FEDERAL
ENERGY REGULATORY COMMISSION
Alcoa Power Generating, Inc. (APGI) Project
No. 2169-020
Re: NOTICE OF SETTLEMENT
AGREEMENT AND SOLICITING
COMMENTS
COMMENTS
ON THE RELICENSING SETTLEMENT AGREEMENT FOR
THE
TAPOCO HYDROELECTRIC PROJECT
FERC PROJECT NO. 2169-020
ON BEHALF OF THE AMERICAN WHITEWATER AFFILIATION, CAROLINA
CANOE CLUB, EAST TENNESSEE WHITEWATER CLUB, ENDLESS RIVERS ADVENTURES,
NANTAHALA GORGE ASSOCIATION, NANTAHALA OUTDOOR CENTER, WESTERN CAROLINA
PADDLERS, AND WILDWATER LIMITED.
The American
Whitewater Affiliation, Carolina Canoe Club, East Tennessee Whitewater Club,
Endless River Adventures, Nantahala Gorge Association,
The Parties:
American Whitewater Affiliation, Carolina Canoe Club, East Tennessee Whitewater Club, Endless River Adventures, Nantahala Gorge Association, Nantahala Outdoor Center, Western Carolina Paddlers, and Wildwater Limited (hereinafter referred to as “Interveners”:
The American
Whitewater Affiliation (hereinafter known as American Whitewater or AW) is a
national non-profit 501(c)3 river conservation and recreation organization
founded in 1954. We have over 6,000
members and 160 canoe club affiliates, representing approximately 80,000
whitewater paddlers across the Nation. Carolina Canoe Club (CCC), East Tennessee
Whitewater Club and Western Carolina Paddlers (WCP) are regional conservation oriented
paddling organizations have a strong interest in the future of the Cheoah and
Little Tennessee Rivers and, therefore, the relicensing
of the Tapoco Project. A significant
portion of the membership of the aforementioned organizations lives and
recreates in
Endless River
Adventures (ERA), Nantahala Outdoor Center (NOC), and Wildwater
Limited (WWL) are outfitters that provide guided trips for the public on rivers
near the project area. Each year these
companies facilitate recreational experiences for tens of thousands of US
Citizens, and employ more people than any other business in
The Interveners
have been dedicated participants in the Alternative Licensing Process since its
inception. We have actively participated
in virtually all of the stakeholder meetings, played a large organizing role in
the Cheaoh River Recreation Study, and offered
significant comments on the Tapoco Preliminary Draft Environmental Assessment,
the Resource Agency Group (RAG) Technical Memorandum, and the economic studies
of the project. In addition, many of our
members and customers have a direct interest in the ecological integrity of,
and recreational experiences provided by the Cheoah and Little Tennessee
rivers. Therefore, American Whitewater,
Carolina Canoe Club, East Tennessee Whitewater Club, Endless River Adventures,
Nantahala Gorge Association,
Collectively, Interveners represent most, if not all of the river recreation interests involved in the Tapoco Relicensing. None of the Interveners have signed, or intend to sign the Agreement in Principle (AIP) or the Settlement Agreement associated with the Tapoco Relicensing because these agreements fail to provide appropriate mitigation for the Tapoco Project’s significant impacts on river recreation on the Cheoah and Little Tennessee rivers, and fail to meet the public demand for these rivers.
COMMENTS
1) Introduction:
These
comments will closely follow our comments and requests made in our recent
comments on the FERC EA. The Settlement
Agreement (SA) is not comprehensive: it provides virtually no mitigation of the
Tapoco Project’s drastic impacts on whitewater recreation on the
2) Objections to Specific Components of the Settlement
Agreement
a) Settlement
agreement is not comprehensive:
The
SA offers conflicting statements about the comprehensive nature of the SA. The stated purpose of the SA is for it to act
as a comprehensive resolution of all relicensing
issues[1]. However the scope of the SA is clearly
defined as only resolving the issues relating to the parties that actually
signed the SA[2]. We would like to state for the record that
the SA is not comprehensive by any definition.
Many stakeholders, including the Interveners, chose not to sign the
settlement, and specific interests and issues are not covered or adequately
mitigated in the SA. Specifically, the
Intervener’s interests in restoring adequate and appropriate whitewater
recreation opportunities to the
·
APGI is providing $0.00 for whitewater recreation
access areas while the
· The high flow releases proposed in the SA are all below the optimal flow for paddling,[4] over half are below the minimum acceptable flow, [5] and most are during spring months when non-commercial paddling is viable but commercial use of the river is highly questionable.
· If the public wishes to have even a single day of recreational releases at an optimal flow they must pay APGI for the water (charges estimated at $15,000-$25,000 per day), a $3,000 administration fee, and an undetermined fee for biological monitoring.
·
The recreational value or use of the high flow
releases is never mentioned in the SA, because these releases were not proposed,
designed, or accepted by APGI as recreational releases. They are biological releases mandated though
negotiations by the Resource Agency Group (RAG). In fact the Licensee stated on numerous
occasions that they would not provide a single release for recreational
boating, only those required to meet the ecological mandate of the RAG. As the Licensee stated in their recent
comments on FERC’s EA, “It is important to note that
the high flow events were designed by the RSA Parties primarily to protect, mitigate,
and enhance aquatic resources which could also provide a whitewater
boating experience on the
·
The whitewater paddling community is not invited
to be involved in any post licensing discussions regarding the
· The high-flow regime can be altered post-licensing to accommodate and optimize biological needs but cannot be altered in any way to improve the recreational benefits of the releases.
· The conservation easements proposed for project and non-project land may impinge upon the public’s recreational use of Yellow Creek, much of the reservoir shorelines, and other creeks by a prohibition of “other modes of transportation” that could include canoes and kayaks.[6]
In summary, APGI provides no mitigation of their
significant impacts on the best whitewater river in the Southeast through the
SA, and the recreational benefits associated with the biologically motivated
high flow events are woefully limited in quality and quantity, and subject to
change in the future with no consideration of the recreational values
associated with these releases.
b)
The
license term should be 30 years if the FERC decides not to include the
recreational interests of the Interveners in the new license for the Tapoco
Project.
While the Interveners see no reason why the FERC would not
address our concerns and meet our interests in the new license for the Tapoco
Project, we request that if FERC does decide to continue to allow APGI to
drastically impact whitewater recreation on the Cheoah River without
mitigation, then the FERC limit the term of the license to 30 years. The recreational and economic impacts of
adopting the SA without adding a recreational component are so great that they
more than justify limiting the term of the license to 30 years. The paddling community in the Southeast and
the Nation[7],
as well as the business community in the region[8]
have waited a long time to see the recreational values of the
c) The FERC has the discretion to add mitigation above
and beyond the SA in order to meet outstanding interests, and APGI cannot
withdraw from the SA without permission from FERC and the Signatories of the
SA.
APGI
has threatened the entire stakeholder group for years that if APGI’s undefined financial limits were exceeded by the relicensing process that they would walk away from the
table and receive a license directly from the FERC. In their recent comments on the FERC EA, they
boldly threaten the FERC by stating, “… the Commission needs to be aware that
acceptance of such Staff recommendations could well torpedo the entire
settlement.” Furthermore they state:
“APGI will not accept additional economic burdens without exercising its right
to withdraw from the settlement and have all the relicensing
issues determined on the basis of the record.”[10] The FERC should not be moved by APGI’s empty threats.
APGI is making $24,611,413.00 in profit per year[11]
on the Tapoco Project and is committing a pittance to the protection,
mitigation, and enhancement measures associated with the relicensing. APGI must know that should FERC determine all the relicensing issues on the basis of the record it would cost
APGI significantly more than the costs associated with the SA, even with the
minor requested whitewater recreation enhancements added to the license.
More
importantly than APGI’s threat being hollow, it is in
conflict with the terms of the SA. APGI cannot simply walk away from the SA to FERC for a
new license based on the record, even if they wanted to. APGI has signed a binding settlement that requires
them to consult with the other SA Parties should FERC modify the SA in a new
license and attempt to reach consensus on adopting the license terms as a
revised settlement agreement[12]. If these efforts fail, then APGI can file a
Request for Rehearing, but cannot simply withdraw from the SA. In fact, APGI would not be able to withdraw
from the SA until the “New License is issued with a FERC-Imposed Modification
and has become Final and Non-Appealable, provided the
withdrawing Party has exhausted its administrative and judicial remedies in
contesting such FERC-Imposed Modification.”[13] More importantly, if the FERC denies a
request for rehearing from APGI, then it requires consensus of the entire group
of settlement signatories for APGI to withdraw from the Settlement Agreement. In short, it is up to the FERC whether APGI can withdraw from
the SA,
since there is almost no chance the signatories to the SA would reach a
consensus agreement that allows APGI to withdraw after a denied request for
rehearing.
In
the unlikely event that APGI would choose to withdraw from the SA, and the FERC
grants APGI a request for rehearing, and the signatories of the settlement
agreement inexplicably agree to let APGI withdraw, then APGI would be faced
with a rather daunting alternative. The
only portion of their SA that is not recommended as a License Article is the
land easement issue. Therefore APGI
would be essentially choosing between mitigating significant project impacts
on-site through flow restoration as part of a new license or offsite mitigation
through land protection as part of the SA.
If the FERC issues a modified license and APGI considers withdrawing
from the SA - thereby removing the easements from the mitigation package - than
APGI would be subject to new 401 water quality certifications and FERC/RAG
mandates relating to flows that would likely be (and should be) far more costly
to APGI than the agreed upon easements.
Suitable mitigation could include operating Santeetlah
in run-of-river mode at the dam to maximize the ecological restoration
of the last vestige of a flowing reach within the project, restoring a
significant amount of flow to the Calderwood Bypass,
or reconsideration of decommissioning of one or more dams. The lands are that important to the SA
parties and to the Interveners. The
mitigation required of APGI by the FERC and the Resource Agency Group - should
APGI consider withdrawing from the settlement - should be sufficient to
convince APGI it is in their best interest to remain a signatory of the SA and
accept the minor inconvenience of restoring whitewater opportunities to the
Cheoah River.
We maintain though, that APGI cannot withdraw from
the settlement as long as FERC denies APGI’s request
for rehearing, and at least a single SA signatory refuses to consent to their
withdrawal.
d) The FERC should not accept the terms of the Settlement
Agreement that allow APGI to charge the public for recreational releases.
The Interveners object the portions of the SA[14]
that would require the public to give the
i)
There is no precedent for requiring the public to pay a Licensee for
releases.
Through conversations with the FERC[15],
Hydropower Reform Coalition steering committee members, and other relicensing experts, the Interveners have determined that
the public has never been required to pay a Licensee for recreational
releases. Frankly, this is because it is
absurd for the public to give a river to a corporation through relicensing so that they can buy it back. Such a decision would undercut the very
foundation of relicensing.
ii)
The Public Trust Doctrine prohibits the FERC from allowing APGI to
charge the public for recreational releases.
One of the
keystones to
iii) Eastern Water Law
prohibits the FERC from allowing APGI to charge the public for recreational
releases.
The SA itself states that the SA does not grant or
affirm any property right, license or privilege in any waters or any right of
use in any waters, nor does it authorize any person to interfere with the
riparian rights, littoral rights or water use rights of any other person[16]. Nor does the Federal Power Act claim to in
any way impact the state of
iv) The Federal Power Act
(FPA) and the Electric Consumers Protection Act (ECPA) prohibit the FERC from
allowing APGI to charge the public for recreational releases.
Nowhere in the FPA or in ECPA is a Licensee granted
the authority to charge the public for recreational releases. In fact, Section 4(e) of the FPA[18]
requires the FERC to give equal consideration to recreation and other
beneficial uses of the river. If equal
consideration is granted, then a power generation corporation will not be
granted the right to charge members of the public that desire the
v)
Economic factors will not support any additional fee-based releases.
APGI economic studies done during relicensing
predict that 30 days of releases would yield $4,663,200 in new economic output
to
3) Recommended Changes to the Proposed License Terms in
the Settlement Agreement for Inclusion in the New License for the Tapoco
Project.
The Intervenors respectfully
propose the following changes to the terms of the SA, with the goal of
eliminating illegal and unethical terms that would fail judicial scrutiny, and
of adding complimentary terms that will make the new license for the Tapoco
Project truly comprehensive through providing fair and reasonable opportunities
for whitewater recreation in the
a)
Section
1.2.2.10:
Change to “Schedule single day high flow events from July through November with
a minimum of 10 days between events. The
Licensee will provide 12 months prior notice to the USFWS, USFS, NCWRC, NCDENR,
EBCI,
b)
Table OR 2.3 “High Flow Events –
5-Year Repeating Schedule” should be changed to reflect Table 1 in these
comments found below.[22]
|
Table 1: Intervener Recommended Changes to the
Five-Year High Flow Releases proposed in the Settlements Agreement Table OR
2.3(Only the magnitude columns and the bottom two rows differ from Table OR
2.3 in the Settlement Agreement). |
|||||||||||||
|
High Flows |
Year 1 2005 |
Year 2 2006 |
Year 3 2007 |
Year 4 2008 |
Year 5 2009 |
Magnitude (cfs) |
|||||||
|
|
Events |
Days |
Events |
Days |
Events |
Days |
Events |
Days |
Events |
Days |
Day 1 |
Day 2 |
Day 3 |
|
January |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February |
1 |
2 |
1 |
2 |
1 |
2 |
1 |
2 |
1 |
2 |
1130 |
Var1 |
|
|
March |
1 |
3 |
1 |
3 |
1 |
3 |
1 |
3 |
1 |
3 |
1130 |
1000 |
300 |
|
April |
2 |
5 |
3 |
6 |
2 |
5 |
2 |
5 |
3 |
6 |
1130 |
1000 |
300 |
|
May |
2 |
4 |
2 |
4 |
3 |
6 |
3 |
6 |
3 |
6 |
1130 |
1000 |
|
|
June |
1 |
2 |
1 |
2 |
|
|
|
|
1 |
2 |
1130 |
1000 |
|
|
July |
|
|
|
|
1 |
2 |
|
|
|
|
1130 |
1000 |
|
|
August |
|
|
|
|
|
|
1 |
1 |
|
|
1130 |
|
|
|
September |
1 |
1 |
|
|
1 |
1 |
|
|
|
|
1130 |
|
|
|
October |
1 |
1 |
1 |
1 |
|
|
1 |
1 |
|
|
1130 |
|
|
|
November |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1130 |
|
|
|
December |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total: |
10 |
19 |
10 |
19 |
10 |
20 |
10 |
19 |
10 |
20 |
|
|
|
|
Optimal Boating Days (>1130) |
10 |
10 |
10 |
10 |
10 |
|
|||||||
|
Boatable Days (>950) |
16 |
17 |
17 |
16 |
18 |
|
|||||||
|
1 600
cfs from hour 15 to hour 19, 400 cfs from hour 20 to hour 34; 200 cfs from
hour 35 to hour 47; 100 cfs for hour 48 2 600
cfs from hour 16 to hour 36; 300 cfs from hour 37 to hour 48 |
|||||||||||||
c)
1.2.3
Reallocation of Flows: A fifth bullet should be
added to the list of 4 considerations that should read: “5. Any requested reallocation shall
consider, and seek to minimize, any potential impacts on existing whitewater
boating recreational benefits of the high flow regime.[23]
d) 1.2.4 Potential Modifications to Repeating Five Year
Schedule of High Flow Events
Change
to:
“Starting in October 2010, in conjunction with the annual planning meeting required in Section 1.2.3 above, the Licensee will consult with the U.S. Fish and Wildlife Service (USFWS), the U.S. Forest Service (USFS), the North Carolina Wildlife Resources Commission (NCWRC), the North Carolina Department of Environment and Natural Resources (NCDENR), the Eastern Band of Cherokee Indians (EBCI), The American Whitewater Affiliation (AW), Carolina Canoe Club (CCC), East Tennessee Whitewater Club (ETWC), Endless River Adventures (ERA), Nantahala Gorge Association (NGA), Nantahala Outdoor Center (NOC), Western Carolina Paddlers (WCP), Wildwater Limited (WWL) and Graham County regarding the possibility of providing high flow events for whitewater boating purposes on a trial basis in addition to the high flow events contemplated in the repeating five year schedule included in Section 1.2.2 above.[24]
If the USFWS, USFS, NCWRC, NCDENR, and EBCI notify the Licensee that they are in full concurrence that biological recovery in the Cheoah River has proceeded to a point that additional high flow events should be scheduled and evaluated on a trial basis, then the Licensee will consult with USFWS, USFS, NCWRC, NCDENR, EBCI, AW, CCC, ETWC, ERA, NGA, NOC, WCP, WWL, and Graham County, to determine the specific number, magnitude and timing of such additional trial high flow events. The Licensee will provide the additional high flow events upon Commission approval if (i) the requested flows do not result in a total number of days of scheduled recreationally viable flows (1000 cfs and above) greater than 30 per year, and (ii) the additional high flow events can be provided in a manner consistent with other requirements of the License (including but not limited to the Santeetlah Reservoir Operating Curve, the Low Inflow Protocol, and the Maintenance and Emergency Protocol).[25]
In the event that the Licensee, USFWS, USFS, NCWRC, NCDENR, EBCI, AW, CCC, ETWC, ERA, NGA, NOC, WCP, WWL and Graham County agree on the provision of additional trial high flow events, then no later than 60 days prior to the anticipated start of the additional high flow events, the Licensee shall file for Commission approval a plan of the proposed revisions to the repeating five year schedule of high flow events. In conjunction with subsequent annual planning meetings, the Licensee will consult with the USFWS, USFS, NCWRC, NCDENR, EBCI, AW, CCC, ETWC, ERA, NGA, NOC, WCP and WWL in order to determine whether to terminate, continue, or modify the additional trial high flow events, or to recommend to FERC a permanent change in the repeating five year schedule of high flow events. The determination shall be based on the aforementioned group’s assessment of the effects of the additional trial high flow events on the Cheoah River aquatic and associated riparian biological communities, on the quality of whitewater recreation opportunity provided, on other recreational uses of the Cheoah River, on water levels in Santeetlah Reservoir, and of cumulative and secondary effects on the ecological and aesthetic resources of the Cheoah River corridor. The determination will also be based upon the Licensee’s assessment of factors associated with Project operations and other relevant License requirements that may be affected by the additional high flow events. The Licensee shall make additional filings, as appropriate, notifying the Commission of any additional requested revisions to the repeating five year schedule of high flow events, and upon Commission approval will implement the revised high flow event schedule.”[26]
4) Recommended Additions to the Proposed License Terms in
the Settlement Agreement for Inclusion in the New License for the Tapoco
Project.
The FERC should include in the new license for the Tapoco
Project a provision that requires APGI to selectively remove woody vegetation
from the Cheoah River channel in a manner that requires: (1) The main flow of
the river as well as the preferred routes through rapids to be clear of trees,
(2) All potentially dangerous areas of high velocity flow associated with
significant rapids to be free of trees, and (3) calm areas, such as eddies and
pools that are associated with significant rapids to be at least partially free
of trees to facilitate resting, boat scouting, regrouping, and general river
safety. The Interveners should be
included in the consultation phase that determines specific areas in need of
vegetation management.
5) Justifications for adoption of Interveners proposed
additions to the Proposed License Terms.
The interveners offer the following basic justifications for adopting our proposed additions to the Proposed License Terms. Adopting our proposed changes would:
a)
Restore high quality whitewater recreation opportunities to the best
whitewater river in the southeast, and one of the best in the country. Specifically, adopting our proposed
changes would increase the number of days of optimal paddling flows from 0 to
10, and increase the number days of acceptable paddling flows from 10 to 17, or
to possibly as many as 30.
b)
Mitigate the massive impacts on river recreation
on the
c)
Meet the interests of the 8 organizations
(Interveners) whose interests were categorically excluded from the Settlement
Agreement.
d)
Lead to an estimated additional $4,663,200 in
new economic output and 153 new jobs
e)
Not threaten the Settlement Agreement, because
the only party potentially negatively affected by our proposed changes is APGI,
and they are unable to withdraw from the settlement without FERC and Signatory
permission, and regardless would chose not to based on the alternative. Our changes are very minor but result in a
significant enhancement to the public values of the Tapoco Project.
f)
Not set a dangerous precedent that allows
Licensees to charge the public for recreational releases or other mitigation
flows, which the Settlement Agreement does.
g)
Not violate the public trust doctrine, in contrast to the Settlement
Agreement, which does violate the public trust doctrine.
h)
Not violate the Federal Power Act (FPA) as amended by the Electric
Consumers Protection Act, in contrast to the Settlement Agreement, which does
violate the FPA.
i)
Not change the USFWS’s finding that the
proposed flows would “not likely adversely affect” any of the rare, threatened,
or endangered species associated with the project. The only change we propose to the flow regime
is a slight increase in volume which the USFWS has stated would not change the
ecological role of the releases.
6) Conclusion.
Based on all the justifications and information provided in these comments and in our significant contribution to the record on the Tapoco Project, the Interveners request that the FERC accept our “Recommended Changes to the Proposed License Terms in the Settlement Agreement for Inclusion in the New License for the Tapoco Project” and our “Recommended Additions to the Proposed License Terms in the Settlement Agreement for Inclusion in the New License for the Tapoco Project” as modifications to the Settlement Agreement and for inclusion in a new license for the Tapoco Project. Specifically we request that the FERC: 1) slightly increase the volume of the high flows recommended in the SA to provide optimal and acceptable recreational opportunities on those limited number of days, 2) eliminate the absurd terms of the SA that require the public to pay APGI for recreational releases and modify those term such that it requires APGI to provide these releases free of charge, and 3) include a vegetation management requirement with the goal of providing a reasonably safe and natural paddling experience on the Cheoah River. If the FERC does this they will restore a valuable recreational resource, avoid setting a precedent that is damaging to the public interest, comply with federal and state laws, meet the interests of groups excluded from the settlement process, comply with the USFWS biological opinion, and will not threaten the viability of the Settlement Agreement. We respectfully ask the FERC to assure a fair and equitable license for the Tapoco Project through addressing our reasonable interests that we have worked tirelessly and fruitlessly to have met for the last 5 years. Without FERC intervention into the settlement process, the Interveners will have been effectively and intentionally excluded from the relicensing of the Tapoco Project by a hostile Licensee.
APPENDIX 1. THE ECONOMIC RELATIONSHIP BETWEEN THE TAPOCO PROJECT AND
ALCOA’S
|
TAPOCO PROJECT FERC NO. 2169 RELICENSING STUDY REPORT ______________________________________________________ THE ECONOMIC RELATIONSHIP BETWEEN THE TAPOCO PROJECT AND ALCOA’S DRAFT REPORT ______________________________________________________ Prepared by Dr. September 2002 Alcoa Power Generating Inc. Tapoco
Division |
________________________
THE ECONOMIC RELATIONSHIP BETWEEN THE TAPOCO PROJECT AND ALCOA’S
Submitted to
Tapoco
Division of
Alcoa
Power Generating Inc.
Submitted
by
Dr.
Economics
Department
One
Table of Contents
OVERVIEW OF ALCOA’S TAPOCO PROJECT AND
Aluminum and electricity are distinct products sold
in separate markets........................
4
The Tapoco Project produces electricity, the
Tennessee Operations aluminum............
4
CALCULATING
THE COST OF ALCOA’S
PRODUCTION.............................................................................................................................
5
Settling bills versus calculating costs .................................................................................. 5
Choice of transfer price can hide internal subsidies
but does not change
joint profits.........................................................................................................................
6
Making decisions using inappropriate transfer prices
can lead to costly
mistakes
........................................................................................................................... 7
THE IMPACT
OF CHANGES IN MARKET AND POWER GENERATING
CONDITIONS ON ALUMINUM PRODUCTION.....................................................................
9
Lower aluminum prices and higher electricity prices
close smelters................................
9
Reductions in power generation do not close smelters...................................................
11
Case study:
Yadkin-APGI and the Badin Works..............................................................
14
THE IMPACT OF REDUCTIONS IN TAPOCO
GENERATION ON THE
APPENDIX: The Smelter, Generation and Joint Income
Statements Associated With the Scenarios Considered in this Report.....................................................................................................
16
Table A: Choice
of transfer price can hide internal subsidies but does not change
joint profits
and can lead to erroneous conclusions........................................
17
Table B: Falling
aluminum prices and rising electricity prices close smelters............ 18
Table C: Reductions in generation reduce the joint
profits shareholders
receive
but do not change smelter profitability................................................
19
INTRODUCTION AND
EXECUTIVE SUMMARY
In September 1999, the Final Scoping Document (SD1) for the Tapoco Hydroelectric Project (FERC Project No. 2169) was issued. SD1 outlines the information and issues to be addressed in the Tapoco Project’s draft environmental assessment (DEA). Specifically, SD1 requires that the DEA:
Characterize the economic relationship between Tapoco and Alcoa and evaluate the potential economic impact to Tapoco, Alcoa and the surrounding region resulting from any changes in Project operations proposed or considered. Assess the need for the electricity generated by the Tapoco Project, and evaluate whether the generation benefits (combined with other benefits provided by the Project) offset or exceed the environmental impacts associated with continued operation of the Project dams. Explain how deregulation of the electric industry may or may not affect future Tapoco Project operations. (SD1, pp. 15-16)
The solicitation for contractors qualified to prepare the sections of the DEA dealing with economic issues summarizes SD1’s charge as follows:
One of the issues that have [sic] been identified through the scoping process that Tapoco must address concerns the economic relationship between the Tapoco Project and Alcoa’s Tennessee Operations. More specifically, Alcoa has been asked to conduct a study to demonstrate the economic relationship between the Tapoco Project and Alcoa’s Tennessee Operations. (LeBoeuf, Lamb, Greene & MacRae, pp. 1-2)
In the interest of providing Alcoa and FERC with the carefully researched and technically correct analysis good policymaking demands, American Whitewater (AW) and Western Carolina Paddlers (WCP) have prepared the following report to address this issue. Our analysis is based on the public documents created by Alcoa and its subcontractors in support of the Tapoco Project Draft License Application (DLA).
Given
Alcoa’s reluctance to divulge many of the details concerning its Tennessee
smelting operations, we have been forced to rely on economic theory and
standard business practice to describe the general principles governing the
economic relationship between two subsidiaries of a single firm linked in the
way Alcoa’s Tennessee smelting and Western North Carolina power generating
operations are. These principles are
illustrated two ways. First, using
numerical examples. The examples are
based on public information concerning Alcoa’s Tennessee and North Carolina
activities combined with the production and cost parameters for typical
aluminum smelters with characteristics similar to those of Alcoa’s Tennessee
smelter described by Charles River Associates (CRA) in their Tapoco relicensing study report Economic Impact Study For the
Tapoco Project. Second, the
principles are illustrated with a case study whose subject is Alcoa’s
Our analysis will demonstrate that the Tapoco Project and
Alcoa’s
OVERVIEW OF ALCOA’S
TAPOCO PROJECT AND
Aluminum and
electricity are distinct products sold in separate markets
The births of the
aluminum and electric power industries coincided, both occurring at the turn of
the 20th Century. This is no
coincidence: smelting aluminum requires
tremendous amounts of electricity. The
first large scale smelters were built in areas blessed with the potential for
generating inexpensive hydroelectric power.
As was the case in
What was true at the turn of the last Century is no longer
true in the
The Tapoco Project
produces electricity, the
APGI-Tapoco is a division of the Alcoa Power Generating Inc
(APGI), a wholly owned subsidiary of Alcoa Inc.
Alcoa is the world’s largest and most profitable producer of primary
aluminum and fabricated aluminum products.
Tapoco owns and operates the Tapoco Project, a four development
hydroelectric project located on the Little Tennessee and
All of the power generated by the Project is sold to the TVA
under the terms of a contract signed in 1983.
The Project is operated to generate high value peaking power. The Cheoah, Calderwood,
and Chilhowee developments are located downstream of
TVA’s Fontana Project, the largest dam and reservoir on the
Alcoa’s Tennessee Operations include a primary smelter, a
UBC reclamation facility, an ingot casting facility, and a fabrication
facility. The smelter is located in
CALCULATING THE COST OF ALCOA’S
Settling bills versus
calculating costs
The fact that all the power used in Alcoa’s Tennessee Operations, including that used in the Tennessee smelter, is purchased from TVA should make the cost of the power used in the Tennessee smelter to its owners clear: it is what the owners have to pay TVA per kWh of electricity used. The historic relationship between the Tapoco Project and the Tennessee smelter, however, in combination with the fact that TVA pays for the power it buys from Tapoco in the form of credits against the Tennessee Operation’s power purchases, has led to confusion in some quarters concerning the cost of the electricity Alcoa uses to smelt aluminum. The authors of the relicensing study report Economic Impact Study For the Tapoco Project (CRA, 2002), for example, write:
Alcoa’s Tennessee Operations are unusual in that the production of electricity from the Tapoco hydroelectric facilities lowers the overall cost of electricity in the production of aluminum, thereby offsetting other higher cost components such as labor. Electricity produced by Tapoco is in effect sold to TVA, while Alcoa purchases its total electricity requirement from TVA. Tapoco production therefore lowers the average cost of electricity to Alcoa’s Tennessee Operation. Given the amount of electricity generated by the Tapoco units, lower aluminum production reduces the amount of electricity supplied by TVA relative to the amount produced by Tapoco and lowers the overall cost of electricity supplied to Alcoa’s Tennessee Operations. (CRA, Economic Impact Study For the Tapoco Project (2002, p. 17))
This is nonsense.
Costs are measures of sacrifice.
Suppose the power Tapoco produces was indeed dispatched directly to
Alcoa’s Tennessee Operations. Even in
this case the cost to Alcoa’s shareholders of using this power would be greater
than its generation cost. Power used to
smelt aluminum is power that cannot be sold to a third party. The sacrifice – hence cost – of this power is
the price Tapoco would receive if it sold its power to another user.
In reality, Tapoco does sell its power to another
user, TVA, in exchange for a credit against the power it purchases. The cost to Alcoa of this power is the full
amount it is charged, not the difference between the total charged and the
credit received. To argue otherwise is
to confuse settling a bill for calculating a cost. The cost of the power used in the
Choice of transfer
price can hide internal subsidies but does not change joint profits
Return for a moment to the fiction that the power Tapoco
produces is indeed dispatched directly to Alcoa’s Tennessee Operations. In this case Alcoa would have to place a
value on it for the purpose of calculating its profits at its two
subsidiaries. This value is called a
transfer price. If there were no
external market for this electricity, then using its generation cost as its
transfer price would be appropriate.
This was the case when Alcoa began operating in
The most common reason for companies to choose transfer prices that differ from market prices is to shift the appearance of profitability from one subsidiary to another. If, for example, taxes are higher in the community in which one subsidiary is located than they are in the community in which a second is located, a company may choose its transfer prices in a way that understates its profits in the first community and overstates them in the second. Joint profits before taxes, however, will be the same. Another way to think of this is as a hidden internal subsidy: the subsidiary in the high tax jurisdiction transfers something it has produced at a value less than its market price, lowering its apparent profits by the difference between the value of what it is transferring and the transfer price it is paid. This is the hidden subsidy. The second subsidiary’s costs appear lower, and its profits higher, by an amount equal to the subsidy. The subsidy paid by one subsidiary and the subsidy received by the other cancel each other out from the perspective of the two subsidiaries taken together, however, so joint profitability – before taxes – is the same. Valuing the electricity Tapoco produces at its generation cost rather than its market value has the same effect: it understates Topoco’s profitability and the Tennessee Operations’ costs, and it overstates the Tennessee Operations’ profitabilty.
Table 1 illustrates the effect of the choice of the transfer
price Alcoa’s apparent profits from smelting and power generation, separately
and in combination. It is the combined
profits that are of most concern to Alcoa’s shareholders because it is out of
these profits that their dividends are paid and it is in anticipation of
increases in these profits that their stock appreciates.1
CRA, in their Economic Impact Study For the Tapoco Project
(2002), uses $0.0107 – Tapoco’s generation cost – to
calculate the
Note that using generation cost to value the electricity it produces and sells to the Tennessee Operations results in what appear to be lower Topoco profits and Tennessee Operation costs, and
Table 1: Choice of Transfer Price Can Hide Internal
Subsidies But Does Not Change Joint Profit
(all values except transfer price in millions of dollars)
|
|
|
Strong Market Conditions |
Typical Market Conditions |
Weak Market Conditions |
|||
|
|
|
||||||
|
Transfer Price of Electricity ($ / kWh) |
$0.0107 |
$0.044 |
$0.0107 |
$0.044 |
$0.0107 |
$0.044 |
|
|
|
|
|
|
|
|
|
|
|
Smelter Operation |
2 potlines
running (smelter operating at full capacity) |
||||||
|
Total revenue |
$372 |
$372 |
$329 |
$329 |
$263 |
$263 |
|
|
Total cost |
$298 |
$349 |
$289 |
$340 |
$272 |
$323 |
|
|
Power cost |
$80 |
$131 |
$80 |
$131 |
$80 |
$131 |
|
|
Tapoco power (at transfer price) |
$16 |
$68 |
$16 |
$68 |
$16 |
$68 |
|
|
TVA power |
$63 |
$63 |
$63 |
$63 |
$63 |
$63 |
|
|
All other costs |
$218 |
$218 |
$209 |
$209 |
$192 |
$192 |
|
|
Profit (at transfer price) |
$74 |
$23 |
$39 |
-$12 |
-$9 |
-$60 |
|
|
|
|
|
|
|
|
|
|
|
Power Generation |
|
|
|
|
|
|
|
|
Total revenue (at transfer price)* |
$16 |
$68 |
$16 |
$68 |
$16 |
$68 |
|
|
Total cost |
$16 |
$16 |
$16 |
$16 |
$16 |
$16 |
|
|
Profit (at
transfer price)* |
$0 |
$51 |
$0 |
$51 |
$0 |
$51 |
|
|
|
|
|
|
|
|
|
|
Joint (Alcoa) Profit*
|
$74 |
$74 |
$39 |
$39 |
-$9 |
-$9 |
|
|
|
|
|
|
|
|
|
|
|
* Power generation revenue and
profits, and Alcoa profits underestimated to the degree peaking and base load
power prices differ. |
|||||||
|
Source:
All values either directly from, or calculated using values from, CRA Tables
3, 4, 5 and page 20. The spreadsheet
used to create this table, including line by line source documentation,
available on request. |
|||||||
higher Tennessee Operation profits, than the same values calculated using the market price of electricity as the transfer price. The $51 million difference in these values reflects the hidden subsidy. Note, however, that the subsidy paid by Tapoco and the subsidy received by the smelter cancel out, so joint profitability is the same.
Making decisions using inappropriate transfer prices can
lead to costly mistakes
Consider the consequences to Alcoa’s shareholders if Alcoa’s managers use generation cost as their measure of the value of the Tapoco power when deciding how much aluminum to produce. Because this results in the managers placing too low a value on the power they use, they will at times choose to produce too much aluminum, operating the smelter when it would be in the shareholder’s interest to shut it down. This is illustrated in Table 2 on page 9.
Table 2 displays the apparent smelter and joint (Alcoa)
profits in weak market conditions. It is
based on Appendix Table A (page 17), which calculates smelter, Tapoco and joint
(Alcoa) revenue, cost and profits calculated using an appropriate and an
inappropriate transfer price under three operating conditions: shut down (operate zero potlines),
run at half capacity (operate one potline), or run at
full capacity (operate two potlines). The first number in the first column
correspond to the profits (or loses in this case) the smelter will appear to
earn if its managers choose to shut it down in weak market conditions. The second number in the first column
corresponds to the actual loses the smelter will incur. These numbers come from the two Weak
Market Conditions columns – one corresponding to each transfer price – of
the Smelter Profit (at transfer price) row in the 0 potlines (smelter shut down) section of Table A. The third number in the first column corresponds
to the profits Alcoa’s shareholders will earn if the
The first row of Table 2 displays what will appear to be the smelter’s profit if the managers use generation cost as their measure of the value of the Tapoco power used in the Tennessee smelter and the smelter operates zero, one or two potlines, respectively. The largest number in the row ($7) corresponds to what to the managers will appear to be the profit earned if what appears to them to be the profit-maximizing number of potlines is operated – one. Note that the reason that the smelter will lose $24 million even if it is shut down (the 0 potlines column) is that some of its costs are fixed; that is, some of the smelters costs can’t be avoided even if no aluminum is produced.
The second row displays the smelter’s true profit, that is,
what is revealed to be the smelter’s profit when the managers use the market
price of electricity as their measure of the value of the Tapoco power used in
the
Table 2: Making Decisions Using Inappropriate Transfer
Prices Can Lead to Costly Mistakes
(values in millions of dollars; [apparent] maximum profit highlighted)
|
Number of Potlines |
0 |
1 |
2 |
|
Apparent smelter profit in weak market
conditions calculated using the inappropriate $0.0107 transfer price |
-$24 |
[$7] |
-$9 |
|
True smelter profit in weak market
conditions calculated using the appropriate $0.044 transfer price |
-$24 |
-$45 |
-$60 |
|
Alcoa profit (includes smelter,
generation) |
$27 |
$7 |
-$9 |
Note: Alcoa profits underestimated to the degree peaking and base load prices differ.
Source: This table emphasizes a finding from Appendix Table A. All values in Table A are either directly from, or calculated using values from, CRA Tables 3, 4, 5 and page 20. The spreadsheet used to create Table A, including line by line source documentation, available on request.
Note that if when choosing the number of potlines to operate the managers use the appropriate transfer price – the market price of power – the managers will make the right choice from the perspective of Alcoa’s owners: shut the smelter. If, on the other hand, the managers use the inappropriately low transfer price that the authors of the report Economic Impact Study For the Tapoco Project (CRA, 2002) imply they should – calculating their costs and profits using Tapoco’s generation cost as the value of the Tapoco power – they will make the wrong choice, a choice that will cost their shareholders $20 million.
THE IMPACT OF CHANGES
IN MARKET AND POWER GENERATING CONDITIONS ON ALUMINUM PRODUCTION
Falling aluminum
prices and rising electricity prices close smelters
Rapid growth in the production of aluminum outside the
Table 3 on page 10 illustrates the effect of falling aluminum prices on Alcoa’s profit-maximizing production choice. It is based on Appendix Table B (page 18), which calculates smelter, Tapoco and joint (Alcoa) revenue, cost and profits under two electricity prices and three refined ore from which aluminum is made – alumina – fall as the market for aluminum weakens. Thus in the strong market for aluminum the price of aluminum is assumed to be $0.85 per pound and the price of alumina $0.24 per pound. The corresponding values for the typical and weak markets are $0.75, $0.22 and $0.60, $0.18, respectively.2
Table 3: Falling Aluminum Prices Close Smelters
(values in millions of dollars; maximum profit highlighted)
|
Number of Potlines |
0 |
1 |
2 |
|
Smelter profit in strong market
conditions |
-$24 |
-$3 |
$23 |
|
Smelter profit in typical market
conditions |
-$24 |
-$18 |
-$12 |
|
Smelter profit in weak market
conditions |
-$24 |
-$45 |
-$60 |
Source: This table emphasizes a finding from Appendix
Table B. All values in Table B are
either directly from, or calculated using values from, CRA Tables 3, 4, 5 and
page 20. The spreadsheet used to create
Table B, including line by line source documentation, available on request.
operating conditions: shut down (operate zero potlines), run at half capacity (operate one potline), or run at full capacity (operate two potlines). Table B uses the appropriate transfer price – the market price of electricity – to calculate smelter costs and profits. This is assumed to be $0.044 per kWh. Both the price of aluminum and the price of the
The numbers in the first column of Table 3 (-$24, -$24, -$24) correspond to the Smelter profit row in the $0.044 Market price of electricity columns for each of the three market conditions whose profits are calculated in the 0 potlines (smelter shut down) section of Table B. The numbers in the second and third columns correspond to the same rows in the 1 potline (smelter operating at half capacity) and 2 potlines (smelter operating at full capacity) sections.
Note that only in
strong market conditions does the smelter earn a profit, and that it does so by
operating two potlines. In typical market conditions, the smelter
loses money, but it loses the least by operating two potlines
since the revenue it receives from doing so covers all its variable costs with
$12 million left over to help cover its fixed costs. In weak market conditions, however, aluminum
prices are too low to even cover the smelter’s variable costs, so it loses the
least money by shutting down. Falling
aluminum prices do indeed close smelters.
Given current price trends, the future does not bode well for Alcoa’s
Table 4 on page 11 illustrates the effect of rising electricity prices on Alcoa’s profit-maximizing production choice. Like Table 3, it is based on Appendix Table B. The numbers in the first column of Table 4 (-$24, -$24) correspond to the Smelter profit row in the pair of columns describing profits under Typical Market Conditions in the 0 potlines (smelter shut down) section of Table B. The numbers in the second and third columns correspond to the same rows in the 1 potline (smelter operating at half capacity) and 2 potlines (smelter operating at full capacity) sections. Note that even at the lower price of electricity the smelter loses money under typical market conditions, but that it loses the least money if it operates two potlines. If the market price of electricity rises one cent per kWh (a 23% increase), the smelter loses the least money by shutting down. Like falling aluminum prices, rising electricity prices do indeed close smelters. This is smelter economics 101.
(values in millions of dollars; maximum profit highlighted)
|
Number of Potlines |
0 |
1 |
2 |
|
Smelter profit in typical market
conditions when the price of electricity is $0.044 |
-$24 |
-$18 |
-$12 |
|
Smelter profit in typical market
conditions when the price of electricity is $0.054 |
-$24 |
-$34 |
-$42 |
Source: This table emphasizes a finding from Appendix Table B. All values in Table B are either directly from, or calculated using values from, CRA Tables 3, 4, 5 and page 20. The spreadsheet used to create Table B, including line by line source documentation, available on request.
Reductions in power
generation do not close smelters
Falling aluminum prices lower the incremental (i.e., extra) revenue the sale of the aluminum produced and sold by the smelter brings in. Falling aluminum prices close smelters when incremental revenue falls below the incremental cost of operating the smelter. In this case the smelter loses the least by shutting down. This was demonstrated in Table 3.
Rising electric prices raise incremental costs. Rising electricity prices close smelters when incremental costs rise above the incremental revenue operating the smelter brings in. Once again, the smelter loses the least by shutting down. This was demonstrated in Table 4.
Reductions in power generated by a sister business tied into
regional energy markets, on the other hand, change neither a smelter’s
incremental revenue nor its incremental costs.3 This is why reductions in power generation –
including regulatory reductions – do not close smelters. This is demonstrated in Table 5 on page 12.
Table 5: Reductions in Power Generation Do Not Close
Smelters
(values in millions of dollars; maximum profit in bold)
|
Number of Potlines |
0 |
1 |
2 |
|
Alcoa Profits in Strong Market
Conditions |
|
|
|
|
No change in Tapoco Generation |
$27 |
$48 |
$74 |
|
20% Reduction in Tapoco Generation |
$13 |
$35 |
$61 |
|
|
|
|
|
|
Alcoa Profits in Typical Market
Conditions |
|
|
|
|
No change in Tapoco Generation |
$27 |
$33 |
$39 |
|
20% Reduction in Tapoco Generation |
$13 |
$19 |
$26 |
|
|
|
|
|
|
Alcoa Profits in Weak Market
Conditions |
|
|
|
|
No change in Tapoco Generation |
$27 |
$7 |
-$9 |
|
20% Reduction in Tapoco Generation |
$13 |
-$7 |
-$22 |
Note:
Alcoa profits underestimated to the degree peaking and base load prices differ.
Source: This table emphasizes a finding from Appendix Table C. All values in Table C are either directly from, or calculated using values from, CRA Tables 3, 4, 5 and page 20. The spreadsheet used to create Table C, including line by line source documentation, available on request.
Table 5 illustrates the effect of a 20% reduction in power generation on Alcoa’s profit-maximizing production choice and profits. It is based on Appendix Table C (page 19), which calculates smelter, Tapoco and joint (Alcoa) revenue, cost and profits under two generating conditions and three smelter operating conditions: shut down (operate zero potlines), run at half capacity (operate one potline), or run at full capacity (operate two potlines). Table C uses the appropriate transfer price – the market price of electricity – to calculate smelter costs and profits. The numbers in the first column of Table 5 ($27, $13, $27, $13, $27, $13) correspond to the Joint Alcoa profit row in the No Change and 20% Reduction columns for each of the three market conditions whose profits are calculated in the 0 potlines (smelter shut down) section of Table C. The numbers in the second and third columns correspond to the same rows in the 1 potline (smelter operating at half capacity) and 2 potlines (smelter operating at full capacity) sections.
Note that the production level that maximizes shareholder profits in every case is the same before and after a 20% reduction in Tapoco generation. This is not a coincidence; it is exactly what economic theory predicts: changes in power generation do not close smelters. Note however, that the reduction does affect Aloca’s shareholders: it reduces Alcoa profits by approximately $14 million. Thus we see that the impact of reductions in Tapoco generation are felt by Alcoa’s shareholders, not its smelter employees and the communities in which they live.
Table 6 below illustrates the effect of a 20% reduction in
power generation on the smelter, Tapoco and joint (Alcoa) income
statements. The income statements
summarize revenue, costs and profits under strong, typical and weak aluminum
market conditions. Like Table 5, Table 6
is based on Appendix Table C. The
strong and typical market condition income statements are calculated assuming
the smelter operates two potlines, since, as we have
already seen, doing so maximizes the profits received by Alcoa’s shareholders;
the weak market condition income statements are calculated assuming the smelter
shuts down, for the same reason.
Note that total smelter power costs are not affected by
changes in power generation, nor are smelter profits. A lose of revenue from the sale of one
product (power) is not the same as an increase in the cost of producing another
(aluminum). Note, however, that the
distribution of the power costs between Tapoco and TVA change: with a reduction in Tapoco generation, the TVA credit makes up a smaller fraction of the
total power cost and the balance owed TVA a larger fraction. Alcoa’s shareholders make up the difference,
causing joint profits to fall.
Table 6: Reductions in Generation Reduce the Profits
Shareholders Receive
But Do Not Change Smelter Profitability
(all in millions of dollars)
|
|
|
Strong Market Conditions |
Typical Market Conditions |
Weak Market Conditions |
|||
|
|
|
||||||
|
Reduction in Tapoco Generation |
No Change |
20% Reduction |
No Change |
20% Reduction |
No Change |
20% Reduction |
|
|
|
|
|
|
|
|
|
|
Smelter Operation
|
2 potlines (smelter operating at full
capacity) |
2 potlines (smelter operating at full
capacity) |
0 potlines (smelter shuts down) |
||||
|
Total revenue |
$372 |
$372 |
$329 |
$329 |
$0 |
$0 |
|
|
Total cost |
$349 |
$349 |
$340 |
$340 |
$24 |
$24 |
|
|
Power cost |
$131 |
$131 |
$131 |
$131 |
$0 |
$0 |
|
|
Tapoco power (at market price) |
$68 |
$54 |
$68 |
$54 |
$0 |
$0 |
|
|
TVA power |
$63 |
$77 |
$63 |
$77 |
$0 |
$0 |
|
|
All other costs |
$218 |
$218 |
$209 |
$209 |
$24 |
$24 |
|
|
Profit |
$23 |
$23 |
-$12 |
-$12 |
-$24 |
-$24 |
|
|
|
|
|
|
|
|
|
|
|
Power Generation |
|
|
|
|
|
|
|
|
Total revenue (at market price)* |
$68 |
$54 |
$68 |
$54 |
$68 |
$54 |
|
|
Total cost |
$16 |
$16 |
$16 |
$16 |
$16 |
$16 |
|
|
Profit* |
$51 |
$38 |
$51 |
$38 |
$51 |
$38 |
|
|
|
|
|
|
|
|
|
|
Joint (Alcoa) Profit*
|
$27 |
$13 |
$27 |
$13 |
$27 |
$13 |
|
|
|
|
|
|
|
|
|
|
|
* Power generation revenue and
profits, and Alcoa profits underestimated to the degree peaking and base load
power prices differ. |
|||||||
|
Source:
This table emphasizes a finding from Appendix Table C. All values in Table C are either directly
from, or calculated using values from, CRA Tables 3, 4, 5 and page 20. The spreadsheet used to create Table C,
including line by line source documentation, available on request. |
|||||||
A Case Study: Yadkin-APGI and the Badin Works
Economic theory and the tables in this report predict that changes in the market prices of electricity and aluminum drive decisions to close smelters, not changes in the amount of power generated by aluminum company subsidiaries. Still, a question remains: do businesses actually behave in the way economic theory predicts?
The answer is provided in a statement made by Paul Campbell,
southeast regional president for Alcoa Primary Metals, at a press conference
announcing the recent shutdown of the Alcoa aluminum smelter in
As is true today in
Alcoa’s corporate website states that the Badin Works’ power
is supplied by Yadkin, and that “Yadkin's supply of
low-cost hydropower enables Alcoa to better meet the challenge of remaining
competitive among low-cost aluminum producers throughout the world.” Elsewhere, however, the website describes an
operation virtually identical to that of Tapoco’s. Yadkin is managed to generate and sell high
value peaking power; the Badin Works’ 24
hours a day, 7 days a week power needs were met with electricity purchased from
the same utilities to which Yadkin sells power.
It is noteworthy that calculating the Badin Works’ power costs using the
erroneous methods suggested in CRA, Economic Impact Study For the Tapoco
Project (2002) results in power costs that appear even lower per pound of aluminum
produced than those calculated for Alcoa’s
In the summer of 2002 the
In late July 2002, Alcoa announced that due to low prices,
the Badin Works would cease production of primary aluminum, and that the
shutdown would last “for years, rather than months.” (Charlotte Business
Journal, Alcoa closing Badin plant ‘for years,’
At the press conference announcing the shutdown, Paul Campbell, southeast regional president for Alcoa Primary Metals, stated that the decision to close the smelter had little to do with the reduction in the amount of power Yadkin could generate as a consequence of the drought:
“I wouldn’t say they were 100 percent mutually exclusive,
but I'm not sure if the lakes were 100 percent full we'd still have to do
this,''
Evidently, Alcoa’s managers understand the connection between generation costs and the value of the power they use in their smelters better than the consultants they hired to write their Economic Impact Analysis do: Changes in the market prices of electricity and aluminum drive decisions to close smelters, not changes in the amount of power generated by aluminum company subsidiaries. This is just as economic theory, standard business practice and the tables in this report predict.4
THE IMPACT OF REDUCTIONS IN TAPOCO GENERATION ON THE
Regulatory reductions in Tapoco generation will have no
effect on the economies of
Appendix: The
Smelter, Generation and Joint Income Statements Associated With the Scenarios
Considered in this Report
Table A: Choice of Transfer Price Can Hide Internal Subsidies But Does Not
Change Joint Profit
And Can Lead to Erroneous
Conclusions
(all values except transfer price of electricity in millions of dollars)
|
|
|
Strong Market Conditions |
Typical Market Conditions |
Weak Market Conditions |
|||
|
|
|
||||||
|
Transfer Price of Electricity ($ / kWh) |
$0.0107 |
$0.044 |
$0.0107 |
$0.044 |
$0.0107 |
$0.044 |
|
|
|
|
|
|
|
|
|
|
|
0 potlines (smelter shut down) |
|||||||
Smelter Operation
|
|
|
|
|
|
|
|
|
Total revenue |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
|
|
Total cost |
$24 |
$24 |
$24 |
$24 |
$24 |
$24 |
|
|
Power cost |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
|
|
Tapoco power (at transfer price) |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
|
|
TVA power |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
|
|
All other costs |
$24 |
$24 |
$24 |
$24 |
$24 |
$24 |
|
|
Profit (at transfer price) |
-$24 |
-$24 |
-$24 |
-$24 |
-$24 |
-$24 |
|
|
|
|
|
|
|
|
|
|
|
Power Generation |
|
|
|
|
|
|
|
|
Total revenue (at transfer price)* |
$68 |
$68 |
$68 |
$68 |
$68 |
$68 |
|
|
Total cost |
$16 |
$16 |
$16 |
$16 |
$16 |
$16 |
|
|
Profit (at transfer price) * |
$51 |
$51 |
$51 |
$51 |
$51 |
$51 |
|
|
|
|
|
|
|
|
|
|
Joint (Alcoa) Profit*
|
$27 |
$27 |
$27 |
$27 |
$27 |
$27 |
|
|
|
|
|
|
|
|
|
|
|
1 potline (smelter operating at half
capacity) |
|||||||
|
Smelter Operation |
|
||||||
|
Total revenue |
$186 |
$186 |
$164 |
$164 |
$131 |
$131 |
|
|
Total cost |
$138 |
$189 |
$131 |
$183 |
$125 |
$176 |
|
|
Power cost |
$17 |
$68 |
$17 |
$68 |
$17 |
$68 |
|
|
Tapoco power (at transfer price) |
$16 |
$68 |
$16 |
$68 |
$16 |
$68 |
|
|
TVA power |
$1 |
$1 |
$1 |
$1 |
$1 |
$1 |
|
|
All other costs |
$121 |
$121 |
$114 |
$114 |
$108 |
$108 |
|
|
Profit (at transfer price) |
$48 |
-$3 |
$33 |
-$18 |
$7 |
-$45 |
|
|
|
|
|
|
|
|
|
|
|
Power Generation |
|
|
|
|
|
|
|
|
Total revenue (at transfer price)* |
$16 |
$68 |
$16 |
$68 |
$16 |
$68 |
|
|
Total cost |
$16 |
$16 |
$16 |
$16 |
$16 |
$16 |
|
|
Profit (at
transfer price)* |
$0 |
$51 |
$0 |
$51 |
$0 |
$51 |
|
|
|
|
|
|
|
|
|
|
Joint (Alcoa) Profit*
|
$48 |
$48 |
$33 |
$33 |
$7 |
$7 |
|
|
|
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