made and whether you think those midcourse corrections have been useful or adequate. >> thank you, chairman bingaman. first of all, in terms of structuring the loans, there have been improvements to the structure of the loans, beginning in the middle of 2010, the department's loan agreements provided for more staging of funding and also provided that the sponsors of these projects should fund the initial stage with equity before the department of energy would be providing loan funds. so, the department would have the opportunity to view progress on these projects before the government starts putting its own money to work. we think that the terms and conditions of these loans, by and large, since the middle of

2010, in most cases, conform closely to commercial practice in the industry. in terms of the internal management, there has been a gradual evolution of the management and oversight of this program within the department of ener energy. we see that, for instance, several committees have been formed to oversee and make recommendations to the secretary about committing additional loan funds. however, in our view, there still is room for improvement, and that's why we've made these recommendations, first of all, to fully staff the loan project office with permanent professionals. there's a need for more expertise in, for instance, project finance. many of the positions are currently financed by consultants who are temporary employe

employees. we believe that going forward, there needs to be consolidated internal oversight, and very importantly, the formation of a risk management department. currently, the loan project office executive director overseas the credit department, for example, the compliance department. we believe those should be separated out and there ought to be an independent view within the department of energy about the risk that is being undertaken as loans are provided and also about the ongoing dynamic changes in risk within these loans. an independent oversight would be another check and balance. we think that position should have the ability to call for a halt in a funding until the secretary approves, if there is a different opinion between the risk management department and the loan project office as to whether that loan should go forward.

>> as i think you're aware, senator murkowski and i and other members on the committee have proposed a bill called the clean deployment clean energy administration to create an independent agency outside of the department of energy that would take over responsibility for administering loans. have you had a chance to look at that? do you think that the general thrust of that legislation would make sense as a alternative to continue continued housing of this activity in the department of energy? >> chairman bingaman, i have reviewed the legislation. i think that all can agree that there's a need for professional oversight and the use of best practices in managing and overseeing this portfolio. i think that there are several questions that i might pose.

these are more in relation to policy. again, my brief here was to do a fact-based analysis. but in answer to your question, i think that one issue is, if there is an independent agency within the department of energy who is responsible for policy implementation of this program, is it the new ceda agency, or is it the secretary? my understanding is that this agency would be completely independent from a decision-making standpoint from the secretary. so, one, i think the law should provide who's really accountable. secondly, should there be a sunset provision in this bill? the purpose of these clean energy loans is to provide funding for projects until they reach commercial maturity and funding is available in ample amounts in the public markets.

unlike many other loan programs administered by the government, which have really indefinite futures, like student loans or fha, so forth, this is intended, i believe, to be a program that would run only a certain number of years. so, perhaps there needs to be some sort of sunset provision. >> do you have anything else to add? if you did, go ahead. >> i think, too, as i read the bill, it would allow this agency to be able to borrow to fund its operations. this could mean that this agency would have not only equity, perhaps $10 billion, but indefinite funding capability. is there a possibility that it might start to grow in size and begin to crowd out private-sector financing? that's one potential risk.

could it become an independent force in and of itself? so, i think that these types of issues need to be carefully looked at before the decision would be made to go ahead. >> thank you very much. senator murkowski. >> thank you, mr. chairman. mr. allison, when we created the loan guarantee program, there were a number of terms and conditions that were inserted at implementati implementation, and i want to ask you three questions, i hope pretty brief. but one condition in the program is that there be a "reasonable prospect of repayment." in your opinion, what is a reasonable prospect of repayment? is it an 80% chance that it's going to be repaid, a 70%? is it higher, is it lower? where is reasonable?

>> senator, that's an excellent question, and we actually looked at the history of that term in legislation, and it goes back quite a long way. but nowhere could we find a definition of "reasonable prospect of repayment." >> so, how would you define it? >> well, i think that's precisely the issue, how does one define it? i would say reasonable prospect would probably mean more than a 50% probability. but others might define it as a 90% probability. and with that amount of vagueness, there is room for a great deal of controversy and second guessing about this program. so, i would respectfully recommend that there be greater clarity to these policy goal regarding financial recovery. >> but then let me ask you another one where i think we ran into a situation where there was some vagueness. another requirement was that the obligation is not subordinate to other financing. >> yes. >> i read that and it's, okay, there's no subordination there.

but apparently, there was some vagueness there. do you think that in that situation, this particular condition of the authorizing statute was vague in any way? >> yes. not being an attorney, let me say, in reading it, i think that it's quite clear to me that at the point of origination, there should not be subordination. the question is, later on, if a project runs into trouble or a loan runs into trouble, does the law allow that in order to preserve taxpayer assets, the d.o.e. have the ability to subordinate? in commercial practice, it is common that where a loan gets in trouble, in order to attract additional financing so the project can succeed, the existing lenders subordinate, they have a better chance of recovery. if the objective is recovery for taxpayers, i would respectfully submit that there are a couple of techniques widely used in the private sector that are missing,

that are not available, or at least are in doubt, to the d.o.e. and one is to be able to subordina subordinate, because at least you'll get something back on the investment, perhaps. and second is to be able to contribute equity or to convert to equity. and in this case, it looks like that is ruled out. i think that, if i may speak more broadly about this -- these laws confine the type of financing that the government can make, quite a bit, and there is virtually no up side for taxpayers if these projects succeed. there's strictly debt. there's one case, tesla, where the government did take options. apparently, the government can take equity interest as a condition for making a loan, but it can't make an outright equity

contribution. i think for early stages of investments, it might be suitable in some cases for the government to contribute equity to prevent a control issue from arising where the government controls a project. it might be nonvoting, it might be convertible preferred, something like that. so, one broad observation would be, going forward with legislation like this, there might be a wider variety of options, there might be more consideration to recovery and gains for taxpayers. if a few projects were to pay off a lot, that might help to pay for any losses in the portfolio in other projects. >> let me ask you one more, then, and this is a requirement to "provide an amount sufficient to carry out the project." it's got to be pretty difficult to determine the overall cost of a project and whether or not available funds then will be there or sufficient to cover the amount before we've issued this

loan guarantee. >> right. >> how do we finesse that one? >> yeah. well, most of the cost is going to take place in the construction phase, until this project is up and running and begins to generate revenues. and in that phase, the loan agreements provide that there must be very detailed budgets, there must be independent engineering analyses and then reports as progress goes along. as i mentioned before, there is phased funding, so certain benchmarks and milestones must be met before funds are advanced by the federal government. >> is that happening now? >> yes. and so, that -- it's easier to estimate the cost. there still may be overruns, and most of these loans provide for some cushion in case of overruns. that's built in. there is, to our understanding, frequent reviews of progress in all of these projects.

what is the unknowable is, once these projects are operating, especially those without a power purchase agreement, which is pretty much a guaranteed source of revenue for the entire project, the capacity going forward -- in the case of the manufacturing ventures, they have no power purchase agreement. they have to sell into the market. how well they will succeed in a dynamic, highly competitive market -- for instance, for electric cars -- that's open to question. that's why we divided up the portfolio the way we did into utility power purchase agreement type financings to the n nonutility loans, including manufacturing of electrical components or cars, for example. and then ford and nissan, which is a large component of the whole portfolio, those are investment-grade credits. so, we treated them differently. those are easier to analyze.

so, much of the risk, i would say, in the portfolio, is in these nonutility manufacturing companies. >> senator stabenow. >> thank you, mr. chairman and mr. allison. thank you very much for your analysis. it's very helpful to us. as someone who was deeply involved in authoring the advanced technology vehicle manufacturing program, or section 136, working with our chairman, at the time when we put that into the energy bill, there were a number of things that were happening in terms of the credit markets. but also, we were in the legislation, the energy bill in 2007, we were raising the fuel efficiency standards and encouraging more smaller, fuel-efficient vehicles. and i was extremely concerned at the time that that production would go overseas if we did not in some ways support retooling

our plant. so, that's how we came up with this particular program. and in fact, it has done what we wanted it to do, at least at the beginning. i mean, it's stuck at the moment here. but when we look at ford motor company retooling their michigan assembly plant in wayne, michigan, saving 1,900 jobs, they're actually bringing jobs back from mexico now related to that operation, as are a number of other operations. so, first, i would just as a statement, mr. chairman, when we look at a global economy where germany, china, india, japan, every other country wants to do manufacturing, advanced manufacturing, so that they have good middle-class jobs, they are all providing support in some way for financing tax incentives and so on. and at least as it relates to the atvm program, that's very much what the goal of that is, is to make sure that we are providing that support to keep jobs here in america.

what would you recommend to make this retooling program more effective at this point? >> first of all, i would point out that these programs are intended to encourage risk-taking. that's the whole point, really. and so, having risk in the portfolio is understandable. i think what is important going forward is to make sure that this portfolio is well managed by professionals, that there is independent risk oversight of this portfolio, that there is ample public reporting on each of these projects and how they're doing, so that the public and the congress is kept well informed. and while these programs are being managed, again, there is some room for improvement. and i think that with the

recommendations that we are putting forth, if those are adopted, i think that this portfolio can be very responsibly managed going forward. >> well, speaking more about the risk, because i know there's a concern and there's been criticism related to the amount of risk that the department has taken on the loans and the loan guarantees, but i find it interesting that your report suggests that some of the risk associated with loans has actually gone down, and particularly, again, with the retooling, the manufacturing retooling loans. in particular, you calculated the risk associated with the ford retooling loan and nissan, had decreased by 95%. >> that's right. >> and now, i would suggest it's in part because companies like ford are making fuel-efficient vehicles people are buying. consumers are buying, it's doing well. it's been a real success story. but i wonder if you could talk a little bit more about other reasons for changes in risk assessment that you saw in your

report. >> well, first of all, some of these projects have progressed. and you know, ford is the best example. during the height of the crisis, all the automobile companies, even including ford, which, you know, didn't need a bailout, they were also suffering during that time. and ford has staged a remarkable recovery, and that's why the debt that the government now holds from ford is rated investment grade. it's bbb today. and that has had a major effect on the overall risk composition of this portfolio. so, i think that as projects, as i mentioned in my testimony, as they progress, as long as they're progressing according to plan, the risk in that project declines. the major component of risk in many of these projects is during the construction phase, especially for the utility-related projects, because once they're completed,

they'll have a binding, long-term contract with an investment-grade utility to purchase all of their production. so, i think that, you know, again, in several years, the tenor of risk in this portfolio should be demonstrably improved, if all goes according to plan. >> thank you very much. >> senator coats. >> thank you, mr. chairman. mr. allison, i want to thank you for your work. i think it was very important. >> thank you. >> to have someone take an independent look at the situation. i guess my question goes back to the more fundamental question of what the role of government should be in something like this. we have some celebrated failu s failures, and it sours the public in terms of the use of taxpayer money when they read about these failures. we're talking about estimates of several billions of dollars of

taxpayer money. and i guess my question goes to, what is your take on the question of the government limiting its investments in the basic research and letting the private market take more of the risk in terms of the commercialization of various products and new innovations? have we learned some lessons from our efforts to direct money to specific industries and specific companies? you know, there's always the question of whether there's political influence in the decision-making process. i mean, there's some of these allegations -- i'm not going to go into them -- but allegations that on some of these loans, there were directions from policymakers at the white house or political directives coming down in terms of certain industries and so forth and so on. are we just, and now we're talking about better management of the process, but is the basic process broken to start, have a

fatal flaw to start with? could you just give me your thoughts on that? >> senator, thanks for the question. that a very important question, question. i'm a big believer in the capital markets having spent most of my years of my professional career in the capital markets. i think that if we look back in history here and i'm sure you are well aware of this, the energy field and many other fields like medicine, et cetera, transportation, the federal government played an important role in getting projects off the ground to the point where they can stand on their own. if you look at the space program now, we're starting to see commercial launch companies coming in to effect and into operation. but the government had to fund the initial stage. and the same with most forms of energy. nuclear energy is a great example as well. i think so where there's a policy need, and this is where, of course, the senate and the

house of representatives have to make the decisions, there may well be a legitimate role for government financing. i think, however, the financing needs to be tailored to the policy goal and to the risk characteristics of these projects and to where possible provide mechanisms for taxpayers to benefit if projects are successful with federal money. i do think that there is the so-called valley of death in various phases of financing for, say, clean energy where the government can play a constructive role. these projects need to be carefully researched and they need to have financing structures that protect taxpayers. and there ought to be a earliero these types of programs which are intended for a specific purpose for a certain period of time until the industries mature.

>> well, i think your recommendations, should we go forward on the basis of what you just said, would be helpful in that regard. it concerns me when i read that inability to track the necessary people, necessary skills and experience in order to work in the public sector, to make these types of evaluations particularly when they're using someone else's money. when you're making these evaluations in the private sector, bottom line is what ultimately counts. and so, therefore, i think this naturally would get a much keener and sharper look at and due diligence before you can commit the funds. and secondly, it's outside the political process. and, you know, there's responsibility here that falls on both sides for some of these programs in terms of we continue to read about the political influence directing things the wrong way. for instance, stepping out of this field into another, i remember talking to the head of

nih and he said if congress wouldn't direct how we allocate our money, we could be making breakthroughs in life threatening illnesses that are very, very close but congress keeps telling us, no, you have to put the money somewhere else. it's just -- i'm afraid part of the beast here that exists from a political standpoint in terms of our thinking that we are responding to constituent requests or whatever that we have a better ability to direct where the funds go than the private sector does. and that's where i think we get in trouble. my time's expired. i just didn't really come to preach. you do come out of the private sector. i think you're evaluation of this is important for us to hear. >> senator, may i ask -- >> go right ahead. >> on your final points,

senator, that's why i think it's important that these programs be reviewed periodically to see whether they're still relevant and ideal for the current climate and the objectives that are being sought. i think in terms of making sure that there's professional staffing. as we pointed out, there is no provision for long-term funding of the loan project office. i think one of the reasons why it's difficult to attract and retain professional talent is that people don't see that if they come into the government in one of these roles that this program will be funded down the road. it's funded now out of origination fees. so as loans are closed, funding comes into the department of energy that underpins this loan project office. but once the origination stops, that funding dwindles. this program has loan thats tha

going to be out there for 20, 30 years. it's going to take active management for the whole time the government holds the loans. decisions will have to be made all along the way. so to tract people, i think they need to have assurance that funding will be there, otherwise, why should they join up and oversee this program? [ inaudible ] >> you're talking about sunsetting the amount of commitment. >> well, what i'm talking about, senator, is that if you have an on going program where you're going to be making loans over time. then i think you need to think about having a sunset provision. when do we stop making new loans? when is the private market able to finance these types of projects without government

assistance? but once long term loans like these are made, they're going to have to be administered. now as we point out, one consideration should be should the d.o.e. sell off these loans once they're matured and there is a public market for them? should they sell them off or hold them? we presume they're going to hold them for many years. if they're going to hold them for many years, there's going to have to be professional oversight to make sure that the taxpayers are being protected. >> thank you, mr. chairman, thank you for your good work. it seems to me that as you drill into this and look at the various kinds of loans, you come to the conclusion that not all energy loan guarantees are created equal. and you then compare that to the statute, the loan guarantee statute which basically lumps

everything together. you say that looks like that's what the congress ought to be doing. you made a number of constructive comments that attract my thinking. if there is private sector investment, for example, that signals a message that people can feel more confident that this is something that can work. utility-linked loans, for example, which the pacific northwest, as you know, has been very interested in, utility-linked loan insures that you already have a customer lined up. you have a customer lined up from the get go which also should give a measure of confidence.

my question is would it make sense for the congress to really step back now and set up different categories that recognize fundamentally different risks to the taxpayers? and you measure, for example, something that would insure that there was a market from the get go. that could be one category. something else which was exciting and promising but didn't have the same level of support be a different category. my question to you is, would it make sense to restructure the loan guarantee statute along the lines of recognizing different risks to taxpayers?

>> senator, i think that's an excellent thought. i think you do have a wide variety of loans in this program. there needs to be great clarity about the purposes of the programs as a whole and what they're designed to achieve. one of the causes of controversy about this program is that there are differing expectations about what this is supposed to be doing. i think your question hits on that. and you could have some programs like the utility length loans where the risks are much better understood, where you have much less risk once these projects are built. there are risk