Power deal is key to Intalco survival

The future of the Alcoa Intalco Works aluminum smelter hangs in the balance this weekend, as its 500 employees wait to find out if their jobs will survive the latest crisis brought on by a global economic squeeze. That depends mostly on the Bonneville Power Administration. Will the federal agency be willing to override objections from other Northwest power users and reserve a long-term supply of cheap hydropower for Intalco's use? As of Friday, April 17, the answer was "maybe." In testimony filed in connection with BPA's complex rate-setting process, BPA staff offered Alcoa a power deal that appeared less attractive than what the company has been seeking for its smelter west of Ferndale. The staff proposal suggests that Intalco's power bill could be cut by perhaps 22 percent when aluminum prices are low. Alcoa had suggested a discount of close to 42 percent. But the staff proposal does show a reluctance to cut Intalco off completely, expressing a desire to hang on to the smelter's regional economic benefits, without imposing too great a burden on other power users. The final decision will be up to BPA administrator Stephen Wright, who has until June 23 to decide on the rate Intalco will pay beginning Oct. 1. That could be the defining moment - if Alcoa is willing to keep the plant open that long. Alcoa officials have said they needed a definitive commitment from BPA in weeks, not months. Jodie Read, Intalco spokeswoman, said company officials would study the staff proposal before responding. Industry analysts say Intalco and other U.S. aluminum producers are facing a crisis. "It all depends on the BPA," said Charles Bradford, an aluminum industry analyst in New York. "If the BPA or somebody else doesn't provide power at a reasonable price for a reasonable amount of time, they (Intalco) won't survive." The problem: An aluminum smelter's appetite for power is enormous. At full capacity, Intalco would use about 483 megawatts of power. With that much power, you could light up 4.83 million 100-watt bulbs. With three times that much power, you could serve the city of Seattle. The now-departed Georgia-Pacific Corp. pulp and paper mill on Bellingham Bay used about 40 megawatts. As a global recession cuts demand, the price of aluminum on world markets has plunged, putting pressure on U.S. plants that typically have higher power costs than many overseas smelters. Alcoa wants BPA to link Intalco's power bill to the world aluminum price, to enable the plant to remain viable under current conditions. In recent weeks, Alcoa officials have said that if BPA does not agree to that arrangement, and do it quickly, the smelter is likely to close. Alcoa Inc., the world's largest aluminum producer, reported a loss of $497 million in the first quarter of 2009. The company has responded by cutting production by one-fifth. Min Ye, industry analyst at Morningstar, said much of that cutting has been in the United States. "Most of the U.S. smelters are higher cost than the ones in Iceland and the Middle East," Ye said. According to information on the company Web site, Alcoa owns all or part of 10 U.S. smelters. Five of those have been shut down "temporarily," while three more are operating at reduced capacity. One of those partially idle smelters is Intalco, which can produce 279,000 metric tons per year but is now at less than two-thirds capacity. The capacity of all Alcoa smelters is 4.8 million metric tons. Production cuts could go deeper in the months ahead. Bradford said there is still a huge surplus of aluminum worldwide that continues to depress the price of the metal. "We really need more closures," Bradford said, adding that the outlook will change when the world economy starts perking again. "It very much depends on world economic growth, and it depends very much on China," Bradford said. "They're the big gorilla." China can produce three times as much aluminum as the U.S., Bradford said, with smelters that run on power from cheap coal. Alcoa has 15 smelters outside the U.S., including Australia, Brazil, Canada, Iceland, Italy, Norway and Spain. As of March 31, the company reported reduced capacity at just two of those other smelters, both in Canada. CHEAP POWER DREW SMELTER OPERATIONS Since the invention of the electricity-intensive aluminum smelting process in the late 19th century, smelters have concentrated in regions where energy is cheap, plentiful and perhaps government-subsidized. In the U.S., aluminum production flourished in the Northwest, drawn by the output from the immense federal dams on the Columbia River system. When those dams were completed, power became abundant and prices were low, for both the smelters and the customers of public utilities in this region. But as population and power demand grew across the region, the power supply swung from surplus to scarcity. As recently as the mid-1990s, BPA was supplying 10 smelters with a total of more than 3,000 megawatts. But when power supplies became tight in 2000 and 2001, BPA no longer had enough cheap power from dams to meet demand. The federal power agency had to buy more costly power to meet that demand, raising everyone's power bill and making most of the smelters uneconomical. Today, Intalco is one of three smelters still producing aluminum in the Northwest. The other two are Swiss-owned Columbia Falls Aluminum Co. in Montana, and an Alcoa smelter in Wenatchee. Columbia Falls, like Intalco, is looking to BPA for its power, and its life expectancy could be short without a long-term BPA contract. In Wenatchee, Alcoa has secured a long-term power supply from the Chelan County Public Utility District, which has its own dams. CLOSURE WOULD LEAD TO BIG JOB LOSSES Intalco workers, joined by Whatcom County business and political leaders, have rallied repeatedly over the last few years to keep BPA officials aware of the importance of the company's payroll and tax base in this area. Western Washington University's Center for Economic and Business Research estimates that the indirect impact of an Intalco closure could eliminate another 1,000 jobs, in addition to the 500 that would be lost at the smelter. That would push the county's unemployment rate to 10.4 percent. But outside Whatcom County, representatives of public utilities question why the households and industries they serve should pay more for power to help keep Intalco operating. BPA officials acknowledge that continuing to reserve cheap power for Alcoa will mean less cheap power and somewhat higher power bills for other BPA customers. "Any hit to the wholesale power price has immediate consequences for them (other power users,)" said Scott Corwin, executive director of the Public Power Council. Dean Boyer, communications director for the Washington Public Utility District Association, agreed. "If rates go up at other industrial customers served by our member utilities in order to subsidize jobs in Whatcom County, it could very well cost jobs in other areas of the state," Boyer said. In November 2008, the Public Power Council submitted testimony to BPA arguing that an Intalco power deal on the table at that time would have amounted to a $140,000-per-job subsidy for the company. At a recent public meeting at BPA headquarters in Portland, Ore., Alcoa officials said the long-term prospects for Intalco and the rest of the aluminum industry are good. William Oplinger, an Alcoa vice president, said world demand for aluminum is expected to double by 2030, and producers will likely be scrambling to meet that demand. "Intalco is a place where we'd like to invest in the future," Oplinger said. But that will only happen if BPA can help Intalco survive the next few years. "We want to run the facility,' Oplinger said. "We just won't do so at the losses we continue to see." Reach JOHN STARK at john.stark@bellinghamherald.com or call 715-2274