Board Talk

Tradewinds Partners With Energy Firm,
Negotiates New Timber License Terms

“My question for the last year has been: Do we have the right project?”

With that remark, Tim Johns of the state Board of Land and Natural Resources voiced his concerns over whether the timber com pany Tradewinds, LLC, will be able to carry out its plans to log state land on the Big Island and process the timber at a veneer mill/energy generation plant that is also a part of the Tradewinds project.

Johns made the remarks at the August 12 meeting of the Land Board, when Tradewinds was seeking board approval of yet another extension of the deadline to raise start-up capital for Phase I of its business plan.

On Tradewinds’ inability to secure $1 million in Phase I funding, Johns, an at-large Land Board member, said, “The market has been voting with its feet. We either have the wrong project or the wrong people.” Al though $1 million is a lot of money, it’s no more than a house costs in many parts of Hawai‘i, “two on the Big Island,” he said.

Tradewinds, based in Washington state, has struggled to meet the many deadlines that have been set and reset since the Land Board granted it a timber land license in 2001. Most recently, it was to have secured legally bind ing commitments of at least $1 million in Phase I financing by July 1 of this year.

Instead, some time past the deadline, Tradewinds submitted to the Department of Land and Natural Resources’ Division of Forestry and Wildlife a non-binding letter of intent from Rockland Capital Energy Invest ments, LLC (RCEI), a young Delaware-based company, to contribute $700,000 to $1.3 million in start-up capital.

That contribution, however, was subject to several conditions, including Land Board approval of several license amendments, RCEI investor and board approval, and the comple tion of RCEI’s due diligence and equity agree ments with Tradewinds’ other investors.

On August 12, DOFAW recommended that the Land Board find Tradewinds in default of its license to harvest eucalyptus and other planted trees from about 9,000 acres of land in Waiakea, south of Hilo. DOFAW administrator Paul Conry wrote in a report to the board, “The LOI [letter of intent] does not represent a binding commitment for Phase 1 funding. Furthermore, the proposed criteria for closing of the Phase 1 equity agreements…is contingent upon too many factors other than mere [Land] Board ap proval.”

Conry took issue with the license amend ments Tradewinds needed to get Rockland’s money. Tradewinds proposed that the Land Board: 1) extend the deadline to raise con struction funding from October 31, 2005 to October 31, 2006 or April 30, 2007, depend ing on how Tradewinds fared in its permit ting process; 2) cancel all other deadlines in the license; 3) change the home base of Tradewinds from Washington to Delaware; and 4) approve an extension of the fixed pricing under the license from 2011 to 2016.

Conry noted that Tradewinds has already received numerous deadline extensions, and that deadlines were necessary for his division to monitor the project’s progress. He ex pressed concern that under the letter of intent between Rockland and Tradewinds, the Dela ware company, which has no experience in forestry, would control Tradewinds in roughly one year. Finally, with regard to the pricing extension, Conry said that approving this would not be in the state’s best interest, since the state had set a low pricing schedule in 2001 to get Tradewinds to commit to replanting harvested areas.

“The stumpage value of timber resources locally and internationally has risen during the last four years while the state has waited for TWto perform,” Conry wrote. “According to the original TLL [timber land license] terms, the TW mill was to have been completed no later than calendar year 2005. Through recent correspondence, TW has indicated that the earliest their mill can now be completed is November 2008 – a minimum delay of three years. Despite the low stumpage values stipu lated in the TLL, the department expects to obtain more than $550,000 in revenue annu ally. The department should not be penalized for the inability of TW to perform by subsidiz ing their start-up efforts further.”

Despite its false starts, Tradewinds gar nered letters of support from the Hawai‘i Forest Industry Association, Hawai‘i County Council member (and former Land Board member) Fred Holschuh, agribusiness com pany Agro Resources, Inc., and state Sen. Lorraine Inouye. HELCO’s president Warren Lee also submitted testimony indicating his company’s willingness to work with biomass power developers.

Kamehameha Schools’ Peter Simmons also supported Tradewinds. He said that the es tate had spent $100,000 rebuilding the company’s financial plan and was planning to contribute to Phase II/construction funding, which is estimated to require about $15 mil lion. (In addition to logging state land, Tradewinds also plans to harvest timber from land owned by Kamehameha Schools.)

Tradewinds president “Don Bryan is hon est and has an amazing amount of grit,” Simmons told the Land Board. “He’s also very, very smart about this industry… He’s really an asset to us.”

Bryan added that the birth of Hawai‘i’s forestry industry “is upon us,” and his com pany was “ready to go.” Bryan said Tradewinds has already spent $1.8 million in time and money on the Waiakea project, and stressed that “it is not a light matter” for the state to abandon Tradewinds just to see if other entities are interested in logging the state’s timber management areas.

Kona resident Jim Quinn, a former presi dent and CEO of a mainland veneer company, expressed doubts that Hawai‘i was on the verge of developing a new industry. Quinn explained to the Land Board that eucalyptus, which makes up most of the growth in the Waiakea Timber Management Area, is good mainly for things like flooring, fixtures, fuels, and furnishings – not veneer, which is what Tradewinds is focused on making.

“[Eucalyptus] is a narrow resource and a narrow market. We’re not a commodity mar ket and veneer is a commodity product,” Quinn said.

Maui board member Ted Yamamura also noted that Tradewinds won’t complete con struction until April 2009, if the company is required to do an environmental impact state ment for the co-generation plant, something that both Bryan and the board say will likely be required.

Instead of approving DOFAW’s recom mendation to find Tradewinds in default, the Land Board voted to give the company an other six weeks or so – until the board’s September 23 meeting in Kona – to negotiate deadlines, possible penalties, and pricing with DOFAW. (Under the current deadlines, Tradewinds was to have submitted all of its 17 permit applications by September 1, some thing Scott Harlan, chief operating officer of Rockland, told the board was not going to happen.)

“Think pretty hard about renegotiating pricing,” Johns told Conry, referring to con cerns that Tradewinds has been able to lock up the resource – for free – for four years. “If that’s something the financing guys can’t live with, then we need to know that.”

“I’d like somebody to go to the ocean. Mud doesn’t stay in the ocean. Local guys fish there. If the reef were damaged, the fish would not be there. The limu would be dead… Go for a swim. Look how clear the water is,” says James Pflueger of allegations – and a recent finding by the Land Board – that a 2001 mudslide that originated from property in Pila‘a, Kaua‘i, owned by a company he man ages, damaged a portion of the reef at Pila‘a Bay.

Pflueger, who manages Pila‘a 400, LLC and whose family once owned a great deal of land in Pila‘a, says his reef expert Ricky Grigg, emeritus professor of oceanography at the University of Hawai‘i, and others who know the area say the mudslide was insignificant compared to the runoff during the sugar plan tation days.

Like Pflueger, Pila‘a 400’s attorneys dispute recent Land Board findings regarding the area and scope of damage to Pila‘a Bay resulting from the 2001 mudslide, and have filed an appeal of the Board’s June 30 decision to fine the company $4 million for damages to state land. The appeal was filed in Fifth Circuit Court on July 27.

In a nutshell, the appeal claims that the Land Board’s decision violates the company’s constitutional and due process rights; exceeds the Land Board’s authority and jurisdiction; was based on unlawful procedure; was arbi trary, capricious, or an abuse of discretion; and was simply wrong in view of the evidence presented during the contested case hearing. The DLNR is also named as an appellee.

The appeal grows out of a Land Board contested case that began in 2003, revolving around damages to marine resources at Pila‘a Bay caused by the November 2001 mudslide, which had been linked to illegal grading on Pila‘a 400’s property. These marine resources, which belong to the state, are in the strictly regulated Conservation District.

Last December, Michael Gibson, hearing officer in the contested case, recommended a $2.8 million fine, which he proposed to be held in trust to remediate property belonging to Pila‘a 400, and not that belonging to the state. On June 30, the Land Board raised the fine to more than $4 million and ordered that it be deposited into a state special fund, which is where all other DLNR fines and lease rents are placed.

By July 21, Pila‘a 400 had still not paid the fine, and the state of Hawai‘i filed a complaint in Fifth Circuit Court against Pila‘a 400 seeking payment of the $4,023,997 fine, as well as any pre-judgment interest.

Days later, Pila‘a 400’s attorneys Wesley Ching, Kathleen Douglas, and Colleen Hanabusa (who also is a state senator representing the Wai‘anae, O‘ahu area) filed their appeal, which disputes the state’s assessment of damage as well as the state’s ability to calculate fines for damages without rules. Both arguments were made and rejected during the contested case.

Some of their other arguments:

• The Land Board’s decision violates Pila‘a’s due process rights because the assertion and eventual finding that Pila‘a 400 had illegally conducted marine construction when it allowed mud from its property to be dumped onto the reef without a Conservation District Use Permit was raised during the contested case hearing, not before.
• The Land Board cannot find Pila‘a 400 responsible for damages done to state lands if the damage occurred before Pila‘a 400 bought the graded property. (Pila‘a 400’s marine ex perts contended during the contested case that much of the coral death was caused by decades of runoff from sugar cultivation. Also, previ ous landowners James Pflueger and Pflueger Properties were originally parties to the case, but were removed at Pila‘a 400’s request.)
• The Land Board’s decision exceeded its statutory authority and jurisdiction because the DLNR failed to establish jurisdiction over Pila‘a 400’s activities outside the Conservation District. (The Board’s fine, however, is not for any activities that occurred outside the Conservation District.)
• The decision doesn’t properly address Pila‘a’s proposed findings of fact or conclusions of law.
• Pila‘a 400 attorneys also took issue with the way the contested case was handled, including the denial of its motions regarding expert testimony and evidence, as well as DLNR director and Land Board chair Peter Young’s participation in the decision, which they say is a conflict of interest.

The appeal also states, “any external political pressure, either from the Legislature or the executive branch, on the BLNR in its perfor mance of its judicial function is a violation of Appellant Pila‘a 400’s right to procedural due process and invalidates the BLNR’s Decision and Order.”

Although the state had not responded to the appeal by press time, deputy attorneys general representing the DLNR, Sonia Faust and Bill Wyhoff, did address most, if not all, of the arguments in their contested case filings.

In one filing, they state that Pila‘a 400’s argument that the DLNR and Land Board lacked jurisdiction over land use violations outside the Conservation District “reflects a fundamental misunderstanding of these proceedings…The undisputed facts are that on November 26, 2001, thousands of cubic yards of mud poured down from Pila‘a 400’s illegally and improperly graded property and altered land into and onto State-owned conservation district land.”

With regard to Pila‘a 400’s accusation that the state slipped a marine construction violation into the contested case proceedings without proper notice, the state’s attorneys argued that the DLNR does not have to quote every chapter or rule possibly related to the case for Pila‘a 400 to have proper notice. They also noted that hearing officer Gibson did not base his recommendations solely on “marine construction”.

And responding to Pila‘a 400’s claim that it is not responsible for violations that occurred before it owned the property, Faust and Wynhoff noted that during the contested case, Pila‘a 400 filed a motion seeking to remove its predecessors Pflueger and Pflueger Properties as liable parties. Its motion stated, “All actions taken by Mr. Pflueger on the Pila‘a property were performed under his authority to act as manager…As a matter of law, Pila‘a 400, LLC is the sole responsible party in this action.” And because the DLNR did not op pose the motion, Pflueger and Pflueger Prop erties were dismissed as parties.

“It is grossly unfair and improper for Pila‘a 400 to now claim it is not responsible after its motion was granted based on exactly the opposite claim,” Faust and Wynhoff wrote.

When sugar plantations across the state began shutting down one by one more than a decade ago, windward farmers, native Hawaiians and environmentalists began calling for the return of waters, diverted by the plantations for more than a century, to their watersheds and streams of origin.

(Windward interests have won back some of the water diverted by O‘ahu’s Waiahole ditch, and on Maui, with its extensive East Maui Irrigation diversion system, efforts to do the same are ongoing.)

So when the DLNR’s Land Division rec ommended on July 22 that the Land Board simply hand off management of thousands of acres and most of the East Kaua‘i Irrigation System to the Agribusiness Development Corporation, several members of the environ mental and native Hawaiian communities were taken aback.

The Land Board ultimately voted to defer the proposed set-aside, but not before a num ber of people indicated that they would re quest a contested case hearing if the transfer were approved without significant amend ments.

The ADC currently operates the Waiahole ditch system on O‘ahu, and manages thou sands of acres in Kekaha on the west side of Kaua‘i, including an old sugarcane irrigation system there. The ADC is a state entity, but by statute its lands are not considered public lands. As such, what it does with those lands is generally not scrutinized as closely as what the Land Board does with lands under its jurisdic tion. Also, unlike the Land Board, which is tasked with protecting the state’s natural re sources, the ADC’s main objective is to pro mote agribusiness.

At the July meeting, Kaua‘i resident Carol Wilcox expressed her concern that transfer ring the Kealia, Anahola and Hanalei por tions of the ditch system, which are not currently being used for agriculture, would be a “misuse of the intent of the ADC.” She added that any allocation of water needed to be coordinated with the state Commission on Water Resource Management.

Like Wilcox, House Rep. Mina Morita, representing the North Shore of Kaua‘i, ex pressed concerns about how the transfer to ADC would affect water allocations, which are the jurisdiction of the Water Commission and the Land Board.

In written testimony she noted, “With the demise of Lihu‘e Plantation, much of the system, especially the parts of the system which affect the Hanalei, Anahola and Kealia watersheds, have been abandoned for several decades.” She asked that the set aside include only those parts of the system currently in use by the East Kaua‘i Water Users Cooperative and the Kaua‘i Island Utility Cooperative. (Co-op president Jerry Ornellas told the Land Board that his members don’t use water from Kealia or Anahola.)

Currently 15 farmers, ranchers and a church have revocable permits covering roughly 5,484 of the 6,766 acres proposed for the set-aside. All belong to the water users co-op, which has a water permit from the Land Board and manages those por tions of the East Kaua‘i Water System that it uses.

The Kaua‘i Island Utility Cooperative has a revocable permit for water as well, but is seeking a 65-year lease from the Land Board for water emanating from the system’s “Blue Hole” diversion to power its two hydroelectric plants.

While the water users coop supports the set-aside to ADC, seeing it as a means of assuring cheap water and low rent, the utility, which is currently involved in a contested case over its water lease with the Office of Hawaiian Affairs and Life of the Land, would rather have any action on the set-aside postponed until the contested case is resolved.

“KIUC is concerned that the issuance of the water lease may not be completed prior to the proposed transfer to ADC in March 2006. KIUC does not want to start over with the application process that has already taken several years to get to this stage of processing,” KIUCvice president Gary Peers wrote in a July 7 letter to the Land Division.

Office of Hawaiian Affairs administrator Clyde Namu‘o also wanted the DLNR to postpone the set-aside, at least until the Blue Hole contested case was resolved. Namu‘o noted in written testimony that, “Transfer ring management of stream diversions on the main watersheds of Kaua‘i – from Wailua to Hanalei – from a protective state agency to an ‘aggressive and dynamic agribusiness devel opment program’ [ADC’s purpose as stated in Hawai‘i Revised Statutes] should, and does, raise concerns.” Like Morita, Namu‘o said the proposed set aside was too broad, given that only portions of the land and ditch are currently in use.

At the July 22 Land Board meeting, OHApolicy analyst Jonathan Scheuer added that he did not feel the DLNR had a good understanding of all of the resources on its Kalepa lands and what the diversion’s ef fects were on streams. “The ADC doesn’t have the Division of Aquatic Resources” to assess stream resources, he said. (The Divi sion of Aquatic Resources, a branch of the Department of Land and Natural Re sources, takes the lead on managing streams within the Land Board’s jurisdiction.) “There is more involved than agricultural land here.” Scheuer also noted that the DLNR does a better job of providing OHA with its legally mandated 20 percent of ceded land revenue than the ADChas done.

Maka‘ala Ka‘aumoana, executive direc tor of the Hanalei Watershed Hui, asked in written testimony that the Land Board exclude from ADC’s application those parts of the ditch system that divert water from the Hanalei River and its tributaries. If the board chose not to do so, she wrote, the Hanalei Watershed Hui would request a contested case hearing. Morita and Wilcox also promised to request a contested case hearing if the board chose to approve its staff recommendations.

Because ADC director Alfredo Lee could not address any of these concerns (he did not attend the July 22 Land Board meeting as he was reportedly on vacation), the Land Board voted to defer the set aside.

— Teresa Dawson

Volume 16, Number 3 September 2005