(Updates with Alcoa idling smelters, CEO comments)
MILAN/NEW YORK Nov 19 (Reuters) - Alcoa Inc (AA.N) said on Thursday it will temporarily idle operations at its two smelters in Italy after the European Commission ordered the U.S. aluminum producer to pay back most of the state aid it has received in Italy since 2006.
Alcoa said it would appeal the ruling and was curtailing operations at the smelters in Fusina and Portovesme because of the uncertainty in obtaining future power supply and the financial impact of the EC decision.
The EC did not say how much Alcoa has to repay.
"The EC's decision, which was not based on a complaint by a competitor or any third-party, will effectively shut down Italian aluminum production and make the European aluminum industry less competitive in the worldwide markets," Alcoa President and Chief Executive Officer Klaus Kleinfeld said in a statement.
"This is a dark day for European heavy industry. The EC is sending a signal to investors and workers that heavy industry is no longer a priority," he said. "Particularly in today's economic crisis, this decision is hard to understand. Skilled and long-term jobs will be lost, facilities will be closed, and companies in Europe will not be able to compete."
The price subsidy mechanism which Alcoa has enjoyed in Italy since 2006 constituted "illegal state aid" and enabled the company to sell its products at a lower price or at a higher margin, the Commission said after an in-depth investigation it opened in 2006.
"Price subsidies that result in artificially low energy prices for selected companies waste taxpayers' money and distort competition in the single market. Alcoa will have to pay back most of the illegal subsidies," Competition Commissioner Neelie Kroes said in a statement.
The Commission also ordered Italy to end the subsidies.
Without the tariff, Alcoa said, the two smelters, which have a combined employment of approximately 1,000 and an additional 1,000 indirect jobs and a combined capacity of 194,000 metric tons of aluminum per year, are not viable at current Italian power rates.
A spokesman at Alcoa's Pittsburgh headquarters told Reuters that Alcoa had already set an appeal in motion when the EC notified the aluminum producer that the matter was being reviewed.
"We launched an appeal to question whether they should do that. After reading this report, we will appeal this decision as well," Alcoa spokesman Kevin Lowery said.
While the EC ruled that Italy's "state aid" gave Alcoa unfair competitive advantage, Lowery said it had been approved by the EC in 1995 and was designed to help bring Italy's power costs in line with energy costs in other EU countries.
Italy's Economic Development Ministry, which has been in talks with Alcoa over the future of its Italian business, said it had drafted new measures which would reduce electricity prices for Alcoa's Portovesme plant on the island of Sardinia.
Such measures, including building new interconnection lines, would help to "bring, in a short term, prices of electricity supplies for a plant in Sardinia, close to average prices paid by aluminium producers in Europe," the ministry said in a document obtained by Reuters.
Alcoa promised the ministry not to close the plant, the ministry said. Lowery said Alcoa never made that promise. (Reporting by Svetlana Kovalyova; additional reporting by Carole Vaporean and Steve James in New York; editing by Marguerita Choy; editing by Carol Bishopric)