An Unexpected Energy Windfall Manufacturer to Make More by Selling Power Than Using It

S P O K A N E, Wash., Dec. 12 — The price of electricity is so high that one aluminum plant can make more money reselling power than by keeping its doors open.

Kaiser Aluminum Corp. on Sunday shut down its Mead aluminum smelter here until at least October and said it would resell the power it is not using to the Bonneville Power Administration, the region’s federal power marketing agency. The company has sent its 400 employees home, and still expects to see huge profits: up to $52 million. “Needless to say, $52 million for a month is a dramatically positive result for us,” says Raymond Milchovich, CEO of Kaiser Aluminum. Kaiser is reaping a windfall made possible by a volatile energy market that is shrinking supplies and driving up prices in the West. A cold snap in the Northwest has made matters worse.

In the Western Power Grid, the price of electricity is fluctuating wildly as deregulation meets winter. One year ago, the price of a megawatt, enough power for 1,000 homes, traded between $25 and $35. Last week in the state of Washington it was $5,000; today in Washington, the price was down to a $1,000.

“Here, we may have from day to day a thousand percent difference in price from the previous day, or indeed, the previous hour,” says George Sladoje of the California Power Exchange.

Not All Companies So Lucky Kaiser’s situation is rare, however. Instead of shutting down to sell power, other western companies — mainly aluminum and paper mills that use electricity to make their products — are simply shutting down until the price of power stabilizes.

Seattle-based Boeing Co. is a major consumer of aluminum and of electricity. Dean Tougas, a spokesman with Boeing’s energy group, said the airplane manufacturer has not curtailed production, but has redoubled efforts to conserve energy.

That means buildings and other sites are being surveyed for “extra opportunities” to save money by turning off lights and equipment when not in use and rescheduling use of high-energy equipment for off-peak times, he said.

Kaiser began making curtailments in June, when it closed its Tacoma smelter. The Mead plant already had been cut to one-third of its production capacity in cost-saving measures.

Kaiser to Make $52 Million By closing the Mead plant, Kaiser not only saves energy costs, it reaps a windfall. The company signed contracts in 1996 to buy power from BPA for $22 per megawatt hour. It will sell that power back to BPA at more then $500 a megawatt hour; the market price for wholesale electricity, BPA spokesman Ed Mosey said Monday.

The company expects to make about $52 million in December from the sale, well above the $15 million the United Steelworkers estimates Kaiser will pay in laying off 400 hourly workers.

In January, the company could begin selling its BPA power on the open market, where prices have climbed to more than $900 per megawatt hour, Mosey said.

“In 1996, they opted for a contract that gave them the right to remarket any power they did not use in their operation,” Mosey said. “They took a risk that the market might actually be lower, in which case they would have incurred a loss. That was a bit of speculation that turned in their favor.”

If current market conditions remain, Kaiser could realize as much as $500 million from the resale of BPA power until a new five-year contract kicks in on Oct. 1, 2001.

When the new contract takes effect, BPA will make only 40 percent of the current power available, at prices 35 percent higher, Kaiser spokeswoman Susan Ashe said.

“We made this power sale in order to improve our situation in the long term,” Kaiser spokeswoman Susan Ashe said. “We need more power at more affordable rates.”

Steelworkers Call Move ‘Profiteering’ The United Steelworkers of America, which represents about 2,000 union workers at Kaiser plants, on Monday called on BPA, the U.S. Department of Energy and the Northwest congressional delegation to stop Kaiser’s “unjustifiable profiteering” of publicly generated power.

Mosey said the BPA is beginning discussions with Kaiser over power sale revenues, such as long-term investments to ensure the Mead smelter’s viability. That could include construction of a natural gas-turbine generating plant by Kaiser to run its smelter.

“We’re concerned about the economy of the Spokane area, ability to continue operating the plant, treatment of employees and the rights of other ratepayers,” Mosey said. “We want to ensure the ratepayers in Northwest are not put at a disadvantage.”

High wholesale prices this year likely will translate into high retail prices next winter, Mosey said. Most of the region’s utilities have sought rate increases to cover the higher costs of electricity and natural gas.

“I do see this as an unintended consequence of restructuring in the wholesale and retail markets,” Tom Carrier, a Spokane energy economist, said of deregulation that led to a tightening of the West’s power supplies and skyrocketing power prices.

“When the country and California embarked on this deregulation experiment, I think they thought it would mean lower prices and greater supplies, when the result has been exactly the opposite,” said Carrier, an Eastern Washington University professor and member of the Northwest Power Planning Council.

http://www.abcnews.go.com/sections/business/DailyNews/power_market001212.html

-- Cave Man (caves@are.us), December 13, 2000

Answers

Slim Relief in Sight for Strained Western Power Grid

Reuters Dec. 12, 2000 18:59

SAN FRANCISCO - Power officials in the Western United States pointed on Tuesday to signs the region's current electricity crisis may be easing, but held out little hope of a lasting fix for the troubled grid.

``Today will be much like yesterday,'' said Kellan Fluckinger, chief operating officer at the California Independent System Operator (Nasdaq:I), the agency that manages about 75 percent of the state's transmission system.

This is the ninth consecutive day Californians have been put on a power alert, producing a stream of pleas on radio and television to cut back on energy use to avoid crashing the grid, which has not kept pace with the state's booming economy.

Certain big industrial customers in California will likely have their power briefly cut again this evening to help the state get through the peak demand hours, Fluckinger said.

Some 8,500 megawatts (MW), or roughly a fourth of California's power generation, was still out of service Tuesday for maintenance and repairs after running hard all summer to keep pace with heavy air conditioning demand.

A megawatt is roughly enough to power 1,000 homes.

But Fluckinger said he expected the number of plants out of service to drop steadily through the week, putting more megawatts on the grid as schools, offices and factories start throttling back for the holiday season, further easing demand.

Relief was also seen coming from the Pacific Northwest as the region began to thaw out after a cold snap that kept power generators scrambling to serve local communities, leaving little electricity for export to California.

NORTHWEST LIFTS POWER ALERT

The power alert declared Friday by the governors of Washington, Oregon and Montana was lifted on Tuesday.

But the usual interstate transfer of electricity on the Western power grid remains severely hampered by a shortage of hydroelectric supplies.

``We've had one of the driest Novembers on record and December is shaping up to be about the same,'' said Mike Hansen, a spokesman for the Bonneville Power Administration (BPA), the federal agency that markets power from giant dams on the Columbia and Snake Rivers.

``We are over the immediate crisis, but just waiting for the next one...we briefly pushed the hydropower system beyond what was planned,'' he said.

Tapping reservoirs now raises the risk of depleting hydroelectric supplies next summer and leaving the rivers dangerously low for the annual salmon migration.

California depends on hydropower from in-state plants and imports power for 20-25 percent of its power needs.

Fluckinger warned that despite successfully staving off widespread outages this past week, the Western power system is still in terrible shape, with demand from the region's growing population and strong economy overwhelming available supplies.

``We're looking at a lack of supply after 10 years of robust growth. We have a huge need to site power plants and transmission lines,'' he said.

In response to the crisis, more than 6,000 MW of new generation, mostly to be fired by natural gas, are now on the drawing boards or under construction just in California.

Despite efforts to rush new units to completion, most will not be on line until 2002, setting the region up for what most industry analysts predict will be a long, hot summer of chronic power shortages and, most likely, blackouts on days when peak demand outstrips supply.

http://www.azcentral.com/news/reuters/stories/NEWS-WEST-POWER-DC.shtml

-- Cave Man (caves@are.us), December 13, 2000.