Assessing Kaiser strike misses bigger question

Monday, September 25, 2000

By BILL VIRGIN
SEATTLE POST-INTELLIGENCER REPORTER

THE BRUISING 23-MONTH strike at Kaiser Aluminum's three Washington plants is over, and the natural -- but erroneous -- temptation is to assess who won.

Slightly more accurate, but still off the mark, would be to assess who lost more, the union for being out so long and getting so little in the settlement, or the company for generating ill-will among its workers that may never disappear.

The most accurate assessment of who won or lost the strike: It may not matter.

The labor battle at Kaiser is akin to two men who battle each other to exhaustion for control of a boat -- only to discover that the boat is poised bow-first to navigate Niagara Falls.

The water hazard is, appropriately enough in this matter, electricity generated from the Pacific Northwest's hydro system. And a lot of people, not just Kaiser workers, are in that boat.

The Pacific Northwest is a center of aluminum production precisely because of the federal hydro system and the preferential rates and access to federal power that the industry has enjoyed.

But less of that power is likely to be available to aluminum smelters -- and what is available is going to cost more.

The Bonneville Power Administration is negotiating rates for the 2001-2006 contract period. While it will offer power at the same rate as the existing contract -- about $24 per megawatt hour, according to BPA spokesman Ed Mosey -- it will offer less total electricity. BPA plans to allocate 1,440 megawatts for electricity in the 2001-2006 contract period, down from the 2,000 megawatts sold under the 1996-2001 contracts.

For the balance of the electricity they need, aluminum producers will have to go to the open market, and they won't like what they find there. Some are already finding it painful. Kaiser, which elected in 1996 to move some of its load off BPA to the open market (at the time, a less expensive option), has shut down its Tacoma smelter and has curtailed production at a facility near Spokane because of spot-market power rates. Vanalco in Vancouver, which elected to go entirely to the open market, is shut down entirely. Those moves meant layoffs for 850 workers.

Meanwhile, even though the aluminum industry is getting a smaller slice of the BPA power pie, Bonneville will have to go to buy electricity to fulfill its commitments to all of its customers. Because of what's happening in the power markets, Bonneville wants a provision that will allow it to raise rates mid-contract if necessary. Hence the result: less power at higher prices. That's not good, says Kaiser's vice president of Northwest regional affairs Peter Forsyth, since the Northwest is already at a disadvantage compared with aluminum-producing regions like Canada.

Without some stark change in the power markets or the worldwide price of aluminum, "The industry is looking at more curtailments next October," Forsyth says.

The aluminum companies are not alone in this pickle. "My members are feeling the same thing," says Kenneth Canon, executive director of the Industrial Customers of Northwest Utilities, citing such electricity-intensive businesses as newsprint production, chlor-alkali chemicals, industrial gases and steelmaking.

Unpalatable as the situation is now, it's unlikely to get much better. BPA is in this squeeze because the long-running regional surplus of electricity is finally running out, and little new generating capacity is being built. Growth has eaten away at the surplus, and that's not going to change. The Columbia River system is now managed as much for fish migration as for power generation, irrigation, navigation, recreation and flood control. "We've lost a lot of megawatts, we spill a lot of water," Forsyth says.

And that's not going to change either. The environmental community has long chafed at the preferential treatment given the aluminum companies, and has argued that the jobs generated by aluminum smelters (about 7,000 in Washington) aren't worth the financial and environmental cost.

As if those pressures weren't enough, there is always the specter of California, which has long eyed the Northwest's low-cost electricity as an affordable solution to its own energy crunch.

Compounding the unpleasantness is that the industry has few options. It's at the mercy of world metal prices that in the last decade have ricocheted from more than a $1 a pound to just above 50 cents. Aluminum making may be a capital intensive process, but it's not a technologically intensive one, which is why aluminum is made in such places as Ghana and Russia. All it takes is a producing country hungry for some hard currency to dump metal on the market, and the bottom falls out of the price.

The aluminum smelters could try shifting their load onto the public utilities and get access to BPA preference power that way, although there are limitations on how much they can move.

They could try building their own generating facilities. That's a serious possibility for pulp and paper mills, Canon says, which can use the steam heat as well as the electricity that a combustion turbine can produce. Brett Wilcox, owner of Northwest Aluminum in Oregon and Goldendale Aluminum in Washington, is proposing to build a combustion turbine, sell the power to BPA and buy it back at a discount, thus recognizing the benefits to the transmission system of having another generating source.

Kaiser estimates that new gas-fired combustion turbines would provide power at about $35 per megawatt hour. "You're really depending on a high price for aluminum to make a profit," Forsyth says. And who knows what will happen with natural gas prices -- maybe they'll keep climbing with more demand, maybe they'll go down once those higher prices spur more exploration.

Conservation? The industry cut power consumption per pound of aluminum by 10 percent from the 1980s to the mid-1990s, but the easy gains are gone. Or smelters could hope for some technological breakthrough that would reduce the power-thirsty industry's gulping of electricity.

Or maybe the region should just let the industry fare for itself. A slow death by attrition might well be what happens to the industry if nothing is done, although Canon notes that the Northwest's industries endured a spike in electricity prices once before, in the form of the WPPSS debacle, and survived.

It's easy enough to write off the aluminum companies, and other industries, as long as it's not your job that's affected.

Or your town, since many of these family wage jobs are in communities that don't have a lot of employment to spare.

Or your region, since the aluminum industry may provide some benefits to everyone in terms of stability for the regional grid.

BPA has commissioned a report to figure out the long-term viability of the aluminum industry, and whether that industry delivers enough net regional benefit to make that viability worth fighting for.

Given the increasing number and volume of voices being heard on this issue, that report is not likely to settle it. Given that power prices are not going down soon, and with the boat poised over the brink, it's likely the industry itself will have to decide itself whether to go along with its seemingly inevitable fate -- or start backpaddling like mad.