Canceling a long-term deal between the Elk Falls mill and the cogen plant could mean the mill will stay closed for good.

"We consider this event important in that it frees up Catalyst to permanently close the high-cost, inefficient Elk Falls facility and rid itself of very high municipal taxes associated with this mill," says an analyst report by Stephen Atkinson, published Monday by BMO Nesbitt Burns.

But although there's nothing holding Catalyst back now from closing the mill, the future of Elk Falls is still unknown, said Lyn Brown, Catalyst Paper's vice-president of corporate relations.

"We haven't made any final decision about the future of the Elk Falls paper mill at this point," she said. "The cogen arbitration settlement means there is nothing preventing the permanent closure of the mill if we can't find a way to bring its cost structure down."

The Elk Falls facility has been unable to take steam from the natural gas-fired power plant beside the mill since last year, when the pulp mill was permanently shut down. The paper machines have also been shut down most of the year, with only a skeleton crew left to keep the lights on.

20-year deal cancelled

On Friday, Catalyst and Island Cogeneration No. 2 Inc. reached an agreement under arbitration that Catalyst won't have to take steam anymore, canceling a long-term deal.

In 2001, the owners of the Elk Falls mill signed a 20-year contract with the owners of the Island Cogeneration power plant. According to the deal, Elk Falls agreed to take excess steam from the plant to power pulp and paper machinery – a cogeneration agreement, where excess heat and steam from the power plant would be used instead of being vented into the atmosphere. The deal was touted at the time as a good reason to allow a natural gas power plant to be built in Campbell River.

The ownership of both companies has changed since then, but the contract has not. And after the mill's closure, Catalyst racked up millions of dollars in fees owed to the cogen plant for steam it couldn't take – $9 million by the middle of this year. Under the deal, if the company couldn't take the steam, it was obligated to pay the cogen plant for it.

But the deal's off. On Friday Catalyst announced that after months of arbitration, the energy services agreement between the two companies is terminated, and that Catalyst's off the hook for the steam bill. In exchange, Catalyst has agreed to give the cogen plant the land it currently leases from the paper company for the Orange Point Road power plant.

"Catalyst has also granted certain easements and access rights to Cogen to facilitate the independent operation of the energy facility," says a Catalyst news release. "In addition, Cogen has agreed to take steps to eliminate its reliance on Catalyst for certain services and the company has agreed to co-operate with Cogen in that regard."

Union's role

The company has been trying to work with the union to restart the mill, Brown said, but so far talks have been unsuccessful.

"We did…put a plan in front of the two union locals back in September, that was at their request," she said. "That plan, in our view, would have supported the restart of the mill. However, the union locals have not given us any indication at this stage that they are prepared to entertain changes that would be required in order that we can bring the labour costs in line with what competitive realities are these days."

For more than a year, the company and the unions have been trying to reduce labour costs to $80 per tonne of paper produced.

Trying to control costs

Catalyst is trying to reduce the costs it can control, Brown said, especially because 2010 looks like it's going to be another tough year to do business. The company continues to protest its tax bills in Campbell River and three other coastal communities, and Brown said with the company facing weak markets and uncertain pricing over the next year, the tax burden is a real struggle for Catalyst.

"The need to focus on costs we can reduce is as important as it was when we began this effort a couple years ago," she said.

Cogen plant keeps on steaming

The cogen plant, meanwhile, continues to operate, but the deal means the cogen plant's not really a cogen plant anymore. However, the steam which used to go to Catalyst isn't being wasted – earlier this year, Don Walters, president of Kelson Canada which owns the plant, told the Mirror the steam is being used to generate an additional 10-15 megawatts of electricity.