Power Sales to California Heat Tempers in Northwest
Skyrocketing energy prices and California’s recent demands for the cheap federal hydropower that fuels the Pacific Northwest’s $4-billion-a-year aluminum industry have unleashed widespread resentment in Washington state and Oregon--which are just beginning to feel the downside of the deregulation movement.
Both states, whose residents traditionally have enjoyed some of the cheapest prices in the nation, face the same soaring rates that are plaguing California. And Energy Secretary Bill Richardson’s order last week to ship Northwest electricity southward comes as a cold, clear autumn renders the region’s own power picture uncharacteristically bleak.
“We are really at the risk of having California and its problems drag down the rest of us,” Oregon Gov. John Kitzhaber said last week. “I think it’s outrageous that Oregon would have to conserve just to sell power to California.”
In the surreal new economics of the Western power grid, it turns out, companies like Kaiser Aluminum can make more money by temporarily shutting their plants and selling the surplus electricity than by simply making aluminum.
Over the last few months, Kaiser has made more than $135 million selling its surplus power--opening a new debate over who really owns the Northwest’s traditionally cheap electricity.
Kaiser’s decision to close its smelters near Spokane and Tacoma and sell some of its subsidized electricity to help meet California’s power demands will mean laying off hundreds of workers who recently returned to work after a two-year strike. Employees with more than 10 years’ service will continue to draw a salary, but many others could be cut off after Jan. 31.
“I’m frustrated with the whole thing. I don’t see how they can sell their power just . . . to make money, when I’m a single parent and I just don’t know what I’m going to do to make ends meet right now,” said Austin Waggy, who was laid off from Kaiser’s aluminum smelter near Spokane.
Power-Sharing Is Nothing New
Power-sharing with California is nothing new. For years, excess power generated by dams on the abundant rivers of the Northwest has moved south in the spring and summer, when river flows are plentiful. California typically repays the favor in the winter, in fact paying back twice the power it borrows.
The crunch came this winter as both regions experienced heavy power demands in a deregulated market that has sent electricity prices soaring.
The result: Northwest officials who had urged their citizens to conserve were faced--as a result of the Energy secretary’s order--with the politically unpleasant task of sending that conserved electricity to California.
Moreover, a region that has imposed drastic and highly controversial logging and building limits to protect the salmon could see many of those efforts jeopardized this spring if the federal hydropower system is forced to lower its reservoir levels too far--thus endangering the migration.
And perhaps most controversial--because it has been so immediately visible--is the move to re-market federally subsidized power by companies like Kaiser, part of a select group of industrial users able to buy cheap power directly from the Bonneville Power Administration. Soaring demand in California and unprecedented prices for electricity have turned that contractual right into an extremely valuable commodity.
The Pacific Northwest has always enjoyed a special relationship with the BPA, the federal agency that markets power generated by 29 dams on the Columbia River system. Hydropower from the dams traditionally has been provided to Northwest utilities at low rates--both because the region is giving up its free-flowing rivers to generate the power and because the influential Northwest congressional delegation keeps the deal in place.
The aluminum industry has been part of the arrangement since the dams were built in the pre-World War II years, when there was a clear national need for aluminum to build airplanes and an obvious benefit in locating their power-intensive facilities near generation sources.
Currently, about 2,000 megawatts of BPA’s total of 8,970 megawatts per hour is allocated to 10 aluminum companies and eight other steel and chemical companies that are also big electrical users.
Dan Russell, president of the Spokane local of the United Steelworkers of America, said the union expects Kaiser to pay employees full wages throughout the time the plant is shut down, not only until Jan. 31.
“They stand to make $500 million in the next 10 months just selling power. They can easily afford to apply some of it to their employees,” Russell said. He said the present agreement will keep about 70% of the work force at full pay. “There’s another 30% out there that are going by the wayside. . . . It kind of stinks.”
Kaiser Casts Itself as a Good Citizen
Kaiser officials point out that the company is acting as a good corporate citizen by conserving electricity in the industrial sector when it is most needed to light homes and Christmas lights in California.
“We have no desire to energize California. We want to keep the power in the Northwest. But somebody has to respond to the national request to move energy to California,” said Pete Forsyth, Kaiser’s vice president for Northwest regional affairs.
“It’s going to come at somebody’s expense,” Forsyth said. “And yet an industry that has the right and the contractual ability to sell power is being told, ‘Don’t do that; you’re making too much money.’ ”
In fact, Northwest industries took a big gamble when they cut the deal with BPA that gave them access to the low-cost power.
In 1996, when the current contract was signed, BPA power was far from a bargain. Utility customers were flocking to lower-cost providers that had sprung up under deregulation, and BPA sought to hang onto the big, easy-to-serve industries that were among its best customers.
To persuade them to sign a long-term contract, BPA offered industrial users like Kaiser the right to resell their electricity if market prices escalated. The catch: Industries had to contract to buy a certain amount of power, even if it turned out they didn’t need it--and even if BPA’s power proved to be more expensive than other sources could provide.
While Kaiser stands to make a windfall over its power allocation, so does BPA: Kaiser sold the electricity back to the utility at $25 million below the market rate.
“Back in ’96 [when the industry contract was being negotiated], the market was level at best, if not heading down,” said BPA spokesman Mike Hansen. “Nobody saw that in the fifth year of these five-year contracts that the market was going to skyrocket out of control like it has. People need to understand that it was a buyers’ market in ‘96, and we needed to sign these people up in order to pay our own bills.”
The new contract, scheduled to take effect Oct. 1, allocates only 1,500 megawatts to the direct-service industries and does not permit any resale. Forsyth said the new contract will provide Kaiser with 20% less power at prices that are 35% higher.
The new contract terms are expected to cost Kaiser $45 million a year, a cost the company hopes to hedge against with the electricity sales.
“The survival of the industry could be at stake,” Forsyth said.
