Tuesday, November 18, 2014

Misstated Profits at the US Department of Energy

Misstated Profits at the US Department of Energy

The US Department of Energy issued a brief press release about a week ago concerning the strong performance of its loan portfolio.[1]  It’s the same portfolio that contained a large loan to Solyndra, the alternative energy company whose demise led to Congressional hearings.  Two years ago, the media amplified Republican and Tea Party conclusions that the loan program was a disaster because a couple of credits had failed.  Today, the media is making the same mistake, except that they are touting the opposite conclusion.  None other than Paul Krugman in his column, “When Government Succeeds,”[2]  accepted DoE’s claim of success at face value.

The DoE is flaunting several “facts” about its $34 billion portfolio.  Even if every one of the “facts” is true, they hardly prove that the program is a success any more than Solyndra’s demise proves that the program was a failure.  For starters, DoE says that it’s already earned a profit because the interest earned on loans ($810 million) exceeds the amount of loans written off ($780 million).  That’s a very odd way to calculate a profit, because it doesn’t take into consideration the borrowing costs incurred by taxpayers to make those loans (and issue guarantees) or any of the expenses for administering the program.  If we had all the figures, the loan program would be running a loss, which is okay for a portfolio that is in its early stages.  The typical loan has a term of 18-years.

Second, DoE says that its losses are only 2.28% of total loans and commitments.  While this is certainly a small loss ratio, it too is meaningless at this point.  DoE’s loan portfolio is not nearly seasoned enough to know what the loan loss ratio will be over the next decade and a half.  Moreover, since DoE is investing in emerging technologies, it’s hard to believe that they’ll achieve loan loss ratios consistent with more conventional credits.

Third, DoE estimates that it will earn $5 billion in interest over the life of the program.   This is the point that Mr. Krugman cites for the proposition that “the program that included Solyndra is, in fact, on track to return profits of $5 billion or more.  As I noted before, gross interest isn’t any kind of measure of profit.  In addition, the figure can only be a rough estimate, since much of the interest will only be paid in the distant future.  Finally and perhaps most importantly, $5 billion on a $34 billion loan portfolio doesn’t seem like much compensation for the risk entailed in investing in alternative energy technologies.

Just to be clear, I am not critical of DoE’s loan program.  In a world where Wall Street has turned all too much of private investment into short-term speculation, I believe the US government has to play a role.  We need to increase our funding into basic research, whether that research is conducted under the auspices of the National Institutes of Health or the Department of Energy.  However, it’s misleading to tell the public that the DoE’s loan program is profitable when there’s no solid evidence for that proposition.

[1] http://www.energy.gov/articles/energy-department-s-loan-portfolio-continues-strong-performance-while-deploying-innovation
[2] http://www.nytimes.com/2014/11/17/opinion/paul-krugman-when-government-succeeds.html?ref=opinion

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