Title XVII of EPAct 2005—Incentives for Innovative Technologies— authorized DOE to guarantee loans for projects that satisfy all three of the following criteria: (1) decrease air pollutants or man-made greenhouse gases by reducing their production or by sequestering them (storing them to prevent their release into the atmosphere); (2) employ new or significantly improved technologies compared with current commercial technologies; and (3) have a “reasonable prospect” of repayment. Title XVII identifies 10 categories of projects that are eligible for a loan guarantee, such as renewable energy systems, advanced fossil energy technologies, and efficient end-use energy technologies. Appendix II provides a list of these categories. The LGP office is under DOE’s Office of the Chief Financial Officer. LGP’s actions are subject to review and approval by a Credit Review Board. The Board met for the first time in April 2007; it approves major policy decisions of the LGP, reviews LGP’s recommendations to the Secretary of Energy regarding the issuance of loan guarantees for specific projects, and advises the Secretary on loan guarantee matters. DOE first received appropriated funds for the LGP’s administrative costs in early 2007 and began processing preapplications—in response to the August 2006 solicitation—and at the same time began to obtain staff and take other steps to initiate the program. During 2007, it reviewed preapplications for 143 projects and in October 2007 invited 16 of the preapplicants to submit full applications for loan guarantees. Appendix II includes information on the 16 projects invited to submit full applications. In general, according to DOE, the processing of full applications will require DOE to have numerous interactions with the applicants and private lenders. It will also require financial, technical, environmental, and legal advisors to assist with underwriting, approving, and issuing a loan guarantee. DOE estimated that the time between receiving an application and completing negotiations for a loan guarantee contract would range from 9 to 25 months, with additional time at the beginning to prepare and issue the solicitation and at the end to close the loan. On April 11, 2008, DOE issued a fiscal year 2008 implementation plan for $38.5 billion in solicitations, to respond to a requirement that DOE provide Congress information about future solicitations 45 days prior to issuing them. On June 30, 2008, DOE simultaneously issued three solicitations that total $30.5 billion—on (1) efficiency, renewable energy, and electric transmission ($10 billion), (2) nuclear power facilities ($18.5 billion), and (3) nuclear facilities for the “front end” of the nuclear fuel cycle ($2 billion). DOE plans to subsequently issue a fourth solicitation in late summer 2008 for advanced fossil energy projects ($8 billion). DOE is also required to annually provide Congress a report on all activities under Title XVII and issued the first report on June 15, 2007. Figure 1 shows a timeline of these and other key program events since 2005 that illustrate the status of the LGP through June 2008. On October 23, 2007, DOE’s final regulations for the LGP were published in the Federal Register. DOE had previously issued program guidelines in August 2006. The final regulations contain requirements for preapplication and application submissions; programmatic, technical and financial evaluation factors for applications; and lender eligibility and servicing requirements. The regulations incorporate and further clarify requirements of Title XVII related to eligibility, fees, default conditions, and audit documentation. The regulations also generally incorporate requirements set forth in OMB Circular A-129 Policies for Federal Credit Programs and Non-Tax Receivables, which prescribes policies and procedures for federal credit programs, such as applicant screening, lender eligibility, and corrective actions. Because loan guarantee programs pose significant financial risks, it is important to include appropriate mechanisms to help protect the federal government and American taxpayers from excessive or unnecessary losses. DOE changed some key aspects of the initial program guidelines in its final regulations to help make the program more attractive to lenders and potentially reduce financing costs for projects. These changes included increasing the maximum guarantee percentage, allowing the lender to separate or “strip” the nonguaranteed portion of the debt, and revising its interpretation of a Title XVII requirement that DOE have superior right to project assets pledged as collateral. Other important changes relate to increased specificity in key definitions and a requirement for independent engineering reports. Specifically, we found the following: Guarantee percentage. The final regulations allow for loan guarantees of up to 100 percent of the loan amount, which is limited to no more than 80 percent of the project costs, provided that, for a 100 percent guarantee, the loan must be disbursed by the Federal Financing Bank (FFB). The use of the FFB is required, in part, because a private lender may exercise less caution when underwriting and monitoring a loan with a 100 percent guarantee. The guidelines stated that DOE preferred not to guarantee more than 80 percent of the loan amount, which was limited to no more than 80 percent of the project costs. Because the regulations increased the maximum guarantee percentage, this change increases the risk that the government is willing to assume on a project by project basis. Stripping the nonguaranteed portion. When DOE guarantees 90 percent or less of a loan, the final regulations allow the nonguaranteed portion of a loan to be separated or “stripped” from the guaranteed portion. This change allows lenders greater flexibility in selling portions of a loan on the secondary market and could reduce overall funding costs for projects. In contrast, the guidelines and the proposed regulations did not allow stripping. Superiority of rights. Title XVII requires DOE to have superior rights to project assets pledged as collateral. In the proposed regulations, DOE interpreted this provision to require DOE to possess first lien priority to assets pledged as collateral. Therefore, holders of nonguaranteed portions of loans would be subordinate to DOE in the event of a default. In the final regulations, DOE changed its interpretation to allow proceeds received from the sale of project assets to be shared with the holders of nonguaranteed portions of loans in the event of a default. As noted in public comments on the proposed regulations, this practice is an established norm in project lending. DOE stated that it retains superiority of rights, as required by Title XVII, because DOE has sole authority to determine whether, and under what terms, the project assets will be sold at all. Key definitions. In the context of “innovative technologies,” the final regulations added a definition that clarified the definition of what constitutes a “new or significantly improved” technology, considerably expanded the definition of “commercial” technology already in use, and clearly linked the definitions to each other. According to the regulations, a new or significantly improved technology is one that has only recently been developed or discovered and involves a meaningful and important improvement in productivity or value in comparison with the commercial technology in use. DOE’s regulations define a commercial technology as being in general use if it is employed by three or more commercial projects in the United States for at least 5 years. Independent engineering report. The final regulations require the applicant to provide an independent engineering report on the project, which was not required under the guidelines. According to the regulations, the engineering report should assess the project, including its site information, status of permits, engineering and design, contractual requirements, environmental compliance, testing and commissioning, and operations and maintenance. Although the final regulations generally address requirements from applicable guidance, we identified one key aspect related to equity requirements that is not clear. The final regulations state that DOE will evaluate whether an applicant is contributing significant equity to the project. The regulations define equity as “cash contributed by the borrowers and other principals.” Based on this definition, it appears that non-cash contributions, such as land, would not be considered equity. However, the LGP director told us that land and certain other non-cash contributions could be considered equity. As a result, the regulations do not fully reflect how DOE is interpreting equity and potential applicants may not have a full understanding of the program’s equity requirements. DOE may not be well positioned to manage the LGP effectively and maintain accountability because it has not completed a number of management and internal control activities key to carrying out the program. As a result, DOE may not be able to process applications efficiently and effectively, even though DOE has begun to review its first application, and officials told us they will begin reviewing other applications as soon as they are submitted. The key activities that DOE has not sufficiently completed include (1) clearly defining its key milestones and its specific resource needs, (2) establishing policies and procedures for operating the program, and (3) agreeing upon key measures to evaluate program progress. The nature and characteristics of the LGP expose the government to substantial inherent risk; implementing these management and internal control tools is a means of mitigating some risks. According to our work on leading performance management practices, agencies should have plans for managing their programs that identify goals, strategies, time frames, resources, and stakeholder involvement in decision making. In January 2008 DOE completed a “concept of operations” document that contains, among other things: information on the LGP’s organizational structure; mission, goals, and objectives; and timelines, milestones, and major program activities that must be accomplished and their sequence. However, LGP officials told us they do not consider the concept of operations a strategic or performance planning document. In addition, it is unclear whether LGP plans to set other timelines and milestones that would be available to stakeholders, such as applicants and Congress. Without associating key activities with the time frames it aims to meet, it is unclear how DOE can adequately gauge its progress or establish and maintain accountability to itself and stakeholders.