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Aluminum Smelters Seek Special Treatment from Bonneville
Aluminum smelters and other Direct Service Industries (DSIs ) continue to campaign relentlessly for special access to the Northwest's low-cost federal power. A group of about ten DSIs have been lobbying both in the region and in Washington D.C. for a special deal for Bonneville Power Administration (BPA ) power under the guise of tiered rates, or marginal cost pricing, a progressive pricing regime long sought by conservation advocates and many economists.
On the surface, the approach appears so reasonable that many in the region fear it will be taken seriously by politicians eager to find a solution to save aluminum industry jobs in a time of high electricity prices.
The concept of tiered rates is a good one for encouraging energy conservation. By charging the going rate during times of peak power demand, when prices are high, customers receive the right incentive, or price signal, to install energy-saving appliances, energy-efficient windows and insulation, to retrofit commercial buildings with better lighting and/or to install on-site generation. Some utilities already approximate this with residential customers using what is called increasing, or inverted, block rates. The more you use, the more you pay.
However good the concept, deciding how many kwhs customers receive at the low rate and at what point the higher rate kicks in presents a problem. This is particularly difficult for business use, since every business is different, and policy makers don't want to discourage growth. Another challenge is to avoid penalizing the marginal use of a very efficient and expanding business while giving cheap power to an older, inefficient company. Because of these complications, tiered rates have never been used for commercial and industrial customers.
Tiered rates can, however, make sense on the wholesale level when a supplier such as BPA sells to local utilities. Charging a utility a higher price for the last 10% of its load, for example, would provide an incentive for the utility to invest in conservation and/or build its own resources. Conservation advocates have long favored such an approach to set BPA rates to its utility customers, but not the DSIs. Tiered rates for an aluminum smelter, for example, send a price signal that some amount of aluminum should be made, but a larger amount should not. That kind of signal doesn't make economic sense.
At current market prices, about $2 to $5 worth of electricity is required to make a pound of aluminum worth only about $.70. Thus a tiered or blocked rate structure for aluminum companies would allow them to make the metal at a loss from a regional economic perspective at a time when the Northwest can't afford to squander a single kilowatt.
BPA will purchase about 25% of its power from the market and blend that high-cost power with much cheaper at-cost federal hydropower. The result will be a significantly higher overall rate that would be prohibitive for continued operation of most, if not all, of the region's aluminum smelters. The DSIs are proposing a tiered-rate structure that would allow BPA customers to buy the first 75% of their power from BPA at cost and any additional power at market rates. This structure would effectively allow the DSIs to take only their 75% "share" of at-cost power and lower their production levels. Utilities don't enjoy the same flexibility they have an obligation to serve consumers and cannot simply take less power.
The DSI scheme also begs the following question: Is it worth continuing to subsidize aluminum smelters with at-cost power in light of the value that power could otherwise provide such as significantly easing the energy crisis and its accompanying extreme power costs for other industries and residential customers?
Steven Weiss & Mark Glyde