Energy Department's plan to rewrite tax credit rules faces blowback from lawmakers

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The Oregon Department of Energy adopted temporary rules in March that allowed Trimet and other recipients of state energy tax credits to sell them at steeper discounts than state rules appear to allow. The Energy Department is trying to make those rules permanent, but faces opposition from lawmakers and others.

(Randy Rasmussen/Staff)

State lawmakers and others are telling the Oregon Department of Energy to back off plans to rewrite state rules governing the sale of energy tax credits.

The agency's plan would legitimize deeply discounted sales of state energy tax credits to private investors. Such transactions appear to violate state law, and officials got an earful at a public hearing held Tuesday to solicit comment on the rules change.

Rep. Phil Barnhart, D-Eugene and chair of the House Revenue Committee, said in comments he submitted that the department was ignoring lawmakers' clearly communicated directions on tax credit sales. He urged the department to drop the rule change and consult with the Legislature before making further changes.

"The statutes we've passed demonstrate clearly that we are interested in tax credit programs that do not give outsized payouts to private investors," Barnhart wrote. "Stated another way, tax credits should be spent on the thing which 'earned' them, not on inefficient markets and insider trading."

Sen. Doug Whitsett, R-Klamath Falls, has questioned the department's statutory authority to make the changes. And other observers are accusing agency officials of using the rulemaking process to cover up illegal deals that they previously sanctioned.

Dennis Richardson, a former state representative from Central Point and recent Republican gubernatorial candidate, said the department looked as if it were colluding with a select group of tax credit buyers and sellers.

If the agency goes through with the rule change, he said he would join with "hundreds of Oregonians" in urging state authorities to investigate the agency and its chief financial officer, Anthony Buckley, who runs the incentive programs.

"Why is DOE violating the statute we created?" Richardson asked. "Whose interests are they protecting? It's certainly not taxpayers.'"

The Energy Department has consistently maintained that it only was cleaning up its rules to reflect longstanding practices that its lawyers have already OK'd. The agency, however, has refused to release any documentation of that advice, citing attorney client privilege.

"The department should have gone through a public rulemaking process three years ago," said Rachel Wray, an agency spokeswoman. "We engaged in this process now because we have to tackle outstanding issues like this one. Any resolutions we come up with need to be informed by public comment, and we take all feedback we receive seriously."

Yet the blowback is only the latest chapter in an ongoing saga at Energy Department. Its blundering administration of $1 billion worth of state energy incentives during the last decade, and an ongoing willingness to bend the programs' rules, have turned the agency into a virtual scandal factory.

Oregon has long encouraged renewable energy and conservation projects by providing their developers with credits they can use to offset their state tax liabilities. Rules permit the recipient of a credit to sell it for cash, which enables unprofitable companies, nonprofits and public agencies that have no tax liability to raise cash to support their projects. Almost three quarters of the agency's tax credit recipients choose to sell them.

State rules also set a specific transfer price to ensure that most of taxpayers' money is going to support the desired project, not the well- heeled individuals and corporations buying the credits to reduce their tax burden.

For years, the Energy Department served as the broker between buyers and sellers of its energy credits and enforced the prescribed price of 67 cents on the dollar for five-year credits. That meant a buyer looking to offset $100,000 in taxes over a five-year period could buy a credit for $67,000 and use it to reduce tax bills by $20,000 in each of the following five years.

That's a rich discount, and an inefficient use of tax money. So in 2009, the Legislature directed the department to develop a new pricing formula, one with lower discounts that would be updated quarterly based on prevailing interest rates and inflation.

Tax credit recipients began to complain almost immediately that the new discounts were insufficient to attract buyers. And rather than wade through the tedious paperwork and wait for the Energy Department to match them up with buyers, they began turning to third party brokers - tax advisers and consultants -- who charged commissions of up to 10 percent to find a buyer and "monetize" their tax credits.

To stimulate sales during the recession, the brokers also started pushing to sell the credits at deeper discounts than the state formula dictated. But when they asked the agency whether that was allowed, they got mixed advice.

As early as February 2012, however, emails show that the agency's chief financial officer, Buckley, was telling those who asked that the pricing rules didn't apply if the department wasn't brokering the sale. He said he was basing that conclusion on guidance received from the Department of Justice.

The issue was raised repeatedly inside the agency but never resolved. Even this February, its new director had to step in to quell concerns.

"This is a business decision that's been thoroughly vetted," Michael Kaplan wrote to staff. "Effective immediately, please begin honoring all request for transfers of tax credits where the parties have negotiated the transaction price."

Department officials issued temporary rules in March that formalized the practice. It also applied the rules retroactively, legitimizing transactions back to a specific date: July 10, 2012.

The agency's rules change are supported by tax credit recipients, brokers and project developers looking to more easily sell their credits.  At Tuesday's hearing, they praised the rule change as necessary.

"The folks we've represented rely on this resource," said John Warner, who was a senior analyst with one of the most prolific and brokers of the credits, Blue Tree Strategies. "They want it to be predictable. If the credit isn't something they can monetize, they're not getting the benefit of the bargain."

For Peggy Ellis, an auditor at the Department of Revenue, the rules are plain, and they need to be followed. She said she was submitting her comments as a private citizen and called on Gov. Kate Brown to intercede and stop agency bureaucrats from "retroactively changing rules they may have already broken."

"To me, it is very important that people acting on behalf of the State of Oregon are doing so with the utmost integrity," she said in her comments.

"It should be self-evident, that government officials do not have the right to use a state agencies rulemaking authority to 'make good' their violations of laws passed by a duly elected Legislature."

- Ted Sickinger

tsickinger@oregonian.com

503-221-8505; @tedsickinger

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