lawsuit to recover what it had wasted on the project.

Clark's starting point was not one of sympathy for giant corporations. "We have no intention of giving Alcan big pots of money," he declared. "We don't believe they are owed anything."

At the same time, the former labour organizer recognized the value of aluminum smelters in terms of high-paying union jobs.

He also judged the province to be flush with a commodity that is essential to the production of aluminum -- electricity, thanks to the emerging payback to B.C. from the Columbia River treaty.

So Clark initiated a carrot-and-stick negotiation with Alcan.

With one hand, his government drafted legislation that would have voided the lawsuit on terms favourable to provincial taxpayers.

With the other, it drafted a law allowing cabinet to deliver power to the smelter at whatever price was deemed to be "in the best interest of B.C."

In the summer of 1997, they cut a deal. Alcan dropped the lawsuit. The province promised enough replacement power to double production in Kitimat.

But the smelter expansion wasn't certain. Alcan merely agreed to study the feasibility of a twice-as-big smelter.

Clark decided to invite other players into the game. If Alcan wouldn't jump at the offer of cheap power, maybe other aluminum producers would.

His ensuing jobs-for-power initiative was pitched to all comers in the aluminum sector. One analysis by the respected Wall Street Journal pegged the electricity discount at 66 per cent below the market price.

Clark spent tens of thousands of dollars visiting Alcan's rivals in a chartered Lear jet. Several agreed to conduct what were euphemistically described as "pre-feasibility" studies.

Every few weeks, he added to the list of possible smelter sites. Prince Rupert, Powell River, Squamish, Port Hardy, Port Alberni, Kamloops, Prince George, Trail. I kept waiting for him to suggest Surrey. Or Saltspring Island.

Ever-confident, the premier boasted in a speech to the party convention in the spring of 1998 that the effort was about to pay off in "three -- count 'em -- three aluminum smelters."

Alcan was not nearly as enthusiastic. The company was in expansion mode. It had just committed to a $2-billion smelter project in Quebec, on the strength of a cheap-power-and-other-incentives deal with that province's separatist government.

But by June 1998, less than a year after striking the deal with Clark, it had reached discouraging conclusions about the prospects for Kitimat. The site was wrong. The economics were wrong. B.C.'s higher taxes and higher labour costs had added 50 per cent to the initial estimate of the cost of construction.

"Back to the drawing board," said a company representative.

"A negotiating strategy," returned Clark. But not to worry -- there were plenty of alternatives. "We are in negotiations right now with about nine other aluminum companies," he claimed. "We're confident."

Still that was pretty much the end of the exercise. Cheap power and an aggressive premier were not enough to attract new smelting capacity all by themselves.

Not with other considerations such as slumping commodity prices and even friendlier jurisdictions in other parts of the globe.

Clark's suitors dropped away one by one, leaving only Alcan, still studying smelter expansion in Kitimat and taking its own sweet time about it.

Only now, with prices high again and Alcan having access to new and more-efficient technology, is the company seriously revisiting its expansion plans.

But the situation has changed regarding the electrical transaction as well. BC Hydro, having constructed little in the way of new generating capacity in years, needs power more than Alcan.

The company will be able to underwrite its investment in modernizing the smelter, in part, by selling its own power surpluses to BC Hydro.

The deal, announced this week, is conditional. It still needs a half dozen kinds of approval and is no less vulnerable than were Clark's plans to changing economic conditions.

Even in its current tentative state, the deal has drawn ample criticism from those who claim to know better how to wring jobs and investment dollars from big corporations.

But if the tough love combination would have done the trick, then surely Clark would have succeeded at least a little.

He promised impressive numbers of smelters, investment dollars and jobs. He delivered precisely none. Count 'em: None.

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