Audit cites risk in DOE loan program

Introduction

A new audit of the Department of Energy’s $34 billion loan guarantee program said the agency doesn’t always follows its own rules in awarding the highly coveted funding, creating risk in an effort already hindered by breakdowns.

The audit by the Government Accountability Office carries fresh relevance amid the bankruptcies of two of the first three firms to land the government’s green energy funding: Solyndra Inc. and Beacon Power Corp.

“What we found was problems in how they followed their process and in some cases deviated from the process without a clear explanation why,” Frank Rusco, the GAO auditor who wrote the report, said in an interview. “This has gotten the program in trouble in the past and certainly raises questions that are hard for them to answer.”

The GAO report, the latest to spotlight vulnerabilities in the way DOE awards public money, details just how selective the loan pool is.

Of 460 applicants, the GAO found, the Energy Department awarded loan guarantees to 7 percent and committed to 2 percent more. To date, the investigative arm of Congress said, the department has issued $15 billion in guarantees and committed to $15 billion more.

The GAO scrutinized 13 winning applications in detail. Of those, it found, the Energy Department did not follow its written procedures at least once in 11 of the 13 cases.

“DOE did not always follow its own process for reviewing applications and documenting its analysis and decisions, potentially increasing the taxpayer’s exposure to financial risk from an applicant’s default,” the GAO found. “It also has not completely documented its analysis and decisions made during reviews, which may undermine applicants’ and the public’s confidence in the legitimacy of its decisions.”

Private lenders who finance energy projects told GAO the loan program’s review process “was generally as stringent as or more stringent than their own,” the report said.

Yet the process wasn’t always followed, the auditor found.

The Energy Department, in a written response to the audit, said it has strengthened its management and recordkeeping, creating a “state-of-the-art” system.

“The Department managed to build and continuously improve an organization that has succeeded in making an unprecedented level of clean energy investments while maintaining standards that are as high or higher than major financial institutions in the United States,” wrote David G. Frantz, acting executive director of the Loan Programs Office.

The loan portfolio, Frantz said, includes two biomass projects, three geothermal power plants, a dozen solar power generation projects and four wind power projects.

For the government, and the loan recipients, the stakes are high. The $34 billion loan guarantee pool was created to help finance innovative clean tech projects that may not otherwise land funding in the private market. Done well, advocates say, the program helps spur green energy projects — from solar panels to wind farms to electric cars — that create jobs and aid the environment.

Yet the program has been hindered by missteps from the start. Solyndra, chosen as the first recipient of an Obama administration green energy loan guarantee, was granted a conditional green light before all due diligence was in hand, The Center for Public Integrity and ABC News reported last year. The company’s bankruptcy last fall cast a harsh spotlight on the way DOE picks its winners, and created a political vulnerability for President Obama.

A GAO audit released in 2010, exploring the same loan guarantee program, found that the Energy Department “treated applicants inconsistently, favoring some and disadvantaging others.”

The new audit said the Energy Department lacked “a consolidated system for documenting and tracking its progress in reviewing applications.”

Auditors said it took months to gather all the paperwork they sought.

“Omitting or poorly documenting reviews reduces the (Loan Guarantee Program’s) assurance that it has treated applicants consistently and equitably and, in some cases, may affect the LGP’s ability to fully assess and mitigate project risks,” the GAO concluded.