Catching up on the Alcoa controversy

Here's a lonnnnngggg blogpost catching up on some developments in the legislature and elsewhere regarding Alcoa's quest for another federal license to operate the Yadkin River hydroelectric projects.

Gene Ellis, Alcoa property manager for its North Carolina operations, posted the following on his blog after appearances before the House Water Resources and Infrasture Committee in recent weeks: http://yadkinproject.blogspot.com/

A couple of weeks ago, he testified, in part:
My name is Gene Ellis and I represent Alcoa Power Generating Incorporated. I was born and raised in North Carolina and I have lived in Stanly County for more than 30 years. For the past seven years, I’ve been working on the relicensing of the Yadkin Hydroelectric Project.
I have to tell you, I never thought I’d see the day when the State of North Carolina contemplated taking over a private business. And that’s exactly what this State Trust bill is – the taking of a privately-owned business that Alcoa started here in 1915.
And, it could cost the state of North Carolina $500 million or more – a half-billion dollars – at a time when the state is in the midst of its worst budget crisis in years.
Some people say this bill doesn’t really do anything – it just puts a structure in place to operate the Yadkin Project if a takeover happens. But a vote to create a Yadkin River Trust is a clear indication that the General Assembly supports a government takeover despite the cost. If this bill becomes law, it will be possible for the state to pursue a government takeover.
See the blog for the remainder of his thoughts.

After last week's session, he posted this on his blog:

I was back at the N.C. General Assembly again this week for another meeting of the N.C. House Water Resources Committee on Tuesday. The meeting was designed to give committee members an opportunity to ask questions about Senate Bill 967, a bill that would authorize North Carolina to take over Alcoa’s privately-owned hydroelectric business along the Yadkin River.
A couple of highlights worth sharing:
1. Faison Hicks, a lawyer with the N.C. Attorney General’s office who has been involved in Gov. Perdue’s push for a government takeover, acknowledged that it is impossible to know what a government takeover of the Yadkin Project would cost. Alcoa believes a takeover will cost North Carolina more than $500 million.
2. When pressed about why the legislature needed to pass Senate Bill 967 this year – without knowing the potential price tag associated with it – Mr. Hicks said it wasn’t necessary to pass this legislation for the state to continue its pursuit of a takeover. He said the state can continue its efforts at the federal level regardless of whether this bill is approved or not.
3. Richard Whisnant, a professor with the UNC School of Government who has extensively studied water issues in North Carolina, acknowledged that control of the water in the Yadkin River will still be subject to federal regulation even if North Carolina succeeds in taking over the Yadkin Project.
Committee members asked a lot of thoughtful and probing questions that underscore the complexity and uncertainty of a government takeover and the associated cost for North Carolina.
One member asked whether a takeover of the Yadkin Project would be a pilot project that could ultimately lead to a state takeover of other privately-owned hydro projects, such as those operated by Duke Energy and Progress Energy. “I don’t know,” Mr. Hicks said.
Following that, the N.C. Water Rights Committee responded with the following explainer:
N.C. WATER RIGHTS COALITION RESPONSES TO QUESTIONS AND STATEMENTS MADE AT WATER RESOURCES AND INFRASTRUCTURE COMMITTEE MEETING 7/7/09

Contact: Roger Dick at contact@ncwaterrights.org
1. THE COMPARISON OF OUR STATE’S REGULATED UTILITIES AND ALCOA
Hydroelectric power from established projects is the cheapest energy to produce, sells for the highest price on the electrical grid, and generally, because it is the cheapest in terms of fuel cost, most of what is available will be dispatched before energy produced from coal or natural gas. It is extremely profitable for projects that are already built, produces cash whenever the water runs, and can be more certain to produce a cash flow than an insurance company annuity… water running down hill with gravity on its way to the ocean is creating virtual guaranteed profits without risk of failure.
Regulated utility companies such as Duke and Progress provide a public service to our citizens. These companies are regulated by the State of North Carolina Utilities Commission. They have retail customers; they provide jobs to thousands of North Carolina citizens; they invest millions in the state’s economic development; and they have as their primary business the purpose of providing electric power to the public.
Alcoa is in the primary business of making aluminum. In order to make aluminum, you need two primary resources: bauxite and lots of cheap electrical power, like hydroelectric. Alcoa is not a regulated public utility providing electrical power services to the public. Alcoa is a private manufacturer, not regulated as a public utility providing a public service. Yet Alcoa has been allowed to hold a “monopoly” on the use of a public resource, by virtue of a FERC license, for a limited amount of time.
Under the terms of its federal license, Alcoa is free to sell its power in the open unregulated wholesale market to the highest bidder. The profits are to be recorded on its books, and the net benefit and profits from the waters of Yadkin, I assume, are then transferred from our state’s economy with an accounting entry, just as any subsidiary of any global corporation would be expected to do. Billions of dollars from a local natural resource that belongs to the public are thus “lost” to a multinational interest, whose first loyalties necessarily belong to an international base of investors.
The primary benefits of the waters, jobs created, and other public good our utility companies create are considered to be of primary benefit to the citizens in our state. The same is not the case with Alcoa … a multinational company, whose primary raw material in this state is lots of cheap electrical power. That raw material was once used to purchase jobs for citizens all across the lower Yadkin Basin, which contributed to a strong regional economy. Alcoa now sells that power in the wholesale market for its own gain with very little of its wealth benefiting the public and very little of the profits generated being invested to create new jobs and capital investment inside North Carolina.
2. ALCOA’S CLAIM THAT THE STATE IS TAKING PRIVATE PROPERTY
Alcoa gave the U.S. Government an option to take back the Yadkin Hydroelectric Project and all the land and other assets (including the dams) necessary to use the water to produce electrical power, when its original license expired. These assets are called “project property”, and the takeback or “recapture” cost of the option in the agreement, payable at the end of a license period, is stipulated in the 1958 license. In exchange for the option, the US Government, through the Federal Power Commission, granted Alcoa an exclusive license for 50 years to generate electricity. That license has expired. Alcoa’s attorney acknowledged this option, backed up by the Federal Power Act, in formal filings more than 50 years ago, perhaps to persuade the Commission to give the company a license for 50 years instead of the shorter period customarily resulting from the Commission’s practice at that time.
Over the next 50 years, and because it had the license, Alcoa made a guaranteed profit worth many millions. Its cost and investment have been returned to its investors many times.
To the extent it has any unrecovered cost on its books because of recent, major improvements, the license agreement specifically addresses how Alcoa will be compensated by the government or any other succeeding licensee. The Company understood and agreed to these terms in exchange for the license to use the public’s waters.
Alcoa struck a business contract more than 50 years ago. It completely understands this and it is being dishonest in making a takings claim. The existing law and the language in the license easily refute Alcoa’s takings claim; it is a matter of Alcoa’s honoring a contract and exclusive right that has been quite profitable to it, in the past and now for the foreseeable future.
3. ALCOA’S PRESENT CLAIM THAT TAKEOVER WOULD COST $500 MILLION
None of the financial information that Alcoa has provided is from an independent source, so it cannot be relied upon, especially since Alcoa has its own motives. FERC and the public need independently prepared financial information on the value of the Yadkin Project.
We know the amount of power that can be and has been reported as generated. Taking published market values for hydroelectric and applying conservative hydroelectric industry operating standards, it appears that the real profits are much higher than those being reported.
By exercising its option, the U.S. Government could acquire the Project and return the use of the waters to its citizens in North Carolina. This will prevent them from being exploited of their God given rights to their very own water.
At a time of budget crisis why would our state not attempt to recover the use of their own water resources that are capable of generating millions in profits, provide water to drink, and create low cost power to support jobs? .
I am confident that our situation could be improved if we had the right to use our own natural resources, and the public would benefit if the State were to pursue this course. Let’s get some good independent financial information and validate the value that we instinctively believe is there.
4. ALCOA SAYS ANNUAL YADKIN PROFIT IS ONLY $8 MILLION
Hydroelectric industry operating standards applied to the “Yadkin Project” annual mega hours output indicate that Alcoa could earn a much higher net profit than $8 million. We believe the value could be as high as $75 to 80 million in net profits, not gross. If Alcoa is telling the truth, then it should have no objections to an audit of Alcoa’s past and present operation on the Yadkin.
The company may well be using different accounting methods for different purposes, for example, using cash flow accounting part of the time and creative financial accounting another part of the time, with no consistent accounting standard available to assess their operations across-the-board. One example is the case where Alcoa has added a line item for the “opportunity cost of capital” in one of its exhibits. Normally, opportunity cost is a judgment-laden value, not a verifiable cost actually experienced by the company and normally included in accounting documents.
The financial information operating statistics released by Alcoa for relicensing purposes does not fit industry standards and begs to be questioned and should be validated by independent audit. The resource is just too valuable to the public not to get better information. We need independently prepared numbers; no private individual would try to make decisions of this scale and value in either their private or business affairs, without independent financials.
The public interest begs the question on independent financial information, and Alcoa has not been forthcoming with that information. And if there is “only $8 million” in profits every year, that still does not answer why those dollars should belong any more to a private corporation than to one established to reinvest those profits for the benefit of North Carolina’s citizens.
And finally, the Yadkin Riverkeeper Dean Naujoks put out the following:
Yadkin Riverkeeper Criticizes Alcoa
For Appealing Conditions of 401 Water Quality Certification Granted by the State
Environmental Group Asks Company to Explain Why it Accepted and Then Denied Conditions for its Permit to Operate the Yadkin Hydroelectric Project
WINSTON-SALEM, N.C. - The Yadkin Riverkeeper® has announced a call for Alcoa to explain why it has flip-flopped and decided to appeal its 401 Water Quality Certification from the N.C. Department of Environmental and Natural Resources (NC DENR) for the Yadkin Hydroelectric Project after saying it was fine with the terms of the permit when it was issued May 7. In a petition for contested case hearing filed July 6 with the N.C. Office of Administrative Hearings, Alcoa now claims that the certification was issued unlawfully and objects to having to pay a $240 million surety bond for the Project as well as address dissolved oxygen levels in the four dams along a 38-mile stretch of the Yadkin River that make up the Project. Along with its April 9 appeal of the fish consumption advisory the N.C. Department of Health and Human Services issued Feb. 11 after finding elevated PCBs in fish caught from Badin Lake (a reservoir within the project), Alcoa has rejected virtually every restriction the state has put on it for the Yadkin Hydroelectric Project this year while at the same time claimed to follow all environmental laws for the Project.
Dean Naujoks, the Yadkin Riverkeeper, said Alcoa does not want any limits on its current setup with the Yadkin Hydroelectric Project as it files for another 50-year federal license to operate it, especially ones that will cost it money to comply with environmental regulations that apply to other businesses in North Carolina.
"By filing this petition after previously saying in public they were fine with the terms of the certification, Alcoa has shown it is concerned more with its bottom line than with the needs of North Carolina residents who use the Yadkin River for drinking water, fishing, swimming and other recreational purposes," said Naujoks. "They even have the gall to conclude that ‘there remains the possibility that additional petitions for contested case will be filed with respect to 401 Water Quality Certification." There are hardly any other conditions DENR issued in the certification that Alcoa has not already objected in this petition.
"Yadkin Riverkeeper filed suit against NC DENR on May 13 for issuing the Water Quality Certification to Alcoa because we felt the agency failed to exercise its full authority under federal Clean Water Act, which Administrative Law Judge Webster agreed by issuing a temporary injunction. We also felt the NC DENR ignored state laws regarding water quality protections and environmental review, in this case," add Naujoks.
"Alcoa is now fighting for the water quality permit they requested yet saying its restrictions are unfair and should be dropped. Apparently in Alcoa's view, DENR was right in issuing a permit but wrong in asking the company to correct any of the environmental concerns the permit is supposed to address. Alcoa is putting the public at risk by trying to block the state from posting signs about PCB contaminated fish in Badin Lake, while trying to thwart efforts to address environmental problems linked to Alcoa. If there has ever been any doubt Alcoa is putting their own self interest over the public interest, their petition just erased all doubts. They should be ashamed of themselves! Why is the media ignoring this issue?"
Alcoa states in the petition that it believes North Carolina officials acted erroneously and capriciously in delivering the terms of the water quality certification, the same charge it made regarding the fish consumption advisory. This is in spite of these facts:
• The N.C. Division of Water Quality, which is part of DENR, issued a report in May that acknowledges Alcoa is in violation of water quality standards for dissolved oxygen in the Project, that "significant contamination" exists at the Alcoa site where 47 hazardous waste sites have been identified and that some of the PCBs it found can be traced to Alcoa's operations.
• PCBs are probable human carcinogens and are associated with other health risks, including anemia; acne-like skin conditions; damage to the liver, stomach or thyroid gland; changes in the immune system or reproductive system; and behavioral problems. Because of those possibilities, the state always issues advisories for bodies of water carrying PCBs that urge pregnant women, nursing women and children under age 15 not to eat fish from them.
When he was appointed Yadkin Riverkeeper, Naujoks reviewed reports of existing contamination at Badin Lake, a 5,300-acre body of water that flows into the river in Stanly County via Narrows Dam. It is one of four reservoirs along a 38-mile stretch of the Yadkin River that comprise the Yadkin Hydroelectric Project. Reports of decades of pollution in the area associated with a now-defunct smelter Alcoa operated near it, including data that Alcoa discharged such contaminants as PCBs into the air, land and waterways, prompted Naujoks to investigate other items regarding the firm's activities.
After considerable discussions with all parties involved, Naujoks concluded that Alcoa was a major reason for the contamination at the lake and the river, and the company insufficiently planned to correct it as part of its license renewal application for the Yadkin Hydroelectric Project. Therefore, he opposes its relicensing effort, because his obligations as Yadkin Riverkeeper involve respecting, protecting, and improving the Yadkin Pee Dee River Basin, and Alcoa's application fails to meet these goals for the river. Its recent filings have only encouraged Naujoks in believing he is pursuing the right course for the Yadkin.
"Alcoa is asking for special treatment by the state, saying it does not have to abide by its regulations ," added Naujoks. "Let's face the facts - the river is contaminated, the contamination came from Alcoa, and Alcoa does not want to clean it up or address environmental problems related to the dam operations." Indeed, the surety bond amount the state requires in its certification is the very same figure Alcoa provided in its Relicensing Settlement Agreement in its federal relicensing application, as it had promised a $240 million investment to upgrade and improve the efficiency of its power generators at the Project.
"So what is wrong with guaranteeing that you will pay what you say you will pay - unless of course you do not really plan to do so, and sell your project license instead for a tidy profit? Alcoa has denied planning that, but the suspicious circumstances here indicate otherwise, unless officials can explain fully their turnabout on the permit's conditions. Many other North Carolinians await the news as well."
Alcoa must have a 401 Water Quality Certification from DENR in order to proceed with its federal application for another 50 years of overseeing the Yadkin Hydroelectric Project. The Yadkin Riverkeeper filed a motion May 29 to consolidate the appeal of the DENR certification with a similar appeal by Stanly County into one case with the N.C. Office of Administrative Hearings while the cases are pending before the state office. In the meantime, Alcoa continues to operate the Project on an extension of its 50-year license it received from the federal government in 1958.