BETC audit raises serious questions

by Sen. Doug Whitsett

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.

In my last column I 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.

Senator Doug Whitsett is the Republican state senator representing Senate District 28 – Klamath Falls