U.S. Attorney fraud specialist reviews Two Elk stimulus project

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U.S. Attorney fraud specialist reviews Two Elk stimulus project

By Rone Tempest, WyoFile.com contributor

— Originally published at WyoFile.com on April 16, 2013

A federal jobs stimulus project that paid more than $1 million in salaries and benefits to a wealthy Colorado businessman and his Wyoming representative has been suspended by federal officials for accounting irregularities and referred to a U.S. Attorney for review, WyoFile has learned.

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The $9.9 million Two Elk Carbon Site characterization study – funded by a pair of U.S. Department of Energy stimulus grants in 2009 and 2010 — was supposed to drill a deep research well in Wyoming’s Powder River Basin to determine if the area had potential as an underground CO2 storage site.

However, by January 2012 when the project was suspended by DOE’s National Energy Technology Laboratory in Pennsylvania, federal records show that much of the money had already been spent on salaries and benefits for its Colorado promoter Michael J. Ruffatto, his Wyoming representative Brad Enzi, and other employees at Ruffatto’s North American Power Group, Ltd. headquartered in Greenwood Village, a Denver suburb.

The exploratory “deep characterization” well that was supposed to be the centerpiece of the Two Elk stimulus project was never drilled. “A contract proposal also was received from Schlumberger Carbon Services for them to drill the deep characterization well,” Ruffatto reported to the Department of Energy. “Schlumberger will assume responsibility for the drilling contractor and overall completion of the well.”

However, Wayne Rowe, Western U.S. Program Manager for Schlumberger Carbon Services, told WyoFile: “There were initial discussions regarding Schlumberger supervising the drilling but negotiations never started, and no contract to do so was ever offered or signed.”

The Department of Energy issued a “Stop Work Order” on the Two Elk project in January 2012, but Rowe said that Schlumberger and other sub-contractors did not receive notice from North American Power, the principal contractor, until several months later.

“In April 2012 NAPG informed Schlumberger that the Department of Energy had halted the project but did not state the reason,” Rowe said. He said that Schlumberger, the giant international oilfield services company, was paid in full for the preliminary geological modeling work it did on the project.

Stanford University in Palo Alto, California, and Montana State University in Bozeman, Montana, got less than 30 percent of the $1.6 million they had originally contracted with North American Power Group to receive for coordinating the project’s scientific research and analyzing data from the well that was never drilled.

No new jobs were created.

Dr. Sally Benson, the Stanford University scientist who directed the California university’s participation in the Two Elk project.

Dr. Sally Benson, who directed Stanford University’s participation in the Two Elk project.

“At a certain point, lacking site-specific data, what you can do is only so meaningful,” said Dr. Sally Benson, the Stanford University scientist who directed the California university’s participation in the Two Elk project. Benson, an internationally-recognized groundwater hydrologist, said the Two Elk site showed “potential,” but without a well Stanford could do nothing more and thus ended its participation.

“I’ve thought a lot about this and I simply do not know what motivated the project to turn out like it did,” Benson said in a telephone interview. “It would be unfair to speculate.”

Lindsey Tollefson, project manager for the Montana State University Big Sky Carbon Sequestration Partnership, said the Bozeman school stopped its work on the project after its sub-award was not renewed by North American Power Group in late 2011.

“We are no longer involved in the project,” said Tollefson. “The last work we billed for was in September 2011.”

Both Stanford and Montana State reported that they were paid in full for the partial work they did on the Two Elk stimulus project.

Lindsey Tollefson, project manager for the Montana State University Big Sky Carbon Sequestration Partnership.

Lindsey Tollefson, project manager for the Montana State University Big Sky Carbon Sequestration Partnership.

North American Power Group CEO Ruffatto did not respond to repeated efforts to get his comments on this story.

The Two Elk stimulus project was one of 46 carbon research contracts awarded by the Obama administration as part of its American Recovery and Reinvestment Act.

In stark contrast to the Two Elk project, almost identical federal stimulus grants to the University of Wyoming totaling $9.9 million for a separate site characterization study near Rock Springs, Wyo., resulted in the successful drilling of a 12,860-foot well that researchers say looks very promising.

Avoiding high salary costs, the University of Wyoming used almost all of its federal stimulus funds to pay the Houston-based oilfield drilling company Baker Hughes, which also contributed some of its work because it was interested in the research.

“Baker Hughes and the costs associated with drilling our stratigraphic test well comprise over 90 percent of the federal DOE budget,” said Shanna C. Dahl, deputy director of the University of Wyoming Carbon Management Institute. According to Dahl, the highest salary paid in the UW project was $110,000 in pay and benefits to a PhD research scientist.

Shanna C. Dahl, deputy director of the University of Wyoming Carbon Management Institute

Shanna C. Dahl, deputy director of the University of Wyoming Carbon Management Institute.

Overall, UW reported that 64 new jobs were created, including those involved in the drilling operation.

Like Baker Hughes, Schlumberger was also prepared to contribute 20 percent of the overall total for the Two Elk project as its “cost share” under federal guidelines, Rowe said.

“Had this project proceeded to its conclusion,” Rowe told WyoFile, “Schlumberger would have contributed to the non-federal portion of the project in the form of in-kind services. No such contributions had been made by Schlumberger to-date.”

The Department of Energy suspension of the Two Elk stimulus project is the latest in a series of setbacks for North American Power Group and its owner Ruffatto, an oil and gas attorney who once dreamed of building a series of seven coal-fired power plants in the Powder River Basin. He envisioned using long-distance transmission lines to serve the needs of Phoenix and the power-hungry American southwest.

Ruffatto’s efforts to create a Wyoming-based electric utility have often involved tax breaks and generous awards of state and federal funds.

In a 2008 story, WyoFile detailed how North American Power benefitted from an obscure provision of the Internal Revenue Code to qualify for $445 million in tax-exempt bonds – approved by successive Wyoming governors Jim Geringer and Dave Freudenthal — for a $1 billion Two Elk Power plant it planned to build east of Wright, Wyoming. The state of Wyoming also funded nearly $10 million for local infrastructure to alleviate the local “impact” of the plant’s construction. But except for some roadwork, a concrete smokestack apron and a metal equipment building, no construction has taken place at the Two Elk site.

In a 2011 story, WyoFile reported that the IRS had revoked Two Elk’s tax exempt status because of lack of progress on the power plant, which remains unbuilt 17 years after it was first proposed. The story also detailed how Ruffatto used stimulus funds to pay himself, his Wyoming representative Brad Enzi, and other employees of his company generous salaries.

A wealthy socialite and philanthropist who has homes in suburban Denver and Newport Beach, Calif., Ruffatto, 66, billed the government at the rate of $214.38 an hour, sometimes reporting 76-hour work weeks on the federal stimulus project, while continuing his full-time position as president and CEO of North American Power Group, which owns and operates several small power plants in California.

Michael Ruffato's home in Corona del Mar, California

Michael Ruffatto’s home in Corona del Mar, California, is worth approximately $2 million. (Sarah Tempest/WyoFile)

In 2009, Ruffatto sold one of his Southern California homes for $12.1 million to Los Angeles Angels baseball team owner Arte Moreno. Ruffatto’s 6,000-square-foot home in Cherry Hills Village outside Denver is appraised by the Arapahoe County Assessor at $9 million.

According to federal pay invoices obtained by WyoFile under the Freedom of Information Act, Ruffatto was compensated with the federal jobs stimulus funds at a rate exceeding $500,000 a year.

Enzi, 37, son of Wyoming U.S. Sen. Mike Enzi, was paid $80 an hour through the stimulus grant, earning as much as $17,363.72 in one month, according to the federal invoices. His father, Sen. Enzi, has been a consistent and vocal critic of the stimulus program, which in 2009 he called “bailout baloney.”

Federal officials would not say if Ruffatto and Enzi’s big paychecks were a factor in the January 2012 suspension of the Two Elk stimulus project.

Other invoices received by the Department of Energy from NAPG included $2,791,103 in payments to North American Land & Livestock for “heavy equipment mobilization; drilling pad and mud pit construction; drilling water procurement; layout area preparation.”

But according to Rowe, Schlumberger, the company that Ruffatto told federal officials would supervise the drilling of a deep characterization well, “has no relationship of any kind with North American Land & Livestock.”

“No representative of this company participated in any project meeting, conference call or discussion that Schlumberger was present for,” Rowe said.

North American Land & Livestock is a Wyoming limited liability corporation created in 1996. Ruffatto is listed on incorporation papers as the manager and only officer.Dan Tracy

Dan Tracy, a cattleman whose large ranch borders the Campbell County, Wyoming, Two Elk property, says he is puzzled by the lack of activity by North American Land & Livestock.

“They did a little land leveling out there a few years ago, but they ain’t done nothing since,” said Tracy. “I’m right here by them. I got cows running right there where that damn thing is, and there is nothing going on.”

All questions to DOE officials about the Two Elk project are now directed to the U.S. Attorney’s office in Pittsburgh, the federal jurisdiction that includes the National Energy Technology Laboratory.

“We’ve turned it all over to the U.S. Attorney’s office,” said John Litynski who, as former technical manager for carbon sequestration at DOE, supervised the Two Elk project. “We can’t talk about it. I’m sorry but I can’t talk about it any more.”

The assistant U.S. attorney in charge of the case, Paul Skirtich, declined to comment except to confirm that he had instructed DOE officials to refer all inquiries to him.

A former Allegheny County, Pennsylvania, assistant district attorney, Skirtich is responsible for the federal civil prosecution of fraud and the recovery of public assets for the Western District of Pennsylvania. An expert on the federal False Claims Act, he is a frequent lecturer on the law before federal investigative and civil organizations.

The False Claims Act, also known as the “Lincoln Law” from its origin during the American Civil War, is used by the federal government to impose liability on federal contractors who defraud government programs. It carries severe financial penalties of up to $10,000 for each false claim, and treble damages for the overall fraud. Penalties and damages often run into the millions of dollars.

Although prosecutors and DOE officials decline to talk publicly about the Two Elk case, many of the details may have been revealed in a March 2013 audit report by the DOE Office of Inspector General. The DOE inspector general audited 15 out of 46 industrial carbon capture and storage stimulus projects, and determined that four had “questionable and/or unallowable” costs.

Although not identified by name, one of the highlighted cases in the audit report fits the facts of the Two Elk project including the dates, the award percentages, and the amounts of money involved:

“The Department reimbursed a third recipient about $3.7 million, or 74 percent of the award, even though documentation submitted to the Department lacked evidence that the costs claimed corresponded to the items in the approved project budget. Although the recipient had not responded to a prior request by the Department for detailed documentation concerning the project’s progress, additional funding through the Carbon Program was provided in September 2010 to expand work under an existing award. After receiving the additional funds, the recipient did not respond to numerous requests from program officials for documentation or questions related to the scope of work. Notably, officials suspended the award in January 2012 because the project was behind schedule, and the recipient failed to meet key deliverables. Department officials indicated that they were working with the recipient to recover unallowable costs. Until such time that all of the questionable costs have been repaid, we continue to question approximately $3.7 million in costs reimbursed by the Department.”

Rickey Hass, the DOE assistant deputy inspector general for Audits and Inspections who supervised the report, declined to comment. However, a spokesperson for the Inspector General’s office said “we stand by our report.”

The DOE’s abrupt decision to suspend the Two Elk stimulus project came only six months after R. Paul Detwiler, chief counsel for the DOE’s National Energy Technology Laboratory, told WyoFile that the project had been reviewed and audited by the DOE for 2009 and 2010, and said “no issues were identified during the audits.”

Detwiler, based in Pittsburgh, said a “cost/price analysis” by DOE “determined that the costs charged to the project were appropriate, based on the involvement of these individuals with the project, and the size of the company.”

“The recipient, NAPG (North American Power Group), provided documentation verifying the wages for its director. The salary and benefits being paid to Mr. Ruffatto and Mr. Enzi are appropriate for their skill set and the work they perform.”

Contacted by WyoFile to explain what had changed in the six months between these statements and the DOE suspension of the project, Detwiler responded by e-mail: “I regret that I cannot.”

Like the other DOE officials familiar with the project, he referred all questions to the assistant U.S. attorney, Paul Skirtich, in Pittsburgh.

— Rone Tempest is a former national and foreign correspondent for the Los Angeles Times. From 2008-2010 he was WyoFile’s editor. He lives in Lander.

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