Energy Research: Opportunities Exist to Recover Federal Investment in
Technology Development Projects (Letter Report, 06/26/96,
GAO/RCED-96-141).
Pursuant to a congressional request, GAO reviewed the Department of
Energy's (DOE) cost sharing arrangements it has with the private sector
to fund technology development programs, focusing on the: (1) extent to
which DOE requires repayment of its investment in cost-shared technology
development; and (2) advantages and disadvantages of repayment.
GAO found that: (1) of the many cost-shared technology development
programs DOE participates in, only the Clean Coal Technology Program,
Metal Initiative Program, Electric Vehicles Advanced Battery Development
Program, and Advanced Light Water Reactor Program require repayment of
the federal investment if the technology is ultimately commercialized;
(2) repayments are collected through royalties and fees from licensing
technologies and revenues from commercial sales; (3) each of the
programs except the Metals Initiative Program provide for up to a
20-year repayment period; (4) the Metals Initiative Program provides for
up to 150-percent repayment, while the other programs limit repayment to
100 percent; (5) while a repayment policy could recover some or all of
the federal government's investment, the additional costs and
administrative burdens it imposes could discourage industry from
commercializing new technologies; (6) the administrative burdens
involved in a repayment policy include negotiating, administering,
auditing, and enforcing cost-sharing and repayment agreements; and (7)
shifting a greater portion of the burden of cost-sharing from government
to industry may be preferable to requiring repayment.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-96-141
TITLE: Energy Research: Opportunities Exist to Recover Federal
Investment in Technology Development Projects
DATE: 06/26/96
SUBJECT: Energy industry
Energy research
Research and development costs
Cost sharing (finance)
Cooperative agreements
Cost control
Fees
Alternative energy sources
Royalty payments
Reimbursements to government
IDENTIFIER: DOE Clean Coal Technology Program
DOE Metals Initiative Program
DOE Electric Vehicles Advanced Battery Program
DOE Advanced Light Water Reactor Program
DOE Advanced Reactor Design Certification Program
DOE First-of-a-Kind Engineering Program
DOE Reservoir Class Field Demonstration Program
DOE Advanced Turbine Systems Program
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Cover
================================================================ COVER
Report to the Chairman, Subcommittee on Energy and Environment,
Committee on Science, House of Representatives
June 1996
ENERGY RESEARCH - OPPORTUNITIES
EXIST TO RECOVER FEDERAL
INVESTMENT IN TECHNOLOGY
DEVELOPMENT PROJECTS
GAO/RCED-96-141
Recover Federal Investment in Technologies
(308889)
Abbreviations
=============================================================== ABBREV
CRADAs - cooperative research and development agreements
DOE - Department of Energy
GAO - General Accounting Office
Letter
=============================================================== LETTER
B-271732
June 26, 1996
The Honorable Dana Rohrabacher
Chairman, Subcommittee on Energy and Environment
Committee on Science
House of Representatives
Dear Mr. Chairman:
The Department of Energy (DOE) is involved in many cost-shared
technology development programs with the private sector. In general,
a major objective of such programs is to help promote the development
and commercialization of more efficient, environmentally attractive,
and affordable technologies that will better utilize the nation's
energy resources and enhance opportunities for domestic economic
growth and employment. In view of the increasing importance of using
creative methods to fund technology programs under today's budgetary
constraints, you requested that we (1) determine the extent to which
DOE requires repayment of its investment in cost-shared technology
development, including the similarities and differences in the
mechanisms used, and (2) identify the advantages and disadvantages of
repayment. We focused most of our work on four DOE offices--Fossil
Energy, Energy Efficiency and Renewable Energy, Environmental
Management, and Nuclear Energy--because they fund most of the
Department's cost-shared technology development programs and projects
involving contracts and cooperative agreements.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
DOE generally does not require repayment of its investment in
cost-shared technology development projects. We identified four
programs in DOE that require repayment of the federal investment if
the technologies are commercialized. The offices we reviewed plan to
devote about $8 billion in federal funds to cost-shared projects, of
which about $2.5 billion is subject to repayment. The four programs
are the (1) Clean Coal Technology Program, which accounts for about
90 percent of the funds subject to repayment; (2) Metals Initiative
Program; (3) Electric Vehicles Advanced Battery Program; and (4)
Advanced Light Water Reactor Program, which requires repayment for
some projects.
DOE recoups its investment under all four programs through royalties
and fees paid under licensing agreements. A percentage of revenues
from commercial sales of technologies is also applied toward
repayment in three of the programs and to a limited extent in the
Advanced Battery Program. The Metals Initiative Program allows for
the recovery of 150 percent of the federal investment, while the
other three programs are limited to 100 percent.
The major advantage of having a repayment policy is that the federal
government could recover some of its investment in successfully
commercialized technologies. However, according to DOE officials,
repayment could also discourage some in industry from commercializing
technologies or participating in projects, create an administrative
burden on both DOE and industry, and cause technologies to become
less competitive in the marketplace. We believe many of the
disadvantages can be mitigated by structuring a flexible repayment
requirement with the disadvantages in mind. Because opportunities
exist for substantial repayment in some of DOE's programs, requiring
repayment would allow the government to share in the benefits of
successfully commercialized technologies that could amount to
hundreds of millions of dollars.
BACKGROUND
------------------------------------------------------------ Letter :2
DOE and the private sector are involved in hundreds of cost-shared
projects aimed at developing a broad spectrum of cost-effective,
energy-efficiency technologies that protect the environment; support
the nation's economic competitiveness; and promote the increased use
of oil, gas, coal, nuclear, and renewable energy resources.
Universities and national laboratories also participate in many of
these government-industry collaborations. Most of the projects that
involve technology development beyond basic research are funded under
cost-shared contracts, cooperative agreements, and cooperative
research and development agreements (CRADAs).
The offices in our review are funding more than 500 projects under
contracts and cooperative agreements with industry that are expected
to cost more than $15 billion by the time they are completed. DOE
plans to fund about $8 billion and industry the balance. The four
programs that require repayment cover about 60 projects. The other
programs cover more than 450 projects.
FOUR DOE PROGRAMS HAVE A
REPAYMENT POLICY, AND THE
REPAYMENT MECHANISMS ARE
SIMILAR
------------------------------------------------------------ Letter :3
Although DOE participates with the private sector in many cost-shared
technology development programs, only four require repayment of the
federal investment if the technology is ultimately commercialized.
The mechanisms used for repayment are similar in that they generally
require a portion of royalties and fees from licensing technologies
and revenues from commercial sales.\1 Also, three programs provide
for up to a 20-year repayment period and two allow flexibility on
when repayment begins. A major difference in the programs is that
one program provides for up to 150-percent repayment, while the other
programs limit repayment to 100 percent.
--------------------
\1 DOE's national laboratories and energy research centers can
receive royalties and fees from licensing patents for inventions,
processes, and services that are developed under cost-shared CRADAs
and other mechanisms. Although the provisions covering these
agreements can also constitute a form of repayment, they are designed
to provide the government with a way to share in the success of a
technology and are independent of the government's contribution to
the underlying technology. As agreed with your office, we excluded
CRADAs as a specific focus of this review because there is no
transfer of federal funds to industry participants.
CLEAN COAL TECHNOLOGY
PROGRAM
---------------------------------------------------------- Letter :3.1
The Clean Coal Technology Program is a partnership between the
federal government and industry for sharing the costs of
commercial-scale projects that demonstrate innovative technologies
for using coal in a more environmentally sound, efficient, and
economical manner. DOE is investing more than $2.2 billion in this
program through the year 2003. The funds have been committed under
cooperative agreements to more than 40 active and completed projects
that were selected in five separate rounds of nationwide competitions
for project proposals conducted from 1986 to 1993. DOE funds up to
50 percent of a project's cost, and the nonfederal participants fund
the balance. Most of the projects are currently in the design,
construction, or operation phases.
In 1985, when the program began, DOE made a programmatic decision in
consultation with industry and the Congress to require the
participants in the clean coal projects to repay the federal
investment in projects within 20 years after a project ends if the
technology is commercialized. For projects selected in the first
round of competition, repayment was to come from (1) any net revenues
generated from continued project operations and (2) revenues accruing
from the commercial sale, lease, manufacture, licensing, or use of
the technology. During rounds two and three, DOE changed the
repayment provisions to respond to the industry's concerns and lessen
the likelihood that the repayment requirements could hamper the
project participants' competitiveness. Among other things, DOE (1)
excluded net operating revenues as a required source of repayment,
(2) reduced the percentage of revenues from technology sales that are
subject to repayment, (3) excluded foreign sales from repayment, (4)
eliminated an inflation adjustment requirement, (5) allowed a grace
period before repayment begins to facilitate the technology's initial
market penetration, and (6) provided for a waiver from repayment
altogether if repayment would place the participants at a competitive
disadvantage in the marketplace.\2
According to DOE officials, three clean coal projects with a federal
investment of about $36.2 million have progressed to the repayment
phase. As of March 1996, DOE had received payments totaling about
$377,000 for these projects.
--------------------
\2 Changes in repayment provisions during the program and their
potential implications are discussed in two prior GAO reports--Fossil
Fuels: Lessons Learned in DOE's Clean Coal Technology Program
(GAO/RCED-94-174, May 26, 1994) and Fossil Fuels: Improvements
Needed in DOE's Clean Coal Technology Program (GAO/RCED-92-17, Oct.
30, 1991).
METALS INITIATIVE PROGRAM
---------------------------------------------------------- Letter :3.2
Under the Metals Initiative Program, DOE shares in the cost of
research and development projects intended to increase the energy
efficiency and enhance the competitiveness of the domestic steel,
aluminum, and copper industries. The projects are carried out under
cooperative agreements. Industry is required to provide at least 30
percent of the funding, and DOE provides the balance. Industry
participants establish a holding company for each project for the
purpose of holding patents, licensing technology, tracking technology
sales and use, and collecting and distributing licensing fees and
other income.
Appropriations laws require repayment of the total federal investment
up to one and one-half times (150 percent) from the proceeds of the
commercial sale, lease, manufacture, or use of technologies developed
under the program. The Metals Initiative Program is the only program
that requires repayment that exceeds DOE's investment. According to
DOE, repayment applies to all sales--domestic or foreign. As of
September 1995, DOE had spent or obligated about $89 million for
projects under this program. Although some patent applications have
been filed and some licensing agreements have been negotiated, none
of the projects have begun repayment yet, according to DOE officials.
ELECTRIC VEHICLES ADVANCED
BATTERY DEVELOPMENT PROGRAM
---------------------------------------------------------- Letter :3.3
In early 1991, Chrysler, Ford, and General Motors established the
United States Advanced Battery Consortium to jointly sponsor research
and testing to develop advanced batteries for electric vehicles.
Later that year, DOE and representatives of the utility industry
agreed to work together with the consortium under a cost-sharing
arrangement. DOE is providing 50 percent of the funding, and the
other 50 percent is being provided by the participating automobile
companies, utilities, and battery developers. According to DOE,
current plans call for federal contributions amounting to about $103
million for funding this research through 1996. DOE expects to
approve additional funding for the continuation of the research after
the consortium submits a proposal identifying its funding needs.
As discussed in our August 1995 report,\3 DOE is entitled to
repayment of its financial contributions to the consortium if the
advanced batteries are commercialized. Repayment is recommended in a
Senate appropriations report. Under the terms of the cooperative
agreement between DOE and the consortium, DOE's investment is to be
repaid based on (1) the revenue received by the consortium or its
battery developers from the licensing of patents to third-party
domestic or foreign battery manufacturers and (2) any payments to the
consortium or its contractors upon the liquidation or winding up of
its business. In addition, one of the consortium's battery
development contracts provides for repayment to DOE based on revenues
from the domestic or foreign sale of batteries by the developer. The
repayment period ends after DOE's total contribution has been repaid,
or 20 years, whichever occurs first. The repayment obligation can be
waived, in whole or in part, if DOE determines that repayment places
the consortium or its battery developers at a competitive
disadvantage. Three of the eight battery development contracts
provide that repayment will not begin until battery sales by the
developer and/or licensee reach a specified level.
--------------------
\3 Electric Vehicles: Efforts to Complete Advanced Battery
Development Will Require More Time and Funding (GAO/RCED-95-234, Aug.
17, 1995).
ADVANCED LIGHT WATER REACTOR
PROGRAM
---------------------------------------------------------- Letter :3.4
The reactor program focuses on making standardized advanced light
water reactors available for orders during the 1990s to help meet the
projected demand for new electrical generation capacity by 2010. DOE
provides up to 50 percent of the funding for projects carried out
with industry, and industry provides the balance. According to DOE,
in 1986 when this program was begun, repayment was not considered
because the main objective was to reduce the licensing and regulatory
impediments that were contributing to extensive delays in the
construction and permitting of nuclear power generating facilities.
The objective evolved into a certification of advanced light water
reactor designs to help restore the industry's confidence and reduce
the financial risks in acquiring new nuclear plants at the
appropriate time in the future. The repayment provisions covering
domestic or foreign sales have been incorporated into two programs
that are part of the Advanced Light Water Reactor Program.
In one of these programs--the advanced reactor design certification
program--the Congress provided $14 million in additional funding for
a specific contract, and an appropriations report recommended that
this additional federal cost should be repaid from royalties on the
first commercial sale of the reactor design. DOE will require
repayment of this amount. DOE subsequently agreed to provide another
$11 million in additional funding and may require that this amount be
repaid, as well as any additional future funding provided under this
contract. DOE's original contractual commitment of about $50 million
is not subject to repayment. According to DOE officials, the
Department also may provide for the recovery of any federal
contributions in excess of the original $50 million commitment under
another contract in the advanced reactor design certification
program.
The other program--the "first-of-a-kind" engineering
program--involves a cooperative agreement between DOE and the
Advanced Reactor Corporation. According to DOE, in the development
of this program, the participating electric generating utilities made
a major commitment to provide cost-share funding and overall
direction and technical advice to achieve a plant design that they
would be willing to acquire at some future time. Because of their
direct, substantial contributions to the plant designs, the utilities
require reactor vendors to pay them royalties from the sale of the
plant designs or technology to other customers. Since the utilities
were going to require royalty payments, DOE decided to also require
royalties proportionate to its share of the project's total costs.
The cooperative agreement requires that DOE be repaid up to its total
investment from the revenues received by the Advanced Reactor
Corporation from the sale or use of the plant designs or technology
developed under this program. The repayment period runs up to 20
years, or until the federal investment, which is expected to total
$100 million, is repaid.
ADVANTAGES AND DISADVANTAGES OF
A REPAYMENT POLICY
------------------------------------------------------------ Letter :4
A repayment policy provides both advantages and disadvantages. The
main advantage is the recovery of the federal investment. We believe
that many of the disadvantages and arguments against repayment can be
mitigated by structuring a flexible policy that provides criteria and
factors to consider in determining the application of repayment to
individual programs or projects.
In 1991, DOE considered having a Department-wide policy to recover
its investment in technology development projects and even developed
a draft order with criteria and guidelines for determining when
repayment is appropriate. But due to substantial opposition within
the Department and the departure of the Deputy Secretary who was the
primary supporter of this concept, the order was never implemented.
ADVANTAGES
---------------------------------------------------------- Letter :4.1
The primary advantage of a repayment policy is that the government
could recover some of its investment in the development of
technologies. According to several DOE officials, a repayment
requirement could also provide more assurance that the project
proposals are sound and economically viable by discouraging proposals
that are too marginal financially for their sponsors to commit to
repayment.
As previously mentioned, the DOE offices in our review are funding
projects with industry that are expected to cost more than $15
billion by the time they are completed. DOE's share of the planned
funding is expected to total about $8 billion, and the nonfederal
share about $7 billion, as shown in table 1. About $2.5 billion of
the $8 billion is subject to repayment.
Table 1
Total Planned Funding for Cost-Shared
Technology Development Projects
Involving Contracts and Cooperative
Agreements Within Four DOE Offices
(Dollars in millions)
Total DOE
Amount Amount not Total DOE and
subject to subject to planned Nonfederal nonfederal
Office repayment repayment funding share share
------------------- ------------ ------------ ------------ ------------ ------------
Fossil Energy $2,232.3 $4,337.5 $6,569.8 $5,249.0 $11,818.8
Energy Efficiency
and Renewable
Energy 144.9 838.3 983.2 1,259.0 2,242.2
Environmental
Management 0.0 46.3 46.3 18.0 64.3
Nuclear Energy 114.0 267.9 381.9 595.2 977.1
=========================================================================================
Total contracts and
cooperative
agreements $2,491.2 $5,490.0 $7,981.2 $7,121.2 $15,102.4
-----------------------------------------------------------------------------------------
Note: The amounts are in nominal dollars and represent the total
funds spent and planned for active projects. DOE spent about $60.9
million for completed or terminated projects under the Metals
Initiative Program.
Source: Prepared by GAO using DOE's data.
Except for the projects within the four programs that already require
repayment, it is important to note that, for a variety of reasons
discussed later, not all of the projects contained in the table would
lend themselves to repayment. In addition, unless follow-on projects
are undertaken, requiring new or amended contracts or cooperative
agreements, only new projects not yet negotiated with industry would
be appropriate for repayment.
While the potential repayment is difficult to quantify, DOE documents
developed when the 1991 draft repayment policy statement was under
consideration indicated that the potential is substantial. To
illustrate the potential for repayment, we subtracted the
approximately $2.5 billion in federal funding included in table 1 for
projects already covered by repayment provisions from the
approximately $8 billion total planned federal funding. The
remaining cooperative agreements and contracts amount to about $5.5
billion. If one assumes that only 50 percent of this amount is
dedicated to projects that would lend themselves to repayment, and
that about 15 percent of research and development funds result in
commercialized technologies (which DOE officials say is about
average), then about $400 million could come back to the federal
government in the form of repayment.
In discussing technology development programs and projects with DOE's
Deputy Assistant Secretaries and other DOE officials, many of them
agreed that certain types of projects might be appropriate candidates
for repayment of the federal investment if the concept was employed
at the beginning of the projects or new projects are undertaken in
the future. The officials generally indicated that repayment should
be more applicable to projects with a large federal investment where
the federal contribution is easily identified, projects involving
technologies that are close to commercialization, and projects in
which the federal investment serves to reduce the costs and risks of
providing the technology to potential users. The officials also said
that technologies that have a large potential market and technologies
that are likely to be commercialized in foreign countries are good
candidates for requiring repayment of the federal investment. Some
officials said that repayment should be directed at projects that
have large, well-financed industry teams.
DOE officials indicated, for example, that the Reservoir Class Field
Demonstration Program might be appropriate for repayment if future
projects are undertaken. This program shares costs for
demonstrations of existing and new technologies for increasing
production from U.S. oil fields that might otherwise be prematurely
abandoned. The program operates on the premise that the
characteristics of some oil formations are similar, and when small
and major oil producers demonstrate technologies and processes that
are successful in increasing production, other oil field operators
may want to try them in their fields. Three rounds of demonstration
projects have been undertaken, and more may be undertaken if funding
becomes available. DOE has committed about $100 million to the 29
projects that are currently in the program. According to DOE, the
projects may take from 3 to 7 years to complete.
The Advanced Turbine Systems Program is another program that DOE
officials said might be appropriate for repayment if new projects are
begun or current projects are amended. This program is intended to
develop more efficient, advanced turbine systems for both utility and
industrial electric power generation. According to DOE, the program
is expected to cost about $700 million by the time it is completed in
the year 2000. Depending on appropriations, DOE is planning to fund
about $450 million of the total estimated cost, and industry
participants are expected to fund the balance.
New cost-shared technology demonstration and commercial application
programs authorized by the Energy Policy Act of 1992 would also be
appropriate candidates for repayment if they are funded. In fact,
the act requires DOE to establish procedures and criteria for the
repayment of the federal investment in several authorized coal
projects, but they have not been funded.
Many of the DOE officials we spoke with generally indicated a
willingness to consider repayment, but they said that flexibility
should exist to be able to structure or waive repayment to meet
programmatic needs. Some officials believed that repayment may not
be suitable for grants, universities, and small businesses or for
projects that are directed at basic research. Others indicated that
repayment should be waived if the federal investment is considered
disproportionately small in comparison with the potential costs of
administering the repayment process. Some DOE officials said that a
stronger argument can be made for repayment if the technology
developed is likely to be commercialized outside of the United
States.
Appendix I provides a more detailed discussion of the types of
projects that DOE officials believe would be the most appropriate or
suitable for repaying the federal investment.
DISADVANTAGES
---------------------------------------------------------- Letter :4.2
DOE officials we spoke with and DOE's 1991 draft document on
repayment policy also pointed out several disadvantages to the
government or industry participants that would need to be addressed.
These disadvantages, along with potential ways to structure repayment
so as to mitigate the disadvantages, are discussed below.
According to DOE, most technologies funded by the Department require
further development and/or funding to bring them to the marketplace
after DOE's participation is complete. Some DOE officials believe
that repayment could lower industry's rate of return on investment
and discourage industry, especially small businesses, from
commercializing such technologies. The officials also believe that
repayment might discourage industry from participating in cost-shared
technology development projects in technological areas that DOE wants
to promote. In our October 1991 report, we recommended that DOE
study the effect that repayment provisions have had on the industry's
participation in the Clean Coal Technology Program. DOE agreed to do
this but has not completed its study. Although a repayment
requirement might have some influence on the timing of
commercialization or participation in technology development
projects, industry participants would not have to repay the federal
investment unless the technology is commercialized. Therefore,
repayment should be more favorable to industry than other sources of
funding, such as a bank loan, which would have to be repaid with
interest regardless of whether the technology is commercialized.
According to a former DOE Deputy Secretary who supported the
expansion of repayment programs, businesses expect some form of
repayment as a normal cost of doing business.
DOE officials generally believe that repayment would create an
administrative burden in negotiating, administering, auditing, and
enforcing cost-sharing and repayment agreements. Both DOE and
industry participants would need to establish a recordkeeping system
for tracking the sales and use of technologies long after a project
ends (up to 20 years in three of the programs that require
repayment). According to DOE, the administrative and auditing costs
may not make it worthwhile to pursue repayment. We believe one way
of making the administrative burden less onerous and minimizing
auditing requirements might be to require sample audits of industry
participants' records. Another approach might be to require
repayment only in those instances in which the amount of the return
justifies the cost of necessary audits and other internal control
measures. DOE officials indicated that they are studying the issue
of ensuring proper repayment in the Clean Coal Technology Program.
Many DOE officials believe that obtaining increased cost-sharing by
industry is preferable to requiring repayment of the federal
investment. Some indicated that a repayment requirement could be
used as a negotiating tool to obtain higher cost-sharing in lieu of
repayment. The officials also argue that it may be better in terms
of conserving federal resources to obtain an increased cost-share
from all participants than to obtain repayment only from those
successfully commercializing their technologies.
According to DOE, any repayment provisions must consider the effect
of repayment on the ability of the entity carrying out the project to
compete in the marketplace (proceed with commercialization of the
technology and achieve a rate of return commensurate with the
industry and the risk). DOE believes that if repayment obligations
are too demanding, especially in the early years of technology sales,
cash flows and profitability may not be sufficient for the
organization responsible for repayment to remain in business, or
licensing fees and costs may be too high for the technology to remain
competitive with alternative technologies. We believe one way of
mitigating this concern could be to allow a grace period after a
project ends before requiring repayment to begin, as was done in two
of the programs discussed above that require repayment. A grace
period could be based on a specified period of elapsed time or a
specified number of technology units sold before repayment begins.
OTHER RELATED ISSUE
---------------------------------------------------------- Letter :4.3
Another issue is the disposition or use of the proceeds resulting
from repayment. Many DOE officials indicated that any proceeds from
repayment programs should flow back into the applicable program to
leverage the federal funding that would be available for ongoing and
future projects, rather than be deposited in the Treasury, which is
the current practice. Under current policy, proceeds are available
to either reduce the budget deficit or to be reallocated on the basis
of national priorities.
CONCLUSIONS
------------------------------------------------------------ Letter :5
While we do not believe that cost recovery should be a major
objective, opportunities may exist for substantial recovery of
taxpayers' dollars if DOE would adopt a policy to require repayment
of its investment in successfully commercialized technologies.
However, a repayment policy would need to be structured with enough
flexibility so as not to interfere with program objectives or
adversely affect industry's participation in projects and technology
commercialization. Such a policy should provide criteria and factors
to consider in determining whether it should be applied to individual
programs or projects. A properly structured policy could provide the
flexibility needed to mitigate many of the arguments against having a
policy.
RECOMMENDATION
------------------------------------------------------------ Letter :6
We recommend that the Secretary of Energy develop and implement a
Department-wide policy for requiring repayment of the federal
investment in successfully commercialized cost-shared technologies.
The policy should provide criteria and flexibility for determining
which programs and projects are appropriate for repayment.
AGENCY COMMENTS AND OUR
RESPONSE
------------------------------------------------------------ Letter :7
We provided a draft of this report to DOE for its review and
comments. DOE said that it concurred with our conclusion that cost
recovery should not be a major objective of a federal technology
development program but pointed out that in its experience, there are
individual projects and programs for which repayment provisions can
work. DOE said that demonstration programs that are well advanced in
the research and development pipeline are the most likely candidates
for repayment. According to DOE, however, the real payback to the
nation is in the societal benefits that flow out of federally funded
research and development, including jobs, competitiveness in world
markets for U.S. companies, and the resulting contributions to the
U.S. economy of both domestic and export technology sales. We agree
that these potential benefits are very important, but they are
independent of the argument for recovering the taxpayers' share of
investment in successfully commercialized technologies. If repayment
under appropriate circumstances was an ancillary requirement for
successfully commercialized technologies, it would allow the
government to potentially recover some of its investment in
technologies as well as enjoy the other positive benefits that might
accrue.
In the case of environmental cleanup technologies, DOE said that the
payback is in the form of cost avoidance to the government through
the use of innovative technologies that reduce the cost of cleaning
up the contaminated weapons complex. We recognized this major
benefit in our draft report. However, we continue to believe that if
such technologies have potential commercial application, new projects
demonstrating the technologies should be considered for repayment of
the federal investment.
DOE said that it agreed with our recommendation that a repayment
policy should provide the flexibility for determining which programs
and projects are appropriate for repayment. DOE believes that the
policy should also have flexibility in determining the repayment
terms, and when and how they should be applied so as not to adversely
affect the development or introduction of technologies into the
marketplace.
Appendix II contains the complete text of DOE's comments, along with
our responses.
---------------------------------------------------------- Letter :7.1
Our work was performed from August 1995 through April 1996 in
accordance with generally accepted government auditing standards.
Appendix III describes the scope and methodology of our review.
As arranged with your office, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 15 days after the date of this letter. At that time, we will
provide copies to the Secretary of Energy, appropriate congressional
committees, and other interested parties. We will also make copies
available to others upon request.
Please contact me at (202) 512-3841 if you have any questions or need
additional information. Major contributors to this report are listed
in appendix IV.
Sincerely yours,
Victor S. Rezendes
Director, Energy, Resources,
and Science Issues
POTENTIAL REPAYMENT IN DOE
COST-SHARED PROGRAMS
=========================================================== Appendix I
This appendix discusses the Department of Energy's (DOE) cost-shared
technology development programs administered under four major
organizational areas--Fossil Energy, Energy Efficiency and Renewable
Energy, Environmental Management, and Nuclear Energy. The appendix
also summarizes the planned funding for technology development
projects in each of the four areas and discusses the views of DOE
officials on the types of programs and projects that would be the
most appropriate or suitable for repayment of the federal
investment.\4
--------------------
\4 In this appendix, we use the term planned funding to include the
total funds spent and planned for active technology development
projects.
FOSSIL ENERGY PROGRAMS
--------------------------------------------------------- Appendix I:1
DOE's fossil energy technology development programs support
cost-shared projects with industry to foster the development and
commercialization of coal, petroleum, and natural gas technologies.
As shown in table I.1, DOE's planned funding for coal and special
technology projects accounts for the largest portion, by far, of the
nearly $6.6 billion that DOE is planning to invest in active fossil
energy projects. More than $2.2 billion is committed to projects in
the Clean Coal Technology Program, which requires repayment if the
technologies are commercialized. Other large DOE investments in coal
and special technology projects involve programs that are developing
fuel cells, advanced turbine systems, and advanced pulverized coal
systems.
DOE's Reservoir Class Field Demonstration Program accounts for about
90 percent of the Department's planned funding for cost-shared
petroleum technology projects. This program demonstrates
technologies and processes for increasing production from oil fields
to prevent them from being prematurely abandoned. Natural gas
technology projects focus on new and improved technologies for
extracting, delivering, storing, and using natural gas.
Table I.1
Planned Funding for Fossil Energy Cost-
Shared Technology Development Projects
(Dollars in millions)
DOE's Nonfederal
share share Total
---------------------------------- ---------- ---------- ----------
Coal and special technology
projects
Contracts $853.0 $278.0 $1,131.0
Cooperative agreements 5,542.6 4,739.9 10,282.5
Petroleum projects
Contracts 11.3 9.4 20.7
Cooperative agreements 100.1 133.6 233.7
Natural gas projects
Contracts 34.0 52.8 86.8
Cooperative agreements 28.8 35.3 64.1
Total contracts 898.3 340.2 1,238.5
Total cooperative
agreements 5,671.5 4,908.8 10,580.3
======================================================================
Total $6,569.8 $5,249.0 $11,818.8
----------------------------------------------------------------------
Source: Prepared by GAO using DOE data.
According to DOE officials in the fossil energy area, several fossil
energy technology development programs may be appropriate candidates
for repayment if new or amended projects are undertaken. Two of
them--the Reservoir Class Field Demonstration Program and the
Advanced Turbine Systems Program--have previously been discussed.
According to the officials, the Fuel Cell Program might also be a
possible candidate for repayment if DOE decides to help fund the
costs and risks of providing fuel cell technology to potential users.
DOE is planning to invest about $270 million through completion of
active cooperative agreements to develop new, improved fuel cells for
power generation. The officials indicated that the fuel cell
industry is an infant industry, and the vision of the program is to
enable the U.S. fuel cell industry to be strongly competitive in the
international market after the year 2000.
According to DOE officials, the Advanced Pulverized Coal Program
could also be a candidate for repayment as additional federal
investment is committed to new projects. Under one aspect of this
program, separate teams of industry partners are developing a
conceptual design for a 400-megawatt power plant based on pulverized
coal-firing technology incorporating advanced boiler design and
innovative pollution control systems. DOE will then select one of
the teams to develop and produce a module to test and confirm the
performance of that team's technology concept, which will serve as a
prototype unit. DOE estimates that the entire effort will cost about
$85 million, with DOE funding about 65 percent of the costs and
industry funding the balance.
Regarding the natural gas projects, DOE officials said that the
Gas-to-Liquids Conversion Program might be a likely future candidate
for a repayment policy. The objectives of this program are to
develop technologies for economic conversion of methane and other
light hydrocarbon gases to liquids that can be used as clean-burning,
alternative liquid transportation fuels or chemical feedstocks. DOE
hopes that such technologies could one day make remote or low-quality
gas supplies economical to produce and transport high-value liquids
for use in petroleum and petrochemical markets.
DOE's Deputy Assistant Secretary for Gas and Petroleum Technologies
told us that the potential for repayment of DOE's cost-share would be
a key consideration in future gas and petroleum technology
development program activities. However, the official said that
funds may not be available for cost-sharing additional rounds of
projects under the Reservoir Class Field Demonstration Program.
ENERGY EFFICIENCY AND RENEWABLE
ENERGY PROGRAMS
--------------------------------------------------------- Appendix I:2
DOE's energy efficiency and renewable energy cost-shared technology
development programs support projects conducted jointly with industry
to develop advanced technologies for use in the transportation,
utility, industrial, and building sectors of the economy. These
programs cover a broad spectrum of activities, ranging from research
and development to demonstration and deployment. Table I.2 shows the
planned funding for active projects in each sector.
Table I.2
Planned Funding for Energy Efficiency
and Renewable Energy Cost-Shared
Technology Development Projects
(Dollars in millions)
DOE's Nonfederal
share share Total
---------------------------------- ---------- ---------- ----------
Transportation projects
Contracts $259.2 $66.9 $326.1
Cooperative agreements 103.0 103.0 206.0
Utility projects
Contracts 129.4 164.7 294.1
Cooperative agreements 133.3 384.2 517.5
Industrial projects
Contracts 114.9 52.4 167.3
Cooperative agreements 225.5 168.3 393.8
Building projects
Contracts 9.9 14.0 23.9
Cooperative agreements 8.0 305.5 313.5
Total contracts 513.4 298.0 811.4
Total cooperative
agreements 469.8 961.0 1,430.8
======================================================================
Total $983.2 $1,259.0 $2,242.2
----------------------------------------------------------------------
Source: Prepared by GAO using DOE data.
Transportation technology programs are directed at developing and
demonstrating advanced electric and hybrid propulsion systems,
advanced propulsion system materials and other new light-weight
transportation materials, and advanced light- and heavy-duty heat
engines. Projects support a wide range of activities, including the
development of advanced batteries for powering electric vehicles,
fuel cell propulsion systems, improved energy storage technologies,
high-efficiency turbine engine technologies, improved automotive
piston engine technologies, clean diesel engine technologies, and
alternative fueled vehicles.
Utility technology programs are directed at developing and
demonstrating cost-effective and energy efficiency technologies for
generating electric power from geothermal, solar thermal, biomass,
photovoltaics, wind, hydroelectric, and other renewable resources.
Projects are also directed at increasing the efficiency and
reliability of energy storage and delivery systems.
DOE supports a wide range of industrial-related projects in
collaboration with the private sector to help industry develop and
deploy advanced energy efficiency, renewable energy, and
pollution-prevention technologies for industrial applications. The
Department focuses on seven manufacturing industries that account for
over 80 percent of the energy used and wastes produced by the
manufacturing sector. These industries include aluminum, chemicals,
forest products, glass, metalcasting, petroleum refining, and steel.
According to an October 1995 DOE report,\5 over 70 of the more than
350 industrial-related projects supported by DOE in the past 20 years
have resulted in commercialized technologies.
DOE also develops and promotes advanced, cost-effective, energy
efficient, and renewable energy technologies for commercial and
residential buildings, appliances, and building equipment. The
building systems program involves research, development, and
deployment activities that enable building owners and developers to
capture significant energy savings opportunities by combining
research on optimal systems designs with programs that deploy these
energy efficiency strategies in the construction of new buildings and
retrofit of existing buildings.
According to DOE's Deputy Assistant Secretary for Transportation
Technologies, several projects administered by his office could have
been candidates for repayment if the concept had been required at the
beginning of the projects. He indicated, for example, that repayment
may be appropriate in the hybrid vehicle development program where
the federal investment is large and major companies are involved. He
also identified some other examples involving projects to develop
advanced materials, reduce manufacturing costs, or improve fuel
economy. He pointed out that if technologies are relatively close to
commercialization, or if the government is planning to undertake a
program to reduce the costs and risks of deployment, it would be
easier to support repayment with the private sector and make it work.
He also indicated that repayment might be appropriate if follow-on
development projects are undertaken for some technologies and the
federal investment is easily identified.
The Deputy Assistant Secretary for Utility Technologies said that the
most appropriate candidates for repayment for projects that his
office administers are those involving plant-scale operations, such
as the Solar 2 plant, geothermal facilities, wind plants, and biomass
gasifier plants. He indicated that the next most appropriate
candidates would be projects that are developing stand-alone systems
components, such as prototype generators, advanced wind turbines, and
dish Sterling solar units. He said his third choice would be
manufacturing assistance programs.
The Deputy Assistant Secretary for Industrial Technologies said that
most of the industrial technologies could be considered likely
candidates for repayment. We were told that while many of the
industrial projects involve large manufacturing companies, many
highly specialized, smaller firms are also typically involved as
partners in these projects. However, the Metals Initiative Program
is the only program that requires repayment for projects that the
Deputy Assistant Secretary's office administers. As previously
mentioned, repayment in that program is legislatively mandated.
--------------------
\5 Impacts: Summary of Results from Programs Conducted by the Office
of Industrial Technologies (DOE, Oct. 1995).
ENVIRONMENTAL MANAGEMENT
PROGRAMS
--------------------------------------------------------- Appendix I:3
DOE's environmental management technology development program
provides new or improved methods for use in cleaning up DOE's sites
across the United States that have been contaminated from decades of
weapons production activities. According to DOE, these methods
either reduce risks to workers, the public, or the environment;
reduce cleanup costs; or provide a problem solution that currently
does not exist.
Under this program, DOE and the private sector undertake cost- shared
projects to demonstrate the capability of industry technologies and
methods for cleaning up contamination at DOE sites. The projects
generally involve development, validation, testing, and evaluation of
the technologies and methods. If the technologies are proven
successful, both DOE and industry benefit. Table I.3 shows the
planned funding for active projects.
Table I.3
Planned Funding for Environmental
Management Cost-Shared Technology
Development Projects
(Dollars in millions)
DOE's Nonfederal
share share Total
---------------------------------- ---------- ---------- ----------
Environmental management projects
Contracts $36.1 $13.7 $49.8
Cooperative agreements 10.2 4.3 14.5
Total $46.3 $18.0 $64.3
----------------------------------------------------------------------
Source: Prepared by GAO using DOE data.
According to DOE program officials, the Department does not require
repayment of its investment in environmental management projects
because most of the technologies or processes have already had
significant expenditures by the private sector in the development
phase before the industry partners entered into cooperative work with
the government. DOE also expects significant savings under the
environmental management technology development program through the
use of the technologies or processes at cleanup sites.\6 We were
told, for example, that the dynamic underground stripping process
removes petroleum from groundwater 40 times faster than conventional
methods. According to DOE, using this improved process, which cost
$13.8 million to develop, saved taxpayers $19 million in fiscal year
1994 at one cleanup site alone.
DOE program officials agreed that some of the processes under
development in their cost-shared projects may have potential
commercial application. The officials also agreed that if the
technologies or processes have commercial potential, they could have
been candidates for repayment of the federal investment. But, the
officials indicated that any such repayment would be small in
comparison with the potential cost avoidance savings that are
expected from using successfully demonstrated technologies or
processes to cleanup DOE sites.
--------------------
\6 "Savings" here is defined as estimated reduction in DOE costs.
Budgetary savings would only result if the Congress captured these
cost reductions by reducing appropriations and lowering the
discretionary spending caps.
NUCLEAR ENERGY PROGRAMS
--------------------------------------------------------- Appendix I:4
DOE's Office of Nuclear Energy administers the Advanced Light Water
Reactor Program under cost-shared partnerships with industry. This
program is intended to eliminate barriers to efficient and
cost-effective operation of nuclear powerplants and maintain
standards of safety in their design and operation. The program's
primary focus is to make standardized advanced reactors available in
time to help meet projected future power generation needs. The
planned funding for light water reactors is shown in table I.4
Table I.4
Planned Funding for Nuclear Energy Cost-
Shared Technology Development Projects
(Dollars in millions)
DOE's Nonfederal
share share Total
---------------------------------- ---------- ---------- ----------
Light water reactor projects
Contracts $281.9 $431.2 $713.1
Cooperative agreements 100.0 164.0 264.0
Total $381.9 $595.2 $977.1
----------------------------------------------------------------------
Source: Prepared by GAO using DOE data.
The overall program involves three major components: a design
certification program for advanced reactors, a first-of-a-kind
engineering program for advanced reactors, and a program to extend
the life of aging commercial nuclear powerplants. Four cost-shared
projects are being funded under separate contracts to design, test,
and obtain Nuclear Regulatory Commission certification of advanced
reactor designs. Two other projects are being funded under a
cooperative agreement to develop the detailed engineering design of
two advanced reactors in order to promote commercial standardization,
produce reliable construction schedules and cost estimates, and
facilitate construction preparations. Additional projects are
developing technologies for assessing material degradation of systems
and components at operating nuclear powerplants.
As previously discussed, DOE may require repayment of any additional
federal funds provided in excess of $50 million under two of the
contracts in the design certification program. According to DOE, the
contractors have agreed to this arrangement. DOE requires repayment
of its total investment under the cooperative agreement in the
first-of-a-kind engineering program. DOE officials said that they
were also looking for opportunities for DOE to share in any patents
that may be developed based on technologies developed under the
commercial operating reactors program.
(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
ENERGY
=========================================================== Appendix I
(See figure in printed edition.)
(See figure in printed edition.)
The following are GAO's comments on the Department of Energy's letter
dated May 24, 1996.
GAO'S COMMENTS
--------------------------------------------------------- Appendix I:5
1. The issues raised in DOE's letter are addressed in the agency
comments section of our report. The issues in the enclosure to DOE's
letter are addressed below.
2. Our report points out that the costs of administering, auditing,
and enforcing repayment agreements should be considered in
determining whether to pursue repayment on specific projects. In
fact, we suggested that DOE should only require repayment in those
instances where the amount of the potential return justifies the cost
of necessary audits and other internal control measures. We also
pointed out that there may be ways to reduce the cost of such control
measures, but it was beyond the scope of this review to design such
measures. Once cost-effective control measures are developed, DOE
could then address the related costs on a case-by-case basis in
determining whether to apply repayment to specific projects.
3. Our hypothetical example of potential repayment if future
projects are funded at the level planned for active projects is for
illustrative purposes only. We included an assumption that half of
the projects may not lend themselves to repayment. Projects in which
the potential costs of obtaining repayment would exceed the potential
benefits would fall in this category, along with projects that are
too early in the technology development process to lend themselves to
repayment.
We disagree with DOE's comment that our report does not sufficiently
elaborate on the tradeoffs between up-front cost-sharing and
downstream repayments if the technologies are commercialized. We
pointed out that DOE generally prefers to have increased industry
cost-sharing, and that some DOE officials believe that it may be
better to obtain increased cost-sharing from all participants than to
obtain repayment only from those that successfully commercialize
their technologies. We believe that even with increased industry
cost-sharing, however, an argument can be made that taxpayers have an
interest in the repayment of taxpayers' dollars when technologies
developed with federal funds are successfully commercialized. See
comment 2 for our response to DOE's point that administrative costs
should be considered in deciding whether to require repayment.
SCOPE AND METHODOLOGY
========================================================= Appendix III
To determine the extent to which the Department of Energy (DOE)
requires repayment of its investment under cost-shared technology
development and demonstration programs, including the similarities
and differences in the mechanisms used for repayment, we interviewed
DOE officials responsible for administering such programs; reviewed
DOE reports and program documents, congressional budget requests,
relevant legislation and congressional reports, and various private
sector reports and publications that discuss the programs; and drew
from our past reviews and reports on such programs. We also talked
with several DOE attorneys, an official of DOE's Office of Inspector
General, and a former congressional subcommittee staff member who had
been responsible for appropriations for many DOE technology
development programs.
To identify advantages and disadvantages of having or not having a
repayment policy, we interviewed many DOE officials involved in
administering cost-shared technology development and demonstration
programs, including several Deputy Assistant Secretaries; DOE policy
officials and attorneys; and a former Deputy Secretary of DOE and his
former Executive Assistant. We also reviewed DOE reports and other
documents that discussed the advantages and disadvantages of a
repayment policy, including DOE files relating to a 1991 draft
repayment policy that was never implemented.
To obtain a perspective on DOE's investment in technology development
projects, we asked DOE to provide us with information on the
estimated total federal and nonfederal funding planned for active
cost-shared technology development projects funded under contracts
and cooperative agreements. We focused on the major organizational
areas of DOE that fund most of the Department's cost-shared
technology development projects involving contracts and cooperative
agreements--Fossil Energy, Energy Efficiency and Renewable Energy,
Environmental Management, and Nuclear Energy--and we asked DOE to
exclude any projects involving grants and basic research. We used
the DOE information in our discussions with DOE officials to obtain
their views on the types of programs and projects that might be
appropriate for repayment if future projects are undertaken. We also
used the information to illustrate what the repayment potential might
be if DOE had a repayment policy and future projects are undertaken.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV
RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C.
Bernice Steinhardt, Associate Director
Gregg A. Fisher, Assistant Director
Marcus R. Clark, Jr., Senior Evaluator
Joseph A. Maranto, Senior Evaluator
OFFICE OF THE GENERAL COUNSEL
Jackie A. Goff, Senior Attorney
RELATED GAO PRODUCTS
Electric Vehicles: Efforts to Complete Advanced Battery Development
Will Require More Time and Funding (GAO/RCED-95-234, Aug. 17, 1995).
Fossil Fuels: Lessons Learned in DOE's Clean Coal Technology Program
(GAO/RCED-94-174, May 26, 1994).
Fossil Fuels: Improvements Needed in DOE's Clean Coal Technology
Program (GAO/RCED-92-17, Oct. 30, 1991).
*** End of document. ***