Subject: Western Issues Update 8/3/01
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Date: Fri, 3 Aug 2001 14:06:05 -0700 (PDT)

Aluminum Smelters (DSI's)

Alcoa Aluminum
There are no new developments in the Alcoa - BC Hydro talks to provide the aluminum producer a source of cheap, stable energy.  Alcoa is still shopping around to find a good seller, since the load reduction agreement with BPA is still in effect.

It should be noted that BC's Premier, Gordon Campbell, has had long-standing poor relations with Alcan, Inc. of Canada, a competitor of Alcoa's.  While in the opposition, Campbell helped to scuttle a completion deal that would have allowed Alcan to finish a $1.3B hydroelectric power project.  Earlier this year, BC Hydro considered a plan to refund Alcan some money for an energy buy-back deal similar to the load reduction agreements south of the border.  If Campbell can move to secure an aluminum partner he does not have a problem with, he will likely do so - to that end, look for Alcoa and BC Hydro talks to be productive if the Premier has anything to say about it.

Alcoa is still in talks with BPA on potential continued load reduction agreements.  In a recent shareholder meeting last week, Alcoa's management was peppered with questions from Wall Street fund managers regarding the BPA talks - the feeling in the sector is that aluminum prices have begun to bottom out, and the impetus is now to start rebuilding production in the Pacific Northwest and re-establishing revenue growth.

Kaiser Aluminum
With the hiring of Harvey Perry as the company's new aluminum chief, Kaiser's long-term aluminum strategy still remains somewhat unclear.  As the only DSI to not have signed a load curtailment agreement with BPA, they are still in discussions.  If anything new arises, we will keep you updated.

BC Hydro

BC Government
Campbell's government will be moving swiftly on the heels of the House bill to approve ANWR drilling to fast track the lifting of the moratorium on offshore oil and natural gas exploration.  Some of the communities in northern British Columbia, such as Fort. St. John, Dawson Creek, Black Gold and Fort McMurray, have had significant recent population booms, and they are poised to hit critical mass as oil company money rolls into the region.  Currently there is debate about how to structure and site the pipeline that will run from ANWR through British Columbia.   Significant oil company exploration royalties will flow into local tax base coffers, which will make the offshore drilling an extremely competitive business between BC and Alaska.

BC Hydro
Hydro officials are in the process of officially courting new partners and are becoming more aggressive in their attempts to find energy buyers.  Due to its ability to generate cheap hydroelectric power, BC Hydro is looking to be competitive player in the market - avoiding its traditional subsidy of the "Jobs for Power" program, and pursuing lucrative cross-border contracts with US firms.  At the same time, Hydro will be moving to slice community programs (anywhere from $6 to $8 million) and outsourcing its information technology departments for savings in the $20-$25 million range.  BC Hydro, whose annual revenues hover typically around $300 million, is looking at early mini-budget estimates for 2001 to be in the $375 million range.  Its trading subsidiary, PowerEx, has not come back with a refund counteroffer to California, and it looks like CA will have to take this issue to court.
BC Hydro is in the process of selecting its new chair of the board, which is looking more and more likely to be Larry Bell, from Campbell's transition team.  We have yet to pin down the name of the second candidate, although we believe he is a vice-president at West Coast Energy.  The selection will not likely occur for another two weeks, so we do not anticipate any major policy shifts until late October or November.  In the meantime, Campbell and Gary Collins (the Finance Minister) will be calling the shots on Hydro's future.  Keep in mind that the Minister of Energy and Mines, Neufeld, has the official title, but his power has been greatly curbed by the Premier - the administration will be playing it safe until they feel they have a few knowledgeable players on board who are receptive to their agenda.

Bonneville Power Administration

Financial Solvency
After having a chance to speak with a source close to Sen. Patty Murray's (D-WA) office, it has become apparent that the energy and water appropriations bill to provide BPA an additional $2 billion in borrowing authority (over the $3.75 billion of existing authority it already has) may be scuttled.  Sen. Murray has been fighting a provision in that bill which would have forced BPA to come back to the Senate every year for review - the White House, the Senate Appropriations Committee, OMB and the Budget Committee have all been opposed to the entire bill.  The feeling is that if the $2 billion of additional authority would be issued, the money would be coming off the back of Social Security and Medicare.

Eight northwest Senators will be convening on this issue over the course of the next month and a half.  The next time this issue will come up again is the middle of September, when there is another energy bill conference.  Obviously, now that Bush's energy bill has passed the House, they will be looking to bring considerable pressure on Democratic Senators to pass the legislation - we would not be surprised if a deal to extend BPA borrowing authority is linked with support for ANWR drilling.

Spill Issues
The $5 million spill over two Columbia River dams a few short weeks after BPA administrator Steve Wright said there would be no summer spills was very likely a political bone for the environmental groups.  

Fish managers, notably CRITFC's Bob Heinith and ODFW's Christine Mallette, had stumped hard for any spill at all being better than none, but they lacked survival data to show that it would benefit fish in this extremely low flow year. Power operators and the Corps of Engineers questioned the models used to determine the value of the spill, citing the impact of adverse tailwater conditions from low flows being compounded by spilling water, making it extra hard for juvenile fish to leave the area below the dams, and hence suffer higher mortality from predators like the northern pike-minnow.

Dam Breaching
Congressman Jim McDermott (D-WA) recently announced that he was introducing a bill that would pave the way for breaching the four lower Snake dams. It would also call for another study on the economic effects of breaching and authorize the Corps of Engineers to "partially remove" the dams if the Secretary of Commerce finds it necessary to satisfy ESA, Clean Water Act or tribal treaty obligations. 

"The Bush Administration has so far failed to allocate funds to implement the 2000 Salmon Recovery Plan to avoid dam removal," McDermott said in a July 19 press release. "If this bill nudges them to take the plan seriously, and it is successful in preventing the breaching of the dams, then no one would be happier than I would," he said. "Now is the time to plan for all contingencies." 

Co-sponsored by Tom Petri (R-WI) and 19 other representatives--but no others from the Northwest--the bill will have difficulty getting out of committee, where opposition has massed quickly, led by Butch Otter (R-ID) and Doc Hastings (R-WA). The two issued "Dear Colleague" letters asking fellow members not to support McDermott's bill.  
Pacific Northwest utilities and energy interests have battled long and hard with salmon environmentalists over the issue with dam breaching.  The environmentalists took their lumps earlier this year when energy prices shot up and left them nowhere to run politically.  Now that energy prices have come down again, they will continue to beat their drum over salmon preservation - although they are much weakened now.

Forestry Issues

Forest Fires
One of the largest forest fires in the Pacific Northwest, the Thirty Mile Fire, which claimed the lives of four firefighters, is under control this week.  The only other major fire in this region currently is the 4,800-acre Union Valley fire in Southeast Washington State.  The fire is three and a half miles north of Chelan, WA, and evacuations of residences continue in upper Union Valley and in Washington Creek drainage.  The fire continues to spread north into Washington Creek drainage.  Burnout operations on the northeast flank of the fire were successfully completed.  We have not seen any reports of this fire disrupting any electrical lines or significantly hampering transmission.