Kaiser free to terminate BPA contract

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Action dashes hopes Mead smelter will resume production
Bert Caldwell
Staff writer

File - The Spokesman-Review Kaiser Aluminum Mead once employed more than 1,000 workers. Without cheap power, there is little hope they will return to work, employees fear.

Kaiser Aluminum Corp. is free to terminate its electricity supply contract with the Bonneville Power Administration.

The move, approved by a bankruptcy court Monday, could save the company millions in potential penalties, but further dims hopes that the Mead smelter will resume operations.

Kaiser spokesman Scott Lamb said the company will pull the plug as soon as an alternative supplier is found for the company's Trentwood rolling mill.

But termination, approved Monday in U.S. Bankruptcy Court in Delaware, may not permanently cut off Kaiser's access to BPA megawatts, the lifeline for Northwest smelters since World War II.

Kaiser will retain a contract that allows the company to use BPA's wires to transmit power to its plants in Spokane and Tacoma.

Lamb said Kaiser officials think that ongoing link to BPA will support the company's continued status as a direct service industry -- one that buys electricity directly from the federal agency, not through a utility.

"By rejecting this contract we are not giving up our rights as a DSI," he said.

BPA officials are pondering that question, spokesman Bill Murlin said.

No DSI has ever walked away from a contract while it was still in force, he said. "We've never seen anything like this before."

But Murlin noted BPA keeps its transmission operations independent of its power operations.

"The two contracts are separate pieces of business," he said.

If Kaiser can maintain its place as a DSI, the company could seek power from BPA in the future. But Lamb said Kaiser may find a better deal in the depressed wholesale market should it choose to restart the Mead and Tacoma smelters, which have been shut down since the fall of 2000.

None of the creditors who earlier said Kaiser's smelters would lose value without access to BPA megawatts opposed termination of the power contract in court Monday.

That silence stunned Dan Russell, president of the United Steelworkers of America local that represents Mead workers.

Russell said he was told the union decided not to file its own motion opposing the contract termination when other creditors backed out.

"This is a shocker," he said. "To me, it's just another nail in the coffin."

Mead once employed more than 1,000 workers. Without cheap power, which represents 30 percent of smelter operating costs, there is little hope they will return to work, they fear.

The contract Kaiser will terminate included a take-or-pay clause that could lead to millions in claims against the company by BPA.

As of Oct. 1, Kaiser must buy 290 megawatts of electricity from BPA, or pay the federal agency the difference between the contractual price and now depressed prices in wholesale markets.

Kaiser estimates those penalties could run as high as $2 million a month.

BPA has already filed a claim for $1 million, a fraction of more than $3 billion creditors are seeking from the aluminum maker.

Kaiser's decision to terminate its power contract with BPA will snuff out a relationship begun in 1946. Mutually beneficial for decades, the connection has unraveled in recent years.

As a DSI, Kaiser was near the head of the line for BPA electricity. But increasing shortages gradually undermined the position of all the smelters.

When drought drove power prices into the stratosphere in 2000, Kaiser and other smelter operators bailed out by shutting down and selling cheap megawatts purchased from BPA at unheard of prices.

Kaiser pocketed about $460 million in profits.

That did not stave off bankruptcy.

Trentwood has continued to operate, albeit at far less than capacity.

Lamb said Kaiser is negotiating with several electricity suppliers who could replace BPA at Trentwood. As soon as a contract is signed, the company will notify BPA it is no longer a customer.

At Mead, the glimmer of hope that the smelter will restart fades.

"That's the end of the story," Russell said. "It's a pretty dismal outlook."