GAO
United States Government Accountabilit
y
Office
Report to Congressional Committees
DEPARTMENT OF
ENERGY
Further Actions Are
Needed to Improve
DOE’s Ability to
Evaluate and
Implement the Loan
Guarantee Program
July 2010
GAO-10-627
What GAO Found
United States Government Accountability Office
Why GAO Did This Study
Highlights
Accountability Integrity Reliability
Jul
y
2010
DEPARTMENT OF ENERGY
Further Actions Are Needed to Improve DOE’s Ability
to Evaluate and Implement the Loan Guarantee
Program
Highlights of GAO-10-627, a report to
congressional committees
Since the Department of Energy’s
(DOE) loan guarantee program
(LGP) for innovative energy
projects was established in Title
XVII of the Energy Policy Act of
2005, its scope has expanded both
in the types of projects it can
support and in the amount of loan
guarantee authority available. DOE
currently has loan guarantee
authority estimated at about $77
billion and is seeking additional
authority. As of April 2010, it had
issued one loan guarantee for $535
million and made nine conditional
commitments. In response to
Congress’ mandate to review
DOE’s execution of the LGP, GAO
assessed (1) the extent to which
DOE has identified what it intends
to achieve through the LGP and is
positioned to evaluate progress and
(2) how DOE has implemented the
program for applicants. GAO
analyzed relevant legislation, prior
GAO work, and DOE guidance and
regulations. GAO also interviewed
DOE officials, LGP applicants, and
trade association representatives.
What GAO Recommends
GAO recommends that DOE
develop performance goals
reflecting the LGP’s policy goals
and activities; revise the loan
guarantee process to treat
applicants consistently unless there
are clear, compelling grounds not
to do so; and develop mechanisms
for administrative appeals and for
systematically obtaining and
addressing applicant feedback.
DOE said it is taking steps to
address GAO’s concerns but did
not explicitly agree or disagree
with the recommendations.
DOE has broadly indicated the program’s direction but has not developed all
the tools necessary to assess progress. DOE officials have identified a number
of broad policy goals that the LGP is intended to support, including helping to
mitigate climate change and create jobs. DOE has also explained, through
agency documents, that the program is intended to support early commercial
production and use of new or significantly improved technologies in energy
projects that abate emissions of air pollutants or of greenhouse gases and
have a reasonable prospect of repaying the loans. GAO has found that to help
operationalize such policy goals efficiently and effectively, agencies should
develop associated performance goals that are objective and quantifiable and
cover all program activities. DOE has linked the LGP to two departmentwide
performance goals, namely to (1) double renewable energy generating
capacity by 2012 and (2) commit conditionally to loan guarantees for two
nuclear power facilities to add a specified minimum amount of capacity in
2010. However, the two performance goals are too few to reflect the full range
of policy goals for the LGP. For example, there is no performance goal for the
number of jobs that should be created. The performance goals also do not
reflect the full scope of program activities; in particular, although the program
has made conditional commitments to issue loan guarantees for energy
efficiency projects, there is no performance goal that relates to such projects.
Without comprehensive performance goals, DOE lacks the foundation to
assess the program’s progress and, more specifically, to determine whether
the projects selected for loan guarantees help achieve the desired results.
DOE has taken steps to implement the LGP for applicants but has treated
applicants inconsistently and lacks mechanisms to identify and address their
concerns. Among other things, DOE increased the LGP’s staff, expedited
procurement of external reviews, and developed procedures for deciding
which projects should receive loan guarantees. However, GAO found:
DOE’s implementation of the LGP has treated applicants inconsistently,
favoring some and disadvantaging others. For example, DOE conditionally
committed to issuing loan guarantees for some projects prior to completion
of external reviews required under DOE procedures. Because applicants
must pay for such reviews, this procedural deviation has allowed some
applicants to receive conditional commitments before incurring expenses
that other applicants had to pay. It is unclear how DOE could have sufficient
information to negotiate conditional commitments without such reviews.
DOE lacks systematic mechanisms for LGP applicants to administratively
appeal its decisions or to provide feedback to DOE on its process for issuing
loan guarantees. Instead, DOE rereviews rejected applications on an ad hoc
basis and gathers feedback through public forums and other outreach
efforts that do not ensure the views obtained are representative.
Until DOE develops implementation processes it can adhere to consistently,
along with systematic approaches for rereviewing applications and obtaining
and addressing applicant feedback, it may not fully realize the benefits
envisioned for the LGP.
View GAO-10-627 or key components.
For more information, contact Frank Rusco at
(202) 512-3841 or ruscof@gao.gov.
Page i GAO-10-627
Contents
Letter 1
DOE Has Broadly Indicated the Program’s Direction but Is Not
Well Positioned to Evaluate Progress 6
DOE Has Taken Steps To Implement the LGP but Has Treated
Applicants Inconsistently and Lacks Mechanisms to Identify and
Address Applicants’ Concerns 7
Conclusions 12
Recommendations for Executive Action 12
Agency Comments 13
Appendix I Scope and Methodology 15
Appendix II Performance Measures for the LGP 17
Appendix III Application Review Process 18
Appendix IV Standardized Fees Associated with Obtaining a Loan
Guarantee, by Solicitation 22
Appendix V Loan Guarantee Amounts Available and Amounts
Applicants Sought for Technology Categories
Targeted in Solicitations
23
Appendix VI Comments from the Department of Energy 24
GAO Comments 29
Appendix VII GAO Contact and Staff Acknowledgments 31
DOE Loan Guarantee Program
Table
Table 1: Technology Categories Targeted by Solicitations Issued
for the LGP and Amounts Available under the
Solicitations, as of April 2010 4
Figures
Figure 1: 2008 Solicitation for Energy Efficiency, Renewable
Energy, and Advanced Transmission and Distribution
Technologies 18
Figure 2: 2008 Solicitation for Coal-based Power Generation and
Industrial Gasification Facilities That Incorporate Carbon
Capture and Sequestration or Other Beneficial Uses of
Carbon and for Advanced Coal Gasification Facilities 19
Figure 3: 2008 Solicitation for Nuclear Power Facilities 20
Figure 4: 2008 Solicitation for Front-End Nuclear Facilities 21
Abbreviations
CRB Credit Review Board
DOE Department of Energy
EPAct Energy Policy Act of 2005
FIPP Financial Institution Partnership Program
GPRA Government Performance and Results Act
LGP Loan Guarantee Program
NETL National Energy Technology Laboratory
Recovery Act American Recovery and Reinvestment Act
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Page ii GAO-10-627 DOE Loan Guarantee Program
Page 1 GAO-10-627
United States Government Accountability Office
Washington, DC 20548
July 12, 2010
The Honorable Byron L. Dorgan
Chairman
The Honorable Robert F. Bennett
Ranking Member
Subcommittee on Energy and Water Development
Committee on Appropriations
United States Senate
The Honorable Peter J. Visclosky
Chairman
The Honorable Rodney P. Frelinghuysen
Ranking Member
Subcommittee on Energy and Water Development
Committee on Appropriations
House of Representatives
Through calendar year 2009, the Department of Energy’s (DOE) Loan
Guarantee Program (LGP) received more than 170 applications seeking
over $175 billion in loan guarantees, generally to bring innovative energy
technologies to market. Under normal economic conditions, companies
can face obstacles in securing enough affordable financing to survive the
“valley of death” between developing innovative technologies and
commercializing them. Because the risks that lenders must assume to
support new technologies can put private financing out of reach,
companies may not be able to commercialize innovative technologies
without government assistance. The financial crisis that emerged in late
2008, together with the associated economic decline, has further reduced
access to capital markets for innovative energy technologies. In this
constrained economic environment, even companies that might ordinarily
rely on private financing are turning to the federal government for
assistance.
Federal loan guarantee programs such as DOE’s can help companies
obtain affordable financing because the federal government agrees to
reimburse lenders for the guaranteed amount if the borrowers default,
which encourages lending by reducing the lenders’ financial risks. In
addition, to the extent that a federal loan guarantee signals confidence in a
project, such guarantees can help companies raise capital from other
sources, for example by selling equity. However, loan guarantee programs
can also expose the government to substantial financial risks. In the past,
DOE Loan Guarantee Program
problems with loan guarantee programs have occurred, in part, because
agencies did not exercise due diligence during the loan origination and
monitoring processes.
Since the LGP was authorized under Title XVII of the Energy Policy Act of
2005 (EPAct), its scope has expanded.
1
The act—specifically section
1703—originally authorized DOE to guarantee loans for projects that (1)
use new or significantly improved technologies as compared with
commercial technologies already in service in the United States and (2)
avoid, reduce, or sequester emissions of air pollutants or man-made
greenhouse gases. In February 2009, Congress passed the American
Recovery and Reinvestment Act (Recovery Act), which amended Title XVII
by adding section 1705.
2
Under section 1705, DOE may guarantee loans for
projects using commercial technologies. Projects supported by the
Recovery Act must employ renewable energy systems, electric power
transmission systems, or leading-edge biofuels that meet certain criteria;
begin construction by the end of fiscal year 2011; and pay wages at or
above market rates.
The LGP’s loan guarantee authority has also increased. In fiscal year 2007,
Congress authorized up to $4 billion in loan guarantees for projects that
meet the criteria in section 1703. By fiscal year 2009, Congress had
authorized an additional $47 billion in loan guarantees for projects that
meet these criteria.
3
Congress did not appropriate funds to cover the
associated credit subsidy costs—that is, the government’s estimated net
long-term cost, in present value terms, of direct or guaranteed loans over
the entire period the loans are outstanding (not including administrative
costs). Consequently, borrowers who obtain loan guarantees under
section 1703 must pay fees to cover these costs. Under the Recovery Act,
Congress has provided nearly $4 billion to cover the credit subsidy costs
1
Pub. L. No. 109-58, Title XVII (Aug. 8, 2005).
2
Pub. L. No. 111-5 (Feb. 17, 2009).
3
Omnibus Appropriations Act, 2009, Pub. L. No. 111-8, Div. C, Title III (Mar. 11, 2009). The
act provided that of the authorized amount of $47 billion, $18.5 billion shall be for nuclear
power. Further congressional direction about the allocation of loan guarantee authority
among technology categories was contained in the explanatory statement accompanying
the act. Use of the funds appropriated for the program was subject to certain conditions,
such as a requirement for DOE to submit an implementation plan to the appropriations
committees prior to issuing any new solicitations inviting applications for loan guarantees.
Page 2 GAO-10-627 DOE Loan Guarantee Program
for projects that meet the criteria in section 1705.
4
While the Recovery Act
appropriation did not specify the amount of new loan guarantee authority,
DOE officials said that the department believes credit subsidy costs will
average at least 15 percent of the value of loan guarantees. Accordingly,
the nearly $4 billion Recovery Act appropriation to pay credit subsidy
costs could increase the amount of loans that the LGP guarantees by about
$26 billion, raising the program’s total estimated loan guarantee capacity
to about $77 billion.
As of April 2010, the department had issued eight solicitations inviting
applications for projects using various categories of technologies (see
table 1). It had also issued one loan guarantee for $535 million to Solyndra,
one of the companies that responded to DOE’s initial LGP solicitation
issued in 2006, and had made nine conditional commitments to issue
additional loan guarantees.
5
The one loan guarantee and four of the
conditional commitments were made under the Recovery Act; the other
five conditional commitments were made under section 1703.
4
Pub. L. No. 111-5, Div. A, Title IV (Feb. 17, 2009). Congress originally appropriated nearly
$6 billion to pay the credit subsidy costs of projects supported under section 1705, with the
limitation that funding to pay the credit subsidy costs of leading-edge biofuel projects
eligible under this section would not exceed $500 million. Congress later authorized the
President to transfer up to $2 billion of the nearly $6 billion to expand the “Cash for
Clunkers” program. Pub. L. No. 111-47 (Aug. 7, 2009). The $2 billion was transferred to the
Department of Transportation, leaving nearly $4 billion to cover credit subsidy costs of
projects supported under section 1705.
5
A conditional commitment is a commitment by DOE to issue a loan guarantee if the
applicant satisfies specific requirements. The Secretary of Energy has the discretion to
cancel a conditional commitment at any time for any reason prior to the issuance of a loan
guarantee.
Page 3 GAO-10-627 DOE Loan Guarantee Program
Table 1: Technology Categories Targeted by Solicitations Issued for the LGP and Amounts Available under the Solicitations,
as of April 2010
Dollars in billions
Targeted technology category
Solicitation
issuance date
Amount
available
Mixed
a
Aug. 8, 2006 $4.0
b
Nuclear power facilities July 11, 2008 18.5
Front-end nuclear facilities
c
July 11, 2008 2.0
b
Coal-based power generation and industrial gasification facilities that incorporate carbon
capture and sequestration or other beneficial uses of carbon and for advanced coal
gasification facilities
Sept. 22, 2008 8.0
Energy efficiency, renewable energy, and advanced transmission and distribution
technologies (EERE)
Oct. 29, 2008 10.0
EERE July 29, 2009 8.5
Electric power transmission infrastructure projects July 29, 2009 5.0
d
Commercial technology renewable energy generation projects under the Financial Institution
Partnership Program (FIPP)
Oct. 7, 2009 5.0
d
Source: GAO presentation of DOE data.
a
The 2006 mixed solicitation invited applications for all technologies eligible to receive loan
guarantees according to the Energy Policy Act of 2005 except for nuclear facilities and oil refineries.
b
DOE received authorization to guarantee up to $4 billion in loans in fiscal year 2007 and had planned
to use this authority to support projects submitted in response to the 2006 mixed technology
solicitation. On March 25, 2010, DOE informed Congress of its intention to use up to $2 billion of its
fiscal year 2007 loan guarantee authority for projects submitted in response to the 2008 front-end
nuclear facilities solicitation.
c
Front-end nuclear facilities are to accelerate deployment of new uranium enrichment capacity and
distribution.
d
This amount is an estimate because the solicitation did not specify how much DOE would issue in
loan guarantees. This estimate is based on the solicitation’s stated plan to use $750 million to cover
credit subsidy costs and assumes credit subsidy costs of 15 percent, which DOE has told us is
consistent with credit subsidy estimates to date.
For fiscal year 2011, DOE is seeking an additional $36 billion in loan
guarantee authority for nuclear power facilities and $500 million to cover
the credit subsidy costs for energy efficiency and renewable energy
projects eligible under section 1703.
6
DOE estimates that this $500 million
will cover the credit subsidy costs for about $3 billion in loan guarantees.
6
When asked if DOE plans to use the $500 million to cover the credit subsidy costs for
projects that are currently under review or for projects that apply under a new solicitation,
the department stated that the $500 million, if approved, will be used by the LGP at its
discretion across the full spectrum of qualified energy efficiency and renewable energy
projects.
Page 4 GAO-10-627 DOE Loan Guarantee Program
We have an ongoing mandate under the 2007 Revised Continuing
Appropriations Resolution to review DOE’s execution of the LGP and to
report our findings to the House and Senate Committees on
Appropriations.
7
Our previous reviews focused on the department’s efforts
to establish the tools needed to evaluate the program’s effectiveness and
to process applications. In 2007 and 2008, we recommended that the
department take steps to further develop and improve its capabilities in
these areas.
8
In light of these recommendations and following discussions
with your staffs, we assessed (1) the extent to which DOE has identified
what it intends to achieve through the LGP and is positioned to evaluate
progress and (2) how DOE has implemented the LGP for applicants.
To address these objectives, we analyzed Title XVII of EPAct, the
Recovery Act, the Government Performance and Results Act (GPRA) and
our prior work on GPRA, and DOE’s program guidance and regulations. In
addition, we interviewed relevant DOE officials and—to obtain a broad
representation of views on DOE’s implementation of the LGP—LGP
applicants and trade association representatives. We selected the
applicants and trade associations using a mix of criteria, including the
amount of the loan guarantee requested and the relevant technology. Our
review did not evaluate the technical or financial soundness of the
projects that applied for DOE loan guarantees. In April 2010, we briefed
your offices on the preliminary results of our review.
We conducted this performance audit from January 2009 through July
2010 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 the
scope of our review and the methods we used is presented in appendix I.
7
Pub. L. No. 110-5 §20320(c) (Feb. 15, 2007).
8
GAO, 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 (Washington, D.C.: Feb. 28, 2007); GAO, Department of
Energy: New Loan Guarantee Program Should Complete Activities Necessary for
Effective and Accountable Program Management, GAO-08-750 (Washington, D.C.: July 7,
2008).
Page 5 GAO-10-627 DOE Loan Guarantee Program
DOE has broadly indicated the direction of the LGP but has not developed
all the tools necessary to evaluate progress. DOE officials have identified a
number of broad policy goals that the LGP is intended to support,
including helping to ensure energy security, mitigate climate change,
jumpstart the alternative energy sector, and create jobs. Additionally,
through DOE’s fiscal year 2011 budget request and a mission statement for
the LGP, the department has explained that the program is intended to
support the “early commercial production and use of new or significantly
improved technologies in energy projects” that “avoid, reduce, or
sequester air pollutants or anthropogenic emissions of greenhouse gases,
and have a reasonable prospect of repaying the principal and interest on
their debt obligations.”
DOE Has Broadly
Indicated the
Program’s Direction
but Is Not Well
Positioned to
Evaluate Progress
To help operationalize such policy goals efficiently and effectively,
principles of good governance identified in our prior work on GPRA
indicate that agencies should develop associated performance goals and
measures that are objective and quantifiable.
9
These performance goals
and measures are intended to allow comparison of programs’ actual
results with the desired results. Each program activity should be linked to
a performance goal and measure unless such a linkage would be infeasible
or impractical.
DOE has linked the LGP to two departmentwide performance goals:
“Double renewable energy generating capacity (excluding conventional
hydropower) by 2012.”
“Commit (conditionally) to loan guarantees for two nuclear power
facilities to add new low-carbon emission capacity of at least 3,800
megawatts in 2010.”
DOE has also established nine performance measures for the LGP (see
app. II).
However, the departmentwide performance goals are too few to reflect the
full range of policy goals for the LGP. For example, there is no measurable
9
GAO, Agencies’ Annual Performance Plans under the Results Act: An Assessment Guide
to Facilitate Congressional Decisionmaking, GAO/GGD/AIMD-10.1.18 (Washington, D.C.:
February 1998, ver. 1.); GAO, The Results Act: An Evaluator’s Guide to Assessing Agency
Annual Performance Plans, GAO/GGD-10.1.20 (Washington, D.C.: April 1998, ver. 1).
Page 6 GAO-10-627 DOE Loan Guarantee Program
performance goal for job creation. The performance goals also do not
reflect the full scope of the program’s authorized activities. For example,
as of April 2010, DOE had issued two conditional commitments for energy
efficiency projects—as authorized in legislation—but the energy efficiency
projects do not address either of the performance goals because the
projects are expected to generate little or no renewable energy and are not
associated with nuclear power facilities. Given the lack of sufficient
performance goals, DOE cannot be sure that the LGP’s performance
measures are appropriate. Thus, DOE lacks the foundation to assess the
program’s progress, and more specifically, to determine whether the
projects it supports with loan guarantees contribute to achieving the
desired results.
As the LGP’s scope and authority have increased, the department has
taken a number of steps to implement the program for applicants. For
example, DOE has substantially increased the LGP’s staff and in-house
expertise, and applicants we interviewed have commended the LGP staff’s
professionalism. DOE officials indicated that, prior to 2008, staffing was
inadequate to review applications, but since June 2008, the LGP’s staff has
increased from 12 federal employees to more than 50, supported by over
40 full-time contractor staff. Also, the LGP now has in-house legal counsel
and project finance expertise, which have increased the program’s
capacity to evaluate proposed projects. In addition, in November 2009, the
Secretary named an Executive Director, reporting directly to the
Secretary, to oversee the LGP and to accelerate the application review
process.
10
DOE Has Taken Steps
to Implement the LGP
but Has Treated
Applicants
Inconsistently and
Lacks Mechanisms to
Identify and Address
Applicants’ Concerns
Other key steps that DOE has taken include the following:
DOE has identified a list of external reviewers qualified to perform legal,
engineering, financial, and marketing analyses of proposed projects.
Identifying these external reviewers beforehand helps to ensure that DOE
will have the necessary expertise readily available during the review
process. DOE officials said that the department has also expedited the
procurement process for hiring these external reviewers.
DOE developed a credit policies and procedures manual for the LGP.
Among other things, the manual contains detailed internal policies and
10
The Executive Director also oversees DOE’s Advanced Technology Vehicles
Manufacturing Loan Program.
Page 7 GAO-10-627 DOE Loan Guarantee Program
procedures that lay out requirements, criteria, and staff responsibilities for
determining which proposed projects should receive loan guarantees.
DOE revised the LGP’s regulations after receiving information from
industry concerning the wide variety of ownership and financing
structures that applicants or potential applicants would like to employ in
projects seeking loan guarantees. Among other things, the modifications
allow for ownership structures that DOE found are typically employed in
utility-grade power plants and are commonly proposed for the next
generation of nuclear power generation facilities.
DOE obtained OMB approval for its model to estimate credit subsidy
costs. The model is a critical tool needed for the LGP to proceed with
issuing loan guarantees because it will be used to calculate each loan
guarantee’s credit subsidy cost and the associated fee, if any, that must be
collected from borrowers. (We are evaluating DOE’s process and key
inputs for estimating credit subsidy costs in other ongoing work.)
Notwithstanding these actions, the department is implementing the
program in a way that treats applicants inconsistently, lacks systematic
mechanisms for applicants to appeal its decisions or for applicants to
provide feedback to DOE, and risks excluding some potential applicants
unnecessarily. Specifically, we found the following:
DOE has treated applicants inconsistently. Although our past work has
shown that agencies should process applications with the goals of treating
applicants fairly and minimizing applicant confusion,
11
DOE’s
implementation of the program has favored some applicants and
disadvantaged others in a number of ways. First, we found that, in at least
five of the ten cases in which DOE made conditional commitments, it did
so before obtaining all of the final reports from external reviewers,
allowing these applicants to receive conditional commitments before
incurring expenses that other applicants were required to pay. Before DOE
makes a conditional commitment, LGP procedures call for engineering,
financial, legal, and marketing reviews of proposed projects as part of the
due diligence process for identifying and mitigating risk. If DOE lacks the
in-house capability to conduct the reviews, external reviews are
11
GAO, Grants Management: Grants.gov Has Systemic Weaknesses That Require
Attention, GAO-09-589 (Washington, D.C.: July 15, 2009).
Page 8 GAO-10-627 DOE Loan Guarantee Program
performed by contractors paid for by applicants.
12
In one of the cases we
identified in which DOE deviated from its procedures, it made a
conditional commitment before obtaining any of the external reports. DOE
officials told us this project was fast-tracked because of its “strong
business fundamentals” and because DOE determined that it had sufficient
information to proceed. However, it is unclear how DOE could have had
sufficient information to negotiate the terms of a conditional commitment
without completing the types of reviews generally performed during due
diligence, and proceeding without this information is contrary to the
department’s procedures for the LGP.
Second, DOE treats applicants with nuclear projects differently from
applicants proposing projects that employ other types of technologies. For
example, DOE allows applicants with nuclear projects that have not been
selected to begin the due diligence process to remain in a queue in case
the LGP receives additional loan guarantee authority, while applicants
with projects involving other types of technologies that have not been
selected to begin due diligence are rejected (see app. III). In order for
applicants whose applications were rejected to receive further
consideration, they must reapply and again pay application fees, which
range from $75,000 to $800,000 (see app. IV). DOE also provided
applicants with nuclear generation projects information on how their
projects ranked in comparison with others before they submitted part II of
the application and 75 percent of the application fees. DOE did not provide
rankings to applicants with any other types of projects. DOE officials said
that applicants with nuclear projects were allowed to remain in a queue
because of the expectation that requests would substantially exceed
available loan guarantee authority and that the applications would be of
high quality. According to DOE officials, they based this expectation on
information available about projects that are seeking licenses from the
Nuclear Regulatory Commission. DOE officials also explained that they
ranked nuclear generation projects for similar reasons—and also to give
applicants with less competitive projects the chance to drop out of the
process early, allowing them to avoid the expense involved in applying for
a loan guarantee. However, all of the solicitations issued through 2008
initially received requests that exceeded the available loan guarantee
authority (see app. V), so nuclear projects were not unique in that respect.
In addition, applicants with coal-based power generation and industrial
12
LGP staff have generally conducted the financial reviews for the projects that have
received conditional commitments or a loan guarantee to date.
Page 9 GAO-10-627 DOE Loan Guarantee Program
gasification facility projects paid application fees equivalent to those paid
by applicants with nuclear generation projects but were not given rankings
prior to paying the second application fee (see app. IV). To provide EERE
applicants with earlier feedback on the competitiveness of their projects,
DOE instituted a two-part application for the 2009 EERE solicitation—a
change from the 2008 EERE solicitation. DOE officials stated that they
made this change based on lessons learned from the 2008 EERE
solicitation. While this change appears to reduce the disparity in treatment
among applicants, it remains to be seen whether DOE will make similar
changes for projects that employ other types of technologies.
Third, DOE has allowed one of the front-end nuclear facility applicants
that we contacted additional time to meet technical and financial
requirements, including requirements for evidence that the technology is
ready to move to commercial-scale operations, but DOE has rejected
applicants with other types of technologies for not meeting similar
technical and financial criteria. DOE has not provided analysis or
documentation explaining why additional time was appropriate for one
project but not for others.
DOE lacks systematic mechanisms for applicants to appeal its decisions
or provide feedback to DOE. In its solicitations, DOE states that a rejection
is “final and non-appealable.” Once a project has been rejected, the only
administrative option left to an applicant under DOE’s documented
procedures is to reapply and incur all of the associated costs.
Nevertheless, DOE said that, as a courtesy, it had rereviewed certain
rejected applications. Some applicants did not know that DOE would
provide such rereviews, which appear contrary to DOE’s stated policy and
have been conducted on an ad hoc basis.
DOE also lacks a systematic mechanism for soliciting, evaluating, and
incorporating feedback from applicants about its implementation of the
program. Our past work has shown that agencies should solicit, evaluate,
and incorporate feedback from program users to improve programs.
13
Unless they do so, agencies may not attain the levels of user satisfaction
that they otherwise could. For example, during our interviews with
applicants, more than half said they received little information about the
13
GAO, Transportation Research: Opportunities for Improving the Oversight of DOT’s
Research Programs and User Satisfaction with Transportation Statistics, GAO-06-917
(Washington, D.C.: Aug. 15, 2006).
Page 10 GAO-10-627 DOE Loan Guarantee Program
timing or status of application reviews. Applicants expressed a desire for
more information about the status of DOE’s reviews and said that not
knowing when a loan guarantee might be issued created difficulties in
managing their projects—for example, in planning construction dates,
knowing how much capital they would need to sustain operations, and
maintaining support for their projects from internal stakeholders.
According to DOE officials, the department has reached out to
stakeholders through its Web site, presentations to industry groups and
policymakers, and other means. DOE has also indicated that it has
changed the program to make it more user-friendly, based on lessons
learned and applicant feedback. For example, unlike the 2008 EERE
solicitation, the 2009 EERE solicitation includes rolling deadlines that give
applicants greater latitude in when to submit their applications; a
simplified part I application that provides a mechanism for DOE to give
applicants early feedback on whether their projects are competitive; and
delayed payment of the bulk of the “facility fee” that DOE charges
applicants to cover certain program costs. While DOE said that these
changes were based, in part, on feedback from applicants, because DOE
has no systematic way of soliciting applicant feedback, the department has
no assurance that the views obtained through its outreach efforts are
representative, particularly since the means that DOE uses to obtain
feedback do not guarantee anonymity. The department also has no
assurance that the changes made in response to feedback are effectively
addressing applicant concerns.
DOE risks excluding some potential applicants. Even though the
Recovery Act requires that applicants begin construction by the end of
fiscal year 2011 to qualify for Recovery Act funding, DOE has not yet
issued solicitations for the full range of projects eligible for Recovery Act
funding under section 1705. DOE has issued two solicitations specific to
the Recovery Act for the LGP, but neither invites applications for
commercial manufacturing projects, which are eligible under the act.
14
While DOE has announced that it will issue an LGP solicitation for
commercial manufacturing projects, it has given no date for doing so. The
2009 EERE solicitation provided an opportunity for some manufacturing
applicants to receive Recovery Act funding, but because DOE combined
14
The solicitations specific to the Recovery Act are the 2009 solicitations targeting electric
power transmission infrastructure projects and commercial technology renewable energy
generation projects.
Page 11 GAO-10-627 DOE Loan Guarantee Program
the Recovery Act’s requirements with the original section 1703
requirements, applicants with commercial manufacturing projects were
excluded. DOE officials told us that they combined the requirements to
ensure that projects that are initially eligible under section 1705 but that
fail to start construction by the deadline can remain in the LGP under
section 1703.
DOE has made substantial progress in building a functional program for
issuing loan guarantees under Title XVII of EPAct; however, it may not
fully realize the benefits envisioned for the LGP until it further improves
its ability to evaluate and implement the program. Since 2007, we have
been reporting on DOE’s lack of tools necessary to evaluate the program
and process applications and recommending that the department take
steps to address these areas. While DOE has identified broad policy goals
and developed a mission statement for the program, it will lack the ability
to implement the program efficiently and effectively and to evaluate
progress in achieving these goals and mission until it develops
corresponding performance goals. As a practical matter, without such
goals, DOE will also lack a clear basis for determining whether the
projects it decides to support with loan guarantees are helping achieve the
desired results, potentially undermining applicants’ and the public’s
confidence in the legitimacy of those decisions. Such confidence could
also be undermined by implementation processes that do not treat
applicants consistently—unless DOE has clear and compelling grounds for
disparate treatment—particularly if DOE skips steps in its review process
prior to issuing conditional commitments or rereviews rejected
applications for some applicants without having an administrative appeal
process. Furthermore, while DOE has taken steps to increase applicants’
satisfaction with the program, it cannot determine the effectiveness of
those efforts without systematic feedback from applicants that preserves
their anonymity.
To improve DOE’s ability to evaluate and implement the LGP, we
recommend that the Secretary of Energy take the following four actions:
Direct the program management to develop relevant performance goals
that reflect the full range of policy goals and activities for the program, and
to the extent necessary, revise the performance measures to align with
these goals.
Conclusions
Recommendations for
Executive Action
Page 12 GAO-10-627 DOE Loan Guarantee Program
Direct the program management to revise the process for issuing loan
guarantees to clearly establish what circumstances warrant disparate
treatment of applicants so that DOE’s implementation of the program
treats applicants consistently unless there are clear and compelling
grounds for doing otherwise.
Direct the program management to develop an administrative appeal
process for applicants who believe their applications were rejected in
error and document the basis for conclusions regarding appeals.
Direct the program management to develop a mechanism to systematically
obtain and address feedback from program applicants, and, in so doing,
ensure that applicants’ anonymity can be maintained, for example, by
using an independent service to obtain the feedback.
We provided a draft of this report to DOE for review and comment. In its
written comments, DOE stated that it recognizes the need for continuous
improvement to its Loan Guarantee Programs as those programs mature
but neither explicitly agreed nor disagreed with our recommendations. In
one instance, DOE specifically disagreed with our findings: the department
maintained that applicants are treated consistently within solicitations.
Agency Comments
Nevertheless, the department stated that it is taking steps to address
concerns identified in our report. Specifically, DOE pointed to the
following recent or planned actions:
Performance goals and measures. DOE stated that, in the context of
revisions to its strategic plan, the department is revisiting the performance
goals and measures for the LGP to better align them with the department’s
policy goals of growing the green economy and reducing greenhouse gases
from power generation.
Consistent treatment of applicants. DOE recognized the need for greater
transparency to avoid the perception of inconsistent treatment and stated
that it will ensure that future solicitations explicitly describe
circumstances that would allow streamlined consideration of loan
guarantee applications.
Appeals. DOE indicated that its process for rejected applications should
be made more transparent and stated that the LGP continues to implement
new strategies intended to reduce the need for any kind of appeals, such
as enhanced communication with applicants including more frequent
Page 13 GAO-10-627 DOE Loan Guarantee Program
contact, and allowing applicants an opportunity to provide additional data
at DOE’s request to address deficiencies DOE has identified in
applications.
While these actions are encouraging, they do not fully address our
findings, especially in the areas of appeals and applicant feedback. We
continue to believe that DOE needs systematic mechanisms for applicants
to appeal its decisions and to provide anonymous feedback.
DOE’s written comments on our findings and recommendations, along
with our detailed responses, are contained in appendix VI. In addition to
the written comments reproduced in that appendix, DOE provided
technical comments, which we incorporated as appropriate.
We are sending copies of this report to the appropriate congressional
committees, the Secretary of Energy, and other interested parties. This
report also is available at no charge on the GAO Web site at
http://www.gao.gov.
If you or your staffs have any questions concerning this report, please
contact me 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 VII.
Frank Rusco
Director, Natural Resources
and Environment
Page 14 GAO-10-627 DOE Loan Guarantee Program
Appendix I: Scope and Methodology
Appendix I: Scope and Methodology
To assess the extent to which the Department of Energy (DOE) has
identified what it intends to achieve through the Loan Guarantee Program
(LGP) and is positioned to evaluate progress, we reviewed and analyzed
relevant provisions of Title XVII of the Energy Policy Act of 2005 (EPAct),
the American Recovery and Reinvestment Act of 2009 (Recovery Act);
DOE’s budget request documents; and Recovery Act planning information,
as well as other documentation provided by DOE. We discussed strategic
planning and program evaluation with cognizant DOE officials from the
LGP office, the Office of the Secretary of Energy, the Office of the Chief
Financial Officer, and the Credit Review Board (CRB) that is charged with
coordinating credit management and debt collection activities as well as
overall policies and procedures for the LGP. As criteria, we used the
Government Performance Results Act (GPRA), along with our prior work
on GPRA.
To evaluate DOE’s implementation of the LGP for applicants, we reviewed
relevant legislation, such as EPAct and the Recovery Act; DOE’s final
regulations and concept of operations for the LGP; solicitations issued by
DOE inviting applications for loan guarantees; DOE’s internal project
tracking reports; technical and financial review criteria for the application
review process; minutes from CRB meetings held between February 2008
and November 2009; applications for loan guarantees; application
rejection letters issued by DOE; and other various DOE guidance and
procurement documents related to the process for issuing loan guarantees.
We interviewed cognizant DOE officials from the LGP office, the Office of
the Secretary of Energy, the Office of the Chief Financial Officer, the
Office of Headquarters Procurement Services, and program offices that
participated in the technical reviews of projects, including the Office of
Electricity Delivery and Energy Reliability, the Office of Energy Efficiency
and Renewable Energy, the Office of Nuclear Energy, and the National
Energy Technology Laboratory (NETL). In addition, we interviewed 31
LGP applicants and 4 trade association representatives, using a standard
list of questions for each group, to obtain a broad representation of views
that we believe can provide insights to bolster other evidence supporting
our findings. We selected the applicants and trade associations using a mix
of criteria, including the amount of the loan guarantee requested and the
relevant technology. As criteria, we used our prior work on customer
service. We did not evaluate the financial or technical soundness of the
projects for which applications were submitted.
We conducted this performance audit from January 2009 through July
2010 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
Page 15 GAO-10-627 DOE Loan Guarantee Program
Appendix I: Scope and Methodology
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.
Page 16 GAO-10-627 DOE Loan Guarantee Program
Appendix II: Performance Measures for the
LGP
Page 17 GAO-10-627
Appendix II: Performance Measures for the
LGP
DOE has developed the following nine performance measures for the LGP:
percentage of projects receiving DOE loan guarantees that have achieved
and maintained commercial operations;
contain the loss rate of guaranteed loans to less than 4 percent;
contain the loss rate of guaranteed loans to less than 11.81 percent in fiscal
year 2009 (11.85 percent for fiscal years 2010 and 2011) on a long-term
portfolio basis;
newly installed generation capacity from power generation projects
receiving DOE loan guarantees;
average cost per megawatthour for projects receiving DOE loan
guarantees;
forecasted greenhouse gas emissions reductions from projects receiving
loan guarantees compared to ‘business as usual’ energy generation;
forecasted air pollutant emissions (nitrogen oxides, sulfur oxides, and
particulates) reductions from projects receiving loan guarantees compared
to ‘business as usual’ energy generation;
average review time of applications for Section 1705 guarantees; and
percentage of conditional commitments issued to qualified applicants
relative to plan.
DOE Loan Guarantee Program
Appendix III: Application Review Process
Appendix III: Application Review Process
Figure 1: 2008 Solicitation for Energy Efficiency, Renewable Energy, and Advanced Transmission and Distribution
Technologies
Source: GAO presentation of DOE data.
Final credit subsidy fee calculated
Credit subsidy fee estimated
25% of application fee due ($18,750-$31,250)
Application
rejected
Application
rejected
DOE services loan
through term
Applicants’ costs
Credit subsidy calculations
DOE issues loan
guarantee
• DOE performs/contracts out
financial, legal, market,
environmental, and technical
reviews
• Term sheet negotiations
75% of application fee due ($56,250-$93,750)
Fee paid for credit assessment
a
Any remaining maintenance fee due ($50,000-$100,000 annually)
Credit subsidy fee due
All or part of maintenance fee due
80% of facility fee due
External reviewer fees due
Fee paid for credit rating
a
20% of facility fee due
DOE performs
formal review
DOE notifies
applicant of intent to
proceed with review
DOE reviews for
responsiveness
and innovativeness
Stand-alone or
manufacturing projects
submit application
Application
rejected
Application
rejected
Applicant submits part II
of application
DOE performs
formal review
DOE notifies
applicant of intent to
proceed with review
DOE reviews for
responsiveness
and innovativeness
Large-scale integration
projects submit part I
of the application
DOE issues solicitation
Underwriting and
due diligence
DOE makes conditional
commitment
a
Required for projects with estimated total costs exceeding $25 million.
Page 18 GAO-10-627 DOE Loan Guarantee Program
Appendix III: Application Review Process
Figure 2: 2008 Solicitation for Coal-based Power Generation and Industrial Gasification Facilities That Incorporate Carbon
Capture and Sequestration or Other Beneficial Uses of Carbon and for Advanced Coal Gasification Facilities
Source: GAO presentation of DOE data.
Application
rejected
Final credit subsidy fee calculated
Credit subsidy fee estimated
25% of application fee due ($200,000)
Application
rejected
DOE services loan
through term
Applicants’ costs
Credit subsidy calculations
DOE issues loan
guarantee
• DOE performs/contracts out
financial, legal, market,
environmental, and technical
reviews
• Term sheet negotiations
75% of application fee due ($600,000)
Fee paid for credit assessment
a
Any remaining maintenance fee due ($200,000-$400,000 annually)
Credit subsidy fee due
All or part of maintenance fee due
80% of facility fee due
External reviewer fees due
Fee paid for credit rating
a
20% of facility fee due
DOE reviews part II
Applicant submits part II
of application
DOE reviews part I
Applicant submits
part I of application
DOE issues solicitation
Underwriting and
due diligence
DOE makes conditional
commitment
a
Required for projects with estimated total costs exceeding $25 million.
Page 19 GAO-10-627 DOE Loan Guarantee Program
Appendix III: Application Review Process
Figure 3: 2008 Solicitation for Nuclear Power Facilities
Source: GAO presentation of DOE data.
Applicant
provides
updates
every
90 days
Final credit subsidy fee calculated
Credit subsidy fee estimated
25% of application fee due ($200,000)
Application
rejected
DOE services loan
through term
Applicants’ costs
Credit subsidy calculations
Applicant
withdraws
DOE issues loan
guarantee
Application not
selected for
due diligence—
remains in
queue
• DOE performs/contracts out
financial, legal, market,
environmental, and technical
reviews
• Term sheet negotiations
Application
rejected
75% of application fee due ($600,000)
Fee paid for credit assessment
a
Any remaining maintenance fee due ($200,000-$400,000 annually)
Credit subsidy fee due
All or part of maintenance fee due
80% of facility fee due
External reviewer fees due
Fee paid for credit rating
a
20% of facility fee due
DOE reviews part II
Applicant submits part II
of application
DOE provides initial
ranking for the application
DOE reviews part I
Applicant submits
part I of application
DOE issues solicitation
Underwriting and
due diligence
DOE makes conditional
commitment
a
Required for projects with estimated total costs exceeding $25 million.
Page 20 GAO-10-627 DOE Loan Guarantee Program
Appendix III: Application Review Process
Figure 4: 2008 Solicitation for Front-End Nuclear Facilities
Source: GAO presentation of DOE data.
Applicant
provides
updates
every
90 days
Final credit subsidy fee calculated
Credit subsidy fee estimated
25% of application fee due ($200,000)
Application
rejected
DOE services loan
through term
Applicants’ costs
Credit subsidy calculations
DOE issues loan
guarantee
Application not
selected for
due diligence—
remains in
queue
• DOE performs/contracts out
financial, legal, market,
environmental, and technical
reviews
• Term sheet negotiations
Application
rejected
75% of application fee due ($600,000)
Fee paid for credit assessment
a
Any remaining maintenance fee due ($200,000-$400,000 annually)
Credit subsidy fee due
All or part of maintenance fee due
80% of facility fee due
External reviewer fees due
Fee paid for credit rating
a
20% of facility fee due
DOE reviews part II
Applicant submits part II
of application
DOE reviews part I
Applicant submits
part I of application
DOE issues solicitation
Underwriting and
due diligence
DOE makes conditional
commitment
a
Required for projects with estimated total costs exceeding $25 million.
Page 21 GAO-10-627 DOE Loan Guarantee Program
Appendix IV: Standardized Fees Associated
with Obtaining a Loan Guarantee, by
Solicitation
Appendix IV: Standardized Fees Associated
with Obtaining a Loan Guarantee, by
Solicitation
Application fee
Solicitation
1st payment
of 25%
2nd payment
of 75%
Facility fee
a
Annual loan
maintenance fee
2008 Front-end nuclear facilities $200,000 $600,000 ½ of 1% of guaranteed
amount
$200,000-400,000
2008 Nuclear power facilities 200,000 600,000 ½ of 1% of guaranteed
amount
200,000-400,000
2008 Coal-based power generation and
industrial gasification facilities
200,000 600,000 ½ of 1% of guaranteed
amount
200,000-400,000
2008 Energy efficiency, renewable energy, and advanced transmission and distribution technologies (EERE)
Loan guarantee amount:
$0 - 150,000,000 18,750 56,250 1% of guaranteed amount 50,000-100,000
Above $150,000,000 - 500,000,000 25,000 75,000 $375,000 + 0.75% of
guaranteed amount
50,000-100,000
Above $500,000,000 31,250 93,750 $1,625,000 + 0.50% of
guaranteed amount
50,000-100,000
2009 EERE
Loan guarantee amount:
$0 - 150,000,000 18,750 56,250 1% of guaranteed amount 50,000-100,000
Above $150,000,000 - 500,000,000 25,000 75,000 $375,000 + 0.75% of
guaranteed amount
50,000-100,000
Above $500,000,000 31,250 93,750 $1,625,000 + 0.50% of
guaranteed amount
50,000-100,000
2009 Electric power transmission
infrastructure projects
200,000 600,000 ½ of 1% of guaranteed
amount
200,000-400,000
2009 Commercial technology renewable
energy generation projects under the
Financial Institution Partnership Program
(FIPP)
12,500 37,500 ½ of 1% of guaranteed
amount
10,000-25,000
Source: GAO presentation of DOE data.
a
According to agency documentation, this fee is intended to cover the LGP’s cost of loan setup and
associated legal and finance fees.
Page 22 GAO-10-627 DOE Loan Guarantee Program
Appendix V: Loan Guarantee Amounts
Available and Amounts Applicants Sought for
Technology Categories Targeted in
Solicitations
Appendix V: Loan Guarantee Amounts Available
and Amounts Applicants Sought for Technology
Categories Targeted in Solicitations
Dollars in billions
Targeted technology category
Solicitation
issuance date
Amount
available
Amount
applicants
sought
Mixed
a
Aug. 8, 2006 $4.0 $8.6
Nuclear power facilities July 11, 2008 18.5 93.2
Front-end nuclear facilities July 11, 2008 2.0 4.0
Coal-based power generation and industrial gasification facilities Sept. 22, 2008 8.0 18.6
Energy efficiency, renewable energy, and advanced transmission and
distribution technologies (EERE)
Oct. 29, 2008 10.0 20.1
EERE July 29, 2009 8.5 22.8
b
Electric power transmission infrastructure projects July 29, 2009 5.0
c
4.3
Commercial technology renewable energy generation projects under the
Financial Institution Partnership Program (FIPP)
Oct. 7, 2009 5.0
c
3.1
Source: GAO presentation of DOE data.
a
The 2006 mixed solicitation invited applications for all technologies eligible to receive loan
guarantees under the Energy Policy Act of 2005 except for nuclear facilities and oil refineries.
b
DOE is still accepting applications in response to the 2009 EERE solicitation, so the final total
amount that applicants will seek is not yet known. Through November 2009, applicants were seeking
a total of $22.8 billion.
c
This amount is an estimate because the solicitation did not specify how much would be issued in
loan guarantees. This estimate is based on the solicitation’s stated plan to use $750 million to cover
credit subsidy costs and assumes credit subsidy costs of 15 percent, which DOE has told us is
consistent with credit subsidy estimates to date.
Page 23 GAO-10-627 DOE Loan Guarantee Program