Alcoa 2013 Annual Report Download - page 55

Italian Energy Matter
As previously reported, before 2002, Alcoa purchased power in Italy in the regulated energy market and received a
drawback of a portion of the price of power under a special tariff in an amount calculated in accordance with a published
resolution of the Italian Energy Authority, Energy Authority Resolution n. 204/1999 (“204/1999”). In 2001, the Energy
Authority published another resolution, which clarified that the drawback would be calculated in the same manner, and in
the same amount, in either the regulated or unregulated market. At the beginning of 2002, Alcoa left the regulated energy
market to purchase energy in the unregulated market. Subsequently, in 2004, the Energy Authority introduced regulation
no. 148/2004 which set forth a different method for calculating the special tariff that would result in a different drawback
for the regulated and unregulated markets. Alcoa challenged the new regulation in the Administrative Court of Milan and
received a favorable judgment in 2006. Following this ruling, Alcoa continued to receive the power price drawback in
accordance with the original calculation method, through 2009, when the European Commission declared all such special
tariffs to be impermissible “state aid.” In 2010, the Energy Authority appealed the 2006 ruling to the Consiglio di Stato
(final court of appeal). On December 2, 2011, the Consiglio di Stato ruled in favor of the Energy Authority and against
Alcoa, thus presenting the opportunity for the energy regulators to seek reimbursement from Alcoa of an amount equal to
the difference between the actual drawback amounts received over the relevant time period, and the drawback as it would
have been calculated in accordance with regulation 148/2004. On February 23, 2012, Alcoa filed its appeal of the decision
of the Consiglio di Stato (this appeal was subsequently withdrawn in March 2013). On March 26, 2012, Alcoa received a
letter from the agency (Cassa Conguaglio per il Settore Eletrico (CCSE)) responsible for making and collecting payments
on behalf of the Energy Authority demanding payment in the amount of approximately $110 million (€85 million),
including interest. By letter dated April 5, 2012, Alcoa informed CCSE that it disputes the payment demand of CCSE
since (i) CCSE was not authorized by the Consiglio di Stato decisions to seek payment of any amount, (ii) the decision of
the Consiglio di Stato has been appealed (see above), and (iii) in any event, no interest should be payable. On April 29,
2012, Law No. 44 of 2012 (“44/2012”) came into effect, changing the method to calculate the drawback. On February 21,
2013, Alcoa received a revised request letter from CCSE demanding Alcoa’s subsidiary, Alcoa Trasformazioni S.r.l.,
make a payment in the amount of $97 million (€76 million), including interest, which reflects a revised calculation
methodology by CCSE and represents the high end of the range of reasonably possible loss associated with this matter of
$0 to $97 million (€76 million). Alcoa has rejected that demand and has formally challenged it through an appeal before
the Administrative Court on April 5, 2013. The Administrative Court scheduled a hearing for December 19, 2013, which
was subsequently postponed until April 17, 2014. At this time, the Company is unable to reasonably predict an outcome
for this matter.
European Commission Matters
As previously reported, in July 2006, the European Commission (EC) announced that it had opened an investigation to
establish whether an extension of the regulated electricity tariff granted by Italy to some energy-intensive industries
complied with European Union (EU) state aid rules. The Italian power tariff extended the tariff that was in force until
December 31, 2005 through November 19, 2009 (Alcoa had been incurring higher power costs at its smelters in Italy
subsequent to the tariff end date through the end of 2012). The extension was originally through 2010, but the date was
changed by legislation adopted by the Italian Parliament effective on August 15, 2009. Prior to expiration of the tariff
in 2005, Alcoa had been operating in Italy for more than 10 years under a power supply structure approved by the EC
in 1996. That measure provided a competitive power supply to the primary aluminum industry and was not considered
state aid from the Italian Government. The EC’s announcement expressed concerns about whether Italy’s extension of
the tariff beyond 2005 was compatible with EU legislation and potentially distorted competition in the European
market of primary aluminum, where energy is an important part of the production costs.
On November 19, 2009, the EC announced a decision in this matter stating that the extension of the tariff by Italy
constituted unlawful state aid, in part, and, therefore, the Italian Government is to recover a portion of the benefit
Alcoa received since January 2006 (including interest). The amount of this recovery was to be based on a calculation
prepared by the Italian Government (see below). In late 2009, after discussions with legal counsel and reviewing the
bases on which the EC decided, including the different considerations cited in the EC decision regarding Alcoa’s two
smelters in Italy, Alcoa recorded a charge of $250 million (€173 million), which included $20 million (€14 million) to
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