The Department of Energy: Key Steps Needed to Help Ensure the
Success of the New Loan Guarantee Program for Innovative
Technologies by Better Managing Its Financial Risk (28-FEB-07,
GAO-07-339R).
In May 2006, the Department of Energy (DOE) proposed transferring
appropriations from some DOE accounts to begin a new loan
guarantee program (LGP) authorized by the Energy Policy Act of
2005 (EPAct 05). Title XVII of EPAct 05--Incentives for
Innovative Technologies--authorized the LGP to guarantee loans
for projects intended to (1) decrease air pollutants or man-made
greenhouse gases by reducing their production or by sequestering
them (storing them to prevent their release into the atmosphere),
(2) employ new or significantly improved technologies compared
with current commercial technologies, and (3) have a "reasonable
prospect" of repayment. Such projects could include renewable
energy systems, advanced fossil energy technologies, and
production facilities for fuel-efficient vehicles. Although EPAct
05 authorized the LGP, the Federal Credit Reform Act of 1990
requires that Congress appropriate budget authority for loan
guarantee program costs before loans can be made. In
appropriating budget authority for the LGP, Congress would be not
only authorizing DOE to issue the loan guarantees but also
establishing policy by setting limits on the dollar amount of
loans that can be guaranteed. Congress can also specify limits on
the amount of LGP administrative costs DOE can incur each year.
In this context, you asked that we report on the (1) sources and
use of funds for the LGP in fiscal years 2006 and 2007, (2)
extent to which the LGP could result in a financial risk to
taxpayers, and (3) steps DOE has taken to ensure that the LGP
will be well managed.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-339R
ACCNO: A66357
TITLE: The Department of Energy: Key Steps Needed to Help Ensure
the Success of the New Loan Guarantee Program for Innovative
Technologies by Better Managing Its Financial Risk
DATE: 02/28/2007
SUBJECT: Alternative energy sources
Budget outlays
Cost analysis
Eligibility determinations
Government guaranteed loans
Loans
Program evaluation
Risk assessment
Cost estimates
Policies and procedures
Program goals or objectives
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GAO-07-339R
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February 28, 2007
The Honorable Peter J. Visclosky
Chairman
The Honorable David L. Hobson
Ranking Minority Member
Subcommittee on Energy and Water Development
Committee on Appropriations
House of Representatives
Subject: The Department of Energy: Key Steps Needed to Help Ensure the
Success of the New Loan Guarantee Program for Innovative Technologies by
Better Managing Its Financial Risk
In May 2006, the Department of Energy (DOE) proposed transferring
appropriations from some DOE accounts to begin a new loan guarantee
program (LGP) authorized by the Energy Policy Act of 2005 (EPAct 05).
Title XVII of EPAct 05--Incentives for Innovative Technologies--authorized
the LGP to guarantee loans for projects intended to (1) decrease air
pollutants or man-made greenhouse gases by reducing their production or by
sequestering them (storing them to prevent their release into the
atmosphere), (2) employ new or significantly improved technologies
compared with current commercial technologies, and (3) have a "reasonable
prospect" of repayment. Such projects could include renewable energy
systems, advanced fossil energy technologies, and production facilities
for fuel-efficient vehicles. Although EPAct 05 authorized the LGP, the
Federal Credit Reform Act of 1990 requires that Congress appropriate
budget authority for loan guarantee program costs before loans can be
made. In appropriating budget authority for the LGP, Congress would be not
only authorizing DOE to issue the loan guarantees but also establishing
policy by setting limits on the dollar amount of loans that can be
guaranteed. Congress can also specify limits on the amount of LGP
administrative costs DOE can incur each year.
In a July 2006 letter to DOE on the department's proposed funds transfer
to begin the LGP, this subcommittee expressed its concern about the lack
of a strategy for instituting the program. Furthermore, the subcommittee
stated that the department had not adequately explained such basic
management policies as the criteria it will use to select projects for
loan guarantees and the number of loans to be guaranteed. Nevertheless, in
August 2006, DOE issued a solicitation for preapplications to the
loan guarantee program, announcing its intention to issue up to $2 billion
in loan guarantees. At the same time, DOE issued guidelines for proposals
submitted in response to this first solicitation, stating that DOE expects
borrowers to pay for program costs.^1
In this context, you asked that we report on the (1) sources and use of
funds for the LGP in fiscal years 2006 and 2007, (2) extent to which the
LGP could result in a financial risk to taxpayers, and (3) steps DOE has
taken to ensure that the LGP will be well managed.^2 On January 4, 2007,
we briefed this subcommittee on the results of our work. Enclosure I
contains the briefing slides we used, with minor revisions to incorporate
technical comments we subsequently received from DOE. This report
summarizes the briefing and recommends steps DOE should take to help
ensure that the program, and its exposure to financial risk, will be well
managed.
To identify the sources and use of funds for DOE's LGP, we reviewed and
analyzed relevant DOE budget documentation, as well as department LGP
guidance and planning documents, and interviewed DOE LGP and budget
officials. To examine the extent to which the LGP could result in
financial risks to taxpayers, we analyzed DOE's plans and guidance for
implementing the LGP and discussed them with DOE and Office of Management
and Budget (OMB) officials. To assess the steps DOE has taken to help
ensure that the LGP will be well managed, we compared DOE's plan with OMB
budget guidance, internal control and accounting standards, and practices
used by other selected agencies that manage loan guarantee programs. We
performed our work in accordance with generally accepted government
auditing standards from October 2006 through January 2007.
In summary, in fiscal year 2006, and continuing through October 2006, DOE
used about $503,000 from three separate appropriation accounts to fund LGP
activities: about $347,000 from its Departmental Administration
appropriation and Science appropriation accounts and about $156,000 from
its Energy Supply and Conservation appropriation and Science appropriation
accounts. DOE used these funds for the salaries of three staff detailed to
the LGP office and for contracts to support program development, including
the development of an LGP Web site. DOE is continuing to pay for task
order support services to respond to program inquiries; these payments are
in addition to the $503,000 already spent to initiate the program.
However, DOE has discontinued other funding, and the staff on detail have
returned to their home units. Nevertheless, according to the deputy
general counsel for energy policy, he and others continue to work on the
program by, for example, preparing a notice of proposed rulemaking and
reviewing preapplications for completeness. Regarding future activities,
DOE officials said they are awaiting appropriations before taking
additional steps to implement the LGP.
^1For the first round of loan guarantees, the guidelines state that DOE
anticipates that borrowers will pay the subsidy costs and that those
borrowers will be assessed fees to cover some administrative costs.
^2You also asked us to issue a legal opinion on certain questions
regarding DOE's implementation of the LGP under section 1702 of the Energy
Policy Act of 2005 and section 301 of the Energy and Water Development
Appropriations Act of 1993. This work is under way and an opinion should
be issued by the end of April 2007.
Although LGP guidelines call for borrowers to be charged fees to cover
program costs, the program could result in substantial financial costs to
taxpayers if DOE underestimates total program costs. These include the
administrative cost associated with evaluating applications; offering,
negotiating, and closing guarantees; and servicing and monitoring the
guarantees. DOE is required to recover applicable administrative costs,
but it has not developed a plan to determine how it will calculate any
fees to charge borrowers to cover these costs or how it will cover
shortfalls if it does not charge borrowers enough. Appropriated funds may
be necessary to cover shortfalls in administrative costs. The other type
of program cost is the subsidy cost, which is the estimated net present
value of the long-term cost to the federal government of guaranteeing
loans over the entire period that the loans are outstanding, excluding
administrative costs. The subsidy cost takes into account (1) estimated
federal payments to cover defaults, delinquencies, or other payments and
(2) estimated payments to the government, including origination and other
fees, penalties, and recoveries on defaults. DOE will have to estimate the
subsidy cost to determine the fees to charge borrowers, but it currently
has no policies or procedures for doing so. Estimating this cost could be
difficult because the program targets innovative energy technologies and
loan performance could depend heavily on future economic conditions,
including energy prices, which are hard to predict accurately. Any
shortfalls in subsidy costs would be automatically funded by the federal
government under the terms of the Federal Credit Reform Act of 1990, not
through the annual appropriations process.
Rather than taking and completing key steps to ensure that the LGP will be
well managed and accomplish its objectives, DOE has focused on initiating
the LGP by soliciting preapplications for proposed projects. From OMB
budget guidance, internal control and accounting standards, and the
experience of other loan guarantee programs, we identified the following
key steps that can provide greater program accountability and reasonable
assurance that program objectives will be met. For each step, we also
describe the actions DOE has taken.
o Issuing regulations. DOE has not issued regulations for
implementing the LGP, relying instead on its guidelines to award
the first $2 billion in loan guarantees. Unlike guidelines,
regulations (1) go through the public notice and comment process
and thus are transparent to the public, oversight agencies, and
Congress and (2) carry the force of law and hold the agency
implementing the program and program participants accountable to
the terms specified in the regulations. DOE officials told us that
they would enforce the guidelines through the terms of the loan
guarantee contracts and thus see no need to issue regulations
before issuing the first $2 billion in loan guarantees. The
officials also told us they would have regulations in place for
later guarantees.
o Establishing a credit review board. DOE has drafted a charter
for a credit review board, but it has not yet been provided to the
Secretary of Energy for approval. This board is to coordinate
credit management and debt collection activities and ensure full
consideration of credit management and debt collection issues.
o Setting policies and procedures for selecting and monitoring
loans and lenders. DOE has taken some steps towards establishing
such policies and procedures through its guidelines, but it has
not completed them. These policies and procedures should protect
the government's interests by, among other things, establishing
mechanisms to screen and select applicants and lenders and monitor
loan and lender performance.
o Setting policies and procedures for estimating administrative
and subsidy costs and accounting for loan guarantees. As noted
above, DOE has not developed policies or procedures for estimating
administrative or subsidy costs. In addition, it has not developed
policies or procedures for accounting for loan guarantees. In the
interim, DOE is asking potential borrowers--who have an incentive
to underestimate the costs--to provide preliminary estimates of
subsidy costs so that it can gain experience in developing them.
DOE expects the necessary accounting policies and procedures to be
in place before guarantees are issued.
o Setting program goals and objectives tied to outcome measures to
determine program effectiveness. DOE has not established outcome
measurements. Instead, it has set the broad objectives of
furthering the policy goals generally set forth in EPAct 05 and
promoting the President's Advanced Energy Initiative. This
initiative supports clean energy technology research to reduce
reliance on oil and address high natural gas and electricity
prices.
EPAct 05 requires DOE to issue regulations defining conditions for
determining when a borrower has defaulted on a loan and requirements for
the documentation borrowers must make available for audits. According to
DOE officials, the department plans to include these requirements in its
final regulations. If DOE issues guarantees before the regulations are
final, officials said they would issue procedural rules covering these
requirements before they issued the guarantees.
Conclusions
DOE's current approach to the LGP raises questions about whether this
program and its financial risks will be well managed. DOE's efforts to
date have focused on expediting program implementation--for example,
issuing guidelines and soliciting preapplications for loan
guarantees--rather than ensuring the department has in place the critical
policies, procedures, and mechanisms necessary to better ensure the
program's success. DOE can better ensure that the LGP will be successful
and financial risks to the federal government will be well managed by
taking key steps before selecting projects and issuing guarantees. Such
steps would also give Congress a basis for making more informed policy
decisions related to the program, including the total amount of loans to
guarantee.
Recommendations for Executive Action
To better ensure that the LGP is well managed, we recommend that the
Secretary of Energy ensure that the department takes the following five
actions before selecting eligible projects for loan guarantees:
o Issue final program regulations that protect the government's
interests, manage risk, and ensure that borrowers are aware of
program requirements.
o Establish policies and procedures for selecting lenders and
loans to guarantee and for monitoring lenders and loans once the
guarantees have been issued.
o Establish policies and procedures for developing subsidy and
administrative cost estimates.
o Establish policies and procedures to account for loan
guarantees.
o Further define program goals and objectives tied to outcome
measures for determining program effectiveness.
Agency Comments
We provided a draft of this report to the Department of Energy for review
and comment. DOE generally agreed with the findings, conclusions, and
recommendations in the report and provided technical comments that were
incorporated, as appropriate. The acting chief financial officer stated
that with funding provided for the LGP in the Revised Continuing
Appropriation Resolution, 2007, enacted on February 15, 2007, DOE intends
to move forward as promptly as possible to implement the program and, in
doing so, affirmatively address the recommendations contained in our
report. DOE's comments are reproduced in enclosure II.
- - - - -
We are sending copies of this report to congressional committees with
responsibilities for energy and federal credit issues; the Secretary of
Energy; and the Director, Office of Management and Budget. We are also
making copies available to others upon request. This report will be
available at no charge on GAO's Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact
James Cosgrove at (202) 512-3841 or [email protected] or Robert Martin
at (202) 512-2600 or [email protected] . Contact points for our Offices
of Congressional Relations and
Public Affairs may be found on the last page of this report. Key
contributors to this report are listed in enclosure III.
James C. Cosgrove
Acting Director, Natural
Resources and Environment
Robert E. Martin
Director, Financial
Management and Assurance
Enclosures
Enclosure I
Enclosure II
Enclosure III
GAO Contacts and Staff Acknowledgments
GAO Contacts
James Cosgrove (202) 512-3841 or [email protected]
Robert E. Martin (202) 512-8341 or [email protected]
Staff Acknowledgments
In addition to the individuals named above, Marcia Carlsen and Karla
Springer, Assistant Directors, and Quindi Franco, Marcia Brouns McWreath,
Barbara Timmerman, and Carol Herrnstadt Shulman made key contributions to
this report.
(360773)
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