DOE

Hillary Clinton's use of her personal email account for official government business has been all over the news lately.  The concern is that the approach escapes the normal channels of accountability regarding official government business, and makes it much more difficult to protect government records for historical purposes.  

If an email is sent from a private address, does it make a noise?

Clinton is not alone.  Jonathan Silver, the former head of DOE's Loan Programs Office, did too.  He was clearly not as high up in the Obama administration as Secretary Clinton; and unlike Clinton, he seems also to have used his DOE email address.  Nonetheless, Silver did oversee the granting of some of the largest non-bailout loans to individual private corporations in US history.  And, like Secretary Clinton, he had a penchant for using his private email a lot. 

Great investigative work by Carol Leonnig and Joe Stephens in the Washington Post back in 2012 highlighted the issue.  They wrote that Silver frequently reminded staff not to include personal emails in DOE correspondance for fear of making the account subpoenable.  But it seems that if one just used private email, without having it appear alongside DOE addresses, that would be fine.  Indeed, he often relied on this less visible method for his own key correspondence.  Leonnig and Stephens: 

Silver repeatedly communicated about internal and sensitive loan decisions via his personal e-mail, the newly released records show, and more than a dozen other Energy Department staff members used their personal e-mail to discuss decisions involving taxpayer-funded loans as well. The Washington Post received the e-mails from Republican investigators on the committee.

"The frequent use of non-government e-mail accounts and the contents of e-mails leaves little doubt that DOE officials participated in an intentional effort to shield their communications from legal scrutiny and the public," committee Chairman Darrell Issa (R-Calif.) and subcommittee Chairmen Jim Jordan (R-Ohio) and Trey Gowdy (R-S.C.) wrote to Chu.

You can review examples of Silver's emails here.

And although the impetus for this Congressional review was concerns over loan guarantees to solar projects, most notably to ill-fated Solyndra, the problem is hardly isolated.  In terms of program risk to taxpayers, the  massive loan to the Vogtle nuclear plant in Georgia is the Mother of All Solyndra's.  With taxpayer exposure topping $8 billion, it is clearly a critical deal to review. 

And review it, I have.  As part of a project with the Southern Alliance for Clean Energy, I went through thousands of pages of documents and emails related to the Vogtle loan guarantee submission and evaluation.  These documents saw the light of day only due to roughly ten separate rounds of FOIA requests over multiple years -- submitted by SACE and the Emory University School of Law’s Turner Environmental Law Clinic . 

Yet the released information had very little linked to Silver's private email.  One can only speculate on why that correspondence was left out, and what important information related to the Vogtle deal we may be missing.  

Taxpayer exposure on Vogtle - some troubling trends

So how's the program doing?  Will taxpayers or others ultimately bear a heavy financial burden because of poor accountability on the review and pricing of massive federal credit support to Vogtle reactors 3 and 4?

If you ask DOE, their loan program overall is going swimmingly well.  In their November 2014 progress report, the Office of Loan Programs' current director Peter Davidson noted that loss ratios are low, and interest and principal payments are running above losses.  Many of the principal payments are back-loaded, so we shall see.  And interest, even if repaid, is still provided at a significantly subsidized rate for many of the borrowers. 

What about the Vogtle loan itself?  The trends don't look very good, actually.

• DOE determined the credit risk on $6.5 billion in government loans to Southern Company, the largest investor in the new Vogtle reactors (through its Georgia Power subsidary), was zero.  It is hard to imagine Peter Davidson's former employer, Morgan Stanley, reaching a similar decision.  The advance credit subsidy fee was one of the key risk management tools available to the Department to reduce losses.  By setting the credit subsidy figure to zero, DOE greatly increased the likely magnitude of taxpayer loss on this deal and established a bad precedent for future solicitations.  The irony here is that they didn't need to give the loan at all and the plant would still have been built:  Southern had said multiple times that they could proceed without the federal credit support. 
  
  If DOE staff were confident in their decision, one would assume they would be proud to demonstrate its basis.  No such luck:  DOE has blocked repeated attempts to get detailed information on how they concluded that zero credit subsidy assessment was warranted. 
• Cost of the project has ballooned to as much as $18 billion and counting, and battles over who pays for the overruns are heating up.   The project's problems (likely in conjunction with a softening market for power) has led Southern Company to delay a second reactor project. 
• Southern Company CEO Tom Fanning sold the vast majority of his shares in the firm last fall, according to Barrons.  This was years prior to the expiration of the associated options.  He sold 275,600 shares in January 2014, and an additional 1,049,185 in September.  At that point, he had less than 40,000 left.  A spokesperson for InsiderInsights.com, a firm that tracks trading activity by corporate insiders, viewed the sales as "bearish" and suggested people avoid the stock.  The sales subsequent to DOE approval of a zero credit subsidy fee; in excess of historical sale patterns; and leaving only a tiny stake in the firm he is in charge of are all problematic.  Sometimes such a pattern precedes CEO replacement or retirement.  In this case, however, Fanning is still there. 
• While nukes were always sold as expensive to build but cheap to run, turns out they may not be very cheap to run either.  Exelon has taken the lead among current reactor owners in begging for alms in order to keep their plants on line.  And the alms, apparently, are quite substantial.  Tim Judson of NIRs has a good summary here.  Of course, these reactors have all been subsidized their entire lives, so perhaps begging for taxpayer handouts comes naturally.  They were subsidized when they were built; when they were deemed uncompetitive during power deregulation; for their accident risks, their waste management, and their accruals for plant decommissioning.  The list goes on.  But a key point is that if even the old reactors that have already paid off their capital can't operate competitively, what hope does a bloated Vogtle 3 & 4 have with cost recovery hurdles continuing to rise?

So how will this play out?  Southern Company rate payers are already feeling the pinch.  SACE notes that:

Georgia Power ratepayers are currently paying an additional over 9.4% on their bills for the Nuclear Construction Cost Recovery (“NCCR”) Rider due to anti-consumer state legislation passed in 2009 to incentivize building new reactors. Since 2011 customers have paid over $1 billion since the Company began collecting the NCCR tariff for financing costs and taxes that would normally be recovered over the normal life of the facility.

Oh, and if I were one of the town administrators in the Vogtle service area who had signed on to one of the take-or-pay, hell-or-highwater power purchase agreements for power from Vogtle 3 and 4, I would be starting to sweat.1

• 1Here's some representative wording for MEAG: "The Conditional Commitment provides that the Project Entities will be the borrowers of the Guaranteed Loans. On or prior to entry into the Definitive Agreements, MEAG Power will enter into a take-or-pay, "hell or high water" power purchase agreement with each Project Entity for all of the power, energy and other services generated by such Project Entity's ownership interest in Vogtle Units 3&4. These power purchase agreements between MEAG Power and each Project Entity will be "back-to-back" arrangements requiring MEAG Power to make payments to the Project Entity to the extent that MEAG Power has received payment under its corresponding power purchase or sale arrangements."

DOE has recently unveiled a price comparison tool to illustrate the reduction in fuel costs experienced by owners (or future owners) of all-electric vehicles.  The screen compares the expensive cost per gallon of regular gasoline to the much cheaper energy equivalent in electrical power needed to move a vehicle the same distance.  The intent of the tool is a good one, and, in fairness, DOE's methodology does seem to accurately portray the comparative cost per gallon to the end-user.

Part of the cost savings is simply avoiding user fees to fund roads

That said, quite important information is missing and should be added.  "Free-riding" is an economic term that describes consumers who use a good or service without paying a fair share of the costs associated with making that good or service possible in the first place.  Jumping the turnstiles on a subway is a common example given, since the incremental cost of that one rider is quite low (often quite close to zero) -- but if lots of people jumped the turnstiles, the ability to repay the fixed costs on the subway infrastructure and related employees would be severely compromised.

Enter eGallon.  Electric vehicles, just like their gasoline counterparts, are using roads and highways.  Yet, while gasoline vehicles pay billions per year in taxes (26.4 to 71.9 cents per gallon of gasoline according to July 2013 data compiled by the American Petroleum Institute, a trade association), all-electric vehicles play quite close to zero. 

The vast majority of the taxes collected on conventional motor fuels goes to build and maintain roads -- funding the infrastructure that all drivers use.  On paper, some gasoline taxes do go to other, non-road uses (such as to fund mass transit). At the same time, however, there are large financial flows into road building that come not from user fees but from general tax revenues or other mechanisms such as tax-exempt road bonds.  These flows are so large that, on a net basis, the current levels of gas taxes going to all uses are well below what is needed to support road construction and maintenance alone.  Thus, attributing all gasoline taxes to roads is a quite reasonable simplifying assumption for the comparisons shown in the table below.

Sales tax exemption for electricity consumption is a big subsidy to the power source

What about taxes paid by electricity consumers?  Again, in principle, these would reduce the distortions in DOE's comparisons because some taxes would be captured for both fuels.  In practice, however, there is not likely to be much of this going on.  An Earth Track review of fossil fuel subsidies in five US states found that in most cases electric power consumers paid no taxes at all on their consumption even when there were wide-reaching sales taxes on other goods and services in the state.  This exemption, often available to commercial and industrial power consumers as well as residential, was among the biggest state subsidies to energy uncovered by our review.  The lack of any tax on electricity means that electric vehicles are literally free-riding on highways, at least for now. 

Even with tax adjustments, there are savings from eGallons relative to gasoline gallons.  But as shown in the table below, tax avoidance is a material component of the savings presented by DOE.  On average across the country, avoidance of state and federal gasoline taxes comprised more than 20% of the cost differential for July 2013.  In some states, such as California, this rises to more than one-third. 

eGallon should differentiate between tax avoidance and real savings

DOE ought to update its display so the differential contributions to our road transport system are visible in their comparisons.  For now, the importance of this change is accuracy in messaging; the impact on highway funding from electric vehicle avoidance remains low due to the small fleet of electric vehicles presently on the road.  But as the number of eVehicles using eGallons continues to rise, ways to ensure these drivers contribute equitably to the highway system they rely on will be needed.  And having DOE update its eGallon calculations now will also ensure that the growing number of states starting to charge annual registration fees to electric vehicles owners to recoup lost road tax revenues will be properly reflected in their comparisons as well.

State and Federal Gas Taxes Comprise a Material Share of eGallon Savings Relative to Gas
($/gallon unless otherwise noted)

Those of us who have been railing on the government's increasing push to make massive loan guarantees available to individual energy firms are not surprised to see the first major bankruptcy.  Solyndra went down with $535 million in federal guarantees for lots of reasons.  The marketplace is increasingly competitive.  Power prices have fallen due to recession and fracking-induced reductions in the cost of natural gas.  China subsidizes its solar production, artificially manipulates exchange rates, and there is a growing supply overhang as PV subsidies in Europe get cut.  New technologies look to be better than Solyndra's.  John Hudson in The Atlantic's blog provides a nice overview of the political hemming and hawing as the parties try to frame the issue to protect their interests. 

Though all of these reasons are plausible contributors to the demise of Solyndra, they are hardly surprise risks.  Operational problems, competitors, changes in market conditions:  all are baseline risks for any type of new investment that a venture capital firm might take on. 

The difference isn't the nature of the risks, but rather the nature of the investor -- the federal government, straying far from its domain of demonstrated competance.  This is the core issue I see in the Solyndra situation, but one that seems to be getting overlooked.  The Title 17 loan guarantee program, in all of its various forms including a swath of more recent even larger plans to have a federal "Clean Energy Bank", is poorly structured to achieve success.  It puts a handful of largely invisible bureaucrats and advisors in the position of making unprecedented wealth transfers to fund high risk private ventures.  That last sentence alone should have been enough to doom the program by both the Bush administration (that passed it) and the Obama administration (which has been approving most of the lending commitments).

Yet there are other program weaknesses as well, compounding the barriers to success.  The risk assessments are not subject to much disclosure or vetting on the outside, and the payments from funding recipients (in the form of credit subsidy assessments on borrowers) are widely recognized to be well below the market value of the credit guarantees.  Thus, the riskier the venture, the better the federal guarantees look to the firm, dramatically increasing the adverse selection risks of the resulting portfolio.  Yes, I know -- there is government review of the deals to alleviate those risks.  But this is done by people with only their goodwill to rest upon; they have no personal financial risk bound up with making a good selection, may not always have the appropriate technical expertise, and have limited time.  And because the financial benefits from getting one of these loans are so high, the government review team is arrayed against the best talent money can buy.  There may be conflicts of interest as well; it is really quite hard for the public to know at this point as many of the key decision makers and reviewers are not named.

The structure of this program has many red flags indicating a high risk of failure and corruption.  Other than scoring political points, it hardly matters that a solar firm is the first one to go down.  The Vogtle nuclear reactor loan guarantee is roughly 16x larger, and was done at terms based on market structure prior to Fukushima.  Anybody want to bet on the default risks for that one as the operating requirements for reactors get ratcheted up in response, and natural gas plants continue to undercut everybody's pricing? 

Back in 2007 DOE was taking comments on their notice or proposed rulemaking (NOPR) for Title 17.  I put in a number of comments on program structure, which, as far as I can tell, were entirely ignored by DOE.  The Department focused instead on the comments from the big investment banks that would be financing these deals.  Lehman Brothers and Merrill Lynch, neither of which exist any longer, comprised a two of the six financial institutions that banded together to submit joint comments on how the multi-billion dollar loan guarantees ought to be structured to work for the banks.  Citi, Goldman Sachs, and Morgan Stanley, all of which went through dramatic restructuring and public bailouts, made up most of the rest.  Their comments resulted in even more generous terms for borrowers, and weakened checks and balances for taxpayers.  Below are some excerpts from the comments I submitted.

The NOPR did not go far enough in outlining how DOE would ensure non-political allocation of resources and protection of taxpayer capital. Many of the ways these issues were addressed in the current version were mostly descriptive in nature, leaving too much guesswork about how actual implementation and institutional oversight will proceed.

...

A combination of wide latitude in determining project eligibility to participate in funding rounds with imprecision on how performance "improvement" will be measured create the conditions for skewed and politicized distribution of billions of dollars in guarantees. These conditions bode poorly for the long-term success of this program.

...

DOE acknowledges wide latitude in targeting loan guarantees and acknowledges they are under no obligation to run open contests across all energy sources authorized under Title XVII of the Energy Policy Act. The NOPR is mostly silent on the establishment of rigorous project comparison metrics and robust institutions that would ensure the billions in guarantees are effectively targeted.

Not all energy resources eligible under the Energy Policy Act of 2005 (EPACT) are necessarily eligible in particular -- or indeed any -- funding rounds. In fact, DOE's NOPR lists specific programmatic objectives, loan guarantee authority or available funds as possible criteria by which guarantees under Title XVII can be awarded. The NOPR includes the example (p.7) of the Administration's 2008 budget that proposes $4 billion in guarantees for centralized power, $4 billion for biofuels and other clean fuels, and $1 billion for new electric transmission or renewable energy power systems. This example is an early indication of the power that the legislative or executive branches will seek to exert in earmarking funding to favored interest groups. The political influence leveraged by these groups is greatly enhanced by DOE's view that Congressional appropriations are needed to support DOE's credit authority under Title XVII, and that Congress can structure these appropriations however it sees fit. While in theory the executive and legislative branches could choose to exert their influence based on the technical merit of the projects alone, assuming they will in fact do so would be both imprudent and naïve.

The risks of political influence are further compounded by the fact that funding under Title XVII will be in the form of loan guarantees, for which valuation and transparency are far more difficult to attain than with direct payments. In addition, recent mandates to publish legislative earmarks (albeit only partially effective thus far even for direct payments) would not seem to apply at all to Title XVII loan guarantee decisions.

By the time the larger lending proposals under CEDA started to surface in 2009, I was a bit more blunt in my concerns about corruption:

CEDA risk profile likely to be far more concentrated than conventional banks, increasing potential problems with systemic risks and corruption. The multi-billion dollar scale of centralized energy technologies suggest the size of the credit commitments for individual projects under CEDA will be far larger than undertaken in other areas of federal credit  guarantees. This opens the initiative to higher systemic risks and potential corruption.

It will be interesting to see what surfaces in the FBI review of documents.  It's a pity we can't learn about potential political influence on the nuclear deals at the same time, but Congressional sources tell me it is not about to happen.  At least the Solyndra failure can serve as a wake-up call on the incentive problems for these mega-lending initiatives, and help us avoid far worse financial blow-ups were we to have followed industry's lead in ramping up lending to nuclear or establishing a large scale "green energy bank" such as CEDA.

UPDATE, September 19th.  Michael Grunwald at Time Magazine has a nice overview of the problems with shining a light only into a small part of a big swamp.  Focusing on Louisana Senator David Vitter, Grunwald documents how Vitter's bill to increase scrutiny only of loan guarantees to renewable energy projects side-steps Vitter's own efforts to bring home the loan guarantee pork to his own constituents -- including for renewable energy projects.  We've got systemic problems here, and piece-meal solutions generally just shift the problem rather than solve it.

Tomorrow's event (November 30th), titled Department of Energy Loan Guarantees: Should Taxpayers Bear the Risks for the Energy Sector with Loan Guarantees? A Conservative Take, looks to be an interesting one tomorrow.  The discussion brings together panelists from the Heritage Foundation, the National Taxpayers Union, the Competitive Enterprise Institute, and the Nonproliferation Policy Education Center to provide views on multi-billion dollar loan guarantees to conventional and renewable forms of energy.

While conservative groups generally support property rights and competitive markets, some of the participants have also opposed elimination of subsidies to favored energy industries in the past.  Hopefully that is now changing.

More information and registration information can be accessed here.

Update:  See a December 8th joint letter issued by most of the organizations involved with this event encouraging Congress not to increase the loan guarantees to new nuclear power plants.  The letter notes that

Putting the full faith and credit of the U.S. government behind costly, risky projects that the private sector won’t finance is fiscally reckless and politically unwise. Because of the size of these nuclear reactor projects, taxpayers stand to lose more on these than any other Title XVII loan guarantee. Congress must face the reality that loan guarantees are anything but “free money” or a wise expansion of government authority and oppose further expansion of this program.

The Heritage Foundation was the only organization participating in the November 29th event that did not sign the letter.  No reason this is given on the Heritage or Taxpayers for Common Sense websites. 

In April of this year, Jack Spencer of Heritage clearly stated in Congressional testimony that these energy loan guarantees are both subsidies and distort market behavior in many unhelpful ways.  He supported more stringent guidelines on nuclear loan guarantees, as well as caps on the total taxpayer exposure.  However, he appears to support a substantially higher cap on loan guarantees to nuclear than the other groups, and this may have been the basis of disagreement.

Keith Schneider at Circle of Blue, wrote a very interesting summary of a Sandia National Laboratory report on water consumption for energy production that has been, shall we say, "held up" within DOE despite 22 rounds of revisions.  The report is a more detailed follow-up of an earlier Sandia Report to Congress -- a document that, based on conversations I had with people involved back then, also took a great deal of cajoling before it could be released.   

Water consumption and pricing to the energy sector is something that I think is a big deal (see a related post from last year).  The power sector uses as much water as the agricultural sector in the United States.  Yet in doing research for an upcoming review of subsidies to the nuclear fuel cycle, I contacted some of the top water policy experts in the US looking for data on how much the utilities paid for their use of cooling water.  With the exception of one or two sites using some municipally-provided water or wastewater for cooling, I could find none. 

Sandia's Report to Congress focused on consumption rates and technical solutions, rather than economics.  I don't think you can get the former without fixing the latter.  If a plant gets its water for free, or nearly so, we shouldn't be surprised that they use so much of it, or that they aren't particularly interested in cutting way back on consumption.  The inputs they have to actually pay for will always trump the free ones for management time and capital investment.

Schneider notes that

...a number of clues are contained in a March 2007 Sandia National Laboratories paper that summarized the Road Map’s contents. The paper, prepared by Hightower and three colleagues—Ron Pate, Chris Cameron, and Wayne Einfeld—makes clear that any number of executives in the coal, nuclear, oil, solar thermal, and biofuels industries, and their allies in Congress, could be unhappy about the report’s conclusions. The Sandia paper essentially asserts that the United States quickly needs to reconsider and realign much of its energy production policy and water management practices in order to avoid dire shortages of water and potential shortfalls in energy. None of the big energy production or large water use sectors will be left untouched, the paper indicates.

If I were an investor in a new water-intensive energy plant, getting real information on water scarcity, regulation, and pricing now would seem a huge plus.  It would be much better than sinking a few billion of capital into the plant then seeing my production costs surge a few years out as a price for water finally takes hold.  

Schneider points to Samuel F. Baldwin, chief technology officer in the DOE Office of Energy Efficiency and Renewable Energy, and Nicholas B. Woodward in the DOE Office of Science, as the two primary reviewers, and the main bottlenecks to releasing the work.  Maybe it is time for them to make revision 23 the magic number; or to formally, and in writing, list the core deficits for which they are blocking the release. 

(Thanks for Ron Steenblik of OECD for making me aware of the Schneider article)

It is hard to imagine the executives of a public company extending an $8.3 billion line of credit to a risky new venture, and then be unwilling to provide any detail to shareholders on how they evaluated the benefits and risks of the deal, and what they were expecting to get paid for taking on that risk.

Yet, this is effectively what the US Department of Energy has done for an $8.3 billion loan guarantee package to support the construction of two new nuclear reactors in Georgia.  We know that DOE is required by statute to have gotten an independent assessment of the project risks without guarantees, yet no details on who did that analysis (to gauge their reputation and potential conflicts of interest) or its findings have been released.  

A key element of the loan guarantees relates to the size of the expected "credit subsidy" that the borrower is expected to prepay to the government.  (This metric is supposed to assess expected losses relative to the "risk-free" government cost of borrowing; even with no default, the utilities will recieve very large subsidies relative to the private borrowing rate on the proposed projects). DOE, with a strong goal of pushing loan guarantees out the door, has an incentive to down play the risks of initial guarantees.  Since actual risks will become evident only years from now if the projects start to veer off course (as has occurred with new reactors in both Finland and France), understating risks now increases the benefits to borrowers, expands the number of deals DOE can do with its pool of capital, and delays the day of reckoning. 

Taxpayers have exactly the opposite interest, since the point of greatest control over our ultimate bailout tab is in the terms of the initial guarantees, and whether or not to extend the credit at all.

In March, a group of environmental groups issued this letter as a followup to a number of freedom of information act (FOIA) requests that DOE had effectively ignored.  Here is one of the rejections to an NRDC request as an example.  The goal of the FOIA's was to obtain the necessary detail on the loan agreements with which to assess the quality of DOE's due diligence, and their assumptions regarding the risk of the loan. 

DOE's Office of the Loan Guarantee, under the Executive Directorship of Jonathan Silver, has continued to release nothing.  As a result, the Southern Alliance for Clean Energy has moved from FOIA to litigation in an effort to ensure transparency and accountability in this massive lending program.   It is surprising that these actions have not yet engaged the imaginations and lawyers from groups focused solely on good governance and fiscal controls.  There are clearly important principles at play that will affect government accountability well beyond the energy area.  This is well illustrated by the conflict between DOE and the Office of Management and Budget on the proper way to calculate credit subsidies, though I've seen little in the public sphere since this article late last year. 

With total energy loan guarantee commitments reaching $111 billion, and much more on the way if the administration is successful, the scale of this program certaintly warrants attention even by those concerned only about the fiscal rules by which our government operates.