The Pricing of Electricity to Aluminum Smelters in the Northwest

Abstract

The Bonneville Power Administration is a federal agency marketing electric power in the Pacific Northwest. Bonneville sells power from federal hydroelectric projects and two nuclear projects to public and private utilities and directly to several major industrial firms, primarily aluminum companies operating aluminum smelters in the region. These direct service industries (DSIs) have a contractual right to purchase up to 3.500 average megawatts annually from Bonneville. Because the aluminum smelters in the Northwest are generally older and less efficient than plants in other parts of the world and because aluminum companies are facing lower electricity prices in other parts of the world, the Northwest plants have become "swing" plants. That is when the world price of aluminum is high, these plants will run at capacity but they are the first plants to shut down when the world price of aluminum is low. Because of these factors, DSIs have been purchasing only about 2.700 megawatts annually, and annual purchases have been as low as 1.670 megawatts. Sales to the DSIs represent about 45 percent of all industrial uses of electricity or about 18 percent of total electricity loads in the four-state region and about 23 percent of all Bonneville sales. The dramatic fluctuations in Bonnevilles revenue brought on by operating the aluminum plants in the region as swing plants have prompted Bonneville to search for innovative pricing schemes designed to maintain its revenue base. Bonneville's proposed strategy includes tying the price of electricity it sells to the aluminum smelters to the world price of aluminum. This paper will examine Bonneville's proposed pricing strategy; it will also examine other strategies to reduce uncertainty in the region's future electric load.