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DOE risking taxpayer dollars in project tied to Obama donor, watchdog warns

By Edward Felker, EnergyGuardian

Thursday - 6/13/2013, 12:02am  ET

The Energy Department helped a struggling government-backed clean coal power plant in California secure a new owner in a donor to President Barack Obama and agreed to revised terms that raised the risk of taxpayer losses, government investigators have found.

The Department's Office of Inspector General said that officials helped keep Hydrogen Energy California afloat after its initial backers moved to terminate their DOE contract in the face of fading commercial prospects.

The project was acquired by Massachusetts-based SCS Energy, headed by Democratic donor James Croyle, in 2011. He gave $2,300 to President Barack Obama's 2008 campaign and $31,400 to the Democratic Senatorial Campaign Committee in 2010, according to federal contribution records compiled by the nonpartisan Center for Responsive Politics.

Under the revised contract, the project's estimated costs rose from $2.8 billion to $4 billion, while the Energy Department agreed to boost conditional taxpayer backing by $100 million, to $408 million in all.

In a report dated June 6, Western Audits Division Director David Sedillo said the department allowed SCS Energy to take over the project with a reduced equity share and did not fully verify their financial projections.

It said the department has put up to $133 million at risk of loss if the 400-megawatt project does not proceed to construction.

"Our audit found that the project is progressing. However, in our view, the Department is managing HECA at an increased risk level," Sedillo said.

The department also failed to secure documentation of costs claimed under the revised contract. It further did not conduct a new merit review, relying instead on a less-stringent technical analysis of budget projections.

The project is funded under $3.4 billion approved by Congress in the 2009 economic stimulus law for so-called "clean coal" technologies.

Located in Kern County, the HECA project would capture carbon from the burning of coal and petroleum-based refinery coke and send it to be used to stimulate production in nearby oil fields and to produce fertilizer.

Sedillo noted that the department had information on other projects that indicated the HECA project future costs were likely to rise.

HECA's operations and maintenance costs projections were 36 percent lower than a similar, smaller carbon capture power plant, he said, and its future property tax payments were estimated by an outside group at 10 times those presented to the department.

"A HECA official stated the costs presented in the financial model were placeholders and the actual amounts could be higher than the projected values," Sedillo said.

He noted that the company has provided cost estimate updates to the department, even though it was not required to do so. Those estimates now project an $800,000 higher price tag.

Department officials did not respond to a request for comment. The company also did not respond to a request for comment.

The original owners, BP and Rio Tinto, got out of the project because of rising capital costs and the inability to win power purchase agreements.

The department argued to Sedillo that the new owners actually lowered taxpayer risk by adding the fertilizer plant to the project, which should provide an additional revenue stream.

A company official said in a 2011 statement that the addition of fertilizer production would make the project "cost effective and economical."

Croyle added that the project would further "significant environmental objectives in low-carbon manufacturing and power generation."

Energy Department officials also stressed that in the early stages of the project they expected financial projections to change and that their review of the new contract was as rigorous as the one conducted for the initial award.

Sedillo urged the department to develop policies governing reviews of projects undergoing ownership changes and to undertake allowable cost reviews of the HECA project.

Croyle also donated $4,800 to campaigns of Sen. Robert Menendez, D-N.J., from 2009 through 2011 and $1,000 to the campaign of Sen. Maria Cantwell, D-Wash., last year.