How startup took advantage of DEQ program with lax oversight to net $1.8 million

A Lincoln City entrepreneur reported false data to the agency’s Clean Fuels Program, sold invalid carbon credits and went on a spending spree

By Alex Baumhardt, Oregon Capital Chronicle, January 23, 2023

Behind a convenience store on Highway 18 near Sheridan, three electric vehicle charging machines sit wrapped in plastic.

They have been there since April and have never charged a single car.

But Merlin Thompson earlier this year convinced the state they had, collecting nearly $2 million in a scheme that tapped into Oregon’s push for environmentally-friendly transportation.

The state belatedly caught on, but not before the Lincoln City entrepreneur went on a spending spree, buying cars and taking a Hawaiian vacation while employees and vendors went unpaid, according to interviews and records.

Thompson and his company, Thompson Technical Services, or TTS, are now the subject of the largest fine ever imposed by the state Department of Environmental Quality. TTS is the only company involved in the state’s six-year-old carbon credit program to face enforcement for submitting fraudulent data, which Thompson is contesting to fend off stiff penalties and recovery of $1.8 million.

An investigation by the Oregon Capital Chronicle traced how he managed the illusion, and found the Environmental Quality Department had woefully inadequate mechanisms to catch such conduct. The Chronicle relied on public documents, more than a dozen interviews and one short interview with Thompson.

In September, DEQ fined Thompson and his company $2.7 million for violating its Clean Fuels Program. TTS was found to have submitted false data about those three charging machines, used to create 16,000 carbon credits that were subsequently converted to cash when they were sold to a Canadian oil and natural gas company. Companies that supply clean fuels, like electricity for electric vehicles, can earn a credit through the Clean Fuels Program for each ton of carbon dioxide kept out of the atmosphere. The credits, in turn, can be sold to companies emitting carbon dioxide that need to show reductions in their contribution to such emissions.

Thompson tapped into that market by joining the Clean Fuels Program and then reporting to DEQ that in the three months at the start of 2022, those machines in Sheridan had supplied tens of thousands of kilowatt-hours of charging for electric vehicles. DEQ officials later calculated that he had claimed charging amounts beyond what the machines could have supplied even if they’d been used every hour for three months.

DEQ officials were alerted when a whistleblower contacted the agency in August.

Thompson said in a 20-minute interview in October that he had misunderstood how DEQ’s carbon crediting system worked.

“I’m not trying to purposely defraud anybody. All I want to do is get these charging stations out there,” Thompson said. “I’ll do whatever we need to do to make it right.”

He has since not responded to calls, texts and emails about the situation.

Clean Fuels Program

Thompson’s business plan for TTS was built on the sale of carbon credits from DEQ’s Clean Fuels Program. It’s how he sold the business to collaborators and employees. He told them that once he sold the credits for a windfall, he would pay everyone, former employees said.

The Clean Fuels Program requires fossil fuels suppliers, such as Chevron and Exxon Mobil, to gradually reduce the carbon dioxide emissions from the fuels they sell in Oregon, until they’ve cut emissions at least 37{64d42ef84185fe650eef13e078a399812999bbd8b8ee84343ab535e62a252847} by 2035.

The companies selling fossil fuels in Oregon essentially owe a carbon debt to DEQ. To pay it, they can reduce the carbon intensity of their fuels by blending them with biofuels, such as those from vegetable oils and animal fats. They can also buy carbon credits from clean fuels producers to offset some of their emissions. Clean fuels producers, such as companies installing electric vehicle charging stations, earn carbon credits from DEQ. For every ton of carbon emissions they save from entering the atmosphere, they receive one carbon credit.

Buyers and sellers negotiate the sale price, but the average price for each Oregon credit in 2022 has been about $120, according to DEQ data.

Jeremy Martin, director of fuels policy at the Union of Concerned Scientists, said that generally carbon credits are sold with a “buyer beware” mentality. The federal and state governments register companies that agree to the terms of the program and attest to their information.

Oregon and California are the only two states with such carbon credit programs, and Washington state will join this year. But DEQ and other state and federal agencies lack staff to verify applications. A similar federal program run by the Environmental Protection Agency was defrauded out of $100 million worth of carbon credits in its first few years.

“This policy design is understood and accepted by the obligated parties, who are generally large companies prepared to take on this due diligence,” Martin said.

During the last six years, the number of carbon credits generated by clean fuels companies in the state has grown tenfold. In total, 4.2 million credits have been generated and sold for almost a half-a-billion dollars since 2017. In 2022 alone, Clean Fuels Program carbon credits were sold for about $137 million.

A promise of money

Before founding TTS, Thomson, 52, spent two decades running his own computer repair and consulting companies in northeast Oregon. He and his wife, though, filed for bankruptcy in early 2021, listing assets of $8,300 and debts of $88,500. His unpaid child support was the largest single debt, according to court records.

That bankruptcy was still being processed in federal court when, in March 2021, Thompson registered TTS as an Oregon business.

That September, Thompson hired his nephew James Thompson to be his lead technician. He had been an airplane mechanic in the U.S. Air Force and had no experience with vehicle chargers. Still, he said in an interview, he learned along the way, and the company seemed to do well maintaining charging machines owned by other companies throughout the West.

Thompson’s ambition, though, was to have his own network of vehicle charging stations that could generate tens of million dollars in revenue, James said. One of his first steps was to get into the carbon credit market through the Clean Fuels Program, and his application to do so was approved by DEQ in December 2021.

Thompson eventually promoted James to chief operating officer and promised his nephew that his pay would eventually jump to $280,000, James said. Other technicians said Thompson also promised them eventual six-figure salaries.

“Everybody had their high hopes up that the carbon credit money would come in because that’s all he was talking about,” James said.

In early 2022, Thompson hired Walt Mower, who he knew through his niece’s family. Mower was a server at a restaurant in Klamath Falls when Thompson told him he was desperate for more technicians.

“He was telling me he was completely swamped, he needed more people, and he started me off at $38.50 an hour,” Mower said. “I was like, well, I can’t say no to that.”

He never received a regular paycheck, Mower said. Just once, according to Mower, Thompson reimbursed him for gas via Facebook Pay.

James said he quit in March after not being paid for the third straight month.

“Emotionally, I tried to keep business and family separate even though he is both,” he said.

Obtaining the credits

In February 2022, Thompson registered three charging machines, showing them at the Valley Market in Sheridan. DEQ took his word for it that the machines were installed because agency procedures don’t require officials to inspect charger sites. Such an inspection would have revealed that the machines didn’t exist. Thompson had ordered them, but they didn’t arrive from the California manufacturer, Tellus Power Green, until April.

A company official said they provided serial numbers to Thompson ahead of the machines’ delivery for what the company understood was for DEQ registration purposes.

In May, though no machines were operational, Thompson contracted Danny Takhar, an independent carbon credit broker in Vancouver, British Columbia. Though Thompson had not submitted his quarterly report to DEQ to get his carbon credits, he had calculated that he should earn about 16,000 of them once he did, Takhar said.

Takhar arranged a deal to help sell the carbon credits once TTS got them. Takhar thought the company was earning them legally, he said. Elbow River Marketing, a Canadian oil and gas distributor, agreed to pay $1.8 million for the credits.

In June, with still no chargers installed, Thompson submitted his company’s quarterly report to DEQ showing the three machines in Sheridan had dispensed nearly 15 million kilowatt-hours of electricity from January through March, according to DEQ records.

He also said the chargers were powered by electricity from Consumers Power Inc., which earned him another 7,000 carbon credits because of the utility’s green practices. But DEQ found the claim was false – Consumers Power doesn’t serve the area. Had he properly reported PGE as the power source, he would not have earned the bonus credits.

Thompson entered the data, submitted the report and received his 16,000 credits.

And just weeks later, he had his $1.8 million, delivered in an electronic transfer from the Canadian company that thought it was buying legitimate Oregon credits.

For his part, Takhar said, he was to get $226,000 for helping to set up the deal. Thompson has yet to pay.

“The excuses piled up,” he said.

Spending spree

Before regulators or suppliers caught on to what happened, Thompson started spending, according to his nephew, James.

He said his uncle sent him pictures of motorcycles and cars he’d purchased to entice him to come back to the company. The Capital Chronicle reviewed those photos.

“The day he got that money, he went to a dealership and he bought like four or five vehicles,” James said.

Mower, still working as a technician, drove to Lincoln City from Klamath Falls, demanding $38,000 in unpaid wages. He had put off treatment for medical issues because he couldn’t afford the care. He said Thompson gave him a $10,000 check and assured him there would be more as soon as he returned from a trip.

That was a resort trip to Hawaii, according to another former employee who asked not to be identified. According to the employee and receipts reviewed by the Capital Chronicle, the trip cost more than $13,000.

Another former employee who also asked not to be identified because they are employed in the industry, watched Thompson buy two new motorcycles at a Gladstone Harley Davidson store shortly after getting the carbon credit money. The Capital Chronicle reviewed photos of the bikes.

Alerting DEQ

Takhar, the broker, still had not been paid his fee by late July and was hearing that TTS technicians were going unpaid too. In early August, he emailed a DEQ analyst, Bill Peters.

“We think he may have spent funds on personal items instead of business,” Takhar wrote.

He asked the agency to put on hold dispersing the 32,000 credits that TTS was expected to get in August after Thompson’s submitted his second quarterly report.

“I do not want this to go any further. Significant dollar amount is involved,” Takhar wrote.

DEQ officials acted quickly, according to an interview with Takhar and email records obtained from DEQ.

Within a few hours, Stephanie Summers, a DEQ analyst, reviewed Thompson’s first quarterly report. She discovered he had reported more electricity than the three charging machines could have dispensed if they had been used every hour for that three months. Peters went into TTS’ account and saw that Thompson was preparing a new report showing that two of the three chargers in Sheridan had dispersed 30 million kilowatt-hours of electrical charges in April, May and June. The second round of credits could have netted Thompson $3 million at the market rates then prevailing.

That same day, Summers emailed Thompson asking about the irregularities. He didn’t answer.

The next day, a DEQ staffer went to Valley Market in Sheridan to check on the machines, the agency’s investigative files showed.

“All were wrapped in plastic shrink wrap and did not appear to be connected to any power supply,” the staff member wrote.

On Aug. 5, Thompson emailed Summers to tell her that he did not have the documents she requested that would substantiate the charges claimed in the report.

On Aug. 12, DEQ notified Elbow River, the Canadian buyer, that it was freezing the credits, flagging them as invalid.

That same day, the agency sent a pre-enforcement notice to Thompson, alerting him it had found he had reported inaccurate information to the agency and that it was suspending his account with the Clean Fuels Program.

Two weeks later, Thompson responded, saying he had been confused about the state program.

“I was under the impression that we could enter an amount of usage that we believed we would have over the next year,” he wrote, “which is what I submitted.”

Thompson told the Capital Chronicle he thought he had registered with DEQ’s Advanced Carbon Crediting Program, which awards credits in advance that can be sold to pay for electric vehicles.

No entity has yet to be accepted into that program but, more importantly, TTS didn’t qualify, said DEQ spokesman Harry Esteve. The program is open only to nonprofits and local and tribal governments or companies doing work for them.

On Sept. 30, DEQ declared in an enforcement notice that its investigation established that TTS and Thompson had been “reckless.” The order required TTS to buy valid credits to replace the ones he sold to Elbow River.

In early October, Thompson took to his company’s website, acknowledging the notice, saying he learned only that day that DEQ had released the enforcement publicly showing he had violated state rules, and that it was a misunderstanding.

In an email to DEQ, Thomson said he used the money made from selling the first batch of credits to buy equipment, tools and vehicles and to add more employees. He attached photos of his Lincoln City headquarters, several vehicle chargers – and an invoice for $82,000 for concrete.

“I hope this helps to show that while it is apparent that I have failed to apply for the advanced credits properly, it was not done with malice but an honest misunderstanding of how to apply,” Thompson wrote.

But vendors and former employees say they are still waiting for their money.

The charging machine manufacturer is owed about $400,000 for a total of nine chargers Thompson bought on credit, the company representative said. Tellus is pursuing legal action to reclaim its losses. The lawyer representing the company, Peter Freeman, declined to send receipts for the machines to the Capital Chronicle. The Valley Market owner, Paul Johal, said he paid for one of the bubble-wrapped chargers on Thompson’s promise he would be paid back. He is still waiting.

“He really screwed us,” Johal said.

TTS owes tens of thousands of dollars to former employees, according to interviews and seven wage-related complaints submitted to the Oregon Bureau of Labor and Industries.

Thompson told the Capital Chronicle that he was only aware of two wage disputes and that both were settled.

Mower, the former employee who confronted Thompson about his unpaid wages, quit after working for TTS for five months.

After he quit, he said, he went on unemployment and eventually saw a doctor for his lower back and urinary pain. He was diagnosed with bladder cancer on Aug. 25, his birthday. He’s working in construction now, but said he is still trying to dig out from the debt he incurred while working for TTS.

“It’s kind of just a surreal kind of thing,” Mower said. “I can’t believe I got involved with this.”

Along with the financial penalties, DEQ moved to revoke TTS’ account in the Clean Fuels Program, but Thompson’s appeal of the $2.7 million fine must first be resolved.

The case will go to a hearing, according to Esteve, the DEQ spokesperson, which could take place months from now.

FEATURED IMAGE: The Valley Market near Sheridan. (Alex Baumhardt/Oregon Capital Chronicle)

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