The director and staffers at the Oregon Department of Energy faced sharp questions and criticisms from lawmakers at a Tuesday hearing regarding their approval of three separate $10 million tax credits for the Shepherds Flat wind farm in eastern Oregon.
The owners sliced and diced the massive wind farm into three entities on paper to qualify for $30 million in subsidies from Oregon taxpayers. An investigation by The Oregonian this spring, however, concluded they did not meet the state’s definition of separate and distinct facilities and were therefore eligible for only a single, $10 million tax credit. Indeed, the newspaper found the Energy Department ignored legislators’ intent and taxpayers’ interest in signing the final two credits, either disregarding the tax credit rules or stretching their definition so far as to render them meaningless.
ODOE offered little new factual information at Tuesday’s joint hearing of the House and Senate Revenue Committees. But Energy Department Director Lisa Schwartz came with a memo from the state Department of Justice that offered some legal cover for her decision to sign off on the credits.
It’s unclear what lawmakers will do with the information they gathered at Tuesday’s hearings. Some seemed principally interested in assurances that the same thing couldn’t happen again because the state’s business energy tax credit has been reformed. Others were nevertheless zeroed in on whether ODOE followed its own rules and protected taxpayers.
Many questions centered on ownership of the wind farm. House Revenue Chairman Phil Barnhart, D-Eugene, asked whether ODOE even attempted to look behind the veil of the project’s three separate limited liability corporations to see if, in fact, the three phases of the wind farm share common ownership.
Schwartz didn’t answer the question, but insisted that common ownership was not a criteria for determining a single facility.
In fact, it is a factor in the state’s seven-part test to define a single renewable energy facility, and Shepherds Flat’s three LLCs share a common parent company, Caithness Shepherd’s Flat LLC. Caithness Shepherd’s Flat LLC, in turn, is owned by the project developer, Caithness Energy, its turbine supplier, General Electric, and three investors brought in to harvest the project’s tax benefits, Google, Itochu and Sumitomo of America.
“I don’t know how much more common ownership you could have,” said Rep. Jason Conger, R-Bend, who originally requested the hearings on Shepherds Flat.
Conger also noted that the three phases were located next to each other; that a single contractor constructed the entire wind farm in a highly coordinated fashion; that ODOE’s own analysts originally determined the project had a single interconnection to the grid; and that the three LLCs’ agreement on file with federal regulators outlines how they will share ownership and expenses of shared facilities.
Those conditions would support a single facility finding under four of the seven state criteria. If a project meets any three of the seven criteria, its is supposed to be defined as a single facility, eligible for only a single $10 million tax credit.
“Most people looking at this with just common sense would say this smells,” Conger said. “I get the feeling it was a foregone conclusion that this should have been approved.”
Schwartz insisted that wasn’t the case, although the question persists why ODOE pushed so hard to approve multiple credits.
Economic development officials like the bragging rights of hosting one of the world’s largest wind farms, albeit one that supplies Californians. Judges from Gilliam and Morrow Counties reminded legislators on Tuesday that the tax revenue and jobs generated are meaningful in rural communities.
Sen. Ginny Burdick, D-Portland, agreed that those benefits were real, but reminded colleagues that wind farms would have been built in Oregon with or without state subsidies.
To explore ODOE’s deliberations, The Oregonian requested a log of staff emails on Shepherds Flat. But the department says the search for five terms over six years would take its staff nearly two weeks to complete and cost the newspaper $5,200.
A PARTIAL REVIEW
Schwartz said ODOE undertook a rigorous analysis of the wind farm. She said the decision conformed to Oregon’s statute, and was consistent with findings by numerous other state and federal entities who recognized three separate facilities at Shepherds Flat.
An analysis of the decision submitted to the committees, however, showed only a selective application of the rules. For example, Schwartz and Anthony Buckley, ODOE’s administrator of energy development services, repeatedly asserted that each phase of the project was financed separately.
In fact, the three phases of Shepherds Flat shared common financing with bonds issued by a single entity. According to Fitch Ratings, none of the bonds is connected with any particular phase. Likewise, the U.S. Department of Energy issued one loan guarantee for the entire financing package to the parent company, Caithness Shepherd’s Flat LLC.
ODOE insists that Caithness Shepherds Flat LLC provided separate financing to each of the three LLCs, which are responsible for their respective portions of the debt service of the bonds issued by the parent company.
The department did not say whether construction contracts were executed with one year of each other, as the rules ask, or why the shared facilities agreement on file with federal regulators did not constitute an agreement to share expenses, as the rules ask. Likewise, ODOE ignored the physical layout of the projects’ interconnection to the grid, and bent the definition of interconnection to overturn its own analyst’s earlier conclusion that three phases share a common interconnection.
PICK YOUR RISK
ODOE did share with the committees an equivocal opinion on its decision from the DOJ. It asked the DOJ for a summary of its authority to grant the tax credits, and DOJ analyzed whether the decision was legally defensible. The Justice Department said the decision was within ODOE’s range of authority, largely because it has wide discretion to interpret rules as it chooses.
However, DOJ said there was risk that ODOE’s decision could be overturned based on arguments that it was a single facility. But DOJ said that risk was minimal because it was unlikely anyone with legal standing would challenge the decision. By contrast, the risk that the project backers would challenge a decision to revoke credits was high, the DOJ said.
The Energy Department could revoke all $30 million of the tax credits if it determined that Caithness made false statements in any of its applications or other submissions. ODOE’s approval process relies heavily on promises rather than physical due diligence, and Shepherds Flat is structured differently than described in original submissions to the state. But revocation seems unlikely given ODOE’s distance on the deal.
Rep. Cliff Bentz, R-Ontario, expressed frustration with the entire process.
“We went through this innumerable times to prevent what now appears to have happened,” he said. “This is a classic form over substance situation.”
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