Did taxpayers get fleeced in Headwaters deal?

By John Krist
jkrist [at] VenturaCountyStar.com
March 3, 2005

The most expensive conservation acquisition in California history could soon prove to have been a bad deal for taxpayers, illustrating a potential weakness of public preservation efforts that rely on the good faith of private companies.

Resurrection of one of the nation's most bitter, drawn-out and violent disputes over forest management also finds Gov. Arnold Schwarzenegger in a distinctly awkward position. He campaigned as a staunch supporter of the business community, but has also pledged to fight hard to defend California's environmental interests. And now, with those interests on a collision course in the state's forests, he's being pressed to take sides, which would be a delicate balancing act under any circumstances but is made much harder by the fact that former timber-industry lobbyists and executives occupy key positions in his administration.

The immediate controversy involves the 1999 Headwaters purchase, through which the state and federal governments paid a combined $480 million to acquire about 7,500 acres of old-growth redwood forest in Northern California from Pacific Lumber Co. The deal included a commitment by the company to adopt a 50-year habitat conservation plan for its remaining 200,000 acres of Humboldt County property, limiting logging to protect such species as coho salmon and the marbled murrelet.

The breathtakingly high price tag for the relatively small Headwaters parcel -- 7,500 acres is a little more than half the area of Camarillo -- dwarfed the commercial value of the land and the trees. The high price was justified only by the leverage the purchase gave the public over logging on Pacific Lumber's remaining land, through the associated conservation plan.

Since the company signed off on the habitat plan, it has been cutting every tree it can. Between September and January alone, the North Coast Regional Water Quality Control Board approved 40 of the company's timber harvest plans. (The board has jurisdiction over the plans because logging can expose slopes to erosion, contaminating waterways with sediment.)

In January, Pacific sought water board approval for 11 additional timber plans, asking the board to relax restrictions on streamside logging in the Elk River and Freshwater Creek watersheds so the company could cut even more trees. Board staff balked, and company executives met privately with the governor and his top advisers to plead their case, threatening to declare bankruptcy, close mills and lay off hundreds of employees unless granted more lenient logging permits. Bankruptcy, the company warned, would effectively dissolve the habitat agreement.

The back-door contacts posed a distinct public-relations risk for the governor. Pacific Lumber's former director of external relations, James F. Branham, is the No. 2 administrator in the California Environmental Protection Agency, which oversees the state's regional water quality control boards. Melinda Terry, deputy secretary for legislation in the Resources Agency, was vice president of legislative affairs for the California Forestry Association until the governor hired her earlier this year.

The board subsequently approved the plans, but did not give the company everything it sought. Pacific Lumber vowed to continue pushing for expanded logging.

Regardless of whether it bears fruit, the political maneuvering came as no surprise to anyone who's familiar with the Pacific Lumber's recent history. And it serves as a warning about the limitations of public-private deals to conserve habitat when that habitat also happens also to have significant commercial value.

Once a model of sustainable forestry, the family-owned Pacific Lumber Co. was acquired in 1996 through a hostile takeover by corporate raider Charles Hurwitz, whose Maxxam Inc. promptly began liquidating old-growth redwoods to retire the junk bonds used to finance the takeover. That led to protests and occasionally violent reprisals, culminating in the Headwaters deal.

Environmental activists regard the bankruptcy threat as a ploy, and it is, indeed, an odd time for the company to be claiming financial hardship. Most publicly owned timber companies in the West are posting fat profits, thanks to record U.S. lumber demand driven by the red-hot housing market. American firms also are benefiting from the falling dollar, which has made imported wood more expensive.

Like most corporations, however, Pacific lumber is about maximizing profits. And when a company's narrow private interests conflict with the broader public interest, it should surprise no one when profits take precedence.