Oil

Tuesday, Jul 09 2013 08:59 PM

Auditors question federal subsidy of project

BY JOHN COX Californian staff writer jcox@bakersfield.com

Federal auditors have raised red flags over the Obama administration's 2011 decision to invest an extra $100 million in the Hydrogen Energy California power and fertilizer plant proposed in western Kern County.

A June 6 audit report by the U.S. Department of Energy's Office of Inspector General found that agency officials neglected to gather supporting documentation from HECA's owner before raising the project's federal subsidy to $408 million after the project changed hands two years ago.

The audit also determined that the department failed to verify that $737,544 in labor costs claimed by HECA were eligible under a "cost share" agreement with the federal government. The report says that at least some of those costs appear to have been related to the new owner's project acquisition costs, which could disqualify those dollar amounts from the subsidy agreement.

As a result, the report says, taxpayers now bear a bigger share of the project's upfront costs. It warns that $133 million of their investment could be lost if the controversial and still-unapproved project fails to attract the financing it needs to begin construction.

The little-noticed report essentially accuses department officials of relying too heavily on the word of the project's Massachusetts-based owner, SCS Energy LLC, whose top executive has given at least $39,500 to Democratic political campaigns, including that of President Obama, since 2008.

"In short, we found that in assessing the viability of the modified project, the department relied on financial projections that were not always fully supported and that the department had not ensured that only allowable costs had been included in the recipient's cost-share contribution," wrote David Sedillo, Western Audits Division director of the department's Office of Inspector General.

A Department of Energy spokesman stated in an email Tuesday that the agency mitigates risk in cases such as HECA's by giving out money only when such projects reach certain technical and financial milestones.

"After careful review, the Energy Department agreed with the new estimates and cost-share agreement. We will continue our rigorous oversight of the project as it goes forward consistent with the original intent of the grant," spokesman Steven R. Thai wrote.

He noted that the department has given $75 million to HECA so far.

HECA declined to comment on the auditor's findings.

Project overview

SCS Energy proposes to use coal and petroleum coke to power what it says would be a 200-employee facility near Tupman.

HECA would produce nitrogen-rich products, mainly fertilizers. Alternately, during times of peak demand for electricity, the plant would generate 300 megawatts of power for sale to the power grid.

HECA plans to sell the plant's byproduct carbon dioxide to Los Angeles-based Occidental Petroleum Corp. for use in stimulating nearby oil wells. After that, the greenhouse gas would be stored underground indefinitely.

Opponents have complained that the plant's emissions would pollute their air and that plans for using anhydrous ammonia would endanger their safety. They also fear that the plant's truck traffic would damage nearby roads.

HECA originally belonged to oil giant BP and international mining company Rio Tinto, which proposed to generate power but not manufacture fertilizers at the plant. But after determining their plan was economically unfeasible, they sold it to SCS, which has said it plans to sell the facility after completion.

The project received bad news late last month when the Department of Energy and the California Energy Commission issued a detailed report raising multiple questions about the project. That staff report was preliminary; a final decision on whether to approve the project is expected by year's end.

Originally the project was estimated to cost $2.8 billion, and its subsidy was set at $308 million. But when SCS stepped in with a more complex project, the price tag rose to $4 billion.

Last month's audit report points to three instances in which the project's costs appear to be higher than SCS estimated. Those costs are related to interest rates, operations and maintenance expenditures, and property tax and insurance costs.

Higher costs could pose a problem if they undermine HECA's profitability.

The audit report notes that although department officials did not require SCS to provide detailed documentation of many of its claims, the agency did perform a financial analysis focused on total project costs and its debt-to-equity ratio.

Money for the subsidy came from the economic stimulus program known as the American Recovery and Reinvestment Act of 2009. That legislation gave the department's Office of Fossil Energy $3.4 billion to focus on ways to use coal more cleanly and efficiently.

Political contributions

Jim Croyle, SCS Energy's co-founder, chairman and CEO, has made numerous donations to Democratic candidates. As reported by the news organization EnergyGuardian and confirmed by The Californian, Croyle contributed $2,300 to Obama's 2008 presidential campaign.

According to the political donations-tracking website OpenSecrets.org, Croyle, a former political science professor at Washington University in St. Louis, also donated $31,400 to the Democratic Senatorial Campaign Committee in 2010. Additionally, he gave a total of $4,800 to campaigns of Sen. Robert Menendez, D-N.J., between 2009 and 2011, and $1,000 to the campaign of Sen. Maria Cantwell, D-Wash., in 2012.

Tehachapi resident Adrian Moore, vice president of policy at the Reason Foundation, a conservative think tank, said federal subsidies for such projects should be structured differently. He said private companies should get public money only at the end of the development process as a way to "make the project cross the finish line."

"The taxpayers are bearing all the downside risk and none of the upside potential," he said.

Project opponent Tom Frantz, a Shafter farmer, said the public subsidy would be better spent on solar power installations.

"That would be a much better investment for the taxpayer to encourage," he said.

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