The Pulp Parachute: How Louisiana-Pacific Got Paid To Destroy the Tongass

One of the most lucrative and environmentally destructive deals in the history of the forest products industry was closed recently with the unfurling of an enormous golden parachute for a $2 billion a year timber company courtesy of the federal treasury. On Feb. 21, the Clinton administration capitulated to the legal threats of the Louisiana-Pacific Corporation by agreeing to pay $250 million to settle a lawsuit over the federal government's cancellation last year of the company's long-term contract to log timber on the Tongass National Forest in Southeast Alaska.

The buyout may have been linked to the confirmation of Federico Pena, Clinton's choice as Secretary of Energy. The nomination had been held up by Alaskan Sen. Frank Murkowski, chairman of the Senate Committee on Energy and the Environment. Sources in the Senate say that Murkowski, who has been a virulent critic of the administration's environmental policies, threatened to block Pena's confirmation unless Clinton agreed to settle the Louisiana-Pacific lawsuit and guarantee higher levels of logging on the Tongass over the next five years. Pena's nomination was approved by Murkowski's committee the same week the Clinton administration announced the Louisiana-Pacific deal.

More than $140 million of the settlement will go directly into Louisiana-Pacific's corporate coffers. The remaining $110 million is scheduled to be distributed to local communities in Southeast Alaska for the retraining of nearly 400 workers laid off from the company's closed Ketchikan pulp mill, although this portion of the deal must await Congressional approval. In addition, the Forest Service agreed to provide Louisiana-Pacific with a steady flow of old-growth timber from the Tongass for the next three years. A large portion of that timber will come from ecologically significant stands of old-growth forest on Central Prince of Wales Island near Ketchikan, which the Forest Service's own biologists have said should not be logged because of adverse impacts on salmon and the rare marbled murrelet, a forest-nesting seabird.

The payoff caps a 40-year run in Southeast Alaska, where the company was granted exclusive rights to log off more than one million acres of temperate rain forest on the fog-enwrapped islands of the Tongass, America's largest national forest. The Ketchikan mill, owned for the past 25 years by Louisiana-Pacific, was the beneficiary of an extraordinary deal hatched by the Forest Service back in the late 1950s. As an inducement to create year-round jobs in remote Southeast Alaska, the Forest Service offered exclusive contracts to log old-growth timber off of the Tongass rain forest for minimal costs to any companies that would build pulp mills in Southeast Alaska and operate them year-round.

By 1954 two pulp mills had been built in the region, one in Ketchikan by the Ketchikan Pulp Company, formerly owned by the gold mining giant FMC, and one in Sitka, controlled by a consortium of Japanese companies, including Mitsubishi and Sumitomo, operating as the Alaska Pulp Company.

The Ketchikan mill produced a bizarre assortment of pulp products, including rayon, fiber for disposable diapers, nitrocellophane explosives, food fillers, and sponges. The Sitka mill mainly produced pulp for newsprint. After pulp prices took a nosedive in 1993, the Alaska Pulp Company closed its Sitka mill and the Forest Service terminated the company's contract. The Japanese-owned company then filed suit in federal claims court seeking nearly a billion dollars in damages. The Alaska Pulp Company suit remains unresolved.

According to informants inside the Portland, Oregon-based company, Louisiana-Pacific had been attempting to unload the Ketchikan pulp mill for at least the last two years. When Louisiana-Pacific could find no buyers, the company shut the mill down, blaming the closure on the Forest Service for failing to provide enough timber at cheap enough rates to keep the mill running. The company also repeatedly lashed out at environmentalists, charging that efforts to protect old-growth forest stand and wildlife on the 16-million acre Tongass forest had created "a climate of uncertainty" over future timber cut levels.

Yet most timber industry economists say that the real problem for Louisiana-Pacific had to do with the changing nature of the pulp market. Pulp prices, always erratic, have plunged to new lows over the past three years and, despite a few temporary spikes upward, have stayed depressed. Increased recycling, cheaper mills built in Mexico and China, and staggering environmental liabilities are only some of the factors undercutting the economic footing of aging pulps mills in the United States.

This situation was compounded for Louisiana-Pacific by the fact that the Ketchikan mill's equipment is outdated, inefficient to operate, and hazardous to workers and the environment. For nearly 40 years, the mill has flushed 5 million gallons of dioxin-laced wastewater into Ward Cove every day. Ward Cove, an inlet north of Ketchikan, was once a vibrant estuary filled with salmon, steelhead, humpback whales, and orca; now it's a toxic dead zone. The company has not had a valid air permit for the mill since 1990. In the last five years, the Ketchikan mill has been hit with more than $6 million in fines for violations of clean air and water laws. In 1994 FBI agents raided the company's offices and seized thousands of pages of documents. As a result of this investigation, Louisiana-Pacific was convicted on felony charges of falsifying pollution reporting data.  

Louisiana-Pacific's decision to permanently close the pulp mill forced the Forest Service to terminate the long-term contract, since the timber purchasing agreement was predicated on the year-round operation of the mill. When the Forest Service voided the contract, Louisiana-Pacific rushed to the federal claims court in Anchorage, where it filed suit against the government. In court papers, the company alleged that the termination of the contract resulted in a governmental "taking" of the economic value of the pulp mill. The suit sought $400 million in damages.

"This settlement is a tremendous victory for the cause of property rights," says Ron Arnold, director of the Center for the Defense of Free Enterprise, a Bellevue, Washington-based Wise Use group. "The Clinton administration has validated our contention that the environmental regulations imposed on Louisiana-Pacific clearly damaged the company economically. The lesson is that the government can impose the regulations on companies, but they cannot escape paying just compensation for doing so, plus damages for bad-faith dealing."

But most legal observers believe that Louisiana-Pacific's suit had little merit. Indeed, the suit sounds nearly frivolous on its face. It almost seems as if there was some prior arrangement between Louisiana-Pacific and the administration, and the suit itself was just a pretext to a financial bailout of a troubled company. The objective of Louisiana-Pacific for several years has been to shift toward the logging of lucrative old-growth trees without being burdened by the costly pulp mill operations.

Ironically, Alaska--where the logging scheme on the Tongass has been underwritten by Congress mainly as a rural jobs program--was exempted from the nationwide ban on the exportation of raw logs cut from federal lands. For the past 10 years, Louisiana-Pacific's biggest money-making enterprise in Alaska has come from exporting yellow cedar to Japan. The company pays the Forest Service about $1.50 per thousand board feet for the right to log the cedar off the Tongass. Then it sells the cedar logs to Japanese timber merchants for as much as $1,500 per thousand board feet, all without running a single cedar log through an Alaskan mill. The Japanese are willing to pay such high prices because the Tongass cedar closely resembles Hinoyki cedar, which is considered sacred.

"The Ketchikan Pulp Mill 50-year contract thus ends up as the most expensive timber sale in Forest Service history," according to forest economist Randal O'Toole. "The net loss from this one sale was close to a quarter billion dollars."

The infusion of federal cash couldn't have come at a better time for Louisiana-Pacific. It had been a turbulent three years for the timber giant. After experiencing record-setting profits in the early 1990s, Louisiana-Pacific was riding high, becoming a favorite of mutual fund managers and institutional investors. Then in 1993 the company was suddenly confronted with allegations that its executive offices resembled a kind of white-collar brothel. A long-time executive assistant to LP CEO Harry Merlo filed suit against the company charging widespread sexual harassment of female employees. According to the complaint, the company only hired top female assistants if "they were young, blond, strikingly attractive, and likely to acquiesce to sexual advances from the CEO."

The suit was largely ignored by Merlo and his hand-picked board, which that very same year rewarded him with a salary of $5 million and $48 million in company stock. But things were starting to fall apart in the company's Portland headquarters. The problems centered on one of Louisiana-Pacific's signature products, Oriented Strand Board, known as OSB. The company marketed the siding as an environmentally friendly replacement for plywood decking and siding for houses and apartments. According to LP's marketing, OSB is a "green product" because its manufacture does not require the logging of old growth. Instead, OSB can be constructed by chipping small diameter trees, including species that were previously considered to have little commercial value. The chips are then cooked up in a kind of toxic stew and pressed into siding panels.

The problem is that when exposed to moderate levels of moisture and humidity, OSB tends to disintegrate within two years. Moreover, as the OSB panels begin to break apart they release dangerous fumes from the glue used to hold the fiberboard together. This toxic phenomenon is known as out-gassing. It causes the insidious poisoning of people residing in houses sheathed in OSB. The ailments suffered by victims of Louisiana-Pacific's deteriorating siding range from headaches and nausea to seizures and partial paralysis. The company recently paid out nearly $500 million to settle class-action suits brought by homeowners who had purchased OSB products. Several states, including Oregon, Washington, and Florida, are pursuing criminal investigations against the company for fraudulent testing and marketing of OSB. Two former employees have alleged that the company falsified testing results on the durability and safety of the OSB from 1990 through 1994.  

As the OSB scandal reached its climax, the Louisiana-Pacific board called an emergency meeting in Chicago. There Merlo was confronted with evidence that he had ordered the doctoring of proxy statements and SEC documents in an effort to conceal the extent of financial liabilities facing the company. After a hostile exchange, the board voted to remove Merlo from his position. The executive was escorted out of the meeting by armed security guards. Meanwhile, the locks on the doors of his penthouse office back in Portland, Oregon, were changed and his files seized by company investigators and outside auditors.

Merlo was replaced as CEO of Louisiana-Pacific by former International Paper Company executive Mark Suwyn, an old friend of Louisiana-Pacific board member Pierre DuPont. But the problems for LP didn't end with Merlo's ouster. Earlier this year, its stock price plunged after the company was forced to make a $300 million charge against its income. This announcement was followed by a new criminal investigation by the FBI into allegations of timber theft by the company on the Tongass National Forest. Forest Service whistleblowers had alleged that over the past 10 years Louisiana-Pacific has stolen more than $24 million worth of federal timber.

Assigned the extraordinarily challenging task of running the public relations campaign over the past few years for the embattled company is a man called Thomas Hoog, general manager of the super-firm of Hill & Knowlton. Like many of the partners at Hill & Knowlton, Hoog's political ties are to the Democratic Party. He served as chief of staff for former Colorado Sen. Gary Hart. Another Democratic powerbroker at Hill & Knowlton is the firm's CEO, Howard Paster, a golfing partner of President Clinton who served for a year as director of legislative affairs in the Clinton White House. Hoog, who attended two of those White House coffee sessions, played a key role in persuading the administration to settle the Louisiana-Pacific case in Alaska.

Sen. Frank Murkowski, the Republican from Alaska who now heads the powerful Energy and Environment Committee, has been a key player in defending Louisiana-Pacific's reign of terror on the Tongass for nearly two decades. During the 104th Congress, Murkowski authored legislative initiatives aimed at overturning environmental regulations on the Tongass in order to accelerate logging in areas under contract to Louisiana-Pacific. In the spring of 1995 it was revealed that Sen. Murkowski owned more than $25,000 worth of stock in Louisiana-Pacific and that he was a major shareholder in the Ketchikan State Bank, one of the pulp mill's largest creditors.

It now seems that Murkowski used his clout as head of the committee responsible for reviewing Federico Pena's nomination as Secretary of Energy to extract concessions on the Tongass. "Murkowski threw his weight around and the administration quickly caved in," said a Democratic staffer. "Everyone thought the fight on Pena's nomination was over the Yucca Mountain nuclear waste site. In reality, all the discussions had to do with logging levels on the Tongass and whether or not LP was going to be compensated for closing down the pulp mill."

The reaction of Alaskan environmentalists to the bailout of Louisiana-Pacific has been strangely supportive. "We are grateful that the contract is voided," said Tim Driscoll of the Southeast Alaska Conservation Council in Juneau. "Now the challenge for the Tongass is to shift toward a sustainable economy in the region. That means a smaller harvest which independent sawmills use to make value-added products."

The problem with this rosy scenario is that there are few independent timber companies left in the region and almost no capital available to build new mills. Louisiana-Pacific is largely responsible for this situation. Native companies were hit the hardest by Louisiana-Pacific's near-hegemony over the regional timber market. In 1979 the Reid Brothers, a small logging company owned by members of the Tlingit tribe, filed a civil suit against both Louisiana-Pacific and the Alaska Pulp Company. Among other things, the Reid Brothers alleged that the timber giants had rigged bids on Tongass timber sales, had conspired with local banks to manipulate the financing of small mill owners, and had overestimated stumpage and logging costs to extract more subsidies from the feds. As a result of these predatory activities, more than 100 small sawmills were driven out of business between 1970 and 1979. The district court ruled in favor of the Reid Brothers and the 9th Circuit Court of Appeals upheld the opinion that Louisiana-Pacific had violated anti-trust laws.  

In the wake of the Reid Brothers case, the Forest Service began its own investigation of the pulp company. It determined that Louisiana-Pacific had defrauded the government out of more than $80 million. Yet no action was taken against the corporation. Forest Service sources say that is because Assistant Secretary of Agriculture John Crowell had quashed the investigation before it reached the Justice Department. Previously Crowell had served as general counsel for Louisiana-Pacific.

Now Louisiana-Pacific, a company with one of the longest eco-rap sheets in the nation, has finally achieved its goal of being the sole player in the lucrative Tongass timber market. And, as a surprise bonus, it has been handed by the Clinton administration $140 million in cash, which it will most likely use to expand its operations in Mexico, China, and Bolivia.

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