False Claims

NOV 1, 2016, UPDATE (Hawaii Tribune-Herald):  "Puna Geothermal Venture’s parent company agreed last week to pay the U.S. government $5.5 million to resolve a civil lawsuit alleging it fraudulently applied for and received millions in federal clean energy grants, according to the federal district attorney for Nevada ..." [read more]

 Acording to recent federal court filings, Ormat Technologies, Inc., owns 100% of Ormat Nevada, Inc., the owner of Puna Geothermal Venture (PGV, a Hawai`i registered general partnership.)  Tina Calilung and Jamie Kell, former employees of Ormat, brought a Federal False Claims Act (referred to as a qui tam) lawsuit alleging Ormat made false and inaccurate applications to obtain grants for projects that were not qualified at a plant in Imperial County, California, known as Brawley and at PGV.  The complaint was filed in the U.S. Southern District of California but venue was changed to Nevada.  Some allegations of paragraphs from the plaintiffs' first amended complaint (starting at page 60) are quoted below (emphasis added):

251. There are three relevant components of the Puna Complex: (1) a geothermal combined cycle system with an alleged net capacity of 30 megawatts (the“30 MW plant”); (2) the “KS-14 Production Well” which was added to the 30 MW plant in 2010; and (3) a binary system with a net capacity of 8 MW (the "8 MW Expansion”).

252. The 30 MW plant was placed in service by its original owner, Constellation Energy, in 1993. Ormat acquired the 30 MW plant in 2004, eleven years after the original owner placed the 30 MW plant in service.

253. In May 2005, more than three months after the purchase of the 30 MW plant by Ormat, the 30 MW plant was sold to Southern Company as an equity investor, who then leased the 30 MW plant back to PGV in a sale-leaseback transaction. The sale-leaseback transaction allowed Southern Company to account for all depreciation in the 30 MW plant, but PGV still retained all rights in the resources generated from the 30 MW plant.

255. Not only is the 30 MW plant itself not qualified to receive grant money under the § 1603 program, but because the 30 MW plant was placed in service before 2004, it is not a Qualified Facility under § 1603 and the IRC, and, accordingly, any expansion to the 30 MW plant cannot constitute Qualified Facility Property and cannot qualify for § 1603 grant money.

257. Although the 30 MW plant was supposed to be generating 30 megawatts of electricity, by February of 2010, the 30 MW plant was reduced to only generating approximately 17 MW. This shortfall was problematic for PGGP and Ormat because the contracts with HELCO required energy production to be at least 30 MW. On February 8, 2010, Israeli newspaper Haaretz reported that Ormat had announced that its revenues would decline by $1 million per month as a result of the drop in steam production from the geothermal reservoir feeding the 30 MW plant.

258. PGV attempted to stimulate the well field with chemical and mechanical cleanouts of the blocked production wells, but such measures ultimately proved unsuccessful.

259. In order to restore the 30 MW plant to full capacity, as part of the planned site maintenance, PGV began drilling a new production well, KS-14, in early 2010.

264. The KS-14 well was initially very successful and, at first, added about 14 MW of net capacity, bringing the 30 MW plant back up to its 30 MW production capacity. However, as the resource stabilized in 2011, the production reduced slightly. The 30 MW plant was generating about 28 MW at the time the 8 MW Expansion was placed in service.

266. The 8 MW Expansion utilizes a binary system to generate electricity. In the binary system of the Puna facility, the 30 MW plant draws the resources from its production wells, including KS-14, and uses those resources to generate steam. That steam generates electricity, and constitutes the 30 MW plant’s output. The by-product of the 30 MW plant – a condensed hot water from the 30 MW plant, also termed geothermal injection fluid - then passes to the 8 MW Expansion. The fluid heats a motive fluid with a lower boiling point than water, which in turn vaporizes and turns a turbine to generate electricity.

271. Ormat substantially completed construction of the 8 MW Expansion in December 2010. However, the 8MW PPA was not executed until February 2011. Furthermore, the Hawaii Public Utilities Commission (“PUC”) did not approve the PPA until December 2011. Because it was not authorized to sell energy at the time, Ormat placed the 8 MW Expansion in “long-term lay-up” while it awaited for PUC approval of the PPA.

272. Though Ormat could not sell energy yet, it wanted to obtain a § 1603 grant for the 8 MW Expansion. Accordingly, though plant operation was “on hold” and PPA approval from PUC was still outstanding, Ormat began delivering energy produced by the 8 MW Expansion to HELCO for free. Ormat believed that if the plant was operating and producing energy it could claim December 2011 as the placed-inservice date for the expansion and thereby qualify the 8 MW Expansion project for § 1603 funds.

273. In late November 2011, Ormat made the decision to take the plant out of lay-up status and began running the units full time. In December 2011, Cathy Tsaniff, Ormat’s Tax Manager, began drafting PGV’s application for a § 1603 grant for the 8 MW Expansion, citing a December 2011 placed-in-service date. Ormat believed a December 2011 placed-in-service date would ensure that the 8 MW expansion project would meet the § 1603 Program’s placed-in-service requirements.

278. In its § 1603 application, Ormat misrepresented the 8 MW Expansion’s true status as an expansion to the 30 MW plant and treated the 8 MW Expansion as a stand-alone new Geothermal Property; a gross misrepresentation. Because the 8 MW Expansion was an expansion of a nonqualified property – the 30 MW plant – it could not qualify for a § 1603 grant.

279. Ormat thus knowingly misrepresented the Eligible Basis for the 8 MW Expansion and KS-14 in order to obtain § 1603 funds.

280. Ms. Tsaniff initially allocated the cost of the KS-14 production well between the 30 MW plant and the 8 MW Expansion. In the initial draft of Ormat’s § 1603 grant application, KS-14’s costs were allocated pro rata between the 30 MW and 8 MW plants based on the respective contributions of the steam and brine to the total output of the complex. However, Ormat management insisted that the grant application be revised to allocate 100% of KS-14’s costs to the 8 MW Expansion.

281. Ms. Kell and Ms. Tsaniff discussed the legality of submitting an Ormat § 1603 application that purposefully excluded relevant material information and included material false information. Ms. Tsaniff acknowledged that she knew the information was incorrect and admitted that she was aware of the legal implications of submitting a false § 1603 application, but told Ms. Kell that Ormat Technologies’s CEO, Dita Bronicki, had made the changes herself and, accordingly, Ms. Tsaniff feared retaliation if she were to raise the issue.

283. On April 14, 2012, Ormat owned PGV was awarded a § 1603 cash grant of $13,821,143. The award amount corresponds to a stated Eligible Basis of $46,070,477. The estimated eligible project costs include the cost of the 8 MW expansion’s generating units (including two Ormat Energy Converter (OEC) bottoming units, interconnection facility upgrades, and separators) and the full costs for drilling and connecting production well KS-14.

A footnote for the above paragraph says:  On October 30, 2012, Ormat conducted a town hall meeting to address public concerns over the Puna plant. During that meeting, Paul Thomson, who at that time was Ormat’s Director of Public Policy, was directly questioned by a member of the audience regarding the receipt of “$200 million in federal grants.” In response, Mr. Thomson denied that Ormat had ever received any federal grants for the Puna plant, despite the fact that Puna had indeed received funds for the 8MW expansion plant. Specifically, Mr. Thomson stated, “we never took a dime from the federal government.” In light of Mr. Thomsen’s comments it is obvious that Ormat has misled, and continues to mislead, outside parties and the public as to their receipt, use, and purpose of the § 1603 funds.

287. After receiving the stimulus funds, rather than increasing the number of jobs provided by the Puna plant, Ormat systematically cut jobs at the Puna plant by eliminating previous positions and failing to replace them. Ormat also cut back on the benefits that the remaining Puna employees received.

A footnote for the above paragraph says:  In light of the downsizing and cutbacks, on May 14, 2012, the operations staff of Puna voted to unionize because of concerns about their job and benefit security. After the union organization was approved by the Puna staff, executive management reassigned the plant manager, Michael Kalekini; a move widely to be considered retaliation for his failure to prevent the unionization of the Puna staff.

288. Ormat knew when it applied for § 1603 funds, a significant portion of the funds would be used to refinance a portion of the equity investment in the 8 MW plant. Construction on the plant had been completed by primarily Israeli engineers who were temporary hires, and thus, the §1603 grant funds provided to the Puna project had little, if any, stimulating effect on local jobs or the economy.

The defendants moved to dismiss the suit and on March 24th the Nevada District Court entered an order granting the motion in part as to some of the Brawley claims and denied it as to all the other Brawly claims and all the claims arising from the PGV grant application.  

Recently Ormat has agreed to sell a minority stake in some power plants, including PGV, to Northleaf Capital Partners.  The law firm that advised the buyer, Northleaf, has also published some detailed articles about the qui tam lawsuit (with links to copies of court documents):

Split Decision on Ormat’s Motion to Dismiss Ex-Employees’ Claims of Cash Grant Fraud

Ormat Defends 1603 Cash Grant Awards in Suit by Ex-Employees

Note:   the website of Bernstein Liebhard LLP, reports that on October 16, 2012, the US District Court for Nevada approved a $3.1 million settlement of claims that Ormat Technologies, Inc., made false and misleading statements concerning its net income to conceal costs of abandoned projects. "The settlement provides for the payment of $3.1 million to a class of investors who purchased Ormat securities between May 7, 2008 and February 24, 2010."