Century Day 1: Smelter viability, definition of unreasonable - Business, Government Legal News from throughout WV

Century Day 1: Smelter viability, definition of unreasonable

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The viability of the Ravenswood smelter and the definition of "unreasonable" occupied much of Public Service Commission of West Virginia's attention on July 30.

It was the first day of what is expected to be a three-day evidentiary hearing on the 10-year special electric rate Century Aluminum requested in May in order to re-open the smelter, which closed in 2009.

Day one revolved around technical aspects in examination of two Century witnesses: Vice President of North American Operations John E. Hoerner and aluminum industry expert Robin G. Adams, director of the Negotiations Support Practice Area for CRU Strategies Limited.

A little context

According to Adams, there are more than 300 aluminum smelters in the world.

Each year, some close. His own analysis of plant closures over the past 40 years found that 90 percent of those that closed did so because of changes in electricity supply, while about 10 percent closed for technological obsolescence.

Some smelters go on for 60 years and longer and a 1923 smelter in Russia is still operating, Adams said — but, illustrating the importance of power costs, one in Britain closed after one year because of an electricity cost hike.

Century's framework for thinking about the proposed special rate structure is the aluminum market's six-to-seven-year business cycle.

The price of aluminum is low now and is in the early stages of an upswing. If Century can get a "leg up" over this hump from Appalachian Power ratepayers and shareholders by banking a near-term deficit in its electricity account, there will be profits to offset that at the other end of the business cycle — making the proposal, based on CRU's price projections, "net neutral," or even leaving a surplus that will reduce electric rates in the long run.

Adams at one point in the hearing objected to the characterization of this as a "subsidy." All ratepayers always bear the cost in some proportion of providing electricity to all other ratepayers, he said.

Revised proposal

In response to concerns parties to the case expressed about the cost, the company filed a revised proposal on July 20. Hoerner explained that it primarily reduced re-start expenses it included in the special rate structure from $91 million to $52 million.

"So Century has, if you will, assumed the risk on that $40 million of working capital," Hoerner said.

Those costs are mainly in raw materials, he said.

Adams said he found the Ravenswood re-start expenses cited by Century "reasonable — quite low, actually. They've been keeping it in good stand-by condition if that's all their costs are."

Unreasonable burden

State law authorizes the commission to consider a special rate that does not impose unreasonable burden on other ratepayers. Lawyers for the parties pressed that point throughout the day: What is unreasonable?

Century's witnesses did not bite.

If you focus on a single figure — say, a deficit of $74 million that appears in one table of a possible mid-point in the business cycle — that looks burdensome, Hoerner acknowledged.

"But that's not what we're talking about," he said. "It could be that over that business cycle there's going to be surpluses in there."

Derrick Williamson, attorney for the West Virginia Energy Users Group of large energy users, reiterated from his opening statement that his clients have borne 70 percent rate increases since Century closed Ravenswood in 2009 and have struggled to remain viable in their markets.

How soon and how often would this "bank" be reconciled and his clients be asked to bear Century's costs, Williamson asked.

"I would think, if you looked at it every three years, four years, but you have to listen to what (Adams) said  —  you've got to look at it through the cycle," Hoerner said, when pressed hard, always maintaining the 10-year view. "If we're looking at 10 years and you do it every 3.3 years, that should be adequate."

In an extreme effort to get at a measure of "unreasonable," Wendy Braswell asked on behalf of PSC staff, is $500 million an unreasonable deficit?

"If you follow the logic, there's going to be a surplus of $500 million somewhere in that business cycle," Hoerner said.

Viable? Obsolete?

Several go-rounds concerned assessments of the Ravenswood plant's viability.

For reference, Century attorney Tom Heywood told The State Journal in a July 10 interview that the plant is "very viable."

"Century invested about $55 million in recent years in the plant," Heywood said. "Century actually had plans for a $100 million investment to make it more efficient at the time the world economy collapsed."

At the hearing, Hoerner emphasized that the plant's technology is the more efficient of two aluminum smelting processes: prebake, not Söderberg.

It's not, however, the most current or efficient equipment for that process.

Adams guessed that about half of the 300 smelters in the world are new, built in China in the last decade. Among Western smelters, in terms of age, possibly 85 or 90 percent are newer than Ravenswood, he said.

The plant's smaller "pot" size means labor is relatively less efficient than in modern plants, Adams said.

Also, "the electricity efficiency of the Ravenswood plant is about 16 megawatt hours per ton, and state of the art today would be around 13.8 megawatt hours per ton, so there is an energy gap there," he said.

"But you need to put that into (perspective) because more significant is the energy price," he qualified. "Around the world, prices vary from $10 to $15 (per megawatt-hour) to a high of $75 — so they vary by factor of six, whereas energy efficiency between least and most efficient is probably 25 percent."

Meaning, if the plant had cheap enough electricity, it wouldn't matter that it's a little less energy-efficient.

Appalachian Power attorney William C. Porth asked Hoerner to reconcile Century's apparent sense that the smelter is worth saving with the company's claims in a recent bid to get its property taxes reduced. Appalachian Power, Porth communicated in his opening statement, is concerned about the plant's efficiency.

"Are you aware that Century of West Virginia argued in that case that the Ravenswood plant suffers from severe functional and technological obsolescence as well as obsolescence from external causes, and that it has outdated technology?" he asked Hoerner. He referenced an appraisal Century had done that noted small pot size and other problems.

Hoerner conceded those things, and explained.

"The big furnaces in general need major repair," he said. "We haven't done a formal cost analysis, but it's measured in tens of millions of dollars — $20 (million), $30 million is the ballpark."

To bring the pots up to modern standards would be an investment in the billions, he said. But beyond  the furnaces, another realistic capital investment that could extend the plant's life beyond the proposed special rate's 10 years would be a cast-house that would produce "a premium product."

Asked by Porth if the plant would be viable beyond 10 years without those investments, Hoerner responded, "It depends on market conditions, but if you're not making those kinds of investments, the possibility of long-term survival gets less and less."

The commitment

Porth asked: "Is Century making this commitment that, if the special rate that Century has asked the commission (for is approved), that Century will keep the plant in operation at full capacity for at least 10 years?" — a fair and important question, since the success of the proposal depends on seeing it through.

"If the special rate is passed and the economy continues on track to recover and not spiral in a death spiral like 2008-2009, absolutely," Hoerner said. "With 99 percent certainty, if Century was to get the rate proposal that we have asked for, that plant's going to operate for the full term of the proposal."

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