State audit finds inappropriate funding of Excelsior Energy

In light of an audit that criticized Iron Range Resources staff, Excelsior Energy Inc. will be asked to repay a sliver of the $9.5 million in loans it received from the agency.

The fledgling company will be asked to refund $40,161 to Iron Range Resources for "inappropriate, duplicate or unsupported costs" flagged by Minnesota's Office of the Legislative Auditor.

The would-be power plant developer received loans from Iron Range Resources to help support its project. The company hopes to construct a 600-megawatt facility near Taconite at a cost of about$2 billion. The plant would be fueled by gasified coal that is supposed to burn cleaner than conventional pulverized coal. However, the project is on hold as no clear customer for the power Excelsior would produce has yet emerged.

Excelsior received loan money from Iron Range Resources in pieces as it submitted records of allowable expenses.

"While $40,000 may seem like a small amount in the scheme of things, Iron Range Resources staff should not have let some of these project costs slip through," said Brad White, a state audit manager.

"We don't question Iron Range Resources' funding of this project, but it was their responsibility to make sure that funds were being used in accordance with the loan agreement," he said.

A loan audit determined that Iron Range Resources paid $15,822 for costs that already had been reimbursed to Excelsior Energy.

The report also identified $3,513 of what it deemed "inappropriate uses of public resources." Under this designation, auditors noted the expenditure of $154 for alcohol, $190 for government relations membership fees, $100 for lobbyist registration, $91 for flowers, $224 for a golf outing, $200 for food deliveries and $1,115 for an office party.

Iron Range Resources Commissioner Sandy Layman declined to comment on the audit report Thursday, but the agency referred the Duluth News Tribune to a letter of response she sent to investigators. In that letter, Layman said: "Iron Range Resources will request repayment of the $40,161. However, it should be noted that many of the expenses in question are reasonable and customary in private commerce. As a private borrower, Excelsior Energy is not subject to the same rules as public employees for entertainment, meals and other expense reimbursements."

Tom Osteraas, general counsel for Excelsior Energy, said the company made no effort to obscure the nature of its expenses, and staff at Iron Range Resources were free to reject any reimbursements they considered objectionable.

"We understand the importance of transparency and maintaining the public trust," Osteraas said.

However, he disagreed with auditors' conclusions, saying: "Iron Range Resources was not lax in its oversight. We will repay any funds they ask us to, but I don't concede that these were inappropriate expenses."

Osteraas further observed that the expenses flagged during the investigation were equivalent to about 0.4 percent of the loan total. "I'm pleased to note that even by their assessment, we were 99.6 percent compliant."

Lobbying activities also were a source of concern to auditors.

Excelsior's loan agreements expressly forbade the use of IRR funds for lobbying, but it made a notable exception: The company was allowed to use lobbyists for the Minnesota Public Utilities Commission. By way of explanation, the commission requires most of those who offer testimony before it to register as lobbyists.

Legislative auditors observed that Iron Range Resources had reimbursed Excelsior $253,000 to cover the salaries of five employees who were registered with the Campaign Finance and Public Disclosure Board as lobbyists. White said Iron Range Resources has been asked to sit down with the parties involved to determine whether any of this compensation went to support unacceptable lobbying activities.

Osteraas maintains that Excelsior abided by the terms of its loan agreement in this respect, as well.

But a group called CAMP -- Citizens Against the Mesaba Project -- issued a statement suggesting that a more in-depth study of Excelsior's lobbying activities could force the company to repay significantly more money to Iron Range Resources.

Also questioned in the loan audit report were $7,450 in travel expenses that investigators considered poorly documented. The purpose of travel also often wasn't clear to auditors.

"Excelsior staff told us the travel costs were for 'trips to the Capitol,'" the audit said. But it also noted that "IRR [staff] did not request sufficient documentation to determine whether these trips were related to prohibited lobbying activities, such as trips to the Capitol to influence legislation."

Because of missing and discarded records, Iron Range Resources lacked documentation for more than $152,000 worth of reimbursements it provided to Excelsior. Nevertheless, auditors said they were able to substantiate the legitimacy of all but $20,826 of these expenses by reviewing invoices and receipts still on file at Excelsior Energy's offices.

Layman notified auditors that her office will request that Excelsior repay $40,161 by Oct. 31.

In her letter, she also stated: "Iron Range Resources concurs with your finding that the agency could have better overseen its loans to Excelsior Energy."

Layman said her agency has taken steps to improve its practices and pledged, "The agency will apply the lessons learned from this project to its future loan administration practices."

PETER PASSI covers business and development. He can be reached weekdays at (218) 279-5526 or by e-mail at ppassi@duluthnews.com .