Today the House Committee on Oversight and Government Reform, chaired by Rep. Darrell Issa (R-Calif.), released the full report on its investigation of the Department of Energy’s loan guarantee program. Readers of IER will not be surprised to learn that the report documents numerous abuses in the program, and concludes that the Solyndra debacle was not a lone “bad apple” spoiling an otherwise healthy program. In this post I’ll outline some of the report’s major findings.
Taxpayers At Risk
The most immediately troubling findings of the report concern the riskiness of the DOE’s current loan portfolio. The abuses and poor judgment of the Solyndra scandal are well-known, but the loan program has suffered other embarrassments as well. Here at IER we have detailed the examples of Beacon Power and Abengoa, which the new Committee report discusses in these terms:
The billions of dollars in loan guarantees and cash grants directed at a Spanish firm, Abengoa, reveal the excessive risks associated with directing that volume of subsidy to a single firm. Abengoa managed to obtain a DOE loan commitment for the lowest rated project across the entire DOE Junk portfolio – which received an extraordinarily low CCC rating and was still approved by DOE for a direct loan to the project. This overinvestment in this single firm will likely cause substantial harm to the taxpayer.
Beacon Power Corp, the second recipient of a § 1705 loan guarantee, paid three executives more than a quarter million dollars in bonuses in March 2010. Eighteen months later, Beacon declared bankruptcy – leaving taxpayers to repay the loan.
The report finds that the DOE’s favoritism of a particular technology yields an unbalanced portfolio:
DOE invested a disproportionate amount of its funds into solar technology leaving taxpayers vulnerable by overemphasizing a single technology. 16 of the 27 1705-backed projects employed solar technology – that represented 80 percent of DOE’s funds.
Prudent loan managers understand the value of diversification—to put it simply, they don’t put all of their eggs in one basket. Yet the DOE has effectively made a massive bet with taxpayer backing on the solar sector. Even if the loans are paid back, the backstop from the government distorts capital markets and causes too much investment to flow into this politically-favored channel.
DOE Breaking Its Own Rules
Perhaps more disturbing than the shaky condition of the DOE’s portfolio of loan guarantees is that its officials on numerous occasions apparently disregarded the safeguards that were originally built into the program. According to the report:
DOE loan commitments exposed taxpayer funds to excessive risk as a result of DOE’s bias toward approving loans without regard to warning signs. The Committee identified many cases where the DOE disregarded their own taxpayer protections, ignored lending standards and eligibility requirements and, as a result, amassed an excessively risky loan portfolio. After review of internal emails, staff have identified instances when DOE faced barriers that placed loan approvals at risk, DOE staff simply sought to justify and overcome the barriers, rather than giving the barriers due consideration…
There appears to be a significant amount of evidence indicating that DOE manipulated analysis and strategically modified evaluations in order to issue loans to First Solar that would qualify under the statutory guidelines. An application that should otherwise fail, but instead passes under improper influence and through manipulation of analysis, results in the defrauding of taxpayers and misappropriation of assets.
For a specific example, the report claims that First Solar’s Antelope Valley project involved no true innovations and hence should not have been eligible for the treatment it received. The report claims that DOE employees deliberately bent the rules and modified their assessments to maintain First Solar’s eligibility, moves that eventually prompted Director of the Technical and Project Management Division, Dong Kim, to write in a June 2011 email:
Someone keeps changing [Antelope Valley Solar Ranch] Technical slides to include single axis trackers as an innovation. Be clear that this not an innovation. The record will show that we did not grade this as innovative during intake review. It will not stand up to scrutiny if compared with CVSR [California Valley Solar Ranch] trackers. Whoever continues to make this change needs to understand that Technical does not support the 20 percent of the CVSR field with trackers as an innovative component. [Emphasis added by report.]
It would be one thing—deplorable, to be sure—if the DOE’s loan guarantee program had insufficient procedural safeguards to protect taxpayer money. However, what the new report confirms is that on several occasions—and not just involving Solyndra—Administration officials allowed certain companies to receive government assistance only by bending or even ignoring the program’s own stated rules.
The Revolving Green Door
To make sense of these abuses, it’s useful to consider the revolving “green door” that the report also documents:
[T]he Committee has also discovered the existence of a revolving door of persons who worked at green energy investment groups who were later hired by the Administration, which present significant conflicts of interest. These connections raise the specter of undue influence over the loan guarantee process.
For example, the Committee report describes the case of
Nancy Ann DeParle, the current Deputy Chief of Staff for Policy in the White House, had a financial stake in the success of Granite Reliable, which received $168.9 million loan from DOE. Prior to joining the White House, DeParle was a Managing Director of multi-billion dollar private equity firm CCMP and she both had a financial interest in and sat on the Board of Directors for Noble Environmental Power, LLC. Noble owned Granite Reliable, a wind energy project….DeParle misrepresented her relationship with Noble Energy, claiming on disclosure forms that her interest had been divested, when in fact it had merely been transferred to her 10 year old son.
By connecting the dots in this fashion, and showing why certain individuals had a vested interest in funneling taxpayer support to particular companies, the Committee report helps unravel the mystery behind the seemingly irrational behavior on the part of Administration officials.
We at IER have been warning for some time that the Solyndra scandal was just the tip of the iceberg, and that the Administration’s various efforts to bolster renewable energy technologies were riddled with economic inefficiency and outright corruption. Today’s new report from the House Committee on Oversight and Government Reform confirms our warnings.