Shepherd's Flat wind farm

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(Gallery by Jamie Francis, The Oregonian)

The Oregon Department of Energy says it is re-examining its

in tax credits to the Shepherd's Flat wind farm in eastern Oregon, and has consulted the Department of Justice.

An analysis by The Oregonian suggests there may be grounds under state rules to revoke the credits.

The developer of the mammoth wind farm,

, went though the legal exercise of subdividing the project on paper to qualify for three separate, $10 million state subsidies. The Energy Department approved them in the last six months, despite sufficient evidence in two of its own analyses to define the wind farm as a single facility, deserving only one tax credit.

Now that the incentives are out the door, the state's ability to recover taxpayers' money would depend on whether Caithness misrepresented its project in filings with the state.

The Oregonian's review of those filings suggests that Shepherd's Flat does not meet state requirements as "separate and distinct" renewable energy facilities.

Energy Department final approval came despite department analyses that should have disqualified it.

The project may not have the separate ownership, separate financing, separate procurement, separate construction, and separate operation and maintenance that Caithness promised in its original applications.

Documents provided to the newspaper show no amendments to those representations by Caithness, as required for major changes.

The paper trail shows the department's staff relied heavily on Caithness' assertions, rather than independent verification, in final approval of the tax credits.

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The Justice Department declined to comment, or confirm if it is making any inquiry into the credits. Since questions from The Oregonian prompted the Energy Department review, officials have declined to answer detailed questions regarding its tax credit approvals or the legal basis for revoking them. Agencies often ask their general counsel at the DOJ for basic legal advice without taking further action.

"We have had an initial discussion with the Department of Justice," said Diana Enright, an Energy Department spokeswoman. "We will continue to consult with DOJ and don't know how long this might take."

Caithness officials would not answer detailed questions about the structure of the Shepherd's Flat, but sent an e-mailed statement: "All the rules were followed and the requirements of the

program were fully met."

ONE OR THREE?



Any state re-examination would tip on seven specific characteristics in state rules that define a single facility.

The Energy Department has repeatedly refined those criteria to protect taxpayers from developers who slice and dice renewable energy projects to qualify for multiple tax credits.The rules say, "the project will be determined to be a single facility, despite the number of applications, owners and construction phases, if three or more" of the criteria apply.

Shepherd's Flat wind farm in northeastern Oregon did the paper work to subdivide into three farms, but the Oregon Department of Energy and Oregon Department of Justice says it is reexamining the approval of $30 million in Business Energy Tax Credits.

Below are the criteria; how the Energy Department applied them to Shepherd's Flat; and The Oregonian's analysis.



1. The facilities are on adjacent parcels of land.



The property -- which Caithness calls North Hurlbert, South Hurlbert and Horseshoe Bend -- is adjacent and by this measure, a single project, the Energy Department found.

This one's a geographic no-brainer.

2. The generating equipment was purchased by the same person or persons who own or operate the facility ...



The department said yes; all equipment was purchased under the authority of the general manager of all three facilities, Derrell Grant.

Caithness' preliminary applications stated that each facility would purchase its generating equipment "separate and apart from the procurement activity" for other projects. Turbine selection, it said, would depend on its specific contracts with one or more supplier. The three subdivisions of Shepherd's Flat use identical turbines, The Oregonian found. The supplier, General Electric, originally announced a

for the entire project, though Fitch Ratings indicates that contract may have been divided in three.

3. Facilities are connected to the grid through a single connection or multiple connections when there is shared net metering.



The Energy Department's approval didn't address this, though its site inspector noted the three subdivisions "share a common ring bus and an interconnection."

The Oregonian's review indicates that Caithness set up a subsidiary that owns the shared grid interconnection. But that's a moot point under the rules. The answer appears to be yes. And that would be three strikes for Caithness. By those measures, Shepherd's Flat would meet the definition of a single facility, and only be eligible for a single $10 million credit. The project appears to meet other criteria, too.

4. There was a single construction contract or multiple contracts with one or multiple contractors entered into within a year of each other; or the projects are interdependent in the way they will be owned, financed, constructed, operated or maintained.



The Energy Department said no, but didn't compare the project to the rule, other than mentioning the company's 2008 assertion it would select contractors and suppliers after competitive bidding.

The Oregonian's review suggests yes, the subdivisions are interdependent in numerous ways.

*

Ownership:

In a cover letter with its preliminary applications, Caithness told the Energy Department that none of its single-facility criteria applied to Shepherd's Flat's subdivisions because they would all be separately owned.

That's not the way the rules work. And it's not at all clear they are separately owned. A variety of regulatory filings refer to North Hurlbert, South Hurlbert and Horseshoe Bend as "directly and wholly owned facilities of Caithness Shepherd's Flat, LLC." Property tax abatement deals with Gilliam and Morrow counties are with

, and tax bills list the properties' owner as Caithness Shepherd's Flat. The tax bills get sent to Caithness Energy's headquarters in New York. Fitch Ratings says Caithness Shepherd's Flat LLC is owned by Caithness Energy, GE and three companies that made equity investments in 2011: Google, Sumitomo and Itochu.

*

Financing:

Caithness's preliminary applications stated each subdivision would be separately "financed and securitized." An overview of the

by GE in 2011 references a single borrower, Caithness Shepherd's Flat LLC. Bonds to finance the project were issued by that company, and according to Fitch Ratings, the debt securities have no connection to any subdivision. The project's financing was guaranteed by a

guarantee to Caithness Shepherd's Flat LLC, according to the U.S. Department of Energy.

*

Construction:

Caithness's preliminary applications stated it would select contractors for each subdivision through competitive bidding and the contracts "will relate only to the ...facility and not to other renewable energy projects to be separately designed, owned and operated by any affiliate of the applicant."

Caithness hired Minnesota-based Blattner Energy as the general contractor for the entire wind farm. Caithness filings reviewed by The Oregonian don't detail how or when its contract or contracts were structured. Blattner invoices submitted to the Energy Department do name separate "projects," but the account name for all of them is "Caithness Shepherd's Flat Wind Project" with a portfolio name "CSF Construction Account."

*

Operation and Maintenance:

Caithness preliminary application stated its individual facilities would be operated and maintained by their turbine suppliers for at least two years. Photographs from the Energy Department inspection show three maintenance huts for the wind farm, which sprawls over 32,000 acres. But news releases from

identify a 10-year operations and maintenance agreement for the entirety of Shepherd's Flat. Caithness wouldn't detail its agreements, but if its turbine supply contract with GE was split in three, that may cover the operations and maintenance agreement, too. The Energy Department's inspection said all the turbines are monitored by GE from New York.

5. The facilities have agreements to share project expenses, personnel, or capital investments, including generating equipment or other resources.



The Energy Department said no, because "agreements are written to exclude shared resources."

The Oregonian found much sharing.

*

Expenses and resources:

On June 17, 2011, the Federal Energy Regulatory Commission approved a "shared facilities agreement" covering how the subdivisions would "jointly own, utilize, operate and maintain certain shared facilities" to connect to the grid. The agreement said they would share construction costs and operating expenses in proportion to their output.

*

Personnel:

Shepherd's Flat employs some 40 people. Derrell Grant is listed as the general manager of all three subdivisions in numerous filings to and from the Energy Department. David Casale was identified the senior vice president for all three in separate letters to the Energy Department. Vincent Giglio, a tax manager at Caithness, is identified as the contact person on final tax credit applications filed by all three, and the Department's letters certifying those credits.

6. If other factors or considerations that demonstrate the facility is not separate and distinct based on construction, operation, maintenance and output.

This catch-all criteria was included to give extra latitude to determine that a chopped-up project was actually a single facility. The Energy Department didn't address this.

The Oregonian uncovered many factors, cited above, that suggest the answer is yes. In additon, the output of Shepherd's Flat all goes to one customer, Southern California Edison. Caithness structured the sale under three power purchase agreements. But SCE told its regulator it was seeking approval of three contracts "relating to a single wind project" in Oregon.

7. The project has been recognized as a single facility in a permit or license from a federal, state, county, city or local authority.

No, said the Energy Department, citing the separate site certificates and power purchase agreements.

Caithness may pass the test. Yet as above, The Oregonian found descriptions of the wind farm as a single facility in official documents and self-promotions.

Shepherd's Flat was originally proposed and permitted as one wind farm in 2008. Caithness later convinced the Energy Facility Siting Council to divide the land-use permit in three. Likewise, Caithness divided its single transmission agreement with the Bonneville Power Administration, its turbine agreement with GE, and its power purchase agreements with Southern California Edison. In news releases and regulatory filings, all those organizations refer to Shepherd's Flat as one wind farm.

Indeed, Caithness' own statements refer to Shepherd's Flat as "a wind power generation facility" and "the largest wind facility in Oregon."

SPLITTING THE FARM



If you're keeping score, The Oregonian's analysis suggests Shepherd's Flat meets six of the seven criteria for a single facility.

The Energy Department ultimately concluded Shepherd's Flat was multiple projects. It approved three $10 million tax credits, the last one in January. But the process appeared flawed, and more dependent on Caithness promises than independent verification.

Last July, department analyst Evan Elias was asked to evaluate whether Shepherd's Flat was a single project or three. He found the projects met two of the state's criteria as a single facility, but said the answer to the others was "either clearly no or likely no."

In his two-page report, he said he based his conclusions on "applications and associated submittals" by Caithness. Attached to his report was the company's original rationale for its "separate and distinct" projects.

On Sept. 5, however, when the

visited the wind farm, she noted the shared interconnection to the grid.

That third point of commonality could have defined Shepherd's Flat as a single facility, disqualifying the company for the second and third tax credits.

But the inspector apparently missed the significance. She noted in her reports that the Caithness representative she met with "assures the projects are autonomous and a memo to file from Evan Elias ... indicates agreement with that assessment."

THE DO-OVER



give the Energy Department director the authority to revoke credits and recover taxpayers' money in the case of "fraud or misrepresentation."

Any re-evaluation of the tax credit approvals could hinge on Caithness' repeated assertions about the separate and distinct characteristics of its wind farm.

The application process for Oregon tax credits is long, but fairly straightforward. For Caithness, it began before a shovel hit the dirt, with a 2008 pre-certification filing that detailed how Shepherd's Flat would qualify as multiple facilities eligible for multiple subsides.

Pre-certification provides reasonable assurance that developers will get the subsidies if they follow their initial plans. As such, the state mandates that developers file amendments covering any major changes, which require re-approval. When the project is up and running, developers apply for final certification of the tax credit.

The Energy Department verifies costs and inspects the site. But its final review leans on good-faith reporting by applicants, rather than in-depth analysis of its own. Managers say a backlog of 2,000 tax credit applications await certification, and it has only two site inspectors. With scant time, analysts turn to the information in applications, amendments and other submittals.

"We're limited in our resources," said Anthony Buckley, who manages the Energy Department's tax credit approvals. "Having staff spend an inordinate amount of time, or having someone challenge us on separate and distinct when they came in to final, that could hamper our ability to process the other 2,000 applications."

State rules also say that renewable energy facilities applying for tax credits "must operate in accordance with the representations made by the applicant" in its filings.

Indeed, in its final application form for tax credits, the Energy Department asks: "Was the project completed as proposed in the preliminary application?"

For each subdivision of Shepherd's Flat, Caithness checked "yes."

A department reviewer both circled and check-marked the answer.

While Caithness amended its pre-certifications, that primarily concerned the substitution of GE as turbine supplier for all three subdivisions, instead of three different suppliers originally listed. They did not alter original representations that the projects would be separately owned, separately financed and securitized, separately constructed, and separately operated and maintained. They did not alter the assertion that the procurement for each subdivision would be undertaken separately, either.

Caithness has already taken some of Oregon's money to the bank. It sold one quarter of one of the tax credits -- a chunk worth $2.5 million -- to Walmart, which will use it to reduce its own state tax bill. The Energy Department said it had no other information on Caithness' use of the

for the tax credits, though it has approval to sell all $30 million worth.

If the re-evaluation finds any misrepresentation by Caithness, Shepherd's Flat would lose all its tax credits. If they've been sold, the original recipient is liable for the full face value.