BCH 2007 EPA ALCAN S.71 ENERGY SUPPLY CONTRACT EXHIBIT

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3 BC Hydro/Alcan 2007 Electricity Purchase Agreement Alcan Report in support of BC Hydro s Filing under Section 71 of the Utilities Commission Act 21 September 2007

4 TABLE OF CONTENTS 1. Overview Introduction Relief Sought Circumstances Leading to the 2007 EPA Reasons for Accepting 2007 EPA Outline of Alcan s Report Contact Information Alcan Company Profile Alcan s Operations Worldwide British Columbia... 7 (a) Kitimat Smelter... 8 (b) Kemano System... 9 (c) Scale of Alcan s Operations in British Columbia Alcan s Kemano System Nature and Quality of the Kemano System Kemano System Basic Parameters Reservoir Hydrology Alcan Water Management System and Operating Regime Analysis of the Kemano System Generating Capacity Safety of People and Facilities Protection of Fish and Fish Habitat Water Rental Rates Kemano Powerhouse Generating Efficiency Kemano System Operating Record The Modernization Project Overview of the Modernization Project Improved Operating Efficiencies and Performance (a) Power Consumption (b) Environmental Performance (c) Operational Infrastructure (d) Labour Requirements EPA Relationship to the Modernization Project Availability of Kemano Power for the 2007 EPA Power Requirements for the Current Kitimat Smelter (a) Aluminum smelting process (b) Smelter power requirements and smelter design Power Requirements during Construction of the Modernization Project Power Requirements after completion of the Modernization Project Kitimat Smelter Operation after Modernization Alcan Power Sales Development of the North Coast Grid Interconnection with BC Hydro s System Power Sales to BC Hydro and to Powerex... 44

5 LIST OF FIGURES Figure 1 - Map showing location of Alcan facilities in B.C Figure 2 - Aerial view of the Kitimat Smelter... 8 Figure 3 - Kemano System... 9 Figure 4 - Kenney Dam Figure 5 - Skins Lake Spillway Figure 6 - Tahtsa Intake Figure 7 - Kemano Powerhouse Figure 8 - Aluminum manufacturing process Figure 9 - Power available for sale during construction LIST OF APPENDICES Appendix A - Alcan s Final Water Licence Appendix B - Inflows information from 1931 to 2006, with supporting data Appendix C - Power deliveries to Kitimat Smelter and to BC Hydro Appendix D - Total planned outage hours during the period January 1994 to April 2007 Appendix E - Annual aluminium production at Kitimat Smelter from Appendix F - Capacity of transmission lines from Kemano to Prince George Appendix G - Alcan Powerpoint Presentation at Sept. 12 th 2007 Workshop

6 1. OVERVIEW 1.1 Introduction Alcan Inc. ( Alcan ) and BC Hydro have entered into a long-term energy purchase agreement ( 2007 EPA ), a copy of which is being filed by BC Hydro pursuant to section 71 of the Utilities Commission Act. As a counterparty to the 2007 EPA, Alcan is filing this report in support of BC Hydro s filing. Alcan has co-ordinated its report with BC Hydro to complement the information provided by BC Hydro so the Commission has a comprehensive record from the perspective of the purchaser and the seller for its review of the 2007 EPA. Alcan s report focuses on information about Alcan s Kemano System and Kitimat Smelter operations because Alcan is in the best position to provide this information to assist the Commission in its review of the 2007 EPA. This overview outlines the structure of Alcan's report. 1.2 Relief Sought Alcan supports BC Hydro s request that the Commission accept the 2007 EPA for filing under s. 71 of the Utilities Commission Act ( Act ). 1.3 Circumstances Leading to the 2007 EPA In 2006, Alcan and BC Hydro negotiated a long-term energy purchase agreement ( LTEPA+ ). LTEPA+ was negotiated in the context of Alcan s plans to modernize the Kitimat Smelter ( Modernization Project ). BC Hydro filed LTEPA+ with the Commission under section 71 of the Act in August 2006, and the Commission convened a review during the later part of Ultimately, the Commission disallowed LTEPA+. BC Hydro and Alcan considered the Commission's reasons for decision and concluded that a restructured and expanded energy supply contract could be negotiated that met the needs of both BC Hydro and Alcan while responding to the concerns expressed by the Commission. The 2007 EPA is the result of those negotiations.

7 2 1.4 Reasons for Accepting 2007 EPA Alcan submits that the 2007 EPA is in the public interest and should be accepted under section 71 of the Act because it satisfies the requirements of section 71 in terms of the quantity, quality, availability, reliability and cost of the Kemano System power. The reports from BC Hydro and Alcan elaborate on these points. In summary, the key points are: The quality of the Kemano System power is very high. The Kemano System is an extremely efficient and reliable generation system. The Kemano System is an existing renewable resource in British Columbia with no development or timing risk. The Alcan and BC Hydro system are already interconnected and capable of delivering the 2007 EPA services. Alcan has over 50 years of operating history with the Kemano System so the characteristics and generating capacity of the system are well understood. Alcan and BC Hydro have a long history of cooperation on the operation of the Kemano System to provide energy and support to BC Hydro s system. Given that the Kemano System is located at the end of the BC Hydro s transmission line from Prince George, it provides a critical source of local reliability and reactive support to the BC Hydro system. As a result, BC Hydro customers receive better and more reliable service than they would otherwise. The 2007 EPA will formalize and enhance services that Alcan has provided on an informal basis. The 2007 EPA is a package of high value products, including scheduling, capacity, equichange and co-ordination rights that few other resources can offer. Increasing the coordination between the systems of Alcan and BC Hydro will enhance the efficiency and benefits of both systems.

8 3 Alcan s Kemano System fits well with the objectives in the Provincial Government s Energy Plan II. Energy Policy #25 explicitly refers to the value of large hydro with storage: Wind and run of river small-hydro generators also provide a less valuable product individually than do large hydro facilities with storage, since these large hydro facilities combine flexibility benefits with the firmness attributes of thermal generation resources. Alcan has sold electricity to BC Hydro or its predecessor since Alcan's longstanding relationship as a supplier to BC Hydro has served both BC Hydro and Alcan well. Alcan's Kemano System is an efficient and reliable generation source for BC Hydro, and it is the only significant supply of electricity in the North Coast region. From Alcan s perspective, on-going power sales will continue to contribute to the economic viability of Alcan s Kitimat Smelter operations. The 2007 EPA has particular importance to the economic viability of the Modernization Project. Monetizing the power sales by way of a long-term contract will provide a predictable revenue stream to assist with the large investment necessary to convert the existing smelting capacity to modern technology. 1.5 Outline of Alcan s Report The balance of this report provides greater details on the following areas to explain Alcan s perspective as the seller under the 2007 EPA: Alcan s corporate profile; Alcan s operations worldwide and the Alcan facilities in British Columbia, including a description of the Kitimat Smelter and the Kemano System; The physical characteristics and operation of Alcan s Kemano System;

9 4 The Modernization Project and the relationship of the 2007 EPA to the Modernization Project; The availability of Kemano Power for the 2007 EPA; and The history of the Kemano System and Alcan power sales. 1.6 Contact Information Please direct all correspondence to: And to: Mathieu Bergeron Alcan Inc. # West Hastings Street P.O. Box 16 Vancouver, B.C. V6C 2W2 Phone: (604) Fax: (604) David Bursey Bull, Housser and Tupper West Georgia Street Vancouver, B.C. V6E 3R3 Phone: (604) Fax: (604)

10 5 2. ALCAN COMPANY PROFILE Alcan Inc. ( Alcan ) is the parent company of an international group involved in many aspects of the aluminum, engineered products and packaging industries. Through subsidiaries, joint ventures and related companies, Alcan operates in 61 countries around the world. The activities of Alcan include bauxite mining, alumina refining, production of specialty alumina, aluminum smelting, manufacturing and recycling, engineered products, flexible and specialty packaging, as well as related research and development. Alcan has approximately 68,000 employees and its 2006 revenues were approximately $23.6 billion. Alcan is a public company with its shares traded on the Toronto, New York, London, Paris and Swiss stock exchanges. Alcan s head office is in Montreal, Canada. 3. ALCAN S OPERATIONS 3.1 Worldwide Alcan operates through four Business Groups, each responsible for the different business units that they comprise: Bauxite and Alumina: Headquartered in Montreal, Canada, this Business Group comprises Alcan s worldwide activities related to bauxite mining and refining into smelter-grade and specialty aluminas, owning, operating or having interests in six bauxite mines and deposits in five countries, five smelter-grade alumina plants in four countries and six specialty alumina plants in three countries and providing engineering and technology services. Primary Metal: Headquartered in Montreal, Canada this Business Group comprises smelting operations, power generation, production of primary valueadded ingot, manufacturing of smelter anodes, cathodes, and aluminum fluoride, smelter technology and equipment sales, engineering services and trading operations for aluminum, operating or having interests in 22 smelters in 11

11 6 countries, power facilities in four countries and 11 technology and equipment sales centres and engineering operations in nine countries. Engineered Products: Headquartered in Paris, France this Business Group produces engineered and fabricated aluminum products including rolled, extruded and cast aluminum products, engineered shaped products and structures, including cable, wire, rod, as well as composite materials such as aluminum-plastic, fibre reinforced plastic and foam-plastic in 52 plants located in 11 countries. Also part of this Business Group are 33 service centres in 11 countries and 33 sales offices in 29 countries. Packaging: Headquartered in Paris, France, this Business Group consists of Alcan s worldwide food, pharmaceutical and medical, beauty and personal care, and tobacco packaging businesses operating 150 plants in 30 countries. This Business Group produces packaging from a number of different materials, including plastics, aluminum, paper, paperboard, glass and steel. Favourable aluminium prices in recent years have contributed to growth in Alcan s operations. The Kitimat Smelter Modernization Project is one of several major smelter projects that Alcan is pursuing worldwide: Kitimat, B.C., Canada: 400,000 tonne smelter modernization project. Saguenay, Quebec, Canada: power plant upgrade and 450,000 tonne smelter modernization project. Isal, Iceland: 460,000 tonne smelter modernization project. Coega, South Africa: 720,000 tonne aluminum smelter project. Sohar, Oman: 350,000 tonne aluminum smelter joint venture project.

12 7 Ma'aden, Saudi Arabia: integrated power plant, bauxite mine, alumina refinery, and 720,000 tonne aluminum smelter project. 3.2 British Columbia Alcan owns and operates an aluminum smelter, power generation system and related infrastructure facilities in Kitimat British Columbia. Alcan s facilities are distributed throughout a large area of northwest British Columbia, extending from Kitimat to Kemano on the coast and then to the Kenney Dam on the Nechako River southwest of Vanderhoof. A brief description of Alcan s major facilities in British Columbia follows. Most of these facilities were constructed in the 1950 s. Figure 1 - Map showing location of Alcan facilities in B.C.

13 8 (a) Kitimat Smelter Figure 2 - Aerial view of the Kitimat Smelter The Kitimat Smelter is located on a deep water port on Douglas Channel at Kitimat. Alcan owns and operates wharf facilities at this port, from which raw material and finished products are transported to and from the Kitimat Smelter. The smelting facilities include seven potlines, housed in fifteen buildings at the smelter site. The Kitimat Smelter site also includes: an anode plant, casting facilities, transportation facilities, waste handling facilities, equipment and vehicle depots, workshops, office buildings, employee facilities, and other related support facilities. The annual rated production capacity of the smelter is approximately 275,000 tonnes of aluminum. Currently, the Kitimat Smelter is operating at approximately 240,000 tonnes per year close to 90% of its annual rated production capacity.

14 9 Alcan supplies power to its Kitimat Smelter from an extensive hydro-electric generation system that Alcan owns and operates at Kemano. ( Kemano System ). Kitimat is about 75 km northwest from Kemano. (b) Kemano System Figure 3 - Kemano System The Kemano System refers to Alcan s power generation and transmission system. It has the following basic components: (i) Nechako Reservoir The Nechako Reservoir ( Reservoir ) is located on the interior plateau east of the Coastal Mountains and southeast of Kitimat. The Reservoir was created from a

15 10 chain of lakes and rivers in the Eutsuk/Tahtsa drainage basin whose natural flow was impounded by the Kenney Dam. The Reservoir is 233 km (148 mi) long, stretching to approximately 87 km (54 mi.) southwest of the town of Vanderhoof. The water surface of the Reservoir when full is 910 km 2 (351 mi 2 ). The Reservoir catchment area (the portion of the watershed that directs water into the Reservoir) is 13,955 km 2 (5,388 mi 2 ). The Reservoir has two water outlets: the Skins Lake Spillway near the north-centre area; and the Tahtsa Intake at the western end. (ii) Kenney Dam Figure 4 - Kenney Dam The Kenney Dam is a rock-filled and clay-core dam at the eastern end of the Nechako Reservoir. It was constructed in the early 1950 s. It is approximately 474 m (1500 ft) in length and 93 m (305 ft) in height, located at the entrance of

16 11 the Grand Canyon of the Nechako River. The Kenney Dam, together with nine saddle dams, created the Nechako Reservoir. (iii) Skins Lake Spillway Figure 5 - Skins Lake Spillway The Skins Lake Spillway is a gated concrete water release structure located about 80 km (50 mi) west of the Kenney Dam on Ootsa Lake. The spillway has two radial gates. The radial gates are each meters square, and each gate is operated by its own twin wire-rope hoist powered by an electric motor. A concrete chute 25 meters wide and 25 meters long with side walls conveys water from the gate structure to the plunge pool. Water is released from the Nechako Reservoir through the Skins Lake Spillway to Skins Lake. Downstream of Skins Lake is the Cheslatta River system which in

17 12 turn flows into the Nechako River at Cheslatta Falls. The Skins Lake Spillway is used to release Nechako Fisheries Conservation Program (NFCP) regulated flows as well as flood routing flows into the Nechako River. (iv) Tahtsa Intake Figure 6 - Tahtsa Intake The Tahtsa Intake is a gated concrete structure located at the western end of the Reservoir at the west end of Tahtsa Lake. The intake structure houses trash racks, guides for bulkheads and a 4.26 m x 7.9 m fixed wheel gate which may be used to completely shut off the flow of water to the Kemano Powerhouse. This structure is the inlet to the Power Tunnel, which leads to the Kemano Powerhouse. The flow of water from the Reservoir is controlled at the Kemano Powerhouse.

18 13 (v) Power Tunnel The Power Tunnel is an arched tunnel, 7.6 m (25 ft) wide and approximately 16 km (10 mi) long, from Tahtsa Lake through Mt. DuBose to the Kemano Powerhouse. Two sloping, steel-lined penstocks (inlet pipes into the powerhouse) lead from the western end of the tunnel to the Kemano powerhouse. The slope of the tunnel is relatively low dropping only 40.8 meters until it reaches the entrance to the penstocks inside Mt. Dubose above the powerhouse. At the point where the power tunnel joins the penstocks, a surge shaft rises at a 46 o angle to the surface. The shaft opens to the surface at an elevation of meters. The surge shaft provides the plant with a hydraulic cushion to absorb rapid load changes. Since the generator nozzle needles can open or close faster than the water in the tunnel can accelerate or decelerate, the surge shaft absorbs the initial hydraulic change until the water in the tunnel can compensate. The power tunnel branches into two 3.35 meter diameter penstocks. The penstocks descend at an angle of 48 o to the powerhouse. They are lined with steel 51 mm thick. Each penstock branch contains an oil-pressure activated and remotely controlled butterfly valve located about 91 meters below the Y branching. Near the powerhouse, each penstock branches into four sections, each of which supplies water to a single generator. A spherical valve in the penstock of each unit is used to control the water supply to a single generator.

19 14 (vi) Kemano Powerhouse Figure 7 - Kemano Powerhouse The Kemano Powerhouse is located inside Mt. Dubose at Kemano. The generating equipment is housed in a chamber excavated from solid rock and located approximately 426 m in from the face of the mountain. The chamber's approximate dimensions are 230 m long, 25 m wide and 41 m high. The elevation difference from the Reservoir surface to the Kemano Powerhouse is approximately 792 m (2,600 ft). The outflow from the Kemano Powerhouse (the tailrace ) discharges into the Kemano River which flows into Kemano Bay on the Gardner Canal. The Kemano Powerhouse does not have a bypass for

20 15 water releases. All water released from the Reservoir through the Tahtsa Intake passes through the Kemano Powerhouse and generates electricity. The Kemano Powerhouse contains eight 125 MW turbine generator units with a total installed capacity of 1,000 MW. The eight generating units at Kemano Powerhouse were installed as follows: a. Units 1, 2 and 3 were commissioned in July 1954, bringing the installed capacity to approximately 336 MW (450,400 hp); b. Unit 4 was commissioned in February 1956, bringing the installed capacity to approximately 448 MW (600,536 hp); c. Unit 6 was commissioned in October 1956, bringing the installed capacity to approximately 560 MW (750,670 hp); d. Unit 5 was commissioned in July 1957, bringing the installed capacity to approximately 672 MW (900,804 hp); e. Unit 7 was commissioned in March 1958, bringing the installed capacity to approximately 784 MW (1,051,938 hp); f. Unit 8 was commissioned in 1967, bringing the installed name-plate capacity to approximately 896 MW (1,201,072 hp); and g. During the 1980 s and 1990 s, Alcan modified the eight generating units to enhance their generating efficiency (see the description that follows for more detail) which increased the combined installed capacity to approximately 1000 MW (1,340,483 hp). The generators were manufactured by three different companies: General Electric, Westinghouse and English Electric. During the 1980's and 1990's, Alcan replaced the original mica/asphalt type stator windings with upgraded

21 16 thermosetting mica/resin windings with a rating of 132 MVA each, which increased the generating capacity of each unit to 125 MW. The generator turbines are a 4-nozzle vertical impulse type manufactured by Allis Chalmers, Pelton and Dominion Engineering. Alcan has replaced the original turbine runners and needle housings with single, higher efficiency designed units from VATech in all units except for generator unit number 6. In generator unit number 6, Alcan has replaced the turbine runner with the new runner, but has not yet upgraded the needle housing. Alcan expects to replace that needle housing within the next year. The power from the generators is stepped up from 13.8 kv to 300 kv by the generator transformers. A total of 12 transformers are arranged in four banks of 3 single-phase transformers each. Each transformer bank normally takes the output of 2 generators but the powerhouse bus system allows switching to permit 3 generators to be connected to a single transformer bank for maintenance purposes. One spare single-phase transformer is located in its own vault in the powerhouse. The generator step-up transformers are high efficiency ABB transformers with a capacity of 132 MVA to match the full capacity throughput of three generators. The 300 kv transformer output is conducted to the external switchyard via crosslinked polyethylene (XLPE) insulated cables manufactured by ABB. The cables run through a 610 m underground cable tunnel to the switchyard, which is located outside the mountain. The generating station is controlled from the Kitimat Control Centre using an ABB Distributed Control System (DCS). The station can also be controlled locally from the Kemano Control Centre. Maintenance and Operation crews rotate into the station from Kitimat on a weekly schedule.

22 17 (vii) Kemano Switchyard The Kemano Switchyard is laid out in two sections. The first section is on the south side of the tailrace and consists of two parallel high-voltage (HV) bus bars. The output from each transformer bank is controlled with an SF6 circuit breaker. A pair of disconnects permits the HV breaker associated with each transformer bank to be connected to either HV bus. The two HV busses can be connected together with a pair of HV disconnects and a Tie circuit breaker. A pair of HV disconnects associated with the two transmission lines permits their connection to either of the two HV busses. A set of high-voltage disconnect switches and overhead cables link the parallel busses to the second switchyard, located on the north side of the tailrace. The second yard is the transmission line terminal at the Kemano end. It consists of line-breakers on each of the two transmission lines along with associated disconnects allowing the transmission lines to be de-energized or tied together, as required. All the HV circuit breakers are of the SF6 type and are manufactured by Alstom. All disconnects are manufactured by Southern States. The terminal yard also houses the wave traps for a high-speed digital Power Line Carrier (PLC) that communicates control, relay and alarm data for the DCS control system using a signal superimposed on the transmission line conductors (viii) Kemano-to-Kitimat Transmission System The Kemano-to-Kitimat Transmission System consists of 82 km (51 mi) of double 300-kV circuits, from Kemano to the Kitimat Smelter. For the first 16 km of the transmission system from the Kemano Powerhouse, both transmission lines are carried on double circuit towers, gradually climbing about 300 m in altitude. From this point, the two lines are carried on individual

23 18 single circuit towers which traverse a mountain pass (Power Line Pass) with a maximum altitude of approximately 1,625 m for a distance of km. One of the single circuits is carried on steel towers while the other is on a braced H frame type tower constructed with thin walled aluminum tubes and a box girder cross-arm. This section of the transmission line was originally built to transmit the planned ultimate capacity of the Kemano powerhouse of 1,600 MW. The lines then descend to the Kildala valley where they resume on double circuit steel towers down the valley, around Kildala Arm and over Green Mountain to the terminal station at Kitimat. (ix) Kitimat Switchyard The Kitimat Switchyard is located adjacent to the Kitimat Smelter site. The Kitimat Busbar referred to in power sales contracts is located at the Kitimat Switchyard. The Kitimat Busbar is the point of interconnection between the transmission systems of Alcan and British Columbia Hydro and Power Authority ( BC Hydro ). (c) Scale of Alcan s Operations in British Columbia Currently, Alcan has approximately 1,500 active full-time employees in its British Columbia operations. Alcan also hires additional workers on a part-time or contract basis, from time to time, as needed. Alcan's direct contribution to the BC economy in 2006 totalled approximately $275 million, including money spent by Alcan on: goods and services purchased from BC Suppliers; employee payroll and benefits; pension payments; and property taxes.

24 19 4. ALCAN S KEMANO SYSTEM 4.1 Nature and Quality of the Kemano System The Kemano System is a large hydro-electric system with unique features that distinguish it as an efficient and reliable source of generation, capacity, and storage for BC Hydro: The large elevation difference from the Reservoir surface to the Kemano Powerhouse, approximately 792 m (2,600 ft), makes the Kemano System an efficient generator of electricity from the water used. The Kemano System has been designed, built and maintained to high standards because Alcan requires a high degree of reliability to serve the Kitimat Smelter s requirements. 1 The Kemano System has a large measure of redundancy designed into the system to assure a reliable base of generation for the smelter. Alcan has over 50 years of operating history with the Kemano System so the characteristics and generating capacity of the system are well understood. Alcan and BC Hydro have a long history of cooperation on the operation of the Kemano System to provide energy and support to BC Hydro s system. As a result, BC Hydro customers receive better and more reliable service than they would otherwise. The Alcan and BC Hydro system are already interconnected and capable of delivering the 2007 EPA services. 1 In addition, Alcan s management practices for its operations in British Columbia comply with internationally-recognized management standards, including: ISO 9001:2000 for its Quality Management System; ISO 14001:2004 for its Environmental Management System; and OHSAS 18001:1999 for its Occupational Health and Safety Management System.

25 Kemano System Basic Parameters The basic parameters of Alcan s Reservoir, Kemano Powerhouse, and Kemano-to- Kitimat transmission system ( Kemano System ) are set out in the following table. KEMANO SYSTEM BASIC PARAMETERS Kemano Powerhouse generation capacity (following recent upgrades) Kemano Powerhouse nameplate generation capacity (original equipment capacity) Maximum dependable generation capacity Expected long-term average generation Expected long-term generation (92% reliability 2 ) Expected long-term generation (100% reliability) Reservoir licensed live storage Reservoir useable live storage (due to Tahtsa Narrows restriction) Reservoir Water License maximum rate for the diversion and use of water for power generation Transmission line losses from Kemano to Kitimat Smelter Annual historical long term average inflows ( ) Annual Skins Lake releases required for fisheries Nechako Fisheries Conservation Program: 36.8 m 3 /s Cooling Water Average Requirements: 15.7 m 3 /s Kemano discharge required to generate 860 MW Kemano discharge required to generate 730 MW 1000 MW 896 MW 860 MW 793 MW 730 MW 700 MW 7,100 cubic hectometres 3,400 cubic hectometres 170 m 3 /s up to 20 MW m3/s 52.5 m3/s m3/s m3/s 2 Reliability data is expressed in terms of the Kemano System as a stand-alone project, rather than in coordination with BC Hydro s system.

26 21 Further explanation of the parameters follows: (a) Kemano Powerhouse current generation capacity The combined generation capacity of the eight generating units in the Kemano Powerhouse is 1000 MW. This capacity was achieved by the efficiency upgrades to the generating units in the 1980 s and 1990 s. (b) Kemano Powerhouse nameplate generation capacity The combined original design (referred to as "nameplate") capacity of the eight generating units in the Kemano Powerhouse is 896 MW. (c) Maximum dependable generation capacity The Power Tunnel has a hydraulic restriction that limits the amount of water that can safely be passed through to the Kemano Powerhouse. Because of this restriction, the peak generation capacity of the Kemano Powerhouse is approximately 880 MW to 900 MW, which can only be sustained for short periods of time. The maximum that the Kemano Powerhouse can dependably generate on a sustained basis is 860 MW, so long as sufficient water is available. (d) Expected long-term average generation Based on the historic inflows and expected performance of the Kemano System, Alcan estimates the long-term generation from the Kemano System to be approximately 793 MW on average. The generation simulation model is described further in sections 4.4 and 4.5.

27 22 (e) Expected long-term generation (92% reliability) Based on the historic inflows and expected performance of the Kemano System, Alcan estimates that the Kemano System can reliably produce 730 MW of power on a long-term basis 92% of the time. Given that the transmission losses would decrease to approximately 15 MW at low generation, Alcan estimates that the Kemano System can deliver the electricity requirements of the Kitimat Smelter and the Tier 1 Electricity Quantities under the 2007 EPA with a reliability of at least 95%, or even higher considering the synergy with the BC Hydro system provided by the equichange and coordination services. (f) Expected long-term generation (100% reliability) Based on the historic inflows and expected performance of the Kemano System, Alcan estimates that the Kemano System can reliably produce 700 MW on a long-term basis 100% of the time. This is the estimated level of reliable generation upon which the Modernization Project is designed, which is more stringent than required to support the 2007 EPA Tier 1 Electricity Quantities. (g) Reservoir licensed live storage Alcan s Final Water Licence No states that [t]he maximum quantity of water which may be stored is 23,850 cubic-hectometres, of which 7,100 cubic-hectometres is live storage. Attached as Appendix A is a copy of Alcan s Final Water Licence. Live storage is that portion of total maximum licensed storage that Alcan may actually use for power production. The maximum operating level is largely determined by the characteristics of various facilities in the Reservoir

28 23 such as the height of the Skins Lake Spillway and the nine saddle dams. The Reservoir s licensed maximum operating level is El m above sea level (2,800 ft) and the minimum operating level is approximately El m above sea level (2,770 ft), providing a licensed operating drawdown range of 9.14 m (30.0 ft). (h) Reservoir useable live storage (due to Tahtsa Narrows restriction) Alcan can only access 3,400 cubic-hectometres, approximately 48% of the licensed 7,100 cubic-hectometres of live storage, for power generation because of the hydraulic restriction created by Tahtsa Narrows, located at the entrance to Tahtsa Lake at the western end of the Reservoir. Tahsta Narrows is a natural restriction in the Reservoir bathymetry. Once the Reservoir level drops below approximately El m (2,787 ft) above sea level, Tahtsa Narrows restricts the water that can pass from the eastern portion of the Reservoir to Tahtsa Lake to the west and then to the Tahtsa Intake. Tahtsa Narrows limits the usable drawdown in the Reservoir to the top 3.96 m (13.0 ft). Alcan normally operates the Reservoir with a range of 3.04 m (10 ft). (i) Reservoir Water License maximum rate for the diversion and use of water for power generation Alcan s Final Water Licence No authorizes the diversion and use for power generation of up to 170 m 3 /s. (j) Transmission line losses from Kemano to Kitimat Smelter The transmission line loss from Kemano to the Kitimat Smelter is up to 20 MW, depending on the transmission load.

29 Reservoir Hydrology The water year is measured from November 1 st to October 31 st. Inflow to the Reservoir comes mainly from melting of the winter snowpack, referred to as the spring freshet. Rainfall also contributes a significant amount of inflow to the Reservoir, mostly during the fall, although the fall contribution is usually less than the spring freshet. Typically, the largest monthly inflows occur in June and July and the smallest inflows occur in January and February. Typically, the Reservoir level reaches its lowest level for the year by the end of April and its highest level for the year by the end of July or August. 4.4 Alcan Water Management System and Operating Regime Alcan s water management system for the operation of the Reservoir is based on three steps: data acquisition, data processing, and decision-making for water releases for generation or other purposes. Alcan collects hydrological and meteorological observations at least every three hours, including observations on: temperature, precipitation, snow water equivalent, reservoir water level and water releases. Alcan augments those observations with manual snow surveys undertaken periodically throughout the winter. Alcan also collects weather forecasts for the watershed from Environment Canada twice a day. This information, combined with past meteorological data, is processed through a hydrological model to estimate the probable future inflows based on current watershed conditions. These inflow sequences are then transferred to a simulation model that takes into account all of the relevant characteristics and constraints of the Reservoir in

30 25 its calculations. The simulation model is used to estimate the outcome of a range of hypothetical generation and spillway release scenarios. Alcan then undertakes a sensitivity analysis to assess the implications of the power generation and spillway release scenarios to determine the optimum operating scenario. Alcan s plans and manages the operation of the Reservoir based on the results of this analysis. The goal is to make best use of the available water. Alcan incorporates the most current information into the analysis on an ongoing basis to update the results as necessary, and then adjusts the Kemano System operation accordingly. Alcan coordinates the generation of power taking into account the terms of its water licence, directives from the British Columbia Comptroller of Water Rights ( Water Comptroller ), Kitimat Smelter requirements, and Alcan s other commitments. Under normal conditions, the generation will be set at approximately 790 MW. The actual generation from day-to-day will be adjusted as the operating model results are updated for reservoir conditions and inflows. If the risk of spilling becomes significant, the generation will be increased. If the reservoir elevation drop and inflows are low, the generation will be reduced until the reservoir conditions improve. 4.5 Analysis of the Kemano System Generating Capacity Alcan assesses the generating capacity of the Kemano System using its Reservoir Operating Model (ROM). The ROM is a simulation model that calculates the generation that would be available if the future reservoir inflows were equivalent to the inflow sequences observed in the past. The ROM differs from the operational model because it is used to study the capacity of the Kemano System rather than to operate it. Alcan uses the historical daily inflows to the Reservoir from 1955 to 2006 as the data set to study the capacity of the Kemano System.

31 26 Alcan believes the 50-year period it uses in the model is sufficiently representative to project the future probabilities for generation. Attached as Appendix B is a graph showing the inflows information from 1931 to 2006, with the supporting data. The inflow data for the period 1931 to 1950 is synthesized based on measurements taken in other watersheds near the Nechako watershed. The information was developed for Alcan by the B.C. International Engineering Company in 1951 for Alcan's planning of the original Kemano project. Conditions related to the Reservoir and Kemano Powerhouse operation have changed over time as certain legal requirements have been established, interconnection capacity has increased, and equipment improvements have increased generation efficiency. Alcan undertook an extensive upgrades to its generator units and other parts of the Kemano System starting in the 1980 s. 3 During the upgrade program, Alcan removed generating units from service at opportune times to accomplish the upgrade work. For example, during the period of 1994 to 1997, Potline 7 was shut down which created an opportunity to schedule Kemano System upgrade work. These sort of events affect the generation statistics during the historical time period and must be considered in estimated the future generating capability of the Kemano System. Attached as Appendix C is a graph showing the power deliveries to Kitimat Smelter and to BC Hydro which indicates some of the notable events that have altered the power requirements at the Kitimat Smelter and affected its power requirements. Rather than using historical generation data, therefore, Alcan simulates future generation based on the current Reservoir and Kemano Powerhouse operating conditions, including the current physical characteristics and capabilities, operating constraints, and anticipated smelter loads. 3 See the description in section 3.2 (b) (vi).

32 Safety of People and Facilities Alcan must operate the Reservoir in a manner that ensures public safety and is within the safe operational margins of its facilities. Historically, the largest Nechako Reservoir inflow volume has resulted mostly from snowmelt in the spring and early summer. Winter inflows are less than required for generation and have to be supplemented with stored water, resulting in the reservoir being drawn down. Additional releases are scheduled when the volume of inflow forecast is greater than the combined volume of storage available in the Reservoir and the amount scheduled to be released for fisheries and generation purposes. If Alcan anticipates excess inflows, it will increase the available storage by releasing water in advance of the freshet to create space in the Reservoir. This reduces the amount of water that would otherwise be released in late May and June, during peak flows in the Fraser River. Alcan meets with the Water Comptroller at least twice a year to review the operational status of the Reservoir. The Water Comptroller has jurisdiction over dam safety and water management generally and may issue directives to Alcan regarding the management of the Reservoir. The Reservoir is also the principal means of flood control for the Nechako River and the Fraser River. 4.7 Protection of Fish and Fish Habitat Pursuant to the 1987 Settlement Agreement among the Province of British Columbia, Canada and Alcan and the 1997 Settlement Agreement between the Province of British Columbia and Alcan, Alcan committed to maintain certain water releases from the Reservoir to the Nechako River for fisheries purposes. The water releases are made under the direction of the Nechako Fisheries Conservation Program ( NFCP ), which was established under the 1987 Settlement Agreement and comprises representatives from Alcan, Canada, and the Province. The quantity of water released for fisheries purposes is equivalent to a mean annual flow of 36.8 m³/s (1,300 cfs) measured at Skins Lake Spillway, plus additional flows in

33 28 July and August for cooling purposes. This water allocation is managed by the NFCP Technical Committee, with Alcan making releases as directed by the Committee. The releases range, on a mean monthly basis, from about 31 m³/s (1,100 cfs) in the winter to about 49 m³/s (1,730 cfs) in the summer, excluding cooling water releases. From mid-july until mid-august, additional cooling water is released from the spillway to manage water temperatures downstream for migrating sockeye salmon. Releases are made depending upon meteorological conditions so that the total flow into the Nechako River below Cheslatta Falls ranges between about 170 m³/s (6,000 cfs) and 283 m³/s (10,000 cfs). The maximum release of 283 m³/s (10,000 cfs) into the Nechako River has been set by the Provincial Water Management Branch, in consultation with Alcan and DFO, to minimize flooding downstream on the Nechako River. Excess water from flood inflows are released as necessary. Such releases are scheduled in consultation with the Water Comptroller and the NFCP Technical Committee. Pursuant to a protocol worked out with the Haisla First Nation, Alcan also regulates the release of water from the Kemano Powerhouse into the Kemano River during the spring to provide a stable water flow for eulachon spawning and to protect against dewatering of incubating eulachon eggs. Alcan calculates the appropriate water flows annually and reviews the annual release regime with the Water Comptroller. 4.8 Water Rental Rates Pursuant to the terms of the 1950 Agreement, the water rental rate that Alcan pays varies according to the use made of the power generated from the water. For the energy Alcan uses in processes that contribute to the production of aluminum or sells as secondary power (i.e. energy for the production of steam or otherwise in direct competition with fuel), Alcan pays a water rental rate that is tied to the price of aluminum. For all other energy generated, Alcan pays the water rental rate that other

34 29 similarly-situated hydroelectric generators would pay, including BC Hydro. The water rate Alcan that pays for power sold to third parties is the standard General Power Generation rate that is applicable to hydropower production. 4.9 Kemano Powerhouse Generating Efficiency The 792 m (2,600 ft.) elevation drop from the Reservoir to the Kemano Powerhouse creates an exceptionally high hydraulic head. The water diverted from the Reservoir enters each turbine at the Kemano Powerhouse at approximately 1,100 psi. As a result, the Kemano System generates a high ratio of electricity from the water it uses approximately 6.3 to 6.5 MW per cubic meter per second of water on average, depending on reservoir elevation and other conditions. The maximum flow through the power tunnel is dependent on the reservoir elevation at the tunnel intake. Higher flows are possible at higher reservoir elevations. The maximum flow through the power tunnel is approximately 142 m 3 /sec. At higher flows, air may be entrained in the water column by drawing it down the surge shaft. With the hydraulic limit of the tunnel, the generating station cannot run at its theoretical maximum output of approximately 1,000 MW and is instead limited to a peak capacity in the range of 880 to 900 MW and maximum dependable capacity of approximately 860 MW. (see the description in section 4.2 (c) for more details.) 4.10 Kemano System Operating Record The operating data since 1994 provides the best representation of the future performance of Kemano because Alcan invested a considerable amount on a complete rewind of all eight generators in the 1980 s and early 1990 s and has since invested approximately C$45 million on further enhancements to Kemano generation. Generator availability, including maintenance outages averages 94% to 95% annually. Maintenance outages decreased after 1997 because Alcan had completed significant

35 30 upgrade work by that time. Alcan expects the maintenance outages to remain at the post-1997 level in the future. Attached in Appendix D is a table that lists the total planned outage hours, maintenance outage hours, forced outage hours, the number of forced outages, and generation shed hours for each month during the period January 1994 to April Planned outages are preventative maintenance and inspections. Maintenance outages are corrective actions that must be taken on relatively short notice and are unplanned. Generation shed are a generator trips requested by BCTC. The total possible number of machine hours each year is 70,080 (8 generators multiplied by 8,760 hours). In most years between 1994 to 2005, forced outages represent less than 1% of total possible machine hours. The noticeable anomaly is 1996 and Between April 1996 and February 1997, one of the eight generating units failed and required significant work. 5. THE MODERNIZATION PROJECT 5.1 Overview of the Modernization Project On 14 August 2006, Alcan announced Alcan's plan to modernize and expand its Kitimat Smelter ( Modernization Project ). The implementation of the modernization project was subject to several conditions, including: the receipt of any required environmental permits, a successful conclusion of the power sale agreement with BC Hydro, and an agreement with the Canadian AutoWorkers (CAW), Local 2301 to extend the term of the collective labour agreement to 2012.

36 31 Once these conditions are met, the application for final approval will be submitted to Alcan s Board of Directors. In May 2007, Alcan reached an agreement with the CAW and is currently working to satisfy the other two conditions. The Kitimat Smelter currently uses Vertical Stud Söderberg ( Söderberg ) technology which is less efficient and more labour-intensive than the modern generation of technology that is typically used in new or updated smelters. Söderberg technology is the original technology installed at the Kitimat Smelter when the potlines were constructed in the 1950 s and 1960 s. Söderberg technology has been surpassed by other technologies, notably AP technology which has been the preferred choice for new smelter installations in recent years because of its superior smelting efficiency, operating efficiency, and environmental performance. Alcan is proposing to modernize the Kitimat Smelter by replacing the existing Söderberg technology with proprietary state-of-the-art AP3X pre-bake anode technology. The AP technology is known to be the most advanced, efficient and environmentally sound technology available. AP technology was developed by Pechiney SA. Alcan acquired Pechiney SA in December 2003 and now owns the AP technology. AP technology has progressed through several generations of smelting pot designs, each generation using a higher level of amperage than the last to improve the smelting efficiency. The generation of AP technology is identified by a number that denotes the amperage used for example, AP18 denotes 180,000 amps, AP30 denotes 300,000 amps, and AP 35 denotes 350,000 amps. Alcan plans to modernize the Kitimat Smelter by replacing the existing Söderberg technology potlines with AP3X series technology. AP 3X denotes that the amperage may be greater than 350,000 amps. Related facilities at the Kitimat Smelter would also be upgraded or constructed to support the smelting technology modifications.

37 32 AP technology pots differ substantially from the Söderberg technology pots currently employed at the Kitimat Smelter. AP technology pots are much larger and operate at higher amperages. They also use an anode that is pre-baked. Converting to AP technology will extend beyond the design of the pots. It will extend to the building configuration, the cranes that service the pots, the design of the anode baking and anode assembly areas, and specialized vehicles that operate in the potrooms. The technology is an integrated package covering all aspects of the smelter. Alcan estimates its overall investment in the Modernization Project would be approximately US $1.8 billion. After completion of the Modernization Project, the Kitimat Smelter would be a large smelter by world standards, and among the largest of the smelters that Alcan owns. Alcan expects the Modernization Project would extend the life of the Kitimat Smelter by more than 35 years. 5.2 Improved Operating Efficiencies and Performance Installing modern smelter technology at the Kitimat Smelter would improve operating efficiency and increase its environmental and economic performance. AP technology is more efficient than Söderberg technology in several important respects: (a) Power Consumption AP technology uses approximately 30% less power to produce an equal amount of aluminum than Söderberg technology. (b) Environmental Performance AP technology consumes fewer resources and creates less environmental impact than Söderberg technology in the smelting process. In a prebake pot, alumina additions and anode effect treatments will take place within the totally enclosed pot. Removable doors will provide access for anode replacement. Emissions generated by the process will be contained within the enclosed pot and drawn off by an emission collection

38 33 system. Emissions treatment will be carried out in dry scrubbers. Certain components of the emissions captured by the scrubbing process will be returned to the production process for re-use. The total waste discharge from the modernized Kitimat Smelter would decrease by approximately 44%, even though aluminum production capacity would increase by approximately 40%. Importantly, polycyclic aromatic hydrocarbon (PAH) releases to the environment would decrease by approximately 97%, greenhouse gases would decrease by approximately 55% and fluorides would decrease by approximately 75%. Further, the work environment at the modernized Kitimat Smelter would be cleaner, quieter and safer. (c) Operational Infrastructure Since the AP pots are larger and more efficient, they will produce metal at approximately three times the rate of a Söderberg pot. The modernized potline would include up to 372 pots housed in six buildings with a total rated capacity of about 400,000 tonnes per year. By comparison, the existing Kitimat Smelter has a total of 900 smaller pots in 15 buildings with a total rated capacity of about 275,000 tonnes per year. The modernized pots cost less to operate and maintain. They also require less support equipment. For example, potroom cranes would be reduced from 29 to 10 and potroom vehicles that support the Söderberg process would be replaced by equipment that is integrated into the pot structure. Overall, the entire infrastructure (pots, buildings, support equipment, lighting, heating) would be reduced. (d) Labour Requirements With fewer pots, less infrastructure, and greater automation, less labour would be required. Alcan expects the Modernization Project would have the following implications:

39 34 The Modernization Project would secure approximately 1,000 stable, technicallyenriched jobs in Alcan s British Columbia operations in the long-term that might otherwise have been lost at the end of the current Söderberg-based Kitimat Smelter life cycle. During construction, Alcan expects the additional jobs associated with the Modernization Project work would exceed 1,000 over the full construction period. Because of the high level of automation associated with AP technology, the work force would require a correspondingly high level training and expertise. Alcan plans to retrain its work force to acquire the necessary skills. Alcan plans to achieve the transition from current work force level to the post-modernization Project level through normal attrition, including retirements and annual staff turnover EPA RELATIONSHIP TO THE MODERNIZATION PROJECT The Kemano System produces more power than the Kitimat Smelter requires. Alcan has sold power to others, mostly BC Hydro and Powerex, for many years. The revenue from these power sales contributes to the economic performance of Alcan s Kitimat operations. The 2007 EPA will therefore be important for Alcan even if the Modernization Project does not proceed. Securing a satisfactory long-term power sales agreement has particular significance in the context of the Modernization Project because of the large investment required to replace the existing Söderberg technology with the AP technology. When evaluating the Modernization Project as an investment opportunity relative to other opportunities, it is important for Alcan to have confidence in the revenue stream associated with the power sales. Without the certainty of the 2007 EPA revenue stream, other Alcan projects rank higher as investment opportunities. For these reasons, the 2007 EPA is a necessary condition to support a decision to proceed with the Modernization Project.

40 35 The Modernization Project is not, however, a necessary condition for the 2007 EPA to proceed. The 2007 EPA is an independent and mutually-beneficial power sales arrangement between Alcan and BC Hydro. If Alcan does not undertake the Modernization Project, the 2007 EPA would remain in place until the end of its term in AVAILABILITY OF KEMANO POWER FOR THE 2007 EPA 7.1 Power Requirements for the Current Kitimat Smelter (a) Aluminum smelting process Aluminum is an abundant metallic element. In its natural state, aluminum is always found in combination with other elements, never in its free state. It is commonly found in the form of oxides. The process of making metallic aluminum is carried out in two successive stages: a chemical process to extract anhydrous aluminum oxide from the bauxite, and an electrolytic process to reduce the alumina to aluminum. Aluminum is produced by the electrolytic reduction of alumina through a process known as the Hall-Heroult process. In this process, an electric current breaks down the alumina, causing the aluminum and oxygen atoms to separate. This reaction takes place in large cells or pots, through which an electrical current is passed. The current Kitimat Smelter design has more than 900 pots configured into 7 potlines that are housed inside buildings called "potrooms." The bottom and sides of each pot act as the cathode or negative electrode and contain the molten electrolyte composed mostly of cryolite and aluminum fluoride. The alumina ore is dissolved into this molten electrolyte in the pots. Carbon blocks suspended just above the cathode, serve as the anode or positive electrode. When the electrical current passes through the mixture, flowing from the anode to the cathode, the molten aluminum molecules settle to the bottom of the pot while the oxygen combines with

41 36 the carbon of the anode. The carbon anode is continuously depleted by the reaction and must be replaced. Figure 8 - Aluminum manufacturing process Two different technologies are associated with the Hall-Heroult process: Söderberg technology (currently used in the Kitimat Smelter) creates and bakes the anodes in place in each pot. The tops of the pots are uncovered and the sides, although normally closed, must be opened regularly for variety of process operations. Prebake technology creates and bakes the anodes in a separate facility. The pots are totally enclosed and most process operations occur without opening the pot enclosure. The molten aluminum deposited at the bottom of the pot is removed regularly using a vacuum siphon. It is then transferred in its molten state from the potrooms to one of Kitimat Works' two casting centres. Here the metal is stored temporarily in gas-fired holding furnaces. Alloying materials such as magnesium, copper, silicon, iron and manganese are added to the aluminum to give it certain properties of strength, hardness, corrosion resistance or weldability.

42 37 Once the aluminum is ready to be cast, it is poured into moulds in a machine known as a direct chill casting machine. This machine uses water to cool the molten aluminum once it has passed through the mould. The mould gives the aluminum its final shape. (b) Smelter power requirements and smelter design Smelters operate continuously 24 hours per day, 365 days per year. The power supply must be available at all times. Smelters are therefore sized within the limits of the reliably firm power supply. Smelters require reliable power supply to avoid costly potline shutdowns caused by power interruptions. Once power is lost, metal production ceases. After two hours, restarting the process will result in increased manual intervention, increased health exposure for workers, and increased environmental emissions loading. If the process can be restarted, it will take many hours to stabilize the process and begin metal production. If the power interruption is greater than four hours, the molten electrolyte in the pots will begin to solidify. Once the electrolyte starts to solidify, the ability to restart the smelting process is limited. If the supply of power is not restored within that critical timeframe, the pot will become inoperable. Smelter equipment can also be damaged in the shutdown and subsequent restart operations since these events push the equipment to its limits. The process required to restart a potline depends on the circumstances in which the line was shutdown. If there was time to siphon metal from the pots and lower the anodes into the metal, to prevent the electrolyte from freezing as a layer between the metal and the anode, restarting the line would be much easier. For this to occur there would have to be auxiliary power available. If the shutdown was the result of total loss of power, restarting the process would be much more difficult since metal tapping and anode lowering would not be possible. In this situation the anodes would have to be removed and the cathode prepared before a restart could be initiated. This would require months to complete and is labour intensive.

43 38 During the start-up of the modernized Kitimat Smelter, under ideal conditions with anodes and cathodes fully prepared, 10 pots per week can be started. The restarting of a potline would take much longer than the original start-up. While the pots are out of service aluminum production is also lost. A restart would typically cost more than $35 million. To ensure the level of reliability in power supply that is essential to an aluminum smelting operation, Alcan designed redundant features into the Kemano System. The Kemano Powerhouse has two additional turbine and generator systems above the required capacity for the Smelter to provide for maintenance outages as well as unexpected failures. As a result, the Kemano Powerhouse has generation capacity in excess of Kitimat Smelter requirements. When more than six of the power generation units are operating and the Reservoir has sufficient water available, more power can be produced than is consumed in the Kitimat Smelter. The annual rated production capacity of the Kitimat Smelter has been approximately 275,000 tonnes since 1967 when the last potline was completed. As noted previously, the Kitimat Smelter is currently producing at a rate of approximately 240,000 tonnes per year close to 90% of its annual rated production capacity. Attached as Appendix E is a graph and supporting data that shows the annual aluminum production at the Kitimat Smelter from 1954 to When Alcan completed construction of potlines 7 and 8 in 1967, the Kitimat Smelter power requirements, at full production, increased to its current maximum requirements of approximately 610 MW plus 20 MW for transmission line losses, for a total 630 MW. Transmission line losses are an incidental effect of electricity transmission and will vary with the load being transmitted. At the current 90% production rate, the Kitimat Smelter requires approximately 568 MW, including transmission line losses. Aluminum production consumes the largest portion of the power supplied to the Kitimat Smelter. The Kitimat Smelter also requires considerable power for heating and the

44 39 operation of the other facilities at the site. The use of power for heating and other auxiliary purposes will also affect the smelter power consumption. Approximately 20 MW on average is currently required to support the other facilities (casting, carbon anode production, shops, offices, etc.). Auxiliary power consumption is typically highest in the winter. As part of the 1997 Agreement with the Province that settled the dispute over the cancellation by the Province of the Kemano Completion Project ( 1997 Agreement ), Alcan and the Province entered into the Replacement Electricity Supply Agreement ( RESA ). Under RESA, Alcan was granted an option to call on the Province to deliver up to 175 MW of electricity for the purposes of aluminum production, subject to various conditions. Alcan s right to exercise this option expired at the end of Power Requirements during Construction of the Modernization Project The conversion to AP technology at the Kitimat Smelter would occur in stages. Some of the existing potlines would remain in operation while others are being converted to AP technology and the related facilities are constructed. The first AP technology potlines are expected to be in service in The full conversion to AP technology is expected to be completed and in full operation at the end of Opportunities to extend capacity beyond the initial design, in conjunction with the AP research and development program, are expected by The infrastructure to allow this capacity increase is being designed into the Modernization Project now. The project duration is expected to be approximately five years. The construction will be phased to allow the existing smelter to continue to operate while the new smelter is being built. As new production is started, old production will be reduced accordingly. The additional capacity of approximately 150,000 tonnes will be realized at the end of the project when existing smelter has been shutdown completely.

45 40 The current plan is for the project to be built in three principle areas on the existing site: the anode paste plant; the area around potline 7 and 8 operation; and in the field directly north of existing smelter. Buildings and equipment that interfere with the new site will be demolished or relocated. The basic phases of the construction plan and the associated surplus power available are shown in the graph in Figure 9. The graph shows the expected availability of power for sale to BC Hydro based on the current construction plans. 250 Pow er available today Planned Average MW available (based on 790 MW generation) Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 MW transition period Pow er available in the future Figure 9 - Power available for sale during construction The amount of power available during the transition from Söderberg technology to the AP 3X technology may change as the design, construction schedule, and ramp up plans are refined. Section 5.13 of the 2007 EPA, allows Alcan and BC Hydro to adjust the Tier 1 Electricity Quantities to accommodate such refinements. BC Hydro may withhold its consent to the proposed adjustment if BC Hydro believes that the adjustment will harm its rate payers. The adjustment contemplated in section 5.13 does not apply if the

46 41 modernization project does not proceed. If Alcan and BC Hydro agree to alter the Tier 1 Electricity Quantities under circumstances other than those contemplated in section 5.13, then an amendment to the 2007 EPA would be necessary. Alcan expects that BC Hydro would file any such amendment with the Commission under Section 71 of the Utilities Commission Act. 7.3 Power Requirements after completion of the Modernization Project Once the Modernization Project is complete, the annual rated production capacity of the Kitimat Smelter would be approximately 400,000 tonnes per year. Alcan expects the modernized Kitimat Smelter would require approximately 700 MW of power from Alcan s Kemano System (inclusive of transmission line losses) when operating at a production rate of 400,000 tonnes. Full production of 400,000 will take several years to achieve, since an operational ramp up phase will follow completion of the construction. The expected life of a cathode is six years. To avoid all pots failing simultaneously six years after start up, Alcan will pre-fail selected pots during the first few operational cycles to stagger the future life cycles of the pots. 7.4 Kitimat Smelter Operation after Modernization The greater efficiencies associated with the modernized smelter will make the Kitimat Smelter one of the lowest cost smelters in the world. This will be an important advantage over our competitors that operate older technology. As high cost smelters are shut down around the world or if aluminum prices fall, there would be strong incentive to shift production to lower cost smelters such as the modernized Kitimat Smelter. Moreover, Alcan would want to maximize aluminum production at Kitimat because the incremental cost of additional production (essentially, raw material costs since the labour and capital would be largely fixed costs) should be

47 42 lower than the cost of new production elsewhere in the world. Further, Kitimat is situated on the Pacific Rim which an area of strategic importance in the aluminum industry. Production at the Kitimat Smelter will vary over time based on market conditions. However, a low-cost modernized Kitimat Smelter would be much better able to weather market conditions relative to the existing Kitimat Smelter and most smelters in the world. After modernization, the Kitimat Smelter will be rank in the lowest quartile of production cost for smelters world-wide and would be one of the most productive in Alcan s system. Given the high cost of shutting down the smelter and the high profitability of operating the new smelter, Alcan expects to run the modernized smelter at maximum production as much as possible. 8. ALCAN POWER SALES 8.1 Development of the North Coast Grid Alcan s Kemano System has been the only significant source of power supply for BC Hydro s North Coast region since the 1950 s. The next largest BC Hydro-owned generation facility is a diesel power generator in Prince Rupert that is used as back up source. In the early 1950 s, the Kitimat area was undeveloped and not connected to the existing provincial power supply infrastructure. Once Alcan s operations began in 1954, Alcan began supplying power to the residents of Kitimat in addition to the aluminum smelter. Alcan built an electricity distribution system in Kitimat in the 1950 s. In the early 1960 s, British Columbia Power Commission ( BCPC ), BC Hydro s predecessor, built a 138 kv transmission line from Kitimat to Terrace to serve the growing needs of Terrace. Alcan began supplying power in 1961 to BCPC. Later during the 1960 s, BC Hydro extended the transmission connections from Terrace to Prince Rupert and the Kitsault region. BC

48 43 Hydro purchased Alcan s local distribution system in 1967, and assumed exclusive control of the distribution of power in this region. Alcan has sold Kemano power to third parties since the commissioning of its power generation facilities in Alcan has sold power to BC Hydro and its predecessors since the early 1960 s. All of Alcan s power sales have been delivered at the Kitimat Busbar since BC Hydro s purchase of the Kitimat distribution system in In 1978, BC Hydro completed the extension of its transmission line from Prince George to Terrace, thereby connecting the isolated regional coastal grid to BC Hydro s provincial power grid. The region served by BC Hydro's transmission line west of Prince George to Kitimat is referred to as the North Coast region of BC Hydro s transmission system. Attached as Appendix F is a schematic based on information received from BC Hydro that shows the capacity of the transmission lines from Kemano to Prince George and the power requirements of the community load centres served by BC Hydro along its transmission line to Prince George. Given that the Kemano System is located at the end of the BC Hydro s transmission line from Prince George, it provides a critical source of local reliability and reactive support to the BC Hydro system. BC Hydro customers receive better and more reliable service than they would otherwise. With support from the Kemano System, the North Coast can continue to run as an island if the transmission line from Prince George is interrupted. As a result, BC Hydro and BCTC have been able to avoid significant additional capital expenditure to upgrade the reliability of their transmission line. 8.2 Interconnection with BC Hydro s System In 1978, Alcan and BC Hydro entered into the 1978 Exchange Agreement which was a comprehensive inter-tie agreement that governed the exchange of power between the 4 See Appendix C for a graph showing the historic power sales.

49 44 Alcan and BC Hydro power systems, including emergency power, power during maintenance outages, storage, equichange, inadvertent transfer, and the exchange or sale of excess power. Pursuant to the 1978 Exchange Agreement, Alcan and BC Hydro established an operating committee to implement and administer the agreement. BC Hydro and Alcan have worked cooperatively for many years under through this arrangement. Alcan s ability to deliver power to BC Hydro s system exceeds BC Hydro s ability to deliver to Alcan s system. This difference is related to the configuration and capacity of the transmission line to Terrace and the remote location of the Kitimat Smelter at the far end of the transmission line from Prince George with many customers in between. The Alcan tie-line between the Kitimat substation and BC Hydro s Minette Bay Substation is a 287 kv circuit (2L103). According to BCTC System Operating Order 7T- 30, Alcan s transmission delivery capability to BC Hydro ranges from 295 MW to 380 MW (depending on smelter load) under a standard configuration with no equipment outages. BC Hydro s transmission delivery capability to Alcan is up to 150 MW under a standard configuration with no equipment outages. Because of the variability of BC Hydro s customer load on its transmission line from Prince George, BC Hydro s transmission delivery capability can be constricted, particularly during high load hours in the winter. 8.3 Power Sales to BC Hydro and to Powerex Alcan currently supplies power to BC Hydro under a Long Term Electricity Purchase Agreement ( LTEPA ) which is a power supply contract that was originally signed in Under the original LTEPA, Alcan agreed to sell 285 annual amw at a 95% load factor to BC Hydro during the term January 1, 1995, to December 31, That delivery commitment was subsequently amended in 1997 following the 1997 Agreement

50 45 to become 140 annual amw at a 95% load factor. The delivery point is the Kitimat Busbar. In September 2001, Alcan and Powerex entered into a Framework Agreement that includes the standard terms and conditions applicable to energy transactions between the companies. Since then, Alcan has transacted a series of short-term power sales with Powerex through the exchange of transaction letters. On 22 December 2004, Alcan gave notice to BC Hydro pursuant to LTEPA that Alcan was recalling all of the LTEPA power effective on 1 January 2010 for its own industrial purposes. The 2007 EPA replaces LTEPA. The 2007 EPA expands the services that Alcan will provide and extends the term of the arrangement to Further, it consolidates Alcan s power sales to BC Hydro and Powerex into one contract. Alcan has sold electricity to BC Hydro or its predecessor since Alcan's longstanding relationship as a supplier to BC Hydro has served both BC Hydro and Alcan well. The 2007 EPA will continue this relationship with an expanded package of high value products, including scheduling, capacity, equichange and co-ordination rights that few other resources can offer. The 2007 EPA increases the integration and coordination between the systems of BC Hydro and Alcan which will optimize use of the resource and enhance the efficiency and benefits of both systems.

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54 Nechako reservoir inflows (m3/s) Days per month Average from Jan to Dec %LTA ( ) Difference Difference Water year (%) (m3/s) Nov-Oct %LTA (1955- Difference Difference 2006) (%) (m3/s) JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Statistics Minimum % -34% % -32% Average % -1% % -1% -1.9 Maximum % 78% % 74% Statistics Minimum % -34% % -32% Average % 0% % 0% 0.0 Maximum % 78% % 74% % -14.6% % % -0.1% % -11.6% % % 2.6% % -2.5% % % 23.7% % 31.0% % % 2.1% % 5.9% % % -2.9% % -13.3% % % 3.9% % 15.5% % % -12.9% % -10.1% % % 13.3% % 1.4% 3 100% % 12.5% % 20.8% % % -6.9% % -11.4% % % -18.9% % -10.7% % % -19.9% % -19.1% % % -29.8% % -32.5% % % -19.4% % -19.1% % % -8.3% % -6.2% % % -9.9% % -17.3% % % 8.5% % 13.8% % % -8.6% % -11.8% % % -13.3% % -13.4% % % -8.6% % -5.8% % % -7.4% % -9.2% % % 2.9% % -0.2% 0 100% % 43.8% % 33.2% % % -22.0% % -7.4% % % -21.9% % -31.5% % % 14.6% % 8.7% % % 14.3% % 26.5% % % 30.0% % 23.1% % % 10.0% % 17.7% % % 9.1% % 7.8% % % 25.4% % 17.8% % % -0.7% % 6.7% % % 28.6% % 30.7% % % 2.6% % -2.9% % % 16.5% % 16.8% % % 14.1% % 17.1% % % 38.8% % 32.8% % % 3.9% % 5.5% % % -33.6% % -24.0% % % 9.6% % 4.0% 8 100% % 27.3% % 27.6% % % -3.9% % -1.8% % % 8.4% % 6.5% % % -1.9% % -9.3% % % 78.1% % 73.8% % % 6.4% % 17.2% % % -10.0% % -16.2% % % -21.4% % -9.8% % % -12.2% % -29.4% % % -11.4% % 1.0% 2 100% % -19.2% % -17.2% % % -26.3% % -26.3% % % -13.0% % -16.1% % % -22.6% % -17.8% % % -9.7% % -13.3% % % -0.8% % -5.5% % % -19.7% % -18.0% % % -12.0% % -19.5% % % -10.8% % -4.6% % % -1.0% % -1.5% % % 2.0% % 3.3% 6 100% % -14.5% % -15.9% % % -8.5% % -6.0% % % -16.6% % -15.0% % % 18.6% % 15.1% % % 22.8% % 22.0% % % -17.7% % -15.3% % % -2.9% % -2.6% % % -26.1% % -29.1% % % -22.5% % -23.2% % % 19.4% % 17.5% % % -19.8% % -15.7% % % -1.4% % -16.2% % % 24.2% % 31.2% % % -20.5% % -19.2% % Average 1931 to Average 1955 to Average 1951 to

55 180% 170% 160% 150% 140% 130% 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% Nechako Reservoir Historical inflow ( ) for Water Year from Nov 1st to Oct 31st % LTA Difference compared with the average (mcs) Average Inflow = cms

56 180% 170% 160% 150% 140% 130% 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% Nechako Reservoir Historical inflow ( ) for Water Year from Nov 1st to Oct 31st % LTA Difference compared with the average (m3/s) Prior to the reservoir: Estimation based on river flows Average Inflow (Nov55-Oct06) = cms

57 Alcan Monthly Power Delivery to Smelter and BC Hydro 1954 to July 2007 Monthly Power Delivery (MW) Tunnel Collapse Repair 1961 Yearly Summary Data 1954 to Alcan supplied area load demand 1979 to present: Alcan supplied contract, emergency and maintenance energy. BC Hydro Grid Intertie connected November, month Strike in 1970 Production cutback PL 2 off 22 days due to Transformer failure Energy import during extreme low water 1986 Potline 7 shutdown 1994 to 1997 Transmission line tower lost in avalanche Production idled during low water cycle Smelter Export / Import Net

58 Month _of Planned Outage Mtce Outage Forced Forced Outages Hrs. Hrs. Outage Hrs. Count Gen Shed Hrs. 01/01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/

59 Month _of Planned Outage Mtce Outage Forced Forced Outages Hrs. Hrs. Outage Hrs. Count Gen Shed Hrs. 03/01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/

60 Month _of Planned Outage Mtce Outage Forced Forced Outages Hrs. Hrs. Outage Hrs. Count Gen Shed Hrs. 05/01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /02/ /03/ /04/ /05/ /06/ /07/ /08/ /09/ /10/ /11/ /12/ /01/ /02/ /03/ /04/ /05/ /06/

61 Month _of Planned Outage Mtce Outage Forced Forced Outages Hrs. Hrs. Outage Hrs. Count Gen Shed Hrs. 01/07/ /08/ /09/ /10/ /11/ /12/ /01/ /02/ /03/ /04/

62 Year Mt tons Period Avg Percent of Rated Capacity

63 Aluminum Production Metric Tons 1954 to Metric Tons

64

65

66 Alcan in British Columbia BC Operations Sept 12 th 2007 Paul Henning Managing Director BC Operations and Modernization Project Business group or unit Slide ALCAN INC.

67 Outline Alcan Inc. Global presence Alcan Primary Metal Group Alcan BC Operations Kitimat Modernization Project Conclusion Business group or unit Slide ALCAN INC.

68 Alcan Inc. s 4 Business Groups BAUXITE AND ALUMINA PRIMARY METAL ENGINEERED PRODUCTS PACKAGING Business group or unit Slide ALCAN INC.

69 APM-BC provincial footprint Business group or unit Slide ALCAN INC.

70 Kenney Dam, Nechako Reservoir Business group or unit Slide ALCAN INC.

71 Skins Lake Spillway Only 2 release points: Tahtsa intake (Kemano) spillway Provides: water management control flows Business group or unit Slide ALCAN INC.

72 Kemano System Business group or unit Slide ALCAN INC.

73 Kemano Power Station World Class asset 8 125MW installed (1000MW) Max Dependable 860MW (hydraulic restriction) Target is 790MW to optimize balance power generation and water spill 700MW 100% reliable Smelter load ~568 MW inc line losses Business group or unit Slide ALCAN INC.

74 Alcan / BC Hydro North Coast Region 52 MW 95 MW 50 MW 123 MW 129 MW Business group or unit Slide ALCAN INC.

75 Elevation [ft] Nechako Historical Elevation 1955 to /Jan 31/Jan 2/Mar 2/Apr 2/May 2/Jun 2/Jul 1/Aug 1/Sep 1/Oct 1/Nov 1/Dec 31/Dec Business group or unit Slide ALCAN INC.

76 Business group or unit Slide ALCAN INC.

77 B.C. Operations statistics Smelter Site Started in 1954 Technology: VSS (vertical stud Soderberg) Production: 245kt/year Products: Sheet, Billet and Remelt Market: 85% Asia/Pacific, 15% NA Power Generation: 793 MW average Capex investment at ~ $46 million/year Direct contribution to B.C. economy in 2006 ~ $275 million $12 million for water rights (BC Prov) 1,500 employees Business group or unit Slide ALCAN INC.

78 Modernization Project highlights Investment of US$1.8 billion to modernize and expand Kitimat Works Announced to Market on Aug 14 th conditions to be met before final board approval. AP3x technology will take Kitimat/Kemano operations to World Class standards Up to 400,000 tonnes/year of low cost aluminum production Significantly reduces environmental impact PAH, Fluorides, GHG Optimizes Kemano power availability Agreement with BC Hydro Smelter First provision Uses more power for smelter than ever before. Wave of retirements over next 5-6 years - natural attrition to land at about 1000 jobs at the end of 2011 to last for another years. Business group or unit Slide ALCAN INC.

79 New 400,000-tpy potline to be concentrated in Lines 7-8 area Today DC &2 7&8 Paste closed closed Business group or unit Slide ALCAN INC.

80 Kitimat Sodeberg AP35 Technical Details Metal Capacity (tonnes) Efficiency Power Consumption (Kwhrs /kg) Operating Amperage (KA) Numbers of Cells Total Power required Tier 1 Power to sell Environment Fluoride Emission Green house Gas ( C0 2 eq / T Al) Employees 275,000T ~ 400,000T 86-88% 94-95% KA 390KA MW 697MW 140MW 33MW 1.8Kg F / T ~0.5Kg F /T 5.5 < ~1000 Business group or unit Slide ALCAN INC.