FOREST SERVICE

Big and small mills lobby for piece of the timber pie

Tucked deep in Congress' bill to fund the government in 2015 was a request to the Forest Service: Get moving on a long-stalled rule that could aid the survival of America's small timber mills.

The report language "strongly encouraged" the agency to write a directive that could ensure small mills are not bullied out of federal timber contracts by larger, better-capitalized corporations.

The language, which was backed by Sens. Lisa Murkowski (R-Alaska) and Maria Cantwell (D-Wash.), signaled Congress' growing involvement in a debate that has sown deep rifts within the forest products industry.

At issue is whether protections for small businesses currently in place for conventional timber sales should be extended to stewardship sales, which are an increasingly popular way for the Forest Service to sell timber.

The debate could be one of many policy flashpoints as lawmakers debate an omnibus spending bill to keep the government running past Dec. 11.

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And it's an issue that has blurred party lines and pitted small-business advocates against labor unions in a battle for access to federal timber.

"It is a wound that has festered for decades," said Andy Stahl, executive director for the environmental group Forest Service Employees for Environmental Ethics, who formerly worked for the logging industry in Oregon.

The small business timber set-aside, jointly administered by the Forest Service and Small Business Administration, was established more than 50 years ago to ensure small mills could maintain their historical share of timber sold from national forests.

The program grew out of the Small Business Act of 1953, which made it the policy of the federal government to ensure a "fair proportion" of federal contracts go to small businesses to maintain "free competitive enterprise."

Twice a year, the Forest Service reviews the portion of timber volume in the previous six-month period in a given market area that was sold to small businesses, which are defined as having 500 employees or fewer. If the small business market share dips 10 percent or more below the historical average -- calculated from the preceding five years -- the agency is forced to hold a "set-aside" sale open only to small businesses.

The Forest Service's set-aside program applies only to traditional timber sales, in which logs are sold to the highest bidder. It doesn't apply to stewardship contracts, a relatively new authority that allows the Forest Service and Bureau of Land Management to sell timber and use the proceeds to fund forest health projects such as the removal of unneeded roads or invasive species.

Rise of, concerns with stewardship contracts

The volume of timber sold through stewardship sales was initially small compared with traditional sales, in part because the authorization from Congress was temporary.

But the program has grown quickly in size due to its bipartisan appeal.

From 2004 to 2014, the portion of national forest timber sold through stewardship contracts rose from 5 percent to one-third, according to federal data. Congress made the program permanent in the 2014 farm bill.

The Forest Service prefers stewardship contracts because, unlike with traditional sales, the agency may use the revenues to pursue forest restoration projects. They're also favored by environmentalists, since they ensure forest health and recreation improvements, and some businesses, since they allow timber to be sold in 10-year contracts that provide certainty for return on investments.

While small businesses have embraced stewardship contracting, the program's growth in the absence of small business protections has many firms worried.

"Small companies want to gear up and invest for this scale of timber work, but the risk is a larger company will come along and bully us around," said Russ Vaagen, vice president of Vaagen Brothers Lumber in Colville, Wash., whose mills turn the region's Douglas fir and western larch trees into two-by-four, two-by-six and two-by-eight lumber.

The Timber Products Manufacturers Association's Small Business Timber Coalition, which includes about two dozen companies in the West that rely on federal timber, has lobbied both Congress and the Obama administration on the issue. It is represented by Tom Michels, once an aide to former Senate Energy and Natural Resources Chairwoman Mary Landrieu (D-La.), who works for BlueWater Strategies.

Opposing the coalition is the Public Timber Purchasers Group, which represents large businesses that aren't qualified to participate in set-aside sales. The group is represented on Capitol Hill by Matt Hill, a lobbyist who previously served a decade under former Sen. Gordon Smith (R-Ore.).

Bill Dryden, executive director at PTPG, said stewardship sales should be exempt from small business set-asides because they are fundamentally different from conventional timber sales.

While conventional sales go to the highest bidders, Congress ordered agencies to sell stewardship contracts on a "best value" basis, which allows them to consider non-monetary factors like the use of the local workforce or past performance.

"It's not what I'd call an objective selection process," said Dryden. The small business set-aside would "twist the stewardship program into something it was never designed to be."

Moreover, looping stewardship sales into the set-aside program could result in fewer bidders and less revenue to the Forest Service, which would result in less acres of national forests treated to reduce threats like insect infestations and wildfires, Dryden said.

Regulatory, legislative steps

As both sides make their case, the Small Business Administration is exploring a potential rulemaking on the issue.

SBA in March issued an advanced notice of proposed rulemaking seeking comments on whether stewardship timber volumes should be included in the set-aside calculation and whether the Forest Service should appraise the value of set-aside timber to benefit small businesses.

It's the latest step in a long-stalled regulatory process.

The Forest Service first proposed including stewardship sales in its set-aside program in 2006, but big businesses fought back and the proposal was ultimately scrapped under Mark Rey, the Agriculture Department's top official overseeing the Forest Service at the time.

In March 2013, the Forest Service again announced plans to move forward with a rule, but no proposals have been put forth.

Members of Congress have started to intervene.

In September 2013, the House passed H.R. 1526 by former Natural Resources Chairman Doc Hastings (R-Wash.), which contained report language ordering the Forest Service to "review and undertake draft rulemaking that would establish parity" between the agency's set-aside program for timber sales and stewardship contracts.

Report language in the 2015 spending bill "strongly encouraged" the agency to put forward a rule. Last summer, Murkowski, who chairs the Appropriations Committee panel that writes the Forest Service budget, released a fiscal 2016 spending bill with report language stating that the Forest Service is "directed to expeditiously prepare and publish" a draft rule to establish a small business set-aside for stewardship sales.

"The administration's failure to finalize its approach on this issue risks harming small manufacturers and rural communities," Murkowski and Cantwell wrote in a letter earlier this month to Howard Shelanski, who leads the Office of Information and Regulatory Affairs within the White House.

On the House side, Rep. Jaime Herrera Beutler (R-Wash.) is seen as a key advocate for small timber manufacturers, as is Majority Leader Kevin McCarthy (R-Calif.).

Most lawmakers have stayed on the sidelines of the issue, at least publicly. Many in the West have both small and large manufacturers in their district and would prefer not to take sides. Officials from timber trade groups are also reluctant to weigh in.

Business, lobbying efforts

Big mills and the labor unions that represent their employees are also flexing their lobbying muscle.

Idaho Forest Group, which is among the 10 members in PTPG, has enlisted David Anderson of Natural Resource Results to lobby on the small business set-aside issue, and is also paying Rey to lobby on securing "timber supply from federal lands," according to federal records.

The United Brotherhood of Carpenters is paying to lobby the Small Business Administration on "issues regarding timber supply and the timber workforce," according to a federal disclosure. It filed comments to SBA urging it to reject set-asides for stewardship sales.

Small mills already win a disproportionately large share of timber from stewardship sales compared to large mills, the union claimed.

"This inquiry should actually be looking at ways to reduce the proportionate share of USFS sales being allocated to SBA timber set-asides -- not increasing them," the union wrote.

Yet as stewardship sales grow, small businesses say the Forest Service has established no checks against predatory bidding, where big firms buy timber contracts simply to put others out of business.

"We've built our business to win stewardship contracts, but we're at risk," said Vaagen of Vaagen Brothers Lumber. "We just don't want large multinationals to have the opportunity to harm and squish small multigenerational family businesses."

The Small Business Timber Coalition said stewardship contracts are quickly becoming the Forest Service's timber sale tool of choice -- they accounted for more than 80 percent of the timber volume sold in the agency's Southwestern region and more than 70 percent in the Intermountain region, which combined cover 54 million acres, according to SBTC.

If stewardship contracting remains exempt from set-asides, it "could lead directly to the closure of nearly all of the remaining 46 sawmill companies that survive through their purchase of Forest Service timber," the coalition said.

In addition, the Forest Service is beginning to offer stewardship contracts across broader landscapes, making them more attractive to big businesses, Vaagen said. He pointed to the Four Forest Restoration Initiative in Arizona, a 20-year plan designed to restore 2.4 million acres of ponderosa pine forest. The project includes a 10-year contract to thin 300,000 acres, the largest stewardship contract in the agency's history.

It's unclear where the Forest Service stands on the issue. The agency declined to comment for this story.

Small business backers say the agency is fearful that expanding the set-aside program could result in less revenue for stewardship contracts, which, while not the original intent of Congress, have become a key source of agency funding in the face of waning appropriations from Congress and the rising cost of wildfires.

Integrated resource timber contracts, the most common form of stewardship contracts where the value of timber exceeds the value of services performed, may be generating $100 million annually for the Forest Service, according to BlueWater's Michels. If true, it would represent a major supplement to the agency's appropriations for forestry work.

The Forest Service declined to say what revenue it receives from stewardship sales.

But the cash flow gives the agency a "perverse incentive" to avoid set-aside sales for stewardship projects, said Frank Gladics, who has represented small sawmills on and off over the past two decades and is a former forestry aide to Murkowski.

Small businesses insist set-aside sales on average generate about the same revenue as open sales. They cite one Forest Service report from 2008 that found set-aside sales in the late 1980s in the Pacific Northwest drew about 2 percent less revenue than open sales. More small businesses bid at set-asides, which results in more robust bidding, SBTC claims.

PTPG estimated the fiscal impacts of more set-asides and other small business provisions would be much greater.

"Expanded across the entire National Forest System, the annual loss of retained stewardship receipts would likely exceed $100 million," it said in its comments to SBA. "Treated acres would be significantly reduced at a time when Congress and other interested parties are pursuing efforts to increase treated acres."

The carpenters union noted in its comments that there's been a "radical transformation" in the timber industry over the past two decades as the total volume of federal timber offered for sale has plummeted. There are now fewer small mills available to bid on set-aside sales, which makes the program vulnerable to "collusion."

"This certainly raises questions about the USFS not getting full market appraised prices for its timber offerings in SBA sales," it said. "The program was not set up to subsidize individual companies based on size."

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