On the cover North Coast Journal
March 10, 2005


Big Muddy: Pacific Lumber, water quality board spar over timber and watershed recovery

On the cover:
Redwood log deck on Waterfront Drive in Eureka.

Big Muddy: Pacific Lumber, water quality board spar over timber and watershed recovery



ON FEB. 23, KRISTI WRIGLEY [photo below left] sat before employees of the North Coast Regional Water Quality Control Board and told her tale, as she has done many times over. Her family farm on the North Fork of the Elk River has been ruined by Pacific Lumber logging upstream, she said. Her apple trees don't produce anymore and her water supply is trashed.

[Kristi Wrigley speaking in front of board]Once more, she asked the water board staff to help her and other residents of the Elk River and Freshwater Creek watersheds, many of whom also testified at the hearing in Eureka the same day. They said that their rivers had become choked with silt, causing endemic flooding that threatened their property and cut them off from the outside world.

"We have nowhere else to go," Wrigley told the water board's staff. "You are our only resource." Her family has worked the farm for more than 100 years.

The stories were not new, but the circumstances were. A few weeks earlier, the Los Angeles Times reported that the Pacific Lumber Co. had quietly held meetings in Sacramento with members of Gov. Schwarzenegger's staff and officials from the California Environmental Protection Agency. At the meeting, Palco management reportedly declared that it would likely go bankrupt unless the water board got off its back. The board is the only thing holding up the company's timber harvest plans in Freshwater and Elk. The THPs -- formal proposals for timber cuts that must be filed with the state -- have been approved by the California Department of Forestry.

In mid-February, Palco arranged a series of meetings with water board staff through Gorton Moore, a Sacramento lobbying firm. The purpose was to hammer out an interim deal for logging in the two watersheds while the board staff finishes its guidelines for new regulations -- known as "watershed-wide waste discharge requirements." Timber harvesting inevitably leads to dirt washing downstream; the question before the board's staff is how much timber harvesting can occur in the two watersheds if the sediment-choked rivers are to recover.

[Catherine Kuhlman speaking]The meetings were unsuccessful from the company's point of view. Two days after the Eureka hearing Catherine Kuhlman [photo at right], water board's executive officer, announced that she would allow the company to log only half what the CDF has permitted in the two watersheds -- in other words, about 300 "clear-cut equivalent" acres in Elk River and 250 in Freshwater. (Several acres of selective harvesting equal one clear-cut-equivalent acre). Palco was not pleased.

The company and its opponents will make their cases again Wednesday at a meeting of the agency's governing body --the water board proper. Residents of the watersheds, supported by the Humboldt Watershed Council, will petition the board to hold firm and support its staff in the face of political pressure. Pacific Lumber will be on hand, perhaps with some of its employees in tow, to ask the board to immediately release the rest of its timber harvest plans or accept responsibility for destroying the company financially.

Despite the pressure from both sides, Kuhlman appears to be keeping a level head. "I think the situation is a really tough one -- there is no easy answer," she said last week. "There is no compromise that makes everyone happy. There are winners and losers in this one, and that makes it really tough to find answers."

Palco vents frustration

Sitting in the company's redwood-lined conference room last week, Palco President and CEO Robert Manne [photo below left] vented his frustration at the water board's intransigence. Manne said he believed that the water board's scientific staff is holding up the company's timber harvest plans not so much out of concern for residents, but because of an anti-Palco bias. If the staff were truly concerned for the residents, he said, they'd be more willing to sit down and listen to the company's proposals.

[Robert Manne speaking]"We have an extremely positive relationship with every other agency -- CDF, Fish and Game, NOAA Fisheries, the U.S. Fish and Wildlife Service," Manne said last week. "If we were in this same kind of discussion with any one of those agencies, we'd have all of our scientists in a room -- trying to seek out and find the truth, to seek out and find the balance point. That's our relationship with every other agency but this one."

Manne and the company are fighting the board on several fronts. First, and perhaps most fundamentally, Palco believes that the water board has overstepped its jurisdiction -- that it has no legal right to hold up THPs already approved by the California Department of Forestry. The CDF, the company claims, is -- or should be -- ultimately responsible for assuring that timber harvesting complies with environmental regulations. The state Supreme Court is scheduled to hear a legal challenge based on this argument sometime this year. In March 2004, a lower court disagreed with the company, saying that the CDF and the water board had overlapping jurisdiction.

Second, the company believes that it can prove that the majority of the new sediment going into the streams is from "legacy logging," which the company defines as logging that took place before the adoption of its Habitat Conservation Plan, part of the Headwaters Agreement, in 1998. The company insists the plan, a set of operational standards that is supposed to minimize the impact of logging on endangered and threatened species, ensures that new logging operations produce very little sediment.

Finally, the company is challenging head-on the idea that the water board's staff has the right idea when it comes to solving the flooding problems in Freshwater and Elk. Even the board's scientists admit that it will take a good deal of time for a lower rate of harvest to affect the sediment-filled riverbeds in Elk River and Freshwater Creek. It will take several winters for Mother Nature to flush any significant portion of the dirt downstream.

"There's a set of expectations, now, that this water board has set up for the residents in Freshwater and Elk that they can't deliver on," Manne said.

He said that the company believes it can solve the problem much more quickly and effectively though engineering. By removing brush and woody debris from the stream beds, for instance, the company believes it can make water flow through the streams more quickly and efficiently. The company has proposed building flood walls at especially problematic low spots along the two rivers, and doing additional cleanup around "legacy" timber harvest sites.

But the company can only do those things, Manne said, if it is allowed to log enough to stay financially solvent. Right now, Manne said, that means getting all its THPs in Freshwater and Elk, as soon as possible. If the company goes under, it wouldn't be able to do any environmental cleanup work for the residents' benefit, he said.

[Robert Klamt speaking]Robert Klamt [photo at right], the water board scientist leading the work on Pacific Lumber's THPs, denied last week that the board's scientific staff had it in for the company. In fact, he said, the board had signed off on the vast majority of Palco THPs that had come before it since last September -- a total of 51 in all, compared to the relative few it is now waiting on.

But the fact that Freshwater and Elk River were impaired watersheds, and that residents were suffering from floods, made the process more difficult.

"We are absolutely committed to reaching a resolution to this, and I can understand Palco's financial concerns 100 percent," he said. "But we also have a charge to protect the environment and to protect resources for the public at large." While Klamt said that the company's Habitat Conservation Plan was a good, important document, it did not specifically address the questions of watershed restoration that his agency is mandated to enforce.

Klamt said that engineering solutions, such as those proposed by the company, had the potential to be part of the solution. However, he said that he had not yet seen the details of the company's proposals and so could not evaluate their potential effectiveness. He held that the best science available indicated recovery of the streams -- the water board's particular mandate, under California law -- would depend on a lower rate of logging.

Money woes mount

The company says that that's something it simply can't afford. Manne said that the remaining CDF-approved Freshwater and Elk timber harvest plans still blocked by the water board amount to 48 percent of its first quarter harvest for 2005, or 38 percent of the first half of its year. The fact that the company can't get at those trees is already taking its toll, Manne said.

"I'm in financial default," he said. He said that since the beginning of the year, the company has been unable to make regular service to a short-term line of Bank of America credit that the company uses for working capital. "We've been working with the Bank of America to refinance that part of the business, and see what it's willing to do."

[Rex Perkes]More critically, later this summer a $20 million payment on the company's timber bonds will come due. Pacific Lumber sold the bonds in 1998; they were used to refinance the debt left over from the company's 1986 takeover by Charles Hurwitz's Maxxam Corp. In the bond offering, the company promised its investors that it could log a certain amount each year, an amount roughly equivalent to what the company was allowed under the Headwaters Agreement -- the landmark $480 million deal between the company and the state and federal government that preserves about 10,000 acres of woodland, including vast areas of old-growth. Manne said the slowdown in Freshwater and Elk increases concern that the company might not be able to make the upcoming payment.

"I'm negotiating with every financial institution I have to try to save this company," Manne said. "I've already laid off 38 people and I've got plans in place to lay off more. As the logs diminish, we're taking shifts off each of the sawmills, one at a time."

If the company were to default on its notes, and be forced into bankruptcy, the effect on the county's economy would be enormous. Palco is one of the largest private employers in the county, and those jobs pay salaries well above the local average.

Photo above left: Rex Perkes, 50, Scotia resident, PL employee

Company bluff?

But skeptics wonder whether the company, which has a well-earned reputation for hard-ball political strategizing, might be bluffing in an attempt to force the water board into acceding to its demands to release the additional timber. Or, similarly, whether the company has no intention of pulling itself out of debt, whether it receives the timber or not -- whether the company is aiming to go bankrupt sooner or later.

[Bill Bertain speaking]At last month's hearing in Eureka, Bill Bertain [photo at right] -- a Eureka attorney who has sued the company on behalf of the residents of Freshwater and Elk -- pointed out that nearly 20 years after Maxxam bought the company, it had paid down very little debt. Maxxam loaded over $800 million in debt onto Pacific Lumber when it bought the company; today, the company still owes around $750 million (as it acknowledges) -- this after 20 years of operation and the sale of hundreds of millions worth of assets, including the Headwaters Forest.

In fact, the company does not claim to be making a dent in its debt. According to Manne, the company's current bonds are interest-only; the company is not paying down any principal. Manne said that this debt structure was a good one for the company, as it meant low rates and smaller payments, but it does feed the argument made by Bertain and others -- that chronic debt is part of the business plan.

"Basically, what's happened in the last 19 years is that Maxxam and Hurwitz have externalized the costs, they've corporatized the debt, and Hurwitz has personalized the profits," Bertain said. He called on Hurwitz to reinvest some of these alleged profits -- which, belonging to the world of high finance, are hard to quantify -- rather than close the company down.

Mark Lovelace of the Humboldt Watershed Council, one of the company's most persistent critics, said that he believed that the company was aiming for "bankruptcy for profit" in any case, and beseeched the water board's staff to base its decisions on the protection of watersheds, not economic factors.

After the staff's decision to limit harvests came through, Lovelace was cautiously optimistic.

"We think it's great that the board staff is implementing this reduction in the rate of harvest, but we're really concerned," he said. "On [March] 16, the board needs to back them up on this."

As Lovelace noted, the battle now moves to the water quality board itself. The North Coast Regional Water Quality Control Board is composed of political appointees. Four new members were just appointed by Gov. Schwarzenegger -- among them Lyle Marshall, chairman of the Hoopa Valley Tribe, Ferndale dairyman Dennis Leonardi and Heidi Harris, a lecturer in rangeland resources at HSU.

The new members will be sworn in at the Wednesday meeting where Pacific Lumber's renewed demands for full logging rights in Freshwater and Elk will be among the first orders of business. Theoretically, the new board could direct its staff to summarily release the remaining THPs.

Catherine Kuhlman, the head of the board's staff, said that the company's past efforts -- the meetings with political appointees in the capital, the Sacramento lobbyists, the lawsuits, the shows of force at board meetings -- demonstrates that it is remarkably able when it came to making its case.

"Pacific Lumber is in a class by itself," she said.


Jan. 27, 2005: IN THE NEWS: "Pacific Lumber cries near-bankruptcy
Secret meeting seeks easing of logging restrictions"

Oct. 17, 2002 IN THE NEWS: "Kristi Wrigley's long fight"




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