Hedging a Commodity Power Rate

Many of the aluminium smelters in the Pacific Northwest served by the Bonneville Power Administration (BPA) have become non-competitive and operate in the role of swing producer in the US and world markets. To avoid these cyclical swings in power demand, BPA is presently studying methods designed to link the price of power charged to smelters with the market price of aluminium. A linked-rate system tends to stabilize incomes to smelters, but increases fluctuations to the utility. These, in turn, could be stabilized by a hedging operation on the London Metals Exchange.