Aug. 6--Most Texans feel pinched by their electric bills these days, but not many can relate to Alcoa's squeeze.

A few months ago, the giant aluminum company had to turn to the spot market for electricity at its smelter in Rockdale, about 60 miles northeast of Austin. With its usual electric supply drying up, the company paid four times more than its standard rate to keep the plant operating.

The unexpected expense cost Alcoa $22 million and was highlighted in its quarterly results. Alcoa responded by laying off 250 people at the plant and halving output.

"We have no choice but to idle production that is reliant on uncompetitive power," Alcoa's president of primary metals said at the time.

For Texas to be "uncompetitive" in something so crucial to operating a business is a shocker. State leaders constantly brag about Texas' being the top place to do business, and media outlets frequently confirm that standing.

So Alcoa's action poses a threat, at least to Texas' experiment with electric deregulation. It indicates that soaring prices are clipping businesses as well as residents, and it could give some employers second thoughts about expanding in the state.

For the past two to three years, homeowners and renters have been stung the worst by higher electric costs. Most companies seemed to be ahead of the curve, buying power in large blocks that afforded significant discounts.

Things have changed this spring and summer, in part because natural gas prices climbed. Then the increase was compounded by congestion in transmission lines and rumors of market manipulation, and wholesale prices spiked to unheard-of levels.

Alcoa was caught short at exactly the wrong time and decided it couldn't risk more hits in the state. Industry leaders say they're not aware of other companies that have cut capacity for the same reason. But they acknowledge that electric prices -- a longtime drawing card for Texas -- have become a competitive disadvantage.

What's surprising is that they don't blame deregulation, which ended most rules in the power market six years ago.

"While we've had some startup problems and need some things to be handled in a different way, we firmly believe that a deregulated market is the way to go," says Tony Bennett, chairman of the Texas Association of Manufacturers and vice president of government affairs at Temple-Inland.

He says that a number of association members have had a sharp spike in electric rates this summer, echoing the problems at Alcoa. But he declined to name the companies, and he said Texas' other attributes -- including low costs for labor, land and taxes -- continue to be a draw.

Several states in the South offer electricity at roughly half the price of Texas', he says, and his members monitor the rates closely. Over the long term, Bennett expects the cost gap to narrow, figuring that prices will rise in other states as they build new (and more expensive) power plants. And he's optimistic that prices in Texas will fall as more generation comes online.

Bill Hammond, president of the Texas Association of Business, says his group remains committed to dereg. He says the answer to higher prices is to add power sources, including clean coal, wind and nuclear.

"To say that deregulation is causing our prices to go up is just Orwellian," Hammond says.

One group of large electric users has criticized deregulation in other parts of the country but not in Texas. The Electricity Consumers Resource Council (Elcon) says changes in the Midwest and Northeast have punished big industrial customers, which make up its membership.

The group cited three plants in Delaware and New Jersey that had been shuttered because companies couldn't afford the spike in power rates.

But members were generally pleased with results in Texas, at least until recently, says John Anderson, Elcon's president.

"It appeared to be working, until all those price spikes," Anderson says. "Now, Texas has caught the attention of the industrials. The question is whether this is a short-term problem that will correct."

That's the optimistic promise of a free marketplace -- that players, consumers and businesses will respond in innovative ways. Texas has already attracted scores of new power plants since deregulation. Unfortunately, most operate on natural gas, the price of which rose sharply in the spring before falling back in recent weeks.

Recently, there's been a big push on wind power, including $4.9 billion approved for transmission lines from West Texas, along with plans for nuclear. Electric retailers are experimenting with meter readers that encourage conservation.

Some large customers are offering to go off-line during a crunch if it means a break on their electric rate.

"At least once a week, I hear from companies that are willing to cut their load to save money," says Phillip Oldham, energy counsel for the manufacturers association.

Because electric prices aren't regulated and subsidized by government, the market is sending a strong signal to change behavior. The rising cost has certainly attracted the attention of decision-makers.

Gary Aksamit, a consultant with Pegasus Power in Plano, says he used to talk to facilities managers about buying power for their companies. Today, he pitches electric plans and plots strategy with chief financial officers and chief risk managers.

That's because electrici- ty has become a significant part of the cost structure, and executives want it monitored year-round, not just when contracts are set to expire.

It's yet another issue to worry about and manage, as it's become for the rest of us.

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Story Source: Fort Worth Star-Telegram (Fort Worth, Texas)