The Department of Energy
Key Steps Needed to Help Ensure the Success of the New Loan Guarantee Program for Innovative Technologies by Better Managing Its Financial Risk Gao ID: GAO-07-339R February 28, 2007In May 2006, the Department of Energy (DOE) proposed transferring appropriations from some DOE accounts to begin a new loan guarantee program (LGP) authorized by the Energy Policy Act of 2005 (EPAct 05). Title XVII of EPAct 05--Incentives for Innovative Technologies--authorized the LGP to guarantee loans for projects intended to (1) decrease air pollutants or man-made greenhouse gases by reducing their production or by sequestering them (storing them to prevent their release into the atmosphere), (2) employ new or significantly improved technologies compared with current commercial technologies, and (3) have a "reasonable prospect" of repayment. Such projects could include renewable energy systems, advanced fossil energy technologies, and production facilities for fuel-efficient vehicles. Although EPAct 05 authorized the LGP, the Federal Credit Reform Act of 1990 requires that Congress appropriate budget authority for loan guarantee program costs before loans can be made. In appropriating budget authority for the LGP, Congress would be not only authorizing DOE to issue the loan guarantees but also establishing policy by setting limits on the dollar amount of loans that can be guaranteed. Congress can also specify limits on the amount of LGP administrative costs DOE can incur each year. In this context, you asked that we report on the (1) sources and use of funds for the LGP in fiscal years 2006 and 2007, (2) extent to which the LGP could result in a financial risk to taxpayers, and (3) steps DOE has taken to ensure that the LGP will be well managed.
In summary, in fiscal year 2006, and continuing through October 2006, DOE used about $503,000 from three separate appropriation accounts to fund LGP activities: about $347,000 from its Departmental Administration appropriation and Science appropriation accounts and about $156,000 from its Energy Supply and Conservation appropriation and Science appropriation accounts. DOE used these funds for the salaries of three staff detailed to the LGP office and for contracts to support program development, including the development of an LGP Web site. DOE is continuing to pay for task order support services to respond to program inquiries; these payments are in addition to the $503,000 already spent to initiate the program. Regarding future activities, DOE officials said they are awaiting appropriations before taking additional steps to implement the LGP. Although LGP guidelines call for borrowers to be charged fees to cover program costs, the program could result in substantial financial costs to taxpayers if DOE underestimates total program costs. These include the administrative cost associated with evaluating applications; offering, negotiating, and closing guarantees; and servicing and monitoring the guarantees. DOE is required to recover applicable administrative costs, but it has not developed a plan to determine how it will calculate any fees to charge borrowers to cover these costs or how it will cover shortfalls if it does not charge borrowers enough. Appropriated funds may be necessary to cover shortfalls in administrative costs. The other type of program cost is the subsidy cost, which is the estimated net present value of the long-term cost to the federal government of guaranteeing loans over the entire period that the loans are outstanding, excluding administrative costs. From OMB budget guidance, internal control and accounting standards, and the experience of other loan guarantee programs, we identified the following key steps that can provide greater program accountability and reasonable assurance that program objectives will be met. Issuing regulations: DOE has not issued regulations for implementing the LGP, relying instead on its guidelines to award the first $2 billion in loan guarantees. Unlike guidelines, regulations (1) go through the public notice and comment process and thus are transparent to the public, oversight agencies, and Congress and (2) carry the force of law and hold the agency implementing the program and program participants accountable to the terms specified in the regulations. Establishing a credit review boar: DOE has drafted a charter for a credit review board, but it has not yet been provided to the Secretary of Energy for approval. Setting policies and procedures for selecting and monitoring loans and lenders: DOE has taken some steps towards establishing such policies and procedures through its guidelines, but it has not completed them. Setting policies and procedures for estimating administrative and subsidy costs and accounting for loan guarantees: As noted above, DOE has not developed policies or procedures for estimating administrative or subsidy costs. In addition, it has not developed policies or procedures for accounting for loan guarantees. Setting program goals and objectives tied to outcome measures to determine program effectiveness: DOE has not established outcome measurements. Instead, it has set the broad objectives of furthering the policy goals generally set forth in EPAct 05 and promoting the President's Advanced Energy Initiative.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-07-339R, The Department of Energy: Key Steps Needed to Help Ensure the Success of the New Loan Guarantee Program for Innovative Technologies by Better Managing Its Financial Risk
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February 28, 2007:
The Honorable Peter J. Visclosky:
Chairman:
The Honorable David L. Hobson:
Ranking Minority Member:
Subcommittee on Energy and Water Development:
Committee on Appropriations:
House of Representatives:
Subject: The Department of Energy: Key Steps Needed to Help Ensure the
Success of the New Loan Guarantee Program for Innovative Technologies
by Better Managing Its Financial Risk:
In May 2006, the Department of Energy (DOE) proposed transferring
appropriations from some DOE accounts to begin a new loan guarantee
program (LGP) authorized by the Energy Policy Act of 2005 (EPAct 05).
Title XVII of EPAct 05--Incentives for Innovative Technologies--
authorized the LGP to guarantee loans for projects intended to (1)
decrease air pollutants or man-made greenhouse gases by reducing their
production or by sequestering them (storing them to prevent their
release into the atmosphere), (2) employ new or significantly improved
technologies compared with current commercial technologies, and (3)
have a "reasonable prospect" of repayment. Such projects could include
renewable energy systems, advanced fossil energy technologies, and
production facilities for fuel-efficient vehicles. Although EPAct 05
authorized the LGP, the Federal Credit Reform Act of 1990 requires that
Congress appropriate budget authority for loan guarantee program costs
before loans can be made. In appropriating budget authority for the
LGP, Congress would be not only authorizing DOE to issue the loan
guarantees but also establishing policy by setting limits on the dollar
amount of loans that can be guaranteed. Congress can also specify
limits on the amount of LGP administrative costs DOE can incur each
year.
In a July 2006 letter to DOE on the department's proposed funds
transfer to begin the LGP, this subcommittee expressed its concern
about the lack of a strategy for instituting the program. Furthermore,
the subcommittee stated that the department had not adequately
explained such basic management policies as the criteria it will use to
select projects for loan guarantees and the number of loans to be
guaranteed. Nevertheless, in August 2006, DOE issued a solicitation for
preapplications to the loan guarantee program, announcing its intention
to issue up to $2 billion in loan guarantees. At the same time, DOE
issued guidelines for proposals submitted in response to this first
solicitation, stating that DOE expects borrowers to pay for program
costs.[Footnote 1]
In this context, you asked that we report on the (1) sources and use of
funds for the LGP in fiscal years 2006 and 2007, (2) extent to which
the LGP could result in a financial risk to taxpayers, and (3) steps
DOE has taken to ensure that the LGP will be well managed.[Footnote 2]
On January 4, 2007, we briefed this subcommittee on the results of our
work. Enclosure I contains the briefing slides we used, with minor
revisions to incorporate technical comments we subsequently received
from DOE. This report summarizes the briefing and recommends steps DOE
should take to help ensure that the program, and its exposure to
financial risk, will be well managed.
To identify the sources and use of funds for DOE's LGP, we reviewed and
analyzed relevant DOE budget documentation, as well as department LGP
guidance and planning documents, and interviewed DOE LGP and budget
officials. To examine the extent to which the LGP could result in
financial risks to taxpayers, we analyzed DOE's plans and guidance for
implementing the LGP and discussed them with DOE and Office of
Management and Budget (OMB) officials. To assess the steps DOE has
taken to help ensure that the LGP will be well managed, we compared
DOE's plan with OMB budget guidance, internal control and accounting
standards, and practices used by other selected agencies that manage
loan guarantee programs. We performed our work in accordance with
generally accepted government auditing standards from October 2006
through January 2007.
In summary, in fiscal year 2006, and continuing through October 2006,
DOE used about $503,000 from three separate appropriation accounts to
fund LGP activities: about $347,000 from its Departmental
Administration appropriation and Science appropriation accounts and
about $156,000 from its Energy Supply and Conservation appropriation
and Science appropriation accounts. DOE used these funds for the
salaries of three staff detailed to the LGP office and for contracts to
support program development, including the development of an LGP Web
site. DOE is continuing to pay for task order support services to
respond to program inquiries; these payments are in addition to the
$503,000 already spent to initiate the program. However, DOE has
discontinued other funding, and the staff on detail have returned to
their home units. Nevertheless, according to the deputy general counsel
for energy policy, he and others continue to work on the program by,
for example, preparing a notice of proposed rulemaking and reviewing
preapplications for completeness. Regarding future activities, DOE
officials said they are awaiting appropriations before taking
additional steps to implement the LGP.
Although LGP guidelines call for borrowers to be charged fees to cover
program costs, the program could result in substantial financial costs
to taxpayers if DOE underestimates total program costs. These include
the administrative cost associated with evaluating applications;
offering, negotiating, and closing guarantees; and servicing and
monitoring the guarantees. DOE is required to recover applicable
administrative costs, but it has not developed a plan to determine how
it will calculate any fees to charge borrowers to cover these costs or
how it will cover shortfalls if it does not charge borrowers enough.
Appropriated funds may be necessary to cover shortfalls in
administrative costs. The other type of program cost is the subsidy
cost, which is the estimated net present value of the long-term cost to
the federal government of guaranteeing loans over the entire period
that the loans are outstanding, excluding administrative costs. The
subsidy cost takes into account (1) estimated federal payments to cover
defaults, delinquencies, or other payments and (2) estimated payments
to the government, including origination and other fees, penalties, and
recoveries on defaults. DOE will have to estimate the subsidy cost to
determine the fees to charge borrowers, but it currently has no
policies or procedures for doing so. Estimating this cost could be
difficult because the program targets innovative energy technologies
and loan performance could depend heavily on future economic
conditions, including energy prices, which are hard to predict
accurately. Any shortfalls in subsidy costs would be automatically
funded by the federal government under the terms of the Federal Credit
Reform Act of 1990, not through the annual appropriations process.
Rather than taking and completing key steps to ensure that the LGP will
be well managed and accomplish its objectives, DOE has focused on
initiating the LGP by soliciting preapplications for proposed projects.
From OMB budget guidance, internal control and accounting standards,
and the experience of other loan guarantee programs, we identified the
following key steps that can provide greater program accountability and
reasonable assurance that program objectives will be met. For each
step, we also describe the actions DOE has taken.
² Issuing regulations. DOE has not issued regulations for implementing
the LGP, relying instead on its guidelines to award the first $2
billion in loan guarantees. Unlike guidelines, regulations (1) go
through the public notice and comment process and thus are transparent
to the public, oversight agencies, and Congress and (2) carry the force
of law and hold the agency implementing the program and program
participants accountable to the terms specified in the regulations. DOE
officials told us that they would enforce the guidelines through the
terms of the loan guarantee contracts and thus see no need to issue
regulations before issuing the first $2 billion in loan guarantees. The
officials also told us they would have regulations in place for later
guarantees.
² Establishing a credit review board. DOE has drafted a charter for a
credit review board, but it has not yet been provided to the Secretary
of Energy for approval. This board is to coordinate credit management
and debt collection activities and ensure full consideration of credit
management and debt collection issues.
² Setting policies and procedures for selecting and monitoring loans
and lenders. DOE has taken some steps towards establishing such
policies and procedures through its guidelines, but it has not
completed them. These policies and procedures should protect the
government's interests by, among other things, establishing mechanisms
to screen and select applicants and lenders and monitor loan and lender
performance.
² Setting policies and procedures for estimating administrative and
subsidy costs and accounting for loan guarantees. As noted above, DOE
has not developed policies or procedures for estimating administrative
or subsidy costs. In addition, it has not developed policies or
procedures for accounting for loan guarantees. In the interim, DOE is
asking potential borrowers--who have an incentive to underestimate the
costs--to provide preliminary estimates of subsidy costs so that it can
gain experience in developing them. DOE expects the necessary
accounting policies and procedures to be in place before guarantees are
issued.
² Setting program goals and objectives tied to outcome measures to
determine program effectiveness. DOE has not established outcome
measurements. Instead, it has set the broad objectives of furthering
the policy goals generally set forth in EPAct 05 and promoting the
President's Advanced Energy Initiative. This initiative supports clean
energy technology research to reduce reliance on oil and address high
natural gas and electricity prices.
EPAct 05 requires DOE to issue regulations defining conditions for
determining when a borrower has defaulted on a loan and requirements
for the documentation borrowers must make available for audits.
According to DOE officials, the department plans to include these
requirements in its final regulations. If DOE issues guarantees before
the regulations are final, officials said they would issue procedural
rules covering these requirements before they issued the guarantees.
Conclusions:
DOE's current approach to the LGP raises questions about whether this
program and its financial risks will be well managed. DOE's efforts to
date have focused on expediting program implementation--for example,
issuing guidelines and soliciting preapplications for loan guarantees-
-rather than ensuring the department has in place the critical
policies, procedures, and mechanisms necessary to better ensure the
program's success. DOE can better ensure that the LGP will be
successful and financial risks to the federal government will be well
managed by taking key steps before selecting projects and issuing
guarantees. Such steps would also give Congress a basis for making more
informed policy decisions related to the program, including the total
amount of loans to guarantee.
Recommendations for Executive Action:
To better ensure that the LGP is well managed, we recommend that the
Secretary of Energy ensure that the department takes the following five
actions before selecting eligible projects for loan guarantees:
² Issue final program regulations that protect the government's
interests, manage risk, and ensure that borrowers are aware of program
requirements.
² Establish policies and procedures for selecting lenders and loans to
guarantee and for monitoring lenders and loans once the guarantees have
been issued.
² Establish policies and procedures for developing subsidy and
administrative cost estimates.
² Establish policies and procedures to account for loan guarantees.
² Further define program goals and objectives tied to outcome measures
for determining program effectiveness.
Agency Comments:
We provided a draft of this report to the Department of Energy for
review and comment. DOE generally agreed with the findings,
conclusions, and recommendations in the report and provided technical
comments that were incorporated, as appropriate. The acting chief
financial officer stated that with funding provided for the LGP in the
Revised Continuing Appropriation Resolution, 2007, enacted on February
15, 2007, DOE intends to move forward as promptly as possible to
implement the program and, in doing so, affirmatively address the
recommendations contained in our report. DOE's comments are reproduced
in enclosure II.
We are sending copies of this report to congressional committees with
responsibilities for energy and federal credit issues; the Secretary of
Energy; and the Director, Office of Management and Budget. We are also
making copies available to others upon request. This report will be
available at no charge on GAO's Web site at [Hyperlink,
http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact James Cosgrove at (202) 512-3841 or cosgrovej@gao.gov or Robert
Martin at (202) 512-2600 or martinr@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Key contributors to this report are
listed in enclosure III.
Signed by:
James C. Cosgrove:
Acting Director, Natural Resources and Environment:
Signed by:
Robert E. Martin:
Director, Financial Management and Assurance:
Enclosures:
Enclosure I:
DOE Loan Guarantee Program for Projects That Employ Innovative
Technologies:
Briefing for the Subcommittee on Energy and Water Development, House
Committee on Appropriations:
January 4, 2007:
Contents:
Introduction:
Objectives, Scope and Methodology:
Results in Brief:
Objective 1: Sources and Uses of Funds for LGP:
Objective 2: Financial Risks Posed by the LGP P:
Objective 3: Steps DOE Has Taken to Manage the LGP:
Introduction:
The Energy Policy Act of 2005 (EPAct 05), Title XVII-Incentives for
Innovative Technologies-authorizes a new federal loan guarantee program
(LGP) to be implemented by the Secretary of Energy.
* Eligible projects must:
- 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),
- employ new or significantly improved technologies compared with
commercial technologies currently used, and:
- have a "reasonable prospect" of repayment.
Title XVII identifies 10 categories of projects that are potentially
eligible for a loan guarantee:
* Renewable energy systems.
* Advanced fossil energy technologies.
* Hydrogen fuel cell technologies.
* Advanced nuclear energy facilities.
* Carbon capture and sequestration practices and technologies.
* Efficient electrical generation, transmission, and distribution
technologies.
* Efficient end-use energy technologies.
* Production facilities for fuel efficient vehicles.
* Pollution control equipment.
* Refineries.
Federal loan guarantee programs help borrowers get credit from private
sector lenders. The federal government guarantees to pay lenders if the
borrowers default on loans, which makes extending credit more
attractive to lenders.
Loan guarantee programs have two types of costs:
* Administrative: costs associated with evaluating applications;
offering, negotiating, and closing guarantees; and servicing and
monitoring guarantees.
* Subsidy: the estimated net present value of the long-term cost to the
government of guaranteeing the loans over the entire period the loans
are outstanding, excluding administrative costs.[Footnote 3] It is to
take into account estimated payments by the government to cover
defaults, delinquencies, or other payments; and estimated payments to
the government, including origination and other fees, penalties, and
recoveries on defaults.
EPAct 05 establishes how subsidy and administrative costs will be
covered in DOE's LGP:
* No loan guarantee shall be made unless Congress appropriates funds to
cover the costs. The act provides that a borrower can pay fees to cover
the full cost of the obligation, referred to in this briefing as the
"borrower pays" option.
* Borrowers are to be charged fees to cover DOE's administrative costs.
While DOE has not yet approved any loan guarantees under the LGP, on
August 8, 2006, DOE issued program guidelines and solicited pre-
applications. DOE plans to invite applications for full proposals only
from the preapplications it received by the December 31, 2006,
deadline. DOE will review the preapplications while awaiting
congressional action on (1) appropriations to cover the administrative
costs of establishing the program, (2) authority for using/limiting the
Title XVII "borrower pays" provisions, and (3) authority to use
administrative fees to fund the continued operation of the loan
guarantee program.
DOE's program guidelines specify:
* DOE will consider projects funded under the "borrower pays" option.
* Potential borrowers will provide preliminary estimates of the subsidy
costs.
* DOE will limit the total value of loan guarantee commitments under
the first round to $2 billion.
* DOE will guarantee no more than 80 percent of a project's costs, as
specified in EPAct 05; DOE prefers not to guarantee more than 80
percent of the loan amount.
DOE last managed loan guarantees issued in the mid-1970s to 1980, after
the Organization of Arab Petroleum Exporting Countries embargoed oil
exports to the United States. Like those of EPAct 05, the loan
guarantees were extended to spur new energy technologies. According to
DOE, at that time it guaranteed 14 loans for coal gasification, ethanol
plants, and other projects. DOE data show that 10 of the 14 borrowers
defaulted and the federal government repaid the lenders.[Footnote 4]
Objectives, Scope, and Methodology:
Objectives:
* Identify sources and use of funds for DOE's LGP in fiscal years 2006
and 2007.
* Examine the extent to which the LGP could result in financial risks
to the taxpayer.
* Assess the steps DOE has taken to ensure that the LGP will be well
managed.
Scope and methodology:
* Reviewed and analyzed DOE documentation on funding and activities
undertaken, to date, to prepare for the LGP.
* Interviewed DOE and Office of Management and Budget (OMB) program and
budget officials.
* To determine key practices essential to loan guarantee programs, we
examined OMB and budget and internal control guidance; prior GAO, CRS,
and CBO reports on federal loan and loan guarantee programs; and work
by a leading expert on federal loan and loan guarantee programs. We
compared DOE's plans to the key practices we identified.
* Furthermore, for the 7 loan guarantee programs reviewed by DOE in
preparation for its LGP, we examined whether the programs used
guidelines or regulations.
* Our work was performed in accordance with generally accepted
government auditing standards from October 2006 to January 2007.
Results in Brief - Sources and Uses of Funds:
From March through October 2006, DOE spent about $503,000 for the LGP.
DOE used funds from the Departmental Administration appropriation and
the Science appropriation accounts to pay for three staff detailed from
elsewhere in DOE the Office of Management, Office of Policy and
International Affairs, and Office of Science.
The Energy Supply and Conservation appropriation and the Science
appropriation accounts paid for task order support services for, among
other things, a LGP Web site.
DOE reports it has stopped most spending for the program while it is
waiting for appropriations and more specific congressional direction.
Results in Brief - Financial Risks Posed by the LGP:
Although DOE plans to charge borrowers fees to cover the LGP's costs,
the government may still incur costs. For example, if DOE does not
adequately assess the risk of borrower default, DOE may not charge
borrowers enough fees to cover actual LGP costs and the government
would have to fund the shortfall. Estimating the subsidy cost with any
certainty that borrower fees will cover LGP costs will be difficult
because, among other reasons, the LGP targets innovative energy
technologies. Furthermore, loan performance could depend heavily on
future economic conditions, including energy prices, which are hard to
accurately predict.
Results in Brief - Steps DOE Has Taken to Manage the LGP P:
DOE has not completed key steps to ensure that the program will be well
managed and accomplish its objectives:
* DOE plans to issue its first round of guarantees under guidelines
rather than regulations. However, other loan guarantee programs we
examined are primarily implemented using regulations, which, unlike
guidelines, are legally binding on program participants. DOE program
officials say they plan to use guidelines instead of regulations
because it will be easier to make minor changes to the program.
* DOE lacks certain policies and procedures for example, for monitoring
lender and loan performance, reviewing and revising subsidy cost
estimates submitted by potential borrowers, and measuring program
effectiveness. Program officials said such policies and procedures are
important but that they have not had the resources to date to take
these steps and they do not intend to take further action on developing
policies and procedures until the agency receives appropriations for
the LGP.
Objective 1: Sources and Use of Funds for LGP:
From March through September 2006, DOE spent a total of about $430,000
for the LGP:
* About $309,000 paid for salaries and expenses for three staff
detailed from the Office of Management, Office of Policy and
International Affairs, and Office of Science.
* $121,194 from the Science appropriation and the Energy Supply and
Conservation appropriation accounts paid for task order support
services.
During October 2006, DOE spent about $73,000:
* About $38,000 paid for salaries and expenses for three staff detailed
from the Office of Management, Office of Policy and International
Affairs, and Office of Science.
* $34,829 from the Science appropriation and the Energy Supply and
Conservation appropriation accounts paid for task order support
services.
DOE reported taking several actions to begin the LGP in fiscal years
2006 and 2007, including:
* program planning and developing policy, including reviewing practices
of other federal loan guarantee programs;
* developing program guidelines and soliciting preapplications; and:
* communicating about the program by, for example, developing a Web
site, and responding to inquiries from the private sector, Congress,
and other stakeholders.
Fiscal year 2007 (November through December 2006):
* Staff details expired October 31 and DOE has reduced but not
eliminated LGP activities.
* According to the Deputy General Counsel for Energy Policy, he and
other staff continue to work on issues related to the program, such as
preparing a notice of proposed rulemaking and reviewing preapplications
for completeness. In addition, DOE staff in the Office of the Chief
Financial Officer are maintaining the LGP Web site.
* DOE continues to pay for task order support services to respond to
program inquiries. This support is funded through the Energy Supply and
Conservation appropriation account.
* DOE officials said they are waiting for appropriations and more
specific congressional direction to decide next steps for the program.
Objective 2 - Financial Risks Posed by the LGP:
Although DOE guidelines call for borrowers to pay both the estimated
subsidy and administrative costs associated with the LGP, financial
risks to the government remain because of the potential for:
* underestimated subsidy costs and:
* underestimated administrative costs.
According to the Under Secretary for Energy, Science, and Environment,
the LGP's "borrower pays" option "in theory, reduces the need for
appropriations. [but] the ultimate cost to the taxpayer could be
significantly higher than." DOE's original estimate.[Footnote 5]
Underestimated Subsidy Costs:
Under the Federal Credit Reform Act of 1990 (FCRA), agencies must
estimate the net cost of extending or guaranteeing credit (the subsidy
cost), based on the net present value of estimated payments to and from
the government, excluding administrative costs. To estimate this cost,
an agency would consider potential loan performance that is, potential
defaults, recoveries on defaults, fees paid by borrowers, and other
cash flows.
OMB guidance generally requires agencies to annually update or
"reestimate" subsidy costs based on actual loan performance and
expected changes in future loan performance.
* If the reestimate indicates that subsidy costs are higher than
previously estimated, the additional cost must be funded.
* FCRA provides permanent indefinite budget authority for reestimates
that reflect increased costs; that is, funding for additional costs
identified through the reestimation process does not require an annual
appropriation.
If DOE were to initially underestimate subsidy costs, it would not
charge borrowers enough fees to cover the subsidy costs. Any shortfalls
would be automatically funded through the reestimation process and be a
cost to the government.
* Several factors could affect DOE's ability to estimate subsidy costs,
including factors within DOE's control, such as having a sound method
to assess risk and estimate subsidy costs; and factors outside of DOE's
control, such as economic conditions and energy prices.
* To the extent that any of these factors cause DOE to underestimate
the subsidy costs, the increased costs recognized in the reestimation
process represent an increased cost to the government.
GAO has repeatedly reported over the last decade that agencies have had
difficulty estimating subsidy costs. (A list of relevant GAO products
is included at the end of this briefing.) Factors contributing to this
difficulty include:
* simplistic models and faulty assumptions that caused estimates to be
too low;
* limited historical data, such as having a small number of guarantees
from which to gather performance data needed to make reasonable
estimates; and:
* deficient policies and procedures for assessing risks and estimating
subsidy costs.
DOE could be at risk for these types of problems because DOE does not
have experience estimating subsidy costs and lacks historical data for
the LGP.
DOE officials told us that they have researched FCRA requirements but
have not determined specifically how subsidy costs would be estimated.
Underestimated Administrative Costs:
The government may also be at financial risk if DOE underestimates
administrative costs:
* To determine the fees to charge borrowers to cover administrative
costs, DOE would have to estimate administrative costs over the life of
the loan.
* As a new program dealing with new technologies, LGP administrative
costs are uncertain.
* DOE has no plan to determine how to (1) initially calculate fees to
cover administrative costs or (2) charge borrowers more if actual
administrative costs over the life of the loan are higher than
initially estimated. DOE officials said it was premature to determine
either of these. OMB officials said it is not clear how shortfalls in
fees for administrative costs would be funded.
* Appropriated funds may be necessary to cover any increase in
administrative costs because FCRA does not provide permanent indefinite
budget authority for administrative costs.
Limiting Financial Risks:
Congress can limit the government's exposure to financial losses from
loan guarantees by (1) providing an appropriation for subsidy costs
that limits the subsidy amount available to fund loan guarantees or (2)
when a program does not have a subsidy cost, as could be the case of
DOE's LGP "borrower pays" option, providing for commitment authority in
an appropriation that limits the total dollar volume of new loans that
an agency can guarantee.
Currently, there is no congressional limit for DOE's LGP. DOE
guidelines indicate that DOE will not issue more than $2 billion in
guarantees during the first round.
Objective 3 - Steps DOE Has Taken to Manage the LGP:
Because of the potential financial risks of a loan guarantee program,
it is important that DOE take appropriate key steps to ensure that its
LGP will be well managed and accomplish its objectives while also
managing the government's financial risks. DOE has taken some actions
in this regard but has not completed any of these key steps.
To manage loan guarantee programs, OMB, budget and accounting guidance,
and practices used by other agencies for loan guarantee programs,
include certain key steps to provide accountability for program
operations and provide reasonable assurance that program objectives
will be met. The following table shows these steps and the status of
DOE's related actions.
Key Steps to Manage a Loan Guarantee Program:
Key steps: Issue regulations for implementing a loan guarantee program;
Status of DOE activities: Issued guidelines to award the first $2
billion in guarantees; plans to issue regulations for awarding
subsequent guarantees.
Key steps: Establish a credit review board to set policies for and
implement a program;
Status of DOE activities: Credit review board charter drafted but not
yet approved by the Secretary of Energy.
Key steps: Set policies and procedures for selecting and monitoring
lenders and loans;
Status of DOE activities: Policies and procedures are incomplete.
Key steps: Set policies and procedures for estimating subsidy and
administrative costs and accounting for loan guarantees;
Status of DOE activities: No policies or procedures developed.
Key steps: Set program goals and objectives tied to outcome metrics for
determining program effectiveness;
Status of DOE activities: Broad objectives set but no outcome metrics
have been developed.
Key steps: Issue rules defining default conditions and audit
documentation requirements;
Status of DOE activities: Has not completed the rules but plans to
prior to issuing any loan guarantees.
Source: GAO analysis of OMB, budget and internal control guidance; GAO,
CRS, and CBO reports; and work by an expert on federal credit programs.
[End of table]
Regulations:
Regulations that implement federal programs go through the public
notice and comment process and are thereby transparent to the public,
oversight agencies, and Congress. Because regulations carry the force
of law, they also hold both the agency implementing the program and
program participants accountable to the terms specified in the
regulations.
Agencies that implement five of seven loan guarantee programs that DOE
reviewed for their practices began and continue to manage their
programs using regulations.
* The five programs with regulations are the Department of
Transportation's infrastructure finance program; the Maritime
Administration program; and the Department of Agriculture's renewable
energy and energy efficiency, business and industry, and rural
utilities programs.
* The two programs without regulations are the Overseas Private
Investment Corporation and Export-Import Bank. Unlike the five programs
with regulations, these two guarantee loans to foreign entities.
The "emergency relief" programs for the steel and oil and gas
industries (both of which first issued guarantees in 2001) and the
airline industry (which first issued guarantees in 2002) were initiated
under regulations.
DOE intends to issue the first round of guarantees under published
administrative guidelines. In parallel, DOE will begin a rulemaking
based, in part, on feedback for subsequent rounds.
DOE sees guidelines as enabling (a) quick start-up, (b) flexibility,
and (c) learning by doing so that changes can be easily incorporated
into proposed rules. DOE officials said they will enforce the
guidelines through the terms of the loan guarantee contracts and
regulations are not needed to issue the first $2 billion in loan
guarantees.
EPAct 05 requires DOE to issue regulations defining borrower default
conditions and audit documentation requirements. According to DOE
officials, they expect to include these items in the rulemaking
process. If DOE issues guarantees before finalizing the regulations,
officials said they will issue procedural rules covering these issues
prior to issuing the guarantees.
Disadvantages of using guidelines rather than regulations:
* Changes DOE makes, and the rationale for them, may not be transparent
to the public, oversight agencies, and Congress. For example, currently
the guidelines' loan sale provisions prohibit separately selling, or
"striping," the guaranteed portion of the loan from the nonguaranteed
portion. This helps protect the government's interest by ensuring that
lenders, because they have risk in the loan (the nonguaranteed
portion), have an incentive to diligently monitor the loan. Because
these provisions are in guidelines, rather than regulations, DOE could
change them without public or congressional input. In contrast, if the
guidelines were issued as regulations, DOE would have to provide public
notice and comment periods, and to respond to comments received before
issuing final rules implementing the change.
* The use of guidelines creates potential restrictions on enforcement
ability.
- Regulations generally carry force of law but guidelines do not.
- DOE's LGP guidelines state that "most provisions of today's
guidelines are not legally binding." DOE officials told us they will
include provisions in the loan contracts to ensure that relevant
provisions of the guidelines are enforceable. However, regulations
could help ensure that-DOE includes necessary provisions in the loan
contracts.
Credit Review Board:
OMB guidance calls for agencies to establish a board, as appropriate,
to coordinate credit management and debt collection activities and
ensure full consideration of credit management and debt collection
issues. Representation on the board should include, but not be limited
to, the agency chief financial officer and the senior officials for
program offices with credit activities.
DOE has drafted a charter for the LGP's credit review board. The stated
purpose and board membership mirror OMB guidance. According to DOE
officials, the charter has not been approved by the Secretary of Energy
and the board has not yet convened.
Selecting and Monitoring Lenders and Loans:
To effectively oversee the government's interests in loan guarantee
programs, OMB guidance and agency practices call for managers to
establish policies and procedures for selecting lenders and loans to
guarantee and for monitoring their performance. These include:
* establishing policies and procedures for screening applicants to
prevent defaults and delinquencies;
* determining that lenders meet all applicable financial and program
requirements for eligibility, such as not being delinquent on
government debts; and:
* establishing mechanisms for monitoring loan performance, such as a
process for reviewing borrowers' financial statements and timeliness of
loan payments.
DOE's policies and procedures for selecting and monitoring lenders and
loan performance are incomplete. For example:
* Program guidelines specify factors DOE will consider when selecting
projects: for example, whether and to what extent the project avoids,
reduces, or sequesters air pollutants or greenhouse gases, and whether
the project sponsors have made a significant financial commitment.
However, DOE officials have yet to determine how these factors will be
ranked or used for selecting projects.
* Program guidelines contain lender eligibility requirements that
generally mirror those set out by OMB and contain an additional
requirement that lenders must demonstrate experience with energy-
related projects. However, DOE has not established procedures for
monitoring either lenders or loan performance. According to DOE
officials, they recognize the importance of these procedures and will
develop them before issuing guarantees.
Estimating Costs and Accounting for Loan Guarantees:
The Financial Accounting Standards Advisory Board's guidance on
preparing subsidy estimates and reestimates lists procedures to
estimate and reestimate subsidy costs, including:
* procedures to calculate the subsidy estimate;
* review and approval processes for the subsidy estimate;
* documentation of underlying assumptions, including historical support
for the assumptions; and:
* documentation of the cash flow model used to develop the estimates.
DOE does not have policies and procedures in place for estimating
subsidy and administrative costs and accounting for loan guarantees.
* DOE guidelines call for potential borrowers to provide an initial
estimate of subsidy costs.
- DOE officials explained that they expect to benefit from the
experience that some borrowers may have with federal loan guarantees.
- However, because the borrower fee is based on the subsidy cost
estimate, the potential borrower has an incentive to underestimate the
initial subsidy cost estimate it submits to DOE as part of its
application for a loan guarantee.
* According to DOE officials, they, in conjunction with OMB, have yet
to decide how to estimate subsidy and administrative costs and to
determine the fees to charge borrowers to cover administrative costs.
DOE will design its approach to reflect any expertise gained from the
borrowers' submissions.
* According to DOE's Director of Finance and Accounting, DOE has not
developed policies and procedures to account for loan guarantee
activities. He expects the policies and procedures will be ready before
any guarantees are issued.
Objectives and Outcomes:
OMB guidance, the Government Performance Results Act, and agency
practices for loan guarantee programs call for agencies to set program
goals and objectives and tie them to measurable outcomes to determine
program effectiveness.
* In particular, OMB guidance for loan guarantee programs calls for
agencies to develop clearly defined objectives and outcomes expected.
DOE established broad program objectives in its solicitation for pre-
applications:
* promote the President's Advanced Energy Initiative (which supports
clean-energy technology research to reduce reliance on oil and address
high natural gas and electricity prices) and:
* further the policy goals of EPAct 05 generally and Title XVII
specifically.
According to DOE officials, it is premature to further define the
objectives and outcomes expected for the program.
Selected GAO Products Related to Federal Loan and Loan Guarantee
Programs:
Small Business Administration: Improvements Made, but Loan Programs
Face Ongoing Management Challenges. GAO-06-605T. Washington, D.C.:
April 6, 2006.
Mortgage Financing: FHA's $7 Billion Reestimate Reflects Higher Claims
and Mortgage Financing: Loan Performance Estimates. GAO-05-875.
Washington D.C.: September 2, 2005.
Housing Finance: Options to Help Prevent Suspensions of FHA and RHS
Loan Guarantee Programs. GAO-05-227. Washington, D.C.: March, 15, 2005.
Maritime Administration: Weaknesses Identified in Management of the
Title XI Loan Guarantee Program. GAO-03-657. Washington, D.C.:June 30,
2003.
Internal Control Standards: Internal Control Management and Evaluation
Tool. GAO-01-1008G. Washington, D.C.: August 2001.
Farm Loan Programs: Improvements in the Loan Portfolio but Continued
Monitoring Needed. GAO-01-732T. Washington, D.C.: May 16, 2001.
Guaranteed Loan System Requirements: Checklist for Reviewing Systems
Under the Federal Financial Management Improvement Act. GAO-01-371 G.
Washington, D.C.: March 2001.
Department of Veterans Affairs: Credit Costs and Risks of Proposed VA
Small Business Loan Guarantee Program. GAO/GGD-00-158. Washington,
D.C.: June 30, 2000.
SBA Loan Monitoring System: Substantial Progress Yet Key Risks and
Challenges Remain. GAO/AIMD-00-124. Washington, D.C.: April 25, 2000.
Rural Development: Rural Business Cooperative Service Business Loan
Losses. GAO/RCED-99-249. Washington, D.C.: August, 25, 1999.
Credit Reform: Key Credit Agencies Had Difficulty Making Reasonable
Loan Program Cost Estimates. GAO/AIMD-99-31. Washington, D.C.: January
29, 1999.
Small Business Administration: Few Reviews of Guaranteed Lenders Have
Been Conducted. GAO/GGD-98-85. Washington, D.C.: June 11, 1998.
Credit Reform: Greater Effort Needed to Overcome Persistent Cost
Estimation Problems. GAO/AIMD-98-14. Washington, D.C.: March 30, 1998.
Rural Utilities Service: Opportunities to Operate Electricity and
Telecommunications Loan Programs More Effectively. GAO/RCED-98-42.
Washington, D.C.: January 21, 1998.
Status of the Great Plains Coal Gasification Project --Dec. 31, 1984.
GAO/RCED-85-92. Washington, D.C.: May 28, 1985.
Geothermal Loan Guarantee Program: Need for Improvements. EMD-80-26.
Washington, D.C.: January 24, 1980.
[End of section]
Enclosure II: Comments from the Department of Energy:
Department of Energy:
Washington, DC 20585:
Feb 1 6 2007:
Mr. James C. Cosgrove:
Acting Director, Natural Resources and Environment:
Government Accountability Office:
Washington, DC 20548:
Dear Mr. Cosgrove:
This letter is in response to the Government Accountability Office's
Draft Report entitled, "Steps Needed to Better Manage the Financial
Risk and Help Ensure the Success of the New Loan Guarantee Program for
Innovative Technologies," (GAO 07-339R) provided to the Department of
Energy for review and comment on February 1, 2007. We have also
solicited input from the Office of Management and Budget and have
incorporated their views in this response.
As you are aware, on May 22, 2006, the Department requested
Congressional approval for an appropriations transfer of $2.7 million
from the Department's Science, Fossil Energy Research and Development,
and Energy Supply and Conservation accounts to fund the start-up of a
Loan Guarantee Office to manage implementation of the authority
provided in Title XVII of the Energy Policy Act of 2005. As noted on
page 2 of your report, the House Energy and Water Development, and
Related Agencies Appropriations Subcommittee, in a July 2006 letter,
stated it was concerned with the lack of a strategy for instituting the
loan guarantee program and that the Department had not adequately
explained such basic management policies as the criteria it will use
for selecting projects for loan guarantees and the number of loans to
be guaranteed. What the report does not indicate is that in this same
letter the Subcommittee disapproved the Department's appropriations
transfer request. As a result of the Subcommittee's disapproval of the
Department's appropriations transfer request, we were not able to fully
carry out the activities that the draft GAO report criticizes DOE for
not doing.
Representatives of the Department continued to work with Subcommittee
staff well into August 2006 in an effort to allay their concerns and to
secure the Subcommittee's approval of a substantially reduced
appropriations transfer request to start up this program. At the same
time, the Department issued the program guidelines and solicitation
discussed in the report with the expectation that our request would
ultimately be funded. However, the Subcommittee never approved the
reduced request and DOE therefore was not able to effectively and
promptly move forward with this program.
Nonetheless, we share GAO's views expressed in the report that several
key steps need to be implemented before the Department will be
positioned to guarantee loans under the Title XVII authority. Clearly,
had we received the funding requested of the Congress, more progress in
addressing some of these steps would have been made. In fact, absent
the requested funding, we have developed a draft charter for the
Department's Credit Review Board which will soon be presented to the
Secretary for approval and have begun to develop draft proposed
regulations for the program. Further, as pointed out in the report,
program guidelines were promulgated and a program solicitation was
issued in August 2006. In response to that solicitation, over 100 pre-
applications for loan guarantees have been received reflecting the
tremendous interest in this program and validating its potential for
major contributions toward the statutory Title XVII objectives of
decreasing emissions of air pollutants or greenhouse gases and
employing new or significantly improved energy technologies.
We are encouraged by the action of the Congress in the FY 2007
Continuing Resolution, H.7. Res. 20, which was signed into law by
President Bush on February 15, 2007 and which will provide funding for
the Loan Guarantee Office as well as the requisite authority to issue
loan guarantees and recover administrative costs from borrowers. Now
that the Department has been provided funding and the necessary legal
authority to fully implement the Title XVII program, we intend to move
forward as promptly as possible. In doing so, we intend to exercise our
authority prudently, fully comply with the provisions of all applicable
law, and affirmatively address the recommendations contained in the
report.
Attached are additional technical comments for your consideration in
finalizing the report. Thank you for the opportunity to review the
draft report. If you have any questions, please contact me at (202) 586-
4171:
Sincerely,
Signed by:
James T. Campbell:
Acting Chief Financial Officer:
Enclosure:
[End of section]
Enclosure III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
James Cosgrove (202) 512-3841 or cosgrovej@gao.gov:
Robert E. Martin (202) 512-8341 or martinr@gao.gov:
Staff Acknowledgments:
In addition to the individuals named above, Marcia Carlsen and Karla
Springer, Assistant Directors, and Quindi Franco, Marcia Brouns
McWreath, Barbara Timmerman, and Carol Herrnstadt Shulman made key
contributions to this report.
[End of section]
(360773):
FOOTNOTES
[1] For the first round of loan guarantees, the guidelines state that
DOE anticipates that borrowers will pay the subsidy costs and that
those borrowers will be assessed fees to cover some administrative
costs.
[2] You also asked us to issue a legal opinion on certain questions
regarding DOE's implementation of the LGP under section 1702 of the
Energy Policy Act of 2005 and section 301 of the Energy and Water
Development Appropriations Act of 1993. This work is under way and an
opinion should be issued by the end of April 2007.
[3] Present value is the worth of the future stream of costs or returns
in terms of money paid immediately. In calculating present value for
subsidy cost calculations, prevailing interest rates provide the basis
for converting future amounts into their "money now" equivalents.
[4] After defaulting on their loans, two of the companies became
profitable. One is now paying on the loan and the other is revenue
sharing with DOE.
[5] Testimony before the Committee on Energy and Natural Resources,
U.S. Senate, May 1, 2006.
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