Power, Profits, and Salmon

Paul O'Neill, the new Secretary of the Treasury, is an unlikely apostle for the global warming crowd. But for the past couple of years, the former CEO has been preaching the virtues of moving away from fossil fuels.

Now O'Neill, who just called for the abolition of the corporate income tax, is not an altruistic green--for more than a decade he ran one of the world's most rapacious timber giants, International Paper. He's a financial opportunist. While at Alcoa he foresaw that new clean air rules could help the aluminum makers, which stood to sell more if Detroit was forced to switch to lighter weight cars made with more aluminum.

More deviously, O'Neill also foresaw an opening to make a killing by getting in on the front end of the new energy market. And he did this for the company that he ran for a decade, Alcoa, and in the process made himself a bundle of money.

Aluminum companies are the biggest energy hogs in the Pacific Northwest. The aluminum industry was lured to the Columbia River basin during the manufacturing frenzy of World War II, where it was given cheap federal power for arms manufacturing. But it is an incredibly inefficient industry. Even at current market rates, the Northwest Energy Coalition estimates that it takes anywhere from $2 to $5 worth of electricity to produce a single pound of aluminum, which then sells for only 70 cents.

These companies could never make it on their own. Thus they turned to the Bonneville Power Administration for help. The BPA is the federal agency based in Portland, which markets hydropower from the federally-operated dams in the Columbia River system. In the past, BPA has sold power at only the cost of generation with no markup--one of the reasons that the Pacific Northwest has enjoyed the cheapest power rates in the country, about $25 per megawatt hour. But the cheap power isn't shared equally. The biggest power gluttons, namely the aluminum smelters, get the lowest rates.

But even the low rates weren't enough. In 1996, the aluminum companies convinced the Clinton administration to give them so-called remarketing rights from BPA, then resell the power at market rates.

When energy prices surged in May 2000 and California felt its first power crunch in decades, utilities scrambled to find new power at nearly any price. The aluminum companies promptly idled their plants, sent thousands of workers home, and sold their subsidized power to California to capitalize on the sky-rocketing rates. The profits are staggering.

This year alone Alcoa has made more than $210 million on BPA subsidized "load curtailments" designed to redirect power to California. And it stands to make another $39 million this summer.

After being tapped as treasury secretary, Paul O'Neill chose not to immediately divest himself of $90 million in share and stock options in Alcoa. It was a shrewd business move. Alcoa's first quarter earnings for 2001 were a company record of $404 million, far surpassing Wall Street's expectations. Since most of the company's plants had been idled, much of the windfall came from the remarketing of its federal power. Alcoa's stock rose by more than 7% during the same period, meaning that O'Neill's bankroll increased by $6 million.

And Alcoa's far from alone. According to a report by the Northwest congressional delegation, the aluminum companies Kaiser, Goldendale Northwest, and Columbia Falls--all with smelters in the Northwest--have profited the most from the resale of BPA power. Kaiser netted $426 million, Goldendale Northwest made $344 million, and Columbia Falls netted $292 million, according to the report, which analyzed data supplied by the BPA.

Kaiser's refusal to share the millions with the federal agency has put the BPA in the position of buying back power for up to 22 times more than it cost to produce it.

And remember the rationale behind giving these aluminum companies preferential rates was that they helped to industrialize the West and provide high-paying jobs in rural areas.

The prolonged drought in the Northwest has only compounded the problems. For much of this year, Los Angeles has received more rainfall than Seattle. The snowpack in the Northwest, which feeds the Columbia River system, is just 53% of normal.

With BPA short of power because of the drought, it has been forced to go back to the aluminum companies and buy back power at astronomical rates. Residential consumers are faced with blackouts, ruined salmon streams, and the prospect of rate increases of 50 to 250%. For every 100 megawatts of power the BPA has to purchase from aluminum companies, rates for other consumers will increase by 10%.

The eight hydropower dams on the lower Snake and Columbia Rivers block passage to spawning grounds for migratory salmon and the migration to the ocean of young salmon and steelhead. Environmentalists, Indian tribes, and most fish biologists believe that for the salmon to survive many of these dams will have to come down. But the Clinton Administration decided not to anger aluminum companies and instead opted for an "aggressive nonbreach strategy." This requires dam operators to increase the flow of water through the spillways, hoping to flush juvenile salmon safely downstream.

The number of Snake River chinook, an endangered species, heading toward the ocean this year was the third lowest on record. The dams are bound by court orders and a salmon recovery plan to provide enough spillwater to flush migrating salmon downstream. But in April, the Bush administration declared a power emergency, which enabled the US Army Corps of Engineers, which operates the dams, to override the salmon-recovery plan and send all the water into the hydroturbines, which slice and dice the salmon like a giant cuisinart.

At the turn of the century more than 16 million salmon and steelhead spawned in the Columbia River system. Today, there are fewer than a million, and more than 90% of those are hatchery bred fish. The wild salmon is nearly extinct. The National Marine Fisheries Service estimates that the salmon death toll will climb by 13.3% because of lack of flows--that's more than 133,000 fish. If the summer is hot and dry as some forecasters predict, the death count could double.

The aluminum companies say that they have given the BPA millions of dollars a year to mitigate the damage their operations do to salmon and steelhead. But much of the money goes to hatcheries, not to save wild fish or their habitat. And, according to documents unearthed by environmental economist Karyn Moscowitz, the BPA spends more than $4.4 million every year on the Columbia Basin Law Enforcement Program, a four-state police force that patrols the Columbia and Snake Rivers largely harassing Indians trying to assert their salmon-fishing rights.

Oregon Rep. Peter DeFazio is pushing a plan that could aid both the salmon and Northwest power consumers. He wants the BPA to sever its contracts with the aluminum companies and reroute that power to residential consumers and provide for the fish. DeFazio has introduced legislation to revoke the deregulation provision of the 1992 Energy Act and re-regulate the energy industry.