Department of Energy: Advanced Technology Vehicle Loan Program Needs Enhanced Oversight and Performance Measures
Published: 2011-06-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In the Energy Independence and Security Act of 2007, Congress mandated higher vehicle fuel economy by model year 2020 and established the Advanced Technology Vehicles Manufacturing (ATVM) loan program in the Department of Energy (DOE). ATVM is to provide up to $25 billion in loans for more fuel-efficient vehicles and components. Congress also provided $7.5 billion to pay the required credit subsidy costs--the government's estimated net long-term cost, in present value terms, of the loans. This testimony is based on GAO's February 2011 report on the ATVM loan program (GAO-11-145). It discusses (1) steps DOE has taken to implement the program, (2) progress in awarding loans, (3) how the program is overseeing the loans, and (4) the extent to which DOE can assess progress toward its goals.
section_title: What GAO Found
paragraphs: DOE has taken several steps to implement the ATVM program. First, it set three program goals: increase the fuel economy of U.S. passenger vehicles as a whole, advance U.S. automotive technology, and protect taxpayers' financial interests. DOE also set technical, financial, and environmental eligibility requirements for applicants. In addition, DOE established criteria for judging the technical and financial merits of applicants and projects deemed eligible, and policy factors to consider, such as a project's potential for supporting jobs. DOE established procedures for ATVM staff, aided by experts from within and outside DOE, to score applicants and projects. Finally, the Credit Review Board, composed of senior DOE officials, uses the scores and other information to recommend loan decisions to the Secretary of Energy. The ATVM program, as of May 2011, had made $8.4 billion in loans that DOE expects to yield fuel economy improvements in the near term along with greater advances, through newer technologies, in years to come. Although the loans represent about a third of the $25 billion authorized by law, the program has used 44 percent of the $7.5 billion allocated to pay credit subsidy costs, which is more than was initially anticipated. These higher credit subsidy costs were, in part, a reflection of the risky financial situation of the automotive industry at the time the loans were made. As a result of the higher credit subsidy costs, the program may be unable to loan the full $25 billion allowed by statute. The ATVM program has set procedures for overseeing the financial and technical performance of borrowers and has begun oversight, but at the time of our February report it had not yet engaged engineering expertise needed for technical oversight as called for by its procedures. To oversee financial performance, staff review data submitted by borrowers on their financial health to identify challenges to repaying the loans. Staff also rely on outside auditors to confirm whether funds have been used for allowable expenses. To oversee technical performance, ATVM staff are to analyze information borrowers report on their technical progress and are to use outside engineering expertise to supplement their analysis, as needed. According to our review, projects needing additional technical oversight are under way, and the ATVM staff lack the engineering expertise called for by the program's procedures for adequately overseeing technical aspects of the projects. However, the program had not yet engaged such expertise. As a result, DOE cannot be adequately assured that the projects will be delivered as agreed. DOE has not developed sufficient performance measures that would enable it to fully assess progress toward achieving its three program goals. For example, DOE has a measure for assessing the fuel economy gains for the vehicles produced under the program, but the measure falls short because it does not account for, among other things, the fuel economy improvements that would have occurred if consumers purchased more fuel-efficient vehicles not covered by the program. Principles of good governance call for performance measures tied to goals as a means of assessing the extent to which goals have been achieved.
section_title: What GAO Recommends
paragraphs: GAO is making no new recommendations at this time. In the February report, GAO recommended that DOE (1) accelerate efforts to engage engineering expertise and (2) develop sufficient, quantifiable performance measures. DOE disagreed with the recommendations, stating that such expertise had not yet been needed and that performance measures would expand the scope of the program. GAO continues to believe that these recommendations are needed to help ensure that DOE is achieving its goals and is accountable to Congress.

section_title: Letter
paragraphs: In recent years, questions have arisen about fluctuations in gasoline prices  and the environmental impact of petroleum use. In addition, gasoline- fueled passenger vehicles are a major source of greenhouse gas emissions.   In 2007, Congress enacted the Energy Independence and Security Act  (EISA) which, among other things, increased corporate average fuel  economy (CAFE) standards, requiring that the nation’s automobile  manufacturers’ new vehicle fleets attain at least an average of 35 miles per  gallon by 2020. In May 2009 the Administration announced its National  Fuel Efficiency Policy, which, to implement the increase in fuel economy  required by EISA, called for higher CAFE standards for model years 2012  through 2016 for passenger cars and light-duty trucks—surpassing those  standards EISA required by 2020. On April 1, 2010, the National Highway  Traffic Safety Administration (NHTSA) and the Environmental Protection  Agency (EPA) made final the rule putting the more stringent CAFE  standards in place.
In addition to increasing CAFE standards, EISA also authorized, but did  not provide funding for, the Advanced Technology Vehicles Manufacturing  (ATVM) loan program to provide up to $25 billion in loans to support  projects to produce more fuel-efficient passenger vehicles and  components. Loans made under the program are to, among other things,  have an interest rate equal to the government’s cost of funds and be in  force for no more than 25 years.
In addition to the negative effect that rising fuel prices had on domestic  automobile sales, the economic recession that began in late 2007  particularly affected the three major domestic automakers—Chrysler  Group LLC, Ford Motor Company, and General Motors Corporation, or the  Detroit 3. Rising fuel prices had negatively affected the sales of domestic  automakers as consumers shifted to smaller, more fuel-efficient vehicles  and away from less fuel-efficient light trucks and sport utility vehicles. At  the end of 2008, several economic indicators, including economic growth  and the unemployment rate, worsened while credit markets tightened and  dampened consumers’ demands for new passenger vehicles. Sales of new  vehicles had been trending downward since 2006, but the decrease was  markedly sharper in 2008 and 2009. For example, U.S. sales for the Detroit  3 dropped by 49 percent from February 2008 through February 2009,  whereas U.S. sales for American Honda Motor Co., Inc.; Nissan North  America, Inc.; and Toyota Motor North America, Inc., dropped 39 percent  during this period. Additionally, the Detroit 3 had been losing U.S. market  share to foreign automakers for several years. For instance, General  Motor’s U.S. market share for total light vehicle retail sales—including  passenger cars and light-duty trucks—fell from 27.2 percent in 2004 to 22.1  percent in 2008, while the market share of Japanese auto manufacturers  grew from 29.8 percent to 38.9 percent during the same period.  Furthermore, since the 1980s, the Detroit 3 have relied heavily on sales of  light-duty trucks and sport utility vehicles, which were more profitable  than passenger cars but had relatively low fuel economy ratings. As a  result of this reliance, the Detroit 3 faced more difficulty in achieving  substantial improvements in fuel economy than most foreign-based  manufacturers, which historically had produced and sold more fuel- efficient vehicles. When proposing the new, more stringent CAFE  standards, NHTSA estimated that the Detroit 3 would face significantly  higher costs to meet revised standards than the major Japanese  automakers.
In September of 2008, the Consolidated Security, Disaster Assistance, and  Continuing Appropriations Act provided $7.5 billion to DOE to pay the  credit subsidy costs of up to $25 billion in ATVM loans. Credit subsidy  costs are the estimated net long-term costs to the government, in present  value terms, of loans over the entire period the loans are outstanding.  Congress also provided $10 million to DOE to administer the ATVM loan  program and required that DOE issue an interim final rule to establish  regulations necessary to implement the program. DOE issued an interim  final rule for implementing the program in November of 2008.
In February 2011 we reported on DOE’s implementation of the ATVM loan  program. My testimony today is based on that report, updated with recent  information from DOE on ATVM loans made, additional loan amounts  requested by applicants, and the subsidy costs DOE expects to need in  order to provide loans to those applicants. My testimony addresses (1) the  steps DOE has taken to implement the ATVM loan program, (2) the ATVM  loan program’s progress in awarding loans, (3) how the program is  overseeing the loans, and (4) the extent to which DOE can assess its  progress toward meeting program goals. A detailed description of our  scope and methodology can be found in the February report. We  conducted this work in accordance with generally accepted government  auditing standards.
subsections: section_title: DOE Established Program Goals and Set Criteria for Applicant and Project Eligibility and Merit
paragraphs: DOE has taken several steps to implement the ATVM program. First, it set  three goals for the program: increase the fuel economy of U.S. passenger  vehicles as a whole, advance U.S. automotive technology, and protect  taxpayers’ financial interests. In that regard, EISA calls for the program to  make loans to provide funding to automobile manufacturers and  component suppliers for projects that re-equip, expand, or establish U.S.  facilities that are to build more fuel-efficient passenger cars and light-duty  trucks. According to DOE, the program’s goals also support the agency’s  goals of building a competitive, low-carbon economy by, among other  things, funding vehicles that reduce the use of petroleum-derived fuels and  accelerating growth in advanced automotive technology manufacturing,  and protecting U.S. taxpayers’ financial interests.
DOE, in its interim final rule, also set technical, financial, and  environmental requirements that vehicle and components manufacturers  must meet to qualify to receive a loan under the program. For example, an  established vehicle manufacturer—one that was manufacturing vehicles in  2005—must demonstrate that the adjusted average fuel economy of the  fleet of vehicles it produced in its most recent model year was at least  equal to that of the fleet of vehicles it produced in model year 2005.
Similarly, a manufacturer that was not producing vehicles in 2005 must  show that its proposed vehicles’ adjusted average fuel economy will at  least equal that of established manufacturers for a similar classs of  vehicles for model year 2005. For applicants deemed eligible, DOE also  uses statutorily based technical criteria to determine which projects are  eligible. For example, proposed vehicles must achieve at least 125 percent  of the average fuel economy achieved by all manufacturers’ vehicles with  substantially similar attributes in 2005.
In addition, DOE established criteria for ATVM staff, aided by experts  from within and outside DOE, to judge and score the technical and  financial merits of applicants and projects deemed eligible, along with  policy factors to consider, such as a project’s potential for supporting jobs  and whether a project is likely to advance automotive technology. Finally,  the Credit Review Board, composed of senior DOE officials, uses the merit  scores and other information, including Office of Management and  Budget’s approved subsidy cost estimates for projects, to recommend loan  decisions to the Secretary of Energy.
section_title: The ATVM Program Has Awarded $8.4 Billion in Loans that Largely Enhance Conventional Vehicle Technology, but the Program May Be Unable to Lend the Full Authorized Amount
paragraphs: To date the ATVM program has made about $8.4 billion in loans: $5.9  billion to the Ford Motor Company; $1.4 billion to Nissan North America;  $529 million to Fisker Automotive, Inc.; $465 million to Tesla Motors, Inc.;  and $50 million to The Vehicle Production Group LLC. About 62 percent  of the funds loaned—$5.2 billion—are for projects that largely enhance the  technologies of conventional vehicles powered by gasoline-fueled internal  combustion engines. These projects include such fuel-saving  improvements as adding assisted direct start technology to conventional  vehicles, which reduces fuel consumption by shutting off the engine when  the vehicle is idling (e.g., while at traffic lights) and automatically re- starting it with direct fuel injection when the driver releases the brake.  According to DOE’s analysis, the projects will result in vehicles with  improved fuel economy that will contribute in the near term to improving  the fuel economy of the passenger vehicles in use in the United States as a  whole because the conventional vehicles are to be produced on a large  scale relatively quickly and offered at a price that is competitive with other  vehicles being offered for sale.
DOE used data from the borrowers to estimate the fuel economy in miles  per gallon (mpg) of the enhanced conventional vehicles that were  considered for ATVM loans. According to our calculations using DOE’s  estimates of fuel economy, these projects are expected to result in  vehicles with improved fuel economy that exceed both the program’s  eligibility requirements and the CAFE targets that will be in place at the  time the vehicles are produced —by, on average, 14 and 21 percent,  respectively.
The remaining 38 percent of the funds loaned—about $3.1 billion— support projects for vehicles and components with newer technologies.  Fisker’s loan is for two plug-in hybrid sedan projects—the Karma and the  Nina. Tesla’s loan is for an all-electric sedan, the Model S, and Nissan’s  loan is for the LEAF, an all-electric vehicle classified by DOE as a small  wagon. The Vehicle Production Group’s loan is for a wheelchair-accessible  vehicle that will run on compressed natural gas. Finally, a portion of the  Ford loan supports projects for manufacturing hybrid and all-electric  vehicles. In addition, there are two advanced technology components  projects: Nissan’s, to build a manufacturing facility to produce batteries  for the LEAF and potentially other vehicles; and Tesla’s, to build a  manufacturing facility to produce electric battery packs, electric motors,  and electric components for the Tesla Roadster and vehicles from other  manufacturers. In contrast to the projects supporting enhancements to  conventional vehicles, DOE’s and the borrowers’ analyses indicate that the  projects with newer technologies will result in vehicles with far greater  fuel economy gains per vehicle but that these vehicles will be sold in  smaller volumes, thereby having a less immediate impact on the fuel  economy of total U.S. passenger vehicles.
According to our calculations using DOE’s fuel economy estimates, the  projects for vehicles with newer technologies, like the projects for  enhanced conventional vehicles, are expected to result in improved fuel  economy that exceeds both the program’s eligibility requirements and  CAFE targets—by about 125 percent and about 161 percent respectively.
The loans made to date represent about a third of the $25 billion  authorized by law, but the program has used 44 percent of the $7.5 billion  allocated to pay credit subsidy costs, which is more than was initially  anticipated. The $7.5 billion Congress appropriated was based on the  Congressional Budget Office’s September 2008 estimated average credit  subsidy rate of 30 percent per loan ($7.5 billion divided by $25 billion  equals 30 percent). However, the average credit subsidy rate for the $8.4  billion in loans awarded to date is 39 percent—a total of roughly $3.3  billion in credit subsidy costs. At this rate, the $4.2 billion remaining to be  used to pay credit subsidy costs will not be sufficient to enable DOE to  loan the full $25 billion in loan authority. These higher credit subsidy costs  were, in part, a reflection of the risky financial situation of the automotive  industry at the time the loans were made. For DOE to make loans that use  all of the remaining $16.6 billion in loan authority, the credit subsidy rate  for the loans would have to average no more than 25 percent ($4.2 billion  divided by $16.6 billion). As a result, the program may be unable to loan  the full $25 billion allowed by statute. As of May 9, 2011, DOE reported  that 16 projects seeking a total of $9.3 billion in loans—representing $3.5  billion in credit subsidy costs—were under consideration.
section_title: The ATVM Program Has Begun Overseeing Loans to Ensure Borrowers Comply with Financial and Technical Requirements but Has Not Engaged Engineering Expertise that Would Help Ensure that Projects Are Delivered as Agreed
paragraphs: The ATVM program has set procedures for overseeing the financial and  technical performance of borrowers and has begun oversight, but at the  time of our February report the agency had not yet engaged engineering  expertise for technical oversight as called for by the procedures. To  oversee financial performance, staff are to review data submitted by  borrowers on their financial health to identify challenges to repaying the  loans. Staff also rely on outside auditors to confirm whether funds have  been used for allowable expenses. As of February 2011, the auditors had  reported instances in which three of the four borrowers did not spend  funds as required. According to ATVM officials, these instances were  minor—the amounts were small relative to the total value of the loans— and the inappropriate use of funds and the borrowers’ practices have been  corrected.
The ATVM program’s procedures also specify technical oversight duties, a  primary purpose of which is to confirm that borrowers have made  sufficient technical progress before the program disburses additional  funds. To oversee technical performance, ATVM staff are to analyze  information borrowers report on their technical progress and are to use  outside engineering expertise to supplement their analysis once borrowers  have begun constructing or retrofitting facilities or are performing  engineering integration—that is, designing and building vehicle and  component production lines. According to our review, several projects  needing additional technical oversight are under way but the program, as  of February of 2011, had not brought in additional technical oversight  expertise to supplement program staffs’ oversight. For example, ATVM  officials identified one borrower with projects at a stage requiring  heightened technical monitoring; however, ATVM program staff alone had  monitored the technical progress of the project. ATVM officials told us  that the manufacturer has experience with bringing vehicles from concept  to production so additional technical oversight expertise has not been  needed, despite the procedures’ calling for it. Further, according to  documents we reviewed, at the time of our report, four borrowers—rather  than the single one identified by ATVM—had one or more projects that,  according to the program’s procedures, had already reached the stage  requiring heightened technical monitoring. Because ATVM staff, whose  expertise is largely financial rather than technical, had so far provided  technical oversight of the loans without the assistance of independent  engineering expertise, we found that the program may be at risk of not  identifying critical deficiencies as they occur and DOE cannot be  adequately assured that the projects will be delivered as agreed. At the  time of our report, according to ATVM staff, they were in the process of  evaluating one consultant’s proposal to provide engineering expertise and  were working with DOE’s Loan Guarantee Program to make that  program’s manufacturing consultants available to assist the ATVM  program.
section_title: DOE Lacks the Performance Measures to Enable It to Fully Assess the ATVM Program’s Progress Toward Achieving Its Goals
paragraphs: DOE has not developed sufficient performance measures that would  enable it to fully assess whether the ATVM program is achieving its three  goals. Principles of good governance indicate that agencies should  establish quantifiable performance measures to demonstrate how they  intend to achieve their program goals and measure the extent to which  they have done so. These performance measures should allow agencies to  compare their programs’ actual results with desired results and should be  linked to program goals.
Although the ATVM program has established performance measures for  assessing the performance of ATVM-funded vehicles relative to the  performance of similar vehicles in model year 2005, the measures stop  short of enabling DOE to fully determine the extent to which it has  accomplished its overall goal of improving the fuel economy of all  passenger vehicles in use in the United States. The measures stop short  because they do not isolate the impact of the program on improving U.S.  fuel economy from fuel economy improvements that might have occurred  in the absence of the program—by consumers investing in more fuel  efficient vehicles not covered by the program in response to high gasoline  prices, for example. In addition, the ATVM program lacks performance  measures that will enable DOE to assess the extent to which it has  achieved the other two goals of the program—advancing automotive  technology and protecting taxpayers’ financial interests.
In our February 2011 report, to help ensure the effectiveness and  accountability of the ATVM program, we recommended that the Secretary  of Energy direct the ATVM program to (1) accelerate efforts to engage  sufficient engineering expertise to verify that borrowers are delivering  projects as agreed and to (2) develop sufficient and quantifiable  performance measures for its three goals. DOE’s Loan Programs Executive  Director disagreed with the first recommendation, saying that the projects  were in the very early stages of engineering integration and such expertise  had not yet been needed for monitoring. However, at that time, three of  the four loans had projects that had been in engineering integration for at  least 10 months, and the fourth loan had at least one project that was  under construction. We maintained that DOE needed technical expertise  engaged in monitoring the loans so that it could become adequately  informed about technical progress of the projects. DOE’s Loan Programs  Executive Director also disagreed with the second recommendation. He  said that DOE would not create new performance measures for the  agency’s three goals, saying that performance measures would expand the  program and did not appear to be the intent of Congress. We maintained  that by not setting appropriate performance measures for its program  goals, DOE was not able to assess its progress in achieving what it set out  to do through the program; furthermore, it could not provide Congress  with information on whether the program was achieving its goals and  warranted continued support.
Chairman Bingaman, this concludes my prepared statement. I would be  pleased to answer any questions that you, Ranking Member Murkowski, or  other Members of the Committee may have at this time.
section_title: Contacts and Staff Acknowledgments
paragraphs: For further information about this testimony, please contact Frank Rusco  at (202) 512-3841 or ruscof@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. Karla Springer, Assistant Director; Nancy Crothers;  Carol Kolarik; Rebecca Makar; Mick Ray; Kiki Theodoropoulous; Barbara  Timmerman; and Jeremy Williams made key contributions to this  statement.
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