GAO-07-339R DOE’s Loan Guarantee Program 

United States Government Accountability Office

Washington, DC 20548 

February 28, 2007 

The Honorable Peter J. Visclosky 

Chairman 

The Honorable David L. Hobson 

Ranking Minority Member 

Subcommittee on Energy and Water Development 

Committee on Appropriations 

House of Representatives 

Subject: 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 

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 a July 2006 letter to DOE on the department’s proposed funds transfer to begin the 

LGP, this subcommittee expressed its concern about the lack of a strategy for 

instituting the program. Furthermore, the subcommittee stated that the department 

had not adequately explained such basic management policies as the criteria it will 

use to select projects for loan guarantees and the number of loans to be guaranteed. 

Nevertheless, in August 2006, DOE issued a solicitation for preapplications to the 
loan guarantee program, announcing its intention to issue up to $2 billion in loan 

guarantees. At the same time, DOE issued guidelines for proposals submitted in 

response to this first solicitation, stating that DOE expects borrowers to pay for 

program costs.1

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.2

 On January 4, 2007, we briefed this subcommittee on the results of 

our work. Enclosure I contains the briefing slides we used, with minor revisions to 

incorporate technical comments we subsequently received from DOE. This report 

summarizes the briefing and recommends steps DOE should take to help ensure that 

the program, and its exposure to financial risk, will be well managed. 

To identify the sources and use of funds for DOE’s LGP, we reviewed and analyzed 

relevant DOE budget documentation, as well as department LGP guidance and 

planning documents, and interviewed DOE LGP and budget officials. To examine the 

extent to which the LGP could result in financial risks to taxpayers, we analyzed 

DOE’s plans and guidance for implementing the LGP and discussed them with DOE 

and Office of Management and Budget (OMB) officials. To assess the steps DOE has 

taken to help ensure that the LGP will be well managed, we compared DOE’s plan 

with OMB budget guidance, internal control and accounting standards, and practices 

used by other selected agencies that manage loan guarantee programs. We performed 

our work in accordance with generally accepted government auditing standards from 

October 2006 through January 2007. 

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. However, DOE 

has discontinued other funding, and the staff on detail have returned to their home 

units. Nevertheless, according to the deputy general counsel for energy policy, he and 

others continue to work on the program by, for example, preparing a notice of 

proposed rulemaking and reviewing preapplications for completeness. Regarding 

future activities, DOE officials said they are awaiting appropriations before taking 

additional steps to implement the LGP. 

 1

For the first round of loan guarantees, the guidelines state that DOE anticipates that borrowers will 

pay the subsidy costs and that those borrowers will be assessed fees to cover some administrative

costs. 

2

You also asked us to issue a legal opinion on certain questions regarding DOE’s implementation of the 

LGP under section 1702 of the Energy Policy Act of 2005 and section 301 of the Energy and Water 

Development Appropriations Act of 1993. This work is under way and an opinion should be issued by

the end of April 2007. 

Page 2 GAO-07-339R DOE’s Loan Guarantee Program 
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. The subsidy cost takes into account (1) 

estimated federal payments to cover defaults, delinquencies, or other payments and 

(2) estimated payments to the government, including origination and other fees, 

penalties, and recoveries on defaults. DOE will have to estimate the subsidy cost to 

determine the fees to charge borrowers, but it currently has no policies or procedures 

for doing so. Estimating this cost could be difficult because the program targets 

innovative energy technologies and loan performance could depend heavily on future 

economic conditions, including energy prices, which are hard to predict accurately. 

Any shortfalls in subsidy costs would be automatically funded by the federal 

government under the terms of the Federal Credit Reform Act of 1990, not through 

the annual appropriations process. 

Rather than taking and completing key steps to ensure that the LGP will be well 

managed and accomplish its objectives, DOE has focused on initiating the LGP by 

soliciting preapplications for proposed projects. 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. For 

each step, we also describe the actions DOE has taken. 

• 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. DOE officials told us that they would enforce the guidelines 

through the terms of the loan guarantee contracts and thus see no need to 

issue regulations before issuing the first $2 billion in loan guarantees. The 

officials also told us they would have regulations in place for later guarantees. 

• Establishing a credit review board. DOE has drafted a charter for a credit 

review board, but it has not yet been provided to the Secretary of Energy for 

approval. This board is to coordinate credit management and debt collection 

activities and ensure full consideration of credit management and debt 

collection issues. 

Page 3 GAO-07-339R DOE’s Loan Guarantee Program 
• 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. These 

policies and procedures should protect the government’s interests by, among 

other things, establishing mechanisms to screen and select applicants and 

lenders and monitor loan and lender performance. 

• 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. In the interim, DOE is asking potential borrowers—who 

have an incentive to underestimate the costs—to provide preliminary 

estimates of subsidy costs so that it can gain experience in developing them. 

DOE expects the necessary accounting policies and procedures to be in place 

before guarantees are issued. 

• 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. This initiative supports clean energy technology research to reduce 

reliance on oil and address high natural gas and electricity prices. 

EPAct 05 requires DOE to issue regulations defining conditions for determining when 

a borrower has defaulted on a loan and requirements for the documentation 

borrowers must make available for audits. According to DOE officials, the 

department plans to include these requirements in its final regulations. If DOE issues 

guarantees before the regulations are final, officials said they would issue procedural 

rules covering these requirements before they issued the guarantees. 

Conclusions

DOE’s current approach to the LGP raises questions about whether this program and 

its financial risks will be well managed. DOE’s efforts to date have focused on 

expediting program implementation—for example, issuing guidelines and soliciting 

preapplications for loan guarantees—rather than ensuring the department has in 

place the critical policies, procedures, and mechanisms necessary to better ensure 

the program’s success. DOE can better ensure that the LGP will be successful and 

financial risks to the federal government will be well managed by taking key steps 

before selecting projects and issuing guarantees. Such steps would also give 

Congress a basis for making more informed policy decisions related to the program, 

including the total amount of loans to guarantee. 

Page 4 GAO-07-339R DOE’s Loan Guarantee Program 
Recommendations for Executive Action

To better ensure that the LGP is well managed, we recommend that the Secretary of 

Energy ensure that the department takes the following five actions before selecting 

eligible projects for loan guarantees: 

• Issue final program regulations that protect the government’s interests, 

manage risk, and ensure that borrowers are aware of program requirements. 

• Establish policies and procedures for selecting lenders and loans to guarantee 

and for monitoring lenders and loans once the guarantees have been issued. 

• Establish policies and procedures for developing subsidy and administrative 

cost estimates. 

• Establish policies and procedures to account for loan guarantees. 

• Further define program goals and objectives tied to outcome measures for 

determining program effectiveness. 

Agency Comments

We provided a draft of this report to the Department of Energy for review and 

comment. DOE generally agreed with the findings, conclusions, and 

recommendations in the report and provided technical comments that were 

incorporated, as appropriate. The acting chief financial officer stated that with 

funding provided for the LGP in the Revised Continuing Appropriation Resolution, 

2007, enacted on February 15, 2007, DOE intends to move forward as promptly as 

possible to implement the program and, in doing so, affirmatively address the 

recommendations contained in our report. DOE’s comments are reproduced in 

enclosure II. 

- - - - - 

We are sending copies of this report to congressional committees with 

responsibilities for energy and federal credit issues; the Secretary of Energy; and the 

Director, Office of Management and Budget. We are also making copies available to 

others upon request. This report will be available at no charge on GAO’s Web site at 

http://www.gao.gov. 

Page 5 GAO-07-339R DOE’s Loan Guarantee Program 
If you or your staffs have any questions about this report, please contact James 

Cosgrove at (202) 512-3841 or cosgrovej@gao.gov or Robert Martin at (202) 512-2600 

or martinr@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 enclosure III. 

James C. Cosgrove 

Acting Director, Natural 

 Resources and Environment 

Robert E. Martin 

Director, Financial 

 Management and Assurance 

Enclosures 

Page 6 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

DOE Loan Guarantee Program for Projects That 

Employ Innovative Technologies

Briefing for the Subcommittee on Energy and Water

Development, House Committee on Appropriations

January 4, 2007

Page 7 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

2

Contents

• Introduction

• Objectives, Scope and Methodology

• Results in Brief

• Objective 1: Sources and Uses of Funds for LGP

• Objective 2: Financial Risks Posed by the LGP 

• Objective 3: Steps DOE Has Taken to Manage the LGP

Page 8 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

3

Introduction

• The Energy Policy Act of 2005 (EPAct 05), Title XVII—Incentives

for Innovative Technologies—authorizes a new federal loan

guarantee program (LGP) to be implemented by the Secretary of

Energy.

• Eligible projects must

• 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),

• employ new or significantly improved technologies 

compared with commercial technologies currently used,

and

• have a “reasonable prospect” of repayment.

Page 9 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

4

Introduction (cont.)

• Title XVII identifies 10 categories of projects that are potentially 

eligible for a loan guarantee:

• Renewable energy systems.

• Advanced fossil energy technologies.

• Hydrogen fuel cell technologies.

• Advanced nuclear energy facilities.

• Carbon capture and sequestration practices and technologies.

• Efficient electrical generation, transmission, and distribution 

technologies.

• Efficient end-use energy technologies.

• Production facilities for fuel efficient vehicles.

• Pollution control equipment.

• Refineries.

Page 10 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

5

Introduction (cont.)

• Federal loan guarantee programs help borrowers get credit from

private sector lenders. The federal government guarantees to pay

lenders if the borrowers default on loans, which makes extending

credit more attractive to lenders.

• Loan guarantee programs have two types of costs:

• Administrative: costs associated with evaluating applications;

offering, negotiating, and closing guarantees; and servicing and

monitoring guarantees. 

• Subsidy: the estimated net present value of the long-term cost

to the government of guaranteeing the loans over the entire 

period the loans are outstanding, excluding administrative

costs.1 It is to take into account estimated payments by the 

government to cover defaults, delinquencies, or other

payments; and estimated payments to the government, 

including origination and other fees, penalties, and recoveries

on defaults. 1Present value is the worth of the future stream of costs or returns in terms of money paid 

immediately. In calculating present value for subsidy cost calculations, prevailing interest rates

provide the basis for converting future amounts into their “money now” equivalents.

Page 11 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

6

Introduction (cont.)

• EPAct 05 establishes how subsidy and administrative costs will 

be covered in DOE’s LGP:

• No loan guarantee shall be made unless Congress 

appropriates funds to cover the costs. The act provides that a 

borrower can pay fees to cover the full cost of the obligation,

referred to in this briefing as the “borrower pays” option. 

• Borrowers are to be charged fees to cover DOE’s 

administrative costs.

Page 12 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

7

Introduction (cont.)

• While DOE has not yet approved any loan guarantees under the 

LGP, on August 8, 2006, DOE issued program guidelines and 

solicited pre-applications. DOE plans to invite applications for full

proposals only from the preapplications it received by the 

December 31, 2006, deadline. DOE will review the preapplications

while awaiting congressional action on (1) appropriations to cover

the administrative costs of establishing the program, (2) authority

for using/limiting the Title XVII “borrower pays" provisions, and (3)

authority to use administrative fees to fund the continued operation

of the loan guarantee program.

• DOE’s program guidelines specify:

• DOE will consider projects funded under the “borrower pays” option.

• Potential borrowers will provide preliminary estimates of the 

subsidy costs.

• DOE will limit the total value of loan guarantee commitments

under the first round to $2 billion.

• DOE will guarantee no more than 80 percent of a project’s

costs, as specified in EPAct 05; DOE prefers not to guarantee 

more than 80 percent of the loan amount. 

Page 13 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

8

Introduction (cont.)

• DOE last managed loan guarantees issued in the mid-1970s to

1980, after the Organization of Arab Petroleum Exporting 

Countries embargoed oil exports to the United States. Like those

of EPAct 05, the loan guarantees were extended to spur new

energy technologies. According to DOE, at that time it guaranteed 

14 loans for coal gasification, ethanol plants, and other projects. 

DOE data show that 10 of the 14 borrowers defaulted and the

federal government repaid the lenders.

2

2After defaulting on their loans, two of the companies became profitable. One is now paying on the 

loan and the other is revenue sharing with DOE.

Page 14 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

9

Objectives, Scope, and Methodology

• Objectives:

• Identify sources and use of funds for DOE’s LGP in fiscal years 2006 and 

2007.

• Examine the extent to which the LGP could result in financial risks to the

taxpayer. 

• Assess the steps DOE has taken to ensure that the LGP will be well

managed.

• Scope and methodology:

• Reviewed and analyzed DOE documentation on funding and activities

undertaken, to date, to prepare for the LGP.

• Interviewed DOE and Office of Management and Budget (OMB) program

and budget officials.

• To determine key practices essential to loan guarantee programs, we

examined OMB and budget and internal control guidance; prior GAO, CRS, 

and CBO reports on federal loan and loan guarantee programs; and work 

by a leading expert on federal loan and loan guarantee programs. We

compared DOE’s plans to the key practices we identified. 

• Furthermore, for the 7 loan guarantee programs reviewed by DOE in

preparation for its LGP, we examined whether the programs used

guidelines or regulations.

• Our work was performed in accordance with generally accepted 

government auditing standards from October 2006 to January 2007.

Page 15 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

10

Results in Brief – Sources and Uses of Funds

• From March through October 2006, DOE spent about $503,000 

for the LGP. 

• DOE used funds from the Departmental Administration 

appropriation and the Science appropriation accounts to pay for 

three staff detailed from elsewhere in DOE—the Office of 

Management, Office of Policy and International Affairs, and Office

of Science. 

• The Energy Supply and Conservation appropriation and the

Science appropriation accounts paid for task order support 

services for, among other things, a LGP Web site. 

• DOE reports it has stopped most spending for the program while 

it is waiting for appropriations and more specific congressional

direction.

Page 16 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

11

Results in Brief – Financial Risks Posed by the 

LGP

• Although DOE plans to charge borrowers fees to cover the LGP’s 

costs, the government may still incur costs. For example, if DOE

does not adequately assess the risk of borrower default, DOE 

may not charge borrowers enough fees to cover actual LGP costs 

and the government would have to fund the shortfall. Estimating 

the subsidy cost with any certainty that borrower fees will cover

LGP costs will be difficult because, among other reasons, the 

LGP targets innovative energy technologies. Furthermore, loan 

performance could depend heavily on future economic conditions, 

including energy prices, which are hard to accurately predict.

Page 17 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

12

Results in Brief – Steps DOE Has Taken to

Manage the LGP

• DOE has not completed key steps to ensure that the program will be

well managed and accomplish its objectives:

• DOE plans to issue its first round of guarantees under guidelines

rather than regulations. However, other loan guarantee programs we

examined are primarily implemented using regulations, which, unlike

guidelines, are legally binding on program participants. DOE 

program officials say they plan to use guidelines instead of 

regulations because it will be easier to make minor changes to the 

program. 

• DOE lacks certain policies and procedures—for example, for 

monitoring lender and loan performance, reviewing and revising

subsidy cost estimates submitted by potential borrowers, and 

measuring program effectiveness. Program officials said such

policies and procedures are important but that they have not had the 

resources to date to take these steps and they do not intend to take

further action on developing policies and procedures until the 

agency receives appropriations for the LGP.

Page 18 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

13

Objective 1: Sources and Use of Funds for LGP

• From March through September 2006, DOE spent a total of about 

$430,000 for the LGP:

• About $309,000 paid for salaries and expenses for three staff 

detailed from the Office of Management, Office of Policy and 

International Affairs, and Office of Science.

• $121,194 from the Science appropriation and the Energy Supply

and Conservation appropriation accounts paid for task order support 

services.

• During October 2006, DOE spent about $73,000:

• About $38,000 paid for salaries and expenses for three staff detailed

from the Office of Management, Office of Policy and International 

Affairs, and Office of Science.

• $34,829 from the Science appropriation and the Energy Supply and

Conservation appropriation accounts paid for task order support

services.

Page 19 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

14

Objective 1: Sources and Use of Funds for LGP

(cont.)

• DOE reported taking several actions to begin the LGP in fiscal 

years 2006 and 2007, including

• program planning and developing policy, including reviewing 

practices of other federal loan guarantee programs;

• developing program guidelines and soliciting preapplications;

and

• communicating about the program by, for example,

developing a Web site, and responding to inquiries from the 

private sector, Congress, and other stakeholders.

Page 20 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

15

Objective 1: Sources and Use of Funds for LGP

(cont.)

• Fiscal year 2007 (November through December 2006):

• Staff details expired October 31 and DOE has reduced but not

eliminated LGP activities.

• According to the Deputy General Counsel for Energy Policy, 

he and other staff continue to work on issues related to the

program, such as preparing a notice of proposed rulemaking 

and reviewing preapplications for completeness. In addition,

DOE staff in the Office of the Chief Financial Officer are 

maintaining the LGP Web site.

• DOE continues to pay for task order support services to

respond to program inquiries. This support is funded through 

the Energy Supply and Conservation appropriation account.

• DOE officials said they are waiting for appropriations and

more specific congressional direction to decide next steps for 

the program.

Page 21 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

16

Objective 2 – Financial Risks Posed by the LGP

• Although DOE guidelines call for borrowers to pay both the 

estimated subsidy and administrative costs associated with

the LGP, financial risks to the government remain because of

the potential for 

• underestimated subsidy costs and

• underestimated administrative costs.

• According to the Under Secretary for Energy, Science, and 

Environment, the LGP’s “borrower pays” option “in theory, reduces the need for appropriations... [but] the ultimate cost 

to the taxpayer could be significantly higher than...” DOE’s 

original estimate.

3

3Testimony before the Committee on Energy and Natural Resources, U.S. Senate, May 1, 2006.

Page 22 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

17

Objective 2 – Financial Risks Posed by the LGP

(cont.)

Underestimated Subsidy Costs

• Under the Federal Credit Reform Act of 1990 (FCRA), agencies 

must estimate the net cost of extending or guaranteeing credit

(the subsidy cost), based on the net present value of estimated 

payments to and from the government, excluding administrative 

costs. To estimate this cost, an agency would consider potential

loan performance—that is, potential defaults, recoveries on

defaults, fees paid by borrowers, and other cash flows.

Page 23 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

18

Objective 2 – Financial Risks Posed by the LGP

(cont.)

• OMB guidance generally requires agencies to annually update or “reestimate” subsidy costs based on actual loan performance and 

expected changes in future loan performance.

• If the reestimate indicates that subsidy costs are higher than 

previously estimated, the additional cost must be funded. 

• FCRA provides permanent indefinite budget authority for 

reestimates that reflect increased costs; that is, funding for

additional costs identified through the reestimation process

does not require an annual appropriation.

Page 24 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

19

Objective 2 – Financial Risks Posed by the LGP

(cont.)

• If DOE were to initially underestimate subsidy costs, it would not

charge borrowers enough fees to cover the subsidy costs. Any 

shortfalls would be automatically funded through the reestimation 

process and be a cost to the government.

• Several factors could affect DOE’s ability to estimate subsidy 

costs, including factors within DOE’s control, such as having a

sound method to assess risk and estimate subsidy costs; and 

factors outside of DOE’s control, such as economic conditions 

and energy prices.

• To the extent that any of these factors cause DOE to

underestimate the subsidy costs, the increased costs 

recognized in the reestimation process represent an 

increased cost to the government.

Page 25 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

20

Objective 2 – Financial Risks Posed by the LGP

(cont.)

• GAO has repeatedly reported over the last decade that agencies have

had difficulty estimating subsidy costs. (A list of relevant GAO products

is included at the end of this briefing.) Factors contributing to this

difficulty include

• simplistic models and faulty assumptions that caused estimates to 

be too low;

• limited historical data, such as having a small number of guarantees

from which to gather performance data needed to make reasonable

estimates; and

• deficient policies and procedures for assessing risks and estimating 

subsidy costs.

• DOE could be at risk for these types of problems because DOE does not 

have experience estimating subsidy costs and lacks historical data for 

the LGP.

• DOE officials told us that they have researched FCRA requirements but 

have not determined specifically how subsidy costs would be estimated.

Page 26 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

21

Objective 2 – Financial Risks Posed by the LGP

(cont.)

Underestimated Administrative Costs

• The government may also be at financial risk if DOE underestimates

administrative costs:

• To determine the fees to charge borrowers to cover administrative 

costs, DOE would have to estimate administrative costs over the life 

of the loan.

• As a new program dealing with new technologies, LGP 

administrative costs are uncertain. 

• DOE has no plan to determine how to (1) initially calculate fees to 

cover administrative costs or (2) charge borrowers more if actual

administrative costs over the life of the loan are higher than initially

estimated. DOE officials said it was premature to determine either of 

these. OMB officials said it is not clear how shortfalls in fees for

administrative costs would be funded.

• Appropriated funds may be necessary to cover any increase in

administrative costs because FCRA does not provide permanent 

indefinite budget authority for administrative costs.

Page 27 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

22

Objective 2 – Financial Risks Posed by the LGP

(cont.)

Limiting Financial Risks

• Congress can limit the government’s exposure to financial losses

from loan guarantees by (1) providing an appropriation for 

subsidy costs that limits the subsidy amount available to fund

loan guarantees or (2) when a program does not have a subsidy 

cost, as could be the case of DOE’s LGP “borrower pays” option, 

providing for commitment authority in an appropriation that limits

the total dollar volume of new loans that an agency can 

guarantee. 

• Currently, there is no congressional limit for DOE’s LGP. DOE 

guidelines indicate that DOE will not issue more than $2 billion in 

guarantees during the first round.

Page 28 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

23

Objective 3 – Steps DOE Has Taken to Manage 

the LGP

• Because of the potential financial risks of a loan guarantee 

program, it is important that DOE take appropriate key steps to

ensure that its LGP will be well managed and accomplish its 

objectives while also managing the government’s financial risks.

DOE has taken some actions in this regard but has not completed

any of these key steps.

• To manage loan guarantee programs, OMB, budget and 

accounting guidance, and practices used by other agencies for

loan guarantee programs, include certain key steps to provide 

accountability for program operations and provide reasonable 

assurance that program objectives will be met. The following 

table shows these steps and the status of DOE’s related actions.

Page 29 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

24

Objective 3 – Steps DOE Has Taken to Manage 

the LGP (cont.)

Key Steps to Manage a Loan Guarantee Program

Has not completed the rules but plans to prior to 

issuing any loan guarantees.

Issue rules defining default conditions and audit 

documentation requirements.

Broad objectives set but no outcome metrics have 

been developed. 

Set program goals and objectives tied to outcome

metrics for determining program effectiveness.

Set policies and procedures for estimating subsidy No policies or procedures developed. 

and administrative costs and accounting for loan 

guarantees.

Set policies and procedures for selecting and Policies and procedures are incomplete.

monitoring lenders and loans.

Credit review board charter drafted but not yet

approved by the Secretary of Energy.

Establish a credit review board to set policies for 

and implement a program.

Issued guidelines to award the first $2 billion in

guarantees; plans to issue regulations for awarding

subsequent guarantees.

Issue regulations for implementing a loan 

guarantee program.

Key steps Status of DOE activities

Source: GAO analysis of OMB, budget and internal control guidance; GAO, CRS, and CBO reports; and work by an

expert on federal credit programs.

Page 30 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

25

Objective 3 – Steps DOE Has Taken to Manage 

the LGP (cont.)

Regulations

• Regulations that implement federal programs go through the public notice and 

comment process and are thereby transparent to the public, oversight agencies, and Congress. Because regulations carry the force of law, they also hold both 

the agency implementing the program and program participants accountable to

the terms specified in the regulations.

• Agencies that implement five of seven loan guarantee programs that DOE

reviewed for their practices began and continue to manage their programs using

regulations.

• The five programs with regulations are the Department of Transportation’s 

infrastructure finance program; the Maritime Administration program; and 

the Department of Agriculture’s renewable energy and energy efficiency, 

business and industry, and rural utilities programs.

• The two programs without regulations are the Overseas Private Investment 

Corporation and Export-Import Bank. Unlike the five programs with 

regulations, these two guarantee loans to foreign entities. 

• The “emergency relief” programs for the steel and oil and gas industries (both of 

which first issued guarantees in 2001) and the airline industry (which first issued

guarantees in 2002) were initiated under regulations.

Page 31 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

26

Objective 3 – Steps DOE Has Taken to Manage 

the LGP (cont.)

Regulations (cont.)

• DOE intends to issue the first round of guarantees under published 

administrative guidelines. In parallel, DOE will begin a rulemaking based, in part, 

on feedback for subsequent rounds.

• DOE sees guidelines as enabling (a) quick start-up, (b) flexibility, and (c) 

learning by doing so that changes can be easily incorporated into proposed 

rules. DOE officials said they will enforce the guidelines through the terms of the 

loan guarantee contracts and regulations are not needed to issue the first $2

billion in loan guarantees.

• EPAct 05 requires DOE to issue regulations defining borrower default conditions

and audit documentation requirements. According to DOE officials, they expect 

to include these items in the rulemaking process. If DOE issues guarantees

before finalizing the regulations, officials said they will issue procedural rules

covering these issues prior to issuing the guarantees.

Page 32 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

27

Objective 3 – Steps DOE Has Taken to Manage 

the LGP (cont.)

Regulations (cont.)

• Disadvantages of using guidelines rather than regulations:

• Changes DOE makes, and the rationale for them, may not be transparent to

the public, oversight agencies, and Congress. For example, currently the

guidelines’ loan sale provisions prohibit separately selling, or “stripping,” the 

guaranteed portion of the loan from the nonguaranteed portion. This helps 

protect the government’s interest by ensuring that lenders, because they have risk in the loan (the nonguaranteed portion), have an incentive to

diligently monitor the loan. Because these provisions are in guidelines, rather than regulations, DOE could change them without public or

congressional input. In contrast, if the guidelines were issued as 

regulations, DOE would have to provide public notice and comment periods, 

and to respond to comments received before issuing final rules 

implementing the change.

• The use of guidelines creates potential restrictions on enforcement ability.

• Regulations generally carry force of law but guidelines do not.

• DOE’s LGP guidelines state that “most provisions of today’s guidelines

are not legally binding.” DOE officials told us they will include provisions

in the loan contracts to ensure that relevant provisions of the guidelines

are enforceable. However, regulations could help ensure that DOE

includes necessary provisions in the loan contracts.

Page 33 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

28

Objective 3 – Steps DOE Has Taken to Manage 

the LGP (cont.)

Credit Review Board

• OMB guidance calls for agencies to establish a board, as

appropriate, to coordinate credit management and debt collection

activities and ensure full consideration of credit management and 

debt collection issues. Representation on the board should 

include, but not be limited to, the agency chief financial officer

and the senior officials for program offices with credit activities. 

• DOE has drafted a charter for the LGP’s credit review board. The

stated purpose and board membership mirror OMB guidance.

According to DOE officials, the charter has not been approved by

the Secretary of Energy and the board has not yet convened.

Page 34 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

29

Objective 3 – Steps DOE Has Taken to Manage 

the LGP (cont.)

Selecting and Monitoring Lenders and Loans

• To effectively oversee the government’s interests in loan 

guarantee programs, OMB guidance and agency practices call for

managers to establish policies and procedures for selecting 

lenders and loans to guarantee and for monitoring their

performance.These include

• establishing policies and procedures for screening applicants 

to prevent defaults and delinquencies;

• determining that lenders meet all applicable financial and

program requirements for eligibility, such as not being 

delinquent on government debts; and

• establishing mechanisms for monitoring loan performance, 

such as a process for reviewing borrowers’ financial 

statements and timeliness of loan payments. 

Page 35 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

30

Objective 3 – Steps DOE Has Taken to Manage 

the LGP (cont.)

Selecting and Monitoring Lenders and Loans (cont.)

• DOE’s policies and procedures for selecting and monitoring lenders

and loan performance are incomplete. For example:

• Program guidelines specify factors DOE will consider when

selecting projects: for example, whether and to what extent the

project avoids, reduces, or sequesters air pollutants or

greenhouse gases, and whether the project sponsors have 

made a significant financial commitment. However, DOE 

officials have yet to determine how these factors will be ranked

or used for selecting projects.

• Program guidelines contain lender eligibility requirements that 

generally mirror those set out by OMB and contain an additional 

requirement that lenders must demonstrate experience with

energy-related projects. However, DOE has not established 

procedures for monitoring either lenders or loan performance. 

According to DOE officials, they recognize the importance of 

these procedures and will develop them before issuing 

guarantees.

Page 36 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

31

Objective 3 – Steps DOE Has Taken to Manage 

the LGP (cont.)

Estimating Costs and Accounting for Loan Guarantees

• The Financial Accounting Standards Advisory Board’s guidance 

on preparing subsidy estimates and reestimates lists procedures 

to estimate and reestimate subsidy costs, including

• procedures to calculate the subsidy estimate;

• review and approval processes for the subsidy estimate;

• documentation of underlying assumptions, including historical 

support for the assumptions; and

• documentation of the cash flow model used to develop the 

estimates.

Page 37 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

32

Objective 3 – Steps DOE Has Taken to Manage 

the LGP (cont.)

Estimating Costs and Accounting for Loan Guarantees (cont.)

• DOE does not have policies and procedures in place for estimating subsidy and 

administrative costs and accounting for loan guarantees.

• DOE guidelines call for potential borrowers to provide an initial estimate of 

subsidy costs. 

• DOE officials explained that they expect to benefit from the experience 

that some borrowers may have with federal loan guarantees. 

• However, because the borrower fee is based on the subsidy cost

estimate, the potential borrower has an incentive to underestimate the 

initial subsidy cost estimate it submits to DOE as part of its application 

for a loan guarantee. 

• According to DOE officials, they, in conjunction with OMB, have yet to

decide how to estimate subsidy and administrative costs and to determine

the fees to charge borrowers to cover administrative costs. DOE will design 

its approach to reflect any expertise gained from the borrowers’

submissions. 

• According to DOE’s Director of Finance and Accounting, DOE has not 

developed policies and procedures to account for loan guarantee activities. He expects the policies and procedures will be ready before any guarantees 

are issued.

Page 38 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

33

Objective 3 – Steps DOE Has Taken to Manage 

the LGP (cont.)

Objectives and Outcomes

• OMB guidance, the Government Performance Results Act, and agency

practices for loan guarantee programs call for agencies to set program 

goals and objectives and tie them to measurable outcomes to determine 

program effectiveness.

• In particular, OMB guidance for loan guarantee programs calls for

agencies to develop clearly defined objectives and outcomes

expected.

• DOE established broad program objectives in its solicitation for pre- applications:

• promote the President’s Advanced Energy Initiative (which supports

clean-energy technology research to reduce reliance on oil and 

address high natural gas and electricity prices) and 

• further the policy goals of EPAct 05 generally and Title XVII 

specifically. 

• According to DOE officials, it is premature to further define the 

objectives and outcomes expected for the program. 

Page 39 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

34

Selected GAO Products Related to Federal Loan 

and Loan Guarantee Programs

• Small Business Administration: Improvements Made, but Loan Programs

Face Ongoing Management Challenges. GAO-06-605T. Washington, D.C.: 

April 6, 2006.

• Mortgage Financing: FHA's $7 Billion Reestimate Reflects Higher Claims

and Changing Loan Performance Estimates. GAO-05-875. Washington, 

D.C.: September 2, 2005.

• Housing Finance: Options to Help Prevent Suspensions of FHA and RHS 

Loan Guarantee Programs. GAO-05-227. Washington, D.C.: March, 15, 2005.

• Maritime Administration: Weaknesses Identified in Management of the Title 

XI Loan Guarantee Program. GAO-03-657. Washington, D.C.: June 30, 2003.

• Internal Control Standards: Internal Control Management and Evaluation

Tool. GAO-01-1008G. Washington, D.C.: August 2001.

• Farm Loan Programs: Improvements in the Loan Portfolio but Continued

Monitoring Needed. GAO-01-732T. Washington, D.C.: May 16, 2001.

• Guaranteed Loan System Requirements: Checklist for Reviewing Systems

Under the Federal Financial Management Improvement Act. GAO-01- 371G. Washington, D.C.: March 2001.

• Department of Veterans Affairs: Credit Costs and Risks of Proposed VA 

Small Business Loan Guarantee Program. GAO/GGD-00-158. Washington, D.C.: June 30, 2000.

Page 40 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure I 

35

Selected GAO Products Related to Federal Loan 

and Loan Guarantee Programs (cont.)

• SBA Loan Monitoring System: Substantial Progress Yet Key Risks and 

Challenges Remain. GAO/AIMD-00-124. Washington, D.C.: April 25, 2000. 

• Rural Development: Rural Business Cooperative Service Business Loan Losses. GAO/RCED-99-249. Washington, D.C.: August, 25, 1999.

• Credit Reform: Key Credit Agencies Had Difficulty Making Reasonable Loan 

Program Cost Estimates. GAO/AIMD-99-31. Washington, D.C.: January 29, 1999.

• Small Business Administration: Few Reviews of Guaranteed Lenders Have 

Been Conducted. GAO/GGD-98-85. Washington, D.C.: June 11, 1998. 

• Credit Reform: Greater Effort Needed to Overcome Persistent Cost Estimation

Problems. GAO/AIMD-98-14. Washington, D.C.: March 30, 1998.

• Rural Utilities Service: Opportunities to Operate Electricity and 

Telecommunications Loan Programs More Effectively. GAO/RCED-98-42.

Washington, D.C.: January 21, 1998.

• Status of the Great Plains Coal Gasification Project -- Dec. 31, 1984. 

GAO/RCED-85-92. Washington, D.C.: May 28, 1985.

• Geothermal Loan Guarantee Program: Need for Improvements. EMD-80-26. 

Washington, D.C.: January 24, 1980.

Page 41 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure II 

Page 42 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure II 

Page 43 GAO-07-339R DOE’s Loan Guarantee Program 
Enclosure III 

GAO Contacts and Staff Acknowledgments

GAO Contacts

James Cosgrove (202) 512-3841 or cosgrovej@gao.gov 

Robert E. Martin (202) 512-8341 or martinr@gao.gov 

Staff Acknowledgments

In addition to the individuals named above, Marcia Carlsen and Karla Springer, 

Assistant Directors, and Quindi Franco, Marcia Brouns McWreath, Barbara 

Timmerman, and Carol Herrnstadt Shulman made key contributions to this report. 

(360773) 

Page 44 GAO-07-339R DOE’s Loan Guarantee Program 
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