The Oregon Department of Energy said it will reevaluate its recent approval of $30 million in tax credits for the Shepherd’s Flat wind farm, a collection of 338 turbines in Gilliam and Morrow counties that bills itself as one of the largest wind farms in the world.
The decision came last week as The Oregonian pressed an investigation into whether the wind farm qualified for multiple Business Energy Tax Credits under explicit state rules governing what constitutes a “separate and distinct” renewable energy facility.
“Because of this information, we do need to revisit this one,” said Kyleen Stone, deputy director at the Energy Department. “We are going to do some work and actually legitimately look at it and review our determinations. We need some time to review all the facts.”
The newspaper’s investigation focused on an abuse of the controversial tax credit program that has vexed legislators for years: wind farm developers subdividing their projects to garner multiple tax credits.
It also reprises a concern that has dogged the department: lax oversight and minimal accountability for the tax credits, which have drained state coffers of millions of dollars that might otherwise fund schools and other public services.
The Legislature previously moved to phase out the tax credit to rein in runaway costs, but is now considering an extension of the tax credits for manufacturers. Meanwhile, the Energy Department faces a long hangover of applications filed to beat the program’s sunset dates. A backlog of some 2,000 tax credits awaits final certification, department officials said.
“This is a program that’s has been riddled with problems,” said Chuck Sheketoff, executive director of the Oregon Center for Public Policy and a frequent critic of the state’s tax giveaways. “The DOE has taken the promotion role for industry to the exclusion of being careful with the tax credits. They’re not giving any scrutiny.
“If they’ve done it for this one, what other ones have they done it with?”
Slicing and dicing is nothing new. One wind developer applied for nine tax credits, and received approval in 2009 for four, worth a total of $40 million, for what some in the Energy Department considered to be a single project. Solar manufacturers have also been able to break projects into phases to claim multiple credits.
Despite repeated rewrites of the administrative rules and laws specifically intended to curb the practice, the loophole persists.
The developer of Shepherd’s Flat, New York-based Caithness Energy, jumped through numerous hoops to legally separate the wind farm into three projects on paper, dividing the ownership and various contracts between subsidiaries. In 2009, the state pre-certified the company’s three tax credits based on assurances the projects would meet state standards for separate and distinct facilities, both in development and ongoing operation.
The Energy Department’s approval of the three $10 million credits for Shepherd’s Flat came in the last five months. The final credit was approved last month after a cursory, cut-and-paste analysis of the finished product.
Yet a review of Shepherd’s Flat’s structure and the Energy Department’s due diligence by The Oregonian indicates that the wind farm meets neither the spirit nor the specific requirements of Oregon law to receive final certification of multiple tax credits. Separate analyses by Energy Department staff cited three factors that identify the wind farm as a single facility:
**The three sections of Shepherd’s Flat sit on adjacent pieces of land.
**They bought generation equipment from the same supplier, under the authority of the same general manager.
** They have a single point of interconnection to the grid and a shared electrical switching system, called a ring bus.
Those factors alone are sufficient to disqualify the project from multiple tax credits. But the state rules include several other defining characteristics of single facilities, and give the Energy Department latitude to weigh “other factors or considerations … based on its construction, operation, maintenance and output.”
In fact, Shepherd’s Flat sold its output to a single customer, Southern California Edison. The deal was made under three power purchase agreements, but the utility told its regulator that the three contracts related to “a single wind project” in Oregon.
The three sections used the same general contractor, Minnesota-based Blattner Energy, for construction. They share operations and maintenance contractors under a 10-year agreement with General Electric. And they were financed under a single loan guarantee from the U.S. Department of Energy that went to Caithness Shepherd’s Flat, LLC.
Even Caithness’s own website and communications refer to Shepherd’s Flat as a single “wind farm.”
Lynn Frank, a former director of the Energy Department, was tapped to help write the tax credit rules when the credit was expanded in 2007. He said rules were drafted to make the definition of a single facility unambiguous. That intention was spelled out in Frank’s memo to the Energy Department director: “The underlying concept is: If it looks like a duck, walks like a duck and quacks like a duck, it is a duck.”
“All Oregonians can understand that,” Frank said last week. “They cannot understand a public official paying three times for one duck cut into three parts. It is still one duck. Why was taxpayer money used this way? Good question. It deserves a good answer.”
Caithness didn’t always claim to be developing three projects. It originally applied to Oregon’s Energy Facility Siting Council for a land use permit covering a single wind farm. The council granted that application July 25, 2008, four days after the Bonneville Power Administration issued a transmission agreement to interconnect with a single, 846-megawatt project.
That same month, however, when Caithness submitted applications for tax credits to the Energy Department, the owners revealed their plans to divide Shepherd’s Flat into “at least four” discrete projects. The company said each project would have separate owners, financing plans, structures, equipment and power sales agreements. So each would be eligible for a separate $10 million tax credit.
The cover letter said the company originally sought a single permit for “reasons of efficiency and economy,” and would amend its site permit to reflect the new reality. It went on to say that it hadn’t committed to the projects. “Making such financial commitments depends in significant part” on whether the tax credits are certified by the state, it said.
Caithness filed the paperwork to subdivide. It registered three separate limited liability corporations with the Oregon Secretary of State and transferred ownership to them. It applied for and received amended site certificates. The BPA split its interconnection agreement in three. And Caithness sold the power to Southern California Edison under three contracts.
But it was still up to the Energy Department to make a final decision, when the wind farm was up and running, whether there were separate and distinct projects.
NATIONAL EXAMPLE, LOCAL CONCERNS
In 2010, Shepherd’s Flat attracted national notoriety for its subsidies. In a briefing memo for the President leaked to the media, Obama’s top advisors worried that the U.S. Department of Energy’s loan guarantee program was subsidizing projects that didn’t need it.
Shepherd’s Flat was their case in point.
Treasury Secretary Larry Summers, energy czar Carol Browner, and Vice President Joe Biden’s chief of staff Ron Klain said Shepherd’s Flat was “double-dipping” on $1.2 billion in federal and state subsidies – 65 percent of its projected cost. The incentives included a $500 million federal grant, $200 million in federal and state tax benefits from accelerated depreciation, $220 million in premium power prices attributed to state renewable energy mandates, and a $1 billion loan guarantee with a value of $300 million to the developers.
They concluded that Caithness has “little skin in the game” – about 10 percent of the project’s cost – but stood to earn a 30 percent return on its investment. It also speculated that Shepherd’s Flat would likely go ahead without the federal loan guarantee because “the economics are favorable for wind investment given tax credits and state renewable energy standards.”
In the meantime, the Oregon Legislature was having its own second thoughts about subsidies. The cost associated with the long-running BETC program had skyrocketed from $15 million every two years to $150 million after the Legislature expanded the tax credit.
As previously reported in The Oregonian, state officials greenwashed the BETC expansion, low-balling its estimated cost before asking the Legislature to boost the subsidies. And the state Energy Department exercised little oversight of the program, handing out tax credits to companies that went bankrupt, never operated, generated little energy savings, or subdivided projects for additional credits.
Wind farms were big recipients. New laws in Oregon, California and Washington required utilities to serve customers with renewable energy, so the demand for wind power exploded, resulting in a stampede to develop the windiest sites near transmission corridors on the Columbia Plateau.
By 2009, Oregon lawmakers were questioning whether the tax credits for big wind were necessary at all.
“I remember thinking we’d made this credit way too rich and needed to cut it back,” said Rep. Phil Barnhart, D-Eugene. Developers, he said, “were quite blatant about it. They were not at all reticent to show me they were going to apply for 10 tax credits.”
Lawmakers passed a bill in 2009 to cut back wind farm incentives from $10 million to $3.5 million apiece. But then-Gov. Ted Kulongoski vetoed the bill after heavy lobbying by wind developers, unions and environmental advocates. Kulongoski cited the economy’s volatility and the uncertainty about the wind industry’s ability to stand on its own. But he directed the Energy Department to address some of the program’s problems.
Their new rules laid out nine specific criteria and said a project that failed to meet any three of them would be considered a single facility. The next year, the Legislature passed a bill to reduce wind farm tax credits, which Kulongoski signed.
“Absolutely, one of our intents was not to allow projects to be sliced and diced,” said Rep Vicki Berger, R-Salem.
$30 MILLION QUESTION
Shepherd’s Flat is certainly a big deal for Gilliam and Morrow counties. It supported 400 construction and 35 to 45 permanent jobs. It promises more than $100 million in property taxes during the next 15 years. And landowners stand to collect millions in lease payments.
Last September, Oregon politicos gathered with Caithness officials to cut the ribbon. Gov. John Kitzhaber, two U.S. senators and its lone Republican Congressman Greg Walden issued statements praising Shepherd’s Flat as a rural job generator, an environmental boon, and a building block of the future economy.
Caithness and state officials were already hard at work finalizing the tax credits.
Anthony Buckley, the head of the Energy Department’s development services division, said he asked an analyst to review the wind farm’s files last July to answer the $30 million question: Does it still qualify as three separate facilities under the latest state rules?
In reality, Buckley said the question had already been answered in the state’s pre-certification process – years before Shepherd’s Flat was even built. The department, he said, couldn’t afford to spend an inordinate amount of time on the final certification lest it bottleneck its backlog of 2,000 other applications.
Nevertheless, it was a lot of money for a project that had already received media scrutiny.
“We didn’t want to get caught short so we did our homework,” Buckley said.
The analyst, Evan Elias, offered a four-paragraph answer. He said the facilities were on adjacent parcels, and the general manager was the same for all three applications, so the generation equipment was purchased under the authority of the same person. Under those two criteria, Shepherd’s Flat qualified as a single facility, he said.
For everything else – whether the projects shared personnel, operating expenses, had a single interconnection to the grid, or were interdependent in the way they were owned, financed, constructed, operated or maintained – Elias said “the answer is either clearly or likely no.”
Therefore, he determined, there were three separate and distinct projects.
In fact, his answer didn’t address most of those criteria. It simply restated some of the promises Caithness originally made in its 2008 application. Department officials said Elias was not available to answer questions, and the only background available was what was in the file.
The files included copies of the three site inspections. On Sept. 5, 2012, an inspector met with Kenneth Talovich, an asset manager at Caithness Energy, to inspect the three sites. The two-page inspection forms for the three facilities include identical checkmarks and comments on eight standard interview questions. A five-paragraph narrative report also was cut and pasted for all three projects, with only the name and number of turbines changed.
Importantly, the final paragraph in each report notes the facilities share a common interconnection to the grid. That third point of commonality could have disqualified the second and third tax credits when coupled with the two that Elias’ analysis identified.
But the department never put them together, or thoroughly analyzed if the project met the other criteria.
The inspector’s report concluded that beyond the common interconnection and ring bus, “Mr. Talovich assures the projects are autonomous.” Furthermore, it said Evan Elias’ memo agreed with that assessment.
Caithness, through its local public relations contact, offered a statement.
“Caithness Shepherds Flat is a world-class wind farm that is providing clean renewable energy to the electric market. The wind farm was developed with the cooperation and support of many stakeholder groups including local landowners, state permitting authorities and local, state and federal elected officials.”
The company said the wind farm was developed as three separate and distinct projects, each with its own site permit, interconnection agreement, power purchase agreement, and tax credit.
“All requirements of the Oregon Business Energy Tax Credit program were fully met.”
Energy Department officials said last week they would gather new information to review the tax credits given Shepherd’s Flat. It’s not clear, if its decision is reversed, whether the state would or could recover the money.
The company, like many other tax credit recipients, received approval to sell the credit in exchange for cash. The pass-through option will net Caithness $20 million, but leave the state’s general fund out the full $30 million.
“We should be calling on the Secretary of State to audit the department’s giveaway of these things,” said Jody Wiser, organizer of the advocacy group Tax Fairness Oregon. “There are so many unmet needs in this state that it’s a travesty that we’re throwing money at wind farms that are going to make money with or without our subsidies.”
[rest of article available at source]
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