Subject: Western Update 8/20/01
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Date: Mon, 20 Aug 2001 11:37:56 -0700 (PDT)

Market Update

A pair of new Pacific Northwest power plants is coming online this month.  The Klamath Cogeneration Project in Klamath Falls, Oregon, will start feeding 486 MW of electricity to the region's power grid. An additional 270 MW are expected to come online this month from Rathdrum Power, a natural gas-fired plant near Rathdrum, Idaho.  All told, nearly 1,240 new MW of power are expected to be buzzing through the region's grid by the end of the year, marking the first major steps toward erasing the Northwest's estimated 3,000 MW power deficit.  

Aluminum Smelters (DSI's)

Alcoa Aluminum
Alcoa's Intalco smelter are negotiating with individuals within BC Hydro to serve as an alternate electricity seller.  BC Hydro individuals are Kelly Lail, Manager of Resourcement Management, Ray Olegaard (title unknown at this time); and Mike Costello, President and Chief Operating Officer of BC Hydro.

There is considerable interest by Wall Street analysts regarding this deal, which has implications on both the aluminum and electricity industries.  This interest is making it more difficult than it ordinarily would be to get information on this target, but we will continue to research this.

Kaiser Aluminum
Kaiser Aluminum is still on the 'outs' with BPA after having been the worst bidder in the load reduction agreement sweepstakes a few weeks ago.  Power prices will have to continue sliding into the low-to-mid $30's before Kaiser will be able to resume smelting operations.  We are still under the belief that Kaiser is bringing back employees to its smelters in an effort to realize 'shareholder value' to affect potential M&A activities.  Although the company has denied that its Trentwood facility is up for sale, we would not be surprised if a competitor steps in and makes an offer.

British Columbia

BC Government
It appears that BC is going to offer an olive branch to California to see whether or not they maintain good relations with the state.  BC officials claim that California utilities still owe them $290 million for electricity sales into the state last year; on the other hand, California claims that BC Hydro was part of the scheme of market manipulation and $8.9 billion in overcharges by energy suppliers.  It looks like the Minister of Energy, Richard Neufeld, and others are favoring a plan to work out a financing plan or a way to forgive California of the $290 million debt.

Recent estimates indicate that at current power generation levels, British Columbia will be a net importer of electricity in 2007.  Officials are looking to put together an extensive plan that will combine off-shore drilling, a streamlined BC Hydro, and improved US-Canadian natural gas and oil transmission pipelines with a look toward alleviating this growing need.  Under the BC Liberal administration, alternative power sources such as wind power are unlikely to receive much attention - indeed, Neufeld has already moved to downplay the cost-effectiveness of wind and solar power, a clear indication that fossil fuels will play a considerable role in the future of BC energy activities.

BC Hydro
BC Hydro has selected a new chairman and CEO, Larry Bell.   Upon taking the position, Bell was immediately hit with a blizzard of criticism from the remnants of the NDP on the left.  Mr. Bell is currently sweeping BC Hydro with a mandate to deregulate segments of the business - at least two major areas of Hydro operations are now looking like they will be farmed out to the private sector:  information technology and transmission lines.  Our contacts have suggested that potential bidders for Hydro's transmission system are beginning to put their bids together due to the rapidity with which Bell is expected to move.  It is likely that Bell will look to maintain Hydro's core business of power generation and keep PowerEx, the trading arm, of the organization.

BPA

Spill-Related Issues
BPA reservoirs are currently at 58.2 MAF, far below the 100 MAF that is typical for this time of year, but enough to meet current BPA load requirements.  Bonneville has not been aggressively spilling water for salmon this summer; they anticipate their decision not to spill, coupled with load reduction agreements with DSI's, have put them on solid footing for this winter.  However, we should not expect BPA to be moving to secure any new contractual agreements soon (it is more likely that they want to get out of existing contracts).

Ed Mosey, spokesman for BPA has said, "We are in pretty good shape.  We'll have enough water to meet our firm load requirements, but there won't be any surplus to sell."