Nucor Steel struggling to strike new power deal with Duke Energy

September 12, 2009

In a year’s time, Nucor Steel devours as much power as 200,000 homes. Its annual electric bill runs in the tens of millions of dollars for the 1 billion kilowatt hours it takes to melt rusty scrap into new metal.

So determining what the Crawfordsville mini-mill will pay for that power is no small matter. And it has struggled over the last two years to forge a new long-term power-supply deal with Duke Energy.

Nucor last month complained to the Indiana Utility Regulatory Commission, asking it to establish a rate schedule containing “reasonable and just charges.”

Nucor’s existing deal, which was set to expire at the end of next month, has been extended, but only through February.

After two years of negotiations, “we are far apart” with Duke, said Pete Mattheis, an attorney for Nucor at the Washington, D.C-based law firm Brickfield Burchette Ritts & Stone.

Nucor, which employs 731 in Crawfordsville, including a number of workers from the Indianapolis area, won’t say what happens if it can’t secure a new long-term agreement within its parameters.

The North Carolina-based steelmaker points out that it has three similar mini mills—in Alabama, Arkansas and South Carolina—that could absorb some of the work. Nucor stated in its most recent financial filings that “almost all of our steel products facilities are operating at less than 50 percent” of capacity.

“Nucor has at this point sister mills that make this product. There are options,” said Mattheis, declining to elaborate.

Mattheis’ local co-counsel is Anne Becker, Indiana’s former consumer utility counselor who now practices at Indianapolis law firm Stewart & Irwin. Becker said Nucor appears to be Duke’s largest Indiana customer. Both Nucor and Duke are based in Charlotte, N.C.

Mattheis said the inability to come to terms on an electricity supply agreement “is something very unusual for Nucor.”

Exactly what the sticking point is in talks is unclear; neither side will elaborate.

Duke is preparing to file a response to Nucor’s complaint with the IURC, said utility spokeswoman Angeline Protogere. Nucor plans to file testimony with the commission by Sept. 18.

Protogere noted that Nucor’s contract was negotiated 20 years ago, when the company opened its Crawfordsville mini-mill. In the first 10 years, Nucor paid a so-called economic development rate that was part of an incentive package the state offered to attract and bolster new business.

“So, for over a decade, Nucor’s rates were among the lowest in our system. Costs have risen significantly over those years” as Duke made capital investments around the state, Protogere said.

“It’s important that all customers pay their fair share. Our industrial rates are very reasonable and among the lowest in the nation,” she added.

Nucor opened a $300 million “mini-mill” in Crawfordsville in 1989.

In the decades prior, mini-mills were relegated largely to using their electric furnaces to melt scrap metal for so-called non-flat products, such as reinforcing rods and rails.

By contrast, traditional “integrated” steel mills, which made steel by cooking iron ore in a blast furnace, commanded the higher-end market for flat steel used in autos and appliances.

Nucor’s Crawfordsville plant would make history. According to a study of Nucor by the Tuck School of Management at Dartmouth University, the Crawfordsville mini-mill was the first to mass produce the more lucrative flat-steel products. Nucor had licensed German technology that had been deployed earlier but only to the extent of a small pilot program.

Today, about 30 mills are patterned after the Crawfordsville facility, said Chris Cox, controller of Nucor’s Crawfordsville division.

Company officials say steel produced at the plant has gone into such projects as Lucas Oil Stadium, The Children’s Museum of Indianapolis, the FedEx hub at Indianapolis International Airport and Community Hospital’s south campus.

In its complaint with the commission, Nucor said electric power costs are one of its principal variable input costs.

“Nucor competes in the highly competitive global steel markets. A competitive electric rate for the Crawfordsville plant is critical for the ongoing competitiveness and success of [the plant] … Given the importance of electricity in the process, the availability of reasonably priced electricity is vital to the plant’s success.”

In a strategy to get power cheaper, Nucor buys power from Duke on what’s known as an interruptible basis. That means, except for a portion of load going to key pieces of equipment, Duke can temporarily shut off power to the Crawfordsville plant during periods of peak power demand.

“Nucor has chosen to take interruptible service, despite the costs and risks of interruptibility, due to the critical need for a competitively priced supply of power,” Nucor said in its complaint with the IURC.

Absent a new supply agreement, the steelmaker would have to pay a firm rate for non-interruptible service. If so, “I would guess that our costs would probably at least double,” Mattheis said.

Nucor argues that continued interruptible electric service won’t hurt other Duke customers and would not require Duke to accelerate its power generation capacity. “This would not be true if Nucor were required to take firm [uninterruptible] service for its total load.”

Becker noted that Duke and other utilities have been trying to get more customers to agree to let the utility switch off service during peak demand as a way to reduce stress on the system and defer the need for costly new generation capacity.

“Nucor is the original demand-response resource customer,” she said.

Given Indiana’s regulatory restrictions, Nucor doesn’t have the ability to purchase power from other providers. Building its own generation capacity is considered an impractical departure from its core steel business.

“We want them to be successful and we will continue to try to work with them to reach an agreement,” said Duke’s Protogere.•


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