BPA power contracts due, aluminum cos dissatisfied

By Carole Vaporean

NEW YORK, Oct 30 (Reuters) - Power contracts are due back at Bonneville Power Authority (BPA) by the close of business on Tuesday, and aluminum companies have said they are not satisfied with the terms as they stand.

When asked whether they had any choice in the contract's terms, one aluminum company spokesman said, ``apparently not.''

Once signed, Portland, Ore.-based Bonneville spokesman Ed Mosey said the contract will set the amount of power allotted to aluminum smelters; the fixed price at which they receive power at $26.5 per megawatt hour or a delivered rate of $27.5; and the length of the contract running from Oct. 1, 2001 through Sept. 30, 2006.

Smelters were also offered a variable rate option that would fluctuate with the price of aluminum. Aluminum producers can choose to accept all of their power on a fixed basis, or some at a fixed rate and some under the variable rate option.

``Under the variable rate option, the price of electricity will rise and fall according to the price of aluminum, within a range. At the end of the five-year period BPA will be no worse off than it would if it charged a flat rate,'' Mosey said.

The variable rate details are still under discussion, and as one analyst said, it does not seem to be much of a choice.

``The reality is, if you've got 50 percent of your power at a fixed cost and 50 percent at a variable rate, and the variable rate could be as high as $50 or $60 (per megawatt hour) you won't opt for it. And you definitely won't invest new capital into those plants if there's the risk that your rate goes up to that price,'' he said.

Furthermore, a $50 to $60 a megawatt hour rate would seem cheap compared with rates that skyrocketed at times to over $1,000 a megawatt hour last summer, and could again.

And, there is still a question of Bonneville's cost recovery adjustment clause, that aluminum companies and BPA agree will take until March or April to negotiate.

That clause is intended to protect BPA if it should have to go into the open market to purchase additional power to meet its obligations. Bonneville said it would need to recoup some of those extra costs if the price of electricity rises above a certain level, beginning with the 2002 to 2003 rate period. Those specifics are also being worked out.

The power authority said it has enough retained revenues to compensate for any extreme fluctuations in the meantime.

``We operate at cost, we are not a profit-making organisation. Our objective is to always be able to meet our treasury payments. In order to do that we always retain some revenues to help us with the uncertainties of market price and the uncertainties of supply,'' Mosey said.

Even with some issues still pending, Kaiser Aluminum Corp. (NYSE:KLU - news), for one, told analysts' at a meeting last week that it was not satisfied with the terms of BPA's proposed contract.

Other aluminum companies are said to be feeling short changed by the deal as well.

Kaiser chief executive officer Ray Milchovich said the new terms would cost the company about $45 million a year from the higher power rate, and more importantly, from operating at a reduced capacity, because of BPA's reduced power allotment.

``The current situation begs additional steps to be taken by us and others to mitigate what otherwise would be a major negative. We're working very aggressively right now on what those steps might be,'' said Milchovich.

For its part, Bonneville's Mosey said, ``Once the contract is signed the terms are locked into place. But, we are always open to proposals for other ways that we might help.''

Aluminum producers operating in the Northwest were hit hard this year with soaring power costs, forcing most smelters in the area to curtail production. Bonneville said it is sympathetic, but has to address all of its constituents needs.

Mosey said it has 130 customers ranging from service companies to municipalities to investor-owned utilities.

``Our intention is to do everything we can to help the aluminum producers remain viable as an industry, but the one thing we cannot do is push costs onto our other customers. We simply can't do that. Whatever we do has to be cost neutral to our other customers,'' Mosey said.

Despite the fixed terms that will be set on Tuesday, one industry analyst noted that both Alcoa Inc. (NYSE:AA - news) and Kaiser stressed at recent analysts meetings the degree of uncertainty surrounding BPA's proposals, that could undermine the process.

``They can sign this thing on Tuesday, and agree to disagree on a point. But if they do not resolve it before it goes into effect, it does not go into effect. That means in October 2001, there is no power for them from the BPA,'' he said.