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Sunday, April 1, 1990 - Page updated at 12:00 AM

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Another Environmental Crisis Confronts Prince William Sound

Wall Street Journal

TWO MOON BAY, Alaska - Through the whim of wind and tide, this inlet on Prince William Sound was spared by the nation's worst oil spill last spring, when the Exxon Valdez ran aground. But now it, and the rest of the sound, face a far more lasting ecological threat. And ironically, none other than Exxon Corp. has been asked to play savior.

The threat is the chain saw. Plans are afoot to clear-cut hundreds of thousands of acres of ancient Sitka spruce along the vast shorelines and misty isles of this remote marine wonderland.

The logging technique leaves nothing standing and, while efficient, often turns wilderness into wasteland. Wildlife habitat is eradicated. Topsoil is left to erode and wash into streams, fouling spawning beds.

The northernmost of America's temperate forests are here, cradling some of the purest streams in the world and providing unfettered room for species such as the grizzly bear that have largely been driven from the lower 48 states. Once cut, these forests can regenerate to their present splendor. But it would take about a century.

Thus, with complete recovery from last spring's oil spill still years away, ``clear-cuts will be the last stroke against bio-integrity of the sound,'' says Rick Steiner, a biologist and environmental activist from nearby Cordova.

This time around, the despoiling springs largely from an unlikely - and arcane - source: the federal tax code. In an effort to bail out corporations owned by Alaska Native Americans, many of which have run up huge losses, Congress wrote an amendment to the 1986 tax reform act that let the corporations sell their losses to outside companies, which could then use them to lower their own tax payments.

Crafted by Alaska's Sen. Ted Stevens, the amendment - since revised - was simply supposed to help the native corporations recoup losses on sour investments.

In the hands of creative tax lawyers, however, the amendment became a vehicle for letting the corporations create huge paper losses on their timber holdings and then profit by selling off the red ink. Not surprisingly, the companies raced to rack up losses, setting off a stampede of loss generating timber sales. The deals - some of which are being scrutinized by the Internal Revenue Service - are bringing in millions for the cash-starved native corporations; but they are also throwing to the chain saw huge, scenic tracts of old-growth forests that have been the domain of local tribes for thousands of years.

Strange Bedfellows

So conservationists, led by Steiner, have gone looking for a white knight - and have turned to Exxon. By the environmentalists' reckoning, timber rights for the entire sound could be bought back from logging companies for $50 million to $100 million. Once purchased, they say, the rights could be transferred to a conservation trust. The land could never be logged, but native-corporation shareholders would still have access for hunting and fishing.

Exxon acknowledges that it has been approached but won't say anything else. Conservationists - quick to play the guilt card - insist the oil company would be smart to get involved, since any help on the timber front would be seen as an effort to make amends for last year's oil spill.

But even if Exxon doesn't come galloping in, the company may still play a role in stopping the clear-cutting, albeit indirectly. Exxon still faces civil and criminal charges in connection with the oil spill, and any settlement, if one is reached, could well involve hundreds of millions of dollars. The state of Alaska, which hopes to have a say in how any settlement money is spent, says it would consider using the funds for selective timber buy-backs.

Whether such a plan can succeed is complicated by debate over whether the sound's forests ought to be locked away from logging - and by native corporations torn between conservation and profit.

``I think the sound can be logged without impacting the environment and without changing its pristine nature,'' says Michael Chittick, president of Chugach Alaska Corp., an Anchorage-based native corporation that owns about 160,000 acres of timberland around the sound. Chittick says virtually all of Chugach's 1,900 shareholders either are involved in fishing enterprises or depend on the sound and its forest for subsistence. Thus, ``we are very concerned about keeping this balance and are willing to go to extremes to make sure what we do has little impact.''

Chittick insists, for example, that clear-cuts don't necessarily ruin nearby steams, if loggers are willing to leave buffer strips of trees along waterways to prevent erosion. In fact, a group of native logging concerns is supporting a bill in the Alaska legislature that would make buffer strips mandatory along salmon streams.

Others, however, are far less sanguine: The same tax-loss timber sales that are driving cuts around the sound have played an important role in accelerating clear-cutting of an estimated 300,000 acres of native-owned forests in southeast Alaska. The Southeast Alaska Environmental Council, a coalition of conservationists and Native Americans monitoring those cuts, recites a litany of horrors: 25-mile-long clear-cuts across a southeast Alaska island, for instance, and a village that sold its timber rights to generate a tax-loss sale and now finds loggers hacking down the ancestral forest at its doorstep.

``What's happened in southeast Alaska is our greatest fear for Prince William Sound,'' says Patti Saunders, a lawyer representing the Alaska Center for the Environment, an Anchorage group. The center has sued to block a proposed timber cut on Montague Island in the sound.

A possible sign of things tocome can be seen here at Two Moon Bay, a double-crescent fiord framed to the north by the snowy peaks of the Chugach Mountains. This is a place of aquamarine bays populated by orcas and otters; of cold, clear streams that swell with summer salmon; of ancient spruce forests weaving a verdant carpet across the foothills.

Marring the scene is a miles-long slash across the mountainside. It is here that logging crews, on land owned by the native Tatitlek Corp., have begun the first cuts of what could be as many as 500,000 acres of sound timberland to fall to the chain saw. That number represents timber holdings of a half a dozen of the sound's major native concerns.

``This logging is more devastating than the oil spill,'' says Tom Johnson, one of 750 commercial fishermen in Cordova. Mr. Johnson, whose Aleut ancestry makes him a shareholder in Chugach Alaska, first saw this clear-cut en route to help fight the Exxon Valdez spill last year; the logging, he says, was more traumatic than the sight of soiled beaches and dying birds. He worries about the damage the cuts will cause to the sound's $200 million-a-year fishing industry.

Few Rules

From a legal standpoint, state officials can do little to stop the clear-cutting. In other states, the practice has fallen out of favor, and, bowing to political pressure, loggers generally leave select trees standing to prevent soil erosion and ensure future harvests.

In California, even the logging industry is supporting a state initiative to halt clear-cutting. But in Alaska, there are virtually no state regulations for logging on private lands. For one thing, until the native corporations sold off tracts of their forest, there simply hadn't been that much private land available for logging, and therefore regulation wasn't much of an issue.

But all of that changed with the tax-shelter program, the law allowing native corporations to sell their net operating losses, or NOLs as they are called. The lands in question are part of 44 million acres, and $962 million in cash, awarded to Alaska's Native Americans in a landmark 1971 settlement of claims on federal lands. An act of Congress simultaneously created about 100 native corporations to manage these holdings. New to capitalism, most of the corporations floundered badly, and a number fell into bankruptcy.

Following the 1986 tax act, most of the timber-rich corporations, about 50 in all, simply valued their timberlands at the boom-year prices of the 1970s, when they were first transferred, and then began selling the timber rights at more recent prices, well below the 1970s peak.

The result: enormous paper losses - more than $1 billion all together - that have been snapped up by outside companies, including Ford Motor Co., Pillsbury Co. and Del E. Webb Corp. Congressional sources estimate the tax shelters have cost the federal treasury about $400 million in forgone taxes.

At the same time, NOL sales, which have been partly curbed by Congress since 1988, provided a much-needed infusion of cash for the native corporations. Chugach Alaska and Eyak Corp. have returned to profitability in part because of money made off the sale of NOLs. Eyak's 327 shareholders got $1,000 dividend checks last year, and the company expects to almost double that dividend this year. The timber-rights sales themselves have also proved profitable, as have some of the logging joint ventures between the corporations and outside concerns.

A Sure Thing

``We are logging at a profit,'' says Eyak's president, Steve Rehnberg. But because on paper it values the forests at 1970s prices, Eyak has also generated about $36 million in net operating losses - which Del E. Webb, Walgreen Co. and Hilton Hotels Corp. bought - by selling its timber rights to a joint venture in which it has a 49 percent stake. So the company will make money at both ends of the deal: first by declaring a loss and selling an NOL, then by getting its take from the joint venture, which harvests the timber.

The joint-venture concern has already begun some clear-cuts just outside of Cordova and plans to log much of its 104,000 acres of land over a ``20- to 30-year period,'' Mr. Rehnberg says.

The IRS has questioned some of these NOL deals, including one structured almost identically to Eyak's. Shee Atika Corp., a Sitka, Alaska, native corporation, says it is being audited for a sale of a $155 million timber-related NOL to Quaker Oats Co. The IRS is concerned that Shee Atika generated the loss by selling its timber to a concern in which it holds a 49 percent stake.

IRS regulations appear to allow a loss on a sale to a joint venture assuming the sale is judged to have been at fair market value. Critics point to the Shee Atika sale as an egregious example of an abuse of the tax code: The company simply dumped its timber at bargain basement prices to exaggerate its losses, and reaped a $50 million gain as a result, they assert.

Shee Atika officials are confident that the 1987 sale, involving timber rights on 23,000 acres, will pass IRS muster, saying that depressed timber values at that time support the size of the loss. Should the corporation flunk the IRS audit, however, it may have to return proceeds from the NOL sale to the buyer.

In the meantime, the state of Alaska, at the behest of environmentalists, has been trying to buy back timber and subsurface rights to 23,000 acres on Kachemak Bay on Alaska's Kenai Peninsula. It probably will have to pay a premium, now that the timberland has become so hot an issue. An appraiser for the native corporations that own the land values the rights to the acreage at $24 million; state appraisers set the figure at half that. But the native corporations have lately said they are willing to accept $15.5 million.

Most of the sound's timber rights appear available for a buy-back - but at a similar premium. ``If the Sierra Club thinks a tree is worth more in the forest than at the sawmill, it has to be willing to pay for that,'' says Eyak's Rehnberg.

Ownership Problems

The state, or conservation groups hoping to preserve the forest, face other problems in any effort to buy back rights. For starters, each acre sometimes has multiple owners. One native corporation, for example, may own the timber, while another owns the mineral rights. The state could buy the land outright, but that doesn't appeal much to the Native Americans living there; besides, it could cost $500 million to buy back most of the sound's private forest lands, according to an estimate by a group of native corporations.

Moreover, some native corporations are banking heavily on harvesting the timber on their lands.

Chugach Alaska, for example, has completed a $20 million sawmill at Seward on the Kenai Peninsula as part of a plan to process its timber and provide jobs for its shareholders. ``The mill requires a log supply,'' says Chugach's Chittick. ``It is inconceivable that we would sell all our timber holdings.''

Chugach's chairman, Edgar Blatchford, has denounced those wanting to buy back timber rights as ``environmental extremists'' meddling in native affairs. But even Chittick concedes that there are limits to how much logging should take place, and that Chugach's board has found the whole affair divisive. He says the corporation would consider some ``selective buybacks'' of Prince William Sound holdings and hopes to avoid logging much of its acreage on the sound. (The company also owns forests elsewhere.)

This is welcome news to David Grimes, a Cordova fisherman and environmentalist. He is worried about Chugach's sale of some timber rights on the sound's Knight Island. The sale was part of an NOL deal, and while there aren't immediate plans to log the island, ``theoretically these lands are on the table,'' Grimes says.

The fisherman admits his love of the sound and Knight Island is extreme, and it isn't hard to see why. The island, in the lower, eastern part of the sound, seems a paradise: desolate, pebbled beaches, azure water, timber-lined bays and huge waterfalls cascading from mountain lagoons.

``Cut here,'' he says, ``and you won't just be cutting trees.''

Reprinted with permission of the Wall Street Journal copyright 1990 Dow Jones & Co., Inc. All rights reserved.

Copyright (c) 1990 Seattle Times Company, All Rights Reserved.

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