News Column

Feds Probing Solar Company for Fraud

Oct. 23, 2012

Alan Yonan Jr., The Honolulu Star-Advertiser

The U.S. Treasury Department and Internal Revenue Service are looking into the possible misuse of a federal solar rebate program by at least one mainland solar company that operates in the Hawaii market.

A spokesman for the U.S. Treasury Department's inspector general confirmed last week that authorities are investigating whether SolarCity Corp., and other companies that install photovoltaic (PV) systems with no upfront costs to the customer, may have inflated the value of those systems to claim larger cash rebates under a popular federal stimulus program.

In the case of solar systems with no upfront costs, the customers don't own the PV system. The leasing companies or their investors are the owners, and they are the ones that are eligible to claim the tax credit or rebate. It is up to the leasing companies to estimate the fair market value for the PV system for tax purposes.

The investigation was first revealed by SolarCity, which disclosed in an Oct. 5 filing with the Securities and Exchange Commission that it and other "significant participants" in the rooftop PV business had been subpoenaed by the Treasury inspector general.

SolarCity, based in San Mateo, Calif., is the eighth-largest PV installer on Oahu based on the volume of building permits it applied for from January through August of this year. The company took out 271 permits for projects totaling $8.6 million, according to an analysis of Department of Planning and Permitting data done by Marco Manglesdorf, president of Hilo-based ProVision Solar.

SolarCity said in its SEC filing that the IRS was auditing two of its investment funds and is reviewing how the company valued the solar PV systems that were eligible for grants.

"The inspector general is working with the Civil Division of the U.S. Department of Justice to investigate the administration and implementation of the U.S. Treasury grant program, including possible misrepresentations concerning the fair market value of the solar power systems submitted for grant under that program made in grant applications by companies in the solar industry, including us," SolarCity said in a filing submitted as part of an initial public offering in which it plans to raise $201 million. The IPO has not yet been priced, nor has a date been set.

SolarCity's filing did not name any of the other PV companies being investigated. Officials for Provo, Utah-based Vivint Inc., which leads the Hawaii market in no-upfront-cost PV installations, said their company is not being investigated by federal authorities.

The Hawaii Department of Taxation is aware of the federal investigation, according to a department spokeswoman.

A SolarCity spokesman in California said the company could not comment beyond what was said in its SEC filing.

The Treasury's inspector general has asked SolarCity to provide documents dating back to 2007, including communications with other solar development companies and firms that appraised solar energy projects, according to the filing.

The Treasury's program, known as Section 1603, allowed commercial installers of PV systems to take cash grants in lieu of a 30 percent federal tax credit from 2009 through the end of 2011. Renewable-energy project developers were able to sell such incentives to investors, who financed the projects.

SolarCity said in the filing that it did not know of any specific allegations of misconduct, but acknowledged that if any were found the company could face damages, penalties and tax liabilities.

The Section 1603 program was popular with companies like SolarCity that install PV systems for customers with no upfront cost. The companies own the PV systems and either lease them to customers for a monthly fee or charge them a fixed rate for the electricity they consume under a power purchase agreement.

The federal rebate that goes to the solar company is based on the cost of the system. If the company states a higher price, the rebate could be higher.

Information that solar installers are required to report in California as part of the state's rebate program showed that last year SolarCity assigned a value to its leased (no upfront cost) systems that was 50 percent higher than what it reported for systems it sold outright to customers, according to an analysis of the data by Jim Jenal, an industry veteran who writes a blog on the California market.

"SolarCity jumped out as an oddity because of the contrast in what they were reporting for system costs," Jenal said. The company was installing customer-owned systems for an average of $6.94 per watt but reporting an average value for their "third-party" systems of $10.06 per watt, Jenal said.

Similar data comparing the costs are not available for Hawaii.

Jenal said he noticed something interesting in the data early this year, when SolarCity began preparing to file for its IPO. The company's estimated cost for its third-party systems started falling, he said.

SolarCity cut its reported price from $9.74 per watt in January to just $6.60 per watt in April -- a drop of more than a dollar a watt per month, according to Jenal.

"The only interpretation is they were getting clear feedback from regulators what they had been doing would not fly going forward," he said.

Source: (c)2012 The Honolulu Star-Advertiser Distributed by MCT Information Services

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