This story is the result of a collaboration between the Southern Investigative Reporting Foundation and the University of North Carolina’s School of Journalism and Mass Communications’ fall 2014 advanced reporting seminar.
North Carolina is fighting a bruising legal battle against Alcoa over the aluminum giant’s claim to a strip of the Yadkin River that it has long used to generate electricity.
At the center of the dispute are a patchwork of federal and state laws that created a quid pro quo between the two: Alcoa could operate dams to make the electricity as long as whatever they did was “in the public interest.”
The public interest in this case was Alcoa’s aluminum manufacturing operations in rural Stanly County that employed thousands over the decades.
That smelter is now gone. But Alcoa still wants the right to dam the Yadkin’s water for its electricity trading operations. The battle, in other words, stems from North Carolina’s refusal to accept that what the law defines as “in the public interest” has changed. In Stanly County, Alcoa was once a factory that turned rural farmland into a middle-class city. Now, it’s another company that sent its jobs overseas.
Alcoa abandoned Stanly County. But it still wants to use the region’s biggest resource: its water.
Whenever Judge Terrence W. Boyle hands down his decision in his Raleigh courtroom, either the state or Alcoa will have control over an asset that will put a lot of money in someone’s pocket.
A lot of eyes are watching this case. Not all of them call the Tar Heel State home. If Alcoa prevails, corporations around the country litigating similar disputes will have a powerful new federal precedent to wield in the argument over a question that few people ever think to ask: “Who owns our water?”
A high-profile divorce
For several generations, North Carolina and Alcoa had an arrangement benefiting both equally.
A state that had yet to shed its backwoods roots got the jobs and tax dollars that flowed from Alcoa’s smelter in Badin, a rural town in the Piedmont whose economy boomed as demand for aluminum soared. In turn, Badin became a company town that would never have existed if not for Alcoa.
“Alcoa built everything in the town,” said David Summerlin, chairman of the Badin Museum. “They built it all. Every kind of business was there. I mean, it was just a boomtown.”
In exchange, in 1958, the state strongly supported Alcoa’s first bid to operate a series of four dams on the Yadkin, helping convince the Federal Power Commission (now the Federal Energy Regulatory Commission) that the proposal was in the public interest.
When the FPC issued the hydropower license in February of 1958, the concept of public interest was effectively defined as Alcoa’s manufacturing operations: “The operations of [Alcoa] are a useful contribution to the industrial life of the Yadkin Valley and their continuation is greatly in the public interest.”
The Yadkin was any chief executive’s answered prayer: water — free and bearing little regulatory burden — providing the basis for cheap power to offset the cost of the energy-intensive smelting process; making aluminum is a competitive business and saving millions of dollars in energy costs helped the bottom line of a company that for decades was a mainstay of the American economy.
But the marriage began to crumble in 2002 when Alcoa idled the smelter. In 2007, the factory shut down and in 2010 word came down from corporate headquarters on New York City’s Park Avenue to dismantle it.
Now that Alcoa is seeking a new license to continue operating its dams for another half-century, its longtime ally has switched sides.
‘Why are we poor?’
Like many divorces, what matters is how the judge divides assets and arranges custody, and the real story isn’t found in legal claims and courtroom motions.
In this case, it’s the residents of Stanly County who have the most to say about life after Alcoa and they spin a classic before-and-after tale.
In the early years of the North Carolina-Alcoa relationship, the jobs from the smelter and its supporting industry turned the town of Badin into a regional economic powerhouse.
Workers flocked in and the influx transformed a small farming town into a middle-class community. With the plant running full bore, no one fussed about air and water quality when residents had enough income to buy a second car or send their kids to college in Chapel Hill.
And then, in a plotline many American towns know too well, the allure of lower wages and less regulation elsewhere drew Alcoa to ship jobs overseas in the early 2000s — a move aided by incentives from foreign governments that promised what Raleigh could not. By April 2010, with the plant officially closed aluminum had become to Badin what tobacco was to Winston-Salem.
With only 26 full time Alcoa employees remain and another 14 full- and part-time contractors, the shuttered factory on N.C. 740 became an unplanned memorial to a way of life, something young people would pass on their way out of Badin for good.
“If you’re a young person and your family doesn’t have a business here, you leave,” said Better Badin’s Bill Harwood. “We just don’t have anything going on here.”
So, when Alcoa sells its juice on the wholesale market, turning a multi-million dollar profit using water it doesn’t have to pay for, that rankles some who are living Badin’s woes.
Roger Dick, who grew up in Badin and now owns a chain of community banks in the area, is adamant the dams would benefit the region more in the hands of the state.
“If you sit it an area that is rich in oil resources but it’s poor, wouldn’t you say, ‘What in the hell is going on?’” he said.
“So here we are. We’re rich in water. We’re told it’s the oil of the 21st century. But look at this place. Why are we poor?”
Turning water into gold
With the smelter gone, the state’s argument is that “the public interest” went with it.
Shortly after the plant was shut, North Carolina began flexing its regulatory muscles in a way that would have been virtually unimaginable a few years earlier. In December 2010, the North Carolina Department of Environment and Natural Resources, during its annual review of Alcoa’s compliance with state water quality laws, revoked a key certificate necessary for relicensing when emails emerged showing Alcoa officials acknowledging frequent, undisclosed difficulties meeting state standards for dissolved oxygen levels. (Alcoa appealed the ruling and was granted the certificate; it currently operates the dams on a yearly license.)
A longstanding cornerstone of central North Carolina’s economy, Alcoa contends that it has done so much for the state — and is continuing to do so. The company argues in legal filings that the riverbed is practically private, pointing out that it has purchased most of the land surrounding its Badin Works facilities.
Alcoa points to a 2008 FERC ruling in defending the public benefit of its relicensing application, including the renewable, low-emission nature of its energy and that the environmental measures then suggested by FERC — if implemented — would provide the public lasting benefit. (Read Alcoa’s full response to the Southern Investigative Reporting Foundation’s question about public interest.)
Nor is Alcoa shy about framing a narrative of a government bent on usurping private property — albeit one in which a demonstrably right-wing, pro-private enterprise governor authorized the litigation.
“I don’t think North Carolina wants to be known as the state that takes private property,” said Alcoa’s relicensing manager, Ray Barham. “If you cave in and roll over because some government wants your property, it sets a dangerous precedent.” (In response to the Investigative Reporting Foundation’s questions, Alcoa said that it paid more than $1.15 million in local property taxes in 2013 in addition to $163,000 in state taxes.)
Arguments notwithstanding, spending a few minutes in Alcoa’s public filings show why this fight is going to get bitter: Whoever holds the license to convert the Yadkin’s water into hydroelectric power has a small fortune in their back pocket.
According to filings from 2008 to 2010, Alcoa’s Yadkin Project is remarkably profitable, sporting a 26 percent net margin in those years. For context, Alcoa’s earnings during the same period carried a 1.2 percent net margin. Moreover, when the paper (or non-cash) expenses of depreciation and amortization are added back to net income, a truer sense of the Yadkin Project’s cash generating power emerges. In 2010, for example, almost $11.5 million in cash was created from just over $31 million in sales. Alcoa declined SIRF’s request to provide updated annual operating figures for Alcoa Power Generating Inc. but said its “recent operating costs and profits are consistent with the information released in 2008-2010.”
Handsome short-term profits aren’t Alcoa’s only option, however. Should it get a new license, it could sell it (and the dams) to the highest bidder, perhaps fetching upwards of $700 million. That’s precisely what Alcoa did in 2012 when it took in $600 million from the sale of a series of similar dams in western North Carolina and eastern Tennessee to Brookfield Asset Management. Asked for comment about possibly selling APGI and its license, Alcoa declined to comment, stating it won’t “speculate on potential asset sales.”
According to Alcoa, about 54 percent of the electricity generated from the Yadkin stays in North Carolina, including sales to Duke Energy. Based on references buried in various filings, it appears the majority of the rest of the production is sold into the Pennsylvania-New Jersey-Maryland power pool because it tends to get higher prices. (Selling into the PJM pool is attractive for Alcoa because it can also sell renewable energy credits associated with the Yadkin’s hydropower production in some of those state’s programs.)
Better Badin’s Harwood – -a supporter of Alcoa’s bid — says he feels the company’s ownership of that section of the Yadkin is already a reality.
“I’m a citizen of North Carolina, and I don’t feel like I own any of it,” he said. “Alcoa bought it, Alcoa paid for it.”
The head of Badin’s museum, David Summerlin, added, “I already know when they get their license they’ll sell the dams. That’s the opinion of everyone that’s here.”
The recapture battle
One of those out-of-staters watching the Raleigh courtroom and its blizzard of legal filings closely is a lawyer named Curt Whittaker, who says Alcoa’s strategy is clear enough to see.
“Allowing Alcoa to relicense means that an asset designed for the public interest is now close to being used or sold at the expense of the public’s interest,” said Whittaker, general counsel for New Energy Capital Partners LLC, a New Hampshire-based private-equity firm that takes equity stakes in renewable energy projects.
Whittaker and his colleagues have petitioned the Federal Energy Regulatory Commission to reopen the bidding process for the Yadkin Project assets in the hopes of eventually operating the dams themselves. (The fund’s initial petition was rejected but they have filed an appeal.)
“Whether [Alcoa] holds or sells [the license], I’m not sure it really matters since it’s clear that apart from small payments or commitments here or there, the state of North Carolina is getting nowhere near fair value for public assets,” said Whittaker. “The profits go directly to the private sector, which is entirely apart from the law’s intent.”
The law Whittaker cites is the Federal Water Power Act of 1920. While it has been amended repeatedly, its essential nature remains unchanged: to regulate and encourage the development of hydroelectric power. The law — now known as FPA Part I — argues that since hydropower uses water from rivers and lakes, a public asset overseen by state governments, a hydropower project must maximize its return to the public.
Given the considerable outlays involved in building dams, licenses are awarded for 40- and 50-year terms to allow the holders time to profit from their investments.
This is not the first time that Alcoa has labored mightily to obtain a recertification to operate dams. In its 2004 bid to relicense the Tapoco hydropower project in eastern Tennessee and western North Carolina, Alcoa argued in filings that, over the 40-year term of the license, it would spend upwards of $100 million in improvements for a project that it estimated created $400 million in economic value for the Knoxville, Tennessee, area and was an important component of Alcoa’s corporate plans.
But by 2010 the smelter was shut and in 2012 Alcoa sold the Tapoco hydropower project. The project’s four generating stations and dams had become “non-core assets,” according to its press release announcing the sale.
In other words, Alcoa is fighting mighty hard to keep the type of asset it has told shareholders is not integral to its long term plans.
Proof that both sides are playing for keeps was seen in a November courtroom hearing when lawyers for both sides took a deep dive into long forgotten statutes, yellowing deeds and bills of sale from the 19th century to support positions on the Yadkin’s navigability and, ultimately, riverbed ownership. The two concepts are intertwined: Should that section of the Yadkin be found navigable, as the state asserts, then Alcoa’s claims are in trouble. Alternately, under North Carolina law, non-navigable rivers can be subject to private ownership.
(In November, Judge Boyle denied Alcoa’s motion for summary judgement, noting there were “genuine issue of material fact” about the Yadkin’s navigability; he also denied several motions by the state. A trial date hasn’t been set.)
Ground zero of the debate is likely to center on interpretations of the Federal Power Act’s recapture provisions, a section of the law that has never been used to reclaim control over a water resource. The rules may be musty but they read plainly enough: When the federal government first granted hydropower access to Alcoa, it clearly delineated its authority to take those rights back after the license expired.
“Under Section 14 of the Act, any project may be ‘recaptured’ at the expiration of the license term,” the Federal Power Commission’s brief reads. “In formulating its plans, therefore, the management of [Alcoa] could not rely upon any assured source of power supply after the expiration of its license for the Yadkin Project.”
To one veteran Republican state senator, Cabarrus’ Fletcher Hartsell, recapturing the Yadkin raised concerns that the state might be overstepping its powers. In an exchange of letters in June 2010 with the state’s Department of Justice, Hartsell expressed concerns about avoiding an infringement of Alcoa’s Fifth Amendment rights. At the same time, however, he also wanted to make sure the state would not be paying through the nose for rights to the river.
The state’s Justice Department issued a swift reply:
“The recapture of the Project by the United States Government would not constitute a taking of the Project licensee’s private property,” the state’s response read. “Following the recapture of the Project . . . the state will not be liable to pay the current Project licensee for the profits that it would have or might have earned on the operation of the Project in the future if the Project had not been recaptured.”
An environmental law analyst said the process of recapture is not so cut and dry as the state is making it out to be.
Heather Payne, a research fellow at the Center for Law, Environment, Adaptation and Resources at the University of North Carolina School of Law, said it will be a long and costly process for the state to take the license because it will have to prove eminent domain — the idea that the state has the power to take private property for public use.
It also won’t be cheap. Eminent domain requires the government to justly compensate the owner of the private property, meaning North Carolina will have to appraise the dams and their surrounding land to pay Alcoa. In 2006, as part of a requirement for its relicensing bid, Alcoa disclosed that the then fair value of the project was just under $137.5 million, representing the amount the federal government would have to pay the company “upon expiration of its license.”
Payne said the state will also have to demonstrate that it could operate the dams better than Alcoa.
In Badin, Roger Dick’s views skeptical of Alcoa and its promises are in the minority, angering some of his neighbors so much he said he’s been called a Communist.
Not shy about couching this as a David vs. Goliath fight, Dick said, “We’re no longer barefooted. We’re no longer yeoman farmers. We can read. [Alcoa has] divided this community by telling [its] retirees and a lot of friends that we’re taking your private property. We’ve got a public document that we can show you and the world, that you know that’s not true. You know that’s not true.”
He wasn’t completely alone, at least initially.
At first, Stanly County’s Board of Commissioners vocally opposed Alcoa renewing its water quality certificate with the N.C. Department of Environment and Natural Resources — a required step for Alcoa’s relicensing efforts. But in May 2013, county leaders backpedaled with the Commissioners voting 3-2 to approve a settlement with the company. What changed? Alcoa made it worth their while. By agreeing to support the company’s bid, Stanly County was given $3 million in cash, access to 30 million gallons of water per day and 20 acres of land for a water treatment plant.
One of the two dissenting commissioners, Lindsey Dunevant, read a statement before the vote that recounted Stanly County’s “long, hard, uphill battle” to reclaim “what legally belongs to the people,” according to minutes of the May 6, 2013 meeting.
Dick’s assertion that North Carolina could benefit from controlling the Yadkin is not unfounded, according to Michael Shuman, an economist hired by Central Park NC, an environmental advocacy organization that participated in relicensing settlement agreement negotiations with but ultimately refused to sign off on it.
Shuman examined the prospective economic benefits of recapturing the water rights to the Yadkin, concluding the state stood to gain a potential $1.2 billion in additional revenues and between 14,000 and 75,000 jobs if it received the standard 50-year license to operate Alcoa’s hydroelectric facilities.
Alcoa is hardly back on its heels, however.
To win hearts and minds, the company went straight to the grassroots, making a multi-year effort to sway local communities to their side, getting counties, state regulators, a business group, a local realtors association and some 20 other stakeholders to sign a settlement agreement. As part of the deal, in exchange for the coalition’s support for a new license, Alcoa promised to implement measures aimed at protecting land and habitat, improving water quality and enhancing recreational opportunities along the river.
Badin, too, is slated to receive some benefits if Alcoa wins another license. The company has promised the town 14 acres along the Badin Lake waterfront, land that its leaders hope to turn into a public park.
Many in Badin project a deep-seated loyalty toward Alcoa, and ex-workers still call themselves “Alcoans.” Some of this is because of a skepticism of government activism ingrained in a politically conservative area. But it’s also because Badin is Alcoa for most residents over the age of 40.
“If the truth comes out, they’ll get the license, and they’ll get it for 40 or 50 years, and we’ll get on about business,” said Badin Mayor Jim Harrison. “They’ve been good stewards of the land; they’ve fixed every complaint that anybody’s had.”
Alcoa has long pumped money into local charities and donated the house that now serves as the Badin Museum. Since the plant closing, Alcoa has expanded these efforts to include joining forces with its old foe Stanly County to recruit industry and spent $15 million turning the site of its old plant into 700,000 square feet of prime industrial space.
The city of Albemarle, seven miles south of Badin, reached its own deal. City Manager Raymond Allen said the town will receive access to water as a back-up to the region’s local drinking supply, a promise from Alcoa to install expensive water filtration technology on its dams and a donation of land from Alcoa to both Morrow Mountain State Park in Albemarle and the Land Trust of Central North Carolina.
Allen said climate change and harsh droughts are areas of concern for his city.
“So, basically, they have protected our ability to supply drinking water to our customers in this region during periods of extreme drought,” Allen said. (Albemarle has paid Alcoa roughly $15,000 annually for water.)
The access to water is especially important, Allen said, because Albemarle is concerned about being able to meet water demand as the effects from climate change set in.
One of the big concerns about private control of the water is that the license holder could regulate water flows. Alcoa’s relicensing manager Ray Barham acknowledged the fears exist, but said federal regulators can require Alcoa to provide water access.
“There’s not a lot of facts to the argument that we can restrict water,” he said. “It resonates fears with people.”
David Moreau, a research professor at the University of North Carolina at Chapel Hill’s Department of City and Regional Planning, takes a middle route, saying the Yadkin could become an important source of water if the Piedmont population grows as expected.
But he also said that it does not matter whether the river is in public or private hands, as long as the license allows the water to be reallocated to public use once demand rises.
“As long as there are provisions in the FERC [license] that permit the ready transfer of water from hydropower to the urban water supply, then I don’t have much problem with Alcoa continuing to own the system,” he said.
Long-buried problems surface again
The possible environmental repercussions of 50 years of aluminum smelting on Badin’s soil and water, perhaps one of the least debated components of Alcoa’s presence, may prove to be the most lasting of all.
At the center of the issue is how decades worth of so-called spent pot linings from aluminum pots were disposed in and around Badin. In 1988, the Environmental Protection Agency classified spent pot lining as toxic.
(Aluminum is smelted, or extracted, from alumina in pots. During the process, which takes several years, toxic fluoride and cyanide contaminates the used pot linings.)
In Alcoa’s case, there has not been a public accounting of where the Badin smelter’s tons of pot lining were disposed of prior to 1988, according to a Yadkin Riverkeeper letter in October to a regional EPA supervisor, asking for a preliminary assessment of Alcoa’s site. The Yadkin Riverkeeper has joined the state in suing Alcoa, arguing that the river is a public trust.
Of particular note are the higher levels of aluminum-related carcinogens and toxins the Riverkeeper’s team claimed they recently found in a drainage area attached to a ball field that Alcoa recently donated to the town. (The EPA, which had a year to respond to the Yadkin Riverkeeper request, responded in 25 days and agreed to start preliminary assessments. Ryke Longest, the Duke Environmental Law Clinic lawyer representing the Yadkin Riverkeeper, said he was stunned by the EPA’s “unusually quick” response.)
That Badin might have extensive contamination is hardly surprising: As far back as 1992, Alcoa was preparing for a major cleanup at Badin when it filed suit against its insurers seeking coverage for the cost of pollution damage, investigation and remediation at its 35 manufacturing sites around the United States. At three of those sites, including Badin, Alcoa had estimated the covered claims would exceed $50 million.
The land and the water around other two sites — in Texas and upstate New York — were designated EPA Superfund sites; Alcoa, per the North Carolina Department of Environmental Regulation, was allowed to conduct its own cleanup. The company didn’t break any speed records in getting a corrective action plan proposal (as mandated under the Resource Conservation and Recovery Act of 1976) to the state, submitting it in 2012, nearly 21 years after the initial investigation uncovered the problem.
The Alcoa plans propose fencing off certain areas and instituting regular monitoring over actual clean up. Asked about this, Alcoa said North Carolina’s Department of Environment and Natural Resources conducted more than “100 studies and reports” into its environmental practices at Badin and determined what was necessary to remediate the site and the company executed these directives. (View Alcoa response to questions from the Southern Investigative Reporting Foundation.)
“As we tested, we found some information that tended to show contamination,” Longest said. “We also found some materials, just visually, that don’t look like they in any way, shape or form belong where they are found,” Longest added.
“Obviously, there’s going to be costs imposed to clean up this water body,” he said. “If the polluter doesn’t pay, then all the rest of us do.”
Alcoa’s Barham said the company has spent more than $12 million on cleanup, a far cry from the $50 million estimated in 1992; conversely, it has spent nearly $23 million on its relicensing bid. He said their costs today are associated with simply monitoring and sampling. Linking cleanup and relicensing is unfair, Alcoa argued in a statement, as the two issues are entirely unrelated. Moreover, according to a statement provided SIRF, the state’s attempt to “take Alcoa’s property” has delayed a planned water quality improvement plan worth up to $80 million.
“We understand where everything is, and it’s being monitored,” Barham said. “There’s this misconception that we’ve got this environmental issue that we have to clean up, but there’s nothing left to do.”
But Barham said he doesn’t think the site meets the requirements to be deemed a Superfund site, arguing that most bodies of water had some level of PCBs or other pollutants and Alcoa couldn’t be blamed for every trace detected.
“If you look at the times we’re below [the state’s dissolved oxygen levels, the minimum standard of which is four parts per liter], most are at 3.99, 3.98,” Barham said. “Does a fish really know the difference between 3.98 and 4.0? It probably doesn’t.”
Officials for government agencies involved in this dispute, such as the North Carolina Department of Administration and FERC, declined comment, citing the ongoing litigation.
Calls for comment to the North Carolina Department of Environment and Natural Resources were not returned.
Fitzpatrick Communications, an outside public relations counsel for Alcoa, provided the responses to the Southern Investigative Reporting Foundation’s questions.
(View all of the questions posed and the responses.)