A Well Seasoned Story

Researched and written by Chris Chiller

For our first Facts Behind Fiction column, I want to say a few words about a plot point which raises a bit of suspense towards the end of book #1, A Devil in the Donations where Marvin reveals that the mill is selling excess power on the short market.

The scoop on the short-sale market. Electricity is sold on “day” and “intra-day” markets. The day market is generally what might be referred to as the short sale market. This market exists to smooth out demand which generally spikes when almost everyone has their air-conditioning on in the summer or heaters during a cold spell. When the demand gets close to exceeding the kilowatts the utility has contracted for, or can supply from their own generators, the utility first raises rates ahead of demand, then must purchase power at an inflated rate from wherever they can get it.

Marvin might decide to run a night shift during hot summer days and dispense with the day shift as lumber mills are generally not air-conditioned. This would ease the strain on the utility because it would reduce demand from a mill that might use almost as much electricity as the whole small town on an average day. Since the mill has contracted for a set amount of monthly power at a fixed LOW price, Marvin can choose to have excess electricity for a day sold for him by a trader. The mill would pocket the difference between the higher rates. And if the difference is wide enough, Marvin might give everyone a week off for ‘maintenance’, if the numbers, say, might earn as much as not running his equipment on a normal day.

This became possible because of the oil price collapse in the mid-1980s. Maine utilities faced a crisis: industrial customers began investing in their own diesel generation to escape rising central-station rates.

Utilities began “scrambling to retain customers” as they lost industrial load. This led to the Maine Public Utilities Commission (MPUC) approving flexible pricing in 1995 specifically to facilitate responses to this competition. Utilities responded by introducing Economic Retention Rates. These allowed utilities to negotiate specific, lower-than-tariff rates for large employers (like mills) whose departure would significantly harm the utility’s remaining rate base. Evolution of Maine’s Electric Utility Industry, 1975-1995

The rate structure currently is a bit different, but AJ took a bit of artistic license as it is unlikely that it would be a good idea to close down a lumber mill to sell the margin of electricity today. The idea was based on a series of catastrophic decisions made by aluminum mills in the pacific northwest in the 1980’s.

In the 1930’s the federal government formed the Bonneville power authority to take advantage of the Columbia river’s and its tributaries’ hydropower potentials. The BPA ultimately built 31 dams and provided a major boost to the region’s economy. While that all sounds good, it is also easy to imagine the revenue gap between what the BPA could produce and what a mostly agriculture based region might need.

By 1938, pressure from Congress compelled the BPA to make offers to aluminum producers to take advantage of cheap electrical power. Aluminum smelting is an energy intensive process using a high powered electrical field to melt the aluminum. The difference between an aluminum smelter and, for example, a sawmill, is that Marvin could have everybody turn off the saws and planers at the end of the day and go home whereas shutting down an aluminum pot is almost catastrophic with no guarantee that it can be restarted. It requires firm, continuous power and three shifts, 365 days a year. 

Aluminum mills were steady customers and, at first, BPA charged enough to subsidize the infrastructure build-out needed to bring electricity everywhere in the northwest, then paid enough to keep rates low for all other customers. Hydropower generation is not costly compared to oil and coal generation, so it is not subject to market fluctuations in the cost to generate. The subsidies paid by the mills were major drivers of economic development, but the BPA was not returning what seemed fair to the Federal Treasury.

The 1980 Northwest Power act formalized a system where the industry would continue to subsidize residential customers in exchange for long-term power contracts. This worked well until 2000 when the deregulated power market was manipulated for profit by a number of players, notably by Enron. This sent wholesale energy prices up by as much as 2000%.

At the same time, foreign aluminum producers using more modern smelting methods began to compete with the northwest’s mills. Companies including Alcoa and Golden Northwest Aluminum, saw that their power contracts were worth far more than aluminum ingots. They closed down their potlines and realized a windfall profit for a year or two. Aluminum in the Northwest, Smelters Grow Cold.

In Devil in the Donations, the fictional Coreland company is trying to do something that might harm Moorewicks Bay in a similar way.