Alcoa nets $80 million on power sales
PUD has collected $8 million for brokering deals on Alcoa's behalf
By Laurie Smith, World staff writer
WENATCHEE -- Alcoa Inc. has netted roughly $80 million since October by selling its allotment of Chelan County PUD electricity on the open market, PUD officials said Monday.
For brokering the power sales on Alcoa's behalf, the PUD got 10 percent of the proceeds, or $8 million in fees.
The power marketing did not contribute to Alcoa's decision to cut production at its Wenatchee Works, PUD General Manager Roger Braden said.
"This little deal really didn't affect employment or operations in any significant way," he said. If anything, Braden told PUD commissioners Monday, the energy remarketing has helped keep two potlines at the plant running.
His explanation for that is complicated. It involves three chunks of power available to the Wenatchee smelter:
* Electricity sold by the PUD to Alcoa under a long-term contract that expires in 2011.
* Energy supplied by the Bonneville Power Administration under a six-year contract that expires in September. In January, Bonneville bought out the contract for an undisclosed price. To meet consumer needs in the Northwest, the federal power marketing agency bought back 150 megawatts from the smelter for about half of what market prices were at the time, BPA spokesman Mark Hansen said Monday.
* Bonneville power that has been transferred to Wenatchee from the now-closed Reynolds Metals Co. plant in Troutdale, Ore. When Alcoa purchased Reynolds last year, it acquired the rights to Reynolds' BPA contract power, which is available until June 30.
Alcoa officials have said two of Wenatchee's four potlines were shut down in January so the company could sell power back to the BPA. This summer, Alcoa plans to reduce the plant's staffing by 150 to 160 jobs. About 40 of the plant's 641 employees have been sent home, with full pay promised through June 30.
The two potlines still in production are running on electricity from the Troutdale smelter and possibly other closed or curtailed aluminum plants in the Northwest, PUD officials say.
In turn, the Reynolds power transfer freed up the Chelan County PUD energy committed to Alcoa, Braden said.
Alcoa's contract with BPA bars the company from reselling federal power on the open market. Meanwhile, the PUD's power sales contracts say Alcoa may not resell Chelan County power without the utility's consent.
On Oct. 2, the PUD granted its consent and entered into a short-term agreement for the resale of Chelan County power by Alcoa. The deal is in effect until June 30.
On Jan. 5, Alcoa publicly announced it was idling two potlines. But the decision had been made as early as September, Braden said.
"Basically, they told us they were going to shut down the potlines and they were going to sell the power," he said. If Alcoa weren't remarketing Chelan County power, he said, it would be selling the Reynolds power back to the BPA.
Alcoa figured it could make more money on the open market and found an outlet with the PUD, Braden said.
Alcoa's Northwest power manager, Jack Speer, declined to comment on specifics of the power sales.
"We've had a lot of power transactions with several parties in the Northwest, and I will not go into the details of what power we're selling where and what power we're buying where," he said.
"Rest assured we are in conformance with our contracts and in conformance with the law and doing nothing that is illegal or immoral."
Leaders of the Wenatchee Aluminum Trades Council, the bargaining unit representing Alcoa employees, declined to comment on the deal.
The bulk of Alcoa's Chelan County power comes from a 50-year contract obligating 23 percent of the output from Rocky Reach Dam to the Wenatchee Works. Alcoa helped finance construction of the dam and receives hydropower at cost in the interest of sustaining a viable industry here. Whether or not it uses the energy, Alcoa must pay the generating cost of between $10 and $13 per megawatt-hour.
The Rocky Reach share varies but runs around 150 megawatts, PUD officials say. Alcoa has also contracted for additional PUD power at industrial rates of $18 per megawatt-hour. The additional increment is currently 22 megawatts and will increase to 42 megawatts by 2004.
It takes about 175 megawatts -- enough for 175,000 homes -- to run two potlines, Braden said. In the past, Alcoa has authorized the PUD to cover any shortfall with market purchases. Earlier this month, it called a halt to market buys because of high prices, Braden said. For off-peak periods during the second quarter of this year, electricity has traded at more than $300 per megawatt-hour.
Braden said the transferred Reynolds power may be a little short of what's needed to run both potlines, and the PUD energy alone isn't always enough. Under the current arrangement, Braden said Alcoa can use a small amount of PUD power and sell any excess.
Without the remarketing deal, he told PUD commissioners, it's questionable whether Alcoa would be operating both potlines. Braden said Alcoa is required to keep the two lines going as a condition of the nine-month remarketing agreement, although that wasn't among the terms written into the contract.
"We're actually protecting those potlines by having made this deal," Commissioner Gary Montague said.
Throughout their dealings since the 1950s, the PUD has bought and sold power on behalf of Alcoa, Braden said. In this instance, he said, the PUD is doing what it has historically done, "but on a much larger scale."
Six PUD power marketers are earning bonuses on the transactions. According to PUD power manager Bill Dearing, the traders' commissions on sales brokered for Alcoa represent a significant portion of their earnings last year, which ranged from $179,000 for a trader/transmission coordinator to $280,000 or more for three marketing employees.
Regarding the PUD's return on Alcoa power sales, Braden said $8 million is the equivalent of a 20-percent rate increase.