Department of Energy
New Loan Guarantee Program Should Complete Activities Necessary for Effective and Accountable Program Management Gao ID: GAO-08-750 July 7, 2008Title XVII of the Energy Policy Act of 2005 established DOE's loan guarantee program (LGP) for innovative energy projects that should decrease air pollutants or greenhouse gases and that have a reasonable prospect of repayment. For fiscal years 2008 and 2009, Congress authorized the use of borrower fees to pay the costs of loan guarantees through Title XVII's "borrower pays" option, under which DOE will limit loan guarantees to $38.5 billion. Congress mandated that GAO review DOE's progress in implementing the LGP. GAO assessed DOE's progress in (1) issuing final regulations and (2) taking actions to help ensure that the program is managed effectively and to maintain accountability. GAO also assessed how inherent risks due to the nature of the LGP may affect DOE's ability to achieve intended program outcomes. GAO analyzed DOE's regulations, guidance, and program documents and files; reviewed Title XVII; and interviewed DOE officials.
In October 2007, DOE issued regulations that govern the LGP and include requirements for application submissions, project evaluation factors, and lender eligibility and servicing requirements. The regulations also generally address requirements set forth in applicable guidance. Some key aspects of the initial LGP guidelines were revised in the regulations to help make the program more attractive to lenders and potentially reduce financing costs for projects. For example, the maximum loan guarantee percentage increased from 80 to 100 percent of the loan. In addition, the regulations define equity as "cash contributed by the borrowers," but DOE officials told us they also plan to consider certain non-cash contributions, such as land, as equity. As a result, applicants may not fully understand the program's equity requirements. DOE is not well positioned to manage the LGP effectively and maintain accountability because it has not completed a number of key management and internal control activities. As a result, DOE may not be able to process applications efficiently and effectively, although it has begun to do so. DOE has not sufficiently determined the resources it will need or completed detailed policies, criteria, and procedures for evaluating applications, identifying eligible lenders, monitoring loans and lenders, estimating program costs, or accounting for the program--key steps that GAO recommended DOE take over a year ago. DOE also has not established key measures to use in evaluating program progress. Risks inherent to the LGP will make it difficult for DOE to estimate subsidy costs, which could lead to financial losses and may introduce biases in the projects that receive guarantees. The nature and characteristics of the LGP and uncertain future economic conditions increase the difficulty in estimating the LGP's subsidy costs. Because the LGP targets innovative technologies and the projects will have unique characteristics--varying in size, technology, and experience of the project sponsor--evaluating the risks of individual projects will be complicated and could result in misestimates. The likelihood that DOE will misestimate costs, along with the practice of charging fees to cover the estimated costs, may lead to biases in the projects that receive guarantees. Borrowers who believe DOE has underestimated costs and has consequently set fees that are less than the risks of the projects are the most likely to accept guarantees. To the extent that DOE underestimates the costs and does not collect sufficient fees from borrowers to cover the full costs, taxpayers will ultimately bear the costs of shortfalls. Even if DOE's estimates of subsidy costs are reasonably accurate, some borrowers may not pursue a guarantee because they perceive the fee to be too high relative to the benefits of the guarantee, affecting the project's financial viability. To the extent that this financial viability is not distributed evenly across the technologies targeted by Title XVII, projects in DOE's portfolio may not represent the range of technologies targeted by the program.
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-08-750, Department of Energy: New Loan Guarantee Program Should Complete Activities Necessary for Effective and Accountable Program Management
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
July 2008:
Department Of Energy:
New Loan Guarantee Program Should Complete Activities Necessary for
Effective and Accountable Program Management:
GAO-08-750:
GAO Highlights:
Highlights of GAO-08-750, a report to congressional committees.
Why GAO Did This Study:
Title XVII of the Energy Policy Act of 2005 established DOE‘s loan
guarantee program (LGP) for innovative energy projects that should
decrease air pollutants or greenhouse gases and that have a reasonable
prospect of repayment. For fiscal years 2008 and 2009, Congress
authorized the use of borrower fees to pay the costs of loan guarantees
through Title XVII‘s ’borrower pays“ option, under which DOE will limit
loan guarantees to $38.5 billion. Congress mandated that GAO review
DOE‘s progress in implementing the LGP. GAO assessed DOE‘s progress in
(1) issuing final regulations and (2) taking actions to help ensure
that the program is managed effectively and to maintain accountability.
GAO also assessed how inherent risks due to the nature of the LGP may
affect DOE‘s ability to achieve intended program outcomes. GAO analyzed
DOE‘s regulations, guidance, and program documents and files; reviewed
Title XVII; and interviewed DOE officials.
What GAO Found:
In October 2007, DOE issued regulations that govern the LGP and include
requirements for application submissions, project evaluation factors,
and lender eligibility and servicing requirements. The regulations also
generally address requirements set forth in applicable guidance. Some
key aspects of the initial LGP guidelines were revised in the
regulations to help make the program more attractive to lenders and
potentially reduce financing costs for projects. For example, the
maximum loan guarantee percentage increased from 80 to 100 percent of
the loan. In addition, the regulations define equity as ’cash
contributed by the borrowers,“ but DOE officials told us they also plan
to consider certain non-cash contributions, such as land, as equity. As
a result, applicants may not fully understand the program‘s equity
requirements. DOE is not well positioned to manage the LGP effectively
and maintain accountability because it has not completed a number of
key management and internal control activities. As a result, DOE may
not be able to process applications efficiently and effectively,
although it has begun to do so. DOE has not sufficiently determined the
resources it will need or completed detailed policies, criteria, and
procedures for evaluating applications, identifying eligible lenders,
monitoring loans and lenders, estimating program costs, or accounting
for the program”key steps that GAO recommended DOE take over a year
ago. DOE also has not established key measures to use in evaluating
program progress. Risks inherent to the LGP will make it difficult for
DOE to estimate subsidy costs, which could lead to financial losses and
may introduce biases in the projects that receive guarantees. The
nature and characteristics of the LGP and uncertain future economic
conditions increase the difficulty in estimating the LGP‘s subsidy
costs. Because the LGP targets innovative technologies and the projects
will have unique characteristics”varying in size, technology, and
experience of the project sponsor”evaluating the risks of individual
projects will be complicated and could result in misestimates. The
likelihood that DOE will misestimate costs, along with the practice of
charging fees to cover the estimated costs, may lead to biases in the
projects that receive guarantees. Borrowers who believe DOE has
underestimated costs and has consequently set fees that are less than
the risks of the projects are the most likely to accept guarantees. To
the extent that DOE underestimates the costs and does not collect
sufficient fees from borrowers to cover the full costs, taxpayers will
ultimately bear the costs of shortfalls. Even if DOE‘s estimates of
subsidy costs are reasonably accurate, some borrowers may not pursue a
guarantee because they perceive the fee to be too high relative to the
benefits of the guarantee, affecting the project‘s financial viability.
To the extent that this financial viability is not distributed evenly
across the technologies targeted by Title XVII, projects in DOE‘s
portfolio may not represent the range of technologies targeted by the
program.
What GAO Recommends:
GAO suggests Congress consider limiting loan guarantee commitments DOE
can make until it has put adequate controls in place. In this regard,
GAO is recommending actions by DOE to help ensure that the LGP will be
well managed. DOE disagreed with two recommendations, indicated it has
largely accomplished four, and disagreed with the matter for
congressional consideration. GAO reaffirms its recommendations and
matter for congressional consideration.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-750]. For more
information, contact Frank Rusco at (202) 512-3841 or ruscof@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
DOE Issued Regulations That Contained Required Elements, but One Key
Aspect Is Not Clear:
DOE Has Not Fully Implemented Activities Necessary for Effective and
Accountable Program Management:
Inherent Risks Will Make Estimating Subsidy Costs Difficult and May
Introduce Self-Selection Biases in the Projects That Ultimately Receive
Loan Guarantees:
Conclusions:
Matter for Congressional Consideration:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Title XVII Categories, DOE's First Solicitation, and
Projects DOE Invited to Submit Full Applications for Loan Guarantees:
Appendix III: Comments from the Department of Energy:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Project Categories for Title XVII and DOE Solicitation:
Table 2: Projects Invited to Submit Full Applications:
Figure:
Figure 1: DOE's Key Actions to Set Up Its LGP:
Abbreviations:
CBO: Congressional Budget Office:
CRB: Credit Review Board:
DOE: Department of Energy:
FFB: Federal Financing Bank:
LGP: Loan Guarantee Program:
FCRA: Federal Credit Reform Act of 1990:
EPAct 2005: Energy Policy Act of 2005:
OMB: Office of Management and Budget:
OPIC: Overseas Private Investment Corporation:
United States Government Accountability Office:
Washington, DC 20548:
July 7, 2008:
The Honorable Byron Dorgan:
Chairman:
The Honorable Pete Domenici:
Ranking Member:
Subcommittee on Energy and Water Development:
Committee on Appropriations:
United States Senate:
The Honorable Peter J. Visclosky:
Chairman The Honorable David L. Hobson:
Ranking Member:
Subcommittee on Energy and Water Development:
Committee on Appropriations:
House of Representatives:
Title XVII of the Energy Policy Act of 2005 (EPAct 2005)--Incentives
for Innovative Technologies--authorized the Secretary of Energy to
implement a new loan guarantee program (LGP) for energy projects that
satisfy three criteria: avoid, reduce, or sequester air pollutants or
greenhouse gases; employ new or significantly improved technologies
compared with commercial technologies in service at the time the
guarantee is issued; and provide a reasonable prospect of
repayment.[Footnote 1] To date, the Department of Energy (DOE) has not
approved any loan guarantees under the LGP.
Federal loan guarantee programs help borrowers obtain access to credit
with more favorable terms than they may otherwise obtain in private
lending markets because the federal government guarantees to pay
lenders if the borrowers default, which makes extending credit more
attractive to lenders. However, loan guarantee programs can expose the
government to substantial financial risks. In the past, problems with
loan guarantee programs have occurred, in part, because agencies did
not exercise due diligence during the loan origination and monitoring
processes. In addition, agencies have had difficulty estimating program
costs because of faulty assumptions that caused cost estimates to be
too low, limited historical data, and deficient policies and procedures
for assessing risk and estimating costs.
Title XVII has a requirement related to the subsidy cost of the LGP:
DOE must either receive an appropriation for the subsidy cost or it
must collect fees from borrowers to cover the subsidy cost (referred to
as the "borrower pays" option). In DOE's appropriations acts for fiscal
years 2007 and 2008, Congress specifically instructed DOE to proceed
under the borrower pays option. The subsidy cost, as defined by the
Federal Credit Reform Act (FCRA) of 1990, is the government's estimated
net long-term cost, in present value terms,[Footnote 2] of direct or
guaranteed loans over the entire period the loans are outstanding (not
including administrative costs). In calculating the subsidy cost for a
guaranteed loan program, agencies estimate (1) payments from the
government to cover interest subsidies, defaults, delinquencies, or
other payments, and (2) payments to the government, including fees,
penalties, and recoveries on defaults. Under FCRA, DOE would estimate
the expected subsidy costs before issuing loan guarantees and is
generally required to annually update, or reestimate, this cost to
reflect actual loan performance and changes in expected future loan
performance. To the extent that DOE underestimates subsidy costs and
does not collect enough fees from borrowers, taxpayers will ultimately
make up the difference.
Through the appropriations process, Congress authorizes the amount of
loans that may be guaranteed, thereby setting limits on the
government's exposure to financial losses. For DOE's LGP, Congress
appropriated funds out of any borrower fees to be received for DOE to
make up to $4 billion of loan guarantees for fiscal year 2007 and
placed no cap on guarantees for fiscal years 2008 and 2009.[Footnote 3]
Because of the financial risks associated with loan guarantees under
the LGP, we assessed DOE's efforts to implement the program in early
2007. We reported that rather than taking and completing key steps to
better ensure that the LGP would be well managed and accomplish its
objectives, DOE focused on soliciting preapplications for proposed
projects.[Footnote 4] We recommended that before DOE select eligible
projects for loan guarantees, it first issue program regulations,
develop policies and procedures for operating the program, and define
goals and metrics to measure program effectiveness. Subsequently, in
Public Law 110-5, Congress directed DOE not to award any loan
guarantees until it issued final regulations. These regulations were to
include programmatic, technical, and financial factors for the
Secretary of Energy to use in selecting projects, as well as policies
and procedures to monitor loans and lenders.[Footnote 5]
Congress also mandated that we annually review DOE's progress in
implementing the LGP and directed us to report to the House and Senate
Committees on Appropriations to help inform their oversight. In
response, we assessed DOE's progress in (1) issuing final regulations
to govern the program and (2) taking actions to help ensure that the
program is managed effectively and to maintain accountability. We also
examined whether inherent risks due to the nature and characteristics
of the LGP may affect DOE's ability to make the program pay for itself
and support a broad spectrum of innovative energy technologies.
For this assessment, we reviewed and analyzed Title XVII of EPAct 2005,
Office of Management and Budget (OMB) guidance on federal credit
programs, GAO's guidance on Government Performance and Results Act and
standards for internal control,[Footnote 6] DOE's program guidance and
regulations, and other information. We interviewed relevant DOE
officials. We also reviewed preapplication files to determine if DOE
conducted its review process consistently and documented its decisions
sufficiently. We did not evaluate the technical or financial soundness
of the projects DOE invited to apply for loan guarantees. To examine
whether the inherent risks due to the nature and characteristics of the
LGP may affect DOE's ability to make the program pay for itself and
support a broad spectrum of innovative energy technologies, we reviewed
reports by the Congressional Budget Office (CBO) and reviewed past GAO
reports of other loan programs that had some similar characteristics
with the LGP. We did not assess the benefits of this program because
doing so at this stage would be premature. It remains to be seen what
projects will receive loan guarantees and when this may occur. We
recognize that the program could have substantial benefits; our
assessment of how the nature and characteristics of the LGP may affect
its effectiveness is not intended to address its overall merits.
Rather, our intent is to highlight how these aspects of the program
could have a bearing on program performance and what the LGP can
achieve. We conducted this performance audit from September 2007
through June 2008, with limited updates after we sent the draft report
to DOE for comment on May 13, in accordance with generally accepted
government auditing standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide
a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our audit objectives. A
further discussion of our scope and methodology is presented in
appendix I.
Results in Brief:
In October of 2007, DOE issued final regulations that govern the LGP,
including requirements for preapplication and application submissions;
programmatic, technical and financial evaluation factors for
applications; and lender eligibility and servicing requirements. The
regulations generally include requirements set forth in applicable
guidance. Some key aspects of the initial program guidelines were
changed in the final regulations to help make the program more
attractive to lenders and potentially reduce financing costs for
projects. For example, the maximum guarantee percentage was increased
from 80 percent to 100 percent of the loan; the loan itself remained
limited to no more than 80 percent of the project costs. This change
increased the risk that the government is willing to assume on a
project by project basis. In addition, we identified one key aspect of
the regulations related to the project's equity commitment that is not
clear. Specifically, the regulations define equity as "cash contributed
by the borrowers," but DOE plans to consider certain non-cash
contributions, such as land, as equity. As a result, potential
applicants may not have a full understanding of the program's equity
requirements.
DOE is not well positioned to manage the LGP effectively and maintain
accountability because it has not completed a number of management and
internal control activities key to carrying out the program. As a
result, DOE may not be able to process applications efficiently and
effectively. In particular, while DOE officials told us they have begun
to review the first submitted application and will begin reviewing
other applications as soon as they are submitted, DOE has not
sufficiently determined the type and timing of contractor resources it
will need to do so. Furthermore, although DOE has developed guidance
for applicants to follow in submitting applications, it has not
developed detailed policies and procedures, including roles and
responsibilities and criteria that demonstrate how DOE plans to
evaluate the applications. In addition, it has not completed policies
and procedures to identify eligible lenders, monitor loans and lenders,
estimate the costs of the program, or account for the program--key
steps that we recommended over a year ago and most of which DOE
reported to Congress that it would have completed by now. Finally, DOE
has not established key measures to use in evaluating program progress.
Risks inherent to the LGP will make it difficult for DOE to estimate
subsidy costs with a reasonable degree of accuracy, which could lead to
financial losses and may introduce biases in the projects that
ultimately receive loan guarantees. The nature and characteristics of
the program and uncertain future economic conditions greatly increase
the difficulty of estimating the program's subsidy costs. For example,
because the LGP targets innovative energy technologies and because
projects will likely have unique characteristics--varying in size,
technology, and experience of the project sponsor--evaluating the risks
of individual projects applying for loan guarantees will be
complicated. The Congressional Budget Office (CBO) has estimated that
DOE will charge companies fees at least one percent lower than costs,
on average. The likelihood that DOE will misestimate costs, along with
the "borrower pays" feature requiring DOE to collect fees to cover
estimated costs, may introduce biases in the projects that ultimately
receive loan guarantees and result in financial losses to the
government. Because potential borrowers will generally know more about
their projects' risks and creditworthiness than DOE, potential
borrowers will be more likely to accept loan guarantees when DOE has
underestimated their projects' risks--and thus set the fee too low--
than in cases for which DOE has overestimated the risks and fees. This
would cause DOE's portfolio to have more projects for which the fee was
underestimated rather than overestimated. To the extent that DOE
underestimates the costs of the program and does not collect sufficient
fees from borrowers to cover the true costs, taxpayers will ultimately
bear the costs of shortfalls. Such shortfalls are automatically funded
by the federal government under the terms of the FCRA[Footnote 7] and
are not subject to congressional scrutiny during the annual
appropriation process. In addition, even in instances where DOE's
estimates of subsidy costs are reasonably accurate, the "borrower pays"
option may cause some potential borrowers to not pursue loan guarantees
because the fee is too high relative to the benefits to the borrower of
the loan guarantee. To the extent that certain types of projects or
technologies are more likely than others to have fees that are too high
to remain economically viable, the projects that ultimately receive
loan guarantees may not represent the full range of technologies that
are targeted by Title XVII.
To the extent that Congress intends for the program to fully pay for
itself, and to help minimize the government's exposure to financial
losses, we are suggesting that Congress consider limiting the amount of
loan guarantee commitments DOE can make under Title XVII until DOE has
put into place adequate management and internal controls by completing
sufficient actions on key policies, procedures, and activities. We are
also making recommendations to assist DOE in this regard.
In commenting on a draft of this report, DOE stated that two of our six
recommendations were inapplicable to the LGP, indicated it has largely
accomplished the remaining four recommendations, and disagreed with our
matter for congressional consideration. DOE further stated that our
report contains flawed logic, significant inaccuracies, and omissions;
however, we believe our evidence is sound and convincing and that DOE
did not provide evidence to support these assertions.
In particular, DOE stated that we placed disproportionate emphasis on
activities that should be completed for a fully implemented loan
guarantee program rather than one that is currently being implemented,
and that we overlooked DOE's accomplishments to date. We disagree. We
believe that our report accurately assesses the LGP in its early
development stage and focused our report's analysis and recommendations
on activities that should be completed before DOE begins to
substantively review any applications. DOE states that it will have
completed many of these activities before it issues loan guarantees,
but we continue to believe these activities should be completed before
DOE reviews applications and negotiates with applicants so that it can
operate the program prudently--and minimize inefficiencies and
inconsistencies it may face in not having these activities completed or
in place before proceeding with its operations. In several cases, DOE
cites as complete, documents and activities that were, and still are at
the time of this report, in draft form. For example, in several
instances DOE states that it has "implemented" its credit subsidy
model. However, as of June 24, 2008, DOE stated that OMB had not
approved its model. Further, DOE illustrated in an updated timetable it
provided in appendix B of its comment letter that a majority of these
activities are not yet complete and that several will not be complete
until the end of the calendar year 2008. DOE's entire letter, including
its appendixes, is reproduced as appendix III of this report.
Background:
Title XVII of EPAct 2005--Incentives for Innovative Technologies--
authorized DOE to guarantee loans for projects that satisfy all three
of the following criteria: (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. Title XVII identifies 10 categories of projects that are
eligible for a loan guarantee, such as renewable energy systems,
advanced fossil energy technologies, and efficient end-use energy
technologies. Appendix II provides a list of these categories.
The LGP office is under DOE's Office of the Chief Financial Officer.
LGP's actions are subject to review and approval by a Credit Review
Board.[Footnote 8] The Board met for the first time in April 2007; it
approves major policy decisions of the LGP, reviews LGP's
recommendations to the Secretary of Energy regarding the issuance of
loan guarantees for specific projects, and advises the Secretary on
loan guarantee matters.[Footnote 9] DOE first received appropriated
funds for the LGP's administrative costs in early 2007 and began
processing preapplications--in response to the August 2006
solicitation--and at the same time began to obtain staff and take other
steps to initiate the program. During 2007, it reviewed preapplications
for 143 projects and in October 2007 invited 16 of the preapplicants to
submit full applications for loan guarantees. Appendix II includes
information on the 16 projects invited to submit full applications. In
general, according to DOE, the processing of full applications will
require DOE to have numerous interactions with the applicants and
private lenders. It will also require financial, technical,
environmental, and legal advisors to assist with underwriting,
approving, and issuing a loan guarantee. DOE estimated that the time
between receiving an application and completing negotiations for a loan
guarantee contract would range from 9 to 25 months, with additional
time at the beginning to prepare and issue the solicitation and at the
end to close the loan.
On April 11, 2008, DOE issued a fiscal year 2008 implementation plan
for $38.5 billion in solicitations, to respond to a requirement that
DOE provide Congress information about future solicitations 45 days
prior to issuing them.[Footnote 10] On June 30, 2008, DOE
simultaneously issued three solicitations that total $30.5 billion--on
(1) efficiency, renewable energy, and electric transmission ($10
billion), (2) nuclear power facilities ($18.5 billion), and (3) nuclear
facilities for the "front end" of the nuclear fuel cycle ($2 billion).
DOE plans to subsequently issue a fourth solicitation in late summer
2008 for advanced fossil energy projects ($8 billion).[Footnote 11] DOE
is also required to annually provide Congress a report on all
activities under Title XVII and issued the first report on June 15,
2007.[Footnote 12] Figure 1 shows a timeline of these and other key
program events since 2005 that illustrate the status of the LGP through
June 2008.
Figure 1: DOE's Key Actions to Set Up Its LGP:
This figure is a timeline of DOE's key actions to set up its LGP.
August 2005: Energy Policy Act of 2005 creates DOE‘s LGP.
August 2006: DOE invites interested parties to submit preapplications
and issues guidelines for solicitation.
December 2006: DOE closes solicitation for preapplications; 143 project
proposals received.
February 2007: Credit Review Board charter approved. DOE receives its
first appropriation apportionment to fund LGP administrative
operations.
March 2007: Congress appropriates funds from any borrower fees DOE
receives for DOE to make up to $4 billion of loan guarantees.
April 2007: Technical review of preapplications begins.
May 2007: DOE issues proposed regulations.
June 2007: Financial review of preapplications begins. DOE holds public
meeting to obtain comments on its proposed regulations.
August 2007: LGP director announced.Program offices and LGP conduct
joint technical and financial review meetings to develop initial
recommendations for preapplications projects.LGP conducts secondary
review session to develop final list of preapplications projects to
recommend to the Credit Review Board.
October 2007: Congress appropriates an unlimited amount of funds from
any borrower fees DOE receives for loan guarantees. The legislation‘s
explanatory language states that loan guarantees should be limited to
$38.5 billion in fiscal years 2008 and 2009.
December 2007: DOE announces final regulations and invites 16
preapplication projects to apply for guarantees.
April 2008: DOE submits its fiscal year 2008 implementation plan for
solicitations to Congress.DOE receives its first loan guarantee
application.
June 2008: DOE issues three solicitations totaling up to $30.5 billion
that invite interested parties to submit applications for loan
guarantees.
[See PDF for image]
Source: GAO presentation of DOE information.
[End of figure]
DOE Issued Regulations That Contained Required Elements, but One Key
Aspect Is Not Clear:
On October 23, 2007, DOE's final regulations for the LGP were published
in the Federal Register. DOE had previously issued program guidelines
in August 2006. The final regulations contain requirements for
preapplication and application submissions; programmatic, technical and
financial evaluation factors for applications; and lender eligibility
and servicing requirements. The regulations incorporate and further
clarify requirements of Title XVII related to eligibility, fees,
default conditions, and audit documentation. The regulations also
generally incorporate requirements set forth in OMB Circular A-129
Policies for Federal Credit Programs and Non-Tax Receivables, which
prescribes policies and procedures for federal credit programs, such as
applicant screening, lender eligibility, and corrective actions.
Because loan guarantee programs pose significant financial risks, it is
important to include appropriate mechanisms to help protect the federal
government and American taxpayers from excessive or unnecessary losses.
DOE changed some key aspects of the initial program guidelines in its
final regulations to help make the program more attractive to lenders
and potentially reduce financing costs for projects. These changes
included increasing the maximum guarantee percentage, allowing the
lender to separate or "strip" the nonguaranteed portion of the debt,
and revising its interpretation of a Title XVII requirement that DOE
have superior right to project assets pledged as collateral. Other
important changes relate to increased specificity in key definitions
and a requirement for independent engineering reports. Specifically, we
found the following:
* Guarantee percentage. The final regulations allow for loan guarantees
of up to 100 percent of the loan amount, which is limited to no more
than 80 percent of the project costs, provided that, for a 100 percent
guarantee, the loan must be disbursed by the Federal Financing Bank
(FFB).[Footnote 13] The use of the FFB is required, in part, because a
private lender may exercise less caution when underwriting and
monitoring a loan with a 100 percent guarantee. The guidelines stated
that DOE preferred not to guarantee more than 80 percent of the loan
amount, which was limited to no more than 80 percent of the project
costs. Because the regulations increased the maximum guarantee
percentage, this change increases the risk that the government is
willing to assume on a project by project basis.
* Stripping the nonguaranteed portion. When DOE guarantees 90 percent
or less of a loan, the final regulations allow the nonguaranteed
portion of a loan to be separated or "stripped" from the guaranteed
portion. This change allows lenders greater flexibility in selling
portions of a loan on the secondary market and could reduce overall
funding costs for projects. In contrast, the guidelines and the
proposed regulations did not allow stripping.
* Superiority of rights. Title XVII requires DOE to have superior
rights to project assets pledged as collateral. In the proposed
regulations, DOE interpreted this provision to require DOE to possess
first lien priority to assets pledged as collateral. Therefore, holders
of nonguaranteed portions of loans would be subordinate to DOE in the
event of a default. In the final regulations, DOE changed its
interpretation to allow proceeds received from the sale of project
assets to be shared with the holders of nonguaranteed portions of loans
in the event of a default. As noted in public comments on the proposed
regulations, this practice is an established norm in project lending.
DOE stated that it retains superiority of rights, as required by Title
XVII, because DOE has sole authority to determine whether, and under
what terms, the project assets will be sold at all.
* Key definitions. In the context of "innovative technologies," the
final regulations added a definition that clarified the definition of
what constitutes a "new or significantly improved" technology,
considerably expanded the definition of "commercial" technology already
in use, and clearly linked the definitions to each other. According to
the regulations, a new or significantly improved technology is one that
has only recently been developed or discovered and involves a
meaningful and important improvement in productivity or value in
comparison with the commercial technology in use. DOE's regulations
define a commercial technology as being in general use if it is
employed by three or more commercial projects in the United States for
at least 5 years.
* Independent engineering report. The final regulations require the
applicant to provide an independent engineering report on the project,
which was not required under the guidelines. According to the
regulations, the engineering report should assess the project,
including its site information, status of permits, engineering and
design, contractual requirements, environmental compliance, testing and
commissioning, and operations and maintenance.
Although the final regulations generally address requirements from
applicable guidance, we identified one key aspect related to equity
requirements that is not clear. The final regulations state that DOE
will evaluate whether an applicant is contributing significant equity
to the project. The regulations define equity as "cash contributed by
the borrowers and other principals." Based on this definition, it
appears that non-cash contributions, such as land, would not be
considered equity. However, the LGP director told us that land and
certain other non-cash contributions could be considered equity. As a
result, the regulations do not fully reflect how DOE is interpreting
equity and potential applicants may not have a full understanding of
the program's equity requirements.
DOE Has Not Fully Implemented Activities Necessary for Effective and
Accountable Program Management:
DOE may not be well positioned to manage the LGP effectively and
maintain accountability because it has not completed a number of
management and internal control activities key to carrying out the
program. As a result, DOE may not be able to process applications
efficiently and effectively, even though DOE has begun to review its
first application, and officials told us they will begin reviewing
other applications as soon as they are submitted. The key activities
that DOE has not sufficiently completed include (1) clearly defining
its key milestones and its specific resource needs, (2) establishing
policies and procedures for operating the program, and (3) agreeing
upon key measures to evaluate program progress. The nature and
characteristics of the LGP expose the government to substantial
inherent risk; implementing these management and internal control tools
is a means of mitigating some risks.
DOE Has Begun Its Application Review Process before Clearly Defining
Program Milestones and Specific Resource Needs:
According to our work on leading performance management practices,
agencies should have plans for managing their programs that identify
goals, strategies, time frames, resources, and stakeholder involvement
in decision making. In January 2008 DOE completed a "concept of
operations" document that contains, among other things: information on
the LGP's organizational structure; mission, goals, and objectives; and
timelines, milestones, and major program activities that must be
accomplished and their sequence. However, LGP officials told us they do
not consider the concept of operations a strategic or performance
planning document. In addition, it is unclear whether LGP plans to set
other timelines and milestones that would be available to stakeholders,
such as applicants and Congress. Without associating key activities
with the time frames it aims to meet, it is unclear how DOE can
adequately gauge its progress or establish and maintain accountability
to itself and stakeholders.
As of March 2008, 14 of the 16 companies invited to submit full
applications reported that they plan to submit their applications to
DOE by the end of September 2008, and the other 2 plan to submit by the
end of January 2009. DOE received one application in April 2008, which
it has begun to review, and DOE officials told us they will begin
reviewing other applications as soon as they are submitted. This influx
of applications could cause a surge in workload, but it is not clear
that DOE has obtained the resources it needs to carry out its
application review activities. Although it is critical for agencies to
determine the timing and type of resources needed, DOE has not
determined the number and type of contractor resources it will need to
review the applications, which could lead to delays. For example, DOE
expects to need legal, engineering, environmental, and financial
contracting expertise but has not completed plans describing the types
of expertise needed, estimated when the expertise will be required, or
determined to what extent each type of expertise will be needed.
According to the LGP director, much of this expertise will have to be
acquired through new contracts that DOE must negotiate and that
generally take some months to put into place. To the extent that these
resources are not available when needed, DOE could experience delays in
reviewing the applications. In early April 2008, the LGP director said
that his office is working with other DOE offices to develop these
contracts and considers this activity high priority; while the
completion date for an acquisition and contract vehicles strategy was
initially set for the end of April, the timetable DOE includes in its
agency comments letter indicates an August 2008 completion date. In
addition, as of April the LGP office was 7 staff short of its
authorized level of 16 for fiscal year 2008; the director told us it
has faced delays in hiring permanent staff, although he indicated that
the office has enough permanent staff to review the first 16
applications.[Footnote 14] He also said that the permanent and
contractor staff LGP has hired have many years of project finance or
loan guarantee experience at other institutions.
DOE Has Not Completed Key Policies and Procedures:
Management has a fundamental responsibility to develop and maintain
effective internal controls to help ensure that programs operate and
resources are used efficiently and effectively to achieve desired
objectives and safeguard the integrity of their programs. As of May
2008, DOE had not completed policies and procedures to select loans,
identify eligible lenders and monitor loans and lenders, estimate the
costs of the program, or account for the program, despite reporting to
Congress in June 2007 that it would have completed most of these
activities by the end of fiscal year 2007.
Selecting Loans:
OMB Circular A-129 calls for agencies to develop policies and
procedures to select loans, including appropriate applicant screening
standards to determine eligibility and creditworthiness. In this
regard, from August 2006 through October 2007, DOE conducted a
preapplication process to help it develop final regulations; develop
and test policies, criteria, and procedures for reviewing
preapplications; and determine which projects it would invite to apply
for loan guarantees. Conducting the preapplication process also enabled
DOE to respond to congressional interest in launching the program,
according to DOE officials.
We found that, during its preapplication review process, DOE did not
always sufficiently document why it ultimately selected projects that
reviewers did not score highly or recommend initially. DOE documented
the results of the selection process, including its technical and
financial reviews for individual projects, its joint technical-
financial reviews for categories of projects, and its decisions made
during its secondary review process. However, we found that DOE's
documentation for deciding which projects to recommend to the Credit
Review Board did not always provide sufficient justification. While our
discussions with DOE officials helped clarify the documentation for 6
of the 16 invited projects, they did not for 2 of those projects.
According to DOE officials, they gave greater weight to the technical
merit than the financial merit of the projects during the
preapplication selection process. In addition, a consultant DOE hired
to review the preapplication process found that although the files were
in "good working order," DOE did not consistently conduct and document
its technical evaluations and did not document financial evaluations in
depth. The consultant recommended that DOE take steps to establish
standards for these evaluations and increase the level of transparency
in the preapplication evaluation process.
We also found that the financial and technical criteria DOE used to
review the preapplications were not sufficiently defined in some cases.
For example, a requirement that is central in considering projects'
overall eligibility--whether it is "innovative," also known as "new and
significantly improved"--was difficult to determine, according to
several program managers and reviewers. After the initial review
process was completed, DOE further defined what it considers "new and
significantly improved" in its final regulations, but has not
correspondingly updated the review criteria. In addition, when DOE
conducted its financial reviews, it evaluated projects by assigning
scores between zero and four--with zero being the weakest score and
four being the strongest score. However, DOE did not define what the
possible scores signified. Moreover, 60 percent of a preapplicant's
financial score was based on creditworthiness; yet, DOE did not require
preapplicants to submit pertinent financial and credit information such
as audited financial statements or credit histories.
DOE has not fully developed detailed internal policies and procedures,
including criteria, for selecting applications. To review the first 16
projects, DOE officials told us they will use criteria developed for
the preapplication process. For projects that apply in response to
future solicitations, DOE plans to amend current preapplication
criteria and develop additional evaluation factors that will be
specific to certain technology areas or sectors. According to DOE
officials, as of May 2008, DOE has also hired one staff person to
develop credit policies and procedures specific to LGP, and to fully
establish its credit policy function. They also said that these credit
policies and procedures would provide internal guidance related to some
aspects of application review.
DOE officials told us they also expect the application process guidance
they developed for companies to also serve as internal review policies
and procedures. This guidance provides instructions on the content and
format applicants should adhere to when applying for a guarantee, such
as background information; a project description; and technical,
business, and financing plans. The guidance generally aligns with
information in the final regulations on the factors DOE plans to review
and should make it easier for companies to develop applications.
However, in some cases the guidance lacks specificity for applicants.
In addition, when considering the guidance for use as internal policies
and procedures, as DOE has indicated it will be used, we determined
that it does not contain criteria or guidance that would be sufficient
for DOE reviewers. Specifically, it lacks instruction and detail
regarding how DOE will determine project eligibility and review
applications, such as roles and responsibilities, criteria for
conducting and documenting analyses, and decision making. For example,
we found the following:
* Project eligibility. DOE does not delineate how it will evaluate
project eligibility--that is, how each project achieves substantial
environmental benefits and employs new or significantly improved
technologies. The guidance requires applicants to submit background
information on the technologies and their anticipated benefits but does
not require enough detail for DOE to assess the information. Without
such detail, it is unclear how DOE will measure each project's
contribution to the program.
* Independent engineer's report. DOE's guidance does not provide
sufficient detail on the technical information applicants should submit
in this report, even though the guidance requires that the report
comprehensively evaluate five technical elements as well as contractual
requirements and arrangements.[Footnote 15] DOE officials told us that
applicants generally develop this report for investors and that the
reports will likely be of varying quality and detail. DOE officials
also expect that, in developing a separate report that assesses this
information, they will likely need to fill considerable gaps and
conduct additional analyses. While DOE recognizes these reports serve
an important due diligence function, DOE has not provided applicants
with specific instructions on what to include. As a result, DOE is
likely to lose efficiency and effectiveness when it uses the reports to
aid in evaluating loan guarantee applications.
* Creditworthiness. For a company to be eligible for a loan guarantee,
a reasonable prospect of repayment must exist and the applicant cannot
have delinquent federal debt, which is critical to determine at the
beginning of the review process to assess whether an applicant is even
eligible. Therefore, a sound assessment of creditworthiness is
essential. However, the criteria DOE has established to evaluate
creditworthiness--which it used during the preapplication process and
plans to use for future applications--did not take into account the
more meaningful and thorough information required for the full
application process. In addition, while DOE's guidance requests
applicants to submit more complete information, such as a credit
assessment, it does not provide details regarding how DOE will evaluate
the information to determine creditworthiness.
* Project cost information. DOE's guidance for the application process
instructs applicants to indicate if their cost estimates are firm or
subject to change, but it does not request applicants to report a level-
of-confidence in their total project estimates. GAO has reported that
for management to make good decisions and determine if a program is
realistically budgeted, the estimate must quantify the uncertainty so
that a level of confidence can be given about the estimate.[Footnote
16] For example, an uncertainty analysis could inform DOE management
that there is a 60 percent chance that a project's cost will be greater
than estimated. Without requiring information on the uncertainty in
project cost estimates and specifying how it will assess that
information, DOE may not be able to appropriately determine a project's
feasibility and identify projects that could eventually require
substantially more investment or loans for completion.
Without sufficient internal policies and procedures that correspond to
application components, DOE's application review process will lack
transparency and it will be difficult for DOE to consistently,
thoroughly, and efficiently evaluate project applications.
Identifying Eligible Lenders and Monitoring Loans and Lenders:
OMB Circular A-129 calls for agencies to establish policies and
procedures to identify eligible lenders and to monitor loans and
lenders. DOE has hired a director of monitoring and, according to DOE
officials, is currently developing policies and procedures that will
include (1) processes for identifying eligible lenders through a
competitive process, as well as an associated checklist and guide for
evaluating potential lenders, and (2) loan servicing and monitoring
guidelines. These policies and procedures may build upon the monitoring
policies of the Overseas Private Investment Corporation
(OPIC).[Footnote 17] Implementing rigorous monitoring policies and
procedures will help DOE ensure the success of the loan guarantee
program. According to DOE officials, these policies and procedures will
be completed before DOE issues the first loan guarantees.
Estimating Subsidy Costs:
As required by the LGP's fiscal years 2007 and 2008 appropriation, DOE
plans to charge borrowers fees to cover subsidy costs, as permitted by
Title XVII. However, estimating the subsidy cost for the LGP will be
difficult because of inherent risks due to the nature and
characteristics of the program. To the extent that DOE underestimates
the costs and does not collect enough fees from borrowers, taxpayers
will ultimately be responsible for any shortfall. Therefore, it is
critical that DOE have a sound and comprehensive methodology to develop
its cost estimates. Guidance on preparing subsidy cost estimates lists
procedures necessary to estimate subsidy costs, such as the development
of a cash flow model; the review and approval process; and
documentation of the cash flow model and underlying
assumptions.[Footnote 18] OMB Circular A-129 requires agencies to
develop models to estimate subsidy costs before obligating direct loans
and committing loan guarantees. According to LGP officials, DOE has
submitted a draft subsidy cost model to OMB for approval and has
drafted documentation for the subsidy calculation process.
Estimating Administrative Costs:
Title XVII requires DOE to collect fees from borrowers to cover
applicable administrative costs. Such costs could include costs
associated with evaluating applications; offering, negotiating, and
closing guarantees; and servicing and monitoring the guarantees. The
federal accounting standard for cost accounting[Footnote 19] states
that cost information is an important basis for setting fees and
reimbursements and that entities should report the full cost of
programs, including the costs of (1) resources the office uses that
directly or indirectly contribute to the program, and (2) identifiable
supporting services other offices provide within the reporting entity.
While DOE has prepared a schedule of fees to be charged for the first
solicitation, it could not provide support for how it calculated the
fees. DOE officials stated that they used professional judgment as a
basis for the fee structure. However, DOE has not developed polices and
procedures to estimate administrative costs, including a determination
of which costs need to be tracked. For example, DOE has not tracked
administrative costs associated with the time general counsel staff
have spent working on issues related to the LGP. Therefore, DOE lacks
assurance that the fees it collects will fully cover applicable
administrative costs, particularly support costs from offices outside
of the LGP office, such as the general counsel. According to DOE
officials, some element of judgment must be used at this time in the
determination of fees and as more experience is gained they will be
able to develop policies and procedures designed to ensure that
adequate fees are collected to cover administrative costs.
Accounting for the Loan Guarantee Program:
In April 2008, DOE officials told us that policies and procedures to
account for the LGP are nearly complete. Under the LGP regulations, DOE
may issue loan guarantees for up to 100 percent of the loan amount as
long as FFB disburses the loan. OMB Circular A-11, Preparation,
Submission and Execution of the Budget, calls for credit issued by FFB
to be budgeted for as a direct loan. Because the accounting treatment
mirrors the budgeting, DOE would also account for such loans as direct
loans. Accordingly, DOE has indicated that the policies and procedures
will cover accounting for both direct loans and loan guarantees.
DOE Has Not Completed Its Framework for Evaluating Program Progress:
DOE has also not completed the measures and metrics it will use to
evaluate program progress. DOE included some of these in its fiscal
year 2009 budget request and its concept of operations document, but
LGP's director told us the measures and metrics have not been made
final because DOE and OMB have not yet agreed on them. In assessing the
draft measures and metrics, we observed the following shortcomings:
* DOE intends to measure outcomes directly tied to overall program
goals--installing new capacity, reducing greenhouse gas emissions, and
reducing air pollution--and has said it will develop baselines or
benchmarks for these outcomes. However, it has not yet gathered and
analyzed the necessary data on, for example, existing capacity or
current emission levels for categories of LGP project technologies.
* DOE included a measure for the recovery of administrative costs but
not one for the recovery of subsidy costs, which will most likely be
the more significant program cost.
* DOE's metric to assess the effectiveness of financing decisions--
containing the loss rate to 5 percent--may not be realistic; it is far
lower than the estimated loss rate of over 25 percent that we
calculated using the assumptions included in the fiscal year 2009
president's budget.[Footnote 20]
Inherent Risks Will Make Estimating Subsidy Costs Difficult and May
Introduce Self-Selection Biases in the Projects That Ultimately Receive
Loan Guarantees:
The nature and characteristics of the LGP will make estimating the
program's subsidy costs difficult even if DOE develops a sound and
comprehensive methodology. Evaluating the risks of individual projects
applying for loan guarantees will be difficult because the LGP targets
innovative energy technologies and because projects will likely have
unique characteristics--varying in size, technology, and experience of
the project sponsor. For the first solicitation alone, the technologies
range from a modest energy efficiency project to multiyear advanced
coal projects, and estimated project costs range from around $25
million to more than $2 billion. In fiscal year 2008, DOE plans to
further diversify the types of technology projects that it will
consider for its loan portfolio, including nuclear power facilities,
whose project costs may be more than $5 billion for each facility.
Further, DOE will not gain significant experience in each technology
because the program's objective is to commercialize a limited number of
each type of innovative technologies. Therefore, the types of projects
will, by design, evolve over time, and the experience and data that DOE
gains may not be applicable to evaluating the risks of projects
applying in the future.[Footnote 21]
The composition of DOE's eventual portfolio will even further limit the
data available to help DOE evaluate project risks. Unlike an agency
that provides a high volume of loan guarantees for relatively similar
purposes, such as student loans or home loans, DOE will likely approve
a small number of guarantees each year, leaving it with relatively
little experience to help inform estimates for the future. In addition,
DOE's loan guarantees will probably be for large dollar amounts,
several of which could range from $500 million to more than $1 billion
each. As a result, if defaults occur, they will be for large dollar
amounts and will likely not take place during easily predicted time
frames. Recoveries may be equally difficult to predict and may be
affected by the condition of the underlying collateral. In addition,
project risks and loan performance could depend heavily on regulatory
and legislative actions, as well as future economic conditions,
including energy prices and economic growth, which generally can not be
predicted accurately. These factors combine to make it difficult for
DOE to prepare reliable estimates of subsidy costs.[Footnote 22] To the
extent that DOE underestimates the costs of the LGP and does not
collect enough fees from borrowers, taxpayers will ultimately have to
pay for any shortfalls. Under FCRA, DOE is required to update, or
reestimate, the subsidy costs of LGP to reflect actual loan performance
and changes in expected future loan performance. Shortfalls identified
in annual reestimates are automatically funded by the federal
government under the terms of the FCRA and are not subject to
congressional scrutiny during the annual appropriation
process.[Footnote 23]
The likelihood of misestimates and the practice of charging fees to
cover all the estimated costs may lead to biases in the projects that
ultimately receive loan guarantees and tilt the portfolio of loan
guarantees toward those that will not pay for themselves. In general,
potential borrowers will know more about their projects and
creditworthiness than DOE. As a result, borrowers will be more likely
to accept loan guarantee offers if they believe DOE has underestimated
the projects' risks and therefore set the fee too low, than if they
believe DOE has overestimated risks. Underestimated fees amount to an
implicit subsidy. The CBO reported that such a bias in applicants'
acceptance of loan guarantees increases the likelihood that DOE's loan
guarantee portfolio will have more projects for which DOE
underestimated the fee. CBO evaluated the cost of the LGP and estimated
that DOE would charge companies, on average, at least 1 percent lower
than the likely costs of the guarantees.[Footnote 24] To the extent
that DOE underestimates the fee, and does not collect enough fees from
borrowers to cover the actual subsidy costs, taxpayers will bear the
cost of any shortfall.
Even if DOE estimates the subsidy cost with a reasonable degree of
accuracy and charges the applicants fees to cover the true costs, there
is a potential for a self-selection bias in the companies participating
in the program toward those for which the fee is small relative to the
expected benefits of the loan guarantee (such as more favorable loan
terms or a lower interest rate). As CBO recently reported about the
LGP, a loan guarantee would improve a project's financial viability if
the cost of the guarantee is shifted to the federal government.
However, when the borrower pays a fee to cover the subsidy cost, as is
the case with the LGP, the cost and most of the risk stay with the
project and the viability of the project may not be substantially
improved. Therefore, for such projects, there is a practical limit to
how large the fee can be without jeopardizing the project's financial
prospects; these constraints add to the challenge of setting fees high
enough to compensate for uncertainties. To the extent that some
projects targeted by Title XVII are not financially viable without some
form of federal assistance or favorable treatment by regulators, these
projects will not pursue loan guarantees even though they are otherwise
eligible. As a result, if this financial viability is not distributed
evenly across technologies targeted by Title XVII, the projects that
ultimately receive loan guarantees may not represent the full range of
technologies targeted by Title XVII.
DOE officials noted that the borrower pays option may cause the more
risky potential borrowers that would be required to pay a higher fee to
either (1) contribute more equity to their projects to lower the fee or
(2) abandon their projects and not enter the program. If potential
borrowers contribute more equity, this could decrease default risk or
improve potential recoveries in the event of a default.
Conclusions:
More than a year has passed since DOE received funding to administer
the LGP and we recommended steps it should take to help manage the
program effectively and maintain accountability. We recognize that it
takes some time to create a new office and hire staff to implement such
a program. However, instead of working to ensure that controls are in
place to help ensure the program's effectiveness and to mitigate risks,
DOE has focused its efforts on accelerating program operations.
Moreover, because loan guarantee programs generally pose financial risk
to the federal government, and this program has additional inherent
risks, it is critical that DOE complete basic management and
accountability activities to help ensure that it will use taxpayer
resources prudently. These include establishing sufficient evaluation
criteria and guidance for the selection process, resource estimates,
and methods to track costs and measure program progress. Without
completing these activities, DOE is hampering its ability to mitigate
risks of excessive or unnecessary losses to the federal government and
American taxpayers.
The difficulties DOE will face in estimating subsidy costs could
increase LGP's financial risk to the taxpayer. If DOE underestimates
costs, the likely end result will be projects that do not fully pay for
themselves and an obligation to taxpayers to make up the difference.
Furthermore, the inherent risks of the program, along with the
expectation that borrowers will cover the costs of their loan
guarantees, may lead to self-selection bias that tilts the portfolio of
projects toward those for which costs have been underestimated. Neither
we nor DOE will be able to fully evaluate the extent or magnitude of
the potential financial costs to the taxpayer until DOE has developed
some experience and expertise in administering the program. Expanding
the LGP at this juncture, when the program's risks and costs are not
well understood, could unnecessarily result in significant financial
losses to the government. Self-selection bias may also--under certain
conditions--lead to less than the full range of projects of
technologies targeted by Title XVII represented in the LGP. The likely
costs to be borne by taxpayers and the potential for self-selection
biases call into question whether the program can fully pay for itself;
they also call into question whether the program will be fully
effective in promoting the commercialization of a broad range of
innovative energy technologies.
It is important to note that, while we found that inherent risks and
certain features of the program may lead to unintended taxpayer costs
and that self-selection biases may reduce the scope of participation in
the program, this is not an indication that the overall costs of the
program outweigh the benefits. Rather, it simply means that the costs
may be higher and the benefits lower than expected. Finally, the extent
to which these costs and benefits will differ from expectations over
the life of the program is something that cannot be reasonably
estimated until DOE gains some experience in administering the LGP.
Even at the current planned pace of the program, it will take a number
of years before we can observe the extent to which unintended taxpayer
costs are incurred or the benefits of innovative energy technologies
emerge.
Matter for Congressional Consideration:
To the extent that Congress intends for the program to fully pay for
itself, and to help minimize the government's exposure to financial
losses, we are suggesting that Congress may wish to consider limiting
the amount of loan guarantee commitments that DOE can make under Title
XVII until DOE has put into place adequate management and internal
controls. We are also making recommendations to assist DOE in this
regard.
Recommendations for Executive Action:
To improve the implementation of the LGP and to help mitigate risk to
the federal government and American taxpayers, we recommend that the
Secretary of Energy direct the Chief Financial Officer to take the
following steps before substantially reviewing LGP applications:
* complete detailed internal loan selection policies and procedures
that lay out roles and responsibilities and criteria and requirements
for conducting and documenting analyses and decision making;
* clearly define needs for contractor expertise to facilitate timely
application reviews;
* amend application guidance to include more specificity on the content
of independent engineering reports and on the development of project
cost estimates to provide the level of detail needed to better assess
overall project feasibility;
* improve the LGP's full tracking of the program's administrative costs
by developing an approach to track and estimate costs associated with
offices that directly and indirectly support the program and including
those costs as appropriate in the fees charged to applicants;
* further develop and define performance measures and metrics to
monitor and evaluate program efficiency, effectiveness, and outcomes;
and:
* clarify the program's equity requirements to the 16 companies invited
to apply for loan guarantees and in future solicitations.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Secretary of Energy for
review and comment. DOE generally disagreed with our characterization
of its progress to date in implementing the LGP. DOE stated two of our
six recommendations were inapplicable to the LGP, indicated it has
largely accomplished the remaining four recommendations, and disagreed
with our matter for congressional consideration. DOE further stated
that our report contains flawed logic, significant inaccuracies, and
omissions; however, DOE did not provide evidence to support these
assertions. Our evaluation of DOE's comments follows. A more detailed
analysis is presented in appendix III.
In particular, DOE stated that we placed disproportionate emphasis on
activities that should be completed for a fully implemented loan
guarantee program rather than one that is currently being implemented,
and that we overlooked DOE's accomplishments to date. We disagree. We
believe that our report accurately assesses the LGP in its early
development stage and focused our report's analysis and recommendations
on activities that should be completed before DOE begins to
substantively review any applications. DOE states that it will have
completed many of these activities before it issues loan guarantees,
but we continue to believe these activities should be completed before
DOE reviews applications and negotiates with applicants so that it can
operate the program prudently. In several cases, DOE cites as complete
documents and activities that were, and still are at the time of this
report, in draft form. For example, in several instances DOE states
that it has "implemented" its credit subsidy model. However, as of June
24, 2008, DOE indicated that OMB has not approved its model. Further,
DOE illustrates in an updated timetable it provides in its appendix B
of its comment letter that a majority of these activities are not yet
complete and that several will not be complete until the end of the
calendar year 2008. DOE's entire letter, including its appendixes, is
reproduced as appendix III of this report.
Regarding our recommendation on policies and procedures for conducting
reviews, DOE cites policies and procedures that it believes are
adequate for continuing program implementation. We disagree. DOE is
developing credit policies and procedures, but it does not have
complete internal application policies and procedures, which it should
have as it begins to review and negotiate its first loan guarantee
applications. DOE also lacks any substantive information in its
external application guidance on how it will select technologies. DOE
has indicated that some of this information will be included in future
solicitations.
DOE partially agreed with our recommendation to define the expertise it
will need to contract for and stated that it is developing descriptions
of necessary contractor expertise on a solicitation-specific basis.
Although DOE may plan to complete such descriptions and other
preparatory work for future solicitations, DOE did not provide us with
any information for contractor expertise for the 2006 solicitation.
DOE's timetable provided in Appendix B indicates an August 2008
completion date for its acquisition strategy and contract vehicles;
this target may be in time for future solicitations but it is not in
time for the applications that companies are now submitting and DOE is
reviewing. DOE also states that it is not possible to develop generic
definitions of needed contractor expertise because the department's
needs will vary from solicitation to solicitation. We continue to
believe it is both reasonable and feasible for DOE to develop estimates
for the timing and type of resources the department will require. To be
transparent and consistent in its review and negotiation processes,
DOE's statements of work within sectors and across sectors should have
similar frameworks and rationale. Specifically, DOE may need assistance
in areas common to all technologies, such as cost and risk analysis,
project management, and engineering and design reviews. DOE should be
able to start defining these and other areas on the basis of past
experience.
DOE disagreed with our recommendation to provide more specific
application guidance on the content of independent engineering reports.
DOE stated that this specificity is not required, necessary, or
appropriate for LGP implementation. We disagree. Providing more
specificity to companies on DOE's expectations for an application's
content--and basic information about how it will review the projects--
will help companies develop higher quality application materials and
help ensure thorough, consistent, and efficient evaluations. Taking
this step is also likely to decrease the number of requests for more
analyses or information from the applicant. We also continue to believe
it is reasonable for DOE to provide more specificity on how to develop
project cost estimates, including a level-of-confidence estimate, so
that it can better evaluate project cost estimates.
DOE disagreed with our recommendation that it track the administrative
costs associated with the LGP. DOE stated it is appropriate to track
the costs of the LGP office and that it plans to develop a methodology
for doing so, but there is no reason to track the costs of certain
support activities. We disagree. Title XVII requires DOE to charge and
collect fees that the Secretary determines are sufficient to cover
applicable administrative expenses. The federal accounting standard for
managerial cost accounting requires agencies to determine and report
the full costs of government goods and services, including both direct
and indirect costs associated with support activities. Therefore, we
believe it is appropriate for DOE to consider costs associated with
support activities, such as costs associated with the time general
counsel staff spend working on issues related to the LGP, to be
"applicable administrative costs." If DOE does not consider support
costs when setting fees, it cannot be assured that the fees it collects
will fully cover all administrative costs incurred to operate the LGP.
Regarding our recommendation to further develop and define performance
measures and metrics before substantially reviewing LGP applications,
DOE stated it has developed initial draft performance measures and
metrics with the aim of completing them by the end of calendar year
2008. We continue to believe such measures and metrics should be
developed as soon as possible for the 16 projects DOE invited to apply
for guarantees. In addition, DOE has emphasized its focus on selecting
technologies and projects that will produce significant environmental
benefits, in particular the avoidance of air pollutants and greenhouse
gases. However, it is unclear how DOE will do so without gathering data
to establish baseline measures and metrics associated with these
benefits.
DOE stated that it did not need to take additional action to implement
our recommendation that it clarify the LGP's equity requirements with
the 16 companies invited to apply and in future solicitations because
it informed the 16 companies invited to apply of DOE's equity position.
However, DOE officials told us that they communicated this information
orally and did not provide specific documentation to the 16 companies.
We believe it is reasonable to provide potential applicants with key
information, such as the LGP's equity requirement, in writing to help
ensure that all potential applicants receive the same information.
Furthermore, we continue to believe that this is appropriate
information to include in future solicitations.
In commenting on our matter for congressional consideration, DOE
disagreed with our findings that LGP does not have adequate management
and internal controls in place to proceed and that it is well on the
way to implementing the accepted recommendations contained in our
report. We disagree. DOE has been slow to recognize the inefficiencies
and inconsistencies it may face in not having key activities, policies,
and procedures completed or in place before proceeding with its
operations. While it is important that DOE make meaningful progress in
accomplishing its mission under Title XVII, it is also important to
operate the program prudently, given that billions of taxpayer dollars
are at risk.
DOE also made minor technical suggestions, which we incorporated as
appropriate. DOE's written comments and our more detailed responses are
provided in appendix III.
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 staff have any questions about this report, please
contact Frank Rusco at 202-512-3841 or ruscof@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 appendix IV.
Signed by:
Frank Rusco:
Acting Director, Natural Resources and Environment:
[End of section]
Appendix I: Scope and Methodology:
To assess the Department of Energy's (DOE) progress in issuing final
regulations that govern the loan guarantee program (LGP), we reviewed
and analyzed relevant provisions of Title XVII of the Energy Policy Act
of 2005; the LGP's August 2006 guidelines and solicitation; its 2007
notice of proposed rulemaking; public comments on the proposed
rulemaking; and final regulations published in the Federal Register. We
compared the final regulations to applicable requirements contained in
Title XVII and OMB Circular A-129 Policies for Federal Credit Programs
and Non-Tax Receivables, which prescribes policies and procedures for
federal credit programs. We also discussed the final regulations with
DOE officials.
To assess DOE's progress in taking actions to help ensure that the
program is managed effectively and to maintain accountability, we
reviewed documentation related to DOE's implementation of the LGP.
Specifically, we reviewed and analyzed the LGP's "concept of
operations," technical and financial review criteria for the
preapplication process, DOE's Application Process Overview Guidance,
Preapplication Evaluation Procedural Guidance, minutes of Credit Review
Board meetings held between April 2007 and February 2008, and other
relevant documents. As criteria, we used our Standards for Internal
Control in the Federal Government[Footnote 25] and budget and
accounting guidance. Further, to assess DOE's progress to develop
measures and metrics, we applied GAO's Government Performance and
Results Act guidance and analyzed information in Title XVII, DOE's
budget request documents and other relevant documents.
When DOE had completed its preapplication review process, we obtained
documentation from DOE's decision files related to the 140
preapplications for 143 projects. We reviewed all decision files DOE
provided to us and analyzed the documentation for the preapplications
that DOE considered responsive to the August 2006 solicitation to
determine if DOE conducted its review process consistently and
documented its decisions sufficiently. Responsive decision files
generally contained a summary of the technology; separate technical and
financial review scoring sheets; minutes documenting results of joint
technical-financial meetings; and a DOE summary of its secondary review
process. We also reviewed other preapplication materials that DOE
provided to us. We did not evaluate the financial or technical
soundness of the projects that DOE invited to submit full applications.
Further, we interviewed cognizant DOE officials from the LGP office,
detailees from the Department of the Treasury, and contractor personnel
assisting DOE with the preapplication process, the development of
policies and procedures, and the implementation of the program. In
addition, we interviewed officials from DOE's Office of General
Counsel; Office of the Chief Financial Officer; and program offices
that participated in the technical reviews of the preapplications,
including the Office of Energy Efficiency and Renewable Energy, the
Office of Fossil Energy, the Office of Nuclear Energy, and the Office
of Electricity Delivery and Energy Reliability. We also spoke with
officials from the Departments of Agriculture and Transportation to
discuss policies and procedures for managing their loan guarantee
programs.
To examine the inherent risks associated with the LGP, including the
"borrower pays" option of Title XVII, we reviewed our prior work on
federal loan guarantee programs, including programs under the Maritime
Administration, the Federal Housing Administration, and the Small
Business Administration. We interviewed officials at and reviewed
reports by the Congressional Budget Office. We also discussed risks
with DOE officials.
We conducted this performance audit from August 2007 through June 2008
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
[End of section]
Appendix II: Title XVII Categories, DOE's First Solicitation, and
Projects DOE Invited to Submit Applications for Loan Guarantees:
The Energy Policy Act of 2005 (EPAct 2005) listed 10 categories of
projects that would be eligible to apply for loan guarantees under
Title XVII. In August 2006, DOE issued a solicitation inviting
companies to submit preapplications for projects eligible to receive
loan guarantees under Title XVII. The solicitation listed categories
falling within 8 of the 10 Title XVII categories. The solicitation did
not invite projects for two Title XVII categories: advanced nuclear
energy facilities, and refineries, meaning facilities at which crude
oil is refined into gasoline. Table 1 shows the 10 categories.
Table 1: Project Categories for Title XVII and DOE Solicitation:
EPAct 2005 Title XVII Categories: (August 2005): Renewable energy
systems;
DOE Solicitation Categories: August 2006): Biomass, solar, wind, and
hydropower.
EPAct 2005 Title XVII Categories: (August 2005): Advanced fossil energy
technology (including coal gasification meeting the criteria in
subsection (d)[A] );
DOE Solicitation Categories: August 2006): Fossil energy coal.
EPAct 2005 Title XVII Categories: (August 2005): Hydrogen fuel cell
technology for residential, industrial, or transportation applications;
DOE Solicitation Categories: August 2006): Hydrogen.
EPAct 2005 Title XVII Categories: (August 2005): Carbon capture and
sequestration practices and technologies, including agricultural and
forestry practices that store and sequester carbon;
DOE Solicitation Categories: August 2006): Carbon sequestration
practices and technologies.
EPAct 2005 Title XVII Categories: (August 2005): Efficient electrical
generation, transmission, and distribution technologies;
DOE Solicitation Categories: August 2006): Efficient electricity
transmission and delivery and energy reliability.
EPAct 2005 Title XVII Categories: (August 2005): Efficient end-use
energy technologies;
DOE Solicitation Categories: August 2006): Industrial energy efficiency
projects.
EPAct 2005 Title XVII Categories: (August 2005): Production facilities
for the manufacture of fuel efficient vehicles or parts of those
vehicles, including electric drive vehicles and advanced diesel
vehicles;
DOE Solicitation Categories: August 2006): Alternative fuel vehicles.
EPAct 2005 Title XVII Categories: (August 2005): Pollution control
equipment;
DOE Solicitation Categories: August 2006): Pollution control equipment.
EPAct 2005 Title XVII Categories: (August 2005): Advanced nuclear
energy facilities;
DOE Solicitation Categories: August 2006): Not included in
solicitation.
EPAct 2005 Title XVII Categories: (August 2005): Refineries, meaning
facilities at which crude oil is refined into gasoline;
DOE Solicitation Categories: August 2006): Not included in
solicitation.
Source: DOE.
[A] Pub. L. No. 109-58, Title XVII Sec. 1703 (d) Emission levels. In
addition to any other applicable federal or state emission limitation
requirements, a project shall attain at least (1) total sulfur dioxide
emissions in flue gas from the project that do not exceed 0.05 lb/
MMBtu; (2) a 90 percent removal rate (including any fuel pretreatment)
of mercury from the coal-derived gas, and any other fuel, combusted by
the project; (3) total nitrogen oxide emissions in the flue gas from
the project that do not exceed 0.08 lb/MMBtu; and (4) total particulate
emissions in the flue gas from the project that do not exceed 0.01 lb/
MMBtu.
[End of table]
On October 4, 2007, DOE announced that it had invited 16 projects to
submit full applications for loan guarantees. Table 2 includes the
projects' sponsors, types, descriptions, and their current proposed
locations.
Table 2: Projects Invited to Submit Full Applications:
Company name: Advanced fossil energy: 1. Mesaba Energy Project (MEP-I,
LLC);
Project description: Advanced fossil energy: Advanced fossil energy:
Integrated Gasification Combined Cycle (IGCC[A]) plant that may allow
for CO2 capture and storage in its design;
Proposed project location: Advanced fossil energy: Taconite, Minnesota.
Company name: Advanced fossil energy: 2. Mississippi Power Company;
Project description: Advanced fossil energy: First IGCC[A] plant to
generate electricity using lignite coal for fuel;
Proposed project location: Advanced fossil energy: Kemper County,
Mississippi.
Company name: Advanced fossil energy: 3. TX energy, LLC;
Project description: Advanced fossil energy: IGCC[A] plant that can
isolate and sell CO2 while producing power and chemicals;
Proposed project location: Advanced fossil energy: Longview, Texas.
Company name: Industrial energy efficiency: 4. GR Silicate Nano Fibers
and Carbonates;
Project description: Industrial energy efficiency: In paper
manufacturing, a more energy efficient process that replaces natural
fibers from trees with synthetic fibers; may allow some CO2 reduction
and capture;
Proposed project location: Industrial energy efficiency: Hoquiam,
Washington.
Company name: 5. Industrial energy efficiency: Sage Electrochromics;
Project description: Industrial energy efficiency: Energy efficient
windows for buildings that can change tint on demand;
Proposed project location: Industrial energy efficiency: Faribault,
Minnesota.
Company name: Solar energy: 6. Bright Source Energy (Luz II, Ltd);
Project description: Solar energy: Large-scale power tower project
using concentrated solar-thermal technology;
Proposed project location: Solar energy: Ivanpah, California.
Company name: Solar energy: 7. Solyndra, Inc;
Project description: Solar energy: Thin-film cylindrical photovoltaic
cells that collect sunlight from many angles;
Proposed project location: Solar energy: Fremont, California.
Company name: Electricity delivery and energy reliability: 8. Beacon
Power Corporation;
Project description: Electricity delivery and energy reliability:
Flywheel-based regulation technology that will balance loads of
electric plants and enhance performance of the power grid;
Proposed project location: Electricity delivery and energy reliability:
Stephentown, New York.
Company name: Hydrogen: 9. Bridgeport Fuel Cell Park, LLC;
Project description: Hydrogen: Largest single-site installation of fuel
cells for a power plant;
Proposed project location: Hydrogen: Bridgeport, Connecticut.
Company name: Alternative fuel vehicles: 10. Tesla Motors, Inc;
Project description: Alternative fuel vehicles: Battery-electric car
with enhanced range and acceleration for the consumer market;
Proposed project location: Alternative fuel vehicles: Albuquerque, New
Mexico.
Company name: Biomass: 11. Alico, Inc;
Project description: Biomass: Cellulosic ethanol plant that would
produce several products from multiple feedstocks;
Proposed project location: Biomass: Hendry County, Florida.
Company name: Biomass: 12. BlueFire Ethanol, Inc;
Project description: Biomass: Cellulosic ethanol plant converting
biomass at landfills to ethanol and other products;
Proposed project location: Biomass: Riverside County, California.
Company name: Biomass: 13. Choren USA;
Project description: Biomass: Gasification plant to produce synthetic
automotive diesel and light distillates from biomass;
Proposed project location: Biomass: Southeastern United States[B].
Company name: Biomass: 14. Endicott Biofuels, LLC;
Project description: Biomass: Plant that would feature feedstock
flexibility and produce a range of biodiesel fuels;
Proposed project location: Biomass: Louisiana[B].
Company name: Biomass: 15. Iogen Biorefinery Partners, LLC;
Project description: Biomass: Biorefinery to produce ethanol and other
byproducts from cellulosic feedstocks;
Proposed project location: Biomass: Bingham County, Idaho.
Company name: Biomass: 16. Voyager Ethanol, LLC;
Project description: Biomass: Cellulosic ethanol plant using multiple
feedstocks to produce ethanol and byproducts;
Proposed project location: Biomass: Emmetsburg, Iowa.
Source: DOE.
[A] Integrated Gasification Combined Cycle (IGCC) is an electric power
generation plant that combines modern coal gasification technology with
both gas turbine and steam turbine power generation. Gasification-based
systems can process a wide variety of feedstocks, including coal,
biomass, petroleum coke, refinery residues, and other wastes.
[B] Not all projects have known or public site locations.
[End of table]
[End of section]
Appendix III: Comments from the Department of Energy:
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
Department of Energy:
Washington, DC 20585:
June 13, 2008:
Mr. Frank Rusco:
Acting Director, Natural Resources and Environment:
U.S. Government Accountability Office:
Washington, D.C. 20548:
Dear Mr. Rusco:
This letter is in response to a draft report of the Government
Accountability Office (GAO), entitled "New Loan Guarantee Program
Should Complete Activities Necessary for Effective and Accountable
Program Management" (GAO 08-750) (Draft Report), provided to the
Department of Energy (DOE or Department) for review and comment on May
14, 2008.
Summary:
The Draft Report contains six GAO recommendations for executive action
by DOE to improve program management and one recommendation for
Congressional action. As is the case in many instances, GAO has
identified aspects of a new program in which more can be done to make
the program in question function at a higher level once fully
implemented. Here, GAO has placed a disproportionate emphasis on what
should be done to improve all aspects of a fully implemented loan
guarantee program (LGP) without adequately acknowledging the progress
and accomplishments the Department has achieved in addressing the near
term actions necessary to stand up the LGP. DOE believes it has
appropriately and thoughtfully prioritized the resources available to
it and has taken the first steps necessary to comply with the
Congressional direction in Title XVII of the Energy Policy Act, 22 USC
16511, et seq., to advance the commercialization of new and
significantly improved technologies which will contribute to a cleaner
environment. DOE is committed to insuring that all necessary actions
have been taken and that all necessary policies and procedures are in
place before the first loan guarantee is issued.
(See comment 1.):
More specifically, as explained below, the Department has or is in the
process of implementing four of the executive action recommendations
and believes that the other two executive action recommendations are
not required, necessary, or appropriate for implementation of the Loan
Guarantee Program (LGP). Further, the Department believes that the
recommendation to Congress is predicated upon a misapprehension that
DOE does not already have in place adequate management and internal
controls and may be counterproductive. The Department addresses the
executive action recommendations in detail in Appendix A to this
letter, entitled "Department of Energy's Response to GAO
Recommendations for Executive Action." Also, as explained in Appendix B
to this letter, entitled "DOE's Detailed Comments on the GAO Draft
Report," the logic displayed in the Draft Report is often flawed; there
are assertions without supporting facts; and there are significant
inaccuracies and omissions.
(See comment 1.):
DOE Accomplishments:
Over the past 18 months, remarkable progress has been made implementing
the LGP. From a field of 143 preapplications received in response to an
August 2006 solicitation, 16 projects were invited to submit full
applications. The Department rigorously reviewed each preapplication in
accordance with criteria set forth in Guidelines issued in August 2006,
as supplemented by detailed technical review standards established by
the Department.
In conformity with Office of Management and Budget Circular A-129, the
Department established a Credit Review Board (CRB), comprised of senior
Department officials, on March 16, 2007. The CRB is the internal
governing board with authority to oversee all policy matters affecting
LGP operations.
The Department's Loan Guarantee Program Office (LGPO) officially began
operations on April 1, 2007 with the Director of the LGPO coming on
board on August 6, 2007. Since August 2007, the Director has hired a
cadre of seasoned professionals with extensive project finance
experience complemented by particular experience in the Federal
Government's Overseas Private Investment Corporation (OPIC) and other
agencies.
On October 4, 2007, DOE issued final regulations implementing Title
XVII at 10 CFR Part 609. These regulations were issued less than eight
months after Congress provided the first dedicated funds for operation
of the LGPO and the first authority to actually issue loan guarantees.
The Department has made significant progress in establishing program
regulations and developing internal administrative and management
policies and procedures. The Department has completed several
application guidance documents and internal management guidelines and
is in the process of developing over five hundred pages of additional
policies and procedures for the due diligence review of applications;
established a sophisticated, user-friendly electronic data submission
system for receipt of applications and supporting documents; installed
Generally Accepted Accounting Principles (GAAP)-compliant accounting
systems and procedures to monitor and manage the loans that will be
guaranteed over the life of each related project; and designed,
constructed, tested, and, on a pilot basis, operated, a state-of-the-
art model for determining the credit subsidy cost for projects that
will receive loan guarantees, as required by Title XVII and the FCRA.
(See comment 1.):
Additional details of the accomplishments of the Department in
implementing the Title XVII program and future plans are supplied in
Appendix B and in the table which follows at page 3 infra, entitled
"Summary of Planning Activities for the Loan Guarantee Program Office."
Importantly, all of the above-described accomplishments and measures
will be achieved in advance of any issuance of loan guarantees. With
these actions, the Department has sufficient policies in place, coupled
with a growing staff of finance and technical professionals, to move
forward with the next steps necessary to review the loan guarantee
applications resulting from the August 2006 solicitation as they are
received; perform a full due diligence review of those applications
prior to recommending to the Secretary that any of them receive loan
guarantees; and prepare to issue additional solicitations, as
authorized by Title XVII and the Consolidated Appropriations Act, 2008.
(See comment 1.):
Response to the Draft Report:
Moving forward, the Department will continue to ensure all necessary
and appropriate policies and procedures are in place to maintain the
integrity of the LGP and to promote the objectives of the Title XVII
program while protecting the American taxpayer. As the Department gains
experience, it intends to further refine its policies and procedures to
address new facts and circumstances as they develop. But this
additional experience and insight and the fine-tuning of procedures and
policies can only be gained by executing the program, not by remaining
in a continuous planning mode.
Unfortunately, the Draft Report completely overlooks many of the above-
described accomplishments, notwithstanding the numerous documents
provided to the GAO audit team and interviews conducted by the audit
team with Departmental employees over a nine month period. Additional
details regarding the incorrect statements contained in the Draft
Report are discussed in the attached appendices.
(See comment 1.):
a. Recommendations for Executive Action:
The draft report contains six recommendations for executive action. The
six actions address the following matters:
1. policies and procedures for conducting reviews:
2. use of contractor expertise:
3. content of independent engineering reports:
4. tracking of administrative costs:
5. performance measures:
6. clarification of project equity requirements:
As further discussed in Appendix A, the Department believes that it has
largely accomplished all but two of the recommendations
(recommendations three and four) and it rejects those two
recommendations because they are inapplicable to the LGP. Specifically:
(See comment 1.):
* With respect to the first recommendation, the Department has
established policies and procedures adequate to move forward with the
processing and review of the applications relating to the 16 successful
preapplicants from the August 2006 solicitation and to draft and issue
solicitations for FY 2008.
* The Department is already fulfilling the second recommendation by
developing descriptions of necessary contractor expertise on a
solicitation-specific basis.
* Recommendation three is inapplicable because it indicates a need to
establish generic contractor scope of work descriptions for independent
engineers when the unique nature of each technology requires that
descriptions be established on a solicitation-specific basis.
* Recommendation four is inapplicable because actions taken by other
program offices relating to the LGP are in furtherance of the missions
of the program offices and the costs of those actions are not properly
assignable to the LGP.
* As for recommendation five, the Department already has developed a
set of proposed performance measures; the Department hopes to complete
full implementation by the end of 2008.
* With respect to recommendation six, the Final Rule clearly states
that equity is cash and accordingly, no further clarification is
required.
No other actions are required to meet the executive action
recommendations.
b. Recommendation for Congressional Consideration:
In addition to the recommendations for executive action, the Draft
Report recommends that "Congress may wish to consider limiting the
amount of loan guarantee commitments that DOE can make under Title XVII
until DOE has put into place adequate management and internal
controls."
(See comment 1.):
DOE strongly disagrees. If DOE thought it did not have in place
"adequate management and internal controls," it would not proceed at
this time. The Draft Report fails to acknowledge and account for most
of the procedures and policies that DOE has already implemented or is
in the process of implementing as well as the limitations that Congress
already has placed on the Department in Title XVII and in the
Consolidated Appropriations Act, 2008. The Department is well on the
way to implementing the accepted executive action recommendations
contained in the Draft Report. Continued implementation of the
executive actions, in parallel with execution of the program, will
enable the Department to apply lessons learned on a continuing basis
rather than to remain static in a continuous planning mode. The ability
to move forward is especially important if the Department is to make
meaningful progress in accomplishing its mission under Title XVII.
(See comment 1.):
c. Errors and Omissions in the Body of the Draft Report:
The Draft Report:
(See comments 5-8 and 10-13.):
* Mischaracterizes the operation of the Federal Credit Reform Act of
1990;
* Uses flawed logic to speculate on the potential for underestimates of
credit subsidy costs;
* Offers other suppositional assertions or assumptions that are
inaccurate;
* Contains a number of factual inaccuracies; and:
* Omits pertinent information on the current operations of the LGPO.
(See comment 1.):
Specific line-by-line comments that document the Draft Report's errors
and omissions are provided in Appendix B of this letter, entitled
"DOE's Detailed Comments on the GAO Draft Report." In addition, the
LGPO has provided "Supplemental Technical Comments" in Appendix C in
order to correct factual inaccuracies within the Draft Report. The
Department would be pleased to provide any additional information that
is desired in this matter.
(See comments 2-20.):
(See comment 21-25.):
Thank you for the opportunity to review the Draft Report. We look
forward to your favorable consideration of the comments and
recommendations contained in this letter and attached appendices.
Sincerely,
Signed by:
Steven Isakowitz:
Chief Financial Officer:
Attachments:
Response to GAO Recommendations for Executive Action (Appendix A):
Detailed Comments on the GAO draft Report (Appendix B):
Supplemental Technical Corrections (Appendix C):
Appendix A:
U.S. Department of Energy:
GAO-08-750 – "Department of Energy: New Loan Guarantee Program Should
Complete Activities Necessary for Effective and Accountable Program
Management":
Response to GAO Recommendations for Executive Action:
Recommendation 1: Complete detailed internal loan selection policies
and procedures that lay out roles and responsibilities and criteria and
requirements for conducting and documenting analyses and decision
making.
DOE Response: In large measure, this recommendation has been completed.
To the extent it is not completed, the Department is well on the way
toward completion.
(See comment 1.):
First, the internal roles and duties of responsible Departmental
officials relevant to the loan guarantee decision-making process are
already well defined. These are set out in the Charter of the Credit
Review Board as well as in a memorandum from the Chairman of the Credit
Review Board to the Chief Financial Officer and other heads of offices.
To the extent the above recommendation suggests that the Department has
not established uniform internal decision-making procedures, the
Department disagrees.
Second, with respect to the loan selection policies and procedures used
by the LGPO, the Department likewise has accomplished a great deal that
the Draft Report appears to overlook or downplay. Specifically, the
Department:
* Based on a thorough technical, environmental, financial, and legal
review, has selected 16 of 143 pre-applicants from its initial
solicitation to receive invitations to submit full loan guarantee
applications
* Has completed several application guidance documents and internal
management guidelines that are being applied to the 16 successful pre-
applicants from the initial solicitation and will be applied in future
solicitations
* Is in the process of developing additional credit review and loan
guarantee processing manuals that, when completed, will comprise
policies and procedures for the application and due diligence review of
applications
* Has established a sophisticated, user-friendly electronic data
submission system for receipt of loan guarantee applications and
supporting documents
* Has installed GAAP-compliant accounting systems and procedures to
monitor and manage loan guarantees over the life of the project 1
* Has designed, constructed, tested, and implemented a state-of-the-art
model for determining the credit subsidy cost for all projects that
will receive loan guarantees, as required by Title XVII and the Federal
Credit Reform Act of 1990
* Pursuant to the authority granted in the Consolidated Appropriations
Act, 2008, on April 11, 2008, has submitted an implementation plan for
the issuance of three additional solicitations in 2008, and has
prepared drafts of each of those solicitations that include detailed
due diligence selection criteria for each of the technologies covered
by the solicitation.
(See comment 1.):
Additional details regarding the Department's policies and procedures
established to date as well as those still under development are
presented in the table in Appendix B at page 3.
Recommendation 2: Clearly define needs for contractor expertise to
facilitate timely application reviews.
DOE Response: The Department agrees that contractor expertise must be
defined so that it is available when needed. However, the precise
contractor expertise needed by the Department in reviewing applications
for loan guarantees is going to vary from solicitation to solicitation.
Accordingly, it is not possible to develop generic definitions of
needed contractor expertise. Insofar as the Draft Report and the above
recommendation in particular suggest otherwise, the Department
disagrees.
(See comment 1.):
To the extent the recommendation is directed toward the establishment
of criteria for needed contractor expertise on a solicitation-specific
basis, the Department is already implementing the recommendation in an
appropriate manner. By August 2008, the Department will finalize
comprehensive statements of work and contractor qualifications under a
"sources sought" procurement procedure that will provide for the
technical, financial, legal and marketing expertise needed during the
due diligence process with the aim of securing qualified contractors by
the end of the summer, 2008. This effort will include expertise needed
to review the applications being received from the 16 successful pre-
applicants from DOE's August 2006 solicitation as well as the
anticipated FY 2008 solicitations for renewable energy, nuclear power,
and nuclear "front end" (i.e. uranium enrichment) project applications.
DOE also expects to have additional expertise available when needed in
the application review process. If for any reason adequate resources or
needed specialized expertise is not available to review applications on
a timely basis, the Department will adjust its review schedules
accordingly, rather than reduce the quality of its underwriting
process.
Recommendation 3: Amend application guidance to include more
specificity on the content of independent engineering reports and the
development of project cost estimates to provide the level of detail
needed to better assess overall project feasibility.
DOE Response: The Department does not concur with this recommendation
and believes that the discussion in the Draft Report in support of this
recommendation does not reflect a full understanding of the
Department's activities or industry underwriting practices with respect
to independent engineering reports.
(See comment 1.):
First, the Draft Report does not adequately credit the fact that the
Department has issued generic application guidance documents that
appropriately stress the necessity of a comprehensive independent
engineer's report, including consideration of factors such as
environmental impact and infrastructure requirements, as a means of
assessing the technical efficacy of each proposed project. The generic
application guidance document states that the determination of the
technical merit of the project will be influenced by the quality of the
independent engineering report, including the credentials of the
consultant, scope of the undertaking, and strength of the opinions
provided. These generic application guidance documents were provided to
GAO staff and discussed with the GAO audit team over the course of the
audit. In particular, as the LGPO staff explained to the audit team,
each solicitation and each project will have unique characteristics
and, therefore, it is not possible or appropriate to provide more
specificity regarding necessary engineering reports in generic
application guidance documents.
Second, because of the unique nature of each project, the Department
will specify more detailed requirements for the independent engineering
report that it will require in the course of preliminarily reviewing
application submissions. It is not reasonable or even possible to
develop detailed job instructions for the independent engineer retained
by DOE at any earlier time.
(See comment 1.):
DOE notes that, despite it making efforts to explain industry practices
to the GAO audit team, the Draft Report appears to ignore the fact that
two independent engineering reports will be separately prepared.
Consistent with prevailing underwriting standards, the applicant will
retain an independent engineer to prepare a study of the project to
meet the demands of potential lenders and investors; this independent
engineering report will be part of the required application submission
and it will furnish much of the basis for the Department's development
of instructions for a second independent engineering firm. This second
independent engineering firm will develop a report at the request of
the Department that will include a review of technical efficacy and the
applicant's project cost estimates.
Third, the Draft Report appears not to consider that all of the
information provided by the two independent engineering firms will be
reviewed and analyzed for a third time by the LGPO underwriting team.
On the basis of the detailed reports and multiple reviews, DOE will
ascertain whether, all other things being equal, the application
process should move forward or whether applicants require additional
guidance. Accordingly, the GAO recommendation for the development of
more specific guidelines for independent engineers is unnecessary and
is not being adopted.
Recommendation 4: Improve the LGP's full tracking of the program's
administrative costs by developing an approach to track and estimate
costs associated with offices that directly and indirectly support the
program and including those costs as appropriate in the fees charged to
the applicants.
DOE Response: The Department rejects this recommendation. While it is
appropriate for the LGPO to develop a means of tracking its own staff
and other internal administrative expenses,[Footnote 26] the Department
does not agree that the LGPO should attempt to track or estimate costs
incurred by program offices that provide a supportive role to the loan
guarantee application and review process. This is because the
activities of the LGPO are in furtherance of the missions of the
program offices. For example, the eventual issuance of loan guarantees
for nuclear power and "front end," i.e. uranium enrichment, projects
will further the mission of the Department's Office of Nuclear Energy.
There is no reason, therefore, why the LGPO should attempt to track the
cost of the supportive activities provided by other offices within the
Department.
(See comment 1.):
Recommendation 5: Further develop and define performance measures and
metrics to monitor and evaluate program efficiency, effectiveness, and
outcomes.
DOE Response: As noted in the Draft Report, DOE has developed an
initial draft set of performance measures and metrics. The Department
will continue to refine these measures with the aim of completing the
effort by the end of calendar year 2008.
(See comments 1,4, and 15.):
Recommendation 6: Clarify the program's equity requirements to the 16
companies invited to apply for loan guarantees and in future
solicitations.
DOE Response: The Department maintains that no further action is
required to implement this recommendation. With respect to the
definition of "equity," DOE's Final Rule at 10 CFR 609.2 is clear.
Equity is "cash contributed by borrowers." The Department is adhering
to that definition, as it must. The Department is also adhering to the
clearly stated requirement in the Final Rule at 10 CFR 609.10(d)(5)
that applicants must make a contribution of "significant" equity in the
form of cash in order to obtain a loan guarantee commitment.
(See comment 1.):
On the other hand, the Department understands that the above
recommendation is not directed at the definition of equity per se but
at the fact that DOE has indicated that it will also consider certain
limited classes of non-cash items as contributed assets when it
evaluates the financial commitment made by loan guarantee applicants to
their respective projects. This acceptance of non-cash items for
consideration brings the Department closer in line with established
commercial practices without altering its adherence to the terms of the
Final Rule. In this regard, the Department has taken the position that
non- cash contributions may be considered for loan guarantee purposes
only if they evidence a commitment of known and certain assets that can
be readily and reliably appraised or evaluated and monetized (e.g.
using Generally Accepted Accounting Principles or GAAP). The infusion
of non-cash contributions, however, will not substitute for the clearly
stated requirements in the Final Rule regarding equity. This position
has already been communicated to the 16 successful preapplicants from
the August 2006 solicitation.
Appendix B:
U.S. Department of Energy:
GAO-08-750 – "Department of Energy: New Loan Guarantee Program Should
Complete Activities Necessary for Effective and Accountable Program
Management":
DOE's Detailed Comments on the GAO Draft Report:
The following are the Department's detailed responses to the GAO
findings in the draft Report.
Management Of The Loan Guarantee Program Office:
1. Draft Report: On pages 5, 12, 13 of the draft Report, GAO states
"DOE is not well positioned to manage the LGP effectively and maintain
accountability because it has not completed a number of management and
internal control activities key to carrying out the program. As a
result, DOE may not be able to process applications efficiently and
effectively.The key activities that DOE has not sufficiently completed
include (1) clearly defining its key milestones and its specific
resource needs, (2) establishing policies and procedures for operating
the program, and (3) agreeing upon key measures to evaluate program
progress."
Before the end of the calendar year, the Department will initiate an
effort with OMB to develop a methodology to estimate and track the
LGPO's administrative costs. Utilizing this cost tracking system, the
Department intends to refine its fee structure. Additionally, the
Department believes that a revolving fund may facilitate the
implementation of this recommendation, and is planning to study its
feasibility.
DOE Response: In making these statements, the Draft Report fails to
acknowledge the Department's significant accomplishments in
establishing program regulations and developing internal administrative
and management policies and procedures. The Department has completed
several application guidance documents and internal management
guidelines and is in the process of developing over five hundred pages
of additional policies and procedures for the due diligence review of
applications; established a sophisticated, user-friendly electronic
data submission system for receipt of applications and supporting
documents; installed GAAP-compliant accounting systems and procedures
to monitor and manage the loans that will be guaranteed over the life
of each related project; and designed, constructed, tested, and
implemented a state-of-the-art model for determining the credit subsidy
cost for projects that will receive loan guarantees, as required by
Title XVII and FCRA. Also, the Draft Report fails to credit the fact
that, in accordance with DOE's Final Rule at 10 CFR 609.2, the Credit
Review Board will ensure appropriate polices and procedures are in
place before loans are approved.
The table on page 3, infra, provides an even more detailed illustration
of the Department's policies and procedures established to date as well
as those still under development. Based on these actions, the
Department maintains that it has sufficient policies in place, coupled
with a growing cadre of finance and technical professionals, to
effectively manage the projects from the 2006 solicitation and to
design the next round of solicitations. As the program proceeds, the
Department will continue to develop and refine all necessary and
appropriate policies and procedures, including those for underwriting
loan guarantees.
Furthermore, all of the above-described accomplishments and measures
have been achieved long in advance of the submission of recommendations
for and approval of the issuance of any loan guarantees. The Department
considers itself well-prepared to move forward with the next steps
necessary to review the 16 loan guarantee applications resulting from
the August 2006 solicitation as they are received; commit to a full due
diligence review of those applications prior to recommending that any
of them receive loan guarantees; and prepare to issue additional
solicitations to implement the authority provided to the Department by
Title XVII and current budgetary authority, as set forth in the
Consolidated Appropriations Act, 2008. In fact, pursuant to the
authority granted in the Consolidated Appropriations Act, the
Department submitted an implementation plan for the issuance of three
additional solicitations on April 11, 2008, and is in the process of
finalizing the details of each of those solicitations for FY 2008.
Table: Summary Of Planning Activities For The Loan Guarantee Program
Office As Of June 2008:
[See PDF for image]
[End of table]
2. Draft Report: The GAO states on page 13 that DOE has not
sufficiently determined the type and timing of resources it will need
to review the applications from the 2006 and 2008 solicitations.
Furthermore, on pages 5, 14, and 15 of the Draft Report, GAO notes that
DOE has not sufficiently determined the resources it will need or
completed detailed policies, criteria, and procedures for evaluating
applications, selecting lenders, monitoring loans and lenders,
estimating program costs or accounting for the program.
DOE Response: The Department believes that it has sufficient resources
and policies in place to effectively manage the projects from the 2006
solicitation, and to release the FY 2008 solicitations while
simultaneously addressing the recommendations and findings identified
in the GAO Draft Report. It is also important to note that the
Department is adequately staffed and prepared to perform the credit
underwriting and due diligence processes associated with the 16
projects invited to submit full applications pursuant to the 2006
solicitation, as well as to prepare and issue new solicitations this
year. This staff has utilized its extensive experience in organizing
the office, initiating all of the requisite policies and procedures
necessary to execute the program, commencing due diligence reviews of
the applications received from the 2006 solicitation, and formulating
and constructing the FY 2008 solicitations. As of May 2008, there are
11 full time equivalent employees on board which are complemented by
two detailees and a contractor staff of 5. The Department also
continues to recruit people with significant relevant experience to
meet the challenges posed in satisfying the requirements of the planned
FY 2008 solicitations.
(See comments 1, 2, 15, and pages 14 through 17 of report.):
3. Draft Report: The draft Report on Page 5 states "although DOE has
developed guidance for applicants to follow in submitting applications,
it has not developed detailed policies and procedures including roles
and responsibilities and criteria that demonstrate how DOE plans to
evaluate the applications."
DOE Response: The above statement from the Draft Report glosses over
the ongoing effort to develop complete and thorough underwriting
guidelines. The table on page 3 fills in many of the details. As
illustrated in the table and as conveyed to the audit team, policy and
procedures for underwriting the applications from the 2006 solicitation
are being developed and will be completed by September 2008 with the
exception of policies and procedures regarding monitoring of loan
guarantees which will only apply after the Department begins to close
loan guarantees. These policies and procedures, in order of priority,
will be completed by December 2008. The FY 2008 solicitations will
contain the criteria demonstrating how DOE plans to evaluate new
applications for selection.
(See comment 1.):
4. Draft Report: On page 13 of the draft Report, the GAO stated it was
unclear whether LGP will follow its timelines and milestones in the
"Concepts of Operations" document or transparently set other timelines
for implementing key program activities.
DOE Response: The timelines in the Concepts of Operations will be
transparent and will provide the basis for implementing key activities
as well as measuring overall success of the program. The Concepts of
Operations is a living document and will be updated on a regular basis
to represent changes in program requirements, in the priority of
individual activities and the continuing addition of qualified staff to
support these activities.
With regard to the planning activities identified in the Concepts of
Operations document, only two activities have not been initiated: 1) a
customer relations strategy; and 2) a method for estimating
administrative costs. The Department intends to commence the design of
a customer relations strategy in June 2008. Also, before the end of the
calendar year, the Department will initiate an effort with OMB to
develop a methodology to estimate and track the LGPO's administrative
costs. The timelines for completion of these two activities are set out
in the table on page 3.
5. Draft Report: On page 21 GAO states "DOE will not gain significant
experience in each technology because the program's objective is to
commercialize a limited number of each type of innovative
technologies."
DOE Response: The purpose of hiring independent, highly experienced,
licensed, and certified engineering, marketing, legal, and financial
consultants to assist with the due diligence and underwriting
processes, is to ensure that DOE will have the expertise needed to
support the multi-disciplinary reviews of the different types of
technologies that will be represented in loan guarantee applications.
This plan of approach is intended to offset the difficulty in building
experience in any limited number of technologies. The difficulty, in
turn, arises from the fact that the Department's mandated mission is to
periodically assist in the commercial development of new and innovative
technologies rather than to settle on a limited set of established
technologies. As new and innovative technologies become commercial
successes as a result of having received loan guarantees, the
Department is required under Title XVII to seek out still other newer
or more innovative technologies.
(See comment 3.):
6. Draft Report: On Page 21 GAO states "However, it has not yet
gathered and analyzed the necessary data on, for example, existing
capacity or current emission levels for categories of LGP project
technologies."
DOE Response: Technical selection criteria, including metrics for
capacity and emission levels, will be determined on a solicitation-
specific basis.
(See comments 1 and 4.):
7. Draft Report: The Draft Report states at pages 5, 18, 19, and 21
that "risks inherent to the LGP will make it difficult for DOE to
estimate subsidy costs with a reasonable degree of accuracy and implies
that DOE may be biased toward under- estimating the appropriate credit
subsidy cost, which could lead to financial losses and may introduce
biases in the projects that ultimately receive loan guarantees."
DOE Response: The Draft Report's statements regarding potential mis-
estimates or bias in the credit subsidy cost calculation methodology
are not supported by any demonstrated analysis and are otherwise
conjectural. Given the fact that the Department has not yet even issued
a loan guarantee under the Title XVII program and that, by working with
OMB, the Department is obtaining independent support for the effort to
derive an objective methodology, GAO's statements are unwarranted.
[Footnote 27] Moreover, the Draft Report, while emphasizing the risks
inherent in developing a sound methodology for calculating credit
subsidy costs, does not adequately credit the fact that, in the absence
of appropriated funds to cover the cost of guarantees, the Department
is statutorily obligated under FCRA and EPAct 2005 to develop a method
of calculating the credit subsidy cost of the loan guarantees that it
plans to issue. Insofar as portions of the draft Report might create
the impression that the Department could choose not to develop a credit
subsidy cost calculation methodology or not even to collect the credit
subsidy cost, that impression also is not factually accurate.
(See comment 5.):
(See comment 6.):
In particular, each applicant will be required to undergo a detailed
analysis and evaluation by several entities external to the Department,
including:
* An initial credit assessment developed by a recognized, independent
credit rating agency as part of their initial application submission.
* A full credit rating, an exhaustive investigation and report,
developed by a rating agency prior to closing on a loan guarantee.
* Two independent engineering studies which, as described in Appendix
A, supra, are performed by separate engineering firms.
* Multiple marketing, appraisal, legal, and other financial reviews
performed by and obtained from private consultants and attorneys.
8. Draft Report: The Draft Report, at page 23, states that the
Congressional Budget Office (CBO) "evaluated the cost of the LGP and
estimated that DOE would charge companies, on average, at least 1
percent lower than the likely costs of the guarantees." In footnote 23,
the Draft Report cites to Congressional Budget Office Cost Estimate:
S.1321 Energy Savings Act of 2007, June 11, 2007.
DOE Response: Neither the Draft Report nor the source document from the
CBO sets forth reasons adequate to support the conclusion that DOE is
likely to undercharge companies by an average factor of 1 percent of
the cost of the guarantees.
(See comment 8.):
9. Draft Report: On page 19, GAO states "while DOE has prepared a
schedule of fees to be charged for the first solicitation, it could not
provide support for how it calculated the fees."
DOE Response: The current fee structure was developed following
consultation between Department personnel and officials from the U.S.
Department of Treasury with experience in reviewing fees related to
similar governmental programs. In the absence of prior agency
experience, this was a reasonable method of complying with Title XVII's
requirement that fees be used to cover related agency administrative
expenses. 10. Draft Report: On page 21, the Draft Report states "DOE's
metric to assess the effectiveness of financing decisions ” containing
the loss rate to 5 percent ” may not be realistic; it is far lower than
the estimated loss rate of over 25 percent that we calculated using the
assumptions included in the fiscal year 2009 president's budget."
DOE Response: The Department submits that the Draft Report is erroneous
in its reliance on and use of the 25 percent figure as a metric for
assessing effectiveness of financing decisions. The 25 percent figure
came from the Appendix to the FY 2009 President's Budget. But, on page
408, the Budget document clearly states that the 25 percent figure in
not intended to be used except as a "placeholder"
(See comment 9.):
Because DOE has not yet evaluated the potential subsidy costs for any
projects that might be eligible for Title XVII loan guarantees, the
fiscal year 2009 budget reflects placeholder estimates for borrower
paid loan guarantee subsidy costs, based on an illustrative portfolio.
These estimates are not related to any specific project proposals
(emphasis added).
Because the 25 percent figure was thus intended only to be a
"placeholder" until additional work was performed, there is no factual
basis for the Draft Report's reliance on that figure as a "realistic"
metric for the likely loss rate on guaranteed loans.
11. Draft Report: On page 22, the Draft Report states "Under FCRA, DOE
is required to update, or reestimate, the subsidy costs of the LGP to
reflect actual loan performance and changes in expected future loan
performance. Shortfalls identified in annual reestimates are
automatically funded by the federal government under the terms of the
FCRA and are not subject to congressional scrutiny during the annual
appropriations process."
DOE Response: This discussion inaccurately characterizes the operation
of FCRA. Once a loan guarantee is issued, FCRA provides for both `re-
estimates' and `modifications'. In addition, in certain circumstances,
a new guarantee may be issued. The Draft Report only discusses one of
three possible scenarios and thereby incorrectly assumes that any and
all changes in loan guarantees will be re-estimates and the re-
estimates can only be higher.
(See comment 10.):
- Re-estimates of subsidy costs are based largely on changes in
technical assumptions. As noted in OMB Circular A-11, re-estimates can
account for a change in the projection of future cash flows. For a re-
estimate that increases the budget subsidy cost, permanent indefinite
budget authority is available to cover this budgetary accounting
transaction. For a re-estimate that decreases the budget subsidy cost,
the savings can be credited back to the program or to a negative
subsidy receipt account. In this circumstance, DOE (and the taxpayers)
would receive the benefit of the savings, since DOE currently has no
provision to refund the savings to the project.
- By comparison, a modification involves a change in the credit subsidy
estimate due to a changed action that was not assumed in the original
baseline estimate. According to Circular No. A-11, examples of actions
that would trigger modifications would include forbearance, interest
rate reductions, extensions of maturity and prepayments. For a
modification or a new loan guarantee agreement, permanent indefinite
budget authority is not available, and the increased cost must be paid
by appropriations or an additional payment from the project.
- Finally, any change that would require an increase in the loan
guarantee amount, such as a change to due to cost growth above the
level of contingency assumed in the original loan guarantee agreement,
would require either a modification to the loan guarantee agreement or
issuance of a new guarantee in the amount of the additional coverage.
12. Draft Report: On page 23, the Draft Report states "To the extent
that DOE underestimates the fee, and does not collect fees from
borrowers to cover the actual subsidy costs, taxpayers will bear the
cost of any shortfall."
DOE Response: The assertion that "taxpayers will bear the cost of any
shortfall" is inaccurate, imprecise and misleading. Under the
provisions of FCRA, taxpayers only bear a cost if the project defaults
on a loan guarantee. And, in that instance, the cost borne by the
taxpayer is largely determined by the amount of the loan balance
outstanding at the time of the default and the level of the recovery
that the government can obtain from the collateral pledged under the
loan guarantee agreement. Fees paid by the project will offset the net
loss, but the effect of the size of the credit subsidy fee on the net
loss will be much less significant than the other factors.
(See comment 12.):
Specifically under FCRA, the payment for the subsidy cost for a loan
guarantee is held in a "Financing Account." OMB Circular No. A-11
defines a financing account as "a non-budgetary account (its
transactions are excluded from the budget totals) that records all of
the cash flow resulting from post-1991 direct loans or loan
guarantees."[Footnote 28] Thus any transactions involving payments made
into or from the financing account are non- budgetary.
If there is an upward re-estimate in the credit subsidy cost, that re-
estimate is recorded in the non-budgetary financing account from the
application of permanent indefinite budget authority as authorized by
FCRA. But again, this is a non-budgetary transaction.
Finally, the Draft Report fails to note that all of these transactions
involving the loan guarantee financing accounts do not result in any
cash outlay to the public, and thus do not add to the deficit or
require any additional Treasury borrowing from the public.
13. Draft Report: On Page 22 the Draft Report states ".the experience
and data that DOE contains may not be applicable to evaluating the
risks of projects applying in the future."
DOE Response: The current cadre of Departmental staff working on the
LGP have spent their careers in assessing risk for similar type
programs. In addition to the underwriting expertise of the LGPO staff,
each applicant will be required to furnish an initial credit assessment
developed by a recognized, independent credit rating agency as part of
their initial application submission. Additionally, all projects will
be required to supply a full credit rating, an exhaustive investigation
and report, developed by a rating agency prior to closing on a loan
guarantee. Each project will also be reviewed by independent
engineering, marketing, legal, and other financial consultants. The
loan evaluation process thus involves a detailed analysis and
evaluation by several bodies external to the Department. Furthermore,
prior to a final decision by the Secretary to issue a loan guarantee,
the Department will be asked to review and certify that all conditions
precedent to the execution of a loan guarantee agreement have been
fulfilled.
(See comment 3.):
14. Draft Report: On page 22, the Draft Report finds ". project risks
and loan performance could depend heavily on regulatory and legislative
actions, as well as future economic conditions, including energy prices
and economic growth, which generally can not be predicted accurately.
These factors combine to make it difficult for DOE to prepare reliable
estimates of subsidy costs."
DOE Response: The Department's due diligence process will include,
among other evaluations, assessments of political and regulatory risk
and market and off-take risk through both an internal Departmental risk
assessment as well as through assessments by independent, highly
experienced, consultants. Furthermore, the credit underwriting process
will include 'stress-tests' under various scenarios to determine a
project's ability to service debt under 'downside' assumptions. Where
there is evidence of exposure to risk, the LGPO will develop and
negotiate risk mitigation strategies with each project under
consideration for a loan guarantee. Where unmitigated risk exists,
these factors would increase the overall risk assessment of a project
and would lead to either a higher credit subsidy payment calculation,
in which case the risk would be covered through the risk reserve, or a
denial of a project from receiving a loan guarantee depending on the
level of risk exposure.
(See comment 13.):
Preapplication Review:
15. Draft Report: The draft Report on page 24 states "projects in DOE's
portfolio may not represent the full range of technologies targeted by
the program."
DOE Response: The GAO does not have a basis in fact to make this
assertion. The response to the 2006 solicitation represented the full
range of the technologies solicitated. The LGPO can expect the same
diverse response to the FY 2008 solicitations based on input received
from the Requests for Information (RFIs) issued in April and May.
(See comment 14.):
16. Draft Report: On pages 14-15, GAO found that "during the
preapplication review process, DOE did not always clearly document why
it ultimately selected projects that reviewers did not score highly or
recommend initially." In addition, the draft Report states that "DOE's
documentation for deciding which projects to recommend to the Credit
Review Board did not always provide clear justification." Furthermore,
on page 15, the GAO states "After the initial review process was
completed, DOE further defined what it considers "new and significantly
improved" in its final regulations, but has not correspondingly updated
the review criteria. In addition, when DOE conducted its financial
reviews, it evaluated projects by assigning scores between zero and
four – with zero being the weakest score and four being the strongest
score. However, DOE did not define what the possible scores signified."
(See comment 15.):
DOE Response: While the preapplication process did involve some level
of subjectivity, the Department conducted a rigorous evaluation that
involved several layers of 10 independent validation reviews to ensure
sound decision making. Based on the reviewers' extensive backgrounds in
project finance and federal loan guarantee programs, they used their
best professional judgments to conduct financial reviews and evaluate
the projects.
17. Draft Report: The draft Report on page 15 states "60 percent of a
preapplicant's financial score was based on creditworthiness, yet DOE
did not require preapplicants to submit pertinent financial and credit
information such as audited financial statements or credit histories."
DOE Response: The Department disputes this statement. Pro-forma
financial statements were required in every preapplication. However,
when the information was not provided, the LGPO was able to obtain
detailed financial information, on projects with high technical
recommendations, through other independent sources. The inclusion of
detailed sources and uses of project funds and additional supporting
information was, in the LGPO's opinion, sufficient to invite full
applications in which this information could be verified. Furthermore,
this assertion refers to 60% of 50% which is actually 30% of the total
gross weighting. The financial review composed 50% of the total gross
weighting while technical review composed the remaining 50%. It is
important to note that selection of a preapplication does not result in
the approval of a loan.
(See comment 16.):
18. Draft Report: The draft Report at page 16 states "DOE does not
delineate how it will evaluate how a project achieves substantial
environmental benefits and employs new or significantly improved
technologies."
DOE Response: During the preapplication process, reviewers did take
into consideration how individual projects achieved environmental
benefits and employed new or significantly improved technologies.
Moving forward, the LGPO is taking steps to formalize its standards and
procedures to identify the extent to which each project achieves these
environmental benefits and employs new technologies.
(See comment 5, 15, 17.):
19. Draft Report: On page 17, the draft Report states that "DOE is
likely to lose efficiency and effectiveness when it uses [applicants"'
project reports to aid in underwriting loan guarantees."
(See comment 18.):
DOE Response: The applicants' project reports will in no way impair the
efficiency and effectiveness of the underwriting process. Instead, the
reports will contribute to overall risk mitigation. The due diligence
process includes a thorough investigation and analysis of each
project's financial, technical, and legal strengths and weaknesses as
well as all identifiable risks. In addition to the underwriting
expertise of the LGPO, each project will be reviewed in consultation
with independent, licensed and certified engineering, marketing, legal
and financial consultants.
20. Draft Report: On page 15 of the draft Report, the GAO stated "...a
consultant DOE hired to review the preapplication process found that
although the files were in "good working order," DOE did not
consistently conduct and document its technical evaluations and did not
document financial evaluations in depth."
(See comment 19.):
DOE Response: The program offices consistently applied the review
criteria that was set forth in the Credit Review Board memo dated April
23, 2007. However the program offices provided their responses to the
LGPO in different formats, which were interpreted incorrectly in the
audit conducted by the consultant DOE hired. Each review that was
conducted by the program offices was consistent and addressed the
review criteria set forth by the Credit Review Board.
21. Draft Report: On Page 16 the GAO cites "However, in some cases the
guidance lacks specificity for applicants we determined that it does
not contain criteria or guidance that would be sufficient for DOE
reviewers. Specifically it lacks instruction and detail regarding how
DOE will determine project eligibility and review applications, such as
roles and responsibilities, criteria."
DOE Response: Building upon lessons learned from the preapplication
review process, policy and procedures for underwriting the applications
from the 2006 solicitation are being developed and will be completed by
September 2008 with the exception of policies and procedures regarding
monitoring of loan guarantees which will only apply after the LGPO
begins to close loan guarantees. These policies and procedures, in
order of priority, will be completed by December 2008. The FY 2008
solicitations will contain the criteria demonstrating how DOE plans to
evaluate new applications for selection.
(See comment 1.):
22. Draft Report: On page 17 the GAO states "In addition, while DOE's
guidance requests applicants to submit more complete information, such
as credit assessment, it does not provide details regarding how DOE
will evaluate the information to determine creditworthiness."
(See comment 20.):
DOE Response: The preapplication guidelines from the 2006 solicitation
are completely and unequivocally superseded by DOE's Final Rule at 10
CFR 609.2. All future solicitations are governed by the Final Rule.
23. Draft Report: On Page 17 the GAO states "DOE's guidance for the
application process instructs applicants to indicate if their cost
estimates are firm or subject to change but it does not request
applicants to report a level of confidence in their total project
estimates."
(See comment 1.):
DOE Response: As explained during the course of the audit, each project
has unique characteristics and scopes of work that will be assessed
separately by two engineering firms: (1) the applicants' assessment as
required by the Final Rule, which represents a routine report prepared
by the firm's engineers and required by their shareholders and
investors; and (2) an independent assessment by experts in the field
engaged by the LGPO. Project cost estimates will be reviewed and
analyzed for a third time by the LGPO underwriting team. DOE will
ascertain whether potential applicants require additional guidance on
the scope of the independent engineering reports, and will provide
additional guidance if appropriate.
Appendix C:
U.S. Department of Energy:
GAO-08-750 – "Department of Energy: New Loan Guarantee Program Should
Complete Activities Necessary for Effective and Accountable Program
Management":
Supplemental Technical Comments:
At page 1, lines 8-9, strike "with more favorable terms than they may
otherwise obtain" and replace with "when not otherwise available"
(See comment 21.):
At page 5, line 12, strike "select lenders". The Loan Guarantee Program
Office (LGPO) will not select lenders.
(See comment 22.):
At page 9, move header at the bottom of the page 9 to next page.
At page 11, lines 1-2, the following should be added to the first full
sentence on the page: "on a project by project basis." This will help
to clarify that the overall risk to the government may not change
because the total budget authority to issue loan guarantees has been
fixed; while an increase in the maximum guarantee percentage was
adopted in the Final Rule, this only means that there will be a
commensurate reduction in the amount of loan guarantees for other
projects but there will be no change in the total available budget
authority.
(See comment 23.):
At page 14, line 4, strike "seven" and replace with "five". As of May
2008, there are 11 full time equivalent employees on board with a
ceiling of 16.
(See comment 24.):
At page 14, lines 13-14, strike "select lenders". The LGPO will not
select lenders.
(See comment 22.):
At page 16, lines 2-3, strike "In April 2008, DOE officials told us
that they were in the process of hiring two staff to begin developing
credit policies and procedures specific to the LGP" and replace with
"As of May 2008, the LGPO has hired one full time equivalent employee
to fully establish the credit policy function within the LGPO and to
develop credit policies and procedures specific to the LGP."
(See comment 25.):
The following are GAO's comments on the Department of Energy's letter
dated June 13, 2008.
GAO Comments:
1. See "Agency Comments and Our Evaluation," pages 27-30 of this
report.
2. DOE's comments incorrectly cite GAO's finding. We specifically refer
to DOE's determination of the type or timing of contractor resources.
As we stated in the draft report, LGP's director told us he has enough
resources for reviewing and negotiating the loan guarantee applications
related to the 2006 solicitation that companies are submitting.
3. We recognize DOE is in the process of hiring experienced staff.
Nevertheless, the nature of the program may not allow DOE to develop
significant expertise for any particular technology.
4. DOE has not yet developed final metrics and measures or gathered the
data necessary to establish meaningful sector-specific baselines for
its 2006 solicitation, from which it formally invited 16 solar,
biomass, advanced fossil energy coal, and other projects to apply for
loan guarantees.
5. We do not imply that DOE may be biased toward underestimating the
subsidy costs of the program. Rather, we point out that the LGP's
inherent risks due to its nature and characteristics could cause DOE to
underestimate its subsidy costs and therefore not collect sufficient
fees from borrowers.
6. We do not believe that our report creates the impression that DOE
could choose not to develop a methodology to calculate the credit
subsidy cost. On the contrary, we state that it is critical that DOE
develop a sound and comprehensive methodology to estimate subsidy costs
because inherent risks due to the nature and characteristics of the
program will make estimating subsidy costs difficult.
7. DOE did not provide us with a detailed presentation of the LGP's
credit subsidy model. On several occasions, the LGP director told us
that we would be given a detailed presentation once the Office of
Management and Budget (OMB) approved the credit subsidy model. As of
June 24, 2008, DOE stated that OMB had not approved the model.
8. We believe that our report and the Congressional Budget Office (CBO)
report DOE cites adequately explain the rationale for potential biases
in applicants' acceptance of loan guarantees that may increase the
likelihood that DOE's loan portfolio will have more projects for which
DOE underestimated the fee.
9. The fiscal year 2009 President's budget states that the assumptions
related to the LGP reflect an illustrative portfolio; that is, the
assumptions do not apply to a specific loan. Nevertheless, the 25-
percent loss rate assumption from the budget does call into question
whether the 5-percent loss rate draft metric DOE established to assess
the effectiveness of financing decisions is realistic.
10. We have not inaccurately characterized the operation of the Federal
Credit Reform Act of 1990 (FCRA). Instead, we specifically discuss
reestimates to explain that even though DOE is proceeding with LGP
under the provision that borrowers pay for the subsidy cost of the
program, taxpayers will bear the cost of any shortfall, depending on
the extent to which DOE underestimates the risks (subsidy cost) and
therefore does not collect sufficient fees from borrowers. DOE
correctly states that reestimates that increase the subsidy costs are
funded by permanent indefinite budget authority, but DOE does not
explain that these funds come from taxpayers. Furthermore, because of
the nature and characteristics of the program, we believe it is
unlikely that the program as a whole will result in savings associated
with the subsidy cost because, to the extent that any loans default,
the cost of the default will likely be much larger than the fee
collected. Lastly, we did not discuss modifications under FCRA because
DOE has not completed its policies and procedures on estimating subsidy
costs. We would expect one component of these policies and procedures
to explain how DOE will identify, estimate the cost of, and fund
modifications.
11. If a project defaults, the cost of the default will likely be
greater than the fee collected, thus creating a shortfall. Under FCRA,
this shortfall would be identified during the reestimate process and
would ultimately be subsidized by taxpayers.
12. OMB Circular A-11, Preparation, Submission and Execution of the
Budget, describes the budgetary treatment for credit programs under
FCRA requirements. While DOE explains that the financing accounting is
nonbudgetary (its transactions are excluded from the budget totals),
DOE fails to explain the sources of the financing account funds.
According to OMB Circular A-11, "an upward reestimate indicates that
insufficient funds had been paid to the financing account, so the
increase is paid from the program account to the financing account to
make it whole." The program account is a budgetary account, and its
transactions do affect the deficit and may require Treasury to borrow
from the public.
13. We recognize that DOE plans to take steps to assess risk and
develop mitigation strategies; however, we continue to believe that the
nature and characteristics of the LGP result in certain inherent risks
that, by definition, DOE is unlikely to be able to mitigate or
accurately quantify. As a result, there are likely to be many cases in
which the risks will not be covered by the borrower fee or a risk
reserve. In addition, even in instances where DOE's estimates of
subsidy costs are reasonably accurate, the "borrower pays" option may
cause some potential borrowers to not pursue loan guarantees because
the fee is too high relative to the benefits to the borrower of the
loan guarantee.
14. As stated in the report, the inherent risks of the program, along
with the expectation that borrowers will cover the costs of their loan
guarantees, may lead to self-selection bias that tilts the portfolio of
projects toward those for which costs have been underestimated. To the
extent that some projects targeted by Title XVII are not financially
viable without some form of federal assistance or favorable treatment
by regulators, these projects will not pursue loan guarantees even
though they are otherwise eligible. As a result, if this financial
viability is not distributed evenly across technologies targeted by
Title XVII, the projects that ultimately receive loan guarantees may
not represent the full range of technologies targeted by Title XVII.
15. We changed "clearly" to "sufficiently." We distinguish between the
technical and financial reviews that staff conducted, and the rational
and clarity of documentation that management provided for its decision-
making processes. We observed from our file review that, when
preapplications contained sufficient information, reviewers applied the
criteria LGP provided, and in some cases applied additional criteria in
their assessments. These assessments were specific to the
preapplication process, not the application process. At times the
preapplications lacked meaningful information for reviewers to assess.
The cases we highlight in our report are those in which the LGP office
did not provide sufficient justification for inviting projects.
GAO welcomes the LGP's office efforts to establish formal standards and
procedures. In recommending that LGP complete its measures and metrics
associated with achieving benefits and employing new and significantly
improved technologies, we believe this effort will also help inform
future selection processes.
16. DOE did not require preapplications to include proforma "financial
statements." Rather, preapplicants were required to submit financing
plans, estimated project costs, and a financial model detailing the
projected cash flows over the life cycle of the project. We believe
that audited financial statements and credit ratings would be more
useful in assessing creditworthiness. In addition, when evaluating
preapplications, DOE did not combine technical and financial scores.
Therefore, it is accurate to state that creditworthiness comprised 60
percent of the preapplicant's financial score.
17. DOE erroneously refers to the preapplication process here. This
analysis on project evaluation is specific to our discussion of project
eligibility, and DOE's use of external guidance as a proxy for internal
policies and procedures for applications.
18. The statement DOE cites is in context with the prior sentence,
"While DOE recognizes these reports serve an important due diligence
function, DOE has not provided applicants with specific instructions on
what to include." This sentence is also prefaced with "as a result" in
the draft report. We changed the word "underwriting" to "evaluating"
and added "applications" after "loan guarantees" to clarify our
statement.
19. We generally agreed with the consultant's finding. Specifically, we
found that DOE program offices used Credit Review Board-approved
criteria as well as other criteria. In one case, these criteria were
appropriate to differentiate projects in accordance with Title XVII. We
could not fully determine whether the use of these additional criteria
had any impact on the selection process.
20. See also comment 17. DOE's response does not address our report's
analysis; specifically, we are referring to DOE's application guidance.
In addition, while DOE's final rule states what applicants should
submit, it and the application guidance do not indicate how DOE will
evaluate these submissions.
21. Federal loan guarantees do help borrowers obtain more favorable
terms than they may otherwise obtain. For example, a borrower may be
able to get a lower interest rate, an extended grace period, or a
longer repayment period when the loan is guaranteed by the federal
government.
22. For clarification, we revised the report to indicate that DOE needs
to "identify eligible lenders."
23. For clarification, we incorporated DOE's suggested revision.
24. We revised the report to reflect this update of information.
25. We revised the report to state "According to DOE, as of May 2008,
DOE has hired one staff person to develop credit policies and
procedures specific to LGP, and to fully establish its credit policy
function."
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Frank Rusco (202) 512-3841 or ruscof@gao.gov:
Staff Acknowledgments:
In addition to the individuals named above, Marcia Carlsen and Karla
Springer, Assistant Directors; Abe Dymond; Richard Eiserman; Jeanette
M. Franzel; Carol Henn; Jason Kirwan; Kristen Kociolek; Steve Koons;
Sarah J. Lynch; Tom McCool; Madhav Panwar; Mehrunisa Qayyum; Carol
Herrnstadt Shulman; Emily C. Wold; and Barbara Timmerman made key
contributions to this report.
[End of section]
Footnotes:
[1] Pub. L. No. 109-58, Title XVII (Aug. 8, 2005).
[2] 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.
[3] An explanatory statement accompanying the Consolidated
Appropriations Act of 2008 (Pub. L. No. 110-161) stated that the loan
guarantee authority be limited to $38.5 billion, with the authority's
availability expiring at the end of fiscal year 2009.
[4] 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.:
Feb. 28, 2007) and Department of Energy: Observations on Actions to
Implement the New Loan Guarantee Program for Innovative Technologies,
GAO-07-398T (Washington, D.C.: Apr. 24, 2007).
[5] Pub. L. No. 110-5 § 2, 121 Stat. 8, 21(Feb. 15, 2007).
[6] GAO, Standards for Internal Control in the Federal Government, GAO/
AIMD-00-21.3.1 (Washington, D.C.: November 1999).
[7] FCRA provides permanent, indefinite budget authority to cover
increases in costs. 2 U.S.C. § 661c(f).
[8] OMB Circular A-129 requires that agencies with credit programs such
as the LGP establish boards "to coordinate credit management and debt
collection activities, and to ensure full consideration of credit
management and debt collection issues by all interested and affected
organizations."
[9] The Board is chaired by the Deputy Secretary of Energy and its
members include the Chief Financial Officer, the Under Secretary of
Energy, the Under Secretary for Science, the Assistant Secretary for
Policy and International Affairs, the Chief of Staff to the Secretary
of Energy, and the General Counsel.
[10] Pub. L. No. 110-161 (2007) provides that none of the funds made
available in this or prior acts are available for a new LGP
solicitation until 45 days after DOE has submitted to the Committees on
Appropriations a loan guarantee implementation plan that defines the
proposed award levels and eligible technologies. The act further
provides that DOE is not to deviate from the plan without 45 days prior
notice to the Committees.
[11] This solicitation would consider projects for coal-based power
generation facilities, industrial gasification activities at
retrofitted and new facilities that incorporate carbon capture and
sequestration, and advanced coal gasification facilities.
[12] The LGP's appropriation directs the Secretary of Energy to submit
a report to the Committees on Appropriations that contains a summary of
all activities under Title XVII of the Energy Policy Act of 2005,
beginning in fiscal year 2007, with a listing of responses to loan
guarantee solicitations under such title, describing the technologies,
amount of loan guarantee sought, and the applicants' assessment of
risk.
[13] The FFB is a government corporation, created by Congress under the
general supervision of the Secretary of the Treasury. It has statutory
authority to purchase any obligation issued, sold, or guaranteed by a
federal agency to ensure that fully guaranteed obligations are financed
efficiently.
[14] DOE stated in its agency comment letter that the LGP had 11 full-
time equivalent employees on board as of May 2008.
[15] The other five elements are site information and status of
permits, engineering and design, environmental compliance, testing and
commissioning, and operations and maintenance.
[16] GAO, Cost Assessment Guide: Best Practices for Estimating and
Managing Program Costs, Exposure Draft, GAO-07-1134SP (Washington,
D.C.: July 2007).
[17] OPIC was established as an agency of the U.S. government to help
U.S. businesses invest overseas. OPIC's financing and political risk
insurance helps U.S. businesses compete in emerging markets and meet
the challenges of investing overseas when private-sector support is not
available. OPIC financing provides funding through direct loans and
loan guarantees to eligible investment projects in developing countries
and emerging markets.
[18] In January 2004, the Federal Accounting Standards Advisory Board's
Accounting and Auditing Policy Committee issued Technical Release 6,
Preparing Estimates for Direct Loan and Loan Guarantee Subsidies under
the Federal Credit Reform Act Amendments to Technical Release 3:
Preparing and Auditing Direct Loan and Loan Guarantee Subsidies under
the Federal Credit Reform Act, which provides guidance to agencies on
preparing subsidy cost estimates.
[19] Statement of Federal Financial Accounting Standard No. 4,
Managerial Cost Accounting Concepts and Standards for the Federal
Government.
[20] Calculated from table 6 of the Federal Credit Supplement, Fiscal
Year 2009. The assumptions presented for the LGP were a default rate of
50.85 percent and a recovery rate of 50 percent, which result in a loss
rate of 25.42 percent when multiplied together.
[21] In 2005, we reported that FHA could benefit from adopting a pilot
approach when launching a new loan product. By proceeding slowly with
the program, FHA could gain data about default risks and recoveries
that could be applied to future products. With DOE's LGP, however, the
program will continually be evaluating new types of project
technologies; therefore the data that DOE gains may be of limited use
for future projects.
[22] In 2003 we reported that a Maritime Administration (MARAD) loan
guarantee program significantly underestimated the default rate of the
projects and significantly overestimated how much the agency would
recover in the event of defaults. Project uniqueness and size were also
risk factors associated with the MARAD program. See GAO, Maritime
Administration: Weaknesses Identified in Management of the Title XI
Loan Guarantee Program, GAO-03-657 (Washington, D.C.: June 2003).
[23] Congress recognized that data were limited or unreliable in the
early years of credit reform and that this could impede the ability of
agencies to make reliable estimates. Thus, Congress provided for
permanent, indefinite budget authority for upward reestimates of
subsidy costs. Agencies with discretionary credit programs then could
reestimate subsidy costs as required without being limited by the
constraints of budgetary spending limits.
[24] Congressional Budget Office Cost Estimate: S. 1321 Energy Savings
Act of 2007, June 11, 2007.
[25] GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
[26] Before the end of the calendar year, the Department will initiate
an effort with OMB to develop a methodology to estimate and track the
LGPO's administrative costs. Utilizing this cost tracking system, the
Department intends to refine its fee structure. Additionally, the
Department believes that a revolving fund may facilitate the
implementation of this recommendation, and is planning to study its
feasibility.
[27] It is particularly jarring that the Draft Report raises these
concerns regarding bias since no member of the audit team raised a
concern related to this issue when, on January 16, 2008, Departmental
staff made a detailed presentation to the auditors regarding how the
proposed methodology likely would work. (See comment 7 by GAO.)
[28] OMB Circular No. A-11, Section 85.3(h).
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