Northwest aluminum industry fears it is being cast aside by electricity suppliers
By Mike Rogoway
Vancouver got a Christmas present from the federal government in 1939. On Dec. 24, Alcoa announced it would build a $3 million aluminum smelter in the Vancouver lake lowlands. Alcoa’s news meant hundreds of jobs, welcome relief in Depression-era Vancouver.
Nothing Can Stop Vancouver Now,” civic leaders proclaimed in a Christmas Day headline in The Columbian.
Alcoa’s Vancouver smelter was the first of 10 built in the Northwest to take advantage of cheap hydropower from Bonneville Power Administration. Aluminum became an economic engine in the Northwest, which produces 40 percent of all the aluminum made in the United States.
Now, though, some wonder if time is passing the Northwest aluminum industry by.
“At the end of the day it’s difficult because a lot of these smelters were built in the ’40s,” said Julien Garran, a london aluminum analyst who recenfly authored a report on the Northwest industry’s problems. Garran said many of the region’s smelters are relatively inefficient and expensive to operate.
“It’s difficult to justify the continued existence of high cost capacity,” he said.
The Vancouver smelter, now a private company called Vanalco, closed four of its fivenproduction lines last June after a sudden, dramatic spike in wholesale electricity prices. Three other Northwest smelters followed, either closing or cutting back production. In all, 1,400 workers were laid off.
The power crunch brought to boil a long-simmering dispute over the region’s power needs and the aluminum industry’s power demands. Aluminum and BPA grew up together, but now power demands are rising and pressure is mounting over dams’ effect on salmon.
To cope, BPA wants to take a step away from aluminum. Next year it plans to sharply reduce the amount of cheap hydropower it supplies to aluminum smelters.
Northwest aluminum producers claim their facilities remain vital and competitive. They complain that BPA is turning its back on the industry it spawned 60 years ago, at the expense of the companies and the 6,500 people who work at Northwest smelters.
“There’s nothing wrong with the aluminum industry in the Northwest except power cost,” said Brett Wilcox, who runs independent smelters in Goldendale and The Dalles, Ore. “And if we were treated like another industry … we would have no other problems.”
How We Got Here
After it began damming the Northwest’s rivers in the 1930s, the federal government needed customers for its expensive, expansive system of hydropower projects. The electricity-intensive aluminum industry was a natural fit and the cheap power those dams produced sustained the Northwest aluminum industry for decades.
Electricity is a fundamental ingredient in aluminum, typically accounting for a third of the total production cost Vanalco’s plant capacity is about 230 megawatts, roughly half the power consumption of all the rest of Clark County.
Northwest aluminum was key to aviation in World War II, and today the region’s aluminum is used for everything from airplanes to soda cans to automobiles.
Demand for aluminum continues to grow but two power-related problems confront the industry in the Northwest. The immediate problem is the sudden, dramatic rise in wholesale energy prices triggered by the deregulated power market in California.
Many smelters stopped relying on BPA power in the 1990s, instead buying market power from the, same energy suppliers that provide electricity to California. When prices went up there, the smelters felt it here. For some, including Vanalco, it was too much and they had to cut back or shut down.
The second problem is more fundamental and long term. The aluminum smelters once were the only year-round customers BPA could depend on, but after power cables were built linking the Northwest with California, BPA had other, more lucrative options for its electricity.
The aluminum industry consumes a fifth of BPAs entire power output but demand for that power is growing from other customers. At the same time, BPAs output is being limited by growing concern over the effect of hydropower on endangered salmon in Northwest rivers.
So beginning next year, BPA plans to reduce the power it supplies to the smelters by almost 25 percent. That means that even those aluminum companies that continued to rely on BPA will be exposed to the wholesale market, putting them at risk if this summer’s power crisis repeats itself in the future.
The aluminum companies charge that BPA is taking advantage of its unique relationship with the aluminum smelters to give its other customers a price break. They say BPA is artificially – and illegally – subsidizing low power rates for other Northwest customers by selling electricity to California.
“They’re clearly forbidden from selling outside the region if there is a market for the power here,” said Paul Murphy, a Portland attorney who has represented various Northwest aluminum companies for 16 years. “They’re not a profit-making entity.”
Vanalco, Alcoa and others have asked the Ninth Circuit Court of Appeals in San Francisco to force BPA to set aside more cheap power for Northwest smelters. Bynselling “surplus” power to California, the smelters charge that BPA is violating federal laws that give Northwest customers preference for BPA electricity.
BPA already has offered some Northwest smelters more electricity, but at the high rate it charges to California customers. The power agency acknowledges that Northwest aluminum smelters have first claim to that electricity, but say that preference applies only to supply, not price.
It will be months before the federal court rules, but early indications don’t give the industry much hope. In July, the court summarily rejected an emergency appeal from Vanalco, and even aluminum’s advocates doubt the appeals court has the will to intervene.
“My own sense is that the 9th Circuit Court of Appeals is more or less unwilling to try and get Bonneville to do anything,” Murphy said.
So the aluminum companies are looking for alternatives. One option is public pressure. last week the smelters released an industry-funded study that pegged aluminum’s total contribution to Washington’s economy at $4.4 billion.
“The aluminum industry has a 60-year commitment to the Northwest and we provide an awful lot of high-wage jobs in rural parts of the state,” said SharonnKanareff of Alcoa.
Responding to the aluminum crisis, BPA convened a study group to assess the smelters’ viability and longterm power needs. The power agency says it would be open to helping the aluminum companies finance construction of new generators, and might also help them buy additional power on the wholesale market.
In setting guidelines for the study group, however, BPA ruled out changing its new rate and power allocation plan that cuts back on smelters’ electricity supply. If BPA undertakes a costly effort to help the smelters, there is concern about how it would affect the agency’s other customers.
“Other industrial, residential and commercial customers would all like to get some extra power right now,” said Dave Warren, assistant director of Washington state’s Office of Trade and Economic Development. “We have a limited source of power. Do we direct it now to the smelters to help the bottom line, or do we get more economic value by directing it to some other customers?”
The BPA study also will look at whether some smelters are too old to make effective use of BPA electricity.
“I think the group wants to look at the efficiency of the various smelters compared to other smelters,” Warren said. “If they’re an older, inefficient smelter, are we kind of throwing away the power?”
When Alcoa closed its Troutdale, Ore., smelter in June, the company said it would not consider reopening it until it could justify the “large capital expenditures” needed for modernization. But aluminum companies maintain that other smelters are extremely competitive.
Vanalco has made continual improvements to keep its plant modem. Brett Wilcox, who runs the smelters in Goldendale and The Dalles said his company has done the same.
“In terms of efficiency, they are not significantly less expensive or more costly (than smelters elsewhere),” he said. “We will do what it takes to continue to be competitive.”
Eventually, aluminum industry leaders and observers believe the Northwest power market will sort itself out.
“I think we’re just in a transition, and some of the (aluminum companies’) management has been caught flat-footed, frankly,” said Robin Adams, an aluminum analyst who recently moved to the Northwest. “What this crisis might do, hopefully, is it might trigger some change here.”
New electric generators will be built. Adams said, and the region will be less vulnerable to wild swings in the cost of electricity. However, he said Northwest electricity will not be the bargain it used to be.
Aluminum companies will likely rely on fixed contracts from Bonneville as a baseline, Adams said, supplemented by wholesale power at times it is affordable. He said smelters will start and stop production based on price swings in the power market
“I think that it could be fairly healthy to have some swing capacity in the aluminum industry,” Adams said.
Unwilling to swing on unpredictable market prices, aluminum companies are taking matters into their own hands and promoting new power generation.
Vanalco told employees last month that it is exploring a number of power deals with energy providers that want to build new generators. Wilcox, who runs the smelters in Goldendale and The Dalles, wants to build a new gas-fired generator in Goldendale dedicated entirely to meeting the power needs of his two smelters.
The generator would give the smelters a measure of independence from both BPA and the fluctuating power market. But Wilcox needs BPA’s help to get it done. He said he needs the federal agency’s assistance financing the project, and wants commitments that BPA will buy any unused power from the Goldendale power plant.
Moving ahead on the generator is the key to keeping the smelters open in Goldendale and The Dalles, according to Wilcox. With a long-term power supply on the horizon he said his company can keep operating until it’s available. Without it, prospects are uncertain.
“There are no assurances, and to some extent it depends on what Bonneville does or doesn’t do,” Wilcox said. “If they assist in our generating project I don’t think it’ll happen to us. If they decline to do that I think we’ll have some real problems.”
August 27, 2000