Saving the Headwaters Forest: A Jewel That Nearly Slipped Away

David J. Hayes

David Hayes is the Deputy Secretary of the U.S. Department of the Interior. Prior to becoming Deputy Secretary, Mr. Hayes served as Counselor to Secretary of the Interior Bruce Babbitt. He is a former Chairman of the Environmental Law Institute and a former partner in the law firm of Latham & Watkins.

[30 ELR 10131]

On March 1, 1999, at 11:56 p.m. Pacific Coast time, the people of the United States took title to the Headwaters Forest, the largest remaining stand of privately owned, old growth redwoods in the world. Uncertain until the end, the transaction was recorded only minutes before the $ 250 million appropriation of federal funds for the purchase expired.

The clock on the wall did not lie. The Headwaters transaction came within a whisker of failing. Indeed, on Saturday, February 27, newspapers across the country accurately reported that the deal was dead. The story of how the transaction was put back together and pushed across the finish line before the stroke of midnight on Monday, March 1, is an interesting tale of personalities and perseverance. But it is more than that. The difficult history of the Headwaters acquisition is a powerful reminder of the legal and policy challenges that so frequently bedevil our nation's efforts to conserve our natural resources and protect our biodiversity.

The Headwaters transaction should have been easy. With nearly one-half billion dollars of public money to work with, and with the prospect of reordering the long-contentious relationship between the Pacific Lumber Company and federal and state authorities, Headwaters shaped up as the classic "win-win" deal. Add to the mix the American people's deeply felt love of virgin forests and, particularly, of the magnificent redwoods, success seemed assured.

The fact that the effort to protect the Headwaters Forest nearly failed provides a sobering lesson: no one should assume that shared public values in protecting natural resources will inevitably lead to the realization of those goals. If our nation wants to preserve and protect our natural resources, we are going to have to work at it. Without a near-obsessive drive to make it happen, the status quo will nearly always prevail.

This is not a new phenomenon. Although we look today with pride on the many special places that have been set aside for future generations, our conservationist successes have been hard-fought. Behind virtually every national park, and behind many of our other, widely acknowledged national treasures, have stood controversy and concern. President Thomas Jefferson's purchase of the West was questioned, at the time, as a foolhardy waste of scarce federal resources. President Theodore Roosevelt's bold moves to establish Yellowstone, Yosemite, and other signature parks, and to establish the Grand Canyon as a national monument, was considered by some to be radical and dangerous. President Franklin Delano Roosevelt's efforts to establish Grand Teton National Park only succeeded after 10 years of controversy.

Headwaters is a modern day reminder of the reality that many of us have forgotten, namely, that preservation efforts are never easy—even (or especially) when national treasures are at stake.

To demonstrate this central point, the discussion below outlines key aspects of the Headwaters transaction, as it was ultimately consummated on March 1, 1999. This description of the compelling "prize" is followed by a blow-by-blow countdown toward the final days of the transaction from my perch as the chief negotiator of the deal for Secretary of the Interior Bruce Babbitt and the U.S. Department of the Interior (DOI). The tale includes twists and turns that read like fiction. The story line, however, was all too true, bearing witness to the near-failure of the effort and the thesis of this Dialogue—namely, that when it comes to striking a deal to protect natural resources, it takes an extraordinary effort to yield an extraordinary result.

The Headwaters Transaction—Background

The largest remaining old growth redwood grove in private hands was, until recently, owned by the Pacific Lumber Company (PALCO or the Company), a subsidiary of the Maxxam Corporation. The 7,500 acres that make up the so-called Headwaters Forest have been eyed by conservation groups for decades as a unique ecosystem that needed to be protected from the chainsaw.¹ Nowhere else was there such a large, virtually untouched tract of private land with 1,000- and 2,000-year-old trees presiding over a diverse, rainforest-type environment that was home to a lush variety of plants and wildlife.

The long-term interest of conservationists in preserving the Headwaters Forest took on increased urgency when the Maxxam Corporation acquired PALCO in 1986 in a highly leveraged transaction. Observers feared that Maxxam's high debt payments would force it to accelerate harvesting activities on all of its properties, including the Headwaters.

These concerns prompted a variety of efforts to purchase the Headwaters Forest in the late 1980s and early 1990s, with one going so far as a vote on the floor of the U.S. House of Representatives. By 1995, however, all efforts to purchase the Headwaters Forest had collapsed, and PALCO ended its voluntary moratorium on cutting in the Headwaters. In the fall of 1995, state officials granted PALCO a permit to begin "salvage logging" activities in the redwood groves, an action that triggered large protests and legal action.

[30 ELR 10132]

Faced with this confluence of events, including the very real prospect of violence, Sen. Diane Feinstein (D-Cal.) entered the fray, seeking to find a permanent solution for the Headwaters controversy. Working closely with federal and state officials, including then-Deputy Secretary John Garamendi, and with Charles Hurwitz, the Chief Executive Officer of Maxxam, she mediated discussions that led to a 1996 Agreement in Principle to acquire the Forest.²

The key terms in the Agreement in Principle were straightforward and, in retrospect, they looked deceptively easy to accomplish: (1) combine federal and state funds to purchase the Headwaters Forest at a market-based price; and (2) negotiate a Habitat Conservation Plan (HCP) to support an "incidental take permit" under the Endangered Species Act (ESA)³ that would identify permissible logging activities which could be undertaken on PALCO's remaining holdings of more than 210,000 acres.

This bare-bones agreement was followed by 1997 federal legislation that appropriated up to $ 250 million in federal funds tied to several preconditions, including a state contribution of $ 130 million, a congressionally reviewed independent appraisal of the purchase price, and the negotiation of an HCP and issuance of an incidental take permit.⁴ The federal legislation required that all of these actions be completed by March 1, 1999, with the appropriated funds reverting to the Land and Water Conservation Fund if the acquisition were not completed by the deadline.

Once the legislation was in place, the parties began to develop the outline of an HCP. These early negotiations led to the signing of a short, conceptual HCP agreement in February 1998 (the Pre-Permit Application Agreement in Principle) by federal and state officials, and Company representatives.⁵

These important, early steps in the transaction—each of which was heralded at the time as a breakthrough—arguably turned out to be the easiest pieces of the Headwaters puzzle. The toughest stages in the transaction lie ahead: (1) the negotiation of a draft HCP for the PALCO property; (2) the negotiation of terms and conditions associated with the state of California's contribution of $ 130 million toward the Headwaters purchase; (3) the processing of 18,000 public comments and the negotiation of final terms for the HCP; and, finally (4) the end-game—closing all of the pieces of the transaction by the March 1, 1999, deadline.

All of the elements of a difficult negotiation were present at each of these critical junctures: high stakes, complex issues, combined legal/policy/scientific questions, and headstrong players. Indeed, each of the stages featured common characteristics, including a long "death march" of contentious, seemingly interminable negotiations, followed by last-minute drama and brinkmanship. To illustrate the point, the California legislature approved California's share of funds for the Headwaters purchase by the narrowest of margins, at the last possible moment—by a single vote, after midnight, on the last day of the legislative session!⁶

While each of the final four stages of the transaction deserve full treatment as a case study of problem solving and decisionmaking in complex environmental matters, I have focused on the final "end-game" negotiations to provide a flavor of the difficulty that the parties had in closing this deal and to illustrate how close we came to losing public ownership of the Headwaters Forest.

First, however, it is appropriate to dwell on the prize that we were after—a Headwaters deal that would provide lasting benefit to the American people.

The Prize

The Headwaters Forest is an untouched jewel that is a unique, irreplaceable resource. The primary goal of the Headwaters transaction was, of course, to place this 7,500 acre forest safely into public hands, where it could be protected in perpetuity for the benefit of all Americans.

In addition to acquiring the Headwaters Forest, the Headwaters transaction brought a second, major public benefit. It put in place a precedent-setting HCP⁷ that includes new protections on more than 210,000 acres of land that remain in private hands.

Ironically, it was this portion of the deal—rather than the purchase of the Headwaters Forest itself—that generated the most controversy. Critics were concerned that the federal and state resource agencies would not include restrictions that are protective enough of the threatened and endangered species on the property. Others questioned the entire concept of an HCP, which allow private landowners an "incidental take" of an endangered species on some of their lands in return for protecting valuable habitatneeded by the species to survive and, over time, to recover.

The final HCP that became part of the Headwaters transaction established a new standard of protectiveness for the targeted endangered species (primarily, the marbled murrelet, northern spotted owl, and coho salmon). For the terrestrial species, the HCP required that PALCO set aside a dozen so-called lesser cathedrals—large areas of privately owned land that would be off-limits to logging during the life of the HCP permit issued by the U.S. Fish and Wildlife Service (FWS). Biologists selected these protected lands based on the quality of their habitat and their relative location. The scientists were seeking to provide large areas of contiguous habitat for endangered birds, thereby avoiding the fragmentation of habitat that typifies unregulated logging activities.

Combined, the HCP set aside a total of approximately 7,728 acres of land in designated Marbled Murrelet Conservation [30 ELR 10133] Areas—an area equal in size to the entire Headwaters Forest. These lands include approximately 1,446 acres of uncut old growth and approximately 2,700 acres of partially harvested residual redwood stands. The plan provides 300-foot selective harvest buffers adjacent to old growth redwood in the Headwaters Forest and around Humboldt Redwoods and Grizzly Creek Redwoods State Parks. Including the Headwaters Forest acquisition, over 90 percent of the uncut old growth redwood and 50 percent of the residual on the property will come under protection. Timber harvest in uncut and residual old growth will be directed to lower quality habitat in smaller, more fragmented stands.

The final HCP also set aside significant areas of private lands to protect endangered salmon. More specifically, in order to protect spawning streams, the HCP required no-cut buffers along streambeds, thereby ensuring a protective canopy to cool the waters, providing protection against the intrusion of logging-based sediments into sensitive streams, and providing an opportunity for the recruitment of "large woody debris"—an important ingredient in the complex spawning environment for salmon.

In addition to buffers along streams, the HCP established special restrictions on areas that had been excessively logged in the past, including so-called mass wasting areas, and prescriptions for the stormproofing and construction of roads.

These prescriptions were combined with a science-heavy watershed analysis process that would allow adjustments to these requirements based on site-specific conditions. Backed by an independent peer review process with final decisionmaking authority residing in the hands of government scientists, the watershed analysis process and a related adaptive management process would break new ground in protective forest practices.

The HCP finally was implemented through a legally binding agreement that converts all of the HCP's restrictions on the use of PALCO's private lands into legally enforceable requirements.⁸ Indeed, because of concerns about PALCO's compliance record, the Implementing Agreement includes several provisions, believed to be without precedent in other HCPs, to provide a significantly increased level of permit compliance oversight and monitoring and effective enforcement and remedies. Specifically, PALCO is required to fund for the life of the permit an independent third party (HCP Monitor) who will have unrestricted access to all PALCO timber harvest activities and will report any deviations from the HCP for appropriate enforcement action. Under the Implementing Agreement, PALCO is explicitly responsible for the actions of all of its employees and contractors and must conduct an HCP education program for them. Each contract between PALCO and a third party must contain a provision requiring the contractor to comply with these permit conditions.

The Implementing Agreement also requires that PALCO provide security in the amount of $ 2 million to assure that it will carry out its obligations under the HCP. The Implementing Agreement provides that the harvesting of a single merchantable tree in violation of the permit constitutes a separate violation for purposes of imposing penalties under state and federal law. These penalties are substantial, including civil and criminal penalties of up to $ 25,000 and $ 50,000, respectively. Further, these penalties may be doubled for each violation by an individual, and quadrupled (up to $ 200,000) for each violation by a corporation. Moreover, the HCP explicitly references 18 U.S.C. § 3571(d), which allows as an alternative to the above fines the imposition of a fine equal to twice the gross pecuniary gain to the person guilty of the offense.

All told, the HCP and the Implementing Agreement provided an unprecedented level of protection for endangered species on a large tract of privately held land.

The Final Chapter

March 1, 1999, was the drop dead date for the Headwaters transaction. The legislation authorizing the purchase was unequivocal: the funds would not be available after that date. And the congressional champion of the Headwaters acquisition, Sen. Diane Feinstein, made it clear to all of the parties that, in her view, it would not be possible get those funds back.

The final days leading up to the conclusion of the Headwaters transaction should have been relatively uneventful. Most of the preconditions for the closing were in place. The property had been appraised in accordance with congressional requirements, California had appropriated its share of the purchase price (albeit by the barest of margins), and, most importantly, the parties had completed negotiations on the final terms of the HCP, which would govern PALCO's logging activities on the 210,000 acres of land that it would continue to own after selling the Headwaters Forest to the United States and the state of California.

Setting Up the Final Act: Final HCP Negotiations

Negotiating the final HCP had been extraordinarily difficult. The Company felt strongly that the logging restrictions, which the DOI and the U.S. Department of Commerce (DOC) were requiring for inclusion in the draft HCP that was released for public comment in the summer of 1998,⁹ were overly protective and financially tenuous. Those restrictions included the set-aside of significant portions of PALCO's property for the benefit of endangered species. Under the draft plan, a dozen so-called lesser cathedrals would be off-limits to logging, and there would be additional restrictions on logging activities around streams, in areas that had been logged heavily in the past (mass wasting areas), and other vulnerable landscapes.

The Company's concerns increased when the California state legislature identified additional protections that it insisted must be in the final HCP if state funds were to be available for the Headwaters purchase. Specifically, the state required the set-aside of larger buffers around streams in order to protect salmon stocks, and it called for more protective, broad-based limitations on a variety of other logging [30 ELR 10134] activities pending the completion of a more specific, watershed-by-watershed review of appropriate conditions.

Following this tightening of the terms of the draft HCP, the federal resource agencies—the DOI's FWS and the DOC's National Marine Fisheries Service—received more than 18,000 comments from the public, the vast majority of which called for inclusion of additional protective measures in the HCP. Following a review of these comments, agency scientists concluded that the HCP's terms needed further tightening to assure protection of the endangered and threatened species on PALCO's property. The agencies called for additional stream buffers, increased "lesser cathedral" protection for the marbled murrelet, more restrictive requirements on road construction and use, and other operational limitations.

Negotiations on these issues involved intense discussions among the parties. Closure was needed by the end of December, so that the resource agencies could devote the month of January to the daunting task of finalizing the environmental impact statement (EIS) for the entire transaction and preparing and issuing a comprehensive biological opinion (BO) to support the HCP. February would then be set aside for the legally required 30-day waiting period, prior to the execution of a final record of decision (ROD) on or before March 1, 1999—the statutory bewitching hour. Time was short indeed.

The December negotiations were extraordinarily difficult and contentious. Indeed, by mid-December, negotiations broke off. The parties went their separate ways, convinced that there were irreconcilable differences between the Company's concerns about the economic viability of the proposed logging restrictions and the federal and state scientists' needs for additional habitat protection.

Despite the apparent enormity of the gap between the parties, Senator Feinstein refused to let the deal die. She called the parties back to the table and hosted an extraordinary set of negotiations in her San Francisco offices during the week before Christmas. In the finest tradition of mediation, the Senator pushed the parties to articulate their concerns, and to find common ground.

Due largely to Senator Feinstein's force of will, all of the major issues had been worked through by Christmas Eve. The PALCO team was unhappy, but they appeared willing to accept the new conditions that the federal and state scientists were insisting on. Only "minor" issues remained to be negotiated.

Predictably, completing negotiations on the remaining "minor" issues turned into another marathon, as the parties negotiated throughout the week between Christmas and New Year's. Senator Feinstein remained attentive throughout, forcing discipline on the parties. As in the previous weeks, the normal workday was irrelevant. Conference calls went long into the night. Vacations, parties, and other personal distractions were pushed aside.

By New Year's Eve,the parties had reached closure on virtually all of the remaining issues. But the Company's discomfort level continued to rise. Concerns about economic viability of the logging activities that would be permissible under the HCP continued to surface with growing intensity. The Company wanted to revisit fundamental structural approaches in the HCP that had been discussed at length before and agreed upon.

But there was simply no time (or inclination) for further negotiations. We needed to finalize the terms of the HCP so that the final EIS and BO could be prepared. Bruce Babbitt called a press conference for the last day of the year, and we announced to the public, and the Company, that we were finished. The HCP that had been the subject of our extensive negotiations would be offered to the Company on a "take it or leave it" basis. Backed into a corner, the Company issued a press release stating that it was supportive of the approach taken in the HCP, but that it would withhold final judgment pending the completion of other aspects of the final Headwaters transaction. The New Year's Day newspapers covered the story from coast-to-coast: the federal government was standing firm on the HCP. The Sierra Club and others applauded our willingness to not compromise the biological integrity of the HCP.

By New Year's Day, we thought that the heavy lifting had been completed. We had negotiated all aspects of the HCP, and the Company—while clearly unhappy and nervous about the restrictiveness of the HCP—appeared to be willing to accept the final terms as part of the overall package. We anticipated that January and February would be devoted to finalizing the many documents needed to complete the transaction—the Implementing Agreement, the incidental take permit, the documents associated with the transfer of legal title of the Headwaters Forest, the EIS, the BO, and the ROD. It would be a sprint to February 1, but it looked feasible.

The Final Push

Our optimism was unfounded. Although the Company had signed off on final revisions to the HCP by Christmas on the major issues, and then by New Years on the "minor" issues, cold winds began to blow. By late January, the Company's negotiators were again raising fundamental concerns about the feasibility of the proposed HCP. They wanted to fundamentally alter the HCP so that it would provide assurances that the Company could harvest a specific threshold of board feet from its property on an annual basis. In essence, the Company was looking for an "override" to the HCP if the HCP's terms did not enable enough logging to meet the Company's financial goals.

At the outset, I assumed that the Company was taking this approach to satisfy internal constituencies who needed to know that the Company would not give up on its efforts to liberalize the HCP until the bitter end. After all, the Company's sophisticated advisors had to know that the resource agencies could not simply say "nevermind" to the science-based restrictions that had been incorporated into the final HCP following weeks of difficult discussions. The Company also had to know that the government could not—at the eleventh hour—simply revisit and renegotiate the fundamental approach taken in the HCP. Such a course of action would raise serious policy issues while also raising insurmountable practical problems, given the number and complexity of the documents that needed to be prepared for execution and filing by March 1.

And yet, the drumbeat from the Company continued. The final HCP would not be economically viable. The HCP had to be fundamentally changed. The resource agencies had to provide assurances that certain production levels could be reached.

[30 ELR 10135]

As the March 1 deadline approached, it became increasingly clear that the Company's change in tone and its push for fundamental change in the HCP was not a ploy. Slowly, the story began to emerge. There were new players. Wall Street types. Apparently, unbeknownst to the federal team (or to Senator Feinstein, for that matter), PALCO had refinanced a large debt burden in the summer of 1998. In connection with the refinancing, PALCO reportedly had assured its bondholders that it had robust harvesting potential on its property and that it could make steep debt payments—based, in part, on an assumption that the restrictions included in the draft HCP would be finalized without material change.

Obviously, however, any such assumption was flawed. The California legislature added significant new conditions on logging in the legislation that it passed on August 31, and the federal resource agencies were persuaded by public comment that their draft HCP needed to be tightened up. As a result, the bondholders were looking at a much different HCP in January 1999, than the draft that had been on the table in the summer of 1998, when they made their refinancing assumptions. The bondholders and the Company directors who worried about their interests wanted assurances that PALCO's lands would yield harvest levels that would meet debt payments. Nevermind about the vagaries of regulatory requirements and site-specific conditions: give us a financial guarantee!

The Company had put itself—and us—in a box. It appeared that the Company had nowhere to go. The bondholders were watching. The Company's directors were hiring independent counsel and financial advisors. The "green eye shade" types were taking over, asking that the government provide the types of assurances that might make sense in a purely business transaction, but which were simply untenable for regulatory agencies with statutory responsibilities.

One week out from the deadline, we decided that the best we could do was to educate the new players about the particulars of the HCP. Our scientists were convinced that the HCP's initial, broad-based restrictions should and would be adjusted for specific landscapes based on principles of adaptive management and watershed analysis. The resource agencies had insisted that general guidelines on logging activities over the entire PALCO property must be conservative, but agency scientists recognized that scientific reviews of some areas may allow those default prescriptions to be adjusted without harming endangered or threatened species habitat. This HCP was organic; it was not a 50-year straightjacket. If the science demonstrated that some additional areas could be logged based on more site-specific scientific reviews—as the Company predicted—then more logging would be allowed. The final call, however, always was in the hands of the federal scientists who have statutory responsibility to implement the ESA.

To assist the education effort, and at the suggestion of our scientists, we clarified the adaptive management provision in the HCP to make it clear that sensible, "on the ground" decisions would be made about the application of broad-based prescriptions to specific landscapes. And we emphasized that we were willing to subject our scientists' judgments to a peer review process. The HCP would be driven by science, and if the Company believed that consensus science would lead to a loosening of some of the HCP's restrictions, then it should not be fearful of the HCP.

As the days ticked down toward March 1, it became clear that our effort to clarify and educate was not persuading the corporate naysayers. The Company's lawyers were faxing to me draft after draft of proposed HCP revisions that would fundamentally alter the terms of the final HCP that we had negotiated over the holidays. The words changed from draft to draft, but the themes were always the same: the HCP had to guarantee a certain level of production from PALCO lands, some of the HCP restrictions that had been added by the federal agencies based on public comment had to be dropped, and the government had to prove that each and every one of the HCP's restrictions were required by the operation of the ESA.

How many times did we have to say "no" before the Company understood our position? Didn't the Company's advisors "get it"? We could not, and would not change the HCP at the eleventh hour.

Rather than rely on subtlety, Secretary of the Interior Babbitt, Secretary of Commerce William M. Daley, and Chief of Staff John Podesta transmitted a letter late in February to the Company that stated—in no uncertain terms—that the proposal to revise the HCP to provide a guarantee of financial results would not fly.¹⁰ We had negotiated the terms of the HCP and would not turn away from them now. The letter continued our campaign of education, however, by emphasizing that the HCP was structured to provide flexibility and on-the-ground adjustments, as appropriate. We committed to work with the Company to make the HCP work-for the species, and for the Company. But no promises.

With seven days to go until the deadline of Monday, March 1, the Company pulled out all the stops. Calls were placed on the Hill, in the White House, and everywhere else the Company thought it might find a sympathetic ear. Senator Feinstein was petitioned to intervene again and to ask the federal agencies to make fundamental changes in the HCP. Chief of Staff Podesta hosted a meeting in the West Wing. One of the lead negotiators, Charles Hurwitz, placed a call to the President on Air Force One.

By the Wednesday preceding the deadline, the Company's efforts had yielded no changes, and we needed to go to "print" with the final HCP. We did so. Senator Feinstein—troubled to learn that the Company's debt load was a major part of the problem—was not willing to question the judgment of the agencies' scientists or otherwise reopen the very provisions in the HCP that she had helped the parties reach closure on in December. Chief of Staff Podesta—and the President—backed us up.

Because we had "gone final," our only hope was that the sensible advisors for the Company would recognize the fundamental benefits of the entire package and persuade the skeptics that this was a deal worth taking. In addition to garnering a huge sum of cash for the Headwaters Forest transaction (nearly one-half billion dollars), the HCP provided a chance for peace between federal and state authorities and PALCO. Granted, the HCP was tough and, yes, departures from the HCP would bring harsh consequences, but the alternative was more unattractive: PALCO would continue to be enemy Number One to the environmental groups who [30 ELR 10136] were concerned about the Company's practices. Also, federal and state authorities could not stand by and allow the Company to operate in violation of the ESA without a permit. They would need to step up their vigilance to ensure that logging practices did not violate the ESA.

By Thursday morning, the dual message seemed to be getting through: (1) we were not going to budge on the HCP; and (2) the HCP—while tough—was workable, and we wanted to see it succeed both for the species involved and for the Company.

Still, it was apparent that a split had developed among the Company's advisors. Some appeared to recognize that walking away from the HCP, and from the sale of the Headwaters Forest, would inflict enormous wounds on the Company. Others were unwilling to affirmatively enter into a deal that, in their view, carried financial risk on its face. Viewed from my perch, it appeared that the inside proponents of the deal were gaining ground. Our sincere willingness to make this HCP work was hitting home with some. Our emphasis on the organic nature of the HCP and the flexibility to change terms and conditions based on site-specific circumstances provided others with comfort. A PALCO Board meeting was scheduled for Friday afternoon (February 26) to make the final decision.

On the eve of the Board's meeting, a serious new complication arose. On Thursday evening, the California Department of Forestry (CDF), which was required by law to issue an umbrella approval for logging activities (known as a sustained yield plan or SYP), characterized the HCP as allowing only 140 million board feet of logging per year on PALCO property—significantly below the Company's break-even point, and significantly below the amount of logging that the federal and state scientists who prepared the HCP believed would be allowed under the plan.¹¹ The CDF letter reinforced the Company's worst fears: the HCP would lock in logging levels that were 50 percent below historic levels, and substantially below the levels needed for the Company to make a profit.

The CDF letter shocked both the federal and state scientists who had prepared the HCP. They thought that the Forestry Department's characterization of the HCP was dead wrong. They had not been given an opportunity to review the letter. But there it was, in black and white, reinforcing the Company's worst fears, and released at the worst possible time, on the eve of the Company's vote.

Despite the CDF surprise and the flurry of calls that it spawned, the morning of Friday, February 26 began with some optimism. A number of the Company's advisors thought that the Company would approve the deal. Expectations spread. The gloom that had pervaded the federal team as we struggled to push the deal forward against increasingly adverse odds, suddenly was lifted. The deal was going to happen. I was ready to celebrate—I needed to celebrate. The days and weeks of non-stop pressure and round-the-clock negotiations were taking a toll.

Morning became afternoon. The Board meeting was underway. And then the calls came in. The Company's primary outside lawyer, Tommy Boggs, called me first. He reported, somberly, that the Board had rejected the deal. Resoundingly. It was not close. The deal was dead.

Senator Feinstein called me next. She was despondent. Was it really dead? What a horrible end!

And then Charles Hurwitz called me, thanking me for my efforts to try to make the deal come together, but lamenting the fact that the final HCP terms were so restrictive—more restrictive than any other on record, so much so that the Company's viability was threatened. Hurwitz confirmed what Boggs had said. The deal was dead.

What a punch in the stomach. It was over. The Company held a closing news conference. Other representatives of the Company checked in with me. The insiders who thought that it was in the best interests of the Company to take the deal were depressed—nearly despondent. Despite the fact that the deal theoretically could still be put together before midnight on Monday, that prospect was dismissed. We had all given it our best.

The Saturday papers trumpeted the news. Headlines in the major California papers, The New York Times, and The Washington Post all reported that the Headwaters deal had cratered.

But the phone calls started up again on Saturday morning, even as I read all of the all-too-accurate press accounts of the demise of the deal. Our Regional Solicitor in Sacramento and leader of the California team of scientists and lawyers, David Nawi, wanted to keep pushing. His team was upset. They were convinced that the CDF's low-ball estimate of harvesting potential under the HCP, released on the eve of the final Board meeting, was absolutely wrong on the facts and legally indefensible. Rumors were flying that some staffers at CDF had issued the in-your-face letter to kill the deal. They reportedly did not want the HCP's restrictive prescriptions to become legally enforceable and serve as a potential precedent for restrictive forest practices in the state.

Whatever the truth of the matter, the California team awoke on Saturday morning highly motivated. The California Fish and Game scientists who had worked hand-in-hand with the federal scientists in preparing the HCP wanted to go on record with the Forestry Department and ask them to revoke their letter and issue an SYP approval that provided an accurate picture of the harvest potential under the HCP. The federal scientists were eager to make the same point. The HCP should support harvests materially higher than the CDF had estimated, and, moreover, the HCP included adaptive management and watershed analysis procedures that had the potential to free up additional lands for harvesting.

The scientists worked all day on Saturday and into the night. Two letters were being prepared for delivery to the CDF, one from California's Department of Fish and Game scientists,¹² and one from the DOI and the DOC scientists.¹³ Both would explain that the CDF had it wrong. The HCP [30 ELR 10137] would clearly allow more harvesting than CDF's Thursday letter had indicated. The CDF's conclusions could not be supported. They had to change.

Throughout the day and into the evening, I followed these developments, engaging the Company's lawyers and state officials in a dialogue on the subject.

The Company's representatives were not optimistic that this effort would make a difference, but they were nonetheless interested in seeing how the government scientists would characterize the HCP. If the government scientists would go on record with their views that the HCP would allow more logging than CDF had indicated, and if the government scientists would acknowledge that the HCP included flexibility to take into account adaptive management and watershed reviews, perhaps the Company directors would be willing to take a second look at the deal on Sunday.

I was the conduit for getting the signed letters to the Company. I went to bed after midnight on Sunday without the letters, but with my home fax machine on, expecting to see copies of the letters when I awoke.

Upon checking the machine first thing in the morning, however, I found that the machine had jammed during the night. No letters had arrived. The Company's representatives were going berserk. Where were the letters? What did they say?

Cell phone calls from the street outside my church that Sunday morning straightened out the mess, as I interrupted a California official's morning shower and arranged to have the letters transmitted to the Company.

When I read the letters prepared by the scientists—both state and federal—I was pleased. In my view, the letters were powerful evidence that the Forestry Department's low-ball estimate of harvest levels was baseless. Just as importantly, the letters provided a forum for the scientists to explain how the HCP would work, including the adaptive management and watershed review provisions. The letters explained that the HCP was not a straightjacket. It was a tough, but flexible, guide that would regulate logging activities in a manner that was science-based.

With the letters in hand, I hit the phones on Sunday to push again for the Company to accept the deal. I explained that this was what the Company had been looking for. The CDF was going to have to admit its mistake. Adequate harvests were likely under the HCP. No, we could not provide guarantees, but the HCP would work. All of us—scientists and policymakers alike—were committed to make it work.

As I sat at my desk in the DOI on Sunday evening, participating in discussion after discussion, I developed the sinking feeling that the letters that had looked so promising a few hours ago would not be enough. Yes, Company officials were acknowledging that the letters were helpful, but they weren't enough to satisfy the Company's internal skeptics.

The Company wanted more. I could offer an assurance that the HCP would get a high-level commitment from me at DOI and Terry Garcia at DOC; we would put our departments behind the effort to make the HCP successful. Still not enough. The Company continued to obsess about the marginal economics of the deal. And their lawyers were concerned that federal scientists would change the rules of the game when applying site-specific requirements under the adaptive management or watershed analysis provisions in the HCP. Would the agencies base their decisions on the ESA, or would they apply some other, higher standards of their own creation when evaluating whether adjustments were appropriate?

It was a discouraging evening. The day that had begun so promisingly was ending with a thud. The Company's negotiators weren't persuaded. There was no reason to take the deal back to the Board. There continued to be too much financial and legal risk for the Company, said the negotiators. The Company was better off taking its chances without a permit, rather than signing onto an HCP that guaranteed financial losses. And, besides, the Company had a phalanx of lawyers who were salivating to prosecute a case against the United States arguing that the proposed restrictions amounted to an unconstitutional "taking" of the Company's property rights without compensation.

By late in the evening, it looked to me like the deal was once again dead. I was extraordinarily discouraged. From a policy perspective, this was a bad outcome, particularly when our weekend efforts had, I thought, answered much of the Company's ill-founded concerns about the HCP.

Refusing to passively watch the deal die another death, I called Charles Hurwitz at home late on Sunday night to confirm with him directly that his representatives were accurately reflecting his views. They were, Hurwitz was very negative. He did not think that the deal "penciled out" for the Company. He appreciated our efforts to try to keep the parties talking despite the Board's definitive vote on Friday, but he asserted that the HCP remained fundamentally flawed. It was uneconomic for the Company. And what seemed to bother Hurwitz even more was that the HCP included restrictions that were more stringent than any of the HCPs that his competitors had negotiated. Hurwitz did not want to create a new standard for the industry.

I passed along the unhappy news to David Nawi and his team in California who had worked so hard to correct the CDF record. What else could we do? The prospect of losing the Headwaters, and a groundbreaking HCP to boot, was too depressing.

David had one, last-ditch suggestion. Perhaps the lawyers' concerns about whether agency scientists would be applying statutory standards when implementing the HCP was more than a smokescreen. We should be able to provide straightforward clarification on the connection between the HCP and the ESA. It was a long shot, but maybe such a letter would make a difference. David agreed to take a crack at a first draft on Pacific Coast time. I went home to bed, exhausted and discouraged to the core.

On Monday morning, March 1, I arrived early at the office to find David's draft. It was excellent. Straightforward, informative. The draft confirmed our commitment to apply the standards of the ESA when implementing the HCP, and reiterated the personal commitment that Terry Garcia and I had to see the HCP through. I worked on the draft and began clearing the letter through the legions of lawyers at multiple agencies who had to review and approve it. The White House—in the person of George [30 ELR 10138] Frampton, Chairman of the Council on Environmental Quality—pitched in and helped us get the approvals that we needed. By mid-afternoon, we had our green light. The letter went out.¹⁴

Meanwhile, throughout the day, I was receiving reports that Maxxam's stock was getting hammered on the American stock exchange. Saturday's news stories about the failure of the Headwaters transaction apparently had not impressed Wall Street. Would the vote that the investment community was making in favor of the deal make a difference? A one-day, 20-percent decline in the market value of the Company had to hurt.

By early evening, with a new letter in hand, the Company was making positive noises, for the first time in a long time. The letter was no more than a straightforward description of the legal context of the HCP, together with a commitment to work together to implement the HCP, but the hard-line lawyers for the Company liked what they saw. They wanted confirmation that it was the ESA that was being implemented, and not some nebulous, higher nonlegal standard. We could deliver on that request.

Could it be that the deal would come together with the combination of our last-ditch letter and the message delivered by the stock market? As afternoon turned into evening, I sensed that the Company was finally interested in doing the deal. Near exhaustion, with only hours left to go before the money disappeared—I began again to hope.

By 10:00 p.m., I was being told that the Company's advisors were ready to take the federal deal to the Board. But they also needed to reach agreement with the state, and there was trouble on that front. A revised CDF letter still was not forthcoming (despite being promised) and, worse yet, the Company was pushing the state to endorse a higher harvest level than the state and federal scientists had supported over the weekend. This was overreaching, and the state negotiators were upset. To make matters worse, the Company was insisting that the state co-sign the interpretational letter that we had drafted. The state had had nothing to do with the letter, and state officials were feeling squeezed.

Emotions were running high. I was hearing reports that conversations between the Company and the state were going very badly. David Nawi and I were beside ourselves. The deal had finally come together, with virtually no time to spare, but now the Company and the state were clashing, and both were digging in. I jumped on a Company/state conference call. It was very tense. People were yelling at each other.

I thought that both sides were at fault. The Company was out-of-line for continuing to push the envelope on harvest levels. And the state seemed to have a visceral reaction against signing a straightforward letter that the feds—and not the state—had written.

Meanwhile, time marched on. It was now after midnight, East Coast time. By necessity, we were now assuming that the congressional deadline of midnight, March 1, applied to the time zone where the property was located and where the transaction would be recorded—Pacific Coast time.

The tension between the Company and the state was leading to meltdown. Folks were tired and ready to walk away. The deal was slipping away.

I wasn't willing to stand by and let that happen. In desperation, I called and woke up Senator Feinstein at her home at 1:30 a.m. Would she be willing to join a conference call among the federal, state, and Company representatives? We were close, but the negotiators were losing their perspective. Could the Senator push back on the Company on the harvest issue and help us work through the letter?

True to form, the Senator was up in a flash and on the phone. She told the Company that they were overreaching on harvest levels. Let it go. Turning to the state, she asked whether they could sign onto the interpretational letter that we had drafted. We talked substance. The state wanted some changes in the letter. We agreed with the proposedrevisions.

By now it was well after 2:00 a.m. Less than 40 minutes to go. The lawyers in Eureka, California, who were standing by to record the deal said they needed an hour of lead time to undertake the documentation. Fat chance. We didn't have a deal yet. They would have to wait.

As the minutes ticked away, the discussions continued. What exactly were the language changes needed by the state on the interpretational letter? What should the signature line say regarding state acquiescence to the letter? Lawyers were concerned about nuances. Lots of hand-holding and very little time.

And how about the CDF letter? The state had prepared a new draft that corrected the harvest level estimates, but did it adequately convey the fact that higher harvests might be possible?

Hurwitz got on the line with an issue or two. Was everyone agreeing to help implement the deal? Could he receive assurances from the governor? (By this time, Mary Nichols, Gov. Gray Davis' new Resources Secretary, and Susan Kennedy, a key personal advisor to Governor Davis, were fully engaged, and extraordinarily helpful.)

Again, the calm voice of Senator Feinstein intervened. All parties would proceed in good faith. Get it done. She signed off.

The last 10 to 15 minutes were chaotic. Instructions were shouted among the Company representatives as they conducted parallel briefings with the Board. Wordsmithing on key documents continued. Signatures were needed. Faxes were being sent and delivered.

Within five minutes of 3:00 a.m., David Nawi was shouting instructions about what documents had to be executed and recorded for the deal to stick. Mass confusion. Documents were being sent to Eureka. Someone announced that the recording of the deal had begun. Two minutes later, someone else announced that documents transferring title of the Headwaters Forest to the United States had been recorded.

It was done! By the barest of margins. Exhausted, we congratulated each other. Charles Hurwitz even said thanks. We started talking to the press, spreading the news. Against all odds, we had completed the deal. The Headwaters Forest now belonged to all citizens of the United States—forever! And we had executed a precedent-setting HCP that established new standards for forest practices.

[30 ELR 10139]

Epilogue

Reviewing the final Headwaters negotiations puts a sharp point on one of the primary lessons that the Headwaters deal teaches us—when it comes to negotiating consensus-based approaches for preserving our natural resources, no Polyannas need apply. Even when there is broad-based appreciation for the importance of protecting a natural resource, the implementation of a plan to protect the resource can be extraordinarily difficult. This is tough stuff, requiring perseverance, creativity, and the sheer will to make it happen. In this case, a long effort in which many individuals and organizations played a major role, bore fruit—barely. The lesson here is that success should never be presumed. We must not forget how close we came to losing the Headwaters Forest.¹⁵

1. The old growth redwood tract that originally was known as the Headwaters Forest approximates 3,500 acres in size; the additional 4,000 acres include residual redwood and douglas fir stands.

2. Agreement entered into on September 23, 1996, among the United States, the state of California, and the Pacific Lumber Company.

3. 16 U.S.C. §§ 1531-1544, ELR STAT. ESA §§ 2-18.

4. Department of the Interior and Related Agencies Appropriations Act, 1998, Pub. L. No. 105-83. 111 Stat. 1543 (1997).

5. Pre-Permit Application in Principle, entered into on February 27, 1998; executed by the Regional Directors of the U.S. Fish and Wildlife Service (FWS) and the National Marine Fisheries Service (NMFS), the Secretary of Resources for the state of California,the Chairman of Maxxam, Inc., and the President of the Pacific Lumber Company.

6. Assembly Bill No. 1986 (Aug. 31, 1998), approved by Gov. Pete Wilson Sept. 19, 1998. Filed with the Secretary of State Sept. 21, 1998.

7. Pacific Lumber Company Habitat Conservation Plan/Sustained Yield Plan, entered into by the Pacific Lumber Company, Scotia Pacific Company, Salmon Creek Corporation, the FWS, the NMFS, the California Department of Fish and Game, and the California Department of Forestry and Fire Protection (Mar. 1, 1999).

8. Implementation Agreement With Regard to the Pacific Lumber Company Habitat Conservation Plan, entered into by and among the FWS, the NMFS, the California Department of Fish and Game, the California Department of Forestry, Pacific Lumber Company, Scotia Pacific Holding Company, and Salmon Creek Corporation (Mar. 1, 1999).

9. See 63 Fed. Reg. 37900 (July 14, 1998).

10. Letter to Mr. Thomas H. Boggs Jr., from John Podesta, Chief of Staff, Office of the President; Bruce Babbitt, Secretary of the U.S. Department of the Interior; and William M. Daley, Secretary of the U.S. Department of Commerce (Feb. 11, 1999).

11. Letter from Richard A. Wilson, Director, California Department of Forestry and Fire Protection, to John Campbell, President, Pacific Lumber Company (Feb. 25, 1999).

12. Memorandum from California Department of Fish and Game to Mr. Richard A. Wilson, Director, California Department of Forestry and Fire Protection (Feb. 27, 1999).

13. Letter from Mike Spear, U.S. Fish and Wildlife Service, and William Hogarth, National Marine Fisheries Service, to Richard A. Wilson, Director, California Department of Forestry and FireProtection (Feb. 27, 1999).

14. Letter from David J. Hayes, U.S. Department of the Interior, and Terry Garcia, U.S. Department of Commerce, to John Campbell, President, Pacific Lumber Company (Mar. 1, 1999).

15. The Headwaters transaction would never have been completed without the selfless dedication of many individuals. Special thanks to the federal team that played key roles in bringing the deal home in late 1998 and 1999, including Terry Garcia, David Nawi, Dinah Bear, Monica Medina, Wendy Thurm, Peter Coppleman, Jim Brookshire, Mike Spear, Bill Hogarth, Ed Hastie, Phil Detrich, Vickie Campbell, Lynn Cox, Ted Buettler, David McIlnay, Tim Ahern, and many others. Special thanks also to Mike McGill and Kathy Reich of Senator Feinstein's staff, and the many advisors to the state of California and the Company who helped push the deal across the finish line.