Friday, February 13, 2009

WSJ: Next Challenge on Stimulus: Spending All That Money

http://online.wsj.com/article/SB123448815417580333.html?mod=googlenews_wsj

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  • FEBRUARY 13, 2009

By STEPHEN POWER and NEIL KING JR.

Minnesota's Sage Electrochromics Inc. has been ready for months to move on just the sort of project the Obama administration hopes will bolster the U.S. economy: a $65 million factory that would make energy-saving windows and generate 250 new jobs.

So what's holding it up? The Energy Department, whose fledgling loan-guarantee office has yet to approve a single project, including the proposed Sage glass factory, since the loan program launched in early 2007.

President Barack Obama plans to rely heavily on agencies like the Energy Department to approve contracts and issue loan guarantees and grants at a record clip in the $789 billion stimulus plan.

But there are signs that parts of the federal bureaucracy will need an overhaul to handle the huge workload heading their way. Such worries are apparent at the Energy Department, which will play a key role in Mr. Obama's bid to revive the economy and wean the country off oil.

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Energy Secretary Steven Chu, with President Barack Obama, says he plans to speed up spending at the DOE.
Associated Press

Energy Secretary Steven Chu, with President Barack Obama, says he plans to speed up spending at the DOE.

The stimulus bill nearing a final vote in Congress could pump as much as $170 billion into projects such as highways, Internet broadband and public-housing repairs. Of that, about a quarter -- or some $40 billion -- could go to the Energy Department. The agency would be under the gun to swiftly hand out money to projects that would modernize the electric grid, build electric cars and make homes and buildings more energy efficient.

The new energy secretary, Steven Chu, has barely moved into his office overlooking the Smithsonian Castle. He says he'll have to transform how parts of his agency work if the president's stimulus plan is to succeed.

"We've got to do it," Mr. Chu said in an interview. "Otherwise it's just going to be a bust."

Other agencies face steep challenges, too. An obscure Commerce Department office with a $19 million budget and fewer than 20 grant officers could end up in charge of $7 billion in grants to expand Internet access in rural areas. A Congressional Budget Office report said it could take eight years for those grants to be issued because the amount of money would "far exceed" the agency's traditional budget and require the deployment of technology that is "not widely available today."

The spending demands could prove particularly taxing at the DOE. The Energy Department has had limited experience pulling off big, transformative energy projects. Most of the department's $25 billion budget goes toward maintaining the nation's nuclear stockpile, cleaning up former weapons plants, and doing basic scientific research.

"DOE is going to have to dramatically change how it does business if it hopes to push all this money out the door," says Karen Harbert, a former senior Energy Department official who now directs the U.S. Chamber of Commerce's lobbying efforts on energy issues. "They are going to need more people, more oversight and more freedom to waive regulations."

History of Delays

The department has a history of delays and of letting costs spiral. It has missed so many deadlines for setting energy-efficiency standards for appliances, for example, that Mr. Obama last week ordered the agency to get it done by August this year. The approval process for guaranteeing loans to energy projects, meanwhile, has dragged on for roughly two years and counting. And last month, the Government Accountability Office cited the agency's "inadequate management and oversight of its contractors" when it put the department on its list of agencies at "high risk" for waste, fraud, abuse and mismanagement.

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Gregory Friedman, the DOE's inspector general, whose office acts as the agency's in-house watchdog, knows the department's weak spots well after holding the position for more than a decade. The House version of the stimulus bill before Congress gives Mr. Friedman's office $15 million to track how all the new money coming into the DOE will be spent.

"Forty billion dollars is a huge amount of money," says Mr. Friedman of the DOE's potential windfall. "Absorbing the money, making sure it's spent appropriately and gets into the hands of the right recipients...are going to be significant challenges."

A Four-Week Window

Mr. Chu, a Nobel Prize-winning physicist whose last job was running the Lawrence Berkeley National Laboratory in California, says one of his first priorities at the DOE is getting projects that are already in the pipeline, like the Sage glass factory, up and running. To agency employees who say such projects need months of additional consideration, "we're saying, 'Tell us what you need to do in order to get them [decided] in four weeks,'" Mr. Chu says.

Sage and more than a dozen other companies have so far labored for more than two years to win loan guarantees through a program authorized by Congress in 2005. Wary of financing projects that might default, the Bush administration took another two years to adopt regulations governing the program. Congress eventually authorized the DOE to issue $42.5 billion in loan guarantees for ventures that many lenders would otherwise consider too risky.

The program is now seen as a test of the department's ability to speed up projects that could both create jobs and help steer the country away from a reliance on oil. But the experience of some of the companies still awaiting their loan guarantees raises questions about whether the DOE will be able to radically change its ways fast enough.

Sage Electrochromics makes windows that can get darker or lighter on command, making rooms easier to cool in summer or warmer in winter. Sage first approached the Energy Department in late 2006 about securing a loan guarantee that would allow the company to build its first commercial-scale glass factory about 40 miles south of the Twin Cities in Minnesota.

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In October 2007, Sage was one of 16 companies that won initial approval. The company, which is seeking a $65 million loan guarantee, is now awaiting a ruling from the DOE on whether it will have to pay a fee for the service. After that comes a due-diligence review that will require a team of lawyers, engineers and market researchers, and could cost up to $1 million, according to Sage estimates.

"I'm guessing that we will have the money by the end of the year at the earliest," says Mike Kennedy, Sage's chief financial officer. "There has to be a way to do this faster."

In Massachusetts, Beacon Power Co. has stood in line for 25 months to win approval for a $50 million loan guarantee that would let the company break ground on an electricity-storage plant about 30 miles southeast of Albany, N.Y. The plant would absorb power and feed it back onto the grid when the supply drops, a function that traditional power plants do much less efficiently.

The vetting has been so thorough, says Beacon spokesman Gene Smith, that the company to date has supplied the Energy Department with 96 documents, which together fill six thick, three-ring binders. One of the documents is a draft 87-page environmental-impact study for the proposed two-acre site. That study required Beacon to hire archaeologists to scour the site for signs of prehistoric remains. The team found a mound of debris from a century ago that was deemed of no historic value.

David Frantz, who directs the DOE's loan-guarantee program, said he couldn't comment on specific applications, but said the agency is moving to "significantly shorten the cycle time from application to loan guarantee to ensure good projects get funded quickly."

On Thursday, Andy Karsner, assistant secretary for energy efficiency and renewable energy under President George W. Bush, told a Senate panel that a combination of "bureaucratic dysfunction," "organizational intransigence," and "institutional barriers" had contributed to the agency's "painfully slow" progress on loan-guarantee applications in recent years.

An Earful About Delays

The Energy Department has missed deadlines and misjudged the costs of projects before. Shortly before Mr. Obama took office, the agency halted contract talks on more than $2 billion worth of energy-efficiency projects at federal buildings, after realizing belatedly that the projects' costs would exceed the limits the department had set for them. An Energy Department spokesman said the agency didn't "adequately keep track of the value of projects in the pipeline," but that most of the affected projects were still in their early stages and that the department is working to move them along "with as little disruption or delay as possible."

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Mr. Chu has heard an earful about such delays. He says when it comes to loan guarantees, the level of documentation the agency requires from companies "may be too much." He says he's talking to officials at other agencies that he says have "a better track record" of getting financial aid to companies quickly. Some of those agencies' employees could be temporarily reassigned to the DOE to help it mete out funds.

Speeding Up the Process

His aides are also pressing the agency's lawyers and loan-guarantee managers to identify ways to speed up the process. The agency's legal department, says Mr. Chu, has been "very conservative," in waiting to vet loan-guarantee applications until after the deadline for submissions has passed, rather than "triaging" them on a "rolling" basis.

David Hill, who was the Energy Department's general counsel under President Bush, says there are reasons for the DOE to tread carefully in funding alternative-energy projects. During the 1970s, he says, the DOE made multiple loan guarantees to support the development of synthetic fuels and geothermal power, only to see many of those projects default and the projects' sponsors abandon them.

"We have to be careful to not make the same mistakes that we made before," Mr. Hill says.

Business groups like the Chamber of Commerce have called for expediting federal environmental reviews to help speed spending. Otherwise, they say, many stimulus-funded projects will be delayed for years. Environmental groups object to such proposals. "The way to ensure stimulus money is spent quickly is to fund the right initiatives, not waive solid laws," says Erin Allweis, a spokeswoman for the Natural Resources Defense Council.

The frenzy of activity is unfolding as government watchdogs are warning the Energy Department not to lose sight of its traditional duties. A report in December by the agency's inspector general, Mr. Friedman, said the department still faces a "monumental task" in cleaning up the more than 1.5 million cubic meters of solid radioactive waste and 88 million gallons of radioactive liquid waste left over from more than 50 years of nuclear defense and energy research work across the country.

Another challenge: making sure money designated for states gets funneled through quickly to the people it's meant to help. A good chunk of the DOE stimulus money, around $5 billion, will flow in the form of grants to states for programs to supply insulation for homes in low-income neighborhoods. There, too, states are scrambling to prepare to handle unprecedented sums of money. Massachusetts, which is farther along than most states in weatherizing homes, expects an injection of upwards of $161 million into a program that last year spent $14 million.

Rep. Rodney Frelinghuysen, a New Jersey Republican who sits on a House panel that controls the DOE's budget, worries that the scale of the stimulus will throw the agency off track. "You have a huge policy shift here of moving a bureaucracy that's been focused on research and development to being a manager of a massive amount of money," he says, calling it, "a prescription for abuse and waste."

Write to Stephen Power at stephen.power@wsj.com and Neil King Jr. at neil.king@wsj.com

Printed in The Wall Street Journal, page A1