IG: DOE Ignored Internal Expert’s Advice in Subsidizing Bankrupt Solar Company

Report may increase scrutiny of DOE decision to restart loan program

Secretary of the Interior Ken Salazar, second from left, examines solar electric panels as he tours the Abound Solar manufacturing plant
Secretary of the Interior Ken Salazar, second from left, examines solar electric panels as he tours the Abound Solar manufacturing plant / AP
April 17, 2014

The Department of Energy ignored warnings by internal solar experts when it subsidized a solar company backed by a major Democratic donor that went bankrupt in 2012, according to a report from federal watchdogs.

Abound Solar filed for Chapter 7 bankruptcy protection in June 2012 and laid off 125 employees. By that time it had drawn on almost $70 million of its $400 million DOE loan guarantee.

According to a DOE inspector general report released on Thursday, market conditions led to Abound’s collapse, but the department, while aware of those conditions, ignored the advice of its own experts when it continued financing the company in 2011.

"We found that [DOE’s] internal solar expert had previously expressed concerns to the program regarding deficiencies in Abound's quality control," the IG’s office wrote in its report.

Those deficiencies were apparent mere months after DOE approved support for the company, in December 2010. Credit rating service Fitch at the time called Abound a "highly speculative" investment.

Initial quality control problems forced Abound to make production changes that hindered its loan repayment ability. DOE suspended loan payments in February 2011, but despite warnings from its own solar industry expert, restarted those payments two months later.

The solar expert’s assessment conflicted with that of an independent engineer tasked with assessing the project’s financial health, but the department did not adequately address that discrepancy in opinions, the IG said.

"Despite the technical shortfalls and the identified concerns regarding quality control, the program approved the restart of disbursements in April 2011, without reconciling the conflicting opinions of the independent engineer and the solar expert," the report explains.

Abound was backed financially by Bohemian Companies, an investment firm owned by Democratic mega-donor Pat Stryker. Bohemian was also one of Abound’s largest customers, purchasing its solar panels for the company’s Loveland, Colo., headquarters.

In an early sign of trouble for Abound, Bohemian had to remove an entire rooftop of solar panels due to product defects a month before DOE approved its support for the company.

According to the IG, "Abound's solar panels were underperforming by as much as 15 percent" a month after its loan guarantee went through. The company’s second largest customer, who is not identified in the IG report, returned $2.2 million in defective panels.

Those defects, together with adverse solar panel market conditions, led to serious financial trouble for Abound. But the IG questioned the DOE loan program’s ability to adequately monitor and respond to such conditions.

"The program had not fully developed policies and procedures for awarding, monitoring and administering loans," the report found.

Those problems, the IG said, led to decisions to continue awarding funds to Abound even when it was clear that the company was in dire financial straits.

"Despite ongoing technical and financial problems encountered by Abound, which should have warranted increased scrutiny, it was not placed on such a [credit watch] list until September 2011 when it failed to meet construction and financial milestones," the report noted.

Even after DOE restarted its Abound loan payments, the IG found that it did not have a means of formally monitoring the solar market for trends that might spell trouble for DOE loan recipients.

The loan program office "continued to move forward with the project without fully evaluating significant financial and market changes that subsequently occurred," the IG wrote.

Loan program officials told the IG’s office that they were, in fact, monitoring the market, the IG "found no evidence of ongoing analyses in the files provided."

Some DOE loan program staffers had irreconcilable opinions about the company’s financial soundness, but the IG noted that a portfolio manager contracted to DOE’s loan programs was woefully under qualified.

"Specifically, we found that this individual had no prior loan management experience and had a limited background in project finance and financial statement analysis, yet he was assigned to manage a number of loans totaling over $2 billion," the report noted.

The contractor said prior to leaving the loan program office that he had not completed reports on the creditworthiness of DOE loan recipients because doing so was "very difficult."

William Yeatman, a senior fellow for the Competitive Enterprise Institute specializing in environmental policy, called the IG report "stunning," and said it demonstrated that DOE’s loan program officers were "reckless" in their stewardship of taxpayer funds.

"Alas, these are the sorts of scandals inherent to government programs that pick winners and losers on the market," Yeatman said in an email.

"The Obama administration views the Energy Department’s Loan Programs Office as a tool to advance alternative energy, and responsible stewardship of taxpayer money is secondary to this policy purpose."

The loan program office denied that it had failed to reconcile the various internal assessments of Abound’s ability to repay taxpayers.

Its independent engineer, wrote Peter Davidson, the office’s executive director, "directly responded to nine of the eleven issues raised by the internal solar expert and encompassed the other two remaining issues at a high level in the [engineer’s] report’s conclusions."

Apparent problems with the management of Abound’s loan guarantee and other concerns about political favoritism could heighten scrutiny of DOE’s decision this month to restart one of the department’s stimulus backed loan programs.

While the program is not the same one that provided Abound with its loan guarantee, Abound’s financial troubles have previously been held up by critics of DOE’s green energy loan programs as emblematic of the financial risks associated with such projects.

"This decision to grant this company taxpayer support will end up costing taxpayers up to $70 million," said Rep. Jim Jordan (R., Ohio) at a 2012 hearing of the House Oversight subcommittee overseeing stimulus spending.

"Had it not been for the attention drawn to problems with the loan program … the losses may have been much greater," Jordan said.

He also raised concerns that the company received taxpayer support due to the political connections of its top investors.

"I think we can all agree that there is something fundamentally flawed about the implementation of this policy by the Department of Energy and its Loan Program Office, which has rewarded the friends of the administration at the expense of the American people," Jordan said.

Bohemian’s Pat Stryker is a major Democratic donor. According an Oversight report, she donated $50,000 and bundled $87,500 for President Barack Obama’s inauguration. She also donated $35,000 to the 2012 Obama Victory Fund.

According to Yahoo News chief political correspondent Matt Bai, Stryker "helped bring about a Democratic revival" in Colorado.