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B-178726 May 9, 1977

B-178726 May 09, 1977
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Ottinqer: This is in reply to your March 21. Asking whether our views have changed on the use of loan guarantees to encourage the development of emerging energy technologies. There are a number of other majorl bills (e.g. Regulatory problems are resolved. We believe it should at least assure itself that the technology has been shown to work and is marginally economical and the party wanting to make the investment cannot do so primarily because of financial constraints. Unless such criteria is established. The price at which energy produced by the technology would have to be sold and the means by which the price would be assimilated by our economic system. Is the technology developed to the extent that it can be deployed on a broad basis?

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B-178726 May 9, 1977

The Honorable Richard L. Ottinger House of Representatives

Dear Mr. Ottinqer:

This is in reply to your March 21, 1977, letter to Monte Canfield, referring to S. 37, 95th Congress, and asking whether our views have changed on the use of loan guarantees to encourage the development of emerging energy technologies. This bill, if enacted, would amend the Federal Nonnuclear Energy Research and Development Act of 1974 (42 U.S.C. 5901) to provide the Energy Research and Development Administration (ERDA) with general or "generic" loan guarantee authority for the advancement of nonnuclear energy research, development, and demonstration. The bill would also provide $300 million in loan guarantees specifically for synthetic fuels and other forms of energy from biomass.

In addition to S. 37, there are a number of other majorl bills (e.g., H.R. 36, H.R. 37, H.R. 38, and H.R. 1142) before the 95th Congress which would provide various forms of Federall assistance to encourage the use of a variety of energy technologies. This assistance would be in the form of loan quarantees and price supports for demonstrating synthetic fuels, oil shale, biomas ocean thermal gradient, geothermal,--and other renewable resource technologies, and grants and loans for community impact assistance.

Our views on the use of loan guarantees to encourage the development of emerging energy technologies remain the same as those expressed in our August 24, 1976, report to the Congress entitled "An Evaluation of Proposed Federal Assistance for Financing Commercialization of Emerging Energy Technologies" (EMD-76-10). We continue to believe that--in lieu of providing Federal loan guarantees for commercial-size plants--efforts should be directed to researching and developing improved emerqinq energy technologies until their technical, economic, environmental, socioeconomic, and regulatory problems are resolved. We continue to believe also that information on. these problems can and should first be obtained from smaller than commercial-size plants.

However, if the Congress wishes to enact one or more of the above bills, we believe it should at least assure itself that the technology has been shown to work and is marginally economical and the party wanting to make the investment cannot do so primarily because of financial constraints. We also believe that the Congress should amend the legislation to (1) establish criteria for making choices among energy technologies and among financing mechanisms to stimulate development of particular technologies, (2) precisely define the type of demonstration projects which would be eligible for Federal assistance, and (3) provide for close congressional overnight of the programs, including affirmative action to approve or disapprove individual large projects before financial arrangements would be finalized.

CRITERIA NEEDED-FOR-CHOOSING-ENERGY TECHNOLOGIES AND FINANCING MECHANISMS

None of the above bills establishes criteria for making choices among energy technologies or for determining the best mechanism for stimulating particular technologies. Unless such criteria is established, piecemeal decisions may result there by hampering the achievement of energy goals. Our earlier report discussed criteria for making the right choices among energy technologies. We said that making these choices requires consideration of three factors.

--The contribution that each technology can make in meeting the Nation's energy needs within a specified time frame either through reducing demand or increasing energy supply.

--The total cost of making the technology commercial including costs of plant construction, costs of alleviating adverse socioeconomic impacts caused by the energy development, and the costs of price supports or further subsidies which may be required.

--The price at which energy produced by the technology would have to be sold and the means by which the price would be assimilated by our economic system.

The decision to use Federal incentives to assist in the commercialization of energy technologies and the determination of which incentives would be most appropriate requires, in our view, interrelated analysis of at least three factors..

--The technology's state of development. Is the technology developed to the extent that it can be deployed on a broad basis? Have the environmental and socioeconomic questions been answered?

--The technology's economic feasibility. Will the energy produced as a result of deploying the technology be economically competitive with competing energy sources?

--The target group whose actions will be influenced. Are they large industrial firms or diverse and widely dispersed groups such as homeowners? Interrelated analysis of these three factors should precede the decision to choose the most appropriate financing mechanism or other Government activity to stimulate a particular energy technology.

For example, loan guarantees have received much attention as a potential way of encouraging a variety of energy technologies. In general, loan guarantees would seem to best fit those circumstances where the technology has been known to work and is marginally economical, and the party wanting to invest in the technology cannot do so primarily fly because of financial constraints. By transferring some of the risk, loan guarantees tend to marginally reduce the interest costs of a loan and to assure the availability of financing which otherwise may not be available. This is the basic logic, for example, for making Federal loan guarantees available for housing. Conversely, the decision to authorize loan guarantees should be carefully examined and other options considered when there are questions regarding the viability of the technology or the economic competitiveness of the product.

Any loan guarantee legislation should require ERDA to evaluate potential projects on the basis of criteria which would include those listed above and report to the Congress on the specific results of the evaluations. Such evaluations would better enable the Congress to determine if loan guarantees are warranted for specific emerging energy technologies.

ELIGIBLE PROJECTS NEED TO BE PRECISELY DEFINED

While each of the above bills would grant - ERDA authority to issue loan guarantees for "demonstration" projects, all need to define what size plant or generation of technology

Would be eligible. The bills, as now written, would enable ERDA to guarantee loans for very large, so called "commercial-size" demonstration projects using technologies where economic, environmental, socioeconomic, and other issues have not been resolved.

This would clearly be inconsistent with our view that (1) efforts should be directed to researching and developing improved emerging energy technologies until their technical, economic, environmental, socioeconomic, and regulatory problems are resolved and (2) information on these problems can and should first be obtained from smaller than commercial-size plants.

CLOSE CONGRESSIONAL OVERSIGHT OF THE PROGRAMS IS NEEDED

In view of the high potential Government liability under each of the bills, we believe it desirable for the Congress to maintain close oversight of the programs. Under all the bills, except H.R. 36, large projects would proceed unless both Houses of Congress, in the case of H.R. 37, H.R. 38, and H.R. 1142, or either House in the case of S. 37, pass resoultions to the contrary within a 90-day period. Under H.R. 36, projects coming over $50 million would require congressional approval under the provisions of the Federal Nonnuclear Energy Research and Development Act of 1974.

We believe it would be preferable for S. 37, H.R. 37,.H.R. 38, and H.R. 1142 to require that the Congress take affirmative action to approve or disapprove each large project, as specified in the legislation, before financial arrangements would be finalized. Such a provision would more clearly provide the Congress with an opportunity to evaluate the proposal considering the economics, energy potential, and feasibility of the project's technology.

We are concerned also that the bills do not make clear whether ERDA would be required to show the total amount of outstanding loan guarantees in its annual budget. The congressional Budget Act of 1974 (Titles I to IX, Public Law No. 93-344, 88 Stat. 297, July 12, 1974) is a comprehensive statute which sets forth many of the procedures by which the Federal budgetary process is to operate. Our interpretation: of the act's language and the intent of the Congress in enacting this legislation is that the total amount of loan guarantees, with their contingent liabilities, is not required to be included in the Federal budget, or the budget resolutions passed pursuant to the act.

However, one must look beyond the language of the congressional Budget Act and consider that one of its fundamental objectives was to establish a process through which the Congress could systematically consider the fatal Federal budget and determine priorities for the allocation of budget resources. We believe this process achieves its maximum effectiveness when the budget represents as complete as possible a picture of the financial activities of Federal agencies.

We further believe it is vital to maximizing the effectiveness of the process that Federal financial resources be measured as accurately as possible because priorities are actually established through decisions on the conferring of the authority to enter into obligations which will result in immediate or future outlays of Government funds.

From this standpoint, therefore, the budget should (1) include all actions which confer authority to spend money, (2) reflect as accurately as possible the amount of such authority which is conferred, and 13) recognize the point at which control over the spending of the money passes from the Congress to the administering agency The consequence of excluding loan guarantees with their contingent liabilities from the budget is to thwart Congress' achieving the maximum effectiveness of the process it established to review the Federal budget and determine priorities.

In the case of Federal loan guarantees for housing and other programs, historical experience permits the default rate to be estimated with reasonable accuracy and included in the budget. However, if the Congress enacts any of the subject loan guarantee legislation, or similar legislation, authorizing a relatively small number of very large loan guarantees, we believe it would be difficult, if not impossible, to accurate, predict the extent of default. We, therefore, believe it would be preferable if these bills provided that the total amount approved for these loan guarantees be deemed budget authority, notwithstanding section 3(a)(2) of the Congressional Budget Act of 1974; and that such amount be included in the budget authority totals for the appropriate functional category as established by budget resolutions passed pursuant to the act. A footnote might be used to indicate that the amount is a contingent liability.

Sincerely yours,

PAUL G. DEMBLING Acting Comptroller General of the United States

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