The future is in the water

Vaughn Palmer has an interesting piece in the Vancouver Sun about another run at power sales for BC Hydro from Alcan. All part of the plan to keep the modernization plans (which date back to one year ago) for the Alcan smelter in Kitimat alive. The Aluminum company and BC Hydro signed an agreement on power sales on August 16th, the proposal will now be filed with the British Columbia Utilities Commission (BCUC), which is where things went off the rails last time.

Palmer explains how the Aluminum company and the Hydro supplier plan on getting around those difficulties this time around.

Adding to the mix is the recent financial meltdown of the last week, which may pose a minor problem in the bid by Rio Tinto, which is in the midst of raising the $40 billion to buy Alcan.

Though as Palmer reports the company has stated that it doesn't anticipate any problems in the financial end as far as the Alcan purchase goes.

Still it shows how events on the other side of the country and the world for that matter can have an impact on this corner of BC.

Alcan power plan switched back on
Vaughn Palmer
Vancouver Sun
Friday, August 17, 2007

VICTORIA - BC Hydro has concluded a revised agreement to buy surplus power from Alcan, another step in the struggle to keep alive plans to modernize the aluminum smelter in Kitimat.
Thursday's announcement came a year after Premier Gordon Campbell presided at a press conference where an earlier version of the power purchase was yoked to Alcan's promise to spend $2 billion bringing the smelter up to date.

But that putative deal ran into trouble almost immediately.

Hydro was accused of paying too much for the power. Campbell was attacked for sacrificing 500 jobs in the smelter modernization.

The district of Kitimat and others challenged the terms before the B.C. Utilities Commission. At year end, they won.

The commission ruled that BC Hydro had failed to make the case: Not clear the power was needed. Not clear it was the best price. No deal.

Alcan lost no time saying it was rethinking its options. Perhaps the $2 billion would flow elsewhere. And the Kitimat smelter was not getting any younger.

The revival effort began in mid-March, with the Campbell government's announcement of a new energy plan, several elements of it seemingly tailored for another deal with Alcan.
Hydro was directed to accomplish self-sufficiency in electrical generation by 2016. It also needed to line up "insurance" power as a hedge against unexpected demand and intermittent sources like wind farms.

Moreover, the new sources of electricity were to be green -- renewable or neutral in terms of greenhouse gas emissions.

The utilities commission, in arguing Hydro was paying too much for the Alcan power, had cited to the lower cost of electricity from gas-fired generating stations.

But that option would immediately become more expensive if the operators were required to purchase carbon offsets for their natural-gas generated output.

A few weeks after the energy plan was released, BC Hydro abandoned plans to appeal the utilities commission ruling. Instead it would go after the Alcan surplus once again, in light of the new energy directives.

Meanwhile, the B.C. Supreme Court dealt a stunning setback to Kitimat in its longstanding fight against the town's leading employer.

The district had gone to court, arguing that Alcan was not allowed to sell surplus power. Instead it was obliged to use every kilowatt to make aluminum.

Not so, ruled Chief Justice Donald Brenner, based on a thorough reading of the law and agreements going back more than 50 years.

"Alcan is not restricted from selling its power or using it for the Kitimat smelter, as it considers appropriate."

Then in May, the Canadian Autoworkers Union, which was supposedly on the outs with Alcan, signed a five-year contract with the company.

Labour stability was one of the preconditions set by the Alcan board for the smelter project.
A new source of uncertainty emerged in late spring, when Alcan became the focus of a takeover battle. It was Alcoa at first. But eventually Rio Tinto emerged as the winner.

One of the new owner's first acts was to take out advertisements in Canadian newspapers, pledging its intentions to proceed with the smelter modernization.

As further evidence, in mid-July the company signed a contract with Bechtel to provide all the planning, engineering and site investigation work on the project.

Then at the end of July, Alcan and Kitimat put another round of court action on hold for 30 days in favour of negotiations.

The goal, so they said, was to try to establish a "positive environment" surrounding the modernization project.

Thursday's announcement gave another boost. The revised deal would provide Hydro with about the same amount of surplus electricity, enough to power more than 200,000 homes at peak.

Hydro, mindful of the utilities commission, said it is paying less than it proposed to do last year. But this is a longer-term agreement, running another 10 years to 2034. So it may well be worth as much or more to Alcan.

In any event, the revised deal still needs the approval of the utilities commission. Hydro will spell out additional details in an application to be filed next month.

Another obstacle is environmental approval. But I gather regulators are of the view that the project won't need extensive review, because the modernized structure will occupy the same site as the old one.

Then there's the concern that Rio Tinto, which is in the midst of raising the $40 billion to buy Alcan, may run into trouble.

Still, in a press release Thursday, the company offered assurances that its financing efforts were "well advanced and running on plan," despite the global credit crunch.

All in all, then the chances for the Kitimat smelter are look better than they did at the outset of the year, if not as shiny as at the premier's premature celebration a year ago.
vpalmer@direct.ca