    [House Hearing, 115 Congress]
    [From the U.S. Government Publishing Office]

                                RISKY BUSINESS:
                         THE DOE LOAN GUARANTEE PROGRAM

    =======================================================================

                                 JOINT HEARING

                                   BEFORE THE

                            SUBCOMMITTEE ON ENERGY &
                           SUBCOMMITTEE ON OVERSIGHT

                  COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               FEBRUARY 15, 2017

                                   __________

                               Serial No. 115-03

                                   __________

     Printed for the use of the Committee on Science, Space, and Technology

     [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

           Available via the World Wide Web: http://science.house.gov

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                  COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY

                       HON. LAMAR S. SMITH, Texas, Chair
    FRANK D. LUCAS, Oklahoma             EDDIE BERNICE JOHNSON, Texas
    DANA ROHRABACHER, California         ZOE LOFGREN, California
    MO BROOKS, Alabama                   DANIEL LIPINSKI, Illinois
    RANDY HULTGREN, Illinois             SUZANNE BONAMICI, Oregon
    BILL POSEY, Florida                  ALAN GRAYSON, Florida
    THOMAS MASSIE, Kentucky              AMI BERA, California
    JIM BRIDENSTINE, Oklahoma            ELIZABETH H. ESTY, Connecticut
    RANDY K. WEBER, Texas                MARC A. VEASEY, Texas
    STEPHEN KNIGHT, California           DONALD S. BEYER, JR., Virginia
    BRIAN BABIN, Texas                   JACKY ROSEN, Nevada
    BARBARA COMSTOCK, Virginia           JERRY MCNERNEY, California
    GARY PALMER, Alabama                 ED PERLMUTTER, Colorado
    BARRY LOUDERMILK, Georgia            PAUL TONKO, New York
    RALPH LEE ABRAHAM, Louisiana         BILL FOSTER, Illinois
    DRAIN LaHOOD, Illinois               MARK TAKANO, California
    DANIEL WEBSTER, Florida              COLLEEN HANABUSA, Hawaii
    JIM BANKS, Indiana                   CHARLIE CRIST, Florida
    ANDY BIGGS, Arizona
    ROGER W. MARSHALL, Kansas
    NEAL P. DUNN, Florida
    CLAY HIGGINS, Louisiana
                                     ------

                             Subcommittee on Energy

                       HON. RANDY K. WEBER, Texas, Chair
    DANA ROHRABACHER, California         MARC A. VEASEY, Texas, Ranking
    FRANK D. LUCAS, Oklahoma                 Member
    MO BROOKS, Alabama                   ZOE LOFGREN, California
    RANDY HULTGREN, Illinois             DANIEL LIPINSKI, Illinois
    THOMAS MASSIE, Kentucky              JACKY ROSEN, Nevada
    JIM BRIDENSTINE, Oklahoma            JERRY MCNERNEY, California
    STEPHEN KNIGHT, California, Vice     PAUL TONKO, New York
        Chair                            JACKY ROSEN, Nevada
    DRAIN LaHOOD, Illinois               BILL FOSTER, Illinois
    DANIEL WEBSTER, Florida              AMI BERA, California
    NEAL P. DUNN, Florida                MARK TAKANO, California
    LAMAR S. SMITH, Texas                EDDIE BERNICE JOHNSON, Texas
                                     ------

                           Subcommittee on Oversight

                       HON. DRAIN LaHOOD, Illinois, Chair
    BILL POSEY, Florida                  DONALD S. BEYER, Jr., Virginia,
    THOMAS MASSIE, Kentucky                  Ranking Member
    GARY PALMER, Alabama                 JERRY MCNERNEY, California
    ROGER W. MARSHALL, Kansas            ED PERLMUTTER, Colorado
    CLAY HIGGINS, Louisiana              EDDIE BERNICE JOHNSON, Texas
    LAMAR S. SMITH, Texas

                                C O N T E N T S

                               February 15, 2017

                                                                       Page
    Witness List.....................................................     2

    Hearing Charter..................................................     3

                               Opening Statements

    Statement by Representative Randy K. Weber, Chairman,
      Subcommittee on Energy, Committee on Science, Space, and
      Technology, U.S. House of Representatives......................     4
        Written Statement............................................     6

    Statement by Representative Marc A. Veasey, Ranking Member,
      Subcommittee on Energy, Committee on Science, Space, and
      Technology, U.S. House of Representatives......................     8
        Written Statement............................................    10

    Statement by Representative Darin LaHood, Chairman, Subcommittee
      on Oversight, Committee on Science, Space, and Technology, U.S.
      House of Representatives.......................................    12
        Written Statement............................................    14

    Statement by Representative Donald S. Beyer, Jr., Ranking Member,
      Subcommittee on Oversight, Committee on Science, Space, and
      Technology, U.S. House of Representatives......................    16
        Written Statement............................................    18

    Statement by Representative Lamar S. Smith, Chairman, Committee
      on Science, Space, and Technology, U.S. House of
      Representatives................................................    20
        Written Statement............................................    22

    Statement by Representative Eddie Bernice Johnson, Ranking
      Member, Committee on Science, Space, and Technology, U.S. House
      of Representatives.............................................    24
        Written Statement............................................    26

                                   Witnesses:

    Ms. Diane Katz, Senior Research Fellow in Regulatory Policy,
      Thomas A. Roe Institute for Economic Policy Studies, The
      Heritage Foundation
        Oral Statement...............................................    28
        Written Statement............................................    31

    Mr. Chris Edwards, Director, Tax Policy Studies, Cato Institute
        Oral Statement...............................................    44
        Written Statement............................................    46

    Mr. Dan Reicher, Executive Director, Steyer-Taylor Center for
      Energy Policy and Finance, Stanford University
        Oral Statement...............................................    56
        Written Statement............................................    58

    Dr. Ryan Yonk, Assistant Research Professor, Department of
      Economics and Finance, and Research Director, Institute of
      Political Economy, Utah State University
        Oral Statement...............................................    73
        Written Statement............................................    75

    Discussion.......................................................    83

                 Appendix I: Additional Material for the Record

    Documents submitted by Representative Randy K. Weber, Chairman,
      Subcommittee on Energy, Committee on Science, Space, and
      Technology, U.S. House of Representatives......................   108

                                RISKY BUSINESS:
                         THE DOE LOAN GUARANTEE PROGRAM

                                  ----------

                          WEDNESDAY, FEBRUARY 15, 2017

                      House of Representatives,
                             Subcommittee on Energy and
                             Subcommittee on Oversight,
                   Committee on Science, Space, and Technology,
                                                       Washington, D.C.

        The Subcommittees met, pursuant to call, at 10:09 a.m., in
    Room 2318, Rayburn House Office Building, Hon. Randy Weber
    [Chairman of the Subcommittee on Energy] presiding.
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Weber. The Subcommittee on Energy and Oversight
    will come to order.
        Without objection, the Chair is authorized to declare
    recesses of the subcommittee at any time.
        Welcome to today's hearing entitled ``Risky Business: The
    DOE Loan Guarantee Program.'' I recognize myself for five
    minutes for an opening statement.
        Today, we will have the opportunity to review the past, the
    present, and the future of the Department of Energy's loan
    program. I want to thank our panel of witnesses for joining us
    in this important discussion about the appropriate federal role
    in supporting energy innovation.
        Established by the Energy Policy Act of 2005, the DOE loan
    guarantee program was designed to give federal support to
    risky, innovative, clean energy technology. Under a federal
    loan guarantee, instead of the private sector taking on risk to
    fund the scale-up of new technology, the government steps in,
    risking federal dollars on the hopes for success of these
    energy projects.
        Through the section 1703 and 1705 programs, the Department
    guaranteed loans to 30 energy companies, putting about $28
    billion of taxpayer money on the line.
        After Congress approved over $2 billion to subsidize the
    costs of loan guarantees, the DOE then issued more than $16
    billion in guarantees to 26 different projects. In these
    subsidized loans, known as section 1705 loans, companies not
    only received government backing for their loan, but additional
    taxpayer dollars were authorized to pay, quote, the ``credit
    subsidy cost,'' end quote, of the loan, or the estimated cost
    to the federal government to manage the loan over its lifetime.
        Easy money combined with political pressure to issue loans
    before the temporary subsidy program expired led the DOE to
    rush loan applications. Both the DOE Inspector General and the
    Government Accountability Office found that DOE did not have
    the necessary expertise or the metrics to effectively evaluate
    these loans. Predictably, a number of companies that received
    section 1705 loans went into default. In total, over $800
    million in taxpayer money has been wasted by this DOE loan
    program.
        It's clear that the DOE loan guarantee program is
    expensive. The GAO estimates that the cost for the current loan
    guarantees is $2.2 billion with a B. Supporters argue the cost
    is justified if we can help innovative technologies make the
    leap to the commercial market.
        But what if federal meddling in the market actually hurts
    innovation? As we will hear in testimony today, when the
    federal government provides loans and loan guarantees to
    favored technologies, innovation in fact stalls. While federal
    government support helps loan guarantee winners attract
    capital, it draws capital away from other innovative ideas in
    the marketplace.
        And since large companies with the resources to lobby on
    behalf of their projects often have an advantage in the loan
    application process, the DOE loan guarantee program pushes
    capital away from those startups and entrepreneurs that often
    have the most innovative ideas. We need to be opening doors for
    these small innovators, not closing them by pushing investors
    toward federally backed, so-called risk-free investments.
        Additionally, taxpayers often end up paying higher prices
    for their power because of federal government meddling in the
    energy market. For example, when the DOE provided a $1.6
    billion loan guarantee to the Ivanpah solar project in
    California, the state mandated the use of renewable power, and
    utilities entered into contracts to buy power from the DOE-
    backed facility. Unfortunately, the ratepayers in southern
    California will now pay two to five more times for power
    generated by this facility in addition to being stuck with the
    bill if the project goes into default.
        The truth is that when the DOE provides loan guarantees,
    there is no benefit for the taxpayer even if the guaranteed
    loan is paid in full. Regular Americans take on the liability
    of the full loan, they don't see a return, and they can end up
    paying more for their electricity if and when the project is
    actually built.
        The DOE loan guarantee program is just another way the
    federal government picks winners and losers in the energy
    market. It doesn't guarantee innovation, doesn't guarantee cost
    savings, and it doesn't guarantee access to the next generation
    of energy technology. The only thing guaranteed for the
    taxpayers is extra cost and extra risk.
        It is our responsibility in this committee to examine
    Department of Energy programs and ensure our limited resources
    prioritize the kind of research and science facilities that
    open doors for all kinds of innovators.The Department cannot
    prioritize the basic research it does best if it's playing
    venture capitalist.
        Therefore, I think we need to take a hard look at the DOE
    loan guarantee program and determine whether it is an
    appropriate way to spend precious federal research dollars. In
    my opinion, and in the testimony you'll hear today, the
    American people would be better served if the federal
    government stopped picking winners and losers, focused on the
    R&D, and let the market drive the investment for energy
    innovation.
        [The prepared statement of Chairman Weber follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Weber. With that, I conclude, and I now recognize
    Ranking Member, Mr. Veasey.
        Mr. Veasey. Thank you, Mr. Chairman. I'm looking forward to
    working with you this Congress in my capacity as Ranking Member
    of the Energy Subcommittee. And given our history together,
    previously, we served in the Texas Legislature together, served
    on the Environmental Regulation Committee together working on
    similar issues here. And so I think that we'll be able to talk
    about some things that we think can help move America's energy
    future together in the right direction.
        Today, we are examining the Department of Energy's Loan
    Programs Office. I hope that by the end of this hearing my
    colleagues on both sides of the aisle can come to the same
    conclusion that so many nonpartisan observers and professionals
    in the finance industry have, that these loan programs have
    been successful by almost every measure.
        Allow me to highlight just a few of these success stories.
    The LPO portfolio has over 30 projects in 18 States. It has
    enabled over $50 billion in private sector investment in clean
    energy technologies. These loan guarantees have created 56,000
    American jobs across our country. And these loan guarantees
    have helped prevent the release of 34.1 million tons of carbon
    dioxide into our atmosphere. All of this is because at
    Congress's direction the DOE intelligently leveraged the
    federal government's strong credit and LPO's deep expertise to
    the benefit of the American taxpayer.
        For my fiscal conservative friends, the loan programs have
    actually helped reduce the national debt. During LPO's
    relatively short life, the loan and loan guarantees have
    returned approximately $980 million to the Treasury. That is
    net revenue from interest payments after accounting for losses.
    It is notable that even the Heritage Foundation left LPO off
    their list of programs to cut or eliminate in their Blueprint
    for Balance. And based on my quick read, there aren't very many
    DOE programs that are spared in that particular report.
        When Congress authorized the loan program we set aside $10
    billion for expect losses that may occur as the federal
    government takes on varying levels of risk with each of these
    projects. While there have been a handful of projects that did
    not pan out, the total losses from all of these projects comes
    nowhere near the $10 billion originally set aside. In fact, it
    is less than ten percent of the amount Congress originally
    projected, with losses so far adding up to $810 million, a
    number that is covered twice over by the interest payments
    collected. So if we consider this program on a strictly cost-
    benefit or risk-reward basis, it has clearly performed beyond
    expectations and is tremendously successful.
        But those aren't the only or even the most appropriate
    metrics to consider. The section 1705 loan guarantees are
    responsible for launching the utility-scale PV solar industry.
    These loan guarantees enabled the first five 100 megawatt solar
    PV facilities to be built in the United States. What followed
    that initial investment from DOE perfectly illustrates the role
    that these loan guarantees fill in the market. After DOE
    demonstrated the viability of those first five projects,
    private financing began funding utility-scale solar PV
    independently. As of the last year, there are now 45 other
    projects that have received financing.
        However, LPO does more than just provide loan guarantees to
    renewable energy. In fact, over 1/3 of the portfolio's loan
    guarantee authority funds the Vogtle nuclear project in
    Georgia. And with the announcement of a conditional commitment
    for the first Advanced Fossil Energy Project in Lake Charles,
    Louisiana the portfolio continues to diversify. In fact, the
    carbon captured from the Lake Charles project will be used by
    Denbury, a Texas company for enhanced oil recovery, in
    Southeast Texas. And as the Chairman of the Carbon Dioxide
    Enhanced Oil Recovery Caucus, I certainly support this project.
        And with the enhanced oil recovery occurring near if not in
    the district of the esteemed Chairman, I'm hopeful that maybe
    he will consider being supportive of this particular project as
    well.
        The market for industrial carbon capture has the potential
    to experience the same revolutionary changes that the solar PV
    industry has experienced as a result of LPO's unique role and
    capabilities to foster our innovation pipeline.
        In conclusion, the Loan Programs Office has something for
    everyone. It has investments for fossil energy, renewables,
    nuclear, and it even reduces our national debt. I hope we can
    all recognize the benefits and extraordinary gains that have
    come out of LPO, and furthermore, I hope my colleagues on the
    other side of the aisle are willing to work together to
    constructively support and wherever appropriate improve the
    Department's work in this crucial area.
        Mr. Chairman, I want to thank you. I look forward to
    working with you, and I yield back the balance of my time.
        [The prepared statement of Mr. Veasey follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Weber. Thank you, Mr. Veasey. And I was remiss. I,
    too, look forward to working with you. We had good times in the
    Texas legislature.
        Mr. Veasey. Yes, we did.
        Chairman Weber. You bet. Man, I now recognize the Chairman
    of the Subcommittee on Oversight, Mr. LaHood, for his opening
    statement.
        Mr. LaHood. Well, thank you, Chairman Weber. And it's an
    honor to join you here today for this hearing. I want to thank
    the witnesses for being here today for our hearing titled
    ``Risky Business: The DOE Loan Guarantee Program.''
        Today's hearing will provide us with an opportunity to
    examine one of the ways the previous Administration used
    taxpayer dollars to fund massive green energy initiatives with
    the Department of Energy's loan guarantee program. With this
    program, over $28 billion in taxpayer money was used to support
    the loan program's portfolio for 30 projects. Too often, loan
    guarantees were handed out based on political favoritism
    instead of merit.
        Problems with the loan program arose when DOE's first
    approved project, Solyndra, defaulted on its loan after
    receiving $535 million in loan guarantees. Four additional
    projects defaulted on their loans, representing $807 million
    taxpayer dollars lost to date.
        So it's no surprise that the Loan Program Office has faced
    strong criticism from Congress. Rigorous oversight should be
    expected when billions of taxpayer dollars are at stake,
    especially when politics can influence how those dollars are
    spent. This Committee, the Energy and Commerce Committee, and
    the Oversight and Government Reform Committee have held many
    hearings outlining concerns with this program. In addition to
    Congressional oversight, the DOE Inspector General and the
    nonpartisan Government Accountability Office have repeatedly
    raised questions about the mismanagement and accountability in
    the loan program.
        The DOE Inspector General described the DOE Loan Program
    office as, quote, ``attaching a garden hose to a fire
    hydrant,'' unquote. Had Congressional committees not drawn
    attention to the problems with the Loan Program Office, the
    losses could have been far greater. As part of Congress'
    oversight mandate, we have a responsibility to ensure that the
    proper transparency in this place--is the place to ensure that
    DOE is not putting taxpayer dollars at undue risk.
        While this is my first hearing as Oversight Subcommittee
    Chairman, my colleagues on this committee led efforts in the
    last Congress to ensure that the DOE loan guaranteeprogram was
    effectively managed and transparent. I'm committed to
    maintaining oversight of this program in the 115th Congress.
        The loss of taxpayer dollars in the DOE loan program raise
    significant questions about the overall effectiveness of the
    program and what steps Congress may need to take to ensure
    taxpayer dollars are no longer put at risk. We can't keep
    putting American tax dollars on the line when loan guarantee
    recipients are in danger of default. And we can't automatically
    expect the federal government to be better than the private
    sector when it comes to investment and what makes technology
    successful in the commercial market.
        Today's hearing is intended to analyze the future of the
    DOE loan guarantee program. How can it be improved? Is the risk
    to the taxpayers worth the benefits gained? Are the taxpayers
    truly benefiting from the Loan Program Office? Is the DOE loan
    guarantee program operating within its intended purpose, to
    close the gap between innovative technologies and private
    investment? Or is federal government intervention crowding out
    other innovative technologies in the energy marketplace?
        All of these are important questions that require the kind
    of thorough discussion I hope we can have here today. It's our
    job in Congress to ensure responsible management of federal
    resources and determine the path forward for the DOE loan
    program.
        We have a number of excellent witnesses here today that
    will help this committee answer some of these questions and
    provide recommendations on next steps for the DOE loan
    guarantee program. I would like to thank our witnesses for
    joining us here today, and I look forward to the testimony.
        With that, I yield back, Mr. Chairman.
        [The prepared statement of Mr. LaHood follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Weber. Thank you, Mr. LaHood.
        I now recognize the Ranking Member of the Subcommittee on
    Oversight, Mr. Beyer, for his opening statement.
        Mr. Beyer. Thank you. Chairman Weber and Chairman LaHood,
    thanks so much for putting this hearing on today.
        The mission of the Department of Energy's Loan Program
    Office is to help accelerate the deployment of advanced
    innovative clean energy technologies across the United States,
    and the successful deployment of these technologies creates
    jobs, enhances America's competitiveness, and helps to protect
    the environment, the climate, and public health.
        Now, we're likely to hear a lot of criticism about the loan
    guarantee program today. Both witnesses and members are likely
    to say that the federal government should play no role in
    funding energy technologies at all, particularly renewable
    energy technologies. And I think this is philosophically
    congruent with much of the majority's opposition to the Export-
    Import Bank, the idea that government doesn't have a role in
    loan guarantees.
        Some even say that the U.S. Government shouldn't have
    provided more than $470 billion in subsidies to the oil and gas
    industry over the last 100 years. But some may also see
    problems with the DOE providing more than $8 billion in loan
    guarantees or 1/3 of its current loan guarantees to construct
    two new nuclear plants in Georgia. The new LPO portfolio that
    includes solar, wind, fossil fuel, nuclear, and other
    technologies comprises more than $30 billion in loans, loan
    guarantees, and conditional commitments covering more than 30
    different projects across multiple energy and transportation
    technologies.
        I believe the possible plan to halt the DOE's loan programs
    completely, as suggested in a memo by President Trump's DOE
    transition team, is supported by some individuals at the
    conservative Heritage Foundation is a spectacularly bad idea.
    Investing in clean energy is smart. It helps to provide
    scientific solutions to combat climate change. It helps to
    protect our environment and the public's health from toxic
    chemicals. It fosters innovation and the development of new
    technologies. It creates new jobs and helps our economy.
        You know, one of the myths here is that somehow we're in a
    perfectly free market. The American companies' workers in our
    advanced energy sector face fierce foreign competition. And the
    international market is certainly not free. Many firms in the
    advanced energy sector benefit from strong home government
    support. China automaker BYD benefits from generous support
    from the Chinese Government, well on its way to becoming the
    world's largest electric car manufacturer. European firms are
    also making significant gains in new plug-in vehicles and
    renewable energy generation.
        The United States should simply not cede its leadership to
    our foreign competitors in the high-tech advanced energy
    sector. This important DOE program is necessary for American
    businesses and American workers to compete in this growing
    field.
        So regardless of whether you believe in the abundant
    scientific evidence that supports the reality of carbon
    pollution and the role of fossil fuel combustion and sea level
    rise, supporting clean, innovative, renewable energy
    technologies that don't damage our waterways, air, and land by
    releasing toxic chemicals is a good idea. The only thing it may
    really threaten is fossil fuel companies that don't clean up
    their act.
        I hope that as Members of Congress we can have some
    foresight and can agree to support federal investments today
    into the clean energy technologies that our nation will need
    tomorrow, clean energy technologies that will never emerge
    without federal support.
        Perhaps the DOE can get an opportunity today to drill down
    on the actual math. The numbers we've seen suggest the loss
    ratio of around two percent, far less than you have in the
    private sector, that we've already received $980 million more
    in total interest payments, more than the total losses even
    projected in the loan program so just on that fact so far it's
    not projected to be a burden on the taxpayers at all. And
    that's not even including all of the taxes generated by the
    many successful businesses funded by this, all the taxes paid
    by the thousands of jobs created by the federal loan program.
    This, at least the evidence we've seen so far, is a huge net
    impact on the positive way against the federal budget deficit
    and for the federal economy. But perhaps I'll have a chance to
    drill down on that even more.
        Thank you very much for being with us today. And, Mr.
    Chairman, Chairman, and Ranking Member, thank you for inviting
    me to be a part of this.
        [The prepared statement of Mr. Beyer follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Weber. Thank you, Mr. Beyer.
        I now recognize the Chairman of the full committee, Mr.
    Smith, for an opening statement.
        Chairman Smith. Thank you, Mr. Chairman. And I also want to
    thank Chairman LaHood for holding this joint hearing today.
        We will hear from a number of expert witnesses on the
    market impact and risk associated with federal loan guarantees
    for energy innovation.
        The Department of Energy loan guarantee program was
    established in 2005. It was intended to provide federal loan
    guarantees to advance commercial application of innovative
    clean energy technology. In short, the Department guarantees a
    loan given to an energy company. By guaranteeing a loan, DOE
    tells private investors that if the company defaults, the
    taxpayers will foot the bill for the loan. This takes the risk
    away from investors who stand to profit and puts it on the
    American people. Instead of the private sector taking on risk
    to develop new technology, the government steps in and risks
    taxpayer dollars on energy projects.
        In 2009, Congress expanded the loan guarantee program and
    gave DOE $2.4 billion and the authority to manage costs of loan
    guarantees. But instead of careful vetting and appropriate
    metrics to avoid risk, the DOE rushed loan applications and
    issued $16 billion in loans to 26 projects. President Obama's
    political allies, like Solyndra, were often fast-tracked, with
    little consideration for project merit or benefits to the
    taxpayer.
        The results were predictable. High-profile defaults
    occurred, like the $535 million loan guarantee to Solyndra in
    2011, $68 million lost when Abound Solar filed for bankruptcy
    in 2012, and $139 million lost from a direct loan to Fisker
    Automotive. These events demonstrate what happens when the
    federal government picks winners and losers in the energy
    market.
        DOE has lost over $800 million on bad loans since 2005.
    According to estimates from the Government Accountability
    Office, the total cost for the current loan portfolio is $2.2
    billion plus $312 million in program administrative costs. This
    is the cost to manage the current loan portfolio over the
    lifetime of the loans. These costs will increase if another
    loan is defaulted or if the Department issues new loan
    guarantees to projects with any financial risk.
        Under the DOE loan guarantee program, American tax dollars
    also subsidize loans for large companies with billions in
    available capital like Ford, Goldman Sachs, Google, GE, and
    Berkshire Hathaway. And if something goes wrong, these
    companies aren't stuck with the bill; the America people are.
    It is unfair to ask American taxpayers to subsidize risky
    loans.
        DOE also provides a government stamp of approval to favored
    technologies through loan guarantees. That means that even when
    DOE backs a successful project, it drives private investment
    away from technologies that don't receive federal loan
    guarantees. Private sector companies can't compete with other
    private sector companies that get loan guarantees.
        It is our responsibility to oversee the use of the
    Department of Energy's resources and only reauthorize those
    programs that provide the best investment for the American
    people.
        Though its loan guarantees have a suspect past, DOE has an
    exemplary track record in basic research. The Department's
    national labs and scientific user facilities provide
    opportunities to university researchers and private innovators
    as they search for the next great breakthrough in energy
    technology. And unlike the DOE loan guarantee program, the
    national labs are open to every innovative entrepreneur, not
    just those with a certain political agenda.
        Mr. Chairman, as we reauthorize the Department of Energy's
    research and development programs, we should prioritize the
    basic and early-stage research that would not be undertaken by
    the private sector.
        Thank you. And I will yield back.
        [The prepared statement of Chairman Smith follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Weber. Thank you, Mr. Chairman. And I now
    recognize the Ranking Member of the full committee, Ms.
    Johnson, for an opening statement.
        Ms. Johnson. Thank you very much, Mr. Chairman. And let me
    express my appreciation to you, Mr. LaHood, and our Ranking
    Members for holding this hearing and I want to thank the
    witnesses for being here today.
        We are here to discuss the record at the Department of
    Energy's Loan Programs Office and the unique role that these
    programs play in our energy innovation pipeline. They provide
    both direct loans and loan guarantees for projects across a
    broad range of energy sector, including nuclear, fossil energy,
    renewables, and advanced vehicles.
        This support has been critical because private lenders are
    typically unwilling or unable to take on the risk associated
    with financing truly innovative and first-of-a-kind projects of
    this scale on their own. And that's true across the board in a
    lot of research and innovation.
        These programs have been instrumental in establishing new,
    American-made, clean energy industries. For example, prior to
    2010, there actually were no large-scale photovoltaic solar
    projects in the United States, but after a careful review of
    both the opportunities and the risk, DOE's loan guarantee
    program supported the first five projects of this kind. And
    since then, the private sector has taken over financing another
    45 utility-scale projects without government involvement. Any
    objective observer will tell you that this simply would not
    have happened if DOE had not fulfilled the loan program's
    unique role of reducing the risk of deploying new energy
    technologies.
        The loan guarantee program is also supporting construction
    of the first U.S. nuclear reactors in 30 years at the Vogtle
    plant in Waynesboro, Georgia. And less than 2 months ago, DOE
    issued a conditional loan guarantee for an exciting new carbon
    capture and methanol production project in Lake Charles,
    Louisiana.
        DOE's advanced technology vehicles manufacturing program
    which issued direct loans, is yet another success story. Not
    only did it help launch one of the leading electric vehicles
    manufacturers in the country today, Tesla Motors, but that
    company paid back its loan with interest almost ten years
    early. Overall, this program has supported the production of
    more than 4 million fuel efficiency cars and more than 35,000
    jobs across eight States.
        The record is also now abundantly clear that DOE has been
    carrying out these key programs in a fiscally responsible
    manner. Even initial critics now view the loan guarantee
    program as a success with losses equaling only 2.23 percent of
    the office's entire portfolio, a rate that is lower than any
    venture capitalist can achieve. While there will undoubtedly be
    instances when an individual project does not meet its goal,
    DOE's overall portfolio remains strong and healthy.
        In closing, I want to emphasize there is no such thing as a
    free market when it comes to energy. You can tell that by all
    these Texans on this committee. The full cost of taxpayers of
    producing and ensuring the safe transportation of oil on the
    global market is not reflected in its price. Further, the
    growing cost of carbon pollution have yet to be priced into the
    energy sector unfortunately. And Germany, China, India, and
    other leading competitors have implemented their own robust
    energy loan and loan guarantee programs to help them across
    what's often called the "valley of death" between clean energy
    and technology development and commercialization.
        So DOE's loan programs are vitally important for enabling
    the United States to compete effectively on the world stage,
    and more broadly, for fostering an American-made clean energy
    future for all of us.
        Again, I thank each of you for joining us today, and with
    that, Mr. Chairman, I yield back.
        [The prepared statement of Ms. Johnson follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Weber. Thank you, Ranking Member Johnson.
        Our first witness today is Ms. Diane Katz, Senior Research
    Fellow in Regulatory Policy at the Thomas A. Roe Institute for
    Economic Policy Studies at the Heritage Foundation. Prior to
    joining the Heritage Foundation, Ms. Katz was a member of the
    editorial board of the Detroit News for nine years. I guess
    that proves there is life after editorializing. Okay. Ms. Katz
    holds a bachelor's degree in philosophy from Thomas Jefferson
    College and a master's degree in journalism from the University
    of Michigan. Welcome.
        Our next witness is Mr. Chris Edwards, Director of Tax
    Policy Studies at the Cato Institute. Before joining Cato, Mr.
    Edwards was a Senior Economist on the Congressional Joint
    Economic Committee. In addition, he was a member of the Fiscal
    Future Commission of the National Academy of Sciences. Mr.
    Edwards received his bachelor's degree in economics from the
    University of Waterloo and his master's degree in economics
    from George Mason. Welcome, Mr. Edwards.
        Our third witness today is Mr. Dan Reicher, Executive
    Director of the Steyer-Taylor Center for Energy Policy and
    Finance at Stanford University. Mr. Reicher previously served
    as Assistant Secretary of Energy for the Office of Energy
    Efficiency and Renewable Energy and the Department of Energy
    Chief of Staff both under President Clinton. Mr. Reicher, it
    says here you received your bachelor's degree in biology from
    Dartmouth, your law degree from Stanford, and your honorary
    doctorate from the State University of New York. Welcome.
        And our final witness is Dr. Ryan Yonk, Assistant Research
    Professor in the Department of Economics and Finance and
    Research Director in the Institute of Political Economy at Utah
    State University. Dr. Yonk received his master's degree in
    political science from Utah State and his Ph.D. in political
    science from Georgia State. Welcome, Doctor. Is it Yonk or
    Yonk?
        Dr. Yonk. Yonk.
        Chairman Weber. It is Yonk. Well, welcome.
        I now recognize myself for five minutes--whoops. I now
    recognize Ms. Katz--I'm sorry. I'm getting ahead of myself--for
    five minutes of testimony, although I've got questions I would
    like to ask you. So, Ms. Katz, you're recognized.

                      TESTIMONY OF MS. DIANE KATZ,

              SENIOR RESEARCH FELLOW IN REGULATORY POLICY,

          THOMAS A. ROE INSTITUTE FOR ECONOMIC POLICY STUDIES,

                        THE HERITAGE FOUNDATION

        Ms. Katz. Mr. Chairman, and Members of the Subcommittee,
    thank you for the opportunity to address you today. My name is
    Diane Katz, and I'm a Senior Research Fellow in Regulatory
    Policy at the Heritage Foundation. The views I express in this
    testimony are my own and do not represent any official position
    of the Heritage Foundation.
        My purpose here is to provide economic context to the loans
    and loan guarantees issued by the Department of Energy. Few
    Americans are aware that, collectively, we shoulder more than
    $18 trillion in debt exposure from loans, loan guarantees, and
    subsidized insurance provided by some 150 federal programs.
    Among them are 35 programs administered by the Department of
    Energy and nine other agencies that provide loans and loan
    guarantees for clean energy projects. This redistribution of
    taxpayer dollars and credit risk erodes the nations
    entrepreneurial spirit, undermines innovation, and fosters
    cronyism.
        The government credit portfolio consists of subsidized
    financing for energy, housing, agriculture, education,
    transportation, exporting, small business, and others. Federal
    insurance programs cover bank and credit union deposits,
    pensions, flood damage, declines in crop prices, and acts of
    terrorism. Capital for mortgage lending by banks is provided by
    Fannie Mae and Freddie Mac. Researchers with the Federal
    Reserve Bank of Richmond in their bailout barometer estimate
    that 61 percent of all liabilities throughout the U.S.
    financial system are explicitly or implicitly backed by
    taxpayers.
        Among--Americans across the political spectrum were rightly
    indignant to witness Washington bailing out banks and
    corporations during the 2008 financial crisis. In similar
    fashion, the Department of Energy routinely uses taxpayers'
    dollars to finance projects that benefit wealthy investors and
    titans of industry. With a market cap exceeding $573 billion,
    Google does not need loan guarantees from the Department of
    Energy. Ford Motor Company, with a market cap of $50 billion,
    does not need loans from the Department of Energy. Neither does
    British Petroleum, Chevron, or Morgan Stanley, but they benefit
    from them nonetheless.
        With some government loans extending decades, the burden of
    federal credit will encumber generations to come without their
    consent. Advocates insist that the subsidies are necessary to
    equalize opportunity, create jobs, and fill gaps in private
    financing. However, the actual lending patterns and outcomes do
    not reflect the purported goals.
        Government credit is a poor substitute for private
    financing. The purposes of the two are entirely different, as
    are the results. Private lenders offer credit to generate
    profit. The challenge they face is to minimize risk and
    maximize return within ever-changing market conditions. Under
    threat of loss, they must take great care in lending.
        In contrast, government financing is detached from the
    profit motive and its inherent discipline because taxes provide
    an endless source of revenue, and federal agencies are largely
    shielded from accountability. Consequently, double-digit
    default rates are common among federal credit programs.
        Too often, policymakers create subsidized financing to
    offset costly regulatory demands, and oftentimes, the
    beneficiaries are those with the most political influence, not
    those with the greatest need. The Department of Energy, for
    example, guaranteed $1.6 billion in loans for a solar thermal
    power facility in Southern California. The facility negotiated
    power purchase agreements with two California utilities, and
    the utilities apply the overpriced power purchases toward
    California's onerous renewable energy quotas. Ratepayers are
    forced to pay four to five times more per megawatt hour than
    they would otherwise. This particular facility is owned by
    Google; NRG Energy, market cap $5 billion; and BrightSource
    Energy, a privately held company that reportedly counts British
    Petroleum, Chevron, and Morgan Stanley among its investors.
        Other beneficiaries of the Department's largesse include a
    Spanish banking consortium with a market cap of $76 billion;
    and ACS Cobra, a world leader in industrial infrastructure,
    market cap $9 billion.
        When the government shifts credit risk to taxpayers,
    borrowers are relieved of the consequences of failure and act
    accordingly. They will still work for success of course, but
    there is less incentive to prevent loss. When companies do not
    compete for private capital based on merit, productivity and
    innovation become less important than political capital. Credit
    worthiness also becomes less relevant to banks that
    increasingly act as pass-through agents for government
    financing. The result is a larger proportion of U.S. assets
    that are inherently weaker than they otherwise would be if
    financed by the private sector.
        And I'll close up. Fisker Automotive is a case in point.
    The Department of Energy awarded the company a $529 million
    loan to produce hybrid plug-in vehicles. Fisker failed to meet
    performance targets and ultimately filed for bankruptcy,
    costing taxpayers $139 million.
        We will never know what innovations have gone undiscovered
    because of preoccupation--the Department's preoccupation with
    electric vehicles, solar panels, and other pet technologies,
    nor does government financing appear to be all that effective.
    The Department of Energy has been financing development of
    electric vehicles for 40 years.
        Reform of government financing should be a Congressional
    priority. Unconstrained spending, unfettered losses, and
    rampant cronyism are only part of the cost. Trillions of
    dollars of credit exposure represents the commandeering of the
    financial services market by the government and is escalating
    power over private enterprise. This should end. Thank you.
        [The prepared statement of Ms. Katz follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Weber. Thank you, Ms. Katz.
        I now recognize Mr. Edwards for five minutes.

               TESTIMONY OF MR. CHRIS EDWARDS, DIRECTOR,

                   TAX POLICY STUDIES, CATO INSTITUTE

        Mr. Edwards. Thank you very much.
        [Audio malfunction in hearing room.]
        Chairman Weber. There we go.
        Mr. Edwards. Today, 29 States impose renewable portfolio
    standards that require purchases of renewable energy such as
    solar and wind, so it seems to me with that high level of state
    support, layering on top federal subsidies is overkill.
        Secondly, the failures like Solyndra have been mentioned,
    and it is true that the DOE appears to have a low default rate
    on its loan portfolio. But to an economist the real issue is
    are the benefits of these projects higher than the costs, and
    in a lot of cases I don't think they are.
        And to give you one example, the Ivanpah solar project in
    California has been mentioned. It strikes me that there's been
    very high cost there with moderate or low benefits. The project
    is generating a lot less power than promised. It's using a lot
    more natural gas to fire up its facility every day than
    promised, and the price of power is a lot higher than natural
    gas fuel generation in California.
        I also think the $8 billion loan guarantee for the nuclear
    power plant in Georgia owned by Southern Company, that's been a
    rather dubious loan as well. That project is far behind
    schedule and far over cost.
        A third issue is the corporate welfare and cronyism issue.
    The Washington Post, looking at Obama's subsidies, concluded,
    quote, ``Obama's green technology program was infused with
    politics at every level,'' unquote.
        Public opinion polls over recent years have shown plunging
    support both for federal politicians and for big businesses,
    and I think part of the issue is cronyism. I think both big
    business and federal lawmakers would gain a lot more public
    support if they separated themselves more, if they ended
    corporate welfare, allowed big business to earn profit and loss
    without federal intervention.
        A fourth issue is that the private sector can fund
    alternative energy itself these days. As has been mentioned,
    most DOE loan guarantees in this program have backed wealthy
    investors and large corporations. Warren Buffett's Berkshire
    Hathaway has invested $17 billion in renewable energy projects
    over the last decade. To me this shows that there's a heck of a
    lot of private cash available for renewable energy these days,
    and the time for federal intervention, I think we're beyond
    that. These are large and mature industries these days that
    should be able to fund themselves.
        A fifth issue is that subsidies distort decision-making. In
    technology-based industries like renewable energy, it is the
    leanest and quickest and most adaptive firms that usually
    succeed. I think federal subsidies undermine private
    productivity. I think they tend to make businesses slow and
    slow to change as markets are constantly changing. So I think
    subsidies undermine private innovation and productivity.
        So without programs like this, what can the federal
    government do? I think one thing the federal government can do
    is do major tax reform. Rather than subsidizing debt for
    particular projects like DOE loan guarantee program did, I
    think Congress should look at reforming the tax code to reduce
    the cost of equity financing across the economy. Rather than
    favoring particular projects, Congress should do things like
    reducing capital gains tax rates, which will incentivize more
    venture and angel investment in advanced industries like
    renewable technology.
        Also, I'm a big fan of capital expensing, which is part of
    the House Republican tax plan. Capital expensing is very much a
    green tax policy reform. Not only does--capital expensing would
    benefit a capital-intensive industries like utilities and
    energy, expensing would encourage businesses in all industries
    to more rapidly change and invest, replacing their old
    structures, their old equipment and technologies that tend to
    be less energy-efficient with new structures and new equipment
    and machinery which is more energy-efficient. So I think tax
    reform can very much be an exercise in green policymaking on
    Capitol Hill.
        So to conclude, I think Republicans are in a unique
    position to start cutting back on some business subsidies like
    the DOE loan guarantees because Republicans are also promising
    to reduce taxes and reduce regulation on business. So business
    would lose federal handouts on the one hand but on the other
    hand the regulatory tax burdens faced by businesses would fall.
    I think that would be a good trade that would benefit everyone
    and the economy. Thank you.
        [The prepared statement of Mr. Edwards follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Weber. Thank you, Mr. Edwards.
        Mr. Reicher, you are now recognized for five minutes.

           TESTIMONY OF MR. DAN REICHER, EXECUTIVE DIRECTOR,

                        STEYER-TAYLOR CENTER FOR

                       ENERGY POLICY AND FINANCE,

                          STANFORD UNIVERSITY

        Mr. Reicher. Thank you, Chairmen Smith, Weber, and LaHood
    and Ranking Members Veasey, Johnson, and Beyer. I appreciate
    the opportunity to testify.
        You have my bio, but let me emphasize that I have some
    honest-to-goodness background in energy project investing. I
    cofounded an energy project investment firm where we raised
    $100 million from a major pension fund and a venture-capital
    firm. I also made project investments while working at Google.
    Finally, I worked for an energy technology company that
    received a major venture-capital investment.
        Mr. Chairman, the U.S. Government has long played a vital
    and successful role in helping to commercialize energy
    technologies, including, among others, commercial nuclear
    power, carbon capture and storage, and hydraulic fracturing. I
    am focusing on technology commercialization because that is the
    real core of the DOE loan guarantee program today.
        You will hear lots of arguments today about how the loan
    guarantee program is not an appropriate role for government and
    that the private sector should assume the burden, but these
    comments miss the mark because the loan guarantee program, as
    currently structured and operating, is focusing quite precisely
    on the role where the private sector needs help. And I
    emphasize technologies that have not reached full commercial
    scale and where, because of their risk profile, banks and bond
    issuers are reluctant to provide financing. Once the technology
    has been proven to work at commercial scale, the DOE loan
    program generally has no further role, and that is the case
    today in the DOE loan program where, for example, financing for
    solar PV projects using fully commercialized technologies has
    ended following loan guarantees made about five years ago that
    helped U.S. PV projects get to full utility scale.
        The private sector has financed scores of subsequent
    projects. The DOE loan guarantee program, as authorized by
    Congress and signed by President George W. Bush, is carrying
    out its role across a broad range of energy and transportation
    technologies: advanced fossil, nuclear, renewables, energy
    efficiency, and vehicles. And DOE's Loan Program Office is
    managing the investment portfolio successfully.
        Here are the numbers, the most updated ones. As of December
    31, 2016, 22 projects supported by the Loan Program Office are
    operational and $6.65 billion in loan principal and $1.79
    billion in interest have repaid to the U.S. Treasury. Loan
    losses in the portfolio are approximately $810 million. This is
    barely half of the interest already paid on the DOE loans to
    date. It is only a little over two percent of the program's $36
    billion of loans, loan guarantees, and conditional commitments.
    And these losses are a tiny fraction of the $10 billion set
    aside by Congress to cover failed loans.
        I would note that in her testimony, Ms. Katz indicates
    that, quote, ``double digit default rates are common among
    federal credit programs.'' The DOE rate is barely in the single
    digits, and the LPO's two percent loan loss ratio is less loss
    ratio in the loan portfolios of virtually every U.S. money-
    centered bank. And these banks are generally not making loans
    for energy projects deploying advanced technologies and
    certainly not in the riskier commercialization stage.
        I also want to emphasize that the focus today is on loans,
    not grants. Loans get paid back, grants do not, and they get
    paid back with interest to the U.S. Treasury, also known as
    U.S. taxpayers. A lot of the testimony today confuses grants
    and loans.
        Looking ahead, the Loan Program Office has more than $40
    billion in remaining authority with $12.5 billion for advanced
    nuclear projects, $8.5 billion for advanced fossil, $4.5
    billion for renewable energy and efficiency, and $16 billion
    for advanced transportation projects. Importantly, the office
    has recently received more than 70 applications in response to
    its current solicitations for almost $50 billion in loans and
    loan guarantees.
        Mr. Chairman, U.S. infrastructure has emerged as an area of
    both substantial national need and bipartisan support. The good
    news is that there are multiple areas where the DOE loan
    guarantee program can provide much-needed infrastructure
    investment from already authorized funds and simultaneously
    support important technology innovation. This includes
    infrastructure projects involving, for example, electricity
    transmission, advanced nuclear technology, carbon capture
    utility-scale storage, and advanced vehicles.
        Infrastructure investing, Mr. Chairman, can divine the next
    phase of the DOE loan guarantee program with no new
    authorization or appropriations. This is a very nice down
    payment on the proposed trillion-dollar infrastructure program
    that is the subject of so much discussion.
        A final point: In the next 20 years the International
    Energy Agency projects that the world will spend roughly $48
    trillion on energy infrastructure, one of the biggest economic
    opportunities of the 21st century. China is organized to take
    the biggest piece of this economic pie. It has no reluctance
    helping energy project developers raise capital to
    commercialize technologies and sell them to the world. We
    ignore China's resolve and impressive success to date at our
    peril, and it is the situation that makes the attacks on
    federal energy technology commercialization like the DOE loan
    program so misguided.
        The Congress and the new Administration should build on the
    loan guarantee program's success to date and substantial
    remaining loan authority to jumpstart infrastructure investing
    and advance the U.S. economy and environment and security in
    the process. Thank you very much.
        [The prepared statement of Mr. Reicher follows:]
        [[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Weber. Thank you, Mr. Reicher.
        Dr. Yonk, you're recognized for five minutes.

                      TESTIMONY OF DR. RYAN YONK,

                     ASSISTANT RESEARCH PROFESSOR,

                  DEPARTMENT OF ECONOMICS AND FINANCE,

                         AND RESEARCH DIRECTOR,

                    INSTITUTE OF POLITICAL ECONOMY,

                         UTAH STATE UNIVERSITY

        Dr. Yonk. Mr. Chairman, Members of the Subcommittee, it's
    my pleasure to speak with you this morning to share some of my
    thoughts and results of preliminary research we've done in the
    Institute of Political Economy at Utah State.
        To begin, the loan guarantee programs were conceived as an
    idea to push financing towards underdeveloped clean energy
    technology and to improve the environment, to promote economic
    growth, and to produce a more secure energy supply. However,
    the title 17 loan guarantee program has likely failed to meet
    these objectives and instead has been used as a political tool,
    diverted funding from alternative clean energy investments, and
    primarily benefited large politically connected corporations.
        Government loan guarantees programs present a number of
    policy difficulties, and the Department of Energy's program is
    no exception. My testimony today and my full written testimony
    illustrate how the Department's loan guarantee programs distort
    markets, misdirect funds, and fail to promote truly innovative
    technology.
        Loan guarantee programs offered by governments and the
    private sector are intended to close a fiduciary gap between
    burgeoning ideas and private investment. By promising to cover
    loan payments if a company fails, loan guarantors allow
    entrepreneurs easier access to private capital. And presenters
    of government programs in this area argue that private capital
    is too risk-adverse to properly finance whatever it is that
    they seek to subsidize.
        The loan guarantee program is well-intentioned, as most
    policy generally is, but its designers failed to consider a
    number of unseen effects. The Department of Energy's program
    has deterred investment in other areas and made it more
    difficult for some to receive private investments, been used as
    a political tool, encouraged mal-investment, and primarily
    benefit established companies with access to--with pre-existing
    access to capital for research and development.
        Now, federal loan guarantees can only be said to serve a
    public benefit if they accomplish what we might call
    additionality, meaning the program must be offering loans to
    projects that would not otherwise have garnered funding in the
    open market. A program that extends government assistance to
    projects and companies that would have little trouble securing
    private financing accomplishes little, adds unnecessary
    administrative costs, and ultimately puts taxpayer money at
    risk.
        Some exploratory research on the additionality of loan
    guarantee programs for energy technology from both the
    Department of Energy and the Department of Agriculture have
    revealed poor additionality. However, even if government loan
    guarantees managed to accomplish perfect additionality, this
    alone would not sufficient justification for the continuation
    of the program.
        Many conceive of loan guarantee programs as marginally
    shifting the risk calculus for private investment.
    Realistically, loan guarantees completely shift the entire
    calculation of private investors. Securing a government loan
    guarantee proves to be a highly political process, and private
    capital often follows public capital.
        Now, despite the appealing tenor of that statement, this
    unfortunately means that only the politically connected are
    funded. Most section 1705 funding has gone to large
    corporations who already have access to capital for investments
    in research development and deployment. And it's here that the
    fundamental problem with this form of subsidy emerges because
    it makes it more difficult for new ideas to emerge and come to
    fruition as it further entrenches establishments.
        Government support, as the previous Chief Marketing Officer
    at Tesla motors complained, may make life easier for those who
    receive support, but it also makes it difficult for new ideas
    to gain private funding and grow.
        Loan guarantee programs, like any subsidy, move resources
    towards the subsidized good. A subsidy redirects private
    capital towards the subsidy because it changes the risk
    calculation investors go through. The subsidy distorts the
    market signals of profit and loss to appear as if the
    subsidized industries provide more value than they do.
    Political power and lobbying prowess, not the collective
    intelligence of all individuals in the market allocate the
    funding of these programs.
        My own analysis indicates that the unseen costs are greater
    than we often anticipate, and this position rests in large part
    on a counterfactual. How do you measure what did not happen?
    The question of what could have been, the opportunity cost of
    these loans, is a serious consideration, even if it is a
    difficult empirical one.
        Preliminary examinations of the Department of Energy and
    USDA's programs have been discouraging. Though the entire
    literature pleads for more concerted research efforts, the
    political problems associated with the funding justify further
    skepticism towards section 1705 and section 1703, as do the
    very nature of the recipients of the guarantees.
        In place of these programs, government would do well to
    simply step out of the way of entrepreneurs and individuals. As
    the development of the technology industry demonstrates,
    allowing experimentation and markets to drive innovation is a
    promising avenue for improving the world. Government officials
    should clear a path for entrepreneurial experimentation
    unfettered by precautionary regulation and subsidization. A
    policy of permission-less innovation is more likely to find
    successful solutions to pressing environmental and energy
    questions such as climate change and pollution than government
    agencies choosing projects based on political considerations.
    Thank you.
        [The prepared statement of Dr. Yonk follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Weber. Thank you, Dr. Yonk.
        Heritage was actually mentioned earlier, a discussion of
    the Heritage Foundation about they were not recommending to do
    away with the loan program, and yet we have a Blueprint for
    Reform that they update every year, in 2017, ``Mandate for
    Leadership'' Series. And on page 51 they actually do recommend
    doing away with it. I want to submit this into the record,
    without objection.
        [The information appears in Appendix II]
        Chairman Weber. And then furthermore, before I get going, I
    have a letter from the Mercatus Center, Veronique de Rugy, also
    a letter about the loan program I, too, want to submit into the
    record. Without objection, so ordered.
        [The information appears in Appendix II]
        Chairman Weber. I now recognize myself for five minutes of
    questioning.
        Mr. Edwards, according to a report by the Mercatus Center
    that I just cited, 90 percent of the section 1705 loans went to
    subsidize lower-risk power plants backed by big companies,
    which actually had pretty good access to capital. These
    companies included Goldman Sachs, NextEra Energy, and General
    Electric. If these projects would have been built without
    government guarantees, why do you think that DOE would be
    wanting to subsidize them? And do you think this is just yet
    another form of corporate welfare?
        Mr. Edwards. It does seem to me that you can divide the
    section 1703 and 1705 projects into two sort of pots. The great
    majority of them were subsidies for projects in my view
    would've gone ahead anyway because, as I said, 29 States now
    have these renewable purchasing requirements, mandates that are
    escalating and increasing over time. These projects were going
    to get built, and when federal subsidies were layered in, it
    just meant that the investors like Warren Buffett and others
    earned higher returns than otherwise. Then, there was a smaller
    group of other investments in the very risky projects like
    Solyndra and a few others that didn't pan out and, you know,
    those didn't have those sort of state subsidy backing.
        So I think in both cases federal intervention doesn't make
    sense. I think the state government subsidized renewable so
    much now not only with the purchase requirements, with the tax
    credits, their own subsidies, federal subsidies are overkill.
    And I have in my testimony some discussion from The New York
    Times which looked at this and agreed that during the Obama
    years there really was overkill in subsidies.
        Chairman Weber. Thank you. I want to follow up with you,
    Dr. Yonk. And I want to come back to something you said in your
    written testimony. The follow-up is that with all of these
    large companies applying for loan guarantees, what does that
    mean for the little guy, number one? What about a small
    business startup or one innovative entrepreneur? Do they have
    the resources to compete against the lobbying power of these
    big companies? What has been your findings?
        Dr. Yonk. Yes, Mr. Chairman. I think you illustrate one of
    the problems with any sort of approach in this regard, and that
    is that precisely those--that entrepreneur in the garage with
    the crazy idea is--will never have access to these sort of loan
    guarantees. What's interesting is, as Mr. Reicher said, these
    are really about commercialization of projects moving from one
    phase to another, as opposed to actually spurring the
    innovation of new technology industries. And so it limits
    greatly the ability of those to do it, and we select on those
    that are already at a certain point and we make a continued bet
    on that same industry over time.
        Chairman Weber. Thank you. You had made the comment that
    you can't measure what has not happened and I was following in
    your testimony and I had actually written down what cannot be
    measured is if the private equity firms adopt a wait-and-see
    posture. They're standing on the sidelines, and you'll never
    know what they contemplated not doing if that's not too many
    negatives, you know. And so I think you make a good point.
        So what does that mean, Dr. Yonk, for innovation in the
    energy market in practical terms? Don't DOE guarantees to some
    companies discourage investment in others? Do you know of
    examples?
        Dr. Yonk. Yes, Mr. Chairman. There are two sort of--let me
    take the first question and then apply it to the second, and
    that is what I believe happens in these regards is, as
    individuals are making these private risk calculations, as
    hedge funds or wherever are, they now incorporate the
    probability of a loan guarantee being brought into it and they
    seek to mitigate risk on their own side by following the loan
    guarantee or the issuance of a loan by government. And as a
    result, we end up primarily betting on--because this again is a
    commercialization issue, we end up betting on technologies that
    are attempting to make the transition into full-scale
    commercial size, as opposed to spurring the innovation at the
    smaller scale.
        And so what I believe happens--and this is where the
    counterfactual comes in--is that we end up seeing that there is
    a flight towards pre-existing alternatives as opposed to what
    might be termed the crazier ideas that in large part if you
    read the background on these loan guarantees, it was meant to
    do risky things.
        So we talk a lot about the risk profile. I hear the risk
    profile of this if it was meant to fund risky technologies of a
    two percent loss rate, that's not encouraging to me if the goal
    was in fact to be spurring the riskier side of innovation.
        Chairman Weber. Thank you. I've got about a minute left.
    Actually, I'm down to 11 seconds. So I tell you what, I'm going
    to stop there and I'm going to recognize the Ranking Member for
    five minutes, Mr. Veasey.
        Mr. Veasey. Thank you, Mr. Chairman. And before I go into
    my questions, I just want to be clear. And I'm not going to
    submit a report for the record--that I specifically referenced
    the Blueprint for Balance while the Chairman specifically
    referenced the Blueprint for Reform, so two different reports
    there that were referenced but just wanted to clarify that.
        And this question is government role for Mr. Reicher. Mr.
    Reicher, some would argue that the government shouldn't have a
    role in issuing loan guarantees or direct loans to companies,
    but this perspective ignores a long history of success that
    loan guarantees have shown not just in the energy sector but
    also the housing market, agriculture market, and many other
    industries. How would you respond to the assertions we've heard
    today that the government should have no role in this space at
    all?
        Mr. Reicher. Thank you, Mr. Veasey. The government has had
    a very long role in commercializing energy technology and in
    providing finance, both loans, loan guarantees, grants. I would
    argue that we would not have seen the development of commercial
    power if the government in the 1950s in the Eisenhower
    Administration had not paid for the development of the early
    plans, could have been delayed, could have been stillborn if
    there was an accident. The private sector was not in a position
    to put its own private capital into those early nuclear power
    plants.
        The government participated with private entrepreneurs in
    the development of fracking. Government put in grants, the
    government put in tax credits, the government provided
    technologies in collaboration with the private sector, and from
    that, in 2006, we saw this technology take off.
        Carbon capture is another example. We would not have seen
    the development of carbon capture to the point that it's
    reached--still a long way to go--had the government not started
    putting federal dollars into this technology in 1997.
        So the government has a long role of commercializing energy
    technology, and I think all this is doing is putting it in a
    smarter form. Remember, these are loans. They have to be paid
    back. These are not grants, which has been the more traditional
    form of government support.
        Mr. Veasey. When you start talking about us being able to
    lessen our dependency from petro-dictators around the world,
    one of the things that has lessened our ability to depend upon
    those petro-dictators have been the advent of renewable
    energies. And in your opinion, would the utility-scale solar
    industry exists as it does today without DOE's loan programs?
        Mr. Reicher. So let's remember where we were in 2008, 2009,
    2010. We were in the depths of the financial crisis. It was not
    easy. In fact, for most companies it was next to impossible to
    go out and get a loan for an energy project. That's number one.
    They were also deploying utility-scale solar. We had never
    built a solar project in this country that was 100 megawatts or
    bigger. Scaling up energy technology is really tough. It's very
    risky.
        Those two things together meant that most banks, most bond
    issuers said we don't either have the money or your project is
    too risky. The federal government stepped in with its
    congressionally authorized loan guarantees and said we're going
    to back the first few projects. Remember, these are just the
    first few projects, number one, number two, number three, not
    30, 40, or 50. The private sector followed from there and the
    photovoltaic project market has exploded.
        Mr. Veasey. Again, us being able to lessen our dependency
    upon foreign oil by investing in our own energy, clean energy
    sectors here, but startup money is a big problem. IT startup
    companies have low capital costs. They are attractive options
    for venture capitalists, but my understanding is that energy
    investments take much longer to pay back and are much riskier.
    In your expert opinion, how do energy sector investments
    compare to other sectors, whether it be information technology,
    health care, or retail?
        Mr. Reicher. Mr. Veasey, Mr. Chairman, I have to say I
    spent several years at Google, and it was fascinating to watch
    the difference between investing in information technology,
    software technology, and investing in energy hardware,
    extraordinarily different. With information technology,
    software engineers sit down. It's often for a few months. They
    develop a new product, and in simple terms, they push a button
    and it's deployed. They make adjustments to it over time, low
    cost, relatively quick.
        In comparison, developing a piece of energy hardware, you
    don't measure things in months. You don't even measure things
    in years. You often measure them in decades. I'll show you any
    number of technologies--you know them well--where it's taken
    10, 20, 30, 40, 50 years to get energy technology to full
    scale. And you don't measure this in billions--I'm sorry in
    millions. You measure it in billions or tens of billions,
    completely different. And that's why these loan guarantees make
    great sense.
        Mr. Veasey. Thank you, Mr. Reicher. Thank you, Mr.
    Chairman.
        Chairman Weber. I now recognize Chairman LaHood.
        Mr. LaHood. Thank you, Mr. Chairman. And I want to thank
    the witnesses for being here today and your valuable testimony.
        And in looking at the DOE loan guarantee program, I guess
    I've tried to objectively look at the program and the 28
    projects that are part of this loan guarantee program. And as I
    look at those projects, many of them have value. There are
    innovative. They present opportunities. They have great people
    involved with them. And so figuring out what role the federal
    government plays with those projects and in looking at that,
    when we think from a public policy standpoint what role we
    should play in that or government should play in that and two
    questions that come up, does the loan guarantee program
    artificially change or alter the marketplace by having this in
    place? And does it dis-incentivize competition in this area?
        And I know, Mr. Reicher, you talked about the role the
    federal government has played and, you know, I guess when I
    look at 2017, you know, if we were $20 trillion of surplus, you
    know, figuring out where to spend money, you know, these 28
    projects would be probably great examples of where to spend
    money. But the reality is we are $20 trillion in debt in this
    country, and that's different from the 1950s where, you know,
    it was a much different country we lived in.
        In 2017 the technology marketplace in this country is
    thriving. We lead the world in innovation. As was mentioned
    earlier, there's a lot of cash in this country that people are
    sitting on waiting to invest. Angel investors were mentioned
    earlier.
        So figuring out that role of how the federal government
    plays a role in this program and that's really objectively what
    I've looked at here. And it seems to me that the role of the
    federal government we always got to keep in mind the fact that
    we're in debt, and that's a problem in this country. And then
    also looking at the marketplace.
        And I guess, Ms. Katz, what I would ask you is when, and
    you mention this in your opening statement, we look at
    government financing, it seems as if government financing is
    divorced from profit motive. Can you elaborate on that
    challenge and also on my statements about those two questions
    on whether we're de-incentivizing competition?
        Ms. Katz. The profit motive requires that you have skin in
    the game, that is, that you're driven to do well by the
    potential for a good return. In government funding programs,
    there is no personal stake. There is no skin in the game in
    terms of a financial incentive, and therefore, the criteria for
    investing money is looser, the demands for, you know, the type
    of performance is looser, and I think those things tend to prop
    up enterprises that tend to be weaker. And then the more of
    those we have, you know, the weaker the economy becomes.
        And given this--the extent to which the federal government
    is now providing credit across the economy, you know, not just
    DOE but, you know, $18 trillion in exposure economy-wide,
    that's very troubling to me in terms of the loss of the
    incentives that are going to make our companies the strongest
    and are going to make them the most competitive.
        In terms of your comment about the effect on competition
    and innovation, absolutely, you know, when government is
    financing certain programs, the private financing tends to
    follow that because that's where the incentives are and that's
    where the, you know, rewards tend to be and that's where the
    regulatory action is also going to occur. And so there's a lot
    of, you know, interest in following that.
        And that--you know, we can say on the balance sheet that
    these programs have a rate of return that's positive. We can
    say they have default rates, but that's only half the equation.
    The other side of the book is all of the distortions that these
    programs cause, among them, loss of competition and innovation,
    and the competitive disadvantage that this creates for all the
    companies that aren't lucky enough to get this largesse.
        Mr. Reicher. Mr. LaHood, could I give a quick answer?
        Mr. LaHood. I'm out of time. Mr. Chairman?
        Chairman Weber. Sure, I think we've got some extra time. Go
    ahead.
        Mr. Reicher. I'll be quick. You mentioned the deficit, the
    debt. Just I want to emphasize these are loans, not grants.
    They're getting repaid and they're getting repaid with
    interest. That's a very different measure I would assert.
        The second thing you mentioned about U.S. leadership in
    energy technology, as much as I'd like to agree, in many ways
    our dominance in energy technology is very much being
    challenged by the Chinese. They have a very well organized
    effort, very well-funded across a whole range of energy
    technologies. We no longer lead in wind or solar. They are far
    ahead of us in many aspects of nuclear and various types of
    turbines and coal-related technology.
        So, Mr. LaHood, I would not assume that we're in great
    shape when it comes to this $48 trillion opportunity we've got
    in energy infrastructure investing over the next 20 years. We
    are not leading in many respects, and programs like this can
    really help.
        Chairman Weber. All right. I thank you, Mr. LaHood, for
    yielding back.
        And I believe that we're going to go to Mr. Foster now.
        Mr. Foster. Thank you, Mr. Chairman.
        Several of you have mentioned and referred to the DOE loan
    programs, which are the subject of this hearing, as a subsidy.
    And I was wondering how is it that a subsidy makes money for
    the taxpayer? That has me a little confused. Is there anyone
    wants to try answering that?
        Ms. Katz. Sure.
        Mr. Foster. We need more of----
        Ms. Katz. So----
        Mr. Foster. --those subsidies, it seems. It could take----
        Ms. Katz. Right.
        Mr. Foster. --the debt down to zero with enough of these.
        Ms. Katz. So because there's virtually no chance that the
    government will not cover a loss, federal credit is provided in
    more favorable terms. Even if the recipient still continues to
    pay fees or interest, it's at a more advantageous rate than
    they would otherwise get in the private financing sector
    because the----
        Mr. Foster. I understand it's a good deal for the recipient
    of the loan, but it's also a good deal for the taxpayer, so it
    seems like this----
        Ms. Katz. Well, it----
        Mr. Foster. --is a win-win.
        Ms. Katz. It's only a good deal for the taxpayers if you
    ignore all of the distortions and costs that are created----
        Mr. Foster. Well, these distortions you hypothesize are
    pretty hard to calculate and, you know, we have--anyway. So
    your argument relies totally on these hypothesized distortions
    and the hypothesized economic damage that they do----
        Ms. Katz. No.
        Mr. Foster. --is that correct?
        Ms. Katz. No, it's not.
        Mr. Foster. All right. Then how does the taxpayer not
    benefit from these? Would the federal debt be higher or lower
    if this--if these projects would not have existed?
        Ms. Katz. It--that's--I don't know.
        Mr. Foster. I think it's a pretty easy----
        Ms. Katz. It's not such an easy equation.
        Mr. Foster. Mr. Reicher?
        Mr. Reicher. Their interest payments exceed the losses.
    It's hard to see how this isn't a net positive. Another----
        Mr. Edwards. The issue is the broader one of opportunity
    constant in the economy. If resources are being steered into
    companies and technologies that are not the best for the
    overall economy, then we've wasted resources, so the issue is
    not just taxpayer resources but the crowding out that occurs in
    the private sector. If you have a big DOE loan office that is
    acting as a venture capitalist, they're drawing some of the
    best minds from Silicon Valley to come here to Washington to
    steer flows of money when I would rather those minds in Silicon
    Valley steering money. That's crowding out----
        Mr. Foster. Well, this is really actually my second
    question here, which is, you know, I'm struck by the lower--the
    very low default rate, lower than a typical VC. And so I was
    wondering how is it that these federal bureaucrats--excuse me,
    these unelected federal bureaucrats seem to be making loan-
    making decisions that are better than free-market investors?
    And I----
        Mr. Edwards. Well, the answer is and I think I touched on
    in my testimony, the vast majority of these projects, as has
    been mentioned, have gone to wind and solar projects that have
    been heavily subsidized by state government. State governments,
    particularly California, have very large and increasing----
        Mr. Foster. But those subsidies would be----
        Mr. Edwards. --mandates, requirements, so these projects
    would have been built anyway I think without federal subsidies
    because there's state-level mandates for them.
        Ms. Katz. I also think that it reflects----
        Mr. Foster. Just a minute.
        Ms. Katz. --the fact that these----
        Mr. Foster. But the state-level subsidies are--would be
    available to either a free market investor or one of these----
        Ms. Katz. No.
        Mr. Foster. Is that true, Mr. Reicher?
        Mr. Reicher. Absolutely. The subsidies at the state level
    don't distinguish between a project that's gotten some federal
    support and projects that haven't.
        Mr. Foster. Sure.
        Ms. Katz. Right, but not every company is going to be
    allowed to benefit from state subsidies. They're not available
    to all.
        Mr. Reicher. You qualify for the state subsidy, you get the
    state subsidy. If you can also get some help from the federal
    government--again, this happens across the whole range of
    energy technologies.
        Ms. Katz. When Tesla Motors negotiates tax abatements or
    other benefits with a state, that's not a deal that's available
    to every company.
        Mr. Reicher. It happens--let me let Mr. Foster go ahead.
        Mr. Foster. Yes. I was a little bit confused, Dr. Yonk. You
    seem to be criticizing the fact that there was a low loss rate
    on this at the end of your testimony, and I--it confused--is
    there a consensus whether a high loss rate is a good thing or a
    bad thing and whether low loss--I'm just--I couldn't follow
    that logic there.
        Dr. Yonk. Yes, so let me walk you through the logic, Mr.
    Foster, because I think it's actually an important policy
    question here. If the goal was in fact to provide loan
    guarantees to what was termed as risky technologies that truly
    would see--that were--that the private market was not willing
    to bear the risk of, we would expect to see higher----
        Mr. Foster. But you're advocating for more Solyndra-type
    investments.
        Dr. Yonk. Only if that is the actual goal of the policy. I
    think that's an ill-advised policy given what can happen in the
    larger economy.
        Mr. Foster. Okay. Let's see. I was also struck in your
    testimony that you seem to buy into this legend, I guess, that
    somehow the high-tech industry Silicon Valley started was a
    bunch of entrepreneurs by themselves whereas in fact if you
    look at the history, they were completely dependent on getting
    federal defense contracts, NASA contracts, and so on and that
    the history of that was completely dependent on government
    investment.
        And so I think that really we should all, you know, study
    history a little bit and understand how effective strategic
    government investments are in getting our economy heading in
    directions that will pay off massively in the future.
        And I believe my time is--and I have to yield back at this
    point.
        Chairman Weber. Thank you, Mr. Foster.
        The Chair recognizes Mr. Posey from Florida.
        Mr. Posey. Thank you very much, Mr. Chairman. Mr. Katz and
    Mr. Edwards, how do you measure accountability for government
    funding in the Department of Energy loan guarantee program? Mr.
    Katz first.
        Ms. Katz. I don't know that it is being----
        Mr. Posey. Ms. Katz.
        Ms. Katz. --you know, measured. I can tell you that, you
    know, there are rules for setting program goals and, you know,
    at the end of the year the Department looks at whether it's
    succeeded. And--but most of those are measured in terms of
    inputs not in terms of, you know, that so many dollars were
    spent as opposed to what the--you know, the actual success of
    the program was.
        And this follows on the earlier discussion, which is, you
    know, it--to assume that these projects wouldn't have happened
    anyway or this Silicon Valley, you know, development wouldn't
    have happened without government I think is a conceit. I think
    we've seen that, you know, there are many great developments
    and innovation throughout the--you know, the history of the
    world that have occurred without the government subsidizing
    them.
        Mr. Posey. Well, I appreciate your comments. So often
    government accountability to some people is how much we spend,
    not what actually gets accomplished. And I'm glad to see that
    the focus is on accomplishments.
        Mr. Edwards?
        Mr. Edwards. Yes, I mean, you know, it's the role of this
    Oversight Committee obviously, and it seems like this Oversight
    Committee has done a good job. It strikes me that the
    Republican scrutiny on some of these projects that the Obama
    Administration started dishing out in 2009, the scrutiny has
    been good because it seems to me that the Obama Administration
    started steering the money to safer projects like the ones that
    had the state purchasing requirements for them in order to get
    the loan losses down because they made these initial screw-ups
    with companies like Solyndra. So--and obviously the GAO and the
    IGs do a fantastic job on this account.
        That's--those are all accounting issues. I think the bigger
    issues are the economic ones. Would the private sector steer
    money into the most innovative and most efficient energy
    technologies, and I think the answer is yes without any kind of
    federal subsidy.
        Mr. Posey. Okay. Have either of you read any of Peter
    Schweizer's books? Extortion, throw them all out, great, great
    literature on government accountability or lack thereof and
    crony capitalism. You know, Solyndra gets mentioned quite
    often, but it was a relatively small potato in a bag full of
    litanies of much bigger ones that for one reason or another the
    media seemed to never think was important.
        As a follow-up, do you think there is a reasonable amount
    of upfront investment before taxpayers can expect returns?
        Mr. Edwards. Again, I think--I mean, I don't think this is
    the role--you know, taxpayers should not be investing in these
    sorts of projects. It's been mentioned a couple times by Mr.
    Reicher that--you know, that there's gaps in private markets
    here that the government has to fill. I just don't buy it. I've
    looked at the history of R&D and industrial R&D in the U.S.
    economy and looked at the history of inventions. The vast
    majority of advances and innovations have come from the private
    sector without federal subsidies. Computers and, you know,
    Xerox machines and cell phones and smart phones, that was all
    private risk capital, private entrepreneurs, investors, and
    Silicon Valley putting their money into these projects.
        The energy industry, I don't believe, is any different than
    any other risky industry, and the--I don't believe that these
    so-called gaps exist in private financing. Entrepreneurs can do
    it. They've shown that they're willing to invest in all kinds
    of risky and new technologies, including energy technologies,
    so we should leave the field to them, I think.
        Ms. Katz. Just as a quick follow on, you know, I'm--I don't
    buy the idea that DOE is funding, you know, the most innovative
    and riskiest, but if they were, then it raises the question if
    private investors are not willing to take a risk on a
    particular project, why should taxpayers have to underwrite
    that?
        Mr. Posey. Well, you know----
        Mr. Reicher. Mr. Posey, if I could, I just want to
    emphasize again we're talking about energy technology that has
    huge scale-up costs. We're not talking about computers----
        Mr. Posey. Yes.
        Mr. Reicher. --or cell phones and the like. And the history
    is there. The nuclear power industry got launched in the 1950s
    with major checks being written by the federal government----
        Mr. Posey. My time's up. I just want to make one comment.
    We had some employment downturn in our district and we decided
    to host an entrepreneurs summit, so we took some local ideas
    and had a summit and invited a few angel investors to attend
    and analyze the projects. And I think there was surprising
    amount of action on some funding there. We did several of them
    and we eventually had, you know, a long list, more than we
    could accommodate people who had wanted to invest in these new
    ideas and these new products that people had, and even in dire
    economic times, investors are interested in making investments
    in things that seem plausible and have potential to show return
    on them.
        So I appreciate your comments very much. Thank you, Mr.
    Chairman. I see my time is up.
        Chairman Weber. I thank the gentleman from Florida.
        The gentleman from Virginia----
        Mr. Beyer. Virginia.
        Chairman Weber. --Mr. Beyer, is recognized.
        Mr. Beyer. Thank you, Mr. Chairman, very much. Mr.
    Chairman, I'd like to begin by saying I appreciate the need to
    title these hearings with cool names like ``Making the EPA
    Great Again'' and ``Risky Business,'' but I fear that we're
    going to go down the road of Top Gun and Mission Impossible and
    Jerry Maguire, so I'd like to move that we don't name any more
    after Tom Cruise movies.
        Chairman Weber. I notice you left your six-shooter in your
    locker, so we won't name any after Tom Cruise movies. So
    ordered.
        Mr. Beyer. Okay. Thank you, Mr. Chairman. Also, we talked
    earlier about GAO mismanagement in this program, and we had a
    hearing on this a year ago and one of the--and we had a GAO
    representative at that point who pointed out that only 16 of
    the 24 GAO recommendations for the loan program had been
    fulfilled, but I've discovered this morning that all 24 are now
    fulfilled. So many of the problems that we're talking about are
    historical rather than current.
        The--I also would like to speak to this as a small-business
    person, and I guess I've borrowed more money than any of our
    panelists--that it's hard to borrow money as a small-business
    person. It--we have--what I've learned in 43 years of running a
    family business is that banks only want to lend money to people
    that don't need it. If you need it, it's very, very hard to get
    it, which is one of the reasons why there's $50 trillion in
    private equity sitting on the sidelines right now.
        So to you, Mr. Reicher, is the industry marketplace
    actually free and does government money actually crowd out the
    private investment?
        Mr. Reicher. I would say that we don't have a free market
    for energy. You know, there's been talk about eliminating all
    subsidies at the federal level. I think that's highly unlikely.
    And even if we did, that market is very much determined in many
    ways by the 50 state Public Utility Commissions that have an
    awful lot to say about how the energy markets and the
    electricity markets work.
        Are we crowding out other companies or other technologies?
    I don't think so. This is a limited program, the loan guarantee
    program, that's focused on getting the first couple of big
    projects built to demonstrate a technology.
        Let me say this. In many of these cases, the project
    developers, often thinly capitalized project developers, often
    small businesses, if they could get a loan from a bank or if
    they could float a bond, they would love to do it. Interest
    rates are low right now. It's much easier. It's not painful
    like having to go to the DOE and getting reviewed for a couple
    of years, having to do an environmental impact statement,
    having to pay a credit subsidy, loan spread. That's tough
    stuff. If they could do it in the normal way, they would do it.
    And I've talked to many developers. I was a developer myself.
    These are painful processes going to the Department of Energy,
    but sometimes you can't get the project done.
        Mr. Beyer. Are you suggesting the federal government works
    slowly?
        Mr. Reicher. I would never suggest such a thing.
        Mr. Beyer. Would it even be possible for the Department to
    manage a federal research grant program without picking winners
    and losers?
        Mr. Reicher. Listen, I was Assistant Secretary for Energy,
    for Energy Efficiency, and Renewable Energy. We had a $1.2
    billion budget then. We were always being asked to pick winners
    and losers. We had competitive processes. The Competition in
    Contracting Act told us we had to do it this way. That's what
    the federal government does, and that's what it often should be
    doing with taxpayer dollars. So I don't understand this
    argument about picking winners and losers. If you're Boeing
    competing with Lockheed for a jet contract, you know the
    government is picking winners and losers.
        Mr. Beyer. When President Trump affects the economic
    prospects of American companies by tweeting about Nordstrom's
    or Toyota or Vanity Fair or Carrier, is that an example of the
    federal government picking winners or losers?
        Mr. Reicher. I'll leave that up to the august members of
    this committee to decide.
        Mr. Beyer. I was fascinated by Mrs.--Ms. Katz's testimony,
    especially the--and I very much respect sort of the deep
    philosophical notion that we have this $18 trillion of federal
    loan guarantees, that it has all kinds of pernicious effects.
        But, Mr. Reicher, what's the--what would the U.S. economy
    look like without the FDIC and the--which would keep from the
    bank runs in the Great Recession or without Freddie Mac and
    Fannie Mae and the ownership society that George W. Bush pushed
    so hard or TARP so you wouldn't have General Motors or
    Chrysler, States that Donald Trump won pretty easily, or
    Homeland security's disaster assistance or the Veteran's
    Housing Benefit Program Fund for veterans or business loans to
    the Small Business Administration or to move from federal loans
    to the $470 billion in oil and gas subsidies?
        Mr. Reicher. Very quickly----
        Mr. Beyer. What's the economy look like without that $18
    trillion.
        Mr. Reicher. I wouldn't have been able to buy a home, let
    me say that. But I want to make one more really important point
    that I think we have to emphasize at this hearing. Let's look
    forward. We seem to be looking backwards. There's $41 billion
    worth of loan guarantee authority for nuclear, for fossil, for
    renewables, and for transportation. We could turn this into
    infrastructure investing, which seems to be the great focus,
    Republican and Democrat, on the Hill right now. This is an
    existing down payment we can make on the infrastructure hope
    that a lot of people have up here on Capitol Hill. So let's
    look forward at what we've got, and let's figure out how to
    spend it well.
        Mr. Beyer. Great. Thank you very much.
        Mr. Chair, I yield back.
        Chairman Weber. Thank you, sir. The Chair now recognizes
    Mr. Dunn for five minutes.
        Mr. Dunn. Thank you, Mr. Chairman. I want to say also thank
    you for the opportunity to serve on this committee. It's a
    great pleasure and it really plucks at my heartstrings so I'm
    delighted to be here.
        So I actually am the Chairman of a bank back home. This is
    a community bank. And I want you to know that I have been
    intimately involved in buying failed banks in that capacity.
    Now, that involves reviewing and underwriting a great many
    failed loans, toxic loans if you will. And as I reviewed the
    Department of Energy's loan portfolio for today's committee
    meeting, I find myself in familiar territory. There's a lot of
    loans in here that are highly, highly questionable, and I think
    you would find frankly very few private bankers would actually
    have made loans on the terms that they were made to companies
    like Solyndra, Beacon, Fisker, VPG, and some of the others
    there. I didn't make my way through the entire loan portfolio
    last night. Valentine's Day.
        So this costs the taxpayers hundreds of millions of
    dollars, and I feel like DOE should actually re-examine
    themselves and say are they comfortable in the role of being a
    banker. They apparently have very few staff with any experience
    in corporate lending.
        I want to call attention to a couple things and ask a
    question. So first off, the actual loan loss ratio. I've heard
    people say that this is a two percent loan loss ratio. The
    government allowed $10 billion for losses, so that's the asset
    that you're measuring against. And the loan loss is actually
    about 8.1 percent if you believe the $810 million is all we
    lost. I would argue that that's a low number for a number of
    reasons.
        I also heard that the interest paid back--the loans that
    went bad--I would remind everyone that interest income does not
    equal profit.
        I would like to also underscore the comments Mr. Edwards
    made on the successful back end of the loan portfolio where
    they're being paid off. Most of those loans already enjoyed a
    government guarantee in the form of purchasing the energy that
    was being put out. So we had a company that was guaranteed
    success if you will on the back end and we gave them another
    guarantee, in fact, a loan at a low rate on the front end. So
    I'm not sure that that should count as you pointed out.
        Now, this is my first committee meeting on this very
    fascinating, important subject that's near to my heart, but I
    would look forward in the future to actually seeing a full
    profit and loss on this just the way a bank would publish a
    profit-and-loss statement. And we do that on pretty much a
    monthly basis. If we don't, the FDIC comes after us.
        Mr. Edwards, I want to ask you, do you believe that the
    Department of Energy prospectively put in place the kind of
    lending structures that would properly and soundly administer
    billions of dollars in loans and serve the public in a
    transparent fashion?
        Mr. Edwards. Well, it certainly wasn't transparent, and I
    think as this committee has investigated in past hearings, that
    initially there were not the proper checks and balances in
    place for a lot of these loans. The expertise wasn't there and
    the GAO heavily criticized these programs. And it does seem
    that over time that DOE has improved at administering these
    programs because of all the scrutiny, particularly by this
    committee.
        But again, I think the bigger issues are the broader
    economic issues. Is there really a gap here that the federal
    government has to fill? And I think the answer is no. There are
    a trillion dollars--trillions of dollars available for private
    investment. If we did overall a general tax reform as House
    Republicans want to do, there would be trillions more for all
    kinds of innovative infrastructure and other types of
    investment in the U.S. economy, and we wouldn't be worrying
    about small programs like this.
        Mr. Dunn. Thank you very much, Mr. Chairman. I yield back.
        Mr. Reicher. Mr. Dunn, could I respond for one second?
        Chairman Weber. You have--I'll give you two seconds.
        Mr. Reicher. All right. Very few private bankers----
        Chairman Weber. Thank you very much. No, go ahead.
        Mr. Reicher. You say very few private bankers would have
    made these loans. That's exactly why this program existed,
    particularly in the depths of the recession, number one.
        There is a group of highly professional staff at DOE with
    finance background.
        And third, I guess I do the math. It's $810 million on $36
    billion----
        Mr. Dunn. I think you've got the wrong denominator. The
    denominator was $10 billion. That's how much was placed at risk
    of the taxpayers' money.
        Mr. Reicher. I'm doing the calculation based on the loss to
    date. You--fair enough, you can do it either way, but----
        Mr. Dunn. Well, you do a profit and loss on the same--let's
    run it like a business, you know? And I could tell you it's not
    being run like a business.
        Chairman Weber. If you all want to talk offline, we'd----
        Mr. Reicher. Thank you, Mr. Chairman.
        Chairman Weber. Yes, appreciate that.
        The gentleman from Colorado is recognized.
        Mr. Perlmutter. Thanks, Mr. Chairman.
        And, Mr. Reicher, I just appreciate your comments. And I
    think one of the things that's gone unstated is the fact that
    many of these loans were to the renewable industry because of
    fear that our climate is just getting worse and worse and worse
    and we've got to do something about it. So I appreciate Ms.
    Katz, Mr. Edwards, your comments, wait a second, this is kind
    of political. Well, sometimes it's policy and--you know, and
    policy can be politics. I got it. And I worry about the climate
    so let's just put that aside.
        Mr. Reicher has testified as to, you know, making some $900
    million when you net it all out. That seems to be a positive to
    me, but maybe there are some opportunity costs that aren't
    being considered or maybe there are some benefits to the
    climate that you may not be considering, Mr. Edwards. So, I
    mean, there's a lot of stuff going on here.
        But for me, the two percent loss ratio--I don't know how
    many of you have been in the lending business, but I
    represented lenders for 25 years. They would have loved to have
    two percent loss ratio.
        Having said all of this, Mr. LaHood, after he finished kind
    of his rhetorical comments, you know, really focused on five
    questions that I thought were very important. I wish he were
    here so I could compliment him on that. And some of you have
    brought up points that I really do have a concern about. Ms.
    Katz, you talked about cronyism and the potential for cronyism
    with respect to these loans. And you may be absolutely right
    because I am worried about cronyism under the Trump
    Administration--I really am--and the potential for conflicts of
    interest and where exactly these loan dollars would go. You
    know, forget about Russia for a second but where will they go?
        And so, you know, I appreciate the testimony of all of you,
    but that's the one that has me most concerned. And to a degree,
    even though this--you know, the Republican Congress passed this
    back in 2005, signed by George Bush, used by that
    Administration, used by the Obama Administration, if this
    Congress wants to take this tool away from the Trump
    Administration because they're worried about potential
    cronyism, I may applaud that. I think it's--I think good work's
    been done to benefit a lot of jobs, as Mr. Reicher said, and to
    improve the climate I hope, but you may be right.
        This is subject to cronyism, and under this Administration
    that's refused to give its tax returns, you know, is already in
    hot water with everything that happened yesterday with General
    Flynn resigning, I think, Ms. Katz, you're right to worry about
    cronyism.
        Ms. Katz. I don't think it's just DOE either. It's all of
    these--the programs of this nature invite that----
        Mr. Perlmutter. You think all these loan programs should be
    taken away from the Trump Administration? Is that your
    testimony?
        Ms. Katz. Absolutely.
        Mr. Perlmutter. Okay.
        Ms. Katz. Absolutely.
        Mr. Perlmutter. I yield back.
        Mr. Edwards. Can I give you one comment agreeing with you
    on that, too? During the Bush Administration--during the early
    Bush Administration, the issue was Enron. Enron was the
    recipient of all kinds of cronyism, guaranteed loans, loan
    guarantees that encouraged it to put its millions, billions of
    dollars of taxpayer and its own money into risky foreign
    investments that ended up crashing down and destroying that
    company. So this is an issue with both Republican and Democrat
    Administrations.
        Mr. Reicher. Okay. Mr. Perlmutter----
        Ms. Katz. And just to your comment that most bankers would
    love a two percent default, I think that speaks to exactly the
    point we're making, which is if this is such a riskless or at
    least good bet on the part of taxpayers and that it's
    performing so well, then I can't imagine that, you know,
    private investors wouldn't jump for it.
        Mr. Perlmutter. No, and you may be absolutely right. And
    Mr. Edwards was saying maybe this is--we moved into a mature
    industry where the risk has been reduced because we've been
    doing these things. But I agree with Mr. Reicher. Back in 2007,
    '08, '09, '10 when nobody was making a loan except for the
    federal government, period, because everybody in the market was
    so risk-adverse, sometimes you have to step in to get things
    moving.
        So, Mr. Reicher, you can finish this up and I'll----
        Mr. Reicher. So let me just say this. Again, we're looking
    backwards. DOE is not in the business right now of making loans
    to mainstream solar and wind projects. They're looking ahead.
        Mr. Higgins, in your district, this new carbon capture
    project that just got a conditional loan guarantee for $2
    billion, that's looking forward. That's a smart investment that
    DOE is backing.
        Chairman Weber. Mr. Reicher, I appreciate that. We're going
    to go to Mr. Higgins now for five minutes I hope.
        Mr. Higgins. Mr. Chairman, thank you, sir. I know this
    committee has an extremely important oversight responsibility
    regarding the Department of Energy and its programs, and it's
    clearly understood that the loan guarantee program has had
    serious problems regarding some of the loans in its portfolio,
    including controversial failed projects such as Solyndra.
        But I think although it's clear that there's room for
    improvement in the program, it's important that we give
    reasonable consideration to Department of Energy loans designed
    to commercialize innovative technology in the oil and gas
    industry versus the green industry. The oil and gas industry is
    well-established by generations of Americans. They well
    understand how to navigate the terrain of innovative
    technologies and energy. And energy technology is certainly not
    cell phones.
        So I believe there may be a continued role for the
    government to play, but we have to balance between the wisdom
    of that role and the careful protection of the people's
    treasure. And again, I would point out an example of where an
    oil and gas industry has certainly demonstrated its capacity to
    take advantage of a program like this to help our country.
        The Lake Charles methanol project received its conditional
    loan guarantee from the Department of Energy last year. Now,
    I've heard terms like startup and skin in the game, Mr.
    Chairman. That would seem to indicate, you know, zero
    investment from the private sector when the reality is, for
    example, Lake Charles methanol project has invested about a
    decade of research and development and about $40 billion of
    private capital. And LCM will use cutting-edge technology to
    refine petroleum coke, and that's a waste product of the oil
    industry in the high-value energy and chemical product such as
    CO2, hydrogen, methanol, and industrial gases. And
    all of its products will be sold to major industrial and energy
    customers under long-term market-driven commercial agreements.
    This clean energy manufacturing plant is ready to commence
    construction and will result in 1,500 direct new jobs.
        Now, that's an example to me of a wise investment,
    although, again, it's the duty of this body to balance wise
    investment in things like the commercialization of innovative
    technology in the energy industry versus the careful protection
    of the people's treasure.
        So I'd ask you, Dr. Yonk, would you agree that it's
    reasonable to conclude that investment in innovative
    technologies in the oil and gas sector is a more sound
    investment than sinking money into green energy projects?
        Dr. Yonk. Mr. Higgins, so in general, as my early comments
    indicated, I'm skeptical of the ability of any centrally
    directed program to identify what the most innovative or the
    most likely to be successful is. Instead, what I suggest and
    what I think the evidence bears out over time is that
    entrepreneurs, those acting in the marketplace, responding to
    the market demands, which it's not a free market, although with
    a little luck we might get closer to that, will do better to
    push forward that innovation both in terms of how we produce
    energy and how we get a cleaner environment than simply
    allowing bets on loan guarantees or loan programs or any of
    these sorts of subsidies to make those sorts of decisions.
        And so my belief is that if we actually allow the
    marketplace to make some of these decisions, we will see
    investment across a variety of sectors, including oil and gas
    and--as well as alternative energy.
        Mr. Higgins. In the example of Lake Charles methanol
    project, hasn't the private sector already made decisions in
    the form of hard dollars and a decade of invested research and
    development?
        Dr. Yonk. It certainly seems to have. I know--I don't know
    a terrible amount about that particular project, but
    oftentimes, the issue here is not that there's no private
    investment in these things but that we nudge investment into
    things because they're following public dollars, as opposed to
    the marketplace speaking and acting.
        Mr. Higgins. Thank you, sir, and thank you, ma'am.
    Gentlemen, thank you for your testimony. Mr. Chairman, I thank
    you. I yield back.
        Chairman Weber. I thank the gentleman from what we call
    East Texas.
        And the gentleman from California Mark Takano is recognized
    for five minutes.
        Mr. Takano. Thank you, Mr. Chairman.
        I want to ask a question of each of you. I want to clarify
    for the committee whether any of you have had any experience
    investing in a major clean energy or power project, so being
    involved in any sort of major decision like that? Have you ever
    been involved in a major business investment decision, Ms.
    Katz?
        Ms. Katz. I have not. I think we should--the entire
    committee is--
        Mr. Takano. I appreciate your answer. Mr. Edwards?
        Mr. Edwards. No, not as an investor but my first job out of
    college was with a major nuclear electric utility, so I have a
    background in--
        Mr. Takano. Yes, but you were never involved in a major
    investment----
        Mr. Edwards. No.
        Mr. Takano. --decision? And you, Dr. Yonk?
        Dr. Yonk. I'm an academic that studies these things. I have
    not.
        Mr. Takano. Okay. Mr. Reicher?
        Mr. Reicher. I have, Congressman. I said earlier, raised
    $100 million with some colleagues to make investments in energy
    projects, and then at Google we made several investments that I
    had a part of.
        Mr. Takano. So I think it's fair to say that of all the
    witnesses we have brought before us today, of the four, Mr.
    Reicher, you're the only one that's actually had experience
    actually raising private capital and working with large
    investments, high-stakes investments, investments that stood to
    lose a good sum of money. The others at the table are
    theorists, academics, or, you know, represent organizations
    that have an ideological commitment to--or an emphasis on very
    small government or a libertarian philosophy of government that
    kind of posits pure free markets.
        But you, Mr. Reicher, have operated in an environment of
    reality, of actual pragmatic reality of having to contend with
    real market forces. And can you--well, tell me how does your
    experience in making the investment decisions you've made
    provide you with greater clarity in understanding the role of
    government in the market?
        Mr. Reicher. Congressman, what I found in this energy
    project investment firm is that there were a lot of developers
    out there with interesting project investment needs. They would
    come to us and we'd ask the question, does this work in the
    laboratory? They'd say yes. Has it worked at demonstration
    scale? They'd say yes. Has it worked at commercial scale?
    They'd generally say no. That became the problem for us as the
    equity investors and for the banks as the providers of debt.
    Has it worked at commercial scale? If the answer to that is no,
    you're in real, real trouble. And that's the specific focus of
    this loan program, getting the first couple of projects built
    at commercial scale and then getting out of the way.
        The carbon capture project you just heard about, get it
    built, show that you can turn pet coke into methanol and
    capture the CO2, government helps to do that, and
    then get out of the way. We couldn't invest in so many of the
    projects that we saw--and I'll wrap up and say the following.
    When all was said and done, during the time I was there the
    biggest focus area of investment turned out to be corn ethanol,
    well-established, lots of plants built, you knew what you were
    going to get, you knew it would work, but was that advancing
    technology? It wasn't. It wasn't advancing cellulosic ethanol,
    a better way to do this.
        Mr. Takano. So--and what you're describing there is not
    necessarily--you're talking about the private investors for the
    corn ethanol?
        Mr. Reicher. Private investors. We were private investors.
    We couldn't take the risk and the banks couldn't take the risk
    of making the jump to the next not-fully-commercialized
    technology. There was too much at stake.
        Mr. Takano. So in practicality, to advance research--not
    just ideas but ideas that have been proven in laboratories,
    ideas that have been proven in demonstrations, to actually have
    the possibility of creating whole new markets, whole new
    industries, whole new categories of activity, economic activity
    which would result in jobs, it often takes a government loan
    guarantee program to be able to move that forward.
        Mr. Reicher. The Chinese certainly think that. They are
    investing heavily in all sorts of advanced technologies to get
    them into the marketplace. And that's why, as I said earlier,
    in many ways we are losing the race on energy technology to
    this country that has decided that commercializing energy
    technology of all sorts--renewables, fossil, nuclear--they're
    making that a big part of their future, and that's where I
    worry that if the government steps out of this, carefully,
    surgically focused, just commercializing the technologies, not
    financing them after you've demonstrated them, that's what I
    worry about here.
        Mr. Takano. Mr. Chairman, my time has run out. Thank you.
        Chairman Weber. I thank the gentleman.
        Mr. Marshall from Kansas, you're recognized for five
    minutes.
        Mr. Marshall. Thank you, Chairman.
        My first question for Ms. Katz, are you aware of the
    Department running any type of cost-benefit analysis prior to
    the approval of new DOE loans? And then do we do any type of
    follow-up on a yearly basis after them?
        Ms. Katz. I'm not aware of that, but I'm not an expert on
    DOE per se. My research has been on the--you know, the total of
    loans and loan guarantees across the economy.
        Mr. Marshall. Any other panelists?
        Mr. Edwards. You raise an interesting point, which is that
    the federal government requires cost-benefit analysis of new
    regulations over certain dollar values that are promulgated by
    departments. There is no requirement for cost-benefit analysis
    for federal spending programs, but in my view, there should be.
    These sorts of government investments should be subject to a
    detailed cost-benefit analysis.
        Ms. Katz. And certainly if the government had done a proper
    benefit-cost analysis on ethanol, we would have found that
    government investment in it was a horrible idea because it
    turned out to actually produce terrible environmental effects,
    as well as produce more carbon dioxide than saving carbon
    dioxide.
        Mr. Reicher. Mr. Marshall, can I quickly say----
        Mr. Marshall. Please.
        Mr. Reicher. Let me emphasize the folks at the Energy
    Department who--the career folks who manage these programs,
    they have to do financial modeling and financial pro formas
    before they can make a loan. The proposer of the loan comes in
    with a financial model, with a financial pro forma. That gets
    reviewed. So I don't know about cost-benefit analysis in a
    policy. They're doing the right kind of analysis, which is a
    financial pro forma or financial model.
        Dr. Yonk. Mr. Marshall, might I just add that we do however
    see significant political pressures placed on these programs,
    at least in their historical context, that in fact there have
    been nudges from Administration officials to push for
    particular loans to be approved. And that illustrates that,
    while I have confidence that there is lots of this modeling
    going on, there is a large--there is an interjection of
    politics into these things that becomes problematic. And I
    might suggest this committee ask DOE in particular the very
    question you asked is what is that process they go through.
        Mr. Marshall. Mr. Reicher, I guess I'm going to follow up
    on your statement. Are those pro formas, I guess that's what
    you're referring to, made public? Are they made available to us
    as well?
        Mr. Reicher. I don't know.
        Mr. Marshall. Okay. My last question I'll go back to Mr.
    Edwards. What options exist for the incoming Administration to
    reform the DOE loan programs and address taxpayer liability?
    What role can Congress play in these reforms?
        Mr. Edwards. Well, I don't think Congress should
    appropriate any more money for these programs. I think the time
    for federal subsidies, if there ever was one, has passed. We've
    been subsidizing solar and wind for 40 years now. It's not a
    so-called infant industry anymore. It's a mature industry.
    We've heard today that there's lots of private investment,
    billions of dollars in these industries, and I think what
    Congress should move ahead with, broad-based tax reform, the
    Congressman was mentioning the methanol plant in his district.
    Those sorts of projects, if we did tax reform, they would
    attract more investment by private equity, by corporations if
    we reduce the tax cost of equity in the economy.
        Ms. Katz. And I would just say with all due respect to Mr.
    Reicher, the--our future is not--the direction we should not be
    going in is to be more like China. That's not what's going to
    help the United States.
        Mr. Reicher. Can I just respond to Mr. Edwards? Let me just
    correct something. You don't build energy projects largely with
    equity. You build it with debt. You want to put as little
    equity in a project as you can because equity is expensive. You
    want to put as much debt on a project as you can because debt
    is cheap. Equity can cost you in an energy project 15, 20, 25
    percent. Debt is in the 5 to seven percent range.
        So this idea that somehow lots more equity is going to
    start flowing, that's good. I don't disagree because you have
    to put some equity in the project, but the thing that stumps
    these project developers is raising debt, getting a loan from a
    bank or issuing a bond, and that's the real struggle.
        Mr. Marshall. I guess----
        Mr. Reicher. The last thing I want to quickly say, looking
    ahead, the money is not there for solar and wind in the loan
    guarantee program. There's--the big money that's left, the
    remaining authority, $12.5 billion for advanced nuclear, $8.5
    billion for advanced fossil. There's $4.5 billion for
    renewables and then there's a big chunk for advanced
    transportation. So to Mr. Edwards, this is not about--largely
    about solar and wind as we look ahead at this $41 billion of
    authority.
        Mr. Marshall. A quick question. So through the years it
    seems like big lending institutions are less likely to loan
    money because of all the rules enhanced by Dodd Frank. Is that
    true or false? Do you think it's so much harder nowadays for
    some of these big projects to get funded?
        And I'm over my time. I apologize if you don't have time to
    answer that question.
        Chairman Weber. No, I want to know the answer.
        Mr. Edwards. I think that's true, but I would strongly
    disagree with Mr. Reicher's comment about debt and equity. It
    is a--private return is equity. You lower the tax on the
    marginal investment dollar, you will get more private
    investment by people like Warren Buffett and all kinds of
    energy projects is--equity is the tail that wags the broader
    dog. That is the return in the economy to private investors,
    but the vast trillions of dollars invested in the American
    economy every year is invested because people want to earn
    after-tax return. You lower taxes, you increase after-tax
    return, you get more investment.
        Dr. Yonk. There's no doubt you could get more equity in a
    project if you need it----
        Chairman Weber. If the gentleman would suspend, we need to
    move on. I apologize.
        Dr. Yonk. Mr. Chairman, could I just take six words to
    answer Mr. Marshall, and that is I think your question is in
    fact where the answer to many of these problems lies, and that
    is clearing the path for more of this sort of investment in
    both the regulatory side and cleaning up the subsidy side.
        Chairman Weber. Did anybody count those words? I----
        Dr. Yonk. They were more than six, but I'm an academic.
        Ms. Katz. The most important ones were six.
        Dr. Yonk. Six.
        Chairman Weber. I thank the panel.
        The Chairman now recognizes Mr. McNerney for five minutes I
    think.
        Mr. McNerney. Well, I thank the Chairman. And I'll try to
    keep it to five minutes.
        Mr. Reicher, the Loan Program--the Loan Programs Office is
    known to have a rigorous selection process. How would you
    characterize the application and selection process compared to
    the private sector?
        Mr. Reicher. It's tough. And as I said, I think before you
    came, Congressman, many of these developers would rather get a
    loan from a bank than have to go to the DOE. So they have to do
    things to get these loans from the DOE like often an
    environmental impact statement that can take a lot of time.
    They have lots of charges. They've got to pay a credit subsidy
    cost; they've got to pay a credit-based interest spread; they
    now have a risk-based fee that has been imposed recently. This
    is tough stuff, so I think it's being rigorously managed and I
    think--I don't think the American taxpayer has a huge amount to
    worry about here because of the way this program is being run.
        Mr. McNerney. So that might help explain the two percent
    default rate?
        Mr. Reicher. It does, and I think--that's why I think that
    this is a program because it has been well-run. I'm the first
    to admit there were mistakes--some mistakes made. There were
    some loans that went bad, but that's not how you look at a
    portfolio. Look at the overall portfolio. How do all the
    investments in the portfolio--how are they doing on a portfolio
    basis? I'd love to have an investment portfolio like this.
        Mr. McNerney. And banks really don't have the resources to
    carry out that sort of a rigorous process. Is that right?
        Mr. Reicher. They often do not, and it's certainly the case
    when you're bringing in an untested technology, that's not what
    banks do.
        Mr. McNerney. So would you explain in clear terms, Mr.
    Reicher, the difference between a loan guarantee and a grant?
        Mr. Reicher. A loan guarantee or a loan is----
        Mr. McNerney. That's kind of a rhetorical question.
        Mr. Reicher. Yes, you've got to pay it back.
        Mr. McNerney. Forgive me.
        Mr. Reicher. You get a loan for your house, you've got to
    pay it back. If your grandmother gives--writes you a check for
    $10,000, that's a gift.
        Mr. McNerney. So----
        Mr. Reicher. That's a grant.
        Mr. McNerney. --are both the loan guarantees and grants
    necessarily government subsidies?
        Mr. Reicher. I don't know if they're subsidies. I think if
    they're surgically applied, if they're rigorously reviewed, and
    if you pay the loan back, that seems like a fair distance from
    being a plain old subsidy, particularly if you pay it back and
    the government can go on and use that money for other things.
        Mr. McNerney. So are tax policies such as suggested by Mr.
    Edwards capable of distorting the economy maybe as much of some
    of these loan guarantees?
        Mr. Reicher. Tax policy can help and tax policy can hurt.
    If you get it wrong, you can distort the market in a very
    serious way. So we play around with tax policy and sometimes it
    does a good thing for taxpayers if we play around with it, and
    sometimes it doesn't.
        Mr. McNerney. And loan guarantees don't have that big of an
    impact on the economy I would guess but maybe I'm wrong.
        Mr. Reicher. As compared to grants, as compared to the cost
    of tax subsidies, they get paid back. I think that's the thing
    to answer.
        Mr. McNerney. So what was the intent of the loan guarantees
    that are in question? What was the original intent?
        Mr. Reicher. Let me tell you that most of the ones we're
    talking about here were granted under the so-called section
    1705 program. That was put in place in the depths of the
    recession in order to get people back to work. They were
    focused on so-called shovel-ready projects. They were ready to
    go. It was really hard to get a loan from a bank so the federal
    government stepped in. These projects got built.
        Let me emphasize something. That program is over. It's over
    as of 2011. What we are focused on are the 1703 projects. Those
    you have to prove innovation. There's a whole set of things
    that make them quite different. So that's why I keep saying,
    looking ahead, this is the 1703 project--program, and I think
    we can do a lot with it for infrastructure.
        Mr. McNerney. So in my remaining time could you give any
    examples of successful energy generation as a result of these
    loan programs?
        Mr. Reicher. Sure. You named the category. You know, we've
    heard about renewables. We haven't talked about several other--
    a major transmission project got financed using the loan
    guarantee program with an innovative technology. Boy, do we
    need transmission in this country. Our transmission is in rough
    shape. We need to expand it. We need to bring energy in from
    remote areas. So that's a great use. We didn't talk about a
    major storage project.
        Electricity storage is key going forward, and a very
    innovative project got built, is functioning well, proved out a
    very important technology. Then, you heard the project in Mr.
    Higgins' district. Those kinds of carbon capture projects, big
    amount of future authority for doing those. We need those to
    work.
        Mr. McNerney. Thank you. Thank you, Mr. Chairman.
        Chairman Weber. I thank the gentleman for yielding back.
        The gentleman from Kentucky, whose home is off the grid, is
    recognized.
        Mr. Massie. I knew you'd call me out.
        Mr. Reicher, what's the differential in the interest rate
    that these companies can get because of the loan guarantee
    versus if they had to go into the private market and borrow the
    money? Or is it such that some of these projects are so risky
    nobody would loan them the money?
        Mr. Reicher. That is the big challenge, Congressman. Some
    of these projects have enough commercialization risk scaling up
    for the very first time to a full-scale utility project that
    often you can't get a bank to make you a loan. If you can get a
    bank to make you a loan, here's the problem. Not only will they
    charge you a pretty high interest rate, but they'll give you a
    very short term for the loan. That doesn't work when you go out
    to get a power purchase agreement. You've got to pay back the
    whole thing in 5 or six years. So that's why these--this very
    targeted program exists.
        Mr. Massie. Isn't that where venture equity would play?
    Because, you know, I had a startup and I went to banks and they
    weren't going to loan me the money, and so I went to the
    venture capitalists. And if you think the terms of the DOE are
    tough, you should check out the vulture--venture capitalists.
        Mr. Reicher. Fair enough. Here's the answer to that in my
    view. Venture capitalists invest small amounts of money in very
    high-risk situations. They are investing in the early stage of
    these technologies. They've come out of the lab and you want to
    build the first demonstration projects. They are definitely not
    the sort that are going to put big amounts of money into
    actually scaling it up. So this notion that the venture capital
    world is somehow going to scale up these big energy projects
    for the first time, that's not what they do.
        Mr. Massie. Well, you know, what's also true about venture
    capital is they fully expect a lot of their programs to fail--
    --
        Mr. Reicher. Yes, but----
        Mr. Massie. --but since this is not how it is structured
    for the taxpayer, you know, a venture capitalist can write off
    nine failures with one good success. I'm not arguing that the
    DOE should become a capital investment firm, but because the
    taxpayer, they just lose one-to-one on all the nine losses and
    then they win back one-to-one on their win. If it were an
    equity investment, that's why this works in an equity
    environment and not in a loan environment. And I think some of
    these programs are so risky that no bank would loan you the
    money and for good reason, and nobody would loan you the money
    unless they had an equity stake and a chance at a multiple
    return on this. Dr. Yonk, do you want to speak to this?
        Dr. Yonk. Just I think what you're illustrating is what I
    described is the way capital moves in these regards and that is
    they're going--they know the program exists. They're going to
    often wait either for not just loan guarantees. They're also
    going to wait for grants and larger-scale loans.
        So with due respect to Mr. Reicher, I think that, yes, he's
    right in describing what venture capitalists have done, but in
    large part that's a construction of both the regulatory and the
    subsidy system that exists today.
        Mr. Massie. Ms. Katz?
        Ms. Katz. Yes, I would just add that the spread between the
    interest rates from--that DOE may offer and the private market
    does, that's just one of a number of types of differences.
    There are--there's a long list. I can tell you that there are
    longer maturities than private loans. There are deferrals of
    interest. There are allowances and grace periods. There are
    waivers or reductions of loan fees, higher loan amounts
    relative to the enterprise value. So there's a, you know, just
    a variety of elements on which they--they're different than--
    the government loans are different than the private sector.
        Mr. Massie. But at some cost to the taxpayer?
        Ms. Katz. Well, there's always a cost to the taxpayer in
    part because of the accounting method that the federal
    government uses. What they do is they try to determine what the
    actual cost of the loan is in the present value. That is what,
    you know, all of the future payments are going to bring in
    versus the cost. And I'll try not to get too technical, but
    what the federal government does is it ties the interest rate
    that they use in that calculation to treasuries, which is a
    below-market interest rate so it appears that the loan or the
    loan guarantee at the time the money is out is actually costing
    less than it really does.
        Mr. Massie. So some of the costs are hidden or----
        Ms. Katz. In part.
        Mr. Massie. Yes. Mr. Edwards, would you like to speak to
    this at all?
        Mr. Edwards. No, I think Diane hit it on the head.
        Mr. Massie. Okay. Well, I will yield back seven seconds to
    the Chairman, and thank you.
        Chairman Weber. I thank the gentleman.
        I do want to close today by thanking our witnesses, all of
    whom, I'm sure, while you probably have never paid--well, you
    have not paid into investment schemes--is that the right word,
    Mr. Reicher--have probably paid taxes and have taken note that
    we do have a $20 trillion deficit, and all of you in my opinion
    should be concerned about that, I want to highlight today that
    we have heard concerns about how the DOE loan guarantee program
    can indeed hurt innovation. Some of it we can't measure, but it
    does especially for the little guy and it can distort the
    energy market.
        So with that, I'm going to say thank you all for being
    here. I want to thank you for your testimony. I want to thank
    the members, all two of us, for our questions. And I want to
    say that the record will remain open for two weeks for
    additional comments and written questions from members.
        This hearing is adjourned.
        Mr. Reicher. Thank you, Mr. Chairman.
        [Whereupon, at 12:16 p.m., the Subcommittees were
    adjourned.]

                                   Appendix I

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