Aluminum plants losers in BPA power reallocation

By Nigel Hunt

LOS ANGELES, Oct 16 (Reuters) - Skyrocketing free market power prices in the U.S. West have raised the stakes as the marketers of much cheaper electricity generated by federally owned hydropower dams negotiate new five-year sales contracts.

Portland, Ore.-based Bonneville Power Administration (BPA), which markets electricity generated by massive hydropower dams and one nuclear power plant in the Pacific Northwest, is able to offer contracts at well below free market rates.

But as the demand for power rises in the region, not everyone can be satisfied.

The latest round of contracts appears set to produce one major loser, Pacific Northwest aluminum plants, whose allocation will be cut to 1,500 megawatts from 2,000 previously to accommodate growing loads of other customers who have a prior legal claim to receive the electricity.

``What makes the aluminum issue so difficult is that they have been customers of the federal system for over 50 years and the plants are in many cases the sole economic support for some rural communities,'' BPA senior vice president Paul Norman said in an interview.

Under the new deal, BPA will supply only half the 3,000 MW of power needed by the aluminum producers. The cost of buying power on the free market is already hitting them hard.

``They just can't afford to pay market-based prices for the other half,'' Norman said.

Since June, aluminum smelters run by Golden Northwest Aluminum, Vanalco Inc., Kaiser Aluminum Corp. (NYSE:KLU - news), Alcoa Inc. (NYSE:AA - news) and Ormet Corp. have cut back production as the cost of electricity climbed.

The new power contracts, which will be signed by October 30, will run from October 2001 through September 2006.

BPA prices its electricity on a traditional cost-based formula and allocates power through preferences set by law.

In contrast, many ``deregulated'' suppliers in the West sell their power to the highest bidder and have been able to get much higher prices as demand for power in the region has soared amid a buoyant economy.

MUNICIPAL UTILITIES UNSCATHED

The largest chunk of BPA's power -- about 6,500 MW -- will go to publicly owned agencies, including municipal utilities who have first preference under law.

This should provide another boost to public power in a year that has already seen its benefits displayed in California, where the Los Angeles Department of Water and Power kept its rates unchanged and offered the prospect of a rate cut.

In contrast, customers of Sempra Energy (NYSE:SRE - news) unit San Diego Gas and Electric, the first in the country to pay free market prices without a safety net, saw their bills triple, putting local businesses at a potentially crippling competitive disadvantage compared with their northern neighbour.

The second claim on BPA's power comes from customers of investor-owned utilities in the Pacific Northwest who will receive 1,000 MW of actual power.

The utilities will also receive a further 900 MW of ``virtual power'' with BPA agreeing to make cash payments to cover the extra cost of buying that amount of electricity from the free market.

BPA's supply of power is heavily dependent on how much rain falls in the region. In a dry year, BPA expects to be short of contract commitments by about 3,000 MW, Norman said.

BPA will purchase a substantial amount of that shortfall in the forward market, part of the reason why contracts are signed a year before they take effect.

Norman said that in an average year, BPA is around 1,000 MW short but does not have to buy in a ``wet year.''

He noted that the amount of power the agency has to sell has been virtually unchanged in recent years after dropping by around 1,000 MW in the mid-1990s due to measures designed to protect fish, particularly endangered salmon, which are found on the Columbia River.

California, which is a major importer of power from the Pacific Northwest during the summer, will not receive any power under the long-term BPA deals at cost-based prices.

California, however, will be able to buy power on the spot market from BPA at market-based prices if BPA finds it has the electricity to sell.