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[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]

RISKY BUSINESS:
THE DOE LOAN GUARANTEE PROGRAM

=======================================================================

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY &
SUBCOMMITTEE ON OVERSIGHT

COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY
HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTEENTH CONGRESS

FIRST SESSION

__________

FEBRUARY 15, 2017

__________

Serial No. 115-03

__________

Printed for the use of the Committee on Science, Space, and Technology

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

Available via the World Wide Web: http://science.house.gov

__________

U.S. GOVERNMENT PUBLISHING OFFICE
24-668PDF WASHINGTON : 2017

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COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY

HON. LAMAR S. SMITH, Texas, Chair
FRANK D. LUCAS, Oklahoma EDDIE BERNICE JOHNSON, Texas
DANA ROHRABACHER, California ZOE LOFGREN, California
MO BROOKS, Alabama DANIEL LIPINSKI, Illinois
RANDY HULTGREN, Illinois SUZANNE BONAMICI, Oregon
BILL POSEY, Florida ALAN GRAYSON, Florida
THOMAS MASSIE, Kentucky AMI BERA, California
JIM BRIDENSTINE, Oklahoma ELIZABETH H. ESTY, Connecticut
RANDY K. WEBER, Texas MARC A. VEASEY, Texas
STEPHEN KNIGHT, California DONALD S. BEYER, JR., Virginia
BRIAN BABIN, Texas JACKY ROSEN, Nevada
BARBARA COMSTOCK, Virginia JERRY MCNERNEY, California
GARY PALMER, Alabama ED PERLMUTTER, Colorado
BARRY LOUDERMILK, Georgia PAUL TONKO, New York
RALPH LEE ABRAHAM, Louisiana BILL FOSTER, Illinois
DRAIN LaHOOD, Illinois MARK TAKANO, California
DANIEL WEBSTER, Florida COLLEEN HANABUSA, Hawaii
JIM BANKS, Indiana CHARLIE CRIST, Florida
ANDY BIGGS, Arizona
ROGER W. MARSHALL, Kansas
NEAL P. DUNN, Florida
CLAY HIGGINS, Louisiana
------

Subcommittee on Energy

HON. RANDY K. WEBER, Texas, Chair
DANA ROHRABACHER, California MARC A. VEASEY, Texas, Ranking
FRANK D. LUCAS, Oklahoma Member
MO BROOKS, Alabama ZOE LOFGREN, California
RANDY HULTGREN, Illinois DANIEL LIPINSKI, Illinois
THOMAS MASSIE, Kentucky JACKY ROSEN, Nevada
JIM BRIDENSTINE, Oklahoma JERRY MCNERNEY, California
STEPHEN KNIGHT, California, Vice PAUL TONKO, New York
Chair JACKY ROSEN, Nevada
DRAIN LaHOOD, Illinois BILL FOSTER, Illinois
DANIEL WEBSTER, Florida AMI BERA, California
NEAL P. DUNN, Florida MARK TAKANO, California
LAMAR S. SMITH, Texas EDDIE BERNICE JOHNSON, Texas
------

Subcommittee on Oversight

HON. DRAIN LaHOOD, Illinois, Chair
BILL POSEY, Florida DONALD S. BEYER, Jr., Virginia,
THOMAS MASSIE, Kentucky Ranking Member
GARY PALMER, Alabama JERRY MCNERNEY, California
ROGER W. MARSHALL, Kansas ED PERLMUTTER, Colorado
CLAY HIGGINS, Louisiana EDDIE BERNICE JOHNSON, Texas
LAMAR S. SMITH, Texas

C O N T E N T S

February 15, 2017

Page
Witness List..................................................... 2

Hearing Charter.................................................. 3

Opening Statements

Statement by Representative Randy K. Weber, Chairman,
Subcommittee on Energy, Committee on Science, Space, and
Technology, U.S. House of Representatives...................... 4
Written Statement............................................ 6

Statement by Representative Marc A. Veasey, Ranking Member,
Subcommittee on Energy, Committee on Science, Space, and
Technology, U.S. House of Representatives...................... 8
Written Statement............................................ 10

Statement by Representative Darin LaHood, Chairman, Subcommittee
on Oversight, Committee on Science, Space, and Technology, U.S.
House of Representatives....................................... 12
Written Statement............................................ 14

Statement by Representative Donald S. Beyer, Jr., Ranking Member,
Subcommittee on Oversight, Committee on Science, Space, and
Technology, U.S. House of Representatives...................... 16
Written Statement............................................ 18

Statement by Representative Lamar S. Smith, Chairman, Committee
on Science, Space, and Technology, U.S. House of
Representatives................................................ 20
Written Statement............................................ 22

Statement by Representative Eddie Bernice Johnson, Ranking
Member, Committee on Science, Space, and Technology, U.S. House
of Representatives............................................. 24
Written Statement............................................ 26

Witnesses:

Ms. Diane Katz, Senior Research Fellow in Regulatory Policy,
Thomas A. Roe Institute for Economic Policy Studies, The
Heritage Foundation
Oral Statement............................................... 28
Written Statement............................................ 31

Mr. Chris Edwards, Director, Tax Policy Studies, Cato Institute
Oral Statement............................................... 44
Written Statement............................................ 46

Mr. Dan Reicher, Executive Director, Steyer-Taylor Center for
Energy Policy and Finance, Stanford University
Oral Statement............................................... 56
Written Statement............................................ 58

Dr. Ryan Yonk, Assistant Research Professor, Department of
Economics and Finance, and Research Director, Institute of
Political Economy, Utah State University
Oral Statement............................................... 73
Written Statement............................................ 75

Discussion....................................................... 83

Appendix I: Additional Material for the Record

Documents submitted by Representative Randy K. Weber, Chairman,
Subcommittee on Energy, Committee on Science, Space, and
Technology, U.S. House of Representatives...................... 108

RISKY BUSINESS:
THE DOE LOAN GUARANTEE PROGRAM

----------

WEDNESDAY, FEBRUARY 15, 2017

House of Representatives,
Subcommittee on Energy and
Subcommittee on Oversight,
Committee on Science, Space, and Technology,
Washington, D.C.

The Subcommittees met, pursuant to call, at 10:09 a.m., in
Room 2318, Rayburn House Office Building, Hon. Randy Weber
[Chairman of the Subcommittee on Energy] presiding.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

Chairman Weber. The Subcommittee on Energy and Oversight
will come to order.
Without objection, the Chair is authorized to declare
recesses of the subcommittee at any time.
Welcome to today's hearing entitled ``Risky Business: The
DOE Loan Guarantee Program.'' I recognize myself for five
minutes for an opening statement.
Today, we will have the opportunity to review the past, the
present, and the future of the Department of Energy's loan
program. I want to thank our panel of witnesses for joining us
in this important discussion about the appropriate federal role
in supporting energy innovation.
Established by the Energy Policy Act of 2005, the DOE loan
guarantee program was designed to give federal support to
risky, innovative, clean energy technology. Under a federal
loan guarantee, instead of the private sector taking on risk to
fund the scale-up of new technology, the government steps in,
risking federal dollars on the hopes for success of these
energy projects.
Through the section 1703 and 1705 programs, the Department
guaranteed loans to 30 energy companies, putting about $28
billion of taxpayer money on the line.
After Congress approved over $2 billion to subsidize the
costs of loan guarantees, the DOE then issued more than $16
billion in guarantees to 26 different projects. In these
subsidized loans, known as section 1705 loans, companies not
only received government backing for their loan, but additional
taxpayer dollars were authorized to pay, quote, the ``credit
subsidy cost,'' end quote, of the loan, or the estimated cost
to the federal government to manage the loan over its lifetime.
Easy money combined with political pressure to issue loans
before the temporary subsidy program expired led the DOE to
rush loan applications. Both the DOE Inspector General and the
Government Accountability Office found that DOE did not have
the necessary expertise or the metrics to effectively evaluate
these loans. Predictably, a number of companies that received
section 1705 loans went into default. In total, over $800
million in taxpayer money has been wasted by this DOE loan
program.
It's clear that the DOE loan guarantee program is
expensive. The GAO estimates that the cost for the current loan
guarantees is $2.2 billion with a B. Supporters argue the cost
is justified if we can help innovative technologies make the
leap to the commercial market.
But what if federal meddling in the market actually hurts
innovation? As we will hear in testimony today, when the
federal government provides loans and loan guarantees to
favored technologies, innovation in fact stalls. While federal
government support helps loan guarantee winners attract
capital, it draws capital away from other innovative ideas in
the marketplace.
And since large companies with the resources to lobby on
behalf of their projects often have an advantage in the loan
application process, the DOE loan guarantee program pushes
capital away from those startups and entrepreneurs that often
have the most innovative ideas. We need to be opening doors for
these small innovators, not closing them by pushing investors
toward federally backed, so-called risk-free investments.
Additionally, taxpayers often end up paying higher prices
for their power because of federal government meddling in the
energy market. For example, when the DOE provided a $1.6
billion loan guarantee to the Ivanpah solar project in
California, the state mandated the use of renewable power, and
utilities entered into contracts to buy power from the DOE-
backed facility. Unfortunately, the ratepayers in southern
California will now pay two to five more times for power
generated by this facility in addition to being stuck with the
bill if the project goes into default.
The truth is that when the DOE provides loan guarantees,
there is no benefit for the taxpayer even if the guaranteed
loan is paid in full. Regular Americans take on the liability
of the full loan, they don't see a return, and they can end up
paying more for their electricity if and when the project is
actually built.
The DOE loan guarantee program is just another way the
federal government picks winners and losers in the energy
market. It doesn't guarantee innovation, doesn't guarantee cost
savings, and it doesn't guarantee access to the next generation
of energy technology. The only thing guaranteed for the
taxpayers is extra cost and extra risk.
It is our responsibility in this committee to examine
Department of Energy programs and ensure our limited resources
prioritize the kind of research and science facilities that
open doors for all kinds of innovators.The Department cannot
prioritize the basic research it does best if it's playing
venture capitalist.
Therefore, I think we need to take a hard look at the DOE
loan guarantee program and determine whether it is an
appropriate way to spend precious federal research dollars. In
my opinion, and in the testimony you'll hear today, the
American people would be better served if the federal
government stopped picking winners and losers, focused on the
R&D, and let the market drive the investment for energy
innovation.
[The prepared statement of Chairman Weber follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

Chairman Weber. With that, I conclude, and I now recognize
Ranking Member, Mr. Veasey.
Mr. Veasey. Thank you, Mr. Chairman. I'm looking forward to
working with you this Congress in my capacity as Ranking Member
of the Energy Subcommittee. And given our history together,
previously, we served in the Texas Legislature together, served
on the Environmental Regulation Committee together working on
similar issues here. And so I think that we'll be able to talk
about some things that we think can help move America's energy
future together in the right direction.
Today, we are examining the Department of Energy's Loan
Programs Office. I hope that by the end of this hearing my
colleagues on both sides of the aisle can come to the same
conclusion that so many nonpartisan observers and professionals
in the finance industry have, that these loan programs have
been successful by almost every measure.
Allow me to highlight just a few of these success stories.
The LPO portfolio has over 30 projects in 18 States. It has
enabled over $50 billion in private sector investment in clean
energy technologies. These loan guarantees have created 56,000
American jobs across our country. And these loan guarantees
have helped prevent the release of 34.1 million tons of carbon
dioxide into our atmosphere. All of this is because at
Congress's direction the DOE intelligently leveraged the
federal government's strong credit and LPO's deep expertise to
the benefit of the American taxpayer.
For my fiscal conservative friends, the loan programs have
actually helped reduce the national debt. During LPO's
relatively short life, the loan and loan guarantees have
returned approximately $980 million to the Treasury. That is
net revenue from interest payments after accounting for losses.
It is notable that even the Heritage Foundation left LPO off
their list of programs to cut or eliminate in their Blueprint
for Balance. And based on my quick read, there aren't very many
DOE programs that are spared in that particular report.
When Congress authorized the loan program we set aside $10
billion for expect losses that may occur as the federal
government takes on varying levels of risk with each of these
projects. While there have been a handful of projects that did
not pan out, the total losses from all of these projects comes
nowhere near the $10 billion originally set aside. In fact, it
is less than ten percent of the amount Congress originally
projected, with losses so far adding up to $810 million, a
number that is covered twice over by the interest payments
collected. So if we consider this program on a strictly cost-
benefit or risk-reward basis, it has clearly performed beyond
expectations and is tremendously successful.
But those aren't the only or even the most appropriate
metrics to consider. The section 1705 loan guarantees are
responsible for launching the utility-scale PV solar industry.
These loan guarantees enabled the first five 100 megawatt solar
PV facilities to be built in the United States. What followed
that initial investment from DOE perfectly illustrates the role
that these loan guarantees fill in the market. After DOE
demonstrated the viability of those first five projects,
private financing began funding utility-scale solar PV
independently. As of the last year, there are now 45 other
projects that have received financing.
However, LPO does more than just provide loan guarantees to
renewable energy. In fact, over 1/3 of the portfolio's loan
guarantee authority funds the Vogtle nuclear project in
Georgia. And with the announcement of a conditional commitment
for the first Advanced Fossil Energy Project in Lake Charles,
Louisiana the portfolio continues to diversify. In fact, the
carbon captured from the Lake Charles project will be used by
Denbury, a Texas company for enhanced oil recovery, in
Southeast Texas. And as the Chairman of the Carbon Dioxide
Enhanced Oil Recovery Caucus, I certainly support this project.
And with the enhanced oil recovery occurring near if not in
the district of the esteemed Chairman, I'm hopeful that maybe
he will consider being supportive of this particular project as
well.
The market for industrial carbon capture has the potential
to experience the same revolutionary changes that the solar PV
industry has experienced as a result of LPO's unique role and
capabilities to foster our innovation pipeline.
In conclusion, the Loan Programs Office has something for
everyone. It has investments for fossil energy, renewables,
nuclear, and it even reduces our national debt. I hope we can
all recognize the benefits and extraordinary gains that have
come out of LPO, and furthermore, I hope my colleagues on the
other side of the aisle are willing to work together to
constructively support and wherever appropriate improve the
Department's work in this crucial area.
Mr. Chairman, I want to thank you. I look forward to
working with you, and I yield back the balance of my time.
[The prepared statement of Mr. Veasey follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

Chairman Weber. Thank you, Mr. Veasey. And I was remiss. I,
too, look forward to working with you. We had good times in the
Texas legislature.
Mr. Veasey. Yes, we did.
Chairman Weber. You bet. Man, I now recognize the Chairman
of the Subcommittee on Oversight, Mr. LaHood, for his opening
statement.
Mr. LaHood. Well, thank you, Chairman Weber. And it's an
honor to join you here today for this hearing. I want to thank
the witnesses for being here today for our hearing titled
``Risky Business: The DOE Loan Guarantee Program.''
Today's hearing will provide us with an opportunity to
examine one of the ways the previous Administration used
taxpayer dollars to fund massive green energy initiatives with
the Department of Energy's loan guarantee program. With this
program, over $28 billion in taxpayer money was used to support
the loan program's portfolio for 30 projects. Too often, loan
guarantees were handed out based on political favoritism
instead of merit.
Problems with the loan program arose when DOE's first
approved project, Solyndra, defaulted on its loan after
receiving $535 million in loan guarantees. Four additional
projects defaulted on their loans, representing $807 million
taxpayer dollars lost to date.
So it's no surprise that the Loan Program Office has faced
strong criticism from Congress. Rigorous oversight should be
expected when billions of taxpayer dollars are at stake,
especially when politics can influence how those dollars are
spent. This Committee, the Energy and Commerce Committee, and
the Oversight and Government Reform Committee have held many
hearings outlining concerns with this program. In addition to
Congressional oversight, the DOE Inspector General and the
nonpartisan Government Accountability Office have repeatedly
raised questions about the mismanagement and accountability in
the loan program.
The DOE Inspector General described the DOE Loan Program
office as, quote, ``attaching a garden hose to a fire
hydrant,'' unquote. Had Congressional committees not drawn
attention to the problems with the Loan Program Office, the
losses could have been far greater. As part of Congress'
oversight mandate, we have a responsibility to ensure that the
proper transparency in this place--is the place to ensure that
DOE is not putting taxpayer dollars at undue risk.
While this is my first hearing as Oversight Subcommittee
Chairman, my colleagues on this committee led efforts in the
last Congress to ensure that the DOE loan guaranteeprogram was
effectively managed and transparent. I'm committed to
maintaining oversight of this program in the 115th Congress.
The loss of taxpayer dollars in the DOE loan program raise
significant questions about the overall effectiveness of the
program and what steps Congress may need to take to ensure
taxpayer dollars are no longer put at risk. We can't keep
putting American tax dollars on the line when loan guarantee
recipients are in danger of default. And we can't automatically
expect the federal government to be better than the private
sector when it comes to investment and what makes technology
successful in the commercial market.
Today's hearing is intended to analyze the future of the
DOE loan guarantee program. How can it be improved? Is the risk
to the taxpayers worth the benefits gained? Are the taxpayers
truly benefiting from the Loan Program Office? Is the DOE loan
guarantee program operating within its intended purpose, to
close the gap between innovative technologies and private
investment? Or is federal government intervention crowding out
other innovative technologies in the energy marketplace?
All of these are important questions that require the kind
of thorough discussion I hope we can have here today. It's our
job in Congress to ensure responsible management of federal
resources and determine the path forward for the DOE loan
program.
We have a number of excellent witnesses here today that
will help this committee answer some of these questions and
provide recommendations on next steps for the DOE loan
guarantee program. I would like to thank our witnesses for
joining us here today, and I look forward to the testimony.
With that, I yield back, Mr. Chairman.
[The prepared statement of Mr. LaHood follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

Chairman Weber. Thank you, Mr. LaHood.
I now recognize the Ranking Member of the Subcommittee on
Oversight, Mr. Beyer, for his opening statement.
Mr. Beyer. Thank you. Chairman Weber and Chairman LaHood,
thanks so much for putting this hearing on today.
The mission of the Department of Energy's Loan Program
Office is to help accelerate the deployment of advanced
innovative clean energy technologies across the United States,
and the successful deployment of these technologies creates
jobs, enhances America's competitiveness, and helps to protect
the environment, the climate, and public health.
Now, we're likely to hear a lot of criticism about the loan
guarantee program today. Both witnesses and members are likely
to say that the federal government should play no role in
funding energy technologies at all, particularly renewable
energy technologies. And I think this is philosophically
congruent with much of the majority's opposition to the Export-
Import Bank, the idea that government doesn't have a role in
loan guarantees.
Some even say that the U.S. Government shouldn't have
provided more than $470 billion in subsidies to the oil and gas
industry over the last 100 years. But some may also see
problems with the DOE providing more than $8 billion in loan
guarantees or 1/3 of its current loan guarantees to construct
two new nuclear plants in Georgia. The new LPO portfolio that
includes solar, wind, fossil fuel, nuclear, and other
technologies comprises more than $30 billion in loans, loan
guarantees, and conditional commitments covering more than 30
different projects across multiple energy and transportation
technologies.
I believe the possible plan to halt the DOE's loan programs
completely, as suggested in a memo by President Trump's DOE
transition team, is supported by some individuals at the
conservative Heritage Foundation is a spectacularly bad idea.
Investing in clean energy is smart. It helps to provide
scientific solutions to combat climate change. It helps to
protect our environment and the public's health from toxic
chemicals. It fosters innovation and the development of new
technologies. It creates new jobs and helps our economy.
You know, one of the myths here is that somehow we're in a
perfectly free market. The American companies' workers in our
advanced energy sector face fierce foreign competition. And the
international market is certainly not free. Many firms in the
advanced energy sector benefit from strong home government
support. China automaker BYD benefits from generous support
from the Chinese Government, well on its way to becoming the
world's largest electric car manufacturer. European firms are
also making significant gains in new plug-in vehicles and
renewable energy generation.
The United States should simply not cede its leadership to
our foreign competitors in the high-tech advanced energy
sector. This important DOE program is necessary for American
businesses and American workers to compete in this growing
field.
So regardless of whether you believe in the abundant
scientific evidence that supports the reality of carbon
pollution and the role of fossil fuel combustion and sea level
rise, supporting clean, innovative, renewable energy
technologies that don't damage our waterways, air, and land by
releasing toxic chemicals is a good idea. The only thing it may
really threaten is fossil fuel companies that don't clean up
their act.
I hope that as Members of Congress we can have some
foresight and can agree to support federal investments today
into the clean energy technologies that our nation will need
tomorrow, clean energy technologies that will never emerge
without federal support.
Perhaps the DOE can get an opportunity today to drill down
on the actual math. The numbers we've seen suggest the loss
ratio of around two percent, far less than you have in the
private sector, that we've already received $980 million more
in total interest payments, more than the total losses even
projected in the loan program so just on that fact so far it's
not projected to be a burden on the taxpayers at all. And
that's not even including all of the taxes generated by the
many successful businesses funded by this, all the taxes paid
by the thousands of jobs created by the federal loan program.
This, at least the evidence we've seen so far, is a huge net
impact on the positive way against the federal budget deficit
and for the federal economy. But perhaps I'll have a chance to
drill down on that even more.
Thank you very much for being with us today. And, Mr.
Chairman, Chairman, and Ranking Member, thank you for inviting
me to be a part of this.
[The prepared statement of Mr. Beyer follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

Chairman Weber. Thank you, Mr. Beyer.
I now recognize the Chairman of the full committee, Mr.
Smith, for an opening statement.
Chairman Smith. Thank you, Mr. Chairman. And I also want to
thank Chairman LaHood for holding this joint hearing today.
We will hear from a number of expert witnesses on the
market impact and risk associated with federal loan guarantees
for energy innovation.
The Department of Energy loan guarantee program was
established in 2005. It was intended to provide federal loan
guarantees to advance commercial application of innovative
clean energy technology. In short, the Department guarantees a
loan given to an energy company. By guaranteeing a loan, DOE
tells private investors that if the company defaults, the
taxpayers will foot the bill for the loan. This takes the risk
away from investors who stand to profit and puts it on the
American people. Instead of the private sector taking on risk
to develop new technology, the government steps in and risks
taxpayer dollars on energy projects.
In 2009, Congress expanded the loan guarantee program and
gave DOE $2.4 billion and the authority to manage costs of loan
guarantees. But instead of careful vetting and appropriate
metrics to avoid risk, the DOE rushed loan applications and
issued $16 billion in loans to 26 projects. President Obama's
political allies, like Solyndra, were often fast-tracked, with
little consideration for project merit or benefits to the
taxpayer.
The results were predictable. High-profile defaults
occurred, like the $535 million loan guarantee to Solyndra in
2011, $68 million lost when Abound Solar filed for bankruptcy
in 2012, and $139 million lost from a direct loan to Fisker
Automotive. These events demonstrate what happens when the
federal government picks winners and losers in the energy
market.
DOE has lost over $800 million on bad loans since 2005.
According to estimates from the Government Accountability
Office, the total cost for the current loan portfolio is $2.2
billion plus $312 million in program administrative costs. This
is the cost to manage the current loan portfolio over the
lifetime of the loans. These costs will increase if another
loan is defaulted or if the Department issues new loan
guarantees to projects with any financial risk.
Under the DOE loan guarantee program, American tax dollars
also subsidize loans for large companies with billions in
available capital like Ford, Goldman Sachs, Google, GE, and
Berkshire Hathaway. And if something goes wrong, these
companies aren't stuck with the bill; the America people are.
It is unfair to ask American taxpayers to subsidize risky
loans.
DOE also provides a government stamp of approval to favored
technologies through loan guarantees. That means that even when
DOE backs a successful project, it drives private investment
away from technologies that don't receive federal loan
guarantees. Private sector companies can't compete with other
private sector companies that get loan guarantees.
It is our responsibility to oversee the use of the
Department of Energy's resources and only reauthorize those
programs that provide the best investment for the American
people.
Though its loan guarantees have a suspect past, DOE has an
exemplary track record in basic research. The Department's
national labs and scientific user facilities provide
opportunities to university researchers and private innovators
as they search for the next great breakthrough in energy
technology. And unlike the DOE loan guarantee program, the
national labs are open to every innovative entrepreneur, not
just those with a certain political agenda.
Mr. Chairman, as we reauthorize the Department of Energy's
research and development programs, we should prioritize the
basic and early-stage research that would not be undertaken by
the private sector.
Thank you. And I will yield back.
[The prepared statement of Chairman Smith follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

Chairman Weber. Thank you, Mr. Chairman. And I now
recognize the Ranking Member of the full committee, Ms.
Johnson, for an opening statement.
Ms. Johnson. Thank you very much, Mr. Chairman. And let me
express my appreciation to you, Mr. LaHood, and our Ranking
Members for holding this hearing and I want to thank the
witnesses for being here today.
We are here to discuss the record at the Department of
Energy's Loan Programs Office and the unique role that these
programs play in our energy innovation pipeline. They provide
both direct loans and loan guarantees for projects across a
broad range of energy sector, including nuclear, fossil energy,
renewables, and advanced vehicles.
This support has been critical because private lenders are
typically unwilling or unable to take on the risk associated
with financing truly innovative and first-of-a-kind projects of
this scale on their own. And that's true across the board in a
lot of research and innovation.
These programs have been instrumental in establishing new,
American-made, clean energy industries. For example, prior to
2010, there actually were no large-scale photovoltaic solar
projects in the United States, but after a careful review of
both the opportunities and the risk, DOE's loan guarantee
program supported the first five projects of this kind. And
since then, the private sector has taken over financing another
45 utility-scale projects without government involvement. Any
objective observer will tell you that this simply would not
have happened if DOE had not fulfilled the loan program's
unique role of reducing the risk of deploying new energy
technologies.
The loan guarantee program is also supporting construction
of the first U.S. nuclear reactors in 30 years at the Vogtle
plant in Waynesboro, Georgia. And less than 2 months ago, DOE
issued a conditional loan guarantee for an exciting new carbon
capture and methanol production project in Lake Charles,
Louisiana.
DOE's advanced technology vehicles manufacturing program
which issued direct loans, is yet another success story. Not
only did it help launch one of the leading electric vehicles
manufacturers in the country today, Tesla Motors, but that
company paid back its loan with interest almost ten years
early. Overall, this program has supported the production of
more than 4 million fuel efficiency cars and more than 35,000
jobs across eight States.
The record is also now abundantly clear that DOE has been
carrying out these key programs in a fiscally responsible
manner. Even initial critics now view the loan guarantee
program as a success with losses equaling only 2.23 percent of
the office's entire portfolio, a rate that is lower than any
venture capitalist can achieve. While there will undoubtedly be
instances when an individual project does not meet its goal,
DOE's overall portfolio remains strong and healthy.
In closing, I want to emphasize there is no such thing as a
free market when it comes to energy. You can tell that by all
these Texans on this committee. The full cost of taxpayers of
producing and ensuring the safe transportation of oil on the
global market is not reflected in its price. Further, the
growing cost of carbon pollution have yet to be priced into the
energy sector unfortunately. And Germany, China, India, and
other leading competitors have implemented their own robust
energy loan and loan guarantee programs to help them across
what's often called the "valley of death" between clean energy
and technology development and commercialization.
So DOE's loan programs are vitally important for enabling
the United States to compete effectively on the world stage,
and more broadly, for fostering an American-made clean energy
future for all of us.
Again, I thank each of you for joining us today, and with
that, Mr. Chairman, I yield back.
[The prepared statement of Ms. Johnson follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

Chairman Weber. Thank you, Ranking Member Johnson.
Our first witness today is Ms. Diane Katz, Senior Research
Fellow in Regulatory Policy at the Thomas A. Roe Institute for
Economic Policy Studies at the Heritage Foundation. Prior to
joining the Heritage Foundation, Ms. Katz was a member of the
editorial board of the Detroit News for nine years. I guess
that proves there is life after editorializing. Okay. Ms. Katz
holds a bachelor's degree in philosophy from Thomas Jefferson
College and a master's degree in journalism from the University
of Michigan. Welcome.
Our next witness is Mr. Chris Edwards, Director of Tax
Policy Studies at the Cato Institute. Before joining Cato, Mr.
Edwards was a Senior Economist on the Congressional Joint
Economic Committee. In addition, he was a member of the Fiscal
Future Commission of the National Academy of Sciences. Mr.
Edwards received his bachelor's degree in economics from the
University of Waterloo and his master's degree in economics
from George Mason. Welcome, Mr. Edwards.
Our third witness today is Mr. Dan Reicher, Executive
Director of the Steyer-Taylor Center for Energy Policy and
Finance at Stanford University. Mr. Reicher previously served
as Assistant Secretary of Energy for the Office of Energy
Efficiency and Renewable Energy and the Department of Energy
Chief of Staff both under President Clinton. Mr. Reicher, it
says here you received your bachelor's degree in biology from
Dartmouth, your law degree from Stanford, and your honorary
doctorate from the State University of New York. Welcome.
And our final witness is Dr. Ryan Yonk, Assistant Research
Professor in the Department of Economics and Finance and
Research Director in the Institute of Political Economy at Utah
State University. Dr. Yonk received his master's degree in
political science from Utah State and his Ph.D. in political
science from Georgia State. Welcome, Doctor. Is it Yonk or
Yonk?
Dr. Yonk. Yonk.
Chairman Weber. It is Yonk. Well, welcome.
I now recognize myself for five minutes--whoops. I now
recognize Ms. Katz--I'm sorry. I'm getting ahead of myself--for
five minutes of testimony, although I've got questions I would
like to ask you. So, Ms. Katz, you're recognized.

TESTIMONY OF MS. DIANE KATZ,

SENIOR RESEARCH FELLOW IN REGULATORY POLICY,

THOMAS A. ROE INSTITUTE FOR ECONOMIC POLICY STUDIES,

THE HERITAGE FOUNDATION

Ms. Katz. Mr. Chairman, and Members of the Subcommittee,
thank you for the opportunity to address you today. My name is
Diane Katz, and I'm a Senior Research Fellow in Regulatory
Policy at the Heritage Foundation. The views I express in this
testimony are my own and do not represent any official position
of the Heritage Foundation.
My purpose here is to provide economic context to the loans
and loan guarantees issued by the Department of Energy. Few
Americans are aware that, collectively, we shoulder more than
$18 trillion in debt exposure from loans, loan guarantees, and
subsidized insurance provided by some 150 federal programs.
Among them are 35 programs administered by the Department of
Energy and nine other agencies that provide loans and loan
guarantees for clean energy projects. This redistribution of
taxpayer dollars and credit risk erodes the nations
entrepreneurial spirit, undermines innovation, and fosters
cronyism.
The government credit portfolio consists of subsidized
financing for energy, housing, agriculture, education,
transportation, exporting, small business, and others. Federal
insurance programs cover bank and credit union deposits,
pensions, flood damage, declines in crop prices, and acts of
terrorism. Capital for mortgage lending by banks is provided by
Fannie Mae and Freddie Mac. Researchers with the Federal
Reserve Bank of Richmond in their bailout barometer estimate
that 61 percent of all liabilities throughout the U.S.
financial system are explicitly or implicitly backed by
taxpayers.
Among--Americans across the political spectrum were rightly
indignant to witness Washington bailing out banks and
corporations during the 2008 financial crisis. In similar
fashion, the Department of Energy routinely uses taxpayers'
dollars to finance projects that benefit wealthy investors and
titans of industry. With a market cap exceeding $573 billion,
Google does not need loan guarantees from the Department of
Energy. Ford Motor Company, with a market cap of $50 billion,
does not need loans from the Department of Energy. Neither does
British Petroleum, Chevron, or Morgan Stanley, but they benefit
from them nonetheless.
With some government loans extending decades, the burden of
federal credit will encumber generations to come without their
consent. Advocates insist that the subsidies are necessary to
equalize opportunity, create jobs, and fill gaps in private
financing. However, the actual lending patterns and outcomes do
not reflect the purported goals.
Government credit is a poor substitute for private
financing. The purposes of the two are entirely different, as
are the results. Private lenders offer credit to generate
profit. The challenge they face is to minimize risk and
maximize return within ever-changing market conditions. Under
threat of loss, they must take great care in lending.
In contrast, government financing is detached from the
profit motive and its inherent discipline because taxes provide
an endless source of revenue, and federal agencies are largely
shielded from accountability. Consequently, double-digit
default rates are common among federal credit programs.
Too often, policymakers create subsidized financing to
offset costly regulatory demands, and oftentimes, the
beneficiaries are those with the most political influence, not
those with the greatest need. The Department of Energy, for
example, guaranteed $1.6 billion in loans for a solar thermal
power facility in Southern California. The facility negotiated
power purchase agreements with two California utilities, and
the utilities apply the overpriced power purchases toward
California's onerous renewable energy quotas. Ratepayers are
forced to pay four to five times more per megawatt hour than
they would otherwise. This particular facility is owned by
Google; NRG Energy, market cap $5 billion; and BrightSource
Energy, a privately held company that reportedly counts British
Petroleum, Chevron, and Morgan Stanley among its investors.
Other beneficiaries of the Department's largesse include a
Spanish banking consortium with a market cap of $76 billion;
and ACS Cobra, a world leader in industrial infrastructure,
market cap $9 billion.
When the government shifts credit risk to taxpayers,
borrowers are relieved of the consequences of failure and act
accordingly. They will still work for success of course, but
there is less incentive to prevent loss. When companies do not
compete for private capital based on merit, productivity and
innovation become less important than political capital. Credit
worthiness also becomes less relevant to banks that
increasingly act as pass-through agents for government
financing. The result is a larger proportion of U.S. assets
that are inherently weaker than they otherwise would be if
financed by the private sector.
And I'll close up. Fisker Automotive is a case in point.
The Department of Energy awarded the company a $529 million
loan to produce hybrid plug-in vehicles. Fisker failed to meet
performance targets and ultimately filed for bankruptcy,
costing taxpayers $139 million.
We will never know what innovations have gone undiscovered
because of preoccupation--the Department's preoccupation with
electric vehicles, solar panels, and other pet technologies,
nor does government financing appear to be all that effective.
The Department of Energy has been financing development of
electric vehicles for 40 years.
Reform of government financing should be a Congressional
priority. Unconstrained spending, unfettered losses, and
rampant cronyism are only part of the cost. Trillions of
dollars of credit exposure represents the commandeering of the
financial services market by the government and is escalating
power over private enterprise. This should end. Thank you.
[The prepared statement of Ms. Katz follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

Chairman Weber. Thank you, Ms. Katz.
I now recognize Mr. Edwards for five minutes.

TESTIMONY OF MR. CHRIS EDWARDS, DIRECTOR,

TAX POLICY STUDIES, CATO INSTITUTE

Mr. Edwards. Thank you very much.
[Audio malfunction in hearing room.]
Chairman Weber. There we go.
Mr. Edwards. Today, 29 States impose renewable portfolio
standards that require purchases of renewable energy such as
solar and wind, so it seems to me with that high level of state
support, layering on top federal subsidies is overkill.
Secondly, the failures like Solyndra have been mentioned,
and it is true that the DOE appears to have a low default rate
on its loan portfolio. But to an economist the real issue is
are the benefits of these projects higher than the costs, and
in a lot of cases I don't think they are.
And to give you one example, the Ivanpah solar project in
California has been mentioned. It strikes me that there's been
very high cost there with moderate or low benefits. The project
is generating a lot less power than promised. It's using a lot
more natural gas to fire up its facility every day than
promised, and the price of power is a lot higher than natural
gas fuel generation in California.
I also think the $8 billion loan guarantee for the nuclear
power plant in Georgia owned by Southern Company, that's been a
rather dubious loan as well. That project is far behind
schedule and far over cost.
A third issue is the corporate welfare and cronyism issue.
The Washington Post, looking at Obama's subsidies, concluded,
quote, ``Obama's green technology program was infused with
politics at every level,'' unquote.
Public opinion polls over recent years have shown plunging
support both for federal politicians and for big businesses,
and I think part of the issue is cronyism. I think both big
business and federal lawmakers would gain a lot more public
support if they separated themselves more, if they ended
corporate welfare, allowed big business to earn profit and loss
without federal intervention.
A fourth issue is that the private sector can fund
alternative energy itself these days. As has been mentioned,
most DOE loan guarantees in this program have backed wealthy
investors and large corporations. Warren Buffett's Berkshire
Hathaway has invested $17 billion in renewable energy projects
over the last decade. To me this shows that there's a heck of a
lot of private cash available for renewable energy these days,
and the time for federal intervention, I think we're beyond
that. These are large and mature industries these days that
should be able to fund themselves.
A fifth issue is that subsidies distort decision-making. In
technology-based industries like renewable energy, it is the
leanest and quickest and most adaptive firms that usually
succeed. I think federal subsidies undermine private
productivity. I think they tend to make businesses slow and
slow to change as markets are constantly changing. So I think
subsidies undermine private innovation and productivity.
So without programs like this, what can the federal
government do? I think one thing the federal government can do
is do major tax reform. Rather than subsidizing debt for
particular projects like DOE loan guarantee program did, I
think Congress should look at reforming the tax code to reduce
the cost of equity financing across the economy. Rather than
favoring particular projects, Congress should do things like
reducing capital gains tax rates, which will incentivize more
venture and angel investment in advanced industries like
renewable technology.
Also, I'm a big fan of capital expensing, which is part of
the House Republican tax plan. Capital expensing is very much a
green tax policy reform. Not only does--capital expensing would
benefit a capital-intensive industries like utilities and
energy, expensing would encourage businesses in all industries
to more rapidly change and invest, replacing their old
structures, their old equipment and technologies that tend to
be less energy-efficient with new structures and new equipment
and machinery which is more energy-efficient. So I think tax
reform can very much be an exercise in green policymaking on
Capitol Hill.
So to conclude, I think Republicans are in a unique
position to start cutting back on some business subsidies like
the DOE loan guarantees because Republicans are also promising
to reduce taxes and reduce regulation on business. So business
would lose federal handouts on the one hand but on the other
hand the regulatory tax burdens faced by businesses would fall.
I think that would be a good trade that would benefit everyone
and the economy. Thank you.
[The prepared statement of Mr. Edwards follows:]
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Chairman Weber. Thank you, Mr. Edwards.
Mr. Reicher, you are now recognized for five minutes.

TESTIMONY OF MR. DAN REICHER, EXECUTIVE DIRECTOR,

STEYER-TAYLOR CENTER FOR

ENERGY POLICY AND FINANCE,

STANFORD UNIVERSITY

Mr. Reicher. Thank you, Chairmen Smith, Weber, and LaHood
and Ranking Members Veasey, Johnson, and Beyer. I appreciate
the opportunity to testify.
You have my bio, but let me emphasize that I have some
honest-to-goodness background in energy project investing. I
cofounded an energy project investment firm where we raised
$100 million from a major pension fund and a venture-capital
firm. I also made project investments while working at Google.
Finally, I worked for an energy technology company that
received a major venture-capital investment.
Mr. Chairman, the U.S. Government has long played a vital
and successful role in helping to commercialize energy
technologies, including, among others, commercial nuclear
power, carbon capture and storage, and hydraulic fracturing. I
am focusing on technology commercialization because that is the
real core of the DOE loan guarantee program today.
You will hear lots of arguments today about how the loan
guarantee program is not an appropriate role for government and
that the private sector should assume the burden, but these
comments miss the mark because the loan guarantee program, as
currently structured and operating, is focusing quite precisely
on the role where the private sector needs help. And I
emphasize technologies that have not reached full commercial
scale and where, because of their risk profile, banks and bond
issuers are reluctant to provide financing. Once the technology
has been proven to work at commercial scale, the DOE loan
program generally has no further role, and that is the case
today in the DOE loan program where, for example, financing for
solar PV projects using fully commercialized technologies has
ended following loan guarantees made about five years ago that
helped U.S. PV projects get to full utility scale.
The private sector has financed scores of subsequent
projects. The DOE loan guarantee program, as authorized by
Congress and signed by President George W. Bush, is carrying
out its role across a broad range of energy and transportation
technologies: advanced fossil, nuclear, renewables, energy
efficiency, and vehicles. And DOE's Loan Program Office is
managing the investment portfolio successfully.
Here are the numbers, the most updated ones. As of December
31, 2016, 22 projects supported by the Loan Program Office are
operational and $6.65 billion in loan principal and $1.79
billion in interest have repaid to the U.S. Treasury. Loan
losses in the portfolio are approximately $810 million. This is
barely half of the interest already paid on the DOE loans to
date. It is only a little over two percent of the program's $36
billion of loans, loan guarantees, and conditional commitments.
And these losses are a tiny fraction of the $10 billion set
aside by Congress to cover failed loans.
I would note that in her testimony, Ms. Katz indicates
that, quote, ``double digit default rates are common among
federal credit programs.'' The DOE rate is barely in the single
digits, and the LPO's two percent loan loss ratio is less loss
ratio in the loan portfolios of virtually every U.S. money-
centered bank. And these banks are generally not making loans
for energy projects deploying advanced technologies and
certainly not in the riskier commercialization stage.
I also want to emphasize that the focus today is on loans,
not grants. Loans get paid back, grants do not, and they get
paid back with interest to the U.S. Treasury, also known as
U.S. taxpayers. A lot of the testimony today confuses grants
and loans.
Looking ahead, the Loan Program Office has more than $40
billion in remaining authority with $12.5 billion for advanced
nuclear projects, $8.5 billion for advanced fossil, $4.5
billion for renewable energy and efficiency, and $16 billion
for advanced transportation projects. Importantly, the office
has recently received more than 70 applications in response to
its current solicitations for almost $50 billion in loans and
loan guarantees.
Mr. Chairman, U.S. infrastructure has emerged as an area of
both substantial national need and bipartisan support. The good
news is that there are multiple areas where the DOE loan
guarantee program can provide much-needed infrastructure
investment from already authorized funds and simultaneously
support important technology innovation. This includes
infrastructure projects involving, for example, electricity
transmission, advanced nuclear technology, carbon capture
utility-scale storage, and advanced vehicles.
Infrastructure investing, Mr. Chairman, can divine the next
phase of the DOE loan guarantee program with no new
authorization or appropriations. This is a very nice down
payment on the proposed trillion-dollar infrastructure program
that is the subject of so much discussion.
A final point: In the next 20 years the International
Energy Agency projects that the world will spend roughly $48
trillion on energy infrastructure, one of the biggest economic
opportunities of the 21st century. China is organized to take
the biggest piece of this economic pie. It has no reluctance
helping energy project developers raise capital to
commercialize technologies and sell them to the world. We
ignore China's resolve and impressive success to date at our
peril, and it is the situation that makes the attacks on
federal energy technology commercialization like the DOE loan
program so misguided.
The Congress and the new Administration should build on the
loan guarantee program's success to date and substantial
remaining loan authority to jumpstart infrastructure investing
and advance the U.S. economy and environment and security in
the process. Thank you very much.
[The prepared statement of Mr. Reicher follows:]
[[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

Chairman Weber. Thank you, Mr. Reicher.
Dr. Yonk, you're recognized for five minutes.

TESTIMONY OF DR. RYAN YONK,

ASSISTANT RESEARCH PROFESSOR,

DEPARTMENT OF ECONOMICS AND FINANCE,

AND RESEARCH DIRECTOR,

INSTITUTE OF POLITICAL ECONOMY,

UTAH STATE UNIVERSITY

Dr. Yonk. Mr. Chairman, Members of the Subcommittee, it's
my pleasure to speak with you this morning to share some of my
thoughts and results of preliminary research we've done in the
Institute of Political Economy at Utah State.
To begin, the loan guarantee programs were conceived as an
idea to push financing towards underdeveloped clean energy
technology and to improve the environment, to promote economic
growth, and to produce a more secure energy supply. However,
the title 17 loan guarantee program has likely failed to meet
these objectives and instead has been used as a political tool,
diverted funding from alternative clean energy investments, and
primarily benefited large politically connected corporations.
Government loan guarantees programs present a number of
policy difficulties, and the Department of Energy's program is
no exception. My testimony today and my full written testimony
illustrate how the Department's loan guarantee programs distort
markets, misdirect funds, and fail to promote truly innovative
technology.
Loan guarantee programs offered by governments and the
private sector are intended to close a fiduciary gap between
burgeoning ideas and private investment. By promising to cover
loan payments if a company fails, loan guarantors allow
entrepreneurs easier access to private capital. And presenters
of government programs in this area argue that private capital
is too risk-adverse to properly finance whatever it is that
they seek to subsidize.
The loan guarantee program is well-intentioned, as most
policy generally is, but its designers failed to consider a
number of unseen effects. The Department of Energy's program
has deterred investment in other areas and made it more
difficult for some to receive private investments, been used as
a political tool, encouraged mal-investment, and primarily
benefit established companies with access to--with pre-existing
access to capital for research and development.
Now, federal loan guarantees can only be said to serve a
public benefit if they accomplish what we might call
additionality, meaning the program must be offering loans to
projects that would not otherwise have garnered funding in the
open market. A program that extends government assistance to
projects and companies that would have little trouble securing
private financing accomplishes little, adds unnecessary
administrative costs, and ultimately puts taxpayer money at
risk.
Some exploratory research on the additionality of loan
guarantee programs for energy technology from both the
Department of Energy and the Department of Agriculture have
revealed poor additionality. However, even if government loan
guarantees managed to accomplish perfect additionality, this
alone would not sufficient justification for the continuation
of the program.
Many conceive of loan guarantee programs as marginally
shifting the risk calculus for private investment.
Realistically, loan guarantees completely shift the entire
calculation of private investors. Securing a government loan
guarantee proves to be a highly political process, and private
capital often follows public capital.
Now, despite the appealing tenor of that statement, this
unfortunately means that only the politically connected are
funded. Most section 1705 funding has gone to large
corporations who already have access to capital for investments
in research development and deployment. And it's here that the
fundamental problem with this form of subsidy emerges because
it makes it more difficult for new ideas to emerge and come to
fruition as it further entrenches establishments.
Government support, as the previous Chief Marketing Officer
at Tesla motors complained, may make life easier for those who
receive support, but it also makes it difficult for new ideas
to gain private funding and grow.
Loan guarantee programs, like any subsidy, move resources
towards the subsidized good. A subsidy redirects private
capital towards the subsidy because it changes the risk
calculation investors go through. The subsidy distorts the
market signals of profit and loss to appear as if the
subsidized industries provide more value than they do.
Political power and lobbying prowess, not the collective
intelligence of all individuals in the market allocate the
funding of these programs.
My own analysis indicates that the unseen costs are greater
than we often anticipate, and this position rests in large part
on a counterfactual. How do you measure what did not happen?
The question of what could have been, the opportunity cost of
these loans, is a serious consideration, even if it is a
difficult empirical one.
Preliminary examinations of the Department of Energy and
USDA's programs have been discouraging. Though the entire
literature pleads for more concerted research efforts, the
political problems associated with the funding justify further
skepticism towards section 1705 and section 1703, as do the
very nature of the recipients of the guarantees.
In place of these programs, government would do well to
simply step out of the way of entrepreneurs and individuals. As
the development of the technology industry demonstrates,
allowing experimentation and markets to drive innovation is a
promising avenue for improving the world. Government officials
should clear a path for entrepreneurial experimentation
unfettered by precautionary regulation and subsidization. A
policy of permission-less innovation is more likely to find
successful solutions to pressing environmental and energy
questions such as climate change and pollution than government
agencies choosing projects based on political considerations.
Thank you.
[The prepared statement of Dr. Yonk follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

Chairman Weber. Thank you, Dr. Yonk.
Heritage was actually mentioned earlier, a discussion of
the Heritage Foundation about they were not recommending to do
away with the loan program, and yet we have a Blueprint for
Reform that they update every year, in 2017, ``Mandate for
Leadership'' Series. And on page 51 they actually do recommend
doing away with it. I want to submit this into the record,
without objection.
[The information appears in Appendix II]
Chairman Weber. And then furthermore, before I get going, I
have a letter from the Mercatus Center, Veronique de Rugy, also
a letter about the loan program I, too, want to submit into the
record. Without objection, so ordered.
[The information appears in Appendix II]
Chairman Weber. I now recognize myself for five minutes of
questioning.
Mr. Edwards, according to a report by the Mercatus Center
that I just cited, 90 percent of the section 1705 loans went to
subsidize lower-risk power plants backed by big companies,
which actually had pretty good access to capital. These
companies included Goldman Sachs, NextEra Energy, and General
Electric. If these projects would have been built without
government guarantees, why do you think that DOE would be
wanting to subsidize them? And do you think this is just yet
another form of corporate welfare?
Mr. Edwards. It does seem to me that you can divide the
section 1703 and 1705 projects into two sort of pots. The great
majority of them were subsidies for projects in my view
would've gone ahead anyway because, as I said, 29 States now
have these renewable purchasing requirements, mandates that are
escalating and increasing over time. These projects were going
to get built, and when federal subsidies were layered in, it
just meant that the investors like Warren Buffett and others
earned higher returns than otherwise. Then, there was a smaller
group of other investments in the very risky projects like
Solyndra and a few others that didn't pan out and, you know,
those didn't have those sort of state subsidy backing.
So I think in both cases federal intervention doesn't make
sense. I think the state government subsidized renewable so
much now not only with the purchase requirements, with the tax
credits, their own subsidies, federal subsidies are overkill.
And I have in my testimony some discussion from The New York
Times which looked at this and agreed that during the Obama
years there really was overkill in subsidies.
Chairman Weber. Thank you. I want to follow up with you,
Dr. Yonk. And I want to come back to something you said in your
written testimony. The follow-up is that with all of these
large companies applying for loan guarantees, what does that
mean for the little guy, number one? What about a small
business startup or one innovative entrepreneur? Do they have
the resources to compete against the lobbying power of these
big companies? What has been your findings?
Dr. Yonk. Yes, Mr. Chairman. I think you illustrate one of
the problems with any sort of approach in this regard, and that
is that precisely those--that entrepreneur in the garage with
the crazy idea is--will never have access to these sort of loan
guarantees. What's interesting is, as Mr. Reicher said, these
are really about commercialization of projects moving from one
phase to another, as opposed to actually spurring the
innovation of new technology industries. And so it limits
greatly the ability of those to do it, and we select on those
that are already at a certain point and we make a continued bet
on that same industry over time.
Chairman Weber. Thank you. You had made the comment that
you can't measure what has not happened and I was following in
your testimony and I had actually written down what cannot be
measured is if the private equity firms adopt a wait-and-see
posture. They're standing on the sidelines, and you'll never
know what they contemplated not doing if that's not too many
negatives, you know. And so I think you make a good point.
So what does that mean, Dr. Yonk, for innovation in the
energy market in practical terms? Don't DOE guarantees to some
companies discourage investment in others? Do you know of
examples?
Dr. Yonk. Yes, Mr. Chairman. There are two sort of--let me
take the first question and then apply it to the second, and
that is what I believe happens in these regards is, as
individuals are making these private risk calculations, as
hedge funds or wherever are, they now incorporate the
probability of a loan guarantee being brought into it and they
seek to mitigate risk on their own side by following the loan
guarantee or the issuance of a loan by government. And as a
result, we end up primarily betting on--because this again is a
commercialization issue, we end up betting on technologies that
are attempting to make the transition into full-scale
commercial size, as opposed to spurring the innovation at the
smaller scale.
And so what I believe happens--and this is where the
counterfactual comes in--is that we end up seeing that there is
a flight towards pre-existing alternatives as opposed to what
might be termed the crazier ideas that in large part if you
read the background on these loan guarantees, it was meant to
do risky things.
So we talk a lot about the risk profile. I hear the risk
profile of this if it was meant to fund risky technologies of a
two percent loss rate, that's not encouraging to me if the goal
was in fact to be spurring the riskier side of innovation.
Chairman Weber. Thank you. I've got about a minute left.
Actually, I'm down to 11 seconds. So I tell you what, I'm going
to stop there and I'm going to recognize the Ranking Member for
five minutes, Mr. Veasey.
Mr. Veasey. Thank you, Mr. Chairman. And before I go into
my questions, I just want to be clear. And I'm not going to
submit a report for the record--that I specifically referenced
the Blueprint for Balance while the Chairman specifically
referenced the Blueprint for Reform, so two different reports
there that were referenced but just wanted to clarify that.
And this question is government role for Mr. Reicher. Mr.
Reicher, some would argue that the government shouldn't have a
role in issuing loan guarantees or direct loans to companies,
but this perspective ignores a long history of success that
loan guarantees have shown not just in the energy sector but
also the housing market, agriculture market, and many other
industries. How would you respond to the assertions we've heard
today that the government should have no role in this space at
all?
Mr. Reicher. Thank you, Mr. Veasey. The government has had
a very long role in commercializing energy technology and in
providing finance, both loans, loan guarantees, grants. I would
argue that we would not have seen the development of commercial
power if the government in the 1950s in the Eisenhower
Administration had not paid for the development of the early
plans, could have been delayed, could have been stillborn if
there was an accident. The private sector was not in a position
to put its own private capital into those early nuclear power
plants.
The government participated with private entrepreneurs in
the development of fracking. Government put in grants, the
government put in tax credits, the government provided
technologies in collaboration with the private sector, and from
that, in 2006, we saw this technology take off.
Carbon capture is another example. We would not have seen
the development of carbon capture to the point that it's
reached--still a long way to go--had the government not started
putting federal dollars into this technology in 1997.
So the government has a long role of commercializing energy
technology, and I think all this is doing is putting it in a
smarter form. Remember, these are loans. They have to be paid
back. These are not grants, which has been the more traditional
form of government support.
Mr. Veasey. When you start talking about us being able to
lessen our dependency from petro-dictators around the world,
one of the things that has lessened our ability to depend upon
those petro-dictators have been the advent of renewable
energies. And in your opinion, would the utility-scale solar
industry exists as it does today without DOE's loan programs?
Mr. Reicher. So let's remember where we were in 2008, 2009,
2010. We were in the depths of the financial crisis. It was not
easy. In fact, for most companies it was next to impossible to
go out and get a loan for an energy project. That's number one.
They were also deploying utility-scale solar. We had never
built a solar project in this country that was 100 megawatts or
bigger. Scaling up energy technology is really tough. It's very
risky.
Those two things together meant that most banks, most bond
issuers said we don't either have the money or your project is
too risky. The federal government stepped in with its
congressionally authorized loan guarantees and said we're going
to back the first few projects. Remember, these are just the
first few projects, number one, number two, number three, not
30, 40, or 50. The private sector followed from there and the
photovoltaic project market has exploded.
Mr. Veasey. Again, us being able to lessen our dependency
upon foreign oil by investing in our own energy, clean energy
sectors here, but startup money is a big problem. IT startup
companies have low capital costs. They are attractive options
for venture capitalists, but my understanding is that energy
investments take much longer to pay back and are much riskier.
In your expert opinion, how do energy sector investments
compare to other sectors, whether it be information technology,
health care, or retail?
Mr. Reicher. Mr. Veasey, Mr. Chairman, I have to say I
spent several years at Google, and it was fascinating to watch
the difference between investing in information technology,
software technology, and investing in energy hardware,
extraordinarily different. With information technology,
software engineers sit down. It's often for a few months. They
develop a new product, and in simple terms, they push a button
and it's deployed. They make adjustments to it over time, low
cost, relatively quick.
In comparison, developing a piece of energy hardware, you
don't measure things in months. You don't even measure things
in years. You often measure them in decades. I'll show you any
number of technologies--you know them well--where it's taken
10, 20, 30, 40, 50 years to get energy technology to full
scale. And you don't measure this in billions--I'm sorry in
millions. You measure it in billions or tens of billions,
completely different. And that's why these loan guarantees make
great sense.
Mr. Veasey. Thank you, Mr. Reicher. Thank you, Mr.
Chairman.
Chairman Weber. I now recognize Chairman LaHood.
Mr. LaHood. Thank you, Mr. Chairman. And I want to thank
the witnesses for being here today and your valuable testimony.
And in looking at the DOE loan guarantee program, I guess
I've tried to objectively look at the program and the 28
projects that are part of this loan guarantee program. And as I
look at those projects, many of them have value. There are
innovative. They present opportunities. They have great people
involved with them. And so figuring out what role the federal
government plays with those projects and in looking at that,
when we think from a public policy standpoint what role we
should play in that or government should play in that and two
questions that come up, does the loan guarantee program
artificially change or alter the marketplace by having this in
place? And does it dis-incentivize competition in this area?
And I know, Mr. Reicher, you talked about the role the
federal government has played and, you know, I guess when I
look at 2017, you know, if we were $20 trillion of surplus, you
know, figuring out where to spend money, you know, these 28
projects would be probably great examples of where to spend
money. But the reality is we are $20 trillion in debt in this
country, and that's different from the 1950s where, you know,
it was a much different country we lived in.
In 2017 the technology marketplace in this country is
thriving. We lead the world in innovation. As was mentioned
earlier, there's a lot of cash in this country that people are
sitting on waiting to invest. Angel investors were mentioned
earlier.
So figuring out that role of how the federal government
plays a role in this program and that's really objectively what
I've looked at here. And it seems to me that the role of the
federal government we always got to keep in mind the fact that
we're in debt, and that's a problem in this country. And then
also looking at the marketplace.
And I guess, Ms. Katz, what I would ask you is when, and
you mention this in your opening statement, we look at
government financing, it seems as if government financing is
divorced from profit motive. Can you elaborate on that
challenge and also on my statements about those two questions
on whether we're de-incentivizing competition?
Ms. Katz. The profit motive requires that you have skin in
the game, that is, that you're driven to do well by the
potential for a good return. In government funding programs,
there is no personal stake. There is no skin in the game in
terms of a financial incentive, and therefore, the criteria for
investing money is looser, the demands for, you know, the type
of performance is looser, and I think those things tend to prop
up enterprises that tend to be weaker. And then the more of
those we have, you know, the weaker the economy becomes.
And given this--the extent to which the federal government
is now providing credit across the economy, you know, not just
DOE but, you know, $18 trillion in exposure economy-wide,
that's very troubling to me in terms of the loss of the
incentives that are going to make our companies the strongest
and are going to make them the most competitive.
In terms of your comment about the effect on competition
and innovation, absolutely, you know, when government is
financing certain programs, the private financing tends to
follow that because that's where the incentives are and that's
where the, you know, rewards tend to be and that's where the
regulatory action is also going to occur. And so there's a lot
of, you know, interest in following that.
And that--you know, we can say on the balance sheet that
these programs have a rate of return that's positive. We can
say they have default rates, but that's only half the equation.
The other side of the book is all of the distortions that these
programs cause, among them, loss of competition and innovation,
and the competitive disadvantage that this creates for all the
companies that aren't lucky enough to get this largesse.
Mr. Reicher. Mr. LaHood, could I give a quick answer?
Mr. LaHood. I'm out of time. Mr. Chairman?
Chairman Weber. Sure, I think we've got some extra time. Go
ahead.
Mr. Reicher. I'll be quick. You mentioned the deficit, the
debt. Just I want to emphasize these are loans, not grants.
They're getting repaid and they're getting repaid with
interest. That's a very different measure I would assert.
The second thing you mentioned about U.S. leadership in
energy technology, as much as I'd like to agree, in many ways
our dominance in energy technology is very much being
challenged by the Chinese. They have a very well organized
effort, very well-funded across a whole range of energy
technologies. We no longer lead in wind or solar. They are far
ahead of us in many aspects of nuclear and various types of
turbines and coal-related technology.
So, Mr. LaHood, I would not assume that we're in great
shape when it comes to this $48 trillion opportunity we've got
in energy infrastructure investing over the next 20 years. We
are not leading in many respects, and programs like this can
really help.
Chairman Weber. All right. I thank you, Mr. LaHood, for
yielding back.
And I believe that we're going to go to Mr. Foster now.
Mr. Foster. Thank you, Mr. Chairman.
Several of you have mentioned and referred to the DOE loan
programs, which are the subject of this hearing, as a subsidy.
And I was wondering how is it that a subsidy makes money for
the taxpayer? That has me a little confused. Is there anyone
wants to try answering that?
Ms. Katz. Sure.
Mr. Foster. We need more of----
Ms. Katz. So----
Mr. Foster. --those subsidies, it seems. It could take----
Ms. Katz. Right.
Mr. Foster. --the debt down to zero with enough of these.
Ms. Katz. So because there's virtually no chance that the
government will not cover a loss, federal credit is provided in
more favorable terms. Even if the recipient still continues to
pay fees or interest, it's at a more advantageous rate than
they would otherwise get in the private financing sector
because the----
Mr. Foster. I understand it's a good deal for the recipient
of the loan, but it's also a good deal for the taxpayer, so it
seems like this----
Ms. Katz. Well, it----
Mr. Foster. --is a win-win.
Ms. Katz. It's only a good deal for the taxpayers if you
ignore all of the distortions and costs that are created----
Mr. Foster. Well, these distortions you hypothesize are
pretty hard to calculate and, you know, we have--anyway. So
your argument relies totally on these hypothesized distortions
and the hypothesized economic damage that they do----
Ms. Katz. No.
Mr. Foster. --is that correct?
Ms. Katz. No, it's not.
Mr. Foster. All right. Then how does the taxpayer not
benefit from these? Would the federal debt be higher or lower
if this--if these projects would not have existed?
Ms. Katz. It--that's--I don't know.
Mr. Foster. I think it's a pretty easy----
Ms. Katz. It's not such an easy equation.
Mr. Foster. Mr. Reicher?
Mr. Reicher. Their interest payments exceed the losses.
It's hard to see how this isn't a net positive. Another----
Mr. Edwards. The issue is the broader one of opportunity
constant in the economy. If resources are being steered into
companies and technologies that are not the best for the
overall economy, then we've wasted resources, so the issue is
not just taxpayer resources but the crowding out that occurs in
the private sector. If you have a big DOE loan office that is
acting as a venture capitalist, they're drawing some of the
best minds from Silicon Valley to come here to Washington to
steer flows of money when I would rather those minds in Silicon
Valley steering money. That's crowding out----
Mr. Foster. Well, this is really actually my second
question here, which is, you know, I'm struck by the lower--the
very low default rate, lower than a typical VC. And so I was
wondering how is it that these federal bureaucrats--excuse me,
these unelected federal bureaucrats seem to be making loan-
making decisions that are better than free-market investors?
And I----
Mr. Edwards. Well, the answer is and I think I touched on
in my testimony, the vast majority of these projects, as has
been mentioned, have gone to wind and solar projects that have
been heavily subsidized by state government. State governments,
particularly California, have very large and increasing----
Mr. Foster. But those subsidies would be----
Mr. Edwards. --mandates, requirements, so these projects
would have been built anyway I think without federal subsidies
because there's state-level mandates for them.
Ms. Katz. I also think that it reflects----
Mr. Foster. Just a minute.
Ms. Katz. --the fact that these----
Mr. Foster. But the state-level subsidies are--would be
available to either a free market investor or one of these----
Ms. Katz. No.
Mr. Foster. Is that true, Mr. Reicher?
Mr. Reicher. Absolutely. The subsidies at the state level
don't distinguish between a project that's gotten some federal
support and projects that haven't.
Mr. Foster. Sure.
Ms. Katz. Right, but not every company is going to be
allowed to benefit from state subsidies. They're not available
to all.
Mr. Reicher. You qualify for the state subsidy, you get the
state subsidy. If you can also get some help from the federal
government--again, this happens across the whole range of
energy technologies.
Ms. Katz. When Tesla Motors negotiates tax abatements or
other benefits with a state, that's not a deal that's available
to every company.
Mr. Reicher. It happens--let me let Mr. Foster go ahead.
Mr. Foster. Yes. I was a little bit confused, Dr. Yonk. You
seem to be criticizing the fact that there was a low loss rate
on this at the end of your testimony, and I--it confused--is
there a consensus whether a high loss rate is a good thing or a
bad thing and whether low loss--I'm just--I couldn't follow
that logic there.
Dr. Yonk. Yes, so let me walk you through the logic, Mr.
Foster, because I think it's actually an important policy
question here. If the goal was in fact to provide loan
guarantees to what was termed as risky technologies that truly
would see--that were--that the private market was not willing
to bear the risk of, we would expect to see higher----
Mr. Foster. But you're advocating for more Solyndra-type
investments.
Dr. Yonk. Only if that is the actual goal of the policy. I
think that's an ill-advised policy given what can happen in the
larger economy.
Mr. Foster. Okay. Let's see. I was also struck in your
testimony that you seem to buy into this legend, I guess, that
somehow the high-tech industry Silicon Valley started was a
bunch of entrepreneurs by themselves whereas in fact if you
look at the history, they were completely dependent on getting
federal defense contracts, NASA contracts, and so on and that
the history of that was completely dependent on government
investment.
And so I think that really we should all, you know, study
history a little bit and understand how effective strategic
government investments are in getting our economy heading in
directions that will pay off massively in the future.
And I believe my time is--and I have to yield back at this
point.
Chairman Weber. Thank you, Mr. Foster.
The Chair recognizes Mr. Posey from Florida.
Mr. Posey. Thank you very much, Mr. Chairman. Mr. Katz and
Mr. Edwards, how do you measure accountability for government
funding in the Department of Energy loan guarantee program? Mr.
Katz first.
Ms. Katz. I don't know that it is being----
Mr. Posey. Ms. Katz.
Ms. Katz. --you know, measured. I can tell you that, you
know, there are rules for setting program goals and, you know,
at the end of the year the Department looks at whether it's
succeeded. And--but most of those are measured in terms of
inputs not in terms of, you know, that so many dollars were
spent as opposed to what the--you know, the actual success of
the program was.
And this follows on the earlier discussion, which is, you
know, it--to assume that these projects wouldn't have happened
anyway or this Silicon Valley, you know, development wouldn't
have happened without government I think is a conceit. I think
we've seen that, you know, there are many great developments
and innovation throughout the--you know, the history of the
world that have occurred without the government subsidizing
them.
Mr. Posey. Well, I appreciate your comments. So often
government accountability to some people is how much we spend,
not what actually gets accomplished. And I'm glad to see that
the focus is on accomplishments.
Mr. Edwards?
Mr. Edwards. Yes, I mean, you know, it's the role of this
Oversight Committee obviously, and it seems like this Oversight
Committee has done a good job. It strikes me that the
Republican scrutiny on some of these projects that the Obama
Administration started dishing out in 2009, the scrutiny has
been good because it seems to me that the Obama Administration
started steering the money to safer projects like the ones that
had the state purchasing requirements for them in order to get
the loan losses down because they made these initial screw-ups
with companies like Solyndra. So--and obviously the GAO and the
IGs do a fantastic job on this account.
That's--those are all accounting issues. I think the bigger
issues are the economic ones. Would the private sector steer
money into the most innovative and most efficient energy
technologies, and I think the answer is yes without any kind of
federal subsidy.
Mr. Posey. Okay. Have either of you read any of Peter
Schweizer's books? Extortion, throw them all out, great, great
literature on government accountability or lack thereof and
crony capitalism. You know, Solyndra gets mentioned quite
often, but it was a relatively small potato in a bag full of
litanies of much bigger ones that for one reason or another the
media seemed to never think was important.
As a follow-up, do you think there is a reasonable amount
of upfront investment before taxpayers can expect returns?
Mr. Edwards. Again, I think--I mean, I don't think this is
the role--you know, taxpayers should not be investing in these
sorts of projects. It's been mentioned a couple times by Mr.
Reicher that--you know, that there's gaps in private markets
here that the government has to fill. I just don't buy it. I've
looked at the history of R&D and industrial R&D in the U.S.
economy and looked at the history of inventions. The vast
majority of advances and innovations have come from the private
sector without federal subsidies. Computers and, you know,
Xerox machines and cell phones and smart phones, that was all
private risk capital, private entrepreneurs, investors, and
Silicon Valley putting their money into these projects.
The energy industry, I don't believe, is any different than
any other risky industry, and the--I don't believe that these
so-called gaps exist in private financing. Entrepreneurs can do
it. They've shown that they're willing to invest in all kinds
of risky and new technologies, including energy technologies,
so we should leave the field to them, I think.
Ms. Katz. Just as a quick follow on, you know, I'm--I don't
buy the idea that DOE is funding, you know, the most innovative
and riskiest, but if they were, then it raises the question if
private investors are not willing to take a risk on a
particular project, why should taxpayers have to underwrite
that?
Mr. Posey. Well, you know----
Mr. Reicher. Mr. Posey, if I could, I just want to
emphasize again we're talking about energy technology that has
huge scale-up costs. We're not talking about computers----
Mr. Posey. Yes.
Mr. Reicher. --or cell phones and the like. And the history
is there. The nuclear power industry got launched in the 1950s
with major checks being written by the federal government----
Mr. Posey. My time's up. I just want to make one comment.
We had some employment downturn in our district and we decided
to host an entrepreneurs summit, so we took some local ideas
and had a summit and invited a few angel investors to attend
and analyze the projects. And I think there was surprising
amount of action on some funding there. We did several of them
and we eventually had, you know, a long list, more than we
could accommodate people who had wanted to invest in these new
ideas and these new products that people had, and even in dire
economic times, investors are interested in making investments
in things that seem plausible and have potential to show return
on them.
So I appreciate your comments very much. Thank you, Mr.
Chairman. I see my time is up.
Chairman Weber. I thank the gentleman from Florida.
The gentleman from Virginia----
Mr. Beyer. Virginia.
Chairman Weber. --Mr. Beyer, is recognized.
Mr. Beyer. Thank you, Mr. Chairman, very much. Mr.
Chairman, I'd like to begin by saying I appreciate the need to
title these hearings with cool names like ``Making the EPA
Great Again'' and ``Risky Business,'' but I fear that we're
going to go down the road of Top Gun and Mission Impossible and
Jerry Maguire, so I'd like to move that we don't name any more
after Tom Cruise movies.
Chairman Weber. I notice you left your six-shooter in your
locker, so we won't name any after Tom Cruise movies. So
ordered.
Mr. Beyer. Okay. Thank you, Mr. Chairman. Also, we talked
earlier about GAO mismanagement in this program, and we had a
hearing on this a year ago and one of the--and we had a GAO
representative at that point who pointed out that only 16 of
the 24 GAO recommendations for the loan program had been
fulfilled, but I've discovered this morning that all 24 are now
fulfilled. So many of the problems that we're talking about are
historical rather than current.
The--I also would like to speak to this as a small-business
person, and I guess I've borrowed more money than any of our
panelists--that it's hard to borrow money as a small-business
person. It--we have--what I've learned in 43 years of running a
family business is that banks only want to lend money to people
that don't need it. If you need it, it's very, very hard to get
it, which is one of the reasons why there's $50 trillion in
private equity sitting on the sidelines right now.
So to you, Mr. Reicher, is the industry marketplace
actually free and does government money actually crowd out the
private investment?
Mr. Reicher. I would say that we don't have a free market
for energy. You know, there's been talk about eliminating all
subsidies at the federal level. I think that's highly unlikely.
And even if we did, that market is very much determined in many
ways by the 50 state Public Utility Commissions that have an
awful lot to say about how the energy markets and the
electricity markets work.
Are we crowding out other companies or other technologies?
I don't think so. This is a limited program, the loan guarantee
program, that's focused on getting the first couple of big
projects built to demonstrate a technology.
Let me say this. In many of these cases, the project
developers, often thinly capitalized project developers, often
small businesses, if they could get a loan from a bank or if
they could float a bond, they would love to do it. Interest
rates are low right now. It's much easier. It's not painful
like having to go to the DOE and getting reviewed for a couple
of years, having to do an environmental impact statement,
having to pay a credit subsidy, loan spread. That's tough
stuff. If they could do it in the normal way, they would do it.
And I've talked to many developers. I was a developer myself.
These are painful processes going to the Department of Energy,
but sometimes you can't get the project done.
Mr. Beyer. Are you suggesting the federal government works
slowly?
Mr. Reicher. I would never suggest such a thing.
Mr. Beyer. Would it even be possible for the Department to
manage a federal research grant program without picking winners
and losers?
Mr. Reicher. Listen, I was Assistant Secretary for Energy,
for Energy Efficiency, and Renewable Energy. We had a $1.2
billion budget then. We were always being asked to pick winners
and losers. We had competitive processes. The Competition in
Contracting Act told us we had to do it this way. That's what
the federal government does, and that's what it often should be
doing with taxpayer dollars. So I don't understand this
argument about picking winners and losers. If you're Boeing
competing with Lockheed for a jet contract, you know the
government is picking winners and losers.
Mr. Beyer. When President Trump affects the economic
prospects of American companies by tweeting about Nordstrom's
or Toyota or Vanity Fair or Carrier, is that an example of the
federal government picking winners or losers?
Mr. Reicher. I'll leave that up to the august members of
this committee to decide.
Mr. Beyer. I was fascinated by Mrs.--Ms. Katz's testimony,
especially the--and I very much respect sort of the deep
philosophical notion that we have this $18 trillion of federal
loan guarantees, that it has all kinds of pernicious effects.
But, Mr. Reicher, what's the--what would the U.S. economy
look like without the FDIC and the--which would keep from the
bank runs in the Great Recession or without Freddie Mac and
Fannie Mae and the ownership society that George W. Bush pushed
so hard or TARP so you wouldn't have General Motors or
Chrysler, States that Donald Trump won pretty easily, or
Homeland security's disaster assistance or the Veteran's
Housing Benefit Program Fund for veterans or business loans to
the Small Business Administration or to move from federal loans
to the $470 billion in oil and gas subsidies?
Mr. Reicher. Very quickly----
Mr. Beyer. What's the economy look like without that $18
trillion.
Mr. Reicher. I wouldn't have been able to buy a home, let
me say that. But I want to make one more really important point
that I think we have to emphasize at this hearing. Let's look
forward. We seem to be looking backwards. There's $41 billion
worth of loan guarantee authority for nuclear, for fossil, for
renewables, and for transportation. We could turn this into
infrastructure investing, which seems to be the great focus,
Republican and Democrat, on the Hill right now. This is an
existing down payment we can make on the infrastructure hope
that a lot of people have up here on Capitol Hill. So let's
look forward at what we've got, and let's figure out how to
spend it well.
Mr. Beyer. Great. Thank you very much.
Mr. Chair, I yield back.
Chairman Weber. Thank you, sir. The Chair now recognizes
Mr. Dunn for five minutes.
Mr. Dunn. Thank you, Mr. Chairman. I want to say also thank
you for the opportunity to serve on this committee. It's a
great pleasure and it really plucks at my heartstrings so I'm
delighted to be here.
So I actually am the Chairman of a bank back home. This is
a community bank. And I want you to know that I have been
intimately involved in buying failed banks in that capacity.
Now, that involves reviewing and underwriting a great many
failed loans, toxic loans if you will. And as I reviewed the
Department of Energy's loan portfolio for today's committee
meeting, I find myself in familiar territory. There's a lot of
loans in here that are highly, highly questionable, and I think
you would find frankly very few private bankers would actually
have made loans on the terms that they were made to companies
like Solyndra, Beacon, Fisker, VPG, and some of the others
there. I didn't make my way through the entire loan portfolio
last night. Valentine's Day.
So this costs the taxpayers hundreds of millions of
dollars, and I feel like DOE should actually re-examine
themselves and say are they comfortable in the role of being a
banker. They apparently have very few staff with any experience
in corporate lending.
I want to call attention to a couple things and ask a
question. So first off, the actual loan loss ratio. I've heard
people say that this is a two percent loan loss ratio. The
government allowed $10 billion for losses, so that's the asset
that you're measuring against. And the loan loss is actually
about 8.1 percent if you believe the $810 million is all we
lost. I would argue that that's a low number for a number of
reasons.
I also heard that the interest paid back--the loans that
went bad--I would remind everyone that interest income does not
equal profit.
I would like to also underscore the comments Mr. Edwards
made on the successful back end of the loan portfolio where
they're being paid off. Most of those loans already enjoyed a
government guarantee in the form of purchasing the energy that
was being put out. So we had a company that was guaranteed
success if you will on the back end and we gave them another
guarantee, in fact, a loan at a low rate on the front end. So
I'm not sure that that should count as you pointed out.
Now, this is my first committee meeting on this very
fascinating, important subject that's near to my heart, but I
would look forward in the future to actually seeing a full
profit and loss on this just the way a bank would publish a
profit-and-loss statement. And we do that on pretty much a
monthly basis. If we don't, the FDIC comes after us.
Mr. Edwards, I want to ask you, do you believe that the
Department of Energy prospectively put in place the kind of
lending structures that would properly and soundly administer
billions of dollars in loans and serve the public in a
transparent fashion?
Mr. Edwards. Well, it certainly wasn't transparent, and I
think as this committee has investigated in past hearings, that
initially there were not the proper checks and balances in
place for a lot of these loans. The expertise wasn't there and
the GAO heavily criticized these programs. And it does seem
that over time that DOE has improved at administering these
programs because of all the scrutiny, particularly by this
committee.
But again, I think the bigger issues are the broader
economic issues. Is there really a gap here that the federal
government has to fill? And I think the answer is no. There are
a trillion dollars--trillions of dollars available for private
investment. If we did overall a general tax reform as House
Republicans want to do, there would be trillions more for all
kinds of innovative infrastructure and other types of
investment in the U.S. economy, and we wouldn't be worrying
about small programs like this.
Mr. Dunn. Thank you very much, Mr. Chairman. I yield back.
Mr. Reicher. Mr. Dunn, could I respond for one second?
Chairman Weber. You have--I'll give you two seconds.
Mr. Reicher. All right. Very few private bankers----
Chairman Weber. Thank you very much. No, go ahead.
Mr. Reicher. You say very few private bankers would have
made these loans. That's exactly why this program existed,
particularly in the depths of the recession, number one.
There is a group of highly professional staff at DOE with
finance background.
And third, I guess I do the math. It's $810 million on $36
billion----
Mr. Dunn. I think you've got the wrong denominator. The
denominator was $10 billion. That's how much was placed at risk
of the taxpayers' money.
Mr. Reicher. I'm doing the calculation based on the loss to
date. You--fair enough, you can do it either way, but----
Mr. Dunn. Well, you do a profit and loss on the same--let's
run it like a business, you know? And I could tell you it's not
being run like a business.
Chairman Weber. If you all want to talk offline, we'd----
Mr. Reicher. Thank you, Mr. Chairman.
Chairman Weber. Yes, appreciate that.
The gentleman from Colorado is recognized.
Mr. Perlmutter. Thanks, Mr. Chairman.
And, Mr. Reicher, I just appreciate your comments. And I
think one of the things that's gone unstated is the fact that
many of these loans were to the renewable industry because of
fear that our climate is just getting worse and worse and worse
and we've got to do something about it. So I appreciate Ms.
Katz, Mr. Edwards, your comments, wait a second, this is kind
of political. Well, sometimes it's policy and--you know, and
policy can be politics. I got it. And I worry about the climate
so let's just put that aside.
Mr. Reicher has testified as to, you know, making some $900
million when you net it all out. That seems to be a positive to
me, but maybe there are some opportunity costs that aren't
being considered or maybe there are some benefits to the
climate that you may not be considering, Mr. Edwards. So, I
mean, there's a lot of stuff going on here.
But for me, the two percent loss ratio--I don't know how
many of you have been in the lending business, but I
represented lenders for 25 years. They would have loved to have
two percent loss ratio.
Having said all of this, Mr. LaHood, after he finished kind
of his rhetorical comments, you know, really focused on five
questions that I thought were very important. I wish he were
here so I could compliment him on that. And some of you have
brought up points that I really do have a concern about. Ms.
Katz, you talked about cronyism and the potential for cronyism
with respect to these loans. And you may be absolutely right
because I am worried about cronyism under the Trump
Administration--I really am--and the potential for conflicts of
interest and where exactly these loan dollars would go. You
know, forget about Russia for a second but where will they go?
And so, you know, I appreciate the testimony of all of you,
but that's the one that has me most concerned. And to a degree,
even though this--you know, the Republican Congress passed this
back in 2005, signed by George Bush, used by that
Administration, used by the Obama Administration, if this
Congress wants to take this tool away from the Trump
Administration because they're worried about potential
cronyism, I may applaud that. I think it's--I think good work's
been done to benefit a lot of jobs, as Mr. Reicher said, and to
improve the climate I hope, but you may be right.
This is subject to cronyism, and under this Administration
that's refused to give its tax returns, you know, is already in
hot water with everything that happened yesterday with General
Flynn resigning, I think, Ms. Katz, you're right to worry about
cronyism.
Ms. Katz. I don't think it's just DOE either. It's all of
these--the programs of this nature invite that----
Mr. Perlmutter. You think all these loan programs should be
taken away from the Trump Administration? Is that your
testimony?
Ms. Katz. Absolutely.
Mr. Perlmutter. Okay.
Ms. Katz. Absolutely.
Mr. Perlmutter. I yield back.
Mr. Edwards. Can I give you one comment agreeing with you
on that, too? During the Bush Administration--during the early
Bush Administration, the issue was Enron. Enron was the
recipient of all kinds of cronyism, guaranteed loans, loan
guarantees that encouraged it to put its millions, billions of
dollars of taxpayer and its own money into risky foreign
investments that ended up crashing down and destroying that
company. So this is an issue with both Republican and Democrat
Administrations.
Mr. Reicher. Okay. Mr. Perlmutter----
Ms. Katz. And just to your comment that most bankers would
love a two percent default, I think that speaks to exactly the
point we're making, which is if this is such a riskless or at
least good bet on the part of taxpayers and that it's
performing so well, then I can't imagine that, you know,
private investors wouldn't jump for it.
Mr. Perlmutter. No, and you may be absolutely right. And
Mr. Edwards was saying maybe this is--we moved into a mature
industry where the risk has been reduced because we've been
doing these things. But I agree with Mr. Reicher. Back in 2007,
'08, '09, '10 when nobody was making a loan except for the
federal government, period, because everybody in the market was
so risk-adverse, sometimes you have to step in to get things
moving.
So, Mr. Reicher, you can finish this up and I'll----
Mr. Reicher. So let me just say this. Again, we're looking
backwards. DOE is not in the business right now of making loans
to mainstream solar and wind projects. They're looking ahead.
Mr. Higgins, in your district, this new carbon capture
project that just got a conditional loan guarantee for $2
billion, that's looking forward. That's a smart investment that
DOE is backing.
Chairman Weber. Mr. Reicher, I appreciate that. We're going
to go to Mr. Higgins now for five minutes I hope.
Mr. Higgins. Mr. Chairman, thank you, sir. I know this
committee has an extremely important oversight responsibility
regarding the Department of Energy and its programs, and it's
clearly understood that the loan guarantee program has had
serious problems regarding some of the loans in its portfolio,
including controversial failed projects such as Solyndra.
But I think although it's clear that there's room for
improvement in the program, it's important that we give
reasonable consideration to Department of Energy loans designed
to commercialize innovative technology in the oil and gas
industry versus the green industry. The oil and gas industry is
well-established by generations of Americans. They well
understand how to navigate the terrain of innovative
technologies and energy. And energy technology is certainly not
cell phones.
So I believe there may be a continued role for the
government to play, but we have to balance between the wisdom
of that role and the careful protection of the people's
treasure. And again, I would point out an example of where an
oil and gas industry has certainly demonstrated its capacity to
take advantage of a program like this to help our country.
The Lake Charles methanol project received its conditional
loan guarantee from the Department of Energy last year. Now,
I've heard terms like startup and skin in the game, Mr.
Chairman. That would seem to indicate, you know, zero
investment from the private sector when the reality is, for
example, Lake Charles methanol project has invested about a
decade of research and development and about $40 billion of
private capital. And LCM will use cutting-edge technology to
refine petroleum coke, and that's a waste product of the oil
industry in the high-value energy and chemical product such as
CO<INF>2</INF>, hydrogen, methanol, and industrial gases. And
all of its products will be sold to major industrial and energy
customers under long-term market-driven commercial agreements.
This clean energy manufacturing plant is ready to commence
construction and will result in 1,500 direct new jobs.
Now, that's an example to me of a wise investment,
although, again, it's the duty of this body to balance wise
investment in things like the commercialization of innovative
technology in the energy industry versus the careful protection
of the people's treasure.
So I'd ask you, Dr. Yonk, would you agree that it's
reasonable to conclude that investment in innovative
technologies in the oil and gas sector is a more sound
investment than sinking money into green energy projects?
Dr. Yonk. Mr. Higgins, so in general, as my early comments
indicated, I'm skeptical of the ability of any centrally
directed program to identify what the most innovative or the
most likely to be successful is. Instead, what I suggest and
what I think the evidence bears out over time is that
entrepreneurs, those acting in the marketplace, responding to
the market demands, which it's not a free market, although with
a little luck we might get closer to that, will do better to
push forward that innovation both in terms of how we produce
energy and how we get a cleaner environment than simply
allowing bets on loan guarantees or loan programs or any of
these sorts of subsidies to make those sorts of decisions.
And so my belief is that if we actually allow the
marketplace to make some of these decisions, we will see
investment across a variety of sectors, including oil and gas
and--as well as alternative energy.
Mr. Higgins. In the example of Lake Charles methanol
project, hasn't the private sector already made decisions in
the form of hard dollars and a decade of invested research and
development?
Dr. Yonk. It certainly seems to have. I know--I don't know
a terrible amount about that particular project, but
oftentimes, the issue here is not that there's no private
investment in these things but that we nudge investment into
things because they're following public dollars, as opposed to
the marketplace speaking and acting.
Mr. Higgins. Thank you, sir, and thank you, ma'am.
Gentlemen, thank you for your testimony. Mr. Chairman, I thank
you. I yield back.
Chairman Weber. I thank the gentleman from what we call
East Texas.
And the gentleman from California Mark Takano is recognized
for five minutes.
Mr. Takano. Thank you, Mr. Chairman.
I want to ask a question of each of you. I want to clarify
for the committee whether any of you have had any experience
investing in a major clean energy or power project, so being
involved in any sort of major decision like that? Have you ever
been involved in a major business investment decision, Ms.
Katz?
Ms. Katz. I have not. I think we should--the entire
committee is--
Mr. Takano. I appreciate your answer. Mr. Edwards?
Mr. Edwards. No, not as an investor but my first job out of
college was with a major nuclear electric utility, so I have a
background in--
Mr. Takano. Yes, but you were never involved in a major
investment----
Mr. Edwards. No.
Mr. Takano. --decision? And you, Dr. Yonk?
Dr. Yonk. I'm an academic that studies these things. I have
not.
Mr. Takano. Okay. Mr. Reicher?
Mr. Reicher. I have, Congressman. I said earlier, raised
$100 million with some colleagues to make investments in energy
projects, and then at Google we made several investments that I
had a part of.
Mr. Takano. So I think it's fair to say that of all the
witnesses we have brought before us today, of the four, Mr.
Reicher, you're the only one that's actually had experience
actually raising private capital and working with large
investments, high-stakes investments, investments that stood to
lose a good sum of money. The others at the table are
theorists, academics, or, you know, represent organizations
that have an ideological commitment to--or an emphasis on very
small government or a libertarian philosophy of government that
kind of posits pure free markets.
But you, Mr. Reicher, have operated in an environment of
reality, of actual pragmatic reality of having to contend with
real market forces. And can you--well, tell me how does your
experience in making the investment decisions you've made
provide you with greater clarity in understanding the role of
government in the market?
Mr. Reicher. Congressman, what I found in this energy
project investment firm is that there were a lot of developers
out there with interesting project investment needs. They would
come to us and we'd ask the question, does this work in the
laboratory? They'd say yes. Has it worked at demonstration
scale? They'd say yes. Has it worked at commercial scale?
They'd generally say no. That became the problem for us as the
equity investors and for the banks as the providers of debt.
Has it worked at commercial scale? If the answer to that is no,
you're in real, real trouble. And that's the specific focus of
this loan program, getting the first couple of projects built
at commercial scale and then getting out of the way.
The carbon capture project you just heard about, get it
built, show that you can turn pet coke into methanol and
capture the CO<INF>2</INF>, government helps to do that, and
then get out of the way. We couldn't invest in so many of the
projects that we saw--and I'll wrap up and say the following.
When all was said and done, during the time I was there the
biggest focus area of investment turned out to be corn ethanol,
well-established, lots of plants built, you knew what you were
going to get, you knew it would work, but was that advancing
technology? It wasn't. It wasn't advancing cellulosic ethanol,
a better way to do this.
Mr. Takano. So--and what you're describing there is not
necessarily--you're talking about the private investors for the
corn ethanol?
Mr. Reicher. Private investors. We were private investors.
We couldn't take the risk and the banks couldn't take the risk
of making the jump to the next not-fully-commercialized
technology. There was too much at stake.
Mr. Takano. So in practicality, to advance research--not
just ideas but ideas that have been proven in laboratories,
ideas that have been proven in demonstrations, to actually have
the possibility of creating whole new markets, whole new
industries, whole new categories of activity, economic activity
which would result in jobs, it often takes a government loan
guarantee program to be able to move that forward.
Mr. Reicher. The Chinese certainly think that. They are
investing heavily in all sorts of advanced technologies to get
them into the marketplace. And that's why, as I said earlier,
in many ways we are losing the race on energy technology to
this country that has decided that commercializing energy
technology of all sorts--renewables, fossil, nuclear--they're
making that a big part of their future, and that's where I
worry that if the government steps out of this, carefully,
surgically focused, just commercializing the technologies, not
financing them after you've demonstrated them, that's what I
worry about here.
Mr. Takano. Mr. Chairman, my time has run out. Thank you.
Chairman Weber. I thank the gentleman.
Mr. Marshall from Kansas, you're recognized for five
minutes.
Mr. Marshall. Thank you, Chairman.
My first question for Ms. Katz, are you aware of the
Department running any type of cost-benefit analysis prior to
the approval of new DOE loans? And then do we do any type of
follow-up on a yearly basis after them?
Ms. Katz. I'm not aware of that, but I'm not an expert on
DOE per se. My research has been on the--you know, the total of
loans and loan guarantees across the economy.
Mr. Marshall. Any other panelists?
Mr. Edwards. You raise an interesting point, which is that
the federal government requires cost-benefit analysis of new
regulations over certain dollar values that are promulgated by
departments. There is no requirement for cost-benefit analysis
for federal spending programs, but in my view, there should be.
These sorts of government investments should be subject to a
detailed cost-benefit analysis.
Ms. Katz. And certainly if the government had done a proper
benefit-cost analysis on ethanol, we would have found that
government investment in it was a horrible idea because it
turned out to actually produce terrible environmental effects,
as well as produce more carbon dioxide than saving carbon
dioxide.
Mr. Reicher. Mr. Marshall, can I quickly say----
Mr. Marshall. Please.
Mr. Reicher. Let me emphasize the folks at the Energy
Department who--the career folks who manage these programs,
they have to do financial modeling and financial pro formas
before they can make a loan. The proposer of the loan comes in
with a financial model, with a financial pro forma. That gets
reviewed. So I don't know about cost-benefit analysis in a
policy. They're doing the right kind of analysis, which is a
financial pro forma or financial model.
Dr. Yonk. Mr. Marshall, might I just add that we do however
see significant political pressures placed on these programs,
at least in their historical context, that in fact there have
been nudges from Administration officials to push for
particular loans to be approved. And that illustrates that,
while I have confidence that there is lots of this modeling
going on, there is a large--there is an interjection of
politics into these things that becomes problematic. And I
might suggest this committee ask DOE in particular the very
question you asked is what is that process they go through.
Mr. Marshall. Mr. Reicher, I guess I'm going to follow up
on your statement. Are those pro formas, I guess that's what
you're referring to, made public? Are they made available to us
as well?
Mr. Reicher. I don't know.
Mr. Marshall. Okay. My last question I'll go back to Mr.
Edwards. What options exist for the incoming Administration to
reform the DOE loan programs and address taxpayer liability?
What role can Congress play in these reforms?
Mr. Edwards. Well, I don't think Congress should
appropriate any more money for these programs. I think the time
for federal subsidies, if there ever was one, has passed. We've
been subsidizing solar and wind for 40 years now. It's not a
so-called infant industry anymore. It's a mature industry.
We've heard today that there's lots of private investment,
billions of dollars in these industries, and I think what
Congress should move ahead with, broad-based tax reform, the
Congressman was mentioning the methanol plant in his district.
Those sorts of projects, if we did tax reform, they would
attract more investment by private equity, by corporations if
we reduce the tax cost of equity in the economy.
Ms. Katz. And I would just say with all due respect to Mr.
Reicher, the--our future is not--the direction we should not be
going in is to be more like China. That's not what's going to
help the United States.
Mr. Reicher. Can I just respond to Mr. Edwards? Let me just
correct something. You don't build energy projects largely with
equity. You build it with debt. You want to put as little
equity in a project as you can because equity is expensive. You
want to put as much debt on a project as you can because debt
is cheap. Equity can cost you in an energy project 15, 20, 25
percent. Debt is in the 5 to seven percent range.
So this idea that somehow lots more equity is going to
start flowing, that's good. I don't disagree because you have
to put some equity in the project, but the thing that stumps
these project developers is raising debt, getting a loan from a
bank or issuing a bond, and that's the real struggle.
Mr. Marshall. I guess----
Mr. Reicher. The last thing I want to quickly say, looking
ahead, the money is not there for solar and wind in the loan
guarantee program. There's--the big money that's left, the
remaining authority, $12.5 billion for advanced nuclear, $8.5
billion for advanced fossil. There's $4.5 billion for
renewables and then there's a big chunk for advanced
transportation. So to Mr. Edwards, this is not about--largely
about solar and wind as we look ahead at this $41 billion of
authority.
Mr. Marshall. A quick question. So through the years it
seems like big lending institutions are less likely to loan
money because of all the rules enhanced by Dodd Frank. Is that
true or false? Do you think it's so much harder nowadays for
some of these big projects to get funded?
And I'm over my time. I apologize if you don't have time to
answer that question.
Chairman Weber. No, I want to know the answer.
Mr. Edwards. I think that's true, but I would strongly
disagree with Mr. Reicher's comment about debt and equity. It
is a--private return is equity. You lower the tax on the
marginal investment dollar, you will get more private
investment by people like Warren Buffett and all kinds of
energy projects is--equity is the tail that wags the broader
dog. That is the return in the economy to private investors,
but the vast trillions of dollars invested in the American
economy every year is invested because people want to earn
after-tax return. You lower taxes, you increase after-tax
return, you get more investment.
Dr. Yonk. There's no doubt you could get more equity in a
project if you need it----
Chairman Weber. If the gentleman would suspend, we need to
move on. I apologize.
Dr. Yonk. Mr. Chairman, could I just take six words to
answer Mr. Marshall, and that is I think your question is in
fact where the answer to many of these problems lies, and that
is clearing the path for more of this sort of investment in
both the regulatory side and cleaning up the subsidy side.
Chairman Weber. Did anybody count those words? I----
Dr. Yonk. They were more than six, but I'm an academic.
Ms. Katz. The most important ones were six.
Dr. Yonk. Six.
Chairman Weber. I thank the panel.
The Chairman now recognizes Mr. McNerney for five minutes I
think.
Mr. McNerney. Well, I thank the Chairman. And I'll try to
keep it to five minutes.
Mr. Reicher, the Loan Program--the Loan Programs Office is
known to have a rigorous selection process. How would you
characterize the application and selection process compared to
the private sector?
Mr. Reicher. It's tough. And as I said, I think before you
came, Congressman, many of these developers would rather get a
loan from a bank than have to go to the DOE. So they have to do
things to get these loans from the DOE like often an
environmental impact statement that can take a lot of time.
They have lots of charges. They've got to pay a credit subsidy
cost; they've got to pay a credit-based interest spread; they
now have a risk-based fee that has been imposed recently. This
is tough stuff, so I think it's being rigorously managed and I
think--I don't think the American taxpayer has a huge amount to
worry about here because of the way this program is being run.
Mr. McNerney. So that might help explain the two percent
default rate?
Mr. Reicher. It does, and I think--that's why I think that
this is a program because it has been well-run. I'm the first
to admit there were mistakes--some mistakes made. There were
some loans that went bad, but that's not how you look at a
portfolio. Look at the overall portfolio. How do all the
investments in the portfolio--how are they doing on a portfolio
basis? I'd love to have an investment portfolio like this.
Mr. McNerney. And banks really don't have the resources to
carry out that sort of a rigorous process. Is that right?
Mr. Reicher. They often do not, and it's certainly the case
when you're bringing in an untested technology, that's not what
banks do.
Mr. McNerney. So would you explain in clear terms, Mr.
Reicher, the difference between a loan guarantee and a grant?
Mr. Reicher. A loan guarantee or a loan is----
Mr. McNerney. That's kind of a rhetorical question.
Mr. Reicher. Yes, you've got to pay it back.
Mr. McNerney. Forgive me.
Mr. Reicher. You get a loan for your house, you've got to
pay it back. If your grandmother gives--writes you a check for
$10,000, that's a gift.
Mr. McNerney. So----
Mr. Reicher. That's a grant.
Mr. McNerney. --are both the loan guarantees and grants
necessarily government subsidies?
Mr. Reicher. I don't know if they're subsidies. I think if
they're surgically applied, if they're rigorously reviewed, and
if you pay the loan back, that seems like a fair distance from
being a plain old subsidy, particularly if you pay it back and
the government can go on and use that money for other things.
Mr. McNerney. So are tax policies such as suggested by Mr.
Edwards capable of distorting the economy maybe as much of some
of these loan guarantees?
Mr. Reicher. Tax policy can help and tax policy can hurt.
If you get it wrong, you can distort the market in a very
serious way. So we play around with tax policy and sometimes it
does a good thing for taxpayers if we play around with it, and
sometimes it doesn't.
Mr. McNerney. And loan guarantees don't have that big of an
impact on the economy I would guess but maybe I'm wrong.
Mr. Reicher. As compared to grants, as compared to the cost
of tax subsidies, they get paid back. I think that's the thing
to answer.
Mr. McNerney. So what was the intent of the loan guarantees
that are in question? What was the original intent?
Mr. Reicher. Let me tell you that most of the ones we're
talking about here were granted under the so-called section
1705 program. That was put in place in the depths of the
recession in order to get people back to work. They were
focused on so-called shovel-ready projects. They were ready to
go. It was really hard to get a loan from a bank so the federal
government stepped in. These projects got built.
Let me emphasize something. That program is over. It's over
as of 2011. What we are focused on are the 1703 projects. Those
you have to prove innovation. There's a whole set of things
that make them quite different. So that's why I keep saying,
looking ahead, this is the 1703 project--program, and I think
we can do a lot with it for infrastructure.
Mr. McNerney. So in my remaining time could you give any
examples of successful energy generation as a result of these
loan programs?
Mr. Reicher. Sure. You named the category. You know, we've
heard about renewables. We haven't talked about several other--
a major transmission project got financed using the loan
guarantee program with an innovative technology. Boy, do we
need transmission in this country. Our transmission is in rough
shape. We need to expand it. We need to bring energy in from
remote areas. So that's a great use. We didn't talk about a
major storage project.
Electricity storage is key going forward, and a very
innovative project got built, is functioning well, proved out a
very important technology. Then, you heard the project in Mr.
Higgins' district. Those kinds of carbon capture projects, big
amount of future authority for doing those. We need those to
work.
Mr. McNerney. Thank you. Thank you, Mr. Chairman.
Chairman Weber. I thank the gentleman for yielding back.
The gentleman from Kentucky, whose home is off the grid, is
recognized.
Mr. Massie. I knew you'd call me out.
Mr. Reicher, what's the differential in the interest rate
that these companies can get because of the loan guarantee
versus if they had to go into the private market and borrow the
money? Or is it such that some of these projects are so risky
nobody would loan them the money?
Mr. Reicher. That is the big challenge, Congressman. Some
of these projects have enough commercialization risk scaling up
for the very first time to a full-scale utility project that
often you can't get a bank to make you a loan. If you can get a
bank to make you a loan, here's the problem. Not only will they
charge you a pretty high interest rate, but they'll give you a
very short term for the loan. That doesn't work when you go out
to get a power purchase agreement. You've got to pay back the
whole thing in 5 or six years. So that's why these--this very
targeted program exists.
Mr. Massie. Isn't that where venture equity would play?
Because, you know, I had a startup and I went to banks and they
weren't going to loan me the money, and so I went to the
venture capitalists. And if you think the terms of the DOE are
tough, you should check out the vulture--venture capitalists.
Mr. Reicher. Fair enough. Here's the answer to that in my
view. Venture capitalists invest small amounts of money in very
high-risk situations. They are investing in the early stage of
these technologies. They've come out of the lab and you want to
build the first demonstration projects. They are definitely not
the sort that are going to put big amounts of money into
actually scaling it up. So this notion that the venture capital
world is somehow going to scale up these big energy projects
for the first time, that's not what they do.
Mr. Massie. Well, you know, what's also true about venture
capital is they fully expect a lot of their programs to fail--
--
Mr. Reicher. Yes, but----
Mr. Massie. --but since this is not how it is structured
for the taxpayer, you know, a venture capitalist can write off
nine failures with one good success. I'm not arguing that the
DOE should become a capital investment firm, but because the
taxpayer, they just lose one-to-one on all the nine losses and
then they win back one-to-one on their win. If it were an
equity investment, that's why this works in an equity
environment and not in a loan environment. And I think some of
these programs are so risky that no bank would loan you the
money and for good reason, and nobody would loan you the money
unless they had an equity stake and a chance at a multiple
return on this. Dr. Yonk, do you want to speak to this?
Dr. Yonk. Just I think what you're illustrating is what I
described is the way capital moves in these regards and that is
they're going--they know the program exists. They're going to
often wait either for not just loan guarantees. They're also
going to wait for grants and larger-scale loans.
So with due respect to Mr. Reicher, I think that, yes, he's
right in describing what venture capitalists have done, but in
large part that's a construction of both the regulatory and the
subsidy system that exists today.
Mr. Massie. Ms. Katz?
Ms. Katz. Yes, I would just add that the spread between the
interest rates from--that DOE may offer and the private market
does, that's just one of a number of types of differences.
There are--there's a long list. I can tell you that there are
longer maturities than private loans. There are deferrals of
interest. There are allowances and grace periods. There are
waivers or reductions of loan fees, higher loan amounts
relative to the enterprise value. So there's a, you know, just
a variety of elements on which they--they're different than--
the government loans are different than the private sector.
Mr. Massie. But at some cost to the taxpayer?
Ms. Katz. Well, there's always a cost to the taxpayer in
part because of the accounting method that the federal
government uses. What they do is they try to determine what the
actual cost of the loan is in the present value. That is what,
you know, all of the future payments are going to bring in
versus the cost. And I'll try not to get too technical, but
what the federal government does is it ties the interest rate
that they use in that calculation to treasuries, which is a
below-market interest rate so it appears that the loan or the
loan guarantee at the time the money is out is actually costing
less than it really does.
Mr. Massie. So some of the costs are hidden or----
Ms. Katz. In part.
Mr. Massie. Yes. Mr. Edwards, would you like to speak to
this at all?
Mr. Edwards. No, I think Diane hit it on the head.
Mr. Massie. Okay. Well, I will yield back seven seconds to
the Chairman, and thank you.
Chairman Weber. I thank the gentleman.
I do want to close today by thanking our witnesses, all of
whom, I'm sure, while you probably have never paid--well, you
have not paid into investment schemes--is that the right word,
Mr. Reicher--have probably paid taxes and have taken note that
we do have a $20 trillion deficit, and all of you in my opinion
should be concerned about that, I want to highlight today that
we have heard concerns about how the DOE loan guarantee program
can indeed hurt innovation. Some of it we can't measure, but it
does especially for the little guy and it can distort the
energy market.
So with that, I'm going to say thank you all for being
here. I want to thank you for your testimony. I want to thank
the members, all two of us, for our questions. And I want to
say that the record will remain open for two weeks for
additional comments and written questions from members.
This hearing is adjourned.
Mr. Reicher. Thank you, Mr. Chairman.
[Whereupon, at 12:16 p.m., the Subcommittees were
adjourned.]

Appendix I

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