The state of Oregon has clawed back $13 million from SolarCity and its accountant after investigators determined the cost of 14 commercial-scale solar projects had been inflated more than 100 percent to qualify for higher state tax credits.

The probe was launched after an April 2015 report by The Oregonian/OregonLive raised questions about the costs SolarCity submitted to qualify for $12 million in tax credits for six solar arrays at public universities across the state.

The settlement announced Thursday caps a long-running investigation that has already resulted in the conviction of an energy consultant and a state employee involved in the university projects. It also provides a coda on the now-defunct Business Energy Tax Credit, a $1 billion program that was mismanaged by Energy Department staffers, whose due diligence and controls on tax credit applications worth millions of dollars apiece were often nonexistent.

The tax credit program "was meant to channel public funds to help local businesses, create clean energy jobs, and stimulate the economy during a period of economic uncertainty. Unfortunately, some companies abused the program," said Attorney General Ellen Rosenblum. "In this case, we have been able to claw millions of tax dollars back from those who sought to cheat the system."

Neither SolarCity, now known as Tesla Energy Solutions since its purchase by Tesla Motors in 2016, nor its accounting firm, Novogradac & Company, admitted wrongdoing in the settlement. Tesla insisted that SolarCity provided accurate information in its applications and "was entitled to every dollar of tax credits that it received."

Tesla, contesting what it called Rosenblum's "hyperbolic claims of 'false applications' and 'inflated' costs," said in a statement that the "dispute merely reflects a difference of opinion about how to interpret an Oregon regulation regarding BETC credits that were received by SolarCity many years ago."

The Oregon Department of Justice and FBI originally launched investigations of the university solar projects in 2015, after The Oregonian/OregonLive reported that project backers had submitted phony and misleading documents to falsely demonstrate that they met a key construction deadline to qualify for tax credits. That report also showed one of SolarCity's suppliers used poorly paid prison labor to keep costs down for a politically popular set of projects meant to showcase Oregon's green energy ambitions and create local jobs.

The state and federal investigations confirmed the forgery, then exposed a bribery scheme involving the projects' Seattle-based energy consultant, Martin Shain, and an Energy Department manager, Joe Colello. Their partnership, which involved Colello using inside information to help Shain sell clients' tax credits, netted Colello $300,000 in kickbacks and allowed Shain to collect $1.3 million in commissions on the tax credits they brokered. About 60 percent of those commissions came from SolarCity.

Colello is now serving a five-year sentence for money laundering, bribe receiving, defrauding the Internal Revenue Service and other charges. He was ordered to pay $120,945 to cover the state's prosecution costs, and $81,000 in back taxes to the IRS. Together with Shain, he was also ordered to pay $1.25 million to clients defrauded in the tax credit brokering scheme.

Shain is slated to be sentenced this month after pleading no contest and guilty to state and federal charges of forgery, bribery, racketeering, grand theft and tax evasion. His agreement with prosecutors includes a recommended sentence of four to five years in prison, and restitution of $2.2 million.

State rules allow the Energy Department to claw back tax credits based on false or misleading submissions. But the agency took no action after learning about the forged documents, which its staffers never verified. SolarCity denied any knowledge of the phony submissions; by the time the energy agency was made aware, the credits had been resold to third parties, generating big commissions for Shain and kickbacks for Colello.

A subsequent story by The Oregonian/OregonLive in April 2015, however, raised questions about the costs SolarCity used as the basis for the tax credits. The news report showed that the prices on the solar modules and inverters used in the arrays far exceeded the costs negotiated with suppliers and the component pricing prevalent in the industry at the time.

The Oregonian/OregonLive also compared the overall costs of the arrays with comparable projects in Oregon and nationally, and found they were much higher than older, commercial-scale arrays at a time when solar prices were in free-fall. Finally, the report found that the opaque "fair market value" accounting method being used inflated the cost of the arrays and was not allowed under state rules, which called for applicants to submit their actual construction costs.

The Department of Energy never evaluated the prices to determine whether they were reasonable or met the rules, saying that wasn't part of its due diligence process and that it relied on a certification by SolarCity's accountant. Novogradac, meanwhile, said it didn't audit the costs, but simply valued them according to a set of "agreed upon procedures" with SolarCity.

At the time, SolarCity told The Oregonian/OregonLive that its costs also reflected its design and engineering expenses, company overhead and profit. A company spokesman, Jonathan Bass, said SolarCity had rescued the university projects after two previous developers had failed, and that it faced unique expenses in Oregon, including prevailing wage requirements and high costs to connect the arrays to the grid.

Bass also said SolarCity's "third-party ownership" model, in which it retains ownership of the arrays and leases them to customers, added to the legal, financing and operating costs.

"SolarCity," he insisted, "is not inflating values."

The Department of Justice investigation found otherwise. Senior Assistant Attorney General Brian de Haan said he was initially assigned to the civil forgery and false claims case against Shain, his partner, Rodger Phillips, and their company Bacgen Technologies. That case is on hold until the criminal prosecution of Shain is finished. De Haan said he started looking into SolarCity's project costs after The Oregonian/OregonLive's report on the costs submitted to the state on the university arrays.

In addition to the six university projects, de Haan and DOJ Special Counsel Tim Nord reviewed the expenses submitted for eight other SolarCity projects, including two built for Tualatin Valley Water District; two for Intel Corp.; one for Lane Electric Cooperative; one for Clatsop Community College; one for the City of Central Point; and one for Clean Water Services in Hillsboro.

From 2010 to 2014, SolarCity's BETC applications reported total project costs of $36.7 million, including $24 million for the six university arrays.

"Novogradac submitted reports purporting to certify the accuracy of those figures," according to a news release from the Department of Justice. "DOJ's investigation confirmed, however, that the costs had been inflated by more than 100 percent."

In order to make that determination, de Haan said the DOJ probe looked at the projects' costs on an invoice-by-invoice basis. "The department's position was clear throughout: The BETC statute and rules say that they needed to submit actual costs incurred, not an appraisal-based fair market value."

SolarCity received $16.7 million in total tax credits from the state, and the investigation determined that, based on its actual costs, it was not entitled to receive roughly $10 million of that amount. The settlement agreement included $12.5 million in restitution to the state and $500,000 in legal fees.

The DOJ did not disclose how Tesla and Novogradac split the restitution.

Tesla maintains SolarCity was transparent about how it calculated the tax credits, and that it reasonably believed it could apply for BETCs based on the fair market value of its solar arrays. Fair market value, it said, is a standard used by other governments.

"Although the State now takes the position that SolarCity should not have used the fair market value of the systems and instead should only have used its out-of-pocket construction costs, we do not believe that is the correct interpretation of the regulation," the company said in its statement. "Nevertheless, we recognize there is a difference of opinion about how to interpret the regulation, and thus decided to resolve this matter with the State."

Last year, SolarCity agreed to pay $29.5 million to settle an investigation by the U.S. Treasury and a related lawsuit over the company's use of the same accounting method to claim federal grants on its solar systems across the country.

Though federal regulations did allow the use of fair market value, the allegations were similar: that the company was using the complicated method to inflate its costs and gain larger grants. The company also offered a similar response after the settlement, saying its accounting methods were both correct and accurate.

Tesla told The Oregonian/OregonLive late Wednesday that far from being inflated, its project costs were 10 to 20 percent lower than those of comparable BETC projects. "Thus, the idea that SolarCity was trying to claim excessive BETCs is clearly incorrect."

The company did not say which projects it was using as a basis of comparison.

Novogradac issued a statement saying the investigation "determined only that the companies omitted or failed to adequately disclose certain information in SolarCity's applications" for tax credits. It said the settlement agreement includes no admission or evidence of any violation of the law.

"We are confident that the methodology used in our (agreed upon procedures) reports was fair, appropriate and consistent with applicable regulations," said Owen Gray, a certified public accountant and a partner at Novogradac. "Novogradac has always held itself to the highest ethical and professional standards, and our work across the state of Oregon is no exception."

–Ted Sickinger

503-221-8505; @tedsickinger