Alcan treads fine line with hydro supply

Alcan treads fine line with hydro supply
Konrad Yakabuski, Globe and Mail, 16-Aug-2006

Alcan replies
Cynthia Carroll, Globe and Mail, 21-Aug-2006

Alcan's newest promise doesn't impress, or fool, Kitimat
Mark Hume, Globe and Mail, 21-Aug-2006

Alcan power grab rankles Kitimat
Jeff Nagel, Victoria News, 23-Aug-2006

Electrifying facts - BC Hydro's deal to buy power from Alcan
Harvey Enchin, Vancouver Sun, 25-Aug-2006

COMMENT: When it was first announced, my comment was "No matter how it appears, underpinning this decision by Alcan, is an energy deal, not an aluminum smelting deal." Sure enough.

Our clean hydro energy gets sold. And contracts are signed for coal-fired energy. Stew on that.

All this time we thought Alcan was an aluminum producer, when it turns out it's really just a gold digger.

Alcan may be a member of a newly endangered species -- the widely held, Canadian-based mining company -- but it's hard to feel patriotic about a multinational whose ability to extract subsidies from governments makes Bombardier look like a hapless amateur.

Like Bombardier, Montreal-based Alcan is so much a part of Canadian folklore that, growing up, many of us first heard about it in our primary school French classes. We learned that Arvida was a town in Quebec where tout le monde travaillait pour Alcan, which brought in bauxite from South America and turned it into aluminum. We were supposed to be très fiers , or proud, of this Canadian world beater, just as we were to be tickled to know that New Yorkers rode Bomber-built subway cars to work.

What the French textbooks didn't tell us was that governments of the day gave Alcan huge chunks of what has become one of our most valuable resources -- our hydroelectric potential -- in exchange for promises of industrial development. And what they couldn't tell us is that we'd probably live to regret it.

Take Alcan's announcement Monday that it will invest $1.8-billion (U.S.) to modernize and expand its aluminum smelter in Kitimat, B.C. More than 50 years ago, the British Columbia government gave Alcan the right to reverse the flow of the Nechako River, flooding thousands of hectares of land, to build a hydroelectric station. The so-called Kemano project was to generate about 900 megawatts of electricity exclusively for use in aluminum smelting. Using the cost-benefit tools of the day, the jobs and export revenue appeared to make it a good deal for B.C. taxpayers, especially since no one in 1950 ever contemplated the emergence of a continental electricity market. In other words, if Alcan didn't use the power, no one would.

In recent years, however, Alcan has been cutting more and more of Kitimat's aluminum smelting output, freeing up power and selling the surplus electricity at market prices. Kemano, whose costs were long ago amortized, produces electricity at about half a cent per kilowatt hour. Depending on where you live, you know that you're paying at least 10 times, but more like 20 times (Hello, Toronto), more for the electricity you consume. So, you have an idea of the profit Alcan reaps by selling the surplus power, especially during peaks of energy consumption, instead of using it to produce aluminum, the price of which -- while currently very high -- remains cyclical.

For years, a coalition of Kitimat politicians, led by Mayor Richard Wozney, has maintained that Alcan is violating its half-century-old, power-for-jobs pact with the B.C. government. Unfortunately, Monday's announcement of an expansion of the Kitimat smelter shows Premier Gordon Campbell has succumbed to the gold digger's charm.

Alcan will increase the capacity of the Kitimat smelter to 400,000 tonnes from 275,000 tonnes. While that sounds good, it's much less than the 550,000 tonnes that could be produced using Kemano's output. In fact, the more modern plant will use a third less electricity per tonne of aluminum produced. It'll be so efficient that employment will drop from 1,550 to 1,000 (according to Alcan) or even 800 (according to the Mayor's educated estimate, based on Alcan's 40-per-cent owned Alouette smelter in Quebec).

So, why isn't Alcan taking advantage of Kemano's low costs to make more metal? Mr. Wozney suspects it's because it's more profitable to sell the surplus power to B.C. Hydro (that is, B.C. taxpayers) at market prices.

It gets better. The new smelter will use even less electricity than the 52-year-old one does -- 30 MW less by 2009, as much as 120 MW less by 2014. So, Alcan will get lump sum payments from B.C. Hydro of $45-million (Canadian) in 2007 and $66-million in 2011, in addition to the market prices the utility will pay over all for electricity purchases from the aluminum company until 2024.

The same scenario risks being played out in Quebec, where more than a third of Alcan's 3.5 million tonnes in global smelting capacity is located. Here, too, previous governments let Alcan build its own hydro stations on the basis the power would be used to create smelting jobs. Old smelters are being shut down, a couple replaced by more energy-efficient ones. This means Alcan will likely have megawatts to burn in coming years. The legality of Alcan's expected move to sell the surplus power at hefty sums on the open market will be a hot topic, as it is in Kitimat.

Or as it could become in Cameroon. Alcan's 47-per-cent-owned Alucam unit has signed a letter of intent with the government to build a $900-million (U.S.) hydroelectric station and aluminum smelter in the bauxite-rich African nation. More than three-quarters of Cameroon's 17 million people don't even have electricity, and those who do pay several times more for it than Alucam. The surplus power from Alcan's new hydro station will be sold back to Cameroons, whose per capita income is barely $1,000.

So what business is Alcan in anyway?

kyakabuski@globeandmail.com

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Montreal -- Konrad Yakabuski (Alcan Treads Fine Line With Hydro Supply -- Aug. 16) asks: "So what business is Alcan in anyway?" With more than a century's experience in aluminum production and as the world's second largest producer of primary aluminum, it should be clear what business Alcan is in.

Were that not enough evidence, Alcan announced its intention to invest $1.8-billion (U.S.) in modernizing the Kitimat, B.C. smelter, to produce 60 per cent more aluminum than today. Alcan would not be contemplating an investment of this magnitude if its primary objective was not to produce aluminum.

Contrary to what Mr. Yakabuski suggests, the modernized smelter would use more power than ever before. The power agreement with B.C. Hydro is specifically structured to ensure that aluminum production always comes first, before any sales of surplus power.

Mr. Yakabuski also states that power sales are likely to increase. Actually, exclusive sales to B.C. Hydro will decrease from current average levels of 225 megawatts to 115 megawatts after the modernization is complete, as the Kitimat smelter would use more energy to produce more aluminum.

It should be clear that this is the rationale behind Alcan pursuing this investment of $1.8-billion. The company will create virtually all its shareholder value from the production of aluminum and certainly not from the sale of energy to B.C. Hydro.

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Ever since it took over control of the Nechako River, in 1950, Alcan Inc. has found itself in a series of battles with various groups in British Columbia.

Environmentalists and the federal Department of Fisheries, concerned about the loss of the salmon habitat; native bands, who saw graveyards, village sites and hunting grounds drowned in a reservoir; and even the provincial government, which stepped in to stop a big power boosting plan known as Kemano II, have all taken on Alcan at various times.

But Alcan's most surprising opponent -- and the last one standing, it appears -- is the District of Kitimat.

It is rare when a company town turns on the company that created it. And it wasn't an easy decision for the community. But with jobs vanishing, property values plummeting, and the future looking increasingly bleak, Kitimat decided a few years ago to take a hard look at Alcan and its power-hungry business strategy.

District council, led by long-time Mayor Richard Wozney, didn't like what it saw, subsequently launching an action in the Supreme Court of British Columbia to try to make Alcan live up to the deal it first signed with the government in 1950.

Alcan was attracted to B.C. originally by a promise of cheap, cheap power. The province gave the aluminum company the rights to about 80 per cent of the flow of the Nechako, and allowed the company to flood wilderness valleys, creating a massive reservoir.

In return, Alcan was supposed to transform the industrial face of northwestern B.C. by building a huge aluminum smelter at Kitimat. The aluminum smelter got built alright, but over the years Alcan began to see that there was easier money in power generation and one by one the smelting pots were allowed to grow cold.

As the smelter operation faltered, power sales grew.

Last year, Kitimat filed a petition with the Supreme Court seeking an order against the B.C. government that would strike down an order-in-council allowing Alcan to sell power outside the vicinity of Kitimat. That petition, to be heard next month, also seeks a declaration that power generated at Kemano can only be used for the enhancement of the aluminum industry.

In effect Kitimat is trying, through litigation against the government, to force Alcan to live up to its 56-year-old promise to build a thriving community around a big aluminum smelter.

In a deal announced by Premier Gordon Campbell last week, Alcan appears to be doing just that, with a promise to spend $1.8-billion upgrading its existing smelter.

But Kitimat, which has seen jobs vanish and property values decline by up to 40 per cent since 1999, is not impressed with the new deal.

In a statement, Mr. Wozney, who has been the mayor for 16 years, says Alcan's plan is to build a smaller, more efficient smelter than what exists now, reducing the work force even more.

"We've lost over 300 jobs already due to power sales and this new deal means another 700 will be lost," Mr. Wozney said.

And that stunning $1.8-billion investment doesn't seem so impressive, he noted, when you consider where the money is coming from.

Under the deal, Alcan will make $2-billion in windfall profits by selling power to BC Hydro.

Trafford Hall, Kitimat's municipal manager, said it costs Alcan under $5 a megawatt hour to produce electricity, and the water rentals the company pays the province costs another $5 per MWh. Under the new deal, the public buys the power back for $71 per MWh.

"So Alcan makes an incredible profit on a public resource. . . . $61 a megawatt hour," Mr. Hall said. "I don't understand this . . . why would any government do that?"

Why indeed?

As I understand it, we give Alcan a river, they destroy salmon spawning areas, flood valleys and sell the water back to us as electricity. The massive profits are now to be used to modernize a plant and get rid of 700 jobs.

And this is good for B.C.?

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A veteran observer of northern B.C. once told me Alcan is like a glacier.

It doesn't move fast. But slowly, inexorably, it goes where it wants and good luck to those who stand in its way.

On Aug. 14, the company took a rare leap forward with the announcement it will spend $2 billion to modernize its aging Kitimat aluminum smelter.

In few places would such an announcement be met with cynicism.

But Alcan's next move has long been anticipated and feared in Kitimat, where town leaders denounced it as one that will undersize the smelter and cut about a third of the 1,500 jobs there to maximize profits from power sales.

The city is pressing on with a legal challenge that aims to limit the sale of electricity Alcan generates from the Nechako watershed and hopes victory will force the company to build a bigger smelter than the one unveiled Monday.

The dispute is rooted in B.C.'s original jobs-for-power accord.

Back in 1950, the province gave Alcan the rights to the Nechako River's phenomenal hydroelectric potential so it would build a smelter, create jobs and open up the northwest.

The only catch was that the power generated be used to make aluminum or other industry in "the vicinity of the works."

Since then, the Kemano power station plugged into the B.C. power grid and B.C. Hydro began buying surplus electricity from Alcan.

Rising energy prices have steadily made it more profitable for Alcan to sell power than make aluminum and the company set up a U.S. power marketing subsidiary to exploit the opportunity.

Kitimat officials say successive governments haven't enforced the original agreement and Alcan is gradually gaining unfettered control of a public resource that should work for the public good.

"British Columbians have been had here," municipal manager Trafford Hall told me. "Power sales create a river - a river of money out of the province."

Some local Liberals had hoped to broker a compromise that would have seen some low-cost Alcan power offered at below-market rates to lure new industry to the area.

That doesn't seem to be in the cards.

Instead the deal on power will see Alcan, which generates electricity at a cost of $5 per megawatt hour, sell it to B.C. Hydro for around $71 - in line with current prices for independent power production.

That's hardly a cost advantage for a resource that theoretically belongs to B.C.

Kitimat argues it adds up to a profit of 1,000 per cent on the power, or more than $100 million per year - enough to finance the entire new smelter over time.

There's more.

The deal only lasts until 2024, with a possible extension to 2029. After that Alcan is free to sell Kemano power on the open market and B.C. may have to match whatever price energy-starved Californians are prepared to pay.

Will Alcan have any obligation to use the electricity for industry in the far future? Or simply export it to the highest bidder? That remains unclear.

"There will be a million different reasons over time to increase power sales," Hall predicts. "It's just more profitable to do it."

Further clouding the issue is the fact the nearly 900 megawatts of Kemano power is increasingly important to B.C. as an energy crunch nears that could force construction of a new dam on the Peace River. Energy-intensive aluminum production in Kitimat may look less and less wise.

Kitimat's city fathers obviously want as many jobs there as possible and come off sounding greedy and grumpy on a good news day.

But our public resources are finite and deserve careful stewardship.

If the rights to a river have permanently flowed away from us and onto the balance sheet of a multinational corporation, we deserve to know how and when it happened.

Good answers have been scarce from finger-pointing Liberals and New Democrats.

But more light may be shed when the new power accord is scrutinized by the B.C. Utilities Commission - or when Kitimat gets its day in court in October.

Jeff Nagel is Black Press' regional reporter for the Lower Mainland.

jnagel@surreyleader.com

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Let's make the unlikely assumption that the mayor of the district of Kitimat, Richard Wozney, got his numbers right.

He argued in these pages last week that Alcan Inc. will sell an average of 210 megawatt hours of electricity at $71 per MWh to BC Hydro, yielding $2 billion in "subsidized" profits over the 22-year term of a newly extended power purchase agreement related to the modernization of Alcan's aluminum smelter. The actual numbers won't be disclosed until the contract is filed with the British Columbia Utilities Commission on Aug. 31.

In any case, one is meant to take from this that Alcan is gouging BC Hydro and, by extension, British Columbians.

Not only does this allegation fail to reflect the language of the contract but it prompts the question: How much should electricity cost?

Most Canadian provinces have artificial markets in electricity in which prices are determined by regulatory bodies irrespective of supply and demand. Most households pay the same rate regardless of consumption or whether the cost of production has been affected by low water levels, high natural gas prices or some adverse event.

From time to time, power utilities are allowed to approach the regulators cap in hand to request a rate adjustment to address changing circumstances. Last spring, BC Hydro applied to the BCUC for a rate increase of 4.65 per cent that took effect July 1, 2006, and a further hike of 2.71 per cent to come into force on April 1, 2007. This still leaves B.C. consumers paying the third-lowest electricity rates in North America.

Industrial users, on the other hand, are accustomed to variable pricing based on peak or off-peak demand. Simply put, they pay more for power when most users want it than they do when they don't.

Outside the fantasy world of regulated prices, there is a vigorous free market in electricity that sets dramatically different rates based on peak or off-peak demand. On the New York Mercantile Exchange, for example, power traders buy and sell futures contracts for the average peak price for the market hub around the Columbia River in Washington and Oregon, considered a benchmark price for the region. The peak spot price has been trading in a bid-ask range of $67.50 US to $74.25 US per MWh. Off-peak prices range from $45 US to $60.25 US.

A futures contract for settlement between next July and September was recently quoted in a range from $83.75 US to $84.75, suggesting that traders expect power prices to escalate sharply in the next year and beyond. If Wozney is correct and BC Hydro has negotiated a contract that locks in the price of electricity from Alcan at $71 per MWh, then it's made the deal of the decade.

The Alcan power purchase agreement saves BC Hydro from having to rely on imports or purchase electricity at the spot price, although one assumes the utility mitigates market volatility with judicious use of derivatives. It is assured delivery of 170 MW between 2007 and 2009 and 80 to 120 MW between 2010 and 2014, which will help meet demand until contracts awarded under the recent open call for power projects from independent producers come on stream, the first of which is expected in 2010.

Not at all surprising is that the anticipated price for electricity under those contracts, specifically those from run-of-the-river projects, is in the ballpark of $70 per MWh.

Kitimat and other Alcan critics portray power sales as some sort of duplicitous scheme that undermines the intent of government when it granted Alcan water rights to the Nechako River in 1950. But supplying the province with electricity from the Kemano power plant has always been part of the game plan.

Alcan isn't just permitted to sell power, it is required to. Under the Long Term Electricity Purchase Agreement, the company is under contract to deliver a certain volume of electricity provided it is surplus to its smelter needs. Under the previous agreement, if Alcan had built a smelter that required more power than it could produce at Kemano, BC Hydro would have had to provide it below its own cost.

Now, that would have been a subsidy.

Postscript: Canadian Business magazine named Kitimat one of the most affordable places in Canada to live with a median house price of $104,000 and median household income of $74,244. That means it would take 1.4 years worth of income to buy a house. By contrast, the median house price in Vancouver is $700,000 and median household income is $57,926, meaning that it takes 12 years of income to buy a house.

Memo to Kitimat: Stop whining.

henchin@png.canwest.com

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