Beijing's Bitmain and Vladimir's Allrise threaten to leave Pend Oreille County, tell PUD they cannot afford to operate here unless residents pay for their electrical service and risk

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.”
 
This report analyzes the ramifications of this important document letter and examines Bitmain/Allrise’s demands and how they could cost the residents of Pend Oreille County.
 
A couple of points to start off with:
 
First, this letter is a glaring admission of financial distress. It is an explicit confirmation of our previous analysis.
 
Second, it is unambiguously indicating that the Usk bitcoin facility is at an even higher level of bankruptcy risk than even we previously assessed and therefore creates an enormous risk to the financial future not only of our PUD but also the financial future of the Pend Oreille County should our PUD leaders to manage that risk well. It signals that our PUD should double down on risk management, not abandon it.
 
Third, the changes to the contract that Bitmain/Allrise are demanding represent only a few percent of their total annual operating costs (not including debt) and represents less than a quarter of one percent of the $100-300 million Bitmain and Allrise have invested into this project. That they are claiming that these fees consume their revenue margin to the point that they cannot stay in business is an indicator of how little revenue they expect to be able to generate (and that the small fees our PUD charges aren't really the reason they are in trouble). It also confirms our previous analysis that the Usk facility will never be able to generate enough revenue to recoup even a fraction of the money invested. Bitmain and Allrise are simply trying to minimize their losses at this point.
 
Fourth, in context this letter amounted to an “F*** You” ultimatum. This letter was sent during the negotiation process for a new power contract because Cascade’s current contract expires in September. Our PUD had been in the process of negotiating the language of contract called “red lining” in which the PUD provided Wood with a proposed contract, then Bitmain makes desired additions or deletions in red ink. The parties then discuss the proposed changes, and it goes back and forth. Instead of responding with red-line version, Wood responded with this ultimatum, signaling that he did not intend to participate in further discussion or accept our PUD’s position.
 
Fifth, Bitcoin mining has not been a benefit to our PUD or to the county. Converting the former mill to a bitcoin facility reduced its taxable property value by 75 percent. Bitmain and Allrise appear to have effectively defrauded the County of at least $2 million by paying less than one quarter of the sales and use tax due to the county by obfuscating the value of the equipment deployed there (the market value of the equipment at the time it was located to the county was $227 million). The facility employs only five people. And this letter affirms that Allrise does not have the financial wherewithal to resource the $50-100 million that would be required to restart the paper mill—something we have long assessed was beyond their financial resources and a clear ploy to use as leverage for a new power contract. Furthermore the facility has had a high opportunity cost by blocking more productive, more sustainable, and more beneficial economic development.
 
Finally, Bitmain and Allrise’s financial problems are their own fault. This letter is part of an ongoing misinformation campaign to blame our PUD, but Bitmain and Allrise are stuck in a money pit of their digging.  Pend Oreille County was never a good match for conditions needed for a successful bitcoin mining business which was only compounded by failure after failure to do due diligence or hedge their own substantial risk. They were confident men that they and their surrogates could sell the costs to County. County residents should not be asked to bail them out.
 
Next, Wood made four demands which we will examine.
 
It is important to know that terms Wood is referring are more favorable to Bitmain/Allrise than their current contract and what Wood is actually seeking is for our PUD to make the residents of Pend Oreille County financially subsidize Beijing’s and Vladimir’s crypto operations and absorb all their risk (which is very high). Furthermore, our PUD has already repeatedly bent over backwards to help them stay afloat.
 
One, Bitmain/Allrise do not want to pay the four tenths of cent ($0.004) per kilowatt hour service fee. This fee is equivalent to the monthly service fee that we all pay. For the average residential customer, the service fee represents 20-25% of their monthly bill, while for Bitmain/Allrise it represents only around 5% so it is hardly unfair. 
 
There are two components to this demand.
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1)Bitmain/Allrise is demanding that our PUD dramatically cut its service fee. Our PUD gets only $295,000 a month from the Usk facility. The rest of the money Bitmain/Allrise pays in their bill (typically $5-6 million when at full operation) passes through our PUD to entities outside of our County. This would reduce our PUDs general operating revenue that would be having to made up by its other rate payers.

2) They are demanding that our PUD remove the “take or pay” provision for the current contract. Like our residential service fees, the “take or pay” provision means that Bitmain/Allrise have to pay our PUD it’s $295,000 service fee even in months when they can’t afford any electricity. In return our PUD maintains the largest substation in the county and extensive transmission lines almost exclusively for use by Bitmain/Allrise. Waiving the “take or pay” requirement would transfer the cost for maintaining this extensive infrastructure that no other customers can use directly onto the residents of the county.
 
Two, Bitmain/Allrise is demanding that our PUD change its process for purchasing Market and District power. Wood’s discussion in the letter is somewhat esoteric, but the important thing to know is that changes that he is demanding would substantially increase both the costs to our PUD in servicing the crypto facility and the transactional risks to our PUD. So, this demand would transfer both costs and risks to the residents of the county.
 
Three, Bitmain/Allrise is demanding that our PUD abandon its risk management measures that protect it and its citizen-owners from losing over $10 million should Cascade Digital Mining breach its contract or declare bankruptcy. Currently, our PUD requires Allrise Capital to provide a $16 million letter of credit from a high-quality financial institution. In a major concession, PUD general managers April Owen and Sarah Holderman have agreed to reduce the guaranteed amount to $10.8 million, but Allrise doesn’t want to have to provide a letter of credit at all.
 
Instead, Allrise wants to make a cash deposit that will be held by our PUD. This is extremely problematic for two reasons. First, unlike a letter of credit from a bank, the deposit would be immediately frozen should Cascade declare bankruptcy and then could be clawed back by other creditors after years of bankruptcy proceedings. And to add insult to injury, Bitmain/Allrise have set up labyrinthine structure of shell companies who are themselves creditors to Cascade. This could allow Bitmain/Allrise to take back their own deposit! Second, when a bank issues a letter of credit, it assumes legal responsibility for assuring that Bitmain/Allrise will pay funds drawn from the letter or credit or the bank has to pay them itself. This provides a very important extra level of protection, especially given Wood’s admission of their precarious financial situation. Our PUD should forfeit its risk protection to bail out a high-risk business.
 
It is important to note that Allrise has been unable to find a qualified financial institution that is willing to provide a letter of credit which is an indication that Allrise is unable to pass even the basic due diligence reviews conducted by these institutions and stands next to Wood’s confession as evidence of Cascade’s financial distress.
 
Although not specifically addressed in this letter, in earlier letters Wood has demanded that our PUD reduce Cascade’s financial penalty in case of a breach of contract.
 
Four, Bitmain/Allrise want to be able to profit for reselling federally subsided power it buys back to Washington residents. During winter months, our PUD receives up to 54 megawatts of subsidized electricity from the Bonneville Power Administration, a federal government corporation. It gets this power at a little over 3 cents per kilowatt hour. All of this power is excess to the needs of the residents and businesses, so our PUD sells this power to Bitmain/Allrise at cost at price much lower than what our PUD charges its residential customers. This power from the BPA is what Wood calls “system power” in his letter.  Bitmain/Allrise want to be able to take this “system power” and resell it back to Washington consumers at a profit. A similar practice by bitcoin miners in Texas has cost consumers there millions of dollars in higher electricity bills and is being attacked by regulators and political leaders there.
 
So, to clarify, a Chinese and Russian owned joint venture wants take electricity subsidized by the residents of Washington, and then sell it back to them at a higher price for a profit! This will undoubtedly draw the attention of regulators, state and national political leaders, and regional and national media and cause substantial reputation harm to our PUD and its leadership as well as transferring costs to Washington’s residents.
 
Bitmain and Allrise Capital are in a money pit of their own digging. It would be irresponsible and immoral for our PUD Commissioner and Management to make their own neighbors bail out a foreign joint venture owned by a Beijing-based company and a Russian businessman. 

A complete copy of the letter is available for download below:

steve_wood_to_pud_7_august_2023.pdf
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