Energy Research: Recovery of Federal Investment in Technology Development
Projects (Testimony, 08/01/96, GAO/T-RCED-96-225).

GAO discussed the Department of Energy's (DOE) investment in technology
development projects, focusing on the: (1) extent to which DOE requires
repayment for its investment in such projects; and (2) advantages and
disadvantages of the DOE repayment policy. GAO noted that: (1) DOE
rarely requires repayment for its investment in cost-shared technology
projects; (2) four projects require repayment for successful
commercialization of innovative technologies; (3) DOE is devoting $8
billion in federal funds to cost-shared projects, of which $2.5 billion
is subject to repayment; (4) DOE has revised its repayment provisions to
respond to industry concerns and has reduced the percentage of
commercial sales revenues that are subject to repayment; (5) DOE has
spent $60.9 million for completed or terminated projects and plans to
spend $41.9 million for active technology projects; (6) the DOE
repayment policy allows the federal government to recover some of its
investment from successfully commercialized technologies, but
discourages industry leaders from participating in cost-shared
development projects, creates administrative burdens for DOE and
industry, and causes technologies to become less competitive; and (7)
DOE needs a flexible repayment policy that allows it to share in the
benefits of successfully commercialized technologies.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-96-225
     TITLE:  Energy Research: Recovery of Federal Investment in 
             Technology Development Projects
      DATE:  08/01/96
   SUBJECT:  Energy industry
             Energy research
             Research and development costs
             Cost sharing (finance)
             Royalty payments
             Reimbursements to government
             Alternative energy sources
             Energy efficiency
IDENTIFIER:  DOE Electric Vehicles Advanced Battery Program
             DOE Advanced Light Water Reactor Program
             DOE Clean Coal Technology Program
             DOE Reservoir Class Field Demonstration Program
             DOE Metals Initiative Program
             
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Cover
================================================================ COVER


Before the Subcommittee on Energy and Environment,
Committee on Science, House of Representatives

For Release
on Delivery
Expected at
10:00 a.m.  EDT
Thursday
August 1, 1996

ENERGY RESEARCH - RECOVERY OF
FEDERAL INVESTMENT IN TECHNOLOGY
DEVELOPMENT PROJECTS

Statement of Allen Li, Associate Director
Energy, Resources, and Science Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-96-225

GAO/RCED-96-225T


(308892)


Abbreviations
=============================================================== ABBREV

  GAO -
  DOE -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to summarize the results of our
recently issued report on recovering the federal investment in
technology development projects.\1 At the Subcommittee's request, we
(1) determined the extent to which the Department of Energy (DOE)
requires repayment of its investment in cost-shared technology
development, including the similarities and differences in the
mechanisms used, and (2) identified advantages and disadvantages of
repayment.  We focused 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. 

In summary, we found that: 

  -- DOE generally does not require repayment of its investment in
     cost-shared technology development projects.  We identified only
     four programs in DOE that require repayment of the federal
     investment if the technologies are commercialized.  The offices
     on which we focused our review plan to devote about $8 billion
     in federal funds to cost-shared projects, of which about $2.5
     billion is subject to repayment.  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.  One program allows for recovery of 150
     percent of the federal investment, while the other three 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.  We believe that
     many of the disadvantages can be mitigated by structuring a
     flexible repayment requirement with the disadvantages in mind. 
     A flexible repayment requirement would allow the government to
     share in the benefits of successfully commercialized
     technologies that could amount to hundreds of millions of
     dollars. 


--------------------
\1 Energy Research:  Opportunities Exist to Recover Federal
Investment in Technology Development Projects (GAO/RCED-96-141, June
26, 1996). 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

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.  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.  As we
mentioned, DOE plans to fund about $8 billion and industry the
balance. 


   FOUR PROGRAMS REQUIRE REPAYMENT
---------------------------------------------------------- Chapter 0:2

The four programs that require repayment are the (1) Clean Coal
Technology Program, which accounts for about 90 percent of all
current and planned 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 in the program.  The time periods for repayment to DOE
generally range up to 20 years after the projects end.  The Clean
Coal Technology and Electric Vehicles Advanced Battery Programs allow
grace periods before repayment begins if starting repayments earlier
would adversely affect the competitiveness of the technologies in the
marketplace. 

DOE is investing more than $2.2 billion in the Clean Coal Technology
Program through the year 2003.  The funds have been committed to more
than 40 demonstration projects that were selected in five separate
rounds of nationwide competitions conducted from 1986 to 1993.  These
cost-shared projects demonstrate innovative technologies for using
coal in a more environmentally sound, efficient, and economical
manner.  When the program began, DOE made a programmatic decision, in
consultation with industry and the Congress, to require repayment of
the federal investment if the technology is successfully
commercialized.  As the program matured, DOE revised the repayment
provisions to respond to industry's concerns and lessen the
likelihood that repayment could hamper the competitiveness of the
project participants.  Among other things, DOE reduced the percentage
of revenues from technology sales that are subject to repayment,
excluded foreign sales from repayment, and allowed a grace period
before repayment begins to ease the technology's initial market
penetration.  As of June 30, 1996, DOE had received payments totaling
about $379,000 from participants of four completed projects. 

The Metals Initiative Program is the only program that allows
repayment that exceeds DOE's investment.  This program shares in the
cost of research and development projects intended to increase energy
efficiency and enhance the competitiveness of domestic steel,
aluminum, and copper industries.  Legislation requires repayment of
up to 150 percent of the total federal investment from the proceeds
of the commercial sale, lease, manufacture, or use of the
technologies developed under the program.  Repayment applies to both
domestic and foreign sales.  DOE has spent about $60.9 million for
completed or terminated projects and plans to spend about $41.9
million for active projects.  According to DOE officials, none of the
projects have begun repayment yet, but repayment for one is expected
to start later this year. 

Under the Electric Vehicles Advanced Battery Program, DOE and a
consortium of automobile companies, together with participating
electric utilities and battery developers, are cost-sharing $206
million in development costs for advanced batteries to be used in
electric vehicles.  DOE is contributing about $103 million through
1996, and the other project participants are providing the balance. 
DOE expects to approve additional funding to continue this research
after the participants submit their funding needs.  As recommended in
a Senate appropriations report, DOE requires repayment of its
investment if the advanced batteries are commercialized.  Repayment,
which has not yet begun, applies to both domestic and foreign
licensing revenues. 

Some projects under the Advanced Light Water Reactor Program provide
for repayment of all or part of the federal investment.  This
program's primary focus is to make standardized advanced nuclear
reactors available in time to help meet the projected needs for
future power generation.  As recommended in an appropriations report,
DOE is requiring the repayment of $14 million in additional funding
provided for a project under the design certification component of
the program.  DOE also may require the repayment of any additional
future funding for this project and another design certification
project.  DOE's original contractual commitment to these two projects
is not subject to repayment.  DOE also requires that its investment
in two first-of-a-kind engineering projects aimed at producing more
detailed designs and reliable construction schedules and cost
estimates, which is expected to total $100 million, be repaid from
royalties from the sale or use of the plant designs or technologies. 
Repayment, which has not yet begun, covers both domestic and foreign
sales. 


   ADVANTAGES AND DISADVANTAGES OF
   A REPAYMENT POLICY
---------------------------------------------------------- Chapter 0:3

As we mentioned, the primary advantage of a repayment policy is that
the government could recover some of its investment in the
development of technologies.  A repayment policy could also provide
more assurance that industry cost-shared project proposals are sound
and economically viable by discouraging proposals that are too
marginal financially for their sponsors to commit to repayment. 

In 1991, DOE considered having a Department-wide policy to recover
its investment in technology development projects and 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. 

In discussing technology development programs and projects with DOE
Deputy Assistant Secretaries and other DOE officials, many of them
said that certain types of projects might be appropriate candidates
for repayment of the federal investment if new projects are
undertaken.\2 The officials generally indicated that repayment should
be more applicable to projects with a large federal investment that
is easily identified, projects involving technologies that are close
to commercialization, projects in which the federal investment serves
to reduce the costs and risks of providing the technology to
potential users, and projects that have large, well-financed industry
teams.  They 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 repayment. 

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 oil fields that might otherwise be prematurely
abandoned.  They also indicated that the Advanced Turbine Systems
Program might be appropriate if new projects are begun.  This program
is intended to develop more efficient, advanced turbine systems for
both utility and industrial electric power generation. 

Many of the DOE officials generally indicated a willingness to
consider repayment for new projects, but they said that flexibility
should exist allowing them to structure repayment to meet program
needs or waive repayment when not appropriate.  For example, some
officials believe 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. 

DOE officials also pointed out several disadvantages to the
government or industry participants that would need to be addressed
if repayment is required.  Some DOE officials believe that repayment
could discourage industry from participating in cost-shared projects
or commercializing the technologies.  We recognize that a repayment
requirement might have some influence on participation in technology
development projects or the timing of commercialization, but industry
participants would not have to repay the federal investment unless
the technology is commercialized.  Therefore, repayment should be
more favorable than a bank loan, which would have to be repaid with
interest regardless of whether the technology is commercialized. 

DOE officials generally believe that repayment would create an
administrative burden in negotiating, administering, auditing, and
enforcing repayment agreements.  In our opinion, one way of making
the administrative burden less onerous might be to require sample
audits of industry participants' records.  Another approach might be
to require repayment only in those instances where the amount of
potential return justifies the cost of necessary audits and other
internal control measures. 

Many DOE officials believe that obtaining increased industry
cost-sharing is preferable to requiring repayment of the federal
investment.  Some officials argue that it may be better to obtain an
increased cost-share from all participants than to obtain repayment
only from those successfully commercializing their technologies. 
However, in our opinion, an argument can still be made that taxpayers
have an interest in the repayment of taxpayers' dollars when
technologies developed with federal funds are commercialized. 

According to DOE, repayment might adversely affect the ability of the
entity carrying out the project to compete in the marketplace (that
is, to proceed with commercialization of the technology and achieve a
rate of return commensurate with the industry and the risk).  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 that require repayment). 

We recognize that some types of projects may not lend themselves to
repayment for various reasons and that repayment has disadvantages. 
However, we believe it may be possible to mitigate the disadvantages
in many cases by structuring a flexible repayment policy. 

We recommended in our report 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. 

In commenting on a draft of our report, DOE did not explicitly state
whether it would develop and implement a repayment policy.  However,
DOE agreed that any repayment policy should provide the flexibility
for determining which programs and projects are appropriate for
repayment.  DOE believes that a 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. 


--------------------
\2 DOE officials said that, except for the projects under programs
that already require repayment, only new or follow-on projects should
be considered for repayment because of the difficulty in
renegotiating applicable cooperative agreements or contracts. 


-------------------------------------------------------- Chapter 0:3.1

Mr.  Chairman, this concludes our prepared statement, which has
highlighted some of the information contained in our report.  We will
be pleased to answer any questions that you or Members of the
Subcommittee may have. 


*** End of document. ***