How much power does the state have to dictate terms to a private company if it claims the public interest is at stake?

That’s the question at the heart of a bill before the Legislature that would force the largest owner of hydroelectric dams in Maine to hand over a portion of its profits to the owner of the paper mill in East Millinocket, which has been idle since late January with a skeleton crew. More than 200 mill workers are jobless in the meantime.

Harold Pachios, a partner in the Portland law firm PretiFlaherty who represents the dams’ owner, Brookfield Renewable Energy Partners, called the bill “a gun to the head” of his client because it would force Brookfield to hand over profits to Cate Street Capital, the private equity firm that owns the mill.

What began as negotiations between the two private companies over the sale of electricity has the potential to become a test case for how far the state can reach into private business dealings to protect jobs.

The bill in question, L.D. 1792, would require Brookfield to provide a portion of its profits – estimated to be several million dollars in just the last month – from the sale of electricity generated at three hydroelectric facilities that were once part of the original Great Northern Paper to Cate Street, which has said it needs a share of the profits from power sales to reopen and remain viable for the long term.

Cate Street’s attorneys at Pierce Atwood argue that the state has this right because the people of Maine own the water flowing through Brookfield’s dams and the state has the ability to affect how that water is used. In addition, the lawyers argue, Maine has the authority because it was the state in 1897 that originally granted Great Northern Paper the charter allowing it to build the dams in the first place with the express purpose of providing power to the paper mills.

Pachios disagrees with the premise, and said that all changed when his client purchased the hydroelectric dams from Great Northern Paper in 2001.

At stake is the fate of the Great Northern Paper mill in East Millinocket and the more than 200 employees who were laid off after the mill was idled on Jan. 23. But beyond the jobs, the bill’s main opponent says there’s much more at stake. Pachios said the bill goes too far, is unconstitutional because it would violate the Contract Clause of the Constitution, and is being used as a tool to interfere with a private business’s operations.

“Look at it this way,” Pachios said. “Are there any other companies in Maine that sell things to another company in Maine and have a contract for the sale? Because if there are, and the Legislature thinks it wants to give the money to someone else, they’ll pass a law. If you can do it to me, you can do it to everyone.”

“There’s so many things about this law that should scare the people of Maine that it’s almost beyond comprehension,” Pachios said.

Scott Hempling, a lawyer in Maryland, has decades of experience working with the Federal Power Act, which grants the federal government jurisdiction over hydroelectric facilities. He was not familiar with the Maine case, but after it was described to him, he said it seems unique.

“It is not unusual for a state to use rate-making to assist a local business, by relieving that business of some portion of the utility’s fixed costs. In that situation, the difference is absorbed by all customers, the logic being that the entire community is better off by retaining the business,” he said. “I know of no situation, however, where to save a business a state orders a single supplier to share its profits with that business.”

William Huang, a lawyer at Spiegel & McDiarmid in Washington, D.C., who represents clients in hydroelectric matters before the Federal Energy Regulatory Commission, also said he was unaware of a comparable situation.

“While the Federal Power Act states that it does not affect state water rights,” he said, “I’m not familiar with a case along the lines of what you’re describing where a state claims its water rights can be used to claim the authority to regulate what happens to the profits from the sale of that electricity.”

The Legislature’s Energy, Utilities and Technology Committee held a public hearing March 5 on the bill but tabled it to allow the two companies more time to try to negotiate a resolution. Rep. Barry Hobbins, D-Saco, House chairman of the committee and a co-sponsor of the bill, said the intent of the legislation is to protect those papermaking jobs and nothing more.

“It’s in the best interests of both parties that this be resolved without interference from the Legislature,” Hobbins said, “but as a last resort, we have to consider other alternatives.”

George Gervais, commissioner of the Maine Department of Economic and Community Development, said the best outcome would be for the companies to come to a resolution on their own that leads to restarting the mill. He would not comment, however, on whether Gov. Paul LePage’s administration supports or opposes the bill. When pressed on whether the administration would support the bill if the negotiations fail, he said: “If these companies can not come to an agreement on their own, then the bill moving forward will hopefully result in Great Northern Paper reopening.”

WHAT CATE STREET WANTS

Cate Street Capital acquired the East Millinocket mill in 2011 from Brookfield for $1. It has invested roughly $25 million in the mill, according to Scott Tranchemontagne, a spokesman for Cate Street, which is based in Portsmouth, N.H.

Brookfield and Cate Street have a 10-year power purchase agreement under which the mill buys 42 megawatts of the three dams’ total 125 megawatts of capacity at a below-market rate of between $40 and $45 per megawatt-hour.

Tranchemontagne said Cate Street is trying to improve the mill’s business plan to allow for a restart by May 1, but that an essential element to that is its ability to profit from a practice known as “load shedding.” Load shedding occurs when a manufacturing facility cuts back on production, and therefore its power usage, during times of peak electricity demand in order to profit from the sale of electricity on the open market, where prices can reach more than $100 per megawatt-hour.

Under the contract between Brookfield and Cate Street, Brookfield can sell any of the 42 megawatts that Cate Street doesn’t use on the open market and pocket the proceeds. Cate Street wants the ability to share in that revenue but has said Brookfield is unwilling to negotiate that possibility.

Pachios denied that claim and said Brookfield is willing to negotiate as long as it makes prudent business sense. An additional hurdle, according to Cate Street, is a 2002 special and private law that prohibits the owner of the paper mill from receiving revenue from the sale of electricity when a “paper mill closing” takes place. L.D. 1792 would amend that law.

“With respect to load shedding, we are simply asking to be allowed to do what the other Maine mills currently are allowed to do,” Tranchemontagne said. Other paper mills benefit from load shedding at times, but in most cases those mills own their own generating assets.

Cate Street estimates that Brookfield has gained between $4 million and $5 million in profit from the sale of electricity on the wholesale market that otherwise would have been sold to Cate Street at a below-market rate. Brookfield couldn’t immediately provide its own estimate.

HISTORY OF THE DEAL

The paper mill in East Millinocket, once the largest in the world, has been a topic of conversation in Augusta for decades. In fact, the state was an integral part of its creation, as it granted the original charter in 1897 allowing the Northern Development Co., which would later be renamed Great Northern Paper, to dam the Penobscot River in order to generate electricity for use at the paper mill.

It’s that original charter, in fact, that is the crux of the argument being made by supporters of L.D. 1792.

In testimony submitted to the energy committee, Cate Street’s attorneys at Pierce Atwood argued that “the relationship between Great Northern Paper and Brookfield is not the standard relationship between two companies in the free market. The Legislature granted the privilege of damming the river. In granting that privilege, the Legislature can and does place conditions on those who enjoy this privilege. The existing private and special law imposes conditions on both of these companies and this bill simply seeks to modify these conditions, which is well within the power of the state.”

As for Pachios’ claim the bill would be unconstitutional, Christopher Howard, a lawyer with Pierce Atwood, argued in a March 10 memo to the co-chairmen of the legislative committee that the bill would not affect the existing contract between Cate Street and Brookfield and therefore wouldn’t violate the Constitution.

Pachios said Brookfield’s position regarding L.D. 1792 does not change its prior assurances that it wants to assist Cate Street to keep the mills operating. It just disagrees with the legislative method being used.

“We are very sympathetic to the plight of these workers, but they should be looking to Cate Street to restart the mill using capital from its own investors,” Pachios said. “Why they’re looking to us to invest the money is beyond me. The workers in the towns should be looking to Cate Street, the owners of the mill, to invest in the mill and put people back to work.”

Whit Richardson can be contacted at 791-6463 or at:

wrichardson@pressherald.com