To Smelt or Not to Smelt? We have said that the opportunity cost of an alternative is the payoff associated with the best of the alternatives that are not chosen. Sometimes that payoff becomes so large that the optimal course of action is to choose the best alternative instead. Such was the case with Kaiser Aluminum in 2000. For many years, Kaiser operated two aluminium smelters (giant plants used to manufacture raw aluminium ingots) near the cities of Spokane and Tacoma, Washington. The production of aluminum requires a substantial amount of electric power, so one of the most important determinants of the cost of producing aluminium is the price of electricity. In 2000, Kaiser was purchasing electricity at about $23 per megawatt hour under a long-term contract with the Bonneville Power Administration (BPA), the federal agency that produces electricity from dams along the Columbia River. Kaiser signed the contract with EPA in 1996 when the spot market price (the current price on the open market) was low. However, in late 2000 and early 2001 the spot market price of electricity skyrocketed, on some days averaging over $1,000 per megawatt hour.4 Kaiser had a great deal because its contract enabled it to buy electricity at far below the market price. But the sharply rising electricity prices also Created a sharply rising opportunity cost for Kaiser as long as it used that electricity to operate its aluminium plants, because its contract with EPA gave it the right to resell the electricity if market prices escalated. (The EPA had offered this option to induce Kaiser to sign a long-term contract in the rst place.) If Kaiser used the electricity purchased from the EPA to smelt aluminium, it sacriced the opportunity to resell that electricity in the open market. The prot that Kaiser would forgo by not reselling electricity was huge. In December 2000, Kaiser decided to shut down both smelters. Kaiser then resold the electricity to EPA at $550 per megawatt hour, which at the time was somewhat below the prevailing spot price of electricity, but far above Kaiser's cost of $23. Kaiser did not reopen the smelters, even when the market price of electricity declined in the spring and summer of 2001. The market price of aluminum fell to a 2-year low in 2001. As a result, Kaiser decided that it was uneconomical to reopen its two plants. In 2003 the Tacoma plant was sold to the Port of Tacoma, which razed it in 2006 to create room for more capacity at the port. In 2004 the Spokane plant was sold for only $4 million. The price was low because the company that purchased it also assumed responsibility for cleaning up pollution at the site. Q.l Comment upon the utility of Opportunity cost concept with the help of above example. Q.2 Sum up your observations! readings from this case