September 2013

(Revised)

Intalco BART SO2 Affordability 

Assessment

Final Report

Prepared for

Debbie Kline

U.S. Environmental Protection Agency

Office of Air Waste and Toxics

AWT-107

1200 Sixth Ave., Suite 900

Seattle, WA 98101

Prepared by

RTI International

3040 Cornwallis Road

Research Triangle Park, NC 27709

RTI Project Number 0212979.002.017
_________________________________

RTI International is a trade name of Research Triangle Institute.

RTI Project Number

0212979.002.017

(Revised)

Intalco BART SO2 Affordability 

Assessment

Final Report

September 2013

Prepared for

Debbie Kline

U.S. Environmental Protection Agency

Office of Air Waste and Toxics

AWT-107

1200 Sixth Ave., Suite 900

Seattle, WA 98101

Prepared by

RTI International

3040 Cornwallis Road

Research Triangle Park, NC 27709
iii

CONTENTS

Section Page

Section 1 Introduction ........................................................................................................... 1-1

Section 2 Intalco Facility Economic Characteristics............................................................. 2-1

Section 3 Economic Methodology ........................................................................................ 3-1

Section 4 Affordability Assessment ...................................................................................... 4-1

4.1 External Factors Influencing the Benefits of Operating Intalco .......................... 4-3

4.2 External Factors Influencing Costs of Operating Intalco .................................... 4-4

4.2.1 Electricity Availability............................................................................. 4-4

4.3 Electricity Price Forecasts.................................................................................... 4-5

4.4 Can Intalco Pass on Additional Costs to Consumers in the Form of Higher 

Prices? .................................................................................................................. 4-7

4.5 Ability to Finance ................................................................................................ 4-8

Section 5 Conclusions ........................................................................................................... 5-1

Section 6 References ............................................................................................................. 6-1
iv

LIST OF TABLES

Number Page

4-1. Cost/Sales Ratios under Different BART Control Cost, Price, and Utilization 

Scenarios.......................................................................................................................... 4-2

4-2. BPA’s 2012–2013 Industrial Firm Power (IP) Rate ........................................................ 4-6

4-3. Alcoa Credit Rating by Agency....................................................................................... 4-9
1-1

SECTION 1

INTRODUCTION

In its Guidelines for BART Determinations under the Regional Haze Rule, (Appendix Y 

to 40 CFR Part 51), the Environmental Protection Agency (EPA) recognizes that there are some 

circumstances in which consideration of the affordability of controls will be necessary. In 

situations where requiring a source to use a control technology is projected to have a severe 

impact on plant operations, EPA permits the consideration of these impacts, but recommends 

provision of an economic analysis to explain for public review the reasoning and evidence 

underlying the consideration. Alcoa’s Intalco primary aluminum smelter, located in Ferndale, 

Washington, is subject to control of sulfur dioxide (SO2) emissions under the Clean Air Act’s 

Best Available Retrofit Technology (BART) provisions. EPA has identified limestone slurry 

forced oxidation (LSFO) as a BART control technology for SO2 for this facility. This document 

presents an economic analysis of the affordability of limestone slurry forced oxidation (LSFO) as 

a BART control technology for control of SO2 at the Intalco works.1

In this report we update our evaluation of Alcoa’s claim that the cost of this technology is 

not affordable and that the Intalco facility would be subject to closure if this control technology

is required. In a redacted version of Attachment 2 (Alcoa, 2013c), Alcoa states that “In every 

year for the last 5 years as well as for current projections of next year scrubbing technology 

would result in Intalco being in a loss position both in terms of after tax operating income as well 

as from a cash generation standpoint. Intalco would be incapable of funding the capital 

requirement to install scrubbers over any time period.” To date, the evidence we have collected 

and present in this report is consistent with this claim. Note that this report only considers 

Intalco’s ability to afford the installation and operation of the LSFO control technology and the 

impact that requiring the controls could have on the viability of continued plant operations. 

We evaluate the affordability of the LSFO technology based on consideration of

information supplied by Alcoa as well as other publically available information. A technology 

may not be affordable if the costs of requiring it would affect the viability of continued plant 

operations. Even if a control technology is cost-effective (i.e., the control technology has a 

relatively low cost/ton of pollutant reduced), if its costs are so high that the facility would be 

unprofitable to operate with the controls in place, it would not be affordable for that source.

2

In 

 

1 This report is an update and revision to an earlier report we provided the EPA in November 2012 regarding the 

Alcoa Intalco facility (Intalco or facility).

2 Throughout the report, we refer to Alcoa as the firm or the company, and we refer to Intalco as the facility or 

source.
1-2

our analysis, we measure the affordability of the LSFO controls at the facility level using a sales 

test, computed as the ratio of estimated costs of the technology to estimated sales revenue 

generated by the facility. The sales test is a widely used measure of regulatory burden; for 

example, it is EPA’s recommended measure of the significance of regulatory impacts on small 

businesses. (EPA, 2006, p.21). The higher the cost/sales ratio, the larger the portion of total 

revenue that would be used to cover the control costs. A discussion of this calculation and its 

implications are found below in Section 3. Sales tests for Intalco suggest that the cost/sales ratio 

ranges between 3% and 15% with installation and operation of LSFO, depending on market 

conditions (i.e., price of aluminum) and facility utilization. Although ratios would be lower when 

all three potlines are operating, the ratios would remain unacceptably high. Current market 

conditions, along with a recently signed a long-term power sales contract with the Bonneville 

Power Administration (BPA), suggest that Alcoa plans to continue to operate two or more 

potlines at the Intalco facility during the next few years.

3

We also examine the possible impact of the controls on the parent company, Alcoa. As 

discussed further below, Alcoa faces several obstacles to fund the control costs as it is unlikely to 

be able to pass the control costs through to consumers. We base this conclusion on the following 

economic reasoning; the market for aluminum, a worldwide commodity, is global; increased

costs affecting a single domestic plant would have a negligible effect on the global supply of 

aluminum and thus the market price would remain essentially unchanged. Further, historical 

evidence exists that the company has not been able to pass through similar cost increases (e.g., 

higher electricity costs). Alcoa’s current BBB- credit rating4could make it difficult to finance the 

new control device, and the installation cost represents over 8% of Alcoa’s current cash on hand. 

Moreover, aluminum prices have steadily fallen, dropping 33% percent since their peak in 2011 

causing Alcoa to place 460,000 metric tons of smelting capacity under review for curtailment. 

Alcoa states that the curtailment review will focus on “plants that have long-term risk due to 

factors such as energy costs or regulatory uncertainty” (Alcoa, 2013a). Absent significant 

increases in the price of aluminum, regulatory uncertainty at facilities such as Intalco could place 

pressure on the company to make more permanent smelting capacity reductions.

 

3 Approximately half of one potline at the Intalco smelter is currently idled (Alcoa, 2012a, p.15).

4 Both Fitch Ratings and S&P Ratings recently revised their outlook on Alcoa from Stable to Negative and Moody’s 

Investor Service has Alcoa under review for downgrade.
2-1

SECTION 2

INTALCO FACILITY ECONOMIC CHARACTERISTICS

The Intalco aluminum smelter uses electricity, labor, and other inputs to refine alumina, a 

raw input, into a final aluminum product. The facility contains three potlines, two and half of 

which are currently active. Each potline has a capacity of 95,000 tonnes/year of aluminum, for a 

total capacity of 279,000 tonnes/year.5 The cost of the electricity, labor, and other inputs needed 

to convert the alumina raw material into the final aluminum product is known as the conversion 

margin. In 2012, CRU Strategies Ltd. (CRU, 2006, p. 3-10) projects Intalco’s conversion margin 

to be $1,455/tonne. Aluminum production is electricity intensive, and electricity prices and 

availability will influence the profitability of individual potlines. Currently, Intalco purchases 

most of its power from BPA, an operator of several hydroelectric facilities in the Pacific 

Northwest. In December of 2012, Alcoa and BPA signed a long-term power contract that will 

provide up to 300 MW of electricity to the Intalco facility for the next 9 years and 9 months 

(until September 30, 2022) (BPA, 2012b).This agreement would allow Intalco to operate two 

potlines profitably over the next 10 years, assuming aluminum market conditions do not change 

significantly.

Alcoa is the world’s leading producer of primary and fabricated aluminum (Alcoa, 2011).

Currently, Intalco represents 6% of Alcoa’s global production and 18% of its production in the

United States; Intalco has the largest capacity of any of Alcoa’s domestic smelters (Alcoa, 2012, 

p.14). Should the plant operate at full capacity, Intalco’s share of total Alcoa production would 

increase by roughly 1%. If Intalco were to shut down entirely, Alcoa would lose a significant 

portion (21.6%) of its aluminum production capacity within the United States (Alcoa, 2012, 

p.14). Alcoa generates 55% of its revenue in the Americas, 28% in Europe, 14% from Australia, 

and the remaining revenue from the Middle East.

 

5 Alcoa’s Annual Report for 2012 (2012a) reports Intalco’s capacity as 279,000 tonnes/year; Alcoa’s Intalco Works 

website (Alcoa, 2013b) state that the capacity of the Intalco works is 278,000 tonnes/year. With approximately 

one half of a potline idled, their reported current capacity is 226,000 tonnes/year.
3-1

SECTION 3

ECONOMIC METHODOLOGY

The primary measure we use to assess affordability is the sales test. The “sales test” used 

in this assessment is the ratio of the present value of compliance costs to the present value of 

facility revenues over the control technology’s lifetime (30 years, as presented in the cost 

analysis). This sales test is also referred to as a cost-to-sales ratio. In this case, the present value 

of the estimated cost of the LSFO control technology is the numerator and the present value of

estimated revenue generated at the Intalco facility is the denominator. Computing the present 

value of the cost and sales is appropriate when a stream of cash flows or a large capital 

expenditure is involved with compliance, and the magnitude of either costs or revenues may vary 

over time.

6

It could be argued that a comparison of costs to profits would be a better measure of 

affordability; facility profits are a measure of the uncommitted resources the facility has 

available to spend on the controls. However, facility profits are not often publically available as 

they are typically confidential business information.

7 Further, they may be computed or defined 

differently by different companies, or by a single company for different applications. In this case, 

Alcoa provided confidential data on after tax operating income (ATOI), but did not provide 

facility-level financial information underlying their ATOI computations. They state (see p. 1-1, 

above) that with the BART controls in effect, the Intalco facility would be unprofitable based on 

historical and projected conditions. 

Sales or revenue data are preferred because they are more consistently defined and more 

likely to be publicly available. Thus, sales are commonly used as a measure of a firm’s ability to 

pay in estimating the economic burden of regulation (EPA, 2006, p.21). In addition, if facility 

sales are not publicly available, they may be readily estimated based on facility production and 

market price.

The compliance cost per sales for a company or plant measures the price increase for the

affected product needed for the company or plant to completely recover the costs of complying 

with the regulation. The EPA has identified LSFO as BART for SO2 emissions from the Intalco

potlines. EPA’s estimated costs of this technology range from $127.7 and $151.9 million for 

installed capital equipment and between $12.9 and $13.9 million for annual operating and 

 

6 Cost-to-sales ratios are frequently computed for a “typical” year, comparing total annualized costs of compliance 

to estimated or reported sales revenues. In cases where there is information about how future streams of costs 

and revenues are expected to vary over time, comparing the present values is preferred.

7

In Attachment 2 to their June 22, 2012 letter to EPA, (Alcoa, 2012b) Alcoa provided confidential data on their 

estimate of Intalco’s profitability if the controls were required, and summarized the data in their redacted version 

of Attachment 2 (see quote in Section 1, above).
3-2

maintenance costs. CRU estimates a conversion margin8of $1,455/tonne in 2012 (CRU, 2006, 

p. 3-10). We estimated revenues and conversion margins using three assumed production levels 

(if 1, 2, or all 3 potlines are operating), and using the CRU projections and also two other 

aluminum price projections. For each revenue projection, we compared the present value of the

control costs and revenues using a 30-year time horizon and using a 7% discount rate for the 

present value calculation.9

The sales ratios are computed as follows:

 ∑

 

( )

 

 

 

 ∑

 

( )

 

 

 

 

 

 

where T is the technology lifetime, r is the interest rate, CCt are capital costs of LSFO in period t, 

OCt are operating costs of LSFO in period t, Q is the quantity of output (in tonnes), and Price is 

the projected price of aluminum in $/tonne.10

We also supplemented the quantitative analysis of affordability (“sales test”) with a 

qualitative discussion of other issues that independently affect the operations of the Intalco plant. 

Later in this report, we explain how overall market conditions for aluminum producers, 

electricity prices, the recent long term power contract and Alcoa’s financing options for controls 

to be applied to Intalco will interact and play an important role in decisions regarding future

smelter operation.

 

8 Computed as the difference between the projected price of aluminum and the price of alumina.

9

30 years is the equipment life for the LSFO control device in the BART cost analysis. We use a 7% discount rate 

for this calculation in order to be consistent with the 7% rate applied in the BART cost analysis. 

10 We also computed cost/margin ratios; these results are presented in Appendix A.
4-1

SECTION 4

AFFORDABILITY ASSESSMENT

To assess affordability, we have computed cost/sales ratios under several scenarios in 

which aluminum price and smelter capacity utilization are varied. These sales tests are the ratio 

of the present value of compliance costs to the present value of expected facility revenues and 

serve as a measure of the impact of applying the LSFO control technology on Intalco’s 

profitability. Alcoa is required to file annual reports with the SEC and report its net income.

11

Using Alcoa’s 2012 reported net income, and supplemented by the information Alcoa provided 

to EPA, we can assess the impact the LSFO control technology would have on the profitability 

of Alcoa as a whole and on the Intalco facility. In 2012, Alcoa reported a net profit of $191 

million on revenues of $23.7 billion, a profit margin of 0.8%, following profits of 2.5% in 2011

(Alcoa, 2012). This is a low profit margin relative to other manufacturing firms nationwide,

which have averaged profit margins between 7% and 9% over the past 10 years (Census, 2013).

Alcoa attributes its lower profits in 2012 to depressed aluminum prices. Alcoa reports an average 

realized price of $2,327 per tonne in 2012, compared to $2,636 per tonne in 2011 (Alcoa, 2012a, 

p. 192 of 200).

As discussed in Section 2, we consider a 30-year time horizon for this analysis and a 7% 

discount rate that is consistent with guidance provided by the White House Office of 

Management and Budget (OMB, 1992). To account for uncertainty, the financial scenarios 

consider different levels of plant utilization as well as different aluminum price forecasts.

We used three aluminum price forecasts to reflect possible market conditions. For each 

price forecast, we estimated facility revenues over the 30-year estimated life of the controls as 

the product of the estimated price times estimated production (if 1, 2, or 3 potlines were 

operating), and computed a present value. We then compared the present value of the estimated 

revenue stream to the present value of EPA’s low and high estimated BART costs. We assumed 

that the BART controls would be scaled to address emissions from all three potlines. Thus, we 

assume that the costs of control would not vary with capacity utilization, while revenues would 

vary with capacity utilization. Table 4-1, below, reports results for forecasts taken from CRU 

(2006, p. 3-10), a forecast constructed from current London Metals Exchange (LME) futures 

contracts (LME, 2013), and a World Bank commodity forecast (WB, 2013).

 

11 Net income is an entity’s income minus expenses for an accounting period; it is generally understood to be a 

company’s “bottom line” or in this case a company’s “profits.”
4-2

Table 4-1. Cost/Sales Ratios under Different BART Control Cost, Price, and Utilization 

Scenarios

Estimated Present Value of Revenues, by Aluminum Price Forecast

Price Forecast

LME CRU WB

Active Pot Lines

1 $2,316.5 $2,915.9 $2,758.0

2 $4,633.1 $5,831.8 $5,515.9

3 $6,949.6 $8,747.6 $8,273.9

Estimated Cost/Sales Ratios

Present Value of EPA’s Low Estimate of BART Control Costs $300.6

Price Forecast

LME CRU WB

Active Pot Lines

1 13.0% 10.3% 10.9%

2 6.5% 5.2% 5.4%

3 4.3% 3.4% 3.6%

Present Value of EPA’s High Estimate of BART Control Costs $337.8

Price Forecast

LME CRU WB

Active Pot Lines

1 14.6% 11.6% 12.2%

2 7.3% 5.8% 6.1%

3 4.9% 3.9% 4.1%

The cost/sales ratios developed here help in determining whether the proposed LSFO 

control technology will pose a significant economic burden to Intalco. 

We estimate Intalco cost/sales ratios of 3.4% to 14.6%, depending on the assumptions 

about control costs, capacity utilization, and aluminum prices used. These ratios are smallest 

when all three potlines are active, resulting in the highest revenue (3.4% to 4.9%, depending on 

the cost estimate and price forecast). Operating 2 potlines, cost/sales ratios are 5.2% to 7.3%, 

depending on the cost estimate and price forecast used. If only 1 potline were in operation, costto-sales ratios range from 10.3% to 14.6%, depending on the cost estimate and price forecast 

used.
4-3

Even in the scenarios where all three potlines operate and using the most favorable price 

forecast, the estimated cost/sales ratio exceeds 3%. The EPA considers cost/sales ratios over 3% 

as posing a potentially significant economic burden for firms (EPA, 2006). As stated in EPA’s 

SBREFA guidance document, “The upper threshold defines a level of economic impact that 

would be unquestionably significant for a small entity.” In all scenarios considered in this 

analysis the cost/sales ratio was above the 3% threshold. While Intalco is not a small entity in 

itself, the Intalco facility would be a small entity if it were operating independently. Because 

Alcoa requires that the smelter be profitable (not subsidized by the rest of Alcoa’s operations) it 

can be surmised that the same metric could be applicable to the facility in this circumstance to 

characterize the economic impact of the BART control measure. The analysis suggests that the 

LSFO control technology proposed at the Intalco facility could pose a potentially significant 

economic burden and force plant operators to consider changes to operations that may reduce 

output.

4.1 External Factors Influencing the Benefits of Operating Intalco

Worldwide demand for aluminum has been projected to increase from 44 million 

tonnes/year in 2011 to 92 million tonnes/year by 2020 (USGS, 2010), resulting in investments in 

and development of new capacity as well as increasing the viability of re-opening and/or 

maintaining higher cost existing production lines. The increase in demand is largely driven by 

urban investment in China. Plants in Europe and North America generally have operating costs 

higher than those facing plants in other parts of the world. Plants such as Intalco may 

nevertheless continue to operate profitably going forward, if demand for aluminum strengthens 

and favorable electricity rates can be obtained. However, the recent slowdown in the global 

economy has tempered demand projections. Additionally, Chinese producers have continued to 

add to aluminum inventories, causing prices to remain lower and Alcoa to reduce production at 

several less profitable facilities (Elmquist, 2012).

If high inventories of aluminum persist the price of aluminum will continue to decline; 

deterioration in aluminum prices could have a material, adverse effect on Alcoa’s business and

financial condition (Alcoa, 2012a). As noted in Section 1, without significant appreciation in the 

price of aluminum, plants with long-term risk due to energy costs and regulatory uncertainty—

plants like Intalco—may be subject to curtailment of output (possibly closure) (Alcoa, 2012a). 

This is consistent with historical trends in the aluminum industry. During the past 10 years, 

several smelters in the northwest have shut down:

■ Reynolds Longview shutdown in early 2001, site demolition and cleanup on-going
4-4

■ Vanalco in Vancouver shutdown in 2000. Site cleanup being done by Evergreen 

Aluminum (Glencore)who bought the plant but never restarted operations.

■ Kaiser in Tacoma and Mead. The Tacoma smelter has been completely removed and 

the plant site is proposed for a number of new uses like vehicle parking and crude oil 

tanks. The Mead plant has been sold to a company that has removed all aluminum 

production equipment except for the anode making and baking equipment which it 

hopes to sell to another company.

■ Columbia Gorge Aluminum (aka Goldendale Aluminum) at Goldendale/Dallesport

officially stopped production in 2003.

Similarly, Columbia Falls Aluminum in Montana was idled, Alcoa in Alcoa, Tennessee was 

closed, Alcoa in Rockdale, Texas permanently closed 40% of their capacity, and Century of 

West Virginia was idled. Ormet (Hannibal, Ohio) is in bankruptcy but operating, and recently 

chose to shut down half its existing operations.

All other things being equal, an increase in aluminum demand would increase product 

prices and the benefits of operating Intalco, while a decrease in demand for aluminum would 

reduce aluminum prices and the benefits of operating Intalco.

4.2 External Factors Influencing Costs of Operating Intalco

4.2.1 Electricity Availability

As previously noted, Alcoa and BPA signed a long-term power sales agreement in 

December 2012 to provide 300 MW of electricity, beginning January 1, 2013, for the next 9 

years and 9 months to the Intalco plant. (BPA, 2012c) This agreement replaces the 2009 power 

sales agreement that provided up to 320 MW of electricity. The previous agreement was set to 

expire on May 26, 2011 but was extended for a period of 12 months ending on May 26, 2012. 

Several short-term extensions of the 2009 agreement preceded the latest agreement while Alcoa 

and BPA were in negotiations.

Alcoa provides employment to the local area; however, their electricity demand competes 

with demand from consumer utilities. Alcoa operates a second plant in the area, in Wenatchee, 

that is older and higher cost. CRU Strategies Ltd. in their 2006 Northwest Smelter Operating 

Outlook: A Report Prepared for Alcoa suggested that if BPA could not reliably supply enough 

power for continuous operation of two potlines at Intalco, operations may be expanded at 

Wenatchee rather than allowing only one line to operate at Intalco (CRU, 2006). This finding 

suggests that even in the absence the proposed LSFO control technology, the profitability of 

operating Intalco is highly responsive to additional costs. In other words, a facility such as 
4-5

Intalco may not operate profitably even with a long-term power sales agreement if additional 

costs resulting from new regulation are factored into the operating cost of the plant.

Intalco’s ability to run at full capacity depends on the availability of affordable 

electricity. Aluminum refining is an electricity-intensive process, with electricity typically 

representing around one-third of total production costs. Intalco uses 15.2 MWh of electricity per 

tonne of aluminum produced, about average energy efficiency for an aluminum smelting plant. 

(CRU, 2006) The plant’s cost structure is highly dependent on its energy use and the electricity 

price it faces. Electricity prices can determine the profitability of a production line, and it is 

expensive to bring lines in and out of production when prices change. This dynamic between 

profitability and the availability of affordable electricity is paramount to Intalco’s future. The 

power sales agreement between Alcoa and BPA ensures 300 MW of electricity at fixed rates 

below the market rate, enough electricity to operate slightly less than 2 potlines at full capacity.

If enough affordable electricity is available on the market (beyond the 300 MW supplied under 

the BPA agreement), all three of Intalco’s potlines can be run more efficiently than a single 

potline.

Intalco requires 483 MW of continuous power to operate at its full 279,000 tonnes/year

capacity. Each of the three potlines requires about 161 MW of electricity to produce 93,000 

tonnes/year. As of today, approximately half of one potline (45,200 tonnes/year) remains idled

leaving two and half potlines currently operating. According to the 2006 CRU report, average 

production costs per tonne would fall from $666 to $552 if all three lines were open. This 

amount of electricity is not available from BPA in the latest power sales agreement. Alcoa’s 

ability to purchase affordable electricity from the market can determine whether Intalco is able to 

run three lines profitably or only one line at higher cost per tonne.

The price of electricity plays an important role in determining whether a potline remains 

idle. For instance, in 2004 to 2005, market prices averaged $50/MWh (5 cents/kWh). At this 

price, the Intalco facility would not be profitable at current utilization. For the facility to 

profitably run three potlines, electricity would need to be available at an average of $41/MWh 

(4.1 cents/kWh) in sufficient quantities (CRU, 2006, p. 4-2). Discussed below are forecasts for 

power costs.

4.3 Electricity Price Forecasts

The Energy Information Agency’s (EIA) Annual Energy Outlook (AEO) for 2013 

forecasts electricity prices in the Northwest Power Pool will range from 4.63 to 6.05 2011 cents 

per kWh for industrial end users during the period 2010 to 2040 (EIA, 2013, Table 55.21). 
4-6

Conventional hydropower capacity and generation in the region are expected to remain nearly 

constant. As discussed above, at 5 cents/kWh, Intalco would not be profitable at current 

utilization. EIA projects that real electricity prices for industrial customers for the Northwest 

Power Pool will average 4.77 cents per kWh over the period 2013 through 2022. As noted above, 

the additional electricity needed to operate a portion of the second potline, and all of the third 

potline, would have to be purchased from the market. EIA data for May 2013 shows that average 

retail electricity price for industrial end users was 3.94 cents per kWh, so at current rates, Intalco 

would be able to operate all 3 potlines with electricity priced, on average, below 4 cents per 

kWh.

The power sales agreement entered into between Alcoa and BPA in December 2012 was 

for the supply and purchase of 300 MW of electricity. This agreement provides 300 MW of 

electric power to Alcoa’s Intalco plant for a term of nine years and 9 months (January 1, 2013, 

until September 30, 2022) at BPA’s industrial firm power rate (IP rate) (BPA, 2012c). BPA’s IP 

rate is reserved for direct service industrial customers (DSIs), as defined by the Northwest Power 

Act, for firm power to be used in their industrial operations in the Pacific Northwest. Alcoa’s 

Intalco plant is considered a DSI. The 2012–2013 IP rates (Table 4-2) published by BPA range 

from 3.0 cents/kWh to 3.9 cents/kWh depending on month and time of day (BPA, 2012a, p.21), 

averaging 3.59 cents/kWh. These rates are more favorable for Intalco than the market rates

Table 4-2. BPA’s 2012–2013 Industrial Firm Power (IP) Rate

Month

Rate in mills/kWh Diurnal Period: Average Rate in 

HLH LLH cents/kWh

October 38.51 31.85 3.5

November 39.02 32.05 3.6

December 41.75 34.04 3.8

January 40.68 32.35 3.7

February 41.58 33.82 3.8

March 40.22 32.98 3.7

April 38.18 31.06 3.5

May 35.71 25.05 3.0

June 36.62 23.67 3.0

July 42.72 30.56 3.7

August 45.00 32.80 3.9

September 44.10 34.24 3.9

Source: BPA, 2012a, p.21.
4-7

projected for the region (4.79 cents/kWh for 2012 and 4.85 cents/kWh for 2013), representing a 

25% discount below the average forecasted market rates for industrial users in the Pacific region.

If EIA projected rates are accurate and the IP rate continues to be 25% lower than the retail rate, 

Intalco’s overall cost of power should remain below 5 cents per kWh until 2040.

4.4 Can Intalco Pass on Additional Costs to Consumers in the Form of Higher Prices?

EPA’s consideration of the circumstances of the Intalco BART determination suggests 

that Intalco would not be able to pass the costs it incurs along to its customers. As anecdotal 

evidence, without data on elasticities in the aluminum market, we note that the Intalco plant is 

not operating at full capacity at this time. If Alcoa could pass costs on to its customers, their 

utilization rate for this plant would presumably be higher. 

Aluminum is a commodity traded on global markets, such as the London Metal Exchange 

(LME). Futures contracts are available for up to 5 years, allowing producers to mitigate risk. 

Aluminum producers can negotiate long-term contracts with alumina suppliers but have little 

control over price. Market price is determined by the interaction of global supply and global 

demand, which in turn depend on other underlying factors. Increased costs at a single smelter are 

unlikely to have much effect on the market price. Global demand for aluminum depends on the 

demand for products made with aluminum, including vehicles, aircraft, and many other products. 

Demand for these items, in turn, is driven by global economic conditions. Global supply of 

aluminum depends on the cost of producing aluminum. The main inputs to aluminum refining 

are the raw input, alumina, and electricity. Alumina is also a widely traded, non-differentiated 

commodity (CRU, 2006). Prices of these inputs affect the supply of aluminum, as do technical 

change in aluminum manufacturing and the number of facilities producing aluminum. 

In the case of the Intalco BART controls, the increased costs of installing and operating 

the controls affect only one aluminum facility. Other aluminum manufacturers are unaffected by 

the controls and thus have no change in costs. Overall, because many other aluminum suppliers 

are available to provide additional aluminum to the market in response to a very small increase in 

prices, Intalco’s increased costs would have little impact on global supply. Thus, the market 

price would be essentially unaffected, and Intalco would be unable to pass much, if any, of its 

cost increase along to its customers. Intalco would be expected to experience increased costs due 

to the BART controls, with no change or very little change in the price it receives for its 

products; as a result, its profits, per-tonne and overall, would be expected to be reduced by the 

BART controls.
4-8

4.5 Ability to Finance

The capital/installation cost for the LSFO is estimated to be approximately $151 million.

Alcoa could finance the cost by borrowing funds or with cash on hand. Generally, the interest 

rate at which firms are able to borrow money for capital investment depends on its financial 

outlook and credit history. As of 2013, the credit ratings provided by agencies Standard & Poors, 

Moody’s, and Fitch reported Alcoa’s financial outlook to be negative or under review for 

downgrade. Although the outlook has deteriorated over previous years, Alcoa’s ratings have 

remained the same since 2009. All three agencies rate Alcoa’s long-term debt at BBB-

(equivalent to Baa3 on Moody’s scale) (Alcoa Annual Reports, 2009–2012). Standard & Poors

defines the BBB- rating as “considered the lowest investment grade by market participants”

(Standard & Poor’s, 2012). Similarly, Moody’s defines Baa as being “medium grade and subject 

to moderate credit risk” (Moody’s, 2013a). Alcoa’s short-term debt ratings for S&P, Moody’s, 

and Fitch were A-3, P-3, and F3, respectively, which is equivalent to the long-term BBB/BBB 

(Alcoa, 2009–2012). In general, Alcoa’s ratings, both for long-term and short-term debt, fall at 

the bottom of the range of acceptable credit risk. They would thus likely to be able to borrow, but 

the company might feel that the cost of debt was unacceptably high. Any reduction in these 

ratings would put Alcoa below investment grade, or what is colloquially called “junk bond”

status.

Alcoa’s overall financial outlook was greatly affected by the global recession in 2008. 

Aluminum and alumina account for 75% of Alcoa’s revenue, and demand for Alcoa’s primary 

commodities dropped as LME-based aluminum prices plummeted 56% (Alcoa, 10-K Report, 

2009). Since 2009, Alcoa’s finances have improved (Alcoa, 2012). In 2009, Alcoa lost $985 

million. Since then, sales have increased and profits have been positive, but relatively small. 

Table 4-3 represents the 5-year change in Alcoa’s credit ratings and financial outlook. This 

outlook may improve in the future if aluminum demand and prices increase as projected.

However, to our knowledge, no credit rating forecasts are available to the public.

Alternatively, Alcoa may consider financing the investment in control technology out of 

cash on hand or equity. According to the 2012 Annual Report, Alcoa had $1.86 billion in cash 

assets, down slightly from $1.93 billion in 2011 (Alcoa, 2012a). The estimated $151 million 

installation cost would represent an economically significant investment (8.1% of total cash on 

hand). In making this decision, Alcoa would compare the expected benefits of using the cash on 

hand to purchase required pollution controls with the value of using that cash for their next best 

alternative (for example, investing in new production technology at another plant).
4-9

Table 4-3. Alcoa Credit Rating by Agency

Year S&P Moody’s Fitch

2013 BBB− Ba1 BBBLong Term

2012 BBB− Baa3 BBB−

2011 BBB− Baa3 BBB−

2010 BBB− Baa3 BBB−

2009 BBB+ Baa1 BBB

2008 BBB+ Baa1 A−

2013 A-3 SGL-3 F3

Short Term

2012 A-3 P-3 F3

2011 A-3 P-3 F3

2010 A-3 P-3 F3

2009 A-2 P-2 F2

2008 A-2 P-2 F2

2013 Negative Stable Negative

Outlook

2012 Negative Stable12 Negative

2011 Stable Stable Stable

2010 Negative Negative Negative

2009 Negative Stable Negative

2008 Negative Negative Negative

Sources: Fitch, 2013; Moody’s, 2013b; Standard & Poor’s, 2013.

 

12 In December 2012, Moody’s Investor Service placed Alcoa’s Baa3 senior unsecured and Prime-3 short-term 

rating under review for downgrade.
5-1

SECTION 5

CONCLUSIONS

Even in the absence of new regulation, the Intalco plant is currently operating at 

somewhat less than full capacity; operating the third potline at full capacity is not economical 

given existing market prices for aluminum and electricity, limited availability of IP rate 

electricity, and potline production costs. BPA has only provided enough power at IP rates to 

operate less than two potlines. Alcoa would then compare the benefits of operating the third, 

highest cost (CRU, 2006) potline at full capacity with the costs of operating it at higher market 

electricity prices. Operating this third line at full capacity is not profitable at currently projected 

market electricity and aluminum prices. To be able to operate at full capacity, Alcoa would need 

to be able to achieve an average electricity price of about 4 cents/kWh (CRU, 2006). Alcoa has 

stated that it may need to curtail output at higher cost plants in the near future as aluminum 

prices fall due to high inventories (Alcoa, 2013a).

If Intalco were to install the LSFO control technology, the cost of installing and operating 

the equipment will represent approximately 3% to 15% of the facility’s sales revenue over the 30 

year lifetime of the equipment at current utilization. The cost/sales ratios may be higher or lower 

depending on plant utilization and future aluminum prices, but exceed 3% in even the most 

optimistic cases.

Alcoa is unlikely to be able to pass these costs along to consumers, as shown by its 

historical inability to pass through higher electricity prices and operate its third potline. Alcoa’s 

BBB– credit rating may limit its ability to borrow resources to purchase pollution control 

equipment. Although limited cash reserves are available, the control technology expenditure 

would use over 8% of Alcoa’s cash reserves; Alcoa may decide those cash reserves could be 

better used in other ways that provide better value to the company.

While we cannot definitively determine what business decisions Alcoa will make, should 

installation and operation of LSFO be required, it is our belief based on our analysis and sound 

business practices that Alcoa would seriously consider other options, such as shifting production 

to other facilities, rather than installing and operating LSFO and continuing aluminum 

production at Intalco.
6-1

SECTION 6

REFERENCES

Alcoa. 2009. “Turning Crisis Into Opportunity: 2009 Annual Report and Form 10-K.”

Alcoa. 2010. “Seizing Opportunity, Accelerating Value: 2010 Annual Report and Form 10-K.”

Alcoa. 2011. “Alcoa Won’t Wait: Taking Decisive Action in a Turbulent World: 2011 Annual 

Report.”

Alcoa. 2012a. “Steady Progress in Volatile Times: 2012 Annual Report.”

Alcoa. 2012b. Letter from Robert Wilt, Alcoa Inc., to Dennis McLarren, EPA Region 10 

Administrator, dated June 22, 2012, including confidential Attachment 2.

Alcoa. 2013a. “Alcoa to Review 460,000 Metric Tons of Smelting Capacity for Possible 

Curtailment.” May 1, 2013 News Release. Available at 

http://www.alcoa.com/global/en/news/news_detail.asp?pageID=20130501005196en&ne

wsYear=2013

Alcoa. 2013b.Alcoa Intalco Works website, “Overview” page. 

http://www.alcoa.com/locations/usa_intalco/en/info_page/about_overview.asp.

Alcoa. 2013c. Redacted Attachment 2: Affordability of SO2 scrubbing technology. Redacted 

version of confidential Attachment 2 to letter from Robert Wilt, Alcoa Inc., to Dennis 

McLarren, EPA Region 10 Administrator, dated June 22, 2012.

Bonneville Power Administration (BPA). 2012a. “2012 Power Rates Schedules and General 

Rate Schedule Provisions (FY 2012–2013).” Available at 

http://www.bpa.gov/Finance/RateCases/InactiveRateCases/BP12/Final%20Proposal/Fina

lPowerRateSchedulesGRSPs_Upload_03-15-2012.pdf. Accessed July 18, 2013.

Bonneville Power Administration (BPA). 2012b. “Administrators Record of Decision: Power 

Sales Agreement to Alcoa, Inc.” Available at 

https://www.bpa.gov/power/pl/regionaldialogue/implementation/documents/2012/Alcoa_

ROD_12-05-12_Blackline_TAC.pdf

Bonneville Power Administration (BPA). 2012c. Long-Term Power Sales Agreement executed 

by the Bonneville Power Administration and Alcoa, Inc. Available at: 

https://www.bpa.gov/power/pl/regionaldialogue/implementation/documents/DSI.SHTML

CRU Strategies Ltd. 2006. “Northwest Smelter Operating Outlook: A Report Prepared for 

Alcoa.” Available at 

http://www.alcoa.com/locations/usa_intalco/en/pdf/AlcoaSmelterOutlook.pdf Accessed 

July 18, 2013.
6-2

Elmquist, S. 2012. “Alcoa Sees Aluminum Cuts as Production Gains: Commodities.” Available 

at http://www.bloomberg.com/news/2012-04-09/alcoa-sees-aluminum-cuts-asproduction-gains-commodities.html. Accessed September 18, 2012.

Fitch Ratings. April 11, 2013. Fitch Affirms Alcoa’s IDR at ‘BBB-‘; Outlook Negative.

Fitch Ratings. Ratings for Alcoa, Inc. Accessed July 1, 2013.

London Metal Exchange. 2013. Aluminum stocks and prices. http://www.lme.com/metals/nonferrous/aluminium. Accessed August 16, 2013.

Moody’s Investors Service. 2013a. Rating Symbols and Definitions. 

http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004

Moody’s Investors Service. 2013b. Moodys downgrades Alcoa’s Ratings, 29 May 2013. 

http://www.moodys.com/research/Moodys-downgrades-Alcoas-ratings-assigns-Ba1-

CFR-outlook-stable--PR_274298 Accessed on June 27, 2013.

Standard & Poor’s. 2012. “Credit Ratings Definitions & FAQs.” Available at 

http://www.standardandpoors.com/ratings/definitions-and-faqs/en/us. Accessed 

September 20, 2012.

Standard & Poor’s Rating Services. 2013. Ratings for Alcoa Inc. Accessed July 1, 2013.

U.S. Census Bureau. 2013. U.S. Census Bureau News, June 10, 2013. Sales and Profits from the 

Current Quarterly Financial Report, and Historical data. 

http://www2.census.gov/econ/qfr/current/qfr_mg.pdf

U.S. Energy Information Administration. 2013. Annual Energy Outlook 2013. 

http://www.eia.gov/forecasts/aeo/

U.S. Environmental Protection Agency (EPA). 2006. EPA’s Action Development Process. 

Available at http://www.epa.gov/rfa/documents/Guidance-RegFlexAct.pdf. Accessed 

October 16, 2012.

U.S. Geological Survey (USGS). 2010. “The Global Flow of Aluminum From 2006 Through 

2025.” Available at http://pubs.usgs.gov/of/2010/1256/pdf/ofr2010-1256.pdf

White House Office of Management and Budget. 1992. Circluar Number A-94, Revised. 

Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs. 

http://www.whitehouse.gov/omb/circulars_a094#8. Accessed July 17, 2013.

World Bank. Commodity Price Forecast, January 15, 2013. 

http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-

1304428586133/Price_Forecast.pdf. Accessed July 17, 2013.
A-1

APPENDIX A

This appendix presents an alternative measure of affordability: the ratio of EPA’s 

estimated BART control costs to Intalco’s estimated conversion margin (cost/margin). The 

conversion margin is defined as revenue minus the cost of alumina, and measures the 

contribution of the Intalco facility to Alcoa (Intalco’s value-added). It is estimated by adjusting

CRU Strategies Ltd.’s 2012 estimate of conversion margin using alternative production estimates 

and aluminum price projections. We consider the cost/sales ratio to be the primary metric by 

which to estimate affordability as discussed in Section 4, but provide the cost/margin ratios in 

this Appendix to show a potential affordability estimate using a different, but related, metric.

Because margin is less than estimated gross revenues, these ratios are slightly higher than 

the cost/sales ratios presented in Section 4. In the scenario where only one potline is operating, 

BART controls would absorb up to 20% of Intalco’s conversion margin.

Table A-1. Cost/Margin Ratios under Different BART Control Cost, Price, and 

Utilization Scenarios

Estimated Present Value of Margin, by Aluminum Price Forecast

Price Forecast

LME CRU WB

Active Pot Lines

1 $1,554.7 $1,702.6 $1,983.6

2 $3,109.4 $3,405.3 $3,967.2

3 $4,664.1 $5,107.9 $5,950.8

Estimated Cost/Sales Ratios

Present Value of EPA’s Low Estimate of BART Control Costs $300.6

Price Forecast

LME CRU WB

Active Pot Lines

1 19.3% 17.7% 15.2%

2 9.7% 8.8% 7.6%

3 6.4% 5.9% 5.1%

Present Value of EPA’s High Estimate of BART Control Costs $337.8

Price Forecast

LME CRU WB

Active Pot Lines

1 21.7% 19.8% 17.0%

2 10.9% 9.9% 8.5%

3 7.2% 6.6% 5.7%