Result of BPA suit: $17 million loss to CFAC

A multi-tiered federal lawsuit had a poison pill for the Columbia Falls Aluminum Co. — it effectively ceased a $17 million annual payment from the Bonneville Power Administration.

That payment, brokered in a 2006 deal between BPA and the company, was designed to bridge the gap between the market rate for power and what CFAC and other aluminum companies in the Northwest said they could afford to pay.

The Ninth Circuit Court of Appeals struck the deal down late last month — a week before the company announced it was shutting down the plant. The company was scheduled to get its 2009 payment in mid-January, according to BPA spokesman Scott Sims. In light of the court ruling, BPA will not make the payment.

The case

In 2006, an agreement was struck in which BPA would pay Direct Service Industries (aluminum companies, in this case) cash instead of of providing power directly to the aluminum companies.

The cash was meant to bridge the gap between low BPA rates and what CFAC would be charged on the open market.

The contract also had caps on it to protect BPA’s financial exposure. For example, CFAC’s subsidy was based on the plant taking 140 megawatts of power annually — enough to run a little less than half the plant.

The total deal was worth about $59 million annually, of which CFAC was supposed to get about $17 million a year through 2011. The remainder went to Alcoa and the Port Townsend Paper Co.

The cash payment was  also a hard cap — BPA agreed it would not pay a differential between the market price and $24 a megawatt annually.

But the deal was challenged in court in a multi-faceted lawsuit brought by several Northwest electrical cooperatives, including the Pacific Northwest Generating Cooperative, aluminum giant Alcoa, and the Public Power Council.

The cooperatives and the Power Council challenged the power agreement, claiming it was an illegal subsidy because it resulted in higher electric rates for other customers.

BPA, even when the deal was first announced, admitted that was true. The court agreed with the cooperatives on that point. It noted that while in some cases it was proper to “monetize” power rather than physically deliver it, in this case, it was not.

The cooperatives also argued that DSIs weren’t obligated to get power at all from the BPA. They argued that when Congress formed the administration, which oversees all the power produced by federal dams in the Northwest, it’s primary customers were intended to be average citizens, not the aluminum companies.

But when the dams were first built, the aluminum industry was a good customer. It took a steady supply of power at a stable rate. Aluminum plants are electricity hogs. The process of turning alumina into aluminum uses tremendous amounts of electricity — enough for thousands and thousands of homes.

But then the Pacific Northwest saw a population boom. There were more people with more demands.  Now the demand has shifted: The average citizen needs the power.

“Times have changed,” the court noted bluntly.

The fine print

Aluminum companies were still good customers. But they needed power more cheaply than what the market rates were. CFAC for example, has long maintained it needs power at less than $30 a megawatt hour to run its plant.

The market rate for DSIs in 2007, however, was about $45 a megawatt hour.

BPA has several rate structures, including a low, cost-based rate that, in 2007, was $27.33 megawatt hour; and an “IP” rate for DSIs, at $45 a megawatt hour.

So BPA crafted its monetization schedule to bridge the gap — but the schedule was at the wrong rate, the court found. BPA was using the cost-based rate.

See, Congress also set out language that BPA should run like a regular business, using “sound business principles.”

In this case, the court ruled, BPA wasn’t following those principles.

“We conclude that BPA’s interpretation of its governing statutes is reasonable and that, under appropriate circumstances, BPA may lawfully monetize its energy contracts. Such circumstances, however, do not exist here … BPA’s decision to monetize the aluminum DSI contracts amounts to an impermissible subsidy of those companies’ operations,” the court ruled, because BPA was creating a subsidy at a rate lower than, by law, it was required to offer.

In short, the DSIs were getting a more than what they were entitled to, because BPA’s subsidy amounted to a rate that was less than the $27 cost-based rate and market rates.

BPA claimed by selling its power at a lower cost, it was diversifying its customer base.

The court disagreed.

Diversification, the court ruled, “does not justify a sale of power at below market or statutorily mandated rates.”

The Alcoa argument

Alcoa, in turn, sued because it didn’t like the monetized schedule — it wanted the physical power delivered to its plants. It also argued that BPA was “obligated” to sell power to DSIs.

The court also disagreed. It said that while BPA could sell power to DSIs if it chose to do so, it wasn’t obligated to sell them power. The court did rule, however, that the BPA cannot refuse to sell DSIs power before selling power to an entity outside the region and it must offer the power at a rate set by statute.