In a high-stakes duel over power and jobs, Alcoa threatened to shut down its smelter if Santee Cooper didn’t give it dirt-cheap electricity rates for 20 years — a price so low it would have forced Santee Cooper to raise all of its other customers’ rates by 12 percent or more, newly released internal documents show.
Santee Cooper rejected Alcoa’s offer, but then engineered a complex deal to keep Alcoa happy until 2015: According to the agreement, Santee Cooper will buy cheap power from another utility outside the region — one that uses inexpensive natural gas to generate electricity —and send that juice through its wires to Alcoa’s Mount Holly smelter in Goose Creek.
The battle between these two local industrial heavyweights comes a year after The Post and Courier revealed that Alcoa officials were threatening to shut down their Mount Holly factory if they didn’t get better prices for electricity.
But new details about the negotiations and how they could affect ratepayers can be found in internal documents Santee Cooper released in response to requests under the S.C. Freedom of Information Act. Requests were made by the newspaper and Frank Heindel, a local commodities broker.
Heindel said he began exploring the issue this spring after Santee Cooper and SCE&G announced plans to increase electricity rates.
“I got interested because I’m in the commodities business, and I know that natural gas is getting cheaper. I didn’t see how they were justifying it.” Those questions led to others about Alcoa’s deal with Santee Cooper.
Alcoa’s factory sits on 4,500 acres in Berkeley County.
More than 600 people work at the plant, which has an annual payroll of $51 million. Every year it turns out about 235,000 tons of aluminum. The company says its smelter is the most advanced of its kind in the United States.
It also uses vast amounts of electricity. Alcoa buys roughly $190 million in electricity a year, which makes up about 10 percent of Santee Cooper’s revenues.
In late 2011, Alcoa began flexing its muscles.
Letters by executives show that Alcoa wanted to pay Santee Cooper an average of 3.5 cents per kilowatt hour for 20 years, and that if they didn’t get that price, the plant and all its jobs would be history.
From Alcoa’s point of view, it was a reasonable request. They were merely asking for what they had calculated was the average price of electricity paid by aluminum smelters across North America. “We didn’t ask to be the cheapest. We asked to be average,” said Mike Rousseau, Alcoa’s Mount Holly plant manager.
Santee Cooper had a different perspective.
At the time, Santee Cooper charged an average of 9.6 cents per kilowatt hour for residents and 5.4 cents for industrial customers, according to state Energy Office data.
Alcoa’s offer was simply too low. Santee Cooper officials calculated Alcoa’s demand equated to an annual $64 million price break. To make up that lost revenue, the agency would have to hike rates for residential customers by 38 percent, the official wrote in one letter.
Or, it could spread the loss among all of its residential, commercial and industrial customers in the form of a 12 percent rate hike.
That wouldn’t fly, Santee Cooper officials told Alcoa. Such discounts would represent a “substantial subsidy from the rest of Santee Cooper’s customers,” Marc Tye, Santee Cooper’s senior vice president of customer service, said in a Nov. 18, 2011, letter.
Tye then floated a novel counter-offer: Santee Cooper could buy electricity from a third party that produces electricity from natural gas, with the assumption that this electricity would be cheaper than what Santee Cooper could provide using its own plants, which mainly burn coal.
Tye said this could save Alcoa as much as $18 million in 2012 and $50 million a year thereafter. Another Santee Cooper vice president, Michael Brown, pressed further: “We have not held anything back in searching for and seeking to offer what we believe to be the most expedient possible solutions to keep (Alcoa’s) Mt. Holly (factory) operating,” he said.
But Alcoa said no; their offer stood.
In response, Brown fired back a letter saying how “dismayed” the agency was with Alcoa’s “unrealistic demand” for a 20-year-deal at rock-bottom prices.
By late January, the agencies were at a standoff. Politicians, such as U.S. Rep. Tim Scott and Gov. Nikki Haley, toured the plant and urged both sides to find a solution. After a Rotary Club meeting in Moncks Corner in January, U.S. Sen. Lindsey Graham told The Berkeley Independent that he was concerned about the Alcoa situation.
“The business model that they were founded under is no longer working,” Graham was quoted as saying. “Santee Cooper was originally conceived to provide power to rural South Carolina. It was not originally designed to accommodate heavy industry.” Graham said the current situation pits homeowners against industry. “If Alcoa’s rates decrease, the homeowner’s rates will subsequently increase.” (Despite repeated requests over the past month, Graham refused to discuss these comments about Santee Cooper.)
Rousseau of Alcoa said negotiations of this scale and importance typically have ups and downs. “I don’t think there was any blinking by either party,” he said. But both sides “remained committed to find a solution that allows us to operate.”
Lonnie Carter, Santee Cooper’s president and chief executive officer, added: “This wasn’t like buying a car. These were business people trying to solve a business problem.”
Carter said he understood Alcoa’s predicament. “We tend to think that we’re competing with China and India, but not with aluminum smelters.” They go where there’s cheap power. “They’ve gone to Iceland, Brazil, South Africa, Saudi Arabia and now they’re talking about Angola … All we were trying to do was do our level best to hang onto those (Alcoa) jobs.”
In March, the two sides came together.
Instead of a long-term deal, Alcoa and Santee Cooper agreed to a temporary solution to buy low-priced electricity generated by natural gas through an unnamed party.
Alcoa’s contract with Santee Cooper expires in 2015, but Alcoa said it would wait until March 2013 before deciding whether to sign a long-term electricity contract with Santee Cooper.
It’s unclear what the price Alcoa is getting because that information has been redacted from Santee Cooper’s documents. Carter said it was a huge victory for both sides. “We got the job done … and without significantly changing the cost to our other customers.”
The deal bought the agency time, but it also raised larger questions: If the agency was able to purchase electricity generated by natural gas at a low rate for Alcoa, why couldn’t it do it for its other customers?
“It tells me that their current strategy of using coal is not economically viable anymore,” Heindel said. “It means their whole business model is flawed.”
Not so, Carter said.
Santee Cooper is now buying electricity generated by natural gas for all of its customers and idling some of its less-efficient coal plants.
“Today we’re importing several hundred megawatts of natural gas,” he said, adding that Santee Cooper is running a natural gas-fired plant in the Upstate at full tilt, even though it was designed to produce electricity mainly during peak periods of energy demand.
He said the agency isn’t too dependent on coal, though he acknowledged that Santee Cooper needs to diversify its power-generation mix. “We’re importing natural gas now because it’s cheaper and not running coal plants. If that switches around, we’ll be back running our coal units.”
About the same time both sides announced that they had formalized the deal, Santee Cooper announced it would increase rates by 3.5 percent at the end of 2012, and an additional 3.5 percent the next year.
Carter said the timing of the rate increase and the Alcoa deal was “completely coincidental and not tied together at all.”
He added that if Alcoa shuts down, ratepayers will suffer. He explained that some of Alcoa’s giant yearly electric bill helps pay off some of Santee Cooper’s debts. Take away that revenue, and ratepayers will have to make up the difference. The natural gas solution was a “creative and innovative” way to save 600 jobs, he said. “And that’s something to be proud of.”
Heindel, however, said the Alcoa deal exposed Santee Cooper’s failure to fully take advantage of lower natural gas prices.
He pointed to the agency’s press release announcing its plans to raise electricity rates, which said that prices for milk and eggs had risen over the past three years. The press release failed to mention the dramatic decline in natural gas prices, he said. “You don’t burn milk and eggs to produce electricity.”