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The Joint
Interim Committee on Department of Energy Oversight was formed
by the Senate President and Speaker of the House after Rep. Gail Whitsett (R-Klamath Falls), other Republican lawmakers
and I called
for an investigation into the Business Energy Tax Credit
(BETC) program administered by the Oregon Department of Energy (ODOE). We
called for the investigation after receiving information from whistleblowers
within both the Department of Revenue and ODOE regarding possible suspicious
activity surrounding the BETC program. Senate President Peter Courtney (D-Salem)
appointed me to be a member of the bipartisan, bicameral committee.
Last
week’s newsletter discussed some of the activities during
the most recent round of Legislative Days held at the state capitol in Salem,
including details of the latest meeting of the ODOE oversight committee.
The Secretary of State commissioned a
private firm to conduct a forensic audit of the troubled BETC program. That
firm’s 76-page
audit report was released on September 8. It was the culmination of over 40 interviews, extensive
database queries and a review of nearly 4,000 BETC project files that took
place between May and mid-August of this year. I was among those both inside
and outside of state government who were interviewed by the auditors as part of
that process.
The vast majority of the audit report
details problems that the ODOE experienced with administering the BETC program.
It found that the agency failed to perform any control or risk analysis of the massive
tax credit program and that projects approved by the agency “reflected
inconsistent compliance with established program controls.” The auditors
concluded that a “retrospective evaluation against a reasonable set of risks
raised significant questions.”
Administrative problems identified included
a lack of formal training, cultural clashes between agency employees, a lack of
institutional knowledge due to high staff turnover, employees being overwhelmed
by the high work volume and complexity, as well as a lack of either quality or
compliance oversight.
The auditors also cited high-aiming
energy policy goals as troubling. They identified directives that applied political
pressure on the agency that inhibited its ability to mitigate risks and control
revenue impacts, even when red flags became apparent.
The auditors reported that their work
did not reveal what seemed to be specific, direct evidence of fraud. However,
it did find circumstantial evidence inferring suspicious activity on at least
75 BETC transactions totaling nearly $350 million. The auditors referred those
identified transactions to the Oregon Department of Justice (DOJ) under
separate cover for further investigation of illegal activity.
According to the audit, revenue
impacts to the state’s General Fund were 3,511 percent more than the original
projections made by the Legislative Revenue Office. The cost overruns were
reported by the agency director, but no action was taken by state political
leaders. The agency subsequently issued more than $1 billion in tax credits
under the BETC program.
Perhaps even more disturbing was how a
Renewable Energy Work Group, formed by Governor Kulongoski in February 2006,
included several members with connections to BETC projects through company
affiliation, direct engagement and other avenues. The report states that some Work
Group members represented companies that subsequently received millions of
dollars in energy tax credits.
The audit discovered a large gap of
time during which the ODOE had no internal auditor on staff. The investigators
could not identify any specific BETC program audit that was performed by the
agency even when that position was filled.
Moreover, the report states no
specific compliance group seems to have existed for the BETC program. No risk
management programs were specifically in place and the agency had no fully
functioning risk or compliance functions. No financial crime detection program
was in place. No specific work unit within the ODOE employed performance
measures to prevent, detect or seek out concerns of waste, fraud and abuse
within the BETC program.
The forensic audit also determined that
projects in the BETC program lacked adherence to, and consistency with, the established
statutes and rules governing its activities. There was no master document for
agency employees to follow that spelled out internal written procedures. Even
worse, BETC project files were processed and treated differently, including
projects approved around the same day with similar, or the same exact, issues.
BETC project files included documents
that were scanned, faxed or emailed in place of original documents. Whiteout
was sometimes used extensively on documents. Some files had no proof of vendor
payment or copies of cancelled checks or receipts. Handwritten notes apparently
rubber-stamping proof of eligible costs on invoices that were paid.
Other invoices were missing entirely,
or substituted with project proposals. There were invoices that were not
clearly labeled for eligible projects and there were others that failed to show
what was purchased or how the purchase was relevant to the project. Some
invoices contained line item expenditures for other projects or purchases.
Projects with an eligible cost of
$50,000 or more were required to have a Certified Public Accountant (CPA)
attest to the project’s cost and viability. The auditors identified a number of
end runs made around those requirements. They found projects whose costs were
seemingly modified to avoid the CPA attestation. The ODOE sometimes had no
documentation as to which CPA actually did the attestation. Some were accepted
by the agency without a CPA’s name or license number, having only the name of
the firm mentioned. Others were accepted by the agency that were not even on a CPA’s
official letterhead.
CPAs must be independent and free
from conflicts of interest. The audit uncovered CPA letters where the CPA acted
in another capacity on the project or for the company. Some CPAs participated
in both the accounting function and the brokering of tax credits between
project owners and pass-through partners.
The ODOE did not require invoices and
receipts from projects to which the CPAs attested and those invoices and
receipts were often not found in the BETC file. Moreover, there was no
documentation that the ODOE verified that attestations were done by licensed
CPAs. One instance occurred where a project owner attested to a project’s costs
in lieu of a CPA.
No BETC compliance inspections were
noted before the year 2010. A nearly 14 percent failure rate occurred in the compliance
inspections subsequently conducted by the agency between 2010 and 2014. According
to the audit, compliance enforcement with the statutes and rules governing the
BETC program was neither functional nor well-performed for about half of the
years that were examined. It is entirely possible the ODOE issued tax credits
to hundreds of millions of dollars’ worth of non-compliant BETC projects.
In some instances, after BETC
projects were completed, the agency adjusted the final tax credits to amounts
that appeared to auditors to be above caps required by the program. For
instance, final tax credits were issued for nearly double the amount allowable
in a single calendar year for a renewable energy facility. Still other projects
were sold, dismantled or became inoperable soon after receiving a final tax credit.
Still more tax credits were issued to projects where machinery or equipment was
purchased but never installed or was installed but was later dismantled or sold
off.
The ODOE approved BETC projects for
businesses that filed for bankruptcy, went out of business or ceased operation
within five years of receiving the credit. The agency issued BETCs for the
operational costs of projects, which was a prohibited use of the energy
incentives. Virtually no attempt by the agency to recover any of this taxpayer
money was identified in the audit.
Potential evidence of conflict of
interest were found by the auditors. They identified projects that received
BETCs where government energy policy advisors were employed by the project
owner. Other policy advisors may have been project owners, vendors, contractors,
sub-contractors or pass-through partners.
The audit identified at least two
renewable energy companies that donated more than $50,000 in campaign
contributions, including five transactions over several years. They found the vice
chair of the then-governor’s Oregon Energy Task Force worked for a company that
made campaign contributions. According to the auditors, that company
subsequently received at least $70 million in BETCs that were passed through
for a lump sum cash payment.
A long
list of recommendations is contained in the
audit report. They include advice that the ODOE enforce existing performance
agreements for the more than $100 million of outstanding BETCs and consider
revoking credits for projects that are not viable. They also recommend developing
a risk management program, considering the additions of a qualified risk and
compliance officer, establishing a financial crime compliance program and
perform quarterly prevention and detection measures.
The auditors also advise the agency
to eliminate the rubber stamping of documents and approvals, prohibit the use
of whiteout and other document manipulation, reconsider accepting complex
financial arrangements as proof of payment for a project, create a verification
process for CPAs, prevent the same CPA firms from attesting to project costs
and brokering credits and require CPAs to furnish the materials used to attest
to eligible project costs.
The audit report raised several additional
questions in my mind.
The auditors pointed out that ORS
316.356 provides a control to prevent tax credit and federal
grant monies from exceeding the project cost. It states that if a taxpayer
obtains a grant from the federal government in connection with a facility that
has been certified by the agency’s Director, the total cost of the facility eligible
for BETC subsidy shall be reduced on a dollar by dollar basis.
It is my understanding that in previous testimony,
ODOE officials asserted that the agency does not keep track of other grants and
credits received by an alternative energy project. How can ODOE follow the law
without keeping track of these other subsidies?
The auditors have pointed out that the ODOE has not
performed control or risk analysis of the BETC program. Has the ODOE performed,
or does it plan to perform, control or risk analysis of the approximately one-third
of BETCs that are yet to be redeemed and for the tax credits issued through the
Energy Incentive Program (EIP)?
The auditors pointed out that, largely at Governor
Kulongoski’s discretion, the BETC program morphed into a plan to incentivize
economic growth and job development.
Approximately one-third of BETCs have not yet been
redeemed and the EIP is ongoing. Is the ODOE attempting to determine the amount
of economic stimulation to be created, including the number of temporary and
full-time jobs to be created by pending BETC and EIP projects, and how long the
jobs have been, or will be, sustained?
The audit recommends the ODOE establish internal
audits, risk management and proactive fraud detection. What are the ODOE’s
current plans to implement these recommendations?
The audit points out some confusion regarding
certified costs, actual costs and market value of projects. It appears that
actual construction costs often exceed the agency certified cost. Moreover, at
least one renewable energy equipment manufacturer appears to have used its estimated
market value of the completed project as its basis for BETC eligibility. How
does the ODOE calculate certified project costs, how does that calculated cost
relate to actual project cost and what is the relevance of the estimated market
value of the project? Does the ODOE ever allow project owners to characterize
their projects’ costs as equal to the project’s estimated market value when
completed?
ORS 469.200 provides for a maximum tax credit amount
based on certified cost. Subsection 2 states the director shall determine the
dollar amount certified for any facility and the priority between applicants. What
criteria were employed by the director to establish the dollar amounts
certified and the priorities of BETC projects?
The audit examined 311 BETC projects that cost more
than $1 million. Apparently, it sent concerns regarding about 25 percent of the
projects, costing as much as $350 million, under separate cover, to the DOJ for
review and possible prosecution. Has the ODOE attempted to determine from the
auditors which projects warranted the audits concerns and the reason for their
concerns? Has the ODOE taken any action to forestall the further loss of
taxpayer money and agency embarrassment regarding these projects of concern?
Although the audit report was made available prior to
the Joint Interim Committee on Department of Energy Oversight’s Wednesday,
September 21 meeting, no discussion of the
audit was included on the agenda, and no meaningful, in-depth discussion was allowed
to take place.
Given the list of unanswered
questions, and the very serious allegations included in the report, I feel it
would be prudent for the committee and its members to discuss these issues in
depth.
The committee’s next meeting is
scheduled for October 17. If we are to truly exercise our proper role as an
oversight committee, committee members must be allowed to have a public
discussion with the auditors regarding the myriad problems associated with the troubled
BETC program.
Please remember--if we do not stand up for rural Oregon, no one will.
Best Regards,
Doug
Senate District 28
Email: Sen.DougWhitsett@state.or.us I Phone: 503-986-1728
Address: 900 Court St NE, S-311, Salem, OR 97301
Website: http://www.oregonlegislature.gov/whitsett
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