Nonferrous Scrap Supplement -- Securing Aluminum's Future

President Bush’s national energy report was the culmination of more than three months of study by the National Energy Policy Development Group, headed by Vice President Dick Cheney. Members of The Aluminum Association, Washington, met in late April with the task force staff to bring to the administration’s attention how the western energy situation has affected aluminum producers in the Pacific Northwest, noting that 40% of the nation’s primary aluminum production and tens of thousands of jobs are at stake.

The Association recommended a range of short-term and long-term options to help protect the nation’s at-risk aluminum capacity, including changes to the Bonneville Power Authority rate offering structure and access to the federal power system.

THE PRESIDENT’S PLAN

President Bush made public his national energy report May 17, entitled “Reliable, Affordable, and Environmentally Sound Energy for America’s Future.” While not detailed in short-term policy changes, the plan does seek to return our nation’s energy policy to a market-based system balance of the environment and conservation with supply. It is critical to the aluminum industry that the transition period allow for its producers reasonable access to affordable energy, and—as production curtailments may occur—provisions to restore that production capacity.

“Vice President Cheney and many members of my Cabinet spent months analyzing our problems, and seeking solutions. The result is a comprehensive series of more than 100 recommendations that light the way to a brighter future through energy that is abundant and reliable, cleaner and more affordable,” Bush said in his introductory remarks.

Bush said, “The plan addresses all three key aspects of the energy equation: demand, supply and the means to match them. First, it reduces demand by promoting innovation and technology to make us the world leader in efficiency and conservation. Second, it expands and diversifies America’s supply of all sources of energy—oil and gas, clean coal, solar, wind, biomass, hydropower and other renewables, as well as safe and clean nuclear power. Third, and finally, the report outlines the ways to bring producers and consumers together, by modernizing the networks of pipes and wires that link the power plant to the outlet on the wall.

“Our energy plan also supports the development of new and renewable sources of energy. It recommends tax credits to homeowners who invest in solar homes, and to utilities that build wind turbines or harness biomass and other environmentally friendly forms of power. It removes impediments to the development of hydro-electricity. It proposes incentives to buy new cars that run on alternative fuels, like ethanol, that consume less oil and, therefore, pollute less. It supports research into fuel cells, a technology of tomorrow that can power a car with hydrogen, the most common element in the universe, and emit only steam as a waste product,” he said.

AN ENERGIZED TASK FORCE

Within two weeks of being sworn in as the 43rd President of the United States, George W. Bush appointed Vice President Dick Cheney to chair an energy task force to find ways to improve the coun-try’s energy supplies and secure their efficient delivery.

Bush said at the time the task force would address both short-term problems of high electricity and natural gas prices and longer-term energy supply problems, focusing on producing more domestic oil and gas and building more electric power plants. The interagency National Energy Policy Development Group included the secretaries of commerce, transportation, energy, agriculture, treasury and interior, as well as the head of the Environmental Protection Agency.

HELP FOR ADDED CAPACITY

Cheney proposes to aid utilities that want to produce more hydroelectric power and build new transmission lines. The task force examined whether the Federal Energy Regulatory Commission (FERC) should revise its hydroelectric dam licensing to weaken the ability of environmental groups, Native Americans and state and federal fish and wildlife agencies to set conditions on electricity production. In both instances, the task force is trying to use the regulatory system, rather than Congress, to boost supply and delivery of electricity.

Cheney said the policy group would recommend “a mix of new legislation, some executive action as well as private initiatives” to bolster energy production. He made clear that the administration would base its policy on promoting a vigorous expansion of the traditional energy industry to avoid the kinds of austerity measures that marked the country’s response to the 1970s energy crises.

“The potential crisis we face is largely the result of short-sighted domestic policies—or, as in recent years, no policy at all,” Cheney said recently. “As a country, we have demanded more and more energy. But we have not brought online the supplies needed to meet that demand.” He said 1,300 to 1,900 new power plants will be needed over the next 20 years.

For his part, President Bush is trying to soften the impression given by Cheney that the administration doesn’t believe in energy conservation. He has issued an executive order aimed at trimming federal agencies’ power use by 10% during peak hours by taking such steps as setting thermostats in federal buildings at 78 degrees.

SAFE EXPLORATION KEY TO SUPPLY

The energy plan calls for increased exploration for new sources of oil, coal and natural gas, and construction of refineries, plants and pipelines. He reiterated the administration’s support of drilling in Alaska’s Arctic National Wildlife Refuge, which he said could be tapped for oil without disrupting its environment.

Cheney, who was chairman of the oil services firm Halliburton Co., Dallas, before taking office, called coal “the most plentiful source of affordable energy in the country” and said it will remain the nation’s primary source of electricity for years. The vice president called nuclear power one of “the cleanest methods of power generation that we know,” but noted that the government has not granted a single new nuclear power permit in more than 20 years.

“If we’re serious about environmental protection, then we must seriously question the wisdom of backing away from what is, as a matter of record, a safe and clean and very plentiful energy source,” Cheney said.

The administration has said it would work for a more stable and predictable process of licensing companies to build or renovate coal-fired generating plants.

For Bush’s energy team, as for Clinton’s health care task force, the problem may lie less in the recommendations and more in selling them to the public. While Clinton’s advisers worked in secrecy, out-of-context news reports created negative impressions, and the feeding frenzy once the plan was released contributed to its downfall.

ASSOCIATION OFFERS RECOMMENDATIONS

Meeting with Vice President Cheney’s Energy Policy staff, Aluminum Association members of the Government and International Affairs Committee defended the almost 40% of primary aluminum production that is at risk in the Pacific Northwest electricity crisis, and could be restored through creative solutions. The Association said it “supports efforts to create an effective national energy policy that resolves the power shortage crisis in the Northwest while sustaining and protecting the regional aluminum industry—accounting for about 40% of domestic primary production and 5% of world supply. The Northwest regional industry should not be made vulnerable to short-term policy changes.”

More generally, the loss of stable and low-cost energy prices nationally will undermine a significant component of the foundation for American manufacturing and our standard of living, according to the recommendations.

The Aluminum Association supports the principles of electricity consumer choice and open access transmission, applied uniformly in the United States. However, it does not support proposals for total federal pre-emption in all areas related to deregulation and restructuring. The industry’s recommendations state that consumer choice legislation should not be tied to taxing electricity consumers to fund public benefits.

NORTHWEST ALUMINUM PROBLEMS OUTLINED

The Northwest power crisis has shut down in excess of 1.4 million tons of aluminum capacity, directly affecting 10,370 jobs and indirectly affecting more than 29,000 jobs. More shutdowns may follow, and the timing is uncertain and eminently changeable.

These shutdowns are the result of a dysfunctional west coast electricity market caused by California price restructuring that insulates residents from actual energy costs, causing disincentives for resource development despite significant demand growth, combined with historically low rainfall in the hydro-dependent region.

Electricity market pricing has increased by about 140% on average in the last year alone (peak prices have spiked by over 1,000%). The industry’s traditional electricity supplier, the Bonneville Power Administration (BPA), Portland, Ore.,has declined to provide more than half of the industry’s power needs. The average blended cost of BPA power is expected to double in October.

The BPA is trying to force the industry to stay curtailed for up to two more years. This would cause profound damage not only to the Northwest aluminum industry, but also to the communities in which it operates.

With these artificial market disadvantages, it may be impossible to operate or restore any primary smelting capacity in the Northwest U.S.

RECOMMENDED APPROACH AND POLICY CHANGES

The Aluminum Association recommends an approach that provides short-term policies to help the industry survive the transition to a rational market situation, and provides long-term policies to restore supply-demand balance in electricity markets.

The changes would require BPA to adopt contract terms or rate design elements that offer each customer the option to purchase at least 75% at average BPA resource cost, and the remaining 25% at market prices, with the ability to decline the market priced power. They would also require BPA to negotiate with customers any curtailments of power for the mutual advantage of BPA and the customer, thus encouraging conservation and preventing closure. The recommendations ask for an amendment to the 1980 Northwest Power Act to exempt the Northwest aluminum industry and other traditional Direct Service Industrial Customers of BPA from the New Large Single Load prohibitions of that Act as BPA discontinues service to those customers, allowing indirect access to power.

To increase energy supply, the recommendations ask for the creation of sufficient generating capacity to service peak demand and prevent brownouts (average system demand is often 60% to 70% of peak demand). The case was made to create a pricing and/or auction mechanism for the purchase of long-term, reasonably priced supply, encouraging new generating plant construction.

To reduce energy demand, the Association recommends the creation of demand management pricing (including cost-of-service, time-of-use and seasonal pricing) that gives consumers appropriate price signals. This allows for conservation and reduces overbuilt capacity for peaking loads. Low cost-to-serve customers should be encouraged because of their significant off-peak demand, to provide off-peak load for generating plants.

Transmission and reliability should be improved by creating national ratings and standards that assess generation and transmission reliability. National standards for grid design and maintenance should be created to assure supply portability with low-load losses to help balance supply and demand on both a regional and national basis. System efficiency and lower cost should be promoted. Economic access to the grid should be assured for new and current generation capacity meeting national standards of quality and reliability.

This article originally appeared in Aluminum Now, published by The Aluminum Association. Robin King is executive editor and Patrick Kelly is associate editor of the publication.