Department of Energy
Observations on Actions to Implement the New Loan Guarantee Program for Innovative Technologies Gao ID: GAO-07-798T April 24, 2007The Energy Policy Act of 2005 (EPAct 05) authorized the Department of Energy (DOE) to establish a loan guarantee program (LGP) for projects intended to, decrease air pollutants or man-made greenhouse gases, employ new or significantly better technologies, and have a reasonable prospect of repayment. The Federal Credit Reform Act requires appropriated budget authority for LGP costs before loans can be made. In 2006, DOE solicited preapplications to the LGP, stating it intended to issue up to $2 billion in guarantees. It also issued guidelines for these proposals, stating that borrowers would ultimately pay for all costs, but funding was authorized. This testimony is based on GAO's February 2007 report (Department of Energy: Key Steps Needed to Help Ensure the Success of the New Loan Guarantee Program, GAO-07-339R) and its April 20, 2007 legal opinion (B-308715). GAO discusses the sources and use of funds for the LGP in fiscal years 2006 and 2007; DOE's authority to implement the LGP and to fund the program before Congress had appropriated funding; extent to which the LGP could result in a financial risk to the taxpayer; and steps DOE has taken to ensure that the LGP will be well managed.
In fiscal year 2006, and continuing through October 2006, DOE used about $503,000 from three separate appropriation accounts to fund LGP activities. DOE used these funds for the salaries of three staff detailed to the LGP office and for contracts to support the program. DOE stopped most LGP development activities at the end of October, but according to the deputy general counsel for energy policy, he and others continued to work on the program by, for example, preparing a notice of proposed rulemaking and reviewing pre-applications for completeness. At the time of GAO's review, DOE officials said they were awaiting appropriations before taking additional implementation steps. DOE should not have begun implementation of the LGP without a specific appropriation. Nevertheless, DOE did begin implementation, and its approach to the LGP raised serious questions about whether this program and its financial risks would be well managed. LGP guidelines call for borrowers to be charged fees to cover all program costs, but the program could result in substantial financial costs to the taxpayer if DOE underestimates administrative costs, such as evaluating applications. While DOE must recover these costs, it had not developed a plan to determine how it would do so at the time of GAO's review. Appropriated funds may be necessary to cover shortfalls. The other type of program cost is the subsidy cost: the estimated net present value of the long-term cost to the federal government of guaranteeing the loans over the entire period that the loans are outstanding, excluding administrative costs. DOE will have to estimate this cost to determine the fees charged borrowers, but it had no policies or procedures for doing so. Estimating this cost could be difficult because the program targets innovative energy technologies, and loan performance could depend heavily on future economic conditions, including energy prices, which are hard to predict accurately. Under federal law, shortfalls in subsidy costs are funded by a permanent indefinite appropriation, not through the annual appropriations process. GAO recommended key steps that DOE did not take but that would help ensure that the program is well managed. The Revised Continuing Appropriations Resolution for Fiscal Year 2007 directed DOE to implement most of GAO's recommendations by issuing final regulations before awarding loan guarantees. These regulations are to include (1) programmatic, technical, and financial factors for selecting projects for loan guarantees; (2) policies and procedures for selecting and monitoring lenders and loan performance, and (3) any other policies or information necessary to implement the LGP. DOE was also instructed to complete these regulations within 6 months of the appropriations act.
GAO-07-798T, Department of Energy: Observations on Actions to Implement the New Loan Guarantee Program for Innovative Technologies
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Testimony:
Before the Subcommittee on Energy and Air Quality, Committee on Energy
and Commerce, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 2:00 p.m. EDT:
April 24, 2007:
Department of Energy:
Observations on Actions to Implement the New Loan Guarantee Program for
Innovative Technologies:
Statement of James C. Cosgrove, Acting Director:
Natural Resources and Environment:
GAO-07-798T:
GAO Highlights:
Highlights of GAO-07-798T, testimony before the Subcommittee on Energy
and Air Quality, Committee on Energy and Commerce, House of
Representatives
Why GAO Did This Study:
The Energy Policy Act of 2005 (EPAct 05) authorized the Department of
Energy (DOE) to establish a loan guarantee program (LGP) for projects
intended to, decrease air pollutants or man-made greenhouse gases,
employ new or significantly better technologies, and have a reasonable
prospect of repayment. The Federal Credit Reform Act requires
appropriated budget authority for LGP costs before loans can be made.
In 2006, DOE solicited preapplications to the LGP, stating it intended
to issue up to $2 billion in guarantees. It also issued guidelines for
these proposals, stating that borrowers would ultimately pay for all
costs, but funding was authorized.
This testimony is based on GAO‘s February 2007 report (Department of
Energy: Key Steps Needed to Help Ensure the Success of the New Loan
Guarantee Program, GAO-07-339R) and its April 20, 2007 legal opinion (B-
308715). GAO discusses the sources and use of funds for the LGP in
fiscal years 2006 and 2007; DOE‘s authority to implement the LGP and to
fund the program before Congress had appropriated funding; extent to
which the LGP could result in a financial risk to the taxpayer; and
steps DOE has taken to ensure that the LGP will be well managed.
What GAO Found:
In fiscal year 2006, and continuing through October 2006, DOE used
about $503,000 from three separate appropriation accounts to fund LGP
activities. DOE used these funds for the salaries of three staff
detailed to the LGP office and for contracts to support the program.
DOE stopped most LGP development activities at the end of October, but
according to the deputy general counsel for energy policy, he and
others continued to work on the program by, for example, preparing a
notice of proposed rulemaking and reviewing pre-applications for
completeness. At the time of GAO‘s review, DOE officials said they were
awaiting appropriations before taking additional implementation steps.
DOE should not have begun implementation of the LGP without a specific
appropriation. Nevertheless, DOE did begin implementation, and its
approach to the LGP raised serious questions about whether this program
and its financial risks would be well managed.
LGP guidelines call for borrowers to be charged fees to cover all
program costs, but the program could result in substantial financial
costs to the taxpayer if DOE underestimates administrative costs, such
as evaluating applications. While DOE must recover these costs, it had
not developed a plan to determine how it would do so at the time of
GAO‘s review. Appropriated funds may be necessary to cover shortfalls.
The other type of program cost is the subsidy cost: the estimated net
present value of the long-term cost to the federal government of
guaranteeing the loans over the entire period that the loans are
outstanding, excluding administrative costs. DOE will have to estimate
this cost to determine the fees charged borrowers, but it had no
policies or procedures for doing so. Estimating this cost could be
difficult because the program targets innovative energy technologies,
and loan performance could depend heavily on future economic
conditions, including energy prices, which are hard to predict
accurately. Under federal law, shortfalls in subsidy costs are funded
by a permanent indefinite appropriation, not through the annual
appropriations process.
GAO recommended key steps that DOE did not take but that would help
ensure that the program is well managed. The Revised Continuing
Appropriations Resolution for Fiscal Year 2007 directed DOE to
implement most of GAO‘s recommendations by issuing final regulations
before awarding loan guarantees. These regulations are to include (1)
programmatic, technical, and financial factors for selecting projects
for loan guarantees; (2) policies and procedures for selecting and
monitoring lenders and loan performance, and (3) any other policies or
information necessary to implement the LGP. DOE was also instructed to
complete these regulations within 6 months of the appropriations act.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-798T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact James C. Cosgrove at
202.512.7029.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss the results of our February
2007 report, and Susan Poling is available to discuss our just-released
legal opinion on the Department of Energy's loan guarantee program for
innovative technologies,[Footnote 1] both of which we prepared at the
request of the Subcommittee on Energy and Water Development, House
Committee on Appropriations.
As you know, the Energy Policy Act of 2005 (EPAct05)[Footnote 2]
authorized the Department of Energy (DOE) to establish a loan guarantee
program (LGP) to guarantee loans for projects that were intended to,
among other things meet the following three conditions: (1) decrease
air pollutants or man-made greenhouse gases by reducing their
production or by sequestering them (storing them to prevent their
release into the atmosphere), (2) employ new or significantly improved
technologies compared with commercial technologies currently used, and
(3) have a "reasonable prospect" of repayment. Such projects could
include renewable energy systems, advanced fossil energy technologies,
and production facilities for fuel-efficient vehicles.
In May 2006, DOE proposed transferring appropriations from some DOE
accounts to begin the program. In August 2006, DOE issued a
solicitation for preapplications to the loan guarantee program,
announcing its intention to issue up to $2 billion in loan guarantees.
At the same time, it issued guidelines for proposals submitted in
response to this first solicitation, stating that the department
expected borrowers to ultimately pay for all program costs.[Footnote 3]
After we had completed our audit work Congress appropriated amounts to
cover the costs of loan guarantees. budget authority for the
program.[Footnote 4]
My testimony today discusses the (1) sources and use of funds for the
LGP in fiscal years 2006 and 2007, (2) DOE's authority to implement the
LGP under section 1702 of the EPAct 05 and section 301 of the Energy
and Water Development Appropriations Act of 1993 and to finance the
program before Congress had appropriated funds,[Footnote 5] (3) extent
to which the LGP could result in a financial risk to the taxpayer, and
(4) steps DOE has taken to ensure that the LGP will be well managed.
To identify sources and use of funds for DOE's LGP, we interviewed DOE
LGP and budget officials and reviewed and analyzed relevant DOE budget
documentation as well as agency LGP guidance and planning documents. To
examine the extent to which the LGP could result in financial risks to
taxpayers, we analyzed DOE's plans and guidance for implementing the
LGP and discussed these plans and the guidance with DOE and Office of
Management and Budget (OMB) officials. To assess the steps DOE has
taken to ensure the LGP will be well managed, we compared DOE's plan
with OMB budget and internal control guidance, federal standards, and
practices used by other selected agencies that manage loan guarantee
programs. We performed our work in accordance with generally accepted
government auditing standards from October 2006 through February
2007.Consistent with our practice in rendering legal opinions, we
contacted DOE to establish the factual record and elicit the agency's
legal position on the subject matter of the request.[Footnote 6]
In February 2007, we reported the following:
First, in fiscal year 2006, and continuing through October 2006, DOE
used about $503,000 from three separate appropriation accounts to fund
LGP activities. DOE used these funds for the salaries of three staff
detailed to the LGP office and for contracts to support program
development, including the development of a LGP Web site. DOE continued
to pay for task order support services to respond to program inquiries,
and these payments were in addition to the $503,000 already spent to
initiate the program. However, DOE had discontinued other funding, and
the staff on detail had returned to their home units. Nevertheless,
according to the deputy general counsel for energy policy, he and
others continued to work on the program by, for example, preparing a
notice of proposed rulemaking and reviewing pre-applications for
completeness. At the time of our review, DOE officials said they were
awaiting appropriations before taking additional steps to implement the
LGP.
Second, although LGP guidelines call for borrowers to be charged fees
to cover all program costs, the program could result in substantial
financial costs to the taxpayer if DOE underestimates total program
costs. These costs include, for example, administrative costs for
evaluating applications; offering, negotiating and closing guarantees;
and servicing and monitoring the guarantees. While DOE must recover
applicable administrative costs, it had not developed a plan to
determine how it would recover these costs at the time of our review.
Appropriated funds may be necessary to cover shortfalls. The other type
of program cost is the subsidy cost: the estimated net present value of
the long-term cost to the federal government of guaranteeing the loans
over the entire period that the loans are outstanding, excluding
administrative costs. The subsidy cost takes into account (1) estimated
federal payments to cover defaults, delinquencies, or other payments;
and (2) estimated payments to the government, including origination and
other fees, penalties, and recoveries on defaults. DOE will have to
estimate the subsidy cost to determine the fees charged borrowers, but
it had no policies or procedures for doing so at the time of our
review. Estimating this cost could be difficult because the program
targets innovative energy technologies, and loan performance could
depend heavily on future economic conditions, including energy prices,
which are hard to predict accurately. Under the Federal Credit Reform
Act of 1990 (FCRA), shortfalls in subsidy costs are funded by a
permanent indefinite appropriation, not through the annual
appropriations process.
Third, rather than taking and completing key steps to ensure that the
LGP would be well managed and accomplish its objectives, we found that
DOE had focused on initiating the LGP by soliciting pre-applications
for proposed projects. From OMB guidance, internal control and
accounting standards, and the experience of other loan guarantee
programs, we identified the following key steps that can provide
greater program accountability and reasonable assurance that program
objectives will be met. For each step, we also describe the actions DOE
had taken at the time of our review.
* Issuing regulations. DOE had not issued regulations for implementing
the LGP; instead it planned to rely on guidelines for awarding the
first $2 billion in loan guarantees. Unlike guidelines, regulations (1)
go through the public notice and comment process and thus are
transparent to the public, oversight agencies, and Congress and (2)
carry the force of law and hold the agency implementing the program and
program participants accountable to the terms specified in the
regulations. DOE officials told us that they would enforce the
guidelines through the terms of the loan guarantee contracts and thus
saw no need to issue regulations before issuing the first $2 billion in
loan guarantees. The officials also told us they would have regulations
in place for later guarantees.
* Establishing a credit review board. DOE drafted a charter for a
credit review board, but it had not yet provided the charter to the
Secretary of Energy for approval at the time of our review. This board
is to coordinate credit management and debt collection activities and
ensure full consideration of credit management and debt collection
issues.
* Setting policies and procedures for selecting and monitoring loans
and lenders. DOE had taken some steps towards establishing such
policies and procedures through its guidelines, but it had not
completed them. These policies and procedures should protect the
government's interests by, among other things, establishing mechanisms
to screen and select applicants and lenders and to monitor loan and
lender performance.
* Setting policies and procedures for estimating administrative and
subsidy costs and accounting for loan guarantees. As previously noted,
DOE had not developed policies or procedures for estimating
administrative or subsidy costs. In addition, it had not developed
policies or procedures for accounting for loan guarantees. In the
interim, DOE was asking potential borrowers--who have an incentive to
underestimate the costs--to provide preliminary estimates of subsidy
costs so that it could gain experience in developing these estimates.
DOE expected the necessary accounting policies and procedures would be
in place before guarantees were issued.
* Setting program goals and objectives tied to outcome measures for
determining program effectiveness. DOE had not established outcome
measurements. Instead, it had set broad objectives of furthering the
policy goals generally set forth in EPAct 05 and promoting the
President's Advanced Energy Initiative. This initiative supports clean
energy technology research to reduce reliance on oil and address high
natural gas and electricity prices.
EPAct 05 requires DOE to issue (1) regulations defining conditions for
determining when a borrower has defaulted on a loan and (2)
requirements for the documentation borrowers must make available for
audits. At the time of our review, DOE officials told us that the
department planned to include these requirements in its final
regulations. If DOE issues guarantees before the regulations are final,
officials said they would issue procedural rules covering these
requirements before they issued the guarantees.
Finally, concerning DOE's authority to implement and fund the LGP
before Congress had appropriated funding, we concluded in our April 20,
2007, opinion that EPAct 05, section 1702(b)(2), confers upon DOE
independent authority to make loan guarantees, notwithstanding the FCRA
requirements. We also concluded that DOE engaged in activities to
implement a loan guarantee program under title XVII of the act during a
period when DOE was affirmatively prohibited from implementing that
title by 42 U.S.C. § 7278. These activities violated section 7278; the
purpose statute, 31 U.S.C. § 1301(a); and the Antideficiency Act, 31
U.S.C. § 1341(a). DOE must report the violations of the Antideficiency
Act to Congress and the President, and submit a copy of that report to
the Comptroller General of the United States under 31 U.S.C. § 1351, as
amended.[Footnote 7]
In conclusion, Mr. Chairman and Members of the Subcommittee, DOE should
not have begun implementation of the LGP without a specific
appropriation. Nevertheless, DOE did begin implementation, and its
approach to the LGP raised serious questions about whether this program
and its financial risks would be well managed. At the time of our
review, DOE had not taken steps to ensure that it had in place the
critical policies, procedures, and mechanisms necessary to ensure the
program's success. In our report we recommended that the department
take these steps.
Since we completed our audit work, the Revised Continuing
Appropriations Resolution for Fiscal Year 2007 directed DOE to
implement most of our recommendations by issuing final regulations
before awarding loan guarantees. These regulations are to include (1)
programmatic, technical, and financial factors for selecting projects
for loan guarantees; (2) policies and procedures for selecting and
monitoring lenders and loan performance, and (3) any other policies or
information necessary to implement the LGP. DOE was also instructed to
complete these regulations within 6 months of the appropriations act.
Mr. Chairman, this concludes my prepared statement. I would be happy to
respond to any questions that you or Members of the Subcommittee may
have.
Contacts and Staff Acknowledgements:
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this testimony. For further
information about our review of the loan guarantee program, please
contact James Cosgrove at 202-512-3841 or cosgrovej@gao.gov. For
further information on our legal opinion, please contact Susan A.
Poling, Managing Associate General Counsel at 202-512-2667 or
polings@gao.gov. Key contributors to this statement were Thomas H.
Armstrong, Assistant General Counsel for Appropriations; Marcia
Carlsen, Assistant Director; Doreen S. Feldman, Assistant General
Counsel; Marcia Brouns McWreath; Neill Martin-Rolsky, Senior Attorney;
Karla Springer, Assistant Director; Carol Herrnstadt Shulman; and
Barbara R. Timmerman, Senior Attorney.
FOOTNOTES
[1] GAO, 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-07-339R (Washington, D.C.:
February 28, 2007); and B-308715, Department of Energy--Title XVII Loan
Guarantee Program, April 20, 2007.
[2] Title XVII of EPAct 05--Incentives for Innovative Technologies.
[3] For the first round of loan guarantees, the guidelines stated that
DOE anticipated that borrowers would pay the subsidy costs and that
those borrowers would be assessed fees to cover some administrative
costs.
[4] Revised Continuing Appropriations Resolution for Fiscal Year 2007.
Pub. L. No. 110-5, title II, ch. 3, §§ 20315, 20320 (February 15,
2007).
[5] 42. U.S.C. § 7278.
[6] GAO, Procedures and Practices for Legal Decisions and Opinions, GAO-
06-1064SP (Washington, D.C.: Sept. 2006), available at www.gao.gov/
congress.html (last visited Apr. 16, 2007).
[7] Office of Management and Budget Circular No. A-11 provides guidance
on the information to include in Antideficiency Act reports. Agencies
must report violations found by GAO, even if they disagree with the
finding. OMB advises agencies, "If the agency does not agree that a
violation has occurred, the report to the President, Congress, and the
Comptroller General will explain the agency's position." OMB Cir. No. A-
11, Preparation, Submission, and Execution of the Budget, § 145.8 (June
2006).
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