Department of Energy: Observations on Actions to Implement the	 
New Loan Guarantee Program for Innovative Technologies		 
(24-APR-07, GAO-07-798T).					 
                                                                 
The Energy Policy Act of 2005 (EPAct 05) authorized the 	 
Department of Energy (DOE) to establish a loan guarantee program 
(LGP) for projects intended to, decrease air pollutants or	 
man-made greenhouse gases, employ new or significantly better	 
technologies, and have a reasonable prospect of repayment. The	 
Federal Credit Reform Act requires appropriated budget authority 
for LGP costs before loans can be made. In 2006, DOE solicited	 
preapplications to the LGP, stating it intended to issue up to $2
billion in guarantees. It also issued guidelines for these	 
proposals, stating that borrowers would ultimately pay for all	 
costs, but funding was authorized. This testimony is based on	 
GAO's February 2007 report (Department of Energy: Key Steps	 
Needed to Help Ensure the Success of the New Loan Guarantee	 
Program, GAO-07-339R) and its April 20, 2007 legal opinion	 
(B-308715). GAO discusses the sources and use of funds for the	 
LGP in fiscal years 2006 and 2007; DOE's authority to implement  
the LGP and to fund the program before Congress had appropriated 
funding; extent to which the LGP could result in a financial risk
to the taxpayer; and steps DOE has taken to ensure that the LGP  
will be well managed.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-798T					        
    ACCNO:   A68718						        
  TITLE:     Department of Energy: Observations on Actions to	      
Implement the New Loan Guarantee Program for Innovative 	 
Technologies							 
     DATE:   04/24/2007 
  SUBJECT:   Air pollution					 
	     Air pollution control				 
	     Appropriations					 
	     Budget authority					 
	     Eligibility determinations 			 
	     Government guaranteed loans			 
	     Greenhouse gases					 
	     Program management 				 
	     Technology 					 
	     Anti-deficiency act violations			 
	     Policies and procedures				 
	     Program goals or objectives			 

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GAO-07-798T

   

     * [1]Contacts and Staff Acknowledgements
     * [2]GAO's Mission
     * [3]Obtaining Copies of GAO Reports and Testimony

          * [4]Order by Mail or Phone

     * [5]To Report Fraud, Waste, and Abuse in Federal Programs
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Testimony

Before the Subcommittee on Energy and Air Quality, Committee on Energy and
Commerce, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery
Expected at 2:00 p.m. EDT
April 24, 2007

DEPARTMENT OF ENERGY

Observations on Actions to Implement the New Loan Guarantee Program for
Innovative Technologies

Statement of James C. Cosgrove, Acting Director
Natural Resources and Environment

GAO-07-798T

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the results of our February 2007
report, and Susan Poling is available to discuss our just-released legal
opinion on the Department of Energy's loan guarantee program for
innovative technologies,^1 both of which we prepared at the request of the
Subcommittee on Energy and Water Development, House Committee on
Appropriations.

As you know, the Energy Policy Act of 2005 (EPAct05)^2 authorized the
Department of Energy (DOE) to establish a loan guarantee program (LGP) to
guarantee loans for projects that were intended to, among other things
meet the following three conditions: (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 commercial
technologies currently used, 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.

In May 2006, DOE proposed transferring appropriations from some DOE
accounts to begin the program. 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,
it issued guidelines for proposals submitted in response to this first
solicitation, stating that the department expected borrowers to ultimately
pay for all program costs.^3 After we had completed our audit work
Congress appropriated amounts to cover the costs of loan guarantees.
budget authority for the program.^4

1GAO, 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, [8]GAO-07-339R (Washington, D.C.: February
28, 2007); and B-308715, Department of Energy--Title XVII Loan Guarantee
Program, April 20, 2007.

^2Title XVII of EPAct 05--Incentives for Innovative Technologies.

^3For the first round of loan guarantees, the guidelines stated that DOE
anticipated that borrowers would pay the subsidy costs and that those
borrowers would be assessed fees to cover some administrative costs.

^4Revised Continuing Appropriations Resolution for Fiscal Year 2007. Pub.
L. No. 110-5, title II, ch. 3, SS 20315, 20320 (February 15, 2007).

My testimony today discusses the (1) sources and use of funds for the LGP
in fiscal years 2006 and 2007, (2) DOE's authority to implement the LGP
under section 1702 of the EPAct 05 and section 301 of the Energy and Water
Development Appropriations Act of 1993 and to finance the program before
Congress had appropriated funds,^5 (3) extent to which the LGP could
result in a financial risk to the taxpayer, and (4) steps DOE has taken to
ensure that the LGP will be well managed.

To identify sources and use of funds for DOE's LGP, we interviewed DOE LGP
and budget officials and reviewed and analyzed relevant DOE budget
documentation as well as agency LGP guidance and planning documents. 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 these plans and the guidance with DOE and Office of
Management and Budget (OMB) officials. To assess the steps DOE has taken
to ensure the LGP will be well managed, we compared DOE's plan with OMB
budget and internal control guidance, federal 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 February 2007.Consistent with
our practice in rendering legal opinions, we contacted DOE to establish
the factual record and elicit the agency's legal position on the subject
matter of the request.^6

In February 2007, we reported the following:

First, in fiscal year 2006, and continuing through October 2006, DOE used
about $503,000 from three separate appropriation accounts to fund LGP
activities. 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 a LGP Web site. DOE continued to pay for task
order support services to respond to program inquiries, and these payments
were in addition to the $503,000 already spent to initiate the program.
However, DOE had discontinued other funding, and the staff on detail had
returned to their home units. Nevertheless, according to the deputy
general counsel for energy policy, he and others continued to work on the
program by, for example, preparing a notice of proposed rulemaking and
reviewing pre-applications for completeness. At the time of our review,
DOE officials said they were awaiting appropriations before taking
additional steps to implement the LGP.

^5 42. U.S.C. S 7278.

^6 GAO, Procedures and Practices for Legal Decisions and Opinions,
[9]GAO-06-1064SP (Washington, D.C.: Sept. 2006), available at
www.gao.gov/congress.html (last visited Apr. 16, 2007).

Second, although LGP guidelines call for borrowers to be charged fees to
cover all program costs, the program could result in substantial financial
costs to the taxpayer if DOE underestimates total program costs. These
costs include, for example, administrative costs for evaluating
applications; offering, negotiating and closing guarantees; and servicing
and monitoring the guarantees. While DOE must recover applicable
administrative costs, it had not developed a plan to determine how it
would recover these costs at the time of our review. Appropriated funds
may be necessary to cover shortfalls. The other type of program cost is
the subsidy cost: the estimated net present value of the long-term cost to
the federal government of guaranteeing the 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 charged borrowers, but it had no policies or procedures
for doing so at the time of our review. 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. Under the
Federal Credit Reform Act of 1990 (FCRA), shortfalls in subsidy costs are
funded by a permanent indefinite appropriation, not through the annual
appropriations process.

Third, rather than taking and completing key steps to ensure that the LGP
would be well managed and accomplish its objectives, we found that DOE had
focused on initiating the LGP by soliciting pre-applications for proposed
projects. From OMB 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 had taken at the time of our review.

           o Issuing regulations. DOE had not issued regulations for
           implementing the LGP; instead it planned to rely on guidelines for
           awarding 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 saw 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 drafted a charter for a
           credit review board, but it had not yet provided the charter to
           the Secretary of Energy for approval at the time of our review.
           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 had taken some steps towards establishing
           such policies and procedures through its guidelines, but it had
           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 to
           monitor loan and lender performance.
           o Setting policies and procedures for estimating administrative
           and subsidy costs and accounting for loan guarantees. As
           previously noted, DOE had not developed policies or procedures for
           estimating administrative or subsidy costs. In addition, it had
           not developed policies or procedures for accounting for loan
           guarantees. In the interim, DOE was asking potential
           borrowers--who have an incentive to underestimate the costs--to
           provide preliminary estimates of subsidy costs so that it could
           gain experience in developing these estimates. DOE expected the
           necessary accounting policies and procedures would be in place
           before guarantees were issued.
           o Setting program goals and objectives tied to outcome measures
           for determining program effectiveness. DOE had not established
           outcome measurements. Instead, it had set 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 (1) regulations defining conditions
           for determining when a borrower has defaulted on a loan and (2)
           requirements for the documentation borrowers must make available
           for audits. At the time of our review, DOE officials told us that
           the department planned 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.

           Finally, concerning DOE's authority to implement and fund the LGP
           before Congress had appropriated funding, we concluded in our
           April 20, 2007, opinion that EPAct 05, section 1702(b)(2), confers
           upon DOE independent authority to make loan guarantees,
           notwithstanding the FCRA requirements. We also concluded that DOE
           engaged in activities to implement a loan guarantee program under
           title XVII of the act during a period when DOE was affirmatively
           prohibited from implementing that title by 42 U.S.C. S 7278. These
           activities violated section 7278; the purpose statute, 31 U.S.C. S
           1301(a); and the Antideficiency Act, 31 U.S.C. S 1341(a). DOE must
           report the violations of the Antideficiency Act to Congress and
           the President, and submit a copy of that report to the Comptroller
           General of the United States under 31 U.S.C. S 1351, as amended.^7

           In conclusion, Mr. Chairman and Members of the Subcommittee, DOE
           should not have begun implementation of the LGP without a specific
           appropriation. Nevertheless, DOE did begin implementation, and its
           approach to the LGP raised serious questions about whether this
           program and its financial risks would be well managed. At the time
           of our review, DOE had not taken steps to ensure that it had in
           place the critical policies, procedures, and mechanisms necessary
           to ensure the program's success. In our report we recommended that
           the department take these steps.

           Since we completed our audit work, the Revised Continuing
           Appropriations Resolution for Fiscal Year 2007 directed DOE to
           implement most of our recommendations by issuing final regulations
           before awarding loan guarantees. These regulations are to include
           (1) programmatic, technical, and financial factors for selecting
           projects for loan guarantees; (2) policies and procedures for
           selecting and monitoring lenders and loan performance, and (3) any
           other policies or information necessary to implement the LGP. DOE
           was also instructed to complete these regulations within 6 months
           of the appropriations act.
		   
^7Office of Management and Budget Circular No. A-11 provides guidance on
the information to include in Antideficiency Act reports. Agencies must
report violations found by GAO, even if they disagree with the finding.
OMB advises agencies, "If the agency does not agree that a violation has
occurred, the report to the President, Congress, and the Comptroller
General will explain the agency's position." OMB Cir. No. A-11,
Preparation, Submission, and Execution of the Budget, S 145.8 (June 2006).

           Mr. Chairman, this concludes my prepared statement. I would be
           happy to respond to any questions that you or Members of the
           Subcommittee may have.

           Contacts and Staff Acknowledgements

           Contact points for our Offices of Congressional Relations and
           Public Affairs may be found on the last page of this testimony.
           For further information about our review of the loan guarantee
           program, please contact James Cosgrove at 202-512-3841 or
           [email protected] . For further information on our legal
           opinion, please contact Susan A. Poling, Managing Associate
           General Counsel at 202-512-2667 or [email protected] . Key
           contributors to this statement were Thomas H. Armstrong, Assistant
           General Counsel for Appropriations; Marcia Carlsen, Assistant
           Director; Doreen S. Feldman, Assistant General Counsel; Marcia
           Brouns McWreath; Neill Martin-Rolsky, Senior Attorney; Karla
           Springer, Assistant Director; Carol Herrnstadt Shulman; and
           Barbara R. Timmerman, Senior Attorney.
		   
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(360839)

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www.gao.gov/cgi-bin/getrpt?GAO-07-798T .

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact James C. Cosgrove at 202.512.7029.

Highlights of [19]GAO-07-798T , testimony before the Subcommittee on
Energy and Air Quality, Committee on Energy and Commerce, House of
Representatives

April 24, 2007

DEPARTMENT OF ENERGY

Observations on Actions to Implement the New Loan Guarantee Program for
Innovative Technologies

The Energy Policy Act of 2005 (EPAct 05) authorized the Department of
Energy (DOE) to establish a loan guarantee program (LGP) for projects
intended to, decrease air pollutants or man-made greenhouse gases, employ
new or significantly better technologies, and have a reasonable prospect
of repayment. The Federal Credit Reform Act requires appropriated budget
authority for LGP costs before loans can be made. In 2006, DOE solicited
preapplications to the LGP, stating it intended to issue up to $2 billion
in guarantees. It also issued guidelines for these proposals, stating that
borrowers would ultimately pay for all costs, but funding was authorized.

This testimony is based on GAO's February 2007 report (Department of
Energy: Key Steps Needed to Help Ensure the Success of the New Loan
Guarantee Program, GAO-07-339R) and its April 20, 2007 legal opinion
(B-308715). GAO discusses the sources and use of funds for the LGP in
fiscal years 2006 and 2007; DOE's authority to implement the LGP and to
fund the program before Congress had appropriated funding; extent to which
the LGP could result in a financial risk to the taxpayer; and steps DOE
has taken to ensure that the LGP will be well managed.

In fiscal year 2006, and continuing through October 2006, DOE used about
$503,000 from three separate appropriation accounts to fund LGP
activities. DOE used these funds for the salaries of three staff detailed
to the LGP office and for contracts to support the program. DOE stopped
most LGP development activities at the end of October, but according to
the deputy general counsel for energy policy, he and others continued to
work on the program by, for example, preparing a notice of proposed
rulemaking and reviewing pre-applications for completeness. At the time of
GAO's review, DOE officials said they were awaiting appropriations before
taking additional implementation steps.

DOE should not have begun implementation of the LGP without a specific
appropriation. Nevertheless, DOE did begin implementation, and its
approach to the LGP raised serious questions about whether this program
and its financial risks would be well managed.

LGP guidelines call for borrowers to be charged fees to cover all program
costs, but the program could result in substantial financial costs to the
taxpayer if DOE underestimates administrative costs, such as evaluating
applications. While DOE must recover these costs, it had not developed a
plan to determine how it would do so at the time of GAO's review.
Appropriated funds may be necessary to cover shortfalls. The other type of
program cost is the subsidy cost: the estimated net present value of the
long-term cost to the federal government of guaranteeing the loans over
the entire period that the loans are outstanding, excluding administrative
costs. DOE will have to estimate this cost to determine the fees charged
borrowers, but it had 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.
Under federal law, shortfalls in subsidy costs are funded by a permanent
indefinite appropriation, not through the annual appropriations process.

GAO recommended key steps that DOE did not take but that would help ensure
that the program is well managed. The Revised Continuing Appropriations
Resolution for Fiscal Year 2007 directed DOE to implement most of GAO's
recommendations by issuing final regulations before awarding loan
guarantees. These regulations are to include (1) programmatic, technical,
and financial factors for selecting projects for loan guarantees; (2)
policies and procedures for selecting and monitoring lenders and loan
performance, and (3) any other policies or information necessary to
implement the LGP. DOE was also instructed to complete these regulations
within 6 months of the appropriations act.

References

Visible links
8. http://www.gao.gov/cgi-bin/getrpt?GAO-07-339R
9. http://www.gao.gov/cgi-bin/getrpt?GAO-06-1064SP
  19. http://www.gao.gov/cgi-bin/getrpt?GAO-07-798T
*** End of document. ***