On November 4, 2011, Gregory H. Friedman, the Inspector General of the Department of Energy (“DOE”), issued a Management Alert with regard to the Western Area Power Administration’s (“WAPA”) borrowing authority under the American Recovery and Reinvestment Act (“ARRA”).  Under the ARRA, WAPA was granted $3.25 billion in borrowing authority to help build transmission infrastructure, spur job creation and assist with economic recovery.  WAPA first used its borrowing authority to execute a financing agreement with Tonbridge Power Inc. to fund a 214-mile transmission line between the state of Montana and Canada’s Alberta province.  The line, with enough capacity to deliver 300 MW in either direction, is intended to provide interconnection for proposed wind power generation projects in Montana. 

WAPA financed $161 million of the transmission project’s original $213 million in estimated costs, with $52 million contributed from other sources, including subordinated non-federal loans.  Repayment of the WAPA financing was to begin after the Montana-Alberta Tie-Line (“MATL”) project became operational and was generating revenue.  Unfortunately, because of issues causing delays and cost overruns, the project has been at a standstill since May, and is estimated to be two years behind schedule and $70 million over budget.   According to Friedman, WAPA “had not implemented the necessary safeguards to ensure its commitment of funding was optimally protected.”  WAPA had failed to set in place standard safeguards, such as an earned value management system and set-aside risk reserves, before funding the project and only moved to create safeguards after the project had suffered serious delays. 

In the event of a project failure, WAPA’s MATL project financing arrangement could cause WAPA, and ultimately U.S. taxpayers, to bear the burden of a defaulted loan.  This is a particularly significant concern because WAPA has already committed $25 million in developmental funding to a different, and potential $3 billion project—a project that could ultimately require an investment of $1.5 billion in Recovery Act borrowing authority.  As a result of this Management Alert, future projects will be required to set up a system to make federal monitoring easier and to set aside risk reserves for cost overruns.  The DOE also plans to create a monitoring system to ensure WAPA is appropriately managing Program funds going forward, and to create a mechanism by which it will receive direct and regular reporting from WAPA to the Deputy Secretary. 

 A copy of the Management Alert is available here.