Department of Energy:

New Loan Guarantee Program Should Complete Activities Necessary for Effective and Accountable Program Management

GAO-08-750: Published: Jul 7, 2008. Publicly Released: Jul 7, 2008.

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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.

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.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: GAO first documented issues with DOE's management and internal controls for the LGP program in July, 2008 report, "Department of Energy: New Loan Guarantee Program Should Complete Activities Necessary for Effective and Accountable Program Management," and expanded upon these findings in the follow-up engagement issued in July, 2010 "Department of Energy: Further Actions Are Needed to Improve DOE's Ability to Evaluate and Implement the Loan Guarantee Program." In response to GAO's findings on internal controls, Congress rescinded $1.5 billion from the LGP's Title XVII section 1705 program in August, 2010. This accomplishment was taken under the July 2010 report due to its timing.

    Matter: 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, and to assist DOE in this regard, 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.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In our 2008 report, "Department of Energy: New Loan Guarantee Program Should Complete Activities Necessary for Effective and Accountable Program Management", we recommended that the Secretary of Energy direct the Chief Financial Officer to amend application guidance to clarify the program's equity requirements to the 16 companies invited to apply for loan guarantees and in future solicitations before substantially reviewing LGP applications. Since the 2008 recommendation, DOE increased the guidance for equity requirements in later solicitations, partly implementing our recommendation. For example, in the August 2006 solicitation issued prior to the 2008 report, DOE indicated that the extent of project sponsor equity commitments was one of the agency?s evaluation factors for loan guarantee applications. However, DOE did not provide guidance about what constituted an equity commitment in the solicitation. In the solicitations issued within a year following the report, DOE included a brief definition of equity as a cash contribution. DOE substantively addressed our concerns with its October, 2009 and August 2010 solicitations which provided an expanded definition of equity that also addressed exclusions.

    Recommendation: To improve the implementation of the LGP and to help mitigate risk to the federal government and American taxpayers, the Secretary of Energy should direct the Chief Financial Officer to amend application guidance to clarify the program's equity requirements to the 16 companies invited to apply for loan guarantees and in future solicitations before substantially reviewing LGP applications.

    Agency Affected: Department of Energy

  2. Status: Closed - Implemented

    Comments: In our 2008 report, "Department of Energy: New Loan Guarantee Program Should Complete Activities Necessary for Effective and Accountable Program Management," we recommended that the Secretary of Energy direct the Chief Financial Officer to amend application guidance to further develop and define performance measures and metrics to monitor and evaluate program efficiency, effectiveness, and outcomes before substantially reviewing Loan Guarantee Program applications. Since our recommendation, DOE developed nine performance measures to evaluate the program's efficiency and outcomes, implementing our recommendation. For example, in its FY 2009 Congressional Budget Justification, DOE had developed two performance measures-one to monitor program efficiency and the other to monitor outcomes. In its June, 2009 Program-Specific Recovery Plan for Section 1705 loans using Recovery Act funds, DOE identified eight performance measures--three efficiency, three outcome, and two output measures to monitor overall program performance. Six of the eight previously developed performance measures were included in DOE's FY 2010 Congressional Budget Justification.

    Recommendation: To improve the implementation of the LGP and to help mitigate risk to the federal government and American taxpayers, the Secretary of Energy should direct the Chief Financial Officer to amend application guidance to further develop and define performance measures and metrics to monitor and evaluate program efficiency, effectiveness, and outcomes before substantially reviewing LGP applications.

    Agency Affected: Department of Energy

  3. Status: Closed - Implemented

    Comments: [In October 2008] The Loan Guarantee Program office began using a DOE software system to track administrative costs within the office, including, for example, staff salaries and travel associated with reviewing the applications for various solicitations. In addition, DOE staff in the field office that was reviewing the greatest number of loan guarantee applications reached an agreement with the program concerning performance of and reimbursement for this work. DOE estimated that annualized fees from loan guarantee applicants and recipients would cover DOE's administrative costs for FY 2009-2014.

    Recommendation: To improve the implementation of the LGP and to help mitigate risk to the federal government and American taxpayers, the Secretary of Energy should direct the Chief Financial Officer to amend application guidance to 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 before substantially reviewing LGP applications.

    Agency Affected: Department of Energy

  4. Status: Closed - Not Implemented

    Comments: In our 2008 report, "Department of Energy: New Loan Guarantee Program Should Complete Activities Necessary for Effective and Accountable Program Management," we recommended that the Secretary of Energy direct the Chief Financial Officer to 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 before substantially reviewing Loan Guarantee Program applications. Since the 2008 recommendation, DOE increased the content guidelines for engineering reports in later solicitations, partly implementing our recommendation. For example, in the August 2006 solicitation issued prior to the 2008 report, there was no guidance for the content of independent engineering reports. In contrast, the July 2009 solicitation provides more detailed instructions on the required content of independent engineering reports such as an evaluation of the project plan, siting and permitting, engineering and design, contractual requirements, among others. DOE further addressed our concerns with the August, 2010 solicitation which provided a detailed, enumerated list of the required content of engineering reports to be included in the application materials. LGP also revised its application review process in July, 2009 to include a two-part intake stage so that LGP could screen applications against eligibility criteria prior to performing a more detailed review of the applications against technical and financial factors so that only the strongest applications would proceed to the more substantive and thorough due diligence process.

    Recommendation: To improve the implementation of the LGP and to help mitigate risk to the federal government and American taxpayers, the Secretary of Energy should direct the Chief Financial Officer to 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 before substantially reviewing LGP applications.

    Agency Affected: Department of Energy

  5. Status: Closed - Implemented

    Comments: To facilitate timely action on applications for loan guarantees, DOE developed "standing source" lists of contractors with legal, engineering, financial, and marketing expertise. Listed contractors were determined by DOE to be capable of providing specific services that DOE identified. Such contractors were available for selection, under a competitive process, to review projects under consideration for loan guarantees. Developing the standing list helped ensure that DOE would have the necessary expertise readily available during the review process.

    Recommendation: To improve the implementation of the LGP and to help mitigate risk to the federal government and American taxpayers, the Secretary of Energy should direct the Chief Financial Officer to clearly define needs for contractor expertise to facilitate timely application reviews before substantially reviewing LGP applications.

    Agency Affected: Department of Energy

  6. Status: Closed - Implemented

    Comments: In our 2008 report, "Department of Energy: New Loan Guarantee Program Should Complete Activities Necessary for Effective and Accountable Program Management," we recommended that the Secretary of Energy direct the Chief Financial Officer to 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 before substantially reviewing Loan Guarantee Program applications. In March, 2009, the DOE Loan Guarantee Program Office issued a Credit Policies and Procedures Manual that established detailed internal loan selection policies and procedures, including roles and responsibilities for LGP staff, and criteria for conducting analyses and decision-making, but the manual did not provide detailed guidance for documenting analyses. In March, 2011, the DOE Inspector General issued a report highlighting poor documentation and records management in the LGP, and cited GAO's 2008 recommendation on the issue. Additionally, in our March 2012 report, we determined that LGP officials were not documenting the results of their analyses consistently, and LGP had not implemented a records management system to store the results of LGP analyses or decisions. In October, 2011, LGP revised its Credit Policies and Procedures manual to also include specific instructions to LGP staff to document their analyses and decisions in LGP's records management system.

    Recommendation: To improve the implementation of the LGP and to help mitigate risk to the federal government and American taxpayers, the Secretary of Energy should direct the Chief Financial Officer to 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 before substantially reviewing LGP applications.

    Agency Affected: Department of Energy

 

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