PUD ethics report: ‘appearance’ of conflict of interest

EVERETT — The Snohomish County Public Utility District failed to avoid the appearance of a conflict of interest when it awarded a no-bid contract to a “clean-energy” software company, an outside investigator’s report says.

The 25-page ethics report, released by the electric utility on Tuesday, details a close relationship between PUD managers and Dave Kaplan, the owner of 1Energy Systems. That relationship, and discussion of a possible contract to develop cutting-edge battery storage systems for the PUD, began when the consultant was still on the utility’s payroll.

“As discussions for the contract proceeded, Mr. Kaplan continued to work side-by-side with the same executives who would ultimately advocate to the commission that it approve the contract with his company, 1Energy,” the report says.

The report says steps could have been taken to avoid the appearance of a conflict of interest, including putting the contract out to be competitively bid to prevent “any inference of favoritism or undue influence.”

Seattle-based 1Energy is the project manager for three energy-storage prototypes and is providing software to control enormous battery systems connected to the PUD’s electric grid.

The company’s contracts with the PUD to date are worth as much $16.2 million. Grants from the state Department of Commerce’s Clean Energy Fund cover about $8.3 million of that cost, and the Bonneville Power Administration has contributed $1 million. State officials also are looking into 1Energy’s relationship with the Commerce Department. Two former Commerce officials now are executives at 1Energy.

In March, the PUD’s Board of Commissioners hired Seattle attorney Colleen Kinerk of Cable, Langenbach, Kinerk and Bauer to investigate allegations by another PUD employee that district leaders steered lucrative no-bid contracts to 1Energy.

The PUD is taking the investigator’s findings seriously, said Anne Spangler, the district’s interim general manager. “The conclusion is that this is an appearance problem, and it’s a lesson learned.”

In a written statement, Kaplan said of the report: “1Energy looks forward to the opportunity to work with the PUD to address an appearances of conflict moving forward.”

The report explains how Kaplan came to be an integral part of the PUD’s effort to be an early innovator in the energy-storage-systems market.

Kaplan was a successful project manager and program developer at Microsoft. After that, he got into the emerging, so-called clean-energy tech field. He started a company called V-2 Green, which developed a platform to connect electric cars to power grids. After selling the company, he became a consultant for the state Department of Commerce in 2009.

He met the PUD’s then-CEO and general manager, Steve Klein, through his work. The two “shared a mutual fascination with technology, innovation and clean energy,” the report states. “They also lived in close proximity and would periodically take walks together during which they discussed these shared interests.”

Kaplan told PUD leaders that he wanted to learn about a utility’s operations from the inside, the report says. In April 2010, several months after he left the state Department of Commerce, Kaplan joined the PUD as a short-term employee, making $193,440 a year.

First, he successfully helped the PUD improve information technology, the report says.

He was a member of executive leadership and reported directly to Klein, who let him work a flexible schedule and continue consulting for outside clients so long as it didn’t conflict with his work at the PUD, the report says.

Kaplan had another reason for joining the PUD, according to the report. He made it clear to Klein and other executives that he “came to the Utility for the express purpose of identifying a business opportunity.”

He “brought skills of considerable value” to the district, the report says. In return, Kaplan learned about utility operations and was paid as an employee to research energy storage and attend conferences about it.

He sought to use “that learning opportunity and his contacts with the utility’s CEO and some senior executives for his own financial gain,” the report says.

In the summer of 2011, while still a district employee, he “actively sought a contract” between 1Energy and the PUD, the report says.

Kaplan took steps to avoid the appearance of a conflict of interest, such as using private email when representing 1Energy. But those measures were insufficient, wrote Kinerk, the report’s author.

The PUD, too, failed to take adequate steps to avoid the appearance of a conflict of interest, as required by agency policy, she wrote.

That policy, called Directive No. 90, says that “employees and supervisors must take measures to prevent either actual conflicts or the appearance of conflicts of interest” and must resolve any situations consistent with the policy.

While the policy prohibits employees from pursuing outside interests that conflict with PUD interests, “there are times when those outside interests do not conflict with the district’s interests,” said Spangler, the PUD’s interim general manager, in an interview Tuesday.

Spangler took over in May after Klein retired following nine years at the PUD. He announced his retirement in February, before the ethics allegations were public. Prior to her current role, Spangler was the district’s general counsel.

Kaplan’s interests and the PUD’s interests, Spangler said, were aligned and did not conflict.

“Where it becomes the appearance of a conflict here is that profit motive” that Kaplan had as owner of 1Energy while also working at the PUD, Spangler said. “The appearance of a conflict comes when those two roles are lined up while he’s still an employee. And once he’s no longer an employee, then you don’t have the appearance of a conflict.”

Kaplan left the PUD at the end of July 2011. The following September, the three elected commissioners approved a research-and-development contract worth up to $800,000 for 1Energy.

He was the company’s sole employee at the time. Once the contract was approved, he began hiring others, the report says.

Before the first contract ended, it was superceded by a second — initially worth up to $3.5 million and ultimately up to $4.3 million — to develop and install a battery prototype.

Electricity storage involves adding huge batteries to the power grid, which in theory would enable a utility to more efficiently handle fluctuations in demand. In addition to increased efficiency, advocates say, the technology promises a way to make greater use of wind, solar and other forms of green power.

Except for the appearance of a conflict related to the first contract, the investigator said she did not find violations of PUD policy or state laws regarding 1Energy contracts.

But the first contract set the foundation for the follow-on work, said Anthony Curtis, the employee who filed the ethics complaint. Kaplan “used that as a stepping stone to millions of dollars. This whole pyramid was built on Kaplan working at the PUD and that first contract.”

Klein, the recently retired PUD general manager, issued a lengthy statement on Tuesday in which he criticized Curtis, calling his complaint “a deliberate attempt to undermine support for the PUD’s successful policies and destroy the reputation of the elected commissioners and senior staff.”

Curtis said that he doesn’t question 1Energy’s qualifications or the benefit of the project for the PUD. “I’m in support of all the things we are doing. It’s not about the product or the people, it’s about the process.”

Dan Catchpole: 425-339-3454; dcatchpole@heraldnet.com; Twitter: @dcatchpole.

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