Audit Report: The Department of Energy's $700 Million Smart Grid Demonstration Program Funded through the American Recovery and Reinvestment Act of 2009


INTRODUCTION AND OBJECTIVE

The Department of Energy's Office of Electricity Delivery and Energy Reliability received about
$4.5 billion under the American Recovery and Reinvestment Act of 2009 to enhance the  reliability and resilience of the Nation's power grid, or nearly 33 times the amount appropriated in Fiscal Year 2009. Of the amount awarded, the Department allocated nearly $700 million to the Smart Grid Demonstration Program (Program) to fund 32 regional demonstrations and energy storage projects. The Program also provided supplemental Recovery Act funding to 10 existing Department projects for renewable and distributed systems integration and high temperature superconductivity. The projects were intended to demonstrate and further the advancement of the "smart grid," promoting innovative grid technologies. The Department awarded Recovery Act funding through cooperative agreements to both for-profit and non-profit entities.

Because of the dramatic increase in funding and the national importance of modernizing the Nation's power grid, we initiated this audit to determine whether the Program had been properly managed. This audit report is the second in a series of reports on the Department's Smart Grid efforts. Our January 2012 report,  


The Department's Management of the Smart Grid Investment Grant Program



(OAS-RA-12-04, January 2012), on a separate Smart Grid grant program, identified several opportunities to enhance the management of the Department's Smart Grid efforts. Specifically, the audit identified weaknesses in financial management and incomplete and insufficient cyber security plans, potentially jeopardizing achievement of Recovery Act goals.


RESULTS OF AUDIT

We found the Department had not always managed the Program effectively and efficiently. Our review of 11 projects, awarded $279 million in Recovery Act funding and $10 million in non-Recovery Act funding, identified weaknesses in reimbursement requests, cost-share contributions, and coordination efforts with another Department program. These issues resulted in about $12.3 million in questioned costs.
 
Specifically, the Department had:
  
- Approved reimbursements totaling about $12.3 million that lacked supporting
documentation necessary to verify that costs were incurred and were reasonable. Contrary to award terms and conditions, the Department reimbursed two recipients for claims based on estimated rather than actual costs, resulting in overpayments of approximately $9.9 million. A third recipient received nearly $2.4 million without providing adequate supporting documentation. In fact, the recipient had not begun manufacturing the energy storage units called for by the award.
- Not always ensured recipients contributed their agreed-upon share of project costs.
For example, the Department erroneously approved one recipient's plan to use about $28 million in expected proceeds from the sale of an energy storage unit manufactured in part with Federal funds and previous recipient contributions to meet its overall $32.7 million cost-share requirement. Federal regulations specifically prohibit using Federal funds and previous recipient contributions toward meeting cost-share requirements.
- Awarded a recipient $14 million for a project even though the recipient had received
$2 million under the Advanced Research Projects Agency – Energy (ARPA-E) Program for similar work. In fact, the recipient, unknown to the Department until our audit, had reported the same accomplishments under both awards.
Although the Program had established procedures over financial reviews of projects, the problems we identified occurred, in part, because it had not adequately reviewed financial transactions and planned for or monitored recipient cost-share provisions. After being presented with the results of our audit, the Department initiated actions to resolve the $12.3 million in questioned costs we discovered. Specifically, Department officials reported that one recipient was making adjustments to address issues with reimbursements made based on estimated versus actual costs. Additionally, the Department was taking action to resolve unsupported costs and the associated cost-share contributions, including requiring payment of corresponding interest owed. The Department also stated one recipient had returned funds improperly claimed for incomplete energy storage units. Furthermore, ARPA-E officials required the recipient with potentially overlapping projects to differentiate specific accomplishments and informed us they would take proactive measures to eliminate any potential overlap, or the appearance thereof, between the ARPA-E and Smart Grid Demonstration projects.
Given the infusion of Recovery Act funding, the Program has a unique opportunity to improve
the Nation's power grid. In total, we questioned about $12.3 million in costs claimed by  recipients. In the absence of significant improvements, the Program is at risk of not meeting its objectives and has an increased risk of fraud, waste and abuse. Accordingly, we made recommendations to the Department to improve the management of the Program.
 
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