AUGUSTA – The sale of the hydroelectric system owned by a subsidiary of Great Northern Paper Co. now hinges on approval by the Legislature.

The sale of the system for $156 million to Great Lakes Power Ltd. will pay for the upgrade of the No. 11 papermaking machine at the Great Northern Paper plant in Millinocket, the mill’s CEO told the Legislature’s Utilities and Energy Committee on Tuesday. Located along the West Branch of the Penobscot River, the hydroelectric system consists of six power stations and 11 dams, which have a generating capacity totaling 130 megawatts.

The sale has been in the works since the fall, but the companies involved realized that since the system is chartered by the state, any transfer of the license first must gain legislative approval.

Sen. Mike Michaud, D-Millinocket, has sponsored the bill that would allow the sale. Michaud is an employee at one of the company’s two mills.

At the hearing on the bill Tuesday, committee members expressed concern about giving the prospective buyer, Great Lakes Power, the right to sell electricity to customers outside Maine, and about dedicating the revenues from the state capital gains tax on the sale of the dams to the Katahdin area. But committee members seemed to concur with the need to help Great Northern Paper remain viable.

“The mills are the lifeblood not only of the Katahdin region,” Michaud told the committee, but also of much of Piscataquis County and southern Aroostook County.

That sentiment was echoed by the co-sponsors of the bill who testified in support of its passage, along with praise for Lambert Bedard, who, as the head of Quebec-based Inexcon, purchased the mills in 1999. Representatives of several of the 14 unions at Great Northern said Bedard came in making promises about what he planned to do, and that he followed up on those promises.

Bedard, who serves as Great Northern’s CEO, told the committee that the previous owners planned to close the Millinocket mill and invest a small sum in the East Millinocket mill, cutting the work force to 300.

“Our plan was much different,” Bedard said, aiming to modernize the Millinocket mill, “which we did.” The mills now employ 1,300.

On top of the money needed to purchase Great Northern, Bedard said he sought financing for the $100 million to $150 million needed for the upgrade, but came up short.

“People didn’t believe in what we’re doing,” he said.

As a last resort, Bedard considered selling the hydropower assets of the company, which had been reorganized as Great Northern Energy.

“It’s a business decision we had to make,” he said, adding that if he could have retained ownership of the system, he would have done so.

Great Lakes Power, which will acquire Great Northern Energy if the deal is completed, is owned by Trilon Financial Corp., based in Toronto, which in turn is owned by another Canadian holding company, Brascan Corp.

Union representatives speaking in support of the bill noted that rank-and-file workers at the mill have been grumbling about losing the system, fearing the breakup of the century-old connection with the electricity source left the mills vulnerable. But workers acknowledge that if the sale keeps the mills operating, they support it, union representatives said.

Part of the sale contract guarantees the mills can buy electricity from the hydropower system for 10 years at a fixed rate, and an additional five years at a negotiated rate.

Committee member Rep. Richard Crabtree, R-Hope, asked Bedard how the upgrade to the papermaking machine could be completed before the sale of the hydroelectric system.

“We needed the cash immediately,” Bedard explained, and Trilon granted Great Northern Paper short-term loans, which will be reimbursed after the sale of the power system.

Crabtree also questioned how Great Northern Paper could use the system as collateral for the loans, if sale of the dams required legislative approval. Bedard said he was unaware then of any requirement to notify the Legislature.

After purchasing the system for $156 million, Great Lakes Power plans to invest another $108 million in the electricity generation and delivery system, according to a company official. Included in that investment are improvements to the connecting lines with the mills, and lines that will let Great Lakes Power sell electricity out-of-state.

Some committee members suggested the need for safeguards in the bill to prevent Great Lakes Power from focusing on exporting electricity rather than providing the mills with power.

Richard Legault, a senior vice president with Brascan, said the banks providing funds for the purchase of the dams insist that other markets for the electricity be developed. There is capacity for generating more power than the mills need, but the power sold to the mills will be a significant part of the revenue stream for Great Lakes Power, he said.

A part of Michaud’s bill directs that the state capital gains tax from the sale of the system – about $6 million to $7 million – will go to benefit the Katahdin region. This provision raised questions from several committee members, who wondered aloud what towns composed the Katahdin region, and whether the Legislature has dedicated such revenue to a particular region before.

Representatives of economic development agencies working on behalf of the region told the committee the funds would help their efforts to improve the area’s unemployment woes.

During a break in the hearing, Michaud indicated there is precedent for dedicating the tax to a particular part of the state, but that he would strike that portion of the bill if it would help its passage.

Committee members also expressed concern that if the system is sold by Great Lakes Power, that transaction would not have any oversight by the Legislature, under the proposed bill. Legault said the banks providing financing for the purchase do not want the system to be encumbered by any no-sale provision.

The committee is expected to continue working on the bill on Thursday.