Image for As power prices spike, Rio Tinto Alcan launches a charm offensive

With power prices for domestic consumers set to climb steeply over the next 18 months, Rio Tinto Alcan, has launched a charm offensive aimed at securing yet another long-term power contract at low prices from Hydro Tasmania. To bolster its case it has launched an $80,000 advertising campaign which will run until the end of the year and hired former Labor adviser Jody Fassina as its Tasmanian lobbyist.

As public controversy rages over power prices, Rio Tinto Alcan finds itself in an awkward position of trying to obliquely defend its current heavily subsidised power price while simultaneously shoring up its bargaining position with Tasmania’s political elite. The company’s current contract for its Bell Bay smelter is for 322 megawatts of power, approximately one-quarter of the state’s power consumption.

Advertising its way out of a hole

The company’s advertisements, which have graced the backblocks of at least The Mercury, The Advocate and The Examiner since early November, seek to address the deep ambivalence of most Tasmanians to the company.

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All of the advertisements state at the outset that “fifty five years ago, a company known as Comalco cast its first aluminium ingot on Tasmanian soil.” Then the ads seek to address themes that have obviously been identified as weak points for the company. One claims the company has “worked closely with local communities”. Another states that Rio Tinto Alcan has worked “hard to improve the health and wellbeing of our employees” while another claims that the Bell Bay smelter “has been pivotal in the changing economic fortunes of Tasmania.” Yet another claims that “we have taken our environmental responsibilities very seriously” and that it has worked “hard to minimise our impact on the environment.”

In an oblique reference to the behind-the-scenes wrangling over a new power contract, the ads all feature a mock aluminium ingot emblazoned with “Bell Bay Tasmania 1955-1960: Beyond 60”. To reinforce the point the text of the ads state that the “relationship” - with the state, its employees, the Tasmanian environment - “is something we want to continue - for the next five years and well beyond.”

All the ads have concluded with with the statement that the punchline “We are Rio Tinto Alcan, and our future is here.” And all prominently feature photos of current employees, with the exception of the one which features a photo of two people fishing in an idyllic looking lake.

The Queensland-based Communication Manager for Rio Tinto Australia, Diane Collier, insists that the power contract negotiations are only “a backdrop but not the reason for the campaign”.

The advertisements, she wrote in an email, are intended to “rebrand ‘Comalco’ as Rio Tinto Alcan in the community and also increase understanding of the social and economic contribution the smelter makes not only to the immediate area but to Tasmania as a whole.”

But to have a future in Tasmania, Rio Tinto Alcan want another long term power contract at favourable prices.

Will Rio Tinto Alcan reap even more subsidies?

Rio Tinto Alcan’s current but still secret contract expires in 2014. When Comalco’s early contracts were first entered into the HEC was in a weak bargaining position of its own creation. In the 1960’s, 70’s and 80’s, the HEC constantly faced the risk of expensive surplus capacity from the Mersey-Forth, Gordon, Pieman and finally the King and Henty-Anthony schemes. Even if there were no customers, the debts on the new capital-intensive dams and power stations would have to be paid for.

There was limited scope to increase the contract prices for the politically well connected major industrial customers, which accounted for approximately two-thirds of the state’s consumption. But there was equally limited financial or political scope to recover the high fixed costs of idle hydro capacity from the narrower base of domestic and small business consumers.

Not only would idle capacity have resulted in significant price rises, the already weak case for building new hydro projects to keep the Hydro’s workforce employed would have collapsed entirely. So the HEC opted to require domestic and small business consumers to cross subsidise the major industrial customers. Even amongst the major industrial customers, Comalco and Temco were treated more generously than other big consumers.

The more insatiable Comalco’s hunger for power became, the more the Hydro became its commercial prisoner. If Comalco did leave after the expiration of its contract, the Hydro would be left to pay the debts on the dams and generation assets but without any income from customers.

However, the relative bargaining positions of Hydro Tasmania and Rio Tinto Alcan have changed since the commissioning of Basslink in April 2006.

The ability to generate power from hydro schemes at the flick of a switch means that Hydro Tasmania can sell power into the National Electricity Market when the prices are highest, such as during the summer afternoon peak load when air conditioners push the mainland system to its limit.(The downside has been Hydro Tasmania importing baseload brown coal power thereby raising the carbon intensity of Tasmanian electricity).

The high likelihood of a carbon price in the short to medium term has further strengthened the market value of hydro power relative to power from the aging fleet of Victorian brown coal based power stations, the most polluting in Australia.

A further factor is that strong demand for aluminium in recent years—with the exception of the depths of the Global Financial Crisis—has pushed the metal’s prices to historic highs.

In a recent presentation for the benefit of investors (see pages 8, 44, 45), Rio Tinto Alcan was upbeat about the prospects for substantial increased demand for primary aluminium over the next twenty years.

The company is also pleased with its position as a relatively low cost supplier in the market. In the presentation to investors the company states that it has a “very strong electricity position” with “low-cost with low-carbon footprint” sources supplied at “very low and predictable escalation” costs. While not specifically referring to the Bell Bay smelter, the comments are relevant.

Will Hydro Tasmania snatch defeat from the jaws of victory?

While there are more factors in Hydro Tasmania’s favour than ever before, they and the Tasmanian government have consistently refused to play their strongest card: public disclosure of Rio Tinto Alcan’s power price and contract details.

The secrecy around the bulk power contracts – and Rio Tinto Alcan’s in particular—is the superglue which has prevented the state breaking free from the unfavourable contracts of the past.

In part, the secrecy has been from a misguided belief that the details of the contracts are ‘commercial in confidence’ and should not be disclosed. (In other states and countries the details of such contracts have been made public). More significantly, secrecy shields Hydro Tasmania, the government and Rio Tinto Alcan from public scrutiny and a better informed debate about the merits or otherwise of heavily subsidising big power consumers.

The old mindset of the Hydro still remains that bigger is better. And to sell more electricity requires keeping the big potentially footloose customers happy. As Hydro Tasmania state in their latest annual report (see page 38) one of their “economic performance commitments” is to “foster closer relationships with major industrial customers and be responsive to their requirements.” Search all you like though and you won’t find a commitment in their annual report to reduce the cross-subsidisation of the major industrial customers by domestic and small business customers.

On Tuesday, the Minister for Resources and Energy, Bryan Green, signalled the minority Labor government’s ongoing preference for secrecy about the prices paid by the major industrial customers.

When the Greens spokesman on Energy, Kim Booth, suggested at the House of Assembly Government Businesses Scrutiny Committee hearing on Hydro Tasmania that Rio Tinto Alcan was paying in the order of 1.4 cents per kilowatt hour, Green was keen to shut the topic down. “You can try but we are not going to start discussing the price that one of our major industrials is paying for their energy,” he told the committee. He provided no further explanation on why that was the case.

At the same hearing the chief executive of Hydro Tasmania, Roy Adair, told the committee that as part of the negotiations with Rio Tinto Alcan they undertook a “commercial evaluation” which involved “looking at what we expect as the price trend within the marketplace and at what other factors need to be built into the contract - for example, how you would deal with the introduction of a carbon price. That situation would then determine the broad commercial terms that we would agree.”

It was a discussion that prompted the Shadow Minister for Energy, Peter Gutwein, to ask whether the Hydro was “currently taking into account employment considerations for the broader community when negotiating with those major industrials?” Adair was keen to reassure Gutwein that “the ongoing sustainability of Hydro Tasmania is affected by the ongoing sustainability of the Tasmanian economy. So clearly the critical nature of that business to the Tasmanian economy is a factor that we do take into account.” But neither Gutwein or Adair raised the issue of the impact on other businesses or taxpayers of Rio Tinto Alcan’s subsidies.

However, Booth bluntly asked if the Hydro was prepared to sell power to the company “for less than the cost of production.” Tellingly, Adair did not rule out a loss making deal, stating only that it had “a customer who is prepared to sign a long-term contract that provides certainty of revenue for us whilst providing certainty of supply for them, so a mutual benefit.”

Collier declined to disclose when the contract negotiations began. Nor did Hydro Tasmania respond to a number of questions, including when the new power contract negotiations commenced and were expected to conclude.

But a deal that suits Rio Tinto Alcan and Hydro Tasmania is not necessarily one that is in the best interests of the Tasmanian community or other electricity consumers.

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Adair would do well to have a look at the ads that Comalco ran back in the early 1980’s. One, from March 1984, was not that dissimilar from the company’s current advertising campaign. Under line drawings of three individual Comalco employees was the bold heading “We’re working for Tasmania’s future”. The ad went on to state that the smelter employed “nearly 1300 people”. At the time the company’s bulk power contracts were for a total of 237 megawatts.

Today, the company employs 580 staff plus a further 60 full-time equivalent contractors. A total workforce of 640 for a company which consumer 322 megawatts of power. Since the early 80’s the company has increased its power consumption by over 35% while the workforce has halved.

For the sake of comparison, it is worth noting that other industries employ far more people than the Bell Bay smelter. For example, the Tasmanian diary industry, which demands and receives far less financial support than Rio Tinto Alcan is estimated to employ 1900 people on farms and a further 800 in the processing sector.

The reality is that the jobs at Rio Tinto Alcan’s Bell Bay smelter are the most heavily subsidised jobs in the state. Even if one generously took the view that such subsidies were reasonable thirty or forty years ago, it is time that the Tasmanian government and economy moved on.

As Adair’s testimony on Tuesday ominously implies, Hydro Tasmania is once more all set to sign another long-term contract involving potentially hundreds of millions more in subsidies. And there is every likelihood that the number of those employed at the Bell Bay smelter will continue to dwindle.

Back in the early 1980’s, two University of Tasmania economists, Bob Rutherford and Mark Trethewey, calculated the subsidy to the major industrial customers at $55 million of which they estimated $25 million came from the labour-intensive small business sector.

They concluded that:

“If this cross subsidy is the practical result of a policy aimed at attracting large-scale capital-intensive industry then it may well in part account for Tasmania’s position as Australia’s economic backwater. Where its object may have been job-creation it will have destroyed jobs, and by increasing Tasmania’s dependence have undermined our ability to determine our economic future”.

For all his talk of Tasmania heading in a new economic direction, Bartlett has been notably silent on the issue of Rio Tinto Alcan’s power contract. His government could insist that Hydro Tasmania pay its shareholders a reasonable rate of return on the capital invested and end the practice of entering into secret sweetheart deals that require Tasmanian consumers and small businesses to prop up Rio Tinto Alcan’s Bell Bay smelter. But so far there’s no indication that it will even though a power contract for the Bell Bay smelter may well be the biggest industry subsidy for the next decade or more.

While Rio Tinto Alcan tout their “beyond 60” hype, it is reasonable to counterpose a question to the company and the Tasmanian government: Isn’t 60 years of secret subsidies enough?