Lake Wenatchee Info

PUD Alcoa Agreement Input Requested

13 Responses to “PUD Alcoa Agreement Input Requested”

1. 1
   George Wilson Says:
   

   The proposed new Alcoa contract currently on the table is getting a growing amount of scrutiny, much of it skeptical. Don & Jeanne Poirier have submitted a thoughtful and interesting analysis of this from the financial perspective which is quite revealing. With their permission it is posted here below. Please do take the time to read it, research this issue yourself and make your thoughts, pro or con, known by posting a comment on this item. To do so just go to the bottom of the PUD lead article on the website, click on the comments link at the bottom of the article, and a window will come up for you to post a comment. If you have not posted a comment previously the first window you will see will prompt you to choose a user name and password and then you will be able to post comments.

   From: Don & Jeanne Poirier
   Subject: Alcoa Contract - Customer Feedback

   Alcoa Contract- Customer Feedback - November 6, 2007

   Thank you for the response to my October 25th e-mail concerning the Alcoa contract.

   The PUD has, in the past, done a good job in projecting future loads based on population growth and past history. However, there are new issues and trends that are highly likely to increase the demand for electricity in general and more so for our low carbon hydropower in the next five to ten years. My concern is that we are not taking these into account in our projections.

   Examples of major trends are peak oil (likely to occur sometime within the lifetime of the proposed contract) and regional and national climate change legislation (already a reality and certain to get stronger), both of which will drive up demand for and market value of our low-carbon hydropower. An example of a minor but still possibly significant trend would be if the increased number of second homes and large primary homes in Chelan County led to increases in per capita and per residence electrical consumption. This is what prompted my request for graphs of these data.

   I asked about load shedding because the PUD has stated they want operational flexibility and control yet we are limiting ourselves per the contract. Clearly the more flexibility a customer offers the grid by permitting their supply to be modified to help the grid meet its other demands, the less they should have to pay for their electricity. If instead a customer requires flexibility of the grid, requiring it to meet the customer’s demand at all times no matter the cost to the grid of having to meet other demands, the more they should have to pay for their electricity. “At cost” pricing should be reserved for the first case and if Alcoa really needs uninterrupted power or control of the shedding, they should have to pay more.

   I asked about the 65% reduction of greenhouse gas (GHG) emissions because it is very important to me to know Alcoa is really being environmentally responsible and also that they are not misleading people about their carbon footprint. I note that the 65% is only on the PFC’s produced and not on the CO2 produced by the actual processes of converting alumina to aluminum. Taking into account all GHGs produced in the smelting process, the reduction is 48%, quite significant but that is because there was no attempt whatsoever to reduce PFC emissions until a few years ago. (Note that PFCs are many thousands of times stronger of a GHG than CO2.) I understand that with the smelting technology Alcoa currently employs (oxidation of carbon anodes), they have no ability to reduce the CO2 produced by the conversion of alumina and reducing emission of PFCs is the best they can do. I commend them on their 65% decrease, however in reporting the total decrease it is misleading to omit mention of the CO2 that is produced by the smelting process – it is part of the footprint and the atmosphere doesn’t care which part of the process the greenhouse gases came from.

   But the most difficult issue for me is the financial picture…

   The market price for our valuable power will certainly increase as a result of climate change legislation. Renewable portfolio standards – already adopted by most of the western grid states – and carbon caps – already adopted by California and soon by the other western states – will make our power very desirable because of its low carbon profile.

   At $50/MWh, Alcoa would purchase 110 million dollars worth of power for $48 million. This would mean we are giving up $62 million worth of power each and every year. In terms of the 450 jobs they create, that is a $138K subsidy per job per year from the County and its citizens. We would be paying Alcoa more per job then what the jobs themselves pay!

   Now consider the price of our valuable power going from $50 to $80/MWh which is a very likely price for low carbon hydropower. We would then be giving up $128 million which is a $284K subsidy per job per year, for seventeen years!

   If we were to sell the power on the open market and take that $62M to $128M subsidy and instead offer incentives to new businesses, we would have a huge amount of money to allow us to attract whatever kind of businesses we wanted. The trickle down effects of jobs creating other jobs will hold true for other industries just as well for aluminum smelting. I have to believe we can attract new high quality jobs for far less than the $138K to $284K per job subsidy we are giving Alcoa. I also have to believe we can create more then the 450 jobs Alcoa provides with $62M to $128M of economic incentives.

   Further, we have a very large debt with associated interest payments. This debt could be paid off at least a decade earlier if we were to sell the power on the open market. What is the interest cost to the County of not doing so and does that get counted against the economic benefits that Alcoa cites?

   Is it wise to commit such a huge portion of our valuable power to one company for such a long period of time and for so little? Could we somehow include an excess profit clause to reclaim some of the value of our power if the price greatly increases? Perhaps we could use the ratio of our current costs to market value to be applied with future market values. I am assuming our cost to generate will not change nearly as much as the value of the power and I’d like to know we aren’t giving it all away, especially for seventeen years!

   I have seen nothing about other options to this contract. It is very hard to disagree with something if you have no other options presented or considered. I would like to see a business plan for other uses for this power so that we could compare the benefits of each proposal. Is it Alcoa or nothing? Sign by January first or disaster strikes?

   What other business plan could we follow that offers better financial rewards, better opportunities, and better flexibility in a rapidly changing world?

   The meeting last night did clearly show me how embedded Alcoa is in our community. They have been here for many years and offer a stability that is comforting. If we were to limit them and restrict their contract our community would certainly suffer slightly during the transition and we may not get as stable of partners as they are. This is a bit of an entitlement issue and not an easy one to resolve, I do not want to destroy our community yet I feel compelled to disapprove of this contract based on the numbers. I would welcome any thoughts you might have to change my mind.

   I recently read a message about Chelan PUD, is it fact or fiction?

   “This organization is dedicated to remaining public in its ownership and operation, at the most prudent financial level.”

   I thank you again for your time and consideration.

   Respectfully,

   Don Poirier, Chelan County resident.

   November 9th, 2007 at 5:34 pm
2. 2
   dbottoms Says:
   

   I wish to echo Don Poirier’s comments and concerns.

   The current Alcoa agreement is just one of several long-term power sales agreements that the PUD has subsequently found to be financially burdensome, and indeed have caused concern for operating cash flows for this year and through 2010. To once again commit to a very long term arrangement that subsidizes a particular corporation at the expense of the majority of ratepayers is just not prudent.

   It is unfortunate that Alcoa cannot have a successful business in Wenatchee unless it receives “charitable support” from the public. However, it is not the job of the PUD to support economically non-viable enterprises they it does not own.

   Don Bottoms
   Plain & Lake WEnatchee

   November 9th, 2007 at 9:17 pm
3. 3
   Ann Lynn Says:
   

   I hope Don Poirier’s cogent comments have been widely published. From our out of state perspective it is clear that his is a voice to be respected and heeded.

   November 10th, 2007 at 8:01 pm
4. 4
   adappen Says:
   

   Don Poirier’s analysis of the Alcoa contract is a must-read. This is an important issue that will impact the financial foundation and possibilities of our public utility. So whether you agree or disagree with Don’s analysis, sending a quick comment to the PUD commissioners (their email addresses are listed in the original posting) is a must-do.

   November 11th, 2007 at 8:43 am
5. 5
   Rob Shurtleff Says:
   

   Coming from the technical side of the world, I am much more inclined to think that fostering innovation is in the PUD’s and the community’s best interest. We have a unique resource and selling it at a discount for a very long time (see below) is not a good idea.

   On a flight last night I happened to read the following article:
   http://www.forbes.com/forbes/2007/1112/154.html

   I think it is illustrative of a key point I don’t see in the current discussion, Time. As I understand it the Alcoa contract is a 20 year lock in. We are entering a time when there is going to be more change in the energy market then we have seen in recent history. Any deals that lock the PUD in for such a substantial period of time, are not in the PUD’s or general ratepayers interest. I am sure Alcoa would like as long a fix priced deal as possible, I would if I were working the deal from the other side of the table. Breaking this into five year chunks would provide more flexibility.

   November 11th, 2007 at 11:31 am
6. 6
   George Wilson Says:
   

   We are not alone- here is an article from Bellingham from a year ago:

   Aluminum Not Foiled
   Posted by Clark Williams-Derry on 08/02/2006 at 02:00 PM
   An interesting tidbit from yesterday’s Bellingham, WA newspaper:
   The 450 jobs at Alcoa Intalco Works are safe for now, thanks to a new power supply contract that is expected to keep the aluminum smelter west of Ferndale operating at its current reduced capacity for the next five years.
   Apparently, the Bonneville Power Administration, which manages most of the hydroelectric dams in the northwest US, has agreed to subsidize Alcoa’s power so that the Intalco smelter can stay up and running. What doesn’t appear in the Bellingham paper, though, is the total value of the BPA subsidy. For that, we have to look to the newspaper in Pittsburgh:
   The Bonneville Power Administration, the Portland, Ore.-based federal agency that markets electricity from hydroelectric dams, is subsidizing Alcoa’s purchase at $12 per megawatt hour up to $38.4 million annually. [emphasis added].
   So, 450 jobs saved for $38.4 million a year. By my calculations, that’s over $85,000 in power subsidies per job saved. Oof.
   I never know quite what to think about the Northwest’s aluminum smelters. They consume huge amounts of power — to the point that aluminum is sometimes called “congealed electricity.” And electricity is the nation’s number one source of greenhouse gas emissions. Even if smelters purchase their electricity from hydropower dams, smelting ultimately increases climate-warming pollution, since the hydropower consumed for aluminum would otherwise have offset coal- and natural gas-fired power generation elsewhere in the northwest.
   Still, it’s not like shuttering the Northwest’s smelters — as happened to most of them after the 2001 west-coast power crunch — reduced overall global emissions from the aluminum industry. Production just shifted somewhere else, where power, land, or labor was cheaper. (Obviously, shifting the location of production could, in theory, change the climate impacts of the industry. It all depends on the marginal sources of electricity that are added and displaced, and on how modern the plants themselves are. Still, closing a Northwest smelter doesn’t necessarily reduce the global climate impacts of aluminum.)
   So for the most part, the news about the Intalco smelter makes me feel relieved for the smelter employees and their families; smelter jobs are among the few high-wage manufacturing jobs available in many areas.
   Still, it’s worth remembering that smelter jobs are almost entirely made possible by a BPA subsidy, paid to Alcoa, without which the company couldn’t make a profit by operating the smelter. And that subsidy ultimately is borne by other electricity ratepayers — that is, you and me.
   Here is a link to another article (Alcoa Bid for Power Called Boggling) from New York State, also showing that this is a pretty pervasive practice by ALCOA:
   http://www.redorbit.com/news/business/988506/alcoa_bid_for_power_called_boggling/index.

   November 11th, 2007 at 4:01 pm
7. 7
   George Wilson Says:
   

   Here are comments received today from from PUD Commissioner Randy Smith on this issue:

   “You won’t find anywhere an exact amount that Alcoa will pay, because they will be paying “actual cost of generation” plus certain other costs on top of that. The anticipated cost to them would “average” somewhere around 2.3-2.5 cents (don’t hold me to any exact numbers…there aren’t any until after the fact) which would vary depending on how much power is actually generated on a given year (depends heavily on how much water is available). It is especially tough to evaluate a contract of this nature because there are so many variables…which in the end will make the decision a real judgment call on the part of the commissioners.

   Let me identify some of the variables:
   Alcoa will definitely get this power below the “market” cost as we know the market today, but they will not be subsidized in terms of getting it below cost. Only our local rate payers get that kind of deal (The actual current cost of power delivered to our ratepayers “averages” close to 5 cents…it costs a lot less to deliver it to an industrial customer like Alcoa).

   We figure that the jobs that Alcoa provides (around 450 hundred people and 40 million dollars in annual payroll) will provide an economic benefit to our area of around 1.5 Billion dollars over the life of the contract.

   Our bond attorney is indicating that this contract will likely maintain our credit rating for bond sale purposes. He also indicates that if we were to “play the market” with this power it very well could have a detrimental impact on our rating (costing us more to borrow money).
   The City of Wenatchee is indicating that their bonding agencies are waiting to rate them based on this contract (the loss of jobs could hurt Wenatchee’s bond rating)

   In Alcoa’s eyes this is at best a “mid length” contract (vs short or long term…their previous contract was 50 yrs.

   We will still retain over 30% of our power that we don’t use locally (25% for Puget; 25% for Alcoa; 18% current local use; 32% unallocated) from the two Columbia River dams (this doesn’t count Lake Chelan Hydro) to play the market with shorter term contracts or to provide for local growth.

   I could go on with the list, but ultimately it comes down to “what’s best for the long term interests of Chelan County owners of the PUD?” and I try to never take my eye off that ball. My gut instinct (along with a lot of data) is telling me we need to have “a” contract with Alcoa and that we as commissioners need to listen closely to the staff who have been negotiating for 6 years (the last three quite intensely). One thing that doesn’t get discussed a lot is that this is a fundamental change with Alcoa, and they will be paying close to double what they have historically paid. As a result of this contract, the Puget Contract and other changes post 2011, we will be putting approximately 100 million dollars a year into our reserves after that date (which could be used for infrastructure improvements ((including fiber)), keeping local rates below cost, debt reduction, etc.) that we didn’t have in prior years.

   These brief comments don’t do justice to all our discussions, but one thing that I want to make sure to let everyone know is that we are trying to look at the “whole” picture on this. We do have another meeting next week for more public input (Nov. 19th 9am) and discussion and would welcome all thoughts.

   If my comments have generated more questions, let me know…I’ll try to give you a call before our next meeting.”

   Randy

   November 12th, 2007 at 9:38 am
8. 8
   George Wilson Says:
   

   Here is additional information from Don Poirier:

   I spent all of Monday talking and working on the Alcoa contract issue. I am firm in the belief that the PUD must hire an independent consultant to review the contract and most importantly, delay any decisions until it does so. I have found yet another major concern, the jobs that are the main purpose for us to proceed with the contract, the main focus of all the numbers, the reason we are giving up hundreds of millions of dollars, those precious 450 direct jobs have only 54% of the employees actually living in Chelan County! We, Chelan County residents, are carrying 100% of the cost of this deal all for those jobs and you will not find the 54% figure in ANY of the information that has been presented. The commissioners are about done taking public testimony, they are not responding to the limited number of people who are asking for more time, they want to vote and put this uncomfortable issue behind them without making waves and four out of five will approve it. I am begging you and your neighbors to please attend the Monday, Nov 19th @ 9:00 AM meeting and request the special consultant plus delay any vote until we have a proper review of this contract.

   Don

   November 13th, 2007 at 8:17 am
9. 9
   gegibbons Says:
   

   I do not support the need for an independent firm to study the issue and make the decision. I think our elected commissioners are totally capable of doing that. I think the info we have received from them shows they are very aware of the issues. Their decision will involve more than Chelan County because many Alcoans do live in Douglas County and probably a few in Grant County - so the 54% number above is misleading. It is our greater Wenatchee region that will suffer if we lose not only those 450 jobs but also the tremendous community support we have received over the years from Alcoa. I was medical director at Alcoa for almost 10 years and know they are very good stewards of the invironment and have put millions of dollars into modernizing the facility and reducing emmissions. I wrote a letter to the Commissioners Nov. 1 supporting the contract and will try and attach it.

   Jerry Gibbons

   Dear Commissioners,
   I write in support of a long term contract for power for Alcoa. An unexpected part of my medical career in Wenatchee was becoming Medical Director at Alcoa for about 10 years. I always knew Alcoa was a part of our community but didn’t realize what a significant role Alcoa played until I was part of our Wenatchee facility. Alcoa provides jobs that are very important to have in our community. Many young men and women who elect to not continue their education have the opportunity to go to work at Alcoa. They often then have the opportunity to develop trade skills as electricians, mechanics, in occupational health, safety, engineering, environment etc. that pay very well an do not require a college degree. Some will take courses at WVC. They do learn to use computers and other technology as well. Most importantly, they are well paid, have great benefits, and most spend at least 30 years with Alcoa. They, and Alcoa as a company, support our local community in many ways, both financially and with service hours. The above relate primarily to the union workers, but the salaried work force is equally valuable and important. I could go on but think you are probably well aware of what I am outlining. The PUD provides similar opportunities to our area.
   I know that down the road the PUD might receive more money per KWH than Alcoa will pay, but overall money alone will not replace what a company and the job opportunities provided by an Alcoa will contribute to our greater regional community during that time period. It also seems clear that the server centers etc. will buy power but provide few jobs. And it is the person with a good job that buys a house, snowmobile, hunting and fishing gear, skis etc. that keeps our business owners viable. Perhaps we will be building electric cars in the future and that industry or another will replace Alcoa, if Wenatchee is not in their plans at that time. I know you are looking closely at this opportunity and will make the proper decision.

   Cordially,

   Gerald (Jerry) Gibbons, MD

   November 13th, 2007 at 11:07 am
10. 10
    George Wilson Says:
    

    Jim Passage has provided the below message from PUD Commissioner Janssen that in turn contains the comments of a PUD ratepayer sent to him:

    I am forwarding to you an email I received from Doug Stewart, one of our customer-owners.

    I also want to make clear that I have received emails that do not question the proposed contract and request our rapid approval of the contract. I am trying to share emails that might offer alternative questions or thoughts.

    I am trying to encourage as much public discussion as possible before we are asked to make this decision. The customer-owners need to get involved. Emails to commissioners are helpful but I think it will take more than emails to slow down the process and consider any changes.

    I have a limited email list so would encourage you to send any of these on to others that you feel might be interested and concerned.

    Thanks

    Werner Janssen

    wcjanssen@charter.net

    548-7826

    ————————————————————————————————————————–

    Chelan PUD Commission President Gutzwiler,

    I have always appreciated your openness and willingness to talk things over. As you know, I advocate taking enough time to consider all alternatives before committing a share of the PUD power to any entity, no matter how intertwined in the community. I am concerned that too much faith is being put on a future that looks like the past. I believe such thinking is wrong and cannot stand up to scrutiny.

    I also do not believe that the board has in fact directed staff to seek an Alcoa contract or has decided to pursue an Alcoa only policy. Per your governance policy no. 12, this would have to have been a decision “of the board acting as a body.” I hear staff claiming this repetitively at public meetings. If I am wrong on this then refer me to the decision. However, if indeed no directive as formally defined by your policy was ever given, then I ask that you, as a matter of honesty and public trust, to state so at the next meeting.

    On a more specific scale, I am also bothered by the presentation of risk without the consideration of associated financial impact or probabilities. Risks such as paying for the cost of one of the dams for a year without any revenues can be easily computed as a risk exposure. So, for example, if RR could not produce power for 1/2 of the year sometime in the seventeen years, and there is $20 million in costs with no revenue, and if the chance of this happening is 50%, then the risk exposure is $20M x 0.50 = $10 million. This is not a scary number and we could easily earn enough at market in 1/2 of a year to cover such an event. In any case, I believe the responsible action is to present the risks in a professional way rather than put them out there as some sort of bogey man. I urge you to direct staff, per policy no. 12, to do an actual risk analysis and present it to the board as part of the public process.

    We are at a time of tremendous opportunity for our community, our state, and, I believe, our country. We must take the time to explore options, envision our future, and answer valid critics. The public process and public good must drive this–not industry, not staff, not vested interests, and not self-interest. You have tremendous power and responsibility in your hands. I understand that this is not easy. I believe that duty demands that you seek the highest good for our future and that this can only be accomplished with a process that is open to options.

    Sincerely,

    Doug Stewart, Customer Owner

    November 15th, 2007 at 9:45 am
11. 11
    George Wilson Says:
    

    Here is amessage from PUD Commissioner Werner Janssen:

    Chelan PUD – Alcoa Contract Discussions

    I URGE YOU TO COME TO THE MEETING ON NOVEMBER 19, AT 9:00 am.

    YOUR PRESENCE ANDYOUR OPINIONS CONCERNING THE CHELAN PUD – ALCOA CONTRACT ARE CRITICAL.

    This meeting is currently scheduled to be held in the regular Board Room on the third floor of the Chelan PUD headquarters building at 327 N. Wenatchee Ave. in Wenatchee.

    The following resolution will be presented but not voted on during the Nov. 19 meeting.

    “A resolution approving a proposed term sheet with Alcoa, Inc. and Alcoa Power Generation, Inc. and directing staff to use the proposed term sheet to develop definitive power sales, transmission and interconnection agreements.”

    Note: This resolution will not be voted on during the Monday meeting. It is introduced pursuant to RCW 54.16.040. Final approval will not take place for a period of at least ten(10) days.

    The above referenced RCW indicates that the resolution for selling power must be presented at least ten days prior to the adoption of the resolution.

    My emails and phone calls are running about 5-1 in favor of slowing the process and allowing extra time for more consideration and discussion. The public comment at the meetings has probably been 7-1 in favor of approving the contract as quickly as possible.

    The resolution being presented does not tie the approval to any specific date but the minimum waiting period would allow the contract to be approved as early as December 3, 2007.

    At our public meeting on November 5, Bob Wilt, Alcoa Manager for power acquisition stated that a delay until March or April would not be a problem for Alcoa although they would prefer that it is approved as early as possible.

    My personal feeling is that we should request a delay in the contract preparation to allow time for a review concerning other options on at least the following points.

    Include options for “openers” two or three times during the length of the contract. These openers could be based on the increase in the value of power on the open market. The seventeen year contract may not be a problem if opportunities are built into the contract to reconsider some important issues.
    Power allocated under the terms of the contract but not used by Alcoa should be the property of the Chelan PUD and available to the Chelan PUD to sell on the market with revenue retained by the PUD. The proposed contract allows Alcoa to retain much of the revenue or if they are operating three pot lines they get all of the revenue. All power must be used at the Wenatchee smelter.
    A more liberal load shedding policy should be considered so the PUD has access to power during periods of the year when our local peaks occur and open market purchases could significantly increase power costs.
    Mandatory Step-Up For example, if Puget Sound Energy defaults on their contract, Alcoa would be required to take over 25% of the PSE’s 25% share of costs and generation. Alcoa would retain the receipts from the sale of this additional electric power. Perhaps we should take the extra risk and have that power available to sell on the open market for increased revenue. Default is not a high probability.

    It is also my suggestion that the Board hire an independent consultant to provide the board an outside review that might provide a new approach to this contract offering long term benefits to the Chelan PUD and the best value to the customer-owners.

    Until the Board actually approves the Alcoa Term Sheet Proposal I would assume public comment will be considered.

    I am approaching this as if the meeting on the 19th will be the final public meeting so it is critical for our customer-owners to participate and emphasize your opinions to the board. The process needs sufficient time if any changes are to be considered. If you have any passion for slowing the process and keeping the discussion alive, make sure we have a good turnout of customer-owners at the meeting on November 19.

    Please participate in the meeting on the 19th. Bring your neighbors. Let’s have a standing room crowd.

    Werner Janssen

    wcjanssen@charger.net

    548-7826

    November 15th, 2007 at 9:36 pm
12. 12
    George Wilson Says:
    

    Here are some comments on this issue recently received from PUD Commissioner Janssen:

    I have attached an article from the Washington Post sent to me this morning by one of our customer-owners. The fact that it is from 2006 doesn’t eliminate the point it is making in terms of the value of power being produced in our area. Perhaps we are too close to the situation to not understand what appears to be obvious to those who look in from afar and envy our ability to produce clean, inexpensive power that is becoming increasingly more valuable.

    The jobs made possible through the Alcoa operation are definitely a positive point and we want to retain all of them and increase the employment if possible. As you recall from an earlier email, 54% of the employees of the Alcoa Plant live in Chelan County. Currently with 360 total employees this would mean that 194 live in Chelan County and are customer-owners of the Chelan PUD. With the proposed three pot lines scheduled in 2011-2012 they are estimating 60 additional employees totaling 420 with 226 employees in Chelan County if the percentages remain the same.

    At the present time the Chelan County PUD has a total of approximately 40,000 customer-owners. The Alcoa employees in Chelan County represent 0.56% of the total customer-owners. It is my understanding that the average salary/payroll of the Alcoa employees is even greater than the average salary/payroll of the Chelan PUD. Alcoa provides jobs in the valley that are very valuable to the economy but we also need to make sure that the revenue brought in to the Chelan PUD is fair and equitable in order to keep our rates low and the financial advantages available to all of the customer-owners.

    If we increased the revenue from Alcoa by $1.00 per Megawatt Hour, this would bring in an additional $2.19 Million in revenue each year which could possibly provide a payback of the rate increases we may experience between now and 2012 and help to eliminate any rate increases for the future.

    The next public discussion of the Chelan PUD – Alcoa contract will be on December 3, 9:00 am at the PUD board room. The resolution presented on November 19 to approve the “terms” of the contract can legally be voted on during the December 3 meeting. I think we need more consideration of the implications of this contract before a final vote. Contact your commissioners and voice your opinion by email or phone and if possible attend the meeting on December 3. Bob Wilt from Alcoa has stated that it would not create any problems for them to delay the contract approval until March or April 2008.

    Thanks

    Werner Janssen

    wcjanssen@charter.net

    November 26th, 2007 at 3:19 pm
13. 13
    George Wilson Says:
    

    Wenatchee World article Nov 26th 2007

    WENATCHEE — How sweet of a power deal is the Chelan County PUD considering giving Alcoa?
    The 17-year proposal would virtually guarantee a three-potline operation and some 450 jobs at Alcoa’s Wenatchee Works smelter, according to the findings of an independent consultant hired by Alcoa to assess the proposed deal.

    CRU Strategies concluded in an April 12 report that the contract has a less than 7 percent chance of being unfavorable for Alcoa — or a greater than 93 percent probability of being favorable.
    These are better-than-expected odds, the study concludes, since an approximately 90 percent favorable probability would be considered a normally acceptable business risk for a smelter like the Wenatchee Works with its 50-year-old technology.
    Even so, Bob Wilt, the Alcoa vice president heading contract negotiations with the PUD, insists the deal wouldn’t be a “slam dunk.” “CRU is not Alcoa. Our decision-making calculus is somewhat different than theirs,” Wilt said Monday after a PUD commission meeting. He said factors including the smelter’s age, its payroll costs and the contract’s terms and length make the 7 percent risk about as much as Alcoa is willing to take in Wenatchee. CRU studied operations costs, not profitability. “I’ve said that there will be more money paid out to the employees in the community than there are net profits anticipated by this contract.”
    The contract would lock in a price per megawatt hour of electricity at between $23 and $26 the first year, or an average of about $30 per megawatt hour adjusted for inflation over the life of the contract. That rate is about half the current open-market rate of about $50 per megawatt hour and nearly 40 percent of the current world market price of about $66 per megawatt hour, according to Platts Metals Week, a leading industry trade publication.
    The proposed power rates cover Alcoa’s 25 percent to 26 percent share of maintenance, operation and debt-service costs at the PUD’s Rocky Reach and Rock Island dams.
    In adjusted dollars, the PUD estimates Alcoa would pay $67 million per year on average or an estimated $1.1 billion over the deal’s 17-year life. The rate doesn’t include a $17.5 million “capacity-reservation” charge that Alcoa would pay in one lump sum when the contract is approved.
    By comparison, PUD analysts estimate average revenues of $154 million per month or $2.6 billion over the life of the contract if Alcoa’s portion of power were sold on the wholesale market — more than double the money the utility would get from Alcoa.

    So, why supply bargain-priced power to a global corporation that collected an estimated $7.4 billion in sales from July through September? With the jobs come add-on benefits.

    A Seattle economist hired by Alcoa estimates that the company adds $89 million per year or $1.5 billion over the 17-year contract in payroll and benefits, local purchasing, spin-off jobs, local tax payments and corporate gifts. The “multiplier effect” would increase total Alcoa payments to the PUD and community to $2.6 billion — exactly the amount the PUD expects to get if it sells the power on the market, according to Alcoa’s estimate.
    Joe Jarvis, the PUD’s chief financial officer, says bond-rating agencies look favorably on long-term power deals, because they add to financial stability. The utility’s very good AA bond rating gives it access to low-cost financing. The lower the rating, the more the PUD pays when it needs to borrow money. But if Alcoa left Wenatchee, the rating wouldn’t necessarily suffer, said Ian Carroll of the rating agency Standard & Poor’s. “To the extent that the PUD can establish relationships with the business community that are long-lived and mutually beneficial, that is a positive rating factor,” said Carroll, a member of the committee that studies the PUD’s finances. He added, “If a customer goes away, often some costs also go away. We’d have to look at what net revenues were lost. It may be neutral, unless the district was making a profit on that business relationship.” Carroll said bond agencies recognize that profits aren’t always the priority of a public utility. “What it comes down to is the long-term effect and the district’s long-term priorities,” he said. “The fact that Chelan (PUD) has a AA rating means that, in general, financial decisions have been beneficial to the overall financial position.”
    PUD General Manager Rich Riazzi said last Monday that he’s satisfied the contract is fair for both sides. “It was a long, hard negotiation process,” he said. “In my heart of hearts I feel a good deal has been struck, otherwise we wouldn’t have recommended it to the board.” He said the deal still gives the PUD surplus power to sell and use to attract new industry. “We still have that,” he said. “It’s not limitless. Obviously the pool would be bigger if we still had the Alcoa piece, but we wouldn’t have the Alcoa jobs with it.”
    The contract negotiations come at a time when the nation’s appetite for electricity is expected to become more voracious — and expensive. The Portland-based Bonneville Power Administration concluded a five-year public debate early this year about the agency’s future role in power marketing beyond 2011, when its long-term power contract expires, including a contract with Alcoa. Alcoa lobbied the BPA hard alongside other Northwest smelters and a paper manufacturer for an interim power deal to secure low-cost power until formal contract talks take place. The company secured a limited subsidy, but hoped for more. Alcoa is using the subsidy to power its more modern Intalco smelter in Ferndale.
    The BPA markets wholesale power from 31 federal hydro projects and other non-federal generation sources. It supplies about 35 percent of the electricity used in the Northwest.

    “Our challenge going forward as we look at the long-term contracts is how can we allocate the federal system in a way that gives the entire Northwest benefits,” BPA spokesman Scott Simms said in a phone interview. Simms said the agency would be discussing the terms of new 20-year contracts, including Alcoa’s, this summer. He said it’s too early to know about the terms of these contracts. Like the Chelan County PUD, the agency will also be faced with the challenge of predicting what the energy market will do, and then setting a price. “On a daily basis, all of us consumers are hearing comments on climate change,” Simms said. “Regardless of whether hydro is operated by a private or public utility, it’s becoming more and more valuable.”

    __________

    PUD/Alcoa proposal at a glance

    Contract length: 17 years (2011 to 2028)
    Terms: Alcoa gets 25 percent to 26 percent of Rocky Reach and Rock Island dams’ output in exchange for paying the same percentage of the dams’ operations costs and debt.
    Alcoa’s estimated yearly payment to PUD: $67 million*
    Estimated revenue for PUD if this same power were sold on the market: $154 million
    Alcoa’s estimated power cost: $30 per megawatt hour*
    Current world market average for power: $66 per megawatt hour
    Power consumption: Approximately 267 megawatts
    Increased production: The deal would allow Alcoa to operate a third potline at Wenatchee Works
    Estimated yearly production at three potlines: 142,000 tons per year
    New jobs: Approximately 60
    Proposal’s total estimated value to PUD: $1.3 billion*
    Estimated total if Alcoa’s allotment of power were sold on the market: $2.6 billion*
    Estimated add-on benefit to community of keeping Alcoa operating: $1.5 billion

    *Adjusted dollars, averaged over the life of the contract

    Source: Chelan County PUD

    November 26th, 2007 at 11:06 pm

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