DOE Issued Regulations That Contained Required Elements, but One Key Aspect Is Not Clear

On October 23, 2007, DOE’s final regulations for the LGP were published  in the Federal Register. The final regulations contain requirements for preapplication  and application submissions; programmatic, technical and financial  evaluation factors for applications; and lender eligibility and servicing  requirements. DOE changed some key aspects of the initial program guidelines in its final  regulations to help make the program more attractive to lenders and  potentially reduce financing costs for projects. The regulations define equity as “cash contributed by the  borrowers and other principals.” Based on this definition, it appears that  non-cash contributions, such as land, would not be considered equity. DOE Has Not Fully Implemented Activities Necessary for Effective and Accountable Program Management

DOE may not be well positioned to manage the LGP effectively and  maintain accountability because it has not completed a number of  management and internal control activities key to carrying out the  program. As a result, DOE may not be able to process applications  efficiently and effectively, even though DOE has begun to review its first  application, and officials told us they will begin reviewing other  applications as soon as they are submitted. For example,  we found the following:    Project eligibility. Estimating Subsidy Costs

As required by the LGP’s fiscal years 2007 and 2008 appropriation, DOE  plans to charge borrowers fees to cover subsidy costs, as permitted by  Title XVII. Inherent Risks Will Make Estimating Subsidy Costs Difficult and May Introduce Self- Selection Biases in the Projects That Ultimately Receive Loan Guarantees

The nature and characteristics of the LGP will make estimating the  program’s subsidy costs difficult even if DOE develops a sound and  comprehensive methodology. Evaluating the risks of individual projects  applying for loan guarantees will be difficult because the LGP targets  innovative energy technologies and because projects will likely have  unique characteristics—varying in size, technology, and experience of the  project sponsor. The likelihood of misestimates and the practice of charging fees to cover  all the estimated costs may lead to biases in the projects that ultimately  receive loan guarantees and tilt the portfolio of loan guarantees toward  those that will not pay for themselves. The CBO reported that  such a bias in applicants’ acceptance of loan guarantees increases the  likelihood that DOE’s loan guarantee portfolio will have more projects for  which DOE underestimated the fee. As a result, if this financial viability is not distributed  evenly across technologies targeted by Title XVII, the projects that  ultimately receive loan guarantees may not represent the full range of  technologies targeted by Title XVII. The difficulties DOE will face in estimating subsidy costs could increase  LGP’s financial risk to the taxpayer. Recommendations for Executive Action

To improve the implementation of the LGP and to help mitigate risk to the  federal government and American taxpayers, we recommend that the  Secretary of Energy direct the Chief Financial Officer to take the following  steps before substantially reviewing LGP applications:    complete detailed internal loan selection policies and procedures that  lay out roles and responsibilities and criteria and requirements for  conducting and documenting analyses and decision making;    clearly define needs for contractor expertise to facilitate timely    amend application guidance to include more specificity on the content  of independent engineering reports and on the development of project  cost estimates to provide the level of detail needed to better assess  overall project feasibility;  improve the LGP’s full tracking of the program’s administrative costs  by developing an approach to track and estimate costs associated with  offices that directly and indirectly support the program and including  those costs as appropriate in the fees charged to applicants;  further develop and define performance measures and metrics to  monitor and evaluate program efficiency, effectiveness, and outcomes;  and    clarify the program’s equity requirements to the 16 companies invited  to apply for loan guarantees and in future solicitations. To assess DOE’s progress in taking actions to help ensure that the  program is managed effectively and to maintain accountability, we  reviewed documentation related to DOE’s implementation of the LGP. GAO Comments

1. 2. 5. Instead, we specifically discuss  reestimates to explain that even though DOE is proceeding with LGP  under the provision that borrowers pay for the subsidy cost of the  program, taxpayers will bear the cost of any shortfall, depending on  the extent to which DOE underestimates the risks (subsidy cost) and  therefore does not collect sufficient fees from borrowers. In addition, even in  instances where DOE’s estimates of subsidy costs are reasonably  accurate, the “borrower pays” option may cause some potential  borrowers to not pursue loan guarantees because the fee is too high  relative to the benefits to the borrower of the loan guarantee.
Why GAO Did This Study

Title XVII of the Energy Policy Act of 2005 established DOE's loan guarantee program (LGP) for innovative energy projects that should decrease air pollutants or greenhouse gases and that have a reasonable prospect of repayment. For fiscal years 2008 and 2009, Congress authorized the use of borrower fees to pay the costs of loan guarantees through Title XVII's "borrower pays" option, under which DOE will limit loan guarantees to $38.5 billion. Congress mandated that GAO review DOE's progress in implementing the LGP. GAO assessed DOE's progress in (1) issuing final regulations and (2) taking actions to help ensure that the program is managed effectively and to maintain accountability. GAO also assessed how inherent risks due to the nature of the LGP may affect DOE's ability to achieve intended program outcomes. GAO analyzed DOE's regulations, guidance, and program documents and files; reviewed Title XVII; and interviewed DOE officials.

What GAO Found

In October 2007, DOE issued regulations that govern the LGP and include requirements for application submissions, project evaluation factors, and lender eligibility and servicing requirements. The regulations also generally address requirements set forth in applicable guidance. Some key aspects of the initial LGP guidelines were revised in the regulations to help make the program more attractive to lenders and potentially reduce financing costs for projects. For example, the maximum loan guarantee percentage increased from 80 to 100 percent of the loan. In addition, the regulations define equity as "cash contributed by the borrowers," but DOE officials told us they also plan to consider certain non-cash contributions, such as land, as equity. As a result, applicants may not fully understand the program's equity requirements. DOE is not well positioned to manage the LGP effectively and maintain accountability because it has not completed a number of key management and internal control activities. As a result, DOE may not be able to process applications efficiently and effectively, although it has begun to do so. DOE has not sufficiently determined the resources it will need or completed detailed policies, criteria, and procedures for evaluating applications, identifying eligible lenders, monitoring loans and lenders, estimating program costs, or accounting for the program--key steps that GAO recommended DOE take over a year ago. DOE also has not established key measures to use in evaluating program progress. Risks inherent to the LGP will make it difficult for DOE to estimate subsidy costs, which could lead to financial losses and may introduce biases in the projects that receive guarantees. The nature and characteristics of the LGP and uncertain future economic conditions increase the difficulty in estimating the LGP's subsidy costs. Because the LGP targets innovative technologies and the projects will have unique characteristics--varying in size, technology, and experience of the project sponsor--evaluating the risks of individual projects will be complicated and could result in misestimates. The likelihood that DOE will misestimate costs, along with the practice of charging fees to cover the estimated costs, may lead to biases in the projects that receive guarantees. Borrowers who believe DOE has underestimated costs and has consequently set fees that are less than the risks of the projects are the most likely to accept guarantees. To the extent that DOE underestimates the costs and does not collect sufficient fees from borrowers to cover the full costs, taxpayers will ultimately bear the costs of shortfalls. Even if DOE's estimates of subsidy costs are reasonably accurate, some borrowers may not pursue a guarantee because they perceive the fee to be too high relative to the benefits of the guarantee, affecting the project's financial viability. To the extent that this financial viability is not distributed evenly across the technologies targeted by Title XVII, projects in DOE's portfolio may not represent the range of technologies targeted by the program.