The owner of the East Millinocket paper mill has said that plans to reopen the mill hinge on the Maine Legislature acting quickly to change what the company calls an out-of-date law that places its operations at a competitive disadvantage.

Last week, news surfaced that Gov. Paul LePage’s administration and legislative leadership had met with officials of Cate Street Capital, the Portsmouth, N.H.-based private equity firm that owns the currently shuttered East Millinocket mill, to discuss a plan to reopen the mill. A major piece of that plan would be the repeal of language in a 2002 law that prohibits the owner of the paper mills in East Millinocket and Millinocket (Cate Street bought both in 2011, but only reopened the East Millinocket mill) from entering into any agreement that would allow it to profit from selling electricity into the wholesale electricity market.

Following the meeting, administration officials and lawmakers on both sides expressed support for Cate Street’s request. But the deal is far from final. Besides the need for a law change, Cate Street would also need to renegotiate an agreement with its power provider, Brookfield Renewable Energy Partners. How willing Brookfield is to renegotiate remains unclear.

Cate Street’s subsidiary, Great Northern Paper Co. LLC, shut down the East Millinocket mill on Jan. 23. The company said it needed to create a new business plan to overcome high energy and production costs. On Feb. 6, the company laid off 212 of its 256 workers.

Scott Tranchemontagne, a spokesman for Cate Street, said the company has a plan to reopen the mill by May 1. The plan includes addressing its outstanding payables with creditors, developing a long-term strategy for wood supply, and finding further efficiencies in its papermaking process. But “a major plank in the platform” would be gaining the ability to generate revenue by reducing its electricity usage during periods of peak demand — when prices are highest — and instead profiting from the sale of that electricity into the wholesale market.

“If the law doesn’t change, and we don’t have the ability to sell the power, then it’s extremely difficult for us to restart and be viable,” Tranchemontagne said.

Cate Street argues that several paper mills in Maine are allowed to sell power to the grid. In practice, those mills idle their machines for a week or two and sell the electricity it would have used to make paper to the wholesale market and pocket the proceeds. The mills don’t lay off anyone and use the time to complete maintenance on their machines, which usually run 24/7.

Following last week’s meeting between Cate Street and lawmakers, George Gervais, commissioner of the Department of Economic and Community Development; Patrick Woodcock, director of the Governor’s Energy Office; and Rep. Barry Hobbins, D-Saco, co-chair of the Joint Standing Committee on Energy, Utilities and Technology came out in support of changing the law.

Sen. Troy Jackson, D-Allagash, submitted a ballot last Thursday as a precursor to get a bill in front of the Legislature that would repeal language in the original 2002 law to allow Cate Street to resell electricity. Because of the Friday snowstorm and the Monday holiday, Jackson expects legislative leadership to sign off on the ballot on Tuesday.

However, that law is not the only hurdle facing the company.

What would Brookfield do?

Cate Street currently buys its electricity from Brookfield Renewable Energy Partners, a subsidiary of Toronto-based Brookfield Asset Management. Brookfield owns the hydroelectric dams on the Penobscot River near the East Millinocket mill, as well as several more throughout Maine. In total, it owns 38 dams in the state.

Brookfield’s history with the paper mills goes back much further than negotiations for a power-purchase agreement with Cate Street when the latter bought the mills in 2011.

Because the power-purchase agreement is proprietary, neither Cate Street nor Brookfield would reveal its details, though Zev Korman, Brookfield’s spokesman, confirmed the price is “below market.”

The agreement’s details are no secret in Augusta, where lawmakers have been involved over the years in the deals that have kept the mill operating. However, none would go on the record revealing proprietary information about two private companies.

Bob Rice, a professor of wood science at the University of Maine, has more than 20 years experience teaching about the papermaking process and the use of renewable resources to create energy for those manufacturing facilities. His estimation, which he based on a 2012 report from the U.S. Department of Energy about costs of generating energy from renewable sources, is that Cate Street purchases electricity from Brookfield for between 3.5 cents and 4.5 cents per kilowatt-hour, or between $35 and $45 per megawatt-hour, far below the wholesale market rate for electricity during the months of peak demand.

Several people familiar with the power-purchase agreement and interviewed by the BDN confirmed Rice’s estimates were correct.

Assume Cate Street buys electricity from Brookfield for $42 per megawatt-hour. During some months, that price is on par with prices the mill could access on the wholesale electricity market. For example, in May 2013, the average wholesale real-time price for electricity in Maine was $41.72 per megawatt-hour, according to ISO-New England, which administers New England’s power grid.

But during the winter, when cold temperatures drive electricity demand (and, therefore, prices) up, Cate Street’s power deal is very beneficial. The average wholesale real-time price for electricity in Maine in December 2013 was $94.69 per megawatt-hour, according to ISO-New England.

Cate Street wants Brookfield to agree to renegotiate their agreement and strike a revenue-sharing deal in which Cate Street would get a share of proceeds whenever it cuts back on production during periods of peak electricity demand and Brookfield instead sells that power on the wholesale market when prices are high. These type of controlled blackouts are called “load shedding.”

This load shedding would be done “in a strategic way” and only when the conditions are right, Tranchemontagne said.

“That opportunity isn’t there every day of the year,” he said. “The opportunity is only there during peak demand for power, but those few times a year can make all the difference in helping the mill bring in the additional revenue it needs to stay viable.”

Cate Street’s incentive to renegotiate (and renegotiate quickly while electricity prices are still high) is clear, but not so for Brookfield.

With the paper mill idled and temperatures cold, Brookfield can take the power it would have sold to Cate Street at the low, fixed-rate price, sell it for a much higher price on the wholesale market, and pocket the proceeds.

It would make sense that from a purely numbers-driven analysis, Brookfield’s financial interests would be best served by maintaining the status quo. However, the company has said it wants to cooperate with the LePage administration, legislators and Cate Street to help get the mill restarted.

Korman said the company has cooperated since the original law was put in place more than a decade ago, and it continues to do so.

“The 2002 law was put in place in the interest of keeping paper mill jobs in the region, a goal that Brookfield supports,” Korman wrote in an email to the BDN. “In that spirit, Brookfield entered into a new agreement to provide low-priced electricity from our hydropower facility to the mill when it was acquired by [Cate Street]. … We have honored the agreement with [Cate Street] and, in spite of their financial difficulties, continue to provide the mill with power during this closure period.”

Harold Pachios, a partner at Preti Flaherty and the attorney who represents Brookfield, echoed Korman’s comments, though he offered a hint at the delicate nature of the negotiations to come.

“Brookfield has a big investment in Maine,” Pachios said. “They want Maine to do well, and they want to cooperate, but it also has to be a prudent business decision for Brookfield. That’s a requirement that every business has — prudence.”

Jackson, who wants to sponsor the bill to change the 2002 law, said Brookfield has to be taken at its word that it wants to cooperate. He admitted Brookfield would make more money by selling power if the paper mill remained shuttered, “but at this point, they’ve done everything they could to make sure that doesn’t happen to Cate Street.

“I just want to be very, very clear. Cate Street is working to do good things. Brookfield is too,” Jackson said. “The Legislature is just trying to be helpful and be a resource. I think at this point, everyone is very much involved and trying to make this work for everyone.”

Not all legislators are as sure as Jackson, however. Rep. Stephen Stanley, D-Medway, is a 42-year veteran employee of the paper mill in East Millinocket. He has worked for both Brookfield and Cate Street and is not confident they have the laid-off employees in their best interests.

“They’re running it for themselves, for their own benefit, not for the benefit of people,” he said. “These guys are in the business to make money. There’s nothing wrong with that, but I’m not sacrificing 250 jobs so two companies can make a bunch of money. … Until I see something and sit down to talk with these people, I’m skeptical about the whole thing.”

Jackson shares Stanley’s concern for jobs, and said any agreement — and any resulting change to the law — would include a clause protecting jobs by prohibiting layoffs as part of any load-shedding agreement.

“I don’t think anyone involved perceives Cate Street as becoming a power-selling operation where it doesn’t need employees,” Jackson said. “The whole idea here is to keep papermaking part of this going forward, so they have jobs in Penobscot County and Millinocket area. And that’s the only reason we’d do it, if we do it.”

Whit Richardson

Whit Richardson is Business Editor at the Bangor Daily News. He blogs about Maine business, entrepreneurs and the economy.