Treasury Secretary Paul O'Neill is an unlikely apostle for the
crusade to combat global warming. But for the past couple of years,
the former corporate executive has been preaching the virtues of
moving away from fossil fuels. In 1998, while head of aluminum giant
Alcoa, O'Neill gave a speech to the aluminum industry's trade association
in which he named what he believed to be the world's two most pressing
problems. "One is nuclear holocaust," he said. "The second is environmental:
specifically, the issue of global climate change and the potential
of global warming." O'Neill handed out copies of this speech at
George W. Bush's first cabinet meeting.
O'Neill is not an altruistic green: For more than a decade he ran
one of the world's most rapacious timber giants, International Paper.
However, he is a financial opportunist. While at Alcoa, O'Neill
correctly calculated that new clean-air rules could help aluminum
makers, which stood to reap higher profits if Detroit were forced
to switch to lighter-weight cars made with more aluminum. More deviously,
O'Neill also foresaw a way to make a killing by getting Alcoa in
on the front-end of the new energy market. And in the process, he
made himself a bundle of money.
Aluminum companies are the biggest energy hogs in the Pacific Northwest.
industry was lured to the Columbia River basin during the manufacturing
frenzy of World War II, when the federal government gave aluminum
companies cheap power in return for a commitment to arms manufacturing.
But the aluminum industry is incredibly inefficient. 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.
Treasury Secretary Paul O'Neill
has made a killing.
GEORGE F. LEE/AFP
These companies could never make it on their own. Thus they turned
to the Bonneville Power
Administration for help. The BPA is a federal agency based in
Portland that markets hydropower from the federally operated dams
in the Columbia River system. The agency provides 46 percent of
electricity used in Oregon, Washington, Idaho and western Montana.
In the past, the BPA has sold the power at the cost of generation
with no markup --one of the reasons that the Pacific Northwest has
enjoyed the cheapest power rates in the country. 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" that would allow them to purchase subsidized power from
the BPA, then resell the power at market rates. Because of these
changes in contracts, the big companies were primed to cash in on
California's misery. 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. "Oregonians always feared
that Californians would come for our water," says Larry
Tuttle, director of the Portland-based Citizens for Environmental
Equity. "But few realized that the first raid would be on water-power."
During the Clinton years, the big aluminum companies negotiated
new contracts with the BPA, allowing them to sell excess power on
the western electric grid at market prices. And although the logic
of giving these companies preferential rates was to provide good-paying
jobs in rural areas of the Northwest, there was no requirement that
the companies actually use the power to keep their plants open.
Thus, the aluminum companies promptly idled their plants, sent thousands
of workers home, and sold their subsidized power to California to
capitalize on the skyrocketing rates. The profits are staggering.
The aluminum companies have taken power that they bought from the
BPA for about $25 per megawatt hour and sold it on the wholesale
market for between $200 and $1,000 per megawatt hour. 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, O'Neill chose not to
immediately divest himself of $100 million in share and stock options
in Alcoa. When asked if this presented a conflict of interest, O'Neill
told Meet the Press: "The ethics department lawyers said
they thought it was OK for me to maintain these shares. You know,
I can't imagine that, as treasury secretary, I'm going to have decisions
come before me that have anything to do with this."
Ethical questions aside, it was a shrewd business move. Alcoa's
first quarter earnings for 2001 were a company record of $404 million--and
$57 million more than last year. Since most of the company's plants
had been idled, much of the windfall can be attributed to the remarketing
of its federal power. Alcoa's stock rose by more than 7 percent
during the same period, meaning that O'Neill's bankroll increased
by $6 million.
Alcoa's far from alone. According to a report by the Northwest
delegation, which analyzed data supplied by the BPA, 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, $344
million; and Columbia Falls, $292 million. Altogether these so-called
Direct Service Industries have reaped approximately $1.7 billion off
these remarketed power deals.
The Columbia river.
The prolonged drought in the Northwest has only compounded the
power problems. For much of this year, Los Angeles has received
more rainfall than Seattle. Portland is 12 inches short of its normal
rainfall level and counting. The snowpack in the Northwest, which
feeds the Columbia River system, is just shy of the all-time low
in 1977. Run-off levels are also the second lowest in 72 years,
and stream flows are the third worst ever. The situation is dire.
"We are becoming increasingly concerned that this may not just be
a problem for this summer," says Steve Wright, acting administrator
for the BPA. Canadian reservoirs, which store half the Columbia
River system's water, are extremely low this year, which means we
could start next year with less than a full tank."
Short of power because of the drought, the BPA has been forced
to go back to those same companies and buy back at astronomical
rates the power it just sold them. As a result, the agency is now
facing bankruptcy. While the big corporations and executives, such
as O'Neill, are making a killing, residential consumers are faced
with blackouts, ruined salmon streams and the prospect of rate increases
between 50 to 250 percent over current costs. There's a direct relationship:
According to Oregon Democratic Rep.
Peter DeFazio, for every 100 megawatts of power the BPA has
to purchase to service the big aluminum companies, rates for other
Northwest consumers will increase by 10 percent.
The timing of all this couldn't be worse for the salmon stocks
that once ran the Columbia watershed in numbers seen nowhere else
on earth, but now teeter at the edge of extinction. The eight hydropower
dams on the lower Snake and Columbia rivers block passage to spawning
grounds for migratory salmon. 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 the aluminum
industry and instead opted for an "aggressive nonbreach strategy."
The cornerstone of this approach was a plan to require the dam operators
to increase the flow of water through the spillways, hoping to flush
juvenile salmon safely downstream. 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, enabling the U.S.
Army Corps of Engineers, which operates the dams, to override
the salmon-recovery plan and send all of the water into hydroturbines,
which slice and dice the salmon like a giant cuisinart.
How bad is it? At the turn of the century, more than 16 million
salmon and steelhead
spawned in the Columbia River system. Today, they number fewer than
a million, and more than 90 percent of those are hatchery-bred fish.
The wild salmon is nearly extinct. The number of Snake River chinook,
an endangered species, heading toward the ocean this year was the
third lowest on record. The National
Marine Fisheries Service estimates that the salmon death toll
will climb by 13.3 percent because of the lack of flows--that's more
than 130,000 fish. If the summer is as hot and dry as some forecasts
predict, the death count could double.
Instead of breaching dams,
industry wants to take the salmon to the
Pacific on barges or in trucks.
Instead of providing flows the fish need to survive, which most
fish biologists conclude will ultimately require the breaching of
several dams, the aluminum industry and the BPA want to collect
the fish in the upper basin, put them into barges or big trucks,
and transport them past the dams. One study estimates that 85 percent
of the Snake River salmon will conduct their journey to the Pacific
mostly on barges. But the barged salmon fare worse than the ones
that face decimation in the giant hydroturbines. "This is no way
to recover salmon," says Ted Koch, a federal fish biologist in Boise,
Idaho. "We are lying to ourselves if we think that we are recovering
salmon stocks and meeting power needs, too."
Other federal fish biologists concur that the BPA's power-generating
schemes will doom the world's most prolific salmon river. "What's
happening makes me extremely nervous," says Howard Schaller, a salmon
expert with the U.S. Fish and Wildlife
Service. "It makes me think that this region doesn't have the
will to do what it needs to recover these fish."
The aluminum companies say they have given the BPA millions of
dollars a year to mitigate the damage their operations do to salmon
and steelhead. But much of that money simply 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. The $4.4 million pays for about 35 full-time officers and
deluxe state-of-the-art equipment, including airplanes, radar equipment,
guns, numerous vehicles and horses. "In 1995, the force made 1,484
arrests, but tracked down only 139 illegally caught salmon," Moscowitz
says. "At a total of $3.6 million, the BPA pays nearly $26,000 a
fish for this program."
DeFazio is pushing a plan that could aid both the salmon and Northwest
power consumers. He argues that the BPA should be forced to sever
its contracts with the aluminum companies and reroute that power
to residential consumers and provide fish. He pins much of the blame
for the current crisis on the 1992 Energy Act, a federal deregulation
bill that allowed for the freewheeling marketing of federally generated
power. DeFazio, one of 60 house members to vote against the deregulation
bill, has introduced legislation to re-regulate the energy industry.
"These have been dark days for Californians, but an extremely profitable
time for a few giant power marketers," DeFazio says. "Congress made
a colossal mistake in allowing the deregulation of wholesale production
and distribution of energy. We need to return to a regulated energy
market with stable, reliable, cost-based power."