Alcoa 2011 Annual Report Download - page 44

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
complies 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 has been incurring higher power costs at its smelters in Italy
subsequent to the tariff end date). 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 will be based on a calculation that
is being prepared by the Italian Government. Pending formal notification from the Italian Government, Alcoa estimates
that a payment in the range of $300 to $500 million will be required (the timing of such payment is uncertain). 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, including $20 million to write off a receivable from the Italian Government for amounts due under the now
expired tariff structure. On April 19, 2010, Alcoa filed an appeal of this decision with the General Court of the EU.
Alcoa will pursue all substantive and procedural legal steps available to annul the EC’s decision. On May 22, 2010,
Alcoa also filed with the General Court a request for injunctive relief to suspend the effectiveness of the decision, but,
on July 12, 2010, the General Court denied such request. On September 10, 2010, Alcoa appealed the July 12, 2010
decision to the European Court of Justice (ECJ); this appeal was dismissed on December 16, 2011.
On March 23, 2011, the EC announced that it has decided to refer the Italian Government to the ECJ for failure to
comply with the EC’s November 19, 2009 decision.
Separately, on November 29, 2006, Alcoa filed an appeal before the General Court (formerly the European Court of
First Instance) seeking the annulment of the EC’s decision to open an investigation alleging that such decision did not
follow the applicable procedural rules. On March 25, 2009, the General Court denied Alcoa’s appeal. On May 29,
2009, Alcoa appealed the March 25, 2009 ruling before the ECJ. The hearing of the May 29, 2009 appeal was held on
June 24, 2010. On July 21, 2011, the ECJ denied Alcoa’s appeal.
As previously reported, in January 2007, the EC announced that it had opened an investigation to establish whether the
regulated electricity tariffs granted by Spain comply with EU state aid rules. At the time the EC opened its
investigation, Alcoa had been operating in Spain for more than nine years under a power supply structure approved by
the Spanish Government in 1986, an equivalent tariff having been granted in 1983. The investigation is limited to the
year 2005 and is focused both on the energy-intensive consumers and the distribution companies. The investigation
provided 30 days to any interested party to submit observations and comments to the EC. With respect to the energy-
intensive consumers, the EC opened the investigation on the assumption that prices paid under the tariff in 2005 were
lower than a pool price mechanism, therefore being, in principle, artificially below market conditions. Alcoa submitted
comments in which the company provided evidence that prices paid by energy-intensive consumers were in line with
the market, in addition to various legal arguments defending the legality of the Spanish tariff system. It is Alcoa’s
understanding that the Spanish tariff system for electricity is in conformity with all applicable laws and regulations,
and therefore no state aid is present in the tariff system. While Alcoa does not believe that an unfavorable decision is
probable, management has estimated that the total potential impact from an unfavorable decision could be
approximately $90 million (€70 million) pretax. Also, while Alcoa believes that any additional cost would only be
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