Our citizen-owned PUD reached a new contract agreement today with Cascade Digital Mining, the joint venture between Beijing's Bitmain and Russian businessman Vladimir Evseev's Allrise Capital.

As we explain below, the new contract is not good news for Cascade's massive bitcoin mining facility in Usk, WA-- the largest crypto facility in the Western United States. 

Last month, Cascade's CEO Steve Wood, the former CFO of the Ponderay Newsprint Company, told our PUD, “I want to be clear that the District’s proposed terms on a few key areas threaten Cascade’s economic viability and are simply not workable.”
 
He concludes by threatening, “Absent the District’s willingness to engage in these critical terms, Cascade will be forced to evaluate other options for electric service, which may include relocating all or a portion of its operations currently in Usk.”

Our PUD largely declined to acquiesce to Bitmain/Allrrise contract demands that would have effectively forced POC residents to subsidize the crypto facilities power bill while assuming all of their business risk. This morning he told our PUD staff after the staff briefed the public on the details of the new contract that will only last for six more months, "“We are committed to this county, but we also need to make some strategic business decisions on really what we are going to do and this allows us a little more time to think about what is going to happen in the next six months.” 

The key takeaways from the contract briefing were:

1) The PUD largely stood its ground on protecting its ratepayers from the substantial financial risk the failing crypto business could expose them to.

2) The contract is only for an additional six months. It will expire on March 31, 2024.

3) The maximum amount of power that Bitmain/Allrise can purchase each month is reduced from 100 megawatts to 55 megawatts, well below the ~77 mw amount of electricity required to run the facility at full capacity.  This doesn't mean that Cascade will purchase 55 mw each month, it only means that can only purchase up to 55 mw. By reducing the maximum load, our PUD reduced its monthly service fee by one-third and the size of the letter of credit Cascade needs to maintain.

4) The PUD will receive less than half of the amount of federally subsidized power from the Bonneville Power Administration this winter than it did last winter-- this may be worst part of the contract for Cascade. 

Let's look at some of the most important parts of the new contract in greater detail. 

WHY A 6-MONTH CONTRACT: The selection of a six-month term by Cascade was likely no accident. It coincides precisely with the Bitcoin "halving"-- a change in the bitcoin algorithm that happens roughly every four years in which the number of bitcoin miners can potentially earn is cut in half. This doubles the amount and cost of electricity to earn each individual bitcoin. As we have previously reported, unless the price of bitcoin more than doubles by April (an unlikely scenario), Cascade will not be able to generate enough revenue from bitcoin mining to pay for the amount of electricity required to mine bitcoin-- even with its most efficient machines. Already, Cascade cannot afford to run its machines at daytime market power rates and market rates will be higher over the winter months. 

WHY 55 MEGAWATTS: 55 mw seems like a random number to pick. The likely reasons why Cascade picked 55 mw is that 55 mw is the amount of power the Bonneville Power Administration provided to them last January and February and by dropping to 55 mw from 100 mw they could reduce their monthly service fee and letter of credit requirements. Our PUD effectively resold this federally subsidized power to Cascade at cost of around 5.5 to 6 cents per kilowatt hour (well below the effective rate our PUD charged its residential customers). 

Last year our PUD received an average of 24 MW a month from the BPA but this power was "shaped" meaning that it was mostly delivered over winter months (55 mw in January in February) while the BPA provided no power in May or June.  Last winter, Cascade operated solely on this 55mw of BPA power because they could not afford power at the market price to power the remainder of their machines. 

So, the Cascade likely asked for the 55 mw limit based on the maximum amount of power they expected to get from BPA. However, after they had requested this amount, the PUD learned that the BPA had cut the allocation of power to Pend Oreille County by a little more than half. Instead of getting 55 mw of electricity from the BPA over winter months, our PUD will only receive 26 mw-- only enough power to operate one-third of Cascade's bitcoin mining computers, and, even using their most efficient machines, only enough to earn less than 2.5 bitcoin each day. This was terrible news for Cascade. 

This effectively limits the maximum after-power-costs revenue for the next six months to under $5 million, but probably closer to $3 million.  Since Cascade earned less than $10 million in its 13 months of operation, this additional $3-5 million will leave a shortfall of around $85 million in losses compared to the over $100 million Bitmain and Allrise invested in the facility. 

So, here is what we think this all means:

1) Bitmain and Allrise Capital will close their bitcoin mining facility in Usk within the next months.

2) Bitmain and Allrise will move their most modern machines to their 40 MW facility in Spartanburg, South Carolina, or another site outside of the Pacific Northwest where they may be able to continue to operate economically due to much lower power prices. The remaining 12,000 or so machines will be fully obsolete by next spring and will just be scrap will little to no value to be recouped. However, if they sell them now, they may be able to recoup some of the value the machines. We think they will have a hard time selling that many nearly obsolete and out of warranty machines.

3) Allrise Capital will either sell their 900-acre Usk property or declare bankruptcy, depending on who is on the hook for the massive financial loss from this ill-conceived venture. Allrise Captial markets itself as a venture capital company-- a business model focused on short-term financial returns. They do not have the capital, access to large loans, or the business expertise to convert the former PNC paper mill into some other type of industry with long-horizon return on investment.  Assuming they can benefit more from selling the facility than declaring bankruptcy, we expect them to begin marketing it for sale in the near future. 

4) Ultimately, someone (Evseev, Bitmain, possible Allrise investors) will eat between $50 and $70 million in losses (assuming Allrise can sell the former mill site and continue to utilize their most efficient machines at other sites) after the Usk facility failed to recoup anywhere near the amount of money spent on setting it up. 

All in all, not a good day for Crypto in Pend Oreille County.

With only two weeks to go before their current power contract with the Pend Oreille Public Utility District (PUD) expires, Beijing's Bitmain and Vladimir's Allrise Capital continue to reject our PUD's generous contract terms while demanding that the citizens of Pend Oreille County subsidize their power bills and assume the incredibly high financial risk of their bitcoin gamble. 

Will they sue our citizen-owned PUD to in a desperate attempt to force residents to subsidize their power and pay for their risk?

Here are four reasons why they will:

1. As we have previously reported, Bitmain and Allrise have been threatening to litigate our PUD almost from the moment they purchased the former PNC paper mill in Usk, WA, and converted it into a bitcoin mining facility. 

2. Bitmain's and Allrise's attorney's at Stoel RIvves LLP -- the same lawyers who helped current Merkle Standard CEO Steve Wood and his c-suite associates at PNC skip out on paying millions of dollars in debts owed to the residents of Pend Oreille County and their employees when Wood was the Chief Financial Officer at the PNC -- have already taken initial steps to prepare for a lawsuit including request thousands of pages documenting PUD contract discussions. 

3. Allrise Capital and especially their local executives at Allrise front company Merkle Standard are getting desperate. In a letter to our PUD dated August 7, Merkle Standard CEO Steve Wood began by addressing the current contract negotiations, “I want to be clear that the District’s proposed terms on a few key areas threaten Cascade’s economic viability and are simply not workable.”
 
He concludes by threatening, “Absent the District’s willingness to engage in these critical terms, Cascade will be forced to evaluate other options for electric service, which may include relocating all or a portion of its operations currently in Usk.”

Merkle COO Monty Stahl public claimed that the Usk facility was a $100 million joint venture between Beijing's Bitmain and Vladimir's Allrise. The facility cost Allrise $18 million plus $4 million in electrical upgrades. The bitcoin mining computers installed at the facility had a market value of $227 million at the time they were installed, although the agreement between Bitmain and Allrise likely reduced the price on the books. 

By comparing the Usk's facilities monthly power bills against the expected value of the bitcoin it could earn each day, Bitmain/Allrise's after-power-costs revenue during their first 13 months of operation has been less than $10 million If we take Stahl's number of $100 million and assume that Allrise could sell the Usk property for what they paid for it, that still leaves Bitmain/Allrise with $70 million in losses and no viable pathway for making substantially more money from their Usk facility.  Furthermore, most of the machines in Usk are nearly obsolete and are past their warranty dates so have little resell value. 

Allrise has not been able to afford the electricity to turn on the bitcoin mining computers at their facility for the last three months and futures prices for the Pacific Northwest indicate the prices will remain too high for crypto mining until next Spring. But next Spring a change in the way bitcoin miners are awarded bitcoin called "the halving" will double the cost of mining making the Usk facility completely untenable at likely market electricity prices. 

4. As we previously reported, PUD Commissioners Joe Onley and Dave Rick have been meeting individually with Bitmain/Allrise executives. During these meetings Messrs. Onley and Rick may have inadvertently compromised our PUD by making statements that Bitmain/Allrise's attorney's could use in court against our PUD. 

But here are four reasons why they won't sue:

1. They have an extremely weak case. The legal theories they have advanced in their threats to our PUD rely on very creative interpretations of Washington RCWs that tend to ignore most of the language of the statute itself or claims that our PUD is being "unfair" in its business practices. To the contrary, the terms offered by our PUD are well within the average of industry practice and our PUD has demonstrated time and again efforts to help Bitmain/Allrise succeed-- steps that our PUD was not contractually obligated to make. Furthermore, other crypto companies have sued other PUDs in the state and their claims have been decisively rejected by the courts.

2. Litigation cannot solve the fundamental problems that Bitmain and Allrise created for themselves. The fundamental problems are that their Usk bitcoin facility requires three times more power than the rest of the county put together, that this requirement is well beyond the District's ability to service with the power available to the district, and that bulk of Bitmain/Allrise cost are for market power which has become too expensive for them to operate profitably. Only a tiny fraction of their power bill actually goes to our PUD. Reducing that fraction will not meaningfully impact their bottom line.

Furthermore, with the halving coming only six months from now, Bitmain and Allrise would only be litigating to marginally improve their revenue for another six months before the bulk of the bitcoin miners in  Usk become fully obsolete. By the time litigation could be resovlved, even if Bitmain/Allrise somehow achieved a favorable outcome, it would be too litlle, too late. 

3. Allrise has better alternatives. Bitcoin mining computers really only have a life span of two years before the next generation of machines makes them no longer economical to operate. Roughly two-thirds of the computers in Usk are already largely uneconomically (Allrise currently can't affort to turn them on) and will be completely obsolete next spring. Allrise has the option of moving their more efficient machines to their other facility near Spartanburg, South Carolina, where market power prices are substantially lower than in the Pacific Northwest. By consolidating their most efficient machines at a lower-cost location they could at least reduce their total losses from their Usk facility. 

4. Litigating our PUD would cause significant reputational harm to Bitmain. As one of the largest bitcoin miners in the world (Bitmain controls approximately one third of global bitcoin mining), the USk facility is not nearly as important to Bitmain as it is to Allrise. Even at full operation (which has really happened), the Usk facility represents only 1-2% of Bitmain's global bitcoin mining portfolio-- and one of its least efficient segments. The cost to Bitmain (as opposed to Allrise) from the reputational harm that would make it more difficult to do business in other parts of the US is much higher than any benefit they could possibly accrue from litigation.

In conclusion, we would not expect a rational actor to litigate our PUD. Unfortunately, Allrise/Merkle has been acting more like a wounded animal than a rational actor. That makes their behavior difficult to predict, but our assessment is that the threat of litigation is more of a bluff than a plan. 

Maybe it's time for Allrise and Bitmain to just rip the bandaid off now and move on while they still have other options. 

Beijing’s Bitmain, Vladimir’s Allrise, and their local surrogates are launching yet another public misinformation campaign seeking to blame our citizen-owned PUD for their financial woes. In a recent letter to our PUD, Bitmain/Allrise local front man, Steve Wood said, ““I want to be clear that the District’s proposed terms on a few key areas threaten Cascade’s economic viability and are simply not workable.”
 
He then demanded that our PUD slash the Chinese/Russian joint venture’s rates, make the citizens of Pend Oreille County pay for their exclusive power infrastructure, and accept all of the crypto company’s risk in a way that they would leave our PUD’s ratepayers owing over $10 million should they declare bankruptcy.
 
The blame game is part of pattern by Wood, Chief Operating Officer Monty Stahl and his previous crypto business partners former Newport City Manager and current EDC chairman Russ Pelleberg, and Kim Gentle, spouse of county commissioner John Gentle who stood to financially benefit from their crypto business plans.
 
In 2020, Stahl owned a small crypto company called 117 West. When our PUD was forced to raise rates for all of its customers after losing over $20 million due to the PNC bankruptcy, Stahl, in a public letter dated December 15, 2020, accused our PUD of “effectively choosing to kill my business,” a move he argued “could financially sink the entire County.” The PUD
 
Our PUD responded in letter dated February 4, 2021: ““While West 117 may not like the terms presented in the current form of contract, this does not mean PUD must offer West 117 a deal at the expense of our other customers. Similarly, the PUD is not required to and will not allow West 117 or some third-party provider to independently leverage or lean on the PUD’s infrastructure for the purpose of serving West 117’s load at the expense of our other ratepayers.”
 
At that time Stahl was in a business relationship with Pelleberg and Gentle seeking turn Pend Oreille County into a crypto hub. Part of the plan included taking down our PUD to create a Newport PUD that would power multiple crypto companies what Gentle called, “The Washington Computational Corridor.” When our PUD declined to provide special rates substantially cheaper to their prospective crypto partners, Gentle and Pelleberg co-wrote a public letter accusing our PUD as being anti-business for protecting its ratepayers.
 
In March and April of last year, Bitmain/Allrise falsely accused our PUD for blocking them restarting the papermill. However, public documents clearly show that Bitmain/Allrise had been fully aware that power infrastructure at the site would only permit either the mill or the crypto facility to operate. It was Allrise’s decision not to reopen the mill. 
 
Bitmain/Allrise’s claims are merely Chinese/Russian propaganda.