DOE Audit Reveals No High-Risk Surprises, But Several Weaknesses


The Obama administration's newly released independent review of the U.S. Department of Energy's (DOE) loan-guarantee portfolio makes several concrete suggestions for program improvement, but overall portfolio risk was not judged to be higher than previously thought.

The review, which was ordered by the White House last October in the wake of DOE loan-guarantee recipient Solyndra's bankruptcy, rated the DOE loan portfolio's risk slightly lower than did the DOE itself. The risk was also deemed to be ‘far less’ than its originally assigned congressional loan loss reserve, DOE Secretary Steven Chu said in a recent post on the DOE's website.

‘We have always known that there were inherent risks in backing innovative technologies at full commercial scale, and it is very likely that there will be other companies in the portfolio that won't succeed, but the vast majority of companies are expected to pay the loans back in full, on time, and with about $8 million interest,’ Chu said. He added that the DOE plans to assess the best way to implement the numerous recommendations for improvement made in the report.

Conducted by Herb Allison – a former U.S. Department of Treasury official who also oversaw the Troubled Asset Relief Program – the DOE portfolio review focused on 30 loans. The deals were divided into ‘utility-linked loans’ (of which 22% of granted funds have been drawn so far) and smaller, riskier non-utility-linked loans (of which 28% of granted funds have been drawn so far). (Solyndra and bankrupt energy-storage firm Beacon Power Corp. were excluded from the analysis.)

Despite the positive overall risk assessment, Allison and his team found the DOE's management strength and program structure lacking in several key areas:

First, the DOE should ‘assure long-term funding for its management and oversight of the portfolio,’ the report said, noting that borrower fees will no longer cover these expenses now that loan origination has ended.

The long-term nature of the completed deals – up to 30 years' maturity – also demands attention to long-term portfolio-management staffing needs, according to Allison.

In addition, the DOE was instructed to fill certain management positions and clarify manager accountability and delegation as soon as possible. ‘Lines of authority are not sufficiently clear,’ the report said, noting that some ‘key positions’ are currently being covered by ‘acting directors relying on outside contractors to augment their expertise.’

Many of the recommendations – not surprisingly – center on risk management. Although the DOE has recently sought to bolster its efforts in this area through personnel reorganization and refocusing, its new organization for credit-exposure oversight has created ‘multiple committees with overlapping memberships and, in some instances, without full independence’ from the Loan Programs Office (LPO), the report said.

Allison suggested that the department create a new position, chief risk officer, to lead a new risk management unit that would include the current credit and compliance personnel. This risk management unit must be independent of the LPO, the report noted.

Oversight boards were also singled out for improvement and expansion, as well as mechanisms that are specifically designated to protect taxpayers' interests.

‘DOE should aggressively strengthen its position as lender or guarantor in cases where borrowers seek relief from requirements in the loan agreements,’ the report stated. ‘Given the novelty, complexity and scale of the projects and the exacting covenants in their loan structures, the independent consultant believes that many projects are likely to seek such relief at some point during the term of the DOE loan or loan guarantee.’

Given these concerns, the report also called for the development of an ‘early warning system’ in order to identify and mitigate potentially troublesome loans. The system would contain regularly updated information on market trends, loan-party status and internal metrics on the LPO's performance.

The release of the audit did not assuage the concerns of lawmakers, who are continuing their investigation into Solyndra's loan guarantee.

In a statement, House Energy and Commerce Committee Chairman Fred Upton and Oversight and Investigations Subcommittee Chairman Cliff Stearns called the review a ‘long-overdue acknowledgement that the Obama administration has a problem.’

‘This report reveals broad-based weaknesses, but it does not answer some of the most fundamental questions about how these risky bets were made over the objections of experts,’ Upton and Stearns added, reiterating that the House Energy and Commerce Committee plans to forge ahead with its Solyndra investigation.

Meanwhile, Sen. Lisa Murkowski, R-Alaska, has called for a new congressional oversight hearing on the DOE's loan programs.

Murkowski, a ranking member on the Senate's Energy and Natural Resources Committee, said Allison's report has made the DOE program's flaws evident.

‘Between the House and the Senate, we are the only committee that has not held a hearing to look into the DOE's loan programs,’ Murkowski said in a statement. ‘I'm a strong proponent of the program, but it's clear that there are some issues that need to be addressed for me to defend it.’

The full DOE loan portfolio review, from the White House, is available here.

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