An electrical rate discount sought by Ormet could determine whether the Monroe County facility stays open, but critics say the company's proposal could result in other utility customers paying Ormet to use power.
According to documents filed with the Public Utilities Commission of Ohio, Ormet is seeking an electrical rate tied to the price of aluminum, which dropped from $3,429 per metric ton in July 2008 to $1,416 per metric ton in April. The company says power accounts for 30 percent to 35 percent of the cost of producing aluminum.
"This contract is essentially an on-or-off switch," according to a brief the company's counsel filed July 1. "If Ormet does not receive sufficient assistance, it may be forced out of business."
Ormet applied for the arrangement in February, and a hearing was held June 11.
The company proposes paying a set discounted rate in the first year of the arrangement. Then, from 2010 to 2018, the company would file a target price with the PUCO, based on an average price of aluminum that would provide the company with the minimal cash flow to keep operations going - the equivalent of "life support," the brief says.
If the monthly price was below that number, Ormet would receive a discount. If the price exceeded the target, Ormet would end up paying 102 percent or 105 percent of the approved market rate.
In documents filed in the case, the PUCO staff acknowledges the importance of assisting Ormet, which employs about 1,000 people and has an annual payroll of more than $54 million. However, the staff has advised against approving Ormet's proposal, saying it could result in Ormet getting free electricity, or even being paid to receive it.
'Involuntary investors'
State law entitles Ormet's electrical provider, AEP Ohio, to recover revenue lost in the discount arrangement, which would be considered an economic development activity. The source for the recovered revenue would be other bill payers.
The PUCO staff argues this would make those customers "involuntary investors in Ormet."
The Ohio Consumers' Counsel says some predictions for 2010 place aluminum prices so low that Ormet effectively could be paid as much as $77.1 million by AEP customers. However, in its July 1 brief, Ormet's counsel says the preferred industry source projects a higher price for aluminum.
Ormet is currently paying $45 per megawatt hour under a temporary agreement approved by the PUCO. PUCO's approved market rate is $53.03, meaning AEP is entitled to recover the difference.
In the first year, the company proposes paying either $38 or $34 per megawatt hour, depending on production levels. The PUCO staff supports that part of the deal but calls the plan to link discounts to aluminum prices "fatally flawed."
Get prices
What Ormet proposes for 2010 through 2018 is filing a target average aluminum price that would allow the company to generate the minimum cash flow to keep the facility running. If the monthly price, as determined by the London Metal Exchange, dropped below that target, Ormet would receive a discount. If it exceeded the target, the company would pay a premium of 2 percent or 5 percent.
The company's rate schedule and books would be open to audit by an independent third party.
PUCO staff members say in a July 1 brief that the international price of aluminum would have to reach $2,725 a metric ton before Ormet would have to pay the premium. And the price would have to get higher than $1,941 before the company would have to pay anything.
Ormet's brief says that, by the end of 2009, aluminum prices could approach $2,000 per metric ton, according to the Harbor Intelligence Aluminum Price Outlook report, the preferred predictor in the aluminum industry.
The PUCO staff says the amount of revenue that AEP Ohio would be entitled to recover under Ormet's plan is almost impossible to estimate but could be anywhere from $28 million to "a breathtaking $205 million."
Alternative proposal
The PUCO staff recommends capping the potential discount at 25 percent of the regular rate and setting a ceiling of total benefits to the company equal to its payroll. That cap, it says, would result in about a 3 percent increase in customers' bills, compared to the 12 percent increase that would result if the benefits reached $205 million.
Ormet opposes those recommendations, saying they are arbitrary and do not protect the company from sudden, volatile price shifts. In addition, delaying a decision on the remaining years of the plan endangers the company's ability to refinance its debt, Ormet's brief says.
Expressing concern over the proposed 10-year length of Ormet's plan, the staff recommends periodic reviews to determine whether it is still necessary and an 11 percent per-year reduction in the cap to wean the company off the subsidy.
In its filings on the case, AEP Ohio has said it will leave the amount of the discount up to Ormet and the PUCO; the company's primary concern is recovering the revenue lost in any discount, as well as that lost under the current arrangement.
There is no deadline for the PUCO to rule on the matter, although commission spokeswoman Shana Eiselstein said a decision is generally not long in coming after a hearing. The hearing in this case was held June 11.
Ormet officials were not available for comment Monday.
