Alcan can't 'justify' smelter deal

Alcan Inc. will scrap the $2-billion expansion of its Kitimat smelter in British Columbia if it is not allowed to sell excess power at market rates, a company executive warned yesterday.

Michel Jacques, who was recently appointed president and chief executive officer of Alcan's primary metal group, said the aluminum producer could not accept a deal to sell the surplus power it generates from its Kemano hydroelectric station at prices below the market average, because it would be unfair to shareholders.

"With the economics we understand today, with the rules of the game as they were laid out for an investment in B.C., we cannot justify an investment unless we are sure we will be able to sell the power at market rates," Mr. Jacques said in an interview.

The British Columbia Utilities Commission (BCUC) rejected Alcan's long-term electricity agreement with British Columbia Hydro and Power authority last week. The accord would have allowed Alcan to sell up to $97-million worth of electricity a year to the province for 20 years.

Mr. Jacques said the price of $71 per megawatt hour that Alcan was to have received from B.C. Hydro was based on the average price paid by B.C. Hydro to other independent power suppliers.

It costs Alcan between $5 and $10 to produce a megawatt hour.

"Why would we accept today less than B.C. Hydro is paying to other producers for exactly the same commodity?" Mr. Jacques said. "How can we justify that to our shareholders and to the pension funds that own Alcan shares?"

In a letter announcing the decision to reject the power sale agreement, the BCUC panel said "B.C. Hydro should not have agreed to the pricing provision" of the accord with Alcan. "In particular, it should not have agreed to pricing provisions based on the [fiscal] 2006 Call," the letter said.

The full reasons for the decision are expected to be released later this month.

Analysts have said that Alcan will have to renegotiate a less lucrative rate with B.C. Hydro if it wants to build a new smelter and expand capacity at Kitimat to 400,000 tonnes a year from 275,000 tonnes.

However, Mr. Jacques said that without guaranteed revenues from the sale of power, the expansion may not be economically viable.

"These revenues are helping us justify the investment in the smelter. If it wasn't for that, if people say 'you can't sell the power,' then there's no deal. It makes no economic sense for us to build a new smelter in B.C."

Alcan was granted water rights and the ability to generate power by British Columbia back in 1950 in exchange for constructing Kitimat and Kemano. At the time, the $500-million project represented the largest private investment in Canada to date.

Kemano produces between 700 and 890 megawatts of power a year, depending on rainfall and water levels. The aging Kitimat smelter uses slightly less than 550 megawatts.

The proposed new smelter will use between 670 and 690 megawatts, once it is running at full capacity, which could happen by 2014.

Alcan has come under fire in recent years from critics who say it is more interested in selling the power it produces in B.C. than aluminum from its smelter.