The Department of Energy:

Key Steps Needed to Help Ensure the Success of the New Loan Guarantee Program for Innovative Technologies by Better Managing Its Financial Risk

GAO-07-339R: Published: Feb 28, 2007. Publicly Released: Feb 28, 2007.

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In May 2006, the Department of Energy (DOE) proposed transferring appropriations from some DOE accounts to begin a new loan guarantee program (LGP) authorized by the Energy Policy Act of 2005 (EPAct 05). Title XVII of EPAct 05--Incentives for Innovative Technologies--authorized the LGP to guarantee loans for projects intended to (1) decrease air pollutants or man-made greenhouse gases by reducing their production or by sequestering them (storing them to prevent their release into the atmosphere), (2) employ new or significantly improved technologies compared with current commercial technologies, and (3) have a "reasonable prospect" of repayment. Such projects could include renewable energy systems, advanced fossil energy technologies, and production facilities for fuel-efficient vehicles. Although EPAct 05 authorized the LGP, the Federal Credit Reform Act of 1990 requires that Congress appropriate budget authority for loan guarantee program costs before loans can be made. In appropriating budget authority for the LGP, Congress would be not only authorizing DOE to issue the loan guarantees but also establishing policy by setting limits on the dollar amount of loans that can be guaranteed. Congress can also specify limits on the amount of LGP administrative costs DOE can incur each year. In this context, you asked that we report on the (1) sources and use of funds for the LGP in fiscal years 2006 and 2007, (2) extent to which the LGP could result in a financial risk to taxpayers, and (3) steps DOE has taken to ensure that the LGP will be well managed.

In summary, in fiscal year 2006, and continuing through October 2006, DOE used about $503,000 from three separate appropriation accounts to fund LGP activities: about $347,000 from its Departmental Administration appropriation and Science appropriation accounts and about $156,000 from its Energy Supply and Conservation appropriation and Science appropriation accounts. DOE used these funds for the salaries of three staff detailed to the LGP office and for contracts to support program development, including the development of an LGP Web site. DOE is continuing to pay for task order support services to respond to program inquiries; these payments are in addition to the $503,000 already spent to initiate the program. Regarding future activities, DOE officials said they are awaiting appropriations before taking additional steps to implement the LGP. Although LGP guidelines call for borrowers to be charged fees to cover program costs, the program could result in substantial financial costs to taxpayers if DOE underestimates total program costs. These include the administrative cost associated with evaluating applications; offering, negotiating, and closing guarantees; and servicing and monitoring the guarantees. DOE is required to recover applicable administrative costs, but it has not developed a plan to determine how it will calculate any fees to charge borrowers to cover these costs or how it will cover shortfalls if it does not charge borrowers enough. Appropriated funds may be necessary to cover shortfalls in administrative costs. The other type of program cost is the subsidy cost, which is the estimated net present value of the long-term cost to the federal government of guaranteeing loans over the entire period that the loans are outstanding, excluding administrative costs. From OMB budget guidance, internal control and accounting standards, and the experience of other loan guarantee programs, we identified the following key steps that can provide greater program accountability and reasonable assurance that program objectives will be met. Issuing regulations: DOE has not issued regulations for implementing the LGP, relying instead on its guidelines to award the first $2 billion in loan guarantees. Unlike guidelines, regulations (1) go through the public notice and comment process and thus are transparent to the public, oversight agencies, and Congress and (2) carry the force of law and hold the agency implementing the program and program participants accountable to the terms specified in the regulations. Establishing a credit review boar: DOE has drafted a charter for a credit review board, but it has not yet been provided to the Secretary of Energy for approval. Setting policies and procedures for selecting and monitoring loans and lenders: DOE has taken some steps towards establishing such policies and procedures through its guidelines, but it has not completed them. Setting policies and procedures for estimating administrative and subsidy costs and accounting for loan guarantees: As noted above, DOE has not developed policies or procedures for estimating administrative or subsidy costs. In addition, it has not developed policies or procedures for accounting for loan guarantees. Setting program goals and objectives tied to outcome measures to determine program effectiveness: DOE has not established outcome measurements. Instead, it has set the broad objectives of furthering the policy goals generally set forth in EPAct 05 and promoting the President's Advanced Energy Initiative.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In May 2007, DOE implemented this recommendation when its Office of Finance and Accounting established standard operating procedures for accounting and reporting for DOE Loan Programs (SOP 1.4). Among other things, the procedures enable DOE to account for payments received from applicants for administrative costs, which is important because the Energy Policy Act of 2005, which established the loan guarantee program, requires that borrowers be charged fees to cover DOE's costs to administer the program. As we recommended, DOE established the procedures before it issued the first loan guarantee in 2010.

    Recommendation: To better ensure that the LGP is well managed, the Secretary of Energy should ensure that the department, before selecting eligible projects for loan guarantees, etablishes policies and procedures to account for loan guarantees.

    Agency Affected: Department of Energy

  2. Status: Closed - Implemented

    Comments: DOE's credit policies manual lays out policies and procedures for estimating subsidy costs and defines administrative costs. In addition, according to DOE, in November 2008 the Office of Management and Budget approved the LGP's model for calculating the credit subsidy costs of loan guarantees. Regarding administrative costs, DOE's solicitations describe how it will charge these costs to applicants. These actions meet the intent of our recommendation.

    Recommendation: To better ensure that the LGP is well managed, the Secretary of Energy should ensure that the department, before selecting eligible projects for loan guarantees, establishes policies and procedures for developing subsidy and administrative cost estimates.

    Agency Affected: Department of Energy

  3. Status: Closed - Implemented

    Comments: DOE satisfied GAO's recommendation to establish policies and procedures for selecting lenders and loans to guarantee and for monitoring lenders and loans once the guarantees have been issued. On October 23, 2007, and December 4, 2009, DOE issued final rules implementing its Title XVII loan guarantee program for innovative energy technologies. The rules incorporated policies and procedures for the issuance of solicitations, submission of applications, and the evaluation of loan guarantee applications. The rules also lay out the requirements for eligible lenders. In addition, on March 5, 2009, the Department of Energy (DOE) issued a credit policies and procedures manual for the program that provides further detail on these policies and procedures. The manual also provides policies and procedures for credit monitoring of projects once loan guarantees have been issued.

    Recommendation: To better ensure that the LGP is well managed, the Secretary of Energy should ensure that the department, before selecting eligible projects for loan guarantees, establishes policies and procedures for selecting lenders and loans to guarantee and for monitoring lenders and loans once the guarantees have been issued.

    Agency Affected: Department of Energy

  4. Status: Closed - Implemented

    Comments: On October 23, 2007, and December 4, 2009, DOE issued final rules implementing its Title XVII loan guarantee program for innovative energy technologies. The rules elaborate on the program established by Title XVII by defining the technologies and types of projects covered by the program, as well as the financial structure required for projects. In publishing this rule, DOE made program requirements publicly available to borrowers; it also established means by which it could help manage project and program risk and protect the government's financial and policy interests. Issuing a rule is in keeping with the intent of our recommendation to provide greater protection of the government's interests because this rule, like other regulations, cannot be changed without public or congressional input and carries the force of law.

    Recommendation: To better ensure that the LGP is well managed, the Secretary of Energy should ensure that the department, before selecting eligible projects for loan guarantees, issues final program regulations that protect the government's interests, manage risk, and ensure that borrowers are aware of program requirements.

    Agency Affected: Department of Energy

  5. Status: Closed - Implemented

    Comments: DOE has taken actions to define program goals and performance measures in order to judge program effectiveness. In 2009, DOE provided information linking the loan guarantee program to two department wide performance goals and information on nine performance measures it had established for the program. In our 2010 report (GAO-10-627) we reported that DOE had established performance goals and measures but that the performance goals did not reflect the full range of policy goals for the program and, consequently, that DOE could not be sure that its performance measures were appropriate. In March 2011, DOE provided additional information explaining how it had revised its performance goals and measures for the program to include five annual performance goals with associated measures targets. We have not evaluated the new goals and measures; consequently, we have not determined whether DOE's new performance goals and measures will enable the agency to fully assess the effectiveness of the program. Nonetheless, the actions meet the intent of the recommendation.

    Recommendation: To better ensure that the LGP is well managed, the Secretary of Energy should ensure that the department, before selecting eligible projects for loan guarantees further defines program goals and objectives tied to outcome measures for determining program effectiveness.

    Agency Affected: Department of Energy

 

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