Loan probe predicts $3B in losses, less than Congress expected
Source: John McArdle and Gabriel Nelson • E&E • Posted: Monday, February 13, 2012
The Obama administration was quick to note today that the loan program was always designed to provide funding for promising projects that could not otherwise get funding from the private sector.
Even $3 billion in losses would wind up far below the $10 billion that Congress set aside to cover potential risks when it established the green energy loan initiative. It is also well under the $5 billion risk assessment that DOE originally made for its $23.8 billion portfolio.
“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 billion in interest,” Energy Secretary Steven Chu said today in response to the report’s release.
The new study by former Treasury Department official Herb Allison, who was tapped to review the program by the White House at the height of the Solyndra controversy last fall, shows that the level of risk associated with the 30 loans in the portfolio has changed substantially since they were originally given their government backing.
Almost all the improvement in the portfolio’s total risk comes from two loans to Ford Motor Co. and Nissan.
Allison found that those two loan guarantees have seen their implied credit subsidy cost — a measure of the likely losses from the federal government making a guarantee to backstop the private loans — plummet by 94.5 percent from just above $3 billion down to $166 million. That means they are far less risky today than originally thought.
Loans without a link to a utility company, such as the one made to Solyndra, as well as several other solar manufacturing companies and startup car companies, made up the smallest share of the portfolio. But Allison found those loan guarantees have become substantially riskier since they were made.
Their implied credit subsidy cost has risen 71 percent from DOE’s original estimates, putting taxpayers on the hook for about $820 million, as well as any losses from Solyndra’s bankruptcy. But while the loan portfolio is less risky overall today, Allison pointed out several red flags in his report, such as concentrations of companies with similar risks.
For example, seven projects in the portfolio are highly susceptible to fluctuations in the price of photovoltaic panels. Three projects currently rely on the same company, First Solar, to produce their solar panels, and two rely on U.S. EPA mandates regarding cellulosic ethanol to establish a market for their product.
Allison said in his report that his projections of potential losses in the DOE portfolio depend on a number of assumptions that will fluctuate over time.
“More important to the ultimate performance of the portfolio will be DOE’s management of it going forward. DOE must be an active manager continuously monitoring the projects, their market environments, and other identified risks to the Portfolio and seizing opportunities to contain taxpayers’ exposure to loss,” he wrote.
And in a comment sure to be picked up by Republicans who argue the entire program has been motivated by the administration’s green agenda, Allison wrote, “DOE should better define the desired balance between policy goals and financial goals.”
Hill reaction
Allison’s review was treated as good news by the White House and Democrats on Capitol Hill.
“The report confirms that the overall loan portfolio as a whole is expected to perform well and holds less than the amount of risk envisioned by Congress when they designed and funded the program,” White House spokesman Eric Schultz said today. “While the portfolio includes loans to a range of projects that carry different levels of risk, today’s report finds that the Department of Energy has been judicious in balancing these risk.”
But Republicans on the House Energy and Commerce Committee, who have led the investigation into Solyndra’s failure, said the Obama administration is just now “overcoming denial” about the loss of taxpayer money.
“It would be a stunning case of bureaucratic disregard to declare victory because the government is expecting to lose ‘just’ $3 billion,” Chairman Fred Upton (R-Mich.) and Oversight Subcommittee Chairman Cliff Stearns (R-Fla.) said. “One key lesson is that taxpayers should not have been placed in the position to lose one dollar, let alone billions, all because the stimulus allowed companies with shaky finances to apply for and receive taxpayer support without putting up any money.”
House Energy and Commerce Committee ranking member Henry Waxman (D-Calif.) said Allison’s report shows the DOE program is working.
“The report is a repudiation of the partisan attack on the program by congressional Republicans and the oil and coal industries,” Waxman said. “I hope Republicans will stop insisting that the U.S. cannot compete in these industries of the future and join an effort to promote U.S. manufacturing, increase our energy security and protect our environment.”
Senate Energy and Natural Resources Committee ranking member Lisa Murkowski (R-Alaska) said the report makes clear there are flaws in the loan program that need to be addressed. She again called for Senate hearings on the program, and Chairman Jeff Bingaman (D-N.M.) said he would invite Allison to appear next month — though he cautioned that no Solyndra-specific “investigation” would be in the offing (see related story).
“We have Secretary Chu testifying on his new budget proposal [on Thursday]. … We need to hear from him and understand what additional steps we might take,” Bingaman said. “Clearly, everybody wants the loan guarantee program to work the right way, but we don’t want to waste taxpayer money at the same time. As far as I can tell, they had professional people making judgments on the basis of the information they had. We can now with 20-20 hindsight say they made some mistakes and perhaps committed money to a company they shouldn’t have committed money to.”
Continued funding for the loan guarantee program has been no sure thing in the post-Solyndra political environment. Some conservatives have called for defunding it as they have accused the government of “picking winners and losers” in energy.
But “compared to the potential for greater losses if the Portfolio is not managed closely and competently, the cost of adequate management and oversight will be small,” Allison wrote.
Differences in the portfolio
Clean energy advocates, who have bristled at the attention paid to Solyndra, claimed vindication today as the report suggested that the program is less risky than initially thought and is likely to lose less taxpayer dollars than Congress allowed.
Despite some high-profile failures, DOE loan guarantees paved the way for the largest U.S. concentrated solar power complex, the world’s largest wind farm and the first commercial-scale plant making cellulosic ethanol, wrote Richard Caperton, a senior policy analyst at the liberal Center for American Progress, in a blog post.
The upshot of Allison’s report is that “DOE staff have avoided exposing taxpayers to unacceptable risks,” he wrote.
Yet the risk of projects varies widely and differently from when the guarantees were first made.
Initially, DOE staff gave a credit subsidy cost of 11.5 percent to utility-linked projects, 24.3 percent to nonutility-linked projects and 41.4 percent to the Ford and Nissan loans. On average, some loans would fail and taxpayers would foot the bill for those shares of the loans.
But while the credit subsidy cost has ticked up only slightly for utility-linked projects, such as solar or wind farms that linked long-term power purchase agreements with utilities, Allison found a credit subsidy cost of 41.6 cents for every dollar loaned to nonutility-linked projects. That does not include Solyndra and its $535 million loan, which was excluded from the analysis.
Meanwhile, the risk of the loan guarantees to Ford and Nissan fell all the way to 2.3 cents on the dollar, reducing taxpayers’ likely exposure by almost $2.9 billion.
Kenneth Hansen, a partner at Chadbourne & Parke LLP who has negotiated DOE loan guarantees on behalf of solar and wind energy companies, said the sharp decline in likely losses from Ford and Nissan reflects that the auto industry has gotten back on track.
He said the report also shows that manufacturing projects, such as Solyndra and Beacon, are innately riskier than the projects linked to utilities.
While a long-term contact with a utility ensures that a company gets paid unless it does not deliver, a manufacturer can lose out when market forces change — or when “somebody else builds a better mousetrap and nobody wants your photovoltaic panels or batteries anymore,” Hansen said.
The lawmakers who created the loan guarantee program recognized that the portfolio would include projects that are more and less risky than others, said Paul Bledsoe, the Bipartisan Policy Center’s senior adviser on energy issues.
“Congress, while cognizant that some level of loan failure was inevitable, also recognized that the efficacy of the loanmaking process will determine government liability, and so the program needs to be held to the highest standard,” he said.
Bledsoe said the most important step will be to continue strong oversight of the loans.
He said he was struck by the report’s recommendation that DOE reorganize the program and hire the first-ever chief risk officer to oversee it. That person would perhaps play a similar role to the one Allison played as assistant secretary for financial stability at the Treasury Department, where he oversaw the loans given out through the Troubled Assets Relief Program, or TARP.
Critics of the loan guarantee program had hoped Allison would write a postmortem for companies such as Solyndra. Hansen said improving the program’s oversight will be the most important step for policymakers.
“There is not much they can do about the portfolio, but there’s a lot they can do about the process,” he said.