Utilities Commission kills Alcan deal

Utilities commission quashes B.C. Hydro-Alcan deal
Scott Simpson, CanWest News Service, 30-Dec-2006

How B.C. threw Alcan a curve
Konrad Yakabuski, The Globe and Mail, 01-Jan-2007

Alcan reconsidering Kitimat smelter; local mayor uncertain of project
Alcan Inc., 02-Jan-2007

Alcan warns Kitimat project at risk
Andy Hoffman, Globe and Mail, 03-Jan-2007

COMMENT: Unexpected New Year Surprise! The BCUC has not accepted LTEPA+. Will Alcan file its formal notice to proceed with a new smelter, as per RESA? This notice is now due January 1, 2007.

"The Commission does not accept the LTEPA Amending Agreement and the Amended and Restated LTEPA that BC Hydro filed on November 1, 2006 ("the Contracts"), as Energy Supply Contracts filed pursuant to Section 71 of the Act, and finds, pursuant to subsection 71(2) of the Act that the Contracts are not in the public interest and, pursuant to subsection 71(3) of the Act, declares that the Contracts are wholly unenforceable."

http://www.bcuc.com/Documents/Proceedings/2006/DOC_14026_G-176-06_S71_Filing_Order_&_Reasons.pdf

Long Term Electricity Purchase Agreement (LTEPA+), Oct 27, 2006
http://www.bcuc.com/Documents/Proceedings/2006/DOC_13105_B-29_LTEPA_with_Alcan.pdf

Replacement Electricity Supply Agreement (RESA), Aug 5, 1997
http://www.bcuc.com/Documents/Proceedings/2006/DOC_13102_B-28_2006_IEP-LTAP_Alcan_Related_Materials.pdf

Comments by Richard McLaren, Dec 1, 2006
http://www.bcuc.com/Documents/Proceedings/2006/DOC_13654_C17-2_McLaren-comments.pdf

BCH - 2006 IEP & LTAP
http://www.bcuc.com/ApplicationView.aspx?ApplicationId=105

BCH_Section 71 Filing - LTEPA with Alcan Inc.
http://www.bcuc.com/ApplicationView.aspx?ApplicationId=135

A controversial $2 billion "sweetheart" deal between B.C. Hydro and Alcan was quashed yesterday when the British Columbia Utilities Commission ruled it too expensive for the 1.6 million Hydro customers who would have to pay for it.

The commission said Hydro "should not have agreed" to an electricity sales contract paying Alcan -- with its 50-year-old Kemano hydroelectric station near Kitimat -- the same rate it offers new power developments.

The Kemano station powers Alcan's Kitimat aluminum smelter, but Alcan also generates significant profits for itself by selling Kemano's electricity to Hydro.

Unlike new power projects, Alcan's rates were settled without a public bidding process and the new rate "should have been reduced" in light of Alcan's lower electricity production costs, the commission suggested.

The decision raises tough questions about Hydro's ability to act in the best interest of its customers -- the commission "expressly rejects" Hydro's contentions that it's a good deal.

The commission's decision could bleed off into the political arena as well -- Premier Gordon Campbell was the first to trumpet a new deal between Hydro and Alcan when he announced in August that Alcan was planning a $2-billion upgrade to its Kitimat smelter.

Campbell described Alcan's plans as "a major vote of confidence" for Kitimat and "recognition of the strength of B.C.'s investment climate."

The premier could not be reached for comment.

A spokesman in the ministry of Energy, Mines and Natural Resources, which is responsible for B.C. Hydro, said the government believes the Alcan-Hydro deal would be a good one for ratepayers and was certainly in the public's interest -- particularly as Hydro works to secure new and reliable sources of electricity.

Campbell's announcement last August came after Alcan took up an option to renegotiate its long-term power agreement with the province.

A backgrounder co-released on Aug. 14 by the premier's office and the ministry of economic development said Alcan and Hydro agreed to extend Alcan's long-term electricity purchase agreement with a new commercial agreement giving Hydro a more secure share of power from Kemano.

The backgrounder says the deal will "maximize benefits to ratepayers."

Hydro and Alcan submitted the deal for the commission's consideration in late October, and initially attempted to keep details secret -- including a $110 million incentive payment to Alcan plus electricity purchases worth up to $97 million a year for 20 years.

Details were disclosed only after the city of Kitimat, which has frequently accused Alcan of favouring electricity sales over aluminum production, convinced the commission that an open review of the deal was in the public interest.

James Quail, legal counsel for the B.C. Public Interest Advocacy Centre, called it a "sweetheart" arrangement whereby Alcan is "turning water into gold" without consideration for Hydro customers who will have to bear the cost of the deal.

Representatives of both B.C. Hydro and Alcan were unhappy with the decision, while a Kitimat resident who testified before the commission earlier in December was elated.

"This is good news for Kitimat because finally someone in authority has realized what Alcan and the government are trying to do," said Richard McLaren in a telephone interview.

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Alcan might rue the day in 1952 that it set up shop in B.C. were it not for all that money it's made there. The twisted saga of the firm's smelter in Kitimat and hydroelectric station at Kemano has more often than not been a story of Murphy's Law run amok.

Just think back to when Alcan spent $500-million in the early nineties toward a government-approved expansion of Kemano, only to have a subsequent premier pull the plug on the project. Or Alcan's fateful entanglement with Enron, to which it sold part of its contract to provide electricity to B.C. Hydro's export arm. When Enron went belly up, Alcan was on the hook to B.C. Hydro to the tune of $110-million.

Or what about Alcan's poisonous relationship with town officials in Kitimat who worry the company has a hidden agenda to ratchet down aluminum production and ramp up power sales to B.C. Hydro. Indeed, it's already partly happened and Alcan has pocketed massive profits by, in essence, selling back to B.C. taxpayers at a premium the electricity taxpayers gave Alcan the right to produce for free five decades ago.

Finally, the British Columbia Utilities Commission has decided there should be a limit to taxpayer's generosity toward Alcan and has put the kibosh on the company's latest deal to sell power from Kemano to B.C. Hydro.

The ruling handed down Friday likely throws Alcan's proposed modernization of the Kitimat smelter into limbo for now.

The deal to sell power at huge markups to government-owned B.C. Hydro was a quid pro quo of sorts for Alcan's $2-billion investment in the aluminum facility.

The idea that the "sweetheart deal" -- as its opponents have labelled it -- was thrust upon the utility by its political masters in Victoria now seems increasingly credible.

Did the government aim to make Alcan "whole" after the Kemano Completion cancellation by the former New Democratic regime? Unfortunately, only Alcan and B.C. Premier Gordon Campbell know for sure because everything about the power sales contract -- its negotiation, its terms, its objectives -- is shrouded in mystery.

Indeed, had it not been for the perseverance of Kitimat's mayor, Richard Wozney, the deal might never have been made public or been the subject of hearings.

Despite being verbally linked to the modernization of the smelter, the contract struck down by the BCUC actually engendered more uncertainty for Kitimat, not less.

In spite of Alcan chief executive officer Dick Evans's insistence that he was sincere about building a new 400,000-tonne smelter and operating it at capacity for the three decades starting in 2011, the power sales agreement in essence allowed Alcan to keep its options open.

It imposed no obligation on Alcan to build a smelter, yet guaranteed the company $71 per megawatt hour for all the electricity it saw fit to sell to B.C. Hydro until 2025.

No matter how much you believe Mr. Evans to be a man of his word, he cannot predict how his successors will act.

Without some kind of obligation to produce aluminum and provide a certain number of jobs -- similar to the kinds of binding undertakings the Quebec government has secured from Alcan in exchange for providing cheap electricity and renewing the company's own hydro licences -- a future Alcan CEO could shut the smelter and sell electricity, period.

Unfortunately, the current B.C. government is forced to play the hand it's been dealt. The New Democrats gave Alcan its Kemano water rights in perpetuity, so B.C.'s bargaining power, unlike Quebec's, is limited.

So, where to from here? Alcan and B.C. Hydro will want to wait until the BCUC later this month provides its detailed reasons for quashing the power sales deal before undertaking new talks.

And all parties will want to wait until the B.C. Supreme Court hands down a ruling in Kitimat's suit against the government, which the town argues has failed to enforce the original 1950 agreement that gave Alcan Kemano water rights to produce electricity only to make aluminum and not to sell power willy-nilly.

Kemano, except for the aborted expansion fiasco, has been a massively profitable asset for Alcan, possibly more profitable than the smelter itself. Expect Alcan to go the distance on this one.

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MONTREAL (CP) - Alcan Inc. (TSX:AL) is reconsidering its $2-billion Kitimat aluminum smelter plan after the B.C. Utilities Commission rejected an energy supply agreement between the company and BC Hydro.

"We are disappointed with the BCUC decision and will be studying it closely to better understand the commission's rationale and to determine the potential impact on the feasibility and timing of the Kitimat modernization project," CEO Michel Jacques said Tuesday in a release.

"We understand that this period of uncertainty will be difficult for the region affected by the BCUC decision."

Alcan produces excess electricity at its massive Kemano power project that it can sell to the province or other buyers. An approval by the commission was one of three conditions set by Alcan for the final go-ahead of the Kitimat modernization project announced last Aug. 14.

"The other two key conditions are the resolution of environmental permitting issues and a long-term labour agreement to ensure stability during the planning, the construction and the startup of the modernization project.

Kitimate Mayor Richard Wozney said he believes that Alcan is more interested in selling hydroelectricity because it's more profitable than building a new smelter in his community.

"One of their conditions has fallen by the way side so are they going to go ahead - you'd have to ask Alcan," Wozney said Tuesday.

A spokesman for B.C. Premier Gordon Campbell said on the weekend the government was disappointed by the regulatory decision blocking a power sales agreement with Alcan.

Mike Morton said officials will review the decision and look at options.

On Friday, the commission rejected a proposed long-term power contract with Alcan, saying it was not in the public interest.

A commission panel said BC Hydro shouldn't have agreed to pricing provisions and the commission "does not accept BC Hydro's evidence regarding the value of the benefits to ratepayers" of the agreement, commission secretary Robert Pellatt said in a letter.

Critics say the deal was struck without competitive bidding and would see Alcan reap the same rates for its electricity as new projects, even though costs at its Kemano power plant are much lower.

Shares in Alcan were trading down 38 cents to $56.40 Tuesday afternoon on the Toronto Stock Exchange.

© The Canadian Press, 2005

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Alcan Inc. warns that the proposed $2-billion expansion of its Kitimat smelter in British Columbia has been thrown into "a period of uncertainty" that could delay or even kill the controversial project, after a regulator rejected the company's lucrative deal to sell excess hydro power to the province.

Michel Jacques, president of Alcan's primary metal group, said in a statement yesterday that the company is disappointed with the decision, and will "be studying it closely to understand the [regulator's] rationale, and to determine the potential impact on the feasibility and timing of the Kitimat modernization project."

The British Columbia Utilities Commission (BCUC) last week rejected a long-term power sale deal between Montreal-based Alcan and British Columbia Hydro and Power Authority that would have seen Alcan sell electricity to the province at highly profitable rates.

Alcan produces power at its Kemano hydroelectric station near Kitimat in northern B.C. for about $5 a megawatt-hour, plus $5 a megawatt-hour paid to the province for water rentals. The proposed deal would have seen provincially owned B.C. Hydro pay Alcan an average rate of $71 a megawatt-hour, and would have let Alcan sell up to $97-million worth of electricity a year for 20 years.

The deal included $111-million in lump-sum payments to Alcan.

The utility commission ruled the accord is not in the public interest.

Now Alcan says its plans to build a new smelter at Kitimat and increase annual capacity to 400,000 tonnes by 2014, from the current 275,000 tonnes, are in limbo. "We understand that this period of uncertainty will be difficult for the region affected by the BCUC decision," Mr. Jacques said. He was not available for further comment.

Analysts said Alcan must renegotiate a less favourable agreement with B.C. Hydro if the Kitimat modernization project is to go forward.

"It could scrap the expansion, although I think that's unlikely," Blackmont Capital Inc. analyst Lawrence Smith said in an interview. The most likely outcome, he said, would be for "the deal between Alcan and B.C. Hydro to be restructured, so at least the optics of it look less favourable for Alcan. I think the project will ultimately go ahead."

Alcan spokeswoman Anik Michaud, however, said the company will "need to secure an agreement" such as the one it had with B.C. Hydro to make the Kitimat expansion "a competitive and viable project."

Analyst Greg Barnes at TD Newcrest in Toronto also said the decision will likely mean Alcan will have to strike another accord to sell surplus power to B.C. Hydro for less. "It is unclear at this point how the BCUC decision will impact the future of the Kitimat smelter, other than the increased likelihood that the modernization project is delayed," he said in a note to clients.

BCUC approval was one of three conditions Alcan said were necessary to give the final go-ahead for the expansion when it was announced in August. Others that Alcan hoped to have nailed down by the middle of this year included resolving environmental permitting issues and winning a long-term labour agreement with unionized workers.

Kitimat's Mayor Richard Wozney, who has led a public and legal fight against Alcan's ability to sell power, said he is not concerned that Alcan may pull the plug on its operations in B.C. "Alcan is not going to walk away from five-dollar power," he said in an interview, adding that the firm is making a "1,000-per-cent profit on each megawatt" it sells.

In the past, Alcan chief executive officer Dick Evans has warned that smelting projects in Iceland or South Africa could take priority over Kitimat expansion if a satisfactory deal can't be reached. Alcan recently chose Saguenay, Que., as testing ground for its new AP50 smelter after the Quebec government extended low-cost power agreements for Alcan as well as tax incentives and interest-free loans. Alcan has said the $1.8-billion (U.S.) pilot project to test the state-of-the-art smelter will create 740 jobs.

Alcan is allowed to sell excess power generated from Kemano and not used at Kitimat as part a legal settlement agreement struck with the B.C. government in the 1990s. For much of the past nine years, Alcan has been decreasing the amount of aluminum it sells from Kitimat, and increasing the amount of power it sells.

"The B.C. government should not be allowing them to sell power. They're taking the cash from here and investing it somewhere else," said Mr. Wozney, who is awaiting a B.C. Supreme Court decision on his town's lawsuit against the province . The claim alleges a failure to enforce the original 1950 agreement that gave Alcan the water rights to generate electricity at Kemano.

© The Globe and Mail

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