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  In spite of all this, Heather’s interests took her away from politics. She attended a summer camp for engineering students during high school, and she loved it. It catered to her aptitude in math and science. She got her college degree in engineering and left Minnesota for New York, where she took her first job as a wastewater engineer. After working in New York, Faragher moved to Alabama and worked at paper mills. She married Greg Faragher and took his name. That’s when a recruiter called and told her about the job at Koch Refining.

  Faragher wanted to move back home to Minnesota. She knew that when she and Greg had kids, she wanted to raise her family in her home state, near her parents and friends. The job at Pine Bend was the perfect opportunity.

  During her first year at Koch, Heather discovered the kind of “work family” that people yearn for. Employees at Pine Bend tended to stay there for their entire careers—it wasn’t rare to bump into employees who’d been there twenty years or more. The collegiality between engineers made it a joy to go to work every day. There was also a sense of great purpose. Everybody knew that Pine Bend was the crown jewel of Koch Industries.

  In fact, the Pine Bend refinery was at the center of Koch Industries’ business during the 1990s. It was the primary fountain of cash that allowed Charles Koch to plow money back into the company and realize his dreams of expansion. That reality was made clear on the ground every day—it was hard to miss the fact that Koch was betting its future on its operation in Minnesota.

  * * *

  In 1992, Koch launched a $220 million project to install new refining towers and other equipment that would make cleaner fuels like low-sulfur diesel fuels to meet new standards being set under the Clean Air Act. The project turned a large quadrant of the refinery into a busy construction zone, with armies of contractors coming in and out every day with heavy equipment. A year later, Koch partnered with Williams Companies, which operated pipelines, to build a new gasoline terminal about thirty miles from Pine Bend to serve Koch’s customers. In 1995, Koch was considering a new $300 million project to build a mini power plant inside the refinery that would power its operations and sell electricity to the surrounding area.

  The production capacity at Pine Bend rose dramatically during this time. In 1985, the refinery was able to process about 137,000 barrels of oil a day. In just one year, Koch boosted that capacity 13 percent to 155,000 barrels a day. Plant supervisors were encouraged to operate machinery in ways that increased production as much as possible even as new units were being added. By 1995, when Heather Faragher was hired, the refinery could process 245,000 barrels a day. Just a year later, it was processing 286,000 barrels a day—more than double the amount from a decade earlier.

  The rapid expansion created strains on the system.

  Refining oil creates a lot of pollution. The refinery towers and stacks release streams of poisonous gas, while cracking units produce a steady flow of toxic water runoff. Every new barrel refined at Pine Bend only created more pollution. But the limits on these pollutants were not as flexible as Koch’s marketing plans. There were strict pollution controls set by both state and federal authorities. The pollution limits were clearly spelled out in state-issued permits that allowed Koch to operate the refineries. These permits were enforced by a web of state and federal agencies. On the state level, Koch was overseen by the Minnesota Pollution Control Agency. On the federal level, it was overseen by the Environmental Protection Agency.

  Karen Hall oversaw the division that ensured Koch didn’t violate limits on hazardous waste and water pollution. She also oversaw the wastewater “group,” which was composed of one person: Heather Faragher.

  Faragher’s glass-walled office was located next to Hall’s. So it was easy for Faragher to pop her head in and touch base with Hall or ask her questions. But it quickly became apparent that there were very few questions that Hall could actually answer. Hall had virtually no experience in the wastewater business and deferred to Faragher when it came to making technical decisions.

  This meant that Faragher was largely on her own. One of her first jobs was to get familiar with Pine Bend’s complex water treatment center. The plant didn’t just have its own sewer system; it had two. One sewer system handled wastewater, and the second sewer system handled “oily” wastewater that was more heavily polluted. These two flows of water were kept in separate piping systems, as the oily water was the more dangerous.

  Wastewater from the refinery was treated in a large sewage plant, which cleaned out pollutants. After that, the water was piped into a set of large ponds on the eastern side of the refinery, called “polishing ponds,” where the water was allowed to sit so that any sediment it carried could settle to the bottom of the ponds. Sitting in the polishing ponds also allowed the hot wastewater to cool and allowed microorganisms to break down pollutants that weren’t caught by the treatment plant.

  After sitting in the polishing ponds, the water was sent into a series of small pipes that injected it straight into the Mississippi River. The refinery pumped about 3.5 million gallons of water into the waterway every day. It was critical, then, to test the water in the polishing ponds and make sure that the pollution levels there were not too high. Faragher oversaw these tests.

  One of the biggest pollutants that Faragher worried about was ammonia, which was a major by-product of the refining process and damaged the environment in two ways. It was a nutrient that caused algae to bloom in overwhelming quantities, which choked waterways like the Mississippi. In high enough concentrations, ammonia also posed a danger to aquatic life, killing fish by damaging the tissue in their gills. Ammonia was also toxic to humans and other organisms. Breathing ammonia vapors—even when diluted—destroys body tissue and can be fatal in high doses.

  The treatment plant cleaned ammonia out of the wastewater in an old-fashioned way: it let microbes eat the substance. This process, called nitrification, cut down drastically on ammonia levels, but it took time. You had to give the microbes plenty of time to eat, and they could only eat so much.

  Faragher liked to cut the ammonia level to zero before she pumped it into the Mississippi. But that wasn’t always achievable. Instead, Koch aimed to release water that was about forty parts ammonia for every million parts of water—or “forty parts per million,” as the environmental engineers say. Running at this level allowed Koch to stay within its permitted pollution limits.

  During Faragher’s first year on the job, the water treatment plant ran smoothly. She walked from her office down to the treatment plant frequently—sometimes multiple times a day—to make sure the operations met her standards. She became friendly with the blue-collar OCAW workers who ran the plant. Faragher also became close with other engineers in her department. She and her husband, Greg, joined the Koch softball team. After the games, everyone went to a local bar to dance and drink beer. She was part of a team, and she loved it.

  Faragher soon discovered, however, that Koch’s employees were all on one team, but not all teammates were created equal. There was, in fact, a stark division of power. The differences were not just the obvious ones that defined so many companies, such as the breach between the unionized workers and their managers. At Koch, even the white-collar workers belonged in two camps. In one camp, there were the operations people. These were workers who ran the machines. In the other camp, there were the engineers, like Faragher. They were not considered part of operations. They were more like support staff.

  Karen Hall explained that the engineers on her team were like “consultants” to the operations people. The engineers were there to offer their advice and their expertise. But the engineers were not in charge. At the end of the day, the operations people decided what would be done. “They pay attention to us, but we don’t run the place,” Hall said.

  Heather Faragher, then, didn’t have any real authority over how the wastewater plant was run. She could just advise and consult with the operations people, who were the ones with the real power.

  * * *


  The operations team that Faragher reported to was run by a twenty-seven-year-old man named Brian Roos. He was a quintessential Koch man. He joined the company in 1990, shortly after graduating from the University of Minnesota with a degree in mechanical engineering. Like so many Koch employees, his real education happened after college, once he joined the company. Roos started as an engineer in the maintenance department and then was moved to the new clean-fuels area. He became a supervisor and eventually was promoted to a senior management position.

  Except, at Koch Industries, there was no such thing as a senior manager. Within the confines of Market-Based Management, Roos was known as a process owner, or someone who acted like they had an ownership stake in the company.

  The refinery at Pine Bend was divided into five groups, which were known as “profit centers.” Each profit center was like a separate piece of property owned by a boss who was responsible for everything that happened within their domain. Koch measured the financial results in each profit center, which, in turn, determined how much money would be steered toward that profit center in the future.

  Brian Roos was the process owner over the Utilities Profit Center, a division that included the refinery’s wastewater treatment plant, boiler house, cooling system, and other equipment that kept the cracking units running efficiently. Roos spent a lot of time with Heather Faragher, explaining to her how things worked at Koch. She sometimes sat with him in the company cafeteria, where Roos spent long lunches outlining free-market principles that undergirded Koch Industries’ philosophy. Roos had an earnestness, a sincerity, that was similar to Charles Koch’s. He was a true believer. But under the dictates of Market-Based Management, there was an important divide between his role and Faragher’s. Faragher was not part of a profit center. Environmental engineers like Faragher were lumped into a category of nonprofit groups.I The nonprofit groups were like a second-tier workforce supporting the “core” profit centers. This distinction helps explain a lot that went wrong at Koch during the 1990s.

  When process owners like Roos read Introduction to Market-Based Management, they were warned against using the nonprofit support services too much. Because services like accounting and environmental engineering were essentially “free” to people like Roos, there was a danger that those services would be overused. The pamphlet likened the nonprofit groups to government agencies that handed out free services: there was a danger that the nonprofit groups might become bloated and overly expensive. The nonprofits might therefore drag down the performance of the very profit centers that they were supposed to serve. As they grew in size and cost, the nonprofit service centers would suck resources away from the parts of the company that actually made money.

  “The predictable result was often a corporate overhead cost spiral,” the pamphlet said.

  To counter this cost spiral, Charles Koch created an internal market system: divisions such as Roos’s had to essentially pay to use the nonprofit groups. That way, the process owners would have to think twice about sucking up support resources. Of course, in some cases, these “nonprofit” resources were all that stood between successful business and criminal conduct.

  * * *

  Heather Faragher spent a lot of time walking around the refinery. She thought the equipment inside the control room was primitive: most of the screens displayed only a digital readout of numbers—much of the data wasn’t even displayed but instead was printed out on a scroll of paper.

  The control room wasn’t the only place that could use improvement. There were other problems at the refinery—much more dangerous problems—that had been left to fester for years. One of these problems was the refinery’s sewer system, which had been decaying without repair. One of the operators who worked at the wastewater plant, named Todd Aalto, had seen firsthand how the infrastructure was falling apart. When inspecting the sewer system, Aalto noticed that the concrete floor of one section had eroded away completely, leaving nothing but wire mesh along the bottom. Shift workers routinely disposed of various chemicals into the “oily water” sewer, dumping large drums of things like naphtha and xylene down into the pipes. It was impossible to measure how much might be leaking out into the outside environment through the cracks and fissures below.

  Giant investments were being made at Pine Bend during the 1990s, and Faragher wanted some of that money to go into the utilities infrastructure, like the sewers and water treatment plants. But the engineers couldn’t make such decisions; only the process owners. In this case, the decision would have gone up to Karen Hall’s boss, a man named Steven David, whom everybody called Steve. He was the boss of all the environmental engineers, but this still didn’t give him the same status as a real process owner. The engineers were a nonprofit center, after all. David was forty-two years old and more experienced than Brian Roos. But David was still at a lower rank than Roos in the refinery pecking order.

  Faragher proposed new investments and upgrades that could be made at the wastewater plant, but those investments were delayed or rejected time and time again. All investments at the refinery were evaluated with one goal in mind: return on investment. The process owners would put their money where it generated the most profit within the plant. Investing in pollution control technology or sewer pipes just couldn’t compete with investing in a new cracking unit that could increase oil production. New equipment was just too profitable. A big investment in new refining equipment might be able to pay for itself within one year. An investment in sewer pipes, on the other hand, might not be earned back for several years.

  Still, Faragher pleaded for new investments to Steve David and Karen Hall. She believed that such investments would benefit the company for many years to come. At first, Faragher thought that this argument might win the day. One of the great things about Koch Industries was how quickly projects were approved; there wasn’t a lot of bureaucratic decision-making. But Faragher learned that only certain kinds of projects got approval from on high.

  “If the payback of the investment was going to be less than a year, they’d basically give you permission and you could run with it,” she recalled. “If I needed money for wastewater treatment, it was like pulling teeth. It was like, ‘Why do you need that? That’s not going to make me any money.’ ”

  * * *

  At the Pine Bend refinery, Koch was allowed to expel an average of 8.3 kilograms of chromium every day and 714 kilograms of ammonia. That was the letter of the law. But Faragher also wanted to abide by the intent of clean-water laws. Obviously, the intent of the law was to keep large levels of ammonia out of the nation’s waterways. That’s why the limit of 714 kilograms was set. But setting the limit at 714 kilograms did not mean that regulators wanted Koch to pump 714 kilograms per day into the Mississippi River. The state had set a maximum level of pollution, but the goal was to be under that level. The intent of the law was to encourage Koch to pollute as little as possible.

  With that in mind, Faragher designed a water treatment plan that kept ammonia and other toxins at very low levels. When it came to measuring pollution, everyone in her business used the terminology of “parts per million” to figure out how much pollution was leaving the pipes with each gallon of water and how close the company was to hitting its limits.

  If the mandatory limit was forty parts per million, Faragher liked to keep the flow at about twenty parts per million. This was a habit that she’d learned at the paper mills. Doing so gave the company a large buffer. Treating water was an inexact science, and there was bound to be unexpected spikes in the level of pollution. Keeping the normal pollution rate low helped the company avoid busting its permit levels in case of an emergency. But maybe more importantly, running at a low rate of pollution helped the company meet the intent of the law. The point was to keep waterways and air as clean as possible.

  One day Steve David came to Faragher’s office for a talk about the Koch method of wastewater treatment. He drew a large graph on a white board in her office. There was a straight lin
e that ran across the graph from left to right: that was the permit level. Ammonia levels could not exceed that level. Below this line, David drew a squiggly line to represent Koch’s actual ammonia emissions (the line was squiggly to represent the natural variation in daily ammonia levels). There was a big gap between the squiggly line and the straight line. This represented that Faragher was emitting far less ammonia than the permit allowed.

  David pointed to the line representing low levels of ammonia emissions and said, “You don’t have to run here,” Faragher later recalled.

  Instead, David drew a new squiggly line that ran just below the permit level. David told Faragher that she could run pollution levels there, just below the maximum level. The goal was to keep the ammonia output levels stable. If they avoided big spikes in ammonia output, they could operate just below the level permitted under the law.

  Faragher listened intently. She understood what he was saying. Running pollution levels just below the permitted level might seem good for the plant—it was a way to avoid expensive treatment procedures. It was also a way to make sure that the plant was able to run continuously at high volumes. In theory, this plan would work perfectly. There was nothing about Koch’s approach that was illegal. Koch could keep its pollution levels just below the legal limit and still operate within full compliance of the law. And the Koch engineers prided themselves on being smart and running efficiently. They were just the kind of people who could keep pollution levels right within the narrow band that they aimed for.

  But Faragher was uneasy with this method. It counted on things going just right inside the oil refinery. That wasn’t how life really worked.

  * * *

  Things started going wrong around June 1, 1996.