characteristics. there may be very good reasons to be supporting early stage innovative manufacturing companies in green energy. that involves high er risk, tha ought to be acknowledged. there ought to be greater reward for taxpayers if there is greater risk. the way the program is structured is one size fits all. these are loans at government rates -- i'm not sure that in all cases they need to be at such a low interest rate. the fees that the d.o.e. can charge are very low. there is no provision for upside in terms of some type of an equity linked gain. so maybe there should be different packaging for riskier projects other than the utility

projects. >> i thank you. i thought the senator made a lot of sense when she was saying right from the get go, nobody goes into this thinking that everything is going to be 100%, you know, winner and a dramatic opportunity for creating scores of new jobs and the like. taxpayers deserve better. i think this is another area, mr. allison, i appreciate your answer where we can do better for taxpayers in this country, better for some of the most exciting and promising technologies. i see senator sanders here. he talked a lot about the opportunities and renewable energy. i think we got a chance to make some exciting changes in this country.

>> thank you very much, mr. chairman. i agree with my colleague. the taxpayers do deserve better. i appreciate your work on this. there was a section called pro actively protecting the taxpayer's interests. the d.o.e. should strengthen its position as lender and guarantor where they seek relief from requirements in the loan repayments. the secretaries argue that they didn't violate the policy act when restructuring solyndra's loan. it worked in a way that i thought put the american taxpayers at a disadvantage, that they were suborder natured to other financing. so, you know, they understand the secretary saying that the law applies to origination of loans, not to restructuring of loans. i don't agree with that

interpretation. i think they do not distinguish between origination and restructuring. would you support legislation to insure that american taxpayers will always be paid before private investors, whether it's an origination of a loan or restructuring of a loan? >> senator, thank you for your question. i think the parra mount issue is recovery for taxpayers, once these loans are made for policy purposes, based on my experience in the commercial world, i think that the -- in this case the department of energy should have some flexibility to suborder nature. that may be best twi recover some money for taxpayers. by suborder naturing, it may make it possible to tract additional funding from other debt investors which can help that project succeed. sometimes these projects are going to run into trouble. they are, after all, risky.

but that doesn't mean everything has to be lost. and there needs to be creative refinancing for projection as a way to protect taxpayers. and actually, enhance the probability that they'll get some of their money back. >> it seems to me that subordination in the case of solyndra did not work to accomplish that goal. thank you. i want to ask about bonus payments to follow up on what you said about taxpayers and getting the value for their money. several department of energy loan and grant recipients recently filed for bankruptcy. they laid off workers. they experienced financial difficulties. the media reported that several of the companies awarded large bonuses to executives and other employees but specifically the bonuses to executives as other employees were being laid off. last week it was reported that beacon power's bonuses were specifically linked to

executives' progress in landing the company's $43 million loan guarantee. so what protections are in place to make that american taxpayers don't foot a bill for bonuses awarded at failing companies? >> thank you, senator. we did not look at solyndra and beacon. we have'looked at the companies that received grants. we're only looking at the loan program. i think that it's important and the provisions in this law allow for this and the department can certainly have policies on this should be looking at all the expenses planned in these programs. and they may want to build in the capability to review, for instance, compensation programs. i'm not sure that that provision is in these loan agreements, by the way. but that's something that might be considered. i can certainly understand the

public consternation if people are receiving bonuses while a company is nearing into bankruptcy. >> so that is one of your recommendations in terms of insuring that abuses like this don't take place again? >> i think that's a reasonable idea, yes, sir. >> thank you. thank you, mr. chairman. >> thank you. senator sanders? >> thank you, mr. chairman. mr. allison, thank you for being with us. in terms of full disclosure, let me just be very clear that i happen to believe that global warming is very real. i think it is causing enormous problems to our planet today. and i think it is totally irresponsible that we are not moving as aggressively as possible to reduce green house gas emissions. i would mention to my colleagues that a few weeks ago whitehouse and i had a meeting with representatives from the insurance industry, noted as one

of the more radical groups in our society. they pointed out the enormous damages that extreme weather disturbances are doing to their bottom line because of global warming. so it is my view that our country and the federal government should be investing very, very strongly in energy efficiency and sustainable energy in order to reverse green house gas emissions and try to protect the planet. now, in a sense what we are talking about today, this is the role of government in energy. and we are focusing on solyndra and the 1705 program. but let me ask you a question which i hope you have some familiarity with. back in the 1960s and 1970s, there was a huge overbuild in terms of nuclear projects. in fact, as i understand it, about 100 nuclear facilities were terminated at huge expense

both to rate payers and taxpayers. right now, i find it a bit eye ronnic that some of my friends talk about picking winners and losers. but wouldn't you agree with me that for the last 50 or so years the united states government has picked as one of its winners a very, very risky industry called nuclear power? an industry in which -- please correct me if you disagree with me -- would not be in existence today without the very, very strong support of the federal government in terms of the price anderson insurance program and furthermore in terms of the attempt at least to get rid of nuclear waste? so would nuclear industry be in existence today if it was solely dependent upon wall street and the financial community to support them? >> senator, i'd like to respond to your question. i must confess i don't have real

expertise on that question. i think that's -- that's a very broad, deep question as to whether the government should have been sponsoring nuclear energy. i do believe as a general comment that in any industry -- >> sorry to interrupt you. whether people talk about winners and losers, is it fair to say that for the last 50 years the united states government decided that one of the winners in which we should make huge invest amenments is t very, very risky nuclear power industry? >> the only comment i make -- and this is from my own experience i can comment on this -- in any early phase of industry it's difficult to pick winners and losers. and, you know, therefore, often

you find financing for a lot of different approaches. over time, one learns a lot. >> i agree with that. the only point that i'm making is when people talk about the riskiness of certain types of sustainable energy or the problems with solyndra is it fair to say we've seen that ten times plus in terms of nuclear industry which has at certain times already lost huge amounts of money from the taxpayers of this country? is that a fair statement? >> respectfully answer, i think your next witness secretary chu is a far more qualified expert on that question than i am. >> i would say that we do pick winners and losers and the great winner in temperatures of federal subsidies is not only nuclear industry but fossil fuel industry as well. we have pumped billions of dollars into those industries.

and i, for one, think it's time to begin focusing on energy efficiency and sustainable energy. thank you, mr. chairman. >> thank you. senator lee? >> thank you, mr. chairman. thank you, mr. allison, for being here. i certainly agree that an audit of this program is warranted wholeheartedly. the real question for me is whether the government should even be playing venture capitalist with taxpayer money in the first place whether in this specific sector of the energy industry or elsewhere. i want to make clear that my concerns over the administration of the loan guarantee program should not be mistaken for tacit approval of the program as a whole. when companies like solyndra and beacon power fail, millions of taxpayer dollars are wasted. it's clear that government, in

my opinion, truly has no business being in the investment business. the parent basis for the program as i understand it, is that there are just certain types of investments that are so inherently risky that only the government can invest in them, own the government will invest in them. today you -- if i understand what you're saying correctly -- to be somewhat downplaying the risk of these investments. it seems a little bit contradictory to say that on the one hand government intervention is absolutely necessary because only the government can do this. and then also to claim that it's an appropriate risk of taxpayer funds because there are adequate safeguards in place. so which is it?

is it too risky or are the risks manageable? >> senator, thank you for your question. i think that these are policy questions that congress needs to grapple with and answer. i'm not sure that you can give a blanket answer to your question. i think -- you know this far better than i. but congress is constantly deliberating about what is in the national interest and the public interest over the long run, the payoffs such from some initiative to the public. they may not be direct financial returns but they may be social sequences, whatever, that make it worth the government's while to be involved. i think that there are up into us are areas where private financing and i'm talking about health initiatives, for example, and that's why we have nih doing research. and that's why we fund research in universities and psychics and

lots of other areas. so there may be a legitimate role for government where private financing is not available. i do believe, as i mentioned earlier, that these programs should be constantly viewed to the extent that there are programs in place to see whether they're still necessary. do they still meet that policy need? are there private alternatives available today? i believe that ultimately the best allocation of resources will take place through private interactive markets. >> part of that inquiry ought to involve the risk manageable. if it is manageable, couldn't it be manageable from a private capital standpoint? right? >> very legitimate question. >> if it's not manageable risk, then perhaps we shouldn't be putting taxpayer dollars at risk. so your report did not consider either solyndra or beacon power. and that is because, as i understand it, that's no longer part of the program. those are finished. >> senator, yeah, they were no

longer really part of the portfolio because they were in bankruptcy and eventual value would be determined in the courts and through recover. >> do you have any way of guessing how that might have affected your report? what your report might have looked like? how it might have been different had those still been on the books had those not gone through bankruptcy at the time you conducted this report? >> well, i don't need to speculate but certainly we would have applied the same methodologies to examining those loans if these companies were still not in bankruptcy. and, you know, the process that we use in each case was totally independent and we took a look at volumous information on these loans. we looked at engineers reports, radiation reports and so forth. and so we would have followed the same process there and, you know, if -- i don't want to be speculating to what we would have found.

we didn't look at those two companies. >> might this have been one of the instances which as you acknowledged in your report certain procedures weren't followed and certain documents weren't completed and so forth? >> i believe, senator, that the investigation is under wayment i don't need to be speculating about that. i have no information about solyndra that's not available in the newspapers. >> thank you, mr. chairman. >> thank you. senator frank? >> i think if i just heard senator lee correctly, he said that if a project -- if the risk is manageable, we shouldn't be putting tax dollars at risk. and if it isn't manageable, we shouldn't be putting tax dollars at risk. did i hear that correctly? i did. so, therefore, we shouldn't ever put tax dollars at risk.

n now, i agree with senator sanders. we have a global climate change problem. we had testimony from the director of the forest service the other day who said the duration of these intensity fires are caused by global climate change and it's going to get worse. we're spending more and more and more money. there is an actual cost to the taxpayer. taxpayer's money at risk because of global climate change. the bark beetle is eating more and more of our forests because of climate change, because they don't die from severe winters at certain elevations when they used to. so it's actually costing the taxpayer dollars are at risk if

we don't address this and try to get to clean energy. and so it seems to me that our tax dollars are at risk if we don't do something. and so it seems like we have to do this as smart as possible. that's what it seems like to me. so i want to follow up on senator widen's comments and questions. first of all, i just want to say i appreciate the thorough investigation you've conducted here. let me get down to something very specific. one of the most important aspects of the loan program is the credit subsidy of the loans if the cost is too high to accompany. it may not be able to seek a loan. and maybe a technology that has

a lot of promise. if it is too low, the taxpayer may not be adequately protected from possible loan default. and as you noted in your report in some cases the subsidy costs were underestimated while in other cases they were overestimated. my question is can you tell us what you observe with respect to transparency of the credit subsidy cost calculation? can the credit subsidy cost calculation for each individual project be done in a more transparent process that the public can access? >> we did look at the credit subsidy process because we had to learn it in order to make our own estimates of what the credit subsidy we think should be. like any financial model, it has

strengths and weaknesses given the intended purpose. the purpose of ficra, the credit reform act method, used in budgeting is to have a consistent approach that applies to all programs across the government. and ficra can certainly do that if, for instance, it uses the same government discount rate pretty much for all these programs. in terms of estimating the loss on these particular loans and the d.o.e. portfolio, you then have to calculate a credit rating. and because the credit rating is used to determine what the default rate is expected to be given that credit. for instance, most of these credits are single b or double b credits. and so what is done is to look at years of data across many different types of loans that are rated bb and figure out historic wla has been the

default rate? then you plug in that rate. then there is a recovery late. let's say the loan does go bad and you have to recover in bankruptcy. what has been the typical rate of recovery against the -- against the amount of the loan? and or the value of the assets? and after bankruptcy. now, the weakness in that model is that you're using indices on default rates and recovery rates that apply to a wide variety of loans that, are not particular to the idiosyncratic nature of these loans. and so there is no easy way given the novelty of these loans to calculate what the default rates and the recovery rates are going to be. and fair market value, another meth method, has some advantages. it will apply an estimate of a market rate of discount to

determine what this penalty would demand in order to purchase this loan at the interest rate that it has and get a market return, given the risk. that also has weaknesses because you can't apply that in budgeting very easily across the government because each discount rate would be different. there is a lot of contention about what is an appropriate discount rate. i think it would be hard to have a standard budgeting process. so it's very important with all these models to understand what the purpose is, what the strengths and weaknesses of the models are and lastly, don't give too much credence to these models in estimating what the ultimate loss will be, especially with loans like these that have 20 or 30-year lives that are dealing with novel technology and where the government has the ability to control the risk and the exposure in a variety of ways through the loan agreement. it doesn't have to advance all the money, for example if, the projects are not meeting their contract ual bench marks.

that's why we concluded, here are the estimates using these models as best as we can do. don't pay too much attention to them or think that we're going to lose $2.7 billion. that's not the case. it may be more. it may be less. it could be a lot less than is indicated by that number. what's important is to manage the portfolio very actively day to day. you have it. it exists. you better manage it carefully on behalf of the taxpayers and use the terms and could have nance to advantage the taxpayers. >> so my time is way up. what you're basically saying is there isn't necessarily a scientific subsidy calculation here for this subset. but the management of each

guarantee is of tremendous importance. thank you. >> senator paul? >> thank you for coming today. do you think that the commissioning of your study had anything to do with the political outcry over the bankruptcy of solyndra? >> senator paul, i couldn't speculate on that. >> were you commissioned after it became public that solyndra was going drupbankrupt? >> yes. >> i find it curious then that we have this huge public outcry over this huge lapse of oversight where a billionaire gets a $500 million loan from the u.s. government and goes bankrupt and turns out that his attorney's husband works in the department of energy granting the loans and we are going to study oversight and we're not going to look at solyndra? i find that very, very curious. my question to you would be did anyone from the administration ask you either verbally or in writing not to mention or look into solyndra?

>> direct answer to your question is no. >> did you have the power to look into solyndra if you wished to? your mandate looks wide open. you're supposed to look at oversight. why wouldn't you look where the problem? >> i was asked to look at the loans that exist now. >> it says current status of the portfolio, strengthen management and oversight of the program f you're going to strengthen oversight, you have to look where the problems are. i wouldn't think -- this seems to be so mi openic as to be politically motivated. i'm skeptical why you don't look at solyndra which is the whole reason you are commissioned is over solyndra. but here's the thing. you've got solyndra. you've got beacon energy going bankrupt. you have bright source maybe going bankrupt. what about bright source? did you look at bright source? >> that was not part of this program, sir. >> isn't bright source part of the current portfolio? bright source got $1.8 billion from this loan portfolio.

and the thing is who owns bright source? robert kennedy jr., another politically connected obama contributor who gets $1.8 billion of our money. you know what their profit was? their loss? they lost $13.5 million. they're $1.8 million in debt. is bright source ever going to get out of debt? why are we giving taxpayer money to a family that has hundreds of millions of dollars? this is about crony capitalism. this isn't about starting up solar panels. it's about giving money to people who already got enough money. let them make their own loans. if they love solar panels, let them do it. i don't understand. you didn't look at any of the problems and how we come to conclusions about oversight if you didn't look at the companies where the problems originate. >> senator, i think -- i understand your question. first of all, there are several investigations under way. and if we were going to look at that, we would have needed investigate torre powers,

subpoena powers, the right to demand documents. we would have taken probably many months if not a year and we would have been going on top of the investigations. >> then very specifically, the public information that's out there on solyndra, solyndra's attorney's husband worked in the department of energy. does that put up any red flags for you? >> again, senator, i have not looked at those types -- >> if you knew that, the attorney for solyndra's husband worked in the loan department granting the loans at the department of energy, does that send up red flags for you, yes or no? >> well, sir, senator, i don't know the facts of that. >> if you knew that in bright source somebody used to work for the kennedy family companies now works in the department of energy and approved a $1.8 billion loan, does that send up a red flag? if you're commissioned to look at oversight, i mean your reputation is on the line as an independent person. you're commissioned to look at oversight. and you didn't look at where the problems in oversight were. >> actually, senator, we have

looked at that. but my point is regardless of those facts, we were going to do as thorough a process of reviewing the policies and procedures of the department of energy regarding the management of this portfolio. i think we did that. i think we came to our own independent conclusions about first of all how the portfolio is being managed and you see a number of recommendations, about a dozen. >> do we give loans to foreign companies? >> we gave loans -- under the law, loans could be made to u.s. companies. >> my understanding is that they're spending it building cars in finland s that true or not true? >> these are, at the time and, again, we did not investigate whether the law was complied with in all cases. that wasn't part of our review. however -- >> did they get $500 million and is it directed towards jobs in finland? >> the entities that borrowed

the money are u.s. companies. they may have ownership from abroad. but they're u.s. companies. for instance, nissan north america is a borrower. and it's owned by a japanese company but it is a u.s. corporation. >> thank you. >> we have a second panel which is secretary chu. i would suggest we go ahead and thank mr. allison for his testimony and go ahead to our second panel unless there is any burning reason not to. mr. allison, thank you very much. we appreciate your being here and your testimony today. why don't we see if we can ask secretary chu to come in so we can hear his perspective and ask him some questions.