As Oregon lawmakers take aim at the runaway costs of the Business Energy Tax Credit program during this month's special session, damaging information is emerging about the state department that oversees the credits.

The Oregon Department of Energy has been under scrutiny since legislative staff revealed in 2008 that the program's costs were far higher than previously announced: BETCs cost $22 million in foregone taxes in 2003-05 and are projected to cost $374 million in 2009-11.

That's real money when Oregon is scrounging for cash and voters just increased taxes on corporations and high-income residents. But what's been less than clear is what role Department of Energy staff played in the expansion.

Documents newly obtained through public-records requests show the manager responsible for the nation's most aggressive renewable energy tax credit program was distracted by his own "volunteer" efforts in a Chinese energy business when lawmakers supercharged the Business Energy Tax Credit program in 2007.

Last fall, a team from the Oregon Department of Administrative Services conducted a four-month confidential review of the department. Its withering report completed Dec. 17 says the 113-employee Energy Department's culture was characterized by "minimal oversight of managers and staff, ad hoc decision-making, fluid organizational boundaries, pliant or non-existing internal administrative policies, and a people-centric (internal) focus.

"Past tolerance of poor performance, lack of discipline in the enforcement of state policies and procedures, diffused accountability, and unclear authority and roles may have reinforced inappropriate work behavior in some employees," the report says.

One employee who clearly caused concern was William Nesmith. Until his departure in January 2008, Nesmith was the $97,272-a-year deputy director responsible for the Business Energy Tax Credit program.

As early as 2004, senior department staff brought questions about Nesmith's Chinese connections to then-department director Michael Grainey, Nesmith's boss. Department finance director Bruce Westerberg wrote Grainey on Dec. 12, 2004, about fears that Nesmith might be using his state position to further his personal interests in China.

"I cannot find a logical explanation, other than for business, why the City of Shanghai, through its Energy Conservation and Supervision Center, would provide round trip tickets and pay lodging for an Oregon State employee to vacation in China and while there have incidental business conversations as Bill states," Westerberg wrote.

The documents WW obtained show Grainey responded to such concerns, but with little effect.

In 2005, for instance, Grainey forbade Nesmith from using a private company he controlled to manage World Bank funds to assist the Shanghai Energy Office. Grainey wrote Nesmith in a Dec. 7, 2005, email that use of his company "could create confusion and ambiguity in your role and your interests." Investigators later determined Nesmith simply substituted a friend's company for his.

In 2007, the Legislature approved a massive expansion of the BETC program, retroactive to Jan. 1 of that year. And applications poured in for the credits. Meanwhile, Nesmith took at least two vacations to China in 2007 and spent office time on personal China-related projects.

In September 2007, according to an investigator's notes, "ODOE management staff discovered documents on Nesmith's computer hard-drive indicating there may be significant ethics/conflicts of interest issues." The hard drive contained information about Chinese contacts and potential deals that Nesmith appeared to be pursuing privately rather than as part of his public responsibilities.

The discovery of that information and prohibited file-shredding software triggered a probe by the Oregon Departments of Justice and Administrative Services.

"Nesmith's priorities are in foreign energy related projects which appear to benefit a small number of Oregon companies with which he is closely acquainted or friends with," read the December 2007 notes of Mark Rasmussen, a senior DAS official who interviewed Nesmith.

No complaint has been filed against Nesmith with the state ethics commission. And Nesmith told Rasmussen that other than travel expenses, he had "not been compensated as a result of these grants or agreements."

Nesmith repeated that denial to WW. He says his three decades in the energy field have yielded many contacts and much expertise that could be useful in China. He has volunteered as an energy adviser to the city of Shanghai but never profited from that arrangement.

"At the end of the day it cost me money," he says of his interest in China. "It was a chance to learn about another culture. It was interesting and fascinating and that's all."

After Grainey again ordered him to cease all international activities in December 2007, Nesmith resigned.

Nesmith says he was "uncomfortable" with the department's direction and the BETC expansion. Donna Bennett, an Oregon lawyer who led the Nesmith probe, says she was unaware of any such concerns.

He says he left with a clean slate. "They made inquiries into the volunteer work that I was doing in Asia, and according to my lawyer there were no issues found," Nesmith says.

It is unclear how much Nesmith's China focus contributed to the BETC program's spiraling out of control. In an August 2007 performance evaluation, Grainey docked Nesmith for inattention to management tasks and rated Nesmith as only "satisfactory" on a scale that runs from "outstanding" to "unacceptable." (One concrete measure: When Nesmith ran the BETC program, the Energy Department rejected only 3 percent of applications; since a management shakeup last summer, the rejection rate has increased fivefold.)

Last May, Gov. Ted Kulongoski forced out Grainey. "There was not the necessary oversight that there should have been [at ODOE]," Kulongoski says now. Nonetheless, Grainey landed at full pay of $123,660 in the Oregon Department of Economic and Community Development. Grainey declined to comment for this story.