[Senate Hearing 112-625]
[From the U.S. Government Publishing Office]
S. Hrg. 112-625
THE ALLISON REPORT
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
TO
RECEIVE TESTIMONY ON THE ``REPORT OF THE INDEPENDENT CONSULTANT'S
REVIEW WITH RESPECT TO THE DEPARTMENT OF ENERGY LOAN AND LOAN GUARANTEE
PORTFOLIO''
__________
MARCH 13, 2012
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Committee on Energy and Natural Resources
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman
RON WYDEN, Oregon LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota JOHN BARRASSO, Wyoming
MARY L. LANDRIEU, Louisiana JAMES E. RISCH, Idaho
MARIA CANTWELL, Washington MIKE LEE, Utah
BERNARD SANDERS, Vermont RAND PAUL, Kentucky
DEBBIE STABENOW, Michigan DANIEL COATS, Indiana
MARK UDALL, Colorado ROB PORTMAN, Ohio
JEANNE SHAHEEN, New Hampshire JOHN HOEVEN, North Dakota
AL FRANKEN, Minnesota DEAN HELLER, Nevada
JOE MANCHIN, III, West Virginia BOB CORKER, Tennessee
CHRISTOPHER A. COONS, Delaware
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
McKie Campbell, Republican Staff Director
Karen K. Billups, Republican Chief Counsel
C O N T E N T S
----------
STATEMENTS
Page
Allison, Herbert M., Author of the ``Report of the Independent
Consultant's Review With Respect to the Department of Energy's
Loan and Loan Guarantee Portfolio''............................ 4
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................ 1
Chu, Hon. Steven, Secretary, Department of Energy................ 25
Murkowski, Hon. Lisa, U.S. Senator From Alaska................... 2
APPENDIXES
Appendix I
Responses to additional questions................................ 47
Appendix II
Additional material submitted for the record..................... 59
THE ALLISON REPORT
----------
TUESDAY, MARCH 13, 2012
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 10:01 a.m., in
room SD-366, Dirksen Senate Office Building, Hon. Jeff
Bingaman, chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW
MEXICO
The Chairman. OK. Why don't we get started? Today's hearing
will provide us an independent snapshot on the loan programs
within the Department of Energy that were created in the 2005
and 2007 energy bills. Mr. Allison has had considerable
expertise, both within the government and in the private
sector. He has produced a useful review of how the programs are
being administered, including his suggestions on how
administration can be improved. We appreciate his willingness
to come here and share his findings with us.
As members of the committee know, the issues surrounding
the United States ability to compete in the international race
to develop and deploy clean energy technology has been a
concern to many of us here on the committee for many years. The
loan programs, in addition to ARPA-E and other efforts to
support domestic deployment of next generation technologies
passed in previous energy bills, are part of a concerted effort
to ensure the U.S. does not fall behind in addressing the
critical challenges of energy, economic, and climate security
posed by our current reliance on fossil fuels, from both power
generation and transportation.
These programs in particular recognize that it's not enough
to have the innovative research that our national labs and
universities conduct. There also needs to be a pathway to
turning those ideas and inventions into profitable companies.
I believe it is important to keep this goal in mind as we
look at these programs today. While these programs need to be
administered with high standards of professionalism and
integrity--I believe Mr. Allison's report indicates they are--
it is also necessary to recognize that there is uncertainty
about what technologies will eventually win the day. If we want
to be sure that taxpayers lose no money, then it is easy enough
to just eliminate government support for American efforts to
compete in developing and deploying these new technologies.
Unfortunately, our efforts to support domestic players in
this race through the Loan Guarantee program have been caught
up with many election year issues. My impression is that
overall the program is doing what it is designed to do; that
is, to take on risks that private investors are not willing to
take on, not that the private sector has not taken on risk.
Every investment the government has made has followed large,
risky investments by the private sector. Private markets are
selecting the winners, at least the companies they believe will
be winners, and the government is stepping in to help these
entrepreneurs achieve the scale necessary to give them a chance
to compete on the global stage.
Unfortunately, although the U.S. remains one of the
greatest sources of innovation in the world today, it is not
clear that we are going to reap the benefits of that
innovation, or even retain the advantage we have in that
innovation. In the ever-changing and highly competitive
environment of high technology, the research and development
necessarily follows the manufacturing, and before long, the
next generation of technologies are being developed overseas,
as well as the manufacturing occurring overseas. So, we have
seen that scenario play out in such industries as televisions
and consumer electronics. In my view, it would be tragic if it
happened again in the technology areas that relate to our
energy future.
I believe that is the important context for our
conversation today. Both our witnesses today have important
insights on how we can best achieve the goal of advancing clean
energy in the United States in a way that gives the most value
to the taxpayers. This will never be a risk-free enterprise.
Very few things of lasting benefit are, but I look forward to
their thoughts on how we can best balance those risks with
potential benefits of fully developing these technologies here
and at home.
Let me call on Senator Murkowski for her comments before we
hear from our first witness.
STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR
FROM ALASKA
Senator Murkowski. Thank you, Mr. Chairman, and I
appreciate you scheduling what I think is a very important
hearing. I think it is vital for our committee to be conducting
regular and intensive oversight over the programs and the
agencies that are under our jurisdiction, especially when we
see problems that may be unexpected, or certainly serious
problems begin to surface.
I understand Secretary Chu will join us later this morning.
I think it will be helpful to him--to hear from him directly
about what has gone in this area. Mr. Allison, to you, thank
you not only for being here this morning, but thank you for
agreeing to take on the audit of the Department's loan
programs.
This is one of the more complicated topics that I think our
committee will be tackling. These loan related authorities and
the Energy Department's use of them span different
Administrations, different Congresses, and include 3 separate
programs, each with their own unique attributes.
I want to say that I found the independent audit to be
quite useful. It disaggregates the projects based on risk
profiles rather than programmatic origin. It discusses
transparency and reporting shortcomings, reveals the
concentration risk in the current portfolio. The audit further
highlights the portfolio's reliance on State and Federal
mandates to force the creation of markets for certain project
and products, and it makes some valuable recommendations that
we and, I think, the Secretary need to consider.
If there is one shortcoming to the audit, it is that it
does not delve deeply into the history of these programs, which
I think is essential to understanding how we have gotten into
some of the difficulties that we are now facing. Again, we are
talking about 3 different programs here. You have got the first
one that was section 1703 from the 2005 energy bill, you have
from the 2007 energy bill, the ATVM, and then you have section
1705 from the 2009 stimulus. While there are certain
similarities between the 3, there are some very important
distinctions and differences between the 3 programs. I just
will take a quick moment, Mr. Chairman, to review them.
Section 1703 was created by a Republican Congress, relied
heavily upon credit subsidy costs being self-paid by the
applicants, made any project using new or significantly
improved technologies eligible. Unfortunately, it is not closed
on a single loan guarantee. Then you have section 1705, which
was created by a Democratic Congress, accompanied by $6 billion
to pay for applicants' credit subsidy costs, narrowly limited
eligibility to renewable and transmission projects. This
program has closed on 27 loan guarantees worth approximately
$16 billion.
Then you have the ATVM, designed to offer direct loans to
auto makers, over $7 billion appropriated to cover credit
subsidy costs, but just 5 loans have been issued. We have heard
concerns raised around this table here about that. The last
loan was in March 2011, and then the one prior to that was
April 2010.
Many of the remaining applicants are withdrawing. They are
expressing clear frustration over DOE's apparent inability to
either make an up or down decision on this. More than half of
ATVM's lending authority remains unused, and the program, as I
understand it, is virtually dormant.
Both the 1705 and the ATVM programs are now dogged by
questions about political influence, compliance with underlying
statutes, and sometimes poor investment decisions. I think that
everyone here is aware of that fact. Some may think that we
have called for this hearing this morning to pile on, to add to
those criticisms, but I do not want to take my time today to
add to the narrative of the scandal and the controversy that
the Department is already confronting. Instead I would just
offer this. Hard questions need to be asked and to be responded
in full.
These programs should be examined, and I think that they
should be improved. That is an appropriate role for Congress
and, more specifically, this committee. We did not expect every
single project of the Department supported to be a roaring
success, but we also did not expect to see an accumulation of
failures so quickly. There are clearly problems that need to be
sorted out and worked through.
Your audit, Mr. Allison, I think is a good first step, and
I think that this hearing moves us in the right direction.
DOE's loan programs can serve a valuable purpose. I have said
that repeatedly. But right now we need to know if the loans and
the loan guarantees that have been issued through them are as
effective as we had all hoped that they would be.
We will still have some tough decisions to make going
forward, and I hope that we learn enough this morning to make
sure that those decisions are fully informed.
I thank you, Mr. Allison, and I thank you, Mr. Chairman.
The Chairman. Thank you. Mr. Herb Allison is the author of
the ``Report of the Independent Consultant's Review with
Respect to the Department of Energy Loan and Loan Guarantee
Portfolio.'' We appreciate your good work on that report, and
we look forward to your describing it to us and making any
other comments you would like before we ask questions. Thank
you.
STATEMENT OF HERBERT M. ALLISON, AUTHOR OF THE ``REPORT OF THE
INDEPENDENT CONSULTANT'S REVIEW WITH RESPECT TO THE DEPARTMENT
OF ENERGY LOAN AND LOAN GUARANTEE PORTFOLIO''
Mr. Allison. Thank you, Chairman Bingaman, Ranking Member
Murkowski, and members of the committee for asking me to
testify today.
Last November, I was appointed by the chief of staff of the
White House to study the Department of Energy's portfolio of
loans and guarantees to clean energy projects. I was asked to
perform 3 tasks: first, evaluate the current status of the
portfolio, second, propose ways to strengthen management and
oversight of the program, and, third, recommend a system to
provide early warning of problems that might harm the
portfolio's value.
The scope of my assignment did not include investigating
past decisions and actions because several independent
investigations are already under way. Given the tight 60-day
deadline, my team and I relied on readily available
information. The Department of Energy, or Department of Energy,
rapidly provided documents and arranged interviews that we
requested.
We conducted our review and developed our recommendations
independently of the White House and the Department of Energy.
We chose 2 methods for estimating future losses in the
portfolio. The first method is the one that the DOE must use to
comply with the Federal Credit Reform Act of 1990, or FCRA. Our
second method, called fair market value, or FMV, is used in the
capital markets to estimate the discount from a loan's face
value that investors would demand so they could receive an
acceptable return if they purchased the loan.
The FCRA and FMV methods have fundamentally different
purposes so their outputs are not directly comparable. FCRA,
the government method, estimates the credit loss on the loans.
FMV, the market method, estimates a broader set of costs and
provides information useful in managing the portfolio. But FMV
does not estimate the cost to DOE if it holds the portfolio
until the loans are paid off.
Using the FCRA method we estimated that the expected credit
loss on the portfolio will be $2.7 billion, about 7 percent
less than the DOE's recent estimate of $2.9 billion. Using the
FMV method, we calculate that investors purchasing the loans
would demand a discount of $5 billion to $6.8 billion from face
value.
Importantly, neither FCRA, nor FMV, nor any other financial
model can reliably predict the eventual loss of the DOE
portfolio, for several reasons. First, these loans will not
mature for up to 30 years, well beyond the limits of
forecasting. Second, most projects are still being built, and
some rely on unproven technologies. Their performance will not
be known for some years. Third, as projects prove themselves,
their risks and expected losses will diminish. Fourth, the
estimates of loss assume that al projects will be fully funded,
and that DOE will be a passive bystander, unable to influence
the portfolio's risk over time.
But so far, DOE has funded only a third of its total
commitments. DOE's loan agreements allow it to stop further
funding and demand more credit protection if projects do not
meet targets. Some of the riskier projects have not received
any funding, and others have been funded only partially. If
those projects do not meet conditions in their loan agreements,
DOE could cutoff more funding, and the forecasted loss could
decline substantially.
For all these reasons, our focus should be less on these
unreliable forecasts of losses and more on assuring effective
management of the portfolio going forward. DOE must be an
active manager, continuously monitoring their projects,
spotting risk, and limiting taxpayers' exposure to loss.
The report recommends ways to strengthen management and
independent oversight of the program and provide early warning
of potential problems.
In brief, our recommendations include, first, assuring
adequate funding and staffing of the program; second,
protecting taxpayers by strengthening DOE's position as a
creditor wherever possible, and having a clear policy on
funding projects that are not meeting targets; third,
determining whether to hold or sell the loans over time;
fourth, strengthening internal oversight by forming a risk
management department and combining several committees in DOE
that now oversee the program; fifth, establishing a high level
advisory board to consult with the Secretary of Energy on
policy matters; sixth, creating an early warning system
covering market conditions, performance of all projects and
loans, and internal operation of the program; and last,
improving public reporting about the program.
Thank you, and I will be pleased to answer your questions.
[The prepared statement of Mr. Allison follows:]
Prepared Statement of Herbert M. Allison, Author of the ``Report of the
Independent Consultant's Review With Respect to the Department of
Energy Loan and Loan Guarantee Portfolio''
Thank you, Chairman Bingaman, Ranking Member Murkowski and members
of the Committee for asking me to testify today.
Last November the Chief of Staff of the White House, then William
Daley, appointed me to conduct an independent study of the Department
of Energy's (``DOE'') portfolio of loans and guarantees to clean energy
projects (hereinafter, ``the Portfolio'').
I was assigned three tasks:
1. evaluate the current status of the Portfolio;
2. recommend ways to strengthen management and oversight of
the DOE's program for granting loans and guarantees to clean
energy projects (hereinafter, ``the Program''); and
3. propose an early warning system for spotting potential
problems that could affect the value of the Portfolio.
I was asked to focus on the present and future of the Program, not
to conduct an investigation into past decisions and actions. Several
independent investigations were already underway.
The Chief of Staff requested that I complete the assignments within
60 days after retaining advisors. I selected Arnold & Porter LLP as
legal advisor, Greenhill LLC as financial advisor, and David M.
Johnson, an experienced financial executive, as project advisor.
Given the tight timeline for the project, my team and I had to rely
on readily available information. DOE rapidly provided documents and
arranged interviews with current and former DOE officials that we
requested. We also interviewed selected officials of the Office of
Management and Budget and the Department of the Treasury. We evaluated
30 individual transactions with aggregate loan and guarantee
commitments of $23.77 billion.
We conducted our review and developed our recommendations
independently of the White House and DOE. I decided on the methods of
valuation and the conclusions about the current status of the
Portfolio, the recommendations for strengthening management and
oversight of the Program, and the proposed early warning system. We did
not include the Solyndra and Beacon loans in our review, as those loans
are no longer in the Portfolio.
We used two quantitative methods to assess the loans in the
Portfolio.
The first is the method that the DOE must use to comply with the
Federal Credit Reform Act of 1990 (``FCRA''). It calculates the
``Credit Subsidy Cost'' that is the amount needed to cover expected
shortfalls in payments from each loan. The Credit Subsidy Cost reflects
DOE's assessment of that loan's credit quality.
The FCRA method is appropriate for budgeting the government's wide
range of loan programs because errors in estimating losses in the
various programs tend to offset each other over time.
We also evaluated the Portfolio by the Fair Market Value method, or
``FMV.'' It is used in the capital markets to estimate the discount
from a loan's face value that investors would demand so they could
receive an acceptable return if they were to purchase the loan.
The FCRA and FMV methods have fundamentally different purposes, so
their outputs are not directly comparable.
FCRA estimates the government's expected loss on the loans.
FMV estimates the discount that investors would require to
purchase the loans.
The FMV discount reflects not only credit risks but also market
risks and transactions costs that will not affect the government if it
holds the Portfolio until the loans are paid off.
We used the FMV method in addition to the FCRA method because FMV
provides additional insight into the future marketability of these
loans and guarantees, into the financial incentives that sponsors and
other parties have to invest in these projects, and into ways that DOE
should manage the Programs to protect and enhance value to taxpayers
over time.
Using the FCRA method, we estimated that the expected credit loss
on the Portfolio will be $2.7 billion, about seven percent less than
DOE's own recent re-estimate, which is $2.9 billion. Using the FMV
method, we estimated that investors would demand a discount of $5.0
billion to $6.8 billion from the face value of the loans if they were
to purchase the Portfolio. All estimates of expected credit losses and
discounts presented in my testimony are as of January 31, 2012, the
date of my Report.
To facilitate our analyses, we grouped the loans and guarantees
into three categories, each with distinctive credit characteristics.
The categories are:
1. ``Utility-Linked Loans'' to projects where an
investmentgrade public utility has agreed to purchase the
output of the project for most or all of its useful life. These
20 commitments total $14.4 billion. Because the loans will be
supported by power-purchase agreements once the projects are
operational, we consider their risk to be moderate.
2. ``Non-Utility-Linked Loans'' to cellulosic ethanol
projects, solar manufacturing companies, and small, start-up
automotive manufacturing companies. These commitments to eight
projects total $2.01 billion and exclude Solyndra and Beacon
Power. On average, these loans are smaller than the Utility-
Linked Loans and entail greater risk because the projects do
not have guaranteed outlets for their production.
3. Loans to Ford and Nissan, which we view as investmentgrade
credits. These loans total $7.355 billion, are secured, and
have terms typical of corporate loans.
The credit ratings we assigned to the Utility-Linked Loans were
modestly lower than those assigned by DOE. Therefore, our estimate of
the Credit Subsidy Costs for Utility-Linked Loans using the FCRA method
is nine percent higher than DOE's reestimate as of December 11, 2011
($1.696 billion vs. $1.551 billion).
Using the fair market value method to evaluate the Utility-Linked
Loans, we estimate that investors would require an aggregate discount
of $3.5 billion to $5.0 billion to the face value of those loans if
they were to purchase them.
In evaluating the Non-Utility-Linked Loans, we assigned lower
average credit ratings than did DOE. We estimate the Credit Subsidy
Cost for these loans to be $820 million, 28 percent higher than DOE's
FCRA re-estimate of $640 million.
Our fair market value analysis yielded an estimated discount of
$707 million to $858 million from the face value of the Non-Utility-
Linked loans.
The Ford and Nissan loans represent a commitment of $7.4 billion.
We assigned a credit rating to the Ford loans that is four notches
higher than DOE's rating at re-estimation, but we agreed with DOE's re-
estimate of the Nissan rating.
Our estimate of the Credit Subsidy Cost of the Ford and Nissan
loans totals $166 million, 78 percent less than DOE's FCRA reestimate
of credit loss, which is $753 million as of December 11, 2011.
We calculated the fair market value discount from the face value of
the Ford and Nissan loans to be $716 million to $1.021 billion.
It is important to emphasize that neither FCRA nor FMV nor any
other financial model can reliably predict the amount of eventual loss
on the DOE Portfolio.
The actual loss will depend upon the outcomes of many factors:
First, the Program's loans have long maturities--up to 30
years, well beyond the limits of forecasting.
Second, most projects are in early development and some are
deploying unproven technologies, so their future performance is
hard to predict.
Third, once some projects are completed, their prospects
will be clearer, so their risks and estimated losses will
diminish in some instances. In other instances, possible
changes in factors such as regulations and markets could
increase expected losses.
Fourth, the FCRA and FMV methods assume that all of the
projects will be fully funded and the DOE will be a passive
bystander unable to influence the Portfolio's risk over time.
However, DOE has funded only about a third of its total
commitments. Some of the riskier projects have not received any
DOE funding and others have been funded only partially.
DOE has negotiated protections in the loan agreements that enable
it to cut off further funding and to demand more credit protection if
projects do not meet targets. If DOE denies further funding to such
projects, the risks and expected losses will decline.
For all of those reasons, focusing on forecasts of losses is far
less productive than is assuring that DOE will effectively manage the
Portfolio going forward.
DOE must be an active manager, continuously monitoring the
projects, spotting risks, exercising its rights in the loan agreements,
and limiting taxpayers' exposure to loss.
The Report contains numerous recommendations for strengthening
management and oversight of the Program and providing early warning of
potential problems.
Our recommendations regarding management of the Program include:
Assuring adequate funding and staffing for management and
oversight of the Portfolio for the long-term. That funding will
be small compared to the risk of higher losses if the Portfolio
is not actively managed.
Clarifying the authority and accountability of managers
along the chain of command.
Establishing clear goals for the Program, to include
defining the vague financial goal in the enabling law for all
of the loans except the automobile loans, which is to assure a
``reasonable prospect of repayment.''
Engaging in long-range strategic planning for the Program,
including determining whether to hold or sell loans over time,
and whether to outsource management of the Program;
Protecting taxpayers by strengthening DOE's position as a
creditor wherever possible and having well-defined policies for
cutting off funds if projects are not meeting targets.
The laws establishing the Program contain few requirements for
oversight and reporting. While the DOE has developed policies and
activities in those areas, we recommend several improvements:
Strengthen internal oversight of the Program by forming a
Risk Management department separate from the office
administering the Program and by consolidating various risk
committees in the DOE that oversee the Program;
Establish an interagency Advisory Board composed of senior
officials from other agencies and experts from the private
sector to review the Program's governance and advise the
Secretary of Energy on policy matters concerning the Program;
Create a comprehensive early warning system covering market
conditions affecting the Program, regulatory changes,
performance of every project, loan, and involved party, and
internal operation of the Program; and, lastly,
Improve public reporting about the Program by enhancing its
content and increasing its frequency.
Thank you. I will be pleased to answer your questions.
The Chairman. Thank you very much.
Maybe I could ask you to elaborate some. Your report
indicates that changes were made in the program to better
control risk, both before the program review or the review
period, and also during the time that you were doing your
review. I guess I would be interested in any comments you could
give us on the effect that these either personnel or policy
changes have made, and whether you think those mid-course
corrections have been useful or adequate.
Mr. Allison. Thank you, Chairman Bingaman.
First of all, in terms of structuring the loans, there have
been improvements to the structure of the loans. Beginning in
the middle of 2010, the Department's loan agreement provided
for more staging of funding, and also provided that the
sponsors of these projects should fund the initial stage with
equity before the Department of Energy would be providing loan
funds. So, the Department would have the opportunity to view
progress on these projects before the government starts putting
its own money to work.
We think that the terms and conditions of these loans, by
and large, since the middle of 2010, in most cases conform
closely to commercial practice in the industry.
In terms of the internal management, there has been a
gradual evolution of the management and oversight of this
program within the Department of Energy. We see that, for
instance, several committees have been formed to oversee and
make recommendations to the Secretary about committing
additional loan funds. However, in our view, there still is
room for improvement, and that is why we have made these
recommendations, first of all, to fully staff the loan project
office with permanent professionals. There is a need for more
expertise in, for instance, project finance.
Many of the positions are currently financed by consultants
who are temporary employees. We believe that going forward
there needs to be consolidated internal oversight and, very
importantly, the formation of a risk management department.
Currently the loan project office executive director oversees
the credit department, for example, the compliance department.
We believe those should be separated out, and there ought to be
an independent view within the Department of Energy about the
risk that is being undertaken as loan are provided, and also
about the ongoing dynamic changes in risk within these loans.
An independent oversight would be another check and
balance. We think that that position should have the ability to
call for a halt in a funding until the Secretary approves if
there is a different opinion between the risk management
department and the loan project office as to whether that loan
should go forward.
The Chairman. As I think you are aware, Senator Murkowski
and I and some others here on the committee have proposed a
bill called a Clean Energy Deployment Administration to
establish an independent agency outside the Department of
Energy that would take over responsibility for administering
loans. Have you had a chance to look at that? Do you think that
the general thrust of that legislation would make sense as an
alternative to continued housing of this activity in the
Department of Energy?
Mr. Allison. Chairman Bingaman, I have reviewed the
legislation. I think that all can agree that there is a need
for professional oversight and the use of best practices in
managing and overseeing this portfolio.
I think that there are several questions that I might pose.
These are more in relation to policy. Again, my brief here was
to do a fact-based analysis.
But in answer to your question, I think that one issue is,
if there is an independent agency within the Department of
Energy, who is responsible for policy implementation of this
program? Is it the new CEDA agency, or is it the Secretary? My
understanding is that this agency would be completely
independent from a decisionmaking standpoint from the
Secretary. So, one, I think the law should provide who is
really accountable.
Second, should there be a sunset provision in this bill?
The purpose of these clean energy loans is to provide funding
for projects until they reach commercial maturity and funding
is available in ample amounts in the public markets. Unlike
many other loan programs administered by the government, which
have really indefinite futures, like student loans, or FHA, and
so forth, this intended, I believe, to be a program that would
run only a certain number of years. So, perhaps there needs to
be some type of sunset provision.
The Chairman. Do you have anything else to add? Go ahead if
you do.
Mr. Allison. I think, too, as I read the bill, it would
allow this agency to be able to borrow to fund its operations.
This could mean that this agency would have not only equity--
perhaps $10 billion--but indefinite funding capability. Is
there a possibility that it might start to grow in size and
begin to crowd out private sector financing? That is one
potential risk. Could it become an independent force in and of
itself?
So, I think that these types of issues need to be carefully
looked at before the decision would be made to go ahead.
The Chairman. Thank you very much.
Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman.
Mr. Allison, when we created the Loan Guarantee program,
there were a number of terms and conditions that were inserted
at implementation, and I want to ask you 3 questions, I hope
pretty brief.
But one condition in the program is that there be a
``reasonable prospect of repayment.'' In your opinion, what is
a reasonable prospect of repayment? Is it an 80 percent chance
that it is going to be repaid, a 70 percent? Is it higher, is
it lower? What is reasonable?
Mr. Allison. Senator, that is an excellent question, and we
actually looked at the history of that term in legislation, and
it goes back quite a long way. But nowhere could we find a
definition of reasonable prospect of repayment.
Senator Murkowski. So, how would you define it?
Mr. Allison. If it were--I think that is precisely the
issue, how does one define it? I would say ``reasonable
prospect'' would probably mean more than a 50 percent
probability, but others might define it as a 90 percent
probability. With that amount of vagueness, there is room for a
great deal of controversy and second guessing----
Senator Murkowski. Yes.
Mr. Allison [continuing]. About this program. So, I would
respectfully recommend that there be greater clarity to these
policy goal regarding financial recovery.
Senator Murkowski. Then, let me ask you another one where I
think we ran into a situation where there was some vagueness.
Another requirement was that the obligation is not subordinate
to other financing.
Mr. Allison. Yes.
Senator Murkowski. I read that and it is, like, OK, there
is no subordination there. But apparently there was some
vagueness there. Do you think that in that situation this
particular condition of the authorizing statute was vague in
any way?
Mr. Allison. Yes. Not being an attorney, let me say in
reading it, I think that it is quite clear to me that at the
point of origination, there should not be subordination. The
question is, later on if a project runs into trouble or a loan
runs into trouble, DOE's the law allow that in order to
preserve taxpayer assets, the DOE have the ability to
subordinate?
In commercial practice, it is common that where a loan gets
in trouble, in order to attract additional financing so the
project can succeed, the existing lenders subordinate. They
have a better chance of recovery.
If the objective is recovery for taxpayers, I would
respectfully submit that there are a couple of techniques
widely used in the private sector that are missing that are not
available, or at least are in doubt, to the DOE. One is to be
able to subordinate because at least you will get something
back on the investment perhaps. The second is to be able to
contribute equity or to convert to equity. In this case, it
looks like that is ruled out.
I think that if I can speak more broadly about this, there
is--these laws confine the type of financing that the
government can make quite a bit. There is virtually no upside
for taxpayers if these projects succeed. They are strictly
debt. There is one case, Tesla, where the government did take
options. Apparently the government can take equity interest as
a condition for making a loan, but it cannot make an outright
equity contribution.
I think for early stages of investments, it might be
suitable in some cases for the government to contribute equity,
to prevent a control issue from arising where the government
controls a project. It might be non-voting. It might be
convertible preferred or something like that. So, one broad
observation would be going forward, with legislation like this,
there might be a wider variety of options. There might be more
consideration to recovery and gains for taxpayers.
If a few projects were to pay off a lot, that might help to
pay for any losses in the portfolio in other projects.
Senator Murkowski. Let me ask you one more then, and this
is a requirement to ``provide an amount sufficient to carry out
the project.'' Got to be pretty difficult to determine the
overall cost of a project and whether or not available funds
then will be there or sufficient to cover the amount before we
have issued this loan guarantee.
Mr. Allison. Right.
Senator Murkowski. How do we finesse that one?
Mr. Allison. Yes. Most of the cost is going to take place
during the construction phase until this project is up and
running and begins to generate revenues. In that phase, the
loan agreements provide that there must be very detailed
budgets. There must be independent engineering analyses and
then reports as progress goes along. As I mentioned before,
there is phase funding, so certain benchmarks and milestones
must be met before funds are advanced by the Federal
Government.
Senator Murkowski. Is that happening, though?
Mr. Allison. Yes. So, it is easier to estimate the cost.
There still may be overruns, and most of these loans provide
for some cushion in case of overruns. That is built in. There
is, to our understanding, frequent reviews of progress in all
of these projects.
What is the unknowable is once these projects are
operating, especially those without a power purchase agreement,
which is pretty much a guaranteed source of revenue for the
entire project, the capacity going forward, in the case of the
manufacturing ventures, they have no power purchase agreement.
They have to sell into the market. How well they will succeed
in a dynamic, highly competitive market, for instance, for
electric cars, that is open to question.
That is why we divided up the portfolio the way we did into
utility power purchase agreement type financings to the non-
utility loans, including manufacturing of electrical components
or cars, for example. Then Ford and Nissan, which is a large
component of the whole portfolio, those are investment grade
credits, so we treated them differently. Those are easier to
analyze.
So, the real risk, much of the risk, I would say, in the
portfolio is in these non-utility manufacturing companies.
The Chairman. Senator Stabenow.
Senator Stabenow. Thank you, Mr. Chairman and Mr. Allison.
Thank you very much for your analysis. It is very helpful to
us.
As someone who was deeply involved in authoring the
advanced technology vehicle manufacturing program or section
136, working with our chairman, at the time when we put that
into the energy bill, there were a number of things that were
happening in terms of the credit markets. But also we were in
the legislation, the energy bill, in 2007, we were raising the
fuel efficiency standards and encouraging more smaller, fuel
efficient vehicles. I was extremely concerned at the time that
that production would go overseas if we did not, in some way,
support retooling our plan. So, that how is we came up with
this particular program.
In fact, it has done what we wanted it to do, at least at
the beginning. I mean, it is stuck at the moment here. But when
we look at Ford Motor Company retooling their Michigan assembly
in Wayne, Michigan, saving 1,900 jobs. They are actually
bringing jobs back from Mexico now related to that operation,
as are a number of other operations.
So, first I would just, as a statement, Mr. Chairman, when
we look at the global economy where Germany, China, India,
Japan, every other country wants to do manufacturing, advanced
manufacturing, so that they have good middle class jobs, they
are all providing support in some way for financing, tax
incentives, and so on. At least as it relates to the ATVM
Program, that is very much what the goal of that is, is to make
sure that we are providing that support to keep jobs here in
America.
What would you recommend to make this retooling program
more effective at this point?
Mr. Allison. First of all, I would point out that these
programs are intended to encourage risk taking. That is the
whole point really. So, having risk in the portfolio is
understandable.
I think what is important going forward is to make sure
that this portfolio is well managed by professionals, that
there is independent risk oversight of this portfolio, that
there is ample public reporting on each of these projects and
how they are doing so that the public and the Congress is kept
well-informed.
While these programs are being managed, again, there is
some room for improvement, and I think that with the
recommendations that we are putting forth, if those are
adopted, I think that this portfolio can be very responsibly
managed going forward.
Senator Stabenow. Speaking more about the risk, because I
know there is a concern and there has been criticism related to
the amount of risk that the Department has taken on the loans
and loan guarantees. But I found it interesting that your
report suggests that some of the risks associated with loans
has actually gone down, and particularly again with the
retooling, the manufacturing retooling loans. In particular,
you calculated the risk associated with the Ford retooling loan
and Nissan had decreased by 95 percent.
Mr. Allison. That's right.
Senator Stabenow. Now I would suggest it is, in part,
because companies like Ford are making fuel efficient vehicles.
People are buying. Consumers are buying. It is doing well. It
has been a real success story.
But I wonder if you could talk a little bit more about
other reasons for changes in risk assessment that you saw in
your report.
Mr. Allison. First of all, some of these projects have
progressed, and, you know, Ford is the best example. During the
height of the crisis, all the automobile companies, even
including Ford, which, you know, did not need a bailout, they
were also suffering during that time. Ford has staged a
remarkable recovery, and that is why the debt that the
government now holds from Ford is rated investment grade. It is
triple B today. That has had a major effect on the overall risk
composition of this portfolio.
So, I think that as projects, as I mentioned in my
testimony, as they progress, as long as they are progressing
according to plan, the risk in that project declines. The major
component of risk in many of these projects is during the
construction phase, especially for the utility related projects
because once they are completed, they will have a binding long-
term contract with an investment grade utility to purchase all
of their production.
So, I think that, again, in several years, the tenor of
risk in this portfolio should be demonstrably improved, if all
goes according to plan.
Senator Stabenow. Thank you very much.
The Chairman. Senator Coats.
Senator Coats. Thank you, Mr. Chairman.
Mr. Allison, I want to thank you for your work. I think it
was very important to have someone take an independent look at
the situation.
I guess my question goes back to the more fundamental
question of what the role of government should be in something
like this. We have some celebrated failures, and it sours the
public in terms of the use of taxpayer money when they read
about these failures. We are talking about estimates of several
billions of dollars of taxpayer money that----
I guess my question goes to, what is your take on the
question of the government limiting its investments into basic
research, and letting the private market take more of the risk
in terms of the commercialization of various products and new
innovations? Have we learned some lessons from our efforts to
direct money to specific industries and specific companies?
You know, there is always the question of whether there is
political influence in the decisionmaking process. I mean,
there are some of these allegations--I am not going to go into
them--but allegations that on some of these loans there were
directions from policymakers at the White House or political
directives coming down in terms of certain industries and so
forth and so on.
Are we just--and now we are talking about better management
of the process, but is the basic process broken to start--have
a fatal flaw to start with?
Mr. Allison. No.
Senator Coats. Could you just give me your thoughts on
that?
Mr. Allison. Senator, thanks for the question. That is a
very important question. I am a big believer in the capital
markets, having spent most of my years of my professional
career in the capital markets. I think that if we look back in
history here, and I am sure you are well aware of this, in the
energy field and many other fields, like medicine, et cetera,
transportation, the Federal Government has played an important
role in getting projects off the ground to the point where they
could stand on their own. If you look at the space program now,
we are starting to see commercial launch commercials coming
into effect and into operation. But the government had to fund
the initial stage, and the same with most forms of energy.
Nuclear energy is a great example as well.
I think--so where there is a policy need, and this is
where, of course, the Senate and the House of Representatives
have to make the decisions, there may well be a legitimate role
for government financing. I think, however, that financing
needs to be tailored to the policy goal and to the risk
characteristics of these projects, and to, where possible,
provide mechanisms for taxpayers to benefit if projects are
successful with Federal money.
I do think that there is the so-called valley of death in
various phases of financing for, say, clean energy, where the
government can play a constructive role. These projects need to
be carefully researched, and they need to have financing
structures that protect taxpayers. There ought to be a finite
life, as I mentioned earlier, to these types of programs, which
are intended for a specific purpose, for a certain period of
time, until these industries mature.
Senator Coats. I think your recommendations--I mean, should
we go forward on the basis of what you have just said, would be
helpful in that regard. But it concerns me when I read that,
you know, the inability to attract the necessary people with
necessary skills and experience in order to work in the public
sector, to make these types of evaluations, particularly when
they are using someone else's money. When you are making these
evaluations in the private sector, the bottom line is what
ultimately counts, and so, therefore, I think this naturally
would get a much keener and sharper look and due diligence
before you commit the funds.
Second, it is outside the political process. I am--you
know, there is responsibility here that falls on both sides for
some of these programs in terms of we continue to read about
the political influence directing things the wrong way. For
instance, stepping out of this field into another, I can
remember talking to the head of NIH, and he said, you know, if
Congress would not direct how we do our--how we allocate our
money, we could be making breakthroughs in life threatening
illnesses that are very, very close. But Congress keeps telling
us, no, you got to put the money somewhere else.
I am afraid part of the beast here that exists from a
political standpoint in terms of our thinking that we have, you
know, or responding to constituent requests or whatever, that
we have a better ability to direct where the funds go than the
private sector does. That's where, I think, we get in trouble.
My time has expired. I just did not really come to preach.
But you do come out of the private sector, and I think your
evaluation of this is important for us to hear.
Mr. Allison. Yes. Senator, may I just respond.
The Chairman. Go right ahead.
Mr. Allison. On your final points, Senator, that is why I
think it is important that these programs be reviewed
periodically to see whether they are still relevant and ideal
for the current climate and the objectives that are being
sought.
I think in terms of making sure that there is professional
staffing, as we pointed out, there is no provision for long-
term funding of the loan project office. I think one of the
reasons why it is difficult to attract and retain professional
talent is that people do not see that if they come into the
government in one of these roles, that this program will be
funded down the road. It is funded now out of origination fees.
So, as loans are closed, funding comes into the Department of
Energy that underpins this loan project office. But once the
origination stops, that funding dwindles.
This program has loans that are going to be out there for
20 to 30 years. It is going to need active, professional
management for the entire time that the government holds these
loans, because decisions will have to be made all along the
way.
So, to attract people, I think they need to have assurance
that the funding will be there. Otherwise, why should they join
up and oversee this program?
Senator Coats. If I could just have 10 seconds, but
wouldn't that go against the whole concept of sunset programs
30 or 40 years out?
Mr. Allison. Yes.
Senator Coats. But assuming that you are talking about
sunset in the amount of commitment, does not that run counter--
--
Mr. Allison. Once----
Senator Coats [continuing]. The other?
Mr. Allison. What I am talking about, Senator, is that if
you have an ongoing program where you are going to making loans
over time, then I think you need to think about having a sunset
provision. When do we stop making new loans? When is the
private market able to finance these types of projects without
government assistance?
But once long-term loans like these are made, they are
going to have to be administered. Now, as we point out, one
consideration should be, should the DOE sell off these loans?
Once they are matured and there is a public market for them,
should they sell them off, or should they hold them? But we
presume that they are going to hold them for many years. If
they are going to hold them for many years, there is going to
have to be professional oversight to make sure that the
taxpayers are being protected.
The Chairman. Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman, and, Mr. Allison,
thank you for your good work.
It seems to me that as you drill into this and look at the
various kinds of loans, you come to the conclusion that not all
energy loan guarantees are created equal. You then compare that
to the statute, the loan guarantee statute, which basically
lumps everything together, and you say to yourself, that sure
looks like it is right at the heart of what the Congress ought
to be trying to do. You have made a number of constructive, you
know, comments today that track with my thinking.
I mean, if there is private sector investment, for example,
that signals a message that people can feel more confident that
this is something that can work. Utility linked loans, for
example, which the Pacific Northwest, as you know, has been
very interested in, a utility linked loan ensures that you
already have a customer lined up. You have got a customer lined
up from the get go, which also should give a measure of
confidence.
I think my question to you is a result of sort of starting
with this proposition that not all energy loan guarantees are
created equal. My question would be to you, would it make sense
for the Congress to really step back now and look at
restructuring the loan guarantee statute to, in effect, set up
different categories that recognize fundamentally different
risk to the taxpayers? You would measure, for example,
something that would ensure that there was a market from the
get go. That could be one category. Something else which was
exciting and promising, but didn't have the same level of
support could be a different, you know, category.
My question to you is, would it make sense to restructure
the loan guarantee statute along the lines of recognizing
different risks to taxpayers?
Mr. Allison. Senator Wyden, I think that is an excellent
thought. I think that you do have a wide variety of loans in
this program. I think there needs to be great clarity about the
purposes of the programs as a whole and what they are designed
to achieve.
Again, as I said before, I do not think there is anything
wrong with making some loans that are admittedly risky as long
as we are acknowledging at the time the risk in the loans. I
think one of the causes of controversy about this program is
that there are differing expectations about what this is
supposed to be doing. I think your question hits on that.
You could have some programs, like the utility linked
loans, where the risks are much better understood, where you
have much less risk once these projects are built. There are
certain risk characteristics. That is why we divided up the
portfolio that way. There may be very good reasons to be
supporting early stage innovative manufacturing companies in
green energy to get those industries off the ground. That is
going to involve higher risk. That ought to be acknowledged.
There should probably be different types of financing available
so that, again, greater risk, there are ought to be prospects
for greater reward for taxpayers.
The way this program is structured today is kind of one
size fits all. These are loans at government rates. I am not
sure that in all cases they need to be at such a low interest
rate to attract funding. The fees that the DOE can charge are
very low. There is no provision for upside in terms of some
type of an equity linked gain. So, maybe there is a different
type or package of financing that should be available for
riskier projects than for, say, the utility projects where
there is a pretty conventional approach to debt structuring.
Senator Wyden. I thank you, and I thought Senator Murkowski
also made a lot of sense when she was saying right from the get
go, nobody goes into this thinking that everything is going to
be 100 percent, you know, winner in a dramatic opportunity for
creating scores of new jobs and the like.
But taxpayers deserve better, it seems to me, than a
program that lumps Solyndra, in effect, in the same category as
one of these utility linked projects that has the customer, you
know, up front. I think this is another area--Mr. Allison, I
appreciate your answer--where we can do better for taxpayers in
this country, do better for some of the most exciting and
promising technologies. I see Senator Sanders here. He has
talked a lot about the opportunities in renewable energy. I
think we have got a chance to make some exciting changes in
this country if we restructure this program.
Mr. Chairman, I thank you for holding the hearing.
The Chairman. Senator Barrasso.
Senator Barrasso. Thank you very much, Mr. Chairman. I
agree with my colleague, Senator Wyden, that taxpayers do
deserve better. I appreciate your work on this.
The report had a section called ``Proactively Protecting
the Taxpayers' Interests.'' The report says that DOE should
aggressively strengthen its positions as lender or guarantor in
cases where borrowers seek relief from requirements in the loan
repayments. Senator Murkowski addressed that.
You know, with regard to the situation with Solyndra, the
Secretary has argued that the Department of Energy did not
violate the 2005 Energy Policy Act when restructuring
Solyndra's loan, which they restructured. It worked in a way
that I thought put the American taxpayers at a disadvantage,
that they were subordinated to other financing.
So, you know, I understand the Secretary saying that the
law applies to origination of loans, not to the restructuring
of loans. I do not agree with that interpretation. I think that
the policy--Energy Policy Act of 2005 does not distinguish
between origination of loans and restructuring of loans.
So, with that said, would you support legislation to ensure
that American taxpayers will always be paid before private
investors, whether it is an origination of a loan or a
restructuring of a loan?
Mr. Allison. Senator, thank you for your question. I think
if the paramount issue is recovery for taxpayers once these
loans are made for policy purposes, based on my experience in
the commercial world, I think that the, in this case, the
Department of Energy, should have some flexibility to
subordinate because that may be the best way, once the loan has
been issued on a singular basis, to recover some money for
taxpayers, because by subordinating, it may make it possible to
attract additional funding from other debt investors, which can
help that project succeed.
Sometimes these projects are going to run into trouble.
They are, after all, risky. But that does not mean everything
has to be lost. There needs to be creative refinancing for
projects as a way to protect taxpayers and actually enhance the
probability that they will get some of their money back.
Senator Barrasso. It seems to me that subordination in the
case specifically of Solyndra did not work----
Mr. Allison. Yes.
Senator Barrasso [continuing]. To accomplish that goal.
Thank you.
I want to ask you about bonus payments, to follow up on
what you have said about taxpayers and getting value for their
money. Several Department of Energy loan and grant recipients
have recently filed for bankruptcy. They have laid off workers.
They have experienced financial difficulties. The media has
reported that several of these companies, including Solyndra,
awarded large bonuses to executives and other employees,
specifically the bonuses to executives as other employees were
being laid off.
Last week it was reported that Beacon Powers' bonuses were
specifically linked to executives' progress in landing the
company's $43 million loan guarantee.
So, what, if any, protections are in place to ensure that
American taxpayers do not foot a bill for bonuses awarded at
failing companies.
Mr. Allison. Thank you, Senator.
First of all, let me, again, emphasize that we did not look
at Solyndra and Beacon. We have not looked at the companies
that received grants. We are only looking at the loan program.
I think that it is important--and the provisions in this
law allow for this, and the Department can certainly have
policies on this--should be looking at all the expenses planned
in these programs. They may want to build in the capability to
review, for instance, compensation programs. I am not sure that
that provision is in these loan agreements, by the way, but
that is something that might be considered because I can
certainly understand the public consternation if people are
receiving bonuses while a company is veering toward bankruptcy.
Senator Barrasso. So, that would be one of your
recommendations in terms of ensuring that abuses like this do
not take place again.
Mr. Allison. I think that is a reasonable idea, yes, sir.
Senator Barrasso. Thank you. Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Sanders.
Senator Sanders. Thank you, Mr. Chairman. Mr. Allison,
thank you for being with us.
In terms of full disclosure, let me just be very clear that
I happen to believe that global warming is very real. I think
it is causing enormous problems to our planet today, and I
think it is totally irresponsible that we are not moving as
aggressively as possible to reduce greenhouse gas emissions.
I would mention to my colleagues that a few weeks ago
Senator Whitehouse and I had a press event with representatives
of the insurance industry, not generally noted as one of the
more radical groups in our society. They pointed out the
enormous damages that extreme weather disturbances are doing to
their bottom line because of global warming.
So, it is my view that our country and the Federal
Government should be investing very, very strongly in energy
efficiency and sustainable energy in order to reverse
greenhouse gas emissions and try to protect the planet.
Now, in a sense, what we are talking about today is the
role of government in energy, and we have been focusing on
Solyndra and the 1705 program. But let me ask you a question,
which I hope you have some familiarity with. Back in the 1960s
and 1970s, there was a huge overbuild in terms of nuclear
projects. In fact, as I understand it, about 100 nuclear
facilities were terminated at huge expense both to rate payers
and taxpayers.
Right now, I find it a bit ironic that some of my friends
talk about picking winners and losers. But would you not agree
with me that for the last 50 or so years, the U.S. Government
has picked as one of its winners a very, very risky industry
called nuclear power, an industry which, and please correct me
if you disagree with me, would not be in existence today
without the very, very strong support of the Federal Government
in terms of the Price-Anderson insurance program and,
furthermore, in terms of the attempt at least to get rid of
nuclear waste. So, would nuclear industry not be in the
existence today if they were solely dependent upon Wall Street
and the financial community to support them?
Mr. Allison. Senator, I would like to respond to your
question, but I must confess I do not have real expertise on
that question. I think that is a very broad, deep question as
to whether the government should have been sponsoring nuclear
energy.
I do believe as a general comment that in any nascent
industry, and right now you could look at nuclear fusion, which
could be the answer to a lot of our energy needs and could be a
very clean source of energy. It may take----
Senator Sanders. Mr. Allison, I am sorry to interrupt you.
I have a limited amount of time.
Mr. Allison. Go ahead.
Senator Sanders. When people talk about winners and
losers----
Mr. Allison. Yes.
Senator Sanders [continuing]. Is it fair to say that for
the last 50 years, the U.S. Government has decided that one of
the winners in which we should make huge investments is the
very, very risky nuclear power industry?
Mr. Allison. The only comment I would make is that early--
and this is from my own experience, so I comment on this. In
early phases of any industry, it is very difficult to pick
winners and losers. Therefore, often you find financing for a
lot of different approaches to solving a particular problem,
and over time, one learns a lot.
Senator Sanders. Right. I agree. I agree with that. The
only point that I am making----
Mr. Allison. Yes.
Senator Sanders [continuing]. Is then when some people talk
about the riskiness of certain types of sustainable energy or
the problems with Solyndra, is it fair to say that we have seen
that maybe 10 times plus in terms of the nuclear industry,
which has at certain times already lost huge amounts of money
from the taxpayers of this country? Is that a fair statement?
Mr. Allison. I would respectfully answer. I think that your
next witness, Secretary Chu, is a far more qualified expert on
that question than I am.
Senator Sanders. All right. Thank you very much, Mr.
Allison. All that I would say, Mr. Chairman, is, yes, we do
pick winners and losers, and probably the great winner in terms
of Federal subsidies is not only the nuclear industry, but the
fossil fuel industry as well. We have pumped billions and
billions of dollars into those industries. I, for one, think it
is time to begin focusing on energy efficiency and sustainable
energy.
Thank you, Mr. Chairman. Thank you, Mr. Allison.
The Chairman. Thank you. Senator Lee.
Senator Lee. Thank you, Mr. Chairman. Thank you, Mr.
Allison, for being here.
I certainly agree that an audit of this program is
warranted wholeheartedly. The real question for me is whether
the government should even be playing venture capitalists with
taxpayer money in the first place, whether in this specific
sector at the energy industry or elsewhere.
I want to make clear that my concerns over the
administration of the Loan Guarantee program should not be
mistaken for tacit approval of the program as a whole. When
companies like Solyndra and Beacon Power fail, millions of
taxpayer dollars are wasted, and it is clear that the
government, in my opinion, truly has no business being in the
investment business.
The apparent basis for the program as I understand it is
that there are just certain types of investments that are so
inherently risky that only the government can invest in them,
only the government will invest in them. Today you seem, if I
am understanding what you are saying correctly, to be somewhat
downplaying the risk of these investments.
It is seems a little bit contradictory to say that, on the
one hand, government intervention is absolutely necessary
because only the government can do this, and that it is too
high for private equity markets, and then also to claim that it
is an appropriate risk of taxpayer funds because there are
adequate safeguards in place. So, which is it? Is it too risky,
or is it--or are the risks manageable?
Mr. Allison. Senator, thank you for your question. I think
that these are policy questions that Congress needs to grapple
with and answer. I am not sure that there--you can give a
blanket answer to your question. I think, and you know this far
better than I, but the Congress has constantly deliberating
about what is in the national interest and the public interest
over the long run, the payoffs such from some initiative to the
public. They may not be direct financial returns, but they may
be social consequences, whatever, that make it worth the
government's while to be involved.
I think that there are numerous areas where private
financing--and I am talking about health initiatives, for
example, and that is why we have NIH doing research, and that
is why we fund research in universities in physics and lots of
other areas. So, there may be a legitimate role for government
where private financing is not available.
I do believe, as I mentioned earlier, that these programs
should be constantly reviewed, to the extent that there are
programs in place, to see whether they are still necessary. Do
they still meet that policy need, or are there private
alternatives available today?
I believe that ultimately the best allocation of resources
will take place through private interactive markets.
Senator Lee. Part of that inquiry then now to involve, is
the risk manageable? If it is manageable, could it not under
circumstances be manageable from a private capital standpoint,
right?
Mr. Allison. That is a very legitimate question.
Senator Lee. If it is not manageable risk, then perhaps we
should not be putting taxpayer dollars at risk.
So, your report did not consider either Solyndra or Beacon
Power, and that is because, as I understand it, that is no
longer part of the program. Those are finished.
Mr. Allison. Senator, yeah. They were no longer really part
of the portfolio because they were in bankruptcy and their
eventual value would be determined in the courts and through
recovery.
Senator Lee. Do you have any way of guessing how that might
have affected your report, what your report might have looked,
how it might have been different had those still been on the
books, had those not gone through bankruptcy at the time you
conducted this report?
Mr. Allison. I would only be speculating, but certainly we
would have applied the same methodologies to examining those
loans if these companies were still extent and not in
bankruptcy. You know, the process that we used in each case was
totally independent, and we took a look at voluminous
information on each one of these loans to try to gauge the risk
at this time. We look at engineer's report, rating agency
reports, and so forth.
So, we would have followed the same process there. You
know, I would only be speculating as to what we would have
found, however, because we did not look at those 2 companies.
Senator Lee. Might this have been one of those instances in
which, as you acknowledged in your report, certain procedures
were not followed, certain documents were not completed, and so
forth?
Mr. Allison. I believe, Senator, that there are--
investigations under way. I would only be speculating about
that because I have no information about Solyndra that is not
available in the newspapers.
Senator Lee. OK. Thank you. I see my time has expired.
Mr. Allison. Thank you very much.
Senator Lee. Thank you, Mr. Chairman.
The Chairman. Thank you. Senator Franken.
Senator Franken. I think if I just heard Senator Lee
correctly, you said that if the risk is manageable, we should
not be putting tax dollars at risk, and if it is not
manageable, we should not be putting tax dollars at risk. Did I
hear that correctly?
Senator Lee. I did.
Senator Franken. So, therefore, we should not ever put tax
dollars at risk.
Now, I agree with Senator Sanders. We have a global climate
change problem. We had testimony from the director of the
Forest Service the other day who said that the duration,
intensity of these forest fires are caused by global climate
change, and it is just going to get worse. We are spending more
and more and more and more money on that. There is an actual
cost to these taxpayer. Taxpayer money is at risk because of
global climate change.
The bark beetle is eating more and more of our forests
because of climate change, because they do not die from severe
winters at certain elevations when they used to.
So, it is actually costing the taxpayer dollars are at risk
if we do not address this and try to get to clean energy. So,
it seems to me that our tax dollars are at risk if we do not do
something. That what it seems to me.
So, it seems like we got to just do this as smart as
possible. That is what it seems like to me. So, I want to
follow up on Senator Wyden's comments and questions.
First of all, I just want to say I appreciate the thorough
investigation you have conducted here.
Let me bore down something very specific. One of the most
important aspects of Loan Guarantee program is the right credit
subsidy of these loans. If the cost is too high to a company,
it may not be able to seek a loan, and it may be a technology
that has a lot of promise. If it is too low, the taxpayer may
not be adequately protected from possible default.
As you noted in you report, in some cases these subsidy
costs were underestimated, while in other cases they were over
estimated.
My question is, can you tell us what you observed with
respect to transparency of the credit subsidy cost calculation?
Can the credit subsidy cost calculation for each individual
project be done in a more transparent process that the public
can access?
Mr. Allison. We did look at the credit subsidy process
because we had to learn it in order to make our own estimates
of what the credit subsidy we think should be.
Like any financial model, it has strengths and witnesses,
given the intended purpose. The purpose of FCRA, the Federal
Credit Reform Act, method used in budgeting is to have a
consistent approach that applies to all programs across the
government. FCRA can certainly do that if, for instance, it
uses the same government discount rate pretty much for all
these programs.
In terms of estimating the loss on these particular loans
in the DOE portfolio, you then have to calculate a credit
rating, and because the credit rating is used to determine what
the default rate is expected to be given that credit. For
instance, most of these credits are single B or double B
credits. So, what is done is to look at years of data across
many different types of loans that are rated, let us say,
double B, and figure out historically what has been the default
rate. Then you plug in that rate into the model.
Then there is a recovery rate. Let us say that the loan
DOE's go bad and you have to recover in bankruptcy. What has
been the typical rate of recovery against the amount of the
loan, and/or the value of the assets after bankruptcy?
Now, the weakness in that model is that you are using
indexes on default rates and recovery rates that apply to a
wide variety of loans that are not particular to the
idiosyncratic nature of these loans. So, there is no easy way,
given the novelty of these loans, to calculate what the default
rates and the recovery rates are going to be.
Fair market value, another method, has some advantages, and
that it will apply an estimate of a market rate of discount to
determine what discount what the investors would demand in
order to purchase this loan at the interest rate that it has
and get a market return given the risk.
That also has weaknesses because you cannot apply that in
budget very easily across the government because you are--each
discount rate would be different. There would be a lot of
contention about what it is an appropriate discount rate for
each one of these. I think it would be hard to have a standard
budgeting process.
So, it is very important with all these models to
understand what the purpose is, what the strengths and
weaknesses of the models are. Last, do not give too much
credence to these models in estimating what the ultimate loss
will be, especially with loans like these that have 2-year or
30-year lives that are dealing with novel technology, and where
the government has the ability to control the risk and its
exposure in a variety of ways through the loan covenants. It
does not have to advance all the money, for example, if these
projects are not meeting their contractual benchmarks.
So, given all that, that is why we concluded, here are the
estimates using these models as best as we can do. Do not pay
too much attention to them or think that, well, we are going to
lose $2.7 billion. That is not the case. It may be more, it may
be less. It could be a lot less than is indicated by that
number.
What is important is to manage the portfolio very actively
day to day. You have it. It exists. You better manage it very
carefully on behalf of the taxpayers and use the terms and
covenants in the loan agreements to the advantage of taxpayers.
Senator Franken. So, my time is way up, but what you are
basically saying is there is not necessarily a scientific
subsidy calculation here for this subset, of loan guarantees,
but the management of each guarantee is of tremendous
important.
Mr. Allison. Yes.
Senator Franken. Thank you, Mr. Allison. Thank you for your
work.
Mr. Allison. Thank you.
The Chairman. Senator Paul.
Senator Paul. Thank you for coming today.
Do you think that the commissioning of your study had
anything to do with the political outcry over the bankruptcy of
Solyndra?
Mr. Allison. Senator Paul, I could not speculate on that.
Senator Paul. Were you commissioned after it became public
that Solyndra was going bankrupt?
Mr. Allison. Yes.
Senator Paul. OK. I find it curious then that we have this
public outcry over this huge lapse of oversight where a
billionaire gets a $500 million loan from the U.S. Government
and goes bankrupt. Turns out that his attorney's husband works
in the Department of Energy granting the loans, and we are
going to study oversight and we are not going to look at
Solyndra? I find that very, very curious.
My question to you would be, did anyone from the
Administration ask you either verbally or in writing not to
mention or look into Solyndra?
Mr. Allison. The direct answer to your question is no.
Senator Paul. Did you have the power to look into Solyndra
if you wished to? Your mandate looks to me wide open. You are
supposed to look at oversight. Why would you not look at where
the problem is?
Mr. Allison. I was asked to look at the loans, the extent
loans, the loans that exist now.
Senator Paul. It is says ``current status of the portfolio,
strengthen management and oversight of DOE's program.''
Mr. Allison. Yes, sir.
Senator Paul. If you are going to strengthen oversight,
certainly you would have to look where the problems are. I
would not think--I mean, this seems to be so myopic as to be
politically motivated. I am very skeptical of why you do not
look at Solyndra when that is the whole reason you were
commissioned was over Solyndra.
But here is the thing is, you have got Solyndra. You have
got Beacon Energy going bankrupt. You have got BrightSource
maybe going bankrupt. What about BrightSource? Did you look at
BrightSource?
Mr. Allison. That was not part of this program, sir.
Senator Paul. Is BrightSource not part of the current
portfolio of Department of Energy loans? BrightSource got $1.8
billion from this loan portfolio.
Mr. Allison. Yes.
Senator Paul. The thing is, is who owns BrightSource?
Robert Kennedy, Junior, another politically connected Obama
contributor who gets $1.8 billion of our money. You know what
their profit? Their loss? They lost $13.5 million. They are
$1.8 in hock. Is BrightSource ever going to get out of debt?
Why are we giving taxpayer money to a family that has got
hundreds of millions of dollars?
This is about crony capitalism. This is not about starting
up solar panels. It is about giving money to people who have
already got enough money. Let them make their own loans. If
they love solar panels, let them do it. But I do not
understand, and you do not--you did not look at any of the
problems and how we come to conclusions about oversight if you
did not look at the companies where the problems originated.
Mr. Allison. Senator, I think I understand your question.
First of all, there are several investigations under way. If we
were going to look at that, we would have needed investigatory
powers, subpoena powers, the right to demand documents. We
would have taken probably many months, if not a year, and we
would have been going on top of the investigations already
under way.
Senator Paul. Then, very specifically, the public
information that is out there on Solyndra that Solyndra's
attorney's husband worked in the Department of Energy, does
that have any red flags for you?
Mr. Allison. Again, Senator, I have not looked at those
types of questions.
Senator Paul. If you knew that the attorney for Solyndra's
husband worked in the loan department granting the loans at the
Department of Energy, does that send up red flags for you, yes
or no?
Mr. Allison. Senator, I do not know the facts of that at
all.
Senator Paul. If you knew that in BrightSource somebody
that used to work for the Kennedy family companies now works in
the Department of Energy and approved the $1.8 billion loans,
does that send up red flags? If you are commissioned to look at
oversight, I mean, your reputation is on the line as an
independent person----
Mr. Allison. Yes, sir.
Senator Paul. You are commissioned to look at oversight,
and you did not look at where the problems in oversight were.
Mr. Allison. Actually, Senator, we have looked at that. My
point is, regardless of those facts, we were going to do as
thorough a process of reviewing the policies and procedures of
the Department of Energy regarding the management of this
portfolio.
I think we did that. I think that we came to our
independent conclusions about, first of all, how the portfolio
is being managed, and you see a number of recommendations--
about a dozen----
Senator Paul. Do we give loans to foreign companies?
Mr. Allison. We gave loans--under the law, loans could be
made to U.S. companies, and these----
Senator Paul. Fisker Karma got $500 million. My
understanding is they are spending it building cars in Finland.
Is that true or not true?
Mr. Allison. At the time, and, again, we did not
investigate whether the law was complied with in all cases.
That was not part of our review. However----
Senator Paul. Fisker Karma, did they get $500 million
directed toward jobs in Finland?
Mr. Allison. The entities that borrowed the money are U.S.
companies. They may have ownership from abroad, but they are
U.S. companies. For instance, Nissan North America is a
borrower, and it is owned by a Japanese company, but it is a
U.S. corporation.
Senator Paul. Thank you.
The Chairman. We have a second panel, which is Secretary
Chu, and I would suggest we go ahead and thank Mr. Allison for
his testimony and go ahead to our second panel, unless there is
any burning reason not to.
Mr. Allison, thank you very much. We appreciate your being
here and your testimony today.
Why do we not see if we could ask Secretary Chu to come in
so we can hear his perspective and ask him some questions?
Mr. Secretary, thank you for being here. Welcome back to
the committee. As you know, we just received testimony from
Herb Allison about his report reviewing the Department of
Energy loan and loan guarantee portfolio. We would be anxious
to hear any thoughts you have on that very same subject, and
then I am sure senators will have questions. So, go right
ahead.
STATEMENT OF HON. STEVEN CHU, SECRETARY, DEPARTMENT OF ENERGY
Secretary Chu. Here we go. Thank you, Chairman Bingaman,
Ranking Member Murkowski, and members of the committee. Thank
you for the opportunity to discuss the Department of Energy's
efforts to strengthen our Loan Programs and to grow America's
clean energy economy.
As part of our commitment to be a responsible steward of
public dollars, the Department has cooperated with Congress'
request to discuss our loan portfolio and welcomed the
independent review of Herb Allison.
Mr. Allison released a thorough, thoughtful report. He made
some important recommendations to strengthen the management and
oversight of the loan portfolio. Even before the conclusion of
Mr. Allison's review, we took steps, many of which are
consistent with the report's recommendations, to improve the
Loan Programs.
This includes working to ensure that our team has a
sufficient number of skills and experienced personnel to
monitor and manage the portfolio to protect U.S. taxpayers. We
have improved, and will continue to improve, processes for
productive monitoring, loan administration compliance,
reporting, and resolution capabilities to take into account
industry best practices. In addition, we have put in place
rigorous internal and external reviews to hold the Loan Program
Office accountable.
The Department takes its responsibility to the U.S.
taxpayers seriously, and we are looking closely at Mr.
Allison's recommendations for additional improvements.
Mr. Allison and his team reviewed each active loan in the
portfolio, looking at the risk factors behind each loan and
estimating each loan's cost. Mr. Allison's report concluded the
Department is using the appropriate risk factors in assessing
each loan.
The Federal Credit Reform Act defines the cost of these
loan programs as the estimated long-term cost to the
government, including the risk of default. For each loan, the
subsidy estimate can be thought of as similar to the loan loss
reserve--to similar to a loan's reserve.
Congress appropriated $10 billion in credit subsidy under
the Federal Credit Reform Act for title 17 Advanced Vehicle
Loan Programs. While the portfolio includes loans to a range of
projects that carry different levels of risk, the reports finds
that the Department of Energy has reasonably estimated the
costs of these risks. In fact, Mr. Allison estimates that the
long-term costs of the outstanding portfolio is $2.7 billion,
roughly $200 million lower than the Department's most recent
estimate.
The purpose of the Loan Programs is to provide low cost
financing to innovative clean energy projects that have a
unique value to the Nation both in terms of providing clean
energy and inspiring the development of new industries.
Overall, the Loan Programs have been successful in growing
America's clean energy sector.
The Department supports roughly 3 dozen clean energy
projects that are expected to employ more than 60,000
Americans, generate enough clean electricity to power nearly 3
million homes, and displace nearly 300 gallons of gasoline
annually. As these are just direct benefits, they do not
include additional supply chain jobs.
Our Loan Program is spurring tens of billions of dollars in
investment in clean energy projects, and helping to unlock
private capital. Thanks in part to the Loan Programs, last year
the United States regained its title from China as the world's
leader in total investment in clean energy.
The Department of Energy is using all the tools at our
disposal, including the Loan Programs, to strengthen America's
clean energy economy so we can compete globally.
Improvements in technology and dramatic reductions in cost
are driving a global revolution in clean energy. Last year, a
record $260 billion was invested globally in clean energy. The
question is no longer whether a clean energy economy will
arrive, but whether America will lead it. As the opportunity
grows, so does the competition. Many countries have established
supportive policies and are making major investments in
everything from renewables to electric vehicles, to next
generation biofuels. To win the clean energy jobs of the
future, the United States must do more than invent
technologies. We must also manufacture them, deploy them here
at home, and sell them around the world. Production of energy
technologies benefits from scale. Simply put, to have a
competitive clean energy industry, we need programs that help
spur deployment and markets.
America faces a stark choice today. Will we play to win the
clean energy race, or will we watch the rest of the world
passes us by? Can we invest in America's workers industries--we
can invest in America's workers, industries, and innovation, or
we can send money and jobs overseas to import the technologies
of tomorrow.
Throughout our history, from aviation to agriculture to
computer technologies, the Federal Government has supported the
private sector to keep the United States at the technological
forefront of important industries. It is time to take a page
from our own playbook. We can still win the clean energy race,
but we must act now.
I know this committee cares deeply about our energy future,
and I look forward to working with you to ensure that the
United States leads in the clean energy economy. So, thank you,
and I am pleased to answer your questions.
[The prepared statement of Secretary Chu follows:]
Prepared Statement of Hon. Steven Chu, Secretary, Department of Energy
Chairman Bingaman, Ranking Member Murkowski, and Members of the
Committee, thank you for the opportunity to discuss the Department of
Energy's efforts to strengthen our loan programs and to grow America's
clean energy economy.
The Department's loan programs have been the subject of much public
attention. As part of our commitment to being a responsible steward of
public dollars, the Department has welcomed and cooperated with
Congress' requests to discuss our loan portfolio. We also welcomed the
independent review by Herb Allison, which we are here today to discuss.
Mr. Allison was tasked with: 1) analyzing the current state of the
loan and guaranteed loan portfolio under two Title XVII programs--
Section 1703, Section 1705--and the Advanced Technology Vehicle
Manufacturing loan program; 2) making recommendations for enhancement
to the programs, if warranted and practical, to ensure effective
monitoring and management of the current loan and loan guarantee
portfolio: and 3) making recommendations, if needed, pertaining to
early-warning systems to identify and mitigate potential concerns on a
timely basis.
Mr. Allison released a thorough, thoughtful report. He made some
important recommendations to strengthen the management and oversight of
the loan portfolio. Even before the conclusion of Mr. Allison's review,
we took steps--many of which are consistent with the report's
recommendations--to improve the loan programs.
This includes ensuring that our team has a sufficient number of
skilled and experienced personnel to monitor and manage the portfolio.
We continue to work to make certain that the Portfolio Management
Division has the resource capacity and expertise to actively monitor
loan and loan guarantee transactions to protect U.S. taxpayers.
We have improved, and will continue to improve, processes for
proactive monitoring, loan administration, compliance, reporting, and
resolution capabilities to take into account industry best practices.
And we have upgraded the electronic systems of the Loan Programs Office
to better automate and standardize data, so it can be reviewed and
acted upon in a timely and streamlined manner, and best inform
decisions.
In addition, we have put in place rigorous internal and external
reviews to hold the Loan Programs Office accountable. The Department
takes our responsibility to U.S. taxpayers seriously, and we are
looking closely at Mr. Allison's recommendations for additional
improvements.
Mr. Allison evaluated both the monitoring efforts of the Loan
Programs Office and its portfolio. As part of this effort, he and his
team reviewed each active loan in the portfolio. They looked at the
risk factors behind each loan and estimated the costs of each loan. Mr.
Allison's report concluded that the Department is using the appropriate
risk factors in assessing each loan. In some cases, the report
recommended minor differences in the weights given to each factor.
The Federal Credit Reform Act defines the cost of these loan
programs as the estimated long-term cost to the government, including
the risk of default net of recoveries; for each loan, the subsidy
estimate can be thought of as similar to a loan loss reserve. Congress
appropriated $10 billion in credit subsidy under the Federal Credit
Reform Act for Title XVII and the Advanced Vehicle Loan Programs. Not
all of the appropriated credit subsidy has been obligated.
While the portfolio includes loans to a range of projects that
carry different levels of risk, the report finds that the Department of
Energy has reasonably estimated the costs of these risks. In fact, Mr.
Allison estimates that the estimated long-term cost of the outstanding
portfolio is $2.7 billion, roughly $200 million lower than Department's
most recent estimate.
The purpose of the loan programs is to provide low-cost financing
to innovative clean energy projects that have a unique value to the
nation--both in terms of providing the clean energy our nation needs
and in spurring the development of new industries that can generate
many more jobs down the line.
Overall, the loan programs have been successful in growing
America's clean energy sector. The Department supports roughly three
dozen clean energy projects that are expected to employ more than
60,000 Americans, generate enough clean electricity to power nearly 3
million homes, and displace nearly 300 million gallons of gasoline
annually. And these are just the direct benefits; they do not include
additional jobs and investment that come from supply chains.
Through active projects supported by loans and loan guarantees, our
Loan Programs are spurring $40 billion in investment in clean energy
and advanced vehicles and helping to unlock private capital.
Additionally, the success of these projects is generating additional
private sector activity by serving as a model for other projects.
Thanks in large part to the loan programs and other federal programs,
last year--for the first time since 2008--the United States regained
the title from China as the world's leader in total investment in clean
energy.
The Energy Department is using all of the tools at our disposal,
including the loan programs, to strengthen America's clean energy
economy so we can compete globally.
Improvements in technology and dramatic reductions in cost are
driving a global revolution in clean energy. Last year, a record $260
billion was invested globally in clean energy, and trillions of dollars
more will be invested in the coming decades. The question is no longer
when the clean energy economy will arrive, but whether America will
lead it.
As the global clean energy opportunity grows, so does the
competition. Countries throughout Europe, Asia, and the Western
Hemisphere have decided that energy technologies are critical to their
national and economic security in the 21st century. Many countries have
established supportive policies and are making major investments in
everything from renewables to electric vehicles to smart grids and the
next generation of biofuels.
At least 10 countries have adopted renewable electricity standards,
and more than 50 countries offer some type of public financing for
clean energy projects. For example, Germany and Canada operate
government-backed clean energy lending programs, and China has provided
strong support to its clean energy industries.
These countries are determined to win the global clean energy race.
And by any measure, they are already reaping rewards on their
investments. Americans invented the silicon solar cell, developed
modern wind turbines for electricity generation, and developed lithium
ion batteries, but we are no longer the leader in these industries.
China has surged into the solar manufacturing lead. Denmark is home to
the world's largest wind manufacturer, and Japan and Korea lead in
advanced battery manufacturing, although the United States is making
strong gains.
To win the clean energy jobs of the future, the United States must
do more than invent technologies; we must also manufacture them, deploy
them here at home, and sell them around the world. The production of
energy technologies benefits from scale. Simply put, we cannot have a
competitive clean energy industry without programs that help spur
deployment and markets.
America faces a stark choice today. Will we play to win the clean
energy race--creating U.S. jobs by making and selling clean energy
technologies--or will we watch the rest of the world pass us by? We can
invest in America's workers, industries, and innovations or we can send
more money and jobs overseas to import the technologies of tomorrow.
Throughout our history, from aviation to agriculture, from
biotechnologies to computer technologies, the federal government has
supported the private sector to keep the United States at the
technological forefront of important industries. In clean energy, other
countries are running our plays. It's time for us to take a page from
our own playbook. We can still win the clean energy race, but we must
act now.
This is a serious issue that deserves a serious discussion. I know
this committee cares deeply about our energy future, and I look forward
to working with you in the coming months to ensure that the United
States leads in the energy technologies of the 21st century. Thank you,
and now I am pleased to answer your questions.
The Chairman. Thank you very much for being here. Let me
start with a very general question. You advocated strongly for
winning the clean energy race, which I have heard you say
before, and I have done myself many times. In fact, I think it
is clear to all of us that we really have several different
clean energy races. One, of course, is in the development of
these new technologies. ARPA-E is working on that. I know the
Department has various other efforts going to achieve that.
A second so-called clean energy race might be the
manufacturing of these technologies so that we create the jobs
here that are going to be created in this area.
Third is the deployment of clean energy technologies, and I
think you correctly point out that there is a real possibility
that we would essentially cede to the rest of the world the
ability to develop and manufacture technologies and just decide
all we can do here is import them and hopefully deploy them.
But it is a different challenge.
I guess that Senator Wyden correctly pointed out that when
we put the Loan Guarantee program into the 2005 law, we had not
separated out the different types of clean energy or energy
projects that might require some level of government support
through a loan guarantee, and we hadn't perhaps adequately
segregated those out.
I would be interested in any general thoughts you have
about the appropriateness of us going back and trying to be
sure that we are doing all we can in each of these various
races to be sure that the United States does not drop out of
the competition.
Secretary Chu. Sure. I have listened to a portion of Herb
Allison's testimony, and I agree with him and the report. The
report took the Loan Program and divided it into certain
sectors. If you consider a sector where you are deploying a
known technology, whether it is wind or solar, something which
has a proven track record, there are considerably--especially
if that project then has a utility company, which is a solid
utility company with a good bond rating, with a long-term so-
called power purchase agreement. That is to say, you have
signed into contract this utility company will pay this amount
for this electricity generated by wind or solar.
As long as that utility company is a strong, stable
company, the risk of that loan is different than the risk of a
new innovative startup company. It is a considerably less risk,
but it does help very much in the deployment of these large
projects. So, that is one class of loans.
The other class of loans that Congress asked us to invest
in are investments in clean innovative manufacturing, whether
it is an ATVM loan or whether it is something in the energy
generation business. That by its very nature might carry a
different risk.
However, the mechanism that we were tasked with using, the
so-called FCRA rules, tries to assess what are the risks to
these loans. Using that estimation, the Allison report says
that we were a little bit higher, but essentially on par with
their evaluation of the risks of those loans; and that Congress
had appropriated that money--appropriated, not authorized,
appropriated, meaning that money could have been spent on other
things. It could have been spent on research. It could have
been spent on hiring policemen, firemen, and teachers. But they
chose to appropriate because they recognized that it was an
opportunity to actually help these industries and help create
jobs.
The Chairman. Let me ask one other question. I think Mr.
Allison also said that it is extremely important that you get
the right professional employees working at the management and
oversight of this loan portfolio over the long term, and that
in order to do that, you need to have assured funding for this
activity so that people might actually consider leaving the
private sector and coming to work for the Department to pursue
this management of these loans. Do you have any comment on that
recommendation?
Secretary Chu. Yes. I agree with that recommendation. I
think it is very important, and we are in the process of trying
to bring in career professionals, because as he noted in the
report, that many--because we had to stand very quickly, we had
a number of consultants to give us the financial expertise. We
would very much want to bring into this program career people
who have experience in project finance, experience in finance
in general. So we agree with that.
It is very important--because of the long tenure of these
loans, some of them 25, 30 years, it is very important--and
because have specific grant milestones, that we pay very close
attention--milestones that then allow the loan program to give
another tranche of money. It is very important that we follow
each of the loans carefully.
The Chairman. Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman. Secretary,
thank you for being here this morning. It is important to hear
Mr. Allison speak to the audit, but I think it is equally
important that you as the Secretary of the Department of Energy
be here to speak to some aspects of the loan program.
In the report from Mr. Allison, he states that ``DOE should
better define the desired balance between policy goals and
financial goals. I look at that and to me it is a pretty basic
managerial function, and I guess I was a bit surprised to learn
that from the audit's perspective, Mr. Allison's perspective,
that that was, in fact, lacking.
So, the question to you is, how would you grade the
Department's implementation of the Loan Guarantee program thus
far?
Secretary Chu. When we started, it was new. We have made a
lot of improvements, and will continue to make improvements,
especially since we all know that--we all know that sometimes
the industry that a particular loan might be embedded in could
rapidly change. That, in particular, is something where you
need to watch on sometimes a weekly basis.
So, I could not say an official grade, but I think one of
the things that the Allison report and Mr. Allison were talking
about is, for example, the vagueness also goes to not only the
Department policy, but the law itself. What do you mean by a
significant chance of payback?
Senator Murkowski. I mean, that is an important thing.
Secretary Chu. Right.
Senator Murkowski. As a committee here, I think we are
tasked with this oversight program.
Secretary Chu. Right.
Senator Murkowski. The Loan Guarantee program is in place.
I want to make sure that it is working as we had hoped that it
would, and we would not see, again, some of the somewhat
stunning failures that we have seen from it. Based on, again,
the results of the audit, what you have observed in through
your interactions through your folks, it looks to me like we
need to do some changes. This is not tweaking a program, but
some serious changes to this program so that we do have
assurances to the taxpayers, so that we do have a structure in
place that provides and allows for a level of accountability.
I know that Senator Stabenow is probably going to ask about
the ATVM----
Secretary Chu. ATVM.
Senator Murkowski. ATVM, thank you. Program and the fact
that we have not seen those loans go out the door. Under the
2005 act, we have not seen any of those loans go forward, and
then from the results from the stimulus dollars that came in,
we had a lot of money go out the door, and that is where we are
seeing some pretty serious concerns.
So, I am looking at this, and if I had to give a grade, if
I had to assign a letter grade to the Department at this point
in time, it is not a passing grade. I think we need to be able
to do much, much better. You have suggested that you are going
to be moving forward with some policy changes, but I think we
need to be aggressive about that.
Let me ask a question. This is kind of a follow-on to what
I had asked Mr. Allison. Some of the conditions that are in the
2005 energy bill as it relates to the Loan Guarantee programs,
one of them is the reasonable prospect of repayment. We
certainly faced that with Solyndra and Beacon's failure to
repay the loan. There is another requirement in the law that
says that no guarantee shall be made unless the Secretary, you
determine that the amount of the obligation is sufficient to
carry out the project.
It is now clear in hindsight that with Solyndra, that
condition was not adhered to. Seventy-million dollars had to
come in from private investors. To make that happen, what we
saw then was the subordination. DOE put taxpayers second in
line in that bankruptcy, and that has caused a great deal of
consternation.
Did you make the determination at that time--as the law
requires, did you make that determination that the amount
available when the loan guarantee was closed that they were
sufficient to carry out the Solyndra project? If you did make
that determination, then how do we get to where we are today,
which, again, is a bad mark on the books?
Secretary Chu. When the loan closed during the commitment
and when the loan closed, there was a world of difference to
when at the time of the restructuring of the loan. By the time
of the restructuring of the loan, we knew that the company was
in deep trouble.
But to your earlier point about what we intend to do, much
of the things that were in the Allison report we are doing. We
have set up a risk committee. Mr. Allison and his colleagues
recommended that there be a risk management structure. We agree
with that. But we set up a different independent--a different,
but a different part of the loan program that would look at
just strictly the risk as future disbursements go out. So, that
is something we did before the Allison report was submitted,
and the report acknowledged that we were doing that.
We are taking his advice, and we have reached this
ourselves that we need people outside the loan program per se
to be part of this evaluation. That is very important that we
get additional sets of eyes on that.
So, in terms of the specific loan to Solyndra that you
mentioned, again, it was a rapidly changing dynamic during this
period of time, and during that restructuring, we knew that the
chance of repayment was low. But what we did was we did
something that would--we thought in the best interest of the
taxpayer, as Mr. Allison pointed out. When asked specifically
would you be in favor of a legal requirement that would not
subordinate anything.
He pointed out very clearly that we followed the statute,
at time of origination no subordination. But there have to be
mechanisms to draw additional investments to give the highest
chance of recovery to the taxpayer.
So, what we did, and I think the Allison report confirms
that, is that we were doing things that would ensure the
highest return of the taxpayer money given the circumstances,
the rapidly changed circumstances.
Senator Murkowski. My time has expired, and I want my
colleagues an opportunity to speak. But I do think it is
important that we also look to some of the other aspects of
that Allison report that speak to the importance of the real
time controls to make sure that the risks are properly managed.
I think Solyndra is a perfect case in point where we missed on
that with regards to the polysilicone issue, and where Solyndra
was at that point in time as opposed to others in the solar
panel manufacturing business.
But I am going to defer to my colleagues so that they have
an opportunity to question.
The Chairman. Senator Shaheen, you have not had a chance to
ask questions. Go ahead.
Senator Shaheen. Thank you very much, Mr. Chairman, and
thank you, Mr. Secretary, for being here.
Yesterday I held a hearing on the USS Kearsage actually
down at the Norfolk Naval Shipyard. It was the Water and Power
Subcommittee of this committee. We heard from Secretary of the
Navy Ray Mabus. We heard from former Secretary of the Navy and
Senator John Warner, and also from some of the top-ranking
officials within the Navy and the Marines about what they are
doing to implement energy efficiency and new sources of energy
within the Navy and among the Marines who are on the front
lines in Afghanistan.
We heard a couple of things that I think are important to
this discussion. One is that being able to look at alternative
energy sources, renewables, that can be used out in the field
are critical. Reducing our dependence on foreign oil is vital
to our national defense, and that there is a direct correlation
between our dependence on fossil fuels and casualties on the
battlefield.
Now, one of the things that I would hope you might address
this morning, and I would point out that I know the Energy--the
Department of Energy is working closely with the Navy, with the
Department of Agriculture on biofuels, which are a critical
piece of trying to reduce the dependence of our military on
foreign oil. But can you talk about how the programs that we
are talking about as part of the Loan Guarantee program relate
to our national defense and how critical they are if we are
going to make some of these changes on the military side of our
government?
Secretary Chu. Certainly. Let me begin with biofuels, and
not only in the Loan Guarantee program, but a lot of the things
we invest in across energy from the Office of Science to
Energy, to ARPA-E. We think that biofuels have considerable
promise. By that, I mean we think they have considerable
promise in developing technologies that can compete in the open
market without subsidy, and that is our goal.
The United States has great agricultural resources. If we
can use biological waste or things that do not compete with
prime farmland, we think this is a great opportunity to offload
some of our dependency on oil, especially if the technology had
advanced to the point where you can produce biofuels, and sell
their profit, and make it a business of, let's say, moderate
price of oil at $80 a barrel, something like that.
We also do a lot in terms of offloading a lot of other
dependencies on oil to help not only the military, but the
consumers and businesses. The advancement of batteries is very
important. Batteries are very important in a forward deployed
place, because rather than trucking in through very hazardous
supply routes, usually diesel fuel to generate electricity, you
could have a lightweight solar system with a lightweight
battery that could be part of your supply chain. So, that is a
very----
Senator Shaheen. We actually saw a demonstration of that
yesterday. That was very impressive. We saw the solar blankets
that are already in use in Afghanistan and heard about how much
weight it saves our soldiers, and also, again, not having to
provide those resupply convoys.
Secretary Chu. Right. So, that is yet another aspect of
decreasing, you know, as people attack these supply lines. Some
of our soldiers and employees die from these attacks. We think
it is very important that we develop these programs.
Remarkable progress with batteries, for example. Recently
at an ARPA-E summit conference, a company we supported
announced that they doubled the world record energy density for
lithium ion batteries, which appears to have no additional
costs in the manufacturing. They are actually optimistic it can
go much better than that. So, this is something that is going
to be very important.
So, we look across--and then finally energy efficiency is
something not only for the forward deployed areas, but in
general for the military we think it is a very important part
of stretching the U.S. taxpayer dollars so the military can
help our security in a way by saving money and by saving
energy. It is a very important deal, and we have a very close
working relationship with the Department of Defense on that.
Senator Shaheen. Again, we saw some excellent examples of
that, which save money, but also make us less dependent and
more efficient.
My time is up, but let me just make one other comment about
that hearing because one of the other things we heard from all
of the military officials who testified was the importance of
sending signals to the private sector about the importance of
these energy efficiency and renewable technologies that the
government has a role to play in doing that. That is very
important to our national security.
Thank you, Mr. Secretary.
Senator Stabenow. [Presiding] Thank you. Senator Bingaman
had to go to the floor to speak to an amendment, and so in his
stead I will call on Senator Lee.
Senator Lee. Thank you, Madam Chair. Thank you, Mr. Chu,
for joining us today.
Shortly before you became the Energy Secretary, you were
quoted as saying, ``Somehow we have to figure out how to boost
the price of gasoline to the levels in Europe.'' The price of
gasoline in Europe, as I understand it, were about $8 a gallon,
which is a lot of money. Last week in your testimony over in
the House of Representatives, it is my understanding that you
indicated that high gas prices are helpful in some ways in
spurring research on alternative energy.
I understand the point. I respectfully disagree with the
conclusion at least insofar as it is made to the exclusion of
another, I think, more compelling point, which is a strong
economy will always provide more capital that can be invested
for research and development purposes. Research and development
money is definitely needed to help develop alternative
energies. So, I hope you take that perspective into account.
I do not think that high gasoline prices help anyone. I do
not think they do anything other than the American people.
Look, I do not how much driving you personally do yourself, and
so you may not personally be feeling the gouge at the pump. But
I assure you that hundreds of millions of hardworking Americans
do feel this. They feel it every time they refuel their cars,
some a lot more than others, but all feel it.
While hardworking Americans continue to suffer because of
the prices they pay at the pump and the corresponding prices
that they have to pay at the grocery store and everywhere else
because all of these costs end up getting passed downstream. I
hope the Administration will take that into account in its
energy policy and pursue an energy policy that acknowledges the
fact that whether we like it or not, we as a people, we as
human beings living in this country today continue to be
dependent on liquid fuels. We have to continue to have a source
of them, and that means we need to continue a robust policy of
aggressive exploration and production of petroleum and natural
gas.
Instead I have seen a focus on this Administration that has
placed most of its emphasis in this area on some failed
policies, including a lot of subsidies of alternative energy
projects.
On that note, the recent GAO audit of the Loan Guarantee
program found that ``DOE did not always follow its own process
for reviewing applications and documenting its analysis and
decisions, potentially increasing the taxpayer's exposure to
financial risk from an applicant's default.'' It went on in
that same report to determine that DOE ``also has not
completely documented its analysis and decisions made during
reviews, which may undermine applicants' and the public's
confidence in the legitimacy of its decisions.''
Are these accurate? Are these statements accurate in your
opinion?
Secretary Chu. Let me first respond to your first
statement, Senator, so I can correct the record. Since I walked
in the door as Secretary of Energy, I have been doing
everything in my power to do what we can to reduce these, as we
see these gas price spike, to reduce those prices. The
Administration, the President, and I personally, yes, we do
acknowledge and feel the pain of not only the American
consumers, but American businesses when they see these prices
increase.
What we can do, is use all the tools available we are
using. But in the Department of Energy's tool chest, the most
important thing we are doing is to offload the dependency on
oil, using natural gas for transportation, electrification,
biofuels, all of those things.
Now, regard to the----
Senator Lee. So, are you saying that you no longer share
the view that we need to figure out how to boost gasoline
prices in America.
Secretary Chu. I no longer share that view.
Senator Lee. OK. You did then, but you do not now?
Secretary Chu. When I became Secretary of Energy, I
represented the U.S. Government, and I think that right now in
this economic, very slow but, you know, return, that these
prices well could affect the comeback of our economy, and we
are very worried about that. So, of course we do not want the
price of gasoline to go up. We want it to go down.
But let me go to the GAO report. The other part of the GAO
report within a few sentences of that said explicitly that the
diligence that we did in our Loan program was actually
considerably more thorough than what the private sector did.
The thing you are referring to, and I admit there is some truth
in that, is that we had at the beginning of this Loan Program
which started in 2007--well, ePACT 2005, but in seriousness
about 2007. A lot of the input was in paper form. A lot of the
input was such that it was, you know, we are moving toward
making those records electronic so that you can have a more
modern data system. This is not only true of our Loan Program
quite frankly, it is true throughout the Department of Energy.
As a kind of a techno geeky guy, I actually like the idea
that we have electronic records rather than paper records, and
I encouraging the Department to make this transition. We are
doing it in the Loan Program.
Senator Lee. You think that will bring about more
compliance with the Department's own processes?
Secretary Chu. I believe the GAO report said that because
the records are here and there and not in a central repository,
that it would be harder for the Loan Program overall to see
what is going on. So, as part of this risk management going
forward, we recognize that we need central repositories of data
so that you can get instant access. We recognize that.
Senator Lee. OK. My time has expired. Thank you.
Senator Stabenow. Thank you very much. Secretary Chu, I
think it is probably no surprise that I am going to talk to you
about the vehicle technology program.
First, let me say in your testimony, when you talk about
the back bit. To win the clean energy jobs of the future, the
United States must do more than invent technologies. We must
also manufacture them, deploy them, sell them around the world.
I could not agree with you more.
I appreciate the fact when I was able to make this program
part of the 2007 energy bill that passed, it was not
implemented in the last Administration, and that it was a
priority for you and the Administration. It was, in fact,
implemented in 2009. That is the good news.
We have good things to report: jobs being saved, jobs
coming back from overseas. Now we are in a spot where we have
incredible delays year after year after year. We have on
company that, in fact, indicated that after spending $25
million as a startup on a -year application, their application
was never completed.
I am very concerned about where we are right now on
something that clearly goes to the heart of keeping advanced
manufacturing in this country. You know that we are competing
with countries around the world. Our companies are competing
with countries that are providing tax incentives, that are
providing financing mechanisms, doing a number of things. The
retooling loan program goes right to that effort of adding
advanced technology and manufacturing to keep jobs here rather
than overseas.
So, I wonder as we look, of course we want to protect
taxpayer dollars. Of course that is absolutely critical. But
how do we streamline this process at this point so that it
actually is meeting the goal that it was set up to do?
Secretary Chu. Senator, I think we are very much on the
same page here. We are in total agreement with regard to the
importance of the ATVM loans. We believe that that ATVM loans,
for example, the loans to Ford and to Nissan, saved or
generated many, many thousands of jobs. Ford alone, I think, it
is over 30,000. A bit of a success story because that loan
enabled Ford to retool, to sell--it is now a major leader
internationally in selling very desirable, competitive cars.
This is exactly what that loan programs was intended to do.
Senator Stabenow. Right.
Secretary Chu. It is a great success. I think the, you
know, the loan to Nissan to generate--produces cars in
Tennessee, a place in the United States. Another great success.
Now, having said that, we do have to look at taxpayer
money. As conditions change, we have to say--again, going back
to the original covenant of the law which says in these loans,
is there a reasonable chance of repayment? In many instances,
we feel that we would like to see private equity be invested in
these companies, and then there are milestones after that
private investment so that we can then say, all right, we can
help you grow your business.
So, we are very, very sensitive to those things, again,
trying to balance the line, as you noted, between stimulating
the manufacturers with these loans, and, again, one of the big
success stories of this Loan Program, and making sure that--
especially in a newer company, whether--we independently assess
whether their market projects do make sense in this very
rapidly dynamic market--and so we try our best to do that, both
to look out after taxpayer money, but knowing that we do want
to stimulate investments in manufacturing in the United States.
Senator Stabenow. Right, and I appreciate that, Mr.
Secretary. I would just tell you that the--at this point, the
way things have gotten bogged down in the slowness of it is
defeating the whole purpose of what needs to be done, because
it is creating an untenable situation for businesses that are
on the edge to be able to move forward, to create these new
technologies. But waiting 3 years is just too long to be able
to come up with those judgments.
Let me ask you one other thing. What changes would you
suggest to make this program more effective, and possibly add
more opportunities for companies? We have passed now twice from
this committee legislation of mine that would expand to medium
and heavy duty vehicles. We know there is tremendous energy
savings in larger vehicles, a very exciting work that is being
done. Would you support something like that, expanding us to
more opportunities to save energy and create jobs?
Secretary Chu. I think this is a program I would be
delighted to talk to you about it to broaden its scope
certainly as you suggest, but also in certain things when it is
really advanced technology and it is an advanced technology in
a new company, you know. Again, working with Congress, I do not
know if Congress has the appetite, but to change some of that
money, especially with ATVM, so it could not only be for loans,
but it also could be for grants for developing new products.
I think that would do a lot, grants that would allow the
company to prototype things that could then be made in America.
So, I would be gladly willing to work with Congress if Congress
deems that this is an important program to stimulate job growth
in the United States, advanced manufacturing in the United
States. That could be another way of broadening the program.
Senator Stabenow. Thank you. Senator Barrasso.
Senator Barrasso. Thank you, Madam Chairman. Mr. Secretary,
I appreciate you being here.
The Department has awarded a $10 million prize for their
production of a light bulb that is supposed to be, one, energy
efficient and, 2, affordable for American families. The prize
went to Phillips Lighting. Do you know how much the winning
light bulb retails for in the United States?
Secretary Chu. I am going to make a guess, about $40 or
$50.
Senator Barrasso. Actually it is $50. Headline Washington
Post last Friday, ``Affordability Award Goes to a $50 Light
Bulb.'' I guess--do you think a $50 light bulb is affordable
for American families where the government's own figures say
the average household in the United States has over 40 light
bulbs? So, it sounds like we are--are we asking American
families to spend over $2,000 to trade out all their light
bulbs?
Secretary Chu. No, absolutely not. We are not asking
American families to spend $40 or $50 for a light bulb. The
prize was intended to incentivize the development of new
technologies. Some of those LED technologies in commercial use,
in buildings and hard to get places where you have to hire
people to go up on a crane, already are very affordable.
Commercial uses in traffic lights, very--already pay for
themselves. So, the idea was to stimulate future development.
Senator Barrasso. The President claims that he and his
Administration are promoting fairness. He talks about fairness
an awful lot. There was a Thursday story in the Washington Post
with a headline, ``More Than Half of Obama's Big Fundraisers
Got Jobs in His Administration.'' The article explained how
bundlers, those who collected at least $500,000 for the
President's campaign, were given jobs in the Administration.
It says one hired--Obama hired bundler Steve Spinner as a
liaison in the Energy Department, and according to internal e-
mails, Spinner pressed for staff members to finalize a
government loan for Solyndra in which another campaign bundler
was a major investor.
Yesterday the Government Accountability Office released its
own audit of the Department of Energy loan program. The report
concluded that the DOE did not follow its own process for
reviewing applications and documenting its decisions,
potentially increasing the taxpayers' exposure to financial
risk from an applicant's default.
You know, it seems like the Administration is doing a
pretty good job looking out for its friends, but I want to know
who is looking out for American taxpayers, and this sure does
not sound fair to most people.
Secretary Chu. First, Steve Spinner was absolutely
firewalled from making any decision or encouragement on what
you make for any loan, let alone the Solyndra loan. So, what he
was pressing for was after the conditional commitment was made,
he was pressing to finalize things. But he was not part of the
decisionmaking process.
Senator Barrasso. I would like to ask about additionally
the gas--I'm sorry, electric vehicles. The President was in
North Carolina giving another speech on energy, promoting
electric cars. Last week we learned that General Motors was
suspending production of its electric car, the Volt, because it
failed to meet sales expectations. Last month we learned that
your Department cutoff funds to Fisker Automotive and other
electric car manufacturers because it failed to meet sales
expectations.
So, I look at electric vehicles, which range from $40,000
to over $100,000, and I ask if those are practical solutions
for families who are struggling to pay bills, especially as the
President is proposing increasing the tax credit for what are
essentially luxury vehicles, and he wants to increase it from
$7,500 where he did not get adequate takers and the vehicles
have not been sold, to now to $10,000.
Is raising the tax credit for these vehicles that few
families can afford the right thing to do and the fair thing to
do?
Secretary Chu. As you may know, but if you do not, the goal
of the Department of Energy is to develop the technologies that
actually will drive down the price of electric vehicles or plug
in hybrids so that, for example, in the $20,000, $25,000 range,
the cost of ownership would be less than a conventional
internal combustion engine car, let us say, of $16,000, because
you are going to be saving in gasoline bills.
If, for example, you take a car, an internal combustion
car, and it gets 30 miles to a gallon, reasonably good combined
driving numbers, that is, in today's gasoline prices, this is
horrendous--$1,400 a year. This is a horrible pain to American
consumers.
If you get an electric vehicle that costs, let us say, in
the low 20s, $20,000, $22,000, to drive the same amount, let us
say 10,000 miles, it is about $300 in electricity. So, we are
very focused on driving the costs of those electric vehicles
down. So, it is is exactly what you say, that the costs of a
vehicle that the American public can afford.
Senator Barrasso. Thank you, Madam Chairman--oh, Mr.
Chairman.
Senator Sanders. [Presiding] I gather I have the invisible
gavel here. Mr. Chairman, thanks very much for being with us.
Let me just ask you--before I ask you a question, I wanted
to agree with Senator Lee a moment ago, who talked about the
high price of gasoline and what it does to rural America. I
come from a rural State and many people travel long distances
to work. I would hope that some of my Republican friends would
work with us on what we think is one of the major causes of the
high price of gas right now; that is, speculation from Wall
Street companies on the oil futures market.
We believe, and I think the evidence is pretty clear, that
over 80 percent of the oil futures market is now controlled not
by end users--airline companies or fuel dealers, people who
actually use the product--but by Wall Street companies who are
speculating on the price of oil and driving oil prices
substantially up. Goldman Sachs themselves, one of the major
speculators, estimated that speculation was adding about 56
cents to a gallon of gas.
Do you have any comments on that, Mr. Secretary?
Secretary Chu. I cannot speak to the estimate that Goldman
Sachs has made and actually put on an additional price that
adds to the speculation. But I agree with you that, you know,
whereas futures do play an important role, for example, if
Southwest Airlines or someone else wants to levelize their cost
of energy, they buy a future, and they are going to take
delivery. But they actually are going to use the fuel.
Senator Sanders. Right.
Secretary Chu. So, it is a financial mechanism that helps
them plan for the future. So, futures in that sense play a very
important role in stabilizing a company's prospects. I would
agree with you, but when futures get traded back and forth,
back and forth, back and forth, where no one actually intends
to take delivery, it enters into a different regime.
But to the extent of how it modifies prices, I do not know,
but it is not what it was meant to do.
Senator Sanders. Let me ask you this. My understanding is
that right now we have about 100,000 Americans working at more
than 5,000 solar companies. I think sometimes if we hear
discussion around here, the impression is that sustainable
energy is just doing terrible. Companies are not making money.
We are not creating new jobs. Would you agree with me that, in
fact, in terms--in recent years, not unrelated to the work that
you and the Department of Energy are doing, that, in fact, we
have seen a significant increase in the number of jobs and the
installations in terms of solar panels and in terms of energy
being produced from wind? Are we making progress and creating
jobs in those areas?
Secretary Chu. We are. We have been making dramatic
progress, I think, since 2008. It should be used as a
benchmark. I think we have almost doubled the amount of
renewable energy with those 2 sources.
Senator Sanders. That is not insignificant.
Secretary Chu. Doubling is not insignificant.
Senator Sanders. Doubling is not, and we are creating
jobs----
Secretary Chu. Yes.
Senator Sanders [continuing]. As well. Would you agree with
me that virtually the entire scientific community, not only in
this country, but around the world recognizes, A, that global
warming is real and, B, that it is significantly caused by
human activity, and, C, that if we do not get a handle on
greenhouse gas emissions, there will be enormous problems
associated with all kinds of--in the future of this country?
Secretary Chu. Yes, I agree with that.
Senator Sanders. OK. Let me ask you this, Mr. Secretary. We
are talking about the role the Federal Government plays in
terms of support of various energy technologies. Is sustainable
energy the only technology that received help from the Federal
Government?
Secretary Chu. I would say, looking backward, that every
form of energy received substantial Federal help: oil, gas,
coal, nuclear, you name it. When they were emerging
technologies, they received substantial help.
Senator Sanders. But not only when they were emerging, I
would agree with that, but they are still receiving help.
Secretary Chu. In some cases, that is correct.
Senator Sanders. For example, I find it somewhat ironic
that some of my friends on this committee express their
distaste for loan guarantees and then tell us they want to
build another 100 or 200 nuclear power plants in this country,
which I--give me your opinion--would not take place at all. You
will not build one nuclear plant without Federal loan
guarantees. Is that a fair statement?
Secretary Chu. Actually that may not be a fair statement,
but let me go back to the original thing that I think you were
driving at.
You know, after we subsidize emerging technology and it
seems to be very successful on its own, there is a good case
that can be made that this technology, this industry, may not
need Federal support. Certainly we think that renewable energy
will. There will come a day, I do not know whether it is going
to be this decade or within a decade and a half, but it is not
30 years from today. The levelized cost of renewable energy
will be the same as any new form of energy. It will be as
competitive.
But until that day arrives, whether it is, you know, in
this decade or the next decade and a half, yes, it could use a
little bit more support, but you can sunset that. When there
are industries that are doing quite well, we can also ask
ourselves, do they need continued support?
Senator Sanders. Mr. Secretary, there is a new plant being
proposed, the Georgia nuclear power plant. How much Federal
loan guarantees are involved in that plant?
Secretary Chu. There is one--there is a Vogtle power
plant----
Senator Sanders. Right.
Secretary Chu. That is the one you are talking about, I
think, that is a consortium of companies led by Southern. I
believe the loan is a conditional commitment. The loan
guarantee is about $8.3 billion.
Senator Sanders. Loan guarantee of $8.3 billion?
Secretary Chu. It is paid for--the credit subsidy is paid
for by the applicant, though. So, it is scored by the CBO as a
1 percent score, but the actual credit subsidy is paid by the
applicant in that case.
The reason I was hedging on that is I know that there is--
before NRC approval, another set of 2 nuclear reactors, which
are not applying for a loan. So, sorry, I do not really--I
cannot really say definitively.
Senator Sanders. If the Federal Government--Congress passed
legislation repealing Price-Anderson, would the--which is, as
you now, a Federal insurance program if, God forbid, there is
ever a nuclear accident. Do you think Wall Street would be
prepared to invest one penny in nuclear power?
Secretary Chu. I agree with you. I think Price-Anderson
is----
Senator Sanders. My only point. Thank you, Mr. Secretary.
Thank you for the excellent work you are doing
My only point on all this is I hear sustainable energy
being attacked, and yet you have an entire major industry that
people want to greatly expand, for better or for worse, which
is totally dependent on the support of the Federal Government,
would not last 2 days from now if the Federal Government
withdrew all of its support.
OK. I have the chair. Senator Paul.
Senator Paul. Thank you for coming, Secretary Chu.
Have you met George Kaiser?
Secretary Chu. I think I might have at a roundtable
meeting.
Senator Paul. More than once?
Secretary Chu. The only one I can recall at the time was
during a roundtable meeting, yes.
Senator Paul. Are you concerned about the propriety of
giving money, $500 million, to a billionaire, you know, and
then sort of changing the rules some so he gets to, you know,
maybe get a better deal than taxpayers do?
Secretary Chu. I am convinced--nothing I have seen in the
Loan Program or anything in the White House had any connection
George Kaiser with raising of money, had anything to do with
the selection of loan.
As you well know, Solyndra was at the head of the line
picked by the Department of Energy under a previous
Administration, and it was the one that career people advanced
forward as the one that had the most work done on that loan,
that satisfied the conditions of the intent of the loan.
Senator Paul. That is sort of troubling, though, that they
were the best case scenario and had met all the criteria best,
and then they went bankruptcy.
But also I think what is troubling to most of us is that we
have given $500 million loans to a guy who is a billionaire.
Why in the world would we do that?
Secretary Chu. There were other investors in Solyndra, also
very wealthy people, also, but associated with the Republican
Party. So, again----
Senator Paul. I would not give it to them either.
Secretary Chu. The politics of the investors was not part
of the decision of whether to give a loan to Solyndra.
Senator Paul. Do you think there is a question of
propriety, though, when you have got someone who works for you,
who is married to somebody who works for Solyndra, who you say
there is this firewall at the beginning maybe, but you are not
insinuating that he never wrote e-mails and never corresponded
with people in favor of Solyndra.
Secretary Chu. For example----
Senator Paul. He did, correct?
Secretary Chu. He was corresponding after the loan was
approved for the timing.
Senator Paul. Do you think that is appropriate for him to
be involved at any stage, not just as--to say he was not
involved in the beginning is a little bit of an excuse for him,
but he should have never, ever had--the word ``Solyndra''
should have never left his lips and never been in any writing.
I think it was.
Secretary Chu. The Department of Energy has very rigorous
standards that we enforce on any potential conflict. As you
mentioned it, for example, his wife was actually firewalled
from having to do any business with Solyndra as well.
Senator Paul. Have you met Robert Kennedy, Junior?
Secretary Chu. Probably. I am not sure.
Senator Paul. Do you recall how many times?
Secretary Chu. Since I am not sure----
Senator Paul. Are you aware of the Kennedy family fortune,
that they are pretty wealthy also, probably worth hundreds of
millions of dollars, and we gave Robert Kennedy, Junior's
company $1.8 billion? Are you aware that someone works for you
who used to work for the Kennedys who people say was involved
with that loan process?
Secretary Chu. I am not aware of that.
Senator Paul. I think that is something we need to look
into as well, and this suggestion will go on with the hearings
in the House as well, that really this revolving door from big
business into the Department of Energy to get large loans--$1.8
billion is a lot of money given, once again, to a large
campaign contributor of the President's.
It looks unseemingly, and I do not think that is your
background, but unfortunately you are the head of this
organization that has been giving these loans to very wealthy
people who are donors of the President's. It looks really bad.
Do you give loans to foreign companies?
Secretary Chu. We give loans for companies meant to
manufacture in the United States.
Senator Paul. What about Fisker Karma? Are they spending
any of our money in Finland?
Secretary Chu. We gave a loan that was to a design group in
Los Angeles, and there is another traunch of the loan if they
satisfy the covenants of the loan, which would go to
manufacturing in the United States. So, the money we give in
loans is very targeted to job creation.
Senator Paul. My understanding is they were struggling here
and that this money was actually going to be used in Finland.
Secretary Chu. As I said before, the loans we give are for
American jobs, and we are very clear about that. So, if they--
you know, if it is a designer----
Senator Paul. No money goes to Finland then. Fisker Karma
is not allowed to use any of that money in Finland?
Secretary Chu. As I said, we give loans for jobs in
America, and we are very clear about that.
Senator Paul. So, Fisker Karma is not using any U.S.
taxpayer dollars in Finland.
Secretary Chu. I can get back to you on the details on
that, but I know the overall scope of the loan is for
manufacturing in the United States and for design, and it went
to a design group.
Senator Paul. You can see our concern, the whole idea of
picking winners and losers. People are saying that windmills,
which have been subsidized for years and years now, that even
though we have paid for the windmills, we have got them up, we
have got them started, if you take away the subsidies, they
will never make a profit. They just are not profitable. Talk
about tilting at windmills. We are just throwing money at
windmills, and I just do not see the purpose.
It really gets down fundamentally to what Senator Lee has
talked about. We should not be in this business at all. The
thing is, is you are choosing, you know, $50 light bulbs.
Nobody understands that in America. There is a real problem
here, and I do not think you are going to win the perception
war on this. My counseling and advice to you would be, let us
get out of this business. Let us not be involved with stuff
like this.
Also, the thing is, is by your involvement in it, it really
looks unseemingly. I do not question your character. You are
known for being an upright person from academia. I mean, but
the thing is you are overseeing something that really does not
pass the smell test.
Thank you.
Senator Franken. [Presiding] Thank you, Senator. Senator
Sanders now has to go and vote. I just voted, and Senator Paul,
you do not have to vote if you do not want to. You got to try
to, you know, play all the percentages here.
Thank you, Mr. Secretary. I wanted to ask a little bit
about just our competition in the world on these technologies.
I think it is really important that we keep pace and do not
fall behind China, and India, and Europe.
Just as I was listening to other questions in this and the
other panel, I was thinking of all of the above. I know the
President gets criticized sometimes when, say, for example, he
may not approve of offshore drilling everywhere. When they say,
well, what about all the above? My feeling is, like, all off
the above does not mean all of all of the above.
But if it does mean all of all the above, certainly it
means innovation, and it means--which means R&D, like ARPA-E,
which is basic--which is patterned after DARPA, which created
the Internet, which I believe--and tell me if I am wrong--has
created some jobs.
Secretary Chu. I think you are right.
Senator Franken. Thank you for that validation.
It also includes what Mr. Allison referred to as investment
so that we do not have the valley of death for all these things
that are discovered at universities and where we have had some
investment by the Federal Government, but to commercialize it.
That seems to me what the loan program is about.
Secretary Chu. That is correct. I think it has been
mischaracterized inappropriately as the government being a
venture capitalist. Venture capitalists deal with small amounts
of money, at a much earlier stage. The valley of death goes to
beginning to deploy a commercial scale where a large investment
of capital is needed. When these loan programs were set up in
ePACT 2005, in 2007, and then authorized--a lot of them
authorized, especially the end of 2008 and beyond, the credit
markets froze.
This is why many countries have some sort of financial bank
of their own to allow their industries to grow. China has a
very large--I think a credit line for 1 year is $34 billion, in
renewable energy and things of that nature. Netherlands,
Germany, England, they are all looking--many of these countries
have these type of programs because----
Senator Franken. Are they not simply looking at the future,
and not the far future, but the near future in terms of the
competitive world global environment, in terms of these
technologies, because we know this is where we are going.
Secretary Chu. Yes. That is why they are doing this. They
want their industries in their countries to be advantaged
relative to other countries that--you know, if all the
countries said we will not have any sort of government
financing in any country, that would be one thing. But if a
large number of countries are going forward and doing this, the
question we should ask ourselves in the United States, what
should we be doing?
Senator Franken. So, we want to be competitive in these
technologies, which are clearly going to be an enormous part of
our economy, and of the world economy, and the world energy
economy, right?
Secretary Chu. Right.
Senator Franken. It is kind of ignoring that, to me, seems
almost willful in not understanding where the world is going.
Secretary Chu. Yes.
Senator Franken. I do not mean to be harsh, but would you
agree with me?
Secretary Chu. I would phrase it slightly differently. If
you look at a way of financing as a way of stimulating private
sector investment, which is what we ultimately want to do, a
loan program, such as the one we are administering, most people
agree was stimulating private sector investment at a 10 to 1
ratio. This is a good thing, and that the losses expected from
this investment are far less, we think, and Allison also
reaffirms this, than what was authorized.
Senator Franken. Right.
Secretary Chu. So, in the aggregate, while there--you know,
nobody wants a failure. In the aggregate, it has been very good
at stimulating private sector investment and success.
Senator Franken. My time has run out, but I am now the
chairman, so I yielded my time.
Solyndra, we must keep in mind, was 3.3 percent--only 3.3
percent of the entire 1705 program. Look, there are risks. We
had one senator on the other--my friend and colleague on the
other side say about the loan program, if the risk is
manageable for this company we are lending money to, we should
not be putting tax dollars at risk. They said if the risk is
not manageable, we should not be putting tax dollars at risk.
So, in other words, we should never put tax dollars at risk
according to my colleague.
Now, he has signed on to all of the above. He has said that
he is for all the above. So, I would--you know, I would suggest
that anyone who is for all of the above and who is not for loan
programs is not really for all of the above.
So, I would caution them when they, you know, when the
President is not opening every, you know, every square mile of
the Continental Shelf to offshore drilling, that the criticism
that he is being a hypocrite because he signed on to all of the
above, they should be a little bit careful in that regard.
How much--OK, you said China is doing $36 billion?
Secretary Chu. They have offered lines of credit, as I
understand it, $34 billion in lines of credit to the renewable
or the clean energy sector.
Senator Franken. OK. I think it is absolutely crucial for
all kinds of reasons that we invest in clean and renewable
energy for obvious reasons, for economic reasons, for climate
reasons. I also--when I hear about the $50 light bulb and the
award given for that technology, I think of what laptops were
when the first laptop came out. I mean, essentially we are
talking about mainframes, what the cost of a mainframe was
compared to now everybody who can get a laptop gets a laptop.
That is what that is about, right? That $50 light bulb that
is, oh, are you expecting every American to put, you know,
spend $2,000 a year on light bulbs or whatever that question
was, strikes me as just disingenuous, or, either that or not
understanding what the purpose of developing that kind of
technology is.
So, let us assume it is the latter, shall we? Can you
explain again about the $50 light bulb and places where it is
already being used and already saving money, that technology?
Secretary Chu. Sure. The LEDs, because they last so long--
10,000 hours--if you are in a place which leaves these bulbs on
a long time like an exit sign--you know, an emergency exit
sign, sometimes an office building because they are left on for
8, 10 hours, and there are very high ceilings. So, you would
have to hire someone with a crane to go up there and change
that light bulb. Traffic lights, another good example. They are
on all the time. In those instances, we already know that
switching out incandescent light bulbs for LEDs make commercial
sense today.
The idea of that light bulb contest was to provide for a
goal going further down to get a light bulb that eventually
Americans can afford. You know, no one expects to pay $60 for a
light bulb. Quite candidly, you know, if you fill your house
with light bulbs like that, given that they last that long,
they should be part of your will.
Senator Franken. I think we will end on that. I just wish
that when we do these hearings that we did them with the
purpose of getting the most understanding of what we are
doing----
Secretary Chu. Yes.
Senator Franken [continuing]. Both from a broad level and,
as I asked Mr. Allison a very specific thing about the loan
subsidies. I think that is the best use of these hearings. I
thank you, Mr. Secretary, for the tremendous job you are doing.
Secretary Chu. Right. Thank you. As I said, our goal is to
get that to a $5 light bulb that lasts 20,000 hours. Then you
buy this--or even 10,000 hours.
Senator Franken. You know, for street lights that should be
on in certain neighborhoods because for safety. It can reduce
crime.
Secretary Chu. Right.
Senator Franken. There's all kinds of reasons for that.
Mr. Secretary, thank you. I assume that the record will
stay open for--I am making this up now--a week.
But the hearing is adjourned.
Secretary Chu. Thank you.
[Whereupon, at 3:12 p.m., the hearing was adjourned.]
APPENDIXES
----------
Appendix I
Responses to Additional Questions
----------
Responses of Secretary Steven Chu to Questions From Senator Murkowski
MEASURING PERFORMANCE AT THE LOAN PROGRAMS OFFICE
Question 1. I'm interested in your perspective on how performance
is measured and priorities established within the Loan Programs Office.
Mr. Allison's report states that, ``DOE should better define the
desired balance between policy goals and financial goals.'' This seems
like a pretty basic managerial function, so I was surprised to hear
that Mr. Allison felt it was lacking.
Do you have any plans to develop a more formal process for
establishing goals in the loan program and measuring their attainment?
Answer. DOE constantly strives to improve the efficiency and
effectiveness of its underwriting and monitoring processes. Clearer
goals have been established at the division level and assist senior
management in driving those elements of the process that DOE can
control. While known policy directives are shared with division
managers and incorporated into everyday processes, certain policy
matters may arise later in the underwriting process or after a
transaction has closed. In those cases, senior LPO management will
interact with senior DOE management to resolve any matters where policy
concerns impact the underwriting or monitoring of a transaction. Those
decisions are then communicated to the deal teams and incorporated in
the structuring and monitoring of each transaction.
IMPORTANCE OF REAL-TIME CONTROLS TO MANAGE RISK
[REFERENCES ATTACHED CHART]
Question 2. Mr. Allison has talked about the importance of `real-
time controls' to make sure that risks are properly managed. On that
point, market trends associated with the raw materials needed for solar
panels are relevant.
Answer. The majority of solar panels require polysilicon, but
Solyndra's did not. As a result, when polysilicon prices rose in 2005,
it created what the Congressional Research Service has called ``a
strong economic value proposition'' for Solyndra. But then polysilicon
dropped precipitously.
This speaks directly to the issue of real-time controls that Mr.
Allison has raised.
The Department's official response to Solyndra's bankruptcy was
that it resulted from a ``totally unexpected'' change in the market. At
a hearing in November of last year, you also said that your decision to
guarantee a loan to Solyndra was ``based on the analysis of experienced
professionals and on the strength of the information they had available
to them at the time.'' But, as you can see from this chart,* the
competitive advantage bestowed upon Solyndra by high polysilicon prices
had disappeared several months before DOE closed on their loan
guarantee.
---------------------------------------------------------------------------
* Chart has been retained in committee files.
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Question 2a. Were you or the advisors you rely upon aware of this
information at the time the guarantee was issued?
Answer. As part of its due diligence prior to issuing the Solyndra
loan guarantee, the Department relied on an Independent Market
Consultant's Report Solyndra Fab 2 Manufacturing Facility, by R.W.Beck,
dated April 4, 2009. The Department commissioned additional market
research from Navigant Consulting, which produced the report
Independent Market Advisory Services, DOE Loan Program, Solyndra, Inc.,
dated February 22, 2010.
Based on the market research and the Department's other due
diligence, it was confident in Solyndra's ability to compete in the
marketplace at the time of financial close. This confidence was shared
by the private sector, as evidenced by private equity's significant
investments in Solyndra both before and after the issuance of the loan
guarantee.
It is important to note that polysilicon pricing is only one driver
of photovoltaic (PV) panel prices. PV module prices are also
significantly driven by a supply and demand. From the time that the
Solyndra loan guarantee closed until the bankruptcy, the market shifted
from supply constrained to oversupplied. While Solyndra was able to
significantly reduce costs, ultimately it was unable to keep pace with
the dramatic margin compression that was occurring throughout the
industry. In addition, market events such as the China Development
Bank's available lines of credit to six Chinese PV manufactures (in
2010), negative margins, the bankruptcy of the world's largest PV cell
manufacturer (Q-cells), and cuts in the European Union's PV subsidies
below retail pricing, were largely unexpected across all major PV
forecasting groups.
Question 2b. If so, why did you close on the loan guarantee? And if
not, would you agree that this underscores Mr. Allison's point about
the need for real-time controls to mitigate risk?
Answer. As indicated in A2a, the Department was confident in
Solyndra's ability to compete in the marketplace at the time of
financial close. The Department does agree with Mr. Allison's point and
believes that it has a robust system of controls and risk mitigation
strategies in place.
CHANGING INTERPRETATIONS OF STATUTORY AUTHORITIES
Question 3. You revised the loan guarantee program's rules shortly
after taking office, including a re-interpretation of who may have a
first lien on the assets of a project that has received a loan
guarantee. Specifically, your rulemaking allowed two new financing
arrangements:
One is called tenancy in common, where ``each owner holds an
undivided interest in the physical project assets, and each owner
typically finances its investment in the projects separately.'' In such
a case, the rule states that ``it may not be feasible to obtain a lien
on all project assets.''
The other financing arrangement discussed is called pari-passu,
where sources of financing other than the Department of Energy--such as
foreign Export Credit Agencies participating as co-lenders or co-
guarantors--may expect to share in ``collateral pledged to secure the
borrower's debt obligations.''
These examples are a far cry from what happened with Solyndra, but
the Department has cited the rule as justification for subordinating
taxpayers to the private investors of $75 million. Nowhere in the rule
is the scenario of a firm nearing bankruptcy and incapable of raising
additional capital unless the Department subordinates itself
contemplated. And yet, that's exactly what was allowed to happen. That
required a very broad--and in my view, inconsistent--read of what's
permitted under even your own rulemaking. So I'd like to know whose
legal opinion relied upon to make that interpretation.
Was it DOE's General Counsel, the Department of Justice, or some
combination of offices? Who said it was legally permissible to
subordinate taxpayers to private investors, and should you have
sought--or did you seek--a second opinion?
What is the Department's current position on the subordination of
taxpayers to private investors?
Answer. Before agreeing to the restructuring of the Solyndra loan,
the Department undertook a thorough legal analysis of the provisions of
Title XVII of the Energy Policy Act of 2005 (EPAct 2005), and concluded
that subordination in the context of the Solyndra restructuring was
permitted under the statute. This analysis was conducted by career
legal professionals in both the Loan Programs Office and the Office of
General Counsel and was approved by the General Counsel. It was also
reviewed by DOE's outside counsel, the law firm of Morrison & Foerster,
which found the analysis reasonable. The analysis also was discussed
with and reviewed by lawyers in the Office of Management and Budget's
(OMB) Office of General Counsel. OMB did not express to DOE any
disagreement with the analysis. We also note that, on November 10,
2011, Mary Anne Sullivan, a partner in the law firm of Hogan Lovells,
wrote in a letter to the Ranking Member of the Committee on Energy and
Commerce, U.S. House of Representatives, that DOE's analysis Is
supported by the statute and by DOE's interpretation of the statute as
reflected in 10 C.F.R. Part 609, the regulations governing the loan
guarantee program....'' As Ms. Sullivan observed, the regulation, like
the statute, treats the subordination requirement purely as a condition
precedent to the issuance of a loan guarantee, and nothing in the
regulation precludes subordination in this context.
The Department has not changed its position on the legality of
subordination in the context of the Solyndra restructuring.
SELF-PAID VS. APPROPRIATED CREDIT SUBSIDY COSTS
Question 4. At a clean-energy forum hosted by the Washington Post
last year, you stated that ``we can design a program that is actually
self-paid and still stimulate the most innovative industries.'' I was
particularly interested in your reference to a self-paid program, which
is not what the stimulus bill's Section 1705 loan guarantees relied
upon. As you know, those loan guarantee applicants were granted access
to $6 billion appropriated to cover their credit subsidy costs.
Answer. I believe we can design a program to take advantage of
benefits from authorities and appropriations that allow it to borrow at
a lower cost than private sector lenders. These might include the right
to borrow at low cost from the Treasury and the option to raise more
capital through bonding authority. It would also ideally include a
substantial initial appropriation, potentially funded in part by
transferring Title 17 authorities and unobligated balances to the
program.
The program could leverage this federal support to attract private
sector co-investors for manufacturing facilities, deployment projects,
or generating assets. It would operate with considerable autonomy
subject to overall portfolio risk management rules such as limits on
total Treasury borrowing and requirements for sound underwriting for
each deal.
With this initial appropriation, the program should be self-
sustaining for a substantial period, roughly ten years. To support
itself, it can collect fees for financing and services, and it will
charge a premium to its rate of borrowing from Treasury. Moreover, it
may securitize its debt to investors in the private sector,
replenishing the capital available to finance additional projects.
Ideally, the program should be set up for reauthorization no later than
twenty years in the future given the likelihood that market conditions
will evolve dramatically in that time frame.
Question 4a. In hindsight, do you believe that credit subsidy costs
should be self-paid?
Answer. The economics of the projects completed under Sec. 1705
were such that imposing a self-pay credit subsidy would almost
certainly have made them uneconomic, particularly in the credit
environment that existed at the time that Congress appropriated the
credit subsidy funding for Sec. 1705.
In FY 2012-2013, the Loan Guarantee Program will focus on portfolio
management and monitoring activities on the existing portfolio as well
as originating new loan guarantees to utilize remaining self-pay loan
authority in the nuclear power, front-end nuclear, fossil, and
renewable and energy efficiency sectors as well as the $170 million
appropriated credit subsidy for renewable and energy efficiency
projects.
Question 4b. Do you think it was wise to appropriate $6 billion in
the stimulus to pay for applicants' credit subsidy costs?
Answer. The original appropriation of $6 billion to pay for
applicants' credit subsidy was ultimately reduced to $2.5 billion after
subsequent rescissions. However, I do believe the significant amount of
appropriated credit subsidy was appropriate, particularly given the
aforementioned market dynamics, to achieve the goals set by Congress in
establishing Title XVII of EPAct 2005. In hindsight, the number of
creditworthy projects that could be completed was limited given the
September 30, 2011 expiration date for the Sec. 1705 program. It was
nonetheless important to signal to the marketplace that these projects
were a priority for Congress, and that Congress recognized the inherent
difficulty for clean energy projects (particularly innovative projects)
to attract private capital.
Question 4c. How would you design a self-paid loan guarantee
program?
Answer. Please see the answer to Q4 above.
ADHERENCE TO STATUTORY TERMS AND CONDITIONS
Question 5. Much attention has been paid to the terms and
conditions for loan guarantees from the 2005 energy bill. Specifically,
the question of a ``reasonable prospect of repayment'' is one that you
have faced given Solyndra and Beacon's failures to repay their loans.
Another provision of law requires that ``No guarantee shall be made
unless the Secretary determines that the amount of the obligation [when
combined with other funds] will be sufficient to carry out the
project.'' For Solyndra, this condition was not adhered to. Another $75
million had to come in from private investors, and to make that happen
DOE put taxpayers second in line during bankruptcy.
Did you make a determination that the amounts available when the
loan guarantee was closed were sufficient to carry out the Solyndra
project and, if so, how do you square that with the fact that they
weren't?
Answer. Professional employees of, and advisors to, the Loan
Programs Office spend up to a year or more underwriting loan guarantees
issued under Title XVII of EPAct 2005. In the course of this analysis,
and the structuring of the loan, significant attention is paid to the
ability of the borrower to repay the loan and to complete the project.
Further, the credit subsidy cost estimate reflects that even with a
reasonable prospect of repayment, there is still some risk of default.
To ensure adequate funding for completion, the construction budget
always includes a reserve for contingencies.
While DOE ultimately makes the statutory determination that there
is a reasonable prospect of repayment and that the project funding is
sufficient to complete the project (as was the case for Solyndra and
Beacon), the determination is necessarily grounded in the analysis and
recommendation of the experienced professionals in the Loan Programs
Office.
It is important to bear in mind that Congress wisely crafted the
two statutory requirements that you cite as determinations that must be
made before the Department issues a loan guarantee. They are not
continuing covenants, and a change in circumstances that results in
shortfalls, either in repayment or in the construction budget, does not
mean that the statute was ``not adhered to.'' As has been widely
discussed and reported, the difficulties encountered by both Solyndra
and Beacon resulted from dramatic changes in the relevant markets that
were not anticipated at the time the loan guarantees were issued.
Moreover, at the time of the Beacon bankruptcy filing, the Stephentown
project was virtually complete, in operation and producing revenue.
Similarly, Solyndra faced a shortfall in cash because market conditions
had resulted in less robust revenues than had been forecast.
ATVM PROGRAM
Question 6a. Five loans have been issued under the ATVM program in
roughly three and a half years, including just one since March 2011.
More than half of the program's credit subsidy is unused today, despite
initial claims that the program was `oversubscribed' and statements
from DOE that more loans were being negotiated and on the verge of
closing. Many are wondering what, exactly, is happening with this
program.
How many applications has DOE received under the ATVM program, and
how much total loan funding have those applications sought?
Answer. We have received a total of 141 document submissions, 70 of
which were deemed as Substantially Complete Applications. Total funding
requested was in excess of available appropriations authority for the
program. Requested funding data is based purely on application
materials received by DOE. A substantial portion of requested funding
was related to incomplete applications, and requested funding does not
reflect rejected or withdrawn applications or any adjustments based on
terms acceptable to the program.
Question 6b. How many ATVM applications are currently being
negotiated by DOE?
Answer. We have a total of 27 open document submissions, 17 of
which are deemed as Substantially Complete Applications. Of these 17,
11 applicants have not responded to the program for an extended period
of time and are considered inactive, while the remaining 6 applications
are under review.
Note that application submissions are first reviewed for
completeness, prior to any due diligence being performed. Once a
company has provided all the required information, the application is
deemed ``Substantially Complete'' and the review process can begin. An
application becoming Substantially Complete does not necessarily
indicate that an applicant's business plan, technology, market strategy
or financial position are fully viable, or that they will meet all
criteria necessary to obtain a DOE loan. It is simply the first step in
a thorough technical, legal, and financial analysis.
Question 6c. Last summer, 18 projects were reportedly negotiating
under ATVM for a total of $9.8 billion in loans. How many of those
projects are still negotiating for loans, and what would those loans
total?
Answer. Of the 18 Substantially Complete Applications that existed
in the summer of 2011, the ATVM has 17 eligible applicants remaining,
11 of which are inactive while the remaining 6 applications are under
review.
Question 6d. How many ATVM applications have been rejected by DOE
to date?
Answer. We have received a total of 141 document submissions, 70 of
which were deemed as Substantially Complete Applications. Of the 70
Substantially Complete Applications, 48 have either been rejected or
withdrawn.
Question 6e. What are the primary factors that are preventing DOE
from issuing loans through the ATVM program? Is it administrative
hurdles that cannot be overcome, a lack of viable projects, or other
factors?
Answer. The ATVM Loan Program is a direct loan program, funded by
the U.S. Treasury, using taxpayer dollars. The Program takes very
seriously its responsibility to ensure that such dollars are awarded in
the most appropriate way to protect the taxpayer's interests. That
said, the program has entered into loan agreements with five borrowers
and continues to closely monitor those loan transactions, insisting on
the completion of milestones and fulfillment of any conditions agreed
to by the applicant and DOE.
The ATVM and its staff endeavor to maintain openness and
transparency with all constituents, including the detailed and timely
response to inquiries from interested parties across the public and
private sectors. The ATVM understands that its work has the ability to
effect a large economic impact across a broad geographic area of the
United States, including areas that have been negatively impacted
during the recent economic downturn. Despite a significant increase
over time in the volume of outside inquiry into ATVM, the program
continues to work independently with a distinct focus on our core
competencies relating to the review, analysis, negotiation and
structuring of loan transactions.
The program was established to offer a low-cost funding opportunity
for financially viable companies with technically meritorious projects
that are ready for commercialization. Early stage companies (which are
the vast majority of applicants) face many challenges in their efforts
to obtain a DOE loan. From the financial and credit risks inherent in
taking on significant senior debt at an early stage in a company's
lifecycle, the quality and experience of the management team, to the
technical and execution risks in designing, developing and establishing
a manufacturing facility, to the market risk of expected penetration
and sales volumes, applicants must carefully consider all aspects of
their business plan. These are the same risks analyzed by equity
investors, who may or may not be identified in the initial application.
To that end, equity investors must be identified, ideally prior to the
issuance of a Conditional Commitment Letter, as is the practice in the
market for commercial loans. ATVM understands that these equity
investors are evaluating the high degree of risks these business plans
face, and to achieve an equity return hurdle commensurate with such
risk, often require a high degree of financial leverage. The statutory
maximum leverage is 80% against eligible costs, and ATVM seeks to
strike a balance between the equity return needed to attract investors
and the appropriate amount of debt that can be supported by the
project.
Automotive component suppliers have also had difficulty qualifying
for ATVM loans. Although these automotive suppliers are potentially
some of the more credit worthy borrowers within the automotive
industry, they have found it difficult to provide a direct connection
between their components and qualified advanced technology vehicles, a
necessary link to establish eligibility and market acceptance.
Question 6f. How many ATVM loans does DOE anticipate finalizing
during Fiscal Year 2013?
Answer. Beyond the several applications currently in the ATVM
pipeline, which are always subject to further review and analysis, the
ability of the program to ``finalize'' loans is entirely dependent on
the quality of applications received, whether new or existing, and the
ability of the DOE and an applicant to reach loan terms agreeable to
each side consistent with the statute. It is DOE's goal to advance the
state of automotive technologies while minimizing the risk to the
taxpayer. This requires that DOE balance its mission of fuel efficiency
and against financial, market, technical and legal risks that may
threaten the applicants' ability to repay the loan. To the extent that
the ATVM Loan Program, in its independent analysis, determines that any
or all of the applicants will not achieve loan funding, we endeavor to
provide clear feedback to the applicant.
VACANCIES
Question 7a. According to Mr. Allison's report, some positions in
LPO are either vacant or staffed by acting heads and rely heavily on
consultants and contractors.''
Which positions are currently vacant in the LPO? Which are staffed
by acting heads?
Answer. The current LPO organizational model and staffing plan
approved in December 2010 by the Secretary, the DOE Human Capital
Officer (HC), and the collective bargaining unit allows for the
recruitment and retention of federal employees compliant with Office of
Personnel Management (OPM) requirements. Accordingly, the LPO mission
and functions are aligned to the staffing plan which: establishes the
roles and responsibilities for all new federal supervisors and staff;
identifies their reporting structure, authorities, job classifications,
and grade levels; and provides the framework for recruitment actions,
which the LPO is undertaking in earnest with the HC organization.
The LPO organization is headed by the Executive Director (LP-1) who
reports directly to the Secretary of Energy, and it has seven Divisions
reporting to LP-1 including the:
(1) Loan Guarantee Origination Division (LP-10) which manages
all aspects of application intake, project evaluations, due
diligence, environmental compliance, and origination and
underwriting for all projects submitted under Title XVII loan
guarantee authority;
(2) Advanced Technology Vehicle Manufacturing (ATVM) Division
(LP-20) which manages all aspects of ATVM loan origination for
projects submitted under EISA Section 136 direct loan
authority;
(3) Technical and Project Management Division (LP-30) which
evaluates the technical, scientific, and engineering
eligibility and viability of all Title XVII and ATVM projects;
(4) Credit Division (LP-40) which manages credit modeling,
credit calculations, and risk analysis, Credit Committee,
Credit Review Board, and interagency risk assessments and
management for Title XVII and ATVM projects;
(5) Portfolio Management Division (LP-50) which provides
portfolio monitoring and reporting, loan disbursement and
repayment administration; and special assets management for
Title XVII and ATVM projects.
(6) Management Operations Division (LP-60) which provides
liaison, reporting, compliance, implementation, and management
of the federal budget, contracts, personnel, information
systems, correspondence, external communications, audits,
safety, and security requirements for the LPO;
(7) Legal Division (LP-70) which reports to the DOE General
Counsel and provides legal expertise on all transactions and
loan agreements for Title XVII and ATVM projects.
The LPO staffing plan allows each Division to have a Director at
the Senior Executive Service (or equivalent) level to establish,
manage, and oversee LPO policy, procedures, and operations in
coordination with LP-1. Currently there are three managers serving in
an ``Acting'' capacity who function in ``dual-hat'' SES roles. They
are: the Acting LP-1, who also serves as the LP-10 Director; the Acting
LP-20 Director, who also serves as a Supervisory Senior Investment
Officer; and the Acting LP-60 Director, who is also the Director for
LPO Strategic Initiatives.
The LP-40 Director position that was mentioned in Mr. Allison's
report is currently vacant. This position was advertised in January
2011 through a public notice on USAJobs, which is the OPM official
federal job vacancy website. After a six-month recruitment effort, the
competitive advertisement yielded no qualified candidates for this
position. This was likely due, in large part, to uncertainly
surrounding the pending expiration of the LPO's Recovery Act authority.
Since Mr. Allison's report was issued, the LPO has undertaken to revise
this announcement to incorporate additional risk management functions
identified in the report and is pursuing multiple notification
strategies to advertise again for this position.
Question 7b. What is your plan, if any, to fill these positions?
Answer. The LPO is engaging in the recruitment for the LP-40
position under a revised framework. In addition, DOE is currently
extending offers to eight new loan professionals for asset management
and supervision in LP-50. At the same time, the LPO has initiated
recruitment actions for specialists in loan administration, special
assets, investment and financial analysis.
As a federal executive agency governed by Title V of the U.S. Code,
Government Organization and Employees, the LPO adheres to OPM and DOE
personnel regulations that require competitive public postings for all
federal vacancies. As a new organization, LPO recruitments have
required significant advance work to create new federal positions in
the specialized job series--for investment officers and loan
specialists with corporate and project finance qualifications--which
were not previously available at DOE. Combined with the timeframe
required for OPM announcements, the LPO recruitment actions have
typically taken six to eight months. The LPO continues working with the
DOE Human Capital Office to determine ways to streamline the federal
recruitment process to improve federal hiring for the critical skills
it requires. At the same time, LPO is trying to find ways to
incentivize federal incumbents with specialized finance skills in a
manner that is competitive with other federal finance organizations to
ensure program stability and that it has the in-house competencies
needed to meet its mission responsibly. These positions will be posted
on USAJobs consistent will federal hiring requirements.
ADDITIONAL SUBSIDY
Question 8a. According to a memo written by administration
officials Carol Browner, Ron Klain, and Larry Summers in October 2010,
``Project sponsors for all power generation projects under the 1705
program have indicated that they intend to claim a 1603 grant once they
enter into service.''
How many projects ultimately selected by DOE for Section 1705 loan
guarantees have also claimed a 1603 grant (or will be eligible to do so
before the `Placed in Service' and `Begun Construction' deadlines of
October 1, 2012)?
Answer. As you know, the Department of Treasury is responsible for
administering the 1603 program and the Investment Tax Credits (ITC).
Under the 1705 loan program, the Department of Energy closed 26
transactions, excluding two transactions that withdrew subsequent to
closing (POET and AES Energy Storage). Of the 26 transactions, 20 are
expected to claim 1603 payments or ITC. The aggregate project cost for
the 20 projects is $22.8 billion and the aggregate expected 1603/ITC is
$5.9 billion or 26% of the project cost after allowing for ineligible
costs.
Question 8b. What is the total government subsidy (federal and
state) for Section 1705 loan recipients, including 1603 grants, in
dollars? Please provide this on a project-byproject basis and as an
average across all projects.
Answer. The Department does not track state-level government
subsidy. The Department cannot release the total project costs of
specific projects as that is business sensitive information and it
cannot report on project specific 1603 data as that program is
administered by the Department of Treasury. Currently most projects
have not completed the 1603 process and been awarded 1603 payments but
when those payments are awarded the payments will be public information
and will be reported on the Treasury website.
Question 8c. What is the total government subsidy for Section 1705
loan recipients, including 1603 grants, as a percentage of project
cost? Please provide this on a project-byproject basis and as an
average across all projects.
Answer. The Department can only report on 1603 grant recipients in
terms of total government subsidy, not on a project specific basis
although for projects that will be receiving 1603 payments, the
information on such payments will be available on the Treasury website
once the payment has been issued. The total aggregate expected 1603
award as a percentage of aggregate total project costs of the 26
projects (excluding the two that withdrew subsequent to closing) is
23.3%.
POWER PURCHASE AGREEMENTS AND LIABILITY
Question 9a. A number of Section 1705 loan guarantees rely on power
purchase agreements between the project sponsor and a utility.
Have power purchase agreements been signed by all applicable
parties (including agencies of the federal government) for all relevant
Section 1705 loan guarantee projects? If not, why not, and when do you
expect those agreements will be completed?
Answer. PPAs have been executed by all relevant parties for all but
one of the Section 1705 energy generation projects. The one exception
is Project Amp, which will deliver a PPA executed by all relevant
parties before any disbursement occurs. Project Amp is designed to be
completed in phases. Approval of a phase (and, therefore, disbursement
of loan proceeds in connection with a phase) requires a PPA executed by
all relevant parties, including an investment grade utility offtaker.
A PPA, which is an agreement to buy generated power, is not
relevant to Section 1705's non-generation projects, as there is no
generated power to sell in those projects.
Question 9b. How is potential liability for damage caused to the
grid in the event of a plant failure or malfunction addressed in power
purchase agreements?
Answer. Measures designed to protect interconnecting high voltage
transmission systems (i.e., ``the grid'') from power plant failures or
malfunctions are generally addressed in interconnection agreements
(rather than in Power Purchase Agreements) between the power plant's
owner (the ``Interconnection Customer''), the owner of the transmission
facilities (the ``Transmitting Organization'') and the independent
Regional Transmission Organization (``RTO''). As these are fairly
standardized agreements, the information below is based on
representative interconnection agreements from the California
Independent System Operator (``CAISO'') and ISO New England (``ISO-
NE'').
Grid protective measures are more a technical issue than a legal
one, as system technical standards are designed to prevent any power
plant from causing damage to the grid. These standards are imposed
legally by the interconnection agreement requirement that the
Interconnection Customer design, construct and operate the power plant
and appurtenant facilities in accordance with the applicable
Reliability Council's requirements and ``good utility practice.'' Each
Interconnection Customer is, therefore, required to install and
maintain protective equipment designed to prevent interference with,
and damage to, the interconnected transmission facilities, as specified
by ``good utility practice'' and the Transmitting Organization's
standards. Before the in-service date and commercial operation of the
power plant, the Transmitting Organization and Interconnection Customer
are also required to perform complete calibration and function tests on
the system protection facilities to ensure compliance with the
specified standards.
In the event of emergency conditions, the RTO is separately
authorized by the interconnection agreement to shut down transmission
from the power plant without notice and to take any other actions to
preserve public health and safety, preserve the reliability of the RTO-
controlled grid or the Transmitting Organization's interconnection
facilities and distribution system, to limit or prevent damage, and to
expedite restoration of service.
From a legal perspective, the interconnection agreements generally
provide that the RTO, Transmitting Organization and Interconnection
Customer indemnify each other from all losses arising out of another
party's actions or inactions under the interconnection agreement,
except in cases of gross negligence or intentional wrongdoing by the
indemnified party. Liability for consequential, indirect or punitive
damages is generally excluded in the interconnection agreements. The
Transmitting Organization and Interconnection Customer are also
required by the interconnection agreement to maintain minimum insurance
coverage, including excess public liability insurance over and above
general commercial liability policies.
Responses of Secretary Steven Chu to Questions From Senator Franken
Question 1. How many companies whose technologies have received
Department of Energy support through grants, public-private
partnerships (such as the NP2010 program), loans, or loan guarantees
have transferred that technology (i.e., intellectual property or trade
secrets) to China in the past ten years?
Answer. The Department of Energy does not centrally collect
information about companies that have received DOE support and have
transferred that technology to China.
Question 2. Please provide the names of all companies that have at
any time over the past ten years transferred technology to China
subsequent to Department of Energy support for the technology through
grants, public-private partnerships, loans, or loan guarantees.
Answer. The Department of Energy does not centrally collect
information about companies that have received DOE support and have
transferred that technology to China.
Question 3. Please provide any relevant information on particular
support programs that the above-mentioned companies and technologies
received.
Answer. The Department of Energy does not centrally collect
information about companies that have received DOE support and have
transferred that technology to China.
Question 4. Please provide a general description of the technology
that was supported by the Department of Energy and subsequently
transferred to China.
Answer. The Department of Energy does not centrally collect
information about companies that have received DOE support and have
transferred that technology to China.
[Responses to the following questions were not received at
the time the hearing went to press:]
Questions for Secretary Steven Chu From Senator Barrasso
Question 1. The Department has made over $16 billion in section
1705 loan guarantees. Over 80 percent of these loan guarantees have
been made to the solar industry. In other words, about $13 billion in
loan guarantees have gone to solar generation companies and solar
manufacturing companies, including Solyndra. Why has the solar industry
received 80 percent of all section 1705 loan guarantees?
Question 2. Again, the Department has made over $16 billion in
section 1705 loan guarantees. However, it is my understanding that the
Department has not originated a single section 1703 loan guarantee. As
you know, section 1703 was enacted almost 4 years prior to section
1705. Please explain how the Department has been able to make over $16
billion in section 1705 loan guarantees but not any section 1703 loan
guarantees?
Question 3. On March 12, 2012, the Government Accountability Office
(GAO) released a report on the Department's loan guarantees. Do you
agree with GAO's conclusion that ``DOE did not always follow its own
process for reviewing applications and documenting its analysis and
decisions, potentially increasing the taxpayer's exposure to financial
risk from an applicant's default''? If not, why not?
Question 4. I understand that the Department is considering
transferring depleted uranium to the Bonneville Power Administration
(BPA). The purpose of these transfers appears to be to assist USEC
which would enrich the depleted uranium. Please explain in detail what
the Department is considering. Please include in your answer: (1) the
exact quantities of uranium that would be transferred to BPA; (2) how
the depleted uranium would be transferred to BPA and the price BPA
would pay for the depleted uranium; and (3) the price BPA would pay
USEC per separate work unit to enrich the depleted uranium.
Question 5. Will you please explain how the transfers to BPA and
all of the Department's other uranium dispositions would be consistent
with the Department's commitment not to dispose of more than 5 million
pounds of natural uranium equivalent (or 10 percent of the nation's
domestic fuel requirements) annually into the commercial market? Please
explain in your answer which years the Department would record the
transfers to BPA for the purposes of satisfying the Department's total
cap on annual uranium dispositions.
Question 6. How would the Department ensure that the uranium
transferred to BPA will remain out of the commercial market prior to
consumption? In other words, how would the Department ensure that BPA
does not swap, loan, or sell the uranium into the market?
Question 7. What steps would the Department take to ensure that BPA
will not sell or trade some of its existing uranium inventories into
the commercial market and replace such inventories with the uranium
transferred from the Department?
______
Responses of Herbert Allison to Questions From Senator Murkowski
THREAT OF CONCENTRATION RISK
Your report goes into some detail about concentration risk in the
Energy Department's loan portfolio. Specifically, you cite the large
share of projects for manufacturing solar equipment or generating solar
power and the reliance upon state and federal mandates to create
markets for many projects' and products.
In many ways, this concentration risk is the direct result of a
Congressional decision to limit eligibility under the stimulus bill's
Section 1705 program. Compared to the 2005 energy bill's Section 1703,
a far narrower set of industries--renewable and transmission projects
only--were allowed to apply for support under Section 1705 from the
Stimulus.
Question 1. Do you think it was wise for Congress to limit
eligibility under Sec. 1705, and do you think these concentration risks
would be more manageable if nuclear, clean coal, or other projects were
also part of the Department's portfolio?
Answer. What the Independent Consultant's Report (``Report'') means
by the term ``concentration risk'' in the existing portfolio is that,
if one project similar to others in a group were to encounter trouble,
the others in that group might also be affected. It is not clear that
the existing concentration risks would be diminished by adding projects
involving other types of energy production, because they may not offset
others in the portfolio and the existing risks would still remain.
CATEGORIES OF RISK AND LESSONS LEARNED
In evaluating the Department's loan and loan guarantee portfolio,
you chose to break out the loans and loan guarantees not by
programmatic origin, but by certain traits that bear heavily on a
project's risk profile. Specifically, you chose to disaggregate the
portfolio into ``Utility-Linked,'' ``Non-Utility Linked,'' and the
``Ford and Nissan'' categories.
In that order, ``Ford and Nissan'' were found to have a credit
subsidy cost of 2%, ``Utility-Linked'' came in at 13%, and ``Non-
Utility-Linked''--without accounting for the already-bankrupt Solyndra
and Beacon--had a credit subsidy cost of 41%.
Question 2a. Can you explain why you chose to break the portfolio
out this way?
Question 2b. Is there a class or category of project that you think
should not receive loan guarantees or direct loans from the government
in the future?
Answer. As you know, the Independent Consultant's assignment was in
part to evaluate the loans in the portfolio. To do so, the Independent
Consultant (which term, as used herein and in the Report, collectively
refers to myself and the team of advisers that was assembled to assist
in preparing the Report) estimated the risk of each loan, assigned a
discount rate appropriate for that risk and then discounted the loan's
expected cash flows using the two methods of valuation that we
selected: FCRA and FMV. In order to provide as much information as
possible about the estimates of expected loss without violating
confidentiality agreements, the Independent Consultant grouped the
loans into three categories, each with the distinctive risk and other
characteristics described in the Report, and disclosed the estimates of
expected loss for each category.
The Independent Consultant believes that the answer to the second
part of the question would depend on a number of factors, including
policy imperatives at the time, analysis of the project by technical
experts, the expected economics of the project, and the risks and
countervailing protections in the financing agreements.
OTHER TOOLS AVAILABLE TO SUPPORT INNOVATIVE ENERGY TECHNOLOGIES
If our policy objective is to facilitate deployment of new or
improved energy technologies, there are many tools available to the
government. To this day, we also utilize tax credits, cash grants,
mandates, government procurement, prizes, performance standards, and
other mechanisms to try and alter the nation's energy mix.
Question 3. Do you think some of these other tools make more sense
than loan guarantees or direct loans? If so, can you provide examples
of where one tool is clearly preferable to loan guarantees or direct
loans?
Answer. As it designs financing programs for energy projects, the
government should select forms of financing best suited to
accomplishing the desired policy objectives and to protecting the
interests of taxpayers. For more innovative, risky projects in early
stages of development, it may be advantageous to use grants, prizes or
equity investments. Equity-linked vehicles could enable taxpayers to
share in returns from successful ventures. Those gains could help to
pay down the deficit, offset losses from other investments, or finance
other projects. The forms of financing permitted in the Title XVII and
ATVM programs expose taxpayers to the downside risk of absorbing
considerable losses but do not offer taxpayers the possibility of
profiting alongside project sponsors if projects are successful.
CHIEF RISK OFFICER RECOMMENDATION
Question 4. Are market trends related to polysilicon prices--in the
context of the loan guarantee to Solyndra--something that a Chief Risk
Officer would have been monitoring ahead of the Department issuing a
loan guarantee to a company whose competitive advantage was derived, in
large part, from the fact that they didn't use polysilicon? (Please
reference question #2 to Secretary Chu for more information and a chart
from CRS depicting historical polysilicon prices.)
Answer. The Chief Risk Officer would provide the Department with an
independent view on markets not only before loans are approved, but
also before funds are disbursed and throughout the lives of the loans.
In addition, the recommended Early Warning System would provide
continuously updated information on markets and developments in
technologies for producing and delivering clean energy.
FEE COLLECTIONS
Your report notes (p. 17) that the level of fees charged to
borrowers were under-market and that proceeds from fee collections may
not be large enough to cover long-term management and oversight of the
project portfolio. As a result, DOE likely needs additional funding to
adequately manage the project portfolio over its lifetime.
Question 5. Should the fee structure for applicants/recipients be
modified to ensure that the charges are sufficient to cover loan
origination, loan monitoring and management, and other long-term
administrative costs? If so, what changes to the fee structure would
you recommend?
Answer. Under the current laws and regulations governing the
Program, most of the fees that fund the Loan Program Office (``LPO'')
derive from origination of financings. Once the origination phase of
the Program ends, fee income will decline substantially and may be
insufficient to fund the activities of the LPO over the lives of the
loans. DOE cannot unilaterally change the fee structure for existing
agreements. Therefore, DOE should modify the fee structure to the
extent it is statutorily authorized if it concludes that revenues are
likely to be insufficient to fund the LPO over the 20-30 year life of
the Program. To the extent such modifications require amendment of the
underlying statutory authorities, Congress should make such necessary
amendments.
LONG-TERM FUNDING
The first recommendation in your report (p. 43) is to ``Provide
Long-Term Funding for the Program.'' Also on page 43, the report states
that ``adequately funding the management and administration of the
Programs will depend on obtaining additional budget and appropriated
funds in the future.'' However, no specific estimate of funding needed
for the program is provided.
Question 6. How much funding is needed to adequately manage,
monitor, and oversee the loan and loan guarantee project portfolio?
Answer. Determining the amount of funding needed to adequately
manage, monitor and oversee the portfolio was not part of the
Independent Consultant's assignment. The Report did state, however,
that the costs to implement the recommendations should be low compared
to risk of added losses if the Programs are not well-managed and
governed. Furthermore, many of the Report's recommendations entail
little or no cost.
EVALUATION METHOD
Your report evaluates DOE's loan and loan guarantee portfolio using
two different methods: (1) Federal Credit Reform Act (FCRA) credit
subsidy cost, and (2) Fair Market Value. However, the report emphasizes
(pages 33 and 37) that neither method should be relied upon as an
accurate predictor of estimated losses or costs to the federal
government.
Question 7. Is there an evaluation method available that might
reliably predict government costs for energy project loans and loan
guarantees such as those currently within DOE's loan and loan guarantee
portfolio?
Answer. For purposes of government budgeting, the method set forth
in the Federal Credit Reform Act of 1990 (``FCRA'') is appropriate, as
it estimates credit loss and excludes other costs that are applicable
to private investors but not to the government so long as the
government holds the loans. Any deviations in the credit subsidy cost
will likely be offset by countervailing changes in costs of the
government's other loan programs or be absorbed by taxpayers under
FCRA's permanent and indefinite authority.
Nonetheless, no method can reliably forecast the actual losses that
will ensue over the life of the Programs because any cost to the
government will be the product of many factors, some unique to an
individual loan, which the FCRA methodology can neither capture nor
forecast today. Moreover, the FCRA methodology's present value
estimates of cost fluctuate materially with changes in assumed long-
term interest rates. The FCRA methodology also assumes that DOE is a
passive bystander unable to act to reduce or mitigate risk over time,
when in fact it has robust tools to protect itself against elective
risk.
NON-UTILITY LINKED LOANS
Your evaluation of the non-utility-linked loans category indicates
that credit subsidy cost estimates have increased 71% since the loans
were originated (p. 32). This increase is partly a result of six of the
eight loans in this category having received lower credit ratings than
those assigned by DOE. The non-utility-linked loans category includes
loans to cellulosic ethanolprojects, automotive manufacturing
companies, and solar manufacturing companies.
Question 8. Could you please explain why six of the non-utility-
linked loans received lower credit ratings than ratings assigned by
DOE?
Answer. The Non-Utility-Linked Loan projects typically rely on
novel technologies and unproven manufacturing methods. They will not
benefit from guaranteed purchases of their production and instead will
have to sell their products into highly competitive markets. Some have
not been meeting progress milestones. In considering these factors, the
Independent Consultant assigned lower credit ratings to some of the
loans than did DOE.
FMV AND FCRA EVALUATIONS
Your evaluation of projects in the non-utility-linked loans
category resulted in FCRA credit subsidy cost estimates and Fair Market
Value discounts, which investors would require, that were essentially
equal. On page 33 of the report, the following statement is made:
``...results from the legally required FCRA Methodology do not reflect
the discounts from the loans' face values that investors would demand
to bear the full set of risks involved in this particular Portfolio.''
This statement seems to indicate that FMV discounts would generally be
larger than credit subsidy cost estimates. The non-utility-linked loans
include the highest-risk projects in the portfolio, so these projects
might be expected to command a significant Fair Market Value discount.
Question 9. For the non-utility-linked loans category, could you
please explain why the Independent Consultant's estimates of Fair
Market Value (FMV) and FCRA credit subsidy cost are essentially equal?
Answer. The fact that the Independent Consultant's estimates of FMV
(measured as a range) and the FCRA credit subsidy cost for the Non-
Utility Linked Loans are similar is largely coincidental and is a
function of the assumptions used to calculate the estimates using the
two methodologies and the individual characteristics of each loan. The
Independent Consultant evaluated eight Non-Utility Linked Loans
independently. The estimates of FMV and FCRA credit subsidy costs for
the Non-Utility Linked Loans presented in the Independent Consultant's
Report are aggregate values comprised of the individual estimates for
each of the eight Non-Utility Linked Loans. In some cases, the FMV and
FCRA credit subsidy costs for individual Non-Utility Linked Loans
overlap. In other cases, they do not. Viewed as a portfolio, as the
report does, there is overlap.
Although the overlap is largely coincidental, the Independent
Consultant, as a general rule, observed less of a disparity between
estimates of FMV and FCRA credit subsidy costs, all other factors held
constant, for credits on the lower end of the credit scale and for
credits for which low recovery-rate-upon-default assumptions were
utilized for the FCRA methodology. The Non-Utility Linked Loans tended
to be on the lower end of the credit scale and utilized relatively low
recovery rates for the FCRA methodology.
TAXPAYER PROTECTIONS
You recommend (p. 45) actions that would protect taxpayer
interests. There are references throughout the report that discuss how
the loan and loan guarantee programs could increase oversight of
projects and transactions and institute more rigorous covenants and
conditions prior to funding disbursement. However, once all funds have
been fully disbursed, taxpayer protection options may be limited to the
ability of the government to operate or liquidate project assets in the
event of a default.
Question 10. After loan or loan guarantee funds are completely
disbursed to projects, what taxpayer protection options are available
to the federal government?
Answer. DOE can claim default if a project does not meet ongoing
contractual requirements for capital, cash flow, debt/equity ratios,
project performance, spending rates, debt limits, etc. DOE does not
have some protections typically available to private lenders, such as
the ability to contribute equity, and it may not be authorized to
subordinate its loans to attract additional funding that may improve
the project's viability and ability to repay DOE.
TIMEFRAME OF REPORT
You mention the `compressed time period for review' (p. 54) in your
discussion of limitations of the report.
Question 11a. Was 60 days sufficient to cover all aspects of the
LPO that you believe are worthy of being examined?
Question 11b. Ideally, how much time would be allotted to complete
a comprehensive review of the LPO?
Answer. The Independent Consultant had sufficient time to complete
the assigned work of evaluating the LPO's portfolio of loans using the
available information provided by DOE, making comprehensive
recommendations for strengthening management of the Program, and
proposing an Early Warning System. As noted in the Report, with
additional time the Independent Consultant could have retained outside
experts (engineering firms, etc.), but the Independent Consultant is
not convinced that such experts would have materially affected the
valuations of loans and the recommendations contained in the Report.
The Independent Consultant's assignment did not include examining day-
to-day operations, record keeping and controls. The Independent
Consultant assumes that the DOE Inspector General performs those
functions.
Appendix II
Additional Material Submitted for the Record
----------
Bright Automotive,
Rochester Hills, MI, December 27, 2011.
Secretary Stephen Chu,
Deputy Secretary Daniel Poneman,
Mr. Owen Barwell,
Mr. Rob Donatucci,
Mr. David Frantz,
Mr. Nick Whitcombe.
Subject: Bright Automotive and its ATVM Loan Program Application
Dear Secretary Chu, Deputy Secretary Poneman and Messrs. Barwell,
Donatucci, Frantz, and Whitcombe:
The purpose of letter is to provide an overview of Bright
Automotive, to comprehensively convey its experience as it relates to
the ATVMLP over the past three years and to request the DOE's senior
leadership's direct and immediate involvement in moving our application
forward to completion.
As our experience to date with ATVMLP has been extensive, we want
to provide a comprehensive summary of our status and situation. An
executive summary is provided, followed by a more comprehensive
overview.
EXECUTIVE SUMMARY
Overview of Bright and its ATVM Loan Process
Bright was spun out of the of a consortium of Google.org,
Rocky Mountain Institute, the Turner Foundation, Alcoa, and
Johnson Controls in 2007, and incorporated in January of 2008;
Bright will produce a light-weight road-coupled PHEV
commercial work truck in the U.S. that will create over 675
American-based direct and at least 2700 indirect jobs--largely
in the Midwest. With an electric-range of over 30 miles and
charge-sustaining efficiency of over 35 miles per gallon, each
vehicle will save about 40 barrels of oil and reduce
CO2 emissions by 16 tons per year;
Bright's PHEV is the first truck engineered from the ground
up as a plug-in electric vehicle (PEV) designed for commercial
and government customers that buy over 900,000 vehicles a year
in North America, offering a 10-30% lower ``total cost of
ownership'' than any competitive vehicle in its class;
The Bright work truck will advance several of the Federal
Government's policy goals, most importantly offering an
Alternative Fuel Vehicle alternative for its van and pickup
applications to help fulfill the government's 2015 pledge to
exclusively procure AFV's;
Bright's projected CAFE number will be over 85-mpg, and its
CO2 will be 102g/mi while having a footprint of over
62-sq ft, offering an example of CAFE standards can be exceeded
without having to ``downsize'' the fleet;
Bright has developed key partnerships with large,
established entities such as General Motors and AM General;
The ATVM Loan Program was created by the Bush Administration
and expanded by the Obama Administration to encourage the
creation of fuel-efficient vehicles in the U.S. Bright
Automotive will help fulfill this objective, thereby reducing
ownership costs for public and private fleet operators, reduce
dependencies on foreign energy sources and develop advanced
technologies in the U.S.
Bright's ATVM loan application was deemed ``substantially
complete'' in December 2008 and it has been in the loan
approval process since that time;
In January 2010, senior LPO leadership indicated that if
Bright established a strategic partnership with a major OEM, it
would greatly speed up its loan approval process.
Bright established a strategic partnership with General
Motors in July-2010, senior LPO leadership indicates a maximum
of 2 months to loan approval;
September 2010, DOE establishes six (6) additional
definitive agreements required for CCL. These are achieved by
December 2010, covering a technical center lease and various
supply, manufacturing and service agreements;
Due diligence for Bright's loan application establishing
technical and market viability was deemed complete in January
2011 and a ``near final'' CCL was issued to Bright;
Consideration for Bright's loan application was suspended in
May 2011 on the basis of volume projections from IHS Global
Insight which were later found to be significantly flawed; a
new study was commissioned and completed by AT Kearny in June
2011;
In June/July 2011, additional loan covenants were added to
Bright's loan package;
In July 2011, DOE senior leadership indicated to Bright the
expectation that its loan would be advanced to the interagency
process by September 2011 with loan approval following in
October 2011;
ATVM loan applications were deprioritized in September 2011
in favor of Title XVII loan approval activities; further,
unfavorable publicity associated with Title XVII and ATVM loan
recipients appears to have impacted negatively companies such
as Bright that remain in the ATVMLP approval process.
In December of 2011, the DOE informed Bright that it has
completed its credit paper and is awaiting an internal decision
on the ``purpose of the ATVM program'' before advancing the
application to OMB.
Broad and Bipartisan Support Exists for Bright
Bright has received comprehensive incentive packages at the
state, county and local levels in both Indiana and Michigan;
Numerous calls of inquiry and letters of support from
Congressional and local leaders have been submitted into the
DOE--these are included in the body of the text below; a
significant amount of Congressional angst over the ATVMLP can
be summarized in the following quote from a Senate legislative
director: ``perhaps if they'd get more loans out the door they
could get some more support from Congress...part of the
frustration with the program is the slowness of the process.''
Bright has completed multiple projects for the US Postal
Service and Department of Defense--each one on time and under
budget--and expects that non-tactical vehicle orders will be
forthcoming from the DoD as well as from the GSA;
Bright has received confirmed orders from customers like
Duke Energy and Snap-on Tools, as well as letters of support
from firms such as Comcast, Frito Lay and ServiceMaster;
Bright has secured all of its equity commitments required
for its CCL.
Bright's Options
Bright remains very committed to the prospect of bringing
cutting-edge PEV technology to businesses and to the U.S.
Government via the ATVMLP, but is unclear as to what will make
this a reality;
Should ATVM loan approval not be forthcoming, Bright will be
forced to pursue its business plans outside of the United
States to fulfill other market needs;
Unfortunately, a primary funding path outside of the U.S.
will lead to the transfer of jobs, IP and know-how to foreign
countries;
Bright has established a relationship with a (non-government
affiliated) Chinese investment firm and has a signed term
sheet. Also, a China-based Joint Venture Letter of Intent is
being finalized;
These relationships in China can be pursued with or without
the presence of an ATVM loan--in the first scenario, it would
be an additive growth and value engine to bolster US developed
technology; if the latter, to the detriment of our country, the
jobs and technology that Bright would otherwise create will
move to China.
DOE Requested Actions
Bright is requesting a meeting between Bright and all of the
recipients of this letter, including, respectfully, Secretary
Chu. The purpose will be to discuss the current status of the
ATVMLP in general and the specific next steps associated with
Bright's application. As time is critical, this meeting should
be targeted for the week of January 2 or 9, 2012.
Bright's application fulfills the intent of the ATVMLP program, and
has been de-risked with the preconditions, equity requirements, and
partnerships incorporated into its lenders case. The current status is
having a material impact on our business, thereby forcing us to
consider moving our operations overseas. Gaining clarity and
transparency from you on next steps is critical.
Your prompt attention to this matter is urgently needed and is
appreciated.
Sincerely,
Reuben Munger,
Chairman and CEO.
Mike Donoughe,
Chief Operating Officer.
DETAILS
Bright Automotive Background
I. Created in 2007 by a consortium of the Rocky Mountain
Institute, Google, Johnson Controls, the Turner Foundation and
Alcoa to explore U.S. business opportunities for PHEV's;
initial studies determined that a combination of ``platform
physics'' and a road-coupled hybrid electric architecture
focused on the commercial market could create compelling
business economics;
II. Incorporated in 2008; created its powertrain center of
excellence in Anderson, Indiana;
III. Secured important customer validation in 2008-9,
including ``voice of the customer'' work with over 50 large
fleets, securing letters of support to the Secretary from
fleets including Cox, Comcast, Best Buy, and order letters from
Duke, Vectren, and Snap On. Comcast, Cox and Duke letters
follow:*
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* Documents have been retained in committee files.
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IV. Delivered Bright IDEA customer prototype in 2009 and
began work with the Department of Defense to prove out the
merits of the road-coupled PHEV architecture;
V. Delivered DoD PHEV prototype and USPS EV conversion in
2010;
VI. Established a strategic partnership with General Motors
in July 2010; GM made initial investment in Bright in August
2010; additional GM investments of $20 million pending--
contingent upon receipt of ATVM loan approval;
VII. Established a strategic partnership and contract with
Dickenson Fleet Services, the leading commercial-fleet service
provider, in the fall of 2010;
VIII. Created a Vehicle Engineering Technical Center in
Rochester Hills, Michigan in 2011;
IX. Established a contract assembly contract with AM General
in Mishawaka, Indiana--contingent upon receipt of ATVM loan
approval;
X. Ready to accelerate program activities to create the IDEA
platform--once ATVM loan approval is achieved.
Bright's ATVMLP Timeline
I. December 2008: Bright's ATVM loan application deemed
``substantially complete'';
II. 2009: loan application processing;
III. September 2009, after rejecting a $450 million loan
application, Matt Rogers and Lach Seward indicate that a loan
for less than $300 million would be quickly approved. Bright
revises its business plan to support a $284 million loan
(subsequently increased to $314)
IV. November 2009, DOE decides to redo the various consulting
studies on Bright's business; this process did not begin in
earnest until January 2010.
V. January 2010: Senior leadership at DOE indicated that if
Bright established a strategic partnership with a major OEM, it
would greatly speed up its loan approval process, saying the
approval would occur in ``weeks, not months.''
VI. July 2010: Bright and GM sign an MOU and establish a
strategic partnership; Senior LPO leadership details a two
month timeline to CCL
VII. August 2010: After securing the GM strategic
partnership, Bright leadership informs the DOE about
potentially problematic volume forecasting done by IHS Global
Insight in early 2010 and asked for the analysis to be
reassessed (see Item X below);
VIII. September 2010: To enable a speedier loan approval,
Bright directed to satisfy six additional pre-conditions:
a) A definitive vehicle maintenance agreement
(service provider);
b) Binding commitments for $70 million in equity;
c) A definitive agreement with a U.S. contract
manufacturer to assemble the IDEA;
d) A lease for its vehicle engineering technical
center;
e) A ICE powertrain supply agreement with General
Motors;
f) A supply contract with General Motors for ``parts
bin'' access.
IX. December 2010: Bright meets each pre-condition;
X. January 2011: Due diligence phase completed; Bright
receives a ``near final'' CCL for a $314 million loan;
XI. February--May 2011: Loan application package developed
and reviewed with credit team;
XII. May 18, 2011: DOE determines it will no longer actively
consider Bright's loan based upon the impact of volume
considerations in the DOE-generated lender's case on Bright;.
Bright leadership discovers that the early 2010 analysis was
never reassessed;
XIII. May 19, 2011: Bright reaches out to political and
business leaders to share the latest status and to garner
support for continued loan consideration activities;
XIV. May 2011:
a) Jon Lauckner, President of GM Ventures and prior
head of global product planning and global program
management, attempts to contact senior LPO leadership
to share GM's viewpoint on the market and business
opportunity. LPO leadership refuses to speak with Mr.
Lauckner
b) Miscellaneous letters and expressions of support
into the DOE are input into the DOE from employees,
congressional members, etc. and are attached below.
c) PRTM sent the DOE a memo of its independent market
assessment of the Bright work truck based on its
extensive fleet electrification research it performed
for the Electrification Coalition (see attached memo);
XV. May 24, 2011: DOE initiates a conference call with Bright
in which it was indicated the volume study used needed to be
updated; a new volume study is commissioned by the DOE to be
conducted by A.T. Kearney;
XVI. June 1, 2011: Bright meets with ATK and DOE to share
market analysis and Voice of the Customer data;
XVII. June 2011: Based on updated volume studies, DOE
reinitiates loan application processing;
XVIII. In June/July 2011, partly as a result of the GAO
report of February 2011, additional loan covenants were added
to Bright's loan package;
XIX. July 2011: During a meeting between Bright and DOE, it
was indicated to Bright that its credit report package should
be advanced to the interagency process by the end of September
2011 and that receipt of CCL could be realized no later than
October 2011;
XX. September 2011: Title XVII wind down activities
prioritized over ATVM loan application processing and media/
political attention over loans casts a potentially unfavorable
light on other applicants;
XXI. October 2011: Bright informed that additional equity
raise requirements are needed to bolster overall balance sheet
and risk profile, which Bright agreed to; December 1 set as
``outside date'' for receipt of CCL;
XXII. November 2011: Another ``near final'' CCL is received
by Bright;
XXIII. December 28, 2011: Bright submits a comprehensive
summary letter to DOE requesting, among other things, a face-
to-face meeting between Bright and DOE senior leadership to
discuss the current status and prospects going forward;
XXIV. January 2012: Meeting between Bright and DOE?
Bright's Business Plan Attributes
I. Targeted customers (annual market size is $25 billion, and
900,000 vehicles, in North America) and benefits:
a. Public--local, state and federal (DoD and GSA)
governments
i. Bright can help the federal government meet its
various policy objectives as announced in April 2011
[2015: all fleet purchases to be alternative fuel
vehicles; 1 million PHEV's on the road by 2016; 2020:
reduce oil imports by 1/3 50+mpg CAFE.
ii. The IDEA platform is the only domestic
engineered and produced all-new PHEV truck; it will get
85+mpg CAFE rating;
iii. The IDEA platform will represent an enabler
for the government to economically lower its operating
costs in the face of declining budgets as it is
targeting a 10-30% lower overall cost to own and
operate;
iv. The IDEA platform may be the only viable PEV
work truck that can meet the U.S. government's 2015 AFV
purchase requirements while offering uncompromised
range and payload
b. Private--large and small fleets alike--from AT&T
to ``Ernie the Plumber''
i. Committed orders already received from Duke
Energy, Snap-on Tools and Vectren;
ii. Letters of intention to purchase already
received from Aramark, Best Buy, Comcast, Cox
Communications, DTE Energy, FritoLay, Servicemaster and
Staples; these companies have a combined fleet of
106,500 vehicles;
iii. The IDEA will provide key functional,
environmental and economic benefits to address fleet
operator challenges:
1. Lower total cost of ownership--by 10 to 30
percent depending on the vehicle it is replacing;
2. Reduced exposure to volatile fuel prices--
full-sized vans typically use about 10 gallons of
gasoline per day, the IDEA will use about 2 gallons;
3. Reduced carbon footprint--each vehicle will
save 16 tons of CO2 emissions per year;
4. Enhanced operator productivity--on-board
telematics and user-defined features are incorporated
into the IDEA platform based on extensive VOC research.
II. Jobs creation expectations:
a. Direct Jobs:
i. Michigan--Vehicle Engineering--200-250
ii. Indiana--Powertrain Engineering--25-30
iii. Indiana--Vehicle Assembly--450-500
b. Indirect Jobs [using a multiplier of 4]: 2700-
3120; primarily in the supply base
III. Intellectual property generation:
a. Parallel road-coupled PHEV architecture;
b. Vehicle, Chassis and Powertrain Control Systems;
c. Battery Systems;
d. Light-weighting through use of advanced materials
including the extensive use of alloys and repurposed
materials.
IV. Reduction of fuel consumption, generation of GHG's,
dependency on foreign energy sources:
a. 40 barrels of oil saved per vehicle per year; at
planned annual volumes of 50,000, 2 million barrels oil
saved per year; over 7 years this equates to 56 million
barrels of oil saved;
b. Reduced carbon footprint--each vehicle will save
16 tons of CO2 emissions per year; at 50,000
planned annual volumes, 800,000 tons of CO2
not emitted per year; over 7 years this equates to 22.4
million tons of CO2 not emitted per year.
c. National security benefits:
i. Saves lives by reducing `in theatre' supply
lines;
ii. Reduces the U.S. trade deficit by lowering
imported oil requirements;
iii. Reduces the pricing power of OPEC and a
funding source for the non-democratic countries that
control over 90% of global oil reserves; given current
instabilities with Iran and within the Middle East,
reducing our exposure has never been more critical.
Bright's Broad and Bipartisan Support:
I. Local level:
a. The communities of Anderson and Mishawaka, IN, and
Rochester Hills, MI as well as the Counties of St.
Joseph, IN and Oakland, MI have each supported Bright
with various incentive programs to support jobs
creation.
b. The attached letters were written on our behalf to
the DOE:
II. State Level:
a. Both the states of Michigan and Indiana have been
steadfast in their support of Bright's initiatives;
b. Incentive packages from both states have been
approved for Bright to encourage jobs creation and
business development in each state.
III. Federal Level:
a. Bipartisan support exists for Bright--including
from Congressional members outside of the states of
Indiana and Michigan;
b. Numerous calls of inquiry to the DOE have been
made on Bright's behalf;
c. Numerous letters of support, encouragement and,
occasionally, frustration have been sent to the DOE by
members of Congress--some of them are included here:*
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* Letters have been retained in committee files.
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General Details
I. Bright itself represents a significant voice of support
for the ATVM program, and not only for its own purposes, but
for the country's. Bright leadership favorably commented on the
ATVM program in the USA Today on 26 September (``Green-Car Fund
Dodges Bullet.'') As conveyed in the attached OpEd* sent to the
Indianapolis Star and Detroit Free Press, Bright strongly
supports the merits of the program when understood in the
broader context of our country's future competitiveness, and,
therefore, well being.
---------------------------------------------------------------------------
* Document has been retained in committee files.
---------------------------------------------------------------------------
II. Bright is committed to continue this public support of
the ATVMLP going forward as needed or requested--in the media,
in Congress, etc.
III. Bright has complied with the ATVM rules and process from
day 1--DOE should consider implications from a fairness
perspective if it decides to change the ``rules'' after 3 years
where Bright has steadfastly followed the process set before it
and complied with every request from the DOE on its loan
application.
IV. Bright employees have voluntarily reduced/deferred their
pay on two separate occasions--currently, 85% of Bright
employees are participating;
V. Bright's top management has committed more than their time
and efforts, they have contributed a substantial amount of
their net worth in the form of investment and bridge loans to
keep the company moving forward while the loan approval process
continues;
VI. Bright's alternatives and plans going forward should the
ATVMLP fail to be administered in the way Congress envisioned
when first created in 2007 and 2008 include going to other
foreign entities that have expressed interest in Bright:
a) China--A Term Sheet was established with a non-
government investment fund in December 2011; currently
a Joint Venture agreement is being finalized;
b) Turkey--inquiries have been made by various
parties in Turkey and are being investigated;
c) Middle East--numerous inquiries from sovereign
wealth funds in Qatar and the United Arab Emirates have
been received and are being investigated.
d) Majority foreign investment has an unfortunate
consequence--namely that the jobs, intellectual
property and know how would be transferred to the
country from which the investments are made.
e) Meetings with dozens of leading investment banks
and private equity firms have made it clear that
domestic funding--due at least in part to the precedent
set by other loan recipients--requires an ATVM loan.
Thus, any domestic manufacturing scenario for Bright
likely requires the completion of the CCL and
subsequent loan funding.
Bright Automotive,
February 23, 2012.
Secretary Steven Chu,
Department of Energy, Washington, DC.
Dear Secretary Chu: We know that you are well aware of the long
journey Bright Automotive taken as we await disposition on our DOE ATVM
loan application. Our letter of December 2011 (attached) outlined the
process through 2011. Unfortunately, despite the many exhaustive
efforts by us and your loan team, it has not yet advanced into the
interagency process--and time is running out.
Our application was filed in December 2008 and after myriad
discussions and changes in the requirements we had to meet, we still
find ourselves today stuck. The engine of our enterprise is still
running, but we are literally almost out of fuel. If our ATVM
application is not moved forward to the next level by March 2, 2012,
our mission ends. Period.
we need your immediate help and intervention to avoid this outcome
One and a half years ago we were told by DOE that our loan approval
was merely ``weeks away.'' And, on a number of occasions we were told
point blank to ``do this'' and our application was complete and ready
for the next stage. Even though requirements have been altered numerous
times, we have continued to be responsive and always in a timely
manner. That is, until now. The latest revised loan terms received
earlier today, are unacceptable to us and our potential investors.
These concerns have been conveyed to your loan team.
Ironically, while we were meeting with DOE officials in Washington
D.C. today, our President was giving a speech to college students
saying ``we need to develop the technology that makes us use less oil
and gasoline.''
We understand the political assault and the often misguided and
partisan criticism unfairly waged against you and your team. For some
inexplicable reason, those slamming clean energy initiatives do not
grasp the national security risk in our inaction to free us from a
dependency on foreign oil, often from countries that just don't like
America.
Just the other day, the Iranians stopped selling oil to Great
Britain and France. Iranian oil represents a pittance of both countries
oil imports, yet oil immediately shot up to $105 a barrel on world
markets. Overnight, Americans got another shock at the pump, with more
shocks predicted on our way to $5 a gallon, clearly threatening the
fragile recovery of our economy. Consider what will happen if events
escalate further. Americans will go from being angry to being scared.
Bright's efforts will help mitigate this.
Of course, some critics will argue that if Bright Automotive's
technology is so promising, there should be no problem whatsoever is
gaining more than enough private funding for our project. We know that
is not the case. While we will be successful in literally matching a
potential ATVM loan dollar-for-dollar with private funding, we cannot
continue without the loan. The market has been distorted in this arena
and the private capital funds capable of fully funding ventures like
Bright Automotive are simply nonexistent.
These same critics have little historical perspective on how
government funding helped this country succeed in many previous
advanced technology arenas. The Internet and GPS would not be common
place, can't-live-without extensions of our lives and livelihoods
without the U.S. Government serving as the early financial catalyst--
not to mention the contributions the space program has made to society.
Today, we take those game-changing technologies for granted.
Unfortunately, irrationality and petty politics have paralyzed your
agency at a time America needs you most. One cannot score if one does
not shoot.
We need our shot and an assist from the DOE. Our team has been
performing brilliantly for more than three years now. We have
practiced, got ourselves in peak performance shape and are ready to
play. Give us the ball and we will shoot to win.
And what does winning mean for Bright Automotive and our country?
It means hundreds of great manufacturing and technical jobs and
thousands of indirect jobs in Indiana and Michigan--the heart of
America. It means a stellar product; the Bright IDEA plug-in hybrid
electric commercial vehicle that provides lowest total cost of
ownership for our commercial fleet customers. It means green technology
that is truly green when it comes to a business' bottom line. It means
taking yet another step forward in our national goal to wean America
away from our addiction to foreign oil and its implications on national
security and our economic strength.
Sadly, the deadline I presented earlier in this letter is solid. If
we reach March 2nd without positive movement on our ATVM application,
our American jobs, American technological innovation and our promise to
save commercial fleet customers millions in fuel savings will
evaporate.
We trust that you and your DOE team will respond accordingly.
Respectfully,
Reuben Munger,
CEO.
Mike Donoughe,
COO.
Bright Automotive,
February 28, 2012.
Secretary Steven Chu,
Department of Energy, Washington, DC.
Dear Secretary Chu, Today Bright Automotive, Inc will withdraw its
application for a loan under the ATVM program administered by your
department. Bright has not been explicitly rejected by the DOE; rather,
we have been forced to say ``uncle''. As a result, we are winding down
our operations.
Last week we received the fourth ``near final'' Conditional
Commitment Letter since September 2010. Each new letter arrived with
more onerous terms than the last. The first three were workable for us,
but the last was so outlandish that most rational and objective persons
would likely conclude that your team was negotiating in bad faith. We
hope that as their Secretary, this was not at your urging.
The actions--or better said ``lack of action''--by your team means
hundreds of great manufacturing and technical jobs, union and non-union
alike, and thousands of indirect jobs in Indiana and Michigan will not
see the light of day. It means our product, the Bright IDEA plug-in
hybrid electric commercial vehicle, will not provide the lowest total
cost of ownership for our commercial and government fleet customers,
saving millions of barrels of oil each year. It means turning your back
on a bona fide step forward in our national goal to wean America away
from our addiction to foreign oil and its implications on national
security and our economic strength.
In good faith we entered the ATVM process, approved under President
Bush with bi-partisan Congressional approval, in December of 2008. At
that time, our application was deemed ``substantially complete.'' As of
today, we have been in the ``due diligence'' process for more than 1175
days. That is a record for which no one can be proud.
We were told by the DOE in August of 2010 that Bright would get the
ATVM loan ``within weeks, not months'' after we formed a strategic
partnership with General Motors as the DOE had urged us to do. We lined
up and agreed to private capital commitments exceeding $200M--a far
greater percentage than previous DOE loan applicants. Finally, we
signed definitive agreements with state-of-the-art manufacturer AM
General that would have employed more than 400 union workers in Indiana
in a facility that recently laid-off 350 workers. Each time your team
asked for another new requirement, we delivered with speed and
excellence.
Then, we waited and waited; staying in this process for as long as
we could after repeated, yet unmet promises by government bureaucrats.
We continued to play by the rules, even as you and your team were
changing those rules constantly--seemingly on a whim.
Because of ATVM's distortion of U.S. private equity markets, the
only opportunities for 100 percent private equity markets are abroad.
We made it clear we were an American company, with American workers
developing advanced, deliverable and clean American technology. We
unfortunately did not aggressively pursue an alternative funding path
in China as early as we would have liked based on our understanding of
where we were in the DOE process. I guess we have only ourselves to
blame for having faith in the words and promises of our government
officials.
The Chairman of a Fortune 10 company told your former deputy,
Jonathan Silver, that this program ``lacked integrity''; that is, it
did not have a consistent process and rules against which private
enterprises could rationally evaluate their chances and intelligently
allocate time and resources against that process. There can be no
greater failing of government than to not have integrity when dealing
with its taxpaying citizens.
It does not give us any solace that we are not alone in the debacle
of the ATVM process. ATVM has executed under $50 million of
transactions since October of 2009. Going back to the creation of the
program, only about $8 billion of the approved $25 billion has been
invested. In the meantime, countless hours, efforts and millions of
dollars have been put forth by a multitude of strong entrepreneurial
teams and some of the largest players in the industry to advance your
articulated goal of advancing the technical strength and clean energy
breakthroughs of the American automotive industry. These collective
efforts have been in vain as the program failed to finance both large
existing companies and younger emerging ones alike.
Our vehicle would have been critical to meet President Obama's
stated goal of one million plug-in electric vehicles on the road in
2015 and his commitment to buy 100 percent alternative fueled vehicles
for the Federal Fleet. So, we are not the only ones who will be
disappointed.
The ineffectiveness of the DOE to execute its program harms
commercial enterprise as it not only interfered with the capital
markets; it placed American companies at the whim of approval by a
group of bureaucrats. Today at your own ARPA-E conference, Fred Smith,
the remarkable leader of FedEx, made the compelling case to reduce our
dependence on oil; a product whose price is manipulated by a cartel
which has caused the greatest wealth transfer in our history from the
pockets of working people and businesses to countries, many of whom are
not our allies. And yet, having in hand a tremendous tool for progress
in this critically strategic battle--a tool that drew the country's
best to your door--you failed not only in the deployment of funds from
ATVM but in dissipating these efforts against not just false hope, but
false words.
For us, this is a particularly sad day for our employees and their
families, as well as the employees and families of our partners. We
asked our team members on countless occasions to work literally around
the clock whenever yet another new DOE requirement came down the pike,
so that we could respond swiftly and accurately. And, we always did.
Sincerely,
Reuben Munger,
CEO.
Mike Donoughe,
COO.
Bright Automotive,
Rochester Hills, MI, March 7, 2012.
Subject: Bright Automotive and its 39-Month ATVM Loan Program
Application History
Dear Senate Energy Committee Members: Enclosed is a series of
documentation concerning Bright Automotive's 39-month application to
the Department of Energy's ATVMLP. On February 28, 2012, Bright
announced in a letter to DOE Secretary Chu that it would withdraw its
application and wind-down its operations due to the DOE's lack of good-
faith negotiations and commitment to resolve the loan application in a
manner that could constructively create a privately-financed deal while
protecting the taxpayer. It is an unfortunate, if not tragic, outcome
that we hope can be avoided in the future by getting these facts out in
front of the public; and holds the unelected officials within the DOE
ATVMLP to a fair level of accountability.
As our experience to date with ATVMLP has been extensive, we want
to provide a comprehensive summary of our status and situation
throughout the three-plus-year unsuccessful processing of our loan
application. The most thorough description is contained in the December
28, 2011 letter sent to Secretary Chu at the request of the DOE. Below
are an overview and history of Bright and our experience with ATVM. We
also provide other supporting documentation as described below.
what bright automotive was offering the country and its customers
The ATVM Loan Program was created by the Bush Administration
and expanded by the Obama Administration to encourage the
creation of fuel-efficient vehicles in the face of ever-present
dependence on foreign oil. Bright Automotive was to help
fulfill this objective, by reducing ownership costs for public
and private fleet operators, reduce dependencies on foreign
energy sources and develop homegrown advanced technologies;
Bright was spun out of the of a consortium of Google.org,
Rocky Mountain Institute, the Turner Foundation, Alcoa, and
Johnson Controls in 2007, and incorporated in January of 2008,
well before ATVM was operational;
Bright was to produce the Bright IDEA: a light-weight road-
coupled plug-in hybrid electric vehicle (PHEV) in the form of a
commercial work truck in the U.S. that would create more than
675 American-based direct and at least 2700 indirect jobs--
largely in the Midwest. With an electric-range of over 30 miles
and charge-sustaining efficiency of over 35 miles per gallon,
each vehicle would have saved about 40 barrels of oil and
reduced CO2 emissions by 16 tons per year;
Bright's PHEV is the first truck engineered from the ground
up as a plug-in electric vehicle (PEV) designed for commercial
and government customers that purchase more than 900,000
vehicles a year in North America. These customers appreciate
and demand the 10-30 percent lower ``total cost of ownership''
the Bright vehicle promised compared to competitive vehicles in
its class;
Bright received confirmed orders from customers including
Duke Energy and Snap-on Tools, as well as letters of support
sent to DOE Secretary Chu from firms such as Comcast, Frito Lay
and ServiceMaster. Consultants to the DOE were told by leaders
of companies such as Frito Lay that they were ready to purchase
tens of thousands of Bright IDEAs;
The Bright IDEA was to advance several of the Federal
Government's policy goals, most importantly offering an
Alternative Fuel Vehicle for its van and pickup applications to
help fulfill the government's 2015 pledge to exclusively
procure AFV's;
Bright's projected CAFE number was over 85-mpg, and its
CO2 was to be 102g/mi while having a footprint of
over 62-sq ft, offering an example of how CAFE standards can be
exceeded without having to ``downsize'' the fleet;
Bright completed multiple projects for the U.S. Postal
Service and Department of Defense--each one on time and under
budget--and would have likely had non-tactical vehicle orders
from the DoD as well as from the GSA;
Bright developed key partnerships with large, established
entities such as General Motors and AM General;
as the clock starts ticking and the promises begin stacking up, the
only constant is the ever-changing requirements from the doe
Bright's ATVM loan application is deemed ``substantially
complete'' in December 2008 and remains in the loan approval
process continuously until March of 2012;
In September of 2009, at the request of senior DOE officials
to resubmit its loan request with a lower amount which if
``under $300M would be approved quickly,'' Bright reduces its
loan request from $450M to $284M, to be matched with $120
million of private equity;
In January 2010, after receiving little progress with its
reduced loan request, Bright is told by senior LPO leadership
that if Bright establishes a strategic partnership with a major
OEM, the DOE will greatly speed up its loan approval process,
saying it will ``move heaven and earth'';
Bright establishes a strategic partnership and investment
with General Motors in July 2010 and senior LPO leadership
indicate face-to-face with Bright leadership that the loan
approval will be ``weeks, not months;'' promising a maximum of
2 months to loan approval;
September 2010, DOE unexpectedly establishes six (6)
additional definitive agreements required for a Conditional
Commitment Letter (CCL) in its first draft term sheet. Bright
agrees to them all. These added requirements are achieved by
December 2010, covering a technical center lease and various
supply, manufacturing and service agreements;
Due diligence for Bright's loan application, establishing
technical and market viability, is deemed complete in January
2011 and a ``near final'' CCL is issued to Bright, marked up
with a slightly higher $314M loan amount. A second draft term
sheet is presented to Bright. Bright officials agree to the new
terms in the draft;
Consideration for Bright's loan application is suspended in
May 2011 on the basis of volume projections from IHS Global
Insight which were found to be significantly flawed--although
Bright had highlighted the flawed projections a year earlier. A
new study is commissioned and completed by AT Kearny in June
2011;
In June/July 2011, additional loan covenants are added to
Bright's loan package;
In July 2011, DOE senior leadership indicates to Bright the
expectation that its loan will be advanced to the interagency
process by September 2011 with loan approval following in
October 2011;
ATVM loan applications are deprioritized in September 2011
in favor of Title XVII loan approval activities; further,
unfavorable publicity associated with Title XVII (Solyndra) and
ATVM loan (Fisker) recipients appears to negatively impact
companies such as Bright that remain in the ATVMLP approval
process;
AND THE BEATING GOES ON
In October of 2011, the DOE informs Bright that the equity
requirements would be doubled to roughly $240M for its $314M
loan, among other new terms, for its third draft term sheet,
Bright quickly agrees to the new terms, including the increased
equity. Bright goes on its second ``bridge loan'' and 85
percent of the company begin salary deferral to try and
maintain cash while it concludes its DOE negotiation process.
In December of 2011, the DOE informs Bright that it has
completed its credit paper and is awaiting an internal decision
on the ``purpose of the ATVM program'' before advancing the
application to OMB;
In late January/early February 2012, DOE representatives
conduct a three-day site visit of Bright's Indiana and Michigan
operations, including detailed discussions regarding all
aspects of Bright's business including vehicle development,
manufacturing, customers, sales, marketing and finance. At the
end of the visit, DOE's technical team leader Jef Walker tells
Bright COO Mike Donoughe: ``This is the best site visit I have
ever been on.'' Walker had been conducting site visits for at
least 15 years.
In February of 2012, after several urgings to work towards
the resolving the third term sheet and quickly get to a deal
finalization of a then 38-month process, the DOE presents a
fourth draft term sheet, this time raising equity requirements
to more than $350M--significantly more than the $314M loan
amount Bright is seeking and far more private equity compared
to previous loans to Tesla, Fisker, Ford and Nissan. Moreover,
the DOE requires for Bright to spend all of the private equity
before drawing on the loan, and justifies its decision based on
an assessed ``risk of a 9 month delay'' it cannot identify or
quantify based on its research; nor can any automotive experts
validate.
``UNCLE''
Bright investors and management conclude after this lengthy
process that, despite earlier and multiple DOE promises and
continuously changing requirements and ``phantom'' concerns,
the agency does not intend to find a workable deal with Bright
that achieves the objectives of the ATVM program while
protecting tax payers.
Clearly, DOE has been negotiating in bad faith. Without the
cash runway required to explore alternative pathways (which
Bright had in abundance right after the GM deal in July 2010),
it is forced to wind down.
In March of 2012, Secretary Chu, ironically appearing at a
clean-energy truck show in Indianapolis, tells a Bright
employee (recorded) that Bright did not get its loan due to
``market issues,'' and although ``its technology is good'' the
DOE knew the Bright loan wouldn't work ``for the last year and
a half.'' This was never communicated with Bright (see previous
history).
ENCLOSED DOCUMENTATION
Enclosed is a set of documentation* highlighting Bright's
experience with the ATVM process. The 12/28/2011 letter contains the
most thorough documentation of the history, with several supporting
documents contained within.
---------------------------------------------------------------------------
* Documents have been retained in committee files.
2/28/2012 Letter to Sec Chu announcing withdrawal from ATVM
and rationale
2/23/2012 Letter to Sec Chu requesting action to speed a
decision on Bright loan
12/28/2011 Letter to Sec Chu describing history of Bright
ATVM loan (extensive)
5/20/2011 Email to Sec Chu from Amory Lovins requesting
action on Bright ATVM loan
9/22/2009 Letter to ATVM program resubmitting loan for
reduced amount
Bright-DOE Exchange--tracking of every DOE interaction
through 2010
Calendar--another view of the DOE exchanges from 2009-10
DOE Timing Log--higher level summary of key DOE interactions
CCL/term sheet drafts highlighting the changing DOE terms as
dated below:
11/8/10; 1/24/11; 2/3/11; 9/12/11; 12-12-11; 2-23-12
Respectfully,
Reuben Munger,
Chairman and CEO.
Mike Donoughe,
Chief Operating Officer.