United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Energy and 

Air Quality, Committee on Energy and 

Commerce, House of Representatives

DEPARTMENT OF 

ENERGY 

Observations on Actions to 

Implement the New Loan 

Guarantee Program for 

Innovative Technologies 

Statement of James C. Cosgrove, Acting Director 

Natural Resources and Environment 

For Release on Delivery

Expected at 2:00 p.m. EDT

April 24, 2007

 

GAO-07-798T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

April 24, 2007

DEPARTMENT OF ENERGY 

Observations on Actions to Implement 

the New Loan Guarantee Program for 

Innovative Technologies 

Highlights of GAO-07-798T, testimony 

before the Subcommittee on Energy and 

Air Quality, Committee on Energy and 

Commerce, House of Representatives 

The Energy Policy Act of 2005

(EPAct 05) authorized the 

Department of Energy (DOE) to

establish a loan guarantee program 

(LGP) for projects intended to, 

decrease air pollutants or manmade greenhouse gases, employ 

new or significantly better 

technologies, and have a

reasonable prospect of repayment.

The Federal Credit Reform Act 

requires appropriated budget 

authority for LGP costs before 

loans can be made. In 2006, DOE 

solicited preapplications to the 

LGP, stating it intended to issue up 

to $2 billion in guarantees. It also 

issued guidelines for these

proposals, stating that borrowers 

would ultimately pay for all costs,

but funding was authorized. 

This testimony is based on GAO’s 

February 2007 report (Department 

of Energy: Key Steps Needed to 

Help Ensure the Success of the 

New Loan Guarantee Program, 

GAO-07-339R) and its April 20, 2007

legal opinion (B-308715). GAO

discusses the sources and use of

funds for the LGP in fiscal years

2006 and 2007; DOE’s authority to

implement the LGP and to fund the 

program before Congress had 

appropriated funding; extent to

which the LGP could result in a 

financial risk to the taxpayer; and 

steps DOE has taken to ensure that 

the LGP will be well managed. 

In fiscal year 2006, and continuing through October 2006, DOE used about 

$503,000 from three separate appropriation accounts to fund LGP activities. 

DOE used these funds for the salaries of three staff detailed to the LGP 

office and for contracts to support the program. DOE stopped most LGP 

development activities at the end of October, but according to the deputy 

general counsel for energy policy, he and others continued to work on the 

program by, for example, preparing a notice of proposed rulemaking and 

reviewing pre-applications for completeness. At the time of GAO’s review,

DOE officials said they were awaiting appropriations before taking 

additional implementation steps. 

DOE should not have begun implementation of the LGP without a specific 

appropriation. Nevertheless, DOE did begin implementation, and its 

approach to the LGP raised serious questions about whether this program 

and its financial risks would be well managed. 

LGP guidelines call for borrowers to be charged fees to cover all program 

costs, but the program could result in substantial financial costs to the 

taxpayer if DOE underestimates administrative costs, such as evaluating 

applications. While DOE must recover these costs, it had not developed a 

plan to determine how it would do so at the time of GAO’s review. 

Appropriated funds may be necessary to cover shortfalls. The other type of 

program cost is the subsidy cost: the estimated net present value of the 

long-term cost to the federal government of guaranteeing the loans over the 

entire period that the loans are outstanding, excluding administrative costs. 

DOE will have to estimate this cost to determine the fees charged borrowers, 

but it had 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. Under federal 

law, shortfalls in subsidy costs are funded by a permanent indefinite 

appropriation, not through the annual appropriations process. 

GAO recommended key steps that DOE did not take but that would help 

ensure that the program is well managed. The Revised Continuing 

Appropriations Resolution for Fiscal Year 2007 directed DOE to implement 

most of GAO’s recommendations by issuing final regulations before 

awarding loan guarantees. These regulations are to include (1) 

programmatic, technical, and financial factors for selecting projects for loan 

guarantees; (2) policies and procedures for selecting and monitoring lenders 

and loan performance, and (3) any other policies or information necessary to 

implement the LGP. DOE was also instructed to complete these regulations 

within 6 months of the appropriations act. www.gao.gov/cgi-bin/getrpt?GAO-07-798T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact James C. 

Cosgrove at 202.512.7029. 
Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss the results of our February 2007 

report, and Susan Poling is available to discuss our just-released legal 

opinion on the Department of Energy’s loan guarantee program for 

innovative technologies,1 both of which we prepared at the request of the 

Subcommittee on Energy and Water Development, House Committee on 

Appropriations. 

As you know, the Energy Policy Act of 2005 (EPAct05)2 authorized the 

Department of Energy (DOE) to establish a loan guarantee program (LGP) 

to guarantee loans for projects that were intended to, among other things

meet the following three conditions: (1) decrease air pollutants or manmade 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 

commercial technologies currently used, 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. 

In May 2006, DOE proposed transferring appropriations from some DOE 

accounts to begin the program. 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, it 

issued guidelines for proposals submitted in response to this first 

solicitation, stating that the department expected borrowers to ultimately 

pay for all program costs.3

 After we had completed our audit work 

Congress appropriated amounts to cover the costs of loan guarantees. 

budget authority for the program.4

 1

GAO, 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.: February 28, 2007); and B-308715, Department of 

Energy—Title XVII Loan Guarantee Program, April 20, 2007. 

2

Title XVII of EPAct 05—Incentives for Innovative Technologies.

3

For the first round of loan guarantees, the guidelines stated that DOE anticipated that 

borrowers would pay the subsidy costs and that those borrowers would be assessed fees to 

cover some administrative costs. 

4

Revised Continuing Appropriations Resolution for Fiscal Year 2007. Pub. L. No. 110-5, title 

II, ch. 3, §§ 20315, 20320 (February 15, 2007). 

Page 1 GAO-07-798T 
My testimony today discusses the (1) sources and use of funds for the LGP 

in fiscal years 2006 and 2007, (2) DOE’s authority to implement the LGP 

under section 1702 of the EPAct 05 and section 301 of the Energy and

Water Development Appropriations Act of 1993 and to finance the 

program before Congress had appropriated funds,5

 (3) extent to which the 

LGP could result in a financial risk to the taxpayer, and (4) steps DOE has 

taken to ensure that the LGP will be well managed. 

To identify sources and use of funds for DOE’s LGP, we interviewed DOE 

LGP and budget officials and reviewed and analyzed relevant DOE budget 

documentation as well as agency LGP guidance and planning documents. 

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 these plans and the guidance with DOE and Office of 

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

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

with OMB budget and internal control guidance, federal 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 February 

2007.Consistent with our practice in rendering legal opinions, we 

contacted DOE to establish the factual record and elicit the agency’s legal

position on the subject matter of the request.6

In February 2007, we reported the following: 

First, in fiscal year 2006, and continuing through October 2006, DOE used 

about $503,000 from three separate appropriation accounts to fund LGP 

activities. 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 a LGP Web site. DOE continued to pay for 

task order support services to respond to program inquiries, and these 

payments were in addition to the $503,000 already spent to initiate the 

program. However, DOE had discontinued other funding, and the staff on 

detail had returned to their home units. Nevertheless, according to the 

deputy general counsel for energy policy, he and others continued to work 

 5

 42. U.S.C. § 7278. 

6

 GAO, Procedures and Practices for Legal Decisions and Opinions, GAO-06-1064SP 

(Washington, D.C.: Sept. 2006), available at www.gao.gov/congress.html (last visited Apr. 

16, 2007). 

Page 2 GAO-07-798T 
on the program by, for example, preparing a notice of proposed 

rulemaking and reviewing pre-applications for completeness. At the time 

of our review, DOE officials said they were awaiting appropriations before 

taking additional steps to implement the LGP. 

Second, although LGP guidelines call for borrowers to be charged fees to 

cover all program costs, the program could result in substantial financial 

costs to the taxpayer if DOE underestimates total program costs. These 

costs include, for example, administrative costs for evaluating

applications; offering, negotiating and closing guarantees; and servicing 

and monitoring the guarantees. While DOE must recover applicable 

administrative costs, it had not developed a plan to determine how it 

would recover these costs at the time of our review. Appropriated funds 

may be necessary to cover shortfalls. The other type of program cost is the 

subsidy cost: the estimated net present value of the long-term cost to the 

federal government of guaranteeing the 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 charged borrowers, but it had no policies or procedures for doing so 

at the time of our review. 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. Under the Federal Credit 

Reform Act of 1990 (FCRA), shortfalls in subsidy costs are funded by a 

permanent indefinite appropriation, not through the annual appropriations 

process. 

Third, rather than taking and completing key steps to ensure that the LGP 

would be well managed and accomplish its objectives, we found that DOE 

had focused on initiating the LGP by soliciting pre-applications for 

proposed projects. From OMB 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 had taken at the 

time of our review. 

• Issuing regulations. DOE had not issued regulations for implementing the 

LGP; instead it planned to rely on guidelines for awarding the first $2 

billion in loan guarantees. Unlike guidelines, regulations (1) go through the 

Page 3 GAO-07-798T 
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 saw 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 drafted a charter for a credit 

review board, but it had not yet provided the charter to the Secretary of 

Energy for approval at the time of our review. This board is to coordinate 

credit management and debt collection activities and ensure full 

consideration of credit management and debt collection issues. 

• Setting policies and procedures for selecting and monitoring loans and 

lenders. DOE had taken some steps towards establishing such policies and 

procedures through its guidelines, but it had 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 to monitor loan and lender performance. 

• Setting policies and procedures for estimating administrative and 

subsidy costs and accounting for loan guarantees. As previously noted, 

DOE had not developed policies or procedures for estimating 

administrative or subsidy costs. In addition, it had not developed policies 

or procedures for accounting for loan guarantees. In the interim, DOE was 

asking potential borrowers—who have an incentive to underestimate the 

costs—to provide preliminary estimates of subsidy costs so that it could 

gain experience in developing these estimates. DOE expected the 

necessary accounting policies and procedures would be in place before 

guarantees were issued. 

• Setting program goals and objectives tied to outcome measures for 

determining program effectiveness. DOE had not established outcome 

measurements. Instead, it had set 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 (1) regulations defining conditions for 

determining when a borrower has defaulted on a loan and (2) 

requirements for the documentation borrowers must make available for 

Page 4 GAO-07-798T 
audits. At the time of our review, DOE officials told us that the department

planned 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.

Finally, concerning DOE’s authority to implement and fund the LGP before 

Congress had appropriated funding, we concluded in our April 20, 2007, 

opinion that EPAct 05, section 1702(b)(2), confers upon DOE independent

authority to make loan guarantees, notwithstanding the FCRA 

requirements. We also concluded that DOE engaged in activities to 

implement a loan guarantee program under title XVII of the act during a 

period when DOE was affirmatively prohibited from implementing that 

title by 42 U.S.C. § 7278. These activities violated section 7278; the purpose 

statute, 31 U.S.C. § 1301(a); and the Antideficiency Act, 31 U.S.C. § 

1341(a). DOE must report the violations of the Antideficiency Act to 

Congress and the President, and submit a copy of that report to the 

Comptroller General of the United States under 31 U.S.C. § 1351, as 

amended.7

In conclusion, Mr. Chairman and Members of the Subcommittee, DOE 

should not have begun implementation of the LGP without a specific 

appropriation. Nevertheless, DOE did begin implementation, and its 

approach to the LGP raised serious questions about whether this program 

and its financial risks would be well managed. At the time of our review, 

DOE had not taken steps to ensure that it had in place the critical policies, 

procedures, and mechanisms necessary to ensure the program’s success. 

In our report we recommended that the department take these steps. 

Since we completed our audit work, the Revised Continuing 

Appropriations Resolution for Fiscal Year 2007 directed DOE to 

implement most of our recommendations by issuing final regulations 

before awarding loan guarantees. These regulations are to include (1) 

programmatic, technical, and financial factors for selecting projects for 

loan guarantees; (2) policies and procedures for selecting and monitoring 

 7

Office of Management and Budget Circular No. A-11 provides guidance on the information 

to include in Antideficiency Act reports. Agencies must report violations found by GAO,

even if they disagree with the finding. OMB advises agencies, “If the agency does not agree

that a violation has occurred, the report to the President, Congress, and the Comptroller

General will explain the agency’s position.” OMB Cir. No. A-11, Preparation, Submission, 

and Execution of the Budget, § 145.8 (June 2006). 

Page 5 GAO-07-798T 
lenders and loan performance, and (3) any other policies or information 

necessary to implement the LGP. DOE was also instructed to complete 

these regulations within 6 months of the appropriations act. 

Mr. Chairman, this concludes my prepared statement. I would be happy to

respond to any questions that you or Members of the Subcommittee may 

have. 

Contact points for our Offices of Congressional Relations and Public 

Affairs may be found on the last page of this testimony. For further 

information about our review of the loan guarantee program, please 

contact James Cosgrove at 202-512-3841 or cosgrovej@gao.gov. For further 

information on our legal opinion, please contact Susan A. Poling, 

Managing Associate General Counsel at 202-512-2667 or polings@gao.gov. 

Key contributors to this statement were Thomas H. Armstrong, Assistant 

General Counsel for Appropriations; Marcia Carlsen, Assistant Director; 

Doreen S. Feldman, Assistant General Counsel; Marcia Brouns McWreath; 

Neill Martin-Rolsky, Senior Attorney; Karla Springer, Assistant Director; 

Carol Herrnstadt Shulman; and Barbara R. Timmerman, Senior Attorney. 

Contacts and Staff 

Acknowledgements 

Page 6 GAO-07-798T (360839) 
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