Nearly seven years ago, state Sen. Byron Sher wrote what turned out to be a prophetic commentary for the San Francisco Examiner about the pending resolution of one of the most bitter, drawn-out and violent disputes over forest management in California history.

"Look beyond the hype over the deal to save the Headwaters Forest," he wrote in June 1998, "and you'll see that taxpayers may not be getting their money's worth."

Last month, with the key partner in that agreement warning that it would declare bankruptcy if not allowed to disregard key environmental safeguards, the words of the veteran legislator, termed out in December, seemed uncannily prescient.

The renewed debate over Headwaters also finds Gov. Arnold Schwarzenegger in a distinctly awkward position of his own making. He campaigned as a staunch supporter of the business community, but has also pledged to fight hard to defend California's environmental assets. And now, with those interests on a collision course in the redwoods, the governor is being pressed to take sides. This would be a delicate balancing act under any circumstances but it is made much harder by the fact that former timber industry lobbyists and executives occupy key positions in his administration.

The 1999 Headwaters purchase, through which the state and federal governments paid a combined $480 million to acquire about 7,000 acres of old-growth redwood forest on the North Coast from Pacific Lumber Co. (PALCO), remains the single most expensive conservation acquisition in California history. The deal included a commitment by the company to adopt a habitat conservation plan for its remaining Humboldt County property, limiting logging to protect such species as coho salmon and the marbled murrelet.

As Sher suggested in 1998, the breathtakingly high price tag dwarfed the commercial value of the land and the trees. "This huge expenditure is justified only if the public can be assured that the side agreement - a giant string attached to the purchase, known as a habitat conservation plan - won't imperil the future of endangered species on the rest of Pacific Lumber's 200,000 acres nearby," he wrote.

After PALCO signed off on the HCP, it went to work cutting every tree it could. Since September 2004 alone, the North Coast Regional Water Quality Control Board (RWQCB) has approved 40 of the company's timber harvest plans and continues to process more applications. The board has jurisdiction over the plans because logging can expose slopes to erosion, contaminating waterways with sediment.

In January, PALCO sought RWQCB approval for 11 additional timber plans, asking the board to relax restrictions on streamside logging in the Elk River and Freshwater Creek watersheds so the company could cut more trees. Board staff concluded that the plans would not adequately protect waterways from contamination, and noted that the company had repeatedly violated provisions of it previous permits, ruining drinking water supplies.

Company executives met privately with the governor and his top advisors to plead their case, threatening to declare bankruptcy, close mills and lay off hundreds of employees unless granted more lenient logging permits. Bankruptcy, the company warned, would effectively dissolve the HCP agreement, removing most restrictions on logging.

It is an odd time for Pacific Lumber to declare financial hardship. The western timber and wood-products industries are experiencing a record boom. The Portland-based Western Wood Products Association reported that U.S. lumber demand in 2004 soared to 59.7 million board feet, the highest level ever and the sixth record-setting year in the past eight. Consumption is being driven by the red-hot domestic housing market and by the falling value of the dollar, which has made imported lumber more expensive.

For many timber companies, the result has been fat profits. Plum Creek Timber, for example, posted a 27.8% increase in sales from 2003 to 2004, and saw net income rise a whopping 88.5% . Weyerhaeuser's net earnings more than doubled from 2003 to 2004.

Environmentalists have long regarded PALCO with loathing, and were quick to dismiss the bankruptcy threat as a ploy to evade its legal obligations.

"They are using their employees as human shields," said a Sierra Club representative.

Once a model of sustainable forestry, the family-owned company was acquired in 1996 through a hostile takeover by corporate raider Charles Hurwitz, whose Maxxam Inc. promptly began liquidating old-growth redwoods to retire the bonds used to finance the takeover. As the chainsaws buzzed ever deeper into the remaining stands of old growth, protestors by the thousands began to block logging roads, chain themselves to gates, and occupy individual trees to thwart the loggers. One activist died when a tree cut by a logger fell on him.

Although the company says it has become a model environmental citizen since the HCP was negotiated, its behavior continues to draw criticism. One Headwaters watchdog, the Garberville-based Environmental Protection Information Center, says it has documented hundreds of violations of the company's HCP agreement, including logging too close to streams and improper use of herbicides. In 2003, the Humboldt County district attorney filed a fraud case against PALCO, alleging that it had lied about the number of landslides caused by its logging practices; the company responded by bankrolling an expensive but unsuccessful recall campaign against him.

As illustrated by the recall campaign, the company remains a divisive element in the local community, where it provides a significant share of the jobs but also is suspected of contributing to mudslides and floods that have damaged homes and farms. Further evidence of split public opinion came earlier this year, when the Humboldt County Board of Supervisors voted - without prior public notice, possibly violating the state's open meeting law - to send a letter to the RWQCB supporting PALCO's request to expand logging. Scores of angry residents confronted the board at its next meeting to decry the maneuver and criticize the company.

If he decides to intervene in the dispute, Schwarzenegger risks inflaming suspicion about the sincerity of his environmental commitment, already rendered suspect by the prominence of former industry representatives in his administration.

For example, PALCO's former director of external relations, James F. Branham, is the number two administrator in the California Environmental Protection Agency, which oversees the state's regional water quality control boards. Melinda Terry, deputy secretary for legislation in the Resources Agency, was a lobbyist for the California Forestry Association when the governor hired her earlier this year.

North Coast Regional Water Quality Control Board, (707) 576-2220.
Pacific Lumber Company, (707) 764-2222.
Environmental Protection Information Center:
Western Wood Products Association: